LUPATECH S.A. Conference Call Asia Transcript 4Q09 in English

Transcription

1 LUPATECH S.A. CNPJ/MF nº / NIRE Companhia Aberta de Capital Autorizado Novo Mercado Conference Call Asia Transcript 4Q09 in English Operator: 2Q09 Good morning, welcome everyone to Lupatech 2009 earnings conference call. Today with us we have Mr. Thiago Alonso de Oliveira, CFO and IRO. We would like to inform that today s presentation is available at We also inform you that this event is recorded and all participants will be in a listen-only mode during the Company s presentation. After Lupatech remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Lupatech management and on information currently available to the Company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that conditions related to the macroeconomic scenario, industry and other factors could also cause results to differ materially from those expressed in such forward looking statements. Now, I will turn the conference over to Mr. Thiago Alonso de Oliveira. You may begin your conference Mr. Thiago. Thiago Alonso de Oliveira: Good morning ladies and gentlemen and welcome to the conference call of Lupatech results of the 4Q09 and the 2009 fiscal year. We begin the presentation noting that the 2009 fiscal year was undoubtedly the most difficult year for the Lupatech businesses in the last ten years, when the demand for our products has been strongly impacted by the global financial crisis that began in the last months of Our business of the energy products focused mainly on the Brazilian oil and gas market, were negatively impacted by the delay in the implementation of investments in development which had been previously set for the sector. We believe that these delays occurred due to the strong reduction of the availability of long-term funding and to the overall reduction in oil prices during the 1H09. In the flow control segment, where our dynamic is similar to other capital goods companies, the demand for industrial valves also had a slowdown in the business,

2 especially in Argentina. In the metallurgy segment, our businesses were impacted by the slowdown of the demand from the automotive chain in the northern hemisphere, our main market. Next slide, please. Since 2007 we have been expanding capacity of our plants, especially those related to the energy products segment and the vast majority of these investments started operating in Besides operating during the year with low capacity utilization, around 35% of the total installed capacity, we believe this new capacity will enable Lupatech to attend more and larger projects in the years ahead, when it is expected a demand recovery. Along the year, the global macro-economic conditions have improved and at the end of the fiscal year we began to see improvement in demand. The Company is comfortable with this new scenario due to several bidding processes and quotations which we had participated through the energy products and flow control segments, whose effects will be noticed throughout 2010 and beyond. Next slide, please. During 2009 we initiated several projects aiming the improvement of the integration and synergies in the 15 companies that we have acquired in the last years as part of our diversification process of product lines and services. We believe that throughout 2010 the first positive effects of these measures will be noticed mainly in the reduction of fixed costs and general and administrative expenses. Among the current main measures are the centralization of industrial activities and the implementation of a Lupatech shared services center. These processes that seek synergies and reduction of fixed costs and expenses can positively impact the operating margins for We also believe that there is room for gains from operating leverage as far as the utilization of the installed capacity increases throughout Next slide. In this slide we highlight the main objectives concluded in 2009 such as a joint venture with Vallourec for liners; a joint venture Cameron for manufacturing of reciprocal compressors; supplying of valves and anchoring ropes for Petrobras in projects such as platforms P-55, P-57 and Capixaba, refineries such as REPLAN, REPAR among others; and Block 31 for British Petroleum in Angola; conclusion of the expansion of the Lupatech MNA, Lupatech Oil Services and Lupatech Oil Tools plants; implementation of the EVA concept in the management of the Company s business; new debt structure; and the reduction of the working capital used in the operations. Next slide, please. The energy products segment has verified an important recover on projects related to the development of oil fields with positive results to the Brazilian oil and gas production. This is the kind of activity that benefits us. Since the end of 2009, the Company has participated in several bids related to valves, services and coating being the winner in most of them. With that, we are in the final moments of the conclusion of these processes, which will result in a significant backlog for the next periods. It is important to mention that the demand from new projects such as platforms, refineries, among others, which are characterized by short-term contracts negotiated

3 with EPC companies, has started to show a recovery, mainly those projects related to the refineries while the projects related to platforms still show a low level of activity. Next slide, please. The flow control segment is widely exposed to industrial activity in Brazil and Argentina. With the economic recovery in most of the economy sectors in Brazil, this segment has verified not only increased improvement in the commercial activity as well as in the capacity utilization that will result in better operational rates during the fiscal year of 2010 than those verified during The metallurgy segment has great exposure to the automotive chain. Although it has been verified improvement in the automotive sector in Brazil, the demand of this segment for the Company is focused on the exports to Europe and the United States, markets where this sector has not recovered or has showed very slight signs of recovery. In Argentina, the Company has business with exposure to industrial sectors, mainly oil and gas. Although the improvement in the global scenario has also impacted Argentina, the country faces other internal issues that lead us to expect that in 2010 the activity level will still be modest, given the lack of incentives for investments in the country at this moment. The expectation is that the plants located in Argentina, excluding the gas compressors business, which exports more than 80% of its production and has presented considerable commercial recovery at the end of 2009, should work at levels close to 60% of those recorded in Next slide. In this slide we summarize the main investments planned for Brazil, where only Petrobras intends to invest in the next five years between US$200 billion and US$220 billion, and during 2010 the investment should amount R$88.5 billion. The large amount of oil and gas fields recently discovered, between 2007 and 2010, meaning the reserves need to be developed, will create, in addition to what we can see here, an extremely favorable environment for Lupatech businesses. We are highlighting what is our exposure to the oil and gas sector, pointing that our participation in the supply chain starts after the exploration phase. What explains the fact that the strong movement of discoveries in the last years has not generated material businesses opportunities for Lupatech so far. The conclusion that we have taken is that the expansion of industrial capacity started before we knew the large part of these investments, as well as the most recent discoveries, was necessary to attend the strong demand signalized by the oil and gas sector for the next years, when we expect to see relevant opportunities for Lupatech. Next slide, please. In the past three years we have invested around R$250 million in organic expansion of our businesses, since we believe in a strong increase of the demand as we can see in this slide. In 2008, still with the old capacity, which corresponded to half of the current capacity, we operated close to the limit.

4 In 2009, with the new installed capacity, the double of the previous one, we operated with capacity utilization close to 35% due to the strong reduction of the demand that we noticed during the year. For 2010, we estimate an average utilization during the year of 50%, due to the macroeconomic environment, more favorable for investments than the one verified in This should drive our net revenues to be set close to the verified in 2008, when we recorded approximately R$700 million. The net revenues during 2010 will be concentrated in the 2H of the year, pointing the end of a period of weak demand started at the end of 2008 and the beginning of a period of a robust demand for our products and services. In relation to the perspectives for 2011 and ahead, the Company still expects strong growth of the oil and gas sector, especially in Brazil, targeting to reach the full capacity between 2012 and Until the full capacity has not been reached, we do not plan any capital investments for Lupatech, and for 2010, besides the current level, we are investing around R$50.9 million to attend new contracts, already in our backlog, and more R$28.7 million, or around 36% of the total CAPEX related to the maintenance of the existent plants. Next slide, please. We started the year of 2009 with a capital structure composed by 79.4% of debt and 20.6% of capital. Lupatech debt was represented by perpetual bonds and facilities from commercial banks with maturity between 2010 and During 2009 we improved and extended the debt profile. As part of this process we announced in May 2009 the restructure of the Company s debt through the prepayment of commercial bank loans with proceeds from convertibles and the BNDES. The restructuring process was made during the 2H09 and besides the benefit from the extension of the debt profile, it brought the reduction of financial costs. The graphic presented here highlights the improvements in the capital structure and in the debt profile of Lupatech during the past year. Next slide, please. The Company s backlog as of December 31 st, 2009, amounted R$770 million, being divided in R$420 million of services and R$350 million of products. In this amount we are not including the value of contracts that are still under negotiation as a result of bidding rounds that we have participated since the end of 2009 and were won by the Company. The backlog is almost all related to maintenance of current production, through contracts with average term of two years and in a few contracts related to development of new oil and gas fields. The main market is still Brazil. In 2010, we expect to convert into net revenues around R$390 million of the backlog which added to the spot market should lead to reach the net revenues targets projected for the 2010 fiscal year. The balance of the backlog of R$380 million will be converted into net revenues during 2011 and beyond.

5 Next slide, please. The consolidated net revenues of 2009 decreased 21.2% when compared to 2008, due to the reduction of volumes and prices verified during Energy products revenue decreased 14.3%%, flow control revenue 28.7% and metallurgy by 42.3%. The consolidated cost of goods sold in 2009 reached R$403.0 million, down 3.6% compared to New fixed costs related to the recent installed capacity, contributed for the reduction of the COGS being smaller than the reduction verified in the net revenues. Consolidated gross profit in 2009 reached R$152.2 million, down 46.9% when compared to 2008, due to the reduction of 21.2% of the consolidated net revenues and the smaller reduction of 3.6% in COGS. The reduction of the gross margin is explained by the reduction of prices as a part of policies implemented by the Company during 2009 and also due to higher fixed costs. The consolidated EBITDA decreased 61.1% and reached R$81.6 million versus R$210 million in The consolidated EBITDA margin reached 14.7% in 2009 versus 29.8% in This significant reduction of EBITDA margin is a direct consequence of gross profit reduction of 46.9% and the increased of administrative expenses of 9.1%. Next slide, please. Here we can see the improvement in the financial result. The total financial income, excluding the exchange variation, increased 209% in comparison to 2008 due to higher interest income, result of cash investments made in Brazil during 2009, while in 2008 we kept the cash position abroad with lower interest rates. Part of this variation is explained by the inclusion of financial income related to the present value of account receivables. The total financial expenses, excluding exchange variation, grew 22.1% in comparison to The reasons for that are higher balance of perpetual bonds, US$275 million in 2009 versus US$200 million in most of 2008; the payment of interest related to the convertible debentures as of April 2009; and the inclusion of expenses related to the pricing of the fair value of derivatives included in the convertibles, related to the mandatory clause of conversion or redemption, a non-cash item. Excluding this last item, the net financial result, excluding the exchange variation, would be 6.8% better than 2008, even though the net debt increased 5.5%. The net exchange variance in 2009 was positive and reversed almost all losses we had in Next slide, please. The consolidated result before taxes and participations verified in 2009 resulted in a profit of R$27.4 million versus a loss of R$19 million in The consolidated result before taxes and participations in 2009 was essentially impacted by the variation of the net financial result verified in 2009 that has more than offset the reduction of the operating results. So that, the consolidated net result in 2009 amounted R$15.4 million versus a loss of R$29.5 million recorded in Next slide, please. The operating working capital change in 2009 resulted in a cash generation of R$80.4 million. The ratio of working capital invested over net consolidated revenues in the last four quarters reached 55.5%; virtually at the same level it ended 2008.

6 We are working with our clients in new commercial conditions, mainly in the anchoring ropes businesses that will make us believe that during 2010 the Working Capital allocation should represent a smaller portion of our sales. Next slide, please. We concluded the restructuring of the debt profile, which will result in a smaller cost and we manage to extend the maturity. With this new debt profile we reduced our necessities of minimum cash and were able to reduce the total debt in 11.7%. With this I end the presentation and I am available to answer questions that you wish to address to the Management. Operator: I will turn over the call to Mr. Thiago Alonso de Oliveira for final considerations. Mr. Thiago, you may give your final considerations at this time. Thiago Alonso de Oliveira: Thanks everybody for attending our conference call. I would like to finish with a message from the management team that several measures are being taken in order to improve the financial results, and we are expecting to see throughout the year gradual improvements over what we presented in 2009, expanding capacity utilization through gaining operational leverage. Please, fell free to contact our IR team at or sending a direct to ir@lupatech.com.br. Thank you and have a great day. Operator: Thank you. This concludes today s Lupatech s 2009 earnings conference call. You may disconnect your lines at this time. This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ. Please, refer to the company s investor relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript.