Unipar Carbocloro SA

BOVESPA:UNIP6

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Welcome to the conference call of the second quarter of 2024 for Unipar. We have here with us Rodrigo Cannaval, CEO; Alexandre Jerussalmy, CFO and Investor Relations Officer and IR team.

This event is being recorded [Operator Instructions]. The conference can be access through MZIQ platform and the company's website, ri.unipar.com, where you can find the slides. Selection of slides will be controlled by you. Audio of the event will be available on the website after its closure. After the presentation, we will start the Q&A session. [Operator Instructions].

Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding Unipar's business prospects projections, operational and financial goals are beliefs and assumptions of the company's management as well as information currently available to nip. Future considerations are not guarantee of performance and involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors can affect Unipar's future results and can lead to results that differ materially from those expressed in such future conditions.

I would like now to give the floor to Rodrigo Cannaval, who will begin the presentation. Please, you can proceed.

[Rodrigo Cannaval, executive]

Thank you, Raquel. Good afternoon to all. Welcome to Unipar's Second Quarter 2024 Earnings Release Presentation. I'll start with information that we have completed the team of statutory directors of Unipar with the arrival of Ricardo Congro. He has over 23 years of experience in operation management. Ricardo has taken over as Industrial Director of the company, and he has been so since first of August. I'm sure that we will have a successful trajectory at Unipar, helping us to deliver the strategy of sustainable growth with safety and operational excellence.

Moving on to our presentation, I highlight that the second quarter of '24 was marked by the persistence of the adverse global scenario. And the maintenance of the downward cycle in the chemical industry. This is all translated into the reduction of trade spreads. In addition, the combination of protectionist measures in some markets, such as Europe and crisis in other markets boosted the flow of products to Brazil. Data from ABIQUIM show record levels in the import of chemical products, especially PVC. This situation led the chemical industry to register, in May, only 58% of use of its installed capacity and 76% in the chlor-alkali industry, the lowest level since the beginning of the time series.

The chemical sector in Brazil through its associations has been working together to recover the ability to compete in face of the global trade dynamics facing the challenges and competitive advantages of other countries. This sectoral dialogue has been led by associations with technical foundations with the representative authorities in the country and within the scope of Mercosur we're trying primarily the positive impact of the installed industry in the generation of investments in local jobs.

The positive point in the Brazilian market is the maintenance of solid demand, especially in the coordinated market, which has the potential of the sanitation framework. It has already contributed to our resilience strategy. In other words, diversification and service to vital industries in the economy.

Looking to Argentina, we have faced an even more challenging scenario, the implementation of measures to contain inflation and fiscal deficit caused a retraction in local demand, especially with the stoppage of public works. Expectations for the resumption of demand in Argentina are still uncertain and depend on the success of the package of measures issued by the government.

I would like to reaffirm that Unipar continues to stand out for its resilience and its ability to operate efficiently. At the same time, we faced this downward cycle for which we are prepared. We continue to invest and believe in our vision of the future to ensure Unipar sustainable growth in the upcoming years. especially with the prospects of sanitation in the Brazilian market.

I'll now hand it over to our CFO and Investor Relations Officer, Alexandre Jerussalmy. He will go into details about the highlights and results of Unipar in the second quarter of 2024.

[Alexandre Jerussalmy, executive]

Thank you, Cannaval. Hello, everyone. It's a pleasure to be here to talk to you about the results of the second quarter. Starting with the financial highlights, which reflect the resilience of Unipar's business model and the company's focus on maintaining financial health. We had EBITDA of BRL 146 million in the quarter, without considering the effects of IAS 29, the accounting effects. It shows the challenges of the petrochemical downturn cycle and macroeconomic reforms in Argentina. Our margin historically has remained above the margin of peers in the sector. We had a net profit of BRL 89 million despite all the challenges. Unipar has been obtaining positive net results for 17 consecutive quarters, once again showing the resilience of our businesses. Our cash generation reached BRL 157 million in the quarter, and our financial leverage stood at 0.70x, which reflects a conservative profile considering our average debtor.

Regarding operational highlights, our electrolysis utilization rate reached 82% in the quarter. once again, higher than the industry average, according to data from ABIQUIM,the Association of Petrochemical. We have progress according to plan in the construction of new electrolysis plant in Bahia and in technological modernization of our site in Cubatao. Please bear in mind that these two projects will have relevant economic impacts to Unipar once they are completed. I'll make some more comments about that later in the presentation. We finally progressed in our ESG agenda.

In the quarter, we achieved 51% of self production energy -- use of self-production energy coming from renewable sources in Brazil versus 30% in the same quarter last year. We have also published in the end of July, our sustainability report. There, you can find details about our ESG journey. I would like to invite all of you to access our report, which is quite good.

Now moving on to the next slide. We can see a progression of our occupancy rate of electrolysis, which reflects reliable competitive operation. We closed the quarter, as I said before, at 82% utilization rate in the consolidated data, 84% in Brazil, 75% in Argentina. Please bear in mind that the numbers of the second quarter '23 still did not include the increasing capacity of [ 70% ] in our plant Santo Andre the numbers of the second quarter '24 already include the expansions of electrolysis.

Operational excellence at the Unipar is based on some strategic actions. Starting with CapEx, focused on safety, operational reliability and modernization of our plants, in addition to an experienced trained team in all of our industrial units. We also have a series of digital transformation initiatives. They are all underway and focused on industrial optimization. For example, we have applied artificial intelligence initiatives, focused on predictive maintenance, optimization of use of our paralysis furnaces, increase the quality of our PVC. Operational calibration that ends up avoiding unscheduled downtime in our unit. And just to name a few examples.

Finally, we have been developing 4 years in strategic partnerships with suppliers. All of our strategic inputs. For example, we have multiyear contracts for the supply of salt, ethane, natural gas, electricity, with first rate reliable partners with proven competence. Summing up all these factors, it explains our capacity utilization rate above the industry average, according to ABIQUIM.

Moving on to the next slide, we see the evolution of our net revenue, which is quite diversified and focused on key sectors of our economy and society. We closed the quarter with net revenues of BRL 1 billion, BRL 159 million, out of which 23% was distributed in the sale of chlorinated products, 41% PVC and 36% soda. When we add up the revenues from sales of soda, PVC we reached 77% of revenue linked to dollar, which gives Unipar further resilience during moments of currency devaluation, both in Brazil and in Argentina. Please bear in mind that our results are adjusted by IAS 29. So they do not include accounting and noncash effect of IAS 29.

Giving you an overview of where our sales are going. Let's say that 25% are directed to pulp and paper, metallurgy and petrochemical. 23% direct to civil construction and laminates, 15% sanitation, cleaning and hospital products, 14% for PVC composite industries and the rest is distributed among many different industries. All in all, we sell to about 30 different industries, several of which have a high potential for demand growth and with expansion projects that have already been announced, such as the area of sanitation. There are also important industries to which we sell and have an export location such as paper and pulp and also steel industry.

Going into the next screen in terms of cost, our COGS reached BRL 835 million in the second quarter, 72% of which had variable costs and 22% fixed costs. Variable cost, 94% referred to ethylene, gas, electricity, salt and see. For each of these inputs, we have a strategic positioning through multiyear stable agreements. Electricity, for example, 51% of what we consume in the quarter came from self-production, self-generation of wind and solar energy in partnership with AES and [ ENGIE ] with whom we have 20 contracts for energy supply, which incorporates the benefits of self-production. In the area of South, we have our own operation in Argentina and multiyear contracts with south suppliers in Brazil and Chile for the Brazilian operation. Finally, we have long-standing, stable partnerships with ethylene supply in both Brazil and Argentina.

On the next slide, we see the comparison of EBITDA on the second quarter with that of the first quarter. We've achieved EBITDA of BRL 146 million in the second quarter without considering the noncash fact of IAS 29. The EBITDA level is below Unipar's track record and clearly reflects the challenges of the petrochemical cycle of downturn and macroeconomic reforms in Argentina. Regarding net income, we reached BRL 89 million in the quarter, 59% above the previous quarter, showing resilience of Unipar's business model. And bear in mind that there are already 17 consecutive quarters of positive net results for Unipar.

The next slide, our operating cash generation was BRL 157 million in the quarter, whereas CapEx was mainly focused on strategic projects of Camacari and Cubatao in addition to having amortized some debts in the quarter. We've reached at the end of the quarter with cash balance of BRL 2.27 billion, which represents robust liquidity support considering our company's debt profile.

Next slide, we can see a description of the main strategic projects which are underway in the company. Greenfield project in Camacari and the technological modernization project in Cubatao will bring relevant gains to Unipar in upcoming years. In Camacari, we are advanced in the construction of a new chlorine soda plant. There will be 20,000 tonnes per year of chlorine and capacity using 100% renewable energy and membrane technology with the world's state-of-the-art for electrolysis process, the most aqua efficient technology in the world. In Cubatao, we are advancing the project to migrate the existing electrolysis technology into membrane, both mercury and diaphragm technology because we operate in Cubatao already part of it based on membrane technology. And now we are going to concentrate on 100% of the production using membrane technology.

Once the project is completed, we will have 28% less energy consumption, 150,000 tonnes of reduction in solid waste generation, 70,000 tonnes per year reduction in greenhouse gas emission. And consequently, we will have a very positive effect on our production cost in the electrolysis operation in Cubatao from the moment the project completely. We also have other projects in progress. All of them focused on operational efficiency and increasing the added value of our products.

Our debt profile going to the next slide, as you can see, remains quite conservative. We have enough cash positioned to cover 95 months of debt amortization. Our debt is concentrated primarily on the capital market. And as a consequence, the company maintains available lines with banks. We have also advanced in the strategy of extending the payment terms. In the quarter, we had disimbursement of a funding line with ECA with a 12-year term. And we are going to move ahead with our strategy of extending the debt term. We closed the quarter with 0.70x leverage and conservative capital structure with net debt to equity from 17% to 83%. In fact, our debt profile vis-a-vis our liquidity support gives us a privileged position to face the challenges of the down cycle to face the macroeconomic challenges in Argentina and also to consider some time of opportunity in the market that may present itself to Unipar.

With that, I close. I hand it back to Cannaval, and I thank you all for being here with us during the presentation of results. Thank you, Cannaval, up to you.

[Rodrigo Cannaval, executive]

Well to conclude our presentation, I would like to highlight our priorities for the continuation of the. We are committed to safety management and operational efficiency. We'll carry out the strategic projects in Camacari and Cubatao. Together with the associations, we will keep on maintaining the agenda of strengthening competitiveness of national industry in Brazil and remain committed to delivering solid and consistent results. And we also will maintain our strategy of sustainable growth with balance, selective actions and preserving cash generation. We'll now open for the Q&A session.

[Operator]

Thank you very much, Cannaval. We are now going to start our question-and-answer session. There is one question by Elena [ Kemi ] with XP.

[Unknown Analyst]

These are our questions. First, can you please update about the next steps of the project, especially unit Camacari and about technological modernization in Cubatao. Can you please tell us what would be the total invested amount and the expected benefits?

[Operator]

Thank you for the question, Elena.

[Unknown Analyst]

Thank you, Raquel.

[Rodrigo Cannaval, executive]

About the projects in Camacari and Cubatao, the following are our updates. In Camacari, our project is ongoing. We have the expectation to complete by the end of the year. The modernization of technology in Cubatao will bring a number of benefits. It will become a safer plant, much more competitive and more sustainable because the reduction of CO2 will be significantly reduced 70,000 tonnes a year of CO2. The beginning of the operation is planned in the end of '25.

[Unknown Analyst]

The next question is, we've seen margins under a lot of pressure in the quarter. Could you please give us more details about the main offenders and still talking about margins. What about the business perspective in the third quarter? Any improvement there?

[Alexandre Jerussalmy, executive]

Thank you, Elena. Good afternoon, everyone. Alexandre speaking. In the second quarter, what we've observed is a continuation of the pressure on margins because of the downturn cycle of petrochemical industry. we've felt the pressure, especially in the commercialization of PVC. And for Unipar, we've also experienced the effect of the economic reform in Argentina. This was an additional factor putting pressure on the margins, selling soda and PVC in Argentina. I would say the combination of the macroeconomic characteristic in Argentina because of the government change of Government Milei and the downturn of petrochemical cycle are the main factors that explain the margins that we reached in the second quarter.

Now looking ahead, what we expect for the next quarter is the expectation of some kind of recovery despite being gradual at Unipar, as we explained to you, we have a sales mix that takes into consideration not only PVC and soda, but also chlorinated products, the price dynamics will be different there, different from caustic soda and PVC. The logic of price or international market, but not for chlorinated products. For chlorinated products, we have our local market dynamic with local pricing strategy.

Therefore, the economy in Brazil has been presenting positive indicators. Therefore, the coordinated market has been strengthening the logic and the resilience of our business model. This is how we've been anticipating in the third quarter.

[Unknown Analyst]

Have you talked about the reference prices of the international market?

[Alexandre Jerussalmy, executive]

Yes.

[Unknown Analyst]

Okay. Could you please give us an update about prospection of investment opportunities, especially M&A.

[Alexandre Jerussalmy, executive]

Thank you, Elena. Unipar has been saying it publicly that it has a perspective of growth, it has the intention of growing in the local market, in the international market. Of course, the company will do things in a very selective fashion so that it does not put at risk our financial health, which is one of our priorities. Therefore, we are continuously analyzing and considering opportunities that may open to us in the market. Once we have any news about it, we are going to tell the market.

[Operator]

Thank you. There is a question by [ Mera Asset ] by Alexandre [ Pavi ] and Jean-Marc [ Copeli ].

[Unknown Analyst]

The company has had expenses apparently extraordinary in legal, strategic consulting services. In addition to expenses with expansion studies, which affected your OpEx. How can -- what can we say about them in upcoming months? Are these expansions associated with new capital allocation in line with the strategic plan? Could you please tell us more about that? What vertical possibilities of growth are more heated greenfield, M&A, brownfield, et cetera.

[Rodrigo Cannaval, executive]

Thank you, Alexandre, for your question. most of the expenses are related with some kind of assessment of market opportunities indeed. [ Lego ] and strategic financial analysis of companies, but there were also other expenses, which we're calling expense expenses with consulting services, which are just our internal agenda improvement of processes, of position and a number of other initiatives that we have to increase profitability when negotiating our products. Most of the expenses are nonrecurring. It's not something that is going to be reported quarterly. There was a concentration in the second quarter, but it's not something that is expected to be recurring.

[Operator]

Thank you. Let's see if we have any more questions. Please hold.

There are three questions by Karina Trevizan with S&P Global.

[Karina Trevizan, analyst]

You've mentioned the imports of PVC. How do you anticipate the demand for internal product? Are your strategic projects going to increase the productive capacity of PVC? And what are the actions that you anticipate to strengthen national competitiveness.

[Rodrigo Cannaval, executive]

Thank you, Karina, for your questions. Strategic projects related to PVC Unipar has been investing in improving competitiveness and quality of so that we can reach more profitable markets that use PVC. For strengthening Brazilian industry, Unipar and ABIQUIM have been working together with the federal government, talking about Brazilian natural gas. Historically, we know that it's not competitive. And our country needs actions that improve competitiveness of natural gas. The one used for a source of energy or raw material for the industry of agriculture applications.

[Operator]

There is one more question by Vida Morato shareholder.

[Unknown Shareholder]

Could you please tell us about the exploitation of lithium in Argentina, Bolivia and Chile, because of the increased demand of batteries for electrification. Would it impact positively the sales of soda?

[Rodrigo Cannaval, executive]

Well, lithium expectation in Argentina brings two possibilities to chemical plants, a potential demand for soda and also for [ hydrochloric ] acid in China. The main point about exploiting lithium in Argentina is when exactly this is going to happen. It is an opportunity, but it depends on the timing. When is it really going to become a reality?

[Operator]

We are going now to close our Q&A session. I would like to hand it over to Cannaval.

[Rodrigo Cannaval, executive]

Thank you all for your participation in our call and your trust. I would like to close by also thanking the hard work and dedication of Unipar staff. Thank you all very much.

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