Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and thank you for standing by. Welcome to the Santos Brasil conference call referring to the second quarter of 2020. Today, we have with us the company's CEO, Antônio Carlos Sepúlveda; the Economic Financial Officer and IR Officer, Daniel Pedreira Dorea; and the Commercial Officer, Ricardo dos Santos Buteri.

We would like to inform you that this event is being recorded. [Operator Instructions] This event is also being broadcast simultaneously through Internet via webcast and can be accessed at the address ri.santosbrasil.com.br, where the respective presentation is also available. Once again, you can flip through the slides at your convenience. The replay of this event will be available soon after closing. We would like to remind you that the webcast participants can post their questions to Santos Brasil Participações through the website. These will be responded by the IR area.

Before proceeding, we would like to clarify that forward-looking statements made during this conference call referring to the business outlook, projections, operational and financial goals are based on the assumptions and beliefs of the company as well as on information currently available to Santos Brasil Participações. These forward-looking statements are no guarantee of performance. They involve risks, uncertainties and premises as they refer to future events and depend on circumstances that may or may not occur.

Investors should understand that general conditions, sector conditions and other operating factors could affect the results, and they may differ materially from those expressed in such forward-looking statements.

I would now like to give the floor to Mr. Daniel Dorea, who will begin the presentation. You may proceed, sir.

[Daniel Dorea, executive]

A good day to all of you, and thank you for joining us at the conference call of Santos Brasil. I hope that you are all well and in good health. I am Daniel Pedreira Dorea, the Economic Financial Officer and IR Officer. And connected with me today, we have Antônio Carlos Sepúlveda, the company's CEO; and our Commercial Officer, Ricardo Buteri.

The second quarter of 2020 proved to be the chronicle of an announced outcome because we had already anticipated that the impacts of the COVID-19 pandemic would have a greater magnitude in the months of May and June, mainly impacting volumes and the quality of the mix operated by Santos Brasil in its main asset, Tecon Santos. Because of this, we were extremely careful with the health and integrity of our employees. And we began the quarter with 2 main priorities. First of all, adopting agile and quick actions to contain expenses and to increase revenue. Secondly, to preserve the solidity of our financial position, ensuring liquidity for the short and long term. The more relevant point concentrated on initiatives to reduce administrative and corporate expenses, the renegotiation of contracts with suppliers, a reduction in the cost of personnel based on labor contract suspensions and reductions of working days and salaries, besides the automation and digitization of processes such as the gates of our main units.

In terms of revenues, we try to expand the share of wallet of the company and the client value chain offering, for example, depot services at Tecon Santos and Tecon Vila do Conde for shipowners that formerly contracted this service outside. We also captured new cargoes at the general cargo terminal in Imbituba such as pulp and sugar, and captured new clients for the warehousing, bonded warehouses and docking operations for Santos Brasil Logística. On the part of cash, we focused on the following actions: reducing the need for working capital, dilating the average term of payment, maintaining the average terms for receivables and reducing our stock levels, managing default, reinforcing collection and the receipt of overdue titles, especially those with more than 90 days. We suspended and deferred federal taxes. This is authorized by the Ministry of Economy. And additionally, we substituted judicial deposits by other instruments, especially insurance bonds. Finally, and not less important, we set aside part of the investments that had been scheduled for 2020, but without hampering those items that we deem to be more strategic for Santos Brasil at the moment. Notably, the extension work for the key -- the vehicle terminal and the reinforcement and deepening of the key in Tecon Santos. We have done our homework without pressures of liquidity in the short and medium term. We have that room to gear resources with the goal of reinforcing the competitive edge of the company at Porto de Santos.

If we analyze the results of the second quarter of 2020 and I translate my initial message into numbers, the company had a drop of 19.8% in the throughput of containers in its 3 terminals vis-à-vis the second quarter 2019, mainly due to the very timid volumes that we observed in the months of May and June. Tecon Santos, for example, presented a retraction of 22% in the key volume, with a reduction in the import mix and the volume dropped 21.5% year-on-year. The use of capacity at Tecon Santos on an annual basis was 73%. And our share in the market in the Porto de Santos was approximately 33% for the quarter. As Tecon Santos is less exposed to the export flows at the port, this is the only trade that stood out in the pandemic, and we had a loss of market share. But we believe that this is merely due to the circumstances.

On the other hand, you can see that Tecon Vila do Conde had a retraction of only 6.2% in the container throughput with a highlight for the growth of 5.5% year-on-year for the long-haul operations, benefited by the export of commodities and inputs for the mineral sector. Our port operation in Santa Catarina, the Imbituba port, has benefited from a greater diversification of the cargo handled with new contracts for shipment for pulp and food transported in big bags. We foresee a trajectory of growth for this type of merchandise.

In terms of volume, the most expressive drop came from the vehicle terminal, the top that had 2 great impacts: first, the continuous decrease of vehicles exported to Argentina; secondly, a significant retraction in domestic demand for imported vehicles. Observed that the reduction was almost 74% in the handling of vehicles vis-à-vis the second quarter of 2019.

In Santos Brasil Logística, the drop in imported containers at the Santos port had an impact on the warehousing volumes, especially because the production change for the automobile and chemical sectors were severely hampered by the lockdown and the dropping projections of economy. Despite these, some factors acted in a positive way to contain the revenues of Santos Brasil Logística where the retraction was only 4.5% in the second quarter '20 when compared to the second quarter '19. Among these factors, we would like to underscore a longer average dwell time of the warehouse cargo, a high volume of higher added volume cargo and an increase of cross-selling and logistics services, such as cross-stocking and bonded warehouse services for clients that only contracted warehousing.

The consolidated financial performance of Santos Brasil had a net revenue of BRL 225 million in the second quarter of 2020, a drop of 15% when compared to the second quarter 2019. However, I remind you that the company no longer includes the box rate charge from the shipowner equivalent to the tax for the use of the port, the TUP. Now this adjustment would increase our quarterly net revenue to BRL 236 million. And on comparable basis, this would represent a drop of 11% quarter-on-quarter. The EBITDA of Santos Brasil amounted to BRL 42.2 million with a margin of 18.8%, which represents a drop of 28% compared to the second quarter '19. If the comparison with the year of 2019 is difficult because of the pandemic, it is interesting to note that compared to the first quarter of 2020, the EBITDA had a growth of 9.5% despite the intensification of these impacts throughout the period. In the bottom line, the company reported a net loss million of BRL 9.4 million compared to a net revenue of BRL 6.3 million in the second quarter 2020 (sic) [ 2019 ].

Now when it comes to investments, we applied BRL 45 million in the second quarter of 2020, practically all allocated to Tecon Santos, the unit in our portfolio that will absorb most of the company resources geared to the expansion and streamlining of our main assets.

In the first semester of 2020, we invested BRL 110 million, and we hope to end the year with a total disbursement of BRL 180 million to BRL 200 million.

Straying a bit from the analysis of the second quarter 2020, we would like to take advantage of this last minutes that we have to set forth what we see going forward. In the first quarter conference call, it was very difficult to forecast any reliable projection even for the short term given the conditions of limited visibility and high degrees of uncertainty. It is clear that the social economic impacts of the pandemic and all of its extension are still unknown, which means that we cannot precisely state the future effects on our business. Despite all of this, and being very cautious, some positive signs point to the fact that the worst is behind us, except in the case that we have a second wave or something of a sort. Therefore, said that is variable, the coming quarter should become more favorable to the business of Santos Brasil.

In the last quarter of -- fortnight, excuse me, of July, we began to observe an increase in the average load per vessel. And we don't have that many cancellations of call schedules or blank sailings at Tecon Santos. Additionally, we have seen better economic indicators that we expected, such as the forecast of the GDP for 2020, that now has a forecast for a less accentuated drop. And we have low interest rates, constant fiscal and monetary incentives and a capital market willing to finance the future investments for several companies. This set of factors could allow for an improvement in the container volumes operated by Santos Brasil and allow for a potential increase of the import flows, with production input, capital goods and even consumer goods, and the company is very well positioned to benefit from this inflow and is prepared to capture the opportunities that will arise from this.

These are the preliminary remarks that I wanted to share with you, and we are now at your entire disposal for the question-and-answer session. I would already like to thank all of you for your presence and participation. Thank you very much.

[Operator]

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

[Victor Mizusaki, analyst]

And I have 2 questions. The first, if you could remark on the signature that you had recently and which will be the impact of this on Santos Brasil? And the second question refers to the second semester. How do you imagine the lineup? Is there anything that draws your attention in terms of this?

[Ricardo dos Buteri, executive]

Victor, this is Ricardo Buteri from the commercial area. Thank you for your questions. In terms of the signature of the [indiscernible] , our vision is that, in fact, there will be an increase in capacity for this type of transformation. And there is a repressed demand for this. And certainly, what is more important at present, especially for assets, is to increase the volume that is transported, especially for Tecon Santos and Vila do Conde. We have a very favorable outlook for these. And as a positive thing, we look upon this with good eyes because we will take advantage of the cabotage. So our vision is positive. We have had this vision for quite some time, and we are analyzing what else can give us this positive impact.

Now to speak about the lineup according to your question, I think Daniel gave you a very qualitative explanation. He reinforced some themes and some numbers, and I will repeat them. In fact, the worst is over, is behind us and the signs that we observe allow us to think that we have returned to growth. We have resumed growth. There is no suppression of service beginning in August. We have had a retraction in May and June, and we have seen the end of this as of the second fortnight of July. Now cabotage has fully resumed the flow, especially to the area of Manaus, and it had been suspended previously. So with all of the signs that we see here, we can bet that there will be a recovery in the second semester. We still don't have numbers, but we think we will come to a level that is very similar to that of 2019, without including the exports that have an expectation for an even greater growth. And we have new harvest in the north, which leads us to think that this sector will be stronger. We will send empty containers abroad to be able to supply all of this demand.

[Unknown Executive]

Victor, allow me to add what was just said. This proposal will still have to go through the House of Representatives and Senate. And of course, it will undergo changes. It can become ever more open or it can become more restrictive. But in any way, the true result is what was said by Ricardo. It will increase the supply for cabotage. This will not be restricted only to the coast. And of course, this could also generate a phenomenon, which is reinforcing the increase of work and allowing the Port of Santos to continue having that cutting edge and that scale as Tecon Santos, which is the largest terminal in Santos. And there has been a competitive battle when we speak about the scale of this. This is what I wanted to add.

[Operator]

[Operator Instructions] Our next question comes from Thais from Itaú BBA.

[Thais Cascello, analyst]

Well, I think that you already remarked on my question in the introduction. I would like to gain a better understanding of what was a very good news for us when it refers to margin. What can we expect in terms of dwelling time? And if you could be more precise regarding the second quarter.

[Daniel Dorea, executive]

This is Daniel, and thank you for your question. Of course, this is what we look on. There is a part that arises from variable costs, and this refers to volume. Although there has been a reduction in the use of some inputs such as fuel and this is a part that we absorb permanently, we're purchasing better when it comes to fuel, and we're improving the internal flow of the terminal. So all of this is incorporated. When it comes to fixed costs, personnel, for example, which is our main input, we base ourselves on labor contract suspensions or reduction of working days and a proportional reduction in salary. But all of this is temporary because this provisional measure of the Ministry of Economy means that eventually, we will reincorporate part or all of this personnel again.

But we also had some layoffs during the semester, and we still have not incorporated this in our results. You will see this going forward. There is still a great deal that we will include permanently to our margins, and the contract negotiation is one of them. And we have taken advantage to alter some of the supplies that came from the outside to improve the consultancy, for example, with attorneys and much more. With all of these, we're making the most of this moment where we stop and tend to become more efficient. And this, of course, will be carried going forward.

[Unknown Executive]

I would like to add what was said by Daniel. Our company, for some years already, has been working a great deal with supervision, and we want to enhance the flexibility of our workers. And we now have a very good operating leverage. We are a company that works with very high fixed costs. And you will observe that if there is an increase in volumes, we will be able to sustain this and also sustain it with our effective personnel because of the gains of efficiency. Now this semester, we have the cost of layoffs, which of course will have an impact at the other end. We expect to have an improvement in margin in the coming months, where we will have an improvement in volumes. And what you can expect from the company is this permanent journey, a journey towards a gain of productivity in all of its processes.

[Operator]

Our next question comes from the webcast from [ David Balsas, E Camp ]. The question is, are there any plans to change your dividend payout policy for shareholders in the coming exercises?

[Daniel Dorea, executive]

Hello. This is Daniel once again. Thank you for the question. No, we don't have any plans to alter this policy. The company has a very good background for paying out approximately 30% of the net revenues that are calculated. Evidently, this is not enshrined, but this is what we have observed based on the company history. And presently, there is no reason to look upon this differently except, of course, what we can do is work with a more efficient capital allocation, and this will be based on the shareholders' input as well.

[Operator]

Our next question comes from Gabriel Rezende from Bradesco BBI.

[Gabriel Rezende, analyst]

And I have 2 very short questions. So first, referring to the new auctions. And which is your vision of the government pipeline? And what could represent an opportunity from Santos Brasil? And if you could give us any update in your negotiations in the contract with Maersk.

[Antônio Sepúlveda, executive]

Gabriel, this is Antônio Carlos Sepúlveda. We're following up very closely on all of the tenders, and there are some very good opportunities and contracts for cargo. And I think that we have a great deal of demand and supply in terms of this. We're looking with a specific focus on agri business that has had a significant growth in Brazil. And once again, we're very attentive. Now the next tender in the horizon is very tied to the verticalization. And once again, we're serving this in greater detail for Tecon Santos and others.

This is a very positive moment for the company. The company has to prepare itself and be attentive to all of the regulatory discussions. Our contracts have been lengthened. And it is a good time to begin to think about diversification and going into other businesses. About the contract with Maersk, I would like to ask Ricardo to make some remarks on this and speak about our expectations.

[Ricardo dos Buteri, executive]

Thank you, Gabriel, for the question. And before we speak specifically about one client, it is important to ratify that all of the negotiations carried out this year, and there were more than 10 contracts, were positive with a real gain in the 2-digit area, which means that what Tecon has in terms of efficiency in the operational delivery to the clients is disproportional to what we are practicing vis-à-vis the market. So this line item is what we are negotiating again with the client, the client that you mentioned. All of the economics for some time, all of the part of service, maintenance, cabotage and transshipment, all of this should begin in the last quarter of the year because the maturity of the contract is only in April of 2021, but the negotiation is continuous. There are several assets and several contracts that we currently, of course, end and we renegotiate with all of the clients. And the results of the negotiations, although we are in the midst of a pandemic, the results are being carried out based on the company's strategy.

[Operator]

Our next question comes from the webcast, [ Gerardo Pena ], [ SMV Investments ]. The question is, can you speak about the revenue concentration among specific clients?

[Daniel Dorea, executive]

This is Daniel. Once again, I'm going to begin answering your question. And of course, Ricardo can also do this. We have to consider the following. We have a great concentration of volume with one specific client at Tecon Santos. This is in the key operation. We should recall that we have 2 great flows of revenues that are quite different. We have the key operations, and then we have the yard operations and those that arise from that. And in that case, we have another 5,000 clients. So our client base is quite fragmented.

And we do have one great client in our main asset, which is Maersk, and that is accountable for approximately 70% of our volume. Now this volume goes to billing and to revenues. And of course, these revenue flows are different. And we don't have an overload of Maersk accordingly to the volumes that they have in our revenues. It's important to see how the revenues of Santos Brasil are built. We have these 2 different flows. So although we have a very high volume with Maersk, 70%, this means that 70% of our revenues are in the hands of Maersk, which would represent a risk, but this is not what happens in reality when we look at the makeup of our revenues.

Now simply to conclude this answer, to give you an idea, Tecon Santos is the main company asset, responsible for 70% of our results, and it has Maersk as part of our clients. But Maersk doesn't represent more than 15% of our consolidated results, our revenues. So 70% is not equal to 70%, it is equal to 15%. This, I think, gives you greater color, and this is something I had not mentioned before.

[Operator]

Our next question comes from Pedro Ferroni from CTM Investments, also from the webcast. He asked, which was the strategy used for the Imbituba terminal to pay the volume for the commodities mentioned? Is this temporary? Or will we continue to see an increase in volume?

[Unknown Executive]

Thank you very much for the question. I understood that you're speaking about the Imbituba terminal. Is that correct?

[Operator]

Yes, it is Imbituba.

[Unknown Executive]

Thank you for the question. Yes, we can speak about Imbituba. And in fact, we had a retraction in the second quarter, especially in the handling of containers. Now Imbituba is a port that is very geared to exports and cabotage, and we resorted to the market to recover our revenues. Focused on 2 segments, we were able to attract pulp and gradual of the cargo is sent out from the south of the country, and we have a 12-month contract. This is not a one-off thing, this is a contract. And we also opened up the number of segments and have begun working with a client that sells sugar and also the project cargo. We had some things related to the windmill and cargo -- project cargo increased. Now we can say that the part referring to the food items will be recurrent at least during 12 months. And we also have the project cargo, which is a different thing. It's a onetime thing. And this throughput has proven to be very good. And the competitors of these clients are considering us as another opportunity, not only for containers and cabotage.

[Operator]

Our next question also comes from the webcast from Marcelo Aguiar from Leblon Equities. The question is, which is the expectation for the utilization of capacity at Tecon Santos and Port of Santos at the end of the year? Can you comment on contracts that will be renegotiated with shipowners during this year? And which is the volume of Maersk that is part of the contracts that will be renegotiated this year?

[Ricardo dos Buteri, executive]

Very well. We do have several questions here. I don't know if I got them all. To speak a bit about the optimization of Tecon and the volumes at Port of Santos, which is what I understood from the first question. Tecon Santos has been very resilient with several operations of exporting and others. And the expectation in terms of throughput for the second semester is good. And we believe there will be a resumption of growth, and that the growth will level out with what we had in the year 2019. This is our expectation, and we have followed up on all of the market share statistics for the Porto de Santos. If you could please repeat your third question.

[Unknown Executive]

And while we retrieve the question simply to complete the answer, Marcelo. Thank you for your question. What we look upon is the following. When we look at the situation of Santos, there was a drop of 3.6% in volume. And we were in the midst of the context of a pandemic with an impact on volumes in May and June. As Ricardo mentioned, the volume at the Port of Santos is very resilient year-to-date because of the resiliency of exports. So the port was growing strongly. And during these more recent months, we observed a drop. But as we stated here, we begin to see a growing trajectory once again. And the expectation is quite conservative. The port would obtain the same results as in 2019. And if this happens through a conservative growth vision for the short term, the rate of utilization will be of 75% to 80% at the end of 2020, and the rate of occupancy of the port is very high. And we see a resumption -- a potential resumption of the flow of imports and the use of Tecon Santos, of course, will be benefited by this. Therefore, I believe that we will not run the risk of working with idleness as we did at the end of 2019. This should not happen at the Port of Santos or in our asset.

[Operator]

Now we can go on to the second part of the question. Now the rest of the question is the following. If you could speak about the contracts that will be renegotiated with shipowners throughout the year, which percentage of the volume ex Maersk will be renegotiated this year?

[Ricardo dos Buteri, executive]

Very well. As I mentioned, we have already renegotiated 6 contracts this year. We have only 2 contracts pending negotiation with shipowners, one in September and one that will expire in December. And this is how we will get traction to our negotiations until the end of the year. And shipowners have a much lower volume than Maersk but they're also very important. Their average tickets are positioned in such a way that we have a whole rationale for the renegotiation following the same strategy and having that true gain of more than 2 digits because of all of the services that they have contracted with us.

[Operator]

Our next question comes from [ Vanderson Hamold ] from [ Cunha ],an individual person. His question is, when it comes to the inflation of Argentina, what is it that Santos Brasil has done to offset the reduction of profit coming from Argentina?

[Unknown Executive]

Thank you for the question. Now Argentina does impact our business with vehicles. And this vehicle had a severe impact in the second quarter, but it seems to be recovering. Our commercial sector has attracted new services, and there's a possibility for cabotage transporting vehicles at our vehicle terminal to offset the risk of Argentina and Mexico, which represents the thick of the exports leaving from Santos. And we have already attained a level that is very similar to that of the first quarter. And I think that going forward, the trend will be to return to normal levels this year.

[Operator]

Our next question is also from the webcast, from [ Marcos de Freitas, LFM ]. The question is, I would like to know if you have the intention of expanding your business to other ports or acquisitions in the coming years.

[Antônio Sepúlveda, executive]

Thank you for the question. The answer is yes. We're serving several businesses not only in terms of keys, but with other types of cargoes, I think that I remarked on this during the call. And several of these will come from the Ministry of Infrastructure, and we have other businesses underway. For example, we also have a focus on grants and authorizations, and this represents another opportunity. And soybeans and fertilizers that were not part of our radar have had a significant growth. And we would like to enter other businesses, of course, to generate more wealth for shareholders.

[Daniel Dorea, executive]

This is Daniel speaking. To add to what was said by Carlos, our fiduciary obligation is to look upon opportunities and value creation for the company, be it through the assets that presently are part of our company portfolio or other opportunities that, of course, could add value to our portfolio through diversification, as was mentioned here. And I think it is worthwhile here to clarify to everybody that there is nothing concrete yet that the company is doing or plans to do so, that this will not generate any false expectations. Besides, of course, the expansion of the business itself, which is something inherent to the business. Thank you.

[Operator]

Our next question also comes from the webcast, from [ David Balsas, E Camp ]. The question is, the federal government has announced regulation for the port law and, as promised, investments in infrastructure. Obtaining this segment in your company, which is your vision for this? And how can the company obtain a competitive edge in this panorama?

[Unknown Executive]

Thank you for the question. That is very important. Our sector is highly regulated and anything issued by the government affects us. All the interference that we have in terms of the legal framework is benign. For example, the PLD 30 that is now being debated that introduces the -- we formerly had the law 815. And clearly, our sector works in an environment of freedom of prices, which is important. And there is a new modality of terminal where it is no longer necessary to carry out all of those economic surveys. And investments are not pegged or rigid, which shows that there is a new path, a simpler path, that is less full of red tape for investment and the expansion of activities.

Now the port sector does have a characteristic that sets it aside from highways or road -- railroads. In the port sector, we do have competition. We have strong buyers. We don't normally have individual persons, and the excess of regulation can hamper the development of our activities. All of the government actions nowadays go towards eliminating red tape and simplifying, which is very propitious for the company and for the expansion of our businesses. Now all of this follow-up nowadays is done through class entities. The present-day government interacts much more with greater transparency. And through this, we have been able to convey to the government which are our needs to simplify investments and to make this segment more attractive to capital. I can say, therefore, that we're living a virtuous cycle when it comes to regulations and government interference, there will be a new package called Pró-Brasil.

We believe that Pró-Brasil will bring about innovations as well and will simplify everything, especially through the privatization of Companhia das Docas or privatization of part of the services, especially the dredging activities. And especially in Santos, in Santos, our terminal could receive larger vessels. And this is a benefit vis-à-vis competitors. And we think that everything is moving towards enhancing the competitiveness at the Port of Santos.

[Operator]

[Operator Instructions] As we have no further questions, we would like to return the floor to Daniel Dorea for his final remarks. You may proceed, sir.

[Daniel Dorea, executive]

To all of you, once again, I would like to thank you for your participation and the excellent questions. We hope to see you again in the third quarter call for 2020 with better news. And we continue here, steady and determined. Until the next time. Thank you very much.

[Operator]

The conference call for Santos Brasil Participações ends here. We would like to thank all of you for your participation, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]