Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's Fourth Quarter 2017 Results Conference Call.

With us here, we have Mr. Julio Fontana, CEO; Ricardo Lewin, Chief Financial and Investor Relations Officer; and Mr. Gustavo Marder, Investor Relations Manager.

We would like to inform you that this event is recorded. [Operator Instructions] The audio and slide show of this presentation are available through live webcast at ri.rumolog.com. The slides can also be downloaded from the webcast platform.

Before proceeding, let me mention that forward-looking statements will be made under the safe harbor of the Securities Litigation Reform Act of 1996. 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, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors, can also affect the future results of Rumo and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Julio Fontana. You may begin your conference.

[Julio Neto, executive]

Good afternoon, everyone, and thank you, all, to participating in the fourth quarter 2017 conference call of Rumo.

I would like to start with some comments about our business. 2017 was very positive for agri business, which stood out as one of the highest growth factor of the Brazilian economy. Soybean and crop achieved production and export records, benefiting the agriculture chain as a whole and fostering investment and development in the sector that is the most relevant to our business.

At Rumo, whilst remaining focused on executing our CapEx plan and as a direct result of this focus, we have seen a great transformation in our business. Evidence of our evolution is clear in the several efficiency and the productivity indicators, such as the volume transported and the cost control, which in turn allowed a big jump in our operating profitability.

We have reached our goals, with EBITDA very close to the top of our announcement guidance range. It's worth mentioning that our priority will always be operational safety and safeguarding of our employees in all of our railway surroundings. Our Zero Accident Program has resulted in an outstanding evolution in major indexes of railway safety. We know that there is much to be done. We will work tirelessly while we focus on reducing accidents.

Our shareholders and the financial markets once again reinforced their confidence in Rumo. In early 2017, we debuted in the international bond market issuing $750 million bonds. In October, we successfully concluded a second capital increase, totaling BRL 2.6 billion.

Capitalization brought the company to another level, enhancing liquidity and reducing the risk of our business. These benefits had already been seen, as in January 2018, Rumo once again issued bonds [ abroad ] totaling $500 million at a considerably lower cost than the previous issuance.

For a company that projects growth above 10% a year, every year is a challenge. At Rumo, 2018 will not be different. We stay focused on our projects and especially on our operations. As the company's motto states: "With focus on the train, the results we will obtain."

[Ricardo Lewin, executive]

Good afternoon, everyone, and thank you, Julio, for the initial words.

I would like to start by reminding [ our debt ]. At the end of 2016, we concluded the reverse merger process of Rumo Logistica and Rumo S.A. by which name the former América Latina Logística is known.

So the results we will be presenting are Rumo S.A. pro forma 2016 results, which take into consideration the accumulated results of Rumo Logistica prior to the merger for comparison purpose.

Beginning in Slide #3, Rumo's consolidated results. We had a great performance in the fourth quarter in the year of 2017. Investments resulted in higher transportation capacity, allowing Rumo to increase transported volume by 23% in 2017 when compared to 2016.

This volume was obtainable due to record corn and soybean crops, which exports extended until the end of the year. Loading volume at our Port of Santos terminals increased 30% in the fourth quarter '17 compared to the same quarter of 2016 as a result of the grain exports.

Let's now turn to Slide #4, where we can see the company's consolidated financial performance. The financial performance reflected the successful execution of our business plan.

EBITDA in fourth quarter '17 was BRL 730 million, an increase of more than 100% compared to the fourth quarter '16. In addition, we recorded substantial cost dilution driven by higher volume, which this quarter resulted in EBITDA margin increase to 46%.

We also ended 2017 with a 46% margin, an increase of 6 percentile points compared to 2016.

Our leverage at the end of 2017 decreased to 2.6x broad net debt EBITDA, versus 4x in the third quarter '17. This result was achieved mainly due to our capital increase concluded in October, in addition to our continued EBITDA growth.

Moving to the next slide, Slide #5. We can see the performance breakdown of our business units. Let's start with the North Operation. As explained in previous slides, higher capacity allowed outstanding total transported volume growth. Specifically, in the North Operation, volume grew more than 100% in the fourth quarter '17, against the same period last year, reaching to 9.3 billion RTK.

Net revenue totaled BRL 1.2 billion in the fourth quarter '17, mainly driven by higher demand for transportation of the record corn crop.

North Operation EBITDA was up 104% against the fourth quarter '16 reaching to BRL 672 million, while margin reached 55% as a result of cost dilutions, driven by higher volumes.

On the next slide, let's look at our market share in Santos. In this slide, you can see how higher capacity allowed us to increase our market share in grains exported to this Port of Santos in 2017. Unlike 2016, when the corn crop failure significantly compromised grain exports, the Port of Santos, the main destination of cargoes transported by North Operation, shipped approximately 36 million tons of grains in 2017. This represented a strong increase versus 27 million tons shipped in the previous year.

Despite this remarkable export market growth, we reached 53% market share, 3 percentile points higher than in 2016, evidencing our successful investment plan execution.

Moving to Slide #7. We look at South Operation's performance. Since the inception of our CapEx plan, we have been working on revamping the South Operation via several initiatives, such as process restructuring, fleet renewal and investments in terminals, yards and permanent waste.

In 2017, better operational conditions, a direct result of these measures, yielded tangible results. Transported volumes substantial increases in the fourth quarter '17 reaching 3.6 billion RTK and contributing BRL 71 million to the total EBITDA, a leap of [ 171% ]versus the fourth quarter '16 with 22% EBITDA margin. However, in the year, South Operation EBITDA came to BRL 301 million, with 24% EBITDA margin against 12% in 2016.

Moving on to the next slide. We discuss our Containers Operation's results. The total volume of containers transported decreased in the fourth quarter '17, reflecting the strategy of rationalizing unprofitable routes. Lower demand for refrigerated products transportation also impacted EBITDA.

It's worth mentioning that this operation has been restructured via diversification of cargoes and customer base expansion, which may result in gains of scale and profitability in the future.

Let's move to Slide #9, where we present the company's consolidated indebtedness position. Broad net debt decreased 24% to BRL 7.2 billion as of December 31, 2017. As already mentioned, we achieved a significant leveraging of the company through a capital increase EBITDA growth. As a result, today, Rumo is far better positioned in the credit market in a process of reduction in financing costs.

Also in 2017, approximately, BRL 1.2 billion debt was rescheduled. In January 2018, we issued bonds in the international market, totaling $500 million at an interest below 6%, considerably below the cost of our first issue in 2017.

Moving to Slide 10. We look at consolidated financial results and cash flow. Fourth quarter '17 financial result was 5.6% below when compared to the fourth quarter '16, led by CDI decrease quarter-over-quarter and lower expenses from leasing and real estate receivable certificates due to the amortization of these instruments.

These effects were partially offset by higher average debt balance due to the issue of senior notes in February 2017. In financial income, we recorded an increase in financial investment yields due to the capital increase concluded in October.

Moving to the next slide. We present the historical trend of operating and financial performance indicators. Operating ratio was down 13% in the fourth quarter '17 from fourth quarter '16 and 7% in 2017 from the previous year, driven by higher transported volumes and the company's cost-control measures. Diesel consumption measuring liters by TKG decreased 9% in 2017 due to high operational efficiency, especially the upgrade of our locomotive fleets. Our operations recorded increased average load of railcars per day as a result of higher capacity and solid demand. Transit time increased due to the execution of works relating to CapEx plan. Higher efficiency at terminals of region and destination offset these effects, resulting in reduced asset cycle time.

Moving to the next slide, we will discuss our most recent market projections. Updated estimates on the 2017, 2018, grain crop are highly positive. According to recent Agroconsult figures, total soybean production [ grew ] and in the State of Mato Grosso is estimated to grow at approximately 3%. The corn crop estimate is for a 9% increase in the Brazilian production and 11% increase in the state of Mato Grosso.

Despite these estimates, substantial carryover inventories should offset this production drop. Assuming this scenario, the volume available for exports should allow us to achieve our objectives.

Now moving to the next slide, Slide #13, which includes our guidance for 2017 and the announcement of our estimates for 2018.

Referring to 2017 guidance, EBITDA reached an amount very close to the top of our projected range and CapEx was in line with our plan, ensuring the continued capacity increase of our railway.

Guidance on EBITDA and CapEx for 2018 is as follows: we estimate a growth of approximately 15% in EBITDA in a range from BRL 3,050,000,000 to BRL 3,250,000,000. CapEx range is from BRL 1.9 billion to BRL 2.1 billion in line with our announced business plan.

On the next slide, we restate our long-term guidance. We are maintaining volume and EBITDA targets for 2020 and the CapEx curves for 2018, 2019 and 2020. This proposal results in 20% annual EBITDA growth. It's worth noting that Rumo has achieved 20% annualized growth since 2015, the year when our CapEx plan was initiated reinforcing our execution capacity to achieve our long-term objectives.

Before finishing my presentation, I would like to invite you to the Cosan Day, which will be held on March 16 in New York and March 19 in São Paulo.

So I'm here with Julio Fontana, Rumo's CEO and Gustavo Marder, our IR Manager, along with the rest of our finance team. And we remain at your disposal for any clarifications during the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Soummo Mukherjee with Mizuho Bank.

[Soummo Mukherjee, analyst]

My question was just to confirm in terms of take-or-pay contracts, what is the absolute amount of the volumes that are secured by take or pay? Saw some articles on Bloomberg saying that it's a 100% of the 2018 volume, so I just wanted to confirm that?

[Ricardo Lewin, executive]

This is Ricardo Lewin. Thank you for your question, and it's right, approximately 100% of the 2018 volume is already guaranteed in contracts, so it's take or pay.

[Soummo Mukherjee, analyst]

And if I may just, a quick follow-up. In terms of the BNDES plans, I know that due to capitalization. You probably don't rely on it as much. But could you just update us on where that stands? What is the time line expected on that?

[Ricardo Lewin, executive]

Yes. For sure. In December last year, the credit area from BNDES approved the lending facilities. And the next step is the negotiation of the contract. We are right now negotiating this contract. And after that contract is negotiated, it goes to the approval of the directory of BNDES. Okay? What's important to say here is that our business plan does not depend on the lending from BNDES, okay. We already have enough fundings and cash generation to support our -- the long-term business plan that was disclosed to the market.

[Operator]

[Operator Instructions] The next question comes from [ Jocelyn Jensen ] with Lucror Analytics.

[Unknown Analyst]

I don't know if you can give us some guidance about your leverage [ with lenders ], I mean, that you have reduced your net leverage because you have done the equity injection. I would like to know if you're planning to do a new equity injection because we have seen 2 equity injections in the last year.

[Ricardo Lewin, executive]

No. The company is already in another financial leverage level, and we don't need any capital injection anymore.

[Unknown Analyst]

And do you see the 2.6x is sustainable, to the pick up leverage for this year?

[Ricardo Lewin, executive]

Our focus is to reduce these -- our long-term focus is 2x broad debt EBITDA.

[Julio Neto, executive]

And not the optimum loan.

[Unknown Analyst]

Okay. And when do you expect to reach that?

[Ricardo Lewin, executive]

In 2020. This is a long-term objective.

[Operator]

[Operator Instructions] Ladies and gentlemen, before proceeding to closing statements, on behalf of Chorus Call, I'd like to ask you to -- sorry, to excuse us for our webcast service failure. As there are no further questions, I'd like to invite Mr. Ricardo Lewin to proceed with his closing statements. Please go ahead, sir.

[Ricardo Lewin, executive]

In name of Rumo, I'd like to thank you all for participating on this call. Again, I'd like to apologize for the technical problems. And if you have any doubts, please contact the IR from Rumo where we are open to answer any doubts you have. Thank you very much.

[Operator]

This concludes our Rumo's audio conference for today. Thank you very much for your participation. Have a good day.