Mills Locacao Servicos E Logistica SA

BOVESPA:MILS3

Earnings Call Analysis

Shifting Focus to Long-Term Rentals, 2024 Optimism

In the prior year, 90% of revenue and EBITDA came from heavy rentals, but in 2023, the mix changed to 70% lights, 20% formwork and shoring, and 10% heavies, reflecting the strategic shift towards long-term contracts. Opportunities for growth remain high, particularly in Brazil, where the company's focus remains, rather than on international expansion.

Mills Achieves Record Gross Revenue and Demonstrates Solid Growth and Commitment to Sustainability

Mills celebrated a remarkable year with gross revenue reaching BRL 1.5 billion, marking a 25.2% jump compared to the previous year, and an 11.6% increase to BRL 402.1 million in Q4 of 2023, observable across all business units. Their efficient management resulted in a consolidated net income of BRL 81 million in Q4 with a robust net margin above 20%. Key to their financial health is an impressive net cash income, boasting a 27% net margin and signaling operational efficiency. The company enhanced their investment strategies, investing nearly BRL 600 million in 2023, and evidenced their prowess with a remarkable return on invested capital (ROIC) of 25.6%. These efforts were matched by a pronounced commitment to sustainability, as evidenced by their pledge to the Science-Based Targets initiative. Internationally, their excellence was recognized by the International Awards for Powered Access 2024, where they were named Company of the Year, a testament to their hard work and ethical business principles.

Strategic Focus on Diversification and Resilient Growth

An integral part of Mills' strategy revolves around diversification, resilience, and opportunity creation, ensuring an array of solutions for customers through premium products. Their 70-year legacy has evolved to incorporate complex and simple segments, along with long-term contracts that have proven their worth by mitigating economic fluctuations and boosting cash flow predictability. Foreseeing substantial growth potential in Brazil's underdeveloped markets, Mills is not only looking to solidify its position in shared and circular economies but also aims to set a benchmark in sustainability and customer-centric market leadership. With 10,000 customers to their name, Mills is unwavering in its pursuit of expanding its foothold in the rental market.

Financial Highlights and Future Growth Outlook

Mills navigated a successful trajectory in the rental industry, with 83% of Q4 revenue attributed to rental services for both light and heavy machinery. Their rental fleet saw a 22% growth year-over-year, ending 2023 with a robust valuation due in part to a focus on heavy-duty equipment. Financially, Mills' net revenue and adjusted EBITDA soared to their highest levels historically, amounting to BRL 1.4 billion and a 36% increase respectively in Q4 2023. Looking forward, the company anticipates consistent growth, a stable pace for heavy rental investments to avoid compromising customer service quality, and targeted investments in light assets and formwork and shoring for the year ahead. The company's indebtedness remains well-managed, with the longest and lowest cost of debt ever acquired, as of Q4 2023, projecting confidence in their continued growth within the segments they operate.

Market Strategy and Merger & Acquisition Prospects

Mills' trajectory shows a strategic approach to price stability in formwork and shoring and an optimistic view of the robust infrastructure investment pipeline, boding well for future benefits. The post-2023 period marks the integration of Triengel acquisitions, with plans to actively pursue additional acquisitions, particularly small- and medium-sized targets that align with the company's strategy of cash flow predictability and long-term partnerships. Management also confirmed no imminent changes in the controlling groups, as the focus remains on long-term objectives. Additionally, Mills' renewed 100% of Triengel contracts, indicating potential cross-selling impact and revenue influence in 2024.

Diverse Fleet and Equipment Quality as a Competitive Edge

Mills addresses the dynamics of an evolving market, including the challenges posed by Chinese machinery. Their focus on quality and performance, especially in complex and longer duration contracts, positions them to maintain competitive rates without feeling the pressure from lower cost options. Mills has begun incorporating some Chinese machinery into its fleet, all while maintaining strong sales and a vigilant stance on market impacts, thus guaranteeing its offerings align with customer demands for quality and productivity.

CapEx Plans and Rental Operations Insights on Fleet Growth

For 2024, Mills is preparing for strategic CapEx growth compared to 2023, with a careful balancing act that hinges on quality customer service. The company is poised to increase investments primarily in heavy equipment, with moderate growth in light rentals and formwork and shoring. Revenue and EBITDA in 2023 illustrated a shift with 70% from light rentals, 20% from formwork and shoring, and 10% from heavy machinery, which reflects a strategic move toward longer-term contracts. This restructuring is forecasted to increase the percentage of heavy machinery contributions moving forward.

Strategic Direction and International Market Considerations

In answer to an investor query, Mills expressed its commitment to deepening its market penetration within Brazil, citing ample opportunities for growth. Although not ruling out future international market considerations, the current strategic focus remains within the domestic market, where they see significant room for expansion and diversification with their broad product portfolio.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to the live disclosure for the results for the fourth quarter and year-end for 2023 Mills. If you'd like simultaneous interpreting, just go to the bottom of the screen, click on Interpretation where there's a little globe and choose, Portuguese or English. For those of you who are listening to the video conference in English, you have the option to mute original audio.

We'd like to inform you that this video conference is being recorded and will be made available on the company's IR site. This will also include complete material for the results disclosure. [Operator Instructions] The information in this presentation and statements that may be made during this video conference regarding perspectives, outlooks and company business as well as projections are based on outlooks and projections for the future of Mills. It is not a guarantee of performance. It involves macroeconomic conditions, market risks and other factors.

I now pass the floor to Sergio Kariya, CEO, Mills.

[Sergio Kariya, executive]

Good afternoon. It is a pleasure to be here again to talk about the fourth quarter 2023. We had wonderful results this year and we will be commenting on them with you, and we'd also like to point out our outlook for 2024.

If you look at Slide 3, we include the highlights. We hit a gross revenue record of BRL 1.5 billion in 2023. That accounts for 25.2% compared to 2022, and BRL 402.1 million in the fourth quarter of 2023, an increase of 11.6% year-on-year. That's an increase in all business units. We went from 190 -- consolidated EBITDA at BRL 190 million, 52% margin. We saw profitability increased all across the board, including in rentals. Net profit consolidated came to BRL 81 million in the quarter, 22.1% margin with net margin above 20%. Net cash income, which includes credit, PIS/Cofins credits and other taxes. It went from BRL 100.5 million (sic) BRL 105.2 million in the fourth quarter, BRL 376.4 million in 2023, a liquid cash net margin of 27%, which shows how efficient this company is.

Our ROIC was 25.6% in 2023. We now disclose it in addition to cash. ROIC and capital costs gives us a better understanding of our business economics. In 2023, BRL 63 million was invested in the fourth quarter, nearly BRL 600 million in 2023. Our fleet has included -- increased over 4x since we started operations. In addition to general growth, we also distributed BRL 70.7 million year-to-date in 2023. Yesterday, our Board approved the fourth repurchase agreement -- share repurchase agreement with 17.1 million in shares or 3.4% of issued shares.

We close these highlights by saying that our consistency is demonstrated through our values and our ESG principles. We are the first company in the machinery and equipment rental sector company to commit to SBTi, which is Science-Based Targets initiative, an initiative that takes companies to reduce GHG and take other actions to address climate change.

Next slide. This is our strategy for growth. We go through diversification, resilience and offer opportunities. It's important to offer the best solutions to our customers in a single place. We have premium products and we offer -- which we stand up from the rest. We've been around for over 70 years and have been evolving ever since with both complex and simple exposure to various segments and long-term contracts have mitigated fluctuations in economic cycles and offer greater cash flow, more predictable cash flow. Our balance also gives us comfort to explore new avenues of growth.

Brazil still has a lot to grow and a lot to improve and it's an underserved market. So we see there's great opportunity for growth. In addition to strengthening the shared and circular economy, we want to be a reference in sustainability, and this will allow us to look at global social changes, climate changes with integrated responsibility to our strategy. We are committed and ready to prepare our business for current and future challenges. Finally, our 10,000 customers, our experience and our team reinforce our position in the rental market.

Carol will now talk about the quarter's financial results.

[Caroline Pepe Leonard, executive]

Good afternoon, and thank you very much, Sergio Kariya. We're going to start by talking about rental, which accounts for 83% of our revenue in the fourth quarter and includes both light and heavy assets. Our fleet grew 22% over the last 12 months, ending the year with BRL 4.2 million. This is a reflection of a focus on heavy fleet and replacement. For light, we adjusted this to better address the needs and increase asset value for rentals throughout the year.

Most of light rental will be seen in 2024. We'd like to raise awareness for assets like combustion, an increase in electric and hybrid vehicles which will reduce emissions. Mills is a pioneer and reference in rentals and a benchmark for elevating platforms. We believe that rentals adds value. Our values, focus on guarantee and quality of service, safety and productivity, reinforcing our culture of establishing trustful and long-term relationships with our customers and suppliers.

Moving on to Slide 7. This shows the diversification of our customer base both in terms of sector segmentation and our customer base. This diversified revenue base ensures greater resilience in terms of economic cycles. Our 20 largest rental customers account for 24% of billing in last year -- sorry, in the fourth quarter of last year. We also an increase of our top line through cross-selling and increased share of wallet. We are also concerned with decreasing concentration and exposure or sector looking to increase resilience of our business.

I'd like to point out our financial highlights. Net revenue grew 4%, 22% over the year -- 11% and 44% over the year through yellow line, with strong growth of the fleet and productivity for light vehicles over 2023. Sales represented 23% and 7% in the year. Adjusted EBITDA showed a 23% increase quarter-on-quarter and 24% increase for the year because of diligence and responsibility. You can see here formwork and shoring improvements here.

Net revenue increased 23% compared to the fourth quarter of 2022 and 53% over the year because of our strong pipeline in infrastructure and increase in construction in general in Brazil. When we look at adjusted EBITDA, we see a 90% increase compared to the fourth quarter 2022 and over 20% in EBITDA year-on-year. Adjusted EBITDA for the year grew 129%, coming to BRL 141 million and 61% margin.

Looking at consolidated results, Slide 12. This is a record performance both. In net revenue and adjusted EBITDA, we've seen the best numbers we've ever seen, BRL 1.4 billion and a growth of 26% and 36%, respectively. When we look at the fourth quarter 2023, we see growth in all business units, which generated a 12% increase in net revenue and 31% in adjusted EBITDA compared to the fourth quarter of 2022. This means rentals have increased for all business units. We are solid and promising expansion. We see that this platform and pipeline should be increasing in terms of yellow line.

In terms of 13 -- Slide 13. On the left, net income came to BRL 81 million, a 70% increase compared to fourth quarter 2022. This variation is a result of an increase of EBITDA in the period and credit reversal of BRL 14 million in the fourth quarter. On the right-hand side, we see an increased cash flow over the period. Operating cash flow -- adjusted operating cash flow in the quarter came to BRL 118 million. That was a drop compared to last quarters due to payments in 2023 for asset acquisition compared to prior years and prior periods.

Cash flow is strong. It oscillated a little bit considering our investments and acquisition of machinery. We have a strong business model that allows for cash flow and financial diligence so that we continue to grow. In 2024, we will continue to invest in rental equipment and rental assets for both light and heavy assets. We are constantly recognizing and looking for opportunities to accelerate growth.

To end on Slide 14. This includes our capital structure. We have a strong indebtedness, and we are able to capture this for growth. Net debt came to BRL 355 million. 80% consists of debentures, 83% is expected to be long-term maturity. We have CDI plus 2.31% in the fourth quarter, average cost. Net debt adjusted EBITDA LTM was 0.5x. We expect to continue growing in the segments where we operate. In January 24, the company had its eighth issue of debenture -- [ symbol ] debentures for 72-month maturity with CDI plus 2% annual. This emission reflects our strategy to improve capital and asset management.

This has the longest term and the lowest terms in the company's history. When we look at our debt profile, this will lead to a longer average term and better average cost. We are proud of the work that we've done and we ended the quarter on a very positive note.

[Sergio Kariya, executive]

Thank you very much, Carol. We're very proud that we were given the Company of the Year from the International Awards for Powered Access 2024. This is the IAPA Awards (sic) IPAF Awards. This was organized by the International Federation of Elevating Platforms and by Access International. This has over 420 participants throughout the sector and recognizes outstanding performance. There are 130 entries in 13 categories. Mills won the most important. We were finalist in four different categories. We are honored to have received this award. It shows our hard work and the dedication of our entire team. This achievement doesn't just stress how committed we are to rentals but with safety, ethics, transparency and future growth. Thank you so much, and thank you to all of our customers, our partners and our employees for making our company such a success. And thank you very much, investors for your trust.

And now we are going to open up for questions and answers. Thank you.

[Operator]

[Operator Instructions] First question is from Gabriel Raposo, analyst sell-side Bradesco.

[Gabriel Raposo de Pinho, analyst]

I have two questions. One, in terms of formwork and shoring, what about price increase? And you said you have a very strong infrastructure investment pipeline. So I wanted to understand how will Mills benefit?

And the second question, in terms of your M&A agenda, I just wanted to understand what's your potential -- what the potential pipeline is for mergers and acquisitions and how might this affect revenue? And if you're looking for a specific sector or region where you'd like to penetrate -- have a greater penetration?

[Sergio Kariya, executive]

Thank you, Gabriel, for this question. Let's start with formwork and shoring. When you look at our results from the fourth quarter 2023 and you look at the prices in the market, there's still an area to recover. We're going to still see the impact in price improvements from formwork and shoring. So when we look in terms of new deals, we see less opportunity to continue growing now. I think prices have hit a stable plateau and I think that's where we're going to stay for the time being.

And in terms of a more robust pipeline, not just because of earlier concessions and the new programs that we've included, this is going to generate opportunities in the infrastructure sector. So we continue to be quite optimistic. But I think the most important message is that, yes, we see that formwork and shoring is going to strengthen up, but there's also great opportunities in our other areas, light and heavy rentals, elevating platforms, compressors and rental of these equipment in these different opportunities, these different areas.

When we look at M&A now, there is something important here. When we look at 2023, we integrated Triengel. We established processes and continuing to do this. We understand, however, that there's room to now look at the market. So at the end of the year last year, we started to map -- we went back to mapping out targets, and we are optimistic that these will be included in our pipeline. In terms of size and as you asked, we look at all the different sizes of potential M&As. However, the small- and medium-sized ones probably have the most potential for us. We're quite optimistic in terms of potential acquisitions moving forward.

You asked a bit about the market. If we look at the company's macro strategy, you can see that we've been looking for more predictability in terms of cash flow. We're trying to be a little bit more awareness in this regard, looking at markets that have longer terms so that we can ensure greater cash flow and revenue predictability. Thank you very much.

[Operator]

Next question from Marcelo Arazi, sell-side analyst, BTG Pactual.

[Marcelo Arazi, analyst]

Two points. We've seen a fleet followed by the -- kind of by the wayside in recent years. There's been a mix change in terms of yellow machinery. And also, what about the Chinese machinery in the market, how might this affect the company in general?

[Sergio Kariya, executive]

Great. Thank you for the question, Marcelo. Let's start with the fleet. The greatest impact was in light, not heavy rentals, and we had a mix shift. We've been investing more in heavy rentals, heavy equipment, vis-a-vis light equipment and bringing -- and selling off our smaller vehicles. So you see the same quantity and that's why you see the quantity changing a bit. But in terms of potential capital or value and reposition of the fleet, we've seen it's been growing. It's been growing year-on-year. There was a revaluation of equipment mid-2023 and you can see this.

But in terms of potential value for assets, it's been growing. Chinese machinery, especially when you look at heavy machinery, in our markets where we're focused on, more complex markets, longer duration contracts, you're really working closely with the customers. So equipment quality, equipment performance, productivity makes a real difference. So we see that volume-wise, we don't see -- including Chinese equipment in this segment. Or perhaps shorter durations, less complex operations, then yes, but that's not what we're focusing on right now. That's where heavy is.

Now light, there is a natural increase in Chinese machinery. We've been testing some of our Chinese machinery. We've been included a little bit more on our fleet. We still don't see any price impact in terms of the rates. We don't see this impacting the market. However, we continue to monitor this and we're monitoring the entry of Chinese machinery. But again, it's not affecting how much our sales are going. Thank you very much.

[Operator]

Next question comes from Joao Andrade, sell-side analyst, Bank of America.

[Unknown Analyst]

Could you talk about what we can expect in terms of fleet or CapEx growth for 2024?

[Sergio Kariya, executive]

We don't disclose the values, the amounts, but we do expect a growth compared to '23 as what we expect, but we don't give the exact numbers. In terms of growth pace and rhythm for heavy rentals, heavy machinery, it depends on the quality of delivery. Because if you speed things up, you might affect customer service. But we don't want to affect our interaction. So we're adjusting our pace to be well prepared for scaling up. So we see some adjustments moving forward. We've been investing specifically in heavy machinery, We are going to be investing in growth and a little bit in light and a small investment increase in formwork and shoring for some of the machines that were damaged. And so that's what we expect for 2024 in terms of investments.

[Operator]

Next question from Artur Kunio, buy side analyst. He's written out, congratulations on the results. Can you talk about the rentals operation mix in terms of light and heavies in terms of revenue/EBITDA and the number of machines?

[Sergio Kariya, executive]

Okay, Artur. Broadly speaking, numbers-wise, we started again in September 2022. In terms of size, it's still majority light and we have over 1,000 -- we ended the year 2023 with over 1,000 heavies. In terms of results for the company, it's important to understand that when we look at 2022, 90% of the company's revenue/EBITDA was heavies and the rest was formwork and shoring. 2023, 70% was light, 20% formwork and shoring and 10% heavies. So this new balance, which is part of the company's strategy looking for more long-term contracts, longer duration contracts, so we're going to see that heavies are going to take up a greater part or have a greater percentage. So I think that's what we expect moving forward.

[Operator]

Next question from Victor Ravazo buy-side analyst. Written question, could you comment a little about a possible change in the Mills control group? Do you expect anything moving forward?

[Sergio Kariya, executive]

Thank you, Victor. Thank you for the question. Our three economic groups that are the controlling groups, Mills [indiscernible] and private equity, are focused and looking towards the long term -- we're not looking for anything short term in terms of changes in primary shareholders or controlling shareholders.

[Operator]

Next question is from Felipe Lenza, sell-side analyst, Citi. Written question. Congratulations on this results. My question refers to renewing the Triengel contracts. The company renewed all of its pre-existing contracts and ended all of its relevant contracts or important contracts for cross-selling. Are these contracts going to have an effect in 2024?

[Sergio Kariya, executive]

Thank you, Felipe. Yes. Yes, it's very important showing our entry into the yellow line. We renewed 100% of the contracts that ended in 2023 -- the end of 2023, early 2024. Yes, without a doubt, these contracts are going to start taking effect. There wasn't -- not just renewal, but there was an expansion of scope with all of these contracts. Something else, I think that's important to mention is that last year, 95% that we -- with deals that we closed were due to cross-selling. We actually weren't well known in heavies and yellow lines, but this is quite different this year. We started off the year with new customers, new markets that were not Triengel and thay were not heavy, so that we're not from formwork and shoring. So we're very optimistic because this market is just going to grow moving forward, as it has done thus far.

[Operator]

Next question. Matteo Suarez, buy-side analyst, Market Makers. Written question. And once again, congratulations for the results. Could you comment on the cross-selling strategy within the company? In addition, I'd also like to know about the yellow line contracts. Long-term contracts is good for predictability but there are also pricing risks involved. What strategy have you used? Furthermore, could you give an outlook on how the year has started? That would be very helpful.

[Sergio Kariya, executive]

Matteo, let's start with cross-selling. Despite the fact that we have different units, heavy, light, formwork and shoring, we act as a single company. And we see how we impact customers thus. Our sales team has its specific areas, but they're supported through the cross-selling with the 10,000 customers. And we can identify opportunities and we help all of the different business units. It can be heavies to lights, et cetera, and moving forward.

The question was about what, pricing -- what do you expect at the beginning of year? The great thing with Mills is that we have three business units with different durations, with different cycles and different pricing. When we look at light, the downside is that the duration for the contracts is lower. But when we have inflation and other oscillations, I can repass these prices much quicker. With long-term contracts, we worked with project finance. I look at the contract as a mass project and I allocate capital to understand inflation, readjusted inflation. Actually, inflation is adjusted according to inflation rates, I forget which index, IGPM.

Obviously, we can't capture all changes in the market, but you adjust and rebalance this out. So the great thing about having three different areas or drivers in the company is that it strengthens the company as a whole, and that's what we've been building on. An how has the year started? Well, we're very optimistic about how this year is going to play out. The three business units, just as I mentioned earlier, infra investments has helped all three areas.

But not just this, lights, which early last year -- we saw stable demand early last year. And we saw supply pretty stable, and we saw an area where we've been able to grow and invest our branches with Lights that we've opened [ 3 ] years, We've started to see maturity and more penetration in certain regions and we started to see an increase in demand. I think there's excellent opportunities with heavies. We're looking at how we can capture this and adjust our operating -- or what we're offering our customers, what we -- our commitment to delivering with our customers. So we really started out 2024 very optimistically.

[Operator]

Next question from [ Alexandre Asaf ], investor. Written question. Congratulations for the excellent results. Does the company have any strategic drivers or directions for perhaps moving to the international market?

[Sergio Kariya, executive]

Yes. We have so much opportunity here in Brazil, Alexandre. There's so much opportunity to penetrate, to move, to diversify our portfolio. I have basically seven different products. We have a number of products to look at our customers and serve our customers. So currently, we're mostly looking at the Brazilian market. We're not yet looking towards international expansion.

[Operator]

[Operator Instructions] This is the end of the Q&A session. I'd like to ask Sergio Kariya to offer his final comments before we end.

[Sergio Kariya, executive]

Thank you very much for your participation. Thank you for your interest in our fourth quarter 2023 results and our 2023 year results. And I'm here, we are all here and all of our IR team is here if you have any other questions moving forward. Have a wonderful day. Thank you very much.

[Caroline Pepe Leonard, executive]

Thank you very much. Have a wonderful day.

[Operator]

This is the end of our earnings call. The IR department is available to answer any questions you may have. Thank you very much to all of our participants, and have a wonderful day.

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