Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, everyone, and thank you for waiting. Welcome to Rumo Conference Call to discuss the First Quarter of 2022 Results. Today with us, we have Mr. Rafael Bergman, CFO and IRO; and Mr. Gustavo Rosa, Investor Relations and Treasury Director.

[Operator Instructions] We also would like to inform the Rumo's Q&A session will be presented in Portuguese by the company's management and there will be simultaneous translation to English. This event is also being broadcast simultaneously on the Internet via webcast.

Before proceeding, we would like to mention the forward statements are based on the beliefs and assumptions of Rumo's management and/or information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand the conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

I will now turn the conference over to Mr. Gustavo Marder. Please, Mr. Marder, you may proceed.

[Gustavo da Rosa, executive]

Good afternoon, everyone, and thank you all for joining us in the earnings conference call for the first quarter 2022. I'm Gustavo Marder, Investor Relations and Treasury Director, and I would like to start this presentation by providing some highlights on our ESG initiatives. Until the end of May, we published the 2021 Sustainability Report, which will detail the several advances we had in our ESG strategy. As a preview, I would like to highlight the improvements in Rumo assessments with Sustainalytics and the advancement of Rumo Institute working with education of youngsters, which now also includes the city of Cubatão in the state of Sao Paulo. Also worth of note is the continuous agenda to reduce the CO2 emissions, where we presented a drop of almost 4% in 2021, and we have already accumulated reductions of 36% since 2015. We also started the first test with hybrid locomotives, which reinforces our search for more efficient and less polluting alternatives.

On the next slide, we will talk about the main highlights of the first quarter 2022. The quarter presented good operational performance with volumes growing 30.5% year-on-year, reaching an all-time high production in March '22. And 6.1% higher than the previous number record in July 2021. As a result, EBITDA reached BRL 1 billion, 20% higher than the same quarter last year. The quarter also brought important achievements for Rumo long-term strategy. We obtained the preliminary environmental licenses for the Lucas do Rio Verde extension, which ensures the social and environmental feasibility of the project. The auction for the STS11 terminal in Santos was also successfully concluded, which will bring significant additional capacity to the port in the near future.

Finally, we present relevant market share gains in the main markets we serve, showing that our commercial strategy was effective to allow greater growth in the beginning of the soybean crop.

On the next slide, we'll see the market share gains in more details. In Mato Grosso, we have reached 46.8% market share in the first quarter, a gain of 10.5 percentage points. In Goias, we reached almost 30% of market share, an increase of 12.4 percentage points compared to the first quarter 2021. In the Ports of Paranagua and Sao Francisco do Sul, we gained almost 4 percentage points in market share.

On the next slide, we will detail the operational performance, starting with volumes. The volume growth in the quarter was driven by grains, a reflection of the early entry of the soybean crop and the growth in the central network, which in the first quarter 2021, only had operations in March with the São Simão terminal. The fertilizers showed some growth, reinforcing that at least for now, there is no risk of disruption in the supply chain. It's also worth mentioning that the growth in fuels, which has been showing increasing volumes of biofuels and corn ethanol, particularly in the North operation. The container segment also grew by more than 20%, highlighting the performance in the cotton domestic market, fertilizers and pulp and paper segments.

On the next slide, we'll see the results by operations. Net revenue grew across all operations, primarily reflecting the volume growth. As we mentioned in the fourth quarter 2021 call, yields were negotiated in a moment where freight prices were unfavorable. So they grew by around 3% on a consolidated basis. Variable costs increased 54%, reflecting the higher volumes and the increase in the fuel prices. As for the fixed cost, we have shown good discipline, growing costs less than inflation, even in a scenario where we were expanding our operations in the central network. As a result, EBITDA grew by 20%, showing a strong performance in the North operation and in containers, even though there was a contraction in margins in the period.

On the next slide, we'll talk about the financial results. In the first quarter 2021, we had a nonrecurring gains of almost BRL 203 million with the dismantling of the swaps that protected the 2024 senior notes. Additionally, the increase in the CDI generated higher debt expenses of around BRL 84 million. As a result, net income, which is historically weaker in the first quarter and which last year was favored by the gains from the prepayment of the 2024 senior notes, this year presented a loss of BRL 68 million.

On the next slide, we'll see the indebtedness and our debt amortization schedule. We ended the first quarter with a leverage of 2.7x net debt to EBITDA. EBITDA in the last 12 months still reflects the corn crop failure in the second half of 2021. Gross debt decreased due to the liability management process, which resulted in the prepayment of the 2025 senior notes. The debt amortization schedule shows that Rumo will not have any significant amount to be amortized until 2027, thus facilitating the execution of the investment plan and the execution of the extension to Lucas do Rio Verde.

On the next slide, we have the market outlook for soybeans and corn. According to Agroconsult's projections, Brazil should have a soybean crop of 124 million tons, out of which 77 million tons should be exported. In comparison with the previous projections, there was a reduction of 3 million tons in production and 1 million tons in exports. Mato Grosso and Goias state are still presenting some significant growth in production and exports, while the South shows a decline due to the unfavorable weather conditions. For the second quarter, we still expect exports to grow in Mato Grosso and Goias, meanwhile, in the South, we should see a retraction as a result of the crop failure.

On the next slide, we will see the corn outlook. Projections continue to point to a record corn crop of 114 million tons. As a result, exports should show recovery compared to last year when there was a strong crop failure. [ Productive ] could still change due to the weather conditions. So numbers could be still reviewed. Commercialization, which was late due to the producers' expectations of rise in the commodity prices, is now evolving. Market conditions and truck prices also suggest a better yield performance for the second half, pointing towards a recovery in margins.

With that, I ended the presentation here, and we can now start the Q&A session. Thank you, all.

[Operator]

[Interpreted] The first question is from Lucas Marquiori BTG Pactual.

[Lucas Marquiori, analyst]

[Interpreted] About the last thing you said on the corn crop, if you could give us some color in terms of projections of transported volumes in the second half, we know that levels will be adjusted upwards, fuel prices have gone up, you talked about rainfall and how that might affect yields. If you could tell us what the net-net is that you're aiming at in terms of volumes and yield for the second half, that would be great. And the second question, you talked about the Lucas do Rio Verde license. What is the next step? What should we be monitoring in terms of licenses, especially environmental licenses?

[Rafael Bergman, executive]

[Interpreted] Lucas, this is Rafael. Thank you for your question. In terms of corn, there were some public information from IMEA export volume for Mato Grosso, it's about 39 million tons. It will be quite a strong crop this year and it's looking favorable in terms of the weather. There was more of an impact last year in terms of impact on our business. There's more pressure and maybe a little different to last year, something that makes me feel comfortable in terms of how it reflects on our business is that the corn crop in the South is looking good, well above last year. So maybe there will be a balance in the domestic market, and that's important for us to feel comfortable. So we'll be monitoring everything. Those are the more recent projections. There are some projections from yesterday. So we'll be monitoring everything, especially our projections, which came out in February for the guidance of the company.

In terms of yield, that was the other point. The first half of the year was affected due to the price carryover, prices that were negotiated because things were looking unfavorable towards the freight. And then the second half, there's an opportunity for us to recover margins because corn crop is advancing and we see that reflected in transportation being contracted and that is in line with our projection intervals from the yield point of view, which validates our theory. We will be striking a balance again in this market and that's what we need in order to have the right kind of compensation for our business. So that's corn.

I'll also start answering your second question about Lucas. I think the Lucas licensing process is advancing well. We got the preliminary license in April. So the primary license is all outlined. So with that, we've made a request for the installation license and the strategy for the installation license is gradual. We want to give more granularity to the licensing process. So we're now waiting the installation license for the first stretch for Rondonopolis. We expect to have some positive news in the next few months. So, we'll be getting the installation license. I hope I've answered your question, Lucas.

[Operator]

[Interpreted] Next question is from Lucas Barbosa from Santander.

[Lucas Barbosa, analyst]

[Interpreted] I have a couple of questions. The first one is a follow-up on the second half. China is running with high corn inventory. So the corn export peak from Brazil in the second half might be smoother, and then there will be some left over for the fourth quarter. So you're signing contracts for the second half. How do you see that dynamic with China now?

[Gustavo da Rosa, executive]

[Interpreted] Thank you, Lucas. Thanks for your question. Yes, you're right. When it comes to seasonality, the smoother the export curve is the better for Rumo. Farmers commercialization for trading was somewhat at a standstill because they were still hoping that commodity prices would go up. That commercialization level is now speeding up. And so at least for the time being, in terms of contracts, we cannot guarantee that the seasonality will take place as you describe it. But since it is moving forward, perhaps over the next few months, we'll be able to have a better idea of what the volume curve will look like in the next few months and the second half. For the time being, all we can say is that you're right, if seasonality is smoother, that will be better for the company.

[Lucas Barbosa, analyst]

[Interpreted] That's very clear. And the second question is about the drop in fuel consumption by RTK. Was that an effect in terms of the assortment in the North compared to the South. There was also an effect coming from the 120 cars. Do you think you'll be keeping the same fuel consumption looking forward because that drop was considerable. It really got our attention.

[Gustavo da Rosa, executive]

[Interpreted] That's a great question, Lucas. Actually, if we consider this quarter, in addition to having had good volumes, our efficiency indicators were also at great levels. cycle, transit time, turnaround time at the port, all of those ports, in addition to the great volume we presented in the quarter, they also help us to reduce fuel because it's better energy efficiency. And it also goes to show that we have more available capacity, which will allow us to reach for higher volumes.

So yes, part of this effect is sustainable. There will be some variability from quarter-to-quarter, but we're very excited about our operational performance, and we think we'll have relevant gains over the year, not only in terms of capacity, but also in efficiency, which will help us in terms of fuel consumption. The energy efficiency agenda will be always present for us. It's the result of investments made by the company. which has led to a better train composition and therefore, bigger cargoes, it all helps in terms of efficiency, and we're still making investments. We're updating the lines, better technology or the licensing, so we will be sharing more achievements with you over time.

[Operator]

[Interpreted] Next question is from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

[Interpreted] I have a follow-up question about the second half. The commercialization of the corn crop according to IMEA data was above the historical curve. It looked like it was further up, but more recently, commercialization has slowed down. You also mentioned that there's some potential risk for the corn crop in the second half. So my question is, given that roughly 50% of the corn crop from Mato Grosso has already been sold, is it reasonable to assume that Rumo has sold 50% of its capacity. So are you selling your capacity as the crop moves forward? Is that a good assumption?

And the second question is, do you think this recent slowdown is a risk for your guidance assumptions for the second half? Or is it too soon to say if things will get worse when it comes to the corn export scenario?

[Rafael Bergman, executive]

[Interpreted] Great question, Bruno. I'll take your question. We talked a little bit about corn projections. And what we have now, our projections showing a relatively strong crop. And in terms of export surplus, it's well above last year. So just as an example, 39 million tons in Mato Grosso and 14 million for the domestic market, we're talking about exporting 25 million tons, which is well above the 15 million, 16 million we saw last year. Of course, we need to monitor climate models, but what we see in practice is that transport contracting farmer selling. We look at those indicators, and we talk to our clients to make sure that we are capturing things that are more attractive. But what we have been observing is that the sales in the second half have been accelerating. And as I said, at price levels that reflect the right margin. Obviously, the weather might affect our business. So we are consistently monitoring it, and we'll continue to do that. But there's nothing different to our assumptions for the guidance for this year.

[Operator]

[Interpreted] And now the question from Pedro Santana, Bradesco BBI.

[Pedro Santana, analyst]

[Interpreted] How do you assess the risk of potential shortage of fertilizers? Do you think that will affect the crop in 2023? And when do you think the STS11 will have an impact on Rumo's volumes?

[Rafael Bergman, executive]

[Interpreted] Great, Pedro. I'll start, and Gustavo can complement with more specific answers. About fertilizers, that was a warning sign for Rumo. Fertilizers are a product that we transport in terms of -- what it means to us, It's not that relevant, but everything counts to us. And there is a secondary impact, obviously, if there is a shortage, it might affect yields and grain yields. But what I can say to you today is that there has been a small growth in fertilizers in the first quarter. And in terms of everything we're hearing, it's looking normal. It might be a little bit higher, but there's a price demand elasticity issue. But in practice, Pedro, I would say that we don't see any sign of changes. We'll continue to monitor it. But the main thing is the price elasticity. So if commodity prices continue to be attractive, then everything will settle at a higher price level and life will go on. So that's how we're seeing things right now. So there's nothing materially different when it comes to fertilizers for this year.

In terms of investments when it comes to fertilizers, it's been in Rio Verde in the central network, as Gustavo showed in the presentation, there's an opportunity for growth. There's an ongoing project by a partner in Lucas do Rio Verde. It's a fertilizer terminal with a 1.5 million ton capacity and it should be operational at the start of the second half of the year. So we're monitoring everything, but there's no material news when it comes to that.

[Gustavo da Rosa, executive]

[Interpreted] Sorry, I made note about STS11. So there was a bidding process for STS 11, a relevant player won the bidding process, and they will be transporting relevant volume. So that's good news to us because there will be more investment in the Santos capacity. We have been doing great there with concrete results, there is some capacity there, but after the expansion, we'll be talking about up to 14 million tons capacity. And the schedule is consistent with the bidding process, and it's already talking about volumes already in operation as of 2025. But we'll let you know if there is any additional information. That's it. Thank you, Rafael.

[Rafael Bergman, executive]

[Interpreted] The terminal will be up and running in 2024, there will be an increase in capacity, and it will go up to close to 14 million tons according to the bidding process. Another important thing, as we had said, if you have more capacity in Santos, the other thing is that more people believe that the railway solution to Santos continues to be a competitive solution. And that is basically our thesis. That's why we've been making all these investments and the extension to Lucas do Rio Verde in Cuiaba.

[Operator]

[Interpreted] Next question is from Regis Cardoso from Credit Suisse.

[Regis Cardoso, analyst]

[Interpreted] It's a follow-up question about yields for the second half of the year. Could you maybe quantify or at least give us a ballpark in terms of a reasonable range in terms of year-on-year comparison or a sequence comparison. If you can't quantify the yield, it would be good to see if you're aiming at the lower end or upper end of the guidance? So that's the first question. Second question is, given the context of higher inflation rates, considering your CapEx and the more expensive cost of debt since the interest rate is going up, do you see any need or advantage in raising funds again? Is that on your radar at all or not given the current market context? And lastly, in terms of volume negotiations for the second half, could you quantify what kind of uncertainty levels you're expecting? I think that the risk in yield reductions for the second half is much less than what we saw in 2021, I think. It should be reviewed downwards, but there's still an expectation of a record crop. So I'd like to hear about those things.

[Rafael Bergman, executive]

[Interpreted] Regis, I'll start by your last question. We agree with you. In terms of average yield in corn, things are less uncertain. We agree with you, that's what makes more sense to us. We don't see any material risk there. So we agree with you on that. So we're following on the assumption we had for the full year. In terms of corn and yields in the first half prices did not keep up with the variable cost evolution we saw in the first quarter, but it's been much more constructive in terms of margin recoveries, you need to have actual yield gains to recover margin in a comparison. I can't talk about actual figures right now. But there's good indication for the company's confidence interval. Once these assumptions are firmer, we will be able to give you more precise information.

And in terms of the inflation rate and interest rates, obviously, that will have a direct impact on our variable cost, fixed cost and CapEx. There's a direct impact. So we need to be more creative in finding solutions in terms of scope and finding intelligent solutions. We need to find the sweet spot between demand and suppliers, the reality of each business. In terms of CapEx, we have a considerable program ahead of us with a return that is attractive enough. So we need to be careful with the CapEx and volume. So that's a point of attention for our everyday management, and that's what we do tirelessly.

In terms of cost pressure and inflation rates, there's a prospect for high interest rates. And if it does happen, obviously, it's more painful for us. It's been a considerable impact on the first quarter. the first quarter isn't that representative in terms of operational results, but it does make us focus on capital allocation. So that has to do with prioritizing investments, obviously, making investments that have the higher return rates for the company, delay in that, which makes sense, and obviously, making prudent decisions and looking for partnerships that makes sense. We've already talked about that. We could be coming up with a model. We're talking about expansion. So we could think of partnerships, which is something that we have already been doing. We talked about the fertilizer terminal in Rio Verde. We have clients investing in railcars that are operated by Rumo. So there's a mutual commitment with clients, and that's something we will continue to explore.

And in terms of capital structure, I might refer to more specific targets. Our leverage was 2.8x at the end of last year. I talked about that during the last meeting, the last call, and that's a high level for us, especially in a scenario of high interest rates. We do have a cash generation project, but it requires heavy CapEx. So we're going to aim at reducing our leveraging and improving our EBITDA. So we'll be focusing on cash so that we can get to the end of the year at a level that is closer to 2.2%. So we can start another incremental investment cycle. So that's the assumption. And we're well positioned to make that happen. So that's what our plan looks like.

[Operator]

The next question will be in English by Stephen Trent from Citigroup.

[Stephen Trent, analyst]

I actually just had 1 or 2 follow-ups. Given all of this discussion about grain demand, we've been hearing some potential risk that there'll be a shortage to a fairly big shortage of some grains because of the war in Eastern Europe. And I'm wondering if that potentially creates any avenues for Rumo or Rumo's customers on the export market? And that's my first question.

[Gustavo da Rosa, executive]

[Interpreted] So the question about the risk of an impact on the grain crops coming from other countries. You mentioned Eastern Europe, well, in general terms, considering a balance between grains and the role Brazil plays as an exporter of corn and soybean, you're probably talking more about corn, but there's a constructive dynamics in terms of Brazilian grain yields which goes well with our thesis to be transporting these volumes, but I don't have any specific information about that. But we will be monitoring it. And obviously, we also have our partnerships with clients to make sure that we meet any demands that may arise and to make the most of any additional opportunities that may come up as well.

[Stephen Trent, analyst]

And just one other quick question. I know that, for example, Rumo did have some arrangement with Hidrovias in terms of some of its volume shipments, which probably seem to help Hidrovias given they had some problems with hydrology. Do you see any opportunities to do things like this in the future?

[Gustavo da Rosa, executive]

[Interpreted] With regards, I think you're referring to our partnership with Hidrovias to operate the fertilizer terminal in Santos, right? That's a small terminal. And initially, we had a partnership for 500,000 tons. And to be honest, this is actually the only relationship we have with Hidrovias because it's the only asset they have in our area of operation. I don't see any other opportunities like that, Stephen, but that terminal may receive future investments to increase capacity. And since Rumo is a huge fertilizer operator in the Port of Santos, obviously, we have an open dialog channel with other players in terms of increasing capacity, whether it be Hidrovias or any other player that may increase capacity in the Port of Santos.

First of all, I'd like to thank you all for joining us on this call. I also want to thank everyone who joined us in English. I hope the translation worked well.

In conclusion, we had a strong first quarter for our operation. The RTKs reflect our investment cycle, and we will be gaining increasingly more efficiency in our operation, including energy efficiency. In terms of perspectives, we talked about the crop failure in the South, unfortunately, does have an impact. We also talked about good prospects for soybean, corn and to recover margins for the second half. We are moving forward in terms of sales. So we trust our guidance. In terms of strategy, we talked about the preliminary license, the importance of the bidding process for STS11, the increase in capacity in the Port of Santos, and we will continue to expand our ESG agenda to increase and improve our sustainability index and focusing on energy efficiency because that's something we've been building over time.

With that, I'll conclude our call. Thank you all for joining, and see you in the next quarter.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]