Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to Rumo's fourth quarter and 2018 results conference call. Today, the conference call will be conducted by Mr. Ricardo Lewin, Chief Financial and Investor Relations Officer, with the initial statement of Julio Fontana, Rumo's Chief Executive Officer. We would like to inform you that this event is recorded and that assistance will be made available during the company's presentation. After Rumo's remarks, there will be a question and answer session for 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. The audio and slideshow of this presentation are available through live webcast at ir.rumolog.com. This live can also be downloaded from the webcast platform.
Before proceeding, let me mention that forward-looking statements will be made under the safe harbor of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the beliefs and assumptions of Rumo 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'll turn the conference over to Mr. Julio Fontana. Sir, you may begin your conference.
Good afternoon, everyone. I am Julio Fontana, Chief Financial Officer of Rumo. First, I would like to thank you for participating in Rumo's fourth quarter 2018 conference call. It's a pleasure to share our 2018 results with you. Please, let's start our presentation on slide two. This year was remarkable for Rumo. The results we delivered in 2018 consolidate a four-year turnaround and represent the achievement of the ambitious objectives defined when we merged with ALL in 2016.
For the first time, Rumo posted significant net income and positive free cash flow, leaving behind a period of cash consumption while reaching a comfortable 2.2x net debt LTM EBITDA, ready to support future CapEx plans. 2018 was not easy. In May, the National Truckers Strike compromised our terminals' supply and resulted in a loss of volume and EBITDA that quarter. At the same time, the corn crop, particularly in the south region, fell short of expectations.
At the same time, the corn crop, particularly in the south region, fell short of expectations. Even so, we delivered results very close to the guidance. 2.2x net debt LTM EBITDA, ready to support future CapEx plans. 2018 was not easy. In May, the National Truckers Strike compromised our terminals' supply and resulted in a loss of volume and EBITDA that quarter. At the same time, the corn crop, particularly in the south region, fell short of expectations. Even so, we delivered results very close to the guidance, fueling on the back of the strong soybean crop efficiency and capacity gains. As for 2019, we maintain commitment to delivering our long-term plan announced to the market three years ago. The year had a very positive start with a soybean harvest beginning in early January, which is normally expected at the end of the month.
Prospects for the corn crop in the second half of the year are favorable as well. Our operations are ready to meet the growing demands of agribusiness and other sectors of the Brazilian economy, which are expected to record growth in 2019. I am very pleased with our 2018 results, as well as with the performance of the Rumo team, who executed the business plan with discipline. As a result, Rumo heads toward the end of the turnaround cycle to pursue a new one, the growth cycle. As announced, we start the succession process of the executive board and will remain active at Rumo on a daily basis until November 2019. After this period, I will remain close, but through the leadership of Rumo's operational committee.
In this new cycle, we will continue doing our best to pursue good projects and grow our business while delivering robust return to our shareholders. I will now pass over to Ricardo Lewin, Rumo's Chief Financial Officer, who will conduct our presentation.
Thank you. Thank you, Julio. 2018 proved to be an outstanding year for Rumo. In a year that presented numerous challenges, Rumo delivered results very close to its guidance ceiling, evidencing a deep commitment to maintaining operations at a high level. In this quarter, we booked a provision of BRL 72.5 million due to the impairment in the West Network. That's not recurring and has no cash effect, led us to report an adjusted EBITDA according to Instruction CVM 527/2012. In the next slides, we will be presenting numbers using the adjusted EBITDA. Due to the current public offering of local bonds, we will not disclose our 2019 guidance. In addition, the long-term guidance that has already been announced is temporarily suspended. Please, let's move to the next slide. Our transported volume grew by 13% in 2018, mainly due to a record soybean crop that boosted grains performance.
On top of the harvest, Rumo showed its ability to deliver other initiatives to afford volume growth. North Operations recorded 127% higher volumes in fertilizer transportation. New contracts boosted our port volumes by 83%, we continued to develop our container operations, capturing backhaul in the domestic market and imports. On the next slide, I would like to share with you a relevant change in our pricing model. Over the last months, we have implemented changes in our pricing system for the grain chain. Previously, our grain contracts were based on long-term three-year contracts considering annual growth. With a change on the market chain dynamic, mainly the relationship between farmers and traders, our clients realized that the high commitment and risk of this system could affect them.
To address this new scenario, we have agreed to reduce contract terms to enhance trading visibility toward competition, while raising the penalty for default of volumes contracted from 50%- 70% of the net revenue. Another relevant change implemented by this new model is that the date of pay is now monthly and collected on a quarterly basis, making volumes recovery not a possibility. This model represents a balance of pros and cons and has been well-received. Above all, it will help us in our growth strategy. Please let's move to slide number seven. In 2018, we achieved a very consistent EBITDA, which grew by 18% year-over-year. The EBITDA margin reached 49.2%, reflecting our company-wide effort to dilute fixed costs and improve locomotive efficiency, decreasing fuel consumption. Analyzing our individual business units, the North Operation recorded continued high profitability.
The South Operation, even though having faced constraints due to a reduced corn crop, continues evolving to deliver improved results. The container operations delivered its first year of positive results by taking advantage of backhaul freight, increasing transportation volumes in the domestic market and import cargos. Moving to slide number eight, we will discuss our financial results and cash generation. As a result of 2018 efforts to cut debt costs, Rumo decreased its financial expenses by 37.4%, and the cost of its gross net debt by 29%. In the fourth quarter 2018, we benefited from a yield curve drop, which resulted in a positive MTM effect of BRL 129 million. Such financial result evolution, coupled with EBITDA performance, enabled Rumo to generate cash before amortizations and funding for the first time, leaving behind periods of cash consumption to ensure the delivery of our CapEx plan.
In 2018, we also reported a net income of BRL 273 million for the first time. Let's move to the next slide to discuss our consolidated indebtedness position. As a result of our operational and financial deliveries this year, we ended 2018 with a leverage of 2.2x net debt-to-EBITDA . This level is very close to the ideal net debt-to-EBITDA for Rumo, which enable us to finance future projects and bring a higher return to shareholders. With this, I finish our presentation and remain at your disposal to provide any clarifications. Before finishing, I would like to reinforce that due to the current public offering of local bonds, we cannot answer any question related to future assumptions or any forecast. Thank you very much.
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. Or if you prefer to send your question over the internet, click on 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 the star two. The questions will be answered in the order they are received. We ask that you 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 Pedro Bruno, Santander.
Hi, good afternoon, Julio and Lewin. Thanks for taking the question. I have two questions, actually. The first one is on the yield year-over-year variation. If you could help us understand that negative effect on the yield. I understand there is the fertilizer volume ramp-up, which should explain part of it as it gains share within the mix with a lower tariff as it, of course, occupies a previously idle capacity in the back hauling. If there is anything else that you can add to help us understand that movement, that would be the first one.
Hi, Pedro. Thank you for participating of the call. Let me give you a complete explanation about the yield, it gets clear for you and the market. I'll split the explanation in two pieces, okay? First one, I explain the North Operation, and second, the South Operations, okay? In the North Operation, there's a different mix with more coke and fertilizer that brought both the fourth quarter and 2019 average yield down, as long as the tariffs for those cargos are lower than the average for the operation. Okay? It's worth to mention that although it has lower tariffs, margins are higher. Also, due to the high volumes, we also served more volume in other terminals besides Rondonópolis, which in turn had lower tariffs. On top of that two reasons that I explained, we also have changed the way we price grains throughout the quarters.
In 2017, we basically had one price for soybeans in the first half and one price for corn in the second half. That's usually below the price of soybean prices, okay? In 2018, we decided to price differently by quarters. There were two prices for soybeans the first quarter, and two prices for corn in the second quarter, following international prices for commodities. For example, for corn, prices are typically higher in the third quarter than in the fourth quarter. While the third quarter, we have the beginning of the harvest and the fourth, the end of the harvest, okay? This change in the price methodology, added to the reasons that I mentioned in the beginning, caused a year-to-year drop in the tariffs, okay?
For the South Operations, the lower yield in the quarter were caused by a mix with less sugar that has higher tariffs for that corridor, and also because of the lower crop of corn in Paraná and south of Mato Grosso do Sul. In this sense, we served more volume in the Mato Grosso do Sul state, which typically had lower tariffs than Paraná and Mato Grosso. I like to reinforce that although we have lower yields, the margins are much higher than we presented in last year.
That's perfect. Thank you very much, Lewin. My second question would be potentially for Julio. A more strategic one in the context of turning the page from being a turnaround story towards being a growth story, as Julio mentioned. How do you see the North-South network strategically within that context that should be coming to the market soon? That's the second one. Thank you very much.
Pedro, sorry for that. This is Ricardo, okay? Julio is here on my side. I will answer that because, unfortunately, due to the local debentures insurance, which the offering memo was posted today in CVM and Rumo's website, we are in the quiet period, we cannot commit to talk about future assumptions of the company, give any guidance or talk to future projects of the company. We cannot disclose any additional information about this issue.
Understood. Thank you.
The next question comes from Bruno Amorim, Goldman Sachs.
Hi, good afternoon. Could you please provide us with an update on the take-or-pay contract that you have probably closed in June, December with your main clients? I understand you cannot provide guidance, but any color on the kind of agreements that you have closed could be helpful. Thank you very much.
Bruno, this is Ricardo. Thank you very much for the question. We gave in the call some explanation about the take-or-pay. I will talk a bit more about that. We are not disclosing how the process is going on, mainly because it is commercially very strategic. Okay? Repeating here a bit about what we told you in the presentation. Our previous grain contracts, they were two-year length agreements that also reflected a high commitment with volumes goals by both sides. Okay? With a change in the market dynamics, when I tell this is mainly the relationship between the farmers and the tradings. Our clients realized that on top of the harvesting risk, they had also a risk of higher competition among the trading companies, which created additional margin pressure for them.
To address this scenario, we have been studying this new price system for maybe the last two years. We have agreed to reduce contractual terms, we enhance the trading visibility towards the competition, while also raising the penalties for default clauses. That went from 50% in the past to 70% in the new agreements. Okay? 30% of the revenues. Another relevant change that we can talk here, that was implemented by the new model, was the take-or-pay is now monthly and collected on a quarterly basis, making the volumes recover not possible, make less volatile for us. This is what we can tell you by now about the take-or-pay contracts.
Okay. Thank you very much.
Thank you.
Our next question comes from Lucas Barbosa, Morgan Stanley.
Good afternoon. Thank you for taking my question. In the release, you have mentioned early exports of corn given the anticipated soybean crop. I just want to hear your thoughts on how you see the grain inventory in the beginning of this year, if this corn export movement has triggered a large reduction in inventories for the beginning of the year, or if this is something that doesn't worry the company. That's my question. Thank you.
Lucas, and all in the call. Sorry, I'm being a bit boring about answering the questions, but I need to repeat that I cannot make any forecast in this call because of the nature of the venture issuance, okay? The only thing that I can tell you is about public information that we disclosed in the release. It's about that according to AgRural, late May exports for the 2018/2019 crops, that indicates increased grain production in Brazil and Mato Grosso, except for soybean crop in Brazil, which should decrease by 2% due to unfavorable planting conditions. On the other hand, the corn crop is expected to grow 18% in Brazil and 9% in the state of Mato Grosso, which is the main region for grains transported by the company. Okay? Rumo continues increasing its capacity to meet ongoing demand for this grain transportation by building new ports.
Okay. That's helpful. Thank you very much.
The next question comes from Alberto Valerio, UBS.
Hi, Ricardo. Thank you for taking my question. Just a quick note. I saw that there was a reduction in the financial expense for Rumo this quarter. I saw that there was BRL 1.9 million non-recurrence, and I'd like to know if you can take just this BRL 1.9 million, or if the cost of debt is back for 10% that we had on the previous quarter. Thank you.
Alberto, thank you very much for the question. I think that the good news about the financial expense reduction, not only about the last quarter. It was that when compared to 2017, the interest expenses was 19% lower. What means BRL 347 million we are saving every year. Okay? Regarding the last quarter, the point here is that the reduction is due to more than the curve. Okay? The CDI curve that went down. Okay? There are two effects here: the cost of debt and in the hedge protection that we have for the bonds, so in the hedge. These were the two effects, okay, that we have that reduction in this last quarter. Hopefully, this answers your question, Alberto.
Yes. Thank you.
The next question comes from Victor Mizusaki, Bradesco BBI.
Hi. Thank you. I have two questions here. The first one will be, I don't know if you can confirm this, but based on what you said about the new pricing model, you're going to reduce some of the volume volatilities. Can we assume that at the end of the day, we are in a situation where, in theory, you increase your capacity without any additional investments? The second question, now that you have 10% of your capacity in the spot market, can you comment how the minimum road freight price is affecting the spot price?
Victor, sorry, but we are not hearing very well your questions. Could you repeat? I don't know if you are too close to the phone.
Yes. The first one, how do you say that now that you track volumes on monthly base, I mean, the take-or-pay contracts, and the trading companies cannot move volume from one month to the other. At the end of the day, if you think about your numbers, you don't see any, I mean, the business seasonality to like reduce a lot. In the end of the day, can I assume that you can increase your capacity without any additional investments, so returns could go up?
Well, because giving you a short question, the answer is yes. The level of volatility we have, better for us, both for forecast the volumes and in terms of planning, okay? In terms of using better the capacity. The answer is yes, you're right.
Thank you.
The second part?
Yes. The second part is in regards to your, I mean, when you take a look on that slide where you show the new price model, apparently 10% of your capacity would be available in the spot market. I don't know if you can comment how the minimum road freight price is affecting the spot market. If freight price could go up.
Victor, first, I cannot tell that we are if it's by the spot market. The point here is that we continue to focus in the take-or-pay, and as we explained exactly, the focus in take-or-pay is shorter term, okay? Once we do not close 100% of our capacity, we will go to the spot market. That, in the sense, is what the market's paying for you. It depends, year-over-year, what will happen with the crop situation, the price of the products, of the grains, okay? It's difficult to forecast that.
Okay. Thank you.
As a reminder, if you want to pose a question, please press star one. Thank you. That concludes the question and answer session for investors and analysts. I would like to pass the floor over again.
Thank you for your participation. After the quiet period, we are here to clarify some doubts.
Thank you very much. It was a pleasure to have all of you in the call.
That concludes the Rumo's audio conference for today. Thank you for participating. Have a nice day.