Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, everyone, and thank you for holding. Welcome to Santos Brasil Participações Second Quarter 2022 Results Conference Call. With us today, we have Mr. Antonio Carlos Sepulveda, 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 the following address ri.santosbrasil.com.br/english, 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. Those following the presentation via webcast may post their questions on our website. These questions will be answered by the IR team after the conference is finished. Before proceeding, let me mention that the forward-looking statements made during this conference call referring to the business outlook of Santos Brasil Participações' projections, operational and financial goals are based on 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 that may or may not occur. Investors and analysts should understand that conditions relating to overall 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 may proceed, Mr. Dorea.

[Daniel Dorea, executive]

Good morning, and thank you for your presence as well as your patience today. We had a problem with the telephony operator of our conference. And, of course, this problem had an impact on several calls. So I do begin with a sincere apology. And once again, thank you for your patience.

Next to me is Antonio Carlos Sepulveda, our CEO; as well as Ricardo Buteri, our Commercial Director. Santos Brasil continues on its upward trajectory growing, improving its operational and financial indicators and above all, recovering its profitability as well as strengthening its investment capacity. The numbers reported in the second quarter '22 and consolidated in the first 6 months of the year reflects this.

Even the volumes recorded are positive, considering that the growth observed occurred in an environment of lockdown in China, which affected logistic chains throughout the world and restricted the expected growth. Observed that Tecon Santos grew 1.5% in the second quarter '22 vis-a-vis the same period last year, reaching a market share of 41.7% in the Port of Santos, which is the best result for a second quarter since 2013, almost 2 percentage points above the market share recorded in the second quarter '21.

Our expectation is that the volumes handled at the Port of Santos will continue growing throughout the second half of the year and that Tecon Santos will exceed the growth rate of the port. Still at the Port of Santos, the Vehicle Terminals hit an all-time record, reaching 85,053 units, an increase of 55% when compared to the first quarter '22, with a good mix of cargo with an improvement in both exports and imports of light as well as heavy vehicles.

Santos Brasil Logistica also continues to grow, increasing by 17%, the number of containers stored in the second quarter '22, even in a scenario of falling container imports at the Port of Santos. This is a demonstration of the commercial strength, operational excellence and quality of our logistic assets and providing integrated services to shippers and cargo owners. Tecon Imbituba meanwhile continues to benefit from a greater volume of domestic cargo transported by Cabotage, having shown a growth of almost 10% in the second quarter '22. The General Cargo Terminal of Imbituba handled 34,676 tonnes of volume, 65.8% lower year-on-year due to a lower shipment of pulp for export and a distorted comparison base, where we worked with steel products in the second quarter of 2021.

In terms of volumes, the negative highlight of the quarter was Tecon Vila do Conde with a drop of 12.8% vis-a-vis the second quarter '21. Tecon Vila do Conde suffers mainly from the slow positioning of empty containers in the region, still reflecting the logistical bottlenecks caused by the COVID-19 pandemic. As the region's vocation is exports, the shortage of empty containers restricts the shipments made in our terminal. Having said that, without a doubt, the highlights of the semester are concentrated in the financial result. Santos Brasil registered a growth of 32% in net revenue year-on-year, reaching BRL 500.9 million in the quarter.

The keynote of this growth is the successful commercial and service pricing strategy, which culminated in the increase of average ticket in all business units and not only in the Wharf operations. Note that revenues grow and margins expand, we have a more balanced cargo, and observe once again that both revenues grow and margins expand in a scenario of stable volumes and a worsening in the flow of full import containers, which is the case of this quarter.

Our vision for the Port of Santos, which is the main gateway of Brazil is to level out the prices to market prices and to, of course, include quality. We are confident that this will be the beginning of an upside cycle. The company's EBITDA totaled BRL 213 million in the second quarter '22, which implies a growth of 44.3% year-on-year, a new quarterly record in the last 10 years.

The EBITDA margin reached 42.5%, a gain of 3.6 percentage points vis-a-vis the second quarter '21, and almost 2 percentage points over the first quarter '22. In the first half of '22, we recorded EBITDA of BRL 393 million (sic) [ BRL 392.1 million ], with a margin close to 42%. In turn, net income reached BRL 102 million in the second quarter '22, and BRL 197 million in the first half with a net margin higher than 20%. The net income recorded in the quarter is 70% higher than in the first quarter of '22. The growth of the company's cash generation allied to our cash and cash equivalents has allowed us to invest in the continuous expansion and streamlining of our operational assets.

For example, in the second quarter '22 alone, we invested BRL 84 million in our units, which includes the payment of a down payment of 2 new ship-to-shore cranes, which should be delivered until the end of 2023 and the dredging of a new berth at Tecon Santos, which will increase the terminal's capacity to 2.4 million TEUs per year. Other investments continue to be directed to the implementation of bulk liquid terminals located at the Port of Itaqui.

The company concluded the purchase of the tanks of the brownfield terminals, which belong to the former lessees. And this will allow us to anticipate the operation of these 2 terminals still in 2022. The pace of CapEx should accelerate in the second half of the year, not only at Tecon Santos but also in other business units and should total around BRL 330 million to BRL 430 million in 2022. I would like to highlight that Santos Brasil ended the second quarter of '22 with a cash position of BRL 1 billion. Discounting the gross debt, we have a net cash position of BRL 680 million.

In my final considerations, it is worth mentioning that in June, we published our 14th Sustainability Report, which presents the initiatives and results of the year 2021, reinforcing the company's commitment with the ESG agenda and the social environmental externalities that impact our business, of course, creating value for the company. Our Sustainability Report is definitely worth reading. It is available at the company's Investor Relations website, a site that, by the way, has been totally redesigned to improve the user's experience.

We can now go on to the question-and-answer session. I will be there at your disposal as well as Antonio Carlos and Ricardo Buteri. And once again, I would like to thank you for your presence and your understanding for the delay in our conference call.

[Operator]

[Operator Instructions] The first question comes from Fernanda Recchia from BTG Pactual.

[Fernanda Recchia, analyst]

Congratulations for your results. I have 2 points at my end. One referring to volumes, and the data for July already point towards even better volumes, showing that the peak of the lockdown effect in China ended in June. You have anticipated some results. Looking forward, is it correct to think that we should have marginally better volumes above 100,000 also given thrust to?

And in terms of the pricing of your contracts, I would like to understand if you have additional contract readjustments that will be done in the second half of the year? If you could also remark if you have already begun negotiations with Maersk? If the answer is affirmative, how are your conversations? In our accounts, there is a gap of 40% of pricing of Tecon vis-a-vis other terminals. Does it make sense to work with figures close to this level in terms of readjustments for 2023?

[Ricardo dos Buteri, executive]

This is Ricardo Buteri, and thank you for your questions. Very well, let us respond to your 3 questions. Regarding volumes, your vision is correct. In fact, the impact of COVID in June was much lower than we had expected and the July volumes have the forecast that they will gain traction beginning in August. And our expectation is very aligned with the forecast you have made, an improvement in imports in the Asian route associated to expectations of exports that are growing in terms of frozen beef and cotton until the end of the year.

Regarding the pricing of our contracts for the second half of the year, we have contracts that were negotiated in the past and the prices have been agreed upon during this year, so that we can enjoy a negotiation that was done still back in 2021, in all of the contracts we worked with a short time, enabling us to renegotiate all of them beginning in 2023.

Referring to your third question about Maersk, the contract is in effect until March of 2023, it will be the first contract that will be renegotiated. It is a 2-year contract with a readjustment applied this year. And after the conclusion of the renegotiation with Maersk that will have to be carried out until March of 2023, the other shipowners that we have clients will also have their contracts renegotiated. So this is what is happening in terms of the program and the bets and the terms that we have for renegotiation.

When you speak about the percentage, what we can say is that we're leveling out the prices down to market prices with a quality that is equivalent to Tecon. This is how we're working. We're quite confident. And this is the beginning of a new negotiation cycle beginning in 2023. I would like to complement something, Fernanda. 2022 is the beginning of a cycle for Santos Brasil. We have invested a great deal in Tecon Santos. We have healthy investments in technology and information to have a better visibility of the market in coming years. Therefore, we will see the Santos position always with that aspiration of increasing market share and enhancing revenues. It's a cycle to enhance margins, market share, and I had already mentioned this in calls. This is a virtuous moment for the company, and quarter-after-quarter, we will witness an increase in EBITDA as well as margins.

[Operator]

The next question comes from Lucas Barbosa from Santander Bank.

[Lucas Barbosa, analyst]

Carlos, Daniel, and Ricardo, congratulations for your results. My doubt refers to the average price at container terminals, which was very strong this quarter. Could you refer to the factors that helped to increase the average price? Besides the dwell time, was there a change in the cargo mix, perhaps more chilled products, or have there -- has there been a price increase for each service? And does the company expect to be able to maintain those prices during the next coming months?

[Unknown Executive]

Well, thank you very much for the questions. Let's speak about the average storage price. What we have is a commercial strategy that is planned and has been very successful associated to the pricing that you referred to the increase in average ticket. We invest and continue to invest in market intelligence and segmentation and an analysis to have a more balanced mix in our storage. You are also right when you mentioned 2 factors that are favorable. One is the dwell time, which increased 2 days if compared to 2021. And yes, we did have a very positive impact with the refrigerated cargo, given the level of export of beef, especially to Asia.

So this commercial strategy to respond to the longevity, we don't identify any variable that could pose a risk or retraction within the period you mentioned. Why? Because we're selecting the cargo that will bring us higher added [ SIF ] value, given the rate of occupancy of our assets. Now this strategy is valid for storage at Tecon and other places. So we're working deeply with business intelligence. We're guiding our commercial strategy towards segmentation, and we have a priority for this type of cargo within the company.

[Operator]

Our next question comes from Guilherme Mendes from JPMorgan.

[Guilherme Mendes, analyst]

Which is your outlook for the TEV? Is the result recurrent that results of [ 2,000 ]?

[Unknown Executive]

Well, thank you very much, Guilherme. Well, we are extremely satisfied with the performance of our Vehicle Terminal. We had historical records in invoicing and volumes, especially into the markets of Chile and Colombia. And the exchange rate disparity with these 2 countries entering the light vehicle segment allows us to have expressive volumes month after month. And if we analyze the market forecast, in fact, the second half of the year will continue gaining traction at levels above 20,000 units associated to another factor that is benefiting this terminal, agricultural machines, heavy machinery, harvesters and others. So our outlook is very optimistic for the Vehicle Terminal until the end of this year. We're having a discussion with our end clients because of this.

[Operator]

The next question comes from Gabriel from Itau BBA.

[Gabriel Rezende, analyst]

Congratulations for your results. Could you remark on the company efforts to increase the average ticket in the different segments of your operation, offering additional services and altering the contract format? I'm referring to what goes on beyond the natural readjustments and inflation, which is the company's expectation regarding a new commercial agreement with Maersk as the agreement will end in March of 2023?

[Ricardo dos Buteri, executive]

Gabriel, this is Ricardo once again, and thank you for your question. We do have a commercial effort based on a strategy and very strong investments in the data lake that we have. We consume all of the data of approximately 10,000 companies that are part of our assets. And the main goal of these efforts are aligned with an extremely well-drafted segmentation and consultive sales for the integration of our assets. We're the only suppliers who associate the port and logistics in Brazil with our own assets. What we have done is through consultations is to identify the needs of our clients, associating the port, the storage, the removal, the sale of products in the secondary areas, and especially the connection of general warehouses, picking, packing and accessory services that formerly were carried out either by our clients or logistic operators that were outsourced.

What we are selling is a single integrated solution, a one-stop shop. And our client who has been working for more than 15 years with Santos Brasil will detect that opportunity of having that entire supply chain strategy since the import until the entry of the product and their plants has a true opportunity. These are the efforts of the commercial and logistic businesses that we have carried out throughout this year with extremely heavy investments in business intelligence and with a new relationship with the pricing team.

Regarding Maersk, as I mentioned previously, we do have until March of 2023 to discuss the terms and conditions of the contract. And we're already analyzing the terminals with the same quality of services equivalent to the size of Tecon Santos Brasil, Vila do Conde, Imbituba, which means that we will always be at the level of the prices practiced and making sure that the Port of Santos will have similar situations of other ports in Brazil.

[Unknown Executive]

Gabriel, I would like to complement what was said by Ricardo. We do have a great deal of strength in Porto do Santos because of Tecon Santos and the logistics we have in surrounding areas. What we want to do is increase the breadth of our services use the port assets and the [ PPL ] connected to the port. And this will, of course, will increase the revenue per container that is unloaded at the port with a marginal application of capital. This has been working. We have already structured logistics. And we have a very aggressive plan for 2023. The year 2022 is but the beginning. We see an increase in logistics with marginal capital investments but with the promise of good revenues.

[Operator]

The next question comes from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

We have 2 questions at our end. Can you remark on the CapEx plan to increase the capacity of Tecon Santos. 2.6 million is the terminal's maximum capacity because of the area of restriction, or would it be possible to make new investments for productivity gains? Which is the opinion of Santos Brasil for the STS10 bidding process?

[Antônio Sepúlveda, executive]

Victor, this is Antonio Carlos. We do have a plan that project that was created with the anticipation of Tecon. We have a project to increase the capacity to 2.6 million TEUs. And we should attain this at the end of 2023, end of 2024. We already have the key in shape. We have purchased 2 ship-to-shore cranes. We're making orders for the yard equipment, and we're carrying out several enhancements in the yard to be able to attain that capacity. Once again, 2.6 million TEUs. It is important to underscore here that the final project is of 3 million TEUs. After this phase, there is an additional investment phase.

Of course, we're doing this with an eye on demand. Now this project of 2.6 million TEUs at Santos Brasil, we believe that this is a project that has already been sold. With the increase we have of demand at the Port of Santos, our terminal is extremely large. Tecon has 80 hectares, double the second terminal in Santos. Our strategy is to offer support to transshipment and navigation lines. And with this, we will leverage the cargo at the Port of Santos with a great deal of added value. So this is under execution. It has shown success. And our expectation is to grow above and beyond the port because of our investments. This is a project that began in 2015. The investments were made in 2019. And we worked with capital allocation in a very precise fashion and we're now harvesting the results.

The work has been done. It came along with that increase of demand at the Port of Santos. And this is a wave that should last 3 years or 4 years. We're highly optimistic regarding the coming period. Regarding the STS10, this is a project that is under discussion. It is still [ in talk ], then it will go on for discussion at the Port Secretariat. Well, we can participate in this project in this bid because of the public notice that was launched. But this public notice has given way to significant discussion. They had a public hearing that was very rich. And the feedback we have from the granting power is that the contributions from the hearing are being assessed, and there will be changes in this public notice. It's too early on to see how Santos Brasil will position itself in this bid and when it will be held.

What we do perceive is the SPA bid, and this is also a very important project for the Port of Santos. You didn't include this in your question, but I would like to refer to it. It comes at a very good time. The Port of Santos is a port for 250 million tonnes, and the expansion to other types of cargo is more complex. And private companies move ahead at a different pace. I think private ports will make the most of the capacity the port has to offer, not only to the city of Sao Paulo, but to Brazil. And the Port of Santos is extremely important for the country as a whole, and the community is thinking more on this project than any other.

[Operator]

The next question comes from Guilherme Mendes from JPMorgan.

[Guilherme Mendes, analyst]

Which is your expectation for EBITDA margin for the coming quarters?

[Daniel Dorea, executive]

Guilherme, this is Daniel. Our expectation is that the margin will continue to expand. Presently, we are around 42% and consolidated wise, this is an interesting margin. If we look at Tecon Santos in isolation, this margin goes beyond the 42% of consolidated results. And this is natural. We use high operational leverage with appropriate prices. We have a quality asset with a good cargo mix. Now this is a trend that we observed. So the trajectory here is for a margin expansion.

There is no cost increase, not a substantial cost increase for the coming quarters. There is a pressure from inflation on personnel, for example, energy, fuel, our expenses per se, such as leasing, but there is nothing that is out of control and nothing that we will add to our cost structure that will exert a negative pressure on EBITDA margin. At the other end, that of revenues, this is what I mentioned previously. What we foresee is the beginning of an upside cycle. What does this mean, that the volumes should continue to grow. Nowadays, our expectation in terms of volume is that the port can grow 5% year-on-year, and Tecon should grow beyond the rate at the Port of Santos gained market share. The volume is growing. Ricardo during the call mentioned the prices that should continue this trend towards a recomposition. Therefore, the margins will expand. This is the expectation of the company.

[Operator]

The next question comes from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

Santos Brasil is -- it's capitalized, and we recently saw an announcement of the sale of 80% for [ CL4 ]. Are you analyzing opportunities in the secondary market? Which are the main assets you are serving in the primary market?

[Daniel Dorea, executive]

Victor, is everything okay? This is Daniel. Regarding the [ 1 ] business and eventual M&A investments in the secondary market, yes, we are assessing opportunities. We have some negotiations underway. And the business closed with one, is a very good one. The company is active at that end. Now in the primary market as we call it, and to take advantage of what Antonio Carlos mentioned with the STS10, of course, we're quite aware of this. We're assessing it, and the participation of the company will depend on timing and other factors.

But we're also very attentive to the privatization of the SPA, and the agenda of the Ministry of Infrastructure could be a good opportunity once again. It will depend on the model once it is made known. Nowadays, there is still an ongoing debate with a great deal of social participation. The entire sector is debating this. But these are the 2 targets in the primary market that have drawn our attention at Santos Brasil.

[Operator]

The next question comes from [ Igor Gomes da Silva ], an individual investor.

[Unknown Attendee]

What is happening with the payout schedule of dividends for 2022?

[Daniel Dorea, executive]

Igor, this is Daniel. I will answer your question. At the pace that we have had with a growing cash generation with profit at the levels we have observed, I'm not going to call it a schedule, but the expectation for the payout of dividends will be quite similar to what we had in 2021. This would be reasonable because of our sound results. The company's capacity to invest in new assets and to work with its scheduled investments in the present day assets allows us to legitimately think about dividend payout similar to 2021 vis-a-vis the results that we would like to obtain during the exercise during the period.

[Operator]

Ladies and gentlemen, at this point, we would like to end the question-and-answer session. We return the floor to Mr. Dorea for the closing remarks. You may proceed, sir.

[Daniel Dorea, executive]

Now before the closing remarks, simply to conclude the question of Igor, so that he is fully aware of what was paid out in 2021. I'm referring to the payout that we had in 2021, which was around 95%. So it will be once again between 80% and 90%, who knows up to 95% payout of dividend without compromising its investment strategy. This is an important message. It will become an important company that pays out dividends while it is a player that is focused on growth.

As that was the last question, I once again apologize. Thank you very much for your attention, for your understanding and your patience with our delay. This was beyond our control. I think the call was very good. We had excellent questions, and we hope to see you again at our next call. Have a very good day.

[Operator]

Thank you, Mr. Dorea. The Santos Brasil Participações conference call ends here. We would like to thank all of you for your participation. Have an excellent day.

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