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 the 2020's first quarter earnings results. This event is simultaneously being webcast to the 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 Rosolen, Chief Executive Officer; and Fabio bio Taiar, Financial and Investor Relations Officer. Initially, Mr. Luiz Cassiano Rosolen will comment on the company's 2020 first quarter earnings results. Afterwards, the executives will be available for a question-and-answer session. It is now my pleasure to turn the call over to Mr. Luiz Cassiano.

Thank you. Good morning, good afternoon, ladies and gentlemen. Thank you very much for attending first quarter 2020 earnings release conference call of Indústrias Romi. This year started confirming the economic recovery noted since the first quarter of last year. However, with the beginning of the health and economic crisis caused by coronavirus, we noticed a significant retraction on the manufacturing confidence. Yesterday, we reported our first quarter earnings release showed an important margin improvement when compared with the first quarter of 2019. In the Romi Machines business unit, the highlight is the order entry and the margin improvement. Order entry increased more than 21% when compared with the first quarter '19, mainly due to the domestic market in January and February. Margins improved with higher volumes and as well as controlled costs and expenses. At the Rough and Machined Cast Iron Parts business unit, we also noted a margin improvement and a strong order entry, mainly in the casting iron heavy parts segment, showing a solid recovery of this market. Our German operation, the Burkhardt + Weber business unit, also showed an important margin recovery in this quarter. This year, we had a better distribution of sales throughout the quarters. Our challenge is to increase the order backlog for 2021 during this volatile environment with few long-terms projects around the world. With the market downturn noted in March and April, our main objective in 2020 is to protect our main asset, Romi team, their families and our business partners. We have implemented several restrictive actions in order to keep operating and serving our customers with excellence. Now I would like to turn the call over to Fabio, who will detail the first quarter 2020 earnings release. Welcome, Fabio.

Thank you, Cassiano. Good morning, good afternoon, ladies and gentlemen. Thank you very much for joining our first quarter 2020 conference call. The Chart #3. Here are the highlights. Order entry in first quarter 2020 increased by 23% over first quarter 2019. The domestic demand for Romi Machines was one of the main reasons for such growth as well as heavy parts in the casting business. Net operating revenues in the first quarter 2020 grew 37.4% compared to the first quarter 2019, together with the strong control over the operating expenses, positively impacted the operating margin that increased by 18.2 points. At Romi Machines Unit, net operating revenue in the first quarter 2020 grew 19.7% compared to the first quarter 2019 due to the recovery of domestic market and, consequently, the increase in order entry of domestic machines. This growth, together with the control of operating expenses, resulted in the expansion of the operating margin of 11.5 points. B+W Machines revenues grew 107.2% compared to the first quarter 2020. B+W Machines revenues in 2020 are more -- are better distributed among the quarters, and analyzing only one specific quarter, then we have this huge growth impact. These higher revenues and also the mix of products increased significantly B+W profitability in this first quarter 2020. In the casting business, net revenues grew 36.9% compared to the first quarter 2019, driven by large parts for wind power segment. With this growth in revenues, the operating margin grew 15.6 points compared to the first quarter 2019. The Chart #4. In this gray line, which is the gross fixed capital formation, in the first quarter, it was slightly negative. However, the industrial GDP was positive in 1.5%. And also, investment rate was slightly above 2018, which positively reflected in the order entry specific -- especially in the Romi Machines business that we have seen since the first quarter 2019, which, when we analyze together with the Chart #5, we saw the capacity utilization and also the industrial confidence index until February and March in good levels, even above previous years, which are reflected positively in the order entry that we'll see later on. However, with the COVID impact, capacity utilization and also confidence index dropped significantly in March 2020. Still very difficult to have any perspective in which level the economy will come back when the reopening start. The Chart #6. These are the demanding sectors of our machines and products. In the Romi Machines, we'd like to highlight the agriculture segment, which grew from 2% participation to 11%. This segment is still demanding in a good level, especially because of the commodity price and the depreciation of the Brazilian real. B+W Machines segments remained quite the same. And in the casting business, we'd like to highlight the wind power segment, which represented 23% of the revenues in 2019, and in this first quarter 2020, it grew to 44%. This is what we have been talking since last quarters that this segment is recovering. We saw this in the order entry. And now we started deliveries, and we see this participation increase already in the first quarter 2020. The other 3 segments, automotive, construction and agriculture, we saw the demand into the first quarter in a good level. However, we don't know what would be the COVID impact in those segments. The Chart #7 is net sales per business unit. Romi Machines in the first quarter 2020 accounted for 50% of the consolidated revenues. It was 57% in the first quarter of 2019. However, as Burkhardt + Weber revenues grew over 100%, Burkhardt + Weber represented 22% in this first quarter 2020 and cast iron parts remained with 28%. Here, what's important is that in the first quarter, the 3 business unit grew its revenues compared to the first quarter 2019. The sales distribution, in the Chart #8, in the first quarter 2020, Brazil accounted for 64%. It was 68% in the first quarter 2019. This reduction happened because B+W, which is all external market, revenues grew over 100%. Then this is also the reason why Europe grew from 27% to 32% in the first quarter 2020. Latin America accounted for 1%, and U.S. remained quite flat. The Chart #9, order entry. Romi Machines orders in the first quarter 2020 compared to the first quarter 2019 grew 21.8%. All this growth came from the domestic market. Burkhardt + Weber Machines, which is our German operation, orders dropped 37.3%, that B+W has experienced a more challenging scenario, especially in the second half of last year and Germany in the last quarter last year. And as the COVID environment started before in Europe then in Brazil, B+W felt even more this reduction in order entry. However, B+W has a strong backlog for the year 2020, and our main challenge is now getting new orders for 2021 deliveries. In the casting business, order entry grew 114.7%, mainly due to the recovery of the wind power segment since the second quarter 2019. The order backlog, due to the increase in the order entry, Romi Machines backlog by the end of March grew 48% -- 48.4% compared to first quarter 2019, here, again, due to the higher demand in the domestic market. Burkhardt + Weber dropped -- backlog dropped 12.3% but still has a strong backlog for the year of 2020. And casting business backlog by the end of March 2020, grew 113.2% compared to March 2019 due to the higher demand for large parts to the wind power segment. The Chart #10, cost of goods sold structure. In the first quarter 2020, the cost structure remained quite similar to the first quarter 2019. The only change was the reduction of labor from 23% to 22%. It's mainly due to the higher production volume in the casting business. We diluted this labor cost, and then the variable part of material grew from 67% to 8% (sic) [ 68% ]. The Chart #11, profitability. Gross margin in the first quarter 2020 grew almost 10 points compared to the first quarter 2019. Here, the 3 business units contributed to this positive development in the gross margin. First, the Romi Machines, due to the higher demand in the domestic market and the higher exports margin due to depreciation of Brazilian real, increased Romi Machines' gross margin; also, B+W, with higher volume and better mix of products also contributed in this positive development. And the casting business, with a higher production volume and also mix -- a better mix of projects. This increase in gross margin and also the 34.7% higher revenues and the controlled operating expenses positively impacted in the operating margin. In the first quarter 2020, operating margin was 3.4% compared to the -- to a negative operating margin in the first quarter 2019 of 14.7%. The same development can be seen in the Chart #12, in the EBITDA. EBITDA margin in the first quarter 2020 was 8.6% compared to a minus 8% in the first quarter 2019. Quite reasonable EBITDA margin for first quarter. And the net margin and net income, we had a net income of BRL 5.8 million in the first quarter 2020, which represents a net margin of 3.5% compared to a minus 15.1% net margin in the first quarter 2020. The Chart #13. Here is the business units' results. We see first Romi Machines. Revenues grew from BRL 69 million to BRL 82.5 million. Also, gross margin increased from BRL 40.4 million to BRL 43.8 million. This was due to higher participation of domestic market and also the increase in the exports margin due to the depreciation of Brazilian real. This increase in revenues and also the -- in gross margin positively impacted the EBITDA margin, which grew from 3.6% to 14.6% in this first quarter 2020. B+W Machines revenues increased from BRL 17.7 million to BRL 36.7 million, over 100% growth. This happened because in 2020, B+W revenues are better distributed among the quarters. And this higher volume and a better mix of products in the first quarter 2020 with larger machines positively contributed to the margin increase. The gross margin, which was negative 18% in the first quarter 2019, in the first quarter of 2020 was positive in 18%. And the EBITDA, which was -- EBITDA margin, which was negative in 53% in the first quarter 2019, was negative in 1.6% in the first quarter 2020, showing a very positive and significant development in this comparison. And in the casting business, revenues grew from 34% -- BRL 34 million to BRL 46.7 million, a growth of about 37%, mainly due to the large parts. And this higher volume and the mix of products contributed to this margin development. Gross margin was negative in the first quarter 2019, 3%. And this -- in this first quarter 2020 was positive in almost 20 -- 12%. And EBITDA margin, which was negative in 7.7% the first quarter 2020, was positive in 6% in the first quarter 2020, showing a positive development. The Chart #14. Before talking about the net cash position or net debt position, it's important to mention that as soon as we were aware of the COVID first impact, we decided to increase the company liquidity. So we had new loans in the amount of BRL 88 million in March with a period of 1 year to increase the liquidity due to the unpredictable future due to this health crisis. So in the -- by the end of 2019, our -- we had a cash -- net cash position of BRL 34 million and by the end of the first quarter was a net debt of BRL 35 million. This cash consumption in the first quarter was due to payment of profit distribution from 2019 paid in January and March 2020 in the amount of approximately BRL 40 million and also the increase in inventories. First, the increase at B+W inventories because, as we already mentioned, the B+W revenues are better distributed among the quarters. So B+W is building the machines to be delivered in the next quarter. And also, in Brazil, which is normally -- usually, we have an increase in inventories in the first half of the year where revenues are lower, and then the second half of the year, this cash comes back to the -- this inventory, reducing the cash comes back to the company. And the Chart #15, the share development. It's a little bit difficult to talk about March because it's very unpredictable scenario and very impacted -- very much impacted by the COVID environment. However, when you look at the shares performance in the last 2 years compared to the Ibovespa index, our shares are performing a little better than the Ibovespa index. Well, now we finished our first quarter 2020 conference call, and we are available for a Q&A session. Again, thank you very much for joining our -- Romi's first quarter 2020 call.

[Operator Instructions] It is concluded today's question-and-answer session. The Investor Relations department is available to answer any further questions you may have. Mr. Luiz Cassiano Rosolen, at this time, you may proceed with your closing statements.

Thank you for attending Romi first quarter conference call. Our Investor Relations team are fully available for any further questions that you may have. We see you in July at our next conference call. Thank you, and have a nice day.

That does conclude Romi's quarter earnings results conference for today. Thank you very much for your participation. You may disconnect now.