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

Good morning, and welcome to JSL's conference call to discuss results relative to the first quarter 2021. Today with us, we have Mr. Ramon Alcaraz, CEO of JSL; Fernando Antonio Simões, Chairman of the Board of JSL and CEO of SIMPAR; Guilherme Sampaio, CFO and IRO of JSL; and Denys Ferrez, CFO of SIMPAR. [Operator Instructions] We would like to inform you that this conference is being recorded and simultaneously translated. Before moving on, we would like to say that forward-looking statements made during the company's remarks, company's -- relative to the company's business outlook, operating and financial targets are based on beliefs and assumptions on the part of the company's management as well as on information currently available for the company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not materialize. General economic conditions, industry conditions and other operating factors might affect the future results of the company and thus lead to results that will differ considerably from those expressed in these forward-looking statements. I'd like now to turn the floor over to Mr. Fernando Simoes. Please, Mr. Simoes, you may carry it on.

Good morning, everyone. I'd like to thank you all for participating. We are now starting earnings call for JSL Logistics for the first quarter 2021, a very special quarter for myself, for the company, not only because of the results you will be able to see, but also because of other strategic moves, the main one being my succession as CEO. As of April 14, Ramon has taken over the CEO of JSL Logistics, and I took over as the Chairman of the Board for the company. Along with this move, JSL Logistics acquired the remaining 25% of stock from Fadel, which still belongs to Ramon. So Ramon now became one of the main individual shareholders of JSL Logistics and taking over as CEO as of April 14. I'm very, very satisfied, happy. It's in line with our strategic planning of having each company with its respective CEOs, different target, governance, and of course, we're talking about listed companies, as you know. Thank you, Ramon, for your trust, confidence. I wish you all the success, happiness, satisfaction, and I'm very happy to be together with you. Now moving on to the presentation of the main numbers, I turn the floor over to Ramon, who will conduct. Thank you.

Thank you, Fernando. Only the invite to be the CEO of the largest logistics company in Brazil, maybe Latin America, it is a great honor. And I take this as a responsible role because I know the challenges are huge. You have been in the company for 40 years, 12 years as CEO. It's a big challenge, but that motivates me because I know we have a team of warriors at JSL, and my role is to take the company to an even higher level. And I start a very good moment because I'll highlight the numbers for Q1, and I can already anticipate very good numbers. I'll start with net revenue, the best in our history, a gross revenue of BRL 1.049 billion, 26% up when compared to Q1 2020; net revenue of BRL 868 million, 25% up when compared to the same period of last year; an EBITDA of something close to BRL 128 million; ROIC, 10.5% when annualized; and a free cash flow of BRL 56 million. Congratulations to all of the team of JSL. I'd like to take the opportunity to say that, that recently announced acquisitions have been approved by CADE. I'm talking about TPC, which will strengthen our warehousing segment and Rodomeu, which will strengthen our road transportation segment for specialized cargo. On Page 3, we have an overview of our business. We're the only company, which is end-to-end, which cover the whole logistics chain with experience of 65 years working in the productive sector and also across the main logistics flows across the main industries that supply the country and the world from the raw material to the final customer. And we are quite balanced across all those [indiscernible] 38% in dedicated logistics with loading and transportation of raw material and into logistics, be it for the industry, be it for our warehousing arm; 44% under cargo transportation; transport road cargo from end-to-end, warehouses and final customer, transportation of waste for disposal in landfills. As for warehousing, we have 137,000 square meters (sic) [ 139,000 square meters ] of dedicated warehousing and multi-client, and we take care of the receipt, storage and shipping of our goods. 30% of our business are -- is focused on urban distribution from small retail outlets and mini grocery stores all the way to the last mile, the warehouses, the B2C, including reverse logistics. And that segmentation specialization is what ensures the business resilience, the resilience around our revenues even amidst economic uncertainties as can be seen by the numbers. We have segments which require specialization know-how, investments, and that ensures us an entry barrier for competitors and right balance between Asset Light, 59%; and Asset Heavy with contracts that have been assured. That's what makes our company quite different, sets us apart from other companies in the same sector. Now I turn the floor over to Guilherme, who will address the numbers in more detail. Guilherme, over to you.

Thank you, Ramon. Good morning, everyone. I'll now present the numbers in more detail for the first quarter of 2021. But before I go into the numbers, I'd like to say that in this quarter, we have already consolidated Fadel and Transmoreno wholly. But the numbers here do not reflect those acquisitions for Rodomeu and TPC. I'd like to start with net revenue. The largest number in a quarter, BRL 868 million, 25% more than the first quarter of last year. Moving to the operating result, which is, in our case, considers IFRS 16 led to an EBIT of BRL 84 million in the first quarter and an EBIT margin of 9.8%, which represents a growth of 50% when compared to the fourth quarter of last year and a contribution of 2.7% to the margin. It's important to say that the results followed the evolution of revenue with the contribution of Fadel and Transmoreno, but it was also impacted by the cost of inputs, parts, tires, fuel, we realized for the past month. And that led us to revisit the depreciation rates we were using for our asset base. That increase was not only on inputs but also on new vehicles, used vehicles, and that considerably changed the pricing of our inputs and our assets for used cars. In EBITDA, we closed at BRL 128 million, an evolution of 5.8% when compared to Q4 last year and a margin of 15%. Worth mentioning that in the past week of March, all automakers stopped, and that, of course, had an impact on our results for the quarter. Looking -- moving now to net profit -- income. Our consolidated numbers, once again, last quarter, I mentioned that starting now in the first Q, we would announce the consolidated numbers by not only the logistics number. We reached the level of BRL 42 million, up 31.3% when compared to the fourth quarter of 2020. And if we exclude the effect of the amortization of the acquisition price of Fadel and Transmoreno, we came to a net income of BRL 47.7 million in the quarter, the largest net income in company's history and a margin of 5.5%. Moving on to Page 5, we break our numbers down between Asset Light and Asset Heavy. Asset Light closed the quarter at BRL 514 million, in line with the fourth quarter of last year. This was expected given the dynamics of our Asset Light business, which reduces its volume in the first quarter and the operating result of BRL 36 million and an EBIT margin of 7.1% and an EBITDA of BRL 65 million with a margin of 12.7% as you can see on the slide. It's important to remember that asset light presents a lower volume in the first half, which impacts dilution of our fixed costs. Moving to the Asset Heavy. We closed the quarter at BRL 355 million in net revenues, an EBIT of BRL 48 million with a margin of 13.8% and an EBITDA of BRL 63 million and a margin of 18.3%. Just to stand out, the numbers for asset light and asset heavy do not take into account the amortization of the acquisition price of Fadel and Transmoreno, which have been excluded from this presentation. On Page 6, you talk about the company's CapEx. We closed the quarter at BRL 50 million net CapEx as opposed to BRL 122 million in the first quarter of last year, which represents an ability to grow without the need of high rents at same proportions. Moving on to Page #7. We talk about our capital structure. We closed the quarter at BRL 600 million in cash, enough to cover our debt until '23, gross debt of BRL 2.2 billion, as I said, BRL 600 million in cash and a net debt of BRL 1.6 billion. That leads us to a leverage level of net debt-to-EBITDA of 3.1x and net debt and added EBITDA 2.4x and an average term of 3.8 years. The cost of debt, net of taxes, reached 4% at the end of the quarter and the rating -- the credit rating for the company in the local scale, AA- for Fitch and AA for S&P. With that, I turn the floor over back to Ramon for him to make his final remarks and talk about our focus for '21. Ramon, over to you.

Thank you, Guilherme. And to close, I'd like to make a few highlights for 2021. If we were to add the numbers you have just informed, the gross revenue from the companies we had just acquired and, as I said, the transaction has been approved by CADE, our revenue in the first quarter would reach BRL 1.2 billion. That would mean a growth of 44% when we compare these numbers to the first quarter of 2020, an exceptional result for the year. I'd like also to highlight my focus for 2021. I'll be focused on operational efficiency on customer service level, on digital transformation, on taking care of our people and, of course, our third-party truck drivers, on cross-selling on new services, on managing acquisitions and also on new acquisitions. Thank you very much for your attention and your patience. I now turn the floor over to the operator for the Q&A session. We remain available, not only myself, but Guilherme, Fernando Simoes and Denys, the company's CFO, SIMPAR's CFO.

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

Before my questions, I'd like to wish you success, Ramon, welcome, all the success in the world in this new journey as the company's new CEO. About the questions, I'd like to take the opportunity, Ramon. If you could comment based on your experience at Fadel, what kind of strategic aspects would be important to emphasize at JSL? What kind of improvements you intend to bring to the new company? Up until recently, you were in a different scenario, a different position. So what kind of assets have you identified where you saw opportunities to improve so that you can understand how you see the company, your vision about going forward? And a second question about capital allocation. Since Denys and Fernando are here as well, if you could continue to see the main capital allocation for growth coming from acquisition activities. The company had a relevant track record of -- in terms of acquisitions for important deals right in the last months. Is that going to go on to continue? What are your objectives in terms of growing, okay? If you could give us that vision as well. Those are the 2 questions I have.

Lucas, good morning. Thank you for your well wishes, and I'll do my best to be in Fernando's shoes as the company deserves. I am very motivated, very excited about it. As for your question, it's important to say that one of the things that attracted me to the group was that the JSL values are very similar to those at Fadel. We both believe that the company will move forward over 3 pillars: excellence around clients, people management and results management. JSL, without a doubt, has grown focus on client diversifying across different segments that, of course, strengthens the company even further amidst economic uncertainties, especially now, right, in such a difficult moment. And proof of that are the numbers we have just presented. And the same goes to people management and also results management. Under this third pillar, the results, I'd like to comment that I do believe in the company. We do not have full control over revenues, of course, but we do have command over costs. And that's why I want to go deeper. JSL, at twice a year, they have a strong cost reduction package. That's also my mindset all the way from Fadel, and we want to dive deeper in that cost control not only because it's obvious, but it's because we've suffered a significant impact in this last year, increase in prices, tires, car parts, fuel. So we need to keep a close eye on that. And the better we can manage costs, the better we'll see the results in the bottom line. That's what I believe in. I hope I have addressed your question. And as for your second query, I'll turn it over to Fernando and Denys to approach them. Thank you.

Lucas, good morning. This is Fernando speaking. When we talk about logistics, and [Technical Difficulty] and management, it's part of our strategy, no doubt, to be a repairing business acquisitions. Logistics is extremely, it overrides -- fragmented in Brazil. There are many opportunities in the country. And of course, in terms of gains of scale -- accounts of scale, JSL already has that, thank god. And that, of course, when we acquire, we have better opportunities for cross-selling, generating more businesses and also improve [Technical Difficulty] So it is [Technical Difficulty] to go after acquisitions of growing organically, of course. As you can see, we have grown organically as well, even with the pandemic. You can see that happening inside the company as well. Okay. Thank you, and have a good day.

Our next question comes from Lucas Laghi from XP Investments.

I also wish all the success to Ramon as the company's new CEO. Two questions I'd like to pose with you. First, as for the margins, we saw a positive advancement of margins in -- under Asset Heavy, specifically in the fourth quarter of last year. But I'd like to have some more color on the Asset Light side. You're talking about a 13% margin. So -- and I know that prices around maintenance fees will impact that. So do you view that as a short price increase, systemic price increase? Or was it a one-off occurrence? Then you could see those margins converging to different levels in the second quarter or perhaps in the second half. I know those higher margins have not reflected yet coming from Transmoreno. You didn't have the top line. So I'd like to know how those numbers are evolving as you'll integrate those companies as you bring them in? And another follow-up, if I may. Concerning acquisitions, we know that [Technical Difficulty] we generate cash, leverage level is above 3x, net debt-to-EBITDA ratio is above 3x. So I'd like to know what you can tell us about that. Can you expect more acquisitions for this year? Or can you expect something more concrete only for 2022 as you continue now that you have [Technical Difficulty] on your plate, right? Those are my 2 points.

Lucas, good morning. Thank you for your question and for your good wishes and your trust. As for your first question about the Asset Light arm of the business, you are correct, Asset Light suffers more quickly, the impact of cost hikes, especially diesel. Asset Light is around third-party contractors, and you have a smaller capacity than Asset Heavy arm to tolerate those readjustments until we get to a point to renegotiate those numbers. We pass some of the adjustments on to our partners to survive as we were renegotiating with our clients. I can already anticipate to you that negotiations went really well. So especially when we talk about fuel readjustments, we'll pass that on in March and April, but there is a mismatch, right? We anticipate those numbers to our partner before we renegotiated our partners. But that's the way it works. That's the final equation, if I may. We -- and we even achieved some gains from that and the main strategy of having a good balance between Asset Light and Asset Heavy. It's important to say that all our asset-heavy contracts are closed under fixed and variable costs. So when you have a strong readjustment in fuel, the transfer is automatic, more automatic than when it's on the Asset Light's arm. As for the second -- I'll address the acquisition question, which has to do with the acquisitions which have been announced, Transmoreno, Fadel, TPC and Rodomeu but Fadel and Transmoreno, which are done deals. We already have managed gains, especially around the [Technical Difficulty] of imports. JSL has enough size to be able to buy imports [Technical Difficulty] fuel, better condition than other companies, of course. We already do that. We can already see gains both coming from Fadel and Transmoreno. And this will even grow. We have the same expectations now with TPC and Rodomeu. As for the second part of your question, I'll turn it over to Fernando for him to answer. Please, Fernando.

Lucas, before going to the answer, just a comment about the first question. Ramon said something I'd like to comment on. We are very happy for what we've done at JSL throughout the years. And we do believe, if I may say, we have created a unique platform for this business. But we are confident that everything, anything can be improved. And Ramon, a person like himself, a person who knows the business, who brings that into his DNA and who joins the company hitting the ground running with good, talented people, I am sure now we have a dedicated leader to the company. There is a lot to do, and we now enter a new development cycle. And you will see results with this improved management not because it's not working now, but it's because now we have a specific focus on the company. And now SIMPAR, we look at the broader picture. And we're now dedicated exclusively to JSL with Ramon. And this will be a major contribution across this front of the company as we start growth in transformation cycle. As for acquisitions and in answer to your query, we are quite reassured with our [Technical Difficulty] level. And we've been saying this, we can be around 3x, slightly above, slightly below. Our target used to be below 2.5x. In our financial planning, we simulate everything even with the COVID. But with our business diversification, we have had good cash generation. This has been proved to market, right? We would weather that. Another, profit, but I've already said that because I'm learning with the business, we believe that cash generation and resilience are key and that reassures to say, yes, it is in our planning. I'm not trying to create any expectations in the market, but acquisitions will happen this year, important acquisitions this year, and there are several. And I am okay. We are okay, we are sure with our leverage level. You already see that level, but you do not see the synergies that we acquired, as Ramon has mentioned. And this will contribute to an even higher cash generation. So we are quite reassured that within our planning, if an acquisition comes up, that will affect the capital structure, SIMPAR is ready to come in and help us reap the opportunity providing the necessary resources for all the managers to run the business and consolidate all those interests. Thank you for your question.

[Operator Instructions] Now the company will answer your questions sent through the webcast platform.

Hello, everyone, Guilherme speaking. I'll read the first question from, Jenna and then I'll answer that along with Ramon. The question is, in this high interest scenario, will this change the company's strategy around leverage level? And what level of SG&A would be sustainable for the company going forward? I'll start by talking about the high interest rate scenario and then Ramon will tackle the SG&A part of the question. The first thing to say is that our operation as Fernando said, we generate cash and 60% of our revenue does not require needing to raise funds to finance our growth. Going to Asset Heavy, where we have the larger part of our capital allocation, we're talking about long-term contracts with the metrics for readjustments. So we are somewhat hedged, protected from increase in interest rates. When I think about pricing, I take into account that interest rates curve, and that's the expectation we have around that. Then Ramon wants to mention about SG&A. Ramon, over to you.

I will complement on your answer. As I said before to Lucas' previous questions, one of my main focus is on operational efficiency and cost management and, of course, SG&A are the items under those pivots. I think we have opportunities there. And the big advantage of working around cost is that if you reduce 0.5%, this would go straight to net income, the bottom line. So I'm not in a position yet to predict the level of reduction, but there are opportunities. Costs are like your fingernails, you need to keep trimming it because they tend to grow. So it is only natural for us to have more people managing that and then to better analyze it. But I do think there are opportunities, and we're going to work on it, and I do see a trend of bringing costs down.

Just an additional comment, Jenna. I think we do have some initiatives in place. We're not going to go into detail now, but initiatives to reduce prices. Financial management going forward to bring down financial costs as well, of course, to [Technical Difficulty] the impact of the high interest rate scenario. Question is CDCA, which was approved at the Board meeting on April 29? We cannot comment on that yet, given our legal structure around the transaction. We cannot give you any detail as of now.

[Operator Instructions] I now turn the floor back over to Mr. Ramon Alcaraz for his final remarks. Mr. Ramon, you may carry on.

Well, my friends, colleagues, thank you so much for participating in our earnings call, for your patience with my lack of experience, I'm still on the learning curve. This is a new cycle, but I'm quite motivated, as I said, when I first answered the questions. The most important thing is that my beliefs are very very close to JSL's beliefs. That's the main important point for things to work. Number two, JSL has several elements, diversification, people which leads me to believe we have a bright future ahead of us. We do have an opportunity to manage costs and resources, which is quite significant, not only thinking about gains and the bottom line but also thinking about gains around sustainability. If we are able to better use equipment, if we are able to eliminate idle routes, this will result in better sustainable results and the environment will be thankful. As Fernando said, the company has come all the way to here. Congratulations. It's all very good. But what brought us here does not ensure we go forward. We have to be prepared for the new opportunities the market will offer, and we will focus on them. Once again, thank you. And Fernando would like to add or Guilherme? That's all I have on my end. And you can be sure we'll do our best only to have good news in the next upcoming earnings call. Thank you.

JSL's audio conference is now over. Thank you all for participating, and have a nice day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]