(A free translation of the original in Portuguese)
Quartely Financial Report
June 30, 2024
Release
Quartely Financial Information
Selected Explanatory Notes
Independent auditors' report
Earnings Conference Call
Date: August 14, 2024
Portuguese/English
11:00 a.m. (Brasília) / 10:00 a.m. (EST
Link: Webinar TUPY3
Code: TUPY
Website: www.tupy.com.br/ir
Investor Relations
Fernando Cestari de Rizzo
CEO and IRO
Rodrigo Périco
CFO
Hugo Zierth
IR Manager
Renan Oliveira
IR Specialist
dri@tupy.com.br
Execution of the strategic agenda. Increase in margins and operational cash generation.
- Revenues: R$2.8 billion in 2Q24 (-5% vs. 2Q23). Drop in physical sales volumes due to the stabilization of demand for commercial vehicles and the performance of off-road applications.
- Operating cash generation: R$413 million (vs. R$159 million in 2Q23), the highest level in the Company's history in a second quarter. The performance was due to cost reductions, operational efficiency, and initiatives in working capital management.
- EBITDA Margin: 14.1%, vs. 11.2% in 2Q23. Capture of synergies across all business areas.
- Adjusted EBITDA: R$395 million, the highest ever (+19% vs. 2Q23). Synergies captured and reductions in costs and expenses offset the impacts from the drop in volumes.
- Net Income: R$18 million (vs. R$62 million in 2Q23). The variation was due to the impact of exchange rates on mark-to-market of derivative instruments amounting to R$168 million, and the appreciation of the Mexican peso on the tax bases in foreign currency (R$66 million, vs positive figure of R$15 million in the previous year)
- Announcement of new contracts for Manufacturing and Energy & Decarbonization segments, with expected revenues of more than R$200 million/year.
TUPY S.A. | Release 1
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
MESSAGE FROM MANAGEMENT
The performance achieved reflects the execution of our strategic agenda. We are advancing on the commercial, operational efficiency, cost reduction and fixed expenses fronts. Despite the market slowdown, we have not lost the basis of our guideline, which is to generate a healthy and solid cash flow.
This allowed us to achieve record results. We recorded the highest quarterly Adjusted EBITDA in the Company's history, in the amount of R$395 million, up by 19% from 2Q23. The Adjusted EBITDA Margin was 14%, increasing by 290 basis points. Operating cash generation was R$413 million, 160% higher than in the same period in 2023.
This is a planned and solid agenda towards a new, larger and more diversified Tupy, with vast growth avenues.
These numbers were achieved amidst a challenging scenario, with a drop in demand in important markets, leading to a 5% decline in net revenue over the previous year. These effects negatively impacted EBITDA by over R$80 million in 2Q24, also impacting margins given the lower dilution of fixed costs. Despite the reduction in volumes, expenses with restructuring and the unfavorable impact from the exchange rate, our internal initiatives contributed to a 9% reduction in costs and a 4% reduction in operating expenses.
Several adjustments will continue to be gradually implemented, including a revision of our structures and processes and the execution of projects aimed at allowing our production to be more flexible, thus enabling production to be reallocated to lines with lower cash costs. This process has required additional expenses; however, it will contribute to a structural increase in margins, which will be leveraged by the resumption in volumes, which will also increase the efficiency of investments in the traditional business.
We also carried out important initiatives in terms of capital allocation, with the issuance of a local market debt instrument (debentures) in the amount of R$1.5 billion, at a CDI rate of +0.97% p.a. The strong demand for these debentures demonstrates the capital markets' confidence in the Company's strategy and its ability to generate value. Proceeds will be used primarily to pay debts with shorter maturities, at an average cost of CDI +1.48% p.a.
Due to uncertainties in the global market and potential repercussions this may have on the economy, we increased our exchange rate protection during the first quarter. The recent currency appreciation negatively impacted the mark-to-market of these instruments, which was reflected in the financial result of 2Q24. However, preserving the exchange rate at current levels will positively contribute to the Company's operating results.
We also approved the income distribution policy, increasing the payout ratio to at least 30% of net income for the year, with semi-annual payments, thus offering greater predictability for shareholders and other market agents.
New Business
Our strategy has also resulted in the signing of new contracts. The skills of our teams, comprised by more than 4,000 technicians and engineers, combined with our history in Research & Development and the comparative advantages of our plants, due to their geographic locations, showcases Tupy as a Company with a unique and strategic positioning in the market.
TUPY S.A. | Release 2
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
Recently, we announced the signing of a contract with Volkswagen Caminhões e Ônibus for machining and assembly of cylinder heads, a type of service that is currently carried out by the customer in Germany. We will also increase our exposure to the pickup truck segment. This is a market with significant growth potential in the coming years and several automakers have already announced investments for additional capacity to meet this demand. We continue to seek new commercial opportunities and have several negotiations underway to offer cast, machined and assembled products.
In the Energy & Decarbonization segment, we recently announced the signing of a memorandum of understanding with Seara, a leading company in food production and part of Grupo JBS, for the development of a new biogas project to produce organo-mineral biofertilizer, biomethane, and carbon dioxide (CO₂) with waste from pig and poultry farming.
The biogas plant will be located in the municipality of Seara, in the state of Santa Catarina, covering a herd of about 200,000 pigs and 1,700,000 poultry
In the distribution segment, we are increasing our product portfolio, and expect to launch of more than 2,000 new spare parts in 2024. We also expanded our network in Brazil and abroad, consolidating our market positioning and becoming a reference in the spare parts segment for diesel engines.
We will continue to adhere to our strategy and envision many growth opportunities, both in traditional businesses and in new segments, in which our skills are always applied on the basis of generating value for our customers, partners and society.
TUPY S.A. | Release 3
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
SUMMARIZED RESULTS
Consolidated (R$ thousand) | |||||||
SUMMARY | 2Q24 | 2Q23 | Var. [%] | 1H24 | 1H23 | Var. [%] | |
Revenues | 2,805,461 | 2,965,864 | -5.4% | 5,403,365 | 5,770,270 | -6.4% | |
Cost of goods sold | (2,262,294) | (2,472,434) | -8.5% | (4,395,849) | (4,772,140) | -7.9% | |
Gross Profit | 543,167 | 493,430 | 10.1% | 1,007,516 | 998,130 | 0.9% | |
% on Revenues | 19.4% | 16.6% | 18.6% | 17.3% | |||
Operating expenses | (239,600) | (249,355) | -3.9% | (483,366) | (528,276) | -8.5% | |
Other operating expenses | (56,222) | (64,661) | -13.1% | (83,933) | (73,178) | 14.7% | |
Income before Financial Result | 247,345 | 179,414 | 37.9% | 440,217 | 396,676 | 11.0% | |
% on Revenues | 8.8% | 6.0% | 8.1% | 6.9% | |||
Net financial result | (176,465) | (94,883) | 86.0% | (228,480) | (161,139) | 41.8% | |
Earnings before Tax Effects | 70,880 | 84,531 | -16.1% | 211,737 | 235,537 | -10.1% | |
% on Revenues | 2.5% | 2.9% | 3.9% | 4.1% | |||
Income tax and social contribution | (52,884) | (22,661) | 133.4% | (81,996) | (28,391) | 188.8% | |
Net Income | 17,996 | 61,870 | -70.9% | 129,741 | 207,146 | -37.4% | |
% on Revenues | 0.6% | 2.1% | 2.4% | 3.6% | |||
EBITDA (CVM Inst. 156/22) | 340,867 | 269,744 | 26.4% | 623,346 | 578,735 | 7.7% | |
% on Revenues | 12.2% | 9.1% | 11.5% | 10.0% | |||
Adjusted EBITDA | 394,973 | 332,250 | 18.9% | 703,034 | 647,603 | 8.6% | |
% on Revenues | 14.1% | 11.2% | 13.0% | 11.2% | |||
Average exchange rate (BRL/USD) | 5.21 | 4.95 | 5.3% | 5.08 | 5.07 | 0.2% | |
Average exchange rate (BRL/EUR) | 5.61 | 5.39 | 4.2% | 5.50 | 5.48 | 0.3% | |
TUPY S.A. | Release 4
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
REVENUES
In 2Q24, 43% of revenues originated in North America. The South and Central Americas accounted for 40%, and Europe for 15% of the total. The remaining 2% came from Asia, Africa, and Oceania, and the acquired plants contributed to higher exposure to the Brazilian and European markets.
It is worth noting that several customers in the U.S. export their goods to other countries. Therefore, a substantial portion of sales to that region meets the global demand for commercial vehicles, machinery, and off-road equipment.
Consolidated (R$ thousand) | |||||||
2Q24 | 2Q23 | Var. [%] | 1H24 | 1H23 | Var. [%] | ||
Revenues | 2,805,461 | 2,965,864 | -5.4% | 5,403,365 | 5,770,270 | -6.4% | |
Domestic Market | 1,062,979 | 948,853 | 12.0% | 1,997,440 | 1,839,588 | 8.6% | |
Structural Components & Manufacturing Contracts | 757,860 | 697,979 | 8.6% | 1,444,700 | 1,302,219 | 10.9% | |
Commercial vehicles (and passenger cars) | 676,686 | 616,369 | 9.8% | 1,301,071 | 1,137,794 | 14.4% | |
Off-road | 81,174 | 81,611 | -0.5% | 143,629 | 164,425 | -12.6% | |
Energy & Decarbonization | 147,470 | 110,754 | 33.2% | 270,145 | 255,027 | 5.9% | |
Distribution | 157,649 | 140,118 | 12.5% | 282,594 | 282,339 | 0.1% | |
Export Market | 1,742,482 | 2,017,011 | -13.6% | 3,405,925 | 3,930,682 | -13.4% | |
Structural Components & Manufacturing Contracts | 1,653,930 | 1,908,242 | -13.3% | 3,235,695 | 3,713,362 | -12.9% | |
Commercial vehicles (and passenger cars) | 1,281,188 | 1,326,263 | -3.4% | 2,489,992 | 2,558,212 | -2.7% | |
Off-road | 372,742 | 581,979 | -36.0% | 745,703 | 1,155,151 | -35.4% | |
Energy & Decarbonization | 42,184 | 49,066 | -14.0% | 79,951 | 100,078 | -20.1% | |
Distribution | 46,368 | 59,700 | -22.3% | 90,280 | 117,239 | -23.0% | |
Note: the division among applications considers our best assumption for cases in which the same product is in two applications.
TUPY S.A. | Release 5
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
REVENUE BY BUSINESS UNIT
Structural Components & Manufacturing Contracts
Price recovery initiatives mitigated the effects of the drop in sales volume, resulting from the stabilization of demand for commercial vehicles in the United States and Europe, the high interest rates, and the product phase out.
In the domestic market, the growth in truck production in Brazil positively impacted our operations in structural components and manufacturing contracts. In turn, we had a reduction in volumes destined for indirect exports.
Demand from off-road applications was mainly impacted by the significant decrease in global prices of agricultural commodities and the performance of sales of machinery for the residential construction market due to high interest rates, as well as adjustments on clients´inventories.
Approximately 45% of revenues come from products that contain machining or engine assembly services for third parties (Manufacturing Contracts), percentage that was 37% in 2Q23.
In terms of product distribution by type of material, 28% of our volume was in CGI casting, compared to 22% in the same period of the previous year.
Energy & Decarbonization
Revenues from the Energy & Decarbonization segment grew by 19% from 2Q23, impacted by the significant increase in sales for generators and marine engines, as well as product ramp-up. These factors offset the reduction in sales of own engines, used mainly in agribusiness, and the lower export volume.
The segment accounted for 14% of the Company's net revenues in the domestic market and 7% of total revenues.
TUPY S.A. | Release 6
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
Distribution
Revenues from the Distribution segment increased by 2%, with highlight to the 13% growth in the domestic market arising from, among other factors, the expansion of the spare parts portfolio (aftermarket).
The hydraulic product business, in turn, was impacted by lower export volume, given the market retraction.
The segment was responsible for 15% of the Company's net revenues in the domestic market and 7% of total revenues.
COST OF GOODS SOLD AND OPERATING EXPENSES
Cost of goods sold (COGS) totaled R$2.3 billion in 2Q24, down by 8% in the annual comparison.
Production volume fell in the quarter in the comparison with 2Q23, due to the reduction in demand of some applications in the Brazilian and foreign markets, resulting in a lower dilution of fixed costs.
Similar to previous quarters, the Mexican peso appreciated in the annual comparison (2% variation vs. 2Q23), impacting costs in this currency.
These effects were partially mitigated by several initiatives to reduce costs and expenses, in addition to productivity gains and synergies implemented over the past quarters. Therefore, gross margin reached 19.4%, increasing by 280 basis points over 2Q23.
Consolidated (R$ thousand) | |||||||||||||||||||
2Q24 | 2Q23 | Var. [%] | 1H24 | 1H23 | Var. [%] | ||||||||||||||
Revenues | 2,805,461 | 2,965,864 | -5.4% | 5,403,365 | 5,770,270 | -6.4% | |||||||||||||
Cost of Goods Sold | (2,262,294) | (2,472,434) | -8.5% | (4,395,849) | (4,772,139) | -7.9% | |||||||||||||
Raw material | (1,359,757) | (1,507,160) | -9.8% | (2,657,732) | (2,943,491) | -9.7% | |||||||||||||
Labor, profit sharing, and social | (493,751) | (505,836) | -2.4% | (937,480) | (957,437) | -2.1% | |||||||||||||
benefits | |||||||||||||||||||
Maintenance supplies | (172,285) | (182,222) | -5.5% | (341,533) | (353,912) | -3.5% | |||||||||||||
Energy | (111,638) | (120,829) | -7.6% | (226,716) | (231,009) | -1.9% | |||||||||||||
Depreciation | (82,030) | (82,621) | -0.7% | (162,942) | (166,760) | -2.3% | |||||||||||||
Others | (42,833) | (73,765) | -41.9% | (69,446) | (119,530) | -41.9% | |||||||||||||
Gross profit | 543,167 | 493,430 | 10.1% | 1,007,516 | 998,131 | 0.9% | |||||||||||||
% on Revenues | 19.4% | 16.6% | 18.6% | 17.3% | |||||||||||||||
Operating expenses | (239,599) | (249,355) | -3.9% | (483,365) | (528,276) | -8.5% | |||||||||||||
% on Revenues | 8.5% | 8.4% | 8.9% | 9.2% |
TUPY S.A. | Release 7
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
Costs for 2Q24 were also mainly affected by:
- Raw material: impact of the appreciation of the Mexican peso and product mix (higher share of machined and CGI parts) mitigated by volume reductions, commercial negotiations and efficiency gain projects;
- Labor: annual salary adjustments and appreciation in the Mexican peso vs. 2Q23, offset by the reduction in headcount and restructuring initiatives;
- Maintenance and outsourced services: volume reductions, management initiatives, and efficiency gains, mitigating the effects of inflation on services and appreciation of the Mexican peso;
- Energy: the reduction was mainly due to the lower production volume in the period and lower energy prices;
- Decrease of R$ 31 million in the other operating costs line. The line includes costs with the handling of products and materials, engine engineering projects, leases, and health and safety, among other items.
Operating expenses, including selling and administrative expenses, reached R$ 240 million, down by 4% from 4Q23, mainly due to the drop in expenses with freight (reduction in volumes and contractual negotiations) and efficiency gains.
OTHER OPERATING INCOME (EXPENSES)
Other Net Operating Income/Expenses came in as an expense of R$ 56 million in 2Q24, compared to an expense of R$ 65 million in the previous year.
Consolidated (R$ thousand)
2Q24 | 2Q23 | Var. [%] | 1H24 | 1H23 | Var. [%] | |
Depreciation of non-operating assets | (2,116) | (2,155) | -1.8% | (4,245) | (4,310) | -1.5% |
Others | (54,106) | (62,506) | -13.4% | (79,688) | (68,868) | 15.7% |
Other operating expenses | (56,222) | (64,661) | -13.1% | (83,933) | (73,178) | 14.7% |
The "Others" line consists of net expenses of R$ 54 million, resulting from (i) the creation/update of provisions, totaling R$ 28 million; (ii) expenses of R$ 12 million with the write-offs of PP&E after the disposal of unserviceable assets and other expenses; (iii) expenses of R$ 5 million related to organizational restructuring; (iv) returns of tax credits received by MWM due to its former controlling shareholder, in accordance with contractual conditions, in the amount of R$ 5 million; and (v) legal fees, in the amount of R$ 4 million.
TUPY S.A. | Release 8
RELEASE | FINANCIAL INFORMATION | EXPLANATORY NOTES | AUDITORS REPORT
NET FINANCIAL RESULT
Net Financial Result came in as an expense of R$ 176 million in 2Q24, against R$ 95 million in 2Q23.
Consolidated (R$ thousand) | ||||||||||||
2Q24 | 2Q23 | Var. [%] | 1H24 | 1H23 | Var. [%] | |||||||
Financial expenses | (96,219) | (76,597) | 25.6% | (174,299) | (159,929) | 9.0% | ||||||
Financial income | 34,722 | 22,140 | 56.8% | 65,908 | 51,227 | 28.7% | ||||||
Net monetary and currency variations | (114,968) | (40,426) | 184.4% | (120,089) | (52,437) | 129.0% | ||||||
Net Financial Result | (176,465) | (94,883) | 86.0% | (228,480) | (161,139) | 41.8% |
The increase in financial expenses in 2Q24 vs. 2Q23, was mainly due to: (i) new funding operations and, consequently, higher expenses related to interest payments, offset by the positive result from swap operations on loans; and (ii) depreciation of the Brazilian real against the U.S. dollar, impacting the provision of interest on debts in foreign currency.
The financial revenues for the period reached R$ 35 million, resulting from the increase in cash position from fundraising and operational cash generation, offsetting the decline in interest income from financial investments.
Net monetary and exchange variations came in as an expense of R$ 115 million, consisting of: (i) results from hedging operations, corresponding to an expense of R$ 168 million in the period, being R$ 143 million from mark-to-market of exchange rate hedging instruments and R$ 25 million from the cash effect on settled operations; and (ii) a positive variation in the balance sheet accounts in foreign currency, of R$ 53 million, due to the depreciation of the Brazilian real against the U.S. dollar in relation to the previous quarter.
EARNINGS BEFORE TAXES AND NET INCOME
The Company's net income was R$ 18 million, down by 71% from the previous year. The result was mainly due to the increase in financial expenses, arising from mark-to-market of exchange rate hedging instruments, and the impact of currency effects on the tax base.
Consolidated (R$ thousand)
2Q24 | 2Q23 | Var. [%] | 1H24 | 1H23 | Var. [%] | |||||||||||||||
Income (Loss) before Tax Effects | 70,880 | 84,531 | -16.1% | 211,737 | 235,537 | -10.1% | ||||||||||||||
Tax effects before currency impacts | 12,993 | (37,316) | - | (43,991) | (91,633) | -52.0% | ||||||||||||||
Earnings before the | 83,873 | 47,215 | 77.6% | 167,746 | 143,904 | 16.6% | ||||||||||||||
currency effects on the tax base | ||||||||||||||||||||
Currency effects on the tax base | (65,877) | 14,655 | - | (38,005) | 63,242 | - | ||||||||||||||
Net Income | 17,996 | 61,870 | -70.9% | 129,741 | 207,146 | -37.4% | ||||||||||||||
The tax bases of the assets and liabilities of the companies located in Mexico, where the functional currency is the U.S. dollar, are held in Mexican pesos at their historical values. Fluctuations in exchange rates affect the tax bases and, consequently, the currency effects are recorded as deferred income tax revenues and/or expenses. In 2Q24, the Company recorded an expense of R$ 66 million, with no cash effect (compared to a revenue of R$ 15 million in 2Q23).
TUPY S.A. | Release 9
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