Earnings Call: Q1 2021

May 14, 2021

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan's First Quarter of 2021 Results Conference Call. Today with us, we have Mr. Luis Enrique Marens, Cosan's CEO with Paula Kovarski, Head of IR and ESG Mr. Giulio Artyx Solvia, Head of Finance and Mr. Felipe Fazari, IR Executive Monitor. We would like to inform you that this event is being recorded and all 2 point 3 billion listen only mode during the company's presentation. After that, there will be a question and answer session for industry analysts. At that time, further instructions will be given. Please press asterisk 0 to reach the operator. Today, we have a simultaneous webcast that may be accessed through the company's website at www.cozum.com. And the live presentation may be downloaded from there as well. There will be also an audio replay for this call available on that website. Before proceeding, let me mention that forward looking statements are based on the beliefs and assumptions of Cozum'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, solid conditions and other operating factors could also affect the future results of Covance uncooperative results to differ materially from those expressed in such forward looking statements. Now I'll turn the conference over to Mr. Felipe Cavalli, who will start the presentation. Mr. Cavalli, you may begin. Good morning, everyone, and thank you for attending our conference call on Cozern's Q1 2021 results. I'll be making a brief presentation of the quarterly results, so we can have more time for Q and A sessions. First, I'd like to point out that Cozern's corporate reorganization has been concluded by the end of this March. Q1 of 2021 results now reflect this new corporate structure. The consolidated numbers are all according to our pro form a view. The difference from the way we presented our results before is that Corzan's consolidated results now take into account 100% of ruble figures for the entire quarterly period in addition to the expenses from Cosan Logistica and Cozerna Limited, CDZ, which were incorporated by Cozerna Se. One important detail for better comparison, The numbers from the Q1 of 2020 from last year are presented on the same basis, so it also incorporates RUMO figures. Now let's get into results. Brazil was hard hit at the beginning of 2021. The number of contaminations and deaths Due to the pandemic rose to record highs, we honor and offer our support not only to the families of those who lost their lives, but to all health professionals and those working in essential services, which includes our own team of more than 40,000 employees who remain at the front lines of such battle. Despite the worst scenario and increased restrictions due to the pandemic, We managed to deliver strong growth in the quarter. Following our usual dynamics here on the presentation, let's begin with Slide 4 that shows the operating results of Raizen for the sugarcane crop in 2020, 2021 year that closed in March. The investments made by Raizen to increase productivity, combined with dry weather, resulted in expanded volumes of crushing, Agricultural Yields and Sugar Equivalent Production. Mixed production hit 52% for sugar in line with Raizen's sales strategy that prioritize the improved profitability of the commodity. As presented in most recent closing days, Raizen has been on an important journey towards agroindustrial efficiency. As a reminder, our forecasted goal was to achieve BRL 800,000,000 in gains per crop just by increasing productivity. During 2020, 2021 crop year, we already reached BRL270 1,000,000 in gains in real terms. By improving the agricultural yields, Raizen increases production per hectare, resulting in gains of scale and diluting costs, especially in the sugarcane cutting, loading and transportation operations. And here we are referring to management of process and expense Both in the field and in the industry, technology applied to area mapping and optimization in the use of land, which reduced fixed costs from leases. Therefore, unit cash costs ex Costacana was 3% lower this quarter. The investments were in line with the previous year. Now moving to the next slide, We will present the results for renewables, comprising ethanol and bioenergy production operations as well as other products including our portfolio of renewable energy. Bone ethanol sales increased both in the quarter and over the crop year, taking advantage of improved prices. The resale and trading operations was lower in the period, largely due to the reduced ethanol production mix in Brazil. Despite the lower volume sold, the improved sales prices resulted in increased revenues in this quarter and for the year. It is important to remember that Raizen offers our diverse ethanol portfolio for various purpose in addition to fuel, which allows us to reach distinct markets, capturing higher premium due to lower carbon footprint of our products. Moving on to Bioenergy. Higher power sales this quarter were offset by the drop in prices over the period. In the crop year, both the lower volumes produced and prices impacted net revenues. This less than favorable scenario compared with the previous year reduced the incentives to originate Vargas, which is the feedstock for energy cogeneration. As a result, the adjusted EBITDA for renewables was below the previous crop. Moving on to the next slide, we will discuss the sugar operations. Just to remind you that this section is comprised of sale of home and third party shipper applying Raizen's expertise and infrastructure to capture increased value through the value chain. We have been gradually increasing our direct sales to final customers, eliminating intermediaries to consistently improve returns from the sugar operation. Volumes sold in this quarter were above those in the same period last year. However, we saw a slightly different dynamic due to lower concentration of sales during the inter harvest. On the other hand, the exponential increase of resale and trading operations more than offset this reduction in our own volumes. In terms of prices, we are undergoing a cycle of record high sugar prices in BRL terms. The average price of sales was higher both in the quarter and during the year, which resulted in a strong increase of revenues. The adjusted EBITDA was also substantially higher, reflecting a more favorable scenario for this commodity. About sugar hedging, we continue to make progress towards hedging in Brazilian real terms. The uncertainties related to the size of the Brazilian crop and the signs of improving ethanol prices had a positive impact on the sugar prices, which hit historical highs with the potential for growing returns over the next coming years as well. Regarding the current crop year closing on March 2022, Raizenra has already had 80% of the sugar directed through exports. And for the next crop, the 2022, 2023, We have already had a little over 70%. In the next slide, our results of marketing and services, which includes our field distribution and proximity operation in Brazil in addition to the downstream business in Argentina. Let's begin with our operations in Brazil. The increased restrictions due to the pandemic had a direct impact on demand for the auto cycle, with a 3% reduction compared with the same period last year. On the other hand, demand for diesel continues to be strong with a 14% increase in the period, helped by our efficient sales strategy and demand from the agricultural sector. The aviation fuel sector has been showing Progressive recovery, however, is still well below historical volumes, having been strongly impacted by the reduced air traffic in Baja Eze's commercial discipline. It is important to note that we have adapted our operations to meet the new level of demand and we are ready to capture new volumes when we see an acceleration in the recovery of the sector as well as the return of the international flights. Adjusted EBITDA for the Brazilian operation was BRL 696 1,000,000 for the quarter, higher quarterly and yearly. Once again, I must say that the contribution of our supply and commercialization strategies led to higher profitability in the period by capturing opportunities from prices dynamic over the quarter. In addition, these results also reflect our focus on operational efficiency and on management of expenses. Speaking of CapEx, We maintained the level of investments compared to previous quarters. Investments in renewal and expansion of our own client network have been maintained at a strong pace, in line with the plan for of bringing best partners to our network. We are optimistic considering the business opportunities for the remainder of the year, in line with the guidance we provided to the market. Now an update on our proximity operations, the Groupe NOS, our JV with FEMSA. Since The opening of the first stores last quarter, we followed up with the opening to reach a total net addition of 65 stores over the quarter, combining OXXO and Shell Select ones. Now moving to downstream operations in Argentina, There were improvements both in demand and in profitability this quarter. Retail and P2B volumes grew both quarterly and year over year. Adjusted EBITDA in Argentina reached $63,000,000 explained by growth of gasoline and diesel demand as well as the improved operational efficiency and recovery of sales prices contributing to a better return overall. Investments amounted to $27,000,000 in line with the plan for the year. Combined marketing and services EBITDA amounted to BRL 1,000,000,000 during the Q1 of 2021. Now proceeding to the next slide on Gas and Energy segment. Adjusted EBITDA for Compas grew during the period with an improvement contribution from Comgas based on 1st, efficient management of expenses, margin adjustments applied in May 2020 and increasing demand for natural gas, especially from industrial segment, namely sectors such as ceramics, steel, chemical and petrochemical. In the residential segment, volumes were slightly lower due to higher average temperatures in the period. The commercial segment continued to suffer due to the pandemic related restrictions. Regarding Compas Energy sales, EBITDA was close to 0 due to price fluctuations during this quarter and market to market effect as well. Compas investments during the quarter reflect mostly Congal investments in line with the regulatory plan. We added 142,000 new clients this quarter, actually over the last 12 months. And Compass continues to develop its long term strategy. We have some advances being made here. So Our capital accretion process is now on a binding stage. In regards to the Sao Paulo Regas Terminal, the commercial, operational and construction agreements are in a divestment stage of negotiation as well. Now moving on to the results from Move. We had a record quarterly EBITDA on move due to the increase in this volume sold, especially in the Brazilian operation. The business continues to react with benefits from the successful sales and supply strategy, always with a focus on maximizing value creation with a differentiated portfolio of premium products. Moving on to the next slide, let's speak of Humu for the first time in this conference call. Since Humu has already their own conference call last week, I will summarize the main highlights here. Please bear in mind that we are talking about 100% of the operation results during the quarter. Adjusted EBITDA was BRL 832 million, a relevant increase when compared to the previous year. Main factors here were, 1st, the 13% increase in transported volumes, of which 16% achieved by Northern operation, despite the delayed start of the soybean crop and 2, the assertive commercialization strategy resulting in a 6% increase in tariffs. Investments were in line with Roma's long term plan. Around 40% of total CapEx was directed to the central network, whose operation started in March, 5 months ahead of schedule despite many challenges in executing projects due to the pandemic of COVID-nineteen. Now let's move to the next slide with consolidated figures of Cosan on a pro form a basis. Codan's EBITDA was BRL2.6 billion on a recurring basis. Once again, it is important to reiterate that This expansion reflects the robustness and complementary nature of our portfolio, supported by our team's execution capacity regardless of this scenario. Net profits continue to grow both on a quarter by quarter basis and year over year due to the improved operating performance of our businesses combined with reduced financial expenses and tax credits at Congas. Next slide, we will talk about our financial results, highlighting cash flow and indebtedness. We worked intensely on our debt management and brought Cosan's consolidated growth in debt net down 9% with contribution from all businesses. It is worth mentioning here that Rumo prepaid the 2024 series of senior notes. On cash flow, despite the increase of generation of operating cash, Greater levels of investments during the quarter and payments to reduce the debt principal resulted in a cash consumption of the free cash flow to equity in line with business' strategy. Leverage went slightly down in the period as a result of improved EBITDA. We expect a decrease of leverage to levels closer to 2.5 times net debt to EBITDA in the following quarters with an improvement of EBITDA. Currently, the last 12 months EBITDA is affected by the more severe impacts of the pandemic over our operations. On to the next slide, we will provide you with a brief update regarding our EESG agenda. At the end of April, We published our 2020 sustainability report, both the full version and the pocket one, with a portal dedicated to the topic. As you are aware, here at Cozzan, we see ESG with an additional read for economic as the 4th pillar of sustainability. In this report, we provide a deep review of our materiality matrix, enlarging the universe of stakeholders consulted. We connected these material topics with our strategy and also committed to concrete goals. We are engaged to fight climate change, looking to offer increasingly cleaner energy as well as reliable and efficient logistics, in addition to continuously promoting diversity in our teams. I invite you all to access the materials available on our website. Moreover, Rumor recently issued a BRL1.5 billion in sustainability liquid debentures and now 30% of its indebtedness is considered green. At Cozan, we just approved our sustainability policy, which is also available at our ESG webpage. Before moving on to the next slide to close this presentation, Let me address 2 important points. So we are back at the IBRX 50 portfolio from V3, supported by increased trading volumes following our corporate reorganization conclusion. We did a 1 to 4 share split, FP3, also focusing on improving further the liquidity of our shares and allow individual investors to easily access our shares. Now let's move to the next slide with the guidance for 2021. Our guidance now brings yearly projections for Rumu, which were already disclosed by the business. There were no change to the other business lines and we reaffirm our expectation of good set of results across the board for 2021. One important point, The numbers for renewables and sugar do not include the operational and financial information from Biocept since the conclusion of the transaction has yet to be completed or reached, which will likely happen within 2 months. With that, I close the presentation. Our entire team is here today with me, so our CEO, Luisa Hickey as well as Paul Kovarski, Head of IR and ESG Guillaume Artur and Ana Perina. Thank you. Ladies and gentlemen, we will now initiate the questions and answer section. Please each participant can ask up to 2 questions. Our first question is coming from Mr. Lucas Ferreira of JPMorgan. Mr. Lucas, your line is open. You may proceed. Hi, Felipe. Hi, everybody. Thanks for taking my questions. I have two questions. The first one On the guidance, Philippe, the guidance is looking very conservative, especially for a move in Argentina. Maybe also for the U. S. Considering where the market prices are trading. So just wondering as So if you can speak a little bit about why not dividing the guidance this quarter, why keeping it flat? I know it's just a beginning of the year, But the growing rate of some of these interests are already super elevated. The second question is about The loss on interest rate in the renewables this quarter, if you can give us more detail about that, How much was already realized? What to expect in the coming quarters in terms of volatility coming from the trading side we need? Thank you. Hi, Lucas, Luis Guimas here. Good morning for everyone and thanks for attending our call. Taking your first question on guidance, I think it's as always, it's we are leaving a moment with volatility and some factors that we cannot control, like the pandemic and if it's going to have any other impact. So we prefer to be conservative at this stage and ensure that we're tracking. Of course, if you feel that there is some significant changes in the environment, we will revise our Our guidance we always had. So I'm pleased that we feel that's conservative, but there's always an upside. But this, I think, would be bad. We will work if we were here Trying to justify why we were under the guidance, but we continue to be optimistic of the recovery of the market, but still a lot of volatility in all different sectors. So we prefer to maintain and stay hold on that. But as soon as we have more confidence, We'll definitely look at that. In terms of your second question, I think it's just to reinforce with new reporting methods and classification of Raizen. So we have sugar, which is a direct Result of all the sugar operations in land and exports, and you have renewables which comprise ethanol and power trading. And on this quarter, which was the end of the crop and the entire crop as a whole, ethanol has performed very well. We had a very strong year, both on our own products, but also on origination, a lot of export new markets, capturing premiums in markets where was important, etcetera. Yes, we had a quarter We're in the electricity area. We didn't perform as we expected. The electricity market has been very volatile on this Q1 with some, I'll call, once in a century events From both climate and also from some regulatory issues, and therefore, we had another good quarter Okay, let me quickly find. But ethanol was very, very strong. Thank you very much. Our next question is coming from Mr. Andre Hachem of Banco Itau. You may proceed. Congratulations on publishing your first results under the new quarter restructuring. I have two questions. The first is related to Raizen. Could you comment, I mean, when we think about the new proprietary technology that you have at ATG and biogas, the advantages of being a first mover I know the difficulty that other players haven't replicated this. So in other words, how much of the industry is comparing these 2 technologies? My second question is related to Compass. Could you please provide us an update on how each of the individual ventures are going and when you expect them to be materialized? We're talking here about the Riga terminal and all the other new projects. Thank you. Thank you, Andre. I appreciate your questions. Let me start with Raizen. Yes, we've been investing for a long time in new technologies to enhance the value of our assets there and to be able to maximize profitability per hectare of biomass on top of sugar and 1 gs betanol and cogeneration. And T2G, as you know, our effort for the last several years and has materialized. We now have A scalable technology with a proven track record and a structured supply chain. And of course, we We will explore that as the market allows and global demand for cleaner products, we are seeing a pickup. BioGaAs, the same story. So we also will be looking at how to transform something that was a byproduct, which is in house to something that's profitable. And again, we have made the development with partners. We have invested in the 1st large scale plant that's operating. And again, right now we have the confidence that can be replicable, pending, of course, market conditions, prices and, of course, of state. All these projects are very important, and we always have the discipline, as you know, not only in Raizen and all the companies that Cozum participates and ensuring that we have sufficient demand and in most of case, firm contracts to start building new assets. So of course, on the first two, we need to take some risk, but as we have very confidence and we are the 1st mover In this market, we will evolve as the market allows. So technology is a key component of Raizen proposition, not only On renewables, we are doing a lot of work, as you know, on sugar, a lot of work on the marketing and service. Shellbox now is a big reality. It's over thousands of transactions today and is one of the largest B2C e commerce, if you compare to all the other e commerce that exists in the country, we will continue to leverage technology for the growth of of Raizen and all the companies in the investment platforms we have. Regarding Compas, some of the statements, So with Petrobras, the discussions with Petrobras continue. We're seeing good progress, but of course, You can only tell when it's finished and we get a final document. So we are progressing on that. So the both teams are pursuing The definition for the agreement, of course, is not an easy transaction from the point of view of several assets, liability and all other components of the transaction of the lease side. So we expect to conclude that in due course, But there's no time line to give you as a certainty because it depends on both parties reaching agreement on that. On regards, We also progressed in all the license have been issued, and we are waiting for the start of the construction as soon as possible. Perfect. Thank you very much. And again, congratulations on the results. Our next question is coming from Mr. Charlie Duarte of BTG Pactual. You may proceed. Hello, good morning everybody. My name is Paolo from the Guiana. First question actually quick ones here. First question would be on guidance. I mean, with the incorporation of Rumor and how you change the, Of course, the profile of the portfolio, can you walk us through how you see your Pro form a leverage spending, you're around 3.1 times now. So just First to understand what level you consider to be ideal considering the portfolio that you now have under under Cozum's umbrella with the corporate restructuring. So that would be the first question. The 2nd question also discussing the guidance and the lack of changes in the guidance, particularly looking At the rising upstream division, we are not changing your crushing volumes Expectations as of course we are all getting receiving news flow and discussing the impacts of the drought. So just If you could comment a little bit on where you see the risks to your chain availability this year relative to the rest of the market? And the third question is still focused on sugar and renewables. How you See, when you look at your own production volumes of sugar and ethanol, where you see your mix standing considering that you have You have hedged a very high volume for sugar, but you also have a pretty attractive ethanol price in the marketplace right now. So If you could comment on that. Thank you so much. Thiago, thank you. I'll take the first one here in terms of the guidance for the Cozhan Consolidated. So as I mentioned on the call, We have incorporated the debt from CZZ and from Cosanozirsk and as well from Iromo. We have considered For this quarter, the last 12 months EBITDA, which again, we faced a more severe impact of the pandemic On this last 12 months number, right? So as soon as we improve throughout the year and as you've seen in the guidance, We're probably going to deliver our results improvement results across the board. So as soon as the EBITDA improves, it's probably going to reach About 2.5 times net debt to EBITDA again, it's a pretty comparable level for us to as a running rate. Thiago, thanks for your question. Good to hear from you. Regarding the guidance on crushing again, we have several Crop's on our backs and we know that we have some oscillation on the climate. We believe that we will continue to deliver productivity. We know that the drought can have some effect, but we are confident that with the productivity gains that we had last year, and we will continue to have This year probably a little bit less than last year because of the drought and sugar content above average, Probably not as good as last year, but above average, we will be able to deliver our guidance on that. This is why, again, we haven't adjusted, As I explained on the first question that was asked before, why we changed when we had the upside. We are and also When we change it, we are seeing a more difficult environment in that sense because we still feel that there is a lot to go through as well as some of the work we are doing. Regarding mix, I think we have 2 environments here. We have the original Raizen and the new Raizen plus baro serve. With the regional Raizen, we are confident that the mix will stay around what was left here, around 52%. We understand the back of your question, of course, is because ethanol prices are very good, very atypical, right? So you see in April where price went up rather than down, which reflects, I think, several issues that we've been talking with you on previous years. The front demand for ethanol So, Enelba Bio is a mandate and again another development of global supply and demand for sugar and recovery of the Otto cycle, etcetera. So we have more leverage and more flexibility on the BioServe asset That we could have more maneuver between sugar and ethanol. And of course, we're going to be looking at the opportunity. And always remember that we can capture also Some of the upside of the ethanol trade and the flows to the non proprietary products and our commercialization, Which you know we are very strong on that. So all in all, we expect, as you know, strong prices for both products, which is good for the business. Also, opportunities for us to advance in future years where profitability indicates is also good. And with the addition of BioCell, a greater flexibility in terms of our way to manage the mix. Let me just complement one thing here, just putting more color to what we said. So we may see the higher impact from sugarcane availability. So Probably looking at more at the low range of the guidance, right, for this crop. But definitely, we'll see a compensation on the sugar equivalent production, Right. That's what he mentioned about the productivity sort of higher, yes, sugar content. So as of now, if you want To look at the guidance number, you may look at the low range in terms of sugarcane availability and crushing. Thank you, guys. That was very clear. And Felipe, just a follow-up on the first question. Would you say When you talk about the 2.5 times leverage, would you say for Crozant's portfolio as we have it Today after the corporate restructuring and the addition of room and so on, Would you say 2.5 times is an ideal leverage, something that you guys should be pursuing over time? The reason I'm asking this is just to understand how we should think about use of cash and capital allocations and so on going forward. Yes. We are looking for the 2.5, Thiago. I think this is a good number. Of course, as you have always followed We will always try to be adjusted cycle, right? So if Conditions we believe will be more tough in the future because of any event in terms of the markets we play or that we will take a more conservative view going forward. But with the visibility we have for the following years, where the markets are positioned, the supply and demand for each of the products that are important, the growth of the EBITDA that we are seeking in all the business, the new projects, etcetera, We believe that the good balance approach as well as the profile of our debt and the type of that we have. So we are very confident that this is a good place to be maximizing the interest of the shareholders. Very nice. Thank you so much. This concludes the question and answer section. At this time, I would like to turn the floor back to Codan for closing remarks. Guys, again, thanks for your attendance for this webcast. Just a couple of messages here from the management. First, we continue to say thanks to all the magical staff On the front line, in Brazil and the other countries we play, it's been a very difficult time and you know that these guys and they also have made a big difference in terms of taking care of us and taking care of the people that are in need. And I'm sure, unfortunately, this will continue for a certain time until vaccinations widely spread. We, as Compagnolo, continue to support several efforts to the donation and availability of time from our teams In terms of food supply, medical supply and ethanol and alco gel supplies, we're doing our part. It's a time for solidarity and it's very important that the whole society supports the ones most in need in this time. Also want to thank our team, Our over 40,000 people that have been every day supplying energy and logistics with full efficiency and we haven't stopped Any of our operations in any place, any day of the last 12 or 18 months, and we continue to do that. That's important to have The society and for people to be able to move, we see the food here in Brazil and in several parts of the world. And To add, I would say, we are confident with the recovery. I think we are entering a good cycle. I think we are seeing that in the U. S, certain parts of Europe and certain parts of Asia. Vaccination clearly works. So we've seen the numbers going down in every project to have a critical mark of vaccination. Even in Brazil with the age Over 60, we've seen the numbers. So we are very confident that we have pickup in demand. We are seeing an effect in 2nd place like end of a war. So people want to going out, want to have fun, want to spend time with friends, family, want Travel, want to have mobility, want to eat out and want to consume. So With that, I think all our business will benefit from that because we are in the core of moving goods, people and all the rest. So we are preparing for that. So ourselves, our dealers, our distributors, our partners, Our constructors, our suppliers, we have engaged them from several months prepared for the recovery, and we expect Given a lot of challenges in supply chain, so you're seeing a lot of segments having difficult supply chain, if you're not prepared, You're not going to be able to cope with the recovery when it comes. So we are confident that we have done our homework. We are confident that we'll be there For our partners, distributors, dealers, constructors, etcetera, and we hope to have a good rest of the year. Of course, as we said, some volatility can happen. We can have always a 3rd wave or other things, but I think the worst is behind us, and we work hard to deliver good numbers and surpass the guidance we have given to you guys and the markets and our shareholders. So thanks for your confidence. See you next quarter. And in the meantime, any update, especially the transactions that are going on. As we update, we're going to continue to