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

Ladies and gentlemen, welcome to Mill's 2Q '25 Earnings Conference Call . Joining us today are Sergio Kariya, CEO; and Renata Vaz, CFO and IR Officer. Please note that this presentation is being recorded and simultaneously translated. Translation is available by in the interpretation for those who listening to the conference in English you may mute the regional Portuguese auto by clicking on mute original audio. During the company's presentation, all participants will have their microphones disabled. Afterwards, we will begin the Q&A session. [Operator Instructions] We would like to remind you that any forward-looking statements made during this conference call, relating to Mills business outlooks, projections, operation and financial targets are forecast based on the company's management's expectations and may or may not occur. Investors should be aware that political, macroeconomic and operational factors may affect the company's future performance and lead to results that differ materially from those in such forward-looking statements. To open the 2Q '25 earnings conference call. I will now open the floor to Mr. Sergio Kariya.

Good afternoon, everyone. It's a pleasure to be here once again to discuss Mill's results for the second quarter '25. We closed another quarter with consistent results, reflecting the continuity of our strategy focused on sustainable growth operational efficiency and disciplined capital allocation. We have maintained execution discipline, supported by a high-quality portfolio and rigor in contract origination, which has helped us to advance with strength and profitability even in a macroeconomic environment is still marked by uncertainty and high volatility in the period. I'll start with Slide 3 with the highlights of the second quarter when we delivered another period of solid results, driven by net revenue growth, margin expansion and strong cash generation. The results reflect the consistency of our strategy. With a focus on disciplined capital allocation, operational excellence and the strengthening of our multiproduct platform. Net revenue in the quarter posted BRL 400 million, up 22% year-over-year. Within the result, net rental revenue grew 20%, once again, expanding across all business units, with special mention to heavy and the relevant contribution from intralogistics, which continues to post significant advances and gains traction. Adjusted EBITDA reached BRL 227 million, with a margin of 50%, an increase of nearly 26% compared to 2Q '24. Once again, this shows the continuous evolution of our operational efficiency. Net income was BRL 87 million with a 19% margin, while cash net income totaled BRL 152 million, a 34% margin, reinforcing the quality of our results. Affirming our commitment to generating value to our shareholders. We announced the payout of BRL 48.9 million in interest on equity related to the second quarter's results with payments scheduled for the end of August. As for cash generation, our adjusted operating cash flow was $114 million, up 31% from the same period last year. Finally, we continue to keep a healthy optimized capital structure. We ended to '25 with leverage at 1.4x net debt over adjusted EBITDA marking the third consecutive quarter of stability and remaining well below our established covenants. In addition, both our average cost and average maturity of debt continue to improve, with the average cost reduced to CDI plus 1.4% a year and average term extended to 3.6 years. This keeps our balance sheet strong and our capital structure increasingly optimized giving us the financial flexibility to continue executing our growth strategy even in a still challenging and stable macroeconomic environment. On Slide 4. Another important highlight for the quarter was the early July announcement of the acquisition of NEXT Rentals assets. NEXT Rental is a subsidiary of Grupo PESA, a Caterpillar dealership recognized in the country's Southern region with over 70 years of experience, headquarter in Curitiba, Paraná with a branch in Betim, Minas Gerais, it currently serves over 14 states, offering a complete portfolio of machinery, mainly yellow line and forklifts with strong presence in the construction, industrial road, mining, forestry, and agricultural sectors. The strategic rationale behind the acquisition is clear to expand Mill's presence in segments where our participation was still limited, such as mining, forestry and [ construction ] and further increase the share of long-term contracts in our revenue profile. With the transaction, we added 738 pieces of equipment to our portfolio. Mainly Yellow Line that is heavy machinery, adapted trucks and forklifts, as well as 210 skilled employees with extensive industry experience. In addition, the transaction also strengthens our regional presence, especially in Brazil, South region, where we see room for quality growth. We are very excited about the acquisition and confident that it will be another significant step in our sustainable growth journey. We will continue to pursue opportunities with discipline and execution, always focused on creating value for our shareholders, also through inorganic growth. Continuing to Slide 6. We remain committed to expanding our multiproduct platform with a clear focus. Increasing revenue predictability and deepening our relationships with clients. In the second quarter, approximately 83% of net rental revenue came from the Rental segment. While the remaining 17% came from formwork and shoring. We have been working in a structured strategic manner to increase the share of recurring revenues, prioritizing long-term contracts. Our proposal of delivering multiproduct solutions has proving very successful as reflected in the concrete advances, particularly through the strengthening of the heavy units and expansion of intralogistics, which both continue to gain relevance in our portfolio and today accounts for 18% and 10%, respectively. These two pillars have been key drivers for our growth this quarter. As a result of the strategy, long-term contracts accounted for 50% of net rental revenue in 2Q '25, an important improvement compared to the 40% in the same period recorded last year. These developments reinforce our positioning as a strategic partner to clients. While making our revenue generation more predictable and resilient over time, a key element in a still volatile macroeconomic environment. It's was worth noting that we closed the quarter with a fleet of over 15,000 pieces of equipment and 48,000 tons of formwork and shoring, consolidating Mills as one of the leaders in Brazil's machine rental and engineering solutions sector. With that, I will now hand it over to Renata, our CFO and IR Officer, who will detail the main financial highlights.

Thanks Kariya. Moving on to Slide 7. Net revenue in 2Q '25 totaled BRL 450 million, up 21.6% from 2Q '24. mainly driven by the expansion of our net rental revenue which once again grew across all our business units results also reflects the expansion of our solutions portfolio, greater penetration in different market segments and our ongoing pursuit of efficiency and closer client relationships. On the chart to the right, costs totaled BRL 122 million, up 23% from 2Q '24, mainly due to increased rental activity and higher consumption of parts in the Heavy segment or deployment of new contracts. Expenses totaled BRL 90 million, an improvement of 3.6 percentage points in relation to net revenue compared to the same period last year. this reduction of expenses as a percentage of revenue reflects the company's ongoing efforts to optimize its personnel structure and enhance operational efficiency, from organization of redesign to more effective management of operational and tax levels. On the next slide, #8, adjusted EBITDA reached BRL 227 million, up 26%, and a margin of 50.5%. The improvement in EBITDA results from a combination of revenue growth and disciplined control of costs and expenses. Additionally, productivity gains from continuous improvement initiatives and operating leverage in SG&A significantly contributed to higher product profitability. On the chart to the right, net income totaled BRL 87 million in 2Q '25, up 23% from 2Q '24. with a net margin of 19.4%, mainly impacted by the higher gross debt balance and an increase in the average CDI rates between periods. In the first half of the year, net income reached BRL 155 million, up 12% from the first half of 2024. Moving on to Slide 9. Adjusted operating cash flow was BRL 114 million, up 31% from 2Q representing 50% EBITDA to cash conversion. This was mainly driven by higher investments and differences in the timing of their recognition between periods, influenced by greater efficiency in managed purchase, receipts and payments scheduled for equipment. CapEx, as shown on the right, totaled BRL 163 million in the quarter, down 65% year-over-year with 93% allocated to acquiring rental assets. mainly directed to business units with greater growth potential, such as Heavy segment and intralogistics. I would like to highlight that diligence in capital allocation remains our priority. We are constantly analyzing opportunities for both organic and inorganic investments to accelerate the company's growth. focusing on our strategy of increasing penetration in markets with strong potential and predictable revenue, positioning ourselves as a multiproduct company with complete integrated solutions for our clients. On the next slide, #10, we ended 2Q '25 with gross debt of BRL 1.6 billion and a strong cash position at the end of the quarter of BRL 519 million. The increase reflects debenture issuances carried out throughout '24, which strengthened the company's capital structure to support our expansion strategies. The average maturity of Mills debt ended the quarter at 3.6 years, while the average cost was reduced to CDI plus 1.4% a year with a continued downward trend, reflecting our strategy of optimizing the capital structure and our ability to access competitive conditions in the capital markets. Leverage measured by net debt over adjusted EBITDA remained at a comfortable level and stable for the third consecutive quarter, closing the second quarter at 1.4x, significantly below the covenant set forth in our financial agreements. In line with our commitment and focus on financial discipline, combining structure optimization with the execution of our growth vission, we announced at the end of July, the 11th issuance of simple debentures in 2 series, totaling BRL 500 million. The first series has a 5-year term, at a cost of CDI plus 0.96% and the second series has a 7-year term at a cost of CDI plus 1.08%. The proceeds will be used to reinforce cash and continue executing the company's growth strategy. Moving on to the business units on Slide 12. We once again delivered another quarter of positive results in the Rental segment, which posted net revenue of BRL 376 million in the quarter, up 23% compared to 2Q '24, once again driven by growth across all business units with highlights to heavy and intralogistics. Adjusted EBITDA reached BRL 182 million -- BRL 183 million in the quarter, up 28% from 2Q '24 with an EBITDA margin of 6% of continuous improvement initiatives and the company's focus on sustainable value creation. Finally, on Slide 13, looking at the formwork and shoring business units, we recorded another quarter of solid performance, driven by the advancement of infrastructure projects nationwide. The consistent growth is the result of higher rental volumes and price increases, reflecting greater demand and our ability to respond quickly to market dynamics, creating additional value negotiations. As a result, net revenue totaled BRL 74 million, up 15% compared to 2Q '24. Adjusted EBITDA totaled BRL 44.5 million in the quarter, up 16% from 2Q '24, with a margin of 60%, expanding 70 bps year-over-year. This completes our results presentation. We thank you for your time and participation. And now we are going to move on to the Q&A session.

We'll now start the Q&A session. [Operator Instructions] Our first question comes from Pedro [ Chanel ] from Itau BBA. Mr. Chanel.

Good morning, everyone. Thanks for my question. I have one especially regarding to margin. I would like to understand your mindset with regards to profitability for the future. what can still be extracted in terms of efficiency, contract adjustments and how we should think about the extension of the life of this contract. So how would March behavior for the coming periods? This is the first question. My second is about formwork and shoring. We have seen a lot of demand for infrastructure in the country. We have had some delays in the beginning of some works that should have started in the first half of the year. It seems that in the second half, we are going to have delays. So how do you see the segment for this year and also for '26?

I'm going to start with your first question. Well, with regards to margin for the future, we believe that we are at a level of very healthy margins. Of course, we are always working hard to seek productivity and reducing SG&A, but I wouldn't project any dramatic change in terms of margin levels that we show today. As for delays in formwork and shoring, they haven't affected our demand for this year. We did mention before that we had additional CapEx. For the beginning of next year, we started to think of additional CapEx for this unit. The products are to start arriving in the beginning of next year. So we are at a very healthy level with a backlog of contracts so that we are able to perform well for the year of '25 and '26.

Our next question comes from Lucas Esteves from Santander. Mr. Esteves? .

Hi, good afternoon, are congratulations on your performance for the 2Q. I would like to talk about elevation platforms and to try and understand the demand for the segment. We see the Heavy segment taking momentum and taking a greater share of the company that helps you with margins, but we should not lose focus on what helped build the company. And you've always been a leader in elevation platform. So I would like to understand the demand you are focus to grow in the segment and also understand a bit about your strategy to extend the useful life of platforms. How is this going on? I know it was a test to you had ongoing.

Thanks for your question. Our focus on light equipment remains the same. We are have been bringing a bit more color on it on the Light segment, because we have contracts at a shorter period of time, and therefore, you have higher risk with regards to demand when you have more restrictive scenarios as we have the high interest rates today. You saw that in the second quarter, we still have no negative effect with regards to demand, but there are risks for the second half of the year to have a bit pressure of demand on the sector. But that does not change our focus on the business. We continue to seek to be leaders and alternatives to use the commercial strengths of mills even helped by new contracts in the Heavy segment and Intralogistics segment. For us, always also to pick momentum in the Light segment. As for extension of useful life, we have been testing some equipment. We are still underway, but so far, very successful. As you know, we have two cycles of 7 years with these assets. So the idea is to have a third cycle. So far, we have been very successful.

Our next question comes from Matheus Sant'Anna from XP. Mr. Sant'Anna?

I have a question about capital expenditure. When we consider just rental assets, corporate, excluding M&A, would be at an amount marginally below year-over-year. I would like to know your expectations for the second half of the year. Is it a deceleration? Do you have a concentration in the first half? Or going to deliver a similar number year-over-year. And also, what is the focus of the segment? Is it Heavy segment and Intralogistics?

Indeed, if we compare quarter-on-quarter, our CapEx is slightly lower, partially based on what we have announced that this year, we are not executing our CapEx in the Light segment. A bit because of what Kariya mentioned, we have the capacity to increase volumes without additional investments. And in terms of projections for the future, we want to keep the same level of CapEx for the second half of the year. mostly concentrated on intralogistics and heavy equipment, given that the CapEx has to be based on contracts. As we sign contracts, we deployed the equipment with the clients. So our efforts are more concentrated on these two business units .

Our next question comes from Fernanda Recchia from BTG.

I have 2 questions on my side. First, I'd like to explore a bit more prices for Elevation platforms. Specifically with regards to the pressure of Chinese machinery. I would like to know if this is a topic that has been normalized. If you're still having pressure, especially with light machinery because that was a point that I remember you saying that you're feeling a bit more pressure. And second, about provisions. We did see a provision for doubtful accounts in this release I would like to understand your mindset for the coming half of the year if you consider this provision will continue to go up.

I'm going to start talking about the provision for doubtful debt. It reflects the current market moment with high interest rates. Companies are being pressured and at a worse financial position. And what we have been doing in-house is constantly monitoring the management of contracts economics of clients to mitigate risks for an increased delinquency. We have adopted initiatives. We have been more diligent in granting credit we are reducing accepting contracts for players that we believe are riskier. Financially speaking, we are charging penalties and interest for payments in arrears. And we are being a bit more agile in retiring equipment for those clients that are not paying as agreed. So all these actions have helped the company to keep delinquencies at the level of 2.5% over revenue to control and mitigate overall delinquency in the market.

As for your first question, Fernanda, about prices compared again to the second half of '24. I would say, just for us to remember a bit of the history. We go back to better levels in the third and fourth quarters of last year compared to the levels that we increased prices. They are slightly below for smaller equipment, as I did mention. We continue to monitor the market. What's going to happen in the second half of the year in terms of demand and we potentially, of course, have a risk to have lower prices for this entry-level equipment. But so far, we haven't felt the effects for the second quarter of '25.

Kariya, if you allow me for a follow-up in terms of Chinese machinery, what's the level of inventory of Chinese machinery?

Of manufacturers, they are heavily built in terms of inventory. They brought the volume close to last year, but sales are less heated than in '24.

[Operator Instructions] Our next question comes from Gabriel Frazao from Bank of America.

I have just a follow-up about questions that we had in terms of provisions for doubtful accounts. When you repossess the assets, what do you expect to rerent it or sell? And do you think that this delinquency was more for short-term contracts or long-term contracts?

Good afternoon. The provision for bad debt is much more connected to short-term contracts. In long-term contracts, we have a much more controlled environment given the size of the client and that equipment is much more part of their core business. I think I have answered your question.

Our next question comes from Andre Ferreira from Bradesco BBI.

Congratulations on your results. I have two questions. Versus a follow-up on capital expenditure, just to confirm, a few months ago, if I'm not mistaken, the intention was to decelerate CapEx in the second half of the year because the first half of the year, we had more contracted CapEx. Is that correct? Do you see more opportunities to keep the CapEx level at about BRL 300 million for the next half of the year? And the second about the acquisition of NEXT. What excites you the most? Is it machinery that complements your portfolio? Is it geography? Is it technology? Or is it scale that you can bring to NEXT?

I'll start with capital expenditure. Indeed, we had mentioned we would have a lower CapEx. But as contracts started to come up, we would allocate capital. And indeed, we have been closing contracts that do demand additional CapEx. It is very much what you had thought had happened.

And a follow-up with regards to CapEx, Kariya here, the second half of the year, perhaps be slightly lower in terms of organic CapEx than the first half of the year. We did concentrated concentrate on CapEx in the first half, but again, as we have the need to complement equipment and signing contracts, will invest in CapEx. For NEXT, we are very excited about several things. First, the quality of the equipment. As you know, we always focus on Tier 1 equipment for heavy equipment. Mostly, you're talking about Caterpillar equipment that is very similar to [ Pasa Frata]. It's basically plug and play a very robust technical base, people that are well trained by Caterpillar, which is very important to us. It brings us integrated contracts with intralogistic, generators, elevation platform. So it brings complementarity to our own contracts and our multi-platform view you have -- we have the knowledge and know-how of the application and use of equipment with radio frequency, remote control operating at risk areas of our clients remotely operating without people embarked on the equipment. So it's a series of factors that make us quite satisfied and excited about the signing. And just to bring you a bit more color on that, we are monitoring all the conditions precedent to be able to carry on with the closing of the acquisition.

Our next question comes from Filipe Nielsen from Citi. Mr. Nielsen?

Hello, everyone. Congratulations on your results. I would like to understand from you a bit more in terms of long-term contracts. You have been advancing well. You got to 50% of your revenue coming from this type of contract. And now with a focus on investing on heavy equipment, intralogistics, sometimes demand can request higher CapEx than what you expected for the beginning -- at the beginning of the year. What would be ideal? What is the optimal size in terms of long-term contracts? When you consider the breakdown between units? And also as a follow-up of the previous question without losing sight of your Light segment. So how much should we see in terms of expansion in the segment?

Filipe, our strategy of balancing short-term and long-term contracts does not mean that we don't like short-term contracts. I think the main point, strategically speaking, is to have a bit more predictability in terms of revenue, cash flow so that we can navigate in a country as complex as Brazil. Short-term contracts, usually, we like them because they have better yields because of the risk of idleness. I don't have higher yields and therefore, you boost productivity for that asset. So we don't say that we are going to go 50-50, 60-40, 70-30. But ideally, is to have in a way that as the macroeconomic scenario improves, we are going to have short-term contracts more accelerated, and we are going to be well positioned to continue growing. In terms of losing focus on elevation platforms, quite the opposite. Whenever we enter into long-term contracts. We see new opportunities of adding elevation platforms to the contracts with better compliance with higher share of wallets at clients. So these are additional opportunities that we see when we sign a long-term contract and then adding elevation platforms to them or vice versa. So I think the combo is very strong. And we want to use all our reach, 75 branches, for short-term contracts and now that we have been accelerating is that is to use those branches to also gain momentum better services at long-term contracts. So it's a very interesting balance and to be able to navigate, build in terms of turnover and long-term contracts.

[Operator Instructions] Q&A session is now closed. We will hand it back to Mr. Kariya for his closing remarks.

Thanks again for attending, for your interest in our conference call. Remember, IR team is at your disposal in case you have any further questions. Thank you very much, and have a great day.

Mill's earnings conference call is now closed. If you have questions send your questions to the Investor Relations team at [email protected]. Thank you for your participation, and have a great day.