Randon SA Implementos e Participacoes

BOVESPA:RAPT4

Earnings Call Transcript

[Operator]

Good morning. Thank you for waiting. Welcome to Randon S.A. Implementos e Participações Q1 2019 Results Conference Call. With us here today, we have Mr. Daniel Raul Randon, Chairman; Mr. Paulo Prignolato, CFO and Investor Relations Director; Mr. Geraldo Santa Catharina, Director; Mr. Esteban Angeletti, Financial Manager and Investor Relations Manager; Hemerson Fernando De Souza, Fras-le's Investor Relations Director; and the IR team.

We inform that this event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through or at the address, ri.randon.com.br, where the presentation is available. You will control the slide selection. The replay of this event will be available right after the conclusion. We remind you that webcast participants may send questions to Randon, and they will be answered by the IR team after the conference is finished.

Before proceeding, we would like to say that any declarations made during this conference call concerning the business perspectives of Randon, projections, goals are based on beliefs of the company's Board and also based on information currently available. Points about the future are not guarantees of performance. They involve risks and assumptions. They refer to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that general business conditions and other factors may affect the future results of Randon and may lead to results that will differ materially.

Now I'd like to turn the floor to Mr. Daniel Raul Randon, Chairman, who will begin the presentation. Sir, you may proceed.

[Daniel Randon, executive]

Good morning, ladies and gentleman, to all those in the conference call and also those who are linked by telephone and through our website, different from what normally happens in the first 3 months of the year.

During this first quarter, demand began very strong. Randon had a growth in revenue in all its segments in comparison with the same quarter in 2018, which resulted in an increase in margins and profitability. The recovery of the market also allowed price increases in some lines and a better production planning since the known portfolio allowed us to expand our production capacity. Although we began the year with good numbers, we know that the challenges are constant in our business. If, on one hand, we have a domestic market performing well, on the other hand, we have the Argentinian market holding up investments due to the economic crisis, a fact that interfered directly in the production of trucks in Brazil. And the production of trucks grew only 1.3% due to drop in exports. Also, we found in this quarter a drop in demand for products linked to light vehicles, which are responsible for the aftermarket parts. This segment normally is the least affected during crisis and normally is very resilient.

Apart from market factors such as production and sales, we have economic financial factors which affect the results. Even in a market environment with greater demand allowing us to readjust prices, we have pressure on cost from suppliers. The freight prices were readjusted beyond the traditional steel prices. And all of these, together with the political change in the country, bringing a level of uncertainty that reduces the trust of the businessmen, withholding greater investments. Until now, the balance has been positive, and we're celebrating the good results of this quarter.

We're adjusting Randon to the market, investing in new processes, new business. For example, like Randon Triel that is being validated by CADE, we are looking for new fronts to grow revenue by increasing the portfolio of products and also by selling in new territories with new partnerships and upgrading the sales channels. Nevertheless, we are cautious, and we know that the challenges always exist in our business. If the external factors may bring elements that make management difficult internally, we should do our homework and prepare the company to continue, both in times when the market is good and also at times when it is not.

Since the last 8th of May, I was elected Chairman. We informed this before the general meeting. In this new position, I would like to once again confirm my commitment with the company and shareholders. Our history is long, and I have been here for 20 years in many positions. My goal is to maintain the company young at the age of 70, always looking for best practices; and corporate governance and innovation, aiming at growth and perpetuating the company; also, cultivating the main principles and values of the company, begun by our founder, Mr. Raul, and brilliantly continued by the current Chairman, David Randon.

Now I invite you all to look at our goals for 2019 on Slide #4. For 2019, we're projecting BRL 7 billion in gross revenue and BRL 5 billion in net revenue. Of these, we have $300 million coming from abroad, from exports in our plants installed outside Brazil. Concerning investments, BRL 220 million projected and BRL 36.7 million of these in Q1 '19. I reinforce that the investments will be made, and the remaining indicators also show good signs.

Now I pass the floor to Mr. Paulo. He will make the detailed presentation of the results.

[Paulo Prignolato, executive]

Thank you, Daniel. Good morning. Beginning on Slide #5, we present the market numbers for the main segments where Randon is present. Beginning with the segment of semitrailers, we produced 15,000 units, 58% more than in Q1 '18. As a consequence of the growth in production, we had an increase in truck and trailers sold and registered by 61% in comparison with the period in 2018, which had 14,000 only. In comparison with Q4 '18, we had lower growth, 4% in production and 9% in sales. Reminding you that the beginning of the year also has less work hours due to vacation and carnival.

Now going on to trucks. We see a stable production year-over-year with a growth of 1.3%. This increase is lower than in the other segments, especially due to the reduction in exports of trucks, which had a drop of 65% in comparison with Q1 '18. This fact is explained mainly by the reduction in demand from the Argentinian market. Now sales in the domestic market had a growth of 47.7% in comparison with Q1 '18 and a drop of 7.5% when compared to Q4 '18.

The OEMs are saying that they will have a Q2 with good demand. The lack of foreseeability begins in Q2. The market has been cautious with the delays in approving reforms, and the drop in trust reduces demand for products related to the country's growth. We're following the signs of change with caution.

I invite you now to go to Slide #6 to talk about the company's results. In Q1 '19, the company had consolidated net revenue of BRL 1.1 billion, a growth of 23% over Q1 '18. There was an increase in revenue in the 3 segments where Randon is present. In the OEM division, the growth of 18.4% was due to the expansion of sales of semitrailers, 5,135 units sold in the domestic and foreign -- export market, 36.6% higher than the volume sold in Q1 '18. In the auto parts division, there was an increase of 27.3% in net revenue, especially due to the increase in sales of brakes, 32% more. And also, in axles and suspensions, more 28%, and various components sold by Fras-le, 30% more. In Q1 '19, Fras-le had an increase in revenue from new companies that were acquired, which had revenue of BRL 42 million in the quarter.

In the first 3 months of the year, Randon exported $40.4 million, an increase of 9.8% in comparison with the same period in 2018. We may highlight 2 main points about the sales -- export sales: the reduction of exports to Argentina, a drop of 58.8%; and the recovery of sales of semitrailers to the African continent, another 82% increase. As you know, Argentina is facing one of its greatest economic crises with high instability and inflationary pressure. In the company's plan, we foresaw difficult scenario for this market. Concerning exports to Africa, we are celebrating the sale to new territories such as Ghana and Ivory Coast.

In relation to EBITDA and consolidated net result, both had a drop when compared with Q1 '18. This reduction is explained mainly by the fact that in 2018, we had the effect of the advantageous purchase of JURID, which had a positive impact on EBITDA by BRL 52 million and the net result by BRL 17 million. Without this event, the indicators of Q1 '19 would have had a comparable evolution.

In this quarter, the only nonrecurring effect has to do to BRL 18.5 million in hedge accounting. If we adjust EBITDA of -- reached of BRL 134.3 million with a margin of 11.8% to this nonrecurring adjusted EBITDA, would reach BRL 152.8 million with an adjusted margin of 13.3%.

Another new element that arose in the numbers was the adoption of IFRS 16. In the press release and explanatory notes released by the company, you may verify the impact of the adoption of its new accounting standard. I highlight that the change in posting the rent contracts had an impact -- positive impact on EBITDA, BRL 4.7 million, and affected in a negative way the net profit, which dropped by BRL 700,000 in the period. The details are in the report, but we are available to make any clarifications that may be necessary.

Now I invite you to go to Slide #7 to begin the presentation of the general view of the different segments. This segment of semitrailers surprised us and had volumes well above those considered normal for this period. 13,949 semitrailers were sold and registered, a growth in the market, a growth of 61% in relation to Q1 '18. Of this number, 4,413 were manufactured by Randon, which had a market share of 31.6%. The capacity restrictions in our plants really resulted in a temporary loss of market share. Now additionally, at the end of last year, we began a project to expand our production capacity up to 30%, which will be concluded by the middle of the year. The portfolio is already sold until Q3 '19, and now we hope that the grain harvest such as corn and soybean and new freight prices will increase even more the sales in this segment.

Now going on to Slide #8. We have the highlights on railway cars and vehicles, which represented 2.7% and 1.8% in net revenue -- consolidated net revenue. Everyone knows that the railway cars market will not react until the railway concessions are renewed. In this quarter, we sold 86 railway cars, 75.8% less than in the same period last year. The good news is that some positive signs are arising such as an auction for the north-south railway and also progress in the negotiation in renovating the concessions. Concerning special vehicles, we have the evolution of the volumes in this quarter. We sold 97 products with a growth of 42.6%.

On Slides #9 and 10, we will talk about the Auto Parts division. Beginning on Slide #9, we will talk about Fras-le. In the first quarter, the volumes sold by Fras-le had an evolution in most of the product lines sold when we compare with the volumes of Q1 '18. Nevertheless, most of this growth is due to the volumes sold by the new companies acquired by Fras-le such as Fremax, ASK Fras-le and [indiscernible]. Most of the sales of Fras-le come from the aftermarket, approximately 86% in total revenue, half comes from foreign markets. In these environments, Q1 had challenges. Talking about the export market, there was a drop in sales to Argentina due to reduction in the economic activity in the country and the long winter in the U.S., which delayed the maintenance of trucks. Now in aftermarket parts in the domestic market, the sales volumes of light vehicles had the greatest drop.

Now the sales of axles and suspensions, we had a growth of 28% in comparison with Q1 '18. Suspensys has constantly tried to innovate their processes and products. In Q1, the branch launched a new suspension, the TAS, Trailer Air Suspension. It was developed to have more durability, more flexibility and more safety. Thus, it adapts itself to the needs of the user in the different configurations.

Concerning the braking systems sold by Master, an acquisition, the evolution of volumes sold was 32.2% in the quarterly comparison. Also, looking at new opportunities, the company began to offer a new line of products aimed at aftermarket with the brand Masterflex.

The increase in sales of coupling systems was 11.5%. The products sold by Jost are directly linked to the segments of trucks. At Jost, the highlight was the automation of shipping. The confirmation of collection, checking, also preparation of invoices and billing will be done through mobile devices, improving the productivity and integration of the services.

Finally, we have the volumes of -- also of braking drums with a growth of 5.5%. With reaching full capacity, Castertech invested in new -- 2 new ovens to expand their capacity in Q4 '18 and expand the production. Now in Q1, we have the ramp-up of these furnaces, increasing the production capacity.

Now we'd like to go to Slide #11, and we will talk about capital markets. Our shares, RAPT4, closed at BRL 9.70 at the end of March 2019, an increase of 12.4 in the price of shares. When we look at 2018 market cap, BRL 3.1 billion in the period. The average negotiated volume of shares -- preferred shares was BRL 21.6 million in Q1 '19 in comparison with BRL 17.1 million in the same period 2018. On April 30, at the company's general meeting, we approved the distribution of dividends to be paid on May 15. We will distribute BRL 30.1 million or BRL 0.0879 per share.

Now going on to Slide #12. We will begin the presentation of the financial results. We closed Q1 with a total gross debt of BRL 2.6 billion, 80% in domestic currency and 20% in foreign currency. The variation of NCG resulted in an increase of BRL 146.2 million in the first 3 months of the year. The most representative accounts were inventory and clients, especially due to the new level of volumes built.

Now going on to Slide 13. We will talk about the net debt -- consolidated net debt. At the end of Q1 2019, the consolidated net debt without Randon Bank was BRL 880.9 million, with an operational leverage of 1.7x of the consolidated EBITDA without the bank. The increase in net debt is directly linked to the increase in working capital, as we saw previously. Considering the consolidated numbers with the indicators of Randon Bank, the degree of leverage was 2.25x the EBITDA in the last 12 months, and net debt is BRL 1.2 billion.

During the Q1, the company announced its seventh issuance of debentures. On April 10, we obtained BRL 400 million to be paid in 7 years. With this operation, we were able to lengthen our debt and reduce the average cost -- average weight (sic) [ weighted ] cost. The changes in the payment schedule will be noticed in Q2 '19.

I would like to conclude the presentation, but I remind you that in the webcasting, we have available the full presentation with slides that give more details about the indicators presented. We are available for clarifications and comments.

I would like to thank you all for your presence, and now we'd like to begin the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Mr. Lucas Marquiori, Safra Bank.

[Lucas Marquiori, analyst]

I have 2 questions. The first, you mentioned in the presentation about working at full capacity -- capacity restrictions, and this explains many points. How is this looking at Q2? Will you have more industrial capacity? Have you recovered? We saw that the volumes are strong. Are you -- now how will things be in Q2?

Second, could you comment on the investments in production capacity? Please talk about the strategy you have with the acquisition of Triel and also Librelato's movement, who announced a production capacity increase for next year.

[Unknown Executive]

Lucas, thank you for the questions. In fact, in Q1, we had an impact on our availability. We are expanding the capacity. We had to revamp some parts. It's difficult to work and also revamp. So in the S end, this had an effect. This expansion -- or the impacts of this expansion should have finished by the middle of March. So in Q2, we should begin the ramp-up of this expansion, taking our production to 130 products per day.

Concerning investments in expansion, part of these investments are related to capacity increase, BRL 35 million to BRL 40 million. We're invested to take our production to 130 products per day. We have seen the competitors' work, as you mentioned, the competitors' announcements. This will happen because there is a boom in the market. The market is booming. Especially the demand for Q -- second semester, this additional capacity of the main players may put pressure on price. But we have to remember that during -- in this booming market, many competitors are winning share. These are small competitors that have a more flexible capacity, competitors, for example, that also work with repair. So this should change in the second semester as we and the other players have higher capacity.

[Lucas Marquiori, analyst]

Now I would also like to talk about Triel, the new company. Please talk about Triel.

[Unknown Executive]

I had forgotten this point. Thank you. Reminding you that Triel is still being approved by CADE. We don't have much to say. The rationale, the reasoning, we mentioned in previous years, we concentrated on the production of standard parts to win scale, and we left aside an important part of the market, which is customized products, which are tailor-made with a higher ticket, but this requires flexibility in the plant. So we decided to leave this aside for some time. With Triel, with this joint venture with Triel, Randon Triel will once again come back to this market niche, and this will supplement our products to increase margin and top line. Thank you.

[Operator]

Our next question comes from Mr. Wagner Salaverry, Quantitas.

[Wagner Salaverry, analyst]

I have 2 questions. The first, I'd like to know your vision. You are expanding production capacity, the competitors, too. How do you see this market in terms of price discount, maintaining a full plant to have more efficiency, current portfolio, new orders can begin and market share? How will the company work on this during the year with all these variables? Will you concentrate on market? Will you try to maintain market share? So what can you tell us about the rest of the year?

[Unknown Executive]

Thank you for the question. What we have noticed, of course, we interact with our main partners and clients. In fact, in Q1, we saw an important growth in the volume of new orders. And now in April, we noticed a certain stabilization in terms of new orders from OEMs. Today, our portfolio has a horizon of 5 months, always reinforcing that this portfolio, to continue on these levels, will depend a lot on the political economic of the country. So we saw in this period an important gain in price, an important progress in price, especially OEMs. So after the second semester, in our case, 5 months, Q2, Q3, we have -- after this, we will have to see the pension reform -- other reforms to be made by the government.

[Wagner Salaverry, analyst]

Second question is for Mr. Daniel. I'd like to understand, considering in the last few years, we had a strong recession, a period when you had important changes in the markets, Mr. David consolidated the company and bringing the company to this date as a mature company. Now you are the Chairman. What can we expect? Can we expect more balance in auto parts? Would you look at other opportunities outside Brazil? What can we expect with you being Chairman of the group?

[Unknown Executive]

Thank you. Well, first, this -- you said our -- David (sic) [ Daniel ], our Chairman, took the company through many crisis. I was there with him. I was here. Randon Companies in the last crisis, we did our homework. Now we have a more lean structure, and the units have more productivity. Randon went from a market share too of 26% to 40%, answering the previous question. But the challenge, historically, Randon has grown more in auto parts. Auto parts are 51% of our revenue, while we're talking about OEMs, 45%. So auto parts have grown and Fras-le had a strong role in M&A with acquisitions. We want to continue to growing the company, especially going after balanced, sustainable growth. I believe it's worthwhile saying what Randon has done, the joint venture with Triel, which is being analyzed by CADE. So this is an opportunity to continue growing, looking for more partners, trying to invest to have the best return on capital but maintaining important work, like increasing capacity and investing strongly in productivity.

Looking forward, we have a challenge. We're looking more and more to innovation. First, we look at the new divisions in the automotive sector, commercial vehicles, also electrification. We are studying this for the medium and long term, to be ready with electric vehicles and also organization and services. We have looked at opportunities with digitalization and startups. Randon has given support in the region to the development of a strong ecosystem of startups to bring cost reduction and opportunities for new business and being closer to the clients.

So we are working on governance. We did the succession. This is not short term. We've been working for more than 20 years. And we -- I worked with David so we can continue this work. And I believe the crisis helped us to go back to the market with a good profitability. But there are opportunities to grow. Paulo said, "Well, we're expecting the government to really help the country to grow." And with reforms, concessions and privatizations, Randon is prepared for this growth.

[Operator]

[Operator Instructions] Our next question comes from Thiago Casseb, Crédit Suisse.

[Thiago Casseb, analyst]

Daniel, Paulo, Esteban, 2 questions. The first, the environment for price increases in semitrailers. You talked about a possible impact in the second semester. Right now, are you having difficulty in increasing prices due to increases from vendors due to competitors? Auto parts, we saw that the margin suffered an impact. But if consolidated, the margin is strong, above 14%, especially in Master and Caster. Do you see this level of profitability as sustainable in Fras-le for the next semesters?

[Esteban Angeletti, executive]

Thiago, thank you. It's Esteban. Concerning the price environment, it's important to remind you that during the crisis, we have to drop prices, reduce prices. So we are recovering prices. We haven't reached the same levels before the crisis, although the environment is favorable. From now on, the price dynamics will depend a lot on the installed capacity. And also, there is a fight with competitors for the share and also the result of this on margin due to cost control, especially raw materials. And then the economy is recovering. Our suppliers also want to recover prices. So this will depend a lot on the demand, our production capacity and inflationary pressure.

Concerning auto parts, we had a good volume at Fras-le. With this, we have a dilution of fixed costs, which enabled this more interesting margin -- EBITDA margin. Once again, from now on, our concern is in costs. Raw material represents most of the costs and our ability to have successful negotiations or work internally on efficiency gains and processes. Thus, we will see if we can maintain this margin during the year.

[Paulo Prignolato, executive]

I'd like to mention 2 aspects. First, we have a supplies area -- corporate supplies area that is very strong, which looks at the volumes for the whole group. So it has been an area doing an excellent work, especially inside to try to anticipate some strategic movements to preserve our costs. Specifically on Fras-le, your question, we have to remember that Q1 '19 concerning Q1 '18 had some important impacts we cannot forget. For example, new taxes from the government on payroll and also the Argentinian crisis, which were stronger in Q1 if compared with the previous period. Just supplementing Esteban's answer.

[Operator]

[Operator Instructions] Our next question comes from Mr. Mizusaki, Bradesco BBI.

[Victor Mizusaki, analyst]

A follow-up question concerning Fras-le. Please comment how we should see the evolution of margin during the year due to the situation in Q1.

[Unknown Executive]

Hemerson will answer your question. Thank you.

[Hemerson De Souza, executive]

Well, we had a complex Q1 at Fras-le, especially due to cost increase in raw materials. At the end of last year, we did not have time to recover in productivity, processes and also price. I remember that an important part of Fras-le's costs are linked to foreign currency, the U.S. dollar. We are an exporting company. We have challenges to recover prices there. We have taken many measures since January, even before closing -- finishing the month, and we noticed a gradual evolution of the indicators at Fras-le. Also, during -- at the closing of Q2 in April, we are more comfortable with the Fras-le situation.

Operationally, we're going back to better levels, as you know. So we are sure that there is work to be done. We're doing a lot of things. We have some nonrecurring expenses that contaminate the result, but we are working -- on the financial side, we have some difficulties, especially hyperinflation problems in Argentina. Also, these things affect the performance of local units. So we're working to find some fast solutions and try to minimize the impacts of this problem in Argentina. We'd like to say that in spite of the financial situation and exchange rate, operations in Argentina would lower sales. They are very robust. And including the units acquired, we -- Fras-le Argentina, more than 20 years old, we're satisfied with the operations. Unfortunately, the results have problems due to the situation.

[Victor Mizusaki, analyst]

Just 1 question. You mentioned monthly evolution in Q1. Then you mentioned quickly about April. So looking -- thinking of margin year-over-year, is it normalized? Or do we have to wait until the end of the year, with the exception of Argentina?

[Unknown Executive]

I'll talk about Q1. March was very close to normal amounts of the -- normal levels of the company. Thank you.

[Operator]

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

[Daniel Randon, executive]

Once again, I'd like to thank you all for participating. We are available. If you need any clarification, please get in touch directly with our Investor Relations department for the clarifications. Thank you, and we will meet again in the next conference.

[Operator]

The audio conference of Randon is concluded. Thank you. Have a good day. And thank you for using Chorus Call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]