Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Santos Brasil Participações Third Quarter of 2020 Results Conference Call. With us here today we have Mr. Antônio Carlos Sepúlveda, Chief Executive Officer; Mr. Daniel Pedreira Dorea, Chief Financial, Investor Relations Officer; and Mr. Ricardo dos Santos Buteri, Chief Commercial Officer.

This event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Santos Brasil Participações' website at ri.santosbrasil.com.br/en, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Santos Brasil Participações' management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Dorea. Mr. Dorea, you may begin your presentation.

[Daniel Dorea, executive]

Good morning, everyone. Thank you for attending this call of Santos Brasil. I hope you're all healthy and safe. Here with me we have Antônio Carlos Sepúlveda, CEO; our Commercial Officer, Ricardo Buteri. And I would like to speak about the third quarter and give you an idea of what's coming and then open for the Q&A session.

The third quarter of 2020 brings the first signs of a more consistent recovery of throughput as well as the mix of Santos Brasil. Since July, we've been experiencing a monthly growth which cause us to believe that more serious or acute phases of the crisis and the impacts of pandemic over the Brazilian economy lagging is behind us. This trend was consolidated since August in which the -- it was the first month in which there was no more blank savings.

Since then, the growing handling quantity, handling amount has increased constantly and it's almost back to the levels of before the COVID. Due to COVID-19, differently from all the other years in the history of the company, the peak season will come later, less concentrated in the first quarter and more in the second quarter and more distributed throughout the third quarter, especially -- in the fourth quarter, especially in October and November. This means that the fourth quarter will keep the trend of recovery seen in the third quarter with a higher relative volume and higher volume of imports because of an increase in inventories of retail and industry, although the recovery is much more promising than the scenario we talked about in our last earnings release conference call because then we had more uncertainty about the economic recovery. Today our reading of the business environment at the Port of Santos for this quarter is more benign because the volumes are back, which means that the occupancy rate of the Port of Santos is 80% year-on-year.

When we look on quantities of the third quarter of 2020, the company had a decrease of 16.4% of total containers handled in the 3 terminals when compared to the third quarter of 2019. Tecon Santos decreased by 18.3% to the cash volume with a decrease in import volume, whose volume fell almost 33% year-on-year. The use of capacity of Tecon Santos on an annual basis was 77%, and our market share was 34.3% in the quarter, with a slight increase in market share when compared to the previous quarter.

There is a specific item in the services operated by Tecon Santos which allows us to have more influence on the import flow, highly impacted by the pandemic effects and less exposure to export effects when compared to our direct competitors. And it was exactly the export sector that was more resilient during COVID-19 crisis.

Tecon Vila do Conde had a slow -- smaller decrease of 10.4% and influenced by the drop of 20% in the volume of containers. We highlight the growth of shipments of refrigerated cargo, especially frozen beef.

Our operation in Imbituba port were positively influenced by new agreements of general cargo, especially pulp and agro commodities. And the vehicles terminal, TEV, which had a strong decrease in the throughput volume in the first -- in the second quarter had an important recovery in the third quarter. The year-on-year was only 2.4%. When compared to the previous quarter, the volume handled grew a lot due to the recovery in exports of vehicle. We believe that this recovery pace will be maintained in this next quarter.

In terms of logistics, the drop in the volume continues to impact the warehousing volume. Despite the decrease, we noticed that the automotive industry in which SBLog has an important participation in the logistics of spare parts is now resuming its production levels with -- after very weak months such as May and June. A positive point is that the net revenue of SBLog had a drop lower than the volume justified by the increase of the average ticket due to the fraction cargo renegotiation of agreements and a higher diversity of services offered such as customs warehousing operations.

On the financial side, the consolidated net revenue reached to BRL 22 million with a drop of 12% when compared to the third quarter of 2019. It's worth mentioning the caveat that the company doesn't include in the box rate charge from shipowners the tariff rate. That is now charged by the Port Authority directly from shipowners.

The EBITDA amounted to BRL 50 million with a margin of 22.5%, which accounts for a drop of 16.3% when compared to the third quarter of 2019. If we compare to the second quarter of 2020, however, the EBITDA had a growth of almost 18%. Efficiency gains and reduction of costs and expenses were key to maintain the EBITDA margin at these levels with the drop of less than 2% when compared to the second quarter of 2019. If we adjust the margin to recurring results, even so, we're talking about a decrease of only 5%. At the bottom line, the company has reported a net loss of BRL 5.5 million compared to a net income of BRL 7.7 million in the third quarter of 2019.

As for investments, we continue to advance in the modernization and extension project of the quay of the Port of Santos, with the schedule of construction maintained for the second quarter 2021. In the third quarter, we invested BRL 72 million, which increases to BRL 122 million the CapEx year-to-date. If we keep the current pace and scheduled pace, we'll end 2020 with a total disbursements from BRL 180 million to BRL 220 million.

I could not fail to highlight the follow-on of the company. These funds raised in the follow-on will finance the growth of the company in the port and logistics integrated to the port, increasing another cycle of growth of our activities. With a share issue made in September, the company ended the third quarter with cash and cash equivalents of BRL 1.2 million, with a net cash of 655 discounting the total net gross debt.

The challenges of the pandemic in Brazil are rather still felt but the signs of recovery that we see in domestic accounts and in our business makes us more confident for 2021. Santos Brasil will renegotiate important sales agreements and will assess other opportunities to grow in the industry, boosting its generation of operating cash.

This were my initial remarks. I remain available with Antônio Carlos and Ricardo Buteri to start the Q&A session. And I thank you once again for attending the call. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Gabriel Rezende from Bradesco BBI.

[Gabriel Rezende, analyst]

I have 2 questions. The first one, I would like to understand how you see the scenario of recovery of volumes, the more gradual recovery in terms of imports but together with the current foreign exchange level how does that impact the operations of Santos Brasil with Maersk and if there's an update on that?

And what has been the strategy for the company in the next quarters and years considering growth? What are the segments that Santos Brasil intends to enter, the next auctions you intend to participate? And also increasing services in logistics, how do you see the segment in a more holistic growth in this segment for years to come?

[Ricardo dos Buteri, executive]

Gabriel, this is Ricardo Buteri speaking. Thank you for your question. I'll answer the first part of it regarding export volume. You asked about Maersk and logistics. About volumes, as Daniel anticipated in his speech, the peak season was a bit -- happened a bit later than we were used to. There has been no cancellation on service scale since August. On the contrary, the trend is for an uptake.

This resumption of imports is a bit slower, but the number of containers handled in October is over 84,000 boxes. Also important to mention is that we already are making, as you can see in the lineup, extra calls. So this peak -- this late peak season, after we zeroed this inventory levels after the lockdown period, caused inventories to be resumed for imports and that causes extraordinary services, new scales are coming up and we are positioning ourselves and telling that Santos Brasil is available for every shipowner to work with a volume that could be proven in November with a very positive trend with more imports.

Our relationship with Maersk is a lot more holistic, not only for imports, because we have cabotage and other services. And I can say that this topic is not dealt with separately. We have a scenario that has been already planned, that considers the balance of supply and demand, and there's the participation of the percentage of occupancy of -- for terminals. There is a prospect of growth for 2021 and there is no new capacity in the Port of Santos except for the one that Tecon Santos has. Of its granted area of 70 hectares we can expand with greater capacity with cranes. And our proposal will be sent to Maersk in November with the negotiations of some months. And the contract we'll zero in the March 2021. Now Gabriel will talk about investments -- Daniel will talk about investments.

[Daniel Dorea, executive]

I will add about Maersk. This relationship has been going on for a long time. There is a lot of conversions because Maersk Group today has 40% of the volume of the Brazilian coast and Santos Brasil has 25% of implemented capacity in operation for containers in the Brazilian coast. So it's a strong convergence and attraction between both companies. We're very confident that we'll be able to reposition our agreements with them and continue to generate wealth for them and for Santos Brasil as well.

The second point is about the future and investments in new endeavors. There are 2 cargoes in Brazil that have been growing highly above the GDP as well as the container throughput, liquid containers with fuel especially. And there are many auctions that will start in the next quarter -- I believe in the first quarter of next year. We're looking at all of them. And the other cargo is soy. The agri business in general that is causing the GDP to grow will have the first auction in December. It will be the Port of Aratu for soybean terminal, and there are other auctions that will be made for these 2 cargoes. We are looking at these 2 businesses. We have been studying that for more than a year now and we're looking for partnerships and looking all projects in detail. So these are the 2 other paths outside of containers that Santos Logistica is looking at.

Logistics is also another area. Logistics in Brazil has become more sophisticated. Santos Brasil has introduced new technologies and it continues to develop its business with its customer, especially Tecon Santos in São Paulo. We're not going to be limited to that. We always seek new good businesses, but the demand for a one-stop-shop solution is ever more present.

We have developed our position in B2C, B2B distribution centers, direct delivery to end customers. There are many industries that have closed plants in Brazil and opened plants abroad and that demand a more complete solution. And this is what we're doing.

We have new projects. We just opened distribution centers. There's a good demand for it already. And the pandemic also demands a lot from logistics, especially in terms of delivering goods to end customers. So I don't know if I was able to answer your questions. That was a broad question. But if you need any more information, let us know.

[Operator]

[Operator Instructions] Our next question comes from the webcast platform from [ Rodrigo Muñoz ].

What is the expected term for investments that raised funds through issue of debentures? And what are the company prospects for accounts receivable in terms of recovery of trade receivables?

[Unknown Executive]

Well in terms of the schedule of using of funds from debentures, we have raised funds through debentures in 2019 with a total of BRL 360 million: BRL 300 million SB Part, BRL 60 million by Convicon. The funds raised by Convicon were used to expand Tecon Vila do Conde and have been allotted already. The debentures from SB Part, the holding company, will be allotted to investments made at Tecon Santos.

This year, as I was saying, we will invest around BRL 180 million and BRL 220 million. It will use from BRL 150 million to BRL 200 million at Tecon Santos. So these are funds that will be used for the leases of Vila do Conde, Tecon Santos.

As for the recovery of trade receivables, our default is relatively low. Our clients are large companies. And although there has been some delay and we see a provision starting at 90 days, these are not defaulting customers. So this is the regular course of business on collection. We've -- we are -- we had successful collections with a joint action between the commercial area and the financial area that has had good results, keeping a high rate of recovery and a very low default rate, absolutely under control.

[Operator]

The next question comes from webcast platform. [ Luiz Augusto from Equity Capital ]

The Port of Santos has been appointed in the beginning by the Ministry of Economy, Paulo Guedes, to be privatized. Is the company prepared for that? How can you leverage on new opportunities for the business?

[Antônio Sepúlveda, executive]

Luiz, this is Antônio Carlos. I think we should answer this question in 2 ways. First, privatization will have a very positive impact over the Port of Santos because private companies are much more agile in solving problems than government authorities in Brazil. There are many restrictions in terms of procurement, and the port has a large responsibility, which is to provide railroad and road and maritime access on deep waters. And the history of Brazil is full of problems when you look at every port in Brazil. So privatization is most welcome. It will bring benefits not only to Santos Brasil but all terminals of the Port of Santos and for the society in general.

The second point is the attractiveness of that as a business. We do not have the invitation to business. We don't -- we're not aware of the model yet because it's been discussed at BNDES right now. But Santos Brasil is interested? Yes, we are interested in looking at it, and depending on the invitation to business, take part. We know the business well. We know the Port of Santos. We have been in the port since 1997, and we believe that depending on the characteristics of the invitation to business, we can be very competitive in that bidding process.

[Operator]

Next question comes from the webcast platform. Mr. Roberto. What is the expected date for payment of dividends? I've had shares for almost 2 years and I received very little dividend. I'm a small investor like thousands of others.

[Unknown Executive]

Roberto, thank you for your question. I'm also a shareholder of the company and it resonates with me your question. We have to adapt the payment of dividends to the bottom line, right, without using the profit reserves and using cash to pay. So we will see the results of the year, the bottom line, and according to what it is, there will be a recommendation for payment of up to 80% of the earnings of the year to the Board, and the Board of Directors will decide on that. This is always linked to the result of the year and this is how it will continue. And we expect -- with the cash from operations growing and the earnings of the year growing, we believe that in future years we plan on paying more dividends.

[Operator]

The next question is from [ Marcelo Aguilar, Leblon Equities ].

[Unknown Analyst]

How much of the current performance in costs and SG&A is recurring for the next quarters?

[Daniel Dorea, executive]

Marcelo, this is Daniel speaking. This cost basis and SG&A basis is the recurring base and should remain so. In 2021, as we understand that the results of the company will grow because there will be a higher generation of price and the volume will grow, but what will not grow so much, costs will be maintained at this base and the growth of the margin will come more from prices.

[Operator]

The next question comes from [ George Luiz ].

[Unknown Analyst]

What does the company expect for the growth in cabotage market in Brazil?

[Ricardo dos Buteri, executive]

[ George ], this is Ricardo. Thank you for your question. Well the reopening and the gradual recovery of the domestic economy in one side and the low inventory levels after the lockdown have brought to us or have increased cabotage operations in all our units in this quarter, especially in October 2020. So this made us record the highest level of containers -- shipped containers, full containers, in history.

The prospects of cabotage companies is good and they expect to offset the volume that decreased due to pandemic. So the scenario for cabotage is of leverage, figures have been resumed. There is growth in all 3 units. And along with the navigation companies, we have an optimistic view of growth for 2021 after looking at the forecast and the balance at which inventory levels were very low in Brazil. And so now, we believe that as of October, it has started to grow and will continue to grow from now on.

[Operator]

Next question is from [ Zoroastro Caldas ].

[Unknown Analyst]

Is there any projection for growth by acquisitions? What is the projection for growth?

[Daniel Dorea, executive]

This is Daniel again. Yes, there is. The company studies to grow by organic and inorganic growth through acquisitions, either in the share -- increasing the share in the containers market, operating terminals, logistics that adds to our terminals, especially Tecon Santos. However, the company does not disclose projections except when there is a material fact. In that case, we'll have a disclosure of a material effect in a timely manner.

[Operator]

Next question comes from [ Marcelo Aguilar from Leblon Equities ].

[Unknown Analyst]

During the follow-on, you mentioned potential M&As with other port terminals. Do you have any update on that?

[Daniel Dorea, executive]

Marcelo, I will answer as I did for the previous question. We have studied, identified targets but right now there is no material fact that we could mention in a call like this. So as soon as there is something to be communicated to the market, the company will do so.

[Operator]

[Operator Instructions] The next question is from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

To follow-up on the last question, I know you cannot provide much detail about targets for M&A but could you speak a little about the rationale for M&A? Synergies, synergy coming from negotiation of prices or any element you can give us in terms of rationale used for M&As? That would be interesting.

[Daniel Dorea, executive]

Bruno, this is Daniel speaking. Well what we can say in a qualitative way is that when you look at the container and terminal market, the ideal scenario is to be in markets of low competition and a growing demand. We were successful in seeing that at Vila do Conde in Pará. We had the initial difficulties of any new business but now for 4 to 5 years has had good results. It's a high demand. Demand has been captured. We've made investments that have a good return. So the idea is to look for those markets and Brazil still offers markets like that, containers, terminals and locations where competition is more reasonable. This is what we think about.

In terms of synergy, there's this obvious synergy which is the G&A synergy. We currently operate or write rather 5 leasing units and we own -- we have a very small corporate team and there's no reason for that to grow. So that's the obvious synergy. A commercial synergy could also happen. We see that in our 3 terminals of containers, for example, in which the clients are the same. And there's also some operational synergy, although we know that these are assets of high operational leverage when considered individually. So on a qualitative note, this is the rationale.

Now I'll hand the floor over to Antônio Carlos, who could add to my answer.

[Antônio Sepúlveda, executive]

Bruno, in recent years, there has been a strong consolidation on the shipowners' side. The Brazilian coast in terms of containers terminals is very spread. There is Santos Brasil, we are the largest and our share is 20% of handling and 25% of installed capacity, but we believe it would be very beneficial to have a consolidation so that -- well, there are 2 ways to be more effective in terms of cost and to be stronger to negotiate with the shipowner clients which are heavily consolidated now.

But technology at the port has advanced a lot. It is expensive. We do have a lot of technology at Tecon Santos and we usually cascade this technology to other businesses we have related to container handling. This is also very good. It would be very good to use the technology developed at the terminal and other units to reduce costs and increase efficiency. We are looking at the entire coast, we're keeping track of the movements, and we await an opportunity that presents a return that is compatible to what we expect.

[Operator]

The next question comes from Luiz Fernando, Finacap Investments.

[Luiz Fernando Araújo;Finacap Investments;Fund Manager, analyst]

Regulatory issues that created unbalancing competition between public and private terminals have been overcome already?

[Unknown Executive]

Well there is a major effort by the current administration to reduce this gap, but they still remain. Law 12,815 from 2012 provided a major advantage to private terminals. Today, they are not the majority yet. The vast majority of terminals in terms of container handling is still in public ports. But there is an intention of the current administration to reduce this gap. Now there is a study being done by the -- led by the infrastructure ministry whose driver is to add efficiency to public terminals.

Santa Catarina has 2 terminals of containers and one in Santos Embraport. And it's visible the private terminals are much more competitive in terms of costs.

[Operator]

Next question comes from the webcast platform from [ Andre ]. What is the current cash position of the company?

[Daniel Dorea, executive]

In terms of cash and cash equivalents, it's BRL 1.1 billion. BRL 1.08 billion was reported in the third quarter ended in September.

[Operator]

The next question from [ Rodrigo Munoz ] from the webcast platform. In addition to the previous question, is there a deadline to use the funds coming from follow-on?

[Daniel Dorea, executive]

No. There's no defined deadline. We have to find opportunities or assets and auctions that provide an adequate return for such capital. There is no deadline for this vestment. But of course, the company does not plan to keep the cash in the bank for a long indefinite term. Of course, we are looking to close deals on identified opportunities. And if we understand that it makes sense, we'll use such funds as soon as possible.

[Operator]

[Operator Instructions] This concludes today's Q&A session. I would like to invite Mr. Daniel Dorea to proceed with his closing remarks.

[Daniel Dorea, executive]

Well, I would like to thank you again for attending the call, for asking questions. And we hope to see you at the next conference to discuss the earnings release for the fourth quarter of 2020. Thank you very much and have a good day.

[Operator]

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

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