Sequoia Logística e Transportes S.A. (SEQL3) Earnings Call Transcript & Summary

Thank you for waiting. Welcome to the teleconference, the first quarter results of 2021 of Sequoia call -- of Sequoia. We have with us Armando Marchesan, CEO; Fernando Stucchi, CFO and Director of Relations with the Market; Bruno Henrique, Operations Director; and Diná Carvalho, Director and RH Director and Sustainability Director. [Operator Instructions] We also inform that this conference is conducted in Portuguese by the management of the company and the teleconference in English will be done by simultaneous translation. This event is also being transmitted simultaneously on the Internet via webcast. Before continuing, we'd like to clarify that any assertions that may be made during this teleconference relative to the perspectives of the business of the company, projections and operational and financial goals constitute beliefs and premises of the directors of Sequoia as well as the information currently available to the company. Future considerations are not guarantees of performance and involve risks and uncertainties and premises, and these refer to future events, and as such, depend on circumstances, which may or may not happen. Investors should understand that general economic conditions, conditions of the industries and other operational factors may affect the future results of the company and may lead us to different -- results to differ materially from those expressed in this presentation. I'd like to pass the word over to Armando who will initiate the presentation. Armando, please?

Thank you all very much. Good morning to everyone. You're all welcome to the results call of the first quarter of 2021 of Sequoia Logistics. We like to initiate with the Slide #4 of the presentation, reinforcing the position of Sequoia which is to attend the needs of the entire logistics -- of the entire supply chain, especially in that e-commerce and retailing -- Brazilian retailing, where we have 3 principal units -- business units. The first is express delivery, B2C, aimed at the direct delivery to the final consumer and attending principally the e-commerce sector. This unit represented 54% of our revenue and with the vision of LTM in 2021 and the principal products are express delivery, standard delivery, same-day delivery, reverse logistics and multiple origin and shipping from store -- ship from store, which we'll pass in more detail going on. Second business unit, which we operate integrated with the first one in our platform, is our solutions for B2B, where the principally operations that we have are LTL, less-than-truckload for field services; reverse logistics; full truckload, which is consolidated and now represents 35% of our revenue with the same vision of LTM 2021. And then logistics services where we offer operations of fulfillment and cross-docking in our storage, value-added services and refurbishing, which represents 11% of our revenue in the LTM vision of 2021. We'd also like to point out that on the next page, on Page #5, and already thank you for the confidence of our investors and the realization of our follow-on, which was very successful, where we had -- we captured BRL 905 million, being 270 primary with a net result of BRL 199 million entered into the cash flow of the company, a result of BRL 800 million. After -- and a secondary, BRL 557 million. We received 54% international, reinforcing our position demand 3x oversubscribed, which gives us -- makes us very proud. And here, we wanted to thank you all for the participation of all of our investors. We did the follow-on at BRL 25 per a valuation of 100% in relation to our IPO from October 5, 2020. The principal highlights were considered the second best IPO in 2020, with 84% appreciation in 3 months, an increase of 209% of investors, international -- institutional investors and 383% of individual investors between the IPO and the follow-on. We also had results, very satisfactory results, positive results and adhesion of 76% of the investors -- 60% of the -- who exercised their priority rights as well as the adhesion of new investors locally and internationally. We had a relevant share of AAA investors here in Brazil as well as abroad. And today, in the last month in April of '21, the stock of Sequoia, the shares were included in the index of small-cap index of the B3 portfolio. So thank you very much for your confidence in our follow-on. Going to the next page, we would like to point out that our position of consolidators in this market and our strategy of acquisitions, as we mentioned during our IPO, the process of acquisition has been following a defined strategy, seeking an increase in our portfolio of services, integration -- total integration between our operations, gains of synergy and principally increase of offering of services to our clients. On the date of IPO, we had 12 opportunities identified in our pipeline, which represented approximately BRL 2.5 billion in gross revenue. Since the IPO until the follow-on, we did 4 acquisitions in that period: the Prime, Directional, Frenet and Plimor, which were approved by the [ CAG recess ] recently, and we project the closing of this business, the closing of that deal in the -- still the same month in May. And also, this represents an additional revenue of BRL 665 million of additional revenue. Also in our pipeline in the same vision during the IPO, we have 8 opportunities selected. 2 of them are standby, 3 with NDAs signed and 3 of them MOU-signed. And this pipeline will represent BRL 1.8 billion in gross revenue. Remembering that the strategy as always is the part -- the most -- priority of our acquisition model where we evaluate the synergies and the complementariness of the products. On the next slide, on Slide #7, we would point out the acquisitions realized since the IPO and the follow-on. As I mentioned, we talked about the entrance in the heavy lifting for e-commerce and in Prime, B2C and B2C medium and heavy road. And the operation of heavy freight with the revenue -- with the recipe of the Prime revenues that you can see on Page 7 of the presentation, which is already over BRL 400 million in this operation, which gives us a geographic reach, which is very important in the potential of the extension of our services, looking at the process -- part of cross-selling to our client base. Then we also pointed out the acquisition of Frenet, a digital freight platform, and we'll give more details about that going forward, reinforcing our strategy of investments in technology. And finally, Plimor, a leader in the south of express delivery and e-commerce delivery with a coverage -- a very important coverage and relevant in the 3 southern states, a brand that's consolidated with high quality where a brand -- where we have an important synergy with that company, especially when we evaluate Sequoia today, we have our biggest -- our origins in the state of Sao Paulo. We have added important destinations in the south. And now the return through Plimor is very complementary to our decision and is very strategic for us. I'd like to now introduce Bruno Henrique, our Vice President of Operations, to go over the operational highlights during this period. Bruno?

Good morning to everyone. Here, we bring our operational ecosystem in expansion. We have 68 bases and 60, 40 -- we opened 405 new municipalities just in this first quarter. We opened up business in 405 new cities. We have more than 480 operating bases, including the ones we already have. We have 43.6 million of orders delivered, 285 deliveries per minute. 300 -- and we got the 300,000 square meters of gross leasable area, more than 100,000 meters more than we had last year with 6,000 employees. More than 9,200 registered drivers. We did our first acquisition in Logtech of Frenet, and our average level of service is above 95% according to our clients. In the following presentation on Page 10, these are the operating data. Our number of -- was 77%, pushed by growth of B2C by 39% increase, and the average ticket of B2C grew by 91%, basically based on the additional contracts aimed at Prime, which represent 36% of the B2C revenue. And also with an average ticket higher in the heavy deliveries much -- heavier. The ticket in this company is 7x higher than in the light delivery, which makes them naturally more exponential growth. We also grew in B2B by 24% compared to the quarters in 2021. In the sequence, I'm going to bring more details. Our new platform SFx, which was released at the end of last year, which is offering good results. This platform permits us to enter into the -- in the small and medium sellers as well as offering a solution for retailers who needed a solution for transportation -- end-to-end transportation to ship from their stores specifically in these locations. This solution are, if you pick up requests and collect, it's 100% traceable integrated with the principal sales platforms available and ERPs and all the tracking is online from the merchant to the end consumer. We are present in 24 states and 150 cities with this platform. We've already done more than 700,000 deliveries in the month of March, between November and March. And today, we reached at a level of 1 million deliveries through the SFx. On Page 12, we see a little bit of the growth of this product. It is multiplied by 100x the volume of transactions and now our principal clients today in the light delivery take advantage of all of this 3,700 cities served, 700,000, all 100% traceable. In these 6 months, the market is still very large. We're attending 53 clients and a total market of more than 1 million among small, large and medium sellers. We had been very successful, and the market has a great difficulty to attend this niche, whether it be due to performance or problems with collection or pickup. And basically like -- and the only competition is a state company, which has difficulty. 100% of our companies are being done outside of the state of origin. Connecting this strategy of accessing the market of small and medium sellers, we made the acquisition of Frenet, start-up of -- freight start-up aimed at this segment. Basically does the integration between more than 300 transport solutions. If you look at Page 13, 15,000 sellers signed up on their platform, and we understand that there's a very important synergy between the SFx and Frenet. And naturally, there will be growth of both products in the next months. Beyond that, we continue to invest in the Frenet system so they can offer solutions more and more customized and differential to the segment. And finalizing the operational part on Page 14, the update of our automation project. In 2020, we did relevant investments in our CDs -- in our DCs, more than 50% of our costs in the management of the shipping. The capacity of processing, we increased by 3x with these new distribution centers. We expect to automate more than 20 more DCs in the principle states in which we operate. We're also doing a consolidation in Belo Horizonte and Rio de Janeiro and Canoas, offering a huge amount of significant square meters to our clients. And I'm going to pass it over to Fernando Stucchi to talk about some of the results for 2021.

Good morning to everyone. Going to the highlights of the first quarter. They're in the old accounting format, and the reconciliation can be found in our release, on Page 19 of our release. On Page 16, our gross revenue reached BRL 387 million, a growth of 101% compared to the same period last year. Our same client sales had a growth of 107% between '20 and '21, and the gross margin, 18.3%. Our adjusted EBITDA reached BRL 30.6 million, grew to 146% compared to the same period last year with a margin of 9.4%. And our adjusted ex IFRS is BRL 15.9 million with a growth of 269% compared to the same period last year, with a margin of 5% approximately. We had an increase and a growth of 3.4% to our -- and ROIC of 35.4%, 1.7% better than it was in the same period last year. In 17 -- our gross revenue reached -- Page 17, reaching BRL 387 million in the first quarter -- in the first quarter of '21 to reinforce the seasonality of the business that usually the first half is 40% and the second half is 60% of our revenue. Due to the deacceleration of the retailing which goes down after Christmas and Black Friday and of course, growing -- which grows along as the year goes by. This 104% as much -- is really supported by -- on Page 18, we point out the profitability of the company, a growth of 104% compared to the first period of 2020 of BRL 19 million, a margin of 18.3%. We continue the evolution during the -- especially in the first quarter, we've been growing over the years. We went from 16 to 7.5 in 2021. Here, historically, our gross margin in the 2 segments has the same level because in logistics, historically, were the same gross margin. For this quarter specifically, this doesn't happen, greatly due to the B2B and logistics has suffered greatly with a few factors. One, the lockdown and the COVID, the pandemic. We had a very strong lockdown in the states and cities in which we operate with the pandemia growing. And also the increase of fuel and consumption -- the consumables that we use were above average, but in compensation had a better margin in B2C based on e-commerce and continues to have a growing margins. So adding the 2 together gave us a good gross margin for the semester. Another point to point out in this margin is the -- compared to some companies, we're going to show on the following slides, the ramp-up of integration, but naturally, those 4 acquisitions will bring us a lot of synergies. So what we have spent to win these synergies in these companies which we've invested which is also affected by these synergies, both in Prime as well as in Directional. Our results was a growth of 146%. The margin grew by 30% to 9.4, and ex IFRS, it grew 269% going from BRL 4.3 million in the first quarter of '20 to BRL 16 million in the first quarter of '21, an increase of margin of almost 100%. If you look at the EBITDA ex IFRS, we see an increment growth quarter to quarter. It went to 3.6. Went to -- it got to 4.9 in '21. It continues to grow the profitability of the company. And since it has the seasonality and the revenue is better, you have new synergies coming in. Other companies that are acquired, part of the Directional is coming in and part of the synergies from these acquisitions which helps us to continue to grow over the next quarters. On Slide 19, looking at the ROIC, adjusted by 35.4% with debt -- our debt was 0.8% of our structure due to the entrance of Prime, which came with debts. But considering the entrance of the IPO, of the follow-on, we have net cash of 7.7x -- 0.5x, and our CapEx is in the level of 2.5, very similar to the first quarter of '20. And then next, on 20, we reinforce our discipline, both in acquisitions as well as integration. We continue delivering them in a medium period of 6 to 8 months. You see the integration of TA which was done in February last year, the principal integrations and synergies. We have SG&A, which is always where we do very quickly, starting to operational integration and all of the operational synergies, consolidating the operations. And then after that, the commercial synergies and the cross-selling on the right-hand side, as I mentioned earlier. The synergy cycle, we start to capture the first synergies very quickly. And then we have -- first, we have a negative curve due to the investment being made in the acquisitions. And then shortly after that, by the fifth month, we start to have good returns. On the upper -- the next integrations and Frenet beginning in April. Directional, Prime, these are the 4 countries for 2021. Due to the cycle of synergies, the synergies will only appear really in 2022. But in the second half of this year, we should already have some synergies already incorporated into the company from these 4 acquisitions. Now I'm going to pass it over to Dina, our Manager of RH and Sustainability.

These are Slide 22. We talk a little bit about ESG. We operate on the basis of sustainability, but due to the importance that we have created in our management area of sustainability. And we're also integrating ESG into our business strategy and matrix on materiality and this information guaranteeing a level -- a high level of data security, 100% of our employees received orientation about the code of ethics. Another important point -- pillar is the conscious use of material and resources. We have a selective collection program. We have a biodigester sustaining more -- sending more than 26 tons of organic garbage per month, and bio -- for biofertilizer. We also have a program for the reduction of plastics, adopt a squeeze and connect and a cup. More than 1 million cups were saved in 2020. We have a program for sustainable delivery with bicycles, 9,900 deliveries, adding 55 tons of CO2 -- more than 9,900 deliveries saving more than 55 tons of carbon dioxide. The inclusions for the -- we have several programs aimed at prosperity. The first is in a program for inclusion when we have the opportunity for the evaluation of people with deficiencies, the talent program, which is a trainee program, internship, which was awarded in 2019, both regionally and nationally by IEO. Sementes program, which is for vulnerable adolescents and the Cresce Sequoia program, which builds -- teaches the vulnerable families to have the opportunity to develop them to work as assistants in our logistics centers, and they can double their family income through these jobs. as the Cresce Sequoia program grows, it gives us the opportunity to have the valuation -- the valorization of our people. On Slide #23, we bring here a few indicators of the management in the -- we have several employees. We have more than 6,500 employees, of whom 67% are men and 33% are women. We have more than 413 leaders, 24.7% are women in our leadership. We had originally a reduction -- with each acquisition, we have a reduction of the number of women in our leadership and then it returns to grow back to our previous levels. We count on the academia -- in the Sequoia Academy for training our people to increasing their capacity. We have the Digital Academy, as you may remember, which we started in November of last year. Today, we have more than 417 -- 498 employees who are helped by that. And we saw that in the -- we have an academy for employees for leadership. The -- with more than 430 -- more than 333 under training. And today, we are having a gradual retaking of this academy. Talking a little about our promise for development. I selected 3 to bring to you the talents. It's an intern program, which in their third class. In the previous group, 82% were hired, became full-time employees, which is our second class. And now we now have more than 30 young people in our fourth class. And the previous group, 77% were hired. And in diversity, we count on more than 145 people with disability is active in the program, and we're helping to grow that number. And now closing at the level of internal occupation, we have 71% of all of our vacancies are filled with our own people, valorizing our people, evaluating our people, adding value to our people. And I'm going to pass it back over to Armando for the final considerations.

Thank you, Dina. We'd like to close this call, reaffirming our confidence in the future -- promising future that we have ahead. Sequoia has made good investments, the offering of services to increase our portfolio, entering in the segment of heavy freight and the SFx and the retailing area for medium and small sellers in e-commerce, and we continue with good multiples and vectors in growth and opportunities going forward. Among them to continue always strengthening our position of leadership in e-commerce and increasing our share of -- our wallet share through -- by growing together with our clients, our coverage and new services to enchant our clients and also offering operational excellence by investing in technology and automation as we have done historically. We also have accelerated, as Henrique mentioned, the automation of our distribution centers. Beyond that, in a market in which we operate, a market which is still extremely fragmented, we're going to continue with our strategy of acquisitions, always looking at the complementary nature of services, the increase of regional density so that we can transfer benefits to our clients, such as efficiency, cost, speed and quality of service. We thank you all for your participation in this call, and we're at your service for any questions or doubts that you might have. Please feel free.

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

Two questions on my side, which I'd like to hear a little bit from you. On the question of seasonality, it seems that sometimes more stronger, but even in the comparison at the beginning of -- we had a stronger beginning of the year in 2020 and 2019 as well. What are the elements that you think that this year specifically in relation to EBITDA margin, which are justified the year of 2021? We see the curve of evolution that we've seen -- we've had. It's been a little bit -- this was the beginning of 2021. What has motivated this growth in profitability year-on-year to make it a more fair comparison? The second question is, I also like to hear you about -- and also you can mention as well, a lot of discussion on our side about the -- on the part of investors, I'd like to hear from you, if you are seeing, in fact, this level of competition that the market offers especially on the routes where you are more competitive, routes where you have the big operators to see if you have any increase of competitiveness, what type of geographies you operate in and how this segment have increased your revenue? If you could give us an idea so that we can see which segments are you seeing as being -- are being more competitive, where you see more competition entering.

Thank you, Lucas, for your questions. Let's start off with the first one. As far as seasonality, in fact, for us, when we project our business, this is already considered -- the seasonalities of the first semester is already considered. We have a deacceleration, important between the fourth quarter of any year to the first quarter of the following year. And this year was not different. However, as you mentioned, we also started with a better base, higher gross margin above 18%, which is better than we've had in the last 2 years. This improvement of margin is due principally to the acceleration of our business, our B2C business in e-commerce, where we have gains of efficiency, increase of density in the routes and also in reflection of the automation of our principal hubs and DCs, and we've captured due to the investments that we made at the end of '19 and during 2020. So we've had -- our principal hubs are automated, which we did not have in the previous quarters. When we look at 2019 and '20, we do not have the same percentage of automation in the hubs that we have today, and we do not have the density that we have today for the same routes, especially the long distance routes. So this helps us to have an operation more profitable and with greater efficiency from the side of e-commerce and the B2C deliveries. Beyond that, we increased greatly in a representative way SFx, which ship from store and pickups in origin. When we multiply the origins, this also helps us to improve the density and the rate of occupation of the vehicles. So we didn't have this SFx in '18, '19 and '20. It's a new product, which has also contributed with a better margin in this first quarter. In spite of that, when -- as Stucchi mentioned, in the segment of B2B logistics, where the service is aimed more at retailers, physical retailers, on this side, we had a very high impact because then we imagine due to the pandemic. Not everyone was planning this level of lockdown that we saw and restrictions that we've had with this new wave and the factories which were trained at their businesses. So although we had this gain in margin and better efficiency in B2C, the B2B for logistics, we had results affected by these restrictions, store closings, et cetera, as we've seen in diverse other news reports and news. The physical retail had a quarter -- a very difficult quarter from the standpoint of activity, commercial activity. And this has a huge impact on us as well in our business of transportation, B2B. Beyond that impact of the closing of commercial establishments, we also had a huge increase of costs on our inputs due to increases of -- that are indexed by the IGPM. We talk about the IGPM, the increase of inputs such as all related to steel and petroleum diesel, everything. So all this price pressured the B2B margins for logistics. And on the other hand, we had a gain in consolidated margins, which means that we had an efficiency -- a greater efficiency in the operation of the B2C. So looking at your second question in terms of competitiveness, logistics market is still very fragmented. Sometimes it's quite regional. And so there's a competition at Sequoia establishes and was created and developed in the company in the last 10 years having this competition. So there's no vast change, this question of behavior. When we enter in new markets, in new regions, we will always confront certain competition. But in general, in Sequoia, we're well positioned. And now with the synergies in heavy products -- in medium and heavy products, we increased our density and our efficiency. And with time, we're able to pass this along to our clients a higher level of efficiency and competitiveness. When we look at our volume, remembering that we -- as we published earlier, 70% of our volume, approximately, to be more specific is 72% in the first quarter, 72% is aimed at the interior, long routes -- route long, small cities where the density is a challenge. So in this region, we don't see the maturity of competition. We don't -- we haven't perceived any change in the competitive dynamic. It already exists. It's established for quite a while. In the capitals, we have a higher level of competitiveness. We always had a higher level of competition. And so it's a behavior that's natural. And so we understand that this market will continue competitive. So I would say that we don't perceive any change in behavior in the competition. And we understand that the platform that we're creating with integration of heavy and medium and light products and automated hubs and increase in last mile will give us more competitiveness, and we see this happening -- we're being prepared to compete in this segment.

Our next question comes from Jorge Lourenção from Morgan Stanley.

Congratulations on your results. My question is related to the previous question. But in numbers, if you could let us know from the standpoint of B2B in organic, how this has evolved so far in the first wave and the second wave? And at the second wave with the reopening, if you have any overall idea of the impact on your revenue? That's my first question. And the second question, in relation to M&A, to be very objective, when do you think we'll see your next movement in this -- on the inorganic side? If you can give us an idea about this next change and the size of the company and the type of operation, it would be interesting for us to know.

Thank you for the question. The first, in terms of B2B, as you mentioned, we still have growth, but it's very specific in relation to Sequoia due to the increase in the size of our client base. Remembering that we entered this segment in a more important way in February of last year with the acquisition of TA. Though with the increase of the base in this movement, we see growth in this period in the B2B area. We recomposed this number, we see the impact -- a higher impact of the pandemic, especially in the sub segment of individual delivery for retailing, which brought us the stability of the operation. This number, you won't see this in a consolidated way because, as I mentioned previously, gain of share, increase in clients in our base, so we observe growth -- B2B growth. However, we already perceived that in the last quarter, more challenging from the standpoint of physical -- on the physical side due to the cooling off of economic activity, the closing of the commercial establishments. So we are looking at the future at a scenario that is post-pandemic scenario. In the B2B segment, it's a segment in which we see organic growth of approximately 12% a year, which is how we always look at this segment. However, we're going to continue observing things, the behavior of the consumption and of the market and how this recovery is going to be. In this new phase, we're still -- there's just been a few days in this new phase, just a few days of the reopening of the e-commerce. And so we're starting to see the behavior of the consumer in shopping center, which is a market that we attend -- the market that we serve. So we still have a very clear picture of how this behavior is going to be. And because the pandemic is still in very high levels of contamination and new cases, and this can also bring a higher level of caution on the part of consumers and the tendency is to continue with a higher level of online purchasing as opposed to physical stores. As far as the next M&A movements, it's a little bit what we discussed already, what we've discussed with you and with the market. We already look -- we always look for opportunities that are involved with our B2C and e-commerce for us, it's a priority segment. We continue to evaluate opportunities. B2B is -- we also understand it's a big market, even bigger than B2C in Brazil. So we understand that we're initiating our cycle of acquisitions, practically done only one, which is TA, Transportadora Americana, which was 100% focused on LTL, on fractured and individual package transport for B2B. It's very interesting for us to follow into that area. We're looking at opportunities for investments in technology companies aimed at logistics, as we did with Frenet. This could also be a movement during this year, a more relevant movement this year and also the opportunity -- regional opportunities, such as for us, the densification is important. And so there are regions and states in which we still have a participation, which is a very small participation. And we have the intention to reinforce more and more our regional participation. Looking at the geographies and the integration with our operations is very important. So that's something that is strategic for us, and we're looking at it very closely and it's part of the pipeline that we showed you on the slide. The pipeline that we showed is in line with these movements, whether it be geographically or with the increase of B2C and B2B or technology companies, which will support the entrance of us into new niches and new segments and then the acceleration of our business overall.

Our next question is from Lucas Barbosa of Santander.

Congratulations on your results. I wanted to follow up on your margins of the company. A little bit -- we see a little bit differently, you have margins that are about 2% more in this quarter. What can we imagine in margins if we don't consider any new acquisitions, if we can imagine that the company will continue to expand at this rate of 2% margin by the end of the year or not? I'm not asking for guidance, but if you can give us an orientation of the margins that we can see in the next quarter, if we can continue to expect this expansion, this margin expansion over the next quarters? If we can imagine '21 any expansion anymore -- margin expansion in '21?

Thank you for your question. I think to answer it, looking at our gross margins, we should maintain a level very close to the first quarter due to our strategy. Our strategy is to continue to pass these things over to our clients, to continue gaining more orders, make the routes more dense and it becomes a virtuous cycle. So I think the gross margins could have a certain adjustment due to the B2B and recovery of B2B, which happened now in this first quarter. But we don't -- we expect the -- a gross margin of 18% to 20% because of the strategies to be passing along to our clients, the benefits of scale and automation and technological improvements. Now with the dilution of fixed costs, the EBITDA margin will continue to grow. I think that your understanding is correct. We should continue to analyze things, what we did year-on-year. we should expect something close to that, 1.5% to 2% of improvement in the EBITDA margin, looking for 1 year to the next. I think that's the tendency because the growth of revenue dilutes fixed cost. And this year, we'll get some synergies, which we'll get from Plimor as we integrate these acquisitions. So there's lots of things to capture in the next few periods.