Mills Locação, Serviços e Logística S.A. (MILS3) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Good afternoon, and welcome to Mill's 1Q '25 Earnings Conference Call. Joining us today are Sergio Kariya, CEO; and Renata Vaz, CFO and Investor Relations Officer. Please note that this presentation is being recorded and simultaneously translated into English. [Operator Instructions] We would like to remind you that any forward-looking statements made during this conference call regarding Mill's business outlook, financial and operating projections and goals, are based on the company's management expectations and are subject to risks and uncertainties. Investors should understand that political factors, macroeconomic factors and other operating factors may cause actual results to differ materially from those in such forward-looking statements. To open Mills' 1Q '25 Earnings Conference Call, I will now hand over to Mr. Sergio Kariya.

Good afternoon, everyone. It is a huge pleasure to be once again here to discuss the results for the first quarter 2025. We made meaningful progress this quarter, which we'll walk you through and that had a positive impact on our performance for the period. We're starting on Slide 3. We closed 1Q '25 with solid results, supported by net revenue growth, margin expansion and strong cash generation. Our continued focus on disciplined capital allocation, operational excellence and strengthening of our multiproduct platform has allowed us to start the year with significant progress. We reported net revenue of [ BRL 1,412 million ] for the quarter, a 17% increase compared to the first quarter '24. Net rental revenue grew 20% in the same period, reflecting the strong performance of our heavy vehicles unit and the contribution from the Intralogistics segment. Adjusted EBITDA reached BRL 207 million in first quarter '25 with a 50% margin, a 21% year-over-year increase, highlighting the ongoing evolution of our operational efficiency. Net income came in at BRL 68 million with net margin of 17% and cash net income totaled BRL 94 million with a cash net margin of 23%. Adjusted operating cash flow reached BRL 151 million, up 30% from the same period last year and EBITDA to cash conversion was 73%. We kept a healthy leverage level with net debt-to-adjusted EBITDA at 1.4x, an average cost of CDI plus 1.44% a year and an average term of 3.7 years. This gives us financial flexibility to continue executing our growth strategy even in a dynamic and volatile macroeconomic scenario. Reinforcing our commitment for -- to value creation for shareholders, we paid out BRL 14 million in interest on equity related to 1Q '25 results. I'd also like to highlight a very special recognition. We are proud to announce that we were the winners of the Sustainability Award at the 2025 IAPA Awards, an international prize that reinforces our commitment to excellence in environmental, social and governance practices. This achievement is the result of our team's dedication to placing ESG at the heart of our strategy through concrete strategies that transform the present and build a more sustainable future. We continue investing in the expansion of our multiproduct platform with a focus on increasing revenue predictability and strengthening our customer relationships. In 1Q '25, approximately 80% of our net rental revenue came from rentals, while the remaining came from formwork and shoring. We have been working in a structured, strategic way to increase the share of more predictable revenue, prioritizing long-term contracts. Our strategy of delivering complete solutions has proven successful, and that reflects important gains, especially with the strengthening of our Heavy unit and our entry into the Intralogistics segment. These 2 pillars were key drivers of growth this quarter. As a result of this strategy, long-term contracts accounted for 47% of net rental revenue in first quarter '25, a significant increase compared to the 32% we had in the same period last year. These developments not only reinforce our position as a strategic partner for our clients, but also make our results more predictable and resilient over time. It's also worth highlighting that we ended the quarter with a fleet of over 15,000 pieces of equipment and 48,000 tons of formwork and shoring, strengthening our leadership position in the equipment rental and engineering solutions market. Now I'll turn it over to Renata, our CFO and IR Officer, who will walk you through the financial highlights of the quarter.

Thanks, Kariya. Moving to Slide 6. Net revenue in 1Q '25 totaled BRL 412 million, a 16.8% increase over 1Q '24, driven primarily by the expansion of rental revenue. The result also reflects the broadening of our solutions portfolio, greater penetration across different market segments and our ongoing efforts to boost efficiency and stay close to our clients. On the right-hand chart, we see costs totaling BRL 111.4 million, a 12% increase compared to 1Q '24, mainly due to higher rental operation costs. Expenses totaled BRL 86.8 million, a 9% increase driven by the inclusion of JM to our portfolio. On next Slide 7, adjusted EBITDA reached BRL 207 million, growth of 21.4% and margin of 50.1%. The improvement in EBITDA is the result of a combination of revenue growth and disciplined cost and expense controls. Additionally, productivity gains from continuous improvement initiatives and SG&A operational leverage also played a key role in driving profitability. Looking at the chart on the right, net income came in at BRL 67.9 million in 1Q '25, net margin of 16.5%, mainly impacted by a higher gross debt balance in the periods and the increase in the CDI between the periods. Slide 8 shows adjusted operating cash flow at BRL 151 million, a 29.9% increase over 1Q '24 with EBITDA to cash conversion of 73%. This results mainly the increase in investment volumes and differences in the account recognition between periods, driven by more efficient management of the purchasing, delivery and payment schedules for equipment. CapEx, as shown on the right, reached BRL 171.2 million for the quarter, down 9.1% year-over-year with 95.3% allocated to the acquisition of rental assets, mainly allocated in business units with greater growth potential such as Heavy and Intralogistics. I want to reinforce our diligent in capital allocation, which remains a top priority. We are constantly evaluating organic and inorganic investment opportunities to accelerate the company's growth with a focus on increasing our penetration in high potential markets and positioning the company as a multiproduct company offering complete integrated solutions for our clients. We ended 1Q '25 with gross debt of BRL 1.8 billion and a strong cash position at the end of the quarter, BRL 716 million. The increase was due to debenture issues carried out throughout '24, which strengthened our capital structure to support our expansion strategies. The average term of Mill's debt stood the quarter at 3.7 years with average cost of CDI plus 1.4% a year, with a continued downward trend and reflecting our strategy to optimize capital structure by leveraging our ability to access competitive conditions in the capital market. Leverage measured by net debt-to-adjusted EBITDA last 12 months remains at a comfortable stable level compared to 4Q '24 and in the quarter at 1.4x, well below the covenants set forth in our financial agreements. Now moving on to the business units on Slide 11. We delivered another strong quarter in rental with net revenue of BRL 346.1 million in the quarter, up 16.4% compared to 1Q '24, driven by the growth of the Heavy business unit. Adjusted EBITDA reached BRL 165.9 million in first Q '25, a 20.3% increase versus the first quarter '24, with EBITDA margin of 47% or 48% in the quarter, reinforcing the unit's operational strength, the effectiveness of our ongoing improvement initiatives and the company's focus on sustainable value creation. Finally, on Slide 12, looking at the formwork shoring business unit, we delivered another solid quarter, driven by the advance of infrastructure projects across the country. In addition to consistent growth, we also saw an increase in the average price, reflecting higher demand and our ability to quickly respond to market dynamics, which creates additional value in negotiations. As a result, net revenue reached BRL 66.3 million, up 18.8% compared to 1Q '24. We now conclude our results presentation, and we're going to open the Q&A session.

[Operator Instructions] The first question comes from Fernanda Recchia from BTG.

I have 2 to explore with you. First, with regards to the extension of the machinery cycle. If you could give us a bit more color how many machines you believe you can extend the cycle, thinking of a 1-year dynamic? How that compares in terms of IRR for extended machines? And also, I'd like to understand what we should consider with regards to incremental costs in terms of maintenance since the machines are going to be running for longer vis-a-vis the benefit of avoiding new CapEx? So I would like to know what the trade-offs are? Second point, CapEx again. On the last call, if I'm not mistaken, we talked about half the CapEx of '24. But when we look at what you executed in the first quarter, it was down, but not that much down. So just to understand if you concentrated much of your purchases in the first quarter, and then we should see a deceleration in CapEx for the coming quarters? That's -- these are my questions.

Fernanda, thanks for your question. Well, to start, we are talking about machinery cycle. I think the idea is to separate the answer by type of product. When you're talking about elevation platforms, when you extend the cycle or you go through the third cycle, the impact on cost is marginal. So you don't really have very relevant impact when you extend the cycle because this machinery is less production oriented. As a counterpart, we have CapEx of 30% to 35% of the new assets, which is quite beneficial in terms of IRR. When you consider intralogistics equipment, then we have 2 cycles. And for some equipment models, depending on the level of utilization, we are seeking a third cycle. Here, we do have a bit of increase in COGS. In the first cycle, you have a direct margin compared to the second cycle of about 15% to 20% lower. But CapEx investment is also 30% to 35%, even 40% depending on the asset model compared to a new asset. At the end of the day, also delivering a better IRR comparing the one of the first cycle, selling the asset instead of extending its useful life. As for CapEx in the first quarter, yes, we did make some investments. And I think that you're going to observe even in terms of profitability, it's a bit impacted this quarter because we are making investments, we prepared equipment. And most of the equipment is going to be deployed in the second quarter. So contracted CapEx investments that are closed, but that have not yet generated revenues in the first quarter, but we will do so in the second quarter onwards. But yes, there will be a concentration probably more elevated between the first and second quarters of the year. But when we compare full year '25 to '24, CapEx is going to be lower compared to the previous year. I think these were your questions, Fernanda.

Our next question comes from Andre Ferreira from Bradesco BBI.

Congratulations on your results. I have 2 topics to address. The first is, given the positive results in formwork and shoring and higher demand, does it make sense to invest further in this business in '25. And together with that, if so, how much this investment could represent of your CapEx for '25 and '26? And second, rental prices, we were seeing pressure from competitors, but Mills was already able to adjust its prices. So I would like to understand what is the dynamics today and if you still see a danger in having to be forced to decrease prices?

Thanks, Andre, for the question. I'm going to start with formwork and shoring. Yes, we are making investments. They are still not showing in the first quarter, but will do so more substantially in the second and third quarter of '25. But it's still a marginal investment compared to the other units, Intralogistics and Heavy businesses, about BRL 30 million in '24. However, the positive impact with regards to these investments is that I release a lot of equipment that is idle today in formwork and shoring. We have low utilization, if you think, about the sector, about 50%. And the idea is with the investments we are making to increase utilization given that I'm equipping the assets to be leased. And again, the prospect in investments, in infrastructure, the projects that we are negotiating and even closed, makes sense for this kind of investment. As for your second question about rentals, I think the competitive environment comparing the fourth quarter to the first quarter has not changed much. Pressure on Chinese equipment, that maybe is normalized, even lower in the first quarter and even the fourth quarter compared to the third quarter last year. But we continue watching and focus to keep price levels and profitability that makes sense for the company.

Our next question comes from Filipe Nielsen from Citi.

I have a follow-up about expansion in Heavy businesses. You talked about utilization and productivity in this first quarter. Just to check if I understood it correctly, you're saying that part of the profitability perhaps is likely lower this quarter because of this, but we are going to see full profitability for the coming quarters? And then I would like to understand from you what is the level of profitability in Heavy contract levels and Intralogistics vis-a-vis the competitive environment? Do you see lots of competition, pressure on new contract prices? So try and understand the environment for you to continue growing in the Heavy unit. And also cost optimization for my second question. We saw an expansion of margins this quarter. And I'd like to understand what you're considering for the future? Should we expect more cost optimizations along the year? And what to expect in terms of margins for this year?

Filipe, thanks for your question. I think you asked 3 questions. First, the Heavy business. The follow-up question on productivity. I think the first quarter what happens with this unit is that you do have some seasonality because of the rains, it is a more raining period. And then you have some decommissioning or sometimes some construction does not start. It's kind of postponed until the rains close and you have the off-season for agricultural equipment. So that gives us a bit of a valley, a bit of seasonality. So productivity does come down a bit. What I was answering to Fernanda is that we did make investments in the first quarter that will start to be deployed. That is you start seeing revenues not only because the off-season period is over because construction starts and because the investments we made for closed contracts are going to start to ramp up. As for profitability, competition pressure in the sector. I would say that the market is very deep, lots of opportunities, and we are very diligent and disciplined with regards to our IRR. I did mention in previous calls is that we've raised the bar. And even if sometimes there are opportunities, we are not going to settle at any price. We want to return compliant with our strategies to close contracts. Yes, competition is there. I don't think there was a changing scenario in the sector in terms of competition, but we continue with discipline and diligence in capital allocation. And just to close your third question about costs. I think the company is always seeking opportunities to increase productivity, reduce costs and expenses. We had mentioned in the third quarter '24 -- I mean, the fourth quarter to be more precise, that we had adjustments in the end of the year that were already impacting the fourth quarter and will certainly impact the whole of the year of '25. We are always seeking opportunities in SG&A, but also cost efficiencies, improvement of processes so that we can keep healthy margins for the company.

[Operator Instructions] Our next question comes from [indiscernible] from Itau BBA.

I have 2. The first I wanted to approach is CapEx and also the utilization of Chinese equipment on your asset base. Since they are already more present in the market, you have competitiveness. So I would like to know what kind of marginal investments you are considering? And if it made sense you increasing the share of this equipment to complement your fleet? And a second question that I would like to approach is on the demand side, especially infrastructure. You talked a lot of stronger infrastructure projects. How about the mid, long-term? How do you think the sector is going to perform?

Talking about CapEx with regards to Chinese machinery. The last -- purchases elevation platform were 100% Chinese machines. This year we are also taking a look at intralogistics equipment. Some contracts we are having -- we are already having Chinese material. So we are always thinking of productivity and low cost and profitability. In terms of infrastructure demand, we see a very strong pipeline, not only for this year, but for the coming years. This is something that we are following from close. And Kariya did mention that we do have CapEx, not that big to increase our utilization rate and the amount allocated to grow revenues because of volumes. So for the company, today, we have a very positive prospect for the future.

Our next question comes from Rogerio Araujo from Bank of America.

Two questions on my side as well. First, about the extension of assets used for life, as you mentioned. Is this enabled by the asset price cycle because asset prices grew a lot? We see the difference between fixed assets and replacement prices. So if the extension is because of this, that is the alternative is a lot more expensive to the client, so you do that or not really in a scenario where equipment prices do not increase as much? You will still continue with extensions. That's the first question. And the second, just in terms of productivity ratio, what would be a recurring level? You did have about 4 percentage points drop year-on-year. Should we expect a complete normalization and when?

Thanks for your questions. Okay. I'll start with the extension of our equipment lifetime. Our assumption in extending cycles depend on assets. It is not precisely related to the increase in equipment prices, but rather the capacity of performing and operating with this asset with good SLAs with our customers. I'll bring you some examples. We have assets that operate 24/7 in quite severe environment. These, we believe, are not the ones that are going to be extended, even if we rebuild the asset and you try to extend their life because we are not going to be able to continue delivering performance to our clients. So you have to analyze the environment, the utilization, the type of equipment and the capacity to perform. That's why for elevation platforms, for instance, generally, we are very confident, and we have clear examples that we can extend the life of these assets. And for some intralogistics assets, we also have this confidence, and we are increasing their life. Heavy equipment, it depends on the case, what kind of application we had, what kind of contract. And then we'll make the decision whether to sell the asset or if we invest in its extension, performing, obviously, at a positive note for our clients. I'm letting Renata answer the second question.

Yes, productivity, I think Kariya mentioned on the first call that we did have some important investments this quarter. But deployment is going to happen in the second quarter. So that did affect productivity. And there is also revenue this quarter which is slightly lower because of the seasonality of Heavy units, intercrop period, rains and also collective vacations. So the next quarter, productivity will come back to higher levels, higher than what we presented this quarter.

Very clear. Just a follow-up. Higher means normalized or that should take long? Do you go back to what we had before?

Yes.

[Operator Instructions] Our next question comes from [indiscernible] Market Makers.

Congratulations on your results. At the end of last year, there was a negative expectation for '25 because of the macroeconomic scenario. And you did reduce your prospects for CapEx. Now that you are already in the second quarter, what are the prospects for this year?

Thanks for the question. I think that considering what we had mentioned last year -- and these prospects today do not change. Interest rates are still increasing, and that brings a more challenging scenario for us to close contracts and et cetera. So, so far, no changes. We continue disciplined in capital allocation. We did raise the bar so that it makes sense to invest in the scenario. So nothing really changing for this year, not for now. We still do not have visibility to say that we are changing the prospects for 2025, okay?

[Operator Instructions] The Q&A session is now closed. We are going to turn the call back to Mr. Kariya for his final remarks.

Well, thank you very much for attending our 1Q '25 conference call. Our Investor Relations team continues available to you if you have any further questions. Thank you very much, and have a good afternoon.

Mills conference call is now closed. If you have any questions, send questions to the Investor Relations team on [email protected]. We thank you very much for attending, and wish you a very good day.