Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2018-Q3

[Operator]

[Foreign Language]

[Audio Gap]

[Christian Binkert, executive]

from domestic sales full year was 17% and for export orient it's around 20%. And yesterday in the Board of Directors meeting it was decided to distribute BRL 71.7 million interest on equity, which will be paid out end of December 2018. And one other positive news in October 2018, we received the Transparency Award from ANEFAC for the good quality, which Mahle Metal Leve is disclosing in the financial statement in regards of 2017. And of course not to forget a very good and strong quarter for Mahle Metal Leve in regards of EBITDA. We reached in the third quarter EBITDA of around 21% compared to a similar third quarter 2017, 22%. And now I would like you give -- hand over to Alves to talk.

[Daniel Alves, executive]

Good morning, everybody, and thank you for attending our conference call today. On Slide 4 where we had it in Brazil and Argentina registration and production for the year-to-date September, this year and last year. We have 2 tables. The first one, which is light vehicles and the second one, which is the medium and heavy vehicle. On the light vehicle, we have in Brazil, Argentina and the combination of the 2 countries. For Brazil, we can see an increase of 13% for the vehicle sales and 9.6% for the vehicle production. In Argentina, we had a decline of minus 12% and an increase of 5.6%. This included [ delays ] related to the Brazilian market so the 2 markets are very correlated. It's interesting to mention about the Argentina, if you look, you want more months so we included October on these numbers we are right at minus 16%. And also the full year expectation for the Argentina market, it's to finish the year around 24%, 25% declining. So if we combine the year-to-date September of Brazil and Argentina, we have in sales 5.8% increase and in the vehicle production 9% increase. The 2-year expectation for the market in vehicle sales, the combination of the 2 countries it's 2% -- around 2% and for vehicle production 5%. So even with today the declining of Argentina, we will finish the year with a increase when we combine the 2 countries.

Moving to the medium and heavy vehicle. We have for Brazil almost 29% for the vehicle sales and in production we had 24.5%. In Argentina, the same situation for the light vehicle so we are declining 9.2% in the year-to-date September and minus 6% on the vehicle production. The combination of Brazil and Argentina in vehicle sales for the medium and heavy it's 17.7% increase for sales and now around 22% for the vehicle production.

In this case the full year expectation for the combination of the 2 countries it's around 15% for the vehicle sales and 22% for the vehicle production.

Regarding the next year, 2019 year, we have a positive perspective for Brazil. And for Argentina, also we have a decline for vehicle sales. In June, we'll have your high comparison for the first half of the year. Therefore, we will have again our expectation of decline on vehicle sales for the next year, around 20%. However, when we combine Brazil and Argentina, the expectation for the next year it's a positive perspective, around a 2%, 3% on vehicle sales and therefore also for the vehicle production.

Moving to Slide 5. We have the vehicle production for the main markets of exports of Mahle Metal Leve. In North America, we had minus 0.5% on the vehicle production. However, the medium and heavy vehicle we had a 12.1% increase. In Europe, we had 1.1% increase. Also for the medium, we had a high number, so 4.8% increase on the vehicle production. And total vehicle production, 0.4%. However, as the medium heavy is high, we had some benefits for the Mahle Metal Leve. We also had a good participation for these markets in the export business.

Now moving to Slide 6 where we have the net revenues performance by market. In this case, the first column is the third quarter this year. We have the volume/price, the FX variation and the fourth column we have the last year quarter.

Moving directly to the last column where we have the variation. We can see on the original equipment, an increase of almost 19% on the Mahle Metal Leve sales, and on the aftermarket we have an increase of 19.4% and the combination of the original equipment and the aftermarket, we have the 19%.

If you look on this quarter, we have an impact, a positive impact because of, we had the truckers' strike from May. This affect our sales, and also in June. Therefore, we have the stronger sales on July and also in August. This is one of the reasons of the strong third quarter for this year comparing to the last year.

Now moving to Slide 7. In this case, we had net revenues performance by market. The year-to-date September this year compared to the year-to-date September last year. On the second column, we have the volume/price, on the third column, the FX variation. Again, moving direct to the last column. On the original equipment we have an increase of around 20%; on the domestic market 23.6% increase; for the export, a 17% increase. This performance on the domestic market is higher than the market. We look at the vehicle production at around 10% increase and our sales improved 23.6%. The main reason for this better performance is the high increase of the medium and heavy market, so the truck convert and we [put through ]. Also the sales of parts the OEM business and aftermarket for new business. So these are the 3 main reasons for our better performance compared to the vehicle production.

In the export market, we can see the FX impact around 15% and the volume price impact of 2%. In this case, we have a higher market share for one business for the medium and heavy market, it sold [ Delinus ]. This is the main reason for our increase on volume in this case.

Going to the aftermarket, we have a consolidation of 8.9% for the domestic and export. In the domestic market, we have a 4.4% and a negative impact for the FX around 8%. The reason of this negative impact is mainly because of our consolidation of the Argentina. So the sales we have in pesos we convert to Brazilian reais. So we have this negative impact of all the FX for the domestic market for the aftermarket. Therefore, the volume price impact for the aftermarket domestic is 12.2% increase. In the export market, we have 26% increase and a FX impact of 10%. The volume/price impact is 16% increase and the main reason is the Columbia market and Chile and also some new share for the intercompany business. So the combination of the original equipment and the aftermarket it's an increase of 16%, an FX impact of 4.4% and the volume/price impact of 11.6%.

Now moving to Slide 8. In this slide, we have the consolidated export by region. And you can see a similar graph as we had on the last call, an increase of the NAFTA market. And the main reason for this increase it's about, as I mentioned, the share for the medium and heavy customer for [ Delinus ].

Now I will hand over to Mr. Christian, so he'll continue the presentation and I will be available for questions at the end of the conference call.

[Christian Binkert, executive]

Thank you, Daniel. Moving to Page #9 the topic in regards of P&L. As already mentioned, sales in the third quarter was quite strong at BRL 710 million, giving us a margin of 30.5% where we were very comparable to last year it was 31%. If we now to look year-to-date we have sales of BRL 1.957 billion plus 16% compared to previous year and here our margin is improving by 0.9 percentage points to third quarter or year-to-date is 29%.

Page #10, some details about selling, general and administration, R&D and other operating income. You can see that our selling cost in the third quarter are increasing from BRL 37.9 million to BRL 51.6 million, one of the major reasons as already explained in the last call is the truck strike. We still have some negative impact in the third quarter 2018. In addition, we had last year some reversal of accruals which impacts the selling cost quoted to you last year, which did not happen this year. And we also did have a negative impact especially in regard of the selling cost because of the revaluation, the new rules in Argentina, the so-called IAS 29. The main changes in regards of the admin costs where we had last year level of 3% and this third quarter 3.3%. We had a reclassification of some contingencies last year for admin costs to other operating costs. The R&D cost in the third quarter, very similar compared to last year. Last year we had 3.2%, this year we have 2.8%. One of the reasons why we have slightly lower R&D costs is that we had lower third-party R&D, meaning the costs related to third-party R&D is not shown in R&D costs but, respectively, in sales and cost of sales.

Other operating income, a couple of impacts even though they are rather small. Here to mention the details, the details of land and buildings are the first for the quarter and the third quarter of 2018 have lower impacts in regards of the integral, the exports program and the provisional reversals of obsolescent stock accruals.

Moving to Page 11. Last year, third quarter we had EBITDA of BRL 130.26 (sic) [ 132.26 ] million with a margin of 22.2% where our major impacts coming from the growth income meaning really higher volumes, around BRL 32 million. On the other hand, as already mentioned, higher selling cost of around BRL 13.7 million and slightly higher general admin costs by BRL 5.6 million giving our third quarter 2000 (sic) [ 2018 ] EBITDA margin of around BRL 149 million or in percent, 20.9%. Year-to-date, we have last year a margin of BRL 319 million with a margin of 18.9%. This year, we have BRL 380 million, an increase of the margin to 19.4% and the major changes, like, in the third quarter mainly coming from cost income, higher volume BRL 95 million, higher selling costs and slightly higher operating income expenses.

Moving to Slide #12. Net financial results. As we go from top to the bottom, the interest result, we had last year in the same quarter a positive impact of BRL 0.1 million, this year minus BRL 0.8 million. So really no major changes. We can see that our overall investment amounted now from BRL 422 million to BRL 124 million and in the same period the overall interest for investments went down from 8.7 to 6.1. On the other hand the interest expenses, we have a positive impact of minus 9.3 last year, this year minus 2.7, so positive impact of around BRL 7 million and the average net spend now about BRL 180 million and also the cost of debt improved from 8 percent points to 3.6 percent points. In regards of the exchange rate variation, the point number two, also really no change. Last year, we had BRL 4.1 million, this year BRL 3.2 million so it's rather stable and stable as all the monetary variations, that's the third point. Last year minus BRL 11.3, this year minus BRL 10.1. So overall the financial income was last year minus BRL 7.1 and this year minus BRL 7.7, a small negative impact of BRL 0.6 million.

Going to the Page #13, our liabilities short-term BRL 202 million. You can see the distribution over the period since September 2019 (sic) [ 2018 ], there is a major portion in January 2019 at BRL 26 million, and a large amount in March 2019 with BRL 57 million and then in May, once again, BRL 25.6 million. Long-term liabilities, they're BRL 138 million. Well distributed between the periods 2020 and 2023. Cash position, BRL 211 million compared to last year BRL 190 million and overall the net position since third quarter, end of September, is BRL 128.8 million.

Page #14. The breakdown of our financing. Last year, we still had a debt of -- we still had a lot of financing distributed. We changed our strategy a little bit. We have now much more ACC contracts plus 50% but still have a portion with FINEP of around 45% and then around 5% in September distributed by BNDES loans and other loans.

Coming to Page #15. Already mentioned yesterday at the Board of Directors meeting, the board decided to distribute BRL 71.7 million of interest on equity by the end of 2018.

And coming already to the last slide, Slide #16, we expect for the total year an investment of around BRL 106 million, slightly higher than we originally had budgeted. Year-to-date, we have invested BRL 55 million and the total depreciation year-to-date is BRL 68 million. Looking at separations means we have invested 2.8% in the regards of our sales. The same number like previous year where we also had 2.8% and in percent of depreciation we have increased from 65% to 81%.

Thank you very much, ladies and gentlemen, for your attention. If you have any questions, kindly let us know.

[Operator]

[Operator Instructions] Our first question comes from Joao Noronha, Santander.

[Joao Noronha, analyst]

Two from my side. First one if you can comment a little bit more on the current capacity utilization of your operations in Brazil. And also the second question it's more related to import tariffs. If you can give us some idea of the level of import tariffs that your products that you sell in the Brazil mainly on the aftermarket they have -- asking this mainly because of local news discussing the willingness of the new government to open the country more widely to imports.

[Christian Binkert, executive]

Coming to the third point, the current capacity utilization, of course it varies from plant to plant. But in general, we can see from all of them we have currently capacity utilization of around 30%.

[Daniel Alves, executive]

Joao, this is Dan Alves, speaking. Could you please repeat your question, the second question. Should be more clear for me to answer.

[Joao Noronha, analyst]

Sure. The second question is regarding import tariffs. So what level of import tariffs do your main products, they have currently? So looking in terms of aftermarket if we would divide overall, pistons, rings and bearings what's the current level of import tariffs for those products? And my question regards the local news that the new government could be willing to open the country more widely to imports. So just to assess the level of competition that it could face in case import tariffs decline?

[Daniel Alves, executive]

Okay. Thank you. So the [ exact remainder of the imported ] again its [ shelf life ] depends on the product. And regarding should we more open the marketing and also there, another FX -- range of the FX rates. So for now, it's not only for the aftermarket, but also for the OE, for instance for the vehicles, the taxes. So we need to have more clear information or definition to calculate the real impact in our sales. So we have so many variants in this case so we'll not have a good evaluation right now.

[Joao Noronha, analyst]

Okay. So in ballpark numbers or in large numbers, you don't have -- don’t you have an assessment of the level of tariffs currently?

[Daniel Alves, executive]

Yes. I don't have it here right now. We can talk later on so to get more details on it.

[Operator]

Our next question comes from Marcelo Inoue, Citibank.

[Marcelo Inoue, analyst]

I have 2 questions on my side. The first is on Europe. We have seen news about the impact on the automakers in Europe with new ignition test procedures. And I wanted to understand if the contraction in volumes in the OEM exports you had in the quarter reflect that or if there is something else. And if you could break down how volumes for OEM exports performed per region that would help us. And the second question is on the OEM domestic here in Brazil, specifically. You mentioned in the call that you expect growth for Brazil and Argentina combined to grow something like 2% to 3% next year. I wanted to further check with you if an implied growth of 9% to 11% in Brazil makes sense in 2019?

[Daniel Alves, executive]

This is Daniel speaking. Regarding the first question, so talking about the [indiscernbile] period. We expect a positive impact for Mahle Metal Leve because we have the new limits for the through consumption and this will bring more technology to the products, to the engines and for the vehicles. And this for sure will bring more numbers or more sales to Mahle Metal Leve. Regarding the second question on the market, if I understood right your question, so for this year -- at the end of this year, we will finish the year with a positive trend. For the full year truck production for the light vehicle we expect around 5%. And for the next year, even with the decline of the Argentina, we also expect a positive trend in vehicle sales, combining the 2 markets, the Brazil and Argentina. And I hope this answered your question.

[Marcelo Inoue, analyst]

Yes. On the second question, you mentioned in the call that you expect sales in Argentina to contract by 20% next year, right, if I understood you correctly.

[Daniel Alves, executive]

Yes.

[Marcelo Inoue, analyst]

Does that mean, implicitly, Brazil growing high single digit to low double digits next year?

[Daniel Alves, executive]

Yes. The marketing numbers or the numbers out from ANFAVEA, the automakers, they are talking about the 2 digits lower, 2 digits, so around 10%, 9%. So this will, even with minus 20% of the Argentina, we'll bring 2% increase on vehicle sales in combination.

[Operator]

Our next question comes from Gabriela Cortez, Banco de Brasil.

[Gabriela Elerati Cortez, analyst]

My question regards gross margin. You broadly saw a great improvement when you compare the year-to-date review. But you see the third quarter from '18 compared to '17, we see a slight drop in that. I would like to know what you expect from now, if you are expecting improvements for the next quarter and for the next year and how it's going to work? And the second question, you mentioned you're expecting production -- an increase in production of 22% for 2018 in medium and heavy vehicles and 15% in sales. So does it mean that in the fourth quarter, you won't see an advancement in production and sales? Is that correct? That's it.

[Daniel Alves, executive]

Okay. So this is Daniel speaking. So I will answer, first, the second question about the market. So we have as I mentioned in the vehicle sales 15% our expectation for the full year and for production 22%. And the main reason of this, so we have in this case a positive perspective. Also we had the trucker strike in May. We had some customer or some companies buying the old fleet and this also helps to increase the number and also this effect on the export business. So I answered your question?

[Gabriela Elerati Cortez, analyst]

Yes. Yes. It's clear.

[Christian Binkert, executive]

And coming to your margin question, this is Christian speaking. Actually we see the future quite positive, but of course, it depends on many factors, mainly on the volume development, but also the exchange rates and also the material prices that as somebody already mentioned in the call about possible tariffs or non-tariffs. But as a summary, we see the future quite bright, but it depends on many factors, which we often do not directly have an impact on.

[Gabriela Elerati Cortez, analyst]

Could you mention for this quarter what was the highest impact? Was it FX rate or material price?

[Christian Binkert, executive]

The highest impact in the third quarter compared to the previous quarter really was the increase in material costs.

[Operator]

Our next question comes from Marcelo Motta, JP Morgan.

[Marcelo Motta, analyst]

Two questions from my side as well. First, you commented about the increase on freight cost that had a negative impact on the overall margin. So wondering if this is a cost that you guys expect to remain? Or is it more related to some kind of one-off? And the second question is regarding the MBE2 technology and if there is any update regarding this front that you guys could share with us?

[Christian Binkert, executive]

Let's start with your last question, this is Christian once again. Speaking in regards of MBE2, at the moment we are full on track with our possible sales contracts. Not only with the sale contracts also with our expected investment as well as our costs so we rather see an upside potential in regards of the MBE2 business at the moment, especially after the elections. In regards of the freight comp, it's really a combination. Of course we hope that the truck strike will not happen anymore going forward. So this would be a onetime impact as mentioned this new accounting regulation, which is now valid for Argentina, which had a quite high impact on our selling costs, the so-called IAS 29. This will continue going forward as long as Argentina is a hyperinflation country. As a summary, it's a combination of onetime impact that we hope it will not happen anymore, and some impact we are at the moment quite certain. As mentioned IAS 29 is going forward still had -- it will have a negative impact on Mahle Metal Leve. Does this answer your questions?

[Marcelo Motta, analyst]

Yes. The second question is regarding the freight cost and do you expect this to remain, the increase that you had during this quarter? Or it was more like a one-off?

[Daniel Alves, executive]

Could you repeat Marcelo, please?

[Christian Binkert, executive]

Freight cost, freight?

[Marcelo Motta, analyst]

Yes.

[Christian Binkert, executive]

Once again, as mentioned, the freight cost is a combination. The truck strike, which we think and hope is a onetimer, yes? On the other hand, we had some rather fixed impacts due to the new accounting rule in Argentina, the IAS 29, which is valid for hyperinflation countries. And for this impact we think as long as Argentina is a hyperinflation country, we will have some negative impact also going forward. So as a summary, it's a combination of a onetime impact and a continuous impact out of Argentina. So really there are 2 major impacts in the third quarter 2018.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. I'd like to invite Dr. Christian Binkert to proceed with his closing statement. Please go ahead, sir.

[Christian Binkert, executive]

Once again, thank you, ladies and gentlemen, for participating on our call. Have a nice day, nice evening and looking forward to hear you very soon again. Thank you. Goodbye.

[Operator]

That does conclude Mahle Metal Leve conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.