TABLE OF CONTENTS 1. THE COMPANY COMMERCIAL RESULTS ECONOMIC-FINANCIAL ASPECTS PROJECTS AND INVESTMENTS...

Transcription

1 ANNUAL REPORT 2016

2 TABLE OF CONTENTS 1. THE COMPANY COMMERCIAL RESULTS ECONOMIC-FINANCIAL ASPECTS PROJECTS AND INVESTMENTS TECHNOLOGICAL PROJECTS HUMAN RESOURCES AND QUALITY SOCIAL RESPONSIBILITY HEALTH, THE ENVIRONMENT AND SAFETY HR DEVELOPMENT STRATEGIES AND PERSPECTIVES INDEPENDENT AUDITORS CONSOLIDATED TABLES: OPERATIONAL AND FINANCIAL RESULTS Rio de Janeiro, March 16, MRS Logística S.A. announces 4Q16 and Full-Year 2016 Financial Results. Comparisons refer to the financial results in the previous quarter and the same period in 2015, as shown. The information directly taken from the Statement of Financial Position and Income Statement was duly audited by independent auditors, with the exception of non-financial information. 2

3 1. THE COMPANY MRS transported million tons (Mt) in 2016, 0.9% up on 2015, setting a production record. During this period, the largest volume of Heavy Haul (iron ore, coal and coke), Mt, was transported by the Company. Other records were set such as the largest volume of agricultural products, 27.4 Mt, containers, 1.8 Mt (or 177,600 TEUs), and the highest volume transported in a quarter, in 3Q16, which reached 45.7 Mt. 3

4 Even with Brazil s poor economic performance, MRS remains resilient, with increasing volumes transported, improving its operational indicators without compromising safety. Better In 2016, the energy efficiency indicator, which measures the fuel consumption of the locomotives, once again reached a record low, with 2.49 L/kTKB (Liter/Thousand Ton Gross Kilometer). The reduction of almost 3% in consumption compared to 2015 is explained by the Company's continuous work on better cost and production management, on two major fronts in 2016, namely: i) increasing the productivity of the trains used in the iron ore flow, which represents the most cargo transported by the Company; and ii) the use of newer and more efficient locomotives, and exploiting opportunities to turn off diesel engines, giving lower fuel consumption. Better Transit Time, an indicator that shows the time - including the return of wagons to load up in the mines - up to transporting iron ore for export, the main product transported, reduced for another consecutive year. The use of modern and more productive locomotives and the use of 4

5 Communication Based Train Control (CBTC) on the entire ore carousel (trains loaded at mines in Minas Gerais and unloaded at ports in Rio de Janeiro) has caused this indicator to improved each year. Financial Aspects The Net Revenue of MRS was R$3.3 billion in 2016, up around 3% on the previous year. EBITDA in 2016 was 20.9% up on 2015, at R$1,470.2 million, with an EBITDA margin of 44.8%. This result includes non-recurring items of R$148.0 million (net of PIS and COFINS) relating to the agreement entered into with Mineração Usiminas S.A. ("MUSA"), explained in the 2016 quarterly releases and item "3 - Economic - Financial Aspects of this Annual Report. However, when we adjust EBITDA by removing this R$148.0 million, the 2016 Profit is 8.7% 5

6 higher than in 2015, affirming the Company's financial strength, which continues to carry larger volumes at lower costs. AAA Rating In October 2016, Fitch Ratings assigned a Brazilian AAA (bra) rating, with a stable outlook, to MRS. The main basis for giving the highest risk rating to the Company were: i) strong and resilient operational cash generation; ii) conservative capital structure; (iii) robust financial flexibility; and iv) low exposure to competition. "Fitch's projections indicate that MRS will sustain its solid operational margins and credit metrics in the coming years, which benefit from its severely tested business model and continuous positive free cash flow (FCF) generation" Global ratings of BBB- given for Local Currency Issuer Default Rating (IDR), with a stable outlook and BB +, with a negative outlook for Foreign Currency, limited to the sovereign rating cap. Regulatory Targets: The target for accidents signed with the National Land Transport Agency - ANTT was met. It was 39.4% lower than the one set for 2016 (5.82 accidents/million.train.km compared to a target of 9.60). This result is mainly due to the investments made in operational safety and due to the continuous work of the campaigns developed by MRS for their prevention and public awareness in reducing the number and severity of rail accidents. MRS has, along with the regulator, a production target for 84 sections. To meet the target, MRS must reach the values agreed upon with ANTT in at least 90% of these 84 sections. The values measured in each section are monitored and verified by ANTT and the 2016 data is still being calculated. 6

7 Safety Taking the rate of railway occurrences, duly weighted by the volume transported, there is a reduction of 5.0% compared to 2015, as shown in the chart below, reinforcing the commitment that has brought year round results not only for MRS but also for the communities around the railroad and for our customers COMMERCIAL RESULTS In 2016, MRS set a new production record million tons (Mt) were transported, up 0.9% on This record stands out even more given Brazil s current economic situation in In addition to the annual transportation record, the first three quarters of 2016 set new transported volume records compared to the same periods in previous years. Of these, the highlight was in 3Q16, when the Company recorded 45.7 Mt, the highest volume in a quarter. 7

8 However, in 4Q16, volume transported was down 10.1% compared to the same period in 2015, caused by the lower volume in Heavy Haul and the drop in the corn crop, impacting the result in the General Cargo group. In 2016, the volume of products transported in the Heavy Haul group accounted for 74.8% of the total volume transported Mt were transported, representing an increase of 1.8% compared to the volume in The General Cargo group, which represents the other cargo transported by MRS, accounted for 42.4 Mt and was down 1.4% on HEAVY HAUL Iron Ore Export The volume of iron ore for export transported in 2016 set a record for the Company of Mt, up 6.4% on the previous year. 8

9 In 4Q16, operational setbacks in loading and unloading and in the section caused the volume transported to reduce 5.8% when compared to the same period in 2015, at 25.8 Mt. Iron Ore, Coal and Coke - Domestic Market In 4Q16, the transportation of iron ore for domestic consumption was 4.1 Mt, up 9.0% on 3Q16. In Full year 2016, 15.0 Mt was transported, 21.2% down on 2015 which was driven by the renegotiation of commercial contracts, and the opportunity to purchase ready-made plates from some customers in the steel sector that operate in integrated mills, so replacing their own production. The total transported volume of coal and coke for domestic consumption in 2016 was down 12.9% on 2015, due to the reduction seen in the domestic steel industry. Despite this, the volume transported was up 45.2% in 4Q16 compared to 3Q16. This was due to the one of the blast furnaces of a major customer coming back into operation in October GENERAL CARGO Steel Products Transport of steel products amounted to 5.2 Mt in 2016, an increase of 1.3% compared to 2015, driven by the higher volume of plates transported to service the operations of certain customers in the steel industry, compensating the low performance in the automobile and civil construction segments. Comparing 4Q16 and 3Q16, it was up 6.1%, as a result of an increase in the export of steel products by the railroad, in addition to an increase in the transport of plates to be used in the plants. Agricultural Products In 2016, MRS transported 27.4 Mt of agricultural products (sugar, corn, soybeans and soybean meal), considering that other railroads use a tolling arrangement. This is a company record. It was up 1.5% on the previous year, a significant result given the crop failure of the corn, which affected transportation of this grain in Among the agricultural commodities transported by MRS, soybean is one of the highlights. This ended the year with an increase of 21.9% compared to 2015, reaching 7.2 Mt. This 9

10 growth was due to an increase in exports through the port of Santos-SP. Sugar also showed a significant increase, 17.4% compared to the previous year, with 10.6 Mt transported. Compared to 3Q16, the agricultural segment showed a 32.3% decrease in volume transported, driven by the seasonality of each commodity. When comparing 4Q16 to the same period in 2015, there is reduction of 30.9%, mainly caused by the crop failure of corn, causing a reduction of more than 3.3 Mt in the volume transported. Others In 2016, MRS transported a total of 9.8 Mt of other General Cargo products, a group that is composed of construction raw materials, bauxite, containers and others, and which, due to the recession in Brazil, shows a decrease of 9.9% compared to The positive highlight in 2016 in the General Cargo group was container transportation. It was up 16.4% on 2015, confirming the strengthening of railways in this logistics solution. The adopted operational model allowed a new route to be included in the state of Rio de Janeiro, with an increase in the customer portfolio, reaching a total volume of 1.8 Mt (or thousand TEUs) transported. 3. ECONOMIC-FINANCIAL ASPECTS Revenue Net Revenue in 2016 was the highest ever recorded by the Company, reaching R$3.3 billion. Higher volumes and a better mix of products, with the transport of strategic loads recovering, has driven this increase. In 4Q16, Net Revenue was 8.8% down on the same period in 2015, due to the 10.1% decrease in volume transported, as mentioned in this Report. 10

11 EBITDA and Profit EBITDA was R$1,470.2 million in 2016, 20.9% higher than in 2015, with an EBITDA Margin of 44.8%, an increase of 6.5pp over the previous year. This profit includes R$148.0 million that relates to the agreement signed with MUSA in early However, as mentioned in this Report, when we adjusted profit by R$148.0 million, EBITDA is still up 8.7% when comparing 2016 and 2015, with the EBITDA Margin above 40%, due to strong cost and expense controls promoted by the Company throughout The most relevant factors in the 2016 EBITDA, according to the order in the chart above, were: I. Net Operating Revenue: Increase of R$106.7 million reflecting the production record in II. Cost of Services Provided: Increase of 4.0%, most of which, R$26.3 million, was from the lease installments and concession paid to the Government, adjusted annually using the IGP-DI index. Maintenance and labor expenses increased by R$13.7 million, while freight paid to other concessionaires by right of way increased by R$11.0 million. On the positive side, gains from Energy Efficiency provided significant savings in fuel costs, reducing the effect of Government-authorized adjustments. III. Operational expenses: Of the positive R$34.4 million shown in the chart above, R$51.8 million is a reversal of an Estimated Loss for Doubtful Accounts (PECLD), recorded in 2014 for MMX Mineração e Metálicos S.A., under reorganization petition. However, the net effect of this reversal in the Company's EBITDA was R$20.5 million, after renegotiation with MMX. The difference between these amounts was recognized in Other Operating Expenses. IV. Other Income and Expenses: This reflects, for the most part, the R$148.0 million relating to the agreement with MUSA. In addition to this, there was a gain of 11

12 approximately R$15.0 million in the sale of assets and the aforementioned expense relating to the renegotiation with MMX. Debt The Company ended 2016 with R$2.8 billion of Gross Debt, down 17.8% compared to the end of The main factors for this reduction were: i) the higher volume of amortization during the year, including the repayment of one of US dollar debts for the amount of R$139.5 million and the first installment of amortization of the Company s 5th issue of debentures, for the amount of R$100 million; and ii) lower funding requirements, in line with the lower volume of investments recorded. This increased outflow of funds to pay the debt principal and charges reflected directly on the cash position, which decreased 48.6% over the year. However, the leverage ratio, measured using the 12-month Net Debt/EBITDA, significantly reduced to 1.66x, the lowest and best result over the last five years, which is also explained by the higher EBITDA. Even after MUSA agreement adjustment in the EBITDA, the indicator remains comfortable, at 1.84x. Profit Profit for 2016 was R$417.5 million, 41.1% up on It was positively affected with the MUSA agreement being accounting for, which added R$98.0 million, net of IRPJ and CSLL. The Company's Profit, after adjusting for this value, was R$319.5 million, 8.0% up on 2015, reflecting the improvement in operating income. 12

13 Cash Flow Statement The cash in December 2016 was R$296.1 million, lower than the R$627.7 million in the same period in 2015, mainly driven by the deleveraging process carried out throughout the year, combined with a lower level of investment, adjusted to a more discrete growth of cargo transportation. 13

14 4. PROJECTS AND INVESTMENTS In 2016, MRS invested R$587.6 million, focusing on investments aimed at maintaining the business. Below are the major investment groups in 2016: ¹ Acquisition, reliability and modernization of rolling stock. ² Expansion, infrastructure reliability and modernization of the permanent route. ³ Investments in Health, Environment and Safety. The main investments were: Rolling stock: The acquisition of 23 FLT wagons to transport bagged and palletized cement; and the conversion of 120 GDT wagons used to transport iron ore into HPT wagons used to transport agricultural products. Expansion of sections permanent track and goods yards: Investment aimed at handling the General Cargo flows and to increase the volume transported, such as: i) licensing to expand and reactivate terminals; ii) the construction of 2 lines in the Areais goods yard (Baixada Santista-SP); Automation of the Santos-SP goods yard and signaling in the Piaçaguera-SP goods yard; iii) the replacement of bridges; and iv) reconditioning Baixada Santista-SP. Modernization of assets: Repairs in locomotives, wagons and in the railway network, increasing reliability levels and, consequently, the availability of the assets, so allowing greater efficiency and optimization of the railway operations. Infrastructure Reliability: To mitigate the risks associated with the reliability of the network, MRS continued the multi-annual program of preventive repairs at previously identified points and also worked on civil engineering works. In 2016, 36 containment works, 9 bridge repairs, 4 replacement works and 5 corrective works were carried out, in addition to the restoring 1 tunnel and removing of interferences from another 2, amounting to R$57.2 million invested. 14

15 5. TECHNOLOGICAL PROJECTS We are in the final phase of implementing CBTC (Communication Based Train Control), an innovative automation system both in Brazil and worldwide, which provides greater transport capacity and greater safety in railway traffic, allowing, for example, remote braking in case of an emergency or human failure. In 2016, the following steps were carried out in the CBTC: i) adjustments in software to increase reliability and operational performance; and (ii) onboard system installations on support vehicles, ensuring receipt and sending information to the OCC (Operational Control Center). Another technological project that started in 2016 was the AESS - Automatic Engine Start Stop - put on the engines of locomotives. Bespoke software configuration services were contracted for 174 model AC44i and Dash 9 locomotives and software upgrades for 107 other AC44i locomotives to increase fuel efficiency by reducing fuel costs by reading analogue and digital variables, monitored by sensors, which optimize the start up and shutdown of the locomotive engines. In 2016, the material was purchased and in 2017 it will be installed in the first locomotives. 6. HUMAN RESOURCES AND QUALITY Ongoing efforts to improve the work environment has provided good results in the Favorable atmosphere" category, which reached the 79% mark in MRS, at the end of 2016, employed 6,081 people, 88% of whom were linked to railway operations. Of this total, 55% come from the State of Minas Gerais, 22% from the State of Rio 15

16 de Janeiro and 23% from the State of São Paulo. The average age is 37 and the proportion of women has increased. Between 2010 and 2016, the number of women contracted has increased by 89%, which currently sits at 10.3% of the Company's employees, the highest level ever achieved. During the year, there were 570 promotions, representing a growth rate of 89%, reinforcing the policy to value our employees. 7. SOCIAL RESPONSIBILITY Relationships with the Surrounding Communities MRS continues to improve its relationship with the communities around the railway ("surrounding communities"). The main interface between the communities and MRS is formed by the activities of the Regional Committees, which promote a dialogue with leaders and residents for solutions to mitigate the impacts of railway operations. In addition to the ongoing work of the Regional Committees, relationships with communities also includes holding annual events called "Open Space: MRS and the Community." At these events, the Company presents a set of measures and investments to key community leaders that will be done to reduce the impacts of rail operations and improve the relationship with the railroad. In 2016, six events were held bringing together approximately 300 community leaders. Accident Prevention Actions In 2016, MRS continued with community actions to raise public awareness of rail accidents. Several actions were carried out in educational institutions, aimed at approximately 4,800 children and young people. Specific actions making people aware of changes in procedures of sounding the horn were also carried out for about 300 residents; Safety actions in critical goods yards, mapped to table movements, affecting 357 residents; actions to multiply the safety culture in Institutions to help Alcohol and other Drug users, mapped in 48 critical points; In addition to several campaigns raising awareness on TV, newspaper, radio and other social media. As a result of these actions and campaigns, in 2016, MRS managed to reduce community accidents by 20% compared to Social, Cultural and Sports Projects In 2014, in partnership with the Municipal Councils for the Rights of Children and Young people, MRS sponsored 9 social community projects in 9 municipalities, through the Fund for 16

17 Childhood and Adolescence (FIA). The company also sponsored 16 cultural projects and 2 sports projects through the Rouanet Law and the Sports Incentive Law, in addition to building a school in Carandaí-MG and a CRAS (Citizens Advice Center) in Nova Cruzeiro-SP with funds from social sub-credits from BNDES financing contracts. Socio-cultural and sports investment amounted to R$9.4 million in 2016, including R$2.5 million in projects supported by BNDES. 8. HEALTH, THE ENVIRONMENT AND SAFETY Occupational Health In 2016, several health-oriented programs were implemented for employees and their dependents, namely: The Program for the Prevention of Alcohol and Other Drug Abuse - PPAD: The program aims at ensuring a safe working environment, based on the promotion of the health of our employees, and it also aims to educate employees on the effects of drug and alcohol abuse. Quality of Life Campaigns: They encourage practices that contribute to a better quality of life and health care. These campaigns totaled 67 actions and topics carried out during 2016, such as Outubro Rosa (Breast Cancer), Novembro Azul (Men s Health), Dezembro Vermelho (Aids), dengue, STDs, smoking, among other issues addressed. PCA - Hearing Conservation Program: It seeks to prevent damage to the auditory system, monitoring employees monthly with audiometric tests and referring those who present auditory alterations to specialists. Vaccination Campaign for Employees and Dependents - H1N1: In 2016, 5,783 people were vaccinated who were either employees or their dependents. The Environment In 2016, MRS conducted its activities ensuring compliance with the legislation, applicable standards and other requirements to preserve the environment, fully complying with all the environmental programs related to the railway network operating license conditions and the operating license conditions such as programs to monitor air quality, waste disposal, protection of flora and fauna, control of erosion processes, mitigation of risks and environmental impacts, and environmental education programs. 17

18 Throughout 2016, MRS maintained its focus on sustainable production, through effective measures to reduce waste generation, seeking alternatives to reuse these by-products, minimizing the negative impacts from final disposal. In addition, the good practices adopted reflect the reduction in water consumption in workshops. Through the Caminhos Verdes Program, 25,000 tree seedlings were planted in the municipal environmental protection area of Barra do Piraí-RJ, equivalent to 17 football fields. The choice of this Conservation Unit was set by MRS, IBAMA and the Municipal Government of Barra do Piraí-RJ. In 2016, MRS insourced the Environmental Education Program aimed at the community surrounding to the railroad, affecting 2,261 people Within the Company, the program was aimed at around 2,000 employees for the workshops, dealing with topics on the best environmental practices in daily activities. Operational Safety Operational safety indicators have improved significantly in recent years. The rate of railway occurrences/incidents (number of occurrences weighted by the gross tonnage transported) decreased by 5.0% compared to 2015, going from a rate of 2.2 events per billion TKB (gross tons/kilometer) to 2.1. This number includes incidents with direct participation of MRS (related to operation and maintenance failure), along with incidents in customer terminals, other railways and involving communities (pedestrians run over by vehicles and collisions). In 2016 several actions were promoted to strengthen operational safety, especially: Mapping Critical Activities: Program to identify and monitor risk factors associated with the railway operation, implemented in the Engineering and Maintenance Department and in the Operations Department, generating more than 300 preventive actions for follow-up. Task Observation Program: Program of behavioral audits with an educational focus, based on safety dialogues. It is given to all operational staff, especially employees in the Engineering and Maintenance Department and the Operations Department (about 4,000 people). It aims to ensure the four pillars in accident prevention, which are: i) Comprehensiveness (involvement of all staff in audits); (ii) People (identifying and auditing people in need of special attention); iii) Constancy (ensure that audits are carried out throughout the month); and iv) Deviations (anticipating problems - ensuring feedback and correcting behavior/employee deviations). Task Force: Program of unannounced, cross-audits to check operational and personal safety items and compliance with the established procedures. It aims to highlight 18

19 preventive operational deviations, with a focus on education, and to compare results with the performance in the Task Observation Program. Terminal Safety Program (PST): They are operational audits and permanently track inspections to improve the safety conditions of customer terminals where MRS operates. In 2016, 771 inspections were carried out in 119 terminals. Clean Rail track Operation: Teams of surveillance motorcyclists monitor trains in critical sections, so eliminating any risk of collision and run-overs. Cameras in PNs: Employees to record footage of the recklessness of pedestrians and drivers. Footage is used in the investigation of accidents involving pedestrians and cars, and reported in the media as a means of community awareness. Occupational Safety (Without lost time + With lost time) The rate of own and third-party accidents, with and without sick leave, increased by 15% compared to 2015, but fell by 84% in relation to 2010, even with a 16% increase in headcount in that period. (With lost time) (Without lost time + with lost time) 19

20 Only analyzing the accidents with sick leave, taking our own and third-party employees, the reduction was also significant over the years, although the rate increased in 2016, which ended at Programs focusing on occupational safety are: Practical Daily Safety Dialog (DDS): Simulation of a certain activity that presents risks to employees. Doubts are clarified during presentation, which makes communication clearer and more objective. Of the 3,538 DDSs carried out during the year, 225 were on the practical DDS. Planned Inspections: Audits carried out to assess work environments and documents relating to the security processes. In 2016, more than 500 inspections were carried out, generating approximately 6,000 improvement actions. Monthly Meetings with Contractors: The aim is to present the indicators, the results of the audits, the accident investigations and the good practices of the companies that provide services to MRS. In 2016, 96.4% compliance was obtained in audited contracts. Safety Blitz: They are carried out periodically to check the physical conditions, machines and equipment, training and qualifications of employees. We significantly increased the number of blitzes, from 59 in 2015 to 263 in Process Audits: More than 450 process audits were carried out. After the audits, improvement actions are drawn up. 9. HR DEVELOPMENT MRS continues to invest in employee training, qualification, improvement and specialization. In 2016, 74 hours of training per employee was given, totaling 504,901 hours of training. 20

21 Main training given in 2016: In partnership with Senai, the railway operation training program trained 170 train drivers and engineers; Another 21 employees started the Specialization course in Rail Freight Transportation, developed in partnership with the Military Engineering Institute. Around 390 students were qualified in Industrial Learning courses through a governmental partnership with the Pronatec and Educamais programs. 10. STRATEGIES AND PERSPECTIVES Start of recovery amid slow growth and difficulties in the international situation. The prospects for the economy in 2017 indicate a slight improvement compared to 2016, but point to a path full of pitfalls to resume production and consumption. As such, there are uncertainties in the Heavy Haul market, where even after prices resume slightly, the strategy of large mining companies remains firm. MRS, highly linked to this segment, maintains its position, ensuring investments to sustain production and maintenance of its safety indicators. The General Cargo segments, despite the crisis, point to some growth, notably container and agricultural growth, where the expectation of reducing logistics and port costs may increase export volume. To this end, the objective of increasing asset productivity continues, with larger and faster trains, better use of locomotives and wagons among other initiatives. The focus is on improved processes and optimized maintenance investments, which ensures competitiveness without financial losses. Our commitments to the indicators required by the Production Granting Authorities continue throughout all the sections of the network, as well as maintaining the operational safety levels. Therefore, the associated investments are maintained. The year also marks the most advanced phase of process to extend the current concession, with the aim of leveraging the entire rail segment, anticipating investment discussions that tend to solve "bottlenecks" that prevent increasing the railway s share of the national transport network, by including new customers or expanding the share of current ones. 21

22 This means a virtuous cycle of more investments, more jobs, more income and lower costs for the entire Brazilian production system, implying, ultimately, the resumption of the Brazil's expected growth cycle. 11. INDEPENDENT AUDITORS In 2016 PricewaterhouseCoopers Auditores Independentes audited the annual financial statements and reviewed the quarterly information. In compliance with CVM Instruction 381/2003, which provides for other services provided by independent auditors, the Company states that no other services were provided by this auditor, except for those mentioned above. 22

23 12. CONSOLIDATED TABLES: OPERATIONAL AND FINANCIAL RESULTS 23

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25 Investor Relations Finance General Manager Felipe Perecmanis Investor Relations and Finance Manager Nilton Pimentel Contact Telephone No.: (21) Bookkeeper Banco Bradesco S.A. Contact Telephone No.: (11) BM&F OTC Market Investor Relations website 25