Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's third quarter of 2018 results conference call. Today, 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 recorded, and all participants will be in a listen-only mode 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 the 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 Private Securities Litigation Reform Act of 1995.
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, industrial 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. Ricardo Lewin. You may begin your presentation.
Good afternoon, everyone. Thank you for attending the call for Rumo's 2018 results. Let me begin our presentation from slide number two. Our transported volume grew by 15% in the third quarter 2018 versus third quarter 2017. In the first nine months of 2018, we see a significant contribution from grains, fertilizers, coke, and containers. In the third quarter 2018, the record soybean crop extended the grain export period, mitigating lower corn production in a few states. Port loading volume declined due to unfavorable sugar export scenario. Moving to the next slide, let's review yield and EBITDA performance. Volume and yield performance, together with cost discipline, increased EBITDA to BRL 953 million in the quarter, up 19% year-over-year. Once again, we evidenced our ability to increase volumes while maintaining cost efficiency.
This quarter, fuel consumption decreased 4.5% in liter per GTK versus the third quarter 2017. Fixed costs were diluted. As a result, Rumo's EBITDA margin reached 51% in the third quarter 2018, up 2 percentage points versus the third quarter 2017. Moving to the next slide, we can see the performance breakdown of our business units. The North Region posted another quarter of consistent results, reaching 60% EBITDA margin. Higher capacity allowed us to meet the higher demand for transportation of corn originated in the state of Mato Grosso. In addition, other cargos such as coke, fertilizer, and containers also showed solid performance. Moving to the next slide, we see Rumo's market share at the Port of Santos. In the third quarter 2018, Rumo's market share of grains transported to the Port of Santos went up 6.6 percentage points.
Besides higher generating capacity, which enabled Rumo-transported volume to grow by 13.9% in the quarter, volume from other logistics sources decreased, demonstrating our competitiveness. In the first nine months of 2018, the company's market share reached 49.5%, 1.2 percentage points higher than the same period last year. Moving to the next slide, we will discuss South Operations results. South Operations volumes in the quarter were similar to those of the third quarter 2017. The record soybean crop allowed exports to extend to the second half, mitigating the impact of poor crop failures in the state of Paraná. However, consolidated results were impacted by an unfavorable sugar trade scenario and a client's ethanol plant shutdown. The decrease in EBITDA and its margin occurred because in the third quarter 2017, the result was affected by the recognition of tax credits.
However, in the nine first months of 2018, results posted 15.3% EBITDA growth and 0.6 percentage point margin expansion. On the next slide, we look at grains transported by our railway to the Port of Paranaguá and São Francisco do Sul. In the third quarter 2018, the South Operations market share was up 5.2 percentage points in the grain transportation to the Port of Paranaguá and São Francisco do Sul. This gain reflects higher capacity, which enabled a 10% increase in Rumo's transported volume, as well as our overall competitiveness since we saw a slowdown in the coal market during this period. In the first nine months of 2018, we gained 5.8 percentage points market share while volumes grew by 26%. Moving to the next slide, let's review our container operation performance. Our containers operation has started to show positive results.
In the third quarter 2018, volumes grew by 20% year-over-year, and for the first time, this operation posted positive EBITDA. There is still a lot of work to be done, but we are on the right track to grow with profitability. Now, let's take a look at the company's consolidated indebtedness position and consolidated financial results. With the increase of last 12 months EBITDA and reduced net debt, we decreased the indebtedness to 2.3 x net debt/ EBITDA this quarter. This is the lowest level since the inception of our investment plan. Thus, we are in an optimal position to pursue cost of debt reduction and finance our investments. This quarter, our financial results significantly improved, posting a net expense of BRL 258 million in the third quarter 2018. The advance in the prepayment process and initiatives to reduce the average cost of debt contributed to the results.
Moving to the next slide, we look at cash flow. It's worth pointing out that this quarter, for the first time, we reached BRL 222 million of cash generation before funding and amortization. In nine months 2018, we can see a cash generation breakeven, reversing the cash consumption in the first six months 2018. Moving to the next slide, we present the most relevant operating and financial performance indicators. This quarter, our operating ratio improved 3% versus the third quarter 2017, reflecting higher use and reduced fixed and variable unit costs. In the third quarter 2018, greater energy efficiency drove a 4.5% reduction in diesel consumption as measured in liters per TKM versus the third quarter 2017, mainly evidencing the gains from renovation of our locomotive fleet and a better mix of product transported.
When we look at the rail safety indexes, we saw a 2% decrease in rail accidents and personal accidents. It is worth mentioning that referring to the personal safety index, Rumo already achieved the safety goal set by international railway benchmarks. The cycle time of railcars improved in the North Operations, mainly due to higher efficiency at terminals operated by the company. Moving to the next slide, we discuss our most recent market projections. Agroconsult again revised its projections for the 2017-2018 soybean crop, indicating a 4% increase versus 2016-2017 crop season, both in Brazilian production and in the state of Mato Grosso. For the 2017-2018 corn crop, Agroconsult foresees an 18% drop in Brazilian production and an 11% drop at Mato Grosso production. For 2019, preliminary estimates indicate another record soybean crop, with 1% growth in Brazil and 2% in the state of Mato Grosso.
In addition, a solid corn crop growth is foreseen, 18% in Brazil and 9% in the state of Mato Grosso. Moving to the next slide, our guidance for 2018. Our guidance for the year remains the same, reaffirming our already disclosed projections. Here, I finish our presentation, and remain at your disposal for any clarification. 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. 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 that you use the handset when asking the question in order to maintain excellent sound quality. Please stand by while we collect the questions. Okay, our first question comes from Bruno Amorim, Goldman Sachs.
Hi. Good afternoon. Congratulations on the results. I have a question on yields. You have reported an average increase of 3% in yields. Diesel prices were up by 18% year-on-year as you have reported. I understand diesel is an important component of price. Just wanted to understand, if you could please shed some light on the reason why yield is not going up even further. Maybe mix explains that trend, so any color in that sense would be helpful. Thank you.
Hi, Bruno. This is Ricardo. Thank you for participating on the call and making questions. Bruno, the main factors for the increase of the yield are basically, you're right, one is yield, and the other is the best mix of products. We have high-yield products in this quarter. Basically, the mix is also an important factor, not only yields.
Okay, thank you. It would also be great if you could give us some color on, and an update on this potential renewal of the take-or-pay contracts with the main customers. Anything in that sense would be interesting as well. Thank you.
Our next question comes from Teresa Barger, Cartica Management.
Good morning. Congratulations on a great quarter. I was just wondering, Ricardo, could you give us some more color on any updates on the Nobres truck terminal, and also the Sorriso and Alto Araguaia projects in the south?
Hi, Teresa. First, it's an honor to have you in the call. Well, as you know, we will be very soon entering a new cycle of the company that we call the growth cycle. One project that we intend to do is the expansion to Sorriso. Okay? The first phase of this expansion will be a terminal, not necessarily in Nobres, but close to Nobres. It will be a truck terminal there. We are still studying this terminal. Okay? It's not already decided, the location, and when it will start. For sure, we'll give more color on that in our next call, because it's too premature without the approval of this expansion to talk about the Sorry, the Paulista concession to talk about the expansion. Most probably, the next call will be giving you more color on that, okay?
Yeah. Very good.
Thank you, Teresa.
Our next question comes from Josh Milberg, Morgan Stanley.
Hey, everyone. Thank you for the call. Two questions on my side. The first was, and I think this was asked before, but the first was if you could just update us on the status of the negotiations with the grain trading companies. Then also related to that, Lewin, if you could just comment on the issue of the different contract structures that you're contemplating. I think some time back, you talked about the possibility of a take-or-pay that might have a shorter duration and a higher penalty, then maybe also a second structure entailing a premium payment. That's my first question.
Hi, Josh. Thank you. This is a very good question. I think everybody is curious about that. The negotiations with the trading are evolving well, okay? We have several contracts already closed. I cannot give much more color or much more detail on that because we still have several contracts that are under discussion, okay? What I can give you some details is that, you're right, there are some changes in the way that we are signing the contracts, and as you know, due to the change in the environment, in the commercial scenario. Okay? As you know, tradings that are our main clients, have been under pressure, squeezed between the take-or-pay contracts and the farmers and the truck drivers. Okay? What's changing due to this change in the scenario, in the commercial chain, is that we still have a relevant amount of take-or-pay contracts. Okay?
Second thing is that these contracts will be shorter than the ones that we are using. They will not be two years anymore, but will be one-year contracts. Okay? As we are reducing the term of the contract, on the other hand, we are increasing the take-or-pay penalties in case of non-performance. There will be the minimum of 70% of penalty, okay? There are other benefits in this contract. I'll give you one example here, is that the flow of cargo during the year will be much better, much more uniform than it was in the past. Okay? What's important here, I would like to reinforce, and I always reinforce in the meetings that I have with sell-side and with our investors, is that these changes are not a consequence of the doubt of our clients regarding of which model is more competitive.
We are cheaper, we are much more competitive and safe than the other models. Okay? This change reflects the situation of our clients that are squeezed between the take-or-pay, long take-or-pay contracts and the farmers. Okay? This is the reason. It's alignment between the clients and the railway in the sense. Okay? Hopefully.
Okay, Lewin.
I answered your question. I think this is the first question. That's right? You have another one?
Yeah. One more. That was very helpful. My second one is if you could comment a little bit on how you're seeing November and December from a volume standpoint. We had understood that all of the volumes on take-or-pay contracts could be already transported by the end of November, perhaps giving customers a little more flexibility, in terms of what they do with, either shipping volumes in December or kind of deferring until next year, maybe awaiting better pricing. Any color you could give there would be great.
Josh, we have the guidance. What I can tell you right now that you are very optimistic about being in the guidance that we provided. Every month you see in our website the volumes, very soon will be the volumes of October. The only thing that I reinforce is something that we wrote in the report, that remember that last year, the harvest was record, the port harvest, okay? The volumes were very high last year. One thing that I just say is that don't expect to have a double-digit growth comparing the two quarters, okay? We are very optimistic that will be in the guidance. Okay?
Lewin, very understood. You have difficult comps coming into the fourth quarter. Can you say a little bit about what you think today's kind of commodity price level means for the interest of grain trading companies and farmers to kind of go ahead and ship volumes on a more anticipated basis? Do you think that the pricing is at a level where it makes sense for the grain trading companies to do as much volume as it can, or can you see them holding some volume until next year?
Our next question comes from Bruno Amorim, Goldman Sachs.
Yeah. Let me answer. Sorry, took a bit longer to answer. Josh, the point here is that there is a specific situation this year. That the commercial war between China and the U.S. There is a huge corn storage in the U.S. It's not very clear still what will happen between these last months between China and the U.S. that can affect the price. It's not very clear for us to confirm anything regarding the price of the washout and how this can affect us on that. Okay?
Okay. Thank you.
Our next question comes from Bruno Amorim, Goldman Sachs.
Hi, thanks for the follow-up. I have a question on your market share. As you said, your unit costs are coming down, you are gaining market share, which makes a lot of sense. I would just like to better understand, to what extent this could continue to be the case and for how long. In that sense, that would be great if we could have, from you, an indication on what's your market share currently out of all the grains that are transported from Mato Grosso to the Port of Santos, for instance, how much market share do you have in these routes? Any indication you could give us in that sense?
Hi, Bruno. You know well, you have been following the company, you see that we have been increasing capacity in the last three years. Okay? Once we increase our capacity. It's a good way to increase market share. Okay? Obviously, in the long run, we are fighting to gain market share, both the south and in Mato Grosso, okay? This will be more a consequence that the increase of our capacity and all the investments that we're doing. To be very direct, yes, we expect increase. How much, this is not part of our guidance, but we do expect to increase our market share, and this is a consequence of our investment that we are doing. Sorry, I don't know if I lost You asked about the market share. Did you ask something else?
Yes. I've asked, in this route, Mato Grosso to the Port of Santos, how much is your market share there? Out of all the grains that go from Mato Grosso to the Port of Santos, how much is currently transported by Rumo as opposed to trucks?
Bruno, let me tell about market share of export, okay? That goes from all of that goes from Mato Grosso to Santos. In 2017, that we have already closed something around 50%. You can see that there is still a lot of room for growth, indeed, that's our most important route. Okay?
Thank you.
Ladies and gentlemen, as a reminder, if you want to pose a question, please press star one. Our next question comes from Lucas Marquiori, Banco Safra.
Hello, gentlemen. Thank you for the call. Ricardo, you mentioned it quickly on an earlier question regarding the Malha Paulista concession renewal. Can you give us an up-to-date on that? How are we today? What should we expect going forward? What are the next steps on the renewing process? It would be nice to have a sight on that. Thank you.
Hi, Lucas. Well, all of you know me very well. You know that I always say the same thing regarding this question, is that I'm always optimistic that this should be solved by the end of this year. Okay? The point here, Lucas, is that the process has been now two years that we have been discussing with ANTT. ANTT approved the postponement of the concession. In September it was sent to TCU. From this last thing, we know that TCU is analyzing the process. They have been talking to some investors that we know about the amount of information that they have. There's huge amount of information. They need time to analyze all the material that was sent to them, all the studies. Formally, TCU has no time to approve that. Okay? Although, we still have doubt, believe to have this solved soon.
As it's in the hands of TCU, it's difficult to make any kind of projection at this stage, almost at the end of the year, when it will be approved.
Okay. Thank you.
Thank you.
Our next question comes from Augusto Ensiki, HSBC.
Hey. Good afternoon, guys. Thank you for taking the question. Two from me. Firstly, on the fertilizer, it's kind of picking up for you guys. Wondering when it gets to where would the normalized run rate be? How much volume can it reach, and by when will you expect to reach that? Secondly, on Sorry, I lost the question here. Sorry, first question on the fertilizer, and then I'll come back to the second question.
Okay. Well, regarding fertilizers, the operation has been evolved very well. Okay? In the first five months of operation, we have done something around 360 tons. I'm sorry, 360,000 tons of fertilizers. What I promised in the past, and I reinforce that, is that in the first 12 months, we would be doing 1 million tons of fertilizer. What's important to state that these first months, we increased our volumes. In July and August, we did something around 100,000 tons of fertilizers. This is what to expect for the next month. We will reach the 1 million in 12 months. Okay? In the long term, what we always said that we can do something around 3 million - 4 million tons of fertilizers. Of fertilizers transportation. Okay.
On an annual basis?
Annual basis, that's right.
Okay, perfect. Thank you. Secondly, on the financials. This quarter came down significantly. Is this kind of a normal or what we can expect going forward for financials? Is there more room for financials to come down?
Part of this is a result of the liability management that we have been done and also CDI has been going down. Okay, we will have these two factors in the results. Also, you have the hedging account, you know that 100% of our two bonds are hedged. You have some noise that for some months, depending on the CDI curve, this can go up and down. Okay. We don't have control on that. There's a small part that can go up and down without our control. Our intention is to keep working in the part of liability management and reducing the cost of our debt. The part that depends on us is expected to still go down.
Okay. That's very helpful. Thank you very much.
Thank you.
Excuse me, ladies and gentlemen. As a reminder, if you want to pose a question, please press star one. Thank you. That does conclude the question- and- answer session for investors and analysts. Now, I would like to turn the floor over to Mr. Ricardo Lewin.
Thank you very much for participating on this call. This is the last call of 2018, I expect to see you and talk to you next year. Thank you very much.