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

Good morning, ladies and gentlemen. Welcome to the video conference and the publication of Randoncorp results about the second quarter 2025. Our event has simultaneous translation into English and LIBRAS interpretation. To listen in English you click the button interpretation at the bottom of the screen. And to listen to the translation select mute original audio. We will record this and made it available on our Investor Relations website, our ir.randoncorp.com. On the screen, we have our disclaimers. Remember, the information presented in this video conference are not a guarantee of performance. They involve risks and uncertainties because they are about future events. Therefore, they depend on circumstances that may or may not happen. In our agenda, we'll have a message from our CEO, Sergio Carvalho, the highlights of the quarter; by CFO, Paulo Prignolato, detailing of the results addressed by Director of IR and Finance, Esteban Angeletti. And our Q&A session is led by the IR and Finance Manager, Davi Bacichette, also with Hemerson De Souza from Frasle Mobility. And last but not least, we'll have a message from our President, Daniel Randon. [Operator Instructions] Now we will listen to Sergio.

Thank you, Carol. Good morning, everyone. Early July, we met in a Randoncorp Day. On that event, we shared not only our transformation and relevance of our revenues, but also we talked about the scenario that we are experiencing in '25. From the foreign perspective with the relevant demand fall in important markets, as well as with the domestic market where we are adopting a number of measures to adapt our structures to the current context, especially in the OEM vertical. We are sure and the numbers show this, our company is much stronger and more solid to face the hard times because today, the majority of our revenues already comes from the sectors and markets that are more resilient. It's a result of our work in the past years. Nevertheless, we need to adapt our business to periods of higher complexity like in the past months. That's why we're making our structures leaner, both productive and administrative structures. We reorganized our footprint, seeking to optimize our logistics and our sourcing. We revisited our business model in some units and anticipated holidays, we adopted flexible working hours to reduce the pace of production and to avoid the high level of inventories. Some measures generated additional spending affecting our quarterly performance. I'd like to highlight, however, that the majority of them are specific ones and they're one-offs that will not be repeated in the following months. If we didn't adjust this, our margins would be at levels that are closer to the usual levels, even with this challenging scenario. This is only possible because of the diversity of our revenues that we are reaching in the company to grow in the aftermarket and the foreign market. Temporarily, we were more leveraged. Paulo is going to explain better next. I'd like to highlight that we're pretty focused on reducing this indicator by capturing synergy with the acquisitions we had, by cutting down NCG, disciplined investments and expenses and with the capital market. We finished in July, the follow-on of the Frasle Mobility. It was a successful operation that added BRL 250 million to our cash flow by the primary offering of shares. And we also published increasing our private capital Randoncorp that is ongoing and may add BRL 250 million in availability. In addition, we are waiting for the approval of the Central Bank for the transaction that we announced in the last quarter with a strategic partnership with [ Rands ] that will bring resources when it's finished. In addition, we are adopting measures to reduce the cost of our debt and to expand the terms as the 12th debentures issuance that enabled to strengthen our cash flow. And we are committed to transparency. We published the revision of our guidance, more in line with the scenario that we're -- that we see now. The premises are listed with the relevant factors. We always see moments that are challenging like we're going through right now as an opportunity to revisit our processes and to correct routes. There have always been complex factors in the business environment. Right now, we have a new component in the business factor linked to the tariffs imposed to a number of countries by the American government. But we are sure that we'll always leave this stronger than we were. We're ready for the next challenges. This is the last video conference that I do as the CEO of Randoncorp. It was an honor to be with you throughout these years. I leave with this confident. I know that there are many outcomes still to capture synergies for our business. This is still ongoing. A number of innovations are still maturing and the long-term plan brings me conviction that Randoncorp will continue this beautiful trajectory that started with Raul and Hercilio in a small workshop in Caxias do Sul and today is considered one of the largest player -- global players in the automotive industry. I'm so happy that I contributed in a relevant way to this growth and this highlight. But I will continue to be close to you. Thank you for your attention and for being with us. Please count on me as a senior adviser from now on. Now we'll hear from Paulo.

Thanks, Sergio. Good morning, everyone. Like Sergio said, the demand for -- in some of our markets went down significantly in '25 in a more intense way in the second quarter. On the screen, you can see that the trailers had a volume reduction in production and in sales, around 20%. And in trucks, it was a smaller reduction, especially a reduction that it sustained supported by the advancement of exports. Like I mentioned in the last quarter, these numbers do not reflect the real impact that we're feeling in our businesses, given that there was a product mix change where the heavy products are going down at a superior level compared to others. In trailers, for example, there was a retraction around 40% of grain trailers and dump trucks, that is the usual products that are most representative of our sales of our OEM vertical. This is an impact of the slowing down of agribusiness. Even with a record crop, they are feeling the impacts of the high level of interest rates for loans, low commodity prices and political economic lack of stability that we're going through in our country. There is no signal right now of recovery in this industry. Greater volumes come from industrial and consumption goods. But the aftermarket keeps a good level because of the stability of the workshop service volumes. Generally speaking, we can state that in all industries, even in aftermarket, it's a more challenging scenario because of the interest rates in Brazil or because of tariff disputes with the U.S. And we're monitoring all this very closely, keeping a good eye on this and making the necessary adaptations in our business to face this and other challenges. Now let's go through the main indicators. The growth of our net revenue, especially because of the addition of new businesses and the evolution of sales to the foreign market, the drop in our EBITDA and the net result because of the reduction of volumes that I mentioned and the addition of unusual spending -- unusual expenses connected with the adaptations that we did, and a light drop in the ROIC, the return on invested capital, because of the necessity to use more cash flow. Talking of debt level, you can see here the increase of our leverage. This is the EBITDA reduction -- an impact of the EBITDA reduction and the increase of the workflow of the cash flow. We're adopting a number of measures to improve these indicators such as discipline and cost investments and to capture synergies in the companies that we acquired with greater focus to reduce our debt level, to reduce its average cost and to increase our debt terms. These are movements together with close to the capital market. And after analyzing detail in a detailed way all our capital structure, we executed 3 important movements to have a structural adaptation. In July, we finished the follow-on of Frasle Mobility, our controlled company for primary and secondary offering of shares together totaled BRL 400 million. In the primary offering, we captured BRL 240 million that corresponded to the issuance of 10.3 million new shares -- ordinary shares. In the secondary offering, we sold around 6.3 million shares FRAS3 belonging to Dramd, BRL 152 million at the same price level as the primary offering. With net resources captured here at Dramd wants to take part in the increase of private capital in Randoncorp has published the relevant fact of the operation. By realizing the subscription of the shares, the controller will add important resources for the cash flow of our company. In addition, we also had our 12th debentures issuance, BRL 1.2 billion in 2 series with payment terms from 5 to 7 years at a very competitive rate. The great highlight of this operation was the demand above expected in the book building that enabled to compress this rate. All the details may be consulted in the documents that we published at CVM and our website of IR. The numbers that we show you right now do not reflect the last capture that we have because the conclusion was in July. Nevertheless, the cost was lower than SELIC interest rate and reduced even further after its completion. I'd like to highlight in relation to our debt level that our financial commitments enable 3.5x leverage, excluding Randon Bank numbers and EBITDA pro forma in the 12 months of the acquired companies. Additionally, they have as a basis 31st of December. To finish my part, I'd like to show you some information about the shares and the history of payment to our shareholders in the last quarter. Our market cap reflects the drop of our share price. The liquidity daily had an advancement in relation to dividends and interest, we did not release payments regarding '25. I'd like to thank you for your attention so far. And now we'll hear from Esteban, who will detail further about the economic indicators of the company.

Thank you, Paulo. Good morning, everyone. I'd like to start with the net revenues and its distribution. On the chart, you can see that the verticals that are most representative for Motion Control and Auto Parts. Together, they accounted for almost 70% of the total. The OEM vertical gave more room to other verticals, not just because of the reduction of the market volumes, but because of the expansion of the revenues in the aftermarket. Now here's the details. Here's a strong drop in the revenues of products that sold to the agribusiness, mentioned by Paulo already, increase of sales of Financial Solutions and Services, especially by expanding the credit portfolio of Randon Consortium and Random Bank, an increase of revenues to the foreign market, both organic and inorganic, which I will detail further. Now let's take a look at revenues. The foreign market, we grew the representativeness on the consolidated close to 34% in the second quarter. With the acquisition of the companies of Dacomsa, EBS and AXN, we added around $80 million to the indicator just in that quarter. But I'd like to highlight too the advances that we had from the recovery of sales of trailers in Argentina and in the United States, compared to the quarter and a good sales performance in Europe, especially Motion Control. Here on the chart, we can see distribution of revenues in the foreign markets. USMCA went beyond 50% in the region. In terms of adjusted EBITDA and its margin indicators showed a drop comparatively to the quarter, as you can see on the chart. You'll notice here that CPV had an increase explained especially and it's because of the drop of the volumes that led to fixed costs going down. And unusual spending such as costs to adapt structure and expenses with sales and administration increased. We had consortium sales going up because it's a more challenging macroeconomic environment and provisions for contingencies. The amounts of the unusual spending in CPV and SG&A went beyond BRL 60 million in the period, affecting the EBITDA in around 2 percentage points. It's important to highlight that CPV and SG&A, we had the accountability of surplus of inventories, mobilized brands and portfolios. These values did not impact EBITDA because there was amortization, but it impacted the net profit. Now let's take a look at the investments. I'd like to stress that we're taking caution here. In the period, the greater investments were in maintenance of equipment, in the industrial vertical to improve Frasle Mobility control Fremax and to continue building substation, the power plant and Subestacion Yguazu. To finish, I'd like to invite you all to take part in the site visit that we will hold in some of our facilities on September 3. There are limited numbers and registrations, and 22nd of August is the last day for you to register. Now we'll listen to Carol for Q&A.

[Operator Instructions] Our first question today is from Gabriel Tinem, Santander analyst.

There are 2 questions here. First, on the restructuring. I'd like to hear more about this process. If you could update us about trailers, timing and Auto Parts. Was it similar process, if you could comment more on this, on what's driving this? And the second point, more focused on foreign market. There was an improvement in some industries, especially some volume increase in other geographies, you could comment on this, if this improvement is also boosting what you saw in terms of your guidance for the foreign market.

Thanks, Tinem for your question. There are 2 important points there, talking of all this restructuring that we're going through in our verticals -- business verticals. Not only the OEM, but as a group, we're looking very carefully at our structure. So not just trailers, but also other actions. In terms of the foreign market, the trailers is more favorable, not just looking from the perspective of the U.S., but we see South America doing better, and we can detail the countries here. Esteban, I count on you to address these first 2 questions. And Paulo, feel free to comment on this, especially the restructuring, not just the businesses, but as a company, discipline with cost, investments, it would be important to address this.

Thanks, Tinem, for the question. Thanks for being with us, our video conference on results. Let's talk about exports first, the foreign market, and then I'll talk about restructuring. So the foreign market is representative, we could see that in the quarter, we're close to 34%. And yes, a good part of this amount of this revision of the guidance is linked to the fact that we see a better environment for exports, especially for Latin American countries. Argentina is one of the countries that is demanding more products right now, but also Hercules in the U.S. that anticipated parts of the deliveries of that order by the Port of South Carolina. Another important point would be that right now, they're having better margin than the domestic market. This is part of our business model. It's not chance -- by chance. It was something that we built in the past 5 years, and the outlook is still good. Of course, as a whole, the exports to Argentina are small amounts, but they help us to support our revenues and our margin. In relation to the processes, in terms of restructuring, we can break this down into many parts. You can see this from the economic and financial part, and Paulo can comment on this about the financial part, especially cash flow. From the economic point, we're talking about CPV, revenues and SG&A. The main focus here is to cut down fixed costs. We have a mission here to reduce by 20% the fixed costs. In the OEM vertical, and we have equivalent challenges in Auto Parts to make operations leaner so we can face this moment in the market. But that's not all. We're also looking at products. One of the main points that is hurting us this year is the product mix in trailers. We're focusing on this. We had a year last year where grain trailers and dump trucks had gone down by 50% and this year, 40%. So over 10 years, it's a very significant drop. And there's no way to get away from this right now. So what we're doing now is looking at product mix and make this product smarter in the sense that leave the added value where the client will pay the value and reduce the cost, where they don't see value where they are not paying for this. Therefore, we want to defend our margins. And we're also looking at processes, especially trying to speed up automation in the factories, in the plants so that when we recover, we keep our productive level. And when we recover our levels, we become more efficient. We saw a similar scenario in 2014, '15 and '16, there were 3 hard years for trailers, and we did all this work then. It's work we know how to do. It's work that we have to continue doing. And it's comfortable, and we believe in this, we'll be more qualified to go through this harder moment in the market. As we recover, we have a double moment of gain because our operations will be more efficient. The only point that really differentiates us from 2015 and '16 is that back then, the OEM represented 35% or 40%, and now it represents less than 25%, only 22% of our revenues. The remaining part comes from other businesses that have greater resilience. In relation to Auto Parts, Tinem, we are adapting our structure as well. But like Paulo said, the market of trucks is more resilient because of the exports. So we have to make adjustments, of course, especially to adapt to the domestic demand, but they end up having a smaller effort, let's say, in terms of adaptation because the demand is still supported by part of the experts. Now Paulo, feel free to comment on working capital that would add to the quality of our answer.

Perfect. Gabriel, thanks a lot for your question. Thanks for being with us. No doubt right now, with high interest rates, our working capital is one of our main priorities. We finished December '24 with around 62 days equivalent of turnover in our working capital. This figure in July is around 100 days. It's important to stress that we have new operations in our portfolio right now, Dacomsa and EBS. They have a characteristic that naturally they carry more inventory for the aftermarket, but it's important to highlight as well that right now, with the adaptations that we had in our production level and adaptations in terms of supplies, manufacturing, raw materials and labor, we saw in July already stability, stabilization with a reduction trend with this working capital. With actions in inventories and clients and suppliers and taxes, we expect to cut down by 20 to 25 days of our equivalent revenues from now until the end of the year. So we're working strongly on this point, mapping all the verticals so we can deliver this reduction to stabilize our working capital close to what we used to have before this moment of market crisis.

Now let's move on to the next question. It's from Lucas Laghi, XP analyst.

I'd like to go back to some points with you about this more challenging moment in the market and the guidance revision for '25. If we take a look at the EBITDA of the first quarter, we saw a margin around 12%, not considering the adjustments of the restructuring. And comparing with the middle 13% for the year, that would imply a margin of 14% to reach this mid-range for '25. This starting with 13% if we exclude all the effects of restructuring. We know the fourth quarter has a weaker seasonability. I'd like to hear from you, from your mindset, what you're thinking about the likelihood of where we can think about this interval of the guidance is more feasible? Do you see leverage of improvement in terms of results for the third and fourth quarter that will bring about improvements for the profitability, not considering the restructuring and perhaps the lower guidance range is more feasible, considering the profitability level you're now operating? I'd like to hear -- to understand a little better this interval of your guidance for profitability. Revenue, I think it's half-half, 50-50. But what do you think is missing for this industry to really catch on if the strong crop is already good enough or if you need any other effects from the outside to leverage farmers or perhaps elections? I'd like to hear from you what's missing for this industry to really catch on? And the second point is about the net debt. We know that there are follow-on effects. There's a lot of potential of other factors. But nevertheless, if we think about a lower range of the guidance, the leverage level is closer to 13% to 3.5%. You mentioned working capital, right, Paulo? I'd like to understand how comfortable you are in relation to the initiatives to reduce the net debt, not relying so much on EBITDA, trying to think about the covenants and leverage by the end of the year.

Thank you, Laghi, for your question. So we'll hear, Esteban, if you can address the first question about the sector, the drivers -- the industry drivers that potentially could help the market to recover. And Paulo, there are 2 questions for you. One, about guidance, about the revision of the guidance. We discontinued our guidance based on what we said at Fras-le and now we have a new guidance with adjusted figures, adjusted to the scenario, and Paulo can talk more about what we saw in the figures to adjust the guidance. And next, the debt and covenants. As we can see that the movements that we're doing, we know in the second half of the year will have a positive impact. You can detail more about this. Esteban, with you about market drivers and then Paulo for guidance and leverage.

Thanks, Lucas, for your question. Thanks, Lucas, for being with us. So the drivers, what can change the compass in terms of demand. So I think it's good to take a step back and to remember how our demand is broken traditionally. There are 2 main drivers, expanding the fleets and renewal of fleets. This year, in agribusiness, we don't see any of those expansion or renewal of fleet. But we know that the crop is a record crop. What does that mean? When we consider that Brazil does not have capability of storage, and we need to transport all of this crop, all of the harvest with the existing fleet, which means that the usage level is probably much higher than the normal numbers. The machinery they have is depreciated. The trailers in the market increases their age, their wear and tear. And as we recover, and we saw this in the past, in 2016, there is a double positive effect that has an impact on the demand to renew everything that they didn't renew in the past 2 or 3 years, plus the expansion of the fleet. So the impact on the volume is pretty strong. What needs to happen for this to start? According to our reading, there are 3 factors. Interest rates, the SELIC at 15% really blocks a lot of investments, hinders the investments. The clients need, but they decide to postpone this. They don't want to do this right now. They don't want to commit their capital right now. The second factor is the grain prices. We don't have the best quotations for corn, for example, for soybeans, which makes our agribusiness client to wait longer on their investments and all the uncertainties that we see in the market. It's truly hard to make a business decision in the long run right now when we have important decisions, both political and economic decisions in Brazil and around the world. Still, they're being debated. They need to wait for this to accommodate this new premises, new scenario, so the clients can make their investment decisions. But I'd like to stress once again, if there is any positive outlook here that, that's what it is. This repressed demand. Everything we didn't sell in the past 2 years at some point will turn into market demand.

And if you allow me, I'd like to comment on something here, the railroad, true. Another positive point is that we have our railcars. There is an order of 280 railcars, which will be delivered in the third quarter. And very good pointed out, Sergio, because in 2016, the year when trailers market went down in a similar way, then railcars helped us to pay our fixed costs of our OEM and even adding margin to our OEM. There are other bids, other orders that are being negotiated that will be translated into revenues in future, coming up next year, even though the domestic, especially the trailers industry, not so positive for next year. We see the railroad, the railcars industry contributing to our business and the foreign market supporting our sales and our margins.

Thanks, Sergio. Great point. Paulo, over to you now to talk about leverage and guidance.

Thanks Esteban. Lucas, thanks for your question. No doubt, as commented by Sergio, Esteban, and Davi, we're going through a lot of uncertainty right now. But the first half of the year counted on a number of one-offs and unusual impacts. Because we have very rigorous criteria about one-offs that we publish. But really a high amount of those, and when we define the EBITDA margin for the guidance around 12% to 14%, we took into account all of this. So we do not expect the second half to have unusual impacts with the same levels that we had in the first half this year. That's why right now, we're comfortable with this range of guidance of EBITDA margin from 12% to 14%. So at any time in the following months, if we feel there is a change that is either higher or lower in relation to this range, we will inform the market about this. But right now, we are comfortable with this range from 12% to 14%. Now in relation to our debt level, of course, it's worth stressing some important points. First of all, the synergy of the companies we acquired. Working capital, it's an important amount that we're working on all fronts, suppliers, taxes, clients and especially inventory levels, we'll see reductions starting in the third quarter and fourth quarter. Financial discipline in relation to our management of costs, and CapEx and capital market operations that we mentioned, follow-on resources coming in, private investment going up that will finish in the following weeks as well as resources coming from the operation [ Compatri ] that will be integrated in the last quarter. Right now, based on this EBITDA level and these actions, we expect to finish this year with a leverage below 3x.

Now let's move on to our next question coming from sell-side analyst, Gabriel Rezende.

I'd like to apologize, I think my Internet connection had a problem in the first question. So please, I'd like a follow-up about this market challenge. You made it clear that it's leveraged by the demand on grain trailers. So I'd like to see midterm and long-term measures. What would be the possibility of Randon migrating their portfolio to have more market share with other equipment perhaps, take into account new challenges in the future to make up for this, to get into other -- in addition to the agro, beyond agro. And how can you anticipate the profitability, let's say, for implements, machinery and parts, taking into account the restructuring movements that characterized the first half? You said you're confident about the guidance. I'd like to hear from you about this break in both parts and machinery.

Thanks, Gabriel. Good questions. I'd like to join this with Lucas Barbosa's question that asked us to mention for the second half about the volume, about grain trailers, if we see an improvement coming up and about your migration in the sectors. We know the agribusiness is a sector that grows a lot in Brazil. We can comment right, Esteban, about the potential in the other industry and how this product mix can change over time and the profitability for the second half due to potentially fewer adjustments compared to the first one, especially for the OEM.

Thanks, Gabriel, for the opportunity. I really like to show figures and data. When we look at the agribusiness, in 2023, it represented 70% of the net revenues of our OEM. In 2024, it went down by 50%; in '25, it's around 40%. It shows the size of the drops in agribusiness. And traditionally, the whole market is focused, not just Randon, but it's focused in agribusiness. That's why it's natural, we chose this over the years. But our mantra here, motto is that we want to be competitive across all product families. And right now, we're revisiting both design and the structural components of our products that are selling more, industrial loads, retails, the dry vans and so on. It's an exercise that takes time. We need to revisit our engineering designs. We are a structured company. That's why it takes some time to reach the market. I'd say it's a mission we have. We're going to harvest the outcome, the fruits in the upcoming years. Now addressing Lucas Barbosa's question about the outlook to recover agribusiness. But what I mentioned is that we still need to see a drop in the interest rate, an improvement in the pricing of grains, which we cannot see in the short-term happening. We don't see any signal that these 2 premises are going to happen and change. So the demand from the agribusiness will continue -- will go up again. Specifically, Gabriel, about profitability, first versus second quarter, actually semester. The first one was, let's say, polluted by the one-offs. We cannot see visibility, cannot see what's coming up in the second half. The one-offs are something that we're hardly able to forecast. But I can tell you that majority of the actions that we could undertake, we undertook them in -- especially in the second quarter. That's why we believe that the second half should be cleaner. And we have 2 components, it's the market and the company efficiency. We believe that from the company efficiency, we are working. Our actions are already yielding some outcomes. And the fourth quarter will have more. But there is a -- the other half, it's the market to recover its volumes. And this part is the one we cannot see in the third quarter based on the figures we have today. Now talking about the domestic market, we need to take into account, we have the ramp-up of Mogi Guacu, Castertech. As they gain volume, they will reduce fixed cost and will improve margin. This is more internal stuff. It will improve our consolidated figures.

Sell-side Citi analyst, Kiepher Kennedy.

There are 2 questions here. One about the Mogi plant, I'd like to hear more about the ramp-up of the company, what you expect for the next 2 years in terms of revenues, profitability of what you've had so far? And the second one to mention -- you mentioned in some answers the work that you've done in relation to cutting fixed costs, which is very positive. I'd like to hear more about this evolution for the upcoming quarters, what we can expect more, especially with the termination that -- termination cost that will impact the results. This could help to have better results in the cost level. So the improvement of SG&A.