Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan S.A. Second Quarter of 2019 Results Conference Call. Today with us, we have Mr. Phillipe Casale, Investor Relations, Executive Manager; and Mr. João Arthur Souza, Head of Finance.

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 the 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 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 related 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 Cosan and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Phillipe Casale. Mr. Casale, you may begin your call..

Good morning, everyone. Welcome to Cosan S.A.’s second quarter 2019 earnings conference call. 2019 started with more promising signs of economic activity. Delay in approving pension reform, however, ended up frustrating a bit those expectations and causing economic activity to slowdown throughout the quarter.

But the diversification of our portfolio assured consolidated EBITDA growth for Cosan. Before we go through results on Slide 4, I would like to take the opportunity to explain the structure and the rationale of the deal around convenience stores announced by Raízen last week.

Raízen sold 50% stake of its convenience store business to Femsa forming a 50/50 JV. Their convenience store business was valued at R$1.1 billion of enterprise value implying a multiple to EBITDA around 13 times. Femsa will pay R$560 million for its 50% stake.

Once this transaction is complete, each partner will inject R$160 million in the JV to support expenses and investments for the first three years cycle in which we expect to add some 500 new stores. This JV will operate with two solid brands.

Shell Select for traditional service station franchise model and OXXO with – which will focus on the proximity stores market.

Raízen’s partner brings proven expertise in leadership in the retail segment, which will enhance our growth capacity in this segment, helping to upgrade our value proposition to franchisees, who are core to Raízen’s strategy and bringing greater efficiency to investments and operations.

Closing of the deal is dependent upon the approval of the antitrust commission, CADE and other standard conditions. Let’s move to Slide 5 to discuss Raízen Combustíveis’ results. Raízen delivered the higher sales volume and EBITDA in the quarter rising 8% and 5% respectively reflecting consistency of its strategy and solid operations.

Before discussing the 2Q 2019, let’s take a look at historical second quarter margins trends related to the dynamics of federal prices and mix as seen in the chart. Talking specifically about the same period last year, the 2Q 2018, the results reflect two different moments.

Before the truckers’ strike, prices were all on the rise, positively impacting inventories. The strike, however, reversed the trend abruptly, causing relevant inventory losses due to diesel price cut on top of reduction in sales. Now in the 2Q 2019, a set of events adversely affected margins of the main product.

Starting with ethanol, a significant drop in prices as well as a greater share of Otto cycle mix resulted in seasonally stronger inventory losses.

Gasoline and diesel faced atypical adjustments in that quarter, reflecting change in periodicity of Petrobras’ price adjustments, resulting in lower gains related to the supply strategy, which as you know encompasses inventory management and imports.

In the Aviation segment, Avianca’s Chapter 11 process and a negative price move depressed the results of this segment.

Remember that demand has not been growing as market expected for a while following lower economic activity in Brazil, despite this Raízen delivered solid growth, maintaining its focus on expanding and strengthening the relationship with the services stations networks, while keeping the consistency on its supply and the commercialization strategy.

Now let’s move to Slide 6 to discuss Raízen’s results in Argentina. I would like to first highlight that as we have been reporting the results of the Argentina businesses in U.S. dollars, which is the functional currency of the downstream operation.

The quarter preceding the primary elections in Argentina was marked by lower feasible activity and a relatively stable economy. Even so, demand for fuels remained depressed. Speaking of volume, diesel and gasoline sales in the quarter were approximately 5% lower than in 2Q 2018.

The Aviation fuel volume grew nearly 20% year-over-year in line with the increase customer base and the higher market share. The total volume processed by Raízen’s refinery came in line with 1Q 2019 with normalized utilization rate.

The quarter’s EBITDA stood at $47 million due to lower sales volume and investments totaled $11 million most of which of maintenance of their refining operation in line with the expectations for 2019. Now moving into the next two slide represent Raízen Energia’s result.

The 2019-2020 crop year is started after a short delay due to rainfalls in early April, reducing crushing volume by 7% in the mid-south region of Brazil, including Raízen. The average sugarcane yield was 9.3 kilos of TRS per hectare, reduction explained by the lower concentration of sugar content on the cane.

That production mix continues to prioritize ethanol, which came in at 51% in line with the commercialization strategy for 2019, which focus on the sale of higher return products. Speaking of sales, let’s start with sugar.

Raízen reduced volume sold building inventories for sugar commercialization during periods when the yield is maximize in line with the hedge position. The average sale price in reals was 16% higher in the quarter as we announced it in previous conference calls given better pricing for this crop year.

On the ethanol, Raízen accelerated the on sales by 8% in the quarter to take advantage of stronger demand with 9% rise in the average price compared to the same quarter last year. We maintain an economic hedge for part of the ethanol sales usually have better prices than those seen in local market.

Along with strategy for sugar, the ethanol hedging aims at protecting profitability and cash flow, mitigating risk is imposed by price volatility. Cogeneration results were impacted by WX operations, our electricity trading company.

We are therefore, highlighting our own volume sales since the trading and activity made by WX, generates higher revenue though with a substantially lower margin than the sale of electricity generated by Raízen. With that said, our own volume sold was 11% lowering the quarter due to a reduction in crushing volumes.

The average price of own electricity sold was in line with the same period last year. Worth noting that the electricity spot prices were significantly higher during the 2Q 2018 last year, due to drought, which did not happen this year.

As for cost dynamics, the unit cash costs of our own product sold in sugar equivalent was R$719 per ton, 17% higher than in 2Q 2018 may impact was the lower dilution of fixed costs, due to this delay in the beginning of the crushing season and inflation in the period.

Adjusted EBITDA totaled R$402 million in the quarter, down 18% from 2Q 2018, mainly reflecting reduction in the own volumes of sugar in Bioenergy sold, as well as lower cost dilution as it just mentioned.

As for sugar hedge, Raízen hedges virtually all of its volume of sugar to be exported this crop reaching approximately 90% of total in an average price of R$0.56 per pound, a prize that is 13% higher than the average price of less crop year.

For the upcoming crop year to 2020, 2021, we also are advanced hedging, which is approximately 35% of the total volume with an average price of R$0.61 per pound. The price scenario for sugar have not changed much since our last conference call.

The sugar prices are still pressured, especially in light of another expected strong crop year in India, while the mix in Brazil points to a higher share of ethanol. Raízen always aims to seize new opportunities to improve the profitability of sugar and ethanol prices by optimizing sales and production mix.

To conclude the presentation of Raízen Energia’s results, investments in the quarter rose 30% to R$630 million, due to increases winter planting in sugarcane field renewal as indicated in the years guidance.

As announced in our previous conference calls, we are stepping off the renewal sugarcane fields in order to increase the agricultural yield over the course of the upcoming years. In addition, we encourage higher expenses mainly related to asset integrity and in the crop maintenance due to the delay in the harvesting period.

Moving now to Slide 8, where we will present Comgás results. The second quarter of 2019 was market by the completion of the fourth tariff review cycle, which was the late for quite a while as you all know.

Business plan and general conditions were defined throughout the 2018 to 2024 cycle and the outcome of the review came quite in line with the expectations and bring back regulatory stability and improves the business environment for Comgás. Now let’s discuss the quarter’s highlights.

Natural gas saves increased by 3% in the 2Q 2019 across all segments. In the Industrial segment, sales growth is due to greater demand from some industrial clients and a weak basis for comparison due to the truckers’ strike last year. Residential and commercial segments continued to grow supported by the addition of new clients.

In the Residential segment, sales growth was partially offset by lower unit consumption affected by higher average temperature in the period. Normalized EBITDA totaled R$583 million in the quarter, up19% due to an increase in the volume sold as well as the annual margin correction in accordance with tariff review.

IFRS EBITDA growth was due to a current regulatory account movement, which left Comgás with an active balance of R$230 million at the close of 2Q 2019 and this balance is in favor of Comgás.

The company also invested R$200 million in network maintenance and expansion, the year-over-year increase resulted from the investment acceleration following the completion of the tariff review process and regulatory commitments defined. Now let’s discuss, move results on Slide 9.

Lubricant sales maintain an upward training operations across whole countries over the last 12 months. Adjusted EBITDA in the quarter was 18% higher than in 2Q 2018.

Speaking of Cosan corporate results, on the right hand side of the slide, we present general and administrative expenses, which increased to R$49 million due to marketing expenses concentrated in the quarter though in line with annual plan. All the operating expenses came in line with comparison basis.

Moving to Slide 10, let’s discuss the consolidated result Cosan SA pro forma considering 50% of Raízen. Cosan recorded an increase in net income as well as in consolidated adjusted EBITDA confirming the robust performance of our portfolio.

The improved performances of Comgás, Raízen Combustíveis, Moove and the consolidation of Raízen Argentina mitigated Raízen Energia seasonally weaker results. Investments in the quarter also increased but are in line with the guidance.

On the next slide, we highlight the main impacts on cash flow, starting with the operating cash flow, where Comgás was the main contributor on improvement normalizing performance and current regulatory account movement in the quarter.

In the financial cash flow, Cosan disbursed R$464 million on the acquisition of common and preferred shares Comgás as part of the voluntary tender offers announces in the first semester of the year. Remember that the preferred shares process is now over, while the common share process will end on September 4.

Today, we have reached 99.1% stake in Comgás. As a result, cash consumption reached R$371 million in the period, in addition to the effect mentioned the second quarter of the year represents the first quarter of the Raízen Energia crop year, when working capital goes up due to inventory buildup.

Last but not least, Cosan paid R$392 million worth of dividends to its shareholders in May this year. Pro forma gross debt rose by 7% in a quarter, specifically in Raízen. Cosan’s average costs of debt equaled 107% of CDI or 115% of CDI, if you exclude Raízen.

The pro forma leverage ratio after the usual adjustments ends up the period at 2.2 times net debt to EBITDA. Now let’s move to Slide 12. And before concluding the presentation, I would like to reiterate here our expectations for the year. There is only one update since our last earnings conference call.

Comgás tightened its CapEx forecast range, which is now between R$800 million and R$900 million, in line with the business plan defined in the tariff review process. All other projections, both for business and Cosan consolidated, remains unchanged. And we keep the focus on delivering it once again. This concludes our presentation.

And we will now take any questions you may have. Thank you..

Thank you. We’ll now begin the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from Luiz Carvalho, UBS. You may proceed..

Hi Phillipe, thank you for the call. I have basically three questions here, if I may. The first one is regarding Argentina.

I mean due to the recent events in the country and the actual depreciation of the currency, I just would like to know the company approach in terms of pricing fuel, the prices through to domestic prices and how this could impact between $210 million to $260 million EBITDA guidance for this year.

The second one is about the distribution margins in Brazil in Raízen Combustíveis. We saw from how the drop as well in the first – compared to the first quarter, there’s a chart in the presentation that shows that, I don’t know, years ago, we had a rebound.

So if you can share with us your perspective for the margin’s behavior during the second half of the year, that would be useful. And my third question is more about the potential investments in potential new businesses.

I mean there is lots of opportunity with the – I’m going to talk in Portuguese [Foreign Language] potential natural gas pipelines and the natural gas distribution. So how Cosan is prepared potentially actually to join this market and take some advantage of integration. Thank you very much..

Hi Luiz, thanks for your questions. So probably, the first one in terms of Argentina, of course, as we have been stating in the past few calls we have in the market, any time you have a strong or enough depreciation of the Argentinian peso, this may impact the structure and ability of the company.

If you adjust the prices in peso terms, right, you know this is a U.S. dollars functional currency business, right. But over time, what happened is that we see that the prices adjust throughout the following months.

So when you look, despite political and economic environment, on the long run, EBITDA has been relatively stable in different political and economic environment. So with that said, we are confirming the guidance for the year, which has a wide range that would absorb those volatilities that we are seeing right now.

So there’s no plans as of now to change the guidance. But of course, we are aiming more to deliver on – off the Argentina EBITDA guidance as of now. When you look at the distribution margins in Brazil, we’ve been pretty clear, the market saw part of the movements on prices, which impacted the results, specifically on the second quarter.

We remembered that the second quarter of the year usually is the one where we see the impact on the margin, mainly due to the ethanol pricing performance here because of the beginning of the harvest.

We have this quarter specifically a change in the periodicity of the price movements from Petrobras, which impacted, of course, our ability in terms on delivering on what we expected at first. And as well we are seeing demand not as one could expect at the beginning of the year.

So when we look on the first quarter of the year, we wouldn’t see that we actually grew in January in the Otto cycle volumes. But after that, along with the adjustments in the growth expectations for Brazil, the volumes, of course, reflect part of this change in the expectation, right.

So putting all of this together, the second quarter had all the impacts that I mentioned in the call, basically in the few products, ethanol, gasoline, diesel and adding that the aviation business. But when we look at the second semester, and that’s part of what the presentation shows on that graph, the second half margins usually shows a rebound.

And that’s what we are expecting again, looking at least to what is implied on our guidance. But in Raízen Combustíveis Brazil, we are as of now looking more to the low end of the guidance rather than the top of – or the mid as we were before. Looking for new business, as you mentioned, there’s obviously specials in terms of the new debt market.

I’m not going to discuss here specific projects. But as a whole, what you should expect in Cosan is that we participate in the discussion.

As you know, we have Comgás, which is the most relevant distribution of natural gas in Brazil, which brings us a lot of opportunities to make other alternatives, not only on the supply of the gas but also the commercialization. And that’s what we are going to study as of now.

So as a group, here, we’re going to look at all the discussions and participate actively to decide what – where we’re going to put more effort on..

Thank you.

If I just check if I understood correctly, so in Raízen Combustíveis Brazil, you’re also targeting the lower part of the guidance, correct?.

Yes. For Raízen Combustíveis Brazil, we are now looking more to the low range of the guidance rather than the mid that we always do when we set the guidance. And remember, we designed this, we developed this, we analyzed this guidance when the GDP expectations for the year was around 2%, 3% as we have moved over the first semester of the year..

Okay, perfect. Thank you very much..

Next question comes from Regis Cardoso, Crédit Suisse..

Absolutely. Thanks for taking the question. Just a little bit more on the fuel distribution theme.

If our calculation in assuming that the range that you just mentioned are correct, you’d require some margins of around – EBITDA margins of R$115 to R$120 per cubic meter in the second half of this year in order to reach the low end of the guidance, which I mean it’s feasible.

And it seems, particularly given the positive seasonality of the second half, that seems aligned with your original expectations for the full year of 2019. But nevertheless, it’s a big jump from the current R$85 per cubic meter you posted in the second quarter in Raízen Combustíveis.

So my question is what do you believe needs to happen for you to be able to reach that guidance or that is to materialize this much higher level of margins in the second half? Does it require having import gains? Does it require having inventory gains that revert any best movements? Or is it for you just maintaining the replacement margins that you had at the end of second quarter? Or do you still have to count on further expansions? I mean my question more generally is what needs to happen so that you’d be able to reach these much higher margins, between R$115 and R$120 coming from R$85? Thanks..

Regis, thanks for the question. Well, we’ve discussed a little bit the impacts of the second quarter of 2019.

And actually this pressured the margins in the quarter specifically, which we cannot guarantee that, that same effect will be present in the second half, right? So what we are looking here historically is that the second half shows an improvement on margins, right? And this is what we will guide on the guidance as we mentioned.

We’re going to keep the focus on our supply and our commercialization strategy, so looking at opportunities on the imports, managing the inventories. And this is part of the recurring strategy of Raízen.

So it’s keep managing the business, making the long-term relationships with our sellers, focusing on maximizing and having an adequate return for the business. So we’re going to do more of the same. And again, the second quarter was impacted by specific events that we mentioned on the call..

Thanks very much. If I may, just a second question on Comgás.

Just if you could update us briefly on how the discussion regarding the pending decisions or the pending discussions for the past tariff review cycle, the one that was kept?.

Regis, there is no schedule defined yet on this process. And Comgás and the company will let the market know as soon as we have news about that..

Thank you..

next question comes from Fernanda Cunha, Citibank..

Hi, guys. It’s actually Pedro Medeiros. Well, I have a couple of questions related to the JV originally announced with FEMSA. Can you walk us through the expectations of value accretion from the JV? And is there any plan to include your Argentina assets into the joint venture? The second question is about capital allocation.

It’s a very specific question. If you can talk about potential M&A opportunities in the natural gas market and whether your company is evaluating any potential opportunity there. I’ll leave it there. These are my two questions..

Pedro, thank you for the question. So first, in convenience store business, so we brought a partner here that has a well-known expertise on the retail business. And we have plans on developing not only the convenience store business but also the proximity one, right? So the JV is operating in Brazil.

And we have a plan to reach in the next two years around an addition of 500 new stores. So this is the initial plan here. The company will have the R$220 million that we stated for expenses and investments on this first cycle. And it’s again a JV formed to operate in Brazil as of now.

In regards to your question about the gas business, we have to remember that Brazil is long in natural gas and Comgás has an operation here, specifically on the concession area. And there is – that’s what, as Cosan, we’re going to look at the opportunities in Brazil, again, long in gas.

But there’s no definitions or anything that we can share now with the market..

Okay, okay. Thank you so much..

Next question comes from Lucas Ferreira, JPMorgan..

Hi, Phillipe. Good morning, everyone. My first question, Phillipe, on the sugar and ethanol business. So how do you see your perspectives for the full crop in terms of crushing and productivity? If you can share if that changed in the last couple of weeks or not.

And if you can still think about reaching the sort of the midpoint guidance of EBITDA for the full year and CapEx as well. And my second question regarding the JV with FEMSA, if you guys have already defined who’s going to be running the JV, who’s going to be the management team.

And if it’s not yet defined, when that should happen and who’s going to be electing them? I suppose, of course, the new Board. But is there any kind of sort of appointment by FEMSA of bringing someone from their operations? If you can give us more details. Thank you..

Lucas, thanks for the question. I’ll start with the second one first. So the JV will have a Board with six members appointed by each shareholder. That’s after the closing of the deal, we’ll define the names that will run the business. So it’s not – it’s not public and it’s not defined yet.

So these will come as soon as we have the closing of the business and then the Board, of course, electing the executives. And going for your question in the sugar, on the perspective for the crop, we reiterate our guidance looking at midpoint of crushing. So we’re talking about 62 million tons for the crop year. There is no change in that.

We are focusing a lot, as we mentioned, on doing the planting and the harvesting in the most efficient way, including the facilities or the specific technologies that we implemented to yield and to harvest better our crops here.

As you remember, the first cycle of investments in Raízen was focused on logistics, where we are now putting more efforts on optimization and productivity of our sugarcane fields. So the decrease in the renewal, it still decreased the average age of our sugarcane fields and by consequence, improving the productivity of our fields.

So looking at the guidance, we are still aiming here the midpoint for Raízen Energia, not only for EBITDA but also for CapEx..

Thank you, Phillipe..

[Operator Instructions] Thank you. With no further questions, I would like to turn the floor back over to Mr. Phillipe Casale. You may proceed..

Thank you, everyone, for joining the call, and talk to you in the next opportunity..

Thank you. That concludes the question-and-answer session for investors and analysts and also the call. Have a nice day..