Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, everyone, and thank you for waiting. Welcome to Rumo's conference call to discuss the second quarter 2022 results. Today with us, we have: Mr. Rafael Bergman, CFO and IRO; and Mr. Gustavo Marder, Investor Relations and Treasury Director. [Operator Instructions]

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

Before proceeding, we would like to mention that 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 and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that 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. I'm Gustavo Marder, Investor Relations and Treasury Director of Rumo. Thank you all for joining us in this earnings conference call for the second quarter 2022. As usual, I would like to start by providing an update on our ESG agenda.

During the second quarter, more precisely in May, we have published the 2021 Sustainability Report. I would like to invite you all to learn more about all the initiatives that we are implementing at Rumo, and highlight the reduction of CO2 emission, that we have already accumulated 36% reduction since 2015. Over the last few years, we have modernized our rolling stock, increase the size and the length of our [ train ] and implemented several technology projects aiming to increase our energy efficiency. We still have room for additional gains, and we have publicly committed to reduce CO2 emissions by 21% until 2030 when compared to the figures for 2020.

On the next slide, I will show the main highlights of the second quarter 2022. In this quarter, we delivered results in line with our initial expectations, which puts us in a very comfortable position regarding the guidance for the year. Despite the crop failure in the South, we grew in volumes and yields, reflecting not only the higher diesel prices, but also an improvement in the competitive landscape. Rumo continues to consistently gain market share in Mato Grosso and in Port of Santos. In addition, we continue to advance in the central network, using the strategic partnerships with our customers to enable new terminals and diversification of cargos.

In the next slide, we'll talk more about the central network. Grains performance continues to be very consistent. The Rio Verde terminal which became operational in the third quarter 2021, has not only allowed us to capture additional volumes in Goias, but also attracted more volumes from the East region of Mato Grosso, previously not served by Rumo.

In June, in a partnership with [ Codolete ], we have started to transport sugar from Iturama to Santos. Now we also have partnered with Andali, and we have been operating fertilizers since April, bringing higher volumes and diversification of cargos to the central network.

On the next slide, I would like to highlight our market performance. In Mato Grosso, we gained 3.4 percentage points in the second quarter and 6.8 percentage points in the year-to-date. In Goias, we were roughly in line in the second quarter with a 5 percentage point gain in the year-to-date. In the ports of Paranagua and Sao Francisco do Sul, we have lost market share during the quarter. Due to an anticipation of volumes in the first quarter once in the year-to-date, we are nearly stable in market share.

In the next slide, we will detail the operational highlights. From an operational standpoint, Rumo continues to show good evolution in its main KPIs. In the second quarter, the train time in Northern operation was roughly stable, even with volumes 15% higher. Year-to-date, the indicator showed a reduction of 8.4%. The drill time at the Port of Santos improved 5.5% in the quarter and has accumulated a reduction of 10% in the year.

The unitary consumption of fuel decreased by 7% in the quarter and reduced more than 8% in the year-to-date, and continues to contribute to the reduction of CO2 emissions in our ESG agenda.

In the next slide, we'll cover the operational results. Transported volume grew by 4.1% in this quarter, sustained by the North operation, which rose 15%, and helped us to offset the weaker performance in the South, which was impacted by the crop failure. Looking at the performance by segment, it's worth highlighting the 5.4% growth in grain, 38% growth in fertilizers and 12% growth in fuels.

On the next slide, we'll see the results by operation. Consolidated net revenue grew 11.2% in the quarter, reflecting a 4.1% growth in the volumes and a 6.2% increase in the yields. Fixed costs and SG&A expenses grew by 8% less than inflation, given with a higher level of operation in the central network, demonstrating and reinforcing our ability to manage costs even in a more challenging environment.

The variable costs grew due to the higher volumes, and the increase in the fuel prices, which rose 42% year-on-year. The EBITDA margin improved 3.2 percentage points when compared to the first quarter 2022, but it's still below to the second quarter 2021 due to the crop failure in the south, and the higher diesel prices, which reduces the percentage margin, even when we pass through this effect to the tariff.

In the next slide, we will present the financial results. Financial results in the second quarter 2022 got worsened by BRL 241 million when compared to the second quarter of 2021. Net cost of debt and other expenses increased mainly due to the increase in the interest rates and in the inflation indexes that adjust the value of the debt, and the concession fees and leases that we have in our balance sheet.

Net income in the quarter totaled BRL 30 million, mainly reflecting higher financial expenses. We ended the second quarter with indebtedness and gross debt roughly in line with the previous quarter. Last 12 months EBITDA still reflects the corn crop shortfall in the second half 2021.

Our debt amortization schedule did not show any significant change as there was no relevant funding or amortization activity during this quarter. It's worth mentioning the long-term profile of our debt, which allows for the fusion of the investment plan for the Lucas do Rio Verde expansion.

In the next slide, we have the market environment and the perspectives for soybean and corn. The competitive environment evolved favorably in the first half, periods of which we carried out commercial negotiations with our customers. Therefore, the second semester should present a margin recovery compared to the first semester and also versus the previous year.

The increase in diesel prices that brings more pressure to trucks than for railway, and the higher demand for transportation, are the main drivers for the favorable environment. According to Agroconsult projections, Brazil should have a soybean harvest of 127 million tons, out of which 77 million tons should be exported. Mato Grosso should produce roughly 41 million tons and export 27 million tons. Goias production should reach 17 million tons. Meanwhile, exports should reach 9 million tons. The growth in Mato Grosso and Goias, where harvesting has already been completed, should offset the decrease in production in the South region caused by the crop shortfall that brought weaker results for that operation in this quarter.

For this year, there is still about 40 million tons to be exported between August and December, out of which approximately 4.5 million tons are going to be originated in the states of Mato Grosso and Goias.

On the next slide, we will look at the outlook for corn. Production is expected to reach 140 million tons of corn, out of which approximately 39 million tons should be exported. Mato Grosso is expected to produce 40 million tons and export 26 million tons. In Goias, production should reach 12 million tons, out of which 3 million tons should be exported.

The states of Mato Grosso do Sul and Parana should reach about 12 million and 16 million tons produced respectively, while the previous harvest, both states produce only 6 million tons. We have already sold all the volumes for the third quarter and most part of the fourth quarter volume.

For now, it seems that the farmer selling is evolving smoothly, which increases the likelihood of a higher availability of grains in the fourth quarter, which could eventually generate higher volumes for us as well.

Here, I conclude the presentation, and we can start the Q&A session. Thank you all.

[Operator]

[Interpreted] [Operator Instructions] The first question is from Lucas Barbosa from Santander.

[Lucas Barbosa, analyst]

[Interpreted] I have a couple of questions to do with yields. Could you provide some color on what it's looking like for the second half, what's the yields for the contracts you have so far? And for the fourth quarter, Gustavo mentioned the pace of sales, farmer selling and so on. But what will be Rumo's strategy in light of that? Will it bring contracts forward through the price, or will it wait and watch the dynamics and perhaps get higher yields? That's my first question, and then I'll ask a second one.

[Rafael Bergman, executive]

[Interpreted] Gustavo did mention corn prospects, which do affect the dynamics. And during the last call, you'll remember there was a concern with a potential downward review that didn't happen in the areas where we operate. So everything looks good. Production is good, exports are good, in line with our expectations at the time.

So now things look interesting for the second half of the year. Corn is doing well, and it sounds like there's still some soybean to be exported. So potentially, we'll have some volumes in the second half, and we will be managing volumes and sales as we get information. So we can't disclose our strategy for the fourth quarter, obviously, because there is -- there may be an opportunity there, and we'll position ourselves according to that, and following the rationale that we think is more suitable in terms of pricing.

And generally speaking, yields for the second half of the year are in line with what we had expected. It's in line with the company's guidance for the year. And in the first half when we priced corn for the second half, mostly, there has been progress in highway spreads, and that has allowed us to achieve better margins to be realized by the company both to build margins because of higher costs -- this is a good time for us to recover margins at a healthier level, and that will help us continue with our investment plans.

[Lucas Barbosa, analyst]

[Interpreted] If I may, I'd like to ask a second question. Could you update us on the toll of BR-163? Well let's start at the beginning of 2023. How are trading companies seeing the pass-through of that price to the first half of 2023?

[Rafael Bergman, executive]

[Interpreted] Well, I think we have access to the same information you have, which is public. BR-163 concession agreement was signed in April, if I'm not mistaken, and concession there was successful in getting the environmental permit - it -- needed to continue with all the work that needed to do to have a toll road. And according to public information, everything should be ready for the toll as of the end of the year, and to correct the distortion that we have been facing.

As for 2023, I think that will depend on the market. When the toll starts, there will be a competitive advantage, and that's part of the commercial conversation. That is part of the scope. And as I said, that is a correction of a distortion. So we will get the company's margins to a healthy level that is compatible to those of a company, that is providing good service, and which has major investment cycles that will be important to meet the needs of all of our clients.

[Operator]

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

[Regis Cardoso, analyst]

[Interpreted] I'd like to hear about the EBITDA expansion drivers. How are those drivers evolving. So there is an increase in yield in the second half compared to the first half. So how are you seeing that yields in the first half did not reflect high fuel prices? What will happen in the second half of the year?

I'd also like hear from you about volumes and how will that affect your market share? And the second topic is the renewal MRS and the reduction of the rise with [indiscernible]. Is that enforce already and has the reduction been according to what you had imagined? There should be a gain of BRL 200 million. So I'd like to hear a little bit more about that.

[Rafael Bergman, executive]

[Interpreted] I will answer what I think I heard from your question. So please, if there's anything I haven't answered, let me know. As for the EBITDA and profit increases by the company with regards to yields in the second half of the year, I did mention that in the previous answer. We have been able to increase our yield levels and to recover margins as expected for the second half, but in line with what we had expected, and that is very good news for us.

As for volumes, on the one hand, we have our operating performance, which is doing well, and we even made a decision to announce July's volume. We did that yesterday, so that we could talk about that. We had had a record in March with 6.7 billion RTK, and now we have another record, 7 billion RTK, great performance in the North operation. So we've recovered from the worst of the crop failure.

So things are progressing, and that's what we said in the last call. We know the importance of looking at how our capacity is tested and how we make the investments we had planned on making. We're very happy about that. Obviously, every day there's a challenge. We need to have good things in the operation and the team is doing a great job. The market may bring potential upside. Obviously, we have 2 products in the systems. So, some soybean. Probably there's some lentil were to be exported. We don't know what the pace will be for whatever is left over. There may be some left over this year and some may be carried over to next year, which won't necessarily be a bad thing in terms of seasonality and transportation, and corn, which is looking very good. So we do have the possibility of having a fourth quarter with more volume flexibility.

And obviously, we're getting ready to be able to mix our client needs and our operation with the right level of profit. Obviously, in the fourth quarter, prices are not as attractive as in the third quarter, but clearly it's a great starting point, much more interesting. And I'm not just talking about last year because there was disclosure last year, but we do see a positive scenario in terms of profitability, which will be important for the recovery of margins.

And the third subject will be quite strong around, which is MRS. We concluded that recently, and that's positive news on many levels out to us and any operators that use that structure. There was a reduction in the price that was charged, or the right of passage, and some potential investments to be made, which, in our opinion, will continue to support efficiency in arriving at the port, which will be great for everyone, not just for Rumo.

Financial impact of the reduction of rest of the rite of passage is in line with what we had expected. And obviously, they will depend on the volume that goes past that structure. So I think that's an achievement for everyone for the whole system, and that was a great job by MRS.

[Operator]

[Interpreted] Next question is by Daniel Sasson from Itau BBA.

[Daniel Sasson, analyst]

[Interpreted] My first question is about your comments on a potential [indiscernible] corn crop which will be quite strong and does away with any concerns and the potential higher volumes in the fourth quarter, and the pace that you've mentioned. Do you think we'll be closer to the top part of your EBITDA guidance for the year than you had imagined in the previous quarter? Your consolidated results prospects have changed from quarter-to-quarter. And on leverage, could you please comment on what possibility on -- what your goal might be for the end of 2022, considering the cash that was generated by selling your shares in [ T16 and T19 ], those BRL 4 billion that you've announced recently, which I believe has been corrected according to the interest rates? So those are my questions.

[Rafael Bergman, executive]

[Interpreted] I'll start by the first one. I think this is a potentially favorable movement. It's what we've been saying, we can -- we cover yield through practice -- we cover yield. Our operation is doing very well and the potential volume that may or may not come into the system in the fourth quarter. So that's a more favorable seasonality. At the moment -- I'll repeat what I told you sometimes, the guidance is the guidance, and it will depend on how close we get to the middle of the guidance either on one side or the other, it will depend on the continuation of health -- operating performance, and how much of that volume will come into the system, and our ability to make the most of it at high -- or adequate profit levels. Well, that's what we have at the time being. As for leverage this is the first time we're talking about selling the terminal during a call.

We had a material fact on the 15th of July. So just to reiterate that transaction isn't just a pure sale transaction, we will be keeping 20% of the shares in the company that has the terminal leases. So it's a long-term partnership with operating agreement that will guarantee good service to the rail customers. The terminal will continue to be important to Rumo and Rumo will continue to be important to the terminal.

The key point who are the partners, and we were very, very happy to be able to establish that partnership with [ SLI ]. We have 2 shareholders, and it's a very relevant partnership. As for deleveraging, we ended last year at 2.8 net debt over EBITDA, and considering delivering our EBITDA and CapEx financial figures according to plan.

And considering the impact of the sale of the terminal, we are close to 2x to 2.5x. But I think it's a good time to make the most to deleverage the company. We had said it's something we want to do, and we're making that happen. So with the sale of the terminal, we are delivering on our strategy to close the year in a healthy position, and to conclude -- and to start our extension in Lucas do Rio Verde and [ Goias ].

[Operator]

[Interpreted] Next question is by Pedro Santana from Bradesco BBI.

[Pedro Santana, analyst]

[Interpreted] What is the expectations for your record volume? And what are your expectations for higher yields? What is the risk of Rumo reaching the top tariffs in some concessions?

[Gustavo da Rosa, executive]

[Interpreted] The tariffs are reviewed by entity. We have tariff cycles every 5 years. And within those cycles, those tariffs are readjusted according to inflation. In the short-term, we don't see any restrictions on the cap tariffs. Let's not forget that we operate with seasonal tariffs throughout the year. And this increase in the second half of the year, obviously, is because you're moving away from peaks.

So there's even less pressure when it comes to that, that what you see in other months. But generally speaking, practically in every concession we operate in, our price is very part on that cap tariff. So, in practice, there is -- there won't be a short-term restriction.

[Pedro Santana, analyst]

[Interpreted] Second question please. The volume for the second half will be higher, especially in the third quarter, but are there any capacity risks?

[Gustavo da Rosa, executive]

[Interpreted] Well, the market is very, very hot at the moment. So, we'll see what our capacity will be to take part in this market in the second half of the year. The results we've delivered in July -- and our efficiency results we delivered in the second quarter. So, we believe we'll be able to have a good performance in the second half of the year. But obviously, when you had extreme levels of demand, you're always testing your limits, and that is precisely why there may be flexibility in terms of volume, because we will be tested to the limit of our capacity in the second half of the year. But that's not a negative. It's more a matter of opportunity we are going to see how much volume we can actually work with, given that both our assets and operations are doing very, very well.

[Operator]

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

[Alberto Valerio, analyst]

[Interpreted] Still on tariffs. We're always anxious about that. You talked about closing the gap, but there's still a considerable gap. If you look at inflation rates up till '15 until now, and these are prices compared to the increase is in Rumo's tariffs. Do you think the gap will close even more though in the long-term or the short-term over the next few years?

[Rafael Bergman, executive]

[Interpreted] Well, in the previous call, I think we already said that this second half of the year would be an inflection point. And it's a dynamic market. If we look at the competitiveness chart that we showed during the presentation, you will see that, our competitiveness level was quite good in the first half, and it evolved gradually. We don't know exactly how it's going to behave over the second half of the year. It will probably continue to be favorable, but probably not to the same degree. So the first step here, I think, is to feel comfortable that our price levels in the market will recover margins, it will be able to face inflation and in order to have a broader assessment, because then you need to consider toll, the paving of the BR-163. But I'd say that in the short-term, our opportunity, what we had considered for the guidance for price levels in the second half, that would allow us to cover inflation, diesel prices, and be able to recover margins.

[Alberto Valerio, analyst]

[Interpreted] Just a quick follow-up question in the South network with perhaps lower volumes. Do you choose where the product come from? Cargo mix is different. Can we consider this increase in the South network, the same for the North network?

[Rafael Bergman, executive]

[Interpreted] No I don't think so, Alberto. These are 2 different things. The South network had consistent performance with other cargoes, such as industrial cargo, fuels, pulp, construction, material. What drove the yield in the South network with the industrial segment -- These are longer-term contracts. And therefore, they do come with some stability and automatic clauses in the pass-through of prices and inflation.

So the yield is more protected then. And in the grains market, there was -- there is a limitation on what you can do to tariffs because of crop failures. So lower volumes have to do with the fact that there was a crop failure and nothing to do with our pricing policy for that market. In the North, it's a completely different dynamic. We did progress yields in the second quarter compared to the first quarter, even with an unfavorable starting point from last year and what we'll see now in the second half of the year.

[Alberto Valerio, analyst]

[Interpreted] Is the pricing that took place in the second quarter in conjunction that were...

[Rafael Bergman, executive]

[Interpreted] Much better than we had last year. So it's a positive scenario for us. And again, this market will probably continue to evolve and we'll have the toll road next year. And we also need to see what the freight prices will do in the second half to see what kind of pricing levels we'll have in 2023.

[Operator]

We conclude the Q&A session, and I would like to turn the floor over to Mr. Rafael Bergman for his final remarks.

[Rafael Bergman, executive]

Thanks, everyone, for joining us in our earnings release call for the second quarter. The main message is that this quarter was in line with what we have expected. Volumes were affected by the crop failure in the South and the volume was well above than last year because we had a good soybean crop, and the corn is also doing well as well. And the operational performance was great with a record of 7 billion RTK in July.

Prospects are still positive. We are delivering on the guidance for the year. Part of that has already happened in line with what we had expected for the first and the second will be even more constructive in terms of strategy. Even though this was part of the second quarter, buy and sell agreement of the Santos terminal came through, and it's a partnership which shows our discipline in capital allocation. Those are our messages. Thank you, everyone, for joining us.

[Operator]

This concludes Rumo's conference call. Thank you very much for your participation. You may now disconnect, and have a great afternoon.