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 Second Quarter of 2022. Before we begin, we would like to clarify that this conference is exclusive for investors and investment professionals. Any statements made during this conference call about the company's business perspectives as well as projections and operational and financial goals are simply beliefs based on the company's expectations about the future. These expectations are highly dependable on market conditions, the country's economic performance, the industry and international markets and are, therefore, subject to change. As a reminder, this conference call is being recorded. It is being carried out in Portuguese and simultaneously translated into English with the slides in our results center in our Investor Relations website at romi.com/investors. During the presentation, all participants are connected in listen-only mode. After that, we will begin the questions-and-answer session. If you'd like to ask a question, you can type it along with your name and the name of the company you're representing using the Q&A tool. If you'd like to ask an audio -- further instructions will be given later. We have with us today, Mr. Luiz Cassiano Rosolen, Chairman and -- Fabio Taiar Financial Investor -- Financial Officer and Investor Relations Officer. They will present the results for the second quarter of 2022, and then they will be available to answer your questions. We will now hear from Mr. Luiz Cassiano.

Thank you, Raisa. Good morning, ladies and gentlemen. Thank you for being in this conference call for the second quarter of 2022 for Romi. 2022 has been a year with many opportunities and challenges. We still have a lot of orders coming in resulting in a very solid portfolio for the next quarters. In Romi Machines Unit the highlights were our orders on the external and domestic market, it still has a high demand for Romi Machines and the rental business has been growing significantly. In the Rough and Machined Cast Iron Parts market, our revenues are still growing, especially in comparison to the previous quarter. And we've kept a good backlog due to new orders coming in for all areas. In the B&W business unit, our operation in Germany, we once again had a great number of orders, and it has expanded for 2023. We still have many challenges so that we can reach our goals for 2022 as our revenues are concentrated in the last quarter. The BW results should be seen in a yearly fashion because the production and revenue cycles are longer. Although there were slight decreases in margins in the second quarter, our team is confident that we will recover margins gradually in the next quarters. And we're focused on capturing new opportunities and executing them with excellence. Now I'll pass it on to Fabio, who is going to tell us about the results for this quarter. Welcome, Fabio.

Thank you, Cassiano. First of all, I'd like to greet everyone watching us in this conference call for the second quarter of 2022. Let's take a look at our presentation, and we'll go into details on the main facts of the second quarter of 2022. Starting on Slide 3, you will see the highlights for this quarter. The 2 main highlights we see are: First, incoming orders, above BRL 480.3 million this quarter with a growth of 36% versus the second quarter of 2021. Across all business units, we had higher incoming orders. First, in the Romi Machinery Unit, which grew in monetary terms, but also in the number of machines ordered. This goes to show that the market in 2022 still has a high demand for equipment. The domestic market had continuous demand. Of course, there was also an increase in exports due to the consolidation of the new generations of machines, which we launched in recent years. They're very consolidated lines in the domestic market, which now are starting to be consolidated in the external market as well. Still concerning incoming orders, the Rough and Machined Cast Iron Parts unit had already grown substantially in the second quarter of 2021. And it grew an additional 20% in the large parts segment for energy and in other segments, which had a very important recovery throughout 2022. And basically, for all segments, including automotive and commercial, yellow line and agriculture Continuing with our order backlog, which was another highlight. In this quarter, once again, we had a record order backlog of over BRL 900 million, an increase of 37% compared to June 2021. And it shows the good perspectives that we have for the next quarters. Increased incoming orders, which we have seen since the second quarter of 2020, have allowed us to deliver on a volume growth. So we would like to highlight that the net revenue has also grown in the second quarter, reaching BRL 372 million. up over the second quarter of 2021. And again, as I mentioned, an increase in the order backlog. On Slide 4, we see our conjunctural indicators such as our GDP and the gross fixed capital formation. 2021 was a year where we had a lot of growth. So here we're always comparing the current quarter to the same quarter in the previous year. So since there was a reduction in COVID, the performance in 2020 was unfavorable. So the comparison was positive. For the first quarter of 2022, it was negative, but we have to mention that there are 2 effects here that we should comment on. First, there was a one-off effect about the first quarter of 2021 in oil and gas. And this was a reflection of Petro, which is an isolated factor. Also, in the first quarter of 2022 and gross fixed capital formation, there was a significant reduction in expense. The next slide, Slide 5, shows our average installed capacity utilization. We can see the 2022 is at the best level we have had since 2015. And it shows that industry, in general, has been operating at a good level of capacity utilization. This is also confirmed by the volumes in after sales. So the utilization of our equipment is still quite reasonable. And it's about 15% above what we usually have on average in July, if we look at 2011 until 2021. So although there have been some adverse macroeconomic effects, capacity utilization is still very favorable. Continuing with our Industrial Entrepreneur Confidence Index, which is a little bit more volatile, right? It depends a lot on the feelings that industrial entrepreneurs have. We can see that there was a sharp drop in the beginning of the pandemic, then there was a recovery and some volatility throughout 2021 with the second wave of COVID. Then the index came to a more stable figure around 57.8 points. We can see that in the last 4 months, it has been on a rise, showing that the current index still has significant optimism for industrial entrepreneurs to make new investments. Considering the different business units with demands for our products and equipment. We can see from the first quarter of 2022 that -- from the first half of 2022 that we still have a very spread-out market for Romi Machines, which is quite favorable. This is a business unit that makes general use machines. So machines that are broadly used across all segments of the industry. So we can see that there was a decrease in machines and equipment, but there was a rise in job shops, which often provide services for the machines and equipments industry and the same goes for agricultural equipment. So this is a segment that supplies the other industries. So we can see that, overall, several industries have been still very positive in consuming and creating a demand for machines. At BW, since it's a niche company, it is naturally more concentrated. So in segments where we delivered machines in the first half of 2020, 1 are -- basically 2, which are the same for the first half of 2022. First, machines and equipment, BW provides machines for capital goods, industries and also orders and systems. Finally Rough and Machined Cast Iron Parts, which were still very solid in energy, representing 45% of the revenue in the first half of 2022 and the other industries, as we said, automotive is still very good. Construction is starting to show good signs of a recovery recently in agriculture, which was already at a very high level and became even higher throughout 2022. Considering revenue distribution, Romi machines had a slight increase in its share, 58%. Cast iron parts grew the most proportionately gaining share. It is now about 34% and BW had a lower share, as Cassiano said. BW shares -- revenues are usually concentrated in the second half of the year and this year that is even more significant. So even in euros, its revenue was slightly lower than in the first half of 2021. And this has also been boosted by the devaluation of the euro, which made for a positive conversion. Considering distribution, Brazil in the first half of 2022 represented 78%. This is a growth, especially due to cast iron parts. Much of our revenue is from the domestic market in that area. In Europe, we lost some of our share due to BW revenues. Latin America have gained shares. And this is a region that still has a strong demand for machines. We've mentioned this for 2021, and this trend has continued throughout this year. The U.S. has kept stable as well as Asia. And Asia is represented exclusively by BW and they delivered 1 machine to the continent in 2022. Considering order entry, starting with Romi Machines, we had a very robust order entry for the second quarter of 2022, a growth of 36.5% versus the second quarter of 2021. Here there was a growth in the domestic and the external market in the second quarter of 2022. In May, one of the main areas of the industry recovered, and we've mentioned this before through our communications. We had a trade show, which was very positive and also a volume of new entries was created there, and that boosted our order entries. At BW, they had significant and expressive growth in the second quarter, great project, around EUR 10 million and we continue to be very positive about the opportunities that BW has in its pipeline to be converted in the next quarters into orders. It demonstrates that the market has recovered for general use machines, and it is now also starting to recover in large-scale machines. Rough and Machined Cast Iron Parts had already been receiving orders in this quarter had an increase of about 20%. Within this figure, we can see how all of these segments supported by this unit have been growing. And it demonstrates that these industries, which have brought in new orders also seem to have good perspectives for the future. They're not anchored at any segments. So all of them have been recovering across the board. There were BRL 480 million in orders, about 36% above 2021, which shows that our revenue and our order entry have been growing hand-in-hand. Now in the second half, we've reached BRL 904 million, of which BRL 409 million are machines, a growth of 25% versus June of 2021 or the same thing is happening with BW. Most of the deliveries in this backlog is concentrated in the second half of the year, especially in the last quarter. So there was a growth even despite a lower currency exchange rate. And finally, Rough and Machined Cast Iron Parts have also grown significantly in the order backlog, BRL 327 million, which is a great perspective for the next quarter. Considering our cost structure, in the first half of 2022, we see a structure that was very similar to the first half of 2021. If you compare it to the previous years, there was a significant improvement, especially diluted expenses and fixed costs. Here, we can see that once again, labor has had a dilution. So our production has gone up, but our labor structure has not expanded in the same rate. Depreciation has been basically stable and industrial expenses have grown a bit, especially due to lower required maintenance for this quarter, especially now that we are using higher capacity utilization than what we historically have used. Considering our profitability, for the second half -- the second quarter of 2022, our gross margin was 28.2%, so about 2 percentage points below the first quarter of 2022. This can be explained by 2 factors: First, BW, which had margins below what we saw in 2021, especially because of the disparity of production and deliveries in the second quarter. We have a very robust portfolio now, which is why we're expecting margins to recover throughout the quarter. But in this comparative period, it was about 1% in reduction in our consolidated figures. Also, in machines, the margins dropped especially because of the exchange rate. The average exchange rate in 2022 showed that the Brazilian real went up by 7%, and the euro went up by 18% versus the US dollar. So the parity was 1.2%, and it went down to 1.6% versus the dollar. So as we saw in the graph, many of our exports are to Europe and of course, that has an even greater impact in our export margins. Finally, cast iron parts had a slight reduction in the second quarter, and this is due to price effects. We have been developing new parts in the beginning of the year as well, and they have been more consolidated now until you can get to production excellence. So if you look at cast iron parts, in general, in the second quarter, you can see that our gross margins have gone up with substantial operational margins. And that also gives us a positive outlook for the next quarter when it comes to cast iron parts. You can see that our revenue has grown even with the reduction of our gross margin and our gross profit was about 10% below what we had in the second quarter of 2021. With that reduction in gross margins, the same happens when we look at our EBIT and EBITDA on the next slide. So there was a slight reduction in our absolute EBIT, BRL 16 billion and as a consequence, our EBITDA margins has also gone down. So here, we'll see the same trend. There was a reduction in gross margins, which reduced our EBITDA and our EBITDA margins. And in net income, there was a reduction of about BRL 10 million. In the second quarter of 2022, we had some more foreign exchange variation affecting our results. So these are small positions. And since the end rate in June versus March, showed in the comparative period, a exchange rate variation. What I mean is that the US dollar was 4.70, and it went up to 5.20-some Brazilian real. So we had a higher effect of the foreign exchange rate in our results, which also reduced our net income. And our net margin was about 9% in the second quarter of 2022. Here we see our results per business unit. In the first quarter, Romi Machines had an expansion for the second quarter. As we mentioned, there was a reduction in gross margins, especially due to the foreign exchange rate variation. And with that, we also had a reduction in our gross margin and our EBITDA. But if you look at it historically, it is still very robust. BW had a lower revenue, as I mentioned. This reduction was denominated in euros. Since the Brazilian real appreciated in 2022, this means that we received less in reals. The production volume is always different between the 2 halves of the year. And this year, that's even more significant, which makes it difficult to keep operational efficiency. And this means that we've lost some of our gross margins, and as a consequence, some of our EBITDA margin was lost as well. In Rough Machined and Cast Iron Parts, we have the highest proportional growth. Our gross margin went down. But if you look at it quarter-by-quarter, you can see that the second quarter has had a significant development. And this, as we said, gives us positive perspectives of our -- especially considering our robust backlog. So here you can see that there has been a significant change. When we look at the half, there is a reduction in gross margin and also our EBITDA margin. So looking at our financial position, some of the cash was used during the second quarter. We usually consume more cash in the first quarter where we have the highest inventory levels. And then throughout the second quarter, a part of it is returned to the company's cash. In any case, we had, during this quarter, an investment of BRL 38 million, a part of it has been dedicating capital to the machine allocation business. which has been performed very favorably. It has shown expressive growth, and we still have a lot of demand for it. Interest over own capital was around BRL 13 million and some working capital, especially in inventories. So BW started receiving components for deliveries in the second quarter -- and also casting has been working a lot to deliver on these orders. So that consumed some cash, but our net debt is still at a relatively healthy level and we have more cash to pay for our short-term obligations. Considering our share performance, looking at the last 2 years, our performance -- we have performed above Ibovespa. If you look at our performance, when we finished reorganizing in 2016-2017 until now, we have consistently shown an evolution in our results. We still have generated cash, net revenues. So for the fifth year in a row, we have been having positive results. Well that concludes our presentation of the results for the second quarter of 2022. Once again, I'd like to thank you all for being here, and we are now available for any questions you may have. Thank you.

[Operator Instructions] We received a question from Osigis Camargo. And his question is, will any dividends be paid out in the second quarter of 2022?

Thank you for your question. First, we'd like to mention that we have a payout policy and it establishes at least 33% payout on our consolidated net income every year. What we've done in the last few years, since this is a quarterly regime in accounting, for the last quarters, we have used that so that we can also make the best fiscal use of these payouts. However, that's something that also requires more analysis. It requires more cash, new credit lines are required and that can be quarterly, as we've said, or it can be at the end of the year. And that's when we will discuss how the net income for that year -- that fiscal year will be. But if there is a profit as has been the case recently, we usually distribute it or pay it out every quarter, depending on an analysis. At the end, the decision is always on the hands of the representatives and shareholders, the Board.

We received 2 questions from Lucas Xavier. The first says, the others category in Romi Machines, does it include machine rental? And can you tell us a bit about how the line is performing? And when do you expect to publish separate results?

Thank you for your question, Lucas. In Romi Machines, actually the entire result for the rental business since it is only in that business unit, we consider that revenue in our net operating revenue. And we consider operational expenses in the operational expenses line, so it is not grouped within any others. Other results, usually refer to machines being sent from our own plant, and it's done as a way to modernize that. We've been mobilizing many machines -- so it ends up carrying other figures, but the allocation is in any -- it's in all of the groups, so as an operational expense. The rental business was launched in the second or third quarter of 2020. It's been widely accepted by our clients. We're starting to conclude a first cycle in rental because usually contracts have a maximum of 2 years and then they are returned. We're now putting the first machines back to rentals. So considering the volume of new business generated in rental since 2020 and also used machine sales, we've seen significant growth. And we also had all sorts of utilizations with rental. So it demonstrates that it's playing a great role as a solution to support players so that they can begin their projects that would not make sense if they only had to -- if the only option they had was to buy the equipment. And considering publishing a breakdown of the results, this is the part of the business. So we still need to get a little bit more color on this, but this is a business that has been in turn connected to the Romi Machines business, and that would have a higher demand so that we can break it down into categories, but I do think it's important to say that this solution has been performing very well. In any case, you can see in the release some of the information in the rental business, which is very interesting. The number of machines versus the previous quarter, values represented by these new contracts and there's even a historical level. Since we started renting, we had 386 machines and how much it represents in when it comes to income. So we have 12 and 24 month long contracts.

You've asked there's a question here by Lucas asking if we have been able to pass on the cost increases in the product sold.

So yes, with some clients, especially when there have been higher costs for raw materials, we have been able to pass it on. So when it comes to Romi Machines, we have also been able to do it. The only challenge has always been real estate volatility because the price of machines in a strong currency in euro or US dollar has been corrected by their inflation which is not low, but it takes some time to pass this on. And by the time you do it, then the exchange variation takes a part of your margin. So we hope that this can be recovered throughout the next quarters.

The next question is being asked by Francisco Cholet. He asked we saw -- we've seen an increase in the percentage of units in Romi Machines for teaching. Can you tell us a bit why this is?

Yes so in our client base, we also have a large number of clients who are technical schools. So they are trade schools from the state or from the city, and we consistently sell machines to them. What happens is that throughout 2022, so the first quarter of 2022, we had deliveries for some of them, one that is spread across Brazil and 1 in Rio. We gave them a large volume, and that's why there is this concentration. So teaching has always been a part of Romi's client base. We see it very frequently, but it is true that we had a higher share during that time due to the concentration of orders during the first quarter. Usually, they have higher or bigger packages for renewals, especially with centralized DBs and that facilitates the negotiation process. That's why there was a concentration in the first quarter. But usually, it is lower than the percentage you see. But this is something that does happen consistently in our business. And this is taking place specifically in Romi Machines.

The next question was asked by Pedro Pimenta. He asked about the share target in the rental segment for Roma Machines and how long this will go for?

Well, we have no target or guidance on that, but the rental business, I mean, looking at the data in our release has a gradual increase every quarter. There is a demand for cash, for working capital for this business, but it has very good results. In our value chain, what's important to highlight is that besides the revenue we get from rental, we will have a second revenue at some point, which should start in the second quarter with the sale of these machines to our manufacturers and return to the market with a guarantee. And we believe we're going to add even more value for our clients. So in that business, I think we'll be able to get 2 very interesting things, which is promoting the client, trying to get new businesses with machine rental and also selling machines that have been refurbished by the manufacturer. So this will be a very interesting line of business, but we still don't have any relevant revenue from that. So we will start doing that in the second half of the year. Again, this business has just been running for 2 years.

The next question is from Marcus Gargari and he's asking about how behaviors and prices have behaved or will behave in the second half of the year? And what we should expect in Romi Machines and cast and iron parts?

I covered that in the other question but again, for cast and iron parts, we expect margins to be better because margins have gone up in June. In Romi Machines, the exchange rate will be an important factor. Margins have been solid and robust in the domestic market, but in the foreign market, it will depend on how our exchange rate behaves in the third and fourth quarters. There have been some price readjustments for US dollar and euro listed items. And of course, there is some foreign exchange variation, which can affect us, but it has been above what we saw during the last quarter. We have exported a lot of machines during this year and the external market has been becoming more relevant.

There's another question from Pedro Pimenta asking about our ability to pass on prices.

And I mentioned this before, the entire chain has been taking a hit from inflation in commodities or we have in the past. So clients usually understand it and all of our competitors are doing the same. How the crisis in Russia and Ukraine can affect our businesses and how representative they are in Romi businesses? They were not direct clients. We would sell maybe 5 or 6 machines a year to these countries. So they don't have a significant effect. In any case, the war has generated more investments in capital goods and defense and that is a market that Romi is exposed to. And the -- so it's third or fourth tier in these markets, but it can generate additional business, especially in the external market.

There was a question from Francisco. Do you see that BW machine margins will evolve with a higher order backlog?

Well, since they have a higher installed capacity, we will definitely see a margin increase for BW, especially in the fourth quarter, which is where we deliver most of our machines for the year. If you look at other years, the fourth quarter is when we have the most significant number of deliveries. So usually, we have better margins during that time.

We also got another question from Marco Carrigari. What is the level of occupation in the second quarter for Romi Machines and cast iron parts?

We're at around 75% in cast iron parts. In Romi Machines, if we look at assembly, it is probably around 60% in capacity. But obviously, when it comes to casting, it's very integrated with other areas. So there might be some bottlenecks and some investments might be required, but overall 60%, 75%.

So Lucas asked the question on mergers and acquisitions, if we've looked at the market for any.

We're always analyzing the market to see if there are any important opportunities for our shareholders, organic or M&A. Right now, we're focusing on our operation and increasing production in upping our rental business, which is performing even better than what we had in our business plan. We're also introducing Produce, which is a financial arm to facilitate financing for machines that are coming back from rental and also require capital use. But yes, we're always looking at the market to see if there are any M&A opportunities, which we believe always add value to our shareholders. Marco asked us to go into our ex-BW order backlog and how much of it has been connected to the dollar. We usually don't say, but Marco I think we can give you an idea. About 30% of our machine production is for the external market and the remaining 70% for the domestic market. So that's about the proportion that we -- upsells that we have in Romi and that reflects our portfolio or our order backlog.

There are no more questions, I would like to give the floor to Mr. Luiz Cassiano for his closing remarks. As a reminder, the Investor Relations department at Romi is available if you have any other questions. Mr. Luiz Cassiano, over to you.

Thank you, everyone, for listening to this conference on the second quarter Romi, and our Investor Relations team is available if you need. Thank you, and have a great day.

This concludes our Romi's conference call. Thank you all for listening, and have a good day.