Tuesday 9 December 2014

Toyota caetano- 3rd quarter- better than it seems?

Third quarter results were not what I expected. In fact, since I had published before my expectations by segment, it is fairly easy to understand where I missed:

Production -626k             IN LINE
Commerce 48k                                MISS BY 500k
Auto services -62k          IN LINE
Auto renting 225k           MISS BY 500k
Industrial sales 39k  MISS BY 30k
Industrial services 410k BETTER THAN EXPECTED BY 110k
Industrial renting 378k BETTER THAN EXPECTED BY 78k
International auto commerce 28 k


Eliminations  -784k          MISS BY 180k

So, it turns out I expected too much from the auto renting sector. Since I had done a direct comparison with same quarter last year there are three explanations I can remember:
1- 3Q was a bad quarter for the rent-a-car business
2- The reduction in RACs in comparison to last year had a bigger impact than I expected
3- There might be one off results (in sales of RACs) in last year's 3Q, that were delayed to 4Q this year (the announced 560 RACs sale)

Since this Summer was significatively better for portuguese tourism than last year's I believe option 1 is unlikely. In fact, if the RACs usage was higher (less vehicles more demand) it could explain that RACs sales could have been delayed - option 3). If that is the case, it is possible that it was not a true result reduction. Option 2 is harder to guess: last year the fleet contained 1383 units at the beggining of 3Q, which included 254 industrial machines. This year total fleet was 1226 units (88%) but segment composition is not disclosed. I had guessed 90% of net income but went wrong. I believe option 2 had an impact both because of a bigger reduction in the passenger segment than the global number implies and because fixed costs might have stayed...fixed.

And then there was also a much worse result in the auto commerce segment. In fact, net profit in this segment was marginal despite the increase in units sold. What happened?
1- Gross margins were squeezed
2- Sales increased above the general market (the company had been losing some market share), which means there was an increase in market share in addition to the general market sales increase  - July to November (yes it continued in the 4Q) Toyota light vehicles (Lexus not included but also increased, I believe) market share was 5.60, 4.95, 5.5, 5.28 and 5.56% respectively versus 4.8, 3.4, 3.94, 4.65 and 4.82 last year)

So the company is increasing sales and market share to get no profit. That sounds scary and the fact that net debt has increased to finance the working capital increase makes it scarier. But is it really that bad or is it the correct option by the company? (here I must say I am not absolutely sure of the answer, but read on). I believe we should go to the industrial vehicles divisions now, and maybe that sheds some light on this question.

So the industrial vehicles sales also had slightly worse net and operational results than I had predicted... in addition sales were 3989k in the quarter, almost as much as in the whole first semester (4476k). So here we seem to have the same problem, sales increase (a lot, I should add here) but profits are almost non existent. But then, industrial services had better than expected results. In fact, together with industrial machines renting (whose results were also better than I expected), industrial services are bringing in most of the company's profit (and it was the same last year). So it seems that at least in the industrial machines division what we want is sales to increase as long as there are no associated losses, and profits will come through the services segment. Are these profits enough? Commerce+services assets are 4,6M equity is 2,8M and net profits in the first 9 months were 1,16M. I believe that is more than enough and as such I will be very happy if commerce sales continue to increase with no immediate profit increase (importantly,  from the data I gathered it seems this sales increase happened in a stable forklift market, which would mean a market share increase).

So back to the auto commerce segment. it is possible that their plan is similar here. I do not expect results here to be similar to those in the industrial segment since competition is much higher (and most of it does not declare most sales and as such pays neither consumption taxes nor profit taxes). As such, here they will mostly get that business in the first years after the car sale, since after that the car warranty expires and most car owners go to the cheaper market. Costumers will migrate to the cheaper market quicker in recessionary times. How do historical results play in this thesis: 2011 to date net loss was 2897k, 2009+2010 net profit was 8713k. So it seems this segment has potential and as such maybe management deserves the benefit of doubt here for increasing sales to get no immediate profit, but i have no way of being sure...

And then we have the auto production segment, in line with expectations but still burning money... the good news is that they seem to lose less when they increase volume and that volume seems to be increasing (they produced 354 units in the whole 3Q and produced 213 just in October). I do not like these losses but the trith is that they are included in the baseline thesis for Toyota. Have a look at the historical data:
(pre tax results/depretiations/capex/ caetano components EBIT)
2007 -3.273.049/......./......../949.133
2008 -4.133.630/3.630.014/4.130.798/ 48.050
2009 -5.315.770/4.083.537/2.374.603/-432.374
2010 -3.073.873/2.093.932/199.276/
2011 -5.454.267/2.007.533/924.667
2012 -4.320.757/1.836.275/432.411/ -419.753
2013 -4.029.575/1.551.136/(613.559)/-717.812
2014(9M) -1.928.611/787.032/1.032.202
About these data: before 2007 data is not comparable. Up to 2013 caetano components results were likely included in this segment so I present that data whenever available, but since they had to be closed down the actual production division results were likely to be a bit better than they seem. But the negative (big negative) results were constant, and as such they are already included in the baseline scenario. Recent results actually make it seem that the crisis and needed cost cutting were actually a way to reduce those losses (we are likely to get a record low in losses in 2014)


As I mentioned and explained above, net debt increased. Current net debt is at 35,75M, which they explain with inventory. They also mention that debt is now cheaper  (which is normal, I think, but it also might mean they are playing that sales increasing game to explore the lower cost of leverage, which is not bad). This also means that debt is mainly tied to the 62.6M in inventory, thus reducing risk since sales are much higher than inventory (implying high rotation).


In conclusion, results seem bad at first sight but it is reasonably possible (and maybe probable) that this is the correct long term strategy. However, read the disclaimer

Disclaimer: I own a sizable position in Toyota Caetano. To be honest, I must mention that today I placed an order to sell a small part of that position (10k shares) at 1,07€ (my last buying price) since I found another very cheap investment and would welcome the diversification. Those shares were not sold yet, and that is also why I will not talk about my new idea yet (despite being much more liquid than this one), since I have not built the position. I am not recomending you to buy or sell any of the securities mentioned. I might and will buy or sell shares in Toyota Caetano without prior disclosure. Read all previous disclosures and always do your own research.

8 comments:

  1. Parabéns pela análise, pelo trabalho e dedicação. Tenho seguido as tuas publicações aqui no blog, bem como os posts no Caldeirão, e tenho uma grande admiração e respeito pelas tuas análises e forma de estar nos mercados, Gostava de ser capaz de analisar assim, meticulosamente, os relatórios de contas das empresas, mas a verdade é que não tenho bagagem. Bem longe disso... Talvez daqui a alguns anos, com muito estudo e vontade de aprender!

    Relativamente à Toyota Caetano, já pensei/tentei entrar mas não estão disponíveis na GoBulling.

    Quem leu atentamente o post tenho a certeza que ficou curioso pela descoberta de um "cheap investement"... Pelo menos eu admito que fiquei. Quando liquidares a posição, podias "matar" essa curiosidade... ;-)

    Um abraço e tudo de bom

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    Replies
    1. Não vou liquidar a posição, nem nada que se pareça. Na minha corretora há um local onde dá para pedir para disponibilizarem ações. De vez em quando lá tenho que pedir para me disponibilizarem alguma ação e no dia seguinte ela aparece.
      Quanto à entrada na Toyota Caetano, como qualquer outra, tenta pelo menos ler um relatório de contas. Vermos com os nossos olhos é o único modo de por um lado aprender e por outro aguentar eventuais subidas ou quedas. A bagagem ganha-se, é preciso gostar e se gostarmos não é estudar mas aprender. E aprender é a ler relatórios de contas e a ler/ouvir quem sabe (e quem sabe são maioritariamente os bilionários - se chegaram lá por algum motivo foi, uns foi por genialidade e trabalho e não dão para imitar, outros são mais imitáveis, embora brilhantes de qualquer modo).

      abraço

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    2. Por acaso pedi na Gobulling para disponibilizarem as ações da Toyota Caetano. Disseram que iam analisar o assunto, mas nunca mais me disseram nada. Entretanto tb nunca mais vi se já é possível ou não adquirir tais ações.
      Já olhei para os relatórios de contas da Toyota. Mais do que uma vez. Mas sem bases em gestão... ou economia... ou em finanças é tudo um pouco mais complicado. Pelo menos nesta fase da minha vida. Comprei as minhas primeiras ações há 3 anos, mas só comecei a estudar (ou a dedicar tempo) os mercados há um pouco menos de um ano.
      Entretanto já li uns poucos de livros, mas ainda olho para um relatório de contas como um burro para um palácio.
      Já agora, não me querendo extender em demasia, tens alguma sugestão de leitura sobre análise fundamental?

      Grato pela atenção e desejos de bons negócios

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    3. Este livro tem os básicos e salvo erro já li várias recomendações como sendo o mais adequado para uma primeira leitura. Gostei de ler mas dá-te a língua e chama a atenção para alguns pormenores importantes. Tens é que ter em atenção que graham tem o viés de andar à procura de net nets.
      https://www.google.pt/?gws_rd=ssl#q=benjamin+graham+the+interpretation+of+financial+statements

      Para a filosofia de base os capítulos 8 e 20 deste são a leitura mais importante de todas. É graham na mesma e em vez de ser de 1937 é dos anos 40.

      https://www.google.pt/?gws_rd=ssl#q=intelligent+investor+benjamin+graham

      Depois é ler o que conseguires sobre o warren buffett (ler as cartas aos acionistas dele todas desde 1977 é sempre uma ideia brilhante). Elas estão aqui:
      http://www.berkshirehathaway.com/letters/letters.html

      Outra alternativa razoável se chegares à conclusão que não tens tempo ou algo do género é leres o que ele diz sobre investimento na carta de 2013, nomeadamente este excerto que foi publicado antes mesmo da carta sair:
      http://fortune.com/2014/02/24/buffetts-annual-letter-what-you-can-learn-from-my-real-estate-investments/

      É engraçado que ele aqui recomenda os mesmos capítulos que referi. Aliás, se calhar este excerto é o melhor sítio para começar. Se depois de leres decidires indexar só precisas de ler os capítulos 8 e 20 para sedimentares a filosofia. Se decidires avançar, lês os básicos no primeiro livro que recomendei e depois é ir avançando para relatórios de contas e ir lendo tudo o que conseguires que te vá interessando. Se tiveres pouca paciência para ler indexa (progressivamente senão corres riscos). Também há alguns videos interessantes dele, do munger e do pabrai (há outros mas gosto destes...acho que as aulas do greenwald também estão no youtube). Um truque é começares por relatórios de empresas pequenas e simples de perceber. Essas são mais acessíveis e vão-te sedimentando os básicos, para além de que é mais fácil aí teres uma vantagem sobre o mercado e conseguires bons negócios: quem investe fortunas não pode investir aqui mas para quem investe tostões dá perfeitamente.

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    4. Ok! Muito obrigado pelas dicas.

      Já li o Intelligent Investor mas para alguém que está a começar é demasiada informação para quem tem uma base tão pequena. Tenciono dar-lhe um segunda leitura num futuro próximo,

      Hoje já é um bocado tarde, mas nos próximos dias vou explorar as tuas sugestões.

      Cumprimentos e mais uma vez agradeço a ajuda

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  2. Parece-me que o BCP está a voltar a vender SCT em força novamente, devem querer reduzir substancialmente a posição até ao final do ano. A venda de 10k de hoje ao melhor deve ser deles, mas não encontrou compradores e não se fez negócio. Vou tentar reforçar mais qualquer coisa.

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  3. In the meanwhile an addendum to the results of Q3 was released (I admit I had not noticed the gross cash flow error since I do not care much about that table). But now we can guess better what happened in the rental unit that I was not able to properly analyze in my analysis the 3rd quarter:
    -Sales of 1,538,388 in the quarter of 2014 compared with sales of 2,648,045 in the same quarter of 2013. The difference is huge with a drop of 42% in sales.
    As I had said:
    “there are three explanations I can remember:
    1- 3Q was a bad quarter for the rent-a-car business
    2- The reduction in RACs in comparison to last year had a bigger impact than I expected
    3- There might be one off results (in sales of RACs) in last year's 3Q, that were delayed to 4Q this year (the announced 560 RACs sale)

    Since this Summer was significatively better for portuguese tourism than last year's I believe option 1 is unlikely. In fact, if the RACs usage was higher (less vehicles more demand) it could explain that RACs sales could have been delayed - option 3). If that is the case, it is possible that it was not a true result reduction. Option 2 is harder to guess: last year the fleet contained 1383 units at the beggining of 3Q, which included 254 industrial machines. This year total fleet was 1226 units (88%) but segment composition is not disclosed. I had guessed 90% of net income but went wrong. I believe option 2 had an impact both because of a bigger reduction in the passenger segment than the global number implies and because fixed costs might have stayed...fixed”
    A 42% fall in sales does not seem justifiable only by the reduction in the number of RACs. In fact, assuming a reduction of 15 to 20% in the number of RACS it makes no sense to have a drop of 42% (if the activity was the same). Moreover, a reduction in the number of vehicles should result in increased occupancy and therefore I would expect a lower drop in sales to than the decrease in the number of RACs, in a stable demand context. Summer is a peak time for the rent a car business, which is seen both by higher sales of this unit and by Toyota Caetano’s decision to increase the number of RACs in the second quarter (and then eventually decrease the number until the end the year). So since tourism increased this summer, this would make me expect and even lower decrease in sales. It seems to me therefore that the most likely option is now 3. If that is so, we can expect a much higher result in the last quarter in this unit for two reasons: on the one hand the possible delay in the start of the 560 RACs sale may be related to a 3rd quarter with a high occupancy rate; and on the other hand it would mean that the RACs to yet to alienate may be closer to the 560 RACs planned. Of course part of these are one-off effects (the overall reduction in the number of RACs), but part is just the normal rent a car business model (take profit on the disposal of the vehicle in compensation for lower margins in the rental itself).
    By the way, the data of November production (178 units) also came out and this unit needs only produce 122 vehicles in December to match the 2nd quarter. It seems to me that is to be expected therefore that this will the best quarter in terms of automobile production( despite the holiday + Christmas + New Year since last year the month of December was better than November and October contrary to the thesis the impact of Christmas and New Year).

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    Replies
    1. As a double check, comparing the cash flow from sale of tangible assets could give a rough idea if there was such a difference in the vehicles' sale between 3Q2014 and 3Q2013. Cash flow from sale of tangible assets 3Q2014: 863.593 vs 3Q2013: 3.092.438. The difference is, however, higher than the difference in sales of the rental unit in the two quarters.

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