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

Good morning and welcome to the conference call of Romi, where we will be discussing the results of the Third Quarter 2023. Before continuing, I should say that this conference call is exclusively for investors investment professionals. Any statements that may be made during this conference call regarding the company's business prospects, projections and operational and financial goals are mere predictions 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 is worth remembering that this conference call is being recorded and held in Portuguese with simultaneous translation into English. Together with slides available on the Results Center of our Investor Relations website at www.romi.com/investors [ Investidores ]. During the presentation, all participants will be connected as listeners only, we will then begin the question-and-answer session. [Operator Instructions] With us today is Mr. Luiz Cassiano Rosolen, Chief Executive Officer. Initially, Mr. Luiz Cassiano will present the results of the third quarter of 2023 and will then be available to answer your questions. Now I give the floor to Mr. Luiz Cassiano.

Thank you, Raissa. Good morning, everyone. Investors and shareholders. Welcome, everyone, for being here at our conference for the third quarter of Romi. I'd like to start by highlighting our continuous dedication to improvement of operating performance of our yearly capital and investment in R&D. And that way, we're able to innovate our portfolio products and services and ensure our main purpose, which is to offer our clients the best opportunities and alternatives for the success that they can reach. Although we're going through a global instability moment. We strongly believe that our competitive edge will allow us to grow and bring value to all stakeholders. We invest significantly on innovative technologies, connectivity, big data, new machine generation, and all of this allows us to get the best of the market and harness the opportunities in Brazil and abroad. Our new businesses with PRODZ a fintech dedicated to the funding of Romi Machines is well established this year, although there's a volatility in the environment today that not only reduced the reductions in market but kept our margins strong in the business unit Romi Machines. I thank you all for your support and confidence at Romi. And now I will give you details of our results of the third quarter. Well, straight to Slide #4. Here, you can see the highlights. In this quarter, we had a gross margin of Romi Machines that is quite solid, which has contributed already for the 2023 year where we have a gross margin of 41.8%, which is 1.9% over the 9 first months of 2022. And we also have incoming orders for rental machines greater than the same period of 2022. That is an increase of 26.5% for such alternatives to clients have brought results who was and helped our clients to invest and produce better. BW Machines, we also have a solid increase of orders in the quarter, and this has an increase of our order backlog and many will be delivered in the fourth quarter of 2023 and others are ready for 2024. And the gross margin also has increased over the year of 2023. Our cash generation is also a highlight for the quarter, where there's a BRL 20.5 million cash generation, thanks to the new businesses that became solid and starts to bring cash as well as the reduction of capital during the period. We have BRL 7.8 million payment of interest on capital for the first quarter compared to what we had before. In release in June, and now in October, we have a new distribution. This has been a very important quarter for both Romi and BW, where we took part again in the main machine and tooling show globally in Hanover, where it takes place every 2 years, and we were very successful with our participation where we had many of our clients visiting us from around the world. And I should also highlight Romi's ESG, we have reached 8.1 at our score for the Ethos 2023 Report, much above the market's average. The environment in the domestic market is quite a challenge still. When we talk about the gross fixed capital formation, the investments on the second quarter, we see that is negative. We don't have a growth of the investments in the Brazilian market. And definitely, that brings to us many challenges, especially when we talk specifically about Rough and Machined Cast and Romi Machines. And for the installed capacity on Slide 3, it's much under what we had in the previous years. So we have average installed capacity utilization that's still reasonable in 2023, but a bit under what we had in the last few years. The Industrial Entrepreneur Confidence Index is still flat, and it has been since the fourth quarter of 2022, where we don't have an increase of confidence of entrepreneurs in our market, so it has been stable in the last 12 months. When we get into the details by business units, we can see that for Romi Machines, there is a profile very similar to what we had in 2022, maybe with some gain in terms of the service providers, which are the small machining companies and because of the new business of leasing, which are companies that do not want to have much capital invested, so they choose to have the leasing of the machine for their own production for a better production. Machine and equipment, we also see a better participation. We will have more in agriculture. That's where we had a steeper drop where we can see that this market, it has been a bit at a lower level this year. We did not deliver many machines in 2023 for these sectors. And I think for BW, we need to look strongly into the full year of 2023 once we have the deliveries of all projects, that would be in the fourth quarter. And for Rough and Machined Cast Iron Parts, we see that the wind power sector is still very low, very much focused on the current scenario. In 2023, we most likely will not have any more contracts for Rough and Machined Cast Iron Parts of wind power for us. And in construction, we can see greater participation. We have kept a good level compared to 2022. And for automotive there was a drop, and then there was some participation increase in agriculture in the first semester of 2023 was very strong, and we now note for the second semester of 2023, a reduction of the agricultural machine demand and most likely, we are losing some share of the revenue of this sector. So net sales per business unit, cast iron parts, because of the reduction of revenue losses share, Romi Machines and BW Machines gain share in 2023. If we look into the sales for geographic region, with the Romi Machine being stable. We have Brazil as our main market and the foreign market for Romi Machine feels the crisis abroad and we see that the demand for Romi Machines abroad has dropped near 50% this year. So Brazil gains share also within the Romi Machine Units and BW is still delivering -- the 3 machines delivered this year were to Europe. That's why we have Europes per share that is still important but for the fourth quarter, we will most likely have an increase with the U.S. with BW projects delivered there. When we analyze the order entry and backlog for this quarter, we see a fluctuation that is positive for BW, where was able for the third quarter of 2023, bring many projects and the backlog is quite solid. But significant part of the order backlog will be delivered on the fourth quarter, and we started already to build our BW order backlog for 2024. There are still challenges for 2024. We haven't completed it, but there are many projects undergoing where which we are working hard, and we should find these orders still within the year 2023. For Rough and Machined Cast Iron Parts, the order backlog was very low, mainly due to the agricultural reduction. And for Romi Machines, we have a reduction compared to the second quarter of 2023 and a bit more if you compare to the third quarter of 2022. Basically, these reductions are due to the reduction of the entry of order for the foreign market. There is a significant reduction of machine and tooling from Argentina, which is a country that is important for us and mainly in Europe, where we see a demand reduction for machine and tooling. The national market is still solid, always compensated by the new lease contracts throughout the third quarter of 2023. In any case, the order backlog for Romi Machines is still very solid, BRL 241 million and most of these orders will be delivered by this quarter. The profitability for the third quarter of 2023 were stable compared to the second quarter, but we will see that unfortunately, we have costs and Rough and Machined costs better in BW and Romi Machines. And we have something similar to the previous quarter and 25 points under what we had in 2022. So the operating profit, we end up having 1.5 dropped compared to the second quarter of 2023. And I'll get into the detail by business unit, so you can understand the impact of Rough and Machined Cast Iron Parts here. And including the profitability we have lost 1 point in the second semester of 2023, we pretty much kept the flat margins compared to the second quarter this year. So by business units, we can see that the revenue of Romi Machines a bit under. If we think about the first 9 months of 2023, but very solid margin and very much similar to what we had in 2022. Those are the 2 reasons which are the foreign markets that have tighter margins, have less participation in the revenue and the consolidation of machine leasing that -- and also the ones that are coming back and we're selling them in the market. So we are talking about machines that have been used for 1 or 2 years with a gross margin that is quite good, and that allows us to keep our margins at a good level. So that is both for net and gross margins. For BW, the bounce back has been quite interesting for gross margin. I'd rather look that into the last 12 months. So we can, that way, get into the details of BW. But in any case, the recovery of gross margin and as we already expected a positive EBITDA for the end of the year, for all the 12 months where we see mainly because of a level sales and support of parts, retrofit and services high in 2023, which makes us improve in a very major way our margins other than the use of our BW capacity in 2023, where it is at a much better level than what we had in 2022. In Rough and Machined Cast Iron Parts, the margins are very low so we will have less of a turnover of what we had in 2022 for this year of 2023, where we are making many adjustments in our unit so it can be more solid with processes that can be more robust so that we can be lean so that when we're back growing 2024, we will already work on good margins. We do expect in the through -- the conversations with our clients, that we will have improvement in this unit by mid-2024 and a production in 2024 that will be much stronger than what we had in 2023. We have items that are noncurrent, which are BRL 12 million of noncurrent in 2023 and out of the BRL 12 million, BRL 5 million on the third quarter alone -- third quarter 2023. Our financial position has improved. We have a good cash generation where we have an expansion of our debt with robust cash and part of our debt has a cost that is quite appealing to us, where we have most with Selic, with BNDES and with innovation programs and of investments and our cash is very robust, nearly BRL 300 million to be able to respond to our duties, and we will keep generating cash in the next quarters. So I added this slide to talk a bit more about the new business or the new businesses of Romi, where we talked to some investors, and we have a strong demand to understand a bit more about the machine leasing, about PRODZ and all of the effects that they bring. So this business is within the machine and tooling units because here at Romi, we don't look at this as a new business. We look at it as a new alternative to our customers, our clients. Our duty and purpose is to deliver to our clients alternatives and opportunities so that they can produce better so that they can produce faster so that they can run less risk and keep prospering. That is our duty that our clients can be successful. If we're able to reach that excellence, definitely, we will have at Romi much success, and we will be adding value to our clients. So we rolled out 3 years ago, the machine leasing, and these machines are all connected where we get much information from all machines and that way we're able to deliver to our clients a monthly leasing of these machines at a very competitive level. That way, we have nearly 400 machines that have been leased and we have over 630 machines leased over 700 contracts of 1 to 2 years or renewal of contracts from 1 to 2 years. And the way we see that to bring value to clients is to deliver a machine that is up to date, much more productive and new in this market. So any client that wishes to lease a machine will get a machine that is new in this leasing. We will be monitoring the machine. We will deliver to them a monthly amount for the leasing that is very competitive. And if they need a bit more of what they have delivered, they will pay for additional hours used at a contract price. So there will be no penalty for using the machine more, quite the opposite, we encourage them to use the machine as much as they can, since they are all connected. We receive much data from each machine, not only in terms of the ROUs, but much data that -- it's important for us to have a better product and to ensure mainly the availability of these machines to our clients and ensuring the availability we are able to ensure as well that clients can keep manufacturing what they need, and at the moment, they need the most. And that way, we're able to monitor and ensure the availability of the machine through the Romi Connect. We use AI to go through the analytics have the detail of the data understand where the machine is at. So we can always work on the machine predictively to ensure the availability and the uptime of the machine. After the contract, the client has the choice of leasing another machine always new or acquiring a new Romi Machine. And this machine, the one that was leased comes back to Romi, where we use our structure for the retrofitting of the machine. And today, we use this machine to get to a low-cost market, which before we were not present. So we are very competitive in selling these machines to this new market that we're in and where before our share was very small. It is clear that the clients that would buy this secondhand machine, many times, they need some financing. We have one that is very competitive and stable with stable installments at a set amount where we can have the financing 12, 24 or 36 months using the expertise that Romi has for credit analysis of the client. And also the proximity. We know most of our clients, we're very close to them, and Romi shows in Brazil to have direct sales and also our own service on the machines. And so that makes us be close to our clients, and we can analyze their credit, and we can feel comfortable to offer the financing of the machines to these clients. It's fast, flexible, adjusting to their cash flow. In that way, we closed a circular economy, and we use this machine in different moments at different clients the best way possible. Bringing much more value to the client because they lease it, they are able to produce with and they find alternatives to produce better to replace an older machine and to have a response time to the demand that they have for machining. In that way, they can have the rights of calculations for the clients in a way that can be very transparent objective. And that way, we are able to encourage the industry to find alternatives and find ways to better produce. And this has been growing in the company and to meet the purpose of Romi, which is to find alternatives to our clients to produce better, to be successful, and that's why today, they have Romi Machines. And to conclude, we'll talk a bit about the capital market, hear the share performance of Romi. We shall recall that 2021, we started to take part in many index, so we had a demand that was very strong. But in any case, this is the performance that we've had in the last 2 years. And now I'd like to thank you all for taking part, and I will open to Q&A. I'm available.

[Operator Instructions] Since there are no questions, I would like to pass the floor back to Mr. Luiz Cassiano for final considerations. Oh, there are just new questions now coming in, okay? Okay. So the first question is from Kevin, [ Cooney ] Investor. And the question is the drop in margin of revenues compared to the third quarter of [ 2022, ] may mean a drop in distribution for the next quarters? Are there expectations and compensation for the delivery of machines forecasted for the fourth quarter of 2023.

Good morning Kevin and thank you for your question. Romi has a policy of dividend distribution where it's 33% of the net profit for that period. So we carry on with such distribution so if we have a reduction in profit, we can have a reduction in distribution of dividends. But 33% is our goal is a minimum. And if there is no major project to invest, the decision of shareholders might be to have more than that amount, but that's the policy for distribution.

The second question comes from Carlos Ramos, Investor. I'd like to know if there is any plan to rebuy shares by the company.

No, today, we do not have any plan to buy back shares that have been authorized by the company.

And third question comes from [ Patterson Luiz. ] I would like to get more details on the leasing business within the Romi Machines business units. What is the weight of the installments in the results?

The leasing in Romi Machines business is very important. It is a service that we deliver to our clients where we give really a great opportunity. But what's important to say, [ Patterson ] that as a whole, we can't see this business separate from Romi Machines business. We do have some managerial separation. But if you see that when we are leasing a machine, we're trying to show an alternative for our clients to produce better so they can be more competitive and produce and be more successful. As I have a machine leasing to the client of 1 to 2 years. And after that, the machine is back to us and we retrofit the machine and we sell it as a semi new which is another revenue coming from the leasing business. So it is very hard to tell you the numbers specifically because in leasing, we have many selling businesses coming out of it. So for us, any number, I'll say will not show the purpose of that business perfectly. But we would already like to detail some numbers, how many contracts that we have leased, how many for the quarter within our release -- earnings release or you can see there the detail of entry of order backlog. And the other question by [ Patterson, ] with the retailing plan of leased equipment funded by Romi as 100% by us through PRODZ, which is a subsidiary fintech, 100% owned by us and today with Romi's Capital.

And how is delinquency?

Well, it is very, very low. And we have some delays from some clients, but they are quickly back on track. And also because for the most part, these machines, I mean any type of delay of the machine payments, they can't use it to produce. So there is no incentive to have a delinquent status for the leased machine or the semi new.

The next question comes from Fredric [ Randomelo ]. Congratulations for your results. I'd like to know if Romi is studying the entering other energy sectors other than wind energy. Can you detail the role of Romi in this sector.

Romi furnished much to the wind energy 2 parts, the hub and the mainframe as we call it. So they're very heavy parts that we manufactured until the beginning of this year for -- the wind energy generator. And we have no orders from this sector. And we don't see in the short term any new order place. Maybe for 2025, we can have. And what we have been doing is still working strongly to have other heavy parts for machine that were specifically for this sector. We are already being able to do that in many aspects. And we want by 2024, be back to have profitability and have an increase in the production of machining, the heavy ones and also the lighter one. We have the flexibility to transfer some part of the light machine cast parts and be able to improve the parts. So we believe that some share, we will be able to have for 2024, some new parts that will come from 2024 and once we have a demand back to normal, especially now for the agricultural industry, we will have in 2024, a bounce back for the machining margins, and we are quite confident.

[ Marco Karikari. ] Is the restructuring of the machining areas, it's fully completed. What can we expect for 2024 in terms of performance and margin.

We still have some work to be done to improve profits and some restructuring for the fourth quarter, and we have been doing that in a way that is responsible, continues according to demand oscillation. And for 2024, as I mentioned, the expectation is to have an improvement in performance and positive margins for the business units in 2024.

[ Patterson Luiz ] What is the expectation of the company in the business scenario when it comes to the tax reform?

It is very hard to explain what is our opinion on tax reform because you can always have some alterations and some changes to the reform and that somehow can have a positive or negative impact to Romi. But if we talk about the core tax reform points, at least it seeks to have a better balance of the taxes within the country. So as the manufacturing sector, which we are strongly participating and all our clients as well, and they're all manufacturing clients, we know that the manufacturing industry is strongly taxed. When it comes to the current system, we expect that there will be greater balance and we'll be more competitive. And once we do become more competitive, there is no doubt that we will be well-positioned to have better offers for our clients and become more competitive through the tax reform. So when it comes to the essence of the tax reform, it should bring a benefit to the industry in that way also to Romi.

The next question is from [ Christian Mattias D'Oliveira. ] What is the outlook of the company when it comes to the order backlog for the Romi Machines and BW, considering the economic challenges faced by Germany and also the competition with the Chinese imports.

For Romi Machines in the domestic market, we are a bit under the previous year, but not significantly. And we have been delivering to our clients new ways to produce a new alternatives as leasing and with a semi new that is back from leasing that way, we consider that the market in Brazil is at a very important activity for Romi Machines. However, Romi Machines abroad is where we have been feeling the impact when comparing to 2022. The exports to Argentina have dropped over 60% this year. Into Europe also, they have dropped close to 50%. And with a bounce back of the economy in Europe and maybe in Argentina in 2024, we should see a bounce back for Romi Machines in the foreign market. And for BW, it's not only Germany's challenge, where there are great ones, but BW works and delivers machines all around the world. There are challenges in China, where it has slowdown, but BW's well positioned. We have good projects in China for capital goods. We have good projects in Finland, in Sweden, for the land, the mining industries where we have great projects in the U.S., in the defense industry and mining industry. So we do have good projects in Germany as well. For the energy industry, we delivered one machine, we will deliver another one next year. For the defense industry also we will deliver one machine, and we'll deliver more for Europe. So today, for BW, we are very confident that we will carry on bringing in projects and having projects for 2024 and already working in some projects already with the outlook into 2025. Competition with the machines from China and Brazil is one that we have already been seeing for some time now. And whoever will buy capital goods will not just look into price, but the availability of parts for replacement at a fair price, service, reselling price of the machine because you can't keep that for -- always -- you will always have more productive ones in the market. So they look into many aspects of supporting for the decision. And I believe that Romi has been working in the last few years in a way that has been quite strong and very close to clients to show the competitiveness and to be a leader in the national market.

Rodrigo [ Kiraz ] Congratulations for the results. Two questions. The progress of the leasing business necessarily will impact the level of inventory at Romi increase.

So to answer your first question, what we have as an impact is actually the property equipment where we're talking about taking that as a part that is considered as property, plant equipment. And then we are able to treat it that way. But as the market becomes more solid, it will start consuming the cash of Romi, and we have a good cash generation in our operations so that we can finance the business in the same way to capitalized PRODZ and also those that buy semi new. And we are already in this quarter pretty much able to have cash generation and from the monthly leasing and plus selling the semi new one with the interest, we're able to be balanced. So from now on, this business as a whole right from the beginning, of the machine when we had it lease. And then when it goes to being sold, and we already have it balanced. So the operation itself is able to fund itself and its growth.

And the second question is, the current capacity is sufficient to support the increase of business in 2024 that you mentioned? Or will it be necessary some investment to increase Romi's capacity?

Most of the investments that we have continuously is to improve productivity, automation, digitization and that's what we have foreseen for 2024. When it comes to our plants, we have a broad and sufficient plant for any business increase that we might have into the future, both in machining, Romi's Machines and BW as well.

Next question comes from Kevin [ Kunia. ] With the exposure to the external market, especially the American and European markets, as mentioned, how important is the exchange rate variation for the business and how? And I consider the company as a brilliant business model and very proud to have it as a Brazilian company.

Kevin. We also feel just as proud and we work strongly so we can take that further perpetuate and be able to keep Romi at such level. It is a big challenge, but we all take on the responsibility. The exchange rate, is very interesting, your question here, because the exchange rate variation for the Romi Machines produced in Brazil and exported have an impact in the margin that is very important. So if we have an exchange rate at a high value of the real, we lose margin. If it's a bit more depreciated, we win margin. And why? Because we sell in the American and the European market, in dollars or euros, and we are not able to pass down the exchange rates difference in the market. So they will buy a machine according to the market price. So we hold this variation in our own margin. So when we have the exchange rate that is not favorable, which we've had situations like that, which were highly unfavorable where our currency, the real was highly valued. We feel that in the margin. And when we have an environment where the real is not valued I mean, we'll have a margin in the exports. And that is pretty much what we see in the dynamics. But in any case, it's very important and strategic to Romi to have a participation in the foreign market. However, that has been the impact that you can tell from the margin when you have this exchange rate variation.

Can you hear me, Luiz?

Yes, I sure can.

Well, Francisco here from [indiscernible] Capital. And I have 2 questions here from my side. And first is related to PRODZ, your fintech. I mean when it comes to machine, do you think that is easier for the semi new. What is the credit risk that you are working on when you do some financing for your clients.

Well, the way to do it, Francisco is the following: we get 20%, 25% down payment of the machine, and we sell it with reserve. And it's something we've been doing for decades. And for any reason if there is a delinquent clients, we'll block the machine they can't use it. And in any case, we go after this machine. And usually with this down payment, we already have a guaranteed debt quite good and favorable. So this has been working much in terms of the manufacturer. Also and PRODZ is also is something that is working on the delinquency is very, very low, nearly 0.

And just to add also in terms of machine leasing. I know that they are very different one from another, where the 10 many industries. But have you thought about any other type of machines in terms of leasing. Do you have a feeling of a yield, the average yield.

Well, when we lease the machines, it is an industry, that is a bit different, where we lease with 100, 200, 300 hours allocated depending on the machine, they might choose what -- path they will choose. And if they go over, they will just need to pay the additional hour according to the cost laid out in the contract. So the yield is very high, but we have clients. Let's see, for instance, a reaction capacity. So they have a machine next to it to have the machining of a part so that they can get back to operating another machine that is much more significant than they have in their plants. So we see machines leased that they use 50 hours, and they pay to us the minimum, which is always 200 hours. Why is that? Because we have a capital allocated there, and we need to have it compensated. So that's how we have been thinking when it comes to leasing. It's very different from other leasing businesses that we see in the market, which is a market on its own, just the lease business. For Romi, it was thought focusing on giving an alternative to our clients, so they don't have capital. So let's produce better. We re-lease it. If they need, for example, to have a reaction capacity, lets lease it to have it next year plan, so you can have this reaction capacity that's greater. Or a client wants to get into a new business and they don't know how to do it. Or what is the availability they'll have in this new business, and they don't want to run the major risk but lets lease it, let's have this until the new business if it works great and if it doesn't after a year, you can really deliver back the machine, obviously, if you want to deliver before there's a penalty because there's a cost to send, to install, to give the support and then bring it back. So it's not necessarily a penalty, but an amount that is fair for what Romi is delivering. So we work together running risk with our clients, and that is the purpose of the leasing business. That's how we see the leasing business in the company.

Well, since there are no more questions, I'd like to give the floor back to Mr. Luiz Cassiano for final considerations. Remembering that Romi's Investor Relations department is available to answer any additional questions you may have. Please, Mr. Luiz Cassiano.

Thank you. [ Grace ] and Thank you, everyone, for your participation for taking part. Fabio is not here with us because he has a very important appointment today. But for the next quarter, he'll be back with us in the call and our Investor Relations team is available throughout the quarter, you can reach us, and we can have your questions answered and share more about Romi to you. Thank you very much and have a great day. Thank you.

Romi's conference call has ended. We appreciate your participation. We wish you have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]