Nelson Gomes - CEO & IR Officer José Cezario - CFO Phillipe Casale - IR Manager Marcelo Martins - Board Member, Cosan S/A & CFO, Cosan Limited.

Rodrigo Mugaburu - Morgan Stanley Ravi Jain - HSBC.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan S/A Second Quarter of 2015 Results Conference Call. Today, with us, we have Mr. Nelson Gomes, CEO and Investor Relations Officer; Mr. José Cezario, CFO; and Mr. Phillipe Casale, Investor Relations Manager of Cosan S/A.

We would like to inform you that this event is recorded and all participants will be in a listen-only mode during the company's presentation. After Cosan's remarks, there will be a question-and-answer session for industry analysts. At that time, further instructions will be given. [Operator Instructions].

The audio and slideshow of this presentation are available through live webcast at ir.cosan.com.br. The slides can also be downloaded from the webcast platform. Before proceeding let me mention that forward-looking statements will be made under the Safe Harbor of the Securities Litigation Reform Act of 1996.

Forward-looking statements are based on the beliefs and assumptions of Cosan'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 circumstance 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 Cosan and current results differ materially from those expressed in such forward-looking statements. Now, as to begin this conference call, I will turn the conference over to Mr.

Marcelo Martins, Board Member of Cosan S/A and CFO of Cosan Limited for his opening remarks. Mr. Marcelo, you may begin the call..

Good morning, everyone.

The purpose of my participation or my short participation in the call today is basically to try to address some of the issues that have been raised by the market in relation to Cosan S/A and potential investment in its current businesses and other businesses, as well as the spinoff of the gas distribution business which was announced last year.

As you know well, Marcos Lutz and I have formally become executives of, actually we were already, but we have -- we are now 100% dedicated to Cosan Limited as executives, but we continue to be board members in the companies that are controlled by CZZ.

We have last year in during the Cosan Day meeting announced our intention to spinoff the gas distribution business out of Cosan S/A. I just want to confirm that it continues to be our objective to implement that transaction or the spinoff.

The only reason why we have not done it yet is because we have also committed to transfer part of the debt that’s dated in Cosan S/A to this new entity, to the gas distribution company.

And considering recent market conditions we are not able to do the refinancing of part of Cosan S/A debt in order to transfer the new debt to the new entity, to the gas distribution business. Once we are in a position to do it, we will complete the spinoff of the business. We continue to be highly committed to doing that deal.

And we also, as a consequence of that first move, we continue to be a 100% committed to simplifying the structure so that we have only one listed company for each energy, logistics, and gas distribution businesses.

There is another issue that was raised by the market recently, which has to do with the fact that there were some rumors in the market about potential investments in other businesses, in addition to the businesses we are in today.

And I want to clarify that we continue to be focused on the cash generation, the operating cash generation of the businesses we control today, including high yielding. And the main purpose is to generate cash to reduce the debt that today sits in Cosan S/A. We don't think that the current leverage is at a level we think is adequate for this business.

And even though we are happy with the consistent performance of the businesses, we will only be a 100% satisfied once we get to a leverage that we consider to be adequate, which is in our opinion not higher than 2.5 times EBITDA. As you know, we have last year completed the spinoff of the logistics business.

So today, Rumo ALL are controlled by Cosan Logística. And this is another business we intend to simplify over time as we have also already mentioned to the directors, in the investors in the most recent Cosan Day -- in the most recent Investors Day.

Therefore, the reason I'm here today, as I said before, is just to confirm that we are very committed to improving the efficiency of the businesses with a cash generation of all the businesses that today are controlled by CZZ, and with the reduction of our debt, including our capital structure over time.

With that, I would like to conclude my presentation, and turn it over to Nelson Gomes, who will make the presentation now to you. And I hope to talk to you again in the next event. Thank you very much..

Good morning everyone. Welcome to the Cosan S/A second quarter 2015 earnings conference call. As we did it in the last quarter, we will discuss our business performance of Raízen Combustíveis, Raízen Energia, Comgás, Lubricants, and Radar.

Starting on the Page 4 with Raízen Combustíveis, our fuels distribution business, before we go through all the numbers, I would like to say that start this quarter we will report the fuel volumes sold exactly in the same way that Sindicom does. Basically, excluding all the volume sold among other distribution companies.

The main reason behind this change is to really facilitate comparisons between the result reported by us and by the market. Now, going to the numbers.

The volume this quarter on our fuels distribution business were impacted by the drop on the economic activity, mainly on diesel sales which suffered a 2% drop when compared with the same quarter last year, not only on B2B, but also in retail.

Despite this challenging macroeconomic scenario, we are presenting a 0.4% growth on total volumes sold, mainly driven by the growth of 5% in gasoline and ethanol business that are more resilient during this economic downturn. The aviation segment went down 3% impacted mainly by the productivity reduction and cost.

On EBITDA, we are also reporting in this quarter above and beyond the accounting EBITDA an adjusted EBITDA, which excludes one-offs, as detailed in the right side of the slide. The accounting EBITDA was $514 million, 20% above the same period the same quarter of last year.

When adjusted by the non-recurring effects related basically to the World Cup last year and some assets divestments. The adjusted EBITDA on this quarter was R$508 million, 60% above the same period of last year, mainly driven by a better sales mix of gasoline and ethanol as I said before.

It is also important to highlight that Raízen's business relationship model was a bit stiller; it's a little bit different than what the market usually does. So what we do, instead of anticipating the whole CapEx when signing the contract, the model assumes some volume targets to be achieved along the way, during the conference.

When reaching those targets, the dealers, they get the benefit of a discount, which is accounted by Raízen Combustíveis as a matter of revenue reduction, known as a rebate or the discount. In this quarter, the rebate or the discount was R$35 million as you can in the highlighted grey numbers in the graph.

The chart on the right demonstrates the behavior of our unit margins in Reais per cubic meter on a quarter-by-quarter basis. And as you can see, the second quarter unit margins which is the first quarter of the crop season are impacted by higher ethanol sales are presented with lower unit margin.

This seasonal effect, the weaker margin in the second Q was already anticipated, and does not affect our margin estimates for the balance of the year. Now, turning to Page 5, Raízen Energia.

Again, before we start its worth to mention that in the last quarter Raízen Energia has been increasing the resale volume both for sugar and ethanol and also the trading volume of ethanol.

So based on that fact, starting this quarter, we will open the breakdown information between our own volumes produced and sold and third-party volumes both for resale and trading. Those operations, which is basically originating sugar and ethanol from the market and resell it aims to generate its scale on our business and also dilute our fixed cost.

However, it's important to highlight that when we look at the margin EBITDA, specifically in this resale and trading operations, they are not relevant. Now, talking about the crushing of this quarter. The beginning of the crop season was postponed as already mentioned due to weather condition.

And last basically our 23 mills in activity just remember that one of our mills Bom Retiro is temporarily hibernating to crush 19.2 million tons this quarter, 8% less than the second quarter of last year.

But different than the last quarter season where we faced a relatively dry intercrop the rains we had in this crop season from January to March this year improved the agriculture productivity by 11%, from 9.9 tons to 11 tons of ATR per acre.

Also, it's worth to mention that since June we've been achieving very high daily crushing volumes, which will lead to recover the total production volume over the coming quarters.

Now talking about volume and prices of the products sugar, ethanol, and cogeneration and starting with sugar, the volume sold in the second Q were 15% lower than the second Q of last year mainly due to the delay of the Monday harvest which reduced the sales of our own volume partially offset by higher resale volumes, as I said before.

The average prices were also down 6% due to heavy account on the back of R$104 million impact on the net rev. If we adjust the sugar net revenues with this effect, the average sugar prices would be R$1,045 per ton instead of R$854 per ton. The ethanol was also impacted by the delay on the crop season.

The sales of our own volumes were 26% lower, but the total volume slowed different than the sugar, which includes resale and trading what increased by 10% mainly due to the higher demand of ethanol in the market. The average price was down 3%, driven by the increased supply of this product when compared with the same period of last year.

In cogeneration, there was no material change in the business performance. Even Brazilian that we crushed 8% less this quarter. Talking about the EBITDA starting this quarter, we will also report an adjusted EBITDA that was R$328 million, which excludes the biological assets variation and the hedge accounting impact.

Even with this adjustment, the second Q EBITDA was highly impacted by the lower own volume slope than with higher resale and trading volume of course with lower margins, again as I already mentioned. CapEx with this quarter was R$381 million, 33% below the same quarter of last year. Overall, two-thirds of this reduction was planned and expected.

Due to one, the completion of several projects that are being finalized; and two, the increase on the mechanization levels that reached 97% this quarter, both of this impact in line with the guidance. The order one-third is related really to the maintenance and is driven by the harvest delays and will catch-up in the upcoming quarter.

The last graph in the lowest right-hand corner shows our hedge position this quarter very similar to the second Q'14, both in volume and in Reais. Obviously, the values in cents or pound reflect these evaluations on the Reais expenditure. At the end of the second Q, we had a 70% of the total sugar export volume hedged at an average US$299.

Reminding that our hedging policy includes the group, so the prices are hedged in Reais without any further exposure to U.S. dollars. Now, turning to page 6, Comgas as you know held the second Q earnings conference call last Tuesday and produced reasonable, I will go over briefly some of the numbers.

Starting with volumes, the positive highlight on this quarter was the commercial segment, which was increased by almost 7% its volume sold and Comgas did more than 1,200 new customers in the last 12 months. The volumes sold to the residential segment stays stable.

Although we added 115,000 new customers to the network on the last 12 months, this growth was offset by the reduction on the unit residential consumption due to the water crisis and the drought in the state of Sao Paulo. Industrial segment, as you all know, remains impacted by the economic slowdown and decreased 4% when compared to the second Q'14.

In the graph on the right, you can see each segment's relevance on total volume sold and their respective contribution margins. The expansion I thought was, obviously on both commercial and residential segments, the one with higher unit margins.

Now, talking about our EBITDA, the better sales mix on this quarter, as already mentioned, associated with lower levels of SG&A, and also with the direct review we are emphasizing regulator last May drove a growth of 13% on both IFRS, EBITDA, and adjusted EBITDA, which includes the regulatory account effect.

Now, when talking about regulatory account effects, the recovery on this quarter was R$81 million. Now, turning to Page 7. The lubricants business shows higher EBITDA due to one, better results from international operations; two, better sales mix; and three, lower raw material cost.

It's also important to remind that in last year, the second to last year the lubricant business was also impacted by negative effects related to the World Cup. Radar presented slightly lower sales of our own land in the quarter but a relevant effect on EBITDA was driven by a lower variation of the fair market value on our own portfolio.

While talking about other business, the main variation on the expenses is related to the last year's impact on the second Q of R$115 million expenses related to the Rumo ALL merger. It's important to remind as we did in the last quarter that no further expenses are expected from this transaction.

Now turning to Page 8, we will now talk about the pro forma Cosan S/A consolidated results which again is based on 50% of Raízen Energia and Raízen Combustíveis, then 100% of the controller business. This quarter the net revenue increased 7% reaching R$10.1 billion.

And the pro forma EBITDA on the quarter was R$874 million, 6% above the second Q last year. Following the same concept presented before for each one of the business, we are presenting also an adjusted EBITDA that was R$815 million, 5% below the same quarter last year it is also adjusted.

CapEx on this quarter was close to R$400 million, a 25% reduction when compared to the second Q'14 mainly driven by the reduction in Raízen Energia and a small reduction in Comgás.

This overall CapEx reduction, combined with a better overall operational business performance especially on a fuel distribution and in Comgás resulted in a R$350 cash generation in this quarter.

Turning to Page 9 to debt and leverage, Cosan's gross debt ended the second Q 4% higher than the first Q, mainly driven by Raízen Energia’s temporary working capital increase in the beginning of the crop season. The consolidated debt profile is mostly concentrated in mid and long-term with the cost equivalent to 94% of this CDI.

This number also includes the hedge our cost related to the U.S. debt. Now talking about cash generation and leverage, as I mentioned before, the cash generation the second Q was R$350 million leading to a pro forma cash and cash equivalents of R$4.1 billion in the end of the quarter.

The pro forma net debt was R$10.7 billion and the leverage on the quarter reached 2.9 times EBITDA. The slight increase on this leverage, on this quarter, does not impact our plan to reach to 2.5 times net debt-to-EBITDA by the end of the year. Now turning to Page 10, I'm talking about guidance.

There is no changes in the guidance this quarter, what we are doing here as agreed on the previous quarter, we're only including Comgas guidance to normalize EBITDA increasing from R$1.3 billion reported on last year 2014 to R$1.4 billion this year when we consider the midpoint of the guidance.

Now, once we are ready, our halfway through 2015, I also would like to share how we internally, how we're seeing the performance in our businesses for the second half of the year.

So going business-by-business on Raízen Combustíveis the fuel distribution due to the economic slowdown and higher unemployment rates especially in major urban cities, we are expecting results that are pointing between the center and the bottom of the guidance.

On Comgas, all metrics are pointing towards the center of the guidance as well as lubricants and radar business. On Raízen Energia, the crushing volumes, the ethanol and sugar production as well as the energy cogeneration sales and EBITDA are all pointing between the midpoint of the guidance and the top of the guidance.

So overall as a result of everything I just said the Cosan S/A consolidated figures for 2015 still pointing to the center of the guidance. With that, I now conclude the presentation, and we are here available to start the Q&A session. Thank you..

Thank you. [Operator Instructions]. Our question comes from Rodrigo Mugaburu, Morgan Stanley. Mr. Rodrigo, your line is open..

Yes, thank you. Good morning, Nelson, quick question on ethanol strategy on the sales, last year Raizen build large inventories waiting for higher prices. Remember that earlier this year you said that strategy might change this year.

So now with how the market has evolved so far, do you still think that you will be selling all of the ethanol during the second half of the year or you might build inventories through going to harvest. Thanks..

Rodrigo, what we said at the beginning of the year is still valid. We're not going to build up inventories as we did last year, but we will follow what the market will do this year. If you look at the inventory levels that we have at this point at the beginning of the crop season it's similar to what we have in the same period of last year..

Our next question comes from Ravi Jain, HSBC..

I had a question on the fuel distribution business so more longer in the medium-term let’s say in 2016 and 2017 the U.S.

net EBITDA growth will be stronger as you've seen in the past unit volumes remain a little muted let's say in the below 5% range do you see that the scope or efficiencies and an increase in EBITDA growth beyond the volume growth in the medium-term. Thanks..

What we see on the long run for the fuels business is still -- we're going to still implement the white flag, the white bumpers conversion that we have. So we still have a lot white flag service stations out there that can be converted to major brand.

So this is part of the strategy and that will remain in the following year, so some of the growth will come from those investments. And then specifically on margins, other than fuels, we have the known fuels, which is convenience stores, for example that will keep on growing as well. Okay. So we do expect additional growth for the coming years..

[Operator Instructions]. This concludes the question-and-answer session for investors and analyst. Now, I turn the floor back over to Mr. Nelson Gomes..

Well once again thank you all for attending the call and we will talk again on the next quarter. Thank you..

That does conclude Cosan's audio conference for today. Thank you very much for your participation. Have a good day..