Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, ladies and gentlemen. Thank you for waiting.

Welcome to MAHLE Metal Leve for the first quarter of 2022 Results Conference Call. With us here today, we have Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Accounting Manager; and Mr. Fabio Lopes Peres, Executive Finance Manager.

This event is being recorded. [Operator Instructions] This event is also being transmitted simultaneously through the Internet via webcast, and it 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. [Operator Instructions]

Before proceeding, let me mention that forward statements that may be made during the teleconference related to business perspectives of MAHLE Metal Leve, forecasts, operational and financial goals are based on the beliefs and the assumptions of the company's management and all information currently available to the company. Future considerations 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 over to Mr. Daniel Camargo, who will begin the presentation. You may proceed, sir.

[Daniel de Oliveira Camargo, executive]

Good afternoon, ladies and gentlemen, and welcome to the first quarter conference of MAHLE Metal Leve. We'll talk about the results of the first quarter of '22. So first of all, we wish that all of you are well and healthy. At the end of this presentation, we will be available for questions and answers.

On Slide 2, you can see our agenda. We are going to address some highlights, then we are going to give you a market overview, net revenue performance, financial management, CapEx and depreciation. And at the end, as I mentioned, the Q&A session.

On Slide 3, you will see some of the highlights for this quarter that relates to its performance. The net sales revenue totaled BRL 890 million in the first quarter of '22, which accounts for a 6.6% increase vis-a-vis the first quarter of '21. As also mentioned in this slide, there was a growth in all markets. In the domestic OE market, there was a 13.5% growth. In the domestic aftermarket, 10.4% growth. In the aftermarket exports, a 34% growth. The only exception will be the original equipment exports market that had a decline of 7.1% due to the negative impact of the exchange rate.

Also, as mentioned in the ordinary general assembly meeting on April 27, it was approved, the distribution of dividends totaling BRL 469 million related to the financial year of 2021. This is 100% of dividend payout of the net profit of the year after legal deductions.

Now, I would like to turn over to Daniel Brasil, who is going to give us an overview of this market.

[Daniel Alves, executive]

Thank you, Daniel Camargo. Good afternoon, everyone. Once again, I would like to thank you for attending our earnings call where we are going to address the results of the first quarter of '22.

Let me start on Slide 4. Here, you can see the sales and production of vehicles for Brazil and Argentina in the first quarter of '22 vis-a-vis the first quarter of '21. In the first block here, you see light vehicles, and the second block, medium and heavy vehicles.

For light vehicles, sales had a 24.7% drop. In Argentina, a drop of 8%. Combined, Brazil and Argentina, there was a total of 22.2% drop in sales. So we started this quarter with a weak situation due to influences such as variants of COVID-19 in the beginning of the year. It was a very high level of absenteeism. Also, we had some other problems in the beginning: the increase in the price of vehicles; the increase in interest rates; and also, disruptions in the supply chain that led to shortage in some of the components. So the beginning of the year is very challenging when it came to sales of vehicles.

In terms of production in Brazil, there was an 18.5% reduction, a growth in Argentina of 17.7%. And in combination of those 2 countries, led to a drop of 13.5%. So in Argentina, there was a growth because of an increased production of pickup trucks. There was a change in the market. They tend to have a higher market share of pickup trucks and SUV like Hilux, so that was reflected in Argentinian production. So the combined results of those 2 countries led to a drop of 13.5%.

Now in medium and heavy vehicles, there was a 2.6% increase in sales in Brazil, a flat result in Argentina vis-a-vis the first quarter of '21. And in combination of those 2 countries, there was a 2.3% growth. So in production, there was a 4.1% (sic) [ 4.8% ] growth in Brazil, 8.4% growth in Argentina, and combined, these countries, 4.8% growth.

So here, we see the comparison basis is a little bit lower vis-a-vis the year of '21 because there was a growth in the second half of 2021, but the market of heavy vehicles also face trouble. Some of the OEMs were giving their employees' vacation because of shortage of components. That's also true for heavy vehicles this year.

If we add up the month of April, just to have an idea of the perspectives, if I go back to light vehicles, we would have a minus 22% drop in the quarter. And if you add -- so we've had the year-to-date results involving April, it will be minus 20%. And this week, ANFAVEA also communicated the daily levels of sales in May and the beginning of the month also indicated improvements. This is why we have a more positive perspective for the upcoming month. ANFAVEA capped its forecast to wrap up 2022 with a growth of 8.4% in the sales of light vehicles. And if we do the same calculations for production, that was minus 13.5%. If calculated in year-to-date, it will be minus 8.4%. And ANFAVEA also maintained its forecast of 9.5% growth for the whole year.

So if we see, the performance in production is better than the performance in sales. This shows improvement in exports especially to Colombia, Chile and Central America. Although Brazil and Argentina had a drop in other markets to which we sell Argentinian and Brazilian cars, so that improves the results of production. And also, the perspectives are very more conservative following along the lines of ANFAVEA forecast, but there was a mild growth considering vis-a-vis 2021.

If we can compare our prospects for 2022 as a whole, it's still going to be a challenging year. There is an increase in the prices of cars, increase in interest rates, increase in components, not only based on semiconductors. And the perspectives for the second half of the year is better than in the beginning of the year when we had problems with absenteeism, COVID, floods and also different health issues.

For heavy vehicles, just bringing April into the numbers, we can see in sales, 2.3%; year-to-date April, it's 0.9%. And in production, 4.8% goes down to minus 3.8%. So there was a slope in heavy vehicles last year, and ANFAVEA has also maintained the projections for the whole year, 10% growth and 8.2% increase in production. MAHLE's somewhat more conservative, but we still anticipate growth, small growth considering '22 over '21. In 2023, there's going to be the introduction of heavy vehicles, [ Hero 6 ], which was expected. And this is something that's going to somewhat impact the second half. We might have a positive surprise concerning numbers. This is how we see production and sales of vehicles in Brazil and Argentina.

Now let's go into Slide 5. Here, we see vehicle production in North America and Europe. Let's start from North America.

First quarter '22 over the first quarter '21, there was a decrease of light vehicles, 1.3% (sic) [ 3.1% ] and 19% drop for heavy vehicles. In Europe, light vehicles, 14% drop, heavy vehicles, 6% drop. So the war has certainly affected the European market shortage of components. Asia, China and the zero-COVID policies have really impacted shortage of components in addition to the European crisis.

For 2022 over '21, there was a 7% for light and heavy-duty vehicles for North America. For Europe, the perspective is 3% growth for light and heavy-duty vehicles. But the projections have been constantly downgraded, so what I would say, we were just expecting some minor growth compared to 2021.

So the year has been as trying as last year. In 2020, there was drop all over the world. In 2021, we could see some levels trying to pick up again far from 2019. But in 2022, as a result of inflation, war, pandemic, semiconductor components, we still are not anticipating a recovery of the market. This is something that has really impacted vehicle production at large in the market.

Now Slide 6. Here, we have net revenues from sales of MAHLE Metal Leve, so OEM and aftermarket, export and domestic. So first quarter '20; then second column, volume over price; third column, exchange rate; fourth column, first quarter '21; and the 3 last columns show percentage variations, volume over price, exchange rate impact and revenue variation.

So original equipment. Domestic market, 13.5% increase. So performing above the market average, which was production of vehicles. The main factors to explain this increase in revenues are the following: product mix, so heavy-duty vehicles have performed better than light vehicles. In addition to mix, there has been a positive impact for MAHLE Metal Leve concerning the light-vehicle manufacturers, which are performing better than other manufacturers. The third factor concerns selling of instruments for new products, tools and instruments for new products and also, sales of services. Yes. So these are the 4 factors that can explain the results in addition to the fact that we've launched new products, new parts, which have all added up to an improved performance compared the market.

Now original equipment exports, 7.1% variation primarily due to the exchange rate variation. We've just seen the decrease in production of vehicles in North America and Europe. So MAHLE Metal Leve performed quite well considering the situations, primarily because of the mix. North America, we have heavy-duty being increased and also, market share gains in some products that amounted to 1.9% increase in revenues of original equipment. Aftermarket domestic sales, 10.4% increase, minus 10.8% of the exchange rate impact in the domestic market. It concerns primarily Argentina because we have enough aftermarket operation in Argentina, so the conversion of pesos into real had a negative impact.

So 21.2% is volume-over-price impact. Very good performance. The main factors is, first, a demand is increasing. And it does happen when new cars, new vehicles are not selling a lot, aftermarket sales seems to improve, so maintenance of used cars and in addition to gaining more market share and working on our inventory levels. So I believe these are the 3 main factors, but primarily the high demand on aftermarket.

Now aftermarket export had a 34% increase; exchange rate impact of minus 5%; volume over price, 39.1% growth. So quite a good recovery after the pandemic for these aftermarket applications. So total aftermarket, 15.2% increase in net revenues. And if we add up both markets, the original equipment and aftermarket, 6.6% increase in revenues.

Now let's go to Slide 7, where we can see consolidated exports by geographic region. First half of -- the first quarter of the year, so '22 over '21, an increase in Latin America and in Europe. And if we look historically, the participation of South America, it was -- it is 16.8% over 12.8% in the previous quarter last year. So really, a very important participation of South America and it goes without saying.

Now let me hand it back to Daniel Camargo.

[Daniel de Oliveira Camargo, executive]

Thank you, Daniel Brasil. Let's go to Slide 8 and 9 to talk about our P&L.

Slide 8, we have gross margin. As we have shown, our net sales revenue had a 6.6% increase, but costs have also increased 13% for the period, which is something that had been happening for a while. In the first quarter '22, especially in March, there was a considerable increase in raw material prices, aluminum, resins. Our company management has been working to just translate that supplies price increase into prices to consumers. But as you know, this is not something that can be done simply overnight. But this is #1 priority of our company management. The gross margin that we can see, 26.5% in the first quarter '22, is higher than what we had in the last quarter last year, which is something positive.

Next slide now. So here, you will see the summary of P&L expenses. First, selling expenses that had -- that were increased, especially because increased freight costs and variable selling expenses. General and administrative expenses were reduced. This drop is a result of the efforts made to bring in synergy and productivity gains across indirect areas of the company. The third line, we have also our other operating income expenses and R&D expenses that are being driven by the main trends of the market, especially regional trends and also automotive programs.

And on the last slide, you see other operating expenses. They have kept the same level in absolute numbers, when we compare both periods. We did not have anything extraordinary that has taken place that had an impact on operating expenses.

Now, I will turn over to Fábio Peres to talk about the financial results.

[Fábio Peres, executive]

Good afternoon. As you know, we have been talking about this chart in the previous quarters. We will compare the first quarter of '22 vis-a-vis the first quarter of '21.

This table has 3 blocks: net income, exchange rate fluctuation and also monetary variation. So we reached BRL 11.8 million net interest income in the first quarter of '22, and it was minus BRL 23 million (sic) [ BRL 2.3 million ] in the first quarter of '21. The revenue comes from the levels of investments and also an increase in the SELIC rate we observed in the last month. We usually make investments at 100% of CDI. So combined with the investments that we make in our Argentinian subsidiary, in total, we had BRL 14.1 million in net interest income. So the amount of interest rate was BRL 4.3 million higher.

And then we also have the interest rates from our loans. That will be our average debt was reduced by 21%. In average in '21, we have about [ BRL 426 million ] or BRL 248 million (sic) [ BRL 243.8 million ] in the first quarter of '22. So there was a reduction in the volume of that and also in the average cost of our debt, 4.3% last year versus 3.5% this year. So when you consolidate volume and cost results, we had a BRL 5.1 million reduction. Also, ICMS tax that also had an impact on this line.

Now talking about exchange rate variation, we had BRL 10.2 million negative because of the exchange rate variation that took place in the end of March, where hedging operations were performed. So what happened in the last week of that month had the hedging for the first week of April. So this is why there was a negative result in the end of March. Here, we see the exchange rate variation of BRL 36.6 million. The headroom results, BRL 21.1 million, BRL 15.1 million net.

We also have a positive exchange rate variation with some transactions. But the other transactions have to do with accounts receivables, accounts that were going to be paid in foreign currency. They also provided a negative result of BRL 22.3 million. As a natural hedging, we use the ACC operations to be able to be more synergistic in the operations to perform. So in total, we had BRL 10.2 million of exchange rate variation. But in the monetary variation, this is the result of some tax legal suits and also some labor legal suits that are adjusted at 2% a year, or if the SELIC rate is higher, it's corrected based on the SELIC rate.

So when you look at the net financial result, we have BRL 4 million in expenses in 2022 versus BRL 6 million in 2021. This indicates a BRL 2 million improvement.

On Slide 11, we can talk about our debts. The first chart on the left-hand side, you can see the net cash status. In December of '21, we had BRL 262 million, to BRL 246 million and in end of the March, BRL 293 million. So this means a BRL 47 million improvement, reduction in loans and also a growth in cash. On the right-hand side, we can see how our loans are distributed. So 5.65% allocated FINEP, this is an investment line for research and development that accounts for 54% of our investments. And the rest, 41% -- 45%, ACC and NCE. So the cost of that is 5.65% for those at FINEP and 1.83% at ACC in an average cost of 3.55%.

In the charts below, we can see how our maturities are distributed. In the short term, BRL 46.1 million -- BRL 141 million; and in the long term, BRL 90 million. The BRL 107.8 million, whose maturity date you see is May '22, has already been renegotiated and it's going to be due on May '23.

Now on Slide 12, we can see the investments that were made in the first quarter of '22. BRL 17.7 million in the first quarter of '22, BRL 25.1 million in total depreciation, and those investments account for 70% of the depreciation. We see that the amount that was invested accounts for 2% of our total net sales revenue. It's important to say that in November last year, an investment plan for 2020 was approved, totaling BRL 107 million that are going to be disbursed along 2022 according to the needs and also according to our expectations of maintenance costs in our plans, also retrofitting of our industry complexes.

Now we are going to move to the Q&A session, and we are going to be open to entertain your questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from Marcelo Motta of JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. First, if you could please tell us more about market perspective for the second half of the year? You've said you were expecting to have an improvement. The beginning of the year is always impacted and there was a shortage of semiconductors and Omicron variant. So can you anticipate some coming improvement for the next month, some orders being placed? Or do you just expect things to pick up again as of the third and fourth quarter?

And finally, CapEx plan. You want to have BRL 108 million. The first quarter was somewhat weaker than if you had been distributing it linearly throughout the quarters. Just to know if you are expecting to have lower CapEx this year than what had been approved?

[Daniel Alves, executive]

This is Daniel speaking. Your first question about future perspective, future outlook. In May, we've been already selling more. Even rental car companies, they need some maintenance and additional parts. Last year, there was a shortage of products. There was demand, but there was shortage of components. So this was a problem. So we believe there is going to be recoveries of the second and third quarter. This week, we heard from ANFAVEA, and this point was clearly made. And this is something we have been witnessing in May.

Well, there is high volatility, of course. We have to monitor things very closely and constantly make the fine-tuning and allocating accordingly our resources to meet the needs of manufacturers. We have to relate very closely with them, but this is something we do expect to see coming shortly.

[Fábio Peres, executive]

Now Marcelo, this is Fábio speaking. Concerning your second question about CapEx. Historically, at MAHLE, the first quarter is somewhat slower, as you pointed out. This is repeated every year. And then investments take place as of the second quarter to the very end of the year where we use all our plan of investment. Exactly where we're going to make our investments can be seen on Page 145 of our release, and there, you will see exactly how we are going to allocate our resources.

As of the second quarter, there is going -- we are going to make more and more investments up to the end of the year in December. Except if the market goes into chaos, BRL 108 million will be spent up to December.

Have I answered your question? Do you still have any remaining questions?

[Marcelo Motta, analyst]

No, no, Crystal clear.

[Operator]

[Operator Instructions] So this concludes the question-and-answer session. Now I would like to turn over to Daniel Camargo for his closing remarks.

[Daniel de Oliveira Camargo, executive]

Thank you very much. We wish that all of you remain safe and healthy, and see you in our next call.

[Operator]

That concludes 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.

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