Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2022-Q1

[Jessica Cantele, executive]

Good morning. Welcome to our conference call at Fras-le for the results. I would like to make some announcements before we begin. This conference call is being recorded and will be made available at our website, ri.frasle.com. We have simultaneous translation in progress. You must click on interpretation at the bottom of the screen represented by a globe. At the end of the presentation, there will be a Q&A session. Questions may be made by audio or in writing. We will give you more information before beginning the Q&A session.

We would like to clarify that the declarations made in this presentation concerning the business perspectives of Fras-le projections and growth potential of the company are based on forecasts and are based on the expectations of the management concerning the future of the company. These expectations are highly dependent on changes in the market and also the performance of the sector and international markets, thus, they may suffer changes.

Now I'd like to pass the floor to our Chairman and CEO, Mr. Sergio de Carvalho, who will begin the presentation for Q1 2022.

[Sergio Lisbão de Carvalho, executive]

Thank you, Jessica. I'd like to welcome everyone to our conference call for earnings of Fras-le for Q1 2022. Hemerson de Souza, our Director for Investor Relations M&A, and myself will make this presentation with the support of Jessica and all our Investor Relations team. Please, next slide.

We began the year with good news with good results, and it's always good to begin this way. When we look at our markets, we have, in general, a positive demand with a highlight for exports and OEMs. In the domestic market, an indicator that is very relevant for workshops, which tells us aftermarket sales had a growth of 2.5% when compared to last year. This means this means more usage of parts in garages and workshops.

The portfolios are firm. They are positive. They are stronger, especially in friction material and also disc brakes and also components for suspension, vehicle suspension. And finally, with all the loss of buying power of the individuals, this has resulted in a search for cheaper products, lower-priced products. We noticed this in the middle of last year and it continues.

Now talking about the results, we would like to say that our net revenue was 10% higher than the revenue in Q1 2021 and approximately 3% above the last quarter, Q4 2021. EBITDA margin is good, recurrent 15%, basically operational. We have no effects from nonrecurrent events that are significant. We had also the appraisal of the local currency real in relation to the U.S. dollar. Especially in March, the average exchange rate reached BRL 4.97 to a dollar, and this has a direct impact on our margins and affects our imports.

We have a natural hedge, but the benefit of this, we will only see in the next few months as the benefits from this change in the dollar exchange rate will be analyzed with products in inventory. All these results are happening in an environment where we have foreseen some problems, but we hadn't foreseen the Omicron. We hadn't foreseen the war in the Ukraine.

And just to give you some color about Omicron, as we all know, it had a relevant impact on the population, but in our manufacturing environment with the actions for protection, each person who tested positive was left 3 to 4 days at home before going back to work. So we have a lot of absenteeism. And even with this, we have good, robust results.

Now talking about our operations, with emphasis here, the lockdown in China, certainly, is one of our greatest concerns. Our operation in China, we were forced to stop the plant for 10 days in March. We're back. The plant is working, but we have difficulties in obtaining raw materials because we know that the lockdown in China is very intense, and we're concerned. But this lockdown in China does not impact only our operation. It impacts all the supply chain, all the worldwide supply chain.

This is being felt by many companies. And our planning people, supply people have been very vigilant in following, anticipating things so we can mitigate any impact in our production. We have excellent news coming from Asia, India, where our unit AFF was certified by Tata. Tata is the largest manufacturer of trucks in India with 50% of the Indian market, and we're beginning the supply to Tata. So this was a great victory and supplying to Tata. This opens the doors to the rest of the market. We have other projects that are very relevant in India, and we're developing the supply of friction materials to them also.

In Brazil, we began important projects in Jurid, Controil for OEMs, and we have a project that is very relevant at Fras-le, which is the integration of logistics and distribution in Extrema in the state of Minas Gerais. In the city of Extrema, we have Nakata with the production of shock absorbers and a giant distribution center for Nakata.

In the next few months, we are transferring all the distribution of Fras-le, Controil and Fremax to this distribution center with the exception of the south of the country where we will distribute from the current distribution centers. This project is very important and a fundamental part of the integration to obtain synergies integrating Nakata.

Now I'd like to pass the floor to Hemerson, and he will continue the presentation.

[Hemerson de Souza, executive]

Thank you, Sergio. Good morning to all who are with us this conference call for Q1. I would like to begin talking about our join concluding the follow-on on April 7, last month and a re-IPO. We were very happy. We concluded one cycle and we began another. So these resources will help us to continue our expansion projects, and this makes us very happy. Obviously, the resources that came from this re-IPO, BRL 630 million will be used for expansion with or organic growth, increase in capacity and also some technologies, technologies we have in the pipeline.

Some projects is Smart Composites, which are very promising for Fras-le in the near future. I remember that we issued 52.5 million shares. And during the presentation, I will touch upon some other points, too.

The second highlight is Nakata. Sergio mentioned the logistics, but Nakata, one many points in the most important survey, it's called brands and workshops, reinforcing our quality and the support we give to garages and workshops. Nakata is a brand and makes a great difference in the market for us. Many times, it is top of mind, first or second, very robust with the product it offers. For example, for shock absorbers and suspension items.

Next slide, please. Here, let's talk about net revenue. Sergio mentioned, we grew 10% in Q1 in relation to the previous one. And this is very relevant. And we know that we had inflation, strong inflation and inflation continues in 2022. But we had a fantastic performance when we compare with the track record that we had at the end of the year, 3% growth.

It was a challenging quarter mentioned by Sergio, COVID in January. Then we have the war between Ukraine and Russia, which brings some difficulties in our operations. But we can, with our diversified model due to the concentration in aftermarket parts, 90% is for aftermarket. We have resilience in...

Next chart. Here, the distribution of this revenue. If we evaluate, we see the growth in the export market. We have a relevant position in many markets outside Brazil, and they continue to have a good demand. In some lines, we even have difficulty in supplying, for example, the heavy line for friction, disc brakes. Today, we have 100% capacity being sold. And this brings us some difficulty to supply all that the clients want. And we grew more than 25% in the export market. We'd like to remind you that our configuration -- business configuration this quarter is 60% for the light line and 40% for the heavy line due to the growth in exports.

86% we sold as aftermarket parts. And so this is for this quarter, Fras-le was always very important aftermarket parts, and this continues. Another important point in the export market. We sell to many countries, and this is -- this makes the company a robust company. This makes us different and helps us with the revenue. Next chart.

Now I would like to talk about margin. Our EBITDA margin, we closed BRL 106 million, a margin of 15%, very healthy, very positive for our business. When we compare with the last quarter, we had some different things. We had some nonrecurring events. But in the quarter, first quarter 2021 was very strong. The exchange rate to close to 550. And in Q1, the exchange rate was lower, but we had a strong demand when we closed 2020 with difficulties in delivering. And we began to solve this in the beginning of 2022. And we -- and also, we anticipated ourselves for the increases in raw material prices.

So we had good margins this year, although we didn't -- I won't say -- so we were able to increase prices to recover margins in 2021. But this year, we were not able to anticipate. So this small drop in relative terms is explained by this today, the cost is higher in all the lines. We don't have space to -- we were not able to anticipate like we did last year.

Net results, we have a net-net margin of 4% in this quarter in relation to 9.4% in 2021, basically affected by the exchange rate. Our expenses increased. Remembering that we have operations in many parts of the world, there was an impact in the operations in Argentina, interest rates, too. But as the U.S. currency becomes more stable, when we see a recovery, this data will be favorable for us.

Next chart. Let's talk about the follow-on. So I would like to highlight the main proposals. With the management team, we brought resources to continue our expansion. But we had also another objective, which was to look for greater liquidity for our papers. And we -- so we had a difficult week doing this with many -- we had many drops in the stock market, not only our shares, but other shares also dropped in price.

So we have -- we were able to get BRL 630 million -- additional BRL 630 million. And we also -- we want to continue with these efforts and liquidity shows this new term. So in the first quarter, we had 4 million daily volume of shares and now 7.5 million. This continues. We want to continue and grow. We'd like to highlight that we were not able to have the secondary offer. When the market allows in the future, we will continue in contact to have support and structure a specific secondary offer. So none of the shareholders are making large sales with the exception of shareholders that are -- that we're already planning to sell.

Now on the next slide, we show the positions. We'd like to remind you that the Controil group made up by Randon and [ Ram D ] increased their position reinforcing the commitment that we believe in the Fras-le business, reinforcing support and our strategy during this project with a follow-on. This is a position that we showed here. In general, [indiscernible] decreased its position from 11% to 10%. So this is not the position today. This is only after the follow-on.

And now we have 270 million shares and 8% additional shares in the market. Our expectation is to have a liquidity between BRL 10 million and BRL 15 million per day, as we mentioned earlier in our meetings and in our road show.

Next chart. While I'd like to conclude the presentation, and we will now talk about the outlook for the next quarters.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. In a general way, we have a forecast for the remaining quarters of this year. We see positive -- everything positive, continuing with our planning. So in general, the perspective is positive. We have good demand. We are continuing with the highlights that we mentioned, linked to exports and linked to OEMs. As we mentioned, we have a project in Extrema, which is consolidation of the distribution center in Minas Gerais. This is very important for us to improve not only financially, but to bring more value to our clients.

And also our operation for shock absorbers has already reached the maturity level and is operating with significant productivity levels. Good perspectives in the future.

Now we mentioned already the lockdown in China and the consequences in terms of supply, impacts on our supply chain and also indirect impacts for our clients, too. Also the war in Ukraine, the lockdown in China is certainly our greatest concern. And we have also to deal with inflation. We showed in the last 12, 18 months, our ability, our resilience to go to the market and correct prices, increased prices to maintain the health of the business. But it's always difficult. It's a delicate situation to increase prices. As I mentioned, in general, we are very positive. We will have a very good year in 2022.

Now I'd like to pass the floor to Jessica. She will coordinate our Q&A session. Jessica?

[Jessica Cantele, executive]

Thank you, Sergio. [Operator Instructions] We now have the first question from Lucas Marquiori. Lucas, we will open your audio.

[Lucas Marquiori, analyst]

Jessica, can you hear me?

[Jessica Cantele, executive]

Yes, you may proceed.

[Lucas Marquiori, analyst]

Two points. First topic, the market, I'd like to understand the consequences of the lockdown in China. And could you give us some color about delay in supplying components to OEMs in the domestic market? And is there any space to win market share from imported parts? So the difficulties in global commerce.

Second point, Hemerson, good news about Nakata. Could you comment about the gains in efficiency with the consolidation of Nakata? So maybe do you believe you will have higher margins after moving to the new plant?

[Hemerson de Souza, executive]

Thank you, Lucas. Sergio, would you like to talk about the lockdown on China? Then I can talk about Nakata.

[Sergio Lisbão de Carvalho, executive]

Yes, I can. Lucas, thank you for the 2 questions. First of all, in the case of Fras-le -- this is not applicable to other companies. But specifically in the case of Fras-le, we have the discipline to work with dual sourcing and in some cases, triple sourcing. We have alternatives in general for the supply of the inputs. So we have to try to anticipate problems, difficulties. And we believe that in a direct way, Fras-le's production as well, and we believe it will continue this way.

All these problems, the war, the lockdowns, situations that are difficult like this, we always say internally, they also bring opportunities, these problems. So in our -- when we export brake linings to the U.S., other suppliers are having difficulties in the U.S., and we were able to sell more, and we had record sales and production for Meritor and also Fremax. We mentioned in previous Fremax. We could have another plant, a second plant totally sold with the production sold. We're investing. We're working on this to expand, but opportunities also appear when there are problems like the one we have now. I hope I answered your question.

[Hemerson de Souza, executive]

What we noticed the difficulties of OEMs, the difficulties they are having, have brought to us a growth more price quotations much more than what we had. And not only for assembly line, but also aftermarket, the parts they sell. So we have recurring orders, and it's not only 1 or 2 higher volume. And this can bring opportunities to us. Yes, we have -- we work with aftermarket. We have capacity to produce. The products are very well accepted in the market with superior quality. So we have conditions to sell to these markets.

So this is not only due to the lockdown, but I knew dynamics that we see with the difficulty in logistics that we see around the globe. OEMs are going back to local suppliers. Also here, when we decided to transfer the plant from Diadema to Extrema, our Nakata plant, we knew what this could bring us in terms of efficiency. It's one of the relevant synergies. We call it structuring synergy, this new plant, which moved from Diadema to Minas Gerais, Extrema.

We mentioned in other calls, this plant when normalized with full capacity that could bring BRL 16 million in savings through synergies. This comes from productivity. We have the same capacity in shock absorbers. Actually, we have a higher production. We're working in one shift. We have another 2 shifts to increase production and sell higher volumes. So this can be optimized, but we already have important savings in raw materials, lower cost.

Now in terms of gains in margin we will be enabled also to win market share. Today, we are at the second or third player. But we have a leader in the market that has more than 50%. So we have space to grow as we always did. So we can offer -- we have advantages to sell more to the market. It's very good to announce that Nakata is already now normal and from now on, will be more efficient.

As these synergies begin to materialize, we will announce them in our conference calls. What we have said is always updating the market. We will also have soon results from the logistics operation, and we will then have more announcements to make.

[Jessica Cantele, executive]

Now our second question, Victor Mizusaki.

[Victor Mizusaki, analyst]

I have 2 questions. Could you comment on sales to Paraguay? What has happened in the last few months? And the second question, thinking about M&A., could you give us an update about the status of negotiations?

[Hemerson de Souza, executive]

Thank you for the questions. I will begin with the second, then Sergio can give you an update on the first.

First, we continue with our agenda that we share with you concerning the re-IPO. We have a clear vision in terms of where we want to use the resources. We have many ideas. We will have to choose the ones that are more efficient in terms of synergies. We continue -- we're not -- we're looking at Brazil, too. We have some good things. We have some good things in Brazil. In terms of efficiency and synergy.

And -- but we want to continue with the previous assumption. We're also looking outside Brazil after the acquisition of Nakata. So we have looked a lot outside Brazil, especially in North America and Central America. We like -- we have a preference. We know that the Mexican market is very similar to ours. The way it works, the size of the fleet, the profile of their fleet. And we have some participation already.

So -- and in Europe, we also have some possibilities to grow. So I will be frank. We don't -- we haven't made any deals because if we had, we would inform the market. So it is part of the process, this diligence, and we hope to continue in our efforts. So -- we had the follow-on, and we continue on the same page. We are making more and more studies in this direction.

[Sergio Lisbão de Carvalho, executive]

Yes, Victor, thank you for the support, for the question. We continue following our plans. We're very optimistic concerning Nione and the future. We have today 11 fronts doing research. We have -- we reinforced our team of researchers to work on projects with new applications. So we're very happy. We're finalizing a project in ferrous metals. It doesn't mean we have concluded all the analysis or the choice of, for example, nanoparticles.

There's a lot of work internally and research to be done still, but the revenue is coming in. We're still in the ramp-up phase and opening new avenues of work. Our vision for the future surprises us and we continue in a positive way. We're following the plans. We don't -- we can't grab all the opportunities because we don't have the means for this. We're selecting those that are closer to us, but there are many good things happening, I can tell you. And in the next few months, we hope to share in a more concrete way, what is happening, apart from the paint operation that we have. We will be -- there are many, many good things coming once again, every time we have an internal meeting on this topic, we are -- we leave very motivated. So, we have to even control ourselves. We're very motivated.

[Victor Mizusaki, analyst]

Just a point this last comment concerning this project on nonferrous metals, Nione. Is this being -- do you have a potential client for this?

[Sergio Lisbão de Carvalho, executive]

Victor, we have the usage in Nione internally, 2 ways to sell this. Nione selling directly to other clients and another internal Nione selling to Fras-le to use nanoparticles in its new formulas or to Fremax who will use nanoparticles in their disc brakes, cast disc brakes in the alloy or outside Fras-le, for example, in Caster Tech, other Randon companies, new alloys.

So we have these 2 avenues. Selling in ferrous materials. We're working with ourselves. Between Fremax and Caster, we have conditions to use. In the case of steel, we're working with the steel works for a global one and one in Mexico, specialized in special steels. In the case of paints, we have an association with W-E-G, WEG. So in the 11 possibilities, there is a partner always to sell to the market.

[Jessica Cantele, executive]

Our next question, Lucas Barbosa. Lucas, we will open your microphone.

[Lucas Barbosa, analyst]

Thank you, Jessica. Can you hear me?

[Jessica Cantele, executive]

Yes.

[Lucas Barbosa, analyst]

Good morning, Sergio, Hemerson. The first is a follow-up concerning M&As. The share -- the stock market is dropping, you can imagine future acquisitions can be made at lower prices with the drop in the stock market.

[Hemerson de Souza, executive]

Thank you. We have our targets outside Brazil. Most of our targets are outside Brazil. The case of multiples in Europe is different when you compare with Brazil. First, the market is more mature in Europe. The premiums are higher. Of course, the nature of each business will define these multiples to be paid. We don't know clearly if we are going after production or production companies or companies like Nakata with brands and services to clients and relevant market presence.

So I always say acquisition is a different thing. Sometimes we do a due diligence, thinking that we will do business. And sometimes, we don't agree on price or sometimes the company has a problem or contingencies are high. So there are so many variables in an acquisition. It's difficult to specify now.

Certainly, yes. The current situation in the stock markets really makes us -- look, I'll mention an example. We never evaluated an operation in Russia or Ukraine. For example, if this were the case, we would not continue if we had a prospect in Russia or Ukraine.

So -- and if we had another business, maybe we could have an advantage. But when things become more mature, we analyze everything. The market business perspectives or whether what we're buying is very profitable. Of course, we want to buy with the best conditions, those that are most important and those that will give us a return at the lowest price. So it's a set of elements that we analyze. It's not always the best price will be the best.

So for example, sometimes you have to be fair and look at the multiples after the synergies. We paid very little for these companies that we bought because they added a lot of value. So if you look at the profile on the day of the acquisition, you would say it's expensive.

In the case of Fremax, for example, we added more than 2 points, in Nakata, too, and even greater. So we paid BRL 70 million. And last year, we built BRL 25 million in Fremax, BRL 25.7 million EBITDA. A year later, it was BRL 40 million.

So answering your question. Today, we don't see this as giving us a discount, the situation in the stock market. In Brazil, we have no large projects, nothing that could benefit from low stock market prices.

[Lucas Barbosa, analyst]

The second question, trends for the future. We have 2 trends that can affect you maybe in a positive way the increase of the penetration of leased vehicles, lease trucks, the increase in leased trucks and outsourced logistics. If you look at Europe, they have more than 30% logistics outsourcing. And in Brazil, only 10% and also rental of fleet. Are there any opportunities in this case? Could you comment what you imagine, how this can affect you?

[Hemerson de Souza, executive]

Sergio, I can begin. Thank you very much. Excellent question. Lucas, yes, we have tried to understand what can happen in Russia. And we have a practical example in Fras-le, Smart Composites, we began -- we wanted to have an efficient use. And because today we thought we would have a drop in the use of friction materials, but this continued. So Smart Composites are billing BRL 15 million, BRL 20 million goods' perspective, and it will be more relevant faster than we expected.

But especially these 2 points, I will focus on consolidation and logistics. For us, the more qualified clients we have, closer they will be to our value proposal. We don't sell products that are low-priced products. We have products that make a difference in the application. Fleet owners know the cost of having the property. They know that stopping the truck many times to fix the brakes is more expensive than stopping only once with our quality products. So we will be able to grow with qualified clients that understand our value proposal.

The second point, our research in materials with business, we have solutions that are even more efficient. And yes, we can think of changes in the way we access the market. Respecting our chain, we can access in a different way, some clients that are very specific or who have different demands. As we do for railways, we can, in the future, maybe sell the service and not the parts. So there are many possibilities, and we have good studies in this direction that can make this feasible.

As I mentioned, in specific markets, we do this already. And consolidation gives us efficiency. And sometimes our competitor is more fragmented.

Now in terms of leasing contracts for trucks, this is very recent. It should impact very little this -- our supply in the next few years. So the more fleets we have, more demand there will be for us. We can access their networks. And we already are doing this in some fleets. We will continue selling parts to them.

I don't believe this will happen so quickly. I don't believe it will be similar to Europe. In Brazil, we have a different network very structured in retail also. So the network as a whole allows clients to access these parts. We have a great diversity in types of vehicle, types of applications and the chain as a whole can work this way.

Sergio, if you wish to supplement, this is my vision.

[Sergio Lisbão de Carvalho, executive]

No, Hemerson. You covered well. We see only an upside. And this consolidation brings more professional use, more value analysis and all of this will help us in terms of fleets, more fleets, leasing of truck fleets.

[Jessica Cantele, executive]

Our next question comes from Lucas [ Largi ]. You can ask your question.

[Unknown Analyst]

Sergio, Hemerson. It's a question with 2 points. Thinking of revenue that you reported in the last quarters and the guidance for 2022 in the short term. We see we're looking at a drop in the domestic market with high inflation and less buying power on the part of consumers and the export market accelerating, booming export market. You mentioned production problems in China.

And -- so thinking with you is a combination of a drop in the domestic market and acceleration in export markets. Was this foreseen in your guidance? And if part of this acceleration, the export market is only for a period due to problems in China and part structural. How long do you believe this boom in revenue from export markets will continue thinking of all these points, these 2 points?

[Hemerson de Souza, executive]

I will begin Sergio. Especially in the international part. Well, Lucas, I believe that the impact on this quarter, it's not that strong. It doesn't -- we don't see this in the rest of the year. We have a great efficiency with support to exports. Yes, since the last quarter of last year, August, September, we already saw many new orders. Today, we have orders, export orders to deliver in September. We have new clients. Of course, all these global problems have accelerated the sales. And we have been in these markets for many years. We have a tradition in these markets.

On the other hand, the domestic market was booming in the past. If you compare Q1 last year with Q1 this year, it's unfair because we began to deliver and we increase prices before. For example, we knew steel would go up next month, we would increase prices the month before. And now we have adequate costs.

Last year, the industry suffered with lack of materials. During the year, we improved our delivery capacity. We made investments I'll give you an example, Controil. Controil spent the whole year owing parts. In September, we installed new assembly lines, and we -- and December was the best month in billing. We delivered a lot in December.

So what happened? Our distributors have a high inventory. And in this first quarter, they had a high inventory because sales did not continue higher, sales stabilized. There was a small growth in workshops, but it stabilized on a high level. So we see during the months, January was more difficult. March was better. April is even better. So we will have a stabilization of the local market, domestic market and our revenue.

And then this -- so going back to the question, the guidance informs the stability in the markets from now on. So we trust that we are well prepared. There is a small change when we look at volumes, and we report this, it's not fair to look at product lines. We grew in some lines that have higher prices, higher ticket and dropped in some where the ticket is lower. For example, we can sell a repair item that is worth BRL 1 or the whole product at BRL 100. We've sold more products with higher tickets. So this is important. Volume has dropped, but we have sold more expensive items. So we would like to grow in volume and price. But still our guidance shows a positive situation for the rest of the year. We are being efficient in increasing prices.

Sergio can supplement talking about export markets, whether this will continue.

[Sergio Lisbão de Carvalho, executive]

Lucas. Thank you, Hemerson. Lucas, thank you for the question. We're very optimistic that demand from the export market will continue and grow. Why? There's -- this has to do with difficulties in other -- in our competitors, but we have experience. For example, when a supplier cannot deliver to U.S. clients, we offer with the condition that this will continue. So we want commitment on their part.

So the quality, the relationship, the technology that we bring, once you buy, it's very difficult to leave, but also if we look at the economies that we export, more good expectations. The U.S. market, for example, we're not foreseeing in the next 18 months any problems in the U.S. and the demand is growing in the U.S.

The third point, as we become better known in the international market, more clients are looking at us for other applications. We have important deals, especially in the U.S. that will be very relevant for the future of Fras-le. So we're very positive that we have a relevant position, and this will have a good impact on the future of the company. So growth with new clients, growth due to difficulties on the part of our competitors and for development of these countries, these geographies, we're very optimistic with all these points.

[Jessica Cantele, executive]

[Operator Instructions] Since there are no more questions, we thank you for participating. And now I pass the floor to Mr. Sergio for his final comments.

[Sergio Lisbão de Carvalho, executive]

Thank you, Jessica. I would like to thank all the participants. We'd like to close our conference call or video conference call, and we're open to give more clarification, please contact us through our website and our Investor Relations department. Thank you very much for the support, and we will meet again to talk about Fras-le.