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

Good day, everyone, and thank you for waiting. Welcome to Tegma Gestão Logística S.A conference call to review first quarter 2022 earnings results. Today, we have Mr. Marcos Medeiros, CEO; and Mr. Ramon Perez, Chief Financial Officer and Investor Relations Officer. We would like to inform you that this event is being recorded. [Operator Instructions] The replay of this event will be available right after the end of the conference call for a period of 7 days. Now I will turn the conference call over 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 once again for joining us for another earnings conference call. Here with me is Ramon Perez, CFO and IRO, as well as Ian Nunes from our Investor Relations team. On Slide 2, we have a disclaimer regarding our forward-looking statements. On Slide #3, where we have the highlights of the quarter, we start with the announcement that we received the Brazilian Digital Transformation Award. Tegma was one of the 17 organizations selected by MicroPower Institute Digital Transformation. We were selected to receive the award. According to the organizers, the initiative aims to identify and recognize organizations with experiences in innovation and digital transformation that stood out in the period of 2021. Moving on to the second topic. We have the expected impact of the Ukraine conflict and of the COVID-19 outbreak in China, and the impact of all that on the automotive industry. Russia and Ukraine are major producers of essential inputs for vehicle manufacturing such as palladium, neon gas and the electrical harnesses, making the global supply of these products even more difficult. Additionally, the lockdown in some cities in China puts a strain on global supply chains that may impact vehicle production in Brazil in subsequent months. A third highlight as detailed in the minutes of the Board of Directors meeting on April 20, we converted debentures of the start-up Rabbot and acquired new shares in the amount of BRL 4 million in this process. Added to other capital inflows that the start-up will receive from other investors, Tegma will end up with 16.2% stake in the company. Simultaneously, the start-up made its Series A with the innovation arm of a large financial institution. With these highlights, I turn the floor over to our CFO, Ramon Perez, to talk about our operating indicators about our results, cash flow and other indicators.

Thank you, Marcos. Good afternoon. Turning on Slide 4. On Slide 4, we see the main statistics of the vehicles market or the automotive market in Brazil. As we can see in the top chart, domestic sales in the first quarter of 2022 were 25% lower year-over-year, reflecting the impact of the economic scenario that has been affecting demand in addition to supply issues that the automakers have been facing. The 4-week shutdown at GM's Gravatai plant in Rio Grande do Sul, once again, was a negative highlight. As a result of this scenario, production was also down 18%, as shown in the chart below on the left side. The drop in production, however, was mitigated by the 14% growth in exports. This was due to the good performance of sales to Mercosur and Chile, as shown in the graph on the bottom right. On Slide 5, we see the main operating indicators of the Automotive Logistics Division. In the top chart, the number of vehicles transported in Q1 2022 was 15% lower in the year-on-year comparison, but the market share grew by almost 1 percentage point to around 24%. This market share growth was due to the favorable sales mix of our main customers despite the 4-week stoppage of the main plant of General Motors, as we mentioned. This affected us negatively. Average distance traveled in the chart below was 7% lower in Q1 '22 on the back of 2 factors, the aforementioned stoppage of the General Motors plant from which longer trips depart, and also to the growth in the share of exports in total trips, which have a shorter distance. Moving on to Slide 6, please. Here, we have the results of the Automotive Logistics Division. We can see in the top chart that the division's net revenue in Q1 '22 was flat versus the same period in 2021. This stability occurred despite the drop in volume and the drop in average distance shown on the previous slide. What mitigated these effects were adjustments made to transportation and service fees in 2021 and in 2022 as well as the growth in revenue from the logistics of used vehicles through our subsidiary, Fastline, in addition to growth of other logistics services such as yard management, accessory installation and other services. The chart on the bottom left shows a drop in EBIT margin this quarter. Part of this reduction can be explained by nonoperating revenues, which positively impacted expenses in the first quarter of 2021 by BRL 6.7 million, harming the comparison. On the other hand, even disregarding this impact, we observed an important reduction, 9.1% down to 5.9%, due to the excessively low volumes of vehicles transported in the quarter. And this volume translates into a less dilution of fixed and personnel costs in addition to an increase of some maintenance costs. Likewise, in the chart on the bottom right, it is necessary to adjust for the same nonrecurring events of Q1 '21 to reach an adequate variation, and which reflects basically the same explanations applied to the EBIT margin. And that comparison would be 13.2%, down to 10.4%. On Slide 7, we have the results of the Integrated Logistics Division. The top chart, the division's net revenue growth in Q1 '22 over Q1 '21 mainly reflects the birthing of 2 vessels with sulfate and soda ash in January. That should have birthed in January -- in December of 2021. This performance occurred despite the drop in revenues of the logistics operation for the home appliances sector, reflecting the difficulties faced by the Brazilian retail market and some occasional parts supply issues. This positive revenue performance is reflected on both EBIT and EBITDA margins, which showed significant growth stemming from a better dilution of fixed costs. Now moving on to Slide 8, please. Here, we see Tegma's consolidated results. We highlight net revenue in the top chart, up 3%, negatively impacted by the 15% reduction in number of vehicles transported and 6.7% reduction in average distance in Q1 '22. However, these effects were more than offset by fee adjustments in the automotive division and by revenue recovery in Integrated Logistics. The 28% drop in EBIT and the 3.9 percentage point drop in EBIT margin in the first quarter 2022 year-on-year reflects the automotive logistics losses with lower volume and shorter distances traveled in addition to the aforementioned positive nonrecurring event from Q1 '21. If we were to exclude this event, this would be a 10.1% reduction to 9%. However, it should be noted that this result was helped by the improvement in Integrated Logistics as well as EBITDA variations on the right. Also here, excluding the nonrecurring event in Q1 '21, our margin would drop from 16.5% to 14.6%. When we exclude the nonrecurring events, which positively impacted Q1 '21, we see that there was a reduction in expenses even at a time of high inflation. Lastly, in the graph on the right, we can see that net income in Q1 '22 fell only 7%. In other words, a 0.8 percentage point retraction only in net margin, much less than the operating indicators. And this was due to the improved equity income result from our joint venture, GDL, which has grown 63% since it started operating. It now accounts for more than 10% of our net income. In addition, our financial results also improved as a consequence of a higher CDI rate in the period and the cash to debt ratio in that period. Further, on Slide 9, we show in the graph on the left the company's CapEx, which totaled BRL 4 million in Q1 '22, representing 1.8% of net revenues with no single investment standing out. In the middle, we can see Tegma's Q1 2022 cash-to-cash cycle of 50 days, 3 days less quarter-on-quarter. This indicator remains influenced by a higher than regular volume of accounts receivable. And this is due to commercial issues, but this has been regularizing little by little but consistently. Lastly, on the slide on the right, we see the company's free cash flow, which was BRL 72 million in Q1 '22, much higher than Q1 '21 due to the settlement of overdue receivables and the release of more working capital from the automotive operation. On Slide 10, we show details about our capital structure. In the first graph, it becomes clear that the company's cash of BRL 211 million in March 2022 is much higher than the current gross debt repayments for the next 3 years. In Q1 2022, BRL 10 million of export credit notes were paid, and this explains the increase in the average cost of debt shown in the graph since this debt had a very low cost. Therefore, just because of the fact that we settled a cheaper debt, our average cost of debt rose to CDI plus 2.9%, as shown in the graph on the right. But now in April, we also paid BRL 50 million of another export credit note that matured, which, in this case, this payment will again bring down our average cost of debt to much lower levels. Regarding the make-up of Tegma's net debt in the table in the bottom left-hand corner, we can see that in March 2022, we had net cash of BRL 91 million, reflecting the company's very deleveraged structure. Lastly, on the right, we point out that even in a very challenging time for the automotive industry, our rating was reaffirmed by Fitch just last month at the level of Local A with stable outlook. Moving on to the last slide. We first show the behavior of Tegma's return on both capital invested, ROIC and return on equity, ROE, in the top graph. We highlight that the ROIC of 16.3% in March 2022, representing a drop compared to December 2021, mainly reflects the difficulties faced by the automotive industry headed to the macroeconomic problems and their impact on the national retail market. The ROE for the quarter, in turn, was stable compared to December 2021 by virtue of the improvement in equity income, as already explained in the reduction of the financial results, which offset operating losses in the period. In the graph on the bottom left, we present the history of dividends and interest on capital paid by the company. The gray line, we show dividend payout as well as dividend yield, which have recovered in 2021, reaching almost 6%. In the 2 graphs on the bottom right, we provide information related to our share performance. First, in the chart above, we have the tradeoff multiples. Price earnings in gray is at its lowest level in recent quarters as is the enterprise value over EBITDA ratio, which was 5x in Q1 '22. Well, we believe that this is mainly due to uncertainties related to the automotive market and the macroeconomic scenario in general. Down below, we see the performance of our stock compared to the Ibovespa Index in 2022. Also due to the great uncertainties related to the automotive market, Tegma's shares have been very volatile during the year, with reduced liquidity and pay performance close to the Ibovespa Index year-to-date. With that, I thank you all for your attention once again. And I open the floor for questions and answers.

[Operator Instructions] Our first question comes from Aline Gil, BTC Pactual.

I have 2 questions. Considering the lockdowns in China and the Russian, Ukraine conflict in Europe, can you give us some color in terms of what is your expected volume for the second half of the year, both in terms of domestic sales and exports? That's the first question. Second question regarding ROIC. Considering the still challenging scenario for the automotive industry and the impact of inflation, how do you expect the ROIC to behave in the coming quarters?

Aline, this is Marcos. Thank you for the questions. Well, this is a hard question. I think that we have new variables in our equation. Well, speaking first about the lockdowns in China. Already, we see an impact particularly in the logistics flow. We can see a long line of vessels waiting to move in which we start seeing breakage in the supply chains. And this has had an impact both on operating capacity and on cost increase. Particularly in Brazil, we are waiting for parts. So yes, China lockdowns do have an impact. Regarding the Russia-Ukraine conflict, as we mentioned, there is also an impact because they have raw materials there and products, which are important for our segment, the automotive segment, such as palladium, neon gas, the electrical harnesses. It's all linked to production. In our recent conversation with our clients, they are concerned about this delay in supply, and they are particularly concerned about prices. Prices will definitely increase in the coming months. And why, Aline? Because you're having to try to find the options for supply. If they cannot count on Ukraine, if they cannot import material from Russia, they need to develop new suppliers. The time needed for that in the development of new relationships bring additional costs. That's already an impact for the automakers. Now what is the impact in terms of volume in the second half of the year? That is hard to predict, Aline. We are all very cautious. On one hand, we see some automakers talking about returning to their previous capacity. Also, we see some automakers stopping their production lines and giving collective vacation for their staff. So for the average of our -- we have to get an average from our customers so that we can have a somewhat clearer vision, but that will only come in the month of June. It's hard to predict what's going to happen regarding volume, but I believe that we're going to have a higher volume than in the first half. That's a unanimous opinion. It might not be the volume that we would wish to have, but it will definitely be a higher volume. The first quarter was a very, very bad benchmark, not only in Brazil, but also in Europe, in the United States. So I think that the first quarter is a very low reference. Second quarter should come better according to Fenabrave and ANFAVEA. And the second half of the year should be better than the first half of the year. To what extent? We'll know more in July. I'll turn the floor to Ramon.

Aline, regarding the ROIC, that is hard to predict because this is linked to those difficult-to-do predictions. In tangible terms, I consider that there will be an improvement given the release of working capital because of these delays that we had that will reduce the base, the denominator of the calculation. This will be somewhat mitigated if we have growth in our operating results, of course, because then our accounts receivable will increase if we have recovery of the automotive market. The size of the recovery? That's complicated to say. First quarter was hard in terms of volume. We have an expectation of recovery along the year. And if that happens, if that materializes, ROIC would be brought back to the average levels that we had during 2021. So we do expect an improvement in the ROIC because of these factors that I explained. To what extent it's going to improve? It will depend on the economic recovery, on the macroeconomic scenario and on the crisis of semiconductors. But yes, we expect improvement looking forward.

I am Ian in the IR team. I will mediate the questions coming from the webcast. The first question goes to Ramon coming from [ Felipe Pinheiro ] [indiscernible]. Regarding the reduction in the level of leverage in the quarter, can we explain a higher dividend payout in the future as seen in 2021? Ramon?

Well, if we maintain the current conditions of pressure and temperature, we can expect a maintenance of our dividend payout policy, an indicative policy of 50%. We have paid a little more than that in recent years because of some extraordinary results that we ended up getting, particularly some tax-related results. Now all of that will depend. So in terms of maintenance, maintenance, stability of our policy. So this can change if the need arises to invest more due to organic and inorganic growth expectations. That's all I can say for now.

Here's a second question coming from [ Rafael ] with [indiscernible]. Congratulations on the resilient results despite all challenges. Could you speak about the initiative in the -- of the logistics of used vehicles?

[ Rafael ], this is Marcos speaking. [ Rafael ], you used the word resilient in your question. And you're right, we have been focusing a lot on resilience. We spare no effort in-house to ensure resilience, to ensure a level of service in our margins in a complex scenario. So I think resilient is our top word currently. We are resilient. And okay, to answer your question about the logistics of used vehicles. We are having a very positive surprise. Last year, volumes were high even with the pandemic and everything that happened with the car rentals. The rental companies, they didn't have new vehicles. So they started holding back to their vehicles and the semi used vehicles, but that kind of flow and change. But we dealt with about 2,000 vehicles. In Fastline, I'd like to remind you, it's almost like a start-up. We can't compare with the volumes that we have with Tegma. But we had 20,000 vehicles. And our estimate is that this volume should be growing close to 50%, something close to 30,000 vehicles. In the first quarter of this year, all was very different. It was very bad. It's a quarter to be forgotten, and that's for new vehicles. But for used vehicles, it was a very good quarter. The rental companies like we saw in their reports started buying equipment again. So that drove the flow of demobilization. In the period of holidays, January, February with Carnival, Carnival was a little bit late, but there was more tourists coming to Brazil, and that generated more car rental in areas that are more touristic. So this was a pleasant surprise. We're very optimistic. Like I said, this is still a small business in terms of volume, but it's something that has a high potential, and particularly because we are able to generate a portfolio of services, which is a lot higher than we expected. We think only about transportation, but now we're thinking about a number of ancillary services. The profile of clients also changed. We were able to attract individual clients, large fleet owners, not just rental companies, but just about any company that has a fleet and that requires transportation. So this was also a very pleasant surprise amidst a very turbulent scenario that we're living.

Next question by [ Gustavo Gomez ]. Two questions. First, what about the balance to be paid? Any restatement or interest in the pace of the amortization? I believe that in 4 to 5 months, the whole outstanding balance should be paid -- should be settled. We didn't negotiate any restatement of the financial cost, but please remember this is valid for the amount that we owe them and the amount that they owe to us. Yes, there is a difference that is unfavorable for us. But what is key is that we are resolving this outstanding problem and moving forward. And one last question by Gustavo regarding GDL results that were quite robust. Could you elaborate more on that operation?

Gustavo, this is Marcos. Well, I think that this was also a pleasant surprise. I mean, not a surprise because it's the third consecutive year that we post record results. So 2022 is not going to be different. We have a very positive expectation. So you want me to speak a little more about this operation. It is a dry port. Basically, it's cargo from airports and port in the area of Espírito Santo. And we store the bonded cargo. We provide other services. But the moment that the cargo is nationalized, we provide warehousing services. There are several types of cargo, vehicles that we operate there, but we have pharmaceutical cargo, consumer goods in general, equipment, clothing, apparel, different types of cargo. A part of the pricing considers the CIF value of the cargo percentage of that. So the dollar rate was favorable to us. Recently, the price of the dollar dropped a little, but that facilitated things for us. So we have full occupancy, above 90% occupancy. And in our Board of Directors, we are now discussing potential expansion, expansion to existing warehouses or perhaps with new verticalizations. In other words, we have a very positive agenda of growth and to increase our investments in technology. This kind of operation still demands a lot of people from the operational standpoint, but we have a lot of opportunities to invest in technology for warehousing as well as for vehicle handling.

Our next question comes from Luiz Capistrano with Itaú BBA.

Marcos, Ramon, can you hear me?

Yes, Luiz. Hello.

I have 2 questions. First, I would like to understand, GM was by far the most impacted automaker in this component crisis, 5 months stopped last year? And in the scenario of new bottlenecks in the second quarter, can we assume that GM again is in a fragile position given that they stopped now in the beginning of the year? Do you think that they have a robust inventory? Will they be able to resist more in the short term because we saw that Volkswagen announced an important stoppage for May? I want to understand about GM because the Gravatai plant is very important for Tegma. My second question is regarding adjustment in your headcount. You mentioned that you didn't make any adjustments in the first quarter because the automakers signaled a strong resumption in the second quarter, but I understand that the scenario is more uncertain now. So thinking about the second quarter, are you planning to reduce your headcount, trying to bring margins to a more optimized level? Are you thinking of doing this eventually? What is your mindset regarding that?

Well, great, Luiz, you have 2 good questions. So let me speak about GM to start. You're right, GM suffered a lot last year. They had a historically long stoppage of 5 months. That cost them a lot in many ways, but particularly because they lost the position of the best seller. I was at the plant in December and in November, December, they started producing again. Incredibly, Onix achieved the first position again in December. I went to the plant, and they had banners celebrating. They were very optimistic in the beginning of the year. And then we had Omicron in Brazil in January. It was absurd, it had the peak of COVID. Here at Tegma, comparing the whole COVID period, January of 2022 was the worst month in terms of people getting COVID. So Omicron had a terrible impact. Now looking forward, it's kind of hard to predict what's going to happen, not even GM knows. They had spoken about increasing to a third shift, increasing production capacity. And then there comes along the Russian-Ukraine conflict, and we talked about it in Aline's question, and this has impacted GM as well. So you have one step in the accelerating the gas and one step in the brake. So we can't be too optimistic saying, oh, it's going to be much better. But what we feel in dealing with our clients is that, yes, there is a volume that is being maintained. In other words, it's not dropping. Now to what extent this will grow in the second quarter, and that will depend a lot on the second half. I think it will -- in the second quarter, it will depend a lot on the month of June because in May, the volumes have been maintained just like the levels of April in the case of GM. So that's what I can say about GM. As regards to our headcount, we have to remember when we compare to last year during the peak of the COVID-19 pandemic, you remember that we had some flexibility in the labor legislation. We gave more vacation to our people, have a lot more flexibility. And we do not expect to have such a poor quarter as we had in the first quarter. On the other hand, we had this expectation, which was kind of frustrated in terms of volume because there was this lack of auto parts that continued and some unexpected stoppages and downtime. But now we don't have that labor flexibility. I think everyone has had their vacation last year. So we can't give vacation to anyone anymore. We don't have layoff possibility anymore, so any headcount variation would mean termination of employees. Of course, in our policy to engage people, we try to avoid that as much as possible. I don't think that we came to the point of making that kind of decision because we still have a lot of cars sitting at the plants, just waiting for a chip. If a container arrives with 30,000 chips, and so in 3 days, we are going to have a large volume. We can't predict that. And we cannot hire people very fast, and we need to keep up the level of service of Tegma. It's a difficult decision, but we chose to maintain our headcount a little above necessary for the volume that we actually had, not for the volume that we expected to have. But naturally, this is something that we look into on a day-to-day. So that was the reason. For lack of flexibility, we chose to keep our team because our team is very well-prepared, skilled, very well trained. And there is a calculation. How much it costs to dismiss people, and how much it costs to rehire them within 3 months so we can lose these people in terms of -- we can lose them to the market. We can lose all their training. We can lose their motivation. So it's a complex calculation.

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

Well, I would like to thank everyone once again for taking part in our conference call. As we mentioned in our answers, we are dealing with a very unpredictable scenario with many variables in Brazil, many variables abroad, different variables, economic variables, supply chain variables, conflicts. In other words, our life in logistics has been quite fun in terms of lessons learned. I have said it over and over. At Tegma, we, the management, and the Board of Directors, we have learned a lot with everything that happened. And fortunately, we do everything to ensure resilience. As it was mentioned in one of the questions, this has been our focus. In other words, to maintain an engaged team, to have resilience, to have strict control over costs and expenses, as you could see in our results. And we are reinvesting in equipment, particularly in technology. It was not by chance that we were awarded the digital transformation price. We also have another important client that is investing in new startups, had the conversion of our debentures at Rabbot, which is a very successful startup. We believe a lot in the future of that start-up. So this is it, and I once again would like to thank you all for your attention. Have a great rest of day, and let's move forward.

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.]