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 Abreu, Rumo's CEO, and then the conference call 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 presentation. After Rumo's remarks, there will be a question and answer session for industry analysts conducted by Mr. Ricardo Lewin. 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 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 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 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 Abreu, reminding that after his first consideration, Mr. Ricardo Lewin will conduct the presentation. Mr. Beto 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 Rumo'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 five-year plan. With relevant investment and impressive levels of return, this ambitious plan will enable the company to double its results over the course of the next five years. Also this quarter, we won the bidding process for the North-South Rail, which will expand our hour of operation and consolidate our presence in Brazil Middle West region. We are already working to start operating this rail while maintaining focus on the results of our current operations. At the same time, the Malha Paulista renewal process has progressed.
The Federal Audit Court, TCU, technical units recognized that renewing the Malha Paulista would 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 Rumo connects major regions of grain production with major exporting ports. Rumo 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 pulp operations. Finally, before presenting the first quarter results, I would like to share with you my expectation for 2019. We delivered positive results in the first quarter, we also recognize that the rest of the year will be challenged with the soybean harvest scenario, 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.
Thanks, Beto, for your opening thoughts. Let's start our first quarter 2019 results presentation with slide number two. First, I would like to illustrate how we reported this quarter's figures using the chart on this slide. As of January 1st, we implemented IFRS 16, a new accounting model that significantly changes the financial information policies. As you see, 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 rights to use and financial charges of interest rates over leasing liabilities. Thus, to ensure that the data is comparable, we report the 2018 pro forma 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 rain that caused landslides at São João Hill. 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, a month traditionally impacted by off-season. Slightly larger transported volume in the north operation. Bulk volumes, which grew 22.5%, and increase on container transported, evidencing a fast-growing operation focused on cargo diversification, narrowing the distance between the southeast and the Midwest regions of the country. Let's move to the next slide.
On the financial side, EBITDA grew 12.7% versus 2018 pro forma result, and consolidated margin contracted to 49.1%. In the site and container operations, both margin and EBITDA posted improvements year-over-year. However, the north operation lost margin due to no recurring expenses related to higher sugar crushing costs to accommodate higher soybean volumes. There are no allotment of obligation from take-or-pay agreements due to low performance of volumes in February. Lower tax credits this year compared to 2018. Let's discuss the financial results and net income. Our financial results improved by 14.4% year-over-year, reflecting the process of lowering cost debts, as well as a CDI interest rate drop. 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 indebtedness on the next slide.
Rumo's indebtedness came in line at 2.1 times gross net debt EBITDA. We reassure our commitment to maintain our capital discipline, always seeking to sustain leverage within acceptable levels for the company. On the next slide, I would like to share with you the market scenario for the upcoming months. With type of the next soybean production in line with market expectations, the grain export scenario is not favorable in the second quarter. A global oversupply and low demand from China have been pressuring international prices of soybean, thus restraining exports. However, our take-or-pay agreements should increase Rumo's market share during this period, reducing the impact in this conjuncture. 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 deliver 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 São Paulo and New York, where we presented our five-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 up to now. Rumo is far from exhausting 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.
This move expands Rumo operational area, cultivating synergy among our networks while consolidating the company in Brazil Midwest region. We already started to deepen our studies and to incorporate this project in our strategic plan. This new corridor 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 2021. We will keep the market informed on any development concerning this issue. Here, I finish our presentation. I'm now at your disposal for the Q&A session. Thank you.
Thank you. We'll now begin the question and answer session for investors and analysts. If you have a question, please press star one on your telephone. If you prefer to send your question over the internet, click on the Ask the Speaker button on the webcast platform. If your question is answered during the session, you may remove it from the line by pressing star two. The questions will be answered in the order they are received. We ask you to use the handset when asking the question in order to maintain excellent sound quality. Please stand by while we collect the questions. 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 second quarter. 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 second quarter, rather than using their full capacity allocations. Actually, if you could, I was also hoping you would 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 were expecting the payment of take-or-pay from our clients, but that they will be able to load our trains. Okay. We don't work with these expectations, and we expect them to fulfill with the contracts that they have. Basically, a 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. What can help the transportation of corn be anticipated? Basically, besides anticipation of the whole harvest, also that the warehouses are, in our opinion, quite full. It's expected that they start the transportation of corn up early. Okay. Did that answer your question, Josh?
Yeah, no, that addressed it. If I might just ask one more related to the take-or-pay 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? If you prefer to frame it maybe in terms of how much of your expected corn volume is covered.
Josh, unfortunately, we are not giving this, 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.
Okay, fair enough. Thanks for the responses.
Thank you, Josh.
The next question comes from Bruno Amorim, Goldman Sachs.
Hi, good afternoon, everyone. 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? The second question, I understand that the second half should be much stronger because of the positive outlook for corn exports. Do you believe it's going to be enough to offset the eventual loss of soybean in the second half?
Usually, soybeans export in the first half of the year mostly, but last year we saw very strong volumes, vis-à-vis historical levels of soybean exports, possibly on the back of the trade tensions between China and the U.S. 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. Thank you.
Hi, Bruno. Thank you very much for your questions. Let's go to 163 first. I think we are being quite optimistic on having this, on foreseeing that 163 will be ready in one year or so. Okay. 163 is not only about finishing the unpaved piece of the road, but also about maintenance of the entire road. Okay. In our opinion, we are being optimistic. Having said, believing what you 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 area of influence. Okay. We don't expect to affect in the short-term. Talking about the long-term, what we built, the extension to Sorriso. As we give you our guidance, we are starting the first step of this expansion.
We are supposed to be much more efficient than trucks. We are supposed to get huge part of market share in this great area. Okay. I want you to read that changes our plans for the future. Regarding the second part of your question, that if corn will be enough that there will be enough volume of corn to be in place of the losses regarding soybean. As Beto said in his message, 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 will increase 33% of corn production in relation to last year.
We do believe that the reduction of soybean transportation will affect the final result, or the guidance that we provided to the market, to the quantity, the amount of corn that we will have, starting in the first part and finishing in the first half of the year and finishing in the second half. We are very quite positive with the volume of corn that we can transport. Does that answer your question, Bruno? Do you have any further doubts?
Yeah, sure. No, that's clear. Just a quick follow-up on the first one. You said that on your numbers, if you calculate the cost of the solution through the north, assuming that the BR-163 would be paved, 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. The other 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, if we have new ones, even we believe that the minimal price table will work, truck prices are supposed to go up. Okay? On the other side, we are, every year, improving our cost and getting much more competitive. With that, we don't believe that they will be competitive compared to us.
Very clear. Thank you very much.
Thank you, Bruno.
Our next question comes from Victor Mizusaki, Bradesco.
Hi. Thank you. I have two questions here. The first one is kind of a follow-up on your take-or-pay contract. For this year, results or the guidance is kind of protected because of this take-or-pay contract. I don't know if you can comment about the timeline. What can expect for next year? What starts here, given the tough situation in China. The second one, about your long-term business plan that you announced back in March, just after you got the North-South rail. I'd like to know, first, if you need to prioritize the project, so that's why you didn't change your CapEx plan. Second, if you make sense for us to assume that probably, despite the concession prepayment, you'll talk about a project that can have a return similar to that related to [monopoly surrender].
Hi, Victor. Thank you for your question. Regarding the first question about 2020, the take-or-pay contract and the scenario, the two, 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 supposed to be different. We haven't started to negotiate with our clients take-or-pay contracts, and we will have the first indications by the end of the year. Okay? Maybe third quarter. Up to now, our expectations are positive. Okay? Regarding 2020, many people have been bringing questions about that. Just to be clear, the scenario for soybean for the first half of 2020 is quite unclear. Okay?
It's difficult to give any precise answer for that, as we have several factors or several issues affecting any forecast. We can talk about China, that we are close to the lack of meat, how much we can increase their poultry and fish farming, how much we will have to provide by other countries. We have the African swine fever, that we don't know what percentage of hogs will be sacrificed. We have this discussion with the U.S. that is not improving, the discussions. There are many factors to give any forecast for 2020, okay? Regarding the long-term business plan, you said your previous question, first question, first half of the question was about prioritization of projects. We already had, when we presented to the market our guidance, we prioritized our projects, okay? Basically, based in our obligations and the return of the projects that we have.
This is done there. Remember that what's included there is part of Paulista Corridor, also the first step of extension to [Principio Jesus]. That the road terminal. The first terminal is halfway between São Luís and Rondonópolis. A part is maintenance of CapEx. We do have a prioritization using this project. After, I can say if you need any additional information on that. 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. As I said in my speech, we are working on including North-South in our long-term guidance, and also in our budget for next year. A bit more by the end of the year when we provide the guidance and the budget, we will provide additional information on North-South.
Okay. Thank you.
Thank you.
The next question comes from Rogério Araujo, UBS.
Yeah. 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 pulp projects that could arise in Mato Grosso do Sul state, and could use Rumo's Malha Norte services. My question is regarding your expectations for pulp's projects and also pulp 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.
Rogério, 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 continuously talking to our clients, okay? We are very close to the scope for doing this with Vale. You know about the projects that we already have with them. Any pulp project will depend on the location of the plant and also the availability of terminals in the areas that we serve. 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, Rogério?
Yeah. If you could give a little bit more color on volume. I think you do a little bit more than 1 million tons in North operations currently. I think in Malha Oeste, almost 1.5 million tons. 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 2023, right now I cannot provide these volumes. I can tell you that we do, in our operation, something around 3 million tons. Sorry, not only in the north, but north and south operations, basically west, yeah. Okay, part of the south system. We can do more than that. We do consider that in our long-term business plan. However, we are not providing right now the breakdown of volumes. Something that we can think about for you in the future, okay?
Okay. Yeah. Sounds good. My second question is, any update on Malha Paulista concession renewal? The technical area from the Federal Audit Court, from TCU, already analyzed the renewal, now it's in the hands of public prosecutor and ministers from TCU. Do you have any expectations for timing of either public prosecutor and minister's voting? Also after that, does the company expect ANTT to sign the renewal soon, or do you think the process could take a while? Any expectation for timing on that? Thank you.
Thank you, Rogério. I was missing this question. Thank you very much. Just to align everybody in the call, it's what basically Rogério said. Recently, we accomplished a very important milestone as the process received the endorsement of the technical body of TCU. Now the process is in the hands of the TCU prosecutor, that's Júlio Marcelo de Oliveira . After that, it's going to the minister of TCU in charge of the case, that will present its recommendations to the other minister, who will then vote for this case. Okay? Rogério, now answering your question. You know how TCU works. Of course, there is no deadline for this process. What we know is that this process is evolving very well. It's very much through the process, as I always say.
We went through all the phases of the process. We do expect to be accomplished the review very soon. Unfortunately, I don't have a specific date to give to you.
Okay, perfect. Thanks so much. Have a good day.
Thank you, Rogério.
The next question comes from Alexandre Falcão 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 African swine fever impacting your numbers? Can you run any sensitivities, so basically share on what could be the impact and if that on basically diverting soybeans from exports to local markets to produce pork and poultry? Thank you.
Falcão, thank you very much. Let me start with what's happening this year. The soybean production is in line with the market expectations, and the export scenario is not as favorable as in the second quarter. Okay? We had an oversupply of soybeans in the market that was caused by several different factors, as all-time high temperatures in the U.S., unexpected all-time high harvest for soybeans in the U.S., and the recovery in Argentina production, which you remember had a severe drought last year. On the other hand, on demand side, we had a weaker demand on China, and this is the reason you said, the African swine fever, which coupled with the oversupply especially the international market for soybeans. Okay?
With the takeaway conflict, the agreement that we have, it's expected that we have a good probability of gaining market share during the second quarter, reducing the impact of all these factors for the company. With the answer that I gave in another question that I had, we have a very good scenario for corn. The quality anticipation is harvest. It's expected to be a record harvest that will allow us to transport more volume in the end of this half of the year through the second half. Okay. The soybean part of 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 what can happen, but somehow the market will have to adjust to this new scenario, for current scenario.
One thing that's very important, and few people talk about this, is that 40% of the volume is not grains. Okay. In the other 60% that represent grains, we are talking about 50% being soybean and 50% being corn. Remember that corn is not exported to China. Okay. This must be taken into consideration when we make the analysis of effect of swine flu in soybean exports to China. Okay.
Okay, thanks for that. Just to follow up on North-South, realistically, when can we expect anything in terms of volumes coming from that? What is necessary for to integrate that? Just trying to understand it and closing. When should we see any sort of volumes coming in from that acquisition? Thank you.
Basically, what we said in our event is live. Just to have an idea, we are supposed to have the contract signed through the beginning of the second half of the year, so 2019. We will start to do our investments in the North-South Railway for the next year and a half, two years. In the second half of 2021 is when we are expected to have the first volumes or significant volumes transported in this corridor.
Perfect. Thank you.
Thank you.
The next question comes from Rogério Araujo, UBS.
Hi, guys. Thanks for taking my other question. It's a follow-up on the contracts, actually. Just to confirm if I heard it well, I think you mentioned that you signed soybean and corn contracts separated. Is that right? If it is, how is the corn contracts going into this? Are you negotiating the corn contracts at this moment? How are they, and when do you expect to start the negotiation of soybean? Thank you.
Rogério, remember that we have two very clear and different harvests for the first half of the year. The first quarter, you have the soybean harvest. You usually sign contracts with your client, October, November, December, okay, to this first half of the year. You start to have an idea how the corn crop will be in the next year. That usually happens in the second half, and you start to sign contracts in February, March, okay? There are two different times for signing these contracts.
Okay. Can you give any color on how these negotiations went on February and March?
As I said, I think to Josh, Rogério, this is a very important information and is key for the negotiation with our client. We don't disclose this kind of information, okay?
Okay. I understand. Thanks so much.
Thank you, Rogério.
Once again, if you want to pose a question, please press star one. 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 first quarter. 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 first quarter relative to what we saw in the fourth quarter. 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. Again, I was just hoping you could maybe address what you're seeing for the second quarter and beyond.
Josh, let me start saying that I always say to the sell side and our investors that this is not a company based in yield, but a company based on margins. If 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, getting more volume, and having this virtuous cycle that we are seeing in the last three years in the company. I think that is very important. The company is more about margins than yield. Having said that, I think that those who understand, remember that. The pricing system changes. It's different through the year. Please don't take that lightly question. I try to be clear here.
In the first part that we have a more strong soybean transportation, there is a higher prices in the second quarter. In the first quarter of the year, you have prices that are changed during the quarters, depending on basically the size or the volumes that are transported. I'm not saying that this is connected to, this is not contracted. That means it's not in our contract, this is how the market prices the transportation. Different partners have different prices, you see this in the variations of what we provide. Additionally to that, there are changes in the yield, depending on the mix of volumes that you transport. When you have more fertilizers, you have more pulp. These products have a lower yield can affect the total yield.
There are different factors that can affect the yield, this is important yield to know. Regarding the second quarter, the second half of the year that you asked. It's basically what I said, you can see a flat yield for the first quarter of the year, the fourth quarter may be a bit lower price as it stands of the corn crop. Okay. If there is any change on these scenarios, we will provide additional information in the releases of the respective quarter.
Okay, that's great. Thank you for the responses.
Thank you, Josh.
Thank you. That concludes the question and answer session for investors and analysts. I'd like to turn the floor over to Mr. Ricardo Lewin for his final considerations.
Well, once more, I would like to thank the key participation of our investors and associates. Thank you very much. Hope to talk to you in the next quarter. Thank you