Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to MAHLE Metal Leve's Second Quarter 2020 Earnings Conference Call.

With us here today, Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Accounting Manager; and Mr. [ Fabio Lopes Perez ], Executive Finance Manager.

We'd like to inform you that this event is being recorded. [Operator Instructions] This event is also being transmitted simultaneously through the Internet, and it can be accessed through the company's IR website, where the slide deck is also available. The selection of the slides will be controlled by participants, and the replay of this event will be available shortly after it ends. You can also send your questions to the company's website, and they will be answered later by the IR team.

Before proceeding, I'd like to clarify that any forward statements made during this call related to MAHLE Metal Leve's business prospects, projections, operating and financial targets, are based on the beliefs and assumptions of the company's management team as well as on information currently available to the company. Forward-looking statements are no guarantees of performance and involve risks, uncertainties and assumptions because they relate to future events and are, therefore, dependent on circumstances that may or may not occur.

Now let me turn it over to Mr. Daniel Camargo. Mr. Camargo, you can start.

[Unknown]

[Interpreted] Good afternoon, everyone. Ladies and gentlemen, welcome to all of you. So today, we are going to discuss the second quarter of 2020 highlights.

Before starting, I would like to say that we hope all of you to be safe and healthy. The safety and health of our employees is the most important wealth of our company, not only our employees, but also our employees' family members. And we have taken action in order to reduce any potential contamination by COVID-19. We are also producing our own masks in order to protect our employees. Operations were fully resumed last month.

So let me go over our agenda. So on Slide #2, we will have the second quarter 2020 highlights, and this has certainly been the most challenging quarter. At the end of the presentation, we will answer your questions.

So on Slide #2, we have today's agenda. So we're going to start with our highlights. Then, we're going to go over the market overview. We're going to talk about the net performance -- net revenue performance, then a summary of our P&L and EBITDA, then we're going to talk about net financial results and net debt. And finally, we're going to talk about CapEx and depreciation.

I'm going to now discuss Slide #3, with some of the highlights. Our net sales revenue was BRL 360 million in the second quarter, which represents a decline of 45% when compared to the same period in 2019, and that was 27% lower when compared to the first half of 2019. And we're going to go over this in-depth later on.

As for OEM, we have data coming from the Brazilian and Argentinian automakers, and the consolidated production of vehicles dropped 49.7%, 50.1% in the Brazilian market and 46.3% in the Argentinian market.

As for our net debt, despite the impact of this pandemic, MAHLE succeeded in reducing its net debt by BRL 45.2 million or 24%. And finally, this slide presents the key indicators of our company, how the company performed. And I'd like to highlight our EBITDA margin.

So in the second quarter of 2020, it was minus 4.1%, and we also have the adjusted EBITDA margin plus 4%. I'd like to talk about this gap between these margins, and that is because of the impairment coming from the subsidiary MAHLE Argentina that is for impairment, and the main driver was also the increase of Argentina's risk as a country. So it used to be 9% last year, and right now, this risk is at 15%, almost 16%. And that's why when we calculated a goodwill of this cultural company, we had this reduction. And we are recognizing this impairment of BRL 29.2 million as the impact it had on our EBITDA.

Now I'd like to turn it to Daniel Brasil. He's going to give us an overview of the market.

[Daniel Alves, executive]

[Interpreted] Thank you, Daniel Camargo. Good morning, everyone, and thank you for joining us in this webcast. So I'd like start on Slide #4, this is the market overview.

Sales of vehicles, Brazil and Argentina, for the first half of 2020 against first half of last year. Let's start with the light vehicle. In Brazil, we had a decrease of 39% in sales and 51% in production, a decrease as well. In Argentina, a decline of 34% in sales, 46% in production. When we put this together, we had a drop in sales of 38% and minus 50.7% in production. This is due to the full shutdown. So automakers, in April, were all shut down, and we had -- they started to reopen in middle of May or June, and some companies even in July. And that explains this 50% decrease in production as well as a decrease in sales because of the pandemic.

I'd like to highlight 1 fact. You can see that we had -- the decrease was lower in sales compared to production. So you can see minus 38% in sales, minus 50% in production. And here, we have the number of units produced. Brazil and Argentina usually represents a positive trade balance. So they export to other markets. So production surpasses sales. But here, it represents a decrease in our inventory. Currently, we have the fact that, in Brazil, we have 138,000 vehicles or 24 inventory days. And that will probably drive production.

And 1 additional piece of information is about the sales from July, and the numbers are better. So we see an improvement month after month. So in July, we had an increase of sales of light vehicles by 20%, and production increased 70% compared to July from the previous year.

As for the full projection for 2020, recently, ANFAVEA disclosed some numbers, and they are [indiscernible] to see a 40% decrease in heavy vehicles and 39%. So their forecast is a little bit better in Argentina, especially for heavy vehicles.

Now I will present the figures for heavy vehicles. In Brazil, the sales in heavy vehicles presented a reduction in sales of 17%, reduction in production of 33%. In Argentina, a drop in sales of 29% and 41% drop in production. Combined, the Brazilian and Argentinian market for heavy vehicles was minus 18.5%, and in production, minus 33.6%. Again, there is a smaller drop in sales than there is in production. So 18% drop in sales and 33% drop in production.

In June and July, we sold trucks in Brazil in levels that were higher than the levels of sales of trucks in June of 2018 and 2019. The agricultural business has contributed to that. The sales of heavy vehicles are more associated with the agricultural sector, and this is why we got better figures for this category.

Now moving to Slide 5. Here, we have the production of vehicles in the main export markets for us. In North America, there was a drop in the production. When comparing the first half of 2020 to the first half of 2019, it was a 40% drop. And in Europe, a 41% drop, better than the drop that we had in our region in Brazil and Argentina, but also a significant drop of 41% when combining the 2 regions.

Now moving to Slide 6. On Slide 6, you can see the evolution of the net revenues from sales in the second quarter of 2020 vis-à-vis the second quarter of 2019. I will focus on the last column. This is where you see the variation.

So from original equipment in the domestic market, there was a drop of 63.8%. As I referenced, the production of vehicles in the same period experienced an 82% drop. So the revenue performance was better than the production performance because of OES parts that were sold, that contributed to a better result for revenues when compared to the production of vehicles. In exports, there was a drop of 43.3%. In this case, the pandemic affected other regions in different times, both in the North America and Europe. So shutdown of operators took place in those countries -- in those regions before than it did in Argentina and Brazil. This is why in the second quarter of 2020, for exports, we had better results than in the same previous of last year.

When combining original equipment for domestic and export market, the drop was a 52.5%. In aftermarket, the domestic market had a reduction of 32%, and in exports, 26.4%. Combined, in aftermarket, we had a drop of 30.7%. The aftermarket market has a different behavior when compared to original equipment. We still have cars being taken to maintenance checks. So when compared to the total sales of revenues, you see that, in both markets, the drop was 45.5% in a combination between information from OE and aftermarket.

Now on Slide 7. Here, we see the evolution of net revenues of the first half of 2020 vis-à-vis the first half of 2019. Again, I will focus on the last column. Here, we see the variation. In the domestic market, for original equipment, there was a drop of 37.7%, again, a better performance when compared to the market reference. Production of vehicles was much higher than -- the drop was much higher than that. In this particular case, this better performance has to do with the mix of products. In the case of heavy vehicles, the drop in production was not as significant as in light vehicles. And its share in net revenues also, its share is higher. And considering OES parts, service parts, performance was also better when compared to the production of vehicles. And finally, there was a gradual recovery of the market, so sales in June are connected to the performance of the production of July, because you're selling parts today so that OEMs can use them the next month or the next day. So this contributes to a better performance. So when you consider the month of June, you see an upward trend. So this benefits the net revenue of the first half of the year when you compare the revenues of this market when compared to the production of vehicles.

In the aftermarket, there was a 20% drop in the domestic market and a 23.2% drop in the export market. Combined, minus 20.8%. Again, the aftermarket behavior difference from OE market behavior, there was a drop in the sales of new vehicles, but maintenance checks remain, so there is an increase in the sales and aftermarket. So the drop in this particular market is lower than in OE. Combined, the net revenues for the first half of the year showed a drop of 27.3%. This is a challenging year for any company. So this is the result of the evolution of the revenues -- net revenues for the company.

Now on Slide 8, you see consolidated exports by region. Not major changes here. The main markets are still North America and Europe, followed by South America and other markets.

Now, again, I will turn over to Daniel Camargo, and I will be available at the end of this talk to answer questions you may have.

[Unknown]

Thank you, Daniel Brasil. So now moving to Slide 9, you see the P&L summary. Here, you see a drop in revenues for the reasons that have already been explained, a drop of 45.5% in the second quarter vis-à-vis the second quarter of 2019, and a drop of 27.3% year-to-date because of the reasons already explained, like drop in volumes, although this is partially offset for the impact of the currency exchange variation. So costs have dropped at a lower proportion, especially fixed costs. So the variation or the proportion in drop is not the same as in other revenues.

On Slide 10. Again, as part of the summary of P&L, selling expenses were reduced in absolute values when compared to the second quarter of 2019. However, its proportion, in relation to the revenue, has increased 6.4% to 9.4% in the second quarter of 2020. This is due to minor impacts combined, like exposure to foreign exchange rates and also restructuring and inflation.

General and administrative expenses, because of several factors, such as strong restructuring measures, also had an impact, 3.5% in the second quarter of 2019 to higher levels in the second quarter of 2020. Expenses with R&D not only they were reduced in total amount, but also in percentual amounts when compared to the revenues, with a reduction in expenses with R&D because of the impacts of the pandemic.

Activities related to R&D were partially suspended because of the pandemic. And other operating income, the main impact here had to do with the nonrecurrent expenses from the provision for impairment losses because of our subsidiary in MAHLE, Argentina, in a total amount of BRL 29.2 million. This is the main impact in terms of other operating expenses.

Now let's move to Slide #11. We have the operating results. You can see here our EBITDA. And as for the results from 2019, you had BRL 114.9 million. We have a substantial decrease in 2020 minus BRL 14.9 million. Major impact was the growth results, as discussed earlier. And once again, some other SG&A. There's a BRL 29.2 million that are part of this result for this quarter. And also, the numbers here for the first half of the year.

Now let me turn it to Fábio Peres. He's going to talk to us about financial management.

[Fábio Peres;Financial Manager, executive]

[Interpreted] Well, good afternoon, everyone. So I'm on Slide #12. So here, we have the net consolidated financial result in 2 parts. So we have the FX variation and others.

So when we start, we have a gap for this year-to-date of BRL 1.2 million, when we compare the first half of this year to last year and this comes from interest also on loans. We know that, that has been declining over time and that has an impact on our CapEx as well as on our borrowings and loans. Combined with that, we also had an increase on our CapEx, particularly in the second quarter of 2020 for BRL 103 million against a debt of BRL 680 million. So we're going to have a gap of minus BRL 1.1 million. And when comparing the second quarter of 2020 against the same period in 2019, we had a gap of BRL 1.7 million.

With regard to FX, we also had the devaluation of the currency. So the Brazilian currency suffered an impact compared to the U.S. dollar and euro. So we had 44.2 negative results and that comes from some activities taken throughout the year. But this is offset by our hedging and also the variation, FX variation. But we have this mismatch between borrowing, and that was done in euros. And you can see that in details in other documents and sales also in foreign currency. So as they add up, and when we have the maturity of that loan, we also need to pay for that. So we have the negative financial result up to a maturity. And at maturity, we have to repay operations in euros, not in reals. So we borrow in euro and we also pay in euro. So we don't have any impact in our cash. But when we consider the exposure, and when we consider foreign currency, particularly Europe, we have this negative result. And also, we have a monetary variation. We can see that we had a variation of BRL 3.5 million. And for the second half year, BRL 7.3 million. So here, we have some corrections done, and also the decrease in volume.

So what we see here is that we have a minus EUR 10.4 million against the year-to-date of BRL 42.1 million. So this is the result we achieved regarding the financial management.

Slide #13. We have our net debt. And that increased from BRL 394 million to BRL 612 million, and that's because of the BRL 250 million that we borrowed at the end of March in order to protect our company's robustness because of the pandemic. And below, you can see the maturities and short-term and long-term debt. So in March of 2021, we will have the maturity of 2 operations regarding borrowing for protecting the company against COVID-19. And we are now negotiating the extension of this -- that. But we are starting negotiations now. The goal is really to benefit from that [indiscernible] also a decrease in selling of interest rates. So we are already talking to the market in order to make the best decision. So anticipating negotiation should start at the beginning of 2021.

Slide #14, we have the percentage of our net debt. So altogether here, we have 41.5%, 29.4%. ACP, as we explained, we had an FX effect variation, 26% and the BNDES 2.5%. So I'd like just to emphasize the fact of that despite all the challenges in the pandemic, the company decreased its net debt by 24%.

Slide #15. Here we have a CapEx. During the first half, you can see that it is not much because of the pandemic, and we decided to focus on our cash flow. We all know about the challenges and the headwinds we have to face, so the company decided to wait a little bit when it came to CapEx. But the goal was really to protect our company's health.

Very well. With that, I'd like to close the presentation, and now let's open for the Q&A session. And then, you will have the opportunity to ask us [indiscernible] any question you may have.

[Operator]

[Operator Instructions] The first question is from Gabriel Rezende, Bradesco BBI.

We are not getting his audio.

[Technical Difficulty]

[Operator Instructions] Our next question is from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

[Interpreted] I have 2 questions. First, I would like to comment on the demand for OEM and aftermarket in the beginning of the third quarter. So could you please share with us the behavior of July and August for orders? And also, does that, that you mentioned and the potential rollover to the beginning of next year, what type of savings do you plan to have? And what type of range you are aiming at improving the financial cost of the company?

[Daniel Alves, executive]

[Interpreted] Marcelo, this is Daniel Brasil. Thank you for your question. As to demand, as I've mentioned, it is in an upward trend. The figures of vehicle production and sales in July will determine the orders for the company a lot in terms of OEM, but that's also true for exports. So after reaching bottom in April, we are in an upward trend.

Fábio, could you please answer his second question?

[Fábio Peres;Financial Manager, executive]

[Interpreted] Talking about that, and as I've mentioned before, we started some discussions with some financial institutions. We are aiming at lower costs. What happened in the end of March and the beginning of April is that spreads were higher because of all the uncertainties we're going through and market volatility. They were talking about CDI plus 4, CDI plus 6. Some banks even saying about CDI plus 8. Now probing the market, you see CDI plus 2 or plus 1.5. So naturally, because of the reduction in market volatility, the costs have returned to more attractive levels. We are, obviously, not simply looking at ACC, but other lines like [ 4131 ] and, of course, we are also checking ACC.

It's also interesting, and it's an interesting line. Our average cost of ACC in Brazil, in composition with Argentina, it's 0.40 a year. It's very attractive. So rollover, that will take place in March. It's going to have lower costs than the cost we have today.

But if we aim at doing that in March 2021, we should start discussing that in February, but we are getting ahead of ourselves and starting these discussions with financial institutions now, including related to [ 4131 ], trying to find an opportunity to renegotiate the debt or maybe renegotiating payment terms. And maybe pushing the payment date forward. So it's going to be more attractive than when we first discussed that in March this year.

I'm not sure whether I answered your question. And if not, please let me know.

[Operator]

[Operator Instructions] Our next question is from Gabriel Rezende, Bradesco BBI.

[Gabriel Rezende, analyst]

I'm sorry, I had connection issues. I wanted to ask you about your expectation in terms of the recovery of the vehicle markets in North America and Europe. You shared your optimism for the Brazilian market in comparison to ANFAVEA's forecast. But what about your expectations to the foreign market? Do you see stronger recovery than what was forecast in the beginning of the pandemic? I would like to understand your take on it.

[Daniel Alves, executive]

This is Daniel Brasil. Gabriel, indeed, the recovery in European and North American markets are expected to improve better than Brazil or Latin America as a whole. The year-to-date production in June, our drop was higher than the drop experienced in foreign markets. And even when it resumes, the resumption is going to be slower than the recovery expected for North America and Europe.

Although we are being surprised because based on the forecast we made in April and May, the result we are getting now are better than the forecast, and that's -- one example of that is for heavy vehicles. The sales of trucks from June and July of 2020, the sales was even higher than the sales of the same period in previous years. So that was surprising to us.

[Gabriel Rezende, analyst]

I'd just like to ask a follow-up question. So this forecast that you have reviewed and now made a more optimist one, is that also true for your forecast for foreign markets?

[Daniel Alves, executive]

Yes. We are making more optimistic forecast because they're better than what was initially expected in April.

[Operator]

[Operator Instructions] Since there are no further questions, we will conclude the Q&A session. Now I'd like to turn over to Mr. Daniel Camargo to proceed with his closing statements.

[Unknown]

Thank you very much to everyone who attended this conference call. We wish that all of you remain safe and healthy, and see you in our next meeting.

[Operator]

This 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.]