Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2022-Q2

[Jessica Cristina Cantele, executive]

Good morning. Welcome to the conference call of Fras-le for the Earnings of Q2 and First Semester 2022.

Before beginning, I would like to make some important announcements. This conference call is being recorded, and after the end will be available on our website, ri.fras-le.com. We have simultaneous translation in progress, please click on the button interpretation with the globe at the bottom of the screen. [Operator Instructions]

Apart from this, we would like to clarify that any forward-looking statements made concerning Fras-le, the projections and results and the growth potential of the company are based on forecasts and were based on the management's expectations in relation to the future of the company. These expectations are highly dependent on changes in the market and general economic performance of the country and international markets and thus, can suffer changes.

We thank you all for being with us in this conference call. My name is Jessica, I am Investor Relations at Fras-le. And we have with us our Chairman, CEO, Sergio de Carvalho; Superintendent Director, Anderson Pontalti; and DRI, M&A and Business Director, Hemerson de Souza. We wish you a good conference.

And I'd like to pass the floor to Sergio, who will begin the presentations.

[Sergio Lisbão de Carvalho, executive]

Thank you, Jessica. Good morning. Once again, we'd like to welcome you to our conference call for earnings for Fras-le for Q2 2022.

I would like to begin talking a little about our highlights, a little about the markets, talking about earnings and our operations. In terms of the markets, we have an important indicator that is very positive and indicator linked to aftermarket. Reminding you that 90% approximately of our revenue are associated to aftermarket parts, and this indicator, which is measured by CINAU gives us an idea of the business at workshops and garages that do maintenance. This is an important indicator for the aftermarket, and it is positive, a growth of 6.8%, until now in terms of increase in business. More users are taking their vehicles for maintenance in workshops and this is very positive for us.

For the [ 10%, 12% ] of our sales that come from OEMs, we have a good demand, especially in the export market, the domestic market in terms of semi trailers, production semi trailers. The market is at a good level but it's not booming like last year. So we have production of buses and trucks are at a good level, but not as strong as last year. In 2021, due to lack of components and other -- but exports are very strong. And we at Fras-le, since we export a lot, this is very important for us. We have good portfolios in terms of friction material for the heavy line, disc brakes and also suspension components, a very positive situation. And we have been expanding. And we see that the markets are more sensitive to price. This is due to the buying power on the part of individuals which has dropped. This impacts more our products for the light line as the buying power of individuals is worse. So they do not look -- they look for cheaper products for the maintenance.

In terms of results, we had another record. In revenue we reached BRL 782.6 million in net revenue, a growth of 30.6% when compared with Q2 2021. We had a gross margin that was very solid 29.4%, thanks to an excellent effort on our sales teams and also supply teams. The EBITDA margin 16% recurrent. We had no non-recurring events. And a net margin of 8.5%.

In terms of operations, we -- the restrictions were normalized in China. You will remember about the lockdowns in China in different cities. All this process this year led to many difficulties in terms of supply of raw materials. But we had a normalization of these points of the supply, especially in April and May. The conflict in Ukraine had an impact on our sales in the region. This conflict continues but we had -- but the impact on our revenue was not strong.

Also economic instability in Argentina was challenging, a new government with a new vision. Many difficulties in imports in Argentina, but we have a very strong team that is working very well in this scenario in Argentina. We continue to operate in this geography. We had approval for a very important project here in Caxias do Sul in Brazil, concerning the production of heavy lining for trucks.

We'll expand our production capacity by 10% in heavy linings with a new shift, an extra shift. And we already hired 114 employees, half of them in June and this will bring us a production capacity, as I said, that is higher in the segment where we have an export market that is growing. So a great victory for us also.

And to continue our dialogue, I would like to pass the floor to Anderson Pontalti.

[Anderson Pontalti, executive]

Thank you, Sergio. Thank you to all participating in our conference call. I hope you're all well. It's a cold sunny morning here in the south of Brazil. I would like to talk more about important facts during this quarter and the first has to do with our brands. Reminding you that brands, our powerhouse of brands is one of the strengths of Fras-le, well-known brands. And we have an endorsement from the mechanic survey.

We had 19 -- we had our brands in 19 categories, the most relevant is that Nakata is second best remembered brand by -- at workshops, Nakata. So it's important to see the survey concerning the fortress of Fras-le the brands that are present in all workshops in Brazil. A very relevant workshop designed when Fras-le acquired Nakata is the consolidation of our logistics in the city of Extrema in the state of Minas Gerais. There, we have the shock absorber plant of Nakata and we're in full implementation.

In July, we began the distribution of items from Controil from this address to the regions except south. All the other 4 regions of the country are being supplied by Controil together with Nakata products from this warehousing Extrema. And now we're including Fras-le and Fremax in the same address.

And finally, next month, we'll begin also supplying Fremax from Joinville and also from Extrema in Minas Gerais consolidating one of our disruptive projects in the Fras-le universe. The benefits of this project will be captured totally as of 2023. This year, we're implementing and the benefits will be partial and we will have the cost of implementation.

Going on to the next slide. Here, ESG, very relevant for us. As Fras-le Smart Materials as of August last year, we had the first line of products implemented, which for the parts of Randon for the semi trailers. And this project had the duration of 6 months. We have a relevant OEM which will use Fras-le Smart Composites, a new line of products that are structural. Soon, we will talk about the name of this OEM. And this is the beginning of a very relevant journey with truck manufacturers and this can also be expanded and exported to other countries. It is a solution that lowers the weight and also helps decrease greenhouse gases. Together with Randon, we have inauguration of a photovoltaic unit in China and it began to generate energy in June. 20% of the consumption of the friction material in China is being generated through solar energy. And we're implementing also our photovoltaic in the technology center of Randon, and it will supply 100% of electricity needs, and this will be used also by other units of the company.

When we look at governance year-after-year, Fras-le challenges itself and proposes to bring transparency and alignment with better practices, the best possible practices for all the investors and the public related to the company to know that we are in line with all the issues in relation to governance. We implemented evaluations and self-evaluation of members of the council, and also, issues linked the forecast that 2/3 of the members of the council are from outside the company and the majority independent, thus, we're looking to improve our practices in this market as a company of the stock market.

Now, the next slide. Here, using words of Sergio. This semester had many challenges. We have some insecurities, conflicts, lockdowns. And here, we show the importance and the resilience of our business model that we built in the last few years. We are leaders in the market. We are an automotive solution. We have -- 87% of our business is aftermarket and the vehicles cannot transport without our components. So we have iconic brands and a very large portfolio bringing a complete solutions from steering until the axles. So this really shields us from economic cycles. Apart from this, we have an important geographic penetration in [ deep ], thus, problems in one or another economy are less important and have a smaller effect for us.

So now, I'd like to pass the floor to Hemerson, who will continue the presentation.

[Hemerson de Souza, executive]

Thank you, Anderson. Good morning to all who are participating in our conference call. It's a pleasure to talk about the results in Q2. As mentioned by Sergio, I don't want to go too much into detail. Our revenue grew when we compare the quarters more than 30%. If we look at Q1 this year, more than 11% in Q2 in comparison with Q1. And if we compare with last year, more than 20% growth in revenue. I believe it's worthwhile reinforcing one point that Anderson mentioned, the diversification of our revenue, because we are exposed to the aftermarket that is more resilient and more robust and also more resilient as I said, but also due to the diversification of the portfolio that we were able to do in the next -- in the previous years.

So if you remember, we made acquisitions. We brought in 2012 Controil, 2017 a company in Argentina, Fremax, Jurid in 2018, 2020 we brought Nakata. All of this brought to us a very robust portfolio and this creates conditions to continue growing in a more robust way. Fras-le 10 years ago had a more limited number of products. We were concentrated on friction materials and today, they are only 50%. Today, they represent 50% friction materials. The other products gives us the possibility to grow, gives us a good balance in terms of competition or difficulties or competition with cheaper products. Today, we're better prepared to go forward and grow and have a modular growth.

Sergio will mention, we're using our guidance to show the growth indicators for the year. Anderson mentioned, we say that 90% or 91% sometimes 88%, in this semester as a whole 87% of the sales came from aftermarket products. I believe it's important to mention, we made a review concerning the cost increases. We were able to increase prices and also improved our operational efficiency trying to affect -- trying to avoid very high prices by optimizing performance. But we were able to increase our prices. And we have also won synergies between the companies that were acquired, being efficient with our clients and not having to increase very much the prices. Although we have an impact on raw materials.

Next chart, I will show this vision of the market. Reminding you that we are 60% domestic and 40% exports. So when we look at the domestic market, we grew close to 20%, and in the semester year-to-date a little more than 15% in this semester, close to BRL 900 million in revenue. In the export market, we – BRL 696 million (sic) [ BRL 596 million ] markets in revenue, export market, a growth of close to 30% -- 27.4% and we're positioning ourselves close to BRL 300 million per quarter when we compare the last 2 semesters and in the last quarters, too, we can see a consistent billing in the export market.

If we look at the segmentation, more than 60% of what we sell is dedicated to parts for light vehicles, passenger vehicles. We changed this during the last quarters. We were a company that was more dedicated to heavy vehicles. The acquisitions we made brought this support to have more relevance in light vehicles. There is no preference. We want to be relevant in both segments, light and heavy. But the light line has a larger fleet than commercial vehicles and this allows us to grow and thus, to grow in a more robust way, looking at the size of the fleet..

Now, per segment, friction today represents 49% of the sales, almost 50%, while suspension, non-friction as we say is the rest. This diversification is very good and very important for Fras-le. If we look at the export market, we still -- we suffered a little in the first semester due to the lockdown in China, difficulties due to freight prices. And this continues to affect the results we show here. We also noticed a strong demand in mature markets like Europe, the U.S. for the heavy line because we are more linked to aftermarket products, we haven't seen any difficulty in sales. The volumes from these clients have been very attractive.

We can go on to the next chart. Here, we talk a little bit about the result. Our results continue to be robust and growing. It's worthwhile mentioning nominally, we had BRL 231 million in EBITDA in this semester, the growth of 1.9%. When we look at this, we have a small drop in relation to the first semester of last year 2021. In 2021, we had a condition, especially the first half of the semester last year, there was -- we -- due to inflation, we didn't have all the effects of inflation.

And then this began to normalize in the next -- in the quarters after this. We have a picture of Q3 2021, very close, very similar to what we were able to do in this semester. So maintaining these margins, these levels of margin, maintaining these margins shows us that we're on the right track with all of the gains in productivity, synergies and also being able to increase our prices due to inflation in raw materials.

We were able and this has sustained the margins. When we go to net profit, we had a small drop in comparison. Here, we have the benefits of JCB interest on capital within the metrics of the semester. And this year, especially we declared the payment of interest on capital in July and this benefit will be part of Q3. So, if we could balance this, the first quarter would be even a little better than the semester.

Now, concerning the quarterly evolution, here, we see our efficiency in relation to some accounts. We have a company that has debts. So the higher interest rates in Brazil have increased our financial expenses, but we had a good year for exports in Q3 in comparison with Q1. So the exchange rate is helping us.

Now, going on to the NCG chart and free cash flow. I understand that, here, we have good numbers to show where we have constantly said this to the market. Our cash usage is a little higher due to the logistics problems, difficulties with inventory.

We have many distribution centers around the world. So we have raised our inventory levels, but we're diligent in finding opportunities to reduce inventory and have a more balanced situation, which is what we want. We reached 73 days of working capital in this semester, therefore, dropping in relation to Q1 and with a better performance if we look at the year of 2021, as shown here.

I believe it's good to say that when we look at free cash flow, we maintained our investments and we had an important number BRL 630 million coming from our follow-on that ended on August 7 this year. And this gives us a good cash position. The resources are here for a short time. We're looking for -- we want to use this.

Our expansion plan was announced. We made small -- we will have in Randon, we invested in a photovoltaic power plant. We want to do this, giving support to renewable energies and aligned with our ESG ambitions.

I would like to go to the last chart, talking about financial performance. Our net debt reached BRL 79 million, almost 0 leverage in this semester, if we compare with the EBIT of the last 12 months. Obviously, reinforced by the resources from the follow-on and the investments BRL 26.1 million invested in this semester well aligned with our guidance to be close to BRL 100 million as mentioned yesterday. And our debt is a long-term debt. We have no cash problems for the expansion we have foreseen in the next semesters. We're very healthy -- financially healthy and conservative situation in relation to leverage even with acquisitions like Nakata.

Well, I would like to pass the floor to Sergio and at the end we will be here for the Q&A.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. Ladies and gentlemen, due to the public offer of shares which ended in April, we opted to cancel our guidance that had been informed to the market at the beginning of the year. And after these results, we decided to reactivate our guidance for 2022, the same one that we had given previously. So BRL 1.5 billion in the first half of the year, and our guidance for the full year is BRL 2.7 billion to BRL 3 billion of net revenue. Our revenues from the export market $117 million in the guidance, between $190 million to $210 million, revenue from the export market. EBITDA margin 15.5% in the first semester, and our guidance was between 14% and 16%. And our investments -- organic investments BRL 26.1 million in the first semester and the forecast was BRL 90 million to BRL 120 million.

So in the beginning of the year for many reasons, we decided to be more conservative in investments. And we -- okay, Jessica. Here our vision for the future, first of all, in the short-term, when I say short-term, the rest of this year, we hope to have a good demand. We are exporting very well for aftermarket products in general. Inflation continues, although on a lower scale.

We have seen an improvement in the logistics chain and supply international logistics although needing attention, but we've seen improvements in international logistics. We have some geopolitical instabilities. We have the situation in Argentina that we already mentioned. In Brazil, we have the second half of the year with elections in the next 60 to 90 days. The conflict in the Ukraine is not over.

We -- possible new conflicts between the U.S. and China in the horizon. And we also have situations in Brazil. The effect of the World Cup where we may have less time for business due to the World Cup. But we continue with a positive vision with our projects, with new technologies that we're creating that will make a difference in the future. Our expansion in international markets, new businesses in the U.S. and India and many other geographies, so we continue very positive in relation to the future.

And now, I'd like to pass the floor and she will begin our Q&A session.

[Operator]

[Operator Instructions] Let's go on to our next question by audio from Luiz Capistrano from ItauBBA.

[Luiz Capistrano;ItauBBA, analyst]

Congratulations for the results. I would like to ask concerning the guidance, reactivating the guidance before the follow-on. In the first semester, we had strong revenue, and to reach this, all you have to do is repeat the first semester to reach the guidance. And as you mentioned showing it seems that demand is good based on the survey at workshops that you mentioned. And there we see a growth trend. So you left the guidance at BRL 3 million. Is there anything that could affect and make the revenue drop? Do you -- or is there a risk of upside in the future?

The second question also concerning the guidance, the margin, to get to the top of the guidance you're doing very well due to the -- as we see in the margins in the first semester. But to get to the top of the guidance you need a margin of 16.5%, because if you look at Q2, I believe you can reach this margin of 16.5% due to this -- a lot of demand. So I'd like to know why you maintained the guidance the way it was in the first semester, at the beginning of the year?

And the last question in relation to the guidance, the CapEx. I'd like to understand these BRL 70 million to BRL 100 million in CapEx in the second semester. Are they for maintenance? Or do you have any strategic projects for CapEx?

[Hemerson de Souza, executive]

Okay, Luiz. I believe I can begin, then Sergio and Anderson can also supplement the answer. In fact, Luiz, when we look at the first semester of this year and our guidance, yes, you have that impression, yes, just replicating. Seasonally, we have -- we see a better performance in Q3 and Q4. In Q4, as Sergio mentioned, we will have the World Cup. And 60% of our sales are concentrated in Brazil.

There will be some impact due to the World Cup. If the World Cup will last 1 month, and this may affect the sales. We know this from other World Cups. There is always an impact. Also, we have December which is a month that is more tight in terms of demand. We have vacation, holidays. But we would like very much, we were prudent in maintaining our guidance and we're working hard to be at the upper end of the guidance.

We have important challenges, demand, elections. So we're cautious, and also in terms of results. The results today are based on value creation that we have been working on, Anderson showed the picture of the first consolidated delivery from our consolidated dispatch center in Extrema. So we will have better results there. And we're all working to do this better and better.

Now concerning investments, well, Sergio and Anderson can supplement bit about investments, Anderson can answer this question. He is very close to these events.

[Anderson Pontalti, executive]

Thank you for the question, Luiz. We were very strict in relation to investments in the first semester because there were announcements. We had Omicron, COVID effects from China, so we decided to delay investments. I believe we should accelerate now. But there were -- first, we have to do maintenance for the current assets we had. So we're capital intensive. We need maintenance to avoid negative surprises. The second, we have some -- we have increased capacity for some products, so we have invested in many lines where we have a lot of demand, and also to reduce over time. We mentioned the business, the project for Smart Composites. This project requires BRL 4 million in investments. This is one example among other new businesses, new products.

I'd like to supplement your answer, Hemerson, since there is a scenario of inflation, but there is also the perception of deflation in the future, less inflation in the future. So, many are waiting to buy later to have lower prices. Many clients are waiting to pay less in the future because of inflation going down. So in the last quarter -- so people are waiting to buy when inflation goes down. This happens when inflation goes down, which is the opposite of last year, where everyone wanted to buy early to avoid higher prices in the future due to inflation. So, this is also mapped in our second semester.

[Hemerson de Souza, executive]

Sergio?

[Sergio Lisbão de Carvalho, executive]

I'd like to continuing in line with what Anderson mentioned linked to the impact of variances in raw material prices.

[Jessica Cristina Cantele, executive]

Now the next question, Lucas Marquiori, BTG Pactual.

[Lucas Marquiori, analyst]

Two topics. The first, I'd like to understand this data that you showed with the survey, growth in demand for aftermarket products. This is the opposite of what we expected. We thought that -- we thought buying power would go down, people will travel less, and this could bring lower demand for maintenance. What you're showing is the opposite, an increase in demand for our aftermarket due to a booming market for workshops. So you increased a shift in brake linings, a premium product. So can you explain why demand is up? And why you increased -- you opened a new shift for brake linings for heavy vehicles?

And also, Hemerson, your analysis of the business for acquisitions, for example, we -- but if you can give us some more details. These 2 points.

[Hemerson de Souza, executive]

I understand that Anderson and Sergio can comment on their vision. Anderson is very close to the market. And other factors that helped us to increase production. Sergio can supplement with his vision of what we know this as demand from other markets. Then I will be back to talk about acquisitions.

[Anderson Pontalti, executive]

Sergio, I will begin here. Aftermarket, Lucas, was a great surprise for us. We began Q1 with less certainty in the light line, but it was due to high inventories in 2021. The demand in Q1 was smaller. In Q2, demand went up because inventories were sold. Inventories are balanced. We see that there is main -- new trucks are very expensive, so there is a lot of maintenance on older trucks. This brought -- this made vehicles run more. And we see that workshops have a lot of business in the last period, in the last month, too. So these factors that increased demand. In transportation, agriculture is doing very well. Transportation and agriculture. So thus, the harvest has record prices, so this has helped the heavy line. But we have to remember that China stopped supplying the world. We're very strong in the commercial line, that's why we added another shift. And so we have gained market share. We're winning market share outside Brazil in heavy line.

Now, talking specifically about market share, I would say that we won -- we increased our penetration. The sales to our direct clients went up 19% in the first semester and our sales continue. So we won market share due to the investments we have made to increase productivity and an excellent sales team that is very constructive in looking at finding all the possibilities to improve our service to clients. It's a sum of all these points that made us gain market share.

[Hemerson de Souza, executive]

Sergio, would you like to talk about the export market?

[Sergio Lisbão de Carvalho, executive]

Anderson already explained well. The new shift is directly linked to the heavy line. The heavy line has behaved well, both in export markets where we are growing, and also in the domestic market. That is why our concern with buying power is related to the light line, passenger vehicles. Anderson explained very well.

[Hemerson de Souza, executive]

Lucas now, your second question. We have had an excellent pipeline, an active pipeline. What changes depreciation of assets in the stock market is not the only factor. We have a lot of experience, so we always look at what we see as what generates value, when we think of an acquisition. So we look a lot at the value generation in the future and not only the acquisition price. Of course, interest rates are high. This makes acquisitions less attractive. We know that we won't continue forever with high interest rates. And in general, this doesn't change things in terms of investing. We have had, I won't say difficulties, but we're being more cautious in comparing projects. And we are making a greater effort to select. We want to also increase our presence in the export market, assets outside Brazil. We want to continue growing in Mexico and Europe.

On the other hand, we have noticed in Brazil some projects that have good value generation prospects for us. We have no transaction, but we're making contacts with these targets as we make progress. We will inform. I'd like to say clearly, the strategy hasn't changed. There is no pressure on us in terms of targets. We want to choose the best possible targets and generate value for our shareholders and stakeholders, as we did in the case of the acquisitions in the first cycle of expansion.

Sergio, would you like to supplement?

[Jessica Cristina Cantele, executive]

Now, the next question Lucas Barbosa, Santander.

[Lucas Barbosa, analyst]

Can you hear me? Congratulations for the results. It is a continuation of the previous question. Could you talk about the aftermarket products in 2023? There is the interest rate that is very high, high interest rates. And also, we may see the fleet getting older next year. How do you believe this will impact the aftermarket products? And...

[Hemerson de Souza, executive]

Okay, I will begin. This -- Lucas, so this is our strong point. We offer products with good brands, trucks, buses, passenger cars, SUVs. We have a great breakdown. And aftermarket products benefit. It's very clear, when new cars are selling well, this also helps aftermarket products. Yes, there were difficulties, it's difficult to buy new cars. In general, the driver for aftermarket continues and this will continue for some time due to the price of new vehicles. And people are keeping used cars for more time. They're using better parts. So we have premium products. We are not a company that sells cheap products, and this has brought us many benefits. I believe this will continue, not only in this cycle, but in the next cycle, too, as we see difficulties due to price, higher interest rates. And also, even if it grows, it's not going to change aftermarket products. It's a very resilient market.

Anderson, would you like to supplement?

[Anderson Pontalti, executive]

This is one of the things that makes us special. And with more products, this becomes more evident in the results. We have 4 important brands. Fras-le and Fremax are positioned as premium, and they are part of maintenance since the early stage of the car. If you have a newer car, you want to invest in better parts, you want to keep it original. So -- and these -- we get some types of products. For example, shock absorbers, people change after the fourth, fifth year, Controil, too. Controil, for example is a brand that is premium in aftermarket. So our strategy is designed for the older fleets. This is what we have seen. In the next few years this will continue for 1 or 2 until credit becomes attractive, again, interest rates go down. And the OEMs are working. This is positive for us. I don't see this as a risk. I believe margins will be maintained with prices also going down because of deflation, lower prices for raw materials, but margins will be maintained. We will have to monitor this every month.

[Hemerson de Souza, executive]

Jessica, I'd like to mention some points. We have some questions from [ Carlos Herrera ]. Carlos, he says, we're seeing an evolution month after month. When we compare June with June last year a growth of 50%, do you believe this growth will continue?

The answer is, yes. We have a more linear situation. If you look at this year, we're growing a little every month. So if we compare with last year, especially some months that were more difficult in sales, yes, this growth can be explained. We can see that it's a linear result. And some months are better because there are more work days. August has the highest number of work days in the year, 1 or 2 extra days. This makes a difference in sales.

And [ Antonio Rizzo ] says, the aftermarket, our sales are linked to aftermarket, which is stronger, heavy line or light line?

We have a better support in light line due to the acquisitions. Nakata, Fremax and Controil are dedicated to the light passenger vehicles. But the fleet in heavy vehicles is 3 million, 4 million. In light line, we have 25 million vehicles only in Brazil. So light vehicles can grow much more.

And also in relation to inventories, Antonio Rizzo says, inventory should it -- will it grow, will it grow in the heavy line?

Normally the light line, passenger vehicles has more inventory because you have a greater variety of parts to be repaired. Inventory is concentrated in passenger vehicles. Heavy vehicles have a better planning for maintenance. And the owner of a truck or bus maintains an inventory of parts, and demand doesn't go up and down for trucks and buses for those parts that are necessary. In the light line, passenger vehicles, the impact is higher, more ups and downs.

Now, the next question? I answered the questions that were sent in writing.

[Jessica Cristina Cantele, executive]

The next question Lucas Laghi.

[Lucas Laghi, analyst]

A simple question. Most of my questions were already answered. Just to confirm one point in relation to aftermarket, evolution of revenue month after month. We saw a strong evolution in May, in June, a strong evolution. I'd like to understand, do you believe this was inflated due to, for example, bonuses received by people? Do you believe this was affected by bonuses or government aid programs? Or is it something that it will be permanent?

[Hemerson de Souza, executive]

That is Pontalti.

[Anderson Pontalti, executive]

Yes, these are some factors. 3 factors, one, in Q1, things -- Q1 was more timid, was more shy and was weaker. So why? Because inventories were high last year. So since people used up the inventories, so there is a greater potential for sales. This is due to our distributors. Also, yes, FGTS is a fact. We saw the immediate effect of -- there was a drop due to higher fuel prices, so distributors, too. So we see -- now we see vehicles being used more because of a downward trend in fuel prices. And the people are repairing their cars. I wouldn't say you that we will go back to the previous demand. Things have changed due to the fact that people are using, once again, more individual cars. People are repairing their vehicles. They are not buying new vehicles. And also additional money due to FGTS and government aid programs. So 50% is due to this.

[Jessica Cristina Cantele, executive]

Our next question Luiza Bastos from Safra Bank.

[Luiza Mussi Tanus e Bastos;Safra, analyst]

The first question which is a follow-up about M&A. With this challenging scenario thinking of the strategy to diversify, can we expect acquisitions in other segments? Do you have new products to release?

[Hemerson de Souza, executive]

Sergio, would you like to answer these questions, Nione and also diversification?

[Sergio Lisbão de Carvalho, executive]

Luiza, thank you for the question. Luiza, we developed strategic plan 4, 5 years and they are linked -- everything is linked to this vision. We haven't changed our position due to situations, due to events that happened. We will recapitalize ourselves to continue in our journey, making new investments. We did this aligned with knowing that the assumptions we made in the past are valid. We want to continue replicating the model we have in other geographies. We have opportunities outside Brazil, countries with strong income. We'd like to privilege more opportunities outside Brazil. But the strategy continues the same. We have good opportunities. We're analyzing them. And we have to choose now the best among the possibilities we have. So that answers the first part of your question. We will continue doing what we had informed to the market at the time of the follow-on.

Now, concerning Nione, we're executing our development plan, business development plan. We continue very optimistic concerning this initiative Nione. We continue being surprised by the opportunities, the size of the opportunities. We have the paint side and we have a good evolution concerning the benefits of Nione to be used in nano particles being mixed to cast products. We have the intention to show a product in the next transportation event. So we have 17 fronts, all of them evolving well. But since it's an innovation, it takes more time to become a business and products and to have an effect in the P&L. We're evolving very well. We're very happy with this initiative.

[Hemerson de Souza, executive]

We have time for one more question and then we can answer the remaining questions in writing.

[Jessica Cristina Cantele, executive]

Our last question Andre Ferreira, Bradesco BBI.

[Andre Ferreira, analyst]

We saw recent announcement of the partnership between Nione and the other company to add niobium to metals. Can you talk about this? And when we will have revenue from this project? Can you update also other new businesses that you have in progress?

[Sergio Lisbão de Carvalho, executive]

I can comment, yes. Andre, thank you for the question. Andre, in this process, we signed a confidentiality agreement. And on our site, we will continue. I cannot give you more details due to this confidentiality agreement even knowing. One application we have in nanoparticles is in the field, synthesized materials, when you mix solid components and you subject them to high temperature and pressure creating different metals. We have initiatives linked to material science. This has applications in the electric motors. But this is one of the 17 areas where we are working on. We haven't found any vertical linked to Nione that is not bringing the benefits we expected. All fronts are bringing benefits. Myself, we're anxious. I'm anxious too to transform this into results, in products, in sales, especially, and this is happening now through the first application, which is in paints. We will continue and cast products. But there are 17 work fronts teams, all are very promising. In the next 18 months, we will have a lot of transformation of this into business.

[Jessica Cristina Cantele, executive]

We thank you all for participating. And we would like to conclude the Q&A session. Now, I invite Sergio for his final comments.

[Anderson Pontalti, executive]

Thank you for participating. Thank you for the questions. We are all available for any clarifications, any other questions you may have, we're all available. Please get in touch with our Investor Relations Department for any clarification. Thank you.

[Jessica Cristina Cantele, executive]

And we will meet again in our next event. Thank you.

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