Rumo SA

BOVESPA:RAIL3

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's Fourth Quarter and 2018 Results Conference Call. Today, the conference call will be conducted by Mr. Ricardo Lewin, Chief Financial and Investor Relations Officer, with initial statement of Julio Fontana, Rumo's CEO.

We would like to inform you that this event is recorded. [Operator Instructions] The audio and slideshow of this presentation are available through live webcast at ir.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 could 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. Sir, you may begin your conference.

[Julio Neto, executive]

Good afternoon, everyone. I am Julio Fontana, CEO of Rumo. First, I would like to thank you for participating in Rumo's fourth quarter 2018 conference call. It's a pleasure to share our 2018 results with you. Please, let's start our presentation on Slide 3.

This year was remarkable for Rumo. The results we delivered in 2018 consolidates a 4-year turnaround and represent the achievement of the ambitious objectives defined when we merged with ALL in 2016.

For the first time, Rumo posted significant net income and positive free cash flow, leaving behind periods of cash consumption while reaching a comfortable 2.2x net debt and [ TM ] EBITDA, ready to support future CapEx plan.

2018 was not easy. In May, the national truckers' strike [ compromised ] our terminals supply and result a loss of volume and EBITDA that quarter. At the same time, the corn crop, particularly in the South region, fell short of expectations. Even so, we delivered results very close to the guidance ceiling on the back of the strong soybean crop, efficiency and capacity gains.

As for 2019, we maintain commitment to delivering our long-term plan announced to the market 3 years ago. The year had a very positive start with the soybean harvest beginning in early January, which is normally expected at the end of the month. Prospects for the corn crop in the second half of the year are favorable as well. Our operations are ready to meet the growing demands of agribusiness and other sectors of Brazilian economy, which are expected to record growth in 2019.

I am very pleased with our 2018 results as well as with the performance of the Rumo team, who executed the business plan with discipline. As a result, Rumo heads towards the end of the turnaround cycles to pursue a new one, the growth cycle.

As announced, we started the succession process of the executive board and we remain active at Rumo on a daily basis until November 2019. After this year, I will remain close but through this leadership of Rumo's operational committee.

In this new cycle, we will continue doing our best to pursue good projects and grow our business while delivering robust return to our shareholders.

I will now pass over to Ricardo Lewin, Rumo's CFO, who will conduct our presentation. Thank you.

[Ricardo Lewin, executive]

Thank you, Julio. 2018 proved to be an outstanding year for Rumo. In a year that started with numerous challenges, Rumo delivered the results very close to its guidance ceiling. Evidently, our deep commitment to maintaining operations at a high level. In this quarter, we booked the provision of BRL 32.5 million due to the impairment in the West network. That's not recurrent and has no cash effect, but levels to report an adjusted EBITDA according to instructions [indiscernible] 527/2012.

In the next slides, we will be presenting numbers using the adjusted EBITDA. Due to the current budget offering of local bonds, we will not disclose our 2019 guidance. In addition, the long-term guidance that has already been announced is temporarily suspended.

Please, let's move to the next slide. Our transported volume grew by 13% in 2018, mainly due to a record soybean crop that boosted grain's performance. On top of the harvest, Rumo showed its ability to deliver other initiatives through a full volume of growth. [indiscernible] operations recorded 127% higher volumes, security line and transportation. New contracts boosted pulp volumes by 83%, and we continue to develop our continuing operations, [ ensuring ] backhaul in the domestic market and imports.

On the next few slides, I'd like to share with you a relevant change in our pricing model. Over the last months, we have implemented change in our pricing systems for the grain chain. Previously, our grain contracts were based on a long-term 3-year contract considering an annual growth. With a change on the market chain dynamics, mainly the relationship between farmers and tradings, our clients realized that the high commitment and the reach of decision would attract that. To [ add to this ] business scenario, we have a bridge to reduce contract terms to enhance trading visibility towards competition while raising the penalty for the full of volumes contracted from 50% to 70% of the net revenue.

Another relevant change implemented by this new model is that the date of pay is now monthly and collected on a quarterly basis, making volumes recovery not a possibility. This model represents a balance of [indiscernible] and has been well received. Above all, it will help us in our growth strategy.

Please, let's move to Slide #7. In 2018, we achieved a very consistent EBITDA, which grew by 18% year-over-year. The EBITDA margin reached 49.2%, reflecting our company-wide effort to dilute fixed cost and improve locomotive efficiency, decreasing fuel consumption. Analyzing our individual business units, the north operations recorded continued high profitability. The South operation, even though [ ag-inflated ] constraints due to a reduced corn crop continues evolving to deliver improved results and the container operations delivered its first year of positive results by taking advantage of [ back half ] rates, increasing transportational volumes in the domestic market and import cargoes.

Moving to Slide #8, we will discuss our financial results and cash generation. As a result of 2018 efforts to cut back costs, Rumo decreased its financial expenses by 27.4% at a cost of its broad net debt by 29%. In the first quarter '18, we've benefited from our [indiscernible], which resulted in a positive [ NTN ] effect of BRL 129 million. Such financial result [indiscernible] coupled with EBITDA performance enabled Rumo to generate cash before amortizations and funding for the first time, leaving behind fears of cash consumption to ensure the deliver of our capital spend. In 2018, we also reported a net income of BRL 273 million for the first time.

Let's move to the next slide [ to express ] our consolidated indebtedness position. As a result of our operational and financial delivery this year, we ended 2018 with an average of 2.2x net debt EBITDA. This level was very close to the ideal [ net debt EBITDA ] for Rumo, which enable us to finance future projects and bring a higher return to shareholders.

With this, I finish our presentation and remain at your disposal to any provide any clarifications. Before finishing, I would like to reinforce that, due to the current public offering of local bonds, we cannot answer any question related to future assumptions or any forecast. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Pedro Bruno, Santander.

[Pedro Bruno, analyst]

I have 2 questions, actually. The first one is on the [indiscernible] year-over-year variation, if you could help us understand that negative effect on the yield. I understand there is the fertilizer volume will ramp up, which should explain profitability gains share within the mix with the lower tariffs as it of course occupies a previously idle capacity in the backhauling. But if there's anything else that you can add to help us understand that movement, that will be the first one.

[Julio Neto, executive]

Pedro, thank you for participating on the call. Let me give you a complete explanation about the yield, so it will be clear for you and the market. Honestly, the explanation in 2 pieces, okay? First one, I explain the North Operation and the second the South Operations, okay? In the North Operation, there's a different mix with more pulp and fertilizer that brought both the fourth quarter and 2018 average yield down as long as the tariffs for those [ carbs ] are lower than the average for the operation, okay? It's worth a mention that although it had lower tariffs, margins are higher. Also, due to the high volumes, we also shared with more volume in other terminals besides [indiscernible], which in turn have lower tariffs. On top of that 2 reasons I explained, we also have changed the way we price the range throughout the quarters. So in 2017, we basically had one price for soybeans in the first half and one price for corn in the second half. That unit is below the price of soybean prices, okay? In 2018, we decide to price differently by quarters. So there are 2 prices for soybean in the first quarter and 2 prices for corn in the second quarter, following international prices for commodities. For example, for corn, price are typically higher in the third quarter than in the fourth quarter. While the third quarter, we had the beginning of the harvesting before the end of the harvest, okay? So this changed the price methodology. Add it to the reason that I mentioned in the beginning causes a year-to-year growth in the tariffs, okay? For the South Operations, the lower yields in the quarter were caused by a mix with less sugar, sugar that has high tariffs for that corridor. And also because the lower crop of corn in Panama and South of Mato Grosso do Sul. It is [ a sense ] we served more volume in Mato Grosso do Sul's case, which typically had lower tariffs than Panama and Mato Grosso. But I'd like to reinforce that although we have lower yields, the margins are much higher than we presented in last year.

[Pedro Bruno, analyst]

That's perfect. My second question would be potentially for Julio, a more strategic one. In the context of turning the page from being a turnaround story towards being a growth story, as Julio mentioned, how do you see the North, South networks strategically within the context that should be coming to the market soon? That's the second one.

[Ricardo Lewin, executive]

Pedro, sorry for the -- this is Ricardo, okay? Julio is here on my side. But I will answer that because, unfortunately, due to the local debenture in insurance, which the [indiscernible] was posted to the [ CVM and Rumo's ] website, we are in the quiet period and we cannot commit to talk about future essentials of the company due to the guidance of future projects of the company. So we cannot disclose any additional information about this issue.

[Operator]

The next question comes from Bruno Amorim, Goldman Sachs.

[Bruno Amorim, analyst]

Could you please provide us with an up-to-date on the take-or-pay contract that you have probably closed until December with your remained clients? I understand you cannot provide guidance, but any color on the kind of agreement that you have closed could be helpful.

[Ricardo Lewin, executive]

Bruno, this is Ricardo. Thank you very much for the question. We gave in the call some explanation about the take or pay. I will talk a bit more about that. We just -- we are not disclosing how the contract is going on maybe because it is commercially very strategic, okay? So just -- and we're talking here a bit about what we've told you in the presentation. Our [indiscernible] they have basically 3 -- they were 2-year less agreements, that also reflected a high commitment with volumes growth by both sides, okay? With the change in the market dynamics, and what I'd tell this is mainly the relationships between the farmers and the trading, our client realized that on top of the harvest, we [ basically ] had also a list of higher competition among the trading companies, which created additional margin pressure for them. So to address this scenario, we have been studying this new price system for maybe the last 2 years. We haven't reached or reduced contractual terms, so we enhance the trading visibility towards the competition while also raising the benefits for the [indiscernible] we -- that went from 50% in the past to 70% in this new agreement, okay? Transport side of the revenues. And another relevant change that we can talk here that was implemented by the new model [indiscernible] pays down monthly and collected on a quarterly basis makes the volumes recovered not possible, and so make less volatile for us. This is what we can tell you by now about the take-or-pay contracts.

[Operator]

Our next question comes from Lucas Barbosa, Morgan Stanley.

[Lucas Barbosa, analyst]

In the release, you have mentioned that early exports of corn have given the -- you have mentioned early exports of corn getting the anticipated soybean crop. I just want to hear your thoughts on how you see the grain venture in the beginning of this year. This corn export movement has triggered a large reduction in inventories for the beginning of the year. This is something that doesn't worry the company. That's my question.

[Ricardo Lewin, executive]

Lucas, and all in the call, sorry I'm being a bit boring about answering the questions, but I need to repeat that I cannot make any forecast in this call because the local debenture is issuance, okay? The only thing that I can tell is about public information that we disclosed in the release. It's about -- that's according to [ agro ] consult, this makes, first off, the '18, '19 crops that indicate increased grain production in Brazil and in Mato Grosso. Except for soybean crop in Brazil, which should decrease by 2%, which we have favorable planting conditions. On the other hand, the corn crop is expected to grow 18% in Brazil and 9% in state of Mato Grosso, which the main region of -- reason for grains transported by the company, okay? Rumo continues increasing its capacity to meet the growing demand also for the grain transportation by Brazilian ports.

[Operator]

The next question comes from Alberto Valerio, UBS.

[Alberto Valerio, analyst]

Just a quick note. I saw that there was a reduction in the finance expense for Rumo this quarter. I saw that there was BRL 1 million to BRL 9 million [indiscernible] clearance and I would like to know if you can -- if you can take just this BRL 1 million to BRL 9 million or is the cost of debt to back 14% that we had in the previous quarter interval.

[Ricardo Lewin, executive]

Alberto, thank you very much for the question. I think that's good news about the financial states reduction. Not only about the last quarter, it was that when compared to 2017, the [ interim ] expenses was 29% lower. What means BRL 347 million we are saving every year, okay? Regarding the last quarter, the point here is that the reduction is [ usual more than the curve ], okay? You see the high curve that went down, okay? So there are 2 effects here. You see the costs of debt and in the protection, it had protection that we have in -- for the [ bonds ], so in the [ hedge ]. So these were the 2 effects, okay, that we had, [ less reduction in ] this last quarter. Hopefully, this answered your question, Alberto.

[Operator]

The next question comes from Victor Mizusaki, Bradesco BBI.

[Victor Mizusaki, analyst]

I have 2 questions here. The first one would be, I don't know if you can confirm this, but based on what you have said about the new pricing model, even after your reduce in the volatile -- volume volatility, can you give us some -- at the end of the day, we are in a situation where you -- [ your theory ] increasing your capacity without any additional investments? And the second question, now that you have like 10% of your capacity in the stock market, can you comment how the minimum works for the tax is affecting the spot price?

[Ricardo Lewin, executive]

Victor, sorry, but we are not listening very well your questions. Could you repeat [indiscernible] too close to the phone?

[Victor Mizusaki, analyst]

Yes. So the first one, how do you say that, now that you have these monthly -- you track volumes on multiple days, I mean, did you [ co-pay ] contracts? And [ the turning companies ] cannot move volumes from [ moment ] to the order. At the end of day, if you think about your numbers, do you not see any -- I mean, the difference [indiscernible] you like to reduce a lot. So at the end of the day, can [ we assume that ] you can increase your capacity without an additional investments so returns could go up?

[Ricardo Lewin, executive]

Well, okay, Victor, to give you a short question (sic) [ answer ] there, the answer is yes. The lack of volatility we have is better for us, both for forecast the volumes and in terms of climate, okay. And in terms of using better the capacity. So the answer is yes, you're right. And the second part?

[Victor Mizusaki, analyst]

Yes, the second part of this was actually your -- I mean [indiscernible] that slide where you showed your new plus model, apparently 10% off your capacity [indiscernible] in the spot market. So I don't know if you can comment how the minimal look for the price is affecting the spot market, so if -- for the price, it could go up.

[Ricardo Lewin, executive]

Victor, first, I cannot tell that we are [indiscernible] the spot market. The point here is that we continue to focus either in the take-or-pay and what we -- and we explained exactly the full [indiscernible] take-or-pay is shorter term, okay? Once we do not close 100% of our capacity, then we will go to the spot market. [ But the fact is what the ] market spend for you, that depends year-over-year what will happen with the crop situation, the price of the process of the grains, okay? So it's difficult to forecast that.

[Operator]

[Operator Instructions]

That concludes the question-and-answer session for investors and analysts. I would like to pass the floor over again.

[Julio Neto, executive]

Thank you all for your participation.

We -- after the quiet period, we are here to clarify some doubts.

[Ricardo Lewin, executive]

Thank you very much.

It's our pleasure to have all of you in the call.

[Operator]

That does conclude the Rumo value conference for today. Thank you for participating.

Have a nice day.