Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's First Quarter 2019 Results Conference Call. Today, we'll start with a message from Mr. Beto Abril, Momo's CEO, And then the conference call 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 remarks, there will be a question and answer session for industry analysts conducted by Mr. Ricardo Levy. At that time, further instructions will be given. The The audio and slideshow of this presentation are available through live webcast@ir.homolog.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 Lumo'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'll turn the conference over to Mr. Beto Abril, reminding that after the REIT's first consideration, Mr. Ricardo Ezzin will conduct the presentation. Mr. Berto Abreu, you may begin the conference.
Good afternoon, everyone. It is with great pleasure today that I take the opportunity to finally share my first consideration of HUMO's future with our stakeholders and shareholders. There have been several remarkable developments for RUMO in the last few months. On our Investment Day in March, we presented to the market our 5 year plan. With relevant investment and impressive levels for churn, this ambitious plan will enable the company to double its result over the course of the next 5 years.
Also this quarter, we won the bidding process for the North South rail, which will expand our power of operation and consolidate our presence in Brazil, Midwest region. We are already working to start operating in Israel while maintaining focus on the results of our current operations. At the same time, the Paulista network renewal process has progressed. The Federal Audit Court, TCU, technical units recognize that renewing the Paulista network could bring benefits to Brazil. We remain confident about this subject and expect to conclude the renewal process soon.
The company's future looks promising. Brazil has a solid agriculture profile and Rumu connects major regions of grain production with major exporting ports. But Rumu is not only about agriculture products transportation. We are effectively reducing the distance between areas of different industrialization levels through our container business. Moreover, we are expanding our fertilizer and coop operations.
Finally, before presenting the Q1 results, I would like to share with you my expectation for 2019. We delivered positive results in the Q1, but we also recognize that the rest of the year will be challenged with the soil bean harvest scenario, but with expectation of a record corn crop. Nevertheless, we are optimizing our operation and increasing volume, transportation with commercial contracts in line with our plans. Having said that, we are confident we will deliver 2019 results. Thank you very much.
Thank you, Beto, for your opening thoughts. Let's start our Q1 2019 results presentation with Slide number 2. First, I would like to illustrate how we reported this quarter's figures using the chart on the slide. As of January 1, we implemented IFRS 16, a lead accounting model that significantly changes the financial information policies. As I said, the company recognizes the right to use assets representing its right to use underlying assets and these liabilities in recognition of its obligation to pay for lease.
In its operational results, the company no longer records leasing expenses by amount incurred and now records amortization expenses of the right to use and financial charges of interest rates over living liabilities. Thus, to ensure that the data is comparable, we report the 2019 pro form a results using the same criteria adopted in 2019. Having said that, let's move to the next slide to discuss our operational results. Our volume performance grew 12.5% this quarter. Although we had operating restrictions in February due to heavy rains that cover landslides at Sao Paulo Rio, the good performance in January and the volumes in March resulted in a double digit growth of transported volume, in line with the plan.
This result was mainly driven by soybean performance that had its crop and harvest anticipated resulting in higher volumes in January, amongst traditionally impacted by off season, Freightliner transported volume in the North operation, pulp volumes, which grew 22.5% and the increase on container transported, evident in a fast growing operation focused on cargo diversification, narrowing the distance between the Southeast and the Midwest regions of the country. Now let's move to the next slide. On the financial side, EBITDA grew 12.7% versus 2018 pro form a result and consolidated margin contracted to 49.1%. In the South and continued operations, both margin and EBITDA posted improvement year over year. However, the North operation lost margin due to lower selling expenses related to higher sugarcreting costs to accommodate higher soybean volumes, the acknowledgment of obligation from take or pay agreements due to nonperformance in our volumes in February, lower tax credits this year compared to 2018.
Now let me show the financial results and net income. Our financial results improved by 14.4% year over year, reflecting the process of lowering cost debt as well as up to the high interest rate drop. Again, we delivered a quarter with net income, reversing the net loss in the same period last year and an effect of EBITDA growth and improved financial results. Let's discuss our investments on the next slide. CUMO's indebtedness came in line at 2.1x broad net debt to EBITDA.
We reassure our commitment to maintaining our capital discipline, always seeking to sustain leverage within acceptable levels for the company. On the next slide, I'd like to share with you the market scenario for the upcoming months. Despite the Atlantic soybean production in line with market expectations, the grain mix export scenario is not favorable in the Q2. A global oversupply and lower demand from China has been pressuring the international prices of soybean, thus with straining exports. However, our trade offs agreements should increase home market share during this period, reducing the impact in this country.
On the other hand, the corn scenario is very positive, an excellent corn crop and anticipated harvest is expected, which should allow higher transported volumes in June. The high inventories of soybean will boost additional corn transportation pressure, which should remain strong during the second half of this year. As already mentioned by Beto, we will have the necessary conditions to the lead 2019 results. On our next slide, I would like to leave you with a message regarding our long term guidance. In March, we held our Investor Day in Sao Paulo, New York, where we presented our 5 year plan.
I have already mentioned this, but I would like to reaffirm here that this plan will bring even more return than investments made at Cinnato. Pueblo is far from exalting its investment possibilities. We are prioritizing the best investment alternatives to create value for our shareholders, always with capital discipline. Finally, going to our last chart. As everyone might know, we won the bidding process for the North South Railway.
We believe expand new operational areas, cultivating CNG among our networks, while consolidating the company in Brazil Midwest region. We already started to deepen our service and to incorporate this project in our strategic plan. This new quarter will be operational as soon as possible after we sign the concession contract, what should happen in this year's second half. Therefore, it's expected that this railway starts to post revenue in the first half of twenty twenty one. We will keep the market informed on any development consolidation.
Here, I finish our presentation. I now
on the webcast platform. Our first question comes from Josh Milberg, Morgan Stanley.
Hi, everyone. Thank you very much for the call. You guys mentioned that you're seeing a pretty tough volume scenario for the Q2. And I was just wondering if you could talk a little more about that and if you're seeing potential for your customers to incur take or pay penalties in the Q2 rather than using their full capacity allocations? And I also wanted to actually, if you could I was also hoping you could comment a little bit more on this opportunity that you mentioned to maybe anticipate some corn volumes in June.
Hi, Josh. Thank you for your question. Basically, we never was expecting the payment of Pick or Pay from our clients, but that they will be able to load the our trains, okay? So we don't work with these expectations, and we expect they to fulfill the contracts that they have. Because they basically have protection for us That's not based on that, we work our expectations.
Regarding the corn harvest, we do expect an anticipation of the harvest. And what can help the transportation of corn be anticipated, basically, besides the anticipation of the own harvest, also the agua houses are, in our opinion, by 2. So it's expected that they start the transportation of Colombia early, okay? Does that answer your question, Josh? Yes.
No, that's not addressed it. And if I might just ask one more related to the type of paid contracts. Can you just remind us how much of your expected volume for the second half of this year is covered by the take or pay contracts? Or if you prefer to frame it maybe in terms of how much of your expected corn volume is covered? Josh, unfortunately, we are not anticipating this number for the market, okay?
This is quite important for us in our negotiation with our clients, and we are not supposed to disclose these numbers, okay?
The next question comes from Bruno Amorim, Goldman Sachs.
Hi, good afternoon, everyone. So I have two questions. The first one is on BR 163. Assuming that the construction works at BR 163 would be concluded, let's say, by the end of the year, by mid next year, I know there are some uncertainties there. But assuming that's the case, to what extent that impacts your operations, should that imply that you will likely have to decrease prices to some extent or not and why?
And the second question, I understand that the second half should be much stronger because of the positive outlook for corn exports. But do you believe it's going to be enough to offset the eventual loss of soybean in the second half? Usually, soybean is exporting the first half of the year mostly. But last year, we saw very strong volumes visavis historical levels of soybean exports possibly on the back of the trade tensions between China and the U. S.
So are you comfortable with the better corn scenario fully offsetting the eventually lower exports of soybean in the second half of the year? Those are my two questions. Let's go to 163 will be ready in 1 year or so, okay? 163 is not only about finishing the anticipated piece of the road, but also about maintenance of the entire road, okay? So in my opinion, meaning of the lease.
But having said, believing in what we said that this may be ready by the, I don't know, the end of the year or so, That's not supposed to affect our operations, neither in volumes nor in prices, okay? This is a different up to now, this is a different area of Okay. And we don't expect to affect in the short term. Talking about the long term, what we view, what the extension to Sofizio. And as we're reading our guidance, we are starting the first step of this expansion.
We are supposed to be much more efficient than trucks. So we are supposed to get huge part of market share in the waste area, okay? So not 1:3 that changes our plans in the future. Regarding the second part of your question, that corn will be enough to that volume of corn to be in place of the losses regarding soybean. As Beto said in his message, we believe that we believe that there will be we foresee a record harvest of corn this year, okay?
Even what we put in our release that the most recent forecast that we have, it has increased 23% of coal production in relation to last year. So we do believe that the reduction of soybean transportation will affect the final result that is in the guidance that we provided to the market due to the quantity, the amount of corn that we have in the starting in the first quarter and finishing in the first half of the year and finishing in the second half. So we are very quite positive with the volumes of corn that we can transport. Answer your question? Bruno, do you have any other doubts?
Yes, sure. No, that's clear. So just a quick follow-up on the first one. So you said that on your numbers, if you calculate the cost of the solution through the north, So assuming that the R163 would be paid, the cost of transportation by road plus the cost of the transportation through waterways, that would be more costly than your cost as you go towards the north of Mato Grosso. Is that correct?
That's correct, okay? Don't take into consideration the truck prices that you see right now. Better truck prices, we have talked a lot with the market about that, are supposed to increase. Remember that the fleet is quite old without maintenance. Once we if we have new ones, even we believe that limo price table will work, truck prices are supposed to go up, okay?
And on the other side, we are, every year, improving our cost and getting much more competitive. So in the sense, we don't believe that they will be competitive compared to us.
Our next question comes from Guillermo Suzuki, Bradesco.
Hi, thank you. I have two questions here. The first one is kind of a follow-up on your take of the contract. I mean, for this year, Brazil or the U. S.
Is kind of protect because this take off a contract. But I don't know if you can comment about the time line. I mean, what can I expect for next year? So what's the structure here given that I mean, the situation in China? And the second one about your long term business plan that you announced back in March, just after you got the North South rail.
So I'd like to know first if you need to prioritize the project, so that's why you didn't change your CapEx plan. And second, it makes sense for us to assume that probably, I mean, despite the concession fee payment, you'll talk about a project that can have a return similar to that related to Manapolita renewal? Regarding the first question about 2020, the pay for pay contract and this scenario, between China and other things. First, remember last year that the take or pay contracts were signed by the end of the year and beginning of next year for the first half of the year, okay? Remember that corn is always signed during the first half.
This year is not basically different. So we are not we haven't started to negotiate with our clients to take or take contracts. And we will have the first indications by the end of the year, okay, maybe Q3. So our expectations are positive, okay? And regarding 2020, many people have been giving questions about that.
But just to be clear, the scenario for soybean for the first half of twenty twenty is quite unclear, okay? It's not difficult to give any precise answer for that as we have several sectors or several issues affecting any forecast. So we can talk about China that we oppose the lack of milk. How much we can increase their poultry and fish farming, how much we have provided by other countries. So we have the swine flu that we don't know what percentage of housing will be exercised.
We have this discussion with the U. S. That is not improving the discussions. So there are many, many factors to give any forecast for 2020, okay? Regarding the long term business plan, you said to your question first question first half of the question was about the creation of projects.
We do we already have when we presented to the market, our guidance, we did have we prioritized our projects, okay, basically in our obligations and the return of the projects that we have. So we've done there. Remember that what's included there is part of Paulista's order. Also the first step of the expansion to terminal, okay? The first terminal in the halfway between Suriniso and Rosolotti, okay?
A part is maintenance of CapEx. So we do have a participation using this project, okay? Arthur, you can say if you need any additional information on that. And regarding North South, we are not still providing if I talk to you about returns on that, I will give you a guidance on that. And as I said in my speech, we are working on included North South in our long term guidance and also in our budget for next year.
So a bit more by the end of the year when we provide additional we provide the guidance and the budget, we will provide additional information on South.
The next question comes from Rogerio Araujo, UBS.
Hi, everyone. Thanks very much for the opportunity. I have a couple of questions. The first one, there has been some local news flow talking about food projects that could arise in Mato Grosso do Sul state and could use RUMO's Maria Norte services. So my question is regarding your expectations for PUP's projects and also PUP volume for upcoming years?
Would be great if you could hear some color on potential volume and new projects that could arise. This is the first question. Thank you. If you're talking about the pulp project that we have been reading in this paper, what I can tell you is that we are continuing to support our clients, okay? So we are very close to the scope for the industry.
You know about the projects that we already have with them. The point here is that we need to any coal product will depend on the location of the plant and also the availability of terminals in the areas that we serve. So having this combination, obviously, we are the best model and the cheaper and more efficient transportation model to do this the transportation of this kind of cargo, okay? Does that answer your question, Javier? Yes.
If you could give a little bit more color on volume, I think you do a little bit more than 1,000,000 ton in North operations currently. I think in MalaWest, almost 1,500,000 ton. So do you have any expectations for maybe 2023, where your long term guidance is? How much you could be doing of pulp volume in the future? Okay.
Regarding the TaltzNet 3, right now, I cannot provide this guidance. I can tell you that we do in the north operation, something around 3,000,000 tons sorry, not only in the north, but north south operations, basically west, yes, okay, part of the south system. And we can do more than that. But we and we do consider that in our long term business plan. However, we are not providing right now the breakdown of volumes, something that you can think about for you in the future, okay?
Okay. Yes, Salvo. So my second question is any update on Marapao Vista concession renewal? So the technical area from the ousted court from TCU already analyzed the renewal. So now it's in the hands of public prosecutor and the administers from TCU.
Do you have any expectations for timing of either Propel, Securitas and administers voting? And also after that, do the the government expect the ANTP to sign the renewal soon? Or do you think the process could take a while? So any expectation for timing on that? Thank you, Rogerio.
I was missing this question. So thank you very much. The virtual line everybody in the call is what basically Margera said recently. We are focused on a very important milestone. The process received the endorsement of the technical body of PCU.
Now the process is in the analysis of the dispute procedure that you will be Marcelo. And after that, going to the minutes of the new charge of the case, that we present its recommendations to the other minister who then vote for this case, okay? And Roger, now answering your question, you know how if you work, of course, there is no deadline for this process. What we know is that the profit is evolving very well. It's very much through the process, as I always say.
We went through all the phases of the process. And we do expect to be accomplished the renewal version. Unfortunately, I don't have specific date to be clear. Okay. Perfect.
Thanks so much. Have a good day. Thank you, Jose, Mario.
The next question comes from Alexandre Falcao with HSBC.
Thank you for the question and good afternoon. Just on the perspective, you said that it's going to be a tough year or it's going to be a tougher year for soybeans. In your projections, do you already see an impact from the sectors flying here that's impacting your numbers? Did you run any specificities? Are you supposed to share on what could be the impact?
And if that's on basically diverting soybeans from exports to local markets to produce pork and poultry? Thank you. Falko, thank you very much. Let me start with what's happening this year. The soybean production is in line with the market expectations.
And again, spot scenario is not as favorable as in the second quarter, okay? So we had an open supply of soybean in the market that was caused by several different factors as all time high inventories in the U. S, unexpected all time high harvest for soybean in the U. S. And the recovery in Argentina production, which you remember had a severe drop last year.
On the other hand, on demand side, we had a weaker demand on China, and this is the reason we said the slowing flu, which coupled with the oversupply with those kind of special international market for soybeans, okay? With the take or take contracts that the agreements that we have, it's expected that we have a visibility of gaining market share during the Q2, reducing the impact of all these factors for the company. We've answered that a little bit in another question that I had. Like, we have a very good scenario for corn. So the corn is anticipating its harvest.
It's expected to be a record harvest that will allow us to transport more volumes in the end of this half of the year through the second half, okay? So the soybean part of the cost is the demand based on swine flu. And as I said, in 2020, it's very unclear what will happen with the soybean, okay? Important thing to say that somehow and we gave some examples of what can happen, but from how the market will have to adjust and to this new scenario for current scenario. And one thing that's very important and people talk about this is that 40% of the women's volume is not grains, okay?
And in the other 50% that represent grains, we are talking about 50% being soybean and 50% being corn. And remember that quarter is not exported to China, okay? So this must be taken into consideration whether you make the and as a result effect outside the flu in soybean exports to China, okay? Okay. Thanks for that.
And just a follow-up on Arce Sul. Realistically, when can we expect anything on in terms of volumes coming from that? And what is necessary for to integrate that? Just trying to understand and closing, I'm aware when should we see any sort of volumes coming from that beer bridge? Thank you.
Francois, basically, what In our slide, this is just to have an idea. We are supposed to have the concept signatory in the beginning of the second half of the year, so 2019. Then we will start to do our investments in the North South for the next year and a half, 2 years. And in the second half for 2021 is when we are expected to have the first volumes or significant volumes transported in this quarter. Perfect.
Thank you. Thank you.
The next question comes from Jose de Huarauge, UBS.
Hi, guys. Thanks for taking my other question. It's a follow-up on the contracts actually. So just to confirm if I heard it well, I think you mentioned that you signed soybean and corn contracts separated. Is that right?
So if it is, how is the corn contracts going into this? So are you negotiating the current contracts at this moment? How are they? And when do you expect to start the negotiation of soybean? Thank you.
Jose, remember that Brazil has 2 very clear and different harvests for the first half of the year. This first quarter, you have the soybean harvest. So you usually sign contract with your client in October, November, December, okay, to this first half of the year. Then you start to have an idea how the corn crop will be in the next year that usually happens in the second half. And we start to sign contracts in February, March, okay?
So there are 2 different times for filing this contract. Okay. So can you give any color on how these negotiations went on February March? As I said, I think to Josh, Rogerio, this is a very important information and is very easy for the negotiation with our clients. So we don't disclose this kind of information, okay?
Okay. I understand. Thank you so much. Thank you,
The next question comes from Josh Milberg, Morgan Stanley.
Thank you guys very much for the follow-up. You guys addressed pretty well the factors behind your yield performance in the Q1. But looking forward, I was just hoping you could give us a little bit of a sense of what we might see in the second quarter and in the second half of the year yield wise. You guys did have a bit of an improvement in the Q1 relative to what we saw in the Q4. And we understood that some of the factors there, you highlighted the mix factor.
In the Northern operation, it was still somewhat on the weak side. So again, I was just hoping you could maybe address what you're seeing for the Q2 and beyond. Yes. Josh, let me start saying that I always say to the sell side and our investors that it's not a company based use, but a company based on margins. So you know our business case is based on being more competitive, reducing our variable costs, diluting our fixed costs, what make us every time more competitive, get more volume and having this virtuous cycle that we are seeing in the last 3 years in the company.
So I think that I think that's very important. This is the company's more margins than yield. Having said that, I think that just to understand, remember that we are the pricing system change is more is different through the year. So when you have and this both takes the other day, the main question, I would like to be clear here. In the first part that we have a soybean, a more strong soybean transportation, There is higher prices in the second half, in the Q1 of the year.
And you have prices that are changing during the quarters depending on basically the size or the volumes that are transported. This is I'm not saying that it's connected to, this is not contracted. That means it's not in our contract, but this is how the market prices the transportation. So the different quarters have different prices. And you see this in the variations of asset profile.
Additionally to that, there are changes in the yield depending on the mix of volumes that yield support. So when you have more fertilizers, you have more pulp, These products have lower yield, and this can affect the total yield. So there are different factors that can affect the yield, and this is important to note. Regarding the second quarter, the second half of the year that you asked, so basically what I said, you can see a flat yield for the next the Q1 of the year, and the Q4 may be a bit lower price as it stands of the corn crop, If there is any change on these scenarios, do you provide additional information in the release results of the respective quarter.
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 Levin for his final consideration.
Well, once more, I would like to thank you for the participation of our investors and outside. And thank you very much. Hope to talk to you in the next quarter. Thank you.