Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2021-Q2

[Operator]

[Audio Gap]

and Fábio Lopes Peres, Executive Finance Manager. This event is being recorded and all participants will be listening to the teleconference during the presentation of MAHLE Metal Leve. [Operator Instructions] So this event is also being webcast simultaneously via webcast. And this can be accessed through the website of investors with the company, and where we also have the presentation available. The slide selection will be controlled by you. The replay of this event will be available right after the closure.

And the participants of this webcast will be -- can address the questions for MAHLE Metal Leve, that will be answered after the end of the conference through the international relations.

Before we move on, we would like to clarify that any declarations or statements that can be done during this conference with regards to the business prospects of MAHLE Metal Leve and other forecasts and other assumptions of the company administrations as well as information that are currently available for MAHLE Metal Leve. Future considerations are not any guarantees for performance, and they involve risks and uncertainties of the assumptions that are referring to future events and therefore, depend on events that might or might not happen.

Now I'd like to yield the floor to Dr. Daniel de Oliveira Camargo, who will start the presentation. Please, Mr. Daniel Camargo, you may start with your presentation.

[Daniel de Oliveira Camargo, executive]

Thank you. Good afternoon, and welcome to the -- our conference call. We are going to talk about the second quarter of 2021. Before we start with our agenda, I hope that you're all safe and healthy. As we have reinforced, the company has been following health protocols to ensure the health of its employees and to ensure the continuity of our operations. At the end of this presentation, we will be open for the question-and-answer session.

So now let's move to our agenda, Slide #2. Today, we will address the highlights of the quarter. We're also going to provide a market overview. We are going to talk about the performance of net revenues, financial management, investments and depreciation. And finally, as I mentioned, we'll move to the Q&A session.

In the next slide, Slide #3, you can see some highlights of the company in the second quarter of 2021 and the first half of 2021. The net sales revenue, as you can see on the chart, totaled BRL 889 million in the second quarter of 2021, 146.4% higher than the second quarter of 2020. In the first half of 2021, we had net sales revenue 84.5% higher than the first half of 2020. As to domestic aftermarket, it accounted a total BRL 243.5 million in the second quarter of '21, 115.5% higher year-over-year. When we compare the first half of the year, it was 86.7% higher than the first half of 2020.

As to domestic OE, revenues totaled BRL 244.7 million in the second quarter of '21, 234.7% higher than the second quarter of '20. And when you compare the half of the year, this first half of the year in 2021 was 99.8% higher year-over-year.

Aftermarket exports was -- total BRL 70.2 million in the second quarter, 98.3% higher than in the second quarter of 2020. As to the first half of the year, 75.1% higher vis-à-vis year-over-year. The original equipment exports totaled BRL 330 million in the second quarter of '21, 137.2% higher than the second quarter of 2020.

In the first half of '21, results were 74.6% higher than last year. Here we have in this -- the EBITDA that totaled 262.9% in second quarter of 2021, much higher than the same period last year because of what we experienced last year. Therefore, our adjusted EBITDA had a margin of 19.6%, and the adjusted EBITDA margin in the first half of 2021 was 21.7%.

Now I would like to turn over to Daniel Brasil, and he will talk about the performance in terms of net expenses.

[Daniel Alves, executive]

Thank you very much, Daniel Camargo. Good afternoon, everyone. And once again, thank you very much for taking part on MAHLE Metal Leve results sharing.

And we will start now by Slide #4, where we can see the Brazil and Argentina registration and production in the first half of this year vis-à-vis to last year. In the upper table, we can see light vehicles where we have in Brazil, in terms of sales, we've had 32% growth; and in Argentina, a growth of 40%. Brazil plus Argentina, 33% altogether. In the production of light vehicles, Brazil presented a growth rate of 55.1%, whilst in Argentina, the growth was 124%, Brazil plus Argentina, 62%.

Well, obviously, comparing those year-on-year rates, where we obviously experienced the pandemic peak and the prices were pretty peaking up. And however, we still experienced some trouble in the production of vehicles and manufacturing vehicles. I don't know if you've been following this, but at least with the semiconductors, the industry has been presenting some trouble to increase this production. The results that is the current inventory levels in Brazil, right now, we have 15 inventory days whilst the normal would be 30 to 35 days and altogether, 85,000 vehicles.

So we have a couple of examples of assemblers that spent, like, 5 months without producing some specific types of models. And now we are witnessing the resumption of -- and in some other dealers, they have announced downtimes of 2 weeks, up to 2 weeks, precisely because of the semiconductors problem.

So if we could now talk about the expectation of the full year for 2021. And using the ANFAVEA, as a reference, ANFAVEA has, in the light vehicle market, a forecast of 14 -- 15% growth on sales and 25% growth in the production. So our view in MAHLE is slightly lower than that for both sales and production precisely because of this difficulty that the sector has been experiencing.

Now moving to the bottom table of medium heavy vehicles where we have here the trucks and the growth in sales in Brazil was 52%; in Argentina, the sales growth was 64.5%; and the 2 countries together, 53.3%. In the production, Brazil experienced 94.6% growth rate and Argentina, 224.5% and both countries together, 95.8%.

And so the medium/heavy vehicles market is slightly different from the light vehicles despite the difficulties. So the dealers have been able to meet and to basically meet the demands of the agribusiness that has been basically spearheading the demand for trucks and the forecast and expectation for the whole year of 2021 using [ poly-SXE ] experience.

ANFAVEA's forecast for sales in terms of growth is 13% if we compare the year-on-year rates and 25% in production. And the MAHLE perspective for the heavy segment is slightly better than the ANFAVEA. So for light vehicles, our perspective is slightly lower. But for the half, the medium heavy vehicles, slightly higher and that will obviously contribute to better rates on the mix numbers, if we check.

Now moving to Slide #5. So here we can see the production -- vehicle production in the Europe and North America. So for North America, the light vehicles experienced a 33% growth; medium and heavy vehicles, 42%; and altogether, 33.6% of growth.

In Europe, light vehicles production, 32%; and medium and heavy vehicles, 34.8%; Europe, 32.1%. And both areas together, consolidated figures of 32.7% growth. Rather significant figures, the percentages are slightly lower here if we compare it to our own region where we had the deeper falls if compared to last year. But the external market has been recovering part of the volumes. And the global industry has been experiencing the same difficulties of the semiconductors, but accomplishing significant figures in terms of vehicle production.

Now as we proceed to Slide #6, we what we can see here is the net revenue performance. And that is down broken by market. So the upper table is of the quarter, and then the -- by [ halves ] in the bottom table, the first half of 2021. We have volume price then the FX variation, fourth column, first half 2020 and then the variations.

So if we move to the very last column, the original equipment on domestic market, the growth in revenue of 99.8% and the impact on the FX variation was 75%. That was basically reflects of the -- we have a valve plant in Rafael in Argentina, so that the sales in pesos converted to reals, that was the result. So the impact in volume price and the original domestic equipment of 102.8%.

So the performance was -- exceeded the growth in vehicle production and the main factor for that was the product mix, as we saw from the medium and heavy vehicles with better figures if compared to the light vehicles. We also had an increase on OES spare parts and an increased market share.

In the second line, we have the original equipment, but for exports, and we can see a growth in 74.6% if we compare the quarter-on-quarter. And the FX variation, 40.5%; and volume price, 34.1%, pretty aligned to the growth -- to the market growth that we saw in the vehicle production. The sum up of original equipment, a growth of 84.6%; and the FX impacts, 23.2%; volume price, 61.4%.

The aftermarket, domestic aftermarket, we had a growth of 86.7% and the impact was 114% and volume price, 100.8%. And if we check on Argentina, if we convert business into reals, we will see that in this market, we could see a strong demand. And again, the reintegration of the inventories that contributed to this turnover and the market share gain with the devaluing of the reals with the imports have been more -- less competitive and MAHLE was gaining market share in the aftermarket segment.

And the exports aftermarket, they experienced growth of 75%; the FX impact's, 14.3%; volume price of 60.8%. Here, strong demand, inventory recomposition for this highlight,

[Audio Gap]

72.2% in terms of volume and price.

Now moving to Slide 7. Slide 7, we have this consolidated based on the region. So comparing the first half of this year, versus last year, no -- not major variations.

Now I will turn over back to Daniel, and I'll be available at the end of the call for the Q&A session.

[Daniel de Oliveira Camargo, executive]

Thank you, Daniel Brasil.

Now let's move to Slide #8. This is the gross margin where we can see the growth results in the second quarter of 2021, BRL 889 million and we can see the comparison against the second quarter, 12.2% to 29% of the first quarter. So we moved from BRL 205 million from last year to BRL 517.3 million this quarter from 22% to 30%, and the margins reflect an increase in the volume of products that have favored the results of the quarter and of the first half. So have the vehicles and aftermarket, of course, aligned to improvements in internal efficiencies, that's something the company has been working on.

Now moving to Slide 9. We can see the summary of expenses, P&L expenses. Selling expenses, for example, we can see an increase in absolute numbers. Talking about the half of the year, we can see how much it has increased. It has increased to BRL 108 million to this half -- first half of the year, especially because of the variable cost increase especially related to freight. Also the sales net revenue increased considerably in this quarter.

General and administrative expenses were also impacted by the increase we've had. as we can see from 44.7% to 51.7 in the first half of this year. This has to do with increase in expenses and everything. In terms of R&D expenses, there was a reduction in absolute numbers because of the COVID pandemic. The company has maintained its conservative approach with respect to R&D spending. We're focusing on developing products to sell quickly.

Now focusing on the other operating income, the main impact we see is that we have a positive results in terms of revenue that has to do with the accounting of an expense from tax credits resulting from the exclusion of ICMS from the PIS and COFINS calculation basis.

Now I would like to turn over to Fábio Peres, who is also going to address this topic.

[Fábio Peres, executive]

Good afternoon, everybody.

So now proceeding on Slide #10, we can see those tables that basically demonstrates the financial results, the net financial results of the company in the first half of this year vis-à-vis to last year figures. And on the net interest line, we can see the accurate for the semester. Last year, we had expenditures of BRL 4.9 million, and this year's, an income of BRL 7.4 million. And the difference that are referring to the exclusion of the base and tax and -- with a reflex of BRL 7.9 million referring to the interest of the amount.

And now moving to the second part of the table where we can see the FX variation. We -- last year, we had BRL 40.8 million of expenses. And this year, BRL 11 million. And that's basically referring to the ACC variations, but we had a very heavy devaluing and this year with slightly more stable rates.

And the third point here on the table is the net monetary variation where it was basically the same, and we can see here, quite close, 14.7% against 14.5%. And in the other part of the table, we can see the amounts here of the investments and the debts for the period.

Last year, we had an average cash of BRL 338 million in the first half of the year. And this year, BRL 155 million, so a reduction of 54%. Now with regards to the debt, we had something like BRL 559 million; this year, BRL 156 million, what demonstrates a reduction on the debt of 73.5%.

Now moving to Slide #11, we can see the breaking down on the indebtedness of the company on both short and long term, where we have 43% this year on short term and 55% -- sorry, 57% on the long term. The long-term is basically comprised of the FINEP operations that have been captured last year. And the short term, are a bit of the FINEP plus the ones that were captured for the cash recomposition.

Then on the right, we can see a graph that FINEP represents 73.8%, whilst NCE, 26%. And above the percentages, we have the cost corresponding costs with an average cost of FINEP of 4.11%, while the NCEs would represent something like 0.79%. So the average cost of the company today, it would be 3.6% per year.

And in the bottom tables, we can see the maturities for each operation. And we can see, on the short term, we have a payment, which is slightly heavy, BRL 50 million in June 2022, and the rest is distributed along the upcoming months. And for the long run, we have the FINEP operations that, again, will follow the schedule that was adjusted with the institution.

Now proceeding to Slide #12. What we see here are the CapEx and the depreciation that we had in the first half of 2020, and that was around BRL 8.6 million. And always bear in mind that this substantial reduction was obviously given to the pandemic scenario. And in 2021, we have 26.9%. That, in terms of percentage of net sales revenue, 1.6%; and the depreciation, 52.8% altogether.

Bear in mind, again, that in that meeting that we had recently on August 11, that we have approved the BRL 76.6 million for investment, they should be invested throughout the second half of the year. So that's it for the moment. And now we are moving towards the question-and-answer session where you might -- you have a chance to clarify your questions.

[Operator]

[Operator Instructions]

We have a question from Pedro Fontana with Bradesco BBI.

[Pedro Fontana, analyst]

Congratulations on your results. In the second quarter, there was an expense with environmental liabilities. I would like to understand what the expense is about.

[Daniel Alves, executive]

Thank you for your question. This contingency has to do with environmental liability. Actually, it's a continuation of remediation processes we have implemented in the node Metal Leve plant. It's been in this process for years now. So now we had to book that because of need of soil remediation on that -- in that plant located in São Paulo.

[Operator]

Next question comes from Werner Roger with Trígono Capital.

[Werner Roger, analyst]

Congratulations on the excellent results in such a challenging environment. I have 2 questions. First one has to do with the gross margin related to raw materials. Is there any type of transfer of costs to the prices? Or in the second half, you expect this to go back to normal? Or should we expect improvements or worsening?

And in terms of tax credits for PIS and COFINS, related to older credits -- older tax credits, how is -- what is the procedure to complete these tax credits?

[Daniel Alves, executive]

This is Daniel Brasil. Thank you for your question. Let me answer your first point related to the gross margin related to raw materials. This is a continuous process. MAHLE is in constant pursuit of getting new contracts with customers to be able to transfer any price variation in raw materials. And this is followed up over the year. So we are constantly taking the previous periods into account. So this is an ongoing process. So we cannot say that there's nothing else to be transferred, actually, because it's an ongoing process. I don't know whether my answer is clear to you.

[Werner Roger, analyst]

But are you experiencing new readjustments? Because we see that some metal prices have decreased, which is the case of steel, but do you foresee stabilization in the prices of raw materials? Because we understand the transfer of prices is not immediate. But do you expect price readjustments to stabilize in raw materials?

[Daniel Alves, executive]

There was a significant growth in the prices of raw materials recently. If you consider the past 6 months or a year, it is more stable than in the past. But we still expect some increases. So it's not totally stable yet.

[Werner Roger, analyst]

And about my tax credit question?

[Daniel de Oliveira Camargo, executive]

Thank you for your question, Werner. Regarding the exclusion of ICMS from the calculation basis for PIS and COFINS, we started this process in 2019. And in our process specifically, we -- it was a legal suit that we won in the first decisions. And based on the Supreme Court decision in May of this year, we were able to recognize these gains retroactively until March 2017. So from March 2017 to now, we have been allowed to register that in the books, these gains until we get the final decision for our specific lawsuit, and then we can complete this.

[Operator]

Next question comes from Marcelo Motta with JPMorgan Bank.

[Marcelo Motta, analyst]

I have 2 questions. First, I'd like you to comment about the semiconductors. You even touched on that during your presentation that the semiconductors had an impact on the production of the first half of the year. What is your forecast for the second half of the year, also based on the orders you expect to have? Because we know that there is a shortage in the supply of semiconductors for some time.

And also I'd like to know about the aftermarket. Maybe the exchange rate was reduced a little bit. And maybe for the imported market, it was too high. And for the domestic market, the exchange rate of 5.2% is favorable to the domestic market. Is this understanding okay? Or do you believe that you're also going to gain market share despite the retraction in the exchange rate?

[Daniel Alves, executive]

This is Daniel Brasil. Thank you for your questions. Regarding the semiconductors supply, we cannot say that situation is solved or that we expect it to improve. This week, we heard that some car dealers and car makers were postponing their operations and giving vacation to their employees, while some are resuming their activities.

But we see that the portfolio for our parts is still high, but carmakers cannot increase their levels of production because they are working with very low levels of stock just for 15 days. And there is a heated demand for vehicles. But the production level has maintained. These levels has been the same for the past months. We don't expect it to grow any soon.

So car makers have made all possible efforts not to stop their lines and try to get components to keep their lines running. So we don't see worsening compared to the current condition. But the ramp-up in production is not expected either in the short term, maybe later in the year. The semiconductors issue is probably going to affect us up to 2022. Globally, it's a very unstable situation, and that has an impact on carmakers.

Regarding your second point, the aftermarket. Yes, the exchange rate is high and it favors the aftermarket business. And because of the lack of new cars, the market of used cars is heated, and people sometimes just wait for a long time to buy a new car, they end up getting a secondhand car. But because of this increase in aftermarket, we see a good market for that.

There was a shortage in stock during the pandemic earlier that has led to a replenished in stock. This has increased the demand at levels higher than previously. So this is what determined this aftermarket. I don't know whether it was clear to you.

[Operator]

[Operator Instructions] So now we would like to close the Q&A session, and we will now give the floor to Mr. Daniel Camargo to the final remarks.

[Daniel de Oliveira Camargo, executive]

Thank you very much to all of you who took part on this conference today. Keep on just safe and sound.

[Operator]

So that concludes today's MAHLE Metal Leve conference for today. And we thank you for your participation, and have a good day.

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