JSL S.A. (JSLG3) Earnings Call Transcript & Summary

Good morning, and welcome to JSL Conference Call to discuss the Earnings regarding the Fourth Quarter 2020. Today with us are Mr. Fernando Simoes, JSL's CEO; Denys Ferrez, Chairman of the Board of Directors of JSL; and CFO of SIMPAR Guilherme Sampaio, CFO and Investor Relations Officer of JSL. [Operator Instructions] We would like to inform you that this conference call is being recorded and simultaneously translated. Before going on, we would like to let you know that any statements made during this conference call relative to the company's business outlook, projections, operating and financial goals are based on the beliefs and assumptions of JSL management and rely on information currently available for the company. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions since they refer to future events and therefore, depend on circumstances that may or may not occur. General economic conditions, industry conditions and other operating factors may affect the future results of the company and lead to results that will materially differ from those in the forward-looking statements. Now I'm going to turn the call to Mr. Fernando Simoes. Please, Mr. Simoes, you may go on.

Good morning. We are now starting the release of the Earnings of JSL Logistics. I'd like to thank you all for attending. As you all know, we had the JSL Logística IPO in September 2020. The company then started to exclusively focus on the Logistics segment, being no longer a holding company. This is the first earnings release in which we are going to present a full quarter, again, focused exclusively on Logistics activities. So we are now starting our results of the fourth quarter 2020 and consolidated year as well. Before we start and talk about the main highlights of 2020 and the main numbers of the company, I'm starting on Page 2, talking a bit about our activities and what Logistics is all about. We are a company that for the last 19 years, the largest road logistics company in the country. Our history started 65 years ago with the largest and most integrated service portfolio, working with the main industries of Brazil that supply with their products, both Brazil and the world. We have dedicated services accounting for 39% of revenues, road car transportation that account for 45% of revenue, warehouse services 3% and other distribution 13%. All of these services are within the production chain of our clients, be it in the mining segment, pulp and paper, commodities that supply to the Brazil and the world, cargo transportation, automotive industry, food, beverage, personal hygiene and even urban distribution connecting industries and end consumers. These services are provided to our main clients. For you to have an idea, our tons clients have been with us for more than 25 years. Thanks, quite modestly, to the quality, dedication, level of services and technology that we have, contributing to their production chain and for them to conquer and consume it. Firm have been with for 40, 50 years. That has to do with our services, technology, that connect our clients to us, but also connect the clients with their own clients, bringing quality and integration to the whole chain. This is a bit of our activity in JSL that was parallel for us to go through such a difficult adverse year of 2020 and get to the numbers we are going to show to you about the fourth quarter 2020. Going on Page 3, we talk about the main highlights of 2020. We have the corporate restructuring. JSL no longer plays role of a holding. It is now in SIMPAR and JSL became a company that exclusively focuses on logistics. In September, we had JSL Logistics IPO. Now it is JSLG3, when we've raised BRL 694 million primary offer. That was a landmark of our history for a new cycle of development, organic growth, but also inorganic that, that is going to be one of the main pillars to support the transformation we want to go through. And according to plan, next, we acquired Fadel and Transmoreno, and we started the whole process of transformation. One of the main highlights in the year of 2020 was the resilience of our business. Due to our profile, our clients and our people, the year of 2020 was the sad year for everything that's happened, the very adverse year, but it was crucial to show the resilience of our business due to our operating model. And we used our whole operating basis to contribute to the world's declines with logistics of food, hygiene products, information that contribute into our infrastructure and uniting with the suffering of the most different. I think the whole team that was very important to the front. Going to Page 4, I talk about the main financial highlights. In the fourth quarter 2020, we had net revenues of BRL 818 million with EBITDA of BRL 121 million and net income of BRL 36.8 million in the fourth quarter 2020. If you look at the year of 2020 as a whole net, revenue combined was BRL 3.3 billion. And combined, I'm talking about Fadel and Transmoreno as well. We have combined EBITDA of BRL 541 million in 2020 and net income of logistics of BRL 147 million, also combined with the numbers. Now before I'm transfer in to Page 5, this is just a match up, but this is our operation center, and I cannot fail to mention how important this is. And here, you see our values, clients, people, work, simplicity and of course, profit, which is extremely important for our business. These are some of our main pillars -- our main high pillars that are paramount to let us go through times like this, not only with good numbers, but building a completely differentiated model. On Page 5, now Guilherme, our CFO, is going to give you a bit more color about the financial results of the fourth quarter '20 and the year of 2020 as a whole. Guilherme?

Well, thank you, Fernando. Good morning, everyone. We are going to present the results throughout the fourth quarter '20 and 2020 as a whole year in more detail. Before going in the numbers, we have to mention that Transmoreno was the consolidated on October 30 and Fadel on 17th of November. So the numbers includes the consolidation as of this date. So we have BRL 2.8 billion in revenues, BRL 2.6 billion in services and BRL 161 million in the sale of assets. If we combine the numbers of Fadel and Transmoreno in 2020, remember they are not audited, they are not combined the way we would get to revenues of BRL 3.3 billion. BRL 3.1 billion in services and BRL 183 million in the sale of assets. About the fourth quarter, we closed the year of 2020 with BRL 818 million, with BRL 29 million on the pay of assets. If we combined the company, not positive, as I mentioned, net revenues would be BRL 903 million, BRL 873 million in net revenues from services and BRL 30 million from the sale of assets in the quarter. Before going to operating income, I would like to say that our numbers include IFRS 16. In the fourth quarter, we closed the quarter with BRL 56 million against BRL 63 million the previous quarter -- the previous period. Margins were up from 0.1% against 8.6%, the same period last year. In the year as a whole, we closed the year with BRL 195 million operating income and margin of BRL 7.4 million against a margin of BRL 9.7 million in 2019. EBITDA, we closed the quarter with BRL 121 million against BRL 118 million of the previous quarter and EBITDA margin of BRL 15.3 million. In the year, we closed with BRL 432 million EBITDA and margin of BRL 16.2 million. Going to the net income in logistics. We closed the quarter with BRL 37 million with net margin of BRL 4.5 million against BRL 25 million, a margin of BRL 3.5 million in the third quarter 2020. In the year, BRL 85 million and net margin of 3%. What's important to highlight here is that we are showing the logistics net income, the Logistics segment, which does not include expenses with indebtedness that we considered as holding in the transient process of 2020 that you followed within the last call. And we tapped our release this way, just for you to have a best base of comparison with last year, but we are going to start just releasing our consolidated numbers as of the first quarter '21. And in 2020, we have some expenses that we do not believe are recurrent for the company. In the earnings release, we have a table to reconcile those amounts for you to take a look. Here are expenses with structuring, M&A and donations related to COVID-19. If we exclude the adjustments of the year's net income, we would get to 95 -- 7.5 with net margin of 3.5%. Another piece of information for you to know were the numbers if Fadel and Transmoreno had been combined since the beginning of the period, we will get to EBITDA of BRL 542 million in the year 2020 and net income of BRL 174 million in the year and BRL 43 million in the fourth quarter 2020. If we were to make the adjustments, I mentioned before, the income in fourth quarter was BRL 49 million and in the year, EUR 159.4 million. Going to Page 6, we break down the company's results between Asset Light in Asset Heavy. In Asset Light, net revenues in the fourth quarter was BRL 510 million against BRL 482 million in the same period in 2019. In 2020, we closed with BRL 1.8 billion net revenue. Operating income of fourth quarter, BRL 40 million against BRL 35 million in the same period last year and BRL 89 million of operating income with margin of 5.1%. EBITDA, we closed the quarter with BRL 82 million and margin of EUR 16.4 million against BRL 73 million in the same period '19, with margin of 15.4%, which shows the recovery in the Asset Light segment that we have seen quarter after quarter. In the year, we closed with BRL 242 million, EBITDA margin of 14% in EBITDA -- and Asset Light. Asset Light, we closed at BRL 309 million against BRL 300 million in the fourth quarter '19 and BRL 1.38 billion in net revenues. Operating income, we closed with BRL 16 million in the quarter, margin of 5.6% and BRL 107 million with margin of 11.5% in the year. EBITDA closed with BRL 39 million in the fourth quarter with margin of 13.5%. And in the year, BRL 190 million margin of 20.5%. What's important to mention here is something very specific compared to the fourth quarter '19, with increased operating net income and margin. They extended the ethanol segment. So when we compare quarter-on-quarter, we have this difference and that reinforces the EBITDA margin of the year, closing at 20.5%. On Page 7, I talk a bit about CapEx. Net CapEx was BRL 28 million in the fourth quarter '19 against BRL 50 million year-on-year and BRL 154 million against BRL 198 million in 2019. That shows the company's capacity to develop even with low CapEx, which reported our Asset Light model. Capital structure on Slide 8, we closed the year with BRL 638 million in cash, which enables us to amortize our debt until 2023, a net debt of BRL 2.2 billion, and that generates a net debt-to-EBITDA ratio of 3x and net debt EBITDA added 2.3% when we conclude the sale of assets. The average term of net debt for years and the cost already net of taxes go from 3.9% in December '19 to 3.4% in December 20. With that, I get back to Fernando, that is going to talk about the year of 2021.

Thank you, Guilherme. Now on Page 9, we are going to talk a bit about the beginning of '21. We cannot fail to mention what we went to do in 2021, what we already did without talking about our people. The commitment and the work of our people who execute our strategic plan. For you to have an idea, of our 140 managers in the company, we have some that are joining us today, but some have been with us for 37 years. On average, they have been with us for 10 years, the first crucial for our work, for our alliance and for us to execute the operations that are trusted to us by our clients. And now talking at this about what is going on now. In the beginning of '21, we have the acquisition of TPC and Rodomeu. We are waiting for their trust agency approval. Added to Fadel and Transmoreno, we have BRL 1.1 billion of new net revenues that are going to be added to our revenues of 2020, in line with our strategic plans, as we already shared with you. We are starting to capture new synergy, operational and commercial of Fadel and Transmoreno. And as soon as the CADE approves, we are going to do the same for TPC and Rodomeu. Quite modestly, we are experienced in acquisitions and always fit for the best synergies as we did in the past. We are starting to get a better capital structure with a prepaid of BRL 911 million of company indebtedness. So 2 important moves, decrease in that business, and we also prepaid more expensive debt in our investment profile. We do believe that we are going to have new businesses and recur the volumes in asset lines with better revenues, better margins and less CapEx. We also believe to increase margins because of the volume and synergies of the companies we acquired. We have been working nonstop on our apps and digital account, thus increasing our commercial partnerships with independent drivers and contractors, which enable us to grow even more in asset line. One of the very important sustainability action is going to be the publishing of Logistics' integrated report. In our strategic plan, we are also working on acquisitions, not only the ones that were already completed, but also we are carrying on conversations for the future. As we said before, we do believe the transformation of our numbers, not only revenues and margins due to scale and potential of growth in our segment, both organically and inorganically. And always remember, we have huge responsibility to seek the best return to work on the crucial segments in which we are Rodomeu is gas, TPC is storage. But also in the area of health, therefore, seeking people and services that can contribute to our development, improvement of our results and a new level of sites to offer the best services to our clients and returns to our shareholders. We'll now open for your questions and to answer anything you might want to know in more detail. With us today are Denys, that was the CFO of the Logistics segment and now is the Chairman of the Board of Directors of SIMPAR and Guilherme, our CFO. Once more, we thank you all for attending, and we are ready for your questions.

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

I have 2 questions. One for your M&A pipeline. You already talked in the call that you have something in your pipeline. So I would like to know what is your M&A focus? Do you have any segments that you want particularly to focus on e-commerce? I would like to know if you want to articulate to the segment or if you have any other that you are more focused on? And the second question is that we are seeing the increase of COVID numbers in Brazil, and we see already drop in production. And I would like to know if you have already felt the impact of the new wave of the coronavirus?

This is Fernando, who is saying for your question. Thanks for it. I think I understood your second question, that I'm not sure. But any way, in terms of M&A, Fernanda. Indeed, we are seeking to have acquisitions. There are several being -- assessments. And we do not focus on a specific segment. We focus on companies that are quality companies that have a similar value and culture to ours in terms of management and processes. We don't want to buy things that are not good or that does not have a good fit with us. We believe in management, in processes and the people and the history of these companies. And with one segment of high resilience that -- it pay attention to clients' production activity. In the case of Fadel for instance, they have a huge share in urban distribution and in the beverage segment. And things can go up or down, but this is part of what people's day to day. And then it's a company that is more than 20 years old, provides services to a very demanding, but fair client. So this is a company that has a lot of synergy with us, a very competitive company. When you go to TPC. This is a company that has some clients like Natura, Claro and we work inside their distribution centers. So we didn't have the transportation outbound. So what do they bring to us? It's not really e-commerce, urban distribution or anything else. They are inside the production change of companies, and they have cost of revenue coming from the health care area, which was an area that we had a little share. So this is also interesting. They work directly with clinics and hospitals. They have the caring of medication for more than 6,000 key coordinates. So again, complementary to our business, things that have continuity. So e-commerce is part of it that we want diversification. Diversification is unique and proved its resilience in 2020 despite of what happened in COVID. Another example, just to close, I think that with Transmoreno, we acquired for the caring of new cars, but also, we have new scale in the segments of the farming machinery. So we are gaining scale with the companies that are acquired very complementary to us and enabling us to grow into new segments. And that's what we look into, resilience of revenue and being part of the insight of the production chain of the main companies that are -- or the industries that are a must for different brilliant people. And today, we have an M&A area. They are very active. They talk to one another. We try and talk to families, family-owned companies. So of the BRL 1.1 billion net revenues coming from new acquisitions, I think this is going to continue bringing more acquisition on sort of the strategic plan, and we are looking into opportunities after the IPO of JSL. So this is what we are doing. And this is the moment we are going to. And the second question is the impact of coronavirus. Is that correct for January and February? If you can repeat your question?

Yes. If deterioration of COVID cases has affected, for instance, the automotive sector is suffering a bit?

Well, it's not really a deterioration because of the COVID-19. But as a whole, we feel clients talking about the top of sales in January and February. I don't know if it is because people are back to school with their kids, if they are traveling less, I don't know exactly what it is. But the COVID impact, perhaps, we might find something in March. But in January, February, we haven't felt much. You see last year, we had a third quarter that was very bad, but thanks to the diversification of our revenues the drop was very little. And here, the same thing, commodities, mining, pulp and paper. We were inside the production plant, and these industry segments that never stop. So we might have some -- but we also have new contracts and you see growth at Fadel, for instance, is growing its revenues. So I would say, again, without creating and a ForEx movement, we are very much focused on developing and delivering numbers that can surprise you even amidst the pandemic. We are prepared to do our best and deliver numbers at a differentiated level.

Our next question comes from Alexandre Kogake from Eleven.

My question is more with the records of the fourth quarter. You have a material effect. When you talk about Asset Light and Asset Heavy, you have growth in one segment, decrease in others. So I would like to know the -- for these. And also, if you could talk about the consolidated EBITDA margin. That also shows a drop year-on-year. And so what we could expect for '21? And my second question is about the EBITDA margin of Transmoreno. You had a drop of 10 percentage points. So I would like to know because if this is because you did not reduce operations waiting for the recovery post-COVID. And as things recover, go back to normal, you should go back to previous levels?

This is Guilherme speaking. Okay. First question, with regard to Asset Heavy, we have 2 points that we can highlight. In Asset Light, we see a recovery of volumes quarter after quarter as a results -- a good reflect of what we did. In Asset Heavy, we especially when you compare '19 to '20 is in between top of the ethanol segment, that has different signing compared to 2020. So in mid-October last year, you had a volume of revenue. So last year, I mean 2019, that were a bit higher. So especially in the segment I think this is something that you have to consider and always look at numbers on an annual base because you do have some fluctuations quarter-on-quarter. When you see the results in the whole year, you have a more normalized indicator. With regards to Transmoreno, we did have a drop in the number of new cars shipped. However, Transmoreno also has an operation inside OEM with internal services, and that makes the company to have fixed costs that, not necessarily, I can -- offset if there is a drop in volumes. But really, I would believe that the things are going to go back to normal as things pick up.

And this is Fernando. It's important for us to look always the whole of the year because when you have a stronger quarter, and you have small revenues in the farming segment or you have a difference in time. But then when you see the whole of the year, you have clear numbers. And you know, if you have to half it sooner, sometimes it affects one quarter. If you have it later, sometimes it affects the other. So we do have this natural seasonality, and you have to take a look a bit further than quarter-on-quarter.

Okay. If I could just have a follow-on to this question. If you compare EBITDA margins consolidated 2019, 17.5% then '20, 16.2%, you have the COVID impact. If you think of trend in '21, recovery of volumes and synergies. I would like you to mention what point could leverage and increase the margin? And should we expect the margin to go to the levels of 2019?

Okay. We do not disclose our guidance, right? So this is not something that we are going to do. But we definitely think that is still none. It would be quite irresponsible for us to make predictions. But what we can tell you is that our partners and our team are a lot more prepared for first year for us not to have interruptions as we had last year. So what I can tell you is that we are, probably as of '21, we are going back to a normal margins. And again, without creating expectations, we have lots of synergy to draw from acquisitions and other gains in scale with new closed quarter. So I do, again, without creating expectations, believe that we are going to get to better margins. And we are prepared to go seek for better numbers of this year.

And just to add the combination that was highlighted by Guilherme already leads our margin to similar levels and of course, everything that Fernando has mentioned about things that can be even better. But in combined numbers, we are already by 17%, just by combining the acquisitions that have already been completed. We have the numbers. Combined numbers, consolidated numbers are just total as of November, right? October with Transmoreno and November with Fadel.

[Operator Instructions] We're going to read and answer the questions that were posted on the webcast.

Okay. This is Denys. I'm going to read the questions on the webcast. The third question is the following. Can you talk about the downtime of automotive plants because of lack of parts? How much of your business can be affected?

Okay. We had in the second quarter of last year, the downtime of some automotive company. We do not have an expectation of downtime today. Of course, things can happen, but we do not have that in our horizon. Today, our revenues, I think, is less than 12% in the automotive industry, less than 12%, not considering some acquisitions to be added in the business in '21. If you consider 12%, but, then again, downtime, not very likely, you can have some one-off stops of some lines. If you consider a decrease of products by 20% and that's happening by 2, 3 months to have over 2.5%. If it happened in 1/3 of the year, you're talking about less than 1% drop in revenues because of volumes. So one second, unless there is a complete scale in an industry as a whole, we are not suffering any impact by one-off downtime. And we do not believe that the automotive industry is going to stop for now. The automotive industry is working very hard, very hard for this not to happen. They were working in a preventive manner, building up inventory levels. So I don't think it will happen.

Yes. And to add to what Fernando said. Just for you to remember, plants are not operating at the level that they were, when the COVID wave hit once. So this is a factor that still has more to deliver, given the operation that they have today.

[Operator Instructions] The second question we have on the web is as following. Could you explain the increase of our operating expenses? And in the same question, the drop of EBIT margins that Guilherme has already answered in a previous question. So Guilherme, just talk about the increase of operating expenses.

Well, operating expenses. Well, this is basically the result of the consolidation of Fadel and Transmoreno. So in the quarter, we had 45 days of Fadel and 60 days of Transmoreno. So the difference is basically due to consolidation.

Okay. And finally, we have a question at least so far, from Claudio Moreno. And he said, what is the management's expectations to complete the acquisitions of TPC and Rodomeu?

Okay. Remember, they are not in our consolidated numbers so far. Okay. Just to report to you, we depend on the antitrust agency. And another important thing to mention is that in JSL alone, we do not have a share, the logistics segment, for the antitrust agency, not to approve the acquisition. And so with all the acquisitions, we are still below 0.9% in the logistic market share in Brazil. So we have a huge opportunity for consolidation. So if you see TPC and Rodomeu, we expect about 30 days to hear back and have the antitrust agency's approval. But remember in our numbers, we have nothing in regards to TPC or Rodomeu.

We have one more question on the webcast, coming from Victor Daniel. You talked about the cost of fuel? Relevant increases happened in the first quarter, are you going to pass on to your contract?

Okay, Victor, this is Fernando speaking. Most of our contracts that are, do have a trigger for piece of increases, especially when you're talking about an impact of 5%, 6%. So to answer your question, yes, this is expected in our agreement and with regards to what is happening now. This really is something that has to be passed on to clients. We have a clear policy to automatically pass on to clients. We have huge operations in some segments that clients provide the -- these tool. We have dedicated operations 24 hours a day, even to avoid the stepping on cost, the tax line, we operate with the clients providing the fuel. So we are exact from this crazy fluctuation. And remember, we have difficulty to pass on cost to truck drivers because one-way trip or round trip. So we are working with a new operational model in logistics for us to gain productivity and make it easier for us to affect on prices. Yes and I'm going to enjoy your questions. Just to remember how JSL Logistics operate. Those contracts in which we have very intense use of assets, what we call Asset Heavy, have apparent metric norm that passes on any increased cost structure in order to maintain the contract in the average period of the contract that is basically 5 years. So remember, the company is more than 60 years. And have always experienced inflation times, but not really stability. So this is a knowhow that is within our contracts. Historically, that are part of the company's history. So we have had the mechanism for many years, and we are able to grow in stable or inflation time. And remember, when these contracts are tried, whenever you talk about the cost of capital allocation, you are always considering the future curves of the interest. You're never looking at interest today that in the whole of the period of the contract. And so what we use today is about 11%. So how much did reduce in June 2020, 9.5%. So with all the volatility that we see in interest rates, especially in short-term expectations, the company had the discipline when pricing control, looking in the long-term and having, therefore, less fluctuation. And remember, we have [Technical Difficulty]

Since there are no more questions, we are going to turn the call back to Mr. Simoes for his final remarks. Please, Mr. Simoes, you may go on.

I'm sorry. with the line has dropped. But anyway, I would like to thank you once again for attending this call. And again, just to close without creating expectations, I would like to say that when I look at JSL Logistics today, I think about -- in the test. We have a holding company. We had lots of companies under the holdings. And things were a bit mixed. Today, JSL Logistics with main focus on logistics base businesses, completely independence, with independent management is starting a new cycle, as you can see with the numbers of the fourth quarter and new acquisitions. You see the net of -- the drop of net CapEx is huge. The company has practically turned into an Asset Light company. We still do not have all combined operations in the fourth quarter. But you have companies coming back, the automotive industry in some sectors is still not fully, but we see that we can have a profit and better EBITDA even with the adverse scenario without even fully enjoying the synergies. We are very sad about what's going on in the whole of the country and the whole of the world. But as a business entrepreneur, we're very confident with the acquisitions made, the synergies drop, and we believe that they will lead to complementary business and growth to our company. To close, we are working very hard. Every day, our teams are focused on executing our strategic plan, seeking more and more synergies of the company with acquired companies, reducing costs, not only financial costs, but other operating costs, improving our activities, having our commercial team bringing more volumes, therefore, decreasing less costs. And in our plan, looking into acquisitions, M&A in industries and segments that are extremely complementary. It is the beginning of a new cycle that you will see this year and the years to come with results to transform the company, not only in some sides, but in terms of better margin. And on behalf of all our people, I thank you for your trust of those that joined us in our IPO, that has been following us, and we are committed to work hard to seek better results always. So on behalf of everyone, we thank the 150 people that are here with us online, thanks for your attention. And Guilherme, our IR Department and myself are always for you for any questions that you might have. Once again, thank you very much. Thanks for your attention, for attending, for your trust, and we hope you have the best health, peace and let God help us for us to close the second wave stronger within our families and doing a difference. Thank you very much, and I wish you all the best.

JSL Conference Call is now closed. We thank you very much for attending. And we wish you a very good day.