Cosan Tops on Higher Revenues - Analyst Blog

Cosan Limited's (CZZ) net earnings in the second quarter of 2011 were US$76.7 million, up 20% year over year and above $11.9 million of net loss reported in the previous quarter.

The net income improvement was driven by higher revenues due to an increase in volumes sold, higher prices and higher transportation revenue. These were partially offset by an escalation in the company's cost of sales and operating expenses.

Revenue

Considering the top line, net sales (excluding eliminations) in the quarter grew 40.7% year over year to US$2,695.5 million (R$4,716.1 million), driven primarily by higher revenues from CAA, Rumo and CCL. 

In local currency, CAA (Cosan Açúcar e Álcool) accounted for approximately 37% of the net sales with revenue totaling R$1,758.5 million (US$999.1 million), an increase of 45.1% year over year. Sugar revenue surged 42.7% to R$1,107.0 million (US$629.0 million), primarily due to a 14.5% increase in sugar prices and a 24.6% hike in sales volume. Ethanol revenue was up 62.4% to R$532.4 million (US$302.5 million) due to a 41.8% rise in volume and a 14.5% increase in prices.

Rumo (Rumo Logística) revenue was R$144.6 million (US$82.2 million), up 236.3% year over year and accounted for 3.1% of net sales. The increase was primarily driven by the transportation agreement between Rumo and ALL.

Cosan Combustíveis e Lubrificantes (CCL) revenue was R$3,017.0 million (US$1,714.2 million), a growth of 25.1% year over year, and accounting for about 63.9% of net sales. Fuels and Lubes revenue rose by 25.8% and 19.7% year over year, respectively.

Margins

Cost of goods sold soared 39.3% year over year to US$2,305.7 million, due primarily to an increase in cost of sales for CCL, Rumo and CAA.

Operating expenses (in dollar) including selling and general and administrative expenses shot up 29.9% year over year to US$231.1 million. As a percentage of net sales, operating expenses plummeted 70 basis points to represent 8.6% in the quarter.

In the reported quarter EBITDA grew 79.2% year on year to US$342.0 million and accounted for 12.7% of net sales. The increase was driven by higher volume sold, higher pricing and up-tick in Rumo's transportation revenue. EBIT was US$137.3 million with a margin of 5.1%, up 80 basis points year over year.

Balance Sheet

Exiting the second quarter 2011, Cosan's cash and cash equivalents (including restricted cash) increased 1.7% sequentially to US$640.4 million versus US$629.9 million in the previous quarter. The company's long-term debt balance was US$3,096.3 million, up 6.1% sequentially.

Cash Flow

Net cash flow from operating activities was a negative US$17.5 million, down from an inflow of US$16.0 million in the year-ago quarter. Capital expenditure increased 21.3% year over year to US$256.6 million.

Outlook

For fiscal year 2011, management anticipates that revenue would be in the range of R$16.5 - R$18.5 billion, EBITDA in the range of R$2.0 - R$2.4 billion, and capital expenditure in the range of R$1.9 - R$2.3 billion.

Crushed cane volumes are expected to range within 54 - 58 million tons, down from prior expectations of 58 - 62 million tons, sugar volume sold within 4.1 - 4.5 million tons (prior expectation of 4.7 - 5.1 million tons), and ethanol volume sold within 2.0 - 2.2 million liters (same as before). Dry weather conditions in the Brazilian Center South region that adversely impacted sugar cane production chiefly accounted for the downward revision.

Cosan Ltd. is one of the world's largest producers of sugar and ethanol. It faces stiff competition from rivals like Archer Daniels Midland Company (ADM) and Copersucar - Cooperativa de Produtores.

We currently maintain our Neutral recommendation for the long term on Cosan.