Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's second 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 the 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 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, 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. Ricardo Lewin. You may begin the conference.
Good afternoon, everyone, thank you for participating in Rumo SA's second quarter 2018 conference call. Let's start our presentation with slide number three. Before starting our presentation, I would like to comment on the truck drivers' strike and its effect on Rumo. This quarter, we posted 9% growth of transported volumes year-over-year. Despite this positive result, it was impacted by the truck drivers' strike in May, which prevented the normal arrival of trucks, especially at our terminal in Rondonópolis. Our volume performance grew by 15% in April against the same period last year. In June, that growth improved to 16%. In May, our transported volume declined 2% due to the truck drivers' strike. As already mentioned, volume in the second quarter 2018 was up 9%, being a growth of 8% for agricultural products and 17% for industrial products.
This quarter, our fertilizer operations initiated its activities in our terminal in Rondonópolis, Mato Grosso, with volume growth in line with expected, showing that we are ready for the peak demand, which typically occurs in the second half of the year. We saw substantial growth of industrial product transportation, mainly driven by Fibria's new pulp operation and a higher volume of containers. Port loading volume declined as an effect of lower sugar exports in the second quarter 2018. We increased six percentile points of market share in sugar transport to the Port of Santos. Moving to the next slide, we can see Rumo's financial performance. Net revenues grew by nearly 11% in the second quarter 2018, boosted by higher volumes and higher average yield as a result of a better mix of transported products.
A good operational performance and higher efficiency regarding cost and expenses enabled EBITDA to reach BRL 844 million in the quarter, up 15% year-over-year. Once more, we evidenced our capacity to increase volumes with cost efficiency. This quarter, fuel consumption decreased, and fixed costs were diluted. As a result, Rumo's EBITDA margin reached 51% in the second quarter, up two percentile points versus second quarter 2017. Moving to the next slide, number five, we can see the performance breakdown of our business units. The North Operations posted another quarter of consistent results, evidencing that our investment strategy and our activities in this corridor are succeeding. This is especially evidenced by the level of volume and the 60% EBITDA margin we are delivering.
This result came even in a scenario when our grain operations was affected by the truck drivers' strike, given two strong volumes in April and June that sustained total volume for the quarter. In addition, other cargos such as pulp, fertilizers, and containers also showed solid performance. Moving to the next slide, we look at South Operations results in the second quarter. South Operations performance continues to evolve. This quarter, besides volume growth, it reached 30% EBITDA margin. Agricultural volumes, which advanced 11% year-over-year, added to a 9% increase in average yield and efficient cost management, drove the 22% EBITDA growth versus the second quarter of 2017. Moving on to the next slide, we look at grain transported by our railway to the ports of Santos, Paranaguá and São Francisco do Sul.
In Q2 2018, Rumo's market share of grain transported to the port of Santos went down two percentile points. During some periods of the quarter, exports at the port of Santos increased over 20% versus the Q2 2017, but our capacity allowed growth of only 15%. As a result, we lost market share in this quarter. Starting this quarter, we will also report Rumo's market share at the ports of Paranaguá and São Francisco do Sul. In Q2 2018, we gained six percentile points market share at these ports, which, in addition to the favorable soybean crop, contributes to explain the good volumes delivered in the quarter. Moving on to the next slide, number eight, we discuss our container operations performance. Our containers operation delivered positive results, boosted by our restructuring strategy. We diversified cargoes service routes with higher average distance in addition to an efficient cost management.
The 6% growth in transported volume and 22% in average yield, coupled with cost dilution, resulted in a significant improvement of EBITDA and margin. Now, let's take a look at the company's consolidated indebtedness position. Our leverage remained at 2.6 times gross net debt EBITDA ratio. It's worth mentioning that our gross debt decreased from BRL 12.1 billion to BRL 10.9 billion due to prepayment made in the quarter. Moving to the next slide, number 10, we look at consolidated financial results and cash flow. This quarter, our financial result was impacted by non-recurring events. The mark-to-market of similar hedge instruments as a result of interest forward curve frustration impacted results by BRL 80 million. It's worth mentioning that this has no cash effect.
With the prepayment of reprofiling debentures, the expenses of BRL 22 million already paid in the moment of its contracting should be recognized now, instead of being deferred over the course of the debt useful life. To amortize an instrument which worth approximately 140% of CDI, we incurred a fee with cash effect totaling BRL 16 million. Moving to the next slide, we present the most relevant operating and financial performance indicators. This quarter, our operating ratio was in line with the Q2 2017, reflecting improved EBITDA margin and higher depreciation, which in turn coincided with a higher level of investment. Greater energy efficiency drove the 7% improvement in diesel consumption as measured in liters per GTK, mainly evidencing the gains from renovation of our locomotive fleet and a better cargo mix.
When we look at the rail accident index, we saw a 6% decrease in the rail accidents against the same period last year. Personal accidents were in line with the international railways benchmark, with a 16% reduction in the Q2 2018 versus the Q2 2017. The cycle time of rail cars was particularly affected by the trucker driver strike in this quarter. Moving to the next slide, we will discuss our most recent market projections. Agroconsult again revised its projections for the 2017-2018 soybean crop, indicating a 4% increase in Brazilian production and in the state of Mato Grosso, confirming a record crop. Concerning the current crop, a 17% reduction is expected in the Brazilian production and a 10% decrease in the Mato Grosso production.
A positive scenario for soybean trade extended its export period, which coupled with corn carryover inventories, contribute to offset lower grain production already estimated for the second half of the year. In addition, we can see in slide 13 that 2018 average road freight prices are above 2017 prices, as evidenced by (INEA) figures. As the scenario continues, our competitiveness will improve even more. Moving to the next slide to present our guidance for 2018. Our guidance for the year remains the same, reaffirming our already disclosed projections. With this, I finish our presentation. I am here with our team, and we remain at your disposal for any clarifications. 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 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. Our first question comes from Josh Milberg, Morgan Stanley.
Good afternoon, everyone, and thanks for the call. I was hoping you guys could elaborate a little bit further on just how you're seeing the second half volume outlook. You mentioned that the grain crop scenario looks very good for you guys. One obvious doubt is, to what extent better soy volumes can make up for lower corn production? With higher road freight yields, are you now seeing some signs that trading companies will opt to ship volumes with you in the fourth quarter, rather than using truck Transpetro at a higher cost in the third quarter? That's my first question.
Hi, Josh. Thank you for participating of the call.
My pleasure, Lewin.
Yeah. Well, answering your questions. The point is, the second quarter seems to be very good for us. The third quarter seems to be very strong. The demand is coming very strong. The projections that Agroconsult did seems to be very real, okay? This was your first question. Regarding the second question, the question was if the demand would go more strong for the fourth quarter. Is that right?
Yeah. Just whether the situation with higher truck yields bodes well for the fourth quarter, just on the idea that trading companies could hold off on shipping some volume and wait until the fourth quarter so that they're getting better pricing with you.
Yeah. I confirm exactly what you are saying. This is the scenario. I can tell you that the soybean crop has been postponed a bit. This is part of your first question, also has been postponed. It has been very strong also in the third quarter, okay? Regarding the corn, it has been a bit lower, as the information that we sent from Agroconsult. The soybean has been postponed and other things that can increase the corn crop or demand for the fourth quarter is that the demand in the internal market has been lower. The export should be even higher than we thought. Even with the decrease of the corn crop.
Okay, Lewin, that's very helpful. My second question is just on your contract renewal process, and just wanted to know if you've begun negotiations with the trading companies, and how much you think maybe the move up in truck freight prices has strengthened your hand in that negotiation process. Another related doubt was just, I think in the past you had talked about stable pricing into 2019, and if that's still your expectation. Thanks.
Hi, Josh. Well, for this question, I would say that the truck drivers strike helped us regarding the negotiation of the next contract, okay? After the strike, some companies decide to anticipate the negotiations. We advanced very well in some negotiations. For closing this contract, clients are waiting for the scenario of commercialization of next year, as they still have some doubts regarding the minimum road freight price. Okay? It's going better than we thought, and we are really confident that the railway will be the best solution, both in terms of price and in terms of guarantee of transportation of the grains.
Lewin, in terms of price, your expectation is still for stable pricing, in real terms of course, in 2019? If you can comment.
Josh, I'd prefer not answering for this question as we are in the middle of the negotiations. Up to now, I cannot disclose that.
Okay, fair enough. Thanks very much.
Thank you.
The next question comes from Bruno Amorim, Goldman Sachs.
Hi, good afternoon. I have a question on 2019 as well, but what I'd like to understand is to what extent is your guidance or your indication for double-digit volume growth in upcoming years. To what extent does it depend on the size of the crop? I understand there is some room for you to keep growing because of market share gains, but at which point would the size of the market eventually represent a risk for this growth expectation? For instance, if this total size of the crop for soybean and corn is flat in 2019, is it still possible for Rumo to grow by double digits in volumes? Thank you.
Hi, Bruno. Good question. Actually, although we are foreseeing good crops, actually not we, but the consultancies are foreseeing a good crop, both for corn and for soybeans to 2018, 2019 crops. In grains, we do not depend too much on the growth of the market. We depend more on the increase of the improvement of our capacity that is doing very well with the investments that we are doing. However, it is important not to forget that we are growing in other products, not only in grains. The increase of demand of products such as fertilizer, such as pulp and paper, has improved a lot of our volumes. We also do not depend on the growth of these products, but as you know, we are improving our capacity to (Transport) these products. One of the projects you know is the project of the
Discharging
of the discharging of fertilizers in Rondonópolis, and the other is the project with Fibria. The demands there is more a question of increasing our capacity.
Very clear. Thank you very much.
Our next question comes from Victor Mizusaki, Bradesco BBI.
Hi, I have two questions. The first one that follow up on this topic about the fertilizer project. Given all these situation with the minimum road freight price, I'd like to know if it would be possible for you to accelerate the ramp-up of these projects or even maybe anticipate the expansion of capacity for this project for fertilizers. The second question with regards-
Victor, sorry to interrupt you, the call is not that good. Could you repeat the first question, please?
Okay. Now, with regards to the fertilizer project, is it possible for you to accelerate the ramp-up of this project or even increase the capacity of this project?
Yeah. Well, regarding the fertilizer project, we are doing very good. There is no need to accelerate as we are already in what was foreseen. We started the project in April. In the three months of this quarter, we improved the volumes, and we are ready in the level that we would like to reach, to face the peak of consumption of fertilizer that happened in the second half of the year. I reinforce what I said to the market before, that we intend to do the 1 million tons in the first 12 years.
1.5
Okay, Julio is correcting me here. That's a bit more than I said, more than 1 million tons in the first 12 months of operation.
Lewin, would it be possible, for example, to handle a demand for, let's say, 3 million tons of fertilizers in the first year? All these guys, they are willing to shift from roads to rail.
We do have capacity to do this, remember, Victor, that we have a ramp-up for this project. When we say 3 million tons of capacity, that will happen in three years. If we need more than that, we do have capacity in this project to do more than that. Don't forget the ramp-up, okay?
Okay. My second question with regards to the BNDES funding, this BRL 2.9 billion. Can you confirm the terms for this debt? The second part of this question, I think that's hard to respond on behalf of BNDES. Can we say that this decision basically shows that they believe that the renewal or not of Malha Paulista is something that in the future should not have any major impact on your financials?
I will start with the second half. Part of the debt was approved by BNDES to the North Corridor. Remember that we have more than 70 years of concession, and part of the facility was approved to the South in a term that's shorter than the concession. Let me give you more details on that, and it will be clear for you. For the BNDES-approved BRL 2.89 billion, from which BRL 2.23 is for the North Corridor. The term is 12 years with two years of grace period. For the South Corridor, it was approved BRL 650 million with nine years and one year of grace period. You can see that for the North Corridor, the term is okay, as well as for the South Corridor.
Okay. Thank you.
Thank you.
The next question comes from Augusto Ensiki, HSBC.
Hey. Good afternoon. Thank you for taking my question. Just follow up on the BNDES debt there. I missed if you mentioned what the rate was for the debt. Secondly, when will this be coming into or when will it be dispersed to you guys? The second question, and apologies if this has already been addressed, I just want to ask you a bit about your margins. You guys finally broke over 50% EBITDA. If you could kind of just give us a little bit more detail into what's driving or what's been contributing to your margin growth, how sustainable it is going forward, and where we can see this going in, I guess, in the next two, three years. Thank you.
Augusto, sorry if I don't answer anything because the call is not that good. If I don't answer, please, you can make additional questions afterwards. First, regarding the disbursement, we just need to go through the regular process of BNDES right now, that we have some conditions, but regular conditions, so disbursement can happen in some months. We already have more than BRL 1 billion that we already invested and can be disbursed. Does that answer the first part of the question?
Yes, it does. Thank you.
Okay, good. The second part of the question is regarding the sustainability of the EBITDA margins. Regarding that, I can tell you that this is sustainable, and that can even increase for two reasons. First, we are still investing in the improvement of the efficiency of the company. There are still opportunities of cost reduction in the company for both the North and the South Corridor. Remember that the margins of the North Corridor are even higher than this 50%, goes around 60%, while the South Corridor, the margins are a bit lower, something around 30%. We do have room for more improvement than the number that you see in the results.
Long term, can you get that margin for the South Operations, South Corridor, closer to what the North Operations is doing?
Actually, there's room for improvement, but it will never be the same size of the North Corridor. This is a physical question. The North Corridor has 1,700 kilometers in just one single line. While the South Corridor, the average distance is something around 700 kilometers. For physical reasons, it will never have the same margins. Even though we intend to improve the South Corridor through the projects that the market already know as the project that we have in South, that we improve the efficiency, improve the volumes in this corridor, as well reduce the costs, operational costs, and fixed costs.
Perfect. Thank you very much. I appreciate it.
The next question comes from Rogerio Araujo, UBS.
Hi, gentlemen. Thanks very much for the opportunity. I have a couple of questions. The first one is a follow-up on volume growth in upcoming years. We now start to see a higher comparison basis as Rumo accelerated its volume growth in third quarter 2017. If you take into consideration the fertilizers project, we would say that it will represent about 4% growth year-over-year in the second half of this year. My question is, how much volume growth we can see in the second half of this year? If this can still be double-digit or not. Also, what is the level of growth you are estimating for 2019? That's my first question. Thank you.
Rogerio, thanks for your question. The answer, yes. We expect double-digit growth in the second half of this year. Actually, if you consider a linear growth in the guidance that we provided to the market, it's just a question of taking into consideration what we did in the first quarter, and it's easy to calculate the second quarter. I think that the best guess would be consider a linear growth until end of 2020, and you will see that we can reach double-digits growth.
My second question is regarding the concession renewal. I think the documents are now in the hands of ANTT, the regulator, and should be channeled to the audit court, the TCU. Do you have any expectations for when this should happen, and also how much time it should stay there? Do you expect back and forth with the TCU, or do you think that the major points of the contract is already well-aligned with all the parties involved? How is your expectations for that process? Thank you.
Rogerio, I'm a bit more optimistic than you are. I saw in your report that you think there's a lot of time for that. We are, here in the company, very optimistic regarding the approval this year. We continue optimistic. Okay? We know that there may be some bureaucracy on there that can postpone, but for now, we see that things are doing well. Okay? This is just to understand the process. The process is in ANTT, you're right. The technicians of ANTT already finished their analysis. That goes to what we call in Portuguese, [Foreign language], and then goes to the directory of ANTT, that will send to the TCU. Okay? This seems to be long, but it's not. It seems that very soon, their report is going to TCU. For TCU, it's foreseen 45 days for the approval at TCU. Okay?
This is what is said legally for what should go, TCU can take more time to approve. That depends on TCU doubts or TCU willing to approve the renewal. Okay? We continue to be optimistic and for the approval this year, although we understand that bumps may happen in the process.
Okay, sounds good. Thanks very much, Ricardo, for the answers.
Okay. Thank you, Rogerio.
Once again, to ask a question, press star one. Please stand by once again while we collect the questions. The next question comes from Natalia Serafim, Citi.
Hi, team. Thank you for taking my question. I work with Stephen Trent, I'll be making a question on his behalf. My first question is, what is your take on the North-South Railway? How are you viewing the potential of the launch of this project? If you can talk more about Ferrogrão on other potential government projects. Thanks.
Natalia, sorry. We do have some technical problems here. Could you repeat the question, please?
Oh, sure. What is your take on the North-South Railway? How are you viewing the potential November launch of this project? If you can talk more about the Ferrogrão on other projects. Thanks.
Okay. I understand that you would like to know our opinion on Ferrogrão and North-South Railway, is that correct?
Yes.
Okay. Well, first it's important to say that we do not have many railway projects here in Brazil. As the largest company in the sector, we take very seriously to understand very deeply on all the projects. Regarding Ferrogrão, first, we know that there are a lot of problems for the project. I could spend a lot of time here talking on the problems, but basically they have the competition of the BR-163. They have several environmental problems, social problems. They reach in a place that's not the best place. It's a bit far from the sea. It's a project that has a lot of challenges, okay? We basically do not have interest on this project. Regarding the Norte-Sul Railway or North-South Railway, we are studying the project. There are some inconsistencies in the studies presented by the government.
What I can say is that we do have interest in participating in a future auction of this railway, okay? We will participate until the level that we think that creates value for our shareholders. Okay?
That's what I can say by now.
Okay. Thanks. My second question is regarding to the southern operations. Are there other initiatives that Rumo can pursue that could continue to boost output?
Again, could you repeat, please?
Sorry. Regarding the southern operations, are there other initiatives that Rumo can pursue that could boost the output or anything like this?
Not I can see right now. We are operating very well. Even with the truck drivers strike, the company did very well. There is no operational issue that can avoid us to reach our guidance. This is the reason that we confirmed our guidance for this year.
Okay. Thank you very much. Just one last question. What is specifically driving port division, EBITDA improvement? Is this related to some level of import improvements, even if it is current effect levels? Thanks.
Actually, the company is investing a lot in the (Transport). There's a part called Porto Feliz, okay? To improve the efficiency of the port. The important thing regarding ports is that the company, Rumo, has created an environment in which all the companies, the trading companies that have terminals in (Transport), now they trust that in the railway, what didn't happen before. Even the trading companies are investing a lot to increase efficiency of the operations in the port terminal. Our investments plus all the terminal investments that they are doing, is improving the total operational efficiency of the port (Transport), and we don't see any bottleneck for the next years before.
Okay, perfect. Thanks for taking my question.
Thank you.
If you want to pose a question, please press star one. The next question comes from Pedro Bruno, Santander.
Hi, good afternoon. Thanks for the question. My question regards the free cash flow generation, and your expectations for the year. We were able to see that the working capital consumption of the first quarter of the year was not offset now in the second quarter. Maybe this will happen in the second semester, for Rumo to get closer to a break-even cash flow generation towards the end of the year. I would like to confirm if this is your expectations or what are your thoughts in that sense. Thank you very much.
Pedro, thank you for your question. Unfortunately, we don't give guidance for the cash generation, although I think that you could do the calculations. We keep our guidance for EBITDA. Everybody knows that we are doing a very important process of liability management that intends to reduce the cost of debt. We have been successful to reduce costs, such as fuel consumption, fixed costs. Regarding the working capital, our projections are directed that in the next two quarters, the result is supposed to be positive, that will help to compensate the result of the year. This is what I can tell you. We don't give guidance, but the company look forward to improve the cash generation, to have a positive cash generation.
This is very clear. Thanks.
This concludes today's question and answer session. I would like to invite Mr. Ricardo Lewin to proceed with his closing statements. Please go ahead, sir.
I would like to thank you all for participating on the call. It's always a pleasure to talk to our investors and analysts. Any doubts you have, all the team, the IR team, are available to talk to you, okay? Thank you very much.
That does conclude the Rumo's audio conference for today. Thank you very much for your participation. Have a good day, and thank you for your participation.