U.S. markets closed
  • S&P 500

    3,380.80
    +17.80 (+0.53%)
     
  • Dow 30

    27,816.90
    +35.20 (+0.13%)
     
  • Nasdaq

    11,326.51
    +159.00 (+1.42%)
     
  • Russell 2000

    1,531.20
    +23.51 (+1.56%)
     
  • Crude Oil

    38.59
    -0.13 (-0.34%)
     
  • Gold

    1,912.10
    -4.20 (-0.22%)
     
  • Silver

    23.97
    -0.28 (-1.17%)
     
  • EUR/USD

    1.1748
    +0.0022 (+0.19%)
     
  • 10-Yr Bond

    0.6770
    0.0000 (0.00%)
     
  • GBP/USD

    1.2888
    -0.0033 (-0.25%)
     
  • USD/JPY

    105.5650
    +0.1350 (+0.13%)
     
  • BTC-USD

    10,631.98
    -164.06 (-1.52%)
     
  • CMC Crypto 200

    218.76
    -4.94 (-2.21%)
     
  • FTSE 100

    5,879.45
    +13.35 (+0.23%)
     
  • Nikkei 225

    23,185.12
    0.00 (0.00%)
     

Edited Transcript of MYPK3.SA earnings conference call or presentation 14-Aug-20 2:00pm GMT

Q2 2020 Iochpe Maxion SA Earnings Call

São Paulo - SP Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Iochpe Maxion SA earnings conference call or presentation Friday, August 14, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Elcio Mitsuhiro Ito

Iochpe-Maxion S.A. - Chief Financial & IR Officer and Member of Executive Board

* Marcos S. de Oliveira

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

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

Conference Call Participants

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

* 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 Second Quarter 2020 Earnings Conference Call. Present at the conference today and available for the Q&A session are Mr. Marcos de Oliveira, Chief Executive Officer; Mr. Elcio Ito, Chief Financial and Investor Relations Officer; and Luis Abreu, Strategy, M&A and Investor Relations Director.

We would like to inform that this conference call is being broadcast in the Internet at the company website, www.iochpe.com.br, and the presentation is available to download at the Investors Information section.

(Operator Instructions)

Before proceeding, we would like to mention that forward-looking statements are based on the beliefs and assumptions of Iochpe-Maxion's management as well 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 circumstance that may or may not occur.

Now I will turn the conference to 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 our second quarter conference call. I will follow the slides made available on our website, and I will start with Slide #1.

And I think, clearly, although we are still living a period with many doubts and complex and after a second quarter with low visibility on automotive demand, during the last several weeks, we have observed more consistency in the planning of our clients and higher volumes plan in the different regions where we operate. And those higher demand and volumes are aligned with information being supplied by the providers of automotive forecasts and information around the world.

Since the beginning of the pandemic, the health and safety of our employees has been a priority in our plans. And we have, during this period, adopted protocols established in accordance with the guidelines of the authorities within each location where we operate. We have implemented actions, rules and controls to monitor the entire process in addition to providing the necessary support to our employees and utilizing the best practices around the world.

Since the beginning, we also have focused on the liquidity. And beyond the liquidity and the health of our employees, managing the efficiency of our operations to accelerate production on a flexible manner has been very important for us. We've been working close with the demand of our customers and adapting our plans to meet their demands during the weeks of the second quarter and going into the third quarter as well.

On Slide #1, we show some examples of the actions and the internal communication relative to the pandemic that basically show the priority around health and safety and how we've been communicating internally with our employees.

On Slide #2, considering the significant change in levels of automotive demand during the second quarter, we are showing on Slide #2 the variation in monthly light vehicle production between the months of April, May and June of 2020 versus the same period of 2019. I think it's clear that we had an unprecedented quarter when light vehicle production was down between 96% and 99% in the month of April versus the same month of last year. It has improved slightly during the month of May. And in June, we already see a much higher level of demand and production by our customers around the world. In the month of June, production in Brazil was still down 59% versus the same period of last year. Production in North America was down 24%, and production in Europe was down 29%. When you look at the entire second quarter, the drop was an average of 60% during the entire quarter when the month of April was clearly the most significant impacted month during that period. When you look at the second quarter, production in Brazil was down 82%, production in North America was down 71% and production in Europe was down almost 67% in the period.

On Slide 3, we look at the signs of recovery in the second quarter, moving to the third and fourth quarter as well based on IHS Automotive forecast. And you can see that light vehicle production that was down 80%, 70% in the second quarter is improving in the third quarter and in the fourth quarter versus the same period of last year. In the case of Brazil particularly, when production was down 82% during the second quarter, the forecast from IHS shows a drop of 25% during the third quarter and a drop of only about 3% in the fourth quarter. In the case of North America, such drop that was 71% in the second quarter is now close to 2% to 5% in the third and fourth quarter as well. And in case of Europe, when production of light vehicles was down 67% in the second quarter should be down between 7% and 8% in the third quarter and down around 4% to 5% in the fourth quarter. There is clearly a recovery trend for the coming quarters. Some regions are recovering faster than others. But in general, all the regions are improving faster than many people thought at the beginning of the pandemic in the April, May time frame. Due to our geographical diversification, volumes for Iochpe-Maxion tend to follow the average recovery of the markets where we operate.

On Slide #4, we can see some of the impacts of COVID-19 and actions implemented by the company during the last few months. On the bottom of the page, we saw a 56% reduction in net operating revenue in the second quarter of 2020 and 34% reduction in the first half of 2020. Our net debt of BRL 3,636 million in the second quarter was BRL 2,640 million in the second quarter of '19. Our financial leverage measured as net debt over adjusted EBITDA represented 5.8x at the end of the second quarter of 2020. Some of the main actions implemented by the company during the period were focused first on strengthening our cash position and managing covenants, and we ended the second quarter with BRL 1.4 billion in cash or 3x the amount of cash that we had in the same period of 2019. We completed a renegotiation of financial covenants during this second quarter. We made adjustments to production capacity and production costs, reducing approximately 8% the number of jobs throughout the world. We announced the North America restructuring of our steel wheel production. We implemented a reduction in operating expense, that considering the same exchange rate at the same period of last year was a reduction of 19% in the second quarter. Our investments, also excluding the exchange rate variation in the period, was down 42% in the second quarter of 2020 versus the same period of last year.

On Slide #5, our consolidated net operating revenue was BRL 1,172 million in the second quarter of '20 or 56% down versus the same period of last year. And our net operating revenue was BRL 3,396 million or down 34% versus the first half of last year, clearly impacted by the drop in vehicle production around the world.

On Slide #6, looking more specifically at different regions where we operate. In South America, our net operating revenue in the second quarter was at BRL 178 million, down 76% versus the second quarter of 2019. The participation of South America in our consolidated net operating revenue was 28% in the second quarter '19, down to 15% in the second quarter of 2020, impacted by a more significant drop in vehicle production in South America in the period. On the bottom of the page, we can see the vehicle production for light vehicles was down 82% in the second quarter of 2020 in South America, particularly Brazil, and production of commercial vehicles was down 66% in the second quarter of 2020.

On Slide #7, looking at North America. Our net operating revenue was BRL 344 million, down 58% versus the same period of last year. North America maintained its participation in the consolidated net operating revenue to approximately 30% of our revenue.

Looking specifically, the production of vehicles in North America. Production of light vehicles was down 71%, and production of commercial vehicle was down 74%. The production of commercial vehicles was down as expected, impacted by the cyclicality of this segment in the beginning of the year, but it was aggravated by the pandemic during the second quarter of 2020. And the recovery in North America has been faster than we expected during the quarter and at the beginning of the third quarter as well.

Looking at Slide #8, the operational performance in Europe. Our net operating revenue in Europe was BRL 576 million, down 33% versus the same period of last year. And the participation of Europe in our consolidated net operating revenue grew from 32% in the second quarter of '19 to 49% in the second quarter of 2020, clearly due to a lower reduction in vehicle production in Europe when compared to Brazil and the U.S. as well in the period.

Looking at specifically different segments in terms of vehicle production. Light vehicle production in Europe was down 67% in the second quarter of this year versus last year, and production of commercial vehicle was down 64% versus the same period of last year. Also, we observed a faster recovery in Europe during the second quarter and beginning of the third quarter.

In the case of Asia, on Slide #9. Looking at our net operating revenue of BRL 74 million, was down 69% versus last year. And the participation of Asia in the net operating revenue of the company has also reduced from 9% in the second quarter of '19 to about 6% in the second quarter of 2020.

Looking specifically at the 2 markets that are more representative for Iochpe-Maxion today in Asia, we saw a significant drop in the production of light vehicles in India to 85% in the second quarter versus last year, a reduction of 55% in the production of commercial vehicles in India and a reduction of 69.5% in Thailand in the production of light vehicles in the second quarter of '20 versus the second quarter of '19.

Clearly, the most significant reduction in light vehicle production was in India. And we launched our new aluminum wheels plant in India in the second half of last year. This plant is in ramp-up mode, and we are adding volume to that plant according to the launch of new vehicles from our customers. And considering the projections of the Indian market recovery in 2021 and the following years indicates that we will continue to grow our production in India on a different pace than we initially thought, but the demand will be there, and the needs for our installed capacity will be there in 2021 and 2022 as well.

On Slide 10, looking at the net operating revenue by product. We can see structural components representing -- for commercial vehicles representing 16% of our consolidated net operating revenue, aluminum wheels for light vehicles representing 30%, steel wheels for light vehicles representing 27% and steel wheels for commercial vehicles representing 26%.

On Slide #11, looking at the net operating revenue by customer. We can see that the variations are more due to the different dynamics in the different markets. At the same time, we can see a growth or a high representation on the aftermarket business, primarily in Europe, that it was a little bit less impacted by the OEM production in the region as well. And today, top 5 customers represent roughly 46% of our operating revenue.

On Slide 12, we had a gross loss of BRL 136 million in the second quarter of 2020 versus a gross profit of BRL 337 million in the second quarter of '19. For the first 6 months of the year, our gross profit was BRL 48 million in the first half of '20 versus BRL 635 million in the first half of '19. The significant drop in the volume of vehicle production in the main markets in which the company operates are clearly impacting our operating leverage during the period.

On Slide #13, looking at our EBITDA. We had a negative EBITDA of BRL 144 million in the second quarter '20 versus a positive of BRL 305 million in the second quarter of '19. For the full year -- for the first 6 months of the year, our EBITDA was BRL 65 million in the first half of '20 versus BRL 548 million in the first half of '19. This EBITDA shown in this graph is what we call the adjusted EBITDA, excluding the impact of restructuring and impairment actions implemented by the company. On the right-hand side, you can see that our restructuring and impairment represented about BRL 55 million in the second quarter of '20 and BRL 60 million in the first half of 2020.

On Slide 14, we had a net loss of BRL 352 million as reported in the second quarter of '20 versus a net profit of BRL 110 million in the first -- in the second quarter of '19 and a net loss as reported of BRL 343 million in the first half of '20 versus a net profit of BRL 173 million in the first half of '19. Excluding the effects of restructuring and impairments, the loss in the second quarter of 2020 would have been BRL 297 million instead of the BRL 352 million, as shown in the graph.

On Slide 5 (sic) [Slide 15], our investments in the second quarter of 2020 were BRL 85 million, down 25% versus the second quarter of '19. And our investments were BRL 195 million in the first half of '20 or a reduction of 14% versus the same period of last year. Excluding the effect of exchange rate variation, the reduction in investments would have been 41.6% in the second quarter of 2020 and 27.8% in the first half of 2020. Main investments in the period were related to health and safety, maintenance and productivity improvement.

On Slide 16, looking at the financial leverage and liquidity ratio for the company. We see our net debt of BRL 3,636 million in the second quarter of 2020. And our adjusted EBITDA, I mean excluding restructuring impairments as seen before, of BRL 628 million during the last 12 months, taking our leverage to 5.8x when looking at the adjusted EBITDA or 6.6x when we look at the reported EBITDA. On the right-hand side, we can see the liquidity ratio, cash over short-term debt, at 0.8x when we finished the second quarter with BRL 1.8 billion of short-term debt and approximately BRL 1.4 billion of cash at the end of the quarter.

On Slide 17, looking at our indebtedness and the breakdown of our gross debt. About 36% of our gross debt is in euros, 44% in Brazilian real and 12% in U.S. dollars. Looking on the right-hand side of the page, our short-term debt that represented 25% in the second quarter of '19, represents now 36% in the second quarter of 2020. The average cost of our indebtedness, which was 5.3% per annum on the second quarter of '19, it is now 3.8% per annum on the second quarter of 2020.

On Slide 18, we can see some of the new business won during the second quarter, both in structural components and wheels as well. We have a new business in aluminum wheels for electric cars in North America and Europe; new structural components, stamping parts for commercial vehicles in Brazil and Mexico; and steel wheels for commercial vehicles in China. On the bottom of the page, we can see some of the recent awards from our customers recognizing the operational efficiency and capabilities of Iochpe-Maxion and its different divisions as well.

As we mentioned at the beginning of the presentation, in addition to prioritizing health and safety of our employees, liquidity management and focusing on improving our operations were priority during the second quarter. Although we had low visibility in demand during the beginning of the second quarter, we worked to plan and implement action, actions that allow us to improve our industrial operations and maintain its flexibility and agility but making those operations more efficient, not only in the quarter, but looking in the second half of the year as well.

The actions implemented during the second quarter and the reduction of expense, adapting our plans to different levels of demand in the short term, restructuring actions, readapting our plans and investments and the focus and discipline on cash and liquidity have prepared us for continuing to work to improve our operating margins in the second half of the year and next year with higher production levels as indicated by IHS and other providers of automotive information.

With this, I would like to open the session for the questions and answers.

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

Questions and Answers

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

Operator [1]

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

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

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

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

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

Two questions on the plant shutdown at Akron. Is the impairment charge for this quarter all there is going to be? Or do you think -- or will there be additional impairment charges in the -- or as the process goes on?

And secondly, what sort of -- how does this change the cost structure for you, I guess, on the whole or just for the North America region? Any detail on that would be great.

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

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

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

Augusto, thanks for your questions. There will be additional restructuring costs in the second half of the year. I mean we are looking at the demand in different markets. And we will be adjusting, as required, our production capacity, level of demand in the different regions as we go along. Therefore, these numbers can be a little bit higher or lower depending on the actual demand during the period. There are some additional restructuring costs in North America related to the restructuring related to steel wheels production in North America. And we plan for it, and that's going to be part of our actions in the second half of the year.

Regarding your second question, Augusto, Elcio will answer that.

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

Elcio Mitsuhiro Ito, Iochpe-Maxion S.A. - Chief Financial & IR Officer and Member of Executive Board [4]

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

Augusto, so when we shift businesses to San Luis Potosi and Sedalia, we are shutting down Akron, and this will lead to the range of the cost structure that will be reduced in [Akron] in the range of BRL 40 million or so.

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

Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [5]

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

I'm sorry, there's a bit of noise on the line. Could you just repeat your last sentence?

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

Elcio Mitsuhiro Ito, Iochpe-Maxion S.A. - Chief Financial & IR Officer and Member of Executive Board [6]

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

Yes. So as we shift the business and transfer the production to Sedalia and San Luis Potosi and as we shut down Akron on a permanent basis, the change or the cost that will be avoided is in the order of BRL 40 million, in the range of BRL 40 million, 4-0.

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

Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [7]

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

Is that quarterly or annually?

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

Elcio Mitsuhiro Ito, Iochpe-Maxion S.A. - Chief Financial & IR Officer and Member of Executive Board [8]

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

That's annually.

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

Operator [9]

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

(Operator Instructions) This concludes 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 [10]

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

As I mentioned before, the efficiency of our operations and adjusting our industrial factories to the different conditions of the market, looking to this demand in 2020 and '21 align with the new business that we have observed during the quarter and implementation of innovative solutions in the market and launching new products. And our geographic diversity in the business allow us to supply and meet the needs of our customers globally. All these actions and our position in the market give us the confidence that we have an adequate strategy and plans to navigate during this period of uncertainty that will make our business stronger as we get out of the second and third quarter of 2020. Thank you very much for your participation today.

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

Operator [11]

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

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