Cosan S A : 4Q23 Teleconference Transcript

Speech

4Q23 Earnings Results

March 28th, 2024

Rodrigo Araújo:

Hello everyone, and welcome to Cosan's Earnings Call for 4Q23. I am very glad to have you here with us today in my first call as Cosan's CFO.

I would like to start talking about the material fact that we disclosed earlier this week on the 25th. As you probably remember, back in December 2023, we achieved significant influence in our investment in Vale, so EY ceased to be independent for audit purposes, and, therefore, because I engaged BDO to audit its annual financial statements, BDO started the audit work in January 2024.

So, despite all the efforts made not only by the Company but also by its independent auditors, we were not able to meet the regulatory deadlines in Brazil. The good news is that, on the 27th, we had an important portion of the portfolio being disclosed, so we have audited financial statements for Rumo, Compass, and Radar.

Also, on February 8th, Raízen disclosed its quarterly financial statements revealed by EY, so, even though the numbers that we are going to discuss today are unaudited numbers, there is an important portion of those numbers that have been audited.

We are, of course, focused on delivering the audited financial statements in the shortest time possible. We still need to have the audit work performed for Moove and Raízen and, for equity metric purposes, for Cosan itself. However, given the fact that we have a portion of the portfolio already audited, we do not expect material changes between the information that we are going to discuss today and the final audited numbers.

Looking at the highlights for 2023, you can see that we had an important improvement in EBITDA under management. We had consistent growth in all the businesses in the portfolio. Also, when we look at the net income of the year, it is flat when we compare year on year, but we had an important positive impact on 4Q23.

We settled a tax dispute in Brazil on very favorable terms for the Company and reverted part of a provision that was recognized during the year related to the tax dispute. Also, if you remember back in 4Q22, we had an important appreciation of Vale's share that positively impacted the results, so, even though it is flat year on year, we came from a strong base back in 2022.

Looking at our leverage, we had a slight increase in 4Q23, almost flat compared to 3Q23, and a 1.8 times net debt-to-EBITDA compared to 1.7 in the prior quarter.

It is also relevant to highlight the dividends received by Cosan. If you look at our annual results, we received R$3.5 billion in dividends. Excluding the dividends used to support the collar financing structure that we developed to acquire our share in Vale and the dividends that we paid to preferred shareholders, we reached the R$2.1 billion net dividends that you see on this chart here.

In addition to that, it is relevant to highlight that we are going to start talking more and more about interest coverage, basically looking at the dividends that we receive at the holding company level compared to the interest cash cost at the holding company level as well.

We finished 2023 with one-time interest coverage, but the prospects are favorable, not only because we expect to improve the level of dividends from the portfolio as the CapEx cycle of the companies is concluded and we reap the benefits of the investments that we are making, but also, given the fact that we are going through an important interest rate reduction cycle in Brazil, that is going to reduce the interest cash cost of Cosan's debt.

Looking at our ESG highlights, first of all, I would like to invite you to look at our integrated report that we are going to disclose in a couple of weeks.

I will start with HSE. Of course, safety is a quite important value for us, and, in terms of recordable injuries, you see that there are metrics that have improved in 2023 when we compare to 2022, from 0.3 to 0.2. We have an ambition of zero fatalities, but, unfortunately, in 2023, we had one fatality in the portfolio. We are focused on continually improving our safety metrics and reducing the operational risks of our operations.

Looking at the ratings and indexes, we highlight the MSCI, where the Company was rated AA. We also had a positive mention in the Sustainability Yearbook of S&P Global.

In addition to that, we have achieved important acknowledgments in terms of diversity. We have female leadership on Cosan's Board of Directors, and we are also evolving in terms of diversity overall across the portfolio.

In terms of climate change, in the next couple of weeks, we expect to report our first report aligned to the recommendations of the TCFD, so I invite you to look at our climate change report as well.

Going through the highlights of the businesses, we had the record sugarcane crushing in Raízen. We also had an important improvement in terms of agricultural yields. As you know, we are investing relevantly in improving sugarcane productivity, so we are already reaching the first benefits.

Fuel distribution margins in Brazil were healthier, returning to a certain degree of normality. We had a positive impact from sugar prices, but also a headwind coming from ethanol prices in Brazil. In addition to that, we highlight the start-up of the production of our secondary E2G plant in Bonfim, which we expect to see ramping up in the course of 2024.

In Rumo, we had record volumes transported and also an important improvement in terms of tariffs, reinforcing not only Rumo's competitiveness but also its importance as a logistical support for the agribusiness in Brazil. We have been advancing our Lucas do Rio Verde project that connects Rumo closer to the core of the agri-business in Brazil, and we expect to see positive results coming from that in the future.

In Compass, we had a record number of new customers. It was a year where margins expanded, but volumes were challenging, especially given the decrease in the decrease in the industrial segment and also the decrease in vehicle natural gas in Brazil.

Additionally, we had the start-up of the operations of Edge, our marketing and services Company, selling the first LNG cargoes and showing the importance of our LNG terminal

in terms of optionalities and business improvements that it brings to the portfolio. Also, we had important advancements in terms of our JV for biomethane.

At Moove, we not only expanded sales but also focused on higher margins. Moove's sales force is continually focused on improving margins for the lubricant business, and we have very important results in 2023. Moove is also advancing on its international footprint, not only through the integration of PetroChoice, which we acquired back in 2022, but also by continuing to improve its global footprint overall.

In our land business, Radar, we concluded the JV with Nuveen. Now we are responsible for managing the entire land portfolio. Even though we have around 30% of the portfolio, we are managing the entirety. Also, given the positive year in terms of agricultural commodities in Brazil, we had an important appreciation of the fair market value of the land that was recognized in 4Q23.

Finally, with respect to Vale, we continue with around a 5% stake. We sold about 0.2% of our stake back in December 2023, but the most important thing here is to highlight that we almost concluded the unwinding of the collar structure. We unwound a relevant portion of the collared part of the investment.

Now we have a 4.1% direct stake in Vale, and two relevant aspects come from that: not only accessing more dividends from Vale but also improving the amortization profile of Cosan's debt, given that the collar was a structure with a two and a half-year duration, and we replaced that with longer-term bonds, part of the bond issuance that we had at the beginning of 2024.

In 2023, we had around R$1.3 billion in dividends coming from Vale, but an important portion of that was used to fund the collar structure, so, in 2024, we expect to have virtually full access to the dividends. Additionally, as I mentioned in the beginning, starting in December 2023, we recognized our investment in Vale as an equity pickup, so we use the equity method to recognize our investment in Vale.

Looking at the EBITDA under management, as I mentioned, we had improvements in all the businesses in the portfolio. Overall, from 4Q23 to 4Q22, we had a 44% increase, with the highlights that I have already mentioned.

In terms of the debt profile, you can see the debt amortization schedule as of February 2024. In the lower part of the chart, you see that, back in December 2023, we had the amortization installments from the collar structure that occurred in 2024, 2025, and 2026.

As you see, we have unwound the collar, and with the bond issuance at the beginning of 2024, we have substantially improved the amortization profile. This is quite important for us, especially because we adjusted the Company's amortization profile and the capital structure for the Capex cycle that is ongoing.

We have relevant companies in our portfolio, like Raízen and Rumo, going through a relevant Capex cycle, so we adjusted our capital structure to support the businesses and properly navigate the Capex cycle.

In terms of leverage, as I have already mentioned, it is virtually flat, with 1.7 in 3Q23 and 1.8 times the net debt-to-EBITDA in 4Q23.

Finally, talking about our cash movement for the year, I have already mentioned most of those aspects here, which are the dividends received, the sale of 0.2% of our Vale stake,

and the issuances and amortizations. Therefore, back to back, you will see that the cash level goes from R$2.4 billion to R$3.7 billion, which shows a healthy level of liquidity for the Company.

I conclude my presentation here. I invite you guys to join us for the Q&A session. Thank you for joining us today. Alongside myself, for the Q&A session, we also have Nelson Gomes, our CEO, and Marcelo Martins, our VP of Strategy.

Thank you for being with us today, and let us move on to our Q&A session.

Q&A

Thiago Duarte, BTG Pactual:

Thank you. Good morning, everyone. Nelson, Marcelo, and Rodrigo, it is a pleasure to talk to you. I have a couple of questions about the operation of some of the subsidiaries.

Firstly, talking about Compass, considering the guidance for EBITDA and CapEx, I do not know how much information you can give us, but if you could give us some granularity of how much is implicit in your EBITDA and CapEx for 2024 in terms of marketing services and gas distribution contributions, that would be very helpful. Could you break down those two segments from what is implicit in the guidance?

Now, as for Radar, in light of this new appraisal you have recognized in your results and after a very strong line of land price appreciation, could you maybe talk about opportunities for monetization of part of that portfolio?

Now that the price of a large number of agricultural commodities has settled and you have done very well in that process of capturing these market timing opportunities in agricultural land in the past, will there be some kind of more active rotation in your land portfolio this year?

And if I might ask a third question, please, you have shown us the received dividend coverage and the debt at the holding level. It is clear to see that that number gradually decreased in the past and dropped in 4Q23. So how do you see this number going? What would be a comfortable level? Now, as portfolio managers and looking at the holding from that perspective, what would be a good level for that number to stabilize in the mid-term? Thank you.

Nelson Gomes:

Hello, Tiago. Good morning. Thank you for your questions. I will answer the first two, and then I will turn it over to Rodrigo to talk about the holdings indebtedness.

Let us start with Compass. You mentioned the guidance for EBITDA and CapEx, which is attributed to Edge marketing and services, which are attributed to distribution. We do not break it down in the guidance, but it is important to remember that, historically, we have wanted to diversify the Compass' portfolio and to continue to attract more value generation outside the regulated environment, and that is exactly what we are doing.

Therefore, what I can say to you when it comes to the guidance, both for CapEx and EBITDA, is that most of it is still focused on distribution, but over time that tends to gradually decrease.

If we look at our EBITDA guidance for 2024, we notice that roughly 75-80% is related to distribution, and CapEx is slightly less, maybe 60-70% of that has to do with distribution because obviously the marketing and services business still has a growth journey to go through in 2024, not only to do with the end of the TRSP execution but also to do with the beginning of the construction of our biomethane plant.

Now, as for Radar and our land portfolio, recycling our land portfolio is perfectly natural, and that is what has been happening, so we have naturally been buying and selling farms when we believe prices have appreciated, up to the point that we think is ideal.

There is nothing substantial in sight to be done in that regard, but our everyday land buying and selling business will continue its regular pace, following what we have always done in Radar's portfolio management.

I will now turn it over to Rodrigo to talk about the debt.

Rodrigo Araújo:

Thank you for the question, Thiago.

About interest coverage, I have a couple of points. You talked about what happened throughout the year, and that is natural. It will always happen in that way because, considering LTM, the interest rate is flat and the dividend fluctuates over the year.

We do not really have a formal target, but anything between 1.5 and 2 is what we consider to be healthy. We do not have a set target, and we will continue to revisit that. So you can expect us to talk more about that and give you more details.

Thank you for the question.

Monique Greco, Itaú BBA:

Hello, everyone. Good morning, Nelson, Marcelo, and Rodrigo. Thank you for the opportunity to ask our questions. I will start with a question directed to Nelson, please, since he is here with us in this video conference call. Nelson, how do you see the holding portfolio looking forward?

In the past, throughout the year, after acquiring a stake in Vale, at the events and conferences we used to attend with Luis, he mentioned several times that the portfolio had a good size and that you would be focusing on consolidating and maturing the portfolio. What are your thoughts on that? Will you be looking for a new vertical in addition to the existing ones?

We have been hearing a lot about Sabesp and reading a lot about it in the news. So do you intend to look for a new business line, a new vertical? Is Sabesp one of those options?

In your answer to Duarte, you mentioned that you will be diversifying by going beyond distribution and the regulated environment at Compass. How can we see that growth strategy for biomethane at Compass?

You have a partnership with Orizon and an agreement with São Martinho, so how can we expect that position to grow within biomethane? Will it be more focused on production

as you did with Orizon, or will it focus more on commercial agreements such as the one you have with São Martinho? Thank you.

Nelson Gomes:

Thank you for the questions, Monique. I will start with your question about Compass, and then I will move on to our portfolio.

When it comes to diversification at Compass, as I said to Thiago, we will be increasingly looking at increasing revenue and value generation in the non-regulated market rather than the regulated market. It is not that the regulated market will not grow, but the non- regulated market tends to grow faster, and one of the platforms for that is biomethane.

Biomethane is the same chemical compound as natural gas. It just comes from a different origin. Compass will include biomethane in its portfolio as one of its options to be provided to clients who wish to have that product in their energy matrix.

So Compass will be pursuing origination not only for biomethane but any other natural gas source in order to meet our clients' needs in a wide ranging fashion.

You mentioned Orizon and São Martinho. They are very different agreements. With Orizon, we have a joint venture to build a biomethane plant based on solid waste. On the other hand, our agreement with São Martinho does not include any investments. It is not a joint venture; it is a commercial agreement in which São Martinho will be making the investment and Compass will be doing the offtake of 100% of the biomethane production coming from biomass as opposed to solid waste.

Therefore, that goes to show the diversification of Compass' portfolio and that we are increasingly more prepared to meet the needs of our clients with our portfolio.

Now, moving from Compass to Cosan, we are very happy with our portfolio. I think small changes and small movements over time are natural. As you saw in our release, we have been considering reducing our position at Vale. Our exposed position at Vale is just over four percentage points, and that is how we will be looking at that investment over time, sometimes increasing, sometimes decreasing our positions a little bit.

In terms of new verticals, I am frequently asked about Sabesp. What I have been saying when I am asked that question is that, yes, we do have a duty to look at a regular weighted asset in the largest state in the country, just like we have a regulated asset at Compass, which is Comgás. We do have a duty to look at it and monitor how the privatization and sale by the state of Sao Paulo are going.

However, that does not mean we will be taking part in it, and, in my opinion, it is unlikely that we will be creating a new business vertical at Cosan.

Do you have any comments, Rodrigo?

Rodrigo Araújo:

No, I think that is it. Just going back to our portfolio, as Nelson said, we will be sharing with you what is efficient to the Company's capital structure and our portfolio performance.

We want to maximize business results, and, as Nelson said, we made a small adjustment at the end of last year, so we might make small adjustments to our position at Vale so that we can have the best position for the Company. That is what is in our pipeline.

Luiz Carvalho, UBS:

Hello, everyone. Good morning. Thank you for taking my questions. I would like to go back to the capital allocation discussion. You have done a great job in allocating the debt profile, and that is already noticeable, but perhaps the balance is still a point of attention, so to speak.

So, my question is: Do you see the need to divest or reduce your stake? Is the original plan from a few years ago to list the unlisted vehicles still being considered, or are you revisiting that? If you could provide some more color on that, it would be great.

The second question is about Compass. You have already talked about that a bit, but if you could provide us more detail on the delays on the TRSP construction, which has not finished yet, it would be great. The guidance estimated the construction completion for the end of last year.

I would also like an update about Subida da Serra and the Comgás tariff review. If you could talk about those three points, that would be great.

And if I can ask a general question, Nelson, you are very familiar with a group. You have been there for years, but it is a new position for you. So, if you could tell us what your three main goals or objectives would be for the next few years, that would be great. Thank you.

Rodrigo Araújo:

Hello, Luiz. Thank you for the question. I will start with the first question about capital allocation, and then I will turn it over to Nelson.

In our answer to Monique, we said that, yes, we are looking at the Company's capital structure and may divest to improve the Company's capital structure. That is still on our radar. You are right in saying that the leverage is a point of attention for us, and we are monitoring it.

Based on the amortization structure, as you mentioned, we have adjusted that. Given the right circumstances and the right market conditions, we are not in a rush, but we will be looking at potential portfolio adjustments to improve our capital structure.

As to your question about listing other assets, obviously, we have different companies in our portfolio that are at different stages. If we compare our two main companies, Compass and Moove, in terms of maturity, Compass is going through a major execution cycle, acquiring distributor companies, the terminal, and the biomass agenda, so there are some key things to happen.

On the other hand, Moove is a bit more mature. In 2023, it had its best year so far. It has been capturing a very successful commercial strategy in highly capillary markets, such as the American market, and obviously it looks at the international market. There is no set date, but we can see that Moove has achieved a greater maturity level than Compass.

Now, I will turn it over to Nelson.

Nelson Gomes:

Hello, Luiz. Good morning, and thank you for the two questions.

I will start with Compass. About the TRSP, the works are being finished right now. The regasification and storage units have arrived. They are at the Port of Santos terminal and have been loaded. Right now, we are commissioning the vessel. So, over the next few weeks, the terminal should go into operation.

As for discussions around Subida da Serra, we made our contributions to a public consultation.

We remain confident that, between the two regulatory agencies, both the state and federal regulatory agencies, they will be able to, based on the contributions and all the information coming from the public consultation, understand the purposes and differences in interpretation and make progress in outlining this agreement that is so highly desired by everyone. However, that has much more to do with the regulatory agencies than ourselves.

As for Comgás' tariff review, it has already started. A while back, we disclosed WACC a few weeks ago. The next step is to discuss the regulatory and investment plans for the next cycle, and that is all on track and on schedule so it can be concluded before the beginning of December, which is the official date after the amendment. It went from May to December.

In your more general question about the group, you asked me about three priorities. I think the first one is looking into our portfolio. I think there is an opportunity to focus on better returns and on improving our capital structure. I think we need to go through some portfolio recycling because I think it is healthy and something we should pursue in each of our lines of business over the next few years.

The second priority, in my view, is governance. We need to look after the Company's governance controls, security, both operational and occupational, and also cybersecurity. So governance is a point of attention, and we need to look after it.

And the third priority, needless to say, is people. We need to take care of our pipeline. That is perhaps our biggest challenge, considering that all of our businesses are growing, whether in attracting and retaining people at our organization.

Therefore, those would be our three priorities. First, looking into our portfolio; second, governance; and third, taking care of our people and focusing on our succession pipeline.

Luiz Carvalho:

That is great. Thank you.

If I may go back to my question about Compass, how is the sale going in the Northeast with Mitsui? Because I think it has to do with your capital allocation portfolio and obviously Compass' cash surplus.

Nelson Gomes:

Yes, sure. That is one of the examples I mentioned when I talked about portfolio recycling, and that is one of Compass' initiatives. That process is ongoing. Selling the distributing companies in the Northeast is happening. It is going very well, and we should conclude that at the beginning of the second half of the year.

It is worth remembering that Mitsui did not exercise its preference rights, so the operation should be concluded as planned. Those assets should be sold at the beginning of the second half of the year.

Gabriel Barra, Citi:

Hello, Nelson, Marcelo, and Rodrigo. Thank you for taking my questions. I have a couple of follow-up questions. The first is something we have not talked a lot about. We saw Moove's results following a growing trend, delivering robust results and reaching close to R$1.2 billion of EBITDA this year.

Considering the acquisitions that were made over the last few years, what can be unlocked inorganically from Moove, considering the past acquisitions? Especially in the U.S. because it is kind of a new market for the Company, is there anything we can expect for 2024 in terms of organic growth?

Now, going back to Compass, you have mentioned a couple of points. During the last conference call, we talked about the opportunity of a few auctions the Company might be joining in the future, especially in the South. Could you update us on any divestments, M&A opportunities, and potential auctions for growth and increasing the Company's penetration in gas distribution?

My last point about Compass, and I have asked this question before, is about marketing and services. During the IPO attempt, we talked about that market and the fact that it was a huge opportunity for Compass considering TRSP, new suppliers, and a smaller footprint by Petrobras, therefore providing more opportunities to new players.

We see that the free gas market has not developed. So what do you see on the regulatory agenda that should move forward? What has moved forward? Where does that market stand right now?

Those are my three questions. Thank you.

Nelson Gomes:

Thank you, Gabriel, for the questions. About Moove, I think it is important to remember that it made two recent acquisitions: PetroChoice in the U.S., now Moove USA; and Tirreno, which is a local company in Brazil that produces brake fluid and other products.

Moove is still focusing on extracting value and generating value through its distribution network, considering these recently acquired assets. Having said that, there are no acquisitions on the horizon, but obviously, Moove is constantly on the lookout for opportunities. Therefore, obviously, we will look for opportunities, but right now, we are fully focused on generating value from these recent acquisitions.

As for Compass and the distribution companies in the South, let us not forget that part of the assets that came with the acquisition of the former Gaspetro, now Commit, is the preferred right we have when one of these states or a partner decides to sell their stake.

In the case of Paraná, in Compagas, that is still an ongoing process. So far, there have not been any binding offers for that offer because, whenever there is one, we will have to make the decision of whether we want to exercise our right of preference or not. We are interested in exercising it, but, obviously, when there is a binding offer, we will look at how much the asset is worth and then make a decision.

Third point, about marketing and services, and Edge. If you remember, we talked a lot about the opportunity of an open natural gas market in Brazil. We never thought that the free market would simply change overnight. That is a gradual change. If we consider the electricity market 20 to 25 years ago and how long it took to migrate from a captive market to a free market, I think we are doing a lot better than they did.

There are a large number of suppliers already. Some numbers still have to grow, and we have been working to make sure that happens, including by investing in the TRSP, but we also see other players, other suppliers, and other traders joining the market, which is very positive for the development of a free natural gas market in Brazil.

The more supply we have and the more competition we have, the better for the development of the market. However, we should not expect that to be something that happens overnight. It is going to happen gradually, exactly as it has, and there will be opportunities over the next few months and years, not only for Edge but also for the market as a whole.

Lucas Ferreira, J.P. Morgan:

My first question is about the São Luís terminal. Are there any updates? Would you continue selling the asset? Do you know how long that will take?

In my second question, we have already talked about portfolio recycling, but it looks like there is still an opportunity to buy back shares not only at Cosan but the whole group. So is that a priority for the group's capital allocation? Thank you.

Rodrigo Araújo:

Lucas, thank you for the question. First, I will answer the question about the São Luís terminal. You know what we have been doing. Obviously, it is a very strategic port for mining in Brazil. We remember that our investment scope had to do with the investments in the port, and we ended up investing in Vale, and that has been progressing.

We developed the port project over time, but it is part of our portfolio recycling process, as Nelson said. So we are interested in selling that asset. It is a strategic asset. We have not got a set date to give you, but it is definitely something we are focusing on as portfolio recycling, and there is demand for it because it is a strategic asset.

As for the share buyback, we have been talking about it. We have been very active. We do have an ongoing buyback program, and we have been buying back shares. We tried to make the most of our holding discount over time. Obviously, we will always look into it, considering the Company's capital structure. We are unable to do it during certain windows, but, at the Cosan level, it is an important part of our capital structure.