Mahle Metal Leve SA

BOVESPA:LEVE3

Earnings Call Analysis

Company Navigates Market Challenges

In the full year of 2023, despite a domestic original equipment market revenue decrease of 6.2%, the company outperformed the sector and gained market share, contributing to overall revenue growth of 2.7%. The fourth quarter, however, saw a significant 8.9% decline due to high prior-year comparison and export market pressures. Cost of sales improved to 70% from the previous year's 73%, reflecting better gross profit margins. A strong performance in the aftermarket domestic market, which increased by 16.7%, partially offset the 22.6% drop in aftermarket exports. The company reported a positive financial outcome for 2023, with final results improving by almost BRL 131 million over the previous year.

Moderate Revenue Growth and Strong Profitability

In the fiscal year 2023, the company achieved a modest increase in net sales revenue of 2.7% to BRL 4.3 million compared to the previous year. This growth was tampered by a substantial pre-purchase effect in late 2022, which was tied to anticipation of Euro 6 regulations. When isolating the pre-purchase impact, the fourth quarter of 2023 saw a more encouraging uptick in revenue by approximately 8% over the same quarter the prior year. This nuanced growth narrative reflects a management team adapt at navigating regulatory changes and market fluctuations.

Substantial Margin Expansion Signals Operational Efficiency

The company's operational efficiency shone through in 2023, with gross margin climbing to 21.2%, a notable enhancement over the 17.2% reported in the year before. This expansion indicates a strong control over costs and an ability to optimize their pricing strategies even under challenging market conditions.

Robust Reward to Shareholders Demonstrates Confidence

Further bulwarking investor confidence, the company boasted a generous return to shareholders, paying out BRL 1.3 million in profit reserves accrued during uncertain pandemic times, alongside dividends and interest on equity totaling BRL 850 million. The willingness to distribute such substantial cash reserves underscore's the company's strong liquidity position and management's belief in its ongoing financial health.

Divergent Trends in Vehicle Sales and Projections Indicate Market Shifts

Vehicle sales and production show a mixed picture. Brazilian light vehicle sales surged by 11.2%, while Argentinian market grew by 8.2%, leading to a consolidated growth of 10.7%. In contrast, heavy vehicle sales dipped by 10.8%, attributed to Euro 6's impact on pricing and demand. Production trends were also mixed, with light vehicles seeing a modest production increase, and heavy vehicles experiencing a sharper production drop of 37.5%, overshooting projections. Looking ahead, the company forecasts growth in light vehicle sales for 2024 between 2% to 4% and a significant bounce-back for heavy vehicles sales with projections of 13.6% in Brazil and overall growth of 32.1%.

Aftermarket Sales Illuminate Strengths and Weaknesses in Market Strategy

The company's aftermarket domestic market rose notably by 16.7% in 2023, signaling solid gains in market share, particularly in Argentina. However, aftermarket exports faced a 22.6% decline due to market dynamics and larger geopolitical issues impacting key economies. Fourth-quarter revenues highlighted these challenges, showing a decrease compared to the highly productive final quarter of 2022.

Financial Readjustments and Exchange Rate Impacts Reflect Strategic Realignments

In the fourth quarter of 2023, a reclassification resulted in a negative revenue adjustment of BRL 10.5 million due to interest revenues and investment exchanges linked to Argentina. Despite this, exchange rate positivity, particularly from Argentine operations, led to a fourth-quarter net increase of BRL 75 million in exchange rate effects and hedges compared to the previous year. Net effects and adjustments in the quarter were also positive, contrasting sharply with the previous year's negativity.

Heightened Indebtedness Amid Equity Returns and Dividend Payouts

The company's indebtedness grew by BRL 559 million in 2023, with a distribution skewing towards long-term liability. This increase corresponds with the cash deployment for dividends and capital equity payments in the latest quarter. Nevertheless, this uptick in debt suggests a strategic approach towards leveraging fiscal strengths while still rewarding shareholders.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to MAHLE Metal Leve's video conference call to discuss the earnings for the fourth quarter 2023.

This conference call is being recorded, and the replay will be available on the company's Investor Relations website. The presentation is also available for download. [Operator Instructions] Before moving on, I'd like to emphasize that the forward-looking statements are based on the beliefs and assumptions of MAHLE Metal Leve's management and rely on current information available to the company.

Forward-looking statements may involve risks and uncertainties since they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and the general public should take into account that events related to the macroeconomic environment, the sector and other factors could lead to results that will materially differ from those in the forward-looking statements.

Today, in this conference call, we have Claudio Cesar Braga, Chief Financial Officer; Daniel Brasil Alves, Marketing and Corporate Communications Manager and Fabio Lopes Peres, Executive Finance Manager.

I will now turn the floor to Mr. Braga that will start the presentation. Mr. Braga, you may go ahead.

[Claudio Cesar Braga, executive]

Thanks, Rodrigo. Good afternoon, everyone. Welcome to the conference call of MAHLE's for the fourth quarter and end of year of '23. We hope everyone is okay. And beforehand, we would like to thank you for your time and attention. As Rodrigo mentioned, just as a reminder, in the end of the presentation, we are going to be available for your questions.

Should we move on to the next page with our agenda. So I'm going to start with an overview of our results. Then I'm going to turn to Daniel Brasil to address points 2 and 3 of the agenda, market of a few, and net revenues, then I go to item 4 to give you a bit more color on our P&L. Then Fabio Peres is going to talk about financial performance and indebtedness, and we'll close the presentation and open for your questions.

Before we start, I'd like to introduce myself. Just I've been a bit more than 10 weeks at MAHLE Metal Leve. I am Claudio, the last 23, 24 years I am devoted to the auto parts industry, focused on the financial area. And since January 2, I have been part of MAHLE Metals Leve. I have to admit that they were extremely intense and interesting 10 weeks, and I'm looking forward to the coming years. Thank you very much.

Now let's move on to the next slide. In 2023, we had net sales revenue of BRL 4.3 million, timid increase when you compare to the full numbers of 2022, an increase of 2.7% and Daniel is going to give you a bit more color on that, but we had the prepurchase of Euro 6 in 2022 that really leveraged sales in the last quarter of 2022.

So looking at '23 compared to '22, only the fourth quarter, we see a reduction of 8.9%, but if you eliminate the prebuy of 2022, and I also compared to '21, the last quarter showed an increase of about 8%. And you take a look at our adjusted EBIT. Some years ago, we had an average of 17%, 18% for adjusted EBIT, in the past 3 years we went up to 20 percentage points. So the year of '23 was extremely good. We closed at 21.2%.

Later on I'm going to give you a bit more color and talk about some factors that contributed to that. And looking at our results, again, net margin -- adjusted net margin in the year hit 17.2% against 13% of the previous year, just for the fourth quarter. So we continue very healthy with 15.2% compared to 12.8% compared to 2021, our number was around 14%. Now still on this page talking about payout of dividends to shareholders.

In 2023, we paid BRL 1.3 million basically profit reserves that were accrued during the pandemic because of the uncertainties of the market, how it would develop for the coming years. So profit reserves accounted to approximately BRL 500 million and dividends and interest on equity of BRL 850 million. BRL 350 million referring to the year of '22 and almost BRL 500 million referring to the reserves of 2023.

Now I'm going to turn to Daniel.

[Daniel Alves, executive]

Thanks, Claudio. Good morning, everyone. It's a pleasure to have you in our conference call for the fourth quarter '23 and the whole year of '23.

We are on Slide 5 where we have our sales and production of vehicles for the Brazilian and Argentinian market as well as North America and Europe, the 2 main destinations for company exports. So we start with light vehicles in Brazil and sales, we had growth of 11.2%. We closed the year very well above our expectations. The month of December was very good.

In Argentina, we had growth of 8.2% in the sales of light vehicles despite oil crises and the exchange devaluation of last year, we did have an increase of 8.2% in the sale of vehicles. Consolidated numbers for Brazil and Argentina, 10.7%.

Heavy vehicles, in sales, we had a drop of 10.8%, in line with our expectations, the drop is the result of the new technology. You know last year as we had the introduction of Euro 6 that increased vehicle prices and consequently decreased sales. In Argentina, a drop of 3.4%, Brazil and Argentina together a drop of 10.1%.

Talking about production, reflects of the sale of vehicles in production, light vehicles growth of 1.3%. In Argentina, growth of 13.7%. The Brazilian and Argentinian market combined vehicles that are produced in Argentina and sold to Brazil and vice versa, so consolidated in production growth of 3.7%.

Compared to sales where we had growth of 10.7%, we see a lower growth in production. This is because of lower amount in exports. Some markets like Colombia, Chile and Peru showed a decrease, and that contributed to the results in exports and also the introduction of imported vehicles that did have a share in the market share, which also took some of the production of Brazil and Argentina together. Heavy vehicles, drop of 37.5%. We had a projection of 34%, so slightly worse than projected in Q3 for the close of '23 and the drop -- above the drop in sales because we have an inventory in the end of '22, we had the production of Euro 5 trucks for inventory that could be sold in -- mainly in the first quarter of '23. In Argentina, a drop of 8.4% and both together a drop of 36.4%.

Now thinking a bit of the prospects for '24, both in Argentina and Brazil for light and heavy vehicles. So talking about 5-year projections for light vehicles '24, vis-a-vis '23, a projection of 5.7% in light vehicles and in heavy 13.6%. As a counterpart in Argentina, we have a deterioration of the crisis. So the expectations is a 2-digit drop in the sales of light vehicles. However, consolidating Brazil and Argentina, we have expectation of growth of 2% to 4% in light vehicles.

Heavy vehicles, 13.6%. That's the estimate. And Brazil and Argentina together expected growth for heavy vehicles, reflecting production -- the projection for '24 ANFAVEA Brazil of light vehicles growth of 4.8% and heavy vehicles growth of 32.1%. The growth is well above the growth in sales due to the fact that for this year, we are going to produce that is what is going to be sold differently from in '23, we sold vehicles that were produced in '22 because of this inventory of Euro 5 that we had. So a positive outlook for light vehicles, and quite positive in the production of heavy vehicles when we consolidate Brazil and Argentina.

Now going on to the European and North American markets. Last year, '23, we had growth in European light vehicles of 12.3%, heavy vehicles, 13.8% and North America, 9% growth in light vehicles and 8% growth in heavy vehicles, consolidated numbers for Europe and North America, the top 2 destinations of company exports, we have 10.7% growth in light vehicles and 10.9% in heavy vehicles.

For this year, the prospects are more in line, so not so significant growth in light vehicles, a slight drop in Europe, perhaps a 1% to 2% drop and in North America, a growth of 1% to 2%. So in light vehicles, it's almost going to be a breakeven in production if we put together Europe and North America, comparing '24 to '23. That's an external projection that we use as reference.

In heavy vehicles, also a decrease, both in Europe and North America of around 5% to 6% again, consolidated numbers, Europe and North America, an approximate drop of 5% to 6%. Europe very much affected by the war in Ukraine and also because 2022 was a very positive year. So we see a slowdown in demand.

Moving on to the next slide, Slide 6. We have the net revenues performance of the company. So first, we have the full year of '23 compared to '22 and the last 2 columns show the fourth quarter '23 against the fourth quarter '22. So talking about the full year '23 against '22, in original equipment domestic market, a drop in revenues of 6.2%, this is a drop.

But again, if you think of the market reference, we had better performance than the market, due to the share in revenues of auto parts for the heavy vehicle market, we saw a drop of almost 40%. So when you have this weighted number, minus 0.6 is a positive number due to gains in market share and exports to customers. We supply to the local market but our customers in exports also asking for parts.

Original equipment export market growth of 2.5% in Brazilian reals, if you take a look at those revenue in dollars would be growth of 7.3%, so here we also have an effect of the exchange rate, but growth of original equipment for exports. Subtotal for original equipment, a drop of 1.7%, with almost BRL 2.5 million in revenues.

Aftermarket domestic market rose in '23, up 16.7%. Market share, this is a gain of market share in Argentina as well. And in aftermarket for exports, we had a drop of 22.6%. The main explanation for the drop in the aftermarket for exports has to do with the market dynamics. So purchases and sales do not happen on a monthly basis, even because of the cost of imports, these orders may take 2, 3 months to be repeated. So customers started '23 with higher inventory levels, and that did impact the market a little. And also the political economics in area of some countries, especially Peru and Colombia, we saw a slowdown in the 2 countries. And inventory adjustments that did impact this line.

The highlight -- I'm sorry, the total first for aftermarket, 9.3% growth and total revenue growth of 2.7%, as mentioned by Claudio, despite the challenges and the drop in the regional equipment, the company was able to reach 2.7% growth in revenues. For the fourth quarter, it's important to highlight the regional equipment, a drop of 15.9%, so the year of '22 had a very strong fourth quarter, nonrecurrent heavy vehicles manufacturers were producing as many trucks as possible under Euro 5 technology, and that has an impact on the quarter. It was the quarter with the most impact, 15.9%.

Aftermarket exports, we had some adjusted in inventory levels from our customers and also market adjustments. So therefore, a drop of 15.5% and for original equipment, spot market, the same reason. So in the fourth quarter, a consolidated decrease of 8.9%.

Now I'll turn the call back to Claudio, and I'll be here for you for your questions at the end of the call.

[Claudio Cesar Braga, executive]

Thanks, Daniel. Well, this is point 4 of our agenda. I'm here giving you a bit more color on our results. We do see the cost of sales at 70%. And last year, it was 73% that has to do with our gross profit, but in basically this line, when you take a look at our more traditional products like pistons and rings, we are more or less with the same share. What we see is that there was an increase of 1 percentage points in the sales of filters, which was a very interesting movement that was observed.

We have a very strong exchange rate fluctuation that did affect our sales in a negative way, but we had a balance of 100% in the cost of imported materials. Think of overhead, we see a very stable movement, what draws a bit attention was the increase in research and development, I think those that are following the media have been noticing a very interesting movement around the tech center in Jundiaí, showing that the company continues to invest heavily in research and development in close contact with the OEMs.

What was not very positive, and it's still not fully covered by sales prices, and we are going to see that in '24 is the adjustment in labor. It is not so some such increase, but it is an increase, '23 against '22, we spent a bit more with maintenance. We continue with steady investments and maintenance is happening on a regular manner, and because of the follow-on that we had in the second half of last year, we had an increase on expenses with professional services.

I think that's it, and now we are going to the final item of our agenda with Fabio talking a bit about our net financial results.

[Fábio Peres, executive]

Good afternoon, everyone. So I'm going to start with the fourth quarter '22 compared to '23 and here, you see that on interest revenues and investments we have a negative amount of BRL 10.5 million in the line of revenues that was a reclassification made in December. We identified that all the interests and exchange rate fluctuation related to Argentina was being allocated in the line of interest rates.

So we had a reclassification in a total amount of BRL 33.2 million, and therefore, in the last quarter, we had this line negative, but it was a readjustment. Then loans compared to '22, in '23 we had an addition of BRL 6.1 million compared to the volume of loans that we had in '22. It was lower than in '23. In total, we get to net interest of BRL 20.2 million in the quarter against BRL 24.4 million last year. Again, this is a reflex of the readjustment made. If it weren't for that, we would have BRL 13.2 million positive.

Talking about exchange rate fluctuation. This year, we had 26.2%, a positive against 32.7% negative last year at BRL 58 million. Remember that the adjustments made of interest and investments on the first line does affect this line 1.1. So here, we have the amount of BRL 32.3 million positive. Fluctuation of financial investments and others, most of this amount comes from our operation in Argentina, where we Rafaela is an exporter. We export it at a lower rate. And when we got the amounts that were actually paid by our customers, which was after the exchange devaluation, we had a very positive effect along the year, especially in the fourth quarter of BRL 15.8 million. So total of net exchange rate effects, plus hedges was 40.3% in the fourth quarter '23 and minus 35% last year, so an increase of BRL 75 million.

Then we have net effects, plus adjustments, 10.3% positive in the fourth quarter against 4.9% negative in '22. Here it's important to mention that we have the impact of CP42 in the amount of BRL 33 million. That also had an impact on this line. And thinking about the full years of '22 and '23, I'm going straight to the total. Net interest income, BRL 75 million against BRL 58.7 million last year, '22. Again, most of the volume comes from Argentina of this total of BRL 75 million, BRL 54.9 million comes from Argentina.

Net exchange rate effects and gain and loss on derivatives 46.3% positive against 40% negative '22. Again, here, the impact was quite significant. Just as a reminder, we had the readjustment of the first line of interest to exchange rate fluctuations, an improvement of BRL 86 million compared to last year. And net financial income, we had -- almost its breakeven and last year, 27.8. Remember that net financial income comes from our labor and tax provisions and their corrections. So we did have an impact there. If we to exclude the BRL 33 million, we would be in line with last year. And total for the year of '23, we had a final result of BRL 121.8 million, against minus BRL 9.1 million last year, so an improvement of almost BRL 131 million.

The next slide, please. So here, we talk a bit about our indebtedness. We had growth of our indebtedness of BRL 559 million, 63%, almost 2/3 of our indebtedness in long term and 37% in short term. And obviously, we had the reduction in cash that was used to pay capital on equity and dividends in the last quarter. So we went from BRL 505 million to BRL 383 million. So here, we had growth in our indebtedness of BRL 437 million and the total net cash gross in net indebtedness of BRL 559 million, okay.

So now we are going to open for your questions. Myself, Claudio and Daniel are here to answer any questions you might have. Thank you very much.

[Operator]

[Operator Instructions]

Our first question comes from Philip Elanza from Citibank.

[Unknown Analyst]

I just had 1 question. Regarding the effect of Argentina on the P&L of the fourth quarter. You still have exchange fluctuations that impacted BRL 380 million, the P&L company. Could you give us a bit more color about this impact? And what to expect from Argentina in 2024?

[Unknown Executive]

Well, thank you for your question. I think we have all been following the developments of Argentina in prior years, more specifically the last quarter of '23 and the beginning of '24. As for the future, I think it's still a very uncertain situation to everyone. What I can tell you that MAHLE Metal Leve is doing everything at it reach to protect itself, as Fabio Peres mentioned, we are protecting with the resources that are within Argentina in the local financial market or through New York, which gives us a very interesting offset.

When I compare the third quarter 2023 and the close of the year of '23, and I see the monetary fluctuation in Argentina isolatedly, we see an increase of BRL 60 million to BRL 65 million of impact. But when you recompose that within MAHLE Metal Leve, we do have an offset within MAHLE Metal Leve, when we compare the third to the fourth quarter, it went from BRL 65 million to BRL 70 million. It's still when you think more broadly, when you think of Argentina, altogether, in compared to MAHLE Metal Leve, Argentina is a very substantial value of sales for us. But in terms of results, it accounts for about 5%. So way below of what we had in MAHLE Metal Leve in Brazil, and we consolidate above results at the end of the day.

So it continues to be a positive operation for '23. As for this year, as the whole market, we are monitoring to see how the country behaves. I don't know if my colleagues would like to add to that. I think that in sales of vehicles, we are expecting a drop and that will certainly impact on revenues, but we expect an offset from the Brazilian market. So again, when we consolidate Brazil and Argentina, we have a positive outlook, as we mentioned, in the market section. That's it. Philip, I don't know if we answered your question.

[Unknown Analyst]

So you did.

[Operator]

Our next question comes from Andre Ferreira from Bradesco BBI.

[Andre Ferreira, analyst]

I have 2 questions. The first I'd like to understand a bit better your EBITDA margin for '24 after a year of strong margins, but with a weaker fourth quarter. And if you see a pressure on prices with increased competition?

And second, I'd like to understand MAHLE's strategy more for the long term. Think of the electrification trend in the world. It is effect in Europe, in the U.S., and it is becoming a reality in Brazil. Are you considering adjusting our portfolio based on electrification.

[Unknown Executive]

I'm going to start with your second question, going electric and our plans. Last year, we had the announcement of BYD and other OEMs starting sales. So there was a share in the Brazilian market. The trend abroad, as you mentioned, that is in Europe, a bit stronger. The U.S., not as much, here in Brazil, we do have a projection of penetration for electric vehicles and not only electric, but also hybrid vehicles.

So purely battery or battery with combustion engines. We understand that there is not a unique solution for the future. It's a diversity of solutions for the future of mobility. And as we mentioned before, MAHLE Metal Leve is part of the MAHLE Group. So MAHLE outside in Europe, we have products for electric vehicles as well, and this is a matter of volumes.

So we are monitoring the market and we need gains of scale, but it's volume, for it to make sense for us to have local production, both for OEMs and for auto parts. So we are monitoring and following the market, and the company adapts as future developments happen.

We do have technology for our solutions to be applied for the future of mobility, but local production depends on volumes.

[Unknown Executive]

And just to add to the answer, when you take a look at 2024, I think it's a still a bit premature. We are just starting the year. So far, we had 2 healthy months. Let's see how March develops and then by April, May, we have a more fact-based answer.

As for Q3, when you talked about EBITDA of Q3 2023, I think it was a bit atypical in 2022. So I do not see Q4 alone as a reference. I don't know Andre if there was any specific points that you would like to address.

[Andre Ferreira, analyst]

No, it was just for me to understand the whole because the margin was very strong, and I just would like to know projections for '24, but you did answer my question.

[Operator]

Our next question comes from [ Jovan Descalzi ] from JPMorgan.

[Unknown Analyst]

I have a question about MAHLE customers in Brazil. If they are growing in line with the guidance from ANFAVEA or if there is any discrepancy and where most growth lies.

[Daniel Alves, executive]

Hi Jovan, thanks for your question. I did not mention that. I did talk about the outlook of ANFAVEA for '24. However, we already have the close of the first 2 months of the market, the year-to-date February. And yes, very much in line. The month of February. Even with current, was a very good month for sales. Argentina already reflects that and when you consolidate Brazil and Argentina and the sale of light vehicles, we had growth of 17.9%. The amount is a higher percentage, so to speak, because of the beginning of the year of '23. '23 started a bit weak and it gained momentum along demand. You remember that we had that project of discount for new vehicles, which changed things a bit. But the first 2 months show alignment with the projections for '24.

In heavy vehicles, we had a drop in sales of 15.7% million, however, it is a base of comparison that is very high, that is Euro 5 vehicles that were being sold at a lower price than Euro 6. But the beginning of the year, the first 2 months, very much in line in terms of outlook for 2024. I don't know if I answered your question.

[Operator]

[Operator Instructions] Since there are no further questions, we are closing the Q&A session. I'd like to turn the call to Mr. Claudio Braga for his final comments.

[Claudio Cesar Braga, executive]

Well, very well then. Thanks for your time. Once again, I believe it's also an opportunity for us to exchange experiences. It's very good for all of us and for you as well. I hope very soon we have the opportunity to meet. I hope that in 2024, these opportunities will come. So I thank you once again for your time, and see you next time, and have a good day.

[Operator]

MAHLE Metal Leve's conference call is now closed. We thank you very much for attending and wish you an excellent afternoon.