Good day, and thank you for waiting. Welcome to Tegma Gestão Logística S.A. conference call to review fourth quarter 2020 earnings results. Today, we have Mr. Marcos Medeiros, Chief Executive Officer, and Mr. Ramón Pérez, Chief Financial and Investor Relations Officer. We would like to inform you that this event is being recorded, and that all participants will be in listen-only mode during the company's presentation. After Tegma's remarks are over, there will be a question- and- answer session when further instructions will be provided. Should any participant need assistance during the conference call, please press star zero to reach the operator. The replay of this event will be available right after the end of the conference call for a period of seven days. With that, 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. We thank you all for joining us today to discuss the fourth quarter earnings of Tegma Gestão Logística. Myself, Marcos Medeiros, CEO of the company, and Ramón Pérez, CFO and IRO, will be presenting the most important highlights and explaining our main numbers for the quarter. As you all know, the rapid dissemination of the COVID-19 pandemic has had a large-scale and global impact, making the business environment extremely volatile and adding uncertainty to all statements made so far. 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. On slide three, we have the fourth quarter highlights. The year of 2020 ended as another year of great challenges for Tegma. The COVID-19 pandemic has been and still is a great test of discipline at all levels of corporate management.
Although some of our employees did catch COVID-19, fortunately, none of them had major complications. Our whole corporate staff continues to work remotely, and all safety measures remain in place for operations that require staff on-site. Despite all of these challenges, we were able to end the year with a better performance than we had forecast in the middle of the crisis. Moving to the second highlight. As mentioned in a management proposal submitted yesterday, a proposal was submitted for approval at the annual shareholders meeting to be held on April 13 for a payout of dividends and supplementary interest on equity amounting to BRL 12.5 million corresponding to BRL 0.19 of a BRL per share, with cut-off date expected to be April 13 and actual payment on April 24.
With the prepayment made in November of 2020 and excluding reserves made the year payout corresponds to 63% with a 2.5% dividend yield. The third bullet item refers to Ford Motor's decision in the beginning of January to end their vehicle manufacturing activities in Brazil, maintaining only the sale of imported vehicles. Ford has been a long-standing client of Tegma's and continues with the current contract to handle part of their vehicles sold locally. It is important to mention that given the diversification of Tegma serving almost 100% of car makers operating in Brazil, we believe the impact of Ford's decision on Tegma will be reduced in the mid to long- term as the demand for Ford vehicles that were produced locally will be redistributed to other car manufacturers.
On the other hand, one can expect a negative impact on average distance of trips run by Tegma as vehicles had to travel long distances to arrive in the South and Southeast of Brazil. The fourth highlight refers to the merger between Fiat Chrysler group and Peugeot Citroën group, creating the Stellantis group, the fourth largest vehicle manufacturing group in the world and a market leader in light vehicles in Brazil. Tegma has a vehicle transporting contract with both players and so far has not been affected by any changes resulting from this merger. The fifth bullet item relates to the problem linked to a lack of auto parts due to a shortage of steel and semiconductors, among other parts. Some car makers temporarily stopped their production at some of their facilities for a few days in this month of March.
The company is paying close attention to this atypical moment of the automotive market and may resize its operations similar to what was done during the vehicle production stoppage in March and April of 2020. With that, I turn the floor to our Chief Financial and Investor Relations Officer, Ramón Pérez, to continue the presentation.
Thank you, Marcos. On the next slide, we can see the main indicators of the automotive market and of Tegma's Automotive Logistics division. You can see on the chart of vehicles transported a 14.8% recovery in the fourth quarter of 2020 compared with the third quarter of 2020. In the upper left-hand table, we see that domestic sales in Q4 2020 were down 10% year-over-year, a lower reduction than the 27% decline in the 2020, 2019 comparison, and at a much smaller proportion than expected in the beginning of the pandemic.
In addition, we can see that production has been almost stable, driven primarily by an increase in exports. On the bottom table, we can see Tegma's transportation indicators. Our market share declined by 2.8 percentage points in Q4, ending the quarter at 25.8%, and by 0.9 percentage point in 2020. This performance resulted from the individual performance of some key clients impacted by a change in the vehicle consumption profile in Brazil, as consumers have been preferring SUVs in detriment of smaller cars, and has also resulted from variations in the regional sales mix. A point to be stressed is that we did not lose a single contract in this period. Lastly, we can see a positive evolution in average distance traveled, both in the full year, up 5.7%, and in Q4 2020 compared with Q4 2019, up 4.8%.
This was mainly due to the positive performance of sales in regions other than the southeast of Brazil. This performance can be attributed to greater liquidity linked to the Federal Emergency Relief Program and the fact that car rental companies, which buy vehicles through the states of São Paulo and Minas Gerais, faced difficulties buying vehicles in the post-pandemic period. On the next slide, we see the results of the Automotive Logistics division. As explained in the previous slide, the automotive market has been showing a consistent recovery. On the other hand, a reduction in industry inventories reduced our revenues related to yard management or warehousing and accessory installment services. As we can see on the table in the upper left-hand corner, this scenario had a direct impact on the division's net revenue in Q4 2020, which was 18.6% lower in the yearly comparison.
This revenue decrease impacted our fixed cost dilution, impacting the gross margin, which was down 1.7 percentage point, totaling 21.6% in Q4 2020. Despite that, it is worth noting a 26.9% reduction in this division's expenses in Q4 2020, even in a period of high IGP-M inflation, as we have observed since the end of last year. Putting it all together, that explains a reduction of only 1.2 percentage point in EBITDA margin in the annual comparison in the fourth quarter 2020, despite a significant drop in revenue. As presented on the chart to the right, it is possible to observe a 10.5% increase in gross revenue quarter-on-quarter. On the bottom left chart, we can see that despite lower revenue levels, this division has posted adjusted EBITDA margins similar to those of the past in the pre-crisis period.
Moving on to the next slide, now talking about the operational highlights of Integrated Logistics. Here, we can appreciate the main metrics influencing this division. We highlight the top left chart, showing a 10.5% increase in the number of trips run by this division. This growth stems mainly from above average volumes in the home appliances operation, given an increase in sales of semi-durable goods in the second half of the year. The chemicals operation also posted a positive performance year-over-year, as shown on the bar chart on the right with 19% increase in tons transported.
The bottom chart, in turn, shows that the average tons stored by the chemicals operation was 7.6% higher in Q4 2020 compared with Q4 2019. On the next slide, we can see the results of the Integrated Logistics division, which posted growth in spite of an adverse scenario on the back of increased volumes from current clients and expansion of our portfolio of services. As a result of this performance, in 2020, this division posted another year of record profitability. On the table, we can see that even with the impact of an abrupt revenue drop in the warehousing operation caused by the loss of one important client, the Integrated Logistics division maintained a good performance in the fourth quarter of 2020.
This division's gross margin decreased year-over-year, and this was because of costs amounting to BRL 5.2 million related to the demobilization of a warehouse in Barueri, State of São Paulo. Adjusted EBITDA margin in this division, when we deduct the previously mentioned demobilization costs, was 37.3% in Q4, up 6.5 percentage point year-over-year. This reflects the growth of industrial logistics and an improved mix of services in this division. On slide eight, we have our consolidated results. The table on the left shows that mainly due to lower volumes in the Automotive Logistics division, the company posted a net revenue reduction of 17.3% in Q4 2020.
As a consequence of this, plus the costs related to warehouse demobilization in the Integrated Logistics division, our gross margin in the quarter was also impacted, down 1.9 percentage points at 20.8% in Q4 and 19.8% in the full year 2020. Thus, as mentioned for the Vehicle Logistics division, control of administrative expenses carried out all along the year is translated into a 23.8% reduction in this line item in Q4 2020 over Q4 2019, despite a high IGP-M inflation rate in the period. The 112% increase in expenses compared with 2019 in the yearly comparison is explained by PIS/COFINS taxes credited in 2019 and a couple of non-recurring expenses in 2020, such as demobilization of the warehouse in Barueri and attorneys' fees and termination costs. Net of these effects, 2020 expenses would have been 10% lower than 2019 expenses.
All that resulted in a stable adjusted EBITDA margin in Q4 2020 in the annual comparison due to the good performance of Integrated Logistics, but also due to the adaptation of Automotive Logistics to the new scenario. On the following slide, we can see on the left-hand graph the reconciliation of net income in Q4 2020, starting with EBITDA and the comparison with Q4 2019 to the right. The highlight goes to a reduction in depreciation and amortization in the quarter, coupled with lower financial result and reversal of the equity income, which was zero in Q4 2020, due mainly to non-recurring expenses and reduced imports of vehicles, which are handled and stored by the joint venture GDL. All that resulted in a net income of BRL 28.8 million in Q4 2020, down 33% compared with the fourth quarter of 2019.
On the next slide, we can see the breakdown of our cash flow. On the top at the left, we highlight a positive free cash flow of BRL 32.7 million in Q4 2020, positively influenced by a continued good performance of the company's operations, as well as by PIS/COFINS tax credits used in the amount of BRL 13.5 million in the quarter. It is also important to mention that net cash generated by investment activities in Q4 2020 was positively impacted by the BRL 2 million in dividends received from the GDL joint venture, BRL 7 million for the full year 2020, and by the Q4 2020 CapEx, which totaled BRL 5.7 million. On the right, we can see that the company's cash to cash cycle, the orange line, which remains stable at 38 days, back to pre-pandemic levels.
On the same chart, it is possible to appreciate that the company's free cash flow, the bars, has been predominantly positive for the last eight quarters. On the bottom chart, we can observe that because the company generates cash, our cash level has been higher than our gross debt for the past three quarters, resulting in a capital structure that is rather deleveraged. We have BRL 66.6 million of net cash in Q4 2020. Let's go to the next and last slide. Here we see on the top left-hand corner chart that the company's ROIC was 16.2% in Q4 2020, lower quarter-on-quarter, mainly affected by the impact of the coronavirus pandemic on the Automotive Logistics division starting March 2020. If we were to annualize the operational results after taxes in the fourth quarter, the ROIC would be 26.2%, a reflex of the recent improvement in our results.
On the right, we see the performance of our share, TGMA3, vis-à-vis the Ibovespa index. Tegma's negative share performance this year reflects, in our view, the uncertainties regarding production capacity of the Automotive market. Although we have shown our strong resilience and our ability to protect our cash, as well as our ability to adapt to more adverse scenarios. On the bottom left-hand corner graph, we can see the company's multiples and how Tegma has been traded in recent quarters. Recent multiples are lower than in 2019, mainly due to the same uncertainties explained before. With that, I would like to thank you for your attention on behalf of Tegma and begin the Q&A session. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. If you have a question, please press star one on your touch-tone phone now. If at any time you would like to remove your question from the queue, please dial star two. Questions can also be sent via webcast. Please hold as we collect the questions. Please hold as we collect the questions. We start with the first question. Fernanda Recchia with BTG Pactual, please go ahead.
Hello, good afternoon. Thank you for taking my question. I actually have two questions. The first is, you mentioned an inflow of about BRL 1 million in Fastline, and I would like to understand the nature of this investment and whether you're going to have other partners on board. The second question is, what has been the impact of increased number in COVID cases on the Automotive Logistics division? I'd like to understand, what is the current situation in the beginning of 2021?
I guess that it will all depend on how long the second wave of COVID lasts, but what would be your expectation for 2021?
Hello, Fernanda. This is Ramón speaking. I will answer your first question about Fastline, and then Marcos will try to answer your second question. To explain BRL 1.1 million for the integration of the new company, just to put things into context, Fastline is a new company controlled by Tegma, and it works initially in the transportation of used vehicles. For a while, we have been mentioning that we've been implementing that. This association with a businessman in the industry who's very well-seasoned happened to accelerate this process. It brings new clients and new suppliers. The suppliers are the transportation companies. This partner of ours, he has 13% of Fastline.
He brought some equipment to the deal, transportation equipment used for the collection of vehicles. In a nutshell, this is the continuity of a process that we began a while ago and which is developing very positively. In other words, our operation in the used vehicle market. Now I'll turn the floor to Marcos.
Hello, Fernanda. How are you? Well, how do we see what we can call the second COVID-19 wave? We had many lessons learned last year, starting in March. We are completing a year of this. We are caring for our people. We're maintaining all of the measures adopted. As we mentioned in the presentation, we did have some cases of COVID-19, and we monitor the cases on a weekly basis with our physician, and we haven't had any serious case. We will continue to maintain this kind of procedure looking forward.
We are already doing it. As for our operational staff, we are reinforcing the protective measures because in the second wave, it seems that the contamination is more aggressive and fast. We are reinforcing our protective measures. Number one, we have to care for our people. With all of this dynamic and the different news popping up here and there, every day we hear something new, particularly regarding the impacts of COVID. We are maintaining a close relationship with our service providers, the carriers, and particularly with our clients. I think that this strategy worked really well last year. Even with a reduction in revenue, we were able to maintain some indicators higher than we had expected initially. We are paying attention. We are keeping a close contact with both suppliers and clients.
A good piece of news, we proved what I mentioned last year, the fact that Tegma is a strong company with muscles, but also with flexibility. We were able to show this, providing an excellent level of service and dealing with a market that was resuming, particularly in September. We realized that caring for our people, keeping a close contact with our main suppliers and clients, and with this kind of operating competence and flexibility, we are prepared for whatever is coming in the future. I guess the main challenge is knowing what will come in the future. We don't really know how big will be the impact of the second wave. We are paying a lot of attention, and we are prepared to deal with this, just like we did last year.
Another point that brings a certain uncertainty is the shortage of some pieces and parts. This has impacted some production lines. This is a global phenomenon. We have seen the effect of this abroad. We believe that in the coming months, in the next three to four months, the supply will be regularized. Because of the pandemic, since the volumes are decelerating a bit, this will give some time for the supply chain to adapt. Because the first time, it was a blow. Everybody was working with just in time, and now everybody had to adapt to this new scenario, which is unpredictable. Considering these two big variables, we are ready. We are prepared to face the big challenges ahead.
Perfect. Thank you.
Our next question comes from Luiz Peçanha with Safra. Safra Bank. Mr. Peçanha , you have to unmute your mic, please.
Sorry, my mic was muted. Hello, everyone. My question has to do with GDL results. The company has been giving good results in recent quarters until it posted a poor result. I'd like to understand what's happening at GDL, and is there any negative effect from currency depreciation, perhaps reduction in vehicle imports? Could you give us some color on the GDL operation?
Hello, this is Ramón speaking. To begin, I would like to highlight that the year at GDL was exceptional. It was a very good year. We received a significant dividend payout from GDL. In the fourth quarter, yes, it was slightly influenced by a reduction in the handling of imported vehicles. This is not the main reason explaining a reduced result. The main reason were provisions made and some expenses that were posted related to a restructuring of GDL management.
We had a change in the management of GDL, and also the recording of a bonus that was not provisioned for. This was a bonus paid to employees because of their excellent performance, way above what we had budgeted. So that ended up impacting the result of the company. But the fundamentals of the company remain solid and strong. After the decision in 2018 to create this joint venture, we were able to turn an operation that was deficient in that company into an operation which is posting very positive results. We are very happy with how the businesses are being conducted there.
Okay, thank you. If I may ask a second question. Regarding the evolution of the company's market share, the company has been losing market share in recent quarters compared to previous years, and I would like to understand what is the company's expectation regarding this. Is this a one-time off phenomenon, or is the market share going to be regained, or can this be considered the new market share level for Tegma?
Luiz, this is Marcos. Let me put things into context before I answer your question directly. Tegma's market share in the automotive market depends strictly on the performance of the company's main client. We can see an important change in the consumption habit of vehicles in Brazil. Brazilians prefer SUVs in detriment of smaller vehicles. This involves average ticket, return, et cetera. That leads to a change in mix, favoring brands that are better positioned in the SUV segment.
There are SUVs that have a backlog of delivery. In 2020, Fiat, Volkswagen, and Hyundai were the car makers that gained more market share, and they have a low to medium exposure. GM and Toyota, our two main clients, they do not have SUVs that are broadly accepted by the market, and consequently, they are losing market share at this point. Although they do have promising plans such as the Corolla Cross. Our market share relies a lot more on the profile and dynamics of our top clients. As we mentioned in the presentation, we did not lose one single contract. All of our contracts remain in place. Even the Ford Motor contract to transport the vehicles that they sell locally. There's the impact of the SUV, but we believe that in the mid to long- term, this will no longer be an impact. We don't see this as a point of attention and a point of concern.
Oh, okay. Thank you very much.
Now we have a question by Alexandre Kogake with Eleven.
Hello, good afternoon. I would like to ask about the warehousing client that left. What was the main reason for them to leave? Did they choose to have their own operation? Did they switch to another supplier that offers Integrated Logistics, another warehouse? What was the reason for the loss of this client? How do you see the rest of the division performance looking forward? Thank you.
Alexandre, this is Marcos. This client in particular. This product, warehousing, as was the case of this contract. This was a contract that in our strategy did not add any added value. It was a totally commoditized service.
The margins were very narrow, although it did bring an important revenue. But looking at the bottom line, the margins were very narrow. We went through an intense negotiation process with the client and realized that we would not be able to meet the client's expectations with that level of price and margin. In total agreement with us, the client started a bidding process. To give you an idea of how commoditized this service is, 12 companies were bidding. It is a commodity price. It is a commodity process. In this type of strategy, we preferred to exit the contract. We took advantage of something that we have been talking about last year to reinforce the positioning of Integrated Logistics as a big differential of Tegma. In other words, we do not want to sell shipping or warehousing.
Our strategy is based on a blue ocean, is to create customized solutions that can add value. Yes, there will be competitors, but not 12 competitors, and this is how we want to be positioned. Of course, that raises the need for additional competencies, et cetera. Since we lost this contract, which was quite significant for warehousing, when we look at the revenue overall, it has a very small representation in terms of revenue and impact. That was not significant. To answer the second part of your question. How do we see this looking forward? We took advantage of this opportunity to change the mindset.
I do not know if you participated in previous conference calls, but the site that we had had a limited growth capacity, and it had a technical characteristic in terms of height that did not give us a good ratio, cubic meter per square meter. We changed to another site. We wanted to find a logistics condominium, maintaining our strategy of being asset light, but in a very well-located condominium with a very high-quality warehouse, which will allow us to grow, to have flexibility. This is fundamental, Alexandre, because a cost that is very difficult to control in a warehouse is idleness. When you have modules, you can manage your idle time better. We believe that although this was bad news, we can make something very good out of it.
May I ask a follow-up question? You cannot say the name of the client, but can you mention the sector where this client operated, maybe? If you can give us a little more color so that we can understand if it is just some sectors that operate only with warehousing logistics and not Integrated Logistics.
Well, Alexandre, there was a bidding process. This client was Nestlé. It was a contract with Nestlé. This was a five-year contract, so we went through a negotiation process, as I explained. The client was Nestlé and their coffee division. There was the Nespresso and Dolce Gusto lines, and they were very successful in sales during Black Friday and even during the pandemic with the fact that everyone is staying home and drinking coffee. But at the end of the day, the margin was very low.
Sometimes with increased volumes, our results would be even more impacted given the limited capacity of the warehouse that we had. If you want to know, that was Nestlé and their coffee business.
Thank you very much. Have a good day, you all.
We do not have any questions to be asked live. If you wish to proceed with the webcast questions, please go ahead.
Yes, we did get some questions here via the webcast. There is one from a shareholder, João Carlos Xavier. "Dear all, thank you for the opportunity. I would like to know about the company's contracts in Integrated Logistics. Any perspective of new contracts?" We also have another question which is related to this by [Gustavo Romito]. "What is the company's expectation for Integrated Logistics in 2021 if we expect to maintain the margin?" He also asks about new contracts.
Putting these two questions together. To begin with, as explained previously, Integrated Logistics to us is a big growth avenue. The company has been investing a lot of efforts for us to achieve the expected and desired growth. Also to revitalize our project area, making investments in the commercial area. We have a significant pipeline of projects. We mentioned the warehousing operation that had a below-average profitability, and we believe that this should have a positive impact on our consolidated margin. On the other hand, we have to remember that in 2020, we had some exceptional volumes for the industrial logistics business, and that allowed us a better cost dilution for this division. In a nutshell, we continue to work hard on new contracts.
We invest a lot of energy and time in this, and we expect that in the coming months, we are going to have good news to disclose to everyone. This is Ramón again. There is another question that we received via the webcast. I am going to read it, and Marcos is going to answer. The question is: Could you elaborate on the impact of Ford Motor's decision on Tegma's results in the mid to long- term?
Regarding Ford Motor, that was indeed a surprising piece of news at the beginning of the year. When a large car maker like Ford decides to end their manufacturing production, it does have an impact on the whole chain. On suppliers, on transportation companies, et cetera. Ford is a Tegma client. We provide Automotive Logistics services to them, to their imported and locally manufactured products.
We had a yard close to Ford's facility in Camaçari in the state of Bahia. Our yard was very close to the plant. Of course, as soon as the volumes were ended there, we demobilized that yard. Now we are assessing whether we are going to be using it for another operation, perhaps for Integrated Logistics, since there is an important petrochemical hub there. Regarding an impact on volumes. How do we see this? This volume is going to be absorbed in the mid to long- term. It will really depend on the recovery of the market, but it will be redistributed to other car makers. Since Tegma serves almost 100% of the car manufacturers in Brazil, this volume will be replaced by another car maker. Yes, there is a natural impact in the short- term.
But in the mid-term, we believe that the volume will be redistributed to other car manufacturers because other car manufacturers do produce similar vehicles to what Ford manufactured in Camaçari. This is a point of attention, but in the mid-term, we believe that this is going to be redistributed to the other car manufacturers.
This is Ramón again. We have two questions related to diesel. The questions are related to how diesel prices can put pressure on our costs, how we deal with price oscillations, and what the impact can be in the first quarter of 2021. Well, I would start answering saying that, yes, indeed, this is in our agenda. We have felt pressure from our suppliers to negotiate tariffs.
We are in the middle of this process of negotiation, and our goal is that this adjustment that probably will come, will be a pass-through, thus minimizing the impact on Tegma. I cannot do any simulations or give you information regarding possible impact on the Automotive Logistics division in Q1 2021. But we are working hard to minimize this impact so that it will be as much pass-through as possible for us.
As a reminder, if you want to ask a question, please dial star one. If you want to remove your question from the queue, you just need to press star two. Please hold. Please hold as we wait for more questions. As there are no more questions, I now turn the floor to Mr. Marcos Medeiros to proceed with his closing statements. Please go ahead, sir.
Well, to end, I would like to thank all of you for participating. You asked important questions that also make us think. I would like to say that Tegma's management is very confident, particularly based on what we learned last year. A crisis brings pain and sadness, but it brought to us at Tegma, a lot of learning, a lot of lessons learned. As I mentioned, we have been able to prove our thesis. We are leaving, at least this first COVID wave, stronger, more resilient, showing the relevance of Integrated Logistics and proving that our diversification strategy is correct.
And also stressing on the operational capacity of our Automotive Logistics division that was able to adapt to a volume that dropped almost 80%, but then a quarter later, it had recovered a good deal of that, maintaining a high level of service. Actually, we are recognized by our clients in both Automotive and Integrated Logistics by our operational excellence.
Another point that gives us confidence that we can live through this moment, which is an adverse scenario, not just for Tegma, but for everyone, which is the automation of processes. We were able to be more efficient. Just to give you a number, in administration, we implemented 32 process automation, administrative process automation, and that reduces costs. This was done not only during the crisis, but this was done way back when. And we agreed that we would not cut costs and cut expenses because that is easy to do. What we did was we managed our expenses and costs. And now everything, all the fruit that we are reaping can work for us in the future. I talked about administrative processes, but to reinforce in our operations, which are fundamental for our business, we had a significant productivity gain.
Unfortunately, at the time, we had to lay off some people, particularly some operational staff. But even in November and December, when volumes had a significant resumption, we were able to serve those volumes and hiring back just a part of the headcount we had let go. That means that our productivity gain is real. To end, I would like to say that we are ready, we are paying attention, but we are confident that we will be able to live through this, and confident that very soon we are going to have good news. Thank you very much. Have a good end of day.
Thank you. 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.