Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Rumo's First Quarter 2024 Earnings Presentation. We would like to inform you that attendees will be on a listen-only mode during the presentation. After which, we will begin the Q&A session when further instructions will be provided.[Operator Instructions] Before proceeding, we would like to reiterate that statements made during this conference call regarding the company's prospects are based on Rumo's Executive Board's beliefs and assumptions and current information available. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Events related to the macroeconomic scenario, the industries in which the company operates as well as other factors may cause results to differ materially from those expressed in forward-looking statements. Now I'll turn the conference over to Mr. Felipe Saraiva, Head of Investor Relations at some -- at Rumo. Mr. Saraiva, you may begin the presentation.

[Felipe Saraiva, executive]

[Interpreted] Good morning, everyone. And thank you for joining Rumo's First Quarter of 2024 Earnings Call. As usual, let's kick off with the highlights on Page 3 of the presentation. The first quarter was a period of business expansion for us, with higher transported volume and market share across all of our operations. The growth in volumes in addition to higher yields in the quarter have driven our quarterly results. EBITDA was BRL 1.7 billion, a 43% increase in net profit was BRL 368 million, 5x the net profit we have recorded in the previous quarter. By the end of the quarter, our financial leverage was 1.7x, slightly below the fourth quarter 2022. In March, we concluded a local debenture issuance for Malha Paulista, in the total amount of BRL 1.2 billion with a cost similar to the Brazilian software. These highly competitive issuance is part of our funding strategy, improving our liquidity, since the increase of the duration of our debt while still keeping competitive costs. In our major expansion projects, we have entered into new EPC agreements for the works in Mato Grosso. Some of these new projects are already in construction with the remaining ones to start construction in the short term. Our focus is to continue the execution of projects to increase the capacity and efficiency in Malha Paulista and in the internal railway at the part of Santos, which will be key for the volume growth in the coming years.

Regarding ESG, we have released our sustainability report in April. In the report, you may find the emissions inventory for the previous year, along with key topics in our sustainability agenda. I invite all of you to read the document available on the Investor Relations website. On Page 4, I will present the market share for the quarter. Mato Grosso and Goias experienced a slight decrease in exports in the quarter, impacted by the soybean crop failure in the Midwest region of the country. The port of Santos performance was flat year-on-year. Despite the challenge of lower volumes, Rumo was able to present volume growth in all of the markets, and therefore, increasing its market share. I would like to highlight the market share of 39% in Mato Grosso and 51% at the Port of Santos.

On Page 5, we will discuss the operational indicators. The transit time for the Northern operation, which measures the travel time between Rondonopolis and Santos decreased to 104 hours due to the improvements in train circulations compared to the previous year. Dwell time in Santos was 17 hours in the quarter, flat year-on-year. Our energy efficiency results was also flat compared to the previous year. On Page 6, I will present the operational results and volumes. The transported volume increased 8% with higher volumes in all of our business units. The total volume in the quarter was 17.4 billion RTK. The improvement was a result of better train circulation conditions in our main corridor with the estimation to the Port of Santos. I remind you all that in the first quarter of last year, the productivity of the system was jeopardized by events of violence in Baixada Santista region. On Page 7, we will highlight revenues and yields. Better yields were the main highlights in the quarter as a result of the capacity commercialization throughout the second half of last year. The constructive momentum in the transportation market with the high utilization rates of long-haul logistics solutions boosted the yields for the period despite the lower fuel prices.

On Page 8, we will see the EBITDA for the quarter. A higher contribution margin due to the growth in volumes and yields has driven the EBITDA increase in part. The fixed costs and operating expenses increase was lower than the expansion of our contribution margin. This increase in fixed costs and expenses is a consequence of our choice to reinforce the structures and process with a clear goal of sustaining our growth strategy, efficiency gains and risk management. On Page 9, I will present the financial results and the net income. Our debt is substantially floating CDI, the local benchmark. Therefore, as you can see in the graph, the cost of debt has been reducing since Q3 of 2023 when the Brazilian interest rate reduction cycle has begun. The net income for the quarter was BRL 368 million, 5x the same figure reported last year. This increase was driven by the operational improvement in the quarter. On Page 10, we will go through the debts of the company. By the end of the quarter, the financial leverage of Rumo was 1.7x, slightly below the previous one. Our cash position was reinforced with the debenture issuance I mentioned at the beginning of our presentation. The cash position was BRL 9.3 billion. Rumo's liquidity profile was enhanced with a strong cash position and maturities well distributed over the next few years.

On Slide 11, we will see the investments for the market. The total investment in the quarter was BRL 967 million, out of which BRL 390 million were record investments in sustaining our operations, BRL 82 million in the expansion project in Mato Grosso and BRL 495 million in other expansion projects. We are on track with the planning for the period. And as I have mentioned earlier, we have progress in defining and contracting partners and mobilizing work fronts for the project in Mato Grosso. We should see a ramp-up of investments this year in line with the guidance we released to the market in February.

Now let's provide an update on the grain market outlook, starting on Page 12 with soybeans. Regarding soybeans, there are no major updates from the figures I have presented in our last earnings call. Harvest in Mato Grosso has been completed, and we estimate 39 million tons of production, out of which 24 million tons should be exported. The soybean crop productive in Mato Grosso was impacted by adverse weather conditions this season, reducing production in the state despite an expansion inflated area compared to the previous year. On Page 13, we will look at the corn outlook. The Brazilian corn production in the current crop is estimated in 121 million tons, with 45 million tons expected to be exported. Mato Grosso is a highlight. The good level of rainfall in the region has increased the potential productivity of the corn crop, which is expected to deliver record high yields. Our estimate for the season is 48 million tons of production out of which 83 million tons should be exported. Now I have concluded my presentation and we are available for the Q&A session. Thank you.

[Operator]

[Interpreted] Thank you. We will now begin the Q&A session. Today, we have with us Mr. Rafael Bergman, Mr. Gustavo Marder, and Mr. Felipe Saraiva. [Operator Instructions] Our first question is from Guillherme Mendes from JP Morgan.

[Guilherme Mendes, analyst]

[Interpreted] Hello. Good afternoon Bergman, Gustavo, Saraiva. My question is about April volumes. There has been a slight drop year-on-year. So my question is, if we consider volume over the next few months, we should be talking about 7 billion roughly. Is that a point of concern when it comes to your guidance for the year? Will it affect that? And how are you seeing things over the next few months?

[Rafael Bergman, executive]

[Interpreted] Good afternoon. This is Rafael. Thank you for your question. Yesterday, we disclosed April's volume. And yes, it is the result of some one-off points that took place in our operation during the month. We were able to finalize our work to install the definitive solution at the San Carlos bridge in April. You probably remember it affected our operation last year. We did have a provisional measure, and we had to spend a few hours in April working on that. So we lost some hours there. Our expectations are for volume to grow as Saraiva said during the presentation. So there is pressure on the system. But we are absolutely confident that we will keep to our plan. So we reiterate the guidance.

[Operator]

[Interpreted] Our next question is from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

[Interpreted] I wanted to talk about the improvement in rainfall, especially in the state of Mato Grosso could you give us an update on how hiring is going? Contracting, sorry, I know that you've sold forward, but there has been an improvement in the corn crop. So the pricing scenario for '25 is looking better. I don't know if it's too soon to talk about that. But could we talk a little bit about how much volume you've contracted and whether that improvement in rainfall will affect 2025?

[Unknown Executive]

[Interpreted] Thank you, Lucas. I'll take your question. Okay. So let's split your question in to different parts. 2024, we started off the year fully contracted. So nothing new there. Now the crop, even though it did suffer with the soybean crop failure, it's still looking good. And the corn crop potential continues to increase and look good. So things are looking up, which is consistent with our general thesis forgetting about current circumstances. So Brazil does have a very powerful agricultural yield, demand for export is growing, and we are meeting the needs of specific regions in Brazil. we're very competitive. So our solution is very competitive. So our thesis hasn't changed. It's been the same for years. So it's a natural movement. There's pressure on the system. And obviously, we're all contracted for 2024, so we won't be affected. Now you asked about 2025, right? And I think that's going to be a common theme. Our contracting level for 2025 will happen in the second half of the year. That's how things naturally happen. As for freight for 2025, that's a conversation based on prospective assumptions. So looking at 2025, what are the expectations? Our expectations, our client expectations, farmers, producers present expectations. We have to consider yield, planted area, as well as logistics capacity that is available. So that will take place in the second half of the year, and we're very confident in our thesis. We are providing reliable service, competitive service and efficient service in the market that provides that kind of solution. So we're very optimistic not only for 2025, but our thesis as a whole for the following years. And our investments are proof of that, when we made the decision to have the expansion in the state of Mato Grosso as of '26 to capture even more cargo shows that we are very optimistic and have a constructive view for the future.

[Operator]

[Interpreted] Next question is from Alberto Valerio from UBS.

[Alberto Valerio, analyst]

[Interpreted] Good afternoon, Rafael, Gustavo and Saraiva. My question is about that first question about volume. We've seen a lot of things happening in the Port of Santos last year. This year, a lot of improvements, and there are no volumes because of the on-off. So my question is month-on-month, year-on-year, what have been the efficiency gains at the port on recurring months or on a day when everything was running smoothly? Have you noticed any difference month-on-month or year-on-year? What can we expect in terms of efficiency gains for the rest of the year? Is there anything coming into the Port of Santos and the North network that might improve things for Rumo?

[Gustavo da Rosa, executive]

[Interpreted] Good afternoon, Alberto, this is Gustavo, and I will answer your question. Alberto.So if we just consider on of movements that we mentioned, yes, the railway system and the port system are already responding with higher daily capacities than we saw last year. That's a reflect of the investments we've made so far. And there's a bigger picture, a bigger plan in the background, which are the structuring plans, the investments that FIPS is making to improve access to Valongo, [ Itajai ], the backyard at Parana. So, there are lots and lots of investments that are planned. And combined with the STS Terminal 11 will ensure that things will improve and we'll have the capacity to deal with bigger volumes that we have for '24, '25 and '26. So in that sense, we're confident that our plan is on the right track. Obviously, it's challenging because we need to implement everything at the same time keeping volume performance is up, but we are on the right track to deliver on what we have promised.

[Operator]

[Interpreted] Our next question is from Filipe Nielsen from Citi.

[Filipe Ferreira Nielsen, analyst]

[Interpreted] And congratulations on the results. About costs in the North operation, there has been a considerable increase in yields. However, in the release, you mentioned that there was a BRL 96 million cost related to strengthening structures, processes. So given that yield increase, will those costs continue over the next quarters and that margin difference. Should that be associated to that yield over the year? Or was that additional cost a one-off and we should see the margin improving over the next few quarters?

[Rafael Bergman, executive]

[Interpreted] Filipe, this is Rafael. Okay. So let's take it in parts. Our margin performance has been consistent with what we've been saying in terms of positioning ourselves as a logistics solution in a market that favors the most efficient logistics provider. And our prospects are very constructive, not only for this year, which is reflected in the guidance, but also looking forward. About the quarters, obviously, quarters are seasonal. So I'll refer you to our guidance for the year, which we have confirmed and reiterated. About costs, as we mentioned in the release, these are company decisions to reinforce our structures, considering a scenario where we are having great performance, and we are getting ready to continue to grow. So we'll be opening new terminals over time. We have strengthened our engineering structure to deal with all of our expansion plan. We have also strengthened safety and security, given the scenarios that took place. We will not be decreasing those for the time being. So not any one-off elements. These are company decisions to strengthen our structure and these are forward-looking decisions considering Rumo's platform growth over time.

[Operator]

[Interpreted] Our next question is from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

[Interpreted] Congratulations on the results. Quick question about [ Lucas ] and a question about CapEx. Could you talk a little bit about how much of Phase 1 you've executed? Contracting, you mentioned those during the presentation and the release. So once that contracting is finished, how much of the project will have been executed? And is that only for 2024? Or will part of that contracting happen after 2024>

[Rafael Bergman, executive]

[Interpreted] Victor, this is Rafael again. Our expansion project in Mato Grosso is on track and according to plan. So our pace is very satisfactory. The works are ongoing, and there's some more information in the release. We're already mobilizing over 50 kilometers. And that contracting obviously means mobilization over time. We do have some contracting packages that are going on now, but they will happen in stages over months. And it might go into '25. That's the normal way of executing a project such as this. They are larger projects that make sense in terms of logistics like earthworks, different kinds of work. So we're on track with this project to begin the first terminal in 2026. There have been no changes on what we have shared with you, and we're very happy with the pace and the way the work is going.

[Interpreted] The next question is from Pedro Bruno from XP.

[Pedro Bruno, analyst]

[Interpreted] I have a follow-up question to the first or the second question that was asked about cost and margin. Can I just check that I got it right. So in addition to the costs related to strengthening your structure -- that's very clear, thank you. Could we say that margins have also been affected by logistics services? And if you could remind us of how that dynamics work because there were other variable costs line to do a third-party services, which are also logistics, and that goes up with volume. So that has gone up considerably, almost doubled year-on-year. So would it be right to say that those volumes, that revenue, and that cost will come with a more compressed margin than the usual railway margin. And if that will make margin numbers not look as high as your operating leveraging and yield increases might suggest? Even though you had a great EBITDA and nominal is really what matters? That's it. Thank you.

[Felipe Saraiva, executive]

[Interpreted] Okay. Pedro, this is Felipe. We did have an increase in our logistics operation solution. Logistics Solutions are a multi-modal solutions. It's railway plus other logistics solutions to transport different commodities. So we do have the option -- when we look at that option and to use railway to bring in additional margins. So we look at logistics solution, not as a stand-alone logistics margin, but an all-in margin that includes everything we do in logistics, railway plus the additional capacity that it might bring in, different cargoes, different flows that may be positive towards the margin. That's an optionality we have, and we may choose to use it or not. That's a trade-off we look at all the time. As you saw, there was a considerable increase in volumes transported through that solution, and that was reflected in an increase in the variable cost. But all things being equal, that will not be a margin detractor over time. There will be a small fluctuation, but if the logistics solution volume increases, that means we are potentially bringing in new flows that will bring in an additional margin. But that's not a relevant driver when it comes to margin over time. Margins will be a consequence of how we operate in terms of efficiency, competitiveness and how that translates into yield quarter-on-quarter structurally.

[Operator]

[Interpreted] The next question is from Rogerio Araujo from Bank of America.

[Rogério Araújo, analyst]

[Interpreted] Good afternoon, everyone. Thanks for this opportunity. The government has been trying to get new concession fees and the concession renewals. You've reviewed your concession fees. It's been announced. So I'd like to hear from you if those concession fees might be used for that segment or if [ Aerogrand ] might go back to a PPP or private project, as you had studied in the past? And if that's the case, would Rumo be interested?

[Rafael Bergman, executive]

[Interpreted] Rogerio, is Rafael. I'll take your question. Well, the simple answer is we are focusing on Rumo. We have a well contracted plan for investment plans, expansion, competitiveness are our focus. In time, we may look into other opportunities. Of course, it goes with the territory, but it's not our current focus. We have the whole Paulista work to do. We have the investments at the Port of Santos. We have the railway expansion in Mato Grosso. Soon, we'll be announcing a new project for grains and fertilizers terminal at the Port of Santos. So that's where our focus is on right now.

[Rogério Araújo, analyst]

[Interpreted] That's great. And do you think the government might do that? Might they use that money for a PPP? Or do you think farrow ground is something that they've looked into and probably won't happen.

[Rafael Bergman, executive]

[Interpreted] Well, Rogerio, I don't think it's my place to speculate on how those funds will be used. The project you mentioned, as far as we know, has its challenges, but it's being assessed and will continue to be assessed then if it proves to be satisfactory, in time, it may be an alternative in the long run, but it's not really our place to comment on it.

[Operator]

[Interpreted] The next question is from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

[Interpreted] I have a follow-up question about volume. I know that you're fully contracted. I just want to hear about how volumes will progress over there. So the comparison basis was quite weak because of the criminal incidents that took place last year. I thought the volume was going to grow more at the beginning of the year and less at the end of the year as the comparison basis became tougher, but the company has grown by 4% in the first 4 months year-on-year. And the guidance for the year is 5% to 9%. So I just wanted to hear from you how that's going to progress for the rest of the year, especially considering grain exports from Mato Grosso, I think your projection point to a roughly 20% drop in soybean and corn if I'm not mistaken. So I just wanted to hear how you think things are going to progress over the year? If there's any operating element that might affect what the company is going to deliver anything else that I haven't considered?

[Rafael Bergman, executive]

[Interpreted] Thank you. Bruno, this is Rafael. Well, this first quarter was practically in line with what we had planned to do. And considering the maintenance schedule, yes, there have been one-off issues, but we haven't really strayed from what we had planned to do. We will have a lot of volume to be transported. We have some consulting numbers in our presentation. And I think they're similar to the numbers you've got, we are already seeing those volumes and the rest of the year should have considerable demand in terms of volume, which is consistent with the company projections we shared with you at the beginning of the year.

[Operator]

[Interpreted] [Operator Instructions] The next question is from Filipe Nielsen from Citi.

[Filipe Ferreira Nielsen, analyst]

[Interpreted] Thank you again. Just a follow-up question. Could you update us on how things are progressing in Rio Grande do Sul. We saw that you've talked a little bit about the operations being interrupted. But have you got any updates or any more recent information on what's happening in Rio Grande de Sul?

[Rafael Bergman, executive]

[Interpreted] Filipe, this is Rafael. First of all, thanks for the question. We are showing our solidarity with the population from the state of Rio Grande do Sul. We have colleagues, family members in Rio Grande do Sul, so our main focus has been on their safety. Making sure everyone is in a safe place, trying to help through community initiatives, doing what we can do. The company is mobilizing to that end and then to think about how to pick up operations when the weather permits. When things become a bit more stable, and we know better and more concretely what is happening in the state, and when transshipment and transportation can be resumed. So we have a few days to wait as we mentioned in our release to the market, given the financial significance of our operations in Rio Grande do Sul, considering that they're not major, considering Rumo's bigger picture, it shouldn't really affect our results for the year. So we won't be changing the guidance. We will be having news over the next 2 weeks, and then we'll keep the market updated.

[Operator]

[Interpreted] The next question is from Lucas Barbosa from Santander.

[Lucas Barbosa, analyst]

[Interpreted] Good afternoon, Bergman, Gustavo and Saraiva. Congratulations on the results. My question is about projects that will be concluded in '25 and '26, in which you are investing now, not just you but other stakeholders, FIPS, the terminal, could you talk about timing? Is the schedule still the same? Have there been any changes? Is anything being brought forward or delayed? And also, if you could talk a little bit about that because that project will bring in a lot of capacity for '25 and '26?

[Unknown Executive]

[Interpreted] Thank you, Lucas. Hello. No changes when it comes to those projects. As you mentioned, those projects are part of a package for '25 and '26. So part of that work will be concluded in 2025, some closer to the end and others more specifically speaking, our terminal in Mata Grosso will be concluded in 2026. So based on what we hear about the other projects, ours are under control and on track. Based on what we've heard the other ones are on track as well. The SBS 11 is under construction and should go into operation in 2025. We haven't heard any changes about that, and we are monitoring it very closely. So we're confident that, that will lead to a considerable increase in capacity for the whole system, both in '25 -- and '25 and '26.

[Operator]

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

[Lucas Marquiori, analyst]

[Interpreted] Could you update us on the DPW project? What's been happening since the announcement. Are you looking for a third-party to smooth cost circumstances? Are there any updates in that regard?

[Unknown Executive]

[Interpreted] Thank you, Lucas. Well, we announced the project a few weeks ago. So we still have a lot of work to do. And our focus has been on fine-tuning the engineering project and seeking information about suppliers, potential service providers, while we continue to get the licensing process ready. That's one of the prerequisites for that project. And we're also taking forward some conversations about potential partnerships. That's one of the objectives we shared with you. We'll be doing that to share the risks and benefits of that project. So we're moving forward with that. We got off to a great start, but there's still a long way to go, a lot of things to happen, and we'll keep you updated in the next earnings release call.

[Operator]

[Interpreted] Our next question is from Alberto Valerio from UBS.

[Alberto Valerio, analyst]

[Interpreted] My second question. Are there any updates on the projects in the South and West networks? Have your conversations with the government progressed? We've heard a lot about that recently. So I'd like to hear if there have been any changes?

[Unknown Executive]

[Interpreted] Thank you. Alberto. Well, about those two projects, no, nothing relevant since the last time we spoke. So we're continuing with the proceedings, returning the West network, as per the conversations about the renewal of the South Network. So no news for now.

[Operator]

[Interpreted] The next question is from Rogerio Araujo from Bank of America.

[Rogério Araújo, analyst]

[Interpreted] That 23% increase in yield on our North operation year-on-year will be a proxy for the rest of the year? Or will we be seeing some volatility?

[Felipe Saraiva, executive]

[Interpreted] Rogerio, this is Felipe. Our yield is not linear. As you know, our pricing system is seasonal. There will be a seasonal effect this year. It's not a linear drop quarter-on-quarter, but it is implicit in our guidance, there will be a relevant increase in yields every quarter. So the pricing has to converge with the rest of our guidance for the year. So considerable increase. Now, how much of an increase? That will fluctuate as it did last year. But, the good news is that yields will continue to increase quarter-on-quarter.

[Rogério Araújo, analyst]

[Interpreted] And can you tell us whether you had a strong first Q?

[Felipe Saraiva, executive]

We're very happy, Rogerio, with our pricing in the first quarter as we are for the rest of the year. That's what we can share for the time being. But in our guidance, there is a considerable yield increase implicit in that. And as you know, that will happen over the year.

[Rogério Araújo, analyst]

[Interpreted] Thank you so much, and congratulations on your results.

[Operator]

[Interpreted] The Q&A session is now concluded. We would like to hand the floor to Mr. Rafael Bergman for his closing remarks. Mr. Bergman, please go ahead.

[Rafael Bergman, executive]

[Interpreted] Thanks, everyone, for joining us. And I'll see you at the next earnings release conference call.

[Operator]

[Interpreted] Rumo's First Quarter 2024 conference call is now concluded. Thank you for joining, and have a great day.