Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon in Brazil, everyone, and thank you for waiting. Welcome to MAHLE Metal Leve for the first quarter of 2020 results conference call.

With us here today, we have Dr. Christian Binkert, CFO; Mr. Daniel Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Accounting Manager; Mr. Fábio Lopes Peres, Executive Finance 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 Management and on 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, who will begin the presentation. Please go ahead, sir.

[Christian Binkert, executive]

Thank you very much. Welcome from my side. Good afternoon, good morning, ladies and gentlemen. This is a challenging time. Welcome to the conference call of MAHLE Metal Leve first quarter 2020.

Before we go through the agenda, I hope everybody on our side is safe and healthy. At least from MAHLE Metal Leve, health and safe of our employees is still on highest priority as discussed in the last call already. And also to mention, perhaps, you read this already in the press, we also started to produce our own masks in our filter plant in Mogi, which is really helping us to protect our people in addition. Also, operations in the meantime, assumed, again, really depending on the plants and some plants more operational and other areas less operational. And additional topic what I wanted to mention at the beginning is that we took not only in regards of health and safety precautious measure, we also introduced all available tools from the government, which are offered like layoffs, salary cuts, but also, totally we will come to this later that early stage additional loans, just to be sure that in this crisis mode, we will not run into difficulties, yes.

And if we go now to the agenda, and it's the usual agenda. We start with the highlights for the first quarter 2020, which was challenging. Then we come to the market overview by Daniel. Net revenues performance by market would be the third point we would touch. I would then give a short summary about P&L and EBITDA. Next point, financial management, including the net financial result and the net indebtedness. And at the end, a short overview of CapEx and depreciation. And of course, like always, if you then still have some questions, we are willing to answer these questions, meaning Daniel and myself.

Moving forward to the highlights page. As you can see, our net sales dropped compared to previous year to a level of BRL 573.8 million, this represents a decline of 7.9% or BRL 49 million, roughly. Where are the impacts coming from? Around minus 11.6% out of the 7.9% drop are from volumes. But on the other hand, we have positive impacts out of the exchange rate. Mainly driven because of our exports here of around 3.7%.

In regards of the domestic original equipment market, the company, MAHLE Metal Leve, recorded a decrease of 8.9%, and the consolidated production of vehicle fall by 15.7%, and the Brazilian market decreased by 15.9% and respectively, in Argentina, 13.6%. But Daniel will comment this later more in regards of the sales line.

If you look at the key indicators, I already mentioned the sales drop. Net revenue decreased from last year BRL 623 million now to a level of BRL 574 million, means a decrease of 7.9%. Our EBITDA dropped from BRL 120 million to BRL 92 million, given EBITDA margin now of 15.9% compared to 19.3%. Where are this drop coming from? This is not a single factor nor it's a couple of factors. The main drivers, of course, of the lower EBITDA absolute amount and margin, is the lower sales amount, the margin -- the absolute amount in margin is dropping. That's the first important topic. The first -- the second important topic we will come to is [ all related ] to the other operating income. We had last year reversal of accruals, which supported our income. This year, we had the opposite. We had to take small additional accruals in regards of labor claims.

The third impact was the IAS 29, the so-called hyperinflation, where we had last year a higher positive impact compared to this year. And this is purely driven that Argentinian peso was devaluated last year in a higher extent than this year. And these are really the main drivers why the EBITDA, and EBITDA margin went down. If we go one line below, we can see our profit for the full year, BRL 21.5 million, 3.7% compared to the last year 10.3% or absolute amount, around BRL 64 million. In addition to the impacts I mentioned in regards of the EBITDA, we will also later see the major driver between the difference of these 2 indicators is the financial results, which impacted the quarter 1 2020 results by around BRL 32 million, but I give you more explanation as a [ footnote ], at the moment it's purely driven by exchange rate.

Then we come to the next page, the market overview, and I would like to hand over to Daniel. Daniel, please go ahead.

[Daniel Alves, executive]

Okay. Thank you, Christian. Good morning, everybody, and thank you very much for attending our conference call today. First of all, I hope you and your family are safe in this very difficult pandemic situation.

Going to Slide 4, where we have the market overview, Brazil and Argentina registration and production. I will start with the light vehicle. Brazil, we had a decline of minus 8%; in Argentina, minus 23.7%; and the combination of Brazil and Argentina, minus 10.3%. For production, in Brazil, we had a decline of almost 17%; in Argentina, minus 14%; and the combination of Brazil and Argentina, minus 16.5%. This vehicle production reduction reflects the customer plant shutdown, which had started in the end of March. So we had almost 2 weeks shutdown, at least 1.5 week with the plants close. This reflects on the vehicle production.

In the medium and heavy vehicles, we had a decline, in Brazil, vehicle sales of minus 6%; in Argentina, minus 16.6%; and the combination of Brazil and Argentina, minus 7%. For production, minus 2% in Brazil; minus -- or 0 equal in Argentina; and the combination of Brazil and Argentina, minus 1.9%. In this case, for the medium and heavy, so mainly because of the agricultural machinery, we had better numbers than the light vehicle, mainly because of they started the shutdown later comparing to the light vehicle. So the total combination of vehicle production is minus 15.7%.

Now, I will give you some highlights about the April figures. About -- so the vehicle production, we had the release of ANFAVEA, automakers association last Friday. And no surprises, so the vehicle production was very, very low. And the vehicle sales was better than expected and also given parallel about MAHLE Metal Leve sales for April. So we were better than the market because of the -- we have the aftermarket sales, so it's not related to the vehicle production in this case, and also the service parts and also export business because in the other markets like Europe and North America, the shutdown period was different comparing to the South America. So we had turnover for this market.

Regarding full year expectation, MAHLE Metal Leve. So we are working with scenarios, and we are constantly evaluating these scenarios. And they are changing. So in the last weeks, they are very dynamic. They are changing. So this is the reason that I will not give you today any projection for the full year. What I can say is we are working as much as possible flexible to adjust our resources to the vehicle production level in the industry.

Now moving to Slide 5. So in this slide, we have the vehicle production in the main export markets of the MAHLE Metal Leve. We have North America and Europe for the light vehicle, North America minus 12% decline. For the medium, it has minus 18.7%. For Europe light vehicle, a decline of minus 20.7%; for the medium and heavy, minus 11.4%. So the combination of Europe and North America total vehicle production for the quarter was minus 17%. So this is a global pandemic and very far affected this, the market as same as we are affecting on the domestic market.

Now moving to Slide 6. We have the net revenues performance by market. We have the first column the first quarter 2020, the volume/price, the FX variation, the first quarter last year, the volume/price impact in the percentage and the FX impact in the percentage and the last column, the variation between the periods. So on the original equipment domestic market, we have a decline of minus 8.9%. This is a better performance when we compare with the vehicle production declining I just mentioned in the last slide. The main reasons for this better performance, it's localization project. So we started this year a big project with a local production. This was important in the past. Now the customer is buying from MAHLE Brazil. This is important in the turnover effect and also a share increase. These are the 2 main reasons for this better performance on the domestic market.

On export sales, we have a decline of minus 5%, with a positive FX impact of 9.5% and volume/price impact minus 14.5%. This declining, it's aligned with the market, declining of the export markets and also the FX impact. Even with this aligning sales performance, it's important to mention start of an important project this year, which offsets a ramp down project that we had. So this is start of a new project with ramp up. It's offsetting a negative effect of a ramp down project we had.

On the aftermarket domestic sales, we had a decline of minus 7.4%, with a negative FX impact of minus 2.5%, the volume and price impact, it's minus 4.9%. It was also impacted by the corona situation less than the OE market because we have, in this case, the vehicle repair. So in this case, we had some in March, some customers put some orders on hold. But the performance was good in this situation if you compare.

In the export market, we had a decline of minus 20% with a positive FX impact of 9%. So the volume price impact, it's minus 29%. In this case, in addition to the COVID effect, we also had some economic and political turbulence in Latin America. This is the main reason for this decline on the export aftermarket. The combination of original equipment and the aftermarket, so we had a total net revenue of minus 7.9%, with a positive FX impact of 3.7% and the total volume and price impact, minus 11.6%.

Now moving to Slide 7. On this slide, we have the export consolidated by region. No big difference. We can see an increase of North America and a decline of Europe. The main reason, it's because of the U.S. comparing to the Europe. So this is the main reason about this change on the percentage of the values. No big change.

Now I'll give it back to Dr. Christian Binkert to continue.

[Christian Binkert, executive]

Thank you, Daniel, very much for your comments and explanations. Coming to the next page, the summary in P&L page. As mentioned, we saw the sales drop of 7.9%, driven by volumes, minus 12% and positive impacts from FX by around 4%. So we achieved a sales of BRL 573.8 million. And the margin, I mentioned at the beginning also already, and the absolute amount is going down because sales is going down. On the other hand, the percentage is going up from 27.1% to 28.2%, and that's once again mainly driven by the exchange rate impacts as we have quite a lot of exporting.

And then coming to the next page, the summary of P&L. A couple of highlights, yes, first of all, the selling expenses, which we have last year, a ratio of -- at 6.1% and this year, 7.5%, increase of 38 -- from BRL 38 million to BRL 43 million. So this was not really one large impact. This increase has been various small impacts. For example, exchange rate impacts where we get some invoices in foreign currencies or some restructuring impacts have been included.

In regards of the general admin expenses, we can see last year, the percentage 3% to sales. Now excuse myself, 4.4% or from BRL 19 million to BRL 25 million. All this year, like the selling expenses, no major onetime impact, several smaller factors like in the admin restructuring impacts or inflation impacts out of Argentina.

R&D expense is on a same level. Last year, 3.2% compared to 3.3%, and absolute amounts in both years around BRL 20 million. In regards of the other operating income, I mentioned already the reversal of provisions last year, labor provisions last year. And this year, we had to take some labor accruals. Therefore, the negative impact this year is higher compared to last year.

Moving to the next page, the EBITDA page comparison to first quarter 2019 compared to the first quarter 2020. We had last year the EBITDA of around BRL 120 million. This year, we achieved BRL 92 million. Where are the major changes coming from? Explained the gross profit minus BRL 7 million, mainly driven by the sales drop. Selling, admin costs, I explained there we is a smaller impacts, not only for selling but also for admin costs. Technology, R&D expenses on a similar level. The other operating income, as mentioned, mainly driven the labor claims. And the remaining 2 positions, the monetary position that -- sorry, I forgot the other operating income. And that's the labor claims, as mentioned, and the gain and losses net monetary position that's truly driven by the exchange rate. And the last position, the depreciation, slightly positive with BRL 2.5 million.

Coming already to the net financial results. On the next page, we can see the first item, the finance costs last year, minus BRL 1.7 million to minus BRL 1.2 million. So we don't have to spend too much time on these items, nearly no change compared to previous year. On the other hand, if you look at the next position, the so-called exchange variation and gain, we can see rather big movements, BRL 2.6 million last quarter, minus 30.2 -- minus BRL 32.7 million this quarter.

If we look in more's details, we can see that out of exchange rate variation and exchange rate hedging, we have a positive deviation compared to previous year, BRL 25 million. Here, once again, purely driven out of exchange rates. Really, as mentioned at the very early stage of the presentation, the negative impact here is coming from ACC exchange rate variation, meaning we have loans in euro, which have to be valuated each month with a new exchange rate. And due to the devaluation of the Argentinian -- of the Brazil peso -- I'm sorry, Brazilian reals, we have negative impact now in our P&L, but it will be compensated, partially compensated over the next couple of months because we will have euro inflows from our export sales in Europe.

If you look then on the monetary variation, the last position here, also nearly no big changes. Last year, we had minus 9 point -- minus BRL 8.9 million, minus BRL 9.8 million; this year, minus BRL 6.7 million. So we have a slight improvement, and overall, our finance income, minus BRL 9 million last year and minus BRL 41 million this year. And the lower part of the table, I think we don't have to go into details.

Just to mention once again that we increased our loan structure at the early stage of the corona crisis of BRL 250 million in additional loans. I will explain this in more details in the next couple of slides.

Coming to the indebtedness and Part #1 page. So we are moving forward. You can see that the net provision, nearly no change, BRL 188 million compared to this year BRL 183 million. But if you then look into the details, you can see that our cash position increased to BRL 560 million yearly, an increase of BRL 353 million compared to last year. But also our loan position by BRL 348 million. And here, one major increase was the mentioned additional loan taken at the very early stage of the corona crisis of BRL 250 million.

At the bottom of the page, you can see our normal distribution, no major changes, what we discussed in the past. Just on the first chart on the very right bottom of the side, with the majority of March 2021 here included the additional loans, which I just mentioned, up BRL 250 million.

Going forward to the next slide, the Part #2, indebtedness. You can see how are we loaned, what is our structure. And also here, some change, but no major changes what we discussed before. First of all, our portion with ACC is around 39%. This 4131, the foreign currency loans around 34%. FINEP and BNDES, respectively, 17% and 10%. And you can see our overall cost and interest cost is 4.26%, 4.3%.

Coming already to the last page, before your questions, you can see CapEx reductions. It's a combination of 2 factors. We started reducing CapEx at very early age. Then we already had some indications about the corona crisis, but also what Daniel mentioned before, the plants have been shut down. So there was even a possibility to invest.

So in the first quarter, we invested BRL 4.9 million. Total depreciation is slightly higher compared to previous year, BRL 25.6 million. And if we look at below ratios, the CapEx in percent of sales, 0.8% now, and the depreciation 19% compared to, respectively, 2.8% and 75% in previous year.

That was it already from my side. Looking forward to your questions or comments if you have any. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Gabriel Rezende, Bradesco BBI.

[Gabriel Rezende, analyst]

I just would like to understand a little better the 29% year-over-year drop on the aftermarket export volumes compared to a smaller drop in the original equipment market. You mentioned some political issues in some countries. I was just wondering if there was something else behind it. My point is, we should expect the aftermarket to be less volatile than margin declines under COVID-19 scenario. So I was just wondering how you -- are you presuming this will evolve in the next quarters? And if I may, a second question. How do you expect these stricter sanitary measures to impact margins from now on, considering that productivity at your plants could decrease?

[Daniel Alves, executive]

Gabriel, this is Daniel speaking. So I will answer the first question regarding the aftermarket? Thank you for your question. In the aftermarket, in this case, the main impact was the COVID, so the coronavirus on the aftermarket exported. So this was more difficult to get to the, in this case, the orders to send this aftermarket for the exporters, but the main impactor was even the pandemic, okay?

[Christian Binkert, executive]

And Gabriel, in regards of your question -- Christian speaking, margin, as Daniel mentioned before, we were working in scenarios and even these scenarios are very, very dynamic, not only in regards of plants communicating open close again. You also heard perhaps news in Germany, Volkswagen opened, but already stated they will close some lines again because there is no demand for certain lines in Volkswagen also. It's really, really dynamic. And I also have to mention. I mean I'm now here 4 years in Brazil, then somebody would have told me the euro-real exchange rate would go up to 6.4%. I would say, I never believe it. Now it's reality. And some people told me, 1 month, it will be maximum 6.1%. So really dynamic challenging times. I cannot give you any prediction for the future. We are working -- in these scenarios, we are trying to adopt as much and as fast as possible, always also under the consideration that the health and safety of our employees is most important. So I cannot give you a clear projection because the situation is too dynamic at the moment.

[Daniel Alves, executive]

Just to give you, Christian, an additional inflow. So we can get also some opportunities with this situation. I just mentioned some localization projects. So even if the -- some competitors have a high effect for the FX. So some opportunities also can come in from this situation.

[Operator]

The next question comes from Marcelo Motta, JPMorgan.

[Marcelo Motta, analyst]

Two quick questions as well. The first also related to margins. I mean, just wondering if you guys could provide what is the utilization capacity of the overall plants today. And also if there is any update about the MBE2 business, now with the crisis, the oil crisis, a lot of things changing very fast. So just wondering if the company plans to continue to invest on it, especially after the announcement together with the fourth quarter results early this year that the productivity, the results were not as good as expected initially.

[Christian Binkert, executive]

Thank you, Marcelo. It's Christian speaking for your questions. In regards of the first one, the utilization, it really depends by plant. As mentioned at the beginning, if you look at aftermarket, coming to a more normal operation and really, if you look from the shutdown till now, April was still a challenge, as Daniel has mentioned, but now May picking up. But in other plants, areas and we are still down by 40%, 50%, but it really depends. We would have to look in the individual plants and also often depending which export share the plant has because, for example, in Europe, some plants as discussed started already. So we'll be picking up in exports. On the other side, domestic market is still down.

Coming to the second question regards of the MBE2. The tests are running. We expect some results in the next couple of weeks and months. You will ask if, like, do we stop investing looking at the technology at the moment, no, we are not. As previously said, we are doing our test runs, and test runs is not in a small scale, really, in the mill. And we are doing this at the moment, and we will have to see, as you know, the crop season just started for sugarcane. And so we will only have a couple of cycle runs with the MBE2 technology in the next couple of days and weeks. And we will have to see what kind of productivity we will get out of this technology. But at the moment, we are still operating. We are still running, and let's see the results in the next couple of weeks and months.

Does this answer your questions, Marcelo?

[Marcelo Motta, analyst]

Yes, that was very clear.

[Operator]

[Operator Instructions]

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

[Christian Binkert, executive]

Thank you very much, again, ladies and gentlemen, for participating this call in these challenging times. Really looking forward to speaking with you soon in the future, once again, yes. But most importantly, kindly stay safe and healthy. Take care and have a nice day, nice afternoon. Thank you very much. Goodbye.

[Operator]

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