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

Good day, everyone. Thank you for waiting. Welcome to Unicasa Indústria de Móveis S.A.'s conference call to discuss Second Quarter 2025 Earnings Results. [Operator Instructions] We inform you that this conference call is being recorded and can be accessed at the company's IR website, ri.unicasamoveis.com.br, where you find the full package of our financial disclosure. You can also download the presentation from the chat icon, including the one in English. [Operator Instructions] We emphasize that the information contained in this presentation and forward-looking statements that might be made during the conference call relating to Unicasa's business prospects, projections and operating and financial targets are based on the beliefs and assumptions of the company's management as well as on information currently available. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect the company's future performance and lead to results that differ materially from those expressed in such forward-looking statements. Today, we have with us Mr. Guilherme de Oliveira, Investor Relations Officer. Now I will turn the floor to Mr. Oliveira to start the presentation. Go ahead, sir.

Good afternoon. On Slide 4, we can see that the company's consolidated revenue grew by 14.5%. Exclusive stores grew 14.1%, while same-store sales performance was 20% higher. Revenue recognition from our stores in the United States grew by 38.9%, while contract signings fell by 38%, reflecting greater caution among American consumers due to political uncertainties in the country. The corporate segment grew by 94% due to specific deals that were delivered this quarter. On Slide 5, we have the evolution of our exclusive and multi-brand points of sale. We ended the second quarter with 124 exclusive stores in Brazil, 16 exclusive stores abroad, 68 multi-brand stores in Brazil and 6 multi-brand stores for export abroad. Moving on to Slide 6, we present a summary of the results. In this quarter, the increase in manufacturing costs and the greater share of showroom revenue were the main factors contributing to the 8.7 percentage point reduction in gross margin and to the operating loss in the quarter despite the fact that we posted 13% growth in net revenue. The main factors that caused the reduction in gross margin were: number one, higher volume of showroom sales. 7 new stores received showrooms and 9 were renovated. In this quarter, the share of showroom revenue was above historical averages, contributing to a lower gross margin as this type of sale has a lower margin compared to typical sales projects aimed at end consumers. Second, increase in the cost of raw materials, as mentioned in the previous quarter's earnings release, not yet offset by the price increase implemented in April due to the normal maturation period. Three, effect of the tariffs imposed by the U.S. government on Brazilian products. Fourth, price reductions in the second half of last year. And fifth, increase in general manufacturing expenses, mainly due to depreciation. In operating expenses, a collective bargaining agreement and variable expenses in the U.S. operation were the main drivers of growth. In the financial result, exchange rate variations and interest on debt were the primary factors behind the reversal. As a result, the quarter ended with a net loss of BRL 2.2 million. On Slide 7, we can see that we consumed BRL 13.8 million of the company's cash, mainly due to the payment of interest on equity in May, which totaled BRL 10.5 million. The concentration of showroom sales during the period also affected cash generation for the quarter as these sales have longer payment terms. Moving on to a topic that has permeated economic debates in Brazil, i.e., the tariffs imposed by the Trump administration on Brazilian products. It is important to clarify that about 13% of our revenues come from the North American market, where we have 8 exclusive stores and 3 owned stores in the United States. Our product had already been taxed at 10% in April and now in August, suffered a 40% surcharge totaling a 50% tariff. Our biggest concern at this point is the competition since we share the market with products coming from countries that are subject to lower tariffs than Brazil. This challenge cannot be overcome without sacrificing margins to protect the market that we have built over many years, which creates direct and indirect jobs in both Brazil and the United States. We have already taken the necessary measures to maintain the competitiveness of our product in order to mitigate the impact of these tariffs on our operations and on the operations of our dealers. The results for this quarter already reflect the effect of the 10% tariff applied since April since sales delivered during this quarter and subject to this tax were transacted and priced in a scenario where there was no trade war as we currently have. We are closely monitoring the actions of the U.S. federal government regarding the sanctions imposed on Brazilian goods and the competition movement in order to assess the need to review the measures taken. We would like to thank our shareholders, dealers, employees, suppliers and other stakeholders for one -- for another quarter ended. I now hand over the floor to the operator to begin the Q&A session.

[Operator Instructions] First question was written by -- was asked by Antonio. Contract signings in the U.S. market fell 38%. What measures are being taken to reverse this?

We understand that this retraction in sales is the result of some uncertainties, political uncertainties in the U.S. market. We had already planned for this year our renovations in the showrooms of Orlando and Miami. The renovation of the Miami showroom was completed now in August. It was a minor renovation, and we replaced the whole showroom in order to display new products and to update the showroom. The Orlando store will undergo renovation starting now in September, and that is a more robust renovation. We understand that even with the tariffs imposed by the U.S. market -- well, we understand that our market -- that our products can still penetrate the market. We still have a market share so much so that we took the necessary measures to maintain our products competitive in the U.S. market. So these are some of the actions that we have adopted to try to reverse this reduction in sales.

[Operator Instructions] Next question asked by an investor called Alex. The gross margin fell 8.7 percentage points in the quarter. What is the expectation for recovery in the second half of the year? And what specific actions are being implemented?

I will briefly comment on the reasons which led the gross margin to fall, but we cannot really give you an expectation of when the recovery will take place and to what extent it will take place. In our earnings release, we mentioned that we had a price increase in April. And given the maturation of the price increase process, this price increase has not impacted the whole revenue. So there's still some price increase, which will be reflected in the revenues of the coming quarters and which will help reduce this reduction in gross margin. Yesterday, we implemented another price increase, and this will help increase the margin. In this quarter, we also had a considerable concentration of showroom sales. Our historical average was about 4% of our revenue coming from showroom sales. And in this quarter, it went up to 10%. And in these sales, we practically have no margin. Our intent when we sell the showroom is that, well, the product will be displayed and that the dealers will sell with the showrooms. So it's not our goal to make money selling the showrooms. Our goal is to foster sales. So in the coming quarters, this concentration of showroom sales tends to decrease. There's also the United States. We did have an impact on the tariffs imposed by the United States of the tariff applied in April. I'd like to remind you that sales delivered in April, the contracts were signed way before April. So these sales were priced during a moment when there were no tariffs imposed on Brazilian products. So this is not included in the price. And this is an expense that we did not consider in those sales. So this does have an impact on Q2 results. But looking forward, we will have the same situation, but now with a 50% tariff imposition. So there will be an impact of the U.S. tariffs imposed on our products. And another point that I mentioned in the release is related to depreciation. Depreciation expense increased because we had the start-up of operations of the equipment that we invested in. But the equipment is not 100% operational. So we still have expenses with overtime that we paid in Q2. And this was -- this exceeded the normal in order to cope with production, and we are also renovating the flooring of one of our lines in the shop floor. We had to deactivate one of the pieces of equipment, and that also led to overtime expenses. So these are things that will have different margin vectors in the future, some up, some down, but this will change our gross margin in the future. So that's it, Al. Thank you very much for the question.

Next question from Joao Miranda with OPP. Is there any plan to continue expanding the number of stores? Or is the strategy to increase sales in the current stores?

Well, yes, we do have an expansion plan. In the earnings release, we speak about expenses, and there are some expenses of travel growing. A good part of that growth comes from our expansion team that is traveling. Our expansion team this year is larger than last year. They're traveling more. We have more portfolio. We are having more meetings. So yes, there is an expansion plan, and we are actively working on the expansion plan. I cannot really specify how many stores and what is the target of the expansion plan. But what I can say is that we are working actively on the expansion plan. And the second part of your question about increasing sales in the current stores. Yes, of course. That is a never-ending work. We have to always foster sales in our current stores. We have to work on the products, on the showroom and the way in which we display the product. This is the basic objective to grow sales. And when we look at same-store sales, they are showing exactly that. And we also see that sell-out sales, it's not a number that we include in the release because that sales happening in our stores, in the stores of our exclusive dealers, but we see a positive same-store sales, a positive number. And that's the result of the work that we are doing to increase organic growth of our stores -- of the sales of our stores. I hope I have answered your questions.

Next question from, Wesley, an investor. Considering that 13% of revenue comes from the U.S. and there is a 40% surcharge, what is the company's base case or baseline scenario that the company is considering for the next 12 months?

As regards the tariffs imposed, at this point, we have 2 major concerns. Number one, the market scenario in the United States, to what extent this will have an impact on the market on us versus our competitors, the actions we have taken versus the actions taken by our competitors. So we are monitoring the market up close to understand the elasticity of the actions that we have taken already and actions that we might have to review. We don't have really visibility. No, no one really knows what's going to happen with these tariffs until then they will continue to be applied. So today, I know how many sales we have to deliver in the United States, and I do the math. And I know how much of the extra tariffs were not priced. But when we're going to deliver the products, whether the tariffs are going to be lower or higher? Well, that's a big question mark. We don't know what's going to happen with the tariffs. I think this is the right moment to mention that the Rio Grande do Sul state government announced last week that they're going to release a credit facility of BRL 100 million for exporting companies of Rio Grande do Sul. We're in contact with Grande Sul. We're getting enrolled to receive these funds. There is no regulation yet, but we are applying to receive a part of these funds. Yesterday, the federal government of Brazil announced credit facilities for exporting companies. And we are also trying to see whether we meet the requirements so that we can get some funding to reduce -- to mitigate the impact of these tariffs and to drive the market. Thank you for the question.

[Operator Instructions] Next question from Fernando, an investor. The increase in raw material costs has not yet been offset by the April price adjustment. Will there be further price increases in the short term?

Yes. I think I mentioned this before that we had a new price increase now in August, a lower percentage than the price increase of April. But yes, we did adjust our prices in August.

[Operator Instructions] Our next question is from Andre, an investor. Is it possible to have local production and local partnerships to mitigate the impact of the tariffs?

Well, I understand that your question is related to the effect of the tariffs, right? If there's any possibility of local production or partnerships. We don't really have visibility of until when these tariffs will be imposed. So thinking about a local production because of the tariffs, that would be very risky at this point. But you asked about local production. We could start thinking about local production when volume makes sense. Now even if we didn't have the tariffs, the volume is still low for us to think about a local production in the United States.

[Operator Instructions] The question-and-answer session is now closed. We would like now to hand over the floor to the company's management for their closing statements.

I would like to thank you all for participating. I wish you a great rest of day. And if you need further information, please contact our Investor Relations department. Thank you very much.

The earnings conference call for the second quarter 2025 of Unicasa is now closed. Thank you very much to all participants, and have a good rest of the day.