Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call for the earnings for Q1 2021 for Fras-le SA. We have with us Mr. Sergio Carvalho, COO of the Auto Parts division of Randon and Chairman, CEO of Fras-le; Hemerson Fernando De Souza, Director for Investor Relations at Fras-le; Anderson Pontalti, General Director of Fras-le and of the IR team. We inform to all the participants that the presentation to be made is available for download on our website, ri.fras le.com.br. [Operator Instructions]

Before proceeding, we would like to clarify that any declarations that may be made during this conference call concerning forward-looking projections and operational and financial goals of the company are based on beliefs and assumptions of the company's Board and as well as on information currently available to the company. Forward-looking statements are not guarantees of performance and involve risks, uncertainties. These refer to forward-looking events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future results of the company and may lead to results that will differ materially from those expressed in such forward-looking statements.

Now I'd like to pass the floor to Mr. Sergio, who will begin the presentation. Sir, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you very much, operator. Good morning to all. Welcome to the conference call of Fras-le for the earnings of Q1 2021. As mentioned, Hemerson De Souza and I will be making the presentation. We have also with us, Anderson Pontalti, our General Director of Fras-le and all the IR team.

We closed 2020 being very optimistic in relation to 2021. But we knew that the pandemic and aspects linked to supply chain and inflation would have a strong impact during this year, maybe not as strong as we are seeing. In spite of all the adversities, the year began in a very positive way, enabling Fras-le to have a historical quarter to the market. Last year, we closed what we call cycle 1 of the expansion of the company, where we went through a sequence of acquisitions that began in 2017 and today are helping Fras-le to perform its role of powerhouse in auto parts -- aftermarket auto parts. It's important to stress that each M&A project is unique. And some need more time, attention and dedication than others in order to have their best performance. And Q1 2021 was marked by a booming market, a strong market, but also the -- an integration between all the units like wheels, all going in the same direction, turning together and going in the same direction, which shows that we're on the right track. In this sense, I would like to say here that our thanks to all the people in the Fras-le universe that daily do their best for these wheels to turn. Thank you very much to all employees and all who work with us.

Now Slide #3, please. The company is in constant evolution, always trying to be a leader in all the fronts. And in this sense, we would like to share with you some highlights. Fras-le Asia received in the month of March, an important recognition in China. The unit is among the 10 best suppliers of Huajing one of the largest Chinese producers of axles. It is the only supplier of friction material to receive this recognition. The plant is installed in China since 2009 and is responsible for brake linings and also brake pads for commercial vehicles. It also exports the products to Europe, Americas and countries in Asia Pacific.

The second highlight is for our public meeting with the support of APIMEC called Fras-le Universe, which happened in November 2020 and was named 1 of the 10 best evaluated companies by APIMEC. We thank the partnership of 19 years with -- by APIMEC and the public recognition that really was shown to us.

I'd like to mention also society Technological Center Randon Ltda has published to the market on April 28, 2021, the management council of Fras-le approved the consolidation of the society of CTR with the participation of Randon. CTR, just to remind you, was founded in 2009 and concentrated in the same structure assets from Fras-le and Randon. The formalization of the society allowed CTR to explore new markets and to grow in a sustainable way, expanding the offer of products, beyond Randon companies as we already have today, but it will grow even further. Apart from this, it also takes care of the governance of these assets. The transaction will give conditions to the CTR to evolve as the unique research center in Latin America with the capacity to attract clients and to be recognized by its excellence in services and execution.

I must talk about the worsening of the pandemic COVID-19. And please, let's go on to Slide #4. Since the beginning of the pandemic, Fras-le has been adopting several measures to protect the health of its employees and families, which is a priority for the company, apart from ensuring the continuity of the operations and contributing with the local economy and global economy. In this sense, logistics, maintenance, purchasing and materials scheduling at Fras-le really understood the critical moments of the pandemic in the month of March and reviewed inventory, frequency of replenishment and also the programming of industrial gases, and we're able to help White Martins in what we call cylinders for life, supplying oxygen cylinders for use in hospitals, a simple action that may save many lives.

And to conclude, I would like to invite you all for the event we will have on June 1, 2021 when Fras-le, together with Randon companies, will present the strategic pillars and public commitments for the next few years in relation to ESG of the company. Please sign the mailing list through in our website to receive more information about this event.

Now I invite Hemerson to begin the presentation on the earnings. Hemerson, please, you may proceed.

[Hemerson de Souza, executive]

Thank you, Sergio. Good morning to all those participating in this conference call. I invite you all to begin looking at Slide #5. During 2021, we began in a vibrant way at Fras-le. We reached a record net -- consolidated net revenue in the company, which was boosted by 3 main factors: first, the booming market; second, favorable exchange rate for exports, and finally, the acquisition of Nakata, which was not in the comparative base of 2020. Some of these factors allowed us to reach a growth of more than 80% when compared to the same period of the previous year. Although with all the difficulties and uncertainties promoted by the pandemic, also a scenario of inflation and lack of inputs, with a good planning and engaged teams, we were able to maintain our margins and this result is being built in the last year's with elements of productivity, cost reduction and synergies among the units.

As Sergio mentioned, I would also like to thank and attribute the results of this quarter to the management and the engaged teams that have been working on many projects, allowing Fras-le to continue to grow, and with it all the people who are part of the Fras-le universe.

Now Slide #6. Fras-le is living in a very positive times with excellent results from the investments made and reaching new levels of revenue, as already mentioned. The growth of sales has a direct relation with the booming market. At the end of March, in the second wave of lockdowns in Brazil, this resulted in a small drop, deacceleration, especially in items linked to light line, the automobiles. But the performance of Q1, '21 was not affected. The acquisitions during the last few years expanded the sales of the families of products that are not friction. And in Q1 '21, for the first time, the sum of families of components for brake systems and suspension, powertrain components were superior to 50% of the net revenue of the company. Thus surpassing the traditional area in the company. These are strategic movements and have been planned and designed for a long time by the company. Today, we can say that Fras-le is a powerhouse for aftermarket auto parts with quality -- premium quality products, important and iconic brands in its portfolio and the largest manufacturer of friction materials in Latin America and one of the world leaders.

Now Slide #7. Talking about our business model, which is more and more diversified and shielded and with diversified characteristics, both in markets as well as in the portfolio of products. And this allows us to be resilient in adverse scenarios. In Q1 '21, with the market -- with the domestic market booming, this allowed the company to have volumes that are greater than in Q1 '20. And in the second wave of lockdowns in March, we did not feel the impact on our business, as already mentioned. Now in the export market, both exports and revenues from the units abroad had growth when compared to the same quarter of the previous year. And this progress is not only due to the exchange rate, which was 22% higher, but also in comparison between quarters with a good recovery of volumes. Now talking about the mix between aftermarket and OEMS. The current model of the company, the revenue from the aftermarket represents a little more than 88%. In Q1 '21, we were able to mitigate the risks of lack of materials, and we made -- we advanced in our market share due to the availability of some of our product lines. The market of OEMs represents 12% of the revenue. And since the business of Fras-le is linked to the production of heavy vehicles, we continue in a positive line. At Fras-le, the growth is slow -- is smaller in volumes when compared to the aftermarket. The growth today is more robust due to exports and the exchange rate.

The company, on Slide 8, here, you can see the evolution of EBITDA and net revenue. And we had many actions, and we were alert to everything that happened in order to mitigate the impacts of the pandemic. In general, the results are good, and we made negotiations with suppliers, and also, we worked internally on productivity and efficiency. Thus, we arrived at Q1 '21 with an EBITDA of BRL 283.1 million and an EBITDA margin of 19.6%. Just a small correction. Our EBITDA is BRL 125 million. The company made evaluations of the impairment of its nonfinancial assets and during the closing of 2020, identified impairment in the unit Armetal and Fanacif totaling BRL 34.4 million. But in March 2021, we reviewed these calculations and cash flow and we identified a reversal of impairment in Fanacif worth BRL 4.2 million. This fact was considered as nonrecurring resulting in an adjusted EBITDA of BRL 121.3 million with an EBITDA margin -- adjusted EBITDA margin of 18.9%, an evolution of 5.4 percentage points in relation to the previous year. The net profit of the quarter was BRL 60.5 million, representing a net margin of 9.4%. Also, the exchange rate was appraised by 22.8% in relation to the local currency. This was positive for Fras-le and also -- but also caused some exposure in the acquisition of Nakata, which has a great volume of imports, which gave us a natural hedge in terms of the U.S. dollar.

Now on Slide #9, let's talk about cash flow. As you know, we went through a strong cycle of expansion in the last few years. In 2020, with the acquisition of Nakata, we expanded the need for working capital. In a managerial way, we analyzed the net revenue of Nakata to calculate the NCG in days. And the number is -- fell from 101 to 87 days in March 2021. Apart from this, the exchange rate -- the exchange rate had a direct influence on the accounts of working capital of the operations outside Brazil. And the devaluation of the U.S. currency in relation to the Brazilian currency showed a strong increment in the balances of operations abroad. With this, the need for working capital was BRL 702.7 million in Q1.

Here, I would like to call Sergio to evaluate our expectations for the next year. Sergio, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. Now talking a little about the future. The next quarters, some points are clear in the next -- but the next quarters really there will be some uncertainties. We still have the sanitary crisis due to COVID-19, and our concern is on the health and well-being of our employees and their families as well as the communities where we are present. Right at this moment brings uncertainties and impacts in all the market, our clients, users and also on demand, whether it be by the drop in income of the families or locked, compulsory lockdowns. Fras-le is alert to the movements of the market and also the booming market, which makes us optimistic, but also makes -- has this concern. Right now, all the efforts are to mitigate the risk of lack of raw materials and growing inflow -- inflation that we are seeing.

I would also like to say that I'm optimistic, because we noticed in the horizon many possibilities and a pipeline of projects that will bring a brilliant future to Fras-le. I'd like to be able to share more information, but right now, what I can tell you is that we are preparing ourselves for the future, and soon, we will announce our first product of the line Fras-le smart composites. Apart from this, I would like to share that the synergies with our controlled Nakata have -- are progressing in a very positive way. And as soon as we have more details, we will communicate them in our regular meetings.

Now in relation to these synergies, as we communicated to the market, we transferred the shock absorber plant from Diadema to Extrema, Minas Gerais. In the second semester, we will have the inauguration of this new plant.

Our presentation is concluded in the webcasting, you will find available the slides presented here as well as the support material that gives more details about the financial indicators. We are available for any clarifications. I would like to thank you for participating in this conference call. And now we would like to begin the Q&A session, where Anderson Pontalti, Hemerson De Souza and I will be available to answer questions. Thank you. Operator, we may proceed.

[Operator]

[Operator Instructions] We have a question that came by e-mail yesterday, and it is for Sergio. Leandro is an investor -- an individual investor. He congratulates us for the results and has a question for Sergio. Congratulating the first cycle of expansion, the acquisitions, he would like to know when cycle 2 of expansion begins. Sergio?

[Sergio Lisbão de Carvalho, executive]

Okay, I will answer. Thank you, Leandro, for the question. Thank you for your comments. Leandro, the results of the company, as we mentioned, are really positive. As we mentioned, we made many transactions, good transactions and we're seeing the results, but we have to integrate the acquisitions. So the last transaction, the purchase of Nakata was a large acquisition, and we are very alert to do a good job of integration of this acquisition on Nakata, to develop synergies.

[Hemerson de Souza, executive]

Sergio had some connection problems. We're doing good progress. We're dedicated to obtain synergies from Nakata. So this has been the work of our team to deliver what we had promised for this acquisition. So we -- soon we will be able to share these points with you. So, first, we want to deliver what we planned, the acquisitions. We don't have an agenda. We are analyzing projects. If one of these projects really is able to bring us what we want, we will share the details with the investors. But we are very happy to deliver what we promised in these projects to extract results. Thank you for the question, Leandro.

[Operator]

[Operator Instructions] We have a question from the webcast, [ André Pratis ]. We can see that this mix of 65% of sales in the domestic market. Do you believe exports -- you can increase exports?

[Sergio Lisbão de Carvalho, executive]

I will pass the floor to Anderson.

[Anderson Pontalti, executive]

Good morning. We're very happy to announce that we had a very positive quarter. This mix is due to the acquisition of Nakata. They are very strong in the domestic market. And today, we have 65% of the products in the domestic market due to the Nakata acquisition. In the past, we had 50% only domestic market. In the short term, we see also many incentives in China and the U.S. that may bring additional sales to us, because it seems that the U.S. and China have already overcome the pandemic. In the short term, we can have more exposure in the export market. And in the long term, yes, we should go back to previous numbers. Supplementing, Andre, we have mature markets like the U.S. They are very good markets for us to expand our sales. Also in South America, we're very optimistic because our exposure to exports will grow, although the numbers changed with the acquisition of Nakata. I believe we should have 60% local market and 40% export market in the future.

[Operator]

Another question from [ Elisa Torrani ]. How -- what is your -- what do you believe will be the margin in the next quarters with a higher cost of raw materials?

[Hemerson de Souza, executive]

I will begin answering and then Pontalti will continue. This is the main concern, not only inflation and higher prices in raw materials, and manufacturing costs, but also the availability of some raw materials. We haven't seen such problems in the last decade. And we have been very agile in negotiating with our vendors, our suppliers in advance and looking for alternatives to supply demand, if we have difficulties with one vendor or another and to win internal productivity to be able to have gains and transfer these extra costs to the price of our products. So this is always something difficult to pass on the price increases of raw materials to the price of our products. So we have to look at the market, the competitors. Now in the export market, maybe Pontalti would like to supplement.

[Anderson Pontalti, executive]

Thank you, Hemerson. Hemerson summarized well the situation. We still have inflation. We don't see a stability of prices yet, the price of commodities. We see record prices in commodities in the supply chain, but our ability to increase our prices is based on our purchasing power. In the heavy line, we depend on the agricultural market and construction markets. If this market continues to do well as it is now, we have a greater ability to increase our prices. But in other parts, this is different. The buying power of Brazilians dropped 5%. So we have difficulties in increasing prices in some lines both in Fras-le and also in all the automotive segment.

[Operator]

We have another question, [ Angelo Santos ]. Congratulations for the results and the excellent work. Do we expect more gains in synergy with the acquisition of Nakata or have they ended?

[Sergio Lisbão de Carvalho, executive]

Thank you, Angelo, for your question. In fact, we're only beginning -- we are only beginning to record the synergies with the acquisition of Nakata. This should take at least a year to have all the synergies mapped. And I can tell you, that we are very, very optimistic with the forecast we have in integration for both sides, gains for both sides. During the acquisition of the company, we had expectations about synergies and our expectations are very good, and we believe we will find more. As we have more detailed granularity of the -- with these data, we will definitely share this with the market, so these synergies can also be captured by you and your evaluations about our company. So it will be a great pleasure to share them with you. We're only beginning to map the synergies.

[Operator]

We have 1 more question. Andre. Could you share the company's vision about investments in corporate venture capital? How is your relationship with Randon?

[Sergio Lisbão de Carvalho, executive]

Anderson was part of the committee that evaluates these investments, he will answer the question.

[Anderson Pontalti, executive]

Thank you, Andre, for the question. We -- right now, this is independent. We have no allocation of capital of Fras-le in venture. But venture was born to boost the efforts of the Randon company and capture non-explored gains. What I can tell you is that all the sister companies of Randon, including Fras-le, we have a governance committee. I am part of this committee, and we evaluate all projects that come up in order to have synergies and capture results from the units. So it's operational, not financial yet in the future. So we are creating products and improving the company situation in this type of investment that is different from the automotive industry. So what we have done is relevant, there are clear investments with great potential. They will be for synergies, and they will be captured by Fras-le in the next few years.

[Operator]

Since there are no more questions, I'd like to pass the floor to Mr. Sergio for his final comments. Mr. Sergio, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Once again, I would like to thank all for the participation. Leandro, sorry, I had a problem during the connection, but I'm sure that your question was answered by Hemerson. We are available for any clarifications that you may need, please get in touch directly with our Investor Relations departments for these clarifications. Thank you, and we wish you a good day.

[Operator]

Thank you. The conference call for earnings for Q1 2021 is concluded. Please disconnect your lines, and we wish you a good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]