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

Good morning, and welcome to JSL's conference call to discuss the earnings regarding the third quarter 2021. Today, with us are Ramon Alcaraz, JSL's CEO and Guilherme Sampaio, CFO and an IR Officer of JSL. [Operator Instructions] We would like to inform you that this conference call is being recorded and simultaneously translated into English. Before going on, we would like to let you know that any statements made during this conference call relative to the company's business outlooks, projections, operating and financial goals are based on the beliefs and assumptions of JSL management and rely on information currently available to 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 company's future results and lead to results that will materially differ from those in such statements. Now we are going to turn the floor to Mr. Ramon Alcaraz. Please, Mr. Ramon, you may start.

Good morning, ladies and gentlemen. I'm here with great satisfaction to talk about the highlights for the third quarter 2021 for JSL. I would like to tell you that it was the best quarter ever. We had net revenue from services of BRL 1.2 billion, 74% higher for the same quarter 2020. EBITDA of BRL 198 million, 68% year-on-year. Net income record of BRL 83 million, 5x higher than that of the third quarter 2020. ROIC up 2 digits, 12.3% considered in the last 12 months. And we have new contract closed this quarter was BRL 1.2 billion. That means BRL 30 million of additional monthly revenue for the next 41 months, which is the average term of these contracts.6% more added to gross revenue for the coming months. Turning on, we have the fantastic highlights. Extension of our debt to 6.4 years, closing the acquisition of Transportes Marvel, the last company we acquired. Also an outlook from neutral to positive of JSL's corporate credit rating, which shows the good market perception with regards to our current numbers. We also were placed one of the top 10 best places to work by Indeed, which we are very proud of. Going to the next page, we show our growth. We had combined organic growth of 17% compared to the third quarter 2020, 15% from JSL specifically and 23% of the acquired companies, which again shows that we are acquiring good companies that were further improving our portfolio. If we add the first, second and third quarter, we already have BRL 3.7 billion in new contracts that were closed this year alone, with an average contract term of 46 months, which gives us an additional of BRL 80 million for revenues monthly or 50% increase of revenue for the coming months. And here, we are not considering price adjustments that are going to be negotiated for current contracts. It's important to highlight that 65% of these new contracts come from cross selling. That is contracts at existing clients, which shows the good relationship that we have with current customers. Another important highlight is that almost 50% of these instilled contracts come from dedicated operations, in which we have guaranteed revenue. We are inside customers' production process. 21% comes from urban distribution. That is the last mile, 15% storage and 16% cargo transportation. On the next page, we give you more color on the results of the third quarter. And for that, I'm going to turn to Guilherme Sampaio that is going to talk about our excellent results on net income, EBIT and EBITDA in the third quarter, even in instance of high inflation rates for our most important input. Guilherme?

Thanks Ramon. Thank you and good morning everyone. I'm going to talk more about the numbers of JSL, that we are very proud to present because of the transformation we did in this quarter. Net revenue closed at -- one point -- already considering the acquisitions that we had, except for Marvel that has only has had for June. In addition to the consolidation, I would like to make the same comment that Ramon made, which is the organic growth of this company, 17% year-on-year, but more than revenues are our results that show the resilience that we have before the increase -- is prices that we have experienced in last quarter. Just for you to have an idea, below the charge on net revenue, we have the inflation for our main inputs, fuel 47%, auto parts 29%, tires 23%. And then if you look at our results, we closed our operating results at BRL 137 million, 11.9% extension of 2.1 percentage points compared to the last quarter and 2.3 percentage points year-on-year. And that shows our capacity of focusing on operational efficiency and the work of keeping the balance of our contracts. EBITDA closed the contract with BRL 198 million, 68% over the third quarter 2020 and margin is above 17%, again, even with the inflation pressuring our costs. Just for you to have an idea to have without the credits of PIS and COFINS, we are showing the numbers without the effect as we did in the previous quarter. Net income closed at BRL 83 million and here, we have the benefit of income tax that is also regarding the credits of PIS and CONFNS that we recorded in the previous quarter. I explained that in the release without the benefit and making the same adjustments that we made in previous quarter. Net income gets to BRL 68 million, 5.8% of net margin that is 4x higher than the third quarter of the previous year and 50% higher than the second quarter of this year. On the next slide, we have our capital structure. We closed the quarter with a very solid cash and with the debentures that we closed next year, we got to BRL 1.2 billion and with the 10th and 12th issue, we have the average term of our debt to 6.4 years. And remember, we had 4.9 years in the previous quarter. Today, we have a cash position that is enough to cover our debt until 2025. Another important quarter that is very important to us is that the S&P had a review of our ranking from neutral to positive and reaffirmed the AA at the national scale and BB minus in the global scale -- B plus and now we have a leverage of 3x the net debt EBITDA and 2.7x net debt EBITDA added our cost of net debt after tax of BRL 5.7 million. And as I mentioned, our average term, 6.4 years. On the next page, we have our CapEx that closed at BRL 384 million and BRL 448 million gross CapEx, BRL 270 million that is 60% of the gross CapEx was executed in the third quarter, much of it related to the implementation of the BRL 3.7 billion contracts that Ramon mentioned that we closed in the period and also the fleet renewal for Rodomeu's and Marvel that are now part of JSL. The sale of assets in the quarter was lower than last year to support the increase in demand that we are feeling from our customers. Another very important point that I would like to talk about our asset base we have had unprecedented valuation of our assets. So looking at the third quarter, we had 27% result in sale. If I apply this margin to our net asset base and here, I'm talking about trucks, tractors, light vehicles, machinery equipment we have a potential valuation this base of BRL 530 million. If we were to compare this number with my financial expenses of BRL 155 million that we had in the last 12 months, we would have a cushion of 3.4x to bear the increase of future financial expenses by the increase of interest rates. So we are in a very robust situation to continue accelerating our plan to grow organically and through acquisitions. With that, I'm going to turn back to Ramon to talk about our ESG programs and final comments. Thank you very much. Ramon?

Thanks, Guilherme. Now, I would like to highlight what we have been doing in ESG. The woman projects that we disclosed in the previous quarter, enabling women to become truck drivers. With that, we want to increase diversity even in predominantly male environment until then. And we are very in recruiting women. More than 100 women joined the program, 12 are already hired and trained. Also the zero accident culture we have been investing in lots of time and energy in this campaign for the zero accident. We believe accidents that can be avoided through, safe program, education, awareness and culture and mainly discipline. My personal goal is zero accidents. Also GE reduction commitment in Brazil. We have signed the entrepreneurs for the weather, compromising together with other companies with emission reduction goals. Today, our own fleet has an average age of 3.9 years, which is much lower than national average of 14 years and for the 2 consecutive year, we received the Golden Seal of the GHG protocol that really grants the reliability of our emissions inventory. And we are part of a very nice project called Aguas da Mantiqueira that developed by Toyota Foundation Brazil, our client and the Agribusiness Development Research Foundation. Each company participating in the restoration of 1 hectare of forest in Sapucai Mirim. So a new level for the company, the best quarter results ever, 74% growth in net revenue from services, double digit ROIC, 12.3% in the last 12 months, even in an atypical scenario, combined to net profit LTM of BRL 290 million, almost BRL 300 million, with an impact of BRL 7 million in synergies already captured after acquisitions. Strong expansion of demand, especially in dedicated operations and urban distribution and we are just starting. Thank you so much for your attention and now we are going to open for your questions and to clarify any point you might have. Thank you very much.

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

Congratulations on your results. I have 2 questions. The first, with regards to the asset-light contracts in your release, you talk about an improvement quarter-on-quarter. But when we compare year-on-year, the merger is about 120 bps below that of 2020. I'd like you to comment on that a bit in this process of negotiation with clients, when should we expect margins to go back to above 15%? And the second question is about M&A projects if you could update what this is like now and if we should expect any transactions for the fourth quarter?

Thanks for your question. Well, first with the asset light business, comparing 2021 and 2020. The asset-light business has advantages and disadvantages, obviously. The advantages that you don't have major investment, the disadvantage is that you have a less cohesive relationship with clients so in a time where prices go up, it takes a bit longer for you to readjust prices. Different from asset heavies, where you have longer contracts and more well-defined rules. So when there is an increase of inputs as we are going through, it's easier to pass-through prices. Also, what affects us at light is that in some segments, we are having a high demand of cargo and an offer of trucks that is not necessarily working hand-in-hand, which forces us to pay a bit higher in some cases. However, the difference is not that significant, considering that the increase of revenues is quite significant, we are talking about almost 50%. Anyhow, in the last 3 months, mostly, we have been working quite hard to renegotiate contracts that are asset light with clients. Each client is a client, its contract is a contract, but we have been quite successful so we should have a return to the modules of 2020 for the fourth quarter. This is what we expect. As for your second question about M&As in our pipeline, we continue with the same strategy that we already referred to in previous quarters. The idea is to have strong organic growth, but also inorganic growth. In our M&A pipeline, there are several negotiations ongoing, some a bit colder others hotter. But very soon, I think we are going to disclose new acquisitions because this is part of our strategy, and we haven't changed any. I hope I have answered your question. Yes. Thank you very much.

Our next question comes from Gabriel Rezende from Itau BB.

Congratulations on your results. Well, as almost a follow-on of the previous question, we clearly see improvements on the comparison quarter-on-quarter, even asset -- year-on-year comparisons. But I would like to understand as costs start to normalize so you stop seeing this increase of input. What is a sustainable margin for you? You said in the fourth quarter to go back to the levels of the third quarter 2020, but can we think of real increases of margins, thinking of more efficiency, consolidation of acquisitions, captured synergies. So what could be your margin if you're talking about normalized number? And then when you talk about the BRL 530 million that could be unlocked with the sale of assets I would like to understand how you are deciding allocating your capital. The thinking of this positive scenario that we are having in the used assets segment, it has been more profitable to continue to depreciate assets instead of selling them and buying new assets. So I would like to understand your rationale for your used assets for the next quarter?

Well, thank you for the questions. Let's start with margins. It's always difficult to talk about the future. But what are the variables that are at stake? On the one hand, you have a substantial increase of prices, mostly on fuel, tires, parts and exchange rate. And on the other -- and not only that I am sorry. It's not only our segment that is impacted all our clients are also being impacted by the increase of inputs in automotive with steel and components, several other products because of the exchange rate. So it's a scenario that we all know, and that makes negotiations tougher and it's good that it is like this. If everyone easily can pass through costs, the inflation is going to reach 100% a month. So on the one hand, our strategy is to continue to renegotiate prices with our clients. In some segments, it's easier because of terms establishing contracts, mostly asset heavy. And on the other hand, much to do with asset-light with negotiations case by case. We are quite relevant in most of our clients, which -- it makes it easier for us to sit down at the negotiation table and find a solution that is a win-win. It's never an easy task, but we have been quite successful and that should show in our results in the coming quarters. This is one thing. But we are not limited to this. We have been using since the beginning of the year, a very strict decision to -- management to reduce costs and to do more with less. This is a beautiful statement. It's something that we believe the increasing CapEx is because of this strategy because with newer equipment, we can improve our equipment availability so I can have less equipment to have the same volume. I reduce maintenance costs so there are several mechanisms that we have been using to be able to reduce costs. So the 2 things together are to renegotiation prices with some clients and reducing costs. And with that, we believe we are going to have better margins quarter-on-quarter. This is our target. This is one thing. Now, with regards to the sale of used assets, well, as you very well put it, we are in a very positive moment with the sale of assets because of the increase of new asset prices and a higher demand than the supply of vehicles, which favors used vehicles. On the other hand, we have a huge demand from our clients. We have 2 segments that are very strong: one in pulp and paper and mining, which are really at a hike, basically due to exports and these are very asset-heavy segments and also retail, food, beverages et cetera, they're part asset-heavy and part asset-light. These clients need vehicles to operates. So we are using those vehicles with these clients rather than selling. It's a balance. We think that after the fourth quarter, especially in the beginning of next year, we are going to have a balanced deck, and we'll continue with our policy of replacing our assets and consequently selling our used assets.

Okay. Very clear. If I can have just another follow-up for us to understand what you think you have in terms of bottleneck for the purchase of new assets. This has been a relevant issue, especially during the pandemic, is it still a point of attention, is there still a bottleneck in the supply of equipment from OEMs?

Well, as I mentioned Gabriel, certainly, the demand for the purchase of new trucks is higher than supply, which is a positive sign, if you think of it. That means that the segment is growing. On the other hand, there is difficulty of industries to go back to a good balance although we are hearing good news for next year. As a group, not only JSL, as an independent logistic company and one of the largest buyers in Brazil, we also have Vamos that is a company that demands the buying of vehicles. So because of a good relationship with OEM, we can benefit from that. So if it's tougher for us, it's tougher for others. So this is something that we are relying on.

Our next question comes from Lucas Laghi from XP Investments.

Congratulations for the strong results on the third quarter. I have some questions that I would like to talk about. First, about organic growth. We saw a strong increase on the size of the acquired company, but also a very strong increase of JSL without the acquired companies in the last 15 months. So thinking about what would be this 17% increase -- what would be a price readjustment and volumes. For us to understand growth of demand, I don't know if we could think of the organic growth of EBIT there. If you could help us out for us to understand also the profitability of this organic growth. And another point about the contracted backlog this year, we saw that most of it, as Ramon mentioned, came from current clients but there are also lots of contracts that were closed, and many of these action came from renewals or am I wrong -- are you talking about new services that adds to customer supply chain? And if you allow me to ask a third question in your release, you talk about cost reductions that you have in a potential with the acquisitions -- do you have any idea of how long it will take for you to capture the remaining synergies of recent acquisitions? So these are my 3 questions. And once again, congratulations on your results.

Okay. Lucas, thank you for your questions. And yes, congratulations on your results because we are very happy. Let me try to answer your questions. First, talking about growth. Well obviously, we are reporting what happened. That is, we are looking at the rear mirror but I like to look forward, when we say we closed contracts of BRL 3.7 billion in the last quarter alone, BRL 1.2 billion so almost BRL 1.2 billion, BRL 1.3 billion per quarter in new contracts, 65% in current clients. So here, we are not including renewals -- these are new service contracts even in existing clients and if we do a simple math, 3.7 divided by 46 months, which is the average term of this contract, we are already growing the current revenue by BRL 80 million. So this already ensures organic growth of 15% and here, I'm not talking about price adjustments to be negotiated for next year I'm not talking about inflation, I'm not talking about passing through prices. I'm talking about actual new contracts and that's why we are quite optimistic. Can we lose contracts or not renew contracts from [ round one ]? Yes, we can. But historically, the non-renewal number has been very low. As for your second question, okay. You asked whether the 17%, you have 23 from acquired companies and 15 JSL. How much is related to price adjustments that is passing through inflation. There is some of it because several contracts did have their base date completed this year, and they were adjusted in prices. So there is some of it but most of it happened in the last 3 months, 4 months. So it has a lesser impact in this 15% or 23% so I would say, a lower portion has to do with price adjustment and large has to do with more businesses, more volumes. As I mentioned, from now onwards. And your final question was about synergies. We have been very conservative in this regard because the way of capturing synergies that exist is lower than the fear of spoiling, which is good. We have been acquiring companies that are healthy with good management and the numbers show that, companies that are growing even more than JSL with better results because they are more specialized companies, they are focused on single businesses and that's what appeals to us. So we are not buying vehicles. We are buying mostly know-how and customer portfolio so we have been very careful to meet a good balance. Of course, we want to seek synergies we have been starting with what is faster, working with new funding contracts with lower interest rates and inputs that we are buying in a central area as tires, sometimes even fuels. And more elaborate synergies, best practices and et cetera, are being studied. In some companies, this is going to be easier others this is going to be tougher. We have a team and [indiscernible] directly involved in that so that we can seek everything that is possible. So we should have synergies a long time, but at the right speed, not to run the risk of losing what these companies have, that is good. I think these were your questions, Lucas, if I haven't answered any of them, just let me know.

No, that's perfect. And we were talking about the backlog that most was cross sale. I just -- I was not sure if renewals were included, but now it's very, very clear.

Our next question comes from [ Guilherme Menzes ] from JPMorgan.

Guilherme here. I would like to understand a bit of leverage. I understand that you have some extra fat compared to your covenants, but this increase of leverage do you think still makes sense? Do you want to use your cash to decrease leverage? And also about prices, I would like to understand if the renewal of contracts is going okay with the next quarter. And are you -- just for me to understand when you are renewing contracts or passing through prices do you use the IPCA or the actual increase of inputs?

Okay. I'm going to start with the second question, Guilherme will answer the first. When we are renegotiating prices, we are not using the IPCA alone. We have a basket of indexes. Fuel included as well as tire, labor and et cetera. IPCA is part of our basket, but it is only one of the variables. Now, this is something that we do client by client, contracts are different. There are some clients for instance, that have a weight of fuel that is different from others. So each contract is negotiated individually. It's a lot of work, but that's how it should be done. The first question, I'm going to let Guilherme answer.

Guilherme, to answer your question, we believe that leverage, as we have been saying in other calls of 3x it's still quite reasonable and comfortable to us in the period. Remember that the financial covenants are connected to our EBIT added, which includes the cost of the sale of assets. So we still have greater comfort there. Now, the model of acquisitions that we have been following gives us flexibility to make the payment in cash with issue of shares. The M&A team is working on that and it depends on case by case, the acquisitions that we made so far enabled us to make extended payments of these acquisitions. So we did not hurt, so to speak, our cash flow in the short term. So this is a model that we see could be followed for the future. But again, it is a case-by-case negotiation by negotiation, and we have to look into.

[Operator Instructions] Our next question comes from the webcast.

This is Guilherme. I'm going to read a question from Pedro from Eleven, I think we have already answered it partially, but I'm going to read the full question. So Pedro says, congratulations on the results. I have 2 questions. One we saw a drop in the sale of vehicles that I believe that has to do with the increase of demand and the difficulty of renewing the fleet because of the crisis of same conductors. I would like to understand how you're seeing the scenario for the future? And second, should we see an increase in the average fleet age and consequently increase in the maintenance costs? Should the scenario lessen till the crisis less or should you pass-through this increase also in the existing contracts? Well, I think I answered part of the question, but I'm going to say it again because I think the second part is even more important. We decreased the sale of assets because of an increased demand. The renewal is continuing, we don't have a strategy of extending useful life of our vehicles. This is not what we want because for us, the increase of cost and availability is very heavy, so this is not what we want. We are just ensuring the demand of some contracts and therefore, extending for some months, they use for life of some equipment. But combined, with the buying of new vehicles it's very important to highlight that we also disclosed a CapEx that is 3x higher than that of 2020, BRL 400 million net. And that really is something that -- in short that we are not planning to extend the useful life of our equipment. The second part of the question is whether we expect increases in maintenance costs, given the scenario of assets. Well, once again, quite the opposite the CapEx that is 3x higher last year is to renew part of our heavy assets and machinery to reduce maintenance costs and more important, extends the availability of these assets. Remember that I said that one of our strategies, perhaps of the main one to neutralize the cost increase of inputs is to reduce costs in the use of assets. So part of this strategy is to renew our fleet. Next question from Alexandre Kogake from Eleven.

The contracts signed in 2021 had lots of dedicated operations. These contracts are related to expansion of capacity of your clients, gaining of market share or renewals?

First, just reinforce what I said when I was answering Guilherme's (sic) [ Lucas' ] question from XP, these new contracts are not renewals. Two, why dedicated contracts for several reasons. First, we have been growing in segments in which the demand is growing and there is a concern of our clients to ensure that they are going to cater to the demand, so it is a comfort for the client to have dedicated contracts because in there, you ensure the availability of equipment, trucks or machinery. And on our side, it's also quite appealing because in uncertain times like these, you ensure volumes and contract rules, including the passing through of increases in inputs. So it is a type of contract that gives assurance to both parties and the results show that it's not by chance that we are having an increase in asset-heavy contracts. In times of uncertainty, this is the best contract, and that's why we privilege this type of negotiation. And just to add to this question Alexandre saying, are we seeing expansion of capacity of our clients or are we gaining market share inside our clients? Its both. There are segments that are growing I mentioned pulp and paper, mining, these are sectors that are actually growing, and we are enjoying this growth. Retail, especially food and beverage industries are also growing, and we are also getting new businesses that were provided by other companies, e-commerce, including. So it is a mixture of both and once again, going back to dedicated contracts, even operations of clients that did not use dedicated operations are going for those to ensure demand for the coming months.

Our next question on the web comes from Rodrigo Faria from SulAmerica.

Congratulations on the results. After trying to acquire Tegna, the Vehicle Logistics segment, is this part of your M&A pipeline with other possible targets?

Rodrigo, thank you for your question. It's important to highlight that we are at present in the transportation, the shipment of new vehicles with Transmoreno and JSL itself that also has a contract for the shipping of brand-new cars. This is a segment we are interested in, as in many others. Our acquisition strategy and the last acquisitions prove that has been acquiring healthy companies and companies that will reinforce segments in which we already operate: Fadel in the last mile, CPC in warehouse, Rodomeu in the transportation of hazardous cargo, Marvel in the transportation of refrigerated products and Transmoreno in the shipping of brand-new cars. It is an important segment as many others.

The next question comes from [ Luisa Cruz ] from [ Stoxos ].

What share of wallet -- what's your share of wallet inside clients? Typically, what other company provides the services that you've done? Is it other carriers or the clients themselves?

Well, Luisa, thanks for your question. I cannot answer this question with 100% certainty because this is not a number that we have available. What I can tell you is that in almost all of our clients, we have quite representative market share, if not the highest. And this is what is expected because we are the latest logistic operator so we always believe there is room to grow in our clients. And proof of that is the BRL 13.7 billion new contracts, 65% of which in cross-selling. So I don't know if I answered your question 100%, but that's what it is.

Our next question comes from [ Claudio ], he is a company shareholder.

Congratulations on your result. Is there is still the possibility of acquiring Tegna?

Claudio, thanks for your question, and thanks for being our shareholder. Claudio, as I mentioned, within our M&A strategy, there are several segments that are being looked into. There are some negotiations that are more advanced others not as much, and we continue with our strategy.

Next question comes from [ Danilo ], also an investor individual.

I am an investor with the company. Congratulations on the results. I would like to have a bit more detail about the national expansion of your operations for the coming quarters and years.

Danilo, congratulations for us as shareholders, it's good to see the business grow. Danilo, in our strategy of organic and inorganic growth is international deals. It's important to say that we doubled revenues for instance, in dedicated operations of Paraguay. We also grew transportation to Argentina and Chile after the acquisition of Marvel, we doubled the contact with the automotive into exports to Argentina, we are negotiating import of brand new cars from Argentina with clients and probably, in the next quarter, we are going to announce a new dedicated operation in countries outside South America, so leaving our closest geography so this is part of our strategy to go international.

And the next question comes from [ Pedro Enrique Ferrera ].

Congratulations on your results. Could you give us a bit more color on the company's technology initiative? Do you have development of optimization software initiatives in-house? Are you thinking of any acquisitions in this regard?

Pedro, thanks for your question. Undoubtedly, technology is part of our strategy, and it is a strong part of it, and we have several fronts. For instance, in-house, we have the development of the e-JSL, which is a transformation of our management systems. We also as we announced before -- in beta version our app that aims to interact with our truck drivers, JSL, cargo and et cetera, and also internal developments. So we always think of other ways to implement technology in our business with our own systems, and we have already looked into the market, but also acquisitions. It is part of our M&A strategy, together with other segments technology is also very important for us.

Well, I think these were the questions that we had on the webcast. [Operator Instructions] Since there are no further questions, we are going to turn the call back to Ramon Alcaraz for his final remarks. Mr. Alcaraz, you have the floor.

Well, ladies and gentlemen, thanks for your questions. Thanks for being here to listen to us and above all, thanks for believing in the company. We believe that we have a positive quarter, but that's just the beginning of our journey. Although happy, we are still not fully satisfied. We always want to have more, we always want to have better results. So we are now in a typical scenario, lots of turmoil, not only in Brazil, but also in the world, but we believe that with the right strategies and tools, we are going to be cope with the difficulties and enjoy the opportunities, a businessman that I really had admired said that his year in the crisis is to enjoy the opportunities that it poses and this is our philosophy. So as a final message, Claudio our shareholder, asked about our future and I would just say, continue betting on the company. Myself, Guilherme and the team are working hard to deliver increasingly better results. Thank you very much.

JSL's conference call is now closed. We thank you very much for joining us and wish you a very good day.