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

Good morning, everyone, and thank you for waiting. Welcome to Rumo Logística conference call to discuss short-, long-term guidances. Today with us, we have Mr. Ricardo Lewin, CFO and IRO; and Mr. Gustavo Rosa, Investor Relations Executive Manager. [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 a simultaneous relation to Portuguese. This event is also being broadcast simultaneously on the Internet via webcast. Before proceeding, we would like to mention that forward statements are based on the beliefs and assumptions of Rumo's management and on 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 that conditions related to macroeconomic conditions, industry conditions 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 go ahead.

Good morning, everyone, and welcome to the conference call to disclose Rumo's guidance. In this presentation, in addition to announcing the short- and long-term guidances, we hope to highlight the potential market expectation of our main transported volumes, competitiveness, efficiency and investments that support the figures disclosed. As previously announced in the material fact, we will present the guidance for 2021 and 2025. For the first time, the guidance now incorporates the Central Network, which is starting to operate this year. I would like to point out that the figures are in nominal terms, except where otherwise stated. These forecasts do not include the local rail extension, M&A projects and new concessions or renewals. In the next slide, we have the growth analysis based on these figures. By looking at guidance figures, we can see that the volume expected for 2021 considers growth of approximately 18%. For 2025, we expect volumes to range between 99 million and 109 billion RTKs, which implies an average annual growth of 11% between 2020 and 2025. As for EBITDA, we forecast growth of 19% for 2021, and average annual growth of 16% from 2021 to 2025. Lastly, in CapEx for 2021, we expect an investment level between BRL 3.3 billion and BRL 3.9 billion, while the annual average between 2021 and 2025 should stand between BRL 3.3 billion and BRL 3.7 billion per year. On the next slide, we will look at the main market forecast that support these numbers. The green market will continue to present a strong opportunity for growth. In Mato Grosso, we expect average growth of 5% per year in exports by 2025. We also expect a recovery in market share, reaching close to 50%. Note that the market will continue to grow even after 2025, which may bring us additional growth opportunities for the future. Another important growth driver will be the markets of Goiás and Tocantins, which are now served by the Central Network. In 2020, exports from these 2 states was 16.8 million tons. For 2025, we expect Rumo's market share to be close to 60% reflecting the greater competitiveness of our solution in the region. On the next slide, we will talk about the potential markets for fertilizers. In Mato Grosso, we achieved 40% of the fertilizer market share. This market will continue to expand following the grain growth trajectory. By 2025, we project our market share level close to 60% over a market that will be 37% larger. In the Goiás and Tocantins market, after implementation of the fertilizer terminal in usage expected for 2022, we forecast for 2025, a market share of 60% of a potential market of approximately 3.1 million tons. On the next slide, we will talk about order cargo that also have seen growth potential. In the sugar market, we expand our operation area with the start-up of the Central Network, and [indiscernible]. We already have our clients making a major investment in the EMA region, which should allow us to supply additional sugar volumes starting in 2022. There will be more, although it's not a priority. In the state of São Paulo, we have volumes that are currently transported by Rumo on trucks, which may gradually migrate to rail with the increased capacity. The pulp market has also been changing considerably. The recent concession for 2 product terminals in Central has attracted great interest from major producers in expanding their plants. These additional projects are an opportunity for Rumo, which due to its network and greater efficiency, has good conditions to capture additional relevant volume. The container segment will continue to grow strongly. The Central Network brings important opportunities that added to other projects under implementation and to market growth. The next slide is about competitiveness. Starting today, we mentioned that we expect a recovery in our market share in Mato Grosso. To understand how we will get there, it's necessary to understand the behavior of some variables that interfere in the competitiveness of Rumo in relation to other transport moves. In 2020, fuel prices trended the decrease allowed truck transportation, which has a much higher exposure to diesel than the railway to reduce its price more than railway. That could transform both our market share and our tariff negotiation. For 2021, fuel prices have already returned to the previous level, bringing a more favorable outlook for railroad transport. Another important factor is the supply and demand ratio to [indiscernible]. In 2020, with the paving of BR-163 highway, logistics supply grew in Mato Grosso, while demand for transportation, especially for corn, did not. As such, freight price dropped even more. In 2021, demand was strong early in the harvest since there was a delay in the soybean harvest. This explains the road freight hike that happened in February, bringing a spread, Miritituba versus Rondonópolis to the same level as in 2019. While there is no guarantee that this scenario will persist, conditions are at least more favorable than in 2020. Finally, in 2020, the BR launch in Q3 was already paced, but without stores. The government expects to conclude the binding for the end of the first half of the year, which means that as early as 2022, the cost of truck freight to the northern ports may be relevant impacted. The next slide is about efficiency. Over the next 5 years, we will continue to see cost efficiency and operating leverage, which may not only increase profitability but also ensure greater competitiveness for Rumo in the market. Diesel consumption will continue to fall as a result of the investments we are making in infrastructure and technology, some relevant projects such as the migration to 120 railcars per train. The North operation and Central Network, investments in railway duplication among others, should generate increasing efficiency and unit cost reduction. Lastly, as the cargo mix grows more in greens than in sugar, once again, cost per RTT should also drop. The next slide is about CapEx. CapEx guidance by 2025 includes some important initiatives. The forecast now consider all of investments in Central Network which will show strong expansion over the next few years. They also include investment in urban conflicts, which reduced the concession fee values during the early concession review process and which will begin to be diversed more significantly in 2024. Finally, the early review of the Paulista Network also brought capacity expansion commitments that aim to double the network capacity. In this sense, some investments such as duplication licensing, resulting a larger capacity than necessary to meet the volume plan. But because they are mandatory investments, they will need to be maintained, generating capacity for the years after 2025. Note that of the BRL 16.5 billion to BRL 18.5 billion in investments, we expect our recurring CapEx level already, including the Central Network in the range BRL 6.2 billion to BRL 6.6 billion. As such, excluding urban conflicts, we would have an expansion CapEx of BRL 8.9 billion to BRL 10.3 billion with very high increasive marginal return levels. The next slide is about the Port of Santos. As previously mentioned, in 2021 and over the next few years, we will have a strong growth in cargo handling to the Port of Santos. Therefore, a significant portion of our investment will seek to increase capacity and efficiency in Santos. Several projects are underway, some with capacity gains should be recorded already in 2021, and other projects will begin in the next few years. This concludes my presentation. We are now available for the Q&A session.

[Operator Instructions] Our first question comes from Lucas Barbosa, Santander.

Thank you for the presentation. You shared a lot of important information. I have two questions from my side. First one, in the 2025 EBITDA, can you give us some color of how much EBITDA do you expect for the Central Network, specifically? Then I'll go to my second question.

Thank you very much for participating. Can you listen?

Yes, I can hear you.

Yes, sorry. Mariana was signing me that you should not listen, but let's start again. So Lucas, first, thank you for participating of the call. Congratulations for the research that you did. I like it a lot. It was a very good idea. Let me tell you a bit about the EBITDA in Central Network in 2025, okay? Indeed, we are not opening or splitting what is -- what's Central and Northern Network, but I think that you can easily reach to this number, okay. So let me give me how you guys can reach to these number. First, regarding volumes, it's very clear in the presentation. You have a potential market, and you have the market share that we can reach in 2025, okay. Talking about prices. I know you guys had like some expectations for Central Network prices, yields. But the expectations in terms of GTK, okay, or [Foreign Language], quarterlies, it will be quite similar to what you have in the Northern Network, okay. The only difference here, Lucas, is basically that the discounts are going to be different. It's going to be different than Northern. So in Northern, you have something around like [indiscernible], something around 1,700 kilometers. You have an average that is something around 1,200 kilometers in the Central Network. Regarding -- when you go to margin in Central Network, you can guess here that the margins will be quite similar to have in the Northern Network as -- and this is a very important point here because the Central Network will share most of the operations and mechanist structures with Paulista Network. So there will be a significant efficiency that we'll get here. It's what I always say to you that we will get additional cost dilution, okay? So considering this and the scale that we get, you can consider the margins something similar to Northern Network. And I get here between like 50% and 60% of EBITDA margins, okay? So this is how I calculate the EBITDA for the next years for Central Network.

Perfect, Lewin. It was very clear. And then my second point is on yields. I wanted to hear, if you can share with us, what the company is assuming in terms of yields for 2021. Maybe the assumption is yields growing in nominal terms, but slightly below inflation. And if you can also share what's the expectation in terms of yields from 2022 until 2025.

Yes. Going to split the question in two, okay? Let's start with 2021, okay? What happened for soybean. So soybean, we already sold a huge amount of volume. So in -- under take-or-pay contracts and we have a good visibility, both in volumes and in prices. Prices are very -- a bit higher -- not single, but a bit higher than previous year, 2020, and here is the point. It's not the average of 2020 that changed. It's very similar to soybean in 2020. So it's a bit higher, remembering that the huge change according to fuel prices. So when I say that is slightly higher than 2020, this is ex fuel prices. Remember that fuel prices are going up when compared to 2020 due to the pandemic that we had and prices went down in 2020, okay? So fuel is a pass-through, and you need to consider that. For the second half of the year, although we already have a relevant volume sold, there is still an amount that was not sold mainly because of the uncertainty caused by the postponement of the soybean crop, okay. Right now, what you can see is that truck prices are higher in the marketing -- in the market, sorry? What reflects the strong demand for freight. We don't know if this -- actually, we cannot guarantee that this will continue to happen, this peak. And after the peak of demand, prices that prices will go down. But what we have now, it's a good sign for the market. And what's the sign for the markets that they depend on trucks, prices are not predictable. While in the -- for railway, we have a much more predictable price. We have much reliable services. Railway is environmentally much more efficient. So we are very positive for the second half of the year for the corn price. Although still there's an uncertainty that does not allow me to tell you precisely about yield in the second half of the year. Regarding 2022, 2025, Lucas, this is a bit more difficult to tell you because -- and this is the reason that we included a slide -- the chart on competitiveness. So -- and why we added that. Because price depends on external factors that are not our in hand. So it depends on the demand, the supply-demand, mainly for trucks; depend on the price of the fuels; depend on the privatization of BR-163. And this is the reason that we provide to you 2 numbers of EBITDA volumes and things like this. So we provide you a range on that. What I can tell you is there is one point that's in our hands. That are the costs, the competitiveness of the company based on cost. And this, I can tell you, you saw one chart talking about this, that we are working very hard both on variable costs. Mainly when we talk about reduction of unitary consumptional fuel, and we are being very disciplined in fixed cost. And this will help us to have a scale gain. So what I can tell you in the fact that you are difficult to foresee but the company will keep with high margins. And when I say I always tell some size that this a company focused on margins not necessarily on prices. And our margins, we foresee that they at least need to keep using they are now having the opportunity to increase.

Our next question comes from Victor Mizusaki with Bradesco BBI.

So in your presentation, you basically mentioned that OpEx for RTK, you like to drop -- drop like 30% until 2025. So can we assume that part of the kind of operational efficiency will likely be transferred to price? And then we'll talk about -- and that basically explains why you're -- some that, too, will gain market share in the set of Mato Grosso? And my second question is...

Can I answer the first one here? Your voice is not that loud. So my understanding that you're talking about OpEx and basically the gain of market share until 2025, is that right?

Exactly.

Exactly. Well, what I can tell you is that this is exactly what I answered for Lucas, cost reduction is in our hands, okay? So we have several investments improving improvement of assets. We have investments in technology, so all of this will make us more -- will allow cost -- unitary cost reduction in the company. And this is the kind of competition that we can work that depend on us that make us more competitive related to when we compare this to the market. Remember that the company, Rumo, is more competitive than other models in 90%, Mato Grosso, for example, okay? In the State of Goiás, we are in the heart of the crop, the heart of prediction of green. Just to have an idea, the average railroads in Goiás to feed the rail is 150 kilometers, while to feed all the models, it's more than 400 kilometers. So we are more competitive, both in Goiás state and in Mato Grosso. And this cost reduction that we have allow us to be more competitive. And I share this that this is one of the levers that we have that will allow us to gain market share.

Okay. And my second question, in the presentation, I think that was in the first slide when you comment about CapEx. You say that basically this guidance does not include any M&A transaction. But can we say that Rumo is now thinking about many transactions and if yes, what could make sense.

You know I have discussed this before, including -- the extent I'm not saying nothing different here, okay? It's like I'm not hearing anything. But for example -- I'm not hiding anything here. But the point here is, I'll give an example why we included the center here, is when we talk about DT world, for example, the EBITDA conversation that we are having right now with a potential partner that we already disclosed to the market, okay? As we do know the conditions of the partnership, we didn't include this in the next 5 years. But once we have the partnership done, we'll come back to the market and explain the details, and you can add easily to this guidance. But it's only for this reason that we included. There is something that we are discussing that can change the route of the company, okay?

Our next question comes from Josh Milberg with Morgan Stanley.

I had a follow-up on the point that you had made, Lewin, about the Central Network having similar profitability as the North operation. Just wanted to ask if you could give a little bit more granularity on that point. I got the message about the synergies and the cost dilution. But we had imagined that having a more diversified cargo and shorter distances to the port could be a negative -- have negative implications for your profitability. So it would be great if you could just sort of touch on those points and their relative importance, and maybe a little bit more on how you're seeing the outlook for unit costs in that operation?

Josh, this is Gustavo. I'm taking this question. You're right. Of course, when we try to compare Central Network with Northern Network, there might be a gap of distance once Northern Network has longer distances. Also a higher scale right now, but we believe in the future, we're going to be bridging this as the Central Network is going to be growing a lot. Maybe the only thing that you are missing is the very fact that Central does not depend as much on truck as Rondonópolis depends today. Because today, Rondonópolis could be the 500 kilometers away from who look at the hearty regions. And therefore, our competitiveness there is affected by the price of trucks, which is very high. In Central, we are very close to the market. Therefore, we become much more competitive. And then we could try to -- we can be more profitable because of that and also more competitive in the market. So that's probably the major reason why Central Network can approach North in terms of profitability. Another thing is because also Central Network share most of the facilities and the infrastructure with Malha Paulista. So when you think about marginal costs and sometimes marginal investments, Central Network will benefit from having low additional costs based on sharing those structures with Malha Paulista. So it brings more efficiency, and it brings more efficiency even to Malha Paulista because Malha Paulista will become also more efficient, sharing the cost and sharing the infrastructure with Malha Central.

And if I can just reinforce one point that I talked the answer for people. You said the distance between Sorriso and Rondonopolis, and I'd like to reinforce the average distance between the firms or the firm and our for example, our future terminal is something around 150 kilometers, okay? If you take other railways from the average distance is like 400 kilometers, just reinforcing this point. So that make our costs much higher -- much better actually for Central Network. Just reinforce and give additional data, Josh, but good question.

Okay. That's great. Lewin and Gustavo. Really appreciate it. The second thing I wanted to touch on and ask you guys about was we saw that you gave some disclosure on what portion of the guided CapEx would be maintenance. And I just wanted to ask you to kind of dig in a little bit on your thinking there, and also, how your perspective on the maintenance level, the recurring level of investment needed to sustain the operations has evolved in the last couple of years. We were looking back on your 2019 guidance, and based on that, what was implied was something like a 13% to 15% maintenance level as a percentage of revenues. And I just wanted to get a little bit of added input there.

Thanks, Josh. Regarding recurring CapEx, first of all, we don't think that net -- try to measure recurring CapEx as a percentage of net revenue, it is good here because we are adding several other operations like Central Network and we are expanding our capacity in the current operations. So we don't like the concept of measuring recurring CapEx as a percentage of net revenues. That being said, what implies the guidance is basically that we're going to have CapEx not growing much only based on inflation, probably in the next upcoming years. And once we're going to have some additional levels of recurring CapEx for Central Network, that means that we're going to have to improve the efficiency brought by technology brought by other investments that we already made in the past. So with those efficiencies, we're going to be able to make the recurring CapEx pretty much stable in real terms over the next 5 years. So that's the plan. But of course, it embeds the challenging of offsetting additional CapEx coming from Central Network so we're going to have to deliver some important efficiencies in the remaining of the network to achieve this guidance.

Our next question comes from Andre Hachem with Itaú.

I basically have two questions. The first one is, if we could discuss a little bit about the Port of Santos. You've been doing some interesting moves in terms of more verticalization, right, or be more integrated both at TP World also. So if you could discuss a little bit about this effort. It has been a big concern among investors if Center wouldn't eventually become a bottleneck for you guys. So how far are you willing to take this into integration? And what are your plans in that regard? My second question would be in regards to the new concessions, right? The government has a big expectation that FICO will be eventually auction off later this year. So how do you see the FICO concession in regards to your numbers, right? I would imagine it's more of a defensive play, not an offensive play. But how do you see that trickling through? How do you see competition for the upcoming concession. I got to have your that on these 2 points.

Andre, good questions. Thank you again for participating of our call. Port of Santos, I always say that we have been working hard in the last 6 years, for Santos. So all in all, investors I'm sure know more about this, but we have been huge investment to transport basically to improve capacity and efficiency. And we will continue to do that. So there are -- I always get these investments that we're doing in how you say transformation and one transformational investments. So when we say nontransformation, is that it's more -- that is more investments. So it's not like is you don't have it, I use a lot of money. That we do to improve efficiency of the train side, the Santos Port. So here, and you see the next chart -- in the last chart that we showed in the presentation,that we'll be doing several investments like the third line of [indiscernible]. Remember that the third line in the entrance of the port is a place where you have bottlenecks. So the third line will help us with maneuvers, with trains going in and going out this port. In the right margin of the port, that is the margin that has more traffic of trains and volumes, we have the extension of Macuco. You have Punta [ de Calla ] that are investments. Some of them are made by us, some of them by [indiscernible] owners, the trading companies, for example. So these are the investment that we do that allows us always increase the efficiency of the port and avoiding bottlenecks. And we are what we call -- I call here a transformation. But basically, when you talk about 239, we will be building the capacity of 239, increasing capacity and efficiency with a better terminal in the right margin. There is this discussion in the net margin with Board that can result in a brand-new -- or with 8 million tons of capacity and capacity for green and 2 million for fertilizers. This will be ready in 2024 than 2025, if the partnership happens. There are investments that we are doing [indiscernible] to increase the capacity of fertilizer. So this is one thing like that we are always looking at, and we are always working to avoid any kind of bottleneck. So we are always concerned with this, and we are doing a good job to improve efficiency and capacity in both the right and the left side of Santos Port. So we don't see it becoming a bottleneck either in the short-term or in the long run, okay? Regarding the new concessions, basically, what we had in the market today, you asked about FICO, but we have -- we see two new concessions that are CO is equal. CO is the one that the market is discussing, is something that, at least for the next decades, will not have any competition with our business. Regarding FICO that's expected to connect the Central Network, Mato Grosso in the first stage. This, in our opinion, if it happens, will happen after 2025. So this is not included in our forecast here. If you talk about a second stage of vehicle, this is very, very long run. It's a much more complex project that will take a decade or even more than that.

Our next question comes from Rogério Araújo with UBS DB.

First so first one is on the CapEx. Can you break down the BRL 9 billion to BRL 10 billion expansion CapEx? And also, you haven't included Lucas do Rio Verde extension or the renewal of Malaco into our guidance. Can you also talk about the next steps for both projects, where they are. So I think that the project of private investments is advancing in the senate. And if you believe that this is going to work for Lucas do Rio Verde and what we should expect in upcoming months in terms of news flow on those projects? That's my first.

Yes. Rogério, thank you very much. Good questions. Regarding CapEx, we are not providing like a detailed breakdown on what have there. However, I can tell you here that you have like several different investments here. So you see that by the chart that we provided that we included this BRL 8.9 billion to BRL 10.3 billion we include, for example, Central. So there is a lot of rolling stock that we invest allow to reach to the 60% of market share that we foresee in 2025. They are like the network finishing their relate terminal and other improvements. There is an expansion of Paulista. So we have obligations related to the renewal that some of them will increase the capacity in the short term. Some others will increase capacity after 2025. They are also included here. For example, what I answered to Andre that there are investments in Santos Port, for example, okay? So all of these are included in expansion CapEx. Another example, okay, here, but the sidings for the 120 railcars per train are included here. So there is a bunch of investments that are included here. All these are increasing capacity of the company, okay? Your second question is about Lucas do Rio Verde and the South Network. Regarding Lucas do Rio Verde, probably you have been following that Mato Grosso state has approved an amendment to the local substitution, what we call in Portuguese PEC. P-E-C that allows these each authorized railway projects within the state, okay. Not all the states, but within this state, okay? That project only shows the importance of the project to Mato Grosso, which is the Mato Grosso the cultural community. And this is an important step for us. If we take into consideration the federal government side of this, we think that we may also have an agreement with [indiscernible] to amend our current agreement that would allow us to make the expansions. Also, we have some optionalities here regarding Lucas do Rio Verde, and we are like looking very close how to expanse -- how to start our expansion to the north of Mato Grosso. Remember that we have plans also to build additional terminals. We have already bought a piece of land in [indiscernible]. I talked about this in several calls. But -- and we can start the extension by building these terminals that will help us a lot in the commercial side of our business. Regarding the South Network, we are starting right now to talk to stakeholders and to the government. And these are the first -- very first steps on a future review of this. But I don't have much to say this. We are in the very early steps for a potential review.

Okay. Sounds good. And my last question is on the maintenance CapEx. It's a follow-up. So you said that you were considering kind of inflation for the current level, and -- but the volume has been expanding. You also mentioned that you have to deliver incremental efficiency to achieve that guidance. So can you go through which are those incremental efficiencies that you can work to offset an increase in maintenance CapEx due to the expansion of volume?

Sure, Rogério. I'm answering this one. Over the past few years, we implemented several investments in our network, trying to reduce also the level of maintenance and recurring CapEx. So we believe that some of those efficiencies will be visible in the upcoming years, so we are extending the life of some raw materials. So for instance, some years ago, we adopted an assistant to lubricate the tracks, avoiding the tracks or extending the life of the track. So this is something that does not yield results in the short term, but in the long run, we're going to start to see some raw materials having longer lives in the site of maintenance. We are also investing a lot, trying to implement predictive maintenance, so we are using a lot of artificial intelligence to help us to identify which factors in our railway we have to improve in order to avoid accidents in order to avoid any speed constraints. So in other words, we are trying to improve the -- we are trying to make investments more -- in a more efficient way so in that way, we can we can avoid to spend unnecessary money in things that don't really matter and try to focus on the things that matter at all. So technology will play a big role here. Maintenance techniques will also help, and of course, we have all the carryover from all the investments that we did in the previous year. So we truly believe that with that we're going to be able to achieve the level of recurring CapEx that we are committing here.

Okay. So the rationale is we should have a reduction in the first years, with a gradual expansion, averaging somewhere like 2020 level with inflation in those years, is that right? Can we expect like a -- no?

No, no. Indeed, what's going to happen is because we are starting Central Network right now, so there is an additional CapEx right now. And as the time goes by, we're going to capture more efficiencies, neutralizing any pressure over recurring CapEx. So I believe that recurring CapEx will be more steady over time. But right now, what we're going to have is the entrance of Central Network and a few efficiencies that will help to offset pressure. Over time, of course, volumes bring additional pressure, and then efficiencies will be needed to offset any eventual pressures coming from additional volumes.

That concludes our question-and-answer session. I would now like to turn the floor over to Mr. Ricardo Lewin for his final considerations. Please, Mr. Ricardo, you may proceed.

Rumo -- in March 1, it was Rumo's birthday. We became in March 1, a 6-years-old company. And what I can tell you is that seeing what we built in the last 6 years make us extremely confident that we will be able to reach the guidance we are now providing to you. This company, I can affirm you, that changes completely in the [indiscernible] scenario in the country in the next 6 years. So I would like to -- and I would like to tell you also a bit more just reinforce what Beto said in the results call that in 2020, we took several steps that really prepared us for what we are going to face in the next 5 years. So we made the Central Network operational. We renewed Paulista Network. We prepared the concession fees. We worked hard in Santos Port to make all necessary improvements to receive additional volume. So these are small examples of what we have done in 2020 to support this growth. So I'd like to take advantage of this moment to thank our shareholders, our investors for the support that they always gave us. I need to thank the sell-side that are here in the call that always -- have been always following and supporting us. But mainly, I would like to thank to our employees that have made the success of this company in the last 6 years. And I'm sure that we'll continue to make the success of this company project in the next 5 years. So thank you very much. Have a good day.

The Rumo's conference call is over. Thank you so much for your participation, and have a nice day.