Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Rumo conference call to discuss the second quarter of 2023 results. Today with us, we have Mr. Rafael Bergmann, CFO and IRO, and Mr. Gustavo Rosa, Investor Relations and Strategic Planning Director. We would like to inform that during the company's presentation, all participants will only be able to listen to the call.

We will then begin the Q&A session when further instructions will be given. In case you need any assistance during the conference, please request your operator's help by pressing *0. We also would like to inform that Rumo's Q&A session will be presented in Portuguese by the company's management, and there will be a simultaneous translation to English. This event is also being broadcast simultaneously live on the internet via webcast.

Before proceeding, I'd like to mention that forward 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. All participants should read the disclaimer available on the second page of the presentation. I will now turn the conference over to Mr. Gustavo. Please, Mr. Gustavo, you may proceed.

[Gustavo da Rosa, executive]

Good afternoon, and thank you for joining the second quarter 2023 earnings conference call. As usual, let's start with the ESG highlights on Page 3 of the presentation. Rumo was awarded with an improved score in the ESG risk rating by Sustainalytics. And in the institutional shareholder services, ISS ESG with the prime rating.

Additionally, in exams best of ESG ranking, we were ranked top 3 companies in the transportation and logistics sector. In the next slide, we will present the quarter highlights. After an important turnaround in the business environment, with constructive second half 2022 for logistics sector, the freight market remains booming in 2023, driven by the record sign being in corn harvests in Brazil, especially in the Midwest region.

This scenario has reinforced the structural competitiveness of railways with Rumo registering quarterly record of volumes and EBITDA. As mentioned in the last conference call, we faced important challenges at the beginning of the year with the increased frequency of criminal incidents in the Santos region, resulting in a worst productive the initiatives implemented by the competent authorities, reduced the incident problems in the region with a sequential improvement noted in the period. Although we still face some challenges.

Lastly, I highlight the positive achievements in our growth agenda. We have advanced with the licensing process for the extension in Mato Grosso with 185 kilometers of installation licenses issued in the first stage of the investment. Additionally, I would like to emphasize the completion of the last stretch of Males Central which was delivered in the quarter, connecting still [indiscernible] in Sao Paulo to Porto of Nacional [indiscernible] . On the next slide, we will present the market share performance. Our volumes increased on both Malachi and Mala Central, but the market grew even more, driving our market share in Mato Grosso to 41% and incentives to 48%.

The market share in Goias remained stable at around 24%. As a result of high level of utilization of the port terminals in which Rumo operates, Part of the volumes were transported by trucks and other railways. In the Southern operation, the 4 percentage point gains in the share was due to the greater competitiveness of railway in a more demanding logistics market scenario in relation to 2022 crop failure and the good performance presented in the state of Mato Grosso do Sul.

Rumo's market share was 27% in the sulfur points. On the next slide, we will detail the operational KPIs. We record a quarter of improvements in our main KPIs. The North operation TransCan which measures the time between Homonopolis and Santos was around 83 hours. The well time in the Santos port was 17 hours.

In energy efficiency, we record a slight increase of 2% compared to the previous year. Due to the assortment of cargos retested and a less economical driving aiming to meet the higher volumes in the period. On the next slide, we will present our operational results.

Transported volume grew 9% compared to the second quarter 2022, driven by the transportation of agricultural commodities. The performance shows an improvement in safety and traffic conditions in the Santos region compared to the previous quarter. In the North operation, growth was 7% mainly due to the higher volumes of soybeans, which grew 18% in addition to the growth in fertilizers and sugar volumes, which registered a growth of 23% and 32%, respectively.

Health operation had an even higher improvement of 27%. The higher volumes of soya beans in relation to the crop shortfall that occurred in 2022, coupled with the enhanced competitiveness of railways made this volume more than double. Sugar transportation also stood out with an increase of 22%. On the next slide, we will present revenues and yields by operation. The structural competitiveness of railings and the higher demand for agricultural commodities transportation, boost yields in the quarter. We grew consolidated yields by 9% compared to the same period last year, although there was a 29% reduction in fuel prices.

Year-to-date, we have record double-digit growth in yields across all operations. On the next slide, we will see EBITDA per operation. EBITDA reached $1.45 billion, up 21% year-on-year with an EBITDA margin of 52.4%. On a like-for-like basis, due to the divestment of Terminals 316 and 319 in the fourth quarter 2022, growth was 29%.

While in the North operation on a like-for-like basis, EBITDA increased 18%. In the South operation, it more than doubled. EBITDA margins were 56.5% and 43.8% respectively. Variable costs fell 8% and mainly reflecting the 29% reduction in fuel prices. Fixed costs and SG&A expenses were impacted by roughly BRL 40 million to fix the impacts of the public safety incidents that occurred in the first quarter 2023, such as the collection and disposal of product waste on top of maintenance carried out on the railway.

On the next slide, we will report the financial results and net income. The financial result came as a loss of BRL 676 million in the quarter, mainly due to the net debt cost and the monetary variation of concession liabilities. Due to the increase in the Selic rate year-on-year and consequently, in the CDI, the main indexer of the company's debt portfolio, either contractually or via derivative instruments.

On the next chart, we will present the indebtedness. Financial leverage at the end of the quarter was 2x net debt to EBITDA. For a better understanding, the leverage calculation, disregards the results of Terminal T16 and T19 in the last 12 months. Momo has a solid liquidity position.

Since cash and equivalents were BRL 7.7 billion in the quarter and maturities over the next 4 years are lower than BRL 1 billion per year. This liquidity position remains appropriate for the company's investment cycle. In the next slide, we'll talk about our main investments in the period. Total investment reached BRL 693 million, in the quarter, out of which BRL 340 million refers to recurring CapEx and BRL 309 million to expansion projects and BRL 44 million to investments for the expansion in the Mato Grosso state.

I reinforce the progress in the extension license agenda, reaching the 185 kilometers mark with installation licenses already issued. In addition, we delivered the final stretch of central network between Santa Elena and Rover in Goias. In fits, the internal railroad at the port of Santos, we are in the final phase of the operational transition process. On the next slide, we will present the outlook for signing and core markets. Brazil is expected to have a soybean crop of 156 million tonnes, out of which 95 million tonnes should be exported.

On the commercialization side, more than 100 million tons have been already sold as of July, and farmer selling was at 76% practically in line with the previous crop. As for the next year crop, preliliminary estimates point to an increase in the planted area between 1 million and 2 million hectares, a growth of up to 4%, resulting in a crop initially estimated at roughly 163 million tonnes.

On the next slide, we will see the outlook for corn. Corn crop is projected to reach 131 million tons, of which approximately 49 million tons are expected to be exported. While in the state of Mato Grosso and Goias, the harvest is slightly ahead of the last 5 years' average. In Mato Grosso do Sul and Parana, the harvest is still at an early stage. Commercialization in the mid-South region of Brazil ended July closing to 50%, slightly ahead of the same period last year.

On the next slide, I will present the update on the short-term guidance. Before closing my presentation, I would like to update our guidance for the fiscal year. After 7 months of the year, we are tightening the range of other 3 KPIs. Due to the operational challenges we faced in the first half of the year, we update our volumes to the range between EUR 76 million and 78 billion RTKs.

Despite the update of volumes, the EBITDA projection had a minimal adjustment with a new range between BRL 5.4 billion and BRL 5.7 billion. The constructive momentum of logistics sector has boosted our margins, creating additional levers for EBITDA. Lastly, the new CapEx projection for the year is between BRL 3.6 billion and BRL 3.8 billion. Here, I conclude my presentation, and we are available for the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question is from Lucas from JPMorgan.

[Lucas Marquiori, analyst]

I have a couple. Gustavo first. You were just talking about the updated guidance. Could you talk about the volume recommendation? What is the outlook for the fourth quarter? Given that the EBITDA reduction was a bit less than volume, has the price offset that? And what about CapEx? What is the main driver for that? And the second question is about the systems bottlenecks. There have been some bottlenecks or operation, bottlenecks for a while. In your opinion, would it make sense for Rumo to invest in any greenfield projects in that segment in addition to the post-STS11?

[Rafael Bergman, executive]

As you know, the guidance is our main means of communication to make sure that we are conveying equitable information to the company's shareholders and to the market. So we have now had 7 months of the year with good results and some challenges. The first quarter was impacted due to the criminal incident. Things are much better, but there are still some challenges. And looking forward, we think our original guidance has become a bit difficult to meet. So we decided to update it because we now believe this is more feasible from now to the end of the year. Obviously, we will continue to work to support the authorities to fight these criminal incidents. And also, we have many productivity initiatives which have helped to offset these incidents.

As you've mentioned, we do have a favorable demand for freight in the market as it was when we contracted this year's volumes. So our profit prospects, for this year, isn't surprising at all. Now when we look at the EBITDA range and the leverages of the EBITDA, that includes the margin. As we have managed to keep practically the same EBITDA margin and to make a slight adjustment by changing that last number in the range. But with very favorable prospects for the year as a whole. And this outlook also applies to our expectations looking forward because crops are looking very, very positive down the line. So the market is also looking very constructive. With regards to the CapEx, we started the year with a high range, considering that one of the projects that are included in the guidance is a new project. It's still under mobilization. So obviously, the mobilization range is a bit wider at the beginning of the year, we were looking into the land licenses. We concluded the overpass over the at the BX at the Rondonopolis exit. And now we're finishing the most relevant work. So what you can expect is a higher expenditure concentration for next year and the year after that. So that's our main driver to have these assumptions that are more compatible with our expectations for the year. As for your second question, about poor opportunities. There is considerable demand, but capacity has also been increasing through different initiatives in addition to the terminal capacity increase. It also comes from productivity and a large part of that comes from Rumo itself, especially through this new partnership, there will definitely be productivity gains looking forward. There's also productivity initiatives. There's a great deal of coordination among the terminals where we unload our volumes and the expansion of existing terminals SDS 11, for instance, which will go into operation as of 2025. So obviously, we're very interested in the increased capacity at the Port of Santos. We are doing our part and we can see that everybody else shares the same opinion. As for taking part in investments, in the past, we did talk about SDS 11. That was an opportunity we were looking at. But our partner made the decision to continue on their own, in terms of investment, but to share a real operation with us, which to us leads to the same result. So we have more unloading capacity at [indiscernible] and more exports to the port. So we're looking at it to understand whether a direct investment from us would be required or that capacity. That wouldn't be particularly strategic for us. So I show that last year, we decided to sell our controlling share in T16 and T19, making sure that the partner that was coming into it would have a high level of operation, which is what has been happening. So we have achieved our objectives. I hope I've answered your questions.

[Operator]

Next question is from Pedro Bruno.

[Pedro Bruno, analyst]

I have a couple and Bergman has somewhat answered them. But if you give a little bit more color on CapEx concerning the Mato Grosso expansion project. If you could give me some more details for the rest of the year and next year. You made it clear that those BRL 70 million you have reported close to BRL 70 million in the first half of the year in the next couple of years or if anything is going to change in the next 3 years for that project? And if you could give us a an overall update in terms of what you have learned based on the first phase of the project. So that's my first question. I'll ask the second one in a minute.

[Rafael Bergman, executive]

Pedro. Unfortunately, there was a problem with the connection, but your question was about CapEx. So I'm going to answer what I think your question was. But if I get it wrong, please let me know and if earning any specific details you'd like also let us know. So this project by nature would have something carried over to the second half. what we have invested so far in the volume that we reported in the first half is immaterial. So obviously, investment levels will change in the second half of the year. That has started to happen. And we are going to have a mobilization that is compatible with the project construction facing so that we can get to the first terminal in 2026 and are to go into operation then. So that will continue. And obviously, our CapEx in 2024, '25 will be higher so that we can meet that schedule. But nothing will change when it comes to our expectation in terms of operating the terminal configuration. It's only a matter of mobilization timing. We learn every day. And this is a transformational project. It is a greenfield project, and it will generate a great deal of benefits. Our in-house team is working with consultants to make sure that in terms of engineering and contractors is conducted the best way possible. We do that every day. We will continue to do that. And obviously, we're very happy to see that Many see this project as a priority. Just recently, we saw Compass talking about the ICMS exemption with regards to materials. And obviously, everybody is once the project to be successful. So our team is highly focused on delivering the project according to what we announced to the market.

[Pedro Bruno, analyst]

That's great, Bergman. That is exactly what I wanted to know. And my second question has to do with an article that was published yesterday and had to do with the previous question. It has to do with the Marimax Land. The news talked about 20 million tons a year, and that's a lot. And obviously, that will include an additional work at the terminal. So what is your expectation in terms of timing and additional capacity coming from that project given the latest events? And that's my last question.

[Rafael Bergman, executive]

Pedro. Well, this is very good news, and it was expected. We had been planning to do that in the context of the FPS. It's a major project. It's possibly the most important project within the FPS context because it will increase efficiency considerably in the Santa complex with the terminals, including those that we have sold controlling share, the SD11, but it will be very helpful to the rest of the terminals on the right-hand side of the port, where it is a very relevant project not only to us but to the Port of Santos itself. Very soon, we will begin to mobilize the work in the context of the FPS. So the project can be implemented and the schedule should go up to 1.5 to 2 years. Obviously, everybody wants this project to be implemented as quickly as possible. And on the line, we'll be looking at any additional opportunities that may arise. You mentioned additional terminal and others. But in addition to the approval of this specific agreement for this project, everybody shares the same opinion about the increase in capacity at the Port of Santos. It won't just benefit Rumo. It will benefit other companies, clients, receiving cargo and exporting those to their own ports.

[Operator]

Next question is from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

I have a couple of regulatory questions, please. There were a couple of decrees today as part of the pac, the ICMS reduction for infrastructure projects. Had you taken that into consideration? Does that apply to your current and future projects? And will there be an impact on your cash and considering taxes? So that's the first question about the ICMS. The second one is are you considering renegotiating your investments, current concessions at the Arista network or any other relevant assets. Is the government wishing for more investments in your current concessions? So those are my 2 questions.

[Rafael Bergman, executive]

Lucas, thanks for the questions. The first one, I've already mentioned it, but let me give you a bit more color on that. So the Compas consortium has been approved under the roof CR. I think it was this morning, if I'm not mistaken. And it's about the ICMS exemption for railways. Obviously that's very positive for us. We're working on quantifying that. But the nature of our CapEx here involves a great deal of services. So that's the first thing. There's no ICMS there. When it comes to materials, in many cases, our configuration already optimizes the ICMS tax. In any case, is very positive because it simplifies the debate and it will bring an additional financial benefit. But it's all to do with what we've been saying about rumors investment. But it's wonderful to see the government looking at railway as a strategic piece of investment for the country. So this confis consortium, the discussion of the pack, the PIC which will prioritize everything that the different stakeholders have been doing. But the bit will be made easier this year. And it's what we believe it just endorses our thesis that it makes sense to continue with our investment plan.

[Bruno Amorim, analyst]

And for your second question, Lucas, about the concessions. We have mentioned that we have proactively managing our different concession agreements here at Rumo. With regard to the [indiscernible] network, our obligation book, obviously, when we look at it, there are opportunities to reconfigure it, so that we can meet its objective safety, capacity and efficiency.

So the concession and the authorities and the company should be able to continue to discuss that and to make the necessary adjustments. So by necessary adjustments that obviously includes rephasing certain works, replacing certain works by others, bringing forward certain work. First is we have decided to bring forward some investments in yards for the trains with 120 cars because that made sense for the concession and the authority. So we made that decision and in discussing it with the agency, we explained the rationale for doing that. And same way, we made a decision to make investments that were part of the original book but with the same objective. So that debate was started by Rumo and now the agency is speaking to the recently created secretariat. And it's a natural thing to happen in a regulated environment. So it's a proactive management to optimize things to make sure that we achieve and overcome the functional objectives that were originally established.

[Operator]

The next question is from Victor Misuzaki from Bradesco.

[Victor Mizusaki, analyst]

The first one is about the guidance. On Slides 13 and 14, you talked a little bit about the 2023 crop. And there's a lot of corn and soybean yet to be exported. So my first question is considering the fourth quarter, do you think there may be a positive surprise when it comes to your results because the fourth quarter seasonally speaking, usually have available capacity. So it could be a pleasant surprise, right? And the second question is considering freight prices, but in the second half of 2021, which helped to anchor negotiations for the soybean negotiations in 2022. Do you think we could expect something like that for 2024, given that? Looking from the outside it looks like at implied for the freight in the second half of the year. So there should be an improvement next year, right?

[Gustavo da Rosa, executive]

This is Gustavo. Let's start with the fourth quarter dynamics, especially the end of the year. December is always hard to predict. We do have considerable brains, brain volumes to be exported. Our forecast points to maybe having a carryover inventory for the following year. Obviously, the price commodity dynamics, especially if the corn could accelerate or flowed that down. It will depend on whether more or less is exported in the fourth quarter. It's hard to predict what will happen with the dynamics. But on the positive side, there's a great deal of product available. It could go in the fourth quarter or next year. And especially December, that's a time we use for preventive maintenance to make sure that our system is ready for the following year. As we said during the earnings release call, the crop outlook is being -- is looking very positive when it comes to this carryover inventory. So there are many variables, which can change throughout the year and swing results one way or another. But in any case, all of these scenarios have been reflected in the guidance that we've announced to the market. With regards to your second question, I think structurally speaking, the environment is generally constructive. Production is increasing. I just touched on the carryover inventory. So in terms of cargo availability, 2024 will be favorable. And at the same time, when we look at logistics supply, there is an increase but there is also a challenge because production is increasing even more. So it's a very healthy market when it comes to supply and demand. And that's why that reiterates the healthier margin dynamics, but also a fair price for our services now and in 2024.

[Operator]

The next question is from Daniel Sasson from Itau BBA.

[Daniel Sasson, analyst]

The first 1 is about potential efficiency projects in the mid to the long term. Could you share some details about what might help the company to increase volumes that don't require expansion CapEx, maybe increasing the number of cars and trains to 75. Have you discussed that at all? Do you think that's something that could happen in the midterm or maybe the rail being able to take more weight, improvement in transit time. If you could comment on that, that would be very helpful. And the second question is a follow-up on the previous one. About volumes and good prospects in terms of available volumes. Do you think the transportation in the fourth quarter will carry over to next year and yields? Could you comment on the first contract you've had with trading companies in a context where commercialization is slightly delayed in 2023 and has been a more concentrated demand for transportation when compared to previous year.

Have you noticed trading companies wanted to negotiate these contracts a bit earlier for next year? I think that give us a good dream of reference in terms of demand at the end.

[Rafael Bergman, executive]

Daniel, thank you for your questions. I'll start with your first one. There are many initiatives to increase capacity. Many of them include CapEx as part of our investment plan, but also through efficiency in processes and using our assets better. As you mentioned, we're currently working on the 135 car train. We were very successful with the 120 car train. So it's only a matter of time before we moved to 135 cars. And perhaps larger or additional yards for those trains. So we'll be making better use of our assets and improve our marginal CapEx. We are updating the railways, that's part of our plan, and that's associated to the CapEx that we have planned for. We have been improving train licensing.

We have TC program, and that's also part of the 2-year time line. So in the next 2 years, we will be -- it will be generating relevant benefits for us. Obviously, having more trains on the rails will improve capacity across the system. We have also mentioned investments that we've made in FIPS at the Port of Santos. There are other investments that are taking place pulp yard. There are many things that are plan and will help our growth and productivity, obviously, coordinating, unloading with different terminals. That does bring results. We have confirmed that it's not CapEx as first, but as part of our plan. That will include lots of investments. We did have lower volumes this year because of things that are out of our control, but prospects are very positive based on what we have done so far and what we will do, and we do have the capacity to meet our clients' needs. As for your second question, about the contracting environment. I'll speak about it generally. I won't go into any specifics about the negotiations environment. But what we can say is that things are looking very favorable and it's a very constructive environment. There's been a lot of transparency when it comes to the drivers where the cargoes are collected. So the system is of the same opinion, the freight does represent an important link in the chain. And our margins will continue to be healthy. And we will continue with our investment plan looking forward. That's all I can say for the time being.

[Operator]

Our next question is from Roberto Valette from UBS.

[Roberto Otero, analyst]

I'd like to hear more about the Port of Santos. What's being done to mitigate the criminal act. There was an article by global saying that there were 200 criminal incidents and on average, that should be 70 a year. So what was the average in the second quarter? And what can we expect for the third quarter?

Second question is about take or pay. There was some left and you were going to try to revert that even with the reduction in the guidance, will you still be reverting the take or pay in the third quarter? Those are my 2 questions. And congratulations on your excellent results.

[Rafael Bergman, executive]

I'll start by the first one. Much has been done since the beginning of the year. As we said in our first quarter earnings release call, there has been considerable improvement based on the responses considering the short time that we've had to do something about it. We're doing our best to make sure that downtime is as short as possible. The authorities and the police are also acting even though they are still happening, there's a great deal of engagement going on. And we continue to be in touch and cooperating and we've seen considerable improvement in the second quarter. What you've seen in the media, gives you a frame of reference in terms of what happened in the first quarter compared to what is to happen. So we're going to continue to work on that to make sure that it can be reduced and the impact can be reduced. There are many short-term initiatives. There have been positive results. It's not a linear journey. At times, things get more challenging, but we will continue on that journey, and we are confident that things will improve in time. There's no other way for it. Things will improve. It's hard to say when, but if we look at the second quarter and compared to the first, it's clear that things have improved. And there are also long-term initiatives when it comes to engaging communities where we operate and more relevant social initiatives, we are looking for partnerships to implement those. And as part of what any responsible company should do. As for the take-or-pay provisions, what we can say is that we did recognize that in the first quarter, there haven't been any material changes to our provisions in the second quarter. So volumes have improved. But we haven't had the opportunity to revert it yet. That will depend on our performance until the end of the year. Given the new guidance range that's part of the positive and negative leverages that will help us achieve our objectives before the end of the year.

[Operator]

The next question is from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

I have a couple of questions. The first one is about pricing. It might look like I felt short, had an 11% reduction compared to the first quarter. There was only a slight increase compared to the second quarter last year. And the yield in this quarter was similar to the third. I'm saying all this because it's not just a matter of looking at things quarter-on-quarter. When you look at it from different perspectives, it looks like this yield could have been better. So what might be the explanation for that? Is it the competitive environment? Was the -- any execution errors or is my interpretation wrong? And if you could give us an outlook for the third quarter. Usually, most of your capacity is sold within a 6-month window. And now we're turning to a new window in the second half of the year. So there's room for new profitability lead compared to the first half of the year? And the second question is a follow-up question about volume. July's volume is relatively weak. Obviously, one month isn't enough to tell what will happen for the rest of the year. But I just wanted to know what happened. Was it a demand issue? Was a supply issue? Or was it just something temporary that won't continue to happen looking forward?

[Gustavo da Rosa, executive]

Bruno, this is Gustavo. Let's begin with pricing. Our first quarter showed a 28% increase year-on-year. That is not what we pointed to that was not what was in the guidance. It wasn't supposed to be at that level for the rest of the year. There subcontract dynamics, most of the volume we contracted was contracted last year.

So the effect short term changes shouldn't impact pricing. Obviously, when we priced the second quarter last year, we didn't know that the harvest was going to be late. And farmer for our selling was going to be delayed and that would lead to considerable grain availability at the end of the crop. So again, there are different dynamics at play quarter-on-quarter. The third quarter, there is a crop peak, especially considering the corn crop.

So we were looking at the market last year. So our pricing ability considering crop peaks is always higher when you look at seasonal troughs, which is the case in May and June, even though there were more products available this year. We couldn't have known that last year. So when you go forward contracts, your hands are somewhat tight.

And in our guidance for the year, we have revised our volumes, but our ranges, our EBITDA ranges have remained practically the same. So that goes to show how confident we are about our pricing for the year. it's not linear. As I said, each quarter tells its own story. But if you look at the first half of the year consolidated results, we grew by 17.5% and consolidated results for the second half of the year. You will see constructive dynamics. But each semester has its own strategies, its own dynamics and therefore, its own pricing. With regards to volumes, in July, specifically, there was some climate instability. There was a cyclone close to the Port of Santos and many of the terminals couldn't receive any additional loads because they were not operating for those vessels at that time and some operating stability as well. Again, that's not linear. I don't think July can be considered a proxy of our volume in the second half of the year. Each month tells its own story. And again, the best forecast we have at the moment is our guidance for our volume. You can extrapolate a curve -- a volume for the next months. And obviously, there will be better months and more challenging months, but definitely enough to deliver on what we have announced for the year.

[Operator]

The next question is from Rogerio Araujo Bank of America.

[Rodrigo Olivares, analyst]

I have a couple. The first one is a follow-up on the macro volume. Since you've lost some share to road transportation has quite a strong market. Right now, we know about what's been happening in Santos and how that impacted your operation? What's your main bottleneck right now or bottlenecks that's stopping volumes from increasing?

And how are you addressing those? Just so we can know roughly when we can expect debottlenecking. And whether we'll have more stable volumes next year, or less capacity. That's my first question. I'll ask the second one in a minute.

[Gustavo da Rosa, executive]

This is Gustavo. Thanks for your question. Market share is always a tough variable to measure. As I was saying, in the second quarter, there was a lot more volume in the market than had been projected originally. The harvest was late, farmer selling was delayed. This is no secret to anyone. There are high utilization rates in the terminals we transport to. And whenever there's a peak in demand, that demand is rerouted to underused terminals, which is usually the case of road transportation and road terminals, and that's a thriving market right now. So when demand is particularly high, the market share indicator isn't perhaps the best proxy. I think volume works much better than. And our volumes did increase, obviously. When you expand for capacity, you have more room for maneuver. So even during peak times, you can absorb higher volumes. I think Bergman has already mentioned that in his previous reply, we have the [indiscernible] works. We also have the works on the left margin and many other fixed investments that will help us to improve access to the port of Santos, but also increased productivity in the existing terminals. In the midterm, we have the SDS11 by COFCO that will go into operation as of 2025 that will drive capacity in Santos. But obviously, there will be demand peaks over the year. There's a limit to grow market share, but what matters to us at the end of the day is to have the volume and to have high utilization rates of the rail so that we can leverage our operational margin.

[Rodrigo Olivares, analyst]

My second question is about yields. As you've just said, the price of road transportation has been considerable despite the drop in fuel prices and considerable detachment when you compare logistics routes between Rumo and Truck to Santos. There's more than 90% different Rumo could increase its price by 90% to be comparable. I know that this was negotiated last year and in company should take on the risk of the take-or-pay but discount was about 25%, 30% up to 40%. So there is a considerable there difference now. So my question is, first, could you help us understand that difference with road transportation and the price of diesel, should that go back to normal levels? And the second question is, is there a specific reason to that implicit discount between Rumo and road transportation and for it not to be going back to normal levels or to be such a high discount to what we normally see?

[Rafael Bergman, executive]

Okay, Rodrigo. To your first point, as we said previously, the freight transportation market is looking favorable. So oil prices are high. Right now, there's a crop peak. And when that happens rail transportation, ports, none of them are able to handle all the additional volume in the market. So obviously, there's higher demand for road transportation. And since there's that peak in demand, road transportation is inelastic to the price of diesel. And that's what's happening right now despite the drop in fuel prices, road transportation costs are high because there's still considerable volumes to be transported by truck considering that we are at the crop peak right now. Now at the Port of Santos, let's not forget some of the structures are dedicated to specific models. So rail unloading is independent to road unloading. So these are different segments. And obviously, we're talking about a constructive market. So that suggests that our margins are very satisfactory. The moment of negotiation is what defines at what level our margins will be set for the following year. And that is -- we're still working on that with our clients. Obviously, we're not going to disclose that. But considering the freight transportation level we'll tell you how the market is doing. And that's a starting point for our conversations with our clients.

[Operator]

The next question is from Filippe Nielsen from Citi.

[Filipe Nielsen, analyst]

Congratulations on your results. You've addressed some of my questions, but I still have one about ports and new projects. A lot has been said about capacity at the Port of Santos and projects to expand the port. But logistics and transportation in Brazil are also dependent on other ports, especially in the South. There's the real granted result, the South port and Paranagua port. And that's how that close to as where you export your volumes in the south. So are there any port expansion projects to foster export capacity increase through those ports other than the Port of Santos.

[Rafael Bergman, executive]

Ports in the south are relevant. Obviously, they work with different markets, Arana and Mato Grosso do Sul specifically, which work with Paranagua and San Francisco ports and [indiscernible] , which serves the state. These are important ports and we do use our South network to serve them, and they help with grain transportation in addition to the Port of Santos, but they are separate markets, obviously. So on the one hand, we have Mato Grosso and Goias. These are major users of the Santo system. And on the other hand, we have Mato Grosso do Sul , Paranagua and Rio Grande do Sul using the ports in the South. That's roughly how it works geographically speaking. There are investments being made in the ports in the south. And with our capacity management, we have been progressing our investment in what's in the South, but we do have a segmented strategy considering those 2 markets.

[Filipe Nielsen, analyst]

Great. And as a follow-up about the terminal Act. You've mentioned that they haven't been 100% solved despite the improvements. In the second quarter, there have been some expenses to do with those issues. So just wanted to understand what will happen looking forward? Will it be bound to the government? Or would you be having any additional expenses to deal with those damages?

[Rafael Bergman, executive]

I'll take your second question. And let's just separate actions from costs. We have recognized some expenses, and we have disclosed those in the second quarter. They have to do with the collection of products that were on the railway, we had to do that to make sure that they were clean and safe, and our operation continued to be efficient. So those expenses came from different criminal incidents that led to products falling on the railway. These are extraordinary events, obviously. They happen more frequently in the first quarter, they're still happening. And that's why we're sharing the impact of those actions. As for who is accountable, this is a joint effort and will continue to be. So the company is taking action in terms of reacting quickly and efficiently in monitoring our operations more effectively and the authorities, which have been policing where we operate and their ongoing investigations. And make sure that we can all come to a satisfactory conclusion and so that our operations can be safe for us for employees and the communities where we operate. So there are 2 different things, but we will be sharing everything with you so that you know exactly what's being done and the extraordinary events that have affected the company during that period.

[Operator]

Our next question is from Regis Cardoso from Credit Suisse.

[Regis Cardoso, analyst]

I'd like to hear about ICS and margin. This has to do with Rogerio's question, prices could be higher. Gustavo mentioned that each quarter tells a story -- and I just wanted to understand if you might be able to share what changed from the first to the second quarter. Is it a matter of cargo mix where the price is higher in the first quarter, and therefore, it's not comparable with the second quarter. And overall, how can we interpret that for the third, fourth quarter this year or next year, what will be your pricing basis for negotiations and our forecast for 2024? So that's one question. The second question is about margins. Well, despite the lower yields, your margins have improved subsequently. And we would expect the opposite, right, lower prices, lower margins. So our recurring margin basis is more similar to the first or the second. And what explains that.

[Gustavo da Rosa, executive]

Well, there's nothing unusual in the second quarter, negotiations that are affecting prices and margins that we are disclosing are a reflection of our negotiations that took place last year. So despite the competitive environment. That's what's happening this first half of the year. It's not unusual. We don't negotiate every single month with our clients. We negotiate a package of services, and we try to align those so that we can have more balanced volumes across the year. So there's nothing unusual there. Nothing has changed. No changes to the cargo mix. This is something that we built during negotiations last year.

The third quarter won't take the second quarter as basis, not necessarily. I would look at the year as a whole. And that's backed up by the guidance that we shared with you, and it shows a consistent message when we disclose the guidance. As a message of repositioning prices and margins in a more favorable environment, and that is compatible with the financial health. We're required to continue with our investment plan and to meet the needs of our clients. You also talked about 2024. So that's a new round of negotiations. I wouldn't take the second quarter as basis. This is what's happening now. It's not a spot environment necessarily, but it is a protected. It's a forecast environment. It's, again, a constructive, favorable environment and it proves the value of the freight service. Exports continue to be strong. Transportation continues to be strong and Brazil will continue to have an important place in the global grains export market.

[Regis Cardoso, analyst]

Thank you, Bergman. About the margin, I don't know if there's anything you'd like to talk about that.

[Rafael Bergman, executive]

Yes. Again, natural dynamics of our contracts, our agreements. These are term agreements, for grains. So when we set the starting price, from then until services are provided, prices are corrected according to diesel price variations. So it's almost like an x diesel price that we look at, and that will lead to specific margins. There was an increase in yields year-on-year is about 9% and a reduction in variable costs backed up by a reduction in diesel prices, which was about 29%, 30%, leading to a higher margin to what we had before, which, at the end of the day is what we want. And this will be a recurring dynamics in our results. When we make the agreements, whether the diesel goes up or down, we have neutral margins. And whether that margin at the starting point is satisfactory or not.

[Operator]

This concludes the Q&A session. Thank you. I will now turn the floor over to Mr. Rafal Bergman for his closing remarks.

[Rafael Bergman, executive]

Thank you so much for joining us. Our team is here for anything you might need. This concludes Rumo's earnings release conference call. Thank you very much for joining us. You may now disconnect. Have a great day.