Iochpe-Maxion S.A. (MYPK3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Iochpe-Maxion's Fourth Quarter 2019 Earnings Conference Call. Present at the conference today and available for the Q&A session are Mr. Marcos Oliveira, Chief Executive Officer; Mr. Elcio Ito, Chief Financial and Investor Relations Officer; and Caio Moraes, Treasury and Investor Relations Executive Officer. We'd like to inform that this conference call is being broadcast in the Internet at the company's website, www.iochpe.com.br, and the presentation is available to download at the Investor Information section. [Operator Instructions] Before proceeding, we'd like to mention that forward-looking statements are based on the beliefs and assumptions of Iochpe-Maxion's management as well as information currently available to the company. Forward-looking statements are not guarantees of performance, involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur. Now I will turn the conference over to Mr. Marcos Oliveira, Iochpe-Maxion's CEO. Mr. Oliveira, you may begin your conference.

Good morning, and welcome to our fourth quarter earnings conference call. I will follow the slides in the presentation made available at our website. On Slide #1, in terms of the highlights for the fourth quarter and 2019, we achieved a consolidated net operating revenue of BRL 2.338 billion in the fourth quarter of '19 and BRL 10.16 billion in 2019. A decrease of 4.8% compared to the fourth quarter of '18, and an increase of 4.2% compared to 2018. A growth in revenue from domestic sales of 1.3% in the fourth quarter and 13.1% in 2019. An EBITDA of BRL 215 million in the fourth quarter and BRL 1.096 billion 2019. A decrease of 11.3% compared to the fourth quarter of '18, and an increase of 3.7% compared to 2018. A net income of BRL 39 million in the fourth quarter and BRL 337 million in 2019, a decrease of 49% compared to the fourth quarter of '18, and an increase of 67.6% compared to 2018. We had a resolution to pay BRL 126.8 million in earnings for 2019, of which BRL 25.6 million in equity interest, already declared before, and BRL 101.2 million in dividends. Our financial leverage, at the end of 2019, was 2.2x, same level observed in 2018. We also had the renegotiation of debt in Mexico in the total amount of $60.9 million, with substantial cost reduction and expansion of term. On Slide #2, when you look at the consolidated net operating revenue for the company, we achieved BRL 2.339 billion of net operating revenue in the fourth quarter of '19, a reduction of 4.8% versus the fourth quarter of '18. For the full year, we had a net operating revenue of BRL 10.016 billion, an increase of 4.2% versus the prior year. This was related to small growth of the Brazilian domestic market in the fourth quarter and a decrease in vehicle production volumes in international markets, as it can be observed in the following slides. On Slide #3, talking about operational performance in terms of net operating revenue and also looking at the market performance in the different regions where we operate. Slide 3 talks about South America, and we can see this increase in operating revenue of 1.3% in the fourth quarter, achieving BRL 614 million. And for the full year 2019, a net operating revenue of BRL 2.681 billion, an increase of 13.1%. The participation in our consolidated net operating revenue of South America was 26.8% in 2019 versus 24.6% in 2018. When you look at the market performance, in terms of vehicles produced in South America, particularly Brazil, in this case, light vehicle production was up 0.4% in the fourth quarter of '19 and was up 2.1% versus 2018 for the full year. In terms of commercial vehicles, production in the fourth quarter in Brazil was down 5.5%, and it was up 5.3% for the full year 2019. The growth in domestic demand in Brazil was the major driver of higher production for the full year despite a reduction in vehicle exports during the year, mainly to Argentina. On Slide #4, looking at North America. Our net operating revenue was BRL 638 million in the fourth quarter, a reduction of 12.7%. And for the full year 2019, our net operating revenue was BRL 3.043 billion, an increase of 8.2% versus the prior year. The participation of the North American market in our net operating revenue was 29.2% in 2018, and it was 30.4% for the full year 2019. Looking at the market performance in terms of vehicles produced, the light vehicle segment was down 9% in the fourth quarter of '19, and it was down 4% versus the full year 2018. In terms of commercial vehicles, production was down 13.5% in the fourth quarter, and production for commercial vehicles for the full year 2019 was up 5.1% versus 2018. On Slide #5, looking at the same indicators for Europe. Our net operating revenue was BRL 861 million or down 2.1% versus the fourth quarter of '18. And our full year net operating revenue in Europe was BRL 3.386 billion, down 3.6% versus 2018. The participation of Europe in our net operating revenue was down from 36.5% in '18 to 33.8% in 2019. Looking at vehicle production in Europe, we can observe that light vehicles was down 5.4% in the fourth quarter, and it was down 4.8% for the full year 2019 versus 2018. In terms of commercial vehicles, production was down 12.8% in the fourth quarter, and it was down 0.7% for the full year 2019. On Slide #6, looking at the same indicators for Asia and other markets. Our net operating revenue in the fourth quarter was BRL 226 million, down 5.8%. And for the full year 2019, our net operating revenue was down 1.6%, achieving BRL 907 million. The participation of Asia and others in our net operating revenue was also down from 9.6% in '18 to 9.1% in 2019. Looking at vehicle production in one of our main markets in Asia, which is the Indian market, we can see the production of light vehicles in India in the fourth quarter was down 8%, and production of the light vehicles in India was down 11% for the full year. In the commercial vehicle segment, production was down 34.2% in the fourth quarter, and it was down 26.2% for the full year 2019. On Slide #7, looking at the net operating revenue by product line, the more relevant change you can see on a year-over-year basis is the participation of our structural components for commercial vehicle segment that it represented 17% of our operating revenue in 2018; and in 2019, represented 20%, primarily due to the growth in the commercial vehicle segment in Brazil and growth for the commercial vehicle segment in North America, observed until the third quarter of last year. On Slide #8, the variations in terms of revenue by customer is mainly driven by market dynamics that we talked about in the prior slides and the commercial vehicle segment growth in Brazil and North America during 2019. On Slide #9, our gross profit was BRL 228 million in the fourth quarter of '19, down 25.7% versus the fourth quarter of the prior year. And for the full year, our gross margin was 11.8%, gross margin down versus the prior year. And a gross profit of BRL 1.185 billion for the full year, down 10.1% versus the prior year. The decrease in sales and production in Europe, India and North America, mainly in the fourth quarter, were the main drivers of the impact to the lower operational leverage of the company related to such demand and production reductions in the international markets. On Slide #10, looking at earnings before interest, tax, depreciation and amortization for the company was BRL 215 million in the fourth quarter of 2019, with an EBITDA margin of 9.2% in the fourth quarter. And for the full year, our EBITDA was BRL 1.096 billion, down -- sorry, up 3.7% versus the prior year with a margin at 10.9% in the full year 2019. Just as a reminder, we had some nonrecurring effect during 2019. We had a favorable decision to exclude the ICMS tax from the PIS and COFINS tax base, with a positive effect of BRL 16 million in the fourth quarter and BRL 59 million for the full year 2019. On the other hand, our structure adjustments in North America had a negative effect of approximately BRL 9.8 million during the fourth quarter of last year. On Slide #11, looking at net income. Net income in the fourth quarter was BRL 39 million, down versus the prior year. And for the full year 2019, our net income was BRL 337 million, up 67.6% versus 2019 -- versus '18. Always with a reminder that we had some nonrecurring effects, as mentioned in the prior slides, that had a positive impact to the full year results of the company. On Slide 12, talking about our investments. We had reduction in our investments in the fourth quarter of '19 of 38% versus the fourth quarter of '18, with a total investment of BRL 138 million in the fourth quarter. And for the full year, our investments were BRL 519 million, relatively stable versus the prior year despite a Brazilian real devaluation during the year. Some of the main projects in 2019 were the beginning of our operations in the new aluminum wheels plant in India, a capacity increase in our plant in Thailand and investments in automation and productivity at different plants, mainly at the Cruzeiro plant in Brazil. On Slide 13, looking at our net debt and leverage. Our net debt in the fourth quarter of '19 was down versus the third quarter of '19 with a total net debt of BRL 2.415 billion, and a financial leverage of 2.2x net debt over EBITDA in the fourth quarter of '19, also down versus the third quarter. The breakdown of our gross debt shows Brazilian real representing 41%, euro 38% and dollar at 15%. On the bottom of the same Slide 13, we can also see a reduction on short-term debt from 38% in the fourth quarter of '18 to 21% in the fourth quarter of '19. And also an average cost reduction of 5.8% per annum in 2018 to 4.2% per annum in the fourth quarter of '19. On Slide 14, we have some examples of our innovation efforts during 2019, and our strategy continues to be focused on weight reduction, adding more value to our products, operational efficiency and improvements in different parts of our plants around the world and digitalization of our processes. In summary, 2019 was a challenging year for the global automotive market. We observed a 6% reduction in vehicle production around the world compared to the previous year. We decreased in Europe, North America and Asia. In Brazil, production continued to recover, growing 2.3% versus the prior year. During the year, as the volume expectations deteriorated, the company reacted on a timely fashion, adapting its planning to the revised expected volumes. It's worthwhile mentioning that the geographical diversification of our business provides natural protection and greater resilience to the company's results. Despite the short-term challenge, we maintain our focus on the execution of our growth and our portfolio diversification. We launched our aluminum wheels plant in India in the third quarter, and despite the sharp drop in vehicle production in this country during the year, our new plant started operations with high demand, providing the -- proving the potential of the investments in this market. We also concluded during the fourth quarter, the investments in the new plant of stamped components for commercial vehicles in Mexico. We also continued our efforts to innovate and develop solutions for the automotive markets, maintaining our focus on weight reductions and process improvement. With this, we would like to open the session for questions.

[Operator Instructions] Our first question comes from Augusto Ensiki, HSBC.

First one, if you could expand a little bit on the structure adjustments that you mentioned for North America. Just -- does that entail, was that like franchising workforce or capacity adjustments? Maybe you can talk more on that. And then secondly, just a question on coronavirus. So if there's any indirect impact out there long your supply chain or logistics, something that could affect you this year?

Augusto, the restructuring last year, we had restructuring in India during the second half of last year, with lower economic impact to the company. And a more relevant restructuring we had was in North America during the fourth quarter, primarily rightsizing our workforce for commercial vehicles in North America as we observed the North American market had a drop in production in orders for trucks, primarily Class 8 trucks, in the fourth quarter last year. And as we projected that such drop will continue during 2020, we took actions in the fourth quarter to right-size our capacities associated with the truck production -- wheels and structural components in North America for the fourth quarter. Regarding the COVID-19 or coronavirus. First of all, it's really too early to tell about any impact due to this virus in terms of potential reduction of vehicle demand and production around the world, with the exception of the Chinese market that was down significantly in the months of January and February. But China, today, represents less than 1% of our global consolidated revenue. China today is not very representative in terms of revenue for Iochpe-Maxion, so very little impact to our results or our business. And also in terms of supply. Raw material and other components that we purchase around the world, we normally buy those components in the regions where we operate. Therefore, supply of raw material, for us, in China, is only for the Chinese market. We have no exports of raw material or other components from China to other operations around the world. Therefore, the direct impact for us in terms of raw material is nonexistent only to the Chinese plant that we have. Therefore, we don't expect a direct impact. We are just watching the markets, looking at the production release and production planning from our customers to see if there is potential reduction on their schedules as we go forward. But again, as I mentioned at the beginning, it's a little bit too early to talk about any potential specific impact to specific demands in different markets.

Okay. And then I just go back to the first question about the rightsizing. Does that mean that you guys are -- sorry, do you expect that you're pretty much set in terms of -- it was just a fourth quarter event? Or possibly to do additional adjustments throughout this year?

We have done pretty much most of the adjustments. Roughly between 70% and 75% of the adjustments were made in the fourth quarter last year. There may be a little bit more to be done in the first quarter of 2020, but the bulk has been done last year.

[Operator Instructions] It is concluded the Q&A session. I would like to invite Mr. Oliveira to proceed with his closing statements. Please go ahead, sir.

In conclusion, over the past years, we have always maintained our flexibility and agility to quickly adapt to change in demand in different markets, whether it's increasing or decreasing. We will continue with this philosophy, picking to accelerate our growth, expand our portfolio, searching for constant innovation in our products and processes and digitalize our activities to better meet the demand of our customers, adding more value and keeping the focus on the execution of our long-term strategy. Thank you very much for your participation this morning.

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