Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2021-Q4

[Operator]

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to MAHLE Metal Leve for the fourth quarter of 2021 results conference call. With us here today, we have Mr. Daniel Brasil Alves, Marketing and Corporate Communication Manager; Mr. Daniel de Oliveira Camargo, Executive Accounting 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 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. Remember that those following the presentation via the webcast may post their questions on our website, which 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 would like to turn the conference over to Mr. Daniel Camargo, who will begin the presentation. Please, Mr. Daniel Camargo, you may begin your presentation. Thank you.

[Daniel de Oliveira Camargo, executive]

Thank you, and good afternoon to all of you. You are most welcome to participate at our conference. We are here to talk about our last quarter of 2021. Before we start, I hope that you are all healthy and safe. And let me tell you that our company is being very strict regarding our health protocols to keep our employees and their families safe. Right after this presentation, we are going to proceed to a Q&A session.

And now on Slide #3, we have some highlights, 2021 performance, fourth quarter. We have our sales net revenue, which was of BRL 3.615 billion in 2021, which was 50% greater than in 2020 fourth quarter, was 21% higher than our fourth quarter of 2020. Our gross margin was higher than 2020. In our fourth quarter of 2021, there was an increase of 17% in comparison to the same fourth quarter of 2020. As to export equipment that were originally exported, we see 47% growth in relation to the third quarter of 2020. And during our fourth quarter, we see a growth of 15% higher than our fourth quarter 2020.

Aftermarket -- the aftermarket domestic growth, we see 21.2% higher growth comparing fourth market '21 and -- fourth quarter, I should say, 2021 and fourth quarter 2020. Export aftermarket, BRL 300 million in 2021, 64% higher in 2020, and our fourth quarter 2021 was 73% higher than the same fourth quarter in 2020. Our margin is increasing due to our oil filter margin. We have some highlights, which we would like to share with all of you, and I'd like to give the floor to Mr. Daniel Brasil.

[Daniel Alves, executive]

Good morning, everyone, and once again, thank you for participating in the earnings call of MAHLE to talk about the closing figures for 2021. I will start talking about sales on Slide 4, where we see the market for production in Brazil and Argentina comparing 2021 and 2020.

On the first chart, you see light vehicles, and you see there was an increase of 1.9% in total increase in sales in both Argentina and Brazil. 2021 was challenging and 2020 was already a first year of the pandemic. So a low level of comparison, and many of the -- our factories were stopped and also because of the impact of the pandemic, you see that in sales, we had just this impact and production increased by 15.9%. In Brazil plus Argentina, total 15.9% in production. There's a mismatch between production and sales because of inventory. So the production was higher than in 2021. And in 2020, it was the other way around. So the inventories are still low for comparing to historical levels, but this was the reason why we had higher levels of production when compared to sales.

Also taking into account exports. So when you talk about Argentina, we had 69% growth. And the main market Argentina sells to is Brazil, but also other South American countries. There was an increase in sales of pickup trucks, especially Hilux, and this is why production increased by 69% in Argentina.

Now moving to heavy vehicles. In the lower chart, we see an increase in sales of 37% in Brazil; in Argentina, 41%; and in combined both countries, 38.1%. As for heavy vehicles, so buses and trucks, despite all difficulties we faced in 2021, still this market grew by record levels in sales and production. In 2021, we reached superior levels when compared to 2019 before the pandemic. So you see that in production, Brazil 64%, 42% of increase in production in Argentina, combined 62%. And Indeed, this was a significant growth in production, especially for trucks. The market for buses is not so heated, but the production of trucks leveraged these figures that were even superior to 2019 before the pandemic.

Now let me talk about 2022, this we are in middle of March. So we already have the figures year-to-date. As for light vehicles, there was a drop both in Brazil and Argentina in the sales of light vehicle by 25%. This is explained by the new variant of COVID-19. So again, the pandemic had a negative impact on our production as well as some floods we had in the region. This is why there was this drop in production of light vehicles. And also we see that we had high levels of absenteeism. So we needed to take some measures not only to run MAHLE Metal Leve, but also keep other lines running. It was challenging, especially in January and beginning of February. As for heavy-duty vehicles, we had a 5.9% increase in sales. So we still see this positive bias. And we also saw an increase for heavy vehicles in year-to-date.

Now given this perspective for 2022 and using ANFAVEA's forecast for Brazil in the sales of light vehicles, so compared -- we expect 8.4% increase in sales, 9.5% increase in production for light vehicles. For heavy vehicles, we expect a 10% increase in sales and 8.2% production -- increase in production for heavy sales. So the year has not started very easily. There were challenges. It was weak in the beginning. And now we have to face the war situation. Of course, we are relieved that the pandemic is subsiding, but there are other factors that maintain the turbulence in the market. These are forecast from ANFAVEA for the full year.

MAHLE is working with more conservative figures, but we

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vis-à-vis 2021.

On Slide 5, you see the 2 main export markets, starting with North America light vehicles. In 2021

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almost the same in terms of sales vehicles. But for heavy vehicles, we also had a performance better than light vehicles with a 25.4% increase.

In Europe, there was a 5.4% drop in the production of light vehicles and a growth of 14.5% in the production of heavy-duty vehicles. So combined, the drop was 2.6% in production. We expect this to grow so for light vehicles, adding up the North American and European market, we expect them to grow by 6%. And for heavy vehicles, we expect a 5% growth. This is a little bit superior in North America and lower in Europe, so 6.5% expected growth for light vehicles then.

Now moving to Slide 6. On Slide 6, you see net revenue performance by market. In the first chart, you see 2021 compared to 2020. And in the lower chart, the fourth quarter of '21 vis-à-vis the fourth quarter of 2020. So we divided revenue between original equipment and aftermarket, domestic and export markets. So in the first column, you see 2021; in the second one, the volume price impact; third column, exchange rate change; the fourth column, data for 2020; and the 3 last columns, the variations.

So let me highlight, moving to the last column. So domestic original equipment was a revenue growth of 62.8%. The exchange rate impact was minus 1.9%, and the volume price impact, 64.7%. It's important to explain the exchange rate impact drop. This is the sale we do in Argentina. So we convert pesos into reals. This is why there is a negative impact related to exchange rate. So the volume pricing impact is 64.7%, which is much higher than the growth of that market, as we saw, the growth was about 15% in the market. And the explanation in the increase in revenue has to do with the mix of market. We realized that the market of heavy vehicles grew by 62%. So the share of MAHLE sales in heavy vehicles, when weighed, gives us some benefit to this final result also and in a superior growth in service market and market share. So these are the reasons why we had this growth superior to the market growth.

As for original equipment export, there was a 47% increase in revenue. The exchange rate impact is 23.7%, and the volume price impact totaled 23.3%. In this market, the mix of products also contributed to these results. The heavy vehicle market reached superior results, both in Europe and in North America and also parts for OES. So in total, 53.6% growth, 13% of exchange rate impact and 40% of volume price impact percentage.

Now moving to aftermarket, domestic market. So there was a 41%, exchange rate impact of minus 8.3%, volume price impact of 49.3%. Again, the exchange rate impact relates to pesos, and this impact here was higher. We have an aftermarket operation that ends up selling more. And because of that, this has led to this result in volume price impact, too.

This was due to demand. There was a higher demand also because we had replenishment of inventory in our distributors and also an increase in the market [ share ]. And also the exchange revenue [indiscernible] drop favored local production for our sales. [indiscernible] this was the negative impact for imports.

For exports, aftermarket, 63.9%; 4.8% exchange rate impact; and volume price impact total 59.1%. Again, a recovery of the markets where market -- MAHLE exports to, especially Latin America. The total naphtha market was 40.5%, minus 5.7% in exchange rate impact, 51% in volume price impact. In total, we had 50.5% in [ AH ], 5.8% exchange rate impact and 44.7% volume price impact.

The lower chart shows the variation between quarters, between the fourth quarter of '21 and '20. So 21.2% in total, reflecting the growth of the market in the last quarter vis-à-vis the last quarter of 2020, which was also a quarter of recovery. If we consider sales and vehicle production in the fourth quarter of 2020, we also had higher levels of production. This is when we resumed activities in 2020 after the shutdowns.

Now I will go to Slide 7. Here, you see consolidated exports by geographical region. So 2020 vis-à-vis 2021 shows growth in South America. But historically, so if we compare with 2019, in 2019, South America also had a market share of 16%. So basically getting this market back. And this is the distribution of the other markets, North America, South America and Europe.

Now I will turn back over to Daniel Camargo, and I'll be available to answer your questions later.

[Daniel de Oliveira Camargo, executive]

Thank you, Daniel Brasil. Now let's switch to Slide #8, where we have a summary of some results. Here, we have the gross margin and a comparison between last -- 2020 and 2021, where we see 58.6% growth and with a margin growth of 26.5% to 27.6% in 2021, which represents a growth in the margin levels.

If we compare 2021 to 2020, there was a drop of our gross margin, considering the increase of some products and materials and inputs in general. But overall, that was a very positive and good year to us, and we are still carrying out to understand how can we surpass those costs to our clients. This is our main challenge.

Slide #9, we see some expenditures with sales that has been through some increase due to general expenditures, overall expenditures. We see here increase in materials and different utilities. As to IT development, due to this new scenario of pandemic, we have a scenario of fast application and consumption.

As to some other net operating income, we see 3 main factors for that: a nonrecurrent revenue, especially due to some taxes such as PIS, COFINS and ICMS. We also had impairment in the recovery of the assets controlled by MAHLE Argentina. And we had a positive variable in terms of provision for some labor contingencies due to some positive actions that were favorable to the company.

Now I'd like to give the floor to [indiscernible], who will share some other results.

[Unknown Executive]

Hello, good afternoon. Now addressing our figures and some net results. We see a net of BRL 86 million negative in 2020, whereas in 2021, minus BRL 8.9 million. If we start from net income, we have minus BRL 10.6 million in 2020, whereas in 2021, BRL 21.9 million.

Let me highlight others, where BRL 9 million of those BRL 11 million, they represents the ICMS process regarding the base taxes. So those BRL 9 million, they were extra in comparison to 2020 because we're not expecting that -- those taxes. In 2020, BRL 45.2 million and almost 0 in 2021. Last year, we had a quite volatile year, especially for currency rates, which were quite volatile. And 2021, we didn't see so much currency exchange volatility. So we reached almost BRL 66 million negative for ACC, which is the currency exchange variation. That monetary or currency variation, we see in 2021, BRL 21 million, almost the same figure.

We see an average reimbursement rate of 21 annually. And SELIC in January 2021, it used to be 2%, and today is 10.75%. And due to that, our main reimbursement was quite lower in comparison to the prior year. In 2020, we see a mean of 4%. And in 2021, that was 3.7%.

We also see here investments with BRL 22 million reduction in our mean debt due to 2 operations, which were acquired in March 2021. And such an acquisition was in March 2020 to be able to cope with all those transactions during a year of pandemic.

Now switching to Slide #11. We see indebtment of the company in 2020, BRL 163 million positive. Our cash flow is much higher than our debt. And in 2021, BRL 46 million, that was our cash flow volume. And we had a certain amount for financing, and that's exactly what I said for the settlement of those 2 prior operations that we had to perform to support that year during the pandemic.

In the short run, we see a settlement chart where we -- in June '22, we have is still -- BRL 128 million is still to be settled. And that has been captured throughout the year of 2021 and this first half of 2022.

How about our debt? 52% regards FINEP and 47% ACC and NCE. And our main cost for FINEP operations and 1.3% for ACC/NCE. Once we weigh those figures, we closed last year with a 3% annually. And if we consider SELIC as our base, we are doing our best to keep such a cost rates throughout the year of 2022.

Now Slide #12. In 2020, we had BRL 68.6 million in investments in a position to BRL 85.7 million investments in 2021. Total depreciation was of BRL 102.5 million. So in -- we have in 2021 in terms of depreciation percentage, 83% versus 66% in 2020.

Let me remind you that we had ratified the approvals that we had approved in the prior year, and they will be paid throughout the year of 2022 for rationalization, research for new products and development of new technologies. As to investments conducted in 2020 amounting BRL 68 million, in 2021, BRL 85 million. And now the company is getting back to a much greater volume of investments, which has been approved to be paid this year.

Now let's proceed to Q&A, where Daniel Brasil, myself, will be available to answer your questions. Thank you for your time and attention.

[Operator]

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

[Marcelo Motta, analyst]

I have 2 questions. Could you please comment about supply chain? I know that semiconductors and other components are supplied from Russia and Ukraine. It might not impact you directly, but it will impact your customers. So I would like to understand the impact of that, when you look at Argentina and Brazil's production dropping by 25%. So are you looking into the possibility of a major disruption in the supply chain? Is there anything that you're monitoring in the beginning of March that could have an impact on the rest of the year? And you also talked about your challenge of trying to transfer the cost of inflation to your customers. So when you look at the budget of 2022, what is your expectation? Do you think you can work at the same levels of the margin of 2021? Or do you think that inflation is going to impact that?

[Daniel Alves, executive]

This is Daniel Brasil. Thank you, Marcelo, for your questions. Regarding supply chain, we don't have direct suppliers from the war zone. As you mentioned yourself, regardless of that, we are part of the supply chain. So any supplier or any carmaker is going to be impacted by the war. So we are working closely with them so that we can update our portfolios, trying to have more forecast and therefore, being able to make adjustments.

At this point, we do not foresee a major disruption, not at this point. MAHLE works with rolling forecast. So every month, we make an assessment for the year, in this case, 2022. Again, this is going to be a challenging year in the heavy vehicle market. It started with results superior to 2021, but the comparison basis is lower because there was a ramp-up in the second half of last year.

So in the heavy vehicles market, we might be positively surprised because next year, there will be a new legislation being introduced, and that could lead to increased sale depending on carmakers being able to produce those cars. So this is our challenge. I think that this year and the next 2 years, both for logistics and supply chain, we had challenges in the past 2 years to keep lines running and to keep the supply chain running. So it is complicating trying to predict what is going to happen the whole year. A lot has happened. We need to see whether there is going to be a ceasefire soon or whether the war is going to take longer to be resolved. So we are constantly updating our forecast and projections to be able to work with the scenario that is posed to us.

We have a recent history of the pandemic. So in March, all carmakers stopped. And I don't think this is going to happen because we are talking about different supply chains, maybe one will stop, but others won't. And MAHLE has a significant market share, we operate with basically all carmakers. So we need to follow this up closely to see how it unveils.

And your second question related to margins, we've been following up the market of raw materials. There have been increases of over 100% in some cases, price increases. And sometimes there are peaks in price contracts. Of course, MAHLE has contracts and agreements with its customers. We have the original equipment market and the aftermarket. 1/3 of our revenue comes from the aftermarket. So that will be driven -- prices will be driven by the market. So we depend on price -- in the market prices. So increases will be applicable not only to MAHLE, but also to other companies.

While in the original equipment market, we work with carmakers. We have agreements with them, and we are on a -- negotiating with them on a monthly basis or a daily basis to be able to transfer our costs to OEMs as well. So we should work on that. And this is the main task of the sales team to see what will be the impact on costs when raw material prices increase and working with our customers to transfer these price increases to maintain our margins.

Whether this is going -- the margins are going to be the same as 2021? I can't even comment on that. But we are working on it constantly. I don't know if I answered all your questions.

[Marcelo Motta, analyst]

That was perfect.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. I would like to turn over to Daniel Camargo for his final comments.

[Daniel de Oliveira Camargo, executive]

Once again, thank you so much for all of you to be participating at this conference call. I hope that you all keep safe and health. Thank you so much, and have a great day.

[Operator]

MAHLE Metal Leve conference call is over now. I would like to thank you so much for your time and participation and wish you all a very nice afternoon, and thank you for using Chorus Call. Thank you.

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