Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's first quarter 2020 results conference call, which will be led by Mr. Ricardo Lewin, Chief Financial and Investor Relations Officer. We would like to inform you that this event is recorded, and all participants will be in a listen-only mode during the company's presentation. After Rumo's remarks, there will be a question and answer session for investors and industry analysts conducted by Mr. Ricardo Lewin, CFO, together with Mr. Gustavo Marder, Investor Relations Executive Manager. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. The audio and slideshow of this presentation are available through live webcast at ri.rumolog.com. The slides can also be downloaded from the webcast platform.
Before proceeding, let me mention that forward-looking statements will be made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Rumo's management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to the future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Rumo and could cause results to differ materially from those expressing such forward-looking statements. I'll turn the conference over to Mr. Ricardo Lewin. Mr. Ricardo, please begin the conference.
Good afternoon, everyone, and thank you all for joining us in our earnings conference call for the second quarter of 2020. I will begin my presentation by commenting on ESG. We published our 2019 sustainability report at the end of July. The report includes the main results of the year, which we are very proud of, and for the first time, we disclosed our nine commitments to sustainable development, aligned with the 17 sustainable development goals of the United Nations. In these commitments, we included three long-term goals related to our emissions, safety, and employee satisfaction levels. Among our main deliveries in 2019, I would like to point out the 26% reduction in specific CO2 emissions since 2015, which is equivalent to 760,000 tons of CO2 avoided in the period. In this number, it's not included the replacement of truck transport, which is six times more polluting than by trains.
This translates into 4.5 million tons of CO2 in five years, considering the additional volume we transported by train in the period. Another milestone for Rumo was the first-ever issuance of a green bond for a Latin America cargo railway. We issued $500 million in green bonds, which will allow us to further expand our operations with consistent and growing energy efficiency and consequent reduction in greenhouse gas emissions. We are proud to be pioneers in the transition to a low-carbon economy. In terms of safety, we continue to deliver excellent lost time injury frequency rates, making us benchmarking in Brazil and other countries. This rate comprises the variable compensation of all Rumo employees. In terms of governance, we continue to develop the highest governance standards, committing to promote diversity in our board of directors.
Another new initiative towards diversity was the creation of People and Culture department, focusing on expanding the presence of diverse genders, culture, and backgrounds within the company. The report is available on our IR website in the sustainability section. We thank our shareholders for their confidence. We are committed to guaranteeing ongoing transparency in our actions and strategic values. On the next slide, I would like to comment on the COVID-19 scenario and the main impacts on the quarter. Regarding the impacts of COVID-19, this chart shows the status of our actions to protect the health of our employees and guarantee the continuity of our services, which are essential to put Brazil in motion from north to south.
In this regard, in addition to all the protocols being followed since the pandemic first struck, we are conducting mass testing with employees and continuing to monitor their health closely, emphasizing the importance of social distancing, providing PPE, and adopting strict cleaning protocols. We continue to make donations to more than 46 institutions in 28 cities across seven states, helping communities to have their basic needs met. Regarding to our financial health, over the course of the second quarter of 2020, we further strengthened our cash. At the end of July, it stood at around BRL 8.5 billion, guaranteeing liquidity and the continuity of our investments. Despite all of these actions, COVID-19 had an impact of approximately BRL 80 million on EBITDA performance in the second quarter. The lower demand for industrial products and containers, which decreased by 14.3% and 4.2% respectively, impacted EBITDA by approximately BRL 37 million.
In addition, due to the sudden decrease in fuel prices, the decrease in revenues was higher than cost gains. This led to an EBITDA loss of approximately BRL 43 million. On the next slide, I will comment on the continuity of our main investments during the pandemic. At the end of July this year, we delivered the expansion of our terminal in Rondonópolis, the largest road railway terminal in Latin America. As you can see from the photos on the slide, we highlight the following work. Three new warehouses, more than doubling static capacity at the terminal. A third railway granary that loads three trains simultaneously, and four new road hoppers increase the efficiency for truck drivers. Investments enable us to increase terminal capacity by 50% and achieve higher efficiency and safety levels. In Goiás and Tocantins, work in the Central Network continues to advance.
We still expect to start operations in the first half of 2021. The photos on the chart show the progress of construction of the Rio Grande Bridge between the states of São Paulo and Minas Gerais, and the infrastructure work in two different locations, a connection between the Central Network and Paulista Network, and the initial works in another stretch in Goiás. Let's take a look at the results for the second quarter of 2020. I will begin by emphasizing that in order to guarantee comparability, we are presenting the adjusted consolidated result, excluding the effects from the renewal of Paulista Network, for which the contract was signed on May 27th. We are also excluding the costs and expenses with Central Network, as the contract was signed on July 31st, 2019, making second quarter 2020 not comparable to the second quarter 2019.
This quarter, we also had an impairment provision for the West Network. Its impact is presented on this slide and detailed on page three of our earnings release. Please note that all sections of the release show the figure with the consolidation of Central Network and the effects of Paulista Network process and the West Network impairment, except when otherwise stated. On the next slide, I will comment on operating results. In second quarter 2020, transported volumes grew 14% to 16.4 billion RTK. The favorable foreign exchange rate and export scenario drove improvement in grain and sugar transported volumes. Fertilizer transportation also increased by 23%, in line with our plan. The industrial and container segments, as mentioned before, were negatively impacted by the effects of COVID-19 on demand. On the next slide, we will discuss financial performance.
Rumo's adjusted EBITDA grew 6.3% from last year, reaching BRL 982 million, with margin of 53.7%. As previously mentioned, the impact of COVID-19 on industrial and container demand, coupled with the impact of the decrease in fuel prices, resulted in a loss of approximately BRL 80 million, which would have made EBITDA grow 15% from the second quarter 2019. Tariff performance was impacted by take-or-pay contracts signed in a scenario of lower road freight prices. Fixed costs and general and administrative expenses, excluding the Central Network, grew only 1%, showing once again a dilution in costs with volume growth of 13.9%. Variable costs performed well, growing less than volume and showing efficiency gains. Fuel costs dropped by 20.7%, reflecting the lower diesel cost and a 7.6% decrease in unit fuel consumption. EBITDA margin grew to 53.7%.
Now, we will take a look at financial results and net income. This quarter's result was a net financial expense of BRL 201 million, 22.4% lower than the second quarter 2019. This result was impacted by three reasons. First, the BRL 20 million increase in cost of gross debt, which was due to the lower mark-to-market gain, partially offset by the BRL 46 million decrease in bank debt expenses due to the lower CDI. Second, the cost of concession fees and operating leases increased due to the addition of interest on the concession installments for the Central Network, as well as the effect of Paulista Network concession renewal. Finally, the other financial expenses, which include the impact of BRL 131 million from the offsetting of accounts in the Paulista Network renewal process.
Net income stood at BRL 405 million, more than doubling the second quarter 2019 figure, reflecting the increase in EBITDA and the liabilities write-offs related to the Paulista Network renewal. On the next slide, we will take a look at our debt. In line with our plan to increase liquidity, we ended the quarter with cash of approximately BRL 5.9 billion. Indebtedness decreased to 2x net debt EBITDA in the second quarter of 2020. On the next slide, we will discuss the market. In the current market, according to Agroconsult, Brazil expected to export 34.6 million tons of the grain in 2020, a decrease of 4.7 million tons from 2019, which has already happened in the first half. According to Agroconsult, Mato Grosso exports of corn is expected to be in the same level as 2019.
Finally, according to information published by IMEA, 87% of corn crop in Mato Grosso has already been sold. This concludes our presentation for the quarter. Let's move on to the Q&A session. I would like to remind you that due to the announced offer described in the material facts disclosed yesterday, we are restricted to talking about projections. It's my pleasure to answer questions about the results. Thank you.
Thank you. We'll now begin the question and answer session for investors and analysts. We kindly ask you that in case you have more than one, please announce it in the beginning and ask one by one to ensure conference flow. The questions will be answered in the order they are received. We ask you that you use your headset when asking the question, in order to maintain excellent sound quality. Our first question comes from Bruno Amorim, Goldman Sachs.
Please, Mr. Bruno, you may proceed.
Hi, good afternoon. I have a question related to the performance of the first semester. Specifically on the pricing side, we saw very strong volumes in the second quarter, but prices were down. This was somehow expected given the lower diesel prices, and you have mentioned in the release that part of the weakness on the pricing side was due to challenging market conditions when you closed some take-or-pay contracts. Can you please further comment on what has made the environment so challenging more recently on the pricing side? To what extent can this be the result of BR-163 being paved, as opposed to specific uncertainty around volumes at that point in time? Just trying to understand what's recurring and what's one-off out of this weakness on the pricing dynamics recently. Thank you.
Hi, Bruno. This is Ricardo. Thank you again for participating on the call. We have different subjects I see in your question. Let me start by talking a bit about the prices. I would like to reinforce that in the second quarter of this year, we saw diesel prices going down by 25% when compared to the second quarter of 2019. That had an impact of roughly 6% in the tariffs. Okay. On top of that, in the time the take-or-pay negotiations took place in the company, prices were low in the market, okay. Especially in March, due to the late soybean crop. What happened is that we carried over low prices level from the previous quarter. Okay. This is what moves affect our prices. From the 85%, that fell 6% refers to fuel. Okay.
Now, there's another question that you asked me, if this has an effect of BR-163. Okay? What we can say by now is that after the pavement of BR-163, obviously it became much easier and cheap to transport to north. Okay? To the north part.
Adding to the pavement. In the short term, low fuel prices increased truck competitiveness. Altogether, for all these reasons, it's brought more pricing pressure to our business. In the long run, you know that, it's public that it may happen, the auction of BR-163. Based only on public sheets that everybody has access, the auction of BR-163 should bring additional road costs that would make the cost of trade more expensive. By what we have public now, it could increase.
Our next question comes from Stephen Trent from Citi. Please, Stephen, you may proceed.
Well, thank you very much, gentlemen, and I appreciate you taking the question. I was kind of curious about the southern network. I remember some time ago that maybe you were having some conversations with foreign companies about potential co-investing in the southern network. I saw some news today about some Saudi Arabian wealth funds. It seems to be poking around the sector. Just wanted to get your color with respect to how you're thinking about the southern network strategically. Thank you.
Hi, Stephen. Good to hear from you. You're right. In the past, we were seeking to have some kind of partnership in the south. Right now, we realize maybe it's better off to wait until we can advance with the renew of the south. As you can see, meanwhile, we are doing a good job in terms of margins in the south operation, so the operation is improving. Maybe we can think about that in the future, but it's definitely better off to advance with the renew of the south first. We are also starting, as we announced before, to operate with Ferroeste in the west of Paraná. I think those two things should be our priority in the short term. In the long run, we can see if we have a potential deal, but at this point, we don't need it anymore.
It would be an option for the company.
Okay. Very clear. I see you've made some big improvements there. That kind of prompted my question, but appreciate that. I'll let someone else ask a question. Stay healthy. Thanks a lot.
Thank you.
Our next question comes from Alex Falcao from HSBC. Please, Alex, you may proceed.
Thank you. Thanks, guys. I have two questions. The first one is on the third-party cost that you guys incurred here. It seems a little bit high or higher than I expected, at least. Can you talk about how recurring are those at this, because of your-- Lucas, you started something there, or there's something within this quarter that made it a little bit higher? That's the first one. The second one, I wanted to go back to the Santos market share and what we can expect for the second half with corn.
Do you expect that the same sort of market share you had in the first half with soybeans, you're gonna see the same way on the second half, meaning that if we have 4 million less tons of corn to be exported, you can make more or less the same math for the second half on where that deficit is gonna be distributed, or you believe that the northern exports less corn than it does soybeans? Thank you.
Hi, Falcao. Thanks for the question. Let me start with this second question. I don't quite hear well the first, so if you can repeat later, it could be better. Regarding market share, although the volumes in Santos, they didn't grow as much, especially when we take into account the cargoes that came from Mato Grosso. We did well. We increased our volumes by 17%, when Mato Grosso, in an average, was growing in the second quarter only 13%. If you look to Mato Grosso, Rumo increased its market share in the second quarter of 2020. When we look to the port specifically, that also provides services to cargoes that comes from other states. We saw our volume growing 17%, but the market and those other markets were sending more trucks to Santos, therefore, we lose the market share.
The one thing that we have to stick here is that we were able to grow 17% with soybeans in Santos, which is pretty good. For the second half, we are somehow limited here. We cannot provide guidance, but the capacity is pretty much the same. We do have, according to public data, a good crop of corn, especially in Mato Grosso. The average in Brazil, you're right, the exports should be somehow lower than last year. When it comes to Mato Grosso, Agroconsult, for instance, forecasts almost the same amount of corn being exported. It seems that the market will be okay in this second half. We cannot go beyond this. Our capacity is pretty much in place. We had shown this with the figures for soybean. Let's see how the exports of corn will evolve.
Okay. Thanks for that. No, the first question was regarding third-party freight costs that double from last year.
Oh, sure.
Yeah. Go ahead.
No. The third-party freight is related to, we increased significantly the volumes of port services. It grew 47%, if I'm not wrong. Because most part of these volumes, they arrive in the port with trucks. This pretty much happens in the sugar business, we transport a significant amount of cargo to trucks because the lack of capacity that we have in the railways to afford all the volumes. We transport from trucks. As long as the volumes increase significantly, we also had some effects of COVID-19, which makes some variable costs in these operations a bit higher, what caused the cost to go up roughly this 80%.
It was basically a function of a higher volume transported with third parties, which happens in the sugar business, especially with the cargoes that we operate in our terminal in Santos, and that we don't have enough capacity to afford using only our railway.
Okay. Just to clarify, this has nothing to do with Lucas and sort of what you wanted to do with the trucks there. That's not the cause of this increase.
No. Not at all.
Not at all. Okay.
Not at all.
When that does happen, where do you think that this line is going to sit at?
It depends. If you remember, Falcao, the market of sugar has been weak over the last two or three years. Sugar mills were producing more ethanol than sugar. This year, due to the lower oil prices, we saw sugar volumes increasing a lot. If you look into the volumes that we performed in the railway, we presented more than 30% growth in sugar. The demand for sugar is pretty high. As long as we cannot afford all the demand with the railways, we rely on third parties to operate that volumes. This cost also provides additional revenues that we charge from customers without transporting with the railway. If you look to the breakdown of our net revenues, we have basically three things there. Railway revenues, which is related to all that we transport.
We have port services, which is specifically services that we provide in the port. We have these other revenues, which is related to the revenues that we receive from the customers, and then we provide the services through third parties. That happens only in the sugar business. It depends on how strong the sugar market will be from now on.
Okay. Sugar continues to be strong, right? Okay. Fair enough. Thank you so much.
Thank you, Falcao.
As a reminder, if you'd like to ask a question, just press star one. Our next question comes from Josh Milberg from Morgan Stanley. Please, Mr. Josh, you may proceed.
Hey, good afternoon, everybody. Good afternoon, Gustavo. Two quick questions on my side. The first one is just on that the issue of your potentially prepaying the Central Network concession fee. I'm not sure if that's something that you can comment on, but would be great if you could just indicate if there's been any movement on that in recent days. From our prior discussions, I know you guys had filed a formal request to proceed with that, but just wanted to see if there had been any evolution.
Hi, Josh. This is Ricardo. Due to the cap increase process, I would like not to answer this question by now.
Okay, Lewin, that's fully understandable, and I imagine that might be your response. Let me ask a second question, which is just if you could update us a bit on the issue of the migration to the 120-car trains and just where you are with the investments needed to support those and how soon those longer trains could start contributing to your capacity.
Hi, Josh. This is Gustavo. As you may know, we are expecting to start with the longer trains next year. They will arguably deliver a much higher capacity in the railways. It's not only about capacity. We're going to have also more efficiency as those longer trains could provide more fuel efficiency, reducing our variable costs. We can operate the same volume with a low number of trains, therefore increasing the average speed, the cycle time. This project, it's maybe one of the main milestones in our seek for efficiency because it provides both capacity and higher efficiency. We are not on hurry. We don't have to put all the volume in the first place. We are okay if we operate with more efficiency. It will be pretty much a function of how willing the customer will be next year to improve the volumes.
If we have more volumes to serve, we can do it quicker. Otherwise, it will be a smooth process throughout the year, and we can take advantage as well on the higher efficiency.
Okay. That's very helpful. Is there sort of like a bull case scenario for that ramp-up? Is it one where maybe you could be increasing capacity dramatically above your expected volume growth today? Could you talk a little bit about what would be the sort of kind of a bull case for how much capacity you could bring in next year?
Sure.
if the demand conditions were.
Yeah, I cannot comment specific on that. If you think about capacity, by having the longer train, capacity in the railways won't be an issue. We also improved our capacity in the terminal on Rondonópolis. As I mentioned before, it will all depend on the customers, on the market, whether those things will be also bullish. If the market is bullish, most part of the infrastructure will be already placed. We can react fast by having the infrastructure already deployed. It will always depend on the market, we cannot disclose any kind of guidance for this growth.
Okay, Gustavo. That's helpful. One of the reasons that I asked is that it hasn't in the past just been about the overall demand in a given year, but also the distribution of the demand over the quarters and the months. It does sound like you're not going to be facing some of the capacity constraints that you've had in the past starting in 2021.
Yeah. We have a system, we could have constraints in the ports, in the terminals. It has to be phased, or it has to be planned as a whole. At least when we look to our terminal in Rondonópolis into the railway, there will be a huge improvement in those things. We are not expecting to have huge bottlenecks on this. Once again, it's not the whole part of the equation. We still need the market. We still need to foster the investment in the ports in order to be able to have more capacity there. We need the customers to be committing with the volumes as well. All of this together is what can drive the volumes.
As I mentioned, we'll be at least in a much better position as long as most part of the investment in the infrastructure, at least on our side, will be placed.
Okay. That's very helpful color. Thank you guys.
Thank you, Josh.
Our next question comes from Alex Falcao from HSBC. Please, Mr. Alex, you may proceed.
Thanks for the follow-up, guys. Quick question. Just looking at the yields that you charged. I understand that we're negotiating in the middle of the pandemic and all that. Just going forward, I don't want any guidance for that. Just logically, as you're going to expand the capacity and the 120 trains are there. Is it fair to assume that we're going to see yields being negotiated at actually lower levels just because as you have the additional return on the volumes when you expand capacity, it's going to be so much higher that you would be incentivized to do that, even if it is to attract more volumes. Is that a fair assumption, or we're not going to see this sort of drop in yields anymore?
Hi, Falcao. This is Lewin. Thank you for the question. Price dynamics is not subject to us, but to the market conditions. It does not depend only on volumes. Okay. On excess or not of capacity. There are many factors that we follow very closely to make our price system, okay? What I can say, and unfortunately, I cannot tell too much at this point about prices in the future. Just thinking about some variables here that are public and that you can take your conclusions on that. In the short term, you know that fuel prices are started already to recover, okay? This is one point important. The second point important that what we have also said for some time is that we are adjusting the pass-through dynamic for the new contracts, okay? We would be avoiding exposure.
This in short-term is what you take into consideration, and in the long run, you cannot take only capacity as a variable for price. There are other variables that we take into consideration. We are improving our pricing system. I would say now that it's not a fair assumption what we're saying, that price is going down once the volume, our capacity is improving.
Falcao, just to complement on that. Remember that I mentioned, I think it was Josh that asked this one. The longer train also brings us higher efficiency. It's not the case that we are enforced to seek desperately more volume at whatever price. We can just run the regular volumes, the volumes that we have under the right level of prices and do it more efficiently, increasing the margin. The company has this option. It will take some time, and the company will have to take the decision whether or not we need more volumes and what will be our pricing strategy. We cannot disclose right now.
Gustavo, this is a very good point. Falcao, the excess of capacity, who impose that? It's ourselves. You can require extreme conditions from the system, or you can work in better conditions. Okay. The capacity depends on how you work, okay. Once we improve capacity, you can work in a system that's much less stressed than it's today. Capacity is also variable, depends on how we stress the system. Just reinforcing one thing that Gustavo said, and we have discussed this already. At the end of the day, we are a margin business. We are more competitive than other models. Being so, we have worked, as Gustavo said, in reducing my variable costs, by reducing consumption, being more efficient. Note that even increasing 14% this last year on volumes, we increased only 1% my SG&A and fixed cost.
We focus on improving the margin, even if we have lower prices in the future. Long term, we need to be seen as a margin business. Okay. Thank you for the question, again.
No, it makes perfect sense. If you can, just one quick follow-up on when you talk to the consultants and the numbers coming out of the next soybean crop, you see numbers going all the way up from 5%-10% increase in Brazilian volumes and Mato Grosso, at some point, even higher than this. If you're taking in the productivity here, do you believe that the system, meaning not only the railroad but also port, is ready for another 5%-10% increase in volume for next year, or do you need to debottleneck and invest more to make sure that you capture those growth? Thank you.
Falcao, let me talk about our system, about Rumo's system. If you talk about Santos, mainly, we have been investing last years, a lot to de bottleneck, the entrance of the port. You know very well Rumo. You know that we have invested in several small projects that improve a lot the capacity of Santos port. Besides that, Santos has free capacity in several terminals. Okay? In the short run, capacity in Santos is not a headache. Obviously, in the long run, it can be. We are working on that. Railway is a long-term business, we already are working on that, thinking about many years in front of us. Okay? That doesn't seem to be a problem in the next harvest also.
Okay. Fantastic. Thank you so much.
That concludes the question and answer session for investors and analysts. Now I'd like to turn the floor over to Mr. Ricardo Lewin to his final considerations. Please, Ricardo, you may proceed.
I was on mute. Guys, I'd like to, as always, thank you all for participating, for making good questions, and supporting always the company. Thank you very much, and have a good weekend.
That concludes Rumo's first quarter results conference call. Thank you so much and have a nice day.