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Edited Transcript of MYPK3.SA earnings conference call or presentation 28-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Iochpe Maxion SA Earnings Call

São Paulo - SP Apr 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Iochpe Maxion SA earnings conference call or presentation Tuesday, March 28, 2017 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 and Member of Executive Board

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Conference Call Participants

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* Leandro Fontanesi

Bradesco S.A. Corretora de T??tulos e Valores Mobili??rios, 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. We would like to welcome everyone to Iochpe-Maxion's Fourth Quarter 2016 Earnings Conference Call. Present at the conference today and available for the Q&A session are Mr. Marcos de Oliveira, Chief Executive Officer; Mr. Augusto Ribeiro Junior, Chief Financial and Investor Relations Officer; and Mr. Caio Moraes, Treasury and Investor Relations Director.

We would like to inform that this event -- 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 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, involving risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur.

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

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

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Good morning, and welcome to the fourth quarter audio conference for Iochpe-Maxion. I will follow the slides that were made available at the Presentation on our site, and I'll start with Slide #2 and talk about some of the highlights of the fourth quarter 2016 and the year of 2016.

We achieved: a consolidated net operating revenue of BRL 1,678,000,000 in the fourth quarter and BRL 6,816,000,000 in 2016, a decrease of 8.6% and 0.4% when compared to the fourth quarter of '15 and the year of 2015, respectively; an EBITDA of BRL 189 million in the fourth quarter of '16 and BRL 796 million in 2016, an increase of 15.4% when compared to fourth quarter of '15 and 6% when compared to the year of 2015; a net income of BRL 16.8 million in the fourth quarter and BRL 21.5 million in 2016, an increase of 208 -- 201% when compared to the fourth quarter and a decrease of 56% when compared to 2015; a net bank indebtedness of BRL 2,628,000,000 at the end of 2016 versus BRL 2,675,000,000 at the end of 2015, with a consequent reduction in financial leverage from 3.56x at the end of '15 to 3.3x at the end of 2016.

Some of the areas of focus and attention for the company in 2016 was increased production capacity in aluminum wheels in Brazil, both in the Santo Andre plant and the ramp-up of the new Limeira plant, which, in line with existing demand, generated a 57% increase in net revenue for this product during 2016.

And our continuous effort to reduce costs and increase productivity with emphasis on restructuring of our operations in Brazil.

On Slide #3, some of the highlights on subsequent events. We had in February of 2017 the conclusion of a syndicated loan in the amount of EUR 130 million, improving the debt profile, lengthening of term and reduction of average cost and the alignment of currencies between debt and company's cash generation.

Also, in March of 2017, we had a conclusion of a private capital increase in the proposed total amount of BRL 400 million, improving the company's capital structure through reduction of indebtedness and financial leverage.

In addition, until March of 2017, there was a conversion of debentures of the sixth issue into shares in the amount of BRL 17 million and subscription of shares of the company for the exercise of the subscription bonus issued as an additional advantage to the subscribers of the seventh issue of debentures in the amount of BRL 136 million, contributing to the reduction of the company's indebtedness and the financial leverage.

On Slide #3, (sic) [Slide #4] some of the main drivers in the fourth quarter were: the growth of domestic sales, mainly aluminum wheels due to our capacity increase and by the increase of production of agricultural machinery in Brazil; decrease in reais of the international revenue of the company due to exchange rate variation; and the reduction of heavy vehicles production in the North American region.

On Slide #5, we can observe the performance of some of the key markets where we operate. And we can see, in the fourth quarter of '16, an increase in production of light vehicles of 13.5% versus the fourth quarter of '15, an increase of 4.4% on the production of commercial vehicles in the fourth quarter and an increase of 79.6% on agricultural machinery production in Brazil. When you look at the entire year of 2016, we see a decrease of 11% on the production of light vehicles, a decrease of 17.1% in the production of commercial vehicles, and a decrease of 3.4% in the production of agricultural machinery in Brazil.

In the NAFTA or North American region, we see the fourth quarter relatively stable versus the fourth quarter of '15, with a 0.7% increase in production. We see a reduction of 24.2% in the production of commercial vehicles, primarily impacted due to the reduction of production of Class 8 trucks. When you look at the entire year of 2016, light vehicle production in North America was up 1.9% and commercial vehicle production was down 16.6% versus 2015.

In Europe, we saw the fourth quarter a continuation of growth in demand and production for both light vehicles and commercial vehicles. Production of light vehicle was up 2% in the fourth quarter and production of commercial vehicles was up 3.3%. For the entire year of 2016, production of light vehicles in Europe was up 3.9% and production of commercial vehicle grew 4.3% versus the year of 2015.

In the railway market, more specifically production of railway freight cars, we saw the fourth quarter with a total production of 1,079 cars, down 4.5% versus the same quarter of the prior year. And for the entire year of 2016, a total production of railway freight cars of 300 -- 3,903 freight cars, down 15.3% versus 2015.

On Slide #6, looking at the net operating revenue of the company, we can see in the fourth quarter of '16, BRL 1,678,000,000, a decrease of 8.6% versus BRL 1,836,000,000 in the fourth quarter of '15. We've -- if we disconsider the exchange rate variation in the fourth quarter, the global consolidated revenue for Iochpe-Maxion would have grown 3.4% versus the fourth quarter of 2015.

For the entire year of 2016, a net operating revenue of BRL 6,816,000,000, down 0.4% versus the BRL 6,846,000,000 during the year of 2015.

On Slide #7, looking on the revenue by region, we see an increase in the representation of South America, more particularly Brazil, in our global consolidated revenue growing from 14.6% to 22.4% in the fourth quarter of '16, driven primarily for the higher volume and production for commercial vehicles and light vehicles in Brazil and a growth in the production in sales of aluminum wheels in Brazil.

When we look at the European region, going down from 42% to 40.1% in the fourth quarter '16. The North American region, down from 34.8% to 30.1%, primarily driven by the reduction in the production of Class 8 trucks in North America. And the representation of Asia and others, going down from 8.7% to 7.4%. Obviously, the international markets were also impacted negatively by the strengthening of the Brazilian real, that in the translation of the foreign revenue was down in the fourth quarter of 2016.

On Slide #8, the revenue by product. We see also the impact of our growing capacity on aluminum wheels and higher demand on vehicles in Brazil, where the representation of aluminum wheels grew from 29.5% in the fourth quarter of '15 to 33.7% in the fourth quarter of '16. We see the decrease on wheels for commercial vehicle from 19% to 17.7% in the fourth quarter of '16; stable participation of the steel wheels for light vehicles at 33.3% level; and a decrease on the participation of Structural Components for commercial vehicle from 16% to 13%, primarily driven by the lower demand of Class 8 trucks in North America.

On Slide #9, looking at the revenue by customer. We see, for the entire year of 2016, a relatively stable contribution or participation on revenue by customer, with the exception of Daimler that was down from 14.2% to 11.2%, and this is driven primarily by the reduction in production and sales of commercial vehicles, both in South America and in North America during 2016.

On Slide #10, looking at gross profit for the company. We can see in the fourth quarter of '16 a total gross profit of BRL 255 million versus BRL 232 million in the fourth quarter of '15 or a growth of 9.8%, giving us a gross margin of 15.2% in the fourth quarter of '16. And when you look at the total year of 2016, a gross profit of BRL 972 million, a growth of 8.9% versus the year of 2015, giving us a gross margin of 14.3% in the entire year of 2016.

On Slide 11, looking at the earnings before interest and tax of BRL 111 million or 38.2% higher than the BRL 80 million in the fourth quarter '15. And for the entire year of 2016, the earnings before interest and tax of BRL 479 million, a growth of 6.6% versus 2016, or 7% of our net operating revenue.

On Slide 12, looking at the earnings before interest, tax, depreciation and amortization of BRL 189 million in the fourth quarter or an EBITDA margin of 11.3% versus BRL 164 million in the fourth quarter of '15. For the year of 2016, total EBITDA of BRL 796 million, an EBITDA margin of 11.7% and a growth of 6% in our EBITDA versus 2015.

On Slide 13, we can see our net financial expense of BRL 80 million in the fourth quarter of '16 and an increase of 2% versus the fourth quarter of '15. And for the entire year of 2016, a total net financial expense of BRL 344 million versus BRL 317 million in 2015.

On Slide 14, net income of BRL 17 million in the fourth quarter of '16 versus a net loss of BRL 17 million in the fourth quarter of '15 and a total net income of BRL 22 million for 2016 versus BRL 49 million in 2015.

On Slide 15, our CapEx of BRL 104 million in the fourth quarter of '16, down versus the BRL 140 million in the fourth quarter of '15. And for the entire year of 2016, total CapEx of BRL 299 million versus BRL 331 million in 2015.

On Slide 16, our net debt of BRL 2,729,000,000, (sic) [BRL 2,629,000,000,] down 1.8% versus the BRL 2,676,000,000 in 2015. When you look at our net debt over the last 12 months, EBITDA of 3.3x at the end of the fourth quarter of 2016.

Looking at the composition of our gross debt, at the end of 2016, our debt in U.S. dollars represents 47.8%, Brazilian reais represents 39.5% and euros represented 9.5% of our gross debt at that point in time.

When you look at Slides 17 and 18, we have a quick analysis of our liquidity management with the actions implemented in 2016 and subsequent events in the first quarter of '17. The company concluded 2 syndicated loans between June 2016 and February 2017 with the following objectives: improve the alignment of currencies between the company's indebtedness and cash generation; lengthen the average term of bank debt; and reduce the average cost of the company's indebtedness. Then in financial conditions: the syndicated loan in North America of BRL 275 million (sic) [$275 million] with an average cost of LIBOR plus 5.4% was concluded in June of 2016; a syndicated loan of BRL 130 million (sic) [EUR 130 million] with an average cost of Euribor 3 months plus 3.6% that was concluded in February of 2017.

On Slide 18, we see the company concluded in March 2017 a private capital increase, which, together with a partial conversion of the sixth issue debentures and a partial exercise of the subscription warrants of the seventh debenture, presented a reduction of net debt of approximately BRL 550 million. This event aims to improve the company's capital structure through reduction of indebtedness and financial leverage.

On Slide 19, just a snapshot of the overall liability management at 3 points in time, where we can see that short and long term represented about 50-50 of our gross debt at the end of 2015. Short term represented 38.7% of our gross debt at the end of 2016. And pro forma December '16, with the syndicated loans and capital increase that happened in the first quarter of 2017, our short term goes down to 27% and our long term is 73%. The same analysis for the composition of our indebtedness in terms of Brazilian reais and foreign currency. Brazilian reais represented 53% at the end of 2015, represented 39% at the end of 2016 and pro forma at the end of '16 with the effect of the syndicated loan and capital increase that happened in the first quarter of 2017, reais represent now 22% of our gross debt.

On Slide 20, we have the performance of our Iochpe-Maxion shares in the year 2016 and the average daily trade volume during the total year of 2016 as well.

When we look at the strategy the company has been following during 2016 and maintaining our discipline in cost reduction, adjusting our structure and aligning our capacity with the demand of the different markets, having importance and continue to improve our operational results, the increase in aluminum wheels capacity, particularly in Brazil, has been quite important in continue to grow our revenue globally and in Brazil, particularly. And the focus on improving our overall liquidity and reducing our leverage are important elements of our 2016, '17 and '18 strategies as we go forward.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Leandro Fontanesi, Bradesco BBI.

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Leandro Fontanesi, Bradesco S.A. Corretora de T??tulos e Valores Mobili??rios, Research Division - Research Analyst [2]

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I have 2 questions. First one, if you're increasing the revenue in the domestic market, could you give us a sense of, let's say, what is due to increasing prices, what is due to the -- one of the automakers that began or recover its production rate and what is, let's say, a sort of increase of the overall market? That's the first question. The second one, if you could give us a sense of your capacity utilization in your Limeira plant and Santo Andre as well.

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

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Leandro, thanks for your question. First of all, when you look at the fourth quarter net operating revenue in Brazil, it has been driven primarily -- the growth has been driven primarily by the increase in production of aluminum wheels and also the higher demand on light vehicles in Structural Components in the fourth quarter as well. The -- it's a combination of market demand, a combination of adjusting or aligning inventories by the OEMs with the mix of products that are being sold in the market and that generated that additional revenue in the fourth quarter.

On pricing, we normally work with our customers to reflect the variation on raw material costs that we face in different markets, sometimes up, sometimes down, depending on the structure of our contracts or agreements with our customers. Sometimes we have a formula that index the variation of price with the variation of the raw material. Sometimes that is negotiated. But historically, we've been able to negotiate with our customers the reflection of the positive or negative variation in raw material.

But again, in the fourth quarter of '16, it's primarily driven by the higher demand of aluminum wheels and the higher production in Brazil. In terms of capacity utilization, our aluminum wheels plant in Santo Andre is operating above 90% of its capacity right now and the aluminum wheels in Limeira is still in the ramp-up curve. We started to produce in Limeira at the end of the second quarter of 2016, more precisely during July, that's when it started increasing the production. And we will continue that ramp-up curve all the way through the end of the third quarter of 2017. In this first phase, our aluminum wheels plant in Limeira has a total capacity -- annual capacity of 800,000 wheels, and our target is to reach the run rate equivalent to 800,000 wheels per year by the end of the third quarter of 2017. For our wheels, it's still in this ramp-up mode that started in June of -- at the end of June of last year.

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Leandro Fontanesi, Bradesco S.A. Corretora de T??tulos e Valores Mobili??rios, Research Division - Research Analyst [4]

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And just a follow-up on the first question. So if we look into aluminum revenues, it increased 82% in fourth quarter. So we understand it's higher demand, but what can we think about it in looking to 2017 and 2018, because these are very strong figures? So just to understand if this trend will continue in 2017 and '18 and what will drive that, because this is materially above what is the production increase, what it was in fourth quarter. And even if we look into 2017, the figures indicate a 12% increase in production. But will this aluminum wheels volumes continue to outperform the overall increase in production?

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Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO and Member of Executive Board [5]

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I think a couple of things here. Obviously, the increase on aluminum wheels production and sales for Iochpe-Maxion has been driven by the higher capacity that we installed in Santo Andre and the ramp-up of Limeira. Obviously, the aluminum wheels volume has grown significantly above the market because we have been substituting imported wheels that the automakers were bringing into Brazil in the past because there was not enough capacity in the market. As we invested and we added this capacity in Brazil, we've been substituting those imports with locally produced wheels.

The second point -- and clearly, now in '16, we have a much higher growth in aluminum wheels because it has both the impact of the Santo Andre capacity expansion and the ramp-up of the Limeira plant that was happening in the second half of the year. When we look in 2017, obviously, the effect of the ramp-up of the aluminum wheels plant in Limeira will bring us additional revenue beyond the market growth as well. Difficult to compare on a year-over-year base because we are comparing '16 versus '15 when we didn't have that capacity installed. Now in '17, we will be comparing 2017 versus '16 when we already have partially this capacity installed. But we expect to see aluminum wheels revenue growing higher than the market demand and the market production in Brazil.

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Operator [6]

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(Operator Instructions) And this concludes Q&A session. I would like to invite Mr. Oliveira to proceed with his closing statement. Please go ahead, sir.

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Marcos S. de Oliveira, Iochpe-Maxion S.A. - CEO and Member of Executive Board [7]

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Once again, thank you very much for your participation. And as I mentioned before, we will maintain the focus on our strategy of continuing to reduce cost, improve productivity, adapting our structure and aligning our capacity to the market demand. If the market is up or if the market is down, looking to align that capacity to such conditions. We will continue to focus on growing our participation in the aluminum wheels segment in Brazil and around the world in the years to come and maintaining the discipline in terms of our liquidity and reducing our leverage, not only in 2017, but 2017, '18 and the years to come, so we can strengthen and position the company for potential growth opportunities that we'll face around the world in the years to come. Thank you very much for your participation, and have a good day.

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Operator [8]

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