Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, and thank you for waiting. Welcome to Santos Brasil Participações Q4 2017 Results. We have with us here Mr. -- we have here the CFO, Mr. Daniel Pedreira Dorea; and the Sales Director, Marcos de Magalhaes Tourinho. We'd like to say that this event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through santosbrasilparticipaçõesri.com.br (sic) [ santosbrasilri.com.br ] and on the platform www.mziq.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay of this event will be available shortly after the event is concluded. We remind you that webcast participants may send questions through our website. They will be answered after the end of the call by Investor Relations area.

Before proceeding, we would like to clarify that any forward-looking statements are based on the beliefs and the 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, they depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors may affect the future results of Santos Brasil Participações and may result in results that will differ materially from those said here.

Now I would like to turn the conference over to Mr. Daniel Pedreira Dorea. He will begin the presentation. Mr. Daniel, you may proceed.

[Daniel Dorea, executive]

Good morning. Apart from Marcos Tourinho, our Sales Director, we have with us Antônio Carlos Sepúlveda, our Chairman; and also Marlos Tavares, our Operations Director, for the earnings call for Q4 2017.

The year of 2017 had many challenges. It was a year with hard work and also some victories. We have a lot of fierce competition in the Port of Santos. We suffered with a loss of an important contract in Tecon Santos, a long-haul service from Asia, and we had an extra -- there was an extra obstacle to recover our margin.

The competition in the secondary zone of the port also influenced the recovery of logistics, the pace of recovery of logistics, and we are awaiting promising results. And this result in EBITDA of BRL 83.8 million in the year, which was 4.1 lower -- 4.1% lower than 2016 in absolute terms. This result does not make us totally satisfied, but in the relative way, I believe that it brings some positive signs, some encouraging signs. The year of 2017 was important for the company to consolidate a management focus on productivity, cost reduction and also expense reduction, administrative expenses. We continue to make progress in the restructuring project for cost and expenses, in with -- which we began in 2016, that generated recurring savings of approximately BRL 45 million in fixed cost. Part of these savings were already captured in 2017. We stress that the efforts to reduce cost and expenses will continue together with the improvement of operational processes with the objective of having additional gains in efficiency. It's important to say that these changes did not compromise and will not compromise the quality of the services rendered in our terminals.

2007 also brought some victories, a renewal in advance for the concession of Tecon Vila do Conde, now extended until 2033 and also the signing of a new service contract, long-haul from Asia, which began to operate in Tecon Imbituba as of September.

Now talking about the beginning of 2018. We announced a new long-haul service led by PIL Company from Singapore, which had its first ship in Tecon Santos at the beginning of February. This service goes to Asia, East Coast of South America. There's a forecast to move 40,000 TEUs and determined in 2018 of a potential to double this volume by making it quarterly. Also, the Port of Santos handled in 2017 2,495,000 containers of volume 5.8% higher than 2016. 2018 should be a positive year for the port. We already see a promising scenario for foreign trade in 2018 as a result of the economic recovery. And we saw -- we see potential of a growth of 7% in handling containers in Port of Santos. In January, the volume of containers grew 15.9%, showing that this -- our estimate may be conservative. We trust the continued growth are in Tecon Imbituba through the growth of organic services over there that already operate with new services.

In Santos Brasil Logística, after a period of negative results, we promoted in 2017 a reorganization of the business, which is already showing signs of results. We -- the reversal of the negative EBITDA in 2016 and positive EBITDA of BRL 9.6 million in 2017 with a margin of 5%. In 2018, we will make an effort to maintain the good indices of the retaining of full containers, currently above 55%, together with volumes coming from contracts with cargo agents NVOCC.

Now concerning TEV. We broke a record of -- a record volume in 2017 with a total 289,000 vehicles handled in the terminal, which operated at 96% capacity during the year. As we see, the trend for the automobile industry in Brazil will continue positive in 2018, allowing TEV to have a positive performance. I'd like to stress also, Tecon Vila do Conde, which had substantial growth in the volume handled as well as the results -- the renewal of the concession conquered for Tecon Vila do Conde, which we've signed at the end of the year, mid-November, brings a new cycle of investments for the company. We foresee that we will invest BRL 40 million in Vila do Conde in 2018, with resources for the purchase of new equipment, some of them already ordered, and also the payment -- paving of the retro area, apart from other improvements in the infrastructure of the terminal. We are awaiting for the approval of the executive project so we can also begin our investments in Tecon Santos.

Concerning the financial part of the company. We closed the year with a comfortable cash position around BRL 270 million, which, discounting the total debt of the company, resulted in a net cash of BRL 37 million.

Concerning the performance of the company in Q4 2017, the main highlights -- operational highlights are: first, the increase of 13.8% in the consolidated volume in the 3 terminals' operations, excluding the volume of the services ECA (sic) [ ESA ]. This -- the one that I mentioned that we lost, ESA. The growth of 43% in warehousing and logistics, which presented the fifth recurring positive EBITDA in the quarter -- in the quarters and an increase of 27.8% in handling vehicles for TEV. We also highlight the reversal of the losses accumulated in the first 9 months of 2017, with an accounting gain of BRL 16.5 million in Tecon Vila do Conde, generated by the recognition of income tax and social contributions that were reversed. This accounting shows that there is a positive perspective and a profit in Vila do Conde. We can only recognize this, the income tax, and the other from previous year. With the results we see that the company presented in Q4 '17, a net profit of BRL 20.4 million accumulated in 2017, a consolidated net profit of BRL 2.5 million.

Now going on to Slide #2 and 3. We have the operational indicators in Q4. We see a drop of 7.1% in the volume handled in the operations of the company in Q4 '17, totaling 248,903 containers. Still with the -- suffering the impact of the end of the contract of ESA at the end of April 2017, I already mentioned before. But if we purge the results that ESA from the annual comparison with Q4 '17, we will have an increase of 13.8% in the volume of the 3 terminals, with a positive influence in the long-haul services at Tecon Imbituba, apart from the good performance of Tecon Vila do Conde. Tecon Imbituba handled 12,494 containers in the quarter, 2x more than the total handled in Q4 '16. The new Asian contract was responsible. It is called ASAS, ASAS was responsible for 38% of this total. And Tecon Vila do Conde total handled in Q4 '17 21,980 containers, which represented an increase year after year of 15.6%. In the Port of Santos, there was a recovery in the market share in Q4 '17 in comparison to the previous quarter, but is still -- it is still low -- below that of Q4 '16. The market participation of 32.5% in Q4 '17 as compared to 41.6% in Q4 '16.

In Slide -- on Slide #3, we see the decrease in the volume handled on a monthly basis in the terminals when we compare Q4 '17 with the previous quarter. We remind you that, as of May, the monthly drops year after year were caused by the end of the ESA contract. The mix of full containers had an increase to handling of full containers had an increase in the participation, which went from 57% of the total -- which went to 57% of the total, 1 point higher than in the Q4 '16. At Tecon Santos, we registered a drop in the handling of full containers, around 11.6%, due to the exit of ESA. The retention index of full containers for storage went up 39.9% in Q4 '16 from -- in Q4 '16 to 57.3% in Q4 '17. And we had a volume of warehousing that went up 42.9% due to a good sales management, which increased the warehousing of containers by direct clients. The contract signed with cargo agents in NVOCC also contributed for the TEV handle 69,674 vehicles in Q4 '17, a growth of 27.8% in relation with previous year. The exports of vehicles corresponded to 97.2% of the handling. And once again, had a good performance in the terminal.

On Slide #4, we see here financial highlights. Net -- consolidated net revenue of Santos Brasil reached BRL 210.9 million in Q4 '17, practically stable if compared with Q4 '16. There was a drop of 11.9% in operational revenues of the Port Terminals, compensated by the increasing revenue of the other business units. Santos Brasil Logística increased its billing by 46.3% in Q4 '17, and TEV had a revenue of 26.5% higher in relation to Q4 '16. The contribution of Tecon Santos in the net billing of the company, net consolidated billing was 57% in Q4 '17. And in Q4 '16, this contribution was 67%. The lower participation of Tecon Santos in the billing of the company is due to the end of the ESA contract, but we also had growth in the other units of the company, highlighting Tecon Vila do Conde. In terms of operational expenses, in Q4 '17, we had nonrecurring expenses due to labor lawsuits worth BRL 3.3 million. Also, the results of some layoffs.

I would like to highlight a drop of 7.8% in the average cost per container handled and also stored warehouse due to the lower cost of labor. TEV -- in TEV, we saw a small increase of 1.3% in the average cost per vehicle transported. The company closed Q4 '17 with a consolidated EBITDA BRL 26.8 million, excluding the cost -- the nonrecurring cost EBIT -- recurring EBITDA in the quarter reached BRL 30.1 million with a margin of 14.3%. The net profit was BRL 20.4 million in the quarter with a positive impact of the taxes that we will recover.

Once again, we say that we have a robust cash position, which maintained a low level of debt, closing the quarter with a net cash of BRL 37.7 million, which represents leverage and also debt EBITDA in 2017, which will be negative 5.45x. These are the main comments concerning Q4 '17.

And now we are available to answer questions. And we would like to thank you in advance for participating on this call. Thank you. Now we will begin the Q&A session.

[Operator]

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

[Victor Mizusaki, analyst]

The first -- the credit cost of BRL 45 million and the part from 2017. Can you give us a number for cost cutting in 2018 or cost reduction in 2018? And how do you see market share in 2018?

[Marcos de Magalhaes Tourinho, executive]

Victor, Marcos Tourinho. Well in relation to your second question, market share, we won recently a new service to Asia although it's not a large service, the trend with this service and also with Maersk, which joined while we saw in this half, we'd able to gain more market share in 2018. In other words, our expectations are positive. We have positive expectations in terms of winning market share in 2018. It's hard to tell you percentage wise, these gains, but I can tell you that this is the trend from now on for Tecon Santos.

[Victor Mizusaki, analyst]

Marcos, only a follow-up question. You mentioned, for example, the contract going from monthly to week -- to quarterly. Is there a period for this option?

[Marcos de Magalhaes Tourinho, executive]

It's not really an option. We're negotiating with other companies for this service in Asia to have more ships and have a weekly service instead of a quarterly -- of a fortnightly. Weekly services instead of every 15 days. The year began on a positive note. The port grew almost 16% in terms of container handling services. And there is great optimism on the part of the companies for 2018. There should be a strong growth at the beginning of 2018. And we believe we will -- this -- the ships are full, in general, from -- ships from the north of Europe and Asia are full. So the need for additional capacity for some services in the port will probably be confirmed during the year. So we're optimistic -- there is optimism at the beginning of the year.

[Antônio Sepúlveda, executive]

Antônio Carlos. Concerning your question about cost, our work is strong in reducing the cost per container handled. So we're working to increase productivity in the handling of containers, especially productivity buying equipments in -- due to the cost and also productivity per person, by employee. What we want this year is to increase the volume. And then with the leverage that we have to reduce the price per container handled. We have a goal. We have a long-term goal to reduce at least 5% a year, the cost of containers handled. We had a -- we did a restructuring. And now we are leading the restructuring. And now we're having operational gains in capitalizing on these gains in productivity. There are some investments that will be made this year, changing equipment, software. This will enable us to do this -- to increase the volume in the terminal without increasing costs. This is the strategic direction that we have for the year. I can tell you that, in numbers, we can reach a cost reduction in relation to last year of 5%, 5% a year. Of course, this depends a lot on the number of containers we will capture this year. In the previous year, when we look only at full containers, imports, exports, the growth was 9%. We believe that, this year, the growth will be higher, although at the beginning of the year, it's a little slower, but we're feeling that there should be a strong rebound this year. So we had very positive expectations due to our -- we want to reduce the cost per container handled and thus increasing our margin.

[Victor Mizusaki, analyst]

Okay. Concerning expectations of cost reduction per container handled with the investments -- what are the investments in 2018 and also the contract that was renewed in advance?

[Unknown Executive]

We should begin civil works and the acquisition of equipment. This will not be ready this year. What we will reap in 2018 is what we began in 2016, '17, a lot in software systems that we developed, especially administrative processes, operational processes. And now we have a new model for management of the yard, improving the way we plan the terminal. I believe that this will bear fruits and our objective is to maintain the structure we have and increase the number of containers handled by equipment and by employee. The investment that we make this year will have -- will bring results in the next 2 years. This is how a container terminal works.

[Operator]

Next question, Mr. Pedro Bruno from Santander.

[Pedro Bruno, analyst]

The first had to do with the cash evolution. It was answered. My second question, what do you see concerning the port as a whole? What do you see in terms of a trigger for the usage of the port to have more favorable prices? If we look at the past, the dynamics of price was very different. Today, it's very different. And as the usage of the port goes up, you -- how do you see the possibility of an impact on prices?

[Marcos de Magalhaes Tourinho, executive]

Pedro, Marcos Tourinho. I believe the main trigger -- can you hear me? The main trigger is the growth of the GDP of the country. We are linked to macroeconomic factors, so this correlation with the GDP is very strong. And also, growth in imports. The link to the growth in the GDP, growth in consumption. So with imports growing, the trend is to have a price increase, also an improvement in the mix, better usage, especially the retro area in the port and a good balance between offer and demand. But if we have a growth of the GDP above 2%, which is what we expect this year, the port will have a growth of 10%. 2 years of 10% growth in the port will give us a more balanced situation between offer and demand. And there is a strong demand to slowly recover prices -- prices to recover. I believe this will happen. We've seen signs of the price recovering.

[Operator]

Our next question comes from Samuel Alves from BTG Pactual Bank.

[Samuel Alves, analyst]

My question has to do with logistics and warehousing we saw with an interesting repricing happening quarter after quarter. Please comment based on your experience, with this new sales strategy that you have, do you guarantee a higher retention rate and offering new services to increase the price?

[Marcos de Magalhaes Tourinho, executive]

Marcos Tourinho. In reality, until last year, since we have this balance between offer and demand, our focus was on volume, to avoid losing clients, especially those that unload in Tecon Santos, those that have containers loaded in Tecon Santos. So this was our main driver to improve significantly retention. Historical retention in Tecon Santos was 45%. We got to almost 60%. So the guidance is not to lose the imports that come to Tecon Santos. And we were able to do this. Apart from this, we are now in a new business segment to minimize the drop in volume, the NVOCCs. 5 years ago, 4 years ago, we did not participate in this market. And due to the recession, due to the market, we decided to go into this area. And this helped the company a little through these hard times in the last 2 years, 2.5 years. Now we're going to change our focus. The idea is to work not only on volume but also in the attempt to recover prices, slow recovery of prices. This is strategic for us. So our strategy in sales, we lose working out -- working with better loads. And also in the last few years, we have created accessory and supplementary services for cargo services that we did not have in Tecon Santos. This also helped us to decrease the effects of the recession that we suffered, especially in the port, where we had not only a drop in volume, but a great increase, as you know, in capacity, with a -- beginning of [ IBCP ] and then [ car ] parts. So now the driver will be price recovery from now on because there is a difference between the quality of the services we render, especially in Tecon Santos in the Port of Santos, Tecon Santos and the price that we charge in Santos. So this will be the focus from now on, price recovery.

[Operator]

[Operator Instructions] The next question comes from [ Leo de Fontenelli, ] Bradesco BBI Bank.

[Unknown Analyst]

Just a quick question. Could you update on the process for Imbituba and Vila do Conde?

[Unknown Executive]

Andrew, you mean M&A? Alternatives and strategy? Okay. Alternatives and strategies. I believe we have no use -- nothing new, nothing relevant to communicate to the market in general. It is in progress, it is happening but there is nothing new we can tell you, apart from the material fact that we disclosed. I'm sorry. I can't give you a more in-depth answer. But in fact, there is no concrete fact. There's no material fact to disclose, and the minimum handling in Imbituba...

[Antônio Sepúlveda, executive]

Andrew, Antônio Carlos speaking. We continue with our process in the transportation ministry, awaiting final answer from them. We have great trust in our process. I believe that we're not being able to have more speed, but we continue working on it, based on the legislation, but we haven't received an answer yet from the authorities.

[Operator]

[Operator Instructions] We'd like to close the Q&A session. I'd like to pass the floor to Mr. Daniel for his final comments. Sir, you may proceed.

[Daniel Dorea, executive]

Thank you for your patience. I would like to supplement Victor's -- the answer to Victor's question. The company volumes are dropping. We lost a relevant service contract, so we are trying to reduce in relation to 2016 our cost structure and expenses. We are reducing -- so we made this reduction in the cost, as we mentioned, around BRL 45 million. The point is the following: when you lay off -- normally, layoffs in Brazil with indemnities, it takes 5 to 6 months to pay the indemnities. We had nonrecurring expenses with labor lawsuits due to the layoffs of BRL 17 million during 2017. A relevant part of this you will only capture totally as of 2018, this year, because the benefit is not noted in the same year. In 2018, as Antônio Carlos mentioned, we will continue even more the cost of G&A and now some changes in the structure, which will decrease some relevant costs for the company, not only labor, but machinery, fuel, maintenance especially, which should decrease our cost structure, supplementing the answer that Antônio Carlos had given.

So if there are no more questions, we would like to close the call. We thank you all for your presence, your time. And we hope to be with you in the results of Q1 on May 15. Thank you.

[Operator]

The conference call is now concluded. Thank you.