Rumo S A : Transcription - Lucas do Rio Verde and Cuiabá Extension Project

RUMO Conference Call

Operator: Good afternoon, everyone. Thank you for waiting. Welcome to Rumo conference call to discuss the Lucas do Rio Verde and Cuiabá extension project. Today we with us we have Mr. Beto Abreu, Rumo's CEO, Mr. Ricardo Lewin, CFO and IRO, and Mr. Gustavo Rosa, Investor Relations and Treasury Director.

We would like to inform you that during the company's presentation all participants will only be able to listen to the call and we will then begin the question-and-answer session when further instructions will be given. In case you need any assistance during the conference, please request the operator's help by pressing *0.

We also would like to inform that the conference call will be presented in English by the company's management and there would be simultaneous translation to Portuguese. This event is also being broadcast simultaneously on the internet via webcast.

Before proceeding, we would like to mention that the 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 and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts should understand that the conditions related, macroeconomic conditions, industry 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, Mr. Lewin, you may proceed.

Mr. Ricardo Lewin: Good afternoon, everyone. In this presentation we will be giving further details on the Lucas do Rio Verde project, which is going to be far from the most important driver for our future growth. We will be covering regulatory and environmental framework, project phasing and volume and market rationale.

On the next chart I will start with the regulatory side. Over the past few years, we accomplished important milestones in our regulatory agenda. In 2019 we won the first railway auction in Brazil after a long period without new railways. In 2020 we early renewed Malha Paulista until 2058 by committing to double its capacity over the next 10 years. On September 20th, we have signed with Mato Grosso State the authorization agreement allowing us to build the extension to Cuiabá and Lucas do Rio Verde. For

some years, worked intensively to obtain regulatory approval from both, the Federal Government and Mato Grosso State Government. In October 2020 state government approved an amendment in its local constitution allowing regional authorization for the railways.

After this approval, the process for the authorization of a local railway evolved quickly due to the great interest of the state in having more railways. Rumo, which had already been you studying a potential extension project from Rondonópolis to Lucas do Rio Verde, was the only company to present a project for the railway request by public call by the government of Mato Grosso. This is a concrete project in addition to being regulatorily safe since, along the process, Mato Grosso Government and senators signed a cooperation agreement with the Federal Government, in order to make sure that all the parties would be working together to put this extension in place as fast as possible and enable the connection between the regional railway with the federal network.

On the next chart, I will share few features of these new regulatory model. The state authorization regulation is a new regulatory model that brings a lot of advantages when compared with traditional concession model. In this new regulatory framework, the assets are 100% private and will never return to the Government. That feature give us more agility to manage the authorization assets without stringent regulations that usually a concession requires. When it comes to the duration, we are also better off. We are authorized to operate for 45 years, and we can get multiple renews of 45 years each, which brings almost a perpetual duration.

On the economic side, there will be neither concession fee nor any kind of cap for returns which once again will give Rumo more flexibility to manage the business in their most efficient way. Last, but not the least, we can also apply for SUDAM tax exemption which could give us a 75% discount over income taxes in this new entity.

On the next chart I will share why we prefer this regulatory model over other possibilities. Several possibilities of authorization to make new railway projects feasible were or are being studied. All of them we've created autonomy for the railway operator. However, the only regulatory option that can be used immediately for our extension project, is the authorization from the state of Mato Grosso. The estimated time for signing an authorization contract in other alternative is much longer. This made the decision clear for Rumo.

On the next chart we will talk about the environmental side. In order to initiate investments, we will still need to accomplish to the environmental process. We started this project back in August 2019 and we are advancing in full compliance with all regulations. Moreover, we expect the entire licensing process to take more than 3 years from August 2019, highlighting how serious and diligent the process is and connecting well with our ESG agenda. This extension will allow us to replace trucks that today are used to bring the cargo from other areas in Mato Grosso to Rondonópolis therefore, generating significant CO2 avoidance and increasing the safety in the roads by reducing the number of trucks and accidents. We expect more than 50,000 job opportunities per year to be created by our project, bringing further development to the state of Mato Grosso.

On the next chart I will share with you how we came up with our railway course. In the early stages of this project, we have studied more than 2500 railway courses and we have considered more than 35 variables before getting into the final project course. By doing this, we avoided proximity with urban, indigenous and environmental areas also making sure that the course would not go through any challenging landscape. With that, we are 100% sure that we'll be optimizing our investments, reducing future operational costs and also advancing more easily with the environmental process.

On the next chart, we will talk about the project phasing. We already disclosed that we are about to invest around BRL 10 billion in this project. We are still working on ways to optimize our CAPEX so this number could be reviewed as we advance with our analysis. Investments could initiate up to 180 days after we have obtained the environmental licenses. Potentially, the project could take up to 2030 to be finalized, meaning that the investment cycle will take almost 8 years. But each of the expected milestones of the project who will have a 24-month tolerance without justification. We are planning to connect with their first terminal in 2025 and this connection should already enable us to serve roughly 50% of all the volume expected from new terminals, considering both additional and volumes that will be shifting from Rondonópolis. So, from this point onward the extension might be already generating cash flow and afford the remaining investments until de completion of the project. After the connection with Nova Mutum terminal, the volumes captured will be roughly 80% of the total therefore, the project will be already generating some positive cash flows.

On the next chart, we will see the volume built-up per terminal. In 2025, with the first terminal becoming operational, we expect roughly 50% of the volume to be at the first terminal. As we get to Nova Mutum, the first terminal should stand for 36% of the volumes and Nova Mutum 27%. By 2030, with the project completed, we will have 14% in the first terminal, 25% in Nova Mutum and 29% at Lucas do Rio Verde. We estimate that over time 16 million tons could be shifting from Rondonópolis to other terminals, generating additional revenue based on higher distance and competitiveness, consequence of the extended railway.

On the next chart, we will be talking about the opportunities for additional volumes. To better understand the breakthrough in the competitiveness caused by the extension, we have to analyze that today only 20% of all the exports of Mato Grosso are within a range of 200 kilometers from Rondonópolis. That means that to get a higher market share, we have to go deeper in the state, lowering our tariffs to be competitive enough to attract additional volumes. After the extension and by having new terminals, we could reach roughly 64% of all the demand in Mato Grosso within a range of 200 kilometers. This will not only allow us to increase our market share, but will boost our prices because we don't need to further in the state to get these additional volumes. So, we expect that potentially we could capture 18 million tons of additional cargo with a market share of approximately 60%.

On the next chart we will talk about the chances in the competitiveness brought by the extension. As of today, we have a lower competitiveness in west, north and east areas of Mato Grosso. When we take a look at our competitiveness in Lucas do Rio Verde, for instance, the solution in the north that includes trucks plus waterways, costs approximately BRL 273/ton. On the other hand, once cargo is collected in Lucas and delivered in Rondonópolis, trucks are charging approximately BRL 102/ton, which implies that in order to the breakeven, Rumo could only charge BRL 171/ton. When we look to 2030, when the extension will be fully completed, the solution through BR163 plus waterways is going to be more expensive due to the poor roads, something around BRL 290/ton. Given the fact that we are going to have a terminal in Lucas, we are going to need trucks just to collect the grains in farms nearby and to deliver in our terminal in Lucas, which make the truck freight much lower than before, around BRL 20/ton, allowing us to charge more than BRL 100/ton to breakeven with the competitor's solution.

On the next chart, we are going to talk a bit about the Cuiabá market potential. The connection with Cuiabá will bring some volume opportunities. The first one is to shift container volumes that we currently serve in Rondonópolis to Cuiabá, replacing costs with trucks per additional railway revenues. The second opportunity is related to additional opportunities that could be created by the arrival of the tracks in the region. Yearly, the return with this part the extension is neither as high nor as quick as the ones we could get in Lucas do Rio Verde and of Mutum. On the other hand, even the lower network density, the CAPEX/km is going to be lower in this stretch.

On the next chart, we are going to be talking about the levels of additional margins that we expect in this extension. In 2019 our margins in the north operation were 61.6%. Since then, we have been and will continue to implement several initiatives to boost railway efficiency, reducing the cost per RTK. On the other hand, given the entrance of central network and the higher capacity in Malha Paulista combined with the additional competitiveness brought by the extension, we could generate higher volumes allowing further cost dilution alongside with additional revenues. That being said, even with potentially lower costs to producers, we expect additional EBITDA margins to be way higher than they were in 2019.

Here I finish the presentation and together with Beto Abreu and Gustavo Marder, I will be available for the Q&A. Thank you.

Operator: Thank you. And I'll now begin the question-and-answer session. If you have a question, please press *1 on your touchtone phone at this time or any time. If it at any point your question is answered, you may remove yourself from the queue by pressing *2. Questions will be taken in order they are received, and we kindly ask you to make it one by one. Please also pick up your headset to provide an optimal sound quality that one position question.

Please hold while we collect the questions.

Our first question comes from Pedro Bruno, with XP Investimentos.

Mr. Pedro Bruno: Hello. Good afternoon. First of all, thank you for taking my question and... First of all, congratulations on signing the authorization. We acknowledge here from our side, from the analysis side, how challenging it is to go through all of the steps to sign such a… such a structural project so congratulations on that. I have two questions. I'll go with the first one. Here regarding potential regulatory risks involved in