Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon in Brazil, everyone, and thank you for waiting. Welcome to MAHLE Metal Leve for the Second Quarter of 2018 Results Conference Call. With us today, we have Dr. Christian Binkert, Chief Financial Officer; and Mr. Daniel Alves, Marketing and Corporate Communication Manager. This event is being recorded. [Operator Instructions]

[Audio Gap]

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, and the replay will be available shortly after this 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 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, Dr. Christian, you may begin.

[Christian Binkert, executive]

Good morning, ladies and gentlemen, and welcome to the second quarter conference call of MAHLE Metal Leve.

If we go to Slide #2, the agenda. First of all, I will give some highlights followed by the market overview, which will commented by Daniel as well as the net revenue by the market performance. The summary and our P&L, EBITDA, I will speak about once again. As well I will speak about the financial managements and the CapEx and depreciation.

If you could switch to Slide #3, the highlights. The net sales in the second quarter were BRL 628 million, a growth of around 9% compared to second quarter 2017. Here, to mention, we had the truck strike, which impacted MAHLE Metal Leve in May, but also in June 2018. The original equipment market, so-called OEM, the growth was, in domestic, around 20% -- 19.9%; and for the export business, compared to previous year, we had a growth of 14.1%.

We did get better -- MAHLE Metal Leve did get 2 awards. The first one is for -- from Valor Inovação Brasil 2018. We have been ranked the second best company in the Automotive Industry and Heavy Vehicle category. This award was given in July to MAHLE Metal Leve. And yesterday evening, we received an additional award for the Automotive Industry from the mega-thin [ Examine ].

If you concentrate a little bit on below charts, the main indicators, I mentioned already, the net revenue increased by 9%. If you compare the growth and the second quarter 2018 this last year second quarter, the EBITDA increased by around 5%; EBITDA margin more or less on a stable level with 19 -- 18.0%. The net income increased around 6%, and the net margin was around 9.6% also more on -- less on a stable level.

For the first half year, we achieved now a sales of BRL 1.246 billion, meaning an increase of 14%. The EBITDA increased by 24% to a level of BRL 231.7 million. The EBITDA margin increased by 1.5% points to 8.6% (sic) [ 18.6% ], and the net income increased around 38% to a level of BRL 132 million. And the net margin at the first half of the year was 10.6% or an improvement of 1.9% points compared to previous year.

Then I would like hand over the speech to Daniel.

[Daniel Alves, executive]

Okay. Good morning, everybody, and thank you for attending our conference call today.

I will start on Slide 4, where we had the Brazil and Argentina vehicle registration production this semester and the last year semester. On the first block, we have the light vehicle and we have Brazil. On the first column, we can see the sales increase of vehicles, almost 14%, and then, production we have 12.6% of increase. In Argentina, we have 1.6% of increase on vehicle sales and 10% increase on the vehicle production. Combining the 2 countries, we have a 10% increase on the vehicle sales and 12% on the vehicle production.

Last conference call, we talked about the potential risk for the Argentina. Now it's not more a potential. So it's really declining the scenario for Argentina. If you look for the July or year-to-date to July, we already have on vehicle sales minus 4%. In a -- it's -- in a positive perspective, a minus 13%, or if you keep the bad situation as we have, it will be closer to minus 20%.

So the combination of Brazil and Argentina. The full year expectation, now we have 10%, and the full year expectation, it's 3%.

Also in production, the year-to-date June, we have 12%, and the full year expectation, it's around 5%, mainly because of the Argentina situation, the economic situation. Yesterday, once again, they increased the interest rate. So it's -- we do not see any good news in the short term for the Argentina in this case.

Now talking about the medium and heavy vehicles. We have, for the Brazil vehicle sales, increase of 23%, and the production, 24%. And therefore Argentina, we have a 1.6% on the vehicle sales and a minus 6.8% for the vehicle production. The combination of Brazil and Argentina for the vehicle production for medium and heavy, we have it in sales, 16% increase, in the production, 21%.

Looking for the 2-year expectation for the medium and heavy, we expect to finish the year with increase of 10% in sales and 12% in production.

Now moving to Slide 5, where we have the vehicle production in the main export markets of the MAHLE Metal Leve. The first one, it's North America. We have light vehicle production, minus 20.5% (sic) [ 2.5% ], so a decline. For medium and heavy, we have an increase of 17.7%. For Europe, we have an increase on light vehicle production of 2.4% and for medium and heavy, an increase of 7.6%. So the combination of this total vehicle production is 0.6%. However, with the better mix for the MAHLE Metal Leve, also the medium and heavy has a higher number or higher increase. And our good participation for the market of medium and heavy, it's good for the MAHLE Metal Leve sales.

Now moving to Slide 6, where we have the net revenues performance by market. In this slide, we have the second quarter this year and second quarter last year. On the second column is the volume and price variation, and the third column is the FX variation. Going directly to the last column, we have the variation.

So in the domestic markets, an increase of 20%. Even with the truckers' strike in May, we got good results for the domestic market. In the export business, the original equipment, we have a 14% of an increase, and the FX impact is 8%. We have a volume and price impacted by 6%, so we got like increase in market share in this case. The total original equipment, it's an increase of 16%.

In the aftermarket -- on the domestic aftermarket, we had minus 9.7%, and the FX impacted minus 4%. The FX impact on the domestic market is because of the Argentina. We sell the goods in pesos Argentinos, and we convert to Brazil reais to have the consolidation here. On the export for the aftermarket, we have an increase of 13% and the FX impact of 11%. The total aftermarket on the quarter was minus 4.9%. And the combination of original equipment and the aftermarket, it's an increase of 9% for the net sales revenue.

Now moving to Slide 7, where we have the semester sales on the first column. It's the -- this year. On the second column, it's the volume/price impact. And the third one is the FX variation. And the fourth column, it's last year numbers.

Again, moving to the last column, where we have the total variation for this semester. On the domestic market, we have an increase on the net sales revenue for 27%. If you look at the Brazil and Argentina vehicle production, we have around 13% of an increase. Therefore, we have in a better performance for the MAHLE Metal Leve sales on the original equipment domestic.

The main points we have here for this better performance, it's a mix. We have a higher increase for the medium and heavy vehicle production. Also, the OES, the service parts, we have a higher increase. And there's finally an increase or a ramp up for a new business. So these are the 3 main reasons for this better performance for the original equipment domestic.

On the export, we have an increase of 15% and the FX impact of almost 10%. So 5% of the volume and price impacted. In this case, we got some new volumes for the liners and business for the North America. These are the main -- this is the main reason for this better performance and volume and price impact for the export market on the original equipment.

Talking about -- now about the aftermarket. We have a decline of minus 2.4%, and the FX impacted minus 4.5%, again, because of the Argentina, so when you convert to Brazil reais. And the volume/price impact for the aftermarket domestic is 2.1%. In this case, it was mainly affected by the truckers' strike in May, not only made by -- mentioned by Dr. Christian, but also, in June, we got not-so-good results because of this.

In the export, we have an increase of almost 25% and a FX impact of almost 8%. The volume/price impact for the export aftermarket, it's 17%. In this case, the main impact is because of new intercompany sales for the aftermarket exports. This is the main reason for this increase on the export aftermarket.

The combination of the aftermarkets, domestic and export, is 3% increase. And the combination of the original equipment and the aftermarket, it's an increase of 14%; and the FX impact, 3%; and the volume and price impact increased to 11%.

Now moving to Slide 8, where we have the share for -- by market for our exports. So you can see no big change. We have an increase for the NAFTA market because the business I just mentioned, for the liners, for the heavy-duty customer. And this is the main reason for this different participation from the markets. We have an increase for our markets, but in this case, higher for the NAFTA and a new split for the participation.

Now, I'll give again the word to Dr. Christian. He can continue this.

[Christian Binkert, executive]

Thank you, Daniel. Moving to Page number 9, the summary and P&L. As mentioned already, the sales increase second quarter 2018 compared to last year was 9%, resulting in a margin increase from 28.4% currently. We had last year 27%. On a half-year basis, as already explained by Daniel, our sales increased by around 14%, mainly by volume and prices. And this resulted in a margin increase from 26.5% to 28.2% in the first half of 2018.

If you switch to Page #10, continuing with the P&L in regards of the SG&A. We can see that we have been impacted, as mentioned already by Daniel, sales by the truck strike, meaning we had higher transportation costs to still deliver to our customers not only domestic but also for our export business. Therefore, we see the selling cost increases for the second quarter this year to 7.6% compared to previous year, 6% on the half-year [ closing ] basis. We have now a selling cost of 6.9% compared to previous year of 6.2%.

The admin cost we can see in both periods, in the second quarter, also in the half year, a decrease compared to previous year. For the second quarter, we had an SG&A and an admin ratio of 3.6% compared to 4.8% last year. On the -- for the first 6 months, we now achieved 3.5% admin cost compared to previous year, 4.7%.

The R&D costs now are, more or less, on a normal level. We have, on the half-year closing, R&D cost of around 3% of sales. And the other operating income, as you might remember, we sold last year one business, which was Mahle Metal Leve Miba Sinterizados, which gave us a positive impact last year and which did not happen this year anymore. Therefore, we have here smaller gains in the other operating income. And all that we mentioned there, Reintegra, the export incentives, the government decided to stop it from 1st of June, 2018, it was reduced from 2% to 0.1%, the legal requirement. This is all the one additional main sector, why we have a difference in the other operating income comparing the 2 periods.

If we move to Page #11, the operating income measured by EBITDA. In the second quarter 2017, we had an EBITDA of BRL 107.7 million, which gives a margin of 18.7%. Now, in the second quarter 2018, we achieved an EBITDA of around BRL 113 million, EBITDA, 18%. Where is the major changes coming from? From the gross income, which gives us a positive impact, around BRL 23 million, as explained by Daniel already here, mainly to mention the volumes and the prices. And other operating income, I mentioned already here the main difference compared to previous year is Mahle Miba Sinterizados. And in regards of the selling cost of BRL 13 million, the major impact here really are the higher transportation costs due to the truck strike in May.

If you look at half year 2017, we had a margin of BRL 170 million (sic) [ BRL 186.5 million ] EBITDA, 17.1%. Now we moved up to 18.6%, an improvement of 1.5% points, while absolute values, BRL 232 million. In principle, the same reasons as mentioned before, the differences are mainly coming from higher gross income, meaning volume and prices. On the other hand, we're a little bit burdened by the other operating income here, the keyword: Miba once again. And the selling costs, once again, the keyword: transportation costs and the truck strike in May.

If you move on to Page #12, the net financial result. If you look at the total financial income, we can see that in the second quarter, we had a negative amount of BRL 5.2 million compared with last year, minus BRL 7.6 million, so really, no major differences. Also, in the first 6 months 2018, minus BRL 7 million we see compared to previous year, where we had minus BRL 17 million, a small improvement.

The major improvement is coming from interest. This is really a combination of lower interest for our debts, but also for our investments as well. As you can see on the lower part of the chart, lower loans, lower debts, but also lower investments compared to previous year.

In regards of the exchange rate variation, if you looked across 6 months, we only have a small difference compared to previous year, small positive difference of BRL 2.8 million. We achieved now BRL 12.8 million, and the monetary variation also going slightly down, now to BRL 18.6 million (sic) [ BRL 18.9 million ]. Once again, overall now for the financial income, we have minus BRL 7 million improvement of around BRL 10 million compared to previous year.

If you look at Slide #13, the indebtedness. Last year, in December 2017, we had net position of minus BRL 14 million. Now of BRL 124 million, mainly because we did repay BNDES loans. We also distributed this year, once again, the full dividends to our shareholders. And the difference then is really the cash generation from our operations.

And in the below chart, you can see our short- and long-term distribution of our indebtedness, where you can see that the -- it's well distributed not only in short term but also long term over the years 2019 until mainly 2023.

Moving on to the Page #14, the indebtedness part number 2. Here, really, the key message is in June 2018, we had around 56% with FINEP and around 40% with ACC financing and still a small portion, around 5% with BNDES loans.

Page #15. I mentioned already the distribution of dividends. We distributed for the year 2017, BRL 232 million. 2016 was BRL 54 million because of the impairment, which we had in our piston ring business. And in 2015, it was in the level of around BRL 198 million.

Coming already to the last page, Page #16. The CapEx we spent year-to-date in June, around BRL 29 million, so very similar value compared to previous year. Although the depreciation was BRL 46 million, it's very, very similar compared to previous year. If we take some ratios in percent to sales, we have 2.3% spend in CapEx at the moment; and in regards of depreciation, 63%. Our estimation is that we will spend for the year 2018 a CapEx of around BRL 100 million, which will exceed partially the depreciation.

Thank you very much for your attention. If you have any questions to Daniel or myself, kindly let us know.

[Operator]

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

[Lucas Marquiori, analyst]

So I have 2 questions on my side. First one, related to the aftermarket -- domestic aftermarket volumes in the second quarter compared to the last year. I was wondering if you guys could you give us any information regarding the volume behavior in the months of April and June. I mean, or any volume, an increase or decrease, excluding the effects of the Argentinian crisis and excluding the effects of truckers' strike. Any metric on that would be nice. And my second question is regarding the ROTA 2030 Program. Well, the program is now officially launched, so I was wondering if you guys have any -- have already studied or assessed the potential impact for MAHLE, especially the tax benefits or a potential new product launch. And any color on that would be nice too. Those are my questions.

[Daniel Alves, executive]

Okay, Lucas, this is Daniel speaking. Regarding your first question for the aftermarket domestic, we have, indeed, impacts, so the truckers' strike impacting altogether with this scenario. So it's difficult to separate it, which is the -- like a market, or in this case, the truckers because the situation in May, and also in June, was really affected by this situation. So I do not have it for you, the numbers separating the facts about the strike and the market, in this case.

[Lucas Marquiori, analyst]

Do you have the volume behavior for April, for example?

[Daniel Alves, executive]

For April, we have an -- like regular environment that we had in the -- comparing to the last year. And the May and June was the mainly months that affect by the strike, okay? Regarding the second question for the ROTA 2030. So the program was launched, and now we need to have the details about the program. But today, our expectation for MAHLE Metal Leve is a positive perspective because of the new targets for the true consumption. So we're expecting new developments from the customer, and also, MAHLE providing solutions or new technologies to achieve the targets for this new program. And a good point, it's -- the participation will be by the average of the models, but the additional discount of minus 1% and minus 2% will be by model, not in the average of the automation. Therefore, this also helped us not in a specific model, but for our models of the customer, we can work together.

[Lucas Marquiori, analyst]

Okay, Daniel. Just to make it clear, which was the volume increase or decrease in the aftermarket? Only domestic aftermarket only in April? Could you give us the number?

[Daniel Alves, executive]

I do not have the number here in my hand for April. We can call later to you and give you this information. I do not have it specifically for April.

[Christian Binkert, executive]

Lucas, just let me add one comment. We know the impact of the truck strike for the aftermarket. We are speaking about 2-digit million reais impact -- negative impact in the month June. But our expectation really is that the next couple of months, we will recover, since the shortage in the truck strike in the aftermarket.

[Operator]

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

[Murilo Freiberger, analyst]

So for now, I have 2 questions. The first one, if you could remind us of your hedging policy. If I'm not mistaken, you have the policy of hedging roughly 75% of your FX exposure looking into a 12-months horizon. And then in the long run, lower hedge positions. So we can understand how the FX depreciation can flow into our results. And the second question is related to -- it's a follow-up question on what Lucas just asked regarding the truck drivers' strike impact. If you guys could provide us any color, if we -- if you already noticed an improvement in July, in terms of volumes on the replacement markets? I think that's it from my side.

[Unknown Executive]

Okay, Murilo, this is [ Jörg ] speaking. Regarding your first question, the hedging policy. Actually, what we have is something that always come up from investors, is that we have been affected by our revenues -- our expense revenues would be affected by 85% on the FX volatility. So with this condition that we have, the devaluation of reais -- recent devaluation of reais, it could be reached positively in terms of revenues, okay, because we have a hedging policy that we have to hedge, on average, 50% of the total volume. But from this 50%, 85% would be positively or negatively impact by our -- by the valuation or devaluation of the exchange rates.

[Daniel Alves, executive]

Regarding your second question about the aftermarket in July. So we cannot talk about the July figures. But for sure, it's not similar that we had in May and June. So it's -- was like not a common situation. And for July, it's -- you can say that's more normal. Volumes are not affected by the strike, but I cannot think the numbers, okay?

[Operator]

[Operator Instructions] Our next question comes from Victor Mizusaki with Bradesco BBI.

[Victor Mizusaki, analyst]

I have just this question. I take a look on your earnings results, we can see this increase in freight costs. So I'd like to know if you think these costs as a percentage of revenues, can I assume that given the discussion about the minimum world trade price that these latest cost is the new level? Or can I assume that it will go down to historical levels?

[Christian Binkert, executive]

It's Christian speaking. I mean, as mentioned in the call already, the selling cost has been -- one of the major impacts has been the transportation costs because of the truck strike because we still have to deliver to some domestic customers and also especially, export customers. At the moment, we have been not approached by transportation company or by logistics company because of the new topic you mentioned. So we don't feel any impacts in regards of the new approach at the moment. My feeling, my perception would be that the selling costs in the -- especially in the second quarter, has been rather high and should stabilize the next couple of months once again. Does this answer your question?

[Murilo Freiberger, analyst]

Yes. I mean, so the -- I mean, depending on what the Supreme Court will say, maybe late this month, on this minimal road freight price. So maybe we can see an increase after this decision?

[Christian Binkert, executive]

Could be. But as mentioned, at the moment, we have been not approached from any of our transportation logistics companies about price increases, offer for price change requests at the moment there.

[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. Please go ahead, sir.

[Christian Binkert, executive]

Thank you very much once again for participating the second quarter 2018 call. Looking forward to seeing you all again our latest COU and the third quarter conference call. Thank you very much, and have a nice day.

[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.