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Edited Transcript of ALLL3S.SA earnings conference call or presentation 12-Nov-19 5:00pm GMT

Q3 2019 Rumo SA Earnings Call

Curitiba Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Rumo SA earnings conference call or presentation Tuesday, November 12, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ricardo Lewin

Rumo S.A. - VP of Finance and Chief Financial & IR Officer

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Conference Call Participants

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* Brian David Roberts

Citigroup Inc, Research Division - Research Analyst

* Felipe Vinagre

Crédit Suisse AG, Research Division - Head of the Latin America Transportation and Capital Goods

* Rogério Araújo

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Victor Mizusaki

Banco Bradesco BBI S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Rumo's Third Quarter 2019 Results Conference Call, which will be led by Mr. Ricardo Lewin, Chief Financial and Investor Relations Officer. 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 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 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 the 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 will turn the conference over to Mr. Ricardo Lewin. Mr. Lewin, you may begin the conference.

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [2]

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Good afternoon, everyone, and thank you for joining us. I would like to point out that likewise previous quarters to facilitate the analysis 2018 results presented in our earnings release, refer to the pro forma figures reflecting the impact of IFRS 16 to guarantee a fair comparison.

On Page 2 of the release, the impact on each line of our income statement is summarized. That said, we will begin our presentation on Slide #2. This quarter, for the first time, we present our consolidated results, including the effects of Ferrovia Norte-Sul, North-South Railway, which we will name from now on Malha Central or Central Network. We will not present a specific session for Central Network as it is at preoperational phase. The signature of the sub-concession contract on July 31, resulted in BRL 2.9 billion referring to the auction value duly restated by contractual parameters and recorded as right-of-use, BRL 220 million in the leasing account as concession fee payments, BRL 75 million in the P&L.

To facilitate the analysis and comparison of results, we present the chart on Page 3, considering the third quarter '19 figures, but excluding the Central Network. However, it's worth noting that other sessions of the release report figures, including Central Network.

On the next slide, I would like to remind you of the strategic relevance of the Central Network. As we mentioned in our last call, the Central Network brings opportunities for Rumo related to transportation of diverse cargoes, such as fertilizers, bauxite, biofuels, by product and containers. In addition, it expands our agricultural products area of operation to the state of Goiás and Tocantins regions with a strong growth potential, which today do not have efficient access to railway. Over the next months, our objective is to have this network fully operational. Therefore, we will make the necessary investments to achieve these railways potential, whose relevant results will be likely seen in 2022.

On the next slide, we will discuss our operational results in the third quarter '19. Volumes grew 7.7% in third quarter '19 to 17.4 billion RTK, highlighting the operational performance in July, which allowed transportation to reach a record of 6.2 billion RTKs. Segment highlights include fertilizer transported volume that grew by 42%, boosted by volumes in the North operation; grains volume that rose by 9%, highlighting corn transportation, which came in 24% higher than in third quarter '18; and container transport that grew by 12%.

Let's move to the next slide to discuss our financial performance. Rumo's EBITDA was BRL 1.2 billion and rose 18.5% this quarter compared to the same period last year. And the consolidated margin stood at 58.6%, 4.4 percent points above third quarter '18, reflecting the company's excellent operational leverage. We highlight the 4.6% yield increase, mainly due to seasonality, which got back on track, yield increased from '18 to '19. Lower impact of fertilizer volume on the average price since third quarter '18 already had a track record of volume. Variable costs increased less than volume growth, mainly reflecting improvements of 6.2% on energy efficiency. Fixed costs increased by 4.3% due to payroll exemption in the West and South Networks and higher maintenance expenses in the North Operations. All operations recorded EBITDA growth with yield gains and positive performance of costs.

We will now take a look at the financial results and net income. The financial result came in line with third quarter '18 with a net expense of BRL 300 million. The factors that positively contributed to such results are the decreasing gross debt and average cost of debt. On the other hand, there was a recognition of the Central Network contract that increased leasing charge due to the inclusion of interest on the concession stock. That said, we delivered a net income of BRL 369 million in the quarter.

On the next slide, we will take a look at our debt. Rumo's indebtedness decreased to 1.8x broad net debt EBITDA compared to 2.0x in the second quarter '19. We emphasize our commitment to capital discipline, always striving to keep leverage at acceptable levels for the company.

On the next slide, I'd like to discuss the market dynamics foreseen for the fourth quarter referring to corn. According to AgRural, corn record crop should result in record exports this year with 35.8 million tons. Even so, final inventory should increase to 18 million tons. Thus, a positive corn availability is combined with positive price conditions may boost Rumo's volumes in fourth quarter '19, a period which depends mostly on the market dynamics rather than in the company's capacity. Regarding 2020, despite a preliminary estimate, we expect production should come in line with the record of 2019 with 101 million tons. We still do not have either data on Brazil's exports or exports by state.

Let's move to the next slide to discuss the soybean scenario for 2020. Soybean production for 2020 already consider planting preliminary data and indicates soybean record production in Brazil and in the state of Mato Grosso and expectations of soybean exports in line with 2019. This estimate takes into account the effects of African swine flu on consumption in China. But at the same time, it foresees that China will not reduce its inventories at the same proportion of 2019, thus opening room for imports increase. Concerning uncertainties deriving from the trade war between China and the U.S., the soybean crop failure in the U.S. should slow down the U.S. inventories from 25 million tons to 12.5 million tons, reducing the probability of the U.S. exports increasing even more. As a consequence, we believe there is room to increase soybean volume transportation in 2020, especially in the first 3 months of the crop period when commodity price and demand for efficient logistics are higher. This concludes my presentation. I remain at your disposal for the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mr. Steve Trent, Citi.

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Brian David Roberts, Citigroup Inc, Research Division - Research Analyst [2]

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It's actually Brian Roberts on for Steve Trent. How should we be thinking about the soybean volume growth in the northern network versus the decline in the southern network? And then have you disclosed any potential margin or cost structure differences between the 2 networks?

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [3]

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Brian, thank you for the question. But giving you a very short answer. First, in the North corridor, okay, the GTK is much higher in the north than in the south, okay? So that takes to a higher margin in the north compared to the south. In the south, being a smaller distance between the farms or from the farms to the port, you have more competition from the truck market, okay? So that makes the margin -- it's -- or standard of the margins. So the margins are also smaller due to this reason. But basically, this is a short answer. This is the huge difference between both.

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Operator [4]

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Our next question comes from Victor Mizusaki, Bradesco BBI.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [5]

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I have 2 questions here. The first one, when we take a look on your container operation, which have several high-volume growth, you talk about like 25% over the year. Can you give any breakdown in terms of how much of this growth is coming from your investments into double-stacker? And when do you expect to see this new volume or this new -- or the growth to stabilize? And the second one, if you can comment about your negotiations with the trading companies to start the new take-or-pay for next year?

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [6]

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Victor, thank you for your questions. But I answer the first one about containers, okay? Basically, the growth comes from the backhauling, the increase of backhaul -- increase of cargoes, not necessarily due to the double-stack, okay? The double-stack is very recent. And you'll see improvement of margin, the improvement of volume due to the double-stack next years or so. But basically, the improvement of volumes come from backhauling. Remember that you bring from a very industrialized market, that's the market from São Paulo to the interior of the country, so we're -- Rondonópolis, Mato Grosso, you bring several different products. So these are commercial efforts that we -- that Brado is doing to increase the backhauling in this direction and improving, obviously, the margin of the business, okay? The second question is about the take-or-pay, is that right? Well, regarding the negotiations, we have started the negotiations, but we are far from the final figures we could be in 2020, okay? But as I have, I think, already said in my previous call, this is a very strategic information for us and at this point, we cannot provide much information without compromising the agreement with big customers, okay? We are seeking to have as much take-or-pay as possible, but remember that this take-or-pay is subject to market conditions, okay. And that's it. Thank you.

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Operator [7]

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Next question comes from Rogério Araújo, UBS.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [8]

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A couple of questions here. First, on Malha Norte-Sul. Can you provide some details on how the investment plan is going, also on efficiencies in CapEx, if there was any, versus what was expected in the original plan and about timing as well? And when this should begin generating revenues and when the major investment should be ready as well? So it would be great to get some color here. And then I will make my second question later.

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [9]

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Rogério, thank you for the question, okay? This first half of the year, we are starting to -- first half or the second half of the year in the third quarter, the first quarter with Norte-Sul or Central Network as we are calling from now on, and we are investing right now on the divisions of the network. And also, we are investing our time in starting to negotiate all the supply contracts, okay? So the huge CapEx on Central Network will start from the next month, and will take more or less 2 years to be operational, okay? So for being operational -- the first operation will start by the end of 2021, okay 2021, beginning of 2022. Regarding efficiencies in CapEx, I think everything that we are seeing in the Central Network has been very positive, okay? So you saw that we provided some information about the market in the way of the Central Network. So you see that it's a very big market, larger than we expected. There is a lot of volume that can be transported by containers also, that by our last studies has been very positive, also better than we expected before. And also the efficiency in CapEx you always have, because this is when you'll start to study and you'll go to the market to hold the -- part of the CapEx, you obviously start to get improvement. So it has been very positive. We still cannot provide to the market any kind of number of CapEx, but a very positive thing we can provide to the market is that including the Central Network, we are not changing our guidance in CapEx. That means that we will include the huge part of the CapEx in the north-south in our long-term CapEx guidance.

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Rogério Araújo, UBS Investment Bank, Research Division - Director and Equity Research Analyst [10]

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Yes, perfect. And second question is regarding the accidents that happened in September that prevented Rumo from transporting more volume. So could you provide more details on what happened and if operations already normalized by October? And also, if there is any sign of capacity constraints? And if this could happen again, so it would be great to get more color on what exactly happened been and what you expect going forward?

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [11]

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Well, Rogério, let me start by the end. There is no capacity constraints right now, okay, and the operations are running okay. Basically, what we had, we had in September 2 derailments, 1 in Alto Araguaia, the other in São José do Rio Preto that, together, resulted in 50 hours of operation interruption, okay? And we had 1 bump that happened when a tank truck crossed at the tracks, not respecting the signs, and was hit by our crane. It also interrupted the operations for something around 15 hours, okay? So these were the accidents, but we worked very quickly on that. The time that we lost was precious, obviously, but we act very -- we are ready to operate in this sense and after these hours operations are working perfectly well. Just to -- you can follow during this week, we will be presenting to the market the volumes of October. You can see it in our website, I think, on Wednesday.

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Unidentified Company Representative, [12]

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Thursday.

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [13]

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Thursday, sorry.

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Operator [14]

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Next question comes from Felipe Vinagre, Crédit Suisse.

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Felipe Vinagre, Crédit Suisse AG, Research Division - Head of the Latin America Transportation and Capital Goods [15]

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I have 2 questions. First, a follow-up on the guidance comments. When you said that the North-South CapEx already included in your long-term guidance, so what's the -- so could you quantify how much would be the CapEx just for North-South? And on the EBITDA side, does it mean the same that the EBITDA from the North-South is also included in your EBITDA guidance? That's the first question. The second, do you expect an impact from the completion of the pavement of BR-163? I know the Minister has been vocal about completing this year. Do you think that there's going to be some pricing pressure as a result of this completion? These are my questions.

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [16]

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Vinagre, thank you very much for the questions. Well, regarding the North-South -- regarding the guidance, okay, the point here is that we don't -- we are not changing the long-term guidance because of North-South, at least by now. That means that by what you saw in the documents of the auction, there was something around BRL 3 billion to be invested in the North-South. BRL 1 billion was an obligation that will be invested in the network and BRL 2 billion in rolling stock. The investments that we are doing in the next 3 years until 2023, 3, 4 years, we are not increasing the guidance. That means we are doing the BRL 1 billion in the network and we are investing whatever we need in the rolling stock, okay? So we need to append the volumes we have in Goiás and Tocantins, okay? So we are not increasing the CapEx. On the other side, we are not changing EBITDA. But obviously, we -- the EBITDA generated by the North-South is not included in the guidance that we provided. Once we have started to negotiate all the contracts for transportation and have a better view on that, we'll provide to the market, okay? So -- but remember that these are preoperational railway that still needs 1.5 years to 2 years to be ready so that the commercial contracts will be signed a bit earlier than that, okay? The second one is about the impact of 163. Most probably, you saw -- you are doing this question because you saw the volume that went up to the North Arc. Okay? Obviously, we are following 163. It is a competition for our railway obviously, mainly once it is 100% completed. Important thing here is that remember that once the railway is completed, much from the broader view to the high depth, so you'll have additional cost in going after 163. The other thing is that we lost part of volumes to the North Arc into 163, not because of the competition of 163 but because the growth of CapEx that we had was lower than the growth of the market, okay? You have a huge concentration of export of corn in 3 months. So -- and this growth was much higher than the growth of our capacity. And that was the main reason to lose capacity or market share for the North Arc and that includes the 163. Important to say that we keep investing, okay? We keep investing -- with investments we increase our capacity that will allow us to take part of these volumes that export once we are more competitive than the other solutions.

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Operator [17]

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(Operator Instructions) Thank you. That concludes the question-and-answer session for investors and analysts. Now I'd like to turn the floor over to Mr. Ricardo Lewin for his final consideration.

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Ricardo Lewin, Rumo S.A. - VP of Finance and Chief Financial & IR Officer [18]

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Well, this is the last call of the year. So I'd like to thank you for our investors and for the sell-side analysts for all the support you gave us during this year. And we hope to be with you in the next year, okay? Thank you very much. Bye-bye.

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Operator [19]

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That concludes Rumo's Third Quarter Results Conference Call. Thank you.