Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to MAHLE Metal Leve for the third quarter of 2020 Results Conference Call. With us here today, we have Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Accounting Manager; and Mr. Fábio Lopes Peres, Executive Finance Manager. This event is being recorded [Operator Instructions]

This event is also being transmitted simultaneously through the Internet via the 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 the 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-looking statements are based on the beliefs and assumptions of MAHLE Metal Leve's 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.

I would now like to turn the conference over to Mr. Daniel Oliveira Camargo, who will begin the presentation. Please, Mr. Camargo, you may proceed.

[Daniel de Oliveira Camargo, executive]

[Interpreted] Good afternoon, everyone. Welcome to the conference call to discuss the results of MAHLE Metal Leve -- to discuss the results of the third quarter 2020. And before continue covering our agenda, we hope everyone is safe and healthy.

As for July, we had a timid response of the automotive market. We saw a gradual in terms of volume production. And with this, we ended some of the aspects or temporary changes, salary reduction and some measures that we had taken. And most employees went back to work that were in those in their working contract. And MAHLE adopted different measures to avoid contamination by the virus. And this is the general overview that we would like to give you all. And at the end of the presentation, I would like to say that we are going to be available to the Q&A session.

And following the presentation on Slide #2, we will talk about the highlights of the third quarter 2020 at first, and then we are going to move on to a market overview and then we will discuss the net revenue performance by the market. And then we'll have a summary of the P&L and EBITDA, the financial manager, CapEx and depreciation. And then we will open the Q&A session.

On the next slide, Slide #3, we have the highlights of the third quarter 2020. The net sales revenue reached BRL 691 million in the third quarter 2020, an increase of 7.1% when we compare to the third quarter 2019. Good performance. And the aftermarket in the third quarter, there was an increase of 35.3%. When compared to the third quarter 2019 and year-to-date, we almost reached the levels of 2019. In the export aftermarket, there was an increase of 21% of the sales in the third quarter 2020. And year-to-date, we reported a reduction of 8.1%.

As for domestic OE, for the third quarter '20, the company recorded a sales reduction of 21% and year-to-date, the reduction was 32%, we'll provide more details about the performance of sales for each of the markets on the following slides.

And lastly, the company has also recorded and this was something a piece of information that was provided in a material fact about the impairments in the amount of BRL 45 million related to the expenses with the development of technology and BRL 36 million related to the provision for losses in inventory.

And lastly, our gross margin of the third quarter of 2020 reached 27.7% when compared to 2019.

I would like to turn the call over to Mr. Daniel Brasil, who will provide information about registration and production and sales of the company.

[Daniel Alves, executive]

[Interpreted] Thank you, Daniel Camargo. Good morning, everyone. Thank you very much for attending our conference call to discuss the results of MAHLE Metal Leve.

On Slide 4, we have information about sales and production of vehicles in Brazil and Argentina in the first 9 months of 2020 compared to the same period of 2019.

Beginning discussing about light vehicles. In Brazil, we had a drop of 33% in sales of light vehicles. And also, in production, we had a drop of 41.5%. In Argentina, the drop was 28.2% for sales and production, a drop of 31.3%. And considering Brazil and Argentina combined year-to-date, we reached a number of 32.3% for sales and 40.4% for production. This figure shows a recovery -- a continuous recovery, meaning that we have improved our sales performance in vehicles and also in production, month after month. It's important to mention that there is a mismatch in the percentage of drop of sales in relation to production. So, sales, reaching 32% and production reaching 40% of reduction.

There's a stock reduction involved, and the stock according to Fábio is enough for 18 days of sales. And generally speaking, this inventory is about 30 or 35 days. And this means that the production has been very strong, accelerated in order to meet the demand that in terms of sales of vehicles.

When we look at October itself, it's not in this presentation, but this is a public information that has already been disclosed. When we compare sales of light vehicles, in October, sales were minus 11% and production, minus 16%. So, we can see that the volumes are very close to what we recorded last year, reinforcing that this continuous recovery of the market.

Now moving on to medium and heavy vehicles, there was a drop in medium and heavy vehicles of 13.4% reduction. And as for production, the drop was 29.7%. In Argentina, the drop was 24% and production minus 40%. So, the 2 figures combined, we come to a reduction of 14% for sales and 30% for production. So we can also see this mismatch of sales in comparison to production. So we have a certain timing to recover the production chain so that we can meet the sales volumes. So we have seen that there has been a constant, better performance, and industry is making all the adaptations in order to meet this demand.

When we look at heavy vehicles for October, the drop in sales was 11%, and production, the drop was 8%. We can observe this recovery, as we said before.

And now moving on about the figures for the end of the year, we have about 2 months before we close the year. When we observed the information that was posted by Fábio for light vehicles. In terms of sale, there is a drop of 31%. And as for production, the projection is a reduction of 35%. And for heavy vehicles, a drop of 14%. And as for production, a drop of 25%. We can observe that all those indexes are very similar to what we have recorded year-to-date up to September. So for sales, we can see that the figures are very close. But as to production, we can see that indexes have been proving, closing the gap between sales and production. So for MAHLE, for the end of the year, an estimated result, which is a little bit better than what Fábio disclosed 3 percentage points, both for sales and production until the -- for the close of the year.

Now moving on to Slide 5. We have information about the vehicle production in North America and Europe. In the first 9 months of the year of 2020 compared to the previous period of last year, there was a drop of 25.5% in vehicle production. And as for light vehicle, the drop was 26.7%. And for medium heavy vehicles, the drop was 45.5%. In Europe, we recorded a drop of 30.4% in which 30% for vehicle -- light vehicles and 34% for medium and heavy vehicles. Combining those markets, we reached the number of 29.1%. It's a better performance when we compare that to Brazil and Argentina's performance. And this is associated with the second wave of COVID-19 pandemic. And we have been following the news, and there is -- there are some uncertainties in terms of the effects of the second wave of the pandemic in the export market of the company.

Now moving on to Slide 6. On Slide 6, we can see the performance of net revenues of the third quarter 2020 when compared to the third quarter 2019. I'm going to focus on the last column. As for original equipment, the domestic segment recorded a drop of 21.8%. When we combine those markets, we see that the income is very aligned with the results. And as for exports, we see a drop of 9.2%, and we see a positive FX combination. So the effect in terms of volume and price, the drop was 13%. So the export market is below the levels of 2019. When we consolidate domestic and export, we see that there was a drop of 6.4%.

In the aftermarket, in the domestic sector, there was a growth of 35.3%. And in relation to exports, we see a growth of 21.2% and 35.9% is related to the FX impact. So we see a drop of 14% in terms of volume and price. The total of -- in the aftermarket, we see a growth of 32.2%. When we combine the original equipment and aftermarket, we record an increase of 7.1% with an FX impact of 9.4% and the effect of volume and price of minus 2.3%, which is very close to what we recorded in the third quarter of 2019.

Now on Slide #7. You can see our net revenue performance in the first 9 months of 2020 compared to the first 9 months of 2019. If you look at the last column for original equipment, in the domestic market, there was a drop of 32.1%. We outperformed the market. We saw a drop in the production in the first 9 months of the year in Brazil and Argentina of 40%. So we outperformed the rest of the market here. And the 3 main factors for our outperformance was the mix. We saw that in heavy vehicles, the drop was smaller. There was a 30% drop in production. The second effect was of OEs pieces or service pieces, which are parts, which were -- had a smaller reduction in the rest of the market; and third, the continuous growth. Our numbers are improving. So this monthly sale reflects the production of the following month. So that's why our performance in vehicle production was better than the rest of the market.

In exports, a drop of 14.4% in regional equipment with an FX impact of 9%. So the volume over price impact was 23.4% -- minus 23.4%. In the exports market, we also saw a significant drop, a bit better than the drop we saw in the North American, Europe markets. And for original equipment, consolidated domestic and exports, there was a drop of 22.6%, an FX impact of 4.7%, volume over price of minus 27.3% over the net revenue of sales.

Now aftermarket, domestic had a 0.5% drop and FX minus 1.8%. This FX variation in the domestic market, both for aftermarket and original equipment in our unit in Argentina that manufacturers valves, impacts this number. So we had the conversion of Argentinian pesos to Brazilian reals. So that's why we had this FX impact. And domestic aftermarket volume over price, a growth of 1.3%.

So interest in revenues in the aftermarket. This is a historical effect when there is a drop of sales in new vehicles, the aftermarket usually has a better performance. In addition to that, we also have exchange -- foreign exchange depreciation. So we are valuing parts produced in Brazil that gained market share compared to imported parts that suffered an increase in prices in Brazilian reals.

Aftermarket exports, a drop of 8.1% and an FX impact of 20.1%. So a drop in volume over price of 28.2%. Aftermarket consolidated both domestic and imports, a drop of 2.2%, FX impact 3.2% and volume over price minus 5.4%. If we combine original equipment and aftermarket in the first 9 months of the year, we had a drop in revenue of 15.8%, FX impact 4.2%, volume over price a drop of 20%.

Now Slide #8. Here, you can see consolidated exports by region in the first 9 months of 2020 year-over-year. There were not major changes in Europe, 47.2% and then 47.3%; North America 35% to 39%; South America, 12% to 10%; and other markets, 4% to 3%.

Now I turn the floor over to Daniel Camargo, and I'll be available at the end of the conference for questions.

[Daniel de Oliveira Camargo, executive]

[Interpreted] Thank you, Daniel Brasil. Now on Slide #9, you can see our gross margin. If we focus on the last column, our gross margin in the quarter remained the same -- with the same percentage year-over-year. And in the first 9 months of the year, we had a slight drop. However, if we exclude the effect of BRL 36 million of stock provision, then we would have achieved a gross margin of 33% in the third quarter of 2020. In the first 9 years of the month (sic) [ first 9 months of the year ] that would be a margin of 26.7%, which is very close to the first 9 months of 2019.

Now on Slide #10, you can see a summary of all the other expenses on our P&L. Selling expenses in the third quarter of 2020 accounted for 6% against 6.5% year-over-year. Even with the use of freight and this recovery after the pandemic, we've had some impacts of foreign currency on some expenses, which prevented us from improving our selling expenses.

General and administrative expenses were impacted by several factors, especially changes in expenses with maintenance, materials and utilities and also by the effects of restructuring.

R&D expenses accounted for 1.9% only in the third quarter of 2019 -- 2020 due to the impact of the pandemic. Some R&D activities were suspended or delayed from the original schedule because of the pandemic. When it comes to other operating income expenses, the major impact, as we mentioned last quarter, was the impairment of BRL 22.9 million in Argentina and BRL 45 million for the intangibles of MBE2. So these are nonrecurring expenses that influenced other operating expenses.

Now on the next slide, you can see the operating income measured by EBITDA. The adjusted EBITDA was 24.5% for the third quarter of 2020 against 20% in the third quarter of 2019. So the EBITDA was BRL 12.8 million due to the events I mentioned, but this does not have an impact on the company's cash.

Now I'd like to turn the floor over to Fábio Peres, who is going to share our net financial results with you.

[Fábio Peres, executive]

[Interpreted] Good afternoon, everyone. Thank you very much for joining us for our earnings conference call today.

Focusing on our net financial results. We've had an interest growth as you can see here on the table on Slide #12, because of the fundraising in March this year of BRL 250 million to support our cash during these times of uncertainties of the pandemic when we did not know exactly what would happen because of scarcity of resources. So the company decided to borrow BRL 150 million to support our cash during this period of time. So you can see the numbers for the third quarter of 2020, BRL 425 million. Right now, the interest rates were 5.5% and now 2.5%. And also the debt level, the average debt of the company was BRL 382.2 million. With those new funds, this has been impacted.

The costs are at the same level, as you can see in the table, 4.2% in 2020 with similar numbers in 2019. Now we have the accumulated for the first 9 months of the year, BRL 376.7 million and now BRL 597.5 million. The cost of debt also remained at the same level from 4.1% to 4.2% from 2019 to 2020. The average level of investment, 47.7%. So that's why the net revenue had a -- net income had a delta of BRL 3.1 million in the last 3 months and BRL 4.3 million in the first 9 months of the year.

Accounts receivable and accounts payable, there is a net of BRL 1.9 billion. And BRL 5.4 million in ACC Exchange variation. Other transactions BRL 4.9 million. So a delta of BRL 1.4 million when we compare the third quarter of 2020 to the third quarter of 2019. On the right-hand side of the table, you can see that the delta achieved was 42.9%, most coming from the ACC, foreign exchange variation and transactions we've done in the past. Now for net monetary variation, we achieved 1.1% of variation in the third quarter year-over-year and 2.3% in the first 9 months of the year.

Now Slide #13. You can see our indebtedness. Our cash had a variation of BRL 382 million and a variation of BRL 226 million in our liabilities, achieving 33.0% indebtedness in the third quarter of 2020. On the right-hand side, you can see our borrowings by type: 4131 accounting for 41.6% of the total; ACC 28.1%; FINEP 27.8%; BNDES 2.4%. So in total, a debt level of 4.15% per year. In the bottom of the slide, you can see short- and long-term indebtedness and their maturities. In March 2021, we have BRL 260 million in debt maturing. We are still evaluating what to do, if we roll out the debt or if we payback, but we have raised money, especially to support these times of uncertainties of the pandemic.

Now on Slide #14, you can see depreciation. CapEx and depreciation comparing the third quarter of 2020 to the third quarter of 2019, we are below the levels of 2019, and that's mainly due to the COVID-19 pandemic. As Daniel said, in the beginning of the call, we still have uncertainties ahead of us and some signs of a second wave of the pandemic coming and the uncertainties regarding the vaccine. We're not sure whether this is going to be made available by the end of the year. For those reasons, we are withholding investments until things become clearer.

Now we would like to open for questions. We will be open to give you any clarification that you might need. Thank you very much.

[Operator]

[Interpreted] [Operator Instructions] The first question is by Marcelo Motta with JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. The first one is about the gross margin of the company. So I can see that the recovery was quite strong in spite of the fact that we do not have volume-related data. We can see that there was a combination of FX and the income or the revenues increased. And I believe that the volumes were a bit lower than those recorded in the third quarter 2019, but the margin recovered. So I would like to understand which are the factors that led to that result? And if you believe that there can be further improvement?

And the second question is related to MBE2. If you -- there was an impairment, and the company decided to stop the investments and causing this impairment. Is there any technology or patent that you could sell and could bring in some cash increase? And can -- is there any possibility of reversing this impairment?

[Fábio Peres, executive]

[Interpreted] Marcelo, thank you very much for your questions. In relation to the gross margin and the major impact on the sales costs are -- considering this resumption, we can say that the productive increased, and we managed to have some synergies. And these are results of the restructuring that we brought about. And these are the main factors. And in relation to the continuity of this process, there's no way we can have any future guidelines. But we would like to have a result very similar to what we recorded in the third quarter, but that would depend on the market sales and everything else. Our cost will continue -- we hope to remain at the level of 70% in relation to the revenues. And this is what we have seen, and this is the performance that we have been able to see.

In relation to the MBE2, I would like to repeat your question. You raised 2 points. And could you ask the question again, please?

[Marcelo Motta, analyst]

[Interpreted] Yes, of course. I would like to know if there is any cash that can be recovered with the impairment, maybe some patents or maybe hardware or software that we developed and could be sold to the market? And if that possible sale would generate cash considering the impairment? I don't know if the impairment made all the calculations back to 0 or if there's any value that can be recovered with this impairment?

[Fábio Peres, executive]

[Interpreted] Okay. Here with us, we have the Director of MBE2, and I'm going to ask him to provide details or to provide more details so that we can clarify the question you have. Could you help us answer this question, please?

[Unknown Executive]

[Interpreted] Marcelo, thank you very much for your question. In the amount of the impairment, we are not considering any sort of recovery at the time. Just to remind you that MAHLE is a licensed company. We have the license to use this technology. MAHLE would not be able to sell this technology. MAHLE has 1/3 of all their shares of a company that holds the patent. So it's another company that does the management. As far as MAHLE is concerned, we are going to close all the activities related to MBE2 technology, and all the data related to the projects have been duly stored. But considering the value that we disclosed, we do not consider any residual value up to the moment.

[Operator]

[Interpreted] [Operator Instructions] Our next question is from Gabriel Rezende with Bradesco BBI.

[Gabriel Rezende, analyst]

[Interpreted] I have 2 questions. The first one is a follow-up to Marcelo's question related to MBE2. I would like to understand that once the project was terminated, finished, I would like to know if there is any other project or any investment channel that MAHLE is considering for the years to come? Is there anything on your radar?

And the second question is related to market operations. If you could provide some clarifications of how your clients expect -- what are the expectations for the next months? Do you expect the car assemblers to have collective vacation? Or do you think that the revenues are held back? Or what are your expectations in other words?

[Daniel de Oliveira Camargo, executive]

[Interpreted] I'm going to make a comment on your first question because the answer is, there's nothing that we can disclose at the moment. As soon as we have any investment planned to be made, we are going to disclose it to the market. Right now, we do not have any information to provide you with. And the second question, Mr. Brasil will help us with the answer.

[Daniel Alves, executive]

[Interpreted] Daniel Camargo complementing the first comment that you made. And thank you, Gabriel, for your question. MAHLE continuously invests in technology. So we have our technology center based in Jundiaí City. And the company is always analyzing the market, and we're always looking for solutions, as Mr. Camargo said, we cannot disclose any technology before it is officially launched, but the company is doing this research continuously in research and development, both for the future products and the products we already have. So we have the electrification technology with the possibility to be used in the future. So we expect that hybrid vehicles will be produced. And moving towards the hybrid level before we move towards the electrical cars, but the company is always working in different technologies.

In relation to your second question, in relation to the future months, we can say that the inventory level is very low and Fábio provides information about the Brazilian market. And according to it, the truck market is being impacted by the lack of products. So as to say, so the production chain is taking some time or delaying the production in order to make the proper adaptations. So some companies will have collective vacations. And these are the information that we have received, and they will have a shorter period for vacation in end of the year. This information is not consolidated yet. So we know that companies are still evaluating all this. And it seems that assemblers will make the proper adjustments to the demand. And you probably heard about rent -- car rentals. They are taking time to receive those vehicles because of the period of resumption. And everybody is being cautious. People are not making high investments to increase production, and -- if you are not sure that everything will be continuous. So the collective vacations, which is going to be shorter, is likely to make it -- help us make adjustments to that, but I don't know if I answered your question?

[Gabriel Rezende, analyst]

[Interpreted] Yes, you did.

[Operator]

[Interpreted] [Operator Instructions] This concludes today's question-and-answer session. I would like to turn the call to Mr. Daniel Camargo for his closing statements.

[Daniel de Oliveira Camargo, executive]

[Interpreted] Thank you very much for having attended this conference call, and see you next call for the next quarter.

[Operator]

[Interpreted] This concludes MAHLE Metal Leve audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]