Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, and thank you for holding. Welcome to Mills live to discuss the earnings of the first quarter of 2023. If you need simultaneous translation, this tool is available on the platform. Simply click the interpretation button at the globe icon on the bottom of the screen and select the language you prefer, Portuguese or English.

For those listening to the conference in English, there is the option to click on mute original audio. We inform that this video conference is being recorded and will be made available at the company's IR website, where you may find all materials of this earnings release. [Operator Instructions]

Note that the information contained in this presentation and the forward-looking statements that may be made during this conference call relating to the company's business prospects and projections are based on the management's expectations regarding the future of Mills. Forward-looking statements are not a guarantee of performance. They involve macroeconomic conditions, market risks and other factors.

I will now turn the floor to Sergio Kariya, Mill's CEO.

[Sergio Kariya, executive]

Good afternoon. Thank you for your interest in our company, and we want to take this opportunity to share our views on Mill's performance in the first quarter of 2023. The first 3 months of '23 were spent with enthusiasm by our team, with a strong focus on customer satisfaction and the expansion of our business. These are the highlights of the period.

Regarding the rental fleet, we added 967 machines and reached a total of 11,348 machines and equipment. We operate with a fleet in 56 addresses. And today, we are already a team of nearly 2,000 employees. Consolidated gross revenue was BRL 374 million, an increase of 38% compared to 1Q 2022. Growth was significant in both business units, 30% in Rental and 86% in Formwork and Shoring compared to the first quarter of last year.

We achieved record adjusted EBITDA of BRL 163 million, up 46% compared to the first quarter of last year at a margin of 50%. We remain watchful of the cash return that our operation has generated. We observed interest curves, inflation and other economic indicators that are crucial to sustain margins and guide our financial decisions.

Net income was BRL 66 million, with a net margin of 20%. Our leverage ended the first quarter of the year 2023 at 0.6x net debt over adjusted EBITDA ratio, still a comfortable position. We always have economic sustainability in mind, considering that low risk drives the use of all opportunities. Investments were BRL 334 million in the quarter, our business grows as we invest. But it takes zeal and good reading of the moment with the diligent monitoring of operational indicators so that the service is always excellent and profitable.

An important point was a slight decrease in demand due to the offseason, lower volume of maintenance stoppages considering the macroeconomic scenario and other seasonal impacts that have always affected our first quarter's business. Return on consolidated invested capital in the first quarter compared to the last 12 months was 23.2%, and ROC Formwork and Shoring improved significantly, as the assets of this business unit is already highly depreciated.

Interest on equity already announced for 2023 financial year totaled BRL 18.5 million. We are committed to shareholder returns without losing sight of the value generated by reinvesting in our company. Mills won first place in the Training Instructor of the Year category at the IAPA Awards with our collaborator, Anna Sarah Costa Morais. We thank Anna Sarah for representing our company and also for embodying our values related to equity, diversity and inclusion. We were also finalists in another three categories, one of them the Best Rental Company in the World. We remained on the top 3 rental companies in the world.

Last week, we published our 2022 annual report, a document that includes information on our financial and nonfinancial performance, being our main channel of accountability on how we're contributing or intend to contribute to sustainable development through our business. The circumstances may seem uncertain from some point of view, especially considering the macro scenario, but we are confident that our team is prepared and motivated to make the best efforts in their working hours. Customers continue to be our reason to move forward and to continue being indispensable partners for the success of their business. It will be through collaboration and partnership that we will build an even better future for all our stakeholders.

On the next slide, Slide 4, we recap the most important messages about the company that we'd like to share with you. And first, we affirm our commitment to stakeholders and look forward very confident on our strength to deal with market uncertainties. The success of our work is only achieved when the client says they're satisfied. They are at the center of everything we do. That's why we move towards being a one-stop shop company. When they sign a contract with Mills, they know their job will be well done and complete.

Resilience is the result of three main pillars. As for operational efficiency, we emphasize that management is done at the branch level. Our processes are based on continuous improvement with benchmarking of solutions and experiences being standardized in all branches, 100%. So a customer at any one of our locations find exactly the same service. We use the lean methodology and we offer differentiated productivity and service to all of our customers. We invest and continue investing in technology and innovation.

On the revenue diversification and predictability front, we aim for diversification focusing on clients from resilient economic sectors. Contracts that we seek are always long-term contracts, and that's how we will increase the predictability of our cash flow. And finally, we have a solid balance sheet, which chose low indebtedness, low leverage.

We always work with responsible capital allocation, especially in the operation with Yellow Line equipment. CapEx is applied ad hoc, that is each contract, each project from the moment we sign a contract will go and seek the equipment. We're always seeking to do it in a sustainable way through our analysis.

I'll turn the floor now to Carol to comment on the financial aspects of the quarter.

[Caroline Pepe, executive]

Thank you, Kariya. Thank you. Good afternoon, everyone. I would like to start on Slide 6, commenting on the results of the combined rental business unit, which represents 82% of our revenue and includes both light and heavy equipment. In the first quarter of '23, we reached a total of 11,348 pieces of rental equipment, an addition of 967 pieces. The current replacement value of our fleet is equivalent to BRL 4 billion. We are constantly analyzing the most appropriate mix of equipment, evaluating the potential rental market and the needs of our customers.

We know the importance of productivity, efficiency and the safety of equipment. And therefore, we work with premium brands and differentiated service to better serve our customers. Organic growth can be accelerated by opportunities to acquire other companies as well. We have a dedicated M&A team that is always attentive to good deals that bring know-how, long-term contracts and that add value in a sustainable way to Mills.

Slide 7 reports our diversification strategy, taking greater resilience to potential economic cycles. The Rental business unit serves customers from a variety of industries as we demonstrate in the chart on the left of the slide. We can also see the distribution between the sectors improving in the last year. It's worth mentioning the greater penetration in the Agribusiness segment, a resilient sector of economy, which increased by 5 percentage points. At the same time, we have reduced our exposure to the construction sector by 7 percentage points.

I'd like to point out that when we talk about construction, we mainly refer to large works and infrastructure construction, while residential construction is of little relevance in the total result of the company. We are diligent as well with the distribution of our portfolio, which remained stable in the first quarter of '23.

The 20 largest clients represent 20% of revenue and we do not have a relevant concentration in any of them. We seek to increase customer base, while seeking to increase the share of wallet through a consultative sale and differentiated long-term service with customers and relationships with customers and suppliers. I take this opportunity to reinforce that the heavy market is deep, and we have a robust pipeline, confirming our thesis for the Yellow Line, reaffirming our expectation of growth in the coming years.

On Slide 8, we present the financial data from Rental. Compared to the first quarter of '22, our net revenue grew 29%, mainly due to the increase in the fleet. Prices remained stable year-over-year. The sale of new and semi new equipment represented 6% of the company's net revenue in the quarter and 5% in the same period last year. Noting that the sale of semi new equipment is part of the equipment cycle and optimizes the management of our fleet.

Commercial negotiations are managed based on the supply and demand of its location. With our unique capillarity, we are closer to our customers and can adapt the fleet mix to the needs of each region. Specifically for Yellow Line equipment, each contract is analyzed individually seeking an attractive return in the analysis of the project in addition to also focusing on long-term contracts, bringing greater cash predictability. In the chart on the right, we show that EBITDA grew 21% compared to the first quarter of '22, mainly impacted by revenue growth in the period.

Moving on to the results of Formwork and Shoring. As we had predicted in our last communications with the market, we see a good moment and relevant growth in the performance of this business unit, mainly due to the pipeline of the infrastructure works and the resumption of the civil construction sector. Revenue increased 95% versus the first quarter of '22, primarily due to the increase in rental revenue. We also highlight that there was a strategic one-off sale of semi new assets, generating sales revenue of BRL 10 million in this quarter.

When we look at the adjusted EBITDA, we see a number that is 2.5x higher than the first quarter of '22, with EBITDA margin growth of 29 percentage points year-on-year. The better performance of the business is due to the increase in rental margins and the sales of semi new equipment with also a dilution of SG&A.

On Slide 12, we show Mills consolidated earnings. Compared to the first quarter of last year, we can see growth in all business units, which generated a 38% increase in net revenue. Adjusted EBITDA was 45% higher compared to the previous year, and margin was up 2.5 percentage points, totaling 50.2%. We remain confident that our pillars and strategy form a solid foundation for Mills' growth.

On Slide 13, the chart on the left shows that our net income reached BRL 66 million in the first quarter of '23, 63% higher than the first quarter of '22. Net margin grew from 17.4% to 20.4%. The company's cash flow demonstrates the benefit generated by the investments in equipment of the rental unit. We grew 29% year-over-year in generation of operating cash flow.

On the other hand, the outflow of BRL 245 million of the free cash flow of the firm demonstrate the disbursement amounts related to these investments. When we entered the Yellow Line segment in September '22, we made an initial organic investment of BRL 225 million. The other investments are made upon closing each contract, mitigating the risk of idleness of equipment. I'd like to emphasize that we are also mindful to adjust our pace of investments according to the movements of the economy and to optimize the allocation of capital at Mills seeking the best return for our shareholders.

To conclude on Slide 14, I present our capital structure, highlighting our sound balance sheet and low indebtedness level, which allows us to capture growth opportunities. We closed the first quarter with gross debt of BRL 882 million, cash of BRL 540 million and BRL 342 million in net debt. Our growth debt is composed almost entirely of debentures and has 89% of its payment expected for the long term.

Following -- we maintained our average cost of our CDI plus 2.23% in the first quarter of '23 versus the fourth quarter of '22. The main movement in this quarter was the addition of the deed of the fifth issue of debentures with improvement on the means of payment and remuneration. Leverage reached 0.6x net debt over adjusted EBITDA in the last 12 months. This guarantees us another quarter of fulfilled covenants. Even though that we've had, I can only thank again the employees of Mills for their tireless effort and constant dedication. We invite our shareholders, investors and stakeholders to continue following our journey as you are an important part of what we're building.

Kariya, thank you very much. The floor is yours.

[Sergio Kariya, executive]

Thank you, Carol. So to close our presentation, I'd like to highlight a few points from the annual report we released last week. As we always say, Mills is fully aware that the most relevant part of our work and its impact on society as a whole, and this impact must not have a negative balance. That is why we closely monitor the indicators and targets that we have set out to meet. I'm proud to say that 73% of the targets were met or exceeded in 2022. We offset 25% of our Scope 1 and 2 greenhouse gas emissions. And we have the largest fleet of electric platforms in Latin America.

We invested in the first hybrid models of MEWPs in Brazil, and we were the first company in the segment to provide a CO2 emission calculator. We continue to invest in diversity and social development. And we have taken an important step towards the Pro-Ethics Seal when we joined the Ethos Institute. The team has done great, not only on the story we have to tell, but for doing such a good job spreading this story. I recommend that you access the QR code in the upper left corner of the slide by pointing your phone's camera at the image and read our report to further explore each of the topics mentioned.

Thank you again for your attention. And let us now move on to the questions-and-answers session.

[Operator]

[Operator Instructions] Our first question, Fernanda Recchia, sell-side analysts, BTG.

[Fernanda Recchia, analyst]

Sergio and Carol, can you hear me? Great. I have 2 questions here on our side. First, about capital allocation. On the investment part of the release, you mentioned that you expect a slowdown of the CapEx for light equipment considering this demand that tends to be -- that's weaker in the beginning of the year as expected at the end of Q4. If you can give us more details? We talked about BRL 780 million in CapEx to be deployed in this year, half of it on light equipment. So how much should we expect in terms of a delay? That's my first question.

And second, still on Rental. Looking at Rental revenue, we see a sequential drop quarter-on-quarter while the fleet has increased. So there was a productivity impact. I'd just like to understand if this impact was 100% related to the usage rate due to the seasonality and considering December that you have a lot of returns? Or if there was any impact of the pricing? And if you can, give us a view of what to expect for the coming quarters? That would be helpful.

[Sergio Kariya, executive]

Thank you, Fernanda, for your question. Let Me start from your second question because I think it also answers the capital allocation a little bit. When you look in terms of our receiving of equipment, just to remind you, in July 2021, we had that request for the manufacturers of lifting platforms.

For lifting platforms, we are still at a moment of restrictions in terms of supply chain of the manufacturers. It took us about 1.5 years to receive those equipment. And that order, plus the other -- the 2022 were concentrated in the last month. Basically, it's all in December 2022 and the first quarter of this year, '23.

So in a moment you get a high volume. All of our orders that were to be distributed throughout '22 we received in 4 months. We had the branches open. The branches are still in the process of maturing in the J-curve in terms of growth and penetration of the concept of use of those platforms at our brand.

So at the same time, in a moment with more restrictions in the first quarter of this year, '23, made us delay part of our orders for 2023. So when you look, we mentioned it be around BRL 350 million of our investments, the organic CapEx for lifting platforms. We push it to about BRL 140 million. So everything that we received until the end of April '23 will have received, and we delayed for the year 2024 until we get a better stabilization and absorption of this additional offer that we're providing in the market. And once we get the stability, we'll start making new investments again.

So with that, I also answer part of the capital allocation question and what we're delaying. And in terms of volume and price, we talked about volume, our price is quarter-on-quarter. On the third quarter, fourth quarter of '22, we already had a leap in terms of price. We had improved the price quarter-on-quarter and we maintained it stable from the quarter to -- fourth quarter of '22 and the first quarter of '23. We had an impact on the volume, but most of it due to this concentrated receiving, as I mentioned, from December of last year to April, all of the equipments that we order in '21 that we should have received '22, '23.

Adding to Kariya's answer, Fernanda, about the heavy equipment, we will make investments for closed contracts. So we have good opportunities with clients who have long-term contracts, with an IRR that we contain, consider attractive and sustainable. We'll continue making these investments. So this anticipated purchase is only on the light equipment, and now we're waiting for the development of the situation so that we have more information and then release the orders that have been delayed.

Talking about numbers last year, I think we acquired [indiscernible] in September. As we talked about, BRL 225 million was a CapEx intention. Of this BRL 225 million of organic movement, we got almost BRL 90 million also in December last year. So this year, we also added a CapEx that was already made.

And just to mention, our strategy is for long-term contracts. We do not participate in any proposal shorter than 12 months. And as Carol said, we haven't -- we consider an adequate internal return rate for the levels in Brazil. And we already have 76% of leased equipment. So close to 80%. And all investments to be made from now on, as I said in the opening speech, will be ad hoc. That means, as we close the contract, we bring equipment in-house.

[Operator]

Next question, Luis Octavio Capistrano, sell-side analyst, Itau.

[Unknown Analyst]

Kariya, Carol, congratulations on the results. My first question is a follow-up on Fernanda's question about CapEx. I'd like to know if you could break down from the rental CapEx in the first quarter about BRL 320 million? What's heavy and what light equipment and confirm the understanding from your answer about this annual expectation of BRL 780 million? What number would it become? Is it just a delay between quarters, less CapEx in the beginning of the year and more at the end of the year? Or is there a reduction of this CapEx? So I'd like to confirm this understanding.

And an additional question is about margins. I believe you mentioned some impact, especially use. There are margin [indiscernible], but do you expect that the maturing of the branches occurred this year faster than the opening of new branches that you have planned. I mean, this effect will be reversed and the margin will start going up this year as the quarters go by?

[Caroline Pepe, executive]

Answering your first question about the investment in the first quarter, we had BRL 125 million in CapEx of lights and BRL 187 million in the CapEx of Yellow Line. About the volume, it does not affect margin, okay? So what affects the margin, of course, is price. So what ended up happening is that the machines came in, our volume goes slightly down also by the seasonality with kind of rains and offseason. And the branches that we already opened, the 15 we opened last year, are improving month by month. We're adjusting the pace of opening new branches as the macroeconomic scenario evolves in Brazil as well. But we're very confident that during this year, the volume of the new open branches will start to gain traction and increase.

Therefore, considering that we are estimating a stable price, the margin remains relatively constant. What we're seeking very strongly in here in the company and you could see in the first quarter of this year, are those captures of efficiencies in SG&A. So we continue strongly working on that effort in the company so that we can seek margin improvement by contracting expenses.

[Operator]

Next question, Roberto [indiscernible], buyside analyst, Ligado Assets.

[Unknown Analyst]

Two's questions in writing. The first, could you please talk about the use of equipments in the rental line? And #2, shall we expect new sales of equipment in the Formwork and Shoring for the next quarters?

[Sergio Kariya, executive]

We aren't breaking down the details, but we did mention that the heavy equipment use, we have already a closed number. We don't see a reflection of that in the results yet. We're starting to mobilize it in the second quarter. We had a very big off-season period in heavy equipment. So in the heavy line, we closed about 70% of what we closed at the Agribusiness sector, but it's the offseason.

So we started to move it now in the second quarter. It will gain traction during the second quarter into the third. And then on the third quarter, we will reach 76% if we don't close anything new, but of course, we intend to continue closing something.

In light equipment, we're around 62%, 63% in the first quarter. There is a slight decrease compared to the fourth quarter, but mostly due to the receivable and the volume of more than 1,000 machines since December and the first quarter of 2023. Considering the sales of Formwork and Shoring, it was a one-off scenario.

We do not intend to sell, as I mentioned in the opening, and Carol mentioned as well, the equipments that are depreciated. But I think an important point for Formwork and Shoring, the duration of this asset is very long. It's more than 30 years.

So we will continue to improve return on invested capital and we are focusing greatly on the increase of volume. That means the usage of those pieces of equipment in our contracts. We are experiencing tailwinds, especially from investments and auctions and so on, and concessions of the previous years that are starting this year of '23 and '24 onwards.

And this will positively benefit this business unit, but it will also affect positively the rental unit with heavy equipment. But I will answer your question specifically, we do not intend, at the same level with the same volume that we had almost BRL 10 million of semi new equipment sales and Formwork and Shoring to repeat over the year, we tend to increase these assets and increase volume to improve our return.

[Operator]

Next question, Gabriel [indiscernible], sell-side analyst, Santander.

[Unknown Analyst]

Good afternoon, Sergio, Caroline. Congratulations on the earnings. My first question is about the -- your organic growth. How do you see this opening of branches this year? And still on growth, thinking about diversification as well, I remember last time you mentioned, with different market segments, different industries, how are you developing these conversations? Do you see one that is more promising than the other? That's the Agribusiness industry. I'd like to hear from you about that.

[Sergio Kariya, executive]

Okay, Gabriel, we had already announced some openings for 2023. We had said about 8 branches, our expectation still of around 6 to 8 branches, as I mentioned as [indiscernible] from Itau, we will adjust this depending on the macroeconomic scenario and the volume of penetration according to the penetration in these areas.

But the project remains. If we look, for example, the business fundaments does not change. We may be suffering some pressure from the macroeconomic moment in Brazil and so on. But in the long run, it's a compound in terms of the penetration of the concept, the platform. It's a change on concept of the use of -- from stairs and so on, 2 lifting platforms. So considering our leadership in the market, we do have this important role of continuing and improving safety and penetrating this concept.

I missed your second question, Gabriel.

[Unknown Analyst]

He talked about inorganic as well.

[Sergio Kariya, executive]

About the M&As, we are still watchful. The positive side is our leverage. I believe we're at a very comfortable moment in terms of leverage, and this brings us opportunities. When you look at a scenario with a higher interest rate potential, credit branch of the small and medium companies not being able to access capital, to have restricted access to credit in the moment where Brazil is renewing contracts, hiring or contracting more machinery, it may be an opportunity for us to look at the acquisition of those companies.

So we remain watchful always to the opportunities. We have not removed our focus in the company. And we understand that the moment and profile that the company has today in terms of leverage generates interesting opportunities for us to make this movement.

[Unknown Analyst]

Very clear. My other question is about Formwork and Shoring. There's a follow-up on the previous question, but we saw good performance, especially in terms of margins, the one-off sale of assets, the infrastructure scenario. I'd like to have a better vision of that because -- what can we expect for this sector, in a more long-term view, if you can tell us?

[Sergio Kariya, executive]

So Gabriel, we're very optimistic with this business unit. It is a unit where we have relatively long-term contracts. The characteristics of infrastructure in Brazil has contracted in recent years, of course, and the duration of the work as well. So these were works that were infrastructure works, but of a smaller size.

And we're seeing here a possible path of, again, having more robust infrastructure works. Even for concessions that have already been made, that will increase that number of contracts. But today, on average, we have 13, 14 months of the contract duration. And a positive reflection of this business unit is that I contracted 12 months ago at a price that is much better than you can see today here.

That's why we're improving margins. That's a unit that's already contracted with price improvement, margin improvement for the coming months. So it's what you saw on the reflection of the fourth quarter to the first quarter and what we see for the year of 2023. '24 as well, I think there's tailwind for the works, the concessions that will be positive reflections from now on.

[Operator]

Next question, Andres Montana, Investor.

[Unknown Attendee]

A text question. Could you give us more detail about the strong results of Shoring? Was it pulled by the increase in price and volume on the segment?

[Sergio Kariya, executive]

I think I've answered now on Gabriel's answer about Formwork and Shoring. It was a lot due to the hike on prices with the duration of the contract. The contracts we closed on recent months. They are having a positive impact in the business units. So it was less volume so far, but much more due to the price. The volume is pretty much the same, but we expect a volume expansion then throughout the year and also price reflections as they renew these contracts. So as the older contracts expire with worse prices, we'll start getting these new contracts at better prices.

[Operator]

Question from Carlos [indiscernible] in writing.

[Unknown Attendee]

I'd like to ask about the investment already contracted by the government in concessions as of intraweek of last year, specifically NovaDutra Highway?

[Sergio Kariya, executive]

So Carlos, I think it's a little bit in line with that. We're experiencing this tailwind with the concessions. NovaDutra is 2 sections, 2 different contracts. One is the Rio de Janeiro stretch where there may be a more positive impact for us and the contract for the Sao Paulo's stretch separately.

They were bidded in two different companies one and they're renegotiating, but it's a work that will occur. We do not expect this effect to be in 2024. Maybe the work will start in the fourth quarter of this year, if all goes well, but the positive impact of this work per se, specifically the road widening at [indiscernible] will be in 2024. So that's the tailwind.

There's a lot of works related to bids from previous years that will be a positive reflection for Formwork and Shoring, for Yellow Line. For example, duplication of the highway at [indiscernible] will rent a lot of equipment. And it's also a target for lifting platforms. That's also important. So our businesses will have a positive surplus of those investments that were already made, either at Infraweek or TPI or whatever name we give it in terms of the infrastructure investments in previous years.

[Operator]

Continuing with the next question, [indiscernible], sell-side analyst, Lumi.

[Unknown Attendee]

A written question. Two questions. One, I'd like to understand if the pipeline of M&As in Yellow Line will focus on any specific industry, mining agribusiness, forestry, et cetera? And two, does the company intend to enter with service -- maintenance service packages dedicated for some determined question -- client?

[Sergio Kariya, executive]

We don't break down the industries we're focusing on. We're focusing on all of them, and not specifically on the Yellow Line, lifting platforms. We encompass all opportunities that make sense in terms of strategic alignment with the company.

The second question about the maintenance service, we -- I give priority 100% of the maintenance. I do not rent equipment just to outsource my balance sheet. I provide maintenance services. So when I rent an equipment, any of our pieces of equipment, the service, the preventive maintenance, corrective maintenance, all of that is actually a differentiator of what we deliver compared to our competitors.

Obviously, what we constantly seek is customer satisfaction, better uptime. That's how we seek to stand out in the market. So we want to continue to do that. We will do that. We want to do that very well, and it's part of our service. 100% of our contracts have maintenance. Just to remind you, with the 56 addresses, at all 56 addresses, I have a mechanic, I have a admission, I have a team there with spare parts, with equipment available for our clients. So that's also a huge differentiator when compared to the competition.

[Operator]

Thank you. We now close the question-and-answer session. I'd like to turn the floor over to Mr. Sergio Kariya for his final remarks.

[Sergio Kariya, executive]

Well, I'd like to thank you all for participating on this video conference, and remind you that our Investor Relations team is available for any doubts or questions. Thank you very much. Have a good afternoon.

[Operator]

Thank you. Have a good day.

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