Iochpe Maxion SA

BOVESPA:MYPK3

Earnings Call Transcript

[Marcos de Oliveira, executive]

Good afternoon, and welcome to our first quarter conference call. I will follow the slides made available in the presentation on our website. During these unprecedented times, we are leading a complex period of uncertainty and low visibility, both from an economic and automotive demand points of view. With 32 plants in 14 different countries, we have been following the COVID-19 crisis since its beginning in China.

Following health protocols established by the Chinese government, and prioritizing the safety of our employees, our plant in Nantong was one of the first factories to resume production after the holiday celebrating Chinese New Year. We have been following the evolution of the pandemic and the impacts on restrictions to mobility initially in Asia and later in Europe and other continents. And we felt a more evident drop in demand and production during the second half of March.

Since the beginning, health and safety of our employees has been the priority. And in addition to following the protocols established by different authorities around the world where we operate, we also implemented additional measures based on best practice aligned with the characteristics of our business. In addition to working on the health aspect of our employees, we paid special attention to financial management with focus on liquidity and preparing our facilities to return to work and support the needs from our customers.

Although there is still very low visibility on automotive demand in the different markets, today, more than 70% of our factories are producing at limited volumes and will increase production according with volumes from the OEMs.

On Slide #1, we see a few examples of the actions implemented to ensure safety of our safety of our employees and other measures were also implemented such as stopping domestic, international travel, substituting physical meetings with video conferencing, limiting access of external personnel to our facilities and other actions to limit concentration of people in the same place. We can see actions like individual protection and body temperature check at our plants, the adoption of home office in admin areas, intensifying cleaning of common areas, readjusting transportation of our employees, among many other actions.

On Slide #2, we can see some of the actions related to financial management with focus on liquidity. We did a detailed review of costs and expense and consequent reduction of such expense; use of programs to reduce hours and waste and suspend employment contracts; investment plan was readjusted; we have a daily management of the company's cash with working capital optimization; and raising additional recourse to strengthen liquidity in the company.

On Slide #3, some of the highlights of the first quarter. Additional fund raising of approximately BRL 670 million in credit lines during the first quarter in order to reinforce the company's liquidity. We achieved a consolidated cash of BRL 1.134 billion in the first quarter, an increase of 160.6% over the first quarter '19. We achieved a consolidated net operating revenue of BRL 2.224 billion in the first quarter, a decrease of 9.9% compared to the first quarter of '19; revenue from domestic sales were BRL 540 million, a decrease of 14.9% compared to the first quarter of '19; an 8.3% revenue reduction in Brazilian reals from international sales in the fourth quarter compared to the first quarter 2019. Excluding the effects of the exchange rate variation, our net operating revenue would have decreased 20.4% in the first quarter 2020. We achieved a net income of BRL 9.2 million, a reduction of 85.5% compared to the first quarter '19. Net financial debt of BRL 3.166 billion and a financial leverage represented 3x at the end of the first quarter 2020.

On Slide #4, we can see some of the information related to the consolidated net operating revenue of BRL 2.225 billion in the first quarter 2020, a reduction of 9.9% versus the first quarter 2019. Our net operating revenue was impacted during the second half of March and also we observed decreasing vehicle production volumes in the main markets during the first quarter.

Looking at each one of the specific main markets on Slide #5. Our net operating revenue in the first quarter was BRL 515 million, a reduction of 14.9% versus the first quarter of '19. South America represented 23.1% of our consolidated net operating revenue versus 24.5% in the first quarter 2019.

When we look at the market performance in terms of vehicles produced in South America, particularly Brazil, we can see a reduction of 16.8% in the production of light vehicles in the first quarter of 2020 and a reduction of 0.6% in the production of commercial vehicles in the first quarter of 2020. We can see a sharp drop in the light vehicle production in Brazil during the period.

On Slide #6, the operational performance in North America. We achieved net operating revenue of BRL 668 million in the first quarter, a reduction of 14.1% versus the first quarter 2019. North America that represented 31.5% of our net operating revenue in the first quarter of '19, now represents 30% in the first quarter of 2020. We can see also a significant reduction in the production of commercial vehicles in North America of 28.3% in the first quarter of 2020 and a reduction of 10.3% in the production of light vehicles during the first quarter.

On Slide #7, you can see our net operating revenue in Europe of BRL 852 million, a reduction of 0.9% versus the fourth -- the first quarter 2019. The participation of Europe in our consolidated net operating revenue increased from 34.8% in the first quarter '19 to 38.3% in the first quarter '20. At the same time, we can observe the reduction in the production of vehicles in Europe during the period. Light vehicle production was down 19.4%, and commercial vehicle production was down 29.7% in the first quarter.

On Slide #8, the operational performance in Asia and other markets. We can see a net operating revenue of BRL 190 million, a reduction of 16.1% versus the same period of last year. Asia that represented 9.2% in the first quarter '19 represented now 8.6% in the first quarter 2020. If we look specifically at vehicle production in India, one of our main markets in Asia, we can see a significant vehicle production reduction in the first quarter of 21.3% for light vehicles and 41.9% in the production of commercial vehicles.

On Slide #9, looking at net operating revenue by product, we see a consistent performance in the first quarter of 2020 versus first quarter of '19. Aluminum wheels for light vehicles represents 34% of our net operating revenue. Steel wheels for light vehicles increased from 25% to 27%. Steel wheels for commercial vehicles reduced from 20% to 19%. Structural components for light vehicles stable at 2%, and structural components for commercial vehicle was down from 19% to 18%, primarily impacted by the reduction in the production of commercial vehicles in North America.

On Slide #10, net operating revenue by customer. And we can see the small variance primarily driven by the dynamics mentioned in the prior slides, mainly related to the reduction in the production of commercial vehicles in North America.

On Slide #11, you can see our gross profit of BRL 184 million in the first quarter '19, a reduction of 38% versus the BRL 298 million in the first quarter of '19. The decrease in vehicle production volume in the main markets and the change in mix with significant drop in commercial vehicle market was some of the main reasons around this gross profit reduction.

On Slide #12, we can see the EBITDA for the company of BRL 205 million, a reduction of 15.5% versus the BRL 243 million in the first quarter 2019. During this first quarter 2020, there were some nonrecurring effects as described on this page. There's a favorable decision to exclude ICMS from the PIS/COFINS tax in Amsted-Maxion with a positive impact of BRL 5.1 million. The devaluation of a put option to purchase the shareholding of a subsidiary with a positive impact of BRL 25.7 million and structural adjustments in North America with a negative impact of BRL 4 million.

Our net income on Page 10 -- on Page 13 was BRL 9 million versus BRL 63 million in the first quarter of 2019.

On Page 14, our investments were BRL 110 million in the first quarter 2020, a 3.5% reduction versus the same period of last year. Our main investments were related to the beginning of the operations of the new aluminum wheels plant in India and investments in automation and productivity.

On Slide 15, you can see the indebtedness of the company of BRL 3.166 billion in the first quarter of '20. On the bottom of the page, you can look at our gross debt growing 36% in the -- from the first quarter of last year to the first quarter of this year and our cash improving 160.6% in the same period. Our net debt grew 16% from the first quarter '19 to the first quarter of 2020.

When you look at the breakdown of our gross debt, Brazilian reals represent 45% of our gross debt; euro represents 35%, dollar represents 14%; and other currencies, 6%. On the bottom of the page, you can look at our short-term debt, represents 34% of our total debt. And the average cost of our indebtedness is 4.2% per annual versus 5.5% versus the same period of last year.

With this, we'd like to open for any questions from participants.

[Operator]

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

[Victor Mizusaki, analyst]

I have got 2 questions. The first one, when we take a look on the balance sheet of some of your competitors, they report, let's say, a high financial leverage in late 2019. So my first question is, if you'd expect a further market consolidation given, I mean, just challenged outlook for the automotive industry. And the second question, more related to Brazil, is there any kind of discussion in order, let's say, to change the Rota 2030?

[Marcos de Oliveira, executive]

Victor, thanks for your questions. Regarding your first question, I think it's too early or too premature to talk about consolidation of companies around the world in the automotive arena. I think over the years, we've seen many, many movements in terms of mergers, acquisitions and different actions. And I think this may be a reality in the future as well, but not necessarily just related to the current COVID-19 situation, but I think more based on the dynamics of the different markets.

Obviously, we are always watching what's going on in the automotive arena, not only related to our components but related to the sector in general, and we'll continue to watch it to see if there is any movement. But at this point in time, I think it's too premature to start assuming based on the results of different companies right now.

Regarding the second question on Rota 2030, I think, I mean, we are watching what investments in engineering around the business. And obviously, the drop in revenues that will be impacting companies in Brazil as well. To understand if that is a significant variance versus the ability of meeting Rota '30 objectives.

At this point in time, there is no specific movement around the Rota 2030. We are continuing to invest on engineering and technology and innovation within Iochpe-Maxion at the right pace, at the right level, obviously, based on our CapEx and our spending capability as we go forward. But I think it's too early also to talk about that because as revenues coming down, as expense by the companies, they come down as well, we need to see what is the threshold and what is the relationship between those 2 elements as we go forward. At this point in time, I think it's -- again, it's a little bit too early to talk about it.

[Operator]

Our next question comes from Mr. Augusto Ensiki, HSBC.

[Augusto Ensiki, analyst]

I've just got 2, initially. If you could go into a little bit more detail, where are you currently operating? And what is suspended? I figure, North America, Europe and Brazil in the main regions. And is there any kind of -- is it entirely suspended? Or is there still minor, partial operations?

And then secondly, could you tell us a little bit about your current cash burn on either a monthly or quarterly basis? And is this set already a paired down level, adjusted, like you said, for the current situation? Or is there more that you can do to bring that down?

[Marcos de Oliveira, executive]

Augusto, good afternoon. Today, we have more than 70% of our plants operating around the world, I would say, at limited volumes and limited production volumes that is basically aligned with the demand from our OEM customers around the world. I mean I think as we observed during the last several weeks, obviously, our plants in Asia are operating. Our plant in Nantong has been operating since the month of February, I mean, right after the New Year's holiday in China. Our plants in Europe have been -- have started to operate in gradually during the last 10 days or so as our OEMs' customers' are starting to operate as well.

In the case of North America, our plants supporting the commercial vehicles, the truck segment, are already operating, are already supporting our customers there. And as the North American OEMs start to operate light vehicles starting next week, our plants supporting light vehicles in North America will also be operating to meet their demand.

In the case of Brazil, our plants supporting commercial vehicles, they've been operating for about 2 weeks already to support the agriculture segment with machinery and earth-moving equipment, and primarily ag equipment, and also to support truck production. The plant supporting the light vehicle segment, they are basically starting to operate again gradually as our customers in the light vehicle segment start to operate again.

We have one of the major customers starting -- that has started to operate this week and others that will start operating next week and mainly at the end of the month of May, and we will be aligning and adjusting those plants to support those customers.

We have taken all the measures in terms of preparing our plants to be able to support those requirements, when needed, both from a health and safety of our personnel in terms of having raw material ready to produce when we need to produce, and in terms of the working conditions, where we align our many to the requirements of our customers as we go forward with flexibility just to accelerate production as required. At this point in time because there is low visibility in the ongoing demand in the different markets, we decided to maintain a flexible strategy where we will bring people as we need to support those volumes that we believe will start to grow in the next couple of weeks and will grow gradually during the first quarter and the second half of this year.

Regarding the second question, I'll let Elcio talk about it.

[Elcio Ito, executive]

Thanks, Augusto. This is Elcio speaking. Just on the question on the cash burn, I just want to give you a kind of highlight on the overall cash situation. I think that's been the focus of the company and the top priority for everyone here to focus on preservation and increase the liquidity of the company. So liquidity is definitely the name of the game over here.

When we see the first quarter of this year, and seasonally speaking this is kind of a slower quarter from a cash flow perspective, we had a negative operating cash, but BRL 74 million better versus a year ago. So we've been very, very careful on managing the working capital on inventory, accounts payable and receivable. Obviously, we had a very sudden stop of sales. We are just as fast as we could on the purchases as well. But I guess, all this working capital, you will be readjusted as we resume operations, right, on a gradual basis. So those things will offset each other. There's no structural changes.

We continue to receive payments from the OEMs as they -- we've seen the robust balance sheet as well and liquidity as well. So there's -- there hasn't been any major change, structurally speaking. If there is a plus or minus in some of the accounts, they will gradually get readjusted as we reignite our operations. We are very much focused on reducing any expenses that's discretionary and looking at every single project to preserve the liquidity once again and pausing projects that are not essential or priority at this moment.

CapEx, we are also doing exactly the same. Some projects more related to cost reduction or productivity levels are being paused for the moment. Other ones, you simply cannot stop because they would probably cost you more stopping now. So we are just finishing them up. And we should see a significant reduction over the coming quarters as we paused. And obviously, depending on how the market reacts, we might resume a bit on those investments. But for the time being, since the visibility of the recovery is still very limited, we are taking a very conservative expense on this one here.

We have been -- when you -- looking to the working capital, the CapEx and your expenses that are -- we've been also applying for many government-related programs, especially related to labor because that's one of the drivers that we continue to pay our employees and we've been applying in Brazil and many other countries, actually. Each country has its conditions and programs and length and types of reimbursement. So we've been doing that, applying as much as we can, obviously, to minimize the cash burn here and on the other things that we can manage. We are definitely being very active on a global basis here. And as you saw it, we've been able to raise additional liquidity cushion. We haven't stopped at the quarter end. We continued on in April. And given the uncertainty or the recovery shape, no one knows exactly how it's going to take place. We'll continue to reinforce our liquidity through operating initiatives or financial ones as well.

[Augusto Ensiki, analyst]

If I could have, sorry, 2 follow-ups. Firstly, on the CapEx point. How much is the ongoing maintenance CapEx? And how much of that is international and domestic? So the overall CapEx out for the first quarter was pretty stable, but there is a big FX swing in there.

And then secondly to that, on the financing side, are there any debt covenants that you guys need to be -- that you guys need to adhere to? Are you still able to tap additional sourcing -- sorry, additional sources of funding, if necessary?

[Marcos de Oliveira, executive]

Augusto, in terms of CapEx, I mean, it's difficult to give you a very exact number on maintenance CapEx because we normally do maintenance together. We do other -- we implement other actions like automation, updating of equipments with old hardware, old software needs updates. There are a lot of reasons and things that goes together around base maintenance. But roughly, I mean, I would say that about 20% of our CapEx is more related to, I would say, maintenance items, although it's not a pure number, but I think 20% gives you a ballpark.

I think in terms of overall commitments and your questions around covenants, I mean, as we mentioned during the presentation, demand visibility continues to be low and foreign exchange variation continues to be uncertain for us. And a lot of our revenue comes from foreign operations, either dollars or euros.

During the last several weeks, we have focused a lot in the health and safety aspects of the business, financial management and liquidity. And right now there is a special attention on an orderly and efficient return to work of our plants. The company does not provide guidance, and we will continue analyzing market dynamics, and if necessary we'll be preparing ourselves to take pertinent actions in whatever part of the business that we need to take.

[Operator]

[Operator Instructions] It is concluded, the Q&A session. I would like to invite Mr. Oliveira to proceed with his closing statements. Please go ahead, sir.

[Marcos de Oliveira, executive]

As we mentioned at the beginning of the presentation, our priority continues to be health and safety of our employees. Financial management with focus on liquidity continues also to be paramount in our short- and mid-term planning. Although there is low visibility in the automotive demand, our global team continues to pay special attention in establishing adequate conditions to work in our facilities and to optimize our resource while aligning with customer demand. Flexibility of our industrial processes and human capital will continue to be critical to adapt production to different levels of activities in each market, each segment and each customer. Thank you very much for your participation this afternoon.

[Operator]

Iochpe-Maxion conference call is concluded. Thank you very much for your participation, and thank you for using Chorus Call.