Dexco S.A. (DXCO3) Earnings Call Transcript

Good morning, and welcome to Duratex' conference call. [Operator Instructions] This conference call is being recorded. We would now like to give the floor to Mr. Henrique Haddad, Investor Relations Director at Duratex S.A. You may go on, sir.

Good morning, everyone. Welcome, and thank you for listening in to one more earnings call from Duratex. I'm here with our CEO, Antonio Joaquim; and the Heads of the Deca Division, Marcelo Izzo; and the Wood division, Henrique Marcondes as well as the Ceramic Tilings. And we have our IR team here. This quarter was marked by uncertainties and many changes at Duratex to adapt to the current scenario of the COVID-19 pandemic, which is what we will discuss in today's presentation. On Slide 2, you see a summary of our Crisis Management Committee. We are still focused on ensuring safety and health for all our employees. Not only do we have working from home and are we following up on possible new cases among employees, but, also, we are reinforcing cleaning our units, we have a robust communication process, and we're always taking care of transparency with employees and with the market. We'd also like to highlight for you some additional items in this agenda. We have health care activities such as daily monitoring through the app, this is made available to all our employees, and we have a psychology support program. We have online physical training and online meetings on mental health and ergonomics. We defined a work relations list with several initiatives to maintain the protection of our workforce. We have been maintaining jobs and avoiding pay cuts. This is an achievement we have this quarter, and we're very happy to share that with you. We have defined a safe recovery protocol in detail to train our employees. It's been very effective so far to help our community. We concluded the quarter with over BRL 10 million donated to projects to fight the COVID-19 pandemic, especially to Todos pela Saúde as well as donations of Deca, Hydra, durafloor, Duratex and Portinari products. We are continuing to pay attention until the pandemic evolves. We really have to raise a yellow flag to avoid any surprises. Looking now at our results, we move on to Slide 3. Our results were strongly impacted by the COVID crisis, especially in April. So they had a major evolution throughout the quarter, concluding at operational levels, similar to the pre-COVID period across all divisions. Due to the loss in sales volumes, our net revenue had a fall of 8.6% despite the Cecrisa consolidation in 2020. While our EBITDA had a reduction of 44% versus 2019, which I'll explain in further detail on Slide 4. As we said at the close of the first quarter with the pandemic, we had to reorganize our structure and production flow to continue servicing our clients. However, we aim to have the lowest impact possible to our cash. In April, we had to adapt our inventory management to adjust our production under the demand we had at the time, which meant we had to stop most of operations for the first time. Although this was essential to manage our working capital, this loss in production scale led to a significant increase in our costs and expenses, which had already been impacted by the exchange rate. These increases were partially offset by a strict crisis management process implemented across the company. It's important to highlight that a part of this reduction will be maintained in the next quarters. Another important activity was getting close to our clients. At first, our goal was to supply their demand, considering the impact of the crisis. However, we quickly evolved into supplying the demand that grew during the quarter, and that strengthened our partnership. This demand management and the quick reaction we had from the beginning of the crisis allowed our recovery to be agile and the potential impact we would have from losses and credit risk was also kept under control. To make this easier to understand, as we can see on the graphs to the right -- on the right part of the slide, the biggest impact on the results was definitely the reduction in volumes in April. In May and June, we already see the recovery was strong, and we were able to conclude the quarter with operational levels similar to the pre-COVID period. Now looking at our cash flow impacts, we continue with Slide 5. We had a huge number of initiatives, especially connected to inventory management, negotiating with suppliers, taxes and others, and they've boosted Duratex so that we had a higher cash generation this quarter than last year. Another important factor was prioritizing maintenance CapEx. We've reprogrammed our investments and focused on high-return projects without losing sight of the productivity commitments we had. With that, we managed to generate nearly BRL 70 million in cash this quarter, and that is before investment projects, as you can see. This result even given the current scenario was higher than what we saw in the second quarter last year, which makes us feel confident of the path we've chosen. It's also worth highlighting that, as planned, we invested BRL 211 million in building a new soluble or dissolving pulp unit in Minas Gerais, which closed the quarter with a total cash consumption of BRL 139 million. Continuing with Slide 6, we're going to go into detail on our working capital and CapEx. As expected, we had a one-off increase in client payment lead times. It was offset by our renegotiation with suppliers, which led to a continuation of the strong effort we had already been starting in the previous quarters. So a strong management of our cash controls and the availability of our clients was the fundamental lever to accelerate our recovery this quarter. Regarding investments. As was said before, our sales of share equity in the last few years is already noticed in our forestry OpEx reduction, which offsets the CapEx increase from the Cecrisa acquisition. Despite these reductions, our total CapEx increased due to the investment in LD Cellulose according to our plan. Now on Slide 7. Even with the worse result due to the crisis and to the investment in LD Cellulose, our debt was basically stable versus the second quarter of 2019. This goes to prove how solid the company is financially and how efficient its crisis management was. Regarding debt, we finished our capture process of BRL 1 billion in April and May, positioning the company's cash to ensure the continuity of its operations as well as its growth projects. With a total capture of BRL 1.6 billion this year, we have a strong position for any short-term debt. Now to talk a bit about our divisions, let's continue with Slide 9. The Wood panels market had a retraction of 22% in Brazil due to the strong drop in domestic demands and volumes reduced by 26% in MDP and 18% in MDF, but with already strong signs of a recovery in June. In the forward market, we saw a 14% drop versus the previous year due to the social isolation measures adopted in Latin America. Now looking at Duratex on Slide 10. At Duratex, the Wood Division had a better result than the market overall, a drop of 18% in sold volumes as well as with other divisions, this is a drop due to a strong retractions in sales in April, which was partially offset by a quick recovery in May and June. And in June, we had a significant high versus June 2019. This quick recovery in plants, along with a strong client relationship was what led to this performance. But anyway, we still had a reduction of 20.9% in our net revenue in this division versus the same period last year. With regard to exports, even with the significant increase in sales to the U.S. and Asia, enjoying the more favorable exchange rate, we still were not able to offset the reduction in sales to South American countries where our main clients are. It's important to remind you that economic activities were suspended around the world, not only in Brazil, but they were more intensive in our neighboring countries. Finally, the loss of production scale and the currency exchange variation were the main factors that justify the 50% drop in the Wood EBITDA. Now with the Deca division on Slide 12, we see that in the midst of the COVID scenario, ABRAMAT showed that we would have a reduction in revenue versus last year, but with signs of recovery. The biggest impact was in April, a reduction of 33.5% with a slight recovery in May of 12 percentage points. That reflects how our time line for construction work was maintained and how construction material stores were opened again. It's worth highlighting that the figures for June have still not yet been published, but the estimate is positive given the evolution that ANFACER presented as we'll see further on. On Slide 13, we discuss Deca. Although there was a strong impact from economic activities being paralyzed in March and April, as I mentioned, as construction projects resume their activities and as construction material stores reopened, we were able to regain our sales quickly, especially in May and June. And consolidated figures for the quarter, Deca had a reduction of 16.1% of its volumes sold. However, our commercial strategy was strengthened, and we are positioned in diverse markets, such as in the food industry with the Hydra brand. And that led to consecutive record sales, but also superior operational levels than the pre-COVID period already in June. However, by reducing our operational capacity in our plants and a strong currency exchange variation led to a strong drop in our gross margins and our EBITDA levels. And our EBITDA was reduced by 50% approximately versus the same period in 2019. If we analyze the results in June, though, we would see a significant improvement versus 2019. Now to talk about Ceramic Tilings, we move on to Slide 15. The Ceramic Tiling market, according to ANFACER, had a 9.6% drop in the first quarter of 2020 versus the first quarter of 2019. The volume produced was 118 million square meters, which is 39% of the installed capacity utilization. There was a reduction in revenue in April and May of 24.6% and 17.1%, respectively. And they were partially offset by a 13.6% increase in June. On Slide 15, before we talk about this division, we have to remind you that in the second quarter of last year, we had not yet consolidated the Cecrisa results, which was only consolidated in August 2019. In this market, Ceramic Tilings also had a retraction in volumes in April and May, but its recovery was faster than the rest of the industry, especially in June. With that, the volume shipped in the quarter was nearly 4.5 million square meters, around 80% of what Ceusa and Portinari did added together in the second quarter of 2019. This is just a pro forma comparison. The reduction in volumes also impacted the cost in this division, which can be quickly seen in the margin reductions this period. Although we are focused on reducing CapEx, we decided to prioritize investments that we would feel improve the -- improve operationally the Ceramic Tiling division. Of course, the effects will take some time to be seen in the results, given the lower utilization of our capacity. But as soon as the operational levels are recovered, this positive impact will be evident. Now to talk a bit about our dissolving pulp operation, we move on to Slide 18. The biggest highlight here is the capturing process for the new plant in Minas Gerais. Valued at $1.2 million, it was acquired through BID Invest, IFC and Finnvera. Direct investments of BRL 211 million have already been made by Duratex for this company. According to our plan for this project, although we have the COVID crisis, the time line is not changed. Operations should begin in the first half of 2022. LD Cellulose results was negative in the first quarter by BRL 23.6 million. However, we are treating this operation in the project period. And they were not considered for our adjusted and recurring EBITDA. We're now going to talk about our expectations for the next months on Slide 19. It's very difficult to estimate what the second half of 2020 will bring, given all the uncertainties we have. However, we have to say that perspectives are very positive. Regarding the market, the construction industry has been more resilient than others. Our strategy is focused on capturing all the opportunities we can as the industry recovers. In line with what happened in June, July also started strong. It had a relevant improvement in our capacity utilization in our plants, which is usually close to capacity. This is a surprising level given that it goes over the levels in which we operated in the last years. Regarding our costs and expenses, we are focused on cutting costs and preserving our cash, paying special attention to working capital. We are also counting on a reduction of the debt provision level for our clients, considering the evolution of the market. Regarding our employees, we continue to monitor people closely where we operate as well as our employees' health. We are trying to take quick measures and be efficient in maintaining health and safety for all. In administrative areas, we've already structured a recovery plan, which will be implemented gradually as the pandemic develops. Finally, I have some good news to share with all of you before I conclude my presentation. I'm very happy to share that today, we're publishing the first integrated report Duratex -- excuse me, the first Duratex integrated report that is. It's an evolution of our yearly report about sustainability, which has been published for the last few years, where we are finding a format that presents our strategy better, including environmental, social and corporate governance concepts as well as, of course, the indexes that confirm our position as one of the most sustainable companies in this sector. We hope it will be received well, and we are counting on your return. This concludes my presentation, and we are now open for any questions you may have. Thank you.

[Operator Instructions] The first question comes from Isabella Vasconcelos at Bradesco BBI.

Congratulations, of course, for your results. I have a couple of questions from my side. First, I have to say that this was an expressive recovery across all segments throughout the quarter. I'd just like to understand a bit better how you're seeing your order book now for July and August, if you can tell us a bit about the differences that you're seeing? And my second question is about prices, especially for the Wood panels market. We saw that some of your competitors have announced price increases. So I'd just like to understand how this will be handled with Duratex, and if you foresee any price increases throughout the second half of the year? That's my question.

This is Antonio Joaquim, and I hope you're all doing well. Isabella, let me answer your questions. The first point that is clear from the results we presented from our figures is that our expectation is very high for the second half of the year. Throughout the second quarter, we had extraordinary lessons learned. We really at the beginning of April with 100% of the plants closed and with very difficult perspectives, that didn't really allow for much planning because everything was very uncertain. We took all the measures we could in the company. We worked on costs. We increased our productivity. We cut our CapEx. So that was the traditional recipe, but it was done very well. And we managed to contain the crisis, which was unpredictable. We didn't know how intensive it would be. So our perspective was quite negative at that time, but we've got a breath of air quickly after May. In May, we already started seeing operational levels at a promising height. And then in June, as Haddad said, we saw some divisions such as the Wood division, working at full speed. And Deca, Ceramic Tilings, was a bit lower, but it was still doing very well. Of course, we're here to talk about the second quarter, but we do believe that July will be exceptional. When we talk about volumes, our portfolio seems to be doing very well this month. So July will probably be very favorable. 100% of our lines are in operation or at capacity. So Wood, for example, is operating at the end of July in all of its plants at full capacity or in some cases, even above their capacity. So that's very positive. Deca is also doing very well. Ceramic Tilings are also reaching full capacity this year. We only had one that was not going to be used this year because it's being refurbished. But with all lines in operation, we will have a strong month of July. We will have a strong portfolio for August and really our short-term perspectives are positive. In July, for example, our operations will be higher than expected in our budget. We expect that July will have a figure that is higher than 2019, but we will talk about the third quarter when we have the call to discuss it, but our expectations are positive right now. So I think that gives you some perspective. With plants in full operation, we also believe our costs will be normalized. Of course, we had an important impact because of the currency exchange variation. But we basically managed to offset that with a few initiatives, and we are implementing some changes in prices. So the scenario for the next months will be quite positive. I'm not sure if I forgot about any questions you asked, Isabella. I don't know if you had anything more specific to ask. If you do, please let us know.

No, that was very clear. And if you can tell us about the price increase that you expect for Wood, that would be great.

Sorry, Isabella. I couldn't hear you very well.

Sorry, if you could just tell us a bit more about the price hike that you expect for Wood products.

Right. What we are expecting for August is an increase of 4% to 5%, depending on the segment.

The next question comes from Caio Greiner from BTG Pactual.

I have a couple of questions. First, I'd just like to understand a bit of your costs. I think we had different messages between all the divisions. We saw that Wood up in costs, when we look at it quarter-by-quarter, and Deca actually seem to have it under control. We know that you are exposed to the foreign exchange in both divisions. So I'd just like to know how you were able to offset that in Deca or with other initiatives. What allowed you to control these costs in the Wood Panels division? And what expectations do you have to recover the levels for the quarter? You mentioned that you are operating at full capacity, and I'm sure that helps. But I'd just like to understand if you have some more details on what you expect for the next quarter? I'd also like to talk a bit about Deca. We note that June volumes were very good for Deca. You had a year-on-year growth. So that was very positive, and there was a loss that you described in your report. But I just like to understand what was surprising here, if you could tell us a bit of a guidance there. And if you could tell us about the initiatives you took this year. You had some initiatives planned for the year, and were you able to do it even with the pandemic? Or did you postpone them? So that's my question.

Caio, I'll answer your first question, and I'll ask others to add in some more details. As I mentioned before, perspectives are positive. Of course, with Wood costs were higher because woods are -- wood is much more sensitive to a continuous cost -- to cost because they are continuous lines. So when you have a lower occupation that creates a bigger impact, and there are many important inputs such as resins, ethanol and they are more bound to the U.S. dollar. We also have imported components and so on, but due to manufacturing specification, sometimes you can change that. Both units were very good at containing costs. As I said and would, this recovery was greater in June and especially now in August, working at better cost levels. Of course, we have to take the following into consideration. When this operation went back to the traditional levels, it was a surprise for everyone in the market. In June, we knew that we were starting to ramp up our recovery, but we still didn't think it was prudent. We still had some idle capacity. We didn't think that we should, at the time, recover the prices because at the time, we still didn't know. We weren't sure of how that would go. By June, we started understanding the market better, especially for Wood, where we had a higher cost impact. And we already programmed for the recovery in August. So we always have a lead time of a month or so in our operations, and that's what we did. I believe it was a very successful strategy. And we actually have a situation in the market where Duratex worked very well. In Wood and in Deca, we are sure we are going to gain market share in some segments. So the work was well done. We offered from many of our clients, during the crisis, better conditions so that they could withstand the crisis, everyone who's exposed to it. It was very easy for Duratex to capture cash, and we had a policy. I actually highlighted this in an article that we were able to do this without changes to the price. This is the first thing we usually do in a crisis, but we did not do it and this was well accepted by our clients. It really reinforced the partnerships we had. It was very positive, and there were many cases of clients, not just a few, but many clients who, after they felt that they had recovered, actually paid us before they had to. So that was very positive and very interesting. It's not usual, but it shows really the strength of the relationship that we have with Duratex. So I'd say that this was very well executed. When you look at Deca, as you said, Deca is able to do continuous work. And as Marcelo said, we have been implementing a medium-term plan to optimize our company to cut costs, and we were able to really accelerate that during the pandemic. It was very good to start back up again. Deca is now hiring, given the demand that we have. So the initiatives we had planned were implemented and even accelerated. So I think that was very positive. It was very positive that we were able to control costs and gain productivity. That was very important given the impact that Deca suffered from the U.S. dollar. I think Marcelo has something to add.

I think Antonio said it right. The effort that we are having now actually started in 2018 when we began our growth strategy, which I've always presented. We used to talk about the pillars that we had, and one of them was definitely operational efficiency. This would be the basis for our sustainable growth. And what we saw this quarter was the result of what we've done for the past 2 years. So we are continuously seeking productivity and efficiency so that we can offset, for example, currency exchange impacts, such as we saw this semester. Volumes were very good in June, and I'd again refer back to our growth strategy. I always said that our implementation strategy included working with operational efficiency and commercial excellence. So again, this growth perspective that we had for our volumes was influenced by our gain in market share and it's the consequence of several projects that we had been starting for our commercial execution, and they were accelerated during the pandemic. We did not stop. Our strategy didn't change. We did not stop. And actually quite contrary, we continued doing what we had committed ourselves to doing. As Antonio said, this was why we had this gain in market share. You asked us what was surprising or what channel surprised us most. The biggest opportunity we saw during the pandemic was how the food channel -- the food industry channel increased. One of our businesses, which was electric showers, did very well in that area. So we more than doubled our production in that channel. So of course, that contributes to the volume performance we saw this quarter.

The next question comes from Lucas Canteras from Goldman Sachs.

Can you hear me?

Yes. We can hear you.

I have a couple of questions on my side. First, going back to costs, you mentioned that in April, the situation was not so good, and you decided to close several pads. We should not see this happen in the second half of the year. So what I'd like to understand is how much of your cost was impacted by the closedowns? And how much will it be better just by moving that effect in the second half of the year? My second question is, according -- talking about capital allocation, we've heard that some of your competitors, especially ceramic tiling competitors have been facing challenges. Do you see this as a good moment for any kind of acquisition in ceramics? Or do you think it's still the moment to preserve your liquidity? That's all.

Lucas, thank you for your questions. With regard to cost, I'm not sure if I understood your point, but what I explained was that when we shut down all plants, this was, of course, during the worst part of the crisis. All the fixed costs with labor and everything else were still there. We and our shareholders had a commitment to try to maintain jobs and to pay everyone. It wasn't a purely economic crisis, right? So that's what we did. Right now, as plants are in operation at full capacity, the situation is quite different when it comes to costs. So costs are completely normalized. And I'd say that the only effect that will still persist is definitely the foreign exchange effect. The U.S. dollar is still high, and this balance is still not as favorable for us, especially for dissolving pulp and so on. So we know that we are in an unfavorable situation when the dollar is up. We're trying to mitigate that as wood recovers its prices. So maybe with that scenario, of course, I can't say this for sure, but we'll have to look at costs. And at some point, when we think things are doing well, we might have an opportunity to try to recover somehow. And of course, we'll have to see how the foreign exchange goes. This is a very important moment to consolidate how we are occupying markets and consolidate our services. We actually have to recover our -- some of our focus. In the Wood Division, we are working at low-inventory levels, which is very good from a certain point of view, but that also create some risks. So that's what we're working on right now. Until the end of November or something of that sort, I do think that all of our plants will be working at full capacity because we also have a low inventory. So that goes for Deca and wood so -- but it also applies to the rest of the chain. This happens -- this is happening with us, but also with store owners. They also took their measures. And as the market grows, the inventory is not completely regained. So we do see that they are having sell-out, especially in Wood in the industry segment and retail. We are seeing some sell-out, and it can be explained clearly. It does seem like a case or something you hear in school, but it can be explained by 2 factors. First, since people are at home a lot, people are renewing and refurbishing their homes. And that's the biggest driver for us, much more than new constructions. Refurbishments probably represents 2/3 of what we sell at Deca. When people are renewing their bathrooms, their homes, this is what they do. And the second factor is that we are competing for -- with fewer people for the end customers. So for example, if people have less consumption or less expenses in restaurants and so on, they are using that available money to improve and refurbish their homes, their offices. And I don't see that as a short-term trend. I think that trend will probably continue for the next years. We'll have to see what the crisis brings us, but it does seem like this new trend to value houses and to value working from home is here to stay. And this, of course, connects closely to our purpose. I think we're well positioned to capture that. So I don't know if Haddad or anyone else has anything else to add. If you do, please feel free.