Frasle Mobility S.A. (FRAS3) Earnings Call Transcript & Summary

Good morning. Welcome to the video conference of Frasle Mobility to present the results for the second quarter of 2026. Before we begin, we would like to share a few important announcements. This video conference is being recorded and will be made available on our website, fraslemobility.com. We have simultaneous interpretation to English. Additionally, please note that some information discussed in this video conference do not guarantee future performance, involve risks and uncertainty. It relates to future events depending on circumstances that may or may not occur. Briefly reviewing today's agenda, Hemerson will cover the quarter's highlights and the integration of Dacomsa, after Mariana will present the operational performance and financial management, and Anderson will provide the guidance and outlook. Finally, we move to the Q&A session moderated by Jessica with Esteban Angeletti, Corporate Director of Finance, IR Strategy and FP&A of Randoncorp, along with executives Anderson and Hemerson. Now I hand the floor to Hemerson to begin his presentation.

Good morning, everyone. Welcome to another video conference of results of Frasle Mobility. It's a pleasure to be with you. I'm speaking from Mexico. We have good news in this presentation regarding the results of the second quarter. First of all, this is the best quarter in the history of Frasle Mobility. When we talk about margin conversion, it could be the best quarter in revenue if we considered an exchange rate that would be neutral in this period. I say this reinforcing this point because the fundament of the company, as we spoke for the past quarters, did not have any changes. Obviously, as a business, we have to perform and seek in the macroeconomic scenarios that we do not control. One is exchange rate. In [ Micron ], we had a diff the year to the system integration, the new design of the logistics operation and logistics automation in that removed some traction in revenue and a bit of the result. Obviously, these are things that we acted passed on and are stable in this quarter. Still a small impact, especially in April, we were not 100% operational where we had space to improve. Anyway, synergies as a whole are starting in a slow pace, I can say, very small start to flow and appear constantly operation and as the consolidation as mobility. We still have some challenges, especially when we talk about heavy vehicles. Core represented BRL 138 million growth of 7.5% compared to the second quarter of '25. As I mentioned, we closed here a margin -- EBITDA margin of 20.4%, which is BRL 282 million, as I mentioned, the best quarter of the company in the history of the company. Investments are around BRL 22.5 million below last year due to the schedule of investments of these amounts, a relevant point that I'd like to reference the fundament of. I started talking about this. They continue to be very much solid, but with this quarter impact and express this in a consistent way. The next chart, I'd like to update you a bit how we are mapping the synergies of Dacomsa updated until June '26. Remind you, we had an estimate -- initial estimate in the year of '29, having something around $15 million in synergies, recurring synergies, one. We have approximately $24 million currently the business case being that the $24 million, approximately 100% of the business case around BRL 15 million, BRL 14 million and some are already implemented are not any longer in the mapping out phase or discussion. When I say implemented, it means they are adding in the DRE of the Dacomsa. Obviously, I'm not saying we have $15 million more now there. It depends on each project. You have a fraction of this until the ramp is complete. We use all of this as things happen. We implemented, for example, we have a synergy, which is a change of supplier until I approve it takes 2, 3, 5 months, and you put in the orders, it takes 2, 3 months and then it arrives and then you have the average cost of stock, it should show up in our DRE between 12 and 13 months being positive and showing up there. In the Frasle universe, we will start to show with method how much this is part of this operation inside the results. But I can bring to you, this is not public data yet, the margin in June is not part of what we have in this quarter is 20% above the level that we had when we acquired, showing clearly the impact and the potential synergies that we have with this operation, a bit more space than an acquisition done in Brazil due to the several complexities that it brings, but very robust above what we had forecast. Going to the next chart, I would like to continue speaking of the concept. One of the important lines we have is the addition of new revenues in the initial business cases, these were the biggest synergies. And during the process, they became smaller due to the fact that we had a large amount in synergies of sourcing and reductions of expenses more than adding new products that takes a bit more time. Highlighting that we had success in the launch of blocks. We are close to 30% market share in the -- with the 2 that we had last year, heavy blocks. This brings a revenue of around $5 million and the impact of this in the synergies in aggregated margins, we launched in the beginning of July, the line of hydraulics with [ Pech ] brand. An important part of this will be done in Brazil by Controil and Fremax. And part of it, we will search for suppliers and co-manufacturers according to our strategy. I can say that our business case had a low sales forecast because it's a new line, but the results that we have received in terms of initial orders from the customers that we were seeing only in November is a lot higher than what we designed for the full year of '27 also. It will be a successful line in the Mexican market due to their characteristics and what we can push as far as the mobility. And for the next years, we have designed a series of other products that we have mapped out already. Obviously, we can speak more of this chart, I invite you to the last day to sign up for Universo Fras-le Mobility, the Investor Day that this year will be in person in Extrema, Minas Gerais and will be broadcast live through YouTube in our networks. It will be in 2 weeks, and you can sign up. We have a transportation from Faria Lima, those that are in São Paulo and all the details when you sign up, you have the schedule in detail. It's a great opportunity to go to Extrema, Minas Gerais and see the advances we have in logistics with mobility, the advances in the plant, shock absorber plant also. And we can talk more about the strategy that we have designed for Frasle in the next cycles. Looking at the next chart, we are detailing the revenue this year, this quarter, as I mentioned, a growth of 2.2% compared to last year. What impacted the most internal market, the repair and the workshops are stable. There was an increase in the availability of products. We're working in competitiveness. We have an impact in volumes. We continue to maintain in some lines even gaining market share. The only exception here, we didn't lose a position, but the beginning of the year is a bit harder with Nakata that was -- had an impact this quarter. We had an advance compared to last year in the commercial line in the United States, as I said, showing recovery, clear recovery for the next quarter. And a meaningful reduction when we talk about exchange rate that impacts almost all of our currencies that are used in the different geographies in conversion where we bring our exchange to real. Argentina had some impact due to the effect of IAS 29, removing a bit. If we eliminated FX, we would have a revenue growing 6.5%, as I said, it would be the best quarter in the history of Frasle also. Next chart, I'm talking about the effects of the heavy line, a heavy line compared to last year, we have here in the internal market growth, as I mentioned, but a decrease when we talk about external market, a decrease of approximately 18%, specifically for this market. If we look at production of vehicles overall, we see there's a variation that's still a bit more complex. When we look the first quarter compared to past quarters. But in the case of Brazil, we produced trucks 20% higher production when we talk about the second quarter of '25 -- sorry, 10% lower when we look at quarter after quarter, but better when we compare to the first quarter of this year, we see a bias of improvement. When we look at the North American market, there's a decrease when we compare quarters, but a reaction when we compare to the first quarter of '26. As I mentioned, the signs are more promising for the second semester when we talk about the commercial line. I will pass the floor to Mariana who's going to talk about the operational results, and I come back for the Q&A at the end of the session. Thank you.

Thank you, Hemerson. Good morning, everyone. It's a pleasure to have you with us in the call for results at Frasle. On Slide 10, we provide an update on the tariff scenario applied by United States to Brazil. First, it is important to emphasize that only 5% of Frasle total sales are exported to the United States, specifically in the following product categories, heavy-duty brake linings and brake discs and pads for both light and heavy lines. The most recent update, July this year changed the tariffs applicable to the heavy-duty brake lines. As you can see in the bottom left section of the slide, the rate in effect from February to July '26 from -- of 10% under Section 232 was raised to 37.5% under Section 301 since late July. It is important to note that only 3.5% of sales correspond to exports to the United States in this product category. The brake lines for heavies and lights didn't change tariff remains at 27.5%. We remind that exports from Brazil to U.S. are on basis, meaning the importer is responsible for paying the tariff. With the increase in tariff for brake lining for heavies, the company continues to monitor and continues competitive to the North American market. We continue to monitor this and the impact in competitiveness and the commercial flow. Currently, we reinforce there is no impact in the business. Going to Slide 11. We see the performance of net revenue per product by product family. The key highlights here are in breaking line. Domestic market growth was driven primarily by the workshop activity and the consistent demand from Frasle Fremax brands with the distributors. The external market was affected by the exchange rate fluctuation that impacted the revenues for this product line in the ride and comfort line, growth in domestic market reflects stabilization of the distribution center automation and the consolidation of the ERP system that was mentioned that factors that had impacted the first quarter. The decline in international market was driven by Argentina due to challenges regarding pricing and shelf space. The powertrain line, the domestic market decline was driven by operation in Extrema, although the volumes in this line is small and growth in foreign market is linked to the Dacomsa's operations that ended the quarter with gains driven by the gradual resumption of repairs on existing vehicle fleet. Going to Slide 12, we see the EBITDA performance. Hemerson said that the quarter closed with the biggest margin in the history, 20.4%, showing an increase compared year after year. This was driven by the combination of favorable exchange rate for some lines, sales mix, the Dacomsa synergies capture and operational efficiency initiatives implemented in recent quarters. We had an important impact in the exchange rate in the period that reduced the cost in co-manufactured and imported inputs. We highlight the impact of BRL 6 million due to credits, tax credits that were not recognized in their correct period and are recurring in the business and the total recognized this year is more than normal. The expenses with sales and administrative are stable compared to the net. And the line of other revenues and expenses, there is a variation due to the reduction of line of expenses in innovation program. Going to Slide 13, we see the generation of cash generation through this plot, we have an important increase with positive cash flow of BRL 308 million and free cash flow positive of BRL 170.3 million. Investments were focused on layout changes and the acquisition of machinery and equipment, maintenance of manufacturing facilities and initiatives aimed at increasing productivity and automating processes. The final results showed a reduction in financial expenses driven especially by lower foreign exchange exposure and optimization of receivables-based financing operations. Besides this, working capital requirements decreased significantly by 33 days compared to '25, reflecting inventory optimization, efficient receivables management and the strengthening of operational financing sources. Moving to Slide 14. We talk about the fiscal management of the company. The company continues with a balanced capital structure, the first quarter leverage of 1.3x net EBITDA, cash position of BRL 1.4 billion. Furthermore, the optimization profile remains comfortable with maturities concentrated in the long term, reinforcing the company financial flexibility to sustain operations and advance its growth strategy with responsibility. I will now hand over to Anderson that will discuss the guidance and outlook moving forward, Anderson?

Thank you, Mariana, Hemerson, Monica. Thank you, everyone that are with us. It's a privilege once again to talk a bit about our quarter -- it's obvious we have an additional challenge regarding guidance of net revenue. We don't have challenges in EBITDA margin, exposure to foreign market. First quarter in the second -- looking at guidance, we understand political stability can bring the dollar to a higher level, closer to the guidance. We have acceleration in Nakata in the first quarter. We have achievements in new product lines in Mexico, synergies in Mexico generate local competitiveness that can bring the revenues the proper moment. We believe there is a possibility to beat the guidance in our revenue. The other are very comfortable. We have margin this quarter due to that said, we had a first quarter with intentional adjustments preparing the structure and the company for a promising future. We have to follow the market trends. That's why we have the need to modernize our distribution and invitation has been made to you can visit us at the end of the month will be to have you and the update of the system where we can capture more integrations of our operations. But what I can tell you is we're very firm with all synergies occupy spaces in different markets and all lines and geographies. Obviously, I have to highlight and mention still in a shy manner starting to capture the results and showing results captured as the project for this to reality takes some time, but the trust in what we told you many quarters ago that in '26, we would start to see -- we're very optimistic with the operational results, synergies and return on investment in this project, which is a transformation for the company. Very happy with our capacity once again to deliver results with these growth projects. How do we see '26? -- of '27. Macro environment, we don't need to repeat ourselves on the tariff policies, tariff wars, China, U.S. commercially speaking, the issue of the Iran conflict, Russia conflict, Ukraine, all of this has complex impacts for a global company like ours. We need to change speed facing the difficult of governance that we see the model of the company and diversity, the size it has allows us to navigate with some that has its own holdings, which is natural in an election process. Of the governments for the next years, this can bring some impact in the long term. Hemerson has said, well, there's a lot to come with. What I can say is the front, the purchasing fronts are well established, but the issue of new revenues is only starting this journey that takes some time due to portfolio, go-to-market strategy, brand positioning, price. This little by little will start to bring great perspectives of growth. Brazil, as mentioned by Mariana, very resilient. I would say there's a time challenge that has to do with pricing due to the natural dynamics of the market, but especially a tax reform and generate an opportunity of better performance of our distributors, better use of the cash, working capital after '27. In '26, the majority of that will back to work with a lower level of stock leverage to have better performance in '27. It's beneficial to our customers. As a consequence, they will maintain the level of service in the lowest level possible as long as it doesn't impact their business. The reduced stock size. This is natural to happen, but also there's a risk if we have a higher stock in December can be a benefit in January. Many of them might have a hard time with supply. Overall, we see that on the long term, we understand -- it's a big factor in terms of possibilities when we have more availability of working capital for our customers. In the premium lines usually have the best space in the shelf. They will reduce stock in the lower margin and lower representation lines that we are not a part of. Our portfolio is paramount for the Brazilian production, and we end up becoming stronger at this moment. In commercial line, we explored. There is a recovery, gradual, not structural yet. I cannot say the market cannot say that the environment in '27 has to do with the motor legislation next year. We have record levels. We will supply the market. There's an improvement also regarding of cargo in the American market. This can benefit us. The volumes are pointing up. It's hard to say that '27 will maintain. It's early to say. We will enjoy the moment and the second semester is probably favorable in this direction. Regarding growth, we have a combination of organic expansion that we mentioned a lot in this presentation, and we will explore even more in the Investor Day at the end of the month. We have an active management in M&A agenda. We did exceptional work in terms of company leverage in the last 14 to 15 months. Allows us to have more appetite in this direction, respecting the controllers' appetite, we will be more active looking at growth for the next fiscal cycles, but we remind you, when we acquired Dacomsa, we said we needed 2 years to digest. We are just doing what we promised, but we are quite active again. With this, very happy with the quarter, exceptional work in terms of cost, austerity -- we adjusted what was needed in terms of operations. We still are in an operational improvement cycle in the next quarters. The company is delivering in a sustainable way results, reinforcing that. We can have a quarter that's a bit lower, a bit higher. But in the long term, the vision continues solid, strong, and we want to increase it with organically and inorganically in the next quarters. Now I turn the floor to Jessica that will do the Q&A session with us. Thank you.

Thank you, Anderson. We will start the Q&A session now. The first question from sell-side analysts, Gabriel.

I would like to make a follow-up to Conti's comment when we look at the horizon for the next quarters, understanding the time challenge with Dacomsa, the market dynamics and less the tariff tax reform, understanding how you see the drivers -- pricing drivers we see in the results. Dona has too off, but understanding exon, how that pricing challenge should impact together with is this exploring the dynamics of competitiveness, what has changed, if it's a continuity of factors that we saw in the last quarters? How is this evolving?

Gabriel. -- questions are already directed to Anderson. If you can talk about the pricing horizon, main drivers and competitiveness overall. Anderson can talk about the market in North American market and the dynamics of competition in that geography.

Perfect. Thank you, Gabriel. Great to hear from you. Thank you for your question. I can say that pricing is a challenge because we have -- when we have a retraction, which is natural, and we need to look at the tariff reform, everybody wants space in the shelf. Some can have more. We see some players with not orthodox measures, and we need to fight this demand retracted, we have some people that want more space. It's not different in our market. But I think that the dollar when it's below or low, it will make us look for repricing in different geographies, especially in exports from Brazil. And we have long-term contracts in 2027, think about repricing of some contracts. We have bs and rules. This should impact more in '27 than '26. It's a bit of a challenge also if we cannot pass the decreasing dollar issue that retracts some margins in some products, we cannot pass on. The competition doesn't have a new factors in the market. Everybody is looking for competitiveness. Through investments or investing in other geographies. It's more of the same. We don't see a big difference from what we already have. We have how to compete in this market because we have multi-exposure plants. We produce worldwide, India, China, Brazil, Argentina, Mexico. This gives us a geopolitic protection that is considerable besides what we already mentioned, the capacity to procure to purchase is like no other, which allows us in this line of product with this purchasing power, the demand in the workshops is high. The workshop guys prefer the premium products, the premium brands. We -- there's a survey that we follow closely the market space with OEM space over the lower reputation brands given the labor and the difficulty to repair due to higher frequency to repair, lower availability of, nobody wants to make a mistake. So the premium is being captured in our product lines. I hope that I answered your question and Hemerson can talk about the U.S.

Perfect. Thank you for your question. Thank you for participating. Speaking of Mexico, Mexico is a very competitive market, a lot more open than Brazil in several fronts. The import tax are a lot lower than what we have in Brazil. It's a geography where it's more simple to act. It doesn't mean that it's simple to manage. We have a fleet complexity that is very diverse. You have coming in from the United States. You have vehicles, autos that come with no record from the United States with continuity. We don't know if it was purchased, stolen, a lot of complexity in the fleet. This brings complexity to manage. Also when we purchased Dacomsa, we knew about this. And the competition here is harder. We have modest growth, I would say, this semester. We were impacted due to the customer dynamics, not due to our capacity to advance and search for space. Big customers had changes in their ERP, also one was acquired 2, 2 years ago, had integration issues. This creates some difficulty when you want to maintain the volumes, but we and the introduction of new lines has shown very assertive market adhesion as a whole. When you have a premium brand that shows the capacity to service and give support that the market needs, the chance of advancing is huge. Hydraulics shows this very well. We advanced a lot more. We don't have the product in the shelf to offer yet. It's a prelaunch, we will deliver only October, November, but the market is acquiring in an expressive way. It is very good. Looking at the price dynamics in Mexico, it's quite stable aftermarket sales, aftermarket market. With the gains we have, we have tried to bring competitiveness to search shelf space, some things are only starting. We have good news to share in the universe about the Dacomsa advances we will have that will be paramount for future growth, but we have some investments to increase productivity and focus on the North American market, expanding to the U.S. also. We have advanced in motors and the project from Dacomsa. For traditional customers also, we are able to maintain a good level of space. There's not a high competitiveness with the items that we are selling for many years already, very competitive in Mexico in motors. There is work to be done expanding the team. We're installing structure to search for a relevant motor market in the United States. When I say relevant, it's not market share. It's a huge market, 1%, 3%, 5% is a huge volume. We want to look at these volumes, twice as much or 2x as much sales. I hope we answered your question.

Our next question from Gabriel, sell-side analyst of Santander.

First question, external market, something that drew my attention, the dollar increase year after year. If you can mention how this improvement has been in heavy vehicles here in aftermarket and OEM, the prebuy effect and talk about '27, if you can talk about the second semester of '26 would be great. And second point here, looking at cost, if you can share with us a bit more the approach regarding the revenue. You have a plan to expand in co-manufacturing in some units, [ Conroona ]. I want to hear more how is this adoption and understand more about the recurring profitability looking at the future, this quarter is we had the impact of exchange rate. It's more the 2 questions I have.

Thank you, Gabriel, for your questions. Anderson, I believe you can talk about external market growth in dollars, talking about the heavy segment, the first question from Gabriel and Anderson regarding profitability, the recurring profitability, you can mention and together with this co-manufacturing strategy, the evolution of the process.

Very well starting here, thank you for your question, for your participation, always participating in the call. Well, we have made good things happening when we talk about new revenues and Dacomsa has a certain relevant due to the fact that they can occupy an important space in blocks in Mexico. We have other blocks customers in Mexico like [ Moresa ] had also used a bit of the space left by First Brands leaving the North American market and the Mexican market. We left approximately 2% share Dacomsa in blocks, and we went to 27%, 30% market share in the 6 first months. We cannot say that this is a normal position yet because we're still understanding researching searching for this information. We know also that our [ Moresa ] or [ TF Victor ] customer had 16% share, advanced a lot also. So in fact, today, we can say that we are a leader in brake linings in Mexico. If I'm thinking about the revenue of Dacomsa estimate for this year is $5 million realized, half of this has been realized already. We are in half of the year. I can think about the same dynamics in our customer that also grew is doing excellent work with our products. We're very happy to advance there and the introduction of new lines like the brake disc of Fremax that were sold in a different manner before are still in an increase or growing ramp. There's still work to be done. But the competitiveness that we imposed combining Dacomsa with Frasle Mobility gave us a possibility to grow in volumes in a few lines. We have seen this as very reasonable regarding what we have in recurring sales. American market in motors were growing year after year, a little bit more shy, around $13 million, $14 million a year. We're growing around 20-something percent in the first quarter due to the strategy change, as we mentioned, the Project Eagle that we have mentioned. And we have seen South American countries increasing volumes. North American market is buying at levels that are similar, a bit more than last year. Pontalti mentioned, we have a bias of being better as the volume of trucks is realized in Europe, we have new customers, OE that buy more. We have the introduction of new product lines, [ Geotech ] suspension steering that are impacting. When we add everything up, sometimes the growth strategy is not robust in one project. Several small seeds that were planted during decades that start to show up as the horizon of sales increase. This summarized a bit, and we cannot see for sure, but we are moderate optimistic that we can continue in this bias of growth when we think about North American heavies, Brazil has difficulty regarding credit trust, this moment of instability due to the elections, it's not so clear to us if it will consolidate in a robust way. We have Esteban here if he wants to add, you're a lot more connected to the domestic market here of how the trailer production is and trucks. You can add, if you like, please.

Congratulations for the results. The truck market and trailer market is still compromised due to the current interest rate. We don't see any meaningful change. While the interest rate levels are at this level, we don't see improvements.

Looking at the second part of your question, it's great to hear from you. Regarding profitability, resilience in the next quarters, I would say that we depend on factors, obviously, macro factors like we had micro factors in the first quarter. We understand that the guidance, we are comfortable with the guidance margin, the first quarter was a little bit below second quarter at the top of the guidance, an average in the guidance, we had the recovery of additional volumes, Nakata second semester. If there isn't a big exchange rate unbalance and stability will be maintained by -- we're always paying attention anticipating the volumes mentioned, especially looking at the tax reform. This can bring some issues in the short term in terms of revenue regarding cost can be impacted. I don't see anything that's compromising that doesn't allow us to navigate in the margins in the semester. Still very cautious due to the macro environment that we are undergoing. Some moments of instability that are strong. We continue firm and optimistic regarding the second semester in terms of conversion despite the revenue is a big challenge.

Thank you, Anderson. Connected to this question, Gabriel has requested information about co-manufacturing, how was our planning, if you can mention this.