Romi SA

BOVESPA:ROMI3

Earnings Call Transcript

[Operator]

Good morning, and welcome to Indústrias Romi's conference call, where we will present the earnings release of 1Q '21. This call is being recorded. It will be held in Portuguese with simultaneous interpretation into English, and slides will be available on our IR website with -- on www.romi.com/investors. [Operator Instructions]

Before we proceed, I would like to clarify, this call is exclusive for investors and investments and financial analysts. And the forward-looking statements are being made under the business projections, forward-looking statements and objectives or forecasts that are based on the expectations of our management in regards to the future outlook of the company. And these are strictly related to market conditions, to the overall economic performance of Brazil and international markets and are, therefore, subject to change.

With us today are Mr. Luiz Cassiano Rosolen, our CEO; and Fabio Taiar, CFO, CRO. Initially, our executives will present our results for 1Q 2021. And subsequently, we'll be available to take your questions.

I will now give the floor to Mr. Luiz Cassiano Rosolen.

[Luiz Cassiano Rosolen, executive]

Good morning, ladies and gentlemen. Thank you very much for joining our earnings release call for 1Q 2021 of Romi Indústrias. In the first quarter 2021, we've remained with solid results with growth of the domestic sales, and we have also observed an important growth in incoming orders in 1Q 2021 over 1Q 2020, which reflects a strong evolution of our order backlog for the upcoming quarters.

As observed in the fourth quarter, the Romi Machines Unit has maintained a positive incoming order results. Consolidating our operation in the national market with a low interest rate and favorable exchange rate has had a positive impact in competitiveness and productivity for customers. The new Romi Machines generations that have been launched over the past years have been consolidated in the domestic and international market. Our sales margins and order backlog have had a positive impact.

In the Rough and Machined Cast Iron Parts Unit, despite challenges, we've maintained solid margins when compared to the previous market, an important growth when compared to the first quarter 2020. Incoming orders still growing in heavy machines, heavy tools and other business units and industries, agricultural machines, earthmoving machines or operation in Germany. The Burkhardt + Weber business unit has had a significant improvement in incoming order levels, with positive prospectives for the Asian market and the initial recovery of the European market, despite the impacts with the pandemic in the incoming orders in 3Q 2020 and 2Q 2020 in B+W.

The first Q 2021, current portfolio has had a strong growth, which should be reflected in improved results, mainly in the second half 2021. With the pandemic, our ultimate objective in 2021 is to protect our key asset, the Romi team, our families and business partners. We have implemented restrictive and protective measures to continue to operate and to continue selling with excellence to our customers. Challenges that lie ahead are still greater in 2021, but we firmly believe that we will continue to grow rapidly our production and to continue growing our sales.

I would now like to give the floor to Fabio, who will walk you through our results in the first quarter 2021. Welcome, Fabio.

[Fabio Taiar, executive]

Thank you, Cassiano. Good morning to all, and thank you for joining our earnings release call for Indústrias Romi, our 1Q 2021 earnings release. On Slide 3, we will see the highlights for this quarter. Beginning by the EBITDA, we had a BRL 35 million EBITDA in the first quarter 2021, which represented, in relation to the adjusted EBITDA in the first quarter 2020, a growth totaling 149%, a significant evolution.

In terms of incoming orders -- new incoming orders, it was also a strong quarter, totaling BRL 408 million, 118% above the first quarter in 2020. And here, in incoming orders, we should point out the 3 business units had substantial growth in relation to the first quarter in 2020. And we will take an in-depth look at these results throughout the presentation with solid incoming orders in 1Q '21.

By March 30, we had an order backlog reaching BRL 708 million, which means our -- we had a growth of 85.5% over 1Q '20. By 31 March, the company had a solid order backlog for deliveries that will actually happen throughout the next quarters.

In terms of our operating revenue and financial revenue in the first quarter, we have observed that, considering the growing incoming orders in the second half last year, which boosted our order backlog, we had a robust order backlog by the end of 2020, with sales totaling BRL 223 million roughly, which stands for 34% growth compared to the first quarter 2020. This higher volume of billing and effective control of costs and expenses may be also found in our financial demonstrations in our income statement. Well, the EBITDA adjusted was -- presented a growth of 149% compared to 1Q '20.

Now looking at the operating results in the Romi Machines Unit, our net operating revenue in the first quarter 2021 increased by 59.9% compared to 1Q '20 due to the resumption of orders as mentioned, mainly starting June 2020. And with the increase in revenue, coupled with effective control in operating expenses, we had a significant expansion in the operating margin reaching 11.9% points.

In the Rough and Machined Cast Iron Parts in the first quarter 2021, the net operating income also had an important growth by 65.2% in the segment. Heavy parts for the energy industry had a high demand rate, and we also had a recovery of other segments, such as trucks, line and agricultural machines. And growth in revenues, coupled with strict control of costs and expenses, allowed for the expansion of 10.6% points in the operating margin, a significant expansion, therefore.

On Slide 4, we have conjunctural indicators for Q 2020 compared to the same half in the previous year. So the first quarter, we had an important growth in investments indicated by the gray line and the fixed gross capital. As Cassiano mentioned, we have a more favorable interest rate now, favorable for investments, and the exchange rate is also bringing a competitive edge to the national industry in a more favorable environment for investments.

Here, we see the fixed gross capital, which is more flexible than the industrial GDP with an important recovery just as the industrial GDP has positive levels over 8 to 9 consecutive months with a positive manufacturing performance.

On Slide 5, we see other economic indicators that we look at, such as the average utilization of the installed capacity in 2021. This index is slightly higher than indices that were measured from 2015, slightly below 2014, indicating this is a reasonable level, mainly when looking at the demand for spare parts and aftersales service. March, there's a slight decline, which we will look at more closely going forward. With the pandemic, there's higher volatility but still at favorable levels, both for new investments as for aftersales services demand.

And also looking at the Industrial Executive Confidence Index, it was quite good last year. It is still at positive levels, driving investments and coupled to the favorable exchange rate and foreign exchange rate, as mentioned. And just as other indexes, it was also hit by the volatility, but there is still a high interest and consistent interest in these investments looking at early 2021.

As for the segments and demand for our products in the different business units, looking at 1 particular quarter, we had deliverables in heavy machines for 1 particular client, which is basic concentration. But in Romi Machines, machines and equipment, looking mainly at machines and tools, the demand is growing strongly.

Service provider, which is more diversified, looking at the industry demand, well, it continues to be relevant, indicating there is a consistency in recovery. And then, of course, we have the automotive, agricultural industries, which are also demanding high volumes of machines.

in B+W, since no machines were sold in the first quarter 2021, as expected already by our team. And as a result of the lack of new orders over the first 9 months of 2020, and the demand, of course, is back as we will see, but the delivery dates, we have longer periods, longer lead times. So we will be delivering mostly on the second half of 2021. This is what explains the lack of distribution in the first half of 2021 for B+W.

And also in Rough and Machined Cast Iron Parts, we still have a significant demand level. But starting in the last quarter in 2020, there is also an important recovery of the other segments for this unit, such as automotive, commercial and construction, yellow line machines and earthmoving machines and also in agriculture. Therefore, all of these segments are growing in sales.

On Slide #7, we have the net sales per business unit. And if we look at the first quarter 2020 compared to 1Q 2021, we see that Romi Machines are growing just as Rough and Machined Cast Iron Parts are growing. Mainly here, as seen in the recovery of the domestic market from mid-2020 and B+W, our German subsidiary has a decline in sales because, as mentioned, the incoming order was favorable. However, deliveries will be concentrated mainly on the next half, the second half of 2021.

As for the sales, domestic sales, we have had a growth in domestic sales. Romi Machines and Rough and Machined Cast Iron Parts grew more rapidly in the domestic market. In Brazil, actually, our sales grew in the domestic market. And on the other hand, B+W had also a recovery by the end of 2020, in 4Q '20 and 1Q '21, mostly with deliveries in the second half of 2021. We had this decline in European -- sales in Europe, and Latin America growing, especially South American countries. And the agricultural industry has had an important recovery. Just as Brazil has, we have a strong presence in South America, and therefore, we have had growing incoming orders in the first quarter, especially with -- from Argentina and Paraguay. And the U.S. market has remained constant. Asia, smaller share because, of course, it's mostly sales from B+W, which should happen throughout 2021.

These are -- this is our order entry and backlog per business unit. Romi Machines totaled BRL 219 million, 150% above 1Q '20, an expressive -- very expressive growth, both in the domestic market, which had been growing strongly since 2Q '20 and remained strong. And there was an important recovery in incoming orders -- international incoming orders from Europe, U.S.A., which were also, of course, hit by the pandemic throughout 2020. And now we see growth in incoming orders in early '21. And our first quarter in '21 had higher incoming orders than 1Q '20, which is not usual in the season, indicating that 2021 started strong for Romi Machines Unit.

Our German subsidiary, Burkhardt + Weber, had 165% growth over 1Q '20 in reals. But even when converting to euros, it more than doubled, over 100% growth compared to 1Q '20, indicating 2 quarters at extremely positive incoming order levels. And therefore, we will be delivering, and there will be a recovery in our revenues over the next quarters in 2021.

And lastly, our Rough and Machined Cast Iron Parts Unit, well, this unit had growing incoming order levels from mid-2019, with a recovery of the segment in the energy industry. In late 2020, early 2021, there has been also growth in other segments, growing above pre-pandemic levels and resulting in the higher incoming orders in the -- over the first quarter 2020 and the fourth quarter 2020, totaling BRL 408 million, more than double compared to 1Q '20. With this robust incoming order level, we have, by March 31, '21, BRL 780, 85% above that of March 31, 2020. And highlighting the Romi Machines with BRL 304 million, over 200% above 1Q '20, a very important contribution of the domestic market recovery increase in sales and mainly with the orders coming from the international market, which have boosted the backlog in this unit.

And over the last 2 quarters, it has also had an important backlog for -- order backlog for this order in 2021. And therefore, we have a positive outlook for margin recovery over the next quarters for B+W business unit. And lastly, we've also had a 70% higher results compared to March 31, 2020 at B+W, indicating we have a solid backlog for the next quarters.

On Slide 10, we have our cost structure, cost of goods sold. And considering our volumes in 2020 and the order backlog in 2021, we have had an important increase in production. We've ramped up production for machines and also Rough and Machined Cast Iron Parts, and we have been very efficient in ramping up causing for the fixed costs to go down. Therefore, we've ramped up production, and our structure has not remained at the same levels. And especially labor has remained flat, and we've had an increase in materials.

Materials, of course, have also been influenced by inflation, imports, exit rate. We've had a 22.8% depreciation of the real against the dollar and the euro. Still, we have been able to absorb this inflation pressure and maintained our operating margins, as shown in the next slides.

On Slide 11, 1Q '21, our gross margin is 33.9%, one of the best historic margins we have attained with volumes above those we reached in 1Q '20. With this margin growth and revenue growth of 34%, we have also grown our gross revenue by -- from BRL 48 million to BRL 75.5 million, which is quite substantial. With this growth in gross profit and reduction in operating expenses, we've had a more important growth in operating profit going to BRL 25.4 million in 1Q '21. And the operating margin went from 3.4% to 11.4%. That is 8% points.

And we have observed the same on Slide 12, EBITDA margin, which was strong, 15.9% in first Q, BRL 34 million EBITDA roughly, more than doubled 1Q '20. And our net margin -- net income was also 9.3%, much higher than 1Q '20. It is important, however, to note that considering all of the comparative analysis with 4Q '20 and 1Q '20 and the previous quarters and all the quarters that are -- that have a star on the slide, we are looking at recurring EBIT, EBITDA and net income results. Because in 1Q '20 and 4Q '20, we had tax incentives from the previous years that are not part of recurring operations. So here, we have the regular operating results. And when we look at our release results, you will see the results that have the nonrecurring effects and also recurring results of the operation.

Now on Slide 13, we have our performance per business unit, our profitability, Romi Machines with growth in sales. And this was, of course, caused by the higher incoming orders mentioned before, BRL 32.5 million to BRL 132 million growth. And this resulted mainly from domestic sales with a good product mix and growth in demand for spare parts and aftersales services, explaining for this growth in gross margin, reaching 46% gross margin in 1Q '21, which is quite positive. And margin growth, together with volume growth, revenue growth and operating expense controls and reduction cause for a higher growth in EBITDA by the end of the quarter in the Romi Machines, our EBITDA margin totaled 26.7%, one of the highest margins we have reached in this business unit.

However, B+W, we did not sell machines in the first quarter for the lack of orders, incoming orders in the second half 2020 with the pandemic. But now, as mentioned, we will deliver machines at this -- for this business unit in the second half of 2021. Therefore, in the first quarter, B+W Machines business unit had a decline. However, as mentioned, we have a robust order backlog for B+W. And these operating results, margins will be recovered.

And in Rough and Machined Cast Iron Parts, we also had an important growth in our results, with a growing demand, maintained demand for large machines, mainly for the energy industry, and a recovery of the other segments, as mentioned before, causing for growth in volumes, in gross margin and also in EBITDA margin.

Once again, in our 3 business units, by March 31, we had a very robust portfolio. A robust order backlog, and deliveries will happen going forward in terms of production.

Looking at the first quarter 2020 compared to '21, the number of machines went from 164 to 219. We had a 41% growth therefore. And in Rough and Machined Cast Iron Parts from -- also a 50% growth, indicating that we ramped up our production, as I mentioned when I explained our cost structure.

And in our cash position, we had BRL 110 million in -- by the end of 2020. And this delta here looks at BRL 63 million here in our net position, a very solid position. Still here, looking at BRL 63 million, there was an impact from payments of the JCP, the payout, profit payout that we declared in December and paid in January, BRL 64 million. That is the remainder -- well, of the operation, all the investments that were made, totaling BRL 8 million and capital deployment for turnover and to support growth. These were supported by the primary origin.

The EBITDA for the first quarter was quite favorable. And if we look historically at the first quarter and the first half, we usually -- well, had overall this turnover usage. Turnover and deliveries would then accelerate in the second half. This cash was used in the first half and went back. We had the return in the second half. This first quarter now, we have been able, with improved margins, to support the turnover of the first half.

As to our debts we paid, we had made a settlement in March 2021. And we obtained new debts to support our exports operations since we have new incoming orders, as I said. Therefore, there was an extension of the debt. And for the next 9 months, we have BRL 54 million to be settled, and cash, BRL 247 million. Therefore, we do have more than sufficient funds to settle our short-term debt.

As for our share performance, as mentioned in our previous call, 4Q '20, in January, we had already joined these indexes, IBRA, IGCT, SMLL, and giving more visibility to our shares. And this line indicates the volumes traded, which were increased significantly in 2021.

We had favorable results for investments. Our shares also were traded at higher levels, and we had a good performance at Bovespa.

These are the results for 1Q '21 that we wanted to share with all of you. And now we will be available to entertain any questions you might have. Thank you once again for joining our earnings release call for 1Q '21.

[Operator]

[Operator Instructions] This call is exclusive for investors and financial analysts. [Operator Instructions] We have 1 question from Luscas Costa from XP Inventimentos.

Lucas asked the following question. I would like to understand why you had a lower net income.

[Luiz Cassiano Rosolen, executive]

Thank you, Lucas, for your question. It is important to be clear on this because this -- and I would suggest, if you have the opportunity to read our release, you will find thorough information on Page 3 on Slide 3.

In the first quarter 2020, Romi had judicial lawsuit that was related to a discussion regarding the Plano Verao, the summer plan, which had to do with the corrective index dating back from 1998. It was actually processed for many years, and we had a favorable ruling for Romi -- Indústrias Romi.

And this had an impact, if you look at the total income of the operation and nonrecurring effects, it totaled in the first quarter, BRL 40.8 million. However, this impact of Plano Verao and the results of the first quarter in 2020 totaled BRL 35 million, meaning that if we disconsider this nonrecurring effect, which was not actually part of the operations in 1Q '20 net income, the adjusted net income would be [ BRL 5,000,843 ] if compared to the recurring income of our operations in 2021, where you will not consider nonrecurring events, BRL 20,740,074, you have an increase of BRL 225 million there to the net income.

But if you look at the total net income, including those BRL 35 million, or 40 to 117, looking at [ 20 574 ] in the first quarter 2021, you'll have this decline of 49.2%. For this reason, we would rather look at what is resulting from the operation to provide a prospective outlook ruling out, and this has been disclosed in note. So you can all access the numbers and conduct your analysis.

Looking at recurring and nonrecurring net income, there was a decline for the nonusual BRL 35 million effect. And you do not consider that you would have a true growth of 225% in net income.

[Operator]

One question from Mr. Carlos from [ CG Consultadia Investementos ]. And here, can you elaborate on the new business line for machine lease? What does it represent in the business revenues in the last quarter? What percentage will this line attain in terms of business revenue over the next years? And finally, what are the risks and opportunities you've identified in this business line?

[Luiz Cassiano Rosolen, executive]

Thank you, Carlos, for your question. We have launched this new solution. Well, we launched last year -- mid last year. It was a challenging business plan, and we may say now that results 9 months later, 9 months after launching the product, we have positive results, important volumes, business volumes in machine leasing in terms of volume and profitability, and it is aligned to our business plan. And it continues.

Well, it is still low in sales volumes and gross profit and EBITDA because it is still a new business line that is still to consolidate. That's why we have a separate release for this product. However, we may say openly that investments that have been made in the first quarter, BRL 18 million. BRL 17.5 million were invested in machines that are to be leased.

And if you look at this business segment from the start, BRL 30 million have been invested in this new business line, in this new line, indicating the business is evolving rapidly. And once it becomes more solid, we will definitely review it and decide whether we should disclose it separately.

In terms of opportunities, I would say that this product, yes, has proven to have a broad acceptance by our customers. It has proven to be a complementary and additional solution to sales. It has brought new opportunities to operations where we would not actually do purchase and sales operations. Therefore, it's an alternative opportunity.

And when semi-new machines, which have 1- to 2-year leasing contracts, and when they are returned to Romi, we will actually review the machines, and we will be able to sell them as semi-new machines. This might be a competitive advantage, and we may operate more strongly in these markets that use low-cost -- lower-cost machines. And we firmly believe in this product in the long run. And of course, there are risks that are related to the macroeconomic outlook because leasing operations are sensitive to the macroeconomic scenario. There is also -- therefore, it's an economic scenario-related risk cannot related to the operation itself.

[Operator]

There's one more question from [ Egidio Feras ]. As an individual investor, he would like to know what is the exchange rate limit, real, dollar, and when it comes to Romi export?

[Luiz Cassiano Rosolen, executive]

Thank you, Egidio for your question. The exchange rate is quite important when it comes to looking at our sales and exports. But if you look at Romi costs, they are also exchange rate-related.

Fabio has talked about the costs that are tied to exchange rate apart from commodities and metals, which also are tied to the exchange rate. There is no particular exchange rate. If you look at 2007, 2008, the exchange rate was -- well, appreciated, and the real was appreciated, and we had an excellent performance at Romi. But yes, there's room for improvement to consolidate our brand in the international market. And of course, if there's no continued depreciation, there will be more appetite for exports. I hope I've answered your question.

[Operator]

There's 1 more question from Sergio [indiscernible], investor. Thank you for your presentation. Could you actually elaborate on the B+W order backlog for 2021?

[Luiz Cassiano Rosolen, executive]

Yes, this is also in our release. We have had BRL 186 million in the B+W portfolio in our order backlog for 2021. We're mostly looking at 2021. I would say 85% of this amount is for 2021.

[Operator]

We have one more question from Fernando [indiscernible], investor. Is the B+W tied to the sluggish economic growth in Germany?

[Luiz Cassiano Rosolen, executive]

B+W has exposure in Asia and China and the European and German markets, where they use heavy tools for capital goods and oftentimes in energy. These are machines that are used for heavy machines machining. This process is not sluggish because of the German economic process, but rather because of the lead time or machines, B+W products require high-end engineering process. And therefore, we are looking at production line that is intensive. You have production execution, heavy execution for heavy machines. B+W machines, well, we are talking about BRL 2.5 million machines. These are heavy machines and projects. Many of the projects comprise more than 1 machine.

We have 4 EUR 5 million agreements, and this is why we have this lead time. And since we had no order backlog last year because of the pandemic, you have the impacts now 12, 15 months later. And in 4Q '20 and 1Q '21, we've had growing incoming orders, and we are working hard to deliver as soon as possible and throughout 2021 and 2022. Thank you, Fernando.

[Operator]

We have a question from Rafael from [ VTS Investmentos ]. Congratulations on the results. I'd like to know what is the lead time for Romi Machines for the delivery?

[Luiz Cassiano Rosolen, executive]

Well, Rafael, it depends on the type of machine that was ordered. We have machines that are delivered in 45, 60 days, and we have also longer lead times. But in average, overall, we had -- 1.5 years ago when the order backlog was smaller, we had for each quarter order backlogs, we would deliver the next quarter. Now with a growing incoming orders, the production is also ramping up, and this also comes to explain the longer lead time. What we did in 1 quarter before, we are maybe looking at 1.5 quarters when it comes to lead time for these machines.

[Operator]

There is one more question from [ Mr. Thiago Blome ], investor. I'd like to ask you about the [indiscernible] debt. By debts, representing 70% of the total receivables, how comfortable does the company feel with this percentage?

[Luiz Cassiano Rosolen, executive]

Thiago, this percentage here, the provision, if you look at our track record, you have the aging levels, overdue debts, and it has actually gone down. What we have found over the last 2 years is that insolvency has actually improved, and companies have actually reorganized, reinvented themselves. They have improved performance and cash, and they are now actually paying their debt. But with the pandemic, which started last year in March, we were concerned, of course, with our customer portfolio. We then actually put together a task force to work more closely with our clients. However, since the operating levels remained normal, we didn't have a deterioration in cash flow. We actually had a decline in insolvency over 2020. December 2020, we had one of the lowest levels in insolvency in our history. And now in March, we have similar levels to those of December.

And if we look at the results and cash flow, you will see we did not have to sign new provisions to insolvent clients, meaning that our active portfolio is still performing positively. And moreover, our cash generation is robust, indicating that receivables are not getting in the way. Thank you very much for your question.

[Operator]

I have one more question from [ Egidio Feras ] regarding the disruption in logistics and supply chain and if this could impact the lead time of Romi going forward?

[Luiz Cassiano Rosolen, executive]

For the time being, no, we have been able to manage our supply chain adequately, and we have been able to import the parts we needed to continue our production. Of course, it has a cost impact, which presents challenges. However, we have no material shortages. And even at times where there's been a shortage of certain materials, we were able to manage our supply chain. We have had no issues there. Our greatest internal challenge now is to ramp up our output for Romi Machines.

[Operator]

There's another question from [ Lucas Nelson ]. How does the pandemic impact the company performance?

[Luiz Cassiano Rosolen, executive]

It doesn't have much of a great impact. It is a challenge. Some of our coworkers, of course, are on leave because we have to comply with protective measures. So we're doing home office and testing our employees. Some are on leave. And of course, whenever we need to ramp up production, there's an impact there.

And mainly when it comes to B+W, this business unit is a global supplier. We have retrofitting services there, and we have fixtures to our machines. And we haven't been able to do that in China, mainly because of the quarantine, the shelter-in-place controls there. This has had an impact on the B+W's spare parts, but it's improving. In April, many of our technical services will be available in China. And this is improving over time. Thank you.

[Operator]

Since there are no further questions, I would like to give the floor to Mr. Luiz Cassiano Rosolen for his closing remarks. The Investor Relations department of Indústrias Romi will be available to take your remaining questions. You have the floor, Mr. Rosolen.

[Luiz Cassiano Rosolen, executive]

Thank you all for joining the earnings release call of 1Q 2021 of Romi Indústrias. Our Investor Relations team will be available to entertain any additional questions you might have. And see you in the next quarter. Thank you, and have a nice day.

[Operator]

Indústrias Romi earnings release call is adjourned. Thank you all for your participation, and we wish you a great day.