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

Good day, everyone. Welcome to Log-In Logistica Intermodal Conference Call to discuss Third Quarter 2022 Results. My name is Sandra Calcado. I'm Log-In's Investor Relations, Strategy and ESG Manager, and I will be your hostess during this event. The presentation and comments about the company's results will be made by Log-In CEO, Marcio Arany, our CFO and IRO, Pascoal Gomes; our Commercial Officer, Felipe Gurgel; our Terminals Officer, Gustavo Paixao and the Director of Tecmar Transportes, Mauricio Alvarenga. They will comment on the company's performance and main highlights of the quarter. Then they will be available to answer questions that you might have. The slides presentation and earnings release in both Portuguese and English are available in the results center at the company's IR website, and we will be showing the presentation in Portuguese here on Zoom. In addition to the rooms available in Portuguese and English, we will also provide resilient sign language interpreting during the whole event. [Operator Instructions] Be advised that this webinar is being recorded and will be available on the company's website. Before proceeding, as usual, let me mention that forward-looking statements that might be made during this conference call relative to Log-In's business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of Log-In's management and on information currently available to the company. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Log-In and could cause results to differ materially from those expressed in such forward-looking statements. Now with the legal disclaimers made, I'd like to turn the floor to Marcio Arany, Log-In's CEO.

To start his comments. Thank you, Sandra. Good day to all. I'm Marcio Arany, CEO of the company. I would like to thank everyone for joining us on this conference call to review third quarter 2022 results of Log-In Logistica Intermodal. We will start the presentation on Slide 3, going over the main achievements of our strategic plan structured around 4 blocks, Costal Shipping, TVV and Terminals, Tecmar and ESG capital structure, which primate all of the company's business lines. Next, we will move on to the presentation of our results. In our cabotage, coastal shipping business were highlight highest EBITDA for the third quarter, highest NOR for third quarter, highest volume handled in cabotage for a third quarter and the state of construction of the blocks that make up the structure of Log-In evolution in China. In TVV and Logistics Solutions, 3PL, we highlight historical an NOR record, historical EBITDA record, historical NOI record of warehousing and other services, highest volume of general cargo handled, renewal of the TEV Area 5 leasing contract and the fact that Fitch upgraded the rating of the first issue of debentures of TVV to AA. With regard to Tecmar, we continue to emphasize the company's restructuring processes. We highlight cargo captured with greater profitability, improved level of service, improved monitoring indicators and the search for opportunities in long-haul cargo, which can use integrated cabotage and highway transport. The fourth and last point talks about our ESG agenda and capital structure. Here, we also highlight ISE B3 test that was performed, first issue of book entry commercial notes totaling the amount of BRL 130 million, and TVV's inclusion in the Great Place to Work Brazil ranking among the 5 best companies to work for in the state of Espirito Santo. We're very happy with this achievement. Next, our team will present the results of the quarter, starting with our CFO, Pascoal Gomes.

Thank you very much, Marcio. Good day, everyone, and thank you for joining us on this call. Starting with the highlights of our consolidated results, I think that Marcio has spoken about this. Log-In posted another very strong quarter of results, financial and operating results. Of course, we still have some challenges that we will share with you. So starting with our net operating revenue, NOI, it grew more than 45%, as you can see here on the left, almost BRL 522 million in the quarter. Of course, this growth is impacted by Tecmar's revenue, which was not included in the same base last year. To remind you, we acquired Tecmar and started consolidating their results in the second quarter of this year. So this revenue by Tecmar in the quarter was BRL 122 million, give or take. Net of this revenue in the consolidated results still the NOR is very positive, 11.3% in the quarter compared with the same quarter last year. In the 9 months of 2022, there was a 23% increase in our net operating revenue. This growth was achieved looking at our coastal shipping business due to higher volumes transported particularly in cabotage and the Mercosur trade also contributing quite well in this quarter, offsetting a marginal reduction we had in the Feeder trade in terms of volume. And these volumes have been achieved, particularly with higher productivity, higher occupancy level of our vessels. That means an opportunity for us to bring new clients to our client base. Another highlight is the unit NOI. And in all our coastal shipping trades, Mercosur, Feeder and cabotage unit NOR has been growing well by virtue of a better mix, and the mix is a reflection of the constant work that we do to bring cargo and converting them from the road transport and bringing cargo with a higher contribution margin and also by virtue of a better pricing, in part reflecting the transfer to customers a bunker price variation in the period. Bunker price has been increasing strongly since the rebound of the pandemic, and we have the ability to transfer this cost increase in our tariffs and prices. Adjusted EBITDA, as you can sees, also posted strong growth, more than 60%. And in this case -- comparing the quarters and in this case, Tecmar's contribution is still marginal. Alvarenga will speak more about this when he talks about Tecmar. So we posted BRL 165 million in this quarter. And this excellent result derives from operating leverage in our business. And this comes with a higher revenue that we show here more than offsetting cost pressures. Of course, here at Log-In, we are feeling the inflation rate on our costs, particularly bunker fuel, diesel for road transport, for our door-to-door service, port costs increasing quite a lot. And of course, our payroll, particularly maritime crews, who have been doing good work to retain and develop our maritime crews. TVV also had a significant contribution in our result. Gustavo Paixao will soon be talking more about that. But even in a difficult quarter in terms of container handling, we were able to break all financial records of TVV. So these records might have been achieved every quarter and the results happen on the back of diversification of revenue of the terminal, particularly related to general cargo handling and ancillary services and warehousing operation services, he is going to give you more detail on that. The revenue increase more than offset cost pressures at the terminal, particularly related to personnel. The terminal is very labor intensive, but with a lot of investments in technology as Gustavo will speak about when the time comes to speak about TVV. I'll now turn the floor to Felipe Gurgel, our Commercial Officer.

Thank you, Pascoal. Good day, everyone. It is a pleasure to have you all on this call with us. I am Felipe Gurgel, Commercial Officer, and I will present a little bit of the results of coastal shipping. As highlighted by Pascoal, we had another excellent quarter, achieving again, some more important records in our results with the highlight going to the highest coastal shipping EBITDA for third quarter, reaching BRL 107.6 million, up 33.2% over the same period of the previous year. Another highlight is the increase in the margin of -- in the adjusted EBITDA margin of container shipping 35.4%, 6.4 percentage points above 2021. Regarding volume of containers, we transported about 114,000 TEUs, which represents a slight 3% reduction basically due to lower handling of Feeder cargo, which occurred in the entire market as observed in the APAC data. Year-to-date, we have 4% above the previous year. Along the quarter, we were able to replace a good part of the Feeder cargo with cabotage cargo, which reached a high occupancy level of our vessels, which resulted in a record number for the third quarter with about 42,000 TEUs, a consistent increase in cargo handling Southbound. Coastal shipping revenue also grew 9% over Q3 '21, totaling about BRL 304 million leveraged by a better mix of cargo transported and in particular, by the continued conversion of cargo from road to cabotage. Finally, I would like to inform that we continue to evaluate several alternatives to use Log-In discovery. The vessel will be released in Q4 after covering the docking plan of Log-In Jacaranda and Log-In Pantanal, which is in its final phase. I now give the floor back to Pascoal Gomes.

Thank you again, Gurgel. Well, to continue. We want to be very transparent about an important adjustment that was made in accounting adjustments that I will explain in which impacts our transport businesses. This accounting adjustment is what we call a cutoff, which is this effect that you can see the gray bar in the second gray bar after adjusted EBITDA of coastal shipping. EBITDA started at BRL 81 million. We had BRL 53 million in NOI. There is this adjustment that impacts the revenue and accounting adjustments, minus costs, and we get to the EBITDA of the third quarter. This adjustment has -- it is not in the base of Q3 '21. So for comparison's sake, it needs to be excluded. So this is what we're doing here. We make the adjustment BRL 28 million, and we end up with BRL 107.6 million. And this is the variation that we are presenting here with adjusted EBITDA. We did not adjust it in the NOR. This is a direct EBITDA adjustment. And what is the cutoff? It is nothing more than a proportional deferral of revenue initiated, but not completed in the last month of the quarter. In other words, there is a lead time for service provision. It starts in the last month of the quarter, and it will end a few weeks or a few days later, already in the start of the following quarter. And this accounting adjustment is a very common practice adopted in the logistics industry. In our last financial statements, we have been considering this effect on our results since the beginning of this year, 2022. But in 2021, this adjustment was maintained. It did not -- it was not posted in our results. It was capped in our adjustment sheet. So for comparison, on the same basis, we should disregard this cutoff to be on the same base. In 2023, next year, the results should be comparable since our revenue has increased a lot in recent quarters. This adjustment became more material, of course. Now as of now, since this is a quarter-on-quarter effect, this effect will be lower looking forward, and the results will be comparable when we land in 2023 and looking back at 2022. Well, then now I give the floor to Gustavo Paixao, who will present the results for Terminals. Gustavo, over to you.

Thank you, Pascoal. Good day, everyone. I'm Gustavo Paixao, Log-In's new Terminals Officer, and it is a pleasure to be with you all to demonstrate the results of our management in TVV, reinforcing and deep tailing what has already been said by our CEO, Marcio Arany, and our CFO, Pascoal. Well, we had another quarter of great numbers. Some are even records, showing a consistent and solid growth of the terminal's results. I would like to start by highlighting our quarterly record net operating result, which totaled BRL 84 million, significant growth compared to the same period of 2021, growing by 20%. And besides this, I would also like to highlight our EBITDA this past quarter, which hit a historical mark BRL 43.4 million, up 34% year-over-year. Still in the line of records obtained by the terminal in Q3, I would like to underscore the best historical results for any quarter in the handling of general cargo, 300,000 tonnes handled in a single quarter, up 6% year-over-year. However, year-to-date, the increase was 39% compared to the results posted in the same period of the previous year, excellent result, a result that shows the consolidation of TVV as a multipurpose terminal inside bulk operations, which we have already advanced a lot and are seeking to grow even more, investing in new equipment and technology. Project cargo, machinery, cargo from the oil and gas segment and rails, granite and vehicles helped explain the significant result. On the other hand, the result of containers is still below, especially when compared to the same period last year, which was a year of strong recovery after the most critical period of the COVID-19 pandemic worldwide. Our result in Q3 was 431,000 containers and well down 18%, while we handled in Q3 '21 following a market trend. These volumes reinforce the company's correct strategy of cargo diversification, our portfolio, which today already includes solid bulk, steel products, vehicles, granite, project cargo and the execution of special and ancillary services has recently gained the handling of liquid bulk cargo with a first operation successfully accomplished. That is one more market at Log-In enters in search of new business possibilities. Now setting aside the results, I'd like to take this opportunity to update everyone about the modernization project of our terminal. One of the stages of the project was the acquisition of new equipment to replace our old part of machinery, the most relevant investment with the acquisition of 2 mobile harbor cranes, which are trains and wheels with 154 ton capacity each that are in operation at the terminal and are already showing their importance for the state of spirits we have gained in a lot in operating capacity. This has already enabled some large projects, which originally would not touch our state exactly because of the lack of specialized equipment. While these large projects have been operationalized at TVV in addition, this new equipment already represents a gain in terms of safety for our people, efficiency and performance in the operation as a whole. In addition, we are continuing with Phase 2 of our modernization project, which provides for the complete retrofit of all 3 STSs in order to bring greater safety, which is a value for our company, reliability and efficiency, all supported by investments in technology and innovation in our operation. We believe that by the year 2023, all 3 STS will be completely modernized, which represents again specifically for our container operations. These were the results for Q3 '22 and also some additional information about the terminal. I thank you all, and I'm available to answer questions at the end of the presentation. I now turn the floor to Mauricio Alvarenga, Officer in Charge of Tecmar Transportes.

Thank you, Gustavo. Good day, everyone. I am Mauricio Alvarenga, and I am now in charge of Tecmar Transportes. Well, folks to recap and before we're still talking about our results, we began our work at Tecmar in March of this year, 2022. And our initial focus has been on structuring our foundations, our basics, so that we can operate the company with the highest standards of safety and level of service. We have been focused on the organizational structuring of the company and leadership alignment. Now moving to Slide 8 please. Here, we see our net revenue of close to BRL 122 million with EBITDA of BRL 6.8 million in Q3 '22. And here, it's worth highlighting, Pascoal has mentioned that in the previous quarter, Q2 when there was the integration of Tecmar results in Log-In's balance sheet, the NOR was BRL 156 million, but they refer to 4 months. So when we compare Q3, we have the impression that we have a reduction in revenue. But actually, when we compare revenue by month, there was no reduction in revenues. We are maintaining the revenues level of the company. But we are putting a lot of effort to improve our EBITDA margin even more. We are accelerating the process of capturing synergies between the businesses with Tecmar volumes handled in coastal shipping already reaching close to 400 TEUs in Q3. And these actions contribute not only to Tecmar results, but they contribute to improving the overall result for Log-In in our coastal shipping business. On Slide 9, at the bottom, we have a schematic drawing that helps us illustrate how the operation of parceled cargo works. In this case, we have 2 possibilities. First of all, we need to understand that in order to operate parceled cargo, we need to have a very robust base of DCs in the several regions where we operate. And we also need a robust distribution network for this parceled cargo. So after we collect the parceled cargo and after we take it to the first DC for cross-docking, in the schematic, we call it regional warehouse. We then have 2 alternatives for long-distance transportation. The cargo can go from the DC of origin to the DC of destination by road. As Tecmar has been doing this for over 20 years or we can use cabotage. And here, it's important to have an example. If we talk about the DC of the South, Rio Grande do Sul state, moving to a DC in the Northeast region. Let's take the example of Ceara state, we are talking about close to 4,000 kilometers of travel. So cabotage becomes an excellent option. And what will define the logistics option between road in shipping, coastal shipping will be a combination of several factors such as delivery, scheduling, the deadline for delivery to the end customer, the type of merchandise if the product is more or less sensitive to damage. The added value of some goods, some goods have a much higher added value in coastal shipping can bring a benefit in terms of avoiding fast, et cetera, and of course, if the Tecmar DCs origin or destination DCs have proximity to the parts. So all of these factors will help us and the customer define what mode of transportation will be the most efficient. I'd like to remind you that cabotage does have some relevant advantages such as reduced damage, less exposure, like I said, to cargo theft and mainly reduction of CO2 reduction in emissions of greenhouse gases. As an example, if we transfer cargo from Rio Grande to the Northeast, from the South and Northeast, that currently uses the road. And if we could have this long haul distance in coastal shipping, we would have a reduction of more than 70% in CO2 emissions. And this is very relevant today. Customers are very much focused and concerned about sustainability. So this is a competitive advantage that we believe the business will naturally be able to capture. At the top of the slide, we review the integration plan that we reported on last quarter. We are now entering Phase 2, where the focus will be on capturing synergies, as I've just mentioned, synergies between the different modes of transportation. Besides transporting Tecmar's cargo through cabotage as we have started to do. We have also started logistics operations that started in cabotage customers of cabotage and now with Tecmar by using their warehouses, using the warehousing management and the last mile being handled by Tecmar, we are offering the service to coastal shipping customers, and this brings us a competitive edge in the logistics chain. So as a take home message, I could say that we believe a lot in the potential of these projects. These projects that integrate coastal shipping, cabotage and road. It generates value in the logistics chain. The whole Tecmar team and the whole Log-In team, we are all very much devoted and dedicated to take the best out of this challenge. So I thank you all for your attention, and we turn the floor to Pascoal Gomes, our CFO.

Thank you, Alvarenga. To continue now talking about debt, again, the highlight in this quarter is in the top right-hand corner table, which is the leverage of the company expressed by the net debt of the company, gross debt plus cash over EBITDA, net debt over EBITDA ratio in the last 12 months. In this quarter, we posted 1.7x for this ratio, and this is the best indicator, and it's another record broken by Log-In. This is the lowest net debt over EBITDA ratio ever posted by the company. And if you will observe, this has been naturally achieved by the increase in EBITDA. As you can see, EBITDA has been growing quarter-after-quarter in the last 12 months. And we have a very solid cash position, almost BRL 700 million this quarter, which would make our net debt to be considered stable. The debt has an average cost of 13% a year, and we consider that this is a high cost. But for Brazilian standards considering the context, it makes sense for the company. Of course, we have opportunities looking forward of improving the amortization schedule and conditions of our debt. We always wait for better windows of opportunity in the market to adopt this as a project. And we have enough cash that gives us the possibility of investments, particularly investments to expand the company. In coastal shipping, in road transport, investments for the terminal, and we can grow organically and in other ways. The profile of the debt is quite interesting. It's balanced in terms of indicators. It's a long-term debt. As you can see, in the top left-hand corner, 86% is long-term debt. But still we have room to improve some of the debt over time. We have been improving the credit ratings of the company. For example, for this quarter, TVV had an upgrade in the rating AA now. Detaching from Log-In and with this consistent result that we have been recording quarter-after-quarter, it is expected that eventually Log-In's rating will improve even more than it has already, to improve even further our funding conditions. I now turn the floor back to Marcio, our CEO.

Thank you, Pascoal, Gustavo, Gurgel and Alvarenga. We will now begin the Q&A session. The whole team is available to answer your questions. Thank you.

[Operator Instructions] We have here 2 questions by Bruno Amorim with Goldman Sachs.

Referring to cutoff. 2 questions on the same theme. So I'll consolidate both. He's asking about what is this cutoff about in the amount of BRL 29.6 million. It would be interesting to have more detail to understand this point in yesterday's earnings release. And after Pascoal's presentation, he said, I understand that Pascoal has already addressed this point, but I would like to understand this dynamic a little better because why is it that now? Is this a relevant topic? Are you changing the way in which you account revenues and costs?

Thank you, Bruno. I will clearly address the questions to Pascoal.

Bruno, Good morning. It's a pleasure to have you on board. Well, I guess that the concept of the cutoff is clear. It is a deferral of a service that starts in one quarter and ends in another. This is not new for Log-In. Log-In had been considering this cutoff adjustment in our results since the beginning of this year, and it has been gaining more materiality. Now to answer your second question, because our revenue has been increasing a lot and the revenue increases a lot, then there is a greater effect. Last year, this effect was in our adjustments sheet. Considering the materiality with our external auditors, there was a discussion about understanding that we needed to overcome to be sure of how to post our results. And while we are awaiting a decision on this, we maintained this adjustment in the adjustments sheet out of the result. That's why in order to compare on the same basis, we need to exclude that. This is not a new practice. It's not a new way of accounting for revenue and costs, but it is the use of an existing rule. Now we have more materiality because of greater business revenue, particularly in coastal shipping. That's where we have the greatest impact, a little bit impact on Tecmar. TVV, it's not relevant. This is not relevant for TVV. Now looking forward, what will the dynamic be like. Since this is an adjustment that runs from one quarter to the next, this difference is only relevant if volumes, revenues and the concentration of that in the end of the quarter are very different. And we don't expect levels of adjustment as we have this year, but we started adjusting this year. So we are counting everything that was in the past. So looking forward, it is expected that this is going to be a lot softer, a lot smoother in our results and comparable, particularly when we're in 2023 looking back at 2022. Then all of our 2022 quarters will have had a cutoff adjustment. And I hope I have answered your question.

Thank you, Pascoal. We have another question in the Q&A posted by Guilherme Costa. Congratulations on the results. Could you comment on the privatization of Codesa and the benefits that can be enjoyed by TTV operation? Second question about CapEx. Could you give us some color on your CapEx expectation for 2023 and about assets that are being invested in or will get some investments?

Thank you, Guilherme. Pascoal, these questions are for you.

All right. So to speak about Codesa, our expectation regarding Codesa is very positive and here, regardless of any upside in terms of new areas for TVV. The fact along that we have a private point administrator that has an agenda to improve the infrastructure of the port access to the port to provide maintenance caring for the draft, caring for security around the port and then generating business because now in the hands of a private administrator, their main interest is to generate business and the dynamic of business around TVV. Regardless of any new areas to explore the terminal, that alone will be very positive for TVV. And that's already starting to happening -- started to happen. They are now making an effort to turn the company that was state-owned until recently and turning it into a private company. So that involves processes, structuring of teams and so on and so forth. But our conversations with them have been very positive in terms of looking forward and thinking about the development of the port as a whole and of the region. With significant investments in infrastructure to unlock capacity for the state of speed test, so we have a very positive expectation. Now naturally, we will be considering areas that are adjacent to our TVV. They are just next to us. And we'll look at these areas together with Codesa to understand if there is any possibility for expansion and organization of the part. So that it can benefit our business as a whole. This is the kind of conversation we've been having with Codesa. Of course, on their end, this is a competitive process. So there are a lot of players around the part looking at those possibilities. And we are positioning ourselves as the main operator of the board. We are the main operator, the main revenue generators. So we are positioning ourselves as a strategic player in the region to develop new businesses. I don't have any CapEx estimate. There's nothing on paper yet. This is an ongoing work in progress. And when the opportunity arises, we will communicate CapEx to the market.

We have another question in the Q&A posted by Schulz. It's divided into 3 sub-questions. Congratulations to the whole Log-In team. I have 3 questions. First, thus, the revenue increment have an impact on the chartered vessels, the chartering over, is there any plan for the vessel? Second, the international shipping market has been suffering with systemic reductions in prices and expects pricing to continue to fall in 2023. So will again see an impact of this? And the third question, what about the new management and integration with MSC?

Well, I will answer these questions myself. First, regarding discovery, Log-In discovery, it has no impact for us for now. The results that we posted, discovery was covering docking operations. It didn't bring any additional relevant revenues for us in Q3. So that's the first point. Reduction in prices in the international shipping market is happening. You are right. How can this impact us? If we intend to charter vessels in the international market, we'll have a reduction in our freight revenues with discovery in the short-term. Of course, discovery is designed to operate in cabotage. Indeed, we just took advantage of this overheated period in the international market to charter the vessel. And when the right time comes, we'll bring her to the Brazilian coast. It's currently covering docking operations. The impact of chartering of Log-In discovery is immaterial in this quarter. Regarding MSC integration, we continue with our synergy agenda, particularly, focused on cost reduction in terms of what they can help Log-In with in terms of size and expertise. So this is our driver. How we can "drink" from MSC fountain. In terms of people integration, it doesn't change at all. Log-In continues 100% independent. They are controlling shareholder MSC, I mean, but our management is 100% independent. It hasn't changed as we communicated previously in other prior earnings conference calls. So nothing changed. We just have a focus on cost reduction for Log-In.

Well, since there are no more questions, I would like to close the Q&A session and turn the floor to Marcio Arany for his final remarks.

Well, thank you, Sandra. Well, folks, to end, I just want to highlight the message that we had an excellent quarter. I would like to stress a special thank you to our Log-In team because they work in a very engaged fashion. The team is very motivated and motivated to overcome challenges. And there is an important message by Tecmar. We are learning a lot about the road transport world. And Alvarenga said, we remain firm in our purpose of promoting cultural transformation, always valuing teams aligned with our values and promoting a management focused on safety and results. We continue to capture synergies between Tecmar and our other business lines. And with the whole package, we want to offer a diversified portfolio of services to the market. So with that, I thank you all for your attention during this conference call. Thank you very much, and have a great day.

Thank you. The conference call of Log-In Logistica Intermodal to discuss third quarter 2022 earnings is ended. You may disconnect and have an excellent day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]