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

Good morning, and welcome to the Romi conference call, where the results for the third quarter of 2022 will be discussed. Before we get started, I'd like to clarify this conference call is meant exclusively for investors and investment professionals only. Any statements that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals constitute mere forecasts based on management's expectations regarding the company's future. These expectations are highly dependent on market conditions, the general economic performance of the country, the sector and international markets and are, therefore, subject to change. It shall be noticed that this conference call is being recorded and held in Portuguese with simultaneous translation into English, accompanied by the slides available in the Results Center of our Investor Relations website at www.romi.com/investors. [Operator Instructions] With us today are Luiz Cassiano Rosolen, Chief Executive Officer; and Fabio Taiar, Chief Financial and Investor Relations Officer. Initially, the executives will present the results of the third quarter of 2022, and then will be available to answer your questions. Now I turn the floor over to Mr. Luiz Cassiano.

Thank you. Good morning, ladies and gentlemen. Thank you very much for participating in Romi's third quarter 2022 earnings conference. In 2022, we've been managing to capture all opportunities and achieve excellence in execution. We continue with a good order inflow, and especially with a very sound backlog for the coming quarters. The Romi machinery unit, the highlights were the recovery of margins in relation to the previous quarter, a robust order inflow and backlog and consolidation of the machine leasing business, which has had a positive impact on margins. In the casting and machine parts unit, we improved a lot in terms of operations with significant growth in margins and revenues this quarter. In the B+W business unit, our operation in Germany, we again had good order inflow, further increasing the backlog for 2023. We still have many challenges to achieve our goals in 2022 with revenues concentrated in the last quarter. The results from BW must be seen on a yearly basis as the production and revenue cycle is long. This quarter, we achieved an important evolution in our operations. We were able to produce and deliver with excellence. Now I'd like to give the floor to Fabio, who will detail the results for the quarter. Welcome, Fabio.

Thank you, Cassiano. Once again, good morning, everyone. I'd like to get started with the highlights on Slide 3. The quarter overall has been a positive quarter where we've reached BRL 82.6 million in EBITDA, adjusted EBITDA excluding revenues coming from real estate construction, which is not effectively part of the company's history. So this is the EBITDA adjusted with recurrent and traditional operations. And this represents an overall growth of 23.6% of EBITDA in comparison to the third quarter of 2021. We shall also notice that the EBITDA margin this quarter was 20.7%, a growth of 2.5% in comparison to the same quarter in 2021, which had already been a very positive quarter in terms of profitability. Another highlight was the order backlog. In spite of our growing revenue, net revenue, we've had a sound inflow of orders, which allowed us by the end of September 2022 to have a sound order backlog with a growth of approximately 15% in comparison to September 2021. With regard to consolidated net operating revenue, we've reached almost BRL 400 million with a growth of 8.8% over the third quarter of 2021 with highlight to Romi Machines Unit and also Rough and Machined Cast Iron Parts. At the Romi Machines Unit, net operating revenue increased 16.9% in comparison to the third quarter of 2021, both in the domestic and foreign markets as well as we have consolidated the machine lease business. This allowed us to show a growth in operating profit of 6.6% in comparison to the third quarter of 2021. We shall also highlight the Rough and Machined Cast Iron Parts Unit, where the net operating revenue increased by 27.3%. This allowed us to raise the gross margin and consequently reduce operational expenses, presenting a sound growth in operational margin with a growth of 6.9% in comparison to the same quarter in 2021. In the next slide, we are highlighting the order backlog of BW. As we've mentioned, B+W has been consistently bringing in a great inflow of orders whereas the backlog by -- in 2022 is BRL 176 million, a growth of 21.6% in comparison to the third quarter of 2021 due to the euro depreciation, which in the same period was approximately 14%. When we analyze the backlog at euros, the growth is of about 50% in comparison to the same period last year, showing that these projects are picking up and materializing more consistently every quarter, giving us good perspectives on future operations for B+W. The backlog has been covered over BRL 800 million, showing sound business incoming for the period and the challenge of continuing to operate with excellency and delivering on in fulfilling all the orders we have. As a highlight, we shall also mention the ESG, the sustainability portal for Romi. It's a portal we've been working on for some time to consolidate information in a friendly way within a portal, and this has been launched in September. You can find the website address if you have not had the opportunity to visit it, and take a moment to analyze the governance numbers and social responsibility numbers and environmental numbers. And if you have any suggestions, please let us know so that we can continue to evolve in that aspect. In the next slide, with regard to conjunctural indicators, we can see that in the second quarter with the latest available data, we've had an evolution of the GDP as well as an evolution of the industrial GDP, which is the lighter blue color and also an evolution in gross fixed capital formation. Industries such as transportation and storage, which are closely connected to logistics as well as the transformation industry, has also been showing growth. And this continues to have a positive impact on our businesses, especially the Romi Machines Unit. Next, we see 2 charts with economic indicators. First, installed capacity utilization. As we can see with the light blue line, the light blue line shows the usage of capacity throughout 2022 at a favorable level in comparison to the previous years, 6 or 7 years. In September, we have 72% capacity utilization, which shows that the industry continues to work at a fast pace. The second chart measures the mood or the trust or confidence of industrial entrepreneurs. This chart is somewhat volatile because each month, a new survey comes out. And we've been noticing throughout the past few months in light -- although in -- with the expectation for the future President of the country, we see a consistent recovery of that index, reaching September with 62.8 points which is one of the highest levels of this index, showing that entrepreneurs on the short and long term and their perspectives remain confident in Brazil. In the next slide, in terms of the industries that order our product. For machines, we don't see a lot of fluctuation. Also because that drop in machines and equipment and being compensated by service provider, which in turn, are closely connected to the machines and equipment sector. These are service providers for the industry. The same applies to automotive and agriculture amongst others. So if we analyze the key segments, the key industries that require our machines, their growth continue to be consistent. Automotive is heavy user, which is also connected to transportation. So they are keeping on strong and agricultural is also showing consistent growth. Packaging, which had been very powerful since 2021, is still at a high level and it's picking up again now in 2022. But overall, growth is consistent across industries. B+W, as we said, has been concentrating its revenues for 2022 in the last quarter of the year. So in a way, the numbers are somewhat distorted due to that fact. It would be better to analyze this segment by the end of the year. But one way or another, we know that BW is a niche company. So it's only natural that it concentrates its revenues in a smaller number of industries. For rough cast -- and machined cast iron, we still have a sound portfolio in energy and the other industries or segments have had already showed a recovery since the second semester of 2021. And they're still growing at a fast pace throughout 2022, demonstrating that we can see a growth, although a small growth in commercial automotive industry, showing that these segments, both automotive as well as civil construction and agriculture remain, requiring a substantial volume of machine and rough cast iron parts. In terms of revenues, or sales per business unit in 2022, we see a reduction of BW's share. First, because it did indeed reduce its revenues in comparison to 2021 because of higher concentration for the last quarter, but also because there has been growth, both at Romi Machines as well as with the cast iron parts. So they gained a lot of ground and share when we analyze the 9 months of 2022. In terms of sales distribution, Brazil has increased its share in these 9 months, especially because the biggest growth came from machining, and machining is inherently a domestic market. So Brazil has acquired share as well as Europe, which outside of Brazil is the key region where we have most of our subsidiaries also; followed by Latin America, which continues to keep a good demand flow; and United States and Asia, which depend a lot on BW's German unit. Now in terms of order entry and backlog. Romi Machines has been showing consistent growth in comparison to 2021. The third quarter has been a sound quarter in terms of order entry. And it's only natural that there is a reduction in comparison to the second quarter because that's where we have the key trade show where a lot of business is generated. And throughout the year, we see a growth of almost 10%. B+W shows a substantial growth of BRL 41 million in the third quarter, a growth of 38% in comparison to the third quarter of 2021. And here, we see an accrued growth of almost 24%. Of course, we're talking about reals. And due to the depreciation of euros, this growth is much superior to 24% when you analyze the currency, showing the recovery of projects at BW. Machining or actually cast iron shows a reduction in the third quarter of 2021, 35% over the year at 16.3%. In the third quarter, these orders have dropped mostly because the parts orders are actually placed for a longer term for a fulfillment because the other industries are automotive, civil construction and agriculture. So depending on the quarter, there are fluctuations that may be impactful. But throughout the year, we still see a sound volume of order entry in cast iron. So overall, at the end of the quarter, we've reached BRL 363 million in order entry, a drop of 8.6% much due to cast iron. And throughout the year, we observed a growth of 20.1%. So even though there is growth of revenue in the quarter, with the consent order entry, we see by the end of September, growth of 14.8%, almost 15% in comparison to 2021. And basically, 10% below the end of June, but still with very sound volume of business. Now in terms of cost of goods sold, we have been constantly working on operational efficiency. We can see a dilution of these costs of labor, for example, and materials are basically stable in comparison to 2021, which means there has been no significant change within the cost structure. Now moving on to profitability and margins. The greatest highlight this quarter is the evolution of gross margin in comparison to the third quarter of 2021, what we see here that justifies this margin is the reduction of cast iron and machined parts where we've gained a lot of operational efficiency. There's also a relief in an inflation and an increase of quality, which causes costs to reduce. In this period of comparison, there is no positive impact from the foreign market because there has been a drop of euro by 14%. But on the other hand, we have the lease business which has been consolidating each quarter, becoming more and more relevant in revenues, positively impacting our operational margins. In comparison to the second quarter, a big part of this resumption or growth comes from cast iron, but mostly due to foreign markets and currency fluctuation. And again, machine lease has been helping with these margins by a lot. In terms of gross margin, we've grown from BRL 115 million to BRL 137 million in the third quarter of 2022, which has had a positive impact on profit and operational margin. Operational profit in comparison to 2021 has grown from BRL 56 million to BRL 69 million as well as the margin has been growing basically 2%, from 15.3% to 17.2%, showing that this quarter is -- the third quarter is very favorable in terms of volume and profitability. In the next slide, we see the EBITDA showing a similar movement as operational profit, from BRL 67 million to BRL 83 million, its margin acquiring almost 2 points, reaching 20.7% of growth in EBITDA. And looking at the full history since 2020, that's been the best quarter so far. And ultimately, net income and net margin by the third quarter of 2021 to 2022, there has been an increase of approximately BRL 15 million, which again has had a positive impact, elevating this net margin from 11.1% to 14% now in the third quarter of 2022. Moving to business unit results. These are 9 -- this is a 9-month period chart. Starting with Romi Machines, there has been an increase in revenues. We've mentioned that the order entry, both in the domestic market and foreign market as well as the lease business has been showing a lot of growth, basically 20% of growth in comparison to the same 9 months in 2021. Gross margin has not come back to the same level as 2021, much because of the second quarter of 2022, rate suffered that impact from currency fluctuation, reducing the margins and exports. But now by this quarter, we've been noticing a sound volume of business in Romi Machines, and we consequently see a reduction in EBITDA. But as you can see, this is still a very sound portfolio for the third quarter. BW, we see a significant reduction in revenues, as we've mentioned a few times. BW revenues is very concentrated in the last quarter, which impairs this intermediary analysis of results. And this revenue reduction ends up having a negative impact both on gross and net margin and other operational margins. Rough and Machined Cast Iron Part, there has been an increase in volume. That's significant. And again, this is all the Rough and Machined Cast Iron Parts, both in energy and other industries. So with this growth and the increase of operational efficiency, we are practically reaching the same level of gross margin as last year. And here, we observe a higher volume, which allowed us to reduce operational expenses, surpassing 2021 in terms of EBITDA margin from 16.3% to 17.4% in the first 9 months of 2022. In terms of net cash position. We've generated BRL 20 million, reducing net debt from BRL 121 million to BRL 100 million. We have BRL 153 million in cash flow, which is more than enough to cover all operations and short-term commitments, showing that the company is still extremely sound and healthy from a net or a liquidity point of view. Here on this slide, we show the performance of ROMI3 stocks in comparison to Ibovespa. Its performance has been exceeding Ibovespa, and we should also emphasize here that this performance is not taking into account the dividends as well as bonus payments and other compensations that we've paid in October. So since 2017, we've been having a lot of growth in revenue. And if we look at the EBITDA evolution, that's also quite substantial as well as liquidity and new businesses, which are making progress and allowing us to continue to grow such as the machine lease business and also funding used machines. And therefore, with the 2-year analysis, ROMI3 is well above the Ibovespa performance. With this, we conclude the presentation. I'd like to once again thank you all for your participation, and we are now at your avail to answer any questions you may have. Thank you very much, and have an excellent afternoon.

[Operator Instructions] Mauricio's question is, can you talk about gross margin and machines? If that's an effect from the inflation fluctuations on raw materials, will that trend be maintained over the fourth quarter?

Actually, Mauricio, what Fabio explained has increased the margin in machines is the exchange rate. The exchange rate was somewhat low which affected exports. Bearing in mind that we sell machines in the foreign markets, both U.S. dollars and euros, which only fluctuates according to the external inflation. That's what we correct them on. But considering the appreciation of real in the latest quarter, that has affected the margin. And now in the third quarter, with the real being depreciated, we've recovered part of that. And part of it is due to the larger volume. We've delivered more -- 20% more machines this quarter in comparison to the second quarter with more efficient production, and that's also reduced cost.

The second question is also from Mauricio. And the question is, what does the scenario look like for automotive growth in 2023? Do you expect a deceleration?

For automotive in 2023, that will depend a lot on investment levels, on agricultural crops harvest. There are many factors that influence automotive industry in the country. Obviously, there is a significant factor in terms of sales, there is an impact from Euro 6 and higher efficiency. And in other occasions, that has caused an increase of volume for commercial automotive. And in 2023, that might mean a deceleration. But overall, the biggest impact we expect in automotive for 2023 will be, as I've mentioned, harvest, crops, investments in the country and the overall GDP performance that could maintain this industry at a good level. It's still not a very high level historically speaking, but a decent level for 2023.

Next question from [ Antonio Rizo ].

When it comes to the cast and machined iron, in energy, is it possible to say that the company's share-- is it possible to say what share this company has in this initially? Is it evolving or not? And what about the order entry in this industry?

Well, talking about power, energy, wind power, it's still very volatile. It's hard to predict what our share will be in the future. Currently, I would say we're manufacturing half of the demand for that industry, and our competitor produces the other half. Next year, that will depend a lot on the industry's demand, which is unpredictable. Vast majority of investments are not made through bidding processes, but rather through private investments. And it depends on the success of our clients in actually building or expanding wind farms for 2023. If we have some orders for the beginning of 2023, and we're working along with them with our clients to see if they can obtain success in the second quarter. And this is how it goes every year. At the moment, it is hard to visualize or anticipate what will happen in the industry, but this is how the dynamics go.

Next question from Conrado.

My name is Conrado. I'm a stockholder. First of all, congratulations on the excellent results. Thank you very much for that. And I have 3 questions. First, what's the company's standpoint on geopolitics and world economy with a war in Ukraine, the Chinese scenario and inflation and increase of interest rates in the United States, U.K. and other countries, and also the scarcity of inputs as well as the selling of machines?

Well, our industry is one that requires great capacity to respond. So we work on a daily basis internally to capture opportunities when the market picks up fast. And also we protect ourselves and take the necessary actions when the market oscillates negatively. This happens even more so in our country. Therefore, we always try to establish a supply chain that has good capacity to respond to opportunities and challenges that may arise in the future. So it is very difficult to predict the continuity of the Ukraine war or the Chinese scenario and their impact. We believe that investments in defense worldwide will be much higher over the next 10 years or so. And this shows a good opportunity for BW because they also sell robustly for this industry. There are many clients that are somehow exposed to these events. The current Chinese scenario is also a challenge because -- for the world's deceleration. But at the same time, the Chinese scenario with problems, where there are supply chains and increase of costs -- of logistics costs worldwide may bring us lots of opportunities in the short, medium and long term considering producing items in the country, which will increase industrial production, and that benefits us. There may be changes in supplies for the United States and Europe, mainly in the United States, where we have a history of decent volume and they might -- we might benefit from that. Some companies are already benefiting from that. And in terms of interest rates, that's necessary to control the inflation, and it will depend a lot on the demand and their possible impact. These are impacts that may occur that may be positive for Romi and they might also have negative aspects. But what I can tell you is that we're going to work effectively to respond to these opportunities and challenges that may arise in the future.

And the second question, in the domestic scenario, Romi understands that the reelection of the current President or the new candidate winning may cause any immediate impact in the future of the company?

Well, we don't talk politics. We're not partisan in our internal politics and public politics. So Romi specifically does not take a stance politically speaking. The impact will always be challenges and opportunities that will arise in the future, and they are always within our radar so that we can adjust quickly to any demand fluctuation that might happen, whether it's positive or negative. It is very difficult to estimate what the impact will be or the immediate impact. We have a sound order inflow for the fourth quarter and the beginning of next year. So I don't think it should have a significant impact on the short term.

Third question. If revenue growth should be maintained, the payment for shares will be a proposal kept by Romi in the future? Or will it concentrate on dividends or JCP?

Well, payments are very important for shareholders. They receive the bonuses at a cost, and this improves the shares and there is a fiscal benefit when you sell with the profit. This policy for dividends and JCP is even more important because the distribution is 33%, and we will always concentrate on maintaining that policy, except if something very atypical should happen but we will distribute the compensation and dividends that way. And of course, it will depend on what we do each year, and the trend is each quarter to distribute JCP because we're working on a quarterly regimen because of tax income -- of income tax. And this gives us a better position as opposed to a yearly regimen. So that's why we always reach the ceiling for JCP each quarter.

Next question from Shin Lai.

Congratulations on the results. How are you feeling about the demand considering a potential change in the political scenario? What about the interest rates? How does that affect Romi?

Well, whether the political scenario changes or not, as I've mentioned, we don't comment on politics, but interest rates, of course, are bad. It decelerates everything, including investments that obviously, inflation could be even worse. Perhaps the perspective for interest rates and the future quarters especially considering the past few months, we are observing interest rates with the trend of decrease and very well -- they seem to be well controlled. So looking into the future, investments may actually improve if we consolidate an interest rate reduction in the medium term.

Next question from [ Marco Carigari ].

I'm going to ask the team, the RI team to communicate with you because we're still looking into onshore and offshore. It's going to become a reality within 5 or 10 years, but there is still a long way to go for using cast iron onshore, and I'm not the most technical professional to answer about these differences and the use of cast iron for products onshore and offshore.

Next question comes from [ Mauricio Rahmani ].

Financial results from the company are recurrently positive in spite of net debt. Could you give us details for this performance? Should it be maintained over time?

Well, Mauricio, Romi for a long time, has chosen strategically to participate not only in the domestic market, but also other foreign markets. Exports currently represent a substantial part of our business, especially for Romi Machines. So here's what happens. We generate a volume of assets to be received in foreign currency. It's a substantial volume. And frequently, you see, what happens is in exports, we are trying to keep and evolving this demand, and that allows us to capture funds in foreign currencies, add a financial cost that's much lower. So we try to keep that equilibrium of the natural hedge capturing funding in foreign countries at a cost that, like I said, is often much lower than the Selic or interest rates in Brazil, especially in the current scenario. So even though we have net debt, the financial results, the financial revenues are finding equilibrium and actually surpassing the financial expenses. And obviously, there is some fluctuation due to currency exchange rates. There is no 100% natural hedge. So between quarters, there might be some fluctuation, but nothing too substantial. This has been the dynamic for some time, and that started when we had access to foreign financing lines, which is the way we're going to continue to go.

Next question from Shin Lai.

Could you provide us with more details about the machine lease business?

Well, we have allocated over 140 machines this year. We had leased 111 machines in the 9 months of 2021, and this makes us have a good portfolio in machine lease at the current moment. And what's interesting is that the lease business was for 1 to 2 years, but the vast majority of clients are choosing 2 years. And these machines, when we started the business in 2020, the machines now in 2022 are coming back to us. So we are renovating them, refurbishing them. We monitor them because they're all connected to the cloud, sending information. So we were already monitoring them and doing maintenance on them. So now they're coming back to us. It's much simpler maintenance as opposed to a used machine, which has given us a down payment for a new one. So now we are going to return them to the market more and more. This is improving our margins because not only do we get revenues from the lease contracts, we are increasing our revenues with machines that were leased and are being returned to us and available to the market again at very appealing margins. This has been very helpful for our business, and we expected to continue. And I hope that satisfies your curiosity for more details in terms of machine leasing.

Next question from Conrado.

Could you give us examples of what parts and products are manufactured for the defense market?

Well, not only for this industry, but any industry, everything -- the machine is a very generic machine. Whatever part you may need, whether it's aluminum or cast iron, stainless steel, any metal part will require a tool at some point of manufacturing. So that's an industry that must receive more investment worldwide in the next 10 years. I've had the opportunity to talk to several clients from BW a month ago, and they are all very optimistic in terms of increasing production for that industry. And all of them produce different parts. And of course, the defense industry requires a lot of metal parts. So it's a significant market, BW, because they have very specific high-precision machines, ends up having more means to serve this industry.

Now to Antonio's question. Circling back to cast and machine iron, automotive, construction, agriculture, could you give us more information in terms of competition and demand levels?

Well, thinking about the machining companies in the country, some of them are listed, some of them are not. And of course, there is competition and imports -- imported parts that are not manufactured in the country. Considering these markets this year to this moment, the demand is very high both in automotive and construction and even more so in agriculture, actually. All of our clients, which are also all known by -- in the market, have been working very robustly in these 3 industries.

Next question from [ Jordan Reiss ].

To what extent these machines that are leased are insured?

Well, when we lease the machine, the equipment remains to be our property, Romi's property. When you sell -- it's different from when you sell them. So for all lease contracts, we have insurance for the machines. That means that for all machines that are in objective lease, there is an insurance policy with a certain coverage for each one of these machines. So 100% of these machines are covered by insurers.

As there are no further questions, I'd like to give the floor to Mr. Luiz Cassiano for final remarks. Reminding you that Romi's Investor Relations department is available to address other questions and concerns. Please, Mr. Luiz Cassiano, the floor is yours.

Thank you, ladies and gentlemen, for participating in this conference call for the third quarter of 2022. And if you should have any questions, our RI team is at your avail. And I hope to see you at the fourth quarter conference call, which we have scheduled for January 31, 2023. The conference call will be held on February 1, 2023. Thank you very much. Have an excellent day.

The Romi conference call is closed. We appreciate the participation of all. Have a good day.