UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 20-F
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 2011
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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___________________________
Commission File Number: 1-33659
COSAN LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Bermuda
(Jurisdiction of incorporation or organization)
Av. Juscelino Kubitschek, 1327 – 4th floor
São Paulo, SP 04543-000, Brazil
(55)(11) 3897-9797
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Marcelo Eduardo Martins
(55)(11) 3897-9797
ri@cosan.com.br
Av. Juscelino Kubitschek, 1327 – 4th floor
São Paulo, SP 04543-000, Brazil
(Name, telephone, e-mail and/or facsimile number and address of Company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Class A Common Shares
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New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The number of outstanding shares as of March 31, 2011 was:
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Title of Class
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Number of Shares Outstanding
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Class A Common Shares, par value $.01 per share
Class B – series 1 – Common Shares, par value $.01 per share
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174,355,341
96,332,044
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer x Accelerated Filer o Non-accelerated Filer o
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board x Other o
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
____________________
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Presentation of Financial and Other Information
Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. These consolidated financial statements are our first financial statements prepared in accordance with the IFRS. IFRS 1 – “First-time Adoption of International Financial Reporting Standards” has been applied in preparing these financial statements and as such, we no longer prepare financial data under generally accepted accounting principle in the United States, or U.S. GAAP.
IFRS 1 First-Time Adoption of International Financial Reporting Standards allows first-time adopters certain exemptions from the retrospective application of certain IFRS. The Company has applied the following exemptions: (i) Business combinations: the Company used the exemption of IFRS 1 and has applied IFRS 3 - Business combinations - for acquisitions from December 1, 2008, the date of the purchase of Cosan Combustiveis e Lubrificantes S.A. (“CCL”) (formerly known as Esso Brasileira de Petroleo Ltda., now known as Cosan Lubrificantes e Especialidades S.A. (“CLE”)) and elected not to remeasure and restate business combinations that occurred before that date; (ii) Deemed cost: the Company elected to measure its farming land at fair value at the date of transition to IFRS. The effects of the deemed cost increased fixed assets with a corresponding increase in equity, net of income tax effects (see Note 14 of our consolidated financial statements attached hereto). The Company elected not to remeasure the remaining fixed assets. Remaining cost basis differences between inflation indexed asset values under IFRS and Brazilian GAAP attributable to Brazil’s hyper-inflationary designation until 1997 are immaterial as of the IFRS transition date; (iii) Defined benefit pension plan: the Company elected to recognize all actuarial gains and losses against the retained earnings as at the date of transition to IFRS. See Note 27 of our consolidated financial statements attached hereto for further details; (iv) Borrowing costs: The Company has applied the transitional provisions in IAS 23 Borrowing Costs and capitalizes borrowing costs on assets where construction was commenced on or after the date of transition, and (v) Cumulative currency translation differences: cumulative currency translation differences are deemed to be zero as at April 1, 2009.
As permitted by the applicable rules to the first-time adopter of IFRS, (1) we have not included in this annual report our consolidated balance sheets as of March 31, 2009 and 2008, or statements of income, cash flows and changes in shareholders’ equity for the fiscal years ended March 31, 2009 and 2008, including the notes thereto and (2) we have not presented a reconciliation of consolidated financial statements prepared in accordance with IFRS to U.S. GAAP.
We previously presented our consolidated financial statements in U.S. GAAP for SEC filings and in Brazilian GAAP for CVM filings. In adopting, IFRS Brazilian GAAP was considered the primary GAAP in the transition to IFRS, and the notes to the consolidated financial statements included in this annual report refer to the transition from Brazilian GAAP to IFRS. We have also included a reconciliation between U.S. GAAP and IFRS as of and for the year ended March 31, 2010 as supplemental information (see Note 30 of our consolidated financial statements attached hereto).
The consolidated financial statements are presented in Brazilian reais . However, the functional currency of Cosan Limited, or “Company”, is the U.S. dollar. The Brazilian real is the currency of the primary economic environment in which Cosan S.A. Indústria e Comércio, “Cosan” or “Cosan S.A.”, and its subsidiaries, located in Brazil, operate and generate and expend cash and is the functional currency, except for the foreign subsidiaries in which U.S. dollar is the functional currency. The Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, mandated that IFRS should be used as the basis for consolidated financial statements of Brazilian public companies from fiscal years ending after December 31, 2010 and onward. Consequently, we have presented our consolidated financial statements for the fiscal years ended March 31, 2011 and 2010, in accordance with IFRS and our transition date was April 1, 2009. Prior to this date, our consolidated financial statements were prepared in accordance with accounting practices adopted in Brazil, or “Brazilian GAAP”, for CVM purposes and U.S. GAAP for SEC purposes. Brazilian GAAP is based on the Brazilian Corporate Law No. 6,404 of December 15, 1976, as amended, and included the provisions of Law No. 11,638/2007 and Law No. 11,941, dated May 27, 2009 the accounting standards issued by the Brazilian Federal Accounting Council (Conselho Federal de Contabilidade); the accounting standards issued by the Accounting Standards Committee (Comitê de Pronunciamentos Contábeis), and the rules and regulations issued by the CVM. After the adoption of CPCs No.15 to 43, Brazilian GAAP does not differ from IFRS, for preparation of consolidated financial statements.
In adopting IFRS for the consolidated financial statements as of and for the fiscal year ended March 31, 2011, certain adjustments were made to adjust the amounts previously presented in accordance with U.S. GAAP or Brazilian GAAP, as applicable, as of and for the year ended March 31, 2010.
The primary differences between our previously presented U.S. GAAP and Brazilian GAAP sets of consolidated financial statements, are: (1) Biological assets: according to International Accounting Standard, or IAS, 41, biological assets of Cosan are measured at fair value at each reporting period, using the discounted cash flow method. In accordance with U.S. GAAP, the biological assets were recorded at their historical cost less amortization and were classified and presented in the statement of financial position as part of inventories and fixed assets; (2) Business combinations: Business combinations are treated in a similar manner under U.S. GAAP, but as the primary GAAP used in the preparation of these IFRS financial statements was Brazilian GAAP: (i) business combinations effects accounted for under U.S. GAAP prior to December 1, 2008 have been reversed and (ii) goodwill amortization effects accounted for under Brazilian GAAP prior to March 31, 2009 have been included; (3) Deemed cost: Cosan elected to measure its farming land at fair value at the date of transition to IFRS; (4) Warrants on the equity method investment: Cosan holds warrants in Radar Propríedades Agricolas S.A., or Radar, exercisable at any time up to maturity (August 2018). Such warrants permit Cosan to purchase additional shares, equivalent to 20% of total shares as of the date of exercise. The exercise of warrants will not change the classification of this investment as an equity investment. Those warrants were not considered to be a financial instrument under U.S. GAAP up to March 31, 2010 as they cannot be net settled. Radar is a privately-owned entity. Under IFRS, the warrants are treated as a separate financial instrument measured at fair value; (5) Investment property in associate: Radar is an equity method investment of the Company that invests in farming land for rent and future appreciation. Under U.S. GAAP, up to March 31, 2010, such land was recorded at cost. With the adoption of IFRS, Radar treated such land as investment property and elected to measure it at fair value. Fair value is measured at each reporting date, impacting the equity income of the Company with regard to Radar; (6) Sale leaseback: On December 30, 2008, Cosan sold land to Radar resulting in a gain of R$188.9 million. Cosan leased back the land. Under U.S. GAAP, this gain was deferred and was being amortized over the 19-year average term of the leases. Under IFRS, since the sale price was based on the fair value of the land, the gain was recorded on the transition date against accumulated earnings; (7) Deferred income taxes: As required by IAS 12, all deferred income taxes have been reclassified to non-current assets or liabilities. Also, the balance of deferred income taxes was impacted by the adjustments previously mentioned; and (8) Borrowing costs: Under U.S. GAAP, up to March 31, 2010, Cosan capitalized borrowing costs, but as the primary GAAP used in the preparation of these IFRS financial statements was Brazilian GAAP, in which borrowing costs were not capitalized, Cosan has applied the transitional provisions in IAS 23 Borrowing Costs and capitalizes borrowing costs on assets where construction was commenced on or after the date of transition.
On February 1, 2010, the Company announced that it, along with Royal Dutch Shell, or “Shell”, had reached a non-binding memorandum of understanding to form a joint venture, or “Joint Venture”, for a combined 50/50 investment. On August 25, 2010, the Company announced the conclusion of the negotiations with Shell and entered into definitive agreements. Cosan will contribute its sugar and ethanol and its distribution assets to the Joint Venture while Shell will contribute its distribution assets in Brazil and its interests on second generation ethanol research and development entities (Iogen Corp. and Codexis, Inc.). Shell will also make a fixed cash contribution in the amount of approximately US$1.6 billion over a two-year period. The sugar logistics and lubricants distribution business along with the investment in Radar will not be contributed to the joint venture. On January 4, 2011, the Company received unconditional merger clearance from the European Union to form the proposed Joint Venture in Brazil. On June 1, 2011, the Company formed the Joint Venture named Raízen. During the year ended March 31, 2011, the Joint Venture did not impact Cosan’s consolidated financial statements except for the incurrence of costs and expenses related to its future formation. See “Item 8. Financial information — B. Significant changes”.
See “Item 4. Information on the Company—A. History and Development of the Company—Acquisitions, Partnerships and Corporate Restructurings.”
Forward -Looking Statements
This annual report contains estimates and forward-looking statements, principally under “Item 3. Key Information—D. Risk Factors”, “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects”. Some of the matters discussed concerning our business and financial performance include estimates and forward-looking statements.
Our estimates and forward-looking statements are mainly based on our current expectations and estimates on projections of future events and trends, which affect or may affect our businesses and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Our estimates and forward-looking statements may be influenced by the following factors, among others:
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general economic, political, demographic and business conditions in Brazil and in the world and the cyclicality affecting our selling prices;
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the effects of the global financial and economic crisis in Brazil;
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our ability to implement our expansion strategy in other regions of Brazil and international markets through organic growth and acquisitions;
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competitive developments in the ethanol and sugar industries;
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our ability to implement our capital expenditure plan, including our ability to arrange financing when required and on reasonable terms;
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our ability to compete and conduct our businesses in the future;
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changes in customer demand;
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changes in our businesses;
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technological advances in the ethanol sector and advances in the development of alternatives to ethanol;
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government interventions and trade barriers, resulting in changes in the economy, taxes, rates or regulatory environment;
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inflation, depreciation, valuation and devaluation of the Brazilian real;
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other factors that may affect our financial condition, liquidity and results of our operations; and
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other risk factors discussed under “Risk Factors”.
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The words “believe”, “may”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.
Market Data
We obtained market and competitive position data, including market forecasts, used throughout this annual report from market research, publicly available information and industry publications, as well as internal surveys. We include data from reports prepared by LMC International Ltd., the Central Bank of Brazil (Banco Central do Brasil), or the “Central Bank”, Sugarcane Agroindustry Association of the State of São Paulo (União da Agroindústria Canavieira de São Paulo), or “UNICA”, Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or “IBGE”, the National Traffic Agency (Departamento Nacional de Trânsito), or DENATRAN, the Brazilian Association of Vehicle Manufactures (Associação Nacional dos Fabricantes de Veículos Automotores), or “ANFAVEA”, Datagro Publicações Ltda., F.O. Licht, Czarnikow, Apoio e Vendas Procana Comunicações Ltda., the São Paulo Stock, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros), or “BM&FBOVESPA”, the International Sugar Organization, the Brazilian National Economic and Social Development Bank (Banco Nacional de Desenvolvimento Econômico e Social), or “BNDES”, the New York Board of Trade, or NYBOT, the New York Stock Exchange, the London Stock Exchange, the National Agency of Petroleum, Natural Gas and Biofuels (ANP - Agência Nacional do Petróleo, Gás Natural e Biocombustíveis), or “ANP”, and the National Union of Distributors of Fuels and Lubricants (Sindicato Nacional das Empresas Distribuidoras de Combustíveis e Lubrificantes), or “Sindicom”. We believe that all market data in this annual report is reliable, accurate and complete.
Terms Used in this Annual Report
In this annual report, we present information in gallons and liters. One gallon is equal to approximately 3.78 liters. In addition, we also present information in tons. In this annual report, references to “ton” refer to the metric ton, which is equal to 1,000 kilograms.
All references in this annual report to “TSR” are to total sugar recovered, which represents the total amount of sugar content in the sugarcane.
All references in this annual report to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars. All references to the “real”, “reais” or “R$” are to the Brazilian real, the official currency of Brazil.
Rounding
We have rounding adjustments to reach some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Not applicable.
Not applicable.
The following table presents selected historical financial and operating data for Cosan Limited derived from our audited consolidated financial statements and for its predecessor for certain periods. You should read the following information in conjunction with our audited consolidated financial statements and related notes, and the information under “Item 5. Operating and Financial Review and Prospects” in this annual report.
IFRS
The financial data at and for the twelve month period ended March 31, 2011, and for the twelve month period ended March 31, 2010, have been derived from our audited consolidated financial statements prepared in accordance with IFRS, unless otherwise stated.
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As of and For Fiscal Year Ended March 31,
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2011
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2010
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(in millions of reais, except where otherwise indicated)
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Income Statement Data:
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Net sales (including adjustments and eliminations)
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18,063.5 | 15,336.1 | ||||||
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Cost of goods sold
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(15,150.1 | ) | (13,271.3 | ) | ||||
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Gross profit
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2,913.4 | 2,064.8 | ||||||
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Selling expenses
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(1,026.0 | ) | (862.7 | ) | ||||
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General and administrative expenses
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(545.4 | ) | (501,6 | ) | ||||
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Other, net
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(33.8 | ) | 37.5 | |||||
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Gain on tax recovery program
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— | 270.3 | ||||||
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Operational income / (expenses)
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(1,605.2 | ) | (1,056.5 | ) | ||||
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Income before financial results, equity income of associates and income taxes
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1,308.2 | 1,008.3 | ||||||
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Equity income of associates
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25.2 | 4.2 | ||||||
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Financial results, net
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(151.1 | ) | 493.4 | |||||
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Income before income taxes
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1,182.3 | 1,505.9 | ||||||
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Income taxes:
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Current
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(85.4 | ) | (78.4 | ) | ||||
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Deferred
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(329.1 | ) | (344.9 | ) | ||||
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Net income for the year
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767.8 | 1,082.6 | ||||||
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Statement of Financial Position Data:
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Cash and cash equivalents
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1,271.8 | 1,110.8 | ||||||
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Inventories
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670.3 | 612.7 | ||||||
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Biological assets
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1,561.1 | 963.2 | ||||||
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Property, plant and equipment
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7,980.5 | 6,114.5 | ||||||
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Intangible assets
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3,889.6 | 3,825.4 | ||||||
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Total assets
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19,212.4 | 16,417.2 | ||||||
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Current liabilities
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2,380.8 | 2,086.2 | ||||||
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As of and For Fiscal Year Ended March 31,
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2011
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2010
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(in millions of reais, except where otherwise indicated)
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Non-current
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Long-term debt
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6,274.9 | 5,136.5 | ||||||
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Legal proceedings
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666.3 | 612.0 | ||||||
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Equity attributable to owners of the Company
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4,560.9 | 4,195.5 | ||||||
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Equity attributable to non-controlling interests
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2,767.8 | 2,296.4 | ||||||
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Total equity
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7,328.7 | 6,491.9 | ||||||
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Other Financial and Operating Data:
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Depreciation and amortization
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742.3 | 664.6 | ||||||
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Net debt (1)
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5,285.7 | 4,261.7 | ||||||
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Working capital (2)
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1,099.8 | 1,312.5 | ||||||
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Cash flow provided by (used in):
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Operating activities
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2,327.2 | 2,209.0 | ||||||
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Investing activities
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(3,145.7 | ) | (2,435.3 | ) | ||||
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Financing activities
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980.7 | 317.9 | ||||||
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Crushed sugarcane (in million tons)
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54.2 | 50.0 | ||||||
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Own sugarcane (in million tons)
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27.4 | 23.4 | ||||||
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Growers sugarcane (in million tons)
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26.8 | 26.6 | ||||||
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Sugar production (in million tons
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3.9 | 3.5 | ||||||
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Ethanol production (in billion liters)
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2.2 | 1.8 | ||||||
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Earnings per share (basic and diluted)
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R$ | 1.74 | R$ | 2.61 | ||||
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Number of shares outstanding
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270,687,385 | 270,687,385 | ||||||
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Dividends paid
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220,125 | 43,981 | ||||||
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(1)
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Net debt consists of current and non-current debt, net of cash and cash equivalents, marketable securities and CTNs (Brazilian Treasury bills) recorded in our consolidated financial statements as other non-current assets. Net debt is not an IFRS measure.
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(2)
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Working capital consists of total current assets less total current liabilities.
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U.S. GAAP
The financial data at and for the eleven month period ended March 31, 2009 and at and for the fiscal years ended April 30, 2008, and 2007 have been derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP in U.S. dollars.
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As of and For
Eleven Months
Ended March 31,
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As of and For Fiscal Year Ended April 30,
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2009
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2008
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2007
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(in millions of US$, except where otherwise indicated)
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Statement of Operations Data:
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Net sales
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US$ | 2,926.5 | US$ | 1,491.2 | US$ | 1,679.1 | ||||||
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Cost of goods sold
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(2,621.9 | ) | (1,345.6 | ) | (1,191.3 | ) | ||||||
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Gross profit
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304.6 | 145.6 | 487.8 | |||||||||
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Selling expenses
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(213.3 | ) | (168.6 | ) | (133.8 | ) | ||||||
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General and administrative expenses
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(140.1 | ) | (115.1 | ) | (121.1 | ) | ||||||
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Operating income (loss)
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(48.8 | ) | (138.1 | ) | 232.9 | |||||||
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Other income (expenses):
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Financial income and (expense), net
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(370.8 | ) | 116.8 | 289.4 | ||||||||
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Gain on tax recovery program
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— | — | — | |||||||||
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Other
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(2.3 | ) | (3.7 | ) | 16.3 | |||||||
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Income (loss) before income taxes and equity in income (loss) of affiliates
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(421.9 | ) | (25.0 | ) | 538.5 | |||||||
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As of and For
Eleven Months
Ended March 31,
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As of and For Fiscal Year Ended April 30,
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2009
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2008
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2007
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(in millions of US$, except where otherwise indicated)
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Income taxes (expense)/benefit
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144.7 | 19.8 | (188.8 | ) | ||||||||
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Income (loss) before equity in income (loss) of affiliates
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(277.2 | ) | (5.2 | ) | 349.7 | |||||||
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Equity in income (loss) of affiliates
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6.1 | (0.2 | ) | (0.0 | ) | |||||||
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Loss (net income) attributable to noncontrolling interests
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83.0 | 22.0 | (173.0 | ) | ||||||||
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Net income (loss)
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US$ | (188.1 | ) | US$ | 16.6 | US$ | 176.7 | |||||
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Balance Sheet Data:
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Cash and cash equivalents
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US$ | 508.8 | US$ | 68.4 | US$ | 316.5 | ||||||
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Marketable securities
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— | 1,014.5 | 281.9 | |||||||||
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Inventories
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477.8 | 337.7 | 247.5 | |||||||||
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Property, plant, and equipment, net
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2,259.4 | 2,108.1 | 1,194.1 | |||||||||
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Goodwill
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888.8 | 772.6 | 491.9 | |||||||||
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Total assets
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5,421.1 | 5,269.1 | 3,253.4 | |||||||||
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Current liabilities
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1,164.7 | 359.1 | 274.2 | |||||||||
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Estimated liability for legal proceedings and labor claims
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497.6 | 494.1 | 379.2 | |||||||||
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Long-term debt
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1,251.1 | 1,249.3 | 1,342.5 | |||||||||
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Equity attributable to noncontrolling interests
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544.5 | 796.8 | 463.6 | |||||||||
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Capital stock
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2.7 | 2.7 | 2.7 | |||||||||
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Equity attributable to shareholders of Cosan Limited
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US$ | 1,596.2 | US$ | 1,995.7 | US$ | 473.6 | ||||||
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Other Financial and Operating Data:
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Depreciation and amortization
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US$ | 290.7 | US$ | 236.1 | US$ | 187.4 | ||||||
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Net debt(1)
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1,420.7 | 90.8 | 697.9 | |||||||||
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Working capital(2)
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362.8 | 1,503.8 | 865.3 | |||||||||
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Cash flow provided by (used in):
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Operating activities
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256.6 | 57.6 | 284.0 | |||||||||
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Investing activities
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(787.8 | ) | (1,441.7 | ) | (251.6 | ) | ||||||
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Financing activities
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US$ | 871.9 | US$ | 1,023.3 | US$ | 222.8 | ||||||
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Crushed sugarcane (in million tons)
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43.1 | 40.3 | 36.2 | |||||||||
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Own sugarcane (in million tons)
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22.7 | 22.3 | 21.6 | |||||||||
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Growers sugarcane (in million tons)
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20.4 | 18.0 | 14.5 | |||||||||
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Sugar production (in thousand tons)
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3,179.2 | 3,241.0 | 3,182.3 | |||||||||
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Ethanol production (in million liters)
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1,688.4 | 1,524.6 | 1,236.6 | |||||||||
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Earnings per share (basic and diluted)
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US$ | (0.76 | ) | US$ | 0.09 | US$ | 1.83 | |||||
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Number of shares outstanding
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270,687,385 | 226,242,856 | 96,332,044 | |||||||||
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Dividends paid
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— | — | US$ | 37.3 | ||||||||
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(1)
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Net debt consists of current and non-current debt, net of cash and cash equivalents, marketable securities and CTNs (Brazilian Treasury bills) recorded in our consolidated financial statements as other non-current assets. Net debt is not a U.S. GAAP measure.
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(2)
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Working capital consists of total current assets less total current liabilities.
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Exchange Rates
The Brazilian Central Bank allows the real/U.S. dollar exchange rate to float freely and has intervened occasionally to control the exchange rate volatility. However, the exchange market may continue to be volatile, and the real may depreciate or appreciate substantially in relation to the U.S. dollar. The Brazilian Central Bank or the Brazilian government may intervene in the exchange rate market.
Since March 17, 2008, Brazilian exporters have been allowed to keep 100% of income from exports outside of Brazil. In addition, the foreign exchange mechanism was simplified to provide for the simultaneous purchase and sale of foreign currency through the same financial institution and using the same exchange rate.
On October 5, 2010, the Brazilian government announced measures to respond to the real appreciation by increasing the IOF (Imposto sobre Operações Financeiras) tax rate to 4% on foreign exchange transactions related to foreign investments in the financial and capital markets, except for variable income investments traded on the stock exchange, which remained at 2%. However, the increase failed to achieve its intended goal of curbing the appreciation of the Brazilian currency in comparison to the U.S. dollar.
On October 18, 2010, new increases in the IOF tax rate were announced by the Brazilian government which adopted a 6% rate for foreign exchange transactions and for the investments of foreign investors in accordance with the margin requirements for future transactions on the BM&FBOVESPA. The IOF tax rate remains at zero on exchange transactions for outflow for these funds as well as for proceeds received as a result of initial public offerings. The conversion of Brazilian currency into foreign currency for purposes of paying dividends for American Depositary Share programs is not subject to tax.
On January 6, 2011, the Central Bank of Brazil published Circular 3,520, which imposes a 60% minimum reserve deposit for any financial operations exceeding US$3 billion.
The following tables set forth the exchange rate, expressed in reais per U.S. dollar (R$/US$) for the periods indicated, as reported by the Central Bank.
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Period-end
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Average for
Period
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Low
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High
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(reais per U.S. dollar)
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Fiscal Year Ended:
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April 30, 2006
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R$ | 2.0892 | R$ | 2.2841 | R$ | 2.0892 | R$ | 2.5146 | ||||||||
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April 30, 2007
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2.0339 | 2.1468 | 2.0231 | 2.3711 | ||||||||||||
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April 30, 2008
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1.6872 | 1.8283 | 1.6575 | 2.1124 | ||||||||||||
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March 31, 2009
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2.3152 | 2.0047 | 1.5593 | 2.5004 | ||||||||||||
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March 31, 2010
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1.7810 | 1.7852 | 1.7637 | 1.8231 | ||||||||||||
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March 31, 2011
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1.6287 | 1.6665 | 1.6279 | 1.6904 | ||||||||||||
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Month Ended:
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April 2011
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1.5725 | 1.5856 | 1.5646 | 1.6186 | ||||||||||||
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May 2011
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1.5791 | 1.6127 | 1.5739 | 1.6331 | ||||||||||||
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June 2011
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1.5611 | 1.5870 | 1.5611 | 1.6108 | ||||||||||||
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July 2011
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1.5563 | 1.5639 | 1.5345 | 1.5828 | ||||||||||||
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August 2011
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1.5864 | 1.5962 | 1.5543 | 1.6326 | ||||||||||||
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September 2011 (through September 26, 2011)
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1.8437 | 1.7314 | 1.6032 | 1.9008 | ||||||||||||
Source: Central Bank.
Exchange rate fluctuation will affect the U.S. dollar equivalent of the market price of our Brazilian Depositary Receipts, or “BDRs”, on BM&FBOVESPA, as well as the U.S. dollar value of any distributions we receive from our subsidiary Cosan S.A., which will be made in reais. See “Item 3. Key Information—D. Risk Factors—Risks Related to Brazil”.
Not applicable.
Not applicable.
This section is intended to be a summary of more detailed discussion contained elsewhere in this annual report. Our business, financial condition or results of operations could be materially adversely affected by any of the risks and uncertainties described below. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our financial condition and business operations.
Risks Relating to the Joint Venture
We closed our Joint Venture with Shell to further develop our sugar and ethanol and fuel distribution businesses on June 1, 2011. We cannot guarantee that the Joint Venture will be successful.
On June 1, 2011, we closed our Joint Venture with Shell, a joint venture relating to the production, supply, distribution and retailing of ethanol-based fuels. The Joint Venture is subject to post-closing antitrust review by CADE, the governing Brazilian antitrust regulator. There can be no assurance that the Joint Venture will be successful and we cannot predict its effects on our consolidated business. We may incur unanticipated expenses, fail
to realize all anticipated benefits or synergies, disrupt relationships with current and new employees, customers and vendors or incur indebtedness. Any delays or difficulties encountered with the Joint Venture could materially adversely impact our business and results of operations.
We have not included financial information regarding Shell or the fuel distribution assets of Shell that it contributed to the Joint Venture.
The Joint Venture is a material transaction. However, we have not included any historical financial information in this annual report regarding Shell or the fuel distribution assets that Shell contributed to the Joint Venture. In addition, we have not included any pro forma financial information regarding this Joint Venture. Investors are therefore cautioned that the nature of the assets contributed by Shell to the Joint Venture and other aspects of the Joint Venture may have a material adverse effect on us.
We cannot provide any assurance that we will obtain the Brazilian antitrust approval to continue to operate the Joint Venture on acceptable terms or predict whether the approval will impose conditions on our businesses in connection with the transaction.
The Joint Venture transaction has been submitted for approval to the Brazilian antitrust regulators, in accordance with Brazilian law, and is subject to post-closing antitrust review of CADE. Closing of the transaction was permitted to occur despite the ongoing review by CADE. Although the Secretariat for Economic Monitoring (Secretaria de Acompanhamento Econômico), or SEAE, and the Secretariat of Economic Law (Secretaria de Direito Econômico), or SDE, have issued non-binding opinions recommending the approval of the Joint Venture with no restrictions, CADE, the governing antitrust authority, continues to review this matter and may disagree with these opinions and impose certain conditions or performance commitments on us. CADE will evaluate whether this transaction negatively impacts competitive conditions in the markets in which we compete or adversely affects consumers in these markets. If CADE does not approve the Joint Venture transaction, we will not be able to continue to operate the Joint Venture in its current form.
Risks Related to Our Business and Industries
We operate in industries in which the demand and the market price for our products are cyclical and are affected by general economic conditions in Brazil and the world.
The ethanol and sugar industries, both globally and in Brazil, have historically been cyclical and sensitive to domestic and international changes in supply and demand.
Ethanol is marketed as a fuel additive to reduce vehicle emissions from gasoline, as an enhancer to improve the octane rating of gasoline with which it is blended or as a substitute fuel for gasoline. As a result, ethanol prices are influenced by the supply and demand for gasoline, and our business and financial performance may be materially adversely affected if gasoline demand or price decreases. The increase in the production and sale of flex fuel vehicles (hybrid vehicles, that runs with ethanol or gasoline or both combined in any proportion) has resulted, in part, from lower taxation, since 2002, of such vehicles compared to gasoline only cars. This favorable tax treatment may be eliminated and the production of flex fuel vehicles may decrease, which could adversely affect demand for ethanol.
Historically, the international sugar market has experienced periods of limited supply—causing sugar prices and industry profit margins to increase—followed by an expansion in the industry that results in oversupply—causing declines in sugar prices and industry profit margins. In addition, fluctuations in prices for ethanol or sugar may occur, for various other reasons, including factors beyond our control, such as:
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fluctuations in gasoline prices;
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variances in the production capacities of our competitors; and
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the availability of substitute goods for the ethanol and sugar products we produce.
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The prices we are able to obtain for sugar depends, in large part, on prevailing market prices. These market conditions, both in Brazil and internationally, are beyond our control. The wholesale price of sugar has a significant impact on our profits. Like other agricultural commodities, sugar is subject to price fluctuations resulting from
weather, natural disasters, harvest levels, agricultural investments, government policies and programs for the agricultural sector, domestic and foreign trade policies, shifts in supply and demand, increasing purchasing power, global production of similar or competing products, and other factors beyond our control. In addition, a significant portion of the total worldwide sugar production is traded on exchanges and thus is subject to speculation, which could affect the price of sugar and our results of operations. The price of sugar, in particular, is also affected by producers’ compliance with sugar export requirements and the resulting effects on domestic supply. As a consequence, sugar prices have been subject to higher historical volatility when compared to many other commodities. Competition from alternative sweeteners, including saccharine and high fructose corn syrup, known as “HFCS”, changes in Brazilian or international agricultural or trade policies or developments relating to international trade, including those under the World Trade Organization, are factors that can directly or indirectly result in lower domestic or global sugar prices. Any prolonged or significant decrease in sugar prices could have a material adverse effect on our business and financial performance.
If we are unable to maintain sales at generally prevailing market prices for ethanol and sugar in Brazil and internationally, or if we are unable to export sufficient quantities of ethanol and sugar to assure an appropriate domestic market balance, our ethanol and sugar business may be adversely affected.
Sugar prices reached the highest levels in nearly 30 years during fiscal 2010, reflecting the deficit in global sugar production.
Ethanol prices are directly correlated to the price of sugar, so that a decline in the price of sugar will adversely affect both our ethanol and sugar businesses.
The price of ethanol generally is closely associated with the price of sugar and is increasingly becoming correlated to the price of oil. A vast majority of ethanol in Brazil is produced at sugarcane mills that produce both ethanol and sugar. Because sugarcane millers are able to alter their product mix in response to the relative prices of ethanol and sugar, this results in the prices of both products being directly correlated, and the correlation between ethanol and sugar may increase over time. In addition, sugar prices in Brazil are determined by prices in the world market, so that there is a correlation between Brazilian ethanol prices and world sugar prices.
Because flex fuel vehicles allow consumers to choose between gasoline and ethanol at the pump rather than at the showroom, ethanol prices are now becoming increasingly correlated to gasoline prices and, consequently, oil prices. We believe that the correlation among the three products will increase over time. Accordingly, a decline in sugar prices will have an adverse effect on the financial performance of our ethanol and sugar businesses, and a decline in oil prices may have an adverse effect on that of our ethanol business.
We may not successfully acquire or develop additional production capacity through greenfield projects or expansion of existing facilities.
We have begun operations at our greenfield plant in the State of Goiás, the Jataí mill, which will be able to crush approximately 4 million tons when operating at full capacity by 2013. The Jataí mill is part of our project to build three ethanol greenfield mills in the State of Goiás. However, the investments in the other two plants are currently on hold. Our Carapó greenfield project, which we acquired as part of the Nova América acquisition, began operating in the third quarter of fiscal year 2010.
We expect to explore other greenfield projects in the future. Except for the ethanol greenfield project in the State of Goiás, we do not have environmental or other permits, designs or engineering, procurement and construction contracts with respect to any potential projects. As a result, we may not complete these greenfield projects on a timely basis or at all, and may not realize the related benefits we anticipate. In addition, we may be unable to obtain the required financing for these projects on satisfactory terms, or at all. For example, we may not be able to obtain all of the land for which we have obtained options in the State of Goiás or we may not have the appropriate personnel, equipment and know-how to implement projects.
The integration of greenfield projects or expansion of our existing facilities may result in unforeseen operating difficulties and may require significant financial and managerial resources that would otherwise be used for the development and ongoing expansion of our existing operations. Planned or future greenfield projects or expansion of existing facilities may not enhance our financial performance.
We may not successfully implement our plans to sell energy from our cogeneration projects, and the Brazilian government’s regulation of the energy sector may affect our business and financial performance.
Our current total installed energy cogeneration capacity is approximately 793 MW, which are used to generate energy for our own industrial operations and to export surplus energy. We have one additional energy co-generation project that we expect to become operational in 2012. We estimate that by the end of 2012, we will have a total installed energy cogeneration capacity of 934 MW, from which 845MW will come from certain of our plants that will sell excess energy to the grid and a total installed energy capacity of 1,300 MW by 2016. The Brazilian government regulates the energy sector extensively. We may not be able to satisfy all the requirements necessary to acquire new contracts or to otherwise comply with Brazilian energy regulation. Changes to the current energy regulation or federal authorization programs, and the creation for more stringent criteria for qualification in future public energy auctions, may adversely affect the implementation of this element of our business strategy.
We may engage in hedging transactions, which involve risks that can harm our financial performance.
We are exposed to market risks arising from the conduct of our business activities—in particular, market risks arising from changes in commodity prices, exchange rates or interest rates. In an attempt to minimize the effects of volatility of sugar prices and exchange rates on our cash flows and results of operations, we engage in hedging transactions involving commodities and exchange rate futures, options, forwards and swaps. We also engage in interest rate-related hedging transactions from time to time. Hedging transactions expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or there is a change in the expected differential between the underlying price in the hedging agreement and the actual price of commodities or exchange rate. We may incur significant hedging-related losses in the future. We hedge against market price fluctuations by fixing the prices of our sugar export volumes and exchange rates. Since we record derivatives at fair value, to the extent that the market prices of our products exceed the fixed price under our hedging policy, our results will be lower than they would have been if we had not engaged in such transactions as a result of the related non-cash derivative expenses. As a result, our financial performance would be adversely affected during periods in which commodities prices increase. Alternatively, we may choose not to engage in hedging transactions in the future, which could adversely affect our financial performance during periods in which commodities prices decrease.
We face significant competition, which may adversely affect our market share and profitability.
The ethanol and sugar industries are highly competitive. Internationally, we compete with global ethanol and sugar producers such as Poet, Inc., Archer-Daniels-Midland Company, Cargill, Inc. and A.E. Staley Manufacturing Company (a subsidiary of Tate & Lyle, PLC). Some of our competitors are divisions of larger enterprises and have greater financial resources than our company. In Brazil, we compete with numerous small to medium-size producers. Despite increased consolidation, the Brazilian ethanol and sugar industries remain highly fragmented. Our major competitors in Brazil are Louis Dreyfus Commodities - Santelisa Vale (the second largest ethanol and sugar producer in Brazil), Tereos - Guarani (the third largest ethanol and sugar producer in Brazil), Bunge, Santa Terezinha, São Martinho, Carlos Lyra, Tercio Wanderley, Zilor, Oscar Figueiredo, Da Pedra, and Irmãos Biagi and other ethanol and sugar producers in Brazil market their ethanol and sugar products through the Cooperative of Sugarcane, Sugar and Ethanol Producers of the State of São Paulo (Cooperativa de Produtores de Cana-de-açúcar, Açúcar e Álcool do Estado de São Paulo), or “Copersucar”. During the 2010/2011 harvest, Copersucar was comprised of producers in the states of São Paulo, Minas Gerais and Paraná. We are not a member of Copersucar.
We face strong competition from international producers – in particular, in highly regulated and protected markets, such as the United States and the European Union. Historically, imports of sugar have not provided substantial competition for us in Brazil due to, among other factors, the production and logistical cost-competitiveness of sugar produced in Brazil. If the Brazilian government creates incentives for sugar imports, we could face increased competition in the Brazilian market by foreign producers. Many factors influence our competitive position, including the availability, quality and cost of fertilizer, energy, water, chemical products and labor. Some of our international competitors have greater financial and marketing resources, larger customer bases and broader product ranges than we do. If we are unable to remain competitive with these producers in the future, our market share may be adversely affected.
The fuel distribution and lubricant market in Brazil is highly competitive. We compete with domestic fuel distributors who purchase substantially all of their fuels from Petrobras. There are very few domestic competitors,
like us, who import certain products into Brazil. In addition, we compete with producers and marketers in other industries that supply alternative forms of energy and fuels to satisfy the requirements of our industrial, commercial and retail consumers. Certain of our competitors, such as Petrobras, have larger fuel distribution networks and vertically integrated oil refineries, and may be able to realize lower per-barrel costs or higher margins per barrel of throughput. Our principal competitors are larger and have substantially greater resources than we do. Because of their integrated operations and larger capitalization, these companies may be more flexible in responding to volatile industry or market conditions, such as shortages of crude oil and other feedstocks or intense price fluctuations. The actions of our competitors could lead to lower prices or reduced margins for the products we sell, which could have a material and adverse effect on our business or results of operations.
Anticompetitive practices in the fuel and lubricants distribution market may distort market prices.
In the last few years, anticompetitive practices have been one of the main problems affecting fuel distributors in Brazil. Generally these practices have involved a combination of tax evasion and fuel adulteration, such as the dilution of gasoline by mixing solvents or adding anhydrous ethanol in an amount greater than the 25% permitted by applicable law (the overall taxation of anhydrous ethanol is lower than hydrated ethanol and gasoline). Taxes constitute a significant portion of the cost of fuels sold in Brazil. For this reason, tax evasion on the part of some fuel distributors has been prevalent, allowing them to lower the prices they charge. These practices have enabled certain distributors to supply large quantities of fuel products at prices lower than those offered by the major distributors, including us, which has resulted in a considerable increase in the sales volumes of the distributors who have adopted these practices. The final prices for fuels are calculated based on the taxes levied on their purchase and sale, among others factors. As a result, anticompetitive practices as such tax evasion may affect our sales volume, which could have a material and adverse effect on our business. If such practices become more prevalent, it could lead to lower prices or reduced margins for the products we sell, which could have a material and adverse effect on our business or results of operations.
Petrobras is our principal supplier of our base oils and of our fuel distribution business unit.
Significant disruption to our fuels and lubricant sales may occur, in the event of an interruption of supply from Petrobras. Any interruption would immediately affect our ability to provide fuel and lubricant products to our customers. If we are not able to obtain an adequate supply of fuel and base oil products from Petrobras under acceptable terms, we may seek to meet our demands through purchases on the international market. The cost of fuel and base oil products on the international market may be more expensive than the price we obtain through Petrobras.
We may face significant challenges in implementing our expansion strategy in other regions of Brazil and international markets.
Our growth strategy includes the expansion of our activities in other regions of Brazil and international markets, through organic growth and acquisitions. Our expansion to regions of Brazil in which we do not now operate may involve potential challenges, such as inadequate transportation systems and different state and local laws, regulations and policies. For example, we may not be able to secure an adequate supply of sugarcane either from suppliers or through our own cultivation in sufficient proximity to our mills to be economically viable in terms of transportation costs.
We are currently looking at opportunities worldwide, but have not yet identified any particular investment locations outside of Brazil. Our international expansion, to countries in which we do not now operate includes additional challenges, such as the following:
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changes in economic, political or regulatory conditions;
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difficulties in managing geographically diverse operations;
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changes in business regulation, including policies governing ethanol technological standards;
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effects of foreign currency movements;
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difficulties in enforcing contracts; and
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cultural and language barriers.
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If we fail to address one or more of these challenges, our business and financial performance may be materially adversely affected.
Our export sales are subject to a broad range of risks associated with international operations.
In fiscal year ended March 31, 2011, our net sales from exports represented 15.0% of our total net sales, while in fiscal year ended March 31, 2010, our net sales from exports represented 17.8% of our total net sales.
In fiscal year 2010, our net sales from exports were R$ 2,737.3 million, representing 17.8% of our total net sales. In fiscal year 2011, our net sales from exports were R$ 2,711.0 million, representing 15.0% of our total net sales. During this same period, our net sales from sugar exports were R$ 2,466.2 million, representing 13.7% of our total net sales, and our net sales from exports of ethanol were R$ 244.8 million, representing 1.3% of our total net sales.
We expect to expand our ethanol exports in the future. Expansion of ethanol exports depends on factors beyond our control, including liberalization of existing trade barriers and the establishment of distribution systems for hydrous ethanol in countries outside of Brazil. Our future financial performance will depend, to a significant extent, on economic, political and social conditions in our main export markets.
Most ethanol and/or sugar producing countries, including the United States and member countries of the European Union, protect local producers from foreign competition by establishing government policies and regulations that affect ethanol and sugar production, including quotas, import and export restrictions, subsidies, tariffs and duties. As a result of these policies, domestic ethanol and sugar prices vary greatly in individual countries. We have limited or no access to these large markets as a result of trade barriers. If these protectionist policies continue, we may not be able to expand our export activities at the rate we currently expect, or at all, which could adversely affect our business and financial performance. Also, if new trade barriers are established in our key export markets, we may face difficulties in reallocating our products to other markets on favorable terms, and our business and financial performance may be adversely affected.
We may not be able to maintain rights to use blending formulas and brands supplied by ExxonMobil.
We, through our subsidiary CLE (previously CCL) are the exclusive manufacturer and distributor of lubricants products in Brazil based on formulas provided to us under a license from ExxonMobil under the Master Lubricants Agreement, which expires on December 1, 2018. We have also been granted a license to use the ExxonMobil brand to market fuels under the Fuels Trademark License Agreement, which expires on December 1, 2013. The termination of any of these licenses, or the failure by ExxonMobil to adequately maintain and protect its intellectual property rights, could materially and adversely affect our results of operations or could require significant unplanned investments by us if we are forced to develop or acquire alternative technology. In the future, it may be necessary or desirable to obtain other third-party technology licenses relating to one or more of our products or relating to current or future technologies to enhance our product offerings. However, we may not be able to obtain licensing rights to the needed technology or components on commercially reasonable terms or at all.
The expansion of our business through acquisitions and strategic alliances creates risks that may reduce the benefits we anticipate from these transactions.
We have grown substantially through acquisitions. We plan to continue to acquire, from time to time, other ethanol or sugar producers or facilities in Brazil or elsewhere that complement or expand our sugar and ethanol existing operations. Moreover, we plan to acquire and build, from time to time, fuel terminals, lubricant production assets, retail distribution stations and other assets that complement and expand our fuel and lubricants existing operations and also intend to expand our network of service stations through increased branding. We also may enter into strategic alliances to increase our competitiveness. However, our management is unable to predict whether or when any prospective acquisitions or strategic alliances will occur, or the likelihood of any particular transaction being completed on favorable terms and conditions. Our ability to continue to expand our business through acquisitions or alliances depends on many factors, including our ability to identify acquisitions or access capital markets on acceptable terms. Even if we are able to identify acquisition targets and obtain the necessary financing to make these acquisitions, we could financially overextend ourselves, especially if an acquisition is followed by a period of lower than projected ethanol and sugar prices.
Acquisitions, especially involving sizeable enterprises, may present financial, managerial and operational challenges, including diversion of management attention from existing business and difficulties in integrating operations and personnel. Any failure by us to integrate new businesses or manage any new alliances successfully could adversely affect our business and financial performance. Some of our major competitors may be pursuing growth through acquisitions and alliances, which may reduce the likelihood that we will be successful in completing acquisitions and alliances. In addition, any major acquisition we consider may be subject to antitrust and other regulatory approvals. We may not be successful in obtaining required approvals on a timely basis or at all.
Acquisitions also pose the risk that we may be exposed to successor liability relating to prior actions involving an acquired company, or contingent liabilities incurred before the acquisition. Due diligence conducted in connection with an acquisition, and any contractual guarantees or indemnities that we receive from sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual liabilities. A material liability associated with an acquisition, such as labor- or environmental-related liabilities, could adversely affect our reputation and financial performance and reduce the benefits of the acquisition.
We have recently closed our joint venture with Shell. See “Item 4. Information of the Company—A. History and Development of the Company—Acquisitions, Partnerships and Corporate Restructuring”. However, we cannot assure you that the joint venture will be successful.
A reduction in market demand for ethanol or a change in governmental policies that ethanol be added to gasoline may materially adversely affect our business.
Governmental authorities of several countries, including Brazil and certain states of the United States, currently require the use of ethanol as an additive to gasoline. Since 1997, the Brazilian Sugar and Alcohol Interministerial Council (Conselho Interministerial do Açúcar e Álcool) has set the percentage of anhydrous ethanol that must be used as an additive to gasoline (currently, at 20% by volume). Approximately one-half of all fuel ethanol in Brazil is used to fuel automobiles that run on a blend of anhydrous ethanol and gasoline; the remainder is used in either flex fuel vehicles or vehicles powered by hydrous ethanol alone. Five districts in China require the addition of 10% ethanol to gasoline. Japan is discussing the requirement the addition of 3% of ethanol to gasoline, increasing such requirement to 20% in 2030 and nine states and four union territories in India require the addition of 5% of ethanol to gasoline. Other countries have similar governmental policies requiring various blends of anhydrous ethanol and gasoline. In addition, flex fuel vehicles in Brazil are currently taxed at lower levels than gasoline-only vehicles, which has contributed to the increase in the production and sale of flex fuel vehicles. Any reduction in the percentage of ethanol required to be added to gasoline or increase in the levels at which flex fuel vehicles are taxed in Brazil, as well as growth in the demand for natural gas and other fuels as an alternative to ethanol, lower gasoline prices or an increase in gasoline consumption (versus ethanol), may cause demand for ethanol to decline and affect our business. In addition, ethanol prices are influenced by the supply and demand for gasoline; therefore, a reduction in oil prices resulting in a decrease in gasoline prices and an increase in gasoline consumption (versus ethanol), may have a material and adverse effect in our business.
Government policies and regulations affecting the agricultural and fuel sectors and related industries could adversely affect our operations and profitability.
Agricultural production and trade flows are significantly affected by Brazilian federal, state and local, as well as foreign, government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies and import and export restrictions on agricultural commodities and commodity products, may influence industry profitability, the planting of certain crops versus others, the uses of agricultural resources, the location and size of crop production, the trading levels for unprocessed versus processed commodities, and the volume and types of imports and exports.
Future government policies in Brazil and elsewhere may adversely affect the supply, and demand for, and prices of, our products or restrict our ability to do business in our existing and target markets, which could adversely affect our financial performance. Sugar prices, like the prices of many other staple goods in Brazil, were historically subject to controls imposed by the Brazilian government. Sugar prices in Brazil have not been subject to price controls since 1997. However, additional measures may be imposed in the future. In addition, our operations are currently concentrated in the State of São Paulo. Any changes affecting governmental policies and regulations regarding ethanol, sugar or sugarcane in the State of São Paulo may adversely affect our company.
In addition, petroleum and petroleum products have historically been subject of price controls in Brazil. Currently there is no legislation or regulation in force giving the Brazilian government power to set prices for petroleum, petroleum products, ethanol or NGV. However, given that Petrobras, the only supplier of oil-based fuels in Brazil, is a state-controlled company, prices of petroleum and petroleum products are subject to government influence, resulting in potential inconsistencies between international prices and internal oil derivative prices that affect our business and our financials results, which are not linked to international prices.
We may not be successful in reducing operating costs and increasing operating efficiencies.
As part of our strategy, we continue to seek to reduce operating costs and increase operating efficiencies to improve our future financial performance. For example, we are purchasing new harvesters and increasing our mechanical harvesting with the goal of reducing sugarcane burning according to the Agri-Environmental Sugarcane Protocol. In areas that are suitable for the replacement of a manual harvest with a mechanical harvest, the burning of sugarcane must be reduced as follows: (1) 70% of the harvested area by 2010; and (2) 100% of the harvested area by 2014. For areas that do not technically allow the replacement of a manual harvest with a mechanical harvest, the burning of sugarcane must be reduced as follows: (1) 30% of the harvested area by 2010; and (2) 100% of the harvested area by 2017. We may not be able to achieve the cost savings that we expect to realize from this and other initiatives. Any failure to realize anticipated cost savings may adversely affect our competitiveness and financial performance.
We incur substantial costs to comply with environmental regulations and may be exposed to liabilities in the event we fail to comply with these regulations or as a result of our handling of hazardous materials.
We are subject to various Brazilian federal, state and local environmental protection and health and safety laws and regulations governing, among other matters:
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the generation, storage, handling, use and transportation of hazardous materials;
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the emission and discharge of hazardous materials into the ground, air or water; and
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the health and safety of our employees.
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We are also required to obtain permits from governmental authorities for certain aspects of our operations. These laws, regulations and permits often require us to purchase and install expensive pollution control equipment or to make operational changes to limit actual or potential impacts on the environment and/or health of our employees. Currently, we do not anticipate any material claims or liabilities resulting from a failure to comply with these laws and regulations. However, any violations of these laws and regulations or permit conditions can result in substantial fines, criminal sanctions, revocations of operating permits and/or shutdowns of our facilities.
Due to the possibility of changes to environmental regulations and other unanticipated developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. Under Brazilian environmental laws, we could be held strictly liable for all of the costs relating to any contamination at our or our predecessors’ current and former facilities and at third-party waste disposal sites used by us or any of our predecessors. We could also be held responsible for any and all consequences arising out of human exposure to hazardous substances, such as pesticides and herbicides, or other environmental damage.
We are party to a number of administrative and judicial proceedings for alleged failures to comply with environmental laws which may result in fines, shutdowns, or other adverse effects on our operations. We have not recorded any provisions or reserves for these proceedings as we do not currently believe that they will result in liabilities material to our business or financial performance. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances could adversely affect our business or financial performance.
Government laws and regulations governing the burning of sugarcane could have a material adverse impact on our business or financial performance.
Approximately 35% of our sugarcane is currently harvested by burning the crop, which removes leaves and destroys insects and other pests. The State of São Paulo and some local governments have established laws and regulations that limit our ability to burn sugarcane or that reduce and/or entirely prohibit the burning of sugarcane.
We currently incur significant costs to comply with these laws and regulations, and there is a likelihood that increasingly stringent regulations relating to the burning of sugarcane will be imposed by the State of São Paulo and other governmental agencies in the near future. As a result, the costs to comply with existing or new laws or regulations are likely to increase, and, as a result, our ability to operate our own plants and harvest our sugarcane crops may be adversely affected.
Any failure to comply with these laws and regulations may subject us to legal and administrative actions. These actions can result in civil or criminal penalties, including a requirement to pay penalties or fines, which may range from R$50.00 to R$50,000 million and can be doubled or tripled in case of recidivism, an obligation to make capital and other expenditures or an obligation to materially change or cease some operations.
Adverse weather conditions may reduce the volume and sucrose content of sugarcane that we can cultivate and purchase in a given harvest, and we are affected by seasonality of the sugarcane growing cycle.
Our sugar production depends on the volume and sucrose content of the sugarcane that we cultivate or that is supplied to us by growers located in the vicinity of our mills. Crop yields and sucrose content depend primarily on weather conditions such as rainfall and temperature, which vary and may be influenced by global climate change. Weather conditions have historically caused volatility in the ethanol and sugar industries and, consequently, in our results of operations by causing crop failures or reduced harvests. Flood, drought or frost, which may be influenced by global climate change, can adversely affect the supply and pricing of the agricultural commodities that we sell and use in our business. Future weather patterns may reduce the amount of sugar or sugarcane that we can recover in a given harvest or its sucrose content. In addition, our business is subject to seasonal trends based on the sugarcane growing cycle in the Center-South region of Brazil. The annual sugarcane harvesting period in the Center-South region of Brazil begins in April/May and ends in November/December. This creates fluctuations in our inventory, usually peaking in November to cover sales between crop harvests (i.e., December through April), and a degree of seasonality in our gross profit, with ethanol and sugar sales significantly lower in the last quarter of the fiscal year. Seasonality and any reduction in the volumes of sugar recovered could have a material adverse effect on our business and financial performance.
We may be adversely affected by a shortage of sugarcane or by high sugarcane costs.
Sugarcane is our principal raw material used for the production of ethanol and sugar. In fiscal year 2011, sugarcane purchased from suppliers accounted for 49.5% of our total sugarcane crushed. Historically, approximately 80% of the sugarcane purchased by us has been under medium- and long-term contracts with sugarcane growers, 5% on a spot basis and the remaining 15% from sugarcane growers with whom we have long-term relationships but no contractual arrangements. We generally enter into medium- and long-term supply contracts for periods varying from three and one-half to seven years. As of March 31, 2011, we also leased 437,698 hectares under 2,128 land lease contracts with an average term of five years. Any shortage in sugarcane supply or increase in sugarcane prices in the near future, including as a result of the termination of supply contracts or lease agreements representing a material reduction in the sugarcane available to us for processing or increase in sugarcane prices may adversely affect our business and financial performance.
We are exposed to the credit and other counterparty risk of our customers in the ordinary course of our business.
We have various credit terms with virtually all of our wholesale and retail industrial customers, and our customers have varying degrees of creditworthiness which exposes us to the risk of nonpayment or other default under our contracts and other arrangements with them. In the event that a significant number of material customers default on their payment obligations to us, our financial condition, results of operations or cash flows, could be materially and adversely affected.
Our business would be materially adversely affected if operations at our transportation, terminal and storage and distribution facilities experienced significant interruptions. Our business would also be materially adversely affected if the operations of our customers and suppliers experienced significant interruptions.
Our operations are dependent upon the uninterrupted operation of our terminal and storage facilities and various means of transportation. We are also dependent upon the uninterrupted operation of certain facilities owned or operated by our suppliers and customers. Operations at our facilities and at the facilities owned or operated by our
suppliers and customers could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:
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catastrophic events, including hurricanes;
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environmental remediation;
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labor difficulties; and
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disruptions in the supply of our products to our facilities or means of transportation.
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Any significant interruption at these facilities or inability to transport products to or from these facilities or to or from our customers for any reason would materially adversely affect our results of operations and cash flow.
Fire and other disasters could affect our agricultural and manufacturing properties, which would adversely affect our production volumes and, consequently, financial performance.
Our operations will be subject to risks affecting our agricultural properties and facilities, including fire potentially destroying some or our entire yield and facilities. In addition, our operations are subject to hazards associated with the manufacture of inflammable products and transportation of feed stocks and inflammable products. Our insurance coverage may not be sufficient to provide full protection against these types of casualties.
Disease and pestilence may strike our crops which may result in destruction of a significant portion of our harvest. Crop disease and pestilence can occur from time to time and have a devastating effect on our crops, potentially rendering useless or unusable all or a substantial portion of affected harvests. Even when only a portion of the crop is damaged, our business and financial performance could be adversely affected because we may have incurred a substantial portion of the production cost for the related harvest. The cost of treatment of crop disease tends to be high. Any serious incidents of crop disease or pestilence, and related costs, may adversely affect our production levels and, as a result, our net sales and overall financial performance.
Disruption of transportation and logistics services or insufficient investment in public infrastructure could adversely affect our operating results.
One of the principal disadvantages of Brazilian agriculture sector is that key growing regions lie far from major ports. As a result, efficient access to transportation infrastructure and ports is critical to the growth of Brazilian agriculture as a whole and of our operations in particular. As part of our business strategy, we are investing in areas where existing transportation infrastructure is under developed. Improvements in transportation infrastructure are likely to be required to make more agricultural production accessible to export terminals at competitive prices. A substantial portion of Brazilian agricultural production is currently transported by truck, a means of transportation significantly more expensive than the rail transportation available to U.S. and other international producers. Our dependence on truck transport may affect our position as low-cost producer, so that our ability to compete in world markets may be impaired.
Even though road and rail improvement projects have been considered for some areas of Brazil, and in some cases implemented, substantial investments are required for road and rail improvement projects, which may not be completed on a timely basis – if at all. Any delay or failure in developing infrastructure systems could hurt the demand for our products, impede our delivery of products or impose additional costs on us. We currently outsource the transportation and logistics services necessary to operate our business. Any disruption in these services could result in supply problems at our processing plants and impair our ability to deliver processed products to our customers in a timely manner. In addition, a natural disaster or other catastrophic event could result in disruption in regional transportation infrastructure systems affecting our third-party transportation providers.
We depend on third parties to provide our customers and us with facilities and services that are integral to our business.
We have entered into agreements with third-party contractors to provide facilities and services required for our operations, such as the transportation and storage of ethanol and sugar. The loss or expiration of our agreements with third-party contractors or our inability to renew these agreements or to negotiate new agreements with other providers at comparable rates could harm our business and financial performance. Our reliance on third parties to
provide essential services on our behalf also gives us less control over the costs, efficiency, timeliness and quality of those services. Contractors’ negligence could compromise the safety of the transportation of ethanol from our production facilities to our export facilities. We expect to be dependent on such agreements for the foreseeable future, and if we enter any new market, we will need to have similar agreements in place.
Technological advances could affect demand for our products or require substantial capital expenditures for us to remain competitive.
The development and implementation of new technologies may result in a significant reduction in the costs of ethanol production. We cannot predict when new technologies may become available, the rate of acceptance of new technologies by our competitors or the costs associated with such new technologies. Advances in the development of alternatives to ethanol also could significantly reduce demand or eliminate the need for ethanol as a fuel oxygenate. Any advances in technology which require significant capital expenditures to remain competitive or which otherwise reduce demand for ethanol will have a material adverse effect on our business and financial performance.
Alternative sweeteners have negatively affected demand for our sugar products in Brazil and other countries.
We believe that the use of alternative sweeteners, especially artificial alternative sweeteners such as aspartame, saccharine and HFCS, has adversely affected the growth of the overall demand for sugar in Brazil and the rest of the world. Soft drink bottlers in many countries have switched from sugar to, or increased consumption of, alternative sweeteners. In addition, the use of alternative sweeteners by sugar consumers, including soft drink bottlers, may also reduce the demand for sugar in Brazil. A substantial decrease in sugar consumption, or the increased use of alternative or artificial sweeteners, would decrease demand for our sugar products and could result in lower growth in our net sales and overall financial performance.
Our sugar and ethanol products are sold to a small number of customers which may be able to exercise significant bargaining power concerning pricing and other sale terms.
A substantial portion of our sugar and ethanol production is sold to a small number of customers that acquire large portions of our production and thus may be able to exercise significant bargaining power concerning pricing and other sale terms. In addition, intensive competition in the ethanol and sugar industries further increases the bargaining power of our customers.
Our subsidiary’s port concession is subject to termination by the granting authority.
We own and operate a sugar-loading terminal at the Port of Santos in the State of São Paulo through our subsidiary Rumo Logística S.A., or “Rumo Logística”. This port terminal is a result of the association of two previous terminals, Cosan Operadora Portuária S.A., or “Cosan Portuária”, and Teaçu Armazéns Gerais S.A., or “Teaçu” (previously owned by Nova América). The close proximity of our mills to the port enables us to benefit from lower transportation costs. Pursuant to the port concession agreement with the State of São Paulo’s Port Authority (Companhia de Docas do Estado de São Paulo – CODESP), or “CODESP,” Cosan Portuária’s concession to operate this terminal will expire on 2016, and it may be renewed for an additional 20 years if Cosan Portuária meets its obligations under the port concession agreement. We are already discussing with the CODESP the renewal of this concession, but we cannot provide assurances that we will be able to renew the concession at all or on favorable terms. The South Terminal concession (formerly Teaçu) was initially scheduled to expire in 2016, but has been extended until 2036. All port concessions may be unilaterally terminated by the granting authority prior to that time upon:
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expropriation of the port concession in the public interest;
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default by Rumo Logística in the performance of its obligations under the port concession agreement, including the payment of concession fees or failure to comply with other legal and regulatory obligations;
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Rumo Logística’s failure to comply with determinations by the granting authority; or
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bankruptcy or dissolution of Rumo Logística.
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Termination of the port concession agreement may adversely impact our transportation costs and the turn-around time for the export of our products as well as our revenues from service agreements related to our port facilities.
We may be adversely affected by unfavorable outcomes in pending legal proceedings.
We are involved in a significant number of tax, civil and labor proceedings, which we estimate involve claims against us totaling R$ 2,917.3 million, and as to which, at March 31, 2011, we recorded a provision totaling R$666.3 million, net of judicial deposits totaling R$ 218.4 million. We cannot predict whether we will prevail in these or other proceedings, or whether we will have to pay significant amounts, including penalties and interest, as payment for our liabilities, which would materially and adversely impact our business and financial performance.
Funding, especially on terms acceptable to us, may not be available to meet our future capital needs.
Global market and economic conditions have been, and continue to be, disruptive and volatile. The debt capital markets have been impacted by significant write-offs in the financial services sector and the re-pricing of credit risk, among other things. These events have negatively affected general economic conditions. In particular, the cost of raising money in the debt capital markets has increased substantially while the availability of funds from those markets has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced and, in some cases, ceased to provide funding to borrowers on commercially reasonable terms or at all.
If funding is not available when needed, or is available only on unfavorable terms, meeting our capital needs or otherwise taking advantage of business opportunities or responding to competitive pressures may become challenging, which could have a material and adverse effect on our revenue and results of operations.
Our subsidiary Rumo Logistica may not obtain the expected return of the contracts with ALL.
Our indirect subsidiary Rumo Logística entered into long term contracts with ALL – América Latina Logística S.A., or “ALL”, providing that Rumo Logística will make investments to expand ALL’s rail transport capacity in exchange for ALL transporting raw sugar and other derivatives. The contracts provide that Rumo Logística will invest approximately R$1.3 billion in a rail transport system, to be supported by ALL’s operations, with investments in (1) the duplication, expansion and improvements to the railway line and the yards in the Bauru-Santos/São Paulo railway corridor, sharply increasing its operating capacity; (2) the acquisition of locomotives and hopper railcars; and (3) the construction and expansion of terminals. In return, ALL will provide transport services, guaranteeing (1) a minimum volume curve; (2) competitive tariffs in comparison with road transport; (3) management of locomotive and wagon suppliers; and (4) payment of rent on equipment in proportion to the actual volume of the product transported. In the event Rumo Logística is not able to originate the volume of sugar to the transported, we may not receive the contractual fees, which could impact negatively the return of invested capital.
The production of lubricants and the storage and transportation of fuel products, lubricant products are inherently hazardous.
The complex manufacturing operations we perform at our Lubricants Oil Blending Plant, or LOBP, involve a variety of safety and other operating risks, including the handling, production, storage and transportation of toxic materials. These risks could result in personal injury and death, severe damage to or destruction of property and equipment and environmental damage. A material accident at one of our plants, service stations or storage facilities could force us to suspend our operations and result in significant remediation costs and lost revenue. In addition, insurance proceeds, if available, may not be received on a timely basis and may be insufficient to cover all losses, including lost profit. Equipment breakdowns, natural disasters, and delays in obtaining supplies or required replacement parts or equipment could also materially adversely affect our manufacturing operations and consequently our results of operations.
We are not insured against business interruption for our Brazilian operations and most of our assets are not insured against war or sabotage. In addition, our insurance coverage may be inadequate to cover all losses and/or liabilities that may be incurred in our operations.
We do not maintain coverage for business interruptions of any nature for our Brazilian operations, including business interruptions caused by labor disruptions. If, for instance, our workers were to strike, the resulting work stoppages could have a material and adverse effect on us. In addition, we do not insure most of our assets against war or sabotage. Therefore, an attack or an operational incident causing an interruption of our business could have a material and adverse effect on our financial condition or results of operations. Our operations are subject to a number of hazards and risks. We maintain insurance at levels that are customary in our industry to protect against these liabilities; however, our insurance may not be adequate to cover all losses or liabilities that might be incurred in our operations. Moreover, we will be subject to the risk that we may not be able to maintain or obtain insurance of the type and amount desired at reasonable rates. If we were to incur a significant liability for which we were not fully insured, it could have a materially adverse effect on our business, financial condition and results of operations.
We are highly dependent on our chairman and other members of our management to develop and implement our strategy and to oversee our operations.
We are dependent upon Mr. Rubens Ometto Silveira Mello, our chairman, other members of senior management and certain members of our board of directors, especially with respect to business planning, strategy and operations. If any of these key members of our management leaves our company, our business and financial performance may be negatively affected. Our business is particularly dependent on Mr. Rubens Ometto Silveira Mello, who is also our controlling shareholder. We currently do not carry any key man insurance.
We are indirectly controlled by a single individual who has the power to control us and all of our subsidiaries.
Mr. Rubens Ometto Silveira Mello, our controlling shareholder and chairman, has the power to indirectly control us, including the power to:
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elect a majority of our directors and appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries;
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agree to sell or otherwise transfer his controlling stake in our company; and
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determine the outcome of substantially all actions requiring shareholder approval, including transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends.
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Our class B common shares have ten votes per share and our class A common shares have one vote per share. Currently, because of our share capital structure, our controlling shareholder is able to control substantially all matters submitted to our shareholders for a vote or approval even if the controlling shareholder comes to own less than 50% of the issued and outstanding share capital in the company. The concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our shareholders do not view as beneficial. As a result, the market price of our class A common shares could be adversely affected.
We may face conflicts of interest in transactions with related parties.
We engage in business and financial transactions with our controlling shareholder and other shareholders that may create conflicts of interest between our company and these shareholders. For example, we enter into land leasing agreements with our affiliates, including Amaralina Agrícola Ltda., or “Amaralina”, Santa Bárbara Agrícola S.A., or “Santa Bárbara” and São Francisco S.A., or “São Francisco”. The accounts payable balances result mainly from the lease of agriculture land, which are at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. Commercial and financial transactions between our affiliates and us, even on if entered into on an arm’s length basis, create the potential for, or could result in, conflicts of interests.
Risks Related To Brazil
Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business and financial performance and the market price of our class A common shares.
The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. For example, the government’s actions to control inflation have at times involved setting wage and price controls, blocking access to bank accounts, imposing exchange controls and limiting imports into Brazil. We have no control over, and cannot predict, what policies or actions the Brazilian government may take in the future.
Our business, financial performance and prospects, as well as the market prices of our class A common shares, may be adversely affected by, among others, the following factors:
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exchange rate movements;
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exchange control policies;
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expansion or contraction of the Brazilian economy, as measured by rates of growth in gross domestic product, or “GDP”;
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inflation;
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tax policies;
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other economic, political, diplomatic and social developments in or affecting Brazil;
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interest rates;
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liquidity of domestic capital and lending markets; and
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social and political instability.
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These factors, as well as uncertainty over whether the Brazilian government may implement changes in policy or regulations relating to these factors, may adversely affect us and our business and financial performance and the market price of our class A common shares.
Cosan S.A. generally invoices its sales in Brazilian reais, but a substantial portion of Cosan S.A.’s net sales are from export sales that are billed in U.S. dollars. At the same time, the majority of Cosan S.A’s costs are denominated in reais . As a result, our operating margins are negatively affected when there is an appreciation of the real to the U.S. dollar. Additionally, we have indebtedness with fixed and floating rates, and we are thus exposed to the risk of fluctuations in interest rates. If there is an increase in interest rates, our financial results may be affected.
Inflation and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations and the market prices of our class A common shares.
At times in the past, Brazil has experienced high rates of inflation. According to the General Market Price Index (Índice Geral de Preços – Mercado), or “IGP-M”, a general price inflation index, the inflation rates in Brazil were 1.2% in 2005, 3.8% in 2006, 7.7% in 2007, 9.8% in 2008 and deflation of 1.71% in 2009. In addition, according to the National Extended Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), published by the IBGE, the Brazilian price inflation rates were 7.5% in 2005, 5.3% in 2006, 2.9% in 2007, 4.7% in 2008, 5.6% in 2009, 5.2% in 2010 and 6.3% in 2011. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
Brazil may experience high levels of inflation in future periods. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing any floating-rate real-denominated debt may increase, resulting in lower net income. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets. Any decline in our net sales or net income and any deterioration in our financial performance would also likely lead to a decline in the market price of our class A common shares.
Significant volatility in the value of the real in relation to the U.S. dollar could harm our ability to meet our U.S. dollar-denominated liabilities.
The Brazilian currency has historically suffered frequent devaluations. In the past, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations and periodic mini-devaluations, during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. There have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. On March 31, 2011, the exchange rate was R$1.63 per US$1.00.
Because Cosan S.A. generally invoices its sales in Brazilian reais, devaluation of the real against foreign currencies may generate losses in our foreign currency-denominated liabilities as well as an increase in our funding costs with a negative impact on our ability to finance our operations through access to the international capital markets and on the market value of the class A common shares. A strengthening of the real in relation to the U.S. dollar generally has the opposite effect. Further devaluations of the Brazilian currency may occur and impact our business in the future. These foreign exchange and monetary gains or losses can be substantial, which can significantly impact our earnings from one period to the next. In addition, depreciation of the real relative to the U.S. dollar could (1) result in additional inflationary pressures in Brazil by generally increasing the price of imported products and services and requiring recessionary government policies to curb demand and (2) weaken investor confidence in Brazil and reduce the market price of the class A common shares. On the other hand, further appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments and may dampen export-driven growth.
Because a substantial portion of our indebtedness is, and will continue to be, denominated in or indexed to the U.S. dollar, our foreign currency exposure related to our indebtedness as of March 31, 2011 was R$ 3,750.8 million. We manage a portion of our exchange rate risk through foreign currency derivative instruments, but our foreign currency debt obligations are not completely hedged. In addition, a devaluation of the real would effectively increase the interest expense in respect of our U.S. dollar-denominated debt.
Changes in tax laws may increase our tax burden and, as a result, adversely affect our profitability.
The Brazilian government regularly implements changes to tax regimes that may increase the tax burden on Cosan S.A. and its customers. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In April 2003, the Brazilian government presented a tax reform proposal, which was mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposal provided for changes in the rules governing the federal Social Integration Program (Programa de Integração Social), or “PIS”, the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social), or “COFINS”, the federal Tax on Bank Account Transactions (Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira), the state Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or “ICMS”, and some other taxes. The effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified. Moreover, as a measure to avoid unfair competitive practices in the ethanol business, the federal government has enacted Law No. 11,727/08. According to this law, the collection of PIS and COFINS has shifted from the distributors to distilleries, thereby increasing the burden of these taxes collected at the distilleries from 25% to 40%. The law further requires the installation of flow meters at distilleries to control the output of ethanol. Some of these measures may result in increases in our overall tax burden, which could negatively affect our overall financial performance.
Risks Related to Our Common Shares
We are a Bermuda company, and it may be difficult for you to enforce judgments against us or our directors and executive officers.
We are a Bermuda exempted company, so that the rights of holders of our shares will be governed by Bermuda law and our by-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. All of our directors and some of the experts referred to in this annual report are not citizens or residents of the United States, and all of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. federal or state securities laws. We have been advised by our Bermuda counsel, Attride-Stirling & Woloniecki, that uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. The United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on U.S. federal or state securities laws, may not necessarily be enforceable in Bermuda.
Bermuda law differs from the laws in effect in the United States and Brazil and may afford less protection to shareholders.
Our shareholders may have more difficulty protecting their interests than shareholders of a company incorporated in the United States or Brazil. As a Bermuda company, we are governed by the Companies Act 1981. The Companies Act 1981 differs in material respects from laws generally applicable to U.S. or Brazilian corporations and their shareholders, including the provisions relating to interested directors, amalgamations, takeovers, shareholder lawsuits and indemnification of directors.
Under Bermuda law, directors and officers of a company generally owe fiduciary duties to the company and not to individual shareholders. Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts may, however, in certain circumstances permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or by-laws. Consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for example, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it. The Companies Act 1981 imposes a duty on directors and officers to act honestly and in good faith with a view to the best interests of the company and to exercise the care and skill that a reasonably prudent person would exercise in comparable circumstances. Directors of a Bermuda company have a duty to avoid conflicts of interest. However, if a director discloses a direct or indirect interest in any contract or arrangement with us as required by Bermuda law, our by-laws provide that such director is entitled to be counted for quorum purposes, but may not vote in respect of any such contract or arrangement in which he or she is interested. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under the Companies Act 1981 are not as clearly established as under statutes or judicial precedent in jurisdictions in the United States, particularly in the State of Delaware.
Provisions in our by-laws may discourage takeovers, which could affect the return on the investment of our shareholders.
Our by-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions provide, among other things, for:
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a classified board of directors with staggered three-year terms;
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restrictions on the time period in which directors may be nominated;
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the affirmative vote of a majority of our directors in office and the resolution of the shareholders passed by a majority of votes cast at a general meeting or, if not approved by a majority of the directors in office, the resolution of the shareholders at a general meeting passed by 66- 2/3% of all votes attaching to all shares then in issue for amalgamation and other business combination transactions; and
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the tag-along rights described under “Item 10. Additional Information—B. Memorandum and By-laws—Tag-along Rights”.
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These by-laws provisions could deter a third party from seeking to acquire us, even if the third party’s offer may be considered beneficial by many shareholders.
As a holding company, we may face limitations on our ability to receive distributions from our subsidiaries.
We conduct all of our operations through subsidiaries and are dependent upon dividends or other intercompany transfers of funds from our subsidiaries to meet our obligations. For example, Brazilian law permits the Brazilian government to impose temporary restrictions on conversions of Brazilian currency into foreign currencies and on remittances to foreign investors of proceeds from their investments in Brazil, whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to expect a pending serious imbalance. The Brazilian government last imposed remittance restrictions for approximately six months in 1989 and early 1990. The Brazilian government may take similar measures in the future. Any imposition of restrictions on conversions and remittances could hinder or prevent us from converting into U.S. dollars or other foreign currencies and remitting abroad dividends, distributions or the proceeds from any sale in Brazil of common shares of our Brazilian subsidiaries. We currently conduct all of our operations through our Brazilian subsidiaries. As a result, any imposition of exchange controls restrictions could reduce the market prices of the class A common shares.
Our by-laws restrict shareholders from bringing legal action against our directors and officers and also provide our directors and officers with indemnification from their actions and omissions, although such indemnification for liabilities under the Securities Act is unenforceable in the United States.
Our by-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty. Our by-laws also indemnify our directors and officers in respect of their actions and omissions, except in respect of their fraud or dishonesty. The indemnification provided in our by-laws is not exclusive of other indemnification rights to which a director or officer may be entitled, provided these rights do not extend to his or her fraud or dishonesty. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we understand that, in the opinion of the staff of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable in the United States.
The sale, or issuance, of a significant number of our common shares may adversely affect the market value of our class A common shares.
The sale of a significant number of our common shares, or the perception that such a sale could occur, may adversely affect the market price of our class A common shares. We have an authorized share capital of 1,000,000,000 class A common shares and 188,886,360 class B common shares, of which 174,355,341 class A common shares are issued and outstanding and 96,332,044 class B series 1 common shares are issued and outstanding as of March 31, 2011. In accordance with lock-up agreements, holders of our class B common shares have agreed, subject to limited exceptions, not to offer, sell, transfer, or dispose in any other way, directly or indirectly before August 16, 2010 less than all of the class B common shares that they own. After the end of such lock-up period, such previously restricted class B common shares may be traded freely.
Our by-laws establish that our board of directors is authorized to issue any of our authorized, but unissued share capital. Our shareholders at a shareholders general meeting may authorize the increase of our authorized share capital. As a result, we will be able to issue a substantial number of new shares after the lock-up period, which, if we decided to do so, could dilute the participation of our shareholders in our share capital.
Actual dividends paid on our shares may not be consistent with the dividend policy adopted by our board of directors.
Our board of directors will adopt a dividend policy that provides, subject to Bermuda law, for the payment of dividends to shareholders equal to approximately 25% of our annual consolidated net income (as calculated in accordance with IFRS). Our board of directors may, in its discretion and for any reason, amend or repeal this dividend policy. Our board of directors may decrease the level of dividends provided for in this dividend policy or entirely discontinue the payment of dividends. Future dividends with respect to our common shares, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, distribution of dividends made by our subsidiaries, contractual restrictions, business opportunities, provisions of applicable law and other factors that our board of directors may deem relevant.
To the extent we pay dividends to our shareholders, we will have less capital available to meet our future liquidity needs.
Our business strategy contemplates substantial growth over the next several years, and we expect that such growth will require considerable liquidity. To the extent that we pay dividends in accordance with our dividend policy, the amounts distributed to our shareholders will not be available to us to fund future growth and meet our other liquidity needs.
We may require additional funds in the future, which may not be available or which may result in dilution of the interests of shareholders in our company.
We may need to issue debt or equity securities in order to obtain additional public or private financing. The securities that we issue may have rights, preferences and privileges senior to those of our shares. If we decide to raise additional capital through an offering of common shares, the participation of our shareholders in our share capital may be diluted. Moreover, additional funding that may be required in the future may not be available under favorable terms.
The price of our class A common shares is subject to volatility.
The market price of our class A common shares could be subject to significant fluctuations due to various factors, including actual or anticipated fluctuations in our financial performance, losses of key personnel, economic downturns, political events in Brazil or other jurisdictions in which we operate, developments affecting the ethanol and sugar industries, changes in financial estimates by securities analysts, the introduction of new products or technologies by us or our competitors, or our failure to meet expectations of analysts or investors.
We are a limited liability exempted company incorporated under the laws of Bermuda on April 30, 2007 for an indefinite term. Cosan Limited is registered with the Registrar of Companies in Bermuda under registration number EC 39981. Our registered office is located at Crawford House, 50 Cedar Avenue, Hamilton HM11, Bermuda. Our principal executive office is located at Av. Juscelino Kubitschek, 1327 – 4th floor, São Paulo – SP, 04543-011, Brazil and our general telephone and fax numbers are 55 11 3897-9797 and 55 11 3897-9799, respectively.
The objects of our business are set forth in our memorandum of association and provide that we have unrestricted objects and powers and rights including to:
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import, export, produce and sell ethanol, sugar, sugarcane and other sugar by-products;
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distribute and sell fuel and other fuel by-products;
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produce and market electricity, steam and other co-generation by-products;
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render technical services related to the activities mentioned above; and
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hold equity interests in other companies.
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Our history dates back to 1936 when the Costa Pinto mill was established by the Ometto family in the city of Piracicaba in the State of São Paulo, with annual sugarcane crushing capacity of 4.0 million tons. Beginning in the mid 1980s, we began to expand our operations through the acquisition of various milling facilities in the State of São Paulo.
The following information about segments is based upon information used by Cosan’s senior management to assess the performance of operating segments and to decide on the allocation of resources for fiscal year 2011. The Company presents three segments: (1) Sugar and Ethanol (“S&E”) or “CAA”; (2) Fuel distribution and lubricants, or (“CCL”); and (3) sugar logistics, (“Rumo Logística”).
The S&E segment is primarily engaged in the production and marketing of a variety of products derived from sugar cane, including raw sugar (VHP), anhydrous and hydrated ethanol, and activities related to energy cogeneration from sugar cane bagasse. We currently operate 24 mills, two of which are leased from third parties (Junqueira and Dois Corregos) under operating leases. One of these mills incurs lease payments that are based on a percentage of its sales.
The CCL segment includes the distribution and marketing of fuels, mainly through franchised network of service stations under the brand “Esso” throughout the national territory, and production, distribution and marketing of lubricants licensed from ExxonMobil International Holdings B.V., or “Exxon”.
The Rumo Logística segment provides logistics services for the transport, storage and port lifting of sugar for both the S&E segment and third parties.
Acquisitions, Partnerships and Corporate Restructurings
Since May 2004, we have expanded our annual sugarcane crushing capacity by 162.0% from approximately 24.8 million tons to approximately 65.0 million tons in fiscal year 2011, primarily through acquisitions, partnerships and corporate restructurings. As a result of these acquisitions, partnerships and corporate restructurings, our net sales and gross profit have increased significantly.
Our principal acquisitions, partnerships and corporate restructurings since 2008 consist of the following:
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On April 23, 2008, Cosan S.A. entered into an agreement with Exxon, for the acquisition of 100% of the capital of Esso Brasileira de Petróleo Ltda. and its subsidiaries, or “Essobrás”, a distributor and seller of fuels and producer and seller of lubricants and specialty petroleum products of ExxonMobil in Brazil. On December 1, 2008, Cosan S.A. completed the acquisition of all of the outstanding shares of Essobrás for a purchase price of approximately R$ 1,684.3 (US$715 million) million and assumed debts in the amount of R$ 412.2 (US$175 million) million. On January 16, 2009 the corporate name of Essobrás was changed to CCL (after the Joint Venture, in July 2011, the name was changed again to Cosan Lubrificantes e Especialidades S.A., or CLE) At the time of the acquisition, CLE had a distribution network of more than 1,500 stations in Brazil and 40 fuel distribution centers. Additionally, CLE registered annual sales of more than 5 billion liters of ethanol, gasoline and diesel, 160 million cubic meters of VNG and 127,000 cubic meters of lubricants produced at our plant in Rio de Janeiro, which will continue to offer products under the Esso and Mobil brands, developed using Exxon’s global technology. With this acquisition, we expanded our business model to become the first integrated renewable energy company in the world, with operations ranging from sugarcane cultivation to fuel distribution and sales in the retail market.
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On August 28, 2008, Cosan S.A. announced the incorporation of a new subsidiary named Radar Propriedades Agrícolas S.A., or “Radar”, which makes real estate investments in Brazil identifying and acquiring rural properties with high appreciation potential for subsequent leasing and/or sale. As of March 31, 2011, Cosan S.A. holds 18.9% of Radar. Cosan S.A. initially invested R$ 56.9 (US$35 million) million and the other investors R$ 243.8 (US$150 million) million. Furthermore, the parties have committed to invest an amount equal to US dollar equivalent of the Brazilian reais amount initially invested, which should only be disbursed when approximately 50% of the initial capital contribution has been invested. Cosan S.A. has the right to exercise significant influence on Radar’s operations and, therefore, the investment is accounted using the equity method.
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In October 2008, a private subscription was announced involving R$ 96 (US$50 million) million by the controlling shareholder, Mr. Rubens Ometto Silveira Mello, and up to R$ 288.1 (US$150 million) million by the funds managed by Gávea Investimentos Ltda., at R$ 8.6 (US$4.50) per class A share or BDR subscribed. The offering was extended to all class A share or BDR holders, as permitted by applicable law. The offering was concluded on October 27, 2008. As a result, Mr. Rubens Ometto Silveira Mello holds 41.5% of our total capital and 86.1% of our voting capital.
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On April 9, 2009, Cosan and Rezende Barbosa, concluded the port terminals combination of Cosan Operadora and Teaçu Armazéns Gerais S.A., or “Teaçú”, a subsidiary of Rezende Barbosa. As a result, Cosan, through its subsidiary Novo Rumo Logística S.A., or “Novo Rumo”, acquired 100% of the outstanding shares of Teaçu for R$121 million (US$53.0 million) and shares representing 28.82% of Novo Rumo’s capital. Teaçu used to hold a port concession in the City of Santos (which was transferred to Cosan Operadora on 2011) and operates a terminal dedicated to exporting sugar and other agricultural products. As a result of the transaction, Cosan’s indirect participation in Novo Rumo’s capital is of 64.06%.
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On June 17, 2009, Cosanpar Participações S.A., or Cosanpar, a wholly-owned subsidiary of Cosan, sold to Shell Brasil Ltda. its equity interest in Jacta Participações S.A., a distributor of aviation fuel that was part of Essobras. Cosanpar received R$115.6 million (US$59.2 million) from the sale.
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On June 18, 2009, Cosan S.A.entered into an agreement with Rezende Barbosa to acquire 100% of the outstanding shares of Curupay S.A. Participações, or “Curupay”. The acquisition was carried out through the merger of Curupay into Cosan S.A. resulting in the issuance by Cosan S.A. of 44,300,389 new common shares, representing 11.89% of its corporate capital on June 18, 2009, fully subscribed and paid-in by Rezende Barbosa. The 11.89% reflects the interest acquired by Rezende Barbosa in Cosan’s capital. The total amount of Cosan S.A.’s capital increase was R$ 334.9 (US$170 million) million, related to this transaction. The principal investment of Curupay was the ownership of 100% of the outstanding shares of Nova América S.A. Agroenergia, or “Nova América”. Nova América is a producer of sugar, ethanol and energy co-generation which also operates in trading and logistics. The assets acquired include the non-controlling interest in Novo Rumo representing 28.82% of its outstanding shares which were issued in the Teaçu acquisition, and 100% of the outstanding shares of two operating companies, Nova América S.A. Trading (which was incorporated on November 2009 by Raízen Tarumã S.A., that used to be known as Cosan Alimentos S.A.) and Nova América S.A. Agroenergia (company that had its corporate name altered on November 2009 to Cosan Alimentos and after the Joint Venture, on July 2011, had its corporate name altered to Raízen Tarumã S.A.), and the “União” brand, which is the leading sugar brand in Brazil. Nova América is a producer of sugar, ethanol and energy co-generation and also operates in trading and logistics.
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On July 2, 2010, Cosan S.A. entered into a subscription agreement with investment vehicles controlled by TPG Capital, or “TPG”, and Gávea Investimentos, or “Gávea”, pursuant to which, the investors made an equity investment in Rumo Logística (company that was merged on June 30, 2011 into Cosan Operadora), by means of a capital increase in the total amount of R$400 million (US$224.9 million), paid by the investors in equal proportions representing 12.5% of issued and outstanding capital stock of Rumo Logística for each investor. At the present date, as per the merger of Rumo Logística by Cosan Operadora, the investors TPG and Gávea became shareholders of Cosan Operadora maintaining its equal proportions in the company, represented by 12.5% of the issued and outstanding capital stock of Cosan Operadora for each investor.
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On August 25, 2010, we successfully concluded negotiations with Shell and entered into definitive agreements for the creation of a proposed joint venture, currently known as Raízen.
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On February 18, 2011, Cosan, through its subsidiary Cosan S.A. Açúcar e Álcool (currently known as Raízen Energia S.A.) acquired 100% of the voting corporate capital of Cosan Araraquara Açúcar e Álcool Ltda., or “Usina Zanin”, for R$90 million. This entity is currently part of Raízen Group.
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On June 1, 2011, we established our Joint Venture with Shell, which combines certain of our assets and liabilities and consolidates our position as the world’s leading integrated bio-energy company. The transaction is still under antitrust review by the Brazilian Competition Authority. Pursuant to the Joint Venture, Cosan and its subsidiaries contributed their sugar and ethanol businesses, their energy
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cogeneration business, their fuel distribution business and their interests in certain ethanol logistics facilities at the Port of Santos and transferred debt minus cash and cash equivalent of approximately R$5,596.2 million to the Joint Venture. Shell and its affiliates contributed their Brazilian fuel distribution business, their Brazilian aviation fuels business, their beneficial interest in two companies (Iogen Corp. and Codexis, Inc.) involved in the research and development of biomass fuel, including ethanol, and a capital contribution resulting in cash proceeds to the Joint Venture of approximately US$1.6 billion. Cosan and its subsidiaries retained, and therefore did not contribute to the Joint Venture, their lubricants manufacturing and marketing business, their sugar logistics business, their land prospecting and development business, the right to conduct their own sugar trading business globally and their sugar retail brands. Additionally, we have elected to retain, and not contribute to the Joint Venture, the operation of our sugar retail business. Shell and its affiliates retained and did not contribute to the Joint Venture their exploration and production, chemicals and gas and power businesses in Brazil, their lubricants manufacturing and marketing business, their trading business and the Shell brand (which has been licensed to the Joint Venture for use in its downstream business, including retail in Brazil). See “Item 10. Additional Information—C. Material Contracts.”
The joint venture consists of three separate legal entities:
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Raízen Energia Participações S.A.: a sugar and ethanol company, which, among other things, conducts the production of sugar and ethanol, as well as all cogeneration activities. Cosan and its subsidiaries and Shell and its affiliates each own 50% common equity interest in this entity. In addition, Cosan and its subsidiaries own 51% of the voting shares (and preferred shares bearing preferential dividend rights in certain circumstances), whereas Shell and its affiliates own 49% of this entity’s voting shares.
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Raízen Combustíveis S.A.: a downstream company, which conducts the supply, distribution and sale of fuels in Brazil. The resulting company has a network of approximately 4,500 fuel stations throughout Brazil. Cosan and its subsidiaries and Shell and its affiliates likewise each own 50% common equity interest in this entity. In this entity, however, Cosan and its subsidiaries own 49% of the voting shares, whereas Shell and its affiliates own 51% of the voting shares. Cosan and its subsidiaries and Shell and its affiliates also hold preferred shares bearing preferential dividend rights in certain circumstances if certain contingent targets are met.
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Raízen S.A.: a management company, which is the Joint Venture’s face to the market and facilitates the building of a unified corporate culture. Cosan and its subsidiaries and Shell and its affiliates each own 50% of the equity and voting interests in this company.
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The foregoing description of the Framework Agreement does not purport to be complete and is qualified in its entirety by reference to the Framework Agreement, which is filed as Exhibit 4.3 as amended by the First Amendment to the Framework Agreement entered into on April 7, 2011, and the Second Amendment to the Framework Agreement entered into on June 1, 2011 which are filed as Exhibits 4.4 and 4.5 respectively.
In the event that Raízen Energia or Raízen Combustíveis seek external financing, they shall provide financial support to each other, including by way of advancing funds to each other and guaranteeing each other’s debt obligations, in each case to the extent approved by the Supervisory Board and consistent with the business plan.
The Joint Venture is run by a management team drawn from Cosan and Shell with a proven track record in sugar, ethanol and fuels. The executive board of the Joint Venture is overseen by the supervisory board. The supervisory board is responsible for appointing members of the executive board and monitors the activities and reports of the executive board. The supervisory board consists of three directors nominated by Cosan and three directors nominated by Shell. Our chairman, Rubens Ometto Silveira Mello, is the chairman of the supervisory board. Cosan and Shell have each designated a shareholder representative who is responsible for determining the Joint Venture’s strategic priorities and resolving any deadlock within the supervisory board. Our shareholder representative is Rubens Ometto Silveira Mello.
Capital Expenditures
We are continuously searching for opportunities to increase our production capacity of sugar, ethanol and bio-electricity, including the development of greenfield projects. Our capital expenditures in property, plant and equipment, including acquisitions (net of cash acquired), expenditures for crop formation and expenditures for purchases of land, were R$3,037.2 million during fiscal year 2011, compared to R$2,545.5 million during fiscal year 2010. The main reason for the increase was the logistics investments made through our subsidiary Rumo Logística.
Our capital expenditure program is focused on four key areas:
Greenfield Project
We have begun operations at two ethanol and sugar plants in the States of Goiás and Mato Grosso do Sul, Brazil. We have acquired the land for the industrial facilities and entered into leases for sugarcane cultivation. Our capital expenditures for the Goiás (Jataí) and for Mato Grosso do Sul (Caarapó) project amounts R$ 1,078.4 million. Production at Jataí began in the third quarter of fiscal year 2010 and is expected to reach full capacity by fiscal year 2013, with an expected crushing capacity of 4 million tons of sugarcane and production of approximately 97 million gallons (370 million liters) of ethanol per year. Production at Caarapó began in the third quarter of fiscal year 2010 and reached full capacity on fiscal year 2011, with a crushing capacity of 2 million tons of sugarcane and production of approximately 75 million liters (19.8 million gallons) of ethanol per year.
Expansion of Our Crushing Capacity
Investments in expansion of capacity of sugar plants totaled R$87.2 million, 34.6% lower than the investments in the same previous fiscal year period. This decrease was due to the conclusion of most of the projects in Gasa, Ipaussu, Bonfim, Junqueira, Tamoio, Costa Pinto and Barra plants.
Cogeneration Projects
The investments in cogeneration amounted to R$287.6 million, primarily focused on Ipaussu, Univalem and Bonfim. The investments in Jataí (Goiás) and Caarapó (Matto Gross do Sul) decreased by 85.5%, as they were in the final stage of investment.
Strategic Acquisitions along the Business Chain
We invested approximately R$ 1.8 billion (US$1.0 billion) in strategic acquisitions along the business chain in the past years. We have added fuel distribution operations through the acquisition of downstream assets of ExxonMobil in Brazil and taken equity stakes in Radar, a newly incorporated land development company, Rumo Logística, a new sugar logistics company, and Uniduto, a newly incorporated company that is exploring an ethanol pipeline project in the central-south region of Brazil. In November 2007, we acquired 50% interest in Vertical UK LLP, a leading ethanol trading company.
On December 1, 2008, Cosan S.A. acquired 100% of the capital of Essobras (as July 2011, CLE) and certain affiliates, marketers and distributors of fuel and lubricants in the Brazilian retail and wholesale markets as well as aviation fuel supply from Exxon. On May 2009, we sold the aviation fuel business to Shell for R$ 126.5 million (US$59.2 million), aligned with our strategy of focusing on our core businesses.
On June 18, 2009, Cosan S.A. acquired 100% of the outstanding shares of Curupay, the parent company of Nova América and controlling shareholder of other assets related to trading, logistics and industrial production of sugar and ethanol and energy co-generation. Nova América is a producer of sugar, ethanol and energy co-generation which also operates in trading and logistics. The assets acquired include the non-controlling interest in Novo Rumo representing 28.82% of its outstanding shares which were issued in the Teaçu acquisition, and 100% of the outstanding shares of two operating companies, Nova América S.A. Trading and Nova América S.A. Agroenergia, and the “União” brand, which is the leading sugar brand in Brazil. Nova América is a producer of sugar, ethanol and energy co-generation and also operates in trading and logistics. We are now focused on the integration of these assets and extraction of synergies, however we will continue to analyze opportunities to grow organically or through strategic acquisitions and partnerships.
On August 25, 2010, we successfully concluded negotiations with Shell and entered into definitive agreements for the creation of a proposed joint venture. On June 1, 2011, we closed our Joint Venture with Shell, which combines certain of our assets and liabilities and consolidates our position as the world’s leading integrated bio-energy company. See “—Acquisitions, Partnerships and Corporate Restructurings.”
We are a leading global ethanol and sugar company in terms of production with low-cost, large-scale and integrated operations in Brazil. Our production is based on sugarcane, a competitive and viable feedstock for ethanol, sugar and energy because of its low production cost and high energy efficiency ratio relative to other ethanol sources, such as corn and sugar beet. We believe that we are:
Sugar and Ethanol
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Sugarcane: the largest grower and processor of sugarcane in the world, having crushed 54.3 million tons in fiscal year 2011 (with approximately 50% of which was sourced from suppliers) and 50.3 million tons in fiscal year 2010 (of which 46.6% came from our own sugarcane and 53.4% came from suppliers);
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Ethanol: the largest ethanol producer in Brazil and one of the largest exporters in the world, having sold 2.2 billion liters in fiscal year 2011 and 2.1 billion liters in fiscal year 2010, and exported 0.2 billion liters and 0.6 billion liters in the same periods, respectively; and
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Sugar: the largest sugar producer in the world, having sold 4.3 million tons of sugar in fiscal year 2011 and 4.1 million tons in fiscal year 2010, as well as the largest exporter of sugar in the world, having exported 3.0 and 3.1 million tons in the same periods, respectively.
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Energy Co-generation
The world’s largest producer of energy from sugarcane bagasse. We currently have an installed energy capacity of 800 MW per year from our 24 plants, out of which 10 delivered energy to the Brazilian energy grid in fiscal year 2011. We have one additional energy co-generation project that we expect to become operational in 2012. We estimate that by the end of 2012 we will have a total installed energy capacity of 934 MW, from which 845 MW will come from certain of our plants that will sell excess energy to the grid and a total installed energy capacity of 1,300 MW by 2016. We see our co-generation of energy as strategic in our business as it allows for a more stable cash flow stream across commodity cycles, significantly reducing the volatility of our cash flows and operations; and
Fuel Distribution
Brazil’s third largest fuel distributor, engaged in sourcing, storing, blending and distributing primarily gasoline, ethanol, diesel and fuel oil through our retail network of approximately 4,500 Esso and Shell-branded stations following the close of the Joint Venture on June 1, 2011, and directly to industrial and wholesale clients. In fiscal year 2011, the operations contributed to the Joint Venture by Cosan and Shell had an estimated combined 23.8% market share in Brazil in terms of volume of fuel sold in 2011, according to Sindicom.
Prior to the closing of the Joint Venture, in fiscal year 2011, we recorded sales of R$10.9 billion of fuels and in fiscal year 2010, we recorded sales of R$9.4 billion of fuels.
Our retail station network is strategically concentrated in urban areas with higher population density, thus enabling us to have a high throughput per station, particularly in the South and Southeast regions of Brazil, where, prior to the closing of our Joint Venture, our fuel sales amounted to 1.32 billion liters (9.3% market share of the Sindicom companies) and 3.42 billion liters (8.1% market share of the Sindicom companies) in fiscal year 2011, respectively, as compared to 1.1 billion liters (6.6% market share of the Sindicom companies) and 3.1 billion liters (6.4% market share of the Sindicom companies) in 2008, respectively, according to Sindicom. The South and Southeast regions are the largest markets for fuel distribution in Brazil, accounting for 16.8% and 49.9% in fiscal year 2011, respectively, of the Brazilian fuel market in terms of volume sold according to Sindicom as compared to 17.3% and 49.6% in 2008, respectively, according to Sindicom. In fiscal year 2011, prior to the closing of our Joint Venture, we sold a total of 4.84 billion liters through our retail network, with a product mix of 41.6% gasoline, 40.7% diesel, 16.0% ethanol and 1.7% other fuels.
We are also an industrial and wholesale fuel distributor, with sales of 1.03 billion liters of fuels sold, consisting of 96.0% diesel and 4.0% gasoline, ethanol and other fuels to our industrial and wholesale clients, in fiscal year 2011, prior to the closing of our Joint Venture. Most of our sales are concentrated in diesel oil and gasoline.
Lubricants
The third largest lubricants player in Brazil by volume of liters sold as of May 31, 2011. In fiscal year 2011, our lubricant operations sold a total of 166.4 million liters of lubricants. For fiscal year 2010, we sold a total of 130.8 million liters of lubricants, corresponding to an estimated market share of 14.3%, according to Sindicom. We sell passenger vehicle lubricants, commercial vehicle lubricants and industrial lubricants under the Mobil brand, among others, which is licensed to us until 2018 by ExxonMobil. We use Esso-branded retail stations to sell our lubricants products, as well as other distributors and direct sales to industrial customers. We capture significant synergies by selling through our distributors’ network to our retail service station network, to industrial and wholesale customer accounts and to car and motorcycle dealerships.
Our lubricant operations consist of a wholly-owned lubricants oil blending plant, located in Rio de Janeiro, with annual production capacity of 1.4 million barrels of lubricants per year, including capacity for 48,000 barrels of grease per year. In addition, we have a pier facility at our lubricants oil blending plant in Rio de Janeiro that allows us to import base stocks.
Sugar Logistics
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Logistics operations: the owner of the largest bulk sugar port terminal in the world with a current annual loading capacity of 10 million tons. We loaded 7.5 million tons in fiscal year 2011, generating net sales (including port lifting, logistics and others) of R$448.1 million and 8.1 million tons loaded in fiscal year 2010, generating net sales of R$158.2 million. We also started to provide transportation services for sugar through road and rail, which generated net revenues of R$305.9 million in fiscal year 2011, compared to R$16.1 million in fiscal year 2010. We expect Rumo Logística to become more significant over the next few years, as the transportation services started only recently in the last quarter of fiscal year 2010.
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Sugar Retail Operations
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Sugar Retail: the largest seller of retail sugar in Brazil within several categories. Our sugar retail and distribution operations use União, Da Barra and other brands.
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For our operations, other than our fuels marketing & lubricants, we operated 24 mills, four sugar refineries, two port facilities and numerous warehouses, as of March 31, 2011. All of these facilities are located in the Center-South region of Brazil, which is one of the world’s most productive sugarcane regions primarily because of its favorable soil, topography and climate, nearby research and development organizations and infrastructure facilities.
Competitive Strengths
We believe that, as a low-cost, large-scale producer with well-established integrated operations and long-standing relationships with key customers and suppliers, we can capitalize on the favorable trends in the ethanol and sugar industries—particularly, in light of our competitive strengths:
Low-cost producer
Our existing mills and other facilities are strategically located in the Center-South region of Brazil. Our operations also are in close proximity to our customers, sugarcane fields owned by us and growers, port terminals and other transportation infrastructure and warehouses. These factors help us to manage our operating costs. Increasing mechanization in our agricultural processes and improvements in industrial operations, combined with our energy self-sufficiency, should allow us to continue to lower our operating costs.
Integrated platform extracting synergies across the sugarcane value chain
We have a fully integrated platform from sugarcane plantation to sugar logistics and fuel distribution. We are engaged in both the agricultural and industrial aspects of sugar and ethanol production. We lease rural properties upon which we cultivate and harvest sugarcane, and we also purchase sugarcane from third parties with whom we have long-term supply contracts. Once harvested, we crush and refine the sugarcane in our mills to produce sugar and ethanol, and we generate electricity through cogeneration from sugarcane bagasse. We export and distribute our sugar and ethanol through Rumo Logística and Raízen Combustíveis, respectively, among others. We generate significant synergies from this integration:
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Sugar and Ethanol: as the world’s largest grower of sugarcane and the third largest fuel distributor in Brazil, we benefit from our superior visibility on sugar and ethanol price formation, allowing us to better manage our decisions with respect to our sugar versus ethanol production mix and our inventory levels;
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Fuel distribution: our fuel distribution terminals are strategically located near our mills, allowing us to significantly optimize our logistics network by using our mills as distribution terminals and vice versa. Additionally, as a fuel distributor we are able to (1) benefit from a more stable cash flow stream to help offset fluctuations in sugar and ethanol prices and (2) capture potential margin gains from declines in ethanol prices during harvest periods, as ethanol price changes tend to be passed on to consumers gradually. Finally, our pier facility at the Port of Santos allows us to be opportunistic and take advantage of favorable “market windows” to import diesel and arbitrage raw material prices;
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Sugar Logistics: through Rumo Logística, we service the logistical needs of sugar exporters in the Center-South region of Brazil, which allows us to further enhance our market intelligence, maximize port utilization and optimize our logistical, distribution and storage activities, reducing our storage and transportation costs. Additionally, our sugar logistics business adds a second source of generally more stable cash flows;
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Energy Cogeneration: all of our mills are electric energy self-sufficient, reducing our dependence and exposure to energy prices and providing us an additional stream of generally stable cash flows;
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Land Development: through Radar, we leverage our unique market intelligence to opportunistically earn revenues and benefit from potential capital appreciation from agricultural real estate; and
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Sugar Retail: we benefit from our superior visibility on sugar pricing and our brand recognition to maximize our revenues and build on our position as the largest seller of retail sugar in Brazil within several categories.
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Diversified portfolio of assets, combining our sugar and ethanol business with more stable and resilient cash flow streams
We have taken key strategic steps in recent years by vertically integrating our business and diversifying into activities with synergies that generally provide more stable cash flow streams as compared to sales of sugar and ethanol. In fiscal year 2011, our generally less cyclical businesses (CCL (fuel distribution and lubricants), Rumo Logística and energy cogeneration) collectively contributed R$12.4 billion in net sales or 69% of our consolidated net sales for the period, before intercompany eliminations and adjustments. We expect the contribution of these businesses to our consolidated results and cash flow origination to continue to grow as our investments in sugar logistics and energy cogeneration mature further. Additionally, we expect our revenues from our fuel distribution business to increase significantly due to our Joint Venture with Shell. We believe this diversification provides us with a unique competitive advantage in our industry, providing a generally more stable stream of cash flows when sugar prices are depressed.
Undisputed leadership in the markets where we operate
We enjoy leading market positions in all of the markets in which we operate, including:
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Sugar & Ethanol: we are the largest grower and processor of sugarcane in the world, having crushed 54.3 million tons in fiscal year 2011, more than 2.5 times the volume crushed by our closest competitor. We are
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the largest sugar producer in Brazil and the third largest sugar producer in the world, having sold 4.3 million tons of sugar in fiscal year 2011, and the largest exporter of sugar in the world, having exported 3.0 million tons in the same period. With respect to ethanol, we are the largest producer in Brazil and the fifth largest in the world, having sold 2.2 billion liters of ethanol in fiscal year 2011, and the largest exporter in the world, having exported 0.2 billion liters of ethanol in the same period;
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Fuel distribution: through Raízen Combustíveis, we are Brazil’s third largest fuel distributor, with an estimated combined 23.8% market share in terms of combined volume sold in 2011 by the operations contributed to the Joint Venture by Cosan and Shell, according to Sindicom;
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Sugar Logistics: we own two bulk sugar port terminals at the Port of Santos, which, on a combined basis, is the largest bulk sugar port terminal in the world with a current annual combined loading capacity of 10 million tons, and Rumo is currently undertaking one of the largest capital expenditure project in rail network expansion in Brazil to enable Rumo to become the world’s largest sugar logistics company;
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Energy Cogeneration: we are the world’s largest producer of energy from sugarcane bagasse. We estimate that by the end of 2012 we will have a total installed energy capacity of 934 MW, from which 845 MW will be sold as excess energy to the grid;
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Lubricants: we are the third largest lubricants player in Brazil as of May 2010, selling under the Mobil and Esso brands, among others, both of which are licensed to CLE until 2018 by ExxonMobil;
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Land Development: we are one of the largest private landowners in Brazil, with a portfolio of approximately 204,000 acres, as of March 31, 2011; and
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Sugar Retail: we are the largest seller of refined sugar in Brazil, with leading market positions in several categories through our brands, including União and Da Barra.
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Disciplined risk management, proven access to capital, and strong overall financial profile
Sugar prices, ethanol prices and exchange rates are the main market risks within our sugar and ethanol business. As such, we operate under strict risk management policies, which include a senior risk committee that meets on a weekly basis to discuss and monitor our sugar price and exchange rate exposures, our hedging mechanisms under use, margin calls (cash at risk), counterparty risk and stress scenarios.
Additionally, we believe that we were one of the first sugar and ethanol producers in Brazil to have accessed the international debt capital markets, which we first did in 2004, and have since issued a total of five cross-border debt offerings in an aggregate principal amount of U.S.$1.7 billion in debt raised. Since 2004, we have also raised additional equity through the initial public offerings of Cosan S.A. and Cosan Limited, a private placement of Cosan Limited shares, a private placement of Radar shares and a private placement of Rumo shares, collectively amounting to U.S.$2.2 billion in equity capital raised. We have also developed a long-term business relationship with Brazil’s national development bank BNDES, from which we had a total of R$1,589.5 million indebtedness outstanding and R$705.2 million outstanding with Finame-BNDES, each as of March 31, 2011.
The result of subtracting the sum of our cash and cash equivalents, marketable securities and Brazilian Treasury bills, or CTNs from our current and non-current debt amounted to R$5,679.8 million as of March 31, 2011 or 2.1 times our EBITDA for fiscal year 2011. As of March 31, 2011, 87.3% of our consolidated indebtedness is long-term. In addition, our financial profile has improved due to our Joint Venture with Shell, following the receipt of a cash contribution of approximately U.S.$1.6 billion by Shell to the Joint Venture.
Strong strategic business relationships
We have developed important strategic relationships over the years, including with the Kuok Group (one of the largest agricultural-focused conglomerates in Asia) and Sucres et Denrées, or Sucden (one of the two largest sugar trading companies in the world), both of which are currently shareholders of Cosan. We have also developed strong business relationships with ExxonMobil, from which CLE licenses the Esso brand for fuels retail use until 2013 and Mobil and Esso brands for lubricants until 2018, and with some of our leading customers, such as Petrobras
Distribuidora S.A. and Shell in the ethanol business and Sucden, Tate & Lyle International and Coimex Trading Ltd. in the sugar business. More recently, Cosan entered into a definitive agreement with Shell for the proposed creation of the Joint Venture. The transaction closed on June 1, 2011.
Strategically located assets with significant geographic overlap
Our existing mills, port terminals, warehouses, fuel distribution facilities and rail network are strategically located in the Center-South region of Brazil. Our operations also are in close proximity to our customers, sugarcane fields owned by us and growers and other transportation infrastructure:
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Sugar & Ethanol: of our 24 mills, 22 are located in the State of São Paulo operating in clusters due to their proximity. The State of São Paulo is one of the world’s most productive sugarcane regions, primarily because of its favorable soil, topography and climate, nearby research and development organizations and infrastructure facilities. The average distance from the fields where our sugarcane is harvested to our mills is approximately 25 kilometers (or approximately 16 miles). The proximity of our milling facilities to the land on which our sugarcane is cultivated reduces our transportation costs and enables us to process the sugarcane within 48 hours of harvesting, thereby maximizing sucrose recovery;
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Fuel distribution: Raízen Combustíveis’ distribution assets consist of 52 terminals – 12 owned by us, 19 joint ventures operated by us, 9 joint ventures operated by others and 12 terminals in which we have throughput arrangements – strategically concentrated in the Southeast and South regions near Brazil’s major fuel markets;
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Sugar Logistics: Rumo’s services follow the geographic footprint of ALL’s rail network-9, which is concentrated in the Center-South region of Brazil and the State of São Paulo in particular, where 171 mills out of Brazil’s 428 mills were located according to UDOP and UNICA as of 2008/2009. We believe there are a total of 95 mills within a median radius of less than 160 kilometers from one of our transportation hubs and/or trans-shipment centers, and therefore, these mills are potential clients for our sugar transportation services. Additionally, our bulk sugar port terminals are located in the city of Santos, which is located an average distance of 600 kilometers (approximately 370 miles) from our mills; and
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Lubricants: we own a lubricants oil blending plant in Rio de Janeiro with a total blending annual capacity of 1.4 million barrels of lubricants, including capacity for 48,000 barrels of grease, per year and a pier facility at such plant that allows us to import base stocks.
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Experienced and professional management team
Our management team has considerable industry experience. In addition, unlike many of our domestic competitors in the sugar and ethanol industries, we have completed the shift from a family-operated business to a company managed by professionals with significant experience in the sugar and ethanol business. Our fuel distribution and, separately our lubricants business, are led by management teams with proven track records in the fuel distribution and lubricant markets, respectively, who previously worked for many years with the ExxonMobil group. Before the Joint Venture, our fuel distribution and lubricants business management team of 30 executives possessed an average of 20 years of experience in the industry. Following the conclusion of the Joint Venture, key executive officers from Shell’s management team responsible for its Brazilian fuel and retail operations have joined, further strengthening our management team.
Our Strategy
Due to our Joint Venture with Shell, we are focusing on achieving sustainable and profitable growth, further reducing our operating costs and building on our competitive strengths in order to expand our industry leadership. The principal components of our strategy are:
Sugar and Ethanol (Raízen Energia)
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Seek further productivity improvements and cost reductions. We are enhancing our productivity through investments in the development of new varieties of sugarcane, more efficient agricultural, industrial and logistics processes, expanded satellite monitoring of sugarcane, increased mechanization of harvests, emphasis on employee training programs and improvements in information flows and internal control systems;
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Participate in the consolidation of the sugar & ethanol sector. The Brazilian sugar and ethanol sector has been consolidating in recent years; however, it still remains highly fragmented. We closely monitor acquisition opportunities in the sector and we will consider selective acquisitions and partnerships that offer the right strategic fit for our operations;
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Take advantage of future ethanol export opportunities. We expect to benefit from the growth of global ethanol exports emerging from the anticipated liberalization of trade barriers that have traditionally limited our access to some major markets, as well as mandatory blending requirements to use ethanol as an additive to gasoline by establishing new commercial and distribution partnerships with international industry players to expand and diversify our client base;
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Focus on environmental and social awareness. We are committed to acting as an environmentally and socially conscious company. We continue to invest in the mechanization of our harvests, which is not only cost-efficient, but also reduces our emission levels and decreases the burning of sugarcane fields for manual harvesting. We continue to improve and develop new training programs for our employees, as well as programs to reduce workforce accidents. We continuously seek environmental best practices, benchmark technologies and clean operations to sustain our best-in-class results and strengthen our relationships and cooperation with relevant environmental authorities and agencies; and
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Participate in the development of second generation technologies for ethanol. We will implement Shell’s second generation ethanol technology, which we expect will result in enhanced yields from improved yeast in our ethanol operations.
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Fuel distribution (Raízen Combustíveis)
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Invest selectively in dealer conversion. We converted 89 retail stations in fiscal year 2011 into the Esso brand. Following our Joint Venture, we plan to continue investing in the conversion of non-branded stations, and begin converting Esso branded stations, to the Shell brand. We expect the majority of our new retail stations to be added in the Southeast region of Brazil, which has higher consumption of gasoline and ethanol and offers the potential for greater synergies with us and our logistics infrastructure;
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Continue to maximize operating efficiencies. We will continue to focus on improving the efficiency of our operations in the fuel distribution business by focusing on two key areas: (1) exploring synergies among our businesses and (2) maximizing the utilization of our retail stations. We continuously monitor the profitability and use of each service station in our retail network and eliminate underperforming sites, particularly in regions we consider less strategic; and
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Integrate with Shell’s operations. With the recent closing of our Joint Venture with Shell, we will pursue all the synergies envisioned, including the rebranding of Esso’s stations into Shell under the ten-year licensing agreement.
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Energy Cogeneration (Raízen Energia)
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Explore the cogeneration potential of our mills. We currently have installed energy capacity of approximately 793 MW per year from eleven plants and plan to bring one additional energy cogeneration project online in 2012. We plan to reach a total installed energy of 934 MW in 2012, out of which 845 MW will be sold as excess energy to the grid. We expect to reach 1,300 MW of installed capacity by 2016; and
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Start generating energy from sugarcane leaves. We plan to build on Shell’s technical, operational and commercial support for our energy cogeneration activities and developing processes to generate electricity from sugarcane bagasse.
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As for our businesses that were not contributed to the Joint Venture, our strategy will be guided by the following key elements:
Sugar Logistics (Rumo Logística)
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Invest in our railroad operations. We have begun to invest R$1.3 billion in rolling stock (through ALL), permanent ways and trans-shipment warehouses. We plan to use rail to transport the majority of the sugar we produce from our mills to our facility at the Port of Santos, which we expect will significantly decrease our transportation costs; and
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Integrate our port terminals. We have begun to integrate our two terminals at the Port of Santos, creating the world’s largest bulk sugar port terminal. After this integration and completion of the construction of a wharf covering the terminal, we expect our total annual loading capacity to increase from 10 million tons to 18 million tons.
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Lubricants (CLE)
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Focus on higher margin products. Premium products, such as synthetic lubricants (i.e., Mobil 1 RACING 2T and Mobilith SHC 007), represented 39% of our total lubricant volume sold in calendar year 2011, compared to 36% in calendar year 2009. We plan to continue improving our product mix and margins by increasing our focus on premium high margin products. We plan to continue investing in marketing, training our employees and exclusive distributors, developing new innovative products and delivering superior services.
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Agricultural Land Development (Radar)
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Expand our land portfolio. We plan to further invest equity in Radar to enable it to expand its land portfolio and maximize earnings from agricultural real estate by acquiring properties with high expected appreciation potential for subsequent leasing and/or resale.
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Sugar Retail (Docelar Alimentos)
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Increase sales of value-added sugar products. We are leveraging our sales of value-added products under our União and Da Barra brands, such as chocolate powder, cake mixes and breakfast products, by having dedicated sales and marketing teams to execute our commercial strategy and manage our brand portfolio, targeting both retail as well as industrial and foodservice clients; and
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Expand our sales efforts: We plan to expand our sales efforts and leverage our superior market visibility as the largest seller of retail sugar in Brazil within several categories.
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Operations
Sugar and Ethanol segment
Sugarcane is the principal raw material used in the production of ethanol and sugar. Sugarcane is a tropical grass that grows best in locations with stable warm temperatures and high humidity, although cold and dry winters are an important factor for the sucrose concentration of sugarcane. The soil, topography, climate and land availability of the Center-South region of Brazil are ideal for the growth of sugarcane. The Center-South region of Brazil accounted for approximately 86.9% of Brazil’s sugarcane production in the 2010/2011 harvest.
As of March 31, 2011 we leased 437,698 hectares, through 2,128 land lease contracts with an average term of five years. Six of these contracts (covering 30,260 hectares, or 7.6% of the land leased by us) are entities controlled by our chairman and controlling shareholder under arms-length terms. In accordance with these land lease contracts, we pay the lessors a certain fixed number of tons of sugarcane per hectare as consideration for the use of the land, and a certain fixed productivity per ton of sugarcane in terms of TSR. The overall volume of TSR is obtained by multiplying the number of hectares leased by the committed tons of sugarcane per hectare by the TSR per ton of sugarcane. The price that we pay for each kilogram of TSR is set by CONSECANA (Conselho dos Produtores de Cana-de-açúcar, Açúcar e Álcool do Estado de São Paulo). In transition fiscal year 2009, we paid an average of 17.2 tons of sugarcane per hectare, and an average of 121.6 kilograms of TSR per ton of sugarcane, at an average cost of US$0.1461 million per kilogram of TSR under our land lease contracts. In fiscal year 2010, we paid an average of 17.52 tons of sugarcane per hectare, at an average cost of US$0.1751 per kilogram of TSR under our land lease contracts.
We also purchase sugarcane directly from thousands of third-party sugarcane growers. Of our sugarcane purchases from third-party growers, we historically have purchased approximately 80% through medium- and long-term contracts with sugarcane producers, 5% on a spot basis and the remaining 15% from sugarcane producers with whom we have long-term relationships but no contractual arrangements. We generally enter into medium- and long-term contracts for periods varying from three and a half to seven years. All of our third-party sugarcane suppliers are responsible for the harvest of the sugarcane and its delivery to our mills. The price that we pay to third-party sugarcane growers is based on the total amount of sugar content in the sugarcane, measured by the amount of sugar recovered and on the prices of ethanol and sugar sold by each mill.
We harvested from owned or leased lands 50.6%, or 27.4 million tons, of the sugarcane that we crushed in fiscal year 2011, and purchased from third-party growers the remaining 26.8 million tons of sugarcane, or 49.4% of the total amount of sugarcane that we crushed in fiscal year 2011. The following table compares the amount of sugarcane grown on owned or leased land with the amount purchased from third parties during the last two fiscal years.
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For Fiscal Year Ended March 31,
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2011
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%
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2010
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%
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(millions of tons, except percentages)
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Sugarcane harvested from owned/leased land
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27.4 | 50.6 | 23.4 | 46.6 | ||||||||||||
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Sugarcane purchased from third-parties
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26.8 | 49.4 | 26.9 | 53.4 | ||||||||||||
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Total
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54.2 | 100.0 | 50.3 | 100.0 | ||||||||||||
Sugarcane Harvesting Cycle
The annual sugarcane harvesting period in the Center-South region of Brazil begins annually in May and ends in November. We plant several species of sugarcane, and the species we use in a particular area depends on the soil quality, rain levels and the resistance to certain types of pestilences, among other factors. Once planted, sugarcane is harvested each year for several continuous years. With each subsequent harvest, agricultural yields decrease, and the current optimum economic cycle is five or six consecutive harvests. However, the harvests must be carefully managed in order to continue to attain sugar yields similar to the newly-planted crop.
Ideally, the sugarcane should be harvested when the crop’s sucrose content is at its highest level. Harvesting is either done manually or mechanically. As of March 31, 2010, 35.5% of our sugarcane is harvested manually. Manual harvesting begins by burning the sugarcane field, which removes leaves and destroys insects and other pests. The amount of the crop that we may burn is subject to environmental regulations. The remaining 64.5% of our sugarcane is harvested mechanically.
Sugarcane yield is an important productivity measure for our harvesting operations. Geographical factors, such as land composition, topography and climate, as well as the agricultural techniques that we implement, affect our sugarcane yield. Although our agricultural yields are above the average Brazilian yields, we believe that by reducing the average age of our sugarcane fields and choosing new sugarcane varieties, our agricultural yields may continue to increase.
In fiscal year 2011, our accumulated sugar extraction was 139.0 kilograms of TSR per ton of sugarcane and our agricultural yield was 91.4 tons of sugarcane per hectare, compared to our average sugar extraction yield of 129.8 kilograms of TSR per ton of sugarcane and 91.4 tons of sugarcane per hectare in fiscal year 2010.
The average Brazilian sugar extraction yield for the 2010/2011 harvest was 140.5 kilograms of TSR per ton of sugarcane and the agricultural yield was 79.6 per hectare. The average Center-South sugar extraction yield for the last five years was 140.75 kilograms of TSR per ton of sugarcane and 83.10 tons of sugarcane per hectare. The average Brazilian sugar extraction yield for the 2009/2010 harvest was 130.09 kilograms of TSR per ton of sugarcane and the agricultural yield was 80.89 tons of sugarcane per hectare. The average sugar extraction yield in the State of São Paulo for the last five years was 141.88 kilograms of TSR per ton of sugarcane and 85.38 tons of sugarcane per hectare.
Milling Facilities
Once the sugarcane is harvested, it is loaded onto trucks and riverboats owned by third parties and transported to one of our 24 mills for inspection and weighing. The average distance from the fields on which our sugarcane is harvested to our mills is approximately 25 kilometers (or approximately 16 miles). The proximity of our milling facilities to the land on which we cultivate sugarcane reduces our transportation costs and enables us to process the sugarcane within 48 hours of harvesting, thereby maximizing sucrose recovery as sucrose concentration in sugarcane starts to decrease upon harvesting. In fiscal year 2011 our average sugarcane freight cost is US$3.14 per ton of sugarcane.
In fiscal year 2011, we crushed 54.3 million tons of sugarcane, or approximately 9.75% of Brazil’s total sugarcane production. In fiscal year 2010, we crushed 50.3 million tons of sugarcane, or approximately 7.6% of Brazil’s total sugarcane production. Currently, we operate a total of 24 milling facilities, 21 of which we own and two of which we lease, with 65.0 million tons of annual crushing capacity. Our Da Barra mill has the world’s second largest crushing capacity (approximately 7 million tons). Twenty of our mills are prepared to produce both sugar and ethanol and the other two prepare only sugar. Jataí, our greenfield, produces ethanol only. We also own four sugar refineries, two port facilities and numerous warehouses.
Ethanol Production Process
We produce ethanol through a chemical process called yeasting, which is a process of fermenting the sugars contained in both sugarcane juice and molasses. Initially, we process the sugarcane used in ethanol production the same way that we process sugarcane for sugar production. The molasses resulting from this process is mixed with clear juice and then with yeast in tanks, and the by-product resulting from the yeasting process, called “yeasted wine”, has an ethanol content of approximately 7% to 9%. After the yeasting process, which takes approximately 10 hours, the yeasted wine is centrifuged, so that we can separate the yeast from the liquid. We use the separated yeast in the ethanol production process. We then boil the yeasted wine at different temperatures, which causes the ethanol to separate from other liquids. Hydrous ethanol is produced after different distillation stages. In order to produce anhydrous ethanol, hydrous ethanol undergoes a dehydration process. The liquid remaining after these processes is called vinasse, a by-product we use as fertilizer in our sugarcane fields. After the distillation and dehydration processes, we produce hydrous, anhydrous, neutral and industrial ethanol, and store the ethanol in large tanks.
The ethanol production flow can be summarized as follows:
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Preparation of the juice. The fermentation is fed with a juice composed by approximately 20% of sugar, which is prepared with juice (from the treatment), molasses (from sugar production) and water. This juice must be cooled to approximately 30°C.
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Fermentation. The fermentation of the juice is the result of the action of yeast, which firstly inverts the sucrose to glucose and fructose (monosaccharide), and then converts the monosaccharide into ethanol and carbon dioxide. This reaction occurs in a fermenter, which is fed with juice and yeast.
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Centrifuging. After the fermentation, the resulting product is carried to centrifuges that separate the yeast from the beer, a solution of approximately 9%v/v (oGL) of ethanol.
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Treatment of the yeast. The yeast that comes from the centrifuges is treated with sulfuric acid and returned to the fermenter tank to be utilized again.
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Distillation. The beer is distillated in a sequence of distillation columns, which separate the water from the ethanol. This process occurs basically due to the differences of ethanol’s and water’s ebullition temperatures. In order to produce hydrous ethanol, two columns are used to achieve the concentration of 94%v/v (oGL) ethanol. From the first column, a slop called vinasse is obtained, which is used as a fertilizer in the sugarcane fields.
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Dehydration. In order to produce anhydrous ethanol, two more columns are used to achieve the concentration of 99%v/v (oGL) ethanol. In the first column, the excess of water is separated with the aid of cycle-hexane.
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The following diagram presents a schematic summary of the above-described ethanol production flow:
Production Capacity and Output
Our current annual ethanol production capacity is approximately 2.2 billion liters. All of our mills produce ethanol except for the São Francisco and Bonfim mills. We were the largest producer of ethanol in Brazil in fiscal year 2010, producing approximately 1.8 billion liters of ethanol, representing approximately 7% of Brazil’s total ethanol production in fiscal year 2010. We are the largest ethanol producer in Brazil and also one of the largest exporters in the world, having sold 2.2 billion liters in fiscal year 2011 and 2.1 billion liters in fiscal year 2010, and exported 0.2 billion liters and 0.6 billion liters in the same periods, respectively.
Products
We produce and sell three different types of ethanol: hydrous ethanol and anhydrous ethanol for fuel and industrial ethanol. The primary type of ethanol consumed in Brazil is hydrous ethanol, which is used as an alternative to gasoline for ethanol-only fueled vehicles and for flex fuel vehicles (as opposed to anhydrous ethanol which is used as an additive to gasoline). As a result, hydrous ethanol represented approximately 66% of our ethanol production in fiscal year 2010 and 68.8% in fiscal year 2011.
Customers
We sell ethanol primarily through gasoline distributors in Brazil mainly at the mill that sell it to retailers that then sell it at the pump to customers. The distributors are required by law to distribute gasoline with an ethanol content ranging from 20% to 25%. Since July 1, 2007, the required ethanol content for gasoline has been set at 25%. In January 2010, the Brazilian government temporarily reduced the ratio of anhydrous ethanol in the C gasoline blend to 20% during the months of February, March and April 2010, seeking to minimize the impact of the lower ethanol supply in this period of inter-harvest. The main distributors in Brazil include Petrobras Distribuidora S.A., Shell Brasil Ltda., Esso Brasileira de Petróleo Ltda. (whom we have acquired), and Cia. Brasileira de Petróleo Ipiranga which has recently acquired Texaco Brasil Ltda. Produtos de Petróleo, among others smaller distributors. We also sell industrial alcohol, which is used in the chemical and pharmaceutical sectors. In fiscal year 2010 and fiscal year 2011, our largest ethanol customer was Shell Brasil Ltda., accounting for 23.0% of our total ethanol net sales. Pricing is based on the ESALQ index and payment generally occurs within 12 days from delivery. We sell our surplus in Brazil on a spot basis.
In fiscal year 2011, we exported 11.5%, by volume, of the ethanol we sold, which consisted primarily of refined hydrous ethanol for industrial purposes, compared to 27.4% in fiscal year 2010. Our main customers are trading companies, which distribute our products mainly to the United States, Japan and Europe. The table below sets forth customers that represent more than 5% of our ethanol net sales.
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Market
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Customer
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% of Net Sales Fiscal Year Ended March 31, 2011
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International
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Vertical UK LLP.
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8%
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Mitsubishi Corporation
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2%
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Domestic
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Petrobras Distribuidora S.A.
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17%
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Ipiranga Prod Petróleo S.A.
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15%
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Shell Brasil Ltda.
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15%
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Cosan Combustíves e Lubrificantes S.A.
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5%
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Braskem S.A.
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4%
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Euro Petróleo do Brasil Ltda.
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7%
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Sales and Distribution
In fiscal year 2011 our net sales from ethanol operations were R$2.2 billion or 12.2% of our total net sales, compared to net sales of R$1.7 billion in fiscal year 2010, or 11.4% of our total net sales in that year.
The following table sets forth our domestic net sales and volumes of ethanol for the periods indicated:
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For Fiscal Year Ended March 31,
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2011
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2010
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Domestic net sales (R$ million) (IFRS)
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1,958.9 | 1,325.9 | ||||||
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% of total net sales
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10.84 | 8.65 | ||||||
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Domestic sales volume (in millions of liters)
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1,989.50 | 1,559.70 | ||||||
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% of total ethanol sales volume
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88.53 | 72.63 | ||||||
The following table sets forth our export net sales and volumes of ethanol for the periods indicated:
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For Fiscal Year Ended March 31,
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2011
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2010
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Export net sales (R$ million) (IFRS)
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244.80 | 421.80 | ||||||
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% of total net sales
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1.36 | 2.75 | ||||||
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Export sales volume (in millions of liters)
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257.80 | 587.90 | ||||||
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% of total sales volume
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11.47 | 27.37 | ||||||
Although we primarily sell ethanol in Brazil, we believe that the international ethanol market has a strong potential to expand substantially. The global trend toward adoption of cleaner-burning fuel and renewable sources of energy and alternative fuels, the tendency to reduce reliance on oil producing countries and the increasing use of flex fuel vehicles are expected to increase the demand for ethanol. Broader international acceptance of ethanol as a fuel or fuel additive could boost our exports of ethanol significantly.
The majority of our ethanol customers in Brazil receive shipments of ethanol at our mills. In fiscal year 2011, we distributed, through third parties, approximately 34% of our ethanol production in Brazil. We transport the ethanol that we produce for export to the Port of Santos primarily through third-party trucking companies.
Ethanol Prices
The price of ethanol we sell in Brazil is set according to market prices, using the indices for ethanol published by ESALQ and BM&FBOVESPA, indices for ethanol as a reference. The prices of the industrial and neutral ethanol (a type of ethanol which has low impurity levels and is used as a raw material in the food, chemical and pharmaceutical industries) that we sell are also determined in accordance with market prices, which historically has been approximately 10% higher than the price of fuel ethanol. Prices of ethanol for export are set according to international market prices for ethanol. The international ethanol market is highly competitive. In May 2004, the New York Board of Trade began trading a futures contract for ethanol, known as the World Ethanol Contract.
The following table sets forth our average selling prices (in R$ per thousand liters) for ethanol in the Brazilian market and for exports for the periods indicated:
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Brazilian average ethanol selling price
|
R$ | 985 | R$ | 850 | ||||
|
Export average ethanol selling price
|
R$ | 950 | R$ | 717 | ||||
|
Average ethanol selling price
|
R$ | 981 | R$ | 814 | ||||
Ethanol Loading Terminal at the Port of Santos
As of March 31, 2011, we owned a 66.67% interest in TEAS, an ethanol loading terminal at the Port of Santos, fully dedicated to ethanol exports that has a storage capacity of approximately 40 million liters of ethanol and loading rate of approximately 960,000 m3 per year.
Sugar
Sugar Production Process
There are essentially three steps in the sugar manufacturing process. First, we crush the sugarcane to extract the sugarcane juice. We then filter the juice to remove any impurities and boil it until the sugar crystallizes, forming a thick syrup. We use these impurities as fertilizer in our sugarcane fields. Lastly, we spin the syrup in a centrifuge which produces raw sugar and molasses. The raw sugar is refined, dried and packaged at our sugar refineries. We use the molasses in our production of ethanol, animal feed and yeast, among other products.
Production Capacity and Output
In fiscal year 2011, we sold 4.3 million tons of sugar, representing 12.8% of Brazil’s total sugar production output. In fiscal year 2010, we sold 4.1 million tons of sugar, representing 12.5% of Brazil’s total sugar production output.
As the production capacity of our mills is used for both ethanol and sugar, if we had produced only sugar (one ton of VHP sugar is equivalent to approximately 592 liters of anhydrous ethanol and 618 liters of hydrous ethanol), our sugar production for fiscal year 2010 and fiscal year 2011 would have been approximately 6.5 million tons, and approximately 7.5 million tons, respectively, which would have made us the largest world sugar producer in fiscal years 2010 and 2011.
Products
We produce a wide variety of standard sugars, including raw sugar (also known as VHP sugar), crystal sugar and organic sugar, and refined sugars, including granulated refined white sugar, amorphous refined sugar, refined sucrose liquid sugar and refined inverted liquid sugar. Currently, almost all of our mills produce standard ethanol and sugar, other than the São Francisco and Tamoio mills that only produce sugar and the Jataí mill, which produces only ethanol. The São Francisco mill and the Da Barra mill are our mills that produce refined sugar. The “Da Barra” brand is the second largest in the Brazilian market in terms of volume and, after Nova América’s acquisition, we also sell sugar under the União brand, which is the largest in the Brazilian market in terms of volume.
Standard sugars. VHP sugar, a raw sugar with approximately 99% sucrose content, is similar to the type of sugar traded in major commodities exchanges, including through the standard NY11 contract. The main difference between VHP sugar and the sugar that is typically traded in the major commodities exchanges is the sugar content of VHP sugar and the price premium that VHP sugar commands in comparison to most sugar traded in the commodities exchanges. We export VHP sugar in bulk, to be refined at its final destination. We also sell a small amount of VHP sugar to the Brazilian market. Crystal sugar is a non-refined sugar produced directly from sugarcane juice and sold to industrial companies in Brazil to be used as an ingredient for food products. We also sell a small amount of crystal sugar to the Brazilian retail market and to export markets. Organic sugar is a kind of raw sugar produced from organic sugarcane and is not submitted to any chemical treatments during its manufacturing process. We sell organic sugar in the international and Brazilian markets.
Refined sugars. We refine VHP sugar and crystal sugar into both granulated and amorphous (non-crystallized) sugar. We sell refined sugar in the Brazilian and export retail and industrial markets. Refined sugar is used as an ingredient in processed food products such as milk and chocolate powders, bakery products, powder refreshments, and pharmaceutical syrups.
Liquid sugars. We refine crystal sugar to produce sucrose liquid sugar and inverted liquid sugar, which has a higher percentage of glucose and fructose than sucrose liquid sugar. We sell both types of sugar for industrial use, mainly for the production of soft drinks.
Customers
We sell sugar to a wide range of customers in Brazil and in the international markets. We primarily sell raw sugar in the international markets through international commodities trading firms and Brazilian trading companies. Our customers in Brazil include retail supermarkets, foodservice distributors and food manufacturers, for which we primarily sell refined and liquid sugar. The table below sets forth customers that represent more than 4% of our sugar net sales.
|
Market
|
Customer
|
% of Net Sales For Fiscal Year Ended March 31, 2011
|
||
|
International
|
Sucres et Denrées
|
33.40
|
||
|
Coimex Trading Ltd./
|
12.60
|
|||
|
Tate & Lyle International
|
5.30
|
|||
|
Cargill International S.A.
|
4.80
|
For the Brazilian market, we sell sugar to a broad and consistent client base but we do not commit to set volumes or prices in advance.
Sales and Distribution
The following table sets forth our export sales and volumes of sugar for the periods indicated:
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Export net sales (R$ million) (IFRS)
|
2,466.20 | 2,315.50 | ||||||
|
% of total net sales
|
13.65 | 15.10 | ||||||
|
Export sales volumes (in thousands of tons)
|
3,052.60 | 3,079.90 | ||||||
|
% of total sales volume
|
71.14 | 74.49 | ||||||
The following table sets forth our domestic net sales and volumes of sugar for the periods indicated:
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Domestic net sales (R$ million) (IFRS)
|
1,387.30 | 1,062.30 | ||||||
|
% of total net sales
|
7.68 | 6.93 | ||||||
|
Domestic sales volumes (in thousands of tons)
|
1,238.20 | 1,054.70 | ||||||
|
% of total sales volume
|
28.86 | 25.51 | ||||||
We coordinate our Brazilian sugar distribution from our warehouses located in Barra Bonita, São Paulo and Cachoeirinha, all in the State of São Paulo. We also deliver sugar products to our customers in Brazil primarily via third-party trucking companies.
Sugar Prices
Prices for our sugar products for export are set in accordance with international market prices. Prices for raw sugar are established in accordance with the NY11 futures contracts. Prices for refined sugar are established in accordance with the Lon 5 futures contract, traded on the LIFFE. Prices for sugar we sell in Brazil are set in accordance with Brazilian market prices, using an index calculated by the Agriculture School of the University of São Paulo (Escola Superior de Agricultura Luiz de Queiroz), or “ESALQ”. The following table sets forth our average selling prices per ton in U.S. dollars for sugar in the Brazilian market and for export for the periods indicated:
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(R$/ton)
|
||||||||
|
Domestic average sugar selling price
|
R$ | 1,120 | R$ | 1,007 | ||||
|
Export average sugar selling price (raw and refined)
|
R$ | 808 | R$ | 752 | ||||
|
Average sugar selling price
|
R$ | 817 | R$ | 898 | ||||
Sugar Loading Terminal at the Port of Santos
Our exports of VHP sugar are shipped through the sugar loading terminal operated by our subsidiary, Rumo Logística, at the Port of Santos, which is located an average distance of 600 kilometers (approximately 370 miles) from our mills. Our sugar-loading terminal is equipped with modern freight handling and shipment machinery. The close proximity of our mills to the port enables us to benefit from lower transportation costs.
Our sugar-loading terminal has the capacity to load approximately 50,000 tons of sugar per day, and to store approximately 380,000 tons of sugar. The port facility serves clients, including Cosan, EDF&Man, Sucden, Bunge, Coimex, Cargill, LDC Corp and Noble among others, with their transport and export of sugar and soy products. Pursuant to the Port Concession Agreement with the State of São Paulo’s Port Authority, the concession granted to operate the south terminal (Cosan Portuária) will expire in 2036 and the concession granted to the north terminal (Teaçu), acquired in 2009, expires in 2016, and the renewal for an additional 20 years has already been requested.
In March 2009, Cosan S.A., through its subsidiary Rumo Logística, entered into an agreement with América Latina Logística, or ALL, for the rail transportation of bulk sugar and other sugarcane by-products. The agreement envisages investments of approximately R$1.3 billion by Rumo Logística, which we expect to raise through equity and debt at the subsidiary level. In exchange, ALL will guarantee a monthly volume to be transported by railroad, which will amount to approximately 11 million tons per year to the Port of Santos.
To finance these capital expenditures, Rumo Logística has contracted R$986 million of long-term credit facilities from BNDES, which R$435.3 was recorded in March 31, 2011. In addition, on September 2, 2010, Rumo Logística closed a private placement in which it raised R$400.0 million in primary proceeds from Gávea Investimentos and TPG Capital in exchange for an aggregate 25.0% interest of the then issued and outstanding shares of Rumo Logística. We believe this recent equity capitalization, together with the financing contracted with BNDES, are sufficient to meet Rumo Logística’s R$1.3 billion investment plan.
During fiscal year 2010, Rumo Logística began to transport sugar by truck and rail for ourselves and other sugar producers. Rumo Logística is also the owner of two bulk sugar port terminals at the Port of Santos, which, on a combined basis, is the largest bulk sugar port terminal in the world, with a current annual combined loading capacity of 10 million tons, having loaded 7.5 million tons in fiscal year 2011 and 8.1 million tons in fiscal year 2010. We are currently investing in this sugar port terminal to add an additional wharf to increase its capacity from the present capacity of 11 million tons to 18 million tons by 2014. After this expansion, this port terminal will have the capacity to support 70% of the volume exported by the sugar producers of the Center-South region of Brazil.
Finally, our pier facility at the Port of Santos allows us to be opportunistic and take advantage of favorable “market windows” to import diesel and arbitrage raw material prices.
Fuel distribution and lubricants
Fuel Distribution
Through Raízen Combustíveis, we are Brazil’s third largest fuel distributor, engaged in sourcing, storing, blending and distributing primarily gasoline, ethanol, diesel and fuel oil through our retail network of approximately 4,500 Esso and Shell-branded stations following the close of the Joint Venture on June 1, 2011, and directly to industrial and wholesale clients. In fiscal year 2011, the operations contributed to the Joint Venture by Cosan and Shell had an estimated combined 23.8% market share in Brazil in terms of volume of fuel sold in 2011, according to Sindicom.
Prior to the closing of the Joint Venture, in fiscal year 2011, we recorded sales of R$10.9 billion of fuels and in fiscal year 2010, we recorded sales of R$9.4 billion of fuels.
|
Fuel Distribution Highlights
|
For Fiscal Year Ended March 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Service stations (eop)
|
1,710 | 1,710 | ||||||
|
Fuel sold (million liters)
|
6,076.9 | 5,490.6 | ||||||
|
Net sales (R$ million) (IFRS)
|
10,902.3 | 9,437.3 | ||||||
Our retail station network is strategically concentrated in urban areas with higher population density, thus enabling us to have a high throughput per station, particularly in the South and Southeast regions of Brazil, where, prior to the closing of our Joint Venture, our fuel sales amounted to 1.32 billion liters (9.3% market share of the Sindicom companies) and 3.42 billion liters (8.1% market share of the Sindicom companies) in fiscal year 2011, respectively, as compared to 1.1 billion liters (6.6% market share of the Sindicom companies), according to Sindicom. The South and Southeast regions are the largest markets for fuel distribution in Brazil, accounting for 16.8% and 49.9% in fiscal year 2011, respectively, of the Brazilian fuel market in terms of volume sold according to Sindicom as compared to 17.3% and 49.6% in 2008, respectively, according to Sindicom. In fiscal year 2011, prior to the closing of our Joint Venture, we sold a total of 4.84 billion liters through our retail network, with a product mix of 41.6% gasoline, 40.7% diesel, 16.0% ethanol and 1.7% other fuels.
Industrial & Wholesale Division
We are also an industrial and wholesale fuel distributor, with sales of 1.03 billion liters of fuels sold, consisting of 96.0% diesel and 4.0% gasoline, ethanol and other fuels to our industrial and wholesale clients, in fiscal year 2011, prior to the closing of our Joint Venture. Most of our sales are concentrated in diesel oil and gasoline.
Lubricants
We are the third largest lubricants player in Brazil by volume of liters sold as of May 31, 2011. In fiscal year 2011, our lubricant operations sold a total of 166.4 million liters of lubricants. For fiscal year 2010, we sold a total of 130.8 million liters of lubricants, corresponding to an estimated market share of 14.3%, according to Sindicom. We sell passenger vehicle lubricants, commercial vehicle lubricants and industrial lubricants under the Mobil brand, among others, which is licensed to us until 2018 by ExxonMobil. We use Esso-branded retail stations to sell our lubricants products, as well as other distributors and direct sales to industrial customers. We capture significant synergies by selling through our distributors’ network to our retail service station network, to industrial and wholesale customer accounts and to car and motorcycle dealerships.
Our lubricant operations consist of a wholly-owned lubricants oil blending plant (LOPB), located in Rio de Janeiro, with annual production capacity of 1.4 million barrels of lubricants per year, including capacity for 48,000 barrels of grease per year. In addition, we have a pier facility at our lubricants oil blending plant in Rio de Janeiro that allows us to import base stocks.
|
Lubricants Highlights:
|
For Fiscal Year Ended March 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Volume of lubricants sold (thousand liters)
|
166.4 | 130.8 | ||||||
|
Net sales (R$ million) (IFRS)
|
822.4 | 634.0 | ||||||
Our Lubricants Distributor Program is recognized as a competitive advantage in the Brazilian market. Participating distributors can only sell Mobil and Esso lubricants and are currently limited to 15 with exclusive geographical coverage. An important differential is the common ERP system used by the distributors that interfaces with our SAP business software system. We believe that these characteristics make our distributors network unique, allowing us to launch new products and implement new programs with speed and flawless execution.
ExxonMobil is a leading brand in the lubricants industry, operating through global strategic alliances with automotive and industrial equipment manufactures, including Caterpillar, Mercedes-Benz, Peugeot and Toyota, collaborating to develop new formulations. We have a licensing agreement for our use of ExxonMobil’s brands and formulations until 2018, renewable at ExxonMobil’s sole discretion, which gives us access to ExxonMobil’s leading technology and international feedstock supplies.
Production Capacity and Output
As of August 2011, our LOBP facility had operated for almost fifteen years without a single lost-time incident, which represents approximately 5 worker-hours worked in a safe workplace over those years, and operates at a utilization rate of approximately 70% of its total capacity as of March 31, 2011. This utilization rate offers an opportunity for growth through expansion of our market share or participation in Brazil’s steady market growth with limited additional capital investments required. We also own a base oil terminal in Duque de Caxias and one secondary warehouse in Manaus.
We have a mix of imported (including significant imports from ExxonMobil) and national (from Petrobras) base oils to use as feedstock in our blending plant located in Rio de Janeiro. This flexibility is due to our pier facility which we use to import raw material, which gives us significant competitive advantage. The lubricants produced at our LOBP are sold to exclusive distributors and direct customers. Distributors have an evergreen contract, and most direct customers have a five year contract at prices set by us. Distributors then resell the products to customers in our retail market. In addition, distributors are contractually obligated to sell Esso and Mobil products and may not sell products directly competing with such brands. Approximately 97% of our sales volume is blended domestically, with the majority of the production delivered to the domestic market. Most of our lubricant sales are concentrated in the Southeast and South regions of Brazil.
Our LOBP provides an efficient and reliable local blending facility with the ability to import base oils. On average, the LOBP receives approximately 3,000 orders per month, 4,800 invoices per month and has 2,200 shipments per month, 42% delivered on CIF (Cost, insurance and freight) basis and 56% delivered FOB (Free On Board) basis during fiscal year 2011. The LOBP was built as a grassroots facility and commenced operations in 1957. Significant investments were undertaken in 2002. The distribution and logistics system for LOBP relies on six packaged carriers, three bulk carriers and one inbound carrier to distribute the products. Our LOBP is also supported by warehouses in Duque de Caxias and Manaus. For our direct sales, we have significant strategic alliances with global OEM’s like Mercedes-Benz, Toyota, Honda, John Deere and Caterpillar covering areas such as secured volume, tailormade products and security of supply.
Cogeneration of Electrical Power
Sugarcane is composed of water, fibers, sucrose and other sugar molecules (glucose and fructose) and minerals. When the sugarcane goes through the milling process, we separate the water, sugar and minerals from the fibers, and are left with sugarcane bagasse. Sugarcane bagasse is an important by-product of sugarcane, and it is used as fuel for the boilers in our plants, through the so-called cogeneration process.
Cogeneration is the production of two kinds of energy—usually electricity and heat—from a single source of fuel. In our process, sugarcane bagasse is burned at very high temperatures in boilers, heating the water that is transformed into steam. This steam can be used in the form of: mechanical energy (to move crushers, for example), thermo energy (to heat the juice in the crystallization process, for example) and electricity, when this steam is used to move turbo-generators. Historically, the energy produced by Brazilian mills has not been price competitive, when compared to the low cost Brazilian hydro-electricity. Consequently, the majority of the groups in the sugar and ethanol sector have not invested in expanding their energy generation for sale, and the majority of the mills were constructed with low-pressure boilers, which are considered not to be the most efficient process.
Since 2000, the Brazilian economy has experienced significant growth, which in turn has resulted in increased demand for energy. However, hydro- and thermo-electricity have not been able to keep pace for the following reasons: (1) new hydro-electric plants are located in regions (such as the Amazon) distant from consumption centers; (2) significant lead-time is required to construct new hydro- and thermo-electric plants; (3) significant investments are required for transmission lines, pipelines (for natural gas used in thermo-electric plants) and barges; (4) significant environmental costs associated with both types of electricity generation; and (5) increased price of the fuel (natural gas) for thermo-electricity and dependence on Bolivia (principal natural gas supplier). As a result, energy prices in Brazil have been increasing and other alternative sources, such as the electricity from the cogeneration of the sugarcane bagasse, have become increasingly competitive and viable options to satisfy increasing energy demands.
All of our plants are currently energy self-sufficient and the majority of them use low-pressure boilers. In order to expand the energy cogeneration in our mills, we have to replace our current low-pressure boilers with new high-
pressure boilers. The steam generated by burning the same amount of bagasse in high-pressure boilers will yield higher pressure and higher temperature and, in turn, turbo-generators will be able to produce significantly more electricity. Excess energy can be sold to the grid. In 2001, we invested in changing one of the boilers at Usina da Serra, which made it possible for us to generate excess electricity that we sold to Companhia Paulista de Força e Luz (CPFL), one of the largest electric power distributors in the State of São Paulo, pursuant to a ten-year power purchase agreement. The installed capacity for third-party sales of this pilot project is only 9 MW. We currently have an installed energy capacity of 793 MW per year from our 24 plants, out of which ten delivered energy to the Brazilian energy grid in fiscal year 2011. We have one additional energy cogeneration project that we expect to become operational in 2012. We estimate that by the end of 2012 we will have a total installed energy capacity of 934 MW, from which 845 MW will come from certain of our plants that will sell excess energy to the grid and a total installed energy capacity of 1,300 MW by 2016. We view our cogeneration business as strategic since it generally allows for a stable cash flow stream across commodity cycles, helping to reduce the volatility of our cash flows and operations.
|
Energy Cogeneration Highlights:
|
For Fiscal Year Ended March 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Energy sold (GWh)
|
1,254.0 | 605.9 | ||||||
|
Net sales (R$ million) (IFRS)
|
194.9 | 93.6 | ||||||
In 2003, we built a successful pilot cogeneration plant at one of our mills, from which we sell surplus energy to Companhia Paulista de Força e Luz - CPFL, one of the largest electric power distributors in the State of São Paulo. We sell energy through bilateral contracts (we currently have contracts with CPFL and Grupo Rede) and through energy auctions promoted by the government, having participated in three auctions of “new energy” in 2005, 2006 and 2008.
Alternative sources of electricity, such as cogeneration from sugarcane bagasse, have become increasingly important within the Brazilian hydro-dependent energy matrix, particularly because the harvest period for sugarcane coincides with generally drier periods for hydraulic energy, when the overall energy supply is, therefore, more constricted. We are self-sufficient for our energy needs. In fiscal years 2011 and 2010, we sold 1,254 GWh and 605.9 GWh, respectively, of energy to third parties. Our primary customers are utility companies, which together accounted for approximately 35% of our cogeneration sales in fiscal year 2011 and 41.7% in fiscal year 2010. We sold our remaining excess electric energy through energy auctions.
We believe that the principal advantages of energy generated by burning sugarcane bagasse are:
|
|
·
|
a cleaner energy derived from renewable sources, considered to be “carbon neutral”;
|
|
|
·
|
highly complementary-relationship to hydro-electric energy, because sugarcane bagasse energy is generated during the crop season, which coincides with the dry period in the Brazilian Center-South region, when water supply levels are lower; and
|
|
|
·
|
short lead-times to initiate operations is required.
|
In addition, smaller investments in transmission lines to the Brazilian power grid are required because our mills are located close to consumption centers.
Brazil’s electricity system is undergoing widespread reforms. In light of projected growth rates in the Brazilian economy, we believe that increased investments in alternative energy sources, such as cogeneration, will be required as hydro-electric energy prices continue to rise. We believe investments in cogeneration will be encouraged by the Brazilian government, which has offered incentives, such as more attractive financing lines from BNDES, for generation from sugarcane bagasse.
Sugar Logistics
Our sugar logistics operations are run through Rumo Logística, which we believe offers an integrated and cost competitive logistics solution to sugar producers located in the Center-South of Brazil by transporting sugar from the mill by truck or rail to be loaded at its bulk sugar port terminal in Santos. We also offer sugar storage services. Rumo Logística started in fiscal year 2010 to transport sugar by truck and rail for ourselves and other sugar producers. Rumo Logística is also the owner of the largest bulk sugar port terminal in the world at the Port of Santos with a current annual loading capacity of 10 million tons, having loaded 7.5 million tons in fiscal year 2011 and 8.1 million tons in fiscal year 2010. We are currently investing in this facility to add an additional wharf to the terminal to increase capacity from the present 10 million tons to 18 million tons by 2014. After the expansion, the port terminal will have the capacity to support 70% of the volume exported by the Center-South region sugar producers of Brazil.
|
Sugar Logistics Highlights:
|
For Fiscal Year Ended March 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Port elevation volume (thousand tons)
|
7,471.0 | 8,124.0 | ||||||
|
Net sales (R$ million) (IFRS)
|
448.0 | 158.3 | ||||||
In order to expand its operations, on March 9, 2009, Rumo Logística signed a long-term agreement with América Latina Logística S.A., or ALL, providing for the transportation by ALL of raw sugar and other sugar derivatives and the expansion of ALL’s rail transport capacity through investments in ALL’s rail network. As part of the agreement, Rumo Logística will invest up to R$1.3 billion in a rail transportation system to be operated by ALL, including rolling stock and permanent ways, modern locomotives and hopper railcars and trans-shipment warehouses. In return, ALL will provide transport services, guaranteeing (1) a minimum volume curve reaching 1.09 million tons per month during the sugar season starting in the 4th year, (2) competitive tariffs to sugar producers compared to truck transportation alternatives available to them, (3) project management in connection with the planned investments, and (4) payment of a rent per ton of sugar transported for the investments undertaken by Rumo Logística, limited to an agreed maximum.
To finance these capital expenditures, Rumo Logística has contracted R$986 million of long-term credit facilities from BNDES. In addition, on September 2, 2010, Rumo Logística closed a private placement in which it raised R$400.0 million in primary proceeds from Gávea Investimentos and TPG Capital in exchange for an aggregate 25.0% interest of the then issued and outstanding shares of Rumo Logística. We believe this recent equity capitalization, together with the financing contracted with BNDES, are sufficient to meet Rumo Logística’s R$1.3 billion investment plan.
Competition
The sugar industry in Brazil has experienced increased consolidation through merger and acquisition activity during the last several years. Most of this activity has involved companies and facilities located in the Center-South region of Brazil, one of the most productive sugar producing regions in the world. Despite this recent wave of consolidation, the industry remains highly fragmented with more than 320 sugar mills and 100 company groups participating. We are the largest ethanol and sugar producer in the world in terms of production volume and sales, with 54.3 million tons of crushed sugarcane in fiscal year 2011.
Many ethanol and sugar producers in Brazil market their ethanol and sugar products through the Copersucar. Copersucar is a private cooperative that was created in 1959 by 10 sugar mills in the State of São Paulo in order to provide a shared commercial distribution for their ethanol and sugar production. Currently, Copersucar is comprised of 38 producers in the states of São Paulo, Minas Gerais and Paraná. During the 2010/2011 harvest, Copersucar’s affiliated mills crushed approximately 91 million tons of sugarcane.
We also face competition from international sugar producers. We are the largest sugar producer in Brazil and the third largest sugar producer in the world with 3.9 million tons of sugar produced in the 2010/2011 harvest, behind British Sugar (4.4 million tons of sugar produced in the 2010/2011 harvest) and Südzucker AG of Germany (with 4.3 million tons of sugar produced in the same period). These producers, however, are the beneficiaries of considerable governmental subsidies in their principal sales markets.
In the fuel the distribution business, we are subject to competition, both from companies in the industries in which we operate and from companies in other industries that produce similar products. Our competitors include service stations of large integrated oil companies, independent gasoline service stations, convenience stores, fast food stores, and other similar retail outlets, some of which are well-recognized national or regional retail systems. The Brazilian fuel distribution industry has consolidated significantly in recent years, with the five major distributors increasing their combined market share from 65.2% in 2000 to 76.1% in 2009. The top-five distributors in Brazil are: Petrobras, operating through the BR Distribuidora brand, Ultrapar S.A., through the Ipiranga and Texaco brands, Shell Brasil Ltda., a subsidiary of Royal Dutch Shell, CLE, through the Esso brand, and AleSat Combustíveis S.A., a domestic Brazilian fuels distribution. The principal competitive factors affecting the retail marketing operations include site location, product price, selection and quality, site appearance and cleanliness, hours of operation, store safety, customer loyalty and brand recognition. We believe that we are in a strong position to compete effectively on ethanol due to the synergies that further integration with Cosan will bring.
We also face competition from international ethanol producers that use other ethanol sources, such as corn and sugar beet for the generation of fuel ethanol.
Trademarks
We have 141 trademarks registered with the National Intellectual Property Institute, or “INPI”, along with 60 pending trademark registration requests. Our principal trademarks, União and Da Barra, are registered with INPI in multiple classes, which allow us to use these trademarks in the sugar, chocolate and various other markets.
CLE is licensed to use ExxonMobil trademarks. CLE has a ten-year agreement for lubricants, with ExxonMobil, expiring in 2018, renewable at ExxonMobil’s sole discretion, for the use of the Esso and Mobil brands, among others.
Research and Development
Crop Monitoring
In 2002, we established a partnership with the University of Campinas (Universidade de Campinas), or UNICAMP, to develop a geographic information system to improve the monitoring of our crops. Through this partnership, we have developed a tool that monitors the sugarcane crops with the use of satellite images. By using the system we are able to have more accurately production estimative. Further, we are able to get extremely detailed information on the state of our crops, which gives us the opportunity to improve the procedures of agricultural crop treatment. Currently, we monitor all land where we produce sugarcane, either in our own land, on leased areas or areas of suppliers.
Development of Sugarcane Varieties and other Products
We have agreements with the following technological institutes for the development of new varieties of sugarcane: Sugarcane Technology Center (Centro de Tecnologia Canavieira), or “CTC”, in which we are a major shareholder; Federal University of São Carlos (Universidade Federal de São Carlos), and Research Agronomical Institute (Instituto Agronômico de Pesquisa). CTC is a private institution focused on research and development of new technologies for agricultural activities, logistics, and industry, as well as creating new varieties of sugarcane. CTC has already developed biological ways for controlling pests and biodegradable plastic (PHB), and also created a VVHP-type (very, very high polarization) sugar that requires less energy to be processed, and cogeneration technology.
We also analyze and develop different products used to facilitate and enhance the growth of sugarcane, such as herbicides and fertilizers, also taking into consideration the different conditions of our sugarcane fields. We share this technology with our sugarcane suppliers to enable them to enjoy higher yields and better quality sugarcane.
In June 2006, we engaged CanaVialis S.A., or “CanaVialis”, to provide Cosan S.A. access to its sugarcane genetic improvement program specifically tailored to our mills. CanaVialis, which is affiliated with Monsanto, is Brazil’s only privately-owned firm focused on the genetic improvement of sugarcane. We believe we will benefit from their support services and use of their biofactory (the largest in Brazil), which will allow us to decrease the amount of time required for seedling production and grant us access to new, improved sugarcane varieties through their genetic improvement program. CanaVialis set up an experimental station in our Destivale mill, which began testing new species of sugarcane especially selected for Cosan S.A.’s production framework.
We invested approximately R$ 5.6 million (US$ 3.4 million) in research and development in fiscal year 2010. In 2011, we invested R$ 2.7 million.
Sugarcane varieties for greenfields
We have also identified other areas where we can build additional greenfield projects. We believe Brazil has land available to expand sugarcane plantations. The areas where we believe there is potential for sugarcane growth are illustrated below:
We have collected weather and soil data for all these areas. However, in order to obtain the productivity levels that we expect, we will first establish field trials to identify the varieties that can be cultivated in each target region.
We will select sugarcane varieties adapted to each target region through a customized genetic selection program. For that purpose, we intend to establish up to ten small field stations in the regions specified in the right side map above.
CanaVialis has been working with Cosan to organize this network of stations and to ensure the quality of the field trials and the region-specific genetic selection program. Approximately US$25.0 million of the net proceeds of our initial public offering were used in funding this network of field stations over six years. We plan to use advanced genetic research provided by CanaVialis to select and breed sugarcane varieties for each of these new production environments.
In December 2009, Cosan S.A. and Amyris S.A. entered into a letter of intent agreement for the adoption of technology developed by Amyris for the production of biofuels with high added value in one of our mills. Together, we plan to invest up to R$50 million. This investment will also allow for the production of farnasene, a chemical component that results from fermentation of sugarcane syrup with yeasts. Cosan and Amyris are currently studying how to implement the partnership and obtain the required capital for the project.
Cosan S.A. and Amyris announced on June 13, 2011 that they have executed a Joint Venture Implementation Agreement as the final step toward the commencement of operations in Novvi SA, the Brazilian company established for the worldwide development, production and commercialization of renewable base oils made from Biofene, Amyris’ renewable farnesene. In December 2010, the parties executed an agreement to set the preliminary terms and the general conditions to conduct a set of business, technical and commercial studies and tests with the goal to assess the feasibility of the formation and implementation of a joint venture. The parties have now completed feasibility studies and are establishing the operating joint venture entity.
Environmental Regulations
We are subject to various Brazilian federal, state and local environmental protection and health and safety laws and regulations as well as foreign environmental protection and health and safety laws and regulations governing, among other things:
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·
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the generation, storage, handling, use and transportation of hazardous materials;
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·
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the emission and discharge of hazardous materials into the ground, air or water; and
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·
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the health and safety of our employees.
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We may not have been or may not be at all times in complete compliance with such laws and regulations. Violation of these laws and regulations can result in substantial fines, administrative sanctions, criminal penalties, revocations of operating permits and/or shutdowns of our facilities.
We may be required to repair or remediate environmental damage we cause, as well as damage caused by third-party subcontractors. Additionally, under certain environmental laws, we could be held strictly liable for all of the costs relating to any contamination at our or our predecessors’ current and former facilities and at third-party waste disposal sites. We could also be held liable for any and all consequences arising out of human exposure to hazardous substances such as pesticides and herbicides or other environmental damage.
Permits. Certain environmental laws also require us to obtain from governmental authorities permits, licenses and authorizations to install and operate our mills, to burn sugarcane, and to perform some of our other operations. In addition, under federal and state laws, we are required to obtain authorizations to use water resources for irrigation and industrial purposes. Violations of such laws and regulations can result in the revocation or modification of our licenses, permits and authorizations, as well as administrative sanctions, fines and injunctions for the individuals and entities involved.
In Brazil, prior to the construction, setting up, extension or operation of facilities or the performance of activities that use natural resources or that may have a current or potential polluting effect, environmental licenses must be obtained from the proper federal, state and/or municipal governmental authorities. In issuing such environmental licenses, the competent governmental authority establishes conditions, restrictions and inspection measures applicable to the project, according to environmental laws and administrative regulations, including pollution control and environmental management requirements.
We are subject to the regulations of the Companhia de Tecnologia de Saneamento Ambiental—CETESB, the pollution control and remediation agency of the State of São Paulo, the AGMA – Agência Goiana de Meio-Ambiente, the pollution control and remediation agency of the State of Goiás and the IMASUL – Instituto de Meio-Ambiente do Mato Grosso do Sul, the pollution control and remediation agency of the State of Mato Grosso do Sul.
Environmental Licensing of Cosan. On March 31, 2011, we operated 24 mills (comprising four sugar refineries), two port facilities and numerous warehouses. All 24 mills obtained environmental operating licenses. Our port facilities have been excused from obtaining an installation license, which is granted to authorize setting up the project based on specifications provided for in the approved plans, programs and designs, including measures of environmental control and further conditions. We have obtained 10 operating licenses for our generation projects and we are in the process of obtaining licenses for two other cogeneration projects that will start operating in the next two years.
Sugarcane Burning. São Paulo state and certain local governments have established laws and regulations that limit our ability to burn sugarcane or that reduce and/or eliminate the burning of sugarcane entirely. São Paulo State regulation establishes that sugarcane burning must end by 2021 in areas where the terrain allows for mechanized harvesting, and by 2031 in all other areas. We have voluntarily committed ourselves to the Agri-Environmental Sugarcane Protocol, which establishes accelerated deadlines for the reduction of sugarcane burning. By signing this protocol, we committed to eliminate the sugarcane burning by 2014 in mechanized areas and by 2017 in non-mechanized areas. For our new plantation areas we have committed not to burn sugarcane.
For areas that are suitable for the replacement of a manual with a mechanical harvest, the burning of sugarcane must be reduced as follows:
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·
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70% of the harvested area by 2010; and
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·
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100% of the harvested area by 2014.
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For areas that do not technically allow the replacement of a manual harvest for a mechanical harvest, the burning of sugarcane must be reduced as follows:
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·
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30% of the harvested area by 2010; and
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·
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100% of the harvested area by 2017.
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Sugarcane producers are also required to burn sugarcane at least one kilometer from urban centers, at least 25 meters from telecommunication stations, at least 15 meters from electricity transmission and distribution lines and at least 15 meters from federal and state railways and highways. The law requires sugarcane producers to give prior notice of the burning of sugarcane to the State of São Paulo Department for the Protection of Natural Resources (Departamento Estadual de Proteção de Recursos Naturais), and to the owners of lands surrounding the area where the sugarcane will be burned.
Certain local governments have recently enacted more stringent laws that prohibit sugarcane burning completely. It is unclear at this point which, if any, of our properties might be affected by these local laws. In addition, the laws in this area are uncertain, complex and subject to change at any time.
There is a likelihood that increasingly stringent regulations relating to the burning of sugarcane will be imposed by the State of São Paulo and other governmental agencies in the near future. As a result, the costs to comply with existing or new laws or regulations are likely to increase, our ability to operate our own plants and harvest our sugarcane crops may be adversely impacted, and the price we may have to pay to purchase already processed sugar may increase.
Our actual or alleged failure to comply with these laws and regulations has subjected and will in the future subject us to legal and administrative actions. These actions can impose civil or criminal penalties on the company, including a requirement to pay penalties or fines, an obligation to make capital and other expenditures or an obligation to materially change or cease some operations.
We cannot assure you that the above costs, liabilities and adverse impacts to our operations will not result in a material adverse effect on our business, results of operations or financial condition.
Brazilian Forestry Code. We are subject to the Brazilian Forestry Code, which prohibits land use in certain permanently protected areas, and obligates us to maintain and register a forestry reserve in each of our rural landholdings covering at least 20% of the total area of such land. In those properties where the legal forestry reserve does not meet the legal minimum, we are permitted to perform gradual reforestation until 100% of the legal forestry reserve is restored. We are currently performing the gradual reforestation of our properties and are in the process of recording this reforestation in the registries of our landholdings, as required by applicable law. If we violate or fail to comply with the Brazilian Forestry Code, we could be fined or otherwise sanctioned by regulators.
Environmental Proceedings. We are party to a number of administrative and judicial proceedings for actual or alleged failure to comply with environmental laws and regulations which may result in fines, shutdowns, or other adverse effects on our operations.
Non-compliance with environmental law is subject to administrative, civil and/or criminal sanctions.
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·
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Civil Liability: Brazilian law provides for strict and joint and several liability for polluters (i.e. persons or legal entities, private or public, which are directly or indirectly responsible for an activity that causes environmental damage). Strict liability means that a party can be held responsible regardless of its knowledge, fault and degree of care or intent. Joint and several liability means that any individual party directly or indirectly involved with the cause of the damage may be sued for the entire amount of such damage, with the right to proportionally recover the losses from the other responsible parties.
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In public civil actions against polluters, the plaintiff may seek money damages or specific performance to, among other things, (1) discontinue polluting activities; (2) restore the environment; or (3) fulfill any environmental law requirement. Usually money damages are awarded to plaintiffs as compensation for losses or are imposed on polluters when the environment may not be restored. The plaintiff may also obtain preliminary or temporary injunctions against polluters by proving the existence of irreparable damages to the environment or public health.
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Criminal and administrative liability: Brazilian law provides for significant administrative and criminal sanctions against legal entities and individuals that violate regulations regarding the protection of natural resources, pollution control and fuel leaks. The sanctions for administrative infractions include: (1) warnings, (2) fines, which may range from R$50 to R$50 million (US$27.93 to US$27.9 million) that can be doubled or tripled in case of recidivism, (3) partial or total interruption or suspension of business operations, (4) demolition, (5) cancellation of licenses, (6) loss or restriction of tax incentives and benefits, (7) loss or suspension of eligibility for credit lines with official credit institutions, and (8) prohibition from contracting with the government. The criminal penalties imposed may involve imprisonment or confinement, may limit or restrict certain rights (such as the temporary suspension or cancellation of an authorization, or prohibition to contract with public bodies), and may also include a monetary penalty.
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We have made and expect to make substantial capital expenditures on an ongoing basis to continue to ensure our compliance with environmental laws and regulations, including those mentioned above. Our environmental compliance costs are likely to increase as a result of the projected increase in our production capacity. In addition, as a result of future expansion of our activities, as well as future regulatory and other developments, the amount and timing of future expenditures required for us to remain in compliance with environmental regulations could increase substantially from their current levels.
Insurance
Cosan S.A. maintains insurance covering all of our inventory of ethanol and sugar and buildings and equipment in certain of our mills, against fire, lightning and explosions of any nature, in an aggregate amount of approximately R$4.5 billion (R$ 3.7 billion or US$2.4 billion). Our inventories of ethanol and sugar located in different mills and warehouses are covered by insurance policies that are annually renewed.
Cosan Portuária/Teaçu maintains civil liability insurance providing protection against any damage caused to third parties in its warehouses, equipment and third parties goods and boats in an aggregate amount equal to approximately R$232 million (US$124 million). Cosan Portuária/Teaçu also maintains employers’ civil liability insurance.
CLE maintains real property insurance against fire, lightning and explosions of its buildings and equipments. The inventories of fuels and lubricants are located in warehouses and are insured under a policy that expires in October 2011. CLE also maintains insurance covering buildings and equipment located in certain terminals, warehouses, tanks, other facilities and services stations. CLE maintains an insurance policy covering products that are transported by truck, ship, ferry and trains. CLE maintains a third party liability policy covering damages to third parties.
We do not anticipate having any difficulties in renewing any of our insurance policies and believe that our insurance coverage is reasonable in amount and consistent with industry standards in Brazil.
The list of subsidiaries included in our audited consolidated financial statements for fiscal year 2011 and fiscal year 2010 is included in Note 2.2 to our consolidated financial statements attached hereto. See also exhibit 8.1 to this Annual Report.
The following table sets forth the amounts related to property, plant and equipment at the end of fiscal year 2011 and fiscal year 2010:
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As of March 31,
|
||||||||
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2011
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2010
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|||||||
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(R$ million)
|
||||||||
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Land and rural properties
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1,263.2 | 1,041.8 | ||||||
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Buildings and improvements
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1,122.3 | 933.3 | ||||||
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Machinery and equipment
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4,980.4 | 3,607.2 | ||||||
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Aircraft
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30.9 | 18.1 | ||||||
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Rail cars and locomotives
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341.6 | 0 | ||||||
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Boats and vehicles
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323.0 | 223.3 | ||||||
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Furniture, fixtures and computer equipment
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137.2 | 119.1 | ||||||
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Construction in progress
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1,218.8 | 1,408.3 | ||||||
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Advances for purchase of property, plant and equipment
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148.9 | 200.6 | ||||||
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Parts and components to be periodically replaced
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1,043.3 | 557.4 | ||||||
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Other
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5 | 1 | ||||||
| 10,614.6 | 8,110.1 | |||||||
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Accumulated depreciation and amortization
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(2,634.0 | ) | (1,995.6 | ) | ||||
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Total
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7,980.6 | 6,114.5 | ||||||
The following table sets forth the types of products produced by and the production capacity and production volumes of each of our mills for the periods indicated:
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Name
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Products
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Annual Crushing Capacity
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Sugarcane Volume Processed
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|||||||||||||||||||
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For Fiscal Ended
March 31,
|
Crop
|
Crop
|
||||||||||||||||||||
|
2011
|
2010
|
2010/2011 | 2009/2010 | |||||||||||||||||||
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(in millions of tons)
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||||||||||||||||||||||
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Da Barra
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sugar, ethanol and cogeneration
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8.20 | 6.37 | 7.10 | 6.37 | 7.10 | ||||||||||||||||
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Bonfim
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sugar, ethanol and cogeneration
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4.32 | 4.30 | 4.22 | 4.30 | 4.22 | ||||||||||||||||
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Costa Pinto
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sugar, ethanol and cogeneration
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4.64 | 4.05 | 4.53 | 4.05 | 4.53 | ||||||||||||||||
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Junqueira
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sugar, ethanol and cogeneration
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3.12 | 2.86 | 2.95 | 2.86 | 2.95 | ||||||||||||||||
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Rafard
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sugar, ethanol and cogeneration
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2.84 | 2.21 | 2.45 | 2.21 | 2.45 | ||||||||||||||||
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Univalem
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sugar, ethanol and cogeneration
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2.79 | 2.33 | 2.11 | 2.33 | 2.10 | ||||||||||||||||
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Santa Helena
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sugar, ethanol and cogeneration
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2.47 | 1.81 | 2.04 | 1.81 | 2.04 | ||||||||||||||||
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Ipaussu
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sugar, ethanol and cogeneration
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2.33 | 1.95 | 2.03 | 1.95 | 2.03 | ||||||||||||||||
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Diamante
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sugar, ethanol and cogeneration
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2.31 | 2.06 | 2.05 | 2.06 | 2.05 | ||||||||||||||||
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Serra
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sugar, ethanol and cogeneration
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2.16 | 1.91 | 1.91 | 1.91 | 1.91 | ||||||||||||||||
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Tamoio
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sugar and cogeneration
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1.57 | 1.28 | 1.30 | 1.28 | 1.30 | ||||||||||||||||
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São Francisco
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sugar and cogeneration
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1.82 | 1.41 | 1.54 | 1.41 | 1.54 | ||||||||||||||||
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Dois Córregos
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sugar, ethanol and cogeneration
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1.67 | 1.44 | 1.39 | 1.44 | 1.39 | ||||||||||||||||
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Destivale
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sugar, ethanol and cogeneration
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1.62 | 1.42 | 1.41 | 1.42 | 1.41 | ||||||||||||||||
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Mundial
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sugar, ethanol and cogeneration
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1.47 | 1.44 | 1.27 | 1.44 | 1.27 | ||||||||||||||||
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Gasa
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sugar, ethanol and cogeneration
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2.09 | 3.34 | 2.95 | 3.34 | 2.95 | ||||||||||||||||
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Bom Retiro
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sugar, ethanol and cogeneration
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1.49 | 1.17 | 1.32 | 1.17 | 1.32 | ||||||||||||||||
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Benálcool
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sugar, ethanol and cogeneration
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1.22 | 1.08 | 1.02 | 1.08 | 1.02 | ||||||||||||||||
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Jataí
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sugar, ethanol and cogeneration
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2.1 | 1.94 | 0.34 | 1.94 | 0.34 | ||||||||||||||||
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Caarapó
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sugar, ethanol and cogeneration
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2.0 | 1.86 | 0.14 | 1.86 | 0.03 | ||||||||||||||||
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Tarumá
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sugar, ethanol and cogeneration
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4.50 | 3.89 | 3.07 | 3.89 | 4.18 | ||||||||||||||||
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Maracaí
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sugar, ethanol and cogeneration
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3.50 | 3.27 | 2.36 | 3.27 | 3.23 | ||||||||||||||||
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Paralcool
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sugar, ethanol and cogeneration
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1.29 | 1.09 | 0.81 | 1.09 | 1.05 | ||||||||||||||||
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Araraquara….
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sugar, ethanol and cogeneration
|
(a)
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(a)
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Mill acquired in March 2011
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The following map shows the location of our mills:
During the last several years, our business has grown mainly due to acquisitions and investments in greenfield projects. Because of the increase in acquisition prices in recent years, we started to invest in the expansion of certain of our mills to improve our overall crushing capacity.
We estimate that we may gain up to an additional 10 million tons of crushing capacity in the next few years upon investing approximately R$ 1,140.0 million, if we decide to continue with these projects on the existing mills (brownfield). We believe that our expansion plans provide us with the following benefits: (1) investments per ton of additional crushing capacity are significantly lower than the current relative acquisition costs in the Brazilian market; and (2) expanding our mills will allow us to gain scale and improve our production processes, thereby reducing operating costs and improving yields.
None.
You should read the following discussion along with our audited consolidated financial statements and the related notes to our audited consolidated financial statements as of and for fiscal year 2011, the fiscal year ended 2010. The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions, including those discussed under “Item 3. Key Information—D. Risk Factors” and described in this annual report generally. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, these forward-looking statements. See “Forward-Looking Statements.”
Consolidated Financial Statements
The discussion in this section is based on our audited consolidated financial statements at March 31, 2011 and March 31, 2010 and for the fiscal years ended March 31, 2011 and 2010. We use IFRS for financial reporting purposes. Our audited consolidated financial statements include the financial statements of the Company and its controlled subsidiaries (i.e., companies as to which the Company holds an ownership interest greater than 50%). Investments in entities in which the Company does not control but has significant influence over managing the business, are accounted for using the equity method. All significant intercompany accounts and transactions are eliminated upon consolidation.
Segment Presentation
In connection with some management changes and realignment of the business, we combined the previously separate sugar and ethanol segments into the Sugar and Ethanol segment. As of March 31, 2011, we operated in three segments: sugar and ethanol (“S&E”); fuel and lubricants (“CCL”) and distribution and sugar logistics (“Rumo Logística”). The sugar and ethanol segment mainly operates and produces a broad variety of sugar products, including raw, organic, crystal and refined sugars and consumer products under the “Da Barra” and “União” brands, which are sold to a wide range of customers in Brazil and abroad, as well as produces and sells hydrous, anhydrous and industrial ethanol, which are sold primarily to the Brazilian market. The sugar and ethanol segment also includes our energy co-generation activities and land development businesses. We have retained the fuel and lubricants distribution segment which principally distributes fuels and also produces and sells lubricants. Finally, the acquisition in fiscal year 2010 of Teaçú and Curupay, and their combination with our Novo Rumo business makes up our new operating segment called Sugar Logistics. The Sugar Logistics segment provides logistics services for the transport, storage and port lifting of sugar for us and third parties. Because we use the same assets to produce products for both our Brazilian and export markets, we do not identify assets by market. See Note 29 of our consolidated financial statements attached hereto.
Factors Affecting Our Results of Operations
Our results of operations have been influenced and will continue to be influenced by the following key factors:
Acquisitions, Partnerships and Corporate Restructurings
Since May 2004, we have expanded our annual sugarcane crushing capacity by approximately 162% from 24.8 million tons to approximately 65 million tons as of March 31, 2011, primarily through acquisitions, partnerships and corporate restructurings (the completion of the Nova América acquisition in June 2009 added 10.6 million tons to our sugarcane crushing capacity). As a result of these acquisitions, partnerships and corporate restructurings, our net sales and gross profit have increased significantly. However, we have not realized all of the expected cost savings from these transactions, as they have also increased our sugarcane planting-related general and administrative expenses and capital expenditures in order to improve the condition of certain sugarcane fields that we acquired under these transactions. See “Item 4. Information on the Company—A. History and Development of the Company—Acquisitions, Partnerships and Corporate Restructurings.”
Sugar
The profitability of our sugar products is principally affected by fluctuations in the international price of raw sugar and in the real/dollar exchange rate. International raw sugar prices are determined based on the New York Board of Trade Futures Contract No. 11, or “NY11”. Refined sugar trades at a premium to raw sugar, known as the “white premium”, and its price is determined based on the London International Financial Futures and Options Exchange Contract No. 5, or “LIFFE No. 5”. Prices are affected by the perceived and actual supply and demand for sugar and its substitute products. The supply of sugar is affected by weather conditions, governmental trade policies and regulations and the amount of sugarcane and sugar beet planted by farmers, including substitution by farmers of other agricultural commodities for sugarcane or sugar beet. Demand is affected by growth in worldwide consumption of sugar and the prices of substitute sugar products. From time to time, imbalances may occur between overall sugarcane and sugar beet processing capacity, sugarcane and sugar beet supply and the demand for sugar products. Prices of sugar products are also affected by these imbalances, which, in turn, impact our decisions regarding whether and when to purchase, store or process sugarcane, to produce sugar or whether to produce more ethanol.
The table below sets forth the prices for raw sugar NY11 for the periods indicated:
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Sugar NY11 (US$/lb)
|
||||||||
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Initial quote
|
0.1670 | 0.1273 | ||||||
|
Closing quote
|
0.2711 | 0.1659 | ||||||
|
Daily average quote
|
0.2376 | 0.2080 | ||||||
|
Monthly average quote
|
0.2391 | 0.2138 | ||||||
|
High quote
|
0.3531 | 0.2990 | ||||||
|
Low quote
|
0.1367 | 0.1222 | ||||||
Source: NYBOT; prices from the 1st Generic Future
The table below sets forth the prices for refined sugar LIFFE for the periods indicated:
|
Sugar LIFE (US$/ton)
|
||||||||
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Initial quote
|
481,60 | 399.20 | ||||||
|
Closing quote
|
711.70 | 504.00 | ||||||
|
Daily average quote
|
639.66 | 557.03 | ||||||
|
Monthly average quote
|
643.84 | 569.97 | ||||||
|
High quote
|
844.50 | 759.00 | ||||||
|
Low quote
|
437.80 | 392.70 | ||||||
Source: LIFFE; prices from the 1st Generic Future
Ethanol
Our ethanol products are affected by domestic Brazilian and international prices of ethanol, competition, governmental policies and regulations and market demand for ethanol as an alternative or additive to gasoline. The price for ethanol we sell in Brazil is set in accordance with market prices, using indices published by the Agriculture School of the University of São Paulo (Escola Superior de Agricultura Luiz de Queiroz—ESALQ) and BM&FBOVESPA as a reference. Prices for ethanol we export are set based on international market prices, including the New York Board of Trade’s recently-launched ethanol futures contract. Prices for the industrial alcohol and bottled alcohol products we sell are also set based on market prices and have been historically higher than market prices for ethanol.
The table below sets forth the prices for hydrous ethanol in the Brazilian market for the periods indicated:
|
Hydrous Ethanol Esalq (US$/thousand liters)
|
||||||||
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Initial quote
|
431.10 | 248.62 | ||||||
|
Closing quote
|
982.20 | 420.11 | ||||||
|
Daily average quote
|
557.85 | 453.91 | ||||||
|
Monthly average quote
|
576.22 | 455.01 | ||||||
|
High quote
|
982.20 | 677.14 | ||||||
|
Low quote
|
381.10 | 248.62 | ||||||
Source: ESALQ.
The table below sets forth the prices for anhydrous ethanol in the Brazilian market for the periods indicated:
|
Anhydrous Ethanol Esalq (US$/thousand liters)
|
||||||||
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Initial quote
|
495.70 | 286.43 | ||||||
|
Closing quote
|
1.157.20 | 489.18 | ||||||
|
Daily average quote
|
636.49 | 518.70 | ||||||
|
Monthly average quote
|
662.19 | 518.87 | ||||||
|
High quote
|
1.157.20 | 734.09 | ||||||
|
Low quote
|
435.60 | 286.43 | ||||||
Source: ESALQ.
Demand for Fuels
Demand for gasoline, ethanol and diesel is susceptible to volatility related to the level of economic activity in Brazil and may also fluctuate depending on the performance of specific industries in the Brazilian market. We expect that a decrease in economic activity would adversely affect demand for fuels.
While Brazil’s GDP decreased by 0.2% in 2009 amid the ongoing global economic crisis, Brazil was among the first major economies to recover from the crisis, experiencing strong GDP growth of 7.5% in 2010. Over the past few years, generally positive economic trends coupled with the availability of credit have resulted in record levels of vehicle sales. Moreover, despite record sales, the current vehicle fleet in Brazil is small compared to other Latin American countries, with 7.2 inhabitants per vehicle, whereas Argentina has 4.9 and the U.S. has 1.2 inhabitants per vehicle, according to ANFAVEA. Economic slowdowns tend to have a greater impact on the sales of diesel fuel, which is primarily used in Brazil by trucks and industrial businesses most affected by a slowdown in the economy. We expect demand for our products, particularly diesel fuels, to continue to be closely tied to economic activity.
Currency Fluctuations
In fiscal year 2011, 84.9% of our net sales were invoiced in reais and 15.1% of our net sales were invoiced in U.S. dollars or linked to dollar prices. A devaluation of the real affects our consolidated financial statements by:
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reducing our real-denominated net sales as a result of the translation of those results into U.S. dollars for consolidation purposes;
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reducing our real-denominated costs of goods sold, selling, general and administrative expenses, as well as other real-denominated operating costs as a result of the translation of those amounts for consolidation purposes into U.S. dollars;
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generating foreign exchange transaction gains on U.S. dollar-denominated monetary assets and foreign exchange liabilities on U.S. dollar-denominated liabilities of our Brazilian subsidiaries, which are reflected in our consolidated statement of operations;
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generating financial losses based on changes in market value of our financial derivatives; and
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indirectly affecting the international market price of sugar.
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Similarly, an appreciation of the real in relation to the U.S. dollar would have opposite effects.
Seasonality
Our business is subject to seasonal trends based on the sugarcane growing cycle in the Center-South region of Brazil. The annual sugarcane harvesting period in the Center-South region of Brazil begins in April and ends in December. This creates fluctuations in our inventory, usually peaking in December to cover sales between crop harvest (i.e., January through March), and a degree of seasonality in our gross profit.
Inflation
Inflation rates in Brazil were 12.1% in 2004, 1.2% in 2005, 3.8% in 2006, 7.7% in 2007, and 9.1% in 2008, negative 1.43% in 2009, and 6.3% in 2010 as measured by the General Price Index—Internal Availability. Inflation affects our financial performance by increasing certain of our operating expenses denominated in reais (and not linked to the U.S. dollar). These operating expenses include labor costs, leases, selling and general administrative expenses. However, inflation did not have a material impact on our business for the periods presented.
Cost Structure
Our cost structure may be divided into costs that are linked to the prices of our products and costs that are not linked to the prices of our products. Two of our principal cost components, raw materials and land leases, are linked to the prices of our products. Accordingly, we adjust the prices of our products to follow fluctuations in the cost of our raw materials and leased land, substantially minimizing the impact of this cost volatility on our results of operations. In addition, another relevant portion of our costs is represented by agricultural and industrial inputs, some of which are imported and which are also subject to price fluctuations primarily as a result of exchange rate variations. As the majority of our net sales are derived from exports, a substantial portion of fluctuations in the costs of these inputs is offset by similar fluctuations in our Brazilian and international prices, substantially minimizing the impact of this cost volatility on our results of operations.
Other Factors
Other factors that will impact the results of our ethanol and sugar operations include:
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hedging transactions (as discussed under “Hedging Transactions and Exposures”);
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trade barriers in U.S., European and other markets that currently limit access to their domestic sugar industry through quotas, subsidies and restrictions on imports;
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the evolving use of ethanol derivatives as an alternative to oil derivatives and as a cleaner-burning fuel, derived from renewable sources;
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the use of ethanol as a cleaner-burning fuel, derived from renewable sources;
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changes in international prices of oil (denominated in U.S. dollars) and related changes in the domestic prices of oil (denominated in reais );
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the growth rate of the global economy and its resulting corresponding growth in worldwide sugar consumption;
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the growth rate of Brazil’s gross domestic product, which impacts the demand for our products and, consequently, our sales volume in Brazil; and
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the tax policies adopted by the Brazilian federal government and the governments of the Brazilian states in which we operate, and our resulting tax obligations.
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Critical Accounting Policies
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities at the end of the reporting period. Such estimates and assumptions are reviewed on a continuous basis and changes are recognized in the period in which the estimates are revised and in any future periods affected.
A significant change in the facts and circumstances on which judgments, estimates and assumptions are based, may cause a material impact on the results and financial condition of the Company. The significant judgments, estimates and assumptions under IFRS are as follows:
Deferred income taxes and social contribution. Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. For further detail on deferred income taxes see Note 18 of our consolidated financial statements attached hereto.
Biological Assets. Biological assets are measured at fair value at each reporting date and the effects of changes in fair value between the periods are allocated directly to cost of goods sold. For further detail on the assumptions used see Note 13 of our consolidated financial statements attached hereto.
Sugar production depends on the volume and sucrose content of sugarcane grown or supplied by farmers located near the plants. The yield of the crop and the sucrose content in sugarcane mainly depend on weather conditions such as rainfall rate and temperature, which may vary. Historically, weather conditions have caused volatility in the ethanol and sugar, and consequently in our operating results because they undermine or reduce crop yields. Future climate conditions may reduce the amount of sugar and sugarcane that the Company will obtain in a particular season or in the sucrose content of sugarcane. Additionally, our business is subject to seasonality according to the growth cycle of sugarcane in South-Central region of Brazil. The period of annual harvest of sugarcane in South-Central region of Brazil begins in April / May and ends in November / December. This creates variations in stock, usually high in November to cover sales between crop (i.e. from December to April) and a degree of seasonality in gross profit from sales of ethanol and sugar significantly lower in the last quarter of fiscal year. The seasonality and any reduction in the volume of sugar recovered could have a material adverse effect on our operating results and financial condition.
Intangible assets and Property, Plant and Equipment (“P,P&E”). The calculation of depreciation and amortization of intangible assets and P,P&E includes the estimation of the useful lives. Also, the determination of the acquisition date fair value of intangible assets and P,P&E acquired in business combinations is a significant estimate. The Company annually performs a review of impairment indicators for intangible assets and P,P&E. Also, an impairment test is undertaken for goodwill. An impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The key assumptions used to determine the recoverable amount for the different cash generating units for which goodwill is allocated are further explained in Note 15 of our consolidated financial statements attached hereto.
Share based payments. Cosan S.A. measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The estimation of fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the assumption of the expected life of the share option, volatility and dividend yield. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 29 of our consolidated financial statements attached hereto.
Pension benefits. The cost of defined benefit pension plans and other post employment medical benefits and the present value of the pension obligation is determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual results in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. A defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Further details about the assumptions used are included in Note 27 of our consolidated financial statements attached hereto.
Fair value measurement of contingent consideration. Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date. Further details about the assumptions used in accounting for business combinations are included in Note 19 of our consolidated financial statements attached hereto.
Fair value of financial instruments. When the fair value of financial assets and liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For further details on financial instruments refer to Note 26 of our consolidated financial statements attached hereto.
Hedging Transactions and Exposures
We hedge part of the future price risk of our sugar production estimated to be exported and exchange rate derivative transactions, using future contracts, options and swaps.
Starting April 1, 2010, we adopted hedge accounting in the cash flow hedge category for certain financial derivative instruments designated for covering price risk and foreign exchange variance risk on revenues from sugar exports. It should be noted that in fiscal year 2010, we did not adopt hedge accounting, and as a consequence the results from derivatives in fiscal years 2011 and 2010 are not comparable since the gains and losses from derivative instruments in the current year financial results refer only to the derivative instruments not designed for hedge accounting and the non-effective portion of the designed hedge.
At March 31, 2011 we had 1,308.7 thousand tons of sugar hedged through Sugar #11 Future contracts at the average price of US$21.9 per pound while the NY11 price was US$27.1 per pound. The market value of the future derivatives portfolio on March 31, 2011 was R$ 86.4 million. We had foreign currency derivatives with a notional amount of R$ 580.4 million hedged through futures and forward contracts (net position) at the average rate of R$1.73 per US$1.00, while the existing exchange rate was R$1.687 per US$1.00, resulting in a market value of R$ 9.8 million.
Our hedging strategy seeks to protect us from cash flow risks caused by commodities price and exchange rates fluctuations. However, because we record derivatives at fair value, fluctuations in such derivative prices may cause significant fluctuations in our net profit in the future resulting from the mark to market accounting. We recorded gains of R$54.7 million relating to our derivative transactions in fiscal year 2011, R$ 354.8 million relating to our derivative transactions in fiscal year 2010.
The following discussion of our results of operations is based on the financial information derived from our audited consolidated financial statements prepared in accordance with IFRS, unless otherwise stated. In the following discussion, references to increases or decreases in any year are made by comparison with the corresponding prior year, as applicable, except as the context otherwise indicates.
Fiscal Year Ended March 31, 2011 compared to Fiscal Year Ended March 31, 2010
Consolidated Results
The following table sets forth our condensed consolidated income statement for the fiscal years ended March 31, 2011 and 2010:
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For Fiscal Year Ended March 31,
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2011
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2010
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% Variation
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(in millions of reais, except percentages)
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Consolidated Income Statement
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Net sales
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18,063.5 | 15,336.1 | 17.8 | |||||||||
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Cost of goods sold
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(15,150.1 | ) | (13,271.3 | ) | 14.2 | |||||||
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Gross profit
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2,913.4 | 2,064.7 | 41.1 | |||||||||
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Selling expenses
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(1,026.0 | ) | (862.7 | ) | 18.9 | |||||||
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General and administrative expenses
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(545.4 | ) | (501,6 | ) | 8.7 | |||||||
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Other, net
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(33.8 | ) | 37.5 | (190.1 | ) | |||||||
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Gain on tax recovery program
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— | 270.3 | — | |||||||||
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Operational income / (expenses)
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(1,605.2 | ) | (1,056.5 | ) | 51.9 | |||||||
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Income before financial results, equity income of associates and income taxes
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1,308.2 | 1,008.2 | 29.7 | |||||||||
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Equity income of associates
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25.2 | 4.2 | 500.0 | |||||||||
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Financial results, net
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(151.1 | ) | 493.4 | (130.6 | ) | |||||||
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Income before income taxes
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1,182.3 | 1,505.8 | (21.5 | ) | ||||||||
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Income taxes:
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Current
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(85.4 | ) | (78.4 | ) | 8.9 | |||||||
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Deferred
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(329.1 | ) | (344.9 | ) | 4.6 | |||||||
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Net income for the year
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767.8 | 1,082.5 | (29.1 | ) | ||||||||
Net Sales
We report net sales after deducting Brazilian federal and state taxes assessed on gross sales (ICMS, PIS, COFINS, IPI and INSS). Deductions from gross sales in the Brazilian domestic market, which are subject to these taxes, are significantly greater than our deductions from gross sales in export markets. Total sales deductions can be broken down as follows:
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ICMS taxes. ICMS is a state value-added tax assessed on our gross sales in the Brazilian market at a rate that varies by state and product.
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PIS and COFINS taxes. PIS and the COFINS taxes are federal social contribution taxes assessed on our gross sales in the Brazilian market at rates that vary by product.
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IPI taxes. IPI is a federal value-added tax assessed on our gross sales in the Brazilian market at rates that vary by product.
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INSS taxes. INSS taxes are federal social contribution taxes assessed on our gross sales in the Brazilian market of our agribusiness entities at a rate of 2.85%.
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Net sales increased by 17.8% to R$18,063.5 million during the fiscal year ended March 31, 2011, from R$15,336.1 million during the fiscal year ended March 31, 2010, primarily as a result of:
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an increase of 18.8% to R$6.4 billion in net sales in the Sugar and Ethanol segment, or S&E. Despite a difficult harvest due to unfavorable weather conditions that affected the sugarcane, our production increased due to (1) the increase in the use of the installed capacity of two greenfields (Jataí and Caarapó), (2) expansion of our sugar plants and (3) the commencing of operations of other co-generation projects, coupled with better prices of sugar and ethanol;
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an increase in the net sales of CCL (fuels distribution and lubricants segment) by 16.4% to R$11.8 billion, primarily because of the increase of 22.7% in the revenue of diesel, 29.7% in the lubricants and 13.3% of gasoline; and
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in Rumo Logística, an increase in the transportation operations because of our partnership agreement with America Latina Logística S.A., or ALL, primarily responsible for the increase of 183.2% in its net sales to R$448.0 million.
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The table below presents a breakdown of our net sales for the fiscal years ended 2011 and 2010:
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For Fiscal Year Ended March 31,
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2011
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2010
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% Variation
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(in millions of reais, except percentages)
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Net sales
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18,063.5 | 15,336.1 | 17.8 | |||||||||
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Sugar and ethanol net sales
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6,389.2 | 5,380.1 | 18.8 | |||||||||
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Sugar sales
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3,853.4 | 3,377.8 | 14.1 | |||||||||
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Ethanol sales
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2,203.7 | 1,747.6 | 26.1 | |||||||||
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Energy cogeneration
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194.9 | 93.6 | 108.3 | |||||||||
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Other sales
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137.1 | 161.1 | (14.9 | ) | ||||||||
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CCL (fuel distribution and lubricants) net sales
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11,795.3 | 10,145.1 | 16.3 | |||||||||
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Fuels
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10,902.3 | 9,437.3 | 15.5 | |||||||||
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Lubricants
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822.4 | 634.0 | 29.7 | |||||||||
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Other
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70.6 | 73.7 | (4.2 | ) | ||||||||
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Rumo Logística (sugar logistics) net sales
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448.0 | 158.2 | 183.2 | |||||||||
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Port lifting
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118.1 | 142.1 | (16.9 | ) | ||||||||
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Logistics
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305.8 | 16.1 | 1,799.4 | |||||||||
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Other
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24.1 | — | — | |||||||||
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Adjustments and eliminations:
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(569.0 | ) | (347.3 | ) | (63.8 | ) | ||||||
Sugar and Ethanol Sugar sales totaled R$3.85 billion in fiscal year 2011, an increase of 14.1% in relation to the prior period. The main factors contributing to the increase of R$475.6 million were:
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an increase of R$128 million arising from higher volumes sold which were 3.8% higher than the previous fiscal year. Sales in the domestic market increased 17.4%, with 1,238.2 thousand tons reflecting the effect of 12 months of sales as compared to approximately 10 months of sales in fiscal year 2010 following the acquisition of Cosan Alimentos in June 2009, and the greater concentration of total sugar recovered, or TSR, in the sugarcane (139.0 kg / ton of sugarcane compared to 129.8 kg / ton of sugarcane in 2009/10 crop). However, the lower than expected harvest affected sugar production and exports of sugar decreased 1% in comparison to the previous fiscal year amounting to 3,052.6 thousand tons;
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an increase of R$335 million due to a 10% increase in the price of sugar; prices in the domestic market increased by 11.2% in fiscal year 2011 and price in the foreign market increased by 7.4% in fiscal year 2011 when compared to the same previous fiscal year period, due to the effect of hedge accounting, which had a negative impact of R$160.3 million; and
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a higher mix of sugar sold in the domestic market at 29.0% for fiscal year 2011 as compared to 25.0% in the prior fiscal year resulted in a R$13 million increase in sales.
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Ethanol sales in fiscal year 2011 totaled R$2.2 billion, increasing 26.1% or R$456.1 million when compared to fiscal year 2010 primarily due to:
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sales of R$81.2 million arising from the increase in the volume of ethanol sold primarily due to: (1) the acquisition of Cosan Alimentos plants in June 2009 which provided us with increased crushing capacity for the full fiscal year when compared to fiscal year 2010; (2) the greater concentration of TSR and (3) the ramp-up of the greenfields Jataí and Caarapó;
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sales of R$358.3 million, due to a 20.5% increase in the average price of ethanol in the domestic and international markets; and
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sales of R$16.6 million due to increased sales in the domestic market and lower sales in the foreign market, which presented lower average prices than the domestic market.
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Cogeneration sales totaled R$194.9 million through the sale of R$8.9 million in steam and 1,254.0 thousand MWh of energy at an average price of R$148.3/MWh. The growth of 107.0% in the volume sold due to the period from the beginning of operation of new cogeneration units (totaling 10 this year, compared to six in the previous fiscal year) and to the ramp-up of the others.
CCL (fuel distribution and lubricants)
Net sales from CCL for fiscal year 2011 increased by 16.3% to R$11.8 billion, from R$10.1 billion during the fiscal year ended March 31, 2010, primarily due to:
In CCL’s fuel distribution operations:
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an increase of 21.6% in the volume of diesel sold in fiscal year 2011 when compared to fiscal year 2010. This increase occurred due to the following factors:
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an increase of 9.0% in the domestic consumption of diesel according to the ANP, due to the increase in the demand from industrial clients and transportation activities due to the economic recovery in Brazil; and
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gains of market-share in the retail market and in the industrial segment;
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an increase of 11.3% in the volume of gasoline C in fiscal year 2011 as compared to fiscal year 2010, primarily due to increased sales of gasoline C, and the increase in the percentage of flex fuel vehicles users that opted for gasoline C instead of hydrous ethanol; and
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an increase in the average unit prices of ethanol, gasoline and diesel, and of higher sales of diesel and gasoline C in the sales mix, which present higher prices than ethanol.
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In CCL’s lubricants operations:
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an increase of 29.7% in the net sales of lubricants, to R$822.4 million for fiscal year 2011, due to increased sales of premium products, which are higher margin products, and a strong increase in sales volume, which reached 166.4 million liters resulting from the increase of approximately 9.0% in domestic consumption and gains of market share, following increased marketing.
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Rumo Logística (sugar logistics). Rumo Logística’s sales in fiscal year 2011 were 183.2% higher than fiscal year 2010, totaling R$448.0 million, primarily due to transportation operations with ALL, contributing R$305.9 million in sales.
Loading sales revenue was broadly in line with the previous fiscal year, at R$142.2 million in fiscal year 2011; despite an 8.0% reduction in volume, revenues benefited from a 10.4% increase in the loading price.
The lower loaded volume was partly due to the lower than expected harvest, which reduced the amount of sugar available to be exported at the end of the harvest. This effect was partially offset by the increase in prices.
As a result of high transportation volume, revenue per loaded ton in fiscal year 2011 was 3.1 times higher than fiscal year 2010.
Adjustments and Eliminations. The components of our net sales are prepared in accordance with IFRS. Accordingly, we have to perform certain eliminations and adjustments in order to consolidate and prepare our IFRS consolidated financial statements. These adjustments corresponded to R$569.0 million in the fiscal year ended March 31, 2011, as compared to R$347.4 million in the fiscal year ended March 31, 2010.
Cost of Goods Sold
We divide our sugar and ethanol cost of goods sold into two major categories: agricultural costs and industrial costs. Agricultural costs include costs related to the production of sugarcane, acquiring sugarcane from suppliers, fertilizers, personnel costs, delivery and logistical services, land and equipment leases, depreciation and third-party services. Industrial costs include the purchase of raw materials (other than sugarcane), personnel costs, depreciation and other chemical and maintenance expenses. CCL’s cost of goods sold includes petroleum derived products and feedstock purchased from Petrobras and ethanol from distilleries, freight costs between our terminals in our fuel distribution business and additives and packaging materials purchased from third parties in our lubricants business. Rumo Logística’s cost of goods sold includes personnel costs, equipment and port lease agreements, electricity and maintenance costs.
Cost of goods sold increased by 14.2% to R$15.1 billion during the fiscal year ended March 31, 2011, from R$13.3 billion during the fiscal year ended March 31, 2010.
Sugar and Ethanol
The cost of S&E goods sold and services rendered amounted to R$4.4 billion, representing an increase of 9.0%, or R$362 million, compared to the previous fiscal year. The main factors that explain this increase, in addition to the adjustments related to the adoption of IFRS, described in “Presentation of Financial And Other Information”, are:
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the higher volume of sugar and ethanol sold, which was responsible for the increase of R$161.1 million;
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R$360.0 million from sugar origination, characterized by the purchase of raw materials for refining and finished products for later resale and distribution in the domestic market;
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R$54.2 million of ethanol origination in order to benefit from market opportunities;
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an increase of R$234.9 in the average value of total sugar recovered, which represents the total amount of sugar content in the sugarcane, or TSR, calculated by the CONSECANA, which increased from R$0.3492/kg in fiscal year 2010 to R$0.4022/kg in fiscal year 2011, giving rise to a higher cost of leasing of land and of sugarcane from suppliers, resulting in an additional cost of approximately R$234.9 million in fiscal year 2011; and
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these effects were partially offset by the increase in the amount of TSR, from 131.1 kg/ton of sugarcane to 139.9 kg/ton due to more adequate weather conditions reducing the cost to R$187.9 million in the fiscal year 2011.
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CCL (fuel and lubricant distribution)
The cost of goods sold of CCL increased by 16.5% in fiscal year 2011 compared to fiscal year 2010. Excluding the volume factor, the unit cost of R$1,764/cbm in the fiscal year 2011 was 4.9% higher than the previous fiscal year, primarily due to:
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an increase in the cost of ethanol, which impacts not only the hydrous ethanol that will be used in the flex fuel vehicles, but also the anhydrous ethanol that is blended into gasoline C (25% mandatory blend);
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a 1.7% increase in the unit cost of diesel in fiscal year 2011; and
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increased sales of gasoline and diesel which present higher per unit costs than ethanol.
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Rumo Logística
The cost of Rumo Logística’s goods sold in fiscal year 2011 of R$316.5 million represented an increase of 147.0% in fiscal year 2011 compared to fiscal year 2010, due to the commencement of transportation, transfer, storage operations in the interior and contracting of railway freights. On the other hand, loading costs, which already occurred in the previous fiscal year, presented a slight reduction due to the lower loaded volume of bulk and bagged sugar, the latest presenting higher costs.
Selling Expenses
Selling expenses are primarily related to transportation costs, including freight and shipping costs for ethanol, sugar, fuel and lubricant sold in Brazil and exported, as well as storage and loading expenses of ethanol and sugar for export at our and third parties’ port facilities. The major portion of our sales of ethanol in Brazil is sold at the mill to distribution companies, and therefore there are no shipping costs. CCL’s fuel and lubricant marketing expenses, as well as fuel storage expenses, are also included as selling expenses.
Selling expenses increased by 18.9% to R$1,026.0 million during the fiscal year ended March 31, 2011 from R$862.7 million during the fiscal year ended March 31, 2010. This increase was primarily due to higher volumes sold by S&E and CCL segments, resulting in higher freight expenditures.
Sugar & Ethanol
S&E selling totaled R$568.4 million in fiscal year 2011 compared to the R$469.8 million for fiscal year 2010. The increase of 21.0%, or R$98.5 million, was primarily due to:
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the 30% increase in the volume of sugar bagged for export, which represents a higher cost than sugar in bulk;
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significant increases in the volume of retail sugar sold in the domestic market;
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marketing expenses of the União brand; and
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increases in the volume of ethanol in the domestic market in the modality CIF, which implies an increase in the expenditures with freight which was more than offset by its higher price.
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CCL (fuel and lubricant distribution)
CCL’s selling expenses reflected an increase of 14.5%, or R$57.9 million, to R$456.1 million, mainly due to the higher volume sold. In unit terms, selling expenses were in line (R$73.0/cbm) with fiscal year 2010 and benefitted from the higher dilution of fixed expenditures due to the 10.7% increase in volumes sold.
Rumo Logística
Due to the nature of its business, no selling expenses are recorded for Rumo Logística.
General and Administrative Expenses
General and administrative expenses consist of salaries and benefits paid to employees, taxes, expenses related to third-party services, rentals and other expenses.
General and administrative expenses increased to R$545.4 million in fiscal year of 2011 from R$501.7 million in fiscal year of 2010. This increase occurred in all of our businesses, and reflects the efforts and investments that continue to be made to improve controls, management and operating efficiency when investments are completed, as well as non-recurring expenses of R$46 million in association with the closing of the Joint Venture with Shell, including the transition to the Shared Services Center with Shell.
Gain on tax recovery program
In fiscal year 2010 we reported R$ 270.3 million in gains due to our participation in the Programa de Recuperação Fiscal, or REFIS, tax recovery program.
Financial Results, Net
Financial results, net in fiscal year 2011 totaled a net expense of R$151.1 million compared to financial results, net of R$493.4 million in fiscal year 2010.
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For Fiscal Year Ended March 31,
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2011
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2010
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(in millions of R$)
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Financial expenses
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(677.3 | ) | (622.4 | ) | ||||
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Financial income
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188.8 | 202.0 | ||||||
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Foreign exchange variation, net
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282.7 | 559.0 | ||||||
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Derivatives, net
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54.7 | 354.8 | ||||||
| (151.1 | ) | 493.4 | ||||||
Financial Expenses. Our financial expenses primarily consist of: (1) accrued interest on our indebtedness; (2) losses on monetary variation related to our financial investments; (3) losses on foreign exchange variations related to our foreign currency-denominated indebtedness; (4) losses on derivatives (swaps, futures, forwards and options); and (5) fees, commissions and other charges paid to financial institutions.
Expenses of debt charges, net of financial investments yields, represented an increase of 5.7%, when compared to the previous fiscal year, mainly due to the greater average indebtedness. This increase was primarily due to debt financed by BNDES for new investment projects in Rumo Logística (the acquisition of locomotives, railcars and investment in permanent ways) as well as in energy cogeneration projects. In addition, as a result of the adoption of IFRS, we capitalized financial charges to fixed assets, which reduced the financial expenses at R$70.5 million in the current year and R$43.3 million in the previous fiscal year.
Financial Income. Our financial income primarily consists of: (1) gains on monetary variation related to our financial investments; (2) gains on foreign exchange variations related to our foreign currency-denominated indebtedness; (3) gains on derivatives (swaps, futures, forwards and options); (4) income from financial investments; and (5) financial income related to compensation awarded in a legal proceeding against the Brazilian federal government.
Financial income during the fiscal year ended March 31, 2011 totaled R$188.8 million compared to financial income of R$202.0 million during the fiscal year ended March 31, 2010.
Foreign exchange variation, net. Foreign exchange variation, net resulted in R$282.7 million in fiscal year 2011 compared to R$559 million in fiscal year 2010. The positive effects from exchange variation occurred due to the impacts on assets and liabilities denominated in foreign currency. Our gross indebtedness denominated in U.S. dollars was R$3,750.8 million and R$3,618.2 million at March 31, 2010 and March 31, 2011, respectively.
Derivatives, net. Derivatives, net totaled R$54.8 million in fiscal year 2011 compared to R$354.8 million in fiscal year 2010, net of hedge accounting impacts. It should be noted that in fiscal year 2010, we did not adopt hedge accounting and as a consequence the results from derivatives in both years are not comparable since the gains/losses with derivatives in the current year financial results refer only to the derivative instruments not designed for hedge accounting and the non-effective portion of the designed hedge. In addition, as a result of the adoption of IFRS, we measure warrants at fair value. As a result, Cosan’s warrant in Radar was recognized as a derivative gain and totaled R$13.2 million for fiscal year 2011, compared to R$23.9 million in fiscal year 2010.
Starting April 1, 2010, we adopted hedge accounting in the cash flow hedge category for certain financial derivative instruments designated for covering price risk and foreign exchange variance risk on revenues from sugar exports. In fiscal year 2011, there was a deferral (reclassification between results and the “reserve” account in equity) of R$143.3 composed of R$ 217.1 regarding derivative fair value and R$ 73.8 related to deferred income tax. The derivatives will impact the net operating revenue in the next quarters, in accordance with the period of coverage of each one of the designated instruments.
Income Taxes
Current income tax expense increased to R$85.4 million in fiscal year 2011, compared to an expense of R$78.4 million in fiscal year 2010, mainly resulting from the earnings in fiscal year 2010 compared to fiscal year 2011. Deferred income tax expense decreased from R$344.9 million in fiscal year 2010 to R$329.1 million in fiscal year 2011, mainly due to gain from a tax recovery program in the previous fiscal year, which tax effect was R$59.0 million.
Net Income for the year
As a result of the foregoing, we incurred net income of R$767.7 million in fiscal year 2011, compared to a net income of R$1,082.5 million in fiscal year 2010.
Our financial condition and liquidity are influenced by several factors, including:
|
|
·
|
our ability to generate cash flow from our operations;
|
|
|
·
|
the level of our outstanding indebtedness and related accrued interest, which affects our net financial expenses;
|
|
|
·
|
prevailing Brazilian and international interest rates, which affects our debt service requirements;
|
|
|
·
|
our ability to continue to borrow funds from Brazilian and international financial institutions and to obtain pre-export financing from certain of our customers;
|
|
|
·
|
our capital expenditure requirements, which consist primarily of investments in crop planting and the purchase of equipment;
|
|
|
·
|
credit ratings, including factors that may materially influence credit ratings, implications of potential changes in ratings and management’s expectations; and covenant compliance, including the implications of a breach of financial or other covenants and the company’s capacity for additional borrowing under its covenants.
|
Our cash needs have traditionally consisted of working capital requirements, servicing of our indebtedness, capital expenditures related to investments in operations, maintenance and expansion of plant facilities, as well as acquisitions. Our sources of liquidity have traditionally consisted of cash flows from our operations and short and
long-term borrowings. We have financed acquisitions of business and agricultural land through seller financing, third party-financing or capital contributions by our shareholders.
In fiscal year 2011, the cash flow used in investing activities was funded principally by increased borrowing, while in fiscal year 2010, the cash flow used in investing activities was funded principally by operations. In fiscal year 2011, the cash flow generated by operations was used primarily for working capital requirements and to service our outstanding debt obligations. As of March 31, 2011, our consolidated cash and cash equivalents amounted to R$1,271.8 million compared to R$1,110.8 million as of March 31, 2010.
Cash Flow from Operating Activities
We had net cash flows from operating activities of R$2,327.2 million in fiscal year 2011, compared to R$2,209.0 million in fiscal year 2010. This increase was primarily attributable to increased sales, better management of our trade accounts receivable and payable and results from derivative financial instruments and an appreciation of the real against the U.S. dollar.
We had net cash flows from operating activities of R$ 2,209.1 million in fiscal year 2010.This increase was primarily attributable to the 276% increase in gross profit as a consequence of the increase in the sugar and ethanol segment contribution margin (net prices per ton minus unitary costs per ton) and the inclusion of the results of our subsidiary CCL for fiscal year 2010.
Cash Flow Used in Investing Activities
We had net cash flows used in investing activities of R$3,145.7 million in fiscal year 2011, compared to R$2,435.3 million in fiscal year 2010. This variation was mainly attributable to:
|
|
·
|
the acquisition of property, plant and equipment of R$3,037.2 million (including R$745.6 million of sugarcane planting and growing costs) in fiscal year 2011, 19.5% higher than in fiscal year 2010, mainly influenced by investments in (1) increased investment by Rumo Logística, (2) higher operating capital expenditures in CAA, increasing from R$1,229.6 million in fiscal year 2010 to R$1,756.8 million in fiscal year 2011, particularly from the increase in investments in biological assets, interharvest maintenance mechanization and health, safety and environmental costs which offset significant reductions in expansion capital expenditures for greenfield and cogeneration due to the completion of such projects; and
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|
|
·
|
the acquisition of Usina Zanin (R$90.0 million) and a controlling interest in Logispot (R$48.9 million) in fiscal year 2011.
|
Cash Flow from Financing Activities
We had R$980.7 million of net cash inflows from financing activities in fiscal year 2011, compared to R$317.9 million of net cash inflows used in financing activities in fiscal year 2010. The addition of long-term debt, net of repayments, has increased from R$322.6 million in fiscal year 2010 to R$747.9 million in fiscal year 2011, while the financing resources from related parties were represented by a cash outflow of R$152.4 million in fiscal year 2010 and a cash inflow of R$37.1 million in fiscal year 2011. Our cash inflow from financing activities in fiscal year 2011 was partially offset by our increased payments of long-term debt and dividends paid during the period.
As of March 31, 2011, our outstanding debt totaled R$7,232.0 million of which R$957.1 million was short-term debt, including current-portion of long term debt. Our debt consisted of R$3,481.2 million of local currency-denominated debt and R$3,750.8 million of foreign currency-denominated debt.
The table below shows the profile of our debt instruments:
|
Average annual
interest rate
|
As of March 31,
|
April 1, 2009
|
Maturity date
|
||||||||||||||||
|
Description
|
Index
|
2011
|
2010
|
||||||||||||||||
|
Senior Notes Due 2014
|
Dollar (USD)
|
9.5 | % | 576,814 | 631,246 | — |
July 2014
|
||||||||||||
|
Senior Notes Due 2017
|
Dollar (USD)
|
7.0 | % | 658,954 | 720,573 | 936,704 |
February 2017
|
||||||||||||
|
Commercial promissory notes
|
DI – Interbank Deposits
|
3.0 | % | — | — | 1,161,971 |
November 2009
|
||||||||||||
|
BNDES
|
URTJLP
|
2.61 | % | 1,308,034 | 1,053,337 | 230,504 |
October 2025
|
||||||||||||
|
Upon fixed
|
4.5 | % | 242,508 | — | — |
July 2020
|
|||||||||||||
|
UMBND
|
7.1 | % | 38,947 | — | — |
July 2019
|
|||||||||||||
|
Bank Credit Notes
|
CDCA
|
0.6%+CDI
|
31,378 | 62,497 | — |
December 2011
|
|||||||||||||
|
ACC
|
Dollar (USD)
|
1.71 | % | 228,229 | 296,375 | 143,250 |
March 2012
|
||||||||||||
|
Perpetual Notes
|
Dollar (USD)
|
8.3 | % | 1,236,209 | 810,896 | 1,054,119 |
November 2015
|
||||||||||||
|
Resolution 2471 (PESA)
|
IGP-M
|
3.95 | % | 674,392 | 603,504 | 579,856 |
April 2023
|
||||||||||||
|
Pre fixed
|
3.0 | % | 114 | 121 | 129 |
October 2025
|
|||||||||||||
|
Rural Credits
|
Pre fixed
|
6.7 | % | 92,352 | — | — |
October 2011
|
||||||||||||
|
Pre-Payments
|
Dollar (USD) + Libor
|
6.01 | % | 736,472 | 976,277 | — |
February 2016
|
||||||||||||
|
Credit Notes
|
125,0% CDI
|
— | 303,719 | 380,140 | — |
February 2014
|
|||||||||||||
|
Dollar (USD)
|
4.64 | % | 314,105 | 182,831 | — |
February 2013
|
|||||||||||||
|
Pre fixed
|
19.7 | % | 10,142 | — | — |
October 2012
|
|||||||||||||
|
Finame
|
Pre fixed
|
4.92 | % | 517,842 | 104,214 | 1,014 |
July 2020
|
||||||||||||
|
URTJLP
|
2.75 | % | 187,336 | 94,775 | 43,653 |
March 2021
|
|||||||||||||
|
Others
|
Diverse
|
Diverse
|
74,482 | 59,272 | 533,833 |
Diverse
|
|||||||||||||
|
Total Debt
|
7,232,029 | 5,976,058 | 4,685,033 | ||||||||||||||||
|
Current
|
(957,134 | ) | (839,529 | ) | (1,452,297 | ) | |||||||||||||
|
Non-Current
|
6,274,895 | 5,136,529 | 3,232,736 | ||||||||||||||||
Some relevant financing activities for this fiscal year are described below:
On July 5, 2010, Rumo Logística received R$400 million from investment vehicles controlled by TPG and Gávea. As a result of this capital increase, each investor now owns a 12.5% stake at Rumo Logística. Such resources will strengthen Rumo Logística’s capital structure and will be used to fund its R$1.3 billion investment plan.
On October 29, 2010 and on July 13, 2011, Cosan Overseas Limited issued US$300 million and US$200 million respectively, in aggregate principal amount of perpetual notes guaranteed by Cosan S.A. in accordance with Regulation S. These notes bear interest at a rate of 8.25% per year payable quarterly.
Working Capital
As of March 31, 2011, we had working capital of R$1,099.8 million, compared to R$1,312.6 million in fiscal year 2010, primarily attributable to:
|
|
·
|
an increase in the current portion of long-term debt, from R$839.5 million at March 31, 2010 to R$957.1 million at March 31, 2011 related to refinancing of our indebtedness;
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|
|
·
|
an increase in the cash and cash equivalents, from R$1,110.8 million to R$1,271.8 million; and
|
|
|
·
|
an increase in inventories, from R$612.7 million at March 31, 2010 to R$670.3 million at March 31, 2011.
|
We believe our current liquidity and our cash flow from operations will be sufficient to meet our working capital requirements for at least the next 12 months.
Capital Expenditures
Our capital expenditures in property, plant and equipment, including acquisitions (net of cash acquired), expenditures for crop formation and expenditures for purchases of land, were R$3,037.2 million during fiscal year 2011, compared to R$2,545.5 million during fiscal year 2010. The main reason for the increase was the logistics investments made through our subsidiary Rumo Logística.
The following table sets forth our capital expenditures, net of cash received from sale of long term assets, for the fiscal years 2011 and 2010:
|
For Fiscal Year Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(in R$ million)
|
||||||||
|
CAA – Operational
|
||||||||
|
Biological assets
|
745.0 | 647.5 | ||||||
|
Inter-harvest maintenance costs
|
514.2 | 332.4 | ||||||
|
Health, safety and environmental (SSMA) & Sustaining
|
121.9 | 45.0 | ||||||
|
Mechanization
|
124.1 | 30.5 | ||||||
|
Projects CAA
|
251.6 | 174.2 | ||||||
|
Total CAA – Operational
|
1,756.8 | 1,229.6 | ||||||
|
CAA – Expansion
|
||||||||
|
Co-generation projects
|
287.6 | 376.4 | ||||||
|
Greenfield projects
|
66.9 | 462.2 | ||||||
|
Other expansion projects
|
87.2 | 133.4 | ||||||
|
Total CAA – Expansion
|
441.7 | 972.0 | ||||||
|
CAA – Total
|
2,198.5 | 2,201.6 | ||||||
|
CCL
|
191.6 | 130.5 | ||||||
|
Rumo Logística
|
427.9 | 143.8 | ||||||
|
IFRS reclassification
|
219.1 | 69.6 | ||||||
|
Total consolidated capital expenditure
|
3,037.1 | 2,545.5 | ||||||
Sugar and ethanol
In fiscal year 2011, we maintained the high level of investments in plantation and crop treatment and invested R$745.0 million compared to R$647.5 million in fiscal year 2010.
In fiscal year 2011, Cosan maintained the high level of investments in plantation and crop treatment. With the adoption of IFRS, these investments are treated as increases in biological assets, which increased 15% compared to the previous fiscal year. Expenses with interharvest maintenance, increased 54.9% when compared to the prior fiscal year to R$514.2 million.
Investments in Safety, Health and Environment (SSMA) increased of 171.1% in fiscal year 2011 when compared to the prior period. Most of these investments were focused on vineyard projects, which is a byproduct reused as fertilizer in the sugarcane crops, aiming to create less exposure in its transportation from the plant to the agricultural areas.
Investments in agricultural mechanization totaled R$124.1 million in fiscal year 2011, four times what was invested in fiscal year 2010, resulting in the acquisition of agricultural equipment and machinery and alterations to existing equipment to receive sugarcane in a mechanized fashion.
S&E projects represented R$251.6 million of total investments in fiscal year 2011, which was 44.4% higher than the previous fiscal year, reflecting substantial investments in its production units in the processing and agricultural areas.
The investments in cogeneration amounted to R$287.6 million, primarily focused on Ipaussu, Univalem and Bonfim. The investments in Jataí (Goiás) and Caarapó (Matto Grosso do Sul) decreased by 85.5%, as they were in the final stage of investment.
Investments in expansion of capacity of sugar plants totaled R$87.2 million, 34.6% lower than the investments in the same previous fiscal year period. This decrease was due to the conclusion of most of the projects in Gasa, Ipaussu, Bonfim, Junqueira, Tamoio, Costa Pinto and Barra plants.
Fuel distribution and lubricants
In fiscal year 2011, CCL capital expenditures amounted to R$191.6 million, representing an increase of 46.9% when compared to the prior fiscal year. Of this total, R$68.3 million relates to the purchase of distribution rights related to long term contracts with clients, which were not treated as capital expenditures in IFRS. The remaining R$123.3 million are concentrated in the supply and distribution in the terminals of fuels distribution, implementation of new programs and system, especially in the tax area and the updating if the storage system of lubricants.
Rumo Logística (sugar logistics)
Of the total of R$427.9 million invested by Rumo Logística, in line with its business plan, approximately 55% was set aside for the acquisition of locomotives and 45% for investments in construction of permanent roads and terminals in the countryside of São Paulo and in the Santos Port. In line with its business plan to become a multimodal logistics alternative, Rumo Logística acquired, in March 2011, control of Logispot Armazéns Gerais for R$48.9 million.
Indebtedness
Our total debt of R$7,232 million at March 31, 2011 increased 21% as compared to our total debt of R$5,976 million at March 31, 2010. Our short-term debt, comprised of our current portion of long-term debt and interest accrued, represented 13.2% of our total indebtedness at March 31, 2011. Our U.S. dollar-denominated debt at March 31, 2011 represented 52% of our total indebtedness.
As of March 31, 2011, we had total assets of R$19,212.4 million compared to R$16,417.2 million at March 31, 2010. Our total assets increased 16.6%, mainly due to R$ 2 billion level capital expenditure additions (as described above) and biological assets investments of R$745.6 million and a fair value variation amounting to R$381.9 million.
Certain of our long-term debt agreements require entities to comply with certain financial and negative covenants, including the Joint Venture’s debt of US$400.0 million 7.0% senior notes due in 2017 and US$350 million 4.50% Senior Notes due in 2014 which limits the Joint Venture’s ability and the ability of their subsidiaries to, among other things, enter into certain transactions with shareholders or affiliates, engage in a merger, sale or consolidation transactions and create liens.
The Company, including its subsidiaries, are subject to certain restrictive financial covenants set forth in existing loans and financing agreements. For the year ended as at March 31, 2011, the Company and its subsidiaries were in compliance of their debt covenants.
See “Item 4. Information on the Company—B. Business Overview—Research and Development.”
We are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect upon our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information to not necessarily be indicative of future operating results or financial condition.
Leases
The Company and its subsidiaries have operating lease contracts on land used for planting sugarcane and the concession contract to operate the port terminal, which will end within 20 years. The minimum payments related to these obligations are calculated on a straight-line basis over the term of the lease. The costs for these contracts during the years ended March 31, 2011 and 2010 consisted of the following:
|
As of March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(In thousands of R$)
|
||||||||
|
Minimum installment
|
155,800 | 113,953 | ||||||
|
Variable installment
|
186,484 | 112,990 | ||||||
|
Total
|
342,284 | 226,943 | ||||||
In accordance with these land lease contracts, we pay the lessors a certain fixed number of tons of sugarcane per hectare as consideration for the use of the land, and a certain fixed productivity per ton of sugarcane in terms of TSR. The overall volume of TSR is obtained by multiplying the number of hectares leased by the committed tons of sugarcane per hectare by the TSR per ton of sugarcane. The price that we pay for each kilogram of TSR is set by CONSECANA.
Sales
Because the Company and its subsidiaries are mainly engaged in the commodities market, sales are substantially performed at the price on the date of sale. However, the Company and its subsidiaries have several agreements in the sugar market, which undertake to sell volumes of those products in future harvests.
The commitments for the sale of sugar, in tons, March 31, 2011 and 2010 are as follows:
|
As of March 31,
|
||||||||
|
Year
|
2011
|
2010
|
||||||
|
2011
|
— | 2,005,434 | ||||||
|
2012
|
2,279,000 | 1,828,134 | ||||||
|
Total
|
2,279,000 | 3,833,568 | ||||||
Purchases
The Company and its subsidiaries have several commitments for the purchase of sugarcane from third parties in order to secure part of its production in subsequent years. The amount of sugarcane to be acquired has been calculated based on an estimate of the quantity to be ground by area. The amount to be paid by the Company and its subsidiaries is determined at the end of each harvest, according to prices published by CONSECANA.
Purchase commitments by harvest in tons on March 31, 2011 and 2010 are as follows:
|
As of March 31,
|
||||||||
|
Year
|
2011
|
2010
|
||||||
|
2011
|
— | 27,029,473 | ||||||
|
2012
|
25,129,648 | 23,600,912 | ||||||
|
2013
|
21,998,612 | 20,112,639 | ||||||
|
2014
|
18,060,914 | 16,345,120 | ||||||
|
2015
|
15,448,964 | 13,667,148 | ||||||
|
Thereafter
|
119,467,512 | 120,129,217 | ||||||
|
Total
|
200,105,650 | 220,884,509 | ||||||
On March 31, 2011, the regular capacity of sugarcane crushing for the next harvest, considering all units, is approximately 63 million tons (60 million tons in 2010 – unaudited information).
The Company and its subsidiaries have contracts to purchase industrial equipment for maintenance with the purpose of expanding plants, such as to supply the cogeneration project of electricity, with the amount of R$ 396.5 million on March 31, 2011.
Additionally, the Company through its indirect subsidiary Rumo Logística has signed a commitment of railcars and locomotives purchasing, and improvements aimed at the expansion of logistics business to be made in future years as follows:
|
As of March 31,
|
||||||||
|
Year
|
2011
|
2010
|
||||||
|
2011
|
341,647 | 652,678 | ||||||
|
2012
|
178,431 | 126,892 | ||||||
|
2013
|
44,000 | 94,682 | ||||||
|
Total
|
564,078 | 874,252 | ||||||
Guarantees
As of March 31, 2011, we have entered into guarantees contracts with financial institutions relating to legal proceedings, debt, energy auctions and concession agreements, as follows:
|
As of March31,2011
|
||||
|
(In thousands of R$)
|
||||
|
Sugar & ethanol
|
814,145 | |||
|
Fuel distribution
|
191,970 | |||
|
Sugar logistics
|
5,443 | |||
|
Total
|
1,011,558 | |||
The following table sets forth the maturity schedule of our material contractual financial obligations at March 31, 2011:
|
Total
|
Less than 1 year
|
1 to 3 years
|
3 to 5 years
|
More than 5 years
|
||||||||||||||||
|
(in millions of R$)
|
||||||||||||||||||||
|
Long-term debt obligations(1)
|
7,232 | 957 | 1,508 | 1,789 | 2,978 | |||||||||||||||
|
Operating lease obligations(2)
|
11,324 | ― | 2,667 | 1,896 | 6,761 | |||||||||||||||
|
Purchase obligations
|
564 | 342 | 222 | ― | ― | |||||||||||||||
|
Total
|
19,120 | 1,299 | 4,397 | 3,685 | 9,739 | |||||||||||||||
|
(1)
|
Less than one year amounts include accrued interest over existing long-term debt installments.
|
|
(2)
|
Purchase obligations were valued at the amount of sugarcane committed by a TSR of 140.7 kg per ton, at a price of R$0.4022, per kg as defined by CONSECANA for March 2011.
|
Since March 31, 2011, there have been no material changes to the contractual obligations described above.
Our long-term debt consists primarily of:
|
|
·
|
R$1,040.2 million of export pre-payment notes due from 2012 through 2016;
|
|
|
·
|
R$ 741.6 million perpetual notes with call option for Cosan exercised on May, 2011;
|
|
|
·
|
R$ 658.9 million senior notes due February 2017;
|
|
|
·
|
R$ 576.8 million senior notes due February 2014;
|
|
|
·
|
R$ 674.5 million PESA debt due between 2018 and 2020, payable against CTN credits;
|
|
|
·
|
R$ 842.1 million export credit notes due between 2012 and 2020; and
|
|
|
·
|
R$ 494.6 million perpetual notes with call option for Cosan beginning on November 5, 2015.
|
We believe we will be able to refinance our existing debt on favorable market conditions.
Recently Issued Accounting Standards
New IASB accounting standards have been published and/or reviewed and may be adopted for the current fiscal year, as described below:
|
|
·
|
IAS 24 Related Party Disclosures (Amendment). It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government related entities. The amended standard is effective for annual periods beginning on or after January 1, 2011
|
|
|
·
|
IFRS 9 Financial Instruments – Classification and Measurement. The IASB has concluded the first part of the project to replace “IAS 39 Financial Instruments: Recognition and measurement”. IFRS 9 uses a simple approach to determine whether a financial asset is measured at amortized cost or fair value, based on the manner in which an entity manages its financial instruments (its business model) and the typical characteristic contractual cash flow of financial assets. The standard also requires the adoption of only one method for determining losses in the recoverable value of assets. This standard will become effective for annual periods beginning on or after January 1, 2013.
|
|
|
·
|
IFRS 10 Consolidated financial statements. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more entities. The FRS 10 replaces the requirements for consolidation in SIC 12 Consolidation – Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. This standard will become effective for annual periods beginning on or after January 1, 2013.
|
|
|
·
|
IFRS 11 Joint Arrangements. IFRS 11 provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. IFRS 13 supersedes IAS 31 Interests in Joint Ventures, and SIC-13 J Jointly Controlled Entities – Non-Monetary Contributions by Venturers, and will be effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The main impact of the adoption of IFRS 11 will be the removal of the proportionate consolidation method of accounting for jointly controlled entities, currently available under IAS 31. Consequently, IFRS 11 will result in the Company changing from proportionate consolidation to the equity method to account for its interests in its joint ventures.
|
|
|
·
|
IFRS 12 Disclosure of Interests in Other Entities. IFRS 12 is a new and comprehensive standard on disclosure requirements of all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013.
|
|
|
·
|
IFRS 13 Fair Value Measurement. IFRS 13 establishes new requirements on how to measure fair value and the related disclosures for IFRS and U.S. generally accepted accounting principles. The standard is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted.
|
|
|
·
|
IFRIC 14 Prepayments of a minimum funding requirement. This standard applies only to those situations where an entity is subject to minimum funding requirements and anticipated contributions to cover these requirements. The standard allows the entity to account for the benefit of such prepayment as an asset. This standard is effective for fiscal years beginning from January 1, 2011.
|
|
|
·
|
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss.
|
Improvements to IFRS – The IASB standards for improvements and amendments to IFRS in May 2010 and the amendments will be effective from January 1, 2011:
|
|
·
|
IFRS 3 – Business combination.
|
|
|
·
|
IFRS 7 – Financial instrument: Disclosures.
|
|
|
·
|
IAS 1 – Presentation of Financial Statements
|
|
|
·
|
IAS 27 – Consolidated and Separate Financial Statements
|
|
|
·
|
IFRIC 13 – Customer Loyalty Program
|
There are no other standards and interpretations issued but not yet adopted that may, in management’s opinion, have a significant impact on the results or equity disclosed by the Company.
See “Forward-Looking Statements.”
Our board of directors and our executive officers are responsible for the operation of our business. Nevertheless, Mr. Rubens Ometto Silveira Mello, who controls all of our class B series 1 common shares, has the overall power to control us, including the power to establish our management policies.
Board of Directors
Our by-laws provide that our board of directors shall consist of between five and eleven directors. Our board of directors currently consists of eleven directors.
Our board of directors is the decision-making body responsible for, among other things, determining policies and guidelines for our business. Our board of directors also supervises our executive officers and monitors their implementation of policies and guidelines established from time to time by our board of directors.
Our board of directors is divided into three classes (Class I, Class II and Class III) that are, as nearly as possible, of equal size. Each class of directors is elected for a three-year term of office, and the terms are staggered so that the term of only one class of directors expires at each annual general meeting. Members of our board of directors are subject to removal at any time with or without cause at a general meeting of shareholders. Our by-laws do not include any citizenship or residency requirements for members of our board of directors.
The following table lists the members of our board of directors on March 31, 2011:
|
Name
|
Initial Year of Appointment to Cosan Limited’s Board
|
Initial Year of Appointment to Cosan S.A.’s Board
|
Class(1)
|
Position Held – Cosan Limited
|
Position Held – Cosan S.A.
|
Year of Birth
|
||||||
|
Rubens Ometto Silveira Mello
|
2007
|
2000
|
III
|
Chairman
|
Chairman
|
1950
|
||||||
|
Marcus Vinicius Pratini de Moraes(2)
|
2007
|
2005
|
II
|
Vice Chairman
|
—
|
1939
|
||||||
|
Marcelo Eduardo Martins
|
2009
|
2009
|
III
|
Director
|
Director
|
1966
|
||||||
|
Mailson Ferreira da Nóbrega(2)
|
2007
|
2008
|
I
|
Director
|
Director
|
1942
|
||||||
|
Marcos Marinho Lutz
|
2007
|
—
|
II
|
Director
|
—
|
1969
|
||||||
|
Pedro Isamu Mizutani
|
2007
|
2000
|
III
|
Director
|
Vice Chairman
|
1959
|
||||||
|
George E. Pataki(2)
|
2007
|
—
|
I
|
Director
|
—
|
1945
|
||||||
|
Marcelo de Souza Scarcela Portela
|
2007
|
2009
|
II
|
Director
|
Director
|
1961
|
||||||
|
José Alexandre Scheinkman(2)
|
2007
|
—
|
I
|
Director
|
—
|
1948
|
||||||
|
Burkhard Otto Cordes
|
2008
|
2005
|
II
|
Director
|
Director
|
1975
|
||||||
|
Hélio Franca Filho (2)
|
2009
|
—
|
III
|
Director
|
—
|
1959
|
||||||
|
Serge Varsano (2)
|
—
|
2009
|
—
|
—
|
Director
|
1955
|
||||||
|
Roberto de Rezende Barbosa
|
—
|
2009
|
—
|
—
|
Director
|
1950
|
|
(1)
|
The terms of the directors expire as follows: Class I at the annual general meeting referred to the fiscal year 2011; Class II at the annual general meeting held in the transition fiscal year 2012; and Class III at the annual general meeting held in the fiscal year 2013.
|
|
(2)
|
Independent director.
|
The following is a summary of the business experience of our current directors. Unless otherwise indicated, the business address of our current directors is Av. Juscelino Kubitschek, 1327, 4th floor, São Paulo, SP, Brazil.
Rubens Ometto Silveira Mello. Mr. Mello is our chairman and chief executive officer. He is also chairman of Cosan S.A. He holds a degree in mechanical engineering from the Escola Politécnica of the University of São Paulo (1972). Mr. Mello has more than 30 years of experience in the management of large companies. He has also served as general director and chairman of the board of directors of Costa Pinto S.A. since 1980, vice president of Pedro Ometto S.A. Administração e Participações since 1980, director of Cosan Operadora Portuária S.A. since 1998, chairman of the board of directors of FBA from 2001 until its merger into Corona and its currently the chairman of the boards of Cosan and Raízen, He also holds the position of director of UNICA, the Sugarcane Agroindustry Association of the State of São Paulo (UNICA—União da Agroindústria Canavieira do Estado de São Paulo). Prior to joining Cosan, Mr. Mello worked from 1971 to 1973 as an advisor to the board of executive officers of UNIBANCO União de Bancos Brasileiros S.A. and from 1973 to 1980 as chief financial officer of Indústrias Votorantim S.A.
Marcus Vinicius Pratini de Moraes. Mr. Pratini de Moraes is our vice-chairman and has been a member of Cosan S.A.’s board of directors since 2005. He holds a degree in economics from Faculdade de Ciências Econômicas da Universidade do Rio Grande do Sul (1963), a postgraduate degree in public administration from Deutsche Stiftung fur Entwicklungsländer—Berlin (1965) and a business administration degree from University of Pittsburgh and Carnegie Institute of Technology (1966). Mr. Pratini de Moraes held several positions in the Brazilian federal government, including Minister of Planning and General Coordination (1968-1969), Minister of Industry and Commerce (1970-1974), Minister of Mines and Energy (1992) and Minister of Agriculture, Livestock and Food Supply (1999-2002). He also served a term as a congressman from the state of Rio Grande Do Sul (1982-1986). He was a board member of Solvay do Brasil (1998-1999) and chairman (2003); member of the advisory council of the Brazilian Mercantile & Futures Exchange—BM&F (2003); member of the Brazil—China Business Council (2004); president of the Brazil—Russia Business Council (2004); member of the National Council of Industrial Development (2005); and vice-president of the Beef Information Center—SIC (2005). Mr. Pratini de Moraes is currently the chairman of ABIEC (Brazilian Beef Export Industries Association), a board member of FIESP (Federation of Industries of the State of São Paulo), a board member of JBS S.A. and a member of the supervisory board and the audit committee of ABN AMRO Bank N.V.
Marcelo Eduardo Martins. Mr. Martins has been a member of our board of directors and Cosan S.A.’s board of directors since 2009. Mr. Martins currently holds the position of chief financial officer and investor relations officer. His duties include identifying acquisition opportunities and implementing takeovers as well as business development activities for which the company may have strategic interest in the future. In July 2007, Mr. Martins was appointed as an executive officer of Aguassanta Participações S.A. Prior to joining the Cosan Group, Mr. Martins was the Chief Financial and Business Development Officer of Votorantim Cimentos between July 2003 and July 2007 and, prior to that, head of Latin American Fixed Income at Salomon Smith Barney (Citigroup) in New York. He has significant experience in capital markets, having worked at Citibank (where he began his career as a trainee in 1989), Unibanco, UBS and FleetBoston. He has a degree in business administration from the Getúlio Vargas Foundation, majoring in finance.
Mailson Ferreira da Nóbrega. Mr. Nóbrega has been a member of our board of directors since November 2007. He is an economist and was Brazil’s Minister of Finance from 1988 to 1990. He was previously Technical Consultant and Chief of Project Analysis Department at Banco do Brasil; Coordination Chief of Economic Affairs of the Ministry of Industry and Commerce and Secretary General of the Ministry of Finance. He performed as the Chief Executive Officer of the European Brazilian Bank—EUROBRAZ, in London. Mr. Nóbrega is also member of the board of directors of the following companies: Abyara Planejamento Imobiliário, CSU Cardsystem S.A., Grendene S.A., Portobello S.A., Rodobens Negócios Imobiliários S.A., TIM Participações S.A. and Veracel Celulose S.A.
Marcos Marinho Lutz. Mr. Lutz is a member of our board of directors and our chief commercial officer. He has been Cosan S.A.’s chief executive officer since November 2009 and served as chief commercial officer since 2006. Mr. Lutz holds a naval engineering degree from Escola Politécnica of the University of São Paulo and a master’s degree in business administration from Kellogg Graduate School of Management, Northwestern University. From 2002 to 2006, Mr. Lutz was the executive director of infra-structure and energy at CSN (SID) and board member of MRS Logística, CFN Railways, and Itá Energética. Before that, Mr. Lutz was the chief operating officer at Ultracargo S.A., the logistics affiliate of the Ultra Group.
Pedro Isamu Mizutani. Mr. Mizutani has been a member of our board directors since 2007 and is our chief operating officer. He has been a member of Cosan S.A.’s board of directors since 2000. He has served as Cosan S.A.’s managing director since 2001, and served as Cosan S.A.’s chief operating officer until June 2011. Currently Mr. Mizutani holds a position as Raízen’s
chief operating officer. Mr. Mizutani holds a production-engineering degree from the Escola Politécnica of the University of São Paulo (1982), a postgraduate degree in finance from UNIMEP—Universidade Metodista de Piracicaba (1986) and a master’s degree in business management from FGV—Fundacão Getúlio Vargas, São Paulo, with an extension degree from Ohio University (2001). Mr. Mizutani has more than 20 years of experience in finance and administration with companies in the ethanol and sugar industries. He also served as a planning director of Usina Costa Pinto S.A. from 1983 to 1987, as financial manager from 1987 to 1988, and as administrative and financial director from 1988 to 1990. From 1990 to 2001, he acted as managing administrative and financial director of the group.
George E. Pataki. Mr. Pataki is a member of our board of directors. He has a bachelor’s degree from Yale University (1967), and a law degree from Columbia Law School (1970). Mr. Pataki was a partner in the New York law firm of Plunkett & Jaffe until 1987. He was elected mayor of Peekskill, New York in 1981, and served in the New York State Legislature as an assemblyman and then a senator from 1985 to 1994. In 1994, Mr. Pataki became the fifty-third Governor of the State of New York and was reelected in 1998 and 2002. He served as Governor from January 1, 1995 until January 1, 2007. Mr. Pataki is counsel at Chadbourne & Parke LLP.
Marcelo de Souza Scarcela Portela. Mr. Portela is a member of our board of directors and has been a member of Cosan S.A.’s board of directors since 2005. He is the general counsel. He holds a law degree from Faculdade de Direito da Universidade de São Paulo (1983), and completed graduate studies in commercial law from Faculdade de Direito da Universidade de São Paulo (1988) and McGill University Law School (1990) in Montreal, Canada.
José Alexandre Scheinkman. Mr. Scheinkman is a member of our board of directors. He is the Theodore A. Wells ‘29 Professor of Economics at Princeton University. He has a bachelor’s degree in economics from the Federal University of the State of Rio de Janeiro (1969), a master’s degree (1973) and doctorate degree (1974) in economics from the University of Rochester, and a master’s degree in mathematics from Instituto de Matemática Pura e Aplicada (Brazil) (1976). Mr. Scheinkman is a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, and received a “docteur honoris causa” from the Université Paris-Dauphine. In 2002, he was a Blaise Pascal Research Professor (France). Professor Scheinkman is a member of the Conseil Scientifique of the Institute Europlace de Finance (Paris) and a member of the Conselho Acadêmico of IBMEC (São Paulo). Previously, he was the Alvin H. Baum Distinguished Service Professor and Chairman of the Department of Economics at the University of Chicago, Vice President in the Financial Strategies Group of Goldman, Sachs & Co., co-editor of the Journal of Political Economy and a member of the advisory panel in economics to the Sloan Foundation.
Burkhard Otto Cordes. Mr. Cordes has been a member of Cosan Limited’s board of directors since 2008 and of Cosan S.A.’s board of directors since 2005. He graduated with a degree in business administration from Fundação Armando Álvares Penteado (1997) and he holds a master’s degree in finance from IBMEC-SP (2001). Mr. Cordes has worked in financial markets over the last seven years. He worked at Banco BBM S.A., a company owned by Grupo Mariani, where he worked at its commercial division focusing corporate and middle market segments. Currently, he serves as financial manager. Before holding his current position, he had worked at IBM Brasil in its financial division. Mr. Cordes is Mr. Mello’s son-in-law.
Helio Franca Filho. Mr. Franca Filho has been a member of Cosan Limited’s board of directors since August 2009. He joined Gavea’s Illiquid Strategies Group in April 2007, focusing primarily on the commodities sector. With over 20 years of experience in the commodities sector, Mr. Franca Filho began his career with the Sucres & Denrées group, where he worked from 1984 to 1985 trading coffee, sugar and cocoa. He subsequently joined the Louis Dreyfus group in New York, where he was in charge of the Latin American sugar and ethanol market from 1985 to 1996. From 2000 to 2007, he was director of Brazilian operations for the Noble group, a commodities trading company listed in England and Singapore. Mr. Franca Filho has a degree in economics from the Pontifical Catholic University of Rio de Janeiro (PUC-RJ).
Serge Varsano. Mr. Varsano has been a member of Cosan Limited’s board of directors since 2007 and holds a degree from the Marshall School of Business of the University of Southern California (1975). Mr. Varsano began his career as a trader in the Sucres et Denrées group, one of the world’s leading sugar traders, subsequently becoming its chief executive officer. He has been chief executive officer of the Sucres et Denrées group since 1988.
Roberto de Rezende Barbosa. Mr. Barbosa has been a member of Cosan S.A.’s board of directors since 2009. He worked as a trainee at Halles Bank and the Dacon dealership, assuming the family business in 1975. He was the chief executive officer of Grupo Nova América and is currently the chief executive officer and a board member at CTC – Centro de Tecnologia Canavieira, and a board member at SCA – Sociedade Corretora de Álcool, IEDI – Institute of Industrial Development Studies and UNICA – the Federation of Sugarcane Industries of São Paulo State.
Executive Officers
Our executive officers serve as our executive management body. They are responsible for our internal organization and day-to-day operations and for the implementation of the general policies and guidelines established from time to time by our board of directors.
Our executive officers are elected by our board of directors for one-year terms and are eligible for reelection. Our board of directors may remove any executive officer from office at any time with or without cause. Our executive officers hold meetings when called by any of our executive officers.
The following table lists our current executive officers:
|
Name
|
Initial Year of Appointment to Cosan Limited
|
Initial Year of Appointment to Cosan S.A.
|
Position Held –
Cosan Limited
|
Position Held – Cosan S.A.
|
Year of Birth
|
|||||
|
Rubens Ometto Silveira Mello
|
2007
|
—
|
Chief Executive Officer
|
—
|
1950
|
|||||
|
Marcos Marinho Lutz
|
2007
|
2009
|
Chief Commercial Officer
|
Chief Executive Officer
|
1969
|
|||||
|
Marcelo Eduardo Martins
|
2009
|
2009
|
Chief Financial Officer and Investor Relations Officer & M&A Officer
|
Chief Financial Officer and Investor Relations Officer & M&A Officer
|
1966
|
|||||
|
Marcelo de Souza Scarcela Portela
|
—
|
2009
|
—
|
General Counsel
|
1961
|
|||||
|
Nelson Roseira Gomes Neto
|
—
|
2011
|
—
|
Executive Officer
|
1970
|
|||||
|
Colin Butterfield
|
—
|
2011
|
—
|
Executive Officer
|
1973
|
The following is a summary of the business experience of our executive officers who are not directors. Unless otherwise indicated, the business address of our current executive officers is Av. Juscelino Kubitschek, 1327, 4th floor, São Paulo, SP, Brazil.
Nelson Roseira Gomes Neto. Mr. Gomes Neto is an executive officer of Cosan S.A. and the chief executive officer of CLE. He received a bachelor’s degree in engineering from Catholic University (1992), a master’s degree in corporate finance from PUC – IAG Master (1998) and a master’s degree in business administration from COPPEAD (2001). He joined Exxon Mobil Corporation in 1991 as a trainee. Throughout the course of his career, he has served in positions of increasing managerial responsibility in several business lines such as Fuels Marketing, Convenience Retailing, Natural Gas, and since 2001 part of Lubricants business. In February 2008 he was appointed Brazil Lubricants Officer to Esso Brasileira de Petroleo Limitada, and in December 2008, Lubricants Vice President.
Collin Butterfield. Mr. Butterfield is an executive officer of Cosan S.A. and chief executive officer of Docelar. He holds a bachelor’s degree in engineering from Boston University and a master’s degree in economics and finance from Dartmouth College. He created the website Viajo.com (currently named Decolar.com.br) and before joining Cosan S.A., he acted as Bracor’s Investments Officer.
Key managers
|
Name
|
Initial Year of Appointment to Cosan S.A.
|
Position Held
|
||
|
Nelson Roseira Gomes Neto
|
2008
|
Chief Executive Officer – CLE
|
||
|
Julio Fontana Neto
|
2009
|
Chief Executive Officer – Cosan Operadora Portuária
|
||
|
Collin Butterfield
|
2010
|
Chief Executive Officer – Docelar
|
The following is a summary of the business experience of the key manager who is not an executive officer.
Julio Fontana Neto. Mr. Neto is the chief executive officer of Cosan Operadora Portuária. He was formerly chief executive officer of MRS Logística S.A. with experience in logistics, railroad operations and infrastructure. He holds a bachelor’s degree in mechanical engineering (1978) and in business administration from Mackenzie University (1981) and a master’s degree in administration from EISE Business school – University of Navarra, Spain (2002).
Our Relationship with our Executive Officers and Directors
Mr. Burkhard Otto Cordes is a member of Cosan’s and Cosan Limited’s boards of directors and serves as financial manager in Aguassanta Participações S.A. Mr. Cordes is Mr. Mello’s son-in-law.
There are no arrangements or understandings with any of our shareholders, customers, suppliers or others, pursuant to which any director or member of our senior management has been or will be selected.
Committees of the Board of Directors
Audit Committee
The members of our audit committee are Messrs. Marcus Vinicius Pratini de Moraes (chairman), Mailson Ferreira da Nóbrega and Helio França Filho. Our board of directors has determined that Marcus Vinicius Pratini de Moraes (chairman), Mailson Ferreira da Nóbrega and Hélio Franca Filho meet the independence requirements of the SEC and the NYSE listing standards. For a discussion of the role of our audit committee, see “—Summary of Significant Differences of Corporate Governance Practices—Audit Committee”.
Compensation Committee
We have a compensation committee that reviews and approves the compensation and benefits for our executive officers and other key executives, makes recommendations to the board regarding compensation matters and is responsible for awarding equity-based compensation to our executive officers and other employees under our employee equity incentive plan. The committee also has the discretion to interpret the terms of the plan, to amend the plan and take all other actions necessary to administer the plan in our best interests. The members of our compensation committee are Messrs. Pedro Isamu Mizutani (chairman), Marcus Vinicius Pratini de Moraes and Marcelo de Souza Scarcela Portela.
Risk Management Committee
We have a risk management committee that is responsible for advising the board on risk management, by establishing exposure limits and hedging ratios on a periodic basis so as to achieve better operational and financial controls. The members of our risk management committee are Messrs. José Alexandre Scheinkman (chairman), Marcelo Eduardo Martins and Marcos Marinho Lutz.
Under our by-laws, our board of directors is responsible for establishing the annual aggregate compensation that we pay to the members of our board of directors and our executive officers.
The aggregate amount of compensation paid to all members of the board of directors and its executive officers in fiscal year 2011 was R$ 35.7 million. In fiscal year 2010, it was R$ 21.9 million. The compensation to be paid to directors and executive officers of Cosan S.A. who also act as such for our company will be in addition to compensation paid to them by our company.
Our executive officers receive the same benefits generally provided to our employees. Members of our board of directors are not entitled to these benefits.
We currently have no employment agreements with our directors and executive officers providing for benefits upon the termination of employment. Our directors and executive officers who serve for both us and Cosan will receive compensation from both companies.
The NYSE Corporate Governance Rules provide that we are required to disclose any significant differences on our corporate governance practices from those required to be followed by U.S. companies under NYSE listing standards. We have summarized these significant differences below.
We are permitted to follow practice in Bermuda in lieu of the provisions of the NYSE Corporate Governance Rules, except that we will be required to have a qualifying audit committee under Section 303A.06 of the Rules, or avail ourselves of an appropriate exemption. In addition, Section 303A.12(b) provides that our chief executive officer is obligated to promptly notify the NYSE in writing after any of our executive officers becomes aware of any material non-compliance with any applicable provisions of the NYSE Corporate Governance Rules.
Majority of Independent Directors
NYSE Rule 303A.01 provides that each U.S. company that is listed on the Exchange must have a majority of independent directors. Bermuda corporate law does not require that we have a majority of independent directors. Under our by-laws, at least 40% of our directors are required to be independent directors; which requirement increases to 60% following the death or permanent incapacitation of Mr. Rubens Ometto Silveira Mello.
Separate Meetings of Non-Management Directors
NYSE Rule 303A.03 provides that the non-management directors of each U.S. company that is listed on the Exchange must meet at regularly scheduled executive sessions without management. We are not required to have such executive sessions for the non-management directors under Bermuda law.
Nominating and Corporate Governance Committee
NYSE Rule 303A.04 provides that each U.S. company that is listed on the Exchange must have a nominating/corporate governance committee composed entirely of independent directors. We are not required to have such a committee under Bermuda law. We believe that, pursuant to our by-laws, the role of a nominating committee is generally performed by our board of directors and that the role of the corporate governance committee is generally performed by either our board of directors or our senior management.
Compensation Committee
NYSE Rule 303A.05 provides that each U.S. company that is listed on the Exchange must have a compensation committee composed entirely of independent directors. We are not required to have such a committee under Bermuda law. However, we formed such a committee with one independent director.
Audit Committee
NYSE Rule 303A.06 and the requirements of Rule 10A-3 of the SEC provide that each listed company is required to have an audit committee consisting entirely of independent members that comply with the requirements of Rule 10A-3. In addition, the company must have an internal audit function and otherwise fulfill the other requirements of the NYSE rules and Rule 10A-3 of the SEC.
While we are not required under Bermuda law to have an audit committee, we have formed a committee that will have the following responsibilities:
|
|
·
|
pre-approve services to be provided by our independent auditor;
|
|
|
·
|
review auditor independence issues and rotation policy;
|
|
|
·
|
supervise the appointment of our independent auditors;
|
|
|
·
|
discuss with management and auditors major audit, accounting and internal control issues;
|
|
|
·
|
review quarterly financial statements prior to their publication, including the related notes, management’s report and auditor’s opinion;
|
|
|
·
|
review our annual report and financial statements;
|
|
|
·
|
provide recommendations to the board on the audit committee’s policies and practices;
|
|
|
·
|
review recommendations given by our independent auditor and internal audits and management’s responses;
|
|
|
·
|
provide recommendations on the audit committee’s by-laws; and
|
|
|
·
|
the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal controls or auditing matters.
|
Equity Compensation Plans
NYSE Rule 303A.08 provides that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto, with certain limited exemptions as described in the rule. Under Bermuda law, shareholder pre-approval is not required for the adoption of equity compensation plans nor any material revision thereto.
Corporate Governance Guidelines
NYSE Rule 303A.09 provides that each U.S. listed company must adopt and disclose its corporate governance guidelines. We do not have a similar requirement under Bermuda law. In addition, we have adopted a written policy of trading of securities and disclosure matters.
Code of Business Conduct and Ethics
NYSE Rule 303A.10 provides that each U.S. listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. Although not required under Bermuda law, the Company has adopted a code of business conduct and ethics for directors, officers and employees as provided for in NYSE Rule 303A.10, which has been filed with the SEC.
As of March 31, 2011, we had 34,281 employees. The following table sets forth the number of our total employees by main category of activity for the periods indicated:
|
At March 31,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Agricultural
|
21,860 | 25,816 | 23,323 | |||||||||
|
Industrial
|
7,971 | 8,019 | 5,550 | |||||||||
|
Commercial(1)
|
— | 876 | 397 | |||||||||
|
Administrative(1)
|
3,799 | 3,128 | 2,130 | |||||||||
|
At March 31,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Financial and investor relations(1)
|
— | 60 | 72 | |||||||||
|
Port
|
651 | 1,165 | 188 | |||||||||
|
Total
|
34,281 | 31,648 | 39,339 | |||||||||
|
(1)
|
The number of Commercial, Financial and Investor Relations employees have been consolidated to the Administrative category in the fiscal year 2011.
|
We pay a mandatory union contribution for all of our employees. We believe that we have good relations with our employees and the unions that represent them, and we have not experienced a strike or other labor slowdown since 1992. Collective bargaining agreements to which we are party have either one-year or two-year terms, are subject to annual renewal and are subject to changes in Brazilian law. We apply the terms of bargaining agreements entered into with the unions equally to unionized and non-unionized employees.
Our total annual payroll was R$ 350 million as of March 31, 2011, which includes a provision for vacations, and bonuses, taxes and social contributions.
We offer our employees, including our executive officers, various benefits, which are provided in accordance with the employee’s position in our company. Benefits include medical (including dental) assistance, meal and transport vouchers, life insurance, maternity leave, scholarships and funeral assistance and nursery assistance. Members of our board of directors are not entitled to these benefits. All of our employees participate in profit sharing plans developed with the labor unions of which our employees are members, which provide performance-based compensation. In fiscal year 2011, we paid R$ 10 million as profit sharing distributions.
Except for Mr. Rubens Ometto Silveira Mello, our indirect controlling shareholder and chairman, who as of March 31, 2011 indirectly holds 96,332,044 of our class B series 1 common shares and 15,441,111 of our Class A common shares, none of our directors and executive officers currently owns or holds class A common shares or class B common shares of our company.
Equity-Based Compensation Plans
Cosan Limited
We have adopted a Cosan Limited equity incentive plan. We have reserved up to 5% of our issued and outstanding class A common shares as of the granting date for issuance under our equity incentive plan. The plan is intended to attract, retain and motivate our directors, officers and employees, to link compensation to the overall performance of the company in order to promote cooperation among our diverse areas of business and to create an ownership interest in the company with respect to these directors, officers and employees in order align their interests with the interests of our shareholders.
Cosan
On August 30, 2005, Cosan’s shareholders approved a stock option plan that authorized the issuance of a maximum of 5% of Cosan’s total share capital. On September 22, 2005, Cosan’s board of directors approved the distribution of stock options corresponding to 4,302,780 common shares, or 3.25% of Cosan’s total share capital. A remaining 1.75% of Cosan’s share capital may subsequently be issued pursuant to the terms of Cosan’s stock option plan. The stock options that were issued have an option price of US$2.93 per common share, and may be partially exercised (up to a maximum of 25% annually) after November 18, 2006. On November 20, 2006, Cosan’s board of directors approved the issuance of 1,132,707 new common shares to certain of Cosan’s executive officers under Cosan’s stock option plan, which resulted in an increase in the number of Cosan’s issued and outstanding common shares on that date. On September 11, 2007, Cosan’s board of directors granted 450,000 options to one of Cosan’s executive officers. On November 19, 2007 and December 11, 2007, 922,947 and 38,725 options, respectively, were exercised. On March 30, 2010 and September 14, 2010, 17,000 and 48,829 options were exercised. On January 29, 2010, 15,000 options were exercised. On July 20, 2010, 225,000 options were exercised. On November 11, 2010, 224,819 options were exercised. On March 4, 2011, 112,500 options were exercised.
The stock option plan expired in December 31, 2010. A new stock option plan was approved in Cosan’s General meeting, held in July 29, 2011. If a holder of stock options ceases to be an executive officer, manager or eligible employee for any reason (other than termination of his or her employment contract without just cause on Cosan’s part, death, retirement or permanent incapacitation), after partially exercising his or her option to purchase Cosan’s common shares, the options that have not yet been exercised will be extinguished as of the date that the holder ceases to be an executive officer, manager or eligible employee.
Cosan stock options held by Cosan’s executive officers may, at their option, be canceled and converted into awards of Cosan Limited, and we will comply with the limit of shares we have reserved for our equity incentive plan. The Cosan stock options will be converted based upon a ratio equal to the initial offering price of our common stock, divided by the weighted average stock price of Cosan’s common stock for a specified period immediately preceding the date of the completion of our initial public offering. The converted securities, if unvested, generally will continue to vest over their original vesting periods.
Cosan Limited
As of the date of this annual report our authorized share capital is US$11,888,863.60, consisting of 1,000,000,000 class A common shares, par value US$0.01 per share, 96,332,044 class B series 1 common shares, par value US$0.01 per share and 92,554,316 class B series 2 common shares, par value US$0.01 per share. Each of our class A common shares entitles its holder to one vote. Each of our class B common shares entitles its holder to ten votes. The chairman of our board of directors, Mr. Rubens Ometto Silveira Mello controls 41.3% of our issued and outstanding share capital, and 86.0% of our voting power by virtue of his control of 100% of our class B common shares and 8.9% of our class A common shares. Other than the entities and individuals mentioned below, no other single shareholder holds more than 5.0% of our issued and outstanding share capital.
The following table sets forth the principal holders of our issued and outstanding share capital and their respective shareholding as of the date of this annual report:
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Shareholders
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Class A Common Shares
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%
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Class B Common Shares
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%
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Total Number of Shares
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%
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Queluz Holdings Limited
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7.941.111 | 4.6 | 66,321,766 | 68.8 | 74,262,877 | 27.4 | ||||||||||||||||||
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Usina Costa Pinto S.A. Açúcar e Álcool
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— | — | 30,010,278 | 31.2 | 30,010,278 | 11.1 | ||||||||||||||||||
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CFV19 Participações S.A.
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1,811,250 | 1.0 | — | — | 1,811,250 | 0.7 | ||||||||||||||||||
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MSAL Participações S.A.
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1,811,250 | 1.0 | — | — | 1,811,250 | 0.7 | ||||||||||||||||||
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Certo Participações S.A.
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1,811,250 | 1.0 | — | — | 1,811,250 | 0.7 | ||||||||||||||||||
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MSOR Participações S.A.
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1,811,250 | 1.0 | — | — | 1,811,250 | 0.7 | ||||||||||||||||||
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Usina Bom Jesus S.A. Açúcar e Álcool
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255,000 | 0.1 | — | — | 255,000 | 0.1 | ||||||||||||||||||
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Gávea Funds
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39,445,393 | 22.6 | — | — | 39,445,393 | 14.6 | ||||||||||||||||||
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Janus Capital Management LLC (1)
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17,141,850 | 9.8 | — | — | 17,141,850 | 6.3 | ||||||||||||||||||
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Skagen Funds (2)
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8,275,000 | 4.7 | — | — | 8,275,000 | 3.1 | ||||||||||||||||||
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Others
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94,051,987 | 53.9 | — | — | 94,051,987 | 34.7 | ||||||||||||||||||
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Total
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174,355,341 | 100.0 | 96,332,044 | 100.0 | 270,687,385 | 100.0 | ||||||||||||||||||
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(1)
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Based on information filed by Janus Capital Management LLC, or Janus Capital, with the SEC on July 31, 2011, as a result of its role as investment adviser or sub adviser to various managed portfolios, Janus Capital may be deemed to be the beneficial owner of 17,141,850 class A common shares held by such managed portfolios.
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(2)
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Based on information filed by Skagen Funds with the SEC on July 31, 2011, Skagen Funds is deemed to be the beneficial owner of 8,900,000 class A common shares. Skagen Funds is a Norwegian investment company and holds the shares for investment purposes.
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No class B series 2 common shares are currently issued and outstanding.
Queluz Holdings Limited, Costa Pinto, CFV19 Participações S.A., MSAL Participações S.A., Certo Participações S.A., MSOR Participações S.A. and Usina Bom Jesus S.A. Açúcar e Álcool
On November 24, 2009, a corporate reorganization was approved within companies from its controlling group (Aguassanta Participações S.A., Queluz Holdings Limited, or “Queluz”, and Usina Bom Jesus S.A. Açúcar e Álcool), aiming at consolidating their control with Mr. Rubens Ometto Silveira Mello.
This reorganization resulted in the transference by an affiliated of Queluz of up to around 5,500,000 class A common shares issued by Cosan Limited, that did not exceed 1% of total Class A shares, pursuant to Securities Act Rule 144 and other applicable provisions. Its class B share position remains unaltered.
Queluz Holdings Limited and Costa Pinto own all of our class B series 1 common shares. Queluz Holdings Limited, CFV19 Participações S.A., MSAL Participações S.A., Certo Participações S.A., MSOR Participações S.A. and Usina Bom Jesus S.A. Açúcar e Álcool also hold in aggregate 10% of our class A common shares. These companies are indirectly controlled by Mr. Rubens Ometto Silveira Mello, the chairman of our board of directors through several companies controlled directly and indirectly by him. Although the control is exercised by Mr. Rubens Ometto Silveira Mello, there are some family members and other individuals who are also beneficial owners of minority interests in these companies.
Cosan S.A
As of March 31, 2011, we owned 62.2% of Cosan’s common shares. Prior to our initial public offering, Usina Costa Pinto S.A. Açúcar e Álcool and Aguassanta Participações S.A., each company indirectly controlled by our chief executive officer, Mr. Rubens Ometto Silveira Mello and his family, were the controlling shareholders of Cosan.
Rezende Barbosa
On June 18, 2009, Cosan entered into an agreement with Rezende Barbosa to acquire 100% of the outstanding shares of Curupay S.A. Participações, or “Curupay”. The acquisition was carried out through the merger of Curupay into Cosan resulting in the issuance by Cosan of 44,300,389 new common shares, fully subscribed and paid-in by Rezende Barbosa.
Shareholders’ Agreements and Other Arrangements
Cosan Limited
Aguassanta and Costa Pinto, our indirect controlling shareholders, entered into a shareholders’ agreement pursuant to which they undertake to vote jointly with respect to any matter related to us and our subsidiaries. Aguassanta and Costa Pinto have agreed to meet before any shareholders’ or board of directors meeting to reach an agreement as to their votes regarding such matters. The vote of the indirect shareholder that owns a greater equity stake in Cosan Limited shall prevail.
Cosan S.A.
Rezende Barbosa
Pursuant to an agreement dated June 9, 2009, the Rezende Barbosa Family has the right to have one member on both the supervisory board and the board of directors. Cosan Limited has, subject to limited exceptions, a right of first refusal on shares of Cosan (CSAN3) owned by the Rezende Barbosa family.
Cosan Portuária
On February 8, 1999, São Francisco and Tate & Lyle do Brasil Serviços e Participações S.A., or “Tate & Lyle”, entered into a shareholders’ agreement that governs the rights of the shareholders of Cosan Portuária (formerly São Francisco Operadora Portuária de Granéis Ltda.). In April 2004, Cosan acquired 90.0% of the outstanding capital stock of Cosan Portúaria through a Cosan capital increase in the amount of US$1.5 million, which was fully subscribed by Cosan’s shareholder, São Francisco, using shares that it held at Cosan Portuária.
Cosan has signed a memorandum of understanding dated April 9, 2008 with Rezende Barbosa with the intention of merging into a new entity the port terminal facilities of Cosan Portuária with those at the neighboring site of Teaçu Armazéns Gerais S/A, owned by Rezende, or the “merged entity”. Cosan asked Tate & Lyle to provide its approval as the minority shareholder in Cosan Portuária to the arrangements. Tate & Lyle’s and Cosan’s equity interests in the merged entity would be held by a holding company owned by Cosan and Tate & Lyle. Because of the creation of the holding company, Cosan and Tate & Lyle entered into a shareholders’ agreement with respect to the holding company named COPSAPAR Participações S/A in order to govern: (1) the election of the board of directors; (2) the exercise of voting rights in general shareholder meetings and meetings of the board of directors; and (3) the preemptive rights of shareholders.
Rumo Logística
On September 2, 2010, Novo Rumo, Cosan, Cosan Limited and investment vehicles controlled by TPG and Gávea entered into a shareholders’ agreement that regulates the rights of the shareholders of Rumo Logística and on the same date the parties have entered into a subscription agreement in which Gávea and TPG agreed to subscribe common shares of Rumo Logística representing a 25% ownership for a price of R$400 million, implying a post-money equity valuation of R$1,600 million. In accordance to the shareholders agreement, Rumo Logística will have a board of directors of five members and Gávea and TPG will have the right to appoint two of the directors. Pursuant to the agreement, (1) Gávea and TPG will have the right to participate, through at least one representative, in all board committees and certain other relevant committees of Rumo Logística; (2) any decision regarding Rumo Logística or any of its subsidiaries will be determined by a simple majority vote; (3) Gávea and TPG will have rights of first refusal; (4) Gávea and TPG will have tag along rights.
TEAS
Cosan and Cargill Agricola S/A entered into a shareholders’ agreement with respect to TEAS Terminal Exportador de Alcool de Santos S/A , or “TEAS”, dated as of February 15, 2005 and amended on November, 26, 2009, that provides for, among other things, the right of first refusal of the shareholder to acquire the shares of TEAS owned by the other shareholder, in the event such party decides to sell its shares to a third party.
We engage in related party transactions with certain of our affiliates, some of which are of a recurring nature. Financial information with respect to certain material related party transactions is set forth in Note 10 to our consolidated financial statements attached hereto.
Our board of directors delegates to the audit committee the responsibility for reviewing and approving all related party transactions (within the meaning of Item 404 of Regulation S-K of the SEC). The audit committee is responsible for obtaining information from our directors, executive officers and major shareholders with respect to related party transactions and for then determining, based on the facts and circumstances, whether our company or a related party has a direct or indirect material interest in the transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to our company or a related party has been disclosed herein.
In October 2008, a private placement of the Company’s class A shares was made in the amount of R$ 96 million (US$50 million) by the controlling shareholder, Mr. Rubens Ometto Silveira Mello, and R$ 288.1 (US$150 million) by the funds managed by Gávea Investimentos Ltda., at R$ 8.6 (US$4.50) per class A share or BDR subscribed. The offering was extended to all class A share or BDR holders, as permitted by applicable law. The offering was concluded on October 27, 2008. As a result and following the date of the acquisition, Mr. Rubens Ometto Silveira Mello holds 41.5% of the Company’s total capital and 86.1% of its voting capital.
In the normal course of business, we have operational and financing transactions with related parties. The significant related party balances and transactions are summarized below:
Aguassanta
We lease land from entities controlled by the Aguassanta Group, a group of companies under the common control of Mr. Rubens Ometto de Silveira de Mello. The lease costs are paid using the ATR price published by CONSECANA and the contracts expire between 2026 and 2027.
On July 1, 2010, Cosan entered into the build-to-suit and lease agreement with Palermo Agricola Ltda, or “Palermo”, a special purpose company wholly-owned by Aguassanta Participações S/A. Following the completion of construction of the shared services center, Cosan will lease this building from Palermo for a period of ten years, with monthly rental payments of R$350,000 (US$ 196,500).
Radar
We leased land from companies controlled by Radar. These lease costs are paid using the ATR price published by CONSECANA and most of the lease contracts expire in 2027.
Rezende Barbosa
We hold a receivable originated from the acquisition of Curupay, which are secured by our shares. We executed a long-term sugar-cane supply agreement with Rezende Barbosa. Prices paid to them are based on ATR price published by CONSECANA.
Vertical UK LLP
We sells and buy ethanol from Vertical UK in the ordinary course of business. Vertical UK is a trading company headquartered in Switzerland where we hold a 50% interest.
Logispot
In the year ended March 31, 2010, we acquired a minority stake in Logispot and the installments outstanding represented the March 31, 2010 balance payable in regard to the share acquisition. In March 2011, we acquired control of the entity.
Recurring Transactions with Shareholders
Cosan leases agricultural land for planting sugarcane from certain of our and its shareholders and other related parties on market terms. As of March 31, 2011 we leased 394.312 hectares, through 2,128 land lease contracts with an average term of five years. Six of these contracts (covering 30,260 hectares, or 7.6% of the land leased by us) are entities controlled by our chairman and controlling shareholder under arms-length terms. These land lease agreements are on arms-length terms equivalent to those we enter into with third parties. Lease payments under these agreements are based on the price of 16.9 tons of sugarcane per hectare, calculated in accordance with certain regulations of CONSECANA.
Through our indirect subsidiary Agrícola Ponte Alta S.A., we also acquired 28 ships for R$12,115,000 pursuant to a Ship Purchase Agreement, entered into on October 1, 2009. We had previously leased and used the ships to transport sugarcane to our plant in Jaú, in the district of Potunduva.
Guarantees with Related Parties
As a result of Cosan’s participation in the PESA federal government financing program between 1998 and 2000, Amaralina mortgaged land to secure the restructuring of Cosan’s debt, and Agrícola Ponte Alta and Pedro Ometto S.A. mortgaged land to secure the restructuring of the debt of Da Barra.
For approximately seven months, Cosan and Palermo Agricola Ltda, a special purpose company wholly-owned by Aguassanta Participações S/A , or “Palermo”, have been in the planning and execution stages of a project involving a build-to-suit and lease arrangement whereby Palermo would construct, pursuant to Cosan specifications, the building that will house Cosan’s shared services center in Piracicaba, São Paulo State, or the “Shared Services Center”, which would thereafter be leased by Palermo to Cosan. On July 1, 2010, Cosan entered into the build-to-suit and lease agreement with Palermo based on previously agreed business terms that formalized this arrangement. Following the completion of construction of the Shared Services Center, Cosan leased this building from Palermo and Cosan has licensed this building to Raízen for a period of ten years, with monthly rental payments of R$350,000 (US$196,500).
Not applicable.
See Item 18 for our audited consolidated financial statements.
Legal Proceedings
Tax Proceedings
We are engaged in a number of legal proceedings with Brazilian tax authorities in the total amount of R$1,989.8 million for which we have recorded provisions in an aggregate amount of R$ 418.7 million at March 31, 2011. In addition, there are currently certain legal proceedings pending in which we are involved for which we have not recorded provisions. If any of these legal proceedings is decided adversely against us, our results of operations or financial condition could be materially and adversely affected.
IPI Credit Premium. Cosan S.A. has tax credits related to the IPI premium credit introduced by Law No. 491/69. Credit premium is an incentive given to exporters, through the grant of IPI tax credits calculated on export sales, as a form of compensation for taxes paid domestically. We have used a portion of these credits to offset federal taxes and contributions. The Superior Court of Justice of Brazil, a Brazilian appellate court, had previously ruled that IPI premium credits could be used by companies to offset other federal taxes. However, in a ruling dated November 9, 2005, the Superior Court of Justice of Brazil changed its prior position. This decision may be appealed by the losing party to the Superior Court of Justice of Brazil, and, if the party loses this appeal, it may further appeal the decision to the Superior Federal Court of Brazil. We have established a provision in the amount of R$ 196.2 million in our consolidated financial statements at April 30, 2008 for the full amount of the taxes that we have offset pursuant to the initial judicial authorization. Cosan opted to settle tax related claims in installments as provided by Brazilian Law No 11.941/09 and in MP 470/09. Consequently, there was a full reduction of the claims related to IPI tax credit, as well as the installment payment of other federal taxes, that were recorded as taxes payable.
IPI challenge. In 1993, our subsidiary, CCL (now CLE) filed a suit to challenge the balance sheet restatement index (IPC) established by the federal government in 1989, because such index did not reflect the actual inflation at that time. The use of this index resulted in CCL overstating and overpaying income and social contribution taxes. CCL obtained a favorable preliminary court ruling that allowed it to recalculate the financial position, using indexes that accurately measured the inflation over the period. In doing so, the amounts of income and social contribution taxes payable and identified that overpayments for both taxes were offset in subsequent years until 1997. Despite the favorable court rulings, the Brazilian tax authorities issued a notice of infringement challenging all tax offsets performed in 1993 and some offsets in 1994 and 1997, and a provision was recorded. As of March 31, 2011, the provision amount to R$ 80.2 million.
Da Barra instituted administrative proceedings to recover IPI taxes paid with respect to refined amorphous sugar and the right to offset these IPI taxes against other federal taxes. During these proceedings, Da Barra offset these IPI tax credits against other federal taxes. However, despite the ongoing administrative proceeding, the Brazilian federal tax authority issued tax deficiency notices against Da Barra, claiming that Da Barra owed the full amount of the federal taxes that it offset with these IPI tax credits. To suspend the effectiveness of these tax deficiency notices, Da Barra filed suit for and obtained a preliminary injunction through a writ of mandamus. As of March 31, 2010, Da Barra has used a portion of these IPI tax credits to offset IPI and other federal taxes in an aggregate amount of R$ 263.5 million. We have not recorded a provision.
As of March 31, 2011, the total amount related to the remaining IPI tax debts was R$ 181.2 million.
Finsocial. From June to December of 1994, based on a preliminary injunction under a lawsuit in which the constitutionality of the Finsocial was disputed, CCL offset amounts due under the COFINS tax and several other federal taxes against a Finsocial tax credit (i.e. against the amount of Finsocial paid prior to such period). However, in 1995, CCL was deemed by the Regional Federal Court (TRF) to not be subject to the COFINS tax.
According to our understanding, TRF’s decision refers to the period from 1992 to 2001, when a Constitutional Amendment (EC nº 33/2001) changed the Brazilian Constitution to determine the applicability of the COFINS tax. As such, CCL considered that the Finsocial tax credits were available to be offset against other taxes, and this was confirmed in 2003 by a Brazilian court decision. Following the court decision, CCL began offsetting the Finsocial tax credits against other federal taxes (IRPJ, CSLL, CIDE, PIS and COFINS). However, the Brazilian tax authorities considers that the TRF applies only to the 1992 tax year.
Due to the contingent characteristic of this offset, the entire offset amount was recorded as a provision for judicial demands, pending approval by the Brazilian tax authorities of such offset. In 2008, the Brazilian tax authorities denied the entire offset, claiming that the credits had already been offset against COFINS in 1994. As such, a provision related to this matter was recorded and management decided to file an administrative appeal against the decision, which is still pending judgment.
As of March 31, 2011, the provision of R$ 56.8 million for ICMS credits is comprised of: (a) a tax assessment received, in which, despite the defense filed at the administrative and judicial levels, our Brazilian legal advisors considers it is more likely than not that a loss will occur and (b) a recovery of credits and financial charges on issues in which management has a different view on the outcome from the Brazilian tax authorities.
Furthermore, the main tax claims for which an unfavorable outcome is deemed possible and, therefore, no provision for legal claims was recorded pertaining to ICMS tax are (1) a tax assessment filed in view of the alleged lack of payment of ICMS and non-compliance with ancillary obligation, in connection with the partnership and manufacturing upon demand, Central Paulista Açúcar e Álcool Ltda., between May to December 2006 and May to December 2007; (2) ICMS levied on the remittances of crystallized sugar for export purposes. In accordance with the Brazilian tax authorities, such product is classified as semi-finished product and that, in accordance with the ICMS regulation, would be subject to taxation; (3) ICMS levied on possible differences in terms of sugar and alcohol inventories, arising from magnetic tax files and Inventory Registry Books; (4) ICMS concerning rate difference due to ethanol sales to companies located in other states, which, subsequently, had their registrations revoked; and (5) disallowance of credit resulting from the acquisition of diesel used in the production process. As of March 31, 2011, the total amount related to these matters equals to R$ 490.8 million.
The Brazilian tax authorities have assessed amounts payable due to PIS/COFINS from their differing interpretation of the tax treatment of raw materials. Such discussions are at the administrative level and following discussions with our Brazilian legal advisors, the amount of such contignecies that are more likely than not to be incurred is R$ 8.2 million and this has been recorded as a provision. Additionally, we have disclosed a potential liability of R$ 163.1 million in Note 19 of our audited consolidated financial statements attached hereto.
Brazilian tax authorities Normative Instruction (“SRF IN”) No. 67/98 approved the procedure adopted by the industrial establishments which performed remittances without registries and payment of the IPI rate,with regard to transfers of sugarcane carried out between July 6, 1995 and November 16, 1997 and refined sugar between January 14, 1992 and November 16, 1997. Since theis Normative Instruction determined that there were would be no tax on operations for the periods indicated above, the Company applied to offset and request reimbursement of amounts paid during the relevant periods against other tax liabilities. Notwithstanding the Normative Instruction, the Brazilian tax authorities denied Cosan S.A.’s requests. Cosan S.A. has challenged this ruling in an administrative proceeding, which is still pending judgment. In addition, Cosan S.A. applied and received from the Brazilian courts a preliminary injunction suspending the ability of the Brazilian tax authorities to demand the relevant tax debts in court.
Our Brazilian legal advisors have advised us that R$ 20.7 million represents the amount of such contingencies that are more likely than not to be incurred by the Company. Additionally, there are other related matters where there is a potential liability of R$ 270.8 million, as described in note 19 of our audited consolidated financial statements attached hereto.
Withholding income taxes. In September 2006, the Brazilian federal tax authorities issued a tax notice against Cosan in an aggregate amount equal to R$ 145.6 million, including penalties and interest, related to withholding income tax. Despite what we believe is a remote chance of our success on the administrative level, we believe, based on the advice of our external Brazilian legal advisors, that it is possible that we will prevail once this matter is brought before a court. As of March 31, 2011, the total amount related to this discussion was R$ 194.4 million.
Social security contribution. Refers mainly to a tax assessment received and defended by our Brazilian legal advisors, concerning social security contribution on: (1) stock option plans; (2) export sales; and (3) resale of materials for companies under common control. As of March 31, 2011, the total amount related to this discussion was R$ 72.6 million.
Social Security Proceedings
The National Social Security Institute (Instituto Nacional da Seguridade Social), or “INSS”, a Brazilian federal agency, has filed several claims against us. The social security claims that have been filed against us amount to R$ 463.5 million with respect to differences in payroll contributions to agricultural employees, differences in joint responsibility contributions with hired service providers and differences in the Workmen’s Compensation Insurance contribution, over a period of several years, as well as reimbursement of alleged payments paid improperly to INSS regarding benefits to self-employed workers. We believe that it is probable that we will be required to pay certain of these claims depending on the periods covered thereby. We have recorded a provision in an aggregate amount of R$ 29.7 million as of March 31, 2011.
Environmental Proceedings
We are party to a number of administrative and judicial proceedings regarding environmental matters. We are subject to several public civil actions related to matters including our burning of sugarcane (which is part of the manual sugarcane harvesting process), historical patrimony preservation, and protected areas. We are also subject to administrative proceedings concerning matters including the burning of sugarcane, liquid effluent discharge, air pollution, damage to environmentally protected areas, death of fish and joint liability in case of environmental damages regarding service stations. Moreover, we are also subject to judicial proceedings concerning suits filed by service stations and third parties asserting damages for fuel leaks in Esso service stations. As of March 31, 2011, the total amount related to environmental discussions equals to R$ 32.3 million and we had established a provision for these contingencies in the amount of R$ 2.2 million.
Labor Claims
As of March 31, 2011, there were 3.513 individual labor lawsuits filed against us and the total amount of our potential liability under these lawsuits amounted to a total of R$ 467.1 million. As of March 31, 2011, we had established a provision for these contingencies in the amount of R$ 164.9 million. The labor claims principally relate to claims to overtime, risk premiums and wage premiums related to workplace hazards.
Other Proceedings
We are party to numerous civil lawsuits involving claims that amounted to R$ 460.1 million in the aggregate as of March 3l, 2011. Based on the opinions of our Brazilian legal advisors handling these lawsuits, we have recorded a provision for civil contingencies in our consolidated financial statements of R$ 82.5 million as of March 31, 2011.
In accordance with court orders concerning certain tax, civil and labor lawsuits, we had bank accounts frozen in an aggregate amount of R$ 1.3 million as of March 31, 2011.
We are involved in numerous other lawsuits from time to time, including commercial litigation.
On February 28, 2007, the subsidiary Usina da Barra S.A. Açúcar e Álcool recognized financial income in the amount of R$ 318.3 million. The company had sought damages from the Brazilian federal government for setting prices for its products below the established price control guidelines. In the third quarter of fiscal year 2007, Brazilian courts reached a final and unappealable decision favorable to us. As of March 31, 2011, this account receivable from the government amounted to R$ 345.1 million.
Costa Pinto, one of the entities through which Mr. Rubens Ometto Silveira Mello previously held Cosan S.A.’s shares, its officers, directors, members of the fiscal council and controlling shareholders were party to an administrative proceeding initiated by the CVM for non-payment of minimum dividends to preferred shareholders during fiscal years 2000, 2002 and 2003. In this proceeding, it was asserted, among other things, that the equity method of accounting to determine net income available for dividends should not have been used. On July 14, 2004, a special preferred shareholders meeting approved the distribution of the dividends and ratified an agreement between the preferred shareholders and Costa Pinto. The parties entered into a consent decree with the CVM, agreeing to pay a total amount of R$ 0,3 million, and as of the date of this annual report, all issues relating to such administrative proceeding have been resolved and Costa Pinto has paid all dividends due to its preferred shareholders.
On August 10, 2007, the CVM requested information from Mr. Rubens Ometto Silveira Mello, in his capacity as chairman of the board of directors and chief executive officer of Cosan S.A., as to whether he breached any duty of loyalty to Cosan S.A.’s minority shareholders under Brazilian law by taking actions to effect the corporate reorganization or by potentially usurping corporate opportunities otherwise available to Cosan S.A., especially with regard to business activities outside of Brazil by our company that could be conducted by Cosan S.A. Mr. Rubens Ometto Silveira Mello informed the CVM on August 14, 2007 that his roles in the corporate reorganization and with respect to the corporate reorganization have been, and will continue to be, conducted in compliance with Brazilian law.
In addition, during a meeting held on August 15, 2007, we were informed by CVM commissioners that, in their opinion, future conduct of business activities outside of Brazil by our company, when these activities could be carried out by Cosan S.A., may breach provisions of Brazilian law relating to the duty of loyalty and corporate opportunities. The CVM stated that, if our company pursues in the future corporate opportunities outside Brazil to the detriment of Cosan S.A., the CVM may bring an administrative proceeding against Mr. Rubens Ometto Silveira Mello or us, which we anticipate may result in the imposition of monetary penalties. Mr. Rubens Ometto Silveira Mello has informed us that he believes he has not, and we also believe that we have not, breached any applicable Brazilian law; and, as and if necessary, he and we will seek to take measures to ensure compliance with such law.
On December 5, 2007, following receipt of the approval of the Extraordinary Shareholders Meeting of Cosan S.A., Cosan Limited, Cosan S.A. and Mr. Rubens Ometto Silveira Mello executed a “Commitment to Offer Commercial Opportunities,” which regulates the terms and conditions in which the international commercial opportunities developed by Cosan Limited are to be offered to Cosan S.A., allowing Cosan S.A. to participate, in accordance with the conditions established under the agreement, in those commercial opportunities.
Our company has undertaken to the CVM not to change the steps of the corporate reorganization as described in our registration statement on Form F-4 (Registration No. 333-147235) filed by the Company with the SEC as well as in this annual report, particularly with respect to the exchange offer to be made to Cosan S.A. shareholders.
Dividends and Dividend Policy
Dividend Rights
Cosan Limited is a holding company and can only pay dividends to the extent, if any, that funds are received from our subsidiaries. Our dividend policy is similar to the current dividend policy of our main subsidiary, Cosan. Cosan is required by the Brazilian corporate law to distribute (and has historically done so) on an annual basis dividends representing 25% of its net income (as calculated under Brazilian GAAP, subject to certain adjustments mandated by Brazilian corporate law). We intend to pay cash dividends representing on an annual basis 25% of our annual consolidated net income (as calculated under IFRS), to holders of class A common shares and class B common shares in proportion to the number of shares held by them unless our board of directors has determined, in its discretion, that such distribution would not be advisable or appropriate in light of our financial condition or we are unable to meet applicable statutory solvency requirements under Bermuda law.
Our board of directors may, in its discretion, amend or repeal our dividend policy. You may not receive the level of dividends provided for in the dividend policy or any dividends at all due to a number of factors, such as:
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we are a holding company, and therefore, our ability to pay dividend will depend on our ability to receive distributions from our subsidiaries, particularly our subsidiary Cosan;
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our subsidiaries may become subject to covenants restricting their ability to distribute dividends under credit facilities, term loans or other indebtedness;
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any imposition of restrictions on conversions and remittances by the Brazilian government could hinder or prevent us from converting into U.S. dollars or other foreign currencies and remitting abroad dividends of our Brazilian subsidiaries;
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our shareholders have no contractual or other legal rights to dividends pursuant to Bermuda law; and
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we may not have sufficient cash to pay dividends due to changes in our operating earnings, working capital requirements and anticipated cash needs.
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Under Bermuda law, a company’s board of directors may declare and pay dividends from time to time unless there are reasonable grounds for believing that the company is or would, after the payment, be unable to pay its liabilities as they become due or that the realizable value of its assets would thereby be less than the aggregate of its liabilities and issued share capital and share premium accounts. Under our by-laws, each class A common share and class B common share is entitled to dividends if, as and when dividends are declared by our board of directors, subject to any preferred dividend right of holders of any preference shares. There are no restrictions on our ability to transfer funds (other than funds denominated in Bermuda dollars) in or out of Bermuda or to pay dividends to U.S. residents who are holders of our common shares.
We expect to have sufficient available cash to pay dividends in accordance with our dividend policy. We do not, however, plan to pay dividends in the event that we do not generate sufficient cash from operations. In addition, we will not pay dividends if we believe that such payment will limit or preclude our or our subsidiaries’ ability to pursue growth opportunities. Although our by-laws and Cosan’s by-laws do not restrict us from borrowing funds to pay dividends, we do not intend to borrow funds to pay dividends.
The dividend rights attaching to our class A common shares and class B common shares are not cumulative in the event that we do not, for any reason, pay dividends on those shares.
Any cash dividends payable to holders of our common shares quoted on the NYSE will be paid to Mellon Investors Services LLC, our transfer agent in the United States, for disbursement to those holders.
Cosan’s Dividend Policy
Brazilian corporate law and Cosan’s by-laws require that Cosan distributes annually to its shareholders a mandatory minimum dividend, unless Cosan’s board of directors notifies the shareholders that such distribution is not advisable in light of Cosan’s financial condition as reflected in Cosan’s consolidated financial statements in accordance with Brazilian GAAP. The mandatory dividend is equal to 25% of Cosan’s net income for the prior year (as calculated under Brazilian GAAP, subject to certain adjustments mandated by Brazilian corporate law). The mandatory dividend may be made in the form of dividends or interest on shareholders equity, which may be deducted by Cosan in calculating its income and social contribution tax obligations. The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of a majority of the holders of Cosan’s common shares and depends on numerous factors. These factors include Cosan’s results of operations, financial condition, cash requirements, future prospects, financial covenant limitations, and other factors deemed relevant by Cosan’s board of directors and shareholders. Cosan’s board of directors has adopted a dividend policy pursuant to which Cosan has distributed as dividends and/or interest on shareholders equity in the amount of approximately 25% of Cosan’s net income for each fiscal year. Under Brazilian corporate law, Cosan may establish income reserve accounts composed of a legal reserve, an investments reserve and/or a retained profit reserve. The balance of such income reserve accounts must not exceed the amount of Cosan’s capital stock and any excess amounts must either be incorporated to its capital stock or distributed as dividends. Cosan has historically paid cash distributions.
The following table sets forth Cosan’s dividend distributions calculated, under Brazilian GAAP, for each of the last five fiscal years:
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Fiscal Year
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Total Dividend Distribution
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(in millions of R$)
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2006
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— | |||
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2007
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75.8 | |||
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2008
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— | |||
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2009
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— | |||
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2010
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43.9 | |||
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2011
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220.1 | |||
Brazilian Taxation
Dividends paid by Cosan to us are currently not subject to withholding income tax in Brazil, to the extent that such amounts are related to profits generated as of January 1, 1996. In addition, Brazilian tax laws permit Cosan to make distributions to shareholders of interest on shareholders’ equity and treat those payments as a deductible expense for purposes of calculating Brazilian income tax and social contributions. For tax purposes, this interest is limited to the daily pro rata portion of the TJLP, as determined by the Central Bank from time to time, and the amount of the deduction is limited to (1) 50% of net income (after social contributions but before income tax and the amount to be distributed as interest on shareholders’ equity) related to the period in respect of which the payment is made; or (2) 50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made. A payment to us of interest on shareholders’ equity is subject to withholding income tax at the rate of 25%.
A discussion of the significant changes in our business can be found under “Item 4. Information on the Company—A. History and Development of the Company.” Please also see our earnings reports filed with the SEC on Form 6-K on June 23, 2011.
Formation of Joint Ventures
On June 2, 2011, the Company, together with Shell, formed two jointly-controlled companies: (i) Raízen Combustíveis S.A. in the fuel distribution segment, and (ii) Raízen Energia Participações S.A. in the segment of sugar and ethanol. Cosan and Shell share control of the two entities, with each company holding 50% of the economic control. Cosan recorded its investments in the joint ventures using the equity method of accounting for the purposes of its individual financial information, and through proportionate consolidation in the consolidated financial information.
On the establishment of the joint ventures, Cosan’s investment was made through the contribution of their sugar and ethanol business as well as their fuel distribution business. Shell’s contribution to the joint venture was made through its fuel distribution business in Brazil, its interests in Iogen and Codexis, the license to use the Shell brand and a fixed cash contribution of approximately R$1.8 billion over a two year period.
The establishment of Raízen Energia and Raízen Combustíveis was aimed at creating one of the world’s largest producers of sugar, ethanol and sugarcane based bio-energy as well as one of the largest fuel distributors in the Brazilian market.
On formation of the joint ventures, the Company contributed its sugar and ethanol and distribution businesses, and therefore was required to deconsolidate the relevant assets and liabilities and recognize the remaining stake at fair value.
The deconsolidation process of the contributed businesses on June 1, 2011, and the recognition of the new stake at fair value produced a gain of R$2.9 million which was recognized in the first quarter (June 30, 2011).
Given that Cosan opted to proportionally consolidate the joint ventures, the fair value of the remaining stake was allocated to these entities’ assets and liabilities at fair value for the purpose of determining the goodwill resulting from this transaction, as shown below:
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Raízen
Energia
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Raízen
Combustíveis
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Total
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Net assets at fair value (a):
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7,656.7 | 4,627.7 | 12,284.4 | |||||||||
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Cosan’s stake – 50%
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3,828.4 | 2,313.9 | 6,142.3 | |||||||||
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Goodwill allocated (a)
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1,195.2 | 722.4 | 1,917.6 | |||||||||
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Fair value of the remaining stake in the joint ventures
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5,023.6 | 3,036.3 | 8,059.9 | |||||||||
The total goodwill verified in the transaction (R$1,917.6 million) was allocated to the Raízen Energia and Raízen Combustíveis segments in the proportion to the net assets at fair value of the respective investments.
Docelar
On July 1, 2011, we transferred capital in the amount of R$85.9 million into our subsidiary Handson Participações S.A., with the objective of acquiring, through this subsidiary and its jointly-controlled subsidiary Raízen Energia, control of Docelar Alimentos e Bebidas S.A., or “Docelar”, a company that focuses on the industrialization and refining of sugar and the sale of these and other products within the foodstuff segment, in the retail market.
CADE Decision – Aviation Assets
In compliance with the CADE decision, which was announced on July 27, 2011, Raízen Combustíveis will sell the aviation assets that were acquired from Cosan by Shell Brasil Ltda in 2009, which include aircraft refueling installations at seven airports. The transaction should be carried out within 60 days in accordance with the decision.
Stock Option Plan
On July 29, 2011, the shareholders of Cosan S.A. approved a stock option plan for its executives and employees in an amount of up to 5% of the total shares of Cosan S.A.
Dividends
On August 12, 2011, the board of directors approved the distribution of the entire dividend to be received by Cosan S.A. on August 31, 2011. The dividends will be paid to shareholders for the fiscal year 2011 ended March 31, 2011 totaling US$ 76.9 million corresponding to US$ 0.281126238 per common share or the equivalent in reais to holders of Brazilian depositary receipts, without withholding income tax.
Perpetual Notes
On July 13, 2011, the subsidiary Cosan Overseas Limited issued perpetual notes guaranteed by Cosan S.A. in accordance with Regulations S in the aggregate principal amount of US$200.0 million in addition to the notes that were issued on November 5, 2010, which are also subject to interest at a rate of 8.25% a year payable quarterly.
Prior to August 16, 2007, no public market existed for our class A common shares. Since August 16, 2007, our class A common shares have been listed on the NYSE and trade under the symbol “CZZ”. The BDRs representing our class A common shares are listed on the BM&FBOVESPA and trade under the symbol “CZLT11”.
The following information concerning the trading history of our class A common shares and BDRs representing our class A common shares is presented solely for informational purposes. This information should not be viewed as indicative of future sales prices for either our class A common shares on the NYSE or BDRs representing our class A common shares on the BM&FBOVESPA. Actual future sales prices for our class A common shares and the BDRs are likely to be significantly different from their trading history.
The following table sets forth the high and low closing sales prices for our class A common shares on the NYSE and the BDRs representing our class A common shares on the BM&FBOVESPA for the periods indicated.
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NYSE
(US$ per common share)
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High
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Low
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Fiscal Year Ended March 31, 2011
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14.57 | 7.95 | ||||||
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Fiscal Year Ended March 31, 2010
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9.75 | 2.40 | ||||||
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Eleven Months Ended March 31, 2009
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14.02 | 2.03 | ||||||
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Fiscal Year Ended March 31, 2008
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15.75 | 10.00 | ||||||
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Fiscal Quarter
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First Fiscal Quarter 2010
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6.67 | 2.40 | ||||||
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Second Fiscal Quarter 2010
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8.47 | 4.86 | ||||||
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Third Fiscal Quarter 2010
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8.69 | 6.65 | ||||||
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Fourth Fiscal Quarter 2010
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9.75 | 7.80 | ||||||
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First Fiscal Quarter 2011
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10.9 | 7.95 | ||||||
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Second Fiscal Quarter 2011
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12.01 | 9.82 | ||||||
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Third Fiscal Quarter 2011
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14.08 | 11.57 | ||||||
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Fourth Fiscal Quarter 2011
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14.57 | 12.17 | ||||||
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First Fiscal Quarter 2012
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13.35 | 10.83 | ||||||
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April 2011
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13.35 | 11.65 | ||||||
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May 2011
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12.38 | 10.83 | ||||||
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June 2011
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12.58 | 11.69 | ||||||
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July 2011
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12.82 | 11.98 | ||||||
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August 2011
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11.68 | 11.48 | ||||||
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September 2011 (through September 26, 2011)
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11.70 | 9.75 | ||||||
Sources: Factset; Reuters.
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BM&FBOVESPA
(reais per BDR)
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High
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Low
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Fiscal Year Ended March 31, 2011
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24.15 | 14.89 | ||||||
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Fiscal Year Ended March 31, 2010
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17.65 | 5.78 | ||||||
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Eleven Months Ended March 31, 2009
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23.20 | 5.40 | ||||||
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Fiscal Year Ended April 30, 2008
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26.99 | 17.80 | ||||||
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Fiscal Quarter
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First Fiscal Quarter 2010
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12.71 | 5.78 | ||||||
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Second Fiscal Quarter 2010
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15.80 | 9.81 | ||||||
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Third Fiscal Quarter 2010
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15.60 | 12.40 | ||||||
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Fourth Fiscal Quarter 2010
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17.65 | 15.10 | ||||||
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First Fiscal Quarter 2011
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19.00 | 14.89 | ||||||
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Second Fiscal Quarter 2011
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20.38 | 17.68 | ||||||
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Third Fiscal Quarter 2011
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23.65 | 19.68 | ||||||
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Fourth Fiscal Quarter 2011
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24.15 | 19.96 | ||||||
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First Fiscal Quarter 2012
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21.29 | 17.40 | ||||||
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April 2011
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21.29 | 18.40 | ||||||
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May 2011
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19.43 | 17.40 | ||||||
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June 2011
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20.00 | 18.52 | ||||||
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Julys 2011
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19.80 | 18.86 | ||||||
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August 2011
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18.80 | 18.10 | ||||||
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September 2011 (through September 26, 2010)
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19.65 | 18.50 | ||||||
Sources: Bloomberg
On September 26, 2011, the last reported closing sale price of our class A common shares on the New York Exchange and the BDRs representing our class A common shares on the BM&FBOVESPA were R$ 10.26 and R$ 18.68 per class A common share and BDR representing our class A common shares, respectively.
Trading History of Cosan’s Common Shares
Prior to our initial public offering and the formation of our company, Cosan’s common shares have been listed on the Novo Mercado segment of the BM&FBOVESPA under the symbol “CSAN3”. Because the exchange offer has been completed and not all shareholders accepted our exchange offer, we do not expect to seek delisting from trading on the Novo Mercado. For more information regarding the exchange offer see our registration statement on Form F-4 (Registration No. 333-147235) filed by the Company with the U.S. Securities and Exchange Commission.
The following information concerning the trading history of Cosan’s common shares is presented solely for informational purposes. This information should not be viewed as indicative of future sales prices for either our class A common shares on the NYSE or BDRs representing our class A common shares on the BM&FBOVESPA. Actual future sales prices for our class A common shares and the BDRs are likely to be significantly different from the trading history of Cosan’s common shares.
The market information in the following tables has been restated to reflect the three-for-one share split of Cosan’s common shares on August 31, 2006.
The following table sets forth the high and low closing sales prices for Cosan’s common shares on the BM&FBOVESPA for the periods indicated.
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BM&FBOVESPA
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(reais per common share)
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High
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Low
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Fiscal Year Ended March 31, 2011
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60.08 | 27.76 | ||||||
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Fiscal Year Ended March 31, 2010
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42.30 | 18.90 | ||||||
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Eleven Months Ended March 31, 2009
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34.15 | 8.00 | ||||||
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Fiscal Year Ended March 31, 2008
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25.60 | 10.08 | ||||||
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Fiscal Year Ended March 31, 2011
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28.85 | 18.00 | ||||||
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Fiscal Quarter
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First Fiscal Quarter 2010
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16.80 | 10.08 | ||||||
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Second Fiscal Quarter 2010
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21.40 | 14.00 | ||||||
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Third Fiscal Quarter 2010
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25.60 | 17.99 | ||||||
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Fourth Fiscal Quarter 2010
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25.60 | 21.30 | ||||||
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First Fiscal Quarter 2011
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23.75 | 18.00 | ||||||
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Second Fiscal Quarter 2011
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25.30 | 22.24 | ||||||
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Third Fiscal Quarter 2011
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28.85 | 24.88 | ||||||
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Fourth Fiscal Quarter 2011
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28.59 | 23.91 | ||||||
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First Fiscal Quarter 2012
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26.78 | 21.23 | ||||||
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April 2011
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26.78 | 23.28 | ||||||
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May 2011
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24.15 | 21.23 | ||||||
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June 2011
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24.80 | 23.13 | ||||||
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July 2011
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24.50 | 22.90 | ||||||
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August 2011
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23.90 | 23.24 | ||||||
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September 2011 (through September 26, 2011)
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25.50 | 23.80 | ||||||
Source: Bloomberg.
On September 26, 2011, the last reported closing sale price of Cosan’s common shares on the BM&FBOVESPA was R$ 24.14 per share.
Trading on the BM&FBOVESPA
The BDRs are traded only in the secondary market of the BM&FBOVESPA, and private trading is not permitted. The CVM and the BM&FBOVESPA have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances. Trading in securities listed on the BM&FBOVESPA may be effected off the exchanges in the over-the-counter market in certain limited circumstances. The shares of all companies listed on the BM&FBOVESPA, including the Novo Mercado and Level 1 and Level 2 companies are traded together. Settlement of transactions occurs three business days after the trade date. Delivery of and payment for shares are made through the facilities of separate clearing houses for each exchange, which maintain accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the clearing house on the second business day following the trade date. The clearing house for the BM&FBOVESPA is the Companhia Brasileira de Liquidação e Custódia, or “CBLC”. In order to reduce volatility, the BM&FBOVESPA has adopted a circuit breaker system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever specified indices of the BM&FBOVESPA fall below the limits of 10% and 15%, respectively, in relation to the index levels for the previous trading session.
Trading on the BM&FBOVESPA by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or by a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment regulation. With limited exceptions, non-Brazilian holders that invest in Brazil under the terms of Conselho Monetário Nacional (National Monetary Council), or “CMN” Resolution No. 2,689 of January 26, 2000, as amended, or Resolution 2,689, may trade on Brazilian stock exchanges or Brazilian organized and authorized over-the-counter markets, and must restrict their securities trading to transactions on such markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution 2,689 to other non-Brazilian holders through a private transaction. Resolution 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions and be registered with a clearing house. Such financial institutions and clearing houses must be duly authorized to act as such by the Central Bank and the CVM.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and by Law No. 6,404 of December 15, 1976, or “Brazilian corporate law”, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets generally; the CMN; and the Central Bank of Brazil, or “Central Bank”, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. These laws and regulations, among others, provide for licensing and oversight of brokerage firms, governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded securities, restrictions on price manipulation and protection of minority shareholders. They also provide for restrictions on insider trading. However, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or securities markets in some other jurisdictions.
Any trades or transfers of the BDRs representing our class A common shares by our officers and directors, our controlling shareholders or any of the officers and directors of our controlling shareholders must comply with the regulations issued by the CVM. Under Brazilian corporate law, a Brazilian corporation is either publicly held (companhia aberta), as Cosan is, or closely held (companhia fechada). All publicly held companies are registered with the CVM and are subject to reporting requirements. Additionally, non-Brazilian companies sponsors of BDR programs are also registered with the CVM and, to the extent permitted by the respective applicable laws and regulations, are also subject to reporting requirements.
A company registered with the CVM may trade its securities either in stock exchanges or in the Brazilian over-the-counter market. The common shares issued by Cosan are listed on the Novo Mercado segment of the BM&FBOVESPA. We have applied to list the BDRs representing our class A common shares on the BM&FBOVESPA. The trading of securities of a listed company on the BM&FBOVESPA may be suspended at the request of such company in anticipation of a material announcement. Trading may also be suspended on the initiative of the BM&FBOVESPA or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a publicly held company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
Investment in BDRs by Non-Residents of Brazil
Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including BDRs, on a Brazilian stock exchange, provided that they comply with the registration requirements set forth in Resolution 2,689 and CVM Instruction No. 325. With certain limited exceptions, Resolution 2,689 investors are permitted to carry out any type of transaction in the Brazilian financial and capital markets involving a security traded on a stock, futures or organized and authorized over-the-counter market. Investments and remittances outside Brazil of gains, dividends, profits or other payments under our BDRs are made through the exchange markets and are subject to restrictions under foreign investment regulations which generally require, among other things, registration with the Central Bank and the CVM. In order to subscribe BDRs through the foreign exchange market, under the Resolution 2,689, an investor residing outside Brazil must:
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appoint at least one representative in Brazil with powers to take actions relating to the investment;
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appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and the CVM; and
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through its representative, register itself as a foreign investor with the CVM and register the investment with the Central Bank.
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Securities and other financial assets held by foreign investors pursuant to Resolution 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors are generally restricted to transactions on the Brazilian stock exchanges and organized over-the-counter markets involving securities listed for trading in such markets.
Additionally, an investor operating under the provisions of Resolution 2,689 must be registered with the Brazilian Taxpayers’ Registry, managed by the Brazilian Federal Revenue Office (Receita Federal do Brasil), pursuant to its Instruction No. 568. For information on certain possible Brazilian tax effects on the sale of our BDRs, see “Item 3. Key Information—D. Risk Factors”.
Not applicable.
Our class A common shares are listed on the NYSE and trade under the symbol “CZZ”. The BDRs representing our class A common shares are listed on the BM&FBOVESPA and trade under the symbol “CZLT11”.
Not applicable.
Not applicable.
Not applicable.
Our authorized share capital consists of 1,000,000,000 class A common shares, par value US$0.01 per share, and 188,886,360 class B common shares, par value US$0.01 per share. The authorized class B common shares are, in turn, divided into two series: 96,332,044 class B series 1 common shares, par value US$0.01 per share; and 92,554,316 class B series 2 common shares, par value US$0.01 per share. We have 174,355,341 class A common shares and 96,332,044 class B series 1 common shares issued and outstanding.
As of the date of this annual report, no preference shares are issued and outstanding. All of our common shares issued and outstanding prior to completion of the exchange offer are and will be fully paid, and all of our shares to be issued in the exchange offer will be issued as fully paid. In accordance with Bermuda law, and subject to any contrary provision in any agreement between us and our shareholders, in relation to fully-paid shares of our company, no shareholder shall be obliged to contribute further amounts to the capital of our company, either in order to complete payment for their shares, to satisfy claims of creditors of our company, or otherwise; and no shareholder will be bound by an alteration of the memorandum of association or by-laws of our company after the date on which he or she became a shareholder, if and so far as the alteration requires him or her to take, or subscribe for additional shares, or in any way increases his or her liability to contribute to the share capital of, or otherwise to pay money to, our company.
Pursuant to our by-laws, and subject to the requirements of any stock exchange on which our shares are listed, our board of directors is authorized to issue any of our authorized but unissued share capital.
General
We are a limited liability exempted company incorporated under the laws of Bermuda on April 30, 2007. We are registered with the Registrar of Companies in Bermuda under registration number EC 39981. Our registered office is located at Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.
The objects of our business are set forth in our memorandum of association and provide that we have unrestricted objects and powers and rights including to:
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import, export, produce and sell ethanol, sugar, sugarcane and other sugar by-products;
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distribute and sell fuel and other fuel by-products;
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produce and market electricity, steam and other co-generation by-products;
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render technical services related to the activities mentioned above; and
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hold equity interests in other companies.
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There have been no bankruptcy, receivership or similar proceedings with respect to us or our subsidiaries.
Issued Share Capital
Under our by-laws, the holders of our class A common shares and class B common shares will be offered the preemptive right to purchase, in the first instance, on a pro rata basis according to their ownership interests, additional shares in the event of any increase in share capital. However, this preemptive right may be waived by (1) a majority of our board of directors in the case of an offering (whether or not registered under the Securities Act) or (2) a majority of the independent directors on our board of directors in any circumstance.
Pursuant to and in accordance with the Notice to the Public dated June 1, 2005 issued by the Bermuda Monetary Authority, there is no limitation on the right of non-residents of Bermuda to hold our shares as long as we remain listed on the NYSE.
Common Shares
Holders of class A common shares are entitled to one vote per share on all matters submitted to a vote of shareholders in general meeting. Holders of class B series 1 common shares or class B series 2 common shares are entitled to ten votes per share on all matters submitted to a vote of shareholders in general meeting, except as otherwise provided by our by-laws.
Except for the conversion provisions relating to our class B common shares, holders of our class A common shares and class B common shares have no redemption, conversion or sinking fund rights. Unless a different majority is required by law or by our by-laws, resolutions to be approved by holders of common shares require approval by a simple majority of votes cast at a meeting at which a quorum is present.
In the event of our liquidation, dissolution or winding-up, the holders of class A common shares and class B common shares are entitled to share equally and ratably in our assets, if any, remaining after the payment of all of our debts and liabilities, subject to any liquidation preference on any outstanding preference shares.
Preference Shares
Under our by-laws, we may, subject to the affirmative vote of a majority of our board of directors and, in certain circumstances as provided for in our by-laws, a majority of our class A common shares and class B common shares, each voting as a separate class, establish one or more series of preference shares having such number of shares, designations, dividend rates, relative voting rights, conversion or exchange rights, redemption rights, liquidation rights and other relative participation, optional or other special rights, qualifications, limitations or restrictions as may be fixed. Such rights, preferences, powers and limitations as may be established could also have the effect of discouraging an attempt to obtain control of us. There are no outstanding preference shares, and we have no present plans to issue any preference shares.
Dividend Rights
For information concerning dividend rights of our class A common shares, class B series 1 common shares and class B series 2 common shares, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy”.
Tag-along Rights
Following the consummation of our initial public offering, no person or group of persons (other than a holder of class B series 1 common shares) may, in a transaction or series of transactions, acquire, directly or indirectly, the beneficial ownership of class A common shares representing more than 15% of our issued and outstanding common shares from any person or otherwise acquire control over our company, unless the terms and conditions of such transaction or transactions include an offer by the acquiring person or group of persons to the holders of all other class A common shares or class B common shares to acquire at the option of each applicable shareholder, all or any part of the respective shares owned by such shareholder. The price per share paid by the acquiring person or group of persons will be equivalent to the greater of (1) the highest price per share paid by the acquiring person or group of persons to acquire any such class A shares representing 15% of our issued and outstanding common shares or control, as applicable and (2) a price determined based on an appraisal report. The tag-along tender offer must be launched promptly after closing of the sale that triggers application of the tag-along provision and be completed within 60 days after the consummation of the transaction or series of transactions. In the event that the tag-along tender offer is not completed within the 60-day period, the holder or holders of the shares acquired in the sale that triggered the preemption rights will not be entitled to vote such shares, and we will be entitled to compel such holder or holders to sell these shares to unaffiliated persons deemed acceptable by a majority of our board of directors at the lower of (A) the lowest acquisition price for the class A common shares and (B) the then prevailing market price on the NYSE or such other stock exchange which constitutes the principal market for the class A common shares on a date selected by our board of directors that is not more than ten trading days on the applicable exchange following the expiration of the 60-day period.
Conversion
Our class A common shares are not convertible into any other shares of our authorized share capital.
Each class B common share is convertible at any time after three years following our initial public offering (August 16, 2007), at the option of the holder, into one class A common share. In addition, each class B common share will, subject to limited exceptions applicable to class B series 1 common shares referred to below, automatically convert into one class A common share upon any transfer of its current beneficial ownership, whether or not for value.
Following the death of Mr. Rubens Ometto Silveira Mello or a determination by 66-2/3% of our board of directors based on the medical determination of two internationally-recognized certified physicians that he is permanently mentally incapacitated, the beneficial ownership of class B series 1 common shares may be transferred from him to his immediate family members without resulting in the automatic conversion of those shares into class A common shares. So long as class B common shares are issued and outstanding, in the case of death or permanent incapacitation of Mr. Rubens Ometto Silveira Mello, the following actions or events will be subject to approval by a majority of the then independent members of our board of directors, in addition to any other approval of shareholders or members of our board required by Bermuda law or our by-laws:
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appointment of the chief executive officer of our company or any of its subsidiaries (including successors thereof);
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changes to the core business strategy of our company or any of its subsidiaries;
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change name or corporate purpose of our company or any of its subsidiaries;
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amendments to any rights of the class B series 1 common shares;
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any recapitalization, stock split, combination, reclassification or similar action affecting equity interests in our company or any of its subsidiaries;
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redemption, capital reduction or other acquisition for value of any shares of equity interests in our company or any of its subsidiaries;
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any transaction or series of transactions resulting in a spin-off, delisting, merger, amalgamation, reorganization or combination of or by our company or any of its subsidiaries with, or any acquisition of, another person involving an amount in excess of US$250 million;
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any sale, lease, assignment, transfer or other disposition of assets valued in the aggregate, in excess of US$250 million;
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any voluntary liquidation, reorganization, dissolution or winding-up of, or a voluntary filing for bankruptcy protection by our company or any of its subsidiaries;
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the approval of the limit of the compensation of members of the board of directors or executive officers of our company or any of its subsidiaries;
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the making of any investment in excess of US$250 million other than investments in the ordinary course of business;
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entering into any joint venture, partnership or any similar arrangement other than in the ordinary course of business;
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any related-party transactions;
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the incurrence of any liens on properties valued, in the aggregate, in excess of US$250 million;
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amendment of the provisions of any of the foregoing actions or events; and
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agreeing to, or otherwise committing to take, any of the foregoing actions.
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Mr. Rubens Ometto Silveira Mello may also transfer his class B series 1 common shares to a trust, corporation, partnership or limited liability company in which he and, following his death or permanent incapacitation, a member or members of his immediate family, directly or indirectly, retain sole dispositive power and exclusive voting control with respect to such entity and the class B series 1 common shares held by such entity. In addition, any such trust, corporation, partnership, or limited liability company that directly holds class B series 1 common shares may distribute those shares to its respective partners, members or owners (which may further distribute the class B series 1 common shares to their respective partners, members or owners) without triggering a conversion to class A common shares, provided that Mr. Rubens Ometto Silveira Mello and, following his death or permanent incapacitation, his immediate family members continue to hold sole dispositive power and exclusive voting control over the class B series 1 common shares.
Class B common shares also will automatically convert into class A common shares when the aggregate outstanding class B series 1 common shares represent less than 45% of our total voting power in respect of the issued and outstanding share capital in the company. In addition, class B series 2 common shares will automatically convert into class A common shares if all the class B series 1 common shares convert into class A common shares.
Once transferred and converted into class A common shares, class B common shares will not be reissued. No class of common shares may be subdivided or combined unless the other class of common shares concurrently is subdivided or combined in the same proportion and in the same manner.
Transfer of Shares
Our board of directors may, in its discretion and without assigning any reason, refuse to register the transfer of a share that it is not fully paid. Our board of directors may also refuse to register the transfer of a share unless the instrument of transfer for such share is duly stamped (if required by law), is in respect of one class of shares, is in favor of less than 5 persons jointly and is accompanied by the relevant share certificate (if one has been issued) and such other evidence of the transferor’s right to make the transfer as our board of directors shall reasonably require. Any transfer of beneficial ownership of class B series 1 common shares or class B series 2 common shares not registered with the company will be null and void. For a period of three years following our initial public offering (August 16, 2007), holders of our class B series 2 common shares may not transfer less than all of the class B series 2 common shares that they own. Subject to these restrictions as are more fully set out in our by-laws a holder of shares in the company may transfer the title to all or any of such holder’s shares in the company by completing a form of transfer in such form as our board of directors may reasonably approve. The instrument of transfer must be signed by the transferor and transferee, although in the case of a fully paid share, our board of directors may accept the instrument signed only by the transferor. The board may also accept mechanically executed transfers.
Meetings of Shareholders
Under Bermuda law, a company is required to convene at least one general meeting of shareholders in each calendar year. Bermuda law provides that a special general meeting of shareholders may be called by the board of directors of a company and must be called upon the requisition of shareholders holding not less than 10% of the paid-up capital of the company as of the date of deposit carries the right to vote. Bermuda law also requires that shareholders be given at least five days’ advance notice of a general meeting, but the accidental omission to give notice to, or the non-receipt of a notice by, any person entitled to receive notice does not invalidate the proceedings at the meeting. Our by-laws provide that the chairman of the Board may call an annual general meeting or a special general meeting. Special general meetings of the shareholders may also be convened by our board of directors.
Under our by-laws, at least 10 clear days notice of an annual general meeting or a special general meeting must be given to each shareholder entitled to receive notice of such meeting. This notice requirement is subject to the ability to hold such meetings on shorter notice if notice is served pursuant to Bermuda law in the manner provided by the Companies Act 1981. The quorum required for a general meeting of shareholders is two or more persons present in person or by proxy and entitled to vote representing the holders of more than 45% of the aggregate voting power of the shares in the Company which by their terms carry the right to vote.
Any action required to be taken at a meeting of shareholders except in the case of the removal of auditors or directors may be taken without a meeting and without vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of issued and outstanding shares of the company, their proxy or corporate representative representing the percentage of votes required if the resolution had been voted on at a meeting of the shareholders. Notice of any resolution in writing shall be given to all shareholders entitled to attend a vote at a shareholder meeting.
Access to Books and Records and Dissemination of Information
Members of the general public have the right to inspect the public documents of a company available at the office of the Registrar of Companies in Bermuda. These documents include the company’s memorandum of association and any alteration to its memorandum of association. The shareholders have the additional right to inspect the by-laws of the company, minutes of general meetings and the company’s audited consolidated financial statements, which audited financial statements must be presented at the annual general meeting unless waived in accordance with the provisions of the Companies Act 1981. The register of shareholders of a company is also open to inspection by shareholders and by members of the general public without charge. The register of shareholders is required to be open for inspection for not less than two hours in any business day (subject to the ability of a company to close the register of shareholders for not more than thirty days in a year). A company is required to maintain its share register in Bermuda but may, subject to the provisions of the Companies Act 1981, establish a branch register outside Bermuda. A company is required to keep at its registered office a register of directors and officers that is open for inspection for not less than two hours in any business day by members of the general public without charge. Bermuda law does not, however, provide a general right for shareholders to inspect or obtain copies of any other corporate records.
Election and Removal of Directors
Our by-laws provide that our board of directors must consist of between five and eleven directors or such greater number as the board may determine. Our board of directors currently consists of eleven directors. Our by-laws provide that at least 40% (and, following the death or permanent incapacitation of Mr. Rubens Ometto Silveira Mello, at least 60%) of the members of our board of directors must be independent (as defined by the rules promulgated by (1) the U.S. Securities and Exchange Commission under the Exchange Act and (2) by the NYSE or any other principal securities exchange on which the class A common shares are so listed).
Our board of directors is divided into three classes that are, as nearly as possible, of equal size. Each class of directors is elected for a three-year term of office, and the terms are staggered so that the term of only one class of directors expires at each annual general meeting. There is also no requirement under Bermuda law or in our by-laws that our directors must retire at a certain age.
Any shareholder wishing to propose for election as a director a person who is not an existing director must give notice to the company of the intention to propose that person for election. The notice must be given not later than 90 days before the first anniversary of the last annual general meeting, or ten days after the notice of the general meeting at which the directors will be elected, whichever is earlier.
Our by-laws provide that a director may be removed with or without cause by a majority of the other directors then in office. Our by-laws also provide that a director may be removed for cause by the affirmative vote of the holders of a majority of the shareholder votes cast at a general meeting at which a quorum is present, provided notice is given to the director of the shareholders general meeting convened to remove the director. A director may be removed without cause upon the affirmative vote of the holders of a majority of the aggregate voting power of the shares of the Company which carry the right to vote on all matters submitted to shareholders, provided notice is given to the director of the general meeting convened to remove the director, which notice must contain a summary of the facts justifying the removal and must be served on the director not less than fourteen days before the meeting. As long as a director has made a written request deposited at the registered office of the Company pursuant to the Companies Act 1981, a director is entitled to attend the general meeting and be heard at any general meeting called for his removal.
So long as a quorum remains in office, our board of directors may fill any casual vacancy occurring.
Proceedings of Board of Directors
Our by-laws provide that our business is to be managed and conducted by our board of directors. Bermuda law requires that our directors be individuals, but there is no requirement in our by-laws or Bermuda law that directors hold any of our shares.
The remuneration of our directors is determined by our board of directors, and there is no requirement that a specified number or percentage of “independent” directors must approve any such determination. Our directors may also be paid all travel, hotel and other expenses properly incurred by them in connection with our business or their duties as directors.
Provided that he or she discloses a direct or indirect interest in any contract or arrangement with us as required by Bermuda law, our by-laws provide that a director is entitled to be counted in the quorum, but may not vote in respect of any such contract or arrangement in which he or she is interested. Under Bermuda law, a director (including the spouse or children of the director or any company (other than a company which is a holding company or a subsidiary of the company making the loan) of which such director, spouse or children own or control, directly or indirectly, more than 20% of the total capital or loan debt) cannot borrow from us without the consent of any shareholders holding in the aggregate not less than 90% of the total voting rights of all shareholders having the right to vote at any general meeting of the shareholders.
Waiver of Claims by Shareholders; Indemnification of Directors and Officers
Our by-laws contain a provision by virtue of which our shareholders waive any claim or right of action that they may have, both individually and on our behalf, against any director or officer in relation to any action or failure to take action by such director or officer, except in respect of any fraud or dishonesty of such director or officer. We understand that, in the opinion of the staff of the SEC, the operation of this provision as a waiver of the right to sue for violations of U.S. federal securities laws would likely be unenforceable in U.S. courts.
Our by-laws also indemnify our directors and officers in respect of their actions and omissions, except in respect of their fraud or dishonesty.
Amalgamations and Other Business Combinations
Under Bermuda law, the amalgamation or other business combination of a Bermuda company with another company (other than certain affiliated companies), unless the by-laws otherwise provide requires the amalgamation or other business combination to be approved by a majority of the Bermuda company’s board of directors and by a majority of 75% of those voting at the general meeting of the Bermuda company. The quorum for the shareholder approval is two persons holding or representing at least one-third of the issued shares of the Company.
Our by-laws provide that an amalgamation or other business combination (as defined in our by-laws) (other than with a wholly-owned subsidiary) that has been approved by our board of directors must only be approved by a majority of the votes cast at a general meeting of our shareholders at which the quorum must be two persons representing the holders of more than 45% of the aggregate voting power of the paid-up and outstanding shares carrying the right to vote. Any amalgamation or other business combination (as defined in our by-laws) not approved by our board of directors must be approved by resolution passed by 66 2/3% of all votes attaching to all shares then in issue entitling the holder to attend and vote on the resolution.
Specified Transactions Involving Interested Shareholders
Specified transactions include the following:
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any merger, consolidation or amalgamation of the Company with an interested shareholder;
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any disposition or security arrangement with or for the benefit of any interested shareholder involving any of our assets, securities or commitments or those of any subsidiary or any interested shareholder that has an aggregate fair market value and/or involves aggregate commitments of US$250 million or more or constitutes more than 10% of the book value of the total assets or 10% of the shareholders equity of the entity in question;
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the adoption of any plan for our liquidation or dissolution or for the discontinuation into another jurisdiction, unless proposed or adopted independently of any interested shareholder; or
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any reclassification of our shares or other securities, or recapitalization, or any merger, consolidation or amalgamation with any of our subsidiaries or any other transaction that has the effect of increasing the proportionate share of any class of shares beneficially owned by an interested shareholder.
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In addition to any affirmative vote required by law or our by-laws, a specified transaction with any interested shareholder will require the affirmative vote of not less than 66 2/3% of the aggregate voting power of the voting shares, voting together as a single class, excluding voting shares beneficially owned by any interested shareholder. Alternatively, a specified transaction may proceed with any affirmative vote required by law or our by-laws if the following principal conditions are satisfied in relation to common shares: (1) the approval of a majority of directors who are not affiliates of the interested shareholder; and (2) the aggregate amount of the cash and the fair market value as of the date of the consummation of the specified transaction of consideration other than cash to be received by the holder of common shares in such specified transaction shall be at least equal to the highest per share amount paid by the interested shareholder within a two-year period immediately prior to the first public announcement of the proposed specified transaction; or in the transaction in which he or she became such an interested shareholder (whichever is higher) or, if higher, the closing sales prices of such shares on the NYSE on the announcement date for the specified transaction or on the date of the transaction in which he or she became such an interested shareholder.
For purposes of our by-laws, an “interested shareholder” includes, among others, any person who is or has publicly disclosed an intention to become the beneficial owner of shares representing 10% or more of our aggregate voting power of the voting shares.
Non-Competition Provision Applicable to Brazil
Our by-laws provide that we will operate and conduct business in Brazil exclusively through Cosan and its subsidiaries, and we will not compete, directly or indirectly, with Cosan in Brazil, unless otherwise approved by a majority of our independent directors.
Amendment of Memorandum of Association and By-laws
Bermuda law provides that the memorandum of association of a company may be amended by a resolution passed at a general meeting of shareholders of which due notice has been given.
Our by-laws provide that no by-law will be rescinded, altered or amended, unless it has been approved by a resolution of our board of directors and by a resolution of the shareholders. In the case of rescission, alteration or amendment to the by-laws relating to interpretation, rights of shares, modification of rights, indemnity of directors and officers, amalgamations and other business combinations, specified transactions involving interested shareholders, our discontinuation into another jurisdiction, tag-along rights and amendment or alterations of by-laws, the required resolutions must include the affirmative vote of at least 66 2/3% of our directors then in office and holders of at least 66 2/3% of class A common shares and at least a majority of class B common shares then in issue entitling the holder to attend and vote on the resolution, with each class voting separately as a class. In the case of rescission, alteration or amendment to the by-laws relating to the transmission of shares upon the death of a holder of class B series 1 shares, election of directors, the removal of directors, the increase of share capital and the alteration of share capital, the requisite affirmative votes are a majority of the directors then in office and holders of a majority of each of class A common shares and class B common shares then in issue entitling the holder to attend and vote on the resolution, with each class voting separately as a class.
Under Bermuda law, the holders of an aggregate of not less than 20% in par value of the company’s issued and outstanding share capital or any class thereof and or the holders of not less in the aggregate than 20% of the company’s debentures entitled to object to amendments to the memorandum of association have the right to apply to the Bermuda court for an annulment of any amendment of the memorandum of association adopted by shareholders at any general meeting, other than an amendment which alters or reduces a company’s share capital as provided in the Companies Act 1981.
Where such an application is made, the amendment becomes effective only to the extent that it is confirmed by the Bermuda court. An application for an annulment of an amendment of the memorandum of association must be made within twenty-one days after the date on which the resolution altering the company’s memorandum of association is passed and may be made on behalf of persons entitled to make the application by one or more of their number as they may appoint in writing for the purpose. No application may be made by shareholders voting in favor of the amendment.
Modification of Rights
While we have more than one class of shares and more than one series of class B common shares, the rights attaching to any class or series, unless otherwise provided for by the terms of issue of the relevant class or series, may be modified with the consent in writing of the holders or the approval of the votes cast at a general meeting representing not less than 66- 2/3 % of the aggregate voting power of the shares in issue and not less than 75% of the aggregate voting power of the issued shares of that class or series, as the case may be. The quorum for any such general meeting will be two or more persons holding or representing by proxy one-third of the voting power of the issued shares of the class or series, as the case may be. Our by-laws specify that the creation or issue of shares ranking equally with existing shares will not, unless expressly provided by the terms of issue of those new shares, vary the rights attached to existing shares.
Appraisal Rights and Shareholder Suits
Under Bermuda law, in the event of an amalgamation of a Bermuda company with another company, a shareholder of the Bermuda company who is not satisfied that fair value has been offered for such shareholder’s shares may apply to the Bermuda court to appraise the fair value of those shares within one month of the giving of the notice of the shareholders’ meeting called to approve the amalgamation.
Class actions and derivative actions are generally not available to shareholders under Bermuda law. Bermuda courts, however, may permit in certain circumstances a shareholder to commence an action in the name of a company to remedy a wrong to the company where the challenged act would allegedly be beyond the power of the company or illegal. In addition, consideration would be given by a Bermuda court to acts that would allegedly constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders’ voting power than that which actually approved it.
When the affairs of a company are being conducted in a manner which is oppressive or prejudicial to the interests of some or all of the shareholders, one or more shareholders may apply to a Bermuda court, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company.
Capitalization of Profits and Reserves
Pursuant to our by-laws, our board of directors may capitalize any part of the amount of our share premium account or any reserve or fund which is available for distribution by either: (1) paying up unissued shares to be allotted on a pro rata basis to shareholders as fully paid bonus shares; or (2) paying up in full partly paid shares of those shareholders who would be entitled to such sums if they were distributed by way of dividend or other distribution (or partly in one way and partly the other) provided that a share premium account may be applied only in paying up of unissued shares to be issued to such shareholders as fully paid.
Untraced Shareholders
Our by-laws provide that our board of directors may forfeit any dividend or other monies payable in respect of any shares which remain unclaimed for six years. In addition, we are entitled to cease sending dividend warrants and checks by post or otherwise to a shareholder if such instruments have been returned undelivered to, or left uncashed by, such shareholder on at least two consecutive occasions or, following one such occasion, reasonable inquires have failed to establish the shareholder’s new address. This entitlement ceases if the shareholder claims a dividend or cashes a dividend check or a warrant.
Certain Provisions of Bermuda Law
We have been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in transactions only in currencies other than the Bermuda dollar, and there are no restrictions on our ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to U.S. residents who are holders of our common shares.
Pursuant to a Notice to the Public dated June 1, 2005, issued by the Bermuda Monetary Authority, the Bermuda Monetary Authority granted general permission for the issue and subsequent transfer of any shares of a Bermuda company to and between non-residents of Bermuda where any shares of the company are listed and remain so listed
on an appointed stock exchange, which includes the NYSE. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a guarantee by the Bermuda Monetary Authority as to our performance or our creditworthiness. Accordingly, in giving such permissions, the Bermuda Monetary Authority will not be liable for the financial soundness, performance or default of our business or for the correctness of any opinions or statements expressed in this annual report.
In accordance with Bermuda law, share certificates are only issued in the names of companies, partnerships or individuals. In the case of a shareholder acting in a special capacity (for example, as a trustee), certificates may, at the request of the shareholder, record the capacity in which the shareholder is acting. Notwithstanding such recording of any special capacity, we are not bound to investigate or see to the execution of any such trust. We will take no notice of any trust applicable to any of our shares, whether or not we have been notified of such trust.
Registrar or Transfer Agent
A register of holders of the class A common shares and class B common shares and any other issued share capital is maintained by Compass Administration Services Ltd. in Bermuda, and a branch register is maintained in the United States by Mellon Investor Services LLC, who serves as branch registrar and transfer agent.
Anti-takeover Effects Of Our By-laws
Our by-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions provide, among other things, for:
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a classified board of directors with staggered three-year terms;
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restrictions on the time period in which directors may be nominated;
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the affirmative vote of a majority of our directors then in office and a majority of all votes cast at a general meeting or, if not approved by a majority of the directors in office, at least 66 2/3% of all votes attaching to all shares then in issue for amalgamation and other business combination transactions; and
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the tag-along rights described under “—Tag-Along Rights”.
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On August 25, 2010, we entered into a definitive agreement, or the Framework Agreement, for the creation of the Joint Venture with Shell. The transaction closed on June 1, 2011. Pursuant to the Joint Venture, Cosan and its subsidiaries contributed their sugar and ethanol businesses, their energy cogeneration business, their fuel distribution business and their interests in certain ethanol logistics facilities at the Port of Santos and transferred debt minus cash and cash equivalent of approximately R$5,596.2 million to the Joint Venture. Shell and its affiliates contributed their Brazilian fuel distribution business, their Brazilian aviation fuels business, their beneficial interest in two companies (Iogen Corp. and Codexis, Inc.) involved in the research and development of biomass fuel, including ethanol, and a capital contribution resulting in cash proceeds to the Joint Venture of approximately US$1.6 billion.
Cosan and its subsidiaries retained, and therefore did not contribute to the Joint Venture, their lubricants manufacturing and marketing business, their sugar logistics business, their land prospecting and development business, the right to conduct their own sugar trading business globally and their sugar retail brands. Additionally, we have elected to retain, and not contribute to the Joint Venture, the operation of our sugar retail business. Shell and its affiliates retained and did not contribute to the Joint Venture their exploration and production, chemicals and gas and power businesses in Brazil, their lubricants manufacturing and marketing business, their trading business and the Shell brand (which has been licensed to the Joint Venture for use in its downstream business, including retail in Brazil).
The Joint Venture consists of three separate legal entities.
Raízen Energia Participações S.A.: a sugar and ethanol company, which, among other things, conducts the production of sugar and ethanol, as well as all cogeneration activities. Cosan and its subsidiaries and Shell and its affiliates each own 50% common equity interest in this entity. In addition, Cosan and its subsidiaries own 51% of
the voting shares (and preferred shares bearing preferential dividend rights in certain circumstances), whereas Shell and its affiliates own 49% of this entity’s voting shares.
Raízen Combustíveis S.A.: a downstream company, which conducts the supply, distribution and sale of fuels in Brazil. The resulting company has a network of approximately 4,500 fuel stations throughout Brazil. Cosan and its subsidiaries and Shell and its affiliates likewise each own 50% common equity interest in this entity. In this entity, however, Cosan and its subsidiaries own 49% of the voting shares, whereas Shell and its affiliates own 51% of the voting shares. Cosan and its subsidiaries and Shell and its affiliates also hold preferred shares bearing preferential dividend rights in certain circumstances if certain contingent targets are met.
Raízen S.A.: a management company, which is the Joint Venture’s face to the market and facilitates the building of a unified corporate culture. Cosan and its subsidiaries and Shell and its affiliates each own 50% of the equity and voting interests in this company.
The closing of the Joint Venture occurred on June 1, 2011, however, the transaction is still subject to regulatory review and imposes certain post-closing obligations on the parties, including but not limited to the receipt of CADE antitrust approval. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Joint Venture—We cannot provide any assurance that we will obtain the Brazilian antitrust approval to continue to operate the Joint Venture on acceptable terms or predict whether the approval will impose conditions on our businesses in connection with the transaction.”
The foregoing description of the Framework Agreement does not purport to be complete and is qualified in its entirety by reference to the Framework Agreement, which is filed as Exhibit 4.3 as amended by the First Amendment to the Framework Agreement entered into on April 7, 2011, and the Second Amendment to the Framework Agreement entered into on June 1, 2011 which are filed as Exhibits 4.4 and 4.4, respectively.
In the event that Raízen Energia or Raízen Combustíveis seek external financing, they shall provide financial support to each other, including by way of advancing funds to each other and guaranteeing each other’s debt obligations, in each case to the extent approved by the Supervisory Board and consistent with the business plan.
The Joint Venture is run by a management team drawn from Cosan and Shell with a proven track record in sugar, ethanol and fuels. The executive board of the Joint Venture is overseen by the supervisory board. The supervisory board is responsible for appointing members of the executive board and monitors the activities and reports of the executive board. The supervisory board consists of three directors nominated by Cosan and three directors nominated by Shell. Our chairman, Rubens Ometto Silveira Mello, is the chairman of the supervisory board. Cosan and Shell have each designated a shareholder representative who is responsible for determining the Joint Venture’s strategic priorities and resolving any deadlock within the supervisory board. Our shareholder representative is Rubens Ometto Silveira Mello.
Other Agreements
Shell and Cosan have entered into other definitive agreements, among others, concerning the scope of the Joint Venture, the governance and management of the Joint Venture and the granting of reciprocal put and call options concerning their interests in the Joint Venture. Each of these agreements was entered into on June 1, 2011.
The shareholders’ agreements for Raízen Energia and Raízen Combustíveis establish the scope and governance of the Joint Venture, as well as its dividend policy. The agreements provide that the scope of the Joint Venture is the global production of sugar cane-based ethanol and sugar and the distribution, commercialization and sale of fuel products within Brazil. Cosan, Shell and their respective affiliates are prohibited from competing with the Joint Venture as long as they remain shareholders of the Joint Venture (subject to customary exceptions).
The shareholders’ agreements provide that the Joint Venture will be governed by supervisory boards that are composed of six members: three nominated by Cosan, with Mr. Rubens Ometto Silveira Mello acting as chairman, and three nominated by Shell. Most decisions by the supervisory boards require a quorum of two members and are generally made by a majority present and voting. Certain significant matters, however, will require the consent of five of the six or four of the six members, as the case may be.
The matters which require the consent of five of the six or four of the six members include but are not limited to the following:
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setting the general strategic guidelines and direction for the Joint Venture and amending and updating the Joint Venture’s business plan;
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appointing, removing or terminating members of the executive board;
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determining the compensation and benefits of certain employees;
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amending key policies and procedures of the Joint Venture;
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adopting or amending the annual and capital budgets;
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instituting or settling any litigation or dispute in excess of a specified sum or which could damage the reputation of the Joint Venture, Cosan or Shell;
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selling, assigning, transferring or encumbering assets of the Joint Venture outside of the ordinary course of business in excess of a specified amount;
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entering into transactions (including mergers, stock purchases or asset purchases) of which the value or purchase price exceeds a specified amount;
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making capital expenditures in excess of a specified amount, subject to certain exceptions;
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submitting any matters, including financial statements and reports, to the meeting of the Joint Venture’s shareholders;
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entering into any contract, agreement or instrument outside of the ordinary course of business and that provides for payments in excess of a specified amount;
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entering into material amendments, modifications or waivers or terminating any contract where payment obligations exceed a specified amount;
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making any decision to borrow money or guarantee the payment or performance of any obligation in excess of a specified amount or to prepay indebtedness of a specified amount;
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creating any encumbrance over or the issuance of any Joint Venture securities or any option relating to any Joint Venture securities, subject to certain exceptions;
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approving the credit limits or the extension of credit to any customer of the Joint Venture in excess of a specified amount; and
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entering into, amending, terminating or renewing any insurance policy.
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If the supervisory boards cannot reach a decision with respect to a matter that is their responsibility, one representative of Cosan and one representative of Shell will meet to attempt to resolve the matter. Any decision by these shareholder representatives must be unanimous. If the shareholder representatives cannot reach a joint decision, no decision would be taken or effected and the status quo would prevail.
Additionally, certain matters require the consent of the shareholders of the Joint Venture. These matters include, but are not limited to, removal of any member of a supervisory board; approval of supervisory board resolutions relating to dividend payments; approval of management accounts and financial statements; amendments to the by-laws of Raízen Energia or Raízen Combustíveis; and issuance of securities by the Joint Venture.
The shareholders’ agreements provide that a shareholder may lose certain governance rights if it fails to make capital contributions that may be required pursuant to the shareholders’ agreements or to make certain payments required pursuant to the Framework Agreement. If the delinquent party pays or contributes such amounts in full
within a specified cure period, the respective governance rights of the shareholders are returned to their original state prior to any such delinquency.
The day-to-day management of the Joint Venture is conducted by the executive boards, composed of a chief executive officer and other senior executive officers. The shareholders’ agreements set forth the various functions and responsibilities of the chief executive officer and senior management, as well as the actions that may be taken by the executives without the approval of the relevant supervisory board.
See “Item 9. The Offer and Listing—A. Offer and Listing Details”.
U.S. Federal Income Tax Considerations
The following are the material U.S. federal income tax consequences of owning and disposing of our common shares. This discussion applies to you only if you are a U.S. Holder (as defined below) that holds our common shares as capital assets for tax purposes.
This discussion does not describe all of the tax consequences that may be relevant to you in light of your particular circumstances, including alternative minimum tax consequences and differing tax consequences applicable to you if you are, for instance:
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a financial institution;
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a regulated investment company;
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a dealer or trader in securities;
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holding common shares as part of a “straddle,” integrated transaction or similar transactions;
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a person whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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a partnership for U.S. federal income tax purposes;
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a tax-exempt entity;
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a person that owns or is deemed to own ten percent or more of our voting stock; or
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a person who acquires our common shares pursuant to the exercise of any employee stock option or otherwise as compensation.
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If you are a partnership for U.S. federal income tax purposes holding common shares, the U.S. federal income tax treatment of your partners will generally depend on the status of the partners and upon the activities of your partnership.
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the “Code,” administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof, any of which is subject to change, possibly with retroactive effect. Please consult your tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of common shares in your particular circumstances.
As used herein, the term “U.S. Holder” means a beneficial owner of common shares that is, for U.S. federal tax purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any state therein or the District of Columbia or
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an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
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This discussion assumes that we are not, and will not become a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on common shares, other than certain pro rata distributions of common shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year (as determined under U.S. federal income tax principles), the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of your common shares, and the balance in excess of adjusted basis will be treated as capital gain recognized on a sale or exchange. Because we do not expect to determine our earnings and profits in accordance with U.S. federal income tax principles, you should expect that a distribution will generally be reported as a dividend. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders in taxable years beginning before January 1, 2013, will be taxable at favorable rates, up to a maximum rate of 15%, provided that certain holding period and other requirements are satisfied. The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.
Dividends will be included in your income on the date you receive them.
Sale or Other Disposition of Common Shares
For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of common shares will be capital gain or loss, and will be long-term capital gain or loss if you held those shares for more than one year at the time of disposition. The amount of gain or loss will be equal to the difference between your tax basis in the shares disposed of and the amount realized on the disposition. The gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation will be classified as a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either (1) at least 75% of its gross income is “passive income” or (2) at least 50% of the average value of its gross assets is attributable to assets that produce “passive income” or are held for the production of “passive income.” Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities, foreign currency and securities transactions. Based on the current composition of our income and the market value and composition of our assets, we do not believe that we were a PFIC for our taxable year ended March 31, 2011. However, because PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, goodwill and less than 25% owned equity investments) from time to time, we cannot assure you that we will not be considered a PFIC for any taxable year.
If we were treated as a PFIC for any taxable year during which you held our common shares, gain recognized by you on a sale or other disposition (including certain pledges) of the common shares would be allocated ratably over your holding period for the common shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the resulting tax liability. Further, to the extent any distribution in respect of common shares exceeded 125% of the average of the annual distributions on common shares received by you during the preceding three years or your holding period, whichever was shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above. Certain elections might be available that would result in alternative treatments (such as mark-to-market treatment) of the common shares. You should consult your tax adviser to determine whether these elections would be available and, if so, what the consequences of the alternative treatments would be in your particular circumstances.
In addition, if we were to be treated as a PFIC in a taxable year in which we paid a dividend or the prior taxable year, the 15% tax rate discussed above with respect to dividends paid to non-corporate holders would not apply.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and backup withholding unless (1) you are an exempt recipient or (2) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.
The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
For taxable years beginning after March 18, 2010, new legislation requires certain U.S. Holders who are individuals to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). You should consult your tax adviser regarding the effect, if any, of this legislation on your ownership and disposition of our common shares.
Bermuda Tax Considerations
The Company has received an assurance from the Ministry of Finance granting an exemption, until March 28, 2016, from the imposition of tax under any applicable Bermuda law computed on profits or income or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, provided that such exemption shall not prevent the application of any such tax or duty to such persons as are ordinarily resident in Bermuda and shall not prevent the application of any tax payable in accordance with the Land Tax Act 1967 or otherwise payable in relation to land in Bermuda leased to the Company.
Not applicable.
Not applicable.
Statements contained in this annual report as to the contents of any contract or other document referred to are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit hereto. A copy of the complete annual report including the exhibits and schedules filed herewith may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street NE., Washington, D.C., and at the SEC’s regional offices located at 233 Broadway, New York, N.Y., 10279 and North Western Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 - 2511. Copies of such materials may be obtained by mail from the Public Reference Section of the SEC, 100 F Street NE., Washington, D.C., at prescribed rates. Such reports and other information may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our class A common shares are listed. In addition the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed over the Internet at http://www.sec.gov.
We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934 as amended, and, in accordance therewith, file periodic reports and other information with the SEC. However, as a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements and relating to short-swing profits reporting and liability.
We also file consolidated financial statements and other periodic reports with the CVM located as Rua Sete de Setembro, 111, Rio de Janeiro, Brazil 20159-900.
Not applicable.
Risk Management
We consider market risk to be the potential loss arising from adverse changes in market rates and prices. We are exposed to a number of market risks arising from our normal business activities. Such market risks principally involve the possibility that changes in commodity prices, interest rates or exchange rates will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. We periodically review our exposure to market risks and determine at the senior management level how to manage and reduce the impact of these risks. We use derivative financial instruments for the purpose of managing market risks, primarily fluctuations in commodity prices and foreign exchange. While these hedging instruments fluctuate in value, these variations are generally offset by the value of the underlying hedged exposures. The counterparties to these contractual arrangements are primarily commodities exchanges, in the case of commodity futures and options, and major financial institutions, in the case of foreign exchange derivative instruments and interest rate swaps. As a result, we do not believe that we are subject to any material credit risk arising from these contracts, and accordingly, we do not anticipate any material credit-related losses. We have formed a risk management committee that is responsible for advising the board on risk management, by establishing exposure limits and hedging ratios so as to achieve better operational and financial controls.
Commodities Risk
The availability and prices of agricultural commodities fluctuate widely due to unpredictable factors, such as weather, level of crop plantings, worldwide government agricultural programs and policies, changes in global demand resulting from population growth and migration, changes in standards of living and global production of similar competitive products. We enter into various types of derivative contracts, primarily commodity exchange-traded futures and options, in order to manage our exposure to adverse price changes in sugar. We use sensitivity analysis to regularly estimate our exposure to market risk on our agricultural commodity position.
Based on the sugar sales volumes in fiscal year 2011, a hypothetical 10% decrease in unhedged prices would reduce our sugar net sales by approximately R$245.9 million in fiscal year 2011 (R$ 241.1 in fiscal year 2010) as set forth below.
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Fair Value -
Net Sales
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Sales Volume
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Market Risk -
10% Price Decrease
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(in millions of R$ )
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(thousand tons of sugar or thousand liters of ethanol)
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(in millions of R$)
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Sugar sales volumes in the twelve months ended March 31, 2011
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3,853.4 | 4,290.8 | 245.9 | |||||||||
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Hedged sugar position at March 31, 2011 (*)
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1,679.2 | 1,831.6 | — | |||||||||
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VHP sugar
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1,662.4 | 1,813.2 | — | |||||||||
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White sugar
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16.8 | 18.3 | — | |||||||||
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Unhedged sugar position at March 31, 2010
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2,174.1 | 2,459.2 | 245.9 | |||||||||
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Total unhedged position at March 31, 2011
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2,174.1 | 2,459,2 | 245.9 | |||||||||
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(*)
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includes derivative futures and firm commitments with customers where there are already fixed prices for the sugar to be sold.
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For risk management purposes and to evaluate our overall level of commodity price exposure, we further reduce our exposure to commodity market risk related to the sugar and ethanol produced from sugarcane that we purchase from growers and sugarcane harvested from leased land, as we pay for the lease costs in TSR. Unlike sugarcane harvested from our own land, the price of sugarcane supplied by growers or the lease payments we incur to produce sugarcane harvested by us from leased land is indexed to the market price of sugar and ethanol, which provides a partial natural hedge to our sugar price exposure. When we acquire sugarcane from growers, we take samples from
the delivered sugarcane to measure its sugar content and pay only for the TSR that we acquire according to a formula established by CONSECANA. In addition, the lease payments are also calculated based on an established TSR volume and a price calculated using the CONSECANA formula. Based on the foregoing, we believe that as of March 31, 2011 a hypothetical 10% decrease in prices would increase our net commodities risk by R$ 39.3 million (R$294.4 as of March 31, 2010) as set forth below.
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Fair Value -
Net Sales
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Commodities Risk -
10% Price Decrease
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(in millions of R$)
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(in millions of R$)
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Total unhedged position at March 31, 2011
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2,459.2 | 245.9 | ||||||
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Sugarcane supplied by growers in fiscal year 2011
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1,075.8 | (107.6 | ) | |||||
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Sugarcane from leased land in fiscal year 2011
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989.6 | (99 | ) | |||||
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Net unhedged position at March 31, 2011
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393.8 | 39.3 | ||||||
As of March 31, 2011, we had entered into hedging agreements with respect to 1,506.8 thousand tons of VHP sugar (Futures sold less Futures bought) at an average fixed price of US$18.96 per pound and 65 thousand tons of refined sugar at an average fixed price of US$595.78 per ton.
The table below provides information about the Company’s sugar derivative contracts that are sensitive to changes in commodity prices, specifically sugar prices as of March 31, 2011. For the derivative contracts the table presents the notional amounts in tons, the weighted average contract prices, and the total US dollar contract amount by expected maturity dates.
On Balance Sheet Commodity Position and Related Derivatives:
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Derivatives
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Future Exchange
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Contract
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Screen
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Expiration Date
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Strike
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Number of contracts
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Avg. Price
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Settlement Price
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Notional
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Carrying Amount
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Fair Value
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(¢US$/lb)
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lots
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US$/ton
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US$/ton
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(tons)
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(R$’000)
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(R$000) | |||||||||||||||||||||||
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Future contracts – sell commitments
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LIFFE
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Sugar
#5
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Jun 2011
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May 1, 2011
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— | 463 | 701.30 | 711.70 | — | 26,442 | (302 | ) | |||||||||||||||||
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Future contracts - sell commitments
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NYBOT
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#11 |
Jun 2011
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May 1, 2011
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— | 4,099 | 26.82 | 27.11 | — | 200,552 | (2,154 | ) | |||||||||||||||||
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Future contracts – sell commitments
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NYBOT
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#11 |
Aug 2011
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Jul 1, 2011
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— | 10,253 | 22.70 | 25.04 | — | 424,617 | (43.705 | ) | |||||||||||||||||
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Future contracts – sell commitments
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NYBOT
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#11 |
Nov 2011
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Oct 1, 2011
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— | 10,107 | 21.08 | 24.16 | — | 388,694 | (56,734 | ) | |||||||||||||||||
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Future contracts - sell commitments
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NYBOT
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#11 |
Apr 2012
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Mar 1, 2012
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— | 2,749 | 24.32 | 23.76 | — | 121,973 | 2.827 | ||||||||||||||||||
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Total future contracts - sell commitments
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1,162,278 | (100,159 | ) | ||||||||||||||||||||||||||
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Future contracts - buy commitments
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NYBOT
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#11 |
Jun 2011
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May 1, 2011
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— | 1,100 | 24.71 | 27.11 | — | (49,591 | ) | 4,807 | |||||||||||||||||
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Future contracts - buy commitments
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NYBOT
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#11 |
Aug 2011
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Jul 1, 2011
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— | 150 | 24.80 | 25.04 | — | (6,786 | ) | 66 | |||||||||||||||||
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Future contracts - buy commitments
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NYBOT
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#11 |
Nov 2011
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Oct 1, 2011
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— | 1,000 | 22.10 | 24.16 | — | (40,314 | ) | 3,758 | |||||||||||||||||
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Future contracts - buy commitments
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NYBOT
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#11 |
Apr 2012
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Mar 1, 2012
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— | 1,654 | 16.26 | 23.76 | — | (49,064 | ) | 22.623 | |||||||||||||||||
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Total Future contracts - buy commitments
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(145,755 | ) | 31.253 | ||||||||||||||||||||||||||
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Subtotal futures
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1,016,524 | (68,906 | ) | ||||||||||||||||||||||||||
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Call options – written
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NYBOT/OTC
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#11 |
Nov 2011
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Oct 1, 2011
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21.00 | 850 | 0.64 | 4.23 | — | 985 | (6,559 | ) | |||||||||||||||||
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Call options – written
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NYBOT
|
#11 |
Nov 2011
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Oct 1, 2011
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21.50 | 1,100 | 1.82 | 3.90 | — | 3,651 | (7,826 | ) | |||||||||||||||||
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Call options – written
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NYBOT
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#11 |
Aug 2012
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Jul 1, 2012
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31.00 | 2,000 | 0.32 | 1.26 | — | 1,177 | (4,597 | ) | |||||||||||||||||
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Put options – purchase
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NYBOT/OTC
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#11 |
Nov 2011
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Oct 1, 2011
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18.00 | 850 | 0.64 | 0.37 | — | 985 | 574 | ||||||||||||||||||
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Put options – purchase
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NYBOT/OTC
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#11 |
Nov 2011
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Oct 1, 2011
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18.50 | 1,100 | 1.78 | 0.46 | — | 3,566 | 923 | ||||||||||||||||||
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Subtotal options
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10,364 | (17,484 | ) | ||||||||||||||||||||||||||
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Total commodities derivatives
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1,026.888 | (86,390 | ) |
Interest Rate Risk
We have fixed and floating rate indebtedness, and, therefore, we are exposed to market risk as a result of changes in interest rates. We engage in interest rate-related hedging transactions from time to time to hedge certain interest rate risk exposures. As of March 31, 2011, 43%, or R$ 3.1 billion (54% or R$ 3.2billion as of March 31, 2010) of our consolidated total debt outstanding was fixed rate debt. Interest rate risk is the effect on our financial results resulting from an increase in interest rates on our variable rate debt indexed to the London Interbank Offered Rate, or “LIBOR”, the Long-Term Interest Rate (Taxa de Juros ao Longo Prazo), or “TJLP”, IGP-M and Interbank Deposit Certificate (Certificado de Depósito Interbancário), or “CDI”. Based on the amount of our floating-interest rate indebtedness at March 31, 2011, net of the swap derivative exchanging Libor to a fixed interest rate, a hypothetical 10% increase in market interest rates would increase our interest expense by approximately R$11.3 million in 2011 (R$14.2 million or US$8 million in fiscal year 2010).
Foreign Currency Exchange Rate Risk
A significant part of our revenues in the Sugar and Ethanol segment are denominated in US dollars. To manage exchange rate risk, we have debt denominated in US dollars and we also enter into derivative contracts with various counterparties to protect ourselves against a possible appreciation of the real in relation to the US dollar. At March 31, 2011, we had outstanding currency derivatives fair valued at R$ 9.8 million (R$ 52.8 or US$29.6 million in fiscal year 2010) which were represented by forward, future, swap and put option contracts as disclosed in Note 26 of our consolidated financial statements attached hereto. As a measure of our market risk with respect to our foreign currency exposure, a hypothetical 10% appreciation of the real against the US dollar would increase our export sales by approximately R$ 454.5 million per year, based on the level of our total export sales for the year ended March 31, 2011, before considering the effects on US dollar derivative contracts and other assets/ liabilities dollar denominated, as set forth below:
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Notional amount/ Quantity
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Estimated Fair value Asset (Liability)
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Foreign Exchange Gain/ Loss – 10% FX rate Increase
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US dollar financial instruments outstanding as at March 31, 2011:
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(in millions of R$)
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Denominated debt
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R$ | 3,750,783 | R$ | 3,750,783 | R$ | 375,078 | ||||||
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Denominated derivative financial instruments (net)
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R$ | 580,395 | R$ | 9,783 | R$ | 79.451 | ||||||
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- Future sale commitments
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R$ | (114,204 | ) | R$ | (117 | ) | R$ | (117 | ) | |||
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- Future purchase commitments
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R$ | (246,970 | ) | R$ | (13,033 | ) | R$ | (31,484 | ) | |||
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- Forward sale commitments
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R$ | 941,570 | R$ | 22,932 | R$ | 111,052 | ||||||
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Net potential impact
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R$ | 454,529 | ||||||||||
Not applicable.
None.
None.
(a) Disclosure Controls and Procedures
As of March 31, 2011, under management’s supervision and with its participation, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011 to ensure that information required to be disclosed under the Exchange Act is recorded, authorized, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and the information required to be disclosed is accumulated and communicated, in order to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Act of 1934. Management conducted an assessment of the effectiveness of internal control over financial reporting based on recommendations and correlated layers established on Internal Controls Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment and those criteria, management concluded that internal control over financial reporting was effective as of March 31, 2011.
Management’s report on internal control over financial reporting appears on page F-1. The consolidated financial statements and internal control over financial reporting have been audited by Ernst & Young Terco Auditores Independentes S.S., or “Ernst & Young”, an independent registered public accounting firm.
(c) Attestation Report of the Registered Public Accounting Firm
See Report Of Independent Registered Public Accounting Firm on page F-2.
(d) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially or significantly affect, our internal control over financial reporting.
Audit Committee
We have an audit committee responsible for advising the board about the selection of independent auditors, reviewing the scope of the audit, validating other allowed services provided by our independent auditors, approving related party transactions, and evaluating our internal controls on a steady basis. The members of our audit committee are Messrs. Marcus Vinicius Pratini de Moraes (chairman), Mailson Ferreira da Nóbrega, and Hélio França Filho.
These members are independent, and our board of directors has determined that both Marcus Vinicius Pratini de Moraes and Mailson Ferreira da Nóbrega are “Audit Committee Financial Experts” in accordance with SEC rules and regulations.
NYSE Rule 303A.10 provides that each U.S. listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. Although not required under Bermuda law, the Company has adopted a code of business conduct and ethics for directors, officers and employees as provided for in NYSE Rule 303A.10, which has been filed with the SEC.
The following table describes the total amount billed to us by Ernst & Young for services performed in fiscal year 2011 and fiscal year ended March 31, 2010.
|
At March 31,
|
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|
2011
|
2010
|
|||||||
|
(in thousands of reais)
|
||||||||
|
Audit fees
|
R$ | 4,753 | R$ | 4,869 | ||||
|
Audit related fees
|
1,352 | 904 | ||||||
|
All other fees
|
120 | 100 | ||||||
|
Total consolidated audit fees
|
R$ | 6,225 | R$ | 5,873 | ||||
Audit Fees
Audit fees are fees billed for the audit of our annual consolidated financial statements and for the reviews of our quarterly consolidated financial statements submitted on Form 6-K.
Audit-Related Fees
Audit-related fees are fees charged by Ernst & Young for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements for fiscal year 2011and fiscal year 2010 Additionally, audit related fees include comfort letters, statutory audits, consents and other services related to SEC matters.
All Other Fees
Ernst & Young other fees refer to other assurance services regarding the review of the sustainability report.
Pre-Approval Policies and Procedures
Our audit committee approves all audit, audit-related services, tax services and other services provided by Ernst & Young. Any services provided by Ernst & Young that are not specifically included within the scope of the audit must be pre-approved by the board of directors in advance of any engagement. The board of directors is permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimis exception prior to the completion of the audit engagement.
Not applicable.
None.
None.
For a comparison of the significant differences between our corporate governance practices and the NYSE Corporate Governance Standards, please see “Item 6. Directors, Senior Management and Employees—C. Summary of Significant Differences of Corporate Governance Practices”.
We have responded to Item 18 in lieu of responding to this Item.
See our audited consolidated financial statements beginning on page F-1.
We are filing the following documents as part of this annual report on Form 20-F:
|
1.1
|
Memorandum of Association (incorporated by reference to our amended registration statement filed on Form F-1/A with the Securities and Exchange Commission on August 9, 2007)
|
|
1.2
|
By-Laws (incorporated by reference to our amended registration statement filed on Form F-1/A with the Securities and Exchange Commission on August 9, 2007)
|
|
2.1
|
Indenture dated as of October 25, 2004 among Cosan S.A. Indústria e Comércio, as issuer, FBA—Franco Brasileira S.A. Açúcar e Álcool and Usina Da Barra S.A.—Açúcar e Álcool, as guarantors, JPMorgan Chase Bank, as trustee, JPMorgan Trust Bank Ltd., as principal paying agent and J.P. Morgan Bank Luxembourg S.A., as Luxembourg paying agent (incorporated by reference to our registration statement filed on Form F-1 with the Securities and Exchange Commission on June 25, 2007)
|
|
2.2
|
Indenture dated as of February 6, 2006 among Cosan S.A. Indústria e Comércio, as issuer, FBA—Franco Brasileira S.A. Açúcar e Álcool and Usina Da Barra S.A.—Açúcar e Álcool, as guarantors, JPMorgan Chase Bank, N.A., as trustee, JPMorgan Trust Bank Ltd., as principal paying agent and J.P. Morgan Bank Luxembourg S.A., as Luxembourg paying agent (incorporated by reference to our registration statement filed on Form F-1 with the Securities and Exchange Commission on June 25, 2007)
|
|
2.3
|
Indenture dated as of January 26, 2007 among Cosan Finance Limited, as issuer, Cosan S.A. Indústria e Comércio and Usina Da Barra S.A.—Açúcar e Álcool, as guarantors, The Bank of New York, as trustee, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as principal paying agent and The Bank of New York Luxembourg S.A., as Luxembourg paying agent (incorporated by reference to our registration statement filed on Form F-1 with the Securities and Exchange Commission on June 25, 2007)
|
|
2.4
|
Indenture dated August 11, 2009 among CCL Finance Limited, Cosan Combustíveis e Lubrificantes S.A., The Bank Of New York Mellon, as Trustee, The Bank of New York Mellon Trust (Japan), Ltd., as Principal Paying Agent, and the Bank of New York Mellon (Luxembourg) S.A., as Luxembourg Listing, Paying and Transfer Agent (incorporated by reference to Exhibit 2.4 of our Annual Report on Form 20-F for the year ended March 31, 2009)
|
|
2.5
|
Indenture dated November 5, 2010 among Cosan Overseas Limited, Cosan S.A. Indústria e Comércio, The Bank of New York Mellon, as Trustee, New York Paying Agent, Transfer Agent and Registrar, The Bank of New York Mellon (London Branch), as London Paying Agent and The Bank of New York Mellon (Luxembourg) S.A., as Paying Agent and Transfer Agent.
|
|
4.1
|
Loan Agreement dated as of June 28, 2005 among Cosan S.A. Indústria e Comércio, as borrower, and International Finance Corporation (incorporated by reference to our registration statement filed on Form F-1 with the Securities and Exchange Commission on June 25, 2007)
|
|
4.2
|
Agreement for the Sale and Purchase of all of the Member Interests in Parent Co-Operative 1 and Parent Co-Operative 2 dated April 23, 2008, between ExxonMobil International Holdings B.V., as vendor, and the registrant’s subsidiaries Cosan S.A. Indústria e Comércio and Usina da Barra S.A. Açúcar e Álcool, as purchasers* (incorporated by reference to our Amendment to our Current Report filed on Form 6-K/A on June 10, 2009)
|
|
4.3
|
Framework Agreement dated August 25, 2010 among Cosan S.A. Indústria e Comércio, Cosan Distribuidora de Cumbustíveis S.A., Cosan Limited, Houches Holdings S.A., Shell Brasil Limitada, Shell Brazil Holding B.V., Shell Overseas Holdings Limited and Milimétrica Participações S.A. (“Framework Agreement”) (incorporated by reference to Exhibit 4.3 of our Annual Report on Form 20-F for the year ended March 31, 2010)
|
|
4.4
|
First Amendment to the Framework Agreement, dated as of April 7, 2011.
|
|
4.5
|
Second Amendment to the Framework Agreement, dated as of June 1, 2011.
|
|
4.6
|
Joint Venture Agreement among Cosan S.A. Indústria e Comércio, Cosan Limited, Raízen Combustíveis S.A., Raízen S.A., Shell Brazil Holding B.V., Shell Overseas Holdings Limited and Raízen Energia Participações S.A. dated June 1, 2011.
|
|
4.7
|
Operating and Coordination Agreement dated June 1, 2011 relating to Raízen Energia Participações S.A., Raízen Combustíveis S.A and Raízen S.A. |
|
4.8
|
Shareholders Agreement of Raizen Combustiveis S.A., dated as of June 1, 2011.
|
|
4.9
|
Shareholders Agreement of Raizen Energia Participacoes S.A., dated as of June 1, 2011.
|
|
8.1
|
Subsidiaries of the Registrant.
|
|
11.1
|
Code of Ethics (incorporated by reference from our exhibit to our annual report filed on Form 20-F for the Fiscal Year ended April 30, 2008).
|
|
12.1
|
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer
|
|
12.2
|
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer
|
|
13.1
|
Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
|
|
13.2
|
Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer
|
* Portions of this item have been omitted pursuant to a request for confidential treatment.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
COSAN LIMITED
|
||||
|
By:
|
/s/ Marcelo Eduardo Martins
|
|||
|
Name:
|
Marcelo Eduardo Martins
|
|||
|
Title:
|
Chief Financial and
Investor Relations Officer
|
|||
Date: September 30, 2011
Consolidated Financial Statements
Cosan Limited
March 31, 2011 and 2010
COSAN LIMITED
Consolidated Financial Statements
March 31, 2011 and 2010
Table of Contents
The management of Cosan Limited is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with .authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
As disclosed in note 11 of its consolidated financial statements, the Company acquired Cosan Araraquara Açúcar e Álcool Ltda and Logispot Armazéns Gerais S.A. As provided under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations of the Securities and Exchange Commission, management has elected to exclude Cosan Araraquara Açúcar e Álcool Ltda and Logispot Armazéns Gerais S.A. from this evaluation, which are included in the 2011 consolidated financial statements of Cosan Limited and constituted combined amounts of R$637,853 and R$85,973 of total and net assets, respectively, as of March 31, 2011 and R$7,239 of revenues and R$4,576 of net loss for the year then ended.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions.
Management assessed the effectiveness of the company's internal control over financial reporting as of March 31, 2011 , based on the criteria set forth by the COSO - Committee of Sponsoring Organization of the Treadway Commission in Internal Control - Integrated Framework. Based on that assessment management has concluded that as of March 31, 2011, the Company's internal control over financial reporting is effective.
Management's assessment of the effectiveness of the company's internal control over financial reporting as of March 31, 2011 has been audited by Ernst & Young Terco Auditores Independentes S.S., the company's independent registered public accounting firm, as stated in their report which appears herein.
/s/ Rubens Ometto Silveira Mello
Rubens Ometto Silveira Mello
Chief Executive Officer
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Cosan Limited
We have audited Cosan Limited’s internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cosan Limited’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Cosan Araraquara Açúcar e Álcool Ltda and Logispot Armazéns Gerais S.A., which are included in the 2011 consolidated financial statements of Cosan Limited and constituted combined amounts of R$637,853 and R$85,973 of total and net assets, respectively, as of March 31, 2011 and R$7,239 of revenues and R$4,576 of net loss for the year then ended. Our audit of internal control over financial reporting of Cosan Limited also did not include an evaluation of the internal control over financial reporting of Cosan Araraquara Açúcar e Álcool Ltda and Logispot Armazéns Gerais S.A..
In our opinion, Cosan Limited maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Cosan Limited as of March 31, 2011 and 2010 and April 1, 2009, and the related consolidated statements of income, equity, and cash flows for each of the two years in the period ended March 31, 2011 and our report dated June 6, 2011 expressed an unqualified opinion thereon.
/s/ Luiz Carlos Nannini
Partner
ERNST & YOUNG TERCO
Auditores Independentes S.S.
São Paulo – SP, Brazil
June 6, 2011
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Cosan Limited
We have audited the accompanying consolidated statements of financial position of Cosan Limited and subsidiaries as of March 31, 2011 and 2010 and April 1, 2009, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the two years in the period ended March 31, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cosan Limited and subsidiaries as of March 31, 2011 and 2010 and April 1, 2009 and the consolidated results of their operations and their cash flows for each of the two years in the period ended March 31, 2011, in conformity with International Financial Reporting Standards – IFRS, as issued by International Accounting Standards Board – IASB.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cosan Limited's internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 6, 2011, expressed an unqualified opinion thereon.
/s/ Luiz Carlos Nannini
Partner
ERNST & YOUNG TERCO
Auditores Independentes S.S.
São Paulo – SP, Brazil
June 6, 2011
COSAN LIMITED
March 31, 2011, 2010 and April 1, 2009
(In Thousands of Reais)
|
Note
|
March 31, 2011
|
March 31,
2010
|
April 1,
2009
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
|
||||||||||||||||
|
Cash and cash equivalents
|
4 | 1,271,780 | 1,110,766 | 1,177,936 | ||||||||||||
|
Restricted cash
|
5 | 187,944 | 44,972 | 11,757 | ||||||||||||
|
Accounts receivable
|
7 | 594,857 | 766,415 | 599,163 | ||||||||||||
|
Derivatives
|
26 | 55,682 | 230,561 | 17,022 | ||||||||||||
|
Inventories
|
8 | 670,331 | 612,683 | 719,656 | ||||||||||||
|
Advances to suppliers
|
229,325 | 201,573 | 206,032 | |||||||||||||
|
Related parties
|
10 | 14,669 | 27,246 | 57,232 | ||||||||||||
|
Recoverable taxes
|
9 | 374,991 | 327,864 | 265,417 | ||||||||||||
|
Other current assets
|
81,023 | 76,672 | 69,508 | |||||||||||||
| 3,480,602 | 3,398,752 | 3,123,723 | ||||||||||||||
|
Non-current
|
||||||||||||||||
|
Deferred income taxes
|
18 | 715,333 | 686,139 | 809,218 | ||||||||||||
|
Advances to suppliers
|
46,037 | 63,741 | 48,035 | |||||||||||||
|
Related parties
|
10 | 91,954 | 81,411 | - | ||||||||||||
|
Recoverable taxes
|
9 | 55,066 | 45,018 | 21,374 | ||||||||||||
|
Judicial deposits
|
218,371 | 167,562 | 171,266 | |||||||||||||
|
Other financial assets
|
6 | 420,417 | 355,370 | 303,467 | ||||||||||||
|
Other non-current assets
|
449,282 | 455,293 | 402,987 | |||||||||||||
|
Equity method investments
|
12 | 304,142 | 260,814 | 323,077 | ||||||||||||
|
Biological assets
|
13 | 1,561,132 | 963,244 | 754,231 | ||||||||||||
|
Property, plant and equipment
|
14 | 7,980,524 | 6,114,531 | 3,923,623 | ||||||||||||
|
Intangible assets
|
15 | 3,889,575 | 3,825,367 | 2,909,856 | ||||||||||||
| 15,731,835 | 13,018,490 | 9,667,134 | ||||||||||||||
|
Total assets
|
19,212,437 | 16,417,242 | 12,790,857 | |||||||||||||
|
Note
|
March 31,
2011
|
March 31,
2010
|
April 1,
2009
|
|||||||||||||
|
Liabilities
|
||||||||||||||||
|
Current
|
||||||||||||||||
|
Current portion of long-term debt
|
16 | 957,134 | 839,529 | 1,452,297 | ||||||||||||
|
Derivatives
|
26 | 132,289 | 76,703 | 66,895 | ||||||||||||
|
Trade accounts payable
|
558,766 | 569,399 | 456,116 | |||||||||||||
|
Salaries payable
|
183,560 | 141,584 | 93,156 | |||||||||||||
|
Taxes payable
|
17 | 245,284 | 215,862 | 168,596 | ||||||||||||
|
Dividends payable
|
72,229 | 43,982 | - | |||||||||||||
|
Related parties
|
10 | 41,163 | 16,105 | 4,458 | ||||||||||||
|
Other current liabilities
|
190,381 | 183,034 | 85,570 | |||||||||||||
| 2,380,806 | 2,086,198 | 2,327,088 | ||||||||||||||
|
Non-current
|
||||||||||||||||
|
Long-term debt
|
16 | 6,274,895 | 5,136,529 | 3,232,736 | ||||||||||||
|
Taxes payable
|
17 | 639,071 | 592,854 | 328,760 | ||||||||||||
|
Legal proceedings
|
19 | 666,282 | 611,983 | 1,277,165 | ||||||||||||
|
Related parties
|
10 | 4,444 | - | 711 | ||||||||||||
|
Pension
|
27 | 24,380 | - | 65,108 | ||||||||||||
|
Deferred income taxes
|
18 | 1,510,965 | 1,122,408 | 528,969 | ||||||||||||
|
Other non-current liabilities
|
382,897 | 375,344 | 362,393 | |||||||||||||
| 9,502,934 | 7,839,118 | 5,795,842 | ||||||||||||||
|
Equity
|
||||||||||||||||
|
Common stock
|
21 | 5,328 | 5,328 | 5,328 | ||||||||||||
|
Capital reserve
|
3,668,218 | 3,654,446 | 3,661,040 | |||||||||||||
|
Accumulated earnings (losses)
|
887,336 | 535,724 | (170,370 | ) | ||||||||||||
|
Equity attributable to owners of the Company
|
4,560,882 | 4,195,498 | 3,495,998 | |||||||||||||
|
Equity attributable to non-controlling interests
|
2,767,815 | 2,296,428 | 1,171,929 | |||||||||||||
|
Total equity
|
7,328,697 | 6,491,926 | 4,667,927 | |||||||||||||
|
Total liabilities and equity
|
19,212,437 | 16,417,242 | 12,790,857 | |||||||||||||
See accompanying notes to consolidated financial statements.
COSAN LIMITED
Years ended March 31, 2011 and 2010
(In thousands of Reais, except otherwise stated)
|
Note
|
2011
|
2010
|
||||||||||
|
Net sales
|
22 | 18,063,480 | 15,336,055 | |||||||||
|
Cost of goods sold
|
23 | (15,150,079 | ) | (13,271,331 | ) | |||||||
|
Gross profit
|
2,913,401 | 2,064,724 | ||||||||||
|
Operational income /(expenses)
|
||||||||||||
|
Selling
|
23 | (1,026,000 | ) | (862,726 | ) | |||||||
|
General and administrative
|
23 | (545,450 | ) | (501,676 | ) | |||||||
|
Other, net
|
25 | (33,828 | ) | 37,523 | ||||||||
|
Gain on tax recovery program
|
17 | - | 270,333 | |||||||||
| (1,605,278 | ) | (1,056,546 | ) | |||||||||
|
Income before financial results, equity income of associates and income taxes
|
1,308,123 | 1,008,178 | ||||||||||
|
Equity income of associates
|
12 | 25,187 | 4,178 | |||||||||
|
Financial results, net
|
24 | (151,146 | ) | 493,441 | ||||||||
| (125,960 | ) | 497,619 | ||||||||||
|
Income before income taxes
|
1,182,164 | 1,505,797 | ||||||||||
|
Income Taxes
|
||||||||||||
|
Current
|
18 | (85,437 | ) | (78,381 | ) | |||||||
|
Deferred
|
18 | (329,071 | ) | (344,923 | ) | |||||||
|
Net income for the year
|
767,656 | 1,082,493 | ||||||||||
|
Net income attributable to non-controlling interests
|
(296,750 | ) | (376,399 | ) | ||||||||
|
Net income attributable to Cosan
|
470,906 | 706,094 | ||||||||||
|
Earnings per share (in Reais)
|
21 | |||||||||||
|
Basic and diluted
|
$ | R1.74 | $ | R2.61 | ||||||||
See accompanying notes to consolidated financial statements.
COSAN LIMITED
Years ended March 31, 2011 and 2010
(In Thousands of Reais)
|
Capital reserve
|
||||||||||||||||||||||||||||
|
Common stock
|
Additional paid-in capital
|
Other components of equity
|
Accumulated earnings (losses)
|
Total
|
Non-controlling interests
|
Total ´
equity
|
||||||||||||||||||||||
|
April 1, 2009
|
5,328 | 3,723,728 | (62,688 | ) | (170,370 | ) | 3,495,998 | 1,171,929 | 4,667,927 | |||||||||||||||||||
|
Acquisition of Teaçu
|
- | 100,143 | - | - | 100,143 | 207,368 | 307,511 | |||||||||||||||||||||
|
Issuance of subsidiary shares to non-controlling interest
|
- | 78,407 | - | - | 78,407 | 423,859 | 502,266 | |||||||||||||||||||||
|
Acquisition of non-controlling interest subsidiary
|
- | (34,957 | ) | - | - | (34,957 | ) | (22,633 | ) | (57,590 | ) | |||||||||||||||||
|
Exercise of stock option
|
- | (4,450 | ) | (20 | ) | - | (4,470 | ) | 10,472 | 6,002 | ||||||||||||||||||
|
Exercise of common stock warrants
|
- | (43,641 | ) | 309 | - | (43,332 | ) | 138,416 | 95,084 | |||||||||||||||||||
|
Acquisition of TEAS
|
- | - | - | - | - | 15,873 | 15,873 | |||||||||||||||||||||
|
Cumulative translation adjustment - CTA
|
- | - | (133,575 | ) | - | (133,575 | ) | (1,111 | ) | (134,686 | ) | |||||||||||||||||
|
Pension
|
- | - | 25,739 | - | 25,739 | 16,317 | 42,056 | |||||||||||||||||||||
|
Share based compensation
|
- | 5,451 | - | - | 5,451 | 3,520 | 8,971 | |||||||||||||||||||||
|
Net income
|
- | - | - | 706,094 | 706,094 | 376,399 | 1,082,493 | |||||||||||||||||||||
|
Dividends
|
- | - | - | - | - | (43,981 | ) | (43,981 | ) | |||||||||||||||||||
|
March 31, 2010
|
5,328 | 3,824,681 | (170,235 | ) | 535,724 | 4,195,498 | 2,296,428 | 6,491,926 | ||||||||||||||||||||
|
Exercise of stock option
|
- | (1,018 | ) | (44 | ) | - | (1,062 | ) | 6,409 | 5,347 | ||||||||||||||||||
|
Treasury shares
|
- | (9,465 | ) | - | - | (9,465 | ) | (5,754 | ) | (15,219 | ) | |||||||||||||||||
|
Issuance of common stock by Rumo to non-controlling shareholders´
|
- | 128,363 | - | - | 128,363 | 271,637 | 400,000 | |||||||||||||||||||||
|
Acquisition of Logispot
|
- | - | - | - | 64,277 | 64,277 | ||||||||||||||||||||||
|
Hedge accounting
|
- | - | (89,117 | ) | - | (89,117 | ) | (54,181 | ) | (143,298 | ) | |||||||||||||||||
|
Cumulative Translation Adjustment - CTA
|
- | - | (4,180 | ) | - | (4,180 | ) | 131 | (4,049 | ) | ||||||||||||||||||
|
Pension
|
- | - | (12,087 | ) | - | (12,087 | ) | (7,349 | ) | (19,436 | ) | |||||||||||||||||
|
Adjustment from impact recorded directly in equity of subsidiary
|
- | (522 | ) | - | - | (522 | ) | (821 | ) | (1,343 | ) | |||||||||||||||||
|
Share based compensation
|
- | 1,842 | - | - | 1,842 | 1,119 | 2,961 | |||||||||||||||||||||
|
Net income
|
- | - | - | 470,906 | 470,906 | 296,750 | 767,656 | |||||||||||||||||||||
|
Dividends
|
- | - | - | (119,294 | ) | (119,294 | ) | (100,831 | ) | (220,125 | ) | |||||||||||||||||
|
Balance at March 31, 2011
|
5,328 | 3,943,881 | (275,663 | ) | 887,336 | 4,560,882 | 2,767,815 | 7,328,697 | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
COSAN LIMITED
Years ended March 31, 2011 and 2010
(In Thousands of Reais)
|
2011
|
2010
|
|||||||
|
Net income of the period
|
767,656 | 1,082,493 | ||||||
|
Other Comprehensive Income (loss):
|
||||||||
|
Exchange differences on translation of foreign operations - CTA
|
(4,049 | ) | (134,685 | ) | ||||
|
Net movement on cash flow hedges
|
(217,117 | ) | - | |||||
|
Actuarial gains and losses on defined benefit plans
|
(29,447 | ) | 63,721 | |||||
|
Income tax effects
|
83,830 | (21,665 | ) | |||||
|
Other comprehensive Income for the year, net of tax
|
(166,783 | ) | (92,629 | ) | ||||
|
Total comprehensive Income for the year, net of tax
|
600,873 | 989,864 | ||||||
|
Attributable to:
|
||||||||
|
Owners of the Company
|
365,521 | 598,258 | ||||||
|
Non-controlling interests
|
235,351 | 391,606 | ||||||
See accompanying notes to consolidated financial statements.
COSAN LIMITED
Years ended March 31, 2011 and 2010
(In Thousands of Reais)
|
2011
|
2010
|
|||||||
|
Operating activities
|
||||||||
|
Net Income
|
470,906 | 706,094 | ||||||
|
Non-cash adjustments to reconcile profit before tax to net cash flows from operating activities:
|
||||||||
|
Depreciation and amortization
|
742,307 | 644,635 | ||||||
|
Biological assets
|
234,799 | 438,454 | ||||||
|
Equity income
|
(25,187 | ) | (4,178 | ) | ||||
|
Gain on disposal of property, plant and equipment
|
(35,295 | ) | (80,466 | ) | ||||
|
Goodwill write off aviation business
|
- | 41,066 | ||||||
|
Deferred income taxes
|
329,071 | 344,923 | ||||||
|
Provision for legal proceedings
|
26,859 | 25,829 | ||||||
|
Non-controlling interests
|
296,750 | 376,399 | ||||||
|
Share based compensation expenses
|
2,961 | 8,971 | ||||||
|
Gain on tax recovery program
|
- | (270,333 | ) | |||||
|
Interest, monetary variations and foreign exchange variation, net
|
238,482 | (185,280 | ) | |||||
|
Other
|
4,584 | (26,858 | ) | |||||
| 2,286,237 | 2,019,256 | |||||||
|
Change in assets/ liabilities
|
||||||||
|
Accounts receivable
|
164,693 | 2,415 | ||||||
|
Restricted cash
|
(142,972 | ) | (33,215 | ) | ||||
|
Inventories
|
84,581 | 413,437 | ||||||
|
Taxes recoverable
|
(50,068 | ) | (36,572 | ) | ||||
|
Advances to suppliers
|
16,779 | 66,542 | ||||||
|
Suppliers
|
(32,361 | ) | (46,515 | ) | ||||
|
Salaries payable
|
36,224 | 30,565 | ||||||
|
Derivatives
|
13,347 | (231,043 | ) | |||||
|
Other assets/ liabilities, net
|
(49,219 | ) | (9,043 | ) | ||||
|
Net cash flows from operating activities
|
2,327,241 | 2,209,009 | ||||||
|
Investing activities
|
||||||||
|
Acquisitions, net of cash acquired
|
(157,345 | ) | (16,041 | ) | ||||
|
Purchase of property, plant and equipment
|
(2,291,647 | ) | (1,897,965 | ) | ||||
|
Sugarcane planting and growing costs
|
(745,572 | ) | (647,467 | ) | ||||
|
Proceeds from sale of the aviation business
|
- | 115,601 | ||||||
|
Proceeds from sale of other investments and property, plant and equipment
|
48,832 | 10,613 | ||||||
|
Net cash flows used in investing activities
|
(3,145,732 | ) | (2,435,259 | ) | ||||
COSAN LIMITED
Consolidated statements of cash flows (Continued)
Years ended March 31, 2011 and 2010
(In Thousands of Reais)
|
2011
|
2010
|
|||||||
|
Financing activities
|
||||||||
|
Proceeds from long-term debt
|
2,719,522 | 3,471,462 | ||||||
|
Repayment of long-term debt
|
(1,971,579 | ) | (3,148,837 | ) | ||||
|
Capital increase
|
3,996 | 147,697 | ||||||
|
Cash proceeds from non-controlling interests
|
400,000 | - | ||||||
|
Share buy-back program (treasury shares)
|
(15,219 | ) | - | |||||
|
Dividends paid
|
(193,095 | ) | - | |||||
|
Cash from/ to related parties
|
37,072 | (152,442 | ) | |||||
|
Net cash flows from financing activities
|
980,697 | 317,880 | ||||||
|
Translation adjustments
|
(1,192 | ) | (125,618 | ) | ||||
|
Net increase in cash and cash equivalents
|
161,014 | (67,170 | ) | |||||
|
Cash and cash equivalents at the beginning of the year
|
1,110,766 | 1,177,936 | ||||||
|
Cash and cash equivalents at the end of the year
|
1,271,780 | 1,110,766 | ||||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Income taxes paid
|
(38,844 | ) | (62,337 | ) | ||||
|
Financial interest expenses paid
|
(450,051 | ) | (388,854 | ) | ||||
|
Issuance of shares for acquisition of Curupay
|
- | 624,192 | ||||||
|
Issuance of subsidiary shares (Rumo) for acquisition of Teaçu
|
- | 261,777 | ||||||
See accompanying notes to the consolidated financial statements.
COSAN LIMITED
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
1.
|
Operations
|
Cosan Limited (“Cosan” and “the Company”) was incorporated in Bermuda on April 30, 2007. Its shares are traded on the New York Stock Exchange (NYSE – CZZ) and in the São Paulo Stock Exchange (Bovespa – CZLT11). Mr. Rubens Ometto Silveira Mello is the ultimate controlling shareholder of the Company. Cosan Limited controls Cosan S.A. Indústria e Comércio and its subsidiaries (“Cosan S.A.”) with a 62.2% interest.
Cosan S.A.’s primary activities are in the following business segments (i) Sugar & Ethanol: the production of sugar and ethanol, as well as the energy cogeneration produced from sugar cane bagasse, (ii) Fuel Distribution and Lubricants: the marketing and distribution of fuel and lubricants, and the production of lubricants in Brazil, and (iii) Rumo: logistics services including transportation, port lifting and storage of sugar.
On February 1, 2010, the Company announced that it, along with Royal Dutch Shell (“Shell”), had reached a non-binding memorandum of understanding (“MOU”) to form a joint venture for a combined 50/50 investment. On August 25, 2010 the Company announced the conclusion of the negotiations with Shell and signed a binding MOU along with other arrangements. Cosan will contribute its sugar and ethanol and its distribution assets to the joint venture while Shell will contribute its distribution assets in Brazil and its interests on second generation ethanol research and development entities (Iogen and Codexis). Shell will also make a fixed cash contribution in the amount of approximately $1.6 billion over a two year period. The sugar logistics and lubricants distribution business along with the investment in Radar Propriedades Agrícolas S.A. will not be contributed to the joint venture. On January 4, 2011, the Company received unconditional merger clearance from the European Union to form the proposed Joint Venture in Brazil. On June 1, 2011, the Company signed the closing agreement to form the joint venture, named Raízen. During the year ended March 31, 2011, the joint venture did not impact Cosan´s financial statements except for the incurrance of costs and expenses related to its future formation.
|
2.
|
Summary of significant accounting policies
|
|
2.1
|
Basis of preparation
|
a) Statement of compliance
The consolidated financial statements of Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
These financial statements for the year ended March 31, 2011 are the first Company has prepared in accordance with IFRS. Refer to Note 3 for information on how the Company adopted IFRS.
These consolidated financial statements were authorized for issue by the Audit Committee on June 6, 2011.
b) Basis of preparation
The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and biological assets that have been measured at fair value.
c) Functional and presentation currency
The consolidated financial statements are presented in Brazilian reais. However, the functional currency of Cosan is the U.S. dollar. The Brazilian real is the currency of the primary economic environment in which Cosan S.A. and its subsidiaries, located in Brazil, operate and generate and expend cash and is the functional currency, except for the foreign subsidiaries in which U.S. dollar is the functional currency.
The financial statements of each subsidiary included in the consolidation and equity method investments are prepared based on the functional currency of each company. Cosan, certain subsidiaries and equity method investments with a functional currency other than Brazilian reais, had their assets and liabilities converted into Brazilian reais at the exchange rate as of year end and their revenues and expenses were converted by applying the average monthly rates.
The exchange rate of the Brazilian real (R$) to the U.S. dollar (US$) was R$1.6287=US$1.00 at March 31, 2011, R$1.7810=US$1.00 at March 31, 2010, and R$2.3152=US$1.00 at March 31, 2009.
d) Significant accounting judgments, estimates and assumptions
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities at the end of the reporting period. Such estimates and assumptions are reviewed on a continuous basis and changes are recognized in the period in which the estimates are revised and in any future periods affected.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
A significant change in the facts and circumstances on which judgments, estimates and assumptions are based, may cause a material impact on the results and financial condition of the Company. The significant judgments, estimates and assumptions are as follows:
Deferred income taxes and social contribution
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. For further detail on deferred income taxes see Note 18.
Biological assets
Biological assets are measured at fair value at each reporting date and the effects of changes in fair value between the periods are allocated directly to cost of goods sold. For further detail on the assumptions used see Note 13.
Intangible assets and property, plant and equipment (“P, P&E”)
The calculation of depreciation and amortization of intangible assets and P, P&E includes the estimation of the useful lives. Also, the determination of the acquisition date fair value of intangible assets and P,P&E acquired in business combinations is a significant estimate.
The Company annually performs a review of impairment indicators for intangible assets and P,P&E. Also, an impairment test is undertaken for goodwill. An impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The key assumptions used to determine the recoverable amount for the different cash generating units for which goodwill is allocated are further explained in Note 15.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Share based payments
Cosan S.A. measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The estimation of fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the assumption of the expected life of the share option, volatility and dividend yield. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 29.
Pension benefits
The cost of defined benefit pension plans and other post employment medical benefits and the present value of the pension obligation is determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual results in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. A defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Further details about the assumptions used are included in Note 27.
Fair value measurement of contingent consideration
Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date. Further details about the assumptions used in accounting for business combinations are included in Note 19.
Fair value of financial instruments
When the fair value of financial assets and liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For further details on financial instruments refer to Note 26.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
2.2
|
Basis of consolidation
|
The following subsidiaries were included in the consolidated financial statements for the years ended March 31, 2011 and 2010:
|
Ownership % direct and indirect
|
||||
|
2011
|
2010
|
|||
|
Cosan S.A. Indústria e Comércio
|
62.2%
|
62.3%
|
||
|
Administração de Participações Aguassanta Ltda.
|
56.9%
|
57.0%
|
||
|
Cosan S.A Açúcar e Álcool
|
61.9%
|
62.0%
|
||
|
Águas da Ponte Alta S.A.
|
56.9%
|
62.0%
|
||
|
Vale da Ponte Alta S.A.
|
56.9%
|
62.0%
|
||
|
Agrícola Ponte Alta S.A.
|
61.9%
|
62.0%
|
||
|
Cosan Centroeste S.A. Açúcar e Álcool
|
61.9%
|
62.0%
|
||
|
Barra Bioenergia S.A.
|
61.9%
|
62.0%
|
||
|
Benálcool Açúcar e Álcool S.A.
|
61.9%
|
62.0%
|
||
|
DaBarra Alimentos S.A.
|
-
|
62.0%
|
||
|
Docelar Alimentos Bebidas S.A. (former Bonfim Nova Tamoio – BNT Agrícola Ltda.)
|
62.1%
|
62.0%
|
||
|
Barrapar Participações Ltda.
|
61.9%
|
62.0%
|
||
|
Aliança Indústria e Comercio de açúcar e Álcool S.A.
|
61.9%
|
62.0%
|
||
|
Agrobio Investimentos e Participações S.A.
|
61.9%
|
62.0%
|
||
|
Bioinvestments Negócios e Participações S.A.
|
56.9%
|
62.0%
|
||
|
Executive Participações S.A.
|
61.9%
|
-
|
||
|
Proud Participações S.A.
|
62.1%
|
62.2%
|
||
|
Cosan Distribuidora de Combustíveis Ltda.
|
62.1%
|
62.2%
|
||
|
Cosan S.A. Bioenergia
|
62.2%
|
62.3%
|
||
|
Cosan Energia S.A.
|
62.2%
|
62.3%
|
||
|
Cosan Biotecnologia S.A.
|
62.1%
|
62.2%
|
||
|
Cosan International Universal Corporation
|
62.2%
|
62.3%
|
||
|
Cosan Finance Limited
|
62.2%
|
62.3%
|
||
|
CCL Finance Limited
|
62.2%
|
62.3%
|
||
|
Cosan Overseas Limited
|
62.2%
|
-
|
||
|
Cosan Cayman Limited
|
62.2%
|
-
|
||
|
Cosan Cayman Finance Limited
|
62.2%
|
-
|
||
|
CCL Cayman Finance Limited
|
62.2%
|
-
|
||
|
Grançucar S.A. Refinadora de Açúcar
|
-
|
62.3%
|
||
|
Cosan Combustíveis e Lubrificantes S.A.
|
62.2%
|
62.3%
|
||
|
Copsapar Participações S.A.
|
56.0%
|
56.0%
|
||
|
Novo Rumo Logística S.A.
|
57.8%
|
57.8%
|
||
|
Rumo Logística S.A.
|
43.3%
|
57.8%
|
||
|
Cosan Operadora Portuária S.A.
|
43.3%
|
57.8%
|
||
|
Teaçú Armazéns Gerais S.A.
|
43.3%
|
57.8%
|
||
|
Pasadena Empreendimentos e Participações S.A.
|
62.2%
|
62.2%
|
||
|
Teas Terminal Exportador de Álcool de Santos S.A.
|
41.5%
|
41.5%
|
||
|
Cosan Alimentos S.A. e empresas controladas
|
62.2%
|
62.2%
|
||
|
Cosan Araraquara Açúcar e Álcool Ltda. (former Usina Zanin Açúcar e Álcool Ltda.)
|
62.2%
|
-
|
||
|
Logispot Armazéns Gerais S.A.
|
31.7%
|
8.9%
|
||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Subsidiaries are fully consolidated from the date of acquisition, the date on which the Company obtains control, and continue to be consolidated until the Company ceases to have control of the subsidiary. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
|
2.3
|
Summary of significant accounting policies
|
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements and have been applied consistently by the subsidiaries and preparing the opening balance sheet as at April 1, 2009, except where indicated otherwise. The April 1, 2009 balance sheet was prepared to reflect the transition to IFRS.
a) Revenue recognition
Revenues from the sale of products or goods are recognized when the entity transfers to the buyer the significant risks and rewards incidental to ownership of the goods and merchandise, and when it is probable that the economic benefits associated with the transaction will flow to the Company. The sales prices are fixed based on purchase orders or contracts.
b) Foreign currency transactions
Transactions in foreign currencies are initially recorded at the functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
c) Financial instruments – Recognition initial and subsequent measurement
(i) Financial assets
Initial recognition and measurement
Financial assets are classified into the following categories: at fair value through profit or loss, held-to-maturity, available for sale and loans and receivables. The Company determines the classification of its financial assets upon initial recognition.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Financial assets are initially recognized at fair value, plus, in the case of investments not designated at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of financial assets.
Financial assets include cash and cash equivalents, restricted cash, accounts receivable, other receivables, marketable securities and derivative financial instruments.
Subsequent measurement
The subsequent measurement of financial assets depends on their classification, which can be as follows:
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading and assets designated upon initial recognition at fair value through profit and loss. They are classified as held for trading if they were acquired with the purpose of selling or repurchasing in the short term. Derivatives are also measured at fair value through profit or loss, except those designated as hedging instruments. Interest, monetary and exchange variations and changes arising from the valuation at fair value are recognized in the income statement when incurred in the line of revenue or expense.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate method (EIR), less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs. Amortization is included in finance income in the income statement. The losses arising from impairment are recognized in the income statement in finance costs.
Held-to-maturity
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to maturity when the Company has the positive intention and ability to hold them to maturity. Interest, monetary, exchange rate, less impairment losses, if any, are recognized in income when incurred in the line of financial income/expense.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Available-for-sale financial assets
Financial assets available for sale are those non-derivative financial assets that are not classified as (a) loans and receivables, (b) investments held to maturity or (c) financial assets at fair value through profit and loss.
Derecognition
A financial asset is derecognized when:
|
|
·
|
The rights to receive cash flows from the asset have expired; and
|
|
|
·
|
The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the cash flows received without material delay to a third party under a pass-through arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
|
Impairment of financial assets
The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
(ii) Financial liabilities
Initial recognition and measurement
Financial liabilities are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge. The Company determines the classification of its financial liabilities at initial recognition.
All financial liabilities are recognized initially at fair value and in the case of loans and borrowings, carried at amortized cost.
The Company’s financial liabilities include payables to suppliers and other payables, loans and borrowings and derivative financial instruments.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Subsequent measurement
The measurement of financial liabilities depends on their classification as follows:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss and derivatives, except those designated as hedging instruments. Interest, monetary and exchange variations and changes arising from the valuation at fair value, where applicable, are recognized in the income statement when incurred.
Loans and borrowings
After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the income statement when the liabilities are amortized or derecognized.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
(iii) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
(iv) Fair value of financial instruments
The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations, without any deduction for transaction costs.
The fair value of financial instruments for which there is no active market is determined using valuation techniques. These techniques can include using recent market transactions (interest free) reference to the current fair value of other similar instruments, analysis of discounted cash flows or other valuation models.
An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 26.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
(v) Derivative financial instruments and hedge accounting
Initial recognition and subsequent measurement
The Company uses derivative financial instruments such as forward currency contracts, interest rate swaps and forward commodity contracts to hedge its foreign currency risks, interest rate risks and commodity price risks, respectively. Derivatives designated in hedge transactions are initially recognized at fair value on the date on which the derivative is acquired, and subsequently also revalued to fair value. Derivatives are presented as financial assets when the instrument's fair value is positive and as liabilities when fair value is negative.
Any gains or losses arising from changes in the fair value of derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognized in other comprehensive income.
For the purpose of hedge accounting, hedges are classified as:
|
|
·
|
Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment;
|
|
|
·
|
Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; and
|
|
|
·
|
Hedges of a net investment in a foreign operation.
|
At the inception of a hedge relationship, Cosan S.A. formally designates and documents the hedge relationship to which Cosan S.A. wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Hedges are expected to be highly effective in offsetting changes in fair value or cash flows, being continually assessed to determine whether they were actually highly effective over all the base periods for which they were intended.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Hedges which meet the strict criteria for hedge accounting are accounted for as follows:
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is recognized directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognized immediately in the income statement in other operating expenses.
Amounts recognized as other comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognized as other comprehensive income are transferred to the initial carrying amount of the nonfinancial asset or liability.
If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognized in equity is transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss.
Cosan S.A. uses forward currency contracts as hedges of its exposure to foreign currency risk in forecasted transactions and firm commitments, as well as forward commodity contracts for its exposure to volatility in the commodity prices. Refer to Note 26 for more details.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Fair value hedge and hedges of a net investment
The Company does not hold derivative financial instruments designated in these types of operations.
d) Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash, bank deposits and other short-term investments of immediate liquidity, redeemable within 90 days from date of issue, readily convertible into a known amount as cash and cash with insignificant risk of change in their market value.
The restricted cash relates mainly to deposits of margin requirements made with brokers who trade commodity derivative instruments linked to Cosan's derivatives instruments and financial transactions.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
e) Accounts receivable
Accounts receivable are receivables from customers and are reduced to their probable realizable value by a provision.
f) Inventories
Inventories are recorded at average cost of acquisition or production, not to exceed the net realizable value. Provisions for slow-moving or obsolete inventories are recorded when deemed necessary by management.
g) Equity method investments
Entities over which the Company exercises significant influence are accounted for by the equity method. Based on the equity method, investments are recorded on the balance sheet at cost, plus the changes following the acquisition of shares and the Company’s share of equity income or loss of the associate.
The income statement reflects the share of operating results of associates associate based on the equity method. When a change is recognized directly in equity of the associate, the Company recognizes its share of the variations, where applicable, statement of changes in equity.
The financial statements of associates are prepared for the same period of presentation of the Company even if the fiscal year is not coincidental. Where necessary, adjustments are made to conform to the accounting practices of the Company.
After applying the equity method, the Company determines whether it is necessary to recognize additional loss of recoverable value on the Company's investment in its associate. The Company determines, at each year end, if there is objective evidence that investment in associate loss suffered by the impairment. If so, the Company calculates the amount of loss on the impairment as the difference between the recoverable value of the associate and the book value and the amount recognized in the income statement.
When there is loss of significant influence over the associate, the Company evaluates and recognizes the investment at fair value at that moment.
The unrealized gains and losses resulting from transactions between the Company and associates are eliminated in accordance with the participation held in the associate.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
h) Biological assets
IAS 41 - Agriculture encompasses the accounting treatment of activities involving biological assets, which in the case of Cosan S.A., refers to the sugarcane plantations. Biological assets are recognized at fair value at each balance sheet date and the effects of changes in fair values between the periods are allocated to cost of goods sold. The sugarcane plantation is measured at fair value in accordance with the discounted cash flow method. The harvest of Cosan S.A. begins generally in April each year and ends in the months of November and December.
Cosan S.A.’s own land on which the biological asset is produced is accounted for in accordance with IAS 16 - Property, Plant and Equipment.
i) Property, plant and equipment (“P, P&E”)
Items of P, P&E are measured at historical cost of acquisition or construction, less accumulated depreciation and impairment when applicable.
Cost includes expenditures that are directly attributable to the acquisition of an asset. The cost of assets constructed by the entity includes the cost of materials and direct labor, other costs to put the asset in location and condition necessary for them to be able to operate in the manner intended by management, and borrowing costs on qualifying assets. Borrowing costs relating to funds raised for work in progress are capitalized until these projects are completed.
The Company carries out the planned major maintenance activities at its plants on an annual basis in order to inspect and replace components. This occurs between January and March. The principal costs include maintenance costs for labor, materials, third party services and overhead allocated during the inter harvest period.
The estimated cost of a component of a piece of equipment that must be replaced each year is recorded as a component of cost of the equipment and depreciated over the following season. Costs of normal periodic maintenance are recorded as expenses when incurred since the components will not improve the production capacity or introduce improvements to equipment.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Depreciation is calculated on a straight line method based on useful life of each asset, following the annual depreciation rates shown below:
|
Buildings and improvements
|
4%
|
|
|
Containers
|
25%
|
|
|
Machinery and equipment
|
3% to 10%
|
|
|
Agricultural machinery
|
10%
|
|
|
Industrial equipment and facilities
|
10%
|
|
|
Furniture and fixtures
|
10%
|
|
|
Computer equipment
|
20%
|
|
|
Vehicles
|
10% to 20%
|
|
|
Locomotives
|
3.3%
|
|
|
Rail cars
|
2.9%
|
|
|
Boats and aircrafts
|
10%
|
j) Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date.
Finance leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the income statement. A leased asset is depreciated over the useful life of the asset.
Operating lease payments are recognized as an operating expense in the income statement on a straight-line basis over the lease term.
k) Intangibles
(i) Goodwill
Under Brazilian GAAP, goodwill arising from business combinations that occurred before March 31, 2009 was amortized on a straight line basis over a period of 5 to 10 years. After March 31, 2009 any remaining balances or new goodwill were no longer amortized and subject to impairment testing.
The goodwill considered for IFRS purposes was the ending balance as of March 31, 2009 (under Brazilian GAAP), except for the goodwill arising from the acquisition of Cosan CL, for which IFRS 3 was applied.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Goodwill is maintained at its cost, less any impairment losses. Goodwill is tested annually for impairment. In order to perform impairment tests goodwill is compared to the recoverable amount of the related cash generating unit to which it was originally allocated.
(ii) Intangible assets with finite lives
Intangible assets with finite lives are amortized over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired.
l) Impairment
In accordance with IAS 36, the Company assesses annually whether there are indications of impairment in its long lived assets. If these indicators are identified, the Company estimates the recoverable amount of the assets. The recoverable amount of an asset or a group of assets is the greater of: (a) the fair value less estimated costs to sell it, and (b) its value in use. Value in use is the discounted cash flow (before taxes) from the continued use of the assets until the end of its useful life.
Regardless of the existence of indicators of loss of value, goodwill and intangible assets with indefinite useful lives are tested for impairment at least once a year.
When the book value of an asset exceeds its recoverable amount, the impairment loss is recognized as an operating expense in the income statement.
m) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur.
The Company capitalizes borrowing costs for all eligible assets where construction was commenced on or after April 1, 2009.
n) Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
o) Pension and other employment benefits
i) Defined benefit pension plan
The Company, through its indirect subsidiary Cosan Combustíveis e Lubrificantes S.A. ("Cosan CL") is the sponsor of a defined benefit pension plan for part of its employees. The cost of providing benefits under the defined benefit plan is determined annually by independent actuaries using the projected unit credit method.
Actuarial gains and losses for the defined benefit plan are recognized in full in the period in which they occur in other comprehensive income. Such actuarial gains and losses are also immediately recognized in equity and are not reclassified to profit or loss in subsequent periods.
ii) Defined contribution pension plan
The Company, through its indirect subsidiary Cosan Alimentos S.A. ("Cosan Alimentos") sponsors a defined contribution plan, for all employees of that subsidiary. The Company does not have a legal or constructive obligation to pay further contributions if the fund does not have sufficient assets to pay all benefits owed.
iii) Share-based payments
Employees (including senior executives) of Cosan S.A. receive regular compensation in the form of equity investments for services rendered (equity-settled transactions).
The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled. Cosan S.A. uses the binomial model to estimate the fair value of the options at the date of the grant.
p) Treasury shares
The Company´s equity instruments which are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the Company’s own equity instruments.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
q) Taxes
i) Income taxes
Income taxes are comprised of income tax and social contribution at a combined rate of 34%.
Deferred income tax assets are recognized for all deductible temporary differences and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and unused tax losses can be utilized.
Deferred income tax assets and liabilities are presented as non-current assets or liabilities and measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates that have been enacted at the reporting date.
ii) Indirect taxes
Net revenues is recognized net of discounts and sales taxes (IPI, ICMS, PIS e COFINS).
r) Business combinations
Business combinations are accounted for using the acquisition method, from December 1, 2008 (transition date of business combinations for IFRS purposes), and the assets and liabilities assumed are measured at fair value for purposes of goodwill calculation. Goodwill represents the excess of the acquisition cost in comparison the fair value of the acquired assets and liabilities. If there is an excess of the acquirer's interest in the fair value of assets and liabilities acquired over the cost, the difference is recognized immediately in the income statement.
s) Asset retirement obligations
The retirement obligations of the subsidiary Cosan CL relate to the legally required obligation to remove underground fuel tanks upon retirement, the initial measurement of which is recognized as a liability discounted to present values and subsequently accreted through earnings. An asset retirement cost equal to the initial estimated liability is capitalized as part of the related asset’s carrying value and depreciated over the asset’s useful life.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
t) Environmental matters
Cosan’s production facilities and its plantation activities are both subject to environmental regulations. Cosan diminishes the risks associated with environmental matters, through operating procedures and controls and investments in pollution control equipment and systems. Cosan believes that no provision for losses related to environmental matters is currently required, based on existing Brazilian laws and regulations.
|
2.4
|
New IFRS and IFRIC Interpretations Committee (Financial Reporting Interpretations of IASB) applicable to the consolidated financial statements
|
New accounting pronouncements from the IASB and IFRIC interpretations have been published and / or reviewed and have the optional adoption in March 31, 2011. The Management assessed the impact of these new pronouncements and interpretations and does not anticipate that its adoption will lead to a significant impact on the annual information of the Company and its subsidiaries in the year of initial application, as follows:
|
•
|
IAS 24 Related Party Disclosures (Amendment) It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government related entities. The amended standard is effective for annual periods beginning on or after 1 January 2011. Management is still evaluating the impact on its financial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard.
|
|
•
|
IFRS 9 Financial Instruments – Classification and measurement - It reflects the first phase of the IASBs work on the replacement of IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a simplified approach to determine whether a financial asset is measured at amortized cost or fair value, based on the manner in which an entity manages its financial instruments (business model) and the typical contractual cash flow of financial assets. The standard also requires the adoption of only one method for determining losses in recoverable value of assets. The standard is effective for annual periods beginning on or after 1 January 2013. Management is still evaluating the impact on its financial position or performance in relation to IFRS 9.
|
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
|
•
|
IFRS 10 Consolidated Financial Statements - IFRS 10 as issued establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements in SIC-12 Consolidation—Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after January 1, 2013. Early application is permitted. Management is still evaluating the impact on its financial position or performance from the adoption of IFRS 10.
|
|
|
•
|
IFRS 11 Joint Arrangements - IFRS 11 provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. IFRS 13 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities - Non-Monetary Contributionsby Ventures, and is effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted. Management is still evaluating the impact on its financial position or performance from the adoption of IFRS 11.
|
|
|
•
|
IFRS 12 Disclosures of Interests in Other Entities - IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted. Management is still evaluating the impact on its financial position or performance from the adoption of IFRS 11.
|
|
|
•
|
IFRS 13 Fair Value Measurement - IFRS 13 establishes new requirements on how to measure fair value and the related disclosures for IFRS and US generally accepted accounting principles. The standard is effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted. Management is still evaluating the impact on its financial position or performance from the adoption of IFRS 13.
|
|
|
•
|
IFRIC 14 Prepayments of a minimum funding requirement. This standard applies only to those situations where an entity is subject to minimum funding requirements and anticipated contributions to cover these requirements. The standard allows the entity to account for the benefit of such prepayment as an asset. This standard is effective for fiscal years beginning from January 1, 2011. Management is still evaluating the impact on its financial position or performance from the adoption of IFRIC 14.
|
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
|
•
|
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments - IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss. Management is still evaluating the impact on its financial position or performance from the adoption of IFRIC 19.
|
Improvements to IFRS – The IASB standards for improvements and amendments to IFRS in May 2010 and the amendments will be effective from January 1, 2011:
· IFRS 3 – Business combination.
· IFRS 7 – Financial instrument: Disclosures.
· IAS 1 – Presentation of Financial Statements
· IAS 27 – Consolidated and Separate Financial Statements
· IFRIC 13 – Customer Loyalty Programme
Management still evaluating the impact on its financial position or performance in relation to the 2010 improvements and amendments.
|
3.
|
First-time adoption of IFRS
|
As mentioned in Note 2.1(a), these financial statements for the year ended March 31, 2011 are the first Company has prepared in accordance with IFRS.
Accordingly, the Company has prepared financial statements which comply with IFRS applicable for periods ending on March 31, 2011, together with the comparative period data as at and for the year ended March 31, 2010, as described in the accounting policies. In preparing these financial statements, the Company’s opening statement of financial position was prepared as of April 1, 2009, the Company’s date of transition to IFRS. This note explains the principal adjustments made by Company in restating its Brazilian GAAP statement of financial position as at April 1, 2009 and its previously published Brazilian GAAP financial statements as of and for the year ended March 31, 2010.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
IFRS 1 First-Time Adoption of International Financial Reporting Standards allows first-time adopters certain exemptions from the retrospective application of certain IFRS. The Company has applied the following exemptions:
|
|
·
|
Business combinations: the Company used the exemption of IFRS 1 and has applied IFRS 3 - Business combinations - for acquisitions from December 1, 2008, date of purchase of Cosan CL (formerly known as Esso Brasileira de Petroleo Ltda.) and elected not to remeasure and restate business combinations that occurred before that date.
|
|
|
·
|
Deemed cost: the Company elected to measure its farming land at fair value at the date of transition to IFRS. The effects of the deemed cost increased fixed assets with a corresponding increase in equity, net of income tax effects (see Note 14). The Company elected not to remeasure the remaining fixed assets. Remaining cost basis differences between inflation indexed asset values under IFRS and Brazilian GAAP attributable to Brazil’s hyper-inflationary designation until 1997 are immaterial as of the IFRS transition date.
|
|
|
·
|
Defined benefit pension plan: the Company elected to recognize all actuarial gains and losses against the retained earnings as at the date of transition to IFRS. See Note 27 for further details.
|
|
|
·
|
Borrowing costs: The Company has applied the transitional provisions in IAS 23 Borrowing Costs and capitalizes borrowing costs on assets where construction was commenced on or after the date of transition.
|
|
|
·
|
Cumulative currency translation differences: cumulative currency translation differences are deemed to be zero as at April 1, 2009.
|
Estimates
The estimates at April 1, 2009 and at March 31, 2010 are consistent with those made for the same dates in accordance with Brazilian GAAP (after adjustments to reflect any differences in accounting policies) apart from the following items where application of Brazilian GAAP did not require estimation:
· Biological assets
· Contingent consideration
· Certain financial instruments
The estimates used by the Company to present these amounts in accordance with IFRS reflect conditions at April 1, 2009, the date of transition to IFRS and as of March 31, 2010.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
In preparing its opening balance sheet under IFRS, the Company has reclassified and adjusted amounts previously presented under Brazilian GAAP. An explanation of the effects of the transition from Brazilian GAAP to IFRS is presented as follows:
3.1 Reconciliation of the statement of financial position
|
April 1, 2009
|
March 31, 2010
|
||||||||||||||||||||||||||||||||||||
|
Note
|
BRGAAP
|
Reclassification
|
Adjustments to IFRS
|
IFRS
|
BRGAAP
|
Reclassification
|
Adjustments to IFRS
|
IFRS
|
|||||||||||||||||||||||||||||
|
Assets
|
|||||||||||||||||||||||||||||||||||||
|
Current
|
|||||||||||||||||||||||||||||||||||||
|
Cash and cash equivalents
|
1,177,936 | - | - | 1,177,936 | 1,110,766 | - | - | 1,110,766 | |||||||||||||||||||||||||||||
|
Restricted cash
|
11,757 | - | - | 11,757 | 44,972 | - | - | 44,972 | |||||||||||||||||||||||||||||
|
Accounts receivable
|
599,163 | - | - | 599,163 | 766,415 | - | - | 766,415 | |||||||||||||||||||||||||||||
|
Derivatives
|
17,022 | - | - | 17,022 | 230,561 | - | - | 230,561 | |||||||||||||||||||||||||||||
|
Inventories
|
a | 1,106,185 | (386,529 | ) | - | 719,656 | 1,046,730 | (434,047 | ) | - | 612,683 | ||||||||||||||||||||||||||
|
Advances to suppliers
|
206,032 | - | - | 206,032 | 235,552 | (33,979 | ) | 201,573 | |||||||||||||||||||||||||||||
|
Related parties
|
57,232 | - | - | 57,232 | 24,859 | 1,689 | 698 | 27,246 | |||||||||||||||||||||||||||||
|
Deferred income taxes
|
i.ii
|
42,471 | (42,471 | ) | - | - | 76,310 | (76,310 | ) | - | - | ||||||||||||||||||||||||||
|
Recoverable taxes
|
265,417 | - | - | 265,417 | 327,864 | - | - | 327,864 | |||||||||||||||||||||||||||||
|
Other current assets
|
a | 50,279 | 19,229 | - | 69,508 | 62,681 | 13,991 | - | 76,672 | ||||||||||||||||||||||||||||
| 3,533,494 | (409,771 | ) | - | 3,123,723 | 3,926,710 | (528,656 | ) | 698 | 3,398,752 | ||||||||||||||||||||||||||||
|
Non-current
|
|||||||||||||||||||||||||||||||||||||
|
Deferred income taxes
|
i.ii
|
700,044 | 42,471 | 66,703 | 809,218 | 560,114 | 76,310 | 49,715 | 686,139 | ||||||||||||||||||||||||||||
|
Advances to suppliers
|
48,035 | - | - | 48,035 | 63,741 | - | - | 63,741 | |||||||||||||||||||||||||||||
|
Related parties
|
- | - | - | - | 81,411 | - | - | 81,411 | |||||||||||||||||||||||||||||
|
Recoverable taxes
|
21,374 | - | - | 21,374 | 45,018 | - | - | 45,018 | |||||||||||||||||||||||||||||
|
Judicial deposits
|
i.i
|
- | 171,266 | - | 171,266 | - | 167,562 | - | 167,562 | ||||||||||||||||||||||||||||
|
Other financial assets
|
g | 177,626 | - | 125,841 | 303,467 | 205,657 | 3 | 149,710 | 355,370 | ||||||||||||||||||||||||||||
|
Other non-current assets
|
443,317 | (42,468 | ) | 2,138 | 402,987 | 512,613 | (49,737 | ) | (7,583 | ) | 455,293 | ||||||||||||||||||||||||||
|
Equity method investments
|
f | 278,209 | - | 44,868 | 323,077 | 193,123 | - | 67,691 | 260,814 | ||||||||||||||||||||||||||||
|
Biological assets
|
a | - | 942,533 | (188,302 | ) | 754,231 | - | 1,106,675 | (143,431 | ) | 963,244 | ||||||||||||||||||||||||||
|
Property, plant and equipment
|
|
a, b, d, e | 3,493,947 | (592,171 | ) | 1,021,847 | 3,923,623 | 5,561,065 | (678,342 | ) | 1,231,808 | 6,114,531 | |||||||||||||||||||||||||
|
Intangible assets
|
b | 2,862,654 | 59,404 | (12,202 | ) | 2,909,856 | 3,289,804 | 75,436 | 460,127 | 3,825,367 | |||||||||||||||||||||||||||
| 8,025,206 | 581,035 | 1,060,893 | 9,667,134 | 10,512,546 | 697,907 | 1,808,037 | 13,018,490 | ||||||||||||||||||||||||||||||
|
Total assets
|
11,558,700 | 171,264 | 1,060,893 | 12,790,857 | 14,439,256 | 169,251 | 1,808,735 | 16,417,242 | |||||||||||||||||||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
April 1, 2009
|
March 31, 2010
|
|||||||||||||||||||||||||||||||||||
|
Note
|
BRGAAP
|
Reclassification
|
Adjustments to IFRS
|
IFRS
|
BRGAAP
|
Reclassification
|
Adjustments to IFRS
|
IFRS
|
||||||||||||||||||||||||||||
|
Liability
|
||||||||||||||||||||||||||||||||||||
|
Current
|
||||||||||||||||||||||||||||||||||||
|
Current portion of long-term debt
|
b | 1,452,297 | - | - | 1,452,297 | 845,430 | - | (5,901 | ) | 839,529 | ||||||||||||||||||||||||||
|
Derivatives
|
66,895 | - | - | 66,895 | 76,703 | - | - | 76,703 | ||||||||||||||||||||||||||||
|
Trades accounts payable
|
456,116 | - | - | 456,116 | 569,399 | - | - | 569,399 | ||||||||||||||||||||||||||||
|
Salaries payable
|
93,156 | - | - | 93,156 | 141,584 | - | - | 141,584 | ||||||||||||||||||||||||||||
|
Taxes payable
|
168,596 | - | - | 168,596 | 215,862 | - | - | 215,862 | ||||||||||||||||||||||||||||
|
Dividends payable
|
- | - | - | - | 43,982 | - | - | 43,982 | ||||||||||||||||||||||||||||
|
Related parties
|
- | 4,458 | - | 4,458 | 14,416 | 1,689 | - | 16,105 | ||||||||||||||||||||||||||||
|
Other current liabilities
|
90,738 | (5,168 | ) | - | 85,570 | 183,034 | - | - | 183,034 | |||||||||||||||||||||||||||
| 2,327,798 | (710 | ) | - | 2,327,088 | 2,090,410 | 1,689 | (5,901 | ) | 2,086,198 | |||||||||||||||||||||||||||
|
Non-current
|
||||||||||||||||||||||||||||||||||||
|
Long-term debt
|
3,232,736 | - | - | 3,232,736 | 5,136,529 | - | - | 5,136,529 | ||||||||||||||||||||||||||||
|
Taxes payable
|
b | 328,760 | - | - | 328,760 | 593,505 | - | (651 | ) | 592,854 | ||||||||||||||||||||||||||
|
Legal proceedings
|
i | 1,105,899 | 171,266 | - | 1,277,165 | 444,421 | 167,562 | - | 611,983 | |||||||||||||||||||||||||||
|
Related parties
|
- | 708 | 3 | 711 | - | - | - | - | ||||||||||||||||||||||||||||
|
Pension
|
h | 60,378 | - | 4,730 | 65,108 | 61,788 | - | (61,788 | ) | - | ||||||||||||||||||||||||||
|
Deferred income taxes
|
- | - | 528,969 | 528,969 | 346,599 | - | 775,809 | 1,122,408 | ||||||||||||||||||||||||||||
|
Other non-current liabilities
|
b | 234,050 | - | 128,343 | 362,393 | 218,935 | - | 156,409 | 375,344 | |||||||||||||||||||||||||||
| 4,961,823 | 171,974 | 662,045 | 5,795,842 | 6,801,777 | 167,562 | 869,779 | 7,839,118 | |||||||||||||||||||||||||||||
|
Equity
|
||||||||||||||||||||||||||||||||||||
|
Common stock
|
5,328 | - | - | 5,328 | 5,328 | - | - | 5,328 | ||||||||||||||||||||||||||||
|
Capital reserve
|
3,749,564 | 59,496 | (148,020 | ) | 3,661,040 | 3,547,410 | 231,986 | (124,950 | ) | 3,654,446 | ||||||||||||||||||||||||||
|
Accumulated earnings (losses)
|
(563,672 | ) | (59,496 | ) | 452,798 | (170,370 | ) | 18,554 | (231,986 | ) | 749,156 | 535,724 | ||||||||||||||||||||||||
|
Equity attributable to owners of the Company
|
3,191,220 | - | 304,778 | 3,495,998 | 3,571,292 | - | 624,206 | 4,195,498 | ||||||||||||||||||||||||||||
|
Equity attributable to non-controlling interests
|
c | 1,077,859 | - | 94,070 | 1,171,929 | 1,975,777 | - | 320,651 | 2,296,428 | |||||||||||||||||||||||||||
|
Total equity
|
4,269,079 | - | 398,848 | 4,667,927 | 5,547,069 | - | 944,857 | 6,491,926 | ||||||||||||||||||||||||||||
|
Total liabilities and equity
|
11,558,700 | 171,264 | 1,060,893 | 12,790,857 | 14,439,256 | 169,251 | 1,808,735 | 16,417,242 | ||||||||||||||||||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
3.2 Reconciliation of the income statement – year ended March 31, 2010
|
Note
|
BR GAAP
|
Adjustments to IFRS
|
IFRS
|
|||||||||||||
|
Net sales
|
15,336,055 | - | 15,336,055 | |||||||||||||
|
Cost of goods sold
|
a/b | (13,210,692 | ) | (60,639 | ) | (13,271,331 | ) | |||||||||
|
Gross profit
|
2,125,363 | (60,639 | ) | 2,064,724 | ||||||||||||
|
Operational income /(expenses)
|
||||||||||||||||
|
Selling
|
(864,601 | ) | 1,875 | (862,726 | ) | |||||||||||
|
General and administrative
|
(502,483 | ) | 807 | (501,676 | ) | |||||||||||
|
Other, net
|
b | (111,289 | ) | 148,812 | 37,523 | |||||||||||
|
Gain on tax recovery program
|
270,333 | - | 270,333 | |||||||||||||
| (1,208,040 | ) | 151,494 | (1,056,546 | ) | ||||||||||||
|
Income before financial results, equity income of associates and income taxes
|
917,323 | 90,855 | 1,008,178 | |||||||||||||
|
Equity income of associates
|
g/e | (18,645 | ) | 22,823 | 4,178 | |||||||||||
|
Financial results, net
|
b | 458,626 | 34,815 | 493,441 | ||||||||||||
| 439,981 | 57,638 | 497,619 | ||||||||||||||
|
Income before income taxes
|
1,357,304 | 148,493 | 1,505,797 | |||||||||||||
|
Income Taxes
|
||||||||||||||||
|
Current
|
(78,381 | ) | - | (78,381 | ) | |||||||||||
|
Deferred
|
ii
|
(355,454 | ) | 10,531 | (344,923 | ) | ||||||||||
|
Net income for the year
|
923,469 | 159,024 | 1,082,493 | |||||||||||||
|
Net income attributable to non-controlling interests
|
c | (344,777 | ) | (31,622 | ) | (376,399 | ) | |||||||||
|
Net income attributable to Cosan
|
578,692 | 127,402 | 706,094 | |||||||||||||
3.3. Reconciliation of equity
|
Note
|
April 1, 2009
|
March 31, 2010
|
||||||||||
|
BR GAAP equity
|
3,191,220 | 3,571,292 | ||||||||||
|
IFRS adjustments:
|
||||||||||||
|
Biological assets
|
a | (129,727 | ) | (89,313 | ) | |||||||
|
Business combinations
|
b | 134,049 | 259,868 | |||||||||
|
Pension plan – defined benefit
|
h | (3,259 | ) | 38,474 | ||||||||
|
Deemed cost of Property, plant and equipment
|
d | 252,252 | 227,999 | |||||||||
|
Borrowing costs
|
e | - | 26,249 | |||||||||
|
Other adjustments
|
(1,880 | ) | (1,477 | ) | ||||||||
|
Warrants on equity method investment
|
g | 86,696 | 93,225 | |||||||||
|
Investment property in associate
|
f | 30,911 | 42,151 | |||||||||
|
Deferred income tax on IFRS adjustments
|
ii
|
(64,304 | ) | 27,853 | ||||||||
|
Non-controlling interest
|
c | 40 | (823 | ) | ||||||||
|
IFRS equity excluding non-controlling interest
|
3,495,998 | 4,195,498 | ||||||||||
|
Presentation of non-controlling interest inside equity
|
1,171,929 | 2,296,428 | ||||||||||
|
IFRS equity
|
4,667,927 | 6,491,926 | ||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
3.4 Reconciliation of net income – Year ended March 31, 2010
|
Note
|
Year ended March 31, 2010
|
|||||||
|
BR GAAP net income
|
578,692 | |||||||
|
IFRS adjustments:
|
||||||||
|
Biological assets
|
a | 17,999 | ||||||
|
Business combinations
|
b | (21,525 | ) | |||||
|
Borrowing costs
|
e | 9,087 | ||||||
|
Warrants on equity method investment
|
g | 45,234 | ||||||
|
Investment property in associate
|
f | 43,245 | ||||||
|
Deferred income tax on IFRS adjustments
|
ii
|
(24,589 | ) | |||||
|
Non-controlling interest
|
c | 57,950 | ||||||
|
IFRS net income
|
706,094 | |||||||
The transition from Brazilian GAAP to IFRS did not result in a material impact on the statement of cash flows.
The significant adjustments as a consequence of the adoption of IFRS are described as follows:
a) Biological assets
According to the IAS 41, biological assets of Cosan S.A. are measured at fair value at each reporting period, using the discounted cash flow method.
In accordance with accounting practices prior to the adoption of IFRS, the biological assets were recorded at their historical cost less amortization and were classified and presented in the statement of financial position as inventories or fixed assets The costs classified in inventories related to maintenance costs of the crop to be harvested within 12 months, and the costs recognized in fixed assets related to the costs of the initial crop of sugarcane plants, which are amortized over five years, the estimated useful life.
The negative adjustment of biological assets to fair value as of the IFRS transition date was not considered an indicator of impairment of the previous carrying value of the previously classified inventory or fixed assets under Brazilian GAAP. Rather, such previous asset values were deemed recoverable as of April 1, 2009 based on the estimated future cash flows of all crops to be grown on the land as they are used to produce sugar and ethanol, as compared to the current fair value of biological assets which is based on the current status on crops in process.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
b) Business combinations
Under IFRS 3, all assets and liabilities of businesses acquired after the transition date, including any intangible assets are valued at their fair value at the date of transaction. In addition, purchases of businesses with payment in shares or other securities issued by the purchaser must also be measured at fair value for purposes of determining the purchase price, which consequently affects the value of goodwill calculated. Cosan considered the transition date for application of IFRS 3 to be December 1, 2008, the date of acquisition of Cosan CL.
The buyer must recognize contingent consideration at fair value at the acquisition date as part of the consideration for obtaining control of the acquiree.
If the Company's interest in the fair value of identifiable assets and liabilities acquired exceeds the acquisition cost, such excess is recorded as an immediate gain in income.
According to Brazilian GAAP, goodwill in a business combination was calculated based on the amount paid in cash. Amounts paid with shares considered the equity value of the shares given and not their market value and determination of the amounts did not consider the existence of any intangible assets to be recorded. Total consideration was then compared with the book value of the acquired company. If a discount was identified, it would be recorded in noncurrent liabilities.
Under Brazilian GAAP, up to March 31, 2010, goodwill on a business combination was calculated as the difference between the purchase price and the historical net assets of the business acquired. The purchase price, if not cash, and the net assets did not reflect any fair value considerations. Any negative goodwill would be presented as a liability.
c) Non-controlling interests
Under IAS 27 - Consolidated and Separate Financial Statements, the participation of non-controlling interest is presented as a component of equity.
According to Brazilian GAAP, up to March 31, 2010, non-controlling interests were presented between non-current liabilities and equity on the statement of financial position.
Also, some first time adoption adjustments impacted non-controlling interests.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
d) Deemed cost
Cosan S.A. elected to measure its farming land at fair value at the date of transition to IFRS. The adjustment was recorded against equity net of deferred taxes.
e) Borrowing costs
Under Brazilian GAAP, up to March 31, 2010, Cosan S.A. did not capitalize borrowing costs. Cosan S.A. has applied the transitional provisions in IAS 23 Borrowing Costs and capitalizes borrowing costs on assets where construction was commenced on or after the date of transition.
f) Investment property in associate
Radar Propriedades Agricolas S.A. (“Radar”) is an equity method investment of the Company that invests in farming land for rent and future appreciation. Under Brazilian GAAP, up to March 31, 2010, such land was recorded at cost. With the adoption of IFRS, Radar treated such land as investment property and elected to measure it at fair value. Fair value is measured at each reporting date, impacting the equity income of Cosan S.A. in regard to Radar.
g) Warrants on equity method investment
Cosan S.A. holds warrants on Radar, exercisable at any time up to maturity (August 2018). Such warrants permit Cosan S.A. to purchase additional shares, equivalent to 20% of total shares as of the date of exercise. The exercise of warrants will not change the classification of this investment as an equity investment. Those warrants were not considered to be a financial instrument under Brazilian GAAP up to March 31, 2010 as they cannot be net settled. Radar is a privately owned entity. Under IFRS the warrants are treated as a separate financial instrument measured at fair value.
h) Pension plan – defined benefit
Under Brazilian GAAP, up to March 31, 2010, the Company recorded its defined benefit plan under the corridor approach with respect to actuarial gains and losses. With the adoption of IAS 19, the Company elected to recognize actuarial gain and losses in the period the occur as a component of other comprehensive income.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
i) Reclassifications
The major reclassifications made in connection with the adoption of IFRS were as follows:
i) Judicial deposits
Under IFRS, judicial deposits related to provisions for legal proceedings are presented on a gross basis in non-current assets as they do not satisfy the requirements for compensation with the related liability under IAS 1. Previously, under Brazilian GAAP up to March 31, 2010, provisions for legal proceedings were presented net of related judicial deposits.
ii) Deferred income taxes
As required by IAS 12, all deferred income taxes have been reclassified to non-current assets or liabilities. Also, the balance of deferred income taxes was impacted by the adjustments previously mentioned.
|
4.
|
Cash and cash equivalents
|
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
Brazilian reais
|
||||||||||||
|
Cash
|
289 | 384 | 125 | |||||||||
|
Bank accounts
|
64,437 | 22,740 | 74,586 | |||||||||
|
Highly liquid investments
|
1,076,599 | 877,017 | 528,539 | |||||||||
|
US dollars
|
||||||||||||
|
Bank accounts
|
78,353 | 127,755 | 48,969 | |||||||||
|
Highly liquid investments
|
52,102 | 82,870 | 525,717 | |||||||||
| 1,271,780 | 1,110,766 | 1,177,936 | ||||||||||
On March 31, 2011, Cosan S.A. had unused lines of credit with BNDES, at the amount of R$1,064,930 (2010: R$765,075). The use of these lines of credit depends upon fulfillment of certain contractual conditions.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
5.
|
Restricted cash
|
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
Restricted financial investments
|
61,072 | - | - | |||||||||
|
Deposits in connection with derivative Transactions
|
126,872 | 44,972 | 11,757 | |||||||||
| 187,944 | 44,972 | 11,757 | ||||||||||
Deposits in connection with derivative transactions relate to margin calls by counterparties in derivative transactions.
|
6.
|
Other financial assets
|
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
Fair value of Radar option (1)
|
162,961 | 149,713 | 125,841 | |||||||||
|
Treasury certificates – CTN (2)
|
257,456 | 205,657 | 177,626 | |||||||||
| 420,417 | 355,370 | 303,467 | ||||||||||
|
|
(1) Cosan S.A. holds warrants on Radar, exercisable at any time up to maturity (August 2018). Such warrants will allow Cosan S.A. to purchase additional shares at R$41.67 per share adjusted for inflation (IPCA), equivalent to 20% of the total shares issued by Radar as of the date of exercise. The exercise of warrants will not change the classification of this investment as an equity investment. The fair value of these warrants was calculated based on observable market data.
|
|
|
(2) Represented by bonds issued by the Brazilian National Treasury under the Special Program for Agricultural Securitization - "PESA" with original maturity of 20 years in connection with the long-term debt denominated PESA (note 16). These bonds yield inflation (IGPM) plus 12% p.a.. The value of these securities at maturity is expected to be equal to the amount due to the PESA at that date. If the PESA debt is paid in advance, Cosan S.A. may still keep this investment until maturity.
|
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
7.
|
Accounts receivable
|
The balances of accounts receivables as of March 31, 2011, 2010 and April 1, 2009 are composed as follows:
|
2011
|
2010
|
April 1,
2009
|
||||||||||
|
Domestic
|
678,498 | 715,481 | 539,326 | |||||||||
|
Foreign
|
7,556 | 148,655 | 162,822 | |||||||||
|
Allowance for doubtful accounts
|
(91,197 | ) | (97,721 | ) | (102,985 | ) | ||||||
| 594,857 | 766,415 | 599,163 | ||||||||||
The analysis of the maturity of the accounts receivable is as follows:
|
2011
|
2010
|
April 1,
2009
|
||||||||||
|
Current
|
555,826 | 483,279 | 359,644 | |||||||||
|
Overdue
|
||||||||||||
|
Up to 30 days
|
21,097 | 273,435 | 228,943 | |||||||||
|
From 31 to 60 days
|
4,317 | 4,760 | 1,882 | |||||||||
|
From 61 to 90 days
|
553 | 4,146 | 4,227 | |||||||||
|
From 91 to 180 days
|
4,096 | 717 | 327 | |||||||||
|
More than 180 days
|
8,968 | 78 | 4,140 | |||||||||
| 39,031 | 283,136 | 239,519 | ||||||||||
| 594,857 | 766,415 | 599,163 | ||||||||||
Changes in the allowance for doubtful accounts are as follows:
|
On April 1, 2009
|
(102,985 | ) | ||
|
Provision
|
(14,011 | ) | ||
|
Reversal
|
15,389 | |||
|
Write-offs
|
11,748 | |||
|
Addition from business combination
|
(7,862 | ) | ||
|
On March 31, 2010
|
(97,721 | ) | ||
|
Provision
|
(16,573 | ) | ||
|
Reversal
|
18,238 | |||
|
Write-offs
|
6,130 | |||
|
Addition from business combination
|
(1,271 | ) | ||
|
On March 31, 2011
|
(91,197 | ) |
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
8.
|
Inventories
|
|
2011
|
2010
|
April 1,
2009
|
||||||||||
|
Finished goods:
|
||||||||||||
|
Sugar
|
77,673 | 93,610 | 109,265 | |||||||||
|
Ethanol
|
42,840 | 97,791 | 200,980 | |||||||||
|
Fuels and lubricants
|
326,634 | 226,248 | 274,430 | |||||||||
|
Raw material
|
51,598 | 42,022 | 45,721 | |||||||||
|
Spare parts and other
|
191,153 | 178,272 | 112,362 | |||||||||
|
Provision for inventory realization and obsolescence
|
(19,567 | ) | (25,260 | ) | (23,102 | ) | ||||||
| 670,331 | 612,683 | 719,656 | ||||||||||
Change in the provision for inventory realization and obsolescence is as follows:
|
On April 1, 2009
|
(23,102 | ) | ||
|
Addition
|
(14,528 | ) | ||
|
Reversal
|
12,370 | |||
|
On March 31, 2010
|
(25,260 | ) | ||
|
Addition
|
(13,483 | ) | ||
|
Reversal
|
19,176 | |||
|
On March 31, 2011
|
(19,567 | ) |
|
9.
|
Recoverable taxes
|
|
2011
|
2010
|
April 1,
2009
|
||||||||||
|
Income Tax
|
66,274 | 107,675 | 66,083 | |||||||||
|
COFINS
|
121,474 | 74,571 | 81,024 | |||||||||
|
PIS
|
27,338 | 24,263 | 21,667 | |||||||||
|
ICMS – State VAT
|
151,161 | 119,404 | 76,474 | |||||||||
|
IPI
|
47,741 | 21,911 | 35,204 | |||||||||
|
Others
|
16,069 | 25,058 | 6,339 | |||||||||
| 430,057 | 372,882 | 286,791 | ||||||||||
|
Current
|
(374,991 | ) | (327,864 | ) | (265,417 | ) | ||||||
|
Non Current
|
55,066 | 45,018 | 21,374 | |||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
10.
|
Related parties
|
In the normal course of business the Company has operational and financing transactions with several related parties. The significant related party balances and transactions are summarized below:
· Aguassanta:
The Company has land leased from entities controlled by Group Aguassanta (“Aguassanta”) a group of entities under common control, being Mr. Rubens Ometto de Silveira de Mello ultimate controlling shareholder. The lease costs are paid considering the ATR price published by CONSECANA and contracts having terms expiring between 2026 and 2027.
· Radar
The Company has land leased from entities controlled by Radar Propriedades Agrícolas S.A. (“Radar”) our associate. These lease costs are paid also considering the ATR price published by CONSECANA and most of the lease contracts have terms expiring in 2027.
· Rezende Barbosa
The Company holds a receivable originated from the acquisition of Curupay which are ultimately guaranteed by shares issued by the Company.
The Company executed a long-term sugar-cane supply agreement with Rezende Barbosa. Prices paid to them are based on ATR price published by CONSECANA.
· Vertical UK LLP
The Company sells and buys ethanol from Vertical UK (“Vertical”) in the normal course of business. Vertical is a Trading Company headquartered in Switzerland for which we have a 50% stake.
· Logispot
In the year ended March 31, 2010 the Company acquired a minority stake in this entity and the installments outstanding represented the March 31, 2010 balance payable in regard to the share acquisition. In March 2011 the Company acquired the control of such entity as disclosed in Note 11.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
|
a.
|
Summarized balances with related parties
|
|
2011
|
2010
|
2009
|
||||||||||
|
Current assets
|
||||||||||||
|
Vertical UK LLP
|
6,430 | 5,015 | 26,850 | |||||||||
|
Aguassanta
|
- | 14,003 | - | |||||||||
|
Rezende Barbosa
|
7,298 | 7,349 | - | |||||||||
|
Other
|
941 | 879 | 30,382 | |||||||||
|
Total current assets
|
14,669 | 27,246 | 57,232 | |||||||||
|
Non-current assets
|
||||||||||||
|
Rezende Barbosa
|
91,954 | 81,411 | - | |||||||||
|
Total assets
|
106,623 | 108,657 | 57,232 | |||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Current Liabilities
|
||||||||||||
|
Rezende Barbosa
|
37,664 | 1,689 | - | |||||||||
|
Logispot
|
- | 11,244 | - | |||||||||
|
Other
|
3,499 | 3,172 | 4,458 | |||||||||
|
Total current liabilities
|
41,163 | 16,105 | 4,458 | |||||||||
|
Non-current liabilities
|
||||||||||||
|
Other
|
4,444 | - | 711 | |||||||||
|
Total non-current liabilities
|
4,444 | - | 711 | |||||||||
|
Total Liabilities
|
45,607 | 16,105 | 5,169 | |||||||||
|
|
b.
|
Summarized transactions with related parties
|
|
2011
|
2010
|
|||||||
|
Sales of products/ services
|
||||||||
|
Vertical UK LLP
|
160,202 | 154,042 | ||||||
|
Aguassanta
|
39,131 | 101,902 | ||||||
|
Other
|
832 | - | ||||||
| 200,165 | 255,944 | |||||||
|
Purchase of goods/ services
|
||||||||
|
Rezende Barbosa
|
(352,195 | ) | (155,615 | ) | ||||
|
Leased land
|
||||||||
|
Aguassanta
|
(26,459 | ) | (18,817 | ) | ||||
|
Radar Propr. Agricolas
|
(28,446 | ) | (18,158 | ) | ||||
| (54,905 | ) | (36,975 | ) | |||||
|
Financial income/ (expense)
|
||||||||
|
Rezende Barbosa
|
233 | 18,045 | ||||||
|
Other
|
524 | (84 | ) | |||||
| 757 | 17,961 | |||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
|
c.
|
Officers and directors compensation
|
Fixed and variable compensation for key management, including officers and directors were recorded as general, administrative and other expenses and amounted to as follows:
|
2011
|
2010
|
||||||||||
|
Regular compensation
|
9,005 | 6,589 | |||||||||
|
Stock option expense
|
2,961 | 8,971 | |||||||||
|
Bonuses and other variable regular compensation
|
23,791 | 6,325 | |||||||||
|
Total compensation recorded as expense
|
35,757 | x | 21,885 | ||||||||
|
11.
|
Business combination and acquisitions of non-controlling interest
|
|
|
a.
|
Logispot Armazéns Gerais S.A. (“Logispot”)
|
On March 14, 2011, Cosan S.A., through its indirect subsidiary Rumo, purchased 874,226 common shares of Logispot, totaling R$ 48,888 cash which increased its participation in the common shares of Logispot from 14.28% to 51.00%.
Logispot is located in the city of Sumaré and is an important link between plants in the state of São Paulo and Santos Port. The terminal is accessed by all railroads that cross the state of São Paulo and is beside the Anhanguera, Bandeirantes and Dom Pedro highways. The site has a static capacity of 400,000 tons, a structure to receive and send both through roads, as well as by rail, but the potential to carry a composition of 120 railcars of 90 tones per day (unaudited information).
The fair value at the acquisition date of the consideration transferred totaled R$ 68,880, which consisted of the following:
|
Cash
|
48,888 | |||
|
Fair value of 14.28% of Cosan S.A. in Logispot immediately before the business combination
|
19,992 | |||
|
Total
|
68,880 |
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The estimated fair value of assets acquired and liabilities assumed at the date of acquisition of Logispot were as follows:
|
Description
|
||||
|
Accounts receivable
|
1,297 | |||
|
Others assets
|
677 | |||
|
Property, plant and equipment
|
218,638 | |||
|
Deferred income and social contribution taxes
|
(64,394 | ) | ||
|
Others liabilities
|
(26,942 | ) | ||
|
Non-controlling interest
|
(63,901 | ) | ||
|
Net assets acquired
|
65,375 | |||
|
Consideration transferred, net of cash acquired
|
67,745 | |||
|
Provisional goodwill
|
2,370 | |||
The purchase price for the acquisition of Logispot was allocated on a preliminary basis based on the estimated fair value of assets acquired and liabilities assumed. The provisional goodwill has been allocated in the segment Rumo.
b. Cosan Araraquara Açúcar e Álcool Ltda. (“Usina Zanin”)
On February 18, 2011, Cosan S.A. acquired 100% of the share capital of Usina Zanin, for R$90,000 cash. Usina Zanin is located in the city of Araraquara and has a production capacity of 300m ³ / day of anhydrous ethanol, 220m ³ / day of hydrous ethanol, 925 tons / day of sugar and storage capacity of 35,000 m³ of ethanol and 25,000 tons of sugar (unaudited information).
The estimated fair value of assets acquired and liabilities assumed at date of acquisition of Usina Zanin, was as follows:
|
Description
|
||||
|
Inventories
|
8,511 | |||
|
Biological assets
|
87,115 | |||
|
Others assets
|
57,527 | |||
|
Property, plant and equipment
|
257,473 | |||
|
Intangible assets
|
4,407 | |||
|
Loans and Long-term debt
|
(280,941 | ) | ||
|
Provision for judicial demands
|
(21,471 | ) | ||
|
Deferred income and social contribution taxes
|
(45,277 | ) | ||
|
Others liabilities
|
(47,819 | ) | ||
|
Net assets acquired
|
19,525 | |||
|
Consideration transferred, net of cash acquired
|
88,927 | |||
|
Goodwill
|
69,402 | |||
The purchase price of the acquisition of Usina Zanin was preliminarily allocated based on the estimated fair value of assets acquired and liabilities assumed. The preliminary goodwill has been allocated in the S&E segment.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
c. TEAS Terminal Exportador de Álcool de Santos S.A. (“TEAS”)
On November 24, 2009, Cosan S.A. acquired, for R$ 20,260 cash, an additional 26.7% interest, represented by 10,527,295 common shares, of TEAS from Crystalsev Comércio e Representação Ltda and Plínio Nastari Consultoria e Participações Ltda.. As a result of this transaction, Cosan S.A. increased its direct share ownership in TEAS from 40.0% to 66.7% and obtained control of TEAS. TEAS has a port concession and operates a dedicated terminal for export of ethanol.
The acquisition date fair value of the consideration transferred totaled R$ 39,911, which consisted of the following:
|
Cash
|
20,260 | |||
|
Fair value of share of 40% of Cosan S.A. in TEAS immediately before the combination
|
19,651 | |||
|
Total
|
39,911 |
The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date:
|
Description
|
||||
|
Property, plant and equipment
|
21,162 | |||
|
Others assets and liabilities, net
|
405 | |||
|
Non-controlling interest
|
(6,258 | ) | ||
|
Net assets acquired
|
15,309 | |||
|
Consideration transferred, net of cash acquired
|
22,610 | |||
|
Goodwill
|
7,301 | |||
The goodwill has been allocated in the S&E segment.
d. Curupay S.A. Participações (“Curupay”)
On June 18, 2009, Cosan S.A. acquired 100% of the outstanding shares of Curupay S.A. Participações from Rezende Barbosa S.A. Administração e Participações (“Rezende Barbosa”), through the issuance of 44,300,389 common shares valued at R$14.09 per share (fair value at the acquisition date) with a value of R$ 624,192. The assets acquired include the non-controlling interest in Novo Rumo representing 28.82% of its outstanding shares which were issued in the Teaçu Armazéns Gerais S.A. (Teaçu”) acquisition, and 100% of the outstanding shares of two operating companies, Nova América S.A. Trading and Cosan Alimentos (collectively referred to as “Nova América”).
With the acquisition of the noncontrolling interest of Novo Rumo, Cosan S.A. increased its share ownership in Novo Rumo to 92.88%. This transaction was a change in ownership interest without a loss of control and accounted for as a transaction in equity.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The following table summarizes the assets acquired and liabilities assumed in relation to Nova America:
|
Description
|
||||
|
Inventories
|
119,212 | |||
|
Related parties
|
67,741 | |||
|
Property, plant and equipment
|
885,786 | |||
|
Intangible assets
|
243,955 | |||
|
Noncontrolling interest in Novo Rumo
|
132,539 | |||
|
Others assets
|
340,776 | |||
|
Loans and Long-term debt
|
(1,174,631 | ) | ||
|
Taxes payables
|
(56,028 | ) | ||
|
Deferred income and social contribution taxes
|
(47,354 | ) | ||
|
Others liabilities
|
(303,651 | ) | ||
|
Net assets acquired
|
208,345 | |||
|
Consideration transferred, net of cash acquired
|
572,710 | |||
|
Goodwill
|
364,365 | |||
The goodwill of R$ 364,365 arising from the acquisition was assigned to the Sugar and Ethanol operating segment (“S&E”).
The purchase price to acquire Curupay was allocated based on the fair value of assets acquired and liabilities assumed. Cosan S.A. obtained an independent valuation of property, plant and equipment, intangible assets, loans and long-term debt and internally determined the fair value of other assets and liabilities of the acquired business.
|
|
e.
|
Teaçu Armazéns Gerais S.A. (“Teaçú”)
|
On April 9, 2009, Cosan S.A., through its 90% owned subsidiary, Copsapar Participacoes SA, which owns 100% of the Novo Rumo, acquired 100% of the shares of Teaçu of Rezende Barbosa for R$ 121,131 and issue of 90,736,131 shares of Novo Rumo, equivalent to 28.82% of their capital. Teaçu holds a port concession and operates a dedicated terminal for export of sugar and other agricultural products.
As a result of this transaction, Cosan S.A. reduced its indirect participation in Novo Rumo to 64.06%.
The acquisition date fair value of the consideration transferred totaled R$ 382,908, which is formed by:
|
Cash
|
121,131 | |||
|
Common stock at fair value
|
261,777 | |||
|
Total consideration transferred
|
382,908 |
In the absence of a market price, the fair value of shares included in the consideration transferred was calculated using an income approach, using the present value of estimated future cash flows.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The table below shows the fair values of assets acquired and liabilities assumed at the date of acquisition.
|
Description
|
||||
|
Property, plant and equipment
|
101,711 | |||
|
Intangible assets
|
316,977 | |||
|
Inventories
|
2,768 | |||
|
Others assets
|
61,740 | |||
|
Loans and Long-term debt
|
(43,355 | ) | ||
|
Suppliers
|
(1,111 | ) | ||
|
Provision for judicial demands
|
(7,532 | ) | ||
|
Deferred income and social contribution taxes
|
(104,551 | ) | ||
|
Others liabilities
|
(7,136 | ) | ||
|
Net assets acquired
|
319,511 | |||
|
Consideration transferred, net of cash acquired
|
382,432 | |||
|
Goodwill
|
62,921 | |||
The goodwill was assigned to Rumo operating segment.
The purchase price for the acquisition of Teaçu was allocated based on the fair value of assets acquired and liabilities assumed. Cosan S.A. obtained an independent valuation of property, plant and equipment, intangible assets, loans and Long-term debt and internally determined the fair value of other assets and liabilities of the acquiree.
e. Additional information (unaudited)
If entities acquired during 2011 had been included in the income statement since the beginning of the year the additional revenue would be R$ 254,368 and net income would be decreased in R$ 6,461.
|
12.
|
Equity method investments
|
|
Investments
|
Equity income (loss) of subsidiaries and associates
|
|||||||||||||||||||
|
2011
|
2010
|
April 1, 2009
|
2011
|
2010
|
||||||||||||||||
|
Radar (interest of 18.92%)
|
260,756 | 222,525 | 184,211 | 28,658 | 24,639 | |||||||||||||||
|
Uniduto Logística Ltda. (interest of 36.45%)
|
9,561 | 17,783 | 7,506 | (12,391 | ) | - | ||||||||||||||
|
Other investments
|
33,825 | 20,506 | 131,360 | 8,920 | (20,461 | ) | ||||||||||||||
| 304,142 | 260,814 | 323,077 | 25,187 | 4,178 | ||||||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Changes in investments
|
Balances at April 1, 2009
|
323,077 | |||
|
Equity income (loss)
|
4,178 | |||
|
Additions to investments
|
48,805 | |||
|
Change from associate to subsidiary
|
(119,051 | ) | ||
|
Others
|
3,805 | |||
|
Balances at March 31, 2010
|
260,814 | |||
|
Equity income (loss)
|
25,187 | |||
|
Additions to investments
|
37,979 | |||
|
Change from associate to subsidiary
|
(20,015 | ) | ||
|
Others
|
177 | |||
|
Balances at March 31, 2011
|
304,142 |
Information on associates
|
On March 31, 2011
|
||||||||||||||||
|
Assets
|
Liabilities
|
Equity
|
Net profit
|
|||||||||||||
|
Radar Propriedades Agrícolas S.A.
|
1,804,609 | 426,355 | 1,378,254 | 151,421 | ||||||||||||
|
Uniduto Logística Ltda.
|
27,836 | 1,608 | 26,228 | (18,786 | ) | |||||||||||
|
13.
|
Biological assets
|
Changes in biological assets (sugarcane plants) is described below:
|
Consolidated
|
||||
|
Balances at April 1, 2009
|
754,231 | |||
|
Change in fair value
|
44,871 | |||
|
Increase due to planting and growing costs
|
647,467 | |||
|
Haversted cane transferred to inventory
|
(483,325 | ) | ||
|
Balances at March 31, 2010
|
963,244 | |||
|
Change in fair value
|
381,894 | |||
|
Increase due to planting and growing costs
|
745,572 | |||
|
Haversted cane transferred to inventory
|
(616,693 | ) | ||
|
Increase resulting from business combination
|
87,115 | |||
|
Balances at March 31, 2011
|
1,561,132 | |||
Sugarcane plants
Areas cultivated represent only the sugarcane, without considering the land where these crops are found. The following assumptions were used to determine fair value using the discounted cash flow:
|
2011
|
2010
|
||
|
Crop area (hectares)
|
340,386
|
297,864
|
|
|
Expect productivity (tons of cane per hectare)
|
84.74
|
90.36
|
|
|
Total amount of recoverable sugar – ATR (kg)
|
138.54
|
134.08
|
|
|
Price kg ATR projected average (R$/kg)
|
0.4228
|
0.3781
|
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Sugar production depends on the volume and sucrose content of sugarcane grown or supplied by farmers located near the plants. The yield of the crop and the sucrose content in sugarcane mainly depend on weather conditions such as rainfall rate and temperature, which may vary. Historically, weather conditions have caused volatility in the ethanol and sugar, and consequently in our operating results because they undermine or reduce crop yields. Future climate conditions may reduce the amount of sugar and sugarcane that the Company will obtain in a particular season or in the sucrose content of sugarcane. Additionally, our business is subject to seasonality according to the growth cycle of sugarcane in South-Central region of Brazil. The period of annual harvest of sugarcane in South-Central region of Brazil begins in April / May and ends in November / December. This creates variations in stock, usually high in November to cover sales between crop (i.e. from December to April) and a degree of seasonality in gross profit from sales of ethanol and sugar significantly lower in the last quarter of fiscal year. The seasonality and any reduction in the volume of sugar recovered could have a material adverse effect on our operating results and financial condition.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
14.
|
Property, plant and equipment
|
|
Land and rural properties
|
Buildings and improvements
|
Machinery and equipment
|
Aircraft
|
Rail cars and locomotives
|
Boats and vehicles
|
Furniture, fixtures and computer equipment
|
Construction in progress
|
Advances for purchase of property, plant and equipment
|
Parts and components to be periodically replaced
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||||
|
Cost or valuation:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at April 1, 2009
|
1,025,824 | 806,335 | 1,994,666 | 14,131 | - | 212,983 | 103,590 | 881,561 | 203,493 | 214,095 | 5,248 | 5,461,926 | ||||||||||||||||||||||||||||||||||||
|
Addition
|
4,297 | 5,313 | 49,580 | - | - | 313 | 494 | 1,326,213 | - | 333,859 | - | 1,720,069 | ||||||||||||||||||||||||||||||||||||
|
Write-offs
|
(5,657 | ) | (11,537 | ) | (44,046 | ) | (736 | ) | - | (19,986 | ) | (6,063 | ) | - | (23,225 | ) | (6,212 | ) | (4,064 | ) | (121,526 | ) | ||||||||||||||||||||||||||
|
Transfers
|
635 | 133,202 | 1,025,250 | 4,691 | - | 28,985 | 15,182 | (1,208,111 | ) | - | (467 | ) | - | (633 | ) | |||||||||||||||||||||||||||||||||
|
Addition by acquisition
|
16,751 | - | 581,788 | - | - | 1,050 | 5,891 | 408,589 | 20,366 | 16,042 | (179 | ) | 1,050,298 | |||||||||||||||||||||||||||||||||||
|
Balances at March 31, 2010
|
1,041,850 | 933,313 | 3,607,238 | 18,086 | - | 223,345 | 119,094 | 1,408,252 | 200,634 | 557,317 | 1,005 | 8,110,134 | ||||||||||||||||||||||||||||||||||||
|
Addition
|
12,500 | 6,684 | 81,133 | - | - | 312 | 1,806 | 1,577,620 | - | 479,446 | - | 2,159,501 | ||||||||||||||||||||||||||||||||||||
|
Write-offs
|
(4,445 | ) | (10,001 | ) | (29,556 | ) | (1,148 | ) | - | (2,814 | ) | (5,575 | ) | - | (87,899 | ) | - | - | (141,438 | ) | ||||||||||||||||||||||||||||
|
Transfers
|
6,534 | 164,304 | 1,170,279 | 13,965 | 341,647 | 102,199 | 21,728 | (1,824,414 | ) | - | - | 3,758 | - | |||||||||||||||||||||||||||||||||||
|
Addition by acquisition
|
206,801 | 27,956 | 151,338 | - | - | - | 153 | 57,307 | 36,212 | 6,579 | 19 | 486,365 | ||||||||||||||||||||||||||||||||||||
|
Balances at March 31, 2011
|
1,263,240 | 1,122,256 | 4,980,432 | 30,903 | 341,647 | 323,042 | 137,206 | 1,218,765 | 148,947 | 1,043,342 | 4,782 | 10,614,562 | ||||||||||||||||||||||||||||||||||||
|
Depreciation:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balances at April 1, 2009
|
- | (217,724 | ) | (1,107,817 | ) | (11,133 | ) | - | (126,580 | ) | (72,580 | ) | - | - | (467 | ) | (2,002 | ) | (1,538,303 | ) | ||||||||||||||||||||||||||||
|
Depreciation expenses
|
- | (43,550 | ) | (198,621 | ) | (2,026 | ) | - | (22,960 | ) | (10,503 | ) | - | - | (240,629 | ) | - | (518,289 | ) | |||||||||||||||||||||||||||||
|
Disposals
|
(954 | ) | 6,505 | 33,016 | 68 | - | 15,553 | 4,332 | - | - | - | 2,002 | 60,522 | |||||||||||||||||||||||||||||||||||
|
Transfers
|
- | 970 | (795 | ) | - | - | (351 | ) | 176 | - | - | 467 | - | 467 | ||||||||||||||||||||||||||||||||||
|
Addition by acquisition
|
- | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
|
Balances at March 31, 2010
|
(954 | ) | (253,799 | ) | (1,274,217 | ) | (13,091 | ) | - | (134,338 | ) | (78,575 | ) | - | - | (240,629 | ) | - | (1,995,603 | ) | ||||||||||||||||||||||||||||
| 961 | - | (46,053 | ) | (218,193 | ) | (2,133 | ) | (6,128 | ) | (18,348 | ) | (14,467 | ) | - | - | (371,230 | ) | - | (676,552 | ) | ||||||||||||||||||||||||||||
|
Disposals
|
(2,164 | ) | 5,947 | 24,776 | 29 | - | 2,487 | 5,160 | - | - | - | - | 36,235 | |||||||||||||||||||||||||||||||||||
|
Transfers
|
- | 6,285 | (4,878 | ) | - | - | 53 | 422 | - | - | - | - | 1,882 | |||||||||||||||||||||||||||||||||||
|
Addition by acquisition
|
- | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
|
Balances at March 31, 2011
|
(3,118 | ) | (287,620 | ) | (1,472,512 | ) | (15,195 | ) | (6,128 | ) | (150,146 | ) | (87,460 | ) | - | - | (611,859 | ) | - | (2,634,038 | ) | |||||||||||||||||||||||||||
|
Net salvage value:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
March 31, 2011
|
1,260,122 | 834,636 | 3,507,920 | 15,708 | 335,519 | 172,896 | 49,746 | 1,218,765 | 148,947 | 431,483 | 4,782 | 7,980,524 | ||||||||||||||||||||||||||||||||||||
|
March 31, 2010
|
1,040,896 | 679,514 | 2,333,021 | 4,995 | - | 89,007 | 40,519 | 1,408,252 | 200,634 | 316,688 | 1,005 | 6,114,531 | ||||||||||||||||||||||||||||||||||||
|
April 1, 2009
|
1,025,824 | 588,611 | 886,849 | 2,998 | - | 86,403 | 31,010 | 881,561 | 203,493 | 213,628 | 3,246 | 3,923,623 | ||||||||||||||||||||||||||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Capitalization of borrowing costs
On March 31, 2011, borrowing costs capitalized amounted to R$ 70,543 (R$ 43,302 in 2010). The weighted average interest rate, used for capitalization of interest on the balance of construction in progress, was 9.13% at March 31, 2011 (6.47% in 2011).
|
15.
|
Intangible assets
|
|
Software license
|
Trademarks
|
Goodwill
|
Customer base
|
Favorable operating leases
|
Distribution rights
|
Others
|
Total
|
|||||||||||||||||||||||||
|
Cost or valuation:
|
||||||||||||||||||||||||||||||||
|
Balances at April 1, 2009
|
66,090 | 341,221 | 2,214,077 | 266,443 | - | 59,404 | - | 2,947,235 | ||||||||||||||||||||||||
|
Addition
|
7,139 | - | - | - | - | 42,607 | - | 49,746 | ||||||||||||||||||||||||
|
Write-off
|
(5,972 | ) | - | (41,066 | ) | - | - | - | - | (47,038 | ) | |||||||||||||||||||||
|
Transfers
|
633 | - | - | - | - | - | - | 633 | ||||||||||||||||||||||||
|
Addition by incorporation/acquisition
|
2,507 | 88,450 | 434,587 | 316,977 | 155,505 | - | 14,226 | 1,012,252 | ||||||||||||||||||||||||
|
Others
|
- | - | 15,554 | - | - | - | - | 15,554 | ||||||||||||||||||||||||
|
Balances at March 31, 2010
|
70,397 | 429,671 | 2,623,152 | 583,420 | 155,505 | 102,011 | 14,226 | 3,978,382 | ||||||||||||||||||||||||
|
Additions
|
33,709 | - | - | - | - | 68,280 | 30,157 | 132,146 | ||||||||||||||||||||||||
|
Write-off
|
(6,103 | ) | - | - | - | - | - | (600 | ) | (6,703 | ) | |||||||||||||||||||||
|
Transfers
|
- | - | - | - | - | - | (1,546 | ) | (1,546 | ) | ||||||||||||||||||||||
|
Addition by incorporation/acquisition
|
60 | - | 71,772 | - | - | - | 1,026 | 72,858 | ||||||||||||||||||||||||
|
Others
|
- | - | 2,297 | - | - | - | - | 2,297 | ||||||||||||||||||||||||
|
Balances at March 31, 2011
|
98,063 | 429,671 | 2,697,221 | 583,420 | 155,505 | 170,291 | 43,263 | 4,177,434 | ||||||||||||||||||||||||
|
Amortization
|
(37,379 | ) | (37,379 | ) | ||||||||||||||||||||||||||||
|
Balances at April 1, 2009
|
(14,153 | ) | (49,134 | ) | - | (20,030 | ) | (6,479 | ) | (26,576 | ) | (2,433 | ) | (118,805 | ) | |||||||||||||||||
|
Amortization expense in the year
|
5,874 | - | - | - | - | - | - | 5,874 | ||||||||||||||||||||||||
|
Addition by incorporation/acquisition
|
(2,186 | ) | - | - | - | - | - | (519 | ) | (2,705 | ) | |||||||||||||||||||||
|
Balances at March 31, 2010
|
(47,844 | ) | (49,134 | ) | - | (20,030 | ) | (6,479 | ) | (26,576 | ) | (2,952 | ) | (153,015 | ) | |||||||||||||||||
|
Amortization expense in the year
|
(16,924 | ) | (49,576 | ) | - | (21,008 | ) | (8,639 | ) | (35,811 | ) | (5,524 | ) | (137,482 | ) | |||||||||||||||||
|
Write-off
|
5,969 | - | - | - | - | - | - | 5,969 | ||||||||||||||||||||||||
|
Transfers
|
(7,265 | ) | - | - | - | - | - | 3,829 | (3,436 | ) | ||||||||||||||||||||||
|
Addition by incorporation/acquisition
|
(47 | ) | - | - | - | - | - | 152 | 105 | |||||||||||||||||||||||
|
Balances at March 31, 2011
|
(66,111 | ) | (98,710 | ) | - | (41,038 | ) | (15,118 | ) | (62,387 | ) | (4,495 | ) | (287,859 | ) | |||||||||||||||||
|
Net book value:
|
||||||||||||||||||||||||||||||||
|
Balances at March 31, 2011
|
31,952 | 330,961 | 2,697,221 | 542,382 | 140,387 | 107,904 | 38,768 | 3,889,575 | ||||||||||||||||||||||||
|
Balances at March 31, 2010
|
22,553 | 380,537 | 2,623,152 | 563,390 | 149,026 | 75,435 | 11,274 | 3,825,367 | ||||||||||||||||||||||||
|
Balances at April 1, 2009
|
28,711 | 341,221 | 2,214,077 | 266,443 | - | 59,404 | - | 2,909,856 | ||||||||||||||||||||||||
|
Annual amortization
rate
|
3/31/2011
|
3/31/2010
|
4/1/2009
|
|||||||||||||
|
Intangible asset
|
thousand
R$
|
thousand
R$
|
thousand R$
|
|||||||||||||
|
Software license
|
20 | % | 31,952 | 22,553 | 28,711 | |||||||||||
|
Trademarks
|
||||||||||||||||
|
Trademark Esso (a)
|
20 | % | 68,696 | 93,677 | 118,657 | |||||||||||
|
Trademark Mobil (b)
|
10 | % | 176,911 | 199,737 | 222,564 | |||||||||||
|
Trademark União (c)
|
2 | % | 85,354 | 87,123 | - | |||||||||||
|
Customer base (d)
|
3.45 | % | 247,907 | 257,176 | 266,443 | |||||||||||
|
Customer base (e)
|
3.70 | % | 294,475 | 306,214 | - | |||||||||||
|
Favorable operating leases (f)
|
5.56 | % | 140,387 | 149,026 | - | |||||||||||
|
Distribution rights
|
Straight line over contract term
|
107,904 | 75,436 | 59,404 | ||||||||||||
|
Others
|
38,768 | 11,273 | - | |||||||||||||
|
Total
|
1,192,354 | 1,202,215 | 695,779 | |||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
(a) refers to the right to use the trademark Esso, arising from the acquisition of Cosan CL.
(b) refers to the right to use the trademark of Mobil lubricants arising from the acquisition of Cosan CL.
(c) refers to the right to use the trademark sugar União arising from the acquisition of Curupay.
(d) refers to the customer of Cosan CL acquired in its business combination.
(e) refers to the costumer base of Teaçu acquired in its business combination.
(f) refers to favorable lease contracts arising from the acquisition of Curupay.
Impairment testing for cash-generating units containing goodwill
For the purpose of impairment testing, goodwill is allocated to the operating segments of the Company, at which goodwill is monitored for purposes of internal administration, not above the Company's operating segments. Goodwill acquired through business combinations has been allocated to three cash-generating units, which are also operating segments that provide information, as shown below:
· Sugar and ethanol cash-generating unit (“S&E”);
· Distribution of fuels and lubricants cash-generating unit (“CCL”);
· Logistic cash-generating unit (“RUMO”).
The combined value of goodwill allocated to each unit is as follows:
|
Carrying amount of goodwill
|
2011
|
2010
|
April 1, 2009
|
|||||||||
|
S&E cash-generating unit
|
1,877,883 | 1,818,338 | 1,447,279 | |||||||||
|
CCL cash-generating unit
|
755,524 | 747,895 | 766,798 | |||||||||
|
Rumo cash-generating unit
|
63,814 | 56,919 | - | |||||||||
|
Total goodwill
|
2,697,221 | 2,623,152 | 2,214,077 | |||||||||
As defined in the accounting policy described in note 2.3 (k), the Company tests annually the recoverable amount of goodwill.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Nonfinancial long term assets, not subject to amortization, are reviewed whenever there are indications that the carrying value is not recoverable.
The Company uses the value in use method to determine the recoverable amount of the asset. The value in use method is based on the projection of the expected cash flows of cash-generating units. In connection with the application of the value in use method, the key assumptions are sales prices of all commodities, operating costs, capital investment and discount rates.
Management determines its cash flows based on its annual budgets taking into account for each cash generating unit (i) S&E: the expected long-term sales price of commodities, productivity of agricultural areas, the performance of total recoverable sugar (“ATR”), and related costs, (ii) CCL: the expected growth in operations based on gross domestic product and other macroeconomic aspects, (iii) Rumo: expectations of the Brazilian sugar production destined designated mainly for export. All these cash flows are discounted at rates that reflect specific risks relating to assets relevant to each cash generating unit.
Management has not identified any impairments for its cash generating units. The determination of the recoverable amount depends on certain key assumptions as described above which are influenced by market conditions, technological and economic forces present at the time that the impairment test is undertaken and thus management cannot determine if impairment losses will occur in the future.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
16.
|
Loans and long-term debt
|
|
Description
|
Index
|
Average annual interest rate
|
2011
|
2010
|
April 1, 2009
|
Maturity date
|
|||
|
Senior Notes Due 2014
|
Dollar (USD)
|
9.5%
|
576,814
|
631,246
|
-
|
July/2014
|
|||
|
Senior Notes Due 2017
|
Dollar (USD)
|
7.0%
|
658,954
|
720,573
|
936,704
|
February/2017
|
|||
|
Commercial promissory notes
|
DI – Interbank Deposits
|
3.0%
|
-
|
-
|
1,161,971
|
November/2009
|
|||
|
BNDES
|
URTJLP
|
2.61%
|
1,308,034
|
1,053,337
|
230,504
|
October/2025
|
|||
|
Upon fixed
|
4.5%
|
242,508
|
-
|
-
|
July/2020
|
||||
|
UMBND
|
7.1%
|
38,947
|
-
|
-
|
July/2019
|
||||
|
Bank Credit Notes
|
CDCA
|
0.6%+CDI
|
31,378
|
62,497
|
-
|
December/2011
|
|||
|
ACC
|
Dollar (USD)
|
1.71%
|
228,229
|
296,375
|
143,250
|
March/2012
|
|||
|
Perpetual Notes
|
Dollar (USD)
|
8.3%
|
1,236,209
|
810,896
|
1,054,119
|
November/2015
|
|||
|
Resolution 2471 (PESA)
|
IGP-M
|
3.95%
|
674,392
|
603,504
|
579,856
|
April/2023
|
|||
|
Pre fixed
|
3.0%
|
114
|
121
|
129
|
October/2025
|
||||
|
Rural Credits
|
Pre fixed
|
6.7%
|
92,352
|
-
|
-
|
October/2011
|
|||
|
Pre Payments
|
Dollar (USD) + Libor
|
6.01%
|
736,472
|
976,277
|
-
|
February/2016
|
|||
|
Credit Notes
|
125,0% CDI
|
-
|
303,719
|
380,140
|
-
|
February/2014
|
|||
|
Dollar (USD)
|
4.64%
|
314,105
|
182,831
|
-
|
February/2013
|
||||
|
Pre fixed
|
19.7%
|
10,142
|
-
|
-
|
October/2012
|
||||
|
Finame
|
Pre fixed
|
4.92%
|
517,842
|
104,214
|
1,014
|
July/2020
|
|||
|
URTJLP
|
2.75%
|
187,336
|
94,775
|
43,653
|
March/2021
|
||||
|
Others
|
Diverse
|
Diverse
|
74,482
|
59,272
|
533,833
|
Diverse
|
|||
|
7,232,029
|
5,976,058
|
4,685,033
|
|||||||
|
Current
|
(957,134)
|
(839,529)
|
(1,452,297)
|
||||||
|
Non Current
|
6,274,895
|
5,136,529
|
3,232,736
|
All loans and long-term debt are guaranteed by promissory notes and endorsements, besides other guarantees, such as: i) Credit rights originated from energy contracts (BNDES); ii) CTN and land mortgages; and iii) underlying assets being financed (Finame).
Long-term debt has the following scheduled maturities:
|
2011
|
2010
|
2009
|
||||||||||
|
13 to 24 months
|
745,454 | 612,101 | 389,602 | |||||||||
|
25 to 36 months
|
762,649 | 748,966 | 49,799 | |||||||||
|
37 to 48 months
|
1,010,797 | 235,191 | 83,140 | |||||||||
|
49 to 60 months
|
777,963 | 849,737 | 23,882 | |||||||||
|
61 to 72 months
|
878,092 | 113,057 | 19,447 | |||||||||
|
73 to 84 months
|
222,289 | 825,623 | 16,676 | |||||||||
|
85 to 96 months
|
453,711 | 109,472 | 943,421 | |||||||||
|
Thereafter
|
1,423,940 | 1,642,382 | 1,706,769 | |||||||||
| 6,274,895 | 5,136,529 | 3,232,736 | ||||||||||
Resolution 2471 – Special Agricultural Financing Program (Programa Especial de Saneamento de Ativos), or PESA
From 1998 to 2000, the Company and its subsidiaries renegotiated their debts related to financing for agricultural costs with several financial institutions, reducing it to annual interest rates below 10%, ensuring the repayment of debt’s principal with assignment and transfer of Treasury Certificates, redeemable at the debt clearing, using the incentives promoted by Central Bank resolution No. 2471 of February 26, 1998. That debt is self-cleared by CTN, as mentioned in explanatory note 6.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Senior Notes due on 2014
On August 4, 2009, the indirect subsidiary CCL Finance Limited issued Senior Notes in the international market in accordance with "Regulation S” and “Rule 144A” in the amount of US$ 350 million, which are subject to interest of 9.5% per year payable semiannually in February and August each year, beginning in February 2010.
Senior Notes due on 2017
On January 26, 2007, the wholly-owned indirect controlled Cosan Finance Limited issued Senior Notes in the international market in accordance with the "Regulations S” and “Rule 144A” in the amount of US$ 400 million, which are subject to interest at 7% per annum, payable semiannually in February and August of each year.
Promissory notes
On November 17, 2008, Cosan S.A. issued one series of 44 registered promissory notes. On November 12, 2009, Cosan S.A. fully paid this debt.
BNDES
Refers to the financing of cogeneration projects, as well the financing of greenfields (sugar and ethanol mills).
Perpetual Notes
On January 24 and February 10, 2006, Cosan S.A. issued perpetual notes which are listed on the Luxembourg Stock Exchange - EURO MTF. These notes bear interest at a rate of 8.25% per year, payable quarterly on May 15, August 15, November 15 and February 15 of each year, beginning May 15, 2006. These notes may, at the discretion of Cosan S.A., be redeemed on any interest payment date subsequent to February 15, 2011. The notes are guaranteed by Cosan and by Cosan S.A. Açúcar e Álcool.
On November 5, 2010 the subsidiary Cosan Overseas Limited issued $300,000 of perpetual notes in the foreign market, in accordance with “Regulation S”. These notes bear interest at a rate of 8.25% per year, payable quarterly.
Advances on Foreign Exchange Contracts (“ACC”), Pre payments and Credit Notes
ACC contracts, pre payments and credit notes have been signed with several financial institutions and will be cleared through exports made from 2011 to 2014. These transactions are subject to interest rates ranging from 1.0% to 6.25% per annum payable semiannually and on maturity.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Finame
Finame borrowings are financing related to financing of machinery and equipment. These loans are subject to interest rates ranging from 1.15% to 9.73% per annum, payable monthly and are secured by underlying financed assets.
Covenants
The Company and its subsidiaries are subject to certain restrictive financial covenants set forth in existing loans and financing agreements. At March 31, 2011, Cosan was in compliance with its debt covenants.
|
17.
|
Taxes payable
|
Cosan Limited is incorporated in Bermuda which has no income taxes. The following relates to Brazilian taxes of Cosan S.A. and its subsidiaries.
|
2011
|
2010
|
April 1,
2009
|
||||||||||
|
ICMS – State VAT
|
72,265 | 49,197 | 24,847 | |||||||||
|
IPI
|
30,661 | 6,379 | 25,776 | |||||||||
|
INSS
|
25,309 | 23,891 | 20,376 | |||||||||
|
PIS
|
7,229 | 8,129 | 6,113 | |||||||||
|
COFINS
|
33,721 | 32,077 | 23,492 | |||||||||
|
Recovery program – REFIS IV
|
670,645 | 665,470 | - | |||||||||
|
Recovery program- REFIS (1)
|
- | - | 273,507 | |||||||||
|
Recovery program– PAES (1)
|
294 | 409 | 69,813 | |||||||||
|
Income Tax
|
20,928 | 1,945 | 41,099 | |||||||||
|
Others
|
23,303 | 21,219 | 12,333 | |||||||||
| 884,355 | 808,716 | 497,356 | ||||||||||
|
Current
|
(245,284 | ) | (215,862 | ) | (168,596 | ) | ||||||
|
Non Current
|
639,071 | 592,854 | 328,760 | |||||||||
|
(1)
|
These tax recovery programs have been reassessed and transferred to the Tax Recovery from Brazilian Law No 11.941/09 and MP 470/09, except for the recovery program related to PAES – salário educação.
|
Maturities of long-term taxes payable are as follows:
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
13 – 24 months
|
67,848 | 59,698 | 44,549 | |||||||||
|
25 - 36 months
|
61,205 | 57,933 | 43,409 | |||||||||
|
37 - 48 months
|
60,396 | 54,991 | 42,644 | |||||||||
|
49 - 60 months
|
60,008 | 51,241 | 28,837 | |||||||||
|
61 - 72 months
|
52,243 | 51,026 | 24,067 | |||||||||
|
73 - 84 months
|
46,707 | 44,303 | 24,067 | |||||||||
|
85 - 96 months
|
45,799 | 38,911 | 24,067 | |||||||||
|
As from 97 months
|
244,865 | 234,751 | 97,120 | |||||||||
| 639,071 | 592,854 | 328,760 | ||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Tax recovery program – Law 11.941/09 e Provisional Measure 470/09 (“Refis IV”)
On May 27, 2009 and October 13, 2009, Law 11.941 and MP 470 were approved by the Brazilian government creating a tax recovery program, permitting the taxpayer to settle its federal tax debts, previous recovery programs, and other federal taxes under court discussions with discounts on previously charged penalties and interest and in installments. Such discounts generated a gain of R$270,333, recorded in the income statement.
Additionally, it was permitted for the taxpayer to offset a portion of the penalties and interest due with its balance of income tax loss carry forwards. MP470 also allowed taxpayers to use tax losses to offset the principal balance related to IPI taxes.
|
18.
|
Income taxes and social contribution
|
Cosan is incorporated in Bermuda which has no income taxes. The following relates to Brazilian income taxes of Cosan S.A. and its subsidiaries.
|
|
a)
|
Reconciliation of income and social contribution tax expenses:
|
|
2011
|
2010
|
|||||||
|
Pretax income
|
1,182,164 | 1,505,797 | ||||||
|
Income tax and social security contribution at nominal rate (34%)
|
(401,936 | ) | (511,971 | ) | ||||
|
Adjustments made for determining the effective rate
|
||||||||
|
Nontaxable income (loss) of the Company
|
(3,026 | ) | 11,201 | |||||
|
Equity pick up
|
8,563 | 1,421 | ||||||
|
Non deductible donations and contributions
|
(9,131 | ) | (4,167 | ) | ||||
|
Tax effect due tax recovery program – REFIS IV
|
- | 59,038 | ||||||
|
Others
|
(8,978 | ) | 21,174 | |||||
|
Total of deferred and current taxes
|
(414,508 | ) | (423,304 | ) | ||||
|
Effective rate
|
35.13 | % | 28.12 | % | ||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
b) Deferred income and social contribution tax assets/liabilities:
|
2011
|
2010
|
2009
|
||||||||||||||||||||||
|
Assets
|
Basis
|
IRPJ 25%
|
CSLL 9%
|
Total
|
||||||||||||||||||||
|
Tax losses:
|
||||||||||||||||||||||||
|
Tax losses
|
1,094,220 | 273,555 | - | 273,555 | 217,360 | 209,859 | ||||||||||||||||||
|
Negative social contribution
|
1,106,768 | - | 99,609 | 99,609 | 79,375 | 75,558 | ||||||||||||||||||
|
Temporary differences:
|
||||||||||||||||||||||||
|
Provisions for legal proceedings and other temporary differences
|
978,093 | 244,523 | 88,030 | 332,553 | 339,689 | 442,064 | ||||||||||||||||||
|
Temporary differences from IFRS adoption
|
28,284 | 7,071 | 2,545 | 9,616 | 49,715 | 81,737 | ||||||||||||||||||
| 3,207,365 | 525,149 | 190,184 | 715,333 | 686,139 | 809,218 | |||||||||||||||||||
|
Liability
|
||||||||||||||||||||||||
|
Temporary differences:
|
||||||||||||||||||||||||
|
Exchange rate
|
(806,438 | ) | (201,610 | ) | (72,579 | ) | (274,189 | ) | (183,449 | ) | - | |||||||||||||
|
Depreciation
|
(18,384 | ) | (4,596 | ) | - | (4,596 | ) | - | - | |||||||||||||||
|
Goodwill
|
(742,129 | ) | (185,532 | ) | (66,791 | ) | (252,323 | ) | (114,152 | ) | - | |||||||||||||
|
Temporary differences from IFRS adoption:
|
||||||||||||||||||||||||
|
Business combination
|
(1,843,862 | ) | (460,965 | ) | (165,948 | ) | (626,913 | ) | (564,934 | ) | (361,548 | ) | ||||||||||||
|
Deemed cost
|
(366,150 | ) | (91,573 | ) | (32,953 | ) | (124,490 | ) | (124,490 | ) | (124,490 | ) | ||||||||||||
|
Others
|
(671,919 | ) | (167,982 | ) | (60,472 | ) | (228,454 | ) | (135,383 | ) | (43,931 | ) | ||||||||||||
| (4,448,882 | ) | (1,112,222 | ) | (398,743 | ) | (1,510,965 | ) | (1,122,408 | ) | (528,969 | ) | |||||||||||||
|
Total deferred taxes, net
|
(1,241,517 | ) | (587,073 | ) | (208,559 | ) | (795,632 | ) | (436,269 | ) | 280,249 | |||||||||||||
In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. There is no expiration term for the net operating loss carry forwards. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Cosan S.A. will realize the benefits of these deductible differences at March 31, 2011, as well as the net operating loss carry forwards. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Income tax losses carry forward and social contribution tax losses may be offset against a maximum of 30% of annual taxable income earned, with no statutory limitation period.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
19.
|
Provision for judicial demands
|
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
Tax
|
418,744 | 397,051 | 1,121,338 | |||||||||
|
Civil
|
82,599 | 66,556 | 77,406 | |||||||||
|
Labor
|
164,939 | 148,376 | 78,421 | |||||||||
| 666,282 | 611,983 | 1,277,165 | ||||||||||
|
Tax
|
Civil
|
Labor
|
Total
|
|||||||||||||
|
Balance at March 31, 2010
|
397,051 | 66,556 | 148,376 | 611,983 | ||||||||||||
|
Provision
|
36,103 | 61,217 | 38,818 | 136,138 | ||||||||||||
|
Settlements
|
(6,648 | ) | (11,278 | ) | (27,901 | ) | (45,827 | ) | ||||||||
|
Write off
|
(45,094 | ) | (59,767 | ) | (4,418 | ) | (109,279 | ) | ||||||||
|
Addition from acquisition
|
14,722 | 3,404 | 4,882 | 23,008 | ||||||||||||
|
Monetary variation
|
22,610 | 22,467 | 5,182 | 50,259 | ||||||||||||
|
Balance at March 31, 2011
|
418,744 | 82,599 | 164,939 | 666,282 | ||||||||||||
Judicial demands deemed as probable loss
a) Tax
The major tax legal proceeding as of March 31, 2011, 2010 and April 1, 2009 are described as follows:
|
2011
|
2010
|
April 1,
2009
|
||||||||||
|
Credit premium – IPI (i)
|
- | - | 269,157 | |||||||||
|
IPI credits (i)
|
- | - | 92,722 | |||||||||
|
Contribution to IAA (i)
|
- | - | 84,904 | |||||||||
|
IPC – 89 (ii)
|
80,273 | 86,503 | 81,546 | |||||||||
|
Compensation with Finsocial (iii)
|
183,706 | 172,960 | 163,668 | |||||||||
|
ICMS credits (iv)
|
56,880 | 60,240 | 46,226 | |||||||||
|
PIS and COFINS
|
8,220 | 21,212 | 144,830 | |||||||||
|
IPI
|
20,759 | 8,357 | 54,699 | |||||||||
|
Income and social contribution taxes
|
2,093 | 789 | 43,463 | |||||||||
|
Other
|
66,813 | 46,990 | 140,123 | |||||||||
| 418,744 | 397,051 | 1,121,338 | ||||||||||
(i) The Company and its subsidiaries opted to settle tax related claims in installments as provided by Brazilian Law No 11.941/09 and in MP 470/09 – Tax recovery program. The Company and its subsidiaries used accumulated tax losses to pay the related fines and interest. Consequently there was a full reduction of the claims related to IPI tax credit, as well as the installment payment of other federal taxes, that were recorded as Taxes Payable (Note 17).
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
(ii) In 1993 subsidiary Cosan CL filed a suit to challenge the balance sheet restatement index (IPC) established by the federal government in 1989, considering that such index did not reflect the actual inflation back then. The use of this index led the Company to supposedly overstate and overpay the income and social contribution taxes. Cosan CL obtained a favorable preliminary court ruling that allowed it to recalculate the financial position, using indexes that accurately measured the inflation over the period. In doing so the company adjusted the amounts of income and social contribution taxes payable and identified that overpayments for both taxes were offset in subsequent years until 1997. Despite the favorable court rulings, tax authorities issued a notice of infringement to the Company challenging all tax offsets performed in 1993 and some offsets in 1994 and 1997 which led the Company to record a provision in relation to those court rulings.
(iii) From June to December of 1994, the subsidiary Cosan CL used tax credits on COFINS taxes based on a favorable court ruling and compensated with other federal taxes. During 2008 the federal tax authorities in Brazil issued an assessment invalidating such compensation and therefore a provision related to this matter was recorded.
(iv) The provision for ICMS credits is comprised of: (a) tax assessment received, in which, despite the defense filed at the administrative and judicial levels, the legal counsel of the Company understand it is more likely than not that a loss will occur, (b) recovery of credits and financial charges on issues in which Company´s management has a differing view from the tax authorities.
b) Civil and labor claims
The Company and its subsidiaries are parties to a number of civil claims related to (i) indemnity for physical and moral damages; (ii) public civil claims related to sugarcane stubble burning; and (iii) environmental matters.
The Company and its subsidiaries are also parties to a number of labor claims filed by former employees and service providers challenging, among other factors, the payment of additional hours, night shift premium and risk premium, employment inclusion, reimbursement of discounts from payroll, such as social contribution, trade union charges, among others.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Judicial demands deemed as possible loss
a) Tax claims
The main tax claims for which the unfavorable outcome is deemed possible and, therefore, no provision for legal claims was recorded, are as follows:
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
Withholding income taxes (i)
|
194,498 | 182,824 | 161,440 | |||||||||
|
ICMS – State VAT (ii)
|
490,896 | 322,340 | 178,390 | |||||||||
|
IPI – Federal VAT (iii)
|
270,817 | 263,597 | 75,667 | |||||||||
|
Compensation with IPI – IN 67/98 (iv)
|
181,292 | 174,867 | 157,525 | |||||||||
|
Contribution to IAA – sugar & ethanol institute
|
9,107 | 2,544 | 73,184 | |||||||||
|
INSS - social security and other (v)
|
72,616 | 4,061 | 1,839 | |||||||||
|
PIS and Cofins (vi)
|
163,129 | 143,556 | 35,953 | |||||||||
|
Other
|
188,777 | 117,784 | 80,686 | |||||||||
| 1,571,132 | 1,211,573 | 764,684 | ||||||||||
(i) Tax assessment – withholding income tax
In September 2006 the Federal Revenue Service served another notice of infringement on the Company, this time for failure to withhold and pay income tax at source on capital gains derived from the acquisition of a subsidiary.
|
(ii)
|
ICMS – State VAT
|
Refers mainly to (i) Tax Assessment filed in view of the alleged lack of payment of ICMS and non-compliance with accessory obligation, in connection with the partnership and manufacturing upon demand, with Central Paulista Açúcar e Álcool Ltda., between May to December 2006 and May to December 2007; and (ii) ICMS levied on the remittances of crystallized sugar for export purposes. In accordance with the tax agent, such product is classified as semi-finished product and that, in accordance with the ICMS regulation, would be subject to taxation and (iii) ICMS levied on possible differences in terms of sugar and alcohol inventories, arising from magnetic tax files and Inventory Registry Books and (iv) ICMS concerning rate difference due to ethanol sales to companies located in other states, which, subsequently, had their registrations revoked and (v) disallowance of credit resulting from the acquisition of diesel used in the production process.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
(iii) IPI – Federal VAT
SRF Normative Instruction n° 67/98 approved the procedure adopted by the industrial establishments which performed remittances without registries and payment of the IPI rate, in regard to transfers of sugarcane carried out between July 6, 1995 and November 16, 1997 and refined sugar between January 14, 1992 and November 16, 1997. Such rule was considered in proceedings filed by the Federal Revenue Secretariat against the Company, the unfavorable outcome of which is deemed as possible, in accordance with the opinion of the Company’s legal advisors.
(iv) Offsets against IPI credits – IN 67/98
SRF Normative Instruction No. 67/98 made it possible to obtain refund of IPI tax payments for sales of refined sugar from January 14, 1992 through November 16, 1997. In view of this rule, the Company applied for offsetting amounts paid during the relevant periods against other tax liabilities. However, the Federal Revenue Service denied its application for both reimbursement and offsetting of such amounts. The Company challenged this ruling in an administrative proceeding.
Upon being notified to pay tax debts resulting from offset transactions in light of certain changes introduced by IN SRF No. 210/02, the Company filed a writ of mandamus and applied for a preliminary injunction seeking to stay enforceability of offset taxes, in an attempt to prevent the tax authorities from demanding the relevant tax debts in court. The preliminary injunction was granted by court.
(v) Social Security Contribution
Refers mainly to tax assessment received and defended by the legal counsel, concerning social security contribution on: (i) stock option plan and (ii) export sales and (iii) resale of materials for companies under common control and suppliers.
(vi) PIS and COFINS
Refers mainly to the reversal of PIS and COFINS credits, provided by Laws 10.637/2002 and 10.833/2003, respectively. Those reversals arise from a differing interpretation of the laws by the Internal Revenue Service in regard to raw materials. Such discussions are still at the administrative level.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
b) Civil and labor
The main civil and labor claims for which the unfavorable outcome is deemed possible are as follows:
|
2011
|
2010
|
April 1, 2009
|
||||||||||
|
Civil
|
377,608 | 235,010 | 145,936 | |||||||||
|
Labor
|
302,289 | 255,483 | 73,080 | |||||||||
| 679,897 | 490,493 | 219,016 | ||||||||||
|
20.
|
Commitments
|
Sales
Considering that Cosan S.A. is mainly engaged in the commodities market, sales are substantially performed at the price on the date of sale. However, Cosan S.A. has several agreements in the sugar market, which undertake to sell volumes of those products in future harvests.
The commitments for the sale of sugar, in tons, March 31, 2011 and 2010 are as follows:
|
Year
|
2011
|
2010
|
||||||
|
2011
|
- | 2,005,434 | ||||||
|
2012
|
2,279,000 | 1,828,134 | ||||||
|
Total
|
2,279,000 | 3,833,568 | ||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Purchases
Cosan S.A. has several commitments for the purchase of sugarcane from third parties in order to secure part of its production in subsequent years. The amount of sugarcane to be acquired has been calculated based on an estimate of the quantity to be ground by area. The amount to be paid by Cosan S.A. is determined at the end of each harvest, according to prices published by CONSECANA.
Purchase commitments by harvest in tons on March 31, 2011 and 2010 are as follows:
|
Year
|
2011
|
2010
|
||||||
|
2011
|
- | 27,029,473 | ||||||
|
2012
|
25,129,648 | 23,600,912 | ||||||
|
2013
|
21,998,612 | 20,112,639 | ||||||
|
2014
|
18,060,914 | 16,345,120 | ||||||
|
2015
|
15,448,964 | 13,667,148 | ||||||
|
Thereafter
|
119,467,512 | 120,129,217 | ||||||
|
Total
|
200,105,650 | 220,884,509 | ||||||
On March 31, 2011, the regular capacity of sugarcane crushing for the next harvest, considering all Cosan S.A. units, is approximately 63 million tons (60 million tons in 2010 – non-audited information).
Cosan S.A. has contracts to purchase industrial equipment for maintenance with the purpose of expanding plants, such as to supply the cogeneration project of electricity, with the amount of R$ 396,536 on March 31, 2011.
Additionally, Cosan S.A. through its indirect subsidiary Rumo Logística has signed a commitment of railcars and locomotives purchasing, and improvements aimed at the expansion of logistics business to be made in future years as follows:
|
Year
|
2011
|
2010
|
||||||
|
2011
|
341,647 | 652,678 | ||||||
|
2012
|
178,431 | 126,892 | ||||||
|
2013
|
44,000 | 94,682 | ||||||
|
Total
|
564,078 | 874,252 | ||||||
Lease Agreements
Operating Leases
Cosan S.A. and its subsidiaries have operating leasing contracts on land used for planting sugarcane and the concession contract to operate the port terminal, which will end within 20 years.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The minimum payments related to these obligations are calculated on a straight-line basis, in accordance with the contracts. The costs for these contracts during the year ended March 31, 2011 and 2010 are as follows:
|
2011
|
2010
|
|||||||
|
Minimum installment
|
155,800 | 113,953 | ||||||
|
Variable installment
|
186,484 | 112,990 | ||||||
|
Total
|
342,284 | 226,943 | ||||||
The future minimum rentals to be paid regarding non-cancellable operating leases as of March 31, 2011 and 2010 are:
|
2011
|
2010
|
|||||||
|
Within 1 year
|
189,530 | 131,362 | ||||||
|
More than 1 year, less than 5 years
|
754,695 | 470,223 | ||||||
|
More than 5 years
|
1,379,313 | 1,354,501 | ||||||
|
Total
|
2,323,538 | 1,956,086 | ||||||
|
21.
|
Equity
|
a) Common stock
As of March 31, 2011 and March 31, 2010, Cosan Limited’s share capital consists of:
|
Shareholder
|
Class A shares
and/or BDRs
|
%
|
Class B shares
|
%
|
||||||||||||
|
Queluz Holding Limited
|
11,111,111 | 6.37 | 66,321,766 | 68.85 | ||||||||||||
|
Usina Costa Pinto S.A. Açúcar e Álcool
|
- | - | 30,010,278 | 31.15 | ||||||||||||
|
Aguassanta Participações S.A.
|
5,000,000 | 2.87 | - | - | ||||||||||||
|
Gávea Funds
|
33,333,333 | 19.12 | - | - | ||||||||||||
|
Others
|
124,910,897 | 71.64 | - | - | ||||||||||||
|
Total
|
174,355,341 | 100.00 | 96,332,044 | 100.00 | ||||||||||||
Class B1 shares are entitle their holders to 10 votes per share and Class A shares entitle holders to 1 vote per share.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
On September 19, 2008, Cosan S.A. undertook a capital subscription of 55,000,000 common shares which was completed on October 20, 2008. Since a number of the noncontrolling interests did not exercise their subscription rights, the Company acquired 54,993,482 of the shares for R$879,896, and noncontrolling shareholders acquired the remaining 6,518 shares for R$104. In connection with this subscription, the shareholders received one Subscription Warrant (Warrant) for each new share. Each Warrant grants its holder the right to subscribe 0.6 common shares, with the distribution of fractional shares not being permitted. Therefore, the Company received Warrants which are valid through December 31, 2009 to purchase 32,996,089 additional common shares of Cosan S.A.. Since Cosan S.A. is a consolidated subsidiary, the Warrants recorded by Cosan S.A. have been eliminated in consolidation.
On September 14, 2009, the Company sold to third parties 10,000,000 of the Warrants for R$26,147, which resulted in a gain which is recorded as financial income. At December 31, 2009, 54,987,552 warrants have been exercised, of which 44,993,482 were exercised by the Company, 9,994,070 were exercised by noncontrolling shareholders and the remaining 12,448 warrants expired. The exercise of the warrants of Cosan S.A. resulted in the issuance of 32,992,531 common shares, valued at R$527,880. Of this amount, the Company received 26,996,089 common shares valued at R$431,937.
b) Earnings per share
According to the IAS 33 – Earnings per share, the tables below present the reconciliation of the net income and the weighted average value per share used to the calculation of the basic and diluted earnings per share.
Cosan Limited does not present any dilutive potential shares outstanding, therefore the table below presents the calculation of basic and diluted earnings per share:
Basic and diluted:
|
2011
|
2010
|
|||||||
|
Numerator:
|
||||||||
|
Net income – attributable to Cosan
|
470,906 | 706,094 | ||||||
|
Denominator:
|
||||||||
|
Weighted average shares outstanding
|
270,687,385 | 270,687,385 | ||||||
|
Basic earnings per share
|
R$ | 1.74 | R$ | 2.61 | ||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
22.
|
Gross sales
|
|
2011
|
2010
|
|||||||
|
Gross revenue from sales of products and services
|
19,783,250 | 16,685,884 | ||||||
|
Indirect taxes and deductions
|
(1,719,770 | ) | (1,349,829 | ) | ||||
|
Net revenue
|
18,063,480 | 15,336,055 | ||||||
|
23.
|
Expense by nature
|
Reconciliation of expenses by nature
The expenses are presented in the consolidated results by function. The reconciliation of income by nature/purpose for the years ended March 31, 2011 and 2010 is detailed as follows:
a) Expenses by Nature:
|
2011
|
2010
|
|||||||
|
Raw materials
|
(3,657,462 | ) | (3,902,508 | ) | ||||
|
Resale fuels
|
(10,084,103 | ) | (8,393,136 | ) | ||||
|
Payroll
|
(901,062 | ) | (694,939 | ) | ||||
|
Commercial expenses
|
(179,283 | ) | (221,332 | ) | ||||
|
Depreciation and amortization
|
(742,307 | ) | (644,635 | ) | ||||
|
Other expenses
|
(1,157,312 | ) | (779,183 | ) | ||||
| (16,721,529 | ) | (14,635,733 | ) | |||||
b) Segregated by:
|
2011
|
2010
|
|||||||
|
Cost of goods sold
|
(15,150,079 | ) | (13,271,331 | ) | ||||
|
Selling
|
(1,026,000 | ) | (862,726 | ) | ||||
|
General & Administrative
|
(545,450 | ) | (501,676 | ) | ||||
| (16,721,529 | ) | (14,635,733 | ) | |||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
24.
|
Financial results, net
|
|
2011
|
2010
|
|||||||
|
Financial expenses
|
||||||||
|
Interest
|
(586,887 | ) | (556,466 | ) | ||||
|
Monetary variation (loss)
|
(81,341 | ) | (64,395 | ) | ||||
|
Other
|
(9,136 | ) | (1,527 | ) | ||||
| (677,364 | ) | (622,388 | ) | |||||
|
Financial Income
|
||||||||
|
Interest
|
63,791 | 96,521 | ||||||
|
Monetary variation (income)
|
34,018 | 13,374 | ||||||
|
Investment income
|
90,345 | 52,530 | ||||||
|
Other
|
603 | 39,606 | ||||||
| 188,757 | 202,031 | |||||||
|
Foreign exchange variation, net
|
282,705 | 558,977 | ||||||
|
Derivatives, net
|
||||||||
|
Commodities derivatives
|
6,524 | (186,268 | ) | |||||
|
Exchange rate and interest derivatives
|
34,984 | 517,216 | ||||||
|
Warrants in associate
|
13,248 | 23,873 | ||||||
| 54,756 | 354,821 | |||||||
| (151,146 | ) | 493,441 | ||||||
|
25.
|
Other income (expense), net
|
|
2011
|
2010
|
|||||||
|
Other income
|
||||||||
|
Gain on sale of aviation fuel distribution business
|
- | 52,031 | ||||||
|
Gain on sale of fixed assets
|
43,708 | - | ||||||
|
Gain on sale of investments
|
6,704 | - | ||||||
|
Scrap and waste sales
|
6,950 | 6,417 | ||||||
|
Rental and leasing income
|
4,111 | 6,215 | ||||||
|
Other income
|
2,204 | 11,536 | ||||||
| 63,677 | 76,199 | |||||||
|
Other expenses
|
||||||||
|
Provision for judicial demands
|
(23,828 | ) | (25,829 | ) | ||||
|
Internal costs on Rumo transaction
|
(20,319 | ) | - | |||||
|
Donations
|
(12,335 | ) | - | |||||
|
Expenses on Zanin acquisition
|
(6,517 | ) | - | |||||
|
Assets’ non realization accrual
|
(5,696 | ) | - | |||||
|
Other expenses
|
(28,810 | ) | (12,847 | ) | ||||
| (97,505 | ) | (38,676 | ) | |||||
| (33,828 | ) | 37,523 | ||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
26.
|
Financial instruments
|
Financial risk management
|
|
a)
|
Overview
|
The Company is exposed to the following risk related to the use of financial instruments:
|
|
·
|
price risk
|
|
|
·
|
foreign exchange rates
|
|
|
·
|
interest rates
|
|
|
·
|
credit risk
|
|
|
·
|
liquidity risk
|
This note presents information about the Company exposure for which risk above, the object of the Company’s risk management policies, the polices and processes for measurement, risk management and capital management.
|
|
b)
|
Risk management structure
|
The Company has two committees related to risk management: (i) Risk management committee, formed by three Board Director´s members, one of them independent member, that meet, at least once by year, to discuss and determine the Company´s hedge policies; (ii) Executive risk committee, formed by management of the Company, that meets on a weekly basis to analyze the foreign exchange and commodities market trends. The committee also reviews cover positions and the strategy of pricing exports of sugar in order to reduce the adverse effects of changes in sugar prices and the foreign exchange rate as well as monitoring the liquidity risks and counterparty (credit).
The Company is exposed to market risks, mainly related to the volatility of sugar prices and foreign exchange rates. Management analyzes these risks and uses financial instruments to hedge a portion of the risk exposure.
On March 31, 2011, 2010 and April 1, 2009, fair values related to transactions involving derivative financial instruments with the purpose of hedge or other purposes were measured at market value (fair value) by observables factors such as quoted prices in active markets or discounted cash flows based on market curves and are presented below:
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
Notional
|
Fair value
|
|||||||||||||||||||||||
|
|
March 31,
|
March 31,
|
April 1,
2009
|
March 31,
|
March 31,
|
April 1,
|
||||||||||||||||||
|
|
2011
|
2010
|
2011
|
2010
|
2009
|
|||||||||||||||||||
|
Price risk
|
||||||||||||||||||||||||
|
Commodity derivatives
|
||||||||||||||||||||||||
|
Future contracts
|
1,308,033 | 1,177,437 | 423,691 | (68,906 | ) | 112,382 | 9,629 | |||||||||||||||||
|
Options contracts
|
10,364 | 1,074,579 | 149,021 | (17,484 | ) | (11,730 | ) | (6,728 | ) | |||||||||||||||
|
Swap contracts
|
- | 100,794 | - | - | 1,081 | - | ||||||||||||||||||
|
|
(86,390 | ) | 101,733 | 2,901 | ||||||||||||||||||||
|
Exchange rate risk
|
||||||||||||||||||||||||
|
Future contracts
|
(114,204 | ) | 2,103,056 | 861,787 | (117 | ) | 471 | 7,384 | ||||||||||||||||
|
Forward contracts
|
694,599 | 963,100 | 433,462 | 9,900 | 36,559 | (53,330 | ) | |||||||||||||||||
|
Options contracts
|
345,00 | 671,502 | - | - | 15,719 | - | ||||||||||||||||||
|
Swap agreements
|
- | 322,023 | 570,700 | - | - | (6,828 | ) | |||||||||||||||||
|
|
9,783 | 52,749 | (52,774 | ) | ||||||||||||||||||||
|
Interest rate risk
|
||||||||||||||||||||||||
|
Interest derivative
|
- | 518,790 | - | (624 | ) | - | ||||||||||||||||||
|
Total
|
(76,607 | ) | 153,858 | (49,873 | ) | |||||||||||||||||||
|
Total assets
|
55,682 | 230,561 | 17,022 | |||||||||||||||||||||
|
Total liabilities
|
(132,289 | ) | (76,703 | ) | (66,895 | ) | ||||||||||||||||||
c) Price risk
This arises from the potential for fluctuations in the market prices of products sold by the Company, mainly raw material sugar - VHP (sugar #11) and white sugar (LIFFE sugar #5). These fluctuations in prices can cause substantial changes in the revenues of the Company. To mitigate these risks, the Company constantly monitors the markets, seeking to anticipate changes in prices. The positions of the consolidated derivative financial instruments to hedge the price risk of commodities are shown in the table below:
|
Price risk: commodity derivatives outstanding on March 31, 2011
|
|||||||||||||||||||
|
Derivatives
|
Long/Short
|
Market
|
Agreement
|
Maturity
|
Notional
|
Notional
|
Fair value
|
||||||||||||
|
Composition of derivatives financial instruments designated in hedge accounting
|
|||||||||||||||||||
|
Future
|
Short
|
NYBOT
|
#11 |
1-May-11
|
23,150 | T | 26,442 | (392 | ) | ||||||||||
|
Future
|
Short
|
NYBOT
|
#11 |
1-May-11
|
208,239 | T | 200,552 | (2,154 | ) | ||||||||||
|
Future
|
Short
|
NYBOT
|
#11 |
1-Jul-11
|
520,877 | T | 424,617 | (43,705 | ) | ||||||||||
|
Future
|
Short
|
NYBOT
|
#11 |
1-Oct-11
|
513,460 | T | 388,694 | (56,734 | ) | ||||||||||
|
Future
|
Short
|
NYBOT
|
#11 |
1-Mar-12
|
139,656 | T | 121,973 | 2,827 | |||||||||||
|
Sub-total of futures of Sugar Sold
|
1,405,382 | T | 1,162,278 | (100,159 | ) | ||||||||||||||
|
Composition of derivatives financial instruments not designated in hedge accounting
|
|||||||||||||||||||
|
Future
|
Long
|
NYBOT
|
#11 |
1-May-11
|
(55,883 T | ) | (49,591 | ) | 4,807 | ||||||||||
|
Future
|
Long
|
NYBOT
|
#11 |
1-Jul-11
|
(7,620 T | ) | (6,786 | ) | 66 | ||||||||||
|
Future
|
Long
|
NYBOT
|
#11 |
1-Oct-11
|
(50,802 T | ) | (40,314 | ) | 3,758 | ||||||||||
|
Future
|
Long
|
NYBOT
|
#11 |
1-Mar-12
|
(84,027 T | ) | (49,064 | ) | 22,623 | ||||||||||
|
Sub-total of futures of Sugar Purchased
|
(198,333 T | ) | (145,755 | ) | 31,253 | ||||||||||||||
|
Call
|
Short
|
NYBOT/OTC
|
#11 |
1-Oct-11
|
43,182 | T | 985 | (6,559 | ) | ||||||||||
|
Call
|
Short
|
NYBOT
|
#11 |
1-Oct-11
|
55,883 | T | 3,651 | (7,826 | ) | ||||||||||
|
Call
|
Short
|
NYBOT
|
#11 |
1-Jul-12
|
101,605 | T | 1,177 | (4,597 | ) | ||||||||||
|
Sub-total of Call Sold
|
200,669 | T | 5,813 | (18,981 | ) | ||||||||||||||
|
Put
|
Long
|
NYBOT/OTC
|
#11 |
1-Oct-11
|
43,182 | T | 985 | 574 | |||||||||||
|
Put
|
Long
|
NYBOT/OTC
|
#11 |
1-Oct-11
|
55,883 | T | 3,566 | 923 | |||||||||||
|
Sub-total de Put Purchased
|
99,065 | T | 4,551 | 1,497 | |||||||||||||||
|
Total de Commodities
|
1,026,888 | (86,390 | ) | ||||||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The fair value of these derivatives was measured by observable factors, such as quoted prices in active markets and, in some cases, by means of models whose assumptions are observable in the market.
d) Foreign Exchange risk
This arises from the possibility of fluctuations in the exchange rates of the foreign currencies used by the Company for the export revenues of products, imports, debt cash flow and other assets and liabilities denominated in a foreign currency. The Company uses derivative transactions to manage the risks of cash flow coming from the export revenues denominated in U.S. dollars, net of other cash flows denominated in foreign currency. The table below demonstrates the consolidated positions outstanding on March 31, 2011 of derivatives used to hedge exchange rates:
|
Exchange risk : exchange derivatives outstanding on March 31, 2011
|
||||||||||||
|
Derivatives
|
Long/Short
|
Market
|
Agreement
|
Maturity
|
Notional
|
Fair value
|
||||||
|
Composition of derivatives financial instruments designated in hedge accounting
|
||||||||||||
|
Forward
|
Short
|
OTC/Cetip
|
NDF
|
1-Apr-11
|
166,150
|
3,279
|
||||||
|
Forward
|
Short
|
OTC/Cetip
|
NDF
|
31-May-11
|
117,782
|
2,094
|
||||||
|
Forward
|
Short
|
OTC/Cetip
|
NDF
|
1-Jul-11
|
84,645
|
1,349
|
||||||
|
Forward
|
Short
|
OTC/Cetip
|
NDF
|
1-Aug-11
|
85,300
|
1,422
|
||||||
|
Forward
|
Short
|
OTC/Cetip
|
NDF
|
3-Oct-11
|
396,618
|
11,046
|
||||||
|
Forward
|
Short
|
OTC/Cetip
|
NDF
|
2-Jan-12
|
91,075
|
3,744
|
||||||
|
Sub-total of Forward Sold
|
941,570
|
22,932
|
||||||||||
|
Composition of derivatives financial instruments not designated in hedge accounting
|
||||||||||||
|
Future
|
Long
|
BMFBovespa
|
Commerc. U.S. dollar
|
2-May-11
|
(114,204)
|
(117)
|
||||||
|
Sub-total of Future Purchased
|
(114,204)
|
(117)
|
||||||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-May-11
|
(10,780)
|
(625)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Aug-11
|
(11,014)
|
(619)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Nov-11
|
(11,246)
|
(613)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
3-Feb-12
|
(11,489)
|
(604)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-May-12
|
(11,722)
|
(584)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
3-Aug-12
|
(11,978)
|
(586)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
1-Nov-12
|
(12,239)
|
(595)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Feb-13
|
(12,504)
|
(595)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
3-May-13
|
(12,739)
|
(571)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
2-Aug-13
|
(12,997)
|
(534)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Nov-13
|
(13,256)
|
(493)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Feb-14
|
(13,521)
|
(462)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
2-May-14
|
(13,743)
|
(476)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Aug-14
|
(14,002)
|
(617)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Nov-14
|
(14,261)
|
(754)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Feb-15
|
(14,497)
|
(872)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-May-15
|
(14,726)
|
(991)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Aug-15
|
(15,003)
|
(1,152)
|
||||||
|
Forward
|
Long
|
OTC
|
NDF (Offshore)
|
4-Nov-15
|
(15,254)
|
(1,291)
|
||||||
|
Sub-total of Forward Purchased
|
(246,970)
|
(13,033)
|
||||||||||
|
Total of exchange
|
580,395
|
9,783
|
||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
On March 31, 2011 and 2010, the Company had the following net exposure to the variation of U.S. dollar assets and liabilities denominated in U.S. dollars:
|
2011
|
2010
|
|||||||||||||||
| R$ |
US$ (in thousands)
|
R$ |
US$ (in thousands)
|
|||||||||||||
|
Bank accounts
|
78,353 | 48,108 | 127,755 | 71,732 | ||||||||||||
|
Highly liquid investments
|
52,102 | 31,990 | 82,870 | 46,530 | ||||||||||||
|
Restricted cash
|
126,872 | 77,898 | 44,972 | 25,251 | ||||||||||||
|
Accounts receivable - foreign
|
7,556 | 4,639 | 148,655 | 83,467 | ||||||||||||
|
Foreign currency-denominated loans
|
(583,068 | ) | (357,998 | ) | (829,363 | ) | (465,672 | ) | ||||||||
|
Export pre-payments
|
(736,472 | ) | (452,184 | ) | (976,277 | ) | (548,161 | ) | ||||||||
|
Senior Notes due in 2014
|
(576,814 | ) | (354,156 | ) | (631,246 | ) | (354,433 | ) | ||||||||
|
Senior Notes due in 2017
|
(658,954 | ) | (404,589 | ) | (720,573 | ) | (404,588 | ) | ||||||||
|
Perpetual bonds
|
(1,236,209 | ) | (759,016 | ) | (810,896 | ) | (455,303 | ) | ||||||||
|
Exchange exposure
|
(3,526,634 | ) | (2,165,308 | ) | (3,564,103 | ) | (2,001,177 | ) | ||||||||
e) Effects of hedge accounting
In the beginning of the year ended at March 31, 2011, the Company formally designated its transactions subject to hedge accounting for cash flow hedges from sugar VHP (raw material) export revenue, documenting: (i) the relationship of the hedge, (ii) the Company’s purpose for taking the hedge and its risk management strategy, (iii) identification of the financial instrument, (iv) the transaction or item covered, (v) the nature of the risk being hedged, (vi) a description of the hedging relationship (vii) the demonstration of correlation between the hedge and the object of coverage, and (viii) the prospective analysis of hedge effectiveness. The Company has designated derivative financial instruments of Sugar # 11 (NYBOT or OTC) to cover the risk of price and Non-Deliverable Forwards (NDF) to cover exchange rate risk, as demonstrated in topics (b) and (c) of this Note.
The Company records gains and losses deemed effective for purposes of hedge accounting to a specific account in equity (“other comprehensive income”), until the object of coverage (hedged item) affects the profit and loss. On March 31, 2011, the amounts recorded in other comprehensive income related to hedge accounting are as follows:
|
Expected period to affect P&L
|
|||||||||||||||||
|
Derivative
|
Market
|
Risk
|
2011/12 | 2010/11 |
Total
|
||||||||||||
|
Future
|
OTC / NYBOT
|
#11 | (353,930 | ) | 2,798 | (351,132 | ) | ||||||||||
|
NDF
|
OTC / CETIP
|
USD
|
134,015 | - | 134,015 | ||||||||||||
| (219,915 | ) | 2,798 | (217,117 | ) | |||||||||||||
|
(-) Deferred income tax
|
74,771 | (951 | ) | 73,819 | |||||||||||||
| (145,144 | ) | 1,847 | (143,298 | ) | |||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
During the year ended March 31, 2011, the Company recorded the amount of R$15,568 on its results of operations due to hedged items that would no longer qualify to be designated under hedge accounting. Also, the Company recorded the amount of R$18,679 related to the gains and losses of the hedges’ ineffectiveness during the year ended March 31, 2011.
|
Cash flow hedge
|
2011
|
|||
| - | ||||
|
Balance at March 31, 2010
|
||||
|
Gain/(losses) of cash flow hedges for the period
|
||||
|
Commodities futures and swap contracts
|
(572,161 | ) | ||
|
Currency forward contracts
|
179,099 | |||
|
Reclassification adjustments for losses included in the income statement
|
175,945 | |||
|
Total before tax effect
|
(217,117 | ) | ||
|
Tax effect on gain/(losses) of cash flow hedges for the period – 34%
|
73,819 | |||
|
Balance at March 31, 2011
|
(143,298 | ) | ||
f) Interest rate risk
The Company monitors fluctuations of the interest rates related to certain loan contracts, mainly those with Libor interest rate risk, and in the event of increased volatility of such rates, it may engage in transactions with derivatives so as to minimize such risks. At March 31, 2011, the Company has not presented interest rate risk derivatives outstanding (US$ 300,000, as March 31, 2010, which fair value was R$624).
g) Credit risk
A significant portion of sales made by the Company is to a select group of best-in-class counterparts (i.e. trading companies, fuel distribution companies and large supermarket chains).
Credit risk is managed through specific rules of client acceptance including credit ratings and limits for customer exposure, including the requirement of a letter of credit from major banks and obtaining actual warranties on given credit, when applicable. Management believes that the risk of credit is covered by the allowance for doubtful accounts.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The Company buys and sells commodity derivatives in futures and options markets on the New York Board of Trade (NYBOT) and the London International Financial Futures and Options Exchange (LIFFE), as well as in the over-the-counter (OTC) market with selected counterparties. The Company buys and sells foreign exchange derivatives on BM&FBovespa and OTC contracts registered with CETIP (OTC clearing house) with banks Goldman Sachs & Co, Banco Santander S.A., Espirito Santo Investment do Brasil S.A., Deutsche Bank S.A. – Banco Alemão, Banco Bradesco S.A., Banco JP Morgan S.A., Banco Standard de Investimentos S.A., e Banco BTG Pactual S.A..
Guarantee margins – The Company’s derivative operations on commodity exchanges (NYBOT, LIFFE and BM&FBovespa) require an initial guarantee margin. The brokers with which the Company operates on these commodity exchanges offer credit limits for these margins. As of March 31, 2011, the total credit limit used as initial margin was R$136,420 (R$68,646 as of March 31, 2010). As a requirement to trade in BM&FBovespa, the Company posted on March 31, 2011, the amount of R$50,000 (R$83,042 as of March 31, 2010) as guarantee in the form of a settlement bond issued by a first-class banking institution. Over-the-counter derivative transactions of the Company are exempt from margin guarantees.
|
h)
|
Liquidity risk
|
Liquidity risk is the risk that the Company will encounter difficulties in meeting the obligations associated with its financial liabilities that are settled with cash payments or other financial assets. The approach of the Company's liquidity management is to ensure, as much as possible, which always has sufficient liquidity to meet its obligations to win, under normal and stress, without causing unacceptable losses or risk damaging the reputation of the Company.
|
i)
|
Fair value
|
The fair value of financial assets and liabilities is included in the price at which the instrument could be exchanged in a current transaction between parties willing to negotiate, and not in a forced sale or liquidation. The following methods and assumptions were used to estimate the fair value.
Cash and cash equivalents, accounts receivable, accounts payable and other short-term obligations approximate their respective carrying values due largely to short-term maturity of these instruments.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The fair value of marketable securities and bonds is based on price quotations on the date of the financial statements. The fair value of non-negotiable instruments, bank loans and other debts, obligations under finance leases, as well as other non-current financial liabilities are estimated by the discounted future cash flows using rates currently available for debt or deadlines and similar instruments.
The fair market value of Senior Notes due 2014 and 2017, described in note 16, at its market price is 116.25% 108.75% and, respectively, of its face value at 31 March 2011.
The fair market value of Perpetual bonds, described in note 16, at its market price is 100,6%, respectively, of its face value at 31 March 2011.
In respect of other loans and financing, their fair market values substantially approximate the amounts recorded in the financial statements due to the fact that these financial instruments are subject to variable interest rates.
The fair value of financial assets available for sale is obtained through quoted market prices in active markets, if any.
The Company enters into derivative financial instruments with various counterparties, primarily financial institutions with credit ratings of investment grade. The derivatives valued using valuation techniques with observable market data relate mainly to interest rate swaps, foreign exchange contracts and term contracts for commodities futures. The valuation techniques applied more often include pricing models for fixed-term contracts and swaps, with a present value calculations. The models incorporate various data, including credit quality of counterparties, the rates of currency spot and forward, interest rate curves and forward rate curves of the commodity underlying.
Fair value hierarchy
The Company has the following hierarchy to determine and disclose the fair value of financial instruments by the technical evaluation:
|
|
·
|
Level 1: quoted prices in a active market to identical assets and liabilities;
|
|
|
·
|
Level 2: other techniques for which all data that have significant effect on the fair value recorded are observable, directly or indirectly; and
|
|
|
·
|
Level 3: techniques that use data that have significant effect on the fair value recorded that are not based on observable market data.
|
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
Assets and Liabilities measured at fair value
|
Level 1
|
Level 2
|
Total
|
|||||||||
|
March 31, 2011
|
||||||||||||
|
Warrants Radar
|
- | 162,961 | 162,961 | |||||||||
|
Derivative financial assets
|
35,577 | 20,105 | 55,682 | |||||||||
|
Derivative financial liabilities
|
(122,084 | ) | (10,205 | ) | (132,289 | ) | ||||||
| (86,507 | ) | 172,861 | 86,354 | |||||||||
|
March 31, 2010
|
||||||||||||
|
Warrants Radar
|
- | 149,713 | 149,713 | |||||||||
|
Derivative financial assets
|
128,658 | 101,903 | 230,561 | |||||||||
|
Derivative financial liabilities
|
(51,880 | ) | (24,823 | ) | (76,703 | ) | ||||||
| 76,778 | 226,793 | 303,571 | ||||||||||
|
April 1, 2009
|
||||||||||||
|
Warrants Radar
|
- | 125,841 | 125,841 | |||||||||
|
Derivative financial assets
|
9,638 | 7,384 | 17,022 | |||||||||
|
Derivative financial liabilities
|
(6,738 | ) | (60,157 | ) | (66,895 | ) | ||||||
| 2,900 | 73,068 | 75,968 | ||||||||||
|
|
j)
|
Sensitivity analysis
|
Following is the sensitivity analysis of the fair value of financial instruments, in accordance with the types of risks deemed to be significant by the Company:
Assumptions for sensitivity analysis
For the analysis, the Company adopted three scenarios, being one probable and two that may have effects from impairment of the fair value of the Company’s financial instruments. The probable scenario was defined based on the futures sugar and US dollar market curves as of March 31, 2011, the same which determines the fair value of the derivatives at that date. Possible and remote scenarios were defined based on adverse impacts of 25% and 50% over the sugar and dollar price curves, which served as basis for the probable scenario.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Sensitivity analysis
Following is the sensitivity analysis on the change in the fair value of the Company’s financial derivatives:
| Impacts on the result (*) | |||||||||||||
|
Risk factors
|
Probable scenario
|
Possible
scenario (25%)
|
Remote scenario (50%)
|
||||||||||
|
Price risk
|
|||||||||||||
|
Commodity derivatives
|
|||||||||||||
|
Futures agreements:
|
|||||||||||||
|
Sale Commitments
|
Increase in sugar price
|
(100,159 | ) | (312,284 | ) | (625,326 | ) | ||||||
|
Purchase Commitments
|
Decrease in sugar price
|
(31,253 | ) | (44,252 | ) | (88,504 | ) | ||||||
|
Sales Commitments
|
Increase in hydrated ethanol
|
||||||||||||
|
Options agreements:
|
|||||||||||||
|
Call options sold
|
Increase in sugar price
|
(18,981 | ) | (26,125 | ) | (58,820 | ) | ||||||
|
Put options purchased
|
Increase in sugar price
|
1,497 | (1,246 | ) | (1,459 | ) | |||||||
|
Exchange rate risk
|
|||||||||||||
|
Exchange rate derivatives
|
|||||||||||||
|
Futures agreements:
|
|||||||||||||
|
Sale Commitments
|
R$ / US exchange rate appreciation
|
(117 | ) | (28,094 | ) | (56,187 | ) | ||||||
|
Purchase Commitments
|
R$ / US exchange rate depreciation
|
(22,932 | ) | (220,298 | ) | (440,597 | ) | ||||||
|
Forward agreements:
|
|||||||||||||
|
Sale Commitments
|
R$ / US exchange rate appreciation
|
(13,033 | ) | (46,871 | ) | (92,877 | ) | ||||||
(*) Result expected for up to 12 months as from March 31, 2011
i) Capital management
The primary objective of the Company’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value.
Occasionally, the Company purchases its own shares on the market, the timing of these purchases depends on market prices.
No changes were made in the objectives, policies or processes for managing capital during the years ended March 31, 2011 and 2010.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
27.
|
Pension and other post-employment benefits plan
|
a) Pension plan
Defined benefit
The Company’s subsidiary Cosan CL has a noncontributory defined benefit pension plan (Previd Exxon) covering substantially all of its employees upon their retirement.
Defined contribution
The Company, through its subsidiary Cosan Alimentos S.A. ("Cosan Alimentos") sponsors a defined contribution plan, for all employees of that subsidiary. The Company does not have a legal or constructive obligation to pay further contributions if the fund does not have sufficient assets to pay all benefits owed.
During the years ended March 31, 2011 and 2010, the amount of contributions totaled R$4,701 and R$5,407 respectively.
b) Actuarial liability
The actuarial liability on Previd Exxon demonstrated in non-current liabilities at March 31, 2011 amounting to R$24,380 ($0 in 2010 and R$ 65,108 on April 1, 2009).
Reconciliation of present value of defined benefit obligation and the fair value of plan assets, with assets and liabilities recognized on the balance sheet:
|
2011
|
2010
|
|||||||
|
Present value of actuarial obligation at beginning of the year
|
(325,534 | ) | (362,339 | ) | ||||
|
Interest cost
|
(35,107 | ) | (32,583 | ) | ||||
|
Current service cost
|
(4,445 | ) | (5,478 | ) | ||||
|
Benefits paid
|
24,637 | 18,985 | ||||||
|
Actuarial gain (loss) on obligation at beginning of the year
|
(43,374 | ) | 55,881 | |||||
|
Present value of actuarial obligation at end of the year
|
(383,823 | ) | (325,534 | ) | ||||
|
Fair value of plan assets at beginning of the year
|
347,703 | 297,231 | ||||||
|
Expect return on plan assets
|
35,918 | 31,046 | ||||||
|
Contribution received by the fund
|
8,702 | 8,403 | ||||||
|
Benefits paid
|
(24,637 | ) | (18,985 | ) | ||||
|
Gain in fair value of assets
|
(8,243 | ) | 30,008 | |||||
|
Fair value of plan assets at end of the year
|
359,443 | 347,703 | ||||||
|
Present value of liabilities in excess of fair value of assets
|
(51,703 | ) | (61,788 | ) | ||||
|
Actuarial gains and losses unrecognized
|
27,323 | 61,788 | ||||||
|
Actuarial liability
|
(24,380 | ) | - | |||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Total expense recognized in profit or loss:
|
Expense recognized in profit or loss
|
2011
|
2010
|
||||||
|
Current service cost
|
(4,445 | ) | (5,478 | ) | ||||
|
Interest on obligation
|
(35,107 | ) | (32,583 | ) | ||||
|
Curtailment gain
|
- | - | ||||||
|
Expected return on plan assets
|
35,918 | 31,046 | ||||||
| (3,634 | ) | (7,015 | ) | |||||
Total amount recognized as other comprehensive income:
|
2011
|
2010
|
|||||||
|
Amount accumulated at 1 April
|
(42,056 | ) | - | |||||
|
Unrecognized gains
|
29,447 | (63,721 | ) | |||||
|
Deferred income tax
|
(10,012 | ) | 21,665 | |||||
|
Amount accumulated at 31 March
|
(22,621 | ) | (42,056 | ) | ||||
Plan assets include:
|
2011
|
2010
|
|||||||||||||||
|
Value
|
Percentage
|
Value
|
Percentage
|
|||||||||||||
|
CDBs – Bank deposits
|
268,864 | 74.80 | % | 261,690 | 74.83 | % | ||||||||||
|
Equity securities of Brazilian Public Entities
|
90,580 | 25.20 | % | 88,023 | 25.17 | % | ||||||||||
|
Total
|
359,444 | 100 | % | 349,713 | 100 | % | ||||||||||
Plan assets are represented by financial assets with quoted prices in an active market and therefore are included as a Level 1 fair value type. The total expected rate of return on assets is calculated based on market expectations existing at that date applicable to the period over which the obligation should be liquidated. These expectations are reflected in the following main assumptions.
The main assumptions used to determine the pension benefit obligations of the Company are as follows:
|
Defined benefit plan
|
2011
|
2010
|
|||
|
Actuarial valuation method
|
Project unit credit
|
Project unit credit
|
|||
|
Mortality table
|
AT 83 segregated by sex, decreased by 10%
|
AT 83 segregated by sex, decreased by 10%
|
|||
|
Discount rate for actuarial liability
|
Interest: 10.77% p.a. + inflation: 4.50% p.a.
|
Interest: 11.08% p.a. + inflation: 4.50% p.a.
|
|||
|
Expected rate of return on plan assets
|
Interest: 11.20% p.a. + inflation: 4.50% p.a.
|
Interest: 10.48% p.a. + inflation: 4.50% p.a.
|
|||
|
Salary growth rare
|
6.07% + inflation: 4.50% p.a.
|
6.07% + inflation: 4.50% p.a.
|
|||
|
Rate in increase of estimated benefits
|
0.00% p.a. + inflation: 4.50% p.a.
|
0.00% p.a. + inflation: 4.50% p.a.
|
During the year ended March 31, 2011 contributions to Previd Exxon – Sociedade Previdência Privada totaled R$ 8,702 (R$ 8,403 on March 31, 2010).
The Company expects contributions at the amount of R$ 9,458 to be paid in relation to its defined benefit plan in 2012.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
|
28.
|
Shared-based payments
|
In the ordinary and extraordinary general meeting held on August 30, 2005, the guidelines for the outlining and structuring of a stock option plan for Cosan S.A. officers and employees were approved, thus authorizing the issue of up to 5% of shares comprising Cosan S.A. share capital. This stock option plan was outlined to attract and retain services rendered by officers and key employees, offering them the opportunity to become shareholders of Cosan S.A.. On September 22, 2005, Cosan S.A. board of directors approved the distribution of stock options corresponding to 4,302,780 common shares to be issued or treasury shares held by Cosan S.A. related to 3.25% of the share capital at the time, authorized by the annual/extraordinary meeting. The remaining 1.75% remained to be distributed. On September 22, 2005, the officers and key employees were informed regarding the key terms and conditions of the share-based compensation arrangement.
On September 11, 2007, the board of directors approved an additional distribution of stock options, in connection with the stock option plan mentioned above, corresponding to 450,000 common shares to be issued or purchased by Cosan S.A. related to 0.24% of the share capital at September 22, 2005. The remaining 1.51% may still be distributed.
On August 7, 2009, the board of directors approved an additional distribution of stock options, in connection with the stock option plan mentioned above, corresponding to 165,657 common shares to be issued or purchased by Cosan S.A., due to changing in the management at that date.
According to the market value at the date of issuance, the exercise price is R$ 6.11 per share, without any discount. The exercise price was calculated before the valuation mentioned above based on an expected private equity agreement was not achieved. The options can be exercised after a waiting period of one year, considering a maximum percentage of 25% per annum of the total stock options offered by Cosan S.A. within a period of 5 years.
The exercise of options may be settled only through issuance of new common shares or treasury shares.
The employees that leave Cosan S.A. before the vesting period will forfeit 100% of their rights. However, if the employment is terminated by Cosan S.A. without cause, the employees will have right to exercise 100% of their options of that particular year plus the right to exercise 50% of the options of the following year.
On March 31, 2011 all stock options related to that plan were exercised by issuance of new shares.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The number and weighted average exercise price of stock options are the following:
|
Shares
|
Weighted average exercise price
|
|||||||
|
Outstanding April 1, 2009
|
1,470,832 | 6.11 | ||||||
|
Exercised (July 17, 2009)
|
(224,819 | ) | 6.11 | |||||
|
Option granted (August 8, 2009)
|
165,657 | 6.11 | ||||||
|
Exercised (October 10, 2009)
|
(169,500 | ) | 6.11 | |||||
|
Exercised (December 15, 2009)
|
(571,194 | ) | 6.11 | |||||
|
Exercised (March 29, 2010)
|
(17,000 | ) | 6.11 | |||||
|
Outstanding March 31, 2010
|
653,976 | 6.11 | ||||||
|
Exercised (July 29, 2010)
|
(449,819 | ) | 6.11 | |||||
|
Exercised (September 17, 2010)
|
(91,717 | ) | 6.11 | |||||
|
Exercised (March 4, 2011)
|
(112,440 | ) | 6.11 | |||||
|
Outstanding March 31, 2011
|
- | - | ||||||
The fair value of share-based awards was estimated using a binominal model with the following assumptions:
|
Options granted on September 22, 2005
|
Options granted on September 11, 2007
|
Options granted on August 7, 2009
|
||||||||||
|
Grant price
|
6.11 | 6.11 | 6.11 | |||||||||
|
Expected life (in years)
|
7.5 | 7.5 |
Immediate
|
|||||||||
|
Interest rate
|
14.52 | % | 9.34 | % | (1 | ) | ||||||
|
Expected Volatility
|
34.00 | % | 46.45 | % | (1 | ) | ||||||
|
Expected Dividend yield
|
1.25 | % | 1.47 | % | (1 | ) | ||||||
|
Weighted-average fair value at grant date
|
12.35 | 18.19 | (1 | ) | ||||||||
|
(1)
|
The options were fully vested at the date of issuance so the fair value was the quoted market price as of the grant date
|
Expected Term – Cosan S.A. expected term represents the period that Cosan S.A. share-based awards are expected to be outstanding and was determined based on the assumption that the officers will exercise their options when the exercise period is over. Therefore, this term was calculated based on the average of 5 and 10 years. Cosan S.A. does not expect any forfeiture as those options are mainly for officers, whose turnover is low.
Expected Volatility – For the options granted on September 22, 2005 Cosan S.A. had its shares publicly-traded for less than 6 months as of April 30, 2006. Therefore, Cosan S.A. opted to substitute the historical volatility by an appropriate global industry sector index, based on the volatility of the share prices, and considering it as an assumption in its valuation model. Cosan S.A. has identified and compared similar public entities for which share or option price information is available to consider the historical, expected, or implied volatility of those entities’ share prices in estimating expected volatility based on global scenarios. For the options granted on September 11, 2007 Cosan S.A. used the volatility of its shares as an assumption in its valuation model since Cosan S.A. IPO in Brazil, in 2005.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
Expected Dividends – As Cosan S.A. was a relatively new public entity, the expected dividend yield was calculated based on the current value of the stock at the grant date, adjusted by the average rate of the return to shareholders for the expected term, in relation of future book value of the shares.
Risk-Free Interest Rate – Cosan S.A. bases the risk-free interest rate used the SELIC - Special System Settlement Custody.
|
29.
|
Segment information
|
a) Segment information
The following information about segments is based upon information used by Cosan’s senior management to assess the performance of operating segments and to decide on the allocation of resources. The Company presents three segments: Sugar and Ethanol (“S&E”), Fuel distribution and lubricants (“CCL”) and sugar logistics (“Rumo”).
The S&E segment is primarily engaged in the production and marketing of a variety of products derived from cane sugar, including raw sugar (VHP), anhydrous and hydrated ethanol, and activities related to energy cogeneration from sugar cane bagasse.
The CCL segment includes the distribution and marketing of fuels and lubricants, mainly through franchised network of service stations under the brand "Esso" throughout the national territory.
The Rumo segment provides logistics services for the transport, storage and port lifting of sugar for both the S&E segment and third parties.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
The following selected information result and segment assets that were measured in accordance with the accounting practices used in the preparation of consolidated information:
|
2011
|
||||||||||||||||||||
|
S&E
|
CCL
|
RUMO
|
Adjustment and elimination
|
Consolidated
|
||||||||||||||||
|
Financial position:
|
||||||||||||||||||||
|
Property, plant and equipment
|
5,988,670 | 1,059,927 | 931,927 | - | 7,980,524 | |||||||||||||||
|
Intangible
|
2,298,743 | 1,232,546 | 358,286 | - | 3,889,575 | |||||||||||||||
|
Loans, net of cash and cash equivalents
|
(5,396,096 | ) | (450,632 | ) | (99,829 | ) | (13,692 | ) | (5,960,249 | ) | ||||||||||
|
Other assets and liabilities, net
|
4,108,146 | 46,973 | (173,826 | ) | (2,562,446 | ) | 1,418,847 | |||||||||||||
|
Total asset (net of liabilities) allocated by segment
|
6,999,463 | 1,888,814 | 1,016,558 | (2,576,138 | ) | 7,328,697 | ||||||||||||||
|
Total asset
|
16,190,023 | 4,070,147 | 1,713,112 | (2,760,845 | ) | 19,212,437 | ||||||||||||||
|
Income statements (12 months):
|
||||||||||||||||||||
|
Net sales
|
6,389,178 | 11,795,277 | 448,003 | (568,978 | ) | 18,063,480 | ||||||||||||||
|
Domestic market
|
3,678,207 | 11,795,277 | 448,003 | (568,978 | ) | 15,352,509 | ||||||||||||||
|
External market
|
2,710,971 | - | - | - | 2,710,971 | |||||||||||||||
|
Gross profit
|
1,988,662 | 781,120 | 131,469 | 12,150 | 2,913,401 | |||||||||||||||
|
Selling general and administrative expenses
|
(961,407 | ) | (575,008 | ) | (28,951 | ) | (6,084 | ) | (1,571,450 | ) | ||||||||||
|
Other income (expense)
|
(65,415 | ) | 31,777 | 9,936 | (10,126 | ) | (33,828 | ) | ||||||||||||
|
Financial result, net
|
(101,755 | ) | (57,980 | ) | 13,047 | (4,458 | ) | (151,146 | ) | |||||||||||
|
Income tax and social contribution
|
(305,977 | ) | (65,666 | ) | (42,865 | ) | - | (414,508 | ) | |||||||||||
|
Net income
|
833,343 | 114,243 | 62,543 | (242,473 | ) | 767,656 | ||||||||||||||
|
Other selected data:
|
||||||||||||||||||||
|
Additions to PP&E and biological assets (cash)
|
2,817,195 | 93,835 | 126,189 | - | 3,037,219 | |||||||||||||||
|
Depreciation and amortization (including biological assets noncash effect)
|
1,266,142 | 72,701 | 20,157 | - | 1,359,000 | |||||||||||||||
|
2010
|
||||||||||||||||||||
|
S&E
|
CCL
|
RUMO
|
Adjustment and elimination
|
Consolidated
|
||||||||||||||||
|
Financial position:
|
||||||||||||||||||||
|
Property, plant and equipment
|
4,795,522 | 1,016,263 | 302,745 | - | 6,114,531 | |||||||||||||||
|
Intangible
|
2,207,198 | 1,255,034 | 363,135 | - | 3,825,367 | |||||||||||||||
|
Loans, net of cash and cash equivalents
|
(4,345,015 | ) | (444,964 | ) | (107,199 | ) | 31,886 | (4,865,292 | ) | |||||||||||
|
Other assets and liabilities, net
|
3,611,383 | 100,095 | (92,671 | ) | (2,201,486 | ) | 1,417,320 | |||||||||||||
|
Total asset (net of liabilities) allocated by segment
|
6,269,088 | 1,926,428 | 466,010 | (2,169,600 | ) | 6,491,926 | ||||||||||||||
|
Total asset
|
14,492,261 | 3,690,368 | 806,394 | (2,571,781 | ) | 16,417,242 | ||||||||||||||
|
Income statements (12 months):
|
||||||||||||||||||||
|
Net sales
|
5,380,134 | 10,145,054 | 158,249 | (347,382 | ) | 15,336,055 | ||||||||||||||
|
Domestic market
|
4,648,436 | 10,145,054 | 158,249 | (347,382 | ) | 14,604,357 | ||||||||||||||
|
External market
|
731,698 | - | - | - | 731,698 | |||||||||||||||
|
Gross profit
|
1,341,599 | 692,732 | 30,393 | - | 2,064,724 | |||||||||||||||
|
Selling general and administrative expenses
|
(846,306 | ) | (490,041 | ) | (18,111 | ) | (9,944 | ) | (1,364,402 | ) | ||||||||||
|
Gain on tax recovery program
|
270,333 | - | - | - | 270,333 | |||||||||||||||
|
Other income (expense)
|
(24,237 | ) | 102,193 | 4,962 | (45,395 | ) | 37,523 | |||||||||||||
|
Financial result, net
|
433,293 | 22,923 | (1,057 | ) | 38,282 | 493,441 | ||||||||||||||
|
Income tax and social contribution
|
(327,363 | ) | (88,245 | ) | (7,696 | ) | - | (423,304 | ) | |||||||||||
|
Net income / (losses)
|
1,111,283 | 153,972 | 11,917 | (194,679 | ) | 1,082,493 | ||||||||||||||
|
Other selected data:
|
||||||||||||||||||||
|
Additions to PP&E and biological assets (cash)
|
2,240,909 | 156,580 | 147,943 | - | 2,545,432 | |||||||||||||||
|
Depreciation and amortization (including biological assets noncash effect)
|
1,040,532 | 73,261 | 14,167 | - | 1,127,960 | |||||||||||||||
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
All non-current assets of the Company are located in Brazil.
b) Detailed net sales per segment
|
2011
|
2010
|
|||||||
|
S&E
|
||||||||
|
Sugar
|
3,853,404 | 3,377,832 | ||||||
|
Ethanol
|
2,203,737 | 1,747,646 | ||||||
|
Cogeneration
|
194,889 | 93,583 | ||||||
|
Other
|
137,148 | 161,073 | ||||||
| 6,389,178 | 5,380,134 | |||||||
|
CCL
|
||||||||
|
Fuels
|
10,902,267 | 9,437,316 | ||||||
|
Lubricants
|
822,420 | 634,045 | ||||||
|
Other
|
70,590 | 73,693 | ||||||
| 11,795,277 | 10,145,054 | |||||||
|
Rumo
|
||||||||
|
Port lifting
|
118,139 | 142,120 | ||||||
|
Logistics
|
305,780 | 16,129 | ||||||
|
Other
|
24,084 | - | ||||||
| 448,003 | 158,249 | |||||||
|
Adjustment/elimination
|
(568,978 | ) | (347,382 | ) | ||||
|
Total
|
18,063,480 | 15,336,055 | ||||||
c) Net sales per region
The percentage of net sales by geographic area for the years ended are as follows:
|
2011
|
2010
|
|||||||
|
Brazil
|
72.63 | % | 86.40 | % | ||||
|
Europe
|
24.93 | % | 9.20 | % | ||||
|
Latin America (Except Brazil)
|
0.20 | % | 2.80 | % | ||||
|
Middle east and Asia
|
1.48 | % | 1.20 | % | ||||
|
North America
|
0.74 | % | 0.30 | % | ||||
|
Other
|
0.02 | % | 0.10 | % | ||||
|
Total
|
100.0 | % | 100.0 | % | ||||
The net sales from segments CCL and Rumo are derived only from the domestic market (Brazil), with no revenue from foreign customers.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
d) Concentration of customers
S&E
There are several clients in this segment, one of which represents more than 10% of the segment net sales during 2011 and 2010 - the SUCDEN Group (25% and 17%, respectively).
CCL
In this segment there are no clients that represent more than 10% of the net sales.
Rumo
In 2011, 55% of the segment net sales were generated from sales to the S&E segment (33% in 2010), with another customer with revenues of more than 10% of this segment, Sucden Group representing 11% (14% in 2010).
|
30.
|
Reconciliation between USGAAP and IFRS as of and for the year ended March 31, 2010 (not required by IFRS)
|
The Company’s consolidated financial statements as of and for the year ended March 31, 2011 have been prepared in accordance with IFRS, which differs in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”). The Company previously prepared and published US GAAP consolidated financial statements for use in its annual report to shareholders on Form 20-F that is filed with the United States Securities and Exchange Commission (“SEC”). In connection with the Company’s transition to IFRS, and disclosed required by the SEC in such situations, the fhe following tables present a reconciliation of the Company’s equity as of April 1, 2009 and March 31, 2010 and consolidated net income for the year ended March 31, 2010 as presented under US GAAP to that reported under IFRS. Amounts are presented in Brazilian reais.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
a) Reconciliation of equity
|
March 31, 2010
|
April 1,
2009
|
|||||||||||
|
Note
|
||||||||||||
|
US GAAP equity (U.S. dollars)
|
3,683,056 | 2,140,765 | ||||||||||
|
Exchange rate at year end
|
1.7810 | 2.3152 | ||||||||||
|
US GAAP equity in reais
|
6,559,522 | 4,956,299 | ||||||||||
|
IFRS adjustments:
|
||||||||||||
|
Biological assets
|
a | (143,431 | ) | (188,302 | ) | |||||||
|
Business combinations
|
b | (274,808 | ) | (516,170 | ) | |||||||
|
Deemed cost
|
c | 366,151 | 366,151 | |||||||||
|
Borrowing costs
|
d | (175,185 | ) | (132,174 | ) | |||||||
|
Warrants on equity method investment
|
e | 149,713 | 125,841 | |||||||||
|
Investment property in associate
|
f | 67,691 | 44,868 | |||||||||
|
Sale leaseback
|
g | 182,533 | 188,866 | |||||||||
|
Other adjustments
|
(15,947 | ) | 7,514 | |||||||||
|
Deferred income tax on IFRS adjustments
|
h | (224,313 | ) | (184,966 | ) | |||||||
|
IFRS equity
|
6,491,926 | 4,667,927 | ||||||||||
b) Reconciliation of income
|
March 31, 2010
|
||||||||
|
Note
|
||||||||
|
US GAAP net income (U.S. dollars)
|
331,859 | |||||||
|
Average exchange rate for the period
|
1.8662 | |||||||
|
US GAAP net income
|
619,316 | |||||||
|
IFRS adjustments:
|
||||||||
|
Biological assets
|
a | 44,871 | ||||||
|
Business combinations
|
b | 140,314 | ||||||
|
Borrowing costs
|
d | (43,011 | ) | |||||
|
Warrants on equity method investment
|
e | 23,873 | ||||||
|
Investment property in associate
|
f | 22,823 | ||||||
|
Sale leaseback
|
g | (6,333 | ) | |||||
|
Other adjustments
|
(27,377 | ) | ||||||
|
Deferred income tax on IFRS adjustments
|
h | (68,382 | ) | |||||
|
IFRS net income
|
706,094 | |||||||
The significant adjustments from US GAAP as a consequence of the adoption of IFRS are described as follows:
a) Biological assets
According to the IAS 41, biological assets of Cosan S.A. are measured at fair value at each reporting period, using the discounted cash flow method.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
In accordance with US GAAP, the biological assets were recorded at their historical cost less amortization and were classified and presented in the statement of financial position as inventories or fixed assets. The costs classified in inventories related to maintenance costs of the crop to be harvested within 12 months, and the costs recognized in fixed assets related to the costs of the initial crop of sugarcane plants, which are amortized over five years, the estimated useful life.
The negative adjustment of biological assets to fair value as of the IFRS transition date was not considered an indicator of impairment of the previous carrying value of the previously classified inventory or fixed assets under US GAAP. Rather, such previous asset values were deemed recoverable as of April 1, 2009 based on the estimated future cash flows of all crops to be grown on the land as they are used to produce sugar and ethanol, as compared to the current fair value of biological assets which is based on the current status on crops in process.
b) Business combinations
Under IFRS 3, all assets and liabilities of businesses acquired after the transition date, including any intangible assets are valued at their fair value at the date of transaction. In addition, purchases of businesses with payment in shares or other securities issued by the purchaser must also be measured at fair value for purposes of determining the purchase price, which consequently affects the value of goodwill calculated. Cosan considered the transition date for application of IFRS 3 to be December 1, 2008, the date of acquisition of Cosan CL.
The buyer must recognize contingent consideration at fair value at the acquisition date as part of the consideration for obtaining control of the acquiree.
If the Company's interest in the fair value of identifiable assets and liabilities acquired exceeds the acquisition cost, such excess is recorded as an immediate gain in income.
Business combinations are treated in a similar manner under US GAAP, but as the primary GAAP used in the preparation of these IFRS financial statements was Brazilian GAAP, (i) business combinations effects accounted for under BR GAAP prior to December 1, 2008 have been reversed and (ii) goodwill amortization effects accounted for under BR GAAP prior to March 31, 2009 have been included.
c) Deemed cost
Cosan S.A. elected to measure its farming land at fair value at the date of transition to IFRS. The adjustment was recorded against equity net of deferred taxes.
COSAN LIMITED
Notes to the consolidated financial statements (Continued)
Years ended March 31, 2011 and 2010
(In thousand Reais, unless otherwise stated)
d) Borrowing costs
Under US GAAP, up to March 31, 2010, the Company capitalized borrowing costs, but as the primary GAAP used in the preparation of these IFRS financial statements was Brazilian GAAP, in which borrowing costs were not capitalized, Cosan has applied the transitional provisions in IAS 23 Borrowing Costs and capitalizes borrowing costs on assets where construction was commenced on or after the date of transition.
e) Warrants on equity method investment
Cosan S.A. holds warrants on Radar, exercisable at any time up to maturity (August 2018). Such warrants permit Cosan S.A. to purchase additional shares, equivalent to 20% of total shares as of the date of exercise. The exercise of warrants will not change the classification of this investment as an equity investment. Those warrants were not considered to be a financial instrument under US GAAP up to March 31, 2010 as they cannot be net settled. Radar is a privately owned entity. Under IFRS the warrants are treated as a separate financial instrument measured at fair value.
f) Investment property in associate
Radar is an equity method investment of the Company that invests in farming land for rent and future appreciation. Under US GAAP, up to March 31, 2010, such land was recorded at cost. With the adoption of IFRS, Radar treated such land as investment property and elected to measure it at fair value. Fair value is measured at each reporting date, impacting the equity income of the Company in regard to Radar.
g) Sale leaseback
On December 30, 2008, Cosan sold land to Radar resulting in a gain of R$188,866. The Company leased back the land. Under US GAAP this gain was deferred and was being amortized over the 19 year average term of the leases.
Under IFRS, since the sale price was based on the fair value of the land the gain was recorded on the transition date against accumulated earnings.
h) Deferred income taxes
As required by IAS 12, all deferred income taxes have been reclassified to non-current assets or liabilities. Also, the balance of deferred income taxes was impacted by the adjustments previously mentioned.
F-92