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 Third Quarter 2020 Earnings Conference Call. Presenters at the conference today and available for the Q&A session are Mr. Marcos de Oliveira, Chief Executive Officer; Mr. Elcio Ito, Chief Financial and Investor Relations Officer; and Luis Abreu, Strategy, M&A and Investor Relations Director. We'd like to inform that this conference call is being broadcast in the Internet at the company's website at www.iochpe.com.br, and the presentation is available to download at the Investor Information section. [Operator Instructions] Before proceeding, we would like to mention that forward-looking statements are based on the beliefs and assumptions of Iochpe-Maxion's management as well as an information purely available to the company. Forward-looking statements are not guarantees of performance. They 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 de Oliveira, Iochpe-Maxion's CEO. Mr. Oliveira, you may begin your conference.

Good morning, and welcome to Iochpe-Maxion's Third Quarter 2020 Earnings Call. I will follow the slides in the presentation made available on our website. Our priority since the beginning of the COVID-19 pandemic has been and continues to be taking care of the health of our employees, their families and communities in the 32 plants in 14 countries in which we operate. We adopt protocols established in accordance with the guidelines of authorities for each location, implemented actions, rules and controls to monitor the entire process, in addition to providing the necessary support to our employees. We are attentive to the evolution of the pandemic and continue to strengthen our procedures, aiming the safety of our people. During the third quarter of 2020, we observed a gradual and consistent recovery in demand for motor vehicles, confirming our expectation and also our customers' views. After a reduction of more than 62% in global automotive production, excluding China in the second quarter of 2020 compared to the second quarter '19, vehicle production in the same markets showed a substantial recovery, reaching a 10.4% drop in the third quarter of 2020 when compared to the same period of the last year. The Brazilian market, which was in the second quarter 2020, a few weeks late in the pandemic cycle, started recovering more clearly during August, with the automotive sector seeking to accelerate local production during the last 2 months. With the recovery of demand, the expectation of the main information providers in the automotive market is for a decrease in the global production of around 20% in 2020 against previous expectations of a drop between 25% and 30%. The recovery in the third quarter 2020 compared to the second quarter 2020 can be demonstrated by Iochpe-Maxion's net revenue, which increased 114.6% in comparison with third quarter '19. Net revenue was equivalent, although positively influenced by the devaluation of the real. In terms of profitability, we had an adjusted EBITDA margin of 9.6% compared to a negative margin in second quarter 2020. Despite the gradual recovery of volumes, the company maintained its effort to reduce costs and maximize cash generation, focusing on 3 fronts: reduction in operating expense, reprioritization and reduction in CapEx versus the third quarter of '19, ongoing restructuring and beginning to execute the closure of the Akron plant in the United States as previously announced. The company's cash balance increased from BRL 1.4 billion in the second quarter of '20 to approximately BRL 1.6 billion in the third quarter 2020, driven by generation of operating cash, new funding and full renewal of short-term debt that matured during the quarter. In Slide #1, we can observe main highlights for the third quarter. A cash position of BRL 1.6 billion, or an increase of BRL 249 million versus the second quarter of 2020. Net revenue reduction of 1.1% versus the third quarter of '19, while during the second quarter '20, net revenue was lower by 56% versus the second quarter of '19. Adjusted EBITDA of BRL 241 million and margin of 9.6%. Excluding exchange rate variation in the period, operating expense were 21.8% lower than the third quarter of '19. Excluding exchange rate variation in the period, investments were 64% lower than the third quarter of '19. On Slide #2, we can follow the consolidated net operating revenue of the company of BRL 2.5 billion in the third quarter of '20, 1.1% lower than the same period of last year. During the 9 first months of 2020, a consolidated net operating revenue of BRL 5.9 billion, a reduction of 23% versus the first 9 months of last year, impacted primarily by the pandemic and the drop in the second quarter, and also the gradual recovery of demand and production during the third quarter. On Slide #3, we can start looking at the operational performance in the different regions where the company operates. And looking at South America, our revenue of BRL 581 million in the third quarter of '20 was down 19.6% versus the third quarter of '19. As the COVID-19 cycle started later compared to Europe and North America, we see the gradual recovery in participation of South America in the consolidated net revenue of the company. South America in the third quarter of last year represented 28.4%; and in the third quarter of 2020, represented 23.1%. When you look at market performance in terms of vehicles produced during the third quarter, we can see the light vehicle production in South America down 23.1% versus the third quarter of last year and commercial vehicles production down 27.5% in the third quarter of '20 versus the same period of last year. On Slide #4, the operational performance in North America, we can see the net operating revenue of the company down 0.6%, achieving BRL 797 million in the third quarter of 2020. Consistent and gradual recovery in both segments light and commercial vehicles were observed during the third quarter of 2020. And the company's revenue was positively impacted by the exchange rate variation during the period. When you look at the participation of North America in our consolidated net operating revenue, North America stayed relatively stable at 31.7% in the third quarter of this year, similar to the same level last year. In terms of market performance in terms of vehicles produced in the region, light vehicle production was down 0.3% in the third quarter of '20 versus third quarter '19, and commercial vehicle production was down 32% in the third quarter '20 versus third quarter '19. And also, revenue was impacted by exchange rate variation and commercial vehicle production there was an all-time record last year in 2019 was expected to be down in 2020 even before the pandemic of coronavirus. On Slide #5, you can see Europe. And we can observe the net operating revenue of the company at BRL 921 million in the third quarter of '20, an increase of 14.7% versus the same period of last year, also consistent and gradual recovery during the third quarter of '20 and revenue was positively impacted by the exchange rate variation. The participation of Europe in our net operating revenue grew from 31.6% in the third quarter of '19 to 36.6% in the third quarter of 2020. Vehicles produced in the region can be observed on the left-bottom side where we see vehicle production down 9.6% for light vehicles in the third quarter of '20 versus third quarter of '19, and commercial vehicle production down 28.1% in the third quarter of '20 versus the third quarter of '19. Looking at Asia and other markets. Our net operating revenue was similar to last year at BRL 215 million, a small increase of 0.4%, due to the recovery of the light vehicle segment, and the ramp-up of the aluminum wheel plant in India and also revenue was positively impacted by exchange rate variation in the period. Asia and other markets participation in our net operating revenue was similar in the third quarter of '20 at 8.6% versus 8.4% in the third quarter last year. Looking at market performance in terms of vehicle produced in the main markets for us in the region. Production of light vehicles in India was down 11.8% in the third quarter of '20, starting a recovery faster than the commercial vehicle segment that was down 31.7% in the third quarter of '20 versus third quarter of '19. The light vehicle segment in Thailand is significantly down in the third quarter of '20, down 39.1% versus third quarter of 2019. On Slide #7, looking at net operating revenue by product, the main variance from third quarter of '19 to third quarter of '20 is related to structural components for commercial vehicles, that represented 21% of our revenue last year and now represents 17% in the third quarter of 2020. And this is due to the impact of the reduction in production of commercial vehicles in North America in 2020. On Slide #8, we can see net operating revenue by customer. And the main variations are related to the dynamics of the different markets and segments where we operate, as explained before, where we see growth in the commercial vehicle segment in gradual happening in Brazil. But the light vehicle segment recovering faster in Europe and in North America during the third quarter of this year versus the third quarter of last year and versus the second quarter of this year as well. On Slide #9, gross profit of 10.2% margin in the third quarter of '20 or a gross profit of BRL 256 million versus BRL 323 million in the third quarter of last year. In the 9 months of 2020, we achieved a gross profit of BRL 304 million or a gross margin of 5.1% versus BRL 958 million in the first 9 months of last year. Gross margin in the third quarter was impacted by lower operational leverage and difference in the mix of products sold around the world, particularly a larger share of commercial vehicles in the main markets where the company operates in the third quarter of last year. On Slide #10, we can look at adjusted EBITDA and margin achieving BRL 241 million in the third quarter of '20 versus BRL 335 million in the third quarter of '19, a margin of 9.6% in the third quarter of '20 versus 13.2% in the third quarter of '19. For the first 9 months of the year, adjusted EBITDA of BRL 306 million in the 9 months of 2020 versus BRL 883 million in the 9 months of '19, primarily impacted by the drop in demand in the second quarter of 2020 and the gradual recovery during the third quarter of this year. In addition to the effect of restructure -- restructuring and impairments, as shown on the left-hand side box of the same page, where we can see restructuring effects and impairments of BRL 33.3 million in the third quarter of '20 versus BRL 1.6 million in the third quarter of '19, and BRL 93.4 million in the first 9 months of '20 versus BRL 2.5 million in the 9 months of '19. In addition to the effect of restructuring and impairments, as shown, third quarter '20 was negatively impacted by expense related to the incidence of social security contributions on 1/3 of the vacation in Brazil, approximately BRL 10 million, and also a reminder that the third quarter of '19 was benefited from gain from the judicial process of the exclusion of ICMS on the base of PIS/COFINS calculations, approximately BRL 59 million benefit in the third quarter of 2019. Net income of BRL 125 million last year was a loss of BRL 19 million in the third quarter of 2020. Our net income of BRL 298 million in the first 9 months of last year for a net loss of BRL 362 million in the first 9 months of '20. Excluding the effects of restructuring and impairment, the result in the third quarter '20 would have been a net income of BRL 14.4 million and a net loss of BRL 268.7 million in the 9 months of 2020. On Slide 12, you can see the reduction in our capital expenditures in the third quarter of 2020 to BRL 69 million or a reduction of 54.8% and a drop of BRL 30.6 million in the first 9 months of the year. Excluding the exchange -- the effect of exchange rate variation and the reduction in capital expenditures would have been 64% in the third quarter of '20 and 42.3% in the first 9 months of the year. On Slide 13, we can see our financial leverage and liquidity ratio where we achieved a net debt of BRL 3.739 billion by the end of the third quarter of '20 and an adjusted a financial leverage of 7x net debt over the adjusted EBITDA for the last 12 months. On the same slide, on the right-hand side, we can see the liquidity ratio of 0.7x cash over short-term debt. And the final number of BRL 2.3 billion net debt or short-term debt in the third quarter of '19 and a cash of BRL 1.6 billion in the third quarter of 2020. On Slide 14, we can look at the composition of our gross debt on the left-hand side and the breakdown of 40% of our gross debt in Brazilian reals, 38% in Europe, 12% in U.S. dollar and 10% in other currencies. Also, on the right-hand side, you can see long-term debt represented 78% in the third quarter of '19, now represents 57% in the third quarter of 2020. Our average cost in third quarter of '19 was 5.3% per annum and the average cost of our debt in the third quarter of '20 is 3.6% per annum. On Slide 15, just an invitation to participate at our Investor Day in Public APIMEC meeting scheduled for November 24, 2020, where we plan to talk a little bit more about our operations and our efforts and plans around innovation in customers and product development around the world. Some final comments for this portion. In addition to prioritizing health and safety of our employees, financial and operational management with the objectives of preserving liquidity and recovering operating margins continue to be our ongoing priorities. Our efforts during the third quarter and fourth quarter are focused on producing efficiently to meet the demand of our customers in different regions and segments. Actions implemented during the third quarter and fourth quarter to reduce expense, adjust our plans to growing levels of demand, restructuring initiatives, reprioritization and investment reduction, focus and discipline on cash and liquidity have supported our work to improve operating margins gradually and continuously. During the third quarter of 2020, we continue the ramp-up process of our new stamping plant in Mexico, and the launch of new products for our customers, meeting the higher demand in the North American truck market. In India, where the light vehicle market, mainly in the entry-level segment is beginning to show a relevant recovery. Our new aluminum wheel plant continued its ramp-up process following a scheduled launch of new vehicle platforms in the country. After the consistent improvement in the Iochpe-Maxion's operational leverage during the third quarter, we remain attentive to the change in demand for vehicles in all countries and segments where we operate in order to keep our cost and expense structures in line with the new reality of each region. Our global footprint and technical competence combined with our efforts to develop innovative solutions and our capability of launching new products remain as priorities to gain new business and meet the needs of our global automotive customers. Thanks for your participation today, and we'll open now for the question-and-answer session.

[Operator Instructions] Our first question comes from Mr. Mizusaki with Bradesco BBI.

I have 2 questions to you. The first one, I mean, if you think about -- I mean, as you mentioned, the vehicle production recovered in Q4 and 2021, we see this positive trend, but I'd like to know if you could comment a little bit about EBITDA margins in Brazil versus other markets, what's happening in the third quarter. And how do you see these margins evolving in the coming quarters? The second question, if you can also comment about Europe, if your clients in Europe, if there is any concern about this second wave of COVID-19?

Victor, this is Elcio. Thanks for your question. I think with regards to the first question on the EBITDA, I think Brazil definitely has -- South America region has recovery very well from the second quarter where the volume was significantly down. The third quarter, when we look across the margin, South America posted a similar but a bit higher than the average of the entire -- of the other regions. And I think that trend, it actually depends a lot on the volumes that we're going to see across the regions because that's really what drives the operational leverage here of the company, but was a little bit higher than the average of the company in the third quarter.

Regarding your second question in terms of European demand, obviously, we are following the second wave of the pandemic in Europe and the increasing number of COVID-19 cases in the region. But so far, we haven't seen any change in terms of plans from our customers regarding production versus what they have been telling us for the last 4 or 6 weeks. I mean, the demand and the schedules have been developed over the last 2 months, and they are increasing in demand on a month by month, both from a net demand point of view and also for adjusting mix of products by our customers in the different markets. But so far, even in the increase in the number of cases of COVID-19 in Europe, we haven't seen any change in terms of production plans by our customers. Obviously, we will continue to monitor. We are following this very closely. But the good news is that so far, there has been no change. And I think the current actions that are being implemented in Europe, they are slightly different in the second quarter when we saw because of the very abrupt increase of cases of COVID-19 and the higher fatality rate there was a more significant lockdown happened in different countries during the second quarter. I think now with the number of increase, obviously, the countries are concerned about the increase of case, although the fatality rate seems to be lower. And these implemented actions that up to now have been more looking at adjusting social distancing on -- not on the business side, but more on the personal side. But we will see this in the next few weeks. And see if there is any impact going forward. But so far, no change to the production plans that the customers have been telling us for the last several weeks.