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

Good morning, and thank you for waiting. Welcome to the teleconference of Sequoia about the results referring to the third quarter of 2021. We have with us today Armando Marchesan Neto, Founder and CEO; Bruno Henrique Souza, COO; Fernando Stucchi, CFO and IRO, and Diná Ribeiro Carvalho, Executive Director of Human Resources and Sustainability. We inform that this event is being recorded and all the participants will be only hearing the teleconference during the presentation of Sequoia. Afterwards, we will start with questions and answers, when other information will be supplied. [Operator Instructions] This is being translated simultaneously via Internet via webcast and can be accessed at ri.sequoialog.com.br, where you see the respective presentations available. This -- the control of the slides will be controlled by you. The recording of this event will be available after the end. We remind the participants in the webcast can register via the website any questions for Sequoia, which will be answered at the end of the conference by the IR area. We'd like to say that declarations that may be made during this relative to business prospects, forecasts or operating and financial results are beliefs and forecast of the company. These estimates are based on company information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties and premises as they refer to future events and therefore depend on circumstances which may or may not happen. Investors and analysts should understand that the general conditions, the conditions of the sector and other operational factors should affect the results of Sequoia and can lead to results which differ materially from future considerations. I would now like to pass the microphone to Armando Marchesan Neto, the Founder and CEO, who will initiate the presentation. Señor Armando, please go ahead.

Thank you very much. Good morning to everyone. Thank you all who hear us now and have joined us today. We are utilizing the presentation of the release, which was made available to the market. And we're initiating on Page 4. Before starting, I would like to thank the entire Sequoia team, all directors, executive directors, heads and all of our leaders and managers, for a third quarter which was very, very robust results in a macro environment which was quite difficult for the logistics sector, especially due to the inflationary pressures on fuel and inputs. It reflects our efficiency and the management of the company. So we start by emphasizing the gross margin in the period of 19.3%, 2.3 percentage points more than in the previous quarter and 11% margin EBITDA, 2.9 percentage points better than the previous quarter, and even in this difficult period with high inflation, especially with fuel prices, where we see gasoline and diesel with more than 50% increase in prices in the last 9 months. And this margin has been positively impacted principally due to the capture of synergies with our M&As, our acquisitions and initially above what we had planned. And in part because of the renegotiation of contracts with part of our base of clients, we have already reached about 50% of our contracts being readjusted principally, as I mentioned, due to the inflation in the period. And for that reason, we've been able to reposition our gross margin closer to what we had before. Before that, in this quarter, we also reached our record in the number of deliveries, 12.6 million orders delivered during the period, overcoming even the fourth quarter of 2020, when we had the most important dates for us such as Black Friday and Christmas. And beyond that, 1.3 million deliveries were done. And that was through SFx in the first quarter, more than 60% of these versus the quarter of '21, which shows a rapid gain of scale in our platform, which was developed by our team in the Sequoia -- here in Sequoia, also inspired by the e-commerce players. In terms of same client sales, we had results that were inferior to the previous quarter, especially due to a forced churn in certain logistics contracts and B2B contracts in terms of readjustments of prices and making a more adequate mix due to the information that we've seen in our hubs and our distribution centers, the mix of products and clients as well as a strong comparison to the B2C in the third quarter of last year, where we lived with a peak of the pandemic being activity -- very high level of e-commerce activity. Even so, the B2C continued to register strong growth in same-client sales of 17% and total organic growth of 23% in the quarter, reinforcing and reiterating what we had presented during our process of IPO and follow-on, in which the company would be able to grow on average together with the market of e-commerce. This reinforces our projections and also our belief in -- for the coming quarters, the following quarters. Beyond that, we continue our execution of our strategy of the creation of the biggest integrated logistics marketplace and transport marketplace in the country, reinforced now with the signing of the Lincros deal, a company leader in the service of supplying of Software as a Service, of TMS, control towers, authorizations, et cetera. We will give you more details going forward. The creation of the Drops brand of pickup and drop-off, which we announced in the second quarter, the creation of this through a joint venture with Gigahub. It's a company -- we continue the focus in interaction with M&A. We implanted the ERP in a qualified way for the two principal companies, Sequoia, our own company, and we have a chronogram by April of next year to deal with the continuation of the integration of the entire back office, both ERP and payroll. Beyond that, we continue with an M&A pipeline which is very robust. And we understand that this scenario -- macro scenario will be more favorable for companies that are well capitalized and well structured, such as Sequoia, due to the dynamic of inflation and of the environment, a more difficult macroeconomic environment. So we continue to be very active in our pipeline and accompanying the next opportunities and movements. On Slide #5, the creation of our ecosystem of physical services and digital services. We have 4,000 clients in all segments. In this period, this third quarter, it represented 59% of our revenue. Our B2B business was 31% of our gross revenue. And adding our digital service, our journey in October of last year with the release of SFx developed by our team; the acquisition of Frenet, which is advanced in a very positive way the integration of a marketplace for small and medium players in e-commerce in a very impressive way, and we'll pass more details on that going ahead; the joint venture with Gigahub for the creation of Drops to support us in the pickup and drop-off solutions and last-mile solutions and reverse logistics; and the signing of the deal with Lincros, a differential company offering Software as a Service and technology service, authorization tracking and other solutions and products, which we see with a great deal of potential. Now on Slide 6, we can update the pipeline of -- and I'll show, our position in the market have always been doing movements for acquisitions and strategic movements which are our priorities. And when we identify an opportunity, we go forward. We have 25 opportunities selected, 16 in prospects and 8 signed NDAs and 1 ready to be signed with Lincros. We're heading for its closing. This pipeline is translated into a potential revenue of BRL 4.2 billion of gross annual revenue. And we have already done 11 acquisitions plus a joint venture with Gigahub, totaling 12 movements, strategic movements that we've done over time. And we continue looking today at the next opportunities for next year. I would like to now call Bruno Henrique, our COO, to pass through the principal operating highlights.

Good morning, Armando. Thank you. Good morning to everyone. Here on Page 8, we bring our ecosystem, our operating ecosystem with focus on expansion and of coverage in our different segments. Most importantly, here, you can see is that on this mandala of the quarter, we already bring a reflection of the synergies which come -- which Armando mentioned with the acquired companies. So both in base -- operational bases, we went from 83 to 74 and operational bases from 480 to -- in the last quarter to 420 now. We have -- our rented area went from 480,000 square meters to 450,000 square meters, all of this is a reflection of the synergies that we achieved with these recent acquisitions using the resources, even with the expansion of the volume that we will comment. We arrived at more than 4,300 municipalities, being that 300 of those are new in the third quarter. And we concluded the expansion of the entire northeast and increased our productivity in all of our hubs by 36% compared with last year. We naturally are new -- partly due to our new sorters, which are in operation, we got almost 46 million orders delivered in the last 12 months, BRL 12.3 billion of GMV transacted in this quarter. 7,600 employees, bigger than -- more than -- 100 more than last time, 13,000 registered drivers and a service level above 96%. On the next page, Page 9. We bring the operating data, and we've had an expansion in the number of orders both in a comparison, as Armando -- over doing -- we're thinking even the last quarter of 2020, which was a -- it was a Black Friday of last year. And the big point is the -- in the B2C is the SFx, which is a big lever for us in this quarter and will be for the next quarters as well, bringing new players into our base of clients. We also grew in B2C as well as B2B and naturally in the total number of orders arriving at almost 12,500,000 -- 12,600,000 in this quarter. Looking at the next page, Page 10. Here, we bring a little bit about our -- another step that we took in the construction of our ecosystem, the acquisition of Lincros, as Armando mentioned, a company which furnishes Software as a Service, specifically focused at optimization of freight, real-time tracking, routing, features that are very important for Sequoia as a company and obviously bring another factor of integration of the ecosystem. But the other problems of the company already possesses Frenet and Drops. We understand that with this acquisition, we're doing an investment of BRL 38 million or 46% of the equity with an option to purchase the rest of the control at the third year. Following further with other log decks on Page 11. I wanted to comment about Frenet. Number one, it's a number of very high robust growth rate in the last quarter. Our projection was to do BRL 1.4 billion in quotes -- freight quotes in '21. We're already much closer to BRL 2.4 billion, 71% growth. In the same way, exclusive quotes went from BRL 800 million to BRL 1.3 billion and total orders, which went from EUR 21 million in the last month -- in the last quarter. The provision for this year is to arrive at almost BRL 34 million of total orders, which will go through the Frenet platform with a total GFV fee transacted business of almost BRL 860 million. And then we are doing the integration with SFx. We have a pilot project for September -- starting in September. And we're now going to expand it in the last quarter with the integration of the Frenet and SFx operation in our base. We have more than 28,000 from a base of 300,000 qualified. Talking about SFx, reinforcing what was one of our principal levers this year, the growth, we did this in the last quarter, 1.3 million deliveries, a capture of collections of 335 cities in 4 states. And it's a principal vector for growth for our last quarter of this year. So going on to the next slide, Page 12. Here, we bring our last joint venture, which is with Gigahub. We changed -- the company now is called Drops. The idea that we brought in our last presentation, giving one more option for the SMBs for drop-off and for an important option to solve delivery logistics problem. We're going to do a soft launch in this quarter with 500 initial points and a footprint with a strong presence, principally in the northeast and southeast. And hopefully, by December '23, to wind up with 3,500 points all over the country -- a couple of points all in the country. Talking about the Black Friday this year, which we understand as being the biggest date for the company, a relevant growth, different characteristics, very focused on origin in several cities connected to SFx. We've done an expansion of more than 60% of the capacity of all the hubs with the implementation of the sorters. And we increased our capacity in our volume of bases and our last-mile delivery by 34%. We have a much higher base than we had last year at the beginning of this year, expansion of 40% of the cities attended and an increment of 1,500 temporary employees and 4,000 vehicles, third-party vehicles. And the planning, which leaves us very -- very strong planning, which leaves us confident that we'll have a very robust Black Friday with results which will be very, very interesting for the company. And now I'm going to pass it over to Fernando Stucchi, who's going to give you a little bit of our financial results.

Before entering to the financial numbers, the numbers presented in the financial part are based on our numbers. And the reconciliation can be seen in our release -- on Page 20 of our release. Here's in the third quarter of '21, Page 15. The gross revenue went to BRL 445 million, a growth of 35% year-on-year. We now had a profit of EUR 72 million, a growth of 16% year-on-year and a gross margin of 19.3%. Our adjusted EBITDA was BRL 57 million, 42% year-on-year growth and a margin of 15.4% million. And our ex-IFRS adjusted EBITDA is BRL 41.7 million, growth of 38% year-on-year of 11.1% margin. Measuring the growth, the adjusted income was BRL 17.1 million, a 5% margin and our ROIC is 2% growth year-on-year -- 36% or 2% better year-on-year. The third quarter of '20 is, on Page 16, to the third quarter of '21. With BRL 446 million in revenue, a growth of 35% -- 65% when we look at the accumulated compared to '21. This growth was 65%. We went from BRL 771 million in 9 months '20 for BRL 1.2 billion for 9 months ending in 2021. On the right-hand side, the evolution of our gross revenue, we already commented a bit. We had a growth below the other quarters in this quarter but really due to the enforced churn due to the B2B operations. We have foreseen the churn for two reasons: one, because of their prices; and the other one to improve the mix -- the product mix, which will be more adequate to our pricing, the company pricing. The same-store sales in B2B were negative and 25% compensated relevant -- in a relevant way by the e-commerce, which had a growth of 17% and an organic growth of 23%. We continue to be very confident that we continue to grow based on our projections. The churn of the B2B was completed. And we hope to have recovery in the next quarters. And the month right now is it will grow gradually. On the next -- on Page 17, we're talking about our profits. We had a growth of 16% in our gross profit, going from BRL 62 million in the third quarter of '20 to BRL 72.2 million in the third quarter '21. The most important thing was the growth of the gross margin in relation to the -- from the second to the third Q -- third quarter. The principal reasons being of this growth of this -- well, the principal reasons for that were the enforced churn and the contracts to the clients, which helped with this increase, all part of the synergies and integrations in divested companies overcoming our baseline. And then the inefficiency in the operations, such as the software, and the growth, which is very important, quarter-on-quarter, more than 2% growth in gross margins. And we hope that this margin will continue to grow over the next quarters and in the next years, stabilizing between 20% and -- 20.5% and 21%, which is our target for margins for the company, remembering that is our expectation is greatly in line with the inflationary scenario. If it starts to go up like it did in the second quarter, then I think these numbers could change. Looking at our adjusted EBITDA. We have 42%, going from BRL 40.8 million to BRL 57 million in the third quarter of '21, a growth in the margin from 14.7% to 15.4%, ex-IFRS of -- from BRL 30.1 million to BRL 41.7 million, the margin -- with an EBITDA margin growing by 2%. And it's important to mention here that our EBITDA margin beyond the growth quarter-on-quarter, from the first quarter compared to the third quarter of this year, a growth of 3%. If we look here at the number from the beginning, we lost in gross margin approximately 2.6 percentage points in the 9 months -- accumulated 9 months, 0.5% of EBITDA margin, while our works on lowering fixed costs and synergies of the new companies, which have been having an effect, so an important advance in our EBITDA. And this is our tendency for the next years to continue to evolve our EBITDA while our margin -- gross margin stabilizes at around 20% to 21% but more volume, more density, lower costs to pass through to my client, will be a virtuous cycle. And higher margin EBITDA, we hope to continue to grow our EBITDA margin between 0.6% to 1% per year, already starting this year. On Slide 18, we look at the -- we continue to invest strongly in our technology. In this quarter, we invested BRL 15.6 million. So we got to BRL 40.8 million or 3.2% of our -- most of that for software and -- half of that was for software and half for new technologies in the technology part of the company. Our ROIC was 36%, 2 percentage points above the second quarter of '21, reinforcing our thesis of returning a good return for our investors. In 2020, it was 1.5%. We have a very high level, a very strong level of leverage. We had growth from the second to third quarter of 0.2%, greatly due to the payment of the second parcel of our recently acquired company as well as the CapEx which the company has been doing. Ending -- on Page 19, talking about our integrations. He mentioned that we have already been operating these operations above the baseline. We ended 100% with the creation of these already integrated and synergized and incorporated into our operations. So we have one company, which is Direcional for heavy transport. And the percentage of capture is 54% above the baseline, approved by the Board for the acquisition of the two, which leaves us very happy and that the process of integration is for the both companies. As we mentioned, we set up a [indiscernible] for the second half of '21 and for the -- we hope to launch the integrated platform of Sequoia, remembering that we operate approximately the base of Frenet with 22 million sellers, a new market for the company starting in 2022. Plimor, we've already done 65% of the synergies captured, it's going very well. We will finish the integration in the first quarter of '21 -- in the fourth quarter of '21. And we believe that it will go above our baseline for the capture of synergies. And Drops, which is our JV with Gigahub, is foreseen for November 2021 soft launch. This concludes the financial part of our presentation, and I'll pass it over to Diná, our Director of People and Sustainability.

Thank you, Stucchi. Good morning, everyone. I'm on Slide 21, speaking about the agenda of ESG, several initiatives, environmental, social and in governance. Looking at the environmental pillar. We have a pilot project of 10 carbon-zero vehicles for the region of São Paulo, Minas, Paraná and Pernambuco, contributing to the reduction of CO2. We have the depollute program, Despoluir, initiative in -- together with the SENAI and SENAC, which are confederations of transportation here, and initiatives principally the quality of life of the transporters, of the drivers and the social and environmental responsibility. We have more than 130 new vehicles participating in the program for the reduction of CO2. Talking about the reduction of CO2, we have measurements underway for scope for our own fleet, two that are underway right now. We've done a management of residues and circular economy, selective waste management and recycling of cardboard, plastic and wood. Just to give you an idea, in cardboard, we have 32 -- 85 million tons, 85,000 tons of -- and 12,000 tons of plastic which is recycled. Looking at the social pillar. Remembering that the month of September is the month of national -- against PWDs -- active -- we have diverse actions for the constant involvement of these -- for the cause of PWDs, people with disabilities. Our social programs, the Sequoia -- which is a program which offers opportunity for development for young low-income youth, we have a participation with PROA, which is -- it offers opportunities to low-income families in the training and technology as programmers. We also now started a program called -- aimed at the area of technology. We have a program of apprenticeships in that, which have been nationally awarded. And now we're initiating this program in our IT network. We have the Cresce Sequoia Program, which is [ Sequoia Growth ], which is the internal group valuing our people. In the last quarter, we had a 78% of internal -- for internal use. Talking about governance. Our ESG plan, we have finished our matrix. And we are now validating our strategy. The next step will be the validation of the pillars and the definition of the objectives and ambitions until 2030. We have, in the fourth quarter, the kickoff with the initiation of the integrated report. So in the first quarter of '21, we already have the -- for the fourth quarter, we have the first report, remembering that in the Investor Relations site, we have a restructuring on the site on our Investor Relations site for better presentation of the information, for offering greater navigability and offering a possibility to be accessed from mobile devices. We also have the Sequoia Day, which will be the first public meeting of the company. I'm going to talk about that, talk about the results and how the next years of Sequoia will be, a meeting with investors talking about governance. Sequoia counts on an Audit Committee. We've already concluded the identification of risks. And we are now in the second phase programming for the first quarter of 2022. I'm going to close my presentation here as the manager of sustainability and environment. And I'll pass it back over to...

We want to thank all of you for your presentation. From the leadership of Sequoia, the conquest of these results in a very macro -- a very difficult, complex macro scenario. We continue to move forward with our expectations and all of our projections for the next years in line with what we imagine and reinforcing that we are creating a company which is quite different in terms of technology and services and which will give continuity to the execution of the strategy. I would now like to pass the word over to and open up to questions, any questions that you might have. Thank you very much for your participation and attention.

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

Two questions here. We have received a lot of questions about the growth -- the organic growth in the country, especially of e-commerce, some companies in this sector commenting about that in the third quarter. And I think that during your presentation, it seems clear that there's also a question of contracts. The base of last year was very strong. I wanted to hear from you, Armando. How do you see that, the organic growth lower this year? And looking forward -- and we know we have a long road ahead to build this express delivery. It's a very little penetrated product. If you could comment on that and address a little bit this concern about the organic growth in e-commerce, I think it will be good. The second question, if you could explain a little bit about your financial project. We've heard news, I think even today, there was one about the launching of your financial product for your digital portfolio, digital wallet. Can you explain a little bit what type of market are you looking at? That would be great, too.

Thank you, Lucas. Thank you for the question. I think that in terms of growth, especially in the third quarter, we saw two dynamics which are completely different. One is that it's more -- in the B2B dynamic, in terms of the positioning in price, in the selection of mix to go through this period of high inflationary period with consumables and fuel. And what this has brought results that were inferior -- so in B2B, we had this dynamic, as was mentioned. It's a question that's much more strategy than time. And to get over this period of higher inflation, we think that we have made the correct decisions in that direction, and looking at the recovery of our margins, EBITDA and gross margins as well. So in terms of B2C, we, in fact, believe that the third quarter of 2020, we had a very high number for all players. We lived in a moment of peak of the pandemic with practically everything closed and with a quick adoption of new categories. So it was a peak that was very, very high in the third quarter of 2020 of last year, which makes it difficult to compare with this quarter. it's a difficult base for comparison. However, on the Sequoia side, we continue to believe in -- that our growth would come 2/3 organically and 1/3 through acquisitions, inorganics or M&As, where we would continue to grow close or a little above the market, the e-commerce market. In our case, specifically, Lucas, I think that there are several variables which will be good opportunities for 2022. We have continuity of the acceleration of SFx in the segments in which we did not operate previously, small and medium clients. As we've mentioned here, we were talking about this, since the IPO and follow-on, the company is -- has service aimed towards large companies and large enterprises and specialists. And we're now initiating an operation with smaller clients, which gives an opportunity for the clients, makes addressable market above BRL 4 billion, where we have a share, which is almost nothing, almost 0. So there's lots and lots of space to grow there. From the freight side, many regions where we still do not reach, and we still have work to be done for geographic expansion for heavy deliveries, heavy trucks. It would also generate opportunities for growth, which are very relevant for us over the next few years. And we also see a dynamic even still very active of e-commerce, e-commerce being very present in terms of frequency, in terms of recurrence, which should benefit an environment which is more challenging than it was last year, considering inflation and interest rates and the availability of credit and the availability for families, which could bring us growth, generating e-commerce below the previous year. However, this year, there is a high -- high double digits -- in the high double digits between 18% and 23%, depending on the projections. And we hope to expect to continue at this level of growth over the next few years. In our particular case, we have several segments, several opportunities to gain -- to exploit in their maximum potential, which leave a lot of space for us to be able to continue our growth curve. Looking at the medium to long term, we're quite a bit in line with what we planned or projected in our model, in our 4- to 5-year model. In relation to your second question I'm going to -- before I get into the question of the financial products, I think it's important to look at the construction of our ecosystem, digital ecosystem and what we offer to our clients. We have advanced a great deal this year with the advances and again the relevance of SFx, a platform which is completely new which we created internally in October of last year; the advance of Frenet, a digital marketplace aimed at small and medium sellers of Brazilian e-commerce. We see rates of growth of new clients and new transactions and new quotes that are quite high, high rates of growth, as Bruno mentioned in his presentation. The integration with Gigahub -- so we're going to construct our ecosystem, our digital ecosystem, bringing more technology for the operation of Sequoia and extending that technology to a base of clients, of more than 4,000 clients, proposing several solutions of tracing, TMS markers and other solutions. This ends up creating an ecosystem which, of course, the potential product is a leg which is still missing. And we're advancing in that direction with the studies. And perhaps, he can give you a little more detail.

Okay. That's it, Armando. Thank you, Lucas, for your question. Our idea is to complete more of this technology ecosystem and bring a little bit of this -- of our capacity -- of our financial capacity to help to make our add-ons more loyal. We work with a base of 13,800 drivers. So it's a product where I can anticipate his receivables so that he can generate cash more quickly and be able to work better with his money. This is the first part of our idea. Continuing with financial products, naturally, this product, as it gains maturity, I will offer this product and grow our base more quickly. And we should add new opportunities for our drivers. The initial idea is to, in anticipation of his receivables, with Sequoia, Sequoia owns the money, so we'll be able to map out, at the end of the trip, he's already close -- finished his trip and already see the money for anticipation. It will dilute his period -- net period for receivables. And so we're naturally going to have a financial benefit to be able to do that. We will have more -- when there's more and more, make the chain loyal, create more -- a higher level of loyalty and use technology to maintain everybody onboard. Our expectation is to finish this. We should have a pilot program by the end of this year. And we have a platform ready to go with our ERP in real time. And we should have a pilot with two or three partners that are still very close this year to test the platform and then do a launch of this platform in the third quarter of next year. This is our expectation for timing.

Our next question comes from Enrico Trotta of Itau BBA.

A couple of questions. You spoke a little bit about your B2B. And we see that it's going a little more sideways, that a lot of this comes from this forced churn within this client. So we can see that in this operation. What type of client? Is that a segment you're working on this forced churn is causing? And what stage we are of this operation? Will it continue to happen in the fourth quarter?

Well, we think that this technology will impact our volume. So the B2B lacks the shipping and so on and so forth. We have to treat the clients correctly -- we have transported -- today, we're looking at this -- I'm sorry, the audio has gone down very greatly. [Technical Difficulty]

If I can make a second question this quarter, questions of M&A for the quarter and also the B2B contracts and looking at the dynamic of the renegotiation of B2C, what we should expect from these new B2C?

We're having a problem with the platform. We heard your question. But it's not -- we're not able to answer. I'm going to ask help from our technicians on the platform. We're having an audio issue here. [Technical Difficulty]

Okay. Can you...