Tegma Gestão Logística S.A. (TGMA3) Earnings Call Transcript & Summary

Good day, and thank you for waiting. Welcome to Tegma Gestão Logística S.A conference call to review third quarter 2021 earnings results. Today, we have Mr. Marcos Medeiros, CEO; and Mr. Ramón Pérez, CFO and IRO. We would like to inform that this event is being recorded. [Operator Instructions] The replay of this event will be available right after the end of the presentation of the conference call for a period of 7 days. Now I turn the floor to Mr. Marcos Medeiros, Tegma's CEO, who will start the presentation. Mr. Medeiros, you may begin.

Good day, everyone. I am Marcos Medeiros, Tegma's CEO. And on behalf of the company, I would like to thank you all for joining us for another earnings conference call. Here with me is Ramón Pérez, our CFO and IRO; as well as Ian Nunes and Felipe Silva from our Investor Relations team. As you all know, the COVID-19 pandemic has had a global economic impact, making the business environment extremely volatile and adding uncertainty to all forward-looking statements to be made during this presentation. Tegma is providing information valid for the date of this webcast and reserves the right not to update any forward-looking statements contained in this presentation. Well, moving now to Slide #3. We'll start with the highlights of the quarter. We start communicating the approval of an interim dividend payout referring to the third quarter of 2021. As the financial flexibility of Tegma permits, payment of BRL 17 million was approved considering dividends and interest on equity, corresponding to 55% of the adjusted net income, equivalent to 50% of Q3 '21 net income into a 4.2% dividend yield in the last 12 months. Dividends shall be paid on November 19. And the cut-off date will be November 9. The second positive highlight in the quarter was the awarding of Tegma, which ranked among the top 5 in the transportation and logistics segments of the 100 open start-ups, a ranking that brings together the companies most engaged in open innovation in the country. In addition, Tegma is in the general top 100, a list that includes all categories as detailed in the Operational Excellence section of the Q3 '21 earnings release. The fruits of tegUP are concrete and are already generating benefits for our processes and customers. The third highlight addresses the recognition of tax credits related to the legal decision prohibiting the collection of income tax and social contribution on the monetary restatement and the interests of overpaid taxes. This court ruling cost us to record BRL 12.9 million of credit on the income tax line this quarter, related to the monetary restatement of the exclusion of ICMS tax from the PIS/COFINS base, accounted for at the end of 2019. The fourth topic is related to the well-known global crisis in the supply chains, which has been hitting the automotive industry hardest. Q3 '21 was the worst in terms of sales since 2005, reflecting frequent production stoppages during the months of July and August. Currently, there are 4 automakers with shift reduction for their teams, but none completely stopped. The fifth bullet item is the significant increase in diesel prices since the last renegotiation of transportation tariffs for Tegma's Vehicle division. This led us to open another round of negotiations, which was concluded in October. The diesel price increase between the date of the 2021 tariff negotiation in April and the month of September totaled 9.1%, but the increase currently stands at around 16%, considering recent price increases. Likewise, in the Integrated Logistics division, renegotiations of transportation tariffs have been carried out throughout September and October to try to recompose the impact of the recent increase in diesel prices. Well, moving to Slide 4. Here, we have some important steps that we are taking to improve compliance of our operations to the best practices in social and environmental responsibility and governance. In Q3, we approved the material themes that will be managed by Tegma's ESG program. These main topics are: one, emissions, fuel consumption and climate change; two, relationship and management of truck drivers; three, people management and diversity; four, health and safety of employees and partners; five, governance and anticorruption; six, relationship with communities around our operations; and seven, technological development and innovation aimed at sustainability. With these topics defined, we will develop an integrated and integral management to be able to advance in these aspects. Additionally, we published the 2019 and 2020 greenhouse gas inventory, thus increasing the transparency of our metrics, impacts and evolution. On the next slide, Slide 5, we would like to give you a tangible example of one of the many initiatives aimed at minimizing the impact of our operations on the environment. This is a project that has already been implemented to steam wash our semi-trailers after loading calcium sulfate and calcium carbonate. This was previously done with water. In the images, you can appreciate the before, during and after this new process, that uses only water vapor, which reduced by approximately 90% the amount of water used. Since its implementation in 2020, we have stopped consuming water and disposing of affluence in a volume of approximately 10,000 cubic meters. This is just 1 example of how innovation can bring economic and environmental benefits for the company and for the community at large -- community as a whole. Now I would like to turn the floor to our CFO, Ramón Pérez, who will continue the presentation.

Thank you, Marcos. Once again, I would like to thank you all for your interest in our company. On Slide 6, we can see the main statistics of the automotive market in Brazil. As can be seen in the top chart, domestic sales for the first 9 months of 2021 were up 13% compared with the same period in 2020. Although it should be noted that Q2 '20 was the most affected by the COVID pandemic. When we compare the same period to the 9 months of the pre-pandemic period in 2019, we see a 24% drop in domestic sales. Comparing Q3 '21, with Q3 '20, we find a 14% reduction in domestic sales, reflecting the greater supply difficulties that the automakers had throughout the months of July and August. The same reason that explains the 21% drop in the graph below for vehicle production. Exports, which have been showing a positive performance until the first half of the year faced a lack of vehicles once again and dropped 15% year-over-year. In any case, it is also worth mentioning that although also influenced by the weak performance in Q2 '20, we found positive performance when comparing 9 months '21 production and exports with 9 months of '20, both increasing 21% and 31%, respectively. On Slide 7, we see the main operational indicators of the Vehicle Logistics division. On the top chart, we see that market share in the 9 months of 2021 was the lowest in the last 2 years. On the back of issues in the automotive industry supply chain, which has had a more marked impact on one important Tegma client. It should be noted that according to publicly available data, this carmaker in question has been recovering its market share with the recent resumption of operations. We expect that this will bring a positive impact in the near future. The number of vehicles transported by Tegma in Q3 2021 was down 30% quarter-on-quarter, and our market share remained stable at around 22%, not yet fully benefiting from the return to production, which happened only in September, of an important plant of one of our main clients. Average distance traveled in the 9 months 2021, in the chart below, returned to a level very close to that of the 9 months of 2019, although 10% lower than the same period the 9 months of 2020 due to the interruption of Ford's production in the State of Bahia. We generated longer trips in addition to the increased share of exports in transportation. Exports have a lower average distance. Nevertheless, there was an improvement in average mileage in Q3 '21 over Q2 '21. Now moving to Slide 8, please. Here, we see the results of the Vehicle Logistics division. We can see in the top chart that the division's net revenue in the first 9 months of 2021 still remained well below that recorded in 2019, down 30%. Although for the same reasons explained before, it shows a positive performance, up 4% compared to 2020. Right next to this, the 21% decrease in quarter revenue in the year-over-year comparison is mainly a reflection of a reduced number of vehicles transported and in average distance traveled in Q3. Just hold on a minute, there's some noise here. Please hold. Please hold, as we try to stop the background noise. Good. I think that some people were celebrating -- some things, perhaps a soccer game, but let's continue. We're still on Slide 8. The bottom left graph shows that the year-to-date EBIT margin shows a significant improvement compared to the 9 months of '20. Although it does remain low when comparing with the same period of 2019 due to lower revenue and lower dilution of fixed costs, the same reason why the Q3 '21 margin was impacted compared to Q3 '20. Similarly, in the chart on the bottom right, we can see that the current year-to-date EBITDA margin is much higher than that in the 9 months of '20. Although it still remains below 2019 levels, with Q3 '21, also showing an adjusted EBITDA margin reduction versus Q3 '20. Moving on to Slide 9, we have the results of the Integrated Logistics division. Starting with the top chart, the division's net revenue year-to-date still reflects the loss of 1 major warehousing client, which justifies -- which explains this decline. It should be noted that in this case, the 9 months '20 were positively affected by the strategic increases in inventories of chemical products and also the sales volume of some of our clients. However, this performance goes against the industrial logistics revenues, which are now at record levels in 2021. In Q3 '21, the quarter-on-quarter decline also reflects the loss of that important warehousing client. Turning to the chart below on the left. The division's EBIT decline in Q3 '21 in the annual comparison is explained by a less profitable logistics service mix for chemicals as well as by diesel price increases. The year-over-year drop in adjusted EBITDA for Q3 '21 on the graph on the right is explained by the same reason, which impacted the EBIT margin. In addition, we highlight that there is some distortion arising from IFRS 16, which does not consider rental costs, which, if considered, would show a lower decline. Please turn to Slide 10 for Tegma's consolidated results. We can see that the company's net revenue in the 9 months of 2021, although in line with the same period in 2020, is still well behind when compared to 2019. By virtue of the problems the automotive industry has been facing, in Q3 '21, the 20% drop versus Q3 '20, is due to the reduction in revenue for both the Vehicle Logistics division and Integrated Logistics division for the reasons mentioned before. The company's EBIT and EBIT margin in Q3 '21, in the bottom left chart, although also better than in 2020, were impacted by the global automotive crisis and by the integrated logistics service mix, have integrated logistics. Adjusted EBITDA in Q3 '21 on the bottom, in the middle, totaled BRL 37 million with a 16.2% EBITDA margin, down 2.9 percentage points versus Q3 '20 for the same reasons impacting EBIT. Lastly, net income on the bottom right, as explained in the quarter highlights, benefited from positive nonrecurring events in Q3 '21 that resulted in a net effect of BRL 13 million. Net of this effect, the company would have posted a net income of BRL 21 million with a net margin of 9.2%, a level consistent with the company's historical resilience despite the challenging outlook for the industry. It is noteworthy that to this result, there is an important contribution, a positive result of our GDL joint venture. Moving on to Slide 11, we show on the graph on the left, the company's CapEx totaling BRL 10 million in Q3 '21 and BRL 23 million year-to-date, corresponding to 4.4% and 3.3% of the net revenue, respectively. This amount in Q3 '21 corresponds mainly to the acquisition of trucks for the Vehicle Logistics operation in accordance with the fleet renewal plan underway since 2019. In addition to this investment, CapEx for the 9 months of 2021 also includes the acquisition of returnable packaging for the Industrial Logistics operation. This will result in new revenues. Besides these most relevant investments, there are investments also in IT and in maintenance. In the middle, we can see Q3 '21 cash-to-cash cycle of 43 days, 3 days lower than the previous quarter. This drop occurred despite the fact that we had delays in receipt of payments in the vehicle operation. These delays were related to outsourced transportation services provided by -- outsourced transportation services by other logistics operators, which negatively impacted the company's cash-to-cash cycle by 6 days in September of 2021. Lastly, on the right, we see the company's free cash flow, which can be -- which, just like in the last 3 years, has been resilient, even in years of crisis. Q3 '21 cash flow was positive by BRL 21 million despite a higher CapEx in the cash-to-cash cycle still under pressure, mainly due to the resilience of both of the company's operations even in difficult times. Now moving to Slide 12. Here, we have more detail on our capital structure. In the first graph, it becomes clear that cash amounting to BRL 221 million is way higher than the current gross debt amortization in the next 4 years. In Q3 of this year, 25 million of debentures were paid, which explains the increase in the average cost of debt in the graph on the right. These newly paid debentures were cheaper. They had a cheaper cost than the company's average debt, resulting in an average cost of debt of CDI plus 2.8%. As regards to composition of our net debt in the table below, we can see that in the third quarter of 2021, at the end of the third quarter, we had a net cash of BRL 94 million, reflecting the Tegma's capital structure remains unleveraged. Lastly, on the right of the slide, we highlight that our rating by Fitch remains as Local A with stable outlook. Moving on now to the last slide. We first show the evolution of our return on invested capital and return on equity. We highlighted the ROIC of 20.4% in Q3 '21, reflects an inflection in the upward trend we had since Q4 2020. This reduction mainly reflects the difficulties that the difficulties that have been mentioned. The ROE for Q3 '21 in turn recorded an increase quarter-on-quarter, ending the quarter at 16%, mainly due to the tax credit in the amount of BRL 12.9 million, as previously mentioned. In the bottom left chart, we show the history of dividends and interest on capital paid by the company. As shown in the quarterly highlights, it was decided to distribute 50% of net income or 55% of Q3 '21 adjusted net income, which corresponds to a dividend yield of 4.2% for the last 12 months. In the chart to the right, we have information related to our stock. First, in the chart above of multiples, price earnings in gray is at its lowest level in recent quarters, about 9.8x, as is the enterprise value over EBITDA, which was 5.3x in Q3 '21, mainly due to uncertainties related to the automotive market. Finally, down below, we see the performance of Tegma's share vis-a-vis the Ibovespa Index. Also due to great uncertainties regarding the automotive market, Tegma's shares have performed below the Ibovespa Index. Well, with that, I would like to, once again, thank you all for your attention. And I would like to open the floor to questions and answers. Thank you.

[Operator Instructions] Our first question comes from Aline Gil with BTG Pactual.

I have 2 questions. First, considering the difficulties of the automotive industry, do you consider increasing your exposure to semi-used vehicles or will you continue to focus on new vehicles? Second question regarding the market share of the company with the resumption of production by GM. What is your expectation in terms of market share for the next quarters?

Hello, Aline. This is Marcos talking. Thank you for the questions. Regarding used vehicles, I think that every quarter, we report the evolution of this business of ours. It's something that started very small and now is kind of gaining momentum. We are also creating a marketing strategy and a commercial organization to have a greater focus on that. And why? Well, because as we have seen, the automakers are not immobilizing a lot of fleet. We have been feeling this for a while, and that's why we started developing new types of clients, large fleet owners and even individuals. Our market communication strategy for this kind of business is increasing. We even developed communication on Instagram and LinkedIn and -- to capture opportunity from individuals who also might need to transport their vehicle. So yes, this is a focus of ours. In addition to marketing, commercial, operational structure, we are investing strongly in our platform because this kind of business needs scale. We don't think that we can meet the demand with quality and with the expected profitability if we don't invest in technology in the platform. So to answer this question, yes, this is a focus of ours that tends to increase. As regards the market share, as you know, we have clients that have a greater or smaller impact on our market share. So we believe that, yes, in the next months, one of our main clients has resumed the production of one of their vehicles, one of their best sellers. There is even a TV spot saying, "the champion has returned." And we believe that the moment that this client and another 2 clients start gradually producing -- we know it's not going to go back to normal quickly. It's going to be gradual. But as soon as this happens, we believe our market share will be back in the previous levels.

Next question by Gabriel Rezende with Itaú BBA.

Hello, everyone. I have 2 questions on my side. First, a follow-up regarding the question on market share and the performance of market share in the future. I'd like to hear from you whatever you can share with us. How should we expect Q4 compared to Q3? How quickly should you resume operations and evolve towards the end of the year? That could be helpful. And so on that, in your earnings, you talk about unfinished inventories, vehicles that are being manufactured, but need to go back to the assembly line for 1 or 2 components that are missing. This means that the numbers we see every month reported by Fabio regarding inventory are underestimated. They consider only finished inventory, and there's a lot of unfinished vehicles, I think. That would be my first question. I'll ask the second one later.

Gabriel, this is Marcos again. Well, regarding the market share, of course, it is very hard for us in the short term to have a trend. But I'd like to say that we see positive signals. There was a meeting in October with the participation of the main automaker executives. And all of them, each with a different level of optimism, were optimistic. So I'm talking about gradual growth here and not an exponential curve. We know that this is a growth curve for the midterm, along 2022. In the short term, what I can tell you is, as one important client that we have, which has a relevant impact on our market share, is going back strong with their main best-selling vehicle in Brazil, we believe that yes, there might be an impact. Actually, we already feel this impact as the production of this vehicle started towards the end of September. We cannot feel the impact yet, but in Q4, we should have a better view of the market share, and there's another client. Once they reinstate the third shift of work, I think, in the next weeks of November or by the end of November, they will definitely have an impact on our market share. So Gabriel, I think that for the short term, the signaling is positive. In the long term, it's kind of what I answered in the first question. About inventories, Gabriel. You know, when you assemble a car and there is a part missing, and they put the car in the yard, that's not a generalized practice. We hear from our clients that the supplies to some models of some carmakers in some situations. Because can you imagine this, the car is ready but not truly ready. But there are cases where the car is ready. They take the vehicle to the yard, and they remove 1 or 2 parts -- the semiconductor, and they go back to production, take it back to production to continue the assembly line, but can you imagine the kind of rework that entails. So this is not generalized action. These are one-time off cases that we have identified with our clients. Now that generates an opportunity for us. We should be careful when we use the word opportunity. We don't want to be seen as opportunistic. But some clients are asking for yards from us to store their vehicles while they wait for the auto parts. We had clients asking for more room to store their vehicles waiting for a part -- specific auto part. But these are exceptional cases, and we will have a gradual recovery little by little, and I don't think that this is going to continue to happen, Gabriel.

My second question has to do with the margins. When we look at the vehicle logistics segment and we compare the margin of Q3 '21 quarter-on-quarter adjusted margin, we see an improvement of almost 1 percentage point. So I just want to understand, given the reduction of volume in the quarterly comparison, how can we explain this improvement of almost 1 percentage point in the margins? Is this a structural thing, a one-time off event? A cost reduction that we could include in our modeling? We would like to hear more about that, please.

This is Ramon speaking. It's a structural thing. I cannot break down the expenses -- details, but if we compare 9 months of '21 with 9 months of '20, there is also a reduction that is significant. Even considering that last year, we used that provisional measure that allowed us to suspend temporarily some contracts and then we could stop paying some costs and salaries. But even with that comparison, we are below. And this is part of the measures that we adopted last year since the beginning of the pandemic crisis. And these are measures that why we put together a crisis management committee. We reviewed a number of expenses and costs. And now we are reaping the fruits of these measures. Our structure is now leaner. This is what I can tell you.

[Operator Instructions] We are ending today's question-and-answer session. I would like to invite Mr. Medeiros to proceed with his closing statements. Go ahead, sir.

Once again, I would like to thank you for your participation. And I'm sorry for the background noise. There's some fireworks. Most likely, they were celebrating some kind of soccer game. And I would like to stress that we are confident that the automotive industry will manage to overcome the current difficulties related to shortage of auto parts and semiconductors. Also as we progress in the vaccination effort in Brazil and around the world, perhaps Brazil will be in a better position than other countries looking forward. But believing in this progress, the market will recover to a strong and solid state as before. We learned a lot in the last few months. I have been saying this over and over. We are now more lean and agile. I think that this has been a positive byproduct. A company can be big, but it has to be lean and agile. And we are now more prepared and motivated to serve our clients, as they resume growth. Again, we know it will be a gradual process. It's not a turnkey thing. It's a gradual, but steady process. We will maintain our strategy to invest in operating excellence and technology, reinforcing our purpose to create value for both our shareholders and clients. Also, as shown in our presentation, we will keep our eyes and attention focused on ESG projects. I think ESG is now an active agenda in the company, in terms of developing our employees in the operating area, all the way to the Board of Directors. Well, myself and the IR team will remain available. Thank you very much, and have a good day.

This concludes Tegma's conference call for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]