Randoncorp S.A. (RAPT4) Earnings Call Transcript & Summary

Good morning, and thank you for waiting. Welcome to Randon S.A. Implementos e Participações for Q1 2021 results. With us here, we have Mr. Daniel Raul Randon, CEO; Paulo Prignolato, CFO; Hemerson Fernando De Souza, Fras-le's Investor Relations Director; Esteban Angeletti, Corporate Finance and Investor Relations Director; and the IR team. We inform that this event is being recorded [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through the Randon website at ri.randon.com.br, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished. Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of Randon's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that conditions relate to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to the Chairman -- to the President, Mr. Daniel Raul Randon, who will begin the presentation. Mr. Daniel, you may proceed.

Good morning. Welcome to the conference call for earnings of Randon. Today, we will talk about Q1 2021. I will share the presentation with our CFO and Investor Relations Director, Paulo Prignolato; and also the Director for Finance and Investor Relations, Esteban Angeletti. I would like to thank you all for being with us, and I invite you to participate in the Q&A session. Our agenda today will be the highlights of the quarter, talking a little about the behavior of the market, our consolidated performance and detailing the results per segment. Apart from this, we will bring information about the stock market, sustainability and innovation. On Slide #4, we have the main highlights, but before, I would like to talk about our business. And well, we delivered, we can see we delivered one of the best quarters in the company's history with records in revenue and margin. In the last few years, we had an in-depth transformation. We plotted each step of this journey looking at the aspects of sustainability of the business, where people are the fundamental part to leverage the change. Having clear goals and transparency and spreading the strategy to our team makes all the difference. Innovating is in our DNA, and we created an environment that motivates innovation in our companies to have -- to be open-minded and looking at trends makes us grow and renovates us every day. We made acquisitions of companies, and we founded others. We expanded the portfolio of products, and we access new geographies. And in the companies that were already part of our group, we continued investing in technology to be more and more efficient and productive. We are also in search of synergies between the businesses and common activities, which allowed us to do more with less. The market has helped and is booming. Very strong, both in semitrailers and in auto parts, enabling important progress in volumes in all our lines of products. Even the export market began to buy in a more intense way because of the favorable exchange rate and the good expectations that vaccination brought. In a nutshell, the market is buying. But it's useful to have a lot of demand when -- if we don't do our homework and if we're not prepared to take care of the needs and expectations of our clients. And it's equally important to have capacity to adapt to the changes in the scenarios and the challenges that come up. In this context, we can mention COVID-19, which seemed to have decreased and now has come back even stronger in 2021, with a lot of responsibility, we maintain the care with our people and intensify the prevention campaigns. We also have the pressure from the supply chain. It was necessary to use a lot of energy and work in our supplies department to guarantee the delivery of inputs and minimize the impacts in the production process. Apart from this, intensive price negotiations of materials happened, trying to mitigate the effect on margins and on the price of the product for the end client. I'd like to close saying that we had an excellent quarter and that it's important to celebrate these results, which are the fruit of a great job done by the 13,000 employees that make everything happen in our companies. We also have a robust portfolio of orders, which gives us visibility and trust for the next quarter. We need to keep alert, especially in relation to the scarcity of raw materials and inflation, which continue putting pressure on business. But we know that following our journey of sustainable growth, with a team that is well prepared and the will to grow and prosper, expanding our fronts in innovation and diversification, we will overcome these difficulties, and we will continue strengthening our objective. Now I pass the floor to Paulo, and he will continue with the presentation.

Thank you, Daniel. Good morning to all, and thank you for being with us this morning. I invite you all to go to Slide #5 where we have the details of the revenue per division, product, geography and market. On the first graph on the left, on the upper part, you can see the distribution of net revenue per business division. The auto parts division continues to be the most relevant one for the company and increased its share in Q1 '21, especially due to the acquisition of Nakata and the better demand from OEMs. Analyzing per product, semitrailers came first with 36% of the consolidated net revenue with a good moment for this segment. In auto parts, we highlight Fras-le, which became more representative. Adding the friction materials and other products controlled by Fras-le, we have 33%, second in consolidated. Now the revenue per geography. We see that there is almost a draw between the countries in the region of United States, Mexico and Canada with 37% and Chile and Mercosur with 35%. In the first region, the highlight goes to the sale of braking systems and friction material to the U.S. market. In Mercosur and Chile, most of the revenue came from the sale of semitrailers. When we look at the segments, the diversified model of our business also can be seen. We see that half is linked to OEMs and -- but with many categories of products within this group, semitrailers being the most relevant. The other half is divided in aftermarket parts, export market and services and -- which have -- which are less cyclic and are more balanced and give resilience to our results. Now I invite you to go on to the next slide, and we will see some economic aspects and market aspects. As you can see on the first table, the performance of the market in Q1 '21 was excellent. There was expressive growth in the production and sales of semitrailers, above 60%. This happened due to many factors, which we will mention during the presentation. But here, I would like to remind you that the comparative base in Q1 2020 was lower. In Q1 2020, we had seasonality. We had also vacation periods and also shutdowns and lockdowns due to COVID. The truck market has a smaller growth than semitrailers, but it's still significant, around 30%. Here we can highlight 2 points for the lower level of growth. The first, in Q1 2020, there were no shutdowns by OEMs due to the pandemic. This happened as of April. Now in the current quarter, due to the scarcity and due to the effects of the second wave of COVID-19, OEMs paralyzed their operations at the end of March, reducing volumes produced in that period. Exports of both products were greater than in 2020. Apart from the smaller comparative base, the export market took a little longer to pick up. But when it came back, it was in a more intense way. Now going on to the economic indicators. We have expectation of growth of the GDP, increase of the interest rate SELIC which should close the year at 5.5%, higher inflation, and exchange rate very high, BRL 5.3 per dollar, which is positive for exports. And the harvesting new record, more than 270 million tons in this cycle, reinforcing the demand for macro business, which for semitrailers is 70% of our sales. Now Slide #7 to talk about net revenue. Net revenue in Q1 '21 reached BRL 1.9 billion, an increase of 63.8% in relation to the same period in 2020. Looking at the blue on the right, you have this growth per division. The auto parts division had an increase of 73.7% in comparison with the previous year. And the main reasons for this growth are strong sales volume for OEMs and aftermarket parts, also adding the new revenue coming from Nakata, CNCS and Fundituba, which were not part of the company in Q1 '20 and the increase in exports of 32.4%. In the OEM division, we had a growth of 55%, with an increase of 40% in volumes sold and an increase in sales to the export market, an extra 29.6%. And in services, the growth was 24% related to the increase in other operations of Randon companies. Going on to Slide #8, we have the revenues of the export market, consolidated export market coming from exports and also controlled companies abroad. In Q1 of this year, we reached $67.4 million, an increase of 28.7% in comparison with Q1 2020, and 13.6% increase in relation to Q4 '20. The exchange rate devaluation, the price increase of some commodities and vaccination against COVID-19 were important factors for the recovery of sales to the export market. And today, we have a portfolio of services for -- sorry, portfolio of orders for more than 120 days in some product lines. But some markets still have challenges like Argentina, which has problems due to the financial situation of the country, as mentioned, and other opportunities. To obtain the entry of Brazilian products in Argentina is a constant challenge, and we don't see any change in the situation in the short term. Now let's go on to Slide 19 (sic) [ Slide 9 ] to talk about consolidated EBITDA. As you may observe, our consolidated EBITDA reached BRL 349.3 million in this quarter with a margin of 18.3%. The growth of 226.5% is due especially to the strong demand, favorable exchange rates and cost -- dilution of fixed costs because of the larger volume. Another factor that contributed for this difference is that in Q1 '20 the nonrecurring expenses affected negatively the EBITDA during that period by BRL 43 million. Now in Q1 '21, we had nonrecurring revenues that really helped EBITDA, both in the auto parts division being the reversal of impairment of the indirect controlled Fanacif for the amount of BRL 4.3 million due to a review in the calculation of expenses in 2020. And also, Castertech, to exclude ICMS tax from the calculation base of PIS/COFINS, and this represented BRL 10.9 million in Q1 '21. To make this comparison without these effects, we had -- we also show the adjusted EBITDA, which reached BRL 334.1 million, an increase of 122.7% in comparison with Q1 '20 and with an EBITDA margin -- adjusted EBITDA margin of 17.5%. Now in relation to the drop in EBITDA in relation to Q4 '20, we remember that in that quarter, we had nonrecurring revenues, relevant nonrecurring revenues from taxes. Now I invite you to go to Slide #10 to analyze the net profit. In Q1 '21, we reached a net profit of BRL 134.1 million with a net margin of 7%. The increase in productivity has been the result of a great effort on the part of company, as we will detail. Investments to make the company more efficient and competitive, acquisitions to expand revenue and portfolio, expansion of synergies between units and processes, long-term planning and execution of good plans, financial management -- efficient financial management. Now we would like to talk about debt and working capital on the next slide. You may observe on the graph on the upper left corner, the history of the net debt without Banco Randon. At the end of Q1 '21, the net debt was BRL 1.4 billion, with a leverage of 0.97x the EBITDA of the last 12 months. The increase in the debt in the last quarter in relation to the closing of 2020 is mainly due to the increase in NCG of BRL 553.6 million. Most of this to support the growth of the level of activity of the company. The accounts that have the highest impact were inventory clients, suppliers and taxes. Analyzing the gross debt, we observed an increase in the period. And here I'd like to comment that in Q1 '21, we anticipated loans of BRL 200 million to renew debt that will mature in the second quarter. The average cost of debt in domestic currency also had an increase in Q1 2021 in relation to 2020, reaching 4.2% a year, especially due to the increase in the CDI and bank spreads. Now the cost in foreign -- the debt in foreign currency remained practically the same. On Slide 12, we have the composition of our investments. We invested BRL 122.8 million, 40% being BRL 50 million in Randon Bank and 43.4% in especially industrial automation and for capacity expansion. Going on to the next slide. You have information about capital markets and liquidity. In Q1 '21, the daily liquidity of our share RAPT4 was BRL 44 million in comparison with BRL 43 million in Q1 2020. You will notice on the graph that in the last 5 years, the increase in daily liquidity going from BRL 8.1 million in 2016 to BRL 44 million in 2020 places us, our company, as one of the companies with the best liquidity with -- in the segment. Also, the shareholder base increased. Currently, it is made up of 35,000 shareholders, 37.7% of the controlling group, 25.5% from foreigners, 18.7% from institutional investors and 12.1% from individuals. Now concerning 2020, we paid interest on our capital JCP worth BRL 70.8 million, and we distributed dividends now in April worth BRL 120.4 million approved in the last meeting. Before going on to pass the floor to Esteban, I would like to make an additional comment about the judgment of the Supreme Court, excluding ICMS from other taxes. As mentioned by the press this morning, some may not have understood about the votes saying that companies will only be able to have credits 5 years before the date of the decision, so as of 2012. But we must clarify that after consulting our legal consultants, the decision says that companies can receive these taxes back for 5 years after they began with the lawsuit. We did this in 2006, so we can go back until December 2001, and have credits -- tax credits as of that date. So since we followed this from the beginning, and with this decision of the Supreme Court, we can say that in case of Randon, we should have no changes in the values calculated and recorded until now. But it's important to stress that we should wait to see the decision in the press. Now I would like to pass the floor to Esteban to talk about each segment.

Thank you, Paulo. Good morning to all, and thank you for being with us in this conference call. Beginning with the OEM division, I would like to highlight net revenue reached BRL 769.3 million, a progress of 34.8% in volumes of semitrailers sold in the domestic market and 99.4% to the export market, totaling 7,918 units in the quarter. The revenues from the export market reached $22.8 million in Q1 '21, with an increase of 41% in comparison with the same period in 2020 especially due to the recovery of sales in Chile and other countries in the Mercosur. Also price increases and cost control to mitigate the impacts of inflation on the margin, agro business maintained 70% of our sales in semitrailers. Market share 32.2% due to pressure from volumes in the market. Also, portfolio of products on average 120 days and railway cars still had a low volume of sales in Q1 '21, but we have deliveries of a larger volume of units for the second quarter of 2021. In a nutshell, it was a very positive quarter for Randon Implementos and our activities, expanding production. We are being more competitive, and we are taking care of the booming demand of the market. Now on the next slide, we will see data about auto parts. We reached BRL 1.1 billion in net revenue with the companies in this division in Q1 '21, representing an increase of 73.7% in comparison with the same quarter. The main factors for this increase were increase in volumes in all the product lines, motivated by the recovery of production and sale of trucks, the good performance of the aftermarket and renewal of inventories at distributors, growth of sales to the export market with a favorable exchange rate and more revenue from controlled companies, especially in Nakata, which contributed with BRL 191.5 million in this quarter. EBITDA of this division reached BRL 230.4 million, BRL 15.2 million of revenue, nonrecurring revenue already explained. The portfolio of orders shows good volumes for the next months. But the maintenance of margins is a challenge due to the pressure from price increases in raw materials. On the next slide, we will see services. In this division, we had a net revenue of BRL 61.8 million, most of it coming from Randon pool sales, Consórcios. Currently, the revenue from the service segment represent 3.2% of the consolidated in Randon. Our intention is to expand this number in the next few years. Banco Randon has increased the number of operations, and its goal is to be a more digital bank due to the new format of financial institutions. Apart from financial services, we also have the digital services by -- led by Randon Ventures, which has 4 start-ups with investments and 5 with co-investments totaling BRL 16.4 million invested. The most recent movement was the investment in the startup ABBIAMO, the focus is logistics related to consumer experience. Now I'd like to pass the floor to Mr. Daniel to talk about sustainability.

So ESG is a topic that has become even more relevant for Randon companies. We always believe that this is only possible to do having a balanced relationship with natural resources, people and society in general. And now we will make even more progress. I want to invite you to be with us at our event, ESG Ambition on June 1 at 3:30. In our call, we will talk about our pillars and public commitments with sustainability. In the next few days, you will receive the invitation for this event through our mailing in Investor Relations. If you are not registered there, please register yourself. We will give you a zoom of G governance. I invite you now to go to Slide 18. On April 14, we had our first meeting in the hybrid format. We elected a new counselor for management, Ana Carolina Strobel, who has a lot of experience in entrepreneurship, innovation and digital transformation, and she will contribute a lot for our company in future projects. We are very happy due to the fact to have, once again, a woman in our council, making it more diverse and more rich. On April 29, the management council elected the new Board, which has, as a new member, Daniel Ely. He's our CTO, Chief Transformation Officer and member of the Executive Committee. He is responsible also for the services division with a change in its strategy. The division now will be called Financial and Digital Services division. This change contemplates the progress that has happened in financial services, together with digital initiatives, which are already in progress in the company. Our objective is to bring even more innovation and transformation for this segment apart from opportunities for new business. And with this change, in financial and digital services, I'd like to reinforce that innovating is what really takes us forward. Apart from services, we have other fronts in innovation that are not only for processes and solutions, but the way we work. Now in April, we were recognized by Marcas de Quem Decide as the brand that innovates the most and has the best recall among brands in our states. I'd like to conclude saying that for Randon, it is very important to guarantee the present, delivering good results now. And we know that our investors are a fundamental part of this journey. Therefore, thank you very much our investor, who is with us here in this audio conference and who believes in our company and our objectives to connect people and riches, generating prosperity. Operator, we can begin the Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Pedro Santana, Bradesco BBI.

I have 2 questions. You say in the release talking that you were able to maintain the inventories. I'd like to know the planning for 2021 and the purchase of raw materials. And also, the -- please talk about the orders for railway cars this year and next year.

Thank you, Pedro, for being with us. Concerning the first question on average price, this is a challenge to try to mitigate the effects of inflation. You know that we always try to do this internally by gains in efficiency, gains in scale. But this year, the pressure is very great. So we had to increase our prices and pass these increases on to our clients. It's important to know that the market is favorable. We see a booming market. The main client, which is agro business, have demanded a lot of products thus, we have more space to increase prices. We've seen our competitors also doing the same. But we believe it is sustainable for the next few months. So now there is an issue with raw materials. It has been a challenge every day because of higher prices. We don't believe that this mismatch of price and costs will continue. We believe that the trend is to consume inventories at a higher average cost. So there should be a compression of margins in the second semester. Concerning railway cars, the scenario is more favorable than last year. The market as a whole has been demanding 1,500 units, so we have 300 portfolios in our orders. So they will be delivered in the next quarters. For 2022, we believe this scenario can be even better. It can get to 3,000 units. That is why we are increasing our capacity in our plant in Araraquara to make road implements and railway cars. When it was founded, it was a hybrid plant. It was dedicated to implement -- or railway cars, but not both at the same time. With this investment we have a dedicated line for railway cars. Our plant in Araraquara is in a strategic area next to railways. And this makes us have an important logistics. And the fact that we have a dedicated line for railway cars makes us more competitive also.

[Operator Instructions] Our next question comes from [indiscernible] [ Autumn Research ].

I'd like to know about market share in the OEMs. We've seen a drop of 34% and almost 2%. In spite of the good performance, the market grew but I'm concerned about this greater gap. I'd like to know why these competitors are winning market share and how you see this?

Thank you for the question. It's important to talk about market share. I begin saying that we continue with the objective to have a market share of 36% or 40%. And this result is not satisfactory. We continue to search for this market share of 36% to 40%. What happens in booming markets and in a fast-moving market, like we saw last year, especially the second semester, it's difficult for us to have the capacity to take care of all this market growth. And in these moments, smaller competitors take advantage of this to place their products in the market and conquer market share. We increased our capacity. Today, we have a nominal capacity of 150 products per day. The pandemic hurt us due to the fact that we have to respect these distancing measures. And for us, this is unnegotiable because we are committed to our employees' health. So we respected this, decreasing our output. We believe that in the next quarters, we will recover this market share, getting close to 35%, 40%. This continues to be our objective.

The next question comes from [indiscernible] BTG Pactual.

Congratulations for the results. I'd like to explore competition. Please comment, will you continue raising prices? Because a more competitive environment should be bad for prices. So are you considering the higher competition when you plan to increase prices? And with a booming market for semitrailers, where does the demand come from? Apart from macro business, is it e-commerce, increasing demand? So what are the products that are being sold dump trucks? What kind of trucks? Dump trucks?

Fernando, thank you for being with us. Concerning your first question on competition. We have seen new competitors and old competitors coming back. I'd like to mention, we believe that the market is going through an evolution in terms of volumes. You remember that normal volume would be 55,000, 60,000 units. And now in the last few years, we believe that this market is closer to 70,000 units. So the market is growing, expanding. We also know that our market is cyclic. We have to be alert to the drops in demand as we saw during 2015, '16 and '17, which put pressure on prices, significant pressure on price. In any way, I can tell you that Randon has always tried to increase productivity and with lower fixed costs. And this helps us to be more resilient when there is a downturn in the market, so also during times that put pressure on prices. With the new entrants, we didn't see pressure on prices yet. We believe that due to their low scale of production, they don't have the capacity to have low cost like us. But we're always monitoring this. Concerning your second question, the demand for semitrailers, more than 70% of our portfolio is going to agro business, semitrailers. The harvest this year, next year, we know that agro has been a very good surprise in Brazil and they are always expanding and growing. And this sector has been less volatile. But apart from agro, consumer goods have been another segment that have brought us good surprises. So we have also sold closed semitrailers for industrialized products. We launched a family that is more efficient, lighter and this was very good. We had a very good demand. The volume for demand for these lighter products was very high.

Ladies and gentlemen, please wait. Okay. Sir, you may proceed. The next question comes from JPMorgan.

First, an update in synergies with Nakata. It might help in the EBITDA margin and gross margin. And your leverage very low, the company is well capitalized. So looking forward, do you believe there will be other M&As? We see the market strong. You could update the guidance.

[ Jonathan ], thank you for the questions. I will share the first question with Hemerson, who is with us here. And he is monitoring this closely.

[ Jonathan ], thank you for the question. We have maintained an agenda, and we have detailed all the synergies with Nakata. The synergies of Nakata have a certain size. We haven't reported anything about this. We are waiting to do things in a better way. I can tell you, we're very aligned with the projections we made in the beginning when we announced the acquisition. This is -- we made a conference call specifically for the acquisition. We're very motivated. We believe we will have more synergies than we expected. So the synergies of Nakata are not all evident in our results in terms -- so we will have more in the future. And we will show this in detail in a conference call -- showing also details in our conference calls. We will do this, and we will be available as soon as we have more data.

[ Jonathan ], this is Paulo Prignolato. Thank you for your questions and for participating. Concerning your question on the guidance for this year, our idea for the time being is to maintain the same guidance, especially due to some uncertainties linked to the second semester of 2021. So we are maintaining the guidance that we published. Now concerning other possibilities of investments or M&As and our leverage, in reality, we always communicate to the market that our intention is to work with a leverage close to 1 without including Randon Bank. And for some periods, we want to get to a maximum of 2 when we have investments in M&A. This year, our work includes focusing, as Hemerson said, using these synergies of the companies acquired. We -- during the last few months, we mentioned some M&A projects, of small-sized M&A projects. We understand that for the year we should be close to this with leverage close to 1 without considering the debt of Randon Bank.

We have a question that came via webcast for Prignolato, Santander. I'd like to congratulate the management for the results. I'd like to know your vision concerning export revenue. Is it sustainable in the long term?

Well, Joao, we're very happy to, with better revenue -- higher revenue from export markets. Here, we have plants in India, in the U.S., in China, plants in Argentina, Peru, Colombia, distribution in Colombia, Argentina. So the export market, we have a focus on expanding this market in the long term. We have exported since the '70s and it's always in our strategy. Currently, our revenue corresponds to 20% of the consolidated net revenue of the company, and we wish to take it to 30% as a way of reducing volatility of the business and dependence on the domestic market. So I hope I answered your question. And we're available for other details.

The conference call is concluded. We thank you very much for your participation. We wish you a good day, and we thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]