Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to MAHLE Metal Leve's Second Quarter 2022 Earnings Conference Call. This conference call is being recorded, and the replay will be made available in the company's IR website where the slide deck is also available for download. [Operator Instructions]

Before proceeding, I would like to highlight that forward-looking statements are based on the beliefs and assumptions of MAHLE Metal Leve's management and on information currently available to the company. Such statements may involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and the general public should understand that the macroeconomic environment, industry conditions and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Joining us today are 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.

Now I'd like to turn the floor over to Mr. Daniel Camargo, who will begin the presentation. Mr. Camargo, you have the floor.

[Daniel de Oliveira Camargo, executive]

Good afternoon, everyone. Welcome, ladies and gentlemen, to MAHLE Metal Leve S.A. earnings conference call to discuss the results of the second quarter of 2022. At the end of this presentation, we'll be available for questions.

So let's just start with our agenda. Here on Slide #2, we will talk about the highlights of the quarter. So we'll start by talking about the highlights and then we'll give you a market overview. Then we will discuss our net revenues performance. Then we will talk about the financial management, about CapEx and depreciation. And finally, the question-and-answer session as we said previously.

So on our next slide, we have the highlights of our performance in the second quarter of 2022. The net sales revenue in the quarter was BRL 1.90 billion, in the second quarter of 2022, up 14.7% year-over-year. You can see in the table, the performance by market. We have had growth in every market, except original equipment exports in which there was a mild decline, and we'll give you further information about that later.

About our main indicators, we saw a small drop in the adjusted EBITDA margin because of the pressure on gross margins. We've been talking about that for a few calls now, and we'll give you further details about that later as well.

Now I'd like to turn the floor over to Daniel Brasil, who will give you the market overview. Please, Daniel, you have the floor.

[Daniel Alves, executive]

Thank you, Daniel Camargo. Good morning, everyone. Thank you for joining us in MAHLE Metal Leve S.A. Earnings Conference Call. Let's get started on Slide #4, where we have Brazil and Argentina reduction in sales of vehicles, comparing the first half of 2022 to the first half of 2021. In the first chart, we have light vehicles. And at the bottom chart, we have heavy vehicles.

In Brazil, we had a minus 15.4% performance in the sales of light vehicles. And in Argentina, we had an increase of 5.1%. Combining both countries, we had a drop of 12.4%. In the first quarter -- I mean, compared to the first quarter of 2022, we had improvement. The first quarter, we had minus 22% combined in Brazil and Argentina, and in the second quarter, we had minus 12.4%.

In the month of June, we had an improvement in the number of sales of light vehicles. The month of July was also great, relatively speaking, of course, we're not talking about 2019 levels, but considering the perspective for the current year, it was a relatively good month.

Now let's talk about the projections for the full year. ANFAVEA's projections for Brazil talk about 0.9% of expected growth. So that is for the year of 2022, we would close the year at levels that are very close to the numbers of 2021 in the sales of light vehicles.

So this has been a challenging year, post pandemic year, both 2021 and 2022, suffered pressures in our supply chain, and we are seeing an increase in the sales of vehicles -- in the price of vehicles with the increase in interest rates that are also impacting our sales. So for the year of 2022, MAHLE's projection is always -- is also aligned with the projections of ANFAVEA.

Now about the production of light vehicles in Brazil, we had a drop of 5.4% in the quarter. In Argentina, a 26% growth. So combining Brazil and Argentina, a drop of 0.6%. In that indicator, we had an improvement as well. In the first quarter, we were at minus 13%, and now we are at minus 0.6%.

Now if we add the month of July, this minus 0.6% would go to 4.2%. So yes, the first quarter was very challenging with the new variant of COVID-19, we also had floods, as we mentioned in our last quarter. So the second quarter has had some improvement.

In terms of production, the expectations for the full year of 2022 using ANFAVEA as a reference, again, for Brazil, we expect growth of 4.4%. So sales close to 0.1% and production close to 4%. MAHLE's expectation is also aligned with that, but with lower numbers than ANFAVEA's, but still with positive numbers. So that would not be negative results compared to previous years.

We would not go back to the levels of 2019. We're still moving sideways, comparing ourselves to 2020 and 2021, but the market has adjusted to this new level of demand. So now let's talk about heavy-duty vehicles. In Brazil, in the first half of the year, we had a drop of 2%. And in Argentina, an increase in 2.3%.

So combining both countries, we had a drop of minus -- a drop of 1.6%. Now the projections for the full year according to ANFAVEA is to achieve growth of 2.3%. So a 1-digit growth but still a 2% growth in terms of heavy vehicles. Unlike light vehicles, the year of 2021 was better than 2019. So we have a higher level for comparison.

Next year, I don't know if you're aware, but we have a new legislation that will come into force. And since last year, we already have very high levels if compared to 2019, then this 2% increase can be considered great. Now in production, Brazil had 0.1% growth, and Argentina had a drop of 6.2. So combining Brazil and Argentina, we are at 0%. ANFAVEA is projecting 0% growth as well for the full year of 2022. So 2022 aligned with the numbers of 2021. In terms of production of light vehicles and heavy vehicles, 2022 should be very similar to what 2021 was.

Now let's move on to Slide 5. In Slide #5, you can see the production of vehicles in North America and Europe. In the upper part, North America, starting with light vehicles and the second line, medium- and heavy-duty vehicles. In light vehicles, we had 4.8% growth in North America. And in heavy vehicles, we had 14.6% growth. In Europe, production of light vehicles had a decrease of 11.3% and the production of medium and heavy-duty vehicles had a drop of 13.9%.

So Europe was hardly hit also because of the war. Russian numbers are also impacting these numbers here. So we see a more positive scenario in North America than in Europe. The projection for the full year of 2022 compared to 2021 in North America for light and heavy vehicles, we are talking about 7% to 8%.

So similar numbers for both light and heavy vehicles from 7% to 8%. In Europe for light vehicles, a projection of minus 0.5%. So 2022 should be similar to 2021. And in heavy vehicles, a full year projection of minus 9.5%. So for heavy vehicles, we have this projection of minus 10%.

Now on Slide #6, here, you can see the evolution of the net revenue performance. In the first chart, we have the second quarter of '22 against the second quarter of '21. We have volume over price and then exchange rate variation. In the first chart, I'd like to highlight the last column, the variation of net revenue for original equipment, domestic, we had growth of 24.2%. So outperforming the market when it comes to the production of these vehicles. In exports, we had a decrease of 8.4%, pretty much aligned with the drop of the exchange rate, which was minus 6%.

The heavy duty vehicle market in Europe dropped so that impacted the revenue of exports here with a drop of 5.4%. Aftermarket domestic, 35% increase, and aftermarket exports, 19.5%. So original equipment plus aftermarket amounting to 14.7% compared to the second quarter of '21.

Now in the chart at the bottom, we have the revenue for the first half of '22. And then we have volume over price and exchange rate variation, and then the numbers of the first half of '21. And in the last column, we have the total variation. For original equipment domestic market, growth of 18.9%, above the growth in vehicle production that we just saw and an impact in exchange rate variation of 0.8%.

This is the conversion of Argentinian pesos to Brazilian reals. Original equipment exports, a drop of 7.8% with a mix change rate impact of minus 6.6%. So an exchange rate impact leading to this drop in volume over price. Consolidating original equipment, we had a growth in the net revenue performance of 3.7%. Aftermarket, domestic market growth of 22.9%. And before going to the aftermarket numbers, let me give you some comments about the quarter.

The main reasons for revenue growth in the first quarter of '22 of original equipment in the domestic market is our customer mix. Some of our customers were not producing their models last year, so that impacted the numbers of 2021. And that's why in 2022, we see this increase in revenue.

We also see revenue of tooling for some new projects impacting the numbers here. And the third effect comes from new products that led to an increase in the company's market share in original equipment domestic market. And in exports, the main effect leading to this drop was the exchange rate variation.

Okay. Now let's talk about the aftermarket. Domestic market, growth of 22.9% with a negative foreign exchange impact of 10%. Without that, we would have had an increase of 33%. So the aftermarket is going strong. It was already going strong last year, and we are seeing growth this year. So we see heated demand.

And that happens when we don't have very good sales of new vehicles. And the aftermarket benefits from that. People will have their cars serviced to continue using their cars, so that affects the aftermarket segment. We also have local production of some components that also led to this increase in the aftermarket domestic numbers.

Export, increase of 26.2% considering the exchange rate impact of 5.9%. So the consolidated aftermarket segment was 23.6%, great post-pandemic recovery as you can see. In total, original equipment plus aftermarket, we had an increase in the net revenue performance in the first half of 2022 of 10.7%.

Now moving on to Slide 7. On this slide, you can see the consolidated exports by region, first half of 2022 against the first half of 2021. We see a drop in Europe. The European market was hit in terms of the production of light and heavy-duty vehicles, and we saw this volume being distributed here through South America and North America. Historically, South America was close to 16%, 16.5%. So last year, it was at 13.9%. And now in the first half of '22, 17.9%. So closer to historic levels.

So this is our consolidated exports by region. Now I would like to turn the floor over to Daniel Camargo again, and I'll be available at the end for the Q&A session.

[Daniel de Oliveira Camargo, executive]

Thank you, Daniel. Okay. Now let's talk about gross margins. You can see here in the chart the evolution, our net sales revenue increased by 14% this quarter and 10.7% year-to-date. With the cost of sales, I mean, these costs have increased by 21% this quarter and 17% in the first half of 2022.

As a result, we see a drop in gross margins of 4 percentage points in the quarter and almost the same percentage for the first half of '22. This is due to the increase in cost of materials. Although this quarter, we have seen stabilization of some prices, including some commodities that have had a mild drop in prices this quarter, and the company is working to pass through to their customers, which doesn't happen immediately as we all know.

Now on the next slide, you can see a summary of our expenses. Selling expenses were impacted because of freight, variable costs and also headcount costs. General and administrative expenses also had a small increase compared to the same quarter last year due to increases in workforce and salary adjustments in Brazil and mainly, Argentina.

Expenses with technology are at the same level because we are maintaining our investment trajectory. So all the investment in technological innovations have been maintained in our company. And other operating income and expenses were highly impacted last year because of the tax credits related to the exclusion of ICMS from the PIS/COFINS calculation basis. That's why we had net expenses this year, normalizing here the other operating income expenses line.

Now I'd like to turn the floor over to Fabio Peres, who is going to give you further information about our financial results.

[Fábio Peres, executive]

Good afternoon, everyone. So let's talk about the net financial results. Here in this chart, you can see a comparison of the second quarter of '22 with the second quarter of '21. And on the right-hand side of the table, you have the comparison between the first half of '22 and the first half of '21. Net profit in the second quarter, BRL 12.2 million against BRL 9.7 million the second quarter of '21. So a 2.5% increase. This is mainly boosted by the SELIC rate that was increased.

And when we look at the average remuneration of 19%, this number is made up of the transactions that happened in Brazil using SELIC rate and our cash invested in Argentina with the BADLAR rate, and that also applies to other quarters. So we have the average year of our compensation and the cost of debt. And we can also see here the financial investments in each period.

And then in the last line, our debt. So when we look at the remuneration of applications and cost of debt and volume, we see an improvement in the second quarter of 2.5% and year-to-date of BRL 16.5 million. Now let's talk about the exchange rate variation in the first quarter. We had BRL 13 million net versus BRL 17 million. So an improvement of 4.1%.

There was also an exchange rate variation that helped us greatly, which is the ACC, exchange rate variation of BRL 22 million. Now other transactions are made up of interest on equity in our subsidiaries in Africa. So there is a natural hedge here between lines 2 and 3.

Now looking at the net results of the quarter, we had an improvement of 8.6% and year-to-date, a drop of BRL 4.6 million. Now talking about net monetary variation, we had an increase in expenses of BRL 4.1 million in the second quarter and year-to-date, BRL 2.8 million. That monetary variation comes basically from the correction of our labor and fiscal legal actions here that are corrected with the SELIC rate.

Now on the next slide, in the first chart on the left-hand side, we have comparisons from June to December '21 of our cash, June '22 to December '21, the rollout of the debt that matured in the beginning of June this year, and we rolled them out according to the chart at the bottom.

So we rolled them out to May 23, and we did a new reasonable BRL 150 million that will mature in May 2024. So here, we had a cash of BRL 508 million in December '21. And in June, we have a cash of BRL 270 million. So this reduction was mainly due to the payout of interest on equity and dividends made on May 27.

About the cost of this debt, this debt is distributed in 2 main pillars here. The first one is FINEP, accounting for 28.2% of our total at a cost of 6.42%. And the second pillar, ACC and NCE, accounting for 72% with a weighted average cost of 2.92%. When we weight this out, we have a total cost of 3.55% a year, way below the SELIC costs. That's why we had those results of interest we mentioned earlier with numbers that are below market numbers.

Now the chart at the bottom, you can see our investments in November '21, a CapEx of BRL 107.6 million was approved, of which up to the first half of this year, we have invested BRL 39 million with a total depreciation of BRL 50 million, which accounts for replacement of depreciation of around 79%.

Historically speaking, we have CapEx investments that are stronger in the second half of the year. So we have BRL 70 million to be invested in the second half of the year. This already started in the month of July and is happening now also in August. So we plan to achieve the total approved amount of BRL 107 million of CapEx for the year.

Now let's move on to the Q&A session. Myself, Daniel Brasil and Daniel Camargo will be available to answer your questions.

[Operator]

[Operator Instructions] Our first question is by Pedro Fontana from Bradesco.

[Pedro Fontana, analyst]

Congratulations on your results. I have 2 questions. First, about your second quarter margins. We've seen other companies with aftermarket exposure also showing a trend of increase in margins. In the case of MAHLE, was that similar to your consolidated numbers with a drop of 2.3 percentage points in the second quarter. How are you passing for prices this quarter? Were you also subject to other effects such as foreign exchange rates and other factors? And what do you expect for the second half of the year?

Now my next question, can you talk about the risk of a global recession and a possible energy crisis in Europe? How can this impact MAHLE's numbers?

[Daniel Alves, executive]

Well, Pedro, I'll start and then Daniel Camargo will add to my answer, okay? Thank you for your questions. About the margins or about the pass-through of crisis, we have our aftermarket revenues and OE that are different dynamics. For the aftermarket, we have market conditions impacting not only MAHLE, but also its competitors and also the exchange rate. But it's a different dynamic from original equipment in which we have windows of negotiation to pass through these increases.

So this is a challenge we've always had. We're working on costs, looking at the materials. As Daniel Camargo said, some of the raw materials already have more stable prices. And in a few cases, even decrease in prices. But this is a different dynamic. So aftermarket is being led by the market itself, considering volume and price. And in original equipment, the contracts with our customers and the rules and dynamics of cost detailing and the -- we're trying to pass through these price increases.

About the risk of a global recession and an energy crisis in Europe, that's like a million dollar question, right? We've been working to meet the demands of the scenario. Since 2019, we -- I mean, we had a higher volume. The market suffered a great drop in 2020. Now in 2021 and also in 2022, not only in Brazil but also abroad, we have not gone back to the levels of 2019 yet. But the industry is adapting to this new market, and we will monitor it continuously.

We work with a rolling forecast every month. We reassess the scenario, and we adjust our capacity to what is possible as quickly as we can in order to have resilience to adjust our volumes to the market conditions. Of course, if there is a recession, this can impact us, but the company's resilience will tell what our results will be, and MAHLE has been showing a lot of resilience. If you look at the results of recent years, you'll see that we've been quite successful in doing so. I'm not sure I answered your questions.

[Pedro Fontana, analyst]

Yes, you did.

[Operator]

Our next question is by Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. First, about selling expenses. You talked about the cost of freight, labor and also about the fact that this line is more variable when the revenue increases. Should this be at a higher level as percentage of revenue? Maybe freight costs are not that easy to pass through, but what can you do in order to increase your EBITDA margin, maybe distributing the selling expense better.

And the second question is about capital. You have credit lines that are quite advantageous in terms of costs. Right now, the SELIC rate is higher, that generates a financial revenue, and some of the loans, would it make sense for the company to lever the balance sheet a bit more, there might be a recession, a crisis in Europe. So wouldn't it be better to work with a more robust cash position since this can generate a positive impact on your P&L?

[Daniel Alves, executive]

Marcelo, I will start by answering your first question. And first, thank you for your questions. About the cost of sales. The freight costs increased significantly, in some cases, doubling in prices, and that was an item that we didn't have detailed in our cost breakdown for every situation with our customers. So this is changing now.

We're working now in a thorough way, in a detailed way with our customers to work on this. We've been discussing this since last year. We're trying to work to have better costs, always aiming to optimize, transport the best route and the best contract with the suppliers and service providers, but that's always discussed with our customers so that we can achieve a balance of cost over price. Now about your second question, I think, Daniel Camargo or Fabio can answer it.

[Daniel de Oliveira Camargo, executive]

Marcelo, thank you for your question. About the capital structure, we've been discussing this internally, and we considered the possibility of leveraging this. This is time for economic planning, and we have this rolling forecast for our operations, and we're now devising our economic plan. We started that in early August, and this should go up to the beginning of next month, so that we have all the numbers and we know about all of the raising rounds for this year and next year.

So yes, we're looking at that. We're in touch with BNDES and FINEP to see if there are lines that can benefit us. And these lines that we mentioned, NCE and ACC, these are basically in euros. So we are careful to keep the natural hedging of our debt not to include the hedging costs in it since the SELIC rate is so high. When you have a spot today and you project it for a year plus the banking spread, it can get up to 15% above what is being practiced right now.

So the cost of hedge today is quite high today for you to have in BRLs. So we're always careful, and we're always trying to keep our natural hedge to maintain costs. And these operations have natural hedge. That's why they are so well. But answering your question, yes, we've been planning for this.

And as soon as our numbers are finalized, and we'll see the cash generation that we'll have, then when we know exactly what the [ NCE ] for the coming months is. Depending on its level, we will also raise funds to lever and achieve financial results in our P&L. I'm not sure I answered your question.

[Marcelo Motta, analyst]

Yes, you did. It was very clear.

[Operator]

Our next question was in writing by [ John White De Silva ]. He says, congratulations on your results. About the movement in India to adopt the technology of Flex engines. Can this be positive for Metal Leve in future exports?

[Daniel de Oliveira Camargo, executive]

Well, I can answer that question first. Thank you, John, about our results. Indeed, we're very proud of those results. It hasn't been easy. It's a lot of work and effort implemented for us to achieve those results. About India, well, at least considering this first analysis, we don't think we'll be directly impacted at first. Our main export markets are Europe and North America. We don't have significant exports to Asia, not as much as North America and Europe, at least. But it's interesting in terms of possibilities related to CO2 emissions. So we always ask that question about the Brazilian market.

We see the use of more electric vehicles here and Toyota's worldwide CEO said the villain is carbon and not combustion engines. So that will depend on where the energy is produced. So the energy sources. And India is now doing that movement. In Brazil recently, we saw the government indicating that they're going to take into account the CO2 emissions and how the energy is generated. Manufacturers have also said they will invest to produce blocks, engines and turbo engines.

So yes, we see a decarbonization movement, not only in electric cars, but also alternative fuels, the use of ethanol, which is so widespread here in Brazil. So we see this in a positive way. And we look at this here at the domestic market to try and see what will be the technological route adopted by the Brazilian market.

[Operator]

This concludes the question-and-answer session. The other questions will be answered by the IR team at the end of the event. Now I would like to turn the floor over to Mr. Daniel Camargo for the final remarks.

[Daniel de Oliveira Camargo, executive]

Thank you very much for joining us in yet another conference call, and we hope to see you in our next call. Thank you very much.

[Operator]

This concludes MAHLE Metal Leve's earnings conference call. Thank you all for joining, and have a great day.