Log-In Logística Intermodal S.A. (LOGN3) Earnings Call Transcript & Summary

[Audio Gap] We aim to offer door-to-door solutions with a diversified customer base. Our main focus here is to migrate road cargo to Cabotage, including with innovative products for this model, such as fractional cargo, LCL. Here, we highlight the start of operation of Log-In Discovery to replace docking vessels and the launch of the super-tracking feature in our Log-Ai platform and the performance of the business at record levels above pre-pandemic levels. The second point is the innovative positioning of our port terminal TVV as a multipurpose terminal, where our team is able to offer also logistics solutions, 3PL, with high operational productivity. In this quarter, we highlight the strength of operations at our new vehicles terminal TEV. The approval of ANTAQ of the executive project and investments necessary to renew our contract and some records -- record marks that will be shown along the presentation. The third point is about our capital structure where the main challenges are a strict management of the company's leverage to improve risk perception by the market to expand our debt and to have higher predictability for our future results. In Q2, we carried out the issuance of the [indiscernible], totaling BRL 340 million and Fitch upgraded the company's rating to A(bra), up 2 notches from the previous rating. And the fourth and last point is linked to our corporate management strategy, where our vision is to be a benchmark in safety with sustainable bumper management; to have an active and pragmatic ESG agenda; to operate with a customer-oriented culture and to drive digital transformation across the company. In Q2, we highlight the improvement of our [indiscernible] culture, achieving a quality and level of service in the NPS survey of Cabotage and Mercosur as well as the construction process of our GHG greenhouse gas inventory. Now our team will be presenting our quarter results, starting with our CFO Pascoal Gomes.

Thank you, Marcio. Good day, everyone, and thank you for joining us on this call today. I'd like to highlight that Q2 2021 was another quarter recording excellent results for Log-In in a robust growth trajectory in the resilient sector as we can observe. Once again, we posted record marks in several lines of our operating and financial results. Our net operating revenue, NOR, totaled BRL 352.8 million in Q2 '21, up more than 50% over Q2 '20. This growth stems from volumes transported by our shipping operation above pre-pandemic levels, as mentioned by Marcio Arany, on the back of economic recovery and a consequent upturn of imports and exports in the heated domestic market favoring our Cabotage business. In addition, we had an increased volume handled of containers, general cargo and warehousing services at TVV and higher volume of vehicles transported between Brazil and Argentina. Now looking at EBITDA. EBITDA totaled BRL 93.2 million in Q2 '21, up 37.6% year-over-year. In addition to higher revenues, this increase was mainly driven by an efficient management of operating expenses, which were down 7.6% in the quarter, coupled with higher AFRMM revenues owing to growth of the company's own fleet. Costs increased proportionately to volume. The reduced EBITDA margin is explained by higher volumes of Ro-Ro, which carry a lower margin compared to other business lines. Adding Q1 and strong Q2 results, the company's results posted higher NOR and EBITDA, up around 30% over first half 2020. Now moving to Slide 5, please. Here we can see record marks of NOR and EBITDA above pre-pandemic levels. NOR was the highest ever in Log-In's historic series, up 30.8% from Q2 '19, pre-pandemic and 26.8% compared to the best pre-pandemic quarter, which was Q3 '19. As regards EBITDA, as we can see on the chart on the left, variations are even greater compared to pre-pandemic period, up 71% over Q2 '19 and 33.1% over the very best quarter in the series in the financial result although historically a good part of it derives from accounting foreign exchange variation with no relevant cash impact. The highlight goes to lower FX variation by virtue of lower depreciation of the Brazilian currency real in the half year, coupled with the hedge accounting strategy adopted by the company in the first quarter 2021, which enhances the predictability of our results. In the first 6 months on the chart on the right. The financial results grew 56.5%, with total expenses of BRL 78 million compared with BRL 181 million in the previous year. This has a relevant impact on our net income, which in the last 12 months posted a positive number of BRL 158.8 million or an earnings per share, as you can see, of BRL 1.50 per share. I now turn the floor to Mauricio Alvarenga, our Chief Commercial Officer.

Thank you, Pascoal. Good morning, everyone. Welcome to our earnings conference call. I am Mauricio Alvarenga, Chief Commercial Officer of Coastal Shipping. Q2 2021 was marked by economic recovery and volume resumption in sectors that have been heavily impacted in the second quarter 2020 with the start of the COVID epidemic in Brazil. In Cabotage, we highlight, in particular, the upturn in the segments of electronics and home appliances, which combined with volumes of food, beverages and hygiene and cleaning products segments that we captured more strongly in the first months of the pandemic, allowed us to improve the cargo mix and achieve considerable growth vis-a-vis 2020 with more than 30% increase in volume of TEUs handled as shown on Slide 7. In the feeder segment, the highlight continued to be imports, which remained strong. We also mentioned that in the previous quarter, we also captured opportunities to reposition empty containers along with the Brazilian coast for international shipowners. Looking at the second quarter of 2021 and first half of 2021, Log-In performed above the average growth for the sector as measured by ABAC, Brazilian Association of Cabotage Shipowners. And as mentioned by Arany in the beginning, this is our focus. Our focus is to move road cargo to Cabotage in Brazil. Our vehicle transport business also posted a quarter of growing volumes. In 2020, several automakers had halted 100% of their operations and our volume had been partially interrupted. To give more emphasis to Slide 7, our total net revenue was BRL 277.6 million, up 51.5% on the back of volume increase. And this was a record NOR for a second quarter since the company started operating. Our EBITDA reached BRL 76.9 million, a 29.9% increase. And here in EBITDA, the highlight goes to a higher feeder NOR with no associated variable costs. EBITDA margin decreased a little, 4.6 percentage points and this was explained by a higher share of vehicle transportation in the quarter. In vehicle transport has a lower marginal result compared to container handling. Another second quarter highlight, as mentioned by Arany, was the start of operation of Log-In Discovery, which replaced the Log-In Resiliente during the docking period. And the docking of Log-In Resiliente is now over. And more towards the end of June, Log-In Discovery started to replace docking operations of Log-In Endurance. I thank you very much, and I now turn the conference over to Ilson Hulle, our Terminals Officer.

Thank you, Mauricio. Good day, everyone, and I hope you're all well. I would like to start with some highlights referring to Vilha Velha terminal, TVV and speak a little about this incredible quarter that has just ended. For the second consecutive quarter, Log-In posted record net revenue and EBITDA, making this the very best quarter of our history from the financial standpoint. Our whole team remains very dedicated to achieve better and better results, always with a lot of operating safety, taking care of both the physical and mental health of our employees. To be able to perform well, recording such high numbers and to protect the health of our employees at the same time, have been the greatest challenges right now. And we're very happy with everything we achieved so far. Besides the financial highlight, another important point to be highlighted is container handling of the period. These have -- this quarter saw months of intense container handling at the terminal. And in order to serve all this volume, we have some new hires and made investments to increase our operating capacity quickly. So the company was able to promptly react to this sudden volume increase. [indiscernible] these financial highlights results from a half year of strong resumption of international trade deals, particularly in the region where we operate, states of Espirito Santo Minas and Rio de Janeiro. An overheated civil construction market in Southern USA increased the demand for ornamental rocks from Espirito Santo. And as I have mentioned over and over in recent calls, our coffee business continues with a strong demand in the international market. In recent months, it posted a significant strong price reaction, increasing the export levels, but actually containers were indeed the big highlight in the second quarter. We have been talking about diversification in general cargo, but in Q2, container was the main player in our results. We have been -- we continue to commercially -- to be commercially aggressive in developing new business opportunities in general cargo and selling customized logistics solutions 3PL. Evidence of that is what Arany mentioned in the beginning and was the start and stabilization of our new operation, the vehicles terminal TEV. And we posted significant growth of general cargo vehicles going through TVV and ending at TEV. We ended the quarter with 163,000 tons in general cargo, significant number. Speaking more specifically about the vehicles operation, we have invested hard in this business. We are specializing in vehicle handling and in managing vehicle handling yards, developing in-house technical expertise in the states of Espirito Santo becoming again an important logistics hub for vehicle imports in Brazil. This leading role was lost over time, but we are working for the traders and local governments to again turn the state in a logistics hub. Going back to the financials, I'd like to highlight the BRL 66 million in net revenue, a record mark, up 51% year-over-year and an EBITDA of BRL 30 million, another record mark for TVV, growing 57% over the same period of last year. We also had a highlight volume of container imports. I talked about the resumption of imports, and that contributes to the results. It brings additional operations to the terminal and this showed good volumes in Q2. Lastly, I would like to update you on our TVV modernization project. This is a project that we announced in September of last year when we renewed our concession until 2048. It is a project that entails investments of around BRL 120 million by the end of 2022. As regards to this project in Q2, we obtained approval of the executive project by ANTAQ to start the rigs and equipment commissioning. We will acquire 2 new mobile harbor cranes, MHC, 150 tons of lifting capacity each imported from Germany and 5 new forklifts, reach stackers, 45 tons of lifting capacity, each imported from the Netherlands. This new equipment is already being built in Europe with expected arrival at TVV in the last quarter of 2021. We have started phase 2 of the project, which includes a complete retrofit of all current equipment of TVV. By the end of 2022, I'm sure TVV will be a much more efficient terminal. And in the beginning of 2023, we'll see a leap in performance in capacity and productivity of our terminal with all of these investments that have been budgeted and are on schedule. And this is what I have for you. Thank you very much. I turn the floor back to Pascoal, our CFO.

Thank you, Ilson. Let's move to the next slide and talk about indebtedness. Here, the main highlight is the extension of the company's debt profile. As you can see, we managed an important liability of the company in this dotted line, 2023 was a wall for Log-In, and we were able to knock down this wall with a successful project, the fourth issuance of the bankers with a 6-year maturity term market standard with the support of many of our partners in the total amount of BRL 340 million. So we could expand the profile of our debt, balancing our expected cash generation with the debt amortization schedule of the company. Together with this very strong result that we had in the last 12 months, as you can see here on the table, in the last column we are talking about an EBITDA of BRL 352 million. Although we have used our own cash to pay for Log-In Discovery, the last vessel we acquired, we have the best net debt over EBITDA in the historic series of the company at 2.2x with an average cost of debt that was very competitive, 7.7% a year and very balanced in terms of long-term, short-term debt and indices for the debt. I think that these are the main highlights about the debt of the company. Thank you very much. And I now turn the floor back to Marcio Arany, our CEO.

Thank you, Pascoal, Mauricio, Ilson. We will now begin the Q&A session. I remain available. Thank you very much.

[Operator Instructions] We have one question in our Q&A asking about dividends, if the company has any expectation for dividend payout.

Okay. Thank you for the question. I'll turn the floor to Pascoal to answer.

Again, thank you. Well, dividends is not something we're thinking about right now at Log-In. We have an accumulated loss, which is relevant, resulting from the time when the company went through its turnaround as a result of the impairment we had due to a past problem. And of course, we have been reversing those losses. We post consecutive positive results. I'm talking about the consolidated for the group. Of course, TVV, for example, is already a company in the group that pays dividends according to the law. And it pays dividends to its shareholders, which is Log-In.

I have a question here in the Q&A by [ Guilherme Nunez ].

Congratulations on the results. I'd like to know in the future, what is the ideal net debt over EBITDA ratio that you would like to have?

Thank you, Guilherme. Again, and I'll turn the floor to Pascoal to answer your question.

Thank you, Guilherme for the question. Net debt over EBITDA ratio is always situational. Now of course, we are on a solid trend to deleverage the company so that we can have funding to fund our next growth cycle. Of course, we are always working at cost of capital considering equity and third party debt. There was an important window to reduce interest rates in the market lately. We are still at very interesting interest rate, which, together with a market window, enables us to fund our projects with third-party capital that we intend to do or for relevant company projects as long as the scenario remains as it is. When we look at our rating reports, some of them point to a net debt over EBITDA ratio which is healthy, below 3.5, around 3.2. It really depends. But we are always managing, trying to get a balance and with a strong focus on the average cost of capital. And I hope I have answered your question.

I have another question, again, Guilherme Nunez. How do you see possible impacts of a reduction or normalization in the price of commodities looking ahead?

Well, I can answer that question, Guilherme. I think the commodities prices don't really affect Log-In. Our customer base is quite broad. We worked with many segments at TVV and in Coastal Shipping. So for us, the impact is not that relevant, particularly if the oscillation is in the short run in terms of the commodities that we transport. We transport petrochemicals, some agricultural commodities for domestic consumption. So we don't see that as a problem.

Thank you, Mauricio. I have a question in English, which I will translate into Portuguese. A question by Jacqueline Broers from ICM. Please can you give us an update on what do you think about the impact of BR do Mar and the impact it will have on Log-In?

Thank you Jacqueline for the question. [indiscernible] myself. The expectation regarding BR do Mar is always positive. I have to remember that we can compete in the market with the first and third largest shipowner worldwide through their Brazilian offices. So when BR do Mar makes it easier to bring vessels at a more competitive cost to our coast, this is positive for Log-In. So our expectation regarding BR do Mar is always very positive. Unfortunately, we had a greater expectation that the approval of the program would be expedited, but unfortunately, at the moment, the Brazilian political agenda put it kind of aside, but we are prepared to join the program as soon as it is approved.

Thank you, Mauricio. I have a question by Leonardo about TVV. Regarding modernization of TVV, can this bring an improvement in the margin or would it be focused on increasing the revenue? And the second question is about Log-In Discovery. Does it have an impact on the result? Does it bring an improvement in efficiency?

Thank you for the questions, Leonardo. I'll ask Ilson to answer your question about TVV and then Mauricio Alvarenga will answer about Discovery.

Well, Leonardo, the expectation is exactly this. Investments are being made for us to modernize our operation to turn TVV into a more efficient operation and consequently, a cheaper operation. An interesting fact about the new cranes is that we will be able to act in a market where we currently don't operate. We'll be able to move more cargo with this new equipment. And here, we have the expectation of having better margins. So the answer is yes. With the arrival of the new equipment and modernization, more towards the end of the year, we expect an increase in the margins for TVV.

Leonardo, your question about Log-In Discovery. So to your second question, for now, no, there is no efficiency translated in our results coming from Log-In Discovery. At this point, it is just replacing docking vessels. There is some inefficiency because I have one vessel in the docking and one vessel in operation. But in the future, we expect to have both vessels in operation, but the vessel is very, very efficient. We're very happy and we are evaluating this vessel in Cabotage, but we are very happy with the efficiency of the vessel in terms of fuel consumption and productivity.

And Mauricio, we have a question from [ Lucas Flahia ] also regarding the expansion plan for the acquisition of new vessel. Lucas Flahia asked, pre-pandemic you had a plan to expand the fleet that was halted with the COVID pandemic. This will again have a new plan to acquire new vessels and increase the fleet in the coming years?

I can answer that. Thank you, Lucas. Well, the plan did not fall apart. On the contrary, it was executed. The arrival of Log-In Discovery was the first step in the plan. The plan indeed was a little bit delayed. We expected to receive the vessel or an equivalent vessel earlier, but the plan did not fall apart. Log-In continues with its expansion plan. Now of course, looking at the market and how it is behaving because putting a vessel in operation entails a high cost, so we have to work to have the vessel in operation at the right timing. But Log-In Discovery is our seventh vessel, it is an explicit part of our expansion plan being executed.

Thank you, Marcio. A question from [ Andres Garving ]. Does TVV intend to participate in the bidding for the concession of Vitoria port? What about the studies in that regard?

Thank you. I'll turn the question to Ilson.

Well, TVV's business is port operations. The concession of the port has to be granted by the port authority, and this is not up to Log-In and TVV. In addition, in the modeling we have some restrictions to the participation of current concession holders. So we are waiting to see what the impacts will be in our business, and we are waiting for the final model of the portal of Vitoria project. We're waiting for the final position of the federal government to decide whether it will bid or not. There are some restrictions for us, but we can bid as a minority player. The project is now at the federal accord of accounts, PCU. They will release the final modeling or they'll be making some adjustments. So at this point, we prefer to wait to speak about our opinion about this. We cannot say more at this point, and we should focus on that more towards the end of the year.

Thank you, Ilson. And I think that first answers the question by [ Marcus Koina ]. He asks, respecting confidentiality limits with the delivery of the Vitoria port proposition, is there any possibility that Log-In will participate in the auction to expand terminal management? I think this question was answered. We have some questions by Luiz Pecanha from Safra, and I will be asking them little by little. First question is, demand growth in Coastal Shipping came on strong with increase in the offering made available by the company. What is the quality of these contracts with new customers and new products handled? This is the first question by Luiz Pecanha.

Thank you, Luiz, for this first question. Log-In has a profile of contracts and customers that is very diversified. So when we get more volume in Cabotage, we are actually using many business models. We have some more long-term contracts, some short-term contracts, it's very hard to have Cabotage spot prices. Most of the contracts have 3 to 6-months duration. So our portfolio is very diversified. We deal with many realities.

Another question. What about the mix of products handled regarding quality/price? And let me complement the question because I think that these 2 questions deal with the same topic. The third question was in addition to talk about quality/price, how does the company see the performance of the mix of cargo handled with fractional cargo transport beginning -- has it begun? If so what is the relevance? And was there an increment with last mile in Q2 '21, how should this line item evolve from now on?

Thank you, Luiz. I'll turn the floor to Mauricio Alvarenga to answer the questions.

Well, let me try to answer the questions in parts. I think the first point of your question was related to cargo mix in level of profitability. You see, this is ongoing work that we have been doing at the company. Our main focus has been to move cargo from road transportation to Coastal Shipping to Cabotage because it has a competitive edge compared to road transport. When we can bring cargo from road to Cabotage in Coastal Shipping we have a better profitability level for a group of commodities that we transport. So this is continuous work that we do with higher or lower profitability products that we transport. Looking forward, we understand that the road transportation market still has a lot of cargo that we can capture in our model. And this is our work front. This is the focus of the whole commercial team of Log-In. As for fractional cargo, we have been working with this kind of cargo in Coastal Shipping. It is only labor-intensive. It requires a differentiated level of service. And we are growing, but our share, our market share is still very low, no more than 5% of everything that we do. But we are in a learning curve regarding fractional cargo. This is what I can tell you. I've been learning a lot and that motivates us to pursue this kind of fractional cargo in the coming quarters. And Sandra, could you repeat the last question, please?

Of course. He asked lastly, was -- there was a cost increment with the last mile in Q2 '21, how should this line item evolve?

Well, regarding the last mile, it is what we call door-to-door and this is what we are offering the market. And had the cost increment related to fuel price increase, increased diesel price, that is what increased the last mile. But it has to do with the mix itself. We have been trying to convert more cargo to door-to-door than just transport to the part. These 2 effects led to a cost increase in the last mile, but it is only natural in my view as we increase our share in door-to-door delivery. This will happen. The cargo we bring in road transport requires more a door-to-door approach. When the -- what the industry was used to, to use more of the maritime shipping part, and then they would hire the road transportation fees. So all cargo that we transport on the roads will have an increased price and also diesel. Diesel -- increased diesel prices increase the cost, but that cost is also felt in the long-haul road transportation or long distance road transportation. So we remain competitive. In my view, there is a cost increase, but there will be a counterpart in our revenue and an increased profitability. So I don't see this as a problem on the contrary.

We have a question by [ Enhiki Moraro ]. What is the level of idleness of TVV and of Cabotage vessels? Are they working in full capacity or is there any room still to grow with the assets of the company?

Thank you, [ Enhiki ]. This is Marcio speaking. I'll turn the floor to Ilson to answer the first part and then Alvarenga will speak about Cabotage vessels.

TVV historically had some idle capacity. Our strategy to turn it into a multipurpose terminal and include a diversified portfolio of services has to do exactly with that to keep TVV busy. What I can tell you today is that our idle capacity is much lower. We still have room to grow and our whole strategy is based on that to reach a minimum idle level. With the current level of imports and exports, our idle capacity is lower. And as we increase our efficiency with the new equipment, the investments we made to meet the demand will reduce our idle capacity. This is the kind of thermometer we always monitor. It's no use trying to occupy 100% of the TVV because the level of service will be reduced. So it's an interesting balance and we keep controlling it. Moving forward, I think we'll have a little bit more idle capacity because of that with the new equipment and the increased efficiency and the turnover at TVV and this will open up some room to attract more cargo to TVV. This is what we pursue.

This is Mauricio speaking. Looking at Coastal Shipping, the question is not that easy to answer because when we talk about occupancy rate of the vessels, there are many variables that we work with to improve efficiency. One of them is what we call intermediary cargo. There is always room in the vessels in between ports that we try to occupy. But when we talk about long distances, in recent years we have been working to capture cargo from road transportation, and that will increase our occupancy rate more and more close to general limits. And this is why we have a planned expansion in terms of capacity. As I mentioned in my previous answer, the capacity of Log-In Discovery is not included in our portfolio so far because Log-In Discovery had -- the site is just replacing docking vessels and we still have a lot of room to work with intermediary cargo and weight of cargo. There are different cargo profiles, and as we're able to work with different cargo profiles, we're able to better occupy the asset. And also feeder segment is a characteristic of cargoing routes where we have idle capacity, particularly northeast south bound cargo. So feeder has those characteristics. So we are trying to get more Cabotage cargo when the vessels are returning southbound. So we have an expansion plan also, as Marcio has mentioned.

Thank you, Mauricio and Ilson. I have a question by [ Juan ]. What is the expected utilization of the new vessel Log-In Endurance after maintenance plans? I think he's referring to Log-In Discovery.

I can answer that.

Great. Because I was going to send you the question your way anyway.

We have some plans for this vessel. I cannot really disclose the options we are considering at this point. But yes, we're expecting the outcome of BR do Mar, but regardless of BR do Mar, we have plans because it's the international market, which is overheated and we have opportunities in the region close to us and I mean South America, Argentina. So we are working on some possibilities for this vessel until we can use it in Cabotage according to the legislation. Marcio, do you want to add anything?

Yes, just to add, we could use it in the northern axis and to announce in partnership with our operating partner. This is what we're planning for this vessel.

We have a question by [ Rafael Rancati ]. What is your expectation regarding Coastal Shipping margins for the coming quarters?

Thank you, Rafael. I'll answer that. I think Alvarenga has spoken a little about this, but we're always trying to capture a new cargo to the [ MOL ], thus, improving the margins. Our expectation remains positive, and expectation of improvement. As we have been doing in recent years, we expect to continue to grow in that direction.

Thank you, Marcio. Question by Guilherme Nunez. Folks, final question. Do you use any type of hedging for bunker prices?

Thank you for the question. I'll turn the floor to Pascoal.

Thank you, Guilherme. Regarding bunker hedge, this is a study we are conducting as we speak. It's not such a simple hedge to do because bunker is a commodity traded in the international market. So it does not have so many references to the point of facilitating hedge price for the bunkers. So we have to correlate the variation of bunker price with the variation of another more popular commodity such as the Brent oil because that's a more available trade. But we are looking into that, and we will be assessing a cost benefit ratio of hedge operations to see if it's worthwhile doing.

Thank you, Pascoal. One last question by [ Rodrigo ]. Any update on the operational test involving cargo coming from Paraguay?

Thank you. I'll turn the floor to Mauricio Alvarenga.

Talking about Paraguay, until you have everyone on the same page, this is a service that we implemented in the second half of last year. Any partnership with the trading company that handles Argentina, Uruguay -- Argentina, Paraguay. So this cargo enters our main service, the Atlantic service that stretches all the way to Argentina connecting the Brazilian northeast to Argentina. And we also handle the connection until Manaus. And yes, we're using this new route. Every month, we have volumes from Paraguay as well as to Paraguay. Right now, if you're following this, there is an issue I should say. Regarding the level of the river, the [ plateau ] river and that entails a few difficulties, particularly of having access to the barges. But this is a onetime off event during -- due to the crisis, the water crisis in the region. But like I said regarding fractional cargo, we are still developing this market. This is not a huge market for us, but it's something that we are developing. And particularly the cargo that we are handling a good deal of this were in trucks. We're very proud to get cargo from long-distance trucks and bring that cargo to Cabotage. So it's going well. And I hope that in the next quarters, this kind of cargo will contribute more to our results.

Thank you, Mauricio. As there are no more questions, I would like to thank all of you for participating. I'd like to turn the floor to Marcio Arany for his final remarks.

Well, thank you very much for your participation. Some final messages. We worked in Q2 at a faster pace than before the pandemic with vigorous business at a strong pace and with extremely positive results. We continue to be motivated and safe, innovating and contributing towards achieving our results. Lastly, I want to thank you all for attending this conference call. And I wish that you remain healthy and safe and collaborating with social distancing so that we can fully recover from all this as quickly as possible. Thank you very much, and have a good day.

Thank you. The conference call of Log-In Intermodal -- Log-In Logistica Intermodal to discuss second quarter 2021 results has ended. Please disconnect, and have an excellent day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]