Transcript - 3Q24 Results Videoconference
0:02 - Movetech Advanced Engineering Center Video
Have you ever dreamed of contributing to the technological development of the world? It was with this visionary perspective of our founder, Francisco Stedile, that the Fras-le Research and Development Center was born. A different perspective on motion control. A pioneering approach to the commitment of developing technologies and solutions for a life in evolution. Over the last 50 years, we have been known for our solid legacy of iconic products, with over 30 years of applications in the global market, cutting-edge technology, and long-standing partnerships. We carry a DNA of innovation and technology in every movement. We work to build a future with a highly skilled team, composed of the best professionals in the market, sustainable solutions, smart materials, products developed in synergy to serve various segments, and tailored projects. Life is movement, and our commitment is to keep technology in constant acceleration. We have evolved from initially focusing on research and development to becoming the largest advanced friction engineering center in Latin America, offering comprehensive solutions for the mobility market. Among several paths, we continue to explore infinite possibilities and seek the best options for each project. A truly new world is the result of innovative ideas, and we invite you to join a new phase of constant technology in motion. Movetech Advanced Engineering Center.
2:19 - Jessica C. Cantele
Hello. Good morning. Welcome to Frasle Mobility's videoconference for the presentation of the third-quarter 2024 results. Before we begin, we would like to share some important announcements. This videoconference is being recorded and will be made available on our website: ri.fraslemobility.com. Simultaneous translation into English is available. To access it, click the "Interpretation" button, represented by the globe icon at the bottom of the screen. There will be a Q&A session at the end of the presentation. Questions can be asked in two ways: via audio, by raising your hand using the "Raise Hand" icon, or in writing through the "Q&A" button. Additionally, we emphasize that the information shared in this videoconference is not a guarantee of performance as it involves risks and uncertainties given that it refers to future events and, therefore, depends on circumstances that may or may not occur.
Thank you for joining us. Today, we are joined by COO Anderson Pontalti, Head of Business, IR, and M&A, Hemerson de Souza, and as a guest, Randoncorp's IRO and CFO, Esteban Angeletti. I now hand it over to Anderson to start the presentation.
3:59 - Anderson Pontalti
Good morning, everyone. Welcome! Jessica, please confirm that I'm coming through clearly. There are several highlights from this quarter that we are very proud of, particularly in our journey of value creation, international expansion, and commitment to the environment. I will begin by emphasizing our focus on the circular economy through our market parts collection project, based at our Fremax plant in Joinville. We have named this initiative Recycle Max. This program partners with our clients, and in 2023 alone, it helped us avoid extracting nearly 3,000 tons of raw materials from the environment. We collaborate with workshops that use our parts in Santa Catarina, Rio Grande do Sul, Paraná, and parts of São Paulo. With this, we avoid extraction, reduce costs, and, above all, achieve a
much more efficient carbon footprint. As some of you have already heard me say, when you place the same product back into a furnace to create a new part, it is already in its ideal chemical composition. This requires less time in the furnace, shortens the cycle, and reduces energy and material consumption, including minerals in general, needed to adjust or calibrate the alloy being melted. We are already proud of this project. It has increasingly been gaining significance. This project, now bearing a name, symbolizes its growing significance to our business in Joinville.
We were also honored with the Sidirepa Award by the Vehicle Repair Industry Union. Fremax received the award for the eighth consecutive year in the category of Best Brake Disc Brand. Additionally, Jurid and Fras-le received the Silver Award as Best Brake Pad Brand. It is worth noting that São Paulo is the region where we face the highest concentration of local and regional players. While Fras-le holds a national leadership position, São Paulo represents the area of greatest competition for us. However, with two strong brands, we have achieved significant market share, penetration, and recognition. In September, which was a month full of innovations, especially in Europe, we participated in the Automechanika trade fair in Frankfurt. For the first time, we presented ourselves as Frasle Mobility, a portfolio company offering solutions rather than simply a provider of individual products. Our brands - Fras-le, Fremax, Juratek (our 2023 acquisition), and Nakata - have all been strengthened. Nakata made its first entry into this market, introducing wheel hubs and preparing to expand into suspension and steering in the near future. Now we are targeting the UK market, where Juratek already has well-established sales channels and a strong sales force. Fremax is also gaining greater importance by expanding its product portfolio, which now includes calipers in addition to friction materials and brake discs. Fras-le remains strong in the region, as it has always been, and is now expanding further, mainly in the UK, leveraging Juratek's sales force. Thus, we have now entered Europe as a solutions and portfolio company rather than just a parts supplier in that region.
Next slide, please. I would now like to invite all of you to join us on December 04 for our Universo Frasle Mobility 2024 event, held in partnership with Marcopolo, which also has an event scheduled for the same week. It would be wonderful to have you join us, to welcome you, and to show you the progress we have made on this site and in Frasle Mobility as a whole. This location represents our DNA. It is where it all began, our headquarters. All plans and ideas were designed there and, from there, we started to execute them. We have evolved from a single-product company to a portfolio company. It would be a pleasure to welcome you. You are our guests. QR codes for registration and programming are available on the screen. We look forward to seeing you. You are always very welcome. Next slide, please. Hemerson, over to you.
9:12 - Hemerson F. de Souza
Thank you, Anderson, and good morning, everyone. It is a pleasure to share some insights about Frasle's performance in the third quarter and first nine months of 2024. To start, I will provide an update on the acquisition of Kuo Refacciones, in Mexico, announced in July. This is a highly significant acquisition for Frasle Mobility, granting us entry into the Mexican market - I like to say "with a red carpet" - by establishing a leadership position with strong access to key channels, relevant brands, and an extremely professional team that has been masterfully managing the business in Mexico. We are still awaiting regulatory approvals from Mexico's antitrust authority. We filed with Cofece (Mexico's equivalent of Brazil's CADE) on July 29 and have made significant progress over the past few weeks. There remains a small chance of approvals coming through in the coming days or months of this year. However, we believe it is more likely this will occur early next year. As Cofece is an independent authority, we have no control over their timelines, but based on other transactions, we remain confident that approval is possible this year, though more likely in January or February. We also submitted this
process in Colombia and have already received approval there. No submissions were necessary in other jurisdictions. Then, when we talk about antitrust authorities, the only remaining approval is from Mexico. From a funding perspective, we have already issued R$750 million in Brazil, ready for drawdown once the conditions precedent, including Cofece's approval, which is the main one, are met. Additionally, we have secured a loan agreement in Mexican pesos equivalent to R$1.0 billion, which will be disbursed post-closing into the acquired company, Dacomsa, the distribution branch of Kuo Refacciones in Mexico. As you can observe in our financial statements, we also secured an investment hedge, specifically a COE (Structured Notes Certificate), a financial investment designed to protect against currency fluctuations. We understand the current environment is quite volatile due to the recent elections in the United States and globally divergent interest rate trends. The Mexican peso has also experienced some fluctuations, but, of course, we are closely monitoring the situation. We are not speculating here; we aim to safeguard our commitments. Therefore, we allocated a portion of these resources to this investment hedge. If you would like to learn more, we held a specific videoconference about this acquisition. I reiterate that this acquisition is extremely relevant for Frasle Mobility, and here is the QR Code that provides access to the videoconference.
Moving on to the next slide, I will discuss the company's performance in the third quarter. As we always emphasize to the market, we are in a solid position to achieve organic growth due to our market leadership across various segments. This is thanks to our market-leading positions in various segments, as well as our diversified revenue base. We operate across multiple regions and have introduced new products in different regions. Anderson just mentioned the launch of Nakata's product lines in the United Kingdom. Initiatives like these allow us to achieve strong growth levels, even organically, and we have done so over time. Earlier in this videoconference, you may have seen a summary video celebrating the 50th anniversary of our Movetech research and development center. This reflects the innovative and pioneering spirit of our business. As I mentioned to someone who called this morning to discuss the results, you cannot harvest apples without planting apple trees. The strong results we are presenting today are a reflection of the long-term foundation we have built. Achieving a 16% growth is the result of targeting markets with growth potential and regions that allow for expansion. Looking at the first nine months of the year, we grew by 8%, which is remarkable considering the challenges we faced in the second quarter. These included severe flooding in Rio Grande do Sul, which many of you followed closely and which continues to have residual effects, as well as global logistical disruptions. We experienced delays of over 200 containers for exports, with a nearly equivalent number of delayed imports. This led to significant difficulties in fulfilling orders, especially at our Nakata unit, which relies heavily on co-manufacturing and imported products. Despite these challenges, we still achieved impressive growth. We are very pleased to say this. Not only here in Brazil but also in international markets, which now account for approximately 40% of our revenue. With the acquisition of Kuo Refacciones, this share is expected to exceed 50%. We will delve further into this later. Compared to the same quarter last year, we grew by 2.3%, a slight decrease quarter-over-quarter, due to the logistical issues I have mentioned. Regarding the first nine months, we saw a slight 2.5% growth. I would like to emphasize our significant exposure to the aftermarket sector. Unlike peers focused on the production of new vehicles, we cater primarily to the automotive consumables market. Nearly 90%, or 88%, of our revenue came from sales to the aftermarket this quarter. This market directly correlates with the vehicles already on the road that require recurring maintenance needs, as our products, such as brakes and suspension components, are critical safety items and not discretionary purchases. This ensures a strong recurrence in sales, which supports our sustained growth.
On the next slide, we will talk a little about the segments. I think it is important to emphasize this. We also share here some details about what we sell for light vehicles-passenger cars and SUVs-
and also what we sell for commercial vehicles, including buses, semi-trailers, and trucks. Overall, approximately 70% of our business comes from the light vehicle segment. However, when we look at our main product line-the area where our company originated, friction products-the commercial segment remains very significant, accounting for over 63%. I can share that across all markets, we have been experiencing a very strong level of sales support. The aftermarket continues to grow, with solid demand across all product lines, mainly for light brake pads for passenger vehicles. We are maintaining and increasing our market share. According to our accessible materials, we currently hold over 40% market share in this line across several brands-a growth we have achieved over recent years. Our capacity is well-suited to meet market demand. We also maintain a near 100% leadership position in the commercial segment for OEM vehicles and are close to 60% in sales of heavy-duty brake linings for trucks, buses, and semi-trailers-a very significant position. In braking systems, we have had excellent and important sales, especially for brake discs. We have also rebuilt a robust portfolio of hydraulic cylinders, master cylinders, and wheel cylinders under the Controil brand, which was impacted by the flooding in the state of Rio Grande do Sul. Here, 90% of our sales are for light vehicles. We have also significantly increased our market share in shock absorbers, expecting to close the year with a share above 25%, compared to 16-17% three years ago. This represents great progress across all lines related to suspension, steering, and powertrain, despite the logistical challenges I have already mentioned. In the "others" category, we include products that do not fit neatly into these lines, primarily sold to the light vehicle segment. One highlight here includes composites (Composs), which Anderson will address later. As this is Fenatran week, as Anderson will address later, we are showcasing this line, especially alongside Randoncorp auto parts, at a very attractive booth. Several shareholders, investors, and analysts have already visited, but the fair runs until tomorrow, offering an excellent opportunity to experience the vibrancy of this sector. There is a lot of optimism, particularly in the heavy vehicle sector, as we expect favorable business opportunities next year.
Returning to the next slide, we will discuss our margins. It is important to note that in addition to challenges with exports and imports, we have faced increased logistical costs due to limited capacity. We have been impacted by costs, which impacts our margins. However, overall, we have quickly balanced this with internal productivity improvements, raw material cost reductions (through source changes or product optimization), manufacturing process enhancements, and strict expense control. Overall, we evaluate that we reached R$190 million, and when adjusted to R$195.4 million, this can be considered very good, taking into account the crisis caused by the floods in Rio Grande do Sul, the closure of our Fanacif unit in Uruguay, and M&A-related expenses. After these adjustments, we achieved a very healthy margin, comparable to or even slightly above the figures outlined in our guidance for the year. This is a great moment to highlight the recovery of median or higher levels, as indicated in Frasle's annual guidance. I also reiterate that during this quarter, there was the sale of an asset in Argentina, which had a deflationary impact. We sold the unit that previously housed Farloc, consolidating everything into a single building. This property was recently sold, resulting in a recorded loss of R$5.7 million due to the effects of Argentine currency appreciation and the effective sale price. We also recognized a R$1.5 million provision for the Fanacif restructuring, leading to an adjusted EBITDA of R$195.4 million.
Moving to the next slide, let's talk a bit about financial performance. We had investments of approximately R$85 million this quarter-sorry, that's over the first nine months of 2024. A significant portion of these investments was directed towards value creation, productivity, and sustainability. The Green Boiler is about to be inaugurated, a significant investment already accounted for in these figures. Our financial results have also been impacted by the dynamics of our business and, notably, some effects related to Argentina. It is important to mention that this quarter, and for the year to date, there
was an increase in the effective tax rate due to the closure of Fanacif. The higher asset values and related effects led to a higher effective tax rate than usual. However, the normalization of business operations brings us closer to a more typical dynamic going forward.
Regarding working capital, there was a fine line between maintaining performance and ensuring product availability for customers. We are not very happy about this because we experienced a period of shortages. In the aftermarket, an unsold product is a lost sale-no one is going to leave their car parked for two months waiting for a repair because Frasle Mobility does not have the part available. We are fully aware of this, and while we are working to recover and move forward, we strive to keep this well-balanced because it reflects our service level. Service level is extremely important when it comes to ensuring access to aftermarket spare parts. Here we present a breakdown of our CAPEX allocation between the subsidiary and the parent company, giving you some insights into this distribution.
On the next slide, we address net income. For the third quarter, we accumulated R$ 89 million with a margin of 8.6%. This figure is lower than that reported last year, primarily due to Argentina's effects. However, when we analyze the year-to-date figures, there is an 18% decrease, but we observe growth on a quarter-over-quarter basis due to the recovery of our results and operational margins. We are a debt-free company, closing the first nine months of the year with R$140 million in cash and distributing a significant amount of dividends over the last few quarters, which highlights how strong we are in generating cash. During this period, we raised R$470 million and amortized R$120 million in loans.
On the next slide, just to give you an overview of how we are positioned regarding our guidance, we have a revenue guidance of R$3.7 to R$4 billion. We have reached R$2.9 billion so far, with a very positive outlook for maintaining similar revenue levels and results from the third to the fourth quarter. This indicates a positive trend. Year-to-date, we have grown 8% compared to last year. In the export market, our guidance ranges from R$250 million to R$290 million. If we annualize the current figures, we will likely be closer to the upper end of this guidance. And when we talk about adjusted EBITDA, we are positioned at the midpoint of the guidance, reflecting a solid business outlook, as we have mentioned on previous occasions. Additionally, the investments are well-supported by previously contracted commitments, which will guide us toward meeting our established guidance. I will now hand it back to Anderson, who will share some insights on our outlook for the upcoming quarters. After that, we will be here to address any questions during the Q&A session to provide further clarification. Thank you.
27:20 - Anderson Pontalti
Thank you, Hemerson. Reflecting on our last quarter, when we discussed the significant accounting adjustments and mentioned that favorable winds were ahead, they have indeed materialized. We had a very robust quarter, meeting expectations, although still impacted by Argentina and the inflationary effects carried over from December last year. However, these challenges are now stabilizing into a cruising altitude. International logistics also had a notable impact on our volumes and some costs, but even so, we can confidently say that Frasle's model is highly resilient, as it is geopolitically diversified. We operate in various regions, sectors, and business areas. When one faces external challenges, another may benefit positively. Our model remains strong.
The winds ahead are favorable once again, so I will repeat the phrase I used three months ago: the market remains heated, our portfolios are robust, and the export market is very dynamic right now. Looking at revenue in terms of dollars, we are trending toward the upper range of our guidance rather than the midpoint. We are seeing highly favorable orders coming from Latin America, the United States,
Asia, and even Europe. Additionally, we have secured business opportunities that will bear fruit in the coming year. In Argentina, with the economy opening up, improved supplier confidence, more favorable receivables, and a balanced trade environment, the country is beginning to show signs of a more regulated and mature economy. While it is still far from ideal, this represents an opportunity for us to expand our portfolio, increase our offerings, and be more aggressive in terms of volume, even if the margins are not yet at protective levels-those that speculatively shield against country risk, which has been diminishing. Over time, we expect margins to align more closely with those in the global auto parts market.
Global logistics remains an area of concern. In Brazil, the most significant imbalance is no longer related to ships, containers, or alternative routes. Frasle has made clear decisions to diversify ports, shipping lines, and increase product availability at sea to ensure supply. The main concern now lies in the lack of maintenance at Brazilian ports, with dredging issues reducing docking capacities for new, higher-capacity ships. We are mitigating this national infrastructure challenge through the actions mentioned, employing more alternate shipment strategies.
The expansion of our brake pad production line in Caxias is progressing as planned. We have also approved the "6 by 2" shift schedule, meaning we will operate 24/7, increasing plant capacity by approximately 20%. Following the closure of the Fanacif plant, we now have some equipment that, fortunately, can be relocated to Brazil. These machines are being imported and will soon be operational in Caxias do Sul and our plant in Sorocaba. We have gained significant market share in the light friction segment in recent years, and we plan to capture even more. This is the plan we are presenting, and we have prepared ourselves with the necessary capacity. It is worth noting that by March or April next year, our new substation will enable a 20% increase in brake disc production. At Fenatran, as Hemerson already mentioned, we are thrilled with the expansion of Composs, whether through the adoption of our fender technology by other market players-such as Volkswagen, which is incorporating it into its hybrid flagship vehicle-or through its growing application within Iveco, now with what we call Iveco 2 for pneumatic suspensions. We are also introducing various other solutions featuring advanced composite technologies like basalt fiber and laminated components for springs in vehicles, trucks, buses, and operational vehicles. For those who have had the opportunity to visit-or those who have not yet-today and tomorrow are still open, and everyone is very welcome. Our outlook remains extremely promising, as I stated three months ago. The closure of a plant may have its accounting effects, but the legacy of this decision endures, and we'll continue to reap the benefits moving forward. We are very optimistic about the company's current state and its future. Thank you, everyone! Jéssica, I think it is back to you, right?
33:09 - Jessica C. Cantele
That's correct, thank you. Thank you, Anderson and Hemerson. We will now begin the Q&A session. At the beginning of the videoconference, I mentioned that Esteban, Randoncorp's IRO and Chief Finance Officer, would be with us, but he had an unforeseen issue and could not attend. However, Davi Coin Bacichette, the IR and Finance Manager at Randoncorp, is here with us for the Q&A. We will now start with the first question, which is from Gabriel Tinem, Sell-Side Analyst at Santander. Gabriel, we will open your audio. You can go ahead with your question.
33:44 - Gabriel Tinem
Good morning, everyone. Thank you for the opportunity. I have two questions. The first one is more focused on the global logistical impacts that have caused supply shortages and difficulties with exports. You mentioned some measures to address the situation, but you could provide more insight on how much this has impacted your business, or more specifically, how much higher your revenue or better your costs could be if the situation had been normalized. And still on this topic, if you could comment on the raw material issue, as there has been a significant increase in it, it would be great if you could address that. My second question is more related to new businesses. You mentioned the commercial truck linings, which are still strong and one of the highlights of the quarter. But I would like to understand, within Frasle's scope, what the medium- and long-term strategic vision is. Also, because we tend to think of Frasle as more focused on light vehicles, I would like to hear a bit more of this long- term view on this business. Thank you, everyone.
34:42 - Jessica C. Cantele
Thank you, Gabriel. I think Hemerson can start by answering, talking a little about logistics, although he has already covered some points, but especially perhaps focusing on the financial impacts. Then, Anderson can complement by talking about the material costs, and Anderson, later, if you could discuss a bit more about the long-term vision regarding light and heavy vehicles for the company.
35:04 - Hemerson F. de Souza
Thank you, Jéssica, and thank you, Tinem, for your questions. Indeed, we have been experiencing, or are still experiencing, since the end of the second quarter, a very delicate moment in terms of international logistics. It reflects in several aspects: the difficulties in importing, the logistics operators, and the conflicts in the Middle East, which have been avoiding the Suez Canal. So, fleets have been redirected to other routes, including a significant portion through the Panama Canal. It's not just about redirecting. It takes more time, and we have limited capacity in terms of ship availability. Brazil, consequently, still faces infrastructure limitations, which prevent us from receiving ships with larger capacities, so that's another challenge. Internally, we have the Port of Santos operating at full capacity, and even a bit beyond that, and difficulties at the Port of Itajaí, which was without a concession for 6 to 7 months - even more than that - in addition to the flooding that occurred in the South, which created a massive problem when it comes to receiving or omitting ships, technical capacity, and infrastructure to handle the ships directed to Brazil. On top of all this international imbalance, we also had the drought in Panama, so all these factors created problems for us.
So, to go straight to the points: at one point, we had about 300 export containers standing still. In fact, at the end of last month, we shipped 130 containers to an important customer in North America in a single vessel. I am not saying this could have only happened in October, but it definitely could have impacted other months better, like August and September. If we estimate, it was at least around R$20 million per month. On the other side, with product availability, we are mainly talking about our co- manufacturing process via Nakata, but we also have co-manufacturing at Controil, Fras-le, and even Fremax. If we sum up all of that, we left around R$40 million in revenue on the table, which, of course, could have contributed significantly to the performance of the quarter, which was already stellar. It was the first time in history that we hit over one billion reais in revenue in a single isolated quarter. So, we would have had even more support and better performance. When we talk about exports, that is going to happen, so we have a very positive outlook for the fourth quarter. In terms of domestic sales, we maintain high portfolios, and the logistics problems did not affect only Frasle Mobility; they affected
competitors as well. So, everyone is facing a shortage of parts. We are very optimistic that we will catch up and complete this product shortage. We are carrying more inventory and reinforcing our purchases. What we bought and had issues with was purchased in May, June, and July, but what we purchased from September onward is already arriving, so it's coming, and we are filling our shelves to better serve our customers. As I mentioned before, having good inventory levels is not necessarily good news. We make much more money with EBITDA by generating new sales than by "saving" money in working capital. So, we need to adjust working capital well to serve customers properly and not burden the company with unnecessary resource usage. We have been trying, lately, to "fine-tune" things, as we like to say. But the fact is, we went through some rough patches due to the lack of inventory, and that will improve from now on.
39:18 - Anderson Pontalti
Great. Let me complement here, Hemerson. Regarding the raw material cost perspective you mentioned, Gabriel, thank you for the question. Here, we have to consider two or three factors. The first is the additional freight costs. Yes, this has impacted us. We had to do some air freights to keep the shock absorber factory running, small components, because these imported components were not arriving. So, this obviously reflects in the product cost. But there is also the issue of the product mix, like in the case of Nakata and Argentina. Argentina, because of inflationary effects that reduce the profitability base when you consolidate. And Nakata, for having very high margins, ended up being the company that suffered the most among those R$40 million in potential revenue that Hemerson mentioned. The mix ends up weighing a bit on the raw material cost because Fras-le has greater exposure to materials, while the other units have a mix that negatively impacts the overall result. So, we ended up having a slightly higher raw material cost in the past quarter, and these are basically the factors I mentioned.
Going back to the second question, about the development of the heavy-duty line, we are living through the best moment in the company's history. And I say this because we have won almost all drum brake business in the United States, and we have a very dominant market position. We have a relationship with our main customer, Meritor, which has also gained a lot of market share. So, we have a very significant recurring revenue stream, which has been growing over the last 3-4 years. Speaking of drum brakes, we have a very large dominance. Our strategy is always to have competitiveness and the right product, delivering more than the market expects and distancing ourselves from the competition. Our medium- and long-term strategy is to focus on technology substitution, meaning the growth/advancement of disc brakes over drum brakes. This is already settling at a 50% split in the U.S. market between vehicles originally produced with drum and disc brakes, and the fleet circulating will obviously reflect this in the future. The share I mentioned for trailers is still a different reality: drum brakes are still very dominant and should remain so, at least 80%. We have an opportunity to sell disc brakes, which are brake pads with higher added value. Fras-le has made significant investments and gained ground that was once mainly dominated by European competitors. We were the first company to launch Copper-Free formulations. We were the first to launch this across the entire U.S. market, ahead of sales by 5 years. We have a winning material with this technology, which is being very well accepted, with numerous projects in validation over the two winters needed for the U.S. market. So, for the heavy- duty friction line, we have a very clear strategy. We have started designing it, and Tonon is preparing us to have a larger offering of steering and powertrain systems. We also want to leverage the channels that Fras-le already has established to offer more Nakata products in the heavy-duty line, as we believe there is room for this. Especially with our new acquisition in Mexico, Kuo Refacciones has the channels
but little product offering in that market. So, this is a line that tends to gain space and grow within Fras- le Mobility, but the light-duty line is still very strong, and it will not let the share change much, as we have very clear strategies for the light-duty line. We want to maintain this mix at 70 or 60, 40 in a healthy way going forward.
43:49 - Jessica C. Cantele
Thank you, Gabriel. Our next question comes from Lucas Marchiori, Sell-Side Analyst at BTG Pactual. Lucas, you may proceed with your question.
43:57 - Lucas Marchiori
Hi, everyone. Good morning, and thanks for the call. Let me explore two topics here as well. First, Pontalti and Hemerson, could you share your perspective on the U.S. elections? I am mainly trying to capture whether there might be a risk of increased import taxes, particularly with Kuo taking over part of your production base in Mexico. Could this potentially lead to higher costs for exports to the U.S., possibly offset by currency depreciation? I would like to understand your perspective on this geopolitical puzzle. Second, I would like to get a general reference point. Considering the capacity expansion in Caxias, but excluding what came out of Fanacif and Farloc, how does your overall capacity look across the different lines? I am curious if you are simply shifting capacity from one region to another or actually increasing overall capacity. This will help us track revenue expansion against capacity growth. Could you share data from the last 12 months to give us a sense of the average capacity growth in the manufacturing plants? That is it. Thank you.
44:29 - Jessica C. Cantele
Perfect. Thank you, Lucas. I think you can split this up, Anderson. You can start with the U.S. election forecast, and then Hemerson can complement it.
45:40 - Anderson Pontalti
Great questions, Lucas. Thank you. It is always a pleasure to hear from you. We have been fine- tuning our perception here at Fenatran, but we have been discussing this for a while, especially regarding a potential Republican victory. From our perspective, the impact of Maia is very small. First, because Maia represents 95% of the Mexican market, which already has natural protection; only 5% of its business involves the U.S. Also, I believe much of this talk is campaign rhetoric. Most people agree it is just campaign talk. It is not feasible to impose higher tariffs on China and extend them to other countries like Brazil or Mexico without imposing a significant and painful impact on the population, which has already faced a 20% loss in purchasing power during the pandemic. Prices have risen and have not returned to previous levels, while wages have not kept up. There is huge pressure on the U.S. purchasing power. If the government implements what has been said during the campaign, it will cause significant hardship. In our view, it is weak rhetoric and very difficult to implement-just like during Trump's previous term, where much was promised, but little was actually done. However, we do not just sit back; we protect ourselves in our own way. We know that, in the short term, the U.S. market would not be able to meet all its industrial demands-especially for auto parts and trucks-without massive investments in infrastructure and industry. In our view, Frasle would likely see no negative impact, and
we might even benefit from increased tariffs, especially if they target China more heavily than other regions. This perspective is almost unanimous, even among American companies present with us here at Fenatran.
Regarding capacity, we transferred everything we could absorb to Caxias do Sul and added some machines. We have not made heavy investments in capacity because the plant still had an entire third shift available for expansion. Currently, we are operating on Saturdays and Sundays, supported by a maintenance team equipped with technology and a strong focus on preventive and predictive measures. This approach allows us to run 24/7 without deteriorating our assets or experiencing production disruptions. This is part of the company's DNA, and we are in a strong position. We estimate there is still over 20% capacity left to be utilized under this perspective. However, by 2025 and 2026, we will need to invest. We will need investments to expand capacity, especially if we cannot maintain a favorable sourcing environment. We are always considering the "make or buy" approach, but we already understand that, in the coming years, we will need to expand productive and friction capacity, both for the light and heavy product lines. Brake discs are well addressed with the substation matter. As for shock absorbers, we still have an entire second shift to fill, as well as starting a third shift. We also have an almost infinite co-manufacturing arrangement with China, as we like to say, which will be consolidated. Therefore, we do not foresee risks of not growing organically in the short term. There is room for us to gain market share. In friction products, we hold a dominance of 40% to 50% of the market share; going much beyond that would mean sacrificing margins, which is not the company's profile nor what we consider healthy. However, we have other product lines such as suspension, steering, shock absorbers, wheel hubs, and brake discs, where we hold between 25% and 30% market share. In our view, there is room to approach 40% to 45%, so there is space for organic growth. This question was raised during the analysts' visit here, but I reiterate the response: Lucas, we are well-positioned and do not see any limitations at this time.
50:25 - Hemerson F. de Souza
If I may, Anderson, I would just like to add to Lucas's question about the United States: Lucas, remember that we have an advantage of having a factory in the U.S., located in Alabama. So, in some aspects, yes, we also benefit from being closer to the production base, even though, as Anderson mentioned, Mexico is truly an exponent when it comes to supplying the U.S. automotive chain. This chain is extensive, with many factories in Mexico supplying the U.S. market, whether with finished products or systems. So, we are moderately neutral to optimistic about the current situation.
51:17 - Jessica C. Cantele
Thank you, Lucas. Our next question comes from André Ferreira, Sell-Side Analyst at Bradesco BBI. André, your microphone is open.
51:30 - André Ferreira
Good morning, everyone. Thank you for taking my question. Congratulations on the results. I have two points to discuss. First, about the EBITDA margin, we have seen it return to higher levels, around 19% adjusted. On this topic, I would like to discuss two points. First, the quarter-over-quarter improvement of about 2 percentage points-was it positively impacted by the depreciated exchange rate? How do you foresee the margin dynamics going forward? The second macro topic relates to the Fenatran event,