Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Analysis

Mills Achieves Strong Revenue and EBITDA Growth Amid Market Challenges

In the third quarter of 2024, Mills reported record net revenue of BRL 419 million, up 21% year-over-year, driven by strategic investments of BRL 173 million in new equipment. The adjusted EBITDA of BRL 199 million highlighted a robust 48% margin. Despite a 10% price pressure from competition, particularly in light rentals, the return on invested capital reached 22.3%. The company maintained a healthy net debt-to-EBITDA ratio of 1.2x and reaffirmed its commitment to sustainable growth through long-term contracts, which now account for 45% of net rental revenue.

Strong Revenue Growth and Historical Performance

In the third quarter of 2024, Mills achieved a significant milestone with net revenue reaching BRL 419 million, marking a robust growth of 21% compared to the same quarter in 2023. This outstanding performance underscores Mills' resilience and adaptability amidst a fluctuating economic backdrop, following an all-time high that reinforces its leadership in Latin America’s rental market.

Investment and Capacity Expansion

Mills has invested BRL 173 million in new equipment during the quarter, aimed at enhancing production capacity while maintaining quality and profitability. This strategic investment not only fortifies its existing operations but also opens avenues to explore new business opportunities in key markets.

Profitability Metrics and Tax Efficiency

The company reported an adjusted EBITDA of BRL 199 million, corresponding to an impressive margin of 48%. Net income stood at BRL 71 million, reflecting a 6% increase year-over-year. Notably, Mills achieved a 10 percentage point improvement in tax efficiency, highlighting its favorable position in managing operational costs.

Focus on Sustainable Growth and Long-term Contracts

Mills continues to emphasize sustainable growth by expanding its product portfolio, which has resulted in 45% of net rental revenue being derived from long-term contracts exceeding 12 months. This strategic move has provided the company with greater revenue predictability while mitigating exposure to economic cycles.

Utilization Rates and Future Expectations

The current utilization rate stands at 67%. The executives expressed optimism for the upcoming quarters, attributing expected stabilization of prices and operational efficiencies to enhanced demand and a constrained supply of equipment. This balance could lead to further improvements in both margins and operational performance.

Pressure on Margins and Competitive Landscape

Despite the overall positive performance, there has been a notable pressure on margins, particularly for light rental assets, which saw a 10% decline in prices. This segment, representing 60% of Mills' results, contributed to a decrease of 36 basis points in margin. Management does not foresee this margin contraction as a consistent issue, anticipating a rebound as supply trends stabilize.

Financial Health and Investment Capacity

Mills reported a net debt-to-EBITDA ratio of 1.2x, maintaining a solid leverage position that facilitates both organic and potential inorganic growth opportunities. Operating cash flow also showed strength, amounting to BRL 202 million, a substantial increase compared to previous quarters, further reinforcing Mills’ financial stability.

Integration of Recent Acquisitions

The integration of the recent acquisition, JM, has provided a robust pipeline of cross-selling opportunities, multiplying proposals nearly tenfold. However, the integration has also adjusted the cost base upward, attributed primarily to the transitional phase after the merger. Looking forward, there remains a significant untapped potential for cross-selling among the 10,000 customers across over 110 sales points.

Market Dynamics and Future Growth Trajectory

The management believes that high interest rates may limit growth opportunities for smaller, highly leveraged competitors, potentially positioning Mills favorably within the market. Their disciplined capital allocation and focus on internal return rates are expected to drive sustainable growth even as market conditions evolve.

Outlook and Guidance

Looking ahead, the management is optimistic about the fourth quarter, suggesting that improved pricing dynamics along with a stable exchange rate could enhance margins further. They also aim to balance investments across various units to sustain competitive advantages and profitability in the face of market challenges.

Earnings Call Transcript 2024-Q3

[Operator]

[Interpreted] Good afternoon, everybody, and thanks for waiting. Welcome to the live webcast of Mills Third Quarter 2024 Results. Please note that simultaneous translation is available on this call. [Operator Instructions] We would like to inform you that this conference call is being recorded and will be made available on the company's IR website where the complete material on the earnings release is also available. During the company's presentation all participants will be in the listen only mode. Then we're going to start Q&A section. We emphasize that the information contained in this presentation and any statements that may be made during the conference call regarding the company's prospects and businesses as well as projections are based on forecasts based on the management's expectations regarding Mills future. Forward-looking statements are not guarantees of performance. They involve macroeconomic conditions, market risks and other factors.



Now we will hand over to Sergio Kariya, Mills CEO. Mr. Kariya, you may go on.

[Sergio Kariya, executive]

[Interpreted] Good afternoon, everyone. It is with great pleasure that we meet again this time to announce Mills third quarter 2024 results. This quarter, we managed to achieve a number of significant advances that are reflected in our figures. Let's now analyze the main highlights, which show our resilience and ability to adapt in a dynamic economic scenario. In 3Q '24, we invested BRL 173 million new equipment with the aim of increasing our production capacity and preserving the quality and profitability of our fleet. In addition, these investments allow us to explore new business opportunities and expand our presence in strategic markets.



Return on invested capital for our Mills reached 22.3% in the quarter. The indicator confirms the effectiveness of our strategies investments and our ability to generate returns in excess of our capital costs. Once again, net revenue reached an all-time high, amounting to BRL 419 million in the quarter, representing a strong growth of 21% compared to the third quarter 2023. Adjusted EBITDA reached BRL 199 million in the third quarter '24, with consolidated margin at 48%. Net income of the company reached BRL 71 million and cash net income, BRL 113 million in 3Q '24. I would like to highlight the company's tax efficiency with a gain of 10 percentage points in the comparison between margins.



For the second consecutive year, we were among the companies included in the B3's iDIVERSA index and continue to be the largest company in Latin America for the rental of themes of excess, reaching 22nd position in the access 50 ranking by the International Rental News.



Before moving on to give you more color on the quarter's results, I would like to highlight that we continue dedicated to our sustainable growth strategy. We continue to expand our product portfolio, generating greater predictability in revenues, coupled with less exposure to more cyclic sectors. In 3Q '24, we reached 45% of the company's net rental revenue based on long-term contracts that is above 12 months and with a balanced portfolio of products with no specific concentration of client segments. We are better prepared to face market variations and to grow in a sustainable manner. Throughout the quarter, we signed new long-term contracts in our business units, further strengthening our leadership position in the market and highlighting our commitment to quality solutions.



The potential for cross-selling and increase of share of wallet with our customers is enhanced as we integrate our business units. This supports our successful strategy of increasingly becoming a multiproduct company. We serve more than 10,000 customers in more than 110 points of sales with a complete platform, an approach that allows us to offer integrated customized solutions, increasing customer satisfaction and loyalty. The portfolio of light equipment remains the largest contributor in net rental revenue, but the balance with other products continues to advance.



Now I'll hand over to Renata, our CFO and IR Officer, who will talk on the details of the company's financial performance.

[Caroline Leonard, executive]

[Interpreted] Thanks, Kariya. Good afternoon, everyone. Now talking a bit about our consolidated results. As Kariya mentioned, this quarter, our net revenue was BRL 419 million, representing an increase of almost 21% over the third quarter '23. Growth is the result of expansion of operations in new rental products with better cross-selling and the benefits we have gained as we become a one-stop shop company.



The chart on your right shows our adjusted EBITDA with growth of more than 11% year-on-year and adjusted EBITDA margin of 48% in the third quarter. It's important to mention that the company is always open with continuous efforts to optimize processes and continue to make gains in operational efficiency.



Next slide. Net income also performed well in the quarter with BRL 71 million, which represents growth of 6% compared to the third quarter '23. The result reflects our ability to consistently generate value to our shareholders. If you think of operating cash flow this quarter, it was BRL 202 million, an increase of 8% compared to the BRL 187 million in third quarter '23. And in comparison to the second quarter '24, growth was 131%. The increase reflects consistent cash generation, strengthening our financial position. And our conversion of EBITDA into cash remains robust with the indicator reaching 105% in the period. Free cash flow, on the other hand, represented an outflow of BRL 8 million, another quarter of strong investments in rental assets.



Now going to indebtedness, our focus continues to be optimizing the capital structure. We maintained a healthy level of debt with a net debt-to-EBITDA ratio of 1.2x at the end of the quarter, reinforcing that our company is a strong cash generator and that our leverage remains at very comfortable levels, enabling us to make organic and inorganic investments.



Now looking at the debt profile. Today, the average maturity is 3.1 years and our CDI, CDI plus 2%. We rely on strict financial planning and robust operating cash generation, which allows us to meet our financial obligations and invest in the company's sustainable growth.



Now talking about each of our business units. On Slide 10, we see the results of rental. And we see that the 23% growth in net revenue compared to 3Q '23 was mainly driven by higher rental revenue in the period. The expansion in rental revenues is a reflection of the growth in heavy vehicles and the incremental revenue of the new intralogistics division, which has been fully accounted for since this quarter. Adjusted EBITDA also grew by 15% compared to 3Q '23, mainly due to the expansion in revenues. EBITDA margin performed at 47%.



Now going to Slide twelve, forms and shoring. When we take a look at this business unit, we see that in the third quarter '24, there was an increase of 7.5% in net revenues compared to the last year. This increase in revenues is basically a reflection of the higher average price in comparison between periods. Adjusted EBITDA amounted to BRL 31 million in the third quarter '24. I close now and we'll open the Q&A session.

[Operator]

[Interpreted] We'll now start the Q&A session. [Operator Instructions] Our first question comes from Fernanda Recchia, sell-side analyst from BTG.

[Fernanda Recchia, analyst]

[Interpreted] I have 2 questions on my side. First, I would like to have a bit more color on margins, especially on rental. We saw a contraction of margins in a year, a slight contraction also quarter-on-quarter. And we -- I would like you to give us again a bit more color on the drivers for this margin contraction. I would like -- how much that is because of worse productivity because of the coming of the Chinese or any other effects that caused that? That's the first question.



The second is the integration of JM. If you could again elaborate a bit on what the first months have been like in the incorporation of JM, the learning curve in the forklift segment. So Kariya, if you could also mention a bit of the cross-selling opportunities, how many JM customers are still not Mills customers and vice versa. So just an overall idea.

[Sergio Kariya, executive]

[Interpreted] Fernanda, thanks for your question. I'm going to start with margins. I think the main impact is undoubtedly a pressure of pressures on elevation platforms. We had a pressure of about 10%, but not in the full of our equipment portfolio. Our entry platform because of the coming of Chinese equipment with slightly lower prices did pressure prices this quarter. Somehow, I see a bit less pressure for the future, especially because of the exchange rate. So the dollar is offsetting the drop somehow. And because demand is very heated, we believe prices should be a bit more balanced next quarter in the other business units like heavy vehicles and intralogistics, no pressure at all. We continue to perform as expected. As for the merger, integration of JM, I think that we are moving on. There is still a learning curve, as you mentioned, but I think the upside is cross-selling.



So today, when we take a look at our equipment profile, something around 60% is still not in JM. So if you're talking about 10,000 customers, we have a potential for cross-selling within our own customer portfolio of about 6,000 customers. Just as a macro view, since we acquired JM, which has been 4 months now, we multiplied the pipeline of proposal by almost 10x. So a very robust pipeline. And one thing that is different in each one of the business units is the lead time of delivery. We work with KION and still equipment and the lead time is slightly higher than other equipment. So the curve of signing/performing is still longer than construction and mining and obviously, light equipment. I think I have answered all your questions, Fernanda.

[Fernanda Recchia, analyst]

[Interpreted] Just a follow-up. You did talk about a 10% pressure on prices. Utilization rate, any pressure on that and how much?

[Sergio Kariya, executive]

[Interpreted] I think that's why I was positive about the fourth quarter. We are at 67% of utilization rates and the 10% of price, 60% are light equipment, that is 6% of right prices. And in rental, about 3% on the margin for the light vehicles. So 60% that today represents 60% of the portfolio, that is 3.6% is the impact of our margin. And just to finish, as utilization is ramping up, we are quite optimistic and the exchange rate also offsets this delta price of Asian products in the purchase of machinery. So we believe prices are going to become more stable, and we might even have further gains in the fourth quarter.

[Operator]

[Interpreted] Our next question comes from Andre Ferreira, sell-side analyst of Bradesco.

[Unknown Analyst]

[Interpreted] I have 2 questions. One is still a follow-up on the competition of machinery imported from China. What makes sense now? Does it make sense to exchange part of this fleet of the 60% that is more exposed with Chinese machines? Or do you think that perhaps this is sustainable and you can continue with fleet as is?



And the second question is still about the topic. How much the pressure on platforms can affect your plans to expand in mining and construction lines? Because if that demands CapEx to change the platform equipment profile, that may affect expansion in other lines.

[Sergio Kariya, executive]

[Interpreted] Andre, thanks for your question. Well, what we see, and we have a portfolio of about 10,000 equipment in elevation platforms. And I think our differentiator is that we can really elongate the life of these assets. So we see no reason for a swap with these machines that are leaders at an accelerated pace with Chinese equipment. We are bringing some equipment that we want to upgrade technology. We have been acquiring Chinese equipment for that. But in terms of strategy, things don't change.



A way of renewing fleet or/growing the lightweight unit. And when you take a look at the organization's strategy, Mills' strategy as a whole is a balance. If you think of how we are reducing exposure of a single product that was the elevation platform. Now we are balancing a basket, bringing intralogistics, having equipment, power generators compressed there. And the idea is to balance it all, but our strategy does not change in terms of investments for elevation platforms or the growth of intralogistics and heavy equipment.

[Operator]

[Interpreted] Our next question comes from [indiscernible], sell-side analyst from Citibank.

[Unknown Analyst]

[Interpreted] Just a follow-up on construction mining equipment. I would like to have a bit more color on the competition. How you see competitors, smaller competitors, more regional competitors, larger competitors. If you could talk about the price dynamics in the segment. So if you can talk about competition and strategy, what are your thinking about, that would be very helpful.

[Sergio Kariya, executive]

[Interpreted] We do not see a significant change. We haven't seen any since we started the construction and mining equipment line. We have a very strong portfolio and our choices of how we are going to grow have to do with long-term strategies of the company and also the suitable rate of return considering the thresholds that we want. So we don't want to grow for the sake of growing. The market could even provide the possibility, but we are very much focused and with discipline on internal return rates.



And just to add, we see that as an opportunity, the time that we have in Brazil and the momentum now tightened -- tighter interest rates provide less possibility for smaller companies or very leveraged companies to grow in a scenario of interest rates. And when we take a look at our company in terms of leverage and even the possibility of raising capital at the CDI spread, this is an opportunity for us to grow in the market.



So I would say 2 things. The addressable market has not changed. The competition environment continues the same, but with opportunities from now on, given the higher interest rates, the tightening of interest rates and leveraged companies. So we believe it's a positive scenario for us.

[Operator]

[Interpreted] Our next question comes from Gabriel Frazao, sell-side analyst from Bank of America.

[Gabriel Frazao, analyst]

[Interpreted] I have a question about costs in the rental division that was slightly above what we expected. If you could talk about the cost with consumer goods. Is it a one-off, so we should not expect that for the future? Or are they more connected to a recent M&A, a new contract mix? I would highly appreciate the answer.

[Sergio Kariya, executive]

[Interpreted] Costs went up because of the merger of JM. In the previous quarter, we only had 12 days of operation. Now it is full. And the drop of margin is more related to prices than increasing costs. That's basically it. Nothing that is one-off or specific other than the coming of JM that increased our cost base. And just to add, pressure of prices is on elevation platforms, and we haven't seen that in the total of the market, not even for intralogistics or heavy vehicles.

[Operator]

[Interpreted] Our next question comes from Gasparete Daniel from sell-side analysts from Itaú.

[Daniel Gasparete, analyst]

[Interpreted] I'd like to explore leverage, especially thinking for this year and next year, considering the current interest rate scenario. I felt in your previous comments that we might even have room to increase leverage. Is there a threshold that you could share any level of leverage we should consider for the future?

[Sergio Kariya, executive]

[Interpreted] Thanks for your question. As you know, the company is quite diligent in capital allocation. And we have been developing work in recent years that is very much concerned with liability management that is allocating debt and reducing costs. If you take a look at our numbers, we were able to do that. If we compare quarter-on-quarter, our results leverage continues quite conservative, 1.2x, and we expect it to be kept at this level, given that the company has a strong conversion of EBITDA, operating cash flow that would enable us to support our CapEx for the coming years. And this is what we are working on. Of course, if there is a specific M&A, a specific transaction, covenants can go up, but we don't see anything much different from what we see today.

[Operator]

[Interpreted] [Operator instructions]. Our next question comes in writing Victor from [indiscernible].

[Victor Mizusaki, analyst]

[Interpreted] Congratulations on your results. I would like to understand a bit more about the Chinese elevation platforms in the market. How much they can pressure the market? And how many pieces of equipment should enter the Brazilian market in the next 2 years?

[Caroline Leonard, executive]

[Interpreted] Victor, well, it is very hard to make a prediction. But if we look at the past, this year, we think it's 5,000 to 6,000 pieces of equipment, 70% of which are Chinese. So I believe the dynamics is not only for elevation platforms. Cars in Brazil are a good example. So the deflation with exports from China is going on. And as I mentioned, the exchange rate is offsetting the deflation a bit, the cheaper prices that Chinese have for equipment in Brazil.



For the coming years, I think the dynamics is going to be more or less the same. Obviously, we have to see what the measures from the Trump administration is going to be like, what's going to happen in the U.S., what the global effect is going to be, but that's the scenario we have today.

[Operator]

[Interpreted] Our next question also in writing comes from Roberto [indiscernible], buy-side analyst from [indiscernible].

[Unknown Analyst]

[Interpreted] We see good operational growth in the last quarters. However, with sequential loss in margins, why are margins going down? And what's the level we should expect for the coming quarters? There was a substantial increase in financial expenses that maintained profit net income flat. With the increase of SELIC plus CapEx, should we expect a continuous increase in financial expenses? What is the pressure expected on margin and net income?

[Sergio Kariya, executive]

[Interpreted] Roberto, I'm going to answer the first question and then turn to Renata. Well, I think we already mentioned that somehow during the call, the pressure on margins, I don't think this is a constant. If you take a look from the first to second quarter, we did have an expansion, and then we have a pressure from second to third. So I don't believe it's a constant.



The margin this quarter was pressured, as I mentioned, because of a drop in prices is specific to 60% of light rental assets, a drop of 10%. And because light rentals account for 60% of company results, we see this margin of 3.6% of 36 percentage basis points. For the future, not only because of exchange rates, but also higher demand in a more controlled supply. There are less pieces of equipment coming in, in this quarter and recent days. I think not as many as we had in the third quarter. So I think prices are going to be a bit more balanced and margins can be resumed.

[Caroline Leonard, executive]

[Interpreted] And talking about the increase in financial expenses, we had an increase quarter-on-quarter, much more related to a new raising in June that was not even -- that was yet not booked in the results. Remember that our debt is backed by the CDI. So interest rates go up, that pressures our financial and financial expenses and results. That's why the company is always looking for opportunities to reduce costs, allocating debt. And because we have a very comfortable leverage, we do not think that will pressure company margins.

[Operator]

[Interpreted] [Operator instructions]. This concludes the Q&A session. I'd like to hand over to Mr. Sergio Kariya for his closing remarks. Mr. Kariya?

[Sergio Kariya, executive]

[Interpreted] Well, thanks, everyone, for your interest and participation in our conference call to discuss the results of the third quarter this year. And our IR team is always available for you if you have any additional questions. Thank you very much.



[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]