U.S. Markets close in 1 hr 31 mins

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

Q2 2019 Iochpe Maxion SA Earnings Call

São Paulo - SP Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Iochpe Maxion SA earnings conference call or presentation Wednesday, August 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Marcos S. de Oliveira

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

================================================================================

Conference Call Participants

================================================================================

* Alexandre Pfrimer Falcao

HSBC, Research Division - SVP

* Augusto Akihito Ensiki

HSBC, Research Division - Latin America Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Iochpe-Maxion's Second Quarter 2019 Earnings Conference Call. Present at the conference today and available for the Q&A session are: Mr. Marcos Oliveira, Chief Executive Officer; Mr. Augusto Ribeiro Junior, Chief Financial and Investor Relations Officer; and Caio Moraes, Treasury and Investor Relations Executive Officer. We would like to inform that this 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 would like to mention that forward-looking statements are based on the beliefs and assumptions of the Iochpe-Maxion's management as well as an information currently available to the company. Forward-looking statements are not guarantees of performance, involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and welcome to the Iochpe-Maxion's Second Quarter Earnings Call. I'll follow the slides within the presentation made available on our website. And I'll start on Slide #2 with the highlights for the second quarter. Our consolidated net operating revenue of BRL 2.667 billion in the second quarter, was an increase of 11.2% compared to the second quarter of 2018. Revenue from domestic sales of BRL 740 million in the second quarter, an increase of 27.7% when compared to the second quarter of last year.

We had a growth of 5.9% in revenues in Reais from international sales in the second quarter and excluding the effect of exchange-rate variation, growth would have been 0.6%.

We achieved an EBITDA of BRL 304 million, with a margin of 11.4% in the second quarter of 2019 or an increase of 10.5% when compared to the second quarter of 2018. We achieved a net income of BRL 110 million in the second quarter of '19, an improvement over the net income of BRL 44 million in the same period of last year. A net bank indebtedness of BRL 2.640 billion in the second quarter, and a financial leverage of net bank indebtedness over the last 12 months EBITDA was reduced from 2.75x at the end of second quarter to 2.4x at the end of the second quarter '19.

The company entered into a share purchase and sale agreement with its partners, Amsted Rail Brasil and Greenbrier do Brasil regarding the sale of shares, representing 18.25% of the capital stock of Amsted-Maxion Fundição e Equipamentos Ferroviários.

Subject to the closing of this transaction, the company will reduce its shareholding in Amsted-Maxion Fundição from 37.75% to 19.5% in line with our strategy to concentrate our operations in the automotive sector.

On Slide #3, some of the main drivers from market demand point of view in the second quarter. While we observed the growth of Brazilian production of light vehicles of 5.2% and 16.1% in the heavy vehicles. Reduction of vehicle production in Europe of 7.4% and a growth in the North American market production of heavy vehicles of 7.8%.

On Slide #4, in terms of market performance, we can observe in more details the growth in the production of light vehicles in Brazil up 5.2%, growth of 16.1% in commercial vehicles during the second quarter of 2019 versus the same period of last year. This growth is consistent with the growth being observed during the last few months in Brazil, driven by higher demand and sales in the Brazil local market and lower export of vehicles from Brazil to other markets, mainly Argentina.

In the North American market, a reduction in the production of light vehicles of 2.8% and a growth of commercial vehicles of 7.8% in the second quarter. In Europe, a reduction in the production of light vehicles of 7.4% and a growth of 0.3% in the production of commercial vehicles during the second quarter.

On Slide 5, you can observe in more detail the net operating revenue of the company. With a growth in Brazilian Reais of 27.7% in the net operating revenue in the South American market, growth of 22.6% in North America, a reduction of 5.6% in the net operating revenue in Europe during the second quarter and a growth of 2.9% in Asia and other markets during the second quarter.

On Slide #6, we can see that the growth in net operating revenue year-over-year, when we achieved BRL 2.667 billion in the second quarter of '19, a growth of 11.2% versus the second quarter of '18 and a growth of 7.2% in Brazilian -- in consolidated revenue and when adjusted by exchange variation in the second quarter of '19 versus the second quarter of '18.

When you look at the net operating revenue, for the first 6 months of the year, we can observe a growth of 13% in Brazilian Reais from BRL 4.543 billion in the first half of '18 to BRL 5.135 billion during the first 6 months of 2019. When we look at the growth, adjusted by exchange-rate variation, during the first 6 months of '19, we can observe a growth of 6.9% on the consolidated revenue, a growth of 3.1% in foreign revenue and a growth of 18.2% in domestic Brazilian market.

On Slide #7, looking at the revenue by region and impacted by the dynamics of the different markets mentioned in the slides before, we can see the growth in the relevance of the South American market from 24.1% to 27.7% in the second quarter of this year, a reduction in the revenue from Europe from 38.1% in the second quarter of '18 to 32.3%, a growth on the revenue from North America from 28.1% to 30.9%, a slight reduction on -- in Asia from 9.7% to 9% in the second quarter.

On Slide #8, revenue by product, also following the same dynamics, as mentioned before, the revenue from aluminum use for light vehicles that represented 33.9% in the second quarter of '18, represented now 31.5% in the second quarter of '19, mainly impacted by lower demand in production in Europe. The revenue for commercial vehicle wheels from 20.2% to 19.6%, the reduction on light vehicles wheels from 27.7% to 25.2% and a growth on structural components for commercial vehicles, growing from 16.2% to 21.6%, mainly supported by the growth in demand and production of commercial vehicles in North America and South America.

On Slide #9, revenue by customer also following the dynamics explained in the prior slides, a growth in revenue for customers, that are more exposed to the commercial vehicle segment and impacted by higher demand and higher production in North and South America.

On slide #10, a gross profit of BRL 337 million in the second quarter of '19, and a gross profit of BRL 635 million in the first half of '19, with a gross margin of 12.4% in the first 6 months of the year.

And EBITDA growth on Slide #11 of 10.5% from BRL 275 million in the second quarter of '18 to BRL 304 million in the second quarter of '19 or an EBITDA margin of 11.4% in the second quarter. A growth in the EBITDA of 8.8% from BRL 503 million to BRL 547 million in the first half of '19 and EBITDA margin of 10.6% for the first 6 months of the year.

On Slide 12, net financial expense reduction of 23.4% from BRL 65 million to BRL 50 million in the second quarter of '19, and the net financial expense of BRL 128 million during the first half of '19 at a similar level from the first half of '18.

On Slide 13, net income of BRL 110 million in the second quarter of '19 versus BRL 44 million in the second quarter of '18. And net income of BRL 173 million in the first half of '19 versus BRL 31 million in the first half of '18. Remembering that net income in the second quarter of '19 was positively impacted by the renegotiation of the deductibility of financial expense related to the convertibility of the sixth issued debenture by the company.

On Slide 14, our investment or CapEx of BRL 114 million in the second quarter of '19 versus BRL 99 million in the second quarter of '18 and CapEx of BRL 228 million in the first 6 months of 2019. Remember that main investments in the second quarter were related to the new aluminum wheels plant in India and investments in new stamping line for commercial vehicles in North America.

On Slide 15, net debt for the company was BRL 2.641 billion in the second quarter of '19 or a financial leverage of 2.4x, net debt over the last 12 months EBITDA for the company. When you look at the composition of gross debt of the company, 31.2% of the gross debt in Brazilian Reais, 37% in euro, 26.6% in U.S. dollar, and about 5.2% in other currencies.

On Slide 16, following the strategy of the company, our indebtedness from a gross debt point of view represented 64.8% in long-term in the second quarter of '18, now represents 75.1% in the second quarter of '19. And the composition from foreign and Brazilian Reais currencies, in the second quarter '19, other currencies represented 76% in the second quarter of '19, now represents 68.8%.

Slide 17, some of the indicators are related to share performance and average daily traded -- trade volume by the company during the last 12 months.

Some closing comments in terms of our results during the second quarter, as mentioned during the presentation, the second quarter was another series of continuos growth for Iochpe-Maxion, when our net operating revenue grew 11.2% in Brazilian Reais or 7.2% when adjusted by exchange rate variation.

The dynamics in the main markets where we operated at low risk with automotive growth continuing in Brazil and growing commercial vehicles in North America, while light vehicle production was down both in Europe and North America allowed us to align our capacity up or down in different regions according to the demand of such markets and also to contain operational expense as required in different regions where we operate.

Our CapEx strategy, to continue investing in products and regions where we consider to have opportunities to grow in the mid- and long-term, continues to yield productive results as observed by our growth in aluminum wheels in Mexico. Therefore, we maintain our plans for global expansion with the construction of an aluminum wheels plant in India and a new stamping line in Mexico, that will start operating during the second half of 2019.

This focused investment strategy, which also supports the goal of growing our presence in Asia goes beyond the new plant in India, but is also supported by a capacity expansion of our plant in Thailand to meet the demand of different customers and the construction of an aluminum use plant in China with Dongfeng, one of the largest vehicle producers in the country. The results in the second quarter demonstrate the consistency of our plans that aim to strengthen our balance sheet, continue to reduce financial expense, grow profitably both in wheels and structural components and also improving our return on invested capital and net income while investing on operational efficiency improvement and developing new products in technologies that support the automotive industry needs today and in the future.

With that, I'd like to open for the Q&A portion of the call.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Augusto Ensiki, HSBC.

--------------------------------------------------------------------------------

Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [2]

--------------------------------------------------------------------------------

I was just looking at an outlook per region, we've seen the Brazilian auto sector kind of growing at -- around 10% so far, and yet we see your growth domestically near 30%. How -- what's contributing to your above-market growth? And then how much further do you see this progressing? Secondly, in the NAFTA region, where do we stand in the truck cycle and do you think that this is going to carry us through to maybe -- or it's going to carry enough to -- of your results until maybe we see some recovery on the light vehicle segment. And then in Europe, finally, we have -- we're going be lapping the WLTP's testing standards, and I think in the second half and what this means for you at least growth even on -- this on the basis of easier comps?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Augusto, and regarding Brazil, and the growth in Brazil, it is really a combination of different factors. First, there is the positive impact and the continuing impact of new products that we have launched for our customers in Brazil, mainly in the commercial vehicle segment that supported growth, primarily in the structural component side of the business. Also the mix of sales from our customers, impact positively or negatively sometimes the sales of our products as the vehicle lines that we supply to grow in demand in the market. You can be benefited or impacted negatively depending on the case as the performance of such vehicles in the market. Therefore, it is a mix of 3 factors: One, obviously, the growth in production of vehicles in Brazil; second, new products that we have launched to our customers that will continue to yield more sales as we go forward; and third is really the mix of sales of vehicles from some of our customers.

Regarding the U.S., the North American segment for trucks Class V and above trucks continue to perform well in the first half of the year and all the indications are that continuous performance in the second half of the year as well. Therefore based on the release of our customers, the visibility that we have on demand from our customers, indications are that second half of 2019 will continue to be strong and the full year '19 is going to be quite strong compared to last year.

The early indications for 2020 on commercial vehicles is that, we don't expect more growth in 2020. At the same time, there is no indication of any significant drop in demand in North America at this point in time. Basically all the conversations with customers and indications in the market is that there maybe some slight adjustment in terms of demand for next year mainly on Class VIII trucks, but it will not be significant. Therefore, our baseline is not a lot of growth because its already a very strong market and maybe some minor adjustment as we go into next year. On light vehicle, the performance of light vehicle has been quite consistent in terms of the levels of demand that we are seeing around the 16.5 million vehicles per year a little high 16.5 million, 16.7 million, down from last year, but not significantly down.

And the outlook in 2020 continues to be on the same line. No growth in light vehicles, but no significant reduction as well in 2020, probably similar levels, maybe slightly lower than 2019, but no significant variation.

And all of that, it's okay for us and good news for us because our plants are operating at a good level, good operational efficiency in North America. Therefore, the volumes are to stay at the same pattern or a little bit higher or little bit lower may really don't have a significant impact into our operational efficiency and the ability of running our plants well in North America.

In Europe, when we look at the first 6 months of the year, mainly the first quarter of the year, we saw still the impact of the new protocol tax for homologating vehicles -- light vehicles in Europe in the end of last year and the beginning of this year, this sort of like stabilized towards the end of the first quarter. And I think that first quarter and second quarter has the impact of lower demand in Europe as well.

The outlook when we talk with customers is for the second half of the year. It's more stable second half of the year, probably with -- on a comparative basis, a little bit performed -- better performance because the second half of last year was impacted by the new emissions protocol that really lowered the production, mainly from the September through the December time frame last year. Therefore, not good growth, but on a relative performance, it should be better the second half than it was in the first half of the year.

And commercial vehicles still performing okay, still performing well. There are some new testing coming up in trucks in Europe as well. But also the auto -- the truck manufacturers are getting ready for the new baseline for emissions in 2020 in European market. Therefore, we believe that the markets will stay relatively stable as we go forward in the next several months or so.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from Alexandre Falcao, HSBC.

--------------------------------------------------------------------------------

Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [5]

--------------------------------------------------------------------------------

I again repeat, HSBC first here. So just wanted to get some color from you guys on the electric vehicle side. Is there anything that you are working on specifically from your China unit in that regard. Is there any volumes there or anything like this -- in the product specifically have 40% production going up? And do you think that -- is that a threat or challenge going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Regarding China for us today, it's -- we have 1 plant producing few wheels for commercial vehicles. Most of the production of that facility today is geared to exports to Asian markets, mainly Thailand, Japan, a little bit into China as well, but the Chinese market by itself today it better represents a lot in terms of demand for us because our sales in China from that plant is still very, very small.

As we go forward, and we start the construction of a new aluminum wheels plant in China, and then we just started the construction of that plant now in the month of June and the plant will be completely built by the end of 2020. Therefore, we believe that we will be positioned in an interesting cycle of the industry. The industry is down, demand is down in China right now end of last year, beginning of this year. By 2021, when we start the ramp-up of that plant, and again normally the ramp-up of a plant like that it takes about 2 years to build a wheels plant you ramp up month-by-month, align with the demand of different customers, before it happens over time, over a 2-year period. We believe that we will be in an adequate cycle of the industry.

Also I mean, we will be supplying wheels primarily, initially to our partner and customer who is Dongfeng, I mean, one of the largest vehicle producers in China and then the plan is to start supplying to them first before we start supplying to the rest of the market. Therefore, we believe that we are well positioned in terms of the construction of this plant, the timing of the plant is going to come mainstream and the requirement of our customers for such operation. Hope it answers your question?

--------------------------------------------------------------------------------

Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [7]

--------------------------------------------------------------------------------

No, it does. It does.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) Next question comes from Augusto Ensiki from HSBC.

--------------------------------------------------------------------------------

Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [9]

--------------------------------------------------------------------------------

I just had another question on -- you guys mentioned that higher raw material prices in the U.S., negatively -- negative impact to the gross margin. Is this something that you guys are going to be passing through or is it something that will continue affecting the margin? And then secondly, if you can just give us a relative margin per region which region is performing the best or is there room for improvement and what can we expect going forward?

--------------------------------------------------------------------------------

Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [10]

--------------------------------------------------------------------------------

Augusto, regarding raw material in the case of North America, most of our business in North America has agreed preset formulas with our customers with a time lag, it's a 3 or 4 months time lag. As the raw material goes up or as the raw material comes down, the percentage of the structure, the cost structure related to raw material goes up and down and this happens more automatically.

Therefore, the more relevant impact in terms of raw material is -- has been in Brazil with the raw material increase earlier in the year and we have been negotiating the pass-through of those -- this raw material increase during the first and the second quarter of this year. We completed the process by the second quarter. By the second quarter, basically, we have our pricing and costs aligned in the Brazilian market. Therefore, as we go forward, this effect of raw material in Brazil, where is the most relevant impact will not be there, will not be present. In Europe, raw material has not changed very much this year versus last year, it's more stable, before there's less of an impact on that.

Regarding our margins, I mean, as Brazil is improving, in terms of demand and as we took actions, restructuring actions in the last few years, the margins in Brazil have been growing and to a point where our margins are starting to get at a very similar levels in the different regions where we operate. If you go back a year or 2 years ago or so, we could see a significant difference between margins in Europe and North America versus Brazil. Brazil was in the very low, low level demand and we were still restructuring, just spending money to restructure. Now that we have restructured, the industry is growing slowly, not rapidly, but its going from a production point of view, our margin has been growing right now. And I think as we -- as you look forward into the next few quarters, we should expect a similar margins in the different regions where we operate.

Obviously, in a quarter like this where there is a more significant drop in production in one region like Europe, for example, where production and demand and production was down 7% or 8%, that has an impact on mix during that specific period of time. But I would say from a steady point of view, and looking forward along the next several quarters, margins should be more aligned among all the different regions.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from start Augusto Ensiki, HSBC.

--------------------------------------------------------------------------------

Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [12]

--------------------------------------------------------------------------------

Just one last one from me. Now that you guys have come down to about 19% in Amsted-Maxion, do you guys plan to divest the rest or is this just a holding that you can remain, and I guess as a follow on to that, what are your plans for mortgage as well?

--------------------------------------------------------------------------------

Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [13]

--------------------------------------------------------------------------------

Yes, Augusto. I mean our strategy has been really to focus our business on the automotive sector and then that is the reason that has been reducing our participation in the railway business. Right now, I mean our participation, once we complete this transaction, it will be at this level, 19.5% and we should stay at that level now at least for the foreseeable future. Our partners one has to continue to be involved in helping to support that business. Therefore, we don't see at least in the foreseeable future, a change in that participation. I believe a few years down the road things may change. Customers or partners may have different ideas or priorities, and we may change that. But at this point in time, we will stay around this 19.5% for the foreseeable future.

--------------------------------------------------------------------------------

Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [14]

--------------------------------------------------------------------------------

And for mortgage there's no change?

--------------------------------------------------------------------------------

Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [15]

--------------------------------------------------------------------------------

No, for mortgage there is no change. I mean we maintain our participation in there the same levels as we were there. We are continuing to treat that on an equity income base, and this is the plan for the foreseeable future as well.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

It has concluded the Q&A session. I would like to invite Mr. Oliveira to proceed with his closing statements. Please go ahead, sir.

--------------------------------------------------------------------------------

Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO & Member of Executive Board [17]

--------------------------------------------------------------------------------

As I mentioned during this presentation, the results during the second quarter demonstrate the consistency of our plans, that aim to strengthen our balance sheet, continue to reduce financial expense, grow profitably, both in wheels and structural components as well. And also improving our return on invested capital and net income, while investing on operational efficiency improvements and developing new products and technologies, and we have seen the impact in the results during the last few quarters that support the automotive industry needs today and in the future. Thank you very much for your participation today.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

The Iochpe-Maxion conference call is concluded. Thank you very much for your participation, and thank you for using Chorus Call.