Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon in Brazil, everyone, and thank you for waiting. Welcome to Mahle Metal Leve for the Third Quarter of 2019 Results Conference Call. With us here today we have Dr. Christian Binkert, CFO, Chief Financial Officer; and Mr. Daniel Alves, Marketing and Corporate Communication Manager. This event is being recorded.

[Operator Instructions] This event is also being translated simultaneously through the Internet via webcast and can be accessed through the Investor Relations website of the company, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Mahle Metal Leve management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur.

Now I'll turn the conference over to Dr. Christian Binkert, CFO, to begin the presentation. Please, Dr. Christian Binkert, you may begin the presentation.

[Christian Binkert, executive]

Good morning, ladies and gentlemen. Christian Binkert speaking, and welcome to the third quarter conference call. Really our pleasure speaking with you once again.

If we come to Slide #2, the agenda, we will start as usual with the highlights for the third quarter and year-to-date numbers, September numbers. And then Daniel will take over for the market overview, and the net revenue performance by market and the last 3 topics, namely the P&L and EBITDA, the financial management and CapEx & depreciation, then from my side will be commented once again.

Moving to the Page #3 of the presentation. Sales in the quarter 3 2019 were BRL 645 million, which represents a decline of 9% compared to last year's third quarter 2018. In the first 9 months of 2019, the sales was lower of 1.4%. We will see later, the major reason of the decline of the 1.4% are export sales, while the domestic sales is increasing.

Coming to the second bullet point, the original equipment market. In the third quarter, we had an increase of 10.4% while the vehicle production was down by 3%, mainly that Brazil increased by 2.8% and Argentina went down by 37%.

Last [indiscernible] the Board of Directors approved an interest on capital of BRL 70 million, which will be distributed in December 2019 and is in line with last year's numbers.

Looking at the key indicators. Once again, we achieved a sales of 900 -- BRL 645 million, a decrease of 9%. EBITDA of around BRL 129 million, giving a margin of 20%. Last year, the same period, it was 20.9%. So we could see a small decrease of 0.9 percent points and the net margin 10.7% compared to 13% last year. Here to mention that last year, I will comment this further later on. In the third quarter 2018, we had a onetime impact, the hyperinflation accounting for the total year. For the 9 months, which we projected as a onetime impact in Q3 2019.

If you look on the right side of the column. Now the 9 months sales is BRL 1.9 billion, minus 1.4%. As mentioned, domestic markets are increasing, export is going down. The EBITDA margin, 18.9%, slightly below compared to previous year by 0.5 percent points. And the net margin, 10%, a drop compared to previous year of 1.4 percent points.

Coming to Slide #4, I would like to hand over to Daniel.

[Daniel Alves, executive]

Good morning, everyone, and thank you very much to be here with us today for the conference call. On the Slide 4, we have the markets overview. Brazil and Argentina vehicle registration and production year-to-date September this year comparing to the last year. On the light vehicle, Brazil, we have 8.8% increase and for production, 2.6%. Comparing to and farther of today's projection for the full year, the vehicle sales is 8.1% and vehicle production is 1.8%. Therefore, the numbers are very close with the year-to-date September, with the full year updated projection [ often going farther. ]

In the Argentina, the light vehicle sales was down 48% and the vehicle production 39 -- 34.9%. In this case, the full year projection, we are -- we have it around 45% declining on vehicle sales and minus 30% on the vehicle production.

The combination of Brazil and Argentina on the vehicle sales for the year-to-date September this year's against last year, it's 4.9% (sic) [minus 4.9%]; in the vehicle production, minus 3%. Our full year projection for the year on the vehicle sales is minus 4%; in the vehicle production, minus 4.5%. Looking behind, in the old conference call we had, we lost 2 points. So we had minus 3% for vehicle sales and minus 2.5%. Now the update Mahle Metal Leve projection for the full year, it's minus 4% for vehicle sales and minus 4.5% for the vehicle production.

Going to the medium and heavy vehicle. On the vehicle sales for Brazil, we had an increase of 24.8%. And in production, we had a 2.7% increase. Then farther updated projection for the full year, it's 22% increase for the vehicle sales and 2.6% increase for the vehicle production, also very aligned with the year-to-date September numbers.

In Argentina, the same history. We had minus 50% of vehicle sales and minus 40% for the vehicle production. The combination for Brazil and Argentina on the vehicle sales, we have increased 8%; and for production, minus 0.1%. In this case, our full year expectation for vehicle sale is 5% and for vehicle production, minus 3%.

Now moving to Slide 5, where we have the vehicle production in the main markets for the export business of Mahle Metal Leve for North America and Europe. Going direct to the last column, we have in North America, light vehicle production minus 1.3%. And for medium and heavy vehicle, 7.3%. The combination of light vehicle and medium and heavy, minus 1%. For Europe, we have on the light vehicle, minus 3.9% for the vehicle production and minus 1.3% (sic) [minus 1.2%] for the medium and heavy vehicle. The combination, Europe minus 3.9%. Total vehicle production year-to-date September this year against last year, it's minus 2.6%. The full year expectation for North America light vehicle is minus 1.8%. For the medium and heavy, it's 4.2%. In Europe, the light vehicle full year projection is minus 1.5%; and the medium and heavy vehicle, it's minus 1%.

So in this case, also in the export market, the volumes are going down. We have the trading issues, the global economy weakness, so many points led to decline in the vehicle production, and for sure impacting the revenue of the Mahle Metal Leve for the export business.

Now moving to Slide 6, where we have in the third quarter, net sales revenues performance by market. We have the third quarter '19, the volume/price impact, the FX variation, the third quarter last year and the comparison percentage. I will direct to the last column where we have the variation. You can see the original equipment domestic 10.4% and the export minus 24.6%. In this case, I will comment on the year-to-date September. The comments are very similar. Therefore, I will keep the comments on the year-to-date September figures. On the aftermarket, we had, for the domestic sales, minus 4.8%. In the export business, minus 14%. And the combining aftermarket, minus 7%. The total revenue is minus 9.1%. The FX impact is minus 2.3%. The volume/price impact is minus 6.8%.

Now moving to Slide 7. In this case, we have the year-to-date September figures this year against year-to-date September last year by market. So we have the original equipment [ domestic ], an increase of 9.4% despite of the decline on the vehicle production, which just saw few minutes ago, the minus 3.8% for the vehicle production. Therefore, the Mahle Metal Leve sales for the domestic market is much better than the market performance. The main reasons for that are share increase. We got some new business ramp-up for this business, also some export engines that we are participating on these engines, the automakers is exporting the engine and the Mahle Metal Leve participates on this engine and this revenue and also the service parts increase.

For the export business, we had a reduction of 12.6% and an FX impact of 6.6% and the volume/price impact, minus 19.2%. In this case, the main reasons for this decline in sales is the market reduction, our inventory adjustment, also because of this market reduction, our last year's spot buy and some write-down problems and also higher competition. These are the main reasons for this decline on the net sales revenue.

Going to the aftermarket [ domestic ], we have an increase of 5.3%, an FX impact of minus 10.4% and our volume/price impact of 15.7%. It's important to mention this effect, in fact, it's mainly because of the alloy business in Argentina, our evolved business in Argentina. So we saw this in pesos. And in this case, this is the main reason for the -- for this decline.

For the South America domestic market aftermarket, the main reasons for this increase is the mix of parts. For the export aftermarket, we have a decline of minus 2.4%, an FX impact of 5.9% and the volume/price impact of minus 8.3%. In this case, the main reasons for the decline is the Turkey business, with Chile and also Paraguay. These 3 countries have impacted negatively in our revenues for the export aftermarket. We got some positive impact for Colombia, Central America and Ecuador, but net is minus 8.3%. The total aftermarket is 3.5%, FX impact minus 6.4% and the volume/price, it's 9.9%. The combination of original equipment and the aftermarket, it's minus 1.4%, the FX impact is 0 and the volume/price impact is minus 1.4%.

Now moving to Slide 8, where we have the participation of the export business by region. In this case, no big change for the [ counts ]. So we have a similar effect that we had on the last year.

Now I will give back to Dr. Christian Binkert the presentation, and I will be available at the end for questions.

[Christian Binkert, executive]

Thank you, Daniel. Coming to the P&L. As you can see from the chart, first of all, concentrating on the last quarter. As mentioned, we achieved a sales of BRL 645 million, 9% lower compared to previous year. The gross margin, 27.6%. Last year, the same period, we had a gross margin of 30.5%. I mentioned already we had last year, a onetime impact due to the hyperinflation accounting, the so-called IAS 29 in Argentina. We've got [ BRL 2-digit million allowance ]. This really was the reason why we had a relatively good margin in the third quarter of 2018. If you look now the year-to-date number, BRL 1.93 billion in sales, minus 1.4%, and the margin dropped from 29% to 26.5%. Some of the reasons already mentioned, the social cost benefit, which we still got last year. We are not getting this year anymore. I mentioned in the last call already, the higher energy cost was not only in Argentina, but also in Brazil. And also, as mentioned by Daniel and myself, the decreasing export sales.

Coming to Page #10. Looking a little bit at SG&A and R&D side. In the selling side, we can see we have now in the third quarter, 6.5% achieved compared to the 7.1% last year. The same or similar trend year-to-date, the selling cost 6.2%, 6.7% was last year. Here, clearly -- as well as for the admin areas, we had some productivity gains, some restructuring activities. And as mentioned, the same for the admin areas, 2.9% versus 3.3% the last quarter 2019 and 2018. And year-to-date, we also can see a drop from 3.2% to 3.4%. So overall, the selling and admin costs on a year-to-date basis dropped from 10.1% to 9.4% as we have better productivities via higher restructuring in our areas.

If we look at the R&D expenses for the third quarter as well, year-to-date, we have seen higher numbers. If we concentrate on year-to-date, 3.3% compared to 2.9% last year 9 months, so 0.4% higher. That's really due to new innovations for new products and new patents for customers.

Other operating results, year-to-date, we have minus BRL 4.6 million. Last year, it was plus BRL 2.1 million. One of the reasons is the Reintegra program, which was finished in 2018. So we don't have the benefit in 2019 anymore and the export expenses or duties, which started in Argentina in -- I think in 2018.

Coming to the Page #11. The bridge between the EBITDA period. First of all, the third quarter of 2018, EBITDA of BRL 148 million with a margin of 20.9%, and we achieved now in the third quarter 2019, on the right side, BRL 129 million, with a margin of 20%. There are the major differences coming from selling and distribution expenses. Here once again to mention the productivity gains, restructuring, the gain and losses on non -- net monetary position, that's purely the hyperinflation in Argentina, the so-called IAS 29, was BRL 6.7 million. And for the general and admin expenses, the same comment as for the selling expenses, productivity and restructuring.

On the right side, the gross income, the minus BRL 38 million. Here once again, the hyperinflation impact last year, the onetime impact from January 2018 to September 2018 and 2-digit million reals number was included.

Now looking at the 9 months numbers, BRL 380 million year-to-date last year, which gave an EBITDA margin of 19%. Now we have BRL 364 million in EBITDA and EBITDA margin of 18.9%. And really, the reasons are nearly the same reasons as for the third quarter. I just would like to end the comments in regards of the technology, the R&D and the new innovations, the patent and for new products. We are spending more. And for the gross income, in addition to the personnel costs, the social costs and also the energy costs, which are increasing not only in Argentina, but [indiscernible] energy costs, but also in Brazil slightly.

Coming to the Page #12, the financial management, the financial results. You can see here 9 months, minus BRL 28 million compared to minus BRL 14.7 million to previous year. So we are losing minus BRL 14 million. Where it is coming from? First of all, the finance costs from minus BRL 1.7 million last year, year-to-date to minus BRL 5.6 million, so minus BRL 3.9 million is the variation. This is a combination of lower investment, which you also can see at the bottom of the table. Last year, we still had an average investment of BRL 93 million. Now we have BRL 73 million. And in addition, we have higher average debt. And last year, minus BRL 195 million, this year minus BRL 282 million. So we have higher loans of around BRL 90 million and [indiscernible] resulting mainly in the deviation of the mentioned minus BRL 3.9 million.

The exchange rate variation, here really the major gap is coming from last year, still a positive amount of BRL 16 million. And this year only BRL 1.5 million. So we have a gap of minus BRL 14.5 million. The main reason is Argentina, the devaluation of the Argentine peso for the same period of time last year was higher than this year. Therefore, a positive impact out of Argentina is going down.

And then coming to the monetary variation, the impact of BRL 4.3 million is minor. But here to mention that the hedging rates in the market are in 2019 closer than in 2018. And once again, as a summary, minus BRL 28 million is the finance income compared to minus BRL 14.7 million to last year.

Coming to the Page #13 already. Our net investment, you can see the liabilities increased from December to September by BRL 103 million to a level of BRL 395 million. You see no major change in the distribution between short and long term. And also, our cash position increased by BRL 93 million to a level of BRL 231 million. So overall, the net position, the net indebtedness, we can see a slight increase by BRL 10 million to a level of BRL 164 million, giving us a leverage of around 0.4.

If you look at the below part of the presentation, between the short- and long-term distribution, you can see as well in short term and as well as long term, it's well distributed between the month and the year.

Coming to Page #14. Our financing structure. Over here, you can see no major changes. We are still mainly financed with FINEP and ACC.

And then already coming to the next page, to Page #15. The net income and the benefit to the shareholders. I mentioned already the profit for the year -- for the third quarter, BRL 69 million. We achieved 10.7% income as compared to the 13.2% last year. The reasons for the drop are already explained. And if you look now on the year-to-date numbers, BRL 190 million with a profit of 9.9% compared to 11.5% previous year.

And on the bottom, as mentioned, the Board of Directors approved interest on capital payment last week of BRL 70 million, which will be distributed in December and is in line with the distribution last year and remaining interest on capital and possible dividend will be discussed in the year of 2020.

Coming already to the last page of the presentation, all we see are very stable numbers. CapEx, BRL 57 million now, 55 million -- last year, it was BRL 55 million for the 9-month period. And the depreciation, BRL 70 million compared to BRL 68 million last year. And percent of sales, similar numbers, 2.9% compared to the 2.8% last year. And if you compare it to depreciation, also very similar numbers, 80.6% to 80.5% compared to previous year.

Thank you very much for your attention. Now if you have any questions, kindly let us know.

[Operator]

[Operator Instructions] Our first question comes from Marcelo Motta, Banco JPMorgan.

[Marcelo Motta, analyst]

Two questions. The first is, if the company could comment a little bit more about the MBE2 business? Has it already contributed to revenues? What's the expectations in terms of profitability and contribution to results for next year? And the second question is, on the results, there is a line called provisions for environmental liability, around BRL 4 million that was booked this quarter under other operating expenses. So just wondering if the company could clarify what exactly it means, if it is like the amount of this could be higher or lower? Just to understand what it means.

[Christian Binkert, executive]

Coming -- first of all, Marcelo, thank you for your questions. Coming to the MBE2, we installed 2 units in the mill. The operations are ongoing. So the installation of the MBE2 equipment took place a couple of weeks. So we are still analyzing at the moment. There is no sales included in the number of 2019. If we will have to include or if we will include something in the last 3 months, we will see really will depend on many factors. As you know, sugarcane, the season is nearly finished.

And so the net fee, if we can still include certain page numbers in 2019. In regards of the environment, are very good and very valid point. This is due to former operations, which we had in the city of São Paulo. We relocated the operations to our facility many, many years ago to Mogi Guaçu, our piston plants. Now it's not new parts. We did note that there are some environmental issues. But just as a precondition and precaution, we built up some additional accruals for this case. Does this answer your questions, Marcelo?

[Marcelo Motta, analyst]

Yes.

[Operator]

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

[Christian Binkert, executive]

Thank you very much, once again, for participating in the call. Thank you, Daniel, for your contribution. Also to [ Virginia ], thank you very much. Looking forward to speaking and discussing with you in the near future, latest in the next call in March 2020.

Thank you very much. Have a nice day.

[Operator]

That does conclude the Mahle Metal Leve audio conference for today. Thank you very much for your participation.

Have a good day, and thank you for using the Chorus Call.