Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to RUMO's 2nd Quarter of 2018 Results Conference Call. Today, 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 recorded and all participants will be in a listen only mode during the company's presentation.
After Ruma's remarks, there will be a question and answer session for industry analysts. At that time, further instructions will be given. The audio and slide show of this presentation are available through the live webcast at ir. Humolog.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 1996. Forward looking statements are based on the beliefs and assumptions of Rumu'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 Rumu 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 Levin. You may begin the conference.
Good afternoon, everyone, and thank you for participating in Rumor S. A. 2nd quarter 2018 conference call. Let's start our presentation with slide number 3. Before starting our presentation, I would like to comment on the truck driver's strike and its effect on rumour.
This quarter, we posted 9% growth of transported volumes year over year. Despite this positive result, it was impacted by the truck driver strike in May, which prevented the normal arrival of trucks, especially at our terminal in Honduras. Our volume performance grew by 15% in April against the same period last year and in June that growth improved to 16%. In May, our transported volume declined 2% due to the truck drivers decline. As already mentioned, volume in the Q2 'eighteen 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 Hordonopolis, 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. In addition, we saw substantial growth of industrial product transportation, mainly driven by Sealya's new pulp operation and a higher volume of containers. Pork loading volume declined as an effect of lower sugar exports in the Q2 'eighteen. Even so, we increased 6% of points of market share in sugar transport to the port of Stenoz. Moving to the next slide, we can see Rumu's financial performance.
Net revenues grew by nearly 11% in the Q2 'eighteen, 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 BRL844 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, Rumu's EBITDA margin reached 51% in the Q2, up 2 percentage points versus Q2 of 'seventeen.
Moving to the next slide, number 5, we can see the performance breakdown of our business units. The non population posted another quarter of consistent results, evidencing that our investment strategy and our activities in this quarter 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 green operations was affected by the truck drivers strike, given to strong volumes in April June that sustained total volume for the quarter. In addition, other cargo such as pulp fertilizers and containers also showed solid performance.
Moving to the next slide, we look at Sao Corporation's results in the second quarter. Tal Corporation's 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 Q2 'seventeen. Moving on to the next slide, we look at green transported by our railway to the parts of Santos, Parana Guard and San Francisco do Sul.
In Q2 'eighteen, Humu's market share of grains transported to the point of Santos went down 2 percentage points. During some periods of the quarter, exports at this point of Santos increased over 20% versus the Q2 'seventeen, but our capacity, a lower growth of only 15%. As a result, we lost market share in this quarter. Starting this quarter, we will also report Gumo's market share at the points of Parana Gua and San Francisco Sur. In Q2 'eighteen, we gained 6% of points market share at these points, 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 8, we discuss our container operations performance. Our containers operation delivered positive results bolstered 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 company's consolidated indebtedness position.
Our leverage remained at 2.6x broad net debt to EBITDA ratio. It's worth mentioning that our gross debt decreased from BRL12.1 billion to BRL10.9 billion due to prepayments 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 nonrecurring events. The mark to market of similar loans hedging instruments as a result of interest forward curve fluctuation impacted results by BRL80 1,000,000.
It's worth mentioning that this has no cash effect. With the prepayment of re profiling debentures, the expenses of BRL22 1,000,000 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 amortizing instruments, which were approximately 140% of CDI, we incurred a fee with cash effect totaling BRL16 1,000,000. Moving to the next slide, we present the most relevant operating and financial performance indicators. This quarter, our operational ratio was in line with the Q2 'seventeen, reflecting improved EBITDA margin and higher depreciation, which in turn coincided with 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% increase 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 2nd quarter's '18 versus the Q2 'seventeen. The cycle time of railcars was particularly affected by the trucker driver's strike in this quarter. Moving to the next slide, we will discuss our most recent market projections.
Agroconsult again revised its projections for the 'seventeen-'eighteen soybean crop, indicating a 4% increase in Brazilian production and in the state of Mato Grosso, confirming a record crop. Concerning the corn 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 EMEA figures. As this scenario continues, our competitiveness will improve even more.
Now moving to the next slide, decide 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'm 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. The Speaker button on the webcast platform. 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. But one doubt is obviously one obvious doubt is to what extent soy volumes, better soy volumes can make up for lower corn production? And also with higher road freight yields, are you now seeing some signs that trading companies will opt to ship volumes with you in the Q4 rather than using truck transport at a higher cost in the Q3?
That's my first question.
Hi, Josh. Thank you for participating of the call.
That's nice to go
in. Yes. Well, answering your questions, the point is the second quarter seems to be very good for us. The demand is coming very, very the Q3, sorry, seems to be very strong. The demand is coming very strong.
So the projections that Agroconsult did seems to be very real, okay? So this was your first question. Regarding the second question, the question was if the demand would go to the more strong for the Q4. Is that right?
Yes. I mean just whether the situation with higher truck yields bodes well for the Q4 just on the idea that trading companies could hold off on shipping some volume and wait until the Q4 so that they're getting better pricing with you?
Yes. I confirm exactly what you are saying. This is the scenario. Although I can tell you that the soybean crop has been postponed a bit. So and this is part of your first question also has been postponed.
So it has been very strong also in the Q3, okay? Regarding the corn, it has been a bit lower as the information that we send from our group of sales. However, the soybean has been postponed and other things that can increase the corn crop or demand for the Q4 is that the internal market has been the demand in the internal market has been lower. So the export should be even higher than we thought even with the decrease of the crop or the crop.
Okay, Luen. That's very helpful. And 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? And 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, George. Well, for this question, I would say that the truck driver strike helped us regarding the negotiation of the next contracts, okay? After the strike, some companies decide to anticipate the negotiations. So we advanced very well in some negotiations. And for closing this contract, we are clients are waiting for the scenario of commercialization of next year as they are they still have some doubts regarding the minimum freight policy, okay?
But 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.
And in terms of price, I mean, your expectation is still for stable pricing in real terms, of course, in 2019, if you can comment?
Josh, I prefer not answering for this question as we are in the middle of the negotiations. So 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. So 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 the total size of the crop for soybean and corn is flat in 2019, is it still possible for rumour to grow by double digit 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 crop. In grains, we do not depend too much on the growth of the market, okay? We depend more on the increase of the improvement of our capacity that's doing very well with the investments that we are doing.
However, it's important not to forget that we are growing in other products, not only in grains. So and we the increase of demand of products such as fertilizer, such as pulp and paper has improved a lot of our volumes, okay? We also do not depend on the growth of these products. But as you know, we are improving our capacity to transport these products. 1 of the projects you know is the project the discharging of fertilizers in Rondonopolis.
And the other is the product with Fibria. So the demand there is more a question of increasing our capacity.
Thank you very much.
Our next question comes from Mr. Mizuho Saki, Bradesco BBI.
Hi. I have two questions. The first one, a 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 these projects for fertilizers? And the second question with regards Victor, sorry to interrupt you, but 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 you're going to increase the capacity of this project? Yes. Well, regarding the fertilizer project, we are doing very good.
There is no need to accelerate as we are already in what was foreseen, okay? We started the project in April. So in the 3 months of this quarter, we improved the volumes, and we are already in the level that we would like to reach, okay, to face the peak of consumption 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 1,000,000 tons in the 1st 12 years of 1.5. Okay.
Julio is correct me here. That's a bit more than I said. So more than 1,000,000 dollars sold in the 1st 12 months of operation. But Luvie, I mean, would it be possible, for example, to handle our demand for, let's say, £3,000,000 of fertilizers in the 1st year? Because I mean for all these guys they are willing to shift from roads to rail?
We do have capacity to do this. But remember, Victor, that we have a ramp up for this project. When we say 3,000,000 tons of capacity, that will happen in 3 years, okay? But we do if we need more than that, we do have capacity in this project to do more than that. But don't forget the ramp up, okay?
Okay. Okay. And my second question with regards to these BN and DAS funding, these BN2.9 billion, can you confirm the terms for these debts? The second part of this question, I feel it's hard to respond on behalf of BNDES, but can we say that this decision basically shows that they believe that the renewal or not of the of Mala Polyista is something that in the future should not have any major impact on your financials? I will start with your the second half, okay?
So part of the debt was approved by the Andes to the north corridor, okay? So remember that we have more than 70 years of concession and part of the facility was approved to the south at in a term that's shorter than the concession, okay? So let me give you more details on that and it will be clear for you. So for the BMS approved BRL2.89 billion, okay, from which BRL2. 2 3 is for the North quarter, okay.
The term is 12 years with 2 years of grace period, okay? For the Q4, it was approved BRL650 1,000,000 with 9 years and one year of grace period. So you can see that for the North quarter, the terms okay as well as for the South quarter.
The next question comes from Augusto Ensigniki, HSBC.
Hey, good afternoon. Thank you for taking my question. Just following up on the BMDS debt there. I missed a few mentioned what the rate was for the debt. And secondly, when will this be coming into or when will it be dispersed to you guys?
And then second and 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% at EBITDA. If you could 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 2, 3 years? Thank you.
So Augusto, sorry if I don't answer anything because the call is not that good. So if I don't answer, please you can make additional questions afterwards. But first, regarding the disbursement, we just need to go through the regular process of BNDES right now that we need to we have some conditions, but regular conditions so that the business can happen in some months, okay? We already have more than BRL 1,000,000,000 that we already invested and can be dispersed, okay? Does that answer your 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, okay? Regarding that, I can tell you that this is sustainable, okay?
And that can even increase for two reasons. First, we are still investing in the improvement of the issues of the company. There is still opportunity of cost reduction in the company for both the north and the south quarter, okay? Remember that the margins of the north quarter are even higher than this 50%, okay, goes around 60%, while the South quarter, the margins are a bit lower, something around 30%, okay? So we do have room for more improvements than the number that you see in the results.
And so long term, I mean, can you get that South the margin for the South operation, South Corridor closer to what the North side North operation is doing? No. Actually, there's room for improvement, but it will never be the same size of the North quarter, okay? This is a physical question. The North quarter has 1700 kiloliters in just one single line, okay?
While the South quarter, the largest the average distance is something around 700 kilometers. So for physical reasons, it will never have the same margins, okay? Even though we intend to improve the South quarter, prove the products that the market already know and the project that we have in South, that we improve the efficiency, improve the volumes in this quarter as well reduce the costs, operational costs and fixed costs.
The next question comes from Rogerio Araujo, UBS.
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 room accelerated its volume growth in Q3 'seventeen. We so we should 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.
So 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? And also what is the level of growth you are estimating for 2019? That's my first question. Thank you.
Roger, thanks for your question. That's a yes. We expect double digit growth in the second half of this year. And actually, if you consider a linear growth in the guidance that we've provided through the market, It's just a question of taking into consideration what we did in the Q1, and it's easy to calculate the Q2. So I think that the best guess, we consider a linear growth until end of 2020, and you will see that we can reach double digit
growth. Okay. And my second question is regarding the concession revenue. So I think the documents are now in the hands of ANTT, the regulator and should be channeled to the out of the court to feel. Do you so 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 CERU? Or do you think that the major points of the contract is already well aligned with all the parties involved? So how is your expectations for that process? Thank you.
Rogerio, I'm a bit more optimistic than you are. Saw in your report that you still think there's a lot of time for that. We are here in the company very optimistic regarding the approval this year. We continue to be optimistic, okay? We know that there may be some bureaucracy on that, that can postpone.
But from now, we see that things are doing well, okay? So this is just to understand the process. The process is in ANTP, right? The technicians of ANTP already finished their analysis that goes to what we call in Portuguese the pogradoria of the agency and then goes to the directory of ANTT that will send to the TCO, 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 we said legally for what should go, but if you can take more time to approve. So that depends on if you doubt or if you really to approve the renewal, okay? So we continue to be optimistic in the approval for the approval this year, although we understand that can bumps may happen in the process.
Okay, sounds good. Thanks very much, gentlemen, for the answers.
Okay. Thank you,
The next question comes from Natalia Serafin, Citi.
Hi, team. Thank you for taking my question. I will proceed on Trent and I'll be making question on his behalf. My first question is, what is your take on the North Slope Railway? How are you seeing the potential of the launch of this project?
And if you can talk more about Cerro Grande now on the potential covenment projects? Thanks.
Natalia, sorry. We do have some technical problems here. Could you repeat the question, please?
Sure. What is your take on the North South rail? And how are you seeing the potential of Amber Lantj of this project? And if you can talk more about the Ferro Grande and other projects?
Thanks. Okay. So I understand that you would like to know our opinion on Cerro Negro and Mont Alto. Is that correct?
Yes.
Okay. Regarding well, first, it's important to say that we do not have many railway projects here in Brazil. And as the largest company in the sector, we speak very seriously to the extent very deeply on all these projects. So regarding Cerro del, 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 163. They have several environmental problems, social problems. They reach in a place that's not the best place to it's a bit far from the sea. So it's a project that has a lot of challenges, okay? And we basically we don't not have interest on this project.
Regarding the Nordex Su or North South, We are studying the project. There are some inconsistencies in the studies presented by the government. But what I can say is that we do have interest in participating in our future auction of this railway, okay? And if there and we will participate until the level that we think that creates value for our shareholders, okay? That's all I can say by now.
Okay. Thanks. And my second question is regarding to the software and operations. Are there other initiatives that Humu can pursue for sure that could continue to build growth?
Again, could you repeat, please?
Sorry. Regarding the sulfur operations, are there other initiatives that Humu Compensio to that could boost the throughput 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. So there is no operational issue that can avoid us to reach our guidance. So 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 Brado division EBITDA improvement? Is this related to some level of important improvements even if it is current effect levels?
Actually, the company is investing a lot in the transport, the part called protoferr, okay, to improve the efficiency of the port. The important thing regarding port is that the company has created Jumbo has created an environment in which all the companies, the trading companies that have terminals in transport, they now they trust that in the railway, what didn't happen before. So even the trading companies are investing a lot to increase efficiency of the operations in the core terminal. So our investments plus the all the terminal investments that they are doing is improving the total operational efficiency of the force and support and we don't see any bottleneck for the next years before.
Okay, perfect. Thanks for taking my questions.
Thank
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 Q1 of the year was not offset now in the Q2. So maybe this will happen in the 2nd semester for us to get closer or for room to get closer to breakeven 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, okay? Everybody knows that we are doing a very important process of liability management that intends to reduce the cost of debt, okay?
And we have been successful to reduce costs such as fuel consumption, fixed costs. So 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. So this is what I can tell you. So we don't give guidance, but the corporate look forward to have to import the cash generation so to still have a positive cash generation.
Okay?
This is very clear. Thanks.
This concludes today's question and answer session. I would like to invite Mr. Ricardo Levin to proceed with his closing statements. Please go ahead, sir.
I would like to thank you all for participating of the call. It's always a pleasure to call to our investors and analysts. Any doubt you have, we are all the team, IR team are available to talk to you. Okay? Thank you very much.
That does conclude the Rumu's audio conference for today. Thank you very much for your participation. Have a good day and thank you