Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and thank you for waiting. Welcome to the conference call of Santos Brasil concerning the earnings for Q1 2018.

We have here with us the Chairman of Santos Brasil, Antônio Carlos Sepúlveda; the CFO and Investor Relations Director, Daniel Pedreira Dorea; and the Sales Director, Marcos de Magalhaes Tourinho.

We'll inform that this event is being recorded [Operator Instructions]

This event is also being transmitted simultaneously through the web via webcast. It can be accessed at ri.santosbrasil.com.br, where you will find also the slide presentation. The selection of the slides will be controlled by you. The replay of this event will be available right after the end of the conference call.

We remind you that the participants may send questions via website for Santos Brasil, and they will be answered also after the conference call has ended.

Before we proceed, we'd like to clarify that any declaration that may be made during this conference call concerning the business perspectives of Santos Brasil or projections, operational and financial goals are based on beliefs of the company's management and also on information currently available to Santos Brasil. Considerations about the future are not guarantees of performance. They involve risks, uncertainties because they refer to future events and, therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand that general financial conditions and operational factors may affect the future results of Santos Brasil and may lead to results that will differ materially from those expressed in such future conditions.

Now I'd like to pass the floor to Mr. Daniel Pedreira Dorea, who will begin the presentation. Sir, you may proceed.

[Daniel Dorea, executive]

Good morning. I am here with Antônio Carlos and also Marcos de Magalhaes Tourinho, our Sales Director, to analyze the results of Q1 '18.

The quarter was marked by a forward acceleration in the terminals. Although the economy is doing well, the Port of Santos Brasil grew 14% in terms of container handling in relation to Q1 last year when the volume was lower, which led to the utilization of the port to 65% of its commercial capacity. Our expectations for growth and the handling of containers for 2018 in the Port of Santos continued to be higher.

Although we had an improvement in volumes, the result is not higher, especially less favorable conditions and more transshipments and a drop in handling of some containers for imports. Also, in -- for this, we also had a drop in the average time of the containers staying in Warehousing. So we continue with retention -- high retention of containers from imports, 65% in Q1 '18.

And in the quarter, Santos as of February, we began to operate a new long-haul service led by ship owners in Singapore and also with Asia. This service in Tecon Imbituba is successful. And now as of July, we will have 8 visits per month.

In Tecon Imbituba, we had an advance in the services in ASAS' Asian service. This service really -- in Q1 had 6,535 containers, a volume that is 37% higher than the previous -- 38% previous -- than the previous quarter. So we had more services and increase in Warehousing, and this, together with strategic alternatives that we already communicated and some special logistics, we continue restructuring the operation, reducing headcount. And in terms of sales supplementing the Warehousing services, we are looking for value-added -- more value-added services. Apart from this, we had success in renegotiating most of the contracts with readjustments above inflation with a better price. We maintained the high usage of capacity, 95%, where the -- apart from this performance, also with the growth in the automobile industry, we had a growth in the number of imported vehicles, representing 11% in the quarter in relation to 4% in Q1 of last year. These 2 highlights, the increase in pricing contracts and also new cargoes, and this has helped us.

In Q1, the new cycle of investments was lower than the company aimed initially at new equipment. And in this unit, we invested BRL 19 million, and we acquired new equipment for the [ team ] and the yard, and this -- not only to improve the services, but it will allow us to take care of the demand from clients and the increasing number of containers in the Port of Santos. Although we have an Executive Project, we will also make investments, getting authorization from parties to substitute equipment like trucks, semitrailers, and we want to really continue with good equipment. In 2018, we'd like to begin to highlight the civil works to extend the quay, and we will be modernizing thus the installations.

Finally, before going into the analysis of financial aspects, I would like to report that the financial numbers in Q1 '18 already used a new accounting methodology that is used for these operations according to the -- our SEC, the CVM. Thus -- and so in a nutshell, the company is recognizing the right of expiration of all its leases as intangibles and to offset the present value on quarterly basis paid as lease. Thus, the operational expenses here with leasing are recognized as financial expenses, also absorbing also the right of expiration. And anyway, the economic impact of this new accounting method in practice, the expenses in leasing did not increase. If we compare with previous periods and also the company's cash, we calculate a pro forma EBITDA, which adjusts the reported EBITDA with lease, as we did in the past. And the details of the new methodology are explained in the explanatory Note #5.

Now we'd like to go to the second part where we highlight the main operational indicators.

We had an increase in the volume handled in the quay in Q1 '18, turning 263,700 (sic) [ 253,157 ] containers. And we had also long-haul operations, and part of these were compensated by the growth in services with a direct influence from greater volumes. So if we do an annual comparison, we had an increase of 18% in the quay volume in the 3 terminals where we have containers.

The Port of Santos continues to recover market share. Our participation was 34.2% in Q1 2018 compared to 32.5% in the previous quarter. In April, we had the leadership of the -- in the market, 34.2%. With the growth of other service, our expectation is to maintain the leadership in the Port of Santos.

Santos Brasil Logistics warehousing grew 37.9%. And also, we had the maturation of contracts with cargo agents during 2017.

The container terminal also, although there was a drop in 2.5% in the volume, I would like to highlight also the increase in imported vehicles has improved, but we observed also a drop in the number of days of retention, which were reflected at the revenue. In a comparison, year after year, there's a positive signal in also recovering the monthly volume.

The recovery of the volumes has not had a full impact on financial results. And as explained here on the right, we have a better participation of containers from imports, which also affects the Warehousing operations.

Now the financial highlights.

The net revenue -- consolidated net revenue, BRL 213.7 million in Q1 '18, practically stable if compared to Q1 2017. We had a drop of 13.9% of the revenue and 2.6% in the revenue of vehicles, which were compensated, these drops, by the increase in 58.5% of revenue from Logistics. So net consolidated revenue, 63% in Q1 2018. Last year, the contribution was lower. Also, the growth -- we have a growth in the consolidated billing.

In Q1 '18, extraordinary expenses were due to labor lawsuits and is due to the restructuring that we continued to execute this year.

The company closed 2018 with a -- with pro forma consolidated numbers. As you can see here, excluding the extraordinary expenses, nonrecurring expenses, pro forma -- recurring pro forma EBITDA, BRL 22.9 million with a margin of 10.7%. And we had a loss of BRL 6 million in the quarter, and this due to the new methodology adopted for accounting.

Finally, we highlight the company's cash position, BRL 253 million, and low level of debt. So we have -- we closed the quarter with BRL 36 million, which shows a pro forma leverage that is negative BRL 49 million (sic) [ 0.49x ].

So these were our comments concerning Q1 '18.

Now we are here, the Board of Directors, available to answer questions, and we'd like to thank you very much for your participation and presence. Thank you. Now we'd like to begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Mr. Samuel Alves, BTG Pactual.

[Samuel Alves, analyst]

Two questions in reality. The first is the investment in Tecon Santos. You mentioned that although the authorization was not decided yet by the port authorities, you should begin in the next few months the investments. Could you share with us the size, the volume of investments that will be made in the next quarters in Tecon Santos? And a second question, could you share with us the effects of the strike in May and June? We have heard that there, we have problems with strikes from the part of trucks. And just to understand, did this have any impact on your operations in June, the strike, truckers' strike?

[Daniel Dorea, executive]

I will answer the question concerning CapEx in Tecon Santos, and then Mr. Tourinho will talk about the strike, truck drivers' strike. Concerning CapEx, we have had difficulty in getting authorization from CODESP concerning the investments we intend to make. So these investments are included in the Executive Project. What we're doing, we're thus working to get -- to begin these investments. Thus, our intention is to invest a maximum of BRL 100 million. If this happens, it doesn't mean that there will be a disbursement. It will depend a lot on the authorization to expand the quay operations where we have most of this amount to be spent. Also, substitution of equipment. We believe that these investments will bring gains in productivity to the terminal. We have been there for a few years without significant investments in substituting equipment. And Tecon Santos in terms of operations, we cannot lose our leadership in services. Tourinho?

[Marcos de Magalhaes Tourinho, executive]

Now we can talk about the truck drivers' strike. Concerning the impact of the truck drivers' strike. In May, we had 11 days with the terminal without activities. During 11 days in May, we had the operations paralyzed, and this due to the strike. And also, we -- but we continued -- we had more warehousing. So there was a significant impact in May in our results due to the strike. After the strike in June, in cabotage during one week, we had no operations here on the Brazilian coast. This is a relevant impact. And apart from cabotage, what we felt in the first 15 days after the strike, we had a recovery that was very slow, especially exports. And we had feedback from shipowners due -- that the inventory of empty containers dropped a lot, and this is impacting the normalization of the operations. It began now as of this week. So in the second half of June, we believe the operations will be normal. So in a nutshell, I would say that this is the impact. We had warehousing since the cargo stayed for a longer period in the terminal, and this has a positive impact on the results in June since this cargo will leave only now. So more revenue from Warehousing in June than we normally have. But also, very, very few cargoes coming from imports. This will also have a negative effect in June since the inventory of containers from imports dropped now after the strike. In general terms, the strike was very bad for us. It should impact the results of Q2.

[Operator]

[Operator Instructions] Our next question comes from Mr. Victor Mizusaki, Bradesco BBI.

[Victor Mizusaki, analyst]

I have 2 questions. The first, you mentioned that in July, you will have 8 ship visits per month. Can you tell us about the number of containers we should have with the increase in the number of ships? And second question, when we look at the volume in Tecon Santos getting to 68%, looking at the second semester, how could this impact also the volume of containers and the price?

[Daniel Dorea, executive]

Concerning the estimates is that we should handle 8,000 containers per month. Now in June, we should have 6 visits than 8. That's the expectation, 8,000 containers per month.

[Marlos Tavares, executive]

Marlos Tavares, Director of Operations. In terms of capacity, we already mentioned. Talking about the strike, with the truck drivers' strike, we unloaded in -- ships that brought import. During the strike, we handled 10 ships unloading the cargo. We have a large terminal, the largest terminal in Santos, so we suffered less due to the truck drivers' strike. This shows to the market our capacity. Since we have this type of utilization, we continue working with high rates of productivity, and we see the second semester in Tecon Santos as a normal operation with full capacity, and we're not concerned with changes. We believe that the terminal will continue growing, volumes will be on the rise and there will be [ peak stats ] inside our strategic plan and operational plan.

[Victor Mizusaki, analyst]

In the second semester, with -- do you expect recovery in volumes?

[Unknown Executive]

Probably the usage rates -- utilization rates of Tecon Santos should go up. Going forward, this can impact price negotiation.

[Victor Mizusaki, analyst]

Looking at this year, with readjustments, price increases, do you believe there will be price increases above inflation?

[Unknown Executive]

Of course, the increase in -- utilization increase in volume is always favorable to negotiate prices with shipowner companies. The expectation is that the usage of the port in the second semester -- when I talk about utilization, it's the commercial utilization, not theoretical. And the usage with -- which is the -- sustainable in the medium and long term, it should be greater than 75%, our estimate for the port, and this helps in the negotiation for the next few months. It's difficult to tell you what will happen. We have the impact of the exchange rates. The U.S. currency has gone up in relation to the local currency. And there's also the volume of imports, which is the best indicator for profitability for container terminal in the Port of Santos. It is very strong in imports. So it helps. We hope we will continue to have a growth upwards of 10%. We hope that the truck drivers' strike will be something only -- that happened only once. In July and August, we will have better volumes, and we're prepared for that. The perspectives are still positive.

[Operator]

[Operator Instructions] Our next question comes from Mr. Victor Mizusaki, Bradesco Bank -- Bradesco BBI.

[Victor Mizusaki, analyst]

I have another 2 questions. The first, could you give an update concerning the contract with Brooksfield and whether the accounting change will impact the covenants of Santos Brasil?

[Marcos de Magalhaes Tourinho, executive]

Marcos Tourinho. It is natural the largest terminal in Santos, where the -- here on the Brazilian coast where you have a contract, of course, it requires negotiation. It's difficult to say when and how we will end these negotiations to renew. But there's an interdependence. Due to the good history of our relationship with the authorities, perspectives are positive. It's difficult to give the details about when we will finalize the negotiations and the result. It's a natural process of negotiation and has already begun, and we expect a positive result for the parties due to the interest on the part of both. What I can tell you is this. We have this question about the financial covenants. Due to the new accounting method, it does not affect our level of debt. The level of debt is the same. You will see in the balance sheet legal obligations, which includes debt and financing. It doesn't change in any way our leverage.

[Operator]

[Operator Instructions] We'd like to conclude the Q&A session. We'll pass the floor now to the Chairman.

[Antônio Sepúlveda, executive]

Well, we'd like to conclude. I'd like to thank you on behalf of the Board of Directors for being with us. We hope to see you again when we have our conference call for Q2. Thank you.

[Operator]

The teleconference of Santos Brasil has concluded. We thank you all for participating, and we wish you a good day.