Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. Welcome to the conference call of Fras-le Mobility on the earnings of Q2 2023. Before beginning, we would like to make some important announcements. This conference call is being recorded, and after the conclusion, will be made available in our website, ri.fraslemobility.com. [Operator Instructions]

We would like to clarify that the declarations made in this presentation concerning business perspectives of Fras-le Mobility, projections, results and business growth potential of the company are based on assumptions and were based on the expectations of management in relation to the future of the company. These expectations are highly dependent on changes in the market, general economic performance of the country, the sector and international markets, thus, it may suffer changes.

[Monica Rech, executive]

We thank you for being with us in this conference call. My name is Monica, I am from Investor Relations of Fras-le Mobility. And we have with us today the Chairman and CEO, Sergio Carvalho; the COO, Anderson Pontalti; the IR Director in M&A, Hemerson de Souza; and as a guest and Coordinator of IR Finance from Randoncorp, Davi Coin.

We wish you a good conference call, and I pass the floor to Sergio, who will begin the presentation. Sergio, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you, Monica. Good morning to all the participants. It's always a great satisfaction to be with you and share with you what we have done within Fras-le Mobility. Talking first about the markets. Our aftermarket is booming, both in the light and heavy line, maybe a little more in the light vehicles line. And this is due to the higher interest rates have made consumers try to keep their vehicles for a longer time instead of buying new vehicles. So this brings a greater need for repair in the vehicles.

Our segments, OEMs, especially OEMs are a little below our expectations, but reminding you that they represent only 10% of our revenue. Trucks, in Brazil, the truck market is below semitrailers, has a good performance. But as I mentioned, the impact of OEMs is limited, is small. In Argentina, the restrictions on imports and the economic activity are our concern. In the U.S., the higher inflation rate together with higher inventories are points of concern.

Now talking about results. We reached a net revenue BRL 919 million in Q2, an almost 18% higher than Q2 '22. And in the first semester, we reached BRL 1.8 billion in net revenue. Our gross margin, almost 35%, which is -- which shows a good performance, the good market share and effectiveness of all our sales areas, both at the clients and also purchasing of raw materials, a very positive -- very positive work is being done in this first part of the year. The EBITDA represented BRL 186.9 million with a 20.3% margin. But as Hemerson will explain later, we had nonrecurring factors that had an impact on results. Without these factors, we would have 21.7% margin. These are very good results.

In terms of operations, all the units have operated and contributed in a very positive way. Juratek, a company that was acquired in the second semester is already part of the results, BRL 47 million in revenue for this quarter, we already have an accelerated process to use -- to adapt the company to our work practices. Thus, we are in the process of integrating this company, and we have great expectations, as we did in other acquisitions, a lot of synergies were obtained. So in the future, we will give you more details. India and China growing in aftermarket in OEMs, new business in India, expressive business in India and China with good results after the pandemic, helping us to have good results.

Argentina, I believe that you all know a lot about the situation in Argentina. But here, we have a picture if we can call it this way, that is positive in spite of all the difficult context in Argentina. As we know, the country is in difficulties for a long time. There -- they had a drop in their harvest due to a drought. And this reduced even more the entrance of dollars in the country. So things that were difficult became even more difficult in Argentina. The Central Bank does not have reserves and has difficulties with its obligations and thus, they are limiting imports. On this -- in the next weekend, we have the beginning of elections in Argentina. So a very volatile and difficult situation.

The issue is what can we or what are we doing to protect our business. And we will share this in two parts. First, protecting our exposure to exchange rate. We have done this with NDFs until June. But -- so real exchange protection by NDF. But the costs do not justify this transaction, this protection because of future devaluation. What we're doing in this scenario of uncertainty in Argentina, although it's not the ideal, is making investments in dollar-linked, protecting 70% of what we have in terms of exposure in Argentina.

In terms of operations, we have a very experienced team that is familiarized with these difficulties. They -- our team in Argentina is alert in terms of prices due to the devaluation of the currency and maintaining our import licenses. So this team is very competent, during many years, they have shown a lot of competence. And our expectation is that we will continue to work in the same way, navigating in these turbulent seas as we have done in prior years.

Now concerning our guidance, we have foreseen a revenue for the full year between BRL 3.3 billion to BRL 3.7 billion in net revenue, actual BRL 1.8 billion in the first semester, $116 million in revenue from the export market versus our guidance of BRL 230 million to BRL 280 million. We had an EBITDA margin of 20.7% compared to a guidance of 15% to 18%. Investments, BRL 57 million. Our guidance is BRL 110 million to BRL 140 million.

Right now, we are still maintaining our guidance for the year. We will wait another month or two in the second semester in order to decide whether we will update or not our guidance due to these very good results that we're having. There are some uncertainties that make us wait a little more to update our guidance.

Now I'd like to pass the floor to Anderson Pontalti, who will continue the presentation.

[Anderson Pontalti, executive]

Thank you, Sergio, Monica. It's a privilege to be here once again with all of you. Thank you for being with us. So I begin on [ JCP ]. And now we approved on the 17th distribution of BRL 64.5 million, BRL 0.24 per share and the payment will be made on August 14. And this is due to the good results, it's a historical distribution. This is also -- we thank also our shareholders.

We'd like to tell you some important stories, highlights in this second quarter. We inaugurated [indiscernible] at Fremax, painting -- paint line that we are calling, Maxcoating, for disc brakes, thus, using Nione. Nione is a company with technology, nanoparticles and we're beginning our first sales to the U.S. market with disc brakes with the protection of nanoparticles in paint. These are -- have a greater resistance to corrosion and a line that is 100% automated, totally ESG with water-based paints and the product -- thus extends the life cycle of the product with a better performance than current solutions in the market.

We're very proud of this line. There is no solution competing with this one in the rest of the world in -- none with nanoparticles and no one delivering the performance that this product delivers. We are developing market opportunities to sell this technology, which is a pioneer technology.

Next slide. Anticipating the numbers that Hemerson will comment later, a very good quarter and revenue surpassing BRL 900 million including Juratek in this quarter, adjusted EBITDA of 22%, as mentioned by Sergio and the CapEx of BRL 25 million. We have BRL 56 million, we have BRL 25 million consolidated. And if we look at this semester, the company has BRL 1.8 billion in revenue, BRL 380 million in adjusted EBITDA which is, by far, the best quarter and the best semester in our history, reminding you that our business passed through a transformation.

Today, we have 48% of the revenue in friction material, which is the origin of the Fras-le. Today, Fras-le Mobility goes beyond friction material. We continue with a resilient revenue and 80% of our exposure is aftermarket and 34% come from the export market. And remind you that we depend a lot on the circulating fleet. So the garages -- the garages and repair shops are 8.5% greater or larger.

So the activities continue and used cars continue to be used. We are -- we have a complete solution from steering 2 wheels, you can use our products and brands. And it's difficult to find a retailer or garage that does not have at least one of our brands, one of our parts and very desired brands in the Brazilian automotive market. Our company will build in the aftermarket in Brazil, BRL 2 billion in aftermarket in Brazil. This depends on the fleet, and we are having -- we are going through a good time of the economy.

Now talking more about Juratek. We -- it was acquired 4 months ago. So in this quarter, it is participating in the results. We're capturing the first results in-sourcing and in-sourcing using the same suppliers, sales force, clients, offering them these products, especially in Europe, reminding you that the multiple we paid represents an EBITDA of 12 months of the operation and the small adjustments, these improvements that we already captured have already delivered from March to June, a company with 3 percentage points.

We have -- we are well on our way to promise GBP 5 million in 5 years. Synergies mapped for 5 years totaling GBP 5 million. Now we have to look at the results, and we're very optimistic with the expansion in Europe since we began to build a powerhouse already consolidated in Brazil and Latin America. And now we're replicating this model in a balanced way and with the right size in Europe. We're very satisfied with this beginning of Juratek.

Now I'd like to pass the floor to Hemerson, who will give us details about the results.

[Hemerson de Souza, executive]

Thank you, Pontalti. Good morning. As mentioned by Sergio and Anderson, I'm here to talk to our analysts, investors, shareholders and also employees watching this conference call. Well, we are in very good times. We're very happy. During the last years, we have built a robust growth and resilient situation for Fras-le Mobility. And we see that we have a business configuration with the market share we have in our lines and with the model that we created based on aftermarket and also our progress in other geographies. We are a company with high growth. So we have also another point, which links us to acquisitions, recent M&As. But in our strategy -- we have a strategy.

So we acquired Juratek. Now Juratek is already 5% of this growth of the 18.2%. When we compare with last year, they represent 5%. So Juratek is here, 5% is the contribution of Juratek in this quarter. But the possibility of increasing market share, we can say that Fras-le is able to have double-digit growth with the business. It has, as we have said many times, Sergio said, we have today, 90% of our business linked to aftermarket. So we are a high-consumption product. This is what we say internally. We're linked to automotive consumption. We have respect and high investments to maintain our sales to OEMs. But even if sales grow as we have seen they represent today 11% sales to OEMs, 11%.

Obviously, this growth comes together with this possibility of going to new geographies, M&As and also due to the products that we offer. And this has been more and more relevant because we're expanding our -- the products we are selling outside Brazil, for example, in Juratek and also in Latin America, Mexico, Colombia, Argentina, sell our brands and products.

Next chart. Here, we show the expansion by market. It's undeniable that we have had a very good performance in the domestic market in Brazil, leveraged even more than the export market, but especially due to progress in market share in some lines. You have seen we have evolved well in suspensions and steering systems. And also, we gained market share in disc brakes and friction materials.

If we evaluate Fras-le in Q2, we maintained 65% of our sales. And in Brazil, more than 40 million vehicles continue to circulate on bad roads. They continue needing repairs. And this is really a power -- makes us a powerhouse. We have also the commercial line, 35% of sales in here. We have sales spread in Brazil and abroad.

Fras-le is the largest manufacturers of brake linings. We have a special situation. In Latin America, we're absolute leaders, but -- and also in OEMs. Now we -- if we evaluate how we are doing, Anderson mentioned this, 48%, 49% of what we sell is from friction but also 6% from powertrain suspension and also brakes. Here, the 49% friction, 29% nonfriction.

When we look at the export market, we made a good evolution in comparison with the first. Juratek helped here. If we eliminate Juratek, we will be similar to what we were, but we had a first quarter that was more difficult, lower sales to some clients, to relevant market. And this gave us a position equivalent to what we did in the previous years. If we eliminate the effect of Juratek, we would have less sales and also problems in Argentina, fierce competition in Latin America and as I mentioned, being also higher inventory at clients, especially in North America in Q1.

In the next chart, we talk about EBITDA and adjusted EBITDA. We mentioned this in our reports, but we'd like to remind you the origin of this adjustment. It is due to our company, Nakata, we made a provision of BRL 37 million due to the IRS and we had an agreement with credits for PIS COFINS taxes. But we had noticed, we had perceived this when we acquired the company. So we will have this expense in Nakata.

We have an escrow account that ensures the protection of this value, the difference between one account and the other are taxes that we will receive, and we will have to pay this difference to the government. The impact is BRL 12 million in EBITDA in this quarter. And it's understandable, but we are available if you have any doubts, if you want to know -- have more details, please get in touch with us. We have some possibility of trying to change this in court, but we have this provision.

And anyway, even if we look at our accounting EBITDA, adjusted or 21.4% in this quarter, we have exceptional performance in this quarter. When we compare also the exposure in Q1, although -- Sergio mentioned, although we don't -- we have -- although we have not adjusted the guidance because the guidance is not only results. We have a ceiling of 18%, and we haven't consolidated 21.4%. The rest is in line revenue. Although we have not updated the guidance, we trust that the results that we have will continue in the right direction.

We have suffered because of fierce competition strong competition, especially in the international markets. And we are conscious that we will need in the future maybe to lower prices a little and make promotions, but we're waiting more to see the situation. So this is -- we don't want this to be -- to look -- to seem negative. No, it's -- we are being cautious. We are being cautious.

Now financial performance. We are a company that has 0 debt. Our cash position is here. An important point is the cash generation we have had. And this encourages us to continue to make acquisitions. On the other hand, we have made investments. As forecasted, there will be an acceleration of investments in the second semester. We will consume more cash.

We'd like to stress that BRL 56 million in investments, these are investments in productivity and in the heavy line in North America with the acquisition of equipment to increase capacity and also more products in Controil. In the second semester, we should we should grow the capacity of Fremax. We are building a substation as we mentioned in some quarters. And we will receive also the environmental license.

In the next chart, we talk about cash flow and working capital. We have -- although we have added a new company, Juratek, our performance is very good, investing resources, as you can see, and we have a stable position. Cash flow, first quarter, this we see the effect of the purchase of Juratek, the acquisition of Juratek. The last quarters also had the benefit of the follow-on.

And now concluding the presentation. This result is very good, and this gives us a return on equity and invested capital that is very robust and growing, making Fras-le a company that, although it has a high growth rate, also the results are excellent. We see very good indicators, especially in this quarter here with the return on capital invested as we can see and above 16% more.

Finally, look, talking about the stock market, which is important for us. We have seen progress in our shares. And this quarter for BRL 4.1 million in daily flow of sales, although it's still lower, a few years ago, we were not able to reach BRL 1 million in shares per day. So we see an evolution. We want to grow even more. We have actions to improve this and make the company more attractive to more investors. This is the strategy of our team.

Well, having said this, I would like to pass the floor to Sergio for the final comments. Sergio, your microphone is off.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. Our vision, our outlook continues to be positive, although we believe as Hemerson said, we will have to make a greater effort with a reduction in sea freight. This will help us to maintain our growth in export markets, and it also facilitates competition, especially with Chinese products.

After the pandemic, China needs to expand its share. There are barriers as we said, in relation to the U.S. market. So Chinese producers, Chinese companies are trying to be more efficient in exporting their products. So we are seeing more competition and we are working on this.

Juratek is beginning its activities in a very positive way. We saw it as part of the results, capturing synergies, freight sales, but this is only the beginning. Many good things are coming from Juratek. We're very happy with the results until now. And the high inflation rate in the U.S. and also problems -- economic problems in Argentina, these continue to call our attention.

With this, I would like to pass the floor to Monica to begin our Q&A session.

[Monica Rech, executive]

Thank you, Sergio. We'd like to begin the Q&A session. Our first question comes from [ Luiz Itau ].

[Unknown Analyst]

Very positive results, congratulations. Two questions. How -- what is your opinion about the inventories in the Brazilian market? Is the -- are the inventories stable? Are they dropping? So could this affect demand in the second semester, inventories?

Also looking at the second semester, when we see a drop in interest rates and new cars being sold and optimism, we might have a changeover because -- due to the difficulty in buying new cars, buyers have to keep their vehicles for -- their vehicles for more time or even buy used cars due to high interest rates. And now with the interest rates dropping, do you think this will change. So what is your perception with the lower interest rates in Brazil? Do you believe that the high interest rates that were helping you, because people were keeping their older cars, do you think things can change?

[Hemerson de Souza, executive]

Thank you, Luiz. Anderson, inventories. I believe you are the best person to talk about this and Sergio talking about the sale of new cars from now on. Maybe you can supplement this.

[Anderson Pontalti, executive]

Thank you, Hemerson. Thank you, Luiz, for the question. I participated in a road show with our clients. We do this. They have less appetite for speculative purchases because we don't have high inflation. Our interest rates are still high in Brazil. The cost of capital is high. And what we see, a drop in inventories. So people have worked with less inventory as long as it doesn't compromise their operation. Why? There is an expectation, yes, not in terms of less business but that we may have a drop in the prices from manufacturers.

Sergio mentioned higher competition. Freight is lower, and now we have new entrants. Also, the real becoming stronger in relation to the dollar. So the market is waiting to see what will happen. Inventories are lower they were high because of inflation. And now with deflation, the market has lower inventories. And the sell-out did not change. Sell-out is very good. So we don't see any sign of drop.

[Hemerson de Souza, executive]

Luiz, thank you for the question. I believe Anderson has answered the second part. There is no doubt this positive scenario, all the dynamics of the sector includes other elements that are all favorable. So we continue with this positive attitude, and we believe the second semester will be very positive. And the drop in interest rates in Brazil makes the future we have so values will continue high. We may have an impact in the optimism on the part of businessmen, the concern in capital goods.

Now in practical terms, the reduction in interest rates will be very small this year. There will be no relevant impact apart from the humor of the market. Next year, yes, we should have a more substantial financial impact with lower interest rates.

This year, the drop in interest rates is very small. It is symbolic. So the market is very favorable for aftermarket prices in any scenario, whether we have more new cars. What impacts aftermarket is the fleet. New vehicles are important for us to maintain sales in the future because if we have less new cars, we will have an impact in the future. So yes, it's favorable.

Of course, after the pandemic, we had many distortions, not only the interest rates, but the price of new vehicles became very high, very distant from -- for example, popular small cars that used to cost BRL 60,000. Now we're close to BRL 100,000, and salaries have not followed. So inflation also corroded the buying power of buyers.

So we want to see new cars. We sell to OEMs. We sell in many countries to OEMs, and we want to be part of this. We -- at Fras-le, we have had relevant business with OEMs in Brazil and Europe for the light line and we have new possibilities of business that we did not have in the past.

So as Sergio said, we -- this will not impact our sales this year. Because the fleet is there, the roads are not very good. Vehicles continue running. There is tear and wear and this helps our business model.

[Monica Rech, executive]

Next question is from Andre. He is from sell-side Bradesco.

[Andre Ferreira, analyst]

Two questions. The first on margin, EBITDA margin is strong in the last quarter, above our expectations. What do you expect in terms of margin for the second semester. And also M&A., do you have anything in the radar? What are the priorities?

[Unknown Executive]

Andre, thank you for the question. Well, in terms of margins, as we mentioned in the presentation, we have had very -- we have been very efficient in negotiating well with what we buy. We have deflation in some raw materials, not all of them. In some raw materials, we still have inflation. We have been diligent in trying to be more productive, more efficient. We're producing more with less.

We invested a lot with -- in equipment with more automation. And some -- for example, Controil, it's a company where we had single-digit margins. And today, we have much better margins in Controil, optimizing, expanding the capacity of the company and producing with less. They -- so it's -- they are -- and we have a legacy. We built this in many units.

Our operation in India is doing very well. in spite of the difficulties in Argentina. We have good margins, and this helped us to have these excellent results in margins. Our guidance is more realistic in terms of what we can reach. If we had an 18% margin in the guidance, we would not be realistic. If you look at our history, it's a company that has good margins between 15%, 16%, 18% is exceptional, the 21% we have now is exceptionally high.

We may have space to be close to these margins. But as we said, competition is more fierce. So we must be diligent and position our prices, our products to allow us to continue winning market share, gaining market share. There is more competition due to the exchange rate. There are some things that may require that we make some price drops. But we have a good position now, and we're working to gain more synergies with the business like Juratek to evolve and continue being closer -- being close to the numbers we reached today.

We can't tell you anything if it's going to be more or less, but if we see positive signs, this is affected by the whole company. We have to be more and more productive. And in terms of M&A, yes, we have been working in all the quarters. We cannot be transparent because we're not ready to announce anything, but we're looking at M&A, where we continue to look at Europe, Also, we're looking at Asia. We have some stories in Brazil and also in Latin America in terms of M&As.

So together with the follow-on, we continue looking at future projects. We don't want to stop. But we want to do everything in a disciplined way as we did in the past. We want businesses that will contribute with margin and synergies help us with better indicators. Yes, we're active looking at M&As. As soon as we have anything new, we will share it with you.

[Monica Rech, executive]

Our next question is from Fernanda. She's sell side from XP.

[Unknown Analyst]

Congratulations for the results. Can you give us more color about competition in export markets, especially Europe and Asia? How do you see competition in these markets, Europe and Asia? What are the challenges to gain market share in these regions? And the second, a follow-up about prices. And does it make sense to think of pressure on prices due to the drop in the price of raw materials?

[Hemerson de Souza, executive]

Thank you, Fernanda, for the questions. Anderson can talk about competition in Europe and Asia, and Sergio can talk about prices.

[Anderson Pontalti, executive]

Thank you, Fernanda, for the question. In fact, the international market after the -- after the efforts of China, businessmen from China are traveling after the pandemic. Also, they had a devaluation and also a drop in freight prices. So they are after the lost ground. So this appetite on the part of China affects all the products.

For us, the markets that are more sensitive or Latin America, Africa, Middle East, right now because we know that there are some tariffs by developed countries and China cannot have a higher penetration. How do we shield this? We also have operations in Asia and China and India for friction materials. So we have -- we look at the best opportunities with the best margins. So we can turn on and off a line, a plant in an intelligent way.

Another way to fight this is to combine synergies in sourcing. So we are becoming more relevant players for our sourcing it from China. So we look at better prices to continue to have -- to be competitive. As we go to new geographies with new portfolios, we are also a more relevant player for our clients, allowing us to have better margins. We are players that are given -- our product is necessary. So consequently, distributors look at us with new eyes.

Other -- also other factors. We have expanded the digitalization efforts in the company, also more training, more education for users. So they have more contact with our brands, and thus, they will use them with more frequency. So many initiatives we have to guarantee that we will continue with good results.

[Sergio Lisbão de Carvalho, executive]

Fernanda, thank you for the question. Concerning price on -- pressure on price due to lower raw material prices, yes, you are correct. This is already happening. This happened in the first semester. Our expectation is that this will continue happening in the second semester, lower raw material prices. What we have done in Fras-le Mobility with this portfolio of products, we have also found opportunities to raise prices in some cases. And in general, this helps us.

There are some product lines where we raised prices in the first semester, and we were able to offset this with other product lines where we saw the possibility to increase prices, as I said. And our team is better and better, making this analysis, looking at the risk, the pressure and opportunities, so our intention is to continue with the same approach, the same methodology that has given us very good results.

[Monica Rech, executive]

Our last question comes from Gabriel. He's an analyst from Santander.

[Unknown Analyst]

Congratulations for the results. Two questions. The first is a follow-up in relation to the export market. How do you see the movements in China? And also, if you can talk about India. My second question has to do with the performance of Juratek. You had a better performance. How do you see also the situation in the U.K. and England?

[Unknown Executive]

Thank you, Gabriel. Pontalti would you like to begin?

[Anderson Pontalti, executive]

Thank you, Gabriel. For the question, talking about China. In fact, looking at the domestic market in China, which represents 30%, 35% of the revenue of the operation, the rest is in Asia Pacific, the market is not as strong as it can be. But many things are -- there is a comeback. So the Chinese economy has shown good recovery from China. We supply Middle East and Europe. We have expanded our accounts, apart from our plant, we have a trading company in Asia. So this has brought new business. We're very optimistic, we're very optimistic in talking about performance.

In China and India, this is the best -- this is the best time -- these are the best results we ever had. We have a good reputation in the market and we -- we are working with buses and trucks. One example, Tata. Tata is the largest manufacturer of commercial vehicles in India, and we have almost all the accounts through our joint venture, and this has given us very good results. When you have this account you can have a premium in your price for aftermarket, apart from the volume because you have more visibility. So we have -- we have gained new good accounts. These markets are more sensitive to price.

Now looking at the U.K., England, Juratek has had improvements in the very short term. They will improve even more their performance. This was part of our targets. And now we're working on the integration of the company.

The U.K. had inflation. There is an improvement. The positioning of our -- of the brand Juratek is good. They have a good positioning. They are premium. They are less sensitive to low prices. They are focused on performance products, quality products because they have very severe demands in the markets, so they suffer less.

Then the advantage is that Juratek does not depend only on the U.K. They have a sales team also in other geographies. We began to sell in Egypt. We began to sell Juratek in the Middle East, in Turkey. So these are accounts that were not there, because they worked in the U.K. So very favorable for China, for India and Juratek in the U.K.

[Monica Rech, executive]

The Q&A session is concluded. I'd like to pass the floor to Hemerson for the final comments.

[Hemerson de Souza, executive]

Thank you, Monica. Well, once again, I'd like to thank the participation of the analysts and our investors. It's good to share with you these points and about the future. And we're available, please get in touch with us if you have more questions, if you need more clarification.

Thank you, Anderson and Sergio, Davi, our guest, and Monica. And we wish you a good day, good afternoon. Bye-bye.