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

Welcome to Romi's earnings call, where we will share the results of the first quarter 2024. Before we proceed, I should clarify the earnings call is exclusive for investors and investment professionals. Eventual statements made during this earnings call in relation to the future perspectives, projections, forward-looking statements are mere forecasts that are based on the Board of Directors' expectations in relation to the future of the company. These expectations are highly dependent on market conditions and the overall economic development of the country, our industry and international markets and are therefore subject to change. Please note, this conference 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 in the web address www.robi.com/investors. [Operator Instructions] With us today are Mr. Luiz Cassiano Rosolen, CEO and President; and Mr. Fabio Taiar, CFO. Initially, the executives will present the results of the first quarter of 2024, and we'll then be available to answer your questions. I will now give the floor to Mr. Luiz Cassiano.

Good morning, ladies and gentlemen, it is with optimism that we open our Romi's earnings call. We will detail the first quarter 2024 details and the outlook for the remaining of the year. 2024 began with a few challenges, but also some very positive highlights. We presented a solid cash generation this quarter and above all, a good volume of new orders. We ended this quarter with an order backlog, 20.8% higher than in December. Our machine rental solution proved its ability to meet our customers' needs, and we had our best quarter with 96 new machine rentals. One other positive highlight is the recovery of our operation in Germany, B+W as shown by the consistent increase in the new orders and the improvement in operating margins. This success is the result of our team's efforts to understand our customers' needs and adapt our strategy accordingly. Today, we have a solid order backlog to be delivered in the next 2 years. In the Rough and Machined Cast Iron Parts Unit, we are still facing important challenges with the reduction in the demand for spare parts in some segments. We are firmly committed to improving the operating efficiency of this unit and in searching for new revenue alternatives. The fundamental pillars of Romi strategy continue to be strengthened. We continue to invest robustly in innovation and human development. We are confident that our competitive edge can provide our customers all the necessary conditions for a successful future. I will now give the floor to Fabio, who will share the results of the quarter. Good morning, Fabio.

Good morning, Cassiano, thank you. Good morning to all. Thank you for joining this earnings call where we will be sharing the earnings results of the first quarter 2024. I will begin by walking you through the highlights in the first quarter. As Cassiano mentioned, in Romi machines, we had incoming orders for rental machines that were very robust, our best quarter in terms of new order entries, and this is a solution that is increasingly consolidating and proving to be a very competitive solution for many different needs from our customers. Considering including volatile and uncertainty environment, the solution is proving to be an excellent alternative for our customers to actually start projects, they would not be able to start if the only option they had was to acquire equipment. I should also point out when it comes to machine red falls, a very significant aspect regarding these customers that rent Romi's equipment and then sign a new deal with Romi. This comes to show that this product has been providing more competitiveness to our customers. As far as the B+W Machines or Burkhardt + Weber Machines, it was a very good quarter. The net operating income had a 141% growth compared to the first quarter in 2023. I should also mention that the revenues for BW this year is still more concentrated in the second half of the year. However, this increase in our order backlog that we have been observing over the past quarters has driven our revenues to increase quarter-over-quarter, and there is a significant evolution in our operating margins for this business unit, in B+W Machines. Our first quarter ended with over BRL 300 million in order backlog with significant volumes in new orders in the first quarter, '24, which has by the end of the first quarter presented a growth when compared to March 2023 by 61%, which educates a positive outlook for B+W for 2024 and 2025. in the overall context, when we consider the order backlog by March 2024, we reached BRL 590 million, which indicates growth compared to the first quarter '23 and mainly this backlog -- well, by the end of December '23, we had a 21% growth, also looking at Romi Machines and B+W Machines. We have also declared the interest of our own capital, March 25. Payment was made on April 10, BRL 10.6 million, and in the first quarter in 2024, we also had the bonus of our shares with the capital increase in March and April. And finally, the ratification of our commitment with ESG actions, and we also generated and shared a thorough report of our ESG-related activities for 2023. And now looking at the macroeconomic educators, 2023 was a relatively stable year with a slight reduction decline in terms of gross fixed capital formation. And over this period, the GDP, the industrial GDP were driven mainly by the agricultural segment, especially the first half last year. Looking at this retroactive illustration. And we are now still facing certain challenges in this environment, but still firmly believe that the sales of machines and new solutions, such as rentals and resales of machines and our fintech have provided us with alternatives to capture opportunities provided by the market. And now looking at our installed capacity. We can see that in 2024, there is a solid utilization from the industry by large. And this is something we do see on a daily basis among our customers. Most of our customers are continuously operating, and this can be seen on the slide, 68% of the installed capacity is being used. Looking back from 2017, it ranks among the -- well, among the 2 or 3 better year beginnings, ever since. And here, we're looking at this chart, looking at the reliability levels since October 2023 or 2022, rather, the confidence index has reached almost 63 points. It then had a slight decline. And now it is quite stable once again, not much fluctuation from 51 to 53 points, which indicates that the industry is using the installed capacity, is operating well. Still, there are uncertainties in the domestic and external markets. And there is a lack of future perspective when it comes to our customers, the manufacturing plants to feel more comfortable to make new investments. And these were the segments that actually placed orders for our machines and Romi Machine spare parts. And here is the largest customer base, machines and equipment. Well, there's a wide range actually and a very diversified range of sectors. We have service providers as a very relevant customer base. Automotive industry had a slight decline. It was more sluggish. And when it comes to commercial vehicles, it is still reasonable. And the key highlight for the quarter in aerospace, the aerospace, aeronautic industry. Well, this is a segment that had a moderate growth for many years. And now 2024, it is demonstrating an important acceleration in terms of demand. And we expect for the demand to continue over time at reasonable levels, at least throughout 2024, 2025. In BW, we delivered a technology solution in the first quarter of 2024 alone to one customer operating in the defense sector. And when it comes to Rough and Machined Cast Iron Parts, we -- well, here in the energy industry, we have been attaining important result of the reduction in demand for large spare parts in the energy sector for some quarters now. No spare parts were provided to this industry in this quarter. Agricultural machines also had a decline. We had maintained adequate levels by mid-2023, and then there was a decline. We have observed a decline as of the second half last year, and it is the same this quarter. And these 2 segments that have actually grown an increase in participation are the commercial automotive industry and construction industry resulting from a significant decline in agricultural machines and the energy sector. As regards the market share, the share of every business unit in our sales, Romi Machines remained stable. And Rough and Machined Cast Iron Parts had a decline in sales of roughly 50%, causing this unit to present a decline in the results, the consolidated results. On the other hand, we had a significant increase here in our revenues, in our operating income going from 6% to 18% in operating equipment. A solid portfolio here. The trend is for BW Machines to become more representative over 2024 in the consolidating income. As for the geographic distribution, Brazil has a smaller share in total of our income for 2 different reasons. We have in the domestic market, we are seeing a reduction of 50% in our sales and also a reduction in the Romi Machine sales caused by the volumes -- well, the backlog volume that we concluded by December last year, causing for Brazil to lose some of its participation, some of its share in sales. We see the United States with a higher growth in sales and mostly from BW with sales for the defense industry through a technology solution that was developed by BW in Germany and exported to our customer in the United States, Latin America remained flat. So to speak, the positive message and the positive takeaway is that Argentina, which is a significant market for us in Latin America has now in March began to attain new goals in terms of permits for exports. And should this trend continue, which would probably have higher trade volume -- sales volumes to Argentina. Europe also presents a slight growth resulting from the BW sales increase. In terms of incoming orders, the first quarter of 2024 with Romi Machines is BRL 178 million in accounting order. So 10.7% below the first quarter in '23. And it's important to point out that this decline was caused basically really by the external market, which is still very timid, Latin America, the European market, when it comes to Romi Machines. And in 2023, one of the fares, the plastic fare was held in the first quarter. And this year, both fares for machine tools and plastic machines will be held in this year, this semester. Therefore, we may conclude that the first quarter of 2024 was somewhat higher than the first quarter '23 when compared to -- well, quarter-over-quarter as we observe a significant growth. BW as mentioned, has also had reported volumes with new projects, and we have already fulfilled our 2025 portfolio for BW, almost BRL 7 million in the first quarter '24. And Rough and Machined spare parts are presenting our greatest challenges. The ag industry is still sluggish, just as the energy industry. And compared to '23, there was a 16% decrease compared to the fourth quarter, which was stable. And here, we have less visibility in relation to this recovery. In total, we about to BRL 298 million with new orders in the first quarter, a significant volume above the first quarter in '23 and also the last quarter last year. With the new significant incoming orders, we have been able to improve our portfolio. In December, Romi Machines presented a 34% growth which makes us more optimistic in relation to this business unit in BW. As mentioned, for 2024 portfolio, it had already been made up. And with the new incoming orders, we will amount to an important portfolio for 2025. So the outlook is very positive for BW. In Rough and Machined Cast Iron Parts, we have a stable portfolio compared to December 2023, which also indicates flat new incoming order levels. We had BRL 595 million in our first quarter -- almost 25% above December results, which is significant and also higher than March 2023 results. As far as our margins had results in 2024, the gross margin was 29.1%, below the first quarter in '23. We'll also look at all the business units in a moment, and with a significant reduction in performance in Rough and Machined spare parts activities resulting from the lower volumes. We have, of course, a fixed volume and we need to make better use of our installed capacity. Romi Machines also presented a slight reduction that we will look at more closely in a moment, and BW on the other hand, had an important improvement increase in the same period. Overall, we had a reduction in the operating income of almost 90%. The gross income was also lower, BRL 61 million, roughly BRL 25 million below the previous results. Looking at operating expenses, which are more fixed in nature. There is a more significant reduction in terms of EBIT and EBITDA and EBIT from EUR 31 million to BRL 4 million, and consequently, the margin from 11.9% to 2%. At the same time, we will see something similar on the EBITDA of BRL 45 million to BRL 18 million, with reductions in margin, in volume and gross margin, causing also a decline in the EBITDA generation. In net income, we went from 30 million to BRL 9.2 million, a reduction that is lower than -- we normally use in JCP quarter-over-quarter, expenses, no expenses with income tax this quarter, but a reduction from 11.6% to 4.4% in net margin in the first quarter of 2024 compared to the first quarter in '23. And here, we can view the performance per business unit. Romi Machines had a slight reduction in terms of sales volumes, resulting from a smaller portfolio or backlog starting 2024 compared to starting the beginning of 2023. The entry backlog, the order backlog remained solid for the quarter, but for deliveries in the second quarter this year. With this reduction, it is also important to mention that we maintained the gross margins at solid levels, 43.2% compared to the fourth quarter last year with over BRL 200 million sales, 42.2%. That is despite lower volumes, we actually attained a slightly higher margin and growth in terms of the rental business, share, which provides for sustainability to this margin. In the first quarter 2024, there were 2 major impacts that actually caused the margins to differ from the usual levels in the past years. Basically, the domestic market and the extra heavy machines that were delivered, which actually had an impact on our gross margin. And looking at the EBITDA margin and the volume reduction and higher dilution of the operating losses. EBITDA went from 31.9% to 21.1%. However, the message, the key message here is that margins, especially the gross margin has been preserved. We see we have a higher -- a larger portfolio, a growing order backlog. And therefore, we should recover our volumes going forward in the next quarters with the lower operating expenses and our EBIT and EBITDA margins will be recovered. BW had presented an important growth in operating income, using its full capacity at the moment, operating capacity in terms of services, spare parts, retrofitting, these areas are doing very well, and we can therefore see a significant growth in sales, gross margin, EBITDA margin, which in the first quarter is positive already with a very relevant evolution when compared to the first quarter in 2023. And as mentioned, we see a reduction of 50% of our sales, mainly from the energy and agricultural industries and therefore, a lower use of the installed capacity, lower production levels, which hurt our margins, both the gross margin and our EBITDA. And this is also a highlight I would like to mention cash generation. In the first quarter, we usually -- well, the first half of the year, we usually use for cash because we're, of course, replenishing our inventories, we attend the fares in May and the first half of this year was slightly different. We have been able to allocate working capital and have, therefore, generated BRL 16 million in the first half, reducing the net debt from BRL 69 million to BRL 63 million. We ended the quarter with over BRL 300 million in cash, which is sufficient to actually settle our debt throughout this year. So in financial terms, the company has a very solid position. In terms of our share performance in the past 2 years, our performance was slightly above the IBOVESPA Index 4.4, we had 8.6%, so resulting from the bonus payout. And these were the key highlights we wanted to share with all of you today, and we will be available to entertain your questions. Thank you.

[Operator Instructions]

We have one question from Mateo. I will read the question -- 3 questions actually, and answer them. Why were the BW margins negative? Which are the margins that can be sustainable reached over the next quarter? Well, the margins were slightly negative for BW. But the first quarter is normally -- will be more challenging for BW. We normally say that we have to consider BW throughout the year. This is a business that had around EUR 45 million -- EUR 42 million to EUR 45 million over the year in sales, annual sales. So it is true. In this quarter, we have only had one project, but it was solid because services were sustainable in the quarter. We are growing also in terms of spare parts and besides this major project that we had. And considering BW by large, and throughout the year, we have a solid portfolio, a solid order backlog and solid sales volumes. We should have a positive result for the year. And a second question, in Machine Rental segment, what is the greatest bottleneck in your opinion in order to grow the segment? Would you say it is finding new customers or the working capital of Romi? Well, there's no working capital bottleneck, whatever. Our working capital has been allocated consistently to the segment. We are not our chain for new customers. We are actually searching for -- we want to find potential Romi customers that will actually benefit from the models, the most from the model that we can offer. We are not actually in fact, driving them to either rent or purchase a machine. We want for our customers to manufacture more, to produce more, to produce new machine instead of a 10-, 12-year renting. The productivity of a new machine is beyond -- is above 25%, depending on the application and be even higher. Therefore, we are aiming at providing our customers more share details in terms of rental opportunities so they can make the best possible choice for them. And third question, can you please make a comparison between pros and cons considering your customers view point comparing FINAMI credit line or renting a machine from your company? Well, there are many different possibilities for customers in terms of wealth the FINAMI product. In simple terms, I would say it will all come down to -- it all comes down to many different aspects related to the customer. Customers may choose to rent the machine without allocating any capital. They will pay rent with less than 2% of the machine value instead of purchasing the machine, they would pay -- they would have to make a down payment of 20%, 25% of the machine value, and they would rather be able to use these funds to pay for working capital or they would allocate these funds in different projects with good returns. So this is something they may choose to do. And of course, if they have the cash and if they have the need to use the machine for 5 to 6 years, maybe it would be best to purchase a machine than renting. So rental, we say usually for 2 to 3 years with lower risk, they may rent for 1 year to see if it works for them, renew the rental contract standard the factors we're providing our customers with more alternatives to increase their production for a better production. There's no reason for our customers to produce with 10-, 12-year machines. Machines in Brazil are mostly older. There is no reason for our customers to use older machines that are not as productive if they have the alternative to rent newer machines. It will all depend on, of course, providing our customers with this option more and more. Next question by Christian Mathias. Congratulations on the results. Could you please elaborate more on the prospects for new entries, order entries, for the domestic and international markets and the factors that explain the strong decline in the margins in this division this quarter? Considering Romi Machines, the margins in the first quarter actually are solid for a first quarter. The first quarter '23, we had some particular points that drove margins up. We had heavier machines in a different kind of mix. However, this being said, the margins for this first quarter, considering our sales that were lower for Romi Machines in the first quarter was quite solid, even better than the 4Q '23 results. And as for the outlook, we had a good solid entry backlog and order backlog in this first quarter as the exhibition for plastic machines was held in March last year. This year, it will happen to alongside the machine tools in May in Sao Paulo. This is a commercial trade fair where we signed many deals. Now we did have positive entry levels in the first quarter. And in rentals, we had a record level for new machine orders for rentals in this quarter. And of course, some are delivered in this quarter, but most of them will be delivered in the second quarter this year. This alternative is providing our customers an interesting possibility to ramp up their production levels and therefore, the order entry this quarter was good. And we are also -- we have a positive outlook in regards to the fare that will be held in May in terms of leasing opportunities. We are doing quite well in April already. In regards to the international market, we are having more challenges in Latin America, Argentina, mainly. But as we said, things are improving. We have received a few orders in the first quarter. Now some more coming in, in April. Argentina is on the way to recovery, and we hope they will consolidate and improve in terms of entry levels, order entries from the external market. Next question from Luis Antonio Callazan. I would like to better understand what drove the company to invest in Villa Romi Residence and if you will continue pursuing this. Well, Villa Romi Residence, Romi has always actually had all its assets within the company, Romi S.A as properties. And Villa Romi was an adjacent property. The property is adjacent to our plant, which was part of our assets, our fixed tax asset. And in order to monetize such assets, mainly the nonoperating assets, we actually made a partnership. And with our partner, we created Villa Romi Residence, which actually has been generating cash and has been very important when it comes to monetizing nonoperating assets from Romi, but this is not our business, and we have also separate results. These results actually are not related to our operations. Next question from Silvan. In terms of order backlog and how long and how long will these values become actual operating income, how many of your customers pay upfront? This will vary depending on our 3 different business units. In Romi machines, for instance, this order backlog is very significant for the second half, a few of them for the third quarter. These are general as machines. The delivery dates range from 60 to 90 to 120 days. If there are heavier machines or specialty machines, could be even 1 year. So this is more or less what we have for Romi Machines order backlog and delivery. We have to look, of course, at taxes, and we have not computed the sales of spare machines and spare parts. In this order backlog, we also have included the rental contracts. If there are annual contracts, it will be 1 year, 2 years or also 2 years. But as for now, order backlog, well, 70% should be delivered over the next quarter. There's no -- well, the cancellation for stages is normally very low, and there's a 25% down payment that customers should make in this portfolio. In BW, it's slightly different. They have an order backlog for 2024 and 2025. In this order backlog, we have important amounts, important values for 2025. The BW order backlog is more robust and long term, so to speak, and the machines and projects for 2024 with BW are more actually concentrated towards the year-end when we should have in coming profit or sales from these projects. And in actually Rough and Machined spare parts, we have short-term order backlogs because there are no orders whatsoever for the heavy spare parts. When the wind industry was solid, this was a more robust order backlog. But now this has changed. The scenario has changed, so we have to focus on the next 3 months. Next question, Anonymous. Which segments in the economy are driving your results in terms of new machine sales? Well, as mentioned, automotive, commercial and aerospace are doing quite well. We see good opportunities there throughout the year in aerospace, and we are excited with these 2 industries. But in the second quarter, we have been receiving -- well, we have had a positive entry level, order entry level for new machines. Next question by Rafael Filo. You've mentioned the order backlog for Rough and Machined spare parts was hit by -- as a result of the energy and ag industry. Are there plans to change this situation around which measures are being considered to go back to the 1Q '23 levels. Yes, we are focusing strongly on our operations to continue improving our operation. Our operating income. And as far as sales, we are focusing on engineering and new project, new part numbers. We are together with our customers and new customers, we are developing our numbers for Rough and Machined spare parts. This, of course, takes some time. It might take more than 1 year before we can actually attain regular production levels. We have to run tests and continue manufacturing. And we'll get into the system, the customer systems, where they will receive our releases until we become a regular supplier, but we are working to improve this. Of course, when the ag industry recovers, this will also evolve faster and our revenues will also increase faster, but there is no short-term expectation for the ag sector. In the energy sector, we have been talking to some wind power customers with the intention to become, once again, they're regular suppliers. We are optimistic for next year but not for the short term. Conrado Carvallo asks, considering the geopolitical current scenario. Well, the weapon defense market might have increased demand. Could you provide more details on how Romi might aim at this segment besides what has already been explored in terms of U.S. exports? Yes, the defense industry, well, in this case, BW, mainly has products that can -- it can supply to this market. It has been supplying products to this industry, B+W Machines, BW has already delivered machines this quarter. There are new projects, not necessarily aimed at the defense industry, but other industries that may have positive impacts and are related to the defense industry, government defense. And BW does have a few products in its portfolio. This is important. It is an industry that, of course, will impact machines and spare parts and mostly BW. We have one more question from Mayara de Paulo. Considering the new configuration of the segments and the Rough and Machined Unit, what are the prospects for the automotive sector order backlog, 2024, the highest number in the domestic market? The automotive industry is still solid in 2024. Our decline results mostly from the wind power industry. 2024, should not have significant revenues from this industry. The agriculture industry is very important. Romi has had a major decline. These are the 2 industries that drove our reductions in sales this year. One question from Christian Matthias regarding the Rough and Machined Unit. What do you expect in terms of reaching breakeven considering the TO rating ag machines market since the past quarter? Are you going to make up for this with other action in automotive? While the recovery is slower than we expected in the second half last year, we reviewed our releases. Well, the demand has had a further decline, and we are now working strongly to attain this breakeven as soon as possible. The recovery is slower than expected this first quarter in 2024 is a fact, but we are working to find new revenue alternatives to reach the breakeven and, of course, to recover our positive margins. One question from Nelson Nieto. Could you share which U.S. company acquired B+W Machines, and share more details about these orders, 100% other sales resulting from this operation? Well, we have solid results with spare parts and services for BW throughout the year. For this company, I think the sales represented 40%. BW has recurring income from retrofit and sales of spare parts. This is very important. We do not normally share our customers' names. We do not disclose their names. This is a standard procedure, but these are major recurring customers of BW both in Europe and in the U.S. and also in Asia. These are important customers that know BW, have known BW, have a long-standing relationship with BW.

One of our participants has raised their hands. We will open your microphone now, sir, Ivan Criser. You may proceed Ivan. Your microphone is open.

Ivan, do you wish to ask a question? Ivan, you wrote your microphone is not working. Would you like to write your question in the Q&A box? We have a question from Ivan. On the optimistic reviews of the assumptions after the interest rate increase of the past days -- well, I don't know if I'm clear on the question, but considering the interest rates increase, if we -- actually if we have a reduction of the interest rate over the next months, we will consequently have a more positive outlook at Romi because our customers will be willing to invest more in capital good and we'll be willing to have more capital gains. Now on the other hand, if interest rates increase, it will be the other way around. Our customers will not be willing to invest in capital goods. This is more or less how it works. One more question here coming in from Miata. I'd like to further understand more about the commercial automotive segment. The Rough and Machined Unit supply directly the assembly lines, the OEMs or spare parts or both? Well, it's both. We do it ourselves and there are second tiers that also supply these spare parts to OEMs. These are the 2 different customers. Sometimes, we supply to the OEMs directly. In other cases, we supply parts to other businesses and that make up, well, groups and in turn supply the parts to the OEMs. We do not operate in the truck replenishment or spare parts segment.

Considering there are no further questions, I will now give the floor to Mr. Luiz Cassiano Rosolen for the closing remarks, and our IR department will be available to take additional questions. Over to you, Mr. Luiz Cassiano Rosolen.

Thank you Melissa. I wish to thank everyone for attending the first quarter 2024 Romi earnings call. We will be available to take additional questions, both Fabio and I. And we will meet again on July 16 when we will have our second earnings release call of the year. Thank you, and I wish you an excellent day.