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

Good morning, and welcome to the Romi conference call, where the results of the second quarter of 2025 will be discussed. Before proceeding, I would like to clarify that this conference call is exclusively for investors and investment professionals. Any statements that may be made during this conference call regarding the company's business outlook, projections and operational and financial targets are merely forecasts based on the management's expectations regarding the company's future. These expectations are highly dependent on market conditions and the overall economic performance of the country, the sector and international markets and are, therefore, subject to change. Please note 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 Mr. Luiz Cassiano Rosolen CEO; and Fabio Taiar, Chief Financial and Investor Relations Officer. At first, they will present the results for the second quarter of 2025 and then they will be available to answer your questions. Now I yield the floor to Mr. Luiz Cassiano Rosolen.

Thank you, Julia. Good morning, ladies and gentlemen. Thank you very much for attending Romi's Second Quarter of 2025 Earnings Conference Call. In this quarter, we reported a solid order backlog with growth across all business units. At Romi Machines, the highlight was the operating margin with adjusted EBITDA of 23.8% in the first half of '25, more than 3% higher than the first half of 2024. We shall also mention the machine rental business. 107 units were rented in the second quarter of '25 alone, highlighting how this solution has been consolidating itself as an excellent alternative for our clients. At B+W, we -- our German operation, we once again recorded strong order entry, virtually completing our 2026 backlog. This reinforces the effectiveness of our strategy of delivering customized, highly complex technological solutions for sophisticated industrial applications. Our challenge now is to execute the 2025 projects, whereas the bulk of revenue is expected to come in the second half of the year. And the Rough and Machined Parts Unit, despite the ongoing challenges, we observed the first signs of recovery with some progress compared to the first quarter. We expect a gradual normalization of productivity over the coming periods. We continue to invest heavily in technology, in connectivity, and heavily in artificial intelligence and new generations of machines and most importantly, in the development of our team. The scenario remains challenging, but we remain committed to finding alternatives for our clients, strengthening our relationship of trust through the continuous delivery of solutions. We are confident that our differentiating factors will continue to generate value and sustainable results. I will now hand the floor over to Fabio, who will detail the quarter's financial results. Thank you very much.

Thank you, Cassiano. First of all, good morning, everyone. I'd like to once again thank you very much for attending our conference call. Starting with the highlights for the second quarter. From a consolidated point of view, we've had a net operating revenue of approximately BRL 316 million. This represents a growth of 7.1% in comparison to net operating revenues in the second quarter of '24. The biggest growth came from B+W Machines which is the fruit of better distribution of revenues throughout the first quarter of the year, although we still observe some concentration of revenues and of delivery of B+W result -- B+W deliverables scheduled for the second half of this year. Adjusted EBITDA amounted to BRL 27.7 million, a margin of 8.8%. And the highlight in this case comes from Romi Machines, although in comparison to the first quarter, we can also observe some evolution at B+W. Order entry is quite strong in this second quarter, BRL 333 million. It's a growth of almost 4% in comparison to the same quarter in the last year. And this case, the scenario the highlight goes to B+W Machines, which continues to bring in important projects for this quarter. Lastly, the order backlog is quite sound, BRL 866 million. That's a large increase in comparison to June 2024. We're talking about BRL 31 million (sic) [ 31% ] growth at B+W, the growth has been substantial. And almost half of this order backlog is represented by B+W. However, Romi Machines also has its own sound order backlog. Now moving to the business units as we were mentioning. In Romi Machines, the order backlog is about 28% larger than the same quarter last year, showing us that we have a significant volume of machines to be delivered in the next quarters, especially now in the second -- in the third quarter of 2025. Still talking about Romi Machines. Operating margins are the greatest highlight of this quarter. Our operating margin was 17.9%, which is a 2.6% increase in relation to the results from this unit obtained in the second quarter of 2024 where we had already obtained quite satisfactory results. And this evolution has a lot to do with the consolidation of the machine rental business and also with exports, which due to the real depreciation in comparison to other currencies namely the dollar, has also allowed for a larger margin in exports. Now when it comes to machine rental. In the second quarter of 2025, we've achieved an increase of 9.2% in comparison to the second quarter of 2024 with 107 rented machines in the quarter. Each day, we observed this business getting more and more consolidated, both in favorable macroeconomic scenarios as well and challenging scenarios showing not only how competitive we can be in a certain environment to the market, but this is quite a diverse business to serve our clients under several different circumstances when they need new equipment. Now focusing on B+W. We have again had a quarter with excellent projects coming in, and these amounted almost BRL 49 million. It's a substantial growth in comparison to the second quarter of '24. This has allowed us to conclude the quarter with a very sound order backlog. We're talking about BRL 455 million, 37.9% growth in comparison to the same quarter last year. 2025 is basically about executing things with excellency. And we have orders for '26 already. And this has been showing us B+W has been finding -- has consistently been finding alternatives to deliver customized solutions for its customer base. Other highlights in this quarter are that we have released our new ESG Report regarding 2024. We've also had the EXPOMAFE Brazil trade show which is basically dedicated to tools and machinery it happened in the beginning of May. It's a large trade show that has gotten us positive results, not only in terms of orders but also in advertising on new technologies. This is the largest trade show in Brazil in the industry and the results are quite favorable. And lastly, we've had the distribution of JCP, which is about BRL 16.8 million, and these will be paid in the second half of this year. Now moving to conjunctural indicators. If we analyze the first quarter of 2025, we still observe a scenario that's positive, both in GDP and industrial GDP now gross fixed capital formation was 9.1% in comparison, which is similar to the previous quarter, and if we analyze this figure, the 9.1%, this shows a significant impact in civil construction. Also, because there has been a large volume of export of platforms for oil and gas -- vessels for oil and gas. And we've also had invested in transformation industry, which is the 1 that's most directly connected to our equipment. Still talking about conjunctural and economic indicators. We continue to observe at least with the most recent data from May that the industrial activity is sound we've concluded May with capacity use of 70%. And if we look at the previous years, we are at the best levels, on average, we're 1% above. That's a very good level of activity. So we continue to see consistent industrial activity throughout 2025. Where we still observe some relevant challenges, though, is the aspect of Industrial Entrepreneur Confidence Index since the second half of 2022 we are observing a switch from optimism to pessimism, which turns at 50 points. It has been varying around 50, 51 But in the last months, the index has been decreased to 47.3 point level. And we observed that the environment and the scenario is slightly more turbulent and this is due to several aspects: political, economic and these aspects bring in more uncertainty to be considered. However, what we are observing is that the industry remains to conduct activities at a satisfactory level. Now in terms of our client base, for Romi Machines, we continue to observe diversification, which is typical of Romi Machines. That is way -- are present in virtually all sectors of the industry, machines in equipment, which is quite diversified, and this is basically 1/3 of revenues in the first quarter 2025 or the first half of 2025. And job shops is also a typical client for Romi. Automotive is very relevant within the industrial matrix and several other industries and sectors. So we are -- we continue to observe demand from several segments in the industry. B+W concentrates in fewer industrial activities when it comes to engines and systems, these are large-sized engines usually related to energy generation this is a very good scenario and B+W has developed and has been developing high complexity solutions that are highly competitive for this industry. And there's also been significant participation from construction and mining. Now moving to Rough and Machined Cast Iron Parts, what we observe in 2025. is a slight deceleration of commercial automotive industry. But on the other hand, agricultural machinery has been picking up the pace in this semester. And our perspective is that this sector continues to positively evolve, which also positively affects the demand levels for our Rough and Machined Cast Iron Parts Unit. Now we observed the net sales per business unit. And what we observed in the first half of '24 and '25 is a significant growth of participation in BW Machines, and that is because B+W has doubled its revenues and B+W revenues are better distributed across the quarters of 2025, although it shall be mentioned that revenues anticipated for the second half is still quite superior to the 1 observed in this quarter. So it will increase its participation Rough and Machined Cast Iron Parts remains stable and Romi Machines has -- had some decrease because of the growth experienced by BW Machines. Now in terms of sales distribution, Brazil lost some of its share in participation, especially because of B+W participation, which takes place completely outside of the Brazilian market. If we look at Asia, there has been a growth from 2% to 11%. And this is fully represented by B+W revenues. And United States, participation has decreased and this is a very specific scenario because in the first quarter of last year, B+W has -- had this relevant delivery of technology in the United States. This was not repeated this year. So the United States' share has decreased in revenues. Latin America is basically stable. And this is what we have been observing in the past 12 months. Some countries have had an increase in demand for machinery, especially Argentina, where we have consolidated presence. And Europe remained stable in comparison to the first half of 2024. Now the order entry and backlog. If we look at Romi Machines, we have brought in BRL 227 million in orders in the second quarter of '25. It's a 10% decrease in comparison to the same quarter of 2024. This decrease took place, especially in the domestic market, where the trust index is slightly lower. However, we also observed significant growth in the foreign markets, but this is also considering the low relevance in the foreign market. In spite of our growth, we can't offset the losses in the domestic market. Now in Romi Machines, we've had a growth of 6.8%. And this is both in the domestic market and considering exports. Now B+W once again, has brought in a significant volume in orders in the second quarter of the year just as when we see the accumulated over the semester, there has been an increase in comparison to last year. We've been observing a significant increase in demand, especially for large-sized engines, and this has been allowing us to consistently bring in new projects throughout the quarters. Lastly, Rough and Machined Cast Iron Parts, this is basically stable throughout the quarters. Again, there has been a slight increase when we look at the half and this semester has had that increase also because of the agricultural machines. But on the other, the other clients are quite stable. So we are looking at BRL 333 million in orders in total for the second quarter '25. It's a large volume. It's a 3.8% increase in comparison to last year. And when we look at this semester, we've reached BRL 755 million in orders. That's a 21% growth, almost 22% growth driven mostly by the Romi Machines and B+W machines. With this order backlog, we've managed to conclude June with a substantial order backlog of almost BRL 867 million. We've observed growth throughout all our business units, starting with Romi Machines. We concluded June with BRL 346 million, and that's a substantial growth in comparison to June last year, almost 28%. The same when we look at B+W, the growth is even larger with almost 38% growth and project and the pipeline for 2025 and '26 and Rough and Machined Cast Iron Parts has had more modest results due to the challenges experienced. However, when we look at the consolidated numbers, we also observed substantial growth of almost 31% in comparison to June last year in total, combining the 3. Now talking about profitability. This semester, we've observed a 27.4% gross margin. There has been a reduction in comparison to the second quarter of last year. If we look at the 3 business units, there's been an evolution in Romi Machines, especially due to the consolidation or larger share of machine rental within its revenues and also the expansion of margins through exports and BW in this period for comparison has also experienced tending a reduction in its margin, but we don't observe that in Rough and Machined Cast Iron Parts. There are difficulties we are still dealing with there. So in the consolidated results, there has been a drop of over 1%. Now talking about operating profit, we left a margin of 6% and moved to a 3.3% margin, gross margin, of course, after operational expenses that's larger. However, our margin now is at 3.3%. And in terms of EBITDA, we've concluded with almost BRL 28 million and although this is slightly lower than the second quarter of 2024. This is a significant evolution. And in terms of margin -- EBITDA margin, this quarter, we have achieved 8.8%. In terms of net income, although there has been a reduction in comparison to the second quarter of '24. We also observed an evolution -- a positive evolution in comparison to the first quarter of '25, where our net margin has reached 4.9%. In terms of profitability. We have the scenario by business unit. Looking at this first semester, there has been an increase in Romi Machines. And also a significant evolution both in gross margin and the EBITDA margin. We've finished this semester with 1 of the best results for the first semester in this business unit because of this evolution in May. As I mentioned earlier, it came mainly from the consolidation that has been taking place in the machine rental business and also the expansion of margin through exports. At B+W, we've observed a significant growth in revenues. It's almost doubled over the semester. We have not observed an improvement in margins, but mostly because in the first semester of last year, we have delivered a technology package to a client that was a significant deliverable and its margin was quite different from our usual margins, even considering pure sales, and that has impacted -- positively impacted the results in the first semester of '24. It shall be noticed that although revenues are better distributed across the quarters, revenues from B+W in 2025 are still more concentrated in the second half of the year, which gives us a positive outlook for B+W for the end of 2025. Lastly, Rough and Machined Cast Iron Parts revenues are relatively stable. However, there has been some deterioration in margin. As we've mentioned earlier, in the first quarter last year, we had the reorganization of the layout, the manufacturing plant and reorganizing production and that reduced our productivity and reduced our results. However, if we look at all the quarters, we can still see this is still a second quarter with a more negative result, but the perspective for the future quarters is of evolution, of course, compatible with historical averages, but an improvement on the less is expected for this semester. In terms of financial position, we've concluded the semester with almost BRL 247 million in cash and our net debt is at BRL 129 million. We've had an evolution of our net debt. And usually in the first semester, that's the behavior we expect because we end up receiving a large volume of materials and components so that we can assemble them and manufacture our machines so that we have those and inventory, especially for the orders that we bring from trade shows and the key trade shows end up happening in the first half of the year. So our perspective is but if we look at the overall scenario, inventory must stabilize and -- actually be reduced, which returns cash into our cash flow. Now as to our loans, most of them have -- were due already, and our indebtedness is still very low, which shows our cash position is extremely robust in order to fulfill our financial obligations. Lastly, about performance in our levels were below the Ibovespa index, although we still have a large backlog to deliver a significant order entry for the semester, the results have been significant. Also, if we consider the challenging macroeconomic scenario, the Entrepreneur Trust Index, but we understand that we are still a very robust business and with a very positive outlook for our operational results in the next quarters. With this, we conclude the presentation. And I'd like to thank you once again for attending, and I'd like to invite you to submit your questions for the Q&A session. Thank you very much.

[Operator Instructions]

Hello. Good morning. So the first question we have received is from Carlos Gamma. He says, I'd like to understand your perspective on the backlog's strategic management. We clearly see a history with multiple speeds. The strong profitability of Romi Machines in contrast with B+W. So the question is, how do the directors will balance the dilemma of allocating resources to feed the drivers for growth versus the efforts to revert a deficit operation. And looking into the future, are there any criteria for return over capital that if it's not reached a certain period, a certain period, it could lead us to reassess the scenario and our own operations. Well, that's a very complex question. And what I'd like to express is this is not a conglomerate business, where we look at the business unit results individually. We do have management for each unit and reporting for each unit is separate. But internal decisions take into account the medium- and long-term strategies and the synergies and relevance, each business has to the other businesses. So how can I put it in a in a streamlined way. Well, Rough and Machined Cast Iron Parts is very important for Romi businesses, but also for B+W in Germany. Almost 30% of our production in this unit is intercompany. So when you look at each business unit, you see the transfer of our production. And strategically, we believe that for the machine businesses to having control and mastering the technology with the ideal alloys for robustness of our machines is a very important competitive differentiating factor for the other units. So Rough and Machined Cast Iron Parts cannot be analyzed for its performance in isolation because of how much business and how much value it generates in our sales. But we have to look at the big picture of the corporation. And obviously, it bothers us a great deal to observe this performance in Rough and Machined Cast Iron Parts, and we have been working hard and taking the necessary actions so that we go back to achieving operational margins that add value to shareholders. Their reduction and then you observe in the slide with the business units, the reduction in Rough and Machined Cast Iron Parts was drastic in the last 2 years. We left from a scenario with BRL 500 million in revenues. And now we add inflation and everything else to reach BRL 177 million in 2024. And the biggest reason for this is that we have lost a very relevant industry for our Rough and Machined Cast Iron Parts, which is energy and wind power parts because of the lack of investment in this industry, wind power projects in the country have decreased significantly. And because we are in the beginning of the chain, we were the first ones to feel the impact. We are looking for alternatives and we are looking at how we can be more flexible in order to make better use of this unit's capacity and get to a turnaround point as quickly as possible. We're optimistic about this. And we don't have any intention to assess this scenario in a more drastic way so as to leave this business. Because although we manage these separately, they only exist because they are combined in our strategy. So I hope that answers your question. Thank you very much, Carlos.

Carlos. We have just enabled your microphone, so you can unmute yourself because we saw you raise your hand.

Okay. May I ask the question now?

Sure. Go ahead, Carlos.

Congratulations. My question is actually about the rental strategy. We can observe, it's already influencing the behavior of clients, which shows a drop of 10% in orders for Romi Machines. So that replacement of sales for rental and changing the company's financial profile. So what I'm looking for is for you to share with us the long-term perspective on this transition. More specifically, on return over capital of rented machine in comparison to a sold machine. How has your company been equalizing the need for investments in the short term? And in a tighter scenario with the consolidated results for machines.

Sure. I'm going to talk about the strategy and Fabio can tell you about the return, so as to as far as the strategy goes, well, first of all, thank you very much for the question. Again, it's an excellent question. From a strategic perspective, Romi doesn't have any influence in the decision made by clients. When we created the possibility to rent machines for our potential clients, this decision as to whether to purchase the machine or to rent it is 100% up to our clients. In fact, our sales team has the same variable compensation, whether they seal a deal for rental or sales. Now in spite of anything, we have a more profitable business in rental, but this decision is not Romi's. It's the client, and that's how we designed this business. Now as to how much this could impact the transition on the long run, it's hard to estimate. We have been observing a growth in the rental business but we also observed within the rental business, that more than 50% of businesses without a doubt, these clients would not have purchased a machine. So these are businesses that are not exactly overlapping. Of course, there are some businesses where the client had to make a decision within their cash flow, what they preferred. But the vast majority of them, over 50% of businesses are clients that would not have purchased the machine. And to rent the machine makes a lot of sense for those businesses. The rental business, in our case, only exists because we have heavily invested in research and development in IoT and connectivity in order to have this business ready by -- in the past few years, we've been making a lot of progress with this. And also data and structured data that is relevant, has been used to give us feedback, instant feedback and feedback for future generations, for future projects and especially to support clients. And what I mean by this is that it is not an isolated business. It is within the machine business because it actually does make part of the value chain and the clients' perception. And of course, in order to have this business it is financially sustainable, and it does generate returns to stakeholders. We use our own cash flow in order to deal with this. We have PRODZ, which is a fintech that funds that offers finance services for our clients because we believe to use our cash flow to fund this business brings the best possible results to our stakeholders. And then I'm going to ask Fabio to add to the answer -- to answer other parts of your question, but otherwise, I'm at your avail.

Well, once again, thank you for your question, Carlos. The rental business, if we analyze it, and although like Luiz Cassiano said, it's deeply connected to the machine business because the structures are fully shared between the sales and rental. But of course, we run the analysis and isolatedly. And if we look at the pure analysis and compare a cycle, of rental and then reselling the machine that had been rented in comparison to selling a new machine at the moment, our return over investment is better for selling a used machine in comparison to a new machine. Of course, there are many aspects that it will impact it. There is a longer operational cycle. We have to allocate additional capital, which is the funding for financing for our clients through our own cash flow and of course, the trust index ends up reducing that return, but it's part of our business. We've been managing that. On the other hand, what's important to notice is that the need for capital in this segment has been much has been great as of 2021. We started the business. And then in '21, it grew, and it's been growing ever since. But when we reached the end of 2023, we observed that if we generate free cash flow from this business, and we analyze it basically feeds itself. There are moments where growth is slightly larger, and it will require some additional capital. But the rental business does not require a significant amount of capital, which has been the case in '21, '22 up to the third quarter of '23. Since then, this business has been funding itself basically. So of course, if there is a large peak in demand, a large growth at a specific moment, there will be the need for capital, but I don't see the need for injecting capital into this because it is funded by its own activities.

I believe we have another question, just thank you, Carlos. Well, we have another question. It goes, congratulations for the sound results in the second quarter of '25. My question is about Romi's internationalization. Are there any initiatives to increase participation in international markets and reduce the dependence on the domestic market? If so, which markets and countries should be prioritized. Well, thank you for that question. We do have several ongoing initiatives connected to internationalization. B+W is part of this, as we have been mentioning it has been performing very well. However, when we talk more specifically about Romi and Romi Machines, we already have a presence in the international market for many, many years. It's Romi's tradition to be part of the international market. It is not as significant. However, that is a strategic choice of the company, a strategic decision to grow in other markets. This is something we've been observing more over the past 12 months. We have been adjusting and adequating our structure outside of Brazil. We have our own sales structure for post sales and sales both in North America, like in the United States and Mexico and in Europe, in several countries of Europe where we have been strengthening the sales and post sales structures by making new hires and also availing more machines and spare parts we see some results coming from these initiatives. They're still shy because the international market has not been growing that much, especially in the countries where we are present. We're talking about the Americas and Europe mostly but we're starting to observe signs of evolution in this process of growing in the international market. So without a doubt, our structure is better established, in these continents. We continue to work in order to offer the best experience possible abroad as close as possible to the experience our Brazilian clients have in terms of support and sales and post sales throughout the entire machine life cycle. And in terms of countries, we prioritize the markets where we already have some sort of presence. Like I've mentioned, Americas plus Europe, mostly consolidating this initiative to increase international participation in these markets. So this is still -- there is still a lot of work to be done ahead of us, but our strategic initiative for the international market is to strengthen the post sales structures in the markets where we already have some sort of presence. Carlos, your microphone is enabled. I'm not sure if you have another question for us.

[Operator Instructions] Since there are no further questions, I'd like to turn the floor over to Mr. Luiz Cassiano Rosolen for his closing remarks. Please note that Romi's Investor Relations department is at your avail to answer any further questions. Mr. Rosolen, the floor is yours.

Well, I just want to thank you all for participating in our second quarter earnings conference call. Our team is at your avail. If you have any questions throughout the quarter, we'll -- we are here for you. Otherwise, we'll see you in the next quarter earnings conference call. Thank you very much.

The Romi conference call has now concluded. Thank you for participating. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]