Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Santos Brasil's First Quarter 2023 Conference Call. With us here today, we have Antonio Carlos Sepulveda, Chief Executive Officer; Daniel Pedreira Dorea, Chief Financial and Investor Relations Officer; and Ricardo dos Santos Buteri, Chief Commercial Officer.

[Operator Instructions]

I would like to remind you that the earnings release and the presentation are available at the company's Investor Relations website, where the replay of this event will be available. Before proceeding, I would like to point out that forward-looking statements that may be made related to the business perspective of Santos Brasil as well as projections and financial and operational targets are beliefs and assumptions of the company's management as well as information currently available to the company.

Forward-looking statements are no guarantee of the results. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not happen. Investors and analysts should understand that general conditions, sector conditions and other operating factors may affect future results of the company and may lead to results that differ materially from those expressed in such forward-looking statements. I would now like to turn the conference over to Mr. Dorea, who will begin the presentation. You may proceed, sir.

[Daniel Dorea, executive]

Good morning. Thank you for attending our call. I hope you are all well. Antonio Carlos Sepulveda is by my side, as well as Buteri, our Chief Commercial Officer. The new topic for the first quarter of 2023 is the drop observed in handling our containers of around 14% year-on-year, worsened by the strong but imperfect compared to the basis of the first quarter of 2022, mainly in the Port of Santos. Having said that, 2023 is proving to be a challenging year in terms of container volume.

Our expectation is that the quantities projected for the next quarters will stabilize the decrease that was recorded, although we do not rule out even a slight downturn.

In terms of volume at Tecon Santos, our main asset, what seems clear to us, however, is that this 14% year-on-year gap should close. And therefore, we should not expect an imbalance between supply and demand capable of impacting the current running of Santos Brasil's business.

In the first quarter of 2023, the main impact was on import, especially consumer goods, the flow to which of the company is most exposed, which explains the loss of market share of Tecon Santos in the first quarter, which reached 38%. But at the beginning of this year, to the export of commodities, which tend to be more resilient, also dropped, given a global inflationary scenario and the economic slowdown in several bio markets such as the Europe area and China.

In any case, even with a decrease in the number of containers operated at the Port of Santos, the use of our terminal remains high. The other container terminals also recorded a decrease in comparison of the first quarter of 2023. Tecon Vila do Conde registered volumes 14% lower in the annual comparison, reflecting the slowdown in exports of minerals and agricultural commodities and also the cabotage in the region. In addition, Tecon Imbituba was affected by the downturn of cabotage with a drop of 9.5% in handling of containers in the first quarter of 2023.

Regarding TEV, our vehicle terminal at the Port of Santos, there was a slight increase close to 2% in volume in the first quarter of 2023 compared to the first quarter of 2022 with 55,358 vehicles handled with an increase of 6.1% in exports and a greater share of heavy vehicles in the mix, which reached 11% of the total operations, 3 percentage points above that of the first quarter of 2022, with emphasis on exports of agricultural machinery and construction equipment.

Finally, Santos Brasil Logistica's bonded warehousing operations were impacted by the drop in imports at the Port of Santos with a 13% drop in the volume of containers stored at CLIAs. On the other hand, there was a growth of 3PL integrated logistics operations as a result of a commercial strategy based on customer segmentation and improvement in the level of service.

In the first quarter of 2023, the distribution centers registered an increase of 20% in the volume of pallets handled totaling 282,000 units. As expected, the financial result of the first quarter reflects the lower volume of port terminals. Net revenue remained relatively stable totaling BRL 427 million in the quarter, which represents a 3% year-on-year decrease. EBITDA amounted to BRL 153 million, 15% below the first quarter of 2022, a margin of 36%. In other words, 5% less than year-on-year. Net income was BRL 46 billion with a net margin of 11%.

Santos Logistica in turn, however, represents a growth of 40% and 15% in EBITDA, respectively, mainly due to the increase in the average ticket and more efficient management of the storage and integrated logistics contract. And in the case of TEV, due to the greater participation of heavy vehicles in the mix. It's also worth noting that the first quarter of 2023 marks the first positive contribution of EBITDA from Liquid Bulk Terminals, which reinforces our confidence in the value generation potential of this business unit.

Even with just a few months of operation, our contracted capacity already exceeds 50% of utilization with a reasonably diversified customer base. From the second quarter onwards, we will gradually begin to observe an improvement in the company's margins and financial indicators, mainly due to the recomposition of prices practiced, including the various services offered at Tecon Santos in addition to the resizing of costs and expenses than projected for a higher throughput.

As I mentioned in our last call, Santos Brasil's gain is not for volume's sake, but being ready to capture future demand or higher value-added services in cargo with great operational efficiency and prices that typically reflect the quality of its assets and the excellence of its operation. The volumes observed in the first quarter of 2023 do not change our strategy in any way, nor do they raise any concerns about the growth potential of Tecon Santos in our other port and logistics assets. For no other reason, we invested BRL 86 million during the first quarter of 2023, BRL 67 billion of which allocated to Tecon Santos, continuing the expansion, modernization and infrastructure improvement with an aim of continuing to be the largest provider of handling of containers capacity in the Port of Santos with a high level of service.

Santos Brasil is committed to reaching at least 2.6 million TEUs of commercial capacity by 2026, a 30% increase from the installed capacity as of last year. It is as if the company were building a new medium-sized terminal in the Port of Santos, but with all the synergies, high return and high potential for generating value of Tecon Santos. CapEx in this terminal alone should be around BRL 400 million in 2023, and starting next year, we're going to slow down this investment curve.

The other unit that should absorb a large part of the investments projected for 2023 is the Liquid Bulk unit, which received about BRL 11 million in the first quarter of 2023, whose CapEx will be intensified with the start of the expansion works. Today, Santos Brasil operates a capacity of 50,000 cubic meters, which will initially EBITDA hold, and in the second phase will reach around 200,000 cubic meters by 2026. We ended the quarter with cash and cash equivalent of BRL 541 million, and a net cash of BRL 248 million. We'll continue optimizing the capital structure throughout 2023, including via distribution of dividends to shareholders. Next Monday, May 15th, we will distribute around BRL 45 million in dividends.

Moving on to my final remarks, I would like to highlight some of the initiatives and results related to the sustainability agenda. Santos Brasil was elected for the fifth consecutive year as one of the best companies to work for, being certified by the Great Place to Work or GPTW, which demonstrates our commitment to invest human resources and continuously develop our employees.

Finally, the company was chosen as the third most influential company in ESG in the digital field, according to the report ESG Evolution in Brazil carried out with the UN Global Compact of UN in partnership with Falconi and Stilingue consultancies. In addition to having won the ESG Award, we won the Group A Tribuna because of the telemetry projects that are implemented in the business units.

I take this opportunity to congratulate everyone on another quarter of important achievement. And now we are available for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Guilherme Mendes with JPMorgan. [Operator Instructions]

Let's move on to the next question, Lucas Marquiori with BTG Pactual.

[Lucas Marquiori, analyst]

I have 2 topics to be addressed. I'd like to understand your comment on your prospects for volume for the year, speaking in light of the guidance that was provided in terms of the consolidated results. And I had some questions when you made some comments. You said there can be a downturn of volumes in relation to the first quarter. So what do you see in terms of a lineup for the rest of the year? Is it fair to say that we are going to consider minus 8% for the year. I would like to understand the rationale behind it in terms of numbers and in the consolidated terms.

And the second topic, maybe Antonio can help me out. We have seen some movement of the BTP for anticipated renewal from the regulatory view point. What do you think this could increase in terms of capacity for the BTP, because I think this is something interesting for the government. So what have you heard in terms of capacity on their side? These are my 2 questions.

[Ricardo dos Buteri, executive]

Lucas, this is Ricardo Buteri speaking. I'm going to answer the first topic about volume. I can say that the first quarter, according to what we experienced in the past 7 weeks, we saw a recovery of volume in every trade in every service, especially in the consignation of Asia to Brazil, which is already above 90%. It shows us that we reached another level. In the previous call, we mentioned that the trend is that in the last fortnight of March, this curve would resume.

What I can say to you since the [indiscernible] is public and can be disclosed to you. So we have this consignation above 90%, we came from 60,000 or 70,000 containers in the May asset, which is Tecon Santos, to close to 100,000 boxes a month. And I'm not only talking about this moment, I'm also talking about the previous month. So this resumption of volume has been confirmed. It's completely different, about 40% of what we experienced, especially February, where we had the worst downturn in the last 5 years.

So what we can say is that consignation has been normalized with larger ships. And they are doing what we call a revamp of ships with the ships with 11,000 containers. So this is how we predicted the future. When we provided you with the guidance, we had a vision of the downturn of the first quarter. And we built the guidance based on what we had experienced in terms of lineup that would be applicable to the months of April and May.

So consider everything that I'm saying to you is that the peak season will go back after the third quarter of the year. And the guidance that was provided by the company is being confirmed in considering the results because of the results that we recovered and also as a result of the renegotiation, and also the improvement of the mix. And this all confirms all the negotiations which are underway.

[Daniel Dorea, executive]

And this is Daniel. I would like to add something. Our guidance has a certain level of flexibility. If we go to the bottom of the guidance, it would account for downturn of 8%. And there would be a growth -- and that happens because our visibility happens every week. And that would depend on variables and factors which are not controlled by us. Only to summarize what was said before, as we see it, we understand that this is going to be the meeting point of the guidance, and it would stand a little downturn, but we are going to be very close to the medium term or the medium way. And this is our best estimate, and this is something that is being updated every week. And as we get information, we provide the update to the market.

[Antônio Sepúlveda, executive]

Hello. This is Antonio Carlos speaking. I'm going to add to what Daniel and Ricardo have already said. I believe that the first quarter was really out of the curve. We handled about 76,000 containers. If we compare to last year, we had average of 90,000 containers, and we have a terminal prepared for 120,000 containers. This is the average for the quarter. So what we have shown is a lot of resilience. And this was driven by the cost control that we have implemented as a company and also the operations.

We have an operational leverage, which was very, very strong. When we look down the road, April is a public number. You can have all the figures. And you can see that at the Tecon Santos we have reached 95,000 containers being handled. And when we add to this number, the improvement of mix, which is also underway, we had a big loss of containers because of the loss of commodities and problems with the beef cargo and also import of chemicals. We noticed a big loss in the first quarter. And in addition to the recomposition of our prices, I mean, this was not included in the results of the first quarter. This will be registered only after April. And all those items allow us to be confident that we are going to deliver the guidance we provided. No other quarter of the year is going to be similar.

Your second question in relation to BTP. BTP extended its agreement and it contemplates the occupancy of the internal area according to their footprint. So probably they are going to optimize the area, the yard, and they're also going to enhance the equipment. However, this has no meaning in the general balance. I would say that again, capacity is going to be easily absorbed by the growth that Porto de Santos presents, and also considering the current situation of occupation. We cannot forget that there is another shipbuilder that bought [ Logan ]. And [ Logan ] is likely to be included in the integrated logistics of this shipbuilder. And this is a shipbuilder that works with BTP. And we believe that this increase in capacity is likely to be consumed with an increment in transshipment that is likely to happen in the Port of Santos. As I said, there are larger ships being allocated for Asia and Europe.

And for sure, this is going to demand the use of transshipment through the ships. And this is something that is going to continue increasing our business.

[Operator]

Our next question comes from Gabriel Rezende with Itau BBA.

[Gabriel Rezende, analyst]

I would like to do a very quick follow-up in terms of volume. I would like to understand how you see the evolution of the mix for the quarters in the future considering there's a rising of recovery of the monthly levels. You mentioned in the release that there was a drop of full containers that impacted the margin. So I would like to understand the mix of imported and exported items may be impacting the profitability of the company. And I would also like to understand about the new adjustments that are likely to be relevant for the second half of the year. How is this going to be distributed, and what will be the quarter most impacted by the readjustments, and how you see the pace of the negotiation with clients? Are the clients willing to -- are they willing to reach a favorable outcome in the negotiations?

[Ricardo dos Buteri, executive]

This is Ricardo speaking. We have already unmuted our microphone. In relation to the point you asked, mix evolution, as Antonio Carlos mentioned, I'll add to what he said in terms of exports. With cargo, beef, it was stopped because of sanitary reasons. And there was an impact because the average ticket when we receive all the payment of the services of all the services related to the beef are very relative. And after the commercialization was approved, everything went back to normal. So the mix where we saw this loss was a ticket which was more favorable. It's a ticket that we were used to realizing. It's already resuming and there's no prospect of any stoppage down the road.

There is another one, which is the bonded warehousing. Regardless of Clia Guarujá or Clia Santos, regardless or not they had this -- they were impacted, but it's just natural when we have no longer a bottleneck, we can add services and there are no additional scales. And there's no possibility of the Clia or Tecon to bring in the problem home. So what's my point, even with the number of containers already invoiced at a lower volume, we understand the average ticket and the revenues of our logistics area grew.

So the commercial strategy that we implemented when we were retaining a safe value or when we are after new customers based on the market intelligence, so we see a mix effect that regardless of any downturn in the situation, we can see that the revenues are sustained and they can even improve. So in terms of the mix, we have the fractionated cargo, so we had a new agreement, which operates fractioned cargo. So the average ticket in the secondary zone can be very solid and there is no possibility of downturn in the sense. So in spite of the volume of the containers, as I gave in the first answer, we see many possibilities of general cargo.

In Vila da Ponte, specifically, the year started at a very heated base with a very good client, I saw the client, and the volume of cargo was growing, and there is no prospect of downturn. Since we are talking about the evolution of the mix, so there is no likelihood of downturn up to the end of the year because we are talking about ore companies and mining companies. And we already have the lineup and also all the forecasts received of the cargo.

So this is the mix related to general cargo projects, logistics, and general cargo. And the second point you asked about the adjustments. We continue with the same strategy that we adopted with the main client of the company that has a large market share. So the strategy is underway, which is the recognition of the balance of the company and the folks of the company to generate the best level of service of the company and maintaining the capacity, but we are always improving the SLA of every ship that comes into the terminal.

And you asked about the month. What's the month where this impact is going to be more relevant. Out of 9 contacts we were going to make adjustments, 4 will happen up to 31st of July 2023. So as of August, out of the 9 agreements, 4 of them will have their negotiations already undergone as of August with a new tariff given to Asia and Israel, so that we can complete by the end of March and beginning of June, so that we can end the negotiations because we start the negotiation 60 days before the termination.

[Operator]

Our next question comes from Mr. Victor Mizusaki with Bradesco.

[Victor Mizusaki, analyst]

I have 2 questions on my side. Could you give an update on the discussion [indiscernible], especially in logistics. So have you made any headway in terms of acquisition of new assets? And the second question is also related to volumes. If we think about the volume of first quarter and thinking about taxes and tariffs of volumes below $50, I would like to understand if this impacted the volume of the first quarter? And can this be an important driver along 2023? And do you see any other type of product that we should be monitoring that can provide us more comfort in terms of recovering the volume along 2023?

[Daniel Dorea, executive]

Hi, Victor, this is Daniel speaking. In terms of M&A in logistics, to be very frank, nothing is on our radar. We have considered this avenue for growth and we came to the conclusion, after doing lots of analysis and studying many assets, we understand that our best bet is in organic growth of this business unit that has a long way to grow in the area. So integration is our focus. So that's why we say integration to the port assets. So this is the focus of our company. When you look at the logistics market, which is very diversified and very scattered in Brazil, there are not many assets with these characteristics that we have.

So this is not where we are looking for growth via acquisition, I mean. And I think the strategy of the company is very clear. We are growing in containers and also in Liquid Bulk. And this is why I mentioned all this in my speech. Santos Brasil is building a new average sized terminal and the return is very high. So we are investing in the short cycle in terms of capacity, and we also have room to move on to 3 million TEUs in the next 5 years as of 2026. So we are talking about 1.1 million TEUs. So this is basically the way we see it. Of course, if opportunities emerge, the company would have the financial capacity to consider an acquisition.

But nowadays we understand the biggest return is increasing the efficiency of Tecon Santos. And the same would apply to Liquid Bulk. So we are likely to reach 200,000 cubic meters. So we are going to have 1/3 of the capacity of Port of Itaqui. We have a very experienced, a very well-formed team. So the idea is to have a very small terminal, but with high utilization rate. But we are always on the lookout for acquisitions that would bring in a lot of value. But nowadays, we have those 3 directions and those 3 pillars are very well devised. So I am going to turn the floor to Ricardo, so that he can talk about volume.

[Ricardo dos Buteri, executive]

Victor, I understood your comment, especially in relation to the impact of tax on product up to $50. The answer is no. No, there is no impact. So when we look at the world of containers, the fees has to be considered. So the influence of the downturn in volume in the first quarter is not going to have any influence in this indicator. And why is that? Because industries have high storage levels, because there was something related to low consignation of Asia and blend sales that we had in the period.

So this is something really connected to demand, but with values higher than tariff on this range of value, but we have another business, as I commented before, which is a segment of fractionated cargo. And the news, I would like to convey, is that there was no downturn in the number of processes, or as we say, the [indiscernible] as a technical language, which are the processes of those importers that bring fractionated cargo. So this import segment did not suffer any impact. The number of BLs budgeted and realized BLs, especially in the first quarter with the continuation in the past 2 months is above expectations. And this is not only because we have a new agreement. So there was no impact of this nature in the first quarter and the reasons were different as we have already mentioned.

[Operator]

Our next question comes from Guilherme Mendes with JPMorgan using the Q&A tool.

[Guilherme Mendes, analyst]

First question, what's the resumption of volume for the next months in terms of services, imports and exports, and cabotage, and which one is going to have more influence on volume? And the second question, what's the optimum capital structure for the company with the normalized payment of dividends a year?

[Ricardo dos Buteri, executive]

Guilherme, thank you very much for your question. The resumption of volume levels is extremely compliant with the percentage that we have observed in terms of cabotage transshipment, so imports becoming much stronger because when you observe the consignation of the ships, and we have the on-time estimate of each ship that is loaded, and we know exactly how many items are coming in, how much of import is coming in, so I can say that import is going to resume by the increase of consignation from the services from Asia. So this is the most detailed information that we have in relation to the ships in this trade.

Now in terms of cabotage, it has already resumed pre-pandemic levels. It has already reached a normal level and what is going to grow when compared to the first quarter of 2022, as Asians are coming with more cargo. So we see difference in the transshipment because there was a drop of 31% in transshipment level. So I would focus on transshipment for cabotage.

And all these have already normalized, especially in the 7 weeks, as we observed not only in Santos, but also in other terminals that we have.

[Daniel Dorea, executive]

Guilherme, adding to what Ricardo said, there are 2 macro effects which have a very big influence in the Port of Santos. China is more active in terms of economic activities and started to purchase more. And the other is the social program increase payment. And this affects the consumption in the northeastern region, and also affects the cabotage. We still haven't noticed in April or in the first quarter the effect of those points that I mentioned. In April, we saw the effects of increase of imports.

So I believe that at the end of the second quarter and the beginning of the third quarter, we are going to start noticing the effect of increase of import and cabotage because of those 2 factors, dividends and capital structure, since last year. So the company started to pay a lot of earnings, so we used the reserve balance to increase the distribution. If I'm not mistaken, we paid BRL 0.70 per share, a payout of 95%, if I'm not mistaken. So we can keep the same level of payout. And why is that. Because cash generation is increasing and the CapEx is going to be lower. As of the next year, we are not going to use so much CapEx. Why is that? Because the essential works for the acquisition of equipment to reach the optimum capacity at Tecon Santos will have been invested.

And at Itaqui, we managed to invest 80% of CapEx with the Bank of Nordeste with very attractive rates. I would say that it's the cheapest, the lowest interest rate in Brazil. So we have a good problem in our hands. We have a cash level that will not be equivalent to interest, and maybe we're going to do something else, maybe a buyback or reduction of capital. But this has not been discussed yet. I can say that as Santos Brasil is going to be a value company and we are going to present growth in the next 5 to 7 years and we're sure about that. And we are going to be a value company because we are going to be able to pay earnings to our shareholders without impacting our expansion. And we can also see the possibility of new acquisitions because the balance sheet would provide support for that. The company, in other words, is going to continue to be deleveraged because there is no need in the short term to take any loans to finance its growth.

[Operator]

[Operator Instructions] Having no more questions, I would like to invite Mr. Dorea for his final remarks.

[Daniel Dorea, executive]

Once again, I would like to thank you for attending our call. Thank you very much. I hope to see you again next quarter in the earnings conference call. Have a good day, everyone.

[Operator]

That concludes Santos Brasil's conference call. Thank you for participating, and have a nice day.

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