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

Good morning, and thank you for waiting. Welcome to the Conference Call for Earnings Q2 2023 for Tupy. [Operator Instructions] This conference call is being recorded. The company would like to remind you that this event is also being transmitted simultaneously through the Internet via webcast. you can access at www.tupy.com.br/ri, where you will find available the slide presentation. The slide selection will be controlled by the participants. Tupy clarifies that any declarations made during this conference call concerning the business perspectives projections of operational and financial goals concerning the company's business are forecast based on the expectations of the management in relation to the future of the company. These expectations are highly dependent on the conditions of the domestic and international markets, the economic performance of the country and of the sector. Therefore, they are subject to change. We have with us Mr. Fernando Cestari de Rizzo, CEO; Mr. Rodrigo Cesar Perico, CFO; and Hugo Ziertht, Investor Relations Manager. Mr. Fernando, you may proceed.

Thank you, and good morning. I thank you all for participating in our conference call. In this quarter, we are through with another part of the process to building New Tupy. We had also many unfavorable elements, Brazilian market severely affected by the highest price of vehicles, Euro 6. This scenario had an impact on new and used vehicles. The export market, light commercial vehicles were affected by restrictions in the supply chain, and they will become normal in the next few months. The drop in global sales volume of the company without MWM was 7% with -- especially in machining and assembly of engines for the South American market. This drop represents a drop superior to BRL 170 million in comparison with Q2 '22. We're also having, for example, the 12% higher price of the Mexican peso. Which represents 20% of the total cost of the company. Also, we gave priority to cash generation and expenses to capture synergies to reduce fixed costs. Well, we have relatively so sales, we produced even less than we sold. And this led to a lower dilution of fixed costs, but we reached a strong cash generation in the period. All these elements affected the margins and the EBITDA of the quarter with a negative impact of BRL 100 million in comparison with Q2 '22. Most of this value will be recovered in the next quarters. On the other hand, we have our actions foreseeing in our synergies plan with many actions from the combination of the casting plants, expense reduction in fixed costs, renegotiation of contracts with suppliers and clients. These are initiatives that affect the company's business have a positive impact on result and will have even greater results as of Q3. We still operate with the structure that is greater than the one, the markets that we have. And brings opportunities to have gains in efficiency. The resilience of our business model and the continued execution of our strategies, broad benefits, which attenuate these factors. Net revenue for the quarter reached BRL 3 billion, 17% higher in comparison with the previous year. The adjusted EBITDA in the period was BRL 322 million with a margin of 11.2%, identical to that of Q1, which also included the operations of MWM. We kept the profitability even in a scenario with an unfavorable exchange rate. when compared with Q1 '23. These Brazilian currency appreciated by 5%, all and 68% of the billing was in dollars or euros. Net profit reached BRL 62 million, with an impact from financial expenses also related to the stronger domestic currency real versus the previous quarter. And also we had a tax contingency of BRL 66 million. This is a change with due to a court process when we included Tupy Fundições in 2007. Excluding this nonrecurring effect, net profit would be EUR 128 million. On the next slide, we show the results of the actions to reduce cash conversion that we mentioned in the last quarter. We adjusted purchasing volume, and we suspended some operations, which helped with the inventory of raw materials due to clients' stops in previous current quarters. With this, we reduced our inventory by 8% in relation to the previous quarter, a drop of 5 days in these stops, as expected, had an impact on the EBITDA of the period and contributed for a strong operational cash generation, which reached BRL 159 million in the quarter versus BRL 132 million in Q1. We will continue with this strategy to reduce working capital, and we hope to have a good cash generation during the year based on efficiency gains and price increases. Now to talk about the main indicators of the process, I pass the floor to Mr. Rodrigo.

Thank you, Fernando. Good morning. The revenues in the quarter had an increase of 17% when compared to the same period of the previous year, reaching BRL 3 billion, including the results of MWM. In relation to the distribution of revenue per geography 45% had origin in USMCA, 34% in South America and Central America, especially Brazil; 19% in Europe and the 2 remaining percent Asia, Africa, Celia. 88% of the revenue come from business in structural components and manufacturing contracts. These are cast iron products and value-added services, such as machining and also assembly of components. 5% of the revenue come from energy and decarbonization. For example, generators, generator sets, engines that are manufactured by us, ocean applications, lighting towers and products linked to decarbonization. And 7% from distribution, which includes aftermarket parts from MWM and hydraulic products. The revenues coming from structural components and manufacturing contracts suffered an impact due to the drop in production in the Brazilian market due to a change in technology in engines, Euro 6 and price increases in the first semester of 2023. And also macroeconomic factors such as high interest rates and restrictions to access the credit. Also, the revenues of the export market had a growth in all the applications with a highlight to commercial vehicles. Now the products with value and value-added products in revenues totaled 37% in this business unit. On the next slide, we see the performance of energy and decarbonization coming from the acquisition of MWM and which includes generator sets, engines manufactured by MWM, also Maritime products, Ocean products, lighting towers, and products related to decarbonization. Generator sets has suffered an impact due to a drop in demand as a consequence of high interest rates and restrictions to credit. Also, lighting towers and vehicle transformation, although they represent little, had an expressive growth in the comparison with the previous quarter. The revenues from this segment represented 12% of total sales for the domestic market and 2% of sales for export market. Now distribution on this slide, we will see the distribution unit which includes parts, aftermarket parts from MWM and hydraulic products. This segment represents 15% of the revenue in the domestic market and had a growth of 150% due to the inclusion of the results of MWM. The sales, the export sales increased 53%. Now the next slide, we see the cost of products sold increased 22% in the annual comparison with an impact by the operation of MWM, the appreciation of the Mexican peso and smaller dilution of costs and expenses due to the lower volumes. The operational expenses had an increase of 2% in relation to Q2 '22 period, which did not include the expenses of MWM. With the same comparison base, including MWM, we see a drop of 8% in comparison with Q1 '23, due especially to commercial negotiations for lower freight prices. Now on Slide #11, adjusted EBITDA reached BRL 332 million in Q2 '23. And the margins in relation to revenue reached 11.2%, similar to that presented in Q1. EBITDA was affected by factors that had relevant impact such as reduction in volumes due to the performance of the domestic market and the initiatives to improve working capital and also the appreciation of the Mexican peso as a result of production cost. These were mitigated by many initiatives to reduce cost and expenses and also to gain efficiency gains due to synergies already made. Net profit reached BRL 62 million, with an impact from the stronger real in relation to Q2 '23 in foreign currency, generating financial expenses of BRL 40 million versus a revenue of BRL 36 million in Q2 '22. And due to the nonrecurring effect of an accrual or provision for a tax contingency with an impact of BRL 66 million. Excluding these effects, the net profit would be BRL 128 million. On the next slide, I will comment on the financial results of the period. The increase in financial expenses is due especially to the greater gross debts due to debentures worth BRL 1 billion for the payment of the acquisition of MWM and also the higher CDI, which impacts the interest rates of the loans in reals. Financial revenues reached BRL 22 million due to the increase in the cash balance in reals and the interest rates that are paid for our investments. The results with exchange variations in the expense were BRL 40 million. The effect of the appreciation of the real is BRL 59 million, mitigated by the gains in hedging operations worth EUR 19 million. Here, we see the main working capital accounts. Accounts receivable will have an increase of 2 days due mainly to the higher volume in sales and commercial negotiations, which were partially mitigated by the stronger Brazilian currency and also accounts receivable in foreign currency, which represented 75% of the total. Inventory represented had a reduction of 5 days. This is due to the company. In accounts well, we had a drop of BRL 190 million due to the higher volume produced and actions to reduce inventory, which contributed for the drop in the amount of purchases in the period. This line was also impacted by the exchange rate on accounts payable and foreign currency, representing 43% of the total. Now going on to the next slide. The -- our indebtedness -- our net debt on June 30 was BRL 2.2 billion, 1.8x the EBITDA, considering that we are considering only 7 months of the EBITDA MWM. Our obligations in foreign currency represented 55% of the total in relation to cash, 54% were in local currency. We closed the first semester with a comfortable cash position of BRL 1.2 billion. Now I'd like to pass the floor to Fernando, who will make his final comments.

Thank you, Rodrigo. Going on to the next slide. In the domestic market, we see many unfavorable factors that led to a drop in the truck market. We hope to have a recovery gradually in the next quarters. In the export market, a strong demand for trucks and heavy machines. Also, we have bottlenecks in the production chain. Now, our main source of value is inside Tupy as we will see in the next slides. In the next slide, with the acquisitions made, we built a unique positioning in the market that allows us to capture opportunities from outsourcing and near-shoring. We announced in Q1 relevant contracts worth BRL 650 million. Yesterday, we highlighted new manufacturing contracts the first to supply heads that are totally machined and erected, allowing a large OEM to acquire the parts locally in Brazil. The heads will be used in 13-liter engines in extra heavy trucks. Another commercial agreement, linking manufacturing contract and aftermarket has focused on the complete process of manufacturing short blocks, including casting, machining, the assembly of the flywheel and also pistons allow apart from these supplying components. This will be trucks for the U.S. market, Canadian market, Mexican market and Colombian market. These new contracts materialize a new positioning of the company and show the trust of our clients in this business model. In energy and decarbonization, we are advancing with large players in agro business to substitute diesel engines for biomethane engines and also biogas plants and energy generation using urban weights and agribusiness weights. And we announced an agreement with OXE Marine from Sweden, bringing the first engines, diesel engines for the Brazilian market. On the next slide, we see our initiatives of synergies and a drop in costs and expenses in our operations, which brought us gains that on an annual basis are higher than BRL 150 million. In purchasing, the new scale has allowed significant gains. The improvement of indicators has happened in an adverse scenario. We are ready to really sell a higher volume, which was affected by the lower demand for commercial vehicles in Brazil and other segments abroad, which are suffering pressure. This effect on fixed costs was higher than BRL 30 million diluted when demand recovers or adjusted. We are preparing the company to advance in optimization of manufacturing, reallocating products for the plants with better structure and also giving priority to a lower cash cost. We continue working on recycling of batteries, hydrogen and new technologies for clean fuels and decarbonization in agro business. And inventory management will help us to have a better profitability and cash generation. Also some recognition from our efforts in innovation and sustainability. For the second consecutive year, we were one of the highlights of the best ESG company of Exame in the category, Capital Goods. And also to be as one of the most innovative companies according to Valor Economico, gaining 100 positions in the last 2 years. I thank you all for your presence, and now we will begin the Q&A session.

Ladies and gentlemen, we would like to begin the Q&A session.[Operator Instructions] Our first question comes from Luiz Capistrano.

Good morning. Congratulations for the results. Concerning heavy vehicles, we have been following the results. Do you believe there will be any visible improvement in Q3. We know that efforts are being made. We haven't heard from anyone a sign that manufacturers have arrived at a price for Euro 6 engines. Do you see any stronger evidence or will we have to wait more? Do you believe we will have anything new, a detailed view in Q3. Also from now onwards, you had -- you separate this impact from OEM stops. What can we expect in Q3, do you -- will you have more synergies. So we want to know what kind of margins you expect in the future. Thank you.

Good morning, Luiz. Thank you for the question. First, concerning trucks, what we are seeing is a production level annually, 110,000, 120,000 trucks in the next few months, 19,000 trucks per month, trucks and buses together. This is what we have heard from many of our clients. And it is lower than last year's numbers but represents an improvement in relation to the first semester of this year. We try to monitor this. We have clients that work with inventory. We have clients that work with orders from large truck OEMs. Certainly, we're trying to monitor all of this, a part was sold. Some clients have high inventories, but we've seen a reaction. We need a reference. Brazil has to replace a certain number of trucks every year, 100,000, 110,000 trucks every year due to obsolescence of the old trucks. So we always use this reference. When we begin to see higher freight prices, we see trucks being substituted. Agro, for example, production going up, higher production. So we should need more freight in the country. The economy is growing. So we should see more trucks being sold. We're using an older fleet. Brand supporters are being careful with their investments because of high interest rates, restrictions on credit. There is a relevant problem. You only or to buy a new truck, you need a good price for freight and cargo. Cargo, we have, there is cargo in the market but they have to sell the truck and the availability of credit for freelancers to buy these trucks. So the fleet owners can buy new ones is small. So every -- for every new truck, you sell 2 or 3 older ones are sold in the chain. So the market is reorganizing itself and we should begin to see an improvement from now on. OEMs are reducing vacation. We see some announcements. There are some forecasts from Fábio de Operações showing that things are better than in Q1. Now concerning the margin curve, it's important we try to explain we did a lot. These are things that are being built based on synergies of the acquisitions we made in the last 18 months. And they are now becoming a reality. Now, if we have a sudden exchange variation, the impact is very strong. So it's very difficult to make forecasts with such a sudden impact in exchange rate. We have some contracts that protect us, but it takes some time. For example, it takes time to increase prices in the short term, but it takes some quarters to recover. So when you have a sudden change in the exchange rate, for example 5%. The Brazilian real became 5% stronger. And in total, 12% difference in the exchange rate. And the revenue from Mexico is all in dollars. So we felt an immediate impact on the operation due to the appraisal of the Brazilian currency. So the company continues to be built. We have 35% of our sales from the acquisitions. We made acquisitions with attractive multiples. And we are now porting this -- it takes time. It is being done. And it's important you can see these effects in the numbers and how the exchange rate affected our corporate results. We sold less and we had an unfavorable exchange rate with a strong impact on immediate results of the company. Most of this was recovered with many activities, increasing efficiency actions that helped to recover most of this. But we still have things to do. We are restructuring, adjusting plants, contracts, purchasing. So we tried to show to you our perspectives in the medium term. We are now integrating different companies, and we were affected by this scenario. So much more than traditional to be. So with all these factors, we are working to recover. But if we maintain the same macroeconomic factors of the previous quarters, we would have had a much better result.

Our next question, Andre Mazini, Citibank.

Hello, Fernando, Rodrigo. The first, a follow-up of this point. the effect of the Mexican peso and in this quarter. So you have a mismatch. I believe you have hedging for financial results. Could you talk more about the hedging and the correlation with the peso and whether you will change the prices. The second more color on the problems in the supply chain. Where did the problems happen, engines, or powertrain, transmission to and will this continue in Q3?

Okay, Andre, I will begin and Rodrigo can supplement. I will begin with the second, the supply chain problems. We had one very large client that made inventory adjustments. They reduced their operation and another large client of the company in the U.S. that decided they had a problem with another component in the vehicle. And because of this, they had to restrict production for many weeks. And one product from one client. But they were relevant for us and caused this effect in the supply chain. Concerning the Mexican peso, for example these operations in Mexico, we have our contracts would happened. There was a strong inflation in Mexico. You have to raise salaries, everything. And apart from these, 7% as of one year. I used to receive MXN 20 for each dollar. Now I received MXN 17 for each dollar. And this effect is very strong on our results and in the EBITDA. When you have a drop in sales, if I don't produce, I lose relative EBITDA. I lose revenue and 77%. When it's in, when the effect is on the exchange rate, the impact is stronger. So our contracts are long-term contracts with the clients. We have mutual investments in tooling, and we have contracts where you recover these exchange variations, but this is not immediate. It happens gradually. It depends on many combinations between exchange variation manufacturing. Rodrigo can also comment.

Hello, Andre. Supplementing, yes. We have protections. We have contract clauses and concerning hedging, the company, yes has hedging for all the currencies. Now in Mexico, as mentioned, we have most of our cost in Mexican pesos. Dollar is the official currency and we work through a hedge in cash flow. So this is not recognized in the operational result. You see some benefits in financial -- in the lines covering financial issues.

Our next question is from Andressa Varotto from UBS.

Good morning, Fernando, Rodrigo. The new contracts that you announced, can you give us an idea of impact of these contracts also, distribution due with these new contracts MWM. What are the opportunities that you see in distribution?

Excellent question, Andressa. Well, the 2 contracts together represent BRL 50 million per year. They involve machining and assembly for demand in Brazil, heavy trucks. You can -- and it has better margins because it has a lot of added value, and we will use existing capacity in MWM and Tupy. We will need investments, but we will be using existing CapEx. On the other hand, concerning distribution, another project we announced has to do with distribution and aftermarket. What does this mean? We will be using -- we will be sending to the U.S. machined engine blocks with flywheel, pistons and rods. It's a preassembled component. It's a contract for aftermarket. It's not for supply to production lines. But this is our objective. So -- we -- for example, we have one container with $50,000, $60,000. If we export the blocks with machining and preassembly, we have very confident companies in Brazil supplying these things for us, like Mali, Group and Bosch. Then we have a better competing capacity. We will deliver this product to the U.S. for dealerships that in Canada, Colombia, Mexico and the U.S. The meaning of this, this is an important message concerning distribution, MWM adds value. And this was not well recognized because we acquired a company that had a large service network in Brazil with trained employees. They have a strong capillarity in Brazil. And they also have the engines. Now we -- they are very talented. They know the business. We're expanding this chain of services for many other engines of other brands too and using the existence of the distribution network that MWM has with all the capillarity. And naturally, we want to migrate to higher value-added products. So for example, in the U.S. market, you have remanufactured engines. You have an intermediate chain that produces these remanufactured engines. Clients need speed. Some components takes a long time to disassemble. So you can give them a ready engine, a remanufactured engine. So we're making progress. The idea is to build offering more components. They are -- our portfolio is limited. We want to include more components and work with higher-priced products. And this is a characteristic of the U.S. and European markets, preassembled engines, preassembled components and you have a faster turnaround for the fleet owners. So we're investigating alternatives to know who the partners are that we can use. Sometimes you remanufacture engines and leave it on the shelf and when the clients need, they gain speed. And we can do this through the distribution chain that MWM has. So we don't have forecasts when we will be able to do this, but these are our plans. This is our strategy. thank you.

Our next question and Andre Ferreira from Bradesco BBI.

Good morning. Congratulations. We know you're casting capacity, but -- how is your -- how is the capacity at MWM to assemble engines? Do you need to increase the capacity at MWM and also the plants in Portugal, Betim and Aveiro. What kind of EBITDA margin you expect from these plants in Portugal.

Well, first, concerning the assembly capacity. MWM has a lot of capacity. It was the largest producer of diesel engines in Brazil in the past, part of this capacity was removed. There is a plant in Canoas in the South that no longer exists. So the capacity was reduced at MWM. So there is capacity force, some products with certain characteristics. There is some surplus capacity, for example, heads for Euro 6 in the Brazilian market. So these will use the existing capacity. This is gradual. It depends on the deals we close because we're looking at all the alternatives. For example, most of the construction machinery in Brazil has imported engines. Most of the pickup trucks have imported engines. So we're looking at this and the services we can render. Engines depend on many tests, emissions and so forth to make these engines. We have this capacity. We have a strong engineering team, and we are focused on biofuels, biomethane, biogas, hydrogen, ethanol. So we will have a Tupy day when we will clarify all these points. So we're working in this direction. We're building the company in this direction with a country that will use multi fuels and we have to be prepared for this. So the company has a strong expense to develop batteries, hydrogen to preserve the engineering team because we have a strong position. We understand the needs in Brazil. And yes, we will benefit from many trends, for example, outsourcing, new fuels. Concerning margins, we have a standard in the last few years. We believe that we will raise Teksid to this standard. And with this combination, we should be better than the previous standard. We're not there yet. This is the plan, the strategy. We already did 40% of what we have to do. The great value will come when we transfer products. We made many investments during these 18 months. And from now on, as of Q2, we will begin to exchange products between the plants. Until now, they were independent. They did not exchange products among plants. Now we have all the teams, all the management integrated with Tupy. But we believe that there is a journey for some quarters to reach the potential.

Our next question, Igor [indiscernible] Investments.

Thank you. Congratulations for the results. Concerning the synergies of acquired companies, now in Q3 and Q4, we see that even with an adverse scenario, we have an improvement in the margin, EBITDA margin. Looking at commercial vehicles in Brazil, we see a strong growth. Is this due to the recovery of heavy vehicles?

Hi, Igor. Thank you for the question. Which you see in sales doesn't mean that we delivered those products to the clients in that period. When you look at the forecast, we had on Fabia [indiscernible]. Our forecast, we were expecting a better market this year. The prepurchase was much smaller than when we had the change to Euro 5 engines. Prepurchases were smaller this time. The company was prepared for a higher volume. We had to stop the company, reduce production to favor cash generation. So in the comparison, the best comparison we're trying to give to you is truly to look at the exchange effects, exchange rate effects, variances in sales and a much smaller production than we had in Q2 last year. And when you have a lower production, you produce more for inventory. So we have to absorb the fixed cost of the company in this quarter. I transferred part of the fixed cost to inventory. With this, I maximize the margin of the period. So there are many combined effects. I was talking to the team. If you look at all these effects, our results would have been worse. There were other effects from synergies that helped us to reach the BRL 330 million. So -- and once again, the exchange rate affects much more the results than the changes in sales. Our -- it was 7%. That's BRL [indiscernible] that I did not tell. When I -- now when you have the exchange effect, the result is very dropped, 5% appreciation of the local currency in Q1, 68% of our revenue in U.S. dollars. This has a great effect. So this is the challenge when you have sudden changes. That's why we consider that we would like to do more and the result is reasonable when we look at the difficulties we had in this quarter. Thank you.

Our next question will be from the web, Alexandre, investor.

In spite of the scenario, congratulations for the results. With a more conservative management in working capital. Will you be ready to avoid losing sales if the market recovers, what is your experience?

First, in the case of Primato, we received the licenses now. Yes, it's a project that should scale a lot in Brazil. I'd like to highlight what this means. It's a project for 6,000 heads of pork that could produce 6,000 liters of diesel per day. This is the energy Brazil is throwing away. We have 23 million heads of pigs -- pork, and they can generate liters of diesel, not actually diesel but biomethane, which can be used as energy advent, can be converted to gallons for industrial operations equivalent to 6,000 liters of diesel. And this can also supply the trucks with engines designed by MWM using biomethane. Yes, this project should scale we see an interesting economic return, and it generates benefits for all. So this is -- it is a solution for a serious problem because it contaminates rivers. It can contaminate underground waters. We're transforming these residues from pork into biomethane with clean energy. Now the recovery of the market, we're prepared. We had a higher inventory because last year, we had many sudden drops, stops from clients due to lack of components. And we don't receive this information sometimes on time, and it's difficult to decrease production and we have many workers, many employees. So we have been planning production. We are prepared for a recovery in sales. We hope it will come and if God will, we will be able to sell much more.

Our next question is from Marcelo Motta, JPMorgan.

Good morning. First, a follow-up on margin. We know the main effect was the exchange rate. In Brazil, the exchange rate has its ups and downs. This margin recovery prices and costs take time. The exchange rate was well below BRL 5 to $1, and now it's back to $5. So what are your expectations for Q3, Q4 in terms of the exchange rate volumes, we believe, will improve. And the second question, concerning cash generation, in transportation and generation, you did the work to preserve capital and now, do you believe we will have the same results in the Q3?

Marcelo, thank you. We have contracts that have clauses concerning exchange rates, exchange variation by quarter, by semester or annually. So it's not for 100% of the portfolio. So if you look at this historically, we worked with an exchange rate of BRL 2 to $1 in the past -- now it's 5 yet contracts protect us. Concerning cash generation in Q3, it's important to say in an ideal scenario, the next quarter will be stronger. With all these expectations of sales. If we don't obtain these sales, we will monetize our inventories. And this was mentioned in other calls. We have an adjustment now to be paid according to negotiations for the payment of MWM, BRL 200 million. And this cash came from the operation. So yes, we expect something better in Q3. We have a solid cash position.

Our next question, Lucas Laghi, XP Investments.

Good morning I'd like to know about capital allocation. Do you believe that you will go back to the previous situation? Also after the acquisition of Teksid, what is the focus of the company? Are you thinking of new acquisitions to supplement your product line? And also any points about dividends. So opportunities for capital allocation.

Hello, Lucas, thank you for the question. when we look at the traditional company with Teksid in casting. Yes, the project has the intention to reduce CapEx. We are reallocating products and we should be increasing cash generation in the traditional business. But we built new strategies that we call New Tupy. First, looking at adding value. Adding value has an effect on CapEx. We announced these projects in Mexico with investments worth BRL 300 million for large projects for machining and preassembly for the U.S. market. These projects are in progress, and they will become revenue as of 2025. The projects are approved. When we look at MWM, there is a demand for CapEx, for example, Primato project. We have great expectations in terms of scalability. We're talking about waste from the production of protein. We have generators -- we have -- we're building projects with wastes from animal protein. There are other wastes we're working on from cattle. We're also looking at carbon credits and other benefits that we can expect. Yes, because we're converting methane. We're reducing the effect of methane and producing energy for society with a lower carbon footprint for products. When we talk about distribution, we're also studying alternatives to grow. We may talk about small acquisitions, but to supplement our products because an important focus is aftermarket parts. We have many opportunities with our distribution chain with MWM brand, and yes, we're looking at this business. Finally, we have the initiatives, hydrogen, battery recycling where we should have an investment at the end of this year, a small investment, a small plant for battery recycling. And this is a project that can have potential and scalability. These are businesses. It's even difficult for us to define the size of the market. Biomethane is a project for all of Brazil and maybe also the U.S. battery recycling will be very important for Brazil. We're trying to obtain a patent. And they will also be important in the U.S. and Europe. Because you recover minerals to build new batteries. What I'm trying to say, we have a great portfolio of projects. The company used to have one business. Now we're spending money to develop these new fronts. Yes. But all this energy transition, low carbon, there are many opportunities. And of course, we're studying all the alternatives. Maybe with projects in the U.S. Reduction Act. We've seen also the Brazilian Development Bank giving support to these projects. And yes, we will take advantage of them. It's difficult to tell you now, we have some demands for CapEx. We're very cautious with CapEx. We penalized EBITDA to preserve cash generation and also to manage our debt. We have a strong financial discipline. We're very cautious with finance. We're testing technologies and when we are sure we will announce new things. It's difficult to talk about capital allocation now. because it depends on the success of these fronts. But fortunately, we're very happy with the performance we have had until now. I'm sorry, I can't give you more objective answer, but there are many things on the table, and we're trying to see how we will allocate capital in the best possible way.

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

Well, I'd like to thank you all for participating both in relation to Q2 '22 and this year. All these adverse events like the exchange rate, our decision to produce less really brought a difference in EBITDA of EUR 100 million when you compare the quarters. This decision to monetize inventory, we're doing this since the beginning of the year, and this helped up operational cash generation. Some of these effects from the exchange rate will continue in the next quarters. The domestic market will recover. Yes. In the last 2 years, we made acquisitions with interesting multiples. And right now, they correspond to 35% of our earnings, our revenue and they are diluting for the time being our margins. But independent of these effects, we continue to go forward according to our business plan, and we will recover. We continue with synergies from acquisitions. Apart from these synergies, we announced new businesses with higher margins that are higher than our average margins. And these results will come in 2024. This is machining growth in aftermarket, biomethane, also plants and decarbonization. And we continue investing in R&D and innovation with recycling of batteries, hydrogen, biofuels. And all of this means that in the next few years, we will make progress in areas with higher profitability, diversifying the revenue and increasing cash generation. Thank you. We wish you a good day.

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