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 quarter earnings results. Before proceeding, I would like to clarify that this conference call is being held exclusively for our 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 will 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 Taiar, Financial and Investor Relations Officer. Initially, Mr. Luiz Cassiano Rosolen will comment on the company's 2020 second 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. Thank you, Lily. Good morning, good the afternoon, ladies and gentlemen. Thank you very much for attending the second quarter 2020 earnings release conference call of Indústrias Romi. We have started the second quarter with a turbulence and uncertainty due to the pandemic. The Romi team have been worked intensively, focusing on supply chains, improving internal process and a lot of creativity in finding new solutions to our customers. In June, we start to feel a recovery in the domestic market. And this is already reflecting positively in the backlog of both the Foundry and the Romi Machines business unit. The second quarter highlight, again, is the evolution of margins when compared with the second quarter 2019. At the Romi business unit, the highlight was once again our order entry and improvement of margins. Orders, even with a turbulent environment and with the cancellation of the most important exhibition fair of machinery in São Paulo, show some stability with the second quarter 2019, mainly due to the domestic market. Margins also was solid due to the cost and expenses well controlled. At the Foundry, 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. We highlight a solid recovery on orders from our customers since June 2020. Our German operation, the Burkhardt + Weber business unit also released again important margin recovery in the second quarter of this year. We have a better distribution on sales throughout the quarters. Our challenge remains to increase the order backlog for 2021 during this volatile environment but now with a better perspective for projects on the Chinese market. With the pandemic, our main objective in 2020 remains to protect our main asset, the Romi team, their families and our business partners. We have implemented a series of restrictive actions to continue operating and serving our customers with excellence. I would like to thank our team who, with intensity, cooperation and responsiveness, managed to deliver an important result in the second quarter. Now I would like to turn the call over to Fabio, who will detail this result, this earnings release. Welcome, Fabio.

Good afternoon, ladies and gentlemen. Thank you very much for joining our second quarter 2020 conference call. In the Chart #3, here are the highlights. All business units increased its profitability, and EBITDA margin reached 9.8 points in this quarter. Also, net revenues increased about 17% this quarter compared to 2019, which, together with the strong control over costs and expenses, positively impacted the EBITDA that grew 5.8 points. The casting business in the second quarter reached net revenues 39% higher than second quarter 2019, mainly due to the heavy casting parts. Operating margin increased about 14 points this quarter due to the higher production volume, a better operational efficiency and the increase in revenues. The Romi Machines business unit had a small decrease in its net revenues of 4.4%, mainly due to the machine orders postponed to the third quarter as a result of the coronavirus situation. Although this business unit had a lower revenues, a strong control over the operating expenses resulted in the margin expansion of 3 points. Even under this pandemic situation and the postpone of the main trade show to 2022, which would take place last May, the order entry in the Romi Machines this quarter was slightly lower than the second quarter 2019. Romi has searched for alternatives as renting machines and other actions in order to face these turbulent times. B+W Machines had a significant increase in its revenue in the second quarter 2020 compared to the same period 2019 of about 34%, mainly because the revenues in 2020 are better distributed among the quarters. The higher revenues and the projects focused on profitability positively reflected in the operating margin, which grew 6.3 points compared to 2019. And finally, backlog by the end of the second quarter increased 9.4% compared to June 2019. The Chart #5. Gross fixed capital formation showed a positive development in the beginning of 2020. However, the latest data relates to first quarter so does not consider the virus impact. And I think the next chart reflects better the situation. This is the capacity utilization where we can see the drop with this pandemic situation, specifically May and April. However, in May, we can see a recovery. It's still very difficult to understand what will be the new normal, but the recovery also can be seen in the chart below. This is the confidence index as we can see a similar development, where in April, it had a strong decrease but shows a recovery since June, and it's what we also can see in our opportunities. The Chart #7. The customer segments of Romi Machines, we can highlight 3 segments. The first one is the agricultural where commodity price and exchange rate are stimulating investments. Also, packaging which is related to the consumer goods, and this packaging also positively reflects in the tooling business. So these 3 segments, demanding segments are showing a positive development in terms of demanding machines. The business unit B+W Machines, it's usual to have a concentration in a few sectors once B+W produced turnkey solution for special applications. And if you compare the first half of 2020 to 2019, the segments remain pretty much the same. In the casting business, what we can see in the first half of 2020 the significant growth in the wind power segments. Since the second quarter 2019, we have been discussing about the recovery of this segment, which continues to demand a significant volume of casting parts. The other 3 segments dropped with this pandemic situation. However, what we can see since the second half of June and beginning of July that the expected demand in volumes are also increasing. The net sales per business unit, what we can see here is that B+W Machines and casting iron parts increased its participation in the consolidated revenues. Casting iron parts, because of the heavy casting parts related to the energy, the wind power segment. And B+W increased its revenues in reais in this period of above 50%, in euros was 18.6%. The significant growth increased its participation and diluted Romi Machines participation because Romi Machines grew about 6% in the same period of comparison. The Chart #9 is the sales distribution. Brazil decreased a little bit its participation because B+W was the main increase in this same period of comparison. And B+W revenues are in Europe and Asia, where we can see Asia growing here. Europe decreased a little bit because Romi Machines' subsidiaries in Europe are facing a turbulent time because of the pandemic situation and still in a challenging scenario. Latin America also decreased its participation. However, what we can say is that since June, there is some recovery in this region. U.S.A. also decreased a little bit its participation, and in U.S., the situation is still very challenging. This is the order entry and backlog. What we can see here is that order entry for Romi Machines in the second quarter dropped 5.8% compared to the second quarter 2019. However, as already mentioned, we had no -- the trade show in May 2020. And under this pandemic situation, we understand that the volume of about BRL 110 million in the second quarter 2020 is quite reasonable due to the situation. And if we take the year-to-date, we see that we are still about 5% above 2019. B+W Machines had no new orders in the second quarter of 2020. Also, the year-to-date, we see a significant drop. The situation in Europe and Asia, where B+W sells its machines, still very challenging. However, what we can say is that, especially in China, projects are increasing and becoming more concrete. So we expect to have a better figures in the following quarters. The casting business, the order entry in the second quarter 2020 grew about 10% compared to the second quarter 2019. If you remember, the second quarter 2019, we already have a strong number of heavy casting parts here. So this was a good order entry quarter. So we are comparing to a good quarter and still an increase in the order entry, and the year-to-date is about 50% increase. In total, we decreased about 19% in order entry mainly because of B+W Machines, and the year-to-date, we are slightly above first half 2019. Talking about backlog. Romi Machines' backlog by the end of June was BRL 151 million, 26.7% higher than June 2019 and 36% about compared to March 2020, which shows that we have a strong backlog for the following quarters. B+W Machines still has a strong backlog for the following quarters, and the main challenge will be 2021 on. The casting business, the backlog compared to the second quarter 2019 increased over 100%. And compared to the first quarter, it grew about 22%. So backlog by the end of June this year is about 9.5% higher than second -- than June 2019, showing that still a solid backlog for the following quarters. In terms of cost of goods sold, here is the cost structure for the first half of 2020. It's pretty much the same compared to the first half of 2019. Even though we are facing this pandemic situation, we kept our operational efficiency, which positively impacted in the operating margins that we will see later on. This is profitability. In the second quarter, gross margin reached 28.1% higher than second quarter 2019. Here, what we see is that mainly in the B+W and casting business, we will see a significant improvement in all operating margins, so this supported this improvement in 2020. Important to mention here that in the second quarter 2020, due to the virus situation, we reformed a structure adjustment which cost us about BRL 4.3 million impact in the second quarter, BRL 3.1 million impacted the cost of goods sold and another BRL 1.2 million impacted operating expenses. So if we take out this one-off impact, this gross margin would jump to 29.6%. The operating margin, due to the higher revenues and mainly to the increase in the gross margin, you can see also a good improvement in the operating margins in the second quarter. We had of BRL 10 million operating profit, which means an operating margin of 5.3% compared to a negative margin of 1% in the second quarter 2019. In the EBITDA margin, impacts are quite similar. We see an improvement in the EBITDA coming from BRL 7 million to about BRL 19 million in the second quarter 2020 and the margin growing from 4% to 9.8%. And also in the net profit, we see a net income of about BRL 11.5 million compared to a breakeven in the second quarter 2019 and net margin growing from 0% to 5.8% net margin. Performance by business unit. Here, we can see that in the first half of 2020, revenues in the Romi Machines grew slightly above first half of 2019. However, we increased gross margin, mainly due to gross margin in the exports reflect of the exchange rate. And this higher gross margin and the strong control over operating expenses reflect positively in the EBITDA margin, which grew from 5.5% to 12.8% in this first half of 2020. Talking about B+W Machines. Net revenues increased over 50% in this first half of 2020. Also, gross margin increased from 4.7% to 18.1%, a significant increase, mainly due to the repricing model and also the several projects focused on profitability. And this increase in margin, together with volume, positively impacted in the EBITDA margin, which was negative in about 14% and this first half 2020 is positive and about 3%. And talking about the casting business. Also, revenues increased from BRL 70 million to BRL 96 million. This was due to the increase in the heavy casting parts for the wind power segment and gross margin due to the higher production volume, operational efficiency and the mix of product increased the gross margin from 4% to 17%, a growth of 13 points. And this also positively impacted in the EBITDA margin, which reached more than 10% in the first [ half ] 2020. Talking about cash position. In the second quarter 2020, we generated cash. So we decreased net debt from BRL 35 million to BRL 28.5 million. Usually, in the second quarter, we increased -- we had some capital allocation in the working capital because usually, we increase inventories to have availability due to the trade shows. However, this year, we -- in the very beginning of the pandemic situation, we reorganized -- we rescheduled purchase orders. We reshaped them, and this allowed us to, instead of consuming cash in the second quarter, generate about BRL 6.5 million and reduce net debt. So by the end of the second quarter, we had BRL 138 million in cash and a gross debt of BRL 166.7 million, amounting to a net debt of BRL 28.5 million, a quite reasonable leverage. And the share performance in the last 2 years, was significantly above the Ibovespa performance. If you remember, since the end of 2016 where we concluded our restructuring. Since 2017, we have delivered positive results with a good development in operating margins, generating cash and distributing profits. So this support this performance, and it's also important to mention here the liquidity. If we take to beginning first half of 2018 and before -- in the years before, the liquidity was quite low, and we had, from middle of 2018 and mainly from second half of 2019, a significant improvement in the liquidity -- the shares liquidity. So we here finish our presentation, and we are now available for the Q&A session. Thank you very much.

[Operator Instructions] 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 Rosolen, at this time, you may proceed with your closing statements.

Thank you for attending Romi's second quarter conference call. Our Investor Relations team are fully available for any further questions that you may have. We'll see you in October 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.