Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone, and thank you for holding. Welcome to the Santos Brasil Participações First Quarter 2022 Results Conference Call. With us today, we have Mr. Antônio Carlos Sepúlveda; the CEO, Mr. Daniel Pedreira Dorea, the Chief Financial and Investor Relations Officer; and Mr. Ricardo Santos Buteri, the Chief Commercial Officer.

This event is being recorded.

[Operator Instructions]

This event is also being broadcast live via webcast and maybe accessed through the company site ri.santosbrasil.com.br, where the presentation is also available. Participants may view the slides at their own convenience. The replay will be available shortly after the event is concluded.

We would like to remind you that those following the webcast may post their questions on our website. These will be answered by the IR team after the conference is finished. Before proceeding, we would like to mention that forward-looking statements made during this conference referring on the outlook of Santos Brasil projection, operational and financial goals are based on the beliefs and assumptions of the company management as well as on information currently available to the company.

They involve risks and uncertainties as they relate to future events and therefore, depend on circumstances, which may or may not occur. Investors and analysts should understand that conditions related to macroeconomics, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

I would now like to turn the floor over to Mr. Daniel Pedreira Dorea, who will begin the presentation. You have the floor, Mr. Dorea.

[Daniel Dorea, executive]

Good morning to everyone, and thank you for your presence. I hope you're all well. By me, I have Antônio Carlos Sepúlveda, the company's CEO; Ricardo Buteri, our Commercial Director. And we're going to speak about the highlights of the first quarter 2022. Santos Brasil presented a very sound first quarter, its best results since the first quarter 2013. Our expectations for the first month of the year have been consolidated despite the congestion in global logistic chains, the volumes handled remained strong throughout the quarter.

At this point, it is worth remembering that the basis of comparison is somewhat distorted if we consider that the first quarter of 2021 was atypical, driven by the extra calls operated and more pronounced impacts of the pandemic in 2020, and which ended up shifting a considerable part of the peak season for the fourth quarter of 2020 and the first quarter of 2021.

If we were to take away the effect of those extra calls operated at Tecon Santos in the first quarter of 2021, we would experience a growth of 1.6% quarter-on-quarter. The drop of 5.6% registered at Tecon Santos in this first quarter was somewhat expected. This does not mean that there is a reduction in demand. Note that the drop in containerized cargo at the Port of Santos was 6.5% quarter against quarter. So Santos Brasil had a less accentuated drop than the general market closing the quarter with a 39% market share.

In our other terminals, it is worth noting the improvement in the mix of vehicles handled that TEV with a growth of 5.7% in imports and a share of 8% of heavy vehicles, 54,325 vehicles. Tecon Imbituba grew 34% and the volume of containers handled driven by the domestic consumption of goods transported via cabotage.

On the other hand, Tecon Vila do Conde continues with the limited offer of empty containers, restricting the volume of exports that the terminal can work with, and there was a drop of 9.8% compared to 2021.

In terms of volume, the highlight of the first quarter was Santos Brasil Logistica with an increase of almost 24% in the number of containers warehoused in the first quarter '22. Despite the reduction registered at the Port of Santos, this strong growth reflects the company's capacity at the right bank of the Port of Santos and the quality of its service level.

Well, if on the one hand, the volume showed some drop on the other, the financial results showed strong growth in all of the main items. This is a great highlight for the first quarter without a doubt. Now the main driver is the recovery of prices charged by the company not only in the key operations, but also in warehousing and integrated logistics.

We have been able to increase the average ticket of our services with a successful commercial and pricing strategy. While the mix of cargo is balanced, additionally, the import dwell time remained above 12 days in the quarter, mitigating the drop observed in the volume and contributing positively to the warehousing activities.

With this, Santos Brasil presented a growth of 40% in the net revenue year-on-year reaching BRL 440 million in the quarter. The EBITDA totaled BRL 179 million with a sound growth of 69% vis-a-vis the first quarter '21 and a consolidated margin of 41%.

This represents a gain of 7 percentage points in the year-on-year comparison. We also had a net income of BRL 94.2 million, threefold the amount recorded in the same period last year. If we look only at our terminals business, EBITDA reached BRL 159 million in the first quarter with a 49% margin. And Tecon Imbituba still was a detractor. In truth, it is a very solid result.

Regarding our CapEx in the first quarter, the most relevant investments took place in Tecon Santos and the liquid bulk terminals at the Port of Itaqui. At Tecon Santos, we allocated -- well, both of the terminals will also be receiving investments. In Tecon Santos, we allocated BRL 31 million and we're aiming at a total of BRL 250 million in 2022 for the acquisition of new equipment, technology systems and civil works that will provide increased capacity and efficiency gains.

In the liquid bulk terminals, we should invest a little more than BRL 100 million in the acquisition of tanks and the expansion of terminals. Now that we have signed the terms of provisional acceptance and permission for use of assets, the perspective of starting operations of 2 brownfield terminals will be done probably in the third quarter. We are starting off with 50,000 cubic meters of capacity for handling and storage capacity of fuels, 9% of the capacity offered at the Itaqui port. When we reach maturity, we will get to 190,000 cubic meters and a share of 22% and we will be one of the greatest providers in terms of capacity. The company continues with a very comfortable cash position, ending the quarter with BRL 1.1 billion in cash and net cash of BRL 708 million, which allows us to pursue our strategy to grow our portfolio of assets and to continue to invest in the expansion and modernization of our terminals.

Additionally, as part of our capital allocation strategy, we recently announced a share buyback program that will be executed in a period of up to 18 months. A final message that I consider valid concerns the persistence of logistical bottlenecks at world level aggravated by the lockdown in China, which puts pressure on the trade of containerized cargo. On our business, the most immediate effects are delays in the scheduled calls and the drop in the average consignment of ships on the Brazil-China route, nothing that will materially alter our outlook for the year 2022.

It is a very different scenario than the one we experienced in 2020 and in 2021, where we had lockdown in several countries simultaneously causing shocks in the production and supply chains. We now expect localized impacts more concentrated in the months of May and June, but with a recovery of the volumes in subsequent months. And this may benefit Tecon Santos considering the capacity of our terminal to operate efficiently in peak scenarios when the impounded cargoes begin to arrive in the period of greater seasonality, especially at the Port of Santos, we saw this happening in some periods of 2021. And again, we are well positioned to take advantage of these market opportunities.

With this, I would like to conclude my initial remarks, I would like to thank all of you for your attention. And Antônio Carlos, Ricardo and myself are at your entire disposal to respond to your questions. Thank you very much.

[Operator]

[Operator Instructions]

Our first question is from Luiz Capistrano from Itau BBA.

[Luiz Capistrano, analyst]

Congratulations for the results. The first question refers to margins in the port terminals. When we look at the first quarter '22, and the last quarter of '21, you had an expressive increase in margin despite the decrease in volumes and the worst cabotage. And as you mentioned we do see an increase in margin. It's a real-time increase. And what has taken to this increase. It is something that refers to logistics. If you could give us more color on this. And if we can expect it to continue at these levels going forward?

The second question refers to the liquid bulk terminals where you have increased your capacity when you reach maturity. What is it that we're speaking about in nominal terms? And how long will you take to attain that maturity?

[Ricardo dos Buteri, executive]

This is Ricardo. Regarding the first part of your question on margin for port terminals despite all of the facts that you mentioned, there are 2 issues that need to be underscored. The commercial efforts and the readjustment to -- in the contract pricing at the port terminal and in terms of logistics. Basically, we have the mix of time -- type of clients with an average ticket that we're operating with at the terminal and the readjustment of the contracts. And obviously, something that refers to the cargo mix. I will give you an example. We have 5% more of reefer cargo in the quarter of '22, when compared to 2021. It's a type of service of segment with a higher ticket and the contribution margin is well above the expectations we had in the first quarter 2021.

Regarding the logistic bottlenecks, what we can say to you is the following, we have been following up on this every week, the exit, especially of the services now the lockdown in the Port of Shanghai that began at the beginning of March. This is a one-off port event that is isolated in the country. And it has been offset by the ports and other continents. How so, the cargo is being deviated to other similar ports or they are using the books that are open in the Asian terminals within the continent. What we have perceived is that the consignation of ships as Daniel mentioned is somewhat lower, but not that low. The consignations are coming at 75%, 80%, which could mention having a bottleneck. Perhaps, what we will have is a delay in the arrival to the Port of Santos.

Now the investments made by the company in infrastructure and service levels will guarantee that this bottleneck, if it happens in the second semester, will mean that we will be completely ready to accommodate the cargoes and eliminate this bottleneck.

[Antônio Sepúlveda, executive]

Now Luiz, I would like to add something to what was said by Ricardo. If we consider that the lockdown in China should be suspended at such time of the year, what will happen? We have a large volume of cargo held back in Asia, and the bookings are open, the ship owners have not closed their booking. So there's an enormous pent-up demand. What will probably happen this year is what happened last year, a very large amount of loads. We had 70 extra ships and more than 80,000 containers of additional movement that were not part of our contract. Our expectation is that this situation will repeat itself. We are working strongly to endow Tecon with capacity so that we can repeat this year what we did last year. And this will absorb the entire queue at the port. But this year, we will have a difference. We will have greater volumes with higher prices.

Now if the Chinese ports due end up opening, we should have a very strong second semester. And all of this will happen because of the volatility in the worldwide supply chain.

[Daniel Dorea, executive]

Now regarding Itaqui, the liquid bulk terminal to give you the answer, this is Daniel. We will have the following. Let's recall that 2 terminals were already operational. One was greenfield and it will undergo works. Now at both terminals, what we have done was to acquire production assets, the tanks that were installed by the [ leases ]. This has already been concretized and [indiscernible] has approved this operation. And our expectation is that it is very plausible that in the third quarter, we will begin the operation of both of these terminals. One terminal has 32,000 square meters after investments, it will reach the 60,000 square meters.

The second terminal has 19,000 square meters and with investments will reach 48,000 square meters at full load, we will have 110,000 square meters in 2025, the 80,000 square meters of cargo will come from greenfield. The port will be concluded and will come into operation at the end of 2026 between 2026, 2027. Everything will depend on the pace that we have when it comes to investments in the greenfield port. And we should have an EBITDA of BRL 100 million, BRL 120 million EBITDA at the point of maturity, all of this, of course, depending on the prices practice going forward.

What we realize are that we have assets with an enormous potential extremely well located to receive fuel and this will help us work with Agri business. This is our outlook.

[Antônio Sepúlveda, executive]

Now I would also like to add something to what Daniel said. We begin with 40,000, but I would like to give you more color on EBITDA. 40,000 is neutral. It gives us an normal EBITDA. Now we're going to gradually increase that capacity. Not all the projects will be finished at the same time. In 2025, 2026, capacity will increase gradually throughout the years. And the difference is very big because the leverage from the starting point to the endpoint, the operational leverage is enormous. So at some point in time in the coming year, we will begin to see a positive EBITDA, perhaps of a smaller magnitude and then it will grow exponentially until the maturity of the product in 2026. And then it will go into a cruise speed in terms of warehousing 70%-80% EBITDA margin is what we're forecasting.

[Operator]

Our next question is from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

We have 2 questions on our side. Allow me to explore this point better of the bottlenecks and the lockdown in China and the reflection on the take-on operation. Daniel mentioned that the lead times will represent a smaller volume for me in June. This is what was included in the presentation. We know that China is 30% to 35% of the trader of Tecon Santos. Now we're done with a peak of restrictions of COVID. Now if we would attempt to quantify what you already have in your delayed calls in emptier mix of containers, with empty containers, which will be the impact in the measurement 15,000 or 20,000 containers a month or am I being a little too hyperbolic when speaking about a reduction of volume.

The second out, perhaps a more strategic discussion here at the last review of contracts with Maersk at the end of 2019, beginning of 2020, you had a very clear vision of a lack of prices at Tecon Santos. And we did observe a contract renegotiation announced. Now thinking of the end of the year and the beginning of the coming year, do you still foresee a price condition lagging behind at Tecon Santos as well as in other terminals. Is there room for adjustment considering that Maersk is one of your main clients.

[Antônio Sepúlveda, executive]

Lucas, you know what the difficulty is, is that we're becoming accustomed to the volumes that have been poorly reported 104,000 containers in April. Let's look at May. We should have gone beyond the barrier of 100,000 containers commonly. What is the lockdown going to do, take away 5,000 or 10,000 containers in May. And we believe this will be the peak of the Chinese restrictive policy in June. We could lose out on 10,000 or 15,000 containers. It's reasonable to suppose that it's something localizing what we imagine is that after June, we will have a growing curve, and we will reach that peak that Ricardo and Carlos mentioned. And given the conditions and the visibility that we have at present, we should be working with more than 110,000 containers beginning in the third quarter. This is a strong volume from any viewpoint. But of course, there will be a more localized impact in June and yes, of course, something in May. May, we have a good visibility. The calls are already aligned, and we're going on to the second fortnight of the month. I will give the floor to my colleagues to speak about the price recomposition.

[Daniel Dorea, executive]

The Port of Santos. Now given the quality of the port, the very thriving market of imports and exports on the situation of cabotage ends up being a low-cost port. If you look at global peers, it's even cheaper than we have to include the exchange rate in that account. So quantitatively, and if we consider Tecon Santos, it's the best container terminal in Brazil with the highest service level and productivity. The cost is very low and the market does make it possible to recompose prices and this is our expectation for 2023.

Now which will be the magnitude. I truly cannot divulge that now the base for the last negotiation was not well defined, but I do see a great deal of room for renegotiation and several opportunities.

[Unknown Executive]

Well, I think Daniel talked very well about the commercial issue. Lucas. In fact, all of the ships referring to May will be arriving at our terminal. This is the forecast. Now since the end of March, that issue related to China had an impact, but it was a marginal impact. Why? There's 5,000 to 7,000 containers on hold. And this regardless of the lockdown. And in the month of June, yes, we do believe this will be more accentuated, 10,000 to 15,000 containers with a resumption after June now the bookings in the Asian terminals are open and the ships loaded at 75% to 80% are coming. There is a delay, but they will arrive, and we believe that the second semester will have the effect of inventory supply from the assembly companies, and it will be higher than 2020, but less accentuated.

This is a specific problem in Asia, but Europe and the United States continued to work normally doing what they can in terms of the model mix. When it comes to the pricing, I reinforce what was said by Daniel here and outside of the country, we know exactly which is the positioning of the operational part and the investments made by the Santos port and the importance it has as a hub in the country.

We are working with 4 shippers that have returned to the negotiation table as they had carried out only a 1-year contract. This will begin in September, and we are going to recompose our prices. And of course, include this in our future negotiations look as a very short addition. My 2 colleagues have been very clear here.

Well, when the Chinese lockdown ends, it will find Brazil unsupplied. And of course, this will lead to a demand peak, especially at the Port of Santos. Very generally, the logistics does not focus on resiliency and focuses on efficiency, but we have focused on resiliency. And the Port of Santos is ready to face that peak that will come in, and we're ready for it.

This is a very good moment. We have good margins. And once the Chinese lockdown is over we should have a sequence of extremely good months at Tecon Santos. This is our expectations and everything will depend on when China will interrupt the lockdown of the Shanghai Port, more specifically.

[Operator]

Our next question is from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

Congratulations for the results. I have 2 questions. The issue of Itaqui that has already received the approval of the CADE. If you could give us more details on the final terms and if we should consider this cash burn in the second quarter.

Secondly, the corporate expenses, we have observed an increase in the figure in the latest quarters in the expense line item.

[Daniel Dorea, executive]

Well, Itaqui, the CapEx in Itaqui in 2022 will be BRL 100 million. Now in the acquisition of the tanks of 2 of the 3 terminals, we are going to be applying BRL 50 million. So this is the breakdown, and this is what will enable us to anticipate the operation of these terminals by 3 years. We believe it has been a very good deal now.

Regarding the corporate expenses. In fact, we have had an increase in expenses. Why? Because we have reinforced several areas of the structure of the corporate structure of Santos Brasil areas such as M&A, excellence in management communication and sustainability that strategic tender of ESG. We have created a new Board, which is the Board that will be leading the project for the liquid project in Santos, Brazil. And the project does not stop at Itaqui. It will go beyond the 190,000 cubic meters. So this explains a significant part of the increase of expenses at corporate level.

We also have greater expenses with consultancy and advisory services. Why? Because the company demands this at this point in time. We have an infinity of M&A projects, projects for participation in auctions and tenders, and you are aware of that very large structuring projects. And of course, these require investments from Santos Brasil to carefully analyze the opportunities.

[Victor Mizusaki, analyst]

Daniel, if you allow me to ask for a clarification, you referred to BRL 100 million for Itaqui. Have you already made BRL 50 million? Is that correct?

[Daniel Dorea, executive]

Yes. Yes, the BRL 50 million are part of the BRL 100 million that we will be investing in Itaqui.

[Victor Mizusaki, analyst]

And to comment on those corporate events, what would be recurrent are we speaking in terms of the liquid terminal, some expenses that could perhaps be withdrawn. What would be recurrent basically? And what could be improved?

[Unknown Executive]

Yes, there will be a reduction, but let us recall that these different areas and M&A is one of them and excellence in management is another. They're here to stay. And we think that the M&A program, we have reinforced the team to put in practice our growth project. This is a business for 1 or 2 years, and it's here to stay. But yes, there will be a reduction of expenses doubtlessly because we have auctions and others that demand more expenses in terms of legal and consultancy. But of course, it will not be happening in a recurring way.

We do have some actions that we're looking at very closely. And I believe that in the year 2023, things will be very similar to the year 2022. We have an auction of Santos that we're following up on. And this is anticipation. I would like to remind you that our efforts are geared towards increasing the company portfolio. This increase in expenses SG&A, they're inevitable. Otherwise, we will not fulfill our target.

The idea is to increase the cash generation of the company. And this for the long term, eventually, of course, we could have a mismatch and a greater impact. But in the long term, we're quite confident that the results will be positive. We have also had a significant increase in prices due to inflation and heavy investments in the capacity of Tecon Santos when compared to the previous year and maintenance of service levels for those peak moments. Now all of those cost increases that we had during the quarter, it didn't come as expected, the diesel oil went up 40%. These are accrued increases. And we think that in the coming semester they will generate cash for the company.

[Operator]

Our next question is from Guilherme Mendes from JPMorgan.

[Guilherme Mendes, analyst]

We have 2 follow-up questions. The first refers to volume, cost expenses. We're thinking if that level of 40% or more of EBITDA margin makes sense for the rest of the year or at least for the first half of the year? And the second question refers to SB Logistics. You carried out strong reforms in the middle of the quarter. This represents a new level for this segment.

[Daniel Dorea, executive]

Guilherme, this is Daniel. Yes, that margin at the level of 40% of consolidated margin is a margin that we deemed to be quite reasonable and I think that maintaining it is quite plausible, improves this margin should expand. This is what we expect and why will it grow because we will have more volume, the growth of cargo continues and the prices. And prices are not only increasing in the key operations and they represent 40% of the revenues of the company. They also increase in the warehousing activities. We continue to be confident in the price increase for the services practiced by the company, and we expect a positive contribution for the company margins.

Regarding logistics, I will give the floor to Ricardo Buteri to give you more color perhaps.

[Ricardo dos Buteri, executive]

Guilherme, thank you for the question on logistics. The company's strategy goes through the sale of integrated logistics. We made investments in 2021. We were building a data lake so that we could have a mapping per segment of the companies on the needs of 8,000 active companies that are working with the port terminal, and we are using this list and expanding it. We are removing the port perhaps to a secondary area to the right or left margin.

This could be to a distribution center, where we have a capacity of an additional 30,000 pallets for 2 international clients that we just gained in March. So what am I trying to say, we're following the strategy of the company when it comes to integrated logistics sales. This includes transportation, distribution centers, warehousing, and this isn't something that we're merely saying, we're going to continue capturing the volumes that we saw in the first quarter. And you can see what we are absorbing negotiating so that the margins on the right bank can also be extended to secondary areas. This is a strategy of integrated logistics and all of the property is ours. This is how we will proceed.

[Operator]

Our next question is from Lucas Barbosa from Santander Bank.

[Lucas Barbosa, analyst]

Congratulations for your results. I will begin with the first question and then go on to the second one. The first question refers to the pent-up demand, the additional ships that should come in, in the third quarter, are you going to use the price list that you use with shipowners or will you practice spot prices.

[Unknown Executive]

Thank you for the question, Lucas. Yes, that pent-up demand does exist ships will arise, but regardless of the ship owner having a regular service with us or not, we have contracts with all shipowners that share the Port of Santos. These are not spot charges. We respect the contracts that they have with us for those additional containers, what we call the extra loaders. So we are going to maintain the values already contracted with the ship owners as we did in 2021.

[Lucas Barbosa, analyst]

That was very clear. If you allow me a second question, for the automotive market, we have discussed with the industry a ramp-up of vehicles for the second semester this year or the coming year, how relevant will this be for you to work with the import of spare parts coming from the interior of Sao Paulo.

[Unknown Executive]

Well, with the automotive market, we have a second quarter with a very high forecast in terms of what has already been produced 20,000 to 22,000 vehicles per month at our terminal for vehicle exports. Now exports of products of manufactured products have produced intense values for us at the vehicle terminal. The expectation that we have from assembly plans is that this will continue on very strongly in the second semester. And at Tecon, the dynamic will continue on, therefore, Tecon Santos, the imports because of the pent-up demand beginning in the second semester, of course, we'll provide all of the inventories that the assembly plants need. And we do have a growth in the import segment and we will have all of the necessary components.

Now Lucas, we already observed at the plants, a lack of supply. Volkswagen has given collective vacations simply because of a lack of supply for lack of parts. They have no headlights, for example. And this is what I mentioned at the beginning that what is being created is a moment of lack of supply, but the demand does exist.

Now if we consider that the lockdown will be over at some point in time and that the ports will go back to operating, we should have an extremely busy second semester on the chemical and automotive markets are the main products in terms of imports that we receive from China as well as Europe.

[Operator]

[Operator Instructions]

We would like to end the question-and-answer session and return the floor to Mr. Dorea for his closing remarks. You may proceed, sir.

[Daniel Dorea, executive]

Dear participants, thank you for your participation. We hope to see you again at the conference call for the second quarter 2022.

[Operator]

The Santos Brasil Participações S.A. conference call ends here. We would like to thank all of you for your participation. Have a good day.

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