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

Good morning, everyone. Welcome to the video conference to discuss the results referring to Iochpe-Maxion's first quarter 2023. I'm [ Rodrigo Caras ], Investor Relations Manager and will lead today's conference. Today, at this conference will be available after the presentation and Q&A with Mr. Marcos de Oliveira, CEO of the company; and Mr. Elcio Ito, CFO. We inform that this video conference is being recorded and will be available on the company's website and also presentations will be available. [Operator Instructions] If you need any other clarification during the conference related to the business prospects, projections and operational and financial goals, they constitute beliefs and assumptions of the board of the Opiates and information is currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events, and therefore, they depend on circumstances that may or may not occur. I would like to now give the floor to Mr. Marcos de Oliveira, company's CEO; and Mr. Marcos, you may proceed.

Good morning, and welcome to Iochpe-Maxion earnings release video conference for the first quarter of 2023. This year's first quarter was still characterized by a scenario of global economic and geopolitical uncertainties. The high interest rates and inflation levels, they signal a calling trend in several countries. From an industry standpoint, bottlenecks in the supply chain occurred less frequently, signaling a gradual improvement. In Brazil, the production volume of trucks was negatively impacted due to the change in norms on the emission of pollutants for diesel engines, Euro 6. On the other hand, regions such as Europe and North America have been surprisingly positive with production levels above the initially projected for the year. Global production of light vehicles, excluding China, according to IHS consultants grew by 11.8% this year's first quarter compared to the first quarter of the previous year.  The Commercial Vehicles segment showed growth in global production, excluding China, of 2.1% in the first quarter of 2023 compared to the first quarter last year, according to LCM consultants. The company's operating margins were negatively impacted in the first quarter of 2023 due to some temporal factors. The lag between the cost of raw material inventory compared to selling prices, as we observed greater stability in raw material prices, this impact has a downward trend in the volume of commercial vehicles in Brazil, impacting operational efficiency and the remaining impacts of inflation in all regions. We continue to work to reduce the impact of cost variations, and we expect margins to recover and return to normal over the course of this year.  I will now follow the slides of our presentation. On Slide #2, we have the global forecast for light and commercial vehicles in IHS and IMC. In light vehicles, we observed a forecast growth of 4% in vehicle production in 2023 when compared to 2022 and the industry reaching a level of 85 million vehicles produced worldwide. In the Commercial Vehicle segment, we see a 6% growth in commercial vehicles production globally when compared to 2022, reaching approximately 3.2 million vehicles worldwide. On Slide #3, we have the main highlights of the company in this year's first quarter. The company's diversified business model contributed to mitigating regional impacts as observed with the drop in commercial vehicles in the Brazilian market. We had a net revenue of BRL 4 billion in the first quarter of 2023, a decrease of 6.5% compared to the first quarter of 2022. We reached a gross margin of 8.5% in the first quarter of 2023, a reduction compared to 14.3% margin in the first quarter of '22, and an increase in 7.8% margin for the fourth quarter of 2022.  We had a net debt-to-EBITDA of 2.77x in the first quarter of '23 compared to 2.06x in the first quarter of 2022 and 2.26x in the fourth quarter of 2022. We had a reduction in net debt of BRL 74.1 million in the first quarter of 2023 compared to the first quarter of '22. Our total liquidity of BRL 3.1047 billion in the first quarter of ‘23 compared to BRL 1.286 billion in the first quarter of ‘22, reaching a liquidity ratio of 1.54 fold. We also announced a partnership with a company called Forsee Power, to develop products and solutions for vehicles with electric propulsion. Slide #4. Now looking at the company's consolidated operating revenue, we reached BRL 3.998 billion in the first quarter of ‘23, a reduction of 6.5% compared to the first quarter of 2022. The lower production volume of commercial vehicles in Brazil, the reduction in the price of raw material reflected in prices and the negative exchange rate variation of BRL 118.6 million, impacted operating revenue in the first quarter of '23.  Now looking at the revenue by region, we can see an important growth in Europe's share, reaching 36% of the revenue of the company, a drop of 26% in South America, mainly impacted by the reduction in the production of commercial vehicles in the Brazilian market and stability in the participation of North America, which represented 29% of the company's revenue, and Asia and other markets that accounted for 9%. And Slide #5. Now looking at the breakdown of the company's net operating revenue, we can see the revenue per product with growth in sales of aluminum wheels mainly in Europe and the share with aluminum wheels growing from 26% in the first quarter of 22% to 31% in this year's first quarter. In revenue per segment, we can see the effect of the reduction in the share of commercial vehicle segment due to the lower production volume in Brazil. Commercial vehicles representing 48% in the first quarter of '22, now represent 44% in this year's first quarter. In revenue per division, we also see a reduction in the share of the Structural Components division due to its greater exposure to commercial vehicles. Structural components accounted for 26% in the first quarter of '22. And now in the first quarter of '23, they account for 24%. Slide #6, revenue per customer, we see the variations impacted by market dynamics, stability and a slight reduction in the segment of trucks, commercial vehicles and a slight growth in customers who are more exposed to the segments of light vehicles worldwide. Slide #7. Now looking at the operating performance per region, we can see a reduction of 14.2% in South America's net operating revenue, reaching BRL 1.26 billion in this year's first quarter. The drop in the production of wheels, chassis and cross members for commercial vehicles, impacted by the change in motorization from Euro 5 to Euro 6, had an important impact in South America. On the other hand, the increased production of steel and aluminum wheels for light vehicles supported us in this region.  When we look at the performance of the Brazilian market in terms of produced vehicles, we can see an increase of 11.3% in the production of light vehicles in Brazil in the first quarter of 2023. In comparison to the first quarter of '22, and a decrease of 28.9% in commercial vehicles in the first quarter of '23. Slide #8. The operational performance in North America showed a drop of 13.9% and in revenue for the first quarter, reaching BRL 1.46 billion, which was impacted by the reduction in the price of raw materials, which were also reflected in prices. The negative exchange variation of BRL 7 million. But on the other hand, we had an increase in the volume of cross members and stamped products and an increase in the volume of aluminum wheels for light vehicles and steel wheels for commercial vehicles in North America.  When we look at the North American market, we can see a growth in light vehicle production of 9.8% and a growth of 13.8% in the production of commercial vehicles in this year's first quarter compared to the first quarter last year. Slide #9. Now looking at the operational performance in Europe. We can see a 10.2% growth in the company's net operating value revenue, reaching a revenue of BRL 1.452 billion in the first quarter of this year. The growth in the volume of aluminum wheels for light vehicles and steel wheels for commercial vehicles supported this growth in operating income in Europe. On the other hand, the exchange variation negatively affected the results by BRL 73.7 million in this year's first quarter. Now looking at the market performance in terms of the number of vehicles produced, we can observe a growth of 23.7% in the production of light vehicles and 12.6% in the commercial vehicle production in Europe in the first quarter of 2023 compared to the first quarter of 2022.  Slide #10. Now looking at Asia and other markets, we can see a reduction of 13.6% of the company's net operational revenue, reaching BRL 374 million in the first quarter this year. The reduction in the price of raw materials reflected in prices and the negative exchange variation of BRL 37.8 million affected the company's net operating revenue in the first quarter of 2023. But on the other hand, the increase in the volume of aluminum wheels for light vehicles, and steel wheels for light and commercial vehicles in India positively supported the company's performance in this first quarter. When we look at the numbers of produced vehicles in the 2 main regions, where the company operates, we can see a growth in the production of light vehicles in India of 9.4% and a decrease of 11.2% in the production of commercial vehicles in the first quarter of 2023 compared to the first quarter in 2022 in India. In Thailand, we see a growth of 3.3% in the production of light vehicles that are produced in that region. On Slide #11 now, now looking at the company's gross profit, we reached a gross profit of BRL 341 million in the first quarter of 2023 compared to BRL 611 million in the first quarter of '22. When we compare the first quarter of this year with the fourth quarter of '22, we see a 5.3% growth in the company's gross profit and a gross margin of 8.5% in the first quarter this year in comparison to 7.8% in the fourth quarter of '22. Raw material inventory with sales prices and low and lower operational efficiency due to the drop in commercial vehicle production in Brazil and the impact of inflation in all regions affected the company's results and gross profit in this year's first quarter. Slide #12. Now looking at company's EBITDA, we reached BRL 287 million in the first quarter of 2023 compared to BRL 548 million in the first quarter of 2022. When we compare the first quarter of '23, with the fourth quarter of '22, we can see a 1.5% reduction in EBITDA between these 2 periods and a growth in gross margin from 7% in the fourth quarter of 2022 to 7.2% in the first quarter this year.  The main nonrecurring effects in the first quarter of 2023 were the recognition of the gain from the exclusion of the ICMS from the PESCO Fintech index calculation based in the amount of BRL 11 billion and an expense of BRL 6.7 million with restructuring in Brazil to the drop in commercial vehicle production in the region. On Slide #13, we see a net loss of BRL 16 million in the first quarter of 2023 compared to a net profit of BRL 160 million in the first quarter of '22. When we compare this year's first quarter, BRL 16 million loss with BRL 141 million in the fourth quarter of 2022. Slide 14. We can see investments of BRL 91 million in the first quarter of 2023 compared to BRL 81 million in the first quarter last year. The investments in the period were related to the increase in capacity to meet demand in the vehicle segment, sales in North America and also the construction of our new plant for aluminum wheels for trucks in Europe.  Slide #15. We can see company's financial leverage. We reached net debt-to-EBITDA in this year's first quarter of 2.77x compared to 2.26x at the end of 2022. We had a reduction in net debt of BRL 74.1 million compared to the first quarter of 2022, and the reduction of the last 12 months is the main factor for the increase in leverage. On Slide 16, we can observe the liquidity ratio of the company, reaching 1.554 fold in the first quarter of 2023 compared to 2.6 million times in the fourth quarter of 2021 and 0.69x in the first quarter of 2022. We obtained a total liquidity of 3.1047 billion in the first quarter of 2023 compared to 2.7871 million in the fourth quarter of '22 and 1.386 billion in the first quarter of '22. In Slide 16, we can observe the indebtedness of the company and the growth breakdown. In different currencies, where euro represented 38.7%, real represented 45.6%. The dollar represented 13% and other currencies represented 2.7%. When we look at the indebtedness between short term and long term, we can see that there was a growth in the long-term debt from 64.4% to 70% in the first quarter of 2022 to 70.9% in the first quarter of 2023. We achieved the growth debt of BRL 6.42 million variation of 22.2% compared to the BRL 5.545 billion in the first quarter 2022. In the next slide, we can see the new launches, some of the new launches in the first quarter of 2023 in different regions. We had the launch of aluminum wheels for light vehicles with Mahindra in Asia. We had aluminum wheel in aluminum wheels and light vehicles with Porsche in Europe. We had a partnership with aluminum wheels with Toyota and light vehicles and also steel wheels for commercial vehicles with Wabash in North America.  Slide 19 shows us some of the partnerships with Forsee Power, some of the details about this partnership. It is an integrated solution to accelerate vehicle electrification. Forsee Power is a French company, which is a European leader specializing in smart battery systems. We also had the participation in the capital increase of Forsee Power in the value of EUR 5 million. On Slide 20 shows some of the ESG highlights regarding sustainable analytics. We had the maintenance of the low risk rating, which is the best level on the scale. We had an improvement of approximately 5% over last year's score and this ranked us in the first quartile among all companies and in a competitive way inside of our segments. Regarding the science-based targets initiative, the SBTI, it is a scientific and legitimate methodology to reach the target of the Paris agreement, which limits global warming to 1.5 degree Celsius. INSA formerly committed itself to the SBTI, and we are now working to approve our goals. So now I would like to open the floor for Q&A segment.

So now we will begin our Q&A segment. [Operator Instructions] So our first question is from Andressa Varotto an analyst from UBS.

I have 2 questions here. So first, I wanted to understand the expenses restructuring because of the subsidies here in Brazil, if you expect this expense -- do you expect more expenses of this type in the coming quarters? And I also want an update on what you expect for the commercial vehicles in Brazil? And my second question is, it's still in the same line, but about images. Could you give us some details about the operational efficiency because of the lighter because of the smaller performance, does this affect our image because we are still seeing this effect. It should improve over the next quarters. So these are my 2 questions.

It's a pleasure to answer your questions. First, regarding expenses with restructuring, observing the reduction in the production of light vehicles, which was greater than we had anticipated for the first quarter of 2023. We began some restructuring of our operations, especially in our operation in Cruzeiro where we produce wheels and structural components for commercial vehicles. And we also announced recently an agreement with the union and our collaborators to reduce the workday and the salaries in this period of reduction of demand. This is an agreement that we renew every 90 days in truth, according to the demand of that period -- of that scenario. Obviously, we will continue monitoring the trends. And if necessary, we will make some other adjustments. But we believe that the necessary adjustments, the main ones have already been made in the beginning of this year of 2023. And now with this agreement regarding the Workday and the reduction of salaries, we can manage this trend throughout the rest of the year, but we are always paying attention, and we will react according to market trends. Our perspective in terms of the reduction in the production of light vehicles for the year, this is around accumulated reduction of 20% compared to last year, remembering that the first quarter, this reduction was close to 30%. It went from 29% in truth, to the same period of the last year. So we believe that there will be a gradual improvement in this demand for commercial vehicles, trucks and the like throughout the year and the second and third quarter of this year. Regarding the lack of operational efficiency, of course, the reduction in the demand for trucks. This has been negative. But when we look at the results of the first quarter, it was very consistent with what we were projecting for this year already. In function of the conjunction of factors that were affecting the transition between 2022 and 2023. We still had a mismatch in the cost of raw materials and in the variation of the price of these raw materials in terms of sales. This has begun to stabilize.  Now at the end of the first quarter and the beginning of the second quarter of this year, we also see stability and even a slight increase in the price of aluminum wheels that will be passed on to the customers at the right time. The world crisis that affected the operational efficiency, together with the scarcity of raw material and inflationary aspects worldwide that are gradually being passed on to our clients. This allows us -- for us to forecast and count on a recovery and normalization of our margins throughout the year. We have begun to observe an improvement in our gross margin to 8% in the first quarter of this year. And we count on this gradual and sequential improvement throughout the second quarter and the second semester of this year.

The next question is by Gabriel Rezende. He is an analyst from Itaú Corretora.

I just like to follow up on Andressa's question and confirm the understanding that at first, all the factors that weighed on the margin in the first quarter, they should have a lesser impact on the other quarters than what Marcos said, the trend in the commercial vehicles is still a reduction, but a smaller reduction. And in the last quarter presentation, you said that there's a lower circulation of cargo than in 2022. So I want to confirm the understanding that we should understand -- that we should understand that there will be a lower working capital in the second quarter and perhaps a better margin in the second quarter. And the second point, talking about Europe, which has called my attention in a positive way, I'd like to say that perhaps there is an expansion of 5% between 2022 to 2023. Does this incorporate the scenario that is surprising you positively if you observe the revenue in Europe comparing the quarters, and you align this with the fact that prices are falling, it seems that the volumes are above what IHS is projecting. So I want to know if there's still space prices to be changing these projections throughout the next month.

Your understanding is correct. We do expect a substantive change in the margin throughout the second quarter, improving throughout the year because of these factors that you mentioned and that we also mentioned before then and the prices of the raw materials with the pricing of the products and the stock products that are already at very normalized levels at the end of the first quarter of this year. And this combination of factors and the stability in volumes, this allows for our margins to accelerate based on the second quarter of this year. Regarding Europe, the scenario is more positive than we imagined, and we see a growth of 2 digits in sales in Europe in the first quarter of the year in light vehicles specifically, but also among commercial vehicles, which is positive. It is superior, I would say, to the initial projections that we had made of the EHS. And with this trend and with the maintenance of the level of global growth could be even superior to this the global growth projected for the EHS for the year.  So we see Europe in a positive life. The Brazilian market despite all the concerns and all the variations regarding the segmentation between direct sales, retail, wholesale, wholesale sales. We see a growth of 4% in light vehicles that is accumulated in the first quarter of 2023. This is a good sign. It's not a 2-digit growth, but it is significant growth. And with the stabilization and gradual improvement in sales and commercialization of our trucks. We believe that the commercialization in Brazil will be more positive throughout the year of 2023. In North America, the Commercial Vehicle segment is very strong. It continues to be very accelerated. For example, 2022 in terms of commercial vehicles in North America, it was very strong and 2023 also begins in a very similar fashion to last year at a very high level. And the forecast and the indications of our customers is that this scenario must maintain itself throughout 2023. We continue producing structural components and wheels at very interesting levels in North America as we count on this performance, I would say, solid performance throughout the year of 2023. In Asia, India continues to have very good performance as a growth in light vehicles. It's still very positive growth. Commercial vehicles had a small reduction in the beginning of this year, but in comparison with last year, it's still very strong compared to 2022. And we believe that they will have very interesting performance throughout the entire year of 2023. China had a year of strong -- more demand of light vehicles in 2022 begins to show improvements, the -- the economy in China begins to show stronger indicators in 2022, which is very positive. So globally, I would say that the segment of light vehicles is performing well throughout the whole world, except for in Brazil because of the transition to Euro 6, especially in the first quarter because we -- the plant still had a lot of trucks in their inventory. Now that this inventory is being emptying with sales, we expect growth in the production of commercial vehicles. Although the light vehicle segment, it has a lot of concerns with geopolitical issues around the world, light vehicles is showing interesting growth, which will be superior to the projections of 4% and the IHS had been counting on for the year of 2023.

Our next question is by [ Fernando Hobono ], analyst from XP.

It will be a follow-up regarding margins. I think that despite this expectation throughout the year is still below historical levels. I'd like to know how this is related to leverage? What is your expectation for the next quarters? Do you think we will be able to reach the EBITDA higher than 3x by the end of the year?

Thank you for your question, [ Fernando ]. Just to reinforce that the topic regarding time are negatively impacting our margins over the last few quarters. So the dephasing of the price and raw material, if we look at the history of the prices, regarding monthly values, there has been a reduction in the last few quarters. And this effect going through inventory, this starts to be more balanced starting in the second quarter. This transitory effect is already starting to have a very substantive reduction and improvement. And it's going to depend on the prices of commodities from here on. We have an improvement in the prices of aluminum and sometimes an increase in the steel market. So we will have a more relative improvement in the next few trimesters. The impact of Euro 6 was very strong, and it can also impact the second quarter, and we will have an improvement in the production of commercial vehicles here in Euro 6.  And inflationary aspects were also strongly impacted here in the first quarter, they are also going towards a negative trend because slowly, we are recovering with our clients, and there are also inflation events. If we remember long ago, the crisis of energy in Europe, we always mentioned this the cost of natural gas reached almost EUR 350. Now it's going back to EUR 30, EUR 40. So very much lower levels, and this reduces inflationary pressure over our costs. So all the main factors that have been impacting in a transitory and temporary way, solely they are leaving the scenario and we should see an improvement based on the second trimester going to our potential margins have not changed. I think it's important to remember that this entire issue of volume that is very important for our business and our margin. This recovery of our volume with some ups and downs that we've had. This is the beauty of our business model. So when our sales fall a little bit, then Europe surprised us positively in North America as well. So this is a factor of our business model that gives us resilience regarding this process.  So there is this transitory nature of the factors that have been impacting us. It has a larger impact in what we observed here in the first quarter, but the forecasts are improving and trending towards normalization throughout the year. We expect a much better recovery in EBIT over the rest of the year. Let's remember that in the third quarter and fourth quarter, we have lower comparisons because the second semester of last year, that's when we started to observe the temporary -- the time impacts in our production. So we did not have strong increases in the third and fourth quarters. So comparisons will improve now that we will go back to normality, which will be deleveraging at the end of the year. The [indiscernible] of ecosystems of performance and markets and exchange rates. So it's hard right now for us to know what will happen by the end of the year. But all the aspects regarding to operational improvements in margin, it continues strong in terms of capital, whether it's CapEx or our working capital. They're still very strong so that we can continue on our trajectory in improving our leverage, which we have been seeing for various trimesters.

Next question is from Rogério Araújo, sell-side analyst for the Bank of America.

I have 2 questions. One is in regard to energy cost, and in the last call, we heard a little bit about a slight reduction in the second semester, but we haven't really felt the impact just yet. Now making all the math in regard to the cost, it really represents 5% of the revenue, which was 4.4% in the last semester, the normalized level was around 3%. So do we think we can expect an improvement in the next semester regarding margin? This is the first question. And then the second question is a confirmation in regard to the drop in revenue for North America in which the vehicle production has been affected due to raw material. Do you think this is just that? Is there any loss in share in volume?

Rogerio, thank you for your question. In regard to energy cost, it is definitely dropping and it's now at levels that are below EUR 40 per megawatt per hour in Europe, which is a good indicator because before it had reached 330 in the second half of last year. So it's dropping. And in the first semester, it also dropped from January into March. And I believe we are now going to see lower representativeness in this regard for this year. But there are 2 factors. There is, for example, the drop in energy costs and also a drop in pacification in regard to raw material because we've mentioned that before, I remember. So, there is this sector. I think that they are in stable conditions, whether energy or raw material, both. This percentage is going to get back to the traditional levels we had before, which are close to 4% according to our cost structure. So I believe in the second or third quarter, you're going to see this being reflected.  In North America, the main impact was the variation in the cost of raw material, the price of raw material, and it happened -- started happening last year, especially the second half of last year, and it's been dropping. There is this time lag in transferring to customers, and this is affecting -- and it's impacting, for sure, our pacification in North America. There is also the exchange rate, which also impacts revenue in North America. And also, there is this one particular client we have in North America in this segment, not in OEM, but trailers. They had a significant drop according to their segmentation, and it really affected our sales during the first quarter. It's not a drop in market share, but a specific segment of wheels for medium vehicles that we have in North America in view of the performance of that segment of that particular client in that segment. But the main factors are related to the variation in raw material because volume as a whole was good in North America in the first quarter.