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

[Operator Instructions] Reminder, this conference call is being recorded and being simultaneously translated into English. Slides are available in our website for Investor Relations. The address is romi.com/investorelites. [Operator Instructions] We have Mr. Luiz Cassiano Rosolen, CEO; and Fabio Taiar, CFO and Investor Relations Officer. First, we will hear the results for the third quarter of 2021, and following that, they will answer questions. I'll now pass it on to Mr. Luiz Cassiano.

Thank you, Lillian, and good morning, ladies and gentlemen, and thank you for being here for the earnings call for the third quarter of 2021. This quarter, we are continuing our production scale of journeys to meet the demand for Romi products. We'd like to highlight the increase in orders for the third quarter of 2021 in comparison to the third quarter of 2020 and in comparison to the second quarter of 2021. And this shows that we have a strong order basis that will support our revenue for the next quarters. At the Romi Machines Unit, net operating revenues increased, because our orders are higher. Margins are solid and are already above the second quarter of 2021. Without a doubt, the new generations of machines launched in the last years are providing greater productivity for our clients in the domestic and foreign markets, which has consolidated the Romi brand in the capital goods industry. In the Rough and Machined Cast Iron Parts Unit, once again, our revenues increased and despite inflation being a challenge, we have maintained solid margins in 2021. New orders have remained strong. Our portfolio, and that is due to all of the different areas in which we work. Automotive, ag, wind, they're all positive. Our business unit in Germany has seen a strong recovery versus 2020. The low orders period in 2020 resulted in a concentration of revenue in the fourth quarter of 2021. Our main challenge now is to continue to find projects for 2022. We're confident about the opportunities that we're seeing for the European and Asian markets. Overall, our challenge is still to increase production in Romi Machines and Rough and Machined Cast Iron Parts. And we're searching for more projects at B+W. Our production is going up this quarter. We're very confident and focused is that we can continue on this journey to service our clients. I'll now pass it on to Fabio. Welcome, Fabio.

Thank you, Cassiano. First of all, good morning. Thank you very much for being here for our conference. We're going to go through our presentation. And after that, we'll begin the Q&A. So starting with our highlights. Our revenue was very robust. It was about BRL 367 million, which is a growth of 46.3% versus the operating -- the net operating revenue that we got in the third quarter of 2020. This was mostly due to Romi Machines Unit and from Rough and Machined Cast Iron Parts. In the Machines unit, the domestic market continues to be robust as well as the foreign market, which has posted a strong recovery from the beginning of 2021. In the Rough and Machined Cast Iron Parts, the heavy parts for the energy industry is still having consistent demands. And there was a growth in other segments such as commercial, automotive or land moving and agricultural. So with this revenue, we also posted a substantial EBITDA of about BRL 67 million in the third quarter of 2021, and a growth of 66.7% versus this figure for the third quarter of 2020. Our revenue growth and the effective control of operational expenses have allowed us to have such a substantial transformation in our EBITDA during this quarter. Going into incoming orders, during the third quarter, we reached about BRL 416 million in incoming orders, which is an increase of 33% over the third quarter of 2020. We had growth across all 3 business units. And as a reminder, in the third quarter of 2020 for Romi Machines and for Rough and Machined Cast Iron Parts had already been a very strong quarter, showing a strong recovery. So in 2021, we're still evolving across all of these segments and gradually recovering in our German subsidiary, B+W. In terms of our order backlog, we saw a net reduction during this quarter, but with incoming orders, we are at a very high level. It was a growth of around 55% versus the third quarter of 2020, which shows how solid we have been in deliveries, and we will continue to be so in the next quarters. So at the Romi Machines Unit net operating revenue increased by 53.5% versus the third quarter of 2020. This was due to a recovery in orders in the domestic market, which had already been taking place since last year and a more recent recovery from exports. So with that and with an effective control over operating expenses, our operational profit increased by 61%, finishing this quarter at a very high level. So at the Rough and Machined Cast Iron Parts Unit, we also saw significant increases in net operating revenue of 52%. And for heavy parts in the energy sector and other segments such as trucks, farming equipment and land moving equipment is what has allowed us to reach this level of growth. Our operating margin also grew this quarter, compared to the third quarter of 2020 by 4.4 percentage points. Continuing on Slide 3. Incoming orders at the Romi Machines Unit increased by 16.2% this quarter versus the third quarter of 2020. The third quarter of 2020 had already been good, especially in the domestic market and both markets, both domestic and the foreign market have evolved in the number of orders this quarter. So incoming orders for Rough and Machined Cast Iron Parts increased significantly versus the third quarter of 2020, about 50%. And this was the continuity of orders for the energy sector and especially a strong recovery of all the other segments I mentioned, which are the main ones serviced by this business unit. Incoming orders for the 9 months at B+W reached BRL 110.1 million, an increase of 320% versus last year, which shows that projects are gradually recovering. So in 2021, we have already seen significant growth. And in fact, we're going to see an evolution in B+W's portfolio at the end of September. Slide 4 shows some of our conjunctural indicators, both our GDP, industrial GDP and gross fixed capital formation. So in 2021, this always the comparison with the previous quarter. We can see that there was strong growth, especially in the domestic market from the second quarter of last year with lower interest rates. Good foreign exchange has encouraged the national industry and that has led to an increase in investments, which have positively impacted our business. Besides that, we're also seeing 2 other economic indexes. One is the average installed capacity utilization. And in 2021, we can see that according to the latest available data from September, it's at 72%. So it's at a very similar level to what we saw in 2014, which might have been the most recent year where we had robust industrial activity. And it's been above all the previous years from 2015 to 2020. So we're at a good utilization level where we can also encourage new investments. In line with that, this may be one of the most important indexes, because it measures the confidence for industrial entrepreneurs. You can see that there's a level of volatility. So when you look at it in a macro level, there are issues with volatility because of the pandemic, because of political issues. But when we look at the last quarter up to October 2021, although we see some volatility, the index is still at a level where there's a good level of optimism or at least confidence from industrial entrepreneurs. So people have been investing. Considering the main segments and business units, we can see that Romi Machines are very diverse. This is in the nature of our machines. So machines and equipment are still the most representative from our base, followed by job shops, which have always been very important in our client's base. The automotive industry, especially commercial automotive, agricultural are still strong. This is the year in which this segment will definitely carry out with a lot of good investments. But overall, we're still at a very good level in the number of industries that use our equipment. With B+W, normally things are a bit more concentrated because it is a niche company. So across the year, 30% of deliveries were for machines and equipments and 70%, this is a package or a solution for one client, which is a motor manufacturer. And in Rough and Machined Cast Iron Parts, power continues to be very strong. And we can see a very positive outlook here. Commercial automotive continues to be very consistent just as construction. And one highlight here is the agricultural equipment segment, which recovered very well in 2021. Considering revenue distribution on Slide 7. As we said, there was an increase in net sales, which have gotten a greater market share for us, just as we saw with Rough and Machined Parts. As you can see, cast iron parts are mostly served to the domestic market, just as machines were initially pulled up by the domestic market, but participation has been gained. And B+W -- as Cassiano said, B+W revenues this year are very concentrated in the fourth quarter. So when we look at the first 9 months, they have been impacted by low incoming orders in the first 9 months of 2020. And the lead time between orders and deliveries is around 1 year, which means that the recovery that we had at the end of 2020, the revenue only came to at the end of this year. So at least in the beginning of the year, we lost some share of consolidated revenues. Geographic distribution result gained, as I just said, the domestic market recovered faster than other markets. We saw reduced interest rates. There were foreign exchange issues that encouraged us and developed competitiveness in the domestic market and a lot of it competes with imported machines. So in the first 9 months of 2021, Brazil gained in the share of our operational revenues; however, we also know that the foreign market recently started to recover again. So in Romi Machines, we are seeing an even more significant recovery. So our perspective is that this concentration will begin to go down in Brazil. We'll see more diversity and our revenues are broad. So with B+W, you can see that Europe had a lower share. Latin America grew. We see here that the number of orders went up. The U.S. is basically flat. There was a slight growth in Asia, dropped down due to the reduction of orders at B+W in 2021. So order entry and backlog. We had strong order entries this quarter, which went above the second quarter of 2021 and the third quarter of 2020, both of which were very strong for comparison. So both the domestic and foreign markets have contributed for this growth, just as we see when we look at the 9 -- the first 9 months. B+W also posted a growth in both quarters and for the 9 months of 2021. We have to take into consideration that the first 9 months were very affected by the pandemic, where Europe and Asia felt the effects of the pandemic in the beginning of 2020. But here, it's important to look at the future. Since the fourth quarter of 2020, B+W has received consistent orders and its backlog has gotten better over time. And also looking at Rough and Machined Cast Iron Parts, it is also more robust, both for the power industry and other industries serviced by this unit. When we look at the year-to-date figures, growth has been substantial. So when we finished the first quarter, we looked at our orders and for the third quarter, it's nearly 33% higher. And the year-to-date figures have already gone over BRL 1 billion. So a growth of 74% versus the first 9 months of 2020. So that takes us to a very strong order backlog, probably the best we've ever had. In the Machine segment, we are at BRL 400 million, so 57% above what we had in September 2020, which means we have a very strong and a very important challenge in manufacturing everything we have been doing a lot of work to deliver, but there's still a lot to do for the next quarters. B+W also posted a 62% growth in the order backlog. We know that most of them will be delivered in the fourth quarter, as we said, but there has certainly been many orders or at least many negotiations at an advanced stage to make up for the next quarters. And finally, Rough and Machined Cast Iron Parts have a much higher order backlog of nearly 46% this year, which shows how orders are continuing from the wind power and from other segments. And finally, we can see that the growth was 55% at the end of September, so nearly BRL 730 million. So that means good things for the next quarters. This is our cost structure. We can see that production went up significantly in 2021, which gives us an opportunity to dilute some fixed costs. Since we're very verticalized, the -- there is a significant fixed cost. But regardless of that, we can see how expenses have been diluted over time and variable expenses have changed. Of course, in materials, a lot of this growth is due to -- excuse me, inflation, especially metals, which are used in all sorts of parts. But the most important increase came from operational efficiency and production capacity. Here are our results. As you can see, our margins were very similar to what we saw in the second quarter. If we look specifically at these 2 quarters, when you look at Machines, there was a slight reduction in margin, but this is basically due to the type of products and in other segments, we had higher margins, which ended into a net flat results. But operational profits went up in the third quarter, and this connected to increased expense control, took our operating profit from BRL 56 million to BRL 56.1 million, a growth of 3 percentage points versus the third quarter of 2020. Similarly on Slide 12. We can see our EBITDA and EBITDA margins. It went up from BRL 40 million to BRL 67 million and our EBITDA margin from 16% to 18.2%. Considering net income and net margins. It's important to mention that this is recurring net income. We did see a tax effect here, because we were successful in a recent ruling, but this has been removed from this analysis. So the effects have been purged. As you can see, our net income was BRL 36.1 million in the third quarter of 2020. Margins went down, but this was basically because when we look at a financial perspective, in the third quarter of 2020, there was a depreciation. So the BRL went down, and we had more assets than liabilities in foreign currencies, which led to a higher or a positive FX result, but this did not happen in the third quarter of 2021. So these are the results per business unit. We see how Romi Machines have been growing significantly in revenue in 2021. Margins, as I said, have stayed flat. It's a very consistent margin. And with controlled expenses, it means that EBITDA margins have evolved significantly. If we look at 2015, we have reached the best EBITDA margins in the last 6 years. B+W had a lower revenue, which has concentrated in the last quarter for this year. So this means that gross margins went down. And with lower volumes, we also see that the EBITDA margin was impacted. And finally, the Rough and Machined Cast Iron Parts Unit also showed an increase across all segments, which means that fixed costs have been diluted, and there has been a good level of operational efficiency. Meaning that both gross margins and EBITDA margins have had important expansions in 2021 versus 2020. Here is a slide on financial position. So we consumed some cash during the third quarter. About BRL 36 million of it was profit sharing paid across the third quarter. And of course, investments are necessary throughout the year, but it's also important to have higher revenues as we saw in the last slide. Meaning that we need to expand our production, and that naturally increases inventories. That's the main reason why cash was consumed. We are increasing our inventories. And as we have more stable levels in production, we'll start to give part of it back to cash. Regardless, it's a very healthy indebtedness level. We know that this industry is very volatile. So when you look at the accumulated EBITDA of nearly BRL 70 million, it's the same net debt of BRL 68 million. So if we were to compare it, it's still far lower than 1x the EBITDA. Here are our share performances. We can see that we had a reduction of 36.5% for Ibovespa, an increase of 3.5%. So we've been seeing good recovery versus the previous years, and it has recovered fast right after the second quarter, where we had the most critical part of the pandemic. And throughout 2021, we have consistently seen good order levels in comparison to last year and also a good advance in terms of results. So our shares reflect how we performed over the last year. So that concludes our presentation. Once again, I'd like to thank you all for being here, and we will remain available for any questions that you might have.

[Operator Instructions] So our first question was asked by Fabio Nio. He asked when can we recover EBIT margins and EBITDA abroad?

The fourth quarter was very strong -- will be very strong in revenue. And this is due to the gap we had in incoming orders during the pandemic so -- with B+W. So we expect to improve those indicators in the fourth quarter of 2021. We hope to see stronger revenues then. And we might still be below the previous years, but our expectation is positive with all the opportunities that we have with B+W in the middle and long term.

The second question was asked by Antonio [ Rizzo ] and he's asking us to say something about each unit's capacity utilization.

Romi is very integrated. So without a doubt, for example, in machine assembly, we have 45% to 50% utilization capacity. But there are different mix variations there. So there are some bottlenecks that we have to remove, so that we can service the market. So that's a bit difficult, but we still have a very good utilization level for machines, as I said, above 60% and some units close to 80%. We're running at around 60% utilization capacity, but there's also a change or a variation between automatic and bigger parts, but on average, we're still at a good level. So we have some plans to increase production.

Antonio, also asked if units are having any issues with missing parts? And he's asking if this problem ever appears on our chain.

We're paying close attention to that. We have been looking at this issue since May or June 2020. There were some challenges, but we were able to overcome most of them. We had strategic purchases in our inventory and we have been able to do this very well, but production has been very significant, and we've been successful in expanding it, and we'll continue to be successful in the next quarters, that is if demand remains at the at the current level, which is very good. So -- we didn't have anything significant affecting our production, but the import and export market has been going very well. So challenges are mostly seen in exporting machines. We're seeing some logistics issues to be able to export machines, because there is a lack of vessels. But we have been able to do well overcoming results and delivering our machines to clients in Europe, Mexico and so on.

Next question was from Luiz Lima. So with expectations about income -- excuse me, interest rates, have companies been investing more what should we expect in capital allocation? And do you believe that this demand level is sustainable?

Well, increasing interest rates will require more returns from us, but current interest rates are still negative. They're still nominal, which also makes our clients continue the investment rates. But we always think long term. We're optimistic. We believe that interest rates will vary, but on the middle and long term, they'll remain at the historical levels. We're confident about that. So we don't believe that interest rates will change much, which is very good for investments. So what can we expect in terms of capital allocation. We're focused. We just need to expand our production, so that we have higher availability. We allocated BRL 900 million in the business in -- and there are some other projects that -- where we have been allocating our investments. We have some investments where we have been focusing our investments on maintenance and automation projects and software. So these are our priorities right now. So if I believe that these levels of demand are sustainable, I think the global demand is quite volatile, but it has been growing when we look at exports at least. So when we look at Romi Machines, we can view how volatile demands are. But I do believe that if in the future we have lower interest rates than the average, it will be lower than our historical levels. We're very competitive, and we can do more. And we have been seeing higher demands from the foreign market, because our clients have been buying more from domestic sources and we see other possibilities like exports. So demand levels will remain at the current level or better. And remember that demands were, on average, higher in 2018 and 2019. So we're still a little short.

Next question from Antonio Huezo. He is asking about cost pressures on our chain as a whole, referring to raw materials.

So yes, there has been a strong pressure. We have seen that ore, scrap, resins have gone up significantly. But we have been negotiating with clients and passing it on, so that we can maintain margins. So with some parts such as high-precision electronics and other added value equipment, we do suffer a cost pressure, but I think we've been doing it very well and always being very transparent with our clients too.

So [ Andre Fujita ] is basically asking the same about increased cost in raw materials, and delays in logistics.

As I said, we do have some challenges, but we have been able to overcome them in 2021. Our shipping dates, they vary from machine to machine. We do have some things to deliver this year, but it depends on the line. With some lines, we have 90 days. With others, we have 120 days. It really depends on the product line. So we have been very transparent in adjusting prices. We've been very correct. And we have been trying to maintain margins as we deliver.

There's another question from Daniel [ Cona ]. What are the main growth opportunities for the next months? If we can mention any recent achievements or relevant clients that started to use Romi Machines?

Well, many clients have been using Romi and many others have started buying our machines. We can't mention any specific names, but we still have a very robust market share, especially with the new lines. And this, of course, is when you look at the foreign market. A part of it is coming in and will become revenue for the fourth quarter or for 2022. So it's always important to have new foreign markets -- excuse me, foreign clients using Romi Machines. Romi has about 5,000 active clients across Brazil. So it's very spread out. But the good thing is that our clients are doing very well and have been buying new machines. We don't give a guidance for growth. So I can't tell you much about that, but our goal is to be able to produce more and service the market, so that we can grow more. And we still have many achievements in R&D. Many new lines are already being launched in the market.

[ Aljesus Kama ] was asking if we are looking at any acquisition short term.

We're always looking at everything possible, anything that can add value, but I can't answer your question. We don't have anything publicly available.

We received another question from John -- excuse me, Juan. He's asking how revenues are at Romi ex B+W and how Romi sees its revenue growing. And if we can say anything about margins in this part of the revenue. And another question is, if there are any information on incoming orders for the first quarter of 2022.

So to answer your second question, Fabio.

So Juan, I'm not sure what can happen in November or December, but for now, we're still very optimistic about 2022. Opportunities are still very robust as we saw in the third quarter of 2021. So GDP is important. There are forecasts. It can generate some noise, but the industry is very competitive. So we're still exporting more. Parts are being consumed domestically. So What I see so far is that the industry is competitive and that we're still very solid. And we will continue to -- we have still been solid until mid-October. So opportunities are good and business units have been very good.

Juan, considering exports to foreign markets, excluding B+W, a number of machines, we are at 20% to 25%. Revenue is a bit lower, 16% to 20%. But the most significant thing here is your question about how we see that growth. The products that we have launched, especially the latest 2 lines were lines that had been developed and conceived considering a global perspective. From its capabilities, its features and including logistics, we've seen that all clients where we have been able to provide a machine are at very good satisfaction levels, and most of them have gotten a second piece of equipment. So another strategic thing in the company that we've been seeing for some time is growth in the foreign market, some through Romi, some through B+W. But regardless, we expect that the market will grow, which can provide us with more resilience, better revenue volatility. And our participation is quite low. So there is a significant market to explore. And since this is one of the company's strategies, there are -- well, we have several subsidiaries, especially Europe and North America. So we will probably be closer to the client with better products. And as a consequence, we'll have greater share of the foreign market. So that's our vision for the company.

So as there are no further questions, we'll pass it back on to Mr. Luiz Cassiano for his closing remarks. As a reminder, the Investor Relations Department at Romi is available and can answer any other questions you may have. Over to you, Mr. Luiz Cassiano.

Thank you, everyone, for being in our conference. Our Investor Relations team is available if you have any questions, and we'll see you for the next call on February 2. Our results will be posted on February 1, 2022. Thank you, everyone.

This concludes Romi Industries conference call. Thank you for listening, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]