Fras Le SA

BOVESPA:FRAS3

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call for results concerning Q4 and full year 2020 for Fras-le. We have with us Mr. Sergio Carvalho, COO of the Autoparts division of Randon and also CEO of Fras-le; Hemerson Fernando De Souza, Director of Investor Relations Department; and Anderson Pontalti, Director of Fras-le and Investor Relations team of Fras-le. We inform that the presentation that we will have is available for download at ri.frasle.com.br. [Operator Instructions].

Before proceeding, we would like to state that any declarations that may be made during this conference call concerning the business perspectives of the company, projections, operational goals, financial goals, are all based on assumptions of the Board of Fras-le and also based on information currently available to the company. Future -- future considerations about the future are not guarantees. that involve assumptions and risks. They refer to the future events that may happen or not. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future results of the company and may lead to results that may differ materially from those expressed in these comments.

Now I'd like to pass the floor to Mr. Sergio, who will begin the presentation. Sir, you have the floor.

[Sergio Lisbão de Carvalho, executive]

Thank you, operator, and good morning. Welcome to the conference call of Fras-le for the earnings of Q4 and also the 12 months of 2020. Anderson Pontalti, General Director of Fras-le; Mr. Hemerson De Souza, Director of Investor Relations and M&A at Fras-le and also the operations at Controil and Fremax; and myself will be here during conference. We also have the Investor Relations team.

The year 2020 was very different from everything we saw. We began in a very positive and optimistic way in relation to business. But in January, we felt the first impacts of the pandemic in our plant located in Pinggu in China, which, in a certain way, prepared us for the rest of the second quarter had the strongest impact due to coronavirus-19 until now. After a few months, there was a gradual improvement of activities. And even with all these difficulties, we continue with dedication and taking good care of our employees, following all the health protocols and all the safety protocols. And thus, we had a growing performance beginning in April, which was the hardest hit until now.

And even with all these adversities, 2020 was a very special year for here because we finished the acquisition of Nakata, the largest acquisition in the company, which will allow us to reach new levels of leadership in the aftermarkets. Now with a richer portfolio and greater diversification of markets, which will help us to shield ourselves to adverse moments. The company is constantly evolving, searching for productivity through innovation, and thus, we would like to share some details of this quarter.

You can follow us, please, Slide #4. In the Fras-le universe of this quarter, we would like to mention the Export Award for the state of Rio Grande do Sul. And we're proud that Fras-le is participating and has really had a good position in the last 10 years in this award. Related to innovation, we inaugurated at the end of last year the new automated area of the headquarters in Caxias do Sul, with the operation of 4 autonomous vehicles, also known as AGVs, automatic guided vehicles. These vehicles allow a safer movement of efficiency and components in our plants, reducing risks for the professionals involved and increasing productivity. Also in partnership with Apimec São Paulo, we have the Fras-le Investor Day called Universe Fras-le. The event happened in November 2020, and we presented the results of the company, the growth strategy, trends in innovation and also perspectives for the future. Because of the pandemic, COVID-19, the event was made 100% online, which allowed more than 250 people to connect themselves to the event simultaneously. Apart from this, this event continues available in our Fras-le channel on YouTube.

Now Slide #5. We -- we're always -- we will continue with actions concerning the environment, social and governance of the company. And we'd like to share some of these actions with you. The Elisabetha Randon Institute, in partnership with the Technological Center, developed the Florestar Project Reforestation-Planting the Future. It involves 40 children and teenagers in this program for reforestation. They participated in the implementation of an area with native species for environmental recovery, collecting and also collection of seeds and also cultural part. It is financed by the government of the State of Rio Grande do Sul through the Secretariat of Labor and Social Systems. And it includes the expansion of our CTR, which inaugurated this year a new area for dynamic vehicle testing.

In relation to the pandemic, we would like to reinforce that since the beginning, Fras-le has been adopting many measures to protect the health of the employees and their families as well as contributing for the functioning of the local economy and global economy. Fras-le follows all the government decrees and consequently enables all its plants to work in all the locations.

Now in relation to government, we would like to highlight the transaction policy between related parties, which expands the level of governance in line with the best practices in the market.

Now I invite Anderson Pontalti to begin the results on earnings.

[Anderson Pontalti, executive]

Thank you, Sergio. Good morning to all those participating in the conference call. We would like to begin on Slide #6. The year 2020 was marked by our efforts and victories. As mentioned by Sergio, Fras-le continued firm in its objectives and finished the acquisition of Nakata, the largest acquisition in history. This takes us now to a new level, but it's important to highlight that even not considering this acquisition, the revenue of the company was higher when compared to Q4 '19 and also the 12 years of 2000 -- 12 months of 2019. With the good planning and teams that are engaged, we were able to maintain our levels of margins. And we have been working on this since 2018 with elements to improve productivity and reduce costs in the companies. These factories contributed for the EBITDA margin, adjusted EBITDA margin, 19.2% in Q4 '20. This is in special, but the best quarter in the history of Fras-le. And the managers are proud to share this with all the stakeholders.

Now Slide #7. Net revenue. The last quarter of 2020 shows that Fras-le, through its expansion strategy, has a portfolio that is more and more complete to really serve the clients. Fras-le is historically known as a manufacturer of friction material because in the past, this family represented more than 80% of the consolidated revenue of the company. Nevertheless, with the acquisitions in the last few years, sales increased in the other families of products. Thus, the friction materials revenue now is 52% of the company's billing in Q4 '20. Apart from suspension components, direction and powertrain, all these became strong with the acquisition of Nakata. And in Q4 '20, they represented more than 23% of the consolidated revenue. And the family of components for brake systems, braking systems, is still growing and represented 15.7% of the company's revenue in Q4 2020. These movements are strategic, and they have been designed for a long time in the company, and we can see that Fras-le is now a powerhouse of aftermarket products, with products and brands that are iconic in its portfolio, apart from being the largest manufacturer of friction materials in Latin America and one of the world leaders.

Now on Slide #8, we will talk about the revenue distributed in the domestic car market and export market. Here we can see the geographic diversification of the company's business. The domestic market continued with high demand for maintenance of commercial vehicles for cargo transportation and also passenger vehicles also during Q4 '20. But the growth of more than 100% is a consequence of the acquisition of Nakata that had its first full quarter in the company's results. In the quarterly comparison, without considering the revenue from this acquisition, we still had a growth of more than 25%. In this quarter, in the domestic -- the domestic market was responsible for more than 65% of the company's revenue, which normally was 50%. This increase is directly linked to the acquisition of Nakata, which has most of its sales concentrated in Brazil. The export market had a gradual recovery in volumes and with the exchange rate having a positive impact, closed Q4 '20 with a revenue 1.1% higher than Q4 '19.

The business model of Fras-le is more and more shielded, protected with a lot of diversification, both in terms of markets and also portfolio of products. This allows us a greater resilience in adverse scenarios as we had in 2020. Now I'd like to invite 2000 -- I'd like to invite -- sorry, Hemerson, to talk about our results.

[Hemerson de Souza, executive]

Thank you, Anderson Pontalti. Good morning to all those participating in our conference call. We'd like to go to Slide #9. The company really took many actions and is alert to the external moments to mitigate the impacts of the pandemic in the results of the operations. Thus, we arrived at the end of 2020 with an adjusted EBITDA of BRL 283.1 million and an adjusted EBITDA margin of 16.9%. We had nonrecurring events that impacted the results, most -- the greatest was, for example, our lawsuit of ICMS tax and this gave us a gain of BRL 70.1 million in Q4 '20 and BRL 93.4 million in the year 2020. At the end of the year also, we had the recovery of the investments, which takes into consideration cash -- discounted cash flow and operations. And thus, we had an impairment of BRL 34.5 million in 2020, BRL 7.9 million referring to the -- our controlled company, Armetal, and this also due to the reduction of volumes in Argentina and also the devaluation of their management.

Now going after synergies and also improving the production of the plants in Q2 '20, the company opted to transfer the production of brake linings from the plant in Montevideo in Uruguay to Fanacif in Caxias do Sul, Brazil. This reduced future cash flow in that operation, resulting in recording an impairment of BRL 2.7 million recorded in June 2020. And at the end of the year, in the annual review, the company recognized an additional impairment of BRL 11.7 million. Related to Jurid, concerning Jurid, the company had an impairment of BRL 5.7 million in Q1 '20 due to the closing of the year 2019 and an additional impairment of BRL 6.5 million on December 31, 2020.

We -- in Q4 '20, we also recorded the change in the recoverability of a social security plan worth BRL 2.2 million. Considering these effects, the consolidated EBITDA closed Q4 '20 adding BRL 156.6 million, which is 156.3% higher than in the same period of the previous year. And the EBITDA margin had a growth of 9.8 percentage points. During the year, the EBITDA represented BRL 330.9 million and a margin of 19.8%. Excluding nonrecurrent effects, the adjusted EBITDA in Q4 '20 reached BRL 114 million and an EBITDA margin of 19.2%. As mentioned previously, during the whole year, adjusted EBITDA represented BRL 283 million, representing a margin of 16.9%. The combination of all these factors, especially the gains in tax, the lawsuits and interest resulted in an accounting net profit of BRL 128.4 million in Q4 '20 and BRL 182 million in the year 2020.

Slide #10. As you know, we had a strong cycle of expansion during the last few years. In 2020, with the largest acquisition in our history, this resulted in increasing the working capital of the company. So this number, we adjusted for the net profit -- net revenue of Nakata, and this number went to 103 during 81 days. Apart from this, we had the exchange rate variation, which had an influence in working capital operations outside Brazil. Thus, at the end of the year, the working capital for 2020 was to BRL 606 million. Apart from this, our taxes to be recovered had a growth -- significant growth due to success in the lawsuits for ICMS tax and also PIS and COFINS. We give you details of this in the documentation, since these amounts will be recovered in the next 18 months.

Now going on to Slide #11. We will talk a little about our recently acquired Nakata, a company that is a reference in the aftermarket parts. The second brand that mechanics and repair workshops love according to the magazine, [ Oh Mechanical ]. In these 4 months with Fras-le, Nakata had excellent results, a good revenue and a record profitability for Fras-le. So thus, we see a good management and also synergies that give us our good results. We will have the immense pleasure to show you with more details our integration plan and synergies during the next quarters and as we do with other acquisitions, for example, Fremax and other acquisitions.

Here, I'd like to conclude. And I invite Sergio to continue with the presentation and talk about the perspectives. Sergio?

[Sergio Lisbão de Carvalho, executive]

Thank you, Hemerson. Now talking about what we see in the future in 2021 has many uncertainties, but we're optimistic. The company hopes to have more stability, but we know that we're still living in the COVID crisis. And in this sense, the concern with health involving of employees and families will continue being our priority. Fras-le is alert to the changes in the market and also the recovery of the economy. But at the same time, we are concerned. The concern is linked to the lack of materials, the risk of having a lack of materials because the growing volumes can bring restrictions in the production lines. Other concerns are inflation, uncontrolled prices and exchange rate. There is one certainty: 2021 will continue being a challenging year.

Now going on to Slide #13. We talk about the company's guidance for 2021. Based on the recent nonorganic movements, growth in certain markets, evaluation of the macroeconomic scenario in Brazil and the countries where we have operations and commercial relations as well as indicators of the automobile industry and also behavior of the markets, our plans lead us to see -- to make a BRL 3 billion of total gross revenue, BRL 2.1 billion of net revenue, consolidated revenue. The export promise will contribute with $170 million in revenue. At the same time, as we project $60 million in imports. For our investments, we're foreseeing expenses around BRL 100 million.

So now concluding the efforts, we conclude the presentation. On webcasting, you will find the slides that we showed and also support material that shows in greater detail the financial and operational indicators. So we are available for any clarification. I'd like to thank your attention. And now we'd like to begin our Q&A session, where Anderson Pontalti, Hemerson De Souza and myself are available to answer questions. Thank you. We may proceed.

[Operator]

[Operator Instructions] Our next question comes from webcasting, [ Thiago, FX Assets ].

[Unknown Analyst]

Expectations for 2021, the impact of the COVID-19?

[Anderson Pontalti, executive]

Good morning, [ Thiago ]. Thank you for the question. 2021, as we mentioned at the end of the presentation, will continue being a challenging year. Although the markets -- although we see a lot of demand in the market, but there are uncertainties in relation to COVID, the lack of materials and inflation out of control that may affect our business. The positive sign, we have a very shielded process. So vehicles need maintenance, and this gives us a competitive edge and also a good coverage, geopolitical. We don't depend only on one continent or one region, so this helps us.

Concerning the impact of COVID, we had, in March, at the end of March, we had plants stopping. And gradually, we recover production. We learned with the protocols. And now, we have total control in our operations without affecting productivity and performance of the company.

[Sergio Lisbão de Carvalho, executive]

Now Sergio speaking. Just to supplement what Anderson mentioned, our expectation is that some markets like the U.S. market, which is important for our structure, will have a very good year. There will be a very good year in the U.S. The contamination rates are dropping in the U.S. at good speed. Vaccination until 2 days ago, 78 million doses of vaccines have been applied. So the U.S. President announced that by the end of May, there will be vaccines available for all the population in the U.S.A -- for all adults in the U.S.A. And in parallel to this, the Chamber -- the U.S. approved a new law with $1.9 trillion for the U.S. economy. This must be approved by the Senate, but the Senate is controlled now by the same Democratic party. So there is good potential for this law to be approved. The pandemic is now in a new phase, a more positive phase, and this injection of resources, these trillions bring us a lot of optimism in relation to the performance of the U.S. economy, especially in the second semester of this year. And certainly, this will also help activities in Brazil.

[Operator]

[Operator Instructions] Our next question comes from the webcast. With the drop in net -- in relation to the net, do you believe you can pay more dividend this year?

[Hemerson de Souza, executive]

Hemerson speaking. Thank you for your question. Concerning dividends, yes, we have a robust policy for dividend payments. We have the 25%. But if you look, we always pay above 30%, in excess of 30% in dividends of our net profit. This year, we just had the meetings with our counsel, and I invite you to see the recommendations they made. Yes, we have a proposal that if approved in the shareholders' meeting, we will pay the same amount we paid in the last few years. It was a very good year for Fras-le in terms of profitability with the tax gains we had. And this can also have an impact, increasing the payment to our shareholders.

[Operator]

The second question. I will read it. Sergio, then do we have any acquisition? Are we looking at other acquisitions? Mr. Sergio Carvalho will answer this question.

[Sergio Lisbão de Carvalho, executive]

Thank you for the question. Our priority right now is to continue in the current integration of Nakata. Since the transaction was the largest in our history, as mentioned by Anderson -- Hemerson, the priority is the integration of Nakata to our system. Fras-le had a very strong cycle of growth. A few years ago, our revenue -- our net revenue was BRL 850 million. Now we just mentioned the guidance for this year. We have a net revenue of BRL 2.1 billion. In other words, a growth -- a very strong growth in a very profitable way. What I can anticipate is that we have the intention to continue growing in a healthy way, in the same way as we did until now. In other words, yes, we will continue in our journey, but the priority now is the successful integration of Nakata.

[Operator]

[Operator Instructions] Since there are no questions, I'd like to pass the floor to Mr. Sergio for his final comments. Sir, you may proceed.

[Sergio Lisbão de Carvalho, executive]

Thank you, operator. Once again, I'd like to thank all the participants. And also, we are available for any clarifications. Please if you have any question, get in touch with our Investor Relations area for the clarification. Thank you. We wish you a good day.

[Operator]

Thank you. The conference call for results of Q4 and the full year of 2020 is concluded. Therefore, please disconnect your lines, and we wish you a good afternoon.

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