Earnings Call: Q2 2019

Aug 13, 2019

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's first quarter 2019 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. At that time, further instructions will be given. Should any participants 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 ir.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 Private Securities Litigation Reform Act of 1995. 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 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 expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Ricardo Lewin. Mr. Lewin, 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 midcaps categories. Another important milestone was Rumo being included on FTSE4Good Index Series for companies with strong ESG practices measured by global recognized standards. Before starting the presentation, it's important to highlight that 2018 results presented in our earnings release refer to the pro forma figures, reflecting the impact of IFRS 16 to guarantee a fair comparison. On page two of the release, the impact on each line item of our income statement is summarized. Let's begin our presentation on slide two. 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's soybean import demand due to African swine fever. This scenario led to a decrease in international soybean prices, and producers preferred to stock unsold volumes instead of closing new sales at market price. As a result, for the second quarter, Brazilian exports were hampered, and Rumo soybean volumes were essentially limited to those previously contracted. The current scenario should be the opposite. Forecasts point 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 Northern Operations in June. On the next slide, let's see the transported volumes. Volumes grew 7.1% in the second quarter of 2019. As mentioned in the previous slide, most of this growth happened in June, mainly on the back of corn inflows in the Northern Operations. Segment highlights include more than 3x fertilizer volume transported in the Northern Operations. Coke volume grew by 28.6% due to the annualization of last year's second half volumes. Container 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. Rumo'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 Northern Operations that grew 14% on volumes this quarter. Tariffs dropped almost 4%, impacted by Northern Operations, 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 contractor levels. Finally, fertilizer volumes, which have a lower tariff when compared to grains. Regarding costs, variable costs have positively contributed to the result as it grew less than volumes. Fixed costs rose 6.6% due to higher maintenance expenses in April and May when capacity was idle, and the end of payroll exemption at Malha Oeste and Malha Sul. Even with a lower margin due to lower yields, Northern Operations reported EBITDA growth. Southern Operations reduced its EBITDA and margin due to weaker soybean volumes. Container operation stood at the same level as the previous year, as the second quarter of 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 second quarter of 2018, 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. Rumo's indebtedness decreased to 2 times net debt EBITDA compared to 2.1 times in the first quarter of 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 31st, we signed the 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 Rumo access to various potential markets. In addition to grains, we have great opportunities to transport fertilizers, pulp, biofuels, by-products, and containers. We have already started to reach out to clients, and we'll pursue commercial agreements for the volumes as soon as the railway is ready. In the grain segment, we will enter two new markets, the state of Goiás and Tocantins. In the case of other cargos, 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 two states exported approximately 13 million tons, which could reach up to 25 million tons in the next 10 years. This is a promising market for grains and other cargos that currently have no access to an efficient railway. As our slogan says, "We are Brazil in motion." We will do for Goiás and Tocantins 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 BRL 13 billion-BRL 15 billion. We reinforce that we will remain committed with capital discipline and the constant seeking for efficiency. I conclude my presentation emphasizing our commitment to the company's business plan, increase capacity, and improve 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 backhauling capacity while reducing greenhouse gas emissions through energy efficiency and market share gains. All this 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&A session. Thank you. We will now begin the question and answer sessions for investors and analysts. If you have a question, please press star one on your telephone. 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 the conference flow. Or if you prefer to send your question over the internet, click on the Ask the Speaker button on the webcast platform. Our first question comes from Mr. Thiago Casemiro, Credit Suisse. Good afternoon, everyone. Thank you for the question. My question is regarding the inventories of grains, stock passaging. We see that due to prices, a great part of the soy crop was not exported yet. How do you compare the current inventories of soy with last year? Any chances we could see part of this volume being transported by Rumo 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 from December to January, due to the high prices. This year is a bit difficult to foresee what will happen. 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. What we are seeing right now is a complete different scenario for the second half of the year due to several reasons. Among them, what's happening in the U.S. USDA announced recently the crop disruption in the U.S., so the soybean production will drop from 124 million tons to 100 million tons. As a consequence of that, we already see prices starting to improve. 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? 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. 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 third quarter volume outlook. We know that grain exports were strong in July, just wanted to see if you could talk a little bit about the outlook for the remaining months of the third quarter. Also just wanted to understand if we need fear at all that with the anticipation of corn volumes in June and what looks like is 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. As you saw the volumes on our website, we had anticipated an all-time high corn crop. This year's crop is expected to be 102 million tons of production. All-time high. As you said, this already brought a strong growth in June. For example, the Northern Operations delivered already 27% growth as we published the volumes. Also, high inventories of soybean, coupled with a good trading due to the international price for corn. This, as I said, the crop disruption in the U.S., I said before about the soybean, that will happen also with the corn. There is a drop from 366 million tons in 2018 to 353 million tons in 2019. In our opinion, for this third quarter, we'll have a very huge additional corn transportation pressure. That will bring us strong volumes throughout all the second half of the year. Okay, Luis, that's good color. I presume that those strong volumes will translate into a better yield performance in the third quarter as well. Actually, if you wouldn't mind just touching on the yield outlook as well, that would be good. I have a second question. Well, let me give you some idea what happened in the Northern Operations. It's well explained. It's good to reinforce here. The yield was lower than expected, that happened because non-recurring issues that affected the tariff. The first one is the seasonality among the months in the quarter, 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. In the second quarter 2019, also, we had a significant amount of corn being transported. Remember that the corn yield is lower than the soy yield. That helped also to bring yields down. We have the RTK volumes went up something around 27% in June, that was higher than clients expected, therefore they started to pursue spot volumes on top of the commercial agreement in a moment where the spot prices were very low. Okay. Finally, something that is happening recurrently, that's the volumes of fertilizers that are growing fast as expected. This is good news for us. Although it bring up the margins, the use start to be reduced. While the backhaul freight is something around 40% lower than the average. That was what happened in this quarter. 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. Regarding the spot logistics, we'll have a certain position to spot prices in the second half, and there are expectations of high volumes. However, we already see better yield in July and August due to the improvement of spot prices. They are getting better in the market. We cannot guarantee that these higher spot prices will remain until the end of the year. Regarding fertilizer, it will continue to grow at yields that are lower than the rest of our products. Regarding next year, it's still difficult to determine that, 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 Rogério Araujo, UBS. Hi, guys. Thanks for the opportunity. I have a couple of questions. First, a follow-up on Josh questions on the tariffs. Is there a way that you can provide an estimate of how tariff variation would look like in our operations if we exclude the non-recurring items, which is the corn mix and the lower volumes in April and May, and also the lower spot prices in June? In other words, if you get our contracts on average, excluding those impacts, how much did the yields vary in this period? Rogério, a very brief answer. Although not considering these non-recurring issues, there's no reason for it to be different from last year, unless the volumes of fertilizers that are going up. There is no reason for being different. Okay. Adjusting for those impacts, was it above inflation, and even fertilizers, or you are not passing through inflation in your contracts this year? Yeah, no. They do have inflation in our contracts, so that there is the influence of inflation and of the yield. 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. Yeah, it's a good call-out. My second question is on Sorriso extension. Is there any recent development in this project? 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. If you could provide the recent developments on that project, would be great. Thank you. Okay. Regarding the extension, Rogerio, remember that we split the project in different phases, in different stages. The first stage will be the road terminal. Sorry, the truck terminal in somewhere in between Rondonópolis and Sorriso. This project, we are already deploying some CapEx for studies. We are also looking for the best place to buy land to do this terminal. Regarding the Sorriso project, actually, to do the first phase of the project, we need to know where the railway will go through. We are deploying also some CapEx to make the analysis of the network. 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, the truck terminal. 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 stage 1, it's not necessary to have ANTT approval, okay? Because this is a port terminal. Regarding the stage 2, that's the expansion to service the railway. We are waiting for the approval of Paulista renewal to restart the process. Okay, thank you. If I may, you mentioned about Malha Paulista. Any news on, or expectations for timing on the conclusion of that? Thank you, that's it. Yeah. Regarding timing, Rogerio, unfortunately, this is impossible to guess how much time it will take to the renewal. The last news that we have is the recommendation of TCU Prosecutor Júlio Marcelo for the non-renewal of Malha Paulista that got public in the beginning of July. 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 TCU Minister Augusto Nardes. That's the reporter of the process. He will present his recommendation and will submit to TCU Plenary. Also it's not bad news for us that the recommendation for non-renewal from Júlio Marcelo, because there are some previous cases in which the reporter of the process did not agree with the public TCU Prosecutor. A very good example is that Júlio Marcelo was against the North-South Railway, and the Minister of TCU didn't agree. We know what are the next steps. Unfortunately, the TCU Minister in charge of the case has no deadline for approving it. In our opinion, the process is very mature. The TCU Minister in charge of the case is familiar with the process because he has been following it since the beginning, many years ago. In our opinion, the decision is not supposed to take that long. Okay, great. Thanks so much. Have a good day, everyone. Thank you, Rogério. Next question comes from Stephen, Trent City. 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 loco, versus 80 on some of your network. 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? Hi, Stephen. Good question. You know that this is a very strategic project for us. We are investing since the merge between Rumo and ALL in the improvement of the capacity. Everything we have done up to now is to support the 120 rail cars train. That means we will have a longer train, much more efficient, and with increased capacity. This is not a project that will change due to very punctual changes in crops, as happened in this year for soybeans. This is a very strategic project that is foreseen to be running between 2021, 2022. We had no changes in the plan. We keep doing our yards, the crossing yards that will allow to have the 120 trains crossing. We are very disciplined in this investment that's very important for the company. As I said, the soybean crop reduction of creating this year doesn't mean that we will have this for next year. We continue to see a very huge potential for soybeans 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. Just one very quick question aside from that. Kind of a follow-up on Josh Milberg's question. When you look at the 2Q freight tariffs, how much of that, the delta, was related to lower sugar volumes? Yeah. Just coming back to your previous question, Stephen. Sorry. I was so excited to answer that I forgot to finish it. No problem. The increasing capacity is something around 70% that we foresee in the Northern Operations once we have the 120-car train. Regarding sugar, the trade of sugar has been very bad this year and last year, but that doesn't affect us at all because actually we are using our capacity to transport much more profitable cargo. That's soybean and corn. The reduction of trading has not affected us at all. Okay. Very helpful. That's it for me, and thanks very much, Ricardo. Next question comes from Victor Mizusaki, Bradesco BBI. Hi. Thank you. I have two questions. The first one is a follow-up on Stephen's question. When you mention about capacity and given all these positive outlook for grain volumes in the second half, can you comment a bit about your capitalization in the second half, especially in Q3? If we compare Q3 with the second quarter, if you think about volume in the second quarter, the volume was concentrated in the Northern Operations. If we can expect that maybe in Q3, this volume growth will be spread or split between the Northern Operations and the Southern Operations. Hi, Victor. Good to have you in the call. Let's start with the last one. The answer is yes. The volumes in the south were worse in the second quarter because we didn't have anticipation of corn. Okay. We will have the entrance 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 third quarter. We will be very close to the full capacity. Okay. We can say that in the second quarter, 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. We expect to be in the next months with this size, the good size of corn crop, that will be at full every single month. Okay. Okay. My second question, think about new investments. When do we start to invest in the North-South Railway? In the North-South, we have a very small, I would say relevant investment in this year. That's basically only studies that we have to do and some consultancies that we have to do this year. 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? The required important data, the required investments to do the network operate, will be deployed without any change in the already released guidance of BRL 13 billion-BRL 15 billion from 2019 to 2023. Okay. 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. Once again, to ask a question, please press star one. To ask a question, please press star one. Thank you. That concludes the question and answer session for investors and analysts. Now I'd like to turn the floor over to Mr. Ricardo Lewin for his final considerations. I'd like to thank all investors and so excited to participate in the call, and talk to you in the next quarter. Thank you. That concludes Rumo's first quarter results conference call. Thank you.