Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the conference call, during which we will be discussing the results of the fourth quarter 2019 and the year.

[Operator Instructions]

We would like to remind you that this call is being recorded and simultaneously broadcast in English. You may ask questions from abroad normally, and the recording will be available at the company's website, mills.com.br. And this call is being broadcast simultaneously on the Internet.

And before proceeding, we would like to clarify that forward-looking statements that might be made during the call in relation to the company's business perspectives as well as projections are mere expectations of the company in relation to the future of Mills. These expectations are subject to macroeconomic conditions, market risks and other factors as well.

Today, with us, we have Mr. Sergio Kariya, CEO; Mr. James Guerreiro, CFO and Investor Relations Officer; as well as Mrs. Camila Conrado, Head of Investor Relations and Governance.

In order to open our call of the fourth quarter 2019, we would like to give the floor to the CEO, Mr. Sergio Kariya.

[Sergio Kariya, executive]

Good afternoon, everybody. We thank you for your participation in this call, and it's a pleasure for us to present the results of Q4 '19 and the full year.

As you can see on Slide #3, we would like to clarify that the company's management has been following very closely the impacts of COVID-19 on the international market and especially on the Brazilian market. Although it is not possible to forecast the extension, the depth and the duration of the impact of this pandemic on our activities, we are taking all the necessary measures so that, as much as possible and with the utmost caution, we may guarantee the continuity of our operations, operations of our clients, mainly looking after the health and the safety of our staff and society in general. As an example, we have been increasing the modality of home office; suspending trips, events with many participants; and intensifying all the cleaning procedures among many other actions.

Our advantage to cope with this moment is the fact that Mills has an experienced team and the company has net cash and a long debt profile, and this is a privileged situation for many scenarios. It is also stronger in the combination of businesses with Solaris. And the revenues come from many different segments of the economy and many regions of Brazil, and this has the potential of mitigating the impact on the top line, although it is not possible yet to measure the intensity of these impacts on the Brazilian economy and as a consequence on Mills.

Now talking about the highlights of the quarter and the full year. We closed 2019 with combined adjusted EBITDA of BRL 128.6 million, 52% higher on a year-on-year basis combined, as you can see, together with the highlights of the period. On Q4 '19, we continued our process of integration, capturing synergies with Solaris, and since the closing of the operation until the end of the year, we unified 11 of the 17 sites planned to be unified by the end of 2020. We integrated 100% of our teams and those commercial processes, our area of people and management, SSMA and others. And on the way, we have the unification of our department, the adaptation of processes, infrastructure, systems and the construction of a new organization culture, in line with the schedule that we have established.

The company reached BRL 138.5 million in total net revenue in Q4 -- 4Q and BRL 37.4 million EBITDA -- consolidated adjusted EBITDA, net of the effect of IFRS 16 and nonrecurring effects. The Rental business unit, in the fourth quarter, we had a net revenue from Rental 7% higher than in the third quarter of '19 due basically to the higher utilization rate, 52.8% on the average for the quarter vis-à-vis, 48% regarding the average of the previous quarter.

In the Construction business unit, the utilization rate of the equipment was higher in relation to the previous quarter. It was 41%, both due to the rented volume as well as the reduction in the total number of equipment. In relation to the balance rented from this unit, it's important to say that we closed the year with 20% more of equipment rented compared with the beginning of 2019, although the main objective of this business unit continues to be the breakeven of the EBITDA proxy cash in the current activities. And although Construction has an improvement of performance vis-à-vis 2018, it was not possible for us to reach this result in 2019 once the recovery of the sector of infrastructure was lower than expected. We closed the fourth quarter of '19 with BRL 125 million in cash and gross debt of BRL 91 million, net cash of BRL 33 million therefore.

Now to talk more specifically about the results of the quarter, I would like to give the floor to James Guerreiro, our CFO and IRO.

[James Oliver Carneiro, executive]

Good afternoon. I would like to thank you very much for your presence. And considering the relevance for Mills of the combination of businesses with Solaris and also aiming at the better understanding of the figures in the quarter and the year, besides the consolidated information that reflect the result of Solaris with Mills as of May 2019 when the combination of the businesses was carried out, we also bring to you some analysis about combined information, that is to say referring to the sum of results of Mills and Solaris for this period. The combined data may be found on Slides 13 and 17 of the presentation and also on slide -- on Item 17 of the earnings release.

Slide #5. As Kariya mentioned, the total consolidated net revenue of the fourth quarter of '19 was BRL 138.5 million, and the Rental business unit contributed 83% of this amount. Due mainly to the increase in the utilization rate and the maintenance of the prices, the consolidated net revenue of Rental in the fourth quarter of '19 was 7% higher than we had in the previous quarter. The net revenue for the full year of '19 in this business unit was 76% higher than the previous year due to the combination of businesses with Solaris as of May '19. On a combined basis, total net revenue of the fourth quarter of '19 grew 11% vis-à-vis the fourth quarter of '18.

The Construction net revenue amounted to BRL 23.5 million in the quarter. And rental revenue accounted for 63% of this amount, and revenue from sales of semi-new equipment and scrap, 25%; indemnification, 9%. And in comparison with the third quarter of '19, Construction net revenue grew by 5%, mainly to the higher rental revenue. We can see that 85.5% of the total rental revenue of the company in the fourth quarter '19 comes from aerial platforms and 34% of the total net revenue from rental comes on the construction market. Motorized equipment accounted for 63% of that and showing the penetration of this equipment in the different sectors of the economy.

Now going to Slide #6. The consolidated cost of the products sold and services delivered, net of depreciation and the effect of IFRS 16 amounted to BRL 46.2 million in the fourth quarter of '19, representing an increase of 9.5% in relation to the previous quarter, mainly due to the reduction of extemporaneous credits of PIS and COFINS and increase in the consumption of materials and parts for the maintenance of machinery due to the higher amount rented.

Consolidated SG&A, net of depreciation and the effects of IFRS 16, closed the quarter at BRL 57.5 million, higher than the previous quarter due mainly to the increase in our PCE. The total of the other expenses net of PCE, had a drop of BRL 600,000.

As you can see on Slide #7, we show details of the consolidated nonrecurring items, those referring to the actions of restructuring of the economy -- of the company and the liabilities of the Industrial Services business unit, which was sold in 2013, and expenses related to the combination of businesses with Solaris in the fourth quarter of '19. Consolidated nonrecurring items were negative by BRL 2.5 million mainly due to the expenses with integration with Solaris. And since the last quarter, we showed separately the expenses related to the closing and the necessary expenses for us to capture synergies, as you can see on this table.

On Slide 8, the consolidated adjusted operating cash flow of Mills reached BRL 26.6 million in the fourth quarter and BRL 100.1 million in the year-to-date of 2019.

On Slide 9, we show our indebtedness. We closed the quarter with a consolidated net debt of BRL 91.6 million and free cash of BRL 124.9 million, with a net cash of BRL 33.3 million. The average maturity for the payment of our total debt in -- on October -- on December 31 is 0.8 year with an average cost of CDI plus 5.83%. It is important to say that we had the fourth issue of debentures with a 5-year term and with quarterly amortizations and with a rate of CDI plus 35%, as you can see on Slide #10, which includes the pro forma debt profile after this issue. These funds will be earmarked for the payment of debt, adaptation of the fleet of equipment and reinforcement of the company's cash in the ordinary business of the company.

Now on Slide #11, we see our covenants, which are on the expected level. On December 31, 2019, Mills again complied with the original debenture covenants linked or pegged to the adjusted EBITDA with a net debt/adjusted EBITDA ratio of minus 0.3x and adjusted EBITDA ratio with financial results equal to 11.9x.

On Slide 12, we show some consolidated data. On Slide #13, combined data of Mills and Solaris, and the next slide show information about the performance of each one business unit -- or each of the business units.

With that, we end our presentation, and we are available now for your questions.

[Operator]

[Operator Instructions] [ Ricardo Campos ] will ask the first question.

[Unknown Analyst]

Congratulations for your result and having this level of cash that is very, very comfortable. I would like to know what you expect in terms of impact of the crisis on your activities in the next few months and what could really be a threat to the business.

[Unknown Executive]

[ Ricardo ], as we said during the presentation, we have put many measures in place. We cannot yet see, for instance, with the reduction -- the lockdown, but of course, it has an impact on Brazil. And probably these impacts will be felt on the top line of the company. We are taking all the necessary measures to continue our business.

We have already faced many crisis. And on a daily basis, we map all the impact of crisis on our business. And in this case -- specific case, what we have to look after is our team, our people and society in general so that everybody is kept safe and healthy. We have a lot of people that are working from home, and we are doing everything we can. And also, regarding the people who work on the field, we are doing exactly the same, keeping everybody as safe as possible.

It is not possible for us to quantify this impact. What we can do is take all the necessary preventive measures so that the impact may be as low as possible so that we may face this crisis with no risk to the liquidity of the company. Thank you.

[Unknown Analyst]

What are your expectations regarding 2020, mainly taking into account the global economy?

[Unknown Executive]

Well, in fact, I have just answered the question. This was the gist of the previous question, in fact. What we said is that we are taking all the precautionary measures so that we may mitigate all the effects and impacts.

Regarding sales, well, it's very difficult for us to measure the impact. Of course, we had already analyzed the international scenarios, what happened in China and other countries in terms of lockdown, what is happening in Europe so that we may try to measure the impact as well here. We are taking measures not only in São Paulo and Rio de Janeiro but in all states where we have a presence. So we have -- we are taking all the austerity measures, and we are delaying projects. We are suspending a few things and -- because we want to minimize any impact on the revenue stream of the company.

[Operator]

[Operator Instructions] [ Mauricio Javeriana ]

[Unknown Analyst]

Congratulations for the result, Kariya. Could you explain the increase in some expenses and other expenses as well? Do you think because of the lower demand, there could be a price war in the sector such as was the case in the past?

[James Oliver Carneiro, executive]

I would like to ask Kariya then to answer your question.

[Sergio Kariya, executive]

We have to look at the combined numbers, consolidated. When you look at -- we made a revision in the third quarter...

[The interpreter apologizes but the sound is very, very low. I can barely hear the executive.]

[James Oliver Carneiro, executive]

From BRL 7 million to BRL 8 million, with an increase in revenue in 2019 and it will be higher by about BRL 1 million. And what we could expect will be a deterioration of 1 percentage point in PCE vis-à-vis the net revenue but mainly because of the integration with Solaris, integration of systems and some delay in billings, the integration of the collection team, for instance. And this is why we had a slight mismatch there and an increase in the PCE. But it is recoverable, this loss is recoverable.

So net of the PCE, we see a reduction of BRL 500 million, as Kariya said. In line with the progress of the capture of synergies, SG&A will be going down as time goes by. Thank you.

[Sergio Kariya, executive]

And your second question about the effect of coronavirus, our expectation is not to have a price war because the market is more mature. So the impact would be lower, and we do not expect any price war. But this depends on the behavior of the economy as a whole. What happens as a consequence of the coronavirus is also a steep drop in consumption. People no longer goes to stores or restaurants, et cetera.

We do not believe there will be a price war. We expect things to recover. In Construction, let's say, the major projects are interrupted and you have a stop or an interruption in your revenue stream, it is also very hard for us to quantify this because it will depend on the lockdown if we have a situation like we have in China where you cannot leave your house, leave your home. You can -- have to stay home.

And so as I said before, we have a crisis committee, and all the time, we evaluate what is going on in the market and in all our projects. So far, we have seen no interruption in our projects. Some of them have already delayed the contract, but not canceled. So this means that it will take longer for them to be completed. So this would all depend on what we have in terms of delay of the projects themselves and all of the maintenance activities and so on and so forth. But this could happen in cities such as Rio and São Paulo, et cetera. It is a possibility.

[Operator]

Rodrigo Fonseca from Vertra Capital.

[Unknown]

You made investments in machines. I would like to know your rationale and what you expect in rental rate. I don't know whether you could say a few words about that.

[And the first question was not possible to understand here for the interpreter.]

[Unknown Executive]

Coronavirus has brought about a degree of uncertainty in Brazil as well. I believe it will be a short period with a very high impact. So many things have been delayed or postponed because in, a scenario of a potential crisis, we have to do as much as we can in order to preserve our cash. So everything that does not affect us or our clients, we are postponing.

In terms of equipment, we have also postponed that. So initially, we had this intent -- no, the marginal impact was not that regarding the purchase that we had already announced.

[Unknown]

About the PCE, going back to that, you mean that you're not concerned about that? In the past, you had a higher collection, and maybe your main concern now is slightly higher difficulty in terms of collecting or receiving.

[James Oliver Carneiro, executive]

As I said before, we saw an increase last year in the average term of our receivables. It was 1 percentage point as I said, but it is much more due to the integration process than to any other reason. In the year, of course, it impacted the turnover and consequently, the PCE. So all this that I have described brings pressure on the PCE.

Now we have to see how the whole market will behave regarding suppliers, big suppliers, smaller suppliers, but we have no concern about our accounts receivable, just answering your question. Regarding the BRL 4 million, these were small investments in rental assets, and that will not continue this year. They are nonrecurrent.

[Unknown]

What is the perspective for you regarding...

[Sergio Kariya, executive]

We are in a selection process for CFO. We already have a short list. And now we are focused on this issue of coronavirus, and this means that we are avoiding traveling. But we are talking with the prospects digitally, of course, no personal contact. Now this short list will be submitted to our Board so that a decision may be made, and we expect this to happen in the short run. And then we will have a new CFO and -- with Guerreiro stepping down.

[Unknown]

Congratulations for your results for 2019.

[Operator]

[Operator Instructions] The Q&A session has come to an end, and we would like to give the floor back to the company for the closing remarks.

[Unknown Executive]

Thank you very much for participating in our call about Mills' results of 2019 and the fourth quarter. The Investor Relations team will continue to be available to you to answer any further questions.

[Operator]

Mill's conference call has come to an end. We thank you very much for participating, and we wish you a good afternoon.

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