Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, everyone, and thank you for waiting. Welcome to Rumo conference call to discuss the third quarter 2021 results. Today with us, we have Mr. Ricardo Lewin, CFO and IRO; and Mr. Gustavo da Rosa, Investor Relations and Treasury Director.

[Operator Instructions]

We also would like to inform that the conference call will be presented in English by the company's management, and there will be simultaneous translation to Portuguese.

This event is also being broadcast simultaneously on the Internet via webcast. Before proceeding, we would like to mention the forward statements are based on the beliefs and assumptions of Rumo's management and information currently available to the company.

They involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand the conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. I will now turn the conference over to Mr. Ricardo Lewin. Please, Mr. Lewin, you may proceed.

[Ricardo Lewin, executive]

Good afternoon, everyone, and thank you all for joining us in this earnings conference call for the third quarter 2021. I would like to start by providing some highlights on ESG initiatives. As part of our liability management efforts, during the third quarter, we issued a sustainability-linked bond, in which we commit to reduce our CO2 emissions by 17.6% until 2026.

The framework was endorsed by Sustainalytics, which appraised us with an ambitious KPI target. The bond was well received by the market, allowing us to price with only 25 bps above the Brazilian sovereign bonds.

On the social side, I would like to share with you the creation of Rumo Institute, where we seek to generate value through the interaction with the communities of the areas where we operate. We will be focusing in encouraging youngers to keep up with their studies. We will keep you informed about our progress as the project advance.

On the next chart, the most important highlight during the third quarter was the regulatory approval to advance with the extension of our railways to Lucas do Rio Verde and Cuiaba, a broad achievement that will be a breakthrough in our competitiveness and therefore, creating significant opportunities for growth and value creation as already presented. Although they already expected decline in volumes and EBITDA due to the failing current crop, Rumo has followed its strategy or focus on volumes, and thanks to its competitiveness when compared to other models, Rumo gained the expressive market share in grains in Mato Grosso and Goias markets. Also, the diversification of cargoes such as fertilizers, containers and fuels helped to partially offset the lower availability of core. Finally, in the coming years, we expect to grow even more in the transportation of biofuels and pulp with new partnerships and contracts signed this year.

On the next chart, we'll present the operational results. As already mentioned, due to the crop disruption, we saw a reduction of roughly 17% in grains that drove our volumes down both in South and North operations.

On the other hand, the container operation, fuel and fertilizers, presented at double-digit growth. On the next chart, we will see results by operations. The EBITDA went down 90% on the back of lower volumes that brought lower fixed cost dilution. Additionally, the variable costs grew more than the revenues once the fuel costs went up 42% year-over-year. Although we did the pass-through in our tariffs, given the lower availability of corn and consequent excess of capacity, additional volume negotiation became more difficult. At the same time, we had to serve grains coming from more distant places where typically we have lower tariffs.

Fixed cost also went up on the back of additional costs year-over-year, given the entrance of central network and also due to the expansion of pricing and commercial structures that took place last year.

On the next chart, we will see the highlights of consolidated financial results. Financial results came better than in the third quarter 2020. Despite the increase in CI and EPC indexes that drove the cost of that upwards, financial results came better than in the third quarter 2020 because we present significant reduction in other expenses given the prepayment of BRL 5.1 billion in concessions fees that we did last year.

Net income reached BRL 51 million on the back of a lower EBITDA performance. On the next chart, we will see more details of debt. We have closed the third quarter with 2.4x net debt-to-EBITDA. When we look at our debt amortization schedule and taking into account our comfortable cash position, we can code the 2025 bond in January 2022, ensuring that Rumo will not have any significant amount to be amortized until 2027, therefore, making easier the execution of the investment plan and the extension to Lucas do Rio Verde.

On the next chart, we have the market outlook for soybean and corn. When we look at 2022, it seems that the market will be very positive for grains. Soybean planting is well advanced in all the areas that we serve. Mato Grosso, for instance, already planted 95% this year compared to only 84% in the same time last year.

Despite the increase in production costs over the past months, the level of profitability of soybean and corn is still pretty high, which is incentivizing farmers to expand planted area that, coupled with a better expected weather, should provide a significant increase in productivity.

On the next chart, we will see soy outlook. Regarding the soybean market, in 2022, according to Agroconsult's projections, Brazil should have a record high bit of 146 million tons, an increase of 9 million tons compared to 2021, of which 88 million should be exported, 4 million tons more than 2021.

Mato Grosso's states should also experience an increase of 1 million tons in exports compared to 2021, while Southeast states exports are expected to raise 3 million tons.

On the next chart, we will see corn outlook. When it comes to the corn market, in 2022 according to Agroconsult's projections, Brazil should have a record harvest of 119 million tons, an increase of 37 million tons compared to 2021.

Also, projections show an increase of 40 million tons in exports, 22 million tons more than in 2021. Mato Grosso and Goiás states, combined to exports 12 million tons more. Meanwhile, Paranagua [indiscernible] states should have an increase of 3.8 million tons in its exports when compared to 2021.

On the next chart, we will talk about the outlook for central network. During 2021, we inaugurated 2 grain terminals that are operating in Goiás. We also present significant volumes and margins. For 2022, we are going to have the answers of a sugar terminal in the second quarter 2022, a fertilizer terminal in the third quarter and initiate a container operation during the second half of 2022.

With that, we should see even further improvements in volumes and margins. Here, I conclude my presentation, and we can go to Q&A session. Thank you.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Please hold while we collect questions. The first question comes from Rogério Araújo with UBS BB.

[Rogério Araújo, analyst]

I have a couple of questions here. One is I would like to know if the negotiations with the trading companies have already started for take-or-pay and prices for next year. I think the expected volume right now for next year is pretty strong. Also, diesel price could potentially support the strong freight prices for next year. So what is your expectations for these negotiations? And if they already started? That's the first one. I can do the second one afterwards.

[Ricardo Lewin, executive]

This is -- sorry, I was on mute. This is Ricardo. Well, first, thank you for participating of the call. Good to have you here. Regarding the take-or-pay for 2022, you know that we start to negotiate this on -- by the end of the year, so we are still negotiating with our customers.

And like always, these are very sensitive information, and we will not be willing to disclose right now. What's important to say Rogério, is maybe I repeat this every single year, but it's important to reinforce is that what we are sure is that we are following our strategy. It will remain the same. So we are trying to have the maximum amount of take-or-pay but under the right level of price, okay? So this is important.

Regarding the pricing for 2022, we expect that the yields will be steady in the real terms. Remember that the -- what's a factor that could increase the yields, in real terms, would be the [ troll ] in the BR-163, but you know that it will be ready only by the -- by the end of 2022, in our opinion, beginning of 2023. Okay?

Another thing that is important in terms of yields for next year in contracts, mainly in contracts, is that our commercial area is trying to engage -- is trying and it's engaging with customers in long-run contracts. You probably have heard about some of them, but I will just say 1 or 2 examples.

We are negotiating with Suzano. Actually, we ended the negotiation with Suzano to transport their volumes from the [indiscernible] plants. And the lead that we already talk is a fertilizer seller that we negotiate a position in Goiás. So this is also very important from the one that we engage with customers in contracts for products besides grains. -- sorry, I interrupt you in the beginning, if you want to do say -- say anything else?

[Unknown Executive]

No. Maybe just complementing on the volume side. We agree with you, Rogerio. We see a very strong outlook, both for soybeans and corn. So Brazil is expecting all-time high crops. So the market should be very strong next year. And this is also something that enables us to price in a better way. Also, we have to take into account that once our strategy is to expand our market share, we are going to go further in the state of Mato Grosso, and therefore, we are going to be capturing cargo for more distant places, which offsets a bit of those pricing gains that we could have based on the market drivers.

So as Ricardo mentioned, at the end, we are expecting to pass through inflation and fuel prices, but not gaining that much price in real terms, as we also have this challenge to go further in Mato Grosso to seek for higher volumes and higher market share next year.

[Rogério Araújo, analyst]

Very clear. Another one is on new projects. If you could provide an update on Lucas do Rio Verde. On the next steps, if there -- as I understand, now the environmental license is the major thing. Is there any potential bottleneck? What is the current expectations?

And also on new projects, Rumo has asked 2 new rail lines to the government under that new regulation that they are trying to test in the congress, which includes Lucas do Rio Verde to Agua Boa. And my question is what's the status of those projects?

Next steps, if there is any expectation from the company in terms of project loads to 61, the Pelen coming out and allowing those new projects to come out? And these 2 from Rumo, what is the timing expectation? What is the status and next steps? That's it.

[Ricardo Lewin, executive]

Rogerio, thanks. Good question here. Let's start with Lucas do Rio Verde. I think this is, as you said, we don't have deals. I think that we gave a bunch of information in our previous call. And there is no bottleneck foreseen. We are waiting and we are working to get the environmental license. You know that it takes time in Brazil to have this license. It's not on the hands of Rumo, but in the hands of the local secretary, and this is foreseen to be ready by the second half of 2022 more for the end of the year 2022.

But it's going well. It takes time. You need to go through a dry season, a wet season. So this is the reason that it takes time. But we don't foresee -- we are already talking to suppliers. We are working on improving the project. So everything is ready once we have -- we'll be ready once we have the environmental license, okay?

The other thing that says about the 2 other projects. I think that we are waiting to see how things work. It's not that clear for us. We have -- we are interested in -- we apply it actually for these 2 projects because I think they are important for us. It's a good option to have in our hands. Is the -- you said -- you're talking about the FICO 2. And both of the ones that we applied are -- in our area, okay, in Mato Grosso. So I always say that's our [indiscernible] obligation to understand everything that's happening in this influenced area. And obviously, understand if you can have the optionality. And it's a project that generates values we'll be studying. But we don't -- we still are waiting the next steps for these projects.

Regarding PLS 261, we are following what's happening, how it's advancing. So also, there is no news. We are following very closely the development of PLS 261. I don't know if there is anything else that you put in your question here.

[Rogério Araújo, analyst]

No, that's all. It was all clear.

[Operator]

The next question comes from Victor Mizusaki with Bradesco BBI.

[Victor Mizusaki, analyst]

All right. I have one question here with regards to Rondonopolis. Apparently, AMT or the ground transportation agents, confirmed that the initial works to cancel or re-auction the toll road concession named Can we say that maybe Rondonopolis terminal can market share? If you assume that this concessionaire, you likely need to reduce the total by,let's say, 5% and to the re-auction I mean in that of the day, cannot set up to be, let's say, cheaper to move trucks to Rondonopolis terminal and then Rumo market share in instead of Mato Grosso?

[Gustavo da Rosa, executive]

Victor, this is Gustavo. Yes, arguably, any kind of reduction in toll road prices around Rondonopolis should benefit us in terms of market share cause it's reduced the cost for trucks to access the terminal. So we are following this. We don't have control on these negotiations that the government is having with toll rolled operators. But arguably, it's something that could be positive if it happens.

[Operator]

The next question comes from Stephen Trent with Citi bank.

[Stephen Trent, analyst]

Just 2 for you, if I may. One, have you seen any disruption kind of global supply chain-wise in your own suppliers? Whether that's labor or locomotives? Or anything funny going on with pricing on that level?

And two, could you just also refresh my memory on what pricing trends you're seeing in the container business?

[Gustavo da Rosa, executive]

Stephen, this is Gustavo. So we are not seeing any kind of disruption in our supply chain. So if you look at, for instance, fertilizers, we had pretty strong volumes in the third quarter. That's a very important raw material that we need to plant the new crops. And we are not seeing any kind of disruption, neither with locomotives or anything else in our supply chain.

So we are basically all set for next year. Of course, the demand of seeds, machineries and fertilizers is pretty strong because we are having a pretty strong crop. But also, Brazil could still afford to increase the area planted. So it's not only necessarily grains coming from productive. We can also afford to increase the area.

So there will be some kind of balancement between the expansion of area and expansion of productive that requires more raw materials such as fertilizers, seeds, among other things. But it's something that doesn't worried us in terms of the next year crops.

With regards to the container business, it's a business that is evolving quite well. Of course, the assortment of cargo sometimes create some kind of variations in pricing. The container business has a broad assortment of cargoes. So as we are working to expand the footprint of our container business, sometimes we add other cargoes that have a different pattern of tariffs. But when we look forward, we believe that the tariffs will continue to grow in the container business, and the same will happen with the volumes.

Next year, we should have Stephen the entrance of the container operations in the central network. So we expect for the second half of next year to start operating with containers in the central network. And then we're going to be operating with a completely different type of cargoes. So for instance, today, we have the opportunity to -- we're going to have next year the opportunity to transport cargoes, typically consumer goods from, São Paulo and deliver in Goiás and maybe next year or 2023, even in the North region of Brazil. And then in the way back, we could collect cargoes from Manaus transport by trucks until the terminals that we are building around in Carajas and then go all the way down to the São Paulo area. So containers should have a very bright outlook ahead as the volumes are growing, and we are also expanding our footprint to operate into the entire network with containers.

[Operator]

The next question comes from Bruno Amorim with Goldman Sachs.

[Bruno Amorim, analyst]

So my question is related to the outlook for the next year. So according to the forecast you presented for corn and soybean on a consolidated basis, seems that export volumes out of Mato Grosso will be 10% bigger next year when compared with 2020. So the question is, is it fair to say that your volumes next year should be around that? Roughly 10% above 2020 levels out of Mato Grosso? Does it make sense? I know you have to balance that with the fact that maybe not all the regions within Mato Grosso are growing at the same pace.

Also, you mentioned earlier in this call that you would probably go further in the north, possibly impacting prices to some extent. So if you can provide us some color on what should happen with volumes next year, that would be great.

[Gustavo da Rosa, executive]

Bruno, this is Gustavo. That's a complicated question because we are not, as of now, able to provide a guidance for next year. We'll be doing so probably in February. What we can mention is that you're right about the market outlook. So we are foreseeing a very strong crop for next year. We are definitely trying to increase our market share. So it's not only about the market growth, Rumo will try and will expand its market share next year. So this will give us additional opportunities for growth. But also, we have to take into account several factors such as seasonality.

So those things could vary a bit, depending -- even in our commercial negotiations that we are having with customers. So in order to get our final volumes for next year, we will have to understand how much the market will be growing, which kind of seasonality we're going to have throughout the year. As of now, seasonality seems to be a bit better because we should have an earlier crop of signing compared to last year. So especially the volumes in the first quarter, they should be stronger. So that gives us an opportunity to grow a bit more our volumes.

But we have to still figure out what's going to happen in the remaining of the year. So there is the second corn crop. And to understand how early this crop would arrive could also interfere and could affect our volumes throughout the year. But we are definitely going to be pursuing additional market share gains. So that means that we are able -- or we are aiming to grow beyond the market to ensure that market share gains.

[Bruno Amorim, analyst]

And just if I may, a quick follow-up on where is -- where are volumes versus capacity right now? You have -- you keep on investing on growth. You mentioned some adjustments to the investment plan in the earnings release. But if you could clarify where is the capacity there versus volumes right now? So we have a sense of by how much you could grow next year, assuming capacity will be fully taken. Is there any indication you can provide this with in that sense?

[Gustavo da Rosa, executive]

Gustavo, again. During the last earnings calls, we have shared with you guys very important improvements that we did in the Port of Santos. So there was very significant deliveries that were made in a couple of months ago. We are still investing in the Port of Santos to increase its capacity. We have to remember, when we think about the efficiency of our network. Back next year, we're going to be operating with 100% of the trains running with 120 railcars. So that also provides significant gains in terms of fuel consumption, capacity and cycle time. So by reducing the cycle, we could reduce the recurring CapEx that we have. We could become more efficient in terms of profitability. And of course, it adds more capacity. So again, capacity is also a function of seasonality. If we have the demand very concentrated in a few months, we might not be able to serve all at once. But if we have a more steady volumes throughout the year, that could potentialize our capacity and our volumes throughout the year.

So we believe that we are in a good position next year to once again afford to grow our volumes beyond market growth. So we are trying to get more market share. How much more depends on some factors that are still being negotiated with customers.

And of course, it depends how the market will evolve in terms of also seasonality of the exports and how the price of the commodities will be behaving. So all of this could interfere in next year's seasonality and therefore in our capacity. But we are doing our homework in terms of both efficiency and capacity, and we believe that we are well equipped for next year to deliver our goals.

[Operator]

The next question comes from Regis Cardoso with Credit Suisse.

[Regis Cardoso, analyst]

I'll maybe focus on one of the discussions, and I know you've touched a little bit on these topics before, but it's been a sort of a recurring theme in all of our conversations with investors that Rumo missed the guidance last year and now pulled the guidance this year again. And investors seem uncomfortable whether the company will indeed get into a sufficiently deep growth phase starting next year so it would be able to reach the medium-term 25% and onwards guidance.

So I know there is a lot that we can discuss, Gustavo if you could maybe provide some numbers or expectations you believe, in terms of how the recovery in the crop for next year should play out in terms of Rumo's volumes specifically? And sort of build up how do you believe that results would grow relative to this year? And I believe this is a particularly big theme in the discussions because it seems the fourth quarter will be particularly weak, right? So I think it would be worthwhile to provide that discussion. So people can be more comfortable with it.

[Ricardo Lewin, executive]

This is Lewin. Let me take this question here. This is a good question, and I think that we have been very transparent with the market during all our calls if ever. But remember that 2020, we had some issues, external issues and internal issues. We had the hacker attack. We had COVID, we have the concentration of crop during certain months. We were changing our commercial policy. So we already talked that we made some mistakes at that moment. So we were very clear things that we were changing. And in 2021, we did a lot of -- we took some very good attitudes regarding -- mainly regarding operational and commercial areas. We anticipated our sales. We signed a huge amount of take-or-pay in anticipation of the soybean crop and the corn crop.

Everything went really well during the first half of the year. So operationally, the company was working pretty well. We were 100% aligned with what we planned. We had several records in the port in the railway. So what happened is obviously an exertional things that we could not avoid. We are very definite on the corn crop in the second half of the year. And we had a failure of a huge part of the crop because of the dry weather result that was a result of la nina, okay?

So I think that we are doing a very good job even with the low volumes that we have, and Gustavo already said about the market share that we gained, okay? I will give you some numbers here.

And much globally are numbers that you will not find here because we make some internal treatment in the numbers that you have in the market to make them more understandable inside the company. But I can tell you that what we gained in terms of market share during the second half of the year in grains, okay, in corn. In Mato Grosso and Goiás added to us 2.8 million tons, okay? And why don't tell you that? First thing is that if we didn't have the right intelligence, and remember that we were at -- we recently decided to build up a stronger market intelligence area, and we disclosed this to the market.

We made a stronger commercial area. So we didn't have the commercial skills. And if we didn't, we're prepared. We knowing the market very well, we would have this 2.8 million tons of grains less this year, okay? So this is very important because this may represent something around BRL 300 million in our results this year.

So what happened that we are -- the guidance -- the initial guidance, okay? We don't have guidance in the market anymore that we missed this year was not really responsibility of the company, but it was a thing that happened to the market, okay? It was in a complete exertional issue. And as I told you, we were 100% prepared if we had a very good corn crop commercially and operations, okay?

For the long-term guidance, we don't see any issue for reaching the -- up to now, at least up to now a [indiscernible] regarding next years. okay? Remember that we do have factors that can support growth of the company. So capacity is increasing. We have been working for the bottlenecking at the company. As Gustavo said, working on efficiency, trying to reduce CapEx as a result of working inefficiency, working in the terminals of Santos to improve efficiency and also capacity.

So we are doing everything to support the growth of the market. okay? Because as you saw, Gustavo already said also, we foresee a very good crop next year. Finally, remember that not next year, but in 2023, we'll be -- we will have the 2 roads in BR-163. And this is a milestone for our results as going to the north will cost BRL 25 more than it costs today and more than it cost in 2022. So part of this BRL 25 will be added to our price part of this BRL 25 will be used to gain additional market share to increase our competitiveness, okay?

So we hedge -- I don't see up to now any reason for being uncomfortable with the proposed guidance, okay? Obviously, every single year is a different year when you talk about agriculture. Every single year, we review our business plan. We see the positive points, the negative ones. If we do change our view on that, we will provide to you to the market beginning next year, okay? But the company is very well -- is working very well to reach the number that we provided.

[Operator]

[Operator Instructions]

I would like to turn the floor over to Mr. Ricardo Lewin for his final remarks. Please, Mr. Lewin, you may proceed.

[Ricardo Lewin, executive]

Yes. well, thank you all for participating on the last call of the year, and I would like to be -- take advantage that we still have some time here. To complement the answer I gave to Regis because his question is really important. And I'd like to complement some additional points.

So reinforcing, okay? The gain of market share that we are having is fully aligned our -- with the strategy of the company, okay? Remember that I always say to investors, to sell-side, that the marginal gain that we have -- if we lost this margin on gain, it's a big loss, but if we gain, we have like almost 100% in terms of EBITDA. So gaining market share even in a market that's not good because the sale of the corn crop is very poor, that shows that we are following our strategy, doing a very commercial operational and market intelligence work, okay?

This is one thing that I would like to tell you. Another thing, just reinforcing what Gustavo already said, but that we are working on the optimization of CapEx. We have -- we -- in the last years, we have reducing transit time, and we are working by the -- this year, we work a lot, and we will continue to work on debottlenecking very specific places in which we can gain a lot of efficiency.

This, together with 120 radio cars per crane improvements in Santos and the optimization of investments in Paulista Network. I'm sure that we will come with much better optimization of the CapEx, mainly when we talk about rolling stock. The efficiency and investments of rolling stock are directly related.

So you can wait for this, will come at the right time to the market. Also, we had Rogerio did a regulatory question. And here, I'd like to spend also a bit more time because I think that this year, we completed a huge cycle of the company, okay, with the milestone of the approval of the extension to Lucas do Rio Verde, in my opinion, we closed a very successful this what I call regulatory and growth cycle.

Remember that in 2019, we were the winner of central network in the bids. Winning this central network reduced a lot of risk of the company. We accessed new markets. Then in 2020, we renewed Paulista network, bringing perpetuity to the North system. And we also prepared a huge part of the concessions fee. What you can see that was a perfect step due to the inflation scenario that we are leaving today. And right now, in 2021, we approved the extension for Lucas do Rio Verde in Cuiaba. So recently, I heard from an investor that we did everything we promised we promised since the merge we did very well. And this I'd like to reinforce.

Today, Rumo has an incomparable portfolio of assets, okay? Together with a unique portfolio of growth projects and assets, okay? And this will generate a high value for the company and for our shareholders.

Finally, I just would like to talk about the debt. Nobody asked about debt. But we have been doing a very huge effort to improve the profile of our debt. I always talk to investors about the liability management that we have been doing. And I would like to provide you some numbers. We started January 2021 with an average cost of debt of 140% of CDI and with an average term of 3.8 years, okay?

In September, right now, we have an average cost of 110% of CDI with an average term of the debt of 5.8 years. And remember that we have enough cash, we have a very comfortable cash situation. And as I told in the presentation, we can prepay the 2025 bond, and paying this in January next year, will reach to an average cost of 107%. So who follows the company, remember the average cost of almost 150% of CDI closed January 2002 less than 110% CDI. And prepaying this bond will have an average an average term of 6.1 years, okay?

So this is very, very important because we are in an environment of high interest rates. And we are entering in a high investment cycle before -- after 2023 with the extension to Lucas do Rio Verde, and that shows that we have been doing the right work to face this new cycle of the company.

So I just would like -- I think that these points are very important for the company. I would like to thank you. This is our last call this year. Thank you for the support of all the investors. Thank you for the support of the sell-side and talk to you in a new call to the market next year. Thank you...

[Operator]

This concludes Rumo's conference call. Thank you very much for your participation. You may now disconnect your lines. Have a good day.