Earnings Call: Q3 2019

Nov 11, 2019

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cazone S. A. Third Quarter of twenty nineteen Results Conference Call. Today with us, we have Mr. Felipe Casale, Investor Relations Executive Manager and Mr. Joao Martur Solza, Head of Finance. We would like to inform you that this event is recorded and all participants will be in a listen only mode during the company's presentation. After the consent remarks, there will be a question and answer session for industry analysts. At that time, further instructions will be given. The audio and slideshow of this presentation are available through live webcast at ir.cozan.com. Er. The slides can also be downloaded from the webcast platform. Before proceeding, let me mention that forward looking statements are based on the beliefs and assumptions of Cozan's management and on information currently available to the company. Good morning, everyone, and welcome to Cousin SA's Third Quarter twenty nineteen Earnings Conference Call. Cousin's consolidated results grew once again this quarter despite challenges posed by the devaluation of Brazilian real against the U. S. Dollar as well as fluctuations in international oil and agricultural commodity prices. Macroeconomic environment is improving in Brazil, but GDP increase has been mild so far. Let's start the presentation on Slide four, discussing the results of Raizen Combustive in Brazil. Raizen posted a solid operational performance. The total volume sold by the company grew by 5% this quarter compared to a 4% growth in the Brazilian market, considering the A and P figures. Motorcycle volume measured in gasoline equivalent grew 7%. The economics in the auto cycle remain at around 35%, and gasoline sales grew after a few quarters in decline. Digital volume was strong, again, reflecting higher demand from clients, particularly those in the agribusiness sector. Aviation sales was 1% down in back of the winding up Avianca's operations in Brazil. Aizen Combustiri's adjusted EBITDA totaled BRL $640,000,000 or BRL $772,000,000 if we exclude the adjustments. Compared to 3Q twenty eighteen, adjusted EBITDA fell 6%. But compared to the second quarter of this year, Raizen posted a 13% increase as an evidence of sequential improvement of market conditions. Sales volume grew, but fuel price fluctuations brought challenge to supply management. Worth mentioning that the substantial increase in ethanol sales in Brazil over the past few years enabled some increase in informality, requiring greater rationality and balance when managing the business. Key pillars of Hygiene's performance include the continued focus on long term relationships with our clients, expansion and renewal of contracts with the service stations network, supply and the commercialization strategy, optimizing the logistics infrastructure and the constant seek for cost efficiency. Investments this quarter totaled $250,000,000 dedicated to the maintenance, conversion and renewal of contract as well as investment in logistics infrastructure. There were good business opportunities throughout 2019, and we will likely result in bringing nearly 1,000,000,000 liters of additional volume to our base. Now let's move to Slide five to discuss Raizen Argentina's results. Remembering that results are in U. S. Dollars, which is a functional currency of the downstream operations in Argentina. The quarter was marked by a worsening political and economic scenario after primary presidential elections in the country. Skyrocket inflation and a strong currency devaluation aggravated the recession scenario. To lessen the impact of this economic crisis, federal government unveiled relief measures, which included freezing fuel and oil prices. The price freeze caused a negative effect of $55,000,000 in inventories. As a result, Raizen's EBITDA ended 3Q 'nineteen at $6,000,000 total. Prices have been frozen in a gradual and rational way, reducing the discount in relation to international prices. The volume of oil processed by Raizen fell 4% with an optimization rate of 73% due to scheduled maintenance this quarter. Despite the adverse scenario, diesel and gasoline sales rose by 7% year over year as a result of the commercial efforts. Aviation sales performance reflects higher demand in the sector. Investments totaled $28,000,000 most of which towards maintenance of the refining complex. Let's move to the next slide and represent the Hyisen Energia's results. '20 crop year was marked by a higher volume of sugarcane crushed, which rose by 10% year over year. Agricultural yield, 4% compared to the same period last year. And the production mix continues to prioritize ethanol, which came in at 50% of the mix. Speaking of sales, starting with sugar. The sales volume fell 48%, but in line with the commercialization strategy for the crop year. The higher storage capacity will draw flexibility to manage sugar sales, focusing on when returns are higher, in line with the hedge strategy. Average sales prices in BRL were 16% better this quarter compared to the same period last year, and this increase is in line with the best prices hedged within BRL. On ethanol, the sales volume rose by 19%, driven by high demand in both domestic and export market. Average price came in 24% higher than 3Q twenty eighteen due to higher exported volumes and economic hedge for ethanol sales. It is worth noting that domestic prices are trading at a better level compared to last year. Moving to electricity, remember that results are impacted by WX, using electricity trading company. Own volume sold fell 6% in the quarter, reflecting the delay on production, which should be normalized by the end of the crop year. Sales average price was negatively affected by the price drop in the spot market. Before discussing the EBITDA, a quick comment here in cash costs. When normalized by the COSECONNA effect, unit cash costs increased by 10%, reflecting inflation, seasonality in the production mix and lower dilution of fixed costs due to the reduced volume of sugar equivalent produced in this crop. Adjusted EBITDA came in 32% higher, reaching BRL $848,000,000, in line with the higher volume of own ethanol sales and better prices of sugar and ethanol. Important to highlight that this year, the sugar commercialization strategy will concentrate a higher volume in the second half of the crop, taking the benefits of the hedging. As for sugar hedge, Haiyi has designated its entire volume for sugar to be exported, this year at an average price of $50.55 cents of reais per pound. For the next crop, 2021, we hedge nearly 55 to 60% with an average price of around 60¢ per pound, 6¢ of reais per pound, which is almost 10% higher than the current crop. Although sugar prices in US dollars remain depressed on the back of high global inventory, we see good opportunities to hedge and improve profitability in BRL. Several consulting firms are already indicating that main producing countries should reduce the sugar output over the coming months. So climate in India have impacted negatively agricultural yield, and the production of ethanol has increased despite subsidies for sugar. The mix of ethanol in Brazil remains strong, reflecting the solid demand for the biofuel at the services stations. Sugar global demand have a relatively steady increase of around 1,500,000 tons per year. And in this scenario, we should expect that sugar prices should be traded above the level that we have been seeing recently. Lastly, investments totaled BRL $541,000,000, reflecting higher expenditures in planning and rent treatment in addition to asset integrity investments. Now let's move to Slide seven, and we'll discuss Comgas. Volume of natural gas sold in the 3Q twenty nineteen fell 5%, mainly impacted by the industrial segment, which faced a lower activity from large clients from specific sectors such as ceramics. The sales volume of commercial segment was also depressed by lower demand. In the residential segment, sales rose by 5%, driven by new connections. Normalized EBITDA totaled BRL $653,000,000, impacted by inflation adjustment on margins and better sales mix. Regulatory current account ended the period with an active balance of BRL 132,000,000 in favor of Comcast. Investments reached BRL $219,000,000, in line with the CapEx spend for the year, focused on maintenance and customer base expansion. Now moving to Slide eight. Lubes EBITDA rose by 33% in the quarter, reaching BRL 80,000,000. Better performance of lubes is explained by consistent sales growth across our countries, reaching record high volume this quarter. Besides expanding international operations, we increased our profitability by focusing on building a high quality portfolio of products and efficient sales strategies. Let's move to the right hand side of the slide. And on Cosentyx corporate segment, we reported an expense of BRL 80,000,000, mainly impacted by a one off effect related to the replacement of the share based compensation plan to stock grant plan, in line with the best practice of retention and governance. Other revenues were positively impacted by the sale of credit rights totaling BRL $363,000,000 and again relating to tax claims after final and then appealed court rulings. The cash effect from the sale of the credit rights will be recorded in the 4Q twenty nineteen. Now let's move to Slide nine. Cosan again delivered solid consolidated results on the back of its business portfolio. Recurring EBITDA grew by 30% to BRL 1,600,000,000.0, while accounting EBITDA reached BRL 2,200,000,000.0. Net income totaled BRL $819,000,000, reflecting the improved performance of the businesses in the quarter, especially Congaas and Raizen Energia, combined with positive results in the corporate segment. Free cash flow through equity also increased in the quarter to 1,600,000,000.0, 87% higher than the same period last year. The main effect here was the operation operating cash flow, where cash generation increased at Raizen and at Congas due to the improved normalized result and the regulatory current account refund. In the cash flow from investments, Raizen and Congas also invested more in the period, but in line with the CapEx spend for the year. Pro form a gross debt moved by 4% in the quarter due to fundraising at Haieri with the issue of BRL 1,000,000,000 in agribusiness receivable certificates or the CRAS. The cost of the debt stood at 109% of the CDI. And on a pro form a basis, 119% of the CDI, which is excluding the high easing. The performing leverage ratio after the usual adjustments ended the period at 1.9x net debt to EBITDA. Now let's move to Slide 10 to discuss our guidance for the year. And here, I would like to point out the following reviews at Raizen Combustibles Brasil. Let me start by reminding that we do adjust non recurring effects, which had a positive contribution to results. Having said that, we are reviewing the adjusted EBITDA guidance, while the accounting EBITDA would have been preserved within the original range. Main reason for the review is the worsening market environment in the second quarter of this year and worth noting that the guidance was based on a GDP growth estimates of above 2%, but reality was quite different. For the fourth fourth quarter of two thousand and nineteen, the seasonality effect and the gradual improvement of the business environment should result in a stronger quarter compared to the previous two quarters. At Hainan Argentina, the EBITDA review reflects the negative impact of the price freeze mentioned before and the worsening political and economic scenario. At Move, the improved performance and better international operations performance drove EBITDA in the year, resulting in an increase in our estimates. The guidance for Congas remained the same, but with a view towards the upper end or even slightly higher. As mentioned earlier, the projections were based on a stronger industrial activity for Brazil. We observed some segments of the industry with weaker than expected activity as well as higher temperature that may impact residential unit consumption. Despite those adjustments, we maintain our initial guidance for Cozano's pro form a consolidated EBITDA. Well, this concludes the presentation, and we will now take any questions you may have in English. Thank you. Just one thing before we start the Q and A session. Please note that we just filed our correction to our earnings release, specifically in the calculation of the free cash flow to equity pro form a. The corrected number is BRL678 million, a reduction of 18% compared to the 3Q twenty eighteen and not BRL1.6 billion, as I mentioned in the presentation. So just this quick correction, we have already filed this correction in our website as well. We will now begin the question and answer session for investors and analysts. If have a question, please press one in your telephone. If a question is answered during the session, you may remove remove it from the line by pressing star 2. We ask that you use the handset when asking the question in order to maintain excellent sound quality. Please stand by while we collect the questions. Our first question comes from Christian Audi, Santander. You, Felipe. I have three questions. The first one on in Brazil fuel distribution business. Can you talk a little bit about market share dynamics and competition, particularly from white flags? And also on the demand front, are you seeing an improving Brazilian dynamic overall? Or do you think it's still kind of moving sideways? The second question related to your Argentine operations. I know it's a difficult macro political dynamic. So I'm just wondering what can you do as an operator to defend yourself or try to minimize the impact from these disruptions, if you will? And then finally, on the sugar and ethanol space, can you just talk a little bit more about the pricing environment and your outlook for both ethanol prices and sugar prices? You. Hi, Christian. Thank you for your questions. I'll try to address all of them here. So first on the dynamics in fuel distribution in Brazil, and I'll focus more on the performance high yield in here, which by the way has been pretty consistent in balance between volume expansion and adequate returns. So we think throughout the year, specifically on the second Q twenty nineteen, the fuel price fluctuations brought a lot of challenges. And a part of that price situation is reflected in July specifically. So this brought to the 3Q twenty nineteen some impacts on our inventory management or basically on the supply management. But the quarter showed a gradual improvement on the market conditions in the market environment as expected. So first, volume grew back again, right, and this is important for the market environment. And second, we have some relevant players in these industries that are still we're still adjusting those strategies. So it's important also to mention that in the second quarter Petrobras price policy was also changes and players were adjusting their suppliers with new dynamics. So it was a gradual improvement on the market environment since the second Q, and we also expect an improvement in the fourth Q. So this is basically what we are seeing now in terms of the market environment in the Fierce division. In your question about the macro political environment in Argentina, as we mentioned in the call. So the prices have been gradually in a very a very standard way adjusting or increasing the prices actually, right? So we are seeing also the market not suffering a lot in volume. So this is what we show in terms of the volume expansion in Argentina, right? So let's see how this new environment will be. But I mean, the operations of Shell in Argentina has been been performing quite well in different scenarios. And we work here, of course, to optimize the operations in any type of scenario, political scenarios. Just your question about the sugar and ethanol and the pricing environment. So as I mentioned, in terms of the sugar, we still see high inventories in the global market. There's some consulting agencies stating about a possible deficit this year, but still, inventories are higher than and prices are not reflecting those that scenario. So we should expect prices to behave better. But meanwhile, we focus our strategy here on maximizing the return and with a quite efficient hedging strategy. So this is one of the reasons our prices has been behaving better. We have already accelerated the hedge for the next crop as well. So we have had about 50% of the next crop, as I mentioned, and the price is already 10% higher. So our strategy here is focusing on maximizing the returns and of course, with an efficiency hedging strategy. And on the ethanol front, in terms of pricing, Felipe, what's your outlook, please? I mean, price of ethanol, we have also been able to capture a better price. Of course, this is linked to the gasoline prices and the demand for ethanol in Brazil is quite high, even though the production is increased as well. So we are getting close to the end of the crop. That's the period when usually prices react better. We accelerated the sales in the first quarter of the year, the second quarter of the crop, but we still have volumes to capture and to sell throughout the next two crops I'm sorry, the next two quarters of this crop, right? So price should improve throughout the next two crops until the end of the crop season. Great. And just a follow-up in Argentina. What's your expectation in terms of the price freeze that it will continue, it will once it expires? Christian, at this point in time, we don't have the information of what is going to happen. As I mentioned, the price control are targeted to be unwinding in a gradual and irrational way, even with these adversities in Argentina. So we don't know if what is going to be the political decision in terms of price fees. Thank you. The next question comes from Jesus Cardoso, Credit Suisse. Hi, Felipe. Good morning, everyone. Two quick call two quick questions from my side. First one is related to the guidance in how you can come to Chivas. Felipe, it it looks a bit stretched in the sense that it would require nearly 120 per cubic meter, if our calculations are correct, for you to reach the low end of the guidance in the fourth quarter. So what I wanted you to discuss is whether you're really seeing a fourth quarter that is really strong and allows for that level of excitement? Or I mean if there was something else you were you had in mind when you put together the guidance? And then conversely, in Congay, it appears to be the contrary of that. It would require a level of result that is much below current levels. So if you could just comment on those two guidances. You. Regis, thank you for your question. So in Commodities, really the 4Q is the strongest terms of performance, right? And as we said in this speech here, so we are expecting we are seeing a gradual improvement on the market environment. And that should that's what we expect actually for 4Q. We adjusted the guidance. And by the way, this is the adjusted guidance, right, excluding all the nonrecurring effects that we usually do adjust, right? We will preserve the range if we consider the account EBITDA. So in this scenario, we expect to be within the range here. So that's what I can tell you right now about high even condos series. And in Condas, as I mentioned, we are looking towards the upper end of the guidance and there's a slightly chance that we even surpass that. But we probably are being more conservative here based on the activities we are seeing in the industry in the past few months. We are seeing also higher temperatures that impacts the unit consumption of residential clients. So we're probably a little bit more conservative here, but we're still aiming to deliver on the upper end of the guidance here for Ongas. Okay. So if you allow me just a second question on refineries. We've seen some other distributors becoming more, let's say, outspoken and aggressive in commenting how integration in the fuel distribution space with refinery is going to be a defensive move and very important for the sector. So if you could discuss whether you think the same, it would be great. You. Hi, Jesus. I mean, we discussed this in the past few conference calls. Raizen is the second largest player in the field distribution in Brazil. We must understand any and all change in opportunities and the supply dynamics. And we will follow-up with the process here and make a decision if makes sense or not to invest in the refinery. But we are always in constantly looking into business opportunities that may bring efficiency and profitability to the operation And analyzing deeply this opportunity of buying a refinery is part of the strategy we take here. Okay. That's all right. Thank you. The next question comes from Pedro Suarez, VTG Pactual. I have two questions here from my side. The first one, again, the new guidance, if we consider the midrange in all business units of this downward revision on Raizen Combustion and Raizen Argentina means a lower EBITDA of around BRL400 million more or less, even considering the upward revision of move. But your consolidated figure was kept unchanged, seems, as you said, to imply stronger results on CONGAS. So I just wanted to have more color on Hydro Energia, if it makes sense to expect that you will reach the high end of Hydro Energia's guidance as well. And the second question on High Energy and Combustion, we saw once again your gas station productivity improving in the quarter. So just wanted to know whether you're already reaching some level of confidence to increase gas station conversion or if we should still expect some conservatism on this front? Thanks. Thank you for your questions. So first thing, Raizi and Najeev, we haven't adjusted the guidance. We are aiming here to probably hit the low range of the guidance, which is around 61,000,000 tons of crushing, right? We saw a decrease here in productivity throughout the year, as we showed, which impacted the fixed costs, right? So this will lead us to a number in between the midpoint of the guidance to the low end of the guidance, which is around BRL 3,400,000,000.0, BRL 2,500,000,000.0 or 2,600,000,000.0. So this is where you should look for Raizen Energy for the year, right? And on the fuels, in terms of patient productivity, this has been something that has been focus of Raizen Fuel since the formation of this company. We are focusing on building and having the best network in terms of efficiency, in terms of productivity. We convert stations that usually have a higher throughput per station to be part of our network. And this is what we have been seeing in the recent movement here at an office station at Raizin Conducidus. So we have committed here to BRL1 billion of additional volume for 2019, and we are pretty aligned with the numbers as of now. So we saw good opportunities of business throughout the year. We are even converting a little bit less in terms of number of stations. But as you mentioned, the quality of those stations are higher. So this is what you should expect for us in a consistent way here in terms of expansion and renewal of contracts that are using Combustion. Okay. That was very clear, Philippe. Thanks. Our next question comes from Luis Carvalho, UBS. Felipe. Basically, two questions from my end. The first one is related to Argentina operations. Comparing actually your results with YPF, I mean, was a big discrepancy in terms of the performance of the one of the two largest fuel distribution companies in the country. I just would like to understand because in the end of the day, the freezing actually happened, I mean, towards the end of the quarter. So I just would like to try to understand if there was any one off or any particular impact that you saw during the year to the quarter that drove to, I would say, performance, something that we might need to consider looking forward? And the second question is submitted to Congress. Looking to the numbers, there was a positive NPV in favor of the company as something close BRL900 million basically on the back of the review of the previous cycle. And I would like to understand if this reimbursement to the company would be through tariff or how this is going to be play out? Thank you. Question. So in Argentina, we saw the biggest impact in August and September inventory. So the number around $50,000,000 that we stated, if we put that back on the EBITDA expected for the year, we'll be within the guidance. So this was the main impact we saw effectively in that business, right? Of course, the economic and political scenario brings some pressure on demand, but even though volumes kept growing. So what led us to look here mainly at this one off effect in terms of the price freeze. In Colas, I'm not sure I got your question, but if you're I know if you're considering here the tariff review process that was completed in May and was effectively proved this quarter. Right? I don't know if that's related to your question. I'm not sure I got that. If you could Yes. I mean, looking to the numbers, there's a positive NPV in the numbers of something close to BRL900 million, to be more precisely, BRL917 million on the back past of tariff review. So I would like to know if the if this reimbursement to Comcast would be through the tariff or not. I mean, how this is gonna be reimbursed to the company? That that's the question. Is that clear? Yes. Yes. Now it's clear. I'm sorry. So regarding the third tariff review process, it is still under public consultation until November 18 with a final publication scheduled for December. And as part of the permit consideration, Congaris is contributing the process and will be published by the regulatory agency. There's no numbers or anything we can discuss at this point in time. Our next question comes from Gabriel Francisco, XP Investmentis. Sorry, everyone. My questions were already answered. You can test for the next one. Thank you. The next question comes from Vicente Falanga, Bradesco VBI. Thank you, Felipe. I just I had a follow-up question on Luis Carvalho's. Do you maybe sell less in Argentina to wholesale clients when compared to YPF? Because I understand you mentioned the inventory losses, right? But YPF did not report such significant inventory losses and the downstream result was actually pretty solid, right? And we were thinking that maybe because prices to wholesale clients weren't frozen in Argentina, maybe your mix made you report more losses when compared to IPF? And then my second question also in Argentina, we should see prices officially unfreezing as of November 13, right, which is tomorrow. Do you expect the companies to gradually start raising prices Based on our calculations, refiners would still need to increase prices by about 17% to be in line with parity. And and do you think, you know, that there will be room for that? Thank you very much. Vicente, now Vicente, I answered Pedro and I thought it was you. I'm sorry, Pedro. But Vicente, regarding your question in Argentina and the comparison with YPF, we have to take a deeper look here of if we're separating the downstream itself and what is the effective impact here. I mean, we did recognize these $105,000,000 of inventory impact, which is actually clearly, of course, also gave me the final products, right? But we need to take a closer look into the what the competition said. So in terms of the price and the freezing of the prices, it started to be unwinded in a gradual and again in a rational, very rational way. We'll determine market conditions and how the market will behave. This is part of the recurring operation of early balance sheet, focusing on the supply and the commercialization strategy, the pricing strategy, and this will be related to the market conditions. So it's tough to say now when we're going to be able to Thank you, Felipe. I'd like to remind you that to make a question, you have to press one. Again, if you want to ask a question, please press the star one. The next question comes from Gustavo Allevato. Philippe. Thanks for the opportunity. So I have one question with distribution review. So can you quantify the inventory losses that you mentioned in the release? And the second question is also in fifteen Argentina's operation. So if you can give share of an overview, how was the margin in October if the company was posting a positive margin business or not? So it would be very helpful to try to quantify the results going forward. Gustavo, thanks for your question. As you know, we do not disclose inventories recurring impact of the inventories in our business. What I can tell you, and you can see that by the price fluctuations, is that the July was the point where we have the biggest impact here, negative impact. So that was concentrated more in July. That's what I can tell you as of now. And regarding the fourth quarter, I repeat myself here. We have seen a gradual improvement on market environment. Fourth quarter usually is the strongest one in a year. That has been the case in the past few years. And in our guidance, we should and we actually do expect an improvement on the market environment and then an improvement on the results. So that's what I can tell you right now about how you can convince you this. And how about Argentina? In Argentina, we cannot I mean, it's tough to guide now on the 4Q. We narrowed the guidance based on the loss of $50,000,000 And again, we see how the market conditions will be for us to, at some point in time, try to narrow the discount. All right. Thank you, Felix. The next question comes from Luis Carvalho, UBS. Yep. Could you please just thanks for taking another question. It's it's just a follow-up on my previous question. Looking to the EHC, our sales representation from, I mean, November 5, so one week ago, they clearly mentioned this difference of BRL 917,000,000 in favor in favor to Comcast. But I mean, any chance that you can provide any color in terms of how this, I would say, this reimbursement will not be given to the company? And when we can expect that? And then any views on this? I'm sorry to insist on this one, guys. No, it's no problem. And thank you again for the question. But again, the process is under public consultation right now. So the final schedule or the final publication schedule is scheduled for December 16. We are participating actively in this process, in these discussions. So we cannot anticipate what will be the decision and what will be the outcome. So we are contributing and following up with the process, and the decision again will come in December. So In in in the schedule that you provided the presentation, I mean, the decision on the analysis of the public consultancy contribution will be given by December 16. But then the so the final decision, it's gonna be given by March 31. Right? So May 31. Sorry. By next year. So only by May 31 that we're have any visibility on when or how the the company might be reimbursed. I mean, should we expect any any anything earlier than that? Yes. Unfortunately, we don't know, but probably, we're gonna have to with the schedule up to May 31. And you're right. It's, the date is May 31. Okay. Thank you. Thank you. With no further questions, I would like to turn the floor back over to Mr. Felipe Casale for his final remarks. Mr. Casale, you may proceed. Thank you, everyone, for joining this conference call. We will see you in the next opportunity. Just one quick reminder here, we're going to have our closedown Investor Day. It's scheduled for March next year. We'll send the date shortly, and we hope to see everyone there. Thank you very much. Thank you. That concludes the question and answer session for investors and analysts and the conference call of Cosan S. A.