Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Good afternoon, ladies and gentlemen. Welcome to MAHLE Metal Leve's videoconference to discuss the results for the fourth quarter of 2022. This video conference is being recorded, and the replay can be accessed on the company's website at the Investor Relations section. The presentation is also available for download. Please be advised that all participants will be only watching the video conference during the presentation. And then we'll begin the question-and-answer session when further instructions will be provided.

Before proceeding, I take this opportunity to reinforce that the forward-looking statements are based on the beliefs and assumptions of the management of MAHLE Metal Leve and on the current information available to the company. These statements may involve risks and uncertainties given that they relate to future events and therefore, depend on circumstances, they may or may not occur. Investors, analysts and journalists must take into account that events related to macroeconomic environment, the segment and other factors that may cause the results to differ materially from those expressed in the respective forward-looking statements.

Present in this videoconference are Mr. Nathan John Quye, CFO; Daniel Brasil Alves, Marketing and Corporate Communications Director; and Fábio [ Lopez ] Peres, Finance, Executive Director. I would now like to hand the floor to Nathan Quye, who will begin his presentation. Mr. Quye, you may proceed.

[Nathan Quye, executive]

Thank you, Rodrigo. Welcome, and good afternoon. Welcome to our call where we are going to disclose the results of the fourth quarter of 2022. It is a pleasure to present those results to you today. This is the agenda for today. This is very similar to other editions. So we will start with the highlights. Then we will provide an overall perspective of the market. That's something Daniel is going to show as well as the net revenues, finance management, CapEx, depreciation. And that will be followed by a Q&A session.

So today's teleconference will present the results we had related to the performance of our company in the fourth quarter of 2022. There is a problem here on this slide. I don't think this is the correct presentation. I apologize. This is the presentation from last year.

[Unknown Executive]

I apologize. In a few seconds, we are going to share the screen with the presentation for this year.

[Nathan Quye, executive]

While we wait, I can tell you that overall, this is an amazing year for MAHLE Metal Leve with sales and very positive financial results, much above those achieved in 2021. This is the best results we've ever had in the history of MAHLE Metal Leve. We are very pleased with those figures. It was not an easy year. As you're familiar with what happened in the market, the difficulties faced in the U.S. have reflected in our operations as well, but we were able to complete 2022 with good results.

Okay. Now we have the correct slide, and I apologize for this mistake. So our net sales revenue has reached record levels, over BRL 4 billion. We completed the year with BRL 4.2 billion. And the first quarter was also a very good quarter, much higher than the fourth quarter of 2021, 21.8% higher than the same period of last year. This is mainly due to all benefits in the domestic market in heavy equipment, but also in the export market.

In 2022 as well as in 2021, we have had very superior results in the aftermarket, especially in domestic market. We had a drop in exports in the fourth quarter of 2022. We faced some difficulties in Europe and North America. In South America, we also faced problems in Peru, for example, but Daniel is going to talk more about those issues later.

The key indicators that we track are listed in the bottom of the screen. So we completed 2022 with an adjusted EBITDA of BRL 845 million. This is again a record level at MAHLE Metal Leve, and the company is very pleased with these results. As I mentioned, it was not an easy year considering all the macroeconomic conditions, but we're able to end the year with good figures.

This is translated as a very similar adjusted EBITDA margin with 20%, very similar to 2021, which was 20.1%. In other slides, I'm going to go deeper into those figures. But right now, I'm going to turn over to Daniel Brasil, who is going to talk more about the sales results.

[Daniel Alves, executive]

Thank you, Nathan. Good afternoon, everyone. It is a pleasure to have you here at MAHLE Metal Leve's teleconference. And as Nathan mentioned, we are so proud with the record levels of sales and financial results we've achieved. On Slide 4, you can see the data for sales and vehicle production in Brazil and Argentina comparing 2022 with 2021. In the upper part of the slide, you see light vehicles, both Brazil and Argentina combined have completed the year with sales of 1.1% increase. And in Brazil and Argentina, and you see that in Argentina, the growth was much higher in sales and production, much higher than we expected.

In production, specifically, the combination of Brazil and Argentina has led to [ 88.3% ] growth. And in Argentina specifically, production grew by 23.5%. You see that production results were better than sales. So because of exports, both from Brazil and Argentina to other countries and to Mexico, we've had increased production. Mexico, Chile and Colombia are the companies -- are the countries that we export to. And you see that it totaled 2.7 million light vehicles that were produced.

The bottom chart, you see the data for medium and heavy vehicles. There was a 0.9% growth in sales in Brazil, a drop of 0.6% in Argentina. In combination, that totaled 0.7% growth in sales, combining both countries. In production, [ 196,000 ] more trucks produced. In 2023, there will be a new law to be passed related to emissions. So this is why we've had an increased production here in Brazil. In Argentina, 5.4% growth in production. And combining both countries, an increased production of 8.8%.

The level of sales and production for heavy vehicles is superior to 2019 vis-a-vis 2019. So it's above the pre-pandemic levels. But as to light vehicles, we're still below the pre-pandemic levels, but still the sales level is much superior.

Now I would like to talk about our perspectives for 2023. We have the year-to-date of February, and I'm going to briefly share with you the information year-to-date until February, both for light vehicles and heavy vehicles and also our prospectus for 2023. So for light vehicles, we expect a growth of 1% of Brazil plus Argentina and a 4% growth in production. And the comparison basis is low because in 2022, we had a slow start in the beginning of the year because we still had COVID cases as well as flooding that took place in the country that also affected production. So these figures are superior to 2023 but they are lower than the ones we had for the third and fourth quarter of the year. So in heavy vehicles, we've had an increase in sales and a drop in production. And there's a new legislation, as I mentioned. And there is a reduction in production. So we are selling the vehicles that are stored that still counted on a technology of -- that was related to the previous legislation.

So now light vehicles. According to ANFAVEA, 4.1% for sales and 4.2% expected growth in production. But our projection for MAHLE, combining Brazil and Argentina for sales, we expect 1.5% in sales, 1% increase in production.

This is our perspective for 2023. So that's what we expect for 2023. We expect to sell and to produce at the same levels we've had in 2022. There are some carmakers that are now making adjustments to their production. They're stopping their production because of lack of components, but also because of adjustments in inventory. So we believe that also there is going to be a decrease in interest rates along the year and that it tends to increase in the second quarter of the year and in the second quarter -- in the second half of 2023.

As for heavy vehicles, expectations for ANFAVEA for Brazil is an 11% drop in sales and increase in production. MAHLE's perspectives is aligned with ANFAVEA. The combination of Brazil plus Argentina would indicate a similar perspective, a drop in 10% in sales and a drop in 21% in production for heavy vehicles. That is affected by the sales of vehicles we have in inventory. I think that the data from March is probably going to be affected by the sales from inventory products. But as of April, there may be a higher drop. Along the year, we expect this evolution finishing with the expected numbers as we are sharing with you.

Now moving to Slide #5. This is the data from vehicle production for North America and Europe. So a growth of 20 -- comparing 2020 to 2021, a 9% increase for light vehicles and 7% in heavy vehicles. In Europe, a drop in production, 1.8% drop in light vehicle, 3.4% drop in heavy vehicles. This is affected by the war between Ukraine and Russia. And we expect these exports in total to increase. We had a total increase of 3.4% in exports this year.

Slide #6 shows the evolution of net revenues. First chart indicates 2021 vis-a-vis 2022. Starting with the last column, domestic original equipment. There was an increase in sales by 22.2%, minus 2% related to exchange rate effect because of Argentina, Argentinian pesos. The total in volume price effect, 24.2% in original equipment for the domestic market. Superior to the growth in the domestic market, which had grown 8% both in light vehicles and heavy vehicles.

So why did we have increase in net revenues? It was a favorable mix of customers, also selling tools to new projects and increased market share. Those are the 3 main reasons that have led to a superior increase in net revenues compared to the market as a whole. As for export, there was a 3% increase, exchange rate effect of minus 3.7%, volume price effect of 6.7%. In exports, this is in line with what happened in the market, again, increase in United States, but a decrease in Europe. This is very similar to the figures we see in the market.

In the aftermarket for the domestic market, there was a 31.2% increase in the net revenue. And if you deduct a significant exchange rate effect of 22.7%, again related to Argentinian pesos, we've had a volume price effect of 53.9%. So this is a pent-up demand and a [ heated ] demand and also increase in market share.

For aftermarket for the export market, a 7.1% growth, exchange rate effect of minus 1.3%. So volume price effect 8.4%. As Nathan mentioned, some countries are still facing problems, but still, we achieved an 8.4% growth in the aftermarket segment for exports. So minus 8.6% in total foreign exchange rate effect, volume price effect, 25.4%. So if in total, 16.8% increase. So again, if you remove the exchange rate effect of 8.6% negative, you would have a growth of 25.4%.

In the chart below, you see the net revenue comparing the fourth quarter of 2022 vis-a-vis the fourth quarter of 2021. So we had a 18.5% growth in total; exchange rate impact, minus 14.7%. So as Nathan mentioned, this is an excellent result, BRL 4.2 billion in sales of the company this year.

Next slide, please. So here, you can see the consolidated exports by region. There is a reduction in the market share of Europe from 43.3% in 2021 to 36.5%, consequently, an increase in other regions. In Europe, both the light vehicles and heavy vehicles markets were decreased mainly because of Metal Leve's distribution, but we've also seen some adjustments in inventory that took place in the end of the year, and that reduced sales as well. So we have this different distribution now, but both Europe and North America are close to 40% in terms of market share in consolidated exports.

Now I'll turn over back to Nathan, and I am open to answer any questions you may have later.

[Nathan Quye, executive]

Thank you, Daniel. Now I would like to comment about the gross margin. The cost of sales was very similar when you compare 2022 and 2021. It was just a little bit higher because of what happened in 2022, increase in raw materials prices, increased inflation in the Europe, increased energy costs in North America, but we completed the year with a good figure. In the fourth quarter, it was above the fourth quarter of 2021. Of course, we understand that there is a seasonal aspect to the results of that in December. The fourth quarter, usually it has lower levels than the third quarter, but we completed 2022 with 26.8%, and this is good. The first half of the year was difficult, and I think that everyone who worked with raw materials felt the same.

Next slide, please. So now let me tell you about the expenses we had in 2022. Let me start with selling and distribution expenses. The absolute figure is much higher than the one for 2021. But most of that is due to the fact that the aftermarket segment had very high values. And of course, this has impacted in the selling and distribution expenses. And this is the reason why the absolute figure was higher in 2022. In terms of percentage of sales, we had this figure because of the inflationary adjustments we needed to make in Argentina.

As to general and administrative expenses, the absolute figure is practically the same as the one for 2021. And there was a significant reduction in the percentage of sales, 2.6%, vis-a-vis 3% in 2021. We don't have a lot to say about this particular line. We implement very stringent controls of administrative costs. So this is why the figures for 2022 are very similar to 2021.

As to technology and product development expenses, as in other quarters of 2022, we see a low number here because of the costs for Germany, and there was a very similar cost to -- similar to the third quarter. And finally, we have other operating income expenses. This particular line includes 2 different things. So we see differences when you compare 2022 and 2021. In 2021, we felt the impact of PIS COFINS taxes, BRL 100 million positive in 2021 because of changes in this tax. And in 2022, in the fourth quarter, there was a one-off item that was related to a legal agreement with the minority shareholder in December. So these were the 2 things that happened. And -- but there was -- they were one-off items. The level of earnings in terms of gross margin, all that is not impacted by these expenses.

Now I'll turn it over to Fabio, who is going to talk more about the financial results.

[Fábio Peres, executive]

Good afternoon, everyone. So let me tell you more about the financial results. Let me start with the full year of 2022. BRL 58.7 million in total in net interest income. That can be related to interest income on financial investments made in Brazil and Argentina as well as interest expenses we had on loans and borrowings for working capital. In a mix of both sources, we have a total of BRL 58.7 million. Some of them are related to the recovery of PIS and COFINS taxes. So in 2022, again, we totaled BRL 58.7 million, while in 2021, it was BRL 21.9 million.

The second part here, you see about the effects related to exchange rates and loss on derivatives, BRL 57 million related to exchange rate variation in our accounts payable and receivable. This is the net results of the exchange rate minus the hedge operations and also foreign exchange contracts. So you see that there is the partial compensation of BRL 18.6 million and BRL 44 million, which are related to hedge and also foreign exchange contracts. As to the net monetary variations, we totaled BRL 23 million and there are others total BRL 4.8 million. So in total, in 2022, you have BRL 9.1 million, while last year, 2021 was very similar, BRL 8.9 million.

Now focusing on the fourth quarter, you see the main lines, BRL 24.4 million of net interest income. Last year was BRL 7.9 million in the fourth quarter of '21. And you see that the 2.14 points vis-a-vis 4.6 last year in exchange rate, 5.5 in the fourth quarter of '22, 7.4 in the fourth quarter of '21, and that's for net monetary variation. So here, you see 16.4 in net finance income in 2022 vis-a-vis 3.4 positive in the fourth quarter of '21. There was a significant devaluation in Argentinian pesos, but that is offset by the interest rates obtained in the financial investments. So they were basically offset.

In the next slide, you see our indebtedness. The first chart to the left shows our net cash position, BRL 405 million in the end of 2022, practically the same as we ended 2021 with BRL 508 million. So in 2022, we had BRL 414 million in loans and borrowings, while the previous year BRL 262 million. So we had BRL 246 million of net cash in the end of 2021, BRL 91 million in net cash at the end of 2022. So you see the maturities in short term, BRL 209 million. And in the long term, BRL 204 million. And you can see the different maturities a long time in short term. So we have BRL 209 million for short term, BRL 204 million in the long term.

So we have payments to make and also installments of FINEP. The average cost of funding shows 24% allocated to FINEP loans, 67% allocated in NCE and ACC. They are supported in euros. And so 6.87 for FINEP and ACC, NCE, in average, in the weight average, we can reach 4.01% in average costs. There is also part of NCE that is in reais. That accounts for 7.8% and also 0.7% from Argentinian [indiscernible].

The next slide, you can see disbursements made with CapEx in 2021 total BRL 80 million, total depreciation of BRL 102.5 million which accounts for 78.7% in their ratio. But in 2022, we totaled BRL 98.8 million in CapEx investments and total depreciation totaled BRL 98.2 million. Our investments fully covered the depreciation we had. Percentage over sales is 2.3% in 2022 vis-a-vis 2.2% in 2021. So this is in line with what happened last year. And in 2022, we were able to make investments that cover the depreciation we experienced.

So now we will move to the question-and-answer session, and all of us will be available to answer any questions you may have. Thank you.

[Unknown Executive]

We will now begin the Q&A session for investors and analysts. [Operator Instructions] Our first question comes from Andre Ferreira from Bradesco BBI.

[Andre Ferreira, analyst]

Congratulations on your results. The lack of semiconductors has improved apparently. But in February and March, there were some announcements made by Volkswagen saying that they were interrupting their production. So do you expect the supply chain involved in semiconductors to improve over time? And I've also seen a drop in exports in aftermarket in the fourth quarter. Could you please talk about that -- the reasons for this drop?

[Daniel Alves, executive]

This is Daniel. Thank you for your question. As to semiconductors, as you've mentioned, this is the third year we've been talking about that already. And in addition to that, there was a shortage of semiconductors to some OEMs. But I think we should consider demand as well. Well, I think the word challenging describes it. We have been talking about that since the beginning of the pandemic, and we don't expect 2023 to be any different.

As I mentioned, our projection for the full year of 2023, both for production and sales, will reach -- we expect that those will be similar levels as vis-a-vis 2022. If you consider daily sales in 2022, they started very slowly in the beginning of the year because of floodings and the pandemic, then got better in Q2 and Q3. And in 2023, we expect to see a similar effect. We expect also to see a reduction in interest rates. We expect in March to see better results, 10% better in March than vis-a-vis February for Brazil.

This is how we expect to recover that so that at the end of 2023, we will have maybe a 1% growth vis-a-vis 2022, both in production and sales. As to aftermarket exports, as mentioned by Nathan, there have been some problems in neighboring countries that have caused a negative impact on sales. That's another challenge. Did I answer your questions?

[Andre Ferreira, analyst]

Sure.

[Unknown Executive]

Our next question comes from Marcelo Motta with JPMorgan.

[Marcelo Motta, analyst]

I would like you to comment on this agreement you've made with filter oil. Could you give us some background of what happened? Can that be reversed in any way? What should we expect? Is that a done deal? Or is any noise expected in this transaction?

[Unknown Executive]

Thank you, Marcelo, for your question. Yes, in the fourth quarter, we had an agreement to solve the legal problem that we've had many years ago. This has been disclosed in financial statements in 2022. And in the first quarter, as next steps to complete this topic, we are going to implement some actions. But in 2022, these figures were disclosed. I don't know whether that answers your question.

[Marcelo Motta, analyst]

It was clear.

[Unknown Executive]

[Operator Instructions] The question-and-answer session has now completed. Now we would like to turn over to Mr. Quye to make the company's closing remarks.

[Nathan Quye, executive]

Again, Rodrigo, thank you very much. I would like to thank the MAHLE's team, Fabio, Daniel and all the team that supports us. It was a very special year for MAHLE Metal Leve with good EBITDA results, with good sales. We've achieved record levels in our history. And it was not easy.

The whole MAHLE team has worked very hard to make this happen. So working with -- in all the plants. And I know that this was not easy, but we are very pleased to have reached those results. And with that, we, of course, also have a significant level of dividends, the best IOC in our history, and we will continue building history at Metal -- Metal Leve. This is one of the best company in terms of distribution of dividends as well.

We are now preparing for 2023. Every month is a different month, and everything is different in this new normal. So let's see what the year has in store for us. Now we see the situation of banks in the U.S., but we are well prepared with a very good team at MAHLE Metal Leve. I think that we can leave our shareholders peace of mind.

In May, we will bring the results of the first quarter. Thank you very much for attending and for dedicating your time to listen to my words in Portuguese, which is not so good. But thank you for your time, and have a great day.

[Unknown Executive]

MAHLE Metal Leve's videoconference is adjourned. We would like to thank everyone for their participation, and wish you a good day.

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