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 third quarter earnings results. Before proceeding, I would like to clarify that 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 could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, marketing risks and other factors. With us today are Mr. Luiz Cassiano Rosolen, Chief Executive Officer; and Fábio Taiar, Financial and Investor Relations Officer. Initially, Mr. Luiz Cassiano Rosolen will comment on the company's 2020 third 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.

Good morning, good afternoon, ladies and gentlemen. Thank you very much for attending third quarter 2020 earnings release conference call of Indústrias Romi. This third quarter, we consolidate a solid and intense recovery in the domestic market. Additionally, international markets are also underway, showing the first signs of recovery. The highlights this quarter are the increase on margins, but mainly a strong order entry in net revenue for Romi Machines and Rough and Machined Cast Iron Parts business units. At the Romi Machines business unit, we note a very positive order entry this quarter, showing a recovery at the domestic manufacturing industry. Certainly, a low interest rate and a favorable exchange rate is creating an environment for our customers with more competitiveness and investments in productivity. The Romi Machines business unit, with the recent launch of the new [ generation of products ] is capturing opportunities and positively impacting the net revenue and the order entry. At the Rough and Machined Cast Iron Parts business unit, we released a strong order entry, both in the heavy parts segment and the other segments. We improved profitability this quarter, but the main highlight was the recovery of all industrial segments since the end of the second quarter. Our German operation, the Burkhardt+Weber business unit, has a concentrated delivery of machines set for the fourth quarter of this year. Therefore, our main challenge remain to increase the backlog for 2021 in a still volatile environment. However, we noted an improved on prospects for the Asian market, mainly China, and we are confident to win important projects for 2021 that are in the final stage of negotiations. With that dynamic, our main objective still remain to protect our main assets, the Romi team, their families and our business partners. We have implemented a series of restrictive measures to continue operating and serving our customers with excellence. I would like to thank again our team who, with intensity, cooperation and responsiveness, are managing to deliver an important result this year. Now I would like to turn the call over to Fábio, who will detail the third quarter 2020 earnings release. Welcome, Fábio.

Thank you, Cassiano. Good morning, good afternoon, ladies and gentlemen. Welcome to the third quarter 2020 Romi's earnings release. Starting in the highlights in the Chart #3, we highlighted the order entry in this third quarter 2020 reached BRL 313 million about, representing an increase of 65.5% compared to the third quarter 2019, mainly due to the recovery of the domestic market for investments represented by Romi Machines. And also, we continue to see good level of orders coming from heavy parts in the casting business as well as the recovery on other industrial segments attended by this business unit like trucks, agriculture equipment and the yellow line. Net operating revenues in the Rough and Machined Cast Iron Parts grew this quarter about 75% compared to the third quarter 2019, mainly due to the deliveries of the large parts. The higher revenues, the increase in the production levels and the improvement on the operational efficiency as well as a very well-controlled operating expenses allowed this business unit to post a growth of about 10% -- 10 points in the EBIT margin. At the Romi Machines Unit, net revenues increased by 12.40% this quarter compared to the same period 2019, mainly due to the recovery in the domestic market. This increase in revenues and the very well-controlled operating expenses resulted in an expansion of the operating margin of 6.3 points compared to the third quarter 2019. Coming back to the order entry, Romi Machines Unit recorded growth of 140% compared to the third quarter 2019, reflecting the recovery of the domestic market, mainly due to the lower interest rate, the favorable exchange rate and controlled inflation, which encouraged customers in making new investments. In the Rough and Machined Cast Iron Parts, also, order entry increased by 41% compared to third quarter 2019, reflecting that we continue to see a good level of orders coming from large parts for the energy sector, but also the recovery of the other industrial segments like trucks, agriculture equipments and the yellow line. With this higher order entry, we end up this third quarter with a backlog of about 41% higher than September 2019, and this was mainly due to the growth in orders from Romi Machines and Rough and Machined Cast Iron Parts. The Chart #4, this is the conjunctural indicators. The latest available information was related to the second quarter 2020, where we see a decrease in all indexes, reflecting the pandemic situation that we saw since mid of March, especially in Brazil. We also felt this decrease in orders at that time, mainly second half of March, April and May. However, since June, we have seen in the domestic market a solid recovery, especially for investments were positively impacted the order entry for Romi Machines. And this maybe can be explained in the next chart, Chart #5, where we see the utilization of stored capacity, which dropped in April due to the COVID. However, we have seen since then a recovery month by month. And in August, this index reached 71% coming back from the pre-COVID levels, which means that the industry as a whole is utilizing better its capacity -- this is -- its installed capacity. Also, the Industrial Executive Confidence Index dropped when the pandemic situation was declared. However, since then, we have seen a recovery in this index as well wherein October reached 61.8%, showing that the market is recovering its confidence and making new investments, as we can see in the increase of order entry in the Romi Machines business unit. Here in the Romi Machines, we would like to highlight 2 demanding segments. One is the agriculture, which grew from 2% to 8%, it's representing 8% of our net revenues, and this is performing pretty well in 2020 for many aspects, but mainly for the exchange rate levels where commodities became even more competitive and margins expanded. And also packing, this is more related to the plastic machines. And with this online sales deliveries of many different goods and items, new packages were designed and launched. And this is positively impacting the -- this plastic molding machines. In the B+W Machines, the segments attended in 2020 were mainly the same as previous years. And in the Rough and Machined Cast Iron Parts, we highlight the wind power segment, which grew from 23% to 54% from 2019 to 2020, reflecting the good level of orders coming from this segment. The other segments, the automotive, construction and agriculture, these segments felt more the pandemic situation. However, more recently, we have seen a recovery also in these industrial segments. The net sales per business unit, we see an increase in the casting business from 21% to 28%, mainly due to the increase in the revenues coming from the large parts. And this increase diluted a little bit these Romi Machines that came from 49% to 47% and B+W Machines from 30% to 25%. The sales distribution, the domestic market accounted for 61% of the consolidated net revenues in 2020, 5 points higher than the 56% in the same period 2019, mainly because of the most solid recovery in the domestic market compared to the foreign markets. So Romi Machines in the domestic markets grew its order entry and consequently its revenues as well as the casting business related to the large parts. Europe continued to be the main area outside Brazil, main market outside Brazil. Latin America remained pretty much the same. What we can say here is that a few countries in the South America are also recovering. We see this movement more recently. U.S., in terms of participation, remained the same. U.S. is a little bit more challenging because it's still in a very challenging situation. And Asia, which is represented by B+W Machines, is representing 8% of the consolidated revenues. The order entry and backlog, what we see here is that in the third quarter 2020, Romi Machines presented an increase of 140% compared to third quarter 2019, accounting for BRL 223 million of new orders, which is a very substantial figure for third quarter. In the year-to-date, the growth is about 50%, also very significant and mainly represented by the recovery of domestic orders since June 2020. B+W Machines decreased its order entry. However, what we can say here is that new projects and new opportunities are coming mainly from the -- from China and are in a diversed stage. And we feel a better market condition to success in these new opportunities we are having in China for B+W Machines. And in the casting business, order entry grew about 41% compared to third quarter 2019. Here, we continued to see a good level of new orders coming from the large parts. And also a recovery in the other segments attended by this business unit, like trucks, agriculture equipments and the yellow line. And if we take the year-to-date figures, also substantial increase of about 45%. So in total, order entry this quarter showed an increase of 65.5% compared to third quarter 2019. Due to this higher order entry, we end up this third quarter 2020 with a very substantial order backlog of about BRL 472 million, which is 41% higher than September 2019. And the main increase here are Romi Machines and the casting business. In terms of cost structure, we remained in 2020 with the same cost structure as 2019, even though the year has been very challenging due to this pandemic situation, all the protocols we have in order to operate normally. But even though we have faced all this challenge, our cost structure remained pretty much the same, which positively reflected in the operating margins, especially in the gross margin. In terms of profitability, in this third quarter, gross margin reached 31.6%, 2 points higher than third quarter 2019, here, mainly to the increase the gross margin of Romi Machines due to the mix of revenues with more domestic machines and also the increase in the gross margin of exports related to the new exchange rate level. With this increase in gross margin and increase in revenues this quarter and also the very well-controlled operating expenses, EBIT margin also expanded from 11.1% to 12.3%. And the same can be seen in the Chart #12 in the EBITDA margin. EBITDA reached BRL 40 million this quarter, representing a margin of 16%, above the EBITDA margin of 14.4% reached in the third quarter 2019. And finally, in the net margin, this quarter, net margin was 14.4%, also higher than in the third quarter 2019, which was 11.3%. And net income reached about BRL 36 million. In the business units' results, this is the year-to-date results, in 2020, in the Romi Machines business unit, revenues grew a little bit. The mix of products in 2020, we see more domestic market. And also, the exports expanded its margins related to the exchange rate, and this allowed us to expand the gross margin for -- from 40.8% to 43.8%. And together with the controlled operating expenses, we see even higher EBITDA margin expansion coming from 11.3% to 18.4% in 2020. The B+W Machines, revenues in reais remained pretty much the same. However, in euros, we decreased 27.3%. And even though we had lower revenues in the first 9 months 2020 compared to the same period 2019, we kept the gross margin stable due to the all the cost controls and all the projects focused on increasing the profitability. And also, this allowed us to keep a pretty stable EBITDA margin as well. And finally, the Rough and Machined Cast Iron Parts, here, we see a significant growth in revenues, represented by the large parts for the wind power segment. With this higher volume, we were able to dilute better the fixed costs and also improve the operational efficiency. And all this allowed us to increase significantly the operating margins. Gross margin jumped from 7.4% to 19% and EBITDA margin from 1.2% to 11.5%. In terms of cash position, we not only presented a good improvement in operating margins, but also in the cash generation. In this quarter, we generated about BRL 60 million cash coming from a net debt position in June, by the end of June of BRL 28.5 million to a net cash by the end of this third quarter of BRL 26.2 million, showing that the company has a very solid cash position and is taking care very carefully of its liquidity. And the share performance, the share in the last 2 years has performed better than the overall index of Ibovespa, mainly due to the improvement on margins, cash generation and, more recently, the improvement on the order entry and backlog as well. Well, finished our presentation. And we now move to the Q&A session. And again, thank you very much for participating of this third quarter 2020 Romi's earnings release. 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 statement.

Thank you for attending Romi third quarter conference call. Our Investor Relations team are fully available for any further questions that you may have. We'll see you at the beginning of next year, beginning of February on 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.