Hidrovias do Brasil S.A. (HBSA3) Earnings Call Transcript & Summary

Good morning, everyone. Thank you so much for waiting. Welcome to the teleconference for results of the First Quarter 2023 for Hidrovias Brasil. We have the presence of Mr. Fabio Schettino, the Director and President; Ricardo Pereira, Financial Director and Relationships with Investors; Ana Carolina Bastos, the Manager -- the Head of Investor Relations. This event is being recorded. [Operator Instructions] The event is also being broadcast live via webcast, and it may be accessed through the website link made available for investors and analysts. [Operator Instructions] Before moving forward, I would like to mention that forward-looking statements are based on the beliefs and assumptions of Hidrovias management and on information which is currently available to the company. Those 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 conditions and other related factors could also cause results that will differ materially from those expressed here in such forward-looking statements. With that being said, I would like to turn it over to Mr. Fabio Schettino so he can start his presentation.

Good morning, everyone. Thank you so much for participating in the call of Hidrovias Brasil first quarter. As you probably might have seen, we disclosed yesterday some information with consolidated financial information for the first 3 months of the year, which is much more in line with the potential of the installed capacity of our company, and those put us back on a trajectory for growth and for cash flow generation. I will start the presentation on Slide #4. And by the way, I remind you of the history of our company. You can see the time lines here, and our development in those 13 years of existence. And I always like to remember that it's only 13 years of existence that already resulted in some very strong outcomes and a highlight position in the logistics chains in South America. 13 years worth of investment focused on growth, consolidation and also the growth of the current logistics corridors, and that shows the strength of our pillars. And I always like to stress that our pillars remain untouched, and they become even more evident as we go back to our normal conditions of operations in the main logistics corridors. We started on an investment business back in 2010, which was developed as we were signing long-term contracts with first-line customers to develop innovative projects in the 2 main corridors in the continent, which is the Amazon Basin and the Paraguay-Parana Waterway. In 2012, we had our first major contract. And from then on, we became the largest ore exporter and one of the leading grain exporters and transporters. So we acquired the [ coastal ] bauxite contract with a long-term contract with [ Alunorte ]. We also leased a terminal in Santos, which is the main entryway for fertilizers and salts to replenish the Southeast and Midwest regions in Brazil. We did our IPO on B3 and we also acquired and integrated the aspects of Imperial Logistics, doubling our capacity for self-navigation, and that gave us more flexibility, even on the operational side, to face a very challenging period in the last 2 years, which demanded a lot of adaptation, agility, and at the same time resiliency for our business model. So those were 13 years of a lot of learning, a lot of resilience and much fruitful investment, which put us in a position to extract all the results and potential from our business as those became mature. We conclude the first cycle of investment now in '23, and in '24, we'll be in a better position to operate fully in almost every single corridor. And with that -- left-hand side, where you can see the consolidated volume for the quarter, which was once again a record for the period. So we had over 4.4 million tons of product being handled for our customers. And we also have a more relevant contribution in the southern corridor for our portfolio, which is now operating in normalcy as of February this year. So as we had disclosed previously, as we had said in our monthly commentary to the market, the average growth rate for the volume curve, or CAGR, since 2019, was above 16%. And by the way, the full potential of the Southern Corridor has yet to be reached because January was a month of a lot of restrictions in terms of navigation in that corridor. And the Santos terminal, which is in the process of growth its [ volume curve ], it is also yet to be completely mature. So I remind you that we still have long-term contracts on take-or-pay format, which enables us to be very resilient on our revenue curve. Not always will our volume curve be 100% in line with the revenue curve, which is obtained on the operations because when customers do not perform the right volume, there is an offset, which is a contract right for revenue per the exercise of take-or-pay clauses. So that gives us more predictability on the revenue curve irrespectively of any variations in volume. Now moving on to Slide #6. On the left-hand side, we can see the historical development of our net revenue. In the first few quarters, since 2019, you can see a growth, and you can see a more -- even more expressive growth, almost 25%, which is superior to the volume. So in other words, we grew our revenue above the volume growth and totaling a revenue to the tune of BRL 473 million in the 3 -- in those first 3 months of 2023. And on the right-hand side, you can see the adjusted EBITDA. And we adjust that by the hedge account and the nonrecurring items, which is also a record, despite us not reaching our full potential on cash generation in the company. Like I said in my previous comments, because of the month of January, it was still very restricted in southern navigation. And we are also on a ramp-up curve in Santos. So adding it all up, BRL 211 million EBITDA for the first quarter. So in the same token, the average compound rated growth for the EBITDA was almost 27%, of CAGR, since 2019. Which is to say that we grew our volume, we grew more than proportionately in our revenue, and we grew more than proportionately in our EBITDA, which goes to show that we have gained some scale and gained [ volume ]. With very strict cost management, whether it's fixed or variable cost, our operating cost, we are very strict on the company's expenses, and we are very efficient because of our innovative solutions that continue to be productive and present in the business. I'll give you some examples here. 35 barges. We are now operating with electric pushers. And this has been a characteristic, this has been a very strong point of our DNA, and that enabled us to have a gain in productivity. We recently announced, for example, a buoy solution to handle grains in the Northern Corridor by using an area, which is the CDP area, which is the dock company in the state of Parana. And that added hundreds of thousands of tons to our North Corridor at a CapEx that is very low. By the way, we started the Northern Corridor with 4.5 million tons in capacity. We increased that to 7.2 million in few years with marginal investments. And now we are at a new level of full capacity in 2022. So that is yet another example of our capacity to develop projects and have very good results, with a marginal CapEx, that will be -- that will move more grains in the integrated system, going from 6 million tons in 2022 to 6.5 million tons as of 2024. So this project that I'm talking about, the buoy project, will enable us to maintain a strong volume coming from the roadways, which is another influenced area. And we will be able, therefore, to handle roughly 8 million tons as of 2024. We started the year with an external scenario that is much more positive and with a team that is qualified and engaged so we expect the best result from the operations, and going back to the same level of performances in our operation which is more in line with the full potential of our installed capacity. So with that introduction, I conclude the first part of my presentation. I'll hand it over to Ricardo, our CFO, who is going to talk about the results for each business units and also a little bit about the financial position. Ricardo, please.

Thank you so much, Fabio. Good morning, and thank you, everyone, for being present once again in our disclosure call, and especially now that the results are reinforcing our pillars. So we'll get in right into it. I'll start with Slide #8. If you can please put on that slide. I will start by talking about the Southern Corridor results, which is a record in volume, a record in net revenue and a record in adjusted EBITDA. Despite a January, that like we said in our previous reports, the month of January was quite challenging, we were able to break a record on revenue, EBITDA and volume. Which goes to show that in 2 months, in a mere 2 months of normalcy in operations, we were able to put ourselves in a best -- in a better position, in a comfortable position, reducing fixed cost, and clearly, with more normal cycles and variables. So without considering the JV, looking at the South Corridor itself, we had over 1 million tons being moved in this first quarter. And you can see that on the left-hand side, you can see that on the table here. There is a highlight for a 13% growth in our iron ore volume, and that came thanks to the MCR contract as well as spot format contracts that we have with other miners in that region. And I think it's noteworthy to mention that our assets proved to be strategically diversified for that type of load. As you might remember, there was a shortage of water in 2021, and we were the only logistics operator that was able to navigate for a certain period. And we were -- we accounted for 90% of the iron ore transportation in that region. Now even with navigation normalcy, which we see in the last few months in this first quarter, we concluded this first quarter with 52% market share, which goes to show there's been a significant growth and continuous growth since 2020. So -- yes, so that consolidates the waterways in Brazil as the main iron ore -- I'm sorry. Hidrovias Brasil as the main iron ore operator and transporter in this region. We have said this in previous calls, and we are just emphasizing this point. It is a great consolidation and very important for Hidrovias Brasil. Now on the same table, we can see that the grain volume grew almost 7% and it totaled 155,000 tons, and that maintained the growth in the production in Para, in that region, after some substantial drops we had in the previous years. As a direct consequence of that volume growth, we reached an operating revenue, which is a record BRL 172 million in the first quarter, which accounts for a 38% growth, even though the exchange rate went slightly less favorable than last year. We also had a growth in volume in our operating costs. Of course, it was higher than last year. But I want to point something out: They grew below the growth of our revenue. So that goes to show what we are used to saying, that we have a huge potential for cost dilution when we put ourselves in a better position with normal navigation conditions. We also reallocated our teams for the operation. We also had some higher expenditures related to the operation. But again, we are going back to normalcy, and that normalcy helps us to make sure that the South Corridor can again collaborate in a very important way, in a strong way with our results, even though it doesn't represent the full potential. Again, we are not at our full potential in the South Corridor. Now on the right-hand side, there is a graph that shows that the adjusted EBITDA by the hedge accounting represents BRL 57.7 million, which is the highest ever recorded by our company in the South Corridor. As a matter of fact, it's even superior to the previous scenario in 2021, back when we were accounting for the fixed income, we had a fixed accounting of take-or-pay. So the EBITDA margin -- the adjusted EBITDA margin grew by 5 percentage points, and it hit 33% just now on the first quarter of 2023. And to conclude this slide, I would just like to emphasize once again that we had a great recovery for the South Corridor. Now getting into the North Corridor for a second. Let's go to the next slide, Slide #9. Well, we had the sixth consecutive year of volume growth and gain in market share when compared to the same period in the previous years, which goes to show that this operation is extremely powerful, it's extremely strong, even with our record-breaking years. So it still grows despite we are breaking record after record. So 2.5 million tons being moved in this first quarter, as you can see on the left-hand side, which accounts for a growth of 23% when compared to the same period last year, which by the way, had been a historic record. I told you that on the previous slide. And I reinforce that on this slide just to emphasize the great growth we've had despite breaking record after record. So it's still worth mentioning that this expressive volume was reached in a quarter which is seasonally slower, but we had a record-breaking season here in Brazil, and that definitely contributed to the exportations to the external market. And this is what we always say about the gap in infrastructure in Brazil. The production and the level of competition are never head-to-head. And it's also important to say that, that occurs as we start billing some of the tolls in the road as of February this year. So in other words, we are attesting that there is no structural commercial change because of that toll in the road, which is something we said before. And actually, the improvement on the roadway is actually ensuring more competition for the north system. And it's worth pointing out a disclaimer. This volume which was moved is already contracted by the company and had no influence on the load allocation and the non-execution of volume for the Port of Santos. So in other words, this is yet another demonstration of major bottlenecks in that system because, like we said before, we are almost 100% contracted for 2023, okay? So the net operating revenue of the quarter has reached BRL 213.7 million, which accounts for a 21.6% growth comparing to the same period last year. I'll stop here for a second and just do a disclaimer which is important. In this growth, we also have to take into consideration the accounting for nontariff revenue which is related to the waste selling, which is an upside to the traditional business. And that was BRL 33.2 million last year and BRL 31 million this year on the first quarter. In other words, for those that like to look at the average tariff in the system, which I think is definitely worthwhile. If you adjust the revenue, you can see that the average tariff increased despite coming from a very strong basis last year with Cofco, and also a different mix of products. So that is to say that we have more share on the roadway and fertilizers. So I want to point something out also, which is a reflection about the robustness of this operation. Note that -- I want to point out that we are still growing without major investment. And just as important as this fact, we are not affecting tariffs. So Fabio mentioned our growth. And I think that this fact puts us in a position to overcome all the scenarios that were estimated and all the attention points reported by the market. So this is a very relevant reflection point about the robustness we have in the north system, and how significant this is to have record after record being broken. So operating costs increased, obviously, because we had a higher volume, but it's still at a lower level than the revenue growth. And we are still using -- which we're still operating and having good variable costs per ton. We grew due to some nonrecurrent rubrics which are not as relevant. And we did have to make some adjustments to obtain operating licenses in the system. And finally, on the right-hand side of the slide, I want to conclude this bit here. We can note once again that we concluded the first 3 months of the year with an adjusted EBITDA, which is a record for the period, which totaled BRL 136 million. And that accounts for a growth of a remarkable 25.8% when compared to last year's [ first quarter ]. And the adjusted EBITDA margin is very robust, 64%. Okay. Getting to the next slide, Slide #10. Let's talk a little bit about Coastal Navigation results. Those are still resilient. [ Our estimate -- everyone ] here is familiar with these dynamics, but it's worth remembering that when we stopped the operation for roughly 6 months with one of our ships, we do a maintenance, a complete maintenance. So that happens every 5 years for each ship. So this is a year where such event is happening. So we were sort of expecting this slight drop that we are seeing on the Coastal Navigation side. Even so, we moved 782,000 tons of bauxite, which is in line with the historical side of the operation. Net operating revenue is at BRL 59.8 million, which remained stable when compared to the first quarter last year. And despite the exchange rate being less favorable, especially compared to those BRL 3 million that were accounted for in the first quarter, which is related to the volume on the fourth quarter last year, of course, we consider that. And you may remember, we said this in the fourth quarter results call. Operating cost is superior to the same period last year because of the initial impact to sustain the operation during the docking period. So again, we take our assets, we send those ships to the shipyard for maintenance. And in that same period, we need to charter different ships to deliver on the volume. So we do have an impact. We had higher cost related to leasing a ship while the other one is undergoing maintenance. And also, the impact is not as productive because those assets or those ships are less productive than ours because our ships are very much superior to the average in the market. But given that price, given that cost, we considered that in our operation, we knew this was coming. And like I said, that happens every 5 years, that happens with each ship. So at every 2.5 years, we see it happening with at least 1 ship. Operating expenses are also superior to the same period last year that are -- have been some legal notices due to controversial tariffs. We also talked about it, I mentioned that on the past quarter, but nothing that significant because we already have a nominal absolute value that is very low. In conclusion, on the right-hand side, we can see that, due to the reasons that I just explained, the adjusted EBITDA was BRL 29.6 million with an adjusted EBITDA margin of 49%, as you can see on the graph. It's worth pointing out that the results of this operation of docking years are a little lower at normal years, but it's still very much substantial. We still have a great contribution for cash generation and strong currency for the company. Finally, I'm going to talk briefly about Santos. So I want to invite you to go to the next slide, which is Slide #11. Speaking about Santos, we cannot say -- I mean, we can say that the volume is surprising, and positively surprising. 314,000 tons of fertilizer being moved in the first quarter, which is in line with what we expected for the operation, which is still in an upward trend in its growth volume. At operating revenue, you can see that on the left side as well, that has reached BRL 27.6 million. And the EBITDA, which you can see on the right-hand side, has declined all the way to BRL 14.2 million, which accounts for a growth of 35% compared to the same period in 2022. And I remind you that we had roughly 4.5 months of the operation in 2022, and now 3 months in 2023. So there's been a significant reduction in that result with an even higher potential since there's going to be more of a reduction in cost and more of a reduction in expenses as the operation becomes more mature. So the adjusted EBITDA margin is at 51.3%, that you can also see on the right-hand side. So super robust for an operation as young as this one. Now we're going to see some financial data. So please, if you can go to Slide #13. On Slide 13, in the top left side, you can see that consolidated CapEx was BRL 83 million in the first quarter, a little superior than last year. And we also mentioned that, besides docking, there's been some scheduled maintenance processes and a 10.8% expansion which is related to the first cycle of investment being concluded, which is for development and consolidation of our business. So we are concluding some payments for the North Corridor. We are going to expand the roadway system in Santos, and there are some specific studies for operating improvements, such as bathymetry on the South. So in the last few years, the investment was really, really important to put us in a standout position in all the corridors that we operate. We are now leaders in iron ore transportation in the south, leaders on grain expansion in the north -- [ inspection ] in the north. We now have the biggest fertilizers and salt operation in the Port of Santos. And we have a very robust operation which is dedicated for bauxite transportation for the north. So the conclusion of this investment cycle is going to contribute to make sure that the company can present all of its cash-generating potential as of 2024, just like Fabio said in the previous slide, and also going through a very quick leveraging process and going back to its new growth trajectory. Speaking of leveraging, please go to Slide #14, where we can see that we had another quarter with consecutive deleveraging. So that was strongly impacted by the improvement we've had in the last 12 months. Our EBITDA continues to grow, and we are still deleveraging. And the net debt is on the same line. So it's worth pointing out that despite not having a direct impact on the leveraging process, we also had a reduction on the gross debt, which is also a standout point on the left-hand side that I want to bring to your attention. So the leveraging impact due to the division of the net debt over EBITDA in the last few months is at 4.58x in the first quarter. When you compare that to the 4.88x from the past quarter and 5.47 which we had, in comparison to the first quarter of 2023, you can see that the company has been delivering what it had promised, which is to not stop making the necessary investment, but still focused a lot to deleverage and not become so indebted in the last few months, and we intend on going down the same route. We still have a very healthy debt profile, you can see that on the right side, when compared to other Brazilian companies. And our schedule is very much long for amortization. So you can see that on the right-hand side, like I said, the main debt is going to come due on 2031. And the cost for that debt is very competitive. So we conclude the first quarter at BRL 561 million in cash, and this is a very healthy cash level when it comes to our obligations and our debt, which shows that we don't have any need to take new debt in the short term. So just in conclusion, this is what I'd like to say. Despite of us working to deleverage, the profile of our debt and the cash that we have in this company do not present any liquidity risk on the short term. Okay? So with that being said, I conclude my bit of the presentation, and I will hand it over to Fabio once again.

Thank you, Ricardo. So before concluding this presentation and opening up for Q&A, I would like to say that all of that development that we mentioned and that Ricardo said in the numbers, this is all happening in a very responsible way in terms of offsetting and sustainability for the business. Now let's get into the 6 pillars of sustainability commitments. Now when it comes to climate change; environmental impacts; local and human development; value chain; ethics and transparency; health, safety and employee development. Those are the 6 positive impact commitments that are part of our sustainability platform which is disclosed broadly to the market. So we were created with a sustainability inclination in our DNA because we are using the potential of our navigational -- navigable coasts and rivers, and we promote more competition for the producers in South America by delivering a transportation solution that is ever more efficient, ever safer and with a lower CO2 emission per kilometer. And again, there is no more eco-friendly way, more sustainable way, to transport large volumes on large distances. And that has been a very strong pillar on the development of our thesis since 2010. And we're going to continue developing on this topic and being pioneers on new tech and taking our Hidrovias style to all other sectors. So I want to ask you to go to Slide #17 at this point, where we have some of our sustainability goals for 2023. And that puts us in line in a trajectory for a higher ambition, which is looking for carbon neutral by 2030. These are important challenges, such as creating a plan for carbon offsetting and decarbonization of our operations; engagement with third parties according to our guidelines and also with some performance standards of IFC; and also coming up with a diagnosis about the sustainability challenges of our customers to make sure we can contribute for the whole chain to develop; and finally, create our first integrated report which is going to be made available this year. We already put the GRI report together last year. And this year, we take an additional step by doing our first integrated sustainability report which will be made available this year. We're going to talk more and more about this topic because it's a very relevant pillar when it comes to corporate responsibility. And in our understanding, it's essential to create a more balanced, sustainable and fair economy. I conclude my message on Slide #19. Despite us being a very young company, it's only 13 years in the making, we still have a very quick capacity to adapt and to develop solutions that are customized, innovative, and that puts us in a direction to make sure that, more and more we can create value and add value to all of our stakeholders. Our pillars are still rock solid, and this year's results make it clear. We have a business that has some strategic differentials that are clear and relevant. And we use the resources that already exists, like our navigable coasts and rivers, with the lowest possible environmental impact, the lowest possible CapEx in a way to develop sustainability in the South American continent and make the entire chain more productive. We maintain our DNA, which includes the ability of building new businesses with differentiated, innovative solutions with a seasoned team that is diverse and that works tirelessly around the clock to stick to the highest possible governance standards. And again, I say thanks to each and every one of you for your attention, and we're going to open for Q&A at this point. Thank you so much.

[Operator Instructions] Our first question comes from Henrique Simoes, Credit Suisse.

Can you hear me okay?

It's a little low, but you can continue.

I have 2 questions on my side here about the north. First, with regards to the volume that you are expecting for this year. We see that it's 7.2 million, the number that you showed and 400,000 tons in the first quarter and 8 million tons going forward. I would like you to elaborate a little more on those numbers, if possible. And also with regards to the roadway toll situation, if you can please comment on that. I would like to just hear a little more about it, if you can elaborate on that topic as well.

Thank you for your question. I'm going to start and Ricardo can chime in. So in terms of the north volume, here's what it's important to keep in mind, we have reached almost the entire potential as far as our installed capacity last year. So we are very close to 6 million tons on the integrated system, and we can complement that with roughly 1.2 million tons between fertilizers and also the roadway direct reception on our terminal. So what we have done as of right now is we are continuing with our high productivity movements, so 7.2 million tons. That is quite challenging to achieve. And this is almost the limit of efficiency. We are trying to make the most of our installed capacity, but at least there should be large nominal growth movements as of right now. And rather, we're going to look for operating efficiency, just like the super convoy, which is going to dilute our fixed costs. When you have a large convoy with 35 barges like we are doing, it's much better than 25. So that being said, Henrique, what we are doing, with the example of what we did with the buoy is precisely that. So how we can increase our capacity on the northern system without having to have a very high CapEx, and we got [ call tenders ] for 700,000 tons ore with the buoy, and we are investing at a low level of investment. And our -- we have a capacity to add this 7.2 million. We can put an additional 600,000 tons. So when we talk about 8 million, we are considering the completeness of our integrated system and also this additional capacity which we already gained, It's already formal. It's been published. And we are now counting on this additional capacity as of 2024. So we should see some stability in the integrated system. We are going to continue with our gain in efficiency as we have already done recurrently, and we're going to have an additional capacity in a more modular way, which is the example of our buoy. And by the way, this is really important. We respect our discipline when it comes to the capital structure, it's going to continue to be very rigorous. We are not going to burden that capital structure. We're going to continue to deleverage the company. And I talked about the investment cycle being concluded now in '23 -- late '22 and early '23. And the company is now a free cash flow generator, very strong. And we should continue to see that leveraging reduction in a very, very strong way. So when it comes to the volume, that's what it is. And we're going to continue to look for alternatives. And there are growth -- some nominal volume growth alternatives in a lighter capital structure, so as to not burden that capital structure. That is going to continue to be a priority for us. When it comes to the tariff, we've been getting some tariff movements which are constant in the North Corridor. And we remind you that, other players, they reduced tariffs in the [ balance ]. We never reduced tariffs. Our tariffs have always stayed steady. Even if when we renegotiate the capital contract, which puts us in line with the market, we've always seen the tariff nominal growth. So the tariffs, they are very resilient on our side because the north system is in a high demand, and it shouldn't be any different. So with regards to the roadway tolls, when it's 100% concluded, and I remind you that it's not yet 100% being applied, not all the tolls are being levied right now, the impact is going to be BRL 15 to BRL 20 per ton, which doesn't really change the competition level of the north part. But the important thing is for the roadway to be well kept because when you have well-kept roads that are predictable in their cycle, the gain in freight is much higher than the toll being built. So as I say, the major risk for Brazilian waterways was the contrary, was to not have good roadways and having the freights go back to the pre-asphalt levels. That would hurt competition. And yes. I mean, the concession is there. And as of right now, we have a concession, and the roadway has been well signaled, well kept. So we shouldn't have any change -- any significant change on our tariff policies as of right now.

Next question, from Pedro Bruno from XP Investimentos.

Now Fabio spoke a little bit about the option of the buoy, but I wanted to go a little more on that topic, Fabio, just to see if I understood it correctly, and get an update from you as far as those expectations in the increase of marginal capacity with low investment. I think that's an excellent example. So CapEx is BRL 11 million with an EBITDA generation capacity that is much higher than this number if we consider those 700,000 additional tons operating in the integrated system. And even if that is -- that was not the case, even if we considered only the elevation tariffs for the additional buoy, which naturally allows you to do that. I mean, that would be a good investment already. But I think the competition level becomes more accentuated, and you show how competitive you are in that region with the possibility of integrating that in the system. So that's what I wanted to confirm with you and doublecheck. And I want to know about the parallel initiatives for the system to have more capacity in the whole -- as a whole. So I think that you had some very good initiatives going on. So I just want to get an update from you with that regard. You even said that there are some opportunities for capacity growth in this asset-light model. So what are some of the opportunities from that front?