SIMPAR S A : Conference Call Transcription 1Q24

Conference Call Transcript

Simpar S/A (SIMH3)

1Q24 Results

May 10, 2024

Operator:

Good morning to you all. Welcome to Simpar's videoconference to discuss the results regarding the 1Q24.

This videoconference is being recorded, and the replay will be available on the Company's website, ir.com.simpar.br. Together, you will also have the presentation, it will also be available for download.

All participants will be in watching-only mode during the presentation. We will then start the Q&A session, when further instructions will be provided.

Before moving on, I would like to emphasize that the forward-looking statements are based on the beliefs and assumptions of Simpar's management, and on the current information available to the Company. Forward-looking statements may involve risks and uncertainties, since they relate to future events and therefore depend on circumstances that may or may not occur. Investors, analysts and journalists should bear in mind that events related to the macroeconomic environment, the segment and other factors could cause results to be materially different from those in the forward-looking statements.

Today with us in this videoconference, we have Mr. Fernando Simões, Chief Executive Officer, and Denys Ferrez, Executive Vice-President of Corporate Finance and IR Officer of the Company.

We will now turn the call to Mr. Simões to start the presentation. Mr. Simões, you have the floor.

Fernando Simões:

Good morning, everyone. We are starting to announce the results for Simpar for the 1Q24. On behalf of our more than 51,000 employees, I would like to thank you all for your participation, and especially thank our customers for the opportunity to work with us and to choose our services. Thank you very much.

Before talking about the main financial highlights, I would like to start on page 3, when we talk about the ecosystem of Simpar Group, which was structured in recent years with completely independent companies, segments of great resilience in several sectors of the industry, a diversification of businesses and services and sectors of the economy.

On the left-hand side, we talk about the main figures of this business group. We are today more than 51,000 employees, 8 completely independent companies with CEO, CFO, administrative structure, management, goals and objectives that are independent, clear and for most part, with completely independent boards.

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We have more than 1,000 service locations today, dealerships, used vehicle stores, car rental stores and especially, the logistic company and branches all over Brazil. Our customers are in 80% of all sectors of Brazil economy. We have more than 1.4 million m² of warehousing and provide services to our customers in the widest variety of industries, all of them with highly resilience and vital to people's lives.

We have more than 330,000 assets. and this business was largely built in Brazil, but today, we are in other 9 countries, in addition to Brazil. I would not say that this is a barrier to enter. But I would say that our infrastructure, our team, our people are prepared for the development of all our businesses.

And when we talk about our companies on the right-hand side, we talk a bit about our strategic planning and value creation and next steps.

Here, again on page 3, on the right-hand side, we talk about the listed companies. Our companies are prepared for development and are positioned in an extremely differentiated position. JSL, the largest road logistics company, several sectors of the customers to several sectors of the economy, all of them with resilience. Alto, which is the first and leader in the sector has less than 2.5% market share. So huge potential for continued growth, whether organic or through M&As.

Movida, the second largest car rental and fleet management company in Brazil has the right positioning in terms of size, brands, management and people, and is prepared now with focus on operational efficiency and value creation. And I would say that it has just the right size for the size of the Brazilian market, and it has the option to grow by improving returns or creating more and more efficiency with less growth.

Vamos, it is leader and has unique positioning in the rental of trucks, machinery and equipment. It has also a small dealership business, which also has great potential, but the rental business, which is its flagship in the market, it's just starting, and it has scale and unique positioning.

When we talk at the bottom right-hand side, in the development of maturation of our businesses that are not listed, we see great synergies to be explored and possible strategic moves that will create even higher value to the Company. We have Automob, which is the largest vehicle brand portfolio in Brazil. Today, we have more than 120 stores with opportunity for continued consolidation, and it is just starting to capture synergies.

We have a bank within our ecosystem that is prepared to take more and better advantage of the ecosystem, bringing more scale, but it has already found its breakeven, with great potential to grow.

CS Infra, with a portfolio of concessions, PPP whose vocation is services, whether in social, infrastructure, logistics or urban mobility. And Ciclus Ambiental, with the largest urban solid waste treatment center in Brazil, one of the largest in the world, and uses the biogas and produces more than 50% of Brazil's biomethane generated in the segment.

CS Brasil, which offers fleet services with drivers, whether logistics services or facility services through mobility, as well as urban mobility for public and mixed ownership companies.

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Now on page 4, we have the main financial highlights for 1Q24. We had a record EBITDA of R$2,4 billion, which is 22% up over the same period last year. We had record revenues of R$10 billion, a 23% increase over the 1Q23.

Net revenue from services alone of R$7.2 billion, an increase of 25% over the same period last year. Adjusted net profit of R$122 million, an increase of 36% over the same period last year as well.

And on the same comparable basis, that would give us an increase in profit of 298% compared to the same period last year. We had net CAPEX of R$2.9 billion, which is down 33% compared to the 4Q23. And our leverage ratio, which is net debt over EBITDA was capped at 3.8%. If we annualize our EBITDA generated in the 1Q24, we would have a leverage ratio of 3.5x.

Return on invested capital of 12.1%, accounting ROIC of 11.2%, an increase of 2.8 p.p.. As you can see, you have a lower CAPEX higher revenue, higher generation of EBITDA, higher profit, which is our focus on efficiency and extracting value from everything that was built over the years.

As we saw on the previous page, the basis foundation, people, our business position have all been built. And it's now up to us to create more and more value and efficiency and focus on extracting value to shareholders and the sustainable development together with our customers.

On page 5, we have JSL. As we mentioned, a unique positioning, managed model scale, operational efficiency, it is positioned in a different way in all segments in which it operates. Great resilience in the economy, essential in the lives of people, with people that are prepared. We have made some acquisitions in recent years, but we have had had extremely strong organic growth.

You can see it on the left-hand side on page 5, JSL's EBITDA has constant margins, a small improvement, very consolidated net profit, return on invested capital improving every quarter, and even more important than that, a contract managed model that ensures the quality of its services and prices. Efficiency of scale has been greater quarter-on-quarter.

And finally, to close JSL, it has just 2.5% market share in Brazil. According to information, a logistic companies in developed countries, United States and Europe, has more than 8% market share, the leader companies. That shows the huge potential of growth. And JSL, in addition to all that, has expertise in post M&A management and has ensured the quality of the Company's applied with growth and improvement in results.

On page 6, we have Movida. Yesterday, it announced its results. So I am going briefly to go through the Company. Movida has rapidly transformed to every cent months, changing its fleet mix, making adjustments to that, both in cost and in a longer period, which is developed for the business. But more than that, it has today, a balanced fleet with an ideal mix, and these vehicles have made it possible for the Company to improve its yield and still recover prices.

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When I look at Movida forward, I see an improvement in prices, this extremely optimal asset mix with possibility of making fleet acquisitions even under more advantageous conditions. And this fleet, this new mix, we still have not seen the sale of those assets, which I believe are factors that will contribute to the constant improvement of Movida's results in a very solid way. That's what I would like to share with you.

On page 7, we talk about Vamos. Vamos has been showing in rental, consistent growth solid and organic, and it is diversifying sectors where it operates as a rental company. Remember, these are long-term contracts, more than 95% are 5-year contracts, and that makes the business resilient.

It has had some returns of vehicles on trucks. The return is not what we wished for, but it has also given us the opportunity to re-rent those trucks at more competitive prices. And when they are sold, they have margins over 30% book value because of the quality of the acquisition, the quality of the product and our positioning.

Asset sales have just been going up in Vamos, which shows the market there is to absorb Vamos' used assets, which is part of its business. Dealerships are still being affected in every business, but showing signs of recovery.

In other words, I think Vamos is only going to improve. And remember, its main business is the rental of trucks, machinery and equipment, which is still a market just emerging in Brazil, with huge potential for development. And Vamos has a unique positioning.

On page 8, we have Automob. This is a network of dealerships. This Group has been operating since 1995, developed more in the 2000's, but it was already part of our strategic planning. In the last 2 years, we focus on consolidating car and light vehicle dealerships becoming today, the Company that represents the greatest number of brands, 28. We are in 22 cities, 5 states, with 122 stores. We are in consolidated regions with great synergy.

As you can see, the growth here is shown on page 8 from 2020 to 1Q24, and this is already a company of R$9 billion pro forma with EBITDA of 4.9%. But there are some comments worth mentioning. You can see we used to sell 1.3 used cars for each every new one in 2020. Acquisitions were made, synergies to be extracted are just starting. But we have more than 34%, 40% growth in the sales of acquired companies after we take over.

So what does that mean? More inventory of used vehicles, more inventory of new vehicles, better differentiated financial conditions to customers, a space to offer a better environment to customers, which has led to higher volume of sales per location, but the synergies are still to come.

We are very happy that the Board has appointed Antonio Barreto, as CEO of Automob. He is now the business owner, while the presidents of the brands are responsible for the operation of each business. In other words, the attitude of a small company with the efficiency of a large company led by someone already in our Group, who certainly knows and we will be able to draw on synergies more quickly, whether in same-store sales and other business opportunities within Automob.

On page 9, we talk a little about CS Infra. It is building, step by step, solid concessions, PPP, with focus to provide services, creating high-quality assets, whether environmental, ports,

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urban mobility, highways, small businesses with appealing returns, and we are sure that through CS infra, we are going to have one of the options to create value to shareholders, whether in joint ventures or different assets, or in the sale of assets. That is, we believe, very much in creating value by contributing to the Group with CS Infra.

On page 10, we have CS Brasil. This is a company that currently provides fleet management of sourcing services with drivers and performs services, logistics services through people and mobility. This is where a small part of our Urban Mobility business is concentrated. It's a company that has had some growth, improving returns, but it is connected to have opportunities in concessions, but I also believe that has potential to grow.

On page 11, we have BBC, which is a bank. As I said, it found its breakeven point, but it's still just touching, with huge potential to extract more value within our ecosystem. It has a credit origination that is growing year-on-year, and it's prepared to improve results, returns and to extract even more value within our ecosystem.

On page 12, we have some of our main financial highlights. Now I am going to turn to Denys.

Denys Marc Ferrez:

Thank you, Fernando. Good morning, everyone. So we are going to start on slide 12, financial highlights, consolidated basis. The Group's net revenue in the 1Q amounted to R$9.1 billion, of which R$7.2 billion came from services, and which, compared to the same period last year, represents a 25% increase in net revenue from services.

To the right top, EBITDA. It amounted to R$2.4 billion, growth of 21% compared to the same period last year. As a reminder, 75% of this EBITDA comes from long-term contracts. On the bottom left-hand part, we see operating profit with R$1.6 billion, 20% higher than the same period last year.

To the right, our net profit amounted to R$122 million, up 36% over the same period last year, although in the previous period, we did have some tax benefits. If we adjust tax benefits, it would be equivalent to saying that this quarter's profit had a 4x increase compared to the same period last year.

So then I am going to the next slide that talks about our debt amortization schedule and liquidity on a consolidated basis. The Group's net debt amounted to R$34 billion at the end of the quarter, and our liquidity position was around R$19 billion of the considering the transaction carried out in the beginning of April.

Average net debt maturity stands at 5 years and the liquidity position enables us to say that it is equivalent to the amortizations of the years of 2024, 2025 and partially of 2026. Or in other words, that this is equivalent to 3.5x the coverage of our short-term debt.

In addition, I would like to draw your attention to the out of the total amount raised in 2024 about R$7 million. The average cost was approximately 90 basis points below the current average cost of debt, which will certainly contribute to the Company in the future.

I would like to continue and move on to the next slide, where we talk about Simpar as a holding company exclusively. Simpar holding company ended the quarter with net debt of

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R$3.3 billion, cash position of R$3.2 billion, average net debt maturity of 70 years and short- term debt coverage of around 8 years. The liquidity means that we can cover all the scheduled payments until 2030.

And here on the right-hand side of the slide, we are pointing out that only our stake in listed companies, remember that we have many other assets within the Group, is equivalent to practically 3x more than the holding company's net debt.

On the next slide, number 15, we talk about our asset base. We ended the 1Q24 with approximately 93% of the total asset base on vehicles, trucks, trailers that are quite young and have a very liquid secondary markets. Also worth nothing is that 95% of our assets are unencumbered.

On the right-hand side, I would like to draw your attention to the fact that the market value of our assets shows appreciation compared to book value, 11% higher than market value versus book value. And when compared to the financial obligations and payables to suppliers of machinery, equipment and vehicles in our subsidiaries, this is 1.2x higher than our applications.

Moving on to the next slide, we bring at the top left, this timeline of investments on a net basis, gross investments minus sales. We had a reduction, as you can see at the end of the charge of 33% in the volume of net investments when we compare 1Q24 with 4Q23.

But it's worth mentioning that a large part of these investments has not yet generated cash. As we show here on the top right-hand side, we have around R$3 billion of investments that did not generate cash in the 1Q. This is part of our model. It's always good to emphasize because you often see the obligation recorded on the balance sheet, but not yet the cash that is generated from this investment.

On the next slide, we talk about leverage. On the right-hand side, we have what we understand to be the business leverage. As we have said before, our business is based on assets with a strong secondary market. And at the end of their contracts, after the service is provided, they will be sold. So when we consider the present value from the sale of assets at the end of contract, we have a leverage of 2.2x.

However, according to the financial convention, we present a leverage if we take the EBITDA for the quarter and annualize it of around 3.5x. I annualized the 1Q because it already begins to better represent the new size of the Company. But in the classic model, 12 months back, leverage would be around 3.8%.

The ratio is used in our external issues, in bonds, but we also have a leverage ratio for the domestic market, which I understand is more in line with the business profile. This ratio, as you can see at the bottom of the page, is 2.3x, when its maximum is 3.5x So we have room of 1.2x the criterion applied, and this is what we call the maintenance covenant.

On the next page, page 18, we give you a bit of the mechanics of how we got to the business leverage ratio of 2.2x. I won't say much, but it's simply to tell you that based on the consolidated net debt, we subtract about R$26 billion, which is our assumption of present value of assets, which will be sold in the future and add obligations payable suppliers of vehicles, which would not be fair not to do so.

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This is exactly what we are doing in Simpar, and the sum of these 3 items leads to a total of R$18 billion if you compare with the services EBITDA. Of course, we could not use the benefit from the sale of assets here. So the figure of R$18 billion after deducting the present value of assets is only checked against the service EBITDA, which brings us to 2.2x leverage.

Moving on here to my last slide before I turn it back to Fernando, on page 19, we talk a bit about the return on invested capital. This is an indicator that we follow from close here. We brought a concept here, which is the concept of production, return on invested capital and production because, as we have talked before, there is part of the capital that has been allocated that is not generating cash. And therefore, that we have reached 12.1% when we analyze the 1Q of the year, which is around 3 p.p. higher the average cost of debt after tax.

This is the result of the work that has been done and will continue to be done in the several companies, as you have already heard in the call of the listed companies, but also the work being done in unlisted companies, which have a lot either to mature because they are preoperational, or to improve whatever is already operation. So we understand that we are on the right track. The figures show that, but we also understand there is a lot to be done.

With that, I turn the floor back to Fernando.

Fernando Simões:

Now we are going to page 20, and I would like to share with you our basis to carry out the strategic plans for 2024 and 2025. Simpar has the mission to contribute to the development of our companies, with focus on creating value through operational efficiency, excellence in services and continuous development to extract the maximum value from everything that was built in a sustainable way.

Take that we are building segments that are highly resilient that they are a part of the lives of people and industries. After investing more than R$31 billion in the last 3 years, we are focused on operational efficiency to extract greater value and returns from investments already made.

I have said that this is the first time we start a new cycle of development, focusing on operational efficiency without having to build the foundations and infrastructure, which is very different, and I believe this will truly enable us to create even greater value to shareholders.

Companies are ready to move forward with development without the need for additional capital. We have consolidated cash of more than R$18 billion, and at the holding, R$3.2 billion, with an extended debt schedule average term of 5 years. And we do not need to have a follow-on in any of the companies in order to develop them properly.

We also have a very strong focus on the efficiency of capital employed, whether by improving our asset turnover, reducing assets, creating value through asset-light operations wherever possible, producing inventory in dealerships or in used cars, which will certainly improve our return on invested capital, and with focus on efficiency and operating costs, all

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this through a company-managed model that is unique, with strong value and culture and people that are dedicated to the development and to the DNA of services that we have.

It's through them that we have our business execution and ensure the strengthening of commercial alliances. People focused on a strategy that adjust the execution of our strategic plans and sustainable development.

We are present in several sectors of the economy with barriers to enter because of our position and the ecosystem built. Scale, reach, strategic differentiation built over the years of the Company's development, with consolidation and a leading position.

This is what I wanted to share with you. Once again, I would like to thank you all for joining us today. And now we are going to open for your questions. Thank you very much.

Gabriel Rezende, Itaú BBA:

Good morning. Thanks for taking my questions. Congratulations for a sequence of strong results. We saw last night, with other unlisted companies, but also listed companies. I have 2 questions about Automob. The first very straightforward. With Barreto now sitting as CEO of the Company, is he also going to sit as the M&A Officer of Simpar as a whole? Just to understand what kind of structure you are going to have and if you are going to restructure the activities that Barreto performs or performed.

And second point about Automob, if you could talk about the bonus for the sale of cars from OEMs. We are monitoring the FIPE table, and we see a more flexible demand and bonuses from OEMs. So if you could talk a bit about that, I would really appreciate that.

Fernando Simões Filho:

Good morning. Gabriel, about Automob, Barreto, as of next week, on the 15th, he is going to be 100% dedicated to Automob. We, as a Group, we count on people, our major difference are the people. Of course, we are going to hear from him. But M&A and Strategic Plans for Simpar, Barreto will leave. He's going to focus on Automob.

He is a board member of some companies, JSL. So he is part of committees when we talk about strategic plans, but he is going to be 100% devoted to Automob, leaving Simpar 's M&A and Planning. He created a very well-structured area, and we still do not have anyone in the position. That is how we have structured ourselves.

As for bonuses from OEMs, we all know that brand new cars had a huge increase. And OEMs, I always say that, in the end of the day, we are almost like a luxury franchisee, because it's an interesting business. You have a low margin, it has always been a tight margin, but it will never be a negative margin for long because it's not interesting that the front end is not healthy. So at some point in time, OEMs can offer more or less bonus to contribute to our margins or to help the sale of some makers that are needed. So you are seeing there with more premium brands, SUV, that are a bit more modest.

This is much more to regulate retail prices. So this is something that we are seeing. It's not really out of the ordinary. This is just business as usual that OEMs do whenever retail is not selling as well as they wished. But quite business as usual, Gabriel.

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Matheus Sant'Anna, XP:

Good morning. First, I have a follow-up on Gabriel's question, Automob. It was a quarter a bit tighter in terms of margins. You talked about bonus. You also had the consolidation of recent acquisitions. What are you expecting for margins in the year? If you could give us a bit more color.

Leverage, I would like to ask, it's slightly up. Again, what is your view for the year? And how do you see the balance between capital allocation and leverage control? Thank you.

Fernando Simões:

Talking about Automob, once again, Automob is a company that in 2020, we had revenue of R$900 million, and now we are close to R$10 billion. This is growth and transformation that happened by acquisitions and consolidation.

And Automob has been integrating the businesses. So all synergies are still to come. Because when you consolidate, you have a concentrated effort, and you do increase costs. And because margins are cut, you have a surplus cost, an excess cost, but this is what it is. You have to first organize yourself, not to lose what is best from each company, and then you start to enjoy results.

I will give you some examples. You buy a dealership. You have administrative personnel that you put together. Then you see what is best in one team, what is best in the other. Sometimes in the integration, you even increase the team. So you have an increase in cost. But then in our stores, we have been improving sales by 30% to 40%.

But with that, you have to increase inventory. Sometimes, these are simple things, R$1 million, R$2 million in a store. But sometimes you invest to improve your showroom because then you increase margins and scale on sales per store. So sometimes you have to create things, a structure to have more lung, and then you will start to enjoy the benefits.

So while you are building, sometimes you have a drop in numbers and returns. But Automob literally is under construction. And I think that in three, four quarters, we are going to have a more stable margin that is more compatible to its potential.

And again, our capacity of sales per store has been bringing 30% to 40% more revenues in acquired companies. But there is still a lot more to be implemented in Automob.

Leverage, I am going to turn to Denys. I would just like to make a very quick comment. In the 4Q23 and in the 1Q, we had more than R$7 billion net CAPEX, and that is something that we have not enjoyed revenues yet; quite the opposite, you have the cost of interest, preoperational costs, and then you start receiving revenues and then you annualize revenues. But Denys can give you a bit more color on that.

Denys Marc Ferrez:

Matheus, in your question about the leverage, you talked about our prospect for the year, and you did ask something else that I forgot, I am sorry.

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Matheus Sant'Anna:

Basically, how you see the balance between higher allocation of capital and leverage control.

Denys Marc Ferrez:

I will start with leverage, then. In the year of 2024, we see the peak of investments in the 1Q, and then slowing down to the 2H24, which therefore should bring the number down. So here, I am talking about just directions.

But due to what Fernando has just mentioned, the Company that you are showing is always closer to reality than the Company 12 months ago, due to all the investments made and everything that we have been doing.

So when you take a look at the higher number, 3.8, this is the number that looks into the past, again, following the classic metric of EBITDA. But if you annualize 1Q numbers, the

3.8 is 3.5. And just using your question, I would like to reinforce that our leverage is very different from other companies and sectors. It is based on net assets that belongs to contracts that are preterm and that will be sold.

The assets have proved their quality along the time. I had the satisfaction of working the Company 16 years. We have gone through prices in Brazil globally, but we are very confident about the quality and value of our assets. So when you take a look at leverage, when you think about the business, this is a leverage level that is not 3.5%, 3.8%. It's about 2.2x. This number is much more adherent to the covenants of local debt. The indicator in this quarter was 2.3x, and the cap is 3.5x. So you see a relevant difference.

And this is the only covenant that we have, which is called maintenance covenant that you cannot go up. So we still have much room there.

But to answer your question, we see all the planned growth ahead not affecting the trend I mentioned before. The peak of investments for 2024 was in the 1Q, and then we have a slowdown throughout the year.

Guilherme Mendes, JPMorgan:

Thanks for taking my questions. I have two follow-ups. First is leverage. Denys, your answer was very clear, but my point is about the holding debt. You mentioned in other calls about reducing debt a long time. So I would like to know from you the main levers to decrease this leverage at the holding level. And what would be your final objective?

And the second question is a follow-up on Automob, more specifically about Chinese OEMs. Much has been said, Chinese OEMs have been very aggressive in the market. How much do you think that could affect vehicle prices?

Fernando Simões:

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