Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan S.A.'s third quarter of 2019 results conference call. Today with us, we have Mr. Felipe Casali, Investor Relations Executive Manager, and Mr. João Arthur Souza, 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 Cosan's remarks, there will be a question and answer session for industry analysts. At that time, further instructions will be given. Should any participants need assistance during the call, please press star zero to reach the operator. The audio and slideshow of this presentation are available through the live webcast at ir.cosan.com.br. 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 Cosan's management and on information currently available to the company.
Good morning, everyone. Welcome to Cosan S.A.'s third quarter 2019 earnings conference call. Cosan'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 us start the presentation on slide four, discussing the results of Raízen Combustíveis Brasil. Raízen 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 ANP figures. Auto cycle volume measured in gasoline equivalent grew 7%. The ethanol mix in the auto cycle remained at around 35%, and gasoline sales grew after a few quarters in decline.
Diesel volume was strong, again reflecting higher demand from clients, particularly those in the agribusiness sector. Aviation sales was 1% down back of the one winding up of Avianca's operations in Brazil. Raízen Combustíveis adjusted EBITDA totaled BRL 640 million or BRL 772 million if we exclude the adjustments. Compared to 3Q18, adjusted EBITDA fell 6%. Compared to the second quarter of this year, Raízen posted a 13% increase as an evidence of sequential improvement of market conditions. Sales volume grew. Fuel price fluctuations brought challenges to supply management. Worth mentioning that the substantial increase in ethanol sales in Brazil over the past few years enabled some increasing informality, requiring greater rationality and balance when managing the business.
The pillars of Raízen's performance include the continued focus on long-term relationships with our clients, expansion and renewal of contracts with the services stations network, supply and the commercialization strategy optimizing the logistics infrastructure, and the constant seek for cost efficiency. Investments this quarter totaled BRL 250 million dedicated to the maintenance, conversion, and renewal of contract, as well as investment in logistics infrastructure. There were good business opportunities throughout 2019, and will likely result in bringing nearly 1 billion liters of additional volume to our base. Let's move to slide five to discuss Raízen Argentina's results. Remembering that results are in US 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.
Skyrocketing 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 million in inventories. As a result, Raízen's EBITDA ended 3Q19 at $6 million 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 Raízen fell 4% with an utilization 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 this sector. Investments totaled $28 million, most of which towards maintenance of the refining complex.
Let's move to the next slide. We'll present Raízen Energia's results. Second quarter of 1920 crop year was marked by a higher volume of sugarcane crushed, which rose by 10% year-over-year. Agricultural yield improved 4% compared to the same period last year. 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 bring flexibility to manage sugar sales, focusing only 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 in BRL.
On ethanol, the sales volume rose by 19%, driven by high demand in both domestic and export markets. Average price came in 24% higher than 3Q 2018 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 Energy, Raízen's electricity trading company. Own volume sold fell 6% in the quarter, reflecting the delay in 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 on cash costs.
When normalized by the CONSECANA effect, unit cash cost increased by 10%, reflecting inflation, seasonality in the production mix, and a lower dilution of fixed costs due to the reduced volume of sugar equivalent produced this crop. Adjusted EBITDA came in 32% higher, reaching BRL 848 million, 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 hedges, Raízen has designated its entire volume for sugar to be exported this year at an average price of BRL 0.55 per pound.
For the next crop, 2021, we hedged nearly 55%-60% with an average price of around BRL 0.60 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. Climate in India have impacted negatively agricultural yield, and the production of ethanol has increased, despite some reduce for sugar. The mix of ethanol in Brazil remains strong, reflecting the solid demand for the biofuel at the service stations. Sugar global demand have a relatively steady decrease of around 1.5 million tons per year.
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 million, reflecting higher expenditures in planning and rent treatment, in addition to asset integrity investments. Let's move to slide seven, and we'll discuss Comgás. Volume of natural gas sold in the 3Q19 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 million, impacted by inflation adjustment on margins and better sales mix. Regulatory current account ended the period with an active balance of BRL 132 million in favor of Comgás.
Investments reached BRL 219 million, in line with the CapEx plan for the year, focused on maintenance and customer base expansion. Moving to slide eight. Moove's EBITDA rose by 33% in the quarter, reaching BRL 80 million. Better performance of Moove is explained by consistent sales growth across all countries, reaching a 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. On Cosan's corporate segment, we reported an expense of BRL 80 million, mainly impacted by a one-off effect related to the replacement of the share-based compensation plan to a 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 million, again, relating to tax claims after final and unappealed court rulings. The cash effect on the sale of the credit rights will be recorded in the 4Q 2019. 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 1.6 billion, while accounting EBITDA reached BRL 2.2 billion. Net income totaled BRL 819 million, reflecting the improved performance of the businesses in the quarter, especially Comgás and Raízen Energia, combined with positive results in the corporate segment. Free cash flow to equity also increased in the quarter to BRL 1.6 billion, 87% higher than the same period last year.
The main effects here were in the operating cash flow, where cash generation increased at Raízen and at Comgás due to the improved normalized results and the regulatory current account refunds. In the cash flow from investments, Raízen and Comgás also invested more in the period, but in line with the CapEx spend for the year. Pro forma gross debt rose by 4% in the quarter due to fundraising at Raízen, with the issue of BRL 1 billion in Agribusiness Receivables Certificates or the CRAs. The cost of the debt stood at 109% of the CDI and on a pro forma basis, 119% of the CDI, which is excluding the Raízen. The pro forma leverage ratio after the usual adjustments ended the period at 1.9 times net debt to EBITDA. Now let's move to slide 10 to discuss our guidance for the year.
Here I would like to point out the following reviews. At Raízen Combustíveis 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 seen in the second quarter of this year, and worth noting that the guidance was based on a GDP growth estimate of above 2%, but reality was quite different. For the fourth quarter of 2019, the seasonality effect and the gradual improvement of the business environment should result in a stronger quarter compared to the previous two quarters. At Raízen Argentina, the EBITDA review reflects the negative impact of the price freeze mentioned before and the worsening political and economic scenario.
At Moove, the improved performance and better international operations performance drove EBITDA in the year, resulting in an increase in our estimates. The guidance for Comgás remains 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 Cosan's pro forma consolidated EBITDA. 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&A session. Please note that we just filed a correction to our earnings release, specifically in the calculation of the free cash flow to equity pro forma.
The corrected number is BRL 678 million, a reduction of 18% compared to the 3Q 2018, and not BRL 1.6 billion, as I mentioned in the presentation. Just this quick correction. We have already filed this correction on our website as well.
The Q&A session will start shortly. We will now begin the question and answer session for investors and analysts. If you have a question, please press star 1 on your telephone. If your question is answered during the session, you may 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.
Thank 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? 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, 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? 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? Thank you.
Hi, Christian. Thank you for your questions. I'll try to address all of them here. First on the dynamics in fuels distribution in Brazil. I now focus more on the performance of Raízen here, which by the way has been pretty consistent in balance between volume expansion and adequate return. We think throughout the year, specifically on the second Q 2019, the fuel price fluctuations brought a lot of challenges and a part of that price fluctuations reflected in July specifically. This brought to the three Q 2019 some impacts on our inventory management or basically on the supply management. The quarter showed a gradual improvement on the market conditions and the market environment as expected. First, volume grew back again, right? This is important for market environment. Secondly, we have some relevant players in this industry that we're still adjusting their strategies.
It's important also to mention that in the second quarter, Petrobras price policy was also changed, and players were adjusting their supplies to this new dynamic. It was a gradual improvement on the market environment since the second quarter, and we also expect an improvement on the fourth quarter. This is basically what we are seeing now in terms of the market environment in the fuels division. In your question about the macro political environment in Argentina. As we mentioned in the call, the prices have been gradually, in a very standard way adjusting, increasing the prices, actually, right? We are seeing also the market not suffering a lot in volume. This is what we show in terms of the volume expansion in Argentina, right? Let's see how this new environment will be.
I mean, the operations of Shell in Argentina has been performing quite well, in different scenarios, and we work here of course, to optimize the operations in any type of economic and political scenarios. Just for your question about the sugar and ethanol and the pricing environment. As I mentioned, in terms of the sugar, we still see high inventories in the global market. There's some consulting agencies saying about a possible deficit this year, but still inventories are higher than. Prices are not reflecting that scenario. We should expect prices to behave better. Meanwhile, we focus our strategy here on maximizing the return and with a quite efficient hedging strategy. This is one of the reasons our prices have been behaving better. We have already accelerated the hedge for the next crop as well.
We have hedged about 50% of the next crop, as I mentioned, and the price is already 10% higher. Our strategy here is focusing on maximizing the returns and of course with an efficiency hedging strategy.
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 increased as well. 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 quarters of this crop. Right. Price should improve throughout the next two crops until the end of the crop season.
Great. Just a follow-up. In Argentina, what's your expectation in terms of the price freeze? That it will continue, 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 starting to be unwinding in a gradual and a rational way, even with this adversity in Argentina. We don't know what is going to be the political decision in terms of price freeze.
Thank you.
The next question comes from Regis Cardoso, Credit Suisse.
Hi, Felipe. Good morning, everyone. Two quick questions from my side. First one is related to the guidance in Raízen Combustíveis, Felipe. It looks a bit stretched in the sense that it would require nearly BRL 120 per cubic meter if our calculations are correct for you to reach the low end of the guidance in the fourth quarter. 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 if there was something else you had in mind when you put together the guidance. Conversely, in Comgás, it appears to be the contrary of that. It would require a level of reload that is much below current levels. If you could just comment on those two guidances. Thank you.
Regis, thank you for your question. In Combustíveis, usually the fourth Q is the strongest in terms of performance, right? As we said in the speech here, we are seeing a gradual improvement on the market environment. That's what we expect actually for the fourth Q. We adjusted the guidance. By the way, this is the adjusted guidance, right? Excluding all the non-recurring effects that we usually do adjust, right? We need to reserve the range if we consider the account EBITDA. In this scenario, we expect to be within the range here. That's what I can tell you right now about Raízen Combustíveis. In Comgás, as I mentioned, we are looking towards the upper end of the guidance, and there's a likely chance that we even surpass that.
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 impact the unit consumption of residential clients. We're probably being a little bit more conservative here, but we are still aiming to deliver on the upper end of the guidance here for Comgás.
If you allow me just a second question on refineries. We've seen some other distributors becoming more 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 this sector. If you could discuss whether you think the same, it'd be great. Thank you.
Regis, we discussed this in the past few conference calls. Raízen is the second largest player in the fuel distribution in Brazil. We must understand any and all changes that occurs in the supply dynamics. We will follow up with the process here, and make a decision if make sense or not to invest in the refinery. We are always constantly looking into business opportunities that may bring efficiency and profitability to the operation. Analyzing deeply this opportunity of buying a refinery is part of the studies we take here.
That's all right. Thank you.
The next question comes from Pedro Soares, BTG Pactual.
Hi. Good morning, Felipe. Good morning, João. I have two questions here from my side. The first one, again, in the New Guys, if we consider the mid-range in all business units, this downward revision on Raízen Combustíveis and Raízen Argentina means a lower EBITDA of around BRL 400 million, more or less, even considering the upward revision Moove. Your consolidated figure was kept on changing, which seems, as you said, to imply stronger results on Comgás. I just wanted to have more color on Raízen Energia, if it makes sense to expect that you will reach the high end of Raízen Energia's guidance as well. The second question on Raízen Combustíveis, we saw once again your gas station productivity improving in the quarter.
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 question. First thing, Raízen Energia, we haven't adjusted the guidance. We are aiming here to probably hit the low range of the guidance, which is around 61 million tons of crushing. We saw a decrease here in productivity throughout the year, as we showed, which impacted the fixed costs, right? This will lead us to a number in between the midpoint of the guidance to the low range of the guidance, which is around BRL 3.4 billion, BRL 3.5 billion or BRL 3.6 billion. This is where you should look for Raízen Energia for the year, right? On the fuels, in terms of station productivity, this has been something that has been a focus of Raízen 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 ticket per station to be part of our network, this is what we have been seeing in the recent movements here at and of expansion at Raízen Combustíveis. We have committed here to 1 billion liters of additional volume for 2019, we are pretty aligned with the numbers as of now. We saw good opportunities of business throughout the year. We are even converting a little bit less in terms of number of stations. As you mentioned, the quality of those stations are higher. This is what we should expect for us in a consistent way here in terms of expansion and renewal of contracts at Raízen Combustíveis.
Okay. That was very clear, Felipe. Thanks.
Our next question comes from Luiz Carvalho, UBS.
Hi, Felipe. Basically, two questions from my end. The first one is related to Argentina operations. Comparing actually your results with YPF's, and then there was a big discrepancy in terms of the performance of 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 towards the end of the quarter. 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 weaker performance, something that we might need to consider looking forward. The second question is related to Comgás.
Looking to the numbers, there was a positive NPV in favor of the company at something close to BRL 900 million, basically on the back of the review of the previous cycle. I would like to understand if this reimbursement to the company would be through a tariff or how this is going to play out. Thank you.
Luiz, thank you for your question. In Argentina, we saw the biggest impact in August and September inventories. The number around $50 million that we stated, if we put that back on the EBITDA expected for the year, we will be within the guidance. This was the main impact we saw effectively in that business. Of course, the economic and political scenario brings some pressure on demand. Even though, volumes kept growing. What led us to look here mainly at this one-off effect, in terms of the price freeze. In Comgás, I'm not sure I got your question, but I don't know if you're considering here the tariff review process that was concluded in May and was effectively through this quarter, right? I don't know if that's related to your question. I'm not sure I got that. If you could repeat that.
Looking to the numbers, there's a positive NPV, in the numbers of something close to 900, to be more precisely, BRL 917 million on the back of the past tariff review. I would like to know if this reimbursement to Comgás will be through the tariff or not. How this is going to be reimbursed to the company? That's the question. Is that clear?
Yes. Now it's clear. I'm sorry. Regarding the third tariff review process, it is still under public consultation until November 18, with a final publication scheduled for December. As part of the public consultation, Comgás is contributing to the process and will be published by the regulatory agency. There's no numbers or anything we can discuss at this point in time.
Okay. Perfect. Thank you.
Our next question comes from Gabriel Francisco, XP Investimentos.
Sorry, everyone. My questions were already asked. You can proceed to the next one. Thank you.
The next question comes from Vicente Falanga, Bradesco BBI.
Thank you, Felipe. I had a follow-up question on Luiz Carvalho's. Do you maybe sell less in Argentina to wholesale clients when compared to YPF? I understand you mentioned the inventory losses. YPF did not report such significant inventory losses, and the downstream result was actually pretty solid. 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 YPF. My second question also in Argentina, we should see prices officially unfreezing as of November 13th, 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. Do you think that there will be room for that? Thank you very much.
Vicente. Not Vicente. I answered Pedro, and I thought it was you. I'm sorry, Pedro. Vicente, regarding your question in Argentina and the comparison with YPF, we have to take a deeper look here if we're separating the downstream itself and what is the effective impact here. We did recognize these $55 million of inventory impact, which is actually clean, of course, also giving the final products, right? We need to take a closer look into what the competition said. In terms of the price, and the freezing of the prices, it started to be unwinded in a gradual, and again, in a very rational way. Will depend on market conditions and how the market will behave. This is part of the recurring operation of any downstream, focusing on the supply and the commercialization strategy, the pricing strategy, and this will be related to the market conditions.
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 star one. If you want to ask a question, please press star one. The next question comes from Gustavo Alevato.
Hi, Felipe. Thanks for the opportunity. I have one question with your distribution review. Can you quantify the inventory losses that you mentioned in the release? The second question is also existing Argentina's operation. If you can give us an overview, how was the margin in October if the company was posting a positive margin business or not? It would be very helpful to try to quantify the results going forward. Thank you.
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 July was the point where we have the biggest impact here, negative impact. That was concentrated more in July. That's what I can tell you as of now. Regarding the fourth quarter, I will repeat myself here. We are seeing 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. In our guidance, we should, and we actually do expect an improvement on the market environment and then an improvement on the results. That's what I can tell you right now about the high income materials.
How about Argentina?
In Argentina, it's tough to guide now on the fourth yield. We narrow the guidance, based on the loss of $50 million. 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, Felipe.
The next question comes from Luiz Carvalho, UBS.
Yeah, Felipe, just thanks for taking another question. It's just a follow-up on my previous question. Looking to the EFC access representation from, I mean, 5th of November, so one week ago. They clearly mentioned this difference of BRL 917 million in favor to Comgás, right? I mean, any chance that you can provide any color in terms of how this, I would say, this reimbursement will be given to the company? When we can expect that, then any views on this? I'm sorry to insist on this one.
It's no problem, thank you again for the question. Again, the process is under public consultation right now. The final schedule, or the final publication is scheduled for December 16th. We are participating actively in this process, in these discussions. We cannot anticipate what will be the decision and what will be the outcome. We are contributing, and following up with the process, and the decision again will come in December.
In the schedule that you provided the presentation, I mean, the decision or the analysis of the public constituency contribution will be given by 16th of December, but then the final decision, it's going to be given by 31st of March, right? 31st of May, sorry, by next year. Only by 31st of May that we can have any visibility on when or how the company might be reimbursed? Should we expect anything earlier than that?
Luiz, unfortunately, we don't know, probably, we're going to have to follow up with the schedule up to May 31st. You're right, the date is May 31st.
Okay. Thank you.
Once again, to ask a question, press star one. Thank you. With no further questions, I would like to turn the floor back over to Mr. Felipe Casali for his final remarks. Mr. Casali, you may proceed.
Thank you, everyone, for joining this conference call. We will see you the next opportunity. Just one quick reminder here. We're going to have our Cosan Investors Day. It is scheduled for March next year. We'll send the save 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 on the conference call of Cosan S.A.