Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2019-Q1

[Operator]

Good morning [indiscernible]. Welcome to Santos Brasil Participações' First Quarter of 2019 Results Conference Call. With us here today, we have Mr. Daniel Pedreira Dorea, Santos Brasil's Chief Financial and Investor Relations Officer; Mr. Antônio Carlos Sepúlveda, Chief Executive Officer; and Mr. Marcos de Magalhaes Tourinho, Chief Commercial Officer.

[Operator Instructions] After Santos Brasil's remarks, we will have a question-and-answer session. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through the website, ri.santosbrasil.com.br, where you can also download the presentation. The slides will appear in the order you wish.

The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on our website. They will be answered by the IR team after the conference is closed.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Santos Brasil Participações' 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 and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Dorea. Mr. Dorea, you may begin your presentation, sir.

[Daniel Dorea, executive]

Good morning, everyone. Thank you very much for attending this conference call. The results for the first quarter of 2019 reflects the slow pace of the Brazilian economy mainly due to the uncertainty regarding the approval of the social security and pension plan reform and the successive projected GDP growth in 2019, which now points to an increase of 1.45% according to the Focus Bulletin. This is an expressive withdraw if you consider that at the end of 2018, the projection were of 2.5% increase for this year.

Reflecting the worsening of expectations, the Port of Santos registered volume of 551,000 containers in the first quarter, 12% down from the same period last year and below our projections for the period. In spite of the generalized retraction in the Port of Santos, Tecon Santos grew by 1.5% in volumes handled, gaining market share and thus retaking the leadership in the port with 40% of market share according CODESP data. In addition, in the first quarter of 2019, we should highlight Tecon Santos' 8.8% growth in the volume of containers -- full containers for imports, especially when compared to the 11.5% drop in the Port of Santos.

The positive performance of Santos Brasil compared to its competitors is a direct result of commercial initiatives that have proved successful.

Notably, the renewal of the contract with Maersk at the end of the year, which brought Tecon Santos a new service from Asia, today the main commercial route for the port. We now operate 2 Asian services noting that as of May, the service led by PIL will count with 5 new vessels: Cosco, Evergreen and CMA CGM, starting to climb weekly the terminals with a significant potential increase of volume compared to last year.

On the other -- other than that, last month, we contracted additional volumes from Maersk and Hapag Lloyd, which were then in [ Sterling ] for [ staffed ] service with the routes to South Africa, which already operates at Tecon Santos points [indiscernible] as a leader.

In the vehicle terminal, also in April, we signed a new contract with K Line, which should export -- which should increase export and import volumes of TEV, reducing the Argentine market vehicles exported through our terminals.

In Imbituba, despite the decrease in the handling of containers due to the discontinuation of the ASAS service, there was a significant increase in the volume of handling of general cargo terminals due to new contracts for the exports of logs, steel rebar above all for the Chinese market.

In turn, the Tecon Vila Conde (sic) [ Tecon Vila do Conde ] suffered with a heavy rainfall in the first quarter of 2019, which was much higher than the rainfall of the previous year, which hampered the shipments of ores, especially manganese and copper. As a result, we saw a slight decrease of 1% in the quarter-to-quarter movement.

In spite of the start of the year, which was very slow in the Brazilian economy, the events reported above, mainly the contracted ones, make us confident with the growth that we expect in our operations for 2019.

In relation to scheduled investments, the company dispersed BRL 15 million in the quarter, almost all of it allocated in Tecon Santos.

We finalized the competition to choose the construction company responsible for the work of extension in the quay. And we also paid the installation license. With this, we'll start mobilizing the work in the next month, and we estimate that we will have the construction done in 2021. The new infrastructure and the new equipment will enable Tecon Santos to gain in productivity and activities and increase in capacity to operate 3 vessels of the new Panamax class.

Closing our highlights and before going into the financial indicators, I would like to state 2 others. The first one is the cost structure, which has been impacted by some factors: one, the payroll, and the adjustment of 17% of the port fee. These 2 factors have impacted BRL 7 million negative compared year-on-year. In addition, in March, we have attached our operational manpower. Therefore, this cost was before variable, and now it's a fixed cost. Comparatively, the company did not think there will be a fall in the costs with sea routes, but also, we will try to cut the cost per container.

According -- another thing is a new accounting methodology introduced by IFRS 2016 (sic) [ IFRS 16 ], which was introduced this year. And therefore, the leasing expenses for logistics will not be allocated as an operational cost about but will be accounted for in financial expenses.

We will now go to the main operational indicators, beginning with Slide 2 of the presentation. In the first quarter of 2019, the company reported 0.7% increase in the handling of containers in 3 terminals, totaling approximately 255,000 containers. Although slight, this hides composition of the mix since we have empty containers which was reduced, whereas the full containers grew by 3.6%.

Tecon Santos increased its market share in the Port of Santos to 39.7% in the first quarter 2019, almost 3 points above the previous quarter, due to the acquisition of new services, notably from Asia, led by Maersk and Hamburg Süd, which is still in the maturation stage.

Also, Santos Brasil's 5.7% increase in storage operations is due to the negotiation of the new agreements, especially chemicals and fertilizers. Likewise, the significant increase in general cargo operations of 84% quarter-over-quarter is due to new contracts for the export of wood, steel and barrel logs.

In turn, the vehicle terminal is still suffering with a retraction of vehicle export to the Argentine market, which is responsible for the decrease of 31.6% in the first quarter of 2019 year-on-year. However, the mix improved comparatively in the first quarter of 2019 with a greater representation of imported vehicles over the total traded.

On Slide 3. You can see that the first quarter of '19 was greatly affected by the weak performance observed in January and February, which were still impacted by the uncertainty of the presidential election and the high exchange rate volatility in the period.

Only in March, the growth in container handling was resumed when Maersk-operated Asia service gained more traction. In the right-hand chart, we can see the recovery of the mix, where the largest shares are imports compared to previous quarter.

On Slide 4, we present the financial highlights. Santos Brasil's consolidated net revenue reached BRL 227.2 million in the first quarter of '19, a year-on-year increase of 6.3%. Revenues from the port terminal grew by 10.5% whereas logistics recorded a 3.9% drop, reflecting the lower unit revenue per storage container.

Revenues from vehicle terminal, impacted by the lower volume of traffic sales, 7.9% in the first quarter. On the other hand, due to the improvements of the import-driven mix, coupled with a higher dwell time, revenue per vehicle moved up 34.6%, almost 35% compared to the first quarter of '19 -- in the first quarter of '19 compared to first quarter of last year.

Tecon's contribution to the company's consolidated revenue was 57% in the first quarter, higher than 43% recorded in the first quarter of '18.

In the first quarter of '19, we recognized nonrecurring expenses arising from labor indemnities and compensations totaling BRL 3.8 million.

The company closed the quarter with a pro forma consolidated EBITDA, that is considering the leasing and rental expenses, of BRL 9.7 million. Excluding the aforementioned nonrecurring effects, recurring pro forma EBITDA totaled BRL 13.5 million with a margin of 6%.

We had a net loss of BRL 9.1 million in the quarter.

Our cash position at the end of March was BRL 249.3 million, where we maintained a low financial leverage ending the quarter with a net cash of BRL 31.4 million, representing a net debt ratio pro EBITDA of negative of 0.35x.

Having made all of these remarks on the first quarter of 2019, we are now available to answer any questions you may have, and we also thank you for attending this conference. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

I have 2 questions. The first one, if you could give more flavor on the amount on the volume of the new services that you have called our attention to. I'm looking at the outlook for the year for 2019. In the beginning of the year, you mentioned that because of the uncertainties of last year, imports were weaker at the end of the year. What can you see now for the rest of the year for 2019?

And the second part -- or the second question is considering CapEx. You mentioned in the release that the total investments in the quay is there. What can we expect for 2019 in terms of CapEx?

[Marcos de Magalhaes Tourinho, executive]

Victor, this is Marcos Tourinho. Concerning the first part of your question, when we say the new services, basically, we mean Asia for Maersk. And we estimate, Victor, for the services -- with the mature services, 20,000 to 24,000 containers per month. And this, we will -- we should have this in May, this amount of volume. And therefore, the ASAS service has brought traction to this because it started in the end of January, and it's now that we are seeing its full performance of all the scale, both in Asia and South America. So it is a service for 20,000, 24,000 containers a month. It's the largest account that we have and maybe the largest service in the port.

And with Asia, we have had better performance. We had a comment on this. Today, we have 4 Asian services -- 4 services to Asia, and they are 30% to 50% of the market share. And this has positioned us well for the rest of the year. What we can see is a rebound of volume, especially because of the pickup in Asia in how we operated in Tecon.

[Victor Mizusaki, analyst]

You have been following up on this?

[Marcos de Magalhaes Tourinho, executive]

We have disclosed on our website the information, that this month, we expect to go to 90,000, 100,000 containers; 70,000 in January, which will be an operational leverage, which should be significant and will help us perform better from now on.

And other services that Daniel commented on in cars and containers was South Africa, that we obtained this in terms of volume from [ Sterling ]. With the group's closing with [ Sterling ], we gained 2,000 containers per month, which is 20,000, 25,000 containers a year.

In addition to this, we have a new service of K Line which we closed in April, which is for Mexico. It's a service for vehicles and equipments to Mexico and will also play a significant role in the recovery of volume due to the crisis in Argentina, which is our largest market. So this service to Mexico will be very significant to us.

I hope I have answered your questions. We are, in sum, very -- better well positioned in Santos, although in the macro activities, we are below our expectations. We know that our position -- when we gain market share in a relevant way, this has positioned us better in the market. So it is our main driver in terms of volume and results for the company.

Could you answer the second part of the question, Daniel, if you like?

[Daniel Dorea, executive]

Thank you very much. Yes, I can. In terms of CapEx, Victor, our CapEx, most of it, it is -- the bulk of CapEx is anchored in the expansion of the quay Tecon Santos with the installation license that has been an issue. We only need a license from the city administration for us to start the work. So this installation license, which is the most complex one, has already been issued. So we'll be starting to mobilize this in the next few weeks and start the work in July. Having said this, I believe that we will consume from this CapEx BRL 80 million to BRL 100 million per year -- of the year.

And attached to this to this -- connected to this, we are starting the last phase of the Tecon Vila do Conde that we started in 2017. In Vila do Conde, we are probably going to use up BRL 30 million to BRL 35 million a year, which would total BRL 130 million to BRL 135 million.

And we still have some key IT services for the system that we will require BRL 15 million. Therefore, to give you an outlook to our audience and answering your question, our CapEx is probably expected to be at BRL 150 million for 2019. Thank you very much.

[Operator]

Our next question comes from Samuel Alves, BTG Pactual.

[Samuel Alves, analyst]

My questions concerns logistics. You have mentioned in the last quarter that the last quarter was not very typical in terms of mix. The LCL load had fallen. You expected that this would level off in the first quarter. My question is concerning this. Do you expect that the mix will improve with these new Asia lines in Tecon Santos? And what do you attach this mix to, especially with the mix of imports which is a little higher?

[Marcos de Magalhaes Tourinho, executive]

This is Marcos Tourinho. LCL, which is our fraction of loads cargo, it sells 40% to 45%, and we suffered also despite having a performance of import cargo better than the other terminals in the first quarter. January and February was very, very bad. In March, this has improved a bit. April, we can see it was at another level. And in May, we can see that the recovery is picking up. The trend is a high trend. We expect to improve a lot. We are already feeling this in our daily activities. We are almost at a normal level.

But in terms of logistics, we will have a gain in market share in Tecon Santos, will have an effect. In the CODESP for March, our market share was 44% in the port in the first quarter. So you see, in April, we don't have the information yet. But we believe that we're keeping at the 43%, 44% level. And this is strongly based on the imports, which is our main logistic arm.

And at the [indiscernible], we can see that this growth to our logistics. And we used up all the segments of transport, dispatch. So that is the highest volume that affects logistics. So the logistics level is much higher and we can see that this is also not expected. And because of the low economic performance that we see in the fraction cargo, LCL dropped less. It dropped 30%, 35%. The average drop was 60%. In any case, both figures are relevant but we are back to normal, and the prospectus from now on is more optimistic. This I believe is what you wanted to know.

[Daniel Dorea, executive]

Yes. Tourinho, thank you very much. Samuel, I would like to add to what Tourinho said. Just to add to his answer, I'd like to call your attention to another point. You see that Tecon Santos has improved the level. But imports dropped at the port. What you'll see is that there will be less imports in [indiscernible] and less in [ Libra ]. That's where we pull the load from, where we take it to our business units. This impacts the result of logistics in the first quarter.

[Samuel Alves, analyst]

Yes. I understand. So our warehousing operations is affected. What happens to logistics?

[Daniel Dorea, executive]

This is a strategic driver of ours, is to have -- to be less dependent on the warehousing operations at customs and to increase services to our clients. The volume of containers' warehouse in logistics -- because we have the fertilizer agreements that we mentioned in the beginning. What we did was, we're not only warehousing it, we are also taking this, we are opening a client unit at our distribution center where we can do the unloading and the exhibitions. We are doing a direct distribution to their clients -- their final clients. So Santos Brasil logistics, if you look at it, our idea for it is to work what we can work in terms of warehousing and to add other services, so we are less dependent from the other imports in competitors. That is what I wanted to add to what Tourinho has to say, to provide a better understanding of our mix.

[Operator]

[Operator Instructions] Our next question comes from Victor Mizusaki from Brazil BBI (sic) [ Bradesco BBI ].

[Victor Mizusaki, analyst]

Just one quick question. If you could give us an update concerning the M&A processes that were being discussed last year. What are their status?

[Unknown Executive]

Victor, we have no new the relevant information that we have to disclose to the market at this moment. So I'm sorry for not being able to give you more details on this.

[Operator]

[Operator Instructions] We are now closing the question-and-answer session. I would like to give the floor to Mr. Daniel Dorea for his last remarks. Thank you very much and please proceed, sir.

[Daniel Dorea, executive]

Just wrapping up, I would like to thank you all for attending. I hope to see you on our next result conference with better results. Thank you so much.

[Operator]

Thank you. Santos Brasil conference call is now closed. Thank you all for attending and have a good day.