Unicasa Indústria de Móveis S.A. (UCAS3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Unicasa Industria de Moveis S.A. conference call to discuss the results referring to the first quarter of 2020. Today with us, we have Mr. Gustavo Dall'Onder, CEO, CFO; and Investor Relations Officer. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the presentation. [Operator Instructions] This event is also being broadcast simultaneously on the Internet via webcast. You may access it at www.unicasamoveis.com.br/investorrelations, where you can find the respective presentation as well. The slide selection will be managed by you. We would like to inform you that webcast participants may send their questions via website addressed to Unicasa, and they will be answered during the Q&A session. Before proceeding, we would like to clarify that forward-looking statements that might be made during the call in relation to Unicasa's business perspectives, projections, operating and financial targets, our beliefs and assumptions of the company's management as well as information currently available to Unicasa. Forward-looking statements are not a guarantee of performance and they involve risks, uncertainties and assumptions as they refer to future events, and therefore, they depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect the future results of Unicasa and may lead to results that differ materially from those expressed in such forward-looking statements. Now we would like to turn the floor over to Mr. Gustavo Dall'Onder to start the presentation. Mr. Dall'Onder, you may proceed.

Good afternoon, everyone. Unicasa has been seeking to address the COVID-19 pandemic with due seriousness following the recommendations of the World Health Organization and government since March 16, according to Material Fact disclosed on March 20. And with the [indiscernible] of activities as for the Material Fact Notice disclosed on April 8. It is difficult to estimate the real impact of the public health crisis on our business. In our chain, our main risk as well as to all retailers is the prolonged closure of our stores and the reduced movement of people due to risks of contamination. We have been helping our store owners in rent negotiations, in strategies to reduce costs using the measures offered by the federal government, and in commercial actions to ensure that they maintain their essential activities. At this time, we have a few stores open in locations where it is permitted by authorities. However, the majority of the stores are closed. However, many stores have been operating remotely, serving clients and showcasing projects online. We have been noticing an increase in client acquisition by means of the do your own project tool available on the website of all our brands. The decline in revenue at the end of this quarter is due to the shutdown of our activities on the week of March 23. Order that were in the portfolio and scheduled to be invoiced during the period during the plant closure were invoiced only in April, which means that the revenue of the first quarter of '20 would have remained practically in line with last year's. The main impact on revenue due the showdown will be felt in the second quarter when the reduced inflow of orders will be observed during the closure of commerce around the country. During this time of lower revenue, we have been taking measure to reduce fixed court in the areas connected with the inflow of orders and support to store owners. These measures include reduction of working hours, advancement of vacation, and in some cases, suspension of employee agreements, all in accordance to Provisional Measure 927/2020 and 936. We are also trying to minimize the impact of the increase in prices of our raw materials due to the appreciation of the U.S. dollar vis-a-vis the real. This effect mainly impact accessories or fixtures. For these cases, we have been negotiating with our suppliers in order to remain our price margin strategies with a reduced impact. Due to the overall decline in demand, we have been using opportunities to offer liquidity to our production chain in general without jeopardizing the company's liquidity in order to maintain or minimize the increase in prices of inputs. In this quarter, we see an increase of approximately BRL 2.5 million in operating expenses. And there were 4 main impacts that led these impacts to have this impact, but they're nonrecurring in nature. Last year, the company started its expansion to the U.S. market. We opened an office in Florida and hiring teams to support the market development. In the first quarter of 2020, expenses at this business unit reached BRL 1.3 million. Apart from not reaching breakeven in this market yet, we had nonrecurring expenses due to the participation in a trade fair and other advisory services. This business unit is still in its initial stage, and fixed expenses are around $45,000 per month. Second, variable compensation of the Board of executive officers approved by the Board of Directors' meeting on March 12, BRL 0.4 million, and the variable expenses for corporate projects that were invoiced in the quarter amounted to BRL 0.5 million and allowance for doubtful account of BRL 0.5 million with the total effect in the quarter of BRL 0.6 million comparing to 2019. We provisioned for a client that, in addition to the problems caused by the closure of the business activities, face liquidity problems. I would like to mention the financial result was impacted by foreign exchange hedge agreements in this quarter. As the company does not adopt hedge accounting practices, gains or losses from foreign exchange hedges are booked directly under the financial results. We closed the quarter with over $3 million, BRL 1.1 million with a financial expense of BRL 825,000. These agreements were executed to execute the [ exposure ] of the company. We have a very good liquid cash and allowing us to have the necessary time for economic recovery and not having to resort to third party cash. Now let's go to Slide #5 to talk about the highlights of the period. Due to the point that we mentioned at the beginning, mainly in relation to the stoppage of the plant, we had a drop of 10.5% in revenues. Operating expenses went up by 28%, mainly due to investments in expansion into the U.S. market. And the combination of factors led to operating and net loss in this quarter. On Slide 7, we highlight the most relevant changes in revenue in the quarter. Further reduction of 10.5% due to the stoppage from March 23 to April 12 to minimize the coronavirus spread; 6% reduction due to the lower number of stores; third, reduction of 0.6% due to the closure of our own store operations. And in the other sales channels, excluding the effect of the factory shutdown, we had an expense of 6.8%, mainly due to corporate sales. In the next slide, we will see the consolidated effects on each one of the channels. Starting by the exclusive Dell Anno and Favorita resellers, and on Slide 8, we see a drop of 17.2% in revenues and reduction in the number of modules of 21.9%. Slide 9, New and Casa Brasileira brands had a drop of 22.3% in revenue and 27.1% drop in modules sold. On Slide 10, we see the multi-brand performance, a reduction of 29.2% in revenue, 35.6% in margins. The Corporate segment on Slide 11 had an increase higher than 300% in revenue and in modules sold. I would like to remind you that the segment is impacted by the specifics of each project sold on a comparative basis, and in this quarter, we build a project of a hospital. On Slide 12, we see the performance of the export segment with a reduction of 39.2% in revenues and 63.9% on module sold. Consolidated Unicasa revenue on Slide 13 went down by 10.4%, and the modules sold dropping by 21.2%. On Slide 14, we can see that the average productivity of the stores in the quarter, mainly because of the effect of a stoppage and the average productivity in the quarter for Dell Anno and Favorita was BRL 53,700 per month, 9.1% lower than the first quarter of '19. Average productivity in the quarter, first store of New and Casa Brasileira was BRL 30,000 per month, 3.2% lower on a year-on-year comparison. On Slide 15, we see a chart with the evolution of our POS, exclusive and multibrand as well. We closed the quarter with 196 inclusive stores, 7.5% lower on a yearly comparison, the reduction, the number of multi-brand stores has to do mainly to the closing of the operation with Via Varejo. On Slide 16, we see a chart with the evolution of our exclusive point of sale separated by brand. We closed the quarter with 98 Dell Anno and Favorita operations, ADH, New and Casa Brasileira besides 10 exclusive stores abroad. On Slide 18, we can see the summary of Unicasa's result. You can see a reduction in the many indicators of performance in the quarter as well as the increase in operating expenses. And I will be talking about this on the next few slides. On Slide 19, we see the evolution of gross margin going down by 1.6 percentage point, going from 37.3% to 35.7%, mainly due to, first, a reduction in revenue pressuring the dilution of general manufacturing expenses, reducing margin by 2 percentage points. Variable compensation of the statutory Executive Board as we said before, and the improvement in the mix of clients and products, improving the gross margin by 0.9 percentage points. On Slide '20, we see a chart of the evolution of selling expense -- SG&A, in fact, going up by 21.1% in the quarter, mainly because of the following: expenses with the U.S. operation, adding BRL 1.3 million to operating expenses and they refer to personnel, occupancy, travel, insurance, advertising, et cetera. As already said at the beginning of the call, this quarter, these expenses were higher than the average because we participated in a trade fair in the U.S. and we had some advisories that are nonrecurrent. We will isolate the explanation of expenses of the U.S. office up to the moment when the nature of these expense is present in all periods. Payroll expenses were BRL 0.9 million higher. And as we before, the beginning of the call, this quarter had a variable compensation of the statutory board and impacting the result by BRL 0.4 million, and the changes in this body in March 2019, added BRL 0.1 million. The other expenses with personnel went up by BRL 0.4 million, mainly due to the opening of a department focused on the acquisition of store owners, as we said, in the release in the previous quarter. Variable expenses increasing by BRL 0.5 million. Of this total, BRL 500 million have to do with specific expenses of corporate projects that we built in this quarter and the others are relative to international freight expenses due to the increase in billings for clients in the North America. Expenses with allowance for loan losses increased due to provisioning for our client amounting to BRL 2.5 million, and the total effect of BRL 0.6 million occurs in the first quarter of '19 were recovered and resulting in a reversal of this. Expenses with consumers were BRL 0.9 million lower, and these expenses have to do with expenses, with merchandise, freight and assembly of final customers that were not served by closed stores. And this is being done directly by the plant and also lawsuits. Expenses with our own stores went down by EUR 0.4 million due to the closing of the operation as disclosed in the release of the fourth quarter of '16. The other expenses were increased by EUR 0.4 million. And in this group, we highlight advertising, growing by BRL 0.2 million due to the reformulation of the biannual campaigns of our brands. On Slide 21, we see the result of the effect already mentioned before, a loss of BRL 100,000. And on Slide 22, we see EBITDA of BRL 1.6 million, generating an EBITDA margin of 5.9%. I would like to mention that due to the effect of the pandemic and the recommendation of the Brazilian health agencies, we decided to postpone our shareholders' meeting originally scheduled to be held on April 16. And according to recommendation by B3, we resubmitted the calendar of events. And with the maximum deadline, July 31, the date for the payment of interest on equity and dividends will be defined when this meeting is carried out. I would like to give the floor to the operator in order to start the Q&A session, please.

[Operator Instructions] Mr. [ Carlos Javier ]?

I am an investor. And I would be grateful if you could answer my questions. What is the expectation that you have about your operations in the U.S., the evolution of the operations and the costs still to be incurred into -- with the maturation of these operations up to the moment you'll reach a breakeven? Are there any initiatives to increase your corporate sales?

First, thank you for the questions. I would like first to answer about the expectation of the evolution of our U.S. operations. What happens, [ Carlos ], is that, we already have an operation in the U.S. for some years already and we had a reseller there, and from 2 years on, we decided to further expand our operation in the U.S. Today, we already have 4 or 5 operations already open and 1 should be opened this month. And I cannot tell you exactly whether the store has already been opened because of the pandemic. And there was a normal maturity curve. First, you open the store, and then you make the advertising, you build the portfolio. So it takes a while for this kind of operation to mature. As such, we have been working other operation that involve prospecting and delivery by us, such as it works in the domestic corporate market. Regarding the expenses and the cost to be incurred until we've reached breakeven, exception made to the fair -- the trade fair that we participated in, they are all practically fixed expenses. At the office, we have 4 people working. They have a salary. They have their equipment, computers, et cetera, and they travel. And so it is the normal operation of an office. It's about $45,000 per month. So it's a fixed expense. So you can do this math, how much revenue should be generated in order to reach breakeven? Regarding the increase of sales in the corporate segment, there are 2 things we have to understand. Sales to the corporate sector, you don't have so much recurrent. They are practically stable. And they are usually one-off. So a major project or something like that. And in the last 3 years, we have been building a certain recurrence of sales to the same partners in new projects that they have, so we are creating certain stability in this channel. We already have some clients who are our partners, major builders, who have already signed the contract with us last year for some projects and this is public information. So we do have recurrent businesses with some construction companies and we believe consolidation will come. This is what we believe in. And should this happen, the channel will increase and keep a certain side. A couple of years ago, we had sales to the hospital segment. And now because of the pandemic -- we don't really know the impact of the pandemic on our medium, long-term sales to the hospital sector. But we do have this front in the Corporate segment, domestic one and abroad. I have already answered during -- the answer to your first question.

[ Roberto Teixeira Cleto ] from 4UM Investment.

Could you please talk about the performance of the pre-COVID sales? How are they before the impact of the COVID dynamic?

[ Roberto ], thank you for the question. The pre-COVID sales were going at a quite good pace. There was an increase in confidence in Brazil, and our store owners were having a good performance, and especially, we had a very good expectation, and we still have a very good expectation about the marketing material that we have. So we have a lot of new products being launched. So we're very optimistic regarding the commercial part and the marketing part of the operation before the COVID pandemic started. On the other hand, it was like a cold shower, the COVID situation. But we are more confident because we have this marketing and commercial part and the situation would be worse for us if we didn't have this before.

Mr. Lucas [indiscernible].

What is the idle capacity of the plant both before and after the stoppage of the plant?

Just to correct, we do not have plants, plural. We have 1 plant. All our production is done in 1 single plant, okay? Now answering your question. After the stoppage, we are working with 50% capacity that we had before the COVID crisis. It depends on the way we produce and the number of products, for instance, if we had always the same product -- for instance, if we had a product with a higher added value or lower added value, so it's different. It's very difficult to tell you which is our idle capacity as a whole. I can tell you that we are operating with 50% of the capacity that we were operating with before the stoppage. This is what I can tell you.

[ Roberto Teixeira Cleto ] from 4UM Investments.

We saw that you have increased the capacity of your website in terms of acquiring new clients. What about the digital media? And what about the importance of digital media in a moment such as the one we are living?

[ Roberto ], Unicasa practically is the same with all the other companies, it is present in all the social media and Facebook, Instagram and so on and so forth. In all these channels, we have some indication that leads the clients to our tool. And in this too, you register, you post your data regarding what your requirements are. And you put like a blueprint or something like that. And we send you an estimate -- and for the area that you want to furnish. And with all this information, we have an internal team that send this to the most adequate store according to your location, according to your own budget and the store gets in contact in order to try and develop the product with a client. I believe this is the answer to your question. We have a lot of things on the web that have to do with brand building. For instance, a material that we published the day before yesterday. If you go to the Dell Anno Instagram today, you will see this material. So we have marketing materials and branding materials in -- on the Internet, but the tool that convert leads into sales works the way that I have just described.

[Operator Instructions] The Q&A session has come to an end. And we would like to turn the floor back to Mr. Gustavo Dall'Onder for his closing remarks.

For additional information, please contact our Investor Relations area. Thank you very much for your presence and we wish you all a very good day.

Unicasa's conference call has come to an end. Thank you very much for participating and we wish you a very good afternoon. Thank you.