Kepler Weber S A : 1Q24 | Transcription

Operator:

Good morning, ladies and gentlemen. Welcome to Kepler Weber's 1Q24 earnings results video conference. Present with us today are Bernardo Nogueira, the CEO, and Paulo Polezi, the CFO and Investor Relations Director.

We would like to inform you that the presentation is being recorded and translated simultaneously. The translation option is available by clicking on the 'interpretation' button. For those following the videoconference in English, it is possible to mute the original audio in Portuguese.

During the Company's presentation, all participants will remain in silent mode. Ensuing this, the question and answer session will begin. To ask questions, click on the 'raise hand' icon. When you are announced, there will be a prompt to activate your microphone, and you will be able to pose your question.

Please bear in mind that any statements made during this conference call regarding Kepler Weber business product, operational and financial targets are projections of the Company's board and may or may not materialize. Investors should understand that political, macroeconomic and other operational factors may influence the Company's future and lead to results that differ materially from the expectations expressed in such forward-looking statements.

To open the 1Q24 results video conference, I turn the floor over to Bernardo Nogueira.

Bernardo Nogueira:

Good morning, everybody. It is a pleasure to be with you for Kepler's 1Q24 results conference call.

Today is a special day for me, the first conference call leading this fantastic Kepler Weber, which, since 1925, has had a team recognized for excellence and with countless opportunities for growth in all segments in which we operate.

Speaking of the 1Q, our performance amplified the positive trends that we had in the 2H13 when there was a significant upturn in business. Our operation continues to deliver excellent results despite the climatic and economic challenges facing some agribusiness gains.

Starting on slide 3, I would like to highlight net revenue, which grew by 17.7% vis-à-vis the 1Q23. The positive performance reflects the Company's excellent market position, which has made a certain moves to capture relevant and at the same time, profitable business. EBITDA reached a robust R$9.4 million with a margin of 23.8%, an increase of 16.8% compared to the 1Q23.

Here, I would like to highlight our operational efficiency, which contributed to greater dilution and absorption of costs together with good commercial and logistics management. Likewise, net profit totaled R$52.2 million with a margin of 13.7% and a growth of 2% compared to the 1Q23. I now invite Paulo to speak about the different business segments.

Paulo Polezi:

Thank you, Bernardo. Good morning to all of you. The Farm segment reached R$132 million, an increase of 22.8% vis-à-vis the same period 2023. We had a portfolio that

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upheld our billing in the 1Q24. And we also showed our efficacy once again, making the most of business opportunities in the south of the country as a result of a strong harvest.

In Agribusiness, we reached R$106 million, down 3.7% vis-à-vis the 1Q23. This quarter, we strategically prioritized directing resources to the more profitable segment. As a result of this strategy, we managed to maintain a stable level of net revenue in absolute numbers.

International business reached R$38.8 million, up 70.2% on 1Q23. An excellent performance, generated by sales of larger projects closed during the 4Q23 contributing to a robust end-of-year portfolio.

Imports and Terminals' net revenue reached R$46.6 million, an increase of 46.5% compared to the 1Q23, as a result of delivery of equipment in 3 important projects, a grain handling terminal in Bahia port project in Para and the corn-ethanol industry in Mato Grosso. Finally, in replacement and services. We saw an increase of 11.8% compared to the same period of 2023, mainly due to the consolidation of Procer, which contributed with an increase of 9.5% in sales.

On slide number 5, I would like to share some important projects concluded in the Três de Maio project, in Rio Grande do Sul. We delivered a dryer with a capacity of 200 tonnes per hour. The main highlight of which is the automated furnace, which delivers greater yield, quality and low energy consumption.

The Correntina project, in Bahia, involves streamlining the unit of a large trading, where we dismantled all equipment that had been in use for a long time and installed new equipment that brought efficiency and safety in grain receiving and storing.

The Ivinhema project in the state of Mato Grosso do Sul, a cooperative project delivered in March 2024, left the client very satisfied, as we met the short delivery deadline, reinforcing Kepler's reliability and leaving us well-positioned to capture new investments.

On slide number 6, we have the Tunas project in Bolivia. This is the first KW MAX dryer to be installed in the country, and it will be a benchmark and will attract new customers to the region.

Finally, we mentioned the Treinta y Tres project in Uruguay. This is an expansion of the project where the client already operated a complete Kepler line and has now built a second line with a KW Dryer 3800, keeping the same equipment configuration.

On slide number 7, we show you the renewal of our portfolio. We had the entry of 18 different supplies contracted, which together amount to approximately R$178 million in new sales.

In the table, we highlight the entry of 10 new simultaneous projects in agro industries, totaling R$119 million, followed by R$35 million in 5 works on the farm and R$23 million referring to 3 export projects for cereal customers, billing starting in June and run until November 2024.

On slide 8, we show you the evolution of EBITDA, where we generated R$90.4 billion, an increase of 1.8% vis-à-vis the 1Q23. EBITDA generation reflects an increase in the level of activity during the period and the result of balance management, the volumes, prices and costs. the margin of 23.8% remained at a level above the average and all the expenses are under control.

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On slide number 9, we show you the evolution of CAPEX investments. In the 1Q24 investments amounted to R$7.8 million, 34% of which was earmarked for complying with standards and legislation, 27% for the development of new products, 26% for increasing manufacturing capacity and 13% for IT systems. We will have an increase of production of 37% and also see significant advances in the economy benefiting the associates in the Company.

On slide 10, you see we had R$319 million for net cash, the same healthy level of the 1Q23. If we do not consider the indebtedness, our net cash position closed at R$173.4 million, reinforcing the robustness of Kepler.

On slide 11, we show the ROIC for the 1Q24, which was 43%, in line with the ROIC for 4Q23, showing a balance between good profitability and the long-term investments made by the Company.

I would like to remind you that the high ROIC is one of the differentials of our business model. It allows us to add new operational capacities without making large CAPEX contributions.

On slide 12, we bring you the payment of R$74.9 million in dividends paid out on April 15, maintaining an attractive payout of 61%.

With this, I would like to conclude my part and return the floor to Bernardo.

Bernardo Nogueira:

Thank you very much, Paulo. Before we end the call, I am delighted to share with you 2 important initiatives in R&S, which we have been working on for months and which will enable us to get even closer to our clients and add value to them.

Firstly, the launch of the Grains of Knowledge long-distance learning. It's innovative and unprecedented in the sector. It will enable us to train customers to increase efficiency and safety in the post-harvest.

Another innovative tool is the Kepler Checklist, an application that carries out detailed diagnosis of equipment, resulting in a significant improvement in customers' operational efficiency.

It is important to note that both projects are scalable and aim to continue generating value in customer relations.

In addition, we have the Kepler Checklist that will facilitate the entry of automatic order for the purchase of new equipment through the app, expanding the possibilities of sales and efficiency, of course.

Before we go on to the question-and-answer session, I want to reinforce our recent achievements, and I will comment on our outlook for the rest of 2024. First of all, I need to emphasize the consistency of the Kepler team's delivery considering the adverse scenario that we are experiencing. We had profitability and turnover at healthy levels and above the historical average.

In March, we also celebrated 1 year of the acquisition of Procer. If we consider the growth of the business during the year, we reached 1,450 people connected, an increase of 37%. The commercial and operational synergies are proof that we are on the right path.

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Finally, I would like to highlight another quarter with a very healthy ROIC. We delivered 43% maintaining consistency in this very important indicator as an outlook for the rest of 2024.

We continue to be cautious and at the same time, confident in maintaining a positive demand of projects for agribusiness ports and terminals replacement and services. I would like to end by saying that although the 2Q traditionally has a lower level of billing due to the typical seasonality, we are working with a scenario of gradual evolution throughout the year.

With this, I would like to end the presentation of the earnings results for the 1Q24. We can now proceed to questions and answers.

Fernanda Urbano, XP:

Good morning. Congratulations for the results, and thank you for taking our two questions. Both questions are thinking about the dynamics of profitability. We saw a very healthy margin in the 1Q of 24% and the cost of raw material has been stable year-on- year. Which will be the pricing dynamic going forward? Will there be a price pressure as the raw material is more stable?

Secondly, a question about mix. In the release, you said that in Agribusiness, your priority are more profitable profits. But you also mentioned a less favorable mix in some projects, with lower margins. Could you give us greater details on the effects of mix in this 1H of the year? And what can we expect in coming quarters considering the portfolio that you already have?

Paulo Polezi:

Thank you for the question, Fernanda. I will begin with the first, Bernardo will help me with the others. You spoke about profitability. In fact, we are quite proud of the profitability that we were able to deliver in the 1Q. A great deal of our efforts is made during the year to maintain productivity in the plant, assertiveness in the certification of products, good strategies for the supply of raw material, good execution and delivery. It is that composition that drives up our profitability.

You spoke about the stable price of raw material. Yes, you are right. We have followed up on the accommodation of commodities. We know that steel and other components connected to steel represent a significant part of our cost. There has been a drop in the prices during the year, and this has helped us to stabilize our cost base. We do not observe any trend for this to change.

Another important factor that we should keep in mind here for you who follows up on the Company is the operating volume. We are delivering a quarter of growth, almost 18% growth in revenue. But this also means there is an adjustment in raw material, especially steel compared to last year, a significant price reduction. But we do have a greater portfolio of orders, almost 30% higher in volume for this quarter.

This, of course, places a great deal of pressure, but also helps us dilute prices and decrease distortion. I would say that these variables will remain as part of our mix of costs and raw material as well, which does not pose any concern for the time being.

Bernardo Nogueira:

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Fernanda, simply to complement the part of the mix and what we can expect for the year, I was thinking about your question, and this is the sixth consecutive year of profitability.

Part of our strategy for this is to be present in the entire productive chain. We are working with farmers, small and larger, well-structured farmers, the cooperative agribusiness, all of that action of the Brazilian agribusiness, we are present in the entire chain until the ports and terminals.

Yes, our strategy is to continue on with this diversification. And of course, year after year, some segments tend to be stronger than others. We have to observe how they behave, and there is a priority of other four businesses on Farm as they end up being more profitable, but always keeping in mind diversification. We do maintain a relevant presence in all segments.

Felipe Lenza, Citi:

Good morning. Congratulations for the results. I have two questions as well. My question refers to the reduction of exposure of Kepler in farms. You said that Kepler has opted for this strategy to focus on more profitable segments. The clients of agribusiness are much larger, and they do not need help in funding, while the farmers do need to have a lower cost access.

There has been a drop in demand for storage in the first months of 2024 because of the rapid depletion of the harvest plan. This being the case, could you give us more color in terms of that reduction that you have in terms of exposure to agribusiness? And what will happen in the Southern region in August? Will this accelerate what you are doing?

My second question, I know it's still very early on, but if you could give us more detail on your entry into silos, the bags, and which is the outlook of the Company for other segments, especially replacement and services? Thank you very much.

Bernardo Nogueira:

Felipe, we have long answers, but we will try to give them all. We can also hold a conversation. Regarding that combination of farms and agribusiness, what is it that we have perceived? The two segments are quite strong in terms of sales, and billing depends on the timing of the execution and the delivery of the work. Sometimes, we have a faster acceleration. We have a lower base compared to last year.

And in industries, we had a very good result last year, but we are not observing a slowdown in agribusiness. We have several projects in the pipeline. Yesterday, we had an acceleration of investments in storage from cooperatives with a very good business pipeline with trading, agribusiness and cooperatives. We are not observing a slowdown.

The part of the 1Q will be very similar to the chart of the year. This is what the pipeline shows us, and this is very healthy. We like the diversification.

To speak about strategy, we have a great deal of continuity in our strategy. We have attained a level of operational excellence, plant excellence, continuous improvement that we want to maintain and strengthen and there is significant work towards strengthening our development and launch of products.

I mentioned at the beginning, some of the observative that are being launched is for quarter in the Agri Show that begins this week, we have the launch of a bio cave that

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helps in the reduction of labor, optimizing labor in the storage units. We have a feeder for the dryer.

And we have a cleaning machine, a new cleaning machine that will be launched in the 2H of the year. So we have a great deal coming out that will add value and increase our revenues, of course.

To speak about the lease of units. I would say that we are at an advanced stage of discussions with some clients and the goal is to set up a pilot this year to learn more. It's important to mention here that when we speak about the lease of units, our vision is that this is very well positioned. It allows us to know where the demand lies. All of this has been mapped throughout Brazil in terms of storage.

We have several clients. We understand from their units. We have a knowledge of engineering, a knowledge of the execution of the work and the maintenance of those units. This knowledge is the value that we can add, and we can enter with capital and the idea is to consolidate storage units for leasing without using the Kepler CAPEX.

Very generally, this is what we are trying to set up. Once we have this pilot concluded, doubtlessly, we will invite you to come to the office so that we can offer you more details in terms of how this will operate.

Álvaro Ruiz, BTG (via webcast):

The increase of rates on Chinese steel, does this impact the operational results of the Company?

Paulo Polezi:

Good morning, Álvaro. Thank you for your question. This issue of the import of steel and much more, I think it's important to discuss it very quickly to give you an answer. We have followed up on this on the last quarter, seeing a higher volume of imported goods, especially coming from China with a highly competitive price. And what impacts the operation of Brazilian plants is this.

We were following up on this very closely. And last week, there was an outcome. The announcement on behalf of the government. There were some announcements in truth, I am going to put them all on the same place. The import aliquot for steel, 10.8%. And in that announcement, the new aliquot would be increased to 25%, but only for a part of that steel.

What they call the NCMs do impact our operation. We would have an impact on the mix of products, especially the steel. We do not import everything, but most of the imports are included on that list, as well as the players of our sector.

Full clarity in terms of the rules, the average volumes considering the years 2021, 2022 would perhaps impact that aliquot that could reach 30% at an average of the 3 years. We know that up to March, the volume of imports was below those 30%. But regardless of these changes and the new rule that applies for the next 12 months, it is important to explain how we work with this at Kepler.

First of all, we have our operational model, we transfer price. Steel represents 50% of our product cost. It is relevant, but obviously, this is reflective in the sales price as well. So we are transferring the price of raw materials.

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Secondly, because of our policies and governance, we do not calculate the price of steel. You will recall that in 2021, 2022, the price of steel increased almost 100%. Nevertheless, the Company continued to work very well with this variation, delivering good results, growth and profitability.

We do not speculate on price. Why not? Because Kepler has a differential of knowing its order portfolio. We know what we are selling, the volume we are selling and we work with a good inventory coverage that is balanced differently from what we see in the market.

Kepler at present knows the margin we will be delivering in each order, and this is very important in terms of our management and Kepler is a company that is a centennial company. It's been around for 99 years. We know how to work well with that. We make our decision based on guaranteed profitability.

And all of the unfoldings of the import aliquot, we are going to have to learn how to work with those mechanisms. And we are going to follow up on what will happen with those volumes in coming quarters. We will keep you informed.

Werner, Trigono Capital:

Good morning, and congratulations for your results. A challenging movement because of the lower prices. But we can see that you are contributing positively. I have two questions on taxation. There is a discussion for a reduction of taxes at federal level, in the Congress. I do not know if you have any news in terms of what is being negotiated. What is happening among the parliamentarians? And to explain the income tax that has had an impact on EBITDA, but not on net revenue. So these are my questions, both referring to taxation.

Paulo Polezi:

Werner, good morning, and thank you for joining us in our earnings results. This is very positive for the Company. Those are important questions that you have just posed. First of all, you are referring to the RESILOS, which is a program that is going through Congress, with incentives to reduce the tax load for the work in terms of grain storage, something that is very important at this point in Brazil.

On Monday, of course, there will be that Agri Show in Ribeirão Preto, and it shows the importance of agribusiness and storage. The price of commodities is somewhat better, but this is a very relevant topic for a country with deficit in storage, even with the harvest break that we have had this year.

When we look forward, the analysts and projections point to the fact that in 2025, the climate variations will not be severe, and there is that perspective that we can go back to a level similar to what we had last year. So this will place a great deal of pressure on the system, on the grain production system and a measure like this one, like RESILOS, is very important for our segment.

The information we have is that this is being debated at internal sessions to be sent to the Senate and the lower chamber. We do not have any updates. The good news, of course, is that it is being debated at Congress, and it will bring us novelties for the harvest coming year.

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The second part of your question, as of the 1st of January this year, we have Law 14709/23 that has fostered changes in taxation and investments granted by the states with a reduction of the gross aliquot of ICMS.

There are two industrial operations, one in the South, the second in Mato Grosso do Sul. This is a newer plant that was built 20 years ago, and we have had that investment incentive. It was very important for our operation, for the production capacity, for a streamlining of the plant.

This alteration, this new law will maintain the benefit of the ICMS, the circulation of merchandise. It will preserve our EBITDA at its present level, but it excludes the benefit of the reduction of the income tax.

This difference of 6.5 p.p. of the rate, the aliquot, we had already captured this in last year, all of the Kepler planning and budgeting already included that variable, and it has not impacted us.

What is more important in our business is that this investment has already been made. It is paid off. And because of this incentive, Kepler nowadays has a very streamlined plan with available production. The market will grow. There will be the need for storage. We are one of the leaders, and we will have room and capacity to continue to invest and increase our production.

So this law has been helpful for Kepler, and we continue with the benefit of the ICMS and not benefits in terms of net revenue. That was the main effect.

Werner:

If you allow me a comment, we have La Niña in the Northern Hemisphere, and it's already pointing towards a problem. We may have a problem with prices. We will see that better in the 2H of the year because there has been a break in soybeans in the United States. Simply an additional comment.

Bernardo Nogueira:

Thank you for that comment about La Niña, Werner. We are following up very closely on the evolutions in the American harvest and in the Brazilian harvest as well. There are 2 interesting elements that we can remark on.

First, the climate, our geographic positioning. Present day Kepler, part of our resilience is to be present throughout the businesses and to be present throughout Brazil. Kepler, 30 years ago, was concentrated in the South. When there was a drought in the South, the Company would suffer.

Last year, we executed work in more than 300 municipalities throughout Brazil, and events such as La Niña and El Niño will impact one region but will benefit other regions, which was the case here with an abundant rainfall in the South and the drought in the North.

Regarding La Niña for the coming year, it's a bit early to speak about the Brazilian production, but La Niña in the 2024, 2025 harvest would bring about good rainfall and good production, and in the South of Brazil, in Argentina and Paraguay, Uruguay, a drought. That would be welcomed by our clients and will end up having a positive impact for us.

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Chrystian Matias de Oliveira, Levant Corp:

Good morning. Congratulations for the results. We have two points of discussion. First of all, you mentioned that you have focused on more profitable segments. But this did have an impact. You are working with larger, more complex businesses. If you could refer to these more profitable products, and which is the outlook for the farm segment for the 2H24?

And secondly, the reduction of commissions, how could this impact your sales team?

Bernardo Nogueira:

Good morning, Chrystian. We had a bit of noise in the first question. It was somewhat difficult to understand what you were saying. You were speaking about a more profitable mix. Could you please repeat the first part of your question?

Chrystian Matias de Oliveira:

Of course, I am sorry. I said that, despite the more profitable mix, you mentioned unfavorable impact on the more complex projects. If I could understand that ratio of mix and the positive impact you had on cost.

Paulo Polezi:

That has clarified the question. Thank you for your questions. In fact, we do have a different mix vis-à-vis what we had last year, but it is not just present in 2023. If you allow me to go back a bit. We had a greater concentration on the farms and lower size projects, and we had a change of mix, as you have observed. That takes us to larger volumes, imports and terminals, a sector that has an enormous project pipeline that is underway as part of the agro chain.

We also have agribusiness and the cooperatives Bernardo mentioned that there was an article in Valore economical, referring to Agribusiness and some of those opportunities that allow Kepler to better gear its mix without losing its focus on the opportunities, of course.

And Farms was a significant answer for our model. Despite what Bernardo will comment on the commodities losing price in international business, the same holds true. A greater growth among our segments where we have a footprint in international business, we have had a higher billing in this quarter. So we end up having an accommodation.

This different billing brings us greater volumes into the plant, a longer delivery term and an increase in the cost, the average weighted cost of the Company. This is the result.

Despite this, Kepler continues to work and has been able to preserve its profitability with a different mix compared to what we had in the past, but we have been able to maintain our sales margins and the important dilution.

This is what we attempted to explain in the results. We see that this will continue on in the coming quarters, so we are making efforts towards a greater diversification, not only when we are servicing clients, but also in the internal part of the plant in our portfolio. Enormous effort from the teams, and we have been able to deliver this differentiated mix.

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Once again, it's a different mix with a somewhat higher cost that will not impact, as it has not impacted our profitability.

I give the floor to Bernardo to answer the rest of the question.

Bernardo Nogueira:

Chrystian, about Farms, very quickly, I think it is worthwhile mentioning two points here. This year, we saw the price of soybean dropping 20% or 30% vis-à-vis last year. So we were cautious about working with farms.

In our portfolio, in sales and procurement, we have observed a need to invest with our clients. There are several segments in agribusiness that have felt that retraction of farmers. But we have not felt that in terms of storage.

And in the conversations we hold with our clients, we see that the priority is storage, among other investments. Of course, the greater bottleneck and the greatest profitability lies in storage.

And an interesting side comment, I was working with a pareto map here, and if we look at sales and billings of farms, 50% of our clients from farms invoice R$50 million, and this extends to R$2 billion in the case of the agricultural groups and other groups in Mato Grosso.

When we speak about farms, therefore, we should keep in mind our farmer, but these are very well-structured groups that work with hedging. They work with enormous professionalism in terms of their cash, and they are better able to deal with these market fluctuations compared to the smaller farmers, or the farmers we had 20 or 30 years ago.

Ricardo Strobino, 4UM Investimentos (via webcast):

Last year, you made a last investment in painting at the plant. I would like to know if this has been concluded. And if you have other large investments in projects. Which is the CAPEX level that we should expect as being a recurrent level for coming periods?

Paulo Polezi:

Ricardo, thank you for the question. To begin with the painting line, there was the inauguration in September last year, and that is a good example of the streamlining that Kepler is carrying out in its plan.

It's a company that in the last few years, has set itself aside. We have been able to take Kepler to another level. And as far as we can observe, Kepler has had a significant evolution, and it's not different in terms of investments to streamline plants.

The painting line is a state-of-the-art technology. It reduces the cost of the product. It enhances the quality and brings about other benefits. It's a part that is sensorial. It has the programming part, it's a highly modern plant that is already under operation.

We have created a plan so that it will absorb growth in the coming 5 years. We do have good capacity for the coming 5 years, and we are very satisfied with the results obtained so far. In Brazil, only 2 companies have that technology, Kepler and a company from another sector.

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