Dexco S.A. (DXCO3) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to Dexco's earnings call for the second quarter of 2026. This conference call is being recorded, and you may watch a recording of it on the company's website, ri.dex.co. The presentation is also available for downloading there. This call is also available in English. Simply click on the globe icon on the lower part of the screen and select English. [Operator Instructions]. Before we continue, we would like to underscore that any statements about the future are based on the company's beliefs and assumptions and on information that is currently available to the managers. They may involve risks and uncertainties since they refer to future events, which, therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should take into account that macroeconomic factors, industrial factors and others may make these results to differ materially from those expressed in these forward-looking statements. We have with us on this call the company's CEO, Raul Guaragna; and CFO, Lucianna Raffaini, along with the Investor Relations team. We will now hand it over to Ms. Lucianna Raffaini, who will begin the presentation. Go ahead, ma'am.

[Presentation]

Good morning, ladies and gentlemen. Welcome to our earnings call for the second quarter of 2026. My name is Lucianna Raffaini. I'm the company's CFO. And today, I'm going to present the results for this quarter. As we'll see throughout the presentation, they confirm a consistent evolution in executing our transformation plan. We've made relevant advances in generating cash, margin and deleveraging the company. We're going through a very special moment, which is our 75th anniversary. Let us begin, starting with the second quarter highlights. In the second quarter of 2026, we posted a consistent performance across most of our divisions. The highlights were: prices; mix; and expense controls. We are continuing to advance on everything that's under our control, with discipline on execution and focusing on sustainability. We've made investments in a structurally challenging scenario. We adjusted our factory footprint by closing one plant to adapt its capacity, adjust costs and reduce inventories. Our priority is to preserve cash. In Metals and Sanitary Ware, we prioritized profitability recovery through price increases already creating an effect to our margins and contributing towards better cash generation. The Wood division maintains a consistent trajectory even with cost pressures. Forestry trading have strengthened our cash generation. In that context, the total net income went -- excuse me, the recurring net revenue went up 5.2%, finishing at BRL 2.2 billion and 5.6% in the first half of 2026, coming to a total of BRL 4.2 billion. Gross margins went up 1.6 percentage points in the quarter and 2.8 percentage points in the first half of the year. Our year-to-date percentage is 26%. Our adjusted recurring EBITDA of Dexco operation was BRL 547 million in the second quarter of 2026, up 20 -- excuse me, up 3.6% versus the second quarter of '25. The margin was impacted mainly by operational gains and by more operational [Audio Gap]... Considering LD Celulose, the company's total EBITDA was BRL 714 million, up 1.7% versus the second half -- excuse me, second quarter of 2025. Year-to-date, we have posted a 30.1% growth in our adjusted recurring EBITDA versus 2026, reaching BRL 1.25 billion, up 4.6 percentage points in our margin. Adding to this, the share of LD Celulose, our total EBITDA was BRL 1.73 billion. Finally, recurring net income. We had a growth of 13.3% versus the second quarter of 2025. It's important to highlight that these results are reflecting the company's turnaround from a loss of BRL 64 million to a profit of BRL 6 million. And this shows the lower contribution from LD Celulose, which was impacted mainly by a reduction in DW -- depreciation of the U.S. dollar. We will now continue with our cash flow results. The second quarter confirms the company's trajectory of improved operating cash generation with contributions from all three divisions: resilience and cost management in Wood; profitability recovery in Sanitary Ware and Metals; and adjusted productive capacity in Ceramic Tiles, all converging toward a lower working capital consumption. The graph on the left-hand side shows the company's free cash flow evolution. We went from consuming BRL 262 million in the first quarter of 2025 to a positive generation of BRL 158 million in cash in the first quarter of 2026. The project line also reduced from BRL 267 million to BRL 109 million in the first half of 2026. It's important to highlight that, yes, we did conclude our investment cycle according to the plan. And in the project account, we're now seeing investments in forestry and trading. As a result of this combination, discipline in working capital and by prioritizing investments, the company's operational free cash flow reached BRL 682 million this quarter. And the total -- free cash flow came to a total of BRL 356 million. These two figures are a great summary of the first half of the year. Dexco is converting its recurring EBITDA into cash consistently and all of its actions are under the company's control. On the right-hand side, we see the working capital to net revenue ratio. We finished at 15.8%, the lowest since the second half of 2025. And now we continue with our indebtedness. The company's position at the end of the second quarter of 2026 confirms our expectations. We reduced to 2.72x our financial leverage, a reduction of 0.7 -- excuse me, 0.67x year-over-year. And this was sustained by our better working capital structure, which have led to a reduction of BRL 200 million in net debt during the first 6 months of the year. Our average term is 5.1 years, and the average cost is 104.4% of the CDI. We have a comfortable amortization schedule with 87% of the debt in long-term and 13% on the short-term. In a still volatile macroeconomic scenario, this combination of being deleveraged and having a healthy debt profile allows us to conserve cash and maintain robust liquidity. Now let's look at the divisions, starting with Ceramic Tiles. First, we're going to give the sector context, and then we'll go into this quarter's results. This sector continues to contract. The wet -- particularly in the wet route segment, it has contracted 8.7% year-to-date. Industry inventories remain above historical levels. And despite signs of stabilization, this continues to weigh on pricing dynamics. Idle capacity remains elevated across the entire ceramic tiles chain. This is a structural feature of the sector, and it reflects a mismatch between supply and demand. Capacity utilization was 65% in the second quarter of 2026, 7.8 percentage points below the second quarter of 2025. Now let's take a look at our results in Ceramic Tiles. In this context, the company has maintained its volume discipline with shipments remaining virtually stable year-over-year, a reduction of 0.3% in the second quarter of '26 to 4,200 square meters. Year-to-date, it was a 5% drop to a total of 7,800 square meters. Recurring net debt was BRL 190 million in the second quarter. And this reflects the company's discipline and priority in a contracting market. This can also be seen in the year-to-date figures. The first half of 2026 had a reduction of 12.8% and a net revenue of BRL 362 million. Gross margins advanced to 13% this quarter, and this reflects the increased productivity and cost and expense discipline. We're finishing the first half up 5.1 percentage points, a total of 14.4%. This combination is translated into our results. The adjusted and recurring EBITDA was a total of BRL 7 million in the second quarter of 2026 with a margin of 3.5% versus BRL 6 million and 2.9% margin in the second quarter of 2025. Year-to-date, our EBITDA reached BRL 3 million with a 0.9% margin. Now we will continue with Metals and Sanitary Ware. The construction materials market has had a contraction during the first half of 2026, with only early signs of stabilization at the end of the second quarter. In Metals and Sanitary Ware specifically, the market posted a contraction of 2.2 points in Metals and 11.1% in Sanitary Ware versus the same time in 2025. It's important to highlight that this is reflecting the successive price readjustments that were implemented by the industry itself throughout the first half of the year, responding to cost pressures, copper, metals and others. And we also saw some down trading on the consumer side and a part of the consumption has been migrating to lower added value segments as prices go up. We've offset this partially with share gains in higher added value products. Civil construction had a growth this year. This was supported by new real estate launches, but this has not yet translated into a meaningful increase in demand for finishing products. Now let's take a look at our performance. In this division, we are focusing on profitability over volume. This is being supported by commercial discipline, and we are executing RGM and go-to-market initiatives designed to capture value through pricing and mix management. In the second quarter of 2026, our recurring net revenue was BRL 471 million, which is basically flat versus the second quarter of 2025. Even with a 15% volume contraction this quarter, we are on a comparable basis, excluding the effect from the Paraiba plant which was closed in 2025. This price and mix strategy is confirming our results. Our recurring net revenue came to a total of BRL 926 million in the first half of 2026. Gross margins went up from 22.8% to 29.1% this quarter. And the recurring adjusted EBITDA went from BRL 9 million to BRL 56 million with an EBITDA margin going up from 1.8% to 11.8%. This was one of the strongest quarters in this division in the last few years. Gross margins went up 7.3 percentage points, and the EBITDA margin went up 8.4 percentage points versus the first half of 2025. This confirms that we've been posting a consistent trajectory over the first 2 quarters. Our adjusted and recurring EBITDA in the first half of the year reached BRL 95 million, which is more than the entire year of 2025. Now, we will continue with the Wood division, starting with the sector environment. According to data from EVA, the domestic panels market maintained healthy fundamentals in the second quarter of 2026 with stable demand. It went up 5% this quarter and 6% in the first half of 2026, while the foreign market continues to contract with reductions of 21% and 19%, respectively. This was led by MDF and MDP, which grew about 5% in volume in the second quarter. For the first half, MDF went up 7.2%, while MDP grew 4%. This was a quarter that was marked by cost pressures in oil byproducts and resins, and this had to be passed on before a price readjustment. Now let's continue with our results. In the Wood division, volume and revenue continued to perform well, operating at 96% capacity utilization in the second quarter. Increased costs related to the war were partially mitigated through price increases, productivity initiatives and cost management. In the second quarter, the panels volume went up to, excuse me, 5.2% and recurring net revenue went up 9.6% to BRL 1.57 million. And the same trend can be seen in the first half, which had an increase of 2.4% in volume and 8.9% in gross -- excuse me, in net revenue, a total of BRL 2.96 billion. We saw an increase in the EBITDA margin in this quarter due to our operational efficiency. Adjusted and recurring EBITDA came to a total of BRL 485 million with a 30.9% margin. This is capturing our cost management, price discipline and gains from the trading operations carried out in Wood. For the first half of the year, we posted a growth of 19.2% in our EBITDA to BRL 927 million with a margin of 31.3%. We will now continue with LD Celulose. I'd like to remind you that these numbers are representing 100% of our operation. In this division, volumes were resilient, reflecting the company's operational strength and maturity. Shipments were stable quarter-over-quarter at 158,000 tons, and it grew 6.7% in the first half of the year. Revenues and margins were impacted and were below the second quarter of 2025. Our adjusted and recurring EBITDA reached BRL 339 million, and our margin dropped by 36% and this reflects DWP prices in international markets and adverse exchange rate effects. So we were impacted by noncash effects as foreign exchange fluctuations on our U.S.-denominated asset base generated deferred tax volatility, which impacted our net revenue, but had no direct cash impact. We will now continue with our ESG results. I'd like to highlight our publication of the climate-related risks report for 2025. This was prepared in accordance to the TCFD. These recommendations have been published since 2021 with limited assurance provided since 2023. This report marks an important step towards the publication of the IFRS S2 report scheduled for 2027 based on fiscal year 2026. Our focus for 2026 is to advance preparation for the sustainability-related financial disclosures in line with IFRS S2 requirements. To give you an update on Dexco's transformation plan announced in September 2025, we remain focused on continuing to execute our five strategic priorities. So I have an update on their advances this quarter, starting with the financial deleveraging project. We reduced our net debt-to-EBITDA ratio to 2.72x with a reduction of BRL 200 million in our net debt this quarter. This was sustained by the company's robust cash -- operational cash generation. In addition to that, as we disclosed this week, we also sold the tiles plant, continuing our deleveraging journey. Our priority is still very clear. We want to reduce our indebtedness by consistently improving operational results and selectively sell nonoperational assets. Continuing with the tiles turnaround project, we are adjusting our production capacity, focusing on executing sustainable profitability actions. And this includes closing a plant to realign our production to the actual demand from the market and reduce excess inventory, which is still a pressure on the industry. Our decision is to rationalize our capacity, and this is not a reactive response to the additional deterioration of the demand. Although the environment is still structurally challenging with no signs of changing in the short-term. Continuing with the Metals and Sanitary Ware competitiveness project. This leap to -- the leap we saw here is the direct effect of our price readjustments and execution. These results are connected to our go-to-market project and RGM. So to tell you a bit about the go-to-market project. Go-to-market actions and RGMs are being executed across all the company's divisions to capture value through price and mix through our pricing strategy in channels and product lines. The most visible advances are in Metals and Sanitary Ware, where this agenda is already a part of our margin expansion in this division this quarter. The Wood division has also advanced on this strategy and is capturing value through prices and mix in its product lines. Forestry trading operations have contributed to our cash generation and to the division's margin resilience even in a pressure marked by cost pressures. We will now conclude with an outlook for the third quarter of 2026. Starting with Ceramic Tiles. Continuing the productivity capture plan with a focus on higher manufacturing utilization and commercial restructuring initiatives. The key watching point here is that the market continues to be challenging with ongoing volatility and uncertainties and a reduced demand. In Metals and Sanitary Ware, we are observing price increases after costs have increased as well. Our challenge is to maintain these volumes with the new prices. For Wood, we expect moderate volumes in line with consumption trends and supported by the favorable seasonal pattern in this half of the year. We expect to gradually capture the implemented price increases. The key watching point here is that we continue to monitor cost volatility driven by geopolitical developments, which impact key input commodities for our operation. In LD Celulose, we have no scheduled maintenance shutdowns this quarter, and we will continue with strong productivity, sustaining our position in the first quartile of the global dissolving pulp cost curve. On the other hand, higher DWP prices will impact our results and margins. This concludes our presentation. Thank you very much for your attention, and we will be available to answer your questions.

[Operator Instructions] I will hand it over to Guilherme Setubal, the Investor Relations Director, who will conduct this Q&A. Go ahead, Guilherme.

Ladies and gentlemen, we are very pleased to begin the Q&A for this call. Let's start with the first question.

The first question will be asked by Tathiane Candini from JPMorgan.

Congratulations on your results. My first question is about Deca. I think your EBITDA was a positive surprise when we look at our numbers, but I'd like to understand some of the things that you mentioned during your presentation and on the release. You mentioned the downtrading movement that has been offset by your better mix market share, but we saw a significant contraction quarter-to-quarter. So what should we expect for the next quarters in your margins? How much of this margin recovery that you saw is sustainable despite reduced volumes and weaker demand? Still, in Deca, you mentioned a cost price due to copper and due to the lower volume. So how do you see this trend now in the third quarter since we're halfway through it?

Thank you, Tathiane. Just a remark, in the second quarter of 2025, we still had the Paraiba operation, and that was the most competitive ceramic product. So a part of the volume is explained by this. I'll hand it over to Raul.

Thank you for that question. Well, I think Deca may be the division that advanced the most, as Lucianna mentioned during her talk in our go-to-market strategy. When you talk about income, I think that's something that we're not going to let go of. The industry we work in is made up of several kinds of products with different price levels, different margins. Deca works in most of the segment, but not across the entire segment. We dropped a plant in Paraiba. We took the volume to Recife, but that reduced our production volume since we have a limited possibility of having adequate margins in this segment. We have to separate the impact in sell-in and sell-out. When we see the increased service and the genuine concern of taking care of working capital, we see that inventories are being reduced at the end. So this shows a reduction of our sales to them, but we're still at a healthy sell-out level. And that's great news. As we sell products with the right level of profitability and deliver products that are aligned with what is being sold, we're not building up inventory, and that gives us more pricing predictability. That's very relevant. And we also adapted our capacity in Deca, not only in metals, but also -- excuse me, not only in Sanitary Ware and Ceramic Tiles, but also in Metals. So we reduced our production lines. It's almost business as usual, but we do have a much better adapted capacity to the demand. When it comes to Metals, we're -- it's much easier to build up the capacity, and it's also less costly to work with some idle capacity. So we're prepared to sustain this profitability level, and this is a quarter that tends to be stronger. In July, retail has made a slight recovery, and that's how we're going to continue. Concerning cost impacts, this is aligned to everything we did in operational efficiency. Our supply team worked very well. So we've been able to align costs to the prices. And this also helps justify the higher income profitability. So we're aligning our cost structure to purchasing management, which has been excellent. So I think that's the right path forward. We're continuing to improve on this step by step. In Deca, we still have some room to advance, but we're cautious about the demand because we don't expect any positive surprises for this year.

If I can ask a second question. I'd just like to ask about Ceusa. You've been making several decisions to try to increase your profitability there. And in this quarter, we saw that EBITDA moved towards a positive side. We saw that sales were stronger and costs were down. So what's the normalized level that we should expect? Is this current level the new normal? Or will we have challenging quarters ahead of us?

Right. You're talking about ceramic tiles in general. So what we did was we closed an old Ceusa plant, but we still sell both brands, Ceusa and Portinari. Ceusa is a very strong brand in retail and Portinari is a high-end brand. So we're going to have to take a look towards our strategy. And we're very confident by doing that, that ceramic tiles will find a way. We have a plant in Botucatu with a high productivity level with a high sophistication level in a location that represents 50% of the ceramic tiles demand in Brazil, the Brazilian Southeast. So this location will help us as we accelerate. We finished ramping up this plant, which is always complex, but we currently have the right cost levels. And many of the products that we had in the Urussanga plant were transferred to Botucatu, where we have lower thickness products, which also help us in reducing costs and being closer to the market. In Criciuma, one of our older plants, we're highly productive in 90x90, which is a market leader in this category. And we also have smaller lines for special parts, which provide an important margin. But, like Lucianna said in the beginning, this is an intentional initiative to select what segment we want to work in. We have an addressable market from super luxury and top of the medium, which is where we can take place. The lower end market is not for us. It doesn't have enough margins. It has a very big idle capacity. So as we gain in productivity, we have been able to adapt our company very well. But when we look at our history, we see that as margins go up, costs go down, inventories go down and inventories are better adjusted to the demand. We'll have a much leaner portfolio. We removed 600 SKUs from our portfolio. So this helps in operational efficiency and also inventory turnover. So we're going to see growing margins. But it is possible that in the next 2 quarters, we might see some changes as we have new products coming in. There are SKUs being sold and we're building out our sales team. We've just concluded the last hire to our commercial team focused on ceramic tiles. And they have 5 years of experience in ceramic tiles in general, and the entire commercial team has 8 years of experience. So these combined initiatives will provide a positive trend. But when you look at this on a quarterly basis, we still might see some standouts.

I'd just like to reinforce something that Raul mentioned. The ceramic tiles market is very challenging. As we can see, there's a lot of pressure. We have excess demand, and there's still a lot of idle capacity in this sector. What we have been doing and something that you can consider for the future is that this entire adjustment that Raul discussed in costs will continue. We've been reinventing ourselves significantly. We worked in reducing product thickness. We're using our energy matrix better. Our live productivity is much better. So we've been advancing on these cost factors significantly. But the market, as you know, is still very challenging. So I'd just like to underscore what Raul said. There are still many uncertainties in this market. And without a doubt, what's in our hands that can be controlled is being done very well, but we still have a huge challenge ahead of us.

The next question will be asked by Matheus Meloni from Santander.

And the first point I'd like to raise is leverage. We saw an improvement this quarter. And I'd just like to get your take on how leveraging will go for the rest of the year? Do you expect to sell more nonoperational assets? And what do you expect from this side? I'd just like to get your mindset on deleveraging for the future? I'd also like to ask about Wood costs. Looking ahead, do you believe that costs have normalized? Or do you still think that there could be an impact in the future?

Thank you, Matheus. I'll let Lucianna answer. And I'd like to underscore that, of course, deleveraging is one of the company's #1 priorities. We've been talking about reducing net debt. This is what's going to allow us to generate cash more consistently. So I'll hand it over to Lucianna, and then Raul will answer your questions about the Wood division costs.

Matheus, thank you for your question. So deleveraging, as we've been saying for a few quarters, this is our #1 priority. It's not even about the ratio, but as we heard, we do want to reduce the amount of the debt. These -- With these 14% interest rates, this has consumed our cash significantly. As you saw during this quarter, about BRL 380 million or BRL 400 million in interest rate expenses. So as some of you know, and just to maintain consistency and not to repeat myself, we're focusing on the operational side. And this quarter, you will see what our cash generation is like. We're seeing very healthy EBITDA levels. As we've been saying, this is due to the operations we've been working on, not just RDM and price, but also portfolio assortment, distribution across the channel. These are all levers that we're working on. And of course, costs. You saw that our productivity improved across all divisions. Wood, even with the cost and everything we expected, have had a improved productivity, and this is reflected in our results. So the first lever, the operational lever in what we control, is supported by our CapEx. We concluded the investment cycle, and we've been very responsible and disciplined in our investments. Of course, we're not letting go of anything that can compromise us for the future. But we've been very disciplined and organized. So in the operational level, we're doing very well, and we will continue. What we expect according to our expectations is to reduce inventories, continue to be disciplined. So we have very robust and solid levers to continue to generate operational cash. You mentioned nonoperational assets. So yes, as we've been saying, this is the fourth quarter in which I've been saying this. We still feel the sense of urgency. We're assessing everything that can be assessed, and we're trying to sell equipment, land areas and other nonoperational sales. But we have to highlight that the last sale still wasn't reflected in the second quarter. So we're still expecting approval from the monetary authorities and so on. And we also expect this to improve our cash position. So yes, we're still consistent in this operation with discipline. We're focusing on what we can control. We're focusing on expenses. We do our monthly cash position, and we're very disciplined in advancing this. So we're focused on operational efficiency. We expect to finish at 2.7 and 2.5, as we've been saying in the last 2 quarters. Raul will now discuss the costs.

Thank you for your question. That was very relevant. I won't go on for too long, but I just want to add to what Lucianna said. We've been saying this since last year that we want to be between 2.5 to 2.7 in our net debt-to-EBITDA ratio. But we're not going to be pleased only with the numbers. We're seeing our EBITDA growing and that also helps, but we need to reduce the absolute value of the debt. This needs to be reduced significantly because at the end of the day, like Lucianna said, when you look at the cash generation that we had, since we're paying a lot in servicing the debt, this hurts. So regardless of being at 2.5 or 2.2, the nominal debt needs to go down. And all initiatives are valid here. We're seeing improved margins, reducing costs, selling operational and nonoperational assets, and this all continues on the table. We still have four assets. They're not easy to sell, but they're not material. But when we add up all of these assets, we have hundreds of millions of reais to sell in nonoperational assets. When it comes to operational assets, we have nothing on our radar, but we are still paying attention to what can be done. Switching to Wood costs. I think you're right in saying that costs of Wood will be more stable, but we still have a deficit for the next few years. We have CNPC, Aracaju, Bracell. We have a demand for corn ethanol. So this will all pressure our Wood costs. But I see that regionally, we're going to have different behaviors. Maybe in Sao Paulo, the demand for wood will be lower. In Rio Grande do Sul, they have a strong demand, in the Brazilian Midwest, the demand will be strong as well. So since we're agile and since we can move quickly, we're still going to see opportunities in forestry business. But we're not expecting a significant cost increase in our Biological Assets. But let's remember that the price of wood has more than tripled, and it continues to be a competitive advantage if you are an integrated company like Dexco. And it's not easy to buy wood, not only because of the cost, but also the supply. Not every wood is available to you. Some part of it will be regional, have different kinds of wood. There's kinds of woods that people don't sell for wood panels and for pulp. So we still see some pressure here. It's still expensive, but we see only some regional variations.

The next question will be asked by Gustavo Hwang from HSBC.