Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen. And welcome, everyone, to MAHLE Metal Leve's audio conference to discuss results relative to Q3 2022. This video conference is being recorded and the replay facility will be available at the company's IR website. The respective slide deck will also be made available for downloads. [Operator Instructions]

Before moving on, I'd like to state that forward-looking statements are based on beliefs and assumptions on the part of the company's management and also on information currently available for the company. Such forward-looking statements might involve risks and uncertainties as they refer to future events and, therefore, depend on circumstances that may or may not materialize. Investors, analysts and the public should take into account that events relative to the macroeconomic environment to the industry and other factors might lead results to being considerably different from those expressed in these forward-looking statements.

Joining us today, we have Mr. Nathan John Quye, CFO; Mr. Brasil Alves, Marketing Manager (sic) [ Marketing and Corporate Communication Manager ]; and Mr. Fábio Peres, Finance Officer.

Now Mr. Quye will carry on. Please, Mr. Quye, you have the floor, please.

[Nathan Quye, executive]

Thank you. And good afternoon, everyone. Ladies and gentlemen, welcome, everyone, to our conference call for MAHLE Metal Leve to discuss in Q3 2022.

Before moving on and start with the agenda, I'd like to wish you all good health. We hope you all are in good health and safe. And at the end of my presentation, we will be available for questions or comments you may have.

Moving on with today's agenda. Please next slide, if you will. We'll start, as usual, with the highlights, and then we're going to go over a market overview with Daniel Brasil and then a bit more detail on the company's performance in terms of net revenues and financial management, then we'll move over to CapEx and depreciation, and we'll wrap up with the Q&A session.

So with the slides, please. Next, highlights. Please, next slide, of course. You have the numbers for Q3 already available. This was a very good quarter for us with sales at a good level of BRL 1.2 billion, up 26.3% when compared to Q3 last year, a good quarter across all segments, especially in the domestic market and, of course, original equipment and aftermarket as well. And the year-to-date September, all numbers are above or going up. Export, slightly below than last year. Daniel Brasil will go into more detail for the reasons behind those numbers. But the year-to-date 9 months are 16.3% higher than last year, so we are quite happy with the sales numbers we had so far. That's a key indicator for this quarter, as you know.

On the bottom part of the chart, you see other important numbers. The company's adjusted EBITDA, way above last year's figure, BRL 283 million, way above the figure of last year, 55% above in the quarter to be sure and 52% on top of last year's numbers, and we'll also talk about the reasons behind those movements. But gross margin really, really contributed because gross margin was way above what we had last year, and we'll be going into the reasons for that as we go down with the presentation.

EBITDA margin, 23.6% in the third line of the table, way above once again what we had in the second quarter. And also when consider the year-to-date numbers, slightly below last year's numbers, but still close to what we had at that level, 20.6% for 2022.

Net profit, 200 million and some. We are quite happy with this number for Q3, once again way above what we had in the first half of the year. And the main drivers for that increase was -- raw material costs also contributed and also our sales level in this quarter were significantly more important, BRL 1.2 billion. So all of that combined helped boost our net profit.

As for the net margin, 16.8% in this quarter, once again way above that what we had in Q2 and also in comparison to last year's numbers. And for the year-to-date, 9 months 2022, still above what we had last year for the same period. So those are very, very important, bullish numbers for Q3 and comparing to both the quarter and the first 9 months of the year.

Next slide, please, if you will. Daniel Brasil will now elaborate on our sales numbers. Over to you, Daniel.

[Daniel Alves, executive]

Thank you, Nathan. Good afternoon, everyone. Thank you so much for joining our call for MAHLE Metal Leve's Q3 results. Now on Slide #4, sales and vehicle production for Brazil and Argentina year-to-date 9 months 2022 as compared to the same period of last year 2021.

On the first part of the slide, light vehicles in Brazil, we saw a drop of 5% in year-to-date sales. In Argentina, a growth of 10%. And combining both countries, a drop of 2.8%. Despite the negative number, it is an improved figure when we look back at the beginning of the year. When you look at the first half of the year, the first 6 months of the year, 2.8% was minus 12%. So we moved from minus 12% to minus 2.8%. So that shows an improvement. And if we add another month, the month of October, for which we already have the number, 5 numbers, that number will go down to minus 1%. So we're moving steady to close the year in line what we had in 2021. That's a forecast for the close of the year, which is also aligned for 5 years numbers for the sales of light vehicles, closing the year at the same level we had in 2021.

In terms of vehicle production, we saw a growth of 6.3% in Brazil, a growth in Argentina of 28.2%. Combining Brazil and Argentina, we see a growth of 10%. Here, once again, an improvement. And in the first half, that number was minus 1%, negative 1%. So the negative 1% became plus 10%. So significant improvement in the year, especially in Q3. And if we add October, once again, that number will go up to 11% in terms of growth in production. Forecast for the whole year, Brazil plus Argentina, a growth of 5%. So overall, production ahead of sales, 5% for production that exports to countries in the region, exports from Brazil and Argentina to other countries in the region. So better numbers on that front, which, of course, has an impact, and that's what you have production ahead of sales.

Moving on to heavy vehicles. First 9 months of the year for Brazil, we see a drop of 1.1%. In Argentina, a growth of 1.5%. Combining both countries, a drop of 0.8%, a significant performance. When we look at the first half, we had a drop of 1.6%. So we see an improvement here, not -- unlike what you see in the 9 first months. And for the year, our forecast is to have a growth of 2% combining Brazil and Argentina for the sales of heavy vehicles.

In terms of production, a growth in Brazil of 5.7%. In Argentina, a growth of 9.5%. Combined figures, 5.8% of growth. Here an outlook for the closing of the year of a growth of 4%, positive numbers, positive outlook for the end of the year.

Last week, we had Fenatran trade fair. Very busy, lots of people present and heavy vehicle makers were there. So last year, we introduced a new Euro 6 technology to meet Euro 6 emission targets. As a consequence, we have an increase in the price of vehicles because we're adding technology, but we'll have a more efficient fuel consumption. So what we hope to see is a drop in the sales for 2023 for heavy vehicles, but that may be offset. It may even be surprised because of this offset between a higher price heavy vehicles and, on the other hand, a lower fuel consumption or a lower operating cost. For light vehicles, we expect for 2023 to have growth as well. So for heavy vehicles we have this effect coming from the Euro 6 emission targets. And for light vehicles, we expect growth.

Moving on to the next slide, please. On Slide #5, we have vehicle production, North America and Europe, the 2 main export markets for MAHLE Metal Leve. North America in first 9 months 2022 as compared to last year, a growth of 10.9% for light vehicles; medium to heavy vehicles, 14.6% of growth. In Europe, light vehicles, a drop of 2.9%; and for heavy vehicles, a drop of 3.3%. When you combined North America and Europe, you see a growth of 3.5%. Europe being more impacted by the war in Ukraine and the shortage of components, supply chain, inflation, more impact than the U.S. And the forecast for the whole year 2022 in North America is a growth of 9% for light vehicles and a growth of 12% for heavy vehicles. And in Europe, the outlook for the year is at a minus 3% for light vehicles and minus 5% for heavy vehicles.

Next slide, please. Now a bit about our net revenue performance. On the first chart, we have Q3 2022 as opposed to the first quarter -- third quarter 2021, Q3 last year. So on the last column, we have the percentages. Original domestic equipment (sic) [ original equipment domestic ], a growth of 28%. Original equipment domestic -- export original equipment (sic) [ original equipment export ], 12.2%. A subtotal for OE, 19.6%.

Aftermarket, a growth of 47.3%. Aftermarket exports, 7% up. When you combine aftermarket numbers, 37.5%. Total growth in Q3 when compared to Q3 2021, 26.3%, as Nathan mentioned, a significant growth in revenue when compared to the previous period. So a very, very strong quarter in terms of sales revenues.

Now on the bottom part of the slide, we have 9 months of 2022 when compared to the first 9 months of 2021. Also looking out again at the last column on the right. OE domestic growth of 22.3%, above the reference number, which is the production of vehicles. So the performance of money for OE domestic coming out at above market levels. Foreign exchange impact of 1.4% relative to sales to Argentina. So we do have an impact from the exchange rate from pesos to BRL. So a growth of 23.7%. The main reason -- the main drivers for that growth are a mix of clients, a favorable client mix for MAHLE Metal Leve S.A., also the sale of tools for new projects and an increase in market share. Those are the 3 main drivers behind that revenue being above market levels.

As for aftermarket export, a drop of 1.1%, still on the original equipment. The foreign exchange impact of 4.4%. So the volume over price impact comes out at 3.3%. North America performing since vehicles production above 2021. And in Europe, we see a drop. Some of that offsetting dynamics led to that 3.3%, eliminating the negative exchange rate impact of 4.4%. The net number is minus 0.1% (sic) [1.1%]. So with final number of growth of 9.2% (sic) [9.3%] for original equipment.

Aftermarket, a growth domestically of 31.6%. Including the negative impact on foreign exchange rate at 16.3%. Here, once again, sales in Argentina, the peso when converted to BRLs have this negative impact. When we remove that foreign exchange impact, a growth of 31%. Aftermarket export, 18.5% of growth, a positive impact of 1.2% coming from ForEx, a growth of 17.4%. The main drivers for this performance a higher demand. We saw sales and production for light vehicles at a level which was similar to what we had in 2021, so that boosts the market for parts in the aftermarket segment, and that benefits our revenues on that for us. And also, we gained a market share also in the aftermarket segment. That also explains the growth in revenue. Final number, 28.7% in aftermarket. OE plus aftermarket, a final growth of 16.3% in the net revenues performance.

Next slide, please. On this slide, we have exports by region. And we can see a drop in Europe, 44.1% (sic) [ 44.7% ] to 38.1% linked to the vehicle manufacturing market and a growth in North America and in South America. That result for South America in 2022, 17.7% is historically a normal level in terms of market share for that MAHLE Metal Leve.

I turn the floor now back over to Nathan, and I'll be available at the end of the presentation for the Q&A session. Over to you, Nathan.

[Nathan Quye, executive]

Thank you, Daniel. On this next slide, as explained before, Q3 2022 saw a level of sales, which was quite high. And from that, we were able to convert that into a gross margin, which was also quite high when compared to the 27% we had last year. So those 3% above will explain or will help explain the increase in the numbers for the quarter.

There are several underlying factors that led to this margin, including the mix, as Daniel just mentioned. And also, we have a good level of transferring onto clients, higher prices, taking into account inflation and price increases in raw materials when comparing to the first half. The pass-through level was high, the pass-through level. And because of that, the third quarter was good because of the combination of all those factors for the 9 months until now, year-to-date, we're still lagging a bit behind last year's numbers, but we have closed the quarter with a GAAP, which was better or narrower than we have with the second quarter. And of course, we have impact coming from inflation, impact coming from raw material shortage and high prices. Prices are better now than in the second quarter. But the rising prices, for example, are still high, similar to what we had in the first half. So again, there is a mix of raw material prices now having a significant impact, but the pass-through level was better in Q3 than in Q2.

Next slide, please. And on this slide, we have the main expense categories but below gross margin. Overall, no major difference, no major variations when compared to 2022 and when we compare '21 and 2022. The percentage number in sales are quite similar when you look at those columns year-on-year.

As for selling expenses, the absolute number sits above the level of 2021, but the main reason for that was the aftermarket sales. So it is above, but the reason is the aftermarket sales performance. And the 7.1% when compared to 6.7%, that's a normal variation when you take into account price inflation and so on.

As for SG&A, no major news here, 2.8%. So not much to say. No major variation, as I mentioned. And the same goes for technology and product development, slightly below in percentage numbers, 1% down compared to 1.5%. But the absolute number is similar for both periods.

I will now turn the floor over to Fábio, who will be talking about our net financial numbers for Q3. Over to you, Fábio. And I'll be back for the Q&A at the end of the presentation. Fábio?

[Fábio Peres, executive]

Good afternoon, everyone. Thank you for participating in our earnings call. A bit of our net financial results. We will start by talking Q3. We'll talk about Q3, where we had a financial net number of BRL 16.3 million. And the breakdown is the following: Net interest rate -- 10.4% (sic) [ BRL 10.4 million ] in interest income from investments out of a volume average of BRL 191.8 million, and the remuneration was 13%. And the cash we have in Argentina, 56.9. In terms of interest rates with loans, BRL 5.2 million coming from average volume of debt of BRL 405 million at 4% per annum.

And other interest expenses, including received interest from clients by -- other interest rates and also interest from the ICMS tax credit on the PIS and COFINS tax base. So as foreign exchange variation, we had BRL 10.9 million positive. And the main result came from the ForEx variation from ACC and NCE, which were funding conducted performing a total of -- a total combining ForEx hedging and the ForEx for ACC of BRL 10.9 million.

Net monetary variation, BRL 4.8 million, coming from tax provisions and labor provisions as well, leading to a total of BRL 16.3 million. When we compare with last year, we saw an improvement of BRL 10.4 million.

Now in terms of year-to-date, we're doing the same math, BRL 34 million of net interest, BRL 10.5 million of interest coming from loans and BRL 13.7 million coming from other interest revenues. Once again, we are including interest on our tax credits. And when we look at the ForEx variation last year, we had BRL 4.7 million year-to-date -- sorry, BRL 2.5 million in year-to-date. And this year, BRL 4.7 million year-to-date.

Once again, a highlight for the ForEx variation for ACC and NCE, BRL 46 million. And ForEx variation as, again, we're combining Brazil, Argentina and Austria, BRL 44.4 million. Monetary variation of BRL 22 million. Once again, provisions for labor and tax issues combining to a total of BRL 7.4 million year-to-date as opposed to BRL 12.1 million (sic) [ negative BRL 12.1 million ] registered last year, an improvement of BRL 19.5 million in terms of financial results.

On the next slide, please. On the next slide, we will be talking about our debt. On the first chart on the left-hand side, the position on September 30, we have a net debt level of BRL 58.6 million when compared to December 31, BRL 246.4 million, December 31, 2021, that change in scenario from positive to negative was driven by the payout of interest in capital -- on capital, which happened in May this year.

On the right-hand side, we see the main credit lines where we work with FINEP, the first one and ACC, NCE. FINEP in September had an average price of 1.64 (sic) [ 6.64% ], whereas ACC, NCI, 1.64%, as you can see. Combining those figures, we have an average cost of 4.03%. And in December 2021, the figure was for FINEP 4.87%. Just as an observation, that number went up from 4.87% to 6.64% because it's indexed in a different interest rate table. And then 0.98% for NCE, a weighted number of 3.01%.

And at the bottom, our maturity time line for the short and long run, May 2022 -- 2024, BRL 145 million and BRL 165 million next year in May. When wed up, BRL 201 million, BRL 204 million, long and short run, we had up to BRL 406 million approximately in terms of operations that we have performed to supply our cash.

On the next slide, if you will. CapEx and depreciation for the year, we have invested BRL 61.6 million, which accounts for 82% of our depreciation, which is approximately BRL 75 million, representing 2% of our net sales revenue. Last year, BRL 44 million for the first 9 months, representing 58.9% of total depreciation, which was BRL 74.9 million. Last year, for 9 months, 1.7% of the net sales revenue. It's worth mentioning that investments sped up or speed up usually in Q3 and Q4. So for Q4, those numbers should go up and cover all depreciation expenses.

So now moving on to the Q&A session. Both Nathan and myself and also Daniel will be available for your questions and comments. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Pedro Fontana from Bradesco BBI.

[Pedro Fontana, analyst]

Congratulations. I'll just pick up the numbers. I'd like to talk about the margin quite strong in Q3. What can you expect for Q4? Do you expect some more pass-through of costs to be performed? Q4 is usually slightly weaker because factories shut down, but at the same time, vehicle production in Brazil is going up. How can we see -- what can we expect margins to behave in Q4? And also for 2023, what do you expect in terms of sustainable margins for next year?

[Nathan Quye, executive]

Thank you, Pedro. Thank you for your questions and your words. Yes, it's a bit difficult as usual. Q4, we always have weaker sales or lower sales collective PPLs in December. So the levels of sales tends to decrease. There is also some noise in the global economy after the elections here in Brazil, after the midterm elections in the U.S. As Daniel said, also the war in Ukraine is also a factor. Inflation in Europe. So it's a bit for us to understand clearly what's going to happen in the coming forward months and weeks. But the level of October was good, was okay. So let's wait and see what happens in November and December.

And specifically for gross margins to your question, it depends on the level of inflation. It depends on the prices of raw materials. Those are the main drivers for our margin behaviors. If raw materials remain at the same level, we'll see what happens to the gross margin. In any event, Q4 is slightly more challenging, as you know, as you said. It depends on whether or not clients still have semiconductors available, other parts. This year, last year, there was a shortage on that front, and so that will happen on a day-by-day basis. So if that problem reemerges, the sales level will be impacted. So let's wait and see what happens in Q4.

And the same goes for next year, 2023. We have to wait and see what happens with inflation around the world, that has an impact on the export market here in Brazil. Of course, inflation is pretty much under control. But around the world, it's a difficult situation. Energy price is going up in Europe. So again, difficult for us to give you an answer around gross margins. But right now, as we speak, Q3, Q4 gross margin is very good for concern -- considering the scenario. That was the answer to your question. I hope I have answered.

[Operator]

[Operator Instructions] This concludes the Q&A session. I'd like to turn the conference over to Mr. Quye for his final remarks. Please, Mr. Quye, you may carry on.

[Nathan Quye, executive]

Well, thank you so much once again for participating in our call today. Our results are here for Q3. Numbers are very good for Q3. We are quite excited with the numbers, and thank you for the questions also and for being here with us today. And we'll see you next quarter, next year actually to discuss Q4 results. Have a nice day, everyone. Thank you.

[Operator]

MAHLE Metal Leve's video conference is over. Questions which have not been addressed will be forwarded to the company's IR team. Thank you once again, and have a nice day, everyone.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]