Romi S.A. (ROMI3) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen. Thank you for standing by. [Operator Instructions] As a reminder, this conference is being recorded. Thank you very much for participating in Romi's conference call to discuss its 2019 fourth quarter earnings results. This event is simultaneously being webcast by Internet; and is available on the website www.romi.com, in the investor relations section. Before proceeding, I would like to clarify that this conference call is being held exclusively for financial analysts and investors and that the forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. With us today are Mr. Luiz Cassiano, Chief Executive Officer; and Fabio Taiar, Financial and Investor Relations Officer. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Luiz Cassiano.

Thank you. Good morning, ladies and gentlemen. Thank you very much for attending 2019 earnings release conference call for Indústrias Romi. Yesterday, we reported our earnings showed an important improvement throughout 2019. All business units presented progress, reflecting a gradual recovery of the domestic market and a strong work of our team on operational efficiency. In the Romi Machines business unit, the highlight is the order entry. In 2019, we increased more than 14% mainly due to the result of fourth quarter 2019 which increased almost 70% compared with the fourth quarter of 2018. Therefore, we are starting 2020 with a strong backlog 51.5% higher than last year. We are seeing a more robust domestic market with solid growth in several industrial segments which Romi serves and regions of Brazil. At the rough and machined casting iron parts business unit, we had a recovery year. We have been constantly improving our profitability throughout 2019. Additionally, we had a significant increase in order entry, 18% higher than last year. As we had noted a solid recovery in the heavy casting iron parts market, we have a very positive perspective for this year. Our German operation Burkhardt + Weber business unit also showed a margin recovery throughout 2019. However, we still need to add new orders for our backlog of 2020, and we are facing a big challenge to accomplish this goal mainly due to the slowdown in Germany and the problems facing China. Now I would like to turn the call over to Fabio, who will detail our 2019's earnings. Welcome, Fabio.

Thank you, Cassiano. Good morning, good afternoon, ladies and gentlemen, and thank you very much for joining our fourth quarter 2019 conference call. Starting the Chart #3, the highlights. The order entry in the fourth quarter 2019 increased 19.5% compared to the same period 2018. Such growth was represented by Romi Machines and castings business units, which grew 68.5% and 38.9%, respectively. A more consistent recovery of the Brazilian economy as well as the higher demand of heavy casting parts related to the wind power segment are the main reasons for the higher orders this quarter. Net operating revenues in the casting business increased 7.5% in the fourth quarter 2019, compared to fourth quarter 2018, due to the start of the deliveries of the heavy casting parts. The operational margin improved 12.8 points related to the higher revenues and also projects focused on operational efficiency. Order backlog by the end of 2019 shows an increase of 9.7% compared to 2018, being Romi Machines and casting businesses the responsible for such growth. By the end of the fourth quarter 2019, Romi had a net cash position of about BRL 34 million, showing a solid financial position. In the fourth quarter 2019, due to the higher revenues and inventory decrease, Romi generated about BRL 18 million in cash. And the Chart #4. Since 2018, we can see a gradual recovery in GDP and gross fixed capital formation, which shows a more consistent recovery of the Brazilian economy. The improvement in the macro scenario has positively impacted the order entry, especially for the Romi Machines business, as we will see later on in this presentation. And Chart #5. The first chart shows the overall capacity utilization of the Brazilian industry. The year of 2019 shows an improvement on capacity utilization compared to last year's, especially in the second half of the year. Regarding the industrial confidence index, we also see a more consistent recovery in 2019 reflecting the improvements in the political and economic situation, which positively impact our businesses, especially Romi Machines' sales in the domestic market. And the Chart #6. The customers segmentation for Romi Machines is distributed in many different segments, which is usual in this business unit. In 2019, we can notice that a larger number of industrial segments in many different regions of Brazil purchased machines, which reflects the improvement in the macroeconomic scenario. In the business unit B+W machines, the demanding segments remained similar to last year. The aerospace segment, which was one of the main sectors chosen by B+W a few years ago in order to develop new machining solutions, appears consistent over the presented years. In the casting business, 2019 was a challenging year, especially for heavy casting parts due to the temporarily lower demand in the wind power segment. This segment reduced its participation from 40% to 23%, comparing 2019 to last year. On the other hand, orders from this segment recovered through the year... [Technical Difficulty]

Excuse me. Romi's conference call has been interrupted. Please hold on, and we will soon resume the conference call.

So the Chart #6. The customer segmentation for Romi Machines is distributed in many different segments, which is usual in this business unit. In 2019, we can notice that a larger number of industrial segments in many different regions of Brazil purchased machines, which reflects the improvement in the macroeconomic scenario. The -- in the business unit B+W machines, the demanding segments remained similar to last year. The aerospace segment, which was one of the main sectors chosen by B+W a few years ago in order to develop new machining solutions appears consistent over the presented years. In the casting business, 2019 was a challenging year, especially for heavy casting parts due to the temporarily lower demand in the wind power segment. This segment reduced its participation from 40% to 23%, comparing 2019 to last year. On the other hand, orders from this segment recovered through the year, where deliveries will occur mainly in 2020. In the Chart #7. Romi Machines accounted for 51% of the consolidated revenues in 2019, an increase of 2 points compared to 2018 due to the increase of the domestic revenues. B+W also increased its revenues and therefore increased its participation in the 2019 consolidated revenues. Casting iron parts decreased its participation due to lower revenues related to heavy casting parts. The Chart #8. Domestic revenues accounted for 55%, slightly lower compared to 2018 due to the decrease in -- of the casting revenues, which is mainly represented by domestic sales. The decrease in the Latin America was due to the lower sales volume to South America, where several countries in this region are facing a challenging political and economic environment. The increase of Europe and decrease of Asia are due to B+W, which had more machines delivered to European customers in 2019 compared to 2018. The Chart #9. Romi Machines' orders in the fourth quarter 2019 increased 68.5% compared to the same period 2018 mainly due to the higher orders in the domestic market. The recovery in the Brazilian economy aligned to the lower interest rates, a reasonable inflation level and a fair exchange rate level encouraged customers to make new investments. B+W orders decreased in 2019 in the fourth quarter -- and in the fourth quarter compared to the same periods in 2018. Europe and Asia are facing a more challenging scenario, as well as economic outlooks have been reviewed to lower growth rates. And due to this environment, projects are taking longer to be closed, and others postponed. In the casting iron parts, orders in the fourth quarter 2019 was an increase of 38.9% compared to the fourth quarter 2018 due to the recovery of the heavy casting parts mainly from the wind power segment. Due to the increase in orders this quarter, backlog by the end of 2019 increased 9.7% compared to 2018, represented by the growth of 51.5% and 47.3% in the Romi Machines and casting business, respectively. The Chart #10. The cost structure reflects the good level of operational efficiency, which had significant improvements in the last couple of years. We keep our focus on projects related to cost improvement and profitability. The Chart #11. Gross margin in the fourth quarter 2019 reached 29.9%, 1.8 points higher compared to the fourth quarter 2018 due to the B+W machines and the casting business units. Regarding the operating margin, fourth quarter 2019 showed 9.7%, a decrease of 2.4% -- of 2.4 points compared to the same period 2018. Such decrease was mainly due to the lower revenues in the external market and the increase in the expenses related to the weaker real and a trade show in this fourth quarter that happens every 3 years. And the Chart #12. EBITDA margin reached 13.5% this quarter, 2 points below fourth quarter 2018. It was also due to the lower revenues in the external market and increase in the expenses relating -- related to the weaker real and the trade show. Although EBITDA margin decreased, net profit and net margin in the -- in this fourth quarter were pretty similar to the fourth quarter 2018. This was due to the income tax benefit related to the interest on capital announced in December 2019 that decreased the effective income tax rate in the fourth quarter 2019. The Chart #13. Romi Machines revenues in 2019 increased about 7% compared to 2018. Gross margin decreased 1.3% (sic) [ 1.3 points ] due to the mix of products. And EBITDA margin decreased 3.4 points compared to 2018 due to the higher allocation of the shared expenses to this business unit, whilst casting business had a decrease of about 15% in its revenues this year and also due to the higher expenses from international subsidiaries which were impacted by the weak real. B+W revenues increased by 11% in 2019 compared to 2018, as well as the gross margin. Such increase in revenues and the gross margin recovery positively impacted the EBITDA margin that in 2019 increased 1.6 points compared to 2018. In the castings iron parts business. Revenues decreased in 2019 compared to 2018 due to the lower demand for heavy casting parts. The change in the mix of products, the lower revenues and the restructuring costs in the fourth quarter this year negatively impacted the 2019 gross and EBITDA margins. The Chart #14. Fourth quarter, there was a good cash generation of about BRL 18 million already net of the BRL 25 million of interests on capital paid in November, resulting in a net cash position of BRL 34 million by the end of 2019. The Chart #15, the performance of Romi shares in the period of 2 years was significantly above Bovespa index due to the positive development of the operating results since 2017, the cash generation, together with a more consistent recovery of the Brazilian economy, which have positively impacted in the share's price. Well, we end up our fourth quarter 2019 presentation and now we move to the Q&A session. Thank you very much.

[Operator Instructions] I would like to mention that today's conference call is being held exclusively for financial analysts and investors. [Operator Instructions] Excuse me. This concludes today's question-and-answer session. The investor relations department is available to answer any further questions you may have. Mr. Luiz Cassiano, at this time, you may proceed with your closing statements.

Thank you very much for attending fourth quarter 2019 earnings release conference call. We are available to answer any questions throughout this quarter, and we'll talk again by April to the first quarter 2020 results. Thank you.

That does conclude Romi's Quarter Earnings Results Conference for today. Thank you very much for your participation. You may now disconnect.