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

Hello. Good evening, everyone. I would like to thank you for your participation of everyone on this video conference and that we will share in detail the acquisition of the EBS Group announced in the group today as market information. [Operator Instructions] This conference is being recorded and the recording will be available in the Investor Relations website. The information contained in this event are not a guarantee to performance. They involve risks and uncertainties and assumptions that may refer to future events and therefore, depend on circumstances, which may or may not occur. In this video conference today, our CEO, Sergio Carvalho, will deliver his message about this acquisition. Then Ricardo, which is Vice President of Latin America and COO of the Auto Parts will provide his insights; then Esteban on M&A -- [ respond director ] M&A and financial corporations; and then at last, Davi, our Investor Relations Manager, will deal with the questions and answers. [Operator Instructions]. Now I will give the floor to Sergio so that we can start our presentation.

Thank you, Carolyn. Good evening, everyone. Thank you so much for being with us with such a short notice like this one to be able to talk about one more transaction of Randoncorp. We are extremely happy to have advanced and signed this agreement on EBS, which is one of the biggest acquisitions of our history as Randoncorp. This project is very important because it is the first time -- it's the first project of M&A of Auto Parts in Europe buying EBS, which is a leader company in the segment of replacement, and it will extend our portfolio of products, our participation, geographically speaking. So it's a very important transaction. So please, Gustavo. When we think about our investment, why we're doing this, one more time, we are executing a strategic plan that we had developed years before. And as you should remember other conversations where we had the intention of expanding a little bit more our Auto Parts going into market. So the internationalization is one of the objectives. And also a big part of the revenue of EBS has to do with replacement parts, which we would like so much. It's also part of our strategic vision. Due to the resilience of its revenue, we have identified synergies that are significant as we do in all the process of acquisition, and we are expanding our portfolio of products, buying access to the market through the knowledge and mainly through the brands -- strong brands that are fundamental for a market of replacement and working in a market with a great size, a big size in economies and also markets that are more stable, more mature that also allow us to have a stability, resilience of revenue that we look so much for. So strategically, it has everything to do with our plan and our thesis of investment is very strong. We are talking about BRL 290 million of revenues of GBP 40 million, with an 18% EBITDA adjusted, a growth of BRL 410 million, GBP 56 million or a multiple pre-synergy of 7.6x. It's the main segment, is replacement aftermarket in Europe and the main portfolio has to do with Brake Systems. So the Brake Systems here from Latin, that less part of the Brake Systems. So we're talking about a portfolio that is very -- there is supplementary to what we already produce today. This company has 24 years of experience; 130 employees; 6 distribution centers: 2 in England, 1 in Ireland, 1 in Romania, 1 in China and 1 in Holland. Headquarters is in England, in the United Kingdom. The products are sold in over 100 countries, 42% of the sales are in the U.K., 80% of the revenue is on commercial vehicles with aftermarket of commercial vehicles. And this company, they have 20,000 [ SKUs ] in its portfolio of products. It is this characteristic of being a pioneer spirit. It's a technological forefront, a lot of cash generation, a strong brand in the aftermarket, very important, a lot of synergies long-term relationship. So what we [ ensured ] 2 years before this company is also a company that is asset-light. Here, just to show you a little bit of our journey, especially in the Auto Parts. Here, you have in the portfolio, the first indicators of the acquisition of the company, MASTER, JAOST, Suspensys in '97 and Castertech in 2006. All the other points refer to the expansions that we have done, also Suspensys in 2013. And then 2019, we also bought the operation of what we call the [indiscernible] Flores da Cunha. And several movement in 2020, Castertech in [indiscernible] region in Schroeder in 2021. And then in 2022 in the foundry, Suspensys’ going to Mogi Guagu location and launching next month and then Campinas and then now EBS in Europe in 2024. Please now, I will give the floor to Ricardo to talk about the generation of value.

So good evening, everyone. So firstly, I will repeat and add to what I mentioned in the [ other ] call today is the evolution that we're having in the vertical Auto Parts. When we look at '19 and '20 -- the year '19-'20, the average revenue around BRL 1.9 billion with an EBITDA of BRL 590 million, and we had 8 locations, 8 units through our strategic planning. We are now in the BRL 3.7 billion revenues. This is the average of the year 2022, 2023. This is our annual average and the EBITDA of BRL 590 million and 15 units of manufacturing. Sergio mentioned in that slide that through our acquisition through the greenfields, we have made several expansions of our units in order to serve the market. And through the accomplishments of our business and market share, EBS comes to bring in BRL 290 million and BRL 53 million EBITDA and more 6 distribution centers, as Sergio mentioned, the U.K., in Manchester; in Holland; and Romania as well; in the Chinese. So it's an operation that is very varied and it's serving the market in several ways, some of the pillars that we have in our cycle, 2025-2026. We want to expand our portfolio. We mentioned about the Mercedes project. So this is a clear expansion of our pie, of our portfolio that we have and that we're able to capture more business, more synergies and also expand our revenue. Our pillar point is a geographical one. This is one of our milestones. We're expanding towards Europe. And then no doubt, we will also expand the business of manufacturing. So we have recovered on our capital on investment, and we are tracking our ways to perform better our business. So now that the vertical starts to have a more relevant global presence. We had [ Suspensys’ ] in Mexico and now, we have all of these distribution centers from EBS. There are over 6 distribution centers across Europe and China that we started working in the market in a more global way with vertical. And these are the main products of our portfolio as Sergio mentioned. When we look at the truck or the trailer or the bus, there is the brake. And so they have disc brakes or chamber, here represented as calipers to have the pneumatic air. To make the brake work, there are several components in the system. So you start to having the compressors. And in the treatment, there are treatment of valves, the air dryers and we have all the electronic ABS components with this system. It works on the aftermarket. It works on the remanufacturing and supplies. Complete solutions to clients in the European market, mainly. And here are the distribution of the revenue of this business as we have here, which is the air dryer. They have some -- the brake chambers. We have the valves. You see there the turbochargers, the air dryers and calipers, which is part of the brakes. 70% is the brake system, and that's why our inventory represents this through these companies that better adapt and helps us to expand our portfolio. And here, we talk about our diversification of revenue source. We talked about strategic planning, our objectives, and this acquisition is in line with this. We are not so much dependent on the market on trucks and buses and trailers where MASTER has 73% of aftermarket and 14% of international and United States. We amplified significantly not only to be in external market, but also to be an aftermarket market. So here, we start to see here through our strategic planning to have a bigger participation in the international market and a bigger participation in the aftermarket. This is our greatest objective. And here are our main synergies. We have added to our portfolio of brands and a territorial expansion, enhancing growth in Europe and Latin America and access to consolidated sales channels with over 1,200 new customers, a greater logistical efficiency. So we have a distribution center already in Asia. We make the acquisition. So we can look for this logistic efficiency with EBS in the South American market. And we have a new sourcing alternatives. As I mentioned before, we have access to EBS, which help us in the Latin American to provide to these other markets. We have corporate purchase such as Randoncorp, can also help us in a better purchasing power among suppliers. And also, we have more revenue. We can reduce our back office fixed cost and looking for more synergies is one of the greatest objectives that we have been able to add through this acquisition of EBS. And now I'll give the floor to Esteban.

Thank you, Ricardo. Once more, congratulations to the deal, Ricardo, Sergio and all the colleagues at Randoncorp that worked on this deal. Speaking quickly with this acquisition structure, here will follow a model very similar to what was the [indiscernible] project. That is the Master Brazil will have 100% of this Master Europe, which is this company is already founded in Europe, and we have the acquisition of the EBS Group through the Master Europe. 100% of the shares will be acquired from the EBS Group. So the funding structure will be part of captured via Brazil will be BRL 230 million that will be captured in Brazil by Master Brazil, which we use these resources as integrating of capital of Master Europe and through this way, Master Europe will capture in the United Kingdom in order to complete the value of acquisition of Group EBS. We chose this structure of financing as a way to -- with a great combination in the point of view of tax as in through a cost point of view of financing and the dilution of the risk of the currency exposition. And as we talked about in the past, this value can have an effect on the prices. So now I will give the word again to -- and looking through the next steps before we finalize and we still have the approval of analysis of economic defense of agencies and bodies. These are conditions that are common in this type of transactions and also conditions and other provisions that are stipulated that are on contracts, which are common in these acquisitions. And this M&A deal will have closing in a much shorter time. We're talking about maybe a month, maybe between October and November, where we will have the closing of this acquisition with 100% of payment of this amount. And now I'll give the word to Carol, so we can talk about the question and answer.

[Operator Instructions]. And the first question today comes from Andre Mazini, which is sell-side analyst from Citi.

Congratulations. My question is about this geography in Europe. How do you see the cost of production in Europe? Certainly, it's a region where you have production cost that is higher than in LatAm and 70% of the sales is not done in U.K. You put that in the slide. How do you have this trade-off to be in a region of production cost that is higher, less competitive, but you have a lot of technology, of course. And possibly through the technologies, you have this trade-off and how the production is really more automated than it is, maybe here in Latin America to compensate this labor force that is higher in the United Kingdom?

Thank you for your question. I will give this answer to Sergio to start and then Ricardo, if you can complement. And remember that this is a model where [indiscernible]. So it's a model that has characteristic not to have so much industrial process, but I think Sergio can make a better comment together with Ricardo.

Perfect, Andre. Thank you for the participation. Thank you for the question. Andre, this is a distribution company, and it has their own products as it is common here in Brazil, where there are projects of EBS and most of what it is commercialized. It is not manufactured by it. So they have a global supply chain involving China, involving the Eastern Europe, Turkey, and it has some remanufacturing of an assembly and the level of activity -- of industrial activity locally is very small. So answering your question, it really is a transaction of very similar to Juratek to Nakata. And therefore, we don't have this concern related to production cost, but higher, as you mentioned.

Just to complement the second part of your question related to after sales, 40% is in the U.K., but it has also in Eastern Europe, where they should concentrate another 30% of the sales and also has sales in the Middle East and in the North of Africa. And this complements this 100% of the sales. These 100 countries that were presented that are all the countries of Eastern Europe as well as Western Europe as well.

Now we will go to the next question in this evening that comes from Gabriel, a sell-side analyst from Santander.

So 2 questions. The first one is just to understand better, you mentioned the objective to increase expansion of the aftermarket in a general way even through this acquisition. But thinking in terms of strategy related to producers and aftermarket, how do you think ahead? How can we think in a general way for the segment of the aftermarket as a whole? And then synergies, the second question. In a general way, we did the last acquisition, can you certain forecast to you have the synergy as a total? How do you -- how are you working with this? How do you see as a time line? What can you share with us in this way?

Thank you for your question, Gabriel. Ricardo, if you can make a comment about the first question that Gabriel has brought up, which I think is very interesting to bring our vision. And Sergio about the synergies, if you could also make some comments. You also made that comment that our last name is [ capturing ] synergies. So we try to bring the synergy in everything we do. So can you make a little comment what is behind this aspect that we're looking along with EBS. So Ricardo, can you start, please?

Thank you, Gabriel, for your question. If I understood correctly, the first part is you're asking about related to our strategy in terms of aftermarket? Well, the vertical Auto Parts already works in the aftermarket in the South American market and also in the Mexican market through Suspensys. So we already have our work in this aftermarket and all the components that we end up supplying to the manufacturers of trucks and trailers and buses. We can provide to the suppliers and to the market of the dealers of Randoncorp manufacturers, our company of trailers. And in Europe, we are making an expansion of our activities and focusing on this aftermarket where there is a stronger resilience and also a strong currency where we can work in a more consolidated way. So our main objectives are related to this. And then it's also reverse way besides gaining more knowledge and more know-how in the products that we already sell as an assembly. So for example, a brake cylinder, brake chamber, we are able to -- through our contacts and our companies, we are able to work and supply to a manufacturer in the European market.

And also to complement the comments from Ricardo. In general terms, we built a business structure where we have, let's say, 30% of your business, be it OEM or assembly, manufacturer of regional products; 30% of aftermarket; 30% in exports or international business. And why this? Because if the economy of the country is going well, this 40% surely will grow and your business -- the OEM will guarantee. So a success to your initiatives. But if the economy of your country is not well, some things end up not being produced in new vehicles and the old vehicles end up being used along with the fleets, are not renewed and the old vehicles start being used and your sales in the aftermarket starts growing. And so in other way, when the economy of the country is not going well and the business of these manufacturers, OEM goes down, you start losing value in the currency of the country. And your international business, you start helping and start having a better result besides what you already gain in competitiveness. And if you are selling your products, you have the conditions to improve these margins and these revenues. So we are, looking at this balance, trying to create a better resilience in the business. So this is our vision. Obviously, we will never tell someone, look, if you say don't do this in OEM because you take 80% of our revenue, of course, we're not going to do that in the -- as we do a transaction, that move us away from this theoretical potentials. So we need to -- people say we need to grow more in aftermarket. We will grow more in the international business because your fellow here in the domestic market has got a great business. So just to just detail a little bit more our way of thinking and why we look for this combination of domestic market, aftermarket OEM and international business that involve applications of aftermarket and OEM. And the aftermarket has this characteristic of to be very resilient and bring good margins. And we -- of course, we're always looking to get better margins. And as Ricardo already exemplified in the synergies, we prefer not to quantify these synergies. What I could say is that we've developed a deep knowledge, very expressive in order to evaluate the synergies. And all of the transactions that we have done after 2 or 3 years, we have shown that a reduction in multiples equivalent to very significant in -- at once or maybe 2x, even 3x. So the multiple after acquisition, they should be substantially smaller, lower. And then we have synergies that start by the growth of revenue, as Ricardo mentioned, as you have access to all the distribution network from EBS, and we are able to put more products and reach even more those so many SKUs that they have. And in reverse logistics, we can bring components of the portfolio of EBS to Brazil as well, probably not selling in Brazil as EBS, maybe another brand of our Auto Parts, but a great synergy is in this cross-selling and in the client base that we have motivated by the expansion of portfolio of products. But most of the synergy -- a lot of synergy in the administrative side in the economies of scale, many suppliers of EBS are also our suppliers with a greater efficiency in the logistics side. So purchasing power leverage more our purchasing power. And also it's a great way, we are very see that we will be able through this transaction as we have done in many others, deliver a lot of synergies.

Sergio, if you allow in addition to the question about synergies to Lucas to BTG because he had a lot of synergies with Juratek with light vehicles. So if we can see similar synergies like Juratek. Of course, they are different business, but he has this question.

So Lucas, thank you for your question and your comments are exactly correct. So the answer is yes, yes, yes. We have done this with Juratek in a period that is relatively shorter. We were able to see substantial improvement of results. Juratek focused so much on the light line. And so we are in our mobility area and Juratek is -- and we have this EBS is more commercial heavy and it's more related to auto parts. So the comparison between them and the parallels are very similar. The road map is the same and the expectations are pretty much the same as well.

Sergio, we will seize this moment and Marcelo Motta, JPMorgan has a question that asks us, as you mentioned, Juratek to be now EBS in MASTER. So what is the rationale of the acquisition to have by Randoncorp? And -- but if you want to exploit a little bit more on this question.

So perfectly. So we have with the phrase that Fras-le is a company that is predominantly in the light line. There are some exceptions. It produces material for friction for the heavy line. Many decades, it's a leader in friction material, but the biggest part of its activities related to the light line and all of this portfolio of products that we are acquiring, compressors, valves, it has everything to do with the portfolio of products and braking, which is the main scope of MASTER brakes. So it's a perfect fit for what we are -- what we have within our MASTER operation. So heavy vehicles, I know that there is a little bit of overlapping there, but heavy vehicles, it's the most important activity of Randoncorp and Auto Parts from Randoncorp. And just to complement, Carolyn, and the dimension of the market when you sell an aftermarket piece to like a person, there's a whole dynamic of participation of the mechanic in the market of enrichment and selection. So when you sell the product to a company, then it has totally different characterization assessment through a different process. So these are segments that both of them have similarity on one side, but the process of commercialization, the process of decision-making of purchase, they follow different lines.

And now we will go to the next question by audio that comes from Fernanda Urbano, sell-side analyst from XP.

Congratulations on one more acquisition. The rationale of the movement, thinking of internationalization and also increasing the name to the aftermarket. So my question is related to profitability of EBS of 18%. So I would like to understand based on what you know of the company, what are the characteristics that you give to this margin level among the characteristics that you mentioned of strong brands or distribution network. I'd like to understand what you see as a more significant as this margin level? And how do you see a potential for improvement?

Thank you, Fernanda. Sergio, I would like to start with you to talk a little bit about this margin potential. So it's a business model that brings good resilient margin, as you mentioned, and we can exploit a little bit more. And Ricardo, the second part of the question that you wanted to comment a little bit is related to the company of EBS, the company as it fits into this strategy. And just repeat the second part of the question because I lost a little bit the part. So an improvement -- room for improvement for how can we connect it to other geographies and improve this footprint that we have that is global of EBS to operations of masses that we have in Brazil? So Sergio, I'll start with you in the first moment related to profitability.

So thank you so much for your participation, Fernanda, for your question. So the margins are very robust. And the main driver of this outperformance of EBS has to do with its brand name and its products. So a big part of the revenue of EBS are from products that bring this EBS brand that were thought of for the aftermarket. And this is the strong point. This makes that we are able to bring a premium price seeing the other competitors in the market. So this is a point that has surprised us since the beginning. We exploited this a lot during the process of due diligence. I know that Ricardo will come in right after, but all of the synergies that we mentioned short time ago, there are spaces for us to improve and continue to improve our margins without increasing our fixed cost. Ricardo?

Thank you, Sergio. Thank you, Fernanda, for your question. 70% of the revenue of EBS comes through the U.K., not exactly U.K. through the U.K. unit. And they have this expansion -- this expansion of their -- through Romania and Holland, in China, which is a consolidation center for its parts. And then they also have some opportunities in the south of Europe. And they're seeking one of the reasons that it's a bigger group that they could give them muscle so that they could increase even more their sales through this segmentation of products that they have. As Sergio mentioned, they have products that are -- they have the manufacturing also through manufacturing those that they buy and then they remanufacture and then they sell in the market. This is part of the story as we can maximize their revenues. And also knowing their systems of sales control of a CRM knowledge of the market is very good, so their internal control system and the system that we have within Randoncorp, they are better. So we've seen in 18 months a space of the potential that we're able to deliver and capture synergies and gains in this process. And no doubt, we have the sourcing. We also have products that we have purchased. We have acquired in the Asian market. As I mentioned, products that we can take to Europe as well and also manufacture over there. And we also see an opportunity in the sourcing part in order to work on. So in different layers, we have identified some synergy practice in order to optimize revenue, maximize it in operational performance and also sourcing.

And now we will go to the next question that comes from Andre Ferreira, sell-side analyst from Bradesco.

So congratulations. Two important points. Ricardo, coming back on the sending products from here to Europe. If you can detail a little bit more how this acquisition open doors in the European manufacturer sending auto parts over there and would it to be of what aftermarket here over there? And another point would be, Sergio, you mentioned very quickly on the decision-making process being different from lights and has a difference to heavy. So if you can detail what are the drivers in order to gain market share in the aftermarket for the heavy?

Thank you, Andre. Well, I'll have -- Sergio will start and Ricardo right after.

When I mentioned, I have a little bit of technical aspect in the answer. The brake synergies that we use in Brazil is a little different than the one that uses in Europe, the capacity of braking and then the systems of sealing are different. So as we have a great production, we are market leader in South America. We've supplied to many -- all the manufacturers. The headquarters are in Europe. We see a potential to have in a short space of time, products that we can adapt here for the European market and then we can sell over there. This is one of the lines that we see as a potential and nothing stops us. That other line of products we cannot add through our expertise of auto parts -- vertical auto parts where we have several suspension systems of bearings and maybe we can expand our revenues in the European market. So we have 2 sites where we can go and sell to manufacturers and also expand our portfolio through different lines and products that we see as a potential.

Sergio, you are on mute.

Can you hear me now?

Yes.

I don't have such a strong signal. Can you hear me now?

You can move on.

Yes, I believe that it's not coming out clear. Let's try once again. So in the segment, and thank you for your participation in the segment. In the light segment, obviously, in our automobiles, we have -- we do the traditional maintenance. We change the oils from time to time. And then there's a moment in which you have to change a brake pad or another component, but the maintenance breakdowns that are not foreseen and the availability of auto parts is an important part which we have these auto parts in the light line. If you have this availability, which components you need to use is the mechanic that -- which of those that opens the toolbox. So that's why it's so important to be connected in the light line to the mechanic because they know if they have substituted the brake pad and put a brake pad that has a better quality. After some time, he will come back. If he puts a suspension product that is not good, after some days, he will come back and he will complain. He will have to do a rework. And so there is a necessity of this mechanic to specify parts and components that they trust in a way that they are able to keep their profitability because the clients do not come back complaining of the replacement that was done. In the heavy line, it's quite different. In the heavy line, you have a businessman with a big fleet. And the level of professionalism and follow-up of the wear and tear of what to expect when the piece will fail. This level of knowledge of this great businessmen, they have. So they can prepare much better when they have to do this replacement, this maintenance. So it's not just one vehicle, maybe it's 1,000, 2,000, 5,000. In the United States, you have a fleet of 120,000, 125,000 vehicles. So they develop an expertise and knowledge that is really, really big over what are the products that are good that have strong durability, great quality, what kind of cost they can expect. So these are some of the points that differ. These 2 sectors, one, it is more...

So let's wait a little to check if Sergio's connection is back. Sergio, are you able to hear us?

So there is a better scheduling system. I hope to have clarified the question.

And now we will move on to the last question in the evening. It comes through writing from Victor, who is sell-side analyst from [indiscernible] Capital, and he's asking, due to the higher level of margins and the manufacturing model and having less capital, is it possible to also take to understand the level of ROI, is also better in EBS than vertical auto parts.

I think, Esteban, you could answer this one. And then we can also make some comments on the capital allocation that we have done recently so much through auto part.

Perfectly. Thank you for the question, Victor. Thank you for listening to the call. The answer goes to what we have shown in the Randoncorp Day when we showed the capital allocation that we have done through the Auto Parts company by organic growth or nonorganic M&As that Sergio had the opportunity to present earlier today in this results call. And yes, because it's a more light model through a natural nature that has a higher ROIC that we have shown in a capital way. So also in the Vertical Auto Parts, this acquisition will help us the ROIC of this vertical, remembering that as we have a guideline and speaking to the market, and we have talked to you every time that we're going to evaluate and do business. The guideline is that this new acquisition obviously has to follow -- the strategic criteria has to be according to our strategy. But part of our strategy is also to be a minimum requirement of return, maybe a fee of attractiveness or an ROIC or through integration.

Perfect. Thank you so much. Thank you, everyone, that participated in the Q&A session. And now I will give the floor to Sergio for his final consideration.

So once again, thank you so much for the participation. This is our third movement in this last part of the year. So I don't know if it was June or July, the [indiscernible] as the mobility part. Last week, we disclosed the delta in products of digital products, extremely important, a part of our future vision. And today, the acquisition of EBS through our Auto Parts and also with a link and adherence very big to our strategic planning. So we are really happy. And now we have to wait the approval by the authorities, as Esteban has already mentioned. But now in this case, we believe that this process will be much shorter. And soon, we will conclude this transaction. Any other questions, doubt clarification, our whole Investor Relations team here will be at your disposal. And thank you so much for your participation, and have a good night, everyone. See you soon. Good night. Bye-bye.