Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Transcript 2020-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to Mills' Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would like to remind you that this conference call is being recorded and translated simultaneously into English. Questions can be asked also by participants connected from abroad.

This recording will be available at the company's website at ri.mills.com.br. This conference call is being broadcast simultaneously over the web. And can also be accessed through the company's website at ri.mills.com.br.

Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to the company's business perspectives 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 Corporate Governance.

Now to start the conference call of the third quarter 2020 earnings results, I turn the floor to Mr. Sergio Kariya, CEO. Mr. Kariya, go ahead.

[Sergio Kariya, executive]

Good day, everyone, and thank you for your interest and for joining us in this conference call to discuss Mills' third quarter 2020 earnings results. Although we are still facing the COVID-19 crisis, which impacts the routine of our employees, clients and the general population. Along the third quarter, we observed a gradual recovery of economic activity with the reopening of some industrial plants, commercial centers and other venues. This recovery, coupled with several actions that we took to mitigate the impact of the prices, resulted in a better performance of the company in the third quarter of 2020 as can be seen in the highlights on Slide 3 of our results presentation. On September 30, 2020, rented volume of the Rental business unit was already close to the pre-crisis levels at 92% of the average volume rented in the first quarter of the year, confirming a recovery trend in rental activity, also seen in the sales activity of semi new equipment.

The Construction business unit, which showed greater resilience during the crisis, for the second consecutive quarter attained the goal of breakeven level of adjusted EBITDA in its recurring activities, in line with the recovery process of this unit. This performance led the company to end the quarter with a consolidated adjusted EBITDA of BRL 36.7 million, 79% up on a quarter-on-quarter comparison. Additionally, we reported a consolidated net income of BRL 1 million in Q3. This might not be a relevant number, but it is quite significant for us as it stops consecutive quarterly losses that extended for 6 years, and it provides positive signs that the company is on track to improve its results.

From the financial standpoint, the company generated an adjusted operating cash flow of BRL 39 million in Q3 and ended September with BRL 262.2 million in cash, which, combined with our intention to carry out another issue of debentures, prepares us to face new challenges to invest in improvements with a focus on our clients and to capture potential opportunities that might arise. As the company is not only about rental sales and numbers, Mills' third quarter was also marked by social and environmental responsibility actions. We signed the letter of support to the Amazon prepared by the business sector, in which we declare and affirm our public commitment to the sustainable development agenda. We also launched a solidarity program called per Partilhar or Share, which is part of the commitment that we made to the UN Global Compact and the respect of Sustainable Development Goals through which we aim to encourage and promote, together with our employees, actions to support sustainable development in society.

We know that we still have room to improve continuously such actions. But every step we take towards that goal and that direction already gives us great satisfaction. Now to speak more specifically about the quarterly results, I turn the floor over to James Guerreiro, our CFO and Investor Relations Officer.

[James Oliver Carneiro, executive]

Good day, and we'd also like to thank you for joining us today. Please go to Slide 4 for the presentation of our results. Third quarter revenues showed a recovery of our rental and sales activities compared to the prior quarter, which was heavily impacted by the COVID-19 prices. Total consolidated net revenue in Q3 '20 amounted to BRL 133.8 million, up 36.1% in the quarter-on-quarter comparison and 3.4% higher in the yearly comparison. The Rental business unit contributed with 76% of that amount. Net revenue of the Rental BU in Q3 '20 totaled BRL 101.2 million, up 25% over the prior quarter, mainly due to an increase in the leased balance on the back of the gradual rebound of the economic activity and due to higher sales of semi new equipment, in line with the divestment process of telehandlers and the sale of some older equipment. In comparison with the same period of 2019, total net revenue of the Rental business unit was 6% lower, given the economic slowdown caused by the crisis in 2020.

In the Construction business unit, net revenue totaled BRL 32.6 million in the quarter, up 89% quarter-on-quarter to -- primarily to 12.7% higher rental revenues, which were practically not affected by the recent crisis, given the characteristic of its equipment and agreements, which have a lower turnover speed. Additionally, there was the approval of a commercial agreement within this group of the bankruptcy protection process of one specific customer for the supplement of a debt that they had with the company, leading to an additional revenue of BRL 11 million in Q3 '20 in this business unit.

Also worth of notice that EBITDA generated in Q3 '20 by this commercial agreement amounted to BRL 6.9 million, as can be seen in detail in Item 13, Table 9.1 of our earnings release. Even excluding this positive effect, Construction adjusted EBITDA would again have ended the quarter at breakeven level, as mentioned by Kariya.

Please go to Slide 5. Consolidated costs and expenses, excluding depreciation and the effects of IFRS 16, totaled BRL 97.8 million in Q3 2020, 25.5% higher than the previous quarter. Such variation is mainly due to: higher consumption of parts for machinery and maintenance, due to the increase in leasing activity and work to increase fleet availability; also due to increase in sales costs, proportional to higher revenue; and third, due to accounting of costs related to the previously mentioned commercial agreement amounting to BRL 12.4 million, which is a onetime off adjustment with no effect on cash. It is worth remembering that in Q2, we had a reclassification of COGS to SG&A of approximately BRL 3 million, although not a relevant number, having no impact on our results, it does interfere in the analysis of variation of these individual accounting groups.

On Slide 6, we show the consolidated adjusted EBITDA of Mills, which totaled BRL 36.7 million in the quarter, BRL 30 million coming from the Rental business unit and BRL 6.7 million from Construction. We also present our adjusted operating cash flow, which amounted to BRL 39 million, reflecting performance improvements of the business units and the actions taken to improve the company's and to preserve the company's cash.

On Slide 7, we find information on our indebtedness. We ended the quarter with a consolidated gross debt of BRL 125.8 million and free cash of BRL 262. 2 million, resulting in a net cash of BRL 136.4 million.

In August, we paid the last installment of the second issue of Mills' debentures in the amount of BRL 59.5 million, remunerated by IPCA plus 7% per annum. Plus, aiming to rebuild and strengthen our cash as announced to the market on September 10, Mills is in the process of structuring an operation to issue new debentures in the total amount of BRL 84 million, limited to CDI rate, plus 4.25% per annum with an additional initial remuneration equivalent to 1%.

The average maturity for paying Mills total indebtedness on September 30, 2020, is 1.9 years, with an average cost of CDI plus 2.84% per annum.

On Slide 8, we see some consolidated data of the past few years and combined data of Mills and Solaris. The following slides bring more information on the performance of each business unit.

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

[Operator]

[Operator Instructions] Our first question comes from [indiscernible] with [indiscernible].

[Unknown Analyst]

My question has to do with the Construction business unit. In the second or third quarter, there has been an improvement in rental revenue. Do you think that we should expect this to continue looking forward? What are you seeing in this industry? And what are your expectations next year in Construction? Do you see new contracts related to infrastructure?

[Sergio Kariya, executive]

Our visibility regarding the Construction business, and it really depends on the infrastructure pipeline of projects. There are still some hurdles for these projects to be released, but we continue to be optimistic and bullish regarding 2021. Our goal is to improve the pricing in this business unit. We want to increase rented volume. And I believe that we are going to have good opportunities coming up, given the perspective of future investments in infrastructure in Brazil.

[Unknown Analyst]

Excellent. And perhaps you could comment regarding the utilization rate. And what about the competitive landscape now in the fourth quarter? If you could give us some color on that, it would be appreciated.

[Sergio Kariya, executive]

You mean Rental or Construction? You're talking about the Rental business unit? Okay. I'll speak about both. Construction, regarding utilization rate, it varies very little. Even during the most critical moment of the pandemic, in Q2, we maintained the Rental volume of the Construction business unit, practically unchanged. The variation is marginal. Also because infrastructure works and construction, overall, were considered essential services. With the exception of some private construction of the private industry. And in that case, the industrial plants decided that it would be best to suspend the construction in the works.

Our outlook for the fourth quarter is positive. We have seen an ongoing improvement, gradual improvement after Q2. More specifically, May was the worst moment. It was the most critical moment of the coronavirus pandemic for our company. But since then, things have been improving. December, more specifically, is a month when seasonally, we have some impact of some collective vacations and projects that are put on hold.

But overall, the fourth quarter expectations are positive.

[Unknown Analyst]

Excellent. And one last question, if I may. My third question has to do with pricing. We know that rental prices were a little depreciated because of the appreciation of the dollar. Can we expect higher prices of Rental next year?

[Sergio Kariya, executive]

I'm sorry, what are you saying?

[Unknown Analyst]

No, please, answer.

[Sergio Kariya, executive]

The answer is yes. We have been increasing our prices, improving our prices. Already in the third quarter, very little price adjustment. But now in the fourth quarter, we will resume our policy to rebalance prices. Of course, in the critical moment of the crisis, we had to hold any price increases because we had a reduction in volume. But now it makes sense for us to resume our policy to improve our prices due to the rental rate and improving our margins. The products in the highest demand are the ones that are having faster price increases. But undoubtedly, along 2021, it is part of our plans to improve -- rebuild our prices actually and to rebalance the rental rate so that we can have an adequate return on invested capital.

[Operator]

[Operator Instructions] We are closing today's question-and-answer session. I would like to invite Mr. Sergio Kariya to proceed with his closing statements. Please go ahead, Mr. Kariya.

[Sergio Kariya, executive]

Dear all, we would like to thank you very much for your participation in this call when we discuss the Q3 '20 results. Our Investor Relations team is available to answer any further questions or clarification you might require. Thank you very much.

[Operator]

This concludes Mills conference call for today. The audio of this conference call will be available for replay and the slide presentation will also be available at the Investor Relations website at ri.mills.com.br. Thank you very much for your participation.

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