10.03.2016

Signs of easing in Brazil?

The Rental division of Brazilian construction group Mills has published its 2015 results which show a slower decline in the fourth quarter.

The Rental division which is almost exclusively made up of aerial work platforms and telehandlers, posted revenues of R293 million ($79.4 million) for the year, down 21.5 percent on 2014. Operating profit for the period fell 32.5 percent to R132.6 million ($35.8 million). However in the fourth quarter revenue slipped 16 percent to R70.3 million ($19 million) while operating profit was just three percent below that of 2014 at 32.3 million ($8.7 million).

According to the accounts capital expenditure in the Rental division was zero, compared to R104 million ($28.2 million) in 2014. While Bad debts were R12.8 million ($3.5 million) compared to R18 million ($4.9 million) in 2014. The company says that it plans another year of zero capital expenditure in 2016.

Overall group revenues fell almost 28 percent to R576 million ($156 million) while last year’s pre-tax profit of R90.3 million ($24.5 million) turned into a loss in 2015 of R128.7 million ($34.9 million).

The company has also announced plans to recapitalise through the issue of up to 47.5 million new shares with the aim to raise R125 million ($34 million). The controlling shareholders, the Nacht family, have also entered into an Investment Agreement with Axxon Brazil Private Equity Fund II pay in 15.2 million shares, worth R$ 40 million ($11 million) and assign Axxon with pre-emptive rights to their remaining interest. In exchange Axxon will underwrite the full rights issue.

Chief executive Sérgio Kariya said: “This quarter we closed the Rental business branch in Guarulhos and started the process to close two other branches: Itaboraí and Sorocaba. Most of labour dismissal costs are already reflected in the results, however, other expenses from closing the branches, including the termination of lease agreements, will impact the first half of 2016”.

“2015 was full of uncertainties in the economic and political scenario, affecting directly on the markets that we operate, negatively impacting our utilisation rate, pricing and margins. Due to this scenario, we have revisited our organisational structure and made all actions in order to turn the company leaner, more agile and structured for this new environment”.

“During the year of 2015, we implemented several measures for Mills to be prepared to overcome the obstacles that will arise in the coming years, in a recessive environment that can get worse. We realised several movements for horizontalising the Company in many different departments that have synergy, which ended in a consolidation of departments, in addition to this, improving productivity and obtaining operational gains and cost reduction. Therefore, Heavy Construction and Real Estate commercial management have been brought together in a single business unit”.

“Engineering and operational officers functions were also consolidated, and the Investor Relations department was integrated with the Finance department. Those changes reduced hierarchy tiers and allows a greater team integration . In order to support the organisational changes and consistently sustain the integration, providing the necessary orientation to our employees, we hired a human resources executive”.

“Our focus is cash generation, through the sale of assets not considered strategic for the company, cost reduction, cutting expenses and investments. This year we have reduced all CAPEX substantially in equipment rental and corporate goods, by 85.8% when compared to the previous year, and do not foresee any CAPEX in 2016, given the high idle of our business units. We did also other actions with the objective of reducing costs and expenses, increasing our profitability as a result. Which include reduction of our back office staff, renegotiation of the lease agreements for our depots, and shutting branches “.

“In an extremely challenging year such as 2015, we took the necessary actions to face this adverse scenario. Therefore, we are confident that we ended 2015 better structured than we began it. And if 2016 brings us new challenges, we are better prepared to face them”.

Vertikal Comment

We do not know at this stage if the easing in Mills Rental decline during the fourth quarter was a one off, possibly related to increased activity triggered by the coming Olympics, or something more solid. The problem is that there are two things going on here. Firstly the company expanded at a pace that was almost never going to be sustainable, and secondly the overall decline in the Brazilian economy.

It has been reducing the fleet and closing outlets which might bring it back into balance with current demand, however restructuring at this speed and level is not at all easy, and in many cases new entrants or smaller companies that did not/were not able to over-expand become the beneficiaries as the chase the demoralised retreat of a big company in trouble. Mills may be fortunate here in that its speed of expansion kept any competitors from growing as it gobbled up the increased demand during the construction boom.

As to the group as a whole now appears to be doing less well the Rental business, the company is looking to raise cash through equity, which makes good sense. It looks as though the major shareholders have also taken a sound pragmatic view and while they risk losing control, they are helping secure the business for what might be a long downturn.