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Edited Transcript of MYPK3.SA earnings conference call or presentation 7-Nov-19 2:00pm GMT

Q3 2019 Iochpe Maxion SA Earnings Call

São Paulo - SP Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Iochpe Maxion SA earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcos S. de Oliveira

Iochpe-Maxion S.A. - CEO & Member of Executive Board

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Conference Call Participants

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* Lucas Marquiori

Banco BTG Pactual S.A., Research Division - Research Analyst

* Victor Mizusaki

Banco Bradesco BBI S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for waiting. I'd like to welcome everyone to Iochpe-Maxion Third Quarter 2019 Earnings Conference Call. Present at the conference today and available for the Q&A session are Mr. Marcos Oliveira, Chief Executive Officer; and Mr. Augusto Ribeiro Junior, Chief Financial and Investor Relations Officer.

We'd like to inform that conference call is being broadcast in the internet at the company's website, www.iochpe.com.br, and the presentation is available to download at the investor information section. (Operator Instructions)

Before proceeding, we'd like to mention that forward-looking statements are based on the beliefs and assumptions of Iochpe-Maxion's management as well information quickly available to the company. Forward-looking statements are not guarantee of performance, involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or not occur.

Now I'll turn the conference to Marcos Oliveira, Iochpe-Maxion CEO. Mr. Oliveira, you may begin your conference.

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Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [2]

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Good morning, and welcome to our third quarter earnings conference call of Iochpe-Maxion. I will follow the presentation made available on our site. And I will start with Slide #1, with the highlights of the quarter. We achieved net operating revenue of BRL 2.542 billion in the third quarter, a reduction of 2.9% compared to the third quarter of 2018.

We achieved a growth of 15.3% in revenue from domestic sales. Our EBITDA was BRL 333.8 million in the third quarter of '19, an increase of 7% compared to the third quarter of '18.

Our net income was BRL 124.8 million, an increase of 33.5%. Our leverage was reduced from 2.57x at the end of third quarter of '18 to 2.39x at the end of third quarter of '19. We have a conclusion of the issues -- of the company's 10th simple debentures series, continue the company's capital structure improvement strategy.

We had the start of our operations of the new aluminum wheels plant in India, and we also have the recognition of a portion of the amount related to the favorable decisions in lawsuits, claiming the exclusion of ICMS from the PIS and COFINS tax base.

Just as a comment, in the first quarter -- in the third quarter, we observed different dynamics in the different markets where we operate as it can be noted on Slide #2, where we can see the Brazilian domestic market continuing to grow in the third quarter of '19, growing 2.8% in the light vehicle segment and 11.2% in the commercial vehicle segment versus the third quarter of '18. We also observed the reduction on the agricultural machinery production of 14.2% in the third quarter.

During the first 9 months of 2019. The light vehicles segment in Brazil grew 2.0% -- 2.6%, and commercial vehicles segment grew 8.9%. In the North American market, we observed the light vehicles segment growing 2% in the third quarter, and the commercial vehicles segment dropping 3.1% versus the third quarter of '18.

For the first 9 months of the year, we see an inverse logic in the dynamics of the North American market. The light vehicles segment was down 1.3% and the commercial vehicles segment was up 8.8% during the first 9 months of '19 versus 2018.

The European market saw a drop in the production of light vehicles of 0.9% in the third quarter and a drop of 1.3% in the commercial vehicles segment.

For the first 9 months of the year, the light vehicles segment in Europe was down 4.6% and was up 5.9% versus the first 9 months of 2018. On Slide #3, our consolidated operating revenue was BRL 2.543 billion in the third quarter of '19, a reduction of 2.9% versus the third quarter of 2018. When we adjust the revenue by exchange rate variation, the reduction between the third quarter of '19 and the third quarter of '18 was 1.7%.

During the first 9 months of the year, our consolidated operating revenue was up 7.2% versus the first 9 months of last year, achieving BRL 7.678 billion in 2019. When we made the same adjustment or exchange rate variation, our net operating revenue grew 3.8% during the first 9 months of this year.

On Slide #4, when we look at the dynamics of the different markets and its impact to the net operating revenue of Iochpe-Maxion, we can see that we achieved BRL 723 million of net operating revenue in South America, an increase of 15.3% in the -- versus the third quarter of last year, primarily due to the increase in domestic demand in Brazil despite the reduction on vehicle exports to other markets, including Argentina.

Our net operating revenue in South America in the first 9 months of the year was BRL 2.067 billion, an increase of 17.2% versus the first 9 months of last year. Our net operating revenue in North America was down 5.1% in the third quarter of '19, achieving BRL 802 million versus BRL 846 million in the same period of last year.

When you look at the first 9 months of the year, we can see the net operating revenue achieving BRL 2.405 billion in the first 9 months of '19, an increase of 15.6% versus the same period of last year.

When we adjust the net operating revenue by the exchange rate variation, the growth was 7% in the first 9 months of '19 versus the first 9 months of last year in North America.

In Europe, we achieved a net operating revenue of BRL 802 million, down 10.2% versus the third quarter of last year. And when we make the exchange rate variation adjustment, the reduction in revenue in Europe was 6.1% in the third quarter of this year versus last year.

During the first 9 months of the year, net operating revenue in Europe was BRL 2.525 billion, a reduction of 4.1% versus the first 9 months of last year.

In Asia, our net operating revenue in the third quarter was BRL 214 million, down 14.5% versus the third quarter of last year. The most relevant impact in the third quarter of '19 was the reduction in vehicle production in the Indian market during the third quarter.

During the first 9 months of the year, we achieved BRL 681 million in the 2019 first 9 months, similar to the same period of last year. Also, I'd like to remember that we have the beginning of the operations of our new aluminum wheels plant in India.

On Slide #5, looking at our net operating revenue by product. We see the most significant variance between the third quarter of last year versus the third quarter of this year in the Structural Component segment that represented 19% in the third quarter of '18 and now represents 21% in the third quarter of '19. This is primarily due to the growth in production of commercial vehicles, primarily trucks, in the Brazilian market during the third quarter of this year.

The other segments, Structural Components for light vehicles, aluminum wheels for light vehicles, steel wheels for commercial vehicles and light vehicles had a similar representation in the third quarter of '19 versus the third quarter of '18.

Also, it's important to observe that South America, primarily Brazil, represented 23.9% in the third quarter of '18 and represented now 28.4% of our total net operating revenue in the third quarter of 2019.

On Slide #6, we see the net operating revenue by customer, that is primarily a reflection of the dynamics of the different markets that I mentioned in the prior slides where we see a higher presentation of some customers that have a participation in the commercial vehicle segment, both in North America and South America, that achieved the growth on a year-over-year basis.

On Slide #7, our gross profit was BRL 323 million in the third quarter of '19, a gross margin of 12.7% versus BRL 379 million in the third quarter of '18. This represents a reduction of 14.9% quarter-over-quarter.

During the first 9 months of 2019, we achieved a gross profit of BRL 958 million, down 5.4% and versus the BRL 1.012 billion in the first 9 months of 2018.

On Slide #8, our EBITDA was BRL 334 million in the third quarter of '19 and EBITDA margin of 13.1% versus BRL 312 million in the third quarter of '19 -- '18, with a margin of 11.9%.

Just as a comment, we had a positive impact of approximately BRL 59 million in the third quarter of '19 related to favorable decisions to exclude ICMS from the PIS and COFINS tax base. This represents the amount of invoice that we have already accounted in the third quarter, and we remain working on accounting additional invoice during the fourth quarter of 2019.

For the first 9 months of 2019, we achieved a total EBITDA of BRL 881 million, an increase of 7% versus the first 9 months of 2018, achieving an EBITDA margin of 11.5%.

On Slide #9, our net income was BRL 125 million, an increase of 33.5% versus the third quarter of '18 and a net margin of 4.9% in the third quarter of '19. Also, remember that we had a nonrecurring effect related to the same tax elements that we mentioned on the prior slide of approximately BRL 58 million positive impact in the third quarter of '19.

During the first 9 months of '19, we had a net income of BRL 298 million, an increase of 139% versus the BRL 125 million in the first 9 months of 2018. Our investments in the third quarter were BRL 153 million versus BRL 115 million in the third quarter of 2018.

During the first 9 months of the year, our total investment in '19 was BRL 381 million versus BRL 284 million in the first 9 months of 2018.

Our investments were related to maintenance to continuing improving efficiency of our operations but also investments on capacity increase in Thailand and the beginning of our operations in the new aluminum wheels plant in India.

On Slide 11, looking at our indebtedness, our net debt at the end of the third quarter of '19 was BRL 2.688 billion versus the net debt of BRL 2.603 billion in the third quarter of '19. Our financial leverage was down from 2.57x in the third quarter of '18 to 2.39x in the third quarter of '19.

The composition of our gross debt indicates that 22%, our total debt is in U.S. dollars; 38% in Brazilian real; 34% in euros; and 6% in other currencies. The average cost of our investment is approximately 5% per annum. And when you look at the composition of our debt, long term represents now 78% of our gross debt in the third quarter of '19 versus 63% in the third quarter of '18.

If we observe in the results presented in the prior slide, international markets were a challenge during the third quarter of '19, mainly in Europe, India and the commercial vehicles segment in North America. Brazil continues to observe a robust domestic market. But I haven't seen yet the full benefit of production growth due to a reduction of exports of vehicles and primarily to Argentina.

We continue our programs and efforts to reduce costs, improve operational efficiency and searching for growth in the regions where we believe automotive will continue to grow in the medium and long term.

As you can see in the investments made to expand capacity in our aluminum wheels plant in Thailand, the last phase of construction of our stamping plant in Mexico that will start operations at the end of this year, and the beginning of our activities in our new aluminum wheels plant in India.

And although the Indian market has presented some challenge from a volume point of view, in the short term, we have been observing a very accelerated pace of production of our new plant supporting one of our customers that is launching a new vehicle in India and has been requesting higher volumes than anticipated for the launch of our new plants in India.

We are also continuing our efforts to reduce the cost of our indebtedness, searching for longer-term debt in our portfolio, as you can see by the issues of the 10th debentures in Brazil in the total amount of BRL 350 million.

Also, as we mentioned in the subsequent event in our report, we have, at the beginning of December, conclude the reduction of our participation in the Iochpe-Maxion business in Brazil, reducing our participation in the railway segment with the objective of continuing to focus our efforts to grow in the automotive segment.

Also, as we presented at the SAE event with Fenatran in the month of October in Brazil, we continue to invest on future technologies and innovation to reduce the weight of our products and support our customers in their quest for higher operational and fuel efficiency as well lower emissions in their vehicles. We continue to reduce costs in our products and adding value to both our Structural Components and our aluminum and steel wheels around the world as well.

We also have started the -- our activities in our new advanced technology office in Berlin with a focus on mobility and the participation of our products in the future of the automotive industry for both internal combustion vehicles, electric vehicles, autonomous vehicles and other needs of our customers.

With that, we would like to open for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Lucas Marquiori, BTG.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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I have 2 questions on my side. First one regarding the Indian market, right? You guys mentioned it in the release, a sharp decrease. You guys show that in the presentation as well. How should we expect the recovery of the market looking for -- I don't know, should we expect any rebound soon? Or it should be much gradual and slow recovery pace for Indian auto market looking forward? That would be the first question.

And the second one, regarding this new Berlin office that you guys announced a month ago. What's the real purpose there? I mean is there any product innovation that you guys can already share with us regarding this new positioning in Berlin, strategically? Those are my questions, guys.

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Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [3]

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Thanks for the participation and your questions. First, regarding the Indian market, the Indian market was quite significant surprise to everyone in 2019. The market started quite strong in the first 3 months of the year with a very significant growth during that period versus the same period of last year.

And then the Indian government implemented some actions and some of them related to credit availability provided by what's called the shadow banking in India, and that restriction on liquidity and financing and saleability in the market really impacted the ability of customers to finance and purchase new vehicles, and that has created a very sharp drop, unexpected and sharp drop, during the last 4 months in the Indian market.

After that, the Indian government has implemented some other actions, trying to improve the overall macroeconomic conditions. And -- but it's too soon to observe any impact of such actions and in the market.

Our view and work with our customers is that there will be recovering the market will be observed along 2020, gradually, with a more pronounced impact or effect in the second half of next year.

So we don't expect an immediate benefit at the beginning of the year, but we expect a gradual growth and recovery in the second half of next year.

And a little bit of that is also observed in the fact that, as I mentioned, we are just launching our new aluminum wheels plant in India, and the plant is doing quite well because it's being launched concurrently with the launch of a new vehicle from one of our customers, and that vehicle is being very well accepted in the market what has been requiring higher volumes in the ramp-up phase at the beginning of the year, beginning of the launch than expected. That indicates that demand in the market exists as long as credit is available for the purchase power of the consumer is there. Demand is there. And that is part of the reason why we believe that we will see some recovery in the second half of next year.

Regarding the Berlin office, I mean, we just started that office. I mean it's too soon to talk about anything that's coming out of that office. But the focus is very clear. We have a very well and structured innovation and advanced engineering effort and work within our wheels division and the same effort within our Structural Component division, and they are both very focused on technologies and products for their respective segments and markets for the next 5 years, and they are working very aggressively on lowering weight; improving fuel efficiency; better finishing; better appearance on the products, primarily in the wheel side; new materials; and new technology that has been added to our existing products. And that effort continues to be done within each respective division: wheels focusing on wheels, Structural Components focusing on structural components and technology and innovation for the future.

The idea for the Berlin office was to go beyond the things that we are doing in the respective divisions today. Looking at mobility at a little broader sense and search for new opportunities for both divisions and potentially for synergies of new products that we could be bringing in our core business to the market. We are still very focused on our core business.

We're still very focused on wheels and Structural Components because we believe that they are both very, very important for the future of the automobile, the vehicles will continue to need wheels, the vehicles will continue to need a platform, either a chassis or a body for the occupants. Therefore, our products are still relevant for the future, but we believe that there are other things that we could be looking and should be looking on the mobility environment and adjacencies to our core business into our products that could create new opportunities for Iochpe-Maxion in the future.

We are very excited about that opportunity. But it's very early. The team has been formed. It's just starting to operate that, and we hope to see work in the next several months, quarters and years that could yield to additional opportunities to Iochpe-Maxion.

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Operator [4]

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Our next question comes from Victor Mizusaki with Bradesco BBI

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [5]

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I have 2 questions. The first one is related to your CapEx plan and the international expansion. You got -- now we talk about, let's say, weaker vehicle sales and production in several markets, how does this new scenario factor your CapEx plan for next year?

And number two, if you think about -- I mean this problem for the automakers, is there any chance that the OEMs may try to squeeze margins in the supply chain.

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Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [6]

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Victor, thanks for your participation and your question. First, regarding CapEx. I mean we are always looking at our business, the projected results and the alignment between our investments and our cash generation in the business. This is an ongoing effort that we do every year, and we do every quarter depending on the conditions of the market.

Obviously, there are investments. They are necessary for maintenance or for regulatory requirements or for operational efficiency, productivity, cost reduction, that we continue to do, and there are the other projects. They are more related to growth.

And what we've been doing from a growth point of view, during the last several years is really to look at that not on the short term but to look at the near and long-term opportunities in different markets and making sure that we are ready to supply the demand that will come from such markets in the future. That is the example on the capacity expansion that we just did in our aluminum wheels plant in Mexico just about a year ago, and we see the benefit of that now this year on additional throughput and additional capacity coming out of our aluminum wheels plant in Mexico.

The new aluminum wheels plant in India where we see this higher requirement of aluminum wheels in a growing industry in the next few years, and we need to invest on that. And that is not subject necessarily to short-term volume variations in the market. Or in the case of the capacity expansion in Thailand, where there is demand, we are -- we run out of capacity there, and we have new business opportunities. We need to supply and we need to attend in the near and the long term, and we are making that invest. Also, the other projects within our new stamping plant in Mexico that we will start operation just at the end of this year is because there are requirements. There are needs. This is new business that are each incorporate to our operations there.

With all of that, we are looking very, very strategically on our CapEx strategy, looking for investing on projects where we have high returns and returns that we believe will be sustainable, not only in the short term, but on the long term, to continue to improve the overall return on invested capital for the company.

With that in mind, our CapEx has been, last year and this year, slightly higher than 40%. And as we work to our business plan, the trend is our CapEx would be more aligned in the next year to our traditional level of 1/3 of our EBITDA allocated to CapEx. Therefore, we've been modulating CapEx to the specific requirements and to the business needs. At the same time, having in mind, that we want a positive cash flow like we achieved in this third quarter where we have more than BRL 100 million of cash flow -- free cash flow for the company through modulation of our CapEx according to the business conditions in different markets.

The second question regarding squeezing margin. I mean I've been in this industry for a long time than many people, and we know that our customers are always looking for opportunities to improve their operational costs because they need to be competitive in the market.

They need to sell their products. There is competition in the market. They need to have a competitive product in the market, and their quest and their efforts to improve results is an ongoing effort by our customers. And we don't believe this is going to change. We think that as we've seen in the past, as we've seen during the significant drop in the Brazilian market during 2014 through 2017, where volumes were down, where margins were down for everyone, everyone looking for opportunities to improve their results, this will just continue. We'll continue as we observed in the last 5 years, 10 years, as we think we'll observe in the future as well.

I think that the most a relevant challenge that our customers and the industry has today, and I think we've been observing this in different actions from different OEMs during the last 12, 18 months is how to balance their capital allocation to maintain competitive products in the market in the short term and allocating capital for the technologies and the products that they will need for the future. They need to invest on electric vehicles. They need to invest autonomous vehicle. They need to invest in new business models that will make more sense in the future. And I think they've been a lot more cautious in terms of allocating capital to the projects where, they believe, they need to support the short and medium term in terms of market competitiveness, but also allocating those resources for the future technologies that they're going to need to be competitive in the long run.

I think this has been a lot of the focus of our customers. And I think this is not going to change. I think this will continue. And their efforts on becoming more efficient on reducing costs internally through their supply base, this will just continue, as we have seen in the last many, many years.

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Operator [7]

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(Operator Instructions) This concluded the Q&A session. I'd like to invite Mr. Oliveira to proceed with his closing statements. Please go ahead, sir.

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Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [8]

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Thank you very much for your participation. As I mentioned before, we continue very focused on implementing, executing and delivering on our strategy of growth in the markets in the regions where we believe there is growth to be obtained. On improving our operational efficiency, our productivity in all of our plants around the world but also continue to invest in new products and new technologies to meet the customer needs today. But thinking about the future and how we will continue to deliver solutions to the market that will support the future of automotive industry with internal combustion vehicles, electric vehicles, autonomous vehicles for any requirements that the mobility industry may have in the long term.

Thank you very much, and have a very nice day.

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Operator [9]

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The Iochpe-Maxion conference call is concluded. Thank you very much for your participation. Have a good day. Thank you for using Chorus Call.