Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2024-Q1

[Jessica Cristina Cantele, executive]

Good morning. Welcome to the conference call of Fras-le Mobility on the earnings of Q1 2024. Before beginning, we'd like to make some important announcements. This conference call is being recorded, and after the end will be available at our website, rifraslemobility.com.We have simultaneous translation in progress for English. Please click on the button interpretation with the icon of the globe at the bottom of the screen. At the end of the presentation, we will have a Q&A session. When questions will be made in 2 ways: by audio, please use raise hand or in writing through the Q&A button.We reinforce that the information supplied in this conference call is not a guarantee of performance. They involve risks and refer to future events and therefore, depend on circumstances that may or may not occur.We thank you for being with us in this earnings call, and we have with us today the Chairman and CEO, Sergio Carvalho, the CEO, Anderson Pontalti, the Business Director, RI and M&A, Hemerson de Souza and as a guest, the RI Finance Director, Esteban Angeletti.Now I'd like to pass the floor to Anderson, who will begin the presentation.

[Anderson Pontalti, executive]

Good morning. Thank you very much, Jessica. It's unavoidable to mention our solidarity to the people in the state of Rio Grande do Sul, affected by the heavy rains. And we know that it will take some time for us to know the magnitude of this.And Sergio at the end, we'll talk more about this in a more detailed way. Two important moments, 2 important things happened in this month. First, in fact, related to the floods. We had to stop operations in Caxias do Sul for 1.5 days from Thursday, 12 a.m. to Friday, but operations are back on Monday. But this does not apply to Sao Leopoldo, which is a lower area in the state where we have control, where we continue close due to the floods.The plant was flooded. And now we are working to help the people who live and work there. And after that, we will recommend operations. We also had a relevant fact, an important decision on the part of the company to close the operations in Fanacif.Fanacif came with the acquisition of our Armetal in 2017, when we made this acquisition and Armetal was the focus, main focus, Fanacif and due to the high dependence on the Argentinian market and the possibility of allocating the production of this plant.In other plants, we made this decision. It's not an easy decision, but it was a well-thought decision. And as we see a correct decision, we decided to close the activities. We made an agreement with all the employees, the employees contributing with reallocation, payments above the normal in that country. But we know that some people will have to be reallocated in the market.And now, we accelerate more the production in other plants in other locations. Please, another important point, we concluded with great efficiency in other transaction, Juratek. So, we are always looking at capturing synergies, but we must understand that the strategy of making an acquisition in Europe was very successful. And now at the end of the year, the results are much better than we expected.A very engaged team in Juratek in the U.K. including, for example, brakes and brake pads with Fras-le brand in the U.K., beginning to create a powerhouse in the U.K. and England. So, on February 22, Fras-le celebrated its 70th birthday, 70th anniversary. We had the opportunity to celebrate with some clients, employees and suppliers in these first months of the year.And we also have the AEO certification, authorized economic operator, Nakata already had this, and this was extended to the other brands and operations. This allows us to agilize the import process. So, this also helps in lowering working capital and also in delivering to clients.We're very happy with the certification. The highlights after that, Hemerson will talk about each one. We already knew that the growth in Q1 would not be very strong in relation to the Q1 last year. We adopted a new SAP system. We are already in the cloud. It was very successful, but also we had clients that had some changes in their branches.We knew that this would result in a lower volume, but we're projecting higher volumes. And so, we delivered what we planned. We delivered more to the foreign market. This was a good surprise. A growth of 11% in relation to last year, 11% growth in the foreign market. And then here, we see EBITDA margin.We projected 17% to 21%. We know that Q1 is slower, and we have an EBITDA margin of 18.3%, well within the guidance. And also, investments we are projecting between EUR 130 million, EUR 170 million. We began the quarter with EUR 21 million. And as we have every year, we have an acceleration. So, a very positive quarter with results that show the current situation. In the last few years, resilience, strength and a lot of optimism in relation to the future.Hemerson, I'd like to pass the floor to you.

[Hemerson de Souza, executive]

Thank you, Anderson. Good morning. Thank you for being with us in our earnings call. Anderson already anticipated, in general, we had a stable quarter when we compare this with 2023. Modest growth, 0.3% total stability. Yes, very in line with the planning that we had.We updated our ERP system, our SAP system. This gave us 5 days less in the beginning of the year and also gave us an important support for the future with SAP, but there was an effect to continue the operations without the system. After we had also a certain delay, but it was very successful, no difficulties after, but there was an impact.Also, we did maintenance. We dedicated ourselves to maintenance during this period when we change the ERP system. We had an important growth in the domestic market due to gains in business and also units outside Brazil especially our unit in Alabama, U.S.A. and also in India.New business both gain new businesses. And this also 1 year of Juratek and we already have an important synergies with Fras-le Mobility, we were able to reduce costs, also gains in supply chain that gave us economy of scale in Juratek and we're beginning to launch products with our brand in the U.K. With the Fras-le brand, we have break discs and also blocks and brake pads. We have begun the same.Also, we're programming other initiatives this year to increase the portfolio of Juratek in the U.K. And another point, a new government in Argentina, this allows us to reestablish some lines, especially brake discs. The difference between Q4 and Q1 this year, almost 90% is due to the devaluation of the Argentinian peso with the new government, and this was explained in previous meetings.On the next chart, we talk about our performance in the markets. I'd like to say that we had 87% of our sales related to aftermarket replacement parts. And we show here the light line and commercial line. 36% of what we sold in friction was light and 64% commercial.In the domestic market, here, we see we had good sales here in brake systems and also we have been making progress. Also, we'd like to say that we have made progress in heavy brake pads, especially for buses, urban buses. They begin to have more relevance in our share.In the foreign market, I mentioned the gains that we had, especially brake pads for heavy vehicles. We began to see this product with an important position and sales, especially in the unit we have in Alabama, U.S.A. In suspension and also steering and powertrain, we were able to make progress developing a more adequate portfolio in Colombia. And this is showing a lot of progress in volumes.In terms of brakes, we had a linear situation, and we had an important variation in competition, especially in disc brakes, more competition and revenue is linked to the mix that we have. We also see here in the light line for these segments.In friction, we have a relevant position in commercial line, especially in North America. On the next chart, let's talk about results that we reached BRL 54 million in EBITDA margin of 18.3%, 13% lower than in the annual comparison. And here, we have many factors that we can mention.In general, we had the factors related to revenue that didn't grow the way we imagine due to the points we mentioned here. Also, we've seen a good management of the supply chain. We don't see great problems. One or another area has an increase in costs, but we're following what we had planned. Some expenses grew and although we are not making an adjustment that's nonrecurring, they can be seen as nonrecurring cases.We had 2.4 million linked to M&A initiatives. You know that we have important activities looking for growth in nonorganic way. So, we have some expenses linked to M&A and also more accruals provisions BRL 10 million linked to reviews in some court processes. These provisions are for labor court cases.Other revenues, we have the reversal of a payment, almost BRL 10 million because we use some investments in dollars in Argentina. As I said, we have similar sales and later, we will see some other variances. If we look at Q4, we have some points, some nonrecurring expenses at the end of the year and also important variances in the Argentinian market, devaluation of the currency in Argentina.On the next chart, we can talk about our financial performance. You can see here that we had a relevant cash flow, a positive variance contributed for this cash flow position and our cash is very high with investments and we had some influence here from Argentina.When we look at working capital, you can see that in Q1, we have a significant variance 8 days less. I understand that we have overcome this. The characteristic of our business. We are connected to the replacement market. We have to have higher levels of inventory to be efficient. And it's natural that we don't want to lose sales. Therefore, sometimes we need higher levels of inventory. And we don't see this continuing in the future.Although we consider that these days are healthy for our business. We already mentioned here, we invested in the beginning of the year, this amount and also, we made investments in sustainability.Going on to the next chart. Let's talk about the company's net profit. We can see the profit here, BRL 109 million in Q1, 20% more in relation to the previous year and 16% higher than Q4 last year. So, we have a good cash level. We have investments helping for this and operations is doing very well. And you can see this.We are looking for more synergies to allow us to have good levels of profit. We don't have any significant debt. We have loans from IFC, BRL 250 million and we had amortizations, BRL 55.5 million.Today, in the quarter, we have a good cash position. Next chart, we invite you to come to the site visit. Those who don't know our site in Extrema in the state of Minas Gerais. It gives support to all of Brazil with the exception of the South and also Nakata plant. So, please come to visit us in 2024.We will be sending you details for you to come and visit us. Save the date, June 27, 2024. So ,you are invited. Very well. The numbers explained we're available to clarify any points. You have also our material, which gives you more information and details, reconciliations and other points such as gross margin.To close the presentation, I'd like to invite Sergio to talk about business perspectives. We're very optimistic, we're very optimistic. Sergio, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. Once again, thank you for participating in our earnings call. Anderson already mentioned briefly, the situation we're going through in the state of Rio Grande do Sul with the floods. We have a calamity situation, never seen before. We had rains in all the states, 340 cities with floods, which led to this disaster, this tragedy we're going through.We have worked in a direct way with all the possible efforts to give support to our employees and the communities where we are present. Thank God, until now, we have no deaths among our employees but in the state, we have almost 100 deaths due to the floods.In our region, we stopped operations as of Tuesday last week in the third shift. And in Caxias do Sul, in a Monday now, we are working normally already. But with the exception of Controil, which is in the city of Sao Leopoldo, the plant was flooded, 20 centimeters of water in the plant. And yesterday night for the first time, we were able to access the operation to evaluate the damages.The damages were not high. We don't have supply problems in our region. And we hope that in the next few days, we will be better when we will begin operations once again in Controil too.In general, in our operations, we're operating normally without logistics problems. We overcame many difficulties and now we're focusing on planning on planning the beginning of our operation in the plant in San Leopoldo for Controil. The market in the state of Rio Grande do Sul represents only 3% of the Brazilian market.So, almost everything that is produced here goes to other regions. Distribution is done from Extrema Mina Gerais, which is very far from the south of Brazil. So, the state of Rio Grande do Sul with the floods represents 3% of the company's sales. We're focusing on giving support and finding solutions for our employees. And at the same time, we're working strongly to recover the operation of Controil.Now, talking about the outlook. Hemerson mentioned this. Our vision is that of moderate optimism. Looking at the domestic market, it continues with positive perspectives. We have garages with good performance and we see this in a positive way. But we don't see this year as strong as previous years.The situation is still positive on one hand, but not with the same levels we had in the previous years. So, this creates more demand on the part of clients. in terms of service, we see more competition. Argentina continues in a recession, but we can say that there is some progress being made. Inflation is under control. Also some positive results and Argentina will have a good harvest, and this will help the recovery process in a market that is very relevant in South America and very important for us.OEMs, both in Brazil and Abradee, very positive with growing production. And in these geographies, we have been able to close new deals, new business in a relevant way, helping our future. That's why we're mentioning that we have a moderate optimism. And we must understand in more detail the impacts of this catastrophe due to the floods in the state of Rie Grande do Sul.Now, I'd like to pass the floor to Jessica to begin our Q&A session.

[Jessica Cristina Cantele, executive]

[Operator instructions] We have our first question, Gabriel de Pinho Analyst from Bradesco Bank BBI.

[Gabriel de Pinho, analyst]

Two questions. The first concerning competition. You mentioned greater competition in disc brakes in the domestic market. So, I'd like to understand better some details about this and also global competition with Chinese companies. So, first question, competition.The second, concerning the tragedy in terms of the floods in the south of Brazil, you mentioned production that you have to recover control. I'd like to know how much you have in normal production and how much you have to recover at Controil? And in the future, what do you see as impact in the supply chain? Because some roads have been blocked.

[Hemerson de Souza, executive]

Thank you, Gabriel, for the questions. I will begin talking about competition in disc brakes and the increase in competition from Chinese companies. Then Sergio can talk about the impact of the floods.First, we're always evaluating the competitiveness of our company. It's a journey that the brands, every single month, we check our position in relation to the competition. And our challenge is to adapt prices and protecting our products.In the case of brake disks, we have a strong production in Brazil, 22% market share in Brazil in premium products, 35%, we operate in lines. So, in general, this explains the success of Fremax in the market, our brand for disc brakes. But there are times when the market has surprises and we noticed this when volumes drop. So, we make some price adjustments in some lines in some SKUs.Some of them we increase the price, others, we dropped the price, thus, adjusting prices where we're losing sales due to competition. And in April, we had a very good performance. We went back to higher volumes due to the adjustments we made. I understand that this is something that is always important. We have, for example, Chinese products in Brazil, some electric vehicles coming to Brazil from China.I'd like to say that China is a large supplier to the Brazilian market. We buy a lot from China. We have partners in China for 15, 20 years, and this isn't going to change the dynamics. We don't see an expansion in the competition from Chinese products in Brazil. Competition always existed. And last year, it came back after the pandemic in geographies like Peru, Colombia, Mexico, where we have sales.And, we have to adjust ourselves and I can tell you that this is not one of the problems that is difficult to manage. We have a lot of local producers. So, we are very connected. The exchange rate also does not help those who want to enter the market. So, I hope I answered your question. Now, I'll pass the floor to Sergio and Anderson to talk about the impact due to the floods in the state of Rio Grande do Sul in the south of the country.

[Anderson Pontalti, executive]

Well, I will begin Sergio can supplement. The impact is still strong because we are in the first phase of a catastrophe. We are making efforts to feed everyone, take water to everyone. We don't have electricity in the region of Controil. And the factory recently, yesterday, the water went down and due to safety reasons, we have turned off electricity of the plant.We have 160 employees that have lost their houses, their homes but we're working. We want our employees to solve their personal problems and be ready to be able to come back to work. We're helping them in all the fronts. We're trying to accelerate the process to supply help to our employees and the communities.It's very difficult to make a forecast of operations coming back. What we are doing, we are working with our sourcing. We are importing to supply what is missing. Also, this market, this state will not consume Fras-le Mobility, especially where we have floods. So, it's not only Controil. This affects all the items.There was a great drop in consumption due to the floods. But most of our operations are outside this area. And there, this generates opportunities of our competitors in Rio Grande do Sul will not be able to supply the other states. So, the impact will be very small. The impact for us will be very small with the exception of Controil. So, yes.First, we are working to help people and then we will work on. I'm sure that a week from now, we will know better, but it's very early now to measure the impact on the business. Would you like to add something, Sergio?

[Sergio Lisbão de Carvalho, executive]

Yes, Gabriel. All our distribution, with the exception of the South Eastern from the state of Minas Gerais, which is very far from the flood. So, our inventory is in the state of Mina Gerais and was not affected.Anderson mentioned in the South, we have 2 operations. We have friction material in Caxias do Sul, which is already working normally since Monday. And we don't have problems in the supply chain. The city is not isolated. There is a route that is a little longer, yes, 3 hours extra, but we have access to receive raw materials and to send products.So, in terms of friction material produced in Caxias do Sul, we're back producing. Our concern is with Controil, where we produce cylinders, master cylinders. This is our concern. And it represents 5% of the revenue of Fras-le Mobility.

[Jessica Cristina Cantele, executive]

Our next question, Gabriel Time analyst from Santander.

[Gabriel, analyst]

Two questions. The first is more focused on market share in the domestic market. You mentioned 2 highlights, one from brake pads for buses and also shock absorbers from Nakata. Can you give us more color about this evolution? And the second point, foreign markets. The ATBs in Alabama. And how do you see opportunities, especially in the U.S. market? Maybe new engines, what do you see?

[Hemerson de Souza, executive]

Thank you, Gabriel. Anderson, the question about the foreign market, you are involved in this. I will begin with market share. In fact, we are gaining market share. When we acquired Nakata, they had 16% of the domestic market. We estimate that at the end of last year, we had 24%, 25% market share in the country for Nakata.So, we have been working, and we're working to be more relevant. Well, we have done this with profitability. We have a new plant with well adjusted production with the economy of scale, using our buying power together with Randon Corp in terms of raw materials to produce the shock absorbers.In terms of brake pads for light vehicles, we have expanded our position due to many strategies. One of them is to launch products in a very quick way. For example, for automobiles, in 1 month, we already have the brake pads. So, we have been we have been working in an efficient way.Now, in the heavy line, we're also leaders in Brazil, a relevant position, but we have made less progress, slower progress. We have been less aggressive in terms of brake pads for heavy vehicles. So, we have focused on fleets. We have a very good product. But although this line is still small, less than 5% of all the demand. When we look at replacement for heavy vehicles, we have focused on this to continue growing in this market.And we have worked making a great effort to sell to bus fleets. We will have good news in the future for you in this area. Now, Anderson can talk about the foreign market, also in brake pads for heavy lines.

[Anderson Pontalti, executive]

Yes, we have a very promising journey ahead of us in the transition of part of the fleet, as you mentioned, original vehicles. Most of the fleet in trucks is now in a transition phase for brake discs, heavy trucks. We are leaders, and we are protecting our main geography.So, we've been in this journey for many years working in all the fronts, competitiveness in production, near-shoring, development and certification and also looking at clients and their demand. So, we won business in clients in Mexico for original parts, 2 important contracts in the U.S. that will begin to give us revenue in 2025, 2026.In our main client Meritor, we have all the applications of OES and aftermarket. And we have a consistent objective to have one of their brakes, which has the highest volume. This will be in the medium term. We have competition there. And in the U.S., we have also gained market share in WABCO, a global partner of ours in Asia.In Europe, those who make axles, axle producers in Europe. So, we have a clear objective by the end of 2027, we want to sell more than 2 million brake pads to OEM market and OES market. I can tell you that we're well aligned with this ambition and we may even overcome these numbers in an easy way.OEMs, it takes years to work with them, but then you will have 5 to 10 years of supply. We're very happy with the objectives we have reached until now.

[Jessica Cristina Cantele, executive]

Our next question is from Fernando Urbano from XP

[Fernanda Urbano, analyst]

A follow-up question about profitability. In this quarter, we saw a margin within the guidance but different from what you delivered last year. You mentioned some effects that influenced this deflation in raw materials, repositioning and the stop due to the new ERP system. Can you give us more details about the profit? Which materials were the cost? And I'd like to know how you see prices in the next quarters, raw materials and maybe a better demand in replacement market?

[Sergio Lisbão de Carvalho, executive]

Thank you, Fernando. During last year, we were always saying that the results that we reached in some quarters were due to a good combination of operational performance, also booming demand and efficiency in the supply chain, enabling us to have gains and savings that we did not have during the pandemic. And this happened.The price of commodities dropped a lot, not only commodities because 40% of our revenue comes from friction, resins oil, other ingredients, the prices fell, and this was important helping us. And we had a booming market and we were able to have an adequate management of our prices with lower costs. This allowed us to have a good profitability.This scenario is not totally different today. We continue with the efficiency, I call this, legacy, and there's another part called opportunity. Opportunity is to see clearly what is happening and also have adequate prices. So, we have good perspectives for profitability hence this is because we were very efficient in going after new business, new synergies, new productivities with cost reductions in an efficient way.So, the legacy really helped us a lot. Two years ago, we had 14% margin. Now, we're well over this profit and we had, at certain moments, some margins above 20%. So, we're working on these points again, but we have problems with days of production. More provisions, accruals due to potential losses, expenses with M&A. So, you will see that with all these facts, our margin is still very sustainable.Today, we have to be looking at the market. So, we know that it's important to be connected to the market because clients today want more services and better payment terms, and this affects prices. But even these discounts are not very relevant. We will continue working on production, spending less, producing more to continue and having results from our legacy.So, as we said, we're moderately optimistic.

[Hemerson de Souza, executive]

Yes, Hermerson, in a nutshell. In terms of operations, we're doing very well. Last year, we had some situations that were very favorable. But structurally, we continue strong. So, we planned the SAP, the ERP change. The only thing we didn't have in the radar were some additional points. And even with this, we were able to get good results. There is nothing structural that can affect the company in the future. It's important to highlight that we have accounting consequences due to the closing of Fanacif plant this will have an effect, and this will be shown during Q2. In our next meeting, we will have details about the closing of the Fanacif plant.

[Jessica Cristina Cantele, executive]

Our next question is from Gabriel Rezende sell-side analyst, Itau BBA.

[Gabriel Rezende, analyst]

2 questions. You talked a lot about revenue and margin for 2024. But bearing in mind Q1, how is the guidance? Is it conservative, optimistic? Please talk about the guidance, growth of top line and margin. What is your opinion about the guidance today? And also, if you could talk more about inventories at clients. You mentioned in the release, this is a variable that can reduce demand. So, please talk about inventory at clients.

[Anderson Pontalti, executive]

Thank you, Gabriel. I will ask Sergio to talk about the guidance. He is the chairman, and I will try to answer about inventory levels at clients. Concerning inventory levels at clients, we noticed some points. Anderson mentioned something very important. And some companies bought less in the beginning of the year.In April, this went back to normal. And in some lines, due to the sellout, we follow the sales of our main clients. So, there was a lot of demand. They sold very well. Our clients sold very well. We can talk about disc breaks and some suspension lines. We noticed that inventory was a little higher. So, when some clients lose sales, these sales are lost. Today, sellout is very good. Inventory is at a good level. We're working with our clients and it's up to us to supply the adequate service to them.We're very focused on the use of working capital but we're being able to sell and sometimes, we're not being able to replenish the inventories. Unfortunately, Controil, for example, has a lot of orders to deliver. And we want to supply the market. So, we're always looking at this. These problems are over. And now, I'd like to ask Sergio to talk about our guidance, his opinion today.

[Sergio Lisbão de Carvalho, executive]

Gabriel, thank you for the question. I believe I can mention that we continue trusting the guidance that we gave for this year. We had foreseen Anderson touched upon this. A slower, more timid beginning in Q1 due to the new ERP. Our markets in Q2, Q3, they have a better performance every year.So, we continue with these margins, although we had a more timid margins. The margins are still good, and we trust that we will operate within the guidance. Of course, we have this need to reevaluate in 1 or 2 weeks when we will have a better understanding of the impact of the floods. But as we said, the market of the states represents 3% of replacement market.So, as soon as Controil is back, we will have a better idea. Anderson mentioned the impact of Fanacif, this is very important for us. There will be an impact from the closing of the plant of Fanacif. But in terms of operations, we still trust and we believe we will have a very good year according to our guidance.

[Hemerson de Souza, executive]

Gabriel, just supplement Anderson mentioned, Sergio, the decision we made to close the Fanacif plant. This because of the market situation in Argentina. It's a very old plant, Fanacif, a plant that would need a lot of investments. And therefore, we made this difficult decision to close this plant, Fanacif and we will be able to leverage the use of our assets elsewhere.And obviously, we will be looking at the impacts of this in Q2, Q3. As Sergio mentioned, we're still moderately optimistic.

[Jessica Cristina Cantele, executive]

Now, the last question in writing, Rubin Machado, an investor. He mentions our free float below 15% if we look at the shares with the controller. And he asks whether there is any discussion about issuing new shares or sale of shares by the controller.

[Anderson Pontalti, executive]

Thank you, we have answered this question already in other forms. We know the quality of our business. We trust in what we can do through our operations where we can get. So, this has resulted in the value of our shares and the consistent delivery of results.Yes, we have always been transparent with the market. We are after accelerated growth, adequate margins. And we're very diligent in allocating our capital. For example, we have an excellent cash position and there is the possibility of M&A. And therefore, we understand that liquidity is a point to be worked on and solved.We have had many conversations with analysts, and this includes the controlling group to work on this a better offer of shares. I can tell you that all the parties know about this. And I understand in the future, there will be the possibility of improving this.There are many things to be built together with the shareholders. And for the time, we have to wait, but I can tell you that we're always working on this. We have an active agenda. Sergio, Anderson and myself are always working on this because we know the quality of our business. And we know that this should be reflected in our shares.For we're using the resources, the loans we took out in 2022. We're evaluating things in terms of M&A. But M&A is always a surprise. And as we use the resources, we will go to the market through equity where we can obtain necessary loans. But I say, this is something we're always working on something that is always present. And I hope we can solve this in an efficient way and fast way. Thank you.

[Jessica Cristina Cantele, executive]

We'd like to thank all the participants. We'd like to close the Q&A session. And now, I'd like to pass the floor to Sergio for his final comments.

[Sergio Lisbão de Carvalho, executive]

Thank you, Jessica. Once again, I'd like to thank all the participants who are always available for further clarifications myself, Hemerson, Anderson, Jessica and the team. Feel free to talk to us. If you need more clarification, call us, and we will meet again in the next event. We wish you a good afternoon.