Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call for the earnings for Q2 2020 for Fras-le S.A. We have with us today, Mr. Sergio Carvalho, COO of the Auto Parts Division of Randon and CEO of Fras-le; Hemerson de Souza, Director for Investor Relations at Fras-le; Anderson Pontalti, Director at Fras-le and also of the IR team.

We inform all the participants that the presentation that will be made will be available for download at the 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 the business perspectives of the company, projections, operational and financial goals are based on beliefs and assumptions of the company's Board as well as on information currently available for the company. Considerations about the future are not guarantees of performance and involve risks, uncertainties and assumptions. They refer to future events and 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 mentioned.

I would now 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. Good morning to all. Welcome to the conference call of Fras-le for the earnings of Q2 and also the first 6 months of 2020. Hemerson de Souza, Director of Investor Relations, and myself will make the presentation. We also have with us today, Mr. Anderson Pontalti, also Director and part of the Investor Relations team.

The second quarter of 2020 began in the midst of many uncertainties in the midst of the COVID-19. The measures with physical distancing paralyzed many sectors of the economy, and this had a direct impact on the consumption of the families. Nevertheless, after some weeks and understanding the impact of the pandemic, we saw really an improvement in the activities. At Fras-le, this was seen after some months with a growing performance from April, the hardest-hit month until June, with almost the same levels of revenue before the pandemic. Since 2019, we have adopted strict controls on expenses, aiming at competitiveness and efficiency. Also, the business model of Fras-le anchored on leadership in the aftermarket parts market with diversification of markets and also product mix by sales geography have really presented very good results in these adverse scenarios. Even in the midst of bad news, the company continues aligned with its expansion, strategic plan and constant innovation.

We would like to share with you some new points. Please, Slide #4. In this chapter that we called Fras-le Universe, we will cover the events that mark the highlights or are the highlights of this quarter. Fras-le strengthened its presence in the domestic market for aftermarket parts with the acquisition of Nakata Automotiva. This operation was informed to the market on December 17, 2019, was approved by the authorities, CADE, on July 3, 2020, and by the shareholders of the company through a general assembly that we had on July 23, 2020. With this, we are close now to close the deal, and this will be shared with you soon.

Apart from this, we would like to share with you some actions and awards that we received during this quarter. The first was the launching of Auto Experts. This is integrated digital catalog with all the products of the brands: Fras-le, Lonaflex, Controil and Fremax. The main objective of this catalog is to speed up the identification of the products by distributors, retailers, mechanics and end users. This tool will really help to do research by type of vehicle product or OEM and has all the options of parts available in each one of the brands mentioned here.

The second is that Fras-le is among the 10 most innovative companies in the South. The 16th research done by Revista Amanha Magazine shows us as responding to the disruption. Fras-le is sixth in general and first in parts and accessories.

I invite you all now to go to Slide #5. With our focus on support actions in relation to the pandemic since it began, Fras-le has given total support to the preservation of health. In this sense, Fras-le has been adopting several measures to protect the health of its employees and families, and this is also a way to ensure the continuity of the operations.

I would like to mention some examples: the implementation of work at home; verification of the temperature of employees when coming to the company; also screening centers for employees and also third parties who have symptoms; the availability of alcohol-based hand sanitizing; also mandatory use of masks in the company's facilities; use of spray to reinforce even more the processes of hygiene; strict hygiene of the facilities, including the use of UV lamps in offices and other facilities; the use of fast tests for all employees; also distancing in changing rooms and also cafeterias, among many other activities. It's important to stress that Fras-le and its controlled units are following the rules of each location for companies.

The units in China were the first to suffer the impacts of the pandemic. They taught us many lessons to really face the problems in the other units around the world. The company, knowing its responsibility with clients and shareholders, gives support to adapt things, including adjustments and adaptations in sales relationship and intensify the monitoring of liquidity and capital. Understanding the importance to contribute to society, Fras-le also participated together with Randon companies in many initiatives during the last months. I won't mention them here, but some of them can be seen on Page 4 of our release with the earnings of this quarter.

I would like to invite Hemerson to begin the presentation on the results.

[Hemerson de Souza, executive]

Thank you, Sergio. Good morning to all participating in our conference call. I invite you all to go to Slide #6. As mentioned by Sergio, the second quarter began in the midst of many uncertainties. The restrictive managers that began at the end of March have been intensified and the month of April was the hardest-hit. In spite of this, in May, we see the recovery of some segments considered essential. And in the month of June, the demand reached levels that were close to normal operations before the pandemic.

In spite of the sales volumes suffering a drop, the exchange variation for -- in exports -- on exports were positive. Also, we had nonrecurring events that had a positive impact on our results in this quarter. But when seen alone, the results are also satisfactory considering the current situation of the world economy and the effects on the company.

Concerning the net results, apart from nonrecurring effects that had an impact on operational performance and financial performance, the fluctuation of the exchange rate also increased our financial expenses.

Slide #7, where I will explain the effects on net revenue. As a result, of the deacceleration of the world economy, the consolidated net revenue in Q2 '20 suffered a drop of 17.3% when compared to the same period in the previous year. Accumulated net revenue in the first semester had a drop of 6% when compared to the first semester of 2019.

Our greatest concentration of revenue is divided in 3 main product lines. The first, also, for example, break lining for commercial vehicles which had a drop in volumes, but not very aggressive because heavy vehicles continued to run in the economy. We had a record harvest, and transportation is considered essential for food and drugs. Now brake pads had an expressive drop in volumes in the month of April when most of the garages paralyzed their activities. But with the recovery, individuals continue to do maintenance, and the retailers also placed new orders, which helped us to reach levels that were considered normal already in the month of June.

In brake components, we have the products sold by Fremax, and they anticipated some sales to continue supplying clients. And with this, they had volume and revenue very close to the same period in the previous year, in spite of the pandemic. Apart from these factors, we would like to highlight that the exchange rate variation compensated the -- partially the drop in volumes. In comparison with Q2 2019, the exchange rate last year was BRL 3.93 for each dollar; and this year, BRL 5.38 to each dollar in Q2 '20, an appraisal of the U.S. currency of 37.2%, a devaluation of the real.

I invite you now to go to Slide #8. In this slide, we present the distributed revenue per domestic market and exports, where we can see clearly the diversification of the company's business and also notice the balance in the distribution of the revenue.

In Brazil, the net revenue was BRL 119.7 million in Q2 '20, which corresponds to a drop of 27.6% when compared to Q2 2019. This drop is linked to the paralyzation of operations in Brazil and restrictions to fight the pandemic. Now year-to-date, the first 6 months, the drop is 14.3% when compared to the previous year. In this quarter, in the domestic market, we -- the domestic market was responsible for 40% of the company's revenue. Normally, it is 50%. This happens due to 2 factors: the first, the drop in sales, as already mentioned; and the second, the influence of the exchange rate in relation to the real, which gave us a greater participation in the export market. In the export market, we reached BRL 160.4 million in net revenue in Q2 '20. And the influence of the exchange rate is the main factor for the small drop of 7.7% in comparison with the previous year. We'd like to highlight that the volume -- we would like to say that the volumes in imports are smaller.

Now in the first 6 months, the revenue from the export market had a growth of 2.4%, reaching BRL 336 million. Once again, I stress that our business model is shielded. Our shielded business model with great diversification in markets and portfolio products allows us a greater stability in adverse scenarios. Even with volumes that are inferior to last year, the revenue reach is very satisfactory.

Now Slide #9. Let's talk about our EBITDA and the net results. The company had -- took many -- a lot of action and is alert to what is happening in this quarter. We use government programs to reduce and also dismiss employees. We gave -- we had vacation. We had a significant reduction in expenses with travel and also exhibitions and events. And this helped minimize the impact of the pandemic. Also together with our principles in more than 65 years of company, which is taking care of people, attention to health and safety, the company gave the employees the option of resigning, and this generated a cost of BRL 3.6 million.

Apart from this, we had other nonrecurring events that had an impact on results. The greatest was the gain in tax process related to ICMS and also the PIS and COFINS. This generated a gain of BRL 25.1 million and being BRL 16.1 million in Controil and BRL 9 million in Jurid. And these were -- these happened and affected financial results, aiming at taking -- at using the synergies that are offered to us. The company also decided to transfer the production of brake linings for heavy vehicles to the plant in Uruguay, Fanacif from -- sorry, from Uruguay to our headquarters in Caxias do Sul. This reduced also the flow of future cash in that operation and an impairment of BRL 2.7 million and also costs with restructuring of that unit, totaling BRL 1.8 million.

We also made a provision for the loss of other receivables worth BRL 1.2 million in Controil. Considering these effects, the consolidated EBITDA closed Q2 '20, BRL 42 million, same as the amounts in the previous year. The EBITDA margin had a growth of 2.6 percentage points. Excluding nonrecurring effects, the adjusted EBITDA in Q2 '20 reaches BRL 30.4 million and an EBITDA margin of 10.8%, which is aligned with the expectations of the company as a result of the scenario we have. The combination of all these factors, especially the lawsuits we won for taxes, resulted in a net profit -- accounting profit of BRL 13.1 million in Q2 '20. Consolidated EBITDA, BRL 80 million, representing an increase of BRL 12.8% when compared to first semester of 2019.

Slide #10, please. As you know, recently, we had a strong cycle, including expansions, especially 2017 and '18. We made acquisitions for distribution and installed new distribution centers. We also expanded our business outside the country. This increased the need for working capital in the company and apart from this, the appraisal of the U.S. currency in relation to our currency allowed us to use more resources, especially financial resources and inventory outside the country.

During 2019, we aimed at reducing working capital needs, and now we believe we have a level that is adequate for our needs. But the exchange rate has a direct influence on these accounts, working capital accounts, especially the operations outside Brazil. And in spite of all the efforts we made to maintain the levels at the end of 2019, the increase in the exchange rate created an increase in the balances outside the country. Thus, in Q2 '20, we have BRL 400.2 million more than what we had in 2019, which was BRL 322 million.

I'd like to conclude the slides on results. The rest, we have supplementary material on the Internet at our website.

And now I invite Sergio to continue the presentation and talk about our expectations for this year. Sergio, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. We'd like to continue on Slide 11, and we will have a summary of our agenda for the current quarter and the rest of the year.

We understand that the demand for products, aftermarket parts, will continue really strong. And as measures of physical distancing are continuing, we should have circulation of vehicles, and this should grow. Also individual transportation is on the rise, and this requires more maintenance. It's important to reinforce that our distribution chain represented by excellent independent distributors in many parts of the world gave us strong support in the most complex situations of this crisis, gaining space and as a consequence, reinforcing our participation in these markets.

In some of the products, we have a portfolio above 60 days of production already sold. In the U.S., which represents more than 50% of exports, although the volumes are lower, the drops have stabilized, and we see good -- we have good expectations. And also, we believe the performance will grow.

We had a complete lockdown in some important economies in South America such as Colombia and Peru. These markets are now coming back, and we should observe the same movements of expansion in demand, which we saw in Brazil and also Argentina.

In China, the demand suffered an impact in February, recovered very rapidly, and sales are above the plans we had for China during this year.

We mentioned before, the acquisition of Nakata places Fras-le as one of the 3 largest suppliers of aftermarket parts in Brazil. After approvals by the authorities, we're preparing the closing of the deal in this quarter, and many synergies are being evaluated. We're very happy to conclude this cycle of expansion, strong expansion in the next few years, and we have made this great acquisition.

We have many important chapters to explore after this acquisition, and we will surely share with you soon the synergies we have achieved.

We also began at the end of the quarter and we concluded in Q3, the inclusion of Fremax in Fras-le, aligned with the strategy to optimize the structures and business of the company. With this, we intend to reduce costs in administrative areas and also other areas, apart from making the joint management more efficient when taking advantage of synergies, and this will certainly create benefits that are financial and also asset-wise. And also, we will be able to amortize the premium that we paid in the acquisition of Fras-le and its participation in Fremax worth BRL 70 million, which will increase -- which may increase or be less according to the progress. The benefits coming from the tax amortization of this premium will be used for the benefit of the shareholders of Fras-le.

We have the legacy of 2019, reinforcing our results and also a favorable exchange rate that has helped in exports. Our business profile is very robust, very adequate with diversification of revenues, geographies and product mix. We are making progress to grow.

We would like to conclude the presentation. In the webcasting, you will find supplementary material and slides and support material that will give you more details about the financial indicators and operational indicators. We are available to clarify any points you may have.

I'd like to thank your participation, and now we'd like to begin our Q&A session, where Hemerson, Anderson Pontalti and our Investor Relations team and myself will be available to answer questions. Thank you. Operator, you may proceed.

[Operator]

[Operator Instructions]

[Unknown Executive]

I have a question that was sent to me by an individual.

The question is, we know that the pandemic have been stronger -- the pandemic has been stronger in the south of the country. And the question, how are you dealing with this? What is the situation in Caxias do Sul?

[Hemerson de Souza, executive]

We have operations in many cities in the south. So I would like Mr. Pontalti to answer because he is very close to these operations.

[Anderson Pontalti, executive]

Thank you, Hemerson. The situation in the city of Caxias do Sul, we have had a rise in the last weeks with the number of people affected by the pandemic. It is under control. The intensive care units in the city are stable at 75% occupation for some weeks. The city hall, together with companies and business have worked to make available beds according to the needs in the city.

Now looking at our business, we have a controlled environment with indicators that are better than the population, the city, safety indicators that are better. We have strong action

[Audio Gap]

July was a very good month and higher than our expectations.

[Operator]

[Operator Instructions] Since we have no more questions, I'd like to pass the floor to Mr. Sergio for his last concluding comments.

[Sergio Lisbão de Carvalho, executive]

Once again, I'd like to thank you all and we're available for any additional clarifications. Please get in touch directly with our Investor Relations department for clarifications.

Thank you. We wish you a good day.

[Operator]

Thank you. The conference call for results for Q2 2020 is concluded. We thank you all for participating, and we wish you a good day.

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