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

We would like to welcome everyone to Iochpe-Maxion's Second Quarter 2021 Earnings Conference Call. Present at the conference today and available for the Q&A session are Mr. Marcos S. Oliveira, Chief Executive Officer; and Mr. Elcio Ito, Chief Financial and Investor Relations Officer; as well as Luis Abreu, Strategy, M&A and Investors Relations Director. We would like to inform you that this conference call is being broadcasted 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] [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 information currently 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 which may or may not occur. Now, I would like to turn the conference to Marcos S. Oliveira, Iochpe-Maxion CEO. Mr. Oliveira, you may begin the conference.

Good morning, everyone. Welcome to the Iochpe-Maxion's result conference regarding the second quarter of 2021. Even though, there were uncertainties regarding the pandemic, a result of the global automotive industry during the second half of 2021 have presented a meaningful recovery in sales and production of vehicles when compared to the same period in the previous year. The demand from the main markets has been consistent. But the supply of certain inputs, particularly semiconductors is still irregular, thus limiting the production of light vehicles and with a lower impact in commercial vehicle production. Global automotive production, excluding China, has presented an increase of 6%-7% in the second quarter. And with regards to the first half of 2020, which was the hardest hit vehicle sector impacted. The growth in commercial vehicles has been noticed in all the regions where the company operates. Our net operational revenue has achieved BRL 3.2 billion, a new quarterly record for the company, moved forward by the huge demand in the production of commercial vehicles. We have reached an adjusted EBITDA of BRL 602 million in the second quarter of 2021, a meaningful growth compared to the negative result documented in the previous years. Even though there is no gain in the judicial rulings about the PIS/COFINS that was acknowledged in 2021 and not a recurring event, we would have an EBITDA of BRL 404.9 million with a margin of 12% -- 12.7%, in fact, which is a quarterly record for the company. Our operational results in the second quarter of 2021 still reflect a recovery scenario of the global production of vehicles regardless of the shortage of semiconductors. It also shows our operational recoveries, the restructuring conducted in 2020 and the positive effect in the diversified model of the company in its geographical locations, customer base, product portfolio and the commercial and light vehicle segments. I'm going to follow the slides containing the presentation, which has been made available in the company's website. And one -- as one can see in Slide #2, the trends for production in light vehicles all over the world show the recovery of the global market. And the projection for light vehicles in 2021 is a global production of 82 million vehicles, a growth of 10% when compared to 2020 and a growth of 12% when we exclude China from the global production. The 82 million units industry projected by IHS for 2021 was about 84 million at the beginning of this year. One can see here that even though there is a consistent demand in the main automotive markets around the world, the limitation and availability of inputs, particularly around the materials such as semiconductors, has brought about limitations when it comes to the capacity of production. Commercial vehicles, which has been less impacted by semiconductors also shows an important growth, reaching approximately 3.7 million vehicles in the production -- projection for 2021 with a growth of 25% in automotive production, excluding China. And we're getting back to the same levels of 2019 in 2021. On Slide 3, some of the main highlights of the second quarter of 2021 are listed. Our net revenue of BRL 3.2 billion has represented an increase of, in fact, 171.7% in the second quarter of 2021 versus the second quarter of 2020. Our adjusted EBITDA of BRL 602 million shows a margin of 18.9% in EBITDA. That also excludes gains in the exclusion of ICMS in the PIS/COFINS calculation. So we reached BRL 404.9 million with a margin of 12.7%. Our gross profit was BRL 420.7 million with a margin of 13.2% -- gross margin of 13.2%. Our net debt divided by the adjusted EBITDA was 2.74x a reduction when compared to the first quarter of 2021 when we achieved 5.74x. Our net income in the second quarter of 2021 was BRL 214.8 million. On Slide 4, we can see the net operating revenue. And these are the consolidated results for the company. And this is BRL 3.184 billion, a growth of 1.6% versus the first quarter of 2021 and a growth of 19.4% when compared to the second quarter of 2019, which was more of a normal quarter when it comes to production, sales of vehicles around the world. Our revenue by region can be seen on the right-hand side chart where South America represented 29.4%; North America, 26.5%; Europe, 33.7%; and Asia, once again, above 10% at 10.4% of the operational revenue. On Slide 5, when we see the net operating revenue by product, we can see the positive impact of the growth of the truck segment, particularly in the Americas. And the participation of structural components for commercial vehicles in this revenue, which represented 16% in the second quarter of 2020, and it now stands at 21% of the company's revenues. Aluminum wheels for light vehicles have maintained themselves quite stable at 30%. Steel wheels have faced a small decrease, particularly in function of the limitation of the production of light vehicles around the world. On Slide 6, we can see how the revenue has evolved for each segment of the company. And we can see that the Commercial Vehicle segment, which represented about 35% in 2015 up to 2017, on the second quarter of 2021 has reached 44%, and light vehicles coming at 56% for the company. On Slide 7, revenue per customer shows, particularly the business dynamics of different car manufacturers around the world. But this is to be highlighted, particularly because of the growth in the segment of spare parts by the company, which represented 4.1% and now represents 6% in the second half of 2021. On Slide 8, when we look into the main regions where the company operates. In South America, we've had a growth in net operating revenue of 426.8%, thus achieving a revenue of BRL 936 million in the second half of 20 -- second quarter, in fact, of 2021. In 2020, the second quarter was the most impacted in the Brazilian market, as well as all over the world. We can see that the Brazilian market performance when it comes to vehicle production is listed at the bottom left-hand side. And the growth of light vehicles in the second quarter of 2021, a growth of 286% and the growth in commercial vehicles of 259%. We can see participation in the consolidated net operating revenue for the company all over the world, which stood at 15% approximately in the second quarter of 2020 with a high impact of the pandemics back in a day. And in the second quarter of 2021, it now represents 29.4%. Once again, this benefits the increase in sales for light vehicles, but particularly for the sale of commercial vehicles and new businesses in wheels and structural components. On Slide 9, looking into North America, we have reached net operating revenue of BRL 844 million, a growth of 145% in comparison to the second quarter of 2020. When it comes to the number of vehicles produced in North America, the light vehicle segment has presented a growth of 132% and for commercial vehicles, a growth of 94%. Once again, the growth of commercial vehicles has been really important along the second quarter of 2021, and we can see the irregular supply of raw materials, particularly for light vehicles in North America in a more highlighted way. We can also see the ramp-up in our factory in Mexico that now continues to consistently in 2021 to grow. North America represented 29.4% of our revenue in 2020, now represents 26.5% in the second quarter of 2021. On Slide #10, looking at the European market. We can see a net operating revenue of BRL 1.72 billion, a growth of 86% in relation to the second quarter of 2020. The growth in the production of vehicles in Europe, in light vehicles is 88.5%, and in commercial vehicles is 75.7%. Europe has been less affected in the second quarter of the previous year. In relation to the other market, represented 49.2% of the consolidated revenue in the second quarter of 2020 and in 2021, returned to the normalized level around 33.7% of our global revenue. On Slide #11, looking now at the Asian market and other, especially India and Thailand and China that represent most of our revenue in Asia, we've had a growth of 348.5% in the operating revenue -- net operating revenue in the second quarter of 2021. We can see the recovery in India being more stronger. In light vehicles it grew 408.2%. In commercial vehicles, it grew 341.3% in the second quarter of 2021. Thailand had a growth of around 162% in the second quarter of 2021. The growth in the region has been limited due to the surge of cases of COVID-19 in India. And in Thailand, it decelerated the production. The growth in production in China was one of the highlights of the quarter and the ramp-up of our factory of aluminum wheels in India is ongoing. There was a growth of 239% of the volume of production in the first half of 2021 when compared to the first semester of 2020. On Slide #12, we reached a gross profit of BRL 421 million in the second quarter of 2021, and a gross margin of 13.2%. The increase of gross profit in the second quarter is due to the revenue growth and great operating leverage. The first quarter -- the first half of 2021 reached a gross profit of BRL 830 million and a gross margin of 30.1% -- 13.1% when compared to 1.4% of the first half of 2020. On Slide #13, looking at the adjusted EBITDA and the margin of the company. We reached an EBITDA of BRL 602 million in the second quarter of 2021 when compared to the negative EBITDA of BRL 144 million in the first -- in the second quarter of 2020. The EBITDA in the second quarter of 2021 was benefited by the devaluation of the option to purchase of subsidiaries shareholding of around BRL 6.7 million and the net gain from the final court ruling from the exclusion of ICMS of the PIS/COFINS calculation basis, which represented around BRL 190.2 million. Excluding non-recurring effects, the EBITDA of the second quarter of 2021 was BRL 404.9 million with a margin of 12.7%. First months of 2021, we reached adjusted EBITDA of BRL 977 million and a margin of 15.5%. On Slide #14, we can see the net income of BRL 215 million in the second quarter of 2021 in relation to the loss of BRL 352 million in the second quarter of 2020. Along the 6 months -- first 6 months of the year, we reached a BRL 266 million profit in relation to the net loss of BRL 343 million in the first half of 2020. On Slide #15, we can see the main investments related to safety, maintenance, new product launches and productivity, which was around BRL 80 million in the second quarter of 2021 compared to the BRL 85 million on the second quarter of 2020. Along the first semester of this year, we've had a total investment of BRL 140 million, with a reduction of 28.6% related to the first half of 2020. On Slide #16, we can see the financial leverage and the liquidity ratio of the company. We've had a net debt of BRL 3.982 billion in the second quarter of 2021, a reduction of -- from the BRL 4 billion of the first quarter of 2021. Our financial leverage that peaked in the first quarter of 2020 was reduced for the second quarter of 2021, and we reached around 2x. The liquidity ratio of the company was around 0.75x. And when we look at the short-term debt of BRL 1.799 billion and the cash in the final of the second quarter was around BRL 1.355 billion. On Slide #17, we can see the indebtedness of the company and the composition of its debt that in the end of the second quarter of 2021 was around 47% in real, 37% in euros, 11% in dollars and 5% in other currencies. At the end of the second quarter of 2021, 67% of the debt is long-term and 33% short-term. We had an average cost of 2.5 years of -- to 4.6 years as the average term. On Slide #18, we can see some of the highlights of ESG for the company in the second quarter of 2021. Around -- about the environment, there are a lot of initiatives. We got the responsibility -- Environmental Responsibility Award from Mercedes-Benz of Brasil due to the Autoset PID/Machine Learning, and our Cruzeiro plant's effluent station with a direct impact of reducing environmental risks. We're focused on machine learning and automation in the decisions of the process. We also had recognition in the second quarter of 2021. Our different customers as Supplier Excellence Award from CNH Industrial in South America; Logistic & Quality - Excellence Performance Award from Honda in Brazil; Honda Service Award from Honda in Mexico; Certificate of Achievement - Quality and Delivery from Isuzu in Thailand; Supplier Quality Excellence Award from GM in the U.S., Mexico and Brazil; Masters of Quality Buses Mexico from Daimler Buses. In social aspects, we continue to improve the implementation of our initiatives related to Diversity & Inclusion, which is our Unique and United project, with the launch of our global policy of inclusion in the company. We also had a food donation campaign at plants in Brazil where we donated 15 tons of food for needy families in cities where Iochpe-Maxion operates. The positive effect of our model being diversified in geography and base of clients and products in light and commercial segments, the improvement of the operational and the implementation of the projects of digitalization permits us to continue to advance in attend even better the structures of the automotive industry. In combustion, in the utilization of internal combustion motors or electrification of the fleet of the global fleet, we can observe different awards and recognitions coming from our clients all over the world. Our search for global growth in the different products and segments where we operate, made possible in the first semester of 2021, the growth of 237% of the produced volume in the new aluminum wheels plant in India, with a growth of 437% (sic) [ 477% ] of production in the stamps factory in Mexico, always related to the first semester of 2020. About the production of aluminum wheels in China, we continue with the construction of our factory and installation of equipment with the forecast of starting operations in the beginning of 2022. We are always attentive to the market movements and prepare to act. We will keep the focus of the strategic agenda in the long-term with innovation products and digitalization as well, consistently advanced -- advancing in our productive capacity, launching new programs and aligned with environmental, social and governance systems. We would like to open for the questions now.

Congratulations for the results. The first one is about indebtedness. If you have a forecast of the improvement of the debt? And what's the strategy? The second question is, do you see the influence for the second semester of the stock recomposition of the automotive industry?

Elcio here. About indebtedness, it's important to highlight that the steps that we have been taking and how we will look from now on. So first step in the pandemic was to improve our cash flow for around BRL 1.5 billion in short-term debts. In some instances, we also accessed some long-term lines with European governments. This cash is initially built due to the uncertainties of the duration of the pandemic. The second step was to refinance longer term. The first important movement was the approval of the line from BNDES of BRL 940 million and in sequence, around $420 million for 7 years. We then got the preventive approval going to the leverages that we are still very under these levels. And the fourth step here, just for us to build the time line and the next steps, we are continuously analyzing the best opportunity and the cost benefit to improve the profile of the debt. We are much better than we were in the past with the performance of the company and leverage. And it's important to mention that in the international capital market, and what we pay to BNDES serve to liquidate bank operations that opened up capacity or flexibility in the bank market. And we also debuted in the capital market, which can make other opportunities from now on. With this, the strategy of continuing to reduce the application of this over -- of overflow of cash and the structure of capital, we had the BNDES line of BRL 940 million. We paid BRL 220 million. So we still have BRL 620 million to pay. Contractually, we have until February 2023 to pay this value. So we are evaluating different alternatives and options to continue to search for that. So answering to your question, we clearly have opportunities and options to continue to advance in this system, and we will always be analyzing the opportunities that are more feasible and looking for the best moment to execute.

And in with regards, with regards to your second question. We have worked along the course of the first half of the year in a strategic manner with a level of inventory that was a bit higher, particularly because of the hardships that we faced in the supply of raw materials at the turn of the year from the last quarter of 2020 and the first quarter of 2021, when the supply of raw materials, particularly steel as well as aluminum was pretty irregular, and we didn't have the same pace for delivery and the deadlines that we expected. Given the product mix and the raw material mix, we decided to operate at a higher level. So we were able to have the capacity to meet the demands of our clients in an efficient manner. In the last quarter of 2020, we had a lot of hardships. That's why we had a large amount of over time with a high number of shifts in tools in our production lines because of the raw material supply issues. So we decided to work at higher levels. So we didn't have this level of operational inefficacy. The raw material situation has been normalizing between the first and second quarters of this year. And at the same time, we have, on the other hand, a large number of changes in production programs by our customers, who now given the hardships they have had in the supply of semiconductors and these changes in productions by the customers, bring about a certain level of instability in the type of product and the mix of raw materials that we use. Therefore, we have been maintaining these levels of inventory a bit higher along the course of the second quarter and the first half of the third quarter. Our goal between the third and fourth quarter of the year is to reduce our inventory in a more normalized manner, with the consistent supply of raw materials with which we normally operate. And we operate with them at every year. The meaningful growth in automotive production this year has been a reason for the increase in inventory and raw materials to meet these high levels of production, but with the stabilization in the supply of raw materials and a better visibility with a higher consistency in the supply of semiconductors for our customers, we expect that these production programs become more consistent over the course of the second half of this year, particularly the fourth quarter of this year and the first quarter of next year with a more normalized level of inventory in comparison to what we normally have.

Could you please be able to comment to the price dynamics in the second half? And what you have seen along the third quarter of this year and what you see for the second half of this year.

Well, [ Catherine ] we have been very consistent since the beginning of the year to pass over costs and increases of prices in raw material as we have been doing historically, and as we have been able to do. Historically speaking, just passing over 100% of these costs to our customers. They happen differently in each region and for each client, depending on the type of a contract and the procurement agreement we have in place with these customers. We have predefined formulas, which have a certain time lag for the adjustments of indicators like CRU or LME in international markets for these updated prices to be reflected in our products as well as in other products in markets and regions, which negotiate these items, customer by customer, product by product. Along the first half of the year, we have been applying these increases consistently within our expectations. When it comes to figures and deadlines, and we believe that this is going to maintain itself throughout the second half of the year, as variations in raw material prices appear. I would say that the estimates have been quite consistent and within the expectations of the company.

The next question comes from Victor Mizusaki with Bradesco BBI.

I have 2 questions to ask. When we're looking to leverage, we see that it happens below the level of 3.5%, which shows a trend for decrease or reduction getting to 3x by the end of this year. Considering that this trend is going to continue in 2022 and 2023, what could Iochpe do when it comes to new projects? Then what can be discussed about that. And when it comes to the one-offs, I wanted to know about the gains in the valorization of the price option or purchase option, in fact, and the cost of reconfiguration for the second quarter. And if we can expect anything else for this quarter.

Victor, thank you very much. I'm going to answer the first question, and then Elcio is going to answer the second one. When it comes to leveraging, this was our plan, and it was -- it still is to maintain the focus and the strengthening of our balance sheet. This is the work we have been doing in the second half of -- the second quarter of 2020 when this industry started recovering from the pandemics. And this repeats itself in 2021. So the focus in our balance sheet is important for the continuous reduction of the financial leveraging. And we hope that this will continue happening over the course of the next quarters. Even with a focus on the sturdiness of our balance sheet, we have been investing in the increase of our operational efficiency in the several plants we have all over the world as well as in the deployment of those plants that were in our strategic planning, such as the aluminum wheel plant in India, which is still in the ramp-up period, because we started in the end of 2019, we moved along through 2020, and we are still doing the ramp-up in 2021, and that is still going to take place over the next quarters. We have the plant in Mexico, which is in ramp-up mode as well. And the main investment has been done back in the day, but we have incremental investments, which have been happening quarter-by-quarter. And as we increase production, we install new equipment for the increase in production. And the building of the aluminum wheel plant in China, we have moved along with the deployment of the plant with new equipment being installed. So ramp-up is going to start next year. Our main focus has been in our balance sheet, the improvement of our operational efficiency, the launch of new programs and products. We've gained many of them all over the world throughout the course of last year. And such programs and products are being launched throughout the course of 2021 and 2022. So we have investment to meet the requirements of these new programs and products. And that goes hand-in-hand with the organic growth in such markets and in products where we perceive an interesting opportunity, not just for a better penetration or meeting the demands of a market in a growth phase. We have invested in innovation in advanced engineering to increase the added value of our products in the future of productivities. For internal combustion engine, this is going to remain relevant, and this is going to be applicable to electric motors as well. And we have been working for these products to bring more added value to customers. And this is a focus on 2021 and 2022. Of course, in the future, one may be able to perceive market opportunities. For us to be ready for opportunities that will arise, but this is not our focus for 2021-2022. Our focus goes along the lines of what I said earlier -- organic growth and strengthening of our balance sheet and the programs for productivity improvement. Well, I wanted to add that when you mentioned leverage, you excluded PIS/COFINS, but we are at 2.74x. Of course, the PIS/COFINS has an impact. It's not an immediate cash, but it's going to be monetized over the next fiscal years. And it is linked to the interest rate at its foundation. So we're going to monetize on that over the course of next year. When it comes to the BRL 6.9 million in gains for the options of this kind of initiative, we have a formula, which given the results that we've had in the previous years, and considering the impact of the pandemics, we have had this devaluation in the purchase option. So we have seen the same impact last year. So this happens on a yearly basis. It moves up or down depending on the results, and this happens on a yearly basis. When it comes to the internal restructuring data, we have mentioned that most of our restructuring process was conducted last year. So this year, we are conducting the Akron plant and the closure of that plant is moving along quite well. So we expect less and less impacts as a result of that topic. We're just monitoring the large number of activities that we started last year.

[Operator Instructions]. The next question comes from [ Guilherme Nunes ] by Condor Insider.

I wanted to ask a few questions. The first one has to do with your idle capacity. You see many of your customers with raw material issues or maybe some kind of downtime, particularly in Brazil, some car manufacturing companies have announced that, and we wanted to know how you perceive that. And another thing has to do with the Mexico scenario that you announced recently, where you wanted to have an agreement of around BRL 150 million, if I'm not mistaken. Have you updated any of that?