Kepler Weber S A : 2Q23 | Transcription

2Q23 EARNINGS RELEASE VIDEOCONFERENCE

Operator:

Hello, ladies and gentlemen, good morning, and welcome to Kepler Weber earnings video conference for the 2Q23.

Today with us, we have Piero Abbondi, CEO; Paulo Polezi, CFO and Investor Relations Director; and Bernardo Nogueira, Commercial Director, who will participate exclusively in the Q&A session.

Please note that the presentation is being recorded and simultaneously translated. The translation is available by clicking the 'interpretation' button. For those listening in English, you have the option to mute the original Portuguese audio by clicking 'mute original audio'.

During the Company's presentation, all participant's microphones will be disabled. Subsequently, we will initiate the Q&A session. To pose questions, click on the 'Q&A' icon, type your name and company. When announced, a request to activate your microphone will appear on the screen, and you can then turn your microphone to pose your questions.

We would like to clarify that forward-looking statements made during this conference call regarding Kepler Weber's business outlook, operational and financial goals are projections of the Company's management that may or may not come true. Investors should understand that political, macroeconomic and other operational factors may affect the Company's future and lead to results that differ materially from those expressed in such forward-looking statements.

To start the 2Q earnings video conference call, I will now turn the floor over to Piero Abbondi.

Piero Abbondi:

Good morning, everyone. It is a pleasure to be here with you for Kepler's earnings call. The 2Q historically represents the period of lowest activity for Kepler in the year and 2023 is not an exception. Nonetheless, our performance was quite positive, only trailing behind 2Q22 and surpassing all other 2Qs in Kepler's history.

The first highlight of the quarter was the net revenue of R$282 million. This is a drop of 22% when compared to 2Q22. Amongst our 5 business segments, I highlight the significant growth in the Replacement & Services and Ports & Terminals segment. The sustainability of the revenue comes from our resiliency, which is a result of efforts made over the past years to diversify our business segments and territories. Paulo will provide further details on the performance of each segment in his presentation.

In EBITDA, we generated R$53.8 million with a 19% margin representing a 42% reduction vis-à-vis the same period last year. I want to draw attention to the EBITDA margin of the 1H the year. We are delivering practically 22% of profitability, a level never seen before during challenging times, especially in the agro industry.

Finally, in the quarter, there were 2 other important factors. The largest harvest plan that will offer a record amount of R$6.6 billion through PCA, with very attractive interest rates and terms, and a significant demand for our projects where the number of new projects created were significantly higher than the 1H22.

Now I give the floor to Paulo to present the performance of the business segments. Paulo, you have the floor.

Paulo Polezi:

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Thank you, Piero, and good morning to everyone.

Moving to slide 4, you can see the evolution of the 5 business segments. Starting with Farms, we generated R$82.7 million. This is a 37% decrease in the quarter and 25% decrease in the semester.

The grain production in Brazil is at an all-time high, but the reduction in orders is explained by high interest rate and reduced producer remuneration leading to investment postponements. However, the excellent conditions in the new harvest plan have started to stimulate our customers.

In Agri Industries revenue reached R$85.2 million in the quarter and R$195.3 million in the semester, representing 37.5% and 47.3% reduction, respectively. This revenue drop was caused by large customers delaying their investments to the 2H23.

International Businesses generated R$25 million in revenue in the quarter and R$47.7 million in the semester, a drop of 38% and 39%, respectively. The lower activity level was due to decreased sales in Paraguay and Uruguay, our main export countries, due to the decline in commodity prices and severe weather issues.

Imports & Terminals, we experienced 375% growth in the quarter and nearly 900% growth in the semester with a revenue of R$28 million during the quarter and R$59.8 million in the semester. These increases are the result of strong sales performance and the possibility of sequential deliveries, better internal restructuring of the segment, and dedicated specialized team contributed to higher volumes.

Finally, Replacement & Services, there is an increase 32.7% in the quarter and 26.3% in the semester with a revenue of R$60.4 million during the quarter and R$111.4 million in the semester. We are pleased to highlight the expanded market reach with approximately 15% more customers compared to the 1H22. We are consolidating our revenue from Procer in Replacement & Services, which contributed R$9.7 million in the quarter and R$14.2 million in the semester.

On slide 5, I share with you some projects delivered on 2Q23. The Tibagi Paraná project was developed with new phases of expansion in mind, incorporating variable speed elevators and different flows within the unit. In the Rio Crespo Project in Roraima, designed for corn storage, the highlight was the rapid response time of the Kepler team. The client needed the project defined quickly to start work with a narrow utilization window during the harvest season.

The Capão Bonito do Sul, in Rio Grande do Sul, delivered to an important co-op, enabled the expansion of the clients' operating area both in terms of collection point and storage capacity, the ability to quickly and uniformly assemble the structure will enable the reception of winter cereals as of September of 2023.

Now on slide 6, we have the Philadelphia works in Paraguay, located in an agricultural opening region, consolidating our presence in all the country, even in more remote locations, that conveys trust into local customers.

Lastly, we mentioned Santa Cruz de La Sierra in Bolivia, which will enable the capture of local corn production for the manufacturing of poultry feed. The project will allow our clients to establish a more efficient and sustainable production chain to meet the demands of its operation.

On slide 7, we share part of our current portfolio book showing 17 distinct supplies that together amount to approximately R$200 million in new sales. As important as our ability to renew our portfolio, this slide demonstrates Kepler's excellent diversification with significant business opportunities in all segments of operations simultaneously.

On slide 8, we present the evolution of EBITDA on 2Q23. We generated R$53.8 million. This is a drop of 42.9% vis-à-vis R$93.3 million in 2Q22. Despite being lower than last year, the quarter's performance was quite positive, only trailing behind the 2Q22 and surpassing all the other 2Qs in Kepler's history, demonstrating resiliency in a challenging period for farmers.

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Now on slide 9, we show the evolution of our CAPEX. On 2Q23, investments reached R$9.1 million and majority. This is 57% dedicated to increase production capacity. Year-to-date, Kepler has invested R$36.6 million, a 102% more than the investment the 1H22. Within the annual amount, we highlight the final payment of the new powder coating line, our main project in progress with an expected inauguration in September of 2023.

On slide 10, I highlight the announcement on June 27 of the 2023-2024 harvest plan, the largest in history, in which R$6.6 billion, 29% higher than last year, will be directed to the program for construction and expansion of warehouses, PCA, with very attractive interest rates for growers and below the Selic rate. The conditions will enable growers seeking financing to accelerate their warehouse expansion projects to increase efficiency gains in the next harvest.

On slide 11, you can see the material prepared by the ABIMAQ Financing Department, showing the distribution of resources to financial agents separated by modality and interest rates.

On slide 12, I highlight our cash availability, which remains at a robust level ending June with a gross balance of R$266.5 million and a net cash of R$114.1 million. It is important to note that during the quarter, we renewed one of our financing lines, totaling R$50 million, aiming to ensure competitive terms and cost to meet the Company's growth commitments.

On slide 13, we highlight the liquidity of our KEPL3 shares with an average daily trading volume of R$18 million in June, the highest historical daily average in the 1H of all time.

slide 14, we show the ROIC for 2Q23, which totaled 65.7%, a drop of 35.8 p.p. compared to 2Q22. Maintaining our high ROIC is one of the differentials of our business model as we achieve excellent returns even during periods of volatility.

With this, I end my part of the presentation, and I hand it back to Piero.

Piero Abbondi:

Thank you, Paulo. Before addressing the main messages, I would like to especially highlight slide 15, and we can see the negative impacts agricultural commodity prices due to the deficit in storage capacity combined with a record 2022-2023 crop. In April, we witnessed the largest negative premium on soybean since 2004, with the projected volume of shipments for the season. The estimated total losses of the year amounts to R$30.5 billion. These losses could have been avoided with adequate storage capacity.

On slide 16, I provide a summary of recent achievements, and then I will comment on the outlook for the rest of 2023. Regarding recent achievements, in addition to a very positive performance in a challenging quarter, only below 2Q22 and higher than the other 2Qs, we demonstrated resilience with an EBITDA margin above 20% in the 1H the year. We completed the procedures for the opening of our 8 distribution centers in Sorriso, Mato Grosso, another achievement of our Company, pursuing excellence technical support to our customers.

Lastly, I share the information that since July 26, Kepler shares have been traded in the Novo Mercado, representing a significant step, reinforcing our commitment to high standards of corporate governance.

As for the outlook for the second half, I highlight the combination of the high-time harvest with the new high-times harvest plan increase expectations for new businesses in all the segments, focusing on resuming projects by farmers and rural producers. The lower pressure on materials, especially steel, together with operational improvements should contribute to maintaining good profitability in the upcoming quarters. Our efforts remain intense to keep Kepler well-positioned to capture the best projects in the market, accelerating growth and bringing predictability to our results.

I bring the presentation of our results of 2Q23 to an end, and I invite everyone to join us at Kepler Day 2023, which will take place on September 6th at 10:00 a.m. in Sao Paulo at the B3 Arena. You can register on the Investor Relations website. It will be a special event with essential information about our differentiators and the Company's future prospects. Don't miss it.

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Operator, may we proceed with the Q&A session?

André Mazini, Citibank:

Piero, Polezi, congratulations for your results, for your migration to Novo Mercado. I have two questions. Number one would be regarding the differences between Agro Industry and Farm segments. We did expect a drop in the Farm segment because the harvest was lower and R$50 million per company. Perhaps I would like you to explain why a slowdown in Agri industry, because there are other funding- wise that do not depend on the harvest plan.

And in the harvest plan, when we see the last harvest, but not this new one, but the one 2022-2023, there was a significant difference between the resources available and what that the farmers received. The difference was they approved R$5 billion for 2022-2023, and I believe that the farmers only received R$1 billion. Do you believe that we will see something similar during this year, something that was approved? And do you think that we will see less bottlenecks? And perhaps last year's bottlenecks affected last year's harvest plan.

Piero Abbondi:

Good morning, André, and thank you for your question. A timely question. I will start talking about the revenue then Bernardo will answer. And Paulo will talk about the funds. In order to initiate my answer, we have to understand that our sales do not immediately turn into revenue the next month. We have a certain delay. So sales realized today will become a revenue between 90 and 150 days. What we see here during 2Q are sales that were realized on 4Q22 and 1Q23. So we must bear this dynamic in mind because Bernardo will show you that each segment has its dynamic. The Agri Industry has a different dynamic that are more business decision. Farms are more connected to the harvest and the crops.

And the PCA availability, I will hand it over to Bernardo, so he can elaborate on this matter of Farms and Agri Industry that deserve greater attention from you.

Bernardo Nogueira:

Thank you, Piero. Thank you, André, for your question. After Piero's introduction, what we see that there is a lower demand, a lower sale from the farmer vis-à-vis 2022. You have to remember that 2021, 2022 were the best years for the farmer in Brazil, and they were highly capitalized when we see the materialization of their businesses. But now we see a significant growth in the sales toward the Agri Industry. And I would like to show you some.

There was a drop of R$190 million in revenue. These were sold in 2021 that became a revenue in 2022. We did not sell major projects in 2022. This is why we do not see our revenue. Now our sales of the Agri Industry grow at double digits. And we have now 3 projects with Agri Industries, and each one surpasses the R$70 million, so they will be affected. We will see the revenue at the end of 2023 and the beginning of 2024.

Piero Abbondi:

Just adding a number of points. When we talk about the Farm and the farmers, during the past months, we have seen more activity. Perhaps the Agri Industries did not close the 2H because of last year. One of them was uncertainties in the Presidential race. And now in March, people have a clear view and they felt this in sales.

And in terms of Farms, in May, June, July, we have seen greater moments when they start preparing their harvest plan, their crops. They are sure regarding the PCA, and we will see greater results now because this will be delivered throughout the 2H and during the beginning of next year.

Paulo will talk about the PCA.

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Paulo Polezi:

André, good morning, and thank you for participating in our call. So you will hear, we have the Plano Safra, the harvest plan. So within our PCA line, R$6.6 billion, 30% above R$5.1 billion of last year. André, your point is interesting. These funds are funds that, when banks release these funds, and we do not know exactly if 100% of these funds will reach the farmers. Historically, if we see things since the first harvest plan, 80% reach to the farmers, one part is not released, then sometimes the banks do not release one part.

What is important to understand is that most of these funds are released. And we work with this calculation. If we use the historic average if we invest 70% over 6 points, we will have R$4.6 billion, R$4.7 billion. That vis-à-vis R$3 billion, it would be R$1.6 billion additional funds.

So we work with this flow, and we feel reassured that these funds will enable a number of projects, because we have had a year of high-time records. We celebrated the harvest plan and the figures that were announced.

André Mazini:

Thank you, Fernando, Bernardo, Piero and Paulo.

John Wayne da Silva, shareholder (via webcast):

Good morning. Congratulations for your resiliency and results, even in an adverse period. Could you talk about the actual flow of orders via PCA funding? I believe that these funds have not been made available by the banks. Kepler is already manufacturing its materials based on a down payment of the client or does credit have to be approved in order to start the process?

Paulo Polezi:

John, thank you for your question. It's interesting. What is the MO? The funds that are granted, they reach the farmer in stages. Therefore, last year, on July 28, there was a protocol of bank funds. What does this mean? It means that the banks already have the funds available or have received authorization to grant the credit. This is positive on slide 11 of our presentation. We placed this slide to demonstrate how much each bank can fund. So on July 28, this means that the bank can already start funding because they have the volumes.

Regardless of this, we do have order portfolio within Kepler that is waiting for these funds. It takes some time until the bank authorizes and until the clients forward their documentation. But despite this part of these values, which are relevant values that are within our order book, they are released, some farmers carry out down payments because they already have their documentation ready, they have done all the analysis, and with this, we are able to start the production in the plant.

The process is not so systematic. The farmer knows that they have the documents. They know that the protocol is ready. They know that the funds will be available in a period of time, and they authorize the production, so part of this portfolio that had come to a halt is already flowing within our plant.

Herbert Tavares, shareholder (via webcast):

Good morning. Have you felt an improvement from the demand after the announcement of the harvest plan?

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