Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2023-Q1

[Caroline Chiarini, executive]

Good afternoon, ladies and gentlemen, welcome to the Malis Metal Leve video conference call to discuss the results for the first quarter of 2023. This video conference is being recorded, and the replay will be available on the company's Investors website section. [Operator Instructions] Before proceeding, let me take this opportunity to point out that forward-looking statements are based on the beliefs and assumptions of the management team of Mahle Metal Leve and current information available to the company.

These statements may involve risks and uncertainties because they relate to future events Therefore, they depend on circumstances that may or may not occur. Investors, analysts and the public in general must take into account macroeconomic industry and other factors that may cause actual results to differ materially from those expressed in such forward-looking statements. Joining us today are Mr. Nathan John Quye, CFO; Mr. Daniel Brasil Alves, Marketing and Corporate Communications Director; and Mr. Fabio Lopes Peres, Finance Executive Director. Now I'd like to turn it over to Mr. Quye, who will begin the presentation. Mr. Quye, you can proceed.

[Nathan Quye, executive]

Well, thank you very much, Caroline. Good afternoon, everyone. Welcome our video conference call to discuss our results regarding the first quarter of 2023. Before we begin, we hope you are all safe and healthy. At the end of today's presentation, we will be available to answer your questions. So now let's start our presentation. Next slide, so that we can go over the agenda. Today's agenda, we'll start with the highlights, and then we will present a market overview with Daniel down net revenue performances by Fabio financial management, CapEx and depreciation, followed by the Q&A session. Next slide, please. I just like to start giving you an overview. First quarter of 2023 was a very strong quarter. Actually, we achieved a record this quarter with sales going over BRL 1 billion. In general, what we see is a different breakdown of sales.

I'm not going to go into debt above that because Daniel's going to address that. But heavy vehicles suffered a strong impact because of the Euro 6 legislation that certainly affected the entire production of such vehicles. Also, with regards to aftermarket, it's still very strong, just as last year, particularly in Brazil and in Argentina. Aftermarket expectation was also affected by political and economic factors related to South America, Chile, Peru and Colombia, just as we mentioned in the previous quarter. Later, Daniel will talk more about such events. At the bottom, you can see the major indicators.

I'm also not going to details, but we achieved a very positive result in this first quarter. We are all extremely happy with an EBITDA above BRL 260 million, 35.7% above the same period last year. And you can see also that the numbers are much better than the last quarter. And all the other major indicators also just show very good results. Now I'd like to turn it over to Daniel. He will talk about sales and -- he will also share details about our Investor Day. Daniel?

[Daniel Alves, executive]

Thank you very much, Nathan, and good afternoon, everyone. It's really great to welcome all of you to discuss this first quarter results. Before we talk about the market, I'd like to highlight the last event we held on April 3, 2023.

We hosted Mahle Investor Day in the APIMEC meeting, so the Brazil Association of Investment Analysts. So we were able then to discuss the trends and innovative solutions to shape a more sustainable future for this industry. You can find the entire presentation available at our RI website. You can also use the link below or the QR code so that you can download everything related to this event. It's a very -- it's a very good content. If you have any questions, you can certainly get in touch with our RI department.

Next slide, please. So let's talk about sales and production for Brazil and Argentina. And then we will discuss production in North America, in Europe. We are comparing this year's first quarter against the first quarter of 2022. So you can see sales and production for heavy vehicles and light vehicles for Brazil, Argentina and Brazil plus Argentina. I'm going to focus on the last columns, Brazil and Argentina. We always address these 2 markets together. Many engines produced in Brazil are exported to Argentina as well as cars and SUVs that are manufactured in Argentina and exported to Brazil.

So you can see an increase of light vehicles of 15.9%. This is based on the loan numbers at the beginning of 2022, we were still suffering from the pandemic. And we also had some floodings which affected sales. And that's why the comparison baseline is lower. As for heavy vehicles, we see an increase 13.4% first quarter year-over-year. As for production of light vehicles, we can see a 14.4% growth.

And as for heavy vehicles, the impact of Euro 6. So January and February, presented a low production because we still had Euro 5 in inventory. And by March, we still sold Euro 5 products. That's why we have this mismatch. For 2023, our forecast considering the entire 2023, considering also members from ANFAVEA -- so to Brazil, it is expected that Brazil presents a 4.2% increase in its production. Our numbers are slightly below ANFAVEA's number. So our forecast is 1% growth in the production of light vehicles, combining Brazil and Argentina. So very similar to what we saw in 2022. With regard to heavy vehicles, the forecast presented by ANFAVEA is a drop of 15.4%.

We expect minus 21% decrease. Now let's talk about Europe and North America, the major destinations of our exportations. Light vehicles, we see a growth of 11.3% in Europe and heavy vehicles 1.5%. North America, light vehicles increase of 6.8%, heavy vehicles 12%. By combining the 2 markets, 9.2% growth regarding light vehicles and 6.5% regarding heavy vehicles. Next slide, please. Here we can see our net revenue performance by market, starting with the regional equipment for domestic original equipment, you can see 9.2% increase above the market rates. If we were to consider expectation of decreasing heavy vehicles and that accounts for important part of our revenue, you can see that this number, especially because of increased market share and mix of clients, we also see the participation of exportations.

So we sell locally, but our clients then export their products. That also improved our numbers, all these factors that I mentioned. As for OE export, we can see revenue increased by 12.1% pretty much aligned to what we see in the market. Here, we have some new projects in the ramp-up phase, and that certainly also supports this growth. So for total OE 10.7%. Aftermarket, domestic aftermarket, 34.3% increase. Here with the market share increases. Just as mentioned by Nathan, we see a very strong demand and despite that low baseline, we still see levels that are similar to what we had during the pandemic. So we did not resume the levels seen in 2019, but that also supports us in the aftermarket segment.

The market share increase and also the Argentinian market. We do have some competitors facing some restrictions. Mahle has a plant in Argentina which supports our trade balance between exportation and importation, allowing us to benefit in the export aftermarket, thus generating this very important number also in our total revenue. Export, you can see a drop of 20.7%, and Nathan already mentioned some political and economic issues, particularly Peru and Colombia led to much of this decrease. And the total increase in the aftermarket of 21.5%. And when we combine OE plus aftermarket, we see that it's up by 14.9%. Now I'd like to turn it over to Nathan and I'll be available during the Q&A session.

[Nathan Quye, executive]

Thank you very much, Daniel. Now I'd like to talk to you about the gross margin and expenses, especially when we talk about sales cost. So in the first quarter, we -- last year, we saw a lower number with 68.9% of cost of sales. And with that, our gross revenue increased by 31.1% when we compare the 2 quarters year-over-year. But mainly because of the aftermarket sales -- they are more than 70% above the regular and also the mix of our clients and products.

On the other plants side, actually, we can see our plants that keep on improving our efficiency. So when we combine all that, we can see that the gross profit was very, very positive in this first quarter. When we go over selling and distribution expenses, absolute number also went up as well as its percentage. The major reasons that explain that are related to freight regarding aftermarket sales, also exportation to Europe and the United States. We also increased advertisement regarding aftermarket and also to support our sales. And you can see that as a consequence, we increased our selling expenses and also inflation rates.

Last year and this first quarter, we also saw inflation increase. And with that selling expenses going up. As for SG&A, when we examine the percentages, 2.9% compared to 2.6% year-over-year, but many factors related to that personnel and also inflation in Argentina and in Brazil. We also had some additional costs related to some projects that are being conducted right now. And these 2 main factors led to this slight increase in our SG&A expenses. As for development and product development expenses, same percentage in absolute numbers, it increased only a little. And there's not many different factors to explain that. And finally, other operating income, you can see it is positive in 2023 compared to 2022.

Two important factors here, sales gain coming from a fixed asset and second, we also had income coming from contracts that were settled in 2022. Now I'd like to turn it over to Fabio. He will talk to us about net financial results.

[Fábio Peres, executive]

Good afternoon, everyone. Thank you for joining us. Let me talk to you about our net financial results. And here, we are comparing the first quarter of 2023 against the first quarter of 2022. We see a substantial improve regarding -- were coming from net interest income coming from investment and also loans and borrowings.

As we know, interest rate is very high in Argentina. So, when we combine the revenues from Brazil and Argentina, you can see that total net interest income is 23.5%. And as for this net -- for exchange rate. So also and hedging very successfully. We manage these 2 aspects. So last year, we had minus 10.7% this year 3%. And you can see that last year, the exchange rate fluctuation was 10% to 12% negative. So we started the year at a higher rate and ending it at a lower rate. And this year, the scenario is different. It was -- exchange rate was flat. So with regard to exchange rate effects, we also see this improvement of BRL 7.2 million.

And as for liquid monetary variation, it's also aligned to what we had last year. And the bottom line, we see an improvement by 18.8%. Closing this quarter was 14.8%. I'm going to the next slide, talking about our indebtedness. Both the net cash as well as loans and borrowings, they are also aligned to what we saw at the end of 2022. So March, we closed with BRL 530 million in cash and also long-term borrowings for BRL 110 million. So short term, BRL 213 million, accounting for 52% of our indebtedness and long term, 48% of our indebtedness.

So in the long term, BRL 197 million. Our net cash position, BRL 119.7 million positive number. So improving from what we had at the end of last year, as you can see on the slide. So now we will open for the Q&A session. Nathan, Daniel and I are available to answer any questions you may have. Thank you very much for your participation so far.

[Caroline Chiarini, executive]

Now we will open for the Q&A session for investors and analysts. [Operator Instructions] Our first question from Pedro Fontana, Bradesco BBI.

[Pedro Fontana, analyst]

Good morning, Nathan, Daniel and Fabio. [indiscernible] the first quarter and the 25% margin, which is a very strong number. Is that related to a different sales mix? Or is it a decrease in the price of raw material that has not been then added to your products? And how do you see the competitive scenario, particularly in the aftermarket segment in Brazil, -- what about the price levels. So how sustainable is this margin in what you did in the first quarter?

[Nathan Quye, executive]

Thank you very much for your question. So I can start and then Daniel, Fabio can jump in. Very good question. Just as you mentioned, this was a very positive number in this quarter. And the 3 aspects that you mentioned are certainly aligned. And it's very hard for us to go in depth. Obviously, price of raw materials is very different this year compared to 2022. And our domestic aftermarket in Brazil is very strong, but there is still room for improvement, though, regarding our market share. And also next conditions, just as Daniel mentioned, with aftermarket heavy vehicles and exportation. it's very difficult to separate each of these factors. They are all aligned and combined when we talk about the gross margin for the first quarter.

[Pedro Fontana, analyst]

Okay. Thank you very much. Do you believe that you will see this trend for the rest of 2023?

[Nathan Quye, executive]

Another very good question. -- it's very hard for me to say anything. [indiscernible] in the first quarter, Euro 5 was still being sold, but not anymore. So it's difficult to see how the market will react to that. The pricing, the price of these products are higher, the new products that meet Euro 6. As for materials, raw materials, it's hard, we don't know what's going to happen.

[Caroline Chiarini, executive]

[Operator Instructions] Your next question from Jonathan Koutras with JPMorgan.

[Jonathan Koutras, analyst]

Good afternoon, Nathan, Fabio and Daniel. My first question is related to the decrease in revenues of aftermarket export market, does that have the impact of FX, the dollar variation year-to-date? And the second question is about your CapEx. I saw the investment and depreciation numbers. So do you find that this growth will be sustained? And if you can just add more color to those numbers, please?

[Daniel Alves, executive]

Jonathan this is Daniel. Let me start regarding OEM. We need to consider instabilities particularly in Latin America countries, mainly Peru and Colombia that -- it's also related to seasonality, but mostly that's explained because of those instabilities.

[Nathan Quye, executive]

Jonathan can you please repeat your second question?

[Jonathan Koutras, analyst]

It's about your strategy regarding investments -- if I just compare CapEx and depreciation.

[Nathan Quye, executive]

Okay. Thank you. Usually, the first quarter of every single year, you see lower CapEx levels because we are just starting projects. -- our budget for 2023 is above the one we had for 2022. And in the following quarters, we will carry out the plan that has been set up for 2023. And we are now aligned to what we had planned.

[Caroline Chiarini, executive]

[Operator Instructions] The Q&A session has come to an end. Let me turn it over to Mr. Nathan Quye for his final remarks.

[Nathan Quye, executive]

Thank you again, Caroline. Thank you, everyone, for joining us this afternoon. As I mentioned, this quarter, we achieved a record in sales for the first quarter. We do face some challenges, just as always in this market, but our team is very well prepared to face all the challenges ahead of us. And we keep on working on a daily basis in order to improve our position. Thank you very much for your questions. And Luis is also available later on to answer any questions you may have. Thank you once again. And we will meet again to discuss the second quarter's results soon.