R$ 7.4 billion plan to transform ALL

Shareholders of the new railways licensee Rumo ALL, a product of the fusion of the two companies, released a short and long-term investment plan yesterday, defined within two phases that aims at transforming the company. The objective is to modernize it, making it more efficient and widening its grains, sugar and other loads transportation capacity. Up to 2019, a total of R$ 7.4 billion are expected, without taking into account current investments.
In the first phase, that will last for 18 months, up to the end of 2016, R$ 2.8 billion are expected, with immediate beginning and priority focus on a greater efficiency and reduction of operational costs.

The second phase, from 2017 to 2019, will require an expenditure of around R$ 4.6 billion. However, its performance is conditioned to the renewal of three concessions by the Agência Nacional de Transportes Terrestres (National Agency of Land Transportation – ANTT). Between 2026 and 2029, three out of the four concessions of ALL, which became an integral subsidiary of Rumo, will expire. The company pleads the renewal of such concessions for more 30 years.

 The plan has been presented last morning, through a conference call with bank analysts. Rumo ALL shares reacted badly and fell 9,69% by the end of the day, the greatest retreat of Ibovespa.

 “We’ve built a management structure focused on improvements of railway conditions, reduction of costs and increase of efficiency”, Júlio Fontana, president of the company, told Valor. The forecast is that the company’s cash flow, which was negative in around R$ 300 million last year, becomes positive only by the end of 2017.

 Up to the end of 2016, Rumo ALL intends to work on three great fronts: the replacement of locomotives, wagons and the restoration of permanent ways. Some of those measures have already been adopted and resulted in a reduction of traffic time. Such investments, in the end of the first phase, may provide an increase of the earnings before interest, taxes, depreciation and amortization (Ebitda) of R$ 500 million. For this year, the company estimates an Ebitda from R$ 1.6 billion to R$ 2 billion.

In the five-year plan, Rumo forecasts the addition of R$ 1.1 billion in the Ebitda up to 2019, compared to 2016 levels, for the range between R$ 3.3 billion and R$ 3.5 billion. With such expansion, the company intends to raise its share on the grains market, equivalent to 22 million tons last year. For 2025, the forecasts are that this volume reaches 39 million tons. When it comes to sugar, the forecasted growth is even greater, from 6.4 million tons last year to 20 million tons in 2025.

“We see a great growth opportunity in the sugar market, which will only be possible if we’re able to widen the railway capacity. Otherwise, there will be no more sense on looking for grains. That’s why we’re working in order to increase the capacity, take out restrictions and bottlenecks, improve the access to the port (of Santos)”, Fontana told the analysts.

According to him, nowadays roughly 2.6 thousand kilometres (1,615.6 miles), or the equivalent to 22% of Rumo ALL railway network, are high-density sections, with high importance for the results of the company. Other 4,5 thousand (or 45% of the network) are considered low-density sections. “We’re performing a deep assessment work of economic viability and volume potential [in these sections]”, he said. When it comes to the sections considered anti-economic, they represent one third of the total network.

 When it comes to the return of sections to the Federation, the CEO said that the company is still under negotiations with ANTT. “We’re negotiating with ANTT how will the indemnification be performed and probably whether this indemnification would be transformed in an investment on railway safety”, he said. In this moment, Rumo works with three “basic agendas” with the regulating organ: the renewal of concessions, the devolution of the sections and the renegotiation of fines and price ceiling and other issues that have been judicialized. “That’s why we’ve created a regulation field, focused on the solution of such problems. We’re going well on this direction and soon we’ll have news. We work with a maximum deadline of 2016 to solve it all”.

Accordingly to Fontana, if ANTT does not renew the concessions, which is a fundamental condition for Rumo to perform the long-term investment plan, the backup plan will be the provision of additional capacity to the North network, whose concession goes up to 2078, in order to deal with the volumes in its region.

The company has already equalized a part of the resources that are necessary for the expansion. From the R$ 2.8 billion on investments settled in the 18-month plan, roughly 50% have already been contracted and the remaining value may be funded by BNDES, by the capital market, through credit agencies for exportations and with the Financing Fund of the Central-West Region (FCO).

 On the long-term plan, the director of finances and relations with investors, José Cezário Sobrinho, says the idea is to give priority to BNDES resources. “The remaining 23% will come from other sources of the market, especially from the capital market”, he said. Accordingly to him, 100% of the plan funding up to 2019 will be provided through debts. Thus, there are no forecasts of an increase in capital. With the expected expenditures and its results, the new company will generate positive cash flow from 2017 on, in the year after the end of the short-term investment program.

On the financial leverage of Rumo ALL, Sobrinho said the peak might have already been reached in the end of the last year, when the net debt of ALL corresponded to five times its Ebitda. “We believe – and we’ll still present the first consolidated balance sheet in the quarter that ends in June 30th – that the consolidation will bring improvements because Rumo was less leveraged than ALL”, he explained.

The annual average forecast of transported volumes is 8% up to 2019, from 48 billion up to 50 billion tons per kilometre (TKU) and reaching between 64 billion and 66 billion in 2019.

The controlling group of the new railway company has 42% of its capital and Cosan Logística is part of the block, with 25.7%; the Texas Pacific Group (TPG and Gávea Investments, 4.3% each, and BNDESPar, with 7.9%. The remaining 57.8% are shares hold by other shareholders and “free float” shares.