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Edited Transcript of RAPT4.SA earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 Randon SA Implementos e Participacoes Earnings Call

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Randon SA Implementos e Participacoes earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Raúl Randon

Randon S.A. Implementos e Participações - President Director

* Esteban Mario Angeletti

Randon S.A. Implementos e Participações - Finance Manager & IR Manager

* Hemerson Fernando De Souza

Randon S.A. Implementos e Participações - Planning & IR Manager

* Paulo Prignolato

Randon S.A. Implementos e Participações - Member of Executive Board

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Conference Call Participants

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* Gabriel Rezende

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

* Lucas Marquiori

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

* Lucas T. Barbosa

Morgan Stanley, Research Division - Research Associate

* Thiago Audi Casseb

Crédit Suisse AG, 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 afternoon, and thank you for waiting. Welcome to Randon S.A. Implementos e Participações Q3 2019 results. Welcome to the conference call. With us here today, we have Mr. Daniel Raul Randon, President, Director; Mr. Paulo Prignolato, CFO and Investor Relations Director; Mr. Hemerson Fernando De Souza, Fras-le's Investor Relations Director; Mr. Esteban Angeletti, Financial and Investor Relations Manager; and our IR team.

This event is being recorded and all participants will be in the listen-only mode during the company's presentation. (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through the website at ri.randon.com.br where the presentation is available. Participants may view the slides in any order they wish. The replay of this event will be available shortly after the event is concluded. We remind you that the participants in the webcast may ask questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of Randon's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I would like to pass the floor to Mr. Daniel Raul Randon, President, Director, who will begin the presentation. Sir, you may proceed.

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Daniel Raúl Randon, Randon S.A. Implementos e Participações - President Director [2]

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Good morning to all those participating in the conference call and those following by phone or our website. I would like to begin our presentation, thanking the 2 awards from IR Magazine 2019, the 2 awards in the categories Best Investor Relations Executive and Best Investor Day, which, together with the awards received at Latin American Executive Team show the recognition of the markets -- capital markets to Randon and our Investor Relations team's work with investors.

Now going on to the presentation of results. We are seeing a very good year for Randon companies with consistent growth, as shown by the evolution of revenue and margins during the period. The uncertainties that we observed in the closing of Q2 caused by consecutive negative reviews of the GDP have changed and now have a more positive scenario in the current quarter. The country began to generate jobs, interest rates are at their lowest level and a record harvest in 2020 have motivated a boost -- have given a boost to trust for consumers and transportation companies. With this, the sales of road equipment and truck equipment, which are important for our Auto Parts division are growing again. This positive sign became even more evident during the main exhibition of the transportation in cargo in Latin America, FENATRAN exhibition or fair.

I would like to talk a lot -- a little about the participation of Randon companies at this exhibition on October 14 to 18 in São Paulo. More than an institutional event as we had in the last 2 editions, this exhibition became the main event for business in the transportation and cargo area in Brazil. For this edition, we expected a great exhibition, which could show the market trends for 2020, and this happened. Record public and record sales, much higher than our expectations, confirmed that the sector is at a good moment, and at the beginning of next year, we'll have a rhythm similar to that of 2019. The participation of Randon companies at the exhibition was marked by innovation, and we had a very positive return from those visiting. We launched 20 new products, fruit of a joint effort from our different business units and also the technological -- Randon technological center. These launches bring more performance, greater availability and cost reduction for our clients, with a strong emphasis on safety and sustainability.

I would like to close this initial message saying that apart from the positive performance of our businesses, we can see that the innovation fronts that we are concentrating on as we saw in FENATRAN exhibition are giving us results, are producing results. This is the message we have for the market. We're working in the present but with focus on the future. When we say that Randon wants to be young at the age of 70, it means to not be contented with good and consistent results, but always leading with innovation and being leaders in the segments where we are present.

Now I would like to invite you all to look at our guidance for 2020 on Slide #4. When observing the main indicators informed in our guidance, we noticed that we are in line with the expected numbers until now for the year. The orders in portfolio releases from OEMs show us that we have conditions to reach the guidance in terms of projected revenue for 2019, showing consistency and capacity of our companies to execute the plan.

The revenue from abroad are a little below the projections, being affected by more complex scenario abroad in the main markets where the company is present. The imports reached the guidance one quarter before the expected quarter. This happened due to road equipment brought from our company, Randon Argentina. We used this as an opportunity to solve 2 problems: reduce the surplus capacity in Argentina; and also supply the strong demand in Brazil. And this helped the 2 countries. The investments are within expectations. And during the year, we carried out many projects, not only to increase production capacity, but also in automation and process improvements.

Now I'd like to pass the floor to Paulo. He will make a detailed presentation of the results.

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Paulo Prignolato, Randon S.A. Implementos e Participações - Member of Executive Board [3]

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Thank you, Mr. Daniel. Now going on to Slide #5, we show the numbers for the main areas where we are present. Beginning with semitrailers, we can observe a good sales rhythm continuing, especially in the Brazilian market. The registration of new trailer trucks year-to-date is already at 47,696 units, more than in the whole year of 2018. In the truck market, production grew a little less with a reduction of exports to Argentina, but the sales in the domestic market have been positive, especially due to heavy truck segments.

Now we would like to go on to Slide #6 and talk about the results of the company. In Q3 2019, the company reached BRL 1.4 billion in net consolidated net revenue, an increase of 23.6% when compared with the same period in 2018. In the OEM division, the growth was 21.5% resulting from a good sales volume in semitrailers. In the Auto Parts division, the growth reached 26.1% due to the increase in brake systems in the export market and also a growth in Fremax, the sales in Fremax.

Now going on to exports. We had a drop of 17.6% in comparison with the previous quarter. The main drop was in the OEM division, where many markets like Chile and Argentina are having political and economic difficulties, and this has affected the sales in these markets. The consolidated EBITDA reached BRL 192.1 million in Q3, with a margin of 14%. Year-to-date, 9 months, EBITDA reached BRL 530.1 million, with a margin of 13.9%. The growth of volumes registered during the year, together with price increases and a better product mix, have contributed to maintain the margins at healthy levels. We also have, as an additional fact, the positive effect of IFRS 16. Which, in year-to-date 9 months, reached BRL 16.5 million.

In this quarter, we also had nonrecurring expenses totaling BRL 17.5 million. The main expense being BRL 17.3 million, referring to hedge accounting in the OEM division. Adjusting the consolidated EBITDA to these expenses, we have an adjusted EBITDA of BRL 209.6 million with an EBITDA margin -- adjusted EBITDA margin of 15.1%. Year-to-date, adjusted consolidated EBITDA reached $572.7 million, with an EBITDA -- adjusted EBITDA margin of 14.9%.

Finally, we have the net results, BRL 78.5 million in the quarter, representing an increase of BRL 88.6 million (sic) [88.6%] in comparison with the same period in the previous year. The 9 months of 2019, the company had a net profit of BRL 194.7 million and a net margin of 5.1%.

I invite you all to go to Slide #7, where we will talk about the different segments, beginning with OEMs. In this quarter, we saw the demand for semitrailers remained strong, and we highlight the recovery of the company's market share, getting to 36.3%, showing that the added capacity in the first semester was fundamental to improve our share in sales. When considering total sales in the quarter, once again, we are close to 7,000 units, which helped us to reach a good volume of 19,016 units, and we believe that we will close 2019 as the second best year in history for a volume of semitrailers produced by the company. Although the export market is more complex for the next few months, the sales for the Brazilian market should continue at a good rhythm, especially with the sales made during the FENATRAN exhibition and also giving us really a good position for the first quarter 2020.

Now on Slide 8, we have the highlights of railway cars and special vehicles. The delay in the renewal of railway concessions is the main reason for the weak performance of this during the year. Randon sold 74 railway cars in the quarter due to a negotiation, and this should not repeat itself in Q4. The bright side is that the clients of this segment are seeing that in 2020, we will have a better year with higher volumes than the volumes of this year. Concerning special vehicles, we sold 113 units, 15% below Q3 '18. But with the sales mix that is more consistent and with a greater number of off-road vehicles that bring better revenue and margins.

On Slide #9 and 10, we will talk about the Auto Parts division, beginning with Fras-le on Slide #9. We divided Fras-le product into 2 groups: friction materials and other. The first had a drop of 6.8% in volumes in comparison with the previous quarter due to the fierce competition -- more complex competition and seasonality, both in Brazil and abroad. Now other products had a growth of 15.2% at Fras-le, especially due to the inclusion of the volumes sold by Fremax, an acquisition and also mostly due to disk brakes. In the operations outside Brazil, we have different scenarios in each country, the closing of the tax year in the U.S. So we have the closing of the tax year in the U.S., and some clients delayed their purchases to reduce inventory. We hope to have normal sales in the next quarter. In Argentina, there is an economic stagnation without any perspective of recovery in the short term. In China, we continued to search for -- to grow market share in the local market. And in India, there is a growth plan for revenue in the region.

Now talking about the Brazilian market. Sales to OEMs are presenting a good performance, especially due to the growth in volumes in heavy vehicles, such as trucks and road equipment.

Now in light vehicles, the demand has been more weak during the whole year, and this intensified competition. There is fierce competition requiring -- demanding from Fras-le many actions to attenuate this negative moment of the market. For more information about Fras-le, please read the quarterly release as of November 12, available on the website.

Going on to the next slide, we will talk more about Auto Parts. The sales of axles and suspensions and coupling systems remained positive, in line with the volumes of the previous quarter and with the performance of the market. Nevertheless, in comparison with Q3 '18, there was no growth. The explanation is that, last year, the company compensated part of the days' -- the production stops during the truck drivers' strike during the third quarter. Thus, we had more days of production, and it became more difficult to compare with this year. Now concerning hubs and drums, we see a growth of 7.5% due to a better product mix to the main clients. But the highlights during the quarter was for brake systems sold by our company Master, an acquisition, with sales 20.7% higher and strong growth of exports to the U.S. market.

Since we're talking about road equipment in Auto Parts, we will dedicate slides 11 and 12 to talk about the FENATRAN exhibition or fair. As Mr. Daniel mentioned in the beginning of our transmission, we launched 20 new products during the fair or exhibition. As a basis for all the launches, we have 3 fundamental pillars: weight reduction in products, an increase in availability and a reduction in total cost of ownership. These are the 3 pillars of innovations. These and continuing with the fundamental concepts of safety and sustainability. For Randon, innovation is always linked to the environment, trying to reduce the impact on our environment and giving benefits to the whole chain: Suppliers, clients and society. Within the most relevant launches that have this concern, we can mention the e-Sys auxiliary electrical axle to be used as road equipment. It can reduce the fuel consumption by 25% in trucks with also a reduction in CO2 emissions. Apart from this innovation, we also presented semitrailers that are lighter and auto parts with 35% more life cycle than the equivalent in the market, thus decreasing the generation of waste.

Going down to the next slide, we prepared special material with the 20 products launched by Randon at the FENATRAN exhibition. Videos can be seen via QR code or in social medias with the name Empresas Randon. Please watch these videos.

On Slide #13, we will talk about the shares in the stock market, RAPT4. At the end of September, RAPT4 share closed at BRL 9.59, an increase -- a rise of 53.2% in comparison with the end of September 2018. The company's market cap was BRL 3.1 billion at the end of the period. The average negotiation volume of the preferential shares was BRL 20.8 million in the first 9 months of 2019 in comparison with $16.1 million in the same period of 2018.

Now concerning the distribution of dividends and JCP. On August 9, the company paid interest on capital after 5 years without paying JCP. We're at $34.9 million or $0.10 per share.

Now going on to Slide 14, we'd like to show the company's financial situation. At the end of the first 9 months of the year, the company had, as a gross debt, BRL 2.9 billion, 18% in foreign currency and 82% in local currency. With a maturity of 2.9 years, the average cost of the debt is 7.2% a year in reais and 4.9% in foreign currency. The reduction in the cost is due to the lower interest rates both in Brazil and abroad. During this quarter, we highlight the improvement in NCG, in our working capital. The company was successful with some actions in the quarter to reduce the inventory accounts and clients. This has had a positive effect on leverage.

To talk more about leverage and about the consolidated net debt, I invite you to go to Slide #15. At the end of the first 9 months of the year, the consolidated net debt without the bank was BRL 779.9 million. The improvement in the working capital account mentioned in the previous slide, helped to reduce the net debt, which supported by a robust cash generation of the company, reduce operational leverage without the bank to 1.22x the consolidated EBITDA. In other words, in June 2019, it was 1.46x the consolidated EBITDA. Considering the consolidated numbers with the indicators of Banco Randon, the leverage was 1.66x the EBITDA of the last 12 months, and the net debt, BRL 1.1 billion. We have, as an objective, to maintain our leverage under control through a robust financial discipline. I'd like to close the presentation, but I remind you that in the webcast, you have available the full presentation with slides that explain in more detail the indicators mentioned. We're available for any clarifications. I thank you all for your attention, and we'd like to begin our Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question, Thiago Casseb, Crédit Suisse.

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Thiago Audi Casseb, Crédit Suisse AG, Research Division - Research Analyst [2]

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Two questions. First, this improvement, the improvement in orders portfolio since the end of the Q4 is due to agriculture? Or do you see a more consistent demand from OEMs in the industry?

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Esteban Mario Angeletti, Randon S.A. Implementos e Participações - Finance Manager & IR Manager [3]

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Concerning your question on orders, we have noticed, even during the exhibition, FENATRAN, a robust number of orders. In July, August, we had a drop. But before the exhibition in December, we saw a robust number of new orders coming. Most of these orders are due to agro business, due to the good harvest and a record harvest next year, that is expected. Industry is recovering and civil construction is -- has not recovered yet. We're waiting for civil construction to place new orders when infrastructure becomes stronger in the economy in the future.

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Thiago Audi Casseb, Crédit Suisse AG, Research Division - Research Analyst [4]

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Second question, on competition. You recovered a lot of market share in this quarter with the prices that seem healthy. How do you see this in new orders? Do you see competitors with more aggressive prices in the future or no?

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Esteban Mario Angeletti, Randon S.A. Implementos e Participações - Finance Manager & IR Manager [5]

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Yes. We -- looking at the year during Q1, we mentioned our limited production capacity. With this, some small competitors won some orders because they could deliver the product. Our market share dropped to 31%. And as we expanded our production capacity, we recovered this market share in Q2 and now in Q3, we have 36% capacity, 36% market share. What we noticed, other competitors also expanded their production capacity. And thus we have more limited capacity to raise prices. In Q2, we talked about stabilization of prices -- stable prices. Our competitors have followed the same prices. We didn't see larger discounts in none of them and our expectation, at least in the future, is to have stable prices as we see in Q3.

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Operator [6]

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The next question comes from Lucas Marquiori, BTG Pactual Bank.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [7]

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First, there was a lot of noise about the exhibition FENATRAN. I'd like to understand prices charged during the exhibition. I know there were launches, competitors. I know that you sold 2 months of production at the fair, at the exhibition. These orders have a good price. The prices were good. And the second question, some technical indicators. First, I like the disclaimer about the evolution of orders during the quarter. It began weak and then recovered. How is the situation per day to day, orders coming in per day, what is the situation and the production to date? You invested in surplus capacity to produce almost 130 implements per day. So how is production to date, to see production?

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Esteban Mario Angeletti, Randon S.A. Implementos e Participações - Finance Manager & IR Manager [8]

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Concerning the prices during the exhibition FENATRAN we did not change our price list. It is -- it was the same that we have before the exhibition FENATRAN, and our price list continues stable at the same level as during the exhibition. We decided not to be more aggressive to give discounts during the exhibition. We maintain the same price list we have in the market. Now concerning orders per day -- new orders per day, we saw a better peak during the exhibition, the period 1 week before the exhibition and a couple of weeks after the -- because some sales begin at the exhibition FENATRAN and then are concluded later. We noticed that during this quarter, during the last weeks, the entry of new orders is in excess of 100 units per day. With the current production, we have a capacity of 130 units per day. This capacity depends a lot on the mix being produced. So depending on what we are manufacturing in the production line, this can go down to 120 or even 100. Right now, we're producing 100, 105 units per day.

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Paulo Prignolato, Randon S.A. Implementos e Participações - Member of Executive Board [9]

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Lucas, it's important, your question about margin, Esteban mentioned that prices are stable. We are comfort because raw materials due to the good management, we're being able to maintain raw material prices under control. That's why the line price versus labor and supply shows stability in the margin.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [10]

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Thank you, Paulo. Now the orders in the exhibition, you have a backlog until when? Do you have a backlog until next year?

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Esteban Mario Angeletti, Randon S.A. Implementos e Participações - Finance Manager & IR Manager [11]

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Our objective at the exhibition and at the -- and by the end of the year is to close all the orders for production for the first quarter. We're very close to having orders for the first quarter of next year. We want to close the year with the first quarter of 2020 sold out.

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Operator [12]

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The next question is from Victor Mizusaki from Bradesco.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [13]

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Two questions. The first concerning Ferrari. How should this impact Master, the company Master, the acquisition? Are you looking at other acquisitions? Acquisitions, first question. And second, on Slide 16, you mentioned a positive outlook for Q4. At the same time, you talk about vacation for the company. So what can we expect in terms of trailer trucks, a drop because of these things? Or do you see production and sales growing?

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Daniel Raúl Randon, Randon S.A. Implementos e Participações - President Director [14]

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Thank you for participating. Hemerson will answer. He was closer to the project.

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Hemerson Fernando De Souza, Randon S.A. Implementos e Participações - Planning & IR Manager [15]

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Ferrari, an acquisition that we concluded on Monday, the purchase of the company. It's a small transaction and a company that has a small billing, BRL 10 million, BRL 12 million per year, with good results, an excellent return for us. More than this, we -- if we look at this, we're talking about 3% more revenue but the integration of the chain with aluminum is important for Mapfre to get new business. We must go back to manufacturing brake chambers, and we have a business volume projected for sale, especially in the export market that is pretty large. We can't give you details because we're still in negotiations. So although the transaction is small, it has adequate returns, good returns, but it can help us to leverage exports and also sales in the domestic market and after sales with good returns.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [16]

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So Hemerson, thinking of this acquisition and verticalization, can we understand it for Mapfre we will have faster growth?

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Hemerson Fernando De Souza, Randon S.A. Implementos e Participações - Planning & IR Manager [17]

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Yes, Mapfre has good businesses and also perspective to expand its business to a good window partnerships with our partner Meritor, and margins with the integration of the chain increase our competitiveness in price. So we have to recover part of this market, but it's a very positive effect for us. Just to supplement your first question, we have an agenda, and we have -- we're analyzing M&A opportunities. This is constant. There is nothing to announce. But opportunities are being analyzed, and they generate new business in the future. And when this happens, we will really inform the market.

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Daniel Raúl Randon, Randon S.A. Implementos e Participações - President Director [18]

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Victor, I would like to answer your question about Q4. Well, in Q4, we have traditionally the vacation period. This year, we will have vacation. And the reason is because we need this period to do preventive maintenance and avoid stopping during the rest of the year. And most of our clients and suppliers also have vacation periods. We would have a logistics problem if we didn't have vacation. When we look at the whole year, we have a seasonality in the first and fourth quarters because of vacation and the first and third -- the second and third are stronger. We believe this year, we will repeat this trend. When we compare the numbers of Q3 '19, it's natural to see a lower top line and consequently compressed margins due to fixed costs but nothing outside the tradition at Randon.

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Operator [19]

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The next question is from Gabriel Rezende from Bradesco BBI.

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Gabriel Rezende, Banco Bradesco BBI S.A., Research Division - Research Analyst [20]

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2 quick questions. Auto Parts, you said more competition in aftermarket sales. And the margins, did they continue in the -- on healthy levels? How do you see this trend? OEM -- will OEMs offset the competition in aftermarket? And concerning 36% market share of trailers, I'd like to understand, with the capacity you have today, do you believe the strong sales will continue?

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Esteban Mario Angeletti, Randon S.A. Implementos e Participações - Finance Manager & IR Manager [21]

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Now concerning Auto Parts margins, we mentioned in our call, Fras-le has had a more difficult year, lower margins than they traditionally have due to the aftermarket being more complex this year. The other Auto Parts have compensated part of this drop in Fras-le due to volume than price. So there is space to dilute the fixed costs, and we work to improve internal productivity. We will work on this with greater gains in productivity. Our vision for the time being, we have opportunity to have gains in efficiency internally and thus defend the margins and maybe stability and volumes, too. Now concerning the market share of equipment, our sales area has the mission to get to 40% market share. Today, it becomes more possible because we have the capacity for this. We got to 40% in 2018, and we did not maintain. Today, we believe we can handle the additional demand in the market with the effort of our sales department. We have to manage also the effect of the competition, but this is a possibility. If we don't get to 40%, we will get close to this.

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Operator [22]

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The next question is from Lucas Barbosa, Morgan Stanley.

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Lucas T. Barbosa, Morgan Stanley, Research Division - Research Associate [23]

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Congratulations for the results. My question is about the dynamics of the equipment area for 2020. We have seen stable, we see trends that show that it will be stable or small growth. You said that some competitors increased capacity and other players should also increase their capacity at the beginning of next year. So what can you tell us about prices next year?

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Esteban Mario Angeletti, Randon S.A. Implementos e Participações - Finance Manager & IR Manager [24]

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Lucas, thank you for the question. For the time being, in terms of volume next year, as you mentioned, each line, each line has stable volumes. We hope to close this way in 2019. In 2020, in terms of competition, we believe there will be concentration of the main players with the market performing well in 2019, and these 3 players having limited capacity, we see other smaller manufacturers increasing their share, and we see this in Q3. And the 3 main players are working, as the 3 main ones increase capacity, the others decreased their participation. With stability and with inflation under control, we don't see space to increase prices, but we don't see an aggressive competition either. In our minds for 2020, we will have volumes very close to the ones we had in 2019, and our mission will be to consolidate margins and price stability. With this, we must mention the issue of railway cars. Railway cars, we had a bad year, the demand was the worst since we began producing railway cars. And it depends on the renewal of the concessions. We hope that next year, the railway car market will have better results and will give incremental revenue to Randon. We believe we could have a volume of 2,000 railway cars, and we believe we can get to 30%, 40% market share in railway cars next year.

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Operator [25]

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We'd like to conclude the Q&A session. I'd like to pass the floor to Mr. Daniel Raul Randon for his final comments.

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Daniel Raúl Randon, Randon S.A. Implementos e Participações - President Director [26]

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Once again, I'd like to thank you all for participating. We are available for any clarification. Please get in touch with our Investor Relations area for clarifications. Thank you very much, and we will meet again in the next one.

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Operator [27]

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The conference call of Randon has concluded. We thank you for participating, and we wish you a good afternoon, and thank you for using Chorus Call.

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