Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone. And thank you for waiting. Welcome to Santos Brasil Participações First Quarter of 2020 Results Conference Call. With us today, we have Mr. Antônio Carlos Sepúlveda, Chief Executive Officer; Mr. Daniel Pedreira Dorea, Chief Financial and Investor Relations Officer; and Mr. Ricardo Dos Santos Buteri, Chief Commercial Officer. This event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Santos Brasil Participações website at ri.santosbrasil.com.br-en, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post your questions on our website that will be answered by the IR team after the conference is finished. Before proceeding, let me mention that forward 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.

[Daniel Dorea, executive]

Good morning, everyone. Thank you for listening in to Santos Brasil's call. I hope everyone is doing well. My name is Daniel Pedreira Dorea. I am the Chief Financial and Investor Relations Officer, and we have today with us Mr. Antônio Carlos Sepúlveda, Chief Executive Officer; and Ricardo Buteri, our Chief Commercial Officer, and we'll be talking about the results for the first quarter of 2020.

2020 was transformed significantly. All the expectations and original assumptions, which have been laid out at the end of 2019, are no longer valid. The big challenge now is to be able to produce consistent prediction in a scenario that's deeply influenced by uncertain variables, which are also random, behavioral and without precedent, which makes any forecast imprecise.

Reality has changed, but it could have been worse. If, in many segments of the economy, the activity is drastically lower, or in some cases even stopped, the port industry is still up, executing essential services for our society, which is a relief when facing a crisis that is still unknown in its magnitude.

Santos Brasil's foundations are still solid, and they allow us to be positioned at a privileged level to reap the fruit after the recovery post coronavirus. Until then, we need to face the present, and that's why I want to tell you quickly how we're dealing with the situation.

From a health point of view, the company took strong measures to ensure our employees' integrity and health, such as cleaning all our units, using masks, using infrared thermometers, distancing and isolation for risk groups and allowing over 400 employees to work from home. These activities have been successful and have allowed us to continue our operations at a high level of efficiency and productivity.

On the social side, Santos Brasil has transported and donated masks, gloves, boots, hygiene kits, mineral water, food baskets and respirators for hospitals and social institutes, especially in the cities of Santos and Guarujá. In economic terms, we've implemented cost-cutting action and optimized our resources used. We've reduced working hours, suspended working contract, had more rationality for the use of input and also one on commercial activities to generate additional revenue from the second quarter.

Finally, from the financial point of view, several cash preservation measures were taken, such as raising resource deposits, reducing and deferring taxes such as the [ S-system ], INSS, PIS COFINS and payroll taxes, reinforcing working capital by extending payment terms, reduce inventory and controlling defaults.

In fact, these activities were also creating a CapEx contingency for 2020, limiting it to strategic investments, such as the expansion and deepening works in the Tecon Santos quay. During this period, we are paying close attention to cash. Our availabilities add up to BRL 375 million with a net debt of BRL 63 million, which puts us at a low controlled financial leverage level.

Our debt profile is equally healthy with attractive terms, interest rates. Our average terms are over 6 years and all of it in Brazilian currency. For the next 2 years, interest and amortization payments will not be above BRL 120 million, which gives us the flexibility to grow to the harder part of the crisis. And as I mentioned before, we're still generating cash through our operations.

So what can we expect for the next month? It's hard to quantify and estimate with a high level of confidence on the long run. However, on the very short term, it's natural to expect that volumes will retract and the cargo mix will be worse. The import flow will suffer as the domestic economy contracts, especially on consumption and industrial activity and, at some measure, overshooting for the new exchange rate.

Besides that, when we compare to previous crisis, even though, we are different, we see that the absolute number of containers handled is reasonably resilient, given the flow of exports of essential commodities, which, in this case, will have an extra benefit from the BRL exchange rate. And the logistics and cargo transportation segments, some challenges are met with opportunities.

Santos Brasil Logistics have already been positioning itself as an integrated logistics player, not only for bonded warehousing. So now we benefit from an increase in services provider from its distribution center, such as managing the client supply chain, e-commerce deliveries and also, as a storage buffer for clients, whose inventory levels are higher due to the drop in sales and the limitations imposed by public social distancing policies.

Regarding the results for the first quarter of 2020, the first remark I have is that the impact of the new coronavirus crisis have been limited, and they have been concentrated in March. Container handling in our 3 terminals went up 4.1% in comparison to the first quarter of 2019, and Tecon Santos had a growth of 7% in quay volumes, with an improvement in the import mix, which had an improvement of 12.7% year-on-year.

Terminal capacity utilization on a yearly basis was 75% and our market share at Santos port was around 37%. For the first 2 months of this year, we managed to renegotiate contracts that had come to term over near term, increasing prices by 2 digits with several ship owners, which had a positive impact to the operational volume at Tecon Santos. We also were able to renegotiate prices in Vila do Conde and Imbituba. We got the timing right without predicting the crisis. As Alexander the Great said, "Fortune favors the bold." It's a positive indication, although, we know that structurally, the dial will move as prices are recomposed by the Maersk volume contracted.

These contracts should come to term in April 2021. The vehicle terminal had, as it highlights, a positive performance in vehicle imports, which grew 88.3% year-on-year. However, this should not continue on the short term because of the macroeconomic reasons I have already mentioned.

The Argentinian market is still a negative variable for vehicle exports, which dropped 13.4% this quarter. For Santos Brasil Logistics, we still are seeing a smaller capture containers in the right side of the port due to migration of the long-term services, which are being operated by Libra Santos for the Santos port, operating on the left side of the port. And that clients migrated from Libra Santos to services operating in Tecon Santos, which increased our storage in the terminal deck. Despite the reduced volume of logistics -- in storage, excuse me, revenue was practically stable for the first quarter of 2020 year-on-year, which is basically explained by an increase in the average price of storage and a better cargo mix per route and implication for Clia Guarujá. Besides our financial performance, we had a revenue of BRL 261 million in the first quarter, a marginal reduction of 1% year-on-year, but we have to reinforce that the company is no longer including in the ship owner box rate that payment for the port use utilization tax, which is now charged directly by the port authorities. So if we work to change our comparative basis to remove that effect, we would see a revenue increase for the first quarter.

Santos Brasil's EBITDA was BRL 38.5 million, a margin of 17.2%. The growth for the first quarter was 17.4% year-on-year, and the company reported a net loss of BRL 13.3 million in comparison to BRL 9.1 million in the first quarter of 2019.

With regard to investment, the company spent BRL 53.3 million this quarter, most of it in Tecon Santos. These are strategic investments for the company, which will place us at a unique position in the Santos port at the end of this CapEx cycle, preserving the competitive edge we have in that market. Also in February this year, we received 2 quay cranes purchased in 2018, which were cutting edge.

The equipment has already been commissioned and tested and have already been integrated to the terminal's normal operations.

Coming to the end of my initial remarks, I'd just like to report a last message. The crisis caused by the new coronavirus will create challenges, which are still unknown for all the global economy. We don't imagine that it will be different with us. But we are convinced that Santos Brasil is prepared to navigate these turbulent waters on the short term, and we know that we are well positioned to reap the fruit of the reorganization we started a few years ago when the economic recovery comes. As happens in any crisis, the most solid companies, the ones that are the best prepared and best managed -- end up stepping out of the crisis stronger.

With that being said, we'll now open for the questions-and-answer session, and I'd like to thank you all for listening in. Thank you.

[Operator]

[Operator Instructions] Our first question is from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

I just have a couple of quick questions. We saw in the first quarter a reduction in the number of containers that goes for handling and a long haul. I know that this was an impact from COVID-19, but I just like to know what we can expect from this new mix. If you can give us some perspective for the second quarter? I just like to understand how your pricing dynamics are growing. And secondly, I just want to ask about the 12-route cancellations from the Asian lines. Have you seen new cancellations from these lines? Or in other lines from Europe or any other services that might impact your volumes? These are my questions.

[Ricardo dos Buteri, executive]

Lucas, this is Ricardo. It's a pleasure to speak to you. So to answer your question on the change in the mix, I want to give you a broader view of that per segment.

So our share is about 40% of the volumes in the Santos port. So our commitment is to keep you informed, even in a scenario that has so many short-term uncertainties, especially in the duration of the impact of the coronavirus on the economy. So we have, for example, seen some things that are growing during the crisis. So we can see that the -- some of the figures that we have, have changed and this obviously reduces consumers' confidence. However, it's important to highlight, besides these figures, that the exposure of our asset is reduced by the -- by our client portfolio and how it's qualified.

So for example, cabotage and exports. In the different segments we service, showed that this risk is smaller. So the services industry, for example, will be one of the most impacted. 63 companies and plants have been stopped in Brazil in April. And some of them are slowly opening again in May. So we expect a reduction in exports because of the crisis in Argentina, and imports will have a reduced demand because of the exchange rate, so we tend to see a retraction.

But now to talk about consumer goods, this is an industry that has already been impacted by social isolation, especially in the electronics wide lines and appliances market. So we will see a reduction of consumer goods initially, according to the most recent reports put out in May. When we look at agricultural commodities and inputs, we will see the glass half full. We were talking about crop protection products and commodities. We are seeing a record harvest of coffee and a high level of productivity in sugar and ethanol. So these are assets that are well-known for needing many chemical fertilizers and imports.

So a great part of the economic activity in Brazil is related to these imports. Where we don't have all the transportation, loading and -- but also the delivery to the farms. So a lot of it comes in through Santos, and we supply the southeastern part of Brazil, which are very important agricultural hubs, and they will continue to require these imports because of the scenario where exports are maintained. We don't see any prediction that they will be reduced according to the CMA. So sugar have gone up by 4% year-on-year -- excuse me, 30.3% is being exported. So this means that delivering fertilizer is also expected to grow by 4%, according to our consultancy companies.

When we look at food and drinks, these exports have also gone up, while pork went up by 23%. In poultry, we had a reduction of 8% year-on-year. Meaning that despite the social isolation, we have extremely favorable expectations from the food industry.

Many plants have been inspected and approved for exports, such as for Egypt last month. So there was a reduction in Indian beef exports, and Brazil is doing what it can to export to countries that have African swine fever. So beef exports or meat exports all have been favored by our condition. Of course, as restaurants and bars are closed, there was a sharp drop initially. However, e-commerce has grown significantly. And our logistics company, its market share has gone since much higher. So we need to do what we can to supply this excess demand. And although there was an impact in the Santos port, I know that this is an extremely important segment. The favorable expectation that we have with the operations, placing the company at a very good level, especially since we work in an essential activity for society.

Import volumes for large machinery had already been contracted before the COVID-19 crisis. So this cargo has been delivered, and it will continue to be delivered throughout 2020. Now the main point also related to mining is mainly these exports to China. So there was a slight retraction in the first quarter. But as we go back to normalcy from mid-April, we already see that purchases go up. So you can see that across all industries, there is a retraction. But exports and what we do for our clients is still being up. So this is a bit offset by cabotage. So some services are maintained, but sometimes at a different level, so we see some retraction from Manaus in Santos. So we need to experience the moment and see what opportunities there are. And the more accurate we are in predicting when social isolation will be reduced, the better we'll be at predicting the best way of working once the recovery begins. So information is very important.

I'd just like to say that the most accurate sources are our [ lineups ]. They are public. We have 30-day predictions for all services programmed. And that goes for the predicted ships coming in as well as the ones that are waiting. So that gives us the predictions, everything we're going to have in operation.

So services are maintained. Sales are lower, but to offset that, we also have extra activity. So we are rearranging our debts and our warehouses to allow us to have a better mix and also to receive port assets. So we don't have anything new to say on cancellations, but we might receive a call from a ship owner, so that may change. But what I can say is that we are prioritizing the part of our company, which is still operating very well.

[Operator]

The next question is from Pedro Bruno from Santander.

[Pedro Bruno, analyst]

Our anchor assets, such as Tecan, we have the best service level in Santos port, and I can say that categorically, for now, our market share and the number of operations we're doing shows it. So there was a significant retraction because of the demand last year, and that led to a commercial negotiation. And last year, the ship owners had a commercial position due to their demand, which favors them. The point now and what we feel is that we need to go back to the market curve. In Santos and in Latin America, we can't be in a market condition without recomposing our contract, so that Santos Brasil, in all of its segments, which is well-known by the market, isn't connected to operational efficiency and the volumes that we work with.

[Ricardo dos Buteri, executive]

So to talk about negotiations with ship owners. We started renegotiating 6 contracts this quarter. We started in December and finished in March 2020. They were all successful, and they were all according to our expectations. Of course, all of this happened before the COVID-19 crisis. So it was much more successful, because we have those conditions, because we have a 7% growth at Tecon, for example. And we were showing the demand that had been very strong in a very favorable condition. So after the COVID-19 crisis, things are different. For example, in Imbituba, we had a renegotiation 2 weeks ago, which was also around 6 digits for a cabotage operation.

So this year, for the second quarter, we have 2 contracts that will come to term, 1 in August and another 1 in September, and we are positioned in our operational efficiency with the same level of service in the port of Santos, specifically in Tecon Santos, so that we can keep our strategy. The commercial relationship we have with ship owners is extremely mature, especially because of the exchange rate with the dollar. We are trying to have a different kind of negotiation, and this will be in the second half of 2020. And we hope to conclude it before the contract comes to term in March 2021.

So Maersk still sees us as their strategic partner, and as an extra capacity for preventing against the crisis caused by COVID-19. So we hope that we can continue to play the role of their important and strategic partner. So we have negotiated until March has been concluded. And from the second half of this year, we will resume and, along the way, we have Vila do Conde and Imbituba. These are contracts that we have directly with our clients, and we're trying to go back to the normal market curve.

[Operator]

The next question comes from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

I have 2 questions. First, you mentioned receiving 2 quay cranes. If you could tell us how that will impact your productivity? And my second question is, how is your investment plan for 2020? You said that you'll continue to invest, but how much should we expect for this year?

[Antônio Sepúlveda, executive]

Victor, this is Antônio Carlos. Before answering your question, I'd just like to add to what Ricardo had answered during the previous question that Pedro asked about renegotiations with Maersk. You might have noticed that Ricardo mentioned recomposing the price a few times, because the price that Santos Brasil is charging from Maersk lines is very outdated. So in any scenario, our approach for that negotiation will be to reach in different price levels. It's difficult to say precisely how much, because we don't know how the utilization capacity will be next year. This negotiation should start during the second half of 2020, and it should be concluded by the first quarter of 2021. So the level of increase will depend on the terminals' occupation rate. But regardless of the occupation rate, our approach is to recompose the contract and reorganize this relationship and not only increase above a certain index.

Maybe during the last quarter of this year, we can give you a better idea. Now Victor, regarding the acquisition for -- of the quay cranes I mentioned, this is a very important one. We now have 6 cranes. And with these 2, we will now have 8. So that allows us to give a lot of productivity in 2 berths in the terminal. That's very important because you can concentrate operations in 2 berths and the operational gains from that are significant. I think the productivity in the terminal is a factor of one of our studies that we have in the port in Santos and in Brazil of our competitors' productivity.

We gauge it and then try to always be above it. We try to also provide a different level of service, and that's been a mark of our product. But these 2 cranes are improving how the deck berth proportion is handled. So you might not see this change in the speed, for example. But what we will do are some handling movements that our competition hasn't done, and we'll be able to reduce costs. So that's our goal right now with these 2 new cranes.

The next group of cranes to be purchased will be used in the third berth, and then we would have an increased terminal capacity level. So that's when we would go to a different level of capacity, which now with COVID-19 will probably be put on hold, just so we can see how the recovery curve behaves. We had planned to begin acquisition studies next year. But right now, we're still holding off on that. I'm not sure if you had any other questions, but if you do, I'm here.

[Daniel Dorea, executive]

I was going to answer your second question related to CapEx in 2020. But if you want to ask anything related to the first question, I can wait.

[Victor Mizusaki, analyst]

No, that was exactly what I was going to ask.

[Daniel Dorea, executive]

Okay. So regarding the 2020 CapEx, we have shown between BRL 250 million and BRL 300 million. This was our expectation by the end of 2019 for our CapEx for the year. We already have this in contingencies, so our expectation is to have BRL 180 million to BRL 220 million in 2020. And as a reminder, we've already allocated BRL 60 million to BRL 67 million. So this is going to be concentrated on several works for Tecon Santos. We have 2 works happening right now: one is to extend the dock, which will -- it will add 120 meters to the dock -- to the quay, excuse me; and also, the quay will be deepened so that we can equalize the depth along the entire quay. So these are the works we are doing in Tecon Santos, and that will place us in a position in which we'll have a competitive edge.

All additional items are being put into contingency. But this will be concentrated on the civil works for Tecon Santos.

[Victor Mizusaki, analyst]

Just a follow-up question in regard to tariff renegotiation. With the weaker BRL, does that make it easier? Or does it make your conversations more challenging?

[Daniel Dorea, executive]

Well, it does make it easier. For ship owners, it's much cheaper because they are buying their shipping rates in U.S. dollars and charging from us in Brazilian real. So it's much better for them.

[Operator]

[Operator Instructions] The next question comes from the webcast and it was asked by Pugliese.

Does the company consider its results for the first quarter good or bad?

[Antônio Sepúlveda, executive]

This is Antônio Carlos. I don't think we can answer your question without looking at how things are doing relatively, right? The first quarter had some impact from the crisis. In March, we had some reduction in our scale. And of course, this affected our results. But considering the scenario, considering that this is an essential business, that the company still has 100% of its capacity available that we managed to implement safety working routines for all of the company's employees. We only had one single case of COVID-19 in a company employee. So I think that we finished the quarter in a very good way. January and February were showing a direction which we already expected. We finished 2019 already gaining traction. And in January and February, we saw an increase that was showing that 2020 was going to be a strong year for the company. But unfortunately, the pandemic came, an outside factor to any economy or any company that ended up creating an impact.

At Santos Brasil, we will continue to make the greatest effort possible to maintain our operations, to keep our employees safe, adjusting for the volumes to come, and we're confident that in this scenario, we'll continue to deliver results far above what other businesses have been delivering, businesses that have been impacted much more.

I'm not sure if we have any additional comments on that.

[Daniel Dorea, executive]

This is Daniel. I agree with what you said. I'd just say that for those of you listening us, because of COVID, which was an extraordinary event, we need to be more disciplined in how we look at our results, especially for the second, third and fourth quarter, without having that rearview mirror of the other quarters, because the situation is completely different. It's a new world for everyone, for analysts, for us. But I would like to reinforce what you said, I think that we -- from the economic point of view, we are in a privileged position because we'll be able to continue our operational activities and all our business units are still generating results and cash for the company.

It won't be at the same level as we expected earlier this year. There's no way of doing that, but I do think that we are very well positioned. In a relative scenario and also by looking at our competition, we see that this company is financially at a solid position, and we're prepared to withstand this acute stage of the crisis.

But what I have to add to what has been said is this. When the COVID-19 impacts were seen, we expected it to impact April and May. But we see that the market is looking at something else, and we're trying to keep our assets in sync. So all companies are focused on costs, understanding and adjusting the new world, and our clients are doing that as well.

So there are several examples of ways to mitigate the impact, which are very healthy. So for example, car manufacturers, the vehicles that already are here since their production has been stopped. They decided to take a new strategy between the manufacturer and the port and the warehouse. And before they even have the need of using our logistics chain as a whole. So for example, we now have a completely new operation because of the impact, because we now have a [ pop ] pilot in Imbituba. The utilization level in our warehouses and our inventory, that is quite high. Our distribution center in São Bernardo currently now has 96% utilization.

So these changes that we're making and synergy with our clients, make these impacts -- have made us have more creativity in how we deal with our clients to generate cash in new operations for the company.

[Operator]

Our next question from the webcast is from [ Guillermo Lucas Regali Viva ] from GLP.

Can you tell us a bit more about your long-term indebtedness?

[Daniel Dorea, executive]

Sure. I think the message here is this. In 2019, we made good use of a positive window in the capital market. So we took out a debt at very attractive interest rate levels here in Brazil. And it was a very long-term one. So as I mentioned in my script, its average term is 6.3 years. This is very long for Brazil. Amortizations come to BRL 120 million. When we look at our cash, which is BRL 365 million, we see that the difference is in our hand for investments.

And over 90% of our current debt is in local currency. So its BRL denominated, which makes us feel very relaxed given the currency volatility that we're looking at. So yes, I'd just like to reinforce that our debt is relatively cheap, long and is BRL denominated. So we are in a very comfortable position from the indebtedness point of view. And besides that, our activity continues to generate cash in its operations.

[Operator]

Our next question from the webcast came from Nicolas from [ DRV ].

Does the company intend to participate in new concessions?

[Antônio Sepúlveda, executive]

Nicolas, this is Antônio Carlos. Yes, we are looking at that. We're looking at all the contracts that are being opened now. We have liquid and solid port terminals, and we're at a very privileged position. So we're going to look at that carefully, especially the next calls for bids in the port of Santos. We don't have anything open yet. Offers are still in the public hearing phase, but we are looking at it. We think that there are some areas that are not well assisted in terms of port services, so we're looking at that very carefully.

[Daniel Dorea, executive]

And if you'll allow me to add something to your answer. This is Daniel. I would say that some or all do a transition contract is something that we put a bid towards, and we got the greatest area there, and we should sign a contract on Friday now. So that already shows that, of course, that is smaller. At a smaller size, it already shows our appetite to take up space in the Santos terminal to diversify our cargo, so that we can also operate pulp in Saboó. So we're open to the opportunities that might seem strategical for the company, and that might contribute to our portfolio.

And Nicolas, when we talk about other kinds of cargo stations, besides containers, it doesn't necessarily mean that this is a completely new business for us, because the basis is the same. It's just like the vehicle terminal. All clients in this vehicle terminal are Tecon Santos clients. If we were to work with the liquid terminal, these clients would also be Tecon Santos clients. That is -- there are several companies using this part of the terminal. So for Saboó, it's the same. Our main client there are new listing on Santos. So there's a strong synergy among the different kinds of terminals because of that.

There are several kinds of cargo and several kinds of ships, that's what we're doing.

[Operator]

[Operator Instructions] Thank you. This concludes today's questions-and-answer session. I would like to invite Mr. Daniel to proceed with his closing remarks. Please go ahead, sir.

[Daniel Dorea, executive]

Hello, everyone. Once again, thank you for listening in. Thank you for your questions. I hope to see you again for our next results call, and I wish you all a good health. And thank you on behalf of the Board.

[Operator]

This concludes Santos Brasil Participações conference call for today. Thank you very much for your participation. And have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]