Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2022-Q3

[Jessica Cristina Cantele, executive]

Good morning. Welcome to the conference call of Fras-le for the earnings of Q3 and year-to-date 9 months 2022.

Before we begin, we'd like to make some important announcements. This conference call is being recorded, and as soon as it ends, it will be available on our website, ri.fras-le.com. We have simultaneous translation in progress. To access, please click on the button interpretation with the icon that is a globe at the bottom of the screen. [Operator Instructions]

Apart from this, we would like to clarify that any declarations made in these presentations concerning the business perspectives of Fras-le, projections, results and growth potential of the company are based on forecast based on expectations of management concerning the future of the company. These expectations are highly dependent on changes in the market, in the economic performance of the country and the sector and international markets, thus may suffer changes.

We'd like to thank all those who are with us in this conference call. My name is Jessica. I am Investor Relations Officer at Fras-le, and we have with us today the Chairman and CEO, Sergio de Carvalho; Director Superintendent, Anderson Pontalti; Business Director, IR and M&A, Hemerson Fernando de Souza; and a guest, the Director of IR and Finance of Randon Companies Esteban Angeletti. He will -- they will be available for the questions at the end of the presentation.

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

[Sergio Lisbão de Carvalho, executive]

Thank you, Jessica. Good morning to all. Welcome to our conference call on the earnings of Q3 at Fras-le. We are having this event in multiple locations. Anderson Pontalti and myself, we are here at Fenatran, and the rest of our team here in our office in Caxias do Sul.

We'd like to begin here on Slide #4, talking about the market, giving you a vision of this quarter talking about the market, the results and our operations. Beginning with the market, a good news here is the fact that the flow in garages and repair shops is 12.8% higher than last year, and this may get to 20% more than the previous year. What does this indicator mean for the aftermarket parts? It is measured by the Center of Automotive Intelligence. It measures the amount of vehicles that go through repair shops for maintenance. And obviously, the more vehicles go to repair shops, to garages, the more revenue, the more business and the more parts will be sold. So we have a good indicator, 12.8% higher than last year, and with the possibility of closing the year with 18% to 20% increase.

Now in OEMs, we continue with a good demand especially in the export market. With a highlight to the U.S., which has a booming market, a very good market, strong market. We are -- we also have good portfolios for friction material for the heavy line, also suspension components, also steering components. All of them with good, robust portfolios. Some difficulty linked to the importation concerning our operation in Argentina due to the political economic situation. But in the domestic market, we have great sensitivity to price, so the market is strong.

But we see a normal situation in the market in comparison with 12 months ago, and this brings a stronger competition especially concerning price. The market is a little more sensitive, let's say, to price.

Results in the quarter. We had a marvelous net revenue, record net revenue, BRL 824 million, 25.4% higher than in Q3 2021. Gross margin of almost 32% and recurring EBITDA of 16.7%. Net revenue of 8.9%, 8.5%. And all the units contributing for these results, with some highlights. For example, JURID, Controil, Nakata, Fremax, all of them with extremely positive results. In the financial aspect, we had a good performance with economic results, financial results also very good.

In terms of operations. The conflict in the Ukraine and the de-acceleration in Europe, inflation problems with energy and exchange rate devaluation, these are concerns for all of us. We have an impact in our European operations. The instability, macroeconomic instability in Argentina already touched upon this. Argentina has been controlling more the exits of dollars to pay exports. And as you know, Argentina imports a lot so there is a great control on imports, giving us a challenge. But our team there has an in-depth knowledge of Argentina and continues having a good performance in spite of these challenges.

Also, we began an extra shift in heavy linings in blocks in Caxias do Sul. We added an extra 400 people in an extra shift, working 24/7 in order to use our assets 24/7. And thus, this allows us to really deliver on time and expand our activities for North America.

We had some stops in China. Also, we have -- we had some stops due to strikes by truck drivers in Brazil, especially deliveries. This happened in the beginning of the month. We believe that we will be able to normalize all the deliveries in Brazil this month, and the lockdown in China is now stronger in the last few weeks. There is coronavirus in China, and this brings greater concerns to our operation. But for the time being, our plans in Pinghu has not suffered any restriction.

And finally, our projects we're consolidating -- with the exception of South of Brazil, we're consolidating all the deliveries in our warehouse in Extrema, Minas Gerais. The project is doing very well. Products from Controil, Fras-le are all being distributed through there, and more recently, Fremax too.

So many good things happening in this quarter. And now, I'd like to pass the floor to Anderson, and he will continue our presentation.

[Anderson Pontalti, executive]

Thank you very much, Jessica and Sergio. It's a pleasure to be -- to talk to our participants here directly from Sao Paulo from the Fenatran exhibition.

My role here on Slide 5 is to thank all those who were present in 2 important events concerning relationship with investors. The first, our presentation of the Fras-le universe in our Investor Day that happened in Extrema in the south of the country where we have our distribution center for the brands -- for the main brands of Fras-le, as Sergio mentioned, a project that is very good for us. It hasn't been captured in the numbers. We're still implementing, but without affecting the service to our clients.

The project has been very successful. This week, we're beginning the inclusion of Fremax, the fourth brand to be distributed there. We already included Fras-le, Controil and Nakata, and it was a pleasure to share this. For those who came to visit us, we had a site visit and also they had the opportunity to know our shock absorber plant, totally redesigned with more modern process, with more logical flows, since this plant was in a very old site in Diadema, Sao Paulo. In the past, we're able to extract many synergies. This is a little of what we want to replicate not only in Brazil, but we're making progress with this model in Argentina and also other units in Latin America.

At Fremax this week, we also had some investors visiting us, also analysts, to show, in practice what we have said, what we have talked about with you. You were able to see the excellence and well-designed plant we have for disc brakes. We're very competitive that Fremax has a giant potential to expand its revenue. We are running at full capacity, and the team is involved in offering and also expanding our offer in the next periods.

On Slide 6 here, Slide 6. Okay. No problem.

Sergio already mentioned we delivered exceptional results this year even with the macroeconomic diversity, especially in the first quarter when we have many lockdown problems in Brazil and other geographies. China continues to have its problems. The war continues. Inflation, never seen in mature geographies. And in spite of this, our team did an excellent job with excellent results, record results year-to-date. 21% growth of revenue with a conversion in line with what Fras-le has been doing in the last few years, and capturing synergies and also adjusting the business as we had planned.

We're very happy with what we delivered until now, and I will allow Hemerson to give you details about the numbers and talk a little more about our performance in Q3.

[Hemerson de Souza, executive]

Thank you, Anderson, and thank you, Sergio. Good morning. Thank you for participating in our conference call for earnings.

Before beginning, I would like to give you a quick view of the numbers and declare our main message to investors and those who follow Fras-le closely. Our profile today allows us, in a very clear way, to have a growth that goes very well. We're talking about a record quarter for Fras-le, but especially a quarter that allowed us to make progress in billing when we look at year-to-date, more than 20%. When we compare the quarters, 25% growth with Q3 last year and Q3 this year, showing very clearly how much we can continue to grow in our current business lines.

Those who came to visit us at Fremax or those who were present in our Investor Day noticed the greatness and the space we have to win market with the current products, both in market share and the challenge to introduce new lines in other lines of products in other geographies, and this chart shows this.

We have a company with a robust growth capacity and an expansion strategy with non-organic movements. And here, we can see the quality of our management. 90%, 87% are linked to aftermarket, which doesn't suffer that much with the difficulties in market with interest rates, with economic growth. It's a market that is very defensive. The other 13% of our revenue from OEMs place us in a position of having an advantage and being leaders in mature markets like the U.S., in Brazil, where we have a great leadership in the heavy line.

So with this, we're very happy after a cycle -- an important cycle of expansion in the previous years to continue maintaining our growth rate for our business.

Now going on to Slide #8, let's talk about the distribution of the revenue. Fras-le's revenue is very balanced. Approximately 40% of the revenue are not -- do not come from Brazil. The part in Brazil is also very relevant, so we maintain this consistency of participating in aftermarket in the last few months. We updated our portfolio of products. We have a distributor base that is even better. We have also repositioned our brands, creating space for them to grow, creating synergies among the commercial departments, as mentioned by Sergio and Anderson.

We have today a centralization in distribution. This week on Monday, we began the delivery. All the brands, Nakata, Controil, Fremax, Lonaflex and Fras-le from Extrema, from our distribution center in Extrema. So all the south of Brazil is received from Extrema, so our distribution is not only Nakata or Fras-le. We have everything together, and this helps us in synergies.

When we evaluate the export market, we see some instability. Sergio mentioned Argentina with difficulties, China with lockdowns, but this did not stop us from making progress. Almost 30% growth in reals when we compare with the previous year. And also, we have noticed an important support from our current clients in mature markets like the U.S., South America. They continue to buy our products due to our quality and the services we have and also the diversity in our portfolio, which makes us strong in this market.

When we look at this in segmentation. We are a company where 65% of the sales are linked to the Light Line passenger cars, which is relevant because that's where we have the greatest possibility of business because of the size of the fleet. But also, 35% comes from the Commercial area being very resilient, a better ticket, so this makes Fras-le very special.

Finally, on this chart, we look at the importance of having added other lines. 50% of the business comes today from Friction, which is where the company began. Friction material, brakes. But now, 50% of the business is linked to other product lines, and this creates this resilience and gives us an important support for us to continue to grow in our business.

On the next chart, here we have the margins. And I'd like to remind you, we issued shares this year in April, this year in the operation, and we brought BRL 630 million of new resources. And many investors said, gee, you're telling us a good story, resilience. But I believe you're selling shares in the highest point. And we said, no, yes. Many good things are happening, and we can show this in numbers with the support we have to continue bringing good results in the company the way it is. Today, this year, we don't have great changes in prices, so this is what the company is. Good growth, good profitability, and we're proud to share these results with the market.

If we go to the numbers, BRL 370 million in EBITDA, 16% accumulated margin here. For example, we almost sold BRL 140 million in EBITDA, 16.7%. So this is the best performance in the history of the company in the quarter, and we're proud to show.

When we look at net profit, we have a small drop in relation to the last year, and this does not have to do with the -- with the performance, but with non-recurring events last year. We had some tax lawsuits that helped us in our profit. This year, we don't have non-recurring. It's all operational results, but very satisfactory when we look at the company. And even on a global basis, a very good profitability. In the quarter, when we compare with the last quarter, we grew 10%. But when we look at last year, also a significant increase.

And finally, talking about working capital, this is also relevant. During the year, we have been reducing our inventory, and this allowed us to have a drop when we look at last year. When we look at this quarter, there was a small evolution in relation to Q1 but this depends on the variables in exchange rate, the need for additional working capital like in Argentina, where we have more inventory than before, and also the balance of the imports. 35%, almost 40% of our sales are not our own products, we outsource manufacturing. This also creates, in some moments, some problems in working capital, but we've seen a drop in this and it's a pleasure to share this to the markets. We're very close here to the efficiency that is necessary also for working capital.

When we look at the free cash flow, we also have a free cash flow that is higher now in comparison with the previous quarter. This shows the efficiency of the results and also the use of resources. It's important to mention, we gave a quantum leap in cash flow due to resources that came from the follow-on. And also, financial results have helped a little, and we are working with CapEx. Many things are happening at the end of the year. And we continue with our guidance in CapEx. We invested a little more than half of this in the first 9 months, but we have some parts to do in the last few months.

Before passing to Sergio, I talk about the financial performance. Here, we show our debt. 20% is in foreign currency, the rest is local. And we have new companies that we acquired like Nakata. We've had a better balance in currencies with imports and exports, and we have had less exposure in foreign currency in terms of debt, also debt in foreign currency. Our debt is very comfortable, I can see, and we're a company that has a leverage that is very, very low, and we haven't used the resources that came from the follow-on.

Obviously, we didn't -- we didn't have to obtain this money to leave it in cash. We have -- we are evaluating companies, and in the future, we may continue to grow in a non-organic way. Well, we -- in fact, we have maintained these resources and we want to use them in an efficient way in the same way that we did in the past with expansion, and this allowed us to triple revenue in 6 years, more than triple results in 6 years, and this helped us to grow in the aftermarket parts.

Concerning CapEx, I mentioned here in 2021, BRL 115 million, and year-to-date, BRL 50 million. So many things will be recorded in the last quarter.

Now, I pass the floor to Sergio for his final comments. And then Sergio, Anderson, Esteban are here to answer questions, where we can give you more details if necessary. Thank you, Sergio. You have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. Well, going on to Slide #12, our vision of what is ahead of us. I can summarize that our vision is positive. We have markets booming, regular demand. We are sure that in this segment, we will continue with this -- with the same performance and revenue. We have more competition, greater sensitivity to price. And we observed this in some points in Brazilian economy, service sensitivity to price is bringing more competition with some challenges.

But in general, we're looking at a positive scenario ahead of us. And therefore, my initial comment is that it's a positive outlook.

Well, this is what we had to say with you. I'd like to pass the floor to Jessica, and she will begin the Q&A session.

[Jessica Cristina Cantele, executive]

[Operator Instructions]. Our first question by audio is from Pedro from Bradesco.

[Unknown Analyst]

First of all, congratulations for another quarter of good results.

You said that the production capacity of Fremax is totally used up. Can you detail the investment plan to increase capacity in disc brakes at Fremax, the CapEx that will be necessary for this? And also, when you will conclude these investments?

[Hemerson de Souza, executive]

Sergio -- [ Anderson ] talking about Fremax. I will begin to answer, then I'd like to Sergio to supplement concerning the U.S. market, the opportunities of the U.S.

Pedro, in fact, at Fremax, we're operating for more than a year with -- we operate -- there is a restriction in terms of electricity. We supplement this with diesel generators, which is not efficient. It's not clean. We have a restriction in electricity. To increase production, we can increase our production by 27%, and we need to build a substation. This will allow us to use the full capacity of the furnaces we have at Fremax.

Those who visit know that Fremax is a disc brake plant that needs a foundry, but it's different from a normal foundry. It was prepared for disc brakes, a very efficient plan. During the last year, we have -- we are working to obtain the environmental license to build a substation. The investment is BRL 30 million between the substation and the support to expand in lines like machining. And this -- this will allow us to produce an extra 1 million parts per year. This would be very good for us.

The deadline, after we get the environmental licenses, we're working on this for some time. And we believe this should happen in the short term, a year, 15 months. So that's one part.

The other part we have looked at may be non-organic movements. We have evaluated the possibility of adding capacity this way by acquisitions. It's very complex to find in this market, companies that may bring the same profitability, the same production that Fremax has. And another way would be a greenfield plant. Apparently for us, it makes more sense today to build a greenfield plant. This would take 2, 3 years. And we have studied -- made studies to find alternatives both in location and markets to give us this support.

When I say we were to represent Fremax. We're very encouraged to make this expansion because we have support and demand for many clients, especially in the U.S. In Brazil, in parts, we have 22% market share. We want to gain more market share. We're a premium brand, the market loves this brand, the best evaluation, so we know how much we can grow in support to market share.

And the exports, the support to other markets is very important. We don't have a strong participation in Mexico. We can grow also a lot in the U.S. market. Sergio has experience in the U.S. market, and he can say what we expect from Fremax for in this market.

[Sergio Lisbão de Carvalho, executive]

Thank you, Pedro, for the question. Just supplementing the comments made by Hemerson. The U.S. market for aftermarket for light vehicles, I don't have the numbers. But it's many, many times, double-digit greater than the Brazilian market. The U.S. has a giant market that is supplied especially by Chinese companies. And you know that there is a more -- there has been a more aggressive vision from the U.S. in looking at China, in relation to China. They are placing barriers for the flow of these merchandise from China to the U.S., and this vision is one of the few topics where political visions -- political vision that is supported by all American parties, and all of this means opportunity. If Chinese products don't arrive in such a competitive way, this huge market in the U.S., it becomes available for other companies to capture.

At Fremax, our Fremax, is a premium brand. It's known in the U.S. market. We have a premium, premium product at the top of the premium products. So we have situations in some cities where the police department, with their vehicles, they need high performance in order to fight crime, for safety. They must have a good performance in their vehicles, above average. And some cities have specified Fremax products. They say we only buy Fremax because of the quality, the performance superiority of the Fremax product when compared with other options in the market.

So what Hemerson mentioned makes sense. We feel that with the U.S. market, we would be able to fill the new operation that we are thinking about here.

[Jessica Cristina Cantele, executive]

Now, our next question from Luiz, [indiscernible]

[Unknown Analyst]

Sergio, Anderson, Hemerson. I'd like to discuss with you margins. We were surprised, very good result in margins. You mentioned that the outlook is positive. The absence of China and the U.S. market, what are your thoughts about margin next year 2023? Should it continue here in the current situation? So 16.7% is -- do you believe this will continue next year? [indiscernible] crisis, de-acceleration due to the World Cup, soccer World Cup? What is your vision today for the last quarter? Is this having an impact on margin? Is competition more aggressive?

[Hemerson de Souza, executive]

Thank you, Luiz. Anderson, I believe we can share our vision for Q4, talking about the market's expectations in terms of margin. And then concerning last year, Sergio and I can answer.

[Anderson Pontalti, executive]

Can I begin? Sorry, sorry. We have a little bit of noise, but I will begin. Luiz, thank you for the question. Truly, Q3 was spectacular for us due to many factors. I would mention 2 main factors. The combination of the business with capture of synergies can be seen in a complete way. The synergies in these 9 months with the acquisitions, and we had an excellent performance because of this.

We had -- and Argentina very well managed due to lack of products from the competition mainly due to the increasing restrictions that we're seeing right now in Argentina. We know that this -- there are peaks and valleys of the story, so we should have a Q4 that is more in line with the average.

And talking about the price pressure in Brazil, this exists because the chain is stabilized. The offer is similar to demand, even with a performance above the historical average. We have to see that the buying power due to inflation makes the income available lower, because -- so we should have margins close to average, but still very good.

Another relevant point aiming at the medium and long term, the stabilization of our distribution center in Extrema will give us more results in [indiscernible] We have the project, we adjusted inventories, additional freight. All of this is being paid for this year, and we believe we will have all the synergies next year.

That's the vision we have right now, but very distant from being bad. We continue to be on a good level as we had in the last 3 years.

[Hemerson de Souza, executive]

Well, I will begin here, Luiz, and I would like to ask Sergio to give you a vision of 2023. Fras-le, as we showed in our expectation for our margins, we always have a range between 14% and 16% of margin. We're building -- we will be able at some time to go above this. But remember that we're a global company. 40% of what we do has to do with other markets, which have their ups and downs due to exchange rate or other difficulties. We may have some concerns.

We mentioned Argentina. We have done an excellent job there. Argentina has contributed for the results and also the synergies that Anderson mentioned. But in a practical way, we have a giant devaluation in euro versus dollar, which has an impact on the performance in Europe. We've had difficulties in other countries like China to give the same support to continue growing for any reasons.

Here, we have the pandemic. We hope this will not be present next year, and we will be able to grow more. And also, the synergies are becoming more mature with Nakata and the progress in market share in other lines. We talked about Fremax, but we have a good performance in Controil, a good performance in JURID. With the lifeline of brake linings, this has grown, and some particular particularities. For example, better relationship with the clients. We have -- we are being able to pass on prices. All of this is favorable for 2023. So we have the same energy, the same moderate optimism that we will be able to have quality results from now on as we always do.

But I'd like to remind you, Anderson touched upon this. In some markets, we have felt a greater need to work on prices. We have given some discounts in spot purchases, and this is beginning to penalize because of inflation we have. We try to grow in volume, we try to grow in services, and we deal this in a clear way as we always did. So I believe this moderate optimism is present, as there is no sign of uncertainties or great concerns that this will happen. It's the opposite.

This market is strong, resilient in terms of uncertainty of growth. Our clients grow, our market share also grew. We have one -- more and more maturity to work in an efficient way. So I'd like to say that our vision is positive.

Now in terms of recent business, I'd like to share this with Sergio to share with us his vision about the aftermarket parts. I'd like Sergio to give us an overview concerning revenue next year, considering the aftermarket parts. I talked about margin already.

[Anderson Pontalti, executive]

Sergio and I are together here. Support for margins next year, margin support. Like you said, we have things to capture, synergies we haven't captured yet. For example, subsidies in the state of Minas Gerais, consolidating our branches there. Also cross-selling in the light line, maximizing the amount per SKU in some regions. We're working on this. We want to continue. You mentioned good margins with Nakata, Fremax, Controil, especially Controil.

Another very relevant point in our valuation is the greater offer of shock absorbers. We had a production that was below 200,000 per month. We're working with 270,000 shock absorbers per month. We want to get to 400,000 shock absorbers per month. Also shipped 6 by 2, 24/7, as Sergio mentioned. We will have the full year with 24/7, and this helps us with some annual contracts that had inflation in 2022. And this, we will have higher prices in 2023 in some families of products where we are more under pressure by the competition, and this guarantees that there will be a balance for margins next year also.

[Jessica Cristina Cantele, executive]

Thank you for talking -- Anderson, sorry. Continuing our next question is from Frederico. He asks us to comment on our partnership with Randon for niobium, the new technologies for -- with niobium.

[Hemerson de Souza, executive]

Sergio. Nione talking about the future. In one minute, I will talk about our partnership, then Sergio can talk about the future. Thank you, Frederico, for the question. We have partnership with Randon that is called CTR. According to this company in 2009, Fras-le contributed assets [indiscernible] last year, we made this partnership. The research that Fras-le does is centered in our technology center, where we are partners.

So Nione, when -- the process to use nanoparticles of niobium, we did this in this company, CTR. And for this revolves a business, we made another company below CTR, and Fras-le has 45%, 45.7%, and Randon has 54%, 54.9%. But Fras-le, since it had the research, it's guaranteed royalties from this operational, 5% on revenue, and Fras-le has an even greater support in terms of profitability.

So for those who don't know, this is the history, and we approved this with minority -- minority parties. Also, this was approved by the council and has a good governance in these operations.

Now in terms of new business and business perspective, Sergio is the right person to talk about this.

[Sergio Lisbão de Carvalho, executive]

Well, supplementing the answer. Thank you, Frederico, for the question. We continue with being very optimistic and positive with Nione and with all its potential. Nione created a process that is commercially feasible to produce nanoparticles of niobium and titanium to using microparticles as raw material. And in the case of nanoparticles of niobium, we have 17 different work fronts. And in all these fronts, the results have been surprisingly good.

We have the fronts for paints and varnishes where we have -- where we are in production. We're selling nanoparticles in paints, improve the resistance to corrosion by 3x, 4x, 5x depending on the geometry of the part. It can also be mixed in steel, improving the mechanical properties of steel. Also in cast products, improving mechanical properties. And the consequence of this improvement is that you can make parts that are much lighter with a stronger material.

This is a competitive edge, a giant competitive edge here at the Fenatran Show. A company from the group is showing [indiscernible] that has the weight of 30 kilograms, and now, the weight is 22 using nanoparticles. So it's a great advantage. Now there are applications in batteries, resins, sunscreens, friction material, many opportunities. I would need a long time to talk about this.

But we continue very optimistic and positive concerning Nione nanoparticles and not only because of what it represents by itself, the sale of nanoparticles, but also the impact that nanoparticles have of the final product. So if we place nanoparticles in the disc brake of Fremax, it will last 40% more. This is the potential. We said we have a capacity problem, we can grow much more in an indirect way.

So 2 benefits with Nione: What will appear in its P&L, and the other and indirect that will appear in all the companies that use the competitive edge and the growth that will be enabled in all the units using nanoparticles.

[Hemerson de Souza, executive]

Thank you, Sergio.

[Jessica Cristina Cantele, executive]

Thank you, Sergio, Anderson, Hemerson. I'd like to thank all those who sent questions. We'd like to close the Q&A session. And I pass the floor to Sergio for his final comments.

[Sergio Lisbão de Carvalho, executive]

Well, once again, thank you for participating. It's always a pleasure for us to talk to you, and all this material is available on our website in Investor Relations chapter. If you need any clarification, our team is available to continue this dialogue and these clarifications. Thank you very much, and we wish you a good day.

[Hemerson de Souza, executive]

Thank you.