Earnings Call: Q1 2019

May 13, 2019

Hi, everyone. Here we are to talk about Coosa Unlimited first quarter twenty nineteen results. Let me start by giving you some context on the macro trends of the quarter. Expectations were quite high in terms of timing for the approval of the pension reform in Brazil and everything it would unlock thereafter. Building political consensus around the content of the reform took longer, affecting confidence and causing economists to reduce their GDP forecast to 1% growth this year and Brazilian real to depreciate. Oil prices appreciated almost 30% during first quarter, helping ethanol prices during intercrop season. Sugar prices, however, remained depressed mainly on another strong crop in India. African swine fever hit Chinese swine livestock, reducing demand for grains and causing a decrease in prices. It's never an easy ride. Let's talk about our businesses and starting with energy. Raisin Combustive sales volumes increased 3% driven by diesel, ethanol and jet fuel. Otto cycle sales keep on improving gradually month after month since last August, but still flat yearly when measured in gasoline equivalent. Fuel prices volatility continued to bring challenges and opportunities, and Raizen managed to deliver consistent and robust results during the quarter through the optimization of its supply and commercialization strategies. Raizenha Argentina results are back to run rate as refining capacity utilization is back to normality after maintenance stoppage and relative economic stability during the quarter. Demand for fuels, however, reduced 6% yearly. Aviation sales increased significantly following higher demand for flights in Argentina, combined with new contracts signed. On rising energy, as discussed previously, the twenty eighteen-twenty nineteen crop year was a perfect storm for the Brazilian sugarcane industry. This quarter concluded the season and was impacted by lower sales prices, sugar and electricity, partially offset by higher sales of on sugar and ethanol. Raisin prioritized ethanol production in the crop to leverage on the biofuel higher profitability. Lower sugarcane availability prevented expected fixed cost dilution, causing unit cash cost of production to increase 10% this year. Comgas normalized adjusted EBITDA increased again on the back of growing volumes. Higher industrial activity in specific sectors led to higher sales volumes in that segment while also helping commercial sales to expand following the addition of more than 800 clients over the last twelve months. Residential volumes instead decreased, given higher temperatures when compared to the same period last year, partially offset by connection of 100,000 new clients in one year. Movies EBITDA improved significantly in the quarter, driven by higher sales of finished lubes as well as the expansion of international operations. COSNA SA pro form a adjusted EBITDA expanded 11% in the first quarter of twenty nineteen, helped by Comgas and MVV's results as well as the consolidation of Raizen Argentina. Net income increased 6%, and the free cash flow to the equity totaled BRL1.7 billion. COSA SA issued BRL1.7 billion in debentures to fund the voluntary tender offer of Comgas preferred shares, and movies capitalization was concluded with CVC funds injecting BRL $430,000,000 in the company for 30% stake. Leverage ended the quarter at 2x net debt to pro form a EBITDA. Now logistics. Humu's transported volumes increased during first quarter when compared to the same period last year. Higher capacity availability following investments enabled capturing seasonally higher volumes in January due to anticipation of the soybean crop commercialization and continued ramp up of fertilizers backhauling at Malanohe. Rains, however, caused landslides at the Santos Downhill, affecting Malanohe operations in February. Humu's market share of exported grain volumes increased in Santos and Southern ports, reflecting the quality of the service provided. Soybean exports are now expected to be lower due to the ASF in China. Impacts for Rumo will likely be reduced by take or pay obligations and strong corn crop with possible anticipation of exports already in the second quarter. Humu's higher EBITDA in the quarter reflect higher volumes transported. Despite continued reduction in fuel consumption, variable costs increased above volume expansion this quarter due to higher costs related to sugar trucking to accommodate higher soybean volumes and penalties related to non delivery of transportation service since February due to the landslides. Net profit totaled BRL27 million, reflecting operational performance as well as efforts to reduce debt costs, including prepayments. About CCZ. Consolidated pro form a EBITDA increased 12% with contributions from energy and logistics. For proper comparison, CCZ adjusted numbers exclude the impact of IFRS 16 for all businesses. Net debt to EBITDA closed the quarter at 2.2x. Before we finish, a few updates about capital allocation and our high conviction in the intrinsic value of our portfolio. This quarter, in particular, we tendered BRL1.6 billion worth of Comgas preferred shares, increasing our stake to over 95% in the company and announced the tender for common shares a couple of weeks ago. In the meantime, Rumu won the Notesul Railway concession, adding another 1,600 kilometers to existing network. That's it for today. See you next quarter.