Monday, 1 September 2014

Toyota Caetano Q2 results are out

Toyota Caetano Q2 results are out. This post is mostly going to be a bullet points style post. I will post in the following days a 5 or 6 bullet points thesis explaining why I believe Toyota Caetano is so cheap and adding some recent sales data, some of which I still do not have. So let’s start:
-          Remember that in June I mentioned that the big gap in monthly car sales between April and May could (in a not so farfetched scene) be due to acquisitions for the rent a car business of Toyota Caetano? It seems it actually happened but in June (210 RAC vehicles where acquired to total 1226). So sales did not increase as much.
-          Net debt increased in Q2 compared to Q1: mostly explained by the increase in transportation equipment, most likely in the renting division both auto and industrial equipment. The good news is that they are selling 560 RAC vehicles until yearend and most likely the difference in timing is justified by business seasonality, so I expect:
o   The 210 RACs investment will only have effects in the second half results, as stated
o   Bigger profits from renting due to the increased number of vehicles in the Summer season
o   Continued divesting (with a 350 RAC vehicle reduction to 666 vehicles) in a less profitable business that requires substantial capital invested
o   A onetime profit in the sale of the 560 RACs (“This sale will give rise to significant gains”)
o   Net debt will decrease
o   Remaining debt will be structured mostly either in lease contracts or in mortgage contracts, with substantial reduction in short term debt. Leasing contracts have seen a 2579k increase despite 513k payments in 1S.
-          The net debt increase is also partially explained by both an inventory and accounts receivable increase. Relevant here is:
o   Non-cash working capital (excluding both short term debt and cash) increased to 56M from 50.65M (a 5.35M increase versus Q1). This 5.35M increase is due to the increase in sales (increased 21% or 13.8M).
o   Operating income has stayed mostly flat despite a  21% increase in sales: as such the extra 5.35M tied up in working capital generated almost no additional profits (only 28K pre tax).
-          Gross margin has fallen substantially in Q2 compared to Q1:
o   This explains the absence of change in operating income
o   The extra working capital needs will only generate earnings if margins recover
o   They state: this reduction “may be justified by the change of product mix traded, particularly with the increase in car sales.” This explanation makes sense since car sales have a lower margin than the remaining businesses the firm is involved with. Other explanation could be a pricing effort to sustain or recover market share. Market share is important not only because of scale in car sales but also because of future services revenue for the firm. In such situation, this investment (5.35M) could end up bringing future profits or at least avoiding a future reduction.
-          Net income increased in Q2 but a different effective tax rate was the main responsible
o   The funny thing is that the use of deferred tax assets was in Q1 but the tax was lower in Q2
o   Net income is what usually determines the dividend chosen, so in what comes to dividends it does not seem to matter where the net income came from

-          My 0.06€/ share 1S profit prediction failed by 0.008€/share. This is not meaningful and I do not overly rely on quarterly fluctuations but I will explain what generated the miss:
o   “a 40% increase in sales (assuming a fixed sales mix)” – a change in sales mix might have changed margins. The sales increase in a consolidated level was lower than 40% because of the 210 RACs deal. It seems I made a mistake in the numbers in the previous post. I assumed a 3638 Toyota+Lexus sales and it seems that number was only for the Toyota sales. Anyway those 210 vehicles are about one third of the increase. The commerce unit had a 33% profit reduction despite the sales increase.
o   The industrial unit had a 505k operating loss in Q2 versus an 802k loss in Q1 (a 300k reduction). I had guess-estimated a bigger reduction in losses. I have no comparison between quarters for auto transformation but they have reduced substantially in the semester. What I do not like about the industrial unit is that not only operating income is negative but also EBITDA is substantially negative. The good news is that an increase in production reduced losses. The bad news is that the company needed to use overtime work in May and June and as such new increases will require higher wages. The other good news is that there might be a lag between production spending increase and sales and maybe the some of the profits (or lower losses) will come in Q3.
o   Except for industrial equipment services all remaining units performed worse than in Q1.
o   Taxes were lower than estimated

-          Other bullet points:
o   Auto industrial unit: “In the meanwhile and as an estimate of the activity to be developed for the 2nd half of the current financial year, over 900 Toyota physical units and about 1,000 conversions are expected to be assembled, thus achieving levels of productive occupation which will enable a significant improve in income for this plant.”
o   Toyota auto commercial unit: “For the second half of the year, the outlook is favourable due to the launch of new products, which we see as core products: - Aygo (new generation); - Yaris (restlyling).”
o   Lexus auto commercial unit: “For the second half of the year, a even more favourable development is expected for the make's sales performance due to the launch of a new model: the new SUV Lexus NX 300h.”
o   Industrial equipment sales: At a global level, Toyota / BT sales grew by 41.9%, above the market, enabling to keep and strengthen Toyota + BT leadership with a market share of 27.8%.” – industrial services is the most profitable unit of the company and increased market share allows future services revenue
o   Costs have remained low despite the sales increase: the increase in payroll expenses in Q2 were more than offset by a reduction in external services

Disclaimer: read my previous disclaimers in Toyota Caetano posts, nothing has changed since the last one.

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