Rumo S.A. (RAIL3.SA) Earnings Call Transcript & Summary

Good afternoon. Thank you for waiting. Welcome to Rumo's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] We would also like to inform you that this presentation is being recorded and simultaneously interpreted. [Operator Instructions] Before we begin, we'd like to remind you that forward-looking statements are based on the expectations and assumptions of Rumo's management and on information currently available to the company. These statements involve risks and uncertainties as they refer to future events and depend on factors that may or may not occur. We recommend that you read the disclaimer on Page 2 of the presentation. I will now turn it over to Mr. Felipe Saraiva, Rumo's IR Executive Manager, who will begin the presentation. Mr. Felipe, please go ahead.

[Interpreted] Good afternoon and thank you for joining Rumo's Second Quarter 2025 Earnings Call. Let's begin with the highlights on Page 3 of the presentation. We have delivered a solid quarter, marked by growth in transported volumes, strong commercial and operational execution and disciplined cost management. Margins remain healthy, and we achieved consistent results despite a more challenging market environment than initial expected. We transported nearly 22 billion RTK during the quarter, driven by an 8% increase in the margin operations. Operational performance benefited for several levers, including improving the energy efficiency in train operations. As a result, adjusted EBITDA reached BRL 2.3 billion and adjusted net income was BRL 731 million, both up year-on-year. We distributed BRL 1.5 billion in dividends to our shareholders and closed the quarter with a financial leverage ratio at 1.8x, a balance level in line with our capital structure strategy. Turning to Page 4. Let's look at our market share this quarter. The grain export dynamics improved compared to the first quarter of the year. We recovered our fair share across all of the 4 regions highlighted on this page. The slight decline in the quarter reflects temporarily monthly fluctuations, such as the peak of soybean exports from Mato Grosso in May and operational challenge in April at the Paranagua and Sao Francisco do Sul corridors. Let's turn to Page 5 to review our operating metric. We delivered another strong quarter in operational efficiency, supported by ongoing investments in infrastructure, technology and process optimization despite higher volumes and more volume stock in circulation, the transit time between Mato Grosso in the Northern operation was stable. In energy efficiency, we achieved a 5% reduction in fuel consumption with a solid performance in both the Northern and Southern operations.The successful rollout of the 135 railcar train design and the continued improvement in this new design of operations marked a significant step forward for the company. Let's turn to Page 6 to review our operating results and volumes. We transported 21.8 billion RTK during the quarter. The Northern operation was a major driver for the growth with an 8% increase in volumes driven by strong performance in soybeans, pulp and bauxite. In the southern operations, we saw a steady and gradual recovery throughout the quarter, with volumes returning to a more normalized level in May and June, particularly in agricultural commodities. Let's turn to Page 7 for the highlights on revenue and yields. Consolidated net revenue reached BRL 3.7 billion in the quarter, a 4% increase, driven primarily by higher volumes in the northern operations. We remain focused on maintaining a balanced strategy between volumes and yields with the objective of maximizing the overall system profitability. In the northern operation, healthy demand and a strong competitive position supported stable use. In the southern operations, the adjusted pricing in response to a more challenging competitive landscape with the goal to recover our market share in strategic markets. Let's turn to Page 8 to review our EBITDA for the quarter. EBITDA grew 6% in the quarter, reaching BRL 2.3 billion. The northern operation, higher transported volumes drove a stronger contribution margin. In the southern operations, commercial repricing and lower volumes weighted on our results, but the impact was offset by BRL 70 million indemnity related to lost profits on the extreme weather events in Rio Grande do Sul in May last year. I would like also to highlight a 3% nominal reduction in fixed cost and expenses, reinforcing our ongoing focus on efficiency. Let's move on to Page 9 to review our financial results and net income. Net financial expense for the quarter was BRL 698 million, reflecting the prevailing interest rate environment. Despite the higher cost of capital, we delivered adjusted net income of BRL 731 million, in line with the same period last year. Let's turn to Page 10 to review our debt position. The net debt was BRL 14.2 billion at the end of June, driven by the cash burden in the period. We closed the quarter with a healthy leverage ratio of 1.8x. Our liquidity position remains solid with over 7 billion barrels in cash position and minimal debt to maturities over the next 2 years. Let's turn to Page 11 to go over our quarter investments. We have invested BRL 1.78 billion during the quarter. Recurring investments was BRL 503 million, reflecting our continued commitment to asset preservation and operational safety. In the Mato Grosso Railway, we invested BRL 468 million with disbursement speeding up in line with the construction progress. Other expansion projects accounted for BRL 423 million, mostly driven by increasing capacity and revamping the existing infrastructure. Let's now move on to a brief update on soybean and corn markets on Page 12 and 13 of the presentation. Both the soybean and corn production, Mato Grosso reached record highlights. The state's exports are expected to approach close to 60 million tons in the year, which continues to support strong demand for logistics services. Our investment fees has only grown stronger. Brazil, Central West region has become increasingly relevant in the global grain markets. And our railway is firmly positioned as the most efficient and competitive logistics solution to serve this demand. It concludes my presentation. And now we are available for the Q&A session. Thank you.

[Interpreted] [Operator Instructions] Joining us today are Mr. Guilherme Machado and Mr. Felipe Saraiva. [Operator Instructions] Our first question is from Pedro Bruno with XP.

[Interpreted] I'd like to start going over costs. Could you please give us a bit more information on this? I'd love 2 approaches here. First, variable costs. I was paying attention to fuel efficiency and how it's been improved even further. So where should we expect this kind of efficiency to stabilize? I'd love to pick your brains on that. Also, what have been the marginal drivers for the increase in fuel consumption efficiency because I think you were down 4% or 5% year-on-year in the second quarter? Regarding fixed costs and expenses, we have a 3% decrease. In the first quarter, we saw a relevant shift in your cost dynamic here. I'd love to understand what explains this in the second quarter because you see another decrease in costs, which were already close to 0? I'd love to understand this in depth. So variable costs, fixed costs, expenses.

[Interpreted] Bruno, this is Felipe Saraiva. We had a very good performance in this quarter when it comes to cost management. As you were saying in both fronts, both variable and fixed costs and expenses. I think in variable costs, energy efficiency is our biggest lever. We have a train with 135 cars now. At the beginning of the year, we had trains with 120 cars. So with bigger trains, the ratio between transported weight and locomotive power leads to more efficiency. As we become more mature with this model, we're going to get even better. Now looking forward, we have other initiatives at the company, which are going to be important levers for energy efficiency. First, we have the PTC system to be implemented. This is a system for licensing and coordination of trains in our network. We're also going to increase our capacity. This is going to be important for us. So we still have room for growth when it comes to improving our energy efficiency. Regarding fixed costs and expenses, in our conference call for the fourth quarter, we said that this year, we would see these line settling a bit. Our fixed costs grew sustainably so that we would be able to sustain the investments that we had. But we've now reached a level that we believe is appropriate for the future. So for fixed costs and expenses, we want this number to only follow inflation over the next few years. And as we improve our volume, we're going to reduce our unit pricing. For this quarter and the first half of the year, more specifically, we were diligently managing this. We were finding levers to make it simpler. We made processes simpler, we made structures simpler and we focused on what really mattered. Whatever could be trimmed was trimmed. This has to do with the management of the whole system. We had a performance that was even better than what we expected for the first half of the year.

Our next question is from Guilherme Mendes with JPMorgan.

This is Guilherme. Could you please discuss your expectation regarding volume for the second half of the year? I'm trying to think of a few variables. For instance, you have increases in corn crops, you have the level of inventory for this industry, and you have your level of efficiency. So how could we expect the evolution of volumes to play out in upcoming months? Would it make sense for us to think about a fourth quarter that is stronger than your historical seasonality because you may have overproduction in agriculture?

Thank you, Guilherme. Here's what we see for the second half of the year. We believe we'll have a very similar structure to what we had in the first 2 quarters of 2025. We're going to see slower trading, even cautious trading, I might say, from growers because this is the position taken by the traders, which are our clients. This has to do with turnaround for these products. We are adapting to it according to volume and according to our capacity and our commercial efforts. Now the most important assumptions on which we're working to guide our operations and meet our targets for the year is that there is product available. You can look at soybeans, you can see the performance of corn. And this is a very important variable for us. We know that this product will come into the trading curve at some point. Another important variable is that we don't see price disruptions neither upwards or downwards. We see good healthy levels that allow for us to perform our operation. We have been operating well. Saraiva was talking about costs. And we have been focusing a lot on managing these costs from the beginning of the year. Operationally speaking, during this quarter, there were months when we were able to test the capacity of our system and it performed well. There is room for more. We expect and we're ready to operate at higher levels when it's necessary. Now to answer your question, looking forward, we believe that the fourth quarter, according to the ratios that we see and what we've seen in previous years should be a busier quarter. We're attuned to that. We're freeing up space. Of course, we have empty spaces in our operation. We plan maintenance, but we want to free up space and have the space available for that. But we're going to have something similar to the beginning of the year. We're going to use this capacity as we need to allocate thanks to our whole system. By the way, I would love to reinforce our guidance for this year. I reiterated, we know what the variables are and we believe that for these variables, which are volume, EBITDA and CapEx, and we had a performance according to what we had announced. We do not expect to change our guidance at all for 2025.

Our next question is from Andre Ferreira with Bradesco BBI.

I have a question regarding CapEx. We had a slowdown in this quarter as expected. So it is in the top half of the guidance when we look at the first half of the year. And historically, our CapEx is higher in the second half of the year. But we had a peak in the first quarter. So we may have a different seasonality here. We may see a decrease in the second half of the year, and I'd love to pick your brain on that. And if we look at the annualized profit, it is above -- it is actually below the 2 quarters according to the year's forecast. And I would love for you to discuss that.

Thank you for your question, Andre. We saw what we had mentioned to you at the end of the first quarter. We had a mismatch in the first quarter of the year. We were very focused on the ramp-up that we had with FMT. We had some expenditure with rolling stock. And now we've stabilized. Now we are going towards the guidance that we had announced. Our investments are being made as planned for. We have a bit over BRL 6 billion. This is well distributed among our maintenance program and our expansion program for our investment portfolio. Of course, FMT is a highlight. It has been fulfilling our plan. So this has to do with what we had mentioned earlier. There's no point of attention here. We don't have any kind of deviation regarding our guidance. Could you please repeat the second half of your question?

Of course. I was saying that when we look at the CapEx for the Mato Grosso highway or railway actually, it is a bit under BRL 2 billion which is what we forecast for the year according to the distribution that you mentioned in the previous quarter. Should we expect any kind of acceleration here for the second half of the year? Or should we be below BRL 2 billion for the year?

Andre, we want to meet what had been established, and this is our goal and expectation. Of course, with this program, we don't have a linear result month-by-month. In the region of Mato Grosso, rainfall requires for us to adapt to the weather when it comes to the progress that we make. At the beginning of the year, we had to adjust our operations to the rainfall. But we have all the right conditions to meet what we had proposed. And it's very important for us to keep at this pace. So that we're able to finish Phase 1 in adherence to what we had mentioned for 2026. So there's no point of attention here.

Our next question is from Lucas Marquiori with BTG.

I'd love to get your help to understand pricing. We started the year expecting something close to inflation, which is what I assume is the assumption in your guidance. We saw changes in the average price for the second quarter as well. You mentioned something and there was a comparison with trucks. Your targets for volume and EBITDA for this year according to what you said, are being kept. So what's your price equation for the second half of the year? What should we expect will be far away from the half point in the guidance?

Lucas, thank you for your question. What we saw in this quarter specifically and also when we look at the whole half of the year, is a level of pricing that was basically flat in nominal terms compared to last year. This is something that we have been operating in a solid, healthy way. In the last 3 years, we had significant adjustments in our pricing levels. This translates the fair value of our services. So we have a very healthy pricing structure now. In 2025, since the first quarter and throughout the second half of the year, we stroke balance with our clients. This allowed us, as we could see in the second quarter of the year, that we had growth in volume. We also recovered our fair share, as Saraiva was saying in our speech. We were competitive. We were able to capture some of these volumes. Here's what we should stress. Our pricing strategy is not linear distributed by month or clients or locations. We have dynamic results. This assessment is very dynamic. We always analyze how we're doing and how competitive we are. To answer Guilherme's question, we'll be ready to fully use the system and to bring volume into our system as we see that this market needs it. We have been operating at healthy levels given the adjustments that we made in the past 3 years. And it is important to remember that we had very healthy price transfers, ensuring very healthy margins for the company. Our goal, as I was saying, is to fully use our capacity. We're ready to process more volume. So within this equation, we're able to reiterate our guidance. We're competitive. If we're able to operate with a lot of efficiency, we'll be able to perform according to our announcements to the market.

Our next question is from Gabriel Rezende with Itau BBA.

I'd love to talk about Lucas do Rio Verde. What are you thinking for the CapEx level for Phase 2? I know there is still an ongoing conversation regarding the size of Phase 2 but could you please go into details regarding what you think about a CapEx per kilometer for Phase 2? What kinds of challenges and opportunities should we expect when we compare it to Phase 1? Should this kind of project be easier or more complex than Phase 1?

Thank you for being with us, Gabriel, and thank you for your question. We're very focused on the execution of Phase 1. As I was saying this is a path forward for us to go on to the next stages. Of course, we've been doing our homework, and we've been doing our research so that we are convinced of what we need for the next phase. If we were to mention any metrics here. Right now, we are diving into engineering research. We're assessing how our assets are positioned. We want to understand how we're going to go about the economic financial modeling of the next phase. Everything will be discussed with our Board. But we're very enthusiastic about the project. We should ask for the proper approvals when the time comes. So far, given the information that we have, we don't see any major deviations from what we've seen in Phase 1, but we'll be sharing more information when it's appropriate to do so.

Our next question is from Alberto Valerio from UBS.

I'd love to understand your thesis for Rumo. We have negative yields for both networks. And I think this is a bit surprising to the market in this quarter. Do you see any structural changes in this market? We see news of legal reorganizations from growers. You also mentioned less trading this year. I'd love to pick your brain on that. Have you seen anything that changed structurally speaking in this industry, maybe more irrationality from prices or growers? Is it just a one-off effect? Or is this a structural change?

Thank you for your question. The difference that we've seen in this crop season compared to previous periods is the dynamics of trading. We see a different kind of seasonality here compared to our history compared to what we used to see. Nothing really draws my attention when it comes to credit our cost structure for growers, at least as far as we're concerned. And actually, when we look at the size of this crop season, at least so far this year, we have no information that would lead us to change our expectations for the next crop season when it comes to the size of it. Of course, it's still early. We will soon have more information about soybeans and about the crop season for 2026. Because of the sanitary break, but we are still convinced that we are at the right place at the right time, working with a good part of the Brazilian economy, which is still growing. So we are going to keep on making investments to really invest in servicing this market. So nothing draws our attention here and nothing changes our thesis. We are still convinced of the assumptions that we were working on.

Our next question is from Rogerio Araujo from Bank of America.

Please talk about your expectations for the FICO 1 auction? We have a connection at the central network. So it is obvious that Rumo should be expected to attend this auction. What are your expectations? And what's its connection with Lucas do Rio Verde 2 and 3? Does it make sense for that? Is this something that you're considering? If you could also talk about the MOU between China and Brazil for the Brazil, Peru railway? We understand how challenging it is for engineering, licensing and economic visibility. But love to know if you have any strong views about this project. Would you look into it? Would you go deeper into it? When you're approving the Phases 2 and 3 for Lucas, would you say there's a small likelihood of it working out so you shouldn't even consider it? How would you tackle this structure with FICO in this project?