Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Humu's First Quarter 2019 Results Conference Call, which will be led by Mr. Ricardo Levin, 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 rumors and remarks, there will be a question and answer session for investors and industry analysts conducted by Mr.
Ricardo Levin. At that time, further instructions will be given. The audio and slide show of this presentation are available through live webcast at ir. Humulagi.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 Humu's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Humu and could cause results to differ materially from those expressed in such forward looking statements. Now, I will turn the conference over to Mr.
Ricardo Levin. Mr. Levin, you may begin.
Good afternoon, and thank you for joining us. I would like to take this opportunity to thank you for the recent recognition of RUMO on institutional investor ranking among the best companies in the transportation and Latin America mid caps categories. Another important milestone was rule being included on FTSC for good index series for companies with strong ESG practices measured by Global Recognizing Standards. Before starting the presentation, it's important to highlight that 2018 results presented in our earnings release refer to the pro form a figures, reflecting the impact of IFRS 16 to guarantee a fair comparison. On Page 2 of the release, the impact on each line item of our income statement is summarized.
Let's begin our presentation on Slide 2. I start our presentation analyzing the market scenario this quarter, which was unusual. On one hand, soybean forecasts predicted high supply due to large inventories in the United States and strong crops in Brazil and Argentina, important exporting countries. On the other hand, estimates showed a contraction in China soybean import demand due to African swine fever. This scenario led to a decrease in international soybean prices and producers preferred to stock and sold volumes instead of closing new sales at market price.
As a result, for the Q2, Brazilian exports were hampered and Humu soybean volumes were essentially limited to those previously contracted. The current scenario should be the opposite. Forecast points to record high domestic production this year, which combined with an equally favorable pricing scenario, a potential American crop disruption and domestic higher soybean inventories should boost Brazilian corn exports. This favorable combination could already be seen in the North operation in June. On the next slide, let's see the transported volumes.
Volumes grew 7.1% in the Q2 2019. As mentioned in the previous slide, most of this growth happened in June, mainly on the back of corn inflows in the North operation. Segment highlights include more than 3 times fertilizer volume transported in the North operation. Both volume grew by 28.6 percent due to the annualization of last year's second half volumes. Companion transport that grew by 20%, having successfully diversified cargoes, which now reaches over 70 different types, strengthening its business model and continuing to expand its network in the Southeast and Midwest regions of Brazil.
Please let's move to the next slide. RULO's EBITDA rose 1.9% this quarter compared to the same period last year, and the consolidated margin stood at 53.4%. The 7% volume increase was satisfactory considering the unfavorable soybean market. We highlight North operation that grew 14% on volumes this quarter. Service dropped almost 4% impacted by non operation, mainly due to the seasonal effect of higher volumes in June when prices tend to be lower, early entrance of corn in the grain mix as corn has a lower tariff, exposure to lower spot prices in June when volume exceeded the contractual levels and finally, centralizing volumes, which have a lower tariff when comparing to grades.
Regarding costs, variable cost has positively contributed to the result as it grew less than volumes. Fixed costs rose 6.6% due to higher maintenance expenses on April May when capacity was idle and the end of payroll exemption at Mario Esti and Marasul. Therefore, even with a lower margin due to lower yields, North Corporation reported EBITDA growth. South Corporation reduced its EBITDA and margin due to weaker soybean volumes. Containing operation stood at the same level as the previous year as the Q2 2018 results were impacted by the revenue from the selling of a business unit.
We will now take a look at the financial results and net income. The financial results decreased by 48.2% compared to the Q2 'eighteen, mainly due to a lower yield curve, lower gross debt and the drop of average cost of debt. Consequently, we had yet another quarter of net income, reversing the loss posted in the same quarter last year. On the next slide, we will take a look at our debt. Como's indebtedness decreased to 2x net debt to EBITDA compared to 2.1 times in the Q1 2019.
We emphasize our commitment with capital discipline, always striving to keep leverage at acceptable levels for the company. On the next slide, we have more information about the North South Railway. On July 31, we signed a sub concession agreement for North South Railway and we are now officially responsible for this new concession. It is still too early to set volume, price, EBITDA and CapEx commitments as they are contingent on the conclusion of pre operating work and the start of negotiations for commercial agreements. However, I would like to share more details on the market dynamics.
North South Railway brings to Humu access to various potential markets. In addition to grains, we have great opportunities to transport, fertilized, bulk feed, biofuels, byproducts and containers. We have already started to reach out clients and we'll pursue commercial agreements for the volumes as soon as the railway is ready. In the grain segment, we will enter 2 new markets, the state of Boyas and Tocanqins. As the case of other cargoes, it is still too early to talk about future market share levels, but we can access the market's potential based on actual export data from 2018 and estimates from the Ministry of Agriculture.
In 2018, the 2 states exported approximately 13,000,000 tons, which could reach up to 25,000,000 tons in the next 10 years. This is a promising market for grains and other tardos that currently has no access to an efficient railway. As Aurelioz Logan says, we are a Brazilian promotion. We will do for Griagena to continue what we did for Mato Grosso and other states. We are now focused on making the network ready to run.
Therefore, the required investments will be deployed without any change in our already released guidance of BRL13 1,000,000,000 to BRL15 1,000,000,000. We reinforce that we will remain committed with capital discipline and the constant seeking for efficiency. I conclude my presentation in providing our commitment to the company's business plan, increased capacity and improved efficiency while putting safety first. We plan to ramp up our business by connecting more producing regions in Brazil to foreign markets, significantly contributing to domestic transportation with pet hauling capacity, while reducing greenhouse gas emissions through energy efficiency and market share gains. All these coupled with the highest governance and sustainability standards committed to profitability and value generation to our shareholders.
I will remain at your disposal for the Q and A session.
Thank you. We will now begin the question and answer session for investors and analysts. We kindly ask you that in case you have more than 1, please announce it in the beginning and ask 1 by 1 to ensure the conference Our first question comes from Mr. Thiago Cacebi, Credit Suisse.
Good afternoon, everyone. Thank you for
the question. My question is regarding the inventories of grains, stock capacity. We see that due to prices, a great part of the soy crop was not exported yet. So how do you compare the current inventories of soy with last year? Any chances you could see part of this volume being transported by Humana in the end of this year already?
Thank you.
Hi, Thiago. Good to have you on the call. Thank you for the question. Well, last year, we did have a small inventory during from December to January, okay, due to the high prices, okay? This year is a bit difficult to foresee what will happen, okay?
You know that what happened with the market this year, it is well explained in our material here that the prices of soybean went down, so the inventories went up, okay? What we are seeing right now is a complete different scenario for second half of the year due to several reasons. Among them, what's happening in the U. S, okay? USDA announced recently the disruption the crop disruption in the U.
S. So the soybean production will drop from 120 4,000,000 tons to 100,000,000 tons. That can as a consequence of that, we already see prices starting to improve. So what we see the inventories at the end of the year depends on the prices and the willingness of the farmers to trade their inventories, okay? So it's difficult to foresee.
What we foresee right now is that we may have a good if the prices continue to be in this level, we foresee a good trading in the last quarter what can reduce inventory. So it's difficult to foresee right now. We'll see more to the end of the year.
That's great. Thank you very much.
Our next question comes from Josh Milberg, Morgan Stanley.
Hey, everyone. Thank you for the call. My first question is if you could give us some perspective on the Q3 volume outlook. We know that grain exports were strong in July and but just wanted to see if you could talk a little bit about the outlook for the remaining months of Q3. And also just wanted to understand if we need fear at all that with the anticipation of corn volumes in June and what looks like it's going to be a very strong July, if we could then see a shortfall later in the year?
That's my first question.
Hi, Josh. Thank you for the question. The scenario, as you said, for corn is very positive, okay? We as you saw the volumes in our website, we had anticipated an all time high corn crop. So this year crop is expected to be 102,000,000 tons of production, okay, all time high.
As you said, this already brought a strong growth in June. For example, the North Corporation delivered already 27% growth as we published the volumes, okay? Also, high inventories of soybean, coupled with a good trading due to the international price for corn, okay? And this as I said, the crop disruption in the U. S, I said before about the soybean, but that will happen also with the corn.
There is a drop from 366,000,000 tons in 2018 to 353,000,000 tons in 2019. So in our opinion, for this Q3, we'll have a very huge additional corn transportation pressure. And that would bring us strong volumes throughout all the second half of the year.
Okay, Lewin. That's good color. And I presume that those strong volumes will translate into a better yield performance in the Q3 as well. Actually, if you wouldn't mind just touching on the yield outlook as well, that would be good. And then I have a second question.
Yes. Good. Well, let me give you some idea what happened in the North operations. It's well explained, but it's good to reinforce here. The yield was lower than expected, but that happened because no recurring issues that affected the tariff.
So the first one is the seasonality among the months in the quarter. So volumes were lower than expected in April and in May when the prices are higher. While we had good volumes of corn in June when the prices are lower, okay? In the Q2 2019, also, we had a significant amount of corn being transported. And remember that the corn yield is lower than the soy yield.
So that helped also to bring yields down. Also, we have the RTK volumes went up something around 27% in June, and that was higher than clients expected. And therefore, they started to pursue spot volumes on top of the commercial agreements in a moment where the spot prices were very low, okay? And finally, something that is happening recurrently, that's the volumes of fertilizers that are growing fast as expected. This is good news for us.
And although it brings up the margins, the yields start to be reduced, while the backhaul freight is something around 40% lower than the average, okay? Now that was what happened in this quarter. Now analyzing these factors, okay, that influence yields for the future, for next half. Regarding the seasonality among months, it's not expected to have any huge influence in the second half of the year compared to the previous year, okay? Regarding the spot logistics, certainly, we will have a certain position to spot prices, okay, in the second half.
And there are expectations of high volumes. However, we already see better yields in July August due to the improvement of spot prices. They are getting better in the market, okay? But we cannot guarantee that these higher spot prices will remain until the end of the year. And regarding fertilizer, it will continue to grow at yields that are lower than the rest of our products, okay?
Regarding next year, it's too difficult to determine that, okay, because we need to start negotiations for commercial agreements that will happen later in this year.
Okay. That's great. That's very helpful. I had one more question, but I'll do a follow-up at the end of the call and give somebody else a chance to ask a question. Thank you.
Okay. Thank you, Josh.
Next question comes from Roger Du Araujo, UBS.
Yes. Hi, guys. Thanks for the opportunity. I have a couple of questions. So first, a follow-up on Josh's questions on the tariffs.
So is there a way that you can provide an estimate of how tariff variation would look like in North operations if we exclude the nonrecurring items, which is the corn mix and the lower volumes in April May and also the lower spot prices in June. So in other words, if you get this if you get our contracts on average, excluding those impacts, how much did the yield varied in this period?
Joselio, A very brief answer. There's no reason for others not considering these nonrecurring issues. There is no reason for the difference from last year unless the volumes of fertilizer that are going up, okay? So there is no reason for being different.
Okay. But was it so adjusting for those impacts, was it above inflation and even fertilizers? Or you are not messing through inflation in your contracts this year?
Yes. No. They do have inflation, okay, in our contract. So that there is the influence of inflation and of the field, okay? However, when you consider the average yield, then don't forget to consider the fertilizer volume that as we said, improve our margins, but reduce our tariffs.
Okay. Yes, it's a good color. So my second question is on Soareso extension. Is there any recent development in this project? And if you could provide a little bit more detail on how the company expects to see this happening if through a contract amendment, if through a project law that enables the authorization for rail in Brazil or any other way you can do that?
So if you could provide the recent developments on that project, would be great.
Okay. Regarding the extension, Rogerio, remember that we split the project in different phases, okay, in different pieces stages. So the first stage will be the road terminal, okay? Sorry, the truck terminal is somewhere between in between Rondonopolis and Sojizo. This project, we are already deploying some CapEx for studies, okay?
And we are also looking for the best place to buy land to do this terminal, okay? Regarding the Sojizo project, actually, to do the first stage, we need to the first phase of the project, we need to know where the railway will go through. So we are deploying also some CapEx to make the analysis of the network, okay? But this compared to the size of the entire project, it is still irrelevant. In a while, we will start to hear about the first stage that is the truck terminal, okay?
So once we buy the land and we have the beginning of the construction of the project, we will let the market know.
Okay. What about government approvals? Do you already ask for any? Or when do you plan to do that? And how are you going to do that?
For the first stage, it's not necessary to have AMTT approval, okay, because this is an Atreb terminal, okay? Regarding the second stage, that's the extension to Cerroso, the railway, we are waiting for the approval for of Paulista renewal to start the process.
Okay. Thank you. If I may, you mentioned about Mala Paolisa. So any news on our expectations for timing on the conclusion of that? Thank you, Basit.
Yes. Regarding timing, Rogerio, unfortunately, this is impossible to guess how much time it will take, okay, to the renewal. The last news that we have is the recommendation of TCO prosecutor, Julio Marcelo, for the non renewal of Mala Paulista that got public in the beginning of July, okay? This is far from being bad news for us because having this decision, at least we can move to the next stage of the process. That means the process will go to the few Minister Augusto Naveres.
That's the reporter of the process. He will present his recommendation and will submit to TCO Penare. And also, it's not bad news for us that the recommendation for non renewal from Jullio Marcello because there are some cases, previous cases, we reached the reporter of the process did not agree with the public issue prosecutor. A very good example is that Julimar Marcelo was against the North South Railway and the ministers of the CEO didn't agree, okay? So we know what are the next steps.
Unfortunately, the deputy minister in charge of the case has no deadline for approving it. But in our opinion, the process is very mature. The decision minister in charge of the case is familiar with the process because he has been following it since the beginning, many years ago. And in our opinion, the decision is not supposed to take that long.
Okay, great. Thanks so much. Have a good day, everyone.
Thank you,
Next question comes from Stephen French, Citi.
Good afternoon, gentlemen, and thanks for taking my questions. I was curious, I know you've had this plan to start running 120 train cars per local versus 80 on some of your network. And I'm wondering if you've made any adjustments to that plan given what's happened with soy. Is it still intact? And if so, approximately what portion of your network would be impacted?
Stefan, good question. You know that this is a very strategic approach for us. We are investing since the merge between Rumu and AOL in the improvement of the capacity. And everything we have done up to now is to support the 120 railcars train. That means we will have a longer train, much more efficient, and with increased capacity.
So this is not a project that will change due to very punctual changes in crops as happened in this year for soybean. These are very strategic project that is foreseen to be running between 2021, 2022. So we had no changes in the plan. We keep doing our yards, the crossing yards that will allow to have the 120 cranes crossing, okay? So we are very disciplined in this investment.
That's very important for the company. And as I said, the soybean crop reduction of Kuwaiti this year doesn't mean that we will have this for next year. So we continue to see a very huge potential for soybean in the next year as well as increase of crop of corn and other products such as cotton, for example, okay?
Great. Thanks very much, Ricardo. And just one very quick question aside from that. I mean, kind of a follow-up on Joshua Muzira's question. When you look at the 2Q freight tariffs, how much of that the delta was related to lower sugar volumes?
Just coming back to your previous question, Stephen. So sorry, I was so excited to answer that I forgot to finish it. But actually, the increasing capacity is something around 70%, okay, that we foresee in the North operations once we have the 120 railcar crane. Regarding sugar, the trade of sugar has been very bad in this year and last year, but that doesn't affect us at all because actually, we are using our capacity, 1st quarter, much more profitable cargo. That's sugar and sorry, that's soybean and corn.
So the reduction of trading has not affected us at all.
Okay. Very helpful. That's it for me. Thanks very much, Ricardo.
Next question comes from Victor Mizusaki, Bradesco, BB.
Hi, thanks. I have two questions. The first one is a follow-up on Steven's question. Juan, you mentioned about capacity and given all these positive outlook for grain volumes in the second half, Can you comment a bit about your capacity utilization in the second half, especially in Q3? And if I mean, if we compare Q3 with the Q2, if you think about volume in the Q2, the volume concentrated in the North operation.
So if we can expect that maybe in Q3, this volume growth will be spread or split between the North operation, the South operation?
Hi, Victor. Good to have you on the call. Let's start with the last one. The answer is yes. The volumes in the South were worst in the Q2 because we didn't have anticipation of corn, okay?
So we'll have the interest of corn in the south, so the volumes will go up and it will be more spread, the results between north and south. Regarding the first question regarding the capacity in the Q3, we will be very close to the full capacity, okay? We can say that in the Q2, for example, in June, that was a very intense month. If we had more capacity, we could transport more. That means that we were full.
So we expect to be in the next month with this size, the good size of corn crop that will be at full every single month, okay?
Okay. Okay. And my second question, think about new investments. When do you start to invest in the North South
In the North South, we have a very, very small, I would say, relevant investment in this year. That's basically on studies that we have to do and some consultancies that we have to do this year. And next year, we will start to have the big investment in the North South, okay? The focus in the first years will be to prepare the network to operate, okay? So the required important to say that the required investments to do the network operation will be deployed without any change in the already released guidance of BRL 13,000,000,000 to BRL 15,000,000,000 from 2019 to 2023.
Okay. So if
you think about 2020, it makes sense to assume that your CapEx will go up versus 2019?
100%. It will increase.
Okay. Thank you.
Thank you.
Thank you. That concludes the question and answer session for investors and analysts. Now I would like to turn the floor over to Mr. Ricardo Levy for his final considerations.
I would like to thank all investors and outside that participated in the call and talk to you in the next quarter. Thank you.
That concludes Humu's 1st quarter results conference call. Thank you.