Santos Brasil Participacoes SA

BOVESPA:STBP3

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, and thank you for holding. Welcome to Santos Brasil Participações Fourth Quarter of 2019 Results Conference Call. With us today here are Mr. Antõnio Carlos Sepúlveda, CEO; 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 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, and the replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions to our website. They will be answered by the IR team after the conference finishes.

Before proceeding, let me mention that forward-looking 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 result to differ materially from those expressed in such forward-looking statements.

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

[Daniel Dorea, executive]

Good morning, everyone. Thank you very much for being here. I have here Sepúlveda and Ricardo, who is Chief Commercial Officer. And together, we'll be talking about the results and earnings presentations of the fourth quarter of '19.

To us, 2019 was bittersweet. On one hand, we were able to grow operationally and financially due to the large movement of containers, especially in the Santos port and also to increase revenues compared to 2018. On the other hand, the growth that we expected was severely impacted due to the macroeconomic structure, which was very below market expectations and they impacted dynamics and clearly the dynamics, which was not expected. In the Santos port, we dropped by 0.3% the movement of containers. And therefore, Santos Brasil grew by 7% in the period and increased almost 8% of the movement in 2019, growing above 1 million. And we have gained market share with a participation close to 40%, which indicates our resilience, our superior quality of service.

As a summary, the expectations of the year are low. However, we believe that in the company's trajectory, it was overall positive, especially because of the shrinkage of the expectations.

In terms of the last quarter, the operations of the ports and containers will increase by 5% in a consolidated and the value of imports increased by 36% and transport dropped by 13%. 80% was the use of Tecon Santos and the vehicle terminal also suffered with the drop in imports and exports to Argentina and dropped by 20% compared to the previous year. In the fourth quarter of 2019, we grew in exports and imports of vehicles compared to the same year of 2018. In addition to the greatest volume of imports, there was an improvement in the vehicle mix.

In Santos Brasil Logistics we saw the impact of a lower flow of imports in the Santos ports because our warehouses are operating loads of clients whose containers have been disembarked in competition. We suffered on the right margin of the ports because of the units that is there, which is the Santos key and the migration of long-haul vehicles to the other parts of the left-hand of the port. This has suffered with the vehicles imports, and I'd like to highlight the integrated logistics operations increase and in-house operations, which developed with our clients in addition to the Port of São Bernardo do Campo.

Another -- the company revenue was BRL 1 billion, which is an increase by 4% compared to 2018. In the fourth quarter of 2019, gross revenue totaled an

increase by 2% compared to the previous year. It is in worth noting that there was a change in the tariff collection by CODESP, which started being charged by the ship hub maker and therefore, this was excluded from and was an impact to our revenue and the cost of handling. Therefore, the gross income was not impacted. Santos Brasil grew by 17% in 2019, totaling BRL 221 million with a 22.6% margin in a model of IFRS 16. The increase in warehousing and the improvement for whether control of cost and expense reflected in better indicators. And the fourth quarter in '19, the results had a margin of 30.7%.

Concerning CapEx, company invested BRL 120 million, most of this in Tecon Santos whose projects for revamping will continue to advance throughout 2020 and 2021 with an improvement and receiving new equipment, which will be start operating right now. Therefore, we have good levers and BRL 450 million in availabilities and assets as well.

In 2020, we are sure that we will keep on the track of recovering our figures and also recompositioning its prices. And, of course, we will be suffering the coronavirus effects in the global market. And structurally, we'll do all we can to avoid the impact and to protect our business.

These were my initial remarks. This is what I had to say. And I believe that you may have questions. And if you do, we are here to answer your questions. And I would like to thank you all for being here today.

[Operator]

[Operator Instructions] Our first question is from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

I think a question that I have, and I'd like to hear from you is what about the coronavirus, the Chinese retraction in the market, how is the port impacted? So I'd like you to explain more. And so what does it mean? How exposed is Santos Brasil to this risk in terms of volumes for China or even in terms of the shrinkage of containers in the global market? How should we expect? What should we expect? And how -- what is the best way to understand this? What is the timing? We haven't heard any information on the impact because, of course, there is a lead time of these volumes, which will be coming in at a lower rate. Would you please share more on this because it is a major concern at the moment?

[Ricardo dos Buteri, executive]

Lucas, this is Ricardo. I'm the company's CCO. And the elements that we have, we have been managing them every day because of the impact of the coronavirus. Speaking in terms of the globe, both exits and cancellations have been planned. The ports in China are full of containers, which are not being shipped. And because it takes 30 to 35 days to get here, what we know and we can say now very briefly is that in March, we had effectively 5 cancellations from Asia, but this level of cancels stopped, is being in terms of 16%, only transports and empty containers. And the full containers in these docks, which have been confirmed and been canceled from us, only represents 3.3%. Therefore, the impact of March will be approximately 2,500 full containers. That's what we have for March. This is what we expect based on our clients -- based on what our clients have told us. When we speak of April, which is the following month's shipping that are not here, and we see that we have confirmed that 3 stops have been canceled. In our opinion, the peak should be the last week of March and the beginning of April, which is the lack of figures in February will peak in April. However, after May, for Santos Brasil, the handling of containers will pick up again. And even though we have a lower number in the beginning for Asia, but the services will probably be all taken up again. That is what we have for March and April in terms of cancellations and what we have. Therefore, in our management with the ship owners as of May, we will pick up.

[Lucas Marquiori, analyst]

Can I just follow-up on 1 point? I understand that this is the impact that containers are generated in China, have you been able to track what is the indirect impact, the lines that are seeded with the Chinese lines? What are other impacts that we should expect, which are not the thought for China?

[Antônio Sepúlveda, executive]

This is Antõnio Carlos, Lucas. It's very difficult for us to find the correlation, and it would be more related to the moment of the global economy and the coronavirus impact. And for us, it's too early to have a figure to it. What we do know is that there is a peak of nonshipping in our -- that will be the peak in February. And therefore, for us receiving this will push it forward for us to March and April, until May. In the Financial Times, there is a chart showing the recovery of the stops in Asia. And what this chart show is that at the end of February, the cancellation of stops -- should stop here, will -- are different. Therefore, in the end of April, things will be back to normal, if things remain the same. And as another important point, when these containers are loaded they will go and everything that has not been loaded will not disappear. Rarely, we believe that the load is on the floor, right? We do hope it's going to be shipped. The region that is affected is a major supplier of parts for the auto-making industry. The cars are here and the automakers, and there will be a repressed demand. Therefore, there will be a peak later if there is a drop now. It is difficult to precise exactly how it will disappear from the statistics, but we believe that what we lose now will pick up in May. Our expectation today is that the second half of April, we have things going back to normal. That is obviously an expectation and we can't really foresee the future with data from the past. But the expectations are just what I've told you.

[Operator]

Our next question comes from the webcast, [indiscernible] from MS Services.

[Unknown Analyst]

What are the prospectus for growth in the Santos port compared to the expectations for the domestic product, the GDP?

[Unknown Executive]

We started in the first 2 months in a very fractioned way. And with -- because of the impact of the coronavirus that we have been identifying for March to April and with a pickup from May onwards, we still see -- we believe that we will have an incrementation of twice the GDP. And because of what Antõnio Carlos said, this would affect -- that we will have when the shipments in China go back to normal. The containers are already there. Therefore, we believe that in the second half, there will be a trend of twice the GDP. That's a possibility. Just as an information that Santos port in January grew by 13%, and in February, we still have to confirm, but it's around 7% to 8% of growth in terms of demand in the beginning of the year.

[Operator]

[Operator Instructions] We have another question via webcast. Marcello Aguiar from Lebion Equities.

[Marcelo Aguiar, analyst]

Could you please give me more information on the price renegotiations for 2020? The impact of the exchange rates in your operations?

[Ricardo dos Buteri, executive]

Marcello, this is Ricardo again. Speaking about the renegotiations, we have some agreements that were due in 2019. And in the beginning of January, now in February, we reestablished the balance because the exchange rate was an issue. And in the recent past, this was not a reality. And the assets in Brazil that has more efficiency to supply our clients. We accelerated a number of agreements. We brought them forward in order to reestablish a contractual balance because this will be better for Brazil and for the Santos port. And by doing this, around 2 digit of recomposition of all the contracts we have renegotiated. That is what we can say about the renegotiations of prices for 2020. They are already retroacting until January and February, and they will be effective for the entire 2020.

[Operator]

Our next question comes from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

Just to obtain some information about 2 things. The first one about your area. Number two, the temporary use, how is this being implemented if this key is going to be authorized so we can have an idea of the revenue potential? And the second thing is, could you comment on the recurrent margin for the fourth quarter? There was a drop, right? But you have the pro forma margin to 11%. I know there is a seasonality effect, but there's a lot of nonincurring effect. What should we expect if this margin comes? And what will happen in 2020? That will be the key.

[Unknown Executive]

Thank you again for your questions. About the first point that you said, what we can say is, effectively, we have been following the process of all the regulations that we have to comply with and the contracts that we have where we won the business, and it's already moved forward. And we are waiting for March for the agreement to be signed as soon as we have a confirmation of the transition agreement, so we can sign it and, therefore, to take over this unit. Meanwhile, we have a number of fronts in terms of loads being studied with clients and our own personnel to seek all the licenses that we are required to start operations. So we believe that from unpack in March, we'll receive the agreement for signing.

[Lucas Marquiori, analyst]

And how about the margins?

[Daniel Dorea, executive]

This is Daniel. The third quarter compared to the fourth quarter of '19, this drop is due to seasonality, exactly, as you said. The third is usually the best. And the fourth quarter, there is a slowdown. This year, the fourth quarter surprised us if we look it against the fourth quarter of 2018. If we look at the recurring EBITDA, there has been an increase by 56%. What we noted was that there was a strong October, November, in which we expected a slowdown in the first week, it was -- it remains strong for the 2 first weeks. And therefore, this impacted a growth in exports. That is the explanation. We should expect a fourth quarter for 2020 better than the fourth quarter for 2019. But because of the pricing, we probably have a better pricing than the pricing for the fourth quarter of '19. That's our expectation.

[Operator]

Our next question comes from the webcast from MS Services.

[Unknown Analyst]

How do you see the operations of containers of Libra that now has opened way or path? Who is going to take the Libra share?

[Unknown Executive]

Thank you for your questions. I think the main point when you look at the close down is a better balance between the offer of capacity at the port and demand. The services have been distributed across 2019. They were -- they went to BTW Santos, which took 90% of this volume and 10% migrated to Santos Brasil. What we see now is the following. Because of this competitive environment in which we're expected to operate at full capacity, what we see is the consent is very well positioned to take on an additional demand that would go to the Santos port because we still have the ability to absorb quality demands especially because of all the new equipments coming in. And if we go look at BTW Santos, although they do have idle capacity, they migrate to another kind of loads, which is focused on pulp. They have this opened warehouse for pulp with a devoted unit for pulp. There are no new equipments coming in, and this is due to a long-term agreement signed with Fibria and Suzano. So at Tecon Santos, we're very well positioned for high-quality services in order to absorb any potential demand at the Santos port.

[Operator]

Our next question comes from Tiago Noel from the Athena.

[Tiago Noel, analyst]

How do you see the trend of those sides? Do you believe the drop will continue as in 2019?

[Ricardo dos Buteri, executive]

Thank you for your questions. The trend in the last few months, if you compare the beginning of 2020, there is no kind of variation compared to the 10.9 days in the fourth quarter of 2019. We have a mapping of all clients and that are accredited at the OAS on the issues of waters. And what happened is that figures have not been growing. There are no new players for the PSA. And for the clients that have already testing and continue with the volume in this kind of handling, we have provided new kinds of services. So it's very common for you to look at the profile of clients as an import of agricultural machinery, including what we have been offering transport services so they can set up their own machinery before they come to the coast. So what we see is, in the last months, we have this rate at 11 days, and these additional requests have enabled us to recover revenue.

[Antônio Sepúlveda, executive]

I would like to add what Ricardo said, this is Antõnio Carlos, by the way. The jump in real-time increases significantly the capacity of the terminal. What we have to do here and what we've been doing is to focus on the nature of the revenue. How can we transform throughout the year the equipment that has a lot of volume at low cost. This is what our job is. We want to increase the volume of containers handled per headcount, per equipment. We have been delivering new algorithms that have decreased our handling rates. Every container that is unloaded, we are reducing the movements on the patio. So it's a natural transformation. We are looking for efficiency and we have sustained the way that we generate revenue. Of course, revenue comes from increase in volume and cost reduction. But in any case, you have the niches where you have more added value, you have higher tickets. So we see this drop as a natural thing. It is constant. In the last 15 years, it has been dropping. And what the company has been doing is to create other forms of generating revenue and meeting new needs. And that's what we're doing.

[Daniel Dorea, executive]

Yes. This is Daniel. Just what Antõnio Carlos said and to wrap up. When we see this change in the warehousing dynamics affecting the efficiency of the Brazilian foreign trade, what we see is that there is competition, which is less harsh in the retro area of the port. So warehousing would tend to improve and to be better absorbed by the wet terminals and the retro agents that were created in the '80s due to a deficiency in the Brazilian logistics chains in this, in foreign trade, and therefore, we'll be able to absorb the warehousing in the wet terminals. This is when you look at a competitive dynamic.

[Operator]

[Operator Instructions] We are now closing the question-and-answer session. I would like to give the floor to Mr. Daniel Dorea for his final remarks. Sir, you have the floor.

[Daniel Dorea, executive]

I would just only like to thank all of you for being here. I hope to hear you, again, in our next earnings results conference. And we'll be here and we are confident in improved results for 2020. Once again, thank you on behalf of the entire management of the company.

[Operator]

The Santos Brasil Participações conference call for today is closed. Thank you very much for your participation, and have a good day.

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