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

Hello, ladies and gentlemen, and welcome. Good morning. Welcome to our third -- our Second Quarter Earnings Call at Sequoia Logística related to the second quarter of '23. Today, we have Armando Marchesan, the CEO; Bruno Henrique, the COO; and Fernando Stucchi, the CFO and Investor Relations Director. The earnings call will be conducted by Mr. Armando and soon after, Mr. Bruno Henrique and Fernando Stucchi will also be available for the Q&A session. We'd like to let you know that this call is being recorded and translated. [Operator Instructions] Any possible statements that could be made during this earnings call related to the business perspectives at Sequoia, operational targets and financial targets represent forecasts of the company's management that could not occur. Investors must comprehend that political and macroeconomic factors as well as other operational factors can affect the future of the company and lead to results that materially differ from those listed in such statements. To start this earnings call for the second quarter of '23, I'll pass the floor on to Armando Marchesan.

Good morning, everyone. We'll begin the release of our earnings for the second quarter of 2023. I'd like to start off by Slide 4 on this presentation, where we have the main highlights of our period. Despite the drop in revenue in the quarter, we can already see the beginning of the recovery of our services through the signing of new contracts, especially in the month of August with the potential for growth in the revenue in the second quarter of the year. We had a successful procedure with almost 100% of the total value in the offering. With the entrance of the BRL 99.4 million, we equated a bit of the drawn risk factor, and that also led to important adjustments. Now, the results in the quarter were really impacted by the significant reduction in the working capital and the short term affecting our revenue also in the debt sector. And it's important to mention that this only entered the company's cash by the end of May and by the end of June. That's why we had a high cost with the owners and the DCs and routes as well as the headcount in the period. In our vision, June and July are important points when it comes to revenue and profitability. And we mentioned the recovery from August onwards. So we want to move on to Slide 5, where we give you more details about the numbers reported. The increase in capital as mentioned, represented a cash increase of BRL 42 million in May and BRL 56.8 million by the end of July, adding up to BRL 99.4 million. The drop in revenue of 38% had main -- 2 main reasons. In the heavy-duty segment and also a reduction in the light revenue by 30%, especially due to the reduction in working capital with the drop in the drawn risk with regards to the margins. We had a reduction of BRL 17 million in cost and expenses, representing most of the adjustments necessary in structure. But there's still some opportunities to optimize other areas that are in progress. The working capital consumption was a lot lower than last quarter. Although the production in these drawn risk lines, we had a consumption of BRL 8.6 million versus the previous quarter, and this is mostly due to the recovery of also the receivables that were restrained. On Page 6, we have the earnings of the revenue in the second quarter compared to the previous quarter. So the gross revenue had a growth of 18%, and the ones in logistics and food service, it grew 5% in the period. We had a drop of 38% of the total revenue and this is mainly impacted by restructure of heavy duties and this will bring benefits in the short term and also considering the drop in some light transportation revenue. So we had the gross profit in the second quarter reaching minus BRL 21 million on the graph side. On the right side, you see the adjusted EBITDA, considering the cost and expenses of the project reaching minus BRL 47.1 million. The margins in the quarter were strongly impacted, especially due to 2 factors. The add-ons of our bases and routes, the headcount, which was above necessary, fixed costs and high expenses, especially in the months of April and May before the capitalization, which allowed us to complete most of these adjustments. Now about working capital on Page 8. The graph on the top considers the variations in the balance of accounts receivable with about BRL 29 million in our budget. That is restrained due to the restructuring of heavy-duty transportation, and we expect to receive this in the third quarter of 2023. Anyways, after these adjustments mentioned, we can identify an improvement in our terms for Recife from 80 days in the first quarter to 75 days in the second quarter, still at about 60 days. The fall with our suppliers went from [indiscernible] in the fourth quarter to 89 in the second quarter and a total of BRL 83 million, a reduction in just 6 months. Basically the effect of the Recife in the lines of forfeiting. On Page 9, we also see the evolution of the debt and the new CCBs. On Page 10, we showed the variation on the balance of our cash on hand going from BRL 62 million in 31st of March in '23, and coming to a balance of BRL 89 million in the 30th of June in '23. The principal accounts that affected this variation were the private capital, our operational results affected by the reduction of profitability and the expenses on interest and loans and the increase in debt. Even though we had this operational and financial challenges, we had an improvement -- a significant improvement in our working capital and reduce the CapEx for the period. Going now to the second part of the presentation. I would like to point out the principal initiatives underway on Page 12. As we said previously, in June and July, we had the lowest levels of sales. And starting August, we started the recovery of [Audio Gap] in the fourth quarter of '23. At the end of June, when we started to receive the cash, a lot of the resources coming from the private capital, which prepared us during these months, in July and August to realize the next start of the firings and returning of basis and the finalization that will make us operate at the new level. In the fourth quarter, we should see a more -- a cleaner financial statement, with the cleaning of these costs, fixed costs and SG&A adequately -- adequate SG&A. In relation to working capital, we hope to have more news going forward with the balance of the -- of redoing these forfeit contracts, and also -- which is the segment has started to improve in the third quarter of this third -- second quarter. We also see the money that's been held up we received during this third quarter of '23. Going to Page 13. We announced the evolution of our sales in the last 4 months. The numbers on the graph, we've gone to a database of 100 from the 30th of April, and shown in advance of revenue in the 4 weeks rolling average. We see the beginning of the recovery with the entrance of 37 new contracts, which we saw. On the 0.47 on the graph, it shows the maturity of these contracts, which can bring approximately BRL 30 million in additional revenue about the baseline -- actual baseline. Finally, our commercial pipeline is robust. And looking at this base of 100, we have come back to the monthly revenue of the first quarter. Looking at Page 14, we bring an update on the initiatives of demobilization for the reduction of costs and expenses and the impact that this has on our EBITDA. We have a total of these costs over the quarter and especially in the second quarter in the months of May and June. The impact of one-off of these reductions totalized BRL 25.3 million in the quarter in the half -- in the first half, as we show in the adjustments presented on Page 5, being BRL 17 million in the second quarter and BRL 8 million in the first quarter. These costs represented a cost of rentals, the return of distribution centers and improvements that have been returned and as well as layoffs in the second quarter. In the second half, we have the expectation of making additional BRL 22 million in additional cuts in fixed cost, buildings and so forth. The impact of this will be approximately BRL 10 million. There, we're talking about a financial statement in the company, which is inflated by approximately BRL 134 million, representing the unused DCs and the operational basis as well as the excess labor costs, which are not -- which are related to that. On Page 15, we bring the financial statement of the company -- the management company -- management finance relation of the company with the results -- showing a result in the first half of approximately 4.5% EBITDA margin ex IFRS, adjusted ex average and an EBITDA of BRL 20.6 million. It's important to point out that this margin is not at the ideal level, and we have the potential to gain scale and grow revenue. Looking at Page 16, before opening up to the section of questions and answers, we'd like to pass you along to the final message. The scenario is still challenging. However, starting now, we have now shown the recovery of growth, both of our businesses, B2B and B2C as well as logistics and food service, which, as we've shown, which we have total confidence for the other result -- of improving results. We've also implemented new structural changes that will be realized during the third quarter of '23. For this, we expect an operation more normalized at the end of the fourth quarter of '23, when we'll have the expectation to presenting an operation -- a leaner operation, more efficient and more integrated. The initiatives that we have done up until now were essential to guarantee the health and strength of the company. And we are confident in our plans for the second half of the year. We'd like to thank you all for your participation in our results call. And I'd like now to open for the question-and-answer period.

[Operator Instructions] From Lucas from BTG Pactual.

I have a few points from my side. It's evident in the results of the quarter, the points that Armando reinforced. The visibility of this being the low point in the recovery this year. If you can help us to see a little more the second half of the year, Armando. Looking at this margin, that's -- which is 1 digit, 4.5% in a simulated exercise here after costs, how much do you think this is doable in the third and fourth quarter? It's important for the market to see a signal of the generation of cash in the second half of the year. And also, if you can give us a little more thermometer about the market itself. E-commerce is okay. There were some shocks in the news and so forth. It's also built into this worsening of results that you reported in the first half. What do you see for the second half going forward from the clients? Is there demand on the table? If we should be doing better in the second half to be able to corroborate, let's say, if this is the low point?

In terms of margins, we expect, in fact, a recovery. We're going to look at the dependencies that we saw in the presentation, approximately BRL 20 million to BRL 24 million. This has a one-off of BRL 10 million. So it will be -- but we expect a recovery really in the fourth quarter. So as we can see in outside these categories, in different business units that we decided to invest in and come back for growth, we see operating margins which are healthy. And so therefore, we project this ramp-up of margins very strong as well as EBITDA margins starting in the fourth quarter. And looking at 2024, totally normalized with the recovery, both the profitability as well as growth. So I think that the third quarter is the end of this period of this process. These final adjustments, which have been almost finalized, looking at the end of August. And this also -- between August -- July and August, but in the fourth quarter, it's totally normalized with the results already -- with a cleaner results on the financial statements. Looking at the reorganization process, we're in a phase where, as we said, the synergy, which is aimed at the services, the recovery of contracts. And so this is a different phase. More of an expansionary phase rather than a reduction phase. So the expansion in the business units, which remains, and we have total knowledge and confidence in the dominion of these categories and the operation is more integrated and more efficient. So this will, in fact, help us, and simplify greatly the management of the company going forward. We have this expectation in the third quarter, consolidating these results in the fourth quarter. In terms of general demand, I think you touched on an important point. The fact that we saw in the first half, not just the internal challenges here, restructuring of the category of heavy freight and the falloff in demand, but we also see, in general, the fact that the e-commerce is weaker in various categories, but we also see now, Lucas, a recovery of this activity with the reduction of interest rates by the Central Bank and within the first quarter with the credit crisis, which scared the retailers. I think all of this is now in the rearview mirror. And our understanding is that this dynamic is in the past and things are getting better. So we now see a market which is more active. A pipeline, as we mentioned earlier, with lots of orders of information and cost requests and looking at the commercial pipeline. And so we see activity heating up in relation to the first half of the year. And so where we had really seen a big fall off and a cooling off. But we now see another dynamic. And we think that this will be related to the macro. The reform and interest rates we perceive this improvement and its greater stability of our principal markets where we operate. So we think we see a pipeline that's more robust, which helps us to believe that in 2024, with a stronger recovery starting in '24, getting back to the levels that we have established in sales and profitability and capacity -- operational capacity. So I think in the short term, as we demonstrated to you, in fact, we look at June and July at the bottom of the curve. And so we're looking at this starting in August. With these 36 contracts that we have already celebrated and which are at the beginning of this implementation. So this is the scenario that we see in the company today.

Our next question comes -- has been written from Daniel Mercado. In the previous quarter, you had commented about the possible sale of the logtechs. Can you give us an update of this process?

In fact, we announced this process. This process continues of the logtechs that we announced. As we mentioned, we have [ Africa ] helping us in this process. And our expectation is to be able to conclude this process by the end of this year, which will bring to us investments in these units and a return of the capital that's been invested. And so the process is going forward. It's a process which generally -- it's a long-term process in terms of seeing the results in all the stages that we have to comply with. But it's going forward as we had expected. So we now expect to focus on this process and the expectation is by the end of the year to conclude this process at least in one of the 2 companies. I think that's the update that we can give you at this point in time.

Our next question comes in writing from Nicolas [ Fupe ] and is the following. I would like to understand what is the size that the company expects to have after this restructuring and a falloff in revenue?

There's 2 ways of looking at this. One is the short term by the end of the year. A little bit what we demonstrated in the slides of the recovery of the signed contracts. This projection includes none, doesn't include any of expectations of conversion of the pipeline. These are only those contracts which are actually concrete and signed contracts with clients. So we see, put here a vision of recovering according to 80% -- 87% of a base of 100% by the end of the year. So I think that 1 point is that each one -- the market is very large. Our share is still small. So we don't see -- with the recovery of the size of the company in terms of sales, revenue, I think the market is very large. And so all of the categories in which we operate and which we will operate going forward and have operators such as e-commerce, B2C and is a market of more than BRL 20 billion, our share is less than 10% of that market. So for express delivery, food service, logistics, middle mile, so these are all segments which offer a size of a market of BRL 80 billion. So we have lots of space to grow in all of these categories. So the most important thing right now, at this first moment, is to grow with profitability. Not just grow, signing contracts that we're confident about, having a positive margin for the generation of cash. For 2024, we don't see a difficulty of recovering -- the recovery of growth because the market is very large, very, very fragmented, and we think that we can still find several verticals for the recovery of this level. So I think, but more importantly than that, it's for us to focus on the level of quality, flexibility, which are the principal points that the company has always delivered to our clients. So this is our initial client and our initial focus in this recovery period.