Cosan S A : 1Q24 Teleconference Transcript

Conference Call Transcript

Cosan

1Q24 Results

Rodrigo Araújo:

Good morning, everyone. Welcome to our earnings call for 1Q24.

I am Rodrigo Araújo, CFO of Cosan, and I am here to go over the main highlights of 1Q24 and some details in terms of strategy and management priorities.

Starting with our priorities for the year, as we have been constantly reinforcing, we are highly focused on discipline and capital allocation, and, of course, being mindful of our leverage at both the HoldCo and the OpCo levels. In addition to that, we are also mindful of the high interest rate environment, which makes our capital allocation decisions and discipline even more important.

Therefore, we are focused on liability management and portfolio recycling throughout the portfolio. We have been, of course, highly focused on execution in our portfolio to make sure that we maintain our track record in terms of execution.

We deliver what has been promised in terms of the different guidance and plans of the operating companies, obviously, making sure that we are always enjoying the benefits of the talent pipeline of high-quality people that we have and continuously maintaining high safety standards in the Group.

And finally, we are focused also on supporting and making sure that we execute the contracted growth that is coming from the operational companies, such as, for example, the structural projects of Lucas do Rio Verde to connect the Brazilian Midwest agricultural area in Rumo, the second-generation ethanol plants in Raízen, and the natural gas regasification terminal in Compass.

Going through our highlights of 1Q24, our EBITDA under management finished at R$7.1 billion in 1Q24. The difference when we compare to 1Q23 is mainly related to tax credits that were recognized in Raízen in 1Q23 and were not recognized in 1Q24.

In terms of net income, we had a negative result of R$-192 million. Compared to 1Q23, which was R$-904 million, the main differences are the tax liabilities that were recognized in 1Q23, and also, this was partially offset by the results of the negative equity pickup from Raízen in 1Q24 and the negative impact of the mark-to-market of our QRS in 1Q24.

In terms of safety, our results in 1Q24 are pretty well aligned with the acceptable limits that we have, even though they are slightly worse than 1Q23. Fortunately, we had no fatalities in 1Q24, and we continue to be highly focused on maintaining very high safety standards and improving results focused on zero fatalities and zero accidents.

In terms of dividends and interest on capital received, it is pretty well aligned with 1Q23. Our net debt is R$22.7 billion, which is pretty aligned with 4Q23 as well.

And, finally, in terms of interest coverage, which, as you know, is a metric that we have been following closely since 4Q23, we evolved from 1 time to 1.1 times for the last 12 months, so we are focused on improving our interest coverage in terms of the sustainability of our leverage at

the HoldCo level.

Looking at the overall figures for the portfolio, in Rumo, we increased the transported volumes and had an important increase in the average tariff. We are also advancing in our project at Lucas do Rio Verde to connect Mato Grosso in the north of the Midwest of Brazil.

In Compass, we had an increase in industrial consumption, which was partially offset by the higher temperatures because it led to a reduction in residential consumption of natural gas. We had a negative mix impact given the fact that we had higher industrial volumes and lower residential volumes.

We had a positive impact coming from Edge, which is the Company of marketing and services that we started up in 4Q23, and we also had the conclusion of our regas terminal in Santos, in Brazil.

Moove had stable volumes of lubricant sales but substantially higher EBITDA with much healthier margins, continuing its schedule and agenda to improve performance over time.

In Radar, our land business, the recurring EBITDA was pretty aligned with 1Q23 with respect to the leases of the agricultural properties in the portfolio, and the fair market value of our properties was R$16.3 billion. Annually, we reassess the fair market value. This was done in 4Q23, and Cosan's stake is around R$5 billion.

In Raízen, we had record sugarcane crushing levels, reaching 84 million tons with an important productivity recovery, especially in the first three pits. The investments that we made over the last couple of years are showing important results in terms of recovering sugar cane productivity.

We also had healthier margins in the fuel distribution segment in mobility and higher sugar prices, but they were partially offset by lower ethanol prices. When compared to 1Q23, we had the negative impacts of tax credits that were recognized in 1Q23 and were not recognized in 1Q24, as well as lower ethanol prices.

Finally, with respect to Vale, this was the first quarter that we consolidated the equity pickup of Vale's results. We have also concluded the unwinding of our collar financing structure by the end of April. So, during 1Q24, we finished unwinding part of the collar, and then, in April, we sold 0.78% of our stake in Vale, mainly focused on reducing the leverage at the HoldCo level and, consequently, reducing the gross debt at the HoldCo level.

We concluded the unwinding of the entire structure and, in May, we also unwound the first tranche of the call spread, which is the forward synthetic forward structure that we had of around 0.25% of optionality in terms of additional Vale's stake. So, overall, if you look at the figures in May, we have 4.15% of the direct stake and 1.43% of the synthetic forward, which is the call spread that we still maintain as an optionality.

Looking at the EBITDA under management, as I mentioned the overall figures before, the main changes here are the better results in Rumo, from higher margins and higher volumes, and the negative results from the lack of recognition of tax credits in 1Q24 in Raízen and the lower ethanol prices that were offset by sugar prices and volume, getting to R$7.1 billion of EBITDA under management.

Looking at our debt profile, as I mentioned, if you look at the green figures in 1Q24 and then in

April, we concluded the unwinding of the collar structure, which is pointed on the slide as "Cosan Oito," and finished with a gross debt of R$23.8 billion in April.

Looking at the net debt to EBITDA, the pro forma adjusted when we included the fair market value of Vale's share. It is pretty aligned with 4Q23, coming down from 1.8 times to 1.7 times. The overall cost of our debt is CDI+ 1.54%.

In terms of the amortization profile, if you look at the figures in the lower part of the slide, you notice that we increased the average duration of the portfolio from 5.8 years to 6.5, doing liability management and improving the profile, so, basically, we substantially reduced the amortizations between 2024 and 2027 to better navigate the CapEx cycle in the portfolio.

And, finally, looking at the cash flow in 1Q24, we received R$911 million in dividends. Debt payments totaled R$3,767 million. We issued a bond of R$3 billion on January 24th, so, after interest and other expenses, we came down to an end balance of R$2,584 million. Therefore, we used part of the Company's cash to reduce the overall gross debt.

In summary, those are the main highlights of 1Q24.

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

Thank you.

Q&A

Luiz Carvalho, UBS:

Hello and good morning. Thank you, Rodrigo and Ana, for taking my two questions.

Rodrigo, could you give us a bit more detail about leveraging? Have you got a leveraging target in terms of that coverage? Or, if I can rephrase my question, at which point will you be looking at capital allocation and investments or accelerating dividends and buybacks? Still along the same lines, would it make sense for Vale to wait for an additional reduction given the influence that you already have there and with a member of the board? How do you see that?

And my second question is about regulatory issues at the HoldCo level. Cosan's OpCos has some ongoing discussions about the concession regulations, the authorization for the regas terminal, the resolution of Subida da Serra, the discussion surrounding Vale, and the tariff review at Comgás. How do you see all these conversations? I know that this is essentially down to the companies, but how are you seeing all of those discussions at the Holdco level?

Thank you.

Rodrigo Araújo:

Hello, Luiz. Good morning, and thank you for your question.

I will start with leveraging. We do not really have a set target, but, to be healthy, it is about 1.5 to 2 times the interest coverage because that would allow us to cover the debt service while keeping the Holdco commitment and our current dividend payout level with organic deleveraging over time.

We do not really have a set time to get to that. We do have levers that we can pull to get to that coverage level, but that is what we consider to be healthy. As I said during the last conference call, you will be hearing us talk a lot more about interest coverage, aiming towards having dividend inflow, interest coverage outflow, and dividend payouts to the shareholders. So you will be hearing us talk about that a lot more.

About Vale's position and the position size, we did quite a lot in 1Q24. It has been an extended first quarter because it has been part of April and part of May. Essentially, regarding what we have done since the beginning of the year, first, we have unwound the collar structure. That collar structure was very important when we went forward with the acquisition, but it consumed part of the dividends that came in from Vale to keep the strike fixations.

Therefore, we are making adjustments so that we can have more access to dividends and have a duration that is more compatible with our CapEx flow in the portfolio. The duration was 2.5 years. Now, we have switched to 7.5 years, and we have changed our amortization profile as well.

We have also adjusted the size. The first thing we did was the 0.78% sale you saw, as you know, which was made to reduce gross debt at the HoldCo. That considered exactly what you said: political influence, stake in the Company, and supporting the constructive agenda at Vale and Cosan's stake in the Company.

We believe that 4% does not make that much difference in terms of our influence in the Company, but it makes a huge difference in terms of gross debt at Cosan. Obviously, we are always looking for the ideal size. It might be less than that, but let us assume that 4.15% taken on through the share buyback is the maximum level.

And what we have also done was the synthetic forward structure we had. Considering that we were not going to exercise the first tranche, which was due on November 24th, we executed it because, in practice, we believe the theta of the option is going against us, so it will lose value over time, and, given that it was still in cash, we chose to execute that, and it is not material because it is roughly R$15 million.

We executed the first tranche and kept the rest because the rest does not really have a relevant carryover cost, but, on the other hand, we continue to have the optionality to have the share upside. So, there are some implicit benefits there.

Therefore, we are not keeping it to increase our position. Regarding that 1.43%, we will not be increasing our position, but we do have the option that, as this agenda moves forward with Vale, we might be able to capture additional value from this call spread without the implicit carryover cost.

Now, as for the regulatory side, we have been monitoring that quite closely. It is key that we are very close to the business. That is one of the Group's characteristics, and we know how to navigate this kind of scenario very well.

What we did recently, now that Nelson has joined us, is that we have made our institutional relations structure much more robust at Cosan so that we have this connection among the business and foster this joint regulatory agenda because there are many touch points in which we have shared regulatory issues within the Group.

One of the roles that Cosan plays is to share, especially when it comes to regulatory issues. With our members on Vale's Board, we can also make contributions to that agenda at Vale.

In summary, that is it for our regulatory agenda. Obviously, we are monitoring everything you have mentioned very closely, but we are also preparing to be able to add value to that agenda as shareholders and to make sure that we have more exchanges so that the portfolio can gain more.

Thank you for your questions.

Isabella Simonato, Bank of America:

Thank you. Good morning, Rodrigo, Ana, and everyone.

As a follow-up to the question about your leveraging, you have been making some important moves since the beginning of the year. My question is about whether you have any strategic moves in mind in terms of managing Cosan's gross debt.

Looking at the normal cost of deleveraging, as you said, depending on the dividends and the OpCos' performances, when we look at each one of them, and we have talked about that a while back, some more than others, but they all have enough CapEx to do it.

So, in your opinion, what is the most relevant source of dividends to ramp up this deleveraging process? Are there any opportunities that are similar to what you are doing at the HoldCo level at any of the OpCos that will allow them to become major dividend payers so that this process can be accelerated?

Rodrigo Araújo:

Thank you for the question, Isabella.

I will start with the first one about leveraging and everything we have been doing. I have also talked about our profile. As I said, I think it is important to reiterate that, just as important as our level, it is important to have an adjusted profile for the CapEx cycle, as you said.

That has been part of what we have done, and we will be doing more. We will still perform some operations to adjust our profile both in the domestic and international markets, so we will be more active in terms of profile DCM.

As for the level and M&A operations, as you know, we do have some assets we do not really have any relevant updates on, but they are potential M&A targets, such as the port. In 4Q23, we talked about maturity levels to list Compass and Moove. Regarding Compass, we are not expecting anything for 2024, but we are looking into potential listings when it comes to Moove.

And as I said in the answer to Luiz's question, we are always looking at the ideal position at Vale. This is a great asset with liquidity, so we are always looking at the size of our stake in it, and we will be monitoring it over time.

In terms of performance, CapEx, and dividends, number one, we need to make sure that we are executing on the structuring projects. I mentioned a few of them during the presentation, such as Lucas do Rio Verde, the regas terminal, and the second-generation ethanol plants. We need to

make sure that those structuring projects are in place.

What we have been discussing and fostering is that some companies are closer to the end of their CapEx cycles and others are right in the middle of their cycle. For instance, Compass is already paying out more dividends this year, so we see some results coming from this very intense CapEx cycle. It does not mean that there will not be any CapEx going forward, but the last two years have been very intense when it comes to CapEx.

Based on the numbers, you will see that Moove is also concluding the integration of its acquisitions and making its cash generation capacity more robust. So you have seen that, and that will obviously translate into potentially higher dividend payouts.

What we are always also seeing is the other portfolio businesses, so we are fostering and managing our portfolio to focus on the structural projects and also recycling our portfolio.

Therefore, especially at Rumo and Raízen, which have a more relevant CapEx cycle over the next few years, we will include bringing in partners to help fund structuring projects and the announcement of the additional capacity at Santos. As we have mentioned, we looked for partners to work with us on that project. Raízen has recently announced the sale of DG, also looking at what is core and what can be recycled within the portfolio.

So, we expect to become increasingly active in our capital discipline. Obviously, that has to do not only with Cosan as a shareholder but also with each individual Company.

It is important to reiterate that we are in a very challenging market environment right now. We started off the year with considerable interest rates looking forward, so every single business in our portfolio needs to have capital discipline. It is key to reiterate that because navigating high interest rates requires excellent capital discipline. You will be hearing a lot more of that from the different OpCos, and that comes from the current scenario.

Thank you, Isabella.

Isabella Simonato:

Thank you, Rodrigo. Could I ask a follow-up question about Raízen?

It is interesting that you are talking about partners for structuring projects that are core to the subsidiaries. Do you think that E2G is included in that? Given the plant pipeline, which is considerably big and there is a long time to develop the pipeline, would it make sense to start thinking about a strategic partner to go into that segment as well, or is it too soon to say?

Rodrigo Araújo:

I think that, generally speaking and giving you a broader answer, it makes sense for any project. If the partner adds value and is in line with the shareholders, we will always consider them. We have no restrictions when it comes to strategic partners.

Obviously, some assets are more challenging than others. You know that the dynamics of second- generation ethanol are very closely related to those of first-generation ethanol. It has its specificities. However, we are definitely looking at partners for structuring projects. If there are partners who can add value, not only financially but also as partners who can help us create

value, then we will always consider them.

Gabriel Barra, Citi:

Hello, Rodrigo and Ana. Good morning. Thank you for answering my questions.

I have a couple of follow-up questions. The first one is about Vale's position. You have made some considerable adjustments to the position. Is this the ideal position, in your opinion, or can we expect further adjustments to Vale's position? What may be the potential triggers for additional adjustments, or are you comfortable with the current position?

The second follow-up question is about listing. You mentioned Moove, maybe in 2024, and Compass, a little bit further down the line. I think Moove's thesis has been working very well because you have had some great results. Compass had good results as well, but there are some micropoints going back to the first question about the regas terminal and Subida da Serra.

My question is about what might be a trigger to list Compass. Would it have to do with market circumstances or more domestic issues before listing the Company and waiting for the right time to do it?

You have been very clear when it comes to capital allocation, the Company's capital structure, and the focus on deleveraging, but every now and again, we are asked about Sabesp. For instance, regarding capital allocation, Cosan has always been a major player in capital allocation, looking for opportunities.

So, given the Company's current capital structure, could you consider capital allocation here, or are you really deleveraging and thinking about adjusting your capital structure in the short term, or might there be room for potential acquisitions or short-term investments?

That is it for me. Thank you.

Rodrigo Araújo:

Thank you for the questions, Gabriel.

Let us start with Vale. There is no magic number when it comes to the ideal position. We will be monitoring what is more adequate to Cosan's capital structure and how our agenda is advancing in terms of value generation. We are always considering levers to create value.

As you know, we have made some public announcements recently about the CEO succession process. As we mentioned at the beginning of the call, there have been some major regulatory discussions.

Therefore, many things are happening, and they are key to potentially unlocking value for the Company in the short to mid-term. We need to consider all of that with the fact that we want to have an active voice and we want to be shareholders that exert influence, so we will constantly consider this.

It is not cast in stone that this is the ideal position, but, from this upwards, I think 4.14% or 4.15%, for the time being, you can take that as the maximum level. However, if, at some point, we believe we should decrease that position based on Cosan's capital structure, we might consider that in

light of liquidity. Therefore, that is where we are right now. In terms of triggers, I think I have already mentioned most of them.

As for listing Compass, let me start by answering the end of your question. There is no market, but that is not the main point. That is one of the points. Regarding the Brazilian market, we all know how challenging things have been this year.

Nevertheless, despite that, it is not just about the regulatory agenda. There are many key things in the Company's plan, such as the major pipeline to be executed. If those are well executed, they will lead to value creation. And we, as shareholders and Compass management, are focusing on executing them well.

We also have Edge's rollout, which is a Company that started last year. As you know, we have very positive prospects for the regas terminal to create more optionality and a commercial agenda for the Company, unlocking more value, which is key to us.

We also have Comgás' tariff review cycle this year and the strategic rollout of the distribution companies' assets in our pipeline, and we may increase our share there. We also have investments in the assets that we are committed to selling, which is very close to closing those assets that are not core to us.

Therefore, all of that is crucial, and removing uncertainties is always a good thing for any M&A. So, back to what I said at the beginning, in the Brazilian capital market, there is no room for that kind of operation right now.

In addition to that, just to reiterate something I said when Isabella asked her question, we want to have enough room in the capital structure of Cosan, and when I talk about profile, that is what I mean, that we can do that when the time is right so that we create as much value as possible for Cosan and its shareholders.

We do not want to be under pressure to do anything at a time when it does not make sense for the Company and that we leave value creation on the table because we are being pressured by capital structure. Therefore, we are very aware of that.

As for capital allocation, let me reiterate what I said during the presentation. We have a lot to do in our portfolio, such as major CapEx in our Companies, and a value creation agenda that we have been working on at Vale with recent investments.

To be very frank, there is no space to increase indebtedness in Cosan's capital structure right now. We are working towards reaching the ideal point where it suits us to have higher interest coverage than we have right now. We have been moving forward, but we want to increase that. So we have a lot to do, and now is not the time.

We have been very active. We have been making considerable contributions based on our experience on how close we are to the regulatory agency and what we do here in the state of Sao Paulo. Therefore, we have been making contributions to that process, but I do not see any room in the Company's capital structure for any additional allocation.

Thank you for your questions.

Regis Cardoso, XP:

Good morning, Rodrigo and Ana. Thank you for taking my questions.

I have a couple of different subjects. Firstly, I would like to touch on Vale, Rodrigo.

Could you give us some more color on the benefits? You talked about increasing the duration and the service of that carryover cost at Vale with your core position right now. Ultimately, do you think that, with your call spread, you could have just a financial settlement? Anyway, could you talk about the specific financial instruments and give us an update on your investment thesis? What you thought at the beginning has been materializing or not?

On my second subject, I would like to touch on your business portfolio composition. We are talking about debt service coverage. Could you talk about the Company's current portfolio, including businesses, sectors, currencies, ability to pay, and conviction about the investment flow at the OpCos to service the HoldCo debt?

Thank you.

Rodrigo Araújo:

Thank you for the questions, Regis

I will give you an overview of what we have been doing at Vale, and then I will go into the strategic side of the thesis.

Since the beginning of the year, the collar unwinding, as you said, is about duration, but it goes beyond that. It has to do with capturing the results we expect for the Company. It is about dividends.

Considering last year, part of the dividends we were to receive were reverted to keep the strikes of the fixed collar. As I mentioned at the beginning, the collar structure was key in terms of funding at the time of the acquisition, but you need to monitor it constantly to be able to unwind it because it becomes expensive over time considering dividends.

If you will remember, in October 2022, we had not elected a member of the board yet. There were many things yet to happen, and there were a lot more uncertainties that we dealt with over time. So that has helped to unwind the collar structure.

Therefore, in addition to having full access to dividends, there is also another soft side to it, but just as important, which is reducing complexity, and that is also important. That is a value lever for Cosan's shareholders, even though it is quite an encompassing portfolio. Even though it is not a hard aspect, reducing complexity is also important. So the current snapshot is all spread plus direct stake, and it also unlocks the dividend payout.

As for the future structure, what we have right now is 1.43%. We are not considering exercising that right now, but it could be liquidated through a financial settlement, so much so that we have already done it with the first tranche, which is that 0.25%. So it can be a financial settlement, and there are no carryover costs.

Now, going into your second question about the thesis, there have been some challenging times, especially at the beginning of this year and the end of last year. Looking forward, I think the

Company is going through a better time now than two or three months ago.

There were a lot of uncertainties and a lot of noise around the Company, but we still see positive fundamentals for the Company and its ability to deliver results and generate cash even more. We have closed the Vale Base Metals' deal. So there have been some important things happening.

It is important to clarify that there are some aspects, such as the ongoing succession process and the unlocking of the regulatory agenda. These are value levers, and, obviously, as a relevant shareholder in the company, we want to make sure they happen.

Therefore, our main thing to monitor in the thesis and the strategy is to make sure that that agenda moves forward, and we hope that that will happen this year, but we will be monitoring it closely, and, given the asset liquidity, even if we are constructive in terms of moving the agenda forward, we need to be pragmatic as well, so we will consider both sides over time.

As for the current portfolio, I think it is healthy and has a healthy combination of assets, such as Compass, a gas distribution company. Those are very strong assets with a regulatory nature that are very resilient. Vale also helped towards being more exposed to hard currencies with assets such as Moove, Raízen, and Rumo, which have a key future and an important upside agenda based on the pipeline that is being executed or the strategic CapEx agenda.

Therefore, in broad terms, we are very happy with our portfolio mix. As I said earlier, I think what we have been doing both at the Cosan's level and at the invested Company's level is to keep an eye out for opportunities to reduce our exposure to non-core assets and look for partners in this challenging high interest rate scenario.

Generally speaking, it is a very healthy portfolio. There are opportunities to recycle the portfolio at the whole HoldCo's level and at the invested Company's level. Therefore, we are very happy with the portfolio's quality, but there are obviously opportunities to recycle it. We should become more active when it comes to that.

Thank you for your questions.

Regis Cardoso:

Thank you, Rodrigo.

Could I ask another follow-up question, please?

Considering the portfolio mix, where do you see Cosan 9 and 10, which are the intermediate holding companies? Is that a way to balance the up-close exposure profile, or do you consider that a debt?

Rodrigo Araújo:

No, this is an equity structure. We have not given any voting rights to anyone. It has more to do with access to dividends, and it is much more financial. It is not a direct divestment. We see it as a contribution to dilute risks from an equity perspective, not as a way to decrease exposure.

Vicente Falanga, Bradesco BBI: