Phillipe Casale - Investor Relations Executive Manager Joao Arthur Sosa - Head, Finance

Petr Grishchenko - Barclays

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan S.A. First Quarter of 2018 Results Conference Call. Today with us, we have Mr. Phillipe Casale, Investor Relations Executive Manager; and Mr. Joao Arthur Sosa, 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 the 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 a 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 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 the call.

Good morning, everyone. And welcome to Cosan S.A. First Quarter of 2018 Earnings Conference Call. I will start the presentation talking about the results from each business unit and then we will discuss the consolidated numbers. We can now move on to slide number 4 and look at Raízen Combustíveis, our fuels division. Before we start, I would like to remind everyone that on April 24, Raízen Combustíveis financed the acquisition of Shell’s downstream business in Argentina for a total amount of $950 million, of which $100 million was paid on the date we announced the transaction. We expect the closing of this transaction in the second half of this year, when we will pay the remaining installment subject to adjustments of change in working capital and by the amount of net debt in the closing date. And now, talking about the results proper, in the first month of the year, we could see the evidence of the challenges presented by Brazil’s economic recovery. Once again, the consistency of our strategy and the focus on expansion in long-term relationships with our service stations network yielded results with above industry sales volume performance. There still high unemployment rate and the pace of economic recovery had impacted the sales of Otto cycle during the quarter. Brazilian sales volumes of gasoline equivalent adjusted by the energy purely fell by 4% year-over-year in Brazil according to the Plural database, formerly known as Sindicom. While Raízen’s sales volume declined by 3% year-over-year in the same comparison basis. It is worth mentioning that the sales mix was strongly influenced by the change in gasoline price dynamics in the Brazil -- in the Brazilian market and sharply increasing biofuel demand in the quarter. As a result, Raízen ethanol sales grew 55% in the quarter, while gasoline sales fell 13%. For diesel, Raízen sales remain strong and increased by 6%, well above the Brazilian market, which has a 1% expansion. Here I would like to highlight that Raízen has a higher exposure to the agribusiness, which continues to perform well and leverages the sales performance for our clients, as well as new contract signed within this market segment. Regarding the aviation segment, while we still have a low comparison basis, sales volume increased by 8% following the market trend and increase in the number of departures. As such, Raízen’s total sales volumes increased by 3% year-over-year, while volumes for the Brazilian market were flat. Regarding the financials, adjusted EBIT increased by 6% in the quarter. We insist on focusing on the EBIT as the first assessments of business performance as it reflects the ever improving management of assets, including the invested capital. As a reminder, return on invested capital is the general performance metric of choice. Adjusted EBITDA grew 7% year-over-year reaching R$732 million. This growth reflects not only the higher volumes sold, but also the gains from our supply and commercialization strategy. It is worth mentioning that these strategy goals maybe unclear it evolves inventory optimization, efficiency in logistics, trading, et cetera. As a reference, Raízen’s first quarter of 2017, the results were positively impacted by fuel imports, partially offset by negative pricing dynamic in return during the period. The effect this quarter was the opposite. So in the first Q ‘18, the impact from imports was considerably smaller and that was offset by the gains on fuel inventories especially in ethanol. Regarding our expectations for the next quarter and for the rest of the year, I would like to first mention that our guidance assumed on a more gradual recovery of the economy during the first month of 2018 and also price volatility. We believe that the strategic consistency will result in another year of delivering the results. Talking about Raízen Combustíveis investments, we disbursed $257 million during this quarter, including maintenance, investments, new service station conversion and contract renewals. We ended the quarter with 6,329 Shell branded stations in total, a net addition of 286 stations over the last 12 months and 57 net additions in the first quarter of 2018, in line with the expectations for the full year. We will now move on to Raízen Energia on the next two slides. The 2017-18 crop season ended in the first quarter. You will find information on the quarterly results on slide five and the full crop season on the slide six. Crushed volumes increased 3% year-over-year, reaching 61.2 million tons crushed -- of sugar cane crushed considering the 500,000 tons crushed in March of 2018. The increase is explained by the longer crushing period during the higher availability of sugar cane throughout the dry season. At the end of the crop, sugar cane productivity reached 9.8 tons of TRS per hectare, 5% lower as a result of the lower rainfalls during this year. The weather conditions also negatively impacted TCH, which is the tons of sugar cane per hectare, partially neutralized by the TRS improvement. Regarding sales volume of each product we have, first in sugar, sales increased by 11% quarter-over-quarter and 10% over the previous crop season, with the highlight being the increase in sales of our own product. Average sugar sales prices in Brazilian reals were lower, both on a quarter-over-quarter and year-over-year basis, due to the strong drop in commodity price throughout the crop year. Differently from the dynamics for the sugar market, ethanol sales volumes grew by 60% this quarter and 27% year-over-year, mainly on trading and good sale. The price volatility created new trading opportunities positively contributing for Raízen Energia results. Ethanol average price was 1% lower on 1Q ‘18 and 3% lower compared to the ‘16, ‘17 crop year. Average prices for the year were mostly stable at around R$1.7 per liter. Going through cogeneration, with more availability of sugar cane bagasse both from our own, as well as from third parties, power generation and sales grew both quarter-over-quarter and year-over-year. The volatility of the spot prices of energy also reflected in opportunities for us to resale and trade energy during the crop season. The average price for the crop a year was R$242 per megawatt hour. Moving on to costs on slide six, just as we did after last year’s crop season, we would like to highlight our TOTEX indicator, which is the sum of maintenance CapEx and the operation expenses or OpEx. You can see as we presented on the graph on the lower left-hand corner of the slide. The green bar reflects basically the higher volume of sugar cane that we bought from the market of third-party sugar cane, offset by the lower CONSECANA costs in the period. The graphs and the bar which turn reflects our own costs, the 3% increase year-over-year basically reflects the higher expense on biological assets and/or diesel costs and also the impact of inflation rates on our costs. The unit cost -- cash cost in sugar equivalent decreased by 4% this crop year as a reflection of the lower CONSECANA index price during the period and also the efficiency gains that we have been capturing throughout the last couple of years. On adjusted EBITDA, we are excluding, as we normally do the impacts of the changes in biological assets, the debt hedging accounting and the exchange rate effect over the sugar exports, especially this quarter, we are positively -- we were positively impacted by R$54 million from the sale of a stake in one of Raízen’s logistics terminal. All the aforementioned adjustments are detailed in our earnings release, and as a result, the adjusted EBITDA grew by 8% and reached R$1 billion in the quarter. For the crop year, adjusted EBITDA reached R$4.1 billion. I would like to once again highlight that even considering all the challenges we faced during the year, we were able to meet our guidance and deliver 11% EBITDA expansion over the previous crop year. Regarding the sugar hedge on slide five, we have not moved further from the hedge position we had in the previous quarter. For the current ‘18, ‘19 crop year, we have approximately 30% to 34%, 35% of the total sugar to be exported hedged at an average price of R$0.52 per pound. For the next crop year, 2019, ‘20, we have approximately 5% hedged at the same price level, but this movement was after the 1Q ‘18 closing. The strong decline in sugar spot prices we saw in the past 2 months reflect the larger production from other countries like India and Thailand producing expected oversupply this year. The magnitude of this oversupply will depend on the size and the production needs of Brazilian crop year that just started in April. The dynamics and the volatility of the commodity are probably well known by all of you. But regardless of the price conditions, we continue focusing on having an even more efficient operation, optimize invested capital and working capital and streaming to improve the ROIC of the business as we see in this crop year that just ended. Finally, our CapEx reached R$1 billion in the quarter, ending the crop year with R$2.4 billion, in line with the guidance we provided. The most significant expenses during the year were mandatory outlays in health, safety and environmental protection, some early renewal on agriculture machinery and higher investments in the planting and land treatment on sugar cane fields. We have maintained the sugar cane renewal rate at around 15% to 16% on a recurring basis. Let’s move now to slide seven, Comgas has already reported results last Wednesday, I will go straight into some of the highlights. Comgas continues to benefit from industrial activity recovery, keeping the focus on expanding higher margin segments, which are the residential and commercial lines. The total sales volumes, excluding thermal generation grew by 6% with residential expanding by 18% year-over-year as a result of the connection of 107,000 new clients over the last 12 months, also due to the lower average temperature on the period. Normalized EBITDA increased 14% in the quarter, reaching R$437 million due to the higher volumes sold, stability in expenses and inflation readjustments on the margins. The IFRS EBITDA was 19% higher due to the movement of the gas cost and the consequent reduction of R$16 million of the regulatory current account in favor of our clients with a remaining balance of R$160 million in their accounts. Comgas invested R$112 million in the quarter, which is in line with the CapEx plan. Let’s now moving to slide eight and here I’d like to discuss first the lubricant business Moove. The higher sales volume and mixed improvement, as well as the recent international expansion of our lube oil operations and here I would like to mention Spain in 2016 and U.K. on the end of 2017 has supported the 19% EBITDA growth, which totaled R$51 million in the first Q ‘18. If we look into the right-hand side of the slide at the corporate, we can see that G&A and other operating expenses reached R$46 million, down by 30% year-over-year. I reinforce that these expenses refer basically to personnel expenses at the corporate level, consulting services and the results from legal discussions. Let’s move to slide nine to talk about pro forma Cosan S.A. consolidated results, which considers our 50% stake in [inaudible]. The better operational performance across all Cosan business lines resulted in 11% adjusted EBITDA expansion reaching R$1.3 billion. The quarterly EBITDA before any adjustments reached R$1.2 billion increasing by 22%. The net income reached R$346 million, 68% higher year-over-year helped by better operating and financial results that already reflect the fall in SELIC interest rate in Brazil and consequently the lower cost of debt. Investments grew by 19% and reached R$759 million in line with our budget across all business lines. Finally, pro forma cash flow to equity reached R$1.8 billion in 1Q ‘18, of which R$1.3 billion was due to the sale of credit rights that occurred during the 4Q ‘17, but was only settled in January of 2018. Even after considering this transaction, the almost R$500 million difference reflects the strong cash flow generation of all the business, especially in Raízen Energia that was positively impacted by the seasonality of working capital and sales dynamics throughout the crop year. Going to slide 10, we can see that pro forma gross debt fell this quarter to R$14.5 billion. I would like to highlight here the effective reduction of gross debt at the closing company Cosan S.A. as we paid down R$164 million of the 2018 bond that expired this year. The pro forma average cost of debt including Raízen was 110% of the CDI. We saw a reduced cash position, made even stronger by the significant cash inflow related to the sale of credit rights in the quarter and our consolidated net debt fell 80%. As a result, leverage reached 1.5 times net debt to EBITDA on a pro forma basis that, of course, helped by this R$1.3 billion of cash coming from the credit rights sale. Before we look at the free cash flow to equity at the bottom of the slide 10, I would like to mention that from January 2018 onwards, we adopted a new accounting policy in accordance to the IFRS 15 standards. There is an important impact on the cash flows from operating and investing activities. Until December 2017, all contracts with clients, here I’m talking specifically about the fuel distribution business, will not be accounted for intangible assets as before, but as contract with client assets. The new accounting standard is detailed in our financial statements. But basically the amounts will now impact cash flow from operating activities and not cash flow from impacting activities as it used to impact before. It’s important to note here that there is absolutely no change in the total cash flow generation or on the bottomline. Now we can highlight the following points on the free cash flow, first on the cash flow from operating activities. In addition to the sale of the credit rights at Cosan, all business showed year-over-year expansion. In the cash flow from investing activities, the reduction is on the back of asset sales at Raízen and change from the new accounting standard that I just explained, partially offset by higher outlays mainly from Raízen Energia and Comgas. And the cash flow from financing activities, the new quarter-over-quarter variation was due to the debt repayment at Cosan and Comgas. This quarter we also disbursed R$10 million for our share buyback program. Finally, going to the last slide number 11, we would like to end this earnings presentation by discussing our guidance for 2018, which is already known by most if not all of you. There was only one update at Raízen Energia due to the drier weather at the beginning of the crop year we have seen productivity suffering in some regions, so we adjusted the crushing guidance to 62 million to 66 million tons of sugar cane. Despite this update, we remain confident with our EBITDA guidance for the crop year, even considering the more challenging sugar price scenario, which should be partially offset by better projections for ethanol beside the opportunities for resale and trading, and the recurring capture of operational efficiencies. We have not changed any other figures that were presented in the last quarter. I want to reinforce our commitment to delivering results and value creation for our shareholders, maintaining the financial strength, which accompanies our business, 2018 will be another challenging year as we already expected, but we are confident that the consistency of our strategy will result in another year of results delivery. With that, we conclude the presentation and we are now ready to start the Q&A session. Thank you, all.

Thank you. [Operator Instructions] First question Petr Grishchenko, Barclays.

Good morning. This is Petr Grishchenko from Barclays and thanks a lot for taking the questions. First, I just wanted to touch a little bit more on Shell Argentina purchase. It’s been reported this week that Raízen also issued about $750 million of a new bond and I was wondering if you have any comments on that. How would you expect leverage to increase post transaction, and just generally, if you think that the recent events in Argentina perhaps somewhat undermined the value of the deal, any comment there would be very helpful.

Hi, Petr. Thank you. Thanks for the question. First in regards to the news of a possible bond issues at Raízen, there is no definition yet with -- we are going to access the market for a possible bond issues. We have already hired, secured the funding for this transaction in the Brazilian market. So there is a possibility that we will analyze back close that or more close to the closing of this transaction, but there is no definition yet of a possible bond issues we have included. Talking about leverage, this acquisition does not change much the idea of having Raízen as an investment grade. It doesn’t change much in terms of the leveraging, because as well as the debt coming for that acquisition will also accommodate the EBITDA and there is not going to be much churn in terms of the leverage. Cosan reached 1.5 times net debt to EBIDTA this quarter that is highly impacted by the R$1.2 billion of cash that entered due to the credit sales that we did on the 4Q ‘17. But the cash position or the cash just was recognized in January and that we see them on January. And in terms of the market conditions, while we have reached -- this recent event does not change our view on this acquisition. This is an asset of high quality asset. We have been evaluating it for a while. We are looking at these acquisitions as an important avenue of growth for our fuel division in the entire group, specifically speaking for Raízen Combustíveis and this does not change our view -- our long-term view for the deal.

Yeah. And that’s helpful. And I know you mentioned anything on the Comgas strategic alternative, has there been any progress since you made that announcement?

There is no change in Comgas in the carrying good process. There is no news in that. In terms of further restructuring, there is no change since our last call.

Okay. Great. And it’s my last question, we see clearly sugar prices being crushed with the global oversupply, but on the other hand, oil prices rallying essentially, which should in theory translate into higher gasoline prices in Brazil and so ethanol prices up as well. So how do you expect this trend to affect your profitability, and perhaps, product mix -- production mix between ethanol and sugar this year, assuming prices for sugar and oil/ethanol to stay at this level?

Well, clearly, we saw the pressure on sugar prices in the last couple of months and that’s, of course, due to the higher crops in India and Thailand mainly, right? Brazil will indeed be a more ethanol or we will have a more ethanol mix this year due to the profitability of the ethanol compared to the sugar ones, definitely the sugar’s spot prices is up now. Raízen will maximize the ethanol production in the year, as well as the other players in the industry. We changed a little bit guidance on crushing from 63 million tons to 67 million tons to 62 million tons to 66 million tons. This is due to the dryer weather in the beginning of the season, which impacted a little bit of productivity in the beginning of the crop, but we haven’t changed anything on our EBITDA guidance. We maintained at the same level. We do know that sugar spot prices are lower now than what we have embedded in our guidance, but we have a better expectation for the ethanol prices and the ethanol industry as a whole. We still capture the efficiencies from all the processes and all the technology we implemented in the sugar and ethanol business, which really results in effectively cost reductions and improvement of the ROIC. I believe will still be the case. And also with all this negativity, we are looking at better opportunities for the sale and trading of all the products basically, right. We are talking here about sugar, about the ethanol and about energy. So, all of these gave us confidence now to keep the same EBITDA guidance for 2018, ‘19 crop year.

Great. Excellent. And sorry, just remembered the last question I wanted to ask on your credit ratings, clearly we have very strong deleveraging in cash generation. You guys are [ID] like corporate, but in terms of the ratings, have you spoken to the agencies and are there any like metrics or targets that agencies are expected to meet before get upgraded, any color will be very helpful? Thank you.

I will pass you to Joao, our Head of Finance here to answer you, Petr.

Two comments about your question, the first is that the 1.5 times leverage that we had at the end of the first quarter is a situation that it will not happen at the end of the year, because March is the lowest point for Raízen in terms of working capital, so this will change until December. The second point is that we received last in January the cash for the sale of the credit receivables from the government that used our EBITDA in December. So, in December, we believe the EBITDA will be roughly in the last 12 months. So we expect that the 1.5 times leverage will be around 1.9 times at the end of the year. But even this, it’s a very good leverage compared to what we expect. The problem is that the Cosan is capped by the sovereign rating, so even that 1.5 times the credit agencies will not change our rating.

Got it. Thank you very much and best of luck.

Thank you.

[Operator Instructions] Thank you. That concludes the question-and-answer session for investors and analysts. I would like to pass the floor to Mr. Phillipe Casale.

Thank you all for joining us in this conference call and I hope to see you in the next following conference calls and also make the IR team here available for any Q&A or any questions you have about the company. Thank you very much.

That does conclude Cosan’s audio conference for today. Thank you very much.