Good evening, ladies and gentlemen. At this time, we would like to welcome everyone to Romeo's Extraordinary Conference Call regarding the results of Norte Su Railway Auction, which took place today, March 28, 2019. The conference call will be conducted by Mr. Ricardo Levin, Chief Financial and Investor Relations Officer. We would like to inform you that this event is live.
After Ruma's remarks, there will be a question and answer session for investors and industry analysts. At that time, further instructions will be given. 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 Grumo'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. You may please begin your conference call.
Good evening, everyone. The results of the North South Railway auction was disclosed today, and the winning economic proposal was Lumos 1. The final result, which includes the complete analysis of all documentation, is expected to be announced officially on April 16, 2019. The Norte Sur railway is approximately 1600 kilometers long and connects the city of Porto Nacional in the Brazilian state of Tocanjes to Espira Loesti in the state of Sao Paulo, where it will connect to Paulista network after Nautilus construction is complete. The concession period is 30 years, and the minimum grant proposed in the auction notice was BRL 1,350,000,000.
Our proposal was BRL 2,72,000,000, representing a goodwill of roughly 101% in relation to the minimum proposal. 5% of the total amount will be paid within 45 days after the winner of the auction is officially announced. And the balance will be paid in 120 quarterly installments calculated in accordance with the sub concession agreement. Our proposal was based on the following 5 assumptions. 1st assumption, mapping out cargo volumes in the Nordechel Sul influence area, which currently serviced by other logistics solutions.
This includes capturing the demand for grains, especially in the state of Boyas, Minas Gerais and Mato Grosso backhauling fertilizers, transporting oil derived fuels from the state of Sao Paulo to the state of Boyas and Tocantins and backhauling biofuels and finally, transporting overall cargo, specialty container in both direction of the network. 2nd assumption, operating synergies between the railway and Rumos network since both have wide gauge operations. 3rd assumption, dilution of ruminous fixed cost since it's possible to incorporate this operation without significantly expanding the company's current structure. Fourth assumption, access to different funding sources at competitive costs, increasing the return to shareholders. And finally, 5th assumption, trackers rights revenues.
As such, we understand that the amount we offered in the bid is consistent with the amount perceived by the company. Once rumor is officially identified as the winning bidder and enters into the sub concession agreement, we will release more information to the market about our business plan. Lastly, I would like to reinforce that Jumu continues to pursue leverage of approximately 2 times the net debt to EBITDA ratio even after this strategic move. This concludes my presentation, and I'm now available to answer your questions. Thank you.
Thank you. We will now begin the question and answer session for investors and analysts. Our first question comes from Josh Milberg from Morgan Stanley. You may proceed.
Hey, everyone. Thank you for the call and congratulations on the auction win. You mentioned that you're going to be providing more information on your business plan in the future. So I don't know if you're you'd be addressing this level of detail at this juncture. But my first question was just, if you could comment on how much CapEx you see relative to the $2,700,000,000 number in the AMTT documents?
And if you could just kind of provide some color on what would account for any difference? And maybe also give an idea of what the distribution of your expected CapEx would be?
Hi, Josh. Thank you for the question. And unfortunately, we'll be not providing in this call any financial forecast, even our guidance, mainly because we still need to wait until RUMO is officially appointed as the winner of the auction. That was supposed to happen in April 16, as I told before in the call. After this date, we'll be informing the market in more details and in the right timing, okay?
Okay. No, no, fair enough. And maybe this is another one you're not going to be able to address. But one thing that was notable in the bidding documents of the concession was just that the government's indication that it isn't able to conclude the final stretch that the concessionaire is responsible for finalizing the construction and wouldn't be entitled to any contract rebalancing. Is that something that you could comment on at this stage?
At this point, this is also you know this is true that the last let's say, the last 40 or 50 kilometers is not connected, is still connected between the two networks. But this is something that we still need to see and talk to the market once we have the contract signed. I'll go ahead. Okay. There's one important thing, okay, George, that I think that's important to market to understand.
Actually, this last I hope you're here last mile, okay, but this 40 kilometers, this is not something that's the bulk of CapEx, okay? This is a very low CapEx dilution connection.
Okay. Fair enough. And Lourdes,
I mean, maybe one thing you could talk about, I think that there were some headlines with reference to your expectations in terms of how long it would take you to have the concession up and running and carry out the necessary investment? Is that something that you could comment a little bit on? Maybe not?
Yes. No, Josh, I think this is okay. The initial expectation something between 2, 3 years, okay? From 2 to 3 years to be operational.
Okay. Thank you very much for that, Lon.
Thank you, Louis. Thank you, Josh.
Next question comes from Paula Tanaseckis with Bradesco BBI. You may proceed.
Hi, thanks for taking my question. It's actually 2 from my side. The first one is, I would like to understand how Humu will evaluate or assess the quality of the train tracks for the North South railway. Is something wrong is found? How will the government compensate the concession?
Do you have this information? Hi.
Yes.
Paula, thank you for the information. The only thing that we can say by now from your question is that the company by what is written in the concession books is that there will be a period of 1 year in which the company can do a full due diligence in the tracks of the company to see if there is something that was not previously said in the auction notes, okay? Once we have these and was not communicated in the auction notes, then this will be go through a process of balancing the concession fees.
Okay. So you're going to evaluate and you have 1 year to tell the government if something is wrong and then this could reduce your concession fee. Is that right?
That's right.
Okay. And my next question is actually how potential action auction of the FICO railway, the West East Integration Railway could affect your operation of the North South Railway?
Paula, we just won this auction. Today, I'm not speaking about FICO. But this one thing that you need to be aware is that like building or even refurbishing, as in the case of Marutu, is not one thing that takes one day, 1 month or 1 year. That takes time. So FICU still needs to go through entire process of public hearing and needs to go through all the process of project after to go.
So it's not something that will affect at all our plans here in the medium or even long term, okay?
Okay. Thank you for answering my question.
Next question comes from Julio Guanais with Goldman Sachs.
Hi, this is actually Bruno Marim with Goldman. So, I have two questions. The first one is whether or not the CapEx for the North South concession is included in the guidance for CapEx that you provided us some days ago? And the second question is a follow-up on the previous question. I understand maybe Feco is far away, but I understand and you correct me if I'm wrong, I understand that fecal and fuel, they were considered as part of the drivers for demand in the long term.
So I just wanted to understand if in your numbers you have accounted for that when calculating the return for the concession or not? Thank you so much.
Bruno, thank you. Next time you can include your name, I will take your question anyways, okay? But Bruno, just let's start with well, regarding the guidance, okay? Nothing here is included in the guidance. So nothing related to Nordea Suez improving the guidance, even because when we provided the guidance to the market, we didn't know whether we would be the winner or not.
2nd one is regarding FICO. FICO was is not considered in our bid, okay? So even if FICO is supposed to be if you consider FICO as a new concession, okay, that will be auctioned. We have even more upside here that the pest rights or the crackers rights of volumes that will go through Noritsu. But FICC is not considered here.
This is the value for us that we see in Noritos Sur by itself.
And then if I may, just a follow-up question. I know you can comment about this project specifically, but what's the kind of IRR that you are seeking on new concessions? Is it possible to comment in general terms what the kind of returns that the company is seeking with new projects?
As regarding this project, Bruno, is what I said, I'm not providing any guidance regarding specifically to Cerro Villalobos Sul. However, I think it's important to reinforce here, and that was said in the Investor Day at Cosante by our new CEO, Beto, Beto Abreu, that we still have a bunch of projects with high return. And when you say high return, we have a bunch of projects that includes all the BRL 14,000,000,000 that we provide of CapEx for the market. We do have returns over 20% of IRRs. So this is what we see as the minimum we have in the next
Please hold. You may proceed, please.
Hello. Sorry, we had some technical problems here, but I was just finishing telling that we have a bunch of high return projects that we showed you in the Investor Day. And when I say high return, we have, as our new CEO, Beto, said, our returns are higher than 20% of IRR. So but I'm not providing any specific IRR for the Nautilus Suu project yet, okay?
Next question comes from Augusto Ezequi, HSBC.
Hey, good evening, gentlemen. Sorry if this is repeating what you said already. Is there a timeline for how soon investments will start? Just trying to get a sense of the time on the CapEx. I understand you have the concession fee to be paid within the time frame of the announcement, but when do you actually take ownership of the concession and start needing to invest or invest in the investment begin investments on the project?
Thank you.
Yes. Sorry, but the question of our call is bad. Could you try to repeat the question, please?
Sure. What's the time frame of investments? So after you take ownership of the concession, how soon will you start to deploy CapEx and other associated costs involving the concession?
Actually, we have other bureaucracies, as you said. So we think that there are something around 4 to 5 days until the we have all the bureaucracy of signing the contract, actually even more than that we can have. But after that, we are ready to start investing. Obviously, we need to do some additional diligence to see what are the how to prioritize the investments in the track. But we want to do this as quick as possible, okay?
So even this year, we can already start to do a part of the investment.
Okay. And sorry, and because I missed
the end of the call,
what is the second function you mentioned is going into your bid for the concession?
Sorry, could you repeat this? Because the client is really not good.
Yes. Sorry. During your presentation, you mentioned there were 5 assumptions behind your bid for the concession. And I just missed what was the 5th one, the fiscal assumption?
The tax rate, we'll be providing you regarding values on that. But I'll give you examples of that when I talk about fields going from example from Sao Paulo area, from Paulina going direction to Brazilian state, for example, Guayana or even other places in the state of Guyana, they pay truckage rights to the north south, okay? So this is what we are seeing. Also, when I told you that we have different general cargo, mainly when you backhaul or you are taking containers from industrialized area from Sao Paulo also to the north of the country or even bringing something from the north of the country all through the and you go through Noritsu direction to Santos, then you are paying record right for Noritsu. And that was taken into consideration.
Unfortunately, I cannot give you the volumes or the financial volumes, but we will provide in the future, okay?
Thank you very much.
Welcome. Next question comes from Rogerio Araujo, UBS.
Hi, guys. Thanks very much for the opportunity and congratulations for the auction. I have a couple of questions. The first one, given the high premium over the minimum concession fee, I was wondering what made room was more optimistic if this was related to CapEx or OpEx or volumes? So is this on a qualitative basis?
Is this something that you could talk broadly about? This is the
first question. Thank you.
Hi, Rodrigo. Thank you. Every time people say about high premium, this is a bit relative, okay? For us, it's what the value that we see in the company. And there is a high strategic value in this railway for Jumbo.
So we consider that this is right value to be paid to generate value for the company and for its shareholders. So what's more important, we have certain amount of synergies between Nori Jesu and the rest of network. That includes synergies in CapEx. We are not buying, for example, locomotives or railcars only for Noritsu. We already buy a lot.
So we do have scale benefits on buy more. We have several synergies or optionalities that other players didn't have. So we are optimistic that we can have this kind of optionality as we have the same gauge for the current network and the Nordexu network. So there's plenty of benefits that we can take that any other player end of the day could not have. So that said, it is part of our analysis that we did when we did what we consider a very fair offer for the concession.
Okay, sounds good. Thank you. And my second question is regarding also on a qualitative basis. I think you partially answered that already, but on a qualitative basis, what is the expected transportation cargoes, the major ones for Norte Sul, if it's grains from Goyas or if it's industrials linking the north and Santos port and from each region. So in other words, can you say how you're looking what are you looking as your major addressable market?
So which kind of volume from which regions exactly? Thank you.
Rogerio, that's a good question. But basically, remember that I always say to you, other analysts, that we are the spine of agriculture in Brazil. We connect high agriculture centers to the port and then export. This is the same ratio basically. The most important volumes here will continue to be agriculture what's important for us.
And for
example, that's entering this calculation to backhauling our fertilizer. So it's exactly the same ratio that we have in the north and the south corridor, okay? But consider that grains is by far the most important volume that we have. And obviously, from Goyas and even from MAPO Grosso and Minerajares.
Okay. Thank you so much. So if I may, one last question on Mala Paolista's capacity. So do you see any potential bottleneck coming from Alacao Vista? Or your investment plan already implies an expansion of the capacity and there will be no issue on high utilization.
So what is this a concern or not?
For specifically the Gulf South, actually, the bottleneck there is part of the Paulista that we already consider in our business plan, our guidance, okay? But for the bottlenecking to support Norcoso is considered also in the renewal of the concession, okay, in what project you know that will need to be invested in the future, in the next 40 years, okay?
Okay, great. Thanks so much. Congratulations again.
Thank you. Thank you very much. Well, as we don't have any additional question, I'd like to support the to thank you the support the usual support of all my investors. And as soon as we have the final result the final at least the final results of the auctions in which we are supposed to be appointed as the winner. I will come back to the market giving additional information.
Again, thank you very much. And that's it. Bye bye.
Thank you. That does conclude today's presentation. You may disconnect your lines.