Good morning and welcome to the conference call of ROMI, where we will be discussing the results of the third quarter 2023. Before continuing, I should say that this conference call is exclusively for investors and investment professionals. Any statements that may be made during this conference call regarding the company's business prospects, projections, and operational financial goals are mere predictions based on management's expectations regarding the company's future. These expectations are highly dependent on market conditions, the general economic performance of the country, the sector, and international markets, and are therefore subject to change. It is worth remembering that this conference call is being recorded and held in Portuguese with simultaneous translation into English, together with slides available on the result center of our investors relations website at www.ROMI.com/investors. During the presentation, all participants will be connected as listeners only. We will then begin the question and answer session.
For questions, enter your question along with your name and the name of the company you represent in the Zoom app's Q&A tool. For audio questions, further instructions will be provided. With us today is Mr. Luiz Cassiano Rosolen, Chief Executive Officer. Initially, Mr. Luiz Cassiano will present the results of the third quarter of 2023 and will then be available to answer your questions. Now, I give the floor to Mr. Luiz Cassiano.
Thank you, Rhaisa. Good morning, everyone. Investors and shareholders, welcome everyone for being here at our conference for the third quarter of ROMI. I'd like to start by highlighting our continuous dedication to improvement of operating performance of our yearly capital and investment in R&D.
That way, we're able to innovate our portfolio of products and services and ensure our main purpose, which is to offer our clients the best opportunities and alternatives for the success that they can reach. Although we're going through a global instability moment, we strongly believe that our competitive edge will allow us to grow and bring value to all stakeholders. We invest significantly on innovative technologies, connectivity, big data, new machine generation. All of this allows us to get the best of the market and harness the opportunities in Brazil and abroad. Our new businesses with the PRODZ, a fintech dedicated to the funding ROMI machines, is well established this year. Although there's a volatility in the environment today that not only reduced the reductions in market but kept our margins strong in the business unit ROMI machines.
I thank you all for your support and confidence at ROMI. Now I will give you details of our results of the third quarter. Well, straight to slide four. Here you can see the highlights. In this quarter, we had a gross margin ROMI machines that is quite solid, which has contributed already for the 2023 year, where we have a gross margin of 41.8%, which is 1.9% over the first months of 2022. We also have incoming orders for rental machines greater than the same period of 2022. That is an increase of 26.5%. Such alternatives to clients have brought results to us and helped our clients to invest and produce better.
B+W Machines, we also have a solid increase of orders in the quarter. This has an increase of our order backlog. Many will be delivered in the fourth quarter of 2023, and others are ready for 2024. The gross margin also has increased over the year of 2023. Our cash generation is also a highlight for the quarter, where there is a BRL 20.5 million cash generation thanks to the new businesses that became solid and start to bring cash, as well as the reduction of capital during the period. We have BRL 7.8 million payment of interest on capital for the first quarter compared to what we had before and released in June. Now in October, we have a new distribution.
This has been a very important quarter for both ROMI and B+W, where we took part again in the main machine and tooling show globally in Hannover, where it takes place every two years. We were very successful with our participation where we had many of our clients visiting us from around the world. I should also highlight ROMI's ESG. We have reached 8.1 at our score for the Instituto Ethos 2023 report, much above the market's average. The environment in the domestic market is quite a challenge still. When we talk about the gross fixed capital formation, the investment on the second quarter, we see that is negative. We do not have a growth of the investments in the Brazilian market. Definitely that brings to us many challenges, especially when we talk specifically about Rough and Machined Cast Iron Parts and ROMI machines.
For the installed capacity on slide, see it is much under what we had in the previous years. So we have average installed capacity utilization that is still reasonable in 2023, but a bit under what we had in the last few years. The Industrial Entrepreneur Confidence Index is still flat, and it has been since the fourth quarter of 2022, where we do not have an increase of confidence of entrepreneurs in our market. So it has been stable in the last 12 months.
When we get into the details by business unit, we can see that ROMI machines, there is a profile very similar to what we had in 2022, maybe with some gain in terms of the service providers, which are the small machining companies, and because of the new business of leasing, which are companies that do not want to have much capital invested, so they choose to have the leasing of the machine for their own production, for a better production. Machine and equipment, we also see a better participation. We will have more in agriculture. That is where we had a steeper drop, where we can see that this market, it has been a bit at a lower level this year.
We did not deliver many machines in 2023 for these sectors. I think for B+W, we need to look strongly into the full year of 2023 once we have the deliveries of all projects. That would be in the fourth quarter. For Rough and Machined Cast Iron Parts, we see that the wind power sector is still very low, very much focused on the current scenario. in 2023, we most likely will not have any more contracts for Rough and Machined Cast Iron Parts of wind power for us. In construction, we can see greater participation. We have kept a good level compared to 2022. For automotive, there was a drop, and then there was some participation increase. Agriculture in the first semester of 2023 was very strong, and we now note for the second semester of 2023 a reduction of the agricultural machine demand.
Most likely we are losing some share of the revenue of the sector. Net sales per business unit, Cast Iron Parts, because of the reduction of revenue, loses ROMI machines and B+W Machines gain share in 2023. If we look into the sales per geographic region with ROMI machine being stable, we have Brazil as our main market and the foreign market for ROMI machine feels the crisis abroad. We see that the demand for ROMI machine abroad has dropped near 50% this year. Brazil gains share also within the ROMI machine units. B+W still delivering the three machines delivered this year were to Europe. That is why we have Europe's fair share, that is still important. For the fourth quarter, we will most likely have an increase with the U.S. with the B+W projects delivered there.
When we analyze the order entry and backlog for this quarter, we see a fluctuation that is positive for B+W, where it was able for the third quarter of 2023, bring many projects and the backlog is quite solid. Significant part of the order backlog will be delivered on the fourth quarter, and we start already to build our B+W order backlog for 2024. There are still challenges for 2024. We haven't completed it, but there are many projects undergoing which we are working hard, and we should sign these orders still within the year 2023. For Rough and Machined Cast Iron Parts, the order backlog was very low, mainly due to the agricultural reduction. ROMI machines, we have a reduction compared to the second quarter of 2023, and a bit more if you compare to the third quarter of 2022.
Basically, these reductions are due to the reduction of the entry of order for the foreign markets. There is a significant reduction of machine and tooling from Argentina, which is a country that is important for us, and mainly in Europe, where we see a demand reduction for machine and tooling. The national market is still solid, always compensated by the new lease contracts throughout the third quarter of 2023. In any case, the order backlog ROMI machines is still very solid, BRL 241 million, and most of these orders will be delivered by this quarter. The profitability for the third quarter of 2023 were stable compared to the second quarter, but we will see that unfortunately, we have worse and Rough and Machined Cast better in B+W ROMI machines. we have something similar to the previous quarter and 25 points under of what we had in 2022.
The operating profit, we end up having 1.5 drop compared to the second quarter of 2023. I will get into the detail by business unit so you can understand the impact of Rough and Machined Cast Iron Parts here. Including the profitability, we have lost one point. In the second semester of 2023, we pretty much kept staying flat to margins compared to the second quarter this year. By business unit, we can see that the revenue ROMI machines a bit under, if we think about the first nine months of 2023. A very solid margin and very much similar of what we had in 2022.
Those are the two reasons which are the foreign markets that have tighter margins, have less participation in the revenue and the consolidation of machine leasing, and also the ones that are coming back, and we are selling them in the market. We are talking about machines that have been used for one or two years with a gross margin that is quite good and that allows us to keep our margins at a good level. That is both for net and gross margins. For B+W, the bounce back has been quite interesting for gross margin. I would rather look that into the last 12 months, so we can, that way, get into the details of B+W.
In any case, the recovery of gross margin, as we already expect a positive EBITDA for the end of the year for all the 12 months, where we see mainly because of a level sales and support of parts, retrofit, and services high in 2023, which makes us improve in a very major way, our margins, other than the use of our B+W capacity in 2023, where it is at a much better level than what we had in 2022.
In Rough and Machined Cast Iron Parts, the margins are still very low, so we will have less of a turnover of what we had in 2022 for this year of 2023, where we are making many adjustments in our unit so it can be more solid with processes that can be more robust so that we can be lean, so that when we are back growing 2024, we will already work on good margins. We do expect, and through the conversations with our clients, that we will have improvement in this unit by mid-2024 and a production in 2024 that will be much stronger than what we had in 2023. We have items that are non-current, which are BRL 12 million of non-current in 2023, and out of the BRL 12 million, BRL 5 million on the third quarter alone. Third quarter 2023. Our financial position has improved.
We have a good cash generation where we have an extension of our debt with robust cash and part of our debt has a cost that is quite appealing to us, where we have most with FINAME, with BNDES, and with innovation programs and of investment. Our cash is very robust, nearly BRL 300 million to be able to respond to our duties, and we will keep generating cash in the next quarters. I added this slide to talk a bit more about the new business or the new businesses of ROMI, where we talk to some investors, and we have a strong demand to understand a bit more about the machine leasing, about PRODZ and all of the effects that they bring. This business is within the machine and tooling unit because here at ROMI, we don't look at this as a new business.
We look at it as a new alternative to our customers or clients. Our duty and purpose is to deliver to our clients alternatives and opportunities so that they can produce better, so that they can produce faster, so that they can run less risk and keep prospering. That is our duty, that our clients can be successful. If we're able to reach that at excellence, definitely we will have, at ROMI, much success, and we will be adding value to our clients. We rolled out, three years ago, the machine leasing, and these machines are all connected, where we get much information from all machines. That way, we're able to deliver to our clients a monthly leasing of these machines at a very competitive level.
That way, we have nearly 400 machines that have been leased, and we have over 630 machines leased, over 700 contracts of one to two years or renewal of contracts from one to two years. The way we see that to bring value to clients is to deliver a machine that is up to date, much more productive, and new in this market. Any client that wishes to lease a machine will get a machine that is new in this leasing. We will be monitoring the machine. We will deliver to them a monthly amount for the leasing that is very competitive. If they need a bit more of what they have delivered, they will pay for additional hours used at a contract price. There will be no penalty for using the machine more. Quite the opposite.
We encourage them to use the machine as much as they can since they are all connected. We receive much data from each machine, not only in terms of the hourly use, but much data that is important for us to have a better product and to ensure mainly the availability of these machines to our clients. Ensuring the availability, we are able to ensure as well that clients can keep manufacturing what they need and at the moment they need the most. That way, we're able to monitor and ensure the availability of the machine through the ROMI connect. We use AI to go through the analytics, have the detail of the data, understand where the machine is at, so we can always work on the machine predictively to ensure the availability and the uptime of the machine.
After the contract, the client has the choice of leasing another machine, always new, or acquiring a new ROMI machine. This machine, the one that was leased, comes back to ROMI, where we use our structure for the retrofit of the machine. Today, we use this machine to get to a low-cost market, which before we were not present. We are very competitive in selling these machines to this new market that we are in, and where before our share was very small. It is clear that the clients that would buy this secondhand machine, many times they need some financing. We have one that is very competitive and stable with stable installments at a set amount where we can have the financing 12, 24 or 36 months using the expertise that ROMI has for credit analysis of the client and also the proximity.
We know most of our clients. We are very close to them, and ROMI chose in Brazil to have direct sales and also our own service on the machines. That makes us be close to our clients, and we can analyze their credit, and we can feel comfortable to offer the financing of the machines to these clients. It is fast, flexible, adjusting to their cash flow. That way, we close a circular economy, and we use this machine in different moments at different clients the best way possible, bringing much more value to the client because they lease it, they are able to produce with, and they find alternatives to produce better, to replace an older machine, and to have a response time to the demands that they have for machining.
In that way, they can have the right calculations for the clients in a way that can be very transparent, objective. That way, we are able to encourage the industry to find alternatives and find ways to better produce. This has been growing in the company. To meet the purpose of ROMI, which is to find alternatives to our clients to produce better, to be successful, and that is why today they ROMI machines. to conclude, we will talk a bit about the capital market. Here, the share performance of ROMI. We shall recall that 2021, we started to take part in many index, so we had a demand that was very strong. In any case, this is the performance that we have had in the last two years. Now I would like to thank you all for taking part, and I will open to Q&A. I am available.
Ladies and gentlemen, we will now begin the question and answer session. Please know that this conference call is exclusively for investors and investment professionals. For questions, enter your question along with your name and the name of the company you represent in the Zoom app's Q&A tool. For audio questions, use the raise hand tool and we will enable your microphone, and you will then be able to introduce yourself. If there is any question, please type the question together with your name and the name of the company you represent in the Q&A tool here on Zoom. For audio question, use the raise hand tool so we can enable your microphone, and then you will be able to introduce yourself. Since there are no question, I would like to pass the floor back to Mr. Luiz Cassiano for final considerations. Oh, there are just new questions now coming in.
Okay.
Okay. The first question is from Kevin Cunha, investor. The question is: Did the drop in margin of revenues compared to the third quarter of 2020 mean a drop in distribution for the next quarters? Are there expectations and compensation for the delivery of machines forecasted for the fourth quarter of 2023?
Good morning, Kevin, and thank you for your question. ROMI has a policy of dividend distribution where it is 33% of the net profit for that period. We carry on with such distribution. If we have a reduction in profit, we can have a reduction in distribution of dividends. But 33% is our goal, is the minimum. If there is no major project to invest, the decision of shareholders might be to have more than that amount. But that is the policy for distribution.
The second question comes from Carlos Ramos, investor. I would like to know if there is any plan to rebuy shares by the company.
No, today, we do not have any plan to buy back shares that have been authorized by the company.
The third question comes from Peterson Luz. I would like to get more details on the leasing business within the ROMI machine business unit. What is the weight of the installments and the results?
The leasing in ROMI machine business is very important. It is a service that we deliver to our clients, where we give really a great opportunity. But what is important to say, Peterson, that as a whole, we cannot see this business separate from ROMI machine business.
We do have some managerial separation, but if you see that when we are leasing a machine, we are trying to show an alternative for our clients to produce better so they can be more competitive and produce and be more successful. As I have a machine leasing to the client of one to two years, and after that, the machine is back to us and we refit the machine, and we sell it as a semi-new, which is another revenue coming from the leasing business. So it is very hard to tell you the numbers specifically, because in leasing, we have many selling businesses coming out of it. So for us, any number I will say will not show the purpose of that business perfectly.
But we would already like to detail some numbers, how many contracts that we have leased, how many for the quarter within our earnings release, where you can see there the detail of entry of order backlog.
The other question by Peterson, with a reselling plan of leased equipment funded by ROMI.
Yes, 100% by us through PRODZ, which is a subsidiary, a fintech, 100% owned by us, and today with ROMI's capital.
How is delinquency?
Well, it is very low. We have some delays from some clients, but they are quickly back on track. Also because for the most part, these machines, any type of delay of the machine payments, they cannot use it to produce. So there is no incentive to have a delinquent status for the leased machine or the semi-new.
The next question comes from Cedric Miranda de Mello. Congratulations for your results.
Thank you.
I would like to know if ROMI is studying the entry in other energy sectors other than wind energy. Can you detail the role of ROMI in this sector?
ROMI furnished much to the wind energy, two parts, the hub and the main frame, as we call it. They are very heavy parts that we manufactured until the beginning of this year for the wind energy generator. We have no orders from the sector, and we do not see in the short term any new order placed. Maybe for 2025, we can have. What we have been doing is still working strongly to have other heavy parts for machining that were specifically for the sector.
We are already being able to do that in many aspects, and we want, by 2024, to be back to have profitability and have an increase in the production of machining the heavy ones and also the lighter one. We have the flexibility to transfer some part of the light machine cast parts and be able to improve the parts. We believe that some share we will be able to have for 2024. Some new parts that will come from 2024. Once we have a demand back to normal, especially now for the agricultural industry, we will have, in 2024, a bounce back for the machining margins, and we are quite confident.
Marco Corradi.
Good morning, Marco.
Is the restructuring of the machining areas fully completed? What can we expect for 2024 in terms of performance and margin?
We still have some work to be done to improve process and some restructuring for the fourth quarter, and we have been doing that in a way that is responsible, continues according to demand oscillation. For 2024, as I mentioned, the expectation is to have an improvement in performance and positive margins for the business unit in 2024.
Peterson Luz. What is the expectation of the company in the business scenario when it comes to the tax reform?
It is very hard to explain what is our opinion on tax reform, because you can always have some alterations and some changes to the reform, and that somehow can have a positive or negative impact to ROMI. If we talk about the core tax reform points, at least it seeks to have a better balance of the taxes within the country.
As the manufacturing sector, which we are strongly participating and all our clients as well, and they are all manufacturing clients, we know that the manufacturing industry is strongly taxed. When it comes to the current system, we expect that there will be greater balance and we will be more competitive. Once we do become more competitive, there is no doubt that we will be well-positioned to have better offers for our clients and become more competitive through the tax reform. When it comes to the essence of the tax reform, it should bring a benefit to the industry in that way, also to ROMI.
The next question is from Christian Matias de Oliveira. Good morning.
What is the outlook of the company when it comes to the order backlog for ROMI machines and B+W, considering the economic challenges faced by Germany and also the competition with the Chinese imports?
ROMI machines in the domestic market, we are a bit under the previous year, but not significantly. We have been delivering to our clients new ways to produce and new alternatives as leasing and with a semi-new that is back from leasing. That way, we consider that the market in Brazil is at a very important activity ROMI machines abroad is where we have been feeling the impact when comparing to 2022. The exports to Argentina have dropped over 60% this year. To Europe also, they have dropped close to 50%.
With a bounce back of economy in Europe and maybe in Argentina in 2024, we should see a bounce back ROMI machines in the foreign market. For B+W, it is not only Germany's challenge, where there are great ones, but B+W works and delivers machines all around the world. There are challenges in China where it has slowed down, but B+W is well-positioned. We have good projects in China for capital goods. We have good project in Finland and Sweden for the land, the mining industries, where we have great projects in the U.S., in the defense industry, mining industry. So we do have good projects in Germany as well. For the energy industry, we delivered one machine. We will deliver another one next year. For the defense industry also, we will deliver one machine, and we will deliver more for Europe.
So today, for B+W, we are very confident that we will carry on bringing in projects and having projects for 2024, and already working in some projects already with the outlook into 2025. Competition with machines from China and Brazil is one that we have already been seeing for some time now, and whoever will buy capital goods will not just look into price, but the availability of parts for replacements at a fair price, service, reselling price of the machine, because you cannot keep that for always. You will always have more productive ones in the market. So they look into many aspects of support before the decision. I believe that ROMI has been working in the last few years in a way that has been quite strong and very close to clients to show the competitiveness and be a leader in the national market.
Thank you for your question. Rodrigo Queiroz: "Good morning. Congratulations for the results. Two questions."
Thank you.
"The progress of the leasing business necessarily will impact the level of inventory at ROMI increase?"
So to answer your first question, what we have as an impact is actually the property equipment, where we are talking about taking that as a part that is considered as property plant equipment, and then we are able to treat it that way. But as the market becomes more solid, it will start consuming the cash of ROMI and we have a good cash generation in our operations so that we can finance the business in the same way to capitalize proxy and also those that buy semi-new.
We are already, in this quarter, pretty much able to have cash generation and from the monthly leasing and plus selling the semi-new and with the interest, we are able to be balanced. So from now on, this business as a whole, right from the beginning of the machine, when we had it leased, and then when it goes to being sold, we already have it balanced. So the operation itself is able to fund itself and its growth.
The second question is, "The current capacity sufficient to support increase of business in 2024 that you mentioned or will it be necessary some investment to increase ROMI's capacity?"
Most of the investments that we have continuously is to improve productivity, automation, digitization, and that is what we have foreseen for 2024.
When it comes to our plant, we have a broad and sufficient plant for any business increase that we might have into the future, both in machining ROMI's machine and B+W as well. Thank you.
Next question comes from Kevin Cunha. Thank you, Kevin. "With the exposure to the external market, especially the American, European markets, as mentioned, how important is the exchange rate variation for the business and how? I consider the company as a brilliant business model and very proud to have it as a Brazilian company."
Thank you very much, Kevin. We also feel just as proud, and we work strongly so we can take that further, perpetuate, and be able to keep ROMI at such level. It is a big challenge, but we all take on the responsibility.
The exchange rate is very interesting question here, because the exchange rate variation for ROMI machines produced in Brazil and exported have an impact in the margin that is very important. So if we have an exchange rate at a high value of the BRL, we lose margin. If it is a bit more depreciated, we win margin. Why? Because we sell in the American and European market in dollars or EUR, and we are not able to pass down the exchange rates difference in the market, so they will buy a machine according to the market price. So we hold this variation in our own margin. So when we have the exchange rate that is not favorable, which we have had situations like that, which were highly unfavorable, where our currency, the BRL, was highly valued, we feel that in the margin.
When we have an environment where the BRL is not valued, we will have a margin in the export. That is pretty much what we see in the dynamics. But in any case, it is very important and strategic to ROMI to have a participation in the foreign market. However, that has been the impact that you can tell from the margin when you have this exchange rate variation.
Can you hear me, Luiz?
Yes, I sure can.
Francisco here from XY&Z Capital, and I have two questions here from my side. First is related to PRODZ, to your fintech. When it comes to a machine leasing, that is easier for the semi-new. What is the credit risk that you are working on when you do some financing for your clients?
Well, the way to do it, Francisco, is the following: we get 20%, 25% down payment of the machine, and we sell it with reserve. If there is a delinquent client, we will block the machine. They cannot use it. In any case, we go after this machine, and usually with this down payment, we already have a guaranteed debt, quite good and favorable. This has been working much in terms of the manufacturer also. At PRODZ, it is something that is working and the delinquency is very low, nearly zero.
Okay, thank you. Just to add also in terms of machine leasing, I know that they are very different, one from another, where they attend many industries, but have you thought about any other type of machines in terms of leasing? Do you have a feeling of the yield, the average yield?
Well, when we lease the machines, it is an industry that is a bit different, where we lease with 100, 200, 300 hours allocated. Depending on the machine, they might choose what batch they will choose, and if they go over, they will just need to pay the additional hour according to the cost laid out in the contract. The yield is very high, but we have clients that seek, for instance, a reaction capacity. They have a machine next to it to have the machining of a part so that they can get back to operating another machine that is much more significant that they have in their plant. We see machines leased that they use 50 hours only, and they pay to us the minimum, which is always 200 hours.
Why is that?
Because we have a capital allocated there, and we need to have it compensated. That is how we have been thinking when it comes to leasing. It is very different from other leasing businesses that we see in the market, which is a market on its own, just the lease, the business. For ROMI, it was thought focusing on giving an alternative to our clients so they do not have capital. Let us produce better, we will release it. If they need, for example, to have a reaction capacity, let us lease it to have it next to your plant so you can have this reaction capacity that is greater. Or a client wants to get into a new business and they do not know how to do it, or what is the availability they will have in this new business, and they do not want to run the major risk. Let us lease it.
Let us have this until the new business. If it works, great, and if it does not after a year, you can really deliver back the machine. Obviously, if you want to deliver before, there is a penalty because there is a cost to send, to install, to give the support, and then bring it back. It is not necessarily a penalty, but an amount that is fair for what ROMI is delivering. We work together, running risks with our clients, and that is the purpose of the leasing business. That is how we see the leasing business in the company.
Thank you, Luiz.
Thank you.
Well, since there are no more questions, I would like to give the floor back to Mr. Luiz Cassiano for final considerations, remembering that ROMI's investor relations department is available to answer any additional questions you may have. Please, Mr. Luiz Cassiano.
Thank you, Rhaisa.
Thank you everyone for your participation, for taking part. Fabio is not here with us because he has a very important appointment today. But for the next quarter, he will be back with us in the call, and our investor relations team is available throughout the quarter. You can reach us, and we can have your questions answered and share more about ROMI to you. Thank you very much and have a great day. Thank you.
ROMI's conference call has ended. We appreciate your participation. We wish you have a good day.