Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan S.A. second 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 participant need assistance during this call, please press star zero to reach the operator. The audio and slideshow of this presentation are available through 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. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Cosan's and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Felipe Casali. Mr. Casali, you may begin the call.
Good morning, everyone. Welcome to Cosan S.A.'s second quarter 2019 earnings conference call. 2019 started with more promising signs of economic activity. Delay in approving pension reform, however, ended up frustrating a bit those expectations and causing economic activity to slow down throughout the quarter. The diversification of our portfolio has sure consolidated the EBITDA growth for Cosan. Before we go to results on slide four, I would like to take the opportunity to explain the structure and the rationale of the deal around convenience stores announced by Raízen last week. Raízen sold 50% stake of its convenience store business to FEMSA, forming a 50/50 JV. The convenience store business was valued at BRL 1.1 billion of enterprise value, implying a multiple to EBITDA around 13 times. FEMSA will pay BRL 560 million for its 50% stake.
Once this transaction is complete, each partner will inject BRL 160 million into JV to support expenses and investments for the first three-year cycle in which we expect to add some 500 new stores. This JV will operate with two solid brands, Shell Select for traditional service station franchise model and OXXO, which will focus on the proximity stores market. Raízen's partner brings proven expertise and leadership in the retail segment, which will enhance our growth capacity in this segment, helping to upgrade our value proposition to franchisees who are core to Raízen's strategy and bringing greater efficiency to investments and operations. Closing of the deal is dependent upon the approval of the Antitrust Commission, CADE, and other standard conditions. Let's move to slide five to discuss Raízen Combustíveis results.
Raízen delivered a higher sales volume and EBITDA in the quarter, rising 8% and 5% respectively, reflecting consistency of its strategy and solid operations. Before discussing the 2Q19, let's take a look at historical second-quarter margins trends related to the dynamics of ethanol prices and mix, as seen in the chart. Talking specifically about the same period last year, the 2Q18, the results reflect two different moments. Before the truckers' strike, prices were all on the rise, positively impacting inventories. The strike, however, reversed the trend abruptly, causing relevant inventory losses due to diesel price cut on top of reduction in sales. Now, in the 2Q19, a set of events adversely affected margins of the main products. Starting with ethanol, a significant drop in prices as well as a greater share of Otto cycle mix resulted in seasonally stronger inventory losses.
Gasoline and diesel faced a typical adjustment seen that quarter, reflecting change in periodicity of Petrobras' price adjustments, resulting in lower gains related to the supply strategy, which as you know, encompasses inventory management and imports. In the aviation segment, Avianca's Chapter 11 process and the negative price move depressed the results of this segment. Remember that demand has not been growing as market expected for a while, following lower economic activity in Brazil. Despite this, Raízen delivered solid growth, maintaining its focus on expanding and strengthening the relationship with the services stations network while keeping the consistency on its supply and the commercialization strategy. Now let's move to slide six to discuss Raízen's results in Argentina.
I would like to first highlight that as we have been reporting, the results of the Argentina business is in US dollars, which is the functional currency of the downstream operation. The quarter preceding the primary elections in Argentina was marked by lower peso volatility and a relatively stable economy. Even so, demand for fuels remained depressed. Speaking of volume, diesel and gasoline sales in the quarter were approximately 5% lower than in second Q18. The aviation fuel volume grew nearly 20% year-over-year, in line with the increased customer base and the higher market share. The total volume processed by Raízen's refinery came in line with 1Q19, with normalized utilization rate. The quarter's EBITDA stood at $47 million due to lower sales volume, and investments totaled $11 million, most of which of maintenance of the refining operation in line with the expectations for 2019.
Now moving to the next slide, we'll present Raízen Energia's result. The 2019/20 crop year started after a short delay due to rainfalls in early April, reducing crushing volume by 7% in the Mid South region of Brazil, including Raízen. The average sugarcane yield was 9.3 kilos of TRS per hectare, a reduction explained by the lower concentration of sugar content on the cane. The production mix continues to prioritize ethanol, which came in at 51%, in line with the commercialization strategy for 2019, which focused on the sale of higher return products. Speaking of sales, let's start with sugar. Raízen reduced the volume sold, building inventories for sugar commercialization during periods when the yield is maximized and in line with the hedge position.
The average sale price in BRL was 16% higher in the quarter, as we announced it in previous conference calls, given better pricing for this crop year. On ethanol, Raízen accelerated the own sales by 8% in the quarter to take advantage of stronger demand, with a 9% rise in the average price compared to the same quarter last year. We maintain an economic hedge for part of ethanol sales, usually at better prices than those seen in local market. Along with strategy for sugar, the ethanol hedging aims at protecting profitability and cash flow, mitigating risks imposed by price volatility. Cogeneration results were impacted by WX operations, our electricity trading company. We are therefore highlighting our own volume sales since the trading activity made by WX generates higher revenue, though with a substantially lower margin than the sale of electricity generated by Raízen.
With that said, our own volume sold was 11% lower in the quarter due to a reduction in crushing volumes. The average price of own electricity sold was in line with the same period last year. Worth noting that electricity spot prices were significantly higher during the second Q18 last year due to the drought, which did not happen this year. As for cost dynamics, the unit cash cost of our own products sold in sugar equivalent was BRL 719 per ton, 17% higher than in second Q18. Main impact was the lower dilution of fixed costs due to this delay in the beginning of the crushing season and inflation in the period.
Adjusted EBITDA stood at BRL 402 million in the quarter, down 18% from 2Q18, mainly reflecting a reduction in the own volumes of sugar and bioenergy sold, as well as lower cost dilution, as I just mentioned. For sugar hedge, Raízen hedged virtually all of the 35% of the total volume with an average price of BRL 0.61 per pound. The price scenario for sugar have not changed much since our last conference call. The sugar prices are still pressured, especially in light of another expected strong crop year in India, while the mix in Brazil points to a higher share of ethanol. Raízen always aims to seize new opportunities to improve the profitability of sugar and ethanol prices by optimizing sales and production mix.
To conclude the presentation of Raízen Energia's results, investments in the quarter rose 30% to BRL 630 million due to increased winter planting and sugarcane field renewal, as indicated in the year's guidance. As announced in our previous conference calls, we are stepping up the renewal of sugarcane fields in order to increase the agricultural yield over the course of the upcoming years. We incurred higher expenses, mainly related to asset integrity and intercrop maintenance due to the delay in the harvesting period. Moving now to slide eight, where we will present Comgás results. The second quarter of 2019 was marked by the completion of the fourth tariff review cycle, which was delayed for quite a while, as you all know.
Business plan and general conditions were defined for the 2018 to 2024 cycle, and the outcome of the review came quite in line with the expectations and bring back regulatory stability and improves the business environment for Comgás. Now let's discuss the quarter's highlights. Natural gas sales increased by 3% in the second Q19 across all segments. In the industrial segment, sales growth is due to greater demand from some industrial clients and a weak basis for comparison due to the truckers' strike last year. Residential and commercial segments continued to grow, supported by the addition of new clients. In the residential segment, sales growth was partially offset by lower unit consumption, affected by a higher average temperature in the period.
Normalized EBITDA totaled BRL 583 million in the quarter, up 19% due to an increase in the volume sold, as well as the annual margin correction in accordance with tariff review. IFRS EBITDA growth was due to a current regulatory account movement, which left Comgás with an active balance of BRL 230 million at the close of the second Q19, and this balance is in favor of Comgás. The company also invested BRL 200 million in network maintenance and expansion. The year-over-year increase resulted from the investment acceleration following the completion of the tariff review process and regulatory commitments defined. Let's discuss Moove results on slide nine. Lubricant sales maintain an upward trend in operations across all countries over the last 12 months. Adjusted EBITDA in the quarter was 18% higher than in second Q18.
Speaking of Cosan corporate results, on the right-hand side of the slide, we present general and administrative expenses, which increased to BRL 49 million due to marketing expenses concentrated in the quarter but in line with annual plan. Other operating expenses came in line with comparison basis. Moving to slide 10, let's discuss the consolidated result of Cosan S.A. pro forma, considering 50% of Raízen. Cosan recorded an increase in net income as well as in consolidated adjusted EBITDA, confirming the robust performance of our portfolio. The improved performances of Comgás, Raízen Combustíveis, Moove, and the consolidation of Raízen Argentina mitigated Raízen Energia's seasonally weaker results. Investments in the quarter also increased but are in line with the guidance.
On the next slide, we highlight the main impacts on cash flow, starting with the operating cash flow, where Comgás was the main contributor on improved normalized performance and current regulatory accounts movement in the quarter. In the financial cash flow, Cosan disbursed BRL 464 million on the acquisition of common and preferred shares of Comgás as part of the voluntary tender offers announced in the first semester of the year. Remember that the preferred shares process is now over, while the common share process will end on September 4. To date, we have reached a 99.1 stake in Comgás. As a result, cash consumption reached BRL 371 million in the period. In addition to the effects mentioned, the second quarter of the year represents the first quarter of the Raízen Energia crop year, when working capital goes up due to inventory buildup.
Last but not least, Cosan paid BRL 392 million worth of dividends to its shareholders in May this year. Pro forma gross debt rose by 7% in the quarter, specifically in Raízen. Cosan's average cost of debt equaled 107% of CDI, or 115% of CDI if you exclude Raízen. The pro forma leverage ratio after the usual adjustments ends up in the period at 2.2 times net debt to EBITDA. Now let's move to slide 12. Before concluding the presentation, I would like to reiterate here our expectations for the year. There is only one update since our last earnings conference call. Comgás tightened its CapEx forecast range, which is now between BRL 800 million and BRL 900 million, in line with the business plan defined in the tariff review process.
All other projections, both for our business and Cosan consolidated, remains unchanged, and we keep the focus on delivering it once again. This concludes our presentation, and we will now take any questions you may have. Thank you.
Thank you. We will now begin the question and answer session for investors and analysts. If you have a question, please press star one. Our first question comes from Luiz Carvalho, UBS. You may proceed.
Hi, Felipe. Thank you for the call. I have basically three questions here, if I may. The first one is regarding Argentina. Due to the recent events in the country and the, perhaps, depreciation of the currency, I just would like to know the company approach in terms of passing through the prices due to domestic prices and how this could impact between $210 billion and $260 billion EBITDA guidance for this year. The second point is about the distribution margins in Brazil in Raízen Combustíveis. We saw somehow a drop as well compared to the first quarter. There's a chart in the presentation that shows that, I don't know, years ago, we had a rebound. If you can share with us your perspective, albeit the margins behavior during the second half of the year, that would be useful.
My third question is more about the potential investments in potential new businesses. There is lots of opportunity with the, I am going to talk in Portuguese, potential natural gas pipelines and the natural gas distribution. How Cosan is preparing potentially to actually to join this market and take some advantage of integration. Thank you very much.
Hi, Luiz. Thanks for your question. Starting with the first one, in terms of Argentina, of course, as we have been stating in the past few calls we had with the market, every time we have a strong or max depreciation of the Argentinian peso, this may impact the short-term ability of the company to adjust the prices at the pump in peso terms, right? This is a U.S. dollars functional currency business, right? Over time, what happened is that we see that the prices adjust throughout the following month. When you look despite the political and economic environment, on the long run, EBITDA has been relatively stable, indifferent, again, political and economic environment. With that said, we are confirming the guidance for the year, which has a wide range that would absorb those volatilities that we are seeing right now.
There's no plans as of now to change the guidance, but of course, we are aiming more to the low end of the Argentina EBITDA guidance as of now. When we look at the distribution margins in Brazil, we've been pretty clear and the market saw part of the movements on prices which impacted the results specifically on the second quarter. We remembered that the second quarter of the year usually is the one where we see the impact on the margin, mainly due to the ethanol pricing performance here because of the beginning of the harvest. We had this quarter specifically, a change of the priority of the price movements from Petrobras, which impacted, of course, our ability, in terms of delivering what we expected at first. As well, we are seeing demand not as one could expect at the beginning of the year.
When we look on the first quarter of the year, we even saw a likely growth in January on the Otto cycle volumes. After that, along with the adjustments on the growth expectations for Brazil, the volumes, of course, reflect part of this change in the expectation. Putting all of this together, the second quarter had all the impacts that I mentioned on the call, basically in the three products, ethanol, gasoline, diesel, and adding that the aviation business. When we look at the second semester and that's part of what the presentation shows on that graph. The second half margins usually shows a rebound, and that's what we are expecting again, looking and it's what is implied on our guidance.
In Raízen Combustíveis Brasil, we are as of now looking more to the low end of the guidance, rather than the top or the mid, as we were before. In looking for a new business, as you mentioned, there's always discussions in terms of the new gas market. I'm not going to discuss here specific projects. As a whole, what you should expect in Cosan is that we participate in the discussion. As you know, we have Comgás, which is the most relevant distribution of natural gas player in Brazil. This brings us a lot of opportunities to look at other alternatives, not only on the supply of the gas, but also the commercialization. That's what we are going to study as of now.
As a group, here, we're going to look at all those discussions and participate actively to decide where we're going to put more effort on.
Thank you. If I just check if I understood correctly. In Raízen Combustíveis Brasil, you're also targeting the lower part of the guidance, correct?
Yeah. For Raízen Combustíveis Brasil, we're now looking more to the low range of the guidance rather than the mid as we always do when we set the guidance. Remembering, we designed this, we developed, we analyzed this guidance when the GDP expectations for the year was around 2%-3%, right? This has moved over the first semester of the year.
Okay, perfect. Thank you very much.
Next question comes from Regis Cardoso, Credit Suisse.
Hi, Felipe. Thanks for taking the question. I will assist a little bit more on the fuel distribution theme. If our calculations and assuming that the range in GDP you just mentioned are correct, you'd require some margins of around, EBITDA margins of BRL 115-BRL 120 per cubic meter in the second half of this year, in order to reach the low end of the guidance. It is feasible, and it seems, particularly given the positive seasonality of the second half, and it seems rather aligned with your original expectations for the full year of 2019. Nevertheless, it's a big jump from the current BRL 85 per cubic meter you posted in the second quarter in Raízen Combustíveis.
My question is: What do you believe needs to happen for you to be able to reach that guidance, or that is, to materialize this much higher level of margins in the second half? Does it require having import gains? Does it require having inventory gains that revert any past movements? Is it for you, just maintaining the replacement margins that you had at the end of second quarter? Do you still have to count on further expansions? My question more generally is: What needs to happen so that you'd be able to reach these much higher margins between 115 and 120, coming from 85? Thanks.
Regis, thanks for the question. We discussed a little bit the impacts of the second quarter of 2019, and actually this pressured the margins in the quarter specifically, which we cannot guarantee that same effect will be present on the second half. Right? What we are looking here historically is that the second half shows an improvement on margins. Right? This is what is implied on the guidance, as you mentioned. We're going to keep the focus on our supply and our commercialization strategy. Looking at opportunities on the imports, managing the inventories, and this is part of the recurring strategy of Raízen. It's keep managing the business, looking at the long-term relationship with our resellers, focusing on maximizing, and having an adequate return for the business. We're going to do more of the same.
Again, the second quarter was impacted by specific events that we mentioned on the call.
Absolutely. Thanks very much. If I may, just a second question on Comgás. Just if you could update us briefly on how's the discussion regarding the pending decisions or pending discussions for the past tariff review cycle, the one that was skipped.
Regis, there is no schedule defined yet for this process. Comgás and the company will let the market know as soon as we have news about that.
Thank you.
Next question comes from Fernanda Cunha, Citibank.
Hi, guys. It's actually Pedro Medeiros, okay? Well, I have a couple of questions related to the JV recently announced with FEMSA. Okay? Can you walk us through the expectations of value creation from that JV and is there any plan to include your Argentine assets into that joint venture? Second question is about capital allocation. Okay? It's a very specific question, if you can talk about potential M&A opportunities in the natural gas market and whether the company is evaluating any potential opportunity there. Okay. Other than that, these are my two questions.
Pedro, thanks for the question. First, in the convenience store business. We brought a partner here that has a well-known expertise on the retail business and will help us and develop, not only the convenience store business, but also the proximity one. Right? The JV is to operate in Brazil. We have a plan to reach, in the next three years, around an additional 500 new stores. Right? This is the initial plan here. The company will have the BRL 320 million that we stated for expenses and investments on this first cycle. It's, again, a JV formed to operate in Brazil as of now. In regards to your question about the gas business, we have to remember that Brazil is long in natural gas. Comgás has an operation here specifically on the concession area.
That's what, as Cosan, we're going to look at the opportunities being Brazil, again, long in gas. Right? There's no definitions or anything that we can share right now with the market.
Okay. Thank you so much.
Next question comes from Lucas Ferreira, J.P. Morgan.
Hi, Felipe. Good morning, everyone. My first question, Felipe, on the sugar and ethanol business. How do you see your perspectives for the full crop in terms of crushing and productivity? If you can share if that changed in the last couple of weeks or not?
If you can still think about reaching the sort of midpoint of the guidance of EBITDA for the full year, and CapEx as well. My second question regarding the JV with FEMSA, if you guys have already defined who's going to be running the JV, who's going to be the management team, and, if it's not yet defined, when that should happen and who's going to be electing this? I suppose, of course, the new board, but is there any kind of appointment by FEMSA of bringing someone from their operations? If you can give us more details. Thank you.
Okay. Thanks for the question. I'll start with the second one first. The JV will have a board with six members, three appointed by each shareholder that, after the closing of the deal, will define the names that will run the business. It's not public, and it's not defined yet. This will come as soon as we have the closing of the business. Again, board of the company electing the executives. For your question in the sugar and alcohol and the perspective for the crop, we reiterate our guidance looking at the midpoint of creation. We're talking about 62 million tons for the crop year. There is no change in that.
We are focusing a lot, as we mentioned, on doing the planting and the harvesting in the most efficient way, improving the techniques and the specific technology that we implemented to yield at, and to harvest better our crops here. As you remember, the first cycle of investments in Raízen was focused on logistics, and we are now putting more effort on optimization and improving productivity of our sugarcane fields. The increase and the renewal is to decrease the average age of our sugarcane fields and, by consequence, improving the productivity of our fields. Looking at the guidance, we are still aiming here the midpoint for Raízen Energia, not only for EBITDA but also for CapEx.
Thank you, Felipe.
Once again, to ask a question, please press star one. To ask a question, please press star one. Thank you. With no further questions, I would like to turn the floor back over to Mr. Felipe Casali. You may proceed.
Thank you, everyone, for joining the call, and I'll talk to you in the next opportunity.
Thank you. That concludes the question and answer session for investors and analysts, and also the call. Have a nice day.