Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, welcome to Mills' conference call to discuss first quarter 2019 results. [Operator Instructions] I would like to remind you that this conference call is being recorded and simultaneously translated into English. Questions can be asked also by participants connected from abroad. This recording will be available at the company's website at www.mills.com.br/ri.

This conference call is being broadcast simultaneously over the web and can also be accessed direct through the company's website, www.mills.com.br/ri. Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to the company's business perspective and projections are based on expectations of the Mills management, relative to the future of the company. Such expectations are subject to macroeconomic conditions, market risks and other factors.

Today, we have here with us, Mr. Sergio Kariya, CEO of the company; Mr. James Guerreiro, CFO and IRO; and Ms. Camila Conrado, Head of Investor Relations and Governance. To start the presentation on the First Quarter '19 Earnings Conference Call, I would turn the floor now to Mr. Kariya, CEO.

[Sergio Kariya, executive]

Good day, everyone. Thank you for your interest and for joining us in this conference call to discuss Mills' first quarter '19 results. Before detailing our quarterly results, I would like to inform you that we filed earlier today the minutes of our extraordinary general shareholders meeting, which approved the merger of Solaris and Mills, and we are still in the process of implementing other measures to close the deal and more details on the operation shall be found in the material effect after the trading floor closes.

Please go to Slide 3, where we can see the main highlights of the first quarter '19. With regards to Rental business unit. Rental revenues are very much in line with 4Q '18 revenues, despite price increases in January. At the beginning of January 2019, we did not predict that much in the conversion rate of [indiscernible], the biggest negative impact stems primarily from lower volume of growth. And we cannot yet pinpoint whether this is due to a sluggish economy, as many market analysts and banks have revised their GDP forecasts downward.

In the Construction business unit, as we always inform, despite recent bidding processes for airports, it takes some time for the project to be structured and for the demand for our equipment to start filing. We are monitoring the potential resumption of halted projects, which will bring a positive short-term impact for this business unit. We remain focused on reaching breakeven of EBITDA proxy for this business unit.

As you can observe in the results, despite a decline in rental revenue, which was a little greater than we expected for the sector, we delivered an adjusted EBITDA ex IFRS 16, 46% better quarter-on-quarter. The turnaround actions implemented across the company over the past years started to show improvements, gradual improvements in our adjusted EBITDA. In other words, excluding the IFRS 16 effect and nonrecurring items, we delivered a result of BRL 15.7 million, up 36% quarter-on-quarter and an adjusted operating cash flow of BRL 22 million in the first quarter of '19, up 66% compared to fourth quarter '18. We are confident that 2019 will be a year of many achievements and challenges for both business units, with continuous profitability recovery for the Rental unit and neutralizing the negative cash result of the Construction unit. Now to speak more specifically about the quarterly results, I turn the floor over to James Guerreiro, our CFO and IRO.

[James Oliver Carneiro, executive]

Good day. I would also like to thank you all for participating in this conference call. Please go to Slide 4. In the first quarter '19, total net revenue remained practically stable quarter-on-quarter, despite a 2.6% reduction in equipment and Rental net revenue. In the [ magnification ] revenue of this unit and better performance of sales of new equipment in the Rental unit offset this effect, and we ended the quarter with total net revenue 0.9% higher in the quarterly comparison.

The Rental business unit contributed with approximately 75% of the company's total net revenue in the quarter as previously underscored by Kariya. Net rental revenue from the Rental BU remained in line with the prior quarter with a lower utilization rate, being offset by progress in our gradual price recovering.

For the Construction business unit, net revenue related to equipment rental in the first Q '19 was negatively impacted by the price/mix effect, still a consequence of the low economic activity in this sector. Despite existing infrastructure projects in the pipeline of government, it is more likely that the positive impact will only be felt by this business unit in 2020 given the maturation time required for these projects.

Please go to Slide 5. Cost of goods sold and services rendered, excluding depreciation and IFRS 16 affect, totaled BRL 26.8 million in the first quarter of 2019, 5.2% higher than the previous quarter. Such variation is mainly due to the decrease of extemporaneous PIS/COFINS credit in comparing first Q '19 and fourth quarter '18, which amounted to BRL 500,000 versus BRL 3.6 million in the previous quarter, which reduced the cost base of that quarter.

In the SG&A analysis, excluding depreciation provision for expected credit losses and IFRS 16 effect, we can observe a 43.2% reduction quarter-on-quarter, mainly stemming from reduced restructuring-related expenses in the combination deal with Solaris, in addition to higher provision for variable compensation posted in the prior quarter.

On Slide 6 we detail nonrecurring items. In other words, those resulting from company's restructuring actions and liabilities of the Industrial Services business unit sold in 2013 as well as expenses related to the Solaris combination project.

In the first Q '19, nonrecurring items were positive by BRL 2 million, mainly due to the sale of scrap from the Construction business unit.

On Slide 7, we have the adjusted EBITDA in the first Q '19, which totaled BRL 15.7 million, up 30% year-on-year and up 36% quarter-on-quarter with a margin of 23%.

On Slide 8, we see that Mills' adjusted operating cash flow totaled BRL 22.1 million in the first quarter '19, BRL 9.4 million higher compared to the same period of last year, resulting basically from better payments received from customers and longer average payment runs.

On Slide 9, we find information on our indebtedness. We ended the quarter with a gross debt of BRL 184.7 million. As a guarantee for the debentures, [indiscernible] will maintain 50% of the respective remaining balance in the reserve account. In other words, approximately BRL 91 million on March 31, 2019. Also considering the company's cash and cash equivalents amounting to BRL 77.4 million. We ended the first quarter of 2019 with BRL 168.4 million in cash, and thus a net debt of BRL 16.3 million. 70% of Mills' debt is short-term and 30% long-term, with a weighted average maturity of 0.6 year at an average cost of CDI plus 3.52% per annum. It is important to highlight that in the last general debenture holders meeting, held on February 22, 2019, approved, among other things, the change in the mechanisms of the restricted account of debentures in order to allow for the use of a portion of such funds, to amortize portions of the debentures, thus improving even more Mills' payment capacity.

On Slide 10, we highlight our covenants, which are within the expected range. For the second consecutive quarter, we achieved the original covenants of debentures linked to adjusted EBITDA as a result of strategies adopted by the company to overcome the economic crisis.

On Slide 11, we present data related to recent years. Following slides detail some information about the performance of each business unit.

With this, we end this presentation and remain available for questions.

[Operator]

[Operator Instructions] Our first question comes from Mr. Pedro Gonzaga with Pacifico.

[Pedro Gonzaga, analyst]

I have two questions. First one, regarding Rental and the business Construction, is the level of the first quarter applicable for the rest of the year? Could we expect any improvement? And the second point, you mentioned that concessions announced by the government should help the construction unit in 2020, but I just want to understand, would this allow for a better construction result in 2020 or would it just continue the projects since open?

[Sergio Kariya, executive]

Hi, Pedro. Regarding utilization rate, which I guess was your question, it is a little bit of what I mentioned. We have been having a reduced volume of growth. And despite the price increase we had in the rental unit in the beginning of January, we didn't have any variation in our conversion rate. So the biggest impact in the first quarter stems, of course, from a lower volume. And it is hard to say whether this is linked to seasonality.

February is a shorter month, in March we have Carnival or if this is the result of a more sluggish economy. In Construction, we already expected a marginal reduction regarding the utilization rate, we do not expect a short-term improvement. And this links to your second question regarding the concessions. Of course, recent concessions, particularly those airports that were recently auctioned to the private initiative, they do not generate enough volume. We have a sound cut.

[Technical Difficulty]

For the private initiative we start seeing a higher volume and when that happens, we expect an increase or better results for this business unit in 2020.

[Pedro Gonzaga, analyst]

There was a sound cut. You mentioned the recent airport concessions will not generate enough volume and there was the sound cut, and I could not hear you. When you were talking about the private initiative, there was a cut.

[Sergio Kariya, executive]

Yes. I said the recent concessions in the current volume. If we consider only the airport concession, this will not generate enough volume to grow our backlog. It will be just a replenishment. So we have to wait and see. We have to wait for new bids, new concessions, new investments in infrastructure so that we can generate momentum to grow the Construction business unit.

[Operator]

[Operator Instructions] Your next question comes from Mr. Pedro Gonzaga with Pacifico.

[Pedro Gonzaga, analyst]

Since there are no other people, I take advantage. [ There are 3 things. ] The level of sale of scrap was better in the Construction unit. Can you imagine that the sale of scrap equipment it will continue around the year? Will the result will be positive or negative as last year? And there was a good news that there was an almost neutralizing effect, and I have concerns about other topics, actually, after this one.

[Sergio Kariya, executive]

Well, our strategy to reduce Construction assets, it's very much in keeping with adjustments that we have been making since 2017 and 2018, to downsize our [ park ] of assets adjusting to the size of the sector as we see it. We have structured a volume of sales/scrap for last year, but we didn't finalize it 100%. So part of these assets will continue to be sold along 2019, and that's why we have that 15% number. Another factor linked to that, and this is the acceleration for 2019 in terms of the sale of Construction assets. Once the merger with Solaris happens the 4 remaining Construction branches, we'll release some space there so that we can unify the Mills and Solaris branches under the Mills brand. Regarding the sale of assets, this BRL 1.6 million, generating BRL 1.5 million or BRL 100,000 or so of cash, well these were older assets. So the balance sheet value is quite reduced. When you generate higher volume, you don't necessarily get to the same margin, but the cash effect is what we are pursuing for this unit.

[Pedro Gonzaga, analyst]

It's clear. Can I ask a more financial question? Now that you have a healthier financial situation with the approval of the merger with Solaris practically defined as you mentioned, you should probably look to elongate the debt to be in a better position when the economy resumes growth and perhaps you can have more flexibility? And do you have any estimates of accumulated tax credits that you have that you could perhaps use when the results of the company improve?

[James Oliver Carneiro, executive]

Pedro, this is Guerreiro speaking. Regarding the debt, yes. This is the time to have a consolidated capital structure. We don't want to necessarily change the current debenture's structure. But yes, and more -- a longer debt for us at this point could help us enjoy market opportunities. This is a strategy to be considered and -- that we have been looking into. So for the debt, yes. We intend to have a longer debt maturity, perhaps [ get ] the new loan facility.

And with that you ask a good question about tax credits. Solaris does have tax credits amounting to approximately BRL 85 million, and we remain with the Solaris corporate tax payer number controlled by Mills. So we will have the tax credits coming from Solaris. And Mills has tax credits of approximately BRL 200 million or a little over BRL 200 million, if I'm not mistaken, that's at the Mills level. And of course, we are considering this for our long-term modeling. We do consider the compensation of these tax credits.

[Operator]

Our next question comes from [ Rodrigo Fransico ] with [ Vestra ] Capital.

[Unknown Analyst]

I have a question regarding the Construction BU. Do have any estimate of the amount you can get with those 10,000 tons that do want to sell along the year? Would it be similar to the sales of the past, that would generate BRL 7 million? Or do you think that you could get more for those tons? And still in the Construction BU, I would like to understand your plan. You said you are resizing the unit according to the segment in Brazil, and at the same time you don't want to invest cash in Construction. So I would like to know, over time, will you continue to sell equipment in addition to the 15% that you mentioned? Or do you intend to get to a limit below which you don't want to reduce your inventory? These are my questions.

[Sergio Kariya, executive]

Hello, [ Rodrigo ]. Well, firstly, regarding the cash amount generated, the only thing we can tell you is that we don't expect to see any great variation regarding the prices that we had last year. That's all we can tell you so far. Regarding the sale, just to remind you, when we announced the project for [ Brazil ], which was that turnaround project for 2018 for the Construction BU, we had mentioned that we would reduce the size of the assets by approximately 40%. We ended up not doing it. In December, we even published that we got close to 30%, more specifically 27%, but we announced simply continuing on with this project. So the final project, still considers 40%, 4-0 in our estimate, compared to the size of assets in January '18 versus at the end of the project with a 40% reduction in the size of assets. We still have assets that would be adequate for what we see in terms of volume of demand from the infrastructure sector in the coming years.

[Unknown Analyst]

It would be something close to 50,000 tons per year?

[Sergio Kariya, executive]

Yes.

[Unknown Analyst]

Around 50,000 tons?

[Sergio Kariya, executive]

Yes, yes. By -- at the end of the project, yes, we should have sold 50,000 tons of equipment, of assets. I just want to make clear, the restructuring project in terms of resizing the Construction BU, we will only maintain it for 2019, these sales of assets. So we will maintain the 4 operating addresses: [indiscernible], Sao Paulo, Rio de Janeiro and Belem. And the project is very linked to a reduction in asset volume through the [indiscernible], as semi-new equipment or scrap.

[Unknown Analyst]

My second question is about the Rental BU. You said that in your interpretation, price was not the main driver of volume reduction because the conversion rates remain the same. And there's a seasonal factor, the end of your inventory, et cetera. So do you follow monthly utilization rate? From January to the beginning of May, have you seen a constant utilization rate, or declining or perhaps growing again, given the inventory effect? So how do you see months after months, the utilization rate after Rental BU, given everything you mentioned?

[Sergio Kariya, executive]

[ Rodrigo ], I think that our comment would be more at a macro level. At the micro level, some contracts ended up being returned in terms of higher volume of machines. But we cannot really say that this reduction will continue. I think that these were one-time off events, given that we have less volume, lower conversion rate. So we have a lower volume of equipment rented. But when we look at the rate of return of the equipment, it remained practically flat or stable, vis-à-vis what we saw over time. So there's nothing like intensified volume versus the equipment that went out of our warehouses.

[Unknown Analyst]

You mentioned that when the trading floor closes, you would have more information about the merger. What kind of information do you intend to disclose? I just want to understand what we can expect for tonight or tomorrow.

[Sergio Kariya, executive]

We will mention a material effect and the shareholder's agreement.

[Operator]

This concludes today's question-and-answer session. I would like to invite Mr. Sergio Kariya to proceed with his closing statements. Go ahead, sir.

[Sergio Kariya, executive]

We thank you for participating in this conference call to discuss Mills' earnings results for the first quarter of 2019. The company's IR team remains available to answer any further questions you might have. Thank you very much.

[Operator]

That does conclude Mills' conference call for today. The audio of this conference call for replay as well as the slides presentation will be available at the company's website at www.mills.com.br/ri. Thank you very much for your participation.

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