Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's First Quarter 2020 Results Conference Call, which will be led by Mr. Ricardo Lewin, Chief Financial and Investor Relations Officer; and Mr. Beto Abreu, Rumo's CEO. We would like to inform you that this event is recorded. [Operator Instructions] The audio and slide show of this presentation are available through live webcast at ir.rumolog.com. These 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 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 also result to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Beto Abreu. Mr. Beto, you may begin the conference.

[João Alberto de Abreu, executive]

Good afternoon, everyone, and thank you for joining us at Rumo's First Quarter 2020 Earnings Conference Call. This time, I take the opportunity to comment on our actions to manage the crisis caused by the new coronavirus pandemic and also to discuss some strategic points regarding the content milestone, which is the Paulista Network renewable, this contract was signed yesterday. It's worth noting that the federal Decree No. 10,282 of March 20, 2020, categorize general cargo transportation as an essential service. Thus, Rumo strictly organized to work in 3 major fronts. The first one, internal protocols and contingence actions; social responsibility and institutional actions; and third one, financial operations to preserve and insure liquidity. We executed several actions and protocols, aiming to ensure the safety of our employees and those related to our business, like clients, suppliers, truck drivers, terminals and ports. We also adopted measures such as social distancing and permanent sanitization in facilities, vehicles, instrument and locomotives. Moreover, employees in the risk group in structure to adopt the safety care and monitoring measures. For the health of employees, we adopted the home office policy. Thus, with safety across all our activities, we have been able to continue operating. We also acted joining with governmental authority and promote social responsibility actions. We identify needs to fight against the pandemic along with health departments of 28 municipalities in 7 Brazilian states covered by our concessions. Donation compromised 26 different institutions. We also entered into partnership with MRS, VLI and Communitas. We donated school meals to children in Santos metropolitan region. Besides that, joining with Cosan, Rumo made a public commitment not dismissed any of its personnel. We were pioneers in certain initiatives, and we are very proud of this. We work as similarly with governmental institution, state and municipalities, and these engagements result in various formal acts such as decrees, provisional measures and ordinance to ensure the continuity of our business. We also adopted measures to preserve the company financial health. In the first quarter, we raised around BRL 850 million to reinforce liquidity and approximately BRL 1.5 billion we raised in second quarter to ensure the continuity of our long-term investment, our cash in May then is around BRL 5 billion. On the next slide, we will discuss the continuity of our main investments during this pandemic. Our operations and ongoing investment at Rondonópolis terminal remained uninterrupted. I'd point out that after concluded the investment of our terminal, which is currently Latin America's largest road in rare terminal, we will have 30% more capacity with higher level of efficiency and safety. In the state of Goiás and Tocantins, investment at the central network continue advancing. The photos on the slide illustrates the ongoing construction of Rio Grande Bridge. In the boundary between São Paulo and Minas Gerais and the connection between Central and Paulista Network. We expect this operation to initiate in the first half of 2021. On the next slide, I would like to talk about the Paulista Network renewal. In continuity to the material fact disclosed on May 27, on the next 4 slides, I will share with you the strategic relevance and the main numbers of the Paulista renewable. It was a long process, but with no doubt, this is a great victory for Rumo for the rail sector in the entire country. This is the first time a rail concession in Brazil received a renewable. These outstanding achievements demands a lot of effort from the entire team, who worked very hard during the entire process and jointly with ANTT and TCU defined a solid framework to be a reference in the other renewables. We are immensely proud, and I'm sure that it will reinforce even more Rumo's role in the Brazilian logistics. On the next slide, I highlight the strategic relevance of the renewable for Rumo. Nearly 80% of our results derived from the North Operation, where we hold 2 concessions. North network that is work until 2079 and Paulista Network now extending until 2058. Discontinuity for 2 of our main concessions is key for wealth creation on rails for our long-term business. As a condition to the renewable, Rumo will make investment that will double this network current capacity, bringing even further efficiency and safety to our system. With that, we will be able to sustain long channel volume growth coming from the state of Mato Grosso through the North network, allow the entrance of additional volumes via central network and enables an increase of cargo in Paulista Network and other rails using this network. Let's see on the next slide, some points of this extension agreement. For the right of the use of Paulista Network from 2028 to 2058, Rumo will pay a concession fee of approximately BRL 2.9 billion. Initially, this amount will be paid in quarterly installments over the next 38 years. Also, a volume achieved are greater than those projected in the NTT model and additional concession fee may be defined. It's also included in the concession fee and the CapEx plan amounts referring to the return of unprofitable stretch such as Cajati and Varginha. In recovery of Panorama and Colombia, which could bring additional demand to Rumo. Rumo also assumed an investment commitment of approximately BRL 6.1 billion over the concession period. On the next slide, I will further discuss the mandatory investments. So Rumo committed on investment, BRL 6.1 billion on which we highlighted, BRL 2.1 billion to acquire rolling stocks. BRL 2.6 billion to improve the permanent way and 1 billion in the urban conflicts. ANTT mandatory investment consider approximately BRL 1.7 billion until 2023. The distribution of this investment over time may change due to Rumo priorities. But so far, we do not see the need of changing our guidance to deal with regulatory commitments. Now I turn the floor over to Ricardo Lewin, who will touch on our financial matters related to the renewal, and we'll finally discuss the first quarter results. Thank you very much.

[Ricardo Lewin, executive]

Thank you, Beto. Good afternoon, everyone, and thank you for joining us. In the fourth quarter of 2019, we had approximately BRL 1.9 billion in unpaid concession fees of the Paulista Network booked in our financials. The agreement with ANTT allows us to settle net liabilities in BRL 468 million, that will bring in part from gains on EBITDA and financial results. The amount deposited in the court will also be used to be deducted from liabilities balances. Also, a second part of the accounts offset in the estimated amount of BRL 148 million will be confirmed by experts' report to then be deducted from liabilities balance. As a result, Rumo should pay to the federal government, approximately BRL 1.1 billion divided into 8 annual installments. Starting on July 15, 2020, with the first 2 installments in the amount of BRL 50 million per year and the rest in approximate amount of BRL 175 million per year. On the next slide, I would like to demonstrate how the review affected this first quarter and review affected the second quarter. Besides the accounts offset, it was also a condition to the review, the settlement of former regulatory controversies of approximately BRL 109 million, which were paid in the first quarter of '20 and will impact our EBITDA in BRL 64 million, and our financial result, BRL 39 million, both considered one-offs. As already said, the final agreement will allow us to recognize in the second quarter 2020, gain deriving from the write-off of provisions totaling BRL 468 million. We consider both impacts as one-offs. That's why we will adjust our reports for a fair comparison with previous year. On the next slide, let's now talk about the first quarter 2020 results. Now discussing our results, I'd like to point out that in sheer comparison, we report consolidated adjusted results, excluding the effect of the Paulista Network renewal, as already discussed, and the costs and expenses related to the central network, given that the signature happening in 31 July, 2019. So this first quarter and the second quarter 2020 results won't be comparable. All of the sections of the earning release consider transfer network consolidation and the effects of Paulista Network renewal process, unless otherwise indicated. On the next slide, let me discuss the operational results. In first quarter 2020, our volumes fell 7.6% to 12.3 billion RTK. In the North Operation, volume was impacted by: first, late start of the soybean harvest season compared to the first quarter '19; second, lower corn carryover inventory in January; third, rainfall on the Santos Hills and the part of Santos in March, 73% above the most historical average; and fourth, cyberattack we underwent in the second half of March, which hampered the recovery of volume demand. In the South Operation, the impact was strong. The late start of the soybean harvest season compared to the first quarter '19; second, lower industrial volume due to COVID-19; third, soybean crop failure in the state of Rio Grande do Sul; and fourth, the cyberattack. On the next slide, we will discuss our financial performance. Rumo adjusted EBITDA dropped 18.6% and to BRL 653 million with a margin of 45.9%, impacted by reduced volume and lower yield in the quarter. In the North Operation, yield blended 7%, reflecting: first, lower demand for freight in the market in January and in February; second, the appointing volume in the March, a month which usually reports higher yield; and finally, the signature of the pay per fee contracts in a moment of lower truck freight prices. In the South Operation, yield grew by 3.4%, and the container operations saw a decline of 3.8%. Fixed costs, general, administration and strategic expenses, excluding the Central Network, increased only by 0.7% less than inflation. Variable costs had a good performance, falling 12% on the back of efficiency gains. Fuel costs dropped at 8%, in line with volumes and the reduction of cemetery steel consumption by 5.3% offset higher steel prices year-over-year. Despite good cost performance, lower operating leverage and lower tariffs decreased margin by 3.2 percentage points. Now let's discuss the financial results and net income. This quarter result had a financial expense of BRL 531 million, 63% above the first quarter '19. The following factors impacted the results: The first factor is the effect of CDI reduction that positively contributed to results; the second factor are 2 adverse effects. First effect is the review of the estimate to measure the fair value of financial issuance, which resulted in a nonrecurring noncash effect of BRL 160 million. This review results in lower NPM volatility in the next quarters. Second effect is the addition of Central Network's financial expenses, referring to the concession fee payment amounting to BRL 70 million. We reported an adjusted net loss of BRL 136 million versus net income of BRL 27 million in the first quarter '19 due to lower EBITDA and the nonrecurring impact of derivatives estimate rental review, as already mentioned. On the next slide, let's discuss our indebtness. This part as already mentioned by Beto, we carried out relevant funding to preserve the company's liquidity and financial health. And in May, we achieved a comfortable position of BRL 5 billion in cash. This quarter leverage reached 2.1x broad net EBITDA. On the next slide, let's talk about market dynamics. Concerning the soybean scenario, there has been significant changes since the beginning of this year. According to Agroconsult, soybean trade, despite the corona peers, is likely to grow to 160 million tons versus EUR 153 million in 2019. Also, we estimate that China should increase its soybean inventory by 6 million tonnes. And finally, the Brazilian soybean devaluation accelerated this commodity commercialization in the state of Mato Grosso, which achieved 89% for 2020 and 36% for 2021. Thus, we expect exports to reach approximately 76 million tons, a more positive scenario than initially projected for the second quarter. This trend of higher exports already can be seen in the volume transported in April with soybean volume growing 28% versus April 2019. On the next slide, we will discuss the outlook for corn in the second half of the year. Regarding corn productions, we foresee favorable availability in the second half as the state of Mato Grosso should record a greater performance than Brazil's average. And also considering that most of exports expected reduction from 39 million to 33 million tons should take place in the first half as you can see on the graph on the right side of the slide. Concerning supply, the United States will see greater corn availabilities due to lower demand for corn ethanol. While Brazil will show a decrease in availability and the platinum window was shorter and the climate did not contribute to the productivity in the southern states. Despite the risk relative to the United States, Brazil has a great competitive advantage as the strong depreciation of the BRL prompted the producer of Mato Grosso to anticipate the corn commercialization, which had already reached to 80% in May 2020. We finish here our presentation on this quarter, which also gave details on the milestone of Paulista Network's renew approval. We remain at your disposal for the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Pedro Bruno, Santander.

[Pedro Bruno, analyst]

Congratulations on the important milestone. I have 2 questions. The first one regarding Malha Paulista and actually the implications going forward. Is it correct to imagine that the process or the regulatory process of approval for the Sorriso project, which is now Lucas project, right? Should accelerate going forward, given that you no longer have the regulatory discussions of Malha Paulista? And what would be the, let's say, timetable that you have in mind for that regulatory process going forward? That's the first question.

[Ricardo Lewin, executive]

Thank you, Pedro Bruno. I think it's best to have Beto answering your question. So Beto, please, you may speak. Sorry, Pedro. I will repeat the question for Beto. So Beto, Pedro Bruno is asking about the Lucas do Rio Verde project, and how do you see the pipeline of this project going forward?

[João Alberto de Abreu, executive]

Can you hear me? Can you hear me?

[Ricardo Lewin, executive]

Yes.

[João Alberto de Abreu, executive]

Sorry. Sorry, Pedro, sorry for that. But just going back to your question, I think -- this is Beto. I think you're completely right. Since the beginning, we, as a team, have decided to put all the focus and to prioritize Malha Paulista So that was the idea. It was a tough process with our…

[Gustavo Marder;Investor Relations Manager, executive]

I think Beto -- we missed Beto. So I'll try to answer this one. So after we accomplish Malha Paulista renewal, it's clear to everyone that Lucas do Rio Verde is the most important project for the company. So we are going to make all the efforts to start this process with the regulator. It's worth mention that last year, we already applied for the environmental licenses, allowing us to gain some time in this process. Meanwhile, we don't have the regulatory approval. But there is a huge pressure for this project in the state of Mato Grosso. We are very excited about the profitability that whom we can have with a project like this. So we think we have all the means necessary to advance with the project now that we accomplished the Malha Paulista renewal. What is your second question, Bruno?

[Ricardo Lewin, executive]

Marder, if I can complete the question Pedro Bruno -- this is Lewin. Remember that we already advanced in the project -- in part of the project in Novo [indiscernible] , where we already bought a piece of land there and we are starting the project for the Novo [indiscernible] terminal, okay? So this is already a first step in the development of the project. If you can go again to the second question, please?

[Pedro Bruno, analyst]

Perfect. The second question also relates to Malha Paulista in the sense that you announced also 2 financial impacts from the signature, a negative one and a positive one, as you explained, with a net positive. Just to make sure it's actually twofold the question here. Did I understand correctly that the net impact when we imply first quarter results and second quarter results, will be a positive of approximately BRL 370 million, which is the net of the negative BRL 100 million and the positive BRL 470 million in rough numbers? That's the first part. And if yes, if that impact is included in the guidance that you provided for 2020 or not?

[João Alberto de Abreu, executive]

Pedro, Ricardo Lewin will answer this question. So please, Ricardo?

[Ricardo Lewin, executive]

Pedro, let me go through all what we said before because this is a good question and needs to be very clear. One of the conditions imposed by TCU was for the concessionary to settle all defined spending payments in legal or administrative appeal, okay? In this regard, in January 2020, so in the first quarter, Rumo paid the amount of BRL 109 million, of which BRL 63 million affected our EBITDA, okay? And the rest affected the P&L, the bottom line through financial expenses. So this was the only effect in the first quarter. And this was not in the guidance, okay? Because we didn't know frequently that we will need to pay debt. It was an agreement by the end of the negotiations. Now talking about the effects on the second part, okay? There will be a settlement, okay? That will be a result of the accounts offset. And Rumo will reverse at first, something around BRL 470 million accounted today as liabilities, which will bring corresponding gains in EBITDA and in financial results, okay? And -- but this second part that I said, just reinforcing, will affect the financials on the second quarter 2020. Is that clear for you?

[Pedro Bruno, analyst]

Yes. No, it's perfectly clear. So a net positive impact overall when you put first quarter and second quarter together. And then the other question was if that was -- the net impact was included in the guidance, and I understand it is not. That's right?

[Ricardo Lewin, executive]

You're right. It's not. And yes, it's a net impact, but affecting in different quarters.

[Operator]

Our next question comes from Alex Falcao, HSBC.

[Alexandre Falcao, analyst]

Can you share with us what's the IRR of the Malha Paulista renewal, if that's possible? That's question number 1. And question number 2, it seems like you guys are extremely confident on beating the guidance even with loan numbers in first quarter, you commented on the second half of corn. Can you share just April and May, what you have so far? What makes you that confident? If you can share a little bit how volumes are going? How you guys are seeing the -- at least second quarter? That would be awesome.

[Gustavo Marder;Investor Relations Manager, executive]

Thank you for your question, Falcao. I will answer the first one. Then I think Ricardo Lewin may comment on the second part of your question. So with regards to the IRR of the renewal, this is not a typical project like the ones like we have in the third world. So actually, what we are doing here is ensuring the extension of this renewal between 2028 and 2058. To accomplish that or to ensure that we'll have to pay a concession fee of BRL 2.9 billion. And on top of that, we have committed to invest BRL 6 billion. It's worth mention that this BRL 6 billion, is something that the company was already willing to invest, not to just increase the capacity in Paulista, but mainly because we do have a lot of cargoes in the northern network. And once we are -- we aim to increase our volumes there, we need to provide the capacity. So when you think about the IRR, I would argue that these investments, they don't matter at all because they will -- they are investments that we would be willing to do either way. And of course, they pay off based on the returns that we can have on the North network, which is pretty high. So it's very hard to come up with a number, but I would say that 30 years of this concession, that is very strategic, in our view, works much more than BRL 2.89 billion, which is the exact amount that we paid for. So it seems a pretty accretive project for the company. And we really believe that we'll be able to extract all the value in the long-term from this renewal. Regarding the second part, maybe Ricardo Lewin can clarify for you.

[Ricardo Lewin, executive]

Thank you, Marder. Just Falcao, mute during the call. So just complementing Gustavo's answer. Remember, that as said today in the live by Beto earlier, Malha Paulista is important to have a good operator, it's important to have investments and increased efficiency of Paulista because Paulista is the support for the group in the North and the Central Network. So there is a mix in the IRR. But as Gustavo said, for sure, the value is much higher than the BRL 2.9 billion that we're paying. You asked about our confidence in the guidance and about volumes in April, May. Unfortunately, in May, it's not disclosed to the market the volumes. So I will talk a bit about April, okay? You know that we have already disclosed the inflows of April volumes to the market. And it's possible to foresee some trends for the second quarter, okay? For soybean. There was increasing -- 70% increase in volumes year-over-year. And 17 is all the volume of the company. Only in soybean, we increased more than 28%. Unfortunately, we are serving in other products, okay? But we are talking about 28% of increase in soybean, that shows that we have expanded our capacity from 1 year to the other, okay? We also expect to have a very second -- a very good second half of the year with corn, and we expect to have good availability as we talked during the presentation, okay? So that being said, the short-term guidance is maintained, okay? We came to foresee during the year, any change or we don't get so confident. We will share with you and the entire market, okay?

[Alexandre Falcao, analyst]

Okay. Can you -- a very quick follow-up on this because on the first point, everyone is going to make their own calculations, right? And it's all there of. So the best way to do to for what's the IRR is just to take the revenues or the EBITDA from Paulista, whatever that is, that you guys publish, get the BRL 3 billion. These are "investments" and see where that lands. Is that a fair assumption to do?

[Gustavo Marder;Investor Relations Manager, executive]

Falcao, it's a fair assumption. I think you may have to take into account also how much more value can we extract from the Northern network and also from Central Network by having the control of Paulista. Clearly, there is a synergy between those 2 concessions with Paulista. So our understanding is that the value of this renewal is much beyond the financials of Paulista itself. It produced positive effects in Central and Northern network as well.

[Operator]

Our next question comes from Victor Mizusaki, Bradesco BBI.

[Victor Mizusaki, analyst]

Congratulations for the renew of Malha Paulista. I have 2 questions here. The first one, how do we take a look on your press release? You mentioned a little bit about the drop of freight price at Malha Norte, something around 2% to 7%. And one of the reasons is because of the take-or-pay contract. So I'd like to -- if you could quantify, I mean, how much of this drop is related to the take-or-pay? And the second question, how do we take a look on your cash flow? We can see an increase in accounts receivables. And so I'd like to understand is that maybe because of the cyberattack. And then in the coming quarters, you likely see contract receivables going down a bit.

[Gustavo Marder;Investor Relations Manager, executive]

Thank you for your question, Victor. I will take the first one and maybe Ricardo Lewin can complement and try to answer the second one. So with regards to yields, what happened during this first quarter was that, first of all, we had a late crop of soybean compared to last year. And on top of that, we also had lower inventories of corn in January. Because if you remember, last year, there was carryovers from the -- from 2018 to 2019, allowing good volumes on January. So this was something that we were already accounting, we were expecting. But with this lower demand in the market, the truck price was slightly lower than we were expecting. So that brought an additional pressure to prices and also delayed a bit the negotiations of additional take-or-pays that right now we have in place for the second quarter. But because of this seasonality issues and because of a lower truck prices, especially in January and February, we end up having -- we had lower yields in those months. When it comes to March, we saw an improvement in the freight prices in the market. But at the same time, we had the operational constraints preventing us from having more volume. And as you may know, March is a month where we have higher carriage. So we didn't take advantage as much on this because we had the operational constraints. Another important thing to think about the yield is the fuel price. So we saw a lot of volatility in fuel prices, and there was significantly reductions throughout the quarter, which also helped the truck drivers to afford lower prices in the market. But hopefully, and luckily, this process is improving. So we are seeing better prices right now in the second market. And it will be always very tough to forecast what could happen with prices because it will depend a lot on the market conditions. We are confident about our ability to price. In the long run, remember, we believe that there will be some structural things that will help to boost our competitiveness. One of them is the improvements that we are implementing in Rondonópolis. This will certainly improve the cycle of trucks in our terminals, and mainly, this will allow them to lower prices because today, they somehow charge a premium to go to Rondonópolis because the terminal operates very close the cap of capacity. And therefore, it's very likely that they're going to -- that we could have to wait to unload in the next day. So this additional cycle time for trucks caused them to increase a bit their prices. Another thing is regarding the toll road fees in the BR-163. We expect this BR to be auctioned and just after this auction, there might be some additional costs with toll road fee. So we definitely expect our competitiveness to improve. And in that scenario, so far, we can say that we advanced well in terms of take-or-pay negotiations. We cannot disclose the numbers, but it's safe to say that most part of our volumes in the second quarter were already negotiated with customers. So we are now much more -- we are looking forward to negotiate the volumes of the second half, which are also well advanced. But we still have some room to sell more transportation. And this is evolving well. So I don't think it's a concern and luckily, we should have good news in the upcoming months. Regarding your second question -- yes, please?

[Victor Mizusaki, analyst]

So just a follow-up here. So based on the scenario that you commented, I mean, think about March, it makes sense to assume that so you in the second quarter will likely improve quarter-over-quarter?

[Gustavo Marder;Investor Relations Manager, executive]

I would say that. But remember, we have, again, a lot of things to take into consideration. One of them is the take-or-pay. So all the take-or-pay that we set during the first quarter, the pricing of those take-or-pays is pretty similar to the prices that we had in the first quarter. Of course, now with the higher truck prices in the market, we have the ability to ask for more price in the market. So it will be a blend between take-or-pay agreements negotiated before during the first quarter, which might have lower prices. And additional volumes with higher pricing based on the market opportunity that right now is very clear. But remember, other things might happen. So right now, recently, we have a fuel adjustment -- a fuel price adjustment. So if fuel prices goes up, this could be positive to the company because very likely truck prices will be also higher.

[Ricardo Lewin, executive]

Okay. Marder, [indiscernible] second part of the question about the accounts receivables. And Victor, you're right. A huge part of these receivables comes from the cyberattack. So we will much probably fix debt during the year, okay? Let me just complement one thing, Victor, because probably you are seeing in other companies we have no problem of no payment by our clients, okay? So I don't know if you're question had something to -- related to that. Remember that a huge part, and let's say, 80% of our clients are trip away clients, okay? That means very good risk and our payment term is very short, something around maximum 10 days, okay? On average, 10 days. And there was an increase because of the cyberattack. So your question that yes, the increase of accounts receivable, a huge part was due to the cyberattack.

[Operator]

Our next question comes from Rogério Araújo, UBS.

[Rogério Araújo, analyst]

Congratulations on the renewal of Malha Paulista and the resilience during this process. I think it's a relief to all of us. So if we travel into Brazilia since 2015 to speak about that, and that's definitely a relief. And I suppose we won't stop go into to Brazilia because we have Lucas do Rio Verde and perhaps Malha Sul renew. So let's see. Congratulations. So my question is regarding the terms of the concession renewal. So I have 5 quick points here that I think is going to be very helpful. And the first one is regarding the concession fee, BRL 2.9 billion. I assume this is NPV using the 11% regulatory work. So can you confirm that? And if there is going to be something around BRL 327 million a year by 2058. So is that correct? That's the first from the 5 points. Let me go one by one, and I think it's going to be clear that way.

[Ricardo Lewin, executive]

Correct. Sorry, Marder. Let's say, it's correct. It's a rounded number, okay? There is a small adjustment because this BRL 2.9 billion is December 2017 value. But it's very [indiscernible] to sell, something -- a bit more than BRL 327 million.

[Rogério Araújo, analyst]

Okay. Sounds good. So second point is investment in urban areas, around BRL 1 billion. So what's the period for which it should be invested? And is this also an NPV based using 11% work? That's the second point.

[Ricardo Lewin, executive]

This is BRL 1.21 billion that will be -- has a long term, okay? The amount to be invested until 2023 is something around BRL 260 million, okay? The rest is long term. And in regard -- it's not 11.04%. Marder, could you confirm that the…

[Gustavo Marder;Investor Relations Manager, executive]

Yes, yes, Rogério most part of the urban context will be deployed after 2023. So it's -- it was discounted in the cash flow by 11.04%. But indeed, what matters here is the inflation. So this is the net present value of those investments. How much we're going to pay for them, it depends on pretty much inflation. We don't have to deliver the money to the government. We must accomplish the investment that we commit with. So you have to adjust pretty much those investments through inflation to see how much we're going to expand to accomplish the project.

[Rogério Araújo, analyst]

Okay. So not an 11% work. This is not an NPV based, not an 11% work. This is based on inflation.

[Ricardo Lewin, executive]

Yes, yes. It is not. But on the other hand, my point is, of course, if you reduce the conflict or urban conflicts, you would end up having a higher concession fee, which is also discounted by 11.04%. So in this case, what we must do is to deliver the project. Doesn't matter how much it's going to cost. We have to accomplish the projects.

[Rogério Araújo, analyst]

Okay. Sounds good. So third point is on CapEx. Also same question. Is it an NPV using 11% work? And in Valor newspaper today, there is the breakdown of BRL 1.7 billion by 2023, the rest by 2058. So I would like to know also if this includes what you consider as maintenance CapEx currently, which one, BRL 1.2 billion, does it -- is it considered as well in that number? And is it an NPV using 11% work or not?

[Ricardo Lewin, executive]

No. This is not an NPV. This is the total investment that we expect to do in the upcoming years, beyond -- going beyond 2023. And once again, it's the same. We have the value of the project, how much we're going to end up spending depends on inflation and the efficiency of the project. And yes, you're right, we have all the CapEx that embedded so we have extension CapEx and also sustaining CapEx. But of course, there is a concentration where the expansion CapEx it's probably concentrated in the next 8 or 10 years. And meanwhile, the sustained CapEx is throughout this concession.

[Rogério Araújo, analyst]

Okay. So -- and also the BRL 6 billion, I suppose you already -- you've done part of that already. So can you say how much you've done already?

[Ricardo Lewin, executive]

Of course, we did a bit. We will not be disclosing by now how much we did because we have to receive the approval of the regulator. So they will have to check whether or not the investments that we did fit in their standards, so they have to accept that investment. So only after that, we can say that the investment is done.

[Rogério Araújo, analyst]

But is this more like 10% or 53% of the BRL 6 billion, just for us to have a broad idea in order to get the assumption.

[Ricardo Lewin, executive]

Rogério, it's really hard to say by now. Of course, we don't want to disclose an exactly number without having the endorsement of the regulators. So that's the reason why we will not disclose further information on this.

[Rogério Araújo, analyst]

Okay. No worries. And then in the indentification fees, for the abandoned rail stretches, I think this has to be defined in 18 months, right? You're going to have to pay a fee to the government, to ANTT. And I think also you're going to have invest part also in making those rail lines operational again. So any idea how this -- how much this will cost?

[Gustavo Marder;Investor Relations Manager, executive]

We have 2 different things here. So first of all is regarding the unprofitable stretch of Varginha and Cajati. Those ones, we are agreeing to return that stretches back to the government because it's not profitable. And the fit is they pretty much took over the railway. It's not possible to have railways there by this time. It's impossible to license. So the only thing that we can do is to give it back to the government. It's already embedded in the current concession fee, a value, a indentification to give it back to the government. So this is already embedded in the current concession fee. On top of that, we took a commitment with the government to recover Panorama, which is, I stretch that starts in Bauru region and goes all the way to Panorama and close to the South Mato Grosso border. And the other one is Colombia, which passed through [ Barretos CD ]. So those areas, we know that we have a lot -- some significant demand there. Demand for grains, for sugar, sometimes even for fuel. So we took the commitment to recover those strategies. This will be a long-term plan. It's not for 2023. It goes beyond that. And we have a CapEx of roughly BRL 400 million to accomplish this which is also embedded in the BRL 6.1 billion.

[Rogério Araújo, analyst]

Okay, perfect. Last point. The net BRL 1.3 billion of the unpaid concession fees and a credit that you had as labeled law suits. So this is going to be paid in 2 installments of BRL 53 million and 6 of about BRL 200 million, right? What is the rate here to be adjusted? Is it inflation? Is it an NPV on the work?

[Ricardo Lewin, executive]

Its only inflation. We have an agreement and from now on…

[Gustavo Marder;Investor Relations Manager, executive]

Ricardo, actually it’s not inflation, its SELIC, okay?

[Rogério Araújo, analyst]

SELIC. Okay, perfect.

[Operator]

Our next question comes from Regis Cardoso, Crédit Suisse.

[Regis Cardoso, analyst]

Two from my side. Lewin, Beto, one of the topics that I have incurred is about in the results was the conversion between EBITDA to cash flow, operating cash flow, which seemed particularly weak. You mentioned the cyberattack on the receivables, that's about BRL 100 million increase in receivables, not sure if entirely related to the cyberattack. If you could comment, I mean, why did working capital consume so much cash? Is this something reversible? That would be very much appreciated. And then my second question is more on a medium-term view. Whether you have any concerns about the corn harvesting in Brazil this year? And especially because of the competition with U.S., given the lower your prices affecting SNL?

[Ricardo Lewin, executive]

This is Ricardo. Let me start with the second question, talking a bit about corn, okay? It's important to give you an entire overview. And I will talk also about the U.S., but the expectation for Mato Grosso, that's our most important market, is above the country average. In Mato Grosso we have already 80% of the corn ready for commercializing, while in Brazil, have less than 60% of commercialized corn, okay? If we compare with PII in '19, there will be significantly less export of corn in the first half of the year, okay? Especially because impacted by January because in 2019, we had higher inventory that were sold in January. And in June volumes because this year, there is no early harvest of corn, okay? So most part of the reduction in export for corn, we have in the first half of the year, okay? Or what will ensure good corn for export in the second half of the year, okay? So it's really important to understand all the picture. And now talking about your question that U.S., okay? You are right, there will be a higher availability of corn in the U.S., as I said, due to the lower consumption of corn ethanol. But Brazil, it's a very good position, mainly because of the FX rate. The BRL is very depreciated, okay? And this makes our corn, it's already very competitive, even more competitive, even more than it's today, okay? And moreover, Mato Grosso, it's really well positioned in this competitiveness, okay? As I said, there is almost 80% commercializing against 58% in the country. Let's just see the level of competitiveness of the Brazilian corn for 2021, okay? Not talking about second half of this year. I'm talking about 2021. Mato Grosso has already commercialized 28% of the crop. So not that we expect 2020 being a very strong year, but also 2021, we expect to have a good year. Talking a bit about the -- your first question, the conversion. If you take the first quarter of 2019, we had the same question at that period, okay? At that time. And the -- as I said, the conversion between EBITDA to cash flow was also weak at that point. So it's recurrent, what's happened in our sector, but in the company and reinforced this year by the cyberattack. But basically, this is something that happens from one year to the other, and that involves both recurring things or even very, very thing that are onetime. For example, we have expenses on Malha Paulista that we needed to pay. We have suppliers payment. You have some traditional demand that happened in the -- that increase the conversion, okay? So it's not something controlled. And like last year, during the year, this conversion will increase at the end of the year. As I said, to Beto in the previous, we -- every year, we reduce the working capital investment during the year, okay?

[Regis Cardoso, analyst]

Very clear. Maybe just a follow-up on the last one, to see if I got it correctly. Do you think this working capital investment is something that will be reverted as in you will generate cash from working capital, from removing working capital? Or is it just that the conversion will be better for the next quarters, but the investments in working capital you needed to make now are permanent?

[Ricardo Lewin, executive]

Conversion will be much better. It's not that we reversibly have a positive working capital. No. It's a more improvement of conversion. Much better improvement, okay?

[Operator]

Our next question comes from Rogério Araújo, UBS.

[Rogério Araújo, analyst]

One more from Malha Paulista renewal here. So the TCU, they required in their report 2 requirements here. One, it was like a return review cycle for Malha Paulista consisting of sharing the income in the case it's above for future assumptions. So how did this go? Is there already a model like a tariff model? How will this work? And also, they required clear guidelines for independent rail operators to use Malha Paulista. So is this regulation out already? How this evolved since then?

[João Alberto de Abreu, executive]

Thank you, Rogério. I will answer the first one. So you're right, that we explained also in the presentation, we'll have a variable concession fee, which may be charged if we overcome the volumes forecasted in the ANTT model, okay? Those volumes will be splitted in 2 types. The first one is on cargo performed by Paulista, which arguably has a higher tariff because when we transport for Paulista, in average, we transport for 700 kilometers. And very likely, we'll charge a tariff around BRL 70 per ton, BRL 80 per ton. So if we do more volumes of cargo in Paulista, of course, they will have to review the model to see how much more concession fee they would have to charge to rebalance the agreement in 11.04%. On the other hand, we have passed through cargoes, which, for instance, includes the volumes that we have in the northern network. So those cargoes, we don't have to pay based on the tariffs that we charge from the customers. But instead, from the pass-through fees that we charge in Paulista to the northern network, which is much lower than the average tariff that Paulista charge from its customers. So for instance, today, this pass-through fee is around BRL 20, BRL 25 per ton. So when we try to put those things together, I would say that maybe and hopefully, we'll overcome the volumes of pass-through cargoes in Paulista. That means we'll have much more revenues in the northern network, which is something good. And as a side effect, we might have to pay a bit more in concession fee. But this adjustment in the concession fee will only happen based on the BRL 25, which is the pass-through fee. So we are not as much sensitive to pass-through cargoes to change that much the concession fee. On the other hand, we think that the volumes forecasted by the regulator for the cargoes, the owned cargoes of Malha Paulista are already pretty high. So it's very difficult to overcome those volumes. It is possible, but it's not likely. So we don't expect to have any kind of major adjustments in terms of concession fee throughout the concession period. But again, the business should be perceived as something good because if we have more volumes, definitely, we have more revenues. And then the methodology to charge these revenues is only based in the volumes. And it depends if we are talking about pass-through volumes or volumes that we are serving the cargoes from Paulista Network. There is a very complicated…

[Rogério Araújo, analyst]

Sorry to interrupt you, when you mean share is 50-50, so 50% of the extra revenue?

[João Alberto de Abreu, executive]

No, no, it's not that. It's much more complex than that. They pretty much bring this volume to the model and try to understand what will be the advantage in terms of fixed cost dilution. And then they realize how much more they have to charge to rebalance. But there isn't a ritual established. Instead, there is a methodology to reveal the whole thing. But again, it makes a lot of difference if we are overcoming the volumes in pass-through cargoes or in cargoes served by Paulista, which have higher tariffs. And for Paulista, we don't see as likely and when we talk about grains coming from the North, okay? If we have to pay a bit more because we overcome the volumes is not a big deal. And it won't be as much because it will be only calculated based on the tariffs, the pass-through tariffs that we pay in the North.

[Ricardo Lewin, executive]

Okay. I would like [indiscernible] that's the -- yes, indefinite railway operator. Rogério just -- at the end of the day, nothing changes compared to the current regulation, okay? In practice, the concept that's defined by the regulator, is this good to be put in place in large distances, okay? The IRO, the indefinite railway operator, it's difficult for them to be able to have like train drivers to replace the shifts of train drivers after 8 hours to stay overnight, like the overnight that we have already built to help here stations. So it's difficult for them to have the infrastructure that we, as operator have, okay? So it's not only acquiring the right of way, but need to have acquired all the other services, okay? Just to -- today, we have a structure in place, like the one we have with Klabin, for example, that the indefinite railway operation, they buy some assets, okay? And we make the service for them. So this is exactly what we have in the South. If you go to the South operation, you'll see that nice clubbing trends, they do the investments and we operate for them. And in my opinion, right? In Rumo opinion, this is even -- this is not a threat for Rumo. On the contrary, this is an opportunity that Rumo has in case we want to reduce the lead for CapEx, okay? And we want to guarantee the volumes. So at the end of the day, it's even positive for us.

[Rogério Araújo, analyst]

Okay. Sounds good. Just confirming on the first on the return review cycle. So you charge about BRL 170 per ton from Rondonopolis to Santos. So can we think that from this BRL 170, everything that goes above the expected volume, the official volume, you would have to pass-through about BRL 25 to the government? So it's like providing a 15% of your charged fees to the government above a certain level, a certain threshold that you have as official estimates? Is that a good way to think about it?

[João Alberto de Abreu, executive]

No, Rogério. It's slightly different. You're right about the tariffs that we charge in the north. They are around 170 million. And out of that, we have roughly BRL 25 per ton as a pass-through fee. What I mean is we only have to share a piece of this BRL 25 per ton, if we overcome the volumes. Not to the BRL 25 per ton. So it's even less okay.

[Rogério Araújo, analyst]

Okay, perfect. It's very clear. Thanks so much again and congratulations for this conclusion.

[Operator]

Thank you. That does concludes the question-and-answer session for investors and analysts. Now I'd like to turn the floor over to Mr. Ricardo Lewin for his final considerations.

[Ricardo Lewin, executive]

Well, once more, I would like to thank you all the investors and [indiscernible] for participating of the call. This is a very important moment, not only for Rumo but for the entire country. The milestone of the renewal of Paulista is the first time in the country that we have anticipated for real, and we were able to set a more of the working for the all other renewals in the country. So it's very important for us, we are commemorating this moment. It's very important, as I said. And I'd like to reinforce that we are very positive in regard to the rest of the year. So we intend to have a very good second quarter as there are a very good second half of the year. So I'd like to thank all of you for the support, always support, how you always supported the company. During the last 5 years that we fight for -- fought for the renewal. And please, all of you stay safe, talk to you in the next quarter. Thank you. Bye-bye.

[Operator]

That concludes Rumo's first quarter results conference call. Thank you very much, and have a nice day.