Ladies and gentlemen, thank you for standing by. Welcome to Armac Locação's conference call to discuss results regarding the fourth quarter and the full year of 2023. For those who need simultaneous translation, we have this tool available on the platform. To access, just click on the "Interpretation" button through the globe icon at the bottom of the screen and choose your preferred language: Portuguese or English. For those listening to the video conference in English, there is an option to mute the original audio in Portuguese by clicking on "Mute Original Audio." We would like to inform you that this video conference is being recorded and will be made available on the company's IR website at ri.armac.com.br, where the complete material of our earnings release is available.
We would like to inform you that the participants attending the conference call will be in listen-only mode during the company's presentation, and we will then open the Q&A session when further instructions will be provided. Before proceeding, we would like to clarify that any forward-looking statements that may be made during this video conference in relation to the business prospects, projections, and financial and economic assumptions are assumptions of Armac's management, as well as information currently available to the company. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties, and assumptions, and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors could affect the company's future results and could lead to results that differ materially from those expressed in such forward-looking statements.
Here with us, we have Mr. Fernando Aragão, CEO. Cássio Castardelli, CFO of Armac. Now, I would like to give the floor to Mr. Fernando Aragão, Armac CEO. You may proceed, sir.
Good morning, everyone. Thank you for attending this conference call to discuss the results of the fourth quarter of 2023. 2023 was another year of growth for Armac, with revenue growing by 40%, the maintenance of high returns, and leverage going back to conservative levels at two times net debt over EBITDA. In addition to the financial growth, 2023 was marked by major internal achievements, among which a culture of safety and continuous improvement in our operations, a higher retention of our employees through initiatives of people management, and the implementation of SAP S/4HANA , a system that will support our long-term growth. An efficient company creates more value since it focuses its resources to what contributes to higher productivity by its clients.
Along those lines, one of the major achievements in 2023 was growing its revenue by 40%, combined with a reduction of 2% in SG&A. In relation to the fourth quarter, our growth was focused on the implementation of long-term contracts, which used a portion of the fleet that was previously rented to short-term rentals. This movement generated a drop in EBITDA margin, but it also means that a significant share of the current EBITDA is now contracted to terms ranging from 3-5 years, giving us the confidence for future expansions of our business. Finally, in 2024, Armac will celebrate 30 years of operation. I would like to pay honor to the founders of the company and thank all the clients who offer their trust to us day in, day out.
With this, I turn the call over to our financial VP, Cássio Castardelli, who will present the financial results. Thank you.
Good morning, everyone. Thank you, Fernando. Thank you, Armac's colleagues, and everyone who's attending this video conference. We ended 2023 reaching 10,206 pieces of equipment in the fleet, BRL 1.5 billion in gross revenue, a growth of 42.2% compared to 2022, and with record results: EBITDA of BRL 640.7 million, 40.1% above 2022, and net profit of BRL 163.3 million, 24.7% above adjusted net profit for 2022. The substantial and sustainable growth of the business was accompanied by improvements in safety of operations, as already mentioned by Fernando Aragão, developments in internal controls, asset management, discipline and pragmatism in capital allocation, and conservative debt management. Before going through the numbers, I would like to recall some points discussed throughout the year, which were objectives achieved in 2023.
Moving on to page four. Firstly, we have proven Armac's ability to realize substantial CapEx and allocate it efficiently to customers with satisfactory returns. We allocated to good customers CapEx of more than BRL 1.3 billion made between the third quarter of 2022 and the fourth quarter of 2023. Secondly, revenue growth of more than 40% with clients from resilient and key sectors for the country: mining, fertilizers, biomass, logistics, agribusiness, infrastructure, and forklifts. Thirdly, reduction of leverage to 2.0x Net Debt/EBITDA from 2.46x Net Debt/EBITDA at the beginning of 2023 to 2.0x at the end of the year. We also managed to increase our rating to Double A minus and strengthen the balance sheet for even more growth, a point that I return to at the end of the presentation.
And finally, taking advantage of economies of scale and leadership position with gradual dilution of the weight of administrative expenses, reaching the level of 11% of net revenue by the end of 2023, and with projects even for even more dilution. Internally, we made important improvements in controls and successfully completed the implementation of SAP for HANA ERP system, which, as mentioned in Fernando's message, reinforces the ability to grow with discipline and responsibility. Starting with the results on page five, we observed the evolution of the number of equipment and Capex amounting to BRL 576 million, mainly in the yellow line. The drop compared to the previous year, as we reinforced, is due to the fact that Capex concentrated at the end of 2022 was, in part, an anticipation preparing the company for the first quarter of 2023. We continue on a growth pathway and with robust investments.
Moving on to page six, we present the evolution of gross revenue, 41.9% higher than in the fourth quarter of 2023 compared to the fourth quarter of 2022. We continue with the main portion of revenue associated with rental and services and with a complementary share in revenue from sales of used cars. Moving on to page seven, we have the consolidated EBITDA for 2023, BRL 641 million, with a margin of 47%, one percentage point below 2022, and BRL 175 million of EBITDA in the fourth quarter of 2023, with a margin of 44% considering asset sales and 46% considering just rental and services. On the right, adjusted EBITDA, excluding asset sales, reached BRL 606 million in 2023, with the same yearly margin of 49% of 2022. The drop in margin in the fourth quarter is mainly due to the intense pace of implementations and projects with a service component.
These are longer contracts with greater predictability and in resilient sectors. Moving on to page eight, we have net profit and managerial operating cash flow. There was an important growth of 24.7% in the company's profits compared to the previous year, with a slight drop in margin due to the greater weight of the financial result in relation to 2022. Adjusted operating cash generation reached BRL 457 million, a conversion of EBITDA into cash of 75.4%. The fourth quarter showed a lower cash conversion compared to the previous quarter, mainly due to the working capital consumed in implementing new operations with customers. Some working capital effect will still occur in the first quarter of 2024, again due to growth. On page nine, we present the adjusted ROIC of 29% in 2023, an increase of one percentage point over 2022, and the accounting ROIC of 18.8%, also higher than 2022.
ROE reached 13.3% in 2023, also higher than in 2022. The impact of working capital and margins in the fourth quarter, due to the factors mentioned above, are responsible for the one-off variation between the fourth and third quarters of 2023. Finally, on page nine, we have the company's debt profile. At the end of 2023, gross debt totaled BRL 2.05 billion, with a cash position of BRL 730 million, resulting in a debt of BRL 1.32 billion. Responsible debt management, solid business model, and ability to deliver value and consistent returns made it possible to raise the fourth debenture according to what we see on page 11. This issuance appears as a subsequent event in the statements for the fourth quarter of 2023. It began with an offer of BRL 500 million at a rate of CDI plus 1.925%, with amortizations in the sixth, seventh, and eighth years.
The aim is to further extend the average debt term and finance growth. The good market receptivity allowed an additional offer, as well as a reduction of the rate to CDI plus 1.9% per year. This debt profile, at an adequate cost for both Armac and creditors, in a market with strong demand for our business model, will allow us to maintain our growth trajectory with discipline in 2024 all over again. With less leverage, we can explore new and current growth vectors around our expertise: machinery, people, services, and capital allocation as a whole. With this, I close the presentation and return the floor to the moderator for the Q&A session. Thank you.
We will now begin the Q&A session. I would like to remind you that if you wish to ask a question, click on Q&A on the lower part of the screen and write your question to be in the queue. When you are announced, a request to activate your microphone will appear on screen, and then you must activate your microphone to ask your question. We would kindly ask you to ask your questions all at once. Let's move on to our first question. Fernanda Recchia, sell-side analyst with BTG. You may proceed, ma'am.
Hello, everyone. Good morning. Thank you very much for answering my question. There are two points I would like you to answer. First, I would like to go back to the mixed topic. I think this quarter you had higher investments in relation to the long term, but I also understand that there was an effect of seasonality.
So I would like to understand your view: how do you see the company's appetite to invest in shorter-term contracts for 2024? In other words, how can we look at the mix in terms of short and long-term contracts? Should we look at those in a proportion of 70/30, different from the 80/20 that we currently see? And the other point is related to CapEx. I think there was an effect of a lower CapEx because of the anticipation that you made in the end of 2022. Thinking about 2024, how do you see CapEx for this year? Can we go back to the level of BRL seven million of monthly CapEx? And how do you see the prices of machines when it comes to CapEx for this year? Thank you.
Good morning, Fernando. Thank you very much for the questions. So first, let's talk about the mix. The company has a commercial team, which is very efficient, operating in different parts of the country. That brings in opportunities for long-term or short-term contracts at a consistent basis, and we evaluate all the assets that we have and the locations. In this quarter, there was a movement with many quality long-term agreements being implemented, and many of the machines that were allocated to short-term rentals had to be redirected when the contract expired because the average term is short. We redirected to those long-term agreements, and that movement has started in the third quarter of 2023 and continued in the third, fourth quarter, which makes sense for us because these are contracts that would provide stability to the company for 3-5 years.
Those contracts typically have a maturation curve after being implemented to reach the target profitability, the target margin, because, of course, they involve people and lots of resources. So in the first month, things are not operating the way they will operate as they get mature. So we have seen those curves in the previous contracts in the past. We are used to this movement. So in the fourth quarter, there was a concentration of those movements, so those machines that had been directed to long-term contracts. In addition to that, as we mentioned, seasonality, yes, in the fourth quarter, there was an impact, and typically for our business in some years operated differently because there is a seasonality related to rainfall.
So Yellow Line machines, they are used to move the earth, so when it rains, you cannot make compacting activities, you cannot use the trucks, and there are some activities that are reduced in the rainfall seasons. But since we measure according to the machine operation hours, we have this impact. Because of the rainfall in this period, we had a reduction of the income of those machines that are at the clients. There is a curve of maturation of those agreements that would explain this drop in margin. The company is interested in renting machines for infrastructure. We provide support to those clients with this interest, and the company can offer different differentials for this considering the capillarity and the personnel we have in the field. The decision is continuous.
We think what would be the best way to allocate the capital and the resources of the company, which are finite, considering all the agreements that are available. Depending on the long-term agreements, they would make sense because there is a longevity of revenues, which is very expressive, and you can also expand continuously for a long time. So we look at the long-term contracts in a positive way, but we do not have any restrictions for infrastructure contracts. In terms of CapEx volume, the company has an average plan for sustainable growth in terms of CapEx, and we are not going to put the company at risk considering the level of sustainability of the company where we can provide a good level of profitability and service and controls. So our growth on the average term will continue to be significant.
It's a company that has grown 40% in 2023, which is not little. We are going to continue growing at a significant pace, and the CapEx will be the necessary CapEx to sustain this growth. We are also going to be on the lookout at the market. We continue purchasing machines at the right price, and we also provide predictability to our clients. Nothing has changed in relation to this. I hope I answered your questions.
Yes, excellent, Fernando. Thank you very much. Have a good day.
Our next question comes from Gabriel Rezende, sell-side analyst with Itaú. Gabriel, we are going to open your line for you to ask your question.
Hi, Fernando. Hi, Cássio. Good morning. I have two questions on our side. The first is a follow-up on Fernando's question. I would like to understand the comment you published in the release in relation to the mixed change for the third and fourth quarter for long-term contracts, in addition to providing the longer predictability, and it prepares you for a new cycle of investment in the short term. I would like to understand if the company is looking at a new construction or a new project, if you're looking at a sequence of short-term contracts, and when will those contracts come up considering the comment you made in the release? There is another point, which is quicker now. How is the commercial dynamics at the edge when you think of off-season and the scenario of the agribusiness in Brazil, which may be more challenging for the short term, also considering the volume of grains and pricing strategies?
So we have seen some challenging trends which can be seen in some segments. I would like to know if those have impacted the way you measure hours and how you execute new agreements. Thank you.
Hello, Gabriel. Thank you very much for the question. I'm also going to answer your question in relation to rentals for infrastructure and if the company is prepared for a new cycle of growth in this business. So this is what happens: our machines are multidisciplinary, so we have fleets for mining, biomass, forest, and also construction works, ports, and highways. So the demand for infrastructure has a very short cycle, different from long-term agreements. The decision for the client is easier because it's more immediate. So the demand for infrastructure, I wouldn't say it's easier to capture, but it's simpler. The sales process is simpler.
So once you invest the capital, we capture the demand very easily and very quickly. However, infrastructure demand is much more volatile than long-term agreements since we are talking about short-term agreements that would not provide the comfort that the company is looking for considering how conservative we are with our balance sheet and with our finances. The comment that we made has the following purpose: the company has grown so much in long-term agreements, so much so that the revenues are very highly contracted, so the level of confidence allows us to have more risks in the fleet, and so we can have those infrastructure agreements. If a company is focused solely on infrastructure agreements, the company would be much more defensive than ours, and this is not our purpose.
We are in a very comfortable position to take risks now considering this less contracted demand, which is much quicker and much easier to contract. This is the meaning that we wanted to convey in the release. In relation to the agribusiness, so the demand continues to be very strong. We do not work for the growers, so we work in the logistics chain that moves all the bulk materials that are produced by the agribusiness and are consumed by the agribusiness, such as fertilizers, such as soybeans, and warehouses and everything else related to this. So this logistics chain continues to be very solid. The reduction in the production was not enough to reduce all those chains, so that means that the demand in this front continues to be very strong, and we continue negotiating different contracts.
Yes, you have answered. Everything's very clear. Thank you very much, Fernando.
Our next question comes from Mr. Gabriel Simões, sell-side analyst with Santander. Gabriel, you may proceed.
Good morning, Fernando, Cássio. Thank you very much for the opportunity. I have two questions on my side. One is a very interesting point, which is the capture that you made in the third quarter with a lower duration, lower rates, and how has this changed the plan for 2024? So how are you intending to allocate the BRL 700 million? And the second point is in relation to productivity, considering the higher yields in the long-term agreements, what do you see in the future, and what do you have seen in the first month of 2024? Thank you very much.
Hi, Gabriel. Thank you very much for the questions. First of all, the capture related to the issue of nearly BRL 700 million, which is a subsequent event that we made subsequent to the results of the year. So this is in line with the average plan of expanding the company, and even with the growth, which was important in 2023, we are going after a deleveraging process to open space to grow even further, taking more risks in sectors that the company can capture quickly, as mentioned by Fernando. This capture, of course, has the purpose of expanding the debt structure with a longer duration. It goes up to the eighth year in order to be amortized, and this is also going to affect the demand, as we can see on the last page of the presentation.
This is going to be primarily used to finance expensive Capex and maybe for smaller payments of debt that may occur from the viewpoint of productivity perspectives. As Fernando mentioned, the profile of the agreements that exploit or where we can provide values for the company are those complex contracts, long-term income, and those are agreements that would bring more ROIC. So what we saw year-on-year as a result is an effect showing that the company is making headway in both sectors, in the more complex and also in rentals. So this is a trend of gaining more EBITDA at the nominal level by the unit of capital employed when we refer to EBITDA and each ROIC that is employed in each piece of machinery. So the effect has to do with the curve.
We do not make adjustments of EBITDA and ROIC for machines which are not 100% of the revenue being used according to the contract. If we made the adjustments, the number obviously would reflect a continuous growth. This growth consumes part of this margin, and the effect on the ROIC will happen as those contracts reach maturity with the perspectives of maturity and a positive recovery or return for 2024. I'm not sure if I answered your question, but I thank you for the question, and we are available. Should you have any other questions?
Okay, yes, you did. Thank you. Have a good day.
Our next question comes from Rogério Araújo, sell-side analyst with Bank of America. You may proceed, sir.
Hello, good morning, Fernando, Cássio. Thank you for the opportunity. I have two questions on my side. The first is, we have seen a drop in the equipment price in the past few months. So how has the price of equipment in Brazil been behaving? And does this impact the pricing considering the contracts that are being expired? Cheaper contracts and the rollover price may be lower or not. My second question, could you provide more detail on those agreements? More labor-intensive costs involving more costs. Could you provide more details or maybe give some examples of what this is exactly so that we can have a more tangible idea? And as far as I understood, this implementation has been putting pressure on the margins, so we are likely to have some recovery in the margins in the next quarters. And what would be the timing if you could?
Rogério, thank you. Thank you for the questions. In relation to the machine prices, this is your first question. This is how I see it. I'm going to step backwards in relation to the rollover of the agreements. You asked if there can be a downturn pressure. I can say that our fleet has a discount in relation to the market value. Our fleet has a level of safety margin in relation to the market prices, which is very significant. I'm not going to disclose the percentage, but it's really something extremely relevant. So the average cost for acquisition of our fleet nowadays is much lower than the retail price, even after the adjustment that was made at the end of last year and also in the beginning of this year. This was an adjustment in the chain of concessionaires that had an over-demand, which was very significant. And this demand, as it ended, machines were made available.
There was no line waiting for the equipment, and some margins in the distribution network were consumed. So it was a very limited movement. Our market tends to have a long-term stability in price. When you make a decision to purchase a machine, it's a long-term decision. And if you imagine that the price may drop in the following year, you're going to wait. If you have to wait two years, you would wait two years. So it's a very disciplined network in terms of annual prices. They have a cadence that is followed. So since it's a highly added value item, so if you have to have discipline in order to make the acquisitions. So I don't see any movement in terms of price adjustments. I believe that the Brazilian market is already adjusted, and the balance was stricken last year when the margins were consumed.
Having said that, in terms of the present price, our fleet has an embedded discount already in the prices, and sometimes the machines continue present in the agreements, but with the price adjustments being implemented. In relation to the contract implementations, when we implement an operation to the client, we hold responsibility for the transport of material, or we are responsible for the transport of grains or the excavation of mines. So there is a support that is provided to each agreement. So those clients are large-sized companies, and sometimes we have 100-100 people working in those contracts, and this involves some time. People have to be qualified, have to be trained according to the needs of the client. So safety training is very intense so that we can offer the client a reliable and safe operation, and that takes a long time.
So you have to make this construction, and after you start operating, you also have the learning curve of everyone. So when a new industry opens, you do not start at the full capacity. There is a productivity ramp considering the knowledge that's being acquired by the people who are working there. So you have those effects, of course, and those are well known by us. Our business has always had these dynamics, and in a company with accelerated growth such as ours, it's just natural that a quarter would be considered to be very short. Sometimes you have a quarter when the costs accumulated here or there. So everything is according to the normal margin of what we do. So what we see is a maturation curve that matches with the seasonality of rainfall rate, high rainfall rate.
So the recovery of margins will happen as the seasonality related to rainfall and structure will reduce, and this is likely to happen in the second and third quarter, which are the strongest quarters historically. We have to consider this curve of learning of the agreements that were implemented in November last year, and these are going to be seen reflected in the margin in the future. So we expect those recoveries as a result of the curve of maturation of all those activities and also the seasonality of the rainfall.
Okay, that was very clear. Thank you, Fernando.
Our next question comes from André Ferreira, sell-side analyst with Bradesco. You may proceed, sir.
Hello, good morning, everyone. Thank you for answering my question. I have two questions on my side. The first one is related to the migration of machines from short-term contracts to long-term contracts.
So I would like to understand how relevant were those machines that had been used for a long time? So was it higher than the average of the company? And does it make sense to think that because we have more used agreements, the contracts will have a higher return? And as to the purchase of machines, considering this more challenging scenario would allow better conditions for purchase. And can you see the results in this area? Thank you.
Hello, André. Thank you for the questions. Well, firstly, starting from the end, these more challenging scenarios for the assemblers and the price conditions that Armac has always had will remain. So we continue with the capacity of using multi-brands and purchasing at scales and with higher discounts with lots that would allow us to have quality assets.
Now going back to your first question in relation to the interchange of machines, considering the age of the machines and the migration from contracts. As we said, the machines of the current portfolio, even the newer machines, already have a discount. They have a difference in relation to the market value, which is quite important. The point that a company, a machine that can be used for rent and for added service, and this continues to be very present. Usually a new operation has a mix of new machines and machines that have been used for some time.
Because Armac has an expertise in maintenance and in the extension of the life of the machines, they make those machines able to be used in different agreements for longer periods without the need of going back to the market to purchase used machines for the company to have a usable fleet. I'm not sure if I answered all your questions, but I continue at your service.
Very clear. Thank you.
Our last question comes from André Mazini, sell-side analyst with Citi. You may proceed, sir.
Hello. Thank you, Cássio, Fernando. Some follow-ups on the questions. You mentioned that the new agreements have more service involved. I would like to know if the machine operator of the agreement is hired by you or is it a worker that is hired by the client? So I saw the COGS increasing.
I would like to know if this worker, this operator, is hired by Armac or hired by the client. And the other question is related to CapEx. So what would keep the CapEx from reaching the levels that we saw in 2022? We saw that in 2022 you had major opportunities for purchase. It was a situation of take it or leave it, so it made sense for you to purchase equipment. So we saw that back then you have good purchase opportunities, or would it be something related to the demand by clients? What would make CapEx reach $1 billion in 2024? Do you believe that this level of $1 billion would be feasible, and what would be the levers that would allow you to get there? Thank you.
Hello, André. Thank you for the questions. I'm going to answer them. We offer the operators in our package of services should the client want the complete solution and not only the rent of the equipment with the maintenance services. And not only the operator, but different supporting services associated with equipment that is being rented that provide support to the equipment during its operation. So it's up to the client to decide. So considering all the number of offers, we build the contract. And in some cases, we offer the operator, and we also offer some other items to the client. In relation to the CapEx, as a CEO and shareholder, I'm going to provide my vision of how I see the company. The company has very strong competitive advantages at the operational viewpoint in addition to the scales. So we have the capacity of training mechanics, and this is something that is very scarce across the world.
We are a company that inspires those operators, those employees, and this is a unique advantage offered by the company and also the workshops that we build. As shareholders, I see it as a long, very long term. We have a machine of compound interests that can be running for a long time. This is a large market and would allow for that. For this machine with the compound interests to continue running, we have to look after it. We cannot have a CapEx viewpoint which has a short term. This is not how we see it. This is not how I see it. My idea is to make the investment that I can, preserving this machine of compound interests that would continue for 20 years and not to focus force it to be operating in the short term. Our growth is not normal.
Our growth is much higher than a company can sustain if we think in the horizon of 10 years. We have to sustain with health. We have to be really sustainable. We have no demand limitation. We do not have any limitations of opportunities of purchasing machines in good condition. I have to think how much do I want to grow and would sustain the advantages, competitive advantages that I want to offer that would sustain the culture of the people who work here. What is the speed I want to have? So, and this speed is going to establish the CapEx I'm going to use. So this is how we see it.
If we are going to go back to $1 billion or if we are going to remain at $700 million or $500 million, what is going to determine the speed of growth that we consider to be sustainable in the long term so that we can maintain this company that generates compound interests as a way of machine and in its cash generation? We want to have it running for a long time and not to accelerate for a single year and have problems in the future. So this is the viewpoint that I have as a CEO and also as a shareholder. I would like to thank you for your question.
Thank you, Fernando. It's very clear.
The conference call related to the fourth quarter of 2023 is now closed. The investor relations department is available to answer any other questions you may have. Thank you, all participants, and have a nice day.