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

Good morning, ladies and gentlemen. Welcome to the video conference of results of Sequoia Logistica referenced to the results of the fourth quarter of '22 and for the year of 2022. We have with us today Armando Marchesan, CEO; Bruno Henrique, COO; and Fernando Stucchi, CFO and Director of Investor Relations. We inform that the presentation is being recorded and simultaneously translated. [Operator Instructions] We clarify that any declarations that may be done during this teleconference are relative to prospective business perspectives of Sequoia operational and financial goals that constitute projections of the management of the company that may or may not happen. Investors should understand that political factors, macroeconomic factors and other operational factors may affect the future of the company and bring it to results, which are materially different from those which are expressed here. To open the video conference for 2022, I pass it over to Armando Marchesan. Sir Armando. Please go ahead.

Good morning to everyone. It's a pleasure that we announced today the results referenced -- referring to the fourth quarter and the full year of 2022. I will start off the presentation with Slide #4. Where we will talk about the financial stats and operational highlights of 2022 and comparisons with the same period of the previous year. The number of orders reached BRL 80.9 million in 2022 and an increase of 52.5%. In the fourth quarter, B2C reached 18.4 million orders, an increase of 7.4% and for 2022, we reached 75.1 million orders, an increase of 57.9%. These results are supported especially by the strong performance in the light deliveries up to 3 kilos and the smaller growth in the heavy deliveries where we have higher tickets. The gross revenue reached BRL 2.1 billion for an increase of 18.6%, highlighting the performance in the B2C segment, which reached BRL 1.4 billion, an increase of 30.7%. It's worth highlighting also that this growth happens due to the strong performance in the segment, which has light items. On the other hand, we see the cooling of the items that have higher value with the B2C heavy and B2B deliveries. In the year, B2B reached a revenue of BRL 534 million, in line with 2021 due to the process of restructuring already announced in the previous quarter, we will give more details during this presentation. Following along with our EBITDA, we reached the year BRL 224 million, which represents an increase of 22.2%. The EBITDA margin was 12.5%, an increase of 0.4% compared to the previous year. At the end of the fourth quarter, we announced the third emission -- third issue of debentures, simple debentures with the majority publicly in the amount of BRL 300 million for 5 years with 2 years of grace period on the principal and interest calculated at CDI plus 2.75%. With this, we reached a level of leverage, 2.2x (sic) [ 2x ] EBITDA for the fourth quarter. In this period, we already concluded the process of integration of the company's acquired companies and we're in the final stage of systemic consolidation. We will give continuous restructuring, and as we mentioned, in the third quarter. Following our ESG agenda at the end of 2022, we published the first edition of our annual report of sustainability elaborated in accordance with the norms of the GRI and SASB, also of the VRF, the Value Reporting Foundation. Please now turn to Slide 5. As you can see in the picture, the highlight was in our segment in relation to the gross revenue for 2022, the B2C represented 66% followed by the B2B with 25%; and finally, logistics with 9%. In the B2C segment, for items -- for light items of lower value, we were very optimistic. We continue very optimistic with the growth leveraged by the efficiency that we have attained in our operating costs. B2B and heavy, we continue to have a restructuring plan as we announced in the third quarter, and we will continue with a focus on the -- working on the Express segment and light cargo in synergy with the B2C. Our focus in B2C and B2C taking advantage of the structures, which are already in operation, consolidating with more volume and more segments as we shared with the automation investments and technology. Going to Page 6, I would like to bring an update a detailed update of the integrations of our acquisitions we've done since the IPO in October of 2020. There were 5 companies acquired in different segments. These companies had their own systems, on structural systems. Beyond the operational degration, it's necessary to have the legal, banking and systemic integrations such as CNPJs, ERPs and transportation management systems. During the year, after the acquisition, we focused on the bases and routes and captures of back-office synergy. In 2022, we focused on legal and systemic integration, which are practically finalized. Due to the complexity of these integrations with more than 80 branches and 12 million suppliers -- 12,000 suppliers and 10,000 clients, we have had a challenge to set up our registries in the recent months. Nonetheless, we are operating in an even more integrated way and a more lean structure. In 2022, we made integrations with 2 companies instead of 5 by December of 2022. We also did the integration of banking systems and payment systems, payroll systems and systemic systems. Over the next months, we will do the integrations in the other systems. We're already operating with only 1 ERP since February of 2023, compared to 3 previously. And we will now operate with 2 TMS starting in 2023. In May of 2020 as compared to 5 previously. It's important to point out that these operations are very complex and involve various steps from the development of systems to the corrections and adjustments up until the phase of stabilization. On Page 7, I would like to comment a little bit more about the product -- project, the restructuring in this segment of B2B and B2C, heavy B2C, which we had mentioned in the previous quarter. Due to the challenge, the macroeconomic challenge, which impacts the great deal the power -- the purchasing power of the consumers, we haven't seen a deterioration in this segment of sales of heavier items. And with that, the company decided to initiate a process of optimization of its operational infrastructure for these segments with the objective of bringing more profitability and cash generation and operational efficiency. In this slide, I wanted to show a little bit has already been done and all that still remains to be done based on what we have seen, and we're looking at the final of the projects. As far as what we've already done, we can point out the cancellation of segments and categories of products with low margins and or that were deficitary, the readjustments on our prices for freight, creation of cells for commercial sales for the -- to attend small clients, demobilizing 16 branches, unifying the branch -- the network of B2B and B2C, light B2C, reduction in the frequency and third-party-deliveries in distant interior and restarting the operational teams. We've also looked at the structure of our operational structure. We're also making our light cargo up to 40 kilos, palletizing it, reduction in the number of branches with a floor to third-party outsourcing of some branches to distribute and optimize costs and increase our network of partners, revision of areas of support and to have gains of agility and efficiency. After we finish the project, we estimate that the operation in B2B will represent about 10% to 14% of our gross revenue of the company, increasing our margin -- contribution of margin for that segment as each one gains in that segment. The company continues to operate in the B2B segment with a focus on express deliveries and deliveries to small and medium clients and deliveries with a profile of light cargo for the better -- take advantage of the existing networks in the B2C, in the light B2C, bringing more integration and efficiency. If you look at Page 8, I would like to invite our COO Bruno Henrique to give you the principal highlights of the period. Bruno, please?

Thank you, Armando. Good morning to everyone. Looking at Page 9, we have the opening of our volume of orders. As Armando mentioned, once again, we registered growth, demonstrating the strength in the B2C segment. The number of orders in B2C had a growth of 58% compared to the previous year, reaching 75 million orders for the year. The average ticket reached BRL 19, a retraction of 17% on the year. In the fourth quarter, the ticket average ticket had a retraction of 3% in relation to the previous quarter. This reduction is related to the change in mix of our orders, which has already been observed with a strong growth in the category of light deliveries of up to 3 kilos, which have the lowest ticket and the lowest growth in relation to heavy products with a higher added value. This scenario has been challenging and has changed the purchasing power of families in relation to more expensive products. In relation to this mix, we would have seen the numbers, as we've seen these numbers. In the B2B segment, we had growth of 6% in the volume on the year. The average ticket reached BRL 91.6 with a reduction of 5% in relation to the previous year. Consolidating the segment, we reached 81 million orders for the year with a strong growth of 52% in comparison to 2021. Our business model has a complete solution to operate with clients with different necessities and has been essential for the growth and the volume of orders that we captured in the market, principally in the B2C light segment where we're seeing large opportunities, great opportunities to conquer new clients to improve our capacity for growth in the construction of innovative solutions. The company continues to invest in its digital platforms as we can see on Page 10. We present here our motors of growth, as SFx and Drops solutions. SFx, our solution for the first mile in omnichannel and its usage. We have BRL 410 million in revenue in 2022, a growth of 86% in an annual comparison, arriving at the number of 75 million orders since its launch. This platform, which already stands out with its efficiency in collection and multi-origin and marketplace clients, started to expand for the segment of small and medium companies. And it's a more viable opportunity -- alternative for the small companies. SFx and Sequoia, we launched Drops in the first quarter of 2022, our solution for pickup, drop-off points for the delivery and pickup of packages where we have more than 1,200 points where businesses and agencies and postal services. We have a technological -- proprietary technological trend form where we look at our partners to operate a more experienced an excellent experience for their clients and users. With this, we offer also the solution of point-to-point for our clients, end-to-end solution for our clients, especially in the segment of PMEs of small businesses. In March of 2023, we announced a partnership with Melhor Envio, a platform of logistics that connects the principal transport companies and logistics in a subsidiary of local web services, Internet S.A. Through this partnership, our clients have best shipping, can emit more than 1.5 million labels per month for different orders and with different players from any place that we have drops, simplifying our delivery and lowering costs. With these initiatives, Sequoia continues to increase its capacity of attending e-commerce while we reinforced our strategy of growth in that segment, in the micro, small and medium-sized market in the B2C market. And we continue to realize investments and expanding our digital operation. Going to Slide 11, a I would pass the word over to Stucchi, so he can comment on our financial results. Stucchi?

Thank you, Bruno. Good morning, everyone. I would like to start my presentation and say that starting in 2022, I've had the -- a better communication with the market, we are no longer adjusting the IFRS adjustments. Therefore, our numbers are shown according to the analysts, who accompany these metrics of the IFRS 16, we have a table on Page 12 with a reconciliation of these 2 numbers. Now looking at Page 12, we can look at the principal highlights of the year. We restate gross revenue of BRL 2.1 billion, representing growth of 18.6% in comparison with 2021. The gross -- adjusted gross revenue of BRL 326 million, a growth of 16.2% in comparison year-on-year and with gross margins of 18.1%, 0.4% below the 2021 number. It's worth mentioning that this profit excludes nonrecurring costs due to the project, the restructuring of the B2D and heavy cargo, as we commented earlier. The EBITDA increased by 22%, reaching BRL 224 million with a margin of 12.5%, representing an increase of 0.4 percentage points in relation to the previous year. Adjusting the EBITDA for nonrecurring effects, it grew by 14.8% with a margin of 12.9%. Our adjusted net profit for nonrecurring items and intangibles generated through acquisitions was BRL 9.3 million in 2022. And finally, our ROIC, ROIC presented an increment of 41.1%. On Slide #13, we see the comparison with the gross revenue. And it's important to -- we had the World Cup, which was in effect -- had an effect on us, which will be a challenging with inflationary pressure with lower income for families and impacted the consumption, and we registered a fall off of 12% in that quarter. Nonetheless, we maintain growth for the year of 19%, being 16% organically. On the graph on the right, we look at the principal segments in the company. The B2C segment, we had an increase of 31%, even with a fall of in the B2B segment, an impact of, as we mentioned previously, for the year, we had growth of 0.3%. Looking at Slide 14, we look at the behavior of our profitability in comparison with previous periods. On the graph on the right -- on the left, you can see there was a growth -- adjusted gross profit of 16%, represent a reduction of 0.4%. On the right, the graph adjusted for 15%, reaching BRL 232 million. The adjusted EBITDA margin for 12.9% presenting a small fall -- small up of 0.4 percentage points. Looking at Page 15, we have the graph, which shows our generation of operating cash at the end of the fourth quarter of 2022, we presented a generation of operating cash of BRL 23 million, returning to the pre-acquisition levels with a conversion above 50% as we see in our history. For the year, our generation of operating cash was BRL 51.6 million, a conversion of 23%. In the lower part of the slide, we demonstrate the evolution of our investments and debt. On the left-hand side, we show the evolution of investment during the quarters. And in the fourth quarter, we had investments of BRL 59.6 million, 4.9% -- BRL 19.8 million, 4.9% of our net revenue, and for the year, BRL 59.6 million, equivalent to 3.3% of our net revenue and in line with our percentage of 2021. On the right-hand side, we have our debt, which in December of '22 reached BRL 440.1 million (sic) [ BRL 440 million ] of net debt, a relation of 2x EBITDA for the last 12 months. We also point out that the company is in line with all its covenants of its debt. Looking at Page 16, we'll bring an update on our debt level and our drawn risk. In December '22, we made an issue of debentures of BRL 300 million with closing in 5 years with 2 years of grace period at a rate of CDI plus 2.75%. These resources were distinct to the payment of short-term debt and to reinforce the working capital of the company. With that in 2023, we have only BRL 8.6 million of debt to pay and BRL 31.5 million of bills to pay for previous acquisitions. To show more transparency for investors, we show our position in drawn risk reinforce that these operations of drawn risk do not reset debt for the company, but not registered on our balance sheet. The drawn risk for the company is to help our service suppliers, who sometimes need to anticipate payments. In the beginning of 2023, and the theme of drawn risk related to -- as mentioned in the media, we reduced the balance of these operations for strategic operations. One of the financial partner to set up our own FIDC for the company. Together, the company's balance with drawn risk is approximately BRL 92 million. It's important to be mentioned, again, that our operation of drawn risk has a nature different from that mentioned in the media. It is not characterized as bank debt. We operate by the making available of anticipation of receivables to our suppliers 100% accounted for the operation on our financial demonstrations. With this, I close the presentation of our financial results, and I pass the word over to Armando.

Thank you, Stucchi. I'd like to thank you all for your participation in our call -- results call and open up for any questions and answers that you might have.

[Operator Instructions] Our first question comes from Lucas [ Stavis ] from Santander.

For my question. I would like to know if you could give us a little more color about the B2B and heavy freight area in general and explain about your distribution centers? And also if along the lines that you plan to close, you're going to have in any way, monetize that? And also talk a little bit about the color about how much this could improve your operation in terms of expenses, working capital and how this will help the company going forward to understand a little bit of your mentality regarding this process, your thinking regarding this process?

Right, Lucas, can you hear me okay? Okay. Yes, fine. Okay. Thank you for the question and participation. The first point is that to remember that this is a process of integration that we have been announcing for quite a while, and the changes in the market with the falling demand, we have -- looking at this since the third quarter of last year, if you remember, that we already so a smaller demand for high-value products and heavy freight. And so we saw this behavior on Black Friday with higher value. We don't have the results yet and express the results in the sale of TVs, for example, which is typical in the World Cup. So it clearly shows that in the macro scenario, economic scenario in terms of expenses and high interest rates beyond a position which is more conservative for the retailers and marketplaces. As you know, if you have a product, it needs to be financing and for the payment plans as well as free freight, depending on the size and weight of this freight. So otherwise, it becomes unviable and it loses its competitiveness in the physical retailers. And if we don't offer free -- if the commercial operators don't offer free freight, so the market has fallen with a smaller volume, and we have to intensify our plan of restructuring, which we have done and which we have published since last year. We have 2 things here. What happened internally. The first is that we can -- we see in Page 6 of the presentation, which is an important step in the integration of the systems of the corporate structures, the tax numbers, the registries, the client registries, the ERPs, as we mentioned here, which shows the complexity that we've been through in the last 2 months, an important step for us because it simplifies greatly our operation and our management, as you can see here in the document on Page 6. We leave a level of 6 -- 5 different ERPs to 1 ERP consolidated for our central shared service center which brings a tremendous economy in management and gains in productivity and efficiency in our back office operation and also better integration of our operations. Beyond this, we also reduced it from 5 to 2 tax numbers, it doesn't seem such a big deal, but it means that we have to -- we're operating in several different municipalities with different tax numbers and different corporate structures. And we integrated more than 4,000 clients so it's a very intensive structure and we passed through in February. And now we're opening up our agenda to really go after the optimizations that we have been seeking. The optimization integration in relation to your question, that we detailed on Page 7 of our presentation, this market of heavy -- higher added value may take time to return as interest rates drop, lower than what we have today. And this has had a huge impact on consumption and affected the sales of the companies with whom we deal on e-commerce. And as we mentioned in the last quarter, we're going to intensify now is due to this total integration and seeking out this optimization. Answering your question, we're leaving an area of only routes that we're leaving all of the deficitary or low-margin routes and we're concentrating in the month of March and April, we're finalizing these changes. And with that, obviously, it reduces the variable cost of freight, which many times is either close to its revenue or even as a negative margin. So this is the first point, which will bring gains and profitability to us. And also, we expect to conclude this by the end of April or beginning of May, this entire formulation of our network. Here, we're talking about uniquely and exclusively about the B2B and B2C -- heavy B2C. We're not making any type of action in the light B2C, because the B2C light continues very much in line with our plans and we are very excited about the opportunities in the light B2C market. So these changes is restricted to the B2C and B2B heavy and B2C heavy freight. If you look at the document in presentation on Page 7, we talked about the clients and categories that we are reformulating, leaving these routes, deficit routes and we're closing branches and moving some branches to B2C. And just these changes should bring us a saving -- a monthly saving recurring savings of BRL 1.5 million per month, we go straight to our profit to the bottom line and save these are expense savings. And in terms of the red work, the redefining of the network in related to B2C with only 1 ERP and with integrated tax numbers, we're able to optimize the integration in all of this part of the structure of the network, bringing important savings for us and more variable savings, but which gains margin and profitability. And in the structure, which is very relevant, the fixed cost to run these operations of heavy and B2B, you have a fixed cost support and a series of other contracts and services, which are connected to these services. And here we estimate again recurring savings. And so adding that, we're estimating something close to BRL 7.5 million per month starting in May and capture savings leaving from our gross revenue and as you may see on the first column, announcing the part of the sales and gross savings, which will also fall. But the fixed cost, which affects the profitability have a higher proportion, and we have to gain in profitability. The focus that we're focused on here is savings, economies and cost-cutting and the results that are coming mainly from high-value items, which we're very confident in our decision. And in this adjustment that we're making, the company will become lighter more profitable. And in the first moment, it will affect the growth. The percentage growth, of course, we're giving up revenue, but the focus is on optimization and gains of margins and profitability and the generation of -- and cash generation. So this is the savings that are projected that we could have during this period, somewhere between BRL 7 million and BRL 7.5 million per month. And I'm not looking at the variable of the freight that goes -- that will leave with the revenue. So this is our variable savings. So that's a little bit our perspective, our thinking on that, and we continue to operate lines, B2B lines and express lines where we can focus on products of up to 40 kilos, which are more integrated with our equipment and our network. This will also bring gains in efficiency and segments of the B2B Express, which we've grown a lot and also brings a good profitability. These are short-term situations. The B2C, we continue with the light freight. We continue maintaining our rhythm and what we've done is -- as we have done in recent years, logistics also presenting better results and fees for services, presenting good services, fleet services. So we're not going to go through that restructuring in this revision, but it's in line with our plan and what we had foreseen. And we're seeking to optimize and gain the margin, especially in this year of this context, which has been very difficult for retailing and e-commerce and for a large part of our clients I hope that answers your question.

Yes, you did. If I could just ask one more real quick. Just to understand 2 points. First of all, the question of drawn risk, which you said that using this type of line, it's a type of a credit which helps greatly in your cash flow, working capital. How do you cover the need for this need for capital of drawn risk for short term? Does this increase your indebtedness? And also if you've done various acquisitions, logtechs and so forth in the last 2 years, with several different specific functions that align with the strategy of the company, how we're counting on the growth of B2B, which is now having a setback and you're reducing that type of work. Does it make sense within the strategy, M&A strategy to get rid of some of these companies that were short in the short term to raise cash? Or are they -- are you maintaining them as a strategic reserve?

As far as your first question, Stucchi can give you more detail, but it's natural that since the dynamic of the market and with restricted credit every -- as we read in the papers every day, we see credit, which is tighter. And we also see the reduction of the balance in drawn risk and naturally, we -- and do our jobs to maintain our lines of working capital. Part of this reduction is renegotiating with our suppliers. It's natural that the company -- the market is adjusting. And part of this is that we're able to revise contracts that we've had with suppliers, gaining part of this through linked to stretching out these periods. And looking at your risk -- drawn risk balances and offering these working capital and the short-term working capital for them. Partner -- one of our partners, Banco do Brasil gave us a line in March, supporting the company with very good rates, but it's a way for us to report -- to reinforce our working capital and also the financing with other suppliers is the readjustment that we have been seeking. With the other initiatives of the company to improve our working capital, this is the focus. It's very important. We see in the accounts receivable that we have also sought renegotiate contracts with our clients. We've communicated this, and we should also seek improvements in terms for receipts -- for account receivables for this working capital for the company. Your other question -- could you repeat your other question for me, please?

Just looking at the recent past, you have made acquisition of several logtechs and many of them with capacities to help with the strategy of growth, the B2B area, which we now see is going through a very difficult moment, and so you're reducing your operation in that area. If these companies that you acquired and the solutions still makes sense for you to own or if you need to do another type of acquisition? Or if on the other hand, if it makes sense to sell off some of those acquisitions to raise cash at this first moment? Just to understand how are you thinking about these questions.

Okay. The important thing of these companies, the logtechs, Lucas, they don't have a lot of cash -- they're not cash burners. These are -- they generate cash or breakeven and we are in an initial cycle, but has been ramped up very quickly, that is drops. And last month, we with the best shipping of local web and this accelerated our number of orders. And we should also increase our -- give us an increase in drops in our drops company. We tend to still on a pilot project, but we should announce it shortly, which will also improve and accelerate drops, balancing out its profitability. These are companies that don't consume cash, companies that we like. We like the team. We like the segment. But as we said, this scenario is different and we're open to evaluate the possibility of these companies as soon as we have a decision about this subject, obviously, we will alert the market at the same time. These are things we have to study repeatedly and look at opportunities and determine what should be done. These are companies that have a good management team. And so looking at the focus of our program of restructuring, our focus here is, in fact, bringing profitability and we're taking -- getting rid of categories in the operation that do not bring this type of profitability to the company in the short term. And we're looking at a very complex area, we look at the results of some companies who operate almost exclusively with low value -- low added value products and looking at the fourth quarter. So this is natural. So our focus for now has been this plan beyond the initiatives, as I mentioned, that bring to us the integration of ERP in advance in our central center of shared services and productivity, accounts receivable and all of this, these are gains, which we will see over the next few months.

Next question is from [ George Engberg ] from Morgan Stanley.

We understand that Black Friday and the macro situation were important sources of pressure on your growth, but the evolution of your revenue from B2C in the fourth quarter was much worse than the evolution of revenue of the other listed players in e-commerce. Can you comment on this divergence? Give us a little more color about what has happened in terms of your largest e-commerce clients and revisit the in-sourcing of these clients? And how protected are you of this in-sourcing effect due to your focus in the interior of the company? Can you also talk about the tendency of growth for B2C and same client sales, which are coming at the beginning of the year -- which have been coming in the beginning of the year?

Joe, this is Bruno speaking. Thank you for the question. First of all, talking about '22, I think that it's -- it was not very well understood. The global revenue of B2C, as you can see, comparing it with the players has the effect, which seems negative. But when you separate our focus, which is the light freight, it has a much higher evolution than the rest of the market. So when we look at these orders and the total revenue goes up as well. Remembering that heavy freight, a lot of this reduction was due to -- was influenced by us. We made the decision to reduce the portfolio of heavy freight and if you remember, heavy freight is a category that doesn't have in-sourcing. So this effect does not happen in this quarter and had no relation to this. What has happened and what you're mentioning as insourcing, we can explain the dedication of some operations, a little bit the reverse effect. We've been sought out and we've evolved in this segment with several clients -- several of our clients. Going on to the -- looking about this year, what we see is that naturally the third quarter was slower, but we've gained a lot of opportunities for large bids, which will have more effect on the second and third quarters of this year. These are new companies coming on board, either client -- at current clients who are also expanding their portfolio -- the service portfolio with us. So this relationship of revenue and growth, I think, is hurt when you do an analysis and weigh it out as one.