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

Good morning, and welcome to the presentation of our results for the second quarter for 2022. Available today for the question-and-answer session, are Marcos in -- our President and Director. We would like to like to know that this video conference is being recorded and will be available on the company's site. [Operator Instructions] Any questions regarding forecast for the company results are beliefs and forecast by our directors and by the information available to us at this time. They are not statements and they can depend on circumstances that may or may not happen. I'd like to give the floor to Mr. Marcos Oliveira to start the presentation. You can start.

Good morning, and welcome to the results video conference for the second quarter of 2022 of Iochpe-Maxion. The second quarter of 2022 was still marked by the global economic and geopolitical uncertainties and the bottlenecks in the supply chain, especially with regards to semiconductors, the historically high inflation levels and growing interest rates around the globe. Even in face of this scenario, we have once again obtained a robust performance. The global production of light vehicles, excluding China, according to IHS consulting presented a slight growth of 2.6% in the second quarter when compared to the same period in the previous year. The segment of commercial vehicle presented an increase in global production, excluding China, of 4.3% according to LMC Consulting, highlighting an important growth of the Indian market during this period. The performance and resilience of our results are due to our diversified business model and operational discipline. The participation in the segments of light and commercial vehicles as well as the diversified geographies and products and closeness of our predictions to our clients and consumer markets. We're determining factors for the results of the second quarter of 2022. Even in face of a still volatile scenario, our operational flexibility and agility have also been important for our solid results. We will now follow the slides made available in the company's site in which you can follow during our presentation. In Slide #2, we can observe a recovery of the global vehicle market with a forecast for light and commercial vehicles. The forecast of IHS for light vehicle production indicates global production in 2022 of 81 million vehicles, a growth of 5% in global production or a growth of 7% when we exclude China from these numbers. LMC's forecast for commercial vehicles shows a growth of 4% in global production of vehicles, excluding China or a downturn of 11% in global production when we include the Chinese market in these numbers. In Slide #3, we can observe the main highlights of the company during the second quarter of 2022. We have achieved a net revenue of BRL 4.2 billion, an increase of 31.7% when compared to the second quarter of 2021. Our EBITDA of BRL 534.6 million with a margin of 12.8%, a reduction of 9.8% when compared to the second quarter of 2021. Excluding nonrecurring factors, the second quarter of 2021 would have presented a growth of 25.2%. We have achieved gross profit of BRL 534.7 million with a margin of 12.8%, an increase of 27.1% when compared to the second quarter of 2021. Our financial leverage or the net debt over EBITDA is up 2.2x, a reduction of -- when compared to the second quarter of 2021 when this comparison was of 3x and an slight increase when compared to the first quarter of 2020 when this relationship was of 2.1x. We have achieved net revenues of BRL 190.5 million in the second quarter of 2022, a reduction of 11.3% when compared to the second quarter of 2021. Our total liquidity was of BRL 1.8929 billion in the second quarter of 2020 compared to BRL 1.386 billion in the first quarter of 2022 and BRL 1.355 billion in the second quarter of 2021. In Slide #4, we can see the net operating revenue of the company by region. South America represented 30% of our net revenues, North America, 30%; Europe, 31%; and Asia and other markets, 8%. Our net operating revenue in the second quarter of 2022 was BRL 4.192 billion, a growth of 32% when compared to the second quarter of 2021. The revenue increase in the second quarter of 2022 was due to the launching of new programs and products and a greater mix of sales in the segment of commercial vehicles. Slide #4 -- 5, we can see the company's net operating revenue breakdown. The revenue by product presented a growth in the participation of structural components revenues with a growth of 21% to 24% in the second quarter of 2022 and a reduction in the participation of aluminum wheels for light vehicles, which represented 30% in the revenues of the second quarter of 2021 and now represented 25% in the second quarter of 2022. We had a growth of 41.6% in the revenues for commercial vehicles where commercial vehicles representing 44% in the revenues of the company in the second quarter of 2021 and now represented 48% in the second quarter of 2022. The revenues by division were positively affected by the growth of commercial vehicles, presenting a growth of 47.6% of revenues in the division of structural components, which represented 24% in the second quarter of '21. And now structural components represent 27% in the second quarter of 2022. Slide #6 shows revenue by clients, and we can see the positive impact in the growth of commercial vehicle segment in the participation of the clients where there's greater exposition to the segment by the company. In Slide #7, we see the operational performance for South America. And we see that the revenues for the second quarter of 2022 was BRL 1.273 billion, a growth of 36% when compared to the second quarter of 2021. This growth was 43.3% in the segment of commercial vehicles and 22.7% in the segment of light vehicles. South America represented 29.4% of our net operating revenue in the second quarter of 2021 now represented 30.4% in the second quarter of 2022. Looking at the performance of the vehicle production, specifically in the Brazilian market, we can see that the segment of light vehicles has grown 3.1% in the second quarter of this year when compared to the same period last year. And the segment of commercial vehicles had a slight reduction in production of 3.8% in the second quarter of 2022 when compared to the second quarter of 2021. Throughout the first semester, we have announced our investments in capacity expansion in the segment of commercial vehicles, both wheels and structural components to support the growth of this segment in Brazil. Slide #8, operational performance for North America can be observed through a growth of 50.8% in net operating revenues in the second quarter of 2021 when we reached revenues of BRL 1.273 billion when compared to the second quarter of 2021. The growth of commercial vehicles was 50.9% and the growth in the segment of light vehicles was 50.7% in the revenues of the company. North America, which represented 26.5% of the company's revenues in the second quarter of 2021, now represented 30.4% in the second quarter of 2022. Looking at vehicle production. During the second quarter of 2022 in North America, we see a good performance of the light vehicle segment with a growth of 11.7% when compared to the second quarter of 2021 and a growth of 2.6% in the segment of commercial vehicles during the second quarter of 2022. In Slide #9 looking at the European market. We see a growth of 22.8% of the company's net operating revenue in the second quarter of 2022 when compared to the second quarter of 2021, with net operating revenue of BRL 1.6 billion in the second quarter of this year, where growth was up 19.1% in commercial vehicles and 32.8% in white vehicles. Europe represented 33.7% in the second quarter of '21 and represented now 31.4% in the second quarter of 2022. Despite the downturn in the commercial vehicle market, we had a good performance in the segment. And you can see the vehicle production in the European market in the second quarter of 2022. That has grown 3.9% for white vehicles, representing -- and represented a downturn of 8.4% in the segment of commercial vehicles throughout the second quarter of this year. For Slide #10, by observing Asia and other markets. The company's revenue was BRL 330 million in the second quarter of 2022. That represented a growth of 11.7% in commercial vehicles and a slight drop of 4.8% in the light vehicle segment. Performance in the light vehicle segment was negatively impacted by the temporary stoppage of one of the main companies -- main customers in South Africa and by the drop in the demand in the Thai market. We can also see growth in sales and production in India, particularly in commercial vehicles. The India market had a growth of 31.7% in the production of light vehicles and the growth of 77.3% in the segment of commercial vehicles. On Slide 11, we can see the company's growth profit of BRL 535 million in the second quarter of 2022 that represented a growth of 27.1% compared to the second quarter of 2021 and a growth of 38% in the gross profit during the first half in 2022 when we reached a profit of BRL 1.146 billion. On Slide 12, looking at the company's EBITDA, we reached BRL 535 million in the second quarter of 2022, which represented a drop of 9.8% when compared to the second quarter of 2021. Disregarding the nonrecurring effects in both periods, the company's EBITDA in the second quarter of 2022 would have represented a growth of 25.2%. And the main nonrecurring effect in both periods were related to the exclusion of sales tax and the PIS/COFINS base. Over the first half of 2022, we reached the EBITDA of BRL 1.083 billion, which represented a growth of 49% when compared to the first half of 2021. On Slide 13, we reached a net income of BRL 190 million in the second quarter of 2022, a decrease of 11.3% when compared to the second quarter of 2021. Over the first half of 2022, we had a growth of 31.7% in the company's net income if compared to the first half of the previous year, reaching a net income of BRL 351 million. As you can see on Slide 14, we can see the company's investments. In the second quarter of 2022, we had a total investment of BRL 132 million, which is a growth of 64.7%. The main investments in that period were related to increasing capacity in order to meet the demand of the commercial vehicle segment by the launching of new products and improving productivity. The company's total investments in the first half of 2022 were BRL 23 million or 52% above the same period of the previous year. On Slide 15, we can see the financial leverage of the company. At that point, we reached 2.21x the net debt over the EBITDA in the second quarter of 2022 compared to 3x in the second quarter of 2021. For Slide #16, we can see the company's liquidity ratio, which is the liquidity over the short-term debt that reached an index of 1.48x in the second quarter of 2022. Just to remind you that in the second quarter 2022, we had a contract with revolving facility that is BRL 500 million for a period of 3 years as part of the company's liquidity strategy. The company's total liquidity, which is the cash and the cash flow equivalents plus the revolving credit facility is BRL 1.893 billion in the second quarter of 2022, if compared to BRL 1.386 billion in the first quarter of 2022 and BRL 1.355 billion in the second quarter of 2021. For the next slide, #17, we can see the composition of the company's gross debit. In other words, debt. And it has 50.3% of the debt in reals, 36% in euros, 9.1% in dollars and 4.1% in other currencies. Our long-term debt grew from 66.5% in the second quarter of 2021 to 68.8% in the second quarter of 2022. On Slide 18, we can see some of the highlights of our activities in the area of Iochpe. We had the release of sustainability report for the year 2021. We were able to present reductions in the CO2 intensity in 4.8%. A reduction in the use of water per kilo produced by 13.75%, a reduction in the total consumption of natural gas of 6.1%. All these indicators in relation to our base in 2019 was used to calculate the sustainability-linked bond. We had an improvement in the levels of Sustainalytics rating. We had an upgrade from severe to low-risk rating and also an advance in the disclosure of ISG practices. For Slide #19, we can see some acknowledgment of our customers by John Deere and DAF here in Brazil; acknowledgment by Iveco, the Maxion [indiscernible] factories in Brazil and Argentina; by GM, the wheel factories in the cities of Limeira in Brazil and Sedalia in the U.S.; and also by Navistar, the Structural Components factory in Mexico. We are now going to proceed with the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Lucas Laghi from XP.

Well, 2 -- there are 2 points that I would like to exploit with you regarding revenue, starting the volume. But considering all talks with Iochpe with the assembly lines, how can you see this recovery of the light vehicles with the case numbers of semiconductor? So is this for the next quarter? And how is the end of this demand can be caused by a demand crisis? So in Europe, for instance, we have major concerns regarding these. So we know that we have this kind of offers. We don't know how far they are from demand. So I would like to see -- I would like to know how you see this possible negative effect of a recession and prioritizing the car assembly lines just facing the other one. So this is regarding volume. And a second question, but considering prices, okay? So price by unit of the products. We can see a sequential drop in the price of commodities. So steel and aluminum are dropping in the second semester compared to a higher level on the fourth quarter and the first quarter of this year. So I was just wondering, has it ever happened any price adjustments to a lower price, which can explain the drop in the 2% that you mentioned, given that volumes are in slight recovery? And by looking at the third and fourth quarter in Brazil, if we take the seasonality aside. So could we think of a higher drop in the revenue, considering these prices by unit, there are going to be higher? Or would it be possible to consider a higher? So not thinking the price of commodities almost suggest. So we can see a great effort from the assembly lines to be more profitable. So considering if that can be implied for a supply chain and for a supplier like Iochpe. So one is about volume another one about prices. So these are my questions.

Lucas, regarding your first question, the situation for semiconductors has been improving slowly but surely in the last quarters in 2021 and 2022. Our perspective within our talks to our clients and by observing the market is to have a gradual improvement in between 2022 and 2023. And we've been observing this improvement that has been taking place, both in light vehicles but in commercial vehicles on different regions in the world. So Europe, South America, North America as well. But it won't be fully solved in 2022, at least that's the perception that we have from the market. It will keep improving, yes. But for 2022, we expect to get normal again. So we'll keep watching that. We'll keep observing -- keeping an eye on that topic because there are many variables. We have the increase of capacity of semiconductors and subconductors adding many regions. They have also been facing some difficulties regarding supply equipment in order to install these capacities that they have been working. And having the availability of equipment, given the high volume of semiconductors. So that's a situation that we are going to keep an eye, and we will react week by week. We can still see on the second quarters to our clients and to have different regions due to the lack of semiconductors and stoppages with some predictability, I would say, and some others that are totally abrupt due to the disruptions in the supply chain. So this is something that we have to keep watching, we have to keep monitoring with our clients and being quick, being swift in the reaction regarding to eventual changes in the program and in the production from our clients. Regarding the demand, we can also watch regarding the macroeconomical events in the world. So we were able to see, for instance, in Brazil, growth in production and also vehicle sales. When we look at the projection of the whole year of 2022, IHS is still anticipating a 7% growth in the production of light vehicles throughout the whole year of 2022, except for China, as we said. So it is positive, yes, but we have to monitor the side effects of increase of inflation numbers and market prices of inputs, generally speaking, especially for vehicles in different markets. The availability for credit that are going to be offered in Brazil and in other countries. And of course, the final impact of this -- [ these ] acceleration, I would say, that can happen in different levels, both Europe, North America and Brazil. So once again, in the situation of semiconductors, we are very much connected to our clients on a weekly basis and trying to avoid working or act in an intensive way. So regarding to what's going on in that week or that month, so that we can optimize our operational plan for production on different factories all over the country. So I believe that the second half of the year, it's going to be different for what happens in the first half if we observe on a weekly basis, on a monthly basis, what's going on with the production from our clients and the demand at that end. But broadly speaking, we can -- we were able to see the numbers in IHS. So indicators are for slight growth, both for light and commercial vehicles all over the world, again, except for China. And an even more accelerated growth in 2023, both ISE and IHS, they point to growth around 9% growth in light vehicles. So these are positive indicators. But of course, we'll keep a close eye on that. Regarding the drop in the revenue that you mentioned, there are 2 important factors right now. The drop in demand that you see when you look at the revenues in the second quarter of 2020 compared to the first quarter of 2021, looking at the same exchange rate, you see that the company has grown a little bit over 4%. But when you include the exchange rate where we see some variation between the first and second quarters. You see this drop that you have mentioned in -- of 2%. In general lines, if we keep the same exchange rate, we have a growth of 4%. We have continuously worked throughout the year of 2021 and 2022 to pass the increase in raw materials on as they happen in each moment in each market. They do not occur in a uniform manner. They work differently. And the planning of our purchases for raw materials and the planning for the market, we have observed that acceleration we saw in 2021 in the price of inputs is not occurring in 2022. We have a more stable basis of raw materials, especially aluminum, there was a pick of increase, a temporary one, especially in the turn from the first quarter to the second quarter due to the situation between Russia and Ukraine in Europe, prices went up very quickly to about -- from $2,500 -- $1,000 to $4,000 very quickly. And now they are back to around $2,500 or $2,600 per ton again. And that has to do with the moving in export raw materials in the European continent. Now the situation is more stable, but we are working passing on these changes, this increases or reductions as they happen according to the contracts or agreements we had to have with some clients. In some cases, we have predefined formulas that define the variation of the prices in raw materials and the effect of this change to our products and other cases are negotiated product by product, client by client, region by region. We will maintain the same consistency we had in 2021 and the first semester of 2022. In the next semesters, passing this variations on as they happen according to the agreements we have with each of our clients.

Next question comes from Luiz Capistrano, sell-side analyst from Itau BBA.

Marcos, congratulations on your results. My question, a follow-on, on Lucas' question regarding volumes. And then I want to ask you something about margin, starting with volumes. Marcos, you talked about IHS forecast for 2022 of 7% when we're talking about levels comparing '22 to '21. When we compare only in Brazil, we have 1%. And what I ask is, of course, the other geographies are -- have a different situation that is different from Brazil. Or is IHS being more conservative or more optimistic depending on the areas. How can you say? How are -- how conservative are these numbers? And how does Brazil compared to the other geographies? And with regards to margins, we saw in the second quarter when compared to the first one, you see an increase in the mix of light vehicles, of course, with a lower participation of the heavy vehicles. And this was something we saw in the last quarters. Can you say that we may be approaching a time of inflection, with margins that will be less important throughout the years and the results of the company will suffer negative pressure?

Luiz, good morning. Thank you for your questions. The growth dynamics that we have observed especially in production because these are the numbers from IHS or LMC regarding production that happened or a forecast for the future so accelerated or recovery great year by year in markets such as the United States, the North American market that we have observed during this last semester and some other markets like the Indian markets had a very important growth. So when you see the full number by IHS, it takes into consideration markets from all over the globe. In terms of Brazil, the indications we have are in a growth of about 4% to 5%. Of course, it's a little below the global average, but production increase is not that far from global production. As I mentioned before for Lucas' questions. These are things that have to be monitored every week and every month and depend on the availability of inputs such as semiconductors and how each of these markets behaves. But when you're talking about the average global production, excluding China and Brazil, with a expected growth of 4% to 5%, that's a good successive growth after a growth of 3% last year. But with a positive perspective, also for the year 2023, for which our perspective regarding the availability of inputs should have a positive input throughout next year, reminding you also that we still have a demand that has not been met in the various markets where we operate. Demand throughout the first semester was higher than the production capacity of the manufacturers. And this is being met and will be met in the next years and semesters. So we can see these numbers as directions. They can vary, but we're talking about positive numbers, and we are working on this basis, both for the Brazilian and other markets. With regards to the growth of light vehicles and commercial vehicles, I think that something interesting is happening. The demand for commercial vehicles, especially in North America, South America and also in Europe, although we have seen a small reduction in the second quarter for commercial vehicles in Europe, we still have a very strong demand, both for Brazil, North America, Europe, India, the demand is too strong. The manufacturers, too, working to meet orders that they have waiting in line. So the speed of this growth can be very interesting because the orders they have in their portfolio should be marked in the second quarter and the next few months. And the demand for 2023 is positive. The forecast in Europe and Asia is positive. And in Brazil, the trend is for a positive demand. We know there's a transition expected in the end of 2022 and the beginning of 2023. But in general, we have a positive demand. So if we look at this speed of this growth in 2021 and to 2023 continue at the levels that I am seeing LMC and IHS show. We would have a stable growth at least in the next few quarters. Considering that in 2023, both commercial and light vehicles would be growing about 9% when compared to the year 2022. The matter of margins varies quite a lot from one quarter to the next, depending on products, costs. You know that the pressure of inflation is real all over the globe. We are passing this increases as they happen, but they do not occur synchronized exactly with the increases. Usually, there is a deficit, considering the increase of cost and when this is based on to our clients due, again, to contract or stabilization in the index market indexes. So this deficit can vary to 4 or 5 months for this cost to be passed on to the prices. But we are continually working, revising and updating the needs according each month and each quarter, and that may cause variations in margins. So we look at the year as a whole, where you can see again a consistent -- greater consistence in the variation of costs and how they are best on to our prices and to our clients and having a more broad view to the alignment of this cost and prices and how we operate.

Our next question comes from Marcelo Motta, sell-side analyst from JPMorgan.

I have 2 quick questions. First, a comment on South Africa and Thailand. I imagine you had some supply chain issues affecting the stoppage from South Africa. I'd like to know if you see something more cultural. And the Thai market, you talked about lower demand? Would that be structured or even specific stoppage? And regarding Europe, how do you see the margins, the issues regarding inflation and the cost of power, which is quite relevant for you? And sometimes this is not in your contract regarding price adjustments. So I just want to understand how you see this change in margin considering power and utter bottlenecks you might have.

Again, Motta, good morning. Thank you for your questions. First, with regards to South Africa, that was a temporary stoppage in our largest client in South Africa due to a climate problem. They had an important flood in their factory during the second semester, which had to stop their productions during the second quarter. And those going back into -- gradually going back into production. This is not an issue of demand or a problem with inputs or logistics. It was a happy circumstance regarding the climate with this flood for this large client in South Africa. With regards to Thailand, this is a market demand issue in the Thai market, very connected to the recovery in Thai economy. It's been happening gradually, but there are still ups and down with peaks in the quarter with another [ course ] is not doing so well. So they still did not add a constant or consistent level. We do believe that in 2023, the situation is going to improve, the turn from '22 to '23, it's going to improve, but they have this market and demand issue for Thailand, which has been affected since the beginning of the pandemic in a very constant way, with variations from one quarter to the other. With regards to the cost of energy in Europe, this is very important in terms of cost structures for the automotive sector in general. And power has never been a factor with subject to great variations in terms of prices throughout the years, unfortunately. And the turn from 2021 to 2022, worsened by the situation in Russia -- between Russia and Ukraine. The cost of power has increased has happened with aluminum. There was a large increase, especially in -- from the first quarter to the second but it's still higher than the levels from last year. And we have been working in the market with our clients with an understanding of the impacts of power to our various products, which is not uniform or aluminum wheels or steel wheels or structural components have different power and consumptions and demands, and we have been working with our clients to get them to understand the impact of this -- the variation in power costs on the products and passing these variations on according to what happens in the market. Of course, when you are talking about a temporary variation in the specific element, you understand, you work on and you size it and react in a way. And when we are talking about a more consistent variation that will last longer, you have to sit down with your client and get to an understanding with them regarding the implications of the variation into the general cost of the product and work with the client to see how we are going to manage that. So with the work, continuous work is not something you do in one semester or not the other. It's something we do through all time. And we have to continue with this effort, especially while we understand that these costs and availability of power and how much concern they bring, especially in the case of Europe.

Next question is from Renata Cabral, analyst sell-side from Citibank.