Tupy S.A. (TUPY3) Earnings Call Transcript & Summary

Good morning. Thank you for waiting. We would like to welcome you to the conference call for earnings for Q3 2020 for Tupy. [Operator Instructions] This conference call is being recorded. The company would like to -- we would like to say that the event is being transmitted by Internet via webcast. You can access at www.tupy.com.br/ri. We -- the slides will be controlled by you. The company clarifies that any declarations and all our operational goals concerning the company's business are assumptions made by management concerning the company's future. These expectations are highly dependent on market conditions, both national and international on the company's performance and the sector performance. With us, we have Mr. Fernando Cestari, CEO; and Mr. Thiago Struminski, CFO.

Thank you, [ Shandina ]. Good morning. I'd like to thank you all for your presence. Well, we continue with the care concerning COVID-19 and the resilience of our business model prepared for market fluctuations. We have been able to improve our operations to deliver better and better results. On Slide #2 of the presentation, I'd like to say that the company continues to make progress in efficiency and management. We restructured the team, and we reviewed essential processes, and we expanded the synergies between the different areas involved in purchasing. We have made progress with a more global look at the choice of suppliers and to look for new alternatives. We improved the purchasing and also movement of materials between plants. This is improving, and we will still make more progress in operations. In Brazil and in Mexico, we also reinforced the dissemination of the Tupy production system. We eliminated some aspects, and we turned off some less efficient systems, increasing flexibility, and we also improved the flow during the pandemic. With control, we reviewed all the costs and expenses of services linked to the operation. We redefined the specification of all the raw materials. We also made progress in the efficiency in Mexico in machining, which we began in 2019, and we already reached the expected standard. In manufacturing, we intensified automation and we continued with more data analytics in order to optimize material mix for furnaces and also better decisions in the interaction with suppliers and increasing efficiency. All of this is being led by a renewed management team made by internal talent and professionals that we brought with their experience in other markets to contribute with Tupy. We understand that these efforts in cost reduction tend to be permanent and also replicable in operations with Teksid. We're creating a more agile company capable of adapting quickly to the change in scenarios and prepared to react quickly in executing our strategy. On Slide #3, we present records in net and operational profits and also in EBITDA, the greatest in the company's history. When we compare with the previous quarter, the growth of revenue is 94%, reaching BRL 1.25 billion, showing the recovery. In comparison with Q3 '19, it is 7% lower. The product mix went back to pre-pandemic levels and much higher than Q2 2020. This also contributed for the growth of revenues and progress in margins with CGI and machined parts, reaching 27% and 26%, respectively. So gross operational profit was BRL 282 million with a gross margin of 22.5%, a record in our history. We also reached also greater EBITDA to be BRL 249 million with a margin of 20%. Adjusted EBITDA reached BRL 257 million, with a margin of 21%. Net profit, also record, grew 93% in relation to the same period last year, showing the operational resilience and less volatility in financial results. With a strict control of cost expenses and also investments, we operated in the first 9 months of the year with an accumulated CapEx of 3.2% of net revenue. The company generated BRL 152 million in cash in the period and closes the period with a higher cash than in the beginning of the pandemic, with the increase in availability, reaching BRL 1.4 billion in September. Now I'd like to pass the floor to Thiago Struminski, our CFO.

Thank you. Good morning. So we felt a recovery month-after-month in sales, Slide 10, but 26% lower than Q3 '19. Although this volume is already 79% higher than that of Q2 '20, although it is on the level of the first quarter this year. The mix of transport infrastructure, agriculture was very favorable, with 26% were total or partially machined, 27% CGI. On Slide 5, revenue had a drop of 5%. And here, comparing with Q2, revenue went up 94%. And the revenue per kilogram had an increase, 26%. Comparing with Q2, so we -- the revenue increased 94%, 70% in NAFTA, 15% in South America; 11%, Europe; and 4% in Asia/Africa. In terms of application, 89% commercial off-road vehicles, 7% and passenger vehicles, 4% hydraulics. In the domestic market, we have a drop in revenue in applications for light and commercial vehicles. The effect, for example -- we had an impact, a reduction and also in exports for European and North American markets. On Slide 7, we show the effects on the -- of revenue on -- in the foreign market. There is a consistent recovery in sales of applications for light commercial vehicles in spite of the good performance of Agro business. Off-road applications were impacted by delays in investments, especially in highly specialized systems like oil, gas and mining. Here, we see the -- now we see on the next slide, the performance in hydraulics, 5% of our revenue. And we see that in the Brazilian market, we had a better product mix. But in exports, we had the impact of coronavirus. Slide 9. When we look at the products sold and operational expenses, we had a drop of 54% with gross margin of 22.5%, the highest in the company's history, a drop of 13% in the cost of raw materials with a drop in volumes. The effective of currency devaluation had an impact on Mexican operations and also had indirect effect on materials consumed in Brazil with more CGI products. This was mitigated by many initiatives in gains in efficiency, operational efficiency, so also flexibility in production, redesign of the flows and also renegotiation of contracts with suppliers. We observed a reduction of 17% in expenses with labor, especially due to the decrease in headcount. And over time, with many measures to reduce wages and layoffs, a decrease of 9% in maintenance and third-party materials. In Q3 2019, there was an impact we -- when we received credits worth BRL 6.5 million, hereto, many impacts due to inflation and currency -- and also currency, higher currency. Operational expenses had an increase of 1% year-over-year, and the great impact is related to freight and also devaluation of the currency -- of the local currency. On slide 10, adjusted EBITDA reached BRL 257 million, 25% more in relation to Q3 2019 and a margin of 21%. Now EBITDA here, CBM was BRL 249 million with a drop -- with a margin of 20%, sorry. The drop in volumes in the period was compensated by all these initiatives to increase efficiency in the last months. Net profit Q3 reached BRL 128 million, a growth of 93% in relation to the previous year. And both profit and EBITDA were the highest values we had in the company's history. Slide 11, we show the effects of devaluation of the Brazilian currency. The devaluation contributes for -- with revenue from abroad, but it has an impact on our costs. Here, both due to the smaller availability of raw materials that we consume in Brazil that we have to pay in dollars. And these macroeconomic effects contribute our revenue, but have an impact on volumes, both due to the drop in the economy, downturn in the economy. We hope that recovering these volumes in the next quarters and with the devaluation of the Brazilian currency, this may be positive for the company. Now continuing, we talk about the financial result. Financial expenses were impacted mainly due to the devaluation of the local currency in relation to the dollar. We see here BRL 5.38, the current exchange rate, at BRL 3.97 last year, and this affects loans and also more debt due to loans in local currency that we did in March, BRL 494 million. As an offset, the use of those resources helped in the financial revenue, BRL 7.5 million, the interest earned. The hedge operations on cash an effect of BRL 23 million. We have a positive effect of the open contracts. There is a payment here for adjustments in contracts already closed in the period. On Slide 13, we have the variations in the main working capital accounts comparing with Q2, an increase of 27 days in accounts receivable. So here, an expressive amount in sales in comparison with the previous quarter, especially in August and September, apart from the impact of exchange variation receivables since 87% is in foreign currency. We observed also 1 day of reduction in inventory. The company has a strategy to have flexibility in production in the plants, increasing operational efficiency. This also suffers with the exchange rate at the inventory and strong currency corresponds to 58%. Accounts payable, 22 days in relation to the previous quarter due to increase in production, more purchases during the period. Apart from exchange rate devaluation, things we have to pay in foreign currency. This corresponds to 50% of our commitments with suppliers in U.S. dollars. Slide 14. Here on slide, BRL 32 million, we see investments in assets, BRL 32 million, a drop of 45% in comparison with 200 -- 2019 and 2.6% of the revenue. Here, on Slide 15, we see cash generation, BRL 152 million, 28% higher than last year, a drop in volumes and consequent reduction in accounts received from clients was compensated by cash preservation, renegotiation of contracts, flexibilization of the lines and the use of materials available in inventory. We closed September with a cash balance of BRL 1.4 billion, higher than that at the beginning of the crisis -- coronavirus crisis in 2000 -- in the beginning of the year. Now here on the next slide, we see also our debt, BRL 1.2 billion here, corresponding to 2.05x EBITDA and a reduction -- expressive reduction in relation to the past, which was 2.65%. We see the percentage in foreign currency is in accordance with our business. In relation to cash, 40% of our cash is in foreign currency. Now I'd like to pass the floor to Fernando to talk about our markets.

Thank you, Thiago. After Slide 17, I would like to talk about some indicators in our main markets. Positive signs that show clearly the recovery of economic activity in markets that are important for our company. Since May, we had a recovery in the sales of light commercial vehicles. This had an impact on inventory, and now is the lowest in 9 years. Our market consists of applications used in professional activities, which benefit from the recovery of the segments such as home construction -- house construction. In Brazil, on Slide 18, we show the growing volume of heavy vehicles. Although the production in September was 25 -- 29% above that of August, we are not absorbing all the demand in the market. We see our portfolio with positive signs of recovery, although gradual of the orders related to indirect exports. On Slide 19, in relation to average in heavy trucks in the U.S., the freight activity has -- is higher than that of pre-coronavirus and the projections are positive. This should mean a new cycle of new fleets of vehicles as of 2021. In off-road, we see also we had delays in investments due to the pandemic. This group includes applications for mining, heavy construction, oil and gas and energy generation. But we see positive signs in new orders. Certainly, we will benefit by infrastructure packages being discussed in U.S. Congress and also sanitation and gas in Brazil. Our clients should benefit from the recovery of the Chinese market in construction and mining. On Slide 20, we stress that the diversification in investments also helps us because we are in segments that are essential for economy recovery. We have had -- we have seen a consistent recovery. Others should benefit from other growth cycles as of 2021. We will continue adopting a strict cost control, CapEx control, implementing new projects for operational efficiency gains, working with partners in Brazil and abroad with the system we have to develop products. We continue based on Tupy production method, and this allows us to implement the best practice very rapidly, new lines and operations. Concerning development -- research and development, we have a robust pipeline, developing material constants with complex geometries that we will be applying in alternative fuels, linked to the reduction in carbon and also solutions that request complex metallurgy. We continue working on new project for machining, and we see many opportunities to continue making progress. Once again, I thank you all for attending. And now we will begin the Q&A session.

[Operator Instructions] The first question comes from Mr. Victor Mizusaki, Bradesco BBI.

Congratulations for the result. I have 2 questions. First, please talk about the outlook in Brazil and abroad, comments on the lineup of production for Q4? The second question, concerning EBITDA margin. In Q3, it was strong. You mentioned cost lower -- better productivity, better product mix and also the exchange rate effect. We understand that you are on a new level. Please comment, looking forward, how much of this will contribute for a higher profit margin in the next few years.

Victor, thank you for the question. Fernando. I will begin and Thiago will supplement. First, looking at the market, we have seen some strong signs. Brazil continues to grow, should continue growing. There is a lack of vehicles and equipment in Brazil. So production is accelerated. Even heavy trucks and agriculture, but also light trucks for urban use. This has grown a lot. The sale of -- in the U.S. light commercial vehicles is very strong, low inventory, and we should have a lot of sales. Also, the Ford made 2 important launches, one is on the market. One should reach the market soon. This is good for us. We have orders -- strong orders for this. But still, in this quarter, we didn't see medium and heavy trucks in the U.S. being strong. Sales were low. The sales of light and medium -- medium and heavy trucks in the U.S. did not recover. The exception was agricultural machines. The other off-road vehicles were weak. We believe we're seeing signs of more demand for -- you asked about Q4. We see signs of demand, which will continue with these sectors that are strong and also the other sectors we see recovering for the Q4 and Q1 2021. So we should continue growing. On Slide 19, I believe we showed the difference in the months in relation to last year. We should continue decreasing the gap in relation to the previous period in the next few months. This is what we're seeing. So we are hiring. We are hiring more employees for some shifts where we are growing production. This should happen. Now concerning margins and what is permanent, what we have worked in the last 2 years to bring new professionals, invest in organization, 2 new vice presidents in 1.5 years: one of them is internal talent, one came from the market. They are restructuring their teams. In purchasing, we revamped totally. Purchasing in the last few months, we brought an international consultancy company to help us. So we're seeing that both purchasing, purchasing has changed a lot. It will continue to change. We're integrating the purchases of Brazil and Mexico. We have more clear comparisons. We're rediscussing the specs for materials. We're exchanging materials between plants. Materials going to Mexico, coming from Mexico to Brazil. So this will continue. So we have new alternatives in terms of suppliers, new materials. This strengthened our supplier base. And now in terms of production, also, especially during the pandemic, this helped us to review productive processes, methods, every phrase, standard operations in each process. We also had a renewal in the team. We brought professionals from other companies with more sophisticated models for maintenance and other activities in machining in Mexico. And all -- in all of this, we have seen progress. So this progress is permanent. Yes, training also. There's a lot of training in the company. So this has helped us. The mix is better. On one side, we have a lower volume. So when other markets recover, these are important. They are profitable for the company. And we're not producing for them right now. We believe they will recover and help in the results.

In the quarter, we showed that we can deliver higher margins. When we look forward, Q4 specifically, December has seasonality. For example, many clients stop, but we are on a sustainable level, above 17% already. So quarter-after-quarter, we had to prove to the market that, in fact, we increased company margins for new level. But we have the volume. Fernando mentioned the recovery of the market is 26% behind Q3 '19. We hope that the operational leverage and looking at fixed costs with the growth of the operation, we will be able to have a strong EBITDA.

The next question from Catherine Kiselar from Bank of Brazil.

I have 2 questions. The first has to do with gains in efficiency. Do you see space for more restructuring of the company?

Well, what we see in this quarter, what we saw, and as Fernando mentioned, the main measures for cost reduction, we understand that they are structural. We had a package for operational efficiency. Corporate action supplies had a relevant impact. And today, when we look at restructuring, additional restructuring, as you asked, most will come with the combination of Teksid. We have great opportunities. Our plants are very close. We have plants in Brazil. We have plants in Mexico. They have 2. Teksid has 2. So we have plants next to each other in Brazil and Mexico. So everything that we build is sustainable. There, have also some more opportunities. Some machines in Brazil are better than those in Mexico. But most of this new quantum leap comes with the combination of the 2 companies.

Second question. We have looked at capital goods that are selling well. Have you seen this in practice? Do you believe there will be an impact on Q4? And next year, how do you see price increases?

This issue of price, for example, higher prices, passing higher costs to clients, this is well structured in the contracts. We're suffering pressure, especially in metals, we've had increases in price. Steel, the price of steel went up. There is strong pressure, especially in imported components and imported materials. If we look at inflation, it's almost 15%. But our structure guarantees that the -- when we pay more, that we pass this on to the clients. It's in our contracts. So we have protection in our agreements and contracts. Catherine, this question is important. We must understand we participate in global platforms. Every product I supply in Brazil, I also supply outside Brazil, platforms that we sell around the world. The clients are global. They have these global platforms, and they manufacture in Brazil, and they also consume the same products here and abroad. This sale process with -- we sell to OEMS. So the combination with Teksid has helped us a lot to reduce costs. Reduce costs, we can expand these models. We have some important models that we began flexibility, plants and equipment between the exchange of machinery and materials between plants, all this model. When we arrived at the pandemic, we had all of this ready up on the shelf. So we began to take action, and we applied these things quickly to help us entering the recovery too. So all of this has contributed. And the next great step to reduce costs and increase efficiency goes through the combination between the 2 companies, Tupy and Teksid. Our clients -- some -- our clients in Brazil, sometimes buy part abroad. The -- for example, there is a lot of -- there are many imports, many blocks, engine blocks, and heads are imported and assembled in Brazil. So they bought from us and they buy from abroad, too, the engines. So we have an important tool. Now the combination of Teksid and Tupy to give us growth with the combined sales of the company -- companies.

[Operator Instructions] Our next question comes from Mr. Werner Roger from Trigono Capital.

Congratulations for the results. Concerning the #6, Seal #6 and incentives to renew fleets to -- is there anything new? Do you have any dialogue with the government and entities because of new restrictions on pollution and other things?

Werner, unfortunately, we don't have any updates. It is a program. I believe it has had some difficulties. Yes, we agree it's necessary, not only for more efficiency in logistics, but also safety. Nowadays, we see old trucks on the roads. 25% of the Brazilian fleet is over 15 years of age. They pollute more. No emissions control. They have safety problems. They cause accidents, and we support this movement. Unfortunately, there is no update on that.

Here we saw the results of Caterpillar 2 days ago. 35% drop in volume. Have you seen a recovery of orders from Caterpillar, especially in mining? Or do you expect this to happen next year?

Werner, we have seen our sector in general, not only Caterpillar, if we sell to many clients who compete in the same sectors as Caterpillar. As I said, we see some signs of better demand for the beginning of next year. But all the companies that work in construction, mining or energy generation -- generators and also engines for ships, we've seen a little more demand.

The next question is from Catherine Kiselar from Bank of Brazil.

Can you update on Teksid?

Well, we don't have great news to process. Was -- it was approved. The analysis was approved in Europe. Now we're looking at analysis in Mexico, Brazil and the U.S. Our authorities are working on it. They're making additional analysis. So we continue waiting for an answer until Q1 next year, the approval of Teksid.

The next question comes from Werner Roger from Trigono Capital.

One more question. The exchange rate devaluation. The company had a hedge until the end of the year. Do you believe this can have an impact on the results in the last quarter, the devaluation of the Brazilian currency? Or do you believe everything has reported and nothing significant will change?

Werner, the impact on the hedge of cash flow was positive. We had a positive effect that was relevant. So the -- we have still until December 2020. We have an -- a motion opening for BRL 124 million. We have no more operations. The market is very unstable. And the market, we see the local currency being devalued. This forces us to protect our accounts. We continue with the same policy and we may have an impact on the results.

We'd like to conclude the Q&A session for Tupy. I would like to pass the floor to Mr. Fernando for his final comments.

Thank you, [ Shandina ]. Once again, I'd like to thank the interest and the participation of all of you. The growing results and constant evolution of our process is something built by our team. I would like to congratulate and thank our team. It's good to see that these initiatives we adopted in the last few years have had a direct impact on results. We'd like to reinforce that the global crisis with the pandemic continues to be a challenge, both in the economic and social ways. So we continue with looking at safety and health, and we're very close to our clients and suppliers. We see a gradual recovery in the markets at different speeds, but with good perspectives for next year. We're exposed to fundamental sectors for the recovery of the global economy and they will benefit from public policies that will be implemented in all the work like sanitation in Brazil and infrastructure packages in the U.S. Even with these impacts that we have, we were able to use this moment to improve our production process and also look at purchasing, and we're reaping the results of these initiatives that we had in the last few years. This has had a significant impact on our work, type of production and will continue to give us positive results in the future. To summarize, more important than the results in this quarter are the changes -- structural changes in the process, the dedication and the perseverance of our employees, team work and always innovating. We continue to work to grow, and we see that this has been done in the last 8 to 2 years. We will benefit from the recovery in volumes impacting revenue and a decrease in fixed costs. We are a transformation industry. We have chemical, metallurgical and mechanical processes. Our in-depth knowledge in metallurgy engineering helps us, and we work with research institutes and universities and other partners. This places us as in a -- being in a very well positioned, developing new materials. The renewable economy will give us many opportunities for companies that have good knowledge of metallurgy and different materials and Tupy will certainly benefit from this. Thank you, and we wish you a good day.

The conference call of Tupy is concluded. We thank you all, and we wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]