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

Good morning, ladies and gentlemen. Good morning. Welcome to the video conference of results for Sequoia Logistica reference the first quarter of 2023. We have with us today Armando Marchesan, CEO; Bruno Henrique, COO; Fernando Henrique (sic) [ Fernando Stucchi ], Director of Relations with Investors. The presentation will be conducted by Armando. And then afterwards, Bruno and Fernando will be available for the question-and-answer session. We inform that the presenting is being recorded and translated simultaneously. [Operator Instructions] We clarify that any declarations that may be made during this call relative to the perspectives of business of Sequoia, its operations or financial issues are projections of the directors, which may or may not -- macroeconomic or operational factors may affect the future of the company and bring us to results materially different than those expressed in the future considerations. To open the video conference of the first quarter, I would now pass it over to Armando Marchesan.

Good morning, everyone. We announced today the -- our results referring to the first quarter of 2023. I would like to now begin the presentation on Page #4, bringing the principal factors that contributed to the first quarter extremely atypical in the history of Sequoia. As we announced at the end of the third quarter of 2022, we're in the phase of implementation of the restructuring project of the categories of heavy products, therefore, an important part of the impact on our results in this first quarter isn't due to this project. The reduction of 33.6% in gross revenue -- total gross revenue can be explained by the reduction in intentional reduction and planned of 64% in the category of heavy freight associated with nonprofitable businesses and in smaller scale in the volume of e-commerce with a reduction of the volume of clients in the light category. We had a contraction in the margin relevant due to this restructuring project. With reduction of volume and revenue, we had a quarter in the phase of demobilization operating with unused capacity in routes and bases, which could not be closed. Therefore, we have a difference in time between the reduction of revenue and the reduction of costs related to these expenses. Beyond that, the EBITDA margin was affected by costs -- nonrecurring costs recisions referring to this project of approximately BRL 8 million. The third point is with respect to the pressure on the working capital of the company due to 2 events. First, in the receivable -- accounts receivable, we suffered with significant delays in payments and contracts related to the project, the restructuring project of heavy freight, the expected difference in the interruption of these contractual relations. Secondly, after the event of the withdrawn risk event in January, we suffered abrupt reductions in the lines of these products by several banks who operated with us. As a consequence of all of these factors, we've had an increase in the leverage and consequently, in the financial expense of the company affecting the results of the company. On the next pages, I will explain in more detail the above points and also detail the plan of action, which is already underway for the quick resolution of the situation confronted in this quarter. Going to Page #5. We can see that we have had a fall-off of 34% in the total gross revenue and compared to the first quarter of '22. On the graph in the upper right-hand corner, we show that the breakdown of the gross revenue in the categories, which are intentionally being discontinued with a reduction of 64% compared to the first quarter of '22. We hope by the end of the second quarter, this revenue will be 100% discontinued. We remember that we continue to operate in the B2B business, focused on the light and express categories. On the graph below, we presented a comparison of the revenue of the category of light freight, which had a falloff of 24%. We attribute this volume to a deterioration in general of e-commerce. According to Neotrust, had a 29% in volume of sales and 13% in revenue in this quarter. It's also important to mention that, in the first quarter of '22, we had additional revenue from one of our marketplace clients reducing our base in comparison to the period as we mentioned in the first quarter -- the first semester of last year. Going to Page #6, we show the contraction of our margins impacted by the project restructuring of heavy freight. The intentional reduction of this freight -- of this revenue temporarily has generated a deleveraging -- operational deleveraging fruit of the unused capacity of routes and bases, which cannot be closed. As you look at the graph on the left, the gross profit of BRL 27 million was a fall of 67%. The EBITDA for the quarter affected by the smaller gross profit related to the restructuring project reached BRL 0.7 million, while the EBITDA -- adjusted EBITDA [ with the ] expenses when the project hit BRL 9 million. On the project -- on the approximate page, as you see in the upper corner, we had an increase of BRL 80 million in our accounts receivable, principally due to the slowing down in the payment of contracts for the closing of the project of restructuring. The provision of improvements with the normalization of these receivables periods will be during the second half of the year. In the lower graph, we show the suppliers and the drawn risk accounts. As we mentioned previously, in 2023, the event of drawn risk, we suffered restrictions by diverse banks and lines of drawn risk, generating an impact of approximately BRL 90 million in the working capital of the company. And the balance of these drawn risk accounts was BRL 55 million currently. On Page 8, we can see on the graph on the left the evolution of our net debt and the level of leverage -- financial leverage. To deal with the precious effort this working capital, we had an increase in our debt and our rate of leverage reached 3.3x. Due to the increase in leverage, we had a chronogram for the amortization of this on long term. At the end of 2022, we showed a capital structure adequate for the year, however, hurt by the event in the beginning of January with the general credit crisis due to the event of a large retailer in Rio de Janeiro. Passing to Page #9, present a general vision of the impact suffered in the quarter: first, a reduction of BRL 38 million in the operational results due to the fall in revenue and the same structure of cost and expenses and expenses -- nonrecurring expenses from the restructuring project; secondly, a reduction of BRL 57 million in the financing results due to an increase in debt with the high interest rates currently in effect; third, the impact of BRL 60 million with receivables, which were delayed due to the reduction in our drawn risk lines. With this, we've had new captures of credit of approximately BRL 85 million, BRL 66 million by the end of the quarter and cash on hand of BRL 66 million to face the current challenges. In relation to revenue, we expect for a recovery that will be slower and the average ticket of the heavy tickets -- having freight 6 to 7x larger than in the light category. The majority of these are companies who already operate with us, especially in regions where we have an excellent competitive advantage. In the beginning of April, we communicated to the market that we gained 3 of these bids, which could bring with them BRL 8 million per month in their mature phase. With the conclusion of the project, the restructuring, we can see the -- it's almost automatic on the contribution margins, and we have a bigger return, which the company has greatest expertise such as B2B to small sellers, express first mile, middle mile and logistics. In relation to our working capital, we expect to improve our cycle -- cash cycle with a liberation of BRL 60 million held up in the accounts receivable as well as focusing on better -- segments with better receivables, such as PMEs. We expect that our -- by the end of this year that our receivables will normalize. The impact of the drawn risk operations has -- will still be seen in the second quarter -- in second half of 2023 as we've had a reduction in April and May, significant restructuring in April and May. We consider that this point is already normalized going forward. Finally, in relation to the capital structure, as we announced in 24th of April in 2023, the administration council of the company authorized the realization of an increase in private capital of BRL 100 million. The company has already signed with stockholders and investors in its current base a minimum quantity of shares for this subscription in the value of BRL 50 million. This amount will be available in the first 15 days of June. Additionally, we evaluated the sale of various assets nonstrategic to make -- to generate additional cash with the expectation of the conclusion of these negotiations in the third quarter of this year. In this way, we expect to present operational improvements and financial improvements starting in the second half of the year. On Page 12, we present the P&L., management P&L of the first quarter and the reductions which is still pending to conclude the project of heavy -- restructuring of heavy freight. With this, we can see we plan to reduce both revenues as well as costs over the course of the second half. The reduction of the revenue is basically for heavy freight, is approximately BRL 50 million in the quarter. The reduction of variable costs of BRL 40 million is due to the reduction -- direct reduction of the cost of freight. We expect a reduction of approximately BRL 7 million per quarter of total costs in building costs and indirect costs and the conclusion of the DCs and operational basis. On the line of fixed cost and direct and indirect costs, we expect to have a net savings of BRL 6.6 million in the quarter, coming principally from the reduction of head count in the bases and -- that are being demobilized. Finally, we estimate a reduction of BRL 9 million in the quarter for SG&A with the reduction of personnel costs and technology. In this way, we expect to incorporate the reductive pending reductions and demonstrate a reduction in fixed costs of approximately BRL 8 million per month. Going to Page 13, bringing our expectation at the conclusion of the funds underway for the reinforcement of our cash position. At the end of second half -- second quarter '23, we'll have the entrance of the increase of capital of approximately BRL 100 million. We expect to conclude the initiative of the nonstrategic sale of nonstrategic assets in this quarter. We already see the offers as nonbinding offers, which are under evaluation, and the project is within the expected chronogram. And finally, by the end of this quarter -- of the third quarter of '23, we expect to normalize the accounts receivable with the receipt of values that are late, late payments and the drawn risk operation, normalizing in this way our average periods for receipt of payment for the cash cycle -- for the conversion of cash cycle. To close our presentation, we'd pass to Page 15, the synthesis of our -- our plan of recovery. As we mentioned, we've had several initiatives to resolve each one of the questions presented previously, with the exclusion of deficit contracts, also the operation which runs in a way which is completely integrated and normalized. With the [ country and ] light and B2B, B2C with scale -- we bring a scale and efficiency for all of the regions in which we operate with additional benefit, the focus on management and structure of back office, which will be more agile. To reinforce our cash flow with the increase of capital, we have the expectation to conclusion in the beginning of June. For the sale of assets, we have the expectation of the conclusions in the third quarter. Even though this perfect storm, which we are currently confronting at the beginning of the year, we're confident that this is a period of transition -- an important transition period for the company. We defined and clearly defined the strategies already being implemented, and we expect a second semester, which will be much more positive and especially in 2024 with an operation that will be lean, efficient and with margins already equalized. I'd like to thank you all for your participation in this call, and we're now open for questions and answers. Thank you.

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

Thank you for the disclosure of the information -- the subsequent information, which is an important point for the market to give -- have comfort in your turnaround. Two topics that I wanted to hear from you about. First is regarding this capital structure. Armando, you said in the presentation that you had the expectation of a conclusion in the second half of the year. And I wondered if you could mention, comment on, due to the eventual size of your capital and what you're looking at with the improvement of e-commerce as a whole and the dynamic of new bids and so forth, if you think that the increase in capital in this scenario will -- perhaps better by the end of the year in the industry, will be enough to help the capital structure of the company. What I want to know is if you think that you'll need more capital than that and also if this will be enough to get through this period. And the second question is, if you could mention -- explain a little bit the demobilization of nonstrategic assets, which shall be -- have an impact and what it can pass to us, the size of the impact of these assets, nonstrategic assets so that we can help -- try to anticipate a little bit the impact on your balance, these 2 topics.

Lucas, thank you for your questions. Can you hear me? Does everybody hear me okay?

Yes, it's normal. Go ahead.

Your first question that you mentioned, I hope that -- we kind of have to go back a little bit to the end of 2022, in December of 2022 when we looked at the question of leverage and the chronogram for amortization of our debt. We had a situation with the closing of 2022, and in the beginning of January was a situation, which was well planned and controlled and where the debts were long-term debts, especially the debenture that we did in the beginning of December of last year with a 2-year [ squeeze ] of nonpayment on the principal and additional period for repayment. This gives us a comfortable situation. In the material of the call, this changed quite a bit after the crisis. The credit crisis was intensified in January after the case of Americanas and other things which happened in the month of January. And this increase and the credit problem brought us a need for working capital in the short term, which we did not have and did not had a plan for. So we anticipated this problem with Americanas or other problems that came along and this credit crisis, which we've had. So this brought to the company a working capital with a very strong period -- the first measure the council approved, which will have good visibility, and it's well set up for the end of the month in June, and it will have a raising this capital. Beyond this, we have, in fact, focusing on the categories, which are profitable with a better working capital cycle, and this will help us in the second quarter. In the second half, we don't have any new changes in categories in which we do not operate, but these are operations, which we dominate. These are categories in which we operate for a long time and with a good structure of costs and margin. And this all will bring us to us an improvement in this cycle. Beyond that, it's obvious that we expect a better scenario on the credit side from the banks. I think that the worst is over. We've heard this from other players and from the market itself that the worst in the credit crisis has passed and that with the working capital, short-term working capital, which we have focused on the company in the first quarter, we'll be able to have a long lengthening of our credit profile and equalize this part of working capital. This will bring us a better scenario for the second half of the year. This, together with the decision which we made to evaluate the sale of these assets, which is part of your second question, we see that it will be enough to equalize the short-term needs of the company. As far as the assets that are being sold, we have 3 assets. Two of them were evaluating the demobilization. These are assets, which together, the book value of these is close to BRL 50 million, summing these -- adding these 2 assets together. And we feel that -- we imagine that, even though it's in initial phase of the process, that with a lot of study and certainty that we'll be able to bring between BRL 50 million and BRL 100 million from the sale of these assets. This is our expectation for the second half. As far as the -- if we sell just one of them and looking at this approximately BRL 50 million, will help us to, in the short term, to equalize our situation. We'll also have other sources of financing, which should appear, and the worst of the credit crisis in the first quarter is behind us. This will help us to be able to recover and come back to growing. As we mentioned, the action plan, we already see various bids, which we've already received. Some of them have already been successful and had confirmation. And part of them, we already communicated to the market, so we have -- we see an important recovery for the second half of the year. Unfortunately, the first half of the year will be impacted and have been very impacted by this problem, unexpected problem from the drawn risk operations. So all of this operation, the exit of the drawn risk and these short-term cash problems brought us a very relevant problem in the operation. So for that, we're going to carry this impact forward. But in the second half of the year, we believe that with these measures, we will be successful. Beyond that, we continue to evaluate other projects, strategic projects such as -- which can bring better structure of capital to the company, which are under evaluation, M&A projects and other projects, which continue being evaluated by us as opportunities for the near future.

[Operator Instructions] Our next question comes from João Pedro Franco Dos Santos from Morgan Stanley.

Can you hear me okay?

Yes, João, we're hearing you fine.

On our side, actually, we have 2 questions. The first is if you could give us a little more color in relation to the bids that you mentioned in the release. As you mentioned, these are from clients that are already in your base. Just want to understand what's the profile of these bids and if we can expect anything in the next few months, how long this will take and if anything is already set up. That would be great to know more about that. And secondly, what do you see in the market today since the volume of the sector as a whole went down 29% and revenue by 13%. I wanted to understand on our side, how you close this gap. How do you see this gap? And where do you see the scenario for the sector as a whole? Are these 2 questions from us, from our side.