Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon in Brazil, everyone, and thank you for waiting. Welcome to Mahle Metal Leve for the Fourth Quarter of 2018 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 transmitted 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 and -- sorry, 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, who will begin the presentation. Please Dr. Binkert, you may begin your presentation.

[Christian Binkert, executive]

Thank you very much for the introduction. And welcome, good morning, ladies and gentlemen, to Mahle Metal Leve's 2018 and Q4 2018 conference call.

Looking at the agenda. We, first of all, will discuss the Q4 2018 results, including the full year 2018; then the market overview; net revenues by market; the summary for P&L and EBITDA; and the last 2 bullet points, the financial management and CapEx and depreciation.

Let's get started with the highlights. The net sales revenue increased to BRL 2.59 billion for 2018. That's an increase of 14% compared to 2017. And we achieved a margin of 18% -- an EBITDA margin of 18%, compared to 17.7% in 2017.

If you look at fourth quarter 2018, the net sales was 10% higher compared to 2017, and the EBITDA margin was at similar level, 13.6% compared to the previous year quarter 2017, where we had a margin of 14.3%.

And in 2018, the domestic market for Mahle Metal Leve, meaning the OE market and aftermarket, accounted around 52% of our net sales, meaning nearly no change compared to the year 2017.

The net profits increased by 22.9%, while in the fourth quarter 2018, the profits for the year -- or for the quarter increased by 56%.

At the moment, the Board of Directors approved distribution of interest on capital of BRL 80.6 million (sic) [ BRL 86.2 million ]. And at the Ordinary General Meeting in April 2019, there will be a proposal to distribute dividend and interest on capital, like in the past, fully but, as mentioned, it's still depending on the approval of the Ordinary General Meeting in April.

And I would like to give over the floor to Daniel in regards to market overview.

[Daniel Alves, executive]

Okay. Good morning, and good afternoon to everybody. First of all, thank you very much for attending our conference call today.

I would start from Slide 4, with the information about the Brazil and Argentina vehicle registration and production full year 2018 and '17.

Starting with the light vehicle sections, we have the Brazilian figures. We can see an increase of sales of 13.8% and a production of 5.8% higher than last year.

In Argentina, we had almost 23% decrease in sales and in production, minus 1.4%. The combination of the 2 countries, we had a 3.2% increase on vehicle sales and plus 4.7% increase on production.

These numbers are very in line with the projection we did on the third quarter last year about the full year expectation.

If you look at the [ deviation ] between sales and production in Argentina, we're having a decline of 23% in sales and minus 1.4% in production is because of the relation between the vehicles produced in Argentina and selling in Brazil.

When you look at the combined countries, Brazil and Argentina, we can see very -- close in numbers, the absolute numbers for production and sales.

Talking about this year, so the projections for 2019. Looking at Brazilian projections, we see there farther figures. We had a good perspective, 2 digits' increases for vehicle sales, 11.3% for light vehicle and 9% in production.

Talking about Argentina. The projection, it's -- our projection, it's minus 30% in vehicle sales and minus 20% on vehicle production. So again, another bad year. If you're looking for the '18 figures, we had a decline in Argentina starting June. This is the reason that we have, again, the reduction for this year.

Looking at year-to-date figures, where you see that -- a bad situation in Argentina at the moment, closing to minus 50%. However, with the lower betas comparison for the second half of the last year, we will have this projection of minus 13%.

Combining Brazil and Argentina, the projections for '19, we expect in sales 2% increase and 3% increase in production. So even with a very bad situation in Argentina, we still expect the combination of the countries is going to increase.

Now talking about the medium and heavy vehicles. We can see much better numbers. In Brazil, we have almost 31% increase on vehicle sales and 27.4% increase on vehicle production.

In Argentina, the same situation, so we had a bad minus 15.5% on vehicle sales and minus 16.4% on production. The combination of Brazil and Argentina, we're having almost 18% increase on vehicle sales and 23.4% increase on production.

The forecast for this year. The combination of Brazil and Argentina. We'll have, again, some positive numbers for Brazil and negative numbers for Argentina closing to 30% decline. But in the combination, the projection we have, it's 4% increase on vehicle sales and 6.6% on the vehicle production.

Now, moving to Slide 5. We have the vehicle production in the main export countries of the Mahle Metal Leve revenue. We can see on the North America a decline of minus 0.4% on the light vehicle and an increase of 16.1% on the medium and heavy vehicle. The total of North America vehicle production, it's 0.1% increase.

In Europe, we had a minus 1% on the vehicle production for the light vehicle and minus 0.2% for the medium and heavy vehicle. The total of Europe, it's minus 1%. And total vehicle production combining Europe and North America, it's minus 0.5%.

For this year, we have big expectation, very close to the number that we had last year. For the North America light vehicle, we have minus 0.5% for light vehicle and an increase of 3% for the medium and heavy. In Europe, we have a 0% for the light vehicle and 2.5% increase for the medium and heavy. So no big numbers or no big increase in the global market. It's a really stable situation for -- even for light and the medium and heavy.

Now moving to Slide 6. We have the net revenues performance by market. We have on the first column, 2018 figures, full year; we have then volume/price impact; the FX variation; and 2017 figures.

Going directly to the last column, where we have the variation, the full year variation. In the original equipment domestic sales, we had an increase of 21.4%. We had a minor impact of FX because of the Argentina. And the volume/price impact we're having is 22.6%.

The main reasons for this better performance than the vehicle production we just see in the -- a few moments ago, we're having a high increase of the medium and heavy market, so we have a better mix when we are talking about the Mahle Metal Leve's sales.

Another effect is the OES parts. We had an increase of the service and products. And the last main reason is the new products ramp-up. We start the new products -- or the new vehicles' engines. In this new engines vehicles, we had the ramp-up during the year of '18. So this is the 3 main reasons of our better performance on the Mahle Metal Leve sales on the domestic market.

On the original equipment export. We have an increase of 15.5%, with an FX impact of 16%. Basically, we are increasing the FX increase that we have. No major comments on this part.

The total of the original equipment's increase is 17.9% with an FX of 9.1%.

Now the aftermarket domestic. We had an increase of 3.2%, with a negative FX impact of minus 10.3%, mainly driven by the Argentina, for the pesos devaluation. If you look on the volume/price impact, we have an increase of 13.5%, mainly driven by the transport segment recovery and our product portfolio expansion.

The aftermarket export. We had an increase of 25.6%, with an FX impact of 11.7%. Therefore, the volume/price impact we're having is 13.9%, mainly driven by the increases for Chile, Colombia, Paraguay and also some inter-company increases we had.

The combination of the aftermarket's domestic and export is 7.8% increase, with minus 7 -- minus 5.7% FX impact. Volume/price increase is 13.5%.

The combination of the original equipment and aftermarket brings us to 14.4% net revenue increase, with 4% impact of FX, a volume/price impact of 10.4%.

Now moving to Slide 7. In this slide, we have the net revenues performance in the quarter, '18 and '17. In this case, I'll go directly to the total. We had an increase of 10% on these net revenues, with FX impact of 3.2% and a volume/price impact of 6.8% increase.

Now, moving to Slide 8. We have here exports by region. We have the participation in '17 and '18. We have an increase of the South America portion, mainly driven by the aftermarket I mentioned about Chile, Colombia and Paraguay. These are the main reasons of this change and this increase of the [rig and oil] in '18.

In the NAFTA region, we had an increase for liners in our heavy-duty customers. This is the main reason for this 1% increase on the participation.

Now, I will give back the word to Dr. Christian Binkert. And I will available at the end of the conference for the questions.

[Christian Binkert, executive]

Thank you, Daniel. Coming to Page #9, the summary, profit and loss. The gross margin in 2018 was 26.6% compared to a gross margin of 27.8%. The major differences are really coming from higher material costs, labor cost increases and force majeure. And the gross margin in quarter 4, 2018 was 19.2% compared to 26.9% in the fourth quarter of 2017.

Moving to Page #10. In regards of the selling expenses. The increase in the selling expenses, in principle, reflects the revenue increase. So the selling expenses are stable at 6.5% in both periods.

If you look at the general and the admin costs, we had an increase from 3.9% to 3.6%. And this is mainly coming off dismissal of headcount compared on both periods.

The R&D expenses, moving from 3.7% to 3.1%. Here we had some restructuring, which [ in turn ] to bringing our R&D cost down by an extra 0.6%.

The other operating income, we had a positive impact in the year 2018 compared to a negative impact in 2017. The major movements are provisions for our labor claims, civil and tax accruals; the Reintegra program; and also we had some gains that -- in regards of the sale of MAHLE Hirschovogel [indiscernible].

Moving to Page #11, the bridge. Where we this -- differences are coming from? The EBITDA 2017 was BRL 401.8 million; as mentioned -- discussed, EBITDA margin of 17.7%. We reached in 2018 BRL 466.9 million in EBITDA, with a margin of 18%.

The major increases are coming from gross income, BRL 61 million, which means higher volume, higher sales; other operating income I mentioned already one of the major reasons is the reversal of labor claim accruals; the impacts IAS 29 for Argentina, higher inflation, BRL 25 million; and we had a negative impact in selling expenses of BRL 21.9 million due really -- mainly to higher freight costs; and there are the smaller impacts in 2017 reflected in 2018.

Looking at the quarter comparison. Quarter 4, 2017, BRL 80.7 million (sic) [ BRL 82.7 million ], with a margin of 14.3%. And now in the last quarter 2018, BRL 86.6 million with a margin of 13.6%, and really the major movements and the major explanations like other operating income, IAS 29, very, very similar compared to the total 2018; then you have the gross income in the last quarter did go down; and really did major negative impact comparative to quarter '17 higher material costs, severance payments. We've reduced quite a lot of people in the last quarter and it's -- negative impact in regards of force majeure.

Coming to the Page #12, the net financial results. If we look at the finance income, we can see we had a negative impact of BRL 21.6 million, an improvement compared to previous year of BRL 6.8 million. Last year, we had net financial income of minus BRL 28.4 million.

Where are the changes coming from? Well, the financing cost, you can see a difference of BRL 3.4 million. And within the finance cost, interest on loans, you can see a combination that the cost of debt went down compared to previous year, but also the average debt decreased. So it's a combination of financing cost and the average debt, it's going down. And the other major improvement is the monetary variation with BRL 4.4 million as the net impact compared to previous year.

If we then go already to the next page, the Page #13, we can see the net position is BRL 153 million. Last year, it was minus BRL 14 million, meaning we have a financial leverage in 2018 of 0.33.

We have liabilities in 2018 -- through the end of 2018 of BRL 291 million.

You can see the distribution -- the short-term distribution till the end of December and sell -- a well-balanced distribution to the year 2023, where we have roughly around BRL 30 million of loans indebtedness each year.

Coming to the next page, the Page #14. The indebtedness. Here is a breakdown. How are we financed? 50% we are financed with FINEP; and 45%, this ACC loans. So it's also the major change compared to previous year. ACC means advance on exchange contract. And this year, in 2018, we still have a small portion with BNDES of around 5%.

Coming to the net income and the benefits to shareholders. I mentioned already the sales, BRL 2.591 billion, increase of 14%. Daniel explained where the major changes are coming from. The profit for the year, BRL 291.7 million, 11.3% -- I also said we've proudly announced that the 11.3%, the net income profit for the year is the highest amount in percentage we ever had. So really a good year for Mahle Metal Leve in the year 2018 compared with 2. -- 10.5% in the year 2017.

Dividend and interest on capital -- on equities. We distributed BRL 231.6 million in the year of 2017. At the moment, for 2018, 80. -- BRL 86.2 million has been agreed has been -- interest on capital, and as mentioned, is our proposal in the general assembly, end of April, is to distribute interest of capital and dividend as usual, everything meaning 100% distribution, but it is necessary, the approval of the general assembly.

Coming already to the last page of the presentation. Looking at CapEx and the depreciation. We've spent a little bit more in 2018, really slightly more than in 2017, BRL 90.5 million. The total depreciation went down to a level of BRL 90 million. At the below chart, the CapEx percentage total sales to the revenue is 3.5% at -- and percent of depreciation is increased to 101%.

Thank you very much for your attention. And now Daniel, myself are available for any questions.

[Operator]

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

[Marcelo Motta, analyst]

I have 2 questions. The first, if you could comment a little bit about the breakdown of all the impact on gross margin. So on the release and the presentation, you comment about the increase on raw material prices, the impact of the taxes that were charged in Brazil. So if you could break down those impacts, so we could have a better idea of what could be your recurring gross margin? That will be very helpful for us. And the second question is regarding the details about the commercialization of the MBE2 technology. And we read that it was approved by the board, the commercialization of this technology. So if you could provide any type of information on how much it could generate in revenues, what you expect in terms of margins, that would be helpful for us as well.

[Christian Binkert, executive]

And thank you for your questions. Coming to the first question, if I understood it correctly, you wanted to know what detail -- breaks down of the margins comparing the 2017 to 2018 numbers. I mentioned material costs that we had a negative impact of around -- above BRL 20 million. We had force majeure, which gave us a negative impact in 2018 compared to 2017 of around BRL 8 million. We had labor cost increases of around BRL 20 million. These are really already the major positions. If you look at margin, 27.8% in '17 compared to the 26.6%, some minor positions, but once again, material costs, labor cost increases, force majeure and then really smaller impacts lie for extendable energy cost or freight cost. Coming to your second question, the MBE2. You're fully correct that the Board of Directors signed the commercialization of the MBE2 product. We've signed already some contracts. That's very positive. We did not create any sales, any turnover at the moment. They're building up in, I think, in 2 facilities at the moment. This is new equipment, and we are very excited -- the first crop or the current results of the MBE2 product for [indiscernible]. We have been sold the equipment will be balanced -- or will come out in the months June or July. That -- this is I think the update I can give you. We signed contracts. We are assembling our equipment at various mills, and we are looking really excited forward to the results of the mills in June and July. Did this answer your questions?

[Marcelo Motta, analyst]

Yes, that was clear.

[Christian Binkert, executive]

Thank you very much. Any other questions?

[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, ladies and gentlemen, for participating in the call. I'm looking forward to hearing, speaking and meeting you in the near future. Have a nice day, and thank you very much once again. Goodbye.

[Operator]

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