Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to MAHLE Metal Leve conference call for analyzing Q4 2020 results. Here with us, we have Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Accounting Manager; and Mr. Fábio Peres, Executive Finance Manager.

We'd like to inform you that this event is being recorded. [Operator Instructions]

Before proceeding, we'd like to clarify that forward statements are based on the beliefs and assumptions of MAHLE Metal Leve's management and currently available to the company's management. They involve risks and uncertainties, because they relate to future events and therefore, depend on circumstances that may or may not occur.

Now I'd like to turn the call to Mr. Daniel Camargo, who will start this presentation. Please go ahead, sir.

[Daniel de Oliveira Camargo, executive]

Good afternoon, everyone, ladies and gentlemen. Welcome to our earnings call to address 2020. Well, before we start, we'd like to say that we hope all of you are staying well and healthy considering the pandemic and MAHLE is keeping stringent measures in our operations in order to mitigate the spread of this virus. And despite such a challenging year, we delivered results as you will be able to follow. And after the presentation, as mentioned, we will be available for your questions.

So let's go over our agenda on Slide #2. We are going to start with the highlights for 2020 as well as for Q4 2020.

On Slide #3, we have the highlights. Net sales revenue, BRL 2.4 million in 2020, slightly below the results from 2019, a decrease of 4.9% despite the challenges. In Q4, we see an increase of 30.4% compared to the same period in 2019, especially because of the aftermarket sales, in which we had an increase by 10.6% compared to 2019 year-over-year. And in the Q4, the increase was 42.1% compared to the same period of the previous year.

As for domestic OE, in 2020, there was a decrease of 19.6% in sales compared to 2019. And as for Q4, we had an increase of 24.3% compared to the same period in 2019. Thus in Q4, we saw an increase in our markets.

Another highlight is interest on equity. In 2020, the Board of Directors approved the payout of BRL 70.6 million, and they will -- this amount will be paid in May of 2021. As for gross margin, we ended 2020 with a gross margin of 26.1%, slightly above the results of 2019 that was 25.3%. When we compare Q4, in 2020, the gross margin was 29.6% against 21.5% in 2019.

And the last point I'd like to highlight is that the Board of Directors also approved the election of Mr. Nathan John, as the company's CFO.

Now I'd like to turn this call to Daniel Brasil Alves. He will now talk to us about the sales and production. Please, Daniel, go ahead.

[Daniel Alves, executive]

Thank you, Daniel Camargo. Good afternoon, everyone. First, I hope you are all staying -- doing well and staying healthy, and thank you for joining us. I am going to start on Slide #4. Here, we have sales and production of vehicles in Brazil and Argentina in 2020 compared to 2019. I'd like to start with light vehicles. Sales in Brazil, we saw decrease by 26.7%. In Argentina, a drop of 16%. And combining these 2 markets, 25.4% less. Despite this negative number, it was above our expectations or the expectations we had at the beginning of this pandemic. And as Daniel Camargo mentioned, Q4 led to an increase in sales.

As for production in Brazil, we see a decline of 32.1%; in Argentina, a decline of 18.3%. These 2 markets together, the decline totaled 30.7%. As for production, this number is also better than our expectations. At first, the estimate was minus 40%, but at the end of the year, the total vehicle production decreased 30%. And there is a mismatch between sales and production. We see that production declined more than sales, especially because OEM companies resumed their operations, and that led to a low inventory.

So at the end of 2020, inventory was approximately 100,000 or equivalent to 12 days in inventory, and this usually is 35 days. So you can see we ended the year with days in inventory of 12 days. 2021 starts with a low inventory and later, I will share our expectations for 2021.

As for medium and heavy vehicles, a decline of 9.3%. Combining Brazil and Argentina, their rates are very similar. Production decline of 19.1% in Brazil, minus 7.6% in Argentina, totaling 18.6%. Once again, a mismatch between sales and production, and that led to low days in inventory. In the Agriculture segment, leverage sales of heavy vehicles of trucks as well as agricultural machines.

Now let's focus to 2021. So we already have information regarding year-to-date. As for light vehicles, we see a drop by 13% in sales and production, a decline of 1%, combining Brazil and Argentina market.

Our expectation is to see a growth by 15%. This is actually given by ANFAVEA and also by the Vehicle Association from Argentina, IHS. This number was more conservative at the beginning of the year, considering the drop in 2020. But considering what is going on in supply chain. And if you paid attention, now OEMs are working hard in order to keep their lines operating.

Production lines were shut down for a while or they had to decrease production. And I'd say that the scenario ahead of us is very challenging. This number is really not certain. It's not clear. The pandemic right now is much worse than what we faced last year. And we work with numbers aligned to this expectation of growth of 15% in 2021.

As for production, ANFAVEA estimates an increase of 25%. I just mentioned inventory and inventory days is now low, and that's why production rate will increase. As for heavy vehicles, we started this year, year-to-date by February. Growth sales of 8% and production increasing 16%. So the market seems to be doing well. And for full year for heavy vehicles, it's expected that 13% in sales and production increased by 23%. So once again, MAHLE works aligned to this forecast. And I'd call it conservative, considering the uncertainties ahead of us. So we are working guided by these numbers.

For the first quarter, we see improvement considering production of light and heavy vehicles. So for this first quarter, we believe that results will be better, especially because we need to provide components to automotive companies.

Now let me move to Slide #5. Here, we have a vehicle production for North America and Europe. For North America, we have data from 2020 against 2019. There is a drop by 20.5% for light vehicles, 33% drop for medium and heavy vehicle. In Europe, 22.2% decline for light vehicle, 23.4% drop for medium and heavy vehicles, totaling a drop or a decline of 21.7%. And this number is better than what we had for Brazil and Argentina, where this decline was higher.

Moving now to Slide #6. Net revenues performance by market, full year and Q4. First part is for full year. We have sales for 2020. We have a volume price -- variation -- FX variation, and we have also the percentage impact on volume price and FX impact; and finally, variation on revenue.

Let's start with original equipment for domestic market. There was a drop of 19.6%, FX impact of minus 0.02% and this relates to our unit in Rafaela devolved in Argentina, because it's sold in pesos, and it's converted in Brazilian real.

As for the volume price impact, minus 19.5%. We see a better performance compared to vehicle production. And this result is explained by the mix of products that we offer, as we saw production of heavy vehicles was lower than what we had for light vehicles.

Secondly, OES services for a replacement, and finally, increased market share with some projects for local production.

As for export of original equipment, a decline of 3.9%, positive FX impact of 14.7%, and volume price impact, minus 18.6%. This is well aligned to the production of vehicles. As I mentioned, in Europe, major export markets where we had a drop of 22%. And here, we had minus 18.5%. As for domestic aftermarket, we see a growth of 10.6%, with FX impact of minus 2%, because of our operations in Argentina and volume price impact of 12.6%. For this market, we had a strong recovery, high demand for components, not to mention the devaluation of the Brazilian real, which favored companies with local production. And that's why our market share increased in the aftermarket market segment.

For export, a decline of 5.4%, positive FX impact of 23.1%. Volume price impact, negative 28.5%. This is explained by the impact of the pandemic and the recovery of our export markets that happened slower than what we had in the domestic market. And that's why we had this declining export aftermarket.

When we combine, as you can see, minus 4.9% with a positive FX impact of 6.4%, and volume price impact of minus 11.3%. So 2020 was certainly a very challenging year, and this is the revenue variation that company had, but we can also see how resilient MAHLE was.

At the bottom, we have the Q4 results. Once again, as Daniel Camargo mentioned, an increase by 30.4%. So this was a very good quarter for us. OEM companies shortened employees' vacation, so they produced more. I'm not going to go into details here line per line, but Q4 was very positive to our company's revenues.

Now on Slide #7, we can see consolidated exports by region. No major changes. You can see a reduction in North America and an increase in South America, when it comes to exports revenue.

So now I'd like to turn the floor over back to Daniel Camargo, who will continue the presentation and I will be available at the end for your questions.

[Daniel de Oliveira Camargo, executive]

Thank you, Daniel Brasil. So moving on to our next slide. You can see our gross margins. And we had an increase in gross margins, as I said in our highlights. And in spite of the drop in sales, we had an increase in our gross margins due to productivity gain and synergy initiatives that we implemented throughout the year. An observation here is that this could be even larger than the previous effects of BRL 40.6 million in cost of sales. So if we exclude this effect, we would have a 27.8% margin in 2020. So this number could have been even better.

Now on Slide #9. You can see our main expenses. Selling expenses, the year of 2020 was impacted by the organizational restructuring process, especially in Q4. The main impact was the use of freight when companies started to resume their activities. We don't know exactly what the future will be like, but we see a recovery from the pandemic, and that is what led to an increase in freight expenses in the fourth quarter of 2020.

General and administrative expenses, we can see a larger impact in 2020 compared to the previous year, which was BRL 85 million, and in 2020, BRL 95 million. The main impacts are also due to changes in the organizational structure, especially in the beginning of the year when we were facing the peak of the crisis caused by the pandemic.

Other operating income expenses, we had the greatest impact coming from nonrecurrent expenses resulting from the provision for impairment losses, as we mentioned in other calls. So part of it from the subsidiary in Argentina and part of it coming from the MBE2 impairments.

Now on our next slide, you can see our operating income measured by EBITDA. EBITDA margin of 17.4% in 2019 dropped to 12.3% in 2020. Once again, that was a result of nonrecurring expenses. We saw the impact of BRL 141 million of other operating income, as I mentioned, especially because of the subsidiary in Argentina and the MBE2 project. Excluding these effects, we would have had an EBITDA margin of 17.2%, and that's our adjusted EBITDA for 2020, 17.2%, very close to the numbers of 2019 in which there was no pandemic. So we believe that these were good results that we were able to achieve.

Now I'd like to turn the floor over to Mr. Fábio Peres, who's going to talk about our net financial results.

[F¨¢bio Peres, executive]

Good afternoon, everyone. So I'm going to tell you about our financial results starting in the fourth quarter. Our bottom line is quite aligned with the 2019 numbers. In 2019, in the fourth quarter, we had BRL 12.6 million, whereas in 2020, we achieved BRL 12.5 million. So very close. When we look at the total of 2019, we achieved BRL 41.4 million against BRL 86 million in financial income in 2020. The differences come from operations of -- foreign exchange impact of the operations we conducted in 2020, regarding ACC exchange variation.

Now at the bottom of the table, you can see the interest rates and average volumes practiced throughout the year. In the fourth quarter of 2019, we had a cost of debt of 4.6% versus a remuneration of 4.8%. Now in 2020, the cost of debt was 4.3% versus investment yield of 3.8%. So the debt level is quite stable.

Now comparing 2019 to 2020, we can see that in 2020, we had 4.1% in costs versus 4.3% in 2019. In terms of investment yield, 5.5% in 2019, and 3.5% in 2020. The volumes of operations, debt investment increased when we look at 2020 compared to 2019, and that is due to the raises in March 25 and 26, 2020 of BRL 250 million to reinforce our cash position, and for us to be better prepared to face the pandemic throughout the year.

Now on Slide #12, you can see our indebtedness numbers. In the first chart on the upper left of the slide, you can see our net debt of BRL 128 million -- a net position of BRL 188 million, I'm sorry. And we improved this position in 2020 because of the cash generation position and the decisions made by the company when it comes to reorganizing our expenses, and those had an impact on our cash position.

Now on the right-hand side of the slide, you can see our borrowings by type. In December 31, 2020, 47% came from 4131 operations. FINEP accounted for 30% of the total at a cost of 4.01%. ACC operations accounted for 19.7% of the total at a cost of 0.47% and BNDES-FINEM accounting for 2.7% at a cost of 6.05%. Combining all these costs, we have an average cost of 4.4% a year.

And in the chart below, we see the maturities of our short-term and long-term debts. For the short-term debts, we have about 73% of the total of our debts and 27% of our debts are long term. This month, we're going to pay BRL 265 million. And as I said previously, this amount is due to tranches that we raised in the past to reinforce our cash position.

Now on Slide #13, you can see a summary of our investments and depreciation. In the fourth quarter, we had BRL 51 million in investments versus BRL 25 million of depreciation. Looking at the year of 2020 as a whole, we had investments of BRL 68 million and total depreciation of BRL 103.3 million, which accounts for 2.9% of our net revenue and 73.4% of the depreciation total -- I'm sorry, 66.4% of the depreciation. Of course, investments are below the depreciation level, because of the harsh situation that we faced in 2020. This was mainly caused by the pandemic with lockdowns in many cities, in our markets. But the company is very well aligned with the needs of our customers, and we've been taking a close look at the demand level. So at the end of the day, we -- when we have special demands from customers, we analyze them and we make investments appropriately or accordingly.

Now I'd like to open the floor for questions, Daniel Brasil, Daniel Camargo and myself are now available to answer any questions that you may have. Thank you very much.

[Operator]

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

[Marcelo Motta, analyst]

So I have 2 questions. The first question is can you comment on the semiconductors? I know you mentioned this during your presentation, you said that some OEMs have shut down their production lines. We know what's going on in Brazil, Europe and North America, because we watch the news. But does this have an impact on sales to OEMs for the next quarter? Or is this going to be solved in the short-term or not?

And now about gross margins. You also talked about synergies and impairments. But can you please tell me about whether the raw material costs can impact this gross margins from now on? Is this level sustainable or not? So these are my 2 questions.

[Daniel Alves, executive]

Marcelo, this is Daniel Brasil speaking. Thank you for your questions. I will answer your first question about the semiconductors. As I said, some OEMs have already announced, they are shutting down a few lines. And the whole chain, I mean, OEMs are working really hard to keep their lines working. And the inventory levels at the end of February was at around 100,000 vehicles, so relatively low.

They are adjusting their mix at the production line with air boarding, airfreight of some of the components, purchasing ahead of time so that the impact can be as small as possible.

MAHLE has been monitoring customers' portfolio. We have orders, but we don't know exactly when the OEMs will stop. But we know that this is an imminent risk. We've been working in close relationship with the OEMs, so that we can be able to react fast and meet our demand if it comes or to slow down whether there is no demand.

So if the OEM has to stop for a week, for example, of course, this is going to impact the original market sales. But at first, we don't expect a general shutdown of all OEMs. You may see one OEM stopping over here and another one increasing production over there. Each OEM has its own pipeline and safety inventory for the components. So we don't have a very clear view of what the impact will be, but we're watching this from up close. And not only for semiconductors, but also raw material, cardboard and tires.

So this recovery -- I mean, the supply chain is under a lot of stress to meet the demand and make things happen, and we've been seeing some changes in market share depending on the situation of each OEM. I hope I answered your question.

[Marcelo Motta, analyst]

Yes, it was quite clear.

[Daniel Alves, executive]

Now when it comes to our revenue, well, we have the service part and the aftermarket part. And as I said, the demand grew very much. And we still have a backlog to serve in our business units. We still have this backlog to produce and deliver to our aftermarket unit. So we are redirecting production lines in order to be able to serve different parts of the market. Daniel Camargo, would you like to comment on the second question?

[Daniel de Oliveira Camargo, executive]

Yes. Well, about the second question, the impacts on margins. Indeed, we made an effort, and we negotiated with suppliers and therefore, we did not see major impacts on our raw material costs.

Of course, we understand that everyone is going through this crisis. So we kept a healthy dialogue with our suppliers. But in the future, we don't know exactly how much increase we're going to face and what this pressure will be like, but we try to transfer this forward to our customers, not always at the same proportions, but this is something that MAHLE has always tried to do, and we'll continue to do so. We cannot predict what will come in terms of increases in the future. But in 2020, we were able to negotiate our contracts with our maintenance vendors, and all of our suppliers.

[Operator]

Now our next question is by Fernando Leitão with Jardim Botânico Investimentos.

[Fernando Leitão, analyst]

Congratulations on the surprising results. Now I have a question about your research center. As far as I understand, it was shut down. Why is that?

And my second question is, looking at the history of sales of MAHLE Metal Leve, since 2015, I mean, from 2015 to 2020, 2020 was a typical. But up until 2019, we saw a growth in revenue that was way below other automotive parts company. Of course, not all companies are the same. They don't serve the same market, but some companies that supply parts to heavy vehicles or trucks or engines, we see that the light vehicles market is what is sustaining the growth of Metal Leve, at least from 2015 to 2020. So a few years ago, Metal Leve focused on the futures segment, which give its products more variability. So what is MAHLE Metal Leve doing right now to rely less on the light vehicles market?

[Daniel de Oliveira Camargo, executive]

Fernando, this is Daniel speaking. Thank you for your questions. So regarding our technology center at MAHLE, I don't know where you got that information from, but it was not shut down. It's working at full steam. It's located in Jundiai, right close to where Bandeirantes and Anhangüera Highways meet. So it's working at full steam. We haven't received any visits because of the pandemic, but our engineers are still working. And our technology center is active. It's up and running. It was not shutdown. That information is not true.

Now about your second question, the revenues of MAHLE. If we look at 2015 as a reference, and looking at the automotive market and the production of vehicles in 2015 to 2020, we saw a drop in production of 25%. So the market decreased. In 2015, I have a chart here. Look, we were producing 2.9 million light vehicles produced in Brazil and Argentina. And this, of course, has a direct impact on MAHLE's revenue with OEMs. So comparing year after year from 2019 to today, we had a performance that was very close to the market, the industry as a whole or we outperformed the market.

Now the aftermarket segment. We also had a progressive revenue. I don't have the numbers of 2015, but I can send you that information via e-mail later. Comparing this market with [ vehicle ] production.

Now about diversifying our portfolio. We've been working on new products and new technologies to keep pace with what we see happening in the automotive market. We're talking about heavy vehicles, agricultural machines and others. And we are keeping pace with the technological advances we see in this area. Our technological center is working on developing new products and new technologies. You gave us an example of the futures. We entered this a long time ago. And in the future, we're talking about hybrids. MAHLE is still working on this portfolio to meet the demand of the OEMs when it comes to hybrid vehicles. I hope this was clear.

[Fernando Leitão, analyst]

Yes, it was very clear. So I understand that the news about shutting down the RD is wrong. And I know that your headquarters also has research centers.

[Daniel de Oliveira Camargo, executive]

Yes. And when we were Metal Leve, that was in Santa Amaro. But now as MAHLE Metal Leve, our RD is in the -- near Bandeirantes highway. So after the pandemic, we can even try to have you visiting the center. So this is an invitation for the future.

[Operator]

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

[Marcelo Motta, analyst]

Thank you for taking one more question. It's about the [ MDHO ] project. Is there anything left of that impairment for the first quarter of 2021? Or have you already ended that in 2020?

[Daniel de Oliveira Camargo, executive]

Thank you, Marcelo, for your question. Actually, there is nothing left for 2021. So regarding that project, we had it in our 2020 P&L. And major impairment took place in the third or rather fourth quarter. We had some impact regarding inventory, but the major impact was actually in the third quarter of 2020. So we have nothing left for -- or any carryover from that to 2021.

[Operator]

Next question from Gabriel Rezende from Bradesco BBI.

[Gabriel Rezende, analyst]

I have a question about the comment you shared on inventory and data coming from ANFAVEA about a record low of inventory days. But on the other hand, ANFAVEA also issued a statement saying that OEMs are now willing to keep inventories at a lower level. So I'd like to understand your take. So let's say that we will eventually come out of this crisis. So do you see inventories going back to historic levels or something above what we have today, but still lower than what we had in the past?

[Daniel Alves, executive]

This is Daniel Brasil. And thank you very much for your question. It's really a great question. And I think that you have partially answered your question. Inventory, the lower, the better, but we need to have the product ready to be delivered to our clients. So inventory days were 30 to 35 days. Perhaps, now we have a lower level, but below 20 days, then you need to consider the mix of products. You need to consider which type of vehicle is being sold more and then you need to consider inventory. As for this new inventory level, we don't know. It will be probably lower than what we had in the past, especially because of financial issues. But let's say that consumers start to increase the demand for a specific type of vehicle, and then, obviously, if that is not available, they may buy from another OEM. And we know that consumers, they also get anxious in getting a new vehicle. Today, there are some types of vehicles in which there is a waiting line for having that produced.

[Operator]

[Operator Instructions] The Q&A session is now closed. Now I'd like to turn it over to Mr. Daniel Camargo for his final remarks.

[Daniel de Oliveira Camargo, executive]

Ladies and gentlemen, thank you very much for participating in our call. We hope you all stay well and healthy.

[Operator]

This webcast now has come to its end. We'd like to thank you all for joining us. Thank you for using Chorus Call. Thank you. Have a great day.

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