Cosan S.A. (NYSE:CSAN) Q3 2023 Earnings Call Transcript

Cosan S.A. (NYSE:CSAN) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good afternoon, everyone. Thank you for waiting, and welcome to Cosan’s Earnings Conference Call for the Third Quarter 2023. Simultaneous translation will be available during the session. To use it, please click on the interpretation button at the bottom of the screen and choose your preferred language, Portuguese or English. Those listening to the video conference in English, you have the option to mute the original audio in Portuguese by clicking on mute original audio. The video conference is being recorded and will be available on the company’s IR website at cosan.com.br where the complete material of our earnings call can be found. You can also download the presentation in English from the chat icon. During the company’s presentation, all participants will have their microphones disabled.

The question-and-answer session will start after the presentation. Please note that the information contained in this presentation and in statements that may be made during the earnings call regarding Cosan’s business prospects, projections and operating and financial goals constitute the beliefs and assumptions of the company’s management as well as information currently available. Forward-looking considerations are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Overall, economic conditions, market conditions and other operating factors may affect Cosan’s future performance and lead to results that differ materially from those expressed in such forward-looking statements.

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Today, with us, we have Mr. Luis Henrique Guimarães, Ricardo Lewin and Ms. Ana Luísa Perina. I will now turn it over to Mr. Ricardo Lewin.

Ricardo Lewin: Good afternoon, everyone, and welcome to Cosan’s earnings conference call for the third quarter of 2023. I’ll start my speaking highlighting the stellar operational performance across all businesses, achieving several record-high figures, which will be detailed throughout in the call. The robust growth in the pro forma EBITDA in the quarter and the evolution of net profit reflect the disciplined execution of our long-term strategic plan, combining organic growth with the maturity of business acquisitions. As for investments, they were in line with the annual plan directed to the efficient maintenance of operations, in addition to the capital allocation in the portfolio structural projects, ensuring the execution of the contracted growth.

Regarding risk management that we reinforced it on our last Cosan Day, we continue with our liability management process, always seeking to optimize terms, costs and liquidity. Before going to the results of each company, I want to highlight the evolution of our brand that we launched during Cosan Day in September, in which we showed how was a portfolio manager that invests in business with replicable assets, makes it happens by investing in areas with the highest potential in Brazil. On the ESG journey, Cosan became part of the each of backs of the page index portfolio, the first diversity index in Latin America focused on the pillars of gender and race, in line with the evolution of the company’s diversity and inclusion agenda. It’s worth highlighting that Cosan has two women in the Board of Directors and one on the Board of Executives, in addition to public commitments at Cosan and businesses to increase and maintain the participation of women in their leadership.

This quarter, I’m also proud to share some of the recognitions we received which are the result of the strength of our business and the dedication of our employees. We were among the Maiores & Melhores in Examem Magazine, with Compass being chosen as the best company in the energy sector. Second place went to Raízen and third place to Cosan. Cosan also won the sixth place as the country’s latest company in the annual Valor 1000 ranking, also being highlighted in the oil and gas sector. I also would like to reinforce that in line with the work we have been doing to improve the disclosure and simplification of information in our materials, we have published a template to support the calculation of Cosan’s valuation using the sum of the parts methods.

The material is being on Cosan’s website as well as the Cosan corporate modeling guide. Now, let’s move to the key financial and operational highlights of each business, starting with Raízen on the next slide. As tele in the conference call held by Raízen, the greater mobility margins added to the relevant gains in agricultural productivity and the better profitability of sugar contributed positively to the quarter strong results. In renewables, performances followed the slower pace of power and ethanol sales in line with the strategy for the crop and positioning of stocks for future sale due to lower ethanol prices thinking return higher than prices practiced in the local market. In sugar, the quarter’s EBITDA specifically reflects the lower pace of sales of its own sugar following the sales and shipment strategy for the crop.

We see a very favorable sugar cycle with a price scenario remaining at high levels for the sixth consecutive year. In mobility, we had a significant increase in EBITDA. In Brazil, we had a very strong performance due to the higher volumes sold, supported by the evolution of the customer base and the expansion of the contracted network in addition to improvement in profitability with adjustments in supplies and sales. In Raízen operations, the solid result was impacted by the maintenance of margins despite the political and economic scenario in Argentina, with expansion of market share and premium product mix. Finally, in line with the strategy of providing advanced solutions that contribute to a low-carbon economy in the month of October and therefore, a subsequent event Raízen began the commissioning of the second E2G plant in the Botin Bioenergy par in the site of Caribe in the state of Sao Paulo.

Now, let’s move to slide number 5, in which I present Rumo. Rumo delivered the best quarterly result in the history of the company with record high transported volumes, driven by strong demand for agricultural commodities transportation and the continuous improvement in safety and traffic conditions in the Baixada Santista region. The constructive moment in the logistics market reinforces the structural competitiveness of the railway mode. In the quarter, Rumo we registered an expansion in margins, which were leveraged by the increase in tariffs. The EBITDA was boosted by high prices and volumes, we remain confident with the strong market momentum. Now let’s move to Compass on Slide number 6. We recorded a robust increase in EBITDA in the quarter that reflects the diversification of Compass portfolio, combining resilience and growth opportunities in the gas distribution with a record number of connections together with the start of the marketing and services operations now organized under the Edge brand, which was impacted by the results of the first LNG cargo.

During this period, we reached key milestones aligned with Compass strategy. In the distribution area, we continue to drive efficiency and network expansion. At Comgas, we reached the mark of 2.5 million connected customers. While at Commit, we made progress in portfolio management with the speed of the distributors in the Northeast and the creation of low gas At Edge, we advanced the biomethane agenda announcing the purification plant in Paulínia, in partnership with Orizon and establishing a long-term contract with São Martinho Furthermore, we are in the final stage of the regas terminal construction, strengthening our portfolio and contributing to Brazil’s energy security and decarbonization solutions. We inaugurated the segment with the sale of the first LNG cargo highlighting the unique opportunities in our portfolio.

As a result, Compass revised EBITDA guidance with an increase compared to the previous forecast. Now let’s move to Slide number 7 to discuss Moove. In the third quarter 2023, Moove showed substantial EBITDA growth when compared to both the third quarter 2022 and the second quarter 2023. The result was driven by single increase, combined with the improvement in the mix of products sold in all regions of operation. The integration process of companies acquired in the second quarter of 2022 continues to evolve, offering good opportunities on multiple business fronts. The company remains committed to its investment plan, aiming to achieve better levels of efficiency and profitability in the long term. EBITDA over the last 12 months has already exceeded BRL 1 billion, reaching BRL 1.130 billion at the end of the quarter, demonstrating the company’s execution capacity.

Let’s move now to Slide number 8, where I present the land segment, which comprises the direct stakes in Radar, Tellus and Janus. We had a strong increase in EBITDA in the period which was marked by the appreciation of the agricultural properties in the portfolio after mark-to-market update in addition to the increase in revenues from land leased from the consolidation of Tellus and Janus. Now let’s move to Slide number 9 to discuss corporate results. On this slide, we present the evolution of Cosan Corporate’s adjusted net income which reflected the robust operational performance of the entire portfolio in addition to the better financial results. It’s worth noting that Cosan corporate results do not include the effects of Cosan’s participation in Vale, which will be detailed below.

Let’s proceed to Slide number 10. Cosan Oito is an intermediate holding company controlled by Cosan S.A. and is a vehicle that roles our investments in Vale as well as the derivative instruments structured as part of the protection and funding strategy. In August, that is within the quarter was on a way to anticipate a 20% partial settlement of the first range of the color financing structure, equivalent to 0.1% of Vale’s total shares on the date. As a result, the prepayment related 4.5 million shares reducing the colorizing participation and resulting in a financial gain of about BRL 30 million. As an outcome of this operation, in addition to the reduction of the colorized participation, direct participation increased to 1.7%. In the quarter, we received IOC from Vale, recorded as other operating income, part of which was passed on the color financing banks affecting the financial results.

Due to depreciation in Vale’s share price compared to June closing price, the effect of the mark-to-market shares held via direct participation was positive. As for the colorize participation, the shared value appreciation was offset by the negative mark-to-market in the derivatives and the net effect of the cost spread was marginally positive. In the quarter, the net value of the total investment impact was positive at BRL 351 million in the month of October and therefore, a subsequent event, causeway to be the unwinding of another installment of the first range of the color financing structure, equivalent to traditional 0.10% of the mining company’s total shares on the date. Size and effects are similar to the movement in August. As a result of the operation, direct participation increased to 1.8%.

Moving now to Slide number 11. In line with how we present our results, we present the debt profile in two views. The first Cosan Corporate, which basically includes the cash and debt of the parent and offshore companies that’s bonds and debentures and the second, Cosan Oito, which reflects the financing of the acquisition of part of Vale shares prove color financing and the fair value of the derivatives that make up the share acquisition structure. Regarding movements in the quarter, the reduction in gross debt at Cosan Corporate is explained by the early parts of redemption of the principal of the senior notes 2027 and amortization of the first installment of the Cosan Logistica debentures. As for net debt, we had a reduction in the quarter that highlights the company’s discipline in liability management in addition to a weak comparison base of the third party 2022, impacted by the issuance of bridge loans to acquire a stake in Vale.

At the end of the period, Cosan’s pro forma leverage fell to 1.7 times within appropriate levels for the company. It’s worth mentioning that the company has a very comfortable monetization schedule and a longer average term of approximately five years. Let’s now proceed to Slide number 12. Here, we present a managerial perspective of Cosan Corporate direct cash flow. Cash consumption in the quarter also reflected our liability management process, as I explained in the previous slide, which was partially offset by the receipt of interest on equity from Vale and dividends from Raízen and land, the main sources of cash in the quarter with these movements. Cosan Corporate ended the period with a robust cash position of around BRL 3 billion, reinforcing the portfolio’s capacity of generating liquidity for Cosan, we have an event subsequent to the third quarter, the announcement of its ordinary dividends by Vale and the distribution of BRL 1 billion in dividends by Compass.

Finally, I want to reinforce to you that myself and the entire IR team are available to clarify any point about the materials released including the modeling guide and the Sum of the Parts & Plate that were recently launched. Now we can start with the Q&A session. Thank you.

Operator: Before we begin the Q&A session, I would like to turn it over to Mr. Luis Henrique Guimarães.

Luis Henrique Guimarães: Thank you, and good afternoon, everyone. It’s a pleasure to be here with you today. And I’m very happy to open this call talking about people, a key point to our group in the last two years. As you’ve heard in our presentation, there are many talents being promoted and being moved from company to company in the holding company and this has been well thought out, and it’s focused on our priorities and focuses to execute our business plan and by allocating people’s time as best as possible. It’s also important to show you the strength of our partnerships, which have evolved in the last three years and how happy we are to have been able to hold on to our talent in-house. We’ve made many movements within the holding, within our own teams.

So Nelson as Cosan’s CEO makes all sense given Nelson’s results within the group. He’s very familiar with our businesses. He has already worked at the holding company. So it only reiterates that he is the right person. And we did a very similar thing in 2016 at Comgas time. He has our full faith to lead Cosan’s business for the next two years. And we’ll have an increased focus on our portfolio, including divestment in certain assets, as we’ve mentioned a few calls and during Cosan Day. So Rodrigo will become our CFO. He has vast experience in many of the sectors we operate in. I’ve been watching him. And during his time at Petrobras. I was on the other side of the table. And since he announced he was stepping down we made sure he joined our group, and how is becoming our CFO.

It’s a huge responsibility to bring our portfolio and our team to a whole new level. I trust the team and the people we have chosen to run our businesses and full in trust Nelson and Rodrigo. I wish them the best of success in their new positions, and I am here to support them and their journey to success. This is an extremely important move. We have announced it in-house and to the market and it involves the creation of other businesses within the company as marketing and services. And we also have the Dimitro [ph] have — he was moved as well. So now we’ve had a very robust quarter, and we should meet our guidance. Some very important achievements. We’ve improved our mobility margins. So important results showing the strength, importance of our portfolio and sales, and you’ll be able to see that in Compass’s future results.

Compass continues to be highly productive and to work on the extension to Lucas Rio Verde move with excellent results of surpassing BRL 1 billion and PetroChoice now move USA with very robust results and continuing our internationalization purchase, Radar businesses also with fantastic assets and continuing on the journey as predicted with Vale. So a very favorable quarter and a very strong year-end, going into 2024, very strong result. Now we’ll move to Q&A. Nelson and Rodrigo are here with us. And as of the 1st of January in the next conference call, they will be here running our businesses.

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Q&A Session

Operator: Now we will begin our Q&A. And to ask questions, please click on the raise hand icon at the bottom of your screen to join the queue. At the end, there will be a prompt to unmute yourself, you should then mute yourself to ask your question. Please ask one question at a time. To ask questions in English, please ask them in writing through the Q&A button. Our first question is from Isabella Simonato Sell-side Analyst, Bank of America. Please go ahead, Isabella.

Isabella Simonato: Hi, everyone. Good afternoon. Before anything else, congratulations on all the changes. And actually, my question is about that. Lewin, I know you’re going through a new VP position with a different perspective to Cosan Investments. But as you always say, Cosan as a portfolio manager of the group, including your assets and the assets you might acquire down the line. So I’d like to hear what’s on your mind? What are your first thoughts in this new position? And Luis, you will be stepping down as an Executive. You’ll be devoting your time to the Board and Vale’s Board, which I imagine will take up a lot of your time. And also, I’d like to hear from you how you see your next step is coming back as an Executive an option. You’ve always said that at Vale’s Board, you are keeping up with the operations on a daily basis. So how has that been?

Luis Henrique Guimarães: I’ll start. Thank you for your questions. The first question about the organization. You’re very familiar with how we do things Isabella. We always work as a team. And we have to give people the direction to make sure that we have discipline. And here at the holding company, we have always worked as a team. So Lewin will be working with Marcelo, who has a key role in allocating capital and thinking about the future of the group. And he will be working with Cosan Investments, Nelson, the rest of the team, the Board, I’ll turn it over to him in a minute. But we have proven that we have the horsepower, the people we need to make it happen. We’re not that worried about titles, positions, hierarchy. And I think that is what has set our group apart in the last two years.

We don’t need to have any complex political dynamics. What matters is having, people who trust each other, who work as a team. And who have shared missions that are important. It’s like Vale’s deal. We put lots of resources together. Leo was leading that before 11. We brought other companies together and set up a team to do it together. So it’s much more about people working together as a team. And the same applies to me. I’ll be in a different role sitting at the Board. And I’ll continue to work with the team. I’ll be part of the Corporate Structure with my colleagues and helping however, I can on specific matters. So don’t think of us as a conventional multinational organization with different boxes and titles and positions. Think of us as a group of people, working together, trusting each other with a common shared purpose and pursuing the best opportunities available.

Lewin?

Ricardo Lewin: Yeah. Well said.

Luis Henrique Guimarães: I think in the last couple of years, Leo, myself and the whole team, have been working closely together. We complement one another. And we rely on each other to make decisions. We have been evolving in portfolio analysis in the last couple of years. We’re not just saying that to the market. No. And we will continue to do that with Nelson, with Marcelo, Leo, myself, Maria Rita will continue to progress on our portfolio analysis and relying on each other to make the best decisions.

Isabella Simonato: Very clear. Congratulations. Thank you.

Operator: Next question is from Thiago Duarte, sell-side analyst from BTG. Please go ahead, Thiago.

Thiago Duarte: Thank you. Hi. Good afternoon everyone. Thanks for taking my question. First of all, congratulations to the four of you, the four of you who are taking part in the call and everyone else, after so many years, it’s wonderful to see the company’s ability to generate retain and promote talent. It’s not the first time. And it’s always wonderful to see that from our side. So my first question is about that. Obviously, Isabella’s question already covered most of it. But I’d like to talk about timing. Why now? We’ve just seen a considerable capital allocation cycle. You’re buying a stake at Vale. Compass accelerated growth and rising so powerful. So everything is consolidated and now we see that change. I don’t know if there’s anything you can add Hard to believe it’s a coincidence.

I don’t know if there’s anything you can add. Hard to believe it’s a coincidence. So I don’t know if there is anything you can add to that end. Why now? Why making such a big change now. And to me, thinking about Luis without playing an executive role is quite curious, quite — I’m intrigued. I don’t know if you could talk about it from that perspective. And my second question is about results. I’d like to talk about Compass. I don’t know if Nelson will be able to talk now. Otherwise, my question is to Luis and Lewin. Fantastic results, especially when it comes to marketing and services. And I think it’s surprised not only us, but you as well, so much so that you’ve revised your guidance. So, is the first quarter where this split has happened at this magnitude.

Could you talk a little bit about the size of the opportunity? Do you think this will happen again looking forward? And if so, why? And I think that’s it. Thank you

Luis Henrique Guimarães: Thank you, Tiago. Well, I’ll go straight to the timing point. We like to look at things in cycles. Many of you have talked to me in the past, and you know how I think about longevity when it comes to people and positions. There is no right time, but it certainly is too long a time because then you become unable to see new things, to question things, to do things. So, end of the year is always a good time to close the results cycle to make sure the company is delivering results to start a new budget cycle. Just to give you an example, we’ll have a Cosan Leaders’ Meeting. We’ll have the top 100 leaders there. So, it doesn’t make any sense to make the changes in February or March when there is a much better time to do it.

So, I think it’s the natural time to do it. We thought now was the right time. And it has to do with the fact that we’ve learned about how to best allocate people’s time, the partners’ time and so on. I will sit at Vale’s Board as well. So, that takes away from Cosan’s CEO. And it’s a relevant considerable amount of time. Nelson will be devoting a lot of time to the controlled companies, co-controlled companies. So, they are many changes going on. We’ll be launching the marketing and services in a more structured fashion. And moving on to your second question, we know that we have established contracts, logistics position, sales position, physical contracts. And yes, it is recurring. Obviously, margins and results will vary quarter-to-quarter, depending on the market.

But the possibilities are there. We didn’t revise the guidance this year. We knew that there was the chance of that happening, but there are uncertainties. And as the year goes by, uncertainties become clearer. Now, going into the fourth quarter, we knew that we were going to go over the top end of the guidance. So, we revised it. So, the timing was a realization that now was the time people were ready. Nelson had a very important cycle in gas. He’s been in gas since 2016, end of 2015, when we had the last transition. And another important thing people ask other groups, other companies about the transition challenge. Things have to move. Otherwise, you don’t generate opportunities to people whether they’re doing well or not in that position, they have more to do, and we need to make sure that things move.

So, that’s why the group made that decision, especially with our Controller and Chairman. Timing, no, there’s timing A, timing B, but we thought now was the right time and that’s why we did it now.