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Cost savings have materialized faster than expected and will likely continue to grow for Raizen, the 50-50 joint venture formed this year between Brazilian sugar and ethanol group Cosan SA (CZZ, CSAN3.BR) and Royal Dutch Shell PLC (RDSA), Cosan officials said Wednesday.
"What we had hoped to capture in two years, we captured in six months," Cosan investor relations manager Guilherme Machado said at a presentation to analysts. He highlighted numbers from Cosan's latest quarterly results, in which earnings before interest, taxes, depreciation and amortization, or Ebitda, from Raizen's fuel segment stood at 55.7 Brazilian reais ($31.01) per 1,000 liters of fuel sold, up 73% from a year earlier.
"In terms of synergies, we expect to extract even more value going forward," said Cosan Chief Financial Officer Marcelo Martins.
Raizen, Brazil's largest sugar and ethanol producer thanks to Cosan's 24 sugarcane mills, distributes fuel--including ethanol, gasoline and diesel--through a network of 4,561 gas stations across the country. Most of the pumps belong to Shell, but around 1,700 of them came from the Esso brand that Cosan had bought from Exxon Mobil Corp. in 2008.
While synergies have come ahead of schedule, Raizen's original five-year expansion plan is starting to look ambitious due to a slowdown in Brazil's center-south sugarcane production, Martins said. Officially, Raizen expects to invest as much as $7 billion to expand its milling capacity to 100 million metric tons of sugarcane per year, up from 65 million tons now.
But the firm crushed around only 53 million tons of cane in the nearly finished 2011-12 season. While Raizen doesn't yet have a revised investment outlook, Martins said the company may reduce its target for crushing capacity around March.
Cosan is also exploring ways to get more out of its foods unit, Cosan Alimentos, which mainly produces and sells sweeteners under the Uniao brand and accounts for about 4% of overall revenue.
"Our long-term goal is to become, through Cosan Alimentos, part of an integrated foods company that isn't just restricted to sugar and that allows to better leverage our strategy and logistical network," Martins said. He said Cosan isn't considering selling the unit, but would allow it to "go from having Ebitda to contributing dividends," for instance.
Cosan is effectively betting that sugar prices will rise next year, as it has been hedging future production slightly less aggressively than in the past. The firm so far has hedged 25% of its expected 2012-13 sugar production, down from about 30% in previous years.
"We've been hedging less, exposing ourselves a little more to sugar prices, to be able to capture moments of upside to prices," Machado said, adding that the risks posed by volatile sugar prices have diminished due to Cosan's increasingly diversified business portfolio.
-By Paul Kiernan, Dow Jones Newswires; (+55)11-3544-7074, firstname.lastname@example.org