Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon in Brazil, everyone, and thank you for waiting. Welcome to Mahle Metal Leve for the Fourth Quarter of 2019 Results Conference Call. With us here today, we have Dr. Christian Binkert, CFO; Mr. Daniel Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Account 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 these 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 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 will 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]

Good afternoon, ladies and gentlemen. Welcome to Mahle Metal Leve's conference call. And first of all, I hope everybody is safe in health. That's very important during the corona crisis. I also would like to start with this topic that's not only the safety of our people, but also the health of our people as well the health of the company at this situation, the most important for Mahle Metal Leve. And you might have heard already that for the admin area, we put our people already mid of March 2020 in the home office. So people are safe. And also, our plants are closed starting last week, mid of last week, and at end of last week. And most probably, the closure of the plants, depending on the customer needs, will be until 13th of April, but we will have to see if we will have to extend the home office as well as the closure of the parts -- plants longer than the 13th of April.

Now let's go to the fourth quarter data. I'm moving to Slide #2. The agenda, like usual, first of all, the highlights for 2019 and for the fourth quarter 2019 will be presented by myself. Daniel Brasil, the market overview, the second topic. Net revenues performance by market also by Daniel Brasil. Then a summary P&L and EBITDA from my side. Some input in regards to financial management, net financial results and indebtedness. And the last bullet point is CapEx and depreciation. And then, of course, we are open for any questions you might have.

Moving to Slide #3. You could see that we achieved in 2019 a sales of BRL 2.526 billion, a reduction of 2.5% compared to previous year. If you look at the fourth quarter, we have received sales of BRL 595.7 million, which is a drop compared to 6.1% compared to previous year. The domestic original market for the company recorded an increase of 5.3%, while the consolidated production of vehicles dropped for the market by 3% in Brazil. And in Argentina, we did see a fall of 36% -- 32.6%, sorry.

Interest on capital will be decided in the AGO and the ordinary shareholders meeting end of April for a discussion. At the moment, for decision and approval is the amount of BRL 80.2 million. And looking at the key indicators, I will give some more information later on. But EBITDA, we achieved BRL 440 million for the total year. And that means that EBITDA margin is for 17.4%, a slight drop compared to previous year of 18%.

If you look at the last quarter 2019, in the fourth quarter, we achieved the EBITDA margin of 12.9% compared to 2018 last quarter, 13.6%. So the last quarter is following the trend of the total year in percentage deviation. In regards of the net margin, the net margin slightly dropped from last year, 11.3% to 10.3%. On the other hand, for the last quarter of 2019, we achieved a net margin of 11.1% compared to 2018 last quarter of 10.7%.

And now I would like to hand over to Daniel Brasil for the market overview.

[Daniel Alves, executive]

Okay. Christian, thank you. Good afternoon, everybody. I'm on the Slide 4. And now I will go to the market overview, Brazil and Argentina registration and production 2019 against 2018.

So in Brazil, we finished the year with 7.7% increase. It was a good number, this amount. In Argentina, a decline of minus 45.4% and a combination of Brazil and Argentina on the vehicle -- light vehicle sales, minus 3.8%. In production, we have a 2.1% increase in Brazil and minus 32.5% in Argentina. And the combination of this market is 2.9% (sic) [ minus 2.9% ]. So you see a very good performance in Brazil and a very bad performance in Argentina. And the total amount is negative in production and in sales.

Going to the medium and heavy vehicles. In sales for Brazil, we had an increase of 19.6%. In Argentina, minus 46%. The same situation for the light vehicle and medium and heavy. And the total combined, it's 6.5% increase for the medium and heavy vehicle sales. For production in Brazil, minus 2.7%. In Argentina, minus 34.5%. And the combination of Brazil and Argentina, it's minus 4.7%. Again, it's a very good one just in Brazil. We had a decline on production, mainly in the [indiscernible] numbers, and the combination of the 2 markets on production was minus 4.7%.

I am not talking about the price for the 2020. So we had the corona situation. It's facing this very bad situation for everybody. And what we can say right now, it's the customer shutdowns. So we have, at the moment, almost 100% of the automakers without producing vehicles. And we are receiving updates, daily updates with the postponement of the return on production. So in average, the scenario we see, combining March and April, it's around 5 weeks' shutdown for the customer. Of course, this will impact on the vehicle production. So the expectation is at least a minus 10% decline on the vehicle production based on the figures we have right now. And then we are working with scenarios, and with these scenarios, we are going to be -- must be as flexible as possible to react or to act between these scenarios. So we are in a very stable market situation. And we need to do daily evaluation for these scenarios and the business going on.

Now moving to Slide 5, where we have the vehicle production in the main exports markets. It's North America and Europe. There is a mistake on the title. So it's showing 2020 and 2019. The right one, it's 2019 against 2018. Sorry for that. As you can see, we had a decline on the North America vehicle production, 3.6%, light vehicle and medium and heavy combined. And in Europe, we had a decline of minus 4.1%. So in total, we had minus 3.9% for Europe and North America combined in the markets, light vehicle and medium and heavy.

Now moving to Slide 6, where we have the net revenues performance by market. We have 2019 values, volume/price column, the FX variation, 2018 values and volume and price percentage, the FX impacts percentage and the variation -- the total variation. I will go direct to the last column, the total variation. In the original equipment domestic market, we had an increase of 5.3%, a negative FX impact of minus 1.7% and the volume and price impact, 7% increase. We had a better performance than the markets and just show the vehicle production with a decline of minus 3%. The main reasons for this better performance was a share increase. We got some new business ramp-up. We also got benefits from the export engines. We supply some parts from the customer that are exporting engines and also on the OE's parts, the servicing parts.

On the export market for original equipment, we had a decline of minus 14% and a positive FX impact of 5.2%, therefore a total decline of volume impact of minus 19.2%. In this case, the main reasons for this performance was the market reduction I just presented and also inventory adjustments from the customers. We had also our last year's spot buy. So we had sales in 2018 and not again in 2019, a specific project, and also helped us also for some projects. These are the main reasons for this lower sales on the export business for the original equipment.

On the subtotal for the original equipment, it's minus 6%. For the aftermarket domestic, we had an increase of 6.9%. With the FX impact, 10.3% negative. This negative FX impact is mainly because of the Argentina. We had the sales in pesos and we bring it to Brazilian reais to make the consolidation, and this is the main reason for this FX impact. And in total, we had a 17.2% increase for the aftermarket domestic. In this case, the main effect was the mix of products of sales. This is the reason for this increase.

In the aftermarket export, we declined 1.5%, with a positive FX of 5.4%, and the total volume/price impact was minus 6.9%. In this case, we had some low turnover in Turkey, Chile and also Paraguay. These are the main reasons for this decline on the aftermarket export. The total for the aftermarket was positive 4.9%. And the combination of the original equipment and the aftermarket, we had minus 2.5%, with the FX impact of minus 0.5% and total volume/price impact of minus 2%.

Now moving to Slide 7. On this slide, we have the last quarter of 2019 and the last quarter of 2018. In this case, the total turnover was a decline of minus 6.1%. And the main reasons for the deviation of the sales turnover was explained on the full year. We have a very similar effect for this last quarter for the turnover.

Now moving to Slide 8, where we have the participation for the export markets by region. As you can see, we had an increase for the South America, 16% against last year, 2.3% (sic) [ 12.3% ]. As I mentioned, we got some new business on the marketing, and this is the reason for this increase.

Now I'm moving back to Dr. Christian Binkert, and I will be available for questions after the end of the presentation.

[Christian Binkert, executive]

Thank you, Daniel. Just one additional comment from my side on Slide #5. The segment said January to December 2020 and January to December 2019. This is typo mistake. It should be January-December 2019 compared to the January-December 2018. The numbers are correct. There's just an error in the years. So once again, it should be not 2020, it should be 2019, but -- and 2019 should be 2018. Thank you.

Coming to Page #9. Mahle Metal Leve achieved a gross margin of 25.3%, a slight drop compared to previous year with 26.6%. The major reasons are the same and like the last time already, the total cost benefits, which we received from the government in 2018 which we did not receive in 2019 anymore and higher energy costs, a major part is coming out of Argentina but also in Brazil, are the major reasons of the decline of the gross margin. On the other hand, for the last quarter, we could see an increase of the gross margin to 21.5% compared to previous year at 19.2%.

Moving to Page #10. You can see, if you look at total 2019, the selling expenses have been stable. We achieved the ratio of 6.6% compared to 6.7% in 2018. In the admin costs, you did see a reduction from 3.6% to 3.4% due to restructuring efforts mainly. Indeed, this year, a small increase in R&D expenses, from 3.1% to 3.3% because mainly of innovation and development with the partnerships with our customers, some patent registrations and also some release of new products at the market.

We also have a change in the other operating income. Last year, positive 0.3%. This year, negative, minus 0.3%. What are the major changes? Reintegra and the export incentives, which we still achieved or received in 2018 but we did not receive in 2019 anymore. In addition, the Argentinian government introduced an export duty expense in Argentina, which was also burdening the other operating income and expenses.

Moving to page number -- go now to Page #11, the EBITDA comparison. 2018, for the total year, the margin, 18%. That's an absolute amount of BRL 466.9 million. And in 2019, we achieved BRL 440.8 million, with a margin of 17.4%. What are the major changes? The first one is the hyperinflation accounts in Argentina, the so-called IAS 29, which gave us a positive impact of around BRL 24 million. General and admin, I already explained, mainly due to restructuring, BRL 8 million achieved. The other large impact was in the other operating income, and here, once again, Reintegra, the export incentives, within the BRL 15.6 million negative are the major portion. And then the gross income was minus BRL 50 million. Here, again, the total incentives, which we did not receive any more, higher energy costs, forward sales. But also, of course, not to forget higher personnel costs. These are really the main highlights for the total year 2019. And if we look at the fourth quarter 2018, we achieved a margin of 13.6%, with an absolute amount of BRL 87 million EBITDA compared to BRL 70.7 million in 2019 in the last quarter, with a margin of 13% here. And really, if you look at the gaps and the reasons are very, very similar, 2018 compared to 2019, the total year.

Moving to Page #12, the net financial results. We could see that the net financial results got worse by around BRL 20 million to a level of minus BRL 41.4 million. There are the major changes coming from. The first one is the finance costs, where we have the deviation of minus BRL 7 million compared to previous year. So it's really, you can see on the lower table on the bottom of the page, the cost of debt has been quite stable with 4.3%, but our average debt did increase from BRL 270 million to BRL 383 million. So that's the first reason. The second reason is the investment yields did go down from 6.3% to 5.5%. And also, the average investment amount did increase from BRL 124 million to BRL 112 million.

Really, the largest deviation is coming from exchange rate variation. And compared to previous year, minus BRL 19.7 million, and this is really -- the majority of this impact is coming due to exchange rate impacts out of Argentina. And the last one, we have a positive impact, monetary variation, BRL 7 million, with the labor claims interest portion, where we had a positive impact in 2019 compared to 2018. And once again, overall, the results, the net financial result got worse by BRL 19.8 million.

Moving to Page #13. The indebtedness did increase from BRL 153 million by BRL 35 million to BRL 188 million. You can see that the distribution and liabilities between short-term and long-term are very stable compared to the previous year with 54% short-term, long-term 46% here. We had an overall increase of BRL 102 million in liabilities. And we also had a decrease in the cash deposits in the bank of around BRL 68 million, once again, giving a net indebtedness of BRL 188 million.

If you look at the lower table of the page, you can see the distribution between short- and long-term. And short-term, once again, the BRL 214 million are quite equally distributed between the different months in 2020. And for long-term, also have a major portion in 2021 to 2023, but also, we can see in the outer years until the year, 2028, some long-term liabilities.

And coming to Page #14. Here, the more details in regards of the indebtedness. For this year, you can see that the company strategy did not change a lot. The loans we are having are around 49% with FINEP compared to 50% last year. And 47% is ACC and NCE. And last year, it was 45%. So all this year, no major change compared to previous year.

Coming to Page #15, which is already the last page before answering any questions. We had a slightly higher CapEx at Page #15, a level of BRL 99.8 million, meaning an increase of around BRL 9 million to BRL 10 million. Accordingly, also the depreciation increased to BRL 97 million, from a level of BRL 90 million in the previous year. If you look at some ratios last year, in percent of sales, CapEx was 3.5%, so it increased to 4%. And compared to depreciation, you also have a slight increase to 103% compared to 101% in previous year.

So this was already the last slide from our side. Now open for any questions, and looking forward, if you have any questions.

[Operator]

[Operator Instructions] Our first question comes from Gabriel Rezende, Bradesco BBI.

[Gabriel Rezende, analyst]

I have 2 questions, if I may. First, I would appreciate it if you could share with us how you're seeing EBITDA margins evolving compared with your historic levels considering this very challenging environment in the auto industry. And second, just to clarify, you mentioned a drop of 10%. Would you please repeat what is this decrease related to? Is it Brazil's vehicle projection falling 10% in 2020?

[Christian Binkert, executive]

Perhaps, Daniel, you could mention on the expectation of the market, just what's mentioned by -- before.

[Daniel Alves, executive]

Okay. I can say about the market first. The minus 10% I mentioned, it's not our forecast in this case. What I mentioned is we have done, in average, the customer shutdowns around 5 weeks. So if you took this consideration in the whole year, we got around 10%. Those -- this is the minimal level that we think the markets will decline. So we are working on the scenarios, as I mentioned. And this was just a difference based on the customer shutdowns. For sure, we will have like the economy situation. We have a negative forecast for the GDP and also maybe unemployment rate on the country, so the confidence level, so the scenarios that we are evaluating, it's different from this 10% declining. So this was my mention. It's clear for you, Gabriel?

[Gabriel Rezende, analyst]

Yes. Yes. It is clear.

[Christian Binkert, executive]

And Gabriel, in regards of the margin, as Daniel mentioned, we are working in different scenarios. So very, very difficult to predict at the moment because our customers are also changing permanently the schedule, not only here in South America. But as you know, our -- we also have a major portion of export to North America and Europe. And for example, Volkswagen in Germany announced they will not reopen as scheduled. They will postpone already. So at the moment, it's very, very difficult. You all know that the government announced some measures which we can use. We are studying these measures very, very carefully at the moment. Highest core, if you let me stress once again, is the health and safety of our people at the moment, really, and also the health of the company. We are trying to flexibilize our production as much as possible. But really, to give an estimate at the moment on forecast, I cannot do. It's because the environment is just changing too much at the moment.

[Operator]

Our next question comes from Marcelo Motta, Banco JPMorgan.

[Marcelo Motta, analyst]

2 questions as well. And the first one is actually a clarification. During the call, you mentioned that the main negative impact on gross margin was energy cost. So I just wanted to check if I got it correctly. And if you think that you could recover this increase in energy prices. You can pass-through these to customers over time, so gross margin would return to a normalized level. And the second question is regarding the MBE2 technology. There was a material effect yesterday night saying that the efficiency level was a little bit lower than expected. So just wondering if the company could provide us with a little bit more color regarding, I mean, what exactly was below expectation, if you could say the amount and if you have other tests going on, which could kind of offset this one, if the company will continue to invest on the initiative, if it might take longer than expected for the commercial ramp-up. So just an update on the MBE2.

[Christian Binkert, executive]

Thank you, Marcelo. Now let me take over the 2 questions. Yes, you did understand correct, I mean, that this impact on the margin was energy cost, mainly driven by Argentina, really a huge inflation in energy in Argentina, but also partially in Brazil. Really depending on the customer, yes, you are right. Partially, we can reorganize this, but partially not. Really, really depending on the customer contracts if we can forward these charges to our customers or not.

And in regards of MBE2, yes, you are correct. There was, yesterday, a release. A little bit more background. We said what you asked. We made a trial mass production in 2019. The productivity was lower than expected. There was delayed starts. We had to finish earlier than expected. Many different reasons. We could study during systems, really the behavior of the MBE2 quite well. And you asked, are we further investing? Yes, we are doing a further mass production at this same customer. We agreed this. So we are not keeping up into productivity, and we will have to see the next couple of weeks and months how the productivity system will develop. I mean really, the good news is that our mill customers did not indicate any shutdown at the moment. So they are continuing to work. This is really, really good news for us. There are different many areas in the automotive. I hope, Marcelo, this answered your 2 questions.

[Marcelo Motta, analyst]

Yes. That was very clear.

[Operator]

Our next question comes from Victor Mizusaki, Bradesco BBI.

[Victor Mizusaki, analyst]

Just a follow-up on this question about the MBE2. Is there any risk that, I mean, given that you do not achieve the expected results, that maybe you need to do a kind of impairment in these investments?

[Christian Binkert, executive]

The MBE2 impairment testing in 2019, we did not see any impairments. As mentioned, we will have to wait for the results of 2020 of the productivity. Really, at this stage as we just started the first crushing and the mills just started. So it's really too early to say if there is a risk of impairment or not. We really have to wait next couple of weeks and months.

[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 for participating at the call. I really wish you all the best and safe in health, not only for you and your family. I hope to be here once again after the first quarter and the crisis is more stable, and we can predict once again how it's going forward. But really, most important now stay in health and safety. Take care, and see you once again. Thank you very much for participating in the conference call. Have a nice day.

[Operator]

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