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International Conference Call

Mills - Estruturas e Servios de Engenharia


1st Quarter2015 Earnings Results
May 6, 2016
Operator: Good morning ladies and gentlemen. Welcome to Mills conference call where
we will discuss the results for 1Q 16. At this time all participants are connected in listenonly mode and later on we will open the session for questions when further instructions
will be provided. Should you need assistance during this call please press star zero for
the operator.
I would like to remind you that this conference call is being recorded and simultaneously
translated into English. Questions can be asked also by participants connected from
abroad. This recording will be available at the company's website at www.mills.com.br/ir.
The webcast is being broadcast simultaneously over the web and can also be accessed
through the company's website www.mills.com.br/ir.
Before proceeding I would like to clarify that statements made during this conference call
related to the outlook and business of the company as well as projections are merely
forecasts based on the expectations of the management related to the future of Mills.
Such expectations are subject to macroeconomic conditions, market risks and other
factors.
Present here today are Mr. Sergio Kariya, CEO; Mr. Gustavo Zeno, CFO and CIR and
Mrs. Camila Conrado, Coordinator of Investor Relations.
To begin with we will have Mr. Sergio Kariya who will comment on Mills performance in
1Q 16 and right after the presentation he will be available to take questions from
participants.
Now I would like to give the floor to Mr. Sergio Kariya. You may proceed sir.
Mr. Sergio Kariya: Good morning ladies and gentlemen thank you very much for
participating in this conference call to discuss the results of Mills in 1Q 16.
We will begin on slide three. Once again we faced another quarter with a very adverse
scenario; but yet the company was cautious and worked diligently to be in line with the
current market condition, which has low visibility due to the economic and political reality
in the country.
With this backdrop we are working hard to minimize damages to our profitability with
discipline and determination - but we remain optimistic and certain that we will overcome
the effects of the challenging landscape.

We have over 60 years of experience in the infrastructure market being leaders in the
markets where we operate with a sound financial position and an excellent team of
qualified and engaged employees that will always be in will continue to be the essence of
our success.
As a result of our hard work looking for opportunities in the moment of crisis we already
had some gains this year as demonstrated on slide four. The capital increase was very
successful with a subscription and payment of the maximum amount of 125 million BRL
and most of it has already had a positive impact in our cash this quarter. We intend to use
the proceeds to strengthen the company's capital and its liquidity levels.
In April we reduced the balance of our gross debt to the amortization of the last payment
of 90 million BRL related to the first issuance of debentures. At the end of April the Board
of Directors approved the election of Gustavo Zeno as CFO and CIR of the company.
As we can see on slide five the uncertainties in the economy and politics continue to
impact our markets with the consistent reduction in investments, expansion of projects
and the lower pace of work for our clients. The paralysis reflects a drop in the main KPIs
from the construction industry. Disbursements from BNDES totaled 18.1 billion BRL in
1Q 16 with a drop of 46% when we compare to the same period of 2015.
Our program of investments in logistics anticipates investments of 198.4 billion BRL in
infrastructure being 86.4 billion in railways; 66.1 billion BRL and highways and 37.4 billion
in ports and 8.5 in airports.
In April the federal court of audit authorized the government to conduct an auction for
airport concessions in Florianpilis, Porto Alegre, Fortaleza and Salvador.
As illustrated in slide six we are deploying several measures to increase revenue and
reduce our expenses and costs. To that and we are directing our efforts to increase our
footprint in the international market, the sale of assets in the real estate market
strengthening our relationship with midsized builders to focus in the nonconstruction
market of our rental business in addition to a continuous effort to pursue operating
efficiency and cost reductions and the shutting down of five heavy construction branches
still under way. We believe that we these measures and others to come until the end of
the year we will be able to increase our ROIC.
On slide seven we present our performance, our financial performance in the quarter: net
revenue was 130.1 million BRL in 1Q 16 with increases of 1.7% in relation to the previous
quarter because increases in sales volume offset the drop in rental revenue.
Costs and expenses totaled 101.1 million BRL in 1Q TY versus 108 million BRL in the
previous quarter excluding the impairment amount of 67.1 million BRL.

The drop in expenses and SG&A partially offset the increase in Cogs and ADD.
Ebitda totaled 29 million BRL this quarter with a margin of 22.3% being negatively
impacted by the large volume of sales in the period.
Net loss in the quarter was 17.8 million BRL when compared to 20.2 million BRL in 4Q
15 excluding impairment.
On slide eight we show the evolution of Ebitda that went from 27.1 million BRL in 4Q 15
excluding 57.1 million of impairment to 29 million BRL in 1Q 16. The Ebitda reduction was
impacted by restructuring measures taken in 2015 generating a large impact in SG&A.
This quarter there was a reduction of 8.7 million BRL.
Ebitda this quarter was impacted by 3.4 million BRL in nonrecurring items. Excluding
these items that include 1.5 million regarding expenses related to the closing of branches
and 1.9 million stemming from liabilities of the business unit of industrial services sold in
2013 Ebitda would add up to 32.4 million with an Ebitda margin of 24.9.
On slide nine we see an adverse scenario of the company that continues to generate free
cash flow, a positive cash flow. Free cash flow before interest payments of debentures
totaled 79.5 million in this quarter; adjusted operating cash flow before interest payments
and investments in rental goods totaled 80.8 million BRL in the quarter and that
represents the capacity of the company to generate cash in the operations. We invested
1.3 million BRL in the period of which 1.2 million was in goods.
The company should maintain medium-term investments at a low level without reducing
its operating capacity. In the medium term we can invest to increase productivity in the
equipment maintenance area.
On slide 10 we illustrate our ROIC evolution since 1Q 15. The average invested capital
of the company tends to be lower with a reduction in investments and with the sale of
assets from the rental and construction units. The average invested capital in 1Q 16 was
1,439.5 million BRL with a negative ROIC of 3.8%.
Now going to slide 11 we show the breakdown of our revenue in the quarter per market
and per type. In 1Q 16 the consolidated revenue increased by 1.7% vis--vis 4Q 15. The
drop of 15.5% in the construction unit and in the real estate unit was offset by increases
in the infrastructure and rental revenue.
The rental business unit contributed with 59% of the revenue and the infrastructure unit
with 24% and real estate with 17.
In relation to types of services 69% of the revenue of Mills was related to the rental of
equipment; 24% related to the sales.

As illustrated in the chart per type of revenue sales of semi-new generated revenues of
29.2 million in the quarter being 6.7 million in the heavy the construction unit and 22.6
million in the rental unit.
We already recognized in our results of 2016 sales of 12.8 million related to a contract
signed in August 2015 of 8 million in semi new machines from the rental division. These
contracts were recognized already of 18.3 million of the revenue. As mentioned in the
previous quarter these revenues will be recognized throughout 1Q 1H 16 and depend
on conditions demanded by the client, the supervision and delivery at the ports of
embarkation.
On slide 12 we present the evolution of our net revenue in the rental area highlighting the
impact of price and mix in volume. In 1Q our revenue was negatively impacted by the
drop in volume of rental and by the effect of price and mix in the units of construction and
rental. The utilization rate of construction was down in relation to the previous quarter due
to lower rental volumes. Utilization LTM was 48%.
In rental the utilization rate also presented a slight decrease.
On slide 13 we show in the first chart the cost of sales and the write-off of assets. In the
quarter it totaled 24.1 million which was 125.5% higher than in 4Q 15. The increase in
sales cost is in keeping with the growth of sales and indemnization that was 125.9% in
the same period. Costs related to the write-off of assets are related to sales of equipment
and indemnization.
In the second chart we present the evolution of costs of execution in the works in
warehouses which are directly related to activities in maintenance and moving of
equipment. The construction unit was responsible for 54% of these costs with a search
for more efficiency gains and productivity and we expect to reduce this ratio of these
costs/net revenue.
On slide 14 we break down SG&A excluding depreciation and ADD that added up to 37.7
million BRL in 1Q 16 presenting a reduction of 18.7 when compared to the quarter before
excluding impairment in 4Q of 57.1 million BRL. Measures to reduce expenses in 2015
had higher focus on SG&A that encompasses expenses reported with general service
which are expenses with rent, safety and cleaning of the branches all over Brazil in the
commercial operation and administrative areas.
On slide 15 we talk about the construction unit. We have here the financial performance
of the heavy construction unit. Net revenue totaled 53.7 million BRL in 1Q 16 and a
reduction of 6.7% in relation to the previous quarter. This drop stems from the paralysis
in the market and the pressure from prices that impacted, directly impacted rental
revenues with a reduction of 20.9% in the rental revenue. The drop in rental revenue was
partially offset by the increase in the sales and indemnization revenue.

Costs and expenses including ADD added up to 49.6 million in a reduction of 16.9% when
compared to 4Q 15 excluding 30.9 million BRL impairment in the period. The reduction
was in all lines: Cogs, SG&A and ADD.
Ebitda was 4.1 million in 1Q 16 with margin of 7.1 7.7%. Ebitda in 4Q excluding
impairment was negative by 2.1 million BRL with margins of -3.7%. ROIC was -9.8% in
1Q 16.
We are able to visualize on slide 17 the main infrastructure works where we are present
in the country. In the Southeast we are in the mobilization phase of some works as for
instance the highway called Nova Tamoios; the monorail of the line Ouro; the line 6 of the
subway amongst other, which are already underway and a large number of equipment
was rented for the line 5 of the subway; the Beltway and the Imigrantes Viaduct in So
Paulo and Transbrasil in Rio.
In the North the Northeast regions we have the express corridor called Aguanambi and
the Tauape bridge in Cear, they are still in mobilization phase; and also the subway in
Salvador and the BA093 highway both in Bahia with high volumes of equipment rented.
And finally the Midwest and South regions we are working in the penitentiary of Papuda
in Braslia, which is in mobilization phase and will demand a large volume of formworks;
and the new bridge of Guaba in the Rio Grande do Sul.
Urban mobility has 28.8 of participation followed by highways with 21.1 and industrial with
16.2%, that was on slide 18.
On slide 19 we can also analyze the segmentation of the real estate revenue. The
residential market accounted for 57% of revenue and commercial 25%. We continue with
our efforts to gain niches in midsized works and small industries, schools and hospitals
only possible through the unification of the equipment inventory and our technical team
in 2015.
On slide 20 we will speak about the rental unit.
As shown on slide 21 revenue was 76.4 million BRL in the quarter which is up by 8.6%
when compared to the previous quarter and mostly that accounted for this increase was
sales revenue from used equipment that was up by 266.9% adding up to 22.6 million
BRL.
Costs and expenses including allowance for doubtful debt was 49.6 million BRL being
30.4% higher than in 4Q 15. Increases in ADD represented an increase of 4% in the
revenues of the quarter versus 1.2% in the previous quarter.

Ebitda totaled 26.8 million BRL in the quarter and an Ebitda margin of 35% against 45.9%
in the previous quarter. This drop in margin is due to higher sales revenue that has a
lower margin.
ROIC was 5.1% in the period.
The rental revenue as shown on slide 22 accounted for 48% of our net revenue when
compared to 57% in the previous quarter. As mentioned in the previous quarter we have
taken measures to increase our share in the nonconstruction market mainly in the sector
of industrial maintenance which have long-term contracts.
Rental revenue accounted for 65% of the revenue whereas the sales revenue accounted
for 32% in compensation, indemnities and technical services of 3%.
Now on slide 23 we will talk about the indebtedness of the company.
On slide 24 we ended the quarter with a net debt position of 207.5 million BRL against
388.8 million at the end of 4Q 15. Our cash position at the end of the quarter was 424
million BRL of which 124.6 million refer to capital increases validated in April and already
paid in 1Q.
As illustrated in the chart our amortization chart of the debt includes payment of 174
million BRL of the principal in 2016 of which 90 million of amortization were already paid
in in April, which then concludes the first issuance of debentures. We still have 70% of
the principal of the total debt to amortize this year.
The debt of the company consists of 31% of short-term debt and 69% of long-term debt.
The total debt is denominated in BRL being 74% tagged to the CDI; 24% to the national
consumer price index and 2% to long-term interest rates.
At the end of 1Q our net debt/Ebitda ratio excluding nonrecurring items was 1.3x as we
can see on slide 24 25 LTM Ebitda/financial result was 2.8x in the same period also
excluding nonrecurring items in the period. In the medium term we maintain our goal to
have a net debt/Ebitda ratio of 1x for the short term and our strategy to preserve cash
includes the sale of assets in addition to strategies to reduce costs and expenses.
To conclude I would like to emphasize that today with you more We are even more
challenged to face the adverse scenario. The success of the operation of capital increase
points to the market and we believe in the drivers to grow our markets.
So we thank you for your trust and reiterate our persistence of pursuing costs and
expenses reductions and a conscious pursuit to reach further operating improvements.
Now thank you for the participation.

Q&A Session

Operator: If you have questions please press star one and to remove yourself from the
queue please press star two.
Our first question comes from Joe Moura, Bank of America Merrill Lynch.
Mr. Joe Moura: Good morning. I have two questions related to the same topic which is
this adjustment that the market is now going through.
First of all I would like you to speak about those reductions in the asset base that Mills
had. You had a more relevant guidance for real estate and in terms of equipment things
were more difficult, in the rental your guidance was a little bit lower; but in terms of
equipment you were moving quite well and you had a positive performance in this quarter.
I just want to know whether you still have new targets or not.
And my second question now also relates to the same topic and it is about this adjustment
which is promoted through the shutting down of plants. You already have five new
closings. This will be done throughout the year or you think that this will happen in the
first half of the year?
And how do you see the offer from the industry whether it is agitated or is it still getting
adjusted or you think that it will still some time until we see a new and more adjusted
scenario? Thank you.
Mr. Kariya: Joe firstly to answer your first question related to the asset sales in fact our
sales appetite in the rental market is lower. We should conclude this year the two packets
of 8 million and US$ 2.3 million that we did last year and this should be concluded, our
sales to Europe should be concluded by 1H TY and also sales to the Middle East market
should be concluded in 1H TY, which will decrease our appetite to continue selling
equipment.
We understand that these platforms refer to strategic equipment and of the cost of
replacement of this equipment will be quite high because of the BRL depreciation. But we
still keep our focus to sell reducing our equipment exposure in the real estate market,
both selling locally but mainly we are also making efforts abroad.
So answering your second question related to the shutting down of branches we are in
the process of closing branches, so that includes five new closings and another one from
rental and so in total six branches.

This process should be concluded still in 1H 16. We expect to conclude the shutting down
as we said before in April but this time has been expanded a bit and so we believe it will
be concluded by the end of this half year.
In terms of market offers we still feel the continuous pressure both in terms of demand
and also in prices in all of the businesses we have both for rental and real estate or
infrastructure.
Mr. Moura: thank you.
Operator: our next question comes from Vitor Santos from Prisma Investments.
Mr. Vitor Santos: Good morning Kariya. My first question has to do with your overhead.
What is the situation today when you compare December 31 of the year before and today
in terms of the number of employees?
Mr. Kariya: okay on December 31 of 2012 we started reducing our headcount. Most of
the headcount cuts started in 1Q 15 or in the first two weeks of 2015 and what we are
doing now are just some minor adjustments related to the shutting down of the branches.
Mr. Santos: fine thank you and what is the companys target in terms of net debt? Are
you thinking in terms of reducing? What do you have in mind for that area?
Mr. Kariya: we continue looking into this topic; but the fact is that we want to focus on
our cash position. We want to continue to have a positive free cash flow in the following
quarters.
Mr. Santos: my last question is about the sales outlook in the real estate in terms of real
estate assets because I think things I mean what is your outlook? You are selling
abroad? Most of it has been sold abroad and how do you see the situation ahead?
Mr. Kariya: we continue to be very optimistic. We already have some things in our
backlog to be delivered in the next three months. The pipeline volume is quite robust and
therefore we still believe that we will be able to sell domestically but our main focus, I
would like to reiterate, that is in the foreign market. We are looking into other alternatives
abroad to leverage the real estate market.
Mr. Santos: now still going back to the previous question how do you see the competition
environment? There was a reduction in price and mix; do you see any of your competitors
leaving the market or leaving some other regions like you did yourself? Is there anyone
in Going through judicial recovery?
Mr. Kariya: we do not speak much about our competitors; but the fact is that everyone is
going through a lot of pressure.
Mr. Santos: okay that was it thank you very much.

Operator: I would like to remind you that if you have questions please press star one.
Once again I would like to remind you that for questions please press star one.
We now conclude our Q&A session. I would like to give the floor to Mr. Sergio Kariya for
his final remarks. Please sir you may proceed.
Mr. Kariya: Ladies and gentlemen firstly I would like to stress that I was the one in charge
of this call; but in the next call we already have our CFO and CIR Mr. Gustavo Zeno so
from now on he will be leading the next call.
I would like also to thank you all for participating by phone in our conference call for the
1Q 16 and our investor relations department is available to take any of your further
questions thank you very much.
Operator: Mills conference call is now concluded. I would like to thank you all for
participating, have a good day and thank you very much for using Chorus Call.