Armac Locação, Logística e Serviços S.A. (ARML3) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, everyone, to Armac's video conference to discuss results relative to Q4 2024. [Operator Instructions] This video conference is being recorded and will be made available at the company's website at ri.armac.com.br, where the respective materials can also be found. [Operator Instructions] Before moving on, I'd like to state that forward-looking statements made during the company's presentation concerning the business' long-term outlook, operating and financial targets are based on beliefs and assumptions on the part of the company's management and also on information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events, which, therefore, depend on circumstances that may or may not materialize. Investors should bear in mind that overall economic conditions, industry conditions and other operating factors might affect the company's future results and thus lead to numbers that will differ substantially from those expressed in these forward-looking statements. Joining us today, we have Mr. Fernando Aragao, the company's CEO; and Marcos Pinheiro, CFO and IRO for Armac. I'd like to turn the conference over to Mr. Aragao for his opening remarks. Please, Mr. Aragao, you may carry on. You have the floor, sir.

Good morning, everyone, and thank you for joining us today at our results conference for Q4 2024. First off, I'd like to thank all employees and clients for yet another year of collective work and for the trust you have placed in our company. 2024 was a year of growth for the company with the addition of over 1,000 units in our fleet and a growth in revenue of more than 30%. This growth was focused on services, long-term services contract vis-a-vis simple rental contracts, which they made up only 22% of our revenues. As discussed in previous opportunities, the value of long-term contracts is what gives us resilience where we have more uncertain economic environments. Such resilience proved to be useful because we closed the year at a very favorable competitive position vis-a-vis the financial difficulties other yellow line rental companies are now facing. At the same time, the complexity to execute services contracts across the country and the inherent pressures on the relationship across large companies have exerted some pressure on our margin and our working capital consumption. In summary, we are satisfied with our resilience, but not that satisfied with our profitability levels. Because of that, we started 2025 focused on recover the EBITDA margin. We understand that our business model is able to operate with margins close to 50%, and that's what we're going to be going for in 2025. We are now executing a robust plan to reduce costs, increase prices and demobilization of low-return contracts. This plan might bring some volatility in the short term because of the costs of exiting contracts and a time to turn over the fleet, but we are sure that, that's the best way in the long run for the company. We will serve to maintain the company resilient, but enjoying better margins and lower complexity of operations. Technical adjustments expected for this year are very small when considered against the company's growth path. We reinforce our optimism with the strategy and with the opportunities that the low penetration and high fragmentation of this market offers us. Our business model focused on maintenance sustains us as the lowest cost providers in the sector and our competitive advantages only grow. We continue to consolidate the sector through providing safe, efficient services to our clients. With that, I now turn the floor over to our CFO, Marcos Pinheiro, for him to talk about our numbers for 2024. Thank you once again for joining us today.

Thank you, Fernando. Good morning, everyone. Moving on to the next slide. We saw our fleet and investment numbers. We closed the year 2024 with over 11,200 units in our fleet, a growth of 10% when compared to the previous year. Our fleet closed the year 2024 with an average age of 2.5 years, and we estimate the acquisition value is now above BRL 4 million. In 2024, we invested BRL 706 million, out of which BRL 614 million refer to support vehicles, machines and equipment. The remaining BRL 65 million were allocated to the acquisition of Terram. Moving on to the next slide, I show you a new chart. Here, you will be able to see the evolution of our utilization rate, rental rate and also productivity of all of our assets. We closed 2024 with a utilization rate on average of 77%, up 1% from the previous year 2023. At the same time, we were able to achieve a positive result in our rental rate. In 2024, the rental rate for [ rental mark ] was 6.4% compared to 6% in 2023. Consequently, productivity for '24 grew by 4.5% and reached 61%, the largest level since 2021. Moving on to the next slide, revenues. In 2024, our gross margin reached BRL 1.9 billion, consolidating a growth of 30% vis-a-vis 2023. Our revenue mix, including continuous operations and simple rental contracts has changed a lot throughout our history. Our continuous operations closed the year 2024, accounting for about 76% of our total revenues. We have received this revenue number with a lot of pride, and we thank our 1,000-plus clients who chose to bring their business to us. We'd like also to celebrate the high renewal rates in our continuous operations, which has reached levels of above 97%, and that has been the case since 2021. On the next slide, EBITDA has surpassed the level of BRL 680 million, growing 14% year-on-year. EBITDA margin was 44%, showing a drop of 4% which can be explained by the revenue mix and a lower share of simple rental contracts. And the net income was BRL 350 million in 2024, a growth of 13% vis-a-vis the BRL 210 million achieved in 2023. Additionally, our managerial cash flow reached BRL 450 million, showing a drop of 8% when compared to 2023, mainly driven by, once again, the revenue mix with a higher share of continuous operation contracts and the somewhat atypical behavior of some clients who in December, perhaps because they were concerned with the leverage levels, pushed part of our payments to early 2025. Moving on to the next slide, profitability. We show our ROIC spread. We closed the year with a ROIC of 18.5% with a debt cost of 8.5%. We closed 2024 with a net debt of BRL 1.7 billion and net debt-to-EBITDA ratio around 2.36x our EBITDA for the previous 12 months. We manage a company where operations generate more than BRL 450 million in cash every year. And our first amortization in relevant terms of our debt cycle will only happen in 2028. Additionally, I'd like to leave 3 final messages about our outlook for 2025. Number one, this year will be a year where we will prioritize leverage control. We will demand higher returns for new capital allocations, and we'll operate our fleet with a utilization rate, which would be higher than the recent past. Number two, we will act on managing prices in a more close way. And number three, we are very aware that our choices. In other words, leverage control and active pricing management can bring some impact on our short-term revenue. But we are confident that those decisions are key to maximize value creation to our shareholders in the long term and position the company to continue to grow and consolidate the market in the years to come. With this slide, I wrap up my presentation. We can now move on to the Q&A session. Thank you, everyone, once again.

[Operator Instructions] Let's now move on to our first question from Andre Ferreira, sell-side analyst from Bradesco.

I have 2 questions actually. Number one, I'd like to perhaps better understand how you see competition in the long-term contracts? And also, if you could please comment on the targets for the new managers, the first experiences you've had under this new management model.

Thank you for your questions. Well, in terms of competition, to your first point, it is actually an economic environment, which is more ripe with uncertainty, especially for smaller companies because of interest rates and also because of inflation pressures that we see going forward. Funding for those competitors for the past 12 months has become much more challenging than before. And those companies that have a revenue base, which is quite focused or concentrated on short-term contracts, they are, of course, more exposed to the scenario. So any revenue fluctuation as we saw happen late in the year, early in the year because of high rainfall levels, those companies have a liquidity buffer, which is much smaller than other larger companies have. So what we've seen out there in the market in terms of competition is a favorable scenario for us for Armac because we are in a good position. Most of our revenue has already been contracted. And so we hope to benefit from that scenario and to grow in the short-term rental arm, servicing clients that might not be served now by other companies which are now facing some difficulties. So that's the competitive environment that we see in the short term. Those difficulties are more present for those competitors who had a higher concentration on short-term contracts. But even those who have longer time contracts are also facing difficulties now. They are sort of stepping back as is. As for our managers, our new incentive system and model that we implemented last year, to your second point, we are quite optimistic with the results. We will reap good benefits in the future in the short term. The company is fragmented in different business units. Each business unit has a different or its own P&L and managers are stimulated in a very simple manner, actually. They have to meet their budgets and deliver results. of course, having satisfied clients and with no safety issues. We've seen a very good reception on their part with this new business model. So without a doubt, that's something that will bring very nice fruits for the company in the years to come. Thank you for your questions.

Our next question comes from Fernando [indiscernible], sell-side analyst from BTG.

2 questions on my side. Number one, I'd like to explore the rationale behind the used vehicles arm. If you could comment on how many stores you're planning to open in 2025 for used vehicles or used units? Do you have any target for revenue for used units in comparison with the total revenue? And if you could also comment, you are focused now in rightsizing the structure. Why open new stores then in this context? I would like to hear from you the rationale behind that. And number two, if you could talk to us about organic growth. How do you see 2025 in terms of organic growth, given this slow demand or slowdown in demand scenario, should we expect a reduction in CapEx year-on-year? That's my 2 questions.

Fernando, thank you for your questions. I'll address the first one and turn it over to Marcos to comment on the CapEx issue we have raised. So as for used units, since our IPO, we have started to develop that plan to explore used units to be able to work in categories where that is necessary. The idea was to add an option to the company. If the company needs to recycle or downsize, the company should be able to do that on its own. We have hundreds of different units, different brands, different mixes, different models, different sizes. So with so many different units to be able to serve clients across the board, it's only natural that there will be moments where you need to adjust the size of your fleet, reduce here, increase there, free up capital here to increase investments there, that kind of dynamics or even decommission, we need to have the option to sell part of their assets if the company believes it will take some time or longer than we expect to have a return on that. We see that as a strength of our business model, something we did not have back at the IPO. But after the IPO, the scale of the company, which is unique in the sector has allowed us to create that. So we've been working on it for some years now, planning, studying to try and find the right model to expand towards that business model. I have total confidence that it will become a huge competitive advantage for the company in the future. In other words, the ability to move or turn around or turn the fleet around. In the first year, we may have some profitability challenges, but I see those challenges at short-term challenges as a tactical one-off adjustment. We did a 30-year trajectory and 10 years of fast growth. at this moment where we increase profitability or increase prices, that's one-off. That's temporary. That in no way will lead us to set aside long-term projects that will provide returns for the next 10, 20, 30 years. That's how I see it. It's a very important new structure we are now developing. In terms of number of stores, the size of the structure, those are very sensitive strategic terms, I cannot give you a number now. But as we move forward along those lines, we'll make sure the market is informed. To talk about our CapEx, I'll ask Marcos to take over, please. Marcos, over to you.

Fernando, thank you for your question. To your question about CapEx, as Fernando said, 2025 is a year where we will tread with caution. We are focused on rightsizing, creating value. And under that light, it's important to make clear that today, we have a base case of a CapEx for the company, which is marginally positive. What does that mean? We do maintenance, of course, and that, of course, entails investments of about BRL 900 million a year to maintain the fleet operational. In addition, we have an expectation of recycling the capital, which is now allocated. In other words, sell part of the fleet or reallocate it to other operations that might bring more adequate returns vis-a-vis our current cost of capital. Without guiding you a formal guidance, as Fernando said, it is a very sensitive topic and the scenario is still materializing. But it's reasonable for us to imagine that the volume of sales of assets we will have our used units should be around 1.5 to 2x the pace we saw last year. That's a bigger information I can give you now. In summary, for 2025, CapEx -- the net CapEx should be marginally positive, okay?

Next question from Lucas Esteves, sell-side analyst from Santander.

I have a couple of topics I'd like to address. Number one, what can we expect in terms of margin stability? Number two, you have been working significantly on used units. I'd like to understand a bit the profitability you're expecting sound desirable. How can you balance the increase in fixed costs and higher difficulties in selling those assets? Would that be an uncomfortable situation going forward? And also, if you could talk about the nonrecurring adjustments that you mentioned in the release. Does that affect your policy on the depreciation of assets going forward?

Lucas, thank you for your questions. I'll start from your last comment, the residual value. I think it's important to say that what we -- the adjustments we made in Q4 was related to spare parts that we have in the company's assets. I'm talking about parts, replacement parts or implements as we call it. The review of that residual amount took place because we understood that we should we should address each asset based on the expectation of return for each asset. So it didn't make too much sense to look at a front loader, which are submitted to intense work, subject to corrosion, useful life cycle of 5 years as we had before. So we did a deep dive in those areas. Just those parts I mentioned, if I could classify them as parts, they account for less than 5% of the company's asset base, but it was an adjustment of life cycle for those parts. It's important to have to that clear look across the board and have a number which reflects reality. I do not expect us to have other adjustments to be made going forward in terms of life cycle for parts or spare parts, but that's an estimate that we constantly go back to and revisit whenever we feel there is something happening. It is our duty to communicate that to the market, to you guys so that numbers do reflect correctly our accounting. As to your second point about the drop in margins for used units, the question was if there was some kind of pressure because of the sales prices scenario and so on. I think the simplest form to answer your question is that we have been selling or we sold in Q4 units, which are newer than the ones we were selling before. So they were less depreciated and their residual amounts as they accounted for in the company's books is higher than for machines, which are older. From the point of view of market prices, we have not felt any negative pressure so far. Our stores are located in a very efficient manner, geographically speaking, for used units. And we test our pricing models across the board. So no -- nothing that would concern us came up in terms of executing our plan of having those used units stores as an integral part of our business model. And your first question was about the consortiums, right? The pool systems for purchase. That's a different kettle of fish when compared to our day-to-day business. They are not very representative in our business, right, to change the needle far from it. I talked to Fernando a lot about that, and we have been looking at this segment as a learning area. We need to try to understand how that demand is being formed vis-a-vis our spot contracts. Having said that, I cannot imagine that we will have very positive upsides in that segment. I cannot give you a feeling or sentiment if our margins will deteriorate significantly. We are partners of 2 consortium operators for earthmoving equipment. We are the main suppliers of equipment and we are kind of exclusive suppliers for those consortia groups. So our objective here is to very transparently communicate that. We are exploring, testing the waters, but we do need to see a return. And today, I cannot give you a concrete number and say we will create a new business unit to work on that. That's not the reality today, okay? I hope I have answered your questions.

Our next question comes from Gabriel Rezende, sell-side analyst from Itau.

I have a question about the rainfall increase late in the year. Those provisions for the contracts, how do they anticipate returns of equipment? I understand you had that in the past. But how does that dynamic work in terms of returning and replacing machines? I'd like to understand if there are penalties involved, any provisions contemplating penalties, including those contracts for early returns. Also, Fernando mentioned the competition before, the competition is facing difficulties within the current context. I'd like to understand if you could tell us about the ROIC spread for the competition, given that Armac reached 10 percentage points, which really draws our attention. I'd like to understand where do you see the competition in terms of ROIC spread? And could you perhaps be even more aggressive in terms of pricing, considering this gap, which seems to be large and increasing when compared to the competition?

Thank you, Gabriel. The contracts, which are more sensitive to rainfall levels in 2025, especially in the Midwest and in the Minas Gerais, rainfall levels, which were twice as large as last year. So the impact was significant for short-term rentals. And those are contracts where clients are looking for that flexibility where they could -- where they can decommission units if their construction work or whatever work is halted. If they are willing to commit to a fixed expense with the unit, they would, of course, buy the equipment, right? So rentals for infrastructure, which are short-term rentals are very sensitive to those factors. And contracts have no penalty provision for that early decommissioning. That's why we call it -- we call them flexible short-term contracts. So when you have a context where you have 2-digit interest rates, to build a company for equipment based only on those contracts without a more long-lasting revenue basis. And that's what our competition is facing now. If it starts running a lot above the average historic levels, works, civil construction, civil works will simply stop and return the equipment before that is common, that happens. There are no penalties provisioned, and that's how the market operates because that's what clients are looking for, a certain level of flexibility with no penalties included. We were highly impacted. As you could see, our makeup of our revenue, only 23% of those contracts are accounted for. Those are high-margin contracts. So there is an impact which is seasonal, but is there. And oftentimes, the competition cannot absorb that. It's a very sudden drop in revenue. It's difficult to absorb. And with a 2-digit cost of capital, of course, that results in a big problem. A contributing factor for us to be in a better position is that we have been regionally diversified. When we have high rainfalls in the Southeastern part of the country, the same is not true for the Northeastern part of the country. So we are able to move our fleet across the country. That sets us apart. That's something we see in the U.S., in Europe. That's something we're doing here in Brazil, not only having stores as hubs, but also our workshops as hubs to minimize the drop in revenues when we have those seasonal changes in the weather. As for our returns, we understand that those are satisfactory returns for you to build an equipment business, which is very capital intensive in a country like Brazil, where volatility is also always present. I do not see Armac as a price -- as a company that will bring prices down. No, for you to absorb all the risks linked to investing in fixed assets, you need to be very conservative in terms of estimating your returns, okay? Thank you, Gabriel.

If I could have a follow-up question, please. We noticed a yield level, which was kind of flat year-on-year, especially vis-a-vis your productivity levels going up. Should we expect a similar yield level for the coming quarters? Is there an issue of mix or comparing apples-to-apples as it were?

So yield levels. Okay. The mix issue, of course, impacts when you look at our yield, Marcos has been in the company for a few months, but he's working hard to provide more transparency to the market in terms of variables behind the company's results to help the market understand and model our results going forward. So throughout time, as we go forward, we hope to be able to give you a better breakdown so that you can better understand the company's yield policies they become clearer. What we hope is a price dynamics, which will become more favorable in the short-term rental services, considering healthy dynamics in equipment prices, which are going up. And also this competitive environment, which is also favorable. So the price dynamics being good for our short-term contracts and also along with an initiative of hiking up prices in services contracts, all of that to adjust to the new reality of cost of capital. The return bar is a different one now, right? We have to go for. So that's why we have internal projects going on to improve prices. And the reflects of that in the consolidated numbers will depend on the mix between those 2 things. But incrementally, we hope Marcos will be able to give you a better and more clear breakdown of those numbers. Thank you.

Our next question from Rogério Araújo, sell-side analyst from Bank of America.

Can you hear me?

Yes. You're breaking up, Rogério, we cannot hear you. Rogério, we couldn't get a single word of your question.

Let me try again. Okay. Have you started renegotiating contracts?

We lost -- we missed the first part of the question. And about the early assumptions on life cycle, residual value. So the question is about renegotiations from what we could gather, the speaker is really breaking out. Rogério, throughout the company's history, when we have over 1,000 clients, we are continuously revisiting results of all operations, and that type of renegotiation is only natural. It happens every day. Of course, given the significant change in cost of capital and other macroeconomic variables for the past month, it's only natural that we may be renegotiating those contracts more frequently, but it's only natural. It's nothing new in our everyday activities. Suppliers and contracts -- contract holders are always renegotiating, revisiting basis and provisions. I wouldn't put a finger on why those conversations are necessary. But what they have in common is this change in the return bar that I mentioned for a long-term contract. We need to see high returns because the real interest rate in the economy has changed levels in Brazil and has also changed levels for a considerable amount of time looking forward. So instead of waiting for interest rates to come down for whatever reason, we chose to actually act proactively to hedge our shareholder value. So including all the conversations we've had with our clients, the common point is a discussion around interest rates. Our assets are our main input, of course, but you also have foreign exchange depreciation, of course, with impact several inputs. So it's all a combination of factors that we talk about when we renegotiate those contracts.

My second question is about the adjustments that were made a mark-to-market for parts. I'd like to understand if it was a non-off or all at once or if you adjusted the curve of depreciation.

Rogério, thank you for your question. Just to make it clear, we took all our volume of spare parts, which had been filed under our asset base. And based on an estimate of its -- of their individual life cycles for each part, we adjusted for the residual values. So the adjustment that took place in Q4 corrects the accumulated depreciation balance for all those components, all those parts. Of course, this is our best estimate of a life cycle for those spare parts. If that's connected to their market value, that's a bit more difficult to -- because we do not have publicly listed prices for those parts, which have been in use for 2 years, 3 years. So our estimates are based on the wear and tear, which we observed for those parts that led to an estimate for the life cycle. Most of them, just to give you a number, the predominantly -- or the predominant life cycle for those assets moved from 5 years down to 2 years, 5 down to 2 years. So we work on an individual basis, as I said. So the life cycle for front loader is different from the life cycle of an engine, a turbine. So they're all classified under the same accounting entry, which is spare parts.

Our next question comes from João Pedro from Morgan Stanley, and it's in writing. I have 2 questions. First one about the strategy you have announced to focus on pricing management for 2025. That's something we see in other players in the segment. It would be interesting to know how that strategy has been performing in the first quarter of 2025. How do they -- what's their share of sales vis-a-vis rental? What's the demand for those assets? The second question is to better understand what we can expect for '25 in terms of CapEx and growth. Would it be correct to conclude that given that strategy on pricing management, could we expect a drop in the organic CapEx for 2025, but at the same time, recovering margins?

João, thank you for your questions. Those conversations are only natural, as I've mentioned, between companies, everybody trying to reach a balance for both parties and of course, in tune with the current level of cost of capital in Brazil. Those conversations happen every day, as I said, in a very transparent fluid way, Per as the company has always acted with their clients, trying to understand points of view on both sides. And we do believe that throughout 2025, not specifically in the first quarter, but throughout 2025, we will be successful in achieving readjustment for prices across all our contracts. Decommissioning tend to be a minority of cases. It only happens when we do not reach a balance. And those are very rare instances, especially considering the scale because we are -- we remain as the lowest cost supplier in the industry. So the company is confident that we have a fair basis of negotiation. So on most cases or in most cases, we're able to reach a consensus in terms of readjustment for those contracts. When that does not happen, the company has 2 options: allocate assets for our used units stores or re-rent or re-lease those assets, and this will depend on the type of assets. It will depend on the demand for short-term contracts for those assets at that time across all the regions where we operate. So there is no fixed rule. There is no percentage to give you to your point. It actually depends on the type of contract, on the type of asset, but it's important to say that the company has always worked to invest in assets that are multidisciplinary, if you will, that can be used across different industries, pulp and paper, agribusiness, mining, construction and other segments. Our business units are complementary. Terram is a huge source of demand for older assets, for example, that might be decommissioned. So this is the fundamental, the strength of the company. If it's going to be sold or rented, it's difficult to say now. The year has just started, but we are quite confident in our ability to turn that fleet over, which is not the reality for other players who worked more focused on certain niches. I think that's what I had, João. I hope I've answered your questions.

Next question comes from João Ramiro, sell-side analyst from XP and also in writing. On my side, I have questions. The first one is the segment of simple rental contracts was impacted by heavy rainfalls in Q4. Having said that, can you give us some color on how the performance for that segment is now early in the year. Lastly, is there a mix that you consider to be ideal between simple and continued operations? And what's the level of ROIC you expect to reach?

João, thank you for your question. Actually, it has rained a lot. That's good for the country, but we suffer a bit in our industry because of that, those heavy rainfall levels. It rained a lot late in the year and also early in the year across different regions of the country. So January and February were months where we still saw our revenues being pressured because of that. That specific business unit where we rent machines for infrastructure was highly impacted, but we have already observed in March, an important recovery, higher demand, several projects already ramping up in March. So we tend to see a normalization in terms of growth for that business unit. That's already happening in March. So for the first quarter, first quarter was impacted by weak first 2 months because of rainfall, but March already showing recovery, and we expect April, May and June to be way above that level. That business unit, because the company has become the go-to company for several companies in the company for the past 2 years, and the percentage of revenue coming from those clients has grown a lot. Historically, in the past, we always operated between 50-50 long-term and short-term contracts, 60% max, 60-40 for long and short. That's a mix that offers us the best of 2 worlds, the resilience in revenue for long term and also a higher margins for short-term contracts, smaller clients. So in the past, we have already operated along those lines, 60-40 or 50-50. That does not mean that in the short run, the company will resume to that mix level. But today, we do have a level of contracts, which is sufficiently relevant that allows us to be more aggressive in short-term rentals. little by little, of course, marginally, perhaps grow marginally in short-term rental contracts in the next 2 years, given the relevant base we have already built in terms of long-term contracts. And the impact on ROIC, of course, tends to be more favorable because we have higher margins for those contracts. It's always a trade-off between higher returns, but which is not contracted for a long term. We are much more exposed to market variations. And we need to strike a balance for that trade-off. A company concentrated totally on short-term rentals, they might have very interesting returns until something goes wrong. And when something goes wrong, they go south. So we need to balance those factors. That's quite important. ROIC tends to improve, as I said, if we increase the share of short-term contracts, but we need to be careful, not forgetting that, that robust basis of long-term contracts is what allows us in a country where we have 2-digit interest rates allows us to operate such an intensive capital business such as ours. Thank you.

Thank you, Mr. Fernando, Mr. Marcos. The video conference for results relative to Q4 2024 for Armac is now over. The IR department is now available to answer questions or comments you may still have. Thank you so much for participating. Have a nice day. See you next quarter.

Thank you all. Have a nice day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]