Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, in Brazil, everyone, and thank you for waiting. Welcome to MAHLE Metal Leve for the first quarter of 2018 results conference call. With us here today, we have Dr. Christian Binkert, CFO; and Mr. Daniel Alves, Marketing and Corporate Communication Manager. This event is being recorded. [Operator Instructions] This event is also being transmitted simultaneously through the Internet via the webcast and can be accessed through the Investor Relations website of the company, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of MAHLE Metal Leve's management and all information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur.

Now I'll turn the conference over to Dr. Christian Binkert, CFO. Please, Dr. Christian Binkert, you may begin your presentation.

[Christian Binkert, executive]

Good morning, good afternoon, ladies and gentlemen, and welcome to the Q1 conference call of MAHLE Metal Leve. If we go to number slides, first of all, briefly about the agenda. A couple of words about the highlights for the first quarter 2018, followed by the market overview. Then we are going to discuss the net revenues and the performance by market, followed by the summary for profit and loss statement and EBITDA, financial management. And at the end, a short overview over the CapEx and depreciation.

If we go to Page #3, the highlight for the first quarter 2018, sales increased to BRL 618.7 million in the first quarter, which is a growth of around 14.5%. And growth in the domestic sales of original equipment manufacturer, so-called OEM, increased first quarter around 17.6%. And important in the Annual General Meeting held on the 27th of April, it was approved to pay dividends like in the past MAHLE Metal Leve’s has done historically -- like done historically, additional BRL 143.6 million. Management did not consider the information on subsidiary of MAHLE Metal Leve Miba as material. And therefore, the numbers in 2017 include still MAHLE Metal Leve Miba. Looking at the main indicators, as mentioned, sales increased by 14.5% to a level of BRL 619 million. EBITDA increased by nearly 50% to a level of BRL 119 million. The EBITDA margin is 19.2%, meaning an increase of 4.3 percent points. The net income nearly doubled to BRL 71.4 million and the net margin is 11.5%, an increased by 4.4 percent points. Now I would like to hand over to Daniel, which give you some more and better information about the market overview.

[Daniel Alves, executive]

Good morning, everybody, and thank you for attending our conference call today. I will start on the Page 4, where we have the automotive figures. In this case, in Brazil and Argentina, vehicle registration and production, the first quarter of 2018 and the last year first quarter. On the first table, we have the light vehicle. On the first column, we have the Brazilian figures. We can see the sales increased, it's almost 15% and the production increased 13.1%. On the second column, we have the Argentina, where we have 16.4% increase on the vehicle sales and 20% on the vehicle production. Combining these 2 countries as a block, so Brazil and Argentina, the main countries of South America region, we're having vehicle sales 15.2% increase and in production we have a 14% increase. If you look at the numbers, the absolute numbers, we had like a positive trend balance, so a higher production level than the sales. And we are in line, so with sales and production.

The inventory in March finished with 34 days with the amount of [ 231,000 ] vehicles. And also in April, we have the same level of inventory of vehicles and after 32 days. So the inventory's in a good level. So close to 30 days. The full year expectation for the vehicle sales it's around 10%. So we have a 15.2% for the 2 countries, Brazil and Argentina. And for the full year we have a 10% because of the higher comparison basis for the second semester. So the first semester -- or the first quarter last year was low, so we have a lower comparison base for this year. And on the second semester, we have a higher basis for comparison.

For production, the full year expectation it's around 12%. We have it on the first quarter 14% and the full year expectation is 12%.

We have a potential risk now. So for the Argentina for sure you've heard about the interest rate increase on the last weeks. And we already have an impact in April, mainly vehicle sales in Argentina so we had a decline. And in this case, we did a simulation, if you keep like the April vehicle day sales for the full year, we would have likely the same level of vehicle sales in Argentina. And in this case, this should have an impact on the vehicle production about [ 2% ].

Moving to the medium and heavy vehicle. So we have Brazil, on the first column, where we had the sales increase, of almost 20% increase. And the production 36.4% increase. So in this case, it's also -- for the production we have a very low comparison basis. This is the reason of the discrepancy between the sales and production index. On the second column, we have the Argentina's market. So an increase of almost 10% on the vehicle sales and at 0.3% on the production. Combining the 2 counts of Brazil and Argentina, we have on vehicle sales for the medium and heavy, 16.3%. And then in production, 32.6% of increase. In this case, the full year expectation for the vehicle sales, it's around 13%. And in production, around 14%.

On this first quarter, we had a better trade balance, so we should have liked a positive yields on this case, with the higher production. So if you keep the same trend that we have in the first quarter, the production should be almost 20% on the full year, the whole number.

Now moving to Slide 5, where we have the vehicle production, the main export markets. So we have the North America market and the Europe market. For North America, in the light vehicle production, we had minus 2.6% and the medium and heavy production, we had 20%. So it's a good increase and it's good for the MAHLE Metal Leve because we had supply for this market so we got the benefits for this increase. In Europe, we had the light vehicle production, 0.9% increase on the quarter and the medium and heavy vehicle production, 4.4%. So the combination of these 2 markets, it's minus 0.3%. So we have the same level, the medium and heavy, it's higher. So this is good for the mix. But the total vehicle production for Europe and North America, it's 0.3% negative.

Now moving to Slide 6, where we have the net revenues performance by market. So we have the original equipment, the first 2 lines and the aftermarket. On the first column, we have the first quarter of this year turnover. We have the volume and price impact from the second column and the FX variation on the third column. In the last year '17, so the first quarter of last year, on the fourth column, I will focus on the percentage. So if you look for the original equipment, domestic, we had an increase of 35.3%. So if you look at the vehicle production, it was 15%, however, we saw higher production for the medium heavy. So this is better for the mix. So this is the reason that we have the higher increase for the MAHLE sales. Not only this reason but one of these. The other reason was likely the service parts increase, where we have on the filters and also the engine components increase. So the economy -- the better economy so increase also our service parts, not only the vehicle production for the OEM but also it is there for the service.

The export business we have on the original equipment, an increase of almost 17%, with FX impact almost 12%. So the volume price impact we have 5%. So in this case, we got some increase on the market share for some businesses in North America. So minus for the heavy-duty market. So this is the main reason for our increasing the volume for the export market for the original equipment.

Going to the aftermarket, the domestic customer market, we had an increase of 6% and our negative impact for the FX, 4.6%. In this case, the negative impact from the FX is the Argentina. So we have our business in Argentina and here we consolidating in reals, so this is the reason for the negative impact. If you look for the volume and price impact for the aftermarket domestic, you have an increase of 10.6%. So also mainly because of the recovery of the economy. So this is also in line with the service I just mentioned for the automakers, and then we have this benefit from -- also from the aftermarket. In the line of the export aftermarket, we had an increase of 39.1% and the FX of 3.6%, so a volume price impact of 35.5%. The main reason for these better numbers are the intercompany business. So we got some new market share for the intercompany for the aftermarket export. This is the main reason for our increase. So the total net revenue consolidated is 20.1%. Excluding the FX impact, we have 16.3%. So this is the net revenues performance by markets, excluding the Miba Sinterizados impact. So we have a separated line for the Miba Sinterizados. So the main volume and price impact, we have 6.3% (sic) [ 16.3% ] increase.

So now I'm going back to Dr. Christian, and I will be available at the end for the question. Sorry, I had one more slide. The Slide 7. We have the participation of the turnover by region, our export turnover by region. You can see a decline in Europe and an increase in the NAFTA market as a nation, so we got some market share for our liners for the heavy-duty customer. And this is the main reason for the change between NAFTA and Europe. So this business increased our NAFTA participation. So now it's okay. So I will go back to Dr. Christian, and I will be available at the end for questions.

[Christian Binkert, executive]

Thank you, Daniel. Coming to this summary of the P&L. As mentioned, the net sales revenue increased 14.5%, and without Miba, it would be around 20%, to a level of BRL 618.7 million. Gross income, you have now a level of BRL 173.5 million, an increase of 27%. And the gross margin in percent is 28%, an increase of 2.7 percent points compared to previous year.

Going to the next slide, giving some comments about SG&A, R&D and other operating expenses. If you look at the total selling, general and R&D costs, you can see a decline from 14.6% to 12.1% in the year first quarter 2018. Looking a little bit at the SG&A expenses, as described, the percentage is going down from 6.3% to 6.1%. On the other hand, the absolute number is going up. The reason is severance payments and, of course, also with the higher sales level. We also have accepted more freight costs. In regards of the R&D, you can see a decline from 3.9% to 2.7%. The major reason for this decline is really that we had more third-party R&D services. And this third-party R&D services, they're not recorded under the R&D cost, but reclassified as cost of sales. And in regards of the admin cost, general administration cost, there you can see the biggest move in percentage from 4.4% to 3.3%. Here, we last year had some severance payments included. And I think we mentioned, also, in one of the previous [ telecons ], the implementation of a lean management program, meaning reducing our admin costs. And then the first impact you can see in quarter 1, 2018. The other operating income was BRL 2.3 million, on a rather low level. The main impacts are really the gain of the positive disposal of assets, the income recovered tax under Reintegra and some reversal of labor, civil and tax accruals in 2018.

If we go to the EBITDA. In 2017, the first quarter we had BRL 80.7 million, with an EBITDA margin of around 15%, increasing now to first quarter 2018 to BRL 118 million, BRL 119 million, while margin of 19.2%. The major impacts really are higher gross income via higher sales of around BRL 37 million and slightly lower R&D expenses. The major reasons I already explained and all the lower admin costs of BRL 3.5 million, mainly because of the lean management program, which we're implementing at the moment, slightly lower depreciation a higher depreciation story and slightly higher selling costs here. In Q1 again, with regards to the selling costs, the higher freight cost because of the higher sales and the reversal of accruals, all that were mentioned once again.

Coming to the net financial result. First of all, the interest that we have seen last year a negative impact of minus BRL 6.9 million. This year, minus BRL 0.3 million. The reduction is a combination of lower interest rates, as you can see below on the table, 9.3%, to 5.8%. In addition, also the average investment decreased from BRL 517 million to BRL 175 million. And accordingly, the interest net was BRL 0.3 million. The exchange rate variation and the result with derivative. We have seen a slight improvement from BRL 4.3 (sic) [ 4.2 ] million to BRL 7.4 million. So improvement of BRL 3.2 million. And the monetary variation, a small decrease from BRL 10.3 million to BRL 8.9 million. Hence, the overall net financial results, last year minus BRL 13 million to this year minus BRL 1.8 million, an improvement of BRL 11.2 million.

Coming to the next page. Investments already touched briefly. Last year in December, we had a net position of BRL 14 million, it's nearly stable. We achieved in March 2018, BRL 14.5 million. Liabilities, nearly no change, a slight increase of BRL 4 million, which was compensated, in principle, by higher cash around BRL 4.6 million. So once again, the overall net position, nearly no change compared to December 2017. If you look at the maturities, short term, we have around BRL 29 million, distributed quite equally from April to March 2019, with amount from BRL 2.3 million to BRL 2.8 million. Long term, we have BRL 21.2 million into 2019 and coming up to a level of around BRL 30 million in the year 2023. And then decreasing for the outer years, once again, coming down to a really low level of 20 -- in 2029 of BRL 0.5 million.

And the financial management and how is the company financed. As you can see, we are financed mainly in FINEP with 92.5% and a small BNDES share of around 7.5%. And the number shown here should not be December 2018, it should be March 2018. Very sorry.

Coming to the net income and the benefits to the shareholder, once again, the net sales revenue, BRL 918 million, the net income, BRL 71.4 million, an increase of around 86%. And as mentioned in the highlights, once again, MAHLE Metal Leve will distribute around BRL 232 million in dividends in the year -- for the year 2017, and BRL 88 million in interest on capital. And in April, approved in the Annual Shareholder Meeting the additional BRL 144 million.

At the end, a couple of words in regards of the CapEx and depreciation. If we look, we have a CapEx of BRL 14.6 million, slightly higher compared to previous year. The total depreciation, on the other hand, is slightly going down. If we take some ratios in percent of sales, we have 2.4% CapEx and in regards of depreciation, we have around 64%. And for the total year 2018, before costs, a CapEx of around BRL 100 million. Thank you very much for your attention. If you have any questions, please let us know.

[Operator]

[Operator Instructions] Our first question comes from Joao Noronha with Santander.

[Joao Noronha, analyst]

Two questions from our side. First of all, if you can elaborate a little bit more on the drivers behind the gross margin expansion? How much was improvement in mix and how much was driven by the -- not including Miba operations? And how sustainable can you expect this to be throughout the year? And my second question, if you can, discuss a little bit about the new government incentive program, ROTA 2030. If you can elaborate a little bit on the R&D impacts and how MAHLE can profit or not from it. I recall that back in time, in a volatile time, MAHLE was benefited by the higher R&D expenses in the local market and you see the ROTA 2030, maybe you have a less -- a lower R&D requirement for the local market. These are the two questions.

[Christian Binkert, executive]

Okay, thank you truly for the question. First, coming to your first question, the gross margin. And in regards of MAHLE Miba Sinterizados, as you know, this was, let's call it, a breakeven business. So selling this business has some positive impact for us. But really the margin increase was coming -- first reason is the sales increased and the second reason, I think we have done our homework in regards of fixed cost reduction and so on during the crisis period of time. So in principle, it's a combination of sales increases and higher synergies, because we have done our homework during the crisis. How sustainable is this margin going forward? I think it will be a challenge. It will be a challenge because we can see that material prices, for example: aluminum, steel prices are increasing. Daniel also mentioned that the crisis in Argentina, where the interest rates comes now to a level of 40%. But nevertheless, we can see that -- and also mentioned by Daniel, the sales forecast from ANFAVEA is still positive for the year 2018, with around 12%. So there are ups and downs and at the moment, it's challenging to say we will stay on the same level, go up a little bit or go down a little bit. But of course, we will try our best to keep it at a very, very good and high level. Does this answer your first question, Joao?

[Joao Noronha, analyst]

Thanks. It works.

[Christian Binkert, executive]

The second question will be answered by Daniel.

[Daniel Alves, executive]

Thank you for your first question. So the ROTA 2030, it looks like a no go so we are likely to postpone of the release of the program. But now we are getting more recent news about the program. And the main talk or the main point will be the incentives for the R&D. So for sure, MAHLE will have -- will get the benefits for this program, because we are prepared for this. So we had our tax in June [ JE. ] We also make some -- anticipate some actions or some analysis from our customers. And we will provide them with the needs for the new targets we will have. So it's not really there yet, but I think we believe that will be this year. Even with the postponing a bit. But for sure, we'll get some benefits for the R&D. So this is -- we have like a picture or a definition about these incentives and how much the automakers can benefit for these investments. I don't know if this answers your question, so this is the information we have so far.

[Operator]

[Operator Instructions] Our next question comes from Lucas Barbosa with UBS.

[Lucas Barbosa, analyst]

My question is actually a follow-up on what Dr. Christian mentioned on the call. He mentioned the company's work to reduce G&A. I just wanted to know if -- what does the company believe regarding SG&A and R&D expense levels, if you believe that these are recurring levels going forward or not? This is my first question.

[Christian Binkert, executive]

As mentioned, we have reduced our SG&A and R&D level from 14.6% to 12.1%. So a reduction of around 2.5 percent points. If we look at the individual lines, I see further potential for a percentage reduction in the selling expenses. I see a further potential in reduction in the admin expenses. With the lean management program implemented, we are going to focus on some areas through the implementation phase. In my opinion, we will see a slight increase in R&D costs. 2.7% are quite low and, as explained, this all had a reason because we had more third-party R&D sales, which then are not recorded. And as R&D but as cost of sales, as overall, at a level of around 12%, I see -- I still see some other potential coming down. Does this answer your question?

[Lucas Barbosa, analyst]

Yes. That answered my question. And then a second part of the question is, you delivered a very strong EBITDA margin of 19.2%. Do you believe that, that can be maintained going forward? What is your expectation regarding EBITDA margin?

[Christian Binkert, executive]

This was similar question like you're calling from Santander. As mentioned, it will be a challenge on one hand, because we see increasing aluminum prices, we see increasing steel prices, the crisis in Argentina. On the other hand, as mentioned by Daniel, ANFAVEA gives us a positive projection for the year 2018 of around 12% sales increase, production increase. So overall it will be a challenge to keep the margin at a level of 19%, but the company, MAHLE Metal Leve, will try to do the best to keep a very good level like we have seen in the past.

[Operator]

[Operator Instructions] Our next question comes from Lucas Marquiori from Banco Safra.

[Lucas Marquiori, analyst]

Just a quick question on my side. Could you give us a quick update quarter-over-quarter regarding the MBE2 program? Have those commercial campaigns accelerated? Or should we expect some push up on the back of the ROTA 2030 announcement?

[Christian Binkert, executive]

The results of MBE2, as you all know, it was approved to really selling the product the beginning of this year. We are in close contact with some specific customers and to really close the first contracts, hopefully, very, very soon in the future. And in regards of ROTA 2030, I think yes, the indications we have that it might potentially increase even more, the potential MBE2 sales going forward. Does this answer your question?

[Lucas Marquiori, analyst]

Yes.

[Operator]

Our next question comes from Murilo Freiberger with Bank of America Merrill Lynch.

[Murilo Freiberger, analyst]

So from our side, the question is regarding the solid performance on the top line. MAHLE outperformed market volumes in most of the regions, especially in South America. And I'd like to understand where that outperformance comes from? Is it more from a mix, you're selling more high value-added products with higher average price? Or if it's some kind of market share gains from imports? And if it's mix, do you guys think it's already a consequence of downsizing trends and OEMs building smaller but more efficient engines?

[Daniel Alves, executive]

Okay, Murilo. This is Daniel. Regarding the outperformance for the domestic market, so we had not only one effect but we need to take care. So looking to the medium and heavy market, so the participation of the MAHLE sales in this segment compared to the vehicle production is different. So we have a higher mix where -- when we see the MAHLE sales. The second point is the service parts, as I mentioned, so we had also in filters and engine components, an increase of this services parts due to the economy recovery and also due to some business that we're recovering, that we had lost and now we get back with this one. And the 30 points, it's also some benefits for the -- for some export engines. So we have some customers exporting the engines and then we are supplying companies for these engines. And the last one is some new business. So these are the 4 reasons for our outperformance in the domestic market. Does this answer your question?

[Murilo Freiberger, analyst]

Yes. Yes. That answers.

[Operator]

This concludes today's question-and-answer session. I would like to invite Dr. Christian Binkert to proceed with his closing statements. Please go ahead, sir.

[Christian Binkert, executive]

Thank you very much, ladies and gentlemen, for participating in Q1 telecall for MAHLE Metal Leve. Looking forward to hearing, seeing you again in the second quarter of 2018. Thank you very much, and have a nice day. Goodbye.

[Operator]

That does conclude the MAHLE Metal Leve conference for today. Thank you very much for your participation, have a good day, and thank you for using Chorus Call.