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

Good morning, and welcome to Romi's conference call where we will discuss the results for the first quarter of 2022. Before we begin, I'd like to clarify that this conference call will be exclusive for investors and investment professionals. Any statements made during this conference call about the company's business perspectives as well as its projections, operational and financial goals are simply forecasts based on the company's expectations about its future. Expectations depend on market conditions, on the Brazilian economic performance, on our industry and international markets and are, therefore, subject to change. As a reminder, this conference call is being recorded, and it's being carried out in Portuguese and simultaneously translated into English. Slides are available in our results center in our Investor Relations website, which can be accessed at romi.com/investors. [Operator Instructions] We have with us Mr. Luiz Cassiano Rosolen, CEO; and Fabio Taiar, CFO and Investor Relations Officer. Our executives will present the results for the first quarter of 2022. And after that, we'll answer your questions. Now I'd like to hand it over to Mr. Luiz Cassiano.

Thank you. Good morning, ladies and gentlemen, and thank you for participating in our earnings call for the first quarter of 2021 (sic) [ 2022 ]. We began 2022 with higher revenues, and we maintained a very solid portfolio. We increased our machine production and expanded our renting business. The Romi Machines Unit continues to have a robust portfolio with a growth of 34% versus the first quarter of 2021. The foreign market is still demanding our machines, and the rental business is growing significantly. In mills and fuse products, we also expanded our revenue 25% versus the first quarter of 2021, and we maintained a robust portfolio. Our challenge is still to expand our production and continue improving our margins throughout 2022. And our B+W business unit and our operations in Germany, orders created an important portfolio for the rest of the year. We still have challenges to meet our goals for the year, and the B+W results should be seen yearly because its production cycle is longer. We started 2022 confidently, and we're focused on capturing new opportunities and executing them with excellence. Now I'd like to pass it over to Fabio, who is going to go into the results for this quarter. Welcome, Fabio.

Thank you, Cassiano. Good morning, everyone, and welcome to our conference call for the first quarter of 2022. We are going to begin with our highlights for this quarter. Starting with our net operating revenue. We had an increase of 28% of our revenue, reaching BRL 285 million, out of which there was growth in Romi Machines and in our Cast Iron business unit. So even with that growth, we finished March with a robust portfolio for the next quarters. So BRL 791 million in our order backlog, an increase of 14% in comparison to March 2021. Our next highlight is that we had higher revenue growth in the Machines division versus the first quarter of 2021, especially due to how consistently orders came in throughout 2021. We'll see how that happened in the first quarter of 2022. This was due to economic recovery and also the consolidation of the main product lines that we've recently launched in the domestic market and in the foreign market. So with this increase in revenue and with efficient operational expense control, our operating revenue in this business unit was 21.3% higher than the first quarter of 2021. As we mentioned, our backlog increased by 14%, especially the Romi Machines and also the raw (sic) [ Rough ] and Machined Cast Iron Parts business unit. In our highlights, we also mentioned the material fact we published in March 2022 about the subsidiary, Rominor Empreendimentos Imobiliários, which was launched in April. This is a real estate enterprise here in Sao Paulo -- in the state of Sao Paulo, which has about 352 lots. According to what has been concluded so far, our total GSV estimated in our material fact was correct. And Rominor has a 50% share of the GSV. Of course, cash flow will happen over some time, depending on what modes of payments clients select when they acquire their residential lots. Continuing with the next slide, here, we see some of the macroeconomic indexes. Gross fixed capital formation this quarter is still growing versus this first quarter of 2021, which already had some substantial growth versus 2019. If we were to break this down and if we were to look specifically at transformation, which is where our clients are, our performance was even more positive, which shows that investments continue being made. And along with that on the next slide, if we were to analyze capacity utilization, it has also been at very positive levels. So what we see on this graph is what we confirm with our clients every day. All levels of activity are very favorable, and this even shows our after sales in replacement parts and in technical assistance. This graph also shows the Industrial Entrepreneur Confidence Index, which really measures how our main clients feel. We can see that in the beginning of the COVID pandemic, there was a sharp drop, but then over the second quarter of 2020, there was a recovery. There has been some volatility because of our macroeconomic scenario with geopolitical issues, with political issues, but we see that the Index has been at a very good level that still shows some optimism in how new investments will be made. This is a little bit about the business units requesting our products. When we look at this quarter, volatility was concentrated in some segments, but we can see that demands are spread out across several industrial segments. The most diverse in our clients' bases are job shops, small companies that provide services to other tiers in the industrial chain. Many of them are providing services for machinery companies, some of them serve is agricultural and the automotive industry. So it shows how much capillarity there is. It goes to show that several industries are still working at high levels in this industry, and the concentration in itself is natural. B+W. Since we didn't deliver any machines in the first quarter, we don't have any statistics for this. And finally, energy, which is still very strong. We still have a backlog for 2022, and the recovery that we had mentioned in previous calls for trucks and also agricultural machinery is starting to play a more significant role. So a commercial automotive has gone up and also agricultural machinery. So from the second quarter of 2021, they started recovering significantly, and that continues to happen in the beginning of 2022. Considering representation, this -- these are our net sales per business unit. The biggest share was in Romi Machines. 62% versus 34% in Cast Iron Parts. B+W Machines lost some share. If we were to look at the breakdown at the end of last year, we would have seen that Romi Machines was growing and it did come to pass. Cast Iron Parts grew, but a bit less, and B+W again lost some of its share because in the first quarter of 2022 and in the first quarter of 2021, we didn't deliver any machines. So its share was very low as a fraction of our net sales. In geographic distribution, Brazil still plays an essential role here. It represents 80% of our sales distribution. So Romi Machines grew in the domestic and foreign markets, and this can be seen, especially in Latin America and in the U.S. where there was a significant growth. Since B+W didn't deliver any machines and they are basically in Europe and Asia, these 2 regions lost some of their share. What's important to see is that the foreign market had already been showing signs of a recovery last year, and we can see that they're still having a strong demand. Our production lines, as we had said before, were recently launched, and they've consolidated very positively, not only in Brazil, but also in the international market. That has driven the volume of new business or new orders from the international market. Considering our order entry and backlog, we can see that the first quarter of 2022 was very good for Romi Machines. In 2021, it has already been very strong. We had posted a strong recovery in comparison to our historical base. So it basically remained flat. The number of machines has an even smaller variation. That goes to show that sales in the domestic market, rental, and as Cassiano said, have posted significant growths. The recovery in the international market has also allowed our order entry and backlog to go up every quarter. And that obviously expands our backlog, and we'll see that our order backlog is robust for the next quarters. B+W. It would be hard to look at this quarter because all we have are very big projects. But regardless of that, if we were to look from the first quarter of 2021, it has been receiving new orders. And although the first quarter is still below what we saw in 2021, it's consistently converting opportunities into new orders, some of them for 2022, and we're starting to look at 2023 as well. Rough and Machined Cast Iron Parts. The first quarter had 94,000 orders -- excuse me, BRL 94 million in orders, but this was mostly due to how orders were placed. In the first quarter of 2021, we received a big volume from the wind power industry, which has longer orders. And in certain quarters, we see some concentration, as we saw in the fourth quarter of 2021 even. But the power industry is still very solid. And it shows here when we look at it per segment that it's been recovering, especially trucks and agricultural machinery. There was a reduction of 17.2% in total. But again, it was a substantial order entry volume. And although Romi Machines had a higher revenue, we maintained a solid portfolio in December and in March last year. B+W, the orders. Since we didn't deliver any machines last quarter, our portfolio was higher, 140,000. It's a bit low last year, but again, we are getting consistent orders. We have many opportunities ahead of us. And in the next quarters, we hope to continue feeding into this portfolio for future deliveries. In Rough and Machined Cast Iron Parts, we received nearly BRL 94 million, and that allowed us to finish the quarter at a very similar level to what we had in December and substantial growth versus March of 2021. It demonstrates that the segment has generated significant volume for Romi. And overall, our order backlog grew 14.1% versus March last year and 2.9% versus December 2021. Our cost of goods sold was basically flat. Production grew especially in machines, and that diluted our costs, like labor, there was some depreciation. But overall, we kept the same efficiency levels in the company. Results and margins. Our profitability in the first quarter, our gross profit -- or excuse me, our gross margin was 30%, and our gross profit was nearly BRL 6 million above what we reached in the first quarter of 2021. We have that 28% growth in net revenues, as we mentioned, but we lost some of our margin, which was basically due to foreign exchange effects and some expenses that are still happening in the casting process. When we look at our operating profit, the growth was nearly 12% versus what we had in the first quarter of 2021, and margins were down 1.4%. So gross margin plus our revenue and efficient control of operating expenses resulted in this reduction in our gross margin. So our operating margin was at 10% at the end of the quarter. Considering our EBITDA, we see the same behavior, which was a growth of about 12% to 13% on our EBITDA margin, but there was a slight reduction -- excuse me, on our EBITDA, but a slight reduction in our EBITDA margin. Net income, there was a growth of about 47%. Net margin also went up 1.4% from 9.3% to 10.7%. And this includes a specific effect, which was the foreign exchange variation in the first quarter of 2022. Since we have frequent volumes in exports, some captures are done usually 1 quarter before. So if you're -- that means that we're exposed for some time. Since the BRL went up in value, that created a positive effect. It diluted our gross margin and led to better financial results impacting net profits and net income -- excuse me, net income and net margins. Business units' results. We see that machines went up in sales, as we said. Gross margins went up due to the foreign exchange. As we said, the international market has been showing clear signs of a recovery since 2021, so its share is growing. And since we had some appreciation, especially since mid-February, that ended up pressuring our foreign margins. But with that growth, we were able to dilute our operating expenses, especially when compared to our gross margins. At B+W, it's difficult to look at a quarter where you didn't deliver any machines, although we had a great portfolio -- or excuse me, a great backlog from the second quarter on. We can see that the analysis is still a bit distorted. Many of the fixed costs affect our results when you have low income. And in Rough and Machined Cast Iron Parts, we also see that operating revenues went up by 25%. In energy and in other segments, there was a reduction in our gross margins' internal processes. So we continue to perfect our internal processes, meaning that net operating costs and other segments were reduced. Our gross margins went down because of the expenses and investments we've made in improving our in-company processes and developing new parts. However, as our revenue went up, we were also able to reduce our operating expenses, and the first quarter finished with an EBITDA margin that was still very favorable, 11.2%. Considering our financial position, we're still at a very -- we're still very strong. The net debt was at BRL 73 million at the end of March. Usually, the first quarter uses more cash due to an acceleration in production, so that it's available on -- within the delivery terms. This first quarter was below the historical level still. Our debt is very well balanced. We have a 9-month debt, BRL 51 million, and it shows that our liquidity and our debt profile is still very solid. Finally, on the capital market, our share performance, it's been above the index. We see that there was one peak, but then it has remained flat above the index. But again, we're going through some volatility, especially smaller companies in the index have taken a hit from the foreign volatilities. So that concludes our presentation. Once again, thank you for being a part of this event, and we're now open for any questions you may have. Thank you, and have a great day.

[Operator Instructions]

Good morning. This is Cassiano. I've got a question from Carlos [ Herrera ]. He asks, what is your perspective for costs in 2022 if we should continue to see a reduction in gross margins? I'm going to split this into the 2 business units, which impacted our gross margins. At B+W, we look at this yearly. So explaining it right now would not make any sense. But in Romi Machines, this was basically due to exports and it was offset by our gross income with the foreign exchange variation. Of course, we are pressured on costs. We're trying to pass it on to our clients as much as we can. There's some competition, but it's a global equation. So we expect clients to do this, and we expect clients to receive the price hikes in prices. So, of course, this applies to a machines sold in Brazil. It will be more complex for machines sold abroad because foreign exchange is what's going to dictate what our gross margins will be. Considering Rough and Machined Cast Iron Parts, we've already been on a recovery, and we're improving our operational efficiency so that we can have better gross margins, like in the first quarter of 2021. So we're very confident about this effort we're making. With increased production and also with higher productivity and with operational excellence and quality, we hope to continue on this path for the next quarters and to post better margins across all parts. The next question is, how are lines dealing with price increases. Are they having -- are you having any challenge in passing them on? Machines and -- Rough and Machined Parts have higher prices, and it needs to be passed on to the end client according to inflation. So we have a system in the company where we measure the future expected inflation and pass that on to our clients. It's always difficult to negotiate. But as I said, inflation is happening around the world. Everyone understands and sees what's happening to raw material prices, and negotiations are being somewhat successful. The third question is, for 2022, are you going to focus on payouts for shareholders? Or are you investing anything this year? Well, our payout policy will be followed, and payouts will be made according to that. It's the shareholders' decision. They are the ones who decide if payouts will be made. We have 2 businesses in the company. They're very profitable. They're new, and they do require some more capital, which are rental and progress, which is our fintech providing financial services for clients. But throughout the year, as we generate cash and as shareholders make their decisions, we'll allocate the investments we believe will give the highest returns for our shareholders. The next question was asked by Antonio Rizo. He asked us to give us some more -- to give him some more details on the order backlog and the service industries. What industries are demanding more? What are the main segments? And where do you see fewer order volumes? Well, Romi services many industries. We have around 3,000 to 4,000 active clients across several industries. When we talk about the service industries, they are service providers, so milling, plastic injections, they work for several industries. So for example, they might provide an axle, so they're going to provide axles for several industries. It's very difficult to split it into segments, but we can clearly see that industries connected to agribusiness, for example, trucks. They do demand more. And aeronautics, for example, is very low. But it's very difficult to give you details because we have a huge number of clients. We received a question from Carlos Perera, and I'll let Fabio answer this one.

Good morning, Carlos. So the question is, please tell us about the financial statement on Item 4.02, Other Results, there was a value of negative BRL 24,000. And how does that impact your net income? So Carlos, this amount, what does it represent? It's the conversion or the translation of the investments that were made abroad, meaning investments made abroad in U.S. dollars or in euros have a foreign exchange variation every month according to our conversion used with the fees we indicate every month. So if the real goes up in value, then you're using fewer BRL, and that has a positive impact. But when it's the opposite, you need to use more reals, and that foreign exchange variation affects our assets. So it does not impact our recurring net income, but it's an item to convert or to translate our investments from abroad. And the foreign exchange variation represents our assets directly. And it means that if it had been taken directly in our results, it would be that. So it shows what the total net income would be considering all other results. So in our case, we only have that effect, which is on the conversion of our investments abroad as every subsidiary Romi in the world, and it really doesn't impact our distribution or a profit distribution base. We received a question from [ Conjado Carvalio ]. He congratulates us for our results and asked if we could talk more about the machine rental service. Are we -- he also asked if we're seeing any acquisitions through M&A or organic expansions. Well, we published a little bit in our release about this performance. In the order backlog section, we had 59 new machines in the first quarter or rental contracts closed, 332 machines since the business was created in mid-2020. So we haven't even completed 2 years but we have 332 machines, which represent over BRL 83 million in contracts. These are contracts that are 12 to 24 months long. The machine is then taken, reworked and sold to the market. It's still growing. So to give you an idea, in the first quarter of 2021, we had 32 rentals. And now in the first quarter of 2022, we have 59. So we've been able to have a good level of growth. And we really like this business because it has very good margins. Is Romi foreseeing any acquisitions? Well, we're always looking at the opportunities. Whenever it's in line with our strategies, we have the duty to analyze and understand them. But right now, we haven't really been struck by anything. We didn't see anything that's going to add value to our shareholders. Considering organic expansion, I'll split it into 2. In Rough and Machined Parts, we are still strong. We're making some organic investments into furnaces and other equipment to increase our output. In B+W and Romi Machines, we still have some idle capacity. As a reminder, with Romi Machines, we have produced over 3,000 machines in some years. So we're making some one-off investments to increase productivity, automation and digitalization for the process, but not specifically to expand because we still have some capacity to fill in B+W and Romi Machines.

[Operator Instructions] As there are no further questions, I'd like to give the floor to Mr. Luiz Cassiano for his closing remarks. As a reminder, the Investor Relations department is open and available to answer all of your questions. Over to you, Mr. Cassiano.

Thank you, everyone, for being in our conference call. Our Investor Relations team is available if you'd like to have -- ask any other questions, and we'll connect during the next quarter. Thank you.

That concludes our conference call. Thank you for listening, and have a great day.