Kepler Weber SA

BOVESPA:KEPL3

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Kepler Weber conference call to discuss the results of the third quarter of 2021. With us, we have Mr. Piero Abbondi, CEO; Mr. Paulo Polezi, CFO and Investor Relations Director; and Mr. Edirlei Lohrentz da Silva, Controller, that will be helping you during the Q&A. This event is being recorded.

[Operator Instructions]

This event is being broadcast via webcast and can be accessed at www.kepler.com.br/ri where the presentation is available for download. These slides will be controlled for you. The recording of this event will be available on the company's website shortly after the end of this call.

Before proceeding, we'd like to remind you that the forward-looking statements made during this call are based on Kepler Weber business assumptions, operational and financial projections and targets regarding the future of the business. Forward-looking statements should not be taken as a guarantee of performance. These considerations involve market conditions, the performance of the Brazilian economy, the industry and international markets and, therefore, are subject to change because they relate to future events and depend on circumstances that may or may not occur.

Investors should understand that general economic conditions and other operating factors could affect the future of Kepler Weber and may cause results that materially differ from those expressed in such forward-looking statements.

Now I give the floor to Mr. Piero Abbondi, who will conduct the first part of the presentation.

[Piero Abbondi, executive]

Good morning, everybody. It's a great pleasure to be here with you for the earnings results of Kepler Weber. We will start with the quarter's highlights. First, the net revenue increased 64% comparing to the third quarter of 2020, the highest net income in a quarter in the history of the company.

The good commercial performance observed on the post-harvest business in almost all regions of Brazil were crucial for this. The robust order portfolio built over the last quarters, especially in storage, significantly contribute for this result.

We also remind you of the strong base of the third quarter of 2020, where we have a great income from post-harvest equipment which makes the delivery even better in this quarter. Another highlight was the EBITDA with a 65% increase, reaching [ BRL 63.3 million ].

The EBITDA margin was stable in relation to the third quarter of '20, reaching 19.2%. It's important to highlight that the margin expansions in the business segments were the result of the effective management of raw material supply together with the price management with our clients.

Over the presentation, Paulo will provide more details about this performance. Finally, we had a ROIC evolution quarter reaching 56.2% in the quarter. This consistent reflects the improvement of our operational performance combined with the margin increase EBITDA and the income, and together with the working capital, good management.

Now Paulo will talk about the business segment. Paulo, you have the floor.

[Paulo Polezi, executive]

Thank you, Piero. Good morning, everybody. Now going to Slide 4. This is the evolution of business segment. Starting with the storage, where we had projects for post-harvest was still high with a 100% increase. This growth was supported by the agricultural commodities and especially our success rate increase in the negotiations between April and May with a record in sales.

Exports in spite of the high demand from Latin American countries, we saw a 34% reduction in this quarter. That's because in the third quarter of '20, we delivered a high -- a great project in the port area of the Peru.

So except for this ad hoc delivery, we have an increase of 3.2% in this period. In bulk, we had 58% in the quarter. This is relevant, but the events absolute results reflect a shortage in this period. It's important to highlight that in the second quarter of '21, we returned the sales in this segment with relevant supply that will increase the revenue in the first quarter of '22.

In parts and services, we saw an acceleration in all the 5 states we operate with a 93% increase. This is because of the favorable structure, our closeness to the final client and the sales of security items and safety items to meet the regulatory norms.

Slide 5 shows some projects delivered. In [indiscernible] in California, in [indiscernible], the storage investments from all the clients reduces their operational costs of grain, grain storage and freight with solutions of deliveries to a decent co-operative.

In Rio Grande do Sul, we have a new plant to meet the demand of the soy and wheat producers. This delivery term and the close management of the plantation area that allowed the installation within the term decided by the client.

In the foreign market, we have a project in Colombia that had a delay, but the client was very happy with our delivery, different from the competition.

And finally, the whole project solved the client's problem. He received grain with high content of impurities and the machines of the local market were not able to deal with this. Kepler solutions gave this quality.

In Slide 7, we see the EBITDA evolution in the third quarter of '21, the conventional and adjusted. In conventional view, we see a 60% increase in relation to the same period of last year, BRL 6 million of EBITDA.

And in adjusted EBITDA, with now considering the nonrecurrent event, we had a 64% growth, generating BRL 63 million and margins of 19.2%. Nonrecurrent expenses show the internal calculation and some immobilized assets. It's important to say that this is one more quarter of margin evolution reflective of the prices of steel, our major raw material, the better occupation of the plant, together with the expansion in the sales margin in this storage segment.

Slide 8 shows the evolution of CapEx investment. Our investments in this quarter were BRL 7 million, reaching BRL 25 million. In this quarter, we directed 64% to manufacturing, 20% in development of new products, 13% to meet safety and environmental regulations, and the rest in IT.

Slide 9 shows the cash availability that was in a robust level closing September with BRL 468 million, net cash BRL 351 million. It's important to remind that in October, the company, this reduced to BRL 278 million, reducing the gross cash to BRL 164 million. This balance and cash generation in collaboration will allow a rapid recomposition of the company's cash flow.

Slide 10 shows the liquidity of our shares that went from 33% in monthly volume in relation to 2020, and now trading BRL 10.5 million. As mentioned, in slide of cash production, we see the repayment of social capital concluded in October 2021 in BRL 9 per share, showing our commitment of generating results and retributing to the shareholders confidence they have in us.

Slide 12 shows the evolution of what was paid to our shareholders and what we had this mark of 426% of payout until September 2021. Slide 13 shows the ROIC accumulated in the last 12 months with the evolution of 32 PPs reaching 56.2%.

The consistence of this indicator is a reflect of our operational improvement with the increase in revenue and EBITDA favoring the working capital in the last 12 months. Slide 14 shows the evolution of a new business.

First, the same platform is already applied in our supplies, and we are advancing in the plants, at this time, would not deliver with this new technology. So 17,000 plants in Brazil.

Seletron is increasing in the offerings of equipment where we have the product well prepared and the go to market strategy already. We have some sales already.

And with this, I close my part and give the floor back to Piero.

[Piero Abbondi, executive]

Thank you, Paulo. Before going to the question and answers -- questions. I want to continue -- in the recent achievements, I need to congratulate Kepler's team. Remember, that we are still in the COVID-19 pandemic and in the volatility environment. This will tell you our deliveries.

In couple of days, we communicate our plans to structure a new business segment, offering digital services in the concept of the 4.0 Agriculture. This will increase our recurrent revenues and offer new alternatives to improve the productivity of our clients.

And finally, on the year's perspective, a positive point is that we have expectations on the cases of more relevance and raw material prices as steel got some stability, and this will collaborate to delivering healthy margins during 2021.

The stability in the logistical chain has not been totally overcame. The sort of containers and the increase at maritime freight can bring some problems. We'll be attentive for this, not to harm our operations.

On the other hand, we have a robust order portfolio that will continue to support the growth of our revenue in the new -- next quarters. With this, I close our presentation.

I thank you for your interest. And now we can start the Q&A session, please.

[Edirlei Lohrentz da Silva, executive]

[Operator Instructions]

We will go now to the questions asked through the webcasting..

[Paulo Polezi, executive]

Good morning. This is Paulo. We have a question from [ Mr. Rafael Gaete ]. Congratulations for the results. And the question is, the Safra plan is advancing in a healthy way?

Well, thank you for the question. The Safra plan, the government announced a record value in our case in the PCA plan of storage equipment, BRL 4.1 billion. This resource was available in June and very rapidly allocated to the sector.

This was a very hot moment in our sector. Our clients, rural producers making investment even before the Safra plan, this explains why this has been consumed so rapidly. And this was a value that was similar to the reality.

Yes, it was positive, unfortunately, it ended rapidly, but the sector continues to reinvest and this is good for the sector and Kepler. So the Safra plan was very positive this year.

[Edirlei Lohrentz da Silva, executive]

We have more questions from the webcasting. So one more question from [ John Dieter ]. Congratulations for the excellent results. I'd like to know if you have seen any drop in demand due to the increase in interest rates. Piero, please?

[Piero Abbondi, executive]

Perfect. Very good question and very timing because we had interest rates increase. I'd like to first go to the history of Brazil. If you go to the -- if you look at the last 30 years, the grain Safra is annually increasing [ 5% ] a year.

In 2001, the production was 100 million tons. And in 2021, 254 million. And the estimate for 290 million for the next harvest. So the interest rates are great. But the [ Safra ] continues to grow.

So we see that, of course, capital cost is important. But in a segment that is increasing and especially looking at the producer point of view or investing with a return of 5 to 6 years, he continues with a good profitability.

So we know that it has some impact but this is what has been happening in the last 20 years. So agriculture is [indiscernible] and the producers will continue to invest.

And just to add, in average last year, half of our sales were with the -- on resources of the producers showing that they are capitalized with a good profitability, and they continue to invest. So since we also estimate that the next harvest will be a good, we see -- we won't see a great impact of this increase in interest rate in our demand or in the investments by these producers.

[Edirlei Lohrentz da Silva, executive]

Thank you, Piero. We have another question, [ Bernando Nogueira ]. He asks what is the expected growth for 2022?

[Paulo Polezi, executive]

Bernardo, the company doesn't have any guidance policy, but we can put into the context, our expectations for next year. I will start, Piero will add. We are now working on the budget for the next year. But we have to put this into a context.

2021 was a very good year for the agribusiness sector. And we have an order portfolio, very robust, being renewed. And this allow us to continue growing. But of course, the comparison base will be much more difficult because this will be more difficult because of 2021, we increased a lot.

But we do have expectations, good expectations that the company is very well prepared. We made investments this year that increased our capacity. So we have all the elements that allow us to continue to grow.

The market -- the real currency devaluated the price of agricultural commodity value in an excellent condition, financing lines available. So all the necessary elements are present. So this give us a good perspective for 2022.

[Piero Abbondi, executive]

Exactly, Paulo. Right in a moment, the producer will make his investment decision, which is the next quarter -- the first quarter of next year, we will have a harvest estimated with [ 290 million ] tonnes. The climate conditions will be better than this year and profitability will be very good.

So we believe that the producer will be capitalized as we mentioned, and with a positive attitude to make investments, especially in our segment where he looks for the effectiveness of this business. So we are very confident in relation to 2022.

[Edirlei Lohrentz da Silva, executive]

One more question from [ Enrico Saluzzo ]. In the last call, you mentioned this new area of Kepler responsible for raw materials. How will you be behaving due to this volatility in the supply chain?

[Piero Abbondi, executive]

[ Enrico ], thank you for your question. This is important. We'd like to remind that Kepler is a company that delivers solutions to clients. We perform projects, projects that require time to be produced, assembled and delivered.

Usually, this takes 3 to 4 months. Today, it is slightly about 6 months. So this make us to work on cost issues to have stability. And we bring this hedge concept. It's not the hedge of the stock exchange. It's the hedge directly with our steel provider -- supplier. And with this, we keep the inventory.

We try to have the cost of raw materials matched. So we went through a high volatility in prices in the first semester. And now we had this price matched with the deliveries because of the raw material was not in the market, it's mismatch. But it is already normalized.

Today, our supply chain is stabilized and our raw material are matched with the deliveries we have. So this is much more comfortable for us because we can have a predictability.

Just adding the examples are our results. In the first and second quarter, we had a certain impact because of the prices of steel in the second semester of last year was really very high.

And it shows that the company -- he knew how to manage this and overcame. So now we are delivering a better result, and the expectations is of stability in the supply chain with no much surprises. So we continue with this smooth flight, showing that our management of raw materials and price were adequate. We have suffered, but more than we would desire, but less if we didn't have this policy. So we will continue with this to avoid the turbulences.

[Edirlei Lohrentz da Silva, executive]

Thank you, Piero. Now in the sequence, we have a question from William Gollis. And he asks I'd like to understand the recurrence of services revenue, the implementation of chip and the percentage of this revenue in the results.

Piero, I'd like you to comment, but I'd like to make a short introduction. When we talk about this microchip, we can understand that the decision to our offer of our digital services, the sync product and our [indiscernible] of connection with the clients. So Piero, can you elaborate on this?

[Piero Abbondi, executive]

Of course, of course. Thank you for the question. It's important to show our great efforts in this business line that we will create this recurrence. When we talk about services recurrence, we talk about post-harvest cost sales that correspond accounts for 15% of the RS area -- 15% of our revenues. This is a recurrent revenue.

It's a segment that increased 5x in the last 5 years. We have 5 distribution centers located at the producing area to deliver the ports with remodel equipment. So it has a rapid growth and it's part of our strategy. The digital product follows the same line. We launched our digital platform 2 years ago, focused on automation and plant management.

Now we have this connectivity with the data in the cloud offering to the producers and also services to managing the plant and maintenance. So remotely we can have a diagnosis of what is happening in the plant in terms of operation and maintenance and suggest the best ways for this producer gave more details on this in our last Kepler Day.

We have here in Panambi, a dedicated sale to this service line, developing not only the part of services, but also adding new sensors, sophisticating even more our offer of embarked electronics. And in the connection of data service, we estimate of having 150 plants connected to our Panambi operational centers.

So I mentioned the recurrence in the area of both of the sales. And with this remote service, we can be more effective in our after sales and support services. So these are complementary views in terms of recurrency.

And we also have our RS area. We are small, but we are growing, and we have the same level growth level in digital and services. RS is our service replacement area, okay?

[Edirlei Lohrentz da Silva, executive]

One more question for Mr. [indiscernible]. How can we imagine the margins for the next semester since the steel price is stable since some past weeks?

[Piero Abbondi, executive]

Well, I can comment on this. The first part relating to margins. We need to understand the dynamics of our business. Our business is exposed to agricultural commodities. And sometimes, we have expansion moments and moments of decrease we've been working very consistently.

The market is high. The company is well restructured and this has allowed us to deliver a consistent and growing margin. Piero just mentioned, even in the first semester, when we have a pressure from this fuel price, but we delivered a good result.

And these conditions becoming -- continuing, we will have a good profitability in this area. We don't manage the company exclusively on the short term. We look at the consistence of the company's profitability. The company is positioning -- positioned in a good level of profitability.

And this is expected to be maintained. And over time, we will look for the expansion of item. We have some cyclical things, but Piero mentioned the recurrent revenues of the RS segment we have good control lean manufacturer and recurrent revenues allows us to see stability with the possibility of expanding even more.

Just reminding, this movement of the steel price started at last August. We had a significant period of a price increase that, if you look to our first semester, especially the second quarter, was the highest impact.

But looking forward, we start to see some price stability, we expect not to have so significant movements in the future. So as I said, we are flying smoothly, and we are always trying to maximize our important volume that we have in the next quarters to have a better assumption of fixed expenses and reducing all this inefficiency.

So we are looking for margins and profitability. Now concerning the acquisition of other players in the same segment. In our growth plan, we have 3 pillars. First, the market growth there is depth and storage. And we believe we are a key piece to help Brazil to decrease this deficit.

I won't go in details, but because you know already, but we expected in this next harvest to reach BRL 100 million. So we believe we need to go for solutions, and this is the first pillar of growth, the opportunities.

And then we have another 2 important pillars. One is the search for solutions and products of greater added value. The first example is Seletron where we acquired the technology and the brand last year, we worked in the first semester of this year to have the go-to-market prepared with the product price market and how we were going to sell this in our restructure.

We are advancing in this. We had 45 proposals running in September. This is an example, and we will continue to look for other opportunities and alternatives for solutions and equipment of high market value. And the third pillar is the digital that we have just spoken about. We have this digital journey established that we think is important and will generate value to our products and solutions, and also recurring revenues with the subscription and closeness to our clients.

[Edirlei Lohrentz da Silva, executive]

One more question. Now changing the subject, it comes from [ Natalia ]. The exchange situation of the [indiscernible] with the increase of the steel price, and what about the exports? Well, the dollar issue is a key.

[Piero Abbondi, executive]

Thank you, Natalia. We saw a great volatility in the exchange rate. But we need to put this into context. The exchange rate has 2 effects. One, very positive in sales storms for 2 reasons. Because we export, we have 2 sales niche for the foreign market. We are leaders exporting to Latin America and other continents. So this help us and make us more competitive to launch more in the external market. In the internal market, as we mentioned previously, we have the grains price in dollars, and it help them to continue to invest because the prices are fixed in dollar.

Steel plant is still is 50% of our variable costs, and it follows the dollar trend. And for this, we need to work paying attention to the -- We try to work with the raw material at home and always matching with the sales.

So the sales decision we make today is because we have already the raw material at home. So with no exchange rate risk. If you -- when we have the inventory protected, if we are more positive what can impair is the volatility of the dollar.

But in the first moment, the -- this is how we manage exchange rate, right, that is a dollar is much more positive than negative to our segment because grains are related to it.

And concerning the storage investment, I think volatility is even an incentive to the producer to investing in storage because we can mitigate in this situation much more easily when the person is harvesting. And it has a window of 1 or 2 windows. And if there is no storage installation and he has to sell right on the spot.

So with the storage, he can work more comfortably. So I believe it's an incentive when we see this fluctuation encouraging the producer to invest in storage to make more structure decision when decision is not so good.

[Edirlei Lohrentz da Silva, executive]

Okay. We have a question from [ Mauricio Fosen ]. Congratulations for the results. What is the inventory level for the next quarters.

[Piero Abbondi, executive]

Mauricio, thank you for your questions, but better than talking about the inventory levels, we can analyze their coverage. The company has an inventory policy. We work with minimum and maximum levels, and we adjust this according to the market. We have a very robust order portfolio and our inventory level is matching despite of the portfolio, as the portfolio expands, we also update the inventory to have it matching.

So this is the way we work. Of course, we have a supply intelligence that analyzes the trends of the steel price. In the first semester, we have consecutive highs in price. And now we see that the steel price is becoming stable. But of course, it has some volatility, and we are working on the planning, expecting drop trend.

So we work with matching inventory. So I repeat, our inventory is matched with the sales levels we have. This is the way we work. So I think we answered the question.

[Edirlei Lohrentz da Silva, executive]

The next question -- I will continue with the same subject. The steel price shows some drop. And if so, Kepler will react to this so the prices.

[Piero Abbondi, executive]

Well, we see some stability in steel prices. If we had fluctuations we see the supply market that we go -- we are very close to it, and we will make our decisions. If you have the price increase, we will have a proper price management and also the portfolio management. Because between inventory and contracts, we look for the coverage to be the steel prices covered by the orders we have. So we see no impact and we manage prices in a way not to have any impact in our results.

[Edirlei Lohrentz da Silva, executive]

Thank you, Piero. We have several questions about the steel price, but I think they have been already answered. So if there is any other question, our IR will answer in writing.

[Operator]

We have a new question here about investments in infrastructure. The question is the interconnection of railway can favor the demand for port to terminals?

Thank you for the question. Piero?

[Piero Abbondi, executive]

Good question because this is one of our segments, the MGS, the segment of ports and terminals is one of the growth vectors of our growth base. The first is investment at the [indiscernible] of the rural producer and the second is logistics.

The logistics in Brazil requires investment that is a deficit, grain production is growing towards the law of the country. And the logic is not to export from the south Paranagua to Santos but to have this in the Amazon Basin in -- and then transporting to ocean ships or the North South railway going to Goias [indiscernible].

So yes, this is an important growth vector. We see some movement -- some investments impacted this segment. The [indiscernible] in the South track of North South rail gave great presence for them, taking this railway to the port of Santos.

And we participated in these 2 projects, [indiscernible]. And we have other projects terminals in the Amazon Basin and other terminals along the [indiscernible] railway going to the port of Itaqui.

We are focused on agricultural bulk. We have an important participation in the port of Santos in sugar. Most of the equipments there are Kepler. So we are well structured to meet this demand. We have a relevant player -- Kepler is a relevant player at Porto de Santos with a new delivery in 2022.

[Operator]

We have another question from [ Mr. John Silver ]. Why is Kepler looking for partners in the assembly area? Does this reflect an increase of demand? But how do you have the quality control of the services. Can you elaborate on this?

[Piero Abbondi, executive]

Well, [indiscernible] sector is a high this extends to all the chain, supplies and services because Kepler works with partners all over Brazil. And the question is, how do you redo this quality control?

The company works with other outsource the companies that go through a selection process internally, they are trained to have a good relationship with the company, and they meet our level of service. This is necessary to keep the quantity of our products to have the work delivered with the Kepler's quality.

And these are obviously regional companies because they are in the area of the country close of the producer. We also -- we are trying to accredit more services provider. And these partners are also investing in their capacity, and we have a dedicated area in Kepler that acts in this sector, the final delivery to the clients because this is very important to Kepler.

Just to complement, it's not today this program that we have of outsource of contractors development. We have this for many, many years already mainly because we believe that the assembly and the project delivery is an integral part of our strategy.

The client does not buy equipment in parts, they plan to buy working plant, a plant that is operating. So we are there to help the client in the operation of this equipment. Many times, the producer has a greater focus on the planting and the assembly of equipment is outside of his knowledge.

So we give this support to the client. And this is Kepler's differential. And in this line of contractors development, we saw more efficiency in the assembly process to have a good satisfaction level and also safety, the quality of the assembly. This is another differentiation that Kepler looks for.

And in the growing moment, we look for new positives but this is a trajectory that we are going through already for many years.

[Operator]

Okay. Thank you, Piero. So we are getting close to the end of this conference, but we still have 1 more question from [ Jon Victor ]. This is his second question.

What about the pressure of the cost of the planting fertilizers? Do you see any type of pressure from the producer in this system for grain storage in this last month?

[Piero Abbondi, executive]

I will answer. Thank you for your question. It's important an important question. And what we've seen is, first, the producers profitability is very good. We are not seeing a great movement of lack of interest of the rural producer. I would say that the first harvest is good.

We have a second harvest to be defined The Interest rate impacts the costs, but also the revenue, we don't see any great impact in the producers' productivity. They are capitalized with a good profitability, and we have a record harvest -- So we will continue to have this interest of the producer in investing and improving the business efficiency.

[Operator]

Thank you, Piero. Well, there is an important question now about CapEx that I think it's worth to ask it. It comes from Fabiano [indiscernible]

Looking to the good pace of sales you have for the next semester, do you have CapEx capacity or the investments you have are enough?

Thank you, Fabiano, for your question. Piero?

[Piero Abbondi, executive]

Yes. Yes, I will comment, okay? Well, first, it's important to say that we follow. We continuing following the needs of CapEx. Today, we have a process of building the budget for the next year, but also looking to 2023 and '24 because we'll have any impact next year and the following years. What we have a very introducing investment conditions. We have 2 good plants installed with capacity -- enough capacity to meet the demand, better efficiency, and we have a space in the plant.

So all investments for growth to follow demand growth are very adhoc in existing bottlenecks. As we did this year, this year, we had investments in laser cut and now we are commissioning [indiscernible] laser machines to allow us to meet the demand for the next year.

And we are now discussing what we are going to do at the end of this year to meet the demands. So this is important with a short investment we were able to leverage the demand growth. This was important, first, to meet the demand; and secondly, the effectiveness of the invested capital, we can capture higher revenues and generate a better profitability of this capital.

Yes, we follow the necessary investments. We estimate investments for the next year because we are getting prepared to the following years. And investments in efficiency, technological -- in the innovation area, new products, we have KWMax dryer, very innovative, with energy efficiency and ESG in the product much more sophisticated than the previous lines.

So we always look for innovation, and we will make investments on this preparing the company for the coming years. We try to manage the company delivering good results every day, but also with an eye on the future to ensure this sustainability and consistency along the years.

[Operator]

Thank you, Piero.

Thank you. The conference call of Kepler Weber is closed. We thank you for your participation. Wishing you a very nice day.

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