Dexco S.A. (DXCO3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Dexco conference call. We have with us today Mr. Antonio Joaquim, Henrique Haddad, Raul Guimarães, Marcelo Izzo and Daniel Franco. We'd like to inform you that this event is recorded and is being simultaneous translate into English. [Operator Instructions] Before we continue, we'd like to clarify that any statements made during this conference call about the company's business perspectives, any projections or operational and financial goals are simply beliefs and assumptions from the company's directors based on the currently available information. Remarks about the future are not a guarantee of performance as they involve risks, uncertainties and assumptions and refer to future events which, therefore, depend on circumstances that may or may not come to pass, that economic general conditions, industry conditions and other operational factors may affect Dexco's future results and may lead to results that differ materially from the ones expressed in these forward-looking statements. [Operator Instructions] Now I would like to give the floor to Mr. Henrique Haddad, who will begin.

Good morning, everyone. Welcome, and thank you for being in this quarterly earnings call. I'm here with the members of the Executive Board and our Investor Relations team. Slide 3 begins our presentation. Although there has been pressure in inflation that created a direct impact on the company's results, which had a reduction of 11% versus the first quarter of 2021, we finished the quarter with a recurring adjusted EBITDA of BRL 950 during the first half of the year, which shows how we stand out. This was a performance based on price levels and a better position for our products for this quarter. The biggest highlight was the Deca Division that posted record results for the quarter once again in the best first quarter of its history. I'd also like to highlight how our ramp-up process is advancing in the Dissolving Pulp unit at LD Celulose and a miniature rise, which should be at full capacity by the end of the year. Now continuing to Slide 4. We finished the quarter with a negative cash flow of BRL 139 million, which reflects the highest -- higher consumption of working capital and recomposing our inventory to healthy levels. We have also made bigger investments to our forestry assets, which have increased our sustaining CapEx investment. Still looking at the cash conversion cycle, we are below pre-pandemic levels, concluding the semester at 37 days similar to what was posted in the first quarter. The working capital to net revenue ratio was at 16%, a reasonable level for our operation, considering projects. We're still focused on the investment cycle we announced last year with a total expense of BRL 537 million in expansion projects this half of the year. Let's continue with Slide 5, which shows our corporate debt. Even with a higher cash consumption due to the investments made, we finished this quarter with a leverage of 1.7x net debt to EBITDA, which is a very comfortable level. Continuing our liability management strategy, during this quarter, we issued receivable agribusiness receivables, CRAs, at a total amount of BRL 800 million at a very competitive term and an average -- at a very competitive cost and average term of 8.3 years on average. And we also anticipated some resources that were going to -- not come to term during the first half of the year. Now we'll continue with Slide 7, speaking about our divisions. According to IBA data, the wood panel market has finished the second quarter with a reduction of 7% in volumes versus 2021. The internal market had a contraction of 14%, and exports grew by 47%. The contraction in the Brazilian market led to -- was due to a higher stability in retail, especially in MDF. During this half of the year, it was 16% versus 2021, 10% in total, but an increase of 35% in exports. Now looking at Dexco on Slide 8. In the Wood Division, we had a reduced sales in the internal market and gains in market share, a contraction of 4.4% in the second half of the year and 6.5% for the half versus last year. Sales were solid and, also, our capacity utilization remained flat. However, the cost of raw materials, such as urea, and currency exchange factors have made a big impact on our cost, which retracted our EBITDA by 22% versus last year. This was 13% for the year, and the pressure on the internal market was offset by exports and sustained prices. We have to highlight that there has been signs that this will become stable and better for the next months. Continuing with Deca. On Slide 10, we see that the construction material market had a contraction of 7% on deflated gross revenue for the second half of 2022 at 8.5% for the first half of the year versus 2021, according to data published by ABRAMAT. Although there was a contraction, ABRAMAT still has a positive outlook for the year and expected growth of 1% for the year. When we look at Deca on Slide 11 now, for this quarter, our results were a highlight in Dexco. Although there was a reduced volume, we gained market share sustained by our price strategy and our mix, with an increase in the unit revenue of 20% this quarter and nearly 30% during the first half of 2022, a new record result with an EBITDA of BRL 113 million and BRL 185 million for the first half of the year, the best first half in our history. Looking at the tile market, let's continue on Slide 13. This market finished the quarter with a contraction of 13% in sales volumes and at a capacity utilization of around 85%, while this reduction was 12.4% for the first half of Q2, according to ANFACER data. Looking at our own Tile Division at Dexco, we'll see Slide 14 showing a drop in line with the market during the first half due to the contraction of retail sales where we have a major share. However, price passes have contributed to increasing our unit revenue, which grew about 37% in the second quarter and over the year versus the comparative of last. This, combined to efficient cost management, has sustained our EBITDA at BRL 73 million this quarter. Now continuing with our dissolving pulp project on Slide 16. Our ramp-up process has been within schedule. We expect that by the end of the year, the plant will be operating close to full capacity. We're still confident about the results of this project, on the execution thus far and on the current price DWP, which are above our initial expectations. Slide 17 discusses our ESG highlights. We published our first integrated report, underscoring our commitments to transparency and management. And there are some points to highlight once again. We confirmed our positive carbon balance, removing over 330,000 tons of carbon from the atmosphere. We reached 25% of women in our leadership team, which makes us very proud. And besides that, we have over 17,000 people and 96 institutions in 14 municipalities who have been positively impacted by our private social investments. And now to conclude the presentation, let's continue on Slide 18. I'd like to conclude this presentation discussing our outlook for the rest of the year. Initially, I'd like to highlight that even though we have been facing inflationary pressures, high interest rates, we have confirmed a new level for Dexco's results with an EBITDA of BRL 950 million, which is above the average yearly results that we have posted between 2015 and 2018. And it's even higher than the entire results for 2019. This makes us confident that the transformations that we have made over the last years have been successful and have changed the company's position. We still have not benefited from the results of LD Celulose, which should take place in the next years and should have a positive effect due to cost competition and price levels we see in the market. Looking at the second half, the inflation that impacted us so much in the beginning of the year seems to have stabilized. We see reductions in prices for some of the inputs we use, which makes us believe that with efficiency gains, with cost reduction and with price discipline, we will be able to generate more value. Another important point was an announcement of stimulus measures, which we believe will be felt on market demands overall. These factors, connected to a high number of new construction projects over the last few years especially, still make us have a positive outlook for the results we'll see in the second half of 2022. Of course, we're still cautious considering the global economic scenario and the elections that are still to come in Brazil. With that, I'd like to conclude my presentation and open up for questions. Thank you.

[Operator Instructions] The first question is from Caio Greiner in BTG Pactual.

Can you hear me?

Yes, we can hear you, Caio.

Two questions from me. The first, when you talk about the cost versus price dynamic, which you showed on the last slide, the impression we got was that this was an outlier quarter. As we saw in many other commodities, your inputs have gone up significantly because of the war and -- but then they have dropped down. As you showed, urea has gone down to the levels we had in the beginning of the year. That impacted your results. Maybe it removed to your second quarter from the recent trend, but it seems like you'll be able to capture these reduced prices in the next quarters, even in your margins. So that's my question. Given the current demands, do you think the industry will start giving discounts in end product prices? Or will you be able to capture these reduced cost margins in the next quarters? And my second question is for Izzo on tiles. This unit performed very well during this quarter. So I'd just like to understand what your view on the demand for tiles will be for the next quarters. If you believe you'll go back to higher utilization rates? And something that drew my attention was that the SG&A in this division seems to be going up significantly. Expenses with sales was nearly BRL 60 million this quarter. There was a lot. So I'd just like to understand how this is going to go. We believe that you would have more synergies with the merger, but it seems to be specifically coming from this unit. So if you can help us understand what happened there, that would be great.

So I can begin and then Izzo will answer your second question. Your analysis is correct in essence. What we saw was an acceleration of many commodities due to many effects: the war, COVID and so on. There's a number of outside effects that have caused this. In fact, the graph we showed here demonstrates that we have been seeing a trend in reducing prices of inputs or at least settling at the current levels. There are some factors that still are at very high prices, for example, international shipping and freight, although it is going down. It's going down, but at levels that were much higher than before COVID. So for exports, we still have a big challenge on costs. This goes for everyone in Brazil. We're exporting to other modalities to reduce costs, but of course, this is not enough to offset this spike, which is not recent. It started last year due to the container crisis and so on. But you're right, there is a trend that it will settle. And we expect that for the second half, costs will be lower. There's a higher likelihood of a reduction than having a new impact, unless we have something that is not in our radar like an effect of the war or something of this sort. But I don't see in any of the industries we work in, Deca, wood or any other, any scenario that will make prices go down and to leverage demand. Because although the scenario is still not settling and reducing, costs are still very high and we have to understand. I mean you're right, the second half of the year had a major impact because there was a reduced demand, but there was a peak of cost. So we always have to consider inventory. You buy in the past when things are expensive, and then you have to use over the quarter. So Deca was recomposing its inventory, getting new average prices. And of course, these things have -- these things -- we lose control of these things. Prices are very relevant thing, especially market, issues with they wood industry. I mean we control demand, we control the market. So prices are extremely high. So when you have pressured costs and inflation, where companies have not had enough space to pass on prices in the first quarter of the year in general, I really don't believe that costs will go down. I believe that costs will be passed on. For example, in ceramic tiles, the price of gas has gone up significantly. So it pressures costs. So I really don't see that it will downsize. So Izzo can answer your specific question on [ our SG&A ].

Thank you, Caio. Thank you for your question. So when we look at ceramic tiles during this quarter, I think we need to look at before really because we need to understand what happened to this area in 2021. In the first half of 2021, we had a systemic change, which made our revenues more difficult in January and February. So our revenue was translated as a higher volume in the first quarter than the second quarter of 2021, which means that the comparative basis was quite inflated due to the systemic issue. Therefore, in the comparison between 2021 and 2022, we see a negative change. But the best way of looking at it is by looking at the entire semester, where you remove that bias from the system change. So to answer your question on EBITDA margins and our SG&A, I'd just like to refer back to what we said, Antonio and I, during our Duratex Day. We mentioned that for the next 5 years, we would have a significant increase in our investments in our brands. And that's one of the reasons why we have a change in how our brands were organized in our portfolio. So we had 2 events this year at high investment levels, which we didn't have last year. One was Revestir; and the other one was a repositioning of the Ceusa brand, which historically did not speak to its consumers, did not have communications. So again, we wanted to give brand the freedom to speak to their clients. One example of that is the repositioning that we had with the Ceusa brand, where we sponsored the Sao Paulo Fashion Week by using that brand. So marketing investments have been higher to bring our brands closer to our consumers. And we also started having a cross charge for the tile segment. So if you look at our gross margins, the gains show our agenda, which are common in Deca and in tiles, which is constantly seeking operational efficiencies. About the demand, just to be very quick in my answer, of course, our expectations have to do with this demand. I don't think we'll see major changes. Of course, the reduction rates will dilute because in the first -- excuse me, in the second half of last year, the market had been going down. So the comparative basis will be better, and the performance per volume will be better in the second half when compared to the second half of last year.

The next question will be asked by Marcio Farid from GS.

I'd like to ask the question maybe to Antonio or Raul. But Antonio, you mentioned briefly that you are facing high cost as well as your competitors, but that they depend more on market values. So if you can tell us a bit about the competitive scenario? We know that in these moments where you are more stressed, competition tends to focus on volumes rather than margins. So for the second half of the year, what can we expect about your pricing strategy? I think you made it clear that, that didn't change. But of course, we start hearing some chitchat on the competitors being more aggressive. So how can we consider the second half of the year, the competitive environment, margin volume? And a second question. From the capital allocation perspective, so Antonio and Haddad, obviously, the entire market has been pressured. But probably Dexco was more pressured since you are connected to real estate. So with everything that happened from your perspective is -- can anything be done to provide more cash return by Dexco? And how can they perform along with your capital allocation strategy? That's my question.

Marcio, thank you for your questions. So let me tell you a bit about wood, and Raul can definitely add some information here. I'd like to underscore the point, Marcio, that I really don't see any relevant movements to reduce prices in the future. Quite contrary, I believe that most companies will need to keep their prices higher. There will be strong exports. There was still a lot of that during the second quarter, much higher than the previous years. The foreign market also has its particularities. It can be difficult, but the volumes exported are at very high levels among us and our main competitors. But the foreign exchange rate has been very good for that, and that removes some pressure. What we're seeing -- and we need to be careful about what we hear from our clients and so on. Because we did not see any contraction in prices in the market, not like we saw in the past. We saw one company making sales on a certain line of products or others, but nothing too general, including announcements that have been made. We've made announcements for price adjustments on -- some of our competitors have as well. And I do believe they will be necessary. That's how the second half of the year will go. It's very difficult to talk about cost reductions because the demand is at -- it's not at a significant demand drop. We have good demands. Everyone is exporting. Most of these companies are working at full capacity. So I really don't see much space for reductions. The second half of the year has been more stable in some competitors. Some of the market has been trying to rebuild its prices. And they really need it because the impacts are on inputs. But they lead different concept points. So the impact we had on wood was very significant. Wood, from over the last year, has gone up about 3 or 4x, and there's no shortcuts around it. If you have wood, that's great. If you don't, that's too bad. And if you're getting from the market, you have to see if they even have it. So it's a very restricted market for wood, which should continue for the next years. It's not something that will be easily solved. When you analyze the conditions of forestry in Brazil, we know that this is an issue for the next years. It's long term. There are many expansions, especially in the pulp market, putting huge pressure on the supply of wood and forests. This will not change in the short run. But I don't believe the demand is strong enough to -- but not justify any changes in any direction. We have to be careful about it, because there's always a natural competition for clients who will prefer sales. They might prefer other companies. But we haven't really seen any general trends. What we saw were companies that managed to adjust their prices around March and April, as they traditionally do, but did not. But we did not see a reduction. And at the end of last year, we had very positive price levels. We were much higher than inflation. So Raul, do you have anything to add?

Thank you, Marcio and Antonio. I don't have much to add. I just have 2 things to say. First, the cost of nonintegrated companies in the wood industry is still to come. This is a recent trend. We usually -- we usually have contracted prices or spot prices. So we'll still see competitors facing competition, and other inputs will go down. But we will see margins pressured, and there really is not much space to reduce prices. Because while this did not happen for the entire industry in the first or the second quarter, and we started seeing more constructive demand scenarios. When you look at the industry, it's at the same level as 2021, maybe a bit below. And retail, in July, we are also slightly above what we had. So we see some constructive sellout. Inventories are being readjusted. So I don't think that margins will go down. But I do believe that margins will need to be recomposed for the entire industry, and our competitors are even more pressured than we are.

Just adding to that, Marcio, your question on capital allocation. It's true. We have been keeping up with this process with due diligence here at Dexco. And this is not a recent trend. We've been doing it for some time, very close to the levers we can manage. First, to tell you about investments, we are confirming middle- and long-term investments that we announced last year. So a part of the resources we generated and we intend to generate until the end of the year, will be for investments. We will not have any additional purchase processes this year. The Board have seen this -- these movements as very positive. We understand that Dexco's value is under dimensioned, not due to what we have done, but due to the horizon we see as our investments mature. When we talk about payments, JCP, we've seen some movements in the last years, where any excessive results or any cash that is generated beyond what we have foreseen can be redirected. So several initiatives are being made. There is not only one that can be used. And most important thing is that we have a concern about generating cash consistently, along with our results, so that we can really make these decisions. So I think at the core of everything, we need to continue generating cash consistently. Naturally, due to the results and the value we generate and working with better working capital rates and with good investments, I do believe it can happen.

The next question will be asked by Isabella Vasconcelos from Bradesco BBI.

Can you hear me?

Yes, we can hear you.

I have 2 questions on my side. First, for wood panels and also how the mix is evolving. Raul, you mentioned that you're seeing good signs from the industry on retail. But I'd just like to hear about your expectations on the mix and how you see inventory levels in your chain today. I'd also like to ask Izzo about his outlook for the demands for different Deca products, how you see it evolving over the year. That would be very helpful.

Thank you, Isabella. Mix evolution is a natural theme. We see this in more mature markets, such as Europe and the U.S. and some countries in Latin America. We see that tiles are used much more than in Brazil. We have the best portfolio in the industry for covered products. We have a good capacity for doing that process. We're starting a new line in Itapetininga, and it's operating very well, above maximum capacity. And we saw that the ceramics market has been -- has had its inventory recomposed, and that has distorted the mix somewhat. So from that point of view, that ended up impacting our inventory recomposition. It's a natural trend. We've been working well on these items. In the last months, we had a major demand for these sorts of items at the end. And we're also working on this trend with our consumers. So abroad and in Brazil, we've seen a much better utilization of these items. And they're switching from a white products. We're also working with retail so that price levels are appropriate, so that they can provide good margins and so that consumers have a better for you to choose. So this is a trend, and we believe that in the next few years, we'll have a better position. And white as a commodity is something that really makes it difficult to generate margins. Everyone does white ceramics. So creating the capability to work with variable products is something that makes us stand out right now. Inventory and the chain, the first quarter was very heavy, meaning that inventories were much higher than necessary, but this was a natural trend. We saw a weak Black Friday. December was not very strong either. So we saw that there was an effort to reduce inventories in MDP, but with MDF, they were still being built back up. Overall, our inventory levels are very well adjusted. We see industries that have lower inventory levels than what we had last year. And retail is starting to adjust its inventory levels to a healthier level. So with retail, they need faster assortments. So it's important to keep inventories below 60 days, and that's absolutely normal for a retail operation. In the industry, we produce items for exports over a month. So naturally, we need to work at higher inventory levels, but it's not very uncommon. So their adjusted in sales -- our end-user sales seem to show that it will continue to be adjusted if this demand level is confirmed in the future.

So concerning our expectations for the demands for the second semester. What I can tell you, as Haddad mentioned at the end of his presentation, historically for the ceramics divisions, the first -- or the second half is much better than the first. So our expectation on -- is that everything that can happen in this year will depend on the current scenario, which includes the elections. Demands are much better, and we need to adapt to it. But we'll continue to -- we'll continue doing what we have been doing historically, trying to maximize our prices in our mix. If you look at the 2 divisions, unit prices are quite high, even comparing the same quarter last year. But it's important to understand how unit revenues are made up. It's not -- you can't simply do a price realization. You need to improve your mix consistently, which is a part of our commercial strategy. What we'll try to do for the rest of the year, without a doubt, is not only try to capture a higher demand than the first half, but also continue our price and mix strategy. So we have potential for the second half of the year that is much higher than the first half of the year.

The next question will be asked by Raul Grego Lemos from Eleven Financial.

I think my questions have been answered. But from the investment side, I'd like to understand how you're seeing the continuity of the expansion plan into new plants and new items. With this increased leverage, you still have healthy financing. But during the first half of the year, we saw a reduction in volumes. With higher interest rates, with inflation and everything, volumes should remain relatively low. So the leverage, do you think your projects can be delayed? Or is your plan to keep the same investments according to what was initially planned?

Thank you for your question, Raul. We have a relatively simple answer. No, we will not retract any of the investments we programmed for our seed. The biggest investment we have is the new plant being installed in Botucatu that's being built, and all the equipment has been purchased. So there's no turning back. We should start in September on the first line and the second line 1 year later in mid-2023 so -- excuse me, mid-2024, so September next year and mid-2024. So our forecast for the next years is good. We believe that we'll be able to position our brands. And we have to understand that ceramic tiles are very different from other kinds of ceramic and wood. We're talking about industrial lines. So in the South, for example, the 4 plants we have in the South, we have, if I'm not mistaken, 16 lines. Some are bigger, some are smaller, some are older. So what we do when the demand is contracted is stopping temporarily the operations of a few lines. So you have several levers. A new plant in Botucatu can stop -- if it's at full capacity, can stop a smaller line to adapt to your inventory and your demand flows. So it's flexible. It's not an issue. It's not an entire plant that has a single line that needs to run 24 hours. So as Haddad mentioned, we have strong investment flow because these investments are focused on the long term and also the mix. These are investments for large shapes and special products that will add to our mix. So it doesn't make sense to adjust any investments. And it's not even possible, like I mentioned in Botucatu. What you may have is an adjusted demand for operations, inventory adjustments, temporary downtime, transfers from one plant to the other, that is possible. We have many tools that we can use here.

The next question was asked by [ Carl Señor ] from [ Condor Insider ]. This question is, are reduced volumes related to a weaker real estate market? Or do you believe it's connected to higher prices? And for the second half of the year, do you expect volumes to continue to go down?

No, we don't believe that these volume -- these reduced volumes are connected to real estate sales. But this does not have value. Construction is being executed and delivered, and there's still a lot to come, and we come at the end of a construction. So reduced volumes we see may be more connected to costs and availability, financial availability that is. Some of our costs were higher due to inflation, and we started this year to have a competition with other expenses. So people started traveling again. They started going to restaurants. The services industry is doing very well. So people are going back to normal life, and volume -- some of the volume levels we see in -- we saw in 2021 in many industries, and not only ours, were more connect -- were more of outliers. Because we had a high concentration of resources focused on construction materials because you couldn't spend on travel and other things. So I think it's more the market settling back down. So expenses will go down, inflation, uncertainties, it's an unstable political year. So it's more about that than anything related to the estate market overall.

This concludes our questions-and-answer session. Henrique Haddad will now make his closing remarks.

Once again, thank you for participating. Along with the Investor Relations team, we'll be available. We will be touched for any other questions you may have. Antonio?

Yes, I'd like to thank everyone. The entire team has been here, and we'll be here available for any questions you may still have. And I'd just like to underscore that our outlook for the future is positive. Markets have been resilient, and the company is at a different result level if we compared to what Haddad mentioned in 2019. Our EBITDA -- our current EBITDA was delivered in a year, and now we're delivering it in 6 months, so higher levels. We really believe in the long-term efforts we've been making. And everything we've been building, our cost strategy, productivity, we're focused on providing better results, and we believe they will come. Thank you.

This concludes Dexco's webinar. Thank you for listening, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]