Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2023-Q2

[Caroline Chiarini, executive]

Good morning, ladies and gentlemen. Welcome to MAHLE Metal Leve's 2023 Quarter 2 Earnings Conference Call. This call is being recorded, and the replay will be available at the company's Investor Relations website where the presentation is also available for download.

[Operator Instructions]Before proceeding, let me point out that any forward-looking statements made during this call are based on the beliefs and assumptions of MAHLE Metal Leve's management and as well as information currently available to the company.

These forward-looking statements may involve risks and uncertainties because they refer to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and the general public should take into consideration that events relative to the macroeconomic environment, the industry and other factors may lead to results that differ materially from those expressed in such forward-looking statements.

Today, we have here with us Mr. Nathan John Quye, CFO; Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager; and Mr. Fabio Lopes Peres, Finance Manager.

Now I'd like to turn the conference over to Mr. Nathan to start his presentation.

[Nathan Quye, executive]

Hello. Thank you. Good afternoon, everyone. Ladies and gentlemen. Welcome to MAHLE Metal Leve's Earnings Conference Call for Quarter 2 2023. It is a pleasure to have you join us today. Before we start with today's agenda, I hope you're all safe and healthy. And at the end of this presentation, we will be available for a question-and-answer session. As for today's agenda, this agenda is very similar to that of previous additions. We will start with the quarter highlights and overview of the market given by Daniel. Then I will give you more details about our results. And then you're going to hear from Fabio about the company's net income. And at the end of the presentation, we will leave some time for questions.

On this first slide, we have an overview of our net sales revenue. This was a very positive quarter comparing year-over-year with quarter 2 2022, in terms of sales. But the market has some differences. In terms of the domestic market for original equipment, there was a slight drop compared with quarter 2 2022, particularly for heavy vehicles. In quarter 2, when we switched to Euro 6, there was a drop in the numbers, and Daniel will give you more information, but our numbers are lower than those of 2022.

In terms of exports for original equipment, our numbers are well above year-over-year. So markets were better in 2023. Now as for the domestic aftermarket, we had a more than 20% increase year-over-year. It was the opposite of the export aftermarket. The export market, the aftermarket for exports is going through some difficulties because of political instability and some problems in South America. And Daniel will give you more information about this later on.

In respect to our distribution to shareholders in 2023, we paid out more than BRL 500 million, it was a record-breaking number for us. This was paid out in May. There was an impact on quarter 2 2022, but this was a historical record for the company. So we're very happy with this distribution to our shareholders, and this is very much in line with our results. And the key indicators as I had mentioned, the net revenues were well above compared with quarter 2 2022.

Our EBITDA was very similar when compared with quarter 1, 2023 to BRL 152 million, up 40% compared with quarter 2 2022. So this result makes us really pleased and as I said, market for heavy vehicles was not easy in quarter 2, but our EBITDA numbers are positive.

The EBITDA margin was slightly below compared with quarter 1 this year, but well above the numbers of 2022, and I'm going to give you more details later about this. Our net income showed an improvement compared with quarter 1 and very strong results for quarter 2 this year.

Now I would like to turn the floor to Daniel Brasil, and he's going to give you more details about our sales.

[Daniel Alves, executive]

Thank you, Nathan. Good morning, ladies and gentlemen, and once again, thank you for joining our conference call to announce the results of quarter 2. Now let's move on to Slide #4. Here, we have the sales and production for the Brazilian and the Argentinian market as well as the production for North America and Europe, which are the main 2 export destinations of the company.

So let's start with Brazil for light vehicles. There was an increase in the first half of this year, a 9.6% increase compared to the first half of last year. Here, it's worth noting the effect of the government incentives for the purchase of new vehicles. There were some incentive plans for vehicles that cost up to BRL 120,000 of 1.5% to 10.8% in terms of discount rates. So we had a lower comparison basis in 2022. Last year, in quarter 1, we still had some remaining effects of the COVID pandemic and some floods that we had in the beginning of the year. So this year, quarter 1 was lower in terms of sales when compared with quarter 2, but it was still higher than quarter 1 last year. So 9.6% increase for light vehicles.

We give highlights to the month of July. It was the highest sales in terms of -- the highest numbers -- we had the highest numbers in July in terms of sales of vehicles because of the incentives offered by the government. PharmEx also offered some additional discounts for the purchase of new vehicles. So that's why we had better numbers in July.

In Argentina, there was a 14.1% increase. So despite the crisis in that country, we have very high inflation rates and also difficulties to pay the country's debts, you know about the conditions in Argentina. However, there's an effect here to protect the equity so people will buy vehicles in Argentina to protect their equity. And they'll have elections in the end of the year in Argentina. So there's an expectation of a devaluation of the of their currency. So this ends up impacting the sales in Argentina as well.

When we combine Brazil and Argentina, the total growth was 10.4% for light vehicles. The prospects for the second half of this year is very positive. So we are expecting higher sales than those of the first half of the year.

Now moving on to medium and heavy vehicles. We had very different quarters in the first half of the year. We had the Euro 6, the start of the Euro 6, so in the first quarter, sales were very high because they were still selling trucks and buses with the Euro 5 emissions and now in quarter 2 2023, there's a hangover effect of the sale of these vehicles. Euro 6 vehicles have a higher price now. And also due to the discounts offered by the government, we have not yet seen the effects of that. There's increased bureaucracy. So that's why we're not yet seeing the effect on the sales of trucks and buses. But we are expecting to see this effect in the second half of the year. So we're expecting a second half better than the first half for trucks and buses in Brazil. Currently, there's a negative 1.6%.

In Argentina, there was a 5.2% drop also in effect of their crisis. And combining Brazil and Argentina, the total drop was 2% for the sales of trucks and buses. Now in terms of production, in Brazil, there was a 6.8% increase in the first half of the year. In Argentina, 21.4%. Combining Brazil and Argentina, the total increase was 9.7%. And for production, there is also an expected higher production in the second half of the year compared with the first.

For medium and heavy vehicles, first quarter, there was a drop of 33% in Brazil and 11% in Argentina and combining the drops to Brazil and Argentina, the total drop of 32%. There will be some adjustments in the government program that should be beneficial for the sales of Euro 6 buses and trucks and also, there is a record-breaking cohort that will come in the second half. So we expect a better second half compared with the first half of 2023.

Now as for Europe and North America, numbers are very positive for light vehicles in Europe, there was an increase of 14.8% in the first half of the year. And for medium and heavy 10.3% in terms of production. In North America, an 11.5% increase in the production of light vehicles and 25.9% for medium and heavy.

Combining Europe and North America, the total increase in the production of light vehicles was 13% and for medium and heavy, 17.9%. And this will consequently contribute to the increase in our exports.

Next slide. On Slide #5, we see the evolution of our net sales. It's worth noting the first half of 2023 compared with the first half of 2022. For domestic original equipment, our sales increase 2.8%, so despite the decrease in the heavy vehicle market, we were able to maintain an increase of 2.8%, we also gained market share for some of our products and also some of our exports, so some of our export customers also contributed to this increase despite the drop in the heavy vehicle market.

For original equipment exports, we saw an increase of 15.1% with a subtotal for original equipment of 9%. Comparing the first half this year with the first half of last year. Now moving on to the aftermarket domestic. There was a 28.2% increase in our sales. Here, we are taking into account a market share gain and also heated up market, which is what we have right now.

The trade balance also was positive due to our production of valves in the Rafaela site. So we've been able to import the components, and this leads to a market share gain, which is also contributing to the increase in domestic aftermarket. And for the export aftermarket, as you heard from Nathan, we had a 23.3% drop. We are seeing some flatness, some stability in South American countries. There was also an increase in the interest rates. And capital is more expensive now. So this ends up having an effect in our export aftermarket. The subtotal for aftermarket was a 17.1% increase in the first half of the year. With total sales increase of 12.2%.

Now let me give the floor back to Nathan and I will be here to answer your questions at the end of the session.

[Nathan Quye, executive]

Thank you Daniel. Now let me go into more details about our results for quarter 2 compared with quarter 2 last year. As we heard, the sales level was much higher last year due to all the reasons mentioned by Daniel. And the selling cost, the cost of sales was much lower or much better when compared with 2022. So this leads to a gross result over 30% compared with 25.4% last year. And if we take into account, the first quarter this year, we have a product mix that leads to higher aftermarket sales compared with last year. And also, there were some improvements that we made in our plans. And this all resulted in a gross result much higher than that of 2022.

So as for our expenses, let's start with our selling and distribution expenses. In absolute numbers, they were higher than last year, BRL 87.5 million. And there are 3 reasons to explain this. First, we had more costs relative to advertisement. One specific example was Automech in April. In April 2023, we had this important event, Automech that we didn't have last year. So this is the first reason for this increase in our selling and distribution expenses. But this also had a positive impact because by attending this type of event, we are able to advertise our company and increase our aftermarket sales, which are very relevant for us. The second reason is the increase in freight expenses, relative to aftermarket sales, also export sales. And with this increase in sales, of course, this leads to increased freight and distribution expenses.

The second line refers to G&A expenses. G&A expenses were significantly below those of 2022, but we had the effects of inflation rates on our personnel costs compared with 2022. We also had technology expenses that increased in number and percentage, but they were also very positive for us because this means that we are increasing the services provided by our engineers. Our engineers are now more focused on providing services to our partners, our MAHLE associates in North America. And these services are being sold to the other locations that MAHLE has. So they increased the cost, but they also bring positive results to the region and to MAHLE Metal Leve overall.

And finally, we have other operating expenses. There's no major change in quarter 2. But when we consider the first half, the first half of 2023 was much better than the first half of 2022. Because we had lower contingencies compared with 2022. So these are the details that I can give you about our results for quarter 2. But overall, the company is very pleased with our quarter 2 numbers, and for quarter 1 as well, 2023.

And our gross profit was BRL 657 million, so more than 30% increase in our gross margin. And this is the result of all the hard work that everyone in MAHLE Metal Leve has been doing. And did in the first half of the year.

Now I turn the conference over to Fabio, and he's going to go into our net financial results, and then I'll be back for questions.

[Fábio Peres, executive]

Thank you, Nathan. Good afternoon, everyone. Now going into our net financial results. So let's first talk about the first half of 2023, and then we can talk specifically about quarter 2. Looking at the first half of 2023 and 2022, we had total finance income and costs, composed by interest income on financial investments, loans and borrowings and other incomes.

In the first half of 2023, we had positive results of BRL 44.2 million. So basically, these results came from interest income of financial investments. So when you look at our financial investments, we had a foreign exchange of BRL 5.4 million, the monetary variation of BRL 10.9 million. And this amount comes from the higher interest rates. This increase in interest rates comes from Brazil and Argentina. Argentina in the first quarter of 2022, the average interest rate that was used by financial institutions was about 45%. And in the second half of '23 -- second half of '22, it was about 86%. So the difference comes from these higher interest rates in Argentina. And of course, that this increase in interest rates were accompanied by an increase in inflation rates as well.

So when we look at quarter 2 2022, we see the same effect of the higher interest rates. And in quarter 2, our net income results were BRL 12.3 million for 2022 and BRL 26.2 million for 2023. The exchange rate variation, there was also a significant improvement. We had minus BRL 5.4 million compared with a positive BRL 8.4 million in 2023 and the competition of the foreign exchange variation, we should always consider ACC and NCE because we use natural hedge with our invoices and accounts payable. And this is important to note because when we combine the 1.2 and 1.1 , we have BRL 15.8 million.

However, the exchange variation of our loans was positive, BRL 26.1 million. And on the bottom, we had a monetary variation of BRL 11.8 million in 2022 versus BRL 5.2 million in 2023. This is due to reductions in our tax and labor provisions. So for the quarter, we were -- we had a negative BRL 4.9 million in 2022 versus a positive BRL 29.4 million in 2023 and the positive delta was BRL 34.3 million.

The next slide shows our indebtedness, so let's start with our net cash. We had a reduction from December 22 until June 2023 of nearly BRL 200 million in our net cash and this was basically because the cash was used for the payment of BRL 559 million of interest over capital and dividends.

Our loans were in line. There was only a 10% increase during the period due to the cash generation that we had and the cash that we had in 2022. So we didn't really have to raise any funds to pay for these loans.

And our net cash position, we had other penalties that we had to pay. So we had a positive -- in 2022, we had a positive BRL 91.3 million, and now we have a net debt of BRL 155.2 million. And this reduction, as I said, is due to the payout of dividends and interest over capital which was already mentioned by Nathan.

I stop here. And now I'm available for questions. We will open for questions now and Daniel, Nathan and I will be available to answer your questions. Thank you.

[Caroline Chiarini, executive]

[Operator Instructions] The first question is from Andre Ferreria, Bradesco BBI.

[Andre Ferreira, analyst]

Good morning. Congratulations for your results. I have two questions. First, you reported a very strong gross margin over 30% in quarter 2. So initially, we may think that MAHLE is being able to hold back the prices to customers even with the changes in raw material prices. So is my understanding correct?

And can you give us more color about your negotiations with your clients and what we can expect in terms of margin until the end of the year? And the second question is, can you comment on the main initiatives and investments for carbonization in your portfolio?

[Nathan Quye, executive]

Yes. Thank you, Andre, for your questions. I will start and then Daniel can also add if he wants. Yes, the gross margin was very strong this quarter, over 30%, as you heard. There were, of course, some reasons for that. The product mix was much better in the aftermarket in 2023 versus 2022. And the aftermarket accounts for 42% of our sales. So it's very relevant.

Now in respect to the original equipment market, we have contracts with most of our customers to adjust the prices according to the raw material prices, as you mentioned. Of course, each contract is individual, it depends on the customer, but the change in prices is provided for in our contracts.

As for your second question, could you please repeat your second question? Please.

[Andre Ferreira, analyst]

Sure. Can you please comment on the main initiatives and investments that you're making to address carbonization in your portfolio?

[Nathan Quye, executive]

Oh, of course, thank you. We have MAHLE Metal in Jundiai. We also have the MAHLE Group, and they have 14 locations around the world, and everybody is working strongly on the nitrogen technologies as well as electric vehicles and MAHLE Metal Leve has different products planned for the future as well. So we are working in different fronts. But here, specifically in the South American market, it's slightly different as you probably know.

Biofuels are very important here. HVO is very relevant here. So we are working with the academia. We're working with suppliers and with the associations -- professional associations to keep evolving in this sense in the sphere of biofuels that use -- that are used by traditional engines. So we have different fronts, as I said, it's not just one way or just one option to work on this area in the future? I don't know if I answered your question, Daniel.

[Daniel Alves, executive]

Andre, thank you for your question. And I think that Nathan said it really well. We're in line with our customers' projects. So we have different initiatives being conducted with our clients that go through hybrid vehicles. So our tech center, not just for light vehicles but also medium and heavy, as Nathan mentioned. We have the best, we have the hybrids, and we are very much aligned with the market and monitoring and tracking the initiatives in the market and the discussion about which will be the way to go in terms of decarbonization of our market. In MAHLE Metal Leve will be working together with its clients to meet the needs in this field.

[Caroline Chiarini, executive]

[Operator Instructions] The next question is from Jonathan Koutras, JPMorgan.

[Jonathan Koutras, analyst]

Congratulations for your results. I have two questions. The first one is about the aftermarket exports if this level that you saw in the first half of the year will be sustainable until the end of the year of about BRL 120 million per half or if we should expect a reduction due to the foreign exchange issue.

And the second question, can you talk about your investments made in quarter 1, another quarter with CapEx below depreciation, even if the company is showing robust growth. So I'd like to know where these investments are being directed to your CapEx and if we can expect BRL 10 million to BRL 12 million per quarter as a sustainable level of investment for the company.

[Daniel Alves, executive]

Let me answer your first question. Thank you for your question. This is a very challenging market. So giving you any trends regarding the second half of the year is complicated because the car brands, the car makes and we don't know what to expect in terms of the level of production of vehicles. But we are working to improve this revenue. But as we heard this economic instability, political instability of the countries in the region has been a hurdle. So it's a challenge. And for investments, Nathan, would you like to answer that one? No, you can go ahead. What I can tell you...

[Nathan Quye, executive]

Yes, I can answer the second question. Jonathan, in respect to our investments, every year, we know that usually, the second half is lower. And the second half, we see an increase in the level of investments that we make. So our plans and the POs that we have issued for machinery, we will certainly see an increase in the second half of the year. The investments that we are planning to make.

[Caroline Chiarini, executive]

[Operator Instructions] I just read a question from Pedro Santoro. This increase in our margin, Pedro, as I already mentioned, was an effect of the product mix, which was more concentrated on the aftermarket. This was the main reason for our higher margin this quarter.

[Operator Instructions] The next question is from Mr. Jonathan Koutras, JPMorgan.

[Jonathan Koutras, analyst]

Just a follow-up question. I'd like to hear more about your supply chain dynamics and where your bottlenecks are. And in [indiscernible] I am -- which one is suffering more and which could improve -- what could improve in your supply chain in the upcoming periods.

[Nathan Quye, executive]

I can answer that one. And Daniel, of course, step in if you want to add something. For supply chain, we know supply chain is never easy in our automotive industry every day is a challenge, right? But it looks a little easier this year compared with last year. in terms of supply chain when we compare with 2021, 2022. But it's never easy. I would just like to add that we can say the situation is more stable when compared with the previous quarters or previous periods. We're always tracking and monitoring, but we can say the situation is more stable now, both for OE and IEAM.

[Caroline Chiarini, executive]

[Operator Instructions] We have a question from Remi about the interest rates. About the lower interest rates and how this will help MAHLE Metal Leve.

[Nathan Quye, executive]

This will help the market as a whole. We already had a first decrease in the standard interest rates, and we are expecting more in the future. This will certainly increase the financing of vehicles. And of course, this will lead to an increase in sale. As for expansion and acquisitions, this is the more sensitive issue. I can't really comment on that. But about the interest rates, this will certainly contribute to better results, not just in the auto industry, but to the all industries overall because the interest rates are very high in Brazil right now.

[Caroline Chiarini, executive]

This question-and-answer session is now closed. Now I'd like to turn the conference over to Mr. Nathan Quye for his final remarks. Mr. Quye, you may proceed.

[Nathan Quye, executive]

Once again, I'd like to thank you all for joining our conference call. Thank you for your interest. This was a very strong quarter for us. We know the market is not easy with all these changes from Euro 6 in heavy vehicles. But with our excellent team we are sure that MAHLE Metal Leve will continue to present good results. I'd like to thank the staff present here today, Daniel, Fabio. Thank you for joining me. And if you have any further questions, we are always available to answer them. Thank you all for joining. Have a great afternoon and a great week. Thank you.

[Caroline Chiarini, executive]

This conference call is now closed. Thank you all for attending, and have a great afternoon.