Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Transcript 2021-Q3

[Operator]

[Interpreted]

Good morning, everybody. Thank you for waiting. Welcome to Mill's conference call about the third quarter of 2021 results. For those of you who need simultaneous translation, we do have this tool available on the platform. And you should click on the interpretation button by means of the globe icon on the lower part of the screen, and then you choose your language, either Portuguese or in English. For those of you who need English, you do have the option of muting original audio by clicking on this button. We would like to mention that this call is being recorded, and it will be made available at the company's website, where you can also find the full material of this quarter's results. During the company presentation, all participants will be in listen-only mode. Afterwards, we will be having a Q&A session.

We would like to inform you that information contained in this presentation and forward-looking statements that might be made during this call, in relation to the perspectives and the businesses of the company as well as projections are forward-looking statements that are based on the expectations of the management in relation of those future forward-looking statements, no guarantee of performance. They involve macroeconomic conditions, market risks and other factors.

Now I would like to turn the floor to Sergio Kariya, CEO of Mills.

[Sergio Kariya, executive]

[The interpreter is not receiving the sound]

The improvement of demand in all the verticals of the company, but mainly those coming from infrastructure. The improvement is being driven by the growing penetration of the use of aerial platforms added to the outcome of our actions to improve market coverage. We achieved an increase in our utilization rate from 57% to 61%. 6% increase also in our prices on a quarter-on-quarter comparison. We reiterate that our purchase order for almost 1,300 pieces of equipment amounting to $63 million has been concluded as the bottleneck and the global supply chain persists.

On the financial side, we can see that our actions in the last few years have brought about growth, better margins and profit generation. On the first slide, you can see that our adjusted EBITDA from 2018 to the last 12 months ending in the third quarter of 2021, went up by 468%, representing in the period a CAGR of 80%. We went from a loss of almost BRL 100 million in 2018 to a net income of BRL 66.4 million in the last 12 months and we reached a ROIC in the rental unit of 15.2% for the last 12 months.

In order for you to understand the importance of this group. If we were to analyze the performance of the third quarter of 2021, at Rental we would have in this unit, BRL 166 million in net revenue, which would be 60% higher than 2020 at almost 90% higher than 2019. We would be delivering BRL 295 million of adjusted EBITDA 15% higher than 2020 and 128% higher than 2019.

I reiterate that our merger with Solaris was very successful in terms of culture, in terms of integration of our teams and also the capture of synergies. And the construction turnaround is concluded also. And this allows management to be totally focused on diversification of products and growth of the company.

I reiterate that we are well prepared to continue growing because we have the best market coverage vis-a-vis all the other equipment rental companies in Brazil, covering over 1,200 cities and we have very robust in logistics as well. And we serve with quality over 7,000 clients. This further increases our confidence to continue growing and diversifying on the geographic coverage side. We will continue to grow both organically and inorganically according to our strategy. On the inorganic side, we communicated this month, the approval of CADE for the acquisition of 100% of SK rental.

In a pro forma analysis, if we were consolidating the SK rental results with Mills, we would have an adjusted EBITDA for the last 12 months, approximately BRL 264 million.

And last but not least, we continue our evolution towards sustainability ESG keeping our focus on certification as a B company. And we are -- and our path towards sustainability. We achieved the WOB seal reinforcing our commitment with the importance of the presence of women in our company.

Now I would like to turn the floor over to James Guerreiro, who will talk in detail about the results of 2021.

[James Oliver Carneiro, executive]

Good morning. I would like to thank you very much for your presence. And on this chart, net revenue per Type, we see an increase of 11.9% driven by rental revenue mainly. The volume, as you can see in the utilization rate reached 60.9% in the quarter. And in September, we reached 63% average net revenue per business unit, also BRL 69 million of rental. There was an evolution vis-a-vis the second quarter of 2021 and also regarding the third quarter of 2020.

Now let's go to the next slide, talk about cost and expenses. As you can see, 3.6% increase and which brings us better margins. And in detail, we see that since the third quarter of '20, we have this level here of about 59 or total COGS. And for different reasons, in the third quarter of '20, we had a nonrecurrent effect in our negotiation with the client of constructions, which brought this up in the second quarter of 2021, as we have already said.

There was a stronger liberation for machine for rental, which, of course, allowed us to grow the volume rented in the third quarter of '21. But we have to consider efficiency and cost management and expense management. And this continues to be the focus of the company, and it should be a trend not only for the next few quarters, but also for the next few years of the company. It is important to mention that we reduced availability. We started the year with approximately 30%. And currently, it is around 20%, 22% the lack of availability. And because of that, we have more machines available for rental.

Our SG&A, 8.6% increase is due to nonrecurrent effects that come from the release of these machines and also the reversal of provision in the second quarter of '21 of BRL 1.5 million that has an impact on the SG&A basis of this quarter, and it is higher than the increase in revenue, which improves our margins.

Now let's go to our EBITDA slide. This is very clear. The effect on the result of the company, practically BRL 80 million in the quarter, 41% margin, a very strong evolution quarter-on-quarter, third quarter of '20 was still a moment of recovery because of the effect of the pandemic that was stronger in the second quarter of that year 2020. But as Kariya said, this is already water under the bridge. We have already turned the company around, and we are looking towards a consistent EBITDA for the future.

Adjusted cash flow, we see an increase in the third quarter of '21, practically BRL 47 million. And when we look at the free cash flow, the difference that we see of BRL 15 million is because of the investments made in the period. About half of that is for rental assets. Our average term for our debt is 1.6 year currently, CDI plus 3.4%.

Those of you who follow the company, you can see the evolution in this regard, not only in terms of making the company better prepared for the growth trajectory, but also for longer debt profile and also cheaper debt than the one we had before. So we see an ongoing evolution in our capital structure. Gross debt, BRL 175 million (sic) [BRL 165 million], BRL 320 million cash. Undoubtedly, the company is very well prepared for the next opportunities for growth.

On the next slide, you have more information about our consolidated debt. But now we would like to open the question -- for questions from you.

[Operator]

[Operator Instructions]

[indiscernible] sell-side analyst of TC. We will open your audio so that you may ask your question.

[Unknown Analyst]

Congratulations for the results. About your M&A pipeline, could you say a few words about that? Because you have recently received the approval by CADE for the acquisition of SK Rental.

[Sergio Kariya, executive]

We continue to be focused on organic and inorganic growth as well, as I said before, because we are always looking for acquisition of other companies, of course, aligned to our strategy, be it of market expansion and expansion to have other verticals for revenue and diversification. So we are very much focused on that. And when you look at the company in the current position, our cash position plus our EBITDA generation, you can see that we have room to continue to leverage the company in this regard. So we have our focus on our capital structure, of course, our capital structure -- our net cash is not the ideal yet, and we intend to look for balance in terms of cost of debt and also using these funds that we might raise in order for acquisition purposes.

[Unknown Analyst]

About your capital structure and net cash. What about the acquisitions of new machinery? Will it be through the issuance of debt and maybe other initiatives? Maybe you could talk about where you will be investing the net income of this year.

[James Oliver Carneiro, executive]

As you said yourself, we have a pipeline for capital allocation from organic activities and the acquisition of machineries to grow, to increase our fleet, inorganic actions, the acquisition of other companies or participation in the control of an ASG and distribution of dividends. This year, specifically, we have a line of maximization in the distribution of dividends for this year.

And I would like to remind you that if you look at the last 6 years of the company, as Kariya said, we have concluded our turnaround. We had a period of consecutive losses. And in 2016, we went to the market for capital. And this year, we have a net income, and we want to maximize dividend payout and also our actions regarding share buyback.

And based on the forecast for CapEx that we have year-on-year, and we have to leverage and allocate and -- leverage and allocate until we get to a very safe level of indebtedness, of course, not waiving our efficiency, but we have been evolving until we get to this ideal level. And we are still a little bit far from that.

I think a couple of quarters ago, we had 1.2. Now we have minus 0.6, and the idea is to continue to evolve until we get to the level that we consider as the best. But for the moment that we are living -- the moment that the company is living and we went through a very strong turnaround, and we are getting into a sustainable growth trajectory, a strong growth. I confess that being at this level, we have to analyze quite a lot of opportunities. And so that we may feel comfortable to choose among all these opportunities.

I would like to add that we have total focus at CSR. All the derivates regarding capital allocation in what regards dividend payout or share buyback. And the use of proceeds, both organically and inorganically.

Today, we have a position as we have been repeating, we finished our turnaround our merger with Solaris, and we are very well prepared to get into the cycle of going back to growth and a lot of this cash for future leverage will be allocated for organic and inorganic growth as well.

Regarding your last question -- your previous question.

[Unknown Analyst]

In terms of useful life of your current machines, we see that in the last few years, the demand was lower. So you have the accounting depreciation. So I would like to know the state of use of the current equipment. And if you could talk about the utilization rate, how do you see this for the next few quarters?

[Unknown Executive]

I would like to talk about the operating part and on the accounting side, just to answer your question, we make an evaluation -- a recurrent evaluation of the depreciation time for the equipment. I could tell you that it is around -- from 10 to 15 years, and it depends on the model and the kind of utilization of the equipment, but it is between 10 and 15 years. And of course, now with a stronger utilization rate and the more intensive use of the equipment, we have to reassess depreciation, and this is done recurrently. This is an ongoing process.

[Arlindo] from '14 to '17, '18, we had the high level of idleness and we made a decision way back then at Rental of not selling the assets because we knew that growth would be coming back. And of course, there was a sudden drop because of the infrastructure situation at that time and also the compression of the whole environment. And so we had a low utilization, which means that we still have room to keep them producing and generating value for the company.

And there is also another point in relation to the equipment. And we have already published that. We have a project called Phoenix, and part of the equipment was and is nonrental-ready. They are not available for rental. We have been working to reduce the lack of availability. And one example is that we took 30% of the lack of availability in the company, and we closed at 20% in this quarter, which means that we still have room to continue growing with a low CapEx. And this is the focus.

While we wait for the equipment that we have acquired the $63 million that we have bought that we will be receiving next year, we have room to generate EBITDA and generate value with a low investment. So the accounting depreciation, there is a lot of -- bit of mismatch between the state of the equipment today and the accounting depreciation.

[Unknown Analyst]

So could you talk about the utilization rate and the evolution of the utilization rate? And what is the outlook for the next few quarters?

[Unknown Executive]

[Arlindo] differently from what is thought sometimes. In spite of the recent inflation and interest rates going up and dollar being anchored in spite of all that, we see a robust demand. The demand is higher than the supply of equipment in general. This is why we're taking advantage of that in order to recover prices also and penetration and the improvement in our footprint. And we are very bullish in this regard for the next year, for the next few quarters, and we see this in our figures. We see an ongoing improvement in our utilization and the financial utilization of the assets from one quarter to the other, and we intend to continue in this direction.

[Unknown Analyst]

Another question about the secondary market for equipment. Maybe talking about the international secondary market, would it make sense for you to study some sales to other countries of your used equipment because of the dollar and the appreciation of the dollar?

[Unknown Executive]

[Arlindo], this is something that we do consistently. During the crisis, of course, the second sales of these assets here in Brazil were much lower. It is very different from the global or the international market. Just to give you an idea, there is an auction in the United States that will be happening in this coming February. There is a very strong auction in aerial platforms, they sell over 100,000 pieces. So there is a very strong demand for that. So this is a big opportunity. When we have a pushback because our assets are 100% dollar-based today, we have an appreciation in this -- on the side of the operation. So we have to analyze what really makes sense for the company to sell these assets and continue to generate EBITDA and generate revenue. It's important to reinforce and remember that before placing this order, we went to the market in order to buy semi-new equipment. And we brought some equipment to Brazil, but we are always focused on that. What is the best option, what generates the most value for the company?

[Unknown Analyst]

And lastly, could you give us an overview of the Brazilian infrastructure sector, new projects, railways? So how do you see this? And do you see this as a growth opportunity for the company? How do you see the sector?

[Unknown Executive]

Well, this is an integral part of the company. It's part of the company's profile. At the beginning of the company, we were only in infrastructure, and we participated in the major landmarks with shoring equipment, scaffolding equipment. And in Rental, there are so many opportunities as well. The intraweek, highways. The contract for the NovaDutra, almost BRL 15 million. And all this will have a very positive impact on the company. And we want to continue in this very strong area, which is infrastructure, which is the birthplace of the company and continue our relationship with the construction companies. And we have a lot of room for additional growth. And in this quarter, we saw a very relevant expansion in our participation in the rental business, in infrastructure, specifically. So we see this as a very positive fact.

[Operator]

Pedro Gonzaga, buy-side analyst.

[Pedro Gonzaga, analyst]

Congratulations. I have a few questions. The first was to Guerreiro about cash generation, net cash, and the opportunity to decrease our cost of debt and the next investment and one accounting question. Are you taking advantage of the tax credit that you have for next year with organic growth. Are you going to take advantage of the PIS and COFINS taxes and the cash cost and the accounting side of that?

[James Oliver Carneiro, executive]

If I forget something, please remind me. But starting with the cost of debt, we look at Mills and you know that Pedro you have been following the company for a long time. We see an evolution in the cash position, cash generation. And as time goes by, we start to have access to better credit conditions. So over time, as Mills grows, et cetera, it is only natural to think that we will be able to evolve in our rating and also access to lower spreads. This is what we expect.

However, it also depends on a favorable macro environment. It doesn't really -- it is not really helping it with the use of credit. We have already started to use our tax credits of the accumulated and in 2021. And of course, expecting the evolution of our net income. The idea is for us to be able to use in 2022 and '23.

And you also mentioned the acquisition of new equipment, the use of the PIS and COFINS credits in the time frame that is allowed for the legislation. So there is the fiscal aspect, both regarding income tax and CSLL and the credits generated by the acquisition of new equipment, which is trivial, which is rather common in our market with this is business as usual.

[Pedro Gonzaga, analyst]

About the recovery of [TU] as the new project and the new concessions start to demand more and more equipment?

[Unknown Executive]

Pedro, we understand that the recovery in formwork and shoring continues to grow quarter-on-quarter. And I would like to draw your attention to the fact that we do not tap into the opportunity of catering to the infrastructure sector only with shoring and formwork. The use of other equipment area platform, generators, compressors, et cetera, they are very much used in the infrastructure area. So the growth that we had from the second to the third quarter was mainly due to the opportunity that we are tapping into with motorized equipment.

[Operator]

[indiscernible].

[Unknown Analyst]

Congratulations. We know that the company's focus has changed investment in Rental became a top priority. And in the concession area, we depend on that. Maybe the market is pricing the company very much based on the low growth of Brazil. How do you see this? Which other sectors could bring about more results in the future and which ones are bringing more results today? [indiscernible], there are some points involved.

[Sergio Kariya, executive]

If you take 2020 in the pandemic, there was a drop of 4% in the GDP and Mills went up by 2%. So it has to do with year-on-year. The penetration of this concept of using lifting platforms, aerial platforms. So more and more people renting vis-a-vis buying equipment. And this means that today, we have a diversification in our revenue pipeline, which is very big. We have many verticals. We do not have a concentration such as was the case in the past. And this is why we had this big correlation with the GDP because we were in one area almost practically.

And today, we are more robust in all the verticals. So we can balance this. Besides today, if you look, you see our nonconstruction revenues are over 70%. We still have a very low percentage of construction revenue, and this doesn't mean formwork and shoring. It has to do with everything. And the aerial platform has a lot to do with the construction sector.

And given all the concessions, all the auctions that we had in the intraweek and the renewal of the concession of CCR for instance, we see a very strong pipeline of projects for the next few years already contracted. And of course, we want to tap into that. We want to get into the sector more and more. This is what we are seeking. And this is where we believe that things could be very interesting in spite of the high inflation rate and the GDP problem. So we see really tailwinds in this regard.

[Unknown Analyst]

Very clear. And talking about growth, we saw in the results of the company maintaining the plan of opening new branches and acquiring equipment. So you have been investing quite a lot in organic growth. And also you had the acquisition of Nest and SK. Will you tend to continue to invest inorganically in M&As or will you be totally focused on organic?

[Unknown Executive]

I would like to start by the organic part. We have a very big room to improve our market coverage. When we integrated Mills and Solaris and even Mills and SK, there were some insights that we had regarding opportunities for market coverage -- And this is what we have been doing.

We have been improving our market coverage consistently and not only in the existing branches, but also opening new branches -- And we should end the year with 42 the closing of SK plus 8 in 2022, ending the year with 50 areas for -- locations maintenance. This doesn't mean that I only have 42.

As I said before, we cover over 1,200 cities. So we have this very big footprint in Brazil. And this is a very strong advantage that we have. We will continue to invest part of the new equipment acquisition is to supply these areas or these offices or branches. And we do have a very strong strategy and [Arlindo] had asked us about that.

We have a very robust pipeline regarding our acquisitions and the acquisition of new companies. And this has to do with the use of receive. The net cash of the company, the leverage of the company, part of the cash generated by the company so that we may grow faster.

[Unknown Analyst]

And just to end, I would like to go back to the increase in demand that you see and the consequent better prices maybe we are reaching a rental rate around 4% increase. Could we continue to expect for the next few years, the rental rate, which is historically high. And will you continue to be able to transfer the price increases? Or will this stabilize?

[Unknown Executive]

Well, the market is very dynamic. We believe that we do have room to further improve our rental rate. Our focus will always be on the EVA -- enterprise value-added. The focus on the capital invested minus our capital cost -- weighted capital cost. And then, we will continue to improve this factor for our shareholders. I believe that in a very short time, and a very positive point is the following. Given this constraint in the supply chain, just to give you an idea, if you place your order now to a manufacturer, he will only deliver in the second half of 2022. So talking with most of the manufacturers, they see the stabilization probably in the last quarter of 2022. And if we continue to expand our penetration, there will be an imbalance between supply and demand. And of course, we have to try and offset this in terms of prices. And there has to be a balance between -- well, the business being attractive not to generate more competitors and the return that we aim at.

[Operator]

[Luis Guilherme] buy side analyst [indiscernible] Brazil.

[Unknown Analyst]

Inviting a text question. I would like to have more information about the Phoenix project. How many machines are in this project? How many already in activity? And what is the deadline for you to bring the other ones?

[Unknown Executive]

We started the project with about 600, 700 machines in 2019. In 2020, it was supposed to be intensified. But with the pandemic, we decided to hold this up. And in 2021, we accelerated again and the improvement in availability and the increase in the rented volume is due to this project. Approximately half has already been done. So I believe it should be about 300, 400 machines that are still in the Phoenix project and that have not been released yet. And naturally, the team is working on that every single day, and we expect to conclude this next year.

As I said at the beginning of the presentation, we have 22% lack of availability and these machines will also be released. And as we release these machines we will get to a reasonable level that really makes sense for our operations.

[Operator]

[Luis Guilherme] from [indiscernible] Brazil.

[Unknown Analyst]

What is the investment potential that you have? What is an acceptable level of leverage 3x the EBITDA? Does that mean that you may invest 1.2?

[Unknown Executive]

Good question. In fact, as we said before, we have a level of leverage that is far from ideal, which is a no-brainer because a company such as ours could get to 1.5 or 2. This is a no-brainer. And naturally, Luis, it is possible, as you can see other companies in our sector make these move. Sometimes they go to 3, then they go back to 2.3. It depends on investments that are bigger or smaller. So it is always best if you can keep to a safe level. But what you say does makes sense as you invest, you continue to increase EBITDA generation. So 1.2 does not mean that it is the limit for investment, organic plus inorganic over time. But you invest and this increases your investment capacity as well. You want about 3 times -- 2 or 3. The EBITDA also goes up. So this increases your investment capacity and you do the organic and inorganic projects, as Kariya mentioned.

[Operator]

Larissa Pérez sell-side analyst, XP.

[Larissa Pérez, analyst]

Congratulations. About Phoenix, a very quick question. I would like to know if this could affect the pace of development.

[Unknown Executive]

Larissa, thank you for the question. We started our plan -- the recovery plan for the equipment. The availability plan of the Phoenix project at the end of last year, I think [Arlindo] said that we had a plan for last year then the epidemic came and then we resumed it afterwards. And at the time, we had already seen that there was a bottleneck regarding the replacement parts, et cetera. And this is why we decided to accelerate our purchase and this had a negative impact on our balance sheet because we are carrying about [ BRL 80 million ] in terms of inventory.

This is not the ideal but we carry this in order to be able to maintain the quality of service to our clients and the focus on the reduction of lack of availability. So answering your question, no, we have no problem regarding that or the number of pieces or parts and we are comfortable with the level that we have, and we have to be able to release this equipment. We have already done a very good job. We have already reduced from 30 to 20 in 9 months, but we continue to be focused to continue this reduction further. So it has much more to do with the time frame than with the pieces.

[Larissa Pérez, analyst]

[The interpreter apologizes, but it's very difficult to hear what the lady is saying]

[Sergio Kariya, executive]

SK over the year also had an improvement and the improvement was not as strong as ours. The CADE process was longer than we expected. And as you know, when a company is involved in an acquisition process. Of course, everybody gets a little bit nervous. But I think there is a good side in terms of opportunity because as we have the closing of the deal, we have the opportunity of leveraging prices and utilization and tapping into synergies and delivering a better EBITDA. If we look at the last 12 months, it's already BRL 14 million, BRL 15 million. And with that, we have room to further improve this.

[Operator]

Pedro Gonzaga from Pacifico Gestão de Recursos Ltda.

[Pedro Gonzaga, analyst]

Thank you, but my question has already been asked.

[Operator]

[Operator Instructions].

The Q&A session has come to an end, and I would like to give the floor back to Mr. Sergio Kariya for his closing remarks. Mr. Kariya, you may proceed.

[Sergio Kariya, executive]

We would like to thank you very much for participating in this live session about the results of the third quarter of 2021. Our Investor Relations team continues to be available to you for any further clarification you might need. Thank you very much.

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