Good evening, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's extraordinary conference call regarding the result of Norte-Sul Railway auction, which took place today, March 28th, 2019. The conference call will be conducted by Mr. Ricardo Lewin, Chief Financial and Investor Relations Officer. We would like to inform you that this event is live. After Rumo's remarks, there will be a question and answer session for investors and industry analysts. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. 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. I will turn the conference over to Mr. Ricardo Lewin. You may please begin your conference call.
Good evening, everyone. The results of the Norte-Sul Railway auction was disclosed today, the winning economic proposal was Rumo's one. The final result, which includes the complete analysis of all documentation, is expected to be announced officially on April 16th, 2019. The Norte-Sul Railway is approximately 1,600 kilometers long and connects the city of Porto Nacional in the Brazilian state of Tocantins to Estrela D'Oeste in the state of São Paulo, where it will connect to Paulista network after Norte-Sul construction is complete. The concession period is 30 years, and the minimum grant proposed in the auction notice was BRL 1.35 billion. Our proposal was BRL 2.72 billion, 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, the balance will be paid in 120 quarterly installments, calculated in accordance with the sub-concession agreement. Our proposal was based on the following five assumptions. First assumption, mapping out cargo volumes in the Norte-Sul influence area, which currently is serviced by other logistic solutions. This includes capturing the demand for grains, especially in the state of Goiás, Minas Gerais, and Mato Grosso, backhauling fertilizers, transporting oil-derived fuels from the state of São Paulo to the state of Goiás and Tocantins, backhauling biofuels. Finally, transporting overall cargo, especially container, in both directions of the network. Second assumption, operating synergies between the railway and Rumo's network, since both have wide gauge operations.
Third assumption, dilution of Rumo's 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. Finally, fifth assumption, trackage rights revenues. As such, we understand that the amount we offered in the bid is consistent with the amount perceived by the company. Once Rumo 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 Rumo continues to pursue leverage of approximately two times the net debt 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. If you have a question, please press star one on your telephone. If you prefer to send your question over the Internet. Our first question comes from Josh Milberg from Morgan Stanley. You may proceed.
Hey, everyone. Thank you for the call, congratulations on the auction win. You mentioned that you're going to be providing more information on your business plan in the future, I don't know if you'd be addressing this level of detail at this juncture. My first question was just if you could comment on how much CapEx you see relative to the $2.7 billion number in the ANTT documents, if you could just 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. Unfortunately, we will not be providing in this call any financial forecast or guidance. Mainly because we still need to wait until Rumo is officially appointed as the winner of the auction. That was supposed to happen on April 16th, as I told you before in the call. After this date, we will be informing the market in more details and in the right timing, okay?
Okay. No, fair enough. 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 the government's indication that if 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, you know this too, that let's say the last 40 or 50 kilometers is not connected, it's still connected between the two networks. This is something that we still need to see and talk to the market once we have the contract signed.
Okay.
There's one important thing, okay, Josh, that I think that's important for the market to understand. Actually, this last, I call here last mile, okay, this 40 kilometers, this is not something that's the bulk of CapEx, okay? This is a very low CapEx to do this connection.
Okay, fair enough. Look, 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.
No, Josh, I think this is okay. The initial expectation is something between two, three years, okay? From two to three years to be operational.
Okay. Thank you very much for that, Lone.
Thank you, Josh.
Next question comes from Paula Athanassakis with Bradesco BBI. You may proceed.
Hi. Thanks for taking my question. It's actually two from my side. The first one is, I would like to understand how Rumo will evaluate or assess the quality of the train tracks for the Norte-Sul Railway. If something wrong is found, how will the government compensate the concessionaire? Do you have this information? Hi?
Yeah. 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 one 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 this and was not communicated in the auction notes, this will go through a process of balancing the concession fees.
Okay, you're going to evaluate, and you have one year to tell the government if something is wrong, and then this could reduce your concession fee. That's right?
That's right.
Okay, thanks. My next question is actually, how potential auction of the FIOL railway, the West-East Integration Railway, could affect your operation of the North-South Railway?
Paula, we just won this auction. Actually today.
Okay.
Today I'm not speaking about FIOL.
Okay.
One thing that you need to be aware is that building or even refurbishing as the case of Norte-Sul, it's not one thing that takes one day, one month, or one year. That takes time. FIOL still needs to go through an entire process of public hearing, and needs to go through all the process of project after to go. It's not something that will affect at all our plans here in the medium or even long term. Okay?
Okay. Thanks. Thank you for answering my question.
Next question comes from Julia Gurnais with Goldman Sachs.
Hi, this is actually Bruno Amorim with Goldman. I have two questions. The first one is whether or not the CapEx for the Norte-Sul concession is included in the guidance for CapEx that you provided us some days ago. The second question is a follow-up on the previous question. I understand maybe FIOL is far away. You correct me if I'm wrong, I understand that FIOL and FIOL, they were considered as part of the drivers for demand in the long term. 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.
Hi, Bruno. Thank you. Next time you can include your name, I will take your question anyways, okay?
Thank you.
Bruno, regarding the guidance. Nothing here is included in the guidance. Nothing related to Norte-Sul is included in the guidance, even because when we provided the guidance to the market, we didn't know whether we would be the winner or not. Second one is regarding FIOL. FIOL is not considered in our bid. Even if FIOL is supposed to be If you consider FIOL as a new concession that will be auctioned, we have even more upsides here that the path rights or the trackage rights of volumes that will go through Norte-Sul. FIOL is not considered here. This is the value for us that we see in Norte-Sul by itself.
Okay. Thank you very much. If I may, just a follow-up question. I know you can't 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 a company is seeking with new projects?
Regarding this project, Bruno, is what I said, I'm not providing any guidance regarding specifically to Ferrovia Norte-Sul. However, I think it's important to reinforce here, and that was said in the Investor Day, at Cosan Day, by our new CEO, Beto Abreu, that we still have a bunch of projects with high return. When we say high return, we have a bunch of projects that includes all the BRL 14 billion that we provide of CapEx for the market. We do have returns over 20% of IRR. This is what we see as the minimum we have in the next few.
Please hold. We are going to reconnect the conductor. Please hold. We are reconnecting the conductor. Please hold. 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 huge high return projects that we showed you in the investors day. When I say high return, we have, as our new CEO, Beto said, our returns are higher than 20% of IRR. I'm not providing any specific IRR for the Norte-Sul project, yes. Okay?
Thank you very much.
Thank you, Bruno.
Next question comes from Augusto Ezequiel, 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 to get a sense of the timeline of CapEx. I understand you have the concession fee to be paid within the timeframe of the announcement, when do you actually take ownership of the concession, then start needing to begin investments on the project? Thank you.
Yeah. Sorry, the quality of your call is a bit bad. Could you try to repeat the question, please?
Sure. What's the timeframe of investments? 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 all the bureaucracy, as you said. We think that there are something around four to five days until we have all the bureaucracy of signing the contract. Actually, even more than that we can have. After that, we are ready to start investing. Obviously, we need to do some additional decisions to see how to prioritize the investments in the track. We want to do this as quickly as possible. Okay? Even this year, we can already start to do a part of the investment.
Okay. Thank you. Sorry, because I missed the end of the call. What is the fifth assumption that you mentioned that is going into your bid for the concession?
Sorry, could you repeat this? Because the quality is really not good.
Yeah. Sorry. During your presentation, you mentioned there were five assumptions behind your bid for the concession. I just missed what was the fifth one, the fifth assumption.
The trackage right, we will be providing you regarding values on that, but I will give you examples of that when I talk about fuels going, for example, from São Paulo area, from Paulínia, going direction to Goiás state, for example, Goiânia, or even other places in the state of Goiás. They pay trackage rights through the Norte-Sul. Okay? This is what we are saying. Also, when I told you that we have different general cargo, mainly when you back haul or you are taking containers from industrialized area from São Paulo, also to the north of the country, or even bringing something from the north of the country, and you go through Norte-Sul in direction to Centro, then you are paying trackage right for Norte-Sul, 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 Rumo's more optimistic, if this was related to CapEx or OpEx or volumes. Is this on a qualitative base? Is this something that you could talk broadly about? This is the first question. Thank you.
Hi, Rogerio. Thank you. Every time people say about high premium, this is a bit relative, okay? For us, is what the value that we see in the company, and there is a high strategic value in this railway for Rumo. We consider that this is right value to be paid to generate value for the company and for its shareholders. What's more important? We have certain amount of synergies between Norte-Sul and the rest of network. That includes synergies in CapEx. We are not buying, for example, locomotives or rail cars only for Norte-Sul. 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. We are optimistic that we can have this kind of optionality as we have the same gauge for the current network and the Norte-Sul network.
There is plenty of benefits that we can take that any other player, end of the day, could not have. That said, this is part of the analysis that we did when we did what we consider a very fair offer for the concession.
Okay. Sounds good. Thank you. 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 cargos, the major ones for Norte-Sul, if it's grains from Goiás or if it's industrials linking the north and Santos Port and from which region? In other words, can you say what you're looking as your major addressable market? Which kind of volume from which regions exactly? Thank you.
Hi, Rogerio. That's a good question. Basically, remember that I always say to you, other analysts, that we are the spine of agriculture in Brazil. We connect high agricultural centers to the port, then it's exported. This is the same rationale, basically. The most important volumes here will continue to be agricultural, what's important for us. For example, that enter in this calculation, the back-hauling of fertilizer. It's exactly the same ratio that we have in the north and the south corridors. Okay? Consider that grains is by far the most important volume that we have. Obviously from Goiás and even from Mato Grosso and Minas Gerais.
Okay. Thank you so much. If I may, one last question on Malha Paulista's capacity. Do you see any potential bottleneck coming from Malha Paulista or your investment plan already implies an expansion of the capacity and there will be no issue on high utilization. Is this a concern or not?
For specifically the Norte-Sul, actually, there is part of the Paulista that we already consider in our business plan, our guidance. Okay? For the bottlenecking to support Norte-Sul is considered also in the renewal of the concessions. Okay? In what public you know that will 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 thank you. The usual support of all my investors. As soon as we have 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. That's it. Bye-bye.
Thank you. That does conclude today's presentation. You may disconnect your lines.