Cosan S.A. (CSAN) Q2 2008 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. At this time, we'd like to welcome everyone to Cosan Limited and Cosan S.A. Second Quarter 2008 Results Conference Call. Today with us, we have Paulo Diniz, CFO and Investor Relations Officer; Guilherme Prado, Investor Relations Manager; and Alexandre Sirihal, Financial Planning Manager. We would like to inform you that this event is recorded and all participants will be in a listen-only mode during this Company's presentation. After Cosan Limited and Cosan S.A.'s remarks, there will be a question-and-answer session for industry analysts. At that time, further instructions will be given. [Operator Instructions]. 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 Limited and Cosan S.A.'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. Investor should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Cosan Limited and Cosan S.A. and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to CFO and Investor Relations Officer, Paulo Diniz. Mr. Diniz, you may begin your conference. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Hi. Good afternoon to everyone. This is a very important call for us because it is the first joint call involving Cosan S.A. listed in the Sao Paolo Stock Exchange and its parent company Cosan Limited just listed in the New York Stock Exchange. In general, the market situation in the second quarter of our fiscal year continued to be very, very similar to our first quarter, with excess of worldwide production of sugar and ethanol in the main producing countries. Consequently the price of these commodities continue to be very compressed and of course affect our operating performance at Cosan Limited that directly mirrors the performance of Cosan S.A. Net sales of $328 million in the quarter for Cosan Limited were 29% lower than the net sales of previous year. This stood-off [ph] resulted from a similar combination of volume, prices and exchange rate. Having the second quarter of last year as a benchmark, the sugar volumes sold of 815,000 tons posted a 15% fall, while the ethanol volumes sold of 79 million [ph] gallons was reduced 11%. The average price of the commercialized sugar of $0.1083 per pound fell 23% while that the average price of ethanol of $1.17 per gallon fell down by 33%. Finally the average exchange rate of 1.74 per dollar in the quarter represented a dollar devaluation of over 7% compared to the same quarter of the previous year. It should be noted that while they have... drop in prices reflect the depressed market, the reduction in volumes mainly ethanol reflects the strategy of the Company of storing for the inter-harvest period when prices tend to improve. The EBITDA of $42 million for Cosan Limited in the quarter represented a 13% margin, although well below their $138 million registered in the second quarter of 2007 is significantly above the $26 million of the first quarter of 2008 what may indicate a favorable trend. The financial income of $76 million was 14% above the one in the same quarter of the previous year. Such financial income was favored by the exchange gain on the dollar denominated debt of its controlled company Cosan S.A. and also for the income from the proceeds raised in the IPO of Cosan Limited itself. Thus the net profit before minority for Cosan Limited reached $24 million far below the $106 million cost booked in the second quarter of 2007. However if one considers the current losses of the other companies in this industry and also our expectation that we should verify a small loss in this fiscal year 2008 as stated in... of the IPO prospect of Cosan Limited we can say that the bottom line for the quarter was really better than expected. With relation to Cosan S.A., needless to say that the same foundations already discussed for the market do apply with oversupply in depressed prices. We have the best combination of lower market prices, reduced volumes sold, and continue appreciation of the reais, generated 38% fall in the net sales of 627 million reais compared to the second quarter of previous year. The cost of goods sold of 551 million reais also presented a reduction, in fact 22% lower than the second quarter of the previous year. However, such reduction happened at a lower speed than the drop in net sales, mainly because of the cost increase in our own sugarcane due to a heavier rate of our all labor replacing the outsourced one, and the increase of fertilizer costs besides the idle time at the mills due to the continuous rain. Thus Cosan S.A. reduced its EBITDA of 76 million reais in the quarter, that is 12% margin, significantly lesser than the 273 million reais of the same quarter of previous year. However, a major portion of the losses caused by priorities and exchange rate was mitigated by the hedge results making EBITDA of 143 million reais to represent a margin of 21% in contrast to the 27% in the second quarter of 2007. The favorable financial income of 144 million reais was strongly influenced by the exchange rate variation on the dollar denominated debt so that Cosan S.A. ended the quarter booking a net profit of 15 million reais, a little better than the last quarter but there'll be loads [ph], the 124 million reais registered in the second quarter of 2007. The capital expenditure program of Cosan S.A. continues at full steam. In this quarter, the Company invested 137 million reais with the main expenditures being 50 million reais in sugarcane plantation, 49 million reais due to plants for co-gen and other 26 million reais in the expansion of the Gara mill that will have its annual crushing capacity increased from 1.2 to 2.8 million tones. With regards to guidance for this fiscal year, we continued to keep the same band and previously presented for all our main metrics with exception of exchange rate, which we initially guided as presenting the variation of 5% and now we expect it to present a variation in the neighborhood of 15% for this fiscal year. Finally, it's worth emphasizing the successful outcome of the main steps in the corporate restructuring announced some months back. One, in January '07 we issued $400 million in 10-year bonds with a coupon of 7%. Last October we tendered $164 million of our '09 bonds with the annual costing of 9.25% a year. In April, we created Cosan Limited as the parent company of Cosan Group with a superior level of corporate governance with the company listed on the New York Stock Exchange with the standards for Sarbanes Oxley and also under the SEC supervision. And number 4, in August '07, the IPO of Cosan Limited at the New York Stock Exchange, raising $1.2 billion and create a strong capital structure with unique leverage potential. And 5, December, so this month, we started the transfer of the funds from Cosan S.A.... from Cosan Limited to Cosan S.A. through capitalization of Cosan S.A. And we expect shortly to launch the exchange offer that we already announced; having very shortly 1:1 between the shares of Cosan S.A.... Cosan Limited in which all Cosan S.A. shareholders will have the right to participate under the same conditions of the controlling shareholder. Well, these were the main highlights of Cosan Limited and Cosan S.A. that we wanted to share with you for the second quarter. Therefore we now open it for questions and answers regarding our earnings or any other matter. Question And Answer

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Chris Agnew of Goldman Sachs. Please go ahead. Your line is live.

Thank you very much. Good afternoon. First question is really about the seasonality of ethanol prices, and I think you point in your newsletter to 25 to 30% increase at the end of November. Can you help us think about how that typically extends through into the new year and to January and February, and also maybe touch on how many of your peers have the ability to store ethanol in the way that you have done? Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Hi Chris. Basically only I would say the major players, they do have this capability because that implies in financing your inventory, and also it depends on the strategy of each one of the players. In our case it was very, very clear from the very beginning of this crop that prices were so depressed that in order to keep the planned cash flow producers, they would have to sell much more. And in fact that happened during the... over the harvest period, especially in terms of small and medium producers. At this point in time, I would say that our sales and other larger players they have that capability, although we also have two factor in that as far as credit is concerned the whole world is much more conscious at this point in time. Give us any reason why we shouldn't believe that we shall be seeing you... we shall see the modernization of this peaking ethanol prices, 20 to 30% starting... well, it has already started. Of course that is going to go peaking back in January, February and March. I guess this is a trend that really is easily noted when you have major distortions in price than in companies where planning... we were expecting a certain cash flow and in reais they get much less, therefore they have accelerated their commercialization of products in order to fulfill their needs. And especially with regards to the customary crop, perhaps we should also verify a very, very similar trend considering that against all those small and medium producers, they are suffering a lot with regards to cash flow. Therefore, they shall try to sell as much as possible their production when they start to crush in end of April or May of next year.

Okay, thanks. And then, the decision to move more production into ethanol, wonder if you could just provide a little more color on that and I guess a sort of follow-up question and linked to that, can you expand a little bit on the comments and your newsletter about protection increasing in sugar markets around the world. I mean, I think you mentioned Russia in particular but also said there may be other. But, what's sort of the driver behind that? And also in Chinese consumption, I think you say it's being fueled by the more expensive corn-based syrup, what's happening there? Thanks.

Hi, Chris, it's Guilherme speaking. I guess... thanks for summing your points. Starting with China, especially with high prices for corn they are trying to use their corn much more for food rather than ethanol, for food includes high fructose, and importantly a bit of sugar and the potential has really been great; if people continue to leverage through series and consume more sugar in the future and of course if the government allows imports and so on. I guess... your second point, can you repeat that, Chris, please?

Well, I mean, I guess all these points were really linked together. Well, I was wondering why did you reduce sugar production and increase ethanol production faster than maybe we'd been thinking. And then also you talk a little bit in your newsletter about protection in global sugar markets increasing?

Yes, we can just...

I was just wondering, what are the dynamics, or is it all linked, there's still oversupply in India, and Russia and other countries are trying to protect them at the segments. What sort of trends in the global sugar market should we be aware of, I'm thinking about, as we look into next year, I guess, is the overall question? Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Okay, so starting with this macro view. We are seeing this huge surplus investment that we already made and before harvesting this crops and probably next year crop will be huge as well, investor levels will be high. This is our view in what we are expecting. Consequently, we are not seeing much room for sugar prices to bake in the short term. Having said that and of course with lower sugar price on international basis and with the ethanol market locally really hot in terms of demand especially coming from the flex-fuel fleet. Not only Cosan but also the whole industry we're using our maximum capacity to produce ethanol. So we are finishing the crop next week and closer... use it again into maximum capacity to produce ethanol. We are selling ethanol with higher prices starting now in the inter-season and we believe that ethanol prices vis-à-vis sugar prices will be more attractive to us in this inter-season. Of course, when the new crop comes all the industry will start questioning again and producing more ethanol and then the Easter starts all over again and ethanol prices probably will be placid again. So, this is our view of course. Here in Brazil all the extra capacity, the new mills that are starting to run in the next crop, if not 100% of these new capacities will acreage for sugarcane with the most... the majority of this new capacity is coming for the ethanol side. But today you have a situation where again flex-fuel fleet is increasing quite a lot, 85% of new cost segmenting [ph] on flex-fuel, better cars, and the current picture in Brazil is that if you compare ethanol prices to gasoline price, that depend on stations, 90% of the total Brazilian fleet are in the regions where petroleum prices are more attractive. So even with this recent new one and higher ethanol prices, prices for ethanol are much more better that gasoline prices. Considering that Petrobras didn't re-price all the recent highs in oil prices. So we firmly believe that there is a strong support in the demand side for us and in the local market, I believe.

Okay. And a comment on the U.S. dollar. With the strength in the U.S. dollar versus, sorry, weakness in the U.S. dollar versus reais, where do you believe Brazil is now, and in terms of competitiveness with sugar production? Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Well, it is not, I would say, competitive at all because at this point in time, basically companies here in Brazil are gathered to enfold the results of order on listed companies. They have basically a breakeven situation; some of them making more profits and some of them in... with direct bottom line. Point is that this is a kind of a price level where it's easy to move in all side to decide it. However in terms of new investment, in terms of acquisitions, in terms of expansions one has to be very, very careful because perhaps the return will not be there. However, at the same time we have to realize that a decorative price level, no country in the world will survive, and based on that it's easy to conclude that's going to be a matter of one crop or another crop where price should begin rebound and perhaps come in the direction of $12.30; because this is our price where we believe is going to remunerate the low cost producing countries and at the same time it is not going to incentivate many other countries... many other players in the world to join this game. Of course that in this... let's say, avenue from time-to-time will have some surprises like now when we will show the increase; their important view to buy $100 per ton of sugar and this is again a move at least for accounts such as Brazil very, very important because Rocham [ph], in the past... I mean so far has been the largest buyer of Brazilian sugar and by doing that in a moment when they are intending to join their opinion this is again a bad move because it's the joined European Union with better tax; afterwards it's going to be much more difficult to believe it. Therefore all the game plan with regards to sugar, it's a bit more complex because again the no free market is just one third of the whole global market considering the two thirds are protected and moreover we have perhaps the second largest producer or maybe it's going to be the first largest producer, India, in a very distress situation where growers are not receiving for their cane. And this week the Indian Government just announced a zero interest on loans to finance sugarcane plantations in India. Also they have announced that they would be allowed sugarcane to be converted into ethanol not only sugar. And also they are incentivized to replace sugarcane by other cultures so that the whole country could come back to a more balanced position. Again it's not going to be happening in this crop because this crop is still... they should be breaking another health record. While I guess that all the producers, all the countries, they are learning the lesson that will that be careful before we start to pump up production.

Thank you. [Operator Instructions]. Our next question is coming from Arif Gangat with South Asset Management.

Hi, it's Arif Gangat at Southpaw; I just have two quick questions. The first is, is it possible for you to quantify for us the level of domestic ethanol inventory and if currently versus this time last year. And the second question is regarding this sort of seasonal phenomenon of pricing, hopefully increasing inter-harvest on ethanol. Are you seeing that phenomenon across all regions of Brazil or are you seeing it just in a few different regions? Thank you.

Well our guesstimate at this point in time is that the local storage amount here in Brazil as far as ethanol is concerned is, I'd say very, very similar to the growth in the ethanol production. So compared to last year, we think that we should have something between 16 to 20% more than again last year. And this trend shall continue because you do have states here in Brazil. Let's take the case of Sao Paulo which is the largest or the most important state with regards to GDP in Brazil. Basically here the balance between ethanol and gasoline is much more towards ethanol. Today, out of 100 liters of our fuel, 60 are for ethanol and 40 for gasoline. This is coming from the segmenting [ph] of flex-fuel cars plus the 25% and by far [ph] blending of ethanol into gasoline. However, you also have other states where the VAT tax is not the same level of Sao Paulo state, that's 12%, but you have 25.7 more than 30% of VAT tax for ethanol. Therefore people they do not use as much as ethanol as they should. You also... there was another part of your question? Yes, with regards to price increase in the harvest period. We... again as we mentioned before, we are positive that this current trend shall continue, we may have picks over 30% into the inter-harvest period. And this situation shall also repeat itself in the next crop, add to it the peaks and valley... not so drastic as in this property because again people are learning their lessons. But, I guess, it's also important to have a mind that on the production side especially during the harvest period, we are talking about more than 300 millions here all over Brazil more than 130 to 150 economic groups that our standing to the fewer distributors that they have perhaps six main fuel distributors at Petrobras, Exxon, Shell and so on and so forth. So the bargaining power, it's really on their side. This changes a little bit during the inter-harvest period only when the major players can carry on inventory.

Thank you. Our next question is coming from Eric Ollom of ING.

Yes, hi, good morning everybody. Could you tell us what was the amount of revenues from co-generation for this quarter and year-to-date and what's your expectation for fiscal 2008?

Yes, hi Eric. So, far we just have one pile... plant for co-gen, and this is at the Faiamu [ph] where that was implemented in 2002 where we are selling excess energy to the CPSA which is the power company in the countryside of Sao Paulo state. Actually we are implementing co-gen plants in three of our mills, because we want the government auction in order to sell our excess energy for those three mills we are starting in year 2009 onwards. So at this point in time, in terms of our revenues this is really I would say peanuts because we are selling I guess something like a ten megawatt something like that. It's 3 million reais so it's very, very small, because again in forces of bundle of experience and the real incremental cash flow starts in 2009 when we endorse a co-gen plant, they start to sell energy to the group.

Thank you. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Yes something around 45 million, 50 million reais for the first two plants starting 2009.

Thank you. Our next question is coming from Denise Qurazian or Santon Bank [ph].

Good morning ladies and gentlemen. Thanks for the call. I noticed your depreciations and amortization rising very significantly in the past couple of quarters having a material impact on your operating income, of course not on cash flows but on a cash flow basis but on your EBIT, it's rising as a percentage of sales rising. Of course your CapEx has been going up, but it's been rising at a percentage of CapEx as well. Can you give us a little bit of color there, and my second question is, I get a lot of calls of concern from investors in your notes regarding the takeout of the covenants by the consented source station in the '09 notes, excuse me, a lot of holders of 17s and perpetuals that had less covenants in them, expressing some concern about governance going forward. Could you just give us an expression of comfort or something; what do you tell investors that are concerned about that? Thanks very much. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Well, with regards to the quantitative covenants was based just once, it was the formicary [ph] net debt to that technique more than 2.5 times. As of today, it is all our consolidated figures. We have a negative net debt so we do have just, let's say, a net cash position if you like; I would do bet. And as far as going forward, I guess that the company so far significantly came to the capital markets in 2004 with raising our '09 months. I guess never the company did any kind of act and any kind of measure that was not according to plan, according to what was said to investors in divest. Therefore there's no reason why one should get concerned that a company would restrain itself into a delicate position. Moreover, if the '09 bonds covenants we would remove, I guess, '09 we are very, very close. I guess we do have all bonds that mature in 2017 in our perpetual bonds, and I would say that they are the people that are really investing in the company and they are grading having investment grade package. And, also in terms of our corporate governance, we are talking about company that now is listed in the New York Stock Exchange; by the way, the first Brazilian controlled company listed in New York Stock Exchange. So, it is subject to the American legal environment, also subject to the legal... to the regulatory environment in the U.S. complying with the Sarbanes-Oxley standards under the ICC supervision. I really want to see how one could have any concerns with regards to corporate or corporate governance. If anything happened recently it was only to raise the bar in that totally different level than it was before.

Thank you for that very complete answer. Could you... and my first question was about the depreciation and amortization, could you address that please? Thank you very much.

Yes, and this is Alex Sirihal speaking here. If we are talking about a U.S. GAAP figures then the bulk of the increase and the depreciation as far as... are related through the conventional rate of reais to dollar as our profit spent and equipment balance is mainly considering reais. So seems we had net evaluation of the U.S. dollar here as it creates an increasing cost reduction just for foreign exchange valuation. But now if we take into consideration from the Br GAAP or the Cosan S.A. figures, yes, we can see a very huge increase in depreciation, but here we have to come back to the fourth quarter of 2007 when we changed the accounting policy of our depreciation of inter-harvest maintenance, the second point in time we did not consider the inter-harvest maintenance as CapEx and depreciation and in the fourth quarter we changed everything and charged... just one quarter, the two amounts of 2007 figures. Now during this year we are charging it quarter-by-quarter, so in the just two first quarters of the year we are going to see higher depreciation than last year. But on the other hand and despite the fourth quarter, it will be very, very lower than what we recorded last year. So, in our full-year basis we are not seeing that increase in depreciation charge.

Yes so basically... this is Guilherme Prado, also we have one point less than the last one, was the, I would say, CVM recommendation on how to treat the depreciation during the harvest and inter-harvest period and the first point with regards to the figures in U.S. GAAP besides a FX rate, when you do portray the accounting for the U.S. GAAP different than in the Brazilian GAAP, you have to split the goodwill amount that you paid in order to reflect the market value for the assets that you repurchased. Therefore in Brazilian GAAP you just have the historical value of those assets and then the amount of goodwill is much bigger and what you amortized is the goodwill. However for U.S. GAAP somehow you reduce the goodwill phase, because you are increasing the book value of the assets based on the market event. Therefore the depreciation over those assets for U.S. GAAP are much higher than the Brazilian GAAP. Okay, so those two points.

Thank you. Our next question is coming from Marcelo Brisac of Itaú. Marcelo Brisac - Itaú Corretora: Hi, good afternoon. And just... I have a question regarding the exchange. I know... I am not sure if you are allowed to comment on that or not if it goes into it. Just correcting this morning regarding my question this morning the cash on Cosan Limited remained in U.S. dollars, right. So, as we the riyal appreciated that cash is worth less reais and the adjacent [ph] better loans have changed ratio a little bit from the 1:1 that was mentioned during the Cosan Limited IPO. So, I understand there is a concern to keep it fair for both sides the Cosan S.A. and Cosan Limited shareholders. But in the past you mentioned about cash adjustments and it seems that the cash wasn't adjusted by the reais depreciation and the riyal, so that makes the 1:1 ratio kind of unfair or at this non economical focus on S.A. shareholders. I am just trying to see for it grieves [ph] me and if there is any chance the ratio can be moved a little bit to accommodate for the FX change? Thank you. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: No. Basically we have already announced that the exchange invoice was going to be 1:1 and again this is optional. It's an option to take in shareholders of Cosan S.A. And again do not forget that any kind of offer that is being put on the table could be argue... both sides, you could have something less than one to one or something than more than one to one. And it's just a proof let's say one single project to be pursued by Cosan Limited alone than we are going to increase this relationship so for each share of Cosan Limited, we would be asking more than one share of Cosan S.A. and the other way around for any... like you used to have for any current movement than we'll have one share of Cosan S.A. asking more than one share of Cosan Limited. Therefore it depends on how we will see the situation depend on the methodology of their use. Again... and the assumption that you use; you could certainly see the situation in different direction. The point is basically for the conceptual point of view at this point in time Cosan Limited should nearly sort of reflect Cosan S.A. Therefore, there is no reason why we should have a different ratio than 1:1. Marcelo Brisac - Itaú Corretora: Yes, I understand your point, just that the FX movement alone kind of switch... but that was... this was my equation but... okay and I thank you very much for your answer.

Thank you. Our next question is coming from Eduardo Vieira of Credit Suisse.

Hi. I think on the operational side could you tell us what is your EBITDA breakeven price for the sugar business in terms of the cents of the dollar per pound? Do you still bake it comparable to the New York level price? So, basically the breakeven price, slowly the depreciation and amortization and also excluding hedge and if you could comment on the ethanol side as well, it would be great. And also on the financial side, are you planning to pay down any debt with the proceeds of the capital increase or... and... or are you actually planning to raise any debt in the near future or in the near term. Thank you very much. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Well with regards to your first question, I mean the answer is not that pretty straightforward because it's not only the New York 11 price, it's also a matter of the FX rate. Therefore I guess that we put products [ph] to ours and we go to our assumptions and we see how it would work. Also assuming that the cost of the products sold and sugar or ethanol, we also have a part of that and the cost is linked to the international price of sugar and ethanol. With regards to the debt, this point in time they are not really... I mean what we said we would do last January, we did, and that was to repurchase part of our '09 bonds. Therefore at this point of time, I guess that we are fine the way that we are. We do have very important CapEx spending projects going on but we do have the proper funding in place. And of course in case there is a major opportunity that requires additional finance, we'll take a look. But again as I said that we have a net debt that is negative, so we have a net cash position. Therefore this should not be a point of concern down the road.

Okay, thanks. Just, so rephrasing the first question or the term, if you could comment on what is your... what would be your recurring level of the operational margin without hedging. As of today's prices and conditions and exchange rate as of today, just a guidance, if you could, and also what would be the upside in terms of margins that you forecast in general terms once you implement... you capture more synergies in your positions and with the full benefit of the co-generation. Thank you. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: So basically nowadays, I mean, you can work out certain scenario for sugar price in terms of cents per pound and also FX. But we think that in the existing scenario, basically we are talking about something between $0.095 to $0.10 in terms of breakeven. Of course it may vary depending on the production mix and also depend on how much of your own sugarcane you use, vis-à-vis how much of the sugarcane you buy from growers. But, back of the envelope calculation $0.095 to... $0.0975 to $0.10. What's the other point you made? Okay, so that's basically I thought it was the second part of your question. Okay thanks.

Thank you. Our next question is coming from Savio Zutoris [ph] of Bear Stearns.

Gentlemen, good afternoon, this is Savio Zutoris [ph]. I have a question regarding your realization of ethanol exports. It looks like quarter-over-quarter you were able to raise to a very nice hike when the reference price at least in the United States plus a decline. And my question is if you could explain that how did you manage to do that, to achieve that, and my question is if you could discuss two things, one, is this related to just a rerouting your exports or it's just a different type of alcohol that you are exporting maybe industrial and non-industrial fuel alcohol? Thank you. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Well I know that's important to consider there are two points. We do have a certain constant volume of ethanol exports that are basically for industrial and chemical purpose. They do have a higher price and of course when the export volume starts to go down, the wait of this industrial and chemical ethanol becomes more relevant and therefore improves in terms of average price. Basically as far as the internal price, I am not sure if you also want to know the difference, I mean the price list between the internal market and external market exports. If that's the case, consider that when we sell locally here we have all the fuel distributors, Petrobras, Exxon, Shell, and so on before; they come to our mills in order to pick up the product. So, it's their transport, so that the frac is on their account. And when we do export we are divided that we have to take their product from our mills to the port terminal. So, we are responsible for this... the land freight and also for lowering the vessels. Therefore, we also have this, I would say, price difference.

Thank you. Our next question is coming from Subhojit of Morgan Stanley.

Good morning Paulo, good morning Guilherme and Alexandre. I have a couple of quick questions. First of all, could you provide a bit of a guidance in terms of CapEx that you are going to be spending this fiscal year and the next one as well? I see that the average CapEx would be around 800 million reais per year based on your strategic plan. But year-to-date you spent around 300 million Reais. So, if you want to speed up the CapEx disbursement in later part of the year are you going to revise that for upper range on the following years; that will be the number one question? The second question if you could comment a bit about the other... the guidance, I see that you reduced the EBITDA guidance for fiscal year '08, and despite the fact that volumes have gone up, prices assumptions for this year have also gone down? So, I was just wondering if you could comment a bit about what changed in terms of your price assumptions, whether it was purely up sugar or ethanol given the current scenario, and what were the main driver for the EBITDA decline in terms of the guidance. Thank you very much. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: Well, Subhojit, hi there. Basically, with regards to your first question, when we started the year we... I mean the only let's say point that we are completely sure was that we have a delicate year for this industry, and we stated that and of course we had to plan ourselves according, therefore we had reached... reduced... we had the cut all let's say CapEx that could be avoided at that point in time waiting for the outcome of the Cosan Limited IPO. Therefore, also in order to refer to one of the first questions that was spoken with regards to covenant, we didn't want to stress the company. Therefore as we didn't know through... possible to realize or not been IPO of course, and then we just reduced the CapEx. Now the situation is a little bit difference and as you pointed out if we peruse our CapEx plans that we have disclosed to the market we should have a very, very sizeable CapEx volume this year. So this, yes, is going to happen. I don't have right here the breakdown of CapEx for this year and next year. But basically we are going just to follow what we have disclosed to the market. With regards to the second question, basically when we talk about guidance we have not changed our guidance. When we talk about fiscal year '08 we've precisely have build fiscal year that we are discussing now. So the same guidance that we are stating here was the guidance that we gave before the year started. So there's no change here. The only metric here that we changed at this point in time that guidance was for the exchange rate because we believe that by Q2 [ph] of next year the FX rate should be much more towards 1.7 reais or so per U.S. dollar. Okay.

Thank you. There appear to be no further questions at this time. I would now like to turn the floor back to Mr. Diniz for any closing remarks. Paulo Sérgio de Oliveira Diniz - Chief Financial and Investor Relations Officer: So, dear investors and collogues, we close here our call related to our second quarter of 2008. We thank you again for your presence and happy holidays. See you soon.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.