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

Good afternoon. Thank you for standing by. Welcome to the teleconference of Tegma Gestão Logística S.A. for the discussion of the results with reference to the third quarter of 2023. We have with us today Nivaldo Tuba, CEO of Tegma; and Ramon Perez, Administrative Director and Financial Director and Relations with investors. We mentioned that this event is being recorded. [Operator Instructions] This event -- the recording of the event will be available after the event for 7 days. We would now like to start, passing the word to Sir Nivaldo, the Director, President of Tegma, who will begin the presentation. Sir Nivaldo, please go ahead.

Good afternoon to everyone. I am Nivaldo Tuba, CEO of Tegma. And in the name of the entire company, I would like to thank you once again for your participation in our teleconference earnings call. I have with me Ramon Perez, our Financial Director and our Investor Relations Director; along with Ian Nunes and Felipe Fogaça of the IR area. As is usual, we will start our presentation with Slide 2, where the participants can find our disclaimer with respect to our declarations -- prospective declarations. Going to Slide 3, we'd like to talk about the highlights of the third quarter. In the first point, we mentioned about the approval of the payment of dividends and interest on equity. Intermittently, revenues through the third quarter of 2023, we will distribute BRL 35.6 million or BRL 0.54 per share, which corresponds to a 72% of the net profit -- adjusted net profit adjusted by the reserve for fiscal incentives. These payments will be made on the November 23, benefiting those stockholders who have a stockholder position as of Thursday, November 9. For the second highlight, we'd like to talk about the important project, which is initiated in the month of October of this year. Tegma started the process of the implementation of a new ERP from Oracle Cloud, which was substitute the ERP of Datasul. This new ERP is a solution which will best attends the needs of the company, innovation, modernness and ease of use -- cost and ease of use. Beyond having the highest -- large portfolio of logistics solution, it is one of the first steps of the digital transformation of our company, focusing on the administrative and financial areas, and which will serve as a basis of foundation for the second step, expanding to other fronts of the company. We have a provision that the implementation of this project will take from 12 to 14 months. The third highlight is an important award that Tegma won, the Open Corps, 100 Open Corps for the [indiscernible] is most involved in innovation in the country. This award always seeks to find opportunities to add new logistics solutions, adding benefits to our solutions and for our clients. Finally, [indiscernible] the inventory of the greenhouse gases by Tegma. This is -- we received the gold seal from the GHG Protocol, which has as one of its demands, the external auditing of the informations attesting -- in this way, the quality of the information supplied. This conquest is the recognition of the efforts that the company has made in this area of sustainability, and what we say with respect to transparency with our emissions, reinforcing our strong intention to always seek the best ways to evaluate and reduce our impact in terms of climate change. Going to Slide 4, we talk about the principal data in the vehicle market in Brazil. As we can observe in the first chart, the domestic sales in the third quarter of 2023 were 10% above those with the annual comparison. This reflects the growth of sales -- retail sales in that quarter, with the availability of components, especially semiconductors. We should point out that the sales in July were positively impacted by the program of discounts on new cars of BRL 120,000 of the federal government. However, we can no longer -- we cannot quantify if these sales were anticipations or actually new sales. The production on its -- for its turn presented a reduction of 3% in the third quarter of '23 on the annual comparison, as we can see in the graph below on the left. This fall is explained by the resizing of the rhythm of production to current levels and the stocks of industries and the falloff in exports, which came at about 20% in the quarter as well as the growth of 31% in the sale of imported vehicles in the country. Looking at Slide 5, we present the principal indicator -- operational indicators in the division of automotive logistics. The quantity of vehicles transported in the third quarter of 2023 was 170,000 units, 2% above on -- the annual comparison, reflecting the growth of domestic sales, as explained in the previous slide. On the other hand, our market share was reduced in the third quarter and the third quarter compared to the annual basis to a level below 25%. This retraction of market share was due to the loss of participation in the market of relevant clients for the company in the month of July, when there was -- when the government's program of discounts for the new cars of the federal government. However, it's important to mention that in the following months, after July, we can observe a normalization of our market share among these clients. Finally, the average distance of our trips, 1.4% higher than on an annual basis due to the growth of export trips and highway transport to other countries in the Mercosur and also the increase of domestic travel overall. It's important -- after these highlights, I'm going to pass the word to Ramon Perez, our Financial Director, who will talk about our results, cash flow and other indicators. After that, we will open for any questions you might have. Thank you.

Thank you, Nivaldo. Good afternoon to everyone. Looking at Slide 6, we can talk about the results in the Logistics division -- Automotive Logistics Division. We can see on the graph above that there was growth of 3% in net revenue of the division in the third quarter of '23, which is explained principally due to the increase of 2% in the number of vehicles transported in the quarter and 1.4% in the distance traveled. It's worth mentioning also that the great oscillation and the price of diesel fuel in the last 12 months has caused readjustments in the tariffs, both positive as well as negative during this period. Finally, we have to point out the good results of Fastline, our unit of logistics for used vehicles, which has had continued evolution of revenue, which has been quite positive. Below, we have the evolution both of the EBIT as well as the EBITDA in the third quarter of 2023 on an annual comparison as well as of their respective margins. We should also maintain -- keep in mind that the margin in the third quarter of '22 are adjusted by the event -- a non-recurring event, which increased in BRL 6.6 million expenses of that division in that period. The reduction of the EBITDA margin in the third quarter of '23 reflects the normalization of the profitability of logistics services as well as the administration of these services -- auto services and the patios as well as the realignment of the tariffs of the division to the current levels of fuel prices. Additionally, there was growth in costs with personnel above the growth of revenue due to the increase in the headcount -- in the operational headcount in the division, which is not always accompany linearly the growth in the number of vehicles transported. Nonetheless, the proportion of expenses with personnel relative to net revenue in the third quarter of '23 is below the average of the last 5 quarters. Also, we see the reduction of the -- it also clears, the reduction in the EBITDA margin, an increase of expenses -- SG&A expenses, especially with people -- especially with personnel due to the wage increase of the year of 2023 and new hiring as well as the increase of expenses with consultancies and legal fees. Slide 7, we show the results of the division of logistics -- integrated logistics. We can observe that the net revenue of the division in the third quarter of '23 reduced by 3% on the annual comparison. This reduction is due to the operation with chemicals, due to the instability in the operational flows caused by the renewal of the fleet of -- silo of tank trucks as well as in the second quarter of '23, which caused a reduction in the amount of chemical products transported. This renewal of the fleet has already been practically finalized. And by the end of November, it will be. And we expect a gradual normalization to the volumes in the fourth quarter of '23. In this quarter, the operation of chemicals of Tegma conquered an important contract for the transport of Bahia, in which we will be responsible for attending the flow between the states of Santa Catarina and Sao Paulo. This contract has a 12-month period and the potential to add 10% to the revenue of the operation, considering the level of 2022 and maintaining our margins in line. The operation of electro domestics, which has also electrical appliances, recovered its revenue, especially due to the recomposition of tariffs. On the graph below, we can see that both the EBIT margin as well as the EBITDA margin presented retraction in the third quarter of 2023 on an annual basis. Both were impacted negatively by the operational event mentioned, which compromised the dilution of costs -- fixed costs in the quarter. Looking at Slide 8, we would like to present our consolidated results. Net revenue was BRL 427 million in the third quarter of 2023, which represents a growth of 3% on the annual comparison, reflecting the growth in the division of automotive logistics during the period. Below we can see that both the EBIT as well as the EBITDA presented a retraction on the annual comparison as well as their margins, reflected in a fall off of margins in both divisions due to the factors previously mentioned. Finally, net profit for the third quarter was BRL 56.3 million, 5% higher on an annual basis. An expansion of 0.3 percentage points in the net margin and the evolution of net margin, which occurred in spite of the retraction of the EBIT margin is through of the results -- financial results, which are still more positive, consequence of the generation of cash and the structure of capital -- of a deleveraged capital structure and the positive results of our joint venture with GDL. The performance of GDL's -- recent GDL performance reflects the growth in the storage of imported vehicles accompanying the increase in the sales of these vehicles in Brazil. Beyond that, the performance of the activity of storage in general of consumer goods also benefited these results. Looking at Slide #9, we present on this graph on the left, the cash flow cycle in September of '23, which was 36 days, five days shorter than the cash cycle in the previous quarter due to an improved dynamic receivables. With respect to CapEx of the company, the total investments in the third quarter of '23 was BRL 11.9 million, or 2.8% of total net revenue, pointing out that the investment of BRL 4.8 million in the renewal of the fleet of company-owned vehicles -- of tank vehicles for the operation with the chemical sector. Finally, on the left, we look at the cash flow -- free cash flow of the company, which was BRL 50 million positive in the third quarter of '23. This cash generation is the fruit of the operational performance, aligned with the reduction in the cash cycle as well as utilization of BRL 4.8 million of tax credits, which contributed positively to our operational cash flow. On Slide 10, we present the details of our capital structure. In the first graph, we can see that the annual cash -- the current cash of hand-on-hand of BRL 259 million, which is above the payments on the net debt for the coming years. In the -- over the third quarter of '23, we liquidated loans in the amount of BRL 45 million in principal as well as the capture of loans and financing that totaled BRL 51.3 million. As a result of these payments and new fundraisings, we can see on the graph on the side that the cost of our debt has been reduced compared to the previous quarters, reaching CDI plus 1.55% in September of '23. On the table below, we can see that our position of cash -- net cash position in September '23 was BRL 163 million in cash, higher than the position of June and due to the operational results -- positive operational results and the reduction in our cash cycle. Finally, on the right is our rating, which was reaffirmed by Fitch in April of this year, and maintained at a local with a perspective of stability. Looking at Slide 11, we can see the indicators of profitability of the company. Our return on capital -- invested capital in the third quarter of '23, in gray, was 28.7%, slightly below that of the second quarter as well as the ROE, in the orange line. These variations were due to principally the reduction of the operating margins of Tegma in this quarter. On the graph below, you can see that the EVA in the third quarter of '23 has also been reduced due to the level of the previous quarter. Basically due to the same factors that impacted negatively the ROIC in the quarter. On the right, we see the story of dividends and interests paid on equity paid by Tegma. On the gray line, we indicate the payout of these distributions. The payment of dividends interpret with the year -- during the year 2023 was BRL 73.2 million, 65% of the net profit without considering the constitution of the reserve for fiscal incentives. [indiscernible] Dividend yield corresponded to 8.2%. Finally, on the last slide, we see the performance of our stock compared to the [ Bovespa ] Index. Tegma stock shown in the first graph showed a performance above that of the market overall. It has until middle of July. This performance is a reflection of the resilience -- operational resilience of the company and the tendency of the recovery of the automotive market. As is shown in the graph below, stock in Tegma as well as happens with a lot of the companies listed in Brazil are sold at multiples below their average, influencing by the macroeconomic scenario, which is still in recovery. With that, I thank you all for your attention, and we open for the session of questions and answers.

[Operator Instructions] Our first question is from Luiz Capistrano of Itau BBA.

I wanted to hear from you two things, and I think which is -- the first thing is an update on how you see the market for next year. In the last month, we've had a downturn in the part of interest rates. Perhaps things won't come back as quickly as was hoped for. And I'd like to understand what's your -- the humor, the attitude of clients in the association of vehicle manufacturers, and your relationship? Any information that might help -- be useful for us? And the second question is regarding Fastline. You have continued to point out about the good performance of the subsidiary. And perhaps the idea is that I want to look at you -- what could helped to have more growth in this segment? And if these possibilities could have an M&A to accelerate this area, if it makes sense? And if you have a structure for this type of inorganic growth? Those are my few questions.

Luiz, thank you for your questions. Good afternoon. It's a pleasure to have you here with us in our conference. Let's go -- in '24, there are still very few indications of growth in the market. However, we'll give you an overview -- the input that we are using in our budgeting. First of all, it's the question of logistics. We estimate a small growth in new vehicles, in the national -- in the domestic production and a bigger growth in imported vehicles because the base of imported vehicles in '23 will be smaller. We have BYD looking at good quantities and with a good market acceptance and a marketing problem, which is quite aggressive. And other big brands that I can mention, which are public also, such as Volvo and Porsche, with positions, which are quite optimistic for growth this year. The question of used vehicles as well as other areas we understand is the growth, which will be disconnected from what we can call the vegetative growth. We're looking at -- it's still a new business, which is an expansion. And we are looking at 2024 with growth in that area -- strong -- interesting -- strongly interesting growth. The question of chemical transportation, we're going to have a recovery due to -- compared to 2022 since there -- at the end of this year and in the beginning of 2024, a normalization of our fleet. And also, we made an announcement about a big contract which we signed recently, and which will come into effect in 2024, the operation of Bahia with a new player who was not in our portfolio. On the side of electronic appliances, transportation, the stability of the market in '24, or perhaps a slight retraction of the market due to the reallocation of the two suppliers and our principal clients, making it possible that the average distance run by our fleet will be slightly lower. I also talked about GDL, our subsidiary in Espirito Santo, which, in the year of 2023, it did very well, with results disconnect -- positive disconnect from our budget. And there is a sign in '24 of this scenario have inputs in vehicle projections with our patios full through the general cargo, which is also moving very well. Talking about Fastline, we have -- has been transforming itself into a very interesting business with good growth, relevant annual growth, and we are looking -- we're working on investing in that company and principally to bring it up to speed. Technologically, we know that right now is the time for the technological advances in the company. It will facilitate what the work and consequently, their performance will improve and we will be able to mark a growth in the market where that the market might support.

Very well. Thank you, Nivaldo. One last point. In relation to M&A in the market of Fastline, would it make any sense an acquisition in that segment?

This is Ramon speaking now. Yes, I believe that we've mentioned this at some point in time. And within the targets that we have been analyzing, there are possibilities connected with the market of vehicles. We see some growth in that area. It's part of our strategy.

The next question is from Marcelo Audi of BTG Pactual.

One point about the impact that you used to had on the margin in 2023, especially in the dynamic of fuel costs and the pass-through of these costs. How is -- how do you negotiate with the clients as pass-through? And how has this affected both in '23 as well as '24 with this greater volatility in fuel prices?

We have contracts with the car companies case by case. There's -- even though it's -- they're independent, there's practically a rule that permits the control of these costs. We define percentages of triggers. When these triggers are reached above or that or below, they are set off. And this has happened with a little bit of relevance in '22. In '23, we also -- has been happening in '23, and we understand we've been having success in the negotiations, being able to pass through all of the increases in fuel cost. For '24, a lot of our contracts are renewed or in the process of renewal. We don't see many surprises there. And the same concept will be, in effect, a trigger, which will increase, as a percentage, whether upwards or downwards on prices, raising or lowering rates come due to that. And this -- we looked at our operational area in the new -- in the vehicle sector.

It's something that you consider a one-off, not recurring. It's something that should maintain itself going forward. In relation to the expenses that you've had with personnel in this quarter, with a higher number of hiring and also the increase of wage contracts, do you think that this is -- will continue going forward? Or is this more of a one-off in the third -- affecting the third quarter numbers?

This is Ramon speaking. I would say -- I would call it a one-off. We tried to explain this, last year it was very clear that these readjustments, the size of our team -- operating team, they did not happen linearly. So this could have an effect -- higher or lower effect in the second quarter. And this is adjusted over time. So it has a lot to do with the size of our team. In the third quarter, we had a ramp up -- increasing cost through to contract wage adjustments, but this was a non-linear adjustment in our costs, which will not be repeated in the next quarter.

Our next question is from Victor Demier of 20 partners -- of Vinci Partners.

Congratulations on the results, Nivaldo and team. I would like you to comment a little bit more on this new contract in the chemical sector. We see that you're -- also that you would comment on what to expect in the next quarters in this ramp-up, both in revenue as well as margin, for this part of the -- this part of the operation, the chemical part of the operation? If you expect a recovery of lost volume due to the renewals of these trucks -- the purchase of new trucks. And if you could pass any information about this ramp-up in revenue, that would be very interesting for us.

Good question. Based on that contract, that could bring an increase of up to 10% in our revenues in '24. The chemical sector is a very interesting characteristic. The operation of Tegma in a geographical area in which we were not working -- operating. A new question, one that's very, very relevant. A large client who's starting their operations with us, operates with other players. There's also the possibility of growth within the same client, a 1-year contract, and we're putting a new fleet at the purpose of this client, and we're going to see the results. As you said, [indiscernible] more specifically in this last quarter and last days in the end of November, we can see almost a fleet operating at full speed, highly renewed with a number of new vehicles, and this will be continuing during [ 2023 ]. We expect independent of the chemical market, Brazil chemical market as a whole. We not see relevant growth at Tegma due to its the actions which we're taking, adding more fleet, placing new trucks in our fleet and having relevant growth have a result which were better than the average we saw in 2023.

[Operator Instructions] We would now look at the webcast questions.

This is Jan from Arne. I would like to mediate the questions which came in during the webcast, some of which we've already answered. But we're going to try to answer the others. The first is from Eduardo. From the best -- the better cash cycle was important for the company and the generation of cash in this quarter. Why there was such a reduction -- such a conservative reduction in this quarter? And can we expect that this will continue in coming quarters? I'd like to pass this question to Ramon.

With relation to this reduction, this improvement in our cash cycle is very much connected to the reduction of receivables and a mix of sales, which had an improvement in participation with lower payment -- sort of payment terms. It's also worth mentioning that the reduction of administrative bosses -- questions that internally operational questions we work with constantly to reduce eventual lateness in payments, sometimes due to systemic questions or lack of proof of payment, but the question -- is not credit questions. On the contrary, one of the strengths of Tegma is that we have a portfolio -- is the quality of our clients and that in all of our divisions. Specifically, in this quarter, we had this situation. In the following quarters, there's nothing that we can really indicate as being a constant diminution of -- to verify, personally, the same rhythm of diminution costs, which ratifies our efforts here. And now which is within our control, under our control the so-called administrative payments as part of the dynamic of our businesses.

Question from [indiscernible] Vinci Partners. When we talk about GDL can -- and I'll pass this question to Nivaldo and ask him to answer about GDL.

Thank you. Really, GDL, in this third quarter of '23, as an important component of investment due to the imported vehicles in the Port of Victoria. And the Great Wall and BYD have had exponential growth in sales here. Other clients also have contributed, which is Volvo and Porsche. It's very important -- when I look at BYD, at simply a client in the automotive area, almost all of the imports that they make through the Port of Victoria, and Victoria concentrates a lot of BYD's imports are removed and operationalized through GDL. GDL has also had a relevant growth of revenue through general storage, merchandise which come into our warehouses and are quickly passed through and then I'll just pass-through system. The merchandise -- other merchandise which is produced in Brazil, which were was there to our patios or as from our patios, they are then distributed as well. It's also worth mentioning that -- and the world is not only flowers, we've had results that we considered a little bit below that, which was expected. When we look at storage, the import tax warehousing of the GDL's -- the logistics of new cars and the logistics as general storage, which has reached -- compensated clearly the small, negative results which we generated.

Some questions from Kayo, which was partially answered already. Do you think about increasing the payout for next year or to make any extraordinary distribution, considering the possibility of the extinction of the JCP in the following year? Asking Ramon.

Kayo, due to the possibility of the extinction of the interest on equity in 2025, there is no definition of extraordinary distribution, specifically related to that. We're going to be accompanying this subject. And finally, the decisions, which we open, will distribute to the market, if necessary. But there's nothing decided in that sense. What we do have that, and it's happening in this third quarter, is that we brought our payout, which normally has been about 70% -- roughly 70% tax. Incentive reserves to something above 70% in this quarter. This is more connected to a question of management of our available cash in relation to our strategy of growth -- inorganic growth. We always like to remember that our cash on hand, which is due to the capacity of the company to generate operating cash, also due to our low level of CapEx and investment is -- this cash on hand will be administered due to the velocity with which we evolve in our strategy of growth -- of inorganic growth through M&A, which we continue to work hard on so that we can put into practice in the near future.

Next question comes from Guilherme for Ramon. Congratulations on the results. Can you tell us your expectations of market share for 2024, especially in relation to the automotive operation? What's the dynamic that this will have -- for the domestic shares -- will have an effect on domestic shares for vehicles -- for domestic vehicles and export vehicles? I would like to ask Nivaldo.

Thank you, Guilherme. The perspective for '24, what we have where results and our attempts with the car companies, though it's premature, it's a scenario for the chemical sector as well. In the beginning of '23, when we talk about '22, we're talking about growth of 4% or 5%. Today, we're looking at 7% growth, and that's actually a conservative number. Within our -- we're looking at numbers of growth. We considered those numbers to be very conservative. As far as the question of exports, we look at the volatility -- we look at an average historic reactions in countries such as Peru, Bolivia, Colombia, where the level of exports and cargo has been growing.

Congratulations on the results, the retail demand. Do you think that this is sustainable? This level of price increases is sustainable?

Yes. We understand that the level of sales, together with their dealers, we can look at them. And I can also quantify the type and the value of these discounts. The daily sales on October '23 were 17% higher than the sales in '22. And without any type of government incentive, this shows that there is an incentive from some other side.

[Operator Instructions] We now close the session of questions and answers. And I would like to pass this to Nivaldo for his final comments.

Thank you all very much for participating in our teleconference. We presented the results in the third quarter quite similar to those which we are budgeted, very positive in relation to our budget. We're initiating the fourth quarter, expecting working to maintain this level and this dynamic of business. Thank you very much.

The audio conference of Tegma is now closed. We thank you all for your participation. Please have a good afternoon, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]