Cosan S.A. (CSAN3) Earnings Call Transcript & Summary

Good evening, everyone. Welcome to Cosan's conference call. This presentation is being recorded, and it has simultaneous interpretation into English. The deck of slides are -- they are available for download at Cosan's IR website. After the presentation is finished, we will begin a Q&A session. And at this time, further instructions will be provided. Before we proceed, we would like to clarify that forward looking statements made hereon are based on the company's beliefs and assumptions, operational and financial targets that are based on release and assumptions of Cosan's leaders as well as on information currently available to the company. Future considerations are not a guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events, and therefore, they rely on circumstances that may or may not occur. General macroeconomic matters, industry and other conditions can also cause results -- future results to differ materially from those expressed in the in these forward-looking statements. I would now like to give the floor to Mr. Ricardo Lewin. Mr. Lewin, you have the floor.

Good night, everyone, and thank you for attending this conference call. I'm here today with Luis Henrique de Guimaraes, CEO of Cosan; Marcelo Martins, Cosan's Chief Strategy Officer; and Leonardo de Pontes, CEO of Cosan Investimentos. Our goal is to talk about the announcement that we made today, the acquisition of a significant minority stake in Vale. Before starting my presentation, I would like to stress that over the past 15 years, Cosan has become 1 of the largest Brazilian groups operating in the natural resources value chain in sectors such as renewable energy, natural gas and fuel distribution in agriculture and carbon credits. The operation we have just announced is another step in the competitive spirit of further diversification journey of operating sectors where Brazil has clear competitive and comparative advantage. Let's go now to Slide 3. Cosan has acquired a minority stake in common shares issued by Vale through a combination of direct share purchase and a derivative structure. Investing in the company aligns with our capital allocation strategy and portfolio diversification. Vale is a unique and irreplicable asset positioned in a sector in which Brazil has a great competitive and comparative advantage with exposure to strong currencies. For this operation, we designed a financial structure that limits financial risks and allows optionality protecting our shareholders. . In addition to what I have already mentioned, Vale is also an asset that is aligned with our ESG values. And in this regard, we can highlight the energy transition and decarbonization process. Now moving to Slide #4. With this minority stake in Vale, Cosan intends to become a relevant shareholder in the company and contribute to value creation with the current shareholders and management. Vale is a unique and irreplicable global asset, which has the competitive and comparative advantage in a sector that's fundamental for Brazil and for the world with exposure to strong currencies in addition to being strategic for the energy transition and decarbonization of distribution chain. This acquisition will bring great value through increased diversification of our portfolio. Moving to Slide #5 to explain in greater detail the transaction structure. One of the most important points to highlight in this transaction is that it has been structured to reduce financial risks and create optionalities for Cosan, a key point in our decision-making process to enter in this transaction. The structure was set up as follows: a 4.9% stake with voting rights in which 1.5% approved direct per case of common shares and 3.5% through a derivative structure, which hedges our position in Vale shares called collar, an additional stake of 1.6% with economic rights only through a second derivative structure that also hedges our position in Vale with that we call forward plus collar. An option to convert the second derivative structure with economics right into a voting derivative structure after CADE's approval. In the event of the conversion, the company will have a 6.5% stake in Vale's common share, 5 of which will be hedged against the downside of Vale shares. The transaction was financed by a combination of long-term nonrecourse lines of credit, which are first, a collar financing; and second, a bridge loan which will be refinanced with an equity structure with preferred shares of holding companies that hold shares in Compass and Raizen. Moving to Slide 6. As I said previously, Vale is a unique and irreplicable asset with a strong presence in the natural resources chain and with a relevant global presence. It is the second largest global producer of iron ore in addition to being a relevant producer of base metals. Continuing on Slide #7. Our entry into Vale comes at a favorable moment for value creation within Cosan's portfolio. It is an asset whose main products are essential to the economy and relevant to the energy transition. The quality of the iron ore and base metals reserves is essential to make steel making and electrification viable leading to higher premiums for its products. Speaking again of the financial structure of the transaction on Slide 8. We have created a structure with derivatives that allows us to achieve an economic exposure of 6.5% of Vale, while limiting financial risks and providing us with optionality. Detailing a little more about the transaction structure, we acquired 1.5% of common shares plus 3.4% through derivative financial instruments with downside protection regarding Vale's share price. In addition, we structured a second derivative transaction that gives us an additional economic exposure of 1.6% in Vale also with downside share price protection. The second derivative transaction may be converted into a voting structure after the approval of the transaction by a CADE. In summary, we will initially have 4.9% of economic rights and voting capital plus 1.6 million of economic rights only. And after CADE's approval, we have the option to reach to 6.5% of common shares with voting and economic rights. Going to Slide #9. The transaction was structured to guarantee optionality for Cosan and reaffirm our investment thesis on the asset, protecting the interest of our shareholders and limiting losses. In addition to that, the derivative structure allows the dismantling of the operation through the sale of shares to the financing banks without credit risk for Cosan. We can also refinance the structure, extending its terms or even pay the collar financing and doing the derivatives operation and becoming exposed to Vale's share price. We emphasize that it will not be necessary to issue Cosan shares to finance the payment of the collar financing. Moving on to Slide #10. I will give more details on the operation final thing. It's important to note here that the long-term credit lines and the nonrecourse financing structure maintain Cosan's leverage at an adequate level. The operation will be financed through long-term credit lines, a bridge loan of BRL 8 billion refinanced by an equity operation, preferred shares of holding companies that own Raizen and Compass shares according to the structure shown on the right side of the slide. The remainder of the operation, approximately BRL 13 billion is financed through a derivative structure of up to 5 years. Moving to Slide #11. Regarding our commitment to maintain leverage at adequate levels, I emphasize that leverage we will keep under control. As in our first moment, an increase in gross debt of BRL 8 billion will be offset by the inclusion of shares such as bonds and securities. And in a second moment, the asset will be classified as an equity investment with an increase in the net debt, offset by an increase in EBITDA via the equity method. The bridge loan will be refinanced by an equity transaction with Raizen and company's preferred shares with no effect on the company's indebtedness. Cosan, I read, had in the past this kind of structure in which the preferred shareholder is remunerated by the dividends distributed by the company. The collar financing is a nonrecourse transaction with several alternatives for its payment such as dividends from the companies in Cosan's current portfolio and from Vale, liability management via the domestic and foreign debt markets and extension of derivative structures, and sale of assets and minority interest of controlled companies in the coming years. We emphasize that it will not be necessary to issue Cosan's shares to finance the payment of the collar financing, and this operation does not impact our controlled company's investment plan alone. Going to Slide #12, I conclude my presentation. We once again highlight the main points of this very important transaction in the journey of diversifying Cosan's portfolio and our capital allocation strategy. This transaction is consistent with our strategy of investing in unique and irreplicable assets in which Brazil is strategically positioned with competitive and comparative advantage and exposure to strong currencies. The structure designed for the transaction limits risks, providing optionality and flexibility for Cosan. This is an investment opportunity that increases the diversity of our portfolio, we remain committed to our usual capital discipline while maintaining leverage at adequate levels. And finally, it's aligned with our EESG values. In summary, I reaffirm the optional nature of this investment, which will give us the necessary time to confirm our strategic assumptions. We are confident that the company is ready for this operation. Each of our businesses is properly capitalized and well positioned to build value. We have a mature portfolio that's delivering consistent results, which give us tranquility to carry out this transaction. Thank you.

[Interpreted] good evening, ladies and gentlemen. Lewin, thank you very much for your presentation. This is Marcelo Martins speaking here. I would like to make a couple of comments before we move into the Q&A session, which I believe is the main part of this conversation. This presentation gives an overview of our strategic vision of investing in Vale in the way we do this. Unfortunately, we had to move forward our material fact announcement. We wanted to do this with tranquility throughout Vale to the weekend, but we noticed that there was a possibility of leaking information about this transaction. So we had to move forward this material fact announcement. I would like to give you a backdrop to our discussion and the Q&A session. To us, Vale is a unique asset, a unique company with exceptional assets, extremely well positioned in its market. It has huge consistency in cash generation and a huge opportunity to generate future businesses. We believe that once we've defined Vale as an asset and a company that makes sense for us, we look for a way to create a structure that had some conditions that are quite important to Cosan. The first one is that this investment would not have an impact on the company's financial health. And this was a condition that had to be met. So we had to find a structure that allowed us to have exposure to the market through the shares, combined with a tool that gives us the optionality so that we reached a share that would make a difference for Cosan. So we are talking about 4.9% at first, that can reach 6.5%, 1.6% is still subject to approval from the Administrative Council of Economic Defense, or CADE. And the way this operation was structured, it allows us with time using the assumptions we had for this investment, we will validate the value generation that will be brought to Cosan, and we will convert this optionality into an effective shareholder participation at Vale. So this optionality and our goal is very important so that we feel no impact whatsoever in the investment of our controlled companies, which we are talking about so that we can execute on our growth plan with the expected levels of return. We don't want to increase our indebtedness level at Cosan. And I'm talking about the immediate moment. This BRL 8 billion that are being used at first -- they will be nonrecourse funded with Cosan, and we are going to give you more details about this in the Q&A session. So at the end of the day, we don't want there to be any dilution focus on shareholders. What do we mean by this? We will not issue Cosan shares to fund this participation in Vale. We had to decide throughout this process and throughout the time we used to make our decision. We had to define what was the percentage that made sense in terms of direct exposure and shares? And what was the percentage that made sense for optionality. When we found a balance, we started executing on the transaction. And we finished this today. So we are doing this material fact. At the very moment, we finished this transaction as planned. I would like to make it clear and I know that there are some questions about this. This transaction does not compromise on Cosan's financial health. It will not compromise because if this should be at stake, the transaction will not take place converting optionality into shares from the company. So if you ask me, through time, we come to the conclusion that this participation, whether this is 1.5% that we have today, reaching 6.5%. If it should go back for whatever reason, Yes, it can go back. We can go back. It may be that at some point, we have a stake between 1.5% and 6.5%, and we might have a stake of 0. So up to 1.5%, we can sell in time if we believe this makes no sense due to the considerations I've just presented. However, we believe that the entry point to Vale is now. We don't believe we should wait for a disinvestment of Cosan's assets in order to invest in Vale because today, the market allows a company with exceptional assets and it's not priced accordingly when compared to other competitors. This opportunity is happening right now. At some point, we will rotate our portfolio. Maybe we should sell some assets at Cosan to maybe fund the conversion of the optionality into shares or to do a cash reserve to invest in other business that might not be this one. So in this call, right here, I'm going to repeat something that I've been saying to Cosan's team. This is an optionality for Cosan. What is important is to build alternatives that can bring to our shareholders value generation aligned or greater to the one we've reached so far. We have a reputation of being a disciplined player, an investor that adds value because we make sensitive sensible decisions about our portfolio, and that doesn't change. Quite the opposite, this just reinforces this background we have. I would like you to understand that unfortunately, we cannot have 100% of the factors that caused an impact in this decision right now. And that's the case. There is a benefit which I believe is important to our decision, which is the discipline of rotating our portfolio and our assets, and we are doing this for our group when we make this decision. The idea is that Cosan is responsible in the face of shareholders of reviewing its portfolio in a recurring manner as to generate other investment options. Otherwise, we would be limited through time with just keeping the portfolio we've built in the last 14 years. The first investment we made outside the Sugar and Ethanol business, it took place in December 2008 Esso Brasileira de Petróleo and from that point on, a lot was questioned about our capacity to manage business, we didn't know in depth. We brought people and experts, and we believe in assets that have the potential to generate value through time. Vale reinforces this thesis. It's probably one of the biggest companies we have for our strategy right now. We believe in this potential, we believe in the capacity to align with other Vale shareholders. We believe that we do have something to add to our partners and the company's governance so that we can reinforce and highlight our support to decisions that will build Vale's future. That's why we're making this decision. And with this presentation, I want to make clear that this is a rational decision, which was made throughout the last months and executed throughout the last few weeks. So based on this assumption, I now would like to begin the Q&A session about this decision and about the execution of this possible investment with Vale. I have here with me Luis Henrique, Leonardo and Ricardo Lewin, and we are available for your questions. So Lewin, you have the floor, and I'm available to answer any questions. Thank you very much.

[Operator Instructions] Our first question comes from Regis Cardoso.

[Interpreted] Thank you, everyone. Thank you, Luis Henrique, Marcelo, Lewin. Thank you for your availability. And congratulations on this transaction. I'm sure this is an important step for the company. Well, I am asking the first question, and I would like to explore 2 topics. One is where do you believe is the marginal value generation looking at Vale? How can Cosan contribute as a shareholder, as a relevant shareholder, but it's still a minority stake differently from other assets in your portfolio in which you actually have more stake. The second topic, which I believe is really important is the funding of this transaction, the 6.5%. The funding seems to rely on the portfolio rotation system and generating liquidity through time to fund the transaction without leading into a dilution of Cosan's shareholders and postponing this leveraging. So I would like to understand how you define a mature asset. Isn't Vale a mature asset? And what is the way to disinvest? Is it through assets? Are you going to carve out part of the OpCos? Or are you going to actually sell share in your controlled companies.

[Interpreted] This is Luis speaking. I will address the first part of your question, and Marcelo will address the second topic you mentioned. Regis, I believe it's important to give a couple of steps back through history. Marcelo talked about the Exxon acquisition. And I would like to talk about the Comgas acquisition. As Lewin said, we want to look at places where Brazil has a competitive edge and also look at companies that have unique assets. When we can go into these companies, our assets, as you know, we have built our portfolio of shares as partners in the last few years. And it should not be different with Vale. We would like to be there to contribute with management, with the Board, and we would like to help implement the plans and the leverages we see at the company. Management sees these two. So our first criteria was to understand whether the asset indeed meets the criteria that Lewin mentioned in his presentation. So what's the difference of these assets when we look at Brazil and its competitors. So it's a unique asset, and it's appropriately priced, as Marcelo mentioned. And we also looked at the leverages. So I can give you some examples. There's the performance, the production levers. The company has invested a lot, so very little new investment to be made. I think this is a concern that some people mentioned. People ask, do you want to grow Vale a lot. Do you want to expand? Well, Vale does not need huge investments to keep on generating a lot of value and results. There's a debate about the base metal business future and the iron ore industry. So we want to be humble about our role, and I'm not going to mention all levers. Just today, I called all Board members and the Chair of the Board, I wanted to introduce myself, and we were very much welcome. They understand that we have a different profile as an investor and to help in operations and we want to add to this transaction. We want to make sure that the company, executives and the Board have the necessary resources and alignment to make sure that we can make the right decisions as to use all the opportunities brought by this portfolio and the quality of Vale's assets. So it is a journey of building together. And that's why we created the structure of funding. It allows us to move forward in time as we prove our thesis. We can bring know-how in safety, in operational management and the know-how of bringing together a group of people around a larger goal in this execution, consistent in time, just like we did in Exxon and Comgas and Raizen. When we entered, when we joined these companies, you also had these questions. Where do the levers come from? These were regulated business. So how is this going to generate value and also looking at pricing revisions. So we proved that working together with partners and with managers, we unlocked many levers that were not looked at in these companies. And we want to replicate the same story of success in this operation together with other shareholders and Vale managers. And I'll give the floor to Marcelo, who is going to cover the portfolio and the financing rotation.

[Interpreted] So Regis, it's just to get into a little bit of the resources, so we can actually convert that optionality into a stake. So we had a lot of exercises here amongst our partners, which are the heads of the group's businesses. And we talked about the type of assets that we consider to be mature enough for it to be a divestment option in the coming years in order for us to have enough cash, so we can cater to that necessity, which is to buy those shares. So we have a laundry list of assets, and I'm talking specifically about assets and not stakes in companies. And these assets are considered -- and at the right time, in the right timing with the right -- in the right moment, they could be divested to generate this cash. Apart from that, at some point, we would consider a potential sale of our stake. However, in any way, will we compromise our control in the business? So this is a secondary option. Again, this is not the first alternative. And for Cosan, this is not an option. Selling our business stake is not a desirable option. Our desirable option is to divest in assets. And we have, like I said, a laundry list that is quite feasible as far as those assets. And as time goes on, I think we'll have a better picture. And it's important to discuss this now, obviously. The fact is when we got into this business, we had a very complete analysis as far as what we could generate in liquidity. So these optionalities can be converted into actual states. This is predefined and we have a commitment to make this happen. With regards to the initial investment, we have BRL 8 billion that had to be raised for us to make this investment. And this funding, it happens through a structure that has no resources against Cosan, which is to say that we have a small portion of the dividend flow from Raizen and from Compass in a way that those dividends would be compensating those preferred stocks that would be redeemed in time so for us to repay those BRL 8 billion. There is no specific deadline because this is a long operation, and we have dividends from those preferred stocks. And as those company start to repay those dividends, the dividends are going to repay the debt, which is a variable schedule. We cannot say this is going to take X time or a Y amount of time. It depends on the dividends that come in. So you might ask how come the banks trust that this structure is going to work and those dividends are going to be paid? Because the banks know that Cosan SA is a holding that is entitled to receive dividends from its controlled companies. As those dividends are paid. And again, this does not compromise Cosan's liquidity nor our cash situation. So those resources will be used to repay this loan through time. So we are very comfortable with this structure that was created and the way that this resource is going to flow into the company to make sure that we pay our debts. And obviously, if we feel it makes sense to reduce our stake in time or convert part of the options into shares, we will do that when we feel comfortable that this flow will not impact the company's leverage. I know the market is concerned about it. We heard a lot of matters that are related to that. But Cosan's management, again, is very comfortable about it. We did a number of analysis. We ran numerous simulations with different scenarios considering the projected cash flow of the company to see how this would impact our leverage level. So we are very comfortable with that. And by the way, Vale's shares will also be paying dividends. So that also has to do with Cosan's interest to continue receiving interest from or dividends from Vale. This is in line with the shareholders. We once receive those dividends and with regards to the future as far as the other investments that Vale can make for the company to grow and for it to be appreciated, that will be a discussion that we'll have in the proper forums with our partners, and we'll discuss with the company's management in the proper forums as well for us to run that analysis. The fact is that Cosan does want to receive dividend payments from Vale, Cosan wants to receive dividend payments from its controlled companies, and we count on those dividends to repay our debt. If I fail to answer your question, please let me know. Sure.

[Interpreted] Good. Just a follow-up to your last comment, Marcelo. Would you be able to tell us a little bit about the stake and your -- and Cosan's share in Raizen, and maybe a little bit of the accrual cost for that debt -- the total cost of the operation, if you may?

[Interpreted] So Lewin, I don't know what we can disclose about this. Getting into it Regis, well, our stake is really indifferent. What matters is that since this operation is a preferred share operation, in reality, the bank, they have 100% of the preferred stocks and 0% of the common stocks. So in other words, they have no right to vote. And they have a small portion of Raizen's dividends and from Compass dividends. And this amount, it will vary through time. Regarding the debts, as you know, preferred stock debt, they are cheaper than the market debts and also, when you consider the cost -- actually, let me rephrase that -- this is not really a debt. This is an underlying cost. It's an underlying cost on the preferred stocks, plus you have the cost of the derivative operation. So it's below the CDI rate plus 1. So it's cheap -- that when you compare to the market overall. And it's important to say that these are long-term debt as well. So in any moment, do we suffer any pressure from short-term debt?

[Operator Instructions] Next question is from [ Mattel Anafels ] from UBS.

[Interpreted] It's just one question that maybe has a few parts to it. I just want to understand a little bit about this announcement and how it fits with the previous MOU announcement, which is about our those [ excludant ] investments or complementary investments. This one impact the other, especially considering the CapEx on the midterm and considering the potential increase in the Vale stake. Can you please comment on that? Marcelo, would you take this one?

[Interpreted] Yes. I just want to remind some aspects that maybe are not clear to the market. Our getting into this mining operation is -- after the 100% acquisition of Port of Sao Luis, the Port of Sao Luis acquisition was concluded early this year. It started late last year. We acquired 1 and then another partner from Port of Sao Luis. Our terms and our contract remains exactly the same. So in other words, our option is to have a contribution with Port of Sao Luis to the company in a way that this contribution could be converted into an effective stake in the project. The terms remain the same. Again, the contract is intact. We are still 100% owners of the port and we are making some progress as far as the terms with regards to the potential -- the mining potential of the project. And at the right time, we are going to make a decision regarding the port's contribution to this project. So that is to say that this project is separate from the Vale operation, and it runs its original course. And just a reminder, our contribution assets on that project or this project is the Sao Luis Port. We own the port 100%.

[Interpreted] And again, just to add on to that, Marcelo, you talked about the optionality play that was put together, and that includes a lot of preceding conditions and a lot of CapEx commitments that have to be established between both parties. So just like Marcelo said very well, these are detached and they are running in parallel until we actually develop this field. Is it clear?

Our next question is from Guilherme Palhares from Bank of America. Guilherme apparently has refrained from asking his question. So the next question is from Thiago Duarte from BTG Pactual.

[Interpreted] I want to ask a question and I just want to make something clear. My question, and that is to Luis' point, I think he did a nice recap on how the Cosan operations took place as far as Rumo and Comgas. But is there a common denominator regarding Cosan's previous operations and acquisitions in different sectors, because as far as in my understanding, Cosan has always sought some level of control or in the shareholders' agreement, the company's movements have always been in the direction of making it an active participant and a strategic decision maker. So I want to connect this rationale with today's announcement and the stake that you are taking on Vale and I want to understand, first, if this rationale, I mean, how applicable is this mindset to the announcement that you are making today? And I would like to know if that share, if that stake of up to 6.5%, like you announced, is still in line with that? Or can we assume that, of course, nothing is factual, but can we consider an increase of that in the future? That's my first question. And just to shed some light on something, something that is not clear. When you talk about the cost, when you talk about the preferred stocks against Cosan, which is going to take place because of the dividend flow at Raizen. And my question is this, -- what happens if the dividend flow that comes from those subsidiary companies, if it's not up to the task, if it doesn't reach that amount, which is CDI plus 1, which is the associated cost to the preferred stocks, I just want to think about that extreme to get an understanding on how cost works for Cosan.

Lewin, can you clear this up and then I can comment on it and Marcelo can add on to it as well as far as the control influence matter?

[Interpreted] So Thiago, well, this is an underlying cost of the overall operations. And that includes collar Finance and preferred stocks. Again, this is an underlying cost of the overall operation, preferred stocks the way they work. And by the way, I emphasize what I said on the call, which is that this structure is different from the previous operation we had with preferred stocks. The operation that we had in the past with preferred share is that the banks had a put against us, and that's why it was adapt. So with this structure now, we have a call option against the banks, and the call has a certain amount. And as you distribute dividends, the amount of that call option drops until the moment you want to exercise this option. So at no moment, can the bank exercise the put option against Cosan.