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Earnings Call Analysis
Summary
Q2-2024
The company reported a solid second quarter with net revenues increasing by 9% to BRL 370 million, largely due to higher rental income. Adjusted EBITDA rose by 7% to BRL 181 million, yielding a margin of 49%. Net income improved by 11% to BRL 71 million, with a net margin of 19%. Despite project delays and weather-related setbacks, the inclusion of JM Empilhadeiras bolstered both results and cross-selling opportunities. The firm maintained a strong capital structure with low indebtedness and issued debentures worth BRL 400 million to reduce debt costs. They also declared dividends and continued their share buyback plan, reinforcing their commitment to shareholder value.
Good afternoon, everyone, and thank you for waiting. Welcome to the live broadcast of Mills Second Quarter 2024 Results. [Operator Instructions]. We would like to inform you that the video conference is being recorded and will be made available on the company's IR website together with the complete release material. During the company's presentation, all participants will be in listen-only mode. And then we'll start the Q&A session. The information in this presentation and any forward-looking statements made during the conference regarding the company's prospects and business as well as projections are merely forecast based on management's expectations regarding Mills' future. Forward-looking statements are not guarantee of performance. The info microeconomic conditions, market risks and other factors. Now I will hand over to Sergio Kariya, Mill's CEO.
Good afternoon, everyone. It is with pleasure to share with you the results of this quarter. We continue to move forward with the termination in our strategy, accomplishing important milestones that reinforce our leadership position in the equipment and finery rental in Brazil. This quarter, we highlight the acquisition of JM Empilhadeiras, which expands our portfolio and opens up new cross-selling opportunities, increasing the resilience of our business and providing more predictability to our cash flow. In addition, we issued the nice debentures and successfully completed the fourth share buyback program, strengthening our capital structure and creating value for shareholders. In ESG, we published our most recent annual sustainability report. -- And we're recognized by -- great Place to Work as one of the best companies to work for in Brazil.
In the Transformer program, we expanded our coverage, bringing in our main suppliers as partners in the development of human capital. Despite the weather challenges in Hugues, our employees are safe, and our branches did not suffer any significant image. The estimated impact was mostly concentrated in the unit of light assets with an estimated reduction of around 1.5% in net rental revenues in the quarter due to the event. In line with our strategy, the company is always paying attention on opportunities to create value. Thus, at the Board of Directors meeting on August 13, we approved to the payout of BRL 17.7 million in interest on equity regarding the third quarter '24 and the payout of BRL 32.3 million in interim dividends and the fifth share buyback plan. The initiatives are part of our ongoing commitment to strengthen our capital structure, reduce financial costs and maximize value for our shareholders. Now Leonard will comment on the financial aspects of the quarter.
Good afternoon, everyone. On Slide 4, we show some more highlights for the period. We ended the quarter with a rental fleet of almost 14,000 assets, a net addition of another 2,000 pieces of equipment compared to 2Q '23, reflecting investments in light, heavy assets and acquisition of JM. Adjusted EBITDA reached BRL 181 million with a margin of 49%, showing consistent growth and maintenance of profitability. Net income reached BRL 71 million, 11% up the first second quarter ‘23 with a margin of 19%. Our net cash income reached BRL 107 million in the quarter. Net cash margin of 29%, reinforcing our tax efficiency. -- return on invested capital, 23% a year, show in the company's solid financial performance. We invested BRL 464 million in the quarter, almost all of which in rental assets via M&A and organic growth, reinforcing our commitment to continuous growth. In ESG, we highlight the publication of our most recent annual sustainability report, which highlights our progress and commitments.
Now on Slide 5, we once again reinforce our strategy of diversifying rental income, seeking greater resilience in the face of possible market fluctuations. JM reinforces our strategy of having more predictability to our cash flow. We're just seeing cyclic periods without specific concentrations on segments, customers and with a balanced portfolio of products. Our exposure to long-term contracts increased by 12 percentage points compared to 2Q ‘23, reaching 44% of revenue. We serve our more than 10,000 customers with a single platform in just 60 days of JM's operation, which triples the pipeline of opportunities, enhancing our opportunities for cross-selling. Now we are going to talk about the financial highlights in rental on Slide 7. Here, we can see that even despite the impact of the delay of infrastructure works and the rains that hit Records, our net revenues grew by 9% compared to 2Q ‘23, mainly reflecting the higher rental revenue in the period due to strong growth in heavy assets as well as the inclusion of 12 days of JM's results. Adjusted EBITDA grew by 6% and margin ex sales reached 46%, also an increase year-on-year -- now moving on to formwork and showing results. We can see on Slide 9 that net rental revenue grew by 17% over 2Q ‘23 reflecting better prices practiced in this business unit. Adjusted EBITDA amounted to BRL 38 million in the second quarter, up 12% over to 2Q ‘23 and margin of 59%. Despite again the delay in the starting of infrastructure projects, we saw growth in the business unit.
We continue with our strategy to generate cash and maintain our leader position in the market by working with these projects and also taking advantage of cross-selling opportunities with other business units. On Slide 11, we show our consolidated results. Net revenues grew by 9% compared to 2Q '23 for a total of BRL 370 million in the period. Net rental revenue grew 14% over 2Q 23 with expansion in all business units. Adjusted EBITDA in turn grew by 7% to BRL 181 million in the quarter, and adjusted EBITDA margin of 49%. The results show that our pillars and our strategy built a solid base for mills consistent growth. On Slide 12, we can see that net income reached BRL 71 million in 2Q an almost 11% higher than in 2Q '23 with net margin of 19%. The result shows the increase in EBITDA, partially offset by the increase in the financial result and depreciation in the period. The chart on the right shows the generation of operational cash flow in the period for a total of EUR 87 million in the quarter, down 19% compared to the second quarter 23 and an outflow of almost BRL 300 million considering the investments made in the period.
Slide 13, shows our capital structure, highlighting our solid balance sheet, low indebtedness, which allows us to capture growth opportunities. We ended the quarter with gross debt of BRL 1.5 billion and BRL 800 million in net debt, 83% of which is scheduled to be paid over the long term. Total average maturity is 3.3x. -- average cost of CDI plus 2.1% a year. Also, as a highlight in June, we issued our ninth simple debenture for a total of BRL 400 million in 2 series: one with maturity of 5 years, cost CDI plus 1.3%, and the other for 8 years, CGI plus 1.4%. The funding made it possible for us to extend our payment period and reduce the average cost of debt. Leverage in the quarter stood at 1.1x net debt-to-EBITDA, which guarantees another covenant quarter of covenant match. We ended the quarter proud of our team's work and prepared for the coming periods. I will run the floor back to Kariya
Thanks, Leonard. I couldn't fail to announce our third annual sustainability report, highlighting our accomplishments and commitments. We were the first company in the industry to make a commitment to SBTI, benefited more than 600 youngsters through the Transformer program and invested $4 million in training our employees. In addition, we will recognize the best rental company for the year at Yap Awards, and we're finalist in other 3 categories. We were voted Company of the Year in the sector by Valor 1000 award, and we are the only company in the sector to be in --indies index. We also received recognition for the highest level of qualification by demonstrating transparency criteria and on gold seal in the 2022 GHG inventory. We are proud to be recognized again by -- great Place to Work in the 17th place in the regional ranking as one of the best companies to work for in Brazil. Reflecting our commitment to exemplary work environment. Also, we were awarded Grand people Mental being one of the top 150 Brazilian companies concerned about our employees' mental health. We thank our employees as part on supplier for their dedication and trust. Together, we will continue to make a difference in the equipment rental market, offering safe, agile and efficient solutions for the most diverse segment. We are now available to take your questions. Thank you very much.
-- we'll now begin the Q&A session. [Operator Instructions] -- We'll now start with our first question comes from Gabriel Raposo de Pinho analyst from Bradesco BBI. Gabriel, we are going to open your mic. You may go on.
I have 2 questions on my side. First, talking about JM Empilhadeiras, I'd like an update from you on the process of integration is evolving and thinking of share, EBITDA top line, could you give us some color on the second half of the year or next year but also the evolution for CapEx allocation Second question, thinking about investments in the quarter. Could you please give us a breakdown of investments by division and the level of leverage that you expect for the end of the year and next year as well, any strategic movements that we should expect within the range that you reported of EBITDA net debt
Okay, Gabriel. I'm going to start answering your questions, and then I'm going to hand over to Leonard. JM, it's been a bit more than 2 months in the integration process. We are still running it completely independently, capturing synergies in the company's top line. And as you could already see, we were able to almost triple the pipeline of the business of what JM had together with our other business units in terms of cross-selling. As for CapEx, we are obviously always seeking the best allocation breakdown today, the diversity and portfolio of services enable us to see what is the best return on invested capital to allocate capital. JM is another opportunity, another front for us to invest our capital efficiently. Now Leonard is going to give you a bit more color on JM and CapEx.
I'll start with CapEx for the second quarter, except the acquisition of JM, a very good balance between light and heavy assets vis-a-vis the goals for the future. And talking about JM, -- last year, they had net revenues of BRL 154 million, EBITDA of BRL 70 million. For now, we are considering this magnitude considering that we are going to consolidate half of this amount for the second half of the year.
And our next question comes from Fernanda Recchia analyst from BTG. Fernanda you may go on.
Hello, everyone, I have 2 questions. First, I'd like to explore a bit more the rental revenue. Rental revenue is slightly flat quarter-on-quarter, but the fleet grew by 18%. I know you had JM joining the end of the quarter. So it's not really a fair comparison. But could you give us a bit more color on yield occupancy rates just for us to understand the driver for this flatter revenue quarter-on-quarter. And for the future, how should we consider those variables -- that's the first question. Second question, on the release, you talked about the deceleration of demand from infrastructure I'd like to know if you have any outlook for the sector to normalize? Do you think it's going to continue a bit decelerated for the second half of the year? Any timing? Then if you could give some color on what segments in infrastructure that have decelerated the most. Thank you very much.
I'm going to answer the first part of your question regarding productivity Fernanda. In light assets, rental, we are at about 67% occupancy, 62% financial wise for this business unit. There was a drop of 1.5% in the total rental top line and rental considering all our rental funds, -- and obviously, that brings productivity slightly down. But for the second half of the year, what's going on. You did see a slightly more leverage operational costs in the second quarter because the demand is changing from faster turnover to long term to the elevation platforms. Although the yield is higher, the operational costs intensify a bit. So that compresses our margin a bit. The entire growth we had at JM that brings an impact of productivity. We have invested capital, then you allocate only 12 days of billing. And that pressures productivity. But for heavy assets, we are investing and growing a lot. So as we had mentioned in the first quarter this year, several contracts that we signed is started to be deployed along the second quarter. And we had some expectations about the deployment of infrastructure work that was delayed to the second half of the year, which has to do with your second question, infrastructure. We have a very positive outlook for the second half of the year, not only because of our heavy assentation platform, but also for work ensuring for the second half. We think all works that were delayed to be started or continued are going to take place in the second half of the year. So we have a very positive outlook for infrastructure
Our next question comes from Gabriel Razende analyst from Itaú BBA. Gabriel, we are going to open your audio. Gabriel, you may go on
-- so we already talked a bit about top line. So if you could give us a bit color on savings, especially SG&A and the behavior for the coming quarters. And also as a follow-up from Fernanda's question. You talked about the company dynamics with more contracts with longer terms, especially for light rental. I'd like to understand how you see the industry dynamics for construction equipment, new entrants if they are competing also for longer-term contracts? And also if you could remind us of the competitive scenario, any change in the coming months, that would be very helpful.
Thanks, Gabriel, for your question. I will start with short and long-term contracts and then Leonard is going to talk about SG&A. In light rental instead of long-term contracts, people are demanding more short term. And because with short term, you have a higher turnover that impacts the cost because whenever the equipment comes back, we service it for it to be rented again. That's why margins were slightly pressured to this quarter. As for long-term contracts, long-term contracts, you could see we went from 32% to 44%. Of course, you have the effect of JM, but also of contracts being signed with longer periods with regards to heavy assets. Our dynamics, what we can observe because we have still a very little share in the heavy assets market. We have huge opportunity. We have a very robust, resilient pipeline of negotiations. So we do not see competition per se, but in light or heavy assets. The dynamics continues quite stable compared to previous quarters. So no major variation from what we see on the day to day. Adjustments have to do a lot more with our paints. Our learning curve, different sectors, different particularities that we say, we are very much acquainted with agribusiness construction, but we are going into other sectors that demand specific knowledge. And so we have just the pace of growth to avoid risks, given the fact that contracts are very long.
And talking about SG&A, we are constantly seeking opportunities to reduce our SG&A, trying to improve processes, increase scalability. And as we acquire new companies, we can also enjoy synergies and diluted SG&A. So for the second half of the year, we are expecting similar results without major gains, which is really an evolution of the company.
Very good Leonard, if I may have a follow-up question. So for rental in light assets, the highest yield for a short-term contract does not offset expenses to have the asset return and then rent it again.
Yes, if you think of productivity, in rental, we talk about dollar utilization. This is the rental of the equipment per se. So I buy a piece of equipment for 100. If I rented at a 4% yield at 12 months, I have 48% dollar utilization or productivity. That's the math. In the spot market, the rental utilization goes down. So in terms of -- sorry, dollar utilization productivity is not necessarily higher. You may rent it with the same yield, then you're going to have a higher productivity, but you have a cost involved. And at some point for you to make it fast, you have to have an upfront cost and then revenue. So there is not a perfect match of the 2 things. For long-term contracts because you have a prefixed duration, sometimes the rental rate drops a bit. Productivity drops a bit, but costs are constant throughout the contract. With disperses cost. And in the end of the day, you have economics that is relatively similar. So in the second quarter, we had a slightly higher impact because of turnover and machines being rerented a bit faster.
Our next question comes from André Mazini analysts from Citi.
Congratulations on your results. I just have one question about the company's forecast of CapEx for '25. Would it be focused on the rental segment?
CapEx for the year is not changed. Of course, given the strong pipeline of that we mentioned in the presentation, we almost tripled the pipeline for JM much because of cross-selling. We are going to have organic case here. But for this year, not substantial, you should expect what was planned before. Then focus on rentals, both heavy and light assets.
As a reminder[Operator Instructions]. Our next question comes from Andres Calderon Investor –
Congratulations on your results. Could you talk a bit about the competitive environment? Are we willing to accommodate margins not to lose the current market share?
Andreas, thanks for your question. I think the competitive environment, as I mentioned before, I haven't felt anything really different compared to previous quarters. And therefore, we do not see an impact on rental prices. So yields, prices remain stable, and this is what we expect and observe for the second half of the year. Our focus for inside the company is to continue seeking differentiation by means of a broad portfolio, expand the China products for us to increase our footprint in the rendering of rental services to customers, always looking to work with high-quality equipment, good to not. This is what we really want in terms of differentiation and strategy. And a consequence of that is a market share in leadership in formwork, shoring or light assets. And this is what we want to try and increase market share now with heavy assets and logistics as well
-- we are now closing I'm sorry. Andres Calderon -- we are now closing the Q&A session. I'd like to turn the call to Sergio Kariya for his closing remarks. Mr. Kariya, you may go on.
Well, we thank you all for attending our video conference for the second quarter 2024. Remember that our IR team is always available to answer any questions you might have. Thank you very much.