Unipar Carbocloro SA

BOVESPA:UNIP6

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Unipar's Conference Call for the First Quarter of 2020. With us here today, we have Mr. Mauricio Russomanno, CEO; and Christian Schnitzlein, Chief Financial and Investor Relations Officer. This event is being recorded. [Operator Instructions]

This event is also being broadcast live via webcast and may be accessed through Unipar's website at www.uniparcarbocloro.com.br/ir, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their question on our website. They will be answered throughout the Q&A session or by the IR team after the conference is finished.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Unipar management and also all the information currently available to the company. They involve risks and uncertainties because they relate to future events, and therefore, they depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn over to Mr. Mauricio Russomanno for his presentation. Mr. Mauricio, you may proceed.

[Mauricio Russomanno, executive]

Thank you, operator. Good afternoon, everyone. I'd like to start the conference call for the first quarter of 2020 by highlighting our operations during the pandemic. In this crisis scenario, it's important to highlight that we have a portfolio of products that is used by segment that operates in the manufacture of products and provision of essential services in the fight against COVID-19.

Unipar is a leading producer of chlorine and caustic soda, and we have recently entered the PVC business. Chlorine is necessary to treat drinking water, where it is used as an efficient disinfectant to eliminate pathogens. We also produce sodium hypochlorite from chlorine, which is an active ingredient in the manufacture of products such as bleach, which is one of the main products for disinfection of hospitals, homes and public places. And caustic soda is an important raw material for the food industry and for the production of soaps, detergents and paper, among other products. And finally, PVC-based products are used by the health care industry to produce masks, aprons, gloves, catheters and blood bags, for example.

The goals of Unipar during the crisis are, number one, to prevent our team and their family members from getting infected; number two, to preserve our operations; and number three, to support our employees, the community and the whole society during the crisis. In order to reach these objectives, we have created a Crisis Management Committee, which has been operating for nearly 2 months now and has implemented a series of actions, among which I'd like to highlight, that we have actions aimed at employees, like prevention campaigns. We have established new hygiene protocols. We have provided a specific help desk to answer questions and to provide guidance about health, psychological support. We have also provided them with hygiene kits. And we have been offering the possibility of telecommuting.

Actions aimed at continuity of our operations. We have defined -- redefined our protocols in all our locations in terms of access for facilities, customer service and operations. We have also segregated. We're working in a rotation basis. We have changed our shift. We have changed the logic of the transportation of our employees. And we also created -- well, we're also using distancing actions in our cafeterias.

In regard to the society, we have launched some support and prevention campaigns to the communities. We have provided them with hygiene kits. We have also donated bleach, soaps, medical masks, gloves and protection masks to the government of the state, to the city hall, to hospitals and health care units, both in Brazil and in Argentina. Some of these donations were directly by Unipar, and others were done jointly with our customers. So far, we have had 3 cases among our 1,400 employees. These 3 employees are at home with their families, and they are now finishing their quarantine before they can return to their activities.

Now regarding our operations. On Slide #4, we can see that in this very adverse time, the behavior of the international liquid soda prices have shown some recovery against 2019, some scheduled shutdowns for maintenance of some producers, and the increase in stocks in some important segments such as paper and pulp, for example, have contributed to a better balance between supply and demand.

In the case of PVC, the export prices in the North American Gulf in the first quarter of 2020 had an increment of 12% over the previous quarter and 6% against quarter 1 '19. The use of our installed capacity has also grown both against the previous quarter, quarter 4 '19 and also quarter 1 '19, with highlights to Santo André where the ramp-up process is nearly finished.

Now I'd like to turn over to Christian, and he's going to talk about our financial results. Christian, please, you may proceed.

[Christian Eduard Schnitzlein, executive]

Thank you, Mauricio. Good afternoon, everyone. Thank you for participating in our conference call. I'd like to start my presentation on Slide #5. Here, we see that the company's net revenue had a growth of about 1% over the previous quarter, which resulted from a discrete increase in the value sold, recovery of the PVC price and the appreciation of the dollar against the real and the Argentinian peso, which could offset the drop in price of caustic soda in the international market. There was a drop in revenue, influenced by a reduction in average sales prices, particularly for caustic soda.

In terms of the consolidated, there was a drop against '19 due to the reduction in cost of services and maintenance and a reduced consumption of inputs, particularly in Santo André in Argentina, which generated better operating efficiency.

In respect to the EBITDA and net income, we had a relevant effect of the foreign exchange valuation of debt with third parties. And this made our consolidated net income of the parent company to be negative in this quarter.

On Slide #6, we have a comparison against quarter 1 '19. There was an increase of 4% in the consolidated net operational revenue, with a favorable impact of the foreign exchange and the recovery of the PVC price in the international market and a higher sales volume, despite the pressure started by the drop in soda prices. And this is what made the parent company's net operational revenue to drop 12%.

Regarding the cost of goods, this also had an influence of the foreign exchange due to the debt in foreign currency.

On the next slide, the allocation of the stock option plan of the company. It's worth highlighting that aligned with this strategy, the company has a robust cash position and a low leverage position and is meeting its financial commitments.

Now I'd like to open for questions. If we cannot answer your questions right now via webcast, our IR team will contact you later to answer your questions.

[Operator]

Thank you for -- we'll open for questions. But before the question-and-answer session, I'd like to turn over to Mr. Christian. He's going to make some remarks.

[Christian Eduard Schnitzlein, executive]

Thank you, operator. We have a question that we received via webcast from [ Mr. Vidal Goiado ]. What is the percentage of mercury electrolytic sales in your total installed capacity? Will this technology be replaced in the coming years? What is the estimated CapEx for the replacement?

Also, we have a question about basin and a project to supply chlorine that was hired. Considering that we still have many water companies in Brazil with these types of plants, wouldn't this be an opportunity for Unipar to enter new business? Mauricio Russomanno will answer the questions.

[Mauricio Russomanno, executive]

[ Vidal ], thank you for your questions. So let's start with the first part, the percentage. Unipar has 27% of its electrolysis capacity with mercury. The CapEx for replacement we calculated is about $120 million, and we have to comply with the law, which says that in 2025, we will have to have replaced everything. So we still have a few years to replace this technology.

In respect to the small machines for production, there are some factors here. We have assessed this and we have been monitoring the market. And for Unipar, it doesn't really make sense right now for scale-related reasons. And these small units, they require the same safety and security standards in terms of the number of engineers and all the Unipar's standard protocols. And for such small units, this is not feasible. And also to administer these small units, the complexity is about the same as that of managing large units, like the ones we have. So right now, our preferable strategy is to have larger units to serve our customers.

[Christian Eduard Schnitzlein, executive]

We have another question that came via webcast from [ Andre Barton ]. Does Unipar have a project to increase production aiming at the international market?

[Unknown Executive]

Right now, we do not have any projects aiming at increasing production to service the international market. Right now, we still have some idle capacity to operate both in Brazil and Argentina and also other South American markets and also international markets. So we don't really see this need right now. We have been doing this recurrently. We have been exporting our excess production or some special orders.

[Christian Eduard Schnitzlein, executive]

We have another question via webcast from [ Marconi ]. Your administrative expenses are still growing. This is concerning. They have been growing quarter after quarter. What have you been doing in practice to cure this?

[Unknown Executive]

[ Marconi ], let me answer your question. Well, in terms of recurring expenses, we have been working very diligently in terms of balancing and curbing expenses. So our recurring expenses, they have been stable and even decreasing. Some nonrecurring expenses like we said in our release, we had the stock option plan, which was fulfilled to 1 executive, and this had a strong impact. But if we exclude this value, everything is very much in line with the plan.

But I must remind you that we are a company that we always pay attention to cost, both variable and fixed costs, because we work in commodities. So we are always picking the best alternatives and the best practices. And we try to optimize the performance of the team and minimize our costs.

[Christian Eduard Schnitzlein, executive]

I have one more question here from [ Santiago Guacio ]. Does it make sense to increase your debt for the share buyback?

[Unknown Executive]

[ Santiago ], thank you for your question. We have been critically assessing this issue of cash generation and capital allocation. We are very comfortable and in a very good position in terms of our liquidity. That's why we have been looking into these possibilities. And every week, we have been rebalancing everything. And right now, it still makes sense to allocate capital to the buyback program.

We are very confident that the actions that we have taken in the short term to go through this crisis period, including everything related with cash, is what's giving us the possibility of continuing the buyback program. And excluding some one-off actions, we still have a very healthy situation.

[Christian Eduard Schnitzlein, executive]

I have one more question that I received by e-mail from [ Rodrigo ]. What is the impact of soda in the company's EBITDA? Mauricio, can you answer this one?

[Mauricio Russomanno, executive]

Rodrigo, the impact of soda on the company's EBITDA. Well, soda represents an important portion of the company's profitability. And on -- the process of the company in our 3 plants, we start from the production of electrolytes. So we turn salt into chlorine, into caustic soda. Then the soda is automatically sold to the market, directly to the market. And chlorine has 2 options. We either use it -- we either sell it through water treatment companies and other variations for applications for the treatment of wastewater effluence and hygiene in general.

And other plans, like in the case of Santo André and Bahía Blanca, for example, we turn chlorine into PVC, which is sold to the market, mainly civil construction and the pharma market. So the importance of caustic soda to our EBITDA, it actually accounts for half of the company's revenues in gross terms because of this initial process that I just mentioned, where you separate, and starting from electrolytes, we produce these 2 products. And of course, soda is a product that -- with prices referenced in the international market, and they fluctuate throughout the year and over time. So it also depends on the supply and demand situation globally. So at certain points, over time, it could account for more or less of our revenue, depending on where we are in the cycle of international prices.

[Operator]

Thank you. The floor is now open for questions. [Operator Instructions] We have another question from [ Mr. Carlos Bran ].

[Unknown Analyst]

Are you planning on providing any bonuses?

[Unknown Executive]

Thank you, [ Carlos ]. Not right now. This is not in our plan.

[Operator]

Excuse me, this concludes today's question-and-answer session. I would like to invite Mr. Christian (sic) [ Mr. Mauricio ] to proceed with his closing remarks. Mr. Mauricio, you may proceed.

[Mauricio Russomanno, executive]

So I would like to thank you all for participating in our conference call. I'd also like to thank the IR team for all the preparation work for this call. And I would like to close by saying that despite all these uncertainties and despite this very unexpected and unprecedented situation due to the coronavirus pandemic, Unipar has done a great preparation work in the past 2 months with several actions to keep our employees protected and safe. And we have also extended this work to their family members also to ensure the company's business continuity. We have taken several actions and measures in order to do that to continue our operations despite any type of stops, quarantine or any internal situation. And we are striving to continue to supply our customers.

And from the financial standpoint, as Christian already said, we are in a solid liquidity and cash position to withstand this period of adversity during the pandemic. And we are even prepared if this period is extended. And we have seen extraordinary commitment from the entire team to make things happen. So this makes me very proud and very impressed with all the hard work of our team to keep our company going and defend our company despite this very adverse situation.

So once again, thank you all for participating, and have a great week.

[Operator]

This concludes Unipar's conference call for today. Thank you very much for your participation, and have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]