Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Analysis

MAHLE Metal Leve Q3: Mixed Sales, Dividend Paid

In Q3 2023, MAHLE Metal Leve faced mixed sales with overall markets 1.6% below, due to complicated conditions in Brazil and the transition to Euro 6 leading to almost 40% production reduction year-over-year. Despite lower sales, especially in the OEM heavy vehicle segment, the company recorded a net profit higher than Q2 and Q3 of the previous year. The nine-month period saw an increase of 7% compared to last year, primarily driven by the domestic aftermarket in Brazil and Argentina, which soared 22%. Additionally, they confirmed a considerable dividend distribution of BRL 711 million at BRL 5.54 per share and an equity interest payment of BRL 88 million for January to September. Expectations for Brazil's sales growth are between 8% and 10%, with exports benefiting from increases in vehicle production growth in Europe and North America. The company predicts a net margin over 18.2%, slightly better than last year.

Overview of MAHLE Metal Leve's Q3 2023 Performance

MAHLE Metal Leve convened to discuss their Q3 2023 financial results in a video conference, highlighting the forward-looking nature of project outcomes and market conditions. The company recently went through a follow-on offer and confirmed a substantial dividend payout of BRL 711 million at BRL 5.54 per share. Despite facing challenging conditions with sales underperformance and a market substantially below the previous year's production by nearly 40%, MAHLE Metal Leve saw some segments, particularly the domestic aftermarket in Brazil and Argentina, perform strongly, with a 22% growth over the last nine months.

Revenue and Market Dynamics

Daniel Brasil Alves shed light on the sales landscape, noting significant growth in vehicle sales in Brazil and Argentina, with expectations to close the year with 8-10% growth. Heavy vehicle sales, however, experienced a decline, attributed to the Euro 6 regulations raising vehicle costs and affecting the agribusiness sector. When looking at production versus sales, light vehicle production trailed behind sales performance, indicating a potential mismatch between production levels and market demand.

Financial Highlights and Challenges

Overall revenue growth was cited at 6.9% with BRL 3.3 million in sales. This growth, however, was juxtaposed with a 3% drop in domestic original equipment and a 24% decrease in export aftermarket revenues due to instability in specific markets. Interestingly, original equipment exports grew by 9.4%, indicating a strong international component. Aftermarket sales showed a robust 12.4% increase, helping offset some of the challenges faced domestically and in other segments.

Gross Profit and Operational Costs

While gross profit was better than previous years, the company acknowledged a slight degradation in gross margins due to an unfavorable mix in the cost of sales. Highlighted cost pressures included increased sales and distribution expenses due to aftermarket-related efforts and exports to Europe and the U.S. General and administrative expenses also inched higher, mainly due to inflation driving up personnel costs, along with higher maintenance outlays and global IT project costs.

Net Financial Performance

The third quarter witnessed a remarkable improvement in net financial results compared to the same period in 2022, boasting an increase in profit by approximately BRL 33.4 million. Factors such as favorable exchange rate fluctuations and financial derivatives played a significant role in this uptick. Despite these gains, the company maintained a conservative cash position with a slight increase in net debt compared to the year-end 2022, now standing at a net debt of BRL 68 million.

Strategic Positioning for Electric Vehicles and Market Share

Executives addressed inquiries regarding electric vehicle components, the longevity of combustion engines, and MAHLE's market share in various products and regions. They emphasized the diverse solutions MAHLE could provide, considering the notable penetration of electric vehicles in Europe against different fuel alternatives like biofuels in regions like Brazil. They recommended investors visit the company's investor relations site for a presentation detailing future market strategies and important revenue breakdowns. The conversation showcased MAHLE's belief in a multi-solution approach to the evolving automotive market.

Capital Management and Future Leverage Considerations

A question about MAHLE's capital structure triggered a discussion about the company's traditionally high payout ratio and recent increase in net debt level, signifying a potential shift toward a more leveraged financial position. While the executive response did not specify a change in dividend policy, the conversation left the door open for further deliberations on how MAHLE will manage its capital moving forward, indicating a possible recalibration of payout strategies in alignment with the company's leveraging plans.

Closing Remarks

The conference concluded with an expression of gratitude for participant engagement and a reaffirmation of the company's openness to addressing further questions post-meeting, highlighting MAHLE's commitment to transparency and investor relations.

Earnings Call Transcript 2023-Q3

[Unknown Executive]

Good afternoon ladies and gentlemen, welcome to MAHLE Metal Leve's video conference to discuss the results for the third quarter 2023. This video conference is being recorded and the replay can be accessed on the company's Investor Relations website. The presentation is also available for download. [Operator Instructions]

Before proceeding, I would like to emphasize that forward-looking statements are based on the beliefs and assumptions of MAHLE Metal Leve's management and the current information available to the company. These statements may involve risks and uncertainties since they related to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and the general public should take into account that events related to the macroeconomic environment to the segment and other factors could cause results to differ materially from those expressed in the respective forward-looking statements.

Present at this video conference are Mr. Nathan John Quye, Chief Financial Officer; Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager, Mr. Fabio Lopes Peres, Executive Financial Manager.

I would now like to give the floor to Mr. Quye, who will begin the presentation. Please, Mr. Quye, you go ahead.

[Nathan Quye, executive]

Thank you very much. Good afternoon, ladies and gentlemen. Welcome to our conference results talk about Q3 of this year of 2023. Before starting, we wish you all to be safe specifically now with all the heat around the country. At the end of this presentation, we will be available for the Q&A session.

Moving to our presentation. On Slide 2, we have the agenda. We start with the highlights, then we have the market overview with Daniel. Then I will talk a bit more about the net revenue performance and summary of results. And then Fabio will talk about financial management. And then we'll have time for questions and answers.

Before starting, the results for the third quarter, I would like to show and talk a bit about the follow-on offer that we had -- we've had in the past 2, 3 weeks. We all know we have the disclosed material fact at the CVM and we've confirmed the distribution of dividends. Well, BRL 711 million at BRL 5.54 per share paid last week, and it's important to confirm the follow-on offer, finalize with one of primary and secondary distribution. And all of this is confirmed that has been actually filed at the Brazilian Securities Commission or CVM.

Okay. Now we'll talk about the performance of third quarter. Overall, it was a quarter a bit below the previous quarter for some things, specifically sales. The quarter were mixed regarding various segments of sales, but we continue with a very complicated situation here in Brazil, with the certain changes of [ Euro 6 ]. Well, the current market continues well below production almost 40% below last year. That's why the sales that we have are a bit complicated at the moment. Thus this quarter, we have in comparison to last year, the second quarter was below.

Overall, all the markets of 1.6 below, we have the aftermarket for export continues down. Those are all the countries of [ Nacasu ] and the part of Brazil and Argentina. To continue with the domestic aftermarket, strong here in Brazil and Argentina, well above last year. And 9 months now, we have 22% above in the specific market.

In total, the 9 months of this year, 7% above last year. And clearly, this is due to domestic aftermarket, and obviously, original exports too. The right bottom, we have actually income of [ BRL 519 million ]. Well, what we have and what has been paid in dividends, BRL 559 million well, it's the top right this year regarding last year and the two other points, BRL 711 million regarding dividends, the part on follow-on offer. And the third was approved on the 7th of November to pay interest on equity BRL 88 million regarding the period from January to September this year. The main indicators are below.

As I said, sales a bit below last year, considering the things that have been mentioned, but specifically to original equipped domestic with heavy vehicles, better due to sales was a bit below regarding last year and also compared to Q2 this year, specifically due to a mix within sales and clearly still or heavy vehicles was better than light vehicles and the margin was a bit below.

With this, we have net profit above second quarter and also above Q3 last year for the past 9 months, this has generated a net margin above 18.2%, a bit of 1 percentage point above last year and above second quarter.

I'll turn over to Daniel's words to talk about sales.

[Daniel Alves, executive]

Well, thank you very much, Nathan. Thank you all or taking part of our video conference results MAHLE Metal Leve, the third quarter, starting on Slide 5 where we have sales and production for the Brazil and Argentina market, and also North America and Europe, the main destination of exports of the company's.

Starting with sales, 9 months of 2023 against the first 9 months of 2022, Brazil, we had a growth 9.8%. Argentina, we had a growth of 13.5%. Adding Brazil and Argentina were 10.4%. We have an expectation for Brazil to close the year between 8% and 10% growth in sales, led strongly by direct sales.

Well, heated sales for direct sales, half year, we had the incentive and the value to acquire vehicles by the government. This effect is diluted for the whole year. So we have 9.8% for the year. Argentina, despite the whole crisis, the inflation in the country, it was an increase in light vehicles of 13.5% as a way of protecting property.

So we have elections coming on. Also in the sales of light vehicles, 10% of growth. In heavy vehicles, as mentioned to by Nathan, we had a drop of 9.8% drop in the first 9 months, in Argentina drop of 5.2% and Brazil plus Argentina, 9.3% drop. Actually, Euro 6 has an increase in the price of vehicles of about 15%, 20%. This has impacted agribusiness also regarding prices of commodities, the crop moving sideways, so slight reduction in crops and this impacted the market of heavy vehicles sales, especially of trucks.

This is reflected in the production of light vehicles, so growth of 3% in Brazil, and Argentina, 18%; Brazil, plus Argentina 5.9% growth. We have performance in the production of light vehicles slightly below compared to sales. We have an effect of exports.

Some Latin American countries had a reduction in the sales of vehicles and part of it of imported vehicles coming into this calculation and highlighted by ANFAVEA. And this week, we had a return of import taxes coming back for hybrid and electric vehicles. It will start as of January next year and gradually until 2026, reaching similar levels to traditional vehicles, this being applied to electric and hybrid vehicles.

In the production of heavy vehicles, a drop in Brazil of 38%, in Argentina, 5.5%, and Brazil plus Argentina, 36.7% drop. As you can see, the absolute volume of 92.9500 vehicles is below the sales volume of 105.9. And usually, the production Brazil Argentina is higher than the sales market of both markets because the two countries export, especially Brazil, outside the Brazil and Argentina market.

However, the inventory we had last year, late last year, not only late last year, but in Q3, we had sales this year vehicles Euro 5 until [ March ] has continued. Well, this is being exhausted, but this is the main reason for this drop, and we expect a recovery, in other words, the growth of this production, and even maintaining daily sales currently that we believe will be improved. I will produce what I had in terms of inventory realized in the first quarter, I have no more, only that will bring me an increase in the production of heavy vehicles for 2024. So we believe in a recovery for this market that is part of our sales.

As to the export market production of light and heavy vehicles Europe, light vehicle growth of 14.7%, and heavy vehicles, 12.8%. North America, light vehicles, 9.7%, and heavy vehicles, 14.7%, combined of both markets, 12.3% in light vehicles, and 13.7% in heavy vehicles. This favors exports of the company.

Slide #6. I believe everybody can see Page 6, we have the net revenues performance by -- well, the evolution of market the evolution, well, so you have third quarter 2023 against Q3 2022. So the highlight here to original equipment domestic with a drop of 12.6%. As I commented, we have a market drop close to 40%. In addition, the effect of last year by last year, so the OEMs have foot on their -- they're speeding up to [ get ] vehicles of Euro 5 for the following year.

This generates the reduction in the third quarter, but I'm going to highlight here the 9 first month of 2023 against the first 9 months of last year. And this case as to domestic original equipment a drop of 3%, this performance despite being negative, it is better than the market, considering the past anticipation in sales of heavy vehicles and the total revenue of the company, if we have weighted analysis, this the drop would be higher.

We have a smaller drop compared to the market due to gains in market share and some export project of our customers that acquire here in the domestic market and export the end product engine or the vehicle. So original equipment exports a growth of 9.4%. I've just shown you growth for Europe and North America. So the growth is in the market, totaling for original equipment, 3.2% growth in revenue.

For the domestic aftermarket growth of 22%. Here, we have market share gain in a more heated market, [ imported ] stake of sales of Argentina contributing to this domestic aftermarket. For export a drop of 24%. Here, we had a lot of instability in the countries especially Colombia, Ecuador and Peru, countries with certain turmoil that impacted the export in the aftermarket, and we are working for the recovery for 2024. So totaling aftermarket to 12.4% and total revenue, 6.9% growth with BRL 3.3 million in sales.

I turn the floor back to Nathan. I'll be available at the end for Q&A.

[Nathan Quye, executive]

Thank you, Daniel, for the words on sales. Now we have a few more details regarding the results of the quarter, including the 9 months. We start with the sales cost for the 9 months has been significantly lower than the previous year as we shown in the first semester, continuing the trend that we have for the 6 months as improving margin due to aftermarket sales, as Daniel mentioned, the aftermarket is well above last year. We also have certain things in here regarding Argentina, the sales that we have in the aftermarket there are much better than last year.

On the contrary, the third quarter was a bit above and with the cost of sales and compared in last year for the third quarter. And this is specifically for this thing for the market and heavy vehicles as the introduction of Euro 6 and the mix in the cost of sales, a bit worse in this quarter compared to last year. But the growth results seems to be in this quarter a bit less than 30%, a bit worse, but this growth result is much better than previous years in terms of gross profit. Below gross profit, we have expenses with sales and distribution, a bit above last year.

For the 9 months period, and specifically, Q3, as I commented previously, this is specifically regarding publicity in relation to aftermarket and also more freight related to aftermarket sales and also exports to Europe and the United States of original equipment.

Our general and administrative expenses was slightly above last year in terms of percentage of sales, the main increases are in personnel costs because of inflation. And also we have higher maintenance costs and some additional costs related to global IT projects. As to technology costs, as I've mentioned in the previous call, above last year. And this is specifically regarding new project that we have for MAHLE for North America in relation to filters.

All those services are sold to them, it's related party transactions. So the cost increases but we also have net revenue with those sales. And other operating income expenses. So this was the timing expenses, the provisions regarding certain labor costs. So we do not have extraordinary impact, just the timing in the third quarter. And if you look at the 9 months to the right, we see a lot in this number in the quarter because of a timing question.

I'm going to turn over to Fabio, as usual, to talk about financial results.

[Fábio Peres, executive]

Good morning, everyone. Good afternoon, everyone. Talking a bit about net financial result, as Nathan said, looking at quarters, we have the third quarter 2023, well above what we had in '22. For the BRL 45 million against BRL 10 million, well, well below, right below, we have exchange rate fluctuation. So we had 16.8%. Last year, we had almost BRL 11 million, and the variation or the foreign exchange net effects, we have quite an improvement from 18 -- from 12.7 to 18.3. So we have a result of derivatives and monetary variation. We have in the third quarter of 2023, BRL 49.6 million against BRL 16.3 million. In other words, an improvement of revenue of about BRL 33.4 million.

Looking at the accumulated more to the right of the chart, we have net interest, an improvement of BRL 60.9 million in the accumulated past 9 months. So we have exchange fluctuation related to BRL 10.7 million and the net finance income of BRL 14.8 million or variation actually. So the incremental revenue of BRL 86.4 million. If we analyze the chart here, the most of the amount comes from net interest, the investments that we have in Argentina.

On the next slide, we talk about indebtedness where we have BRL 505 million in cash on the 31st of December 2022. So net position of BRL 91 million. So in September, 30th of September 2023, cash is practically stable. We had a slight increase in the part of funding deriving from the interest rates in the period. Then we have a net debt of BRL 68 million.

Moving on to Q&A, I, Nathan and Daniel Brasil are available to answer your possible questions that you may have.

[Unknown Executive]

[Operator Instructions] Our first question comes from [ Filipe Laza ] from Citi.

[Unknown Analyst]

Congratulations on the results even at such a complicated period. I have two questions. First one is the company in the long term. People talk about useful life for combustion engines. So lots of things can be linked to electric cars. So could you give an estimate of electric vehicles, which vehicles produced by market can be adapted to the equipment of MAHLE, could be adapted to hybrid. And then the market share company, opened on the yearly report, you have certain things, [ 60% ] of the first and over 80% in the remainder. Can the company give some color on its share -- market share in other products and regions.

[Unknown Executive]

Well, Filipe, I can start the answer, and then Nathan will complement. First question, when you talk about future strategy, you have to analyze the market separately. I actually recommend -- I don't know if you have seen it or not, we have some material on our website which has been our meeting with investors. The material is available. That was -- if I'm not mistaken, was held in early April, we have revenue broken down by markets, that occasion was the closing of 2022, just by [ half ], 40% of the sales for the aftermarket. And then we break down exports, light vehicles and heavy vehicles to European, North American and domestic market.

So this penetration of electric cars or vehicles, we understand as a solution, we'll have not only one solution, we will have various solutions to serve that market. For example, Europe, we have greater electric car penetration. In countries like Brazil, India, our understand is that applications like biofuel will play an important role for some time for decarbonization.

So the question is not so simple to be answered in a short period of time. We would need more time to be able to follow the rationale regarding that. I recommend you check this presentation, and then later, we can clarify any questions you may have regarding this topic.

As to market share, as has been mentioned, we have the main components. You've mentioned some of them. I don't know which would be missing there to be presented. The main products have been listed there as leaders in the part of engine components and a relevant part of leading role in the part of filters component for filtering, which is our current action as a company.

I don't know if Nathan has anything to add. Nathan?

[Nathan Quye, executive]

No, thank you. No I have nothing to add. Thank you. I think this has been the correct answer to that. But Filipe, if you have questions later, after looking at the materials on our website, please getting touched with [ Louis ] for further details if you have further questions.

And this presentation actually shows future scenarios. We actually unfold revenue in these markets. In the aftermarket, it's interesting presentation to understand the positioning of the company and future positioning. It's a material actually to -- that I recommend you have a look at it. There is a video of the presentation and also the material that was used in PowerPoint. I don't know if I've answered your question.

[Unknown Analyst]

Yes, sure. I'll have a look.

[Unknown Executive]

Our next question is from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

Well, a bit more long-term question. When we think about capital and investment and positioning of MAHLE. It's always been high payout, 95% of profit has been worked in a more deleveraged way. If we look at the post-COVID period and past years when we see this offer. And we see the size of dividends, interest on equity. If we do not get it wrong in our math, the company that should work with a level of net debt a bit higher than what we've seen or perhaps something what the company was in 2010 to 2020.

I'd like to understand a bit if it makes sense to think that MAHLE will actually work with a more leveraged structure from now on. And that means that the payout should be kept at the current level or you should reduce payout to actually work on the leveraging of the company.

[Unknown Executive]

Thank you Marcelo, for your question. As we've mentioned, with all the information that we have, and the detail regarding follow-on offer, MAHLE, MAHLE Metal Leve, it is very clear what has been the reason to have a follow-on. And as we've mentioned in that, within it, we have nothing planned to change regarding dividends. You mentioned that MAHLE Metal Leve every year has [indiscernible] 100% or 95% payout. We have nothing planned to change that.

[Unknown Executive]

[Operator Instructions] The question-and-answer session is closed. We would like to give the floor to Mr. Nathan Quye to make the company's closing remarks.

[Nathan Quye, executive]

Thank you very much once again. Thank you all for your participation in our meeting today with the results for the third quarter. We are available afterwards as I've mentioned, [ Louis ] is available. If you have further questions. Once again, thank you very much for your participation, and thank you, the whole team to actually make this call stable and active. Good afternoon.

[Unknown Executive]

The MAHLE Metal Leve conference is now closed. We thank you for your participation and wish you a good afternoon.

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