Cosan S.A. ADS

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cozum SEA's third quarter of 2020 results conference call. Today with us, we have Mr. João Arthur Souza, Head of Finance, and Felipe Casale, Investment Relations Executive Manager. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. After Kozan'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 ri.kozan.com.pr.en. These 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 Cousins 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 Cousins and could cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mr. Felipe Casale. Mr. Casale, you may begin the call.

Good morning, everyone, and welcome to our earnings call for Cousins SAVED. Great challenges marked our business over the past months during the pandemic. However, the Brazilian macroeconomic figures in the third quarter demonstrated an upward trend in economic recovery. As social isolation measures gradually loosened, we observed an increase in demand for fuels, lubricants and natural gas. Slide 3 demonstrates this upward trend in the macroeconomic data that relates directly to our business. At the onset of the crisis, we were swift to adapt to this new business scenario. And more than that, we prepared in advance for when the economy would be picking up speed again to allow us to be well positioned to capture such opportunities in the market. Our teams are focused on execution and value generation, whereby the results lead to an increased consolidated adjusted EBITDA, measured both year over year and quarterly, confirming once again the robust nature of our business portfolio. The pandemic continues to affect people's lives and businesses. We remain attentive to the uncertainties posed by the new waves of contagion around the world. Regardless of this pandemic scenario, which we understand is a dynamic one in nature, we will keep prioritizing our team's health and safety to ensure our operations efficiency and sustainability. Moving along to the numbers, you will notice on slide 4 that in addition to the previously mentioned EBITDA growth, we achieved solid net income for the period. I would like to point out the progress in accumulated EBITDA over 2020 compared to nine months to date in 2019. The main negative variations here occurred in the business that were most affected by the crisis in the second quarter of this year. However, these businesses are already showing performance levels much closer to pre-crisis levels throughout all second half of the current year. Proceeding to the next slide, we will discuss each business results, starting with fields distribution. And let's begin with Brazil on the left-hand side of the slide. And the recovery hinted at the end of the second quarter in demand for fields have consolidated during this quarter. The relaxation of social isolation measures and the resumption of economic activity were drivers for the gradual improvement of sales in the quarter. The main highlight has been the demand for diesel, which grew both consecutively and year over year, and here the largest share of sales continues to be supported by agribusiness demand. Additionally, the return of industrial activity is also playing an important role on diesel performance. Despite the auto cycle's expected demand improvement, sales continues to be affected by the lower levels of consumer activity during the pandemic, comparing, of course, year over year. In the aviation sector, recovery will be slower indeed, but we are already seeing sequential progression. That being said, adjusted EBITDA was 611 million reais, reversing the downward trend from last quarter. Expanded sales volumes improved operational efficiency, and the gains from our supply strategy supported the EBITDA recovery. We observed a marked improvement in the business environment, and as a result, profitability is back to historical levels. Let me remind you what we outlined during the previous call. The scenario of volatility with no sudden fluctuations in fuel prices, combined with a normalized demand environment, enabled return to the pre-pandemic levels. In addition to the lower volumes of sales, I would like to point out three important factors in contrast to the third Q19. We no longer consolidate the results from convenience store, the segment since we formed JV with EMSA, the group of NOS. And the results of this segment is now recognized via equity pickup in the proportion of our 50% stake. The smaller volumes of sales from the aviation segment were directly affected by the reduced numbers of flights being taken, and additionally to an even more disciplined management of our credit risk, considering the current scenario. Finally, the costs associated with the RenovaBIO program impacted our results by R$ 25 million in the quarter. CapEx during the quarter totaled 173 million reais. Despite the reduction in investments, we have maintained consistent progress in renewing and conversions of service stations throughout the year. Before moving to Argentina's operation, I would like to update you in two key initiatives here in Brazil. First, the NOS Group, our JV in the convenience and proximity store segment. Following a period of intensive planning and development, we are now positioned to open the first store of our own with Oxo Brand this year, while opening new Shell Select stores at service stations, mainly under the standard franchisee agreement. For this first year of operation, the plan is to grow around 10%, the number of total stores, and we'll probably close the year end with over 1.1 thousand stores. Adding to this expansion, we will open our first distribution center in São Paulo State this year. The second update is Shell Box. The last time we spoke about the high-easing client relationship platform was in March, during Code Sunday. At that time, we presented a number of 600,000 transactions a month. Since then, which coincided with the pandemic outbreak in Brazil, This transaction month metric has doubled, and we have currently surpassed 1.5 million transactions a month, demonstrating high rates of usage and strong consumer loyalty to the vPower products. Let us now move on to Raizen Argentina on the right-hand side of this slide. And just a reminder that results are in US dollars, which is the functional currency for that entity. Similarly with Brazil, demand for fuel has also demonstrated a strong recovery as compared with the second quarter, despite the extended lockdown in Argentina. The adjusted EBITDA was $56 million, reverting the loss from the previous quarter. In addition to the increase in demand, the lower unit cost of inputs and products sold and the gradual increase of sales prices have also contributed to these improvement results. Investments during the quarter totaled $10 million, a reduction that is in line with the investment expected for the year. Moving along to the next slide, we will discuss high-easing energy as earnings. The acceleration of sugarcane crushing marked the second quarter of 2020-21 crop year. Dryer weather and recent year's investments resulted in expansion of agricultural yields, and the mix continues to be dedicated to maximizing sugar output, which reached 54% of our production, a clear signal of the sugar's higher profitability compared to the ethanol. Now let's move along to more detailed information on the main products sold, starting in sugar. The owned volume sold nearly doubled over the last years, in line with our sales strategy for the harvest, which will result in a more balanced sales between the last two quarters of the year. Since the beginning of the harvest, we have been increasing third-party sugar origination operations, leveraging our expertise in infrastructure to capture increased value within the supply chain in both owned and third-party products. Sales prices improved 22% in line with the hedging instruments contracted for the year. Moving on to ethanol, own sales volume was 14% lower year over year due to the lower levels of the biofuel production and the sales strategy for the harvest. Average prices rose 5% over the third quarter of 2019, supported by an increase in exports and also the ethanol proxy hedge strategy. Now on to electricity, our own electricity sales volume was in line with the previous quarter, with an average prices being 6% higher. Moving to the sugar hedging strategy. As mentioned in prior conference calls, Brazilian sugar's competitiveness increased due to the depreciation of the Brazilian Reais, leading to great hedge opportunities. The price in reais for sugar has been breaking historical highs, stimulating an acceleration of hedging with growing returns for the coming years. Considering the current harvest, Haizen has hedged 100% of its sugar target to exports at an average price of 62 cents of real per pound, which is more than 10% above the previous harvest average price. For the 21-22 harvest period, we hedged a little over 70% at an average price of 65 cents of real per pound weight. And for this 22-23 harvest, we have hedged a good portion of the sugar production volumes at a price near 74 cents. Now let's move to the results. The accelerating sales of sugar, combined with improved prices for all products, and the cost efficiency from improved agricultural yields led to a 15% growth in adjusted EBITDA. We continue to build sugar and ethanol inventory for future sales, in line with our strategy that focuses on taking advantage of better price-return ratios. To conclude, investments totaled R$ 422 million in the quarter, Decrease explained by the higher investments in projects in the compared period of the third quarter 2019. Let's carry on to the next slide and discuss natural gas segment. Before we begin with the highlights for the quarter, one quick comment about our decision to suspend the Compass Gas and Energy IPO. Given the substantially worsening in market conditions compared to the moment we launched the operation and our capital allocation discipline, the best decision was to postpone the IPO to a future opportunity. I want to emphasize that nothing changed regarding the business plan for Compass. In line with this plan, last October we announced that the company submitted a proposal for the acquisition of 51% of GasPetro's equity, which is included in the Petrobras divestment program. This process is advancing under confidentiality, restricting what we can disclose or discuss at this time. Now let's move to the quarter's results. Adjusted EBITDA was 646 million reais in the quarter, boosted by a recovery of natural gas distributed by Congas, which we will discuss in more detail now. Natural gas sales for the quarter experienced a sizable increase compared to the second Q20, returning to very close levels of those before the crisis. The industrial segment was the key driver of volume growth in line with the gradual recovery of production. Commercial segment is also gradually recovering, but at a slower pace, since many of our clients are still facing restrictions on their operations, such as hotels and restaurants, for example. And the residential growth continues to expand in line with an increasing customer base. As a result, Congas EBITDA was substantially higher compared to the second Q20. Year-over-year comparison posted a slight decrease, explained by lower demand from segments still affected by the pandemic. The efficient management of expenses and margin adjustments by inflation in May this year drove the good financial performance of Congas. Regarding CapEx, we are keeping the pace of investments aligned to the regulatory plan. Going over to the next slide, starting with Move Our Lubricants business. As with fuels and natural gas, lubricants demand strongly recovered during the third quarter across all countries where we operate. It is worth mentioning that seasonally, the third quarter is the best in terms of demand in the sector. And in the case of lubricants, a portion of the demand that was withheld during the second quarter due to the pandemic shifted over the third Q2020. As a result, MOVE posted a record EBITDA of R$177 million, supported by our commercial strategy and by our product portfolio that allow us to seize opportunities, especially in Brazil. Improvement in operational indicators reflects operational efficiency combined with economies of scale, management of expenses, and optimization of our supply strategy. Now, on the right-hand side of this slide, we present Kuzan Corporate. Adjusted expenses for the 3Q20 were in line with the same period last year, and the other expenses totaled 20 million reais in the quarter. Following the presentation, on slide 9, we will discuss the main consolidated financial indicators. Proforma growth stat reduced 2% in the quarter, reflecting the decrease in high easing. As for cash flow, we had some specific factors that impacted the quarter, which I will detail. Operational cash flow was seasonally affected by sugar and ethanol inventories at high ease in energia. In the cash flow from investments, there was an investment of R$290 million by way of RUMO's follow-on participation. And on the financing line, Haizen amortized a greater amount of debt, offsetting the funding raised during the second Q20. As a consequence of these effects, coupled with a lower last 12 months EBITDA, performer leverage increased to 2.7 times net debt to EBITDA. As the company resumed to its normalized levels of results, we expect leverage ratio to return to its historical range of two to two and a half times net debt to EBITDA. Before concluding our presentation today, I'd like to give you an update regarding our ESG journey. One more important step in our commitment to sustainable development was taken this quarter. We signed the United Nations Global Compact and this pact is responsible to encourage businesses worldwide to adopt sustainable and socially responsible policies. This means not only reiterating our engagement with our stakeholders, but also learning and exchanging valuable knowledge with other members to the Compact. And concerning ESG indicators, we once again responded to the questionnaires of CDP and ISE, as well as the Bloomberg Gender Equality Index. Our active participation in these rankings and indexes is key to increasing our transparency, allowing improved communications to our stakeholders. Another important initiative is the inauguration of Haizen's first biogas plant, the world's largest with gas production based on sugarcane's derivate. This plant reinforces the group's pioneering spirit in the sector development and consolidates Raizen's position as an integrated energy company that invests in innovation to ensure long-term sustainability. Before closing the call, a word about the corporate reorganization process we announced back in July. We are currently in the assessment and negotiation of the exchange ratios phase, which is being conducted by the independent committees. The process is on the schedule and as planned. The company will keep market posted regarding the next steps as they arise. With that, I conclude the presentations and we can now start the Q&A session. 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 1 on your telephone. If your question is answered during the session, you may remove it from the line by pressing the star 2. We ask that you use the handset when asking the question in order to maintain excellent sound quality. Please, we ask everyone to ask only two questions per person. Please, stand by while we collect the questions. Our first question comes from Mr. Gabriel Barras.