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Cosan Ltd  (NYSE:CZZ)
Q2 2019 Earnings Call
Aug. 15, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Paula Kovarsky -- Head of Investor Relations

Hi, everyone. Here we are to talk about Cosan Limited Second Quarter '19 results. Delay in approving the pension reform, slow down economic activity during the quarter compared to a more promising start of 2019, curbing demand for fuels in Brazil. Brazilian real was actually back to what seemed to be considered equilibrium, while oil prices went down somewhat capping much awaited recovery of sugar prices. In turn, Brazil is expected to have record corn crop right when US faces weather-related problems, likely translating into higher exports and offsetting weaker scenario for soybeans.

Let's go through each business results starting with Raizen Combustiveis. Adjusted EBITDA increased 5% in second quarter of '19, driven by higher sales volumes, largely explained by Raizen strategy of expanding its service stations network and higher diesel sales. When measured in gasoline equivalent Otto-cycle volumes rose 7%, boosted by ethanol sales. Ethanol prices, however, declined throughout the quarter, hurting inventories. Gasoline and diesel prices faced a typical adjustments, reflecting Petrobras' changes in periodicity of adjustments, reducing imports window while also causing inventory losses.

Raizen Argentina adjusted EBITDA ended the quarter at $47 million due to lower sales volume in the period, explained by economic activity in Argentina ahead of elections. Fuel [Phonetic] sales actually dropped 5% year-on-year, but aviation instead continued to expand significantly on rising demand for flights and market share.

Raizen Energia's adjusted EBITDA was impacted by rainy weather, which delayed the start of 2019-'20 crop year. This delayed reduced product availability, increasing unit costs in the quarter. We continue to prioritize ethanol production over sugar due to higher bio fuel profitability and demand. Note that we already hedged 90% of sugar exports at BRL0.50 per pound, almost 15 % higher compared to previous crop year. A good part of ethanol was also hedged, aiming to deliver better average prices compared to local market.

Comgas's normalized EBITDA increased 19% with 3% higher sales volumes across all segments. Industrial sales volume were boosted by higher activity in specific sectors. Residential and commercial growth reflect the addition of new connections. Note that the 2018-2024 regulatory cycle was concluded in May, reestablishing regulatory stability and supporting higher investments going forward. We actually narrowed capex guidance to higher end of the original range.

Moove's EBITDA reached BRL78 million this quarter helped by higher sales of finished lubricants in Brazil and abroad. Focus remains on the expanding volumes and capturing operational synergies across recent geographic expansion. Cosan S.A. reached pro forma adjusted EBITDA of BRL1.2 billion reflecting improvements at Comgas Raizen Combustiveis and Moove's numbers, as well as consolidation of Raizen Argentina's results. Net income reached BRL418 million and operating cash flow BRL726 million. Net debt to EBITDA closed the quarter at 2.1 times.

Now logistics, Rumo's total transported volume reached 14.4 billion [Phonetic] RTK, 7% higher despite the typical market dynamics. Soybean prices were pressured by supply demand mismatch and ASF leaving Brazilian producers to postpone exports, therefore reducing demand in April and May. In turn record high corn crop exports were anticipated in June and continued very strong thereafter helping second quarter and calling for a strong second half of the year.

Both fertilizers and containers also contributed to volume growth this quarter. A worst product mix combined with spot sales in June and lower dilution of fixed costs explained a more modest EBITDA expansion. Variable costs, however, keep on increasing the low volume growth leveraging on higher efficiency of fuel consumption. Rumo posted a net income of BRL185 million compared to a loss of BRL38 million in the second quarter of 2018, on better financial results. Leverage ended the quarter at two times broad net debt to EBITDA. Rumo invested [Indecipherable] million in second quarter in line with plan.

Now Cosan Limited, pro forma adjusted EBITDA combining all businesses increase of 9% and reached BRL 2 billion, with contributions from both energy and logistics portfolio amid the challenging scenario. Net income total BRL208 million, almost 10 times higher than the number we had in the second quarter of 2018. Adjusted net debt to EBITDA closed the quarter 2.3 times. Before, we finish a quick snapshot on our capital allocation. CZZ successfully concluded a liability management process and increased its cash position. We issued $750 million 10-year bond, while tendering nearly $300 million worth of 2024 notes, resulting on a net cash addition of $450 million. CSAN3 tendered Comgas' common shares, increasing its stake to over 99% and reiterating high conviction in the portfolio intrinsic value.

Last but not least, Raizen announced last week the sale of 50% stake of its Convenience stores business in Brazil to FEMSA at BRL1.12 billion EV. We are partnering with a global leader to accelerate growth of Raizen's C-stores, while expanding into promising proximity business. We expect a better second half in terms of economic activity in Brazil. Eyes are now on final approval of pension reform, but signs of activity recovery are begining to show up following privatizations and some measures required to support more sustainable growth. We keep on watching rising US-China trade war and political environment in Argentina. Thank you and please check our website for details. See you next quarter.

Duration: 6 minutes

Call participants:

Paula Kovarsky -- Head of Investor Relations

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