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Edited Transcript of TUPY3.SA earnings conference call or presentation 12-Nov-19 2:00pm GMT

Q3 2019 Tupy SA Earnings Call

Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Tupy SA earnings conference call or presentation Tuesday, November 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fernando Cestar de Rizzo

Tupy S.A. - CEO & Member of the Board of Officers

* Thiago Fontoura Struminski

Tupy S.A. - CFO & VP of the Board of Officers

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Conference Call Participants

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* Catherine Kiselar

BB-Banco de Investimento S.A., Research Division - Analyst

* Eduardo Nishio

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Financial Sector Analyst

* Lucas Marquiori

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

* Marcelo Garaldi Motta

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and thank you for waiting. We'd like to welcome you to the conference call for earnings for Q3 2019 for Tupy. (Operator Instructions) This conference call is being recorded. The company would like to remind you that this event is also being transmitted simultaneously by the Internet via webcast at www.tupy.com.br/ri where you will find the slide presentation. The selection of the slides is controlled by you.

The company clarifies that any declarations made during this conference call concerning business perspectives, projections and operational goals, financial goals concerning the business of Tupy are forecast based on the expectations of management in relation to the future of the company. These expectations are highly dependent on the conditions of the domestic and international markets, the economic performance of the country and also the sector, subject to changes.

Here we have with us Mr. Fernando Cestari Rizzo, Chairman of the Company; and Mr. Thiago Struminski, Vice President of Finance, Administration and Controls.

Mr. Fernando, you may proceed.

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [2]

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Good morning. I thank you for your interest and also your presence. On Slide #3, I'd like to say that we're very happy to see quarter after quarter that the actions that we planned to have greater operational efficiency have been converted into results, and we can see this in the evolution of the many indicators. This is the fruit of the renewed, more dynamic management, thus improving processes from end-to-end, from sale, manufacture, going through engineering, purchasing and sales.

Our revenue grew 1.8% in relation to Q3 '18, in spite of the drop in the physical sale volume. Apart from a favorable exchange rate scenario, it is also due to our strict commercial strategy with better prices and an increase in the share on high value-added products such as CGI, which was from 13% to 22%, and the expansion of the machining operation from 19% to 26%.

Our objective is to continue making progress in these fronts, increasing our participation in the value chain of our clients. Gross margin reached 18.2% and increased 70 basis points in relation to Q3 '18 and Q2 '19, the best margin in the last 2 years. We believe that with the increase in our share in these products and the greater operational efficiency, we will reach even better margins.

We reached also the highest adjusted EBITDA and EBITDA of our history with margins of 15.4% and 14.1%, respectively. This growth is the result of the combination of 2 key factors for our operation: an effective commercial strategy and continuous improvement in processes, which gives us productivity gains. I'd like to stress that these margins do not reflect the total potential of our portfolio.

As I've said in the previous call, we're extracting more value from this portfolio with a new style of management. The innovation with new products from Mexico have improved, but they haven't reached the standards we believe are good. We were able to grow, although, we had a drop in volumes, and we have adapted ourselves in an agile way, preserving our margins from market fluctuations. Thus, we triggered our defense actions, a set of actions that were predefined, including flexibility in transfer -- transferring products from plant to plant, maximizing also the scale and many activities involving reduction in fixed costs that were previously planned.

I'm sure we're on the right track. We have many opportunities to increase margins due to a better mix in products, new contracts and operational efficiency gains. This increase in Mexico, which until recently, had higher margins than Brazil, had its profitability hurt. There was a lot of growth in the volume in some lines and this hurts economy of scale. Also ramp-up of very complex products and a learning curve.

Soon, we -- thus, we are working on these and certainly in the future, the results in Mexico will improve. To give you an example, the percentage of products made in CGI Mexico went from 8% to 20% in the last 2 years.

Finally, we increased significantly our operational cash generation, which reached BRL 155 million in the period, taking our net debt adjusted EBITDA ratio to 1.29x, showing the resilience of our business model and will allow us to make the necessary investments to capture the opportunity that will arise in the next few years.

Now to talk about the main indicators, I invite Mr. Thiago Struminski, our CFO.

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Thiago Fontoura Struminski, Tupy S.A. - CFO & VP of the Board of Officers [3]

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Thank you, Fernando. Slide 4, 147,000 tons, a drop of 4% in relation to Q3 '18, of the transportation infrastructure and agriculture volume, 26% was totally or partially machined; 22% produced in CGI.

On Slide 5, the revenue increased 2% at BRL 1,339 million. The factors that contribute with the product mix, revenue from services of engineering, exchange rate devaluation and the ability to pass on new costs to the prices.

In the domestic market, we saw a growth -- expected growth 12% due to the stability. It's important to say that the recovery of the domestic market is very important for the company. 63% of the revenue came from NAFTA. In this case, we have to say that in this region, we use many plants as hubs for exports, 20% South America and Central America; 12% Europe; 5% Asia, Africa and Oceana. In terms of application, 82% commercial and off-road vehicles; 13% passenger cars.

On Slide 6, we see the revenue for transportation, infrastructure and agriculture. In the domestic market, an increase in light vehicles, there was a phase-out of some products. This was already planned. And also there was a drop in indirect exports.

Slide #7. The revenue from the export market, had an impact due to phase-in and ramp-up of products and an increase in the share of high value-added products such as CGI and machine products. This gave us an increase of 3% in passenger cars; 5% increase in light commercial vehicles; 11% in medium and heavy vehicles; and a drop of 15% in off-roads and also sectors like oil and gas, agriculture and construction.

Slide 8 shows the sales of hydraulics, 5% of the revenue. Internal and export markets had a growth of 15% and 5%, respectively due to the increase in volume, price and exchange rates depreciation.

Going on to Slide #9. We see here CPV and operational expenses, CPV BRL 1.1 billion, 1% higher to that of Q3 '18, reaching a gross margin of 18.2%, a growth of 70 basis points. Also in this period, 5% drop in the cost of raw materials due to the price reduction in materials and also gains in efficiency. And in spite of the increase of CGI and machining that require higher value materials.

A growth of 10% in the expenses with labor, social benefits. We'd like to say that looking at the previous quarter, Q2, 2019, there was a 3% drop in this line due to actions to improve operations and reduction in overtime.

Operational expenses went up 8%. This variance is linked to greater expense with labor, freight and third-party services. When compared to the previous quarter, we see a drop of 4%.

Slide #10. Adjusted EBITDA reached BRL 207 million, highest amount, 5% increase in relation to Q3 '18 with a margin of 15.4%, a substantial increase in relation to Q2 '19, 80 basis points and due to initiatives -- internal initiatives, greater operational efficiency, new projects in Brazil and ramp-up of products in Mexico.

Now at the bottom of the slide, net profit shows BRL 59 million in comparison with BRL 89 million in Q2 '18 in -- this was affected by tax benefits due to the payment of interest on capital in 2018.

On Slide 11, we see the variances in the main working capital accounts, an increase of 7 days in the cash conversion cycle, higher inventory, $62 million, and an increase of 5 days. This increase is due to the transfer of production from Mexico to Brazil in order to preserve our margins.

On the next Slide #2 (sic) [Slide #12], we see the investments in assets intangible, $59 million. These investments during Q3 '19 represented 4.4% of the revenue and once again, they are lower than the depreciation and amortization of the period.

Slide #13 shows cash -- shows operational cash, BRL 155 million, especially due to profit before taxes and also lower variance in working capital in comparison with the previous quarter.

Slide 14, we show net debt BRL 899 million, corresponding to 1.29x adjusted EBITDA in the last 12 months. Our obligations in foreign currency represent 98%, which is in line with our business. And most of this debt in foreign currency is represented by our bond that will become mature only in 2024.

Now, I'd like to pass the floor to Fernando. He will talk -- make his final comments.

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [4]

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Thank you, Thiago. On Slide 16, I'd like to stress, after beginning of the year with many nonrecurring events, we have increased a lot our margins, in spite of lower volumes at the beginning of very complex operations such as filling -- such as machining, a large-scale machine with components, CGI in Mexico. This performance was based on the review of our organizational structure that began last year to bring more agility to the decision-making process and concentrating efforts on critical processes for our business.

We hired new executives for key positions with experience in management of global companies, which together with our internal talent, professionals with a lot of experience, knowledge of the market and technical capacity.

In relation to operations, we increased a lot operational efficiency of the Joinville plant with many actions related to reduction in materials consumption, optimization of the ovens and also metal alloys and also lead scrap this -- and less absenteeism. This will be extended to other plants. We know that Mexico has higher margins than Brazil, but they are still in a ramp-up phase, and they are working on the ramp-up. We're working on many fronts within a growth strategy with profitability.

Apart from the perspective of new contracts in 2020, we continue evaluating strategic acquisitions, which will bring efficiency gains and access to new products and geographies and also the sharing of best practices for research and development in operations. The search for flexibility in the production process continues, adapting thus the company for scenarios with drops in volume and a mitigating the impact on margins.

Slide 17. We'd like to stress that this fluctuation is due to a different type of cycle, depending on each market segment and region. In other words, the diversification that is present in our business model is based on solid pillars and sectors that will continue for decades -- clients that will continue for decades and also due to the increase with global demand of the population for food, infrastructure, transportation and energy. We continue to benefit with the recovery of Brazilian economy.

Now, in relation to export markets, we see solid signs in the U.S. economy and in all the indicators, employment and consumption. We have had lower volumes due to high level of heavy inventory of heavy vehicles. So we have also seen a drop in exports to the main economies in Europe with delayed investments in Europe. These effects will be compensated by the product mix with more added value, an increase in the share of machines, services and complex alloys and CGI and engineering services as well as gains in efficiency, flexibility and things that are being implemented more rapidly if volumes drop more. This would prepare the company for a new cycle of growth. It's also an opportunity to reduce our cost with overtime, maintenance, energy with a better usage.

Now Slide 18. I'd like to stress that our business model is based on resilience, diversification and a great percentage of variable cost, mitigating the impact of drops in demand. With the same economic effects that have an impact on our volumes, we also have the depreciation of the local currency, which helped our revenue and -- because most of our products are sold in strong currency. We have a dynamic operational model. We want to respond in an agile way if we have further reduction in volumes. This -- we are always working on this with our actions to defend ourselves. There, we transferred production, as an example, from Mexico to Brazil in order to have better efficiency in the use of appliance in mitigating the effect of volume -- lower volumes in our margins.

Well, the results that we show today have been built in the last 2 years. They are the result of our strategic decisions. In the first 9 months of 2019 in comparison with 2017, our revenue grew 47% and absolute EBITDA, 41%. We count on a smaller base of assets, less plants, due to a rigid investment discipline. Also, we stopped some plants such as in Mauá, end of sale of assets. We are -- increased the unit value of our product, thus generating more value for the shareholders. All of this is the result of the management aimed at results, which generates value in all the activities under our control.

The operations in Mexico still have a great opportunity for the company in 2020. We increased significantly the margins after acquisition in 2012, which remained higher than in Brazil, the margins, until recently when we had a great increase in volume, which thus hurt our economy of scale due to very complex products with less efficiency, but with a great potential in the long term.

We continue adopting a methodology that is very strict in allocating capital with investments that are lower than depreciation. We continue investing in safety and also projects to increase efficiency. We increased cash generation, which allows this comfortable situation. Our products are known for their quality and technological innovation, and this is linked to investments made in R&D as well as in partnerships that we developed with universities in Brazil and abroad. Now, we're searching to increase our -- the look at our production system, which has continuous improvement in processes and we are getting closer to the ecosystem of startups, aiming at improving our practices, using Industry 4.0. Among the initiatives, I'd say, we are working to have -- to use mathematical modeling -- advanced mathematical modeling to choose materials and analytics apart from many automation traceability and other initiatives.

To conclude, the organizational culture of Tupy is based on our values, and this has sustained the delivery of solid results. We are able to preserve our concern with people, safety and the environment, even with a market that is a more and more dynamic, but we are prepared to adapt with always having focus on generating value for our clients, shareholders, employees and community.

I thank you for your attention. Now we will begin the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mrs. Catherine from Banco Brasil.

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Catherine Kiselar, BB-Banco de Investimento S.A., Research Division - Analyst [2]

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Congratulations. Two questions. The first on off-road segment. We've seen a drop in revenue and volumes in off-road, and it is not picking up. When do you believe this recovery -- or this sector will recover, especially in the U.S.?

The second question, dividends. What is the strategy with this strategy of value-added? Can we see a change in the dividend policy?

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [3]

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Well, Fernando. The answer for the off-road market. In fact, we've seen a drop in the global CapEx, especially due to the tension between U.S. and China, less investments in Europe. So we see a reduction of 1.2 in global CapEx. In 2020 on a global basis, we see the construction market with a drop of 7% global market for next year.

The dividends, concerning dividends. In the last 12 months, we distributed to our shareholders BRL 213 million, higher than 7%. We are evaluating the opportunity to distribute additional dividends in the fourth quarter. Our leverage is 1.29, very comfortable. And if there are no projects involving acquisition, so we have the opportunity to increase the dividends.

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Operator [4]

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Our next question, Mr. Marcelo Motta, JPMorgan.

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Marcelo Garaldi Motta, JP Morgan Chase & Co, Research Division - Research Analyst [5]

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Two quick questions. Can you comment on the operations in Mexico? As you said, the margins have potential to improve. I'd like to hear about the timing of this and anything for 2020, '21?

And M&A, is there anything strategic, any opportunities, new products, new markets? So how are the opportunities in M&A if it's an initial evaluation, products?

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [6]

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Good morning, Marcelo. First, operations in Mexico. Evidently we built the strategy to accelerate the product exchange. So we are renewing products. We are producing more sophisticated products that have a higher unit value. And this discussion about the margin, we are attaching more value -- more revenue per hour production from our plants when we use complex alloys and machining. So even -- I made a comparison with Q2 '17, if you see -- sorry, 9 months of 2017. Our margin was a little lower in 2019, but we have 41% more EBITDA in the same period. So that's our surge. We understand, it's also a cultural issue of the plants, the training of the employees to work with more complex products. We have more scrap. We have more -- and also the machining plants where we have problems in the first semester. Now we are better, but there is a lot of -- to capture. So we believe that in 2020, we will have a better operation.

We also suffered due to economy of scale. We have 2 plants in Mexico. One is aimed at light commercial vehicle, the pickups, which is still strong. There is a forecast to continue strong the volumes. So since you have a product linked to certain machines, we were working even on Sundays on some machines. So we were able to reduce this. We're working on normal work hours. But in the other plant, dedicated to off-road, demand dropped, and we could -- we didn't have work even for weekdays. So we are moving production from one plant to another. We launched also new products. We brought more products from Mexico to Brazil because of the favorable exchange rate. So we're attracting more products and we want to keep the plants in Brazil at full speed, maybe reduce the volume in Mexico. And here, I can have a better result in 2020.

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Thiago Fontoura Struminski, Tupy S.A. - CFO & VP of the Board of Officers [7]

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Concerning M&A, our focus -- Thiago speaking, is on structural foundry components. We're looking at complex geometry parts, especially heavy applications. So depending on the asset, there are markets where we are not present that could supplement our portfolio. So we're looking at this all the time and it makes sense for us in terms of strategy in the medium-term.

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Operator [8]

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Our next question comes from Mr. [Breno Freitas].

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Unidentified Analyst, [9]

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I'd like to know what you see for next year concerning Europe. You are seeing a drop in Europe, especially countries like Germany, Africa, and Asia also, less activity in these regions.

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [10]

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Well, we see Europe, we see less volume in trucks. We are strong also in products for Eastern Europe. Going back to the previous question, we study where the products are better to produce and we continue transferring products between Brazil and Mexico and so forth. Also between plants in Mexico.

Concerning other markets, we deliver products to Africa and Asia. Asia is strong. We don't see great changes for Asia. We see Brazil. We see growth in Brazil. The truck market should react. Machines -- the machine market should react. Light commercial vehicles, we are launching new products now. We're increasing our share in programs where we were present. Optimizing products in other vehicles, you see a strong light commercial vehicle market. So we see a strong base and we have a small share in Class 8. We take care of demands of a U.S. OEM that uses -- that used their engines and engines from other manufacturers. We believe they will privilege the use of their engines.

So essentially, the off-road segment is going through a fluctuation, long production chains. We see a reduction in CapEx, adjustments in the whole chain and initially, we have a greater effect and then adjustments. Still, when we talk about the plans and economy of scale, adjustments of our operations and efficiency gains that we will have by launching new products. Since the end of 2018, we continue launching new products until the end of this year, a new machining line. All of this should bring us interesting results next year.

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Operator [11]

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Our next question comes from Mr. [Peter Rogers].

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Unidentified Analyst, [12]

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Congratulations for the results. 2 questions -- 3. Dividends. Is there an inventory of JCP for the company to use? Dividends in the form of JCP? Or does it depend on the results of Q4?

With the flexibility of the company, and a drop in off-road abroad, can the company increase the production locally for heavy trucks? And the off-road line in Mexico adapt exporting to Brazil, so Brazil would be better supplied by local operations for trucks and Mexico would export to Brazil, is that possible? Within this question, we see Euro 6 to be implemented in 2023 in Brazil. The OEMs will have to produce new engines or will you use catalysts? And are you developing, together with the OEMs, these new engines?

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [13]

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Good morning. I will begin with your second question. First on flexibility. Yes, there is. We are prepared to be very strong in heavy vehicles in Brazil. And this growth is in our results this year, and it will continue. This segment will grow more in the next few years.

Fleet owners are better now at calculations, and they have to operate with larger trucks, heavier trucks. We always have this belief, and we positioned ourselves in this market because it is the only market in the world where you sell more medium-size trucks than heavy trucks, Brazil. So you have to -- we have to sell more heavy trucks in Brazil because of the great distances. We're prepared for this.

With the off-road plant in Mexico, we're creating flexibility for products for Class 8 U.S. for the current generation and the new generations in 2023, '24 in the U.S. So we have products, some already approved in the U.S. as the Brazilian market reacts. If there is growth, we have this lever to transfer.

We have a scenario with many alternatives available to us to explore any changes in the market. The Brazilian market, we believe, will grow, yes. This is what we have heard from our clients.

Now, concerning Euro 6 in Brazil, yes, there are OEMs that will convert current engines, current platforms, to Euro 6 and some are developing new generations to launch in Brazil. We are working with them in this development in the same platforms and some foreigners that import. And we might build these engines in Brazil. Most of our products are here. We export a lot. So it will be a reallocation, delivering products that we export currently also in Brazil.

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Thiago Fontoura Struminski, Tupy S.A. - CFO & VP of the Board of Officers [14]

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Thiago, concerning JCP, we used everything we had in the beginning of the year. So we have close to BRL 100 million on an annual basis. So there is no more space this year for more JCP.

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Unidentified Analyst, [15]

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Within the first question, truck markets -- heavy truck markets, I heard that Mercedes-Benz, they have everything sold for 2020 and they are your client. Is it true that they have sold their production for next year?

We've, seen in the local OEMs, data from the association that the domestic market is growing, but exports dropped because of Argentina and other markets. Can the OEMs grow? Or are they close to their limit in terms of capacity? We believe they will have more shifts. Is it true?

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [16]

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Mercedes-Benz, yesterday made an announcement that this is not true. The Chairman said this in Joinville. They have many vendors here. They are the largest client of Tupy. We are one of the largest suppliers of Mercedes-Benz. And the fact is, Mercedes-Benz launched a new vehicle. It has -- it is selling very well, many orders. They have a strong demand for this vehicle, but it is not true what was said, as you mentioned that they have sold everything for next year. We make many products for this vehicle, engine blocks and other components that we developed, and we machine for Mercedes. We see a favorable situation. The market will grow for heavy trucks in Brazil and maybe due to investments in infrastructure, oil and gas in Brazil and agriculture should grow and with this, this will bring a good portfolio for Mercedes-Benz. Also, suspension axle that we supply for this truck, but they are -- haven't sold -- they are not sold out for next year. But they have a good portfolio of orders. And yes, we have great expectations with Mercedes-Benz next year in Brazil.

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Operator [17]

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Our next question comes from Mr. Lucas Marquiori, BTG Pactual.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [18]

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Two questions. Please talk about the adjustment between plants. We see this in Joinville. Can you do the same in Mexico as you did in Joinville plant? There, you have a peak, now a small drop. And the efficiencies in Mexico, they had an efficiency of 60%. And today, they're producing more products. You -- I'd like to know, do you intend to recover the activities in Mexico, adjust the invested capital to extract more ROIC from that operation?

Second, I'm looking at the expenses by segment. So your exposure for trucks, I can't see this. How much is for small trucks for urban distribution? Maybe -- we know that there might be a threat to electric bus -- electric trucks for distribution in urban centers. So how much does this represent in your revenue here and abroad?

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [19]

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Thank you for the questions. First, Mexico, we're not planning to close any plants, as we did in Brazil, we are not planning to close plants, but we have moved products around to avoid stopping lines. We have many alternative that we're using. We're learning in this process that what we did in Mauá taught us a lot, and we continue moving products around. This has brought extraordinary results. We have a cyclic industry, our acquisitions involve finding more plants and what we are doing now is what we want to do on a greater scale. We understand we can generate a lot of efficiency in an industry that's suffered due to migration to aluminum, and we will have good opportunities for acquisitions and as we see.

But yes, Mexico, we have complex products, and we were not able to improve the efficiency, but we didn't lose. We have a high-value products, and we are concentrating this production in some assets and creating flexibility, as I said in the beginning, because we have a problem with economy of scale. Some markets grew more than we had expected, and we want to find alternatives for the clients. So we took measures to -- by moving production between plants. So we see a drop in operating, the other markets, no great changes in some sectors growth, and we believe we will produce volume in a more comfortable situation than in 2019.

When we look at Brazil, we produced more in Brazil this year than in 2017 with 1 plant less. This is what we want. In 2015, '16, we had a drop in the global market, Brazilian market. We operated with 8 lines for blocks and heads. Now we produce much more with less plants. That's the mechanism and we're taking this to all the plants.

Concerning the market that you mentioned, Mercedes-Benz brings some engines from Germany. Volkswagen bring Cummins engines from China. I don't believe we will have a strong growth of electric trucks. We have a product that we supply to Ford, an engine that they use in pickup trucks and also in vans. So other sectors, these engines are also made in-house. The leaders are IVECO in Europe, Mercedes-Benz and in the U.S. market, it is small. The import engines from Europe too. So that's what we see, pickup trucks, a small possibility of electric because they are different from trucks [with] delivery. So we see a resilience in this model. We launched new products this year for the 3 OEMs in the U.S. that are leaders in pickups, and we see continue seeing these products continue for many years with growth in the next 10, 15 years as the U.S. market grows.

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Operator [20]

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Ladies and gentlemen, the next question, Eduardo Nishio, Banco Plural.

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Eduardo Nishio, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Financial Sector Analyst [21]

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We had a drop in volume, drop in revenue, but good margin. I'd like to know how is your initiative of flexibility in production? In this quarter, it happened between regions, Brazil and Mexico, and you talk about initiatives to have more flexibility in Mexico in the plants for off-road. Do we have any bottleneck? So if the volumes continue low, how long will you be able to maintain higher margins?

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [22]

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The bottleneck of these operations is the approval time by clients. I told you that we have defense actions. We have predefined actions and we are ready for these drops. We have many products developed between Brazil and Mexico and between the 2 plants in Mexico and the plant in Joinville. So the objective is to maintain some lower-cost products because we use a logic that makes sense.

Mexico has other challenges too. We have some raw materials that are more expensive than in Brazil. For example, the sand comes from the U.S. So every time, I produce above certain limit, then I have a problem in economy of scale. We begin to have work on Sundays. We spent more in maintenance with less efficiency. So this combination, we're always fighting, creating alternatives. So it's a very advanced process in Tupy.

Of course, there are limits in volume that we can shift, but it's a well-known process. And what we plan today, we see the assets of the company, we had lower costs. We will -- they will continue in 3 shifts. And the more expensive ones, 1 shift or 2 shifts. But as we gain efficiency, we turn off machines. That's the challenge.

Lucas made a comment, revenue 60% in Mexico, here 80%, which means that if Mexico becomes like Brazil, we gain capacity. That's the challenge. There is a maintenance culture to be improved, the operation of the plant. They have better margins, but they produce simple products. When we look at the indicators, they even improved. The products now are more complex and that's the idea. This is what we'll guarantee the company in the next 15, 20 years, more moderate engines.

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Operator [23]

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(Operator Instructions) We'd like to conclude the Q&A session. Now I'd like to pass the floor to Mr. Fernando for his final comments.

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Fernando Cestar de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [24]

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Thank you. Well, once again, I thank you all for participating in our conference call and your trust as investors and analysts in our company. I'd like to thank publicly our clients for the trust and partnership of many years and the opportunity to develop together solutions that will be used in the next decades.

Finally, I'd like to thank the team at Tupy for the excellent work that was done. We have a strong commitment, my part and my team, to generate value to you, and we're available with our team to clarify any further points. Thank you, and a good day.

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Operator [25]

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The conference call for Tupy is concluded. Thank you, and we wish you a good day.

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