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Edited Transcript of TUPY3.SA earnings conference call or presentation 5-Mar-21 2:00pm GMT

·25 min read

Q4 2020 Tupy SA Earnings Call Mar 5, 2021 (Thomson StreetEvents) -- Edited Transcript of Tupy SA earnings conference call or presentation Friday, March 5, 2021 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Fernando Cestari de Rizzo Tupy S.A. - CEO & Member of the Board of Officers * Thiago Fontoura Struminski Tupy S.A. - CFO, IR Director & Member of the Board of Officers ================================================================================ Conference Call Participants ================================================================================ * Gabriel Rezende Banco Bradesco BBI S.A., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. Thank you very much for waiting. Welcome to the conference call for the earnings of Q4 2020 for Tupy. (Operator Instructions) This conference call is being recorded. The company would like to remind you that this event is also being transmitted simultaneously through the Internet via webcast and can be accessed at the address, www.tupy.com.br/ri, where you will have available the presentation. The slides will be controlled by the participants. Tupy clarifies that any declarations made during the conference call on business perspectives, projections or operational goals, financial goals concerning the company's business are forecast based on the expectations of the company's Board in relation to the future of the company. These expectations are highly dependent on the conditions of the domestic and international markets and also the economic performance of the country, the sector and, therefore, is subject to change. We have with us Mr. Fernando Cestari de Rizzo, CEO; and Thiago Struminski, CFO. Mr. Fernando, you may proceed. -------------------------------------------------------------------------------- Fernando Cestari de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [2] -------------------------------------------------------------------------------- Thank you, Priscilla. Good morning. I'd like to thank you all for your presence. I would like to thank our more than 14,000 employees, we are hiring employees in Brazil and in Mexico; also our vendors; our suppliers, for the trust in us. This year was very challenging, and we continue having great challenges. On Slide #2, we show Q4 and the trend of recovery that we can see as of June. Our volume is practically the same in comparison with 2019, with a strong recovery in Q4. This is due to the solid and diverse sectors in which we are present and the investment cycles in important segments. We will see more details about this during the conference call. This performance in sales, together with the high operational efficiency that has been built during the last few years, brought expressive results in the second semester. In spite of effects that impacted our costs, such as the strong increase in the price of raw materials and stopping production lines to adjust inventory. This result contributed for a strong cash generation, and also as a consequence, a reduction in leverage. These challenges were overcome with a new management formed by internal talent and professionals that brought their experience from other markets to contribute with Tupy. The resilience and also agility, speed and decision-making are the great legacies of the year and show our preparation for to grow the business. On Slide 3 and 4, we have the financial and operational highlights in Q4. We reached the highest revenue, gross profit and EBITDA of the company in history. Revenue BRL 1,269.8 million, growth of 11.6% in relation to Q4 '19. The greater participation of machine products and the exchange variation, the exchange rate helped in this. The gross operational profit, BRL 217 million, a growth of 25% and a gross margin of 17.1%. This is very important because it shows the gains and efficiency that the company had. EBITDA reached BRL 225 million with a margin of 17.7%, excluding the reversal and nonrecurring, the -- we arrived at BRL 185 million with a margin of BRL 14.6 million (sic) [14.6%], which represents an increase of 120 basis points when compared with Q4 '19. Another highlight and that we had also in other quarters that operational cash generation, BRL 255 million, corresponding to 113.6% of the EBITDA of the period. We continue generating cash. Net profit reached BRL 86.1 million, growth of 19% in relation to Q4 '19. And we closed the year with a cash position of BRL 1.4 billion, higher than the period before the pandemic, even discounting the additional liquidity that we obtained during the beginning of the impacts in COVID-19. Thus, our relation between net adjusted EBITDA and LTM is now 1.32x, much lower than before the pandemic. Now Thiago will talk about the main indicators of the quarter. He is our CFO. Thiago, you have the floor. -------------------------------------------------------------------------------- Thiago Fontoura Struminski, Tupy S.A. - CFO, IR Director & Member of the Board of Officers [3] -------------------------------------------------------------------------------- Thank you, Fernando. Good morning. After the total or partial stop in our clients in Q1 and 2, the volumes are on a recovery phase resumption. Fernando already mentioned in the beginning of the presentation, the volume of transportation, agriculture, infrastructure in the country was favorable. We arrived at 27% of machined products, and 24% was produced in CGI, and the 2 very hard. On Slide #6, the revenues had an increase of 12%. The revenue per kilogram grew 18%; 65% in NAFTA; 19%, South America and Central America, mainly Brazil; 12% Europe; and the remaining 4%, Asia, Africa, Oceania. In terms of application, 88% commercial vehicles and off-road, 7% passenger vehicles, 5% hydraulic products. On Slide 7, we observed the domestic market an increase in revenue, and practically, all the applications with a highlight here for the recovery of the domestic market and also indirect exports are a little low, but we see here the position. Slide #8. Here, we see the effects of revenue in the export market in passenger cars and light commercial vehicles; a combination of adjustments in our clients' production line, they wanted to produce new models; and also some restrictions in capacity in some other clients. And now to compensate this average commercial vehicles, heavy vehicles and off-road were relevant, especially due to the increase in demand and also recovery of inventories and exchange variation. Now on the next slide, we show the sales in Hydraulics. Here, they correspond to 5% of the revenue. And the Brazilian market had a benefit due to the increase in the sales. And the drop in the export market was partially compensated by depreciation of the current Brazilian currency. Now on Slide #10. Here, we see an increase of 16% in the cost with raw materials due to inflation in the period. We had also exchange variation, devaluation of the Brazilian currency in our plants and Mexican plants. Also the exchange rate for materials used in Brazil, we see a variation higher than the 80% in exchange variation in the last 12 months. These effects were mitigated by many initiatives -- with many initiatives, new vendors, both in Brazil and outside Brazil, new suppliers, apart from operational efficiency, flexibility in production, redesign of flows. We turned off some equipment with less efficiency, with lower efficiency. We renegotiated also many contracts, but it was a period with higher cost. We also had 1% higher costs in labor, especially due to negotiation of salaries. Here also, we had effects of the exchange rate, an increase of 6% in maintenance and materials from third parties. Apart from inflation, we had also the exchange rate, and operational expenses had an increase of 18% year after year, due to the use of freight and also due to these measures we took to make production more flexible, also exchange variation and labor negotiations. On Slide #11, we see the increase in the price of raw materials, especially scrap. So on one hand, we have the recovery of the global economy. This, for example, increased the demand for many raw materials. And the suppliers are still recovering from stops due to the pandemic, and there is a difference between offer and demand. In Brazil, this effect was stronger due to the devaluation of our currency, also the increase in Brazilian steel and the price of scrap. So as I said, we carried out many actions, not only to guarantee the -- our products but also our clients. We have many vendors, including from the north of Brazil and from abroad. So many are activities here. I would like to highlight that according to our contracts, the increase in price in Q4 '20 and during 2021, we were able to charge to our products increased prices. So in spite of all these actions that we carried out in the last months, the impact on the margin in raw materials was BRL 445 million. On Slide 12, here, we see adjusted EBITDA of BRL 185 million, an increase of 22% in comparison with Q4 '19, and a margin of 15%. EBITDA according to CBM was BRL 225 million, the highest value for the company for Q4 with -- so in this case, apart from operational efficiency in the many initiatives that we had, there's also the recognition of some credits, and also a reversal in Mexico. At the bottom part of the slide, we have a net profit worth BRL 86 million, a growth of 19% in relation to the previous year. On the next slide, we highlight the financial results during this period. So financial expenses were impacted, especially due to the devaluation of the Brazilian currency in relation to the U.S. dollar. We had an average exchange rate of BRL 5.39 to $1 versus BRL 4.12 to $1 in Q4 '19. So an increase in the loans and -- in the debt -- sorry, we had an increase in the debt due to loans in local currency worth BRL 494 million. As an option, we had also -- we invested these resources, and this gave us BRL 15 million. Also, monetary variation, exchange variations in our year-end report, BRL 55 million in expenses, especially in Q3 '20. So also the effect of updating derivatives to adjust the present value of credits to be received from a letter of about BRL 37 million without cash effect, the result of hedge operations due based on the instrument of 0, updating the value of derivatives with a revenue. So this brought us BRL 25 million revenue in the period. The cash effect in the operations of derivatives, a disbursement of BRL 47 million. So here, we have the effect -- the offset, a positive effect because of the exchange rate, exchange variation on cash. So the positive effect of these operations without cash effect was BRL 72 million. Slide 14, we have the variations in the main working capital accounts based on Q3 '20, which will be used as a comparison. We had a reduction of 15 days in accounts receivable due to seasonality and also the collection of sales during Q3 '20, a good recovery in relation to the peak of the crisis. And also, we had the impact of the exchange rate in receivables since 86% of the value is in foreign currency. Also an increase in -- of inventory, 1 day increase in inventory. And the company has the strategy to have flexible production to increase operational efficiency. Due to the pandemic, we increased the inventory levels in order to mitigate the effects and avoid having clients without our products. And also here, we had the exchange variation on accounts receivable and evolution of 5 days in relation to the previous quarter because of the gradual increase in production, more purchases and the increase in the price of our materials. On the next slide, #15, we have investments of assets, BRL 40 million, a drop of 57% in comparison with 2019, representing 3.1% of the revenue in the period. CapEx of 2020 represented 3.2% of the period, lower than previous years. And we maintained investments related to maintenance, safety and the environment. Slide 16, strong cash generation, strong operational cash generation. So we see here on Slide 16, the consumption of BRL 9 million in cash. The company continues with many initiatives to preserve cash and concerning the flow of loans, financing. During the quarter, there was an impact of BRL 185 billion (sic) [BRL 185 million] to amortize bank loans. Here on Slide #7 (sic) [Slide #17], we see the indebtedness, BRL 801 million, corresponding to 1.32x the adjusted EBIT in the last 12 months, a great drop in relation to the indicator we had in the previous quarter. In the second quarter, peak of the pandemic, we have reached 2.65x, and now to end the year with 1.32x, is a very good results. Total obligations in foreign currency represent 84%, and the largest part is related to the bond that we have, which will mature in 2024. We will talk about -- in the next few slides, we will see how we'll -- we delayed this maturity to 2032. So in relation to debt, we have this bond, 10 years bond in February. So we have a very resilient model with good cash generation. So this was the -- so with the current situation, we delayed the maturity. We reduced in a relevant way, the cost of our debt, and this was very good for investors, and which demanded 10x the book. So the resources that we obtained, BRL 375 million will be used to buy back the bond, which will mature in 2024 at a cost of 6.625% a year. As a comparison, it is for 10 years, and the rate is 4.5%. So this will give us savings upwards of BRL 6 million per year because of the lower interest rates. Now I'd like to pass the floor to Fernando. -------------------------------------------------------------------------------- Fernando Cestari de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [4] -------------------------------------------------------------------------------- Thank you, Thiago. The global industry is in a strong recovery of demand because of low interest rates, the recovery of the trust, and also the governments have been helping the population. Here, we see the recovery and the effect in the price of scrap, which has had the highest values in dollars in the last 10 years. This affects our costs -- production costs. But above all, we have to highlight the impact of this recovery in our demand. The increase in the price of commodities is directly linked to economic activity, the sale of capital goods, company's CapEx, and this automatically generates demand, 90% of our demand, because it affects the sale of commercial vehicles, all off-road vehicles, and these represent 90% of our demand. It's important to remind you, our contracts have clauses that show that we can increase the prices due to these increases in cost every 3 months. On Slide 20, we see some important indicators for the U.S. economy, which represents our greatest market. So we see a consistent improvement in jobs, and this is important for our business because transportation, civil construction and infrastructure are getting stronger. Here, we see also that the recovery of industrial production is not the same as the consumption indicators. This means that investments will be made during 2021. The drop in the contamination rates of COVID-19 also confirm our expectations of growth. Now on Slide 21, Tupy is in sectors that are very resilient. This is fundamental for the recovery after the pandemic. Our revenues come mainly from countries with very dynamic economies that are benefiting from the low interest rates, the stimulus to credit and also government-aided programs. So we would like to see the recovery in demand. In the U.S., freight is already higher than pre-pandemic era. And also, there are many positive reviews, and this shows that new fleets will be exchanged, especially medium and heavy trucks beginning this year. Also other housing starts will also demand more commercial and heavy vehicles. In Brazil, the production of trucks had an increase of 26% in Q4 '20 in comparison with the same period 2019. Apart from this, agriculture is strong in Brazil, which demands transportation for cargo and also investments in machinery and equipments plus off-road. Also, the rise in the price of commodities is very important for the performance of this segment. And this should translate into the demand for equipment used in mining, construction, energy generation and agro business. In general, there are scenarios very positive in the markets where we are present, stimulated by the recovery of the economy and also due to the demand that had the demand. On slide, Tupy now is a very agile company, very flexible company and ready to capture opportunities for growth. We made many improvements, and this will bring us operational gains. The year began with important challenges, with the increase in the price of materials that we already mentioned, lack of some raw materials that have had some effects of the mix of our materials, and we increased the efficiency. Also, as said, in the market -- in February, we had some stops in our operations in Mexico because of the supply of energy and natural gas in Mexico. Anyways, we continue very optimistic with the prospectus for 2021. Even though in the short term, there are problems, the exchange rate is favorable, and the volumes are good. This is a rare situation. Also in relation to 2021 in the next slide, I would like to share our vision of the initiatives for the year. We have seen the growth of volumes and opportunities to increase our presence in services with high value-added services such as machining and also the components. Also, our technical knowledge has increased. Another important thing is capturing the synergy in the integration of cast parts from Teksid. We continue trusting in the approval of this business, this acquisition, which should happen in the first semester of 2021. We continue investing in the digital transformation, automation and the adoption of technologies that can expand our operational efficiency, including an installation of ERP in Mexico, which will contribute for speed and decision-making. Yes, we will continue with our ecosystem of innovation, and together with the knowledge of the company, this can give us new opportunities. This is also connected to ESG and the company, ESG topics, in relation to our role and also in the decrease in carbonization of our clients through our process. And thus, we are working together with other actors to contribute in this direction. Soon, we will issue our sustainability report based on the Global Reporting Initiative, GRI, and we will also show our commitments for the next few years. We're very motivated by the perspectives and projects we have this year, and we will share with you these plans during the next months. Once again, I thank you for your attention. Now we will begin the Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question, Gabriel Rezende, Bradesco BBI. -------------------------------------------------------------------------------- Gabriel Rezende, Banco Bradesco BBI S.A., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Fernando, Thiago, congratulations. I have 2 questions. The first, based on a comment on lowering carbon levels, please comment how Tupy is preparing itself for this long-term opportunity, so the potential? And in a few years, how this can compensate losses? The second issue, on Teksid, the acquisition, how is the analysis? What are your expectations in terms of approval of the acquisition? -------------------------------------------------------------------------------- Unidentified Company Representative, [3] -------------------------------------------------------------------------------- Hello, Gabriel, thank you for the question. A very important topic, and this has used a lot of our time lowering the carbon levels. Tupy is a company that knows many technologies for materials, machining, mechanical products, projects and also chemicals. We're seeing there is a great, first of all, there are new fuels, alternative fuels that will be used. And these fuels will be used in accordance with the availability and also the cost in each region of the world. So we have an initiative in our engineering department to do research and develop new materials for possible alternatives in biofuels and also electro fuels and even synthetic fuels. So we have some projects with research institutes in Europe, also in Brazil. The use of new fuels like bio, diesel, ethanol, analysis involving methanol, and also, we're looking in the long term, the possibility of hydrogen because engines with hydrogen can be very competitive with fuel cells. So we are analyzing this as an important opportunity, hydrogen. So in terms of decarbonization and renewable and opportunities, we also have the (inaudible). This involves complex metallurgic processes, photovoltaic processes, also wind energy, battery systems. Batteries need important metallurgical processes. So we're looking at all this. We're understanding the possibilities, and we're studying these alternatives in different sectors and their opportunities. Now concerning Teksid, the acquisition, we're making progress. We trust with our arguments, the economic analysis we did, all the reports, we understand that the pandemic also hurt the capacity of the authorities to analyze these projects. But we have a strong group, and this transaction began with a solid analysis. We talked to our lawyers, and we continue trusting. We hope to have a decision in Brazil by the end of April. We hope to have a decision in the U.S., which is the most important one, and in Mexico, around June. So when the U.S.'s decision and Mexico's decision have been made, then we will have the closing of the transaction. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is in English, from Mrs. Clarence from MetLife. -------------------------------------------------------------------------------- Unidentified Analyst, [5] -------------------------------------------------------------------------------- Thiago and Fernando, congratulations for the results. I would like to know what do you think about the potential impact on margins for higher raw material prices in the first quarter. They're looking, volume which is recurring, but we already have seen some pressure, perhaps the very strong performance year-over-year on the margins. And also if you can comment on the trend of the salaries and wage expenses, which also show up quarter-over-quarter increase? -------------------------------------------------------------------------------- Unidentified Company Representative, [6] -------------------------------------------------------------------------------- Well, I will answer the first part of the question. And then I will ask you please to repeat the second part of the question. We mentioned here during the call, the pressure on raw material prices, both in Brazil and Mexico. Brazil had a higher effect, especially with the devaluation of the Brazilian currency. We have problems with price and also lack of availability of raw materials. So in our accounts, this was as high as 300 bps of a difference in margin in this semester. It is relevant and the offset, in fact, there is -- we have great volumes in the hands of our clients. The economy is strong. And certainly, we will benefit from this. But in the short term, we are living with this mismatch until we're able to increase our prices. So this happens in the first quarter. We paid for the raw materials a price that is much higher than we get from our clients. This is in Q1. So what happens in the world is an imbalance of -- imbalance with many differences in geographies and sectors. And until all of this comes in line, we have a strong recovery, this in sales. Now please repeat the second part of the question. -------------------------------------------------------------------------------- Unidentified Analyst, [7] -------------------------------------------------------------------------------- And the second part of the question is, you can comment on the trend of the sales and wage expenses, which already saw a quarter-over-quarter increase in the fourth quarter. -------------------------------------------------------------------------------- Unidentified Company Representative, [8] -------------------------------------------------------------------------------- I understood your question has to do with wages and sales expenses. Is that right? Is that correct? Commercial expenses and wages? -------------------------------------------------------------------------------- Unidentified Analyst, [9] -------------------------------------------------------------------------------- Wages, yes, exactly. What will be the trend in the first quarter of 2021 or over this year? -------------------------------------------------------------------------------- Unidentified Company Representative, [10] -------------------------------------------------------------------------------- Sorry. In sales expenses, we have an impact because of freight. So in terms of sales expenses, these are the main factors. I don't know if I answered your question? This business [disallow use]. -------------------------------------------------------------------------------- Unidentified Analyst, [11] -------------------------------------------------------------------------------- Yes. That's Tupy. -------------------------------------------------------------------------------- Unidentified Company Representative, [12] -------------------------------------------------------------------------------- Okay, done. Oh, wage expenses. In terms of salaries, wages, inflation is not a structural problem in terms of use of labor. It is more linked with the greatest impact is on materials, not wages. So sometimes, we have overtime and absenteeism that increases the cost in the operation. Also, wage increases in Brazil and in Mexico are not very relevant. There is the exchange rate that helps Brazil and Mexico. So the problem is the allocation, and it's very difficult to manage absenteeism due to the pandemic. So because of this, we have a little more overtime than do we normally have. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) Our next question will be from Bank of America, Peter. -------------------------------------------------------------------------------- Unidentified Analyst, [14] -------------------------------------------------------------------------------- Fernando and Thiago, congratulations for the results. I have a question. Could you share your perspective of CapEx, your plans for CapEx in 2021, please? -------------------------------------------------------------------------------- Unidentified Company Representative, [15] -------------------------------------------------------------------------------- Well, we are -- we have been recovering our ROIC in the last 6 years. We had a consumption of 8%, 9% of revenue, 120 -- 130% depreciation to a level of 3.4% of revenue, 70% in depreciation. So we are in this curve for 6 years. In 2020, it's a different year, depreciation was much lower due to a strategy to protect cash. But now we are recovering, and we're close -- we should go to BRL 240 million, BRL 250 million in CapEx. Although the number is close to depreciation of the company, it includes growth projects. So we have projects for efficiency in manufacture and new machining projects. But the rhythm during the next few years should be equal to the depreciation. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question, Gabriel Rezende, Bradesco BBI. -------------------------------------------------------------------------------- Gabriel Rezende, Banco Bradesco BBI S.A., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- One more question, concerning the issue of natural gas in Mexico, the lack of natural gas. What is the impact of this in the results in Q1? The volumes, for example, that you lost in February, will you recover in March? -------------------------------------------------------------------------------- Unidentified Company Representative, [18] -------------------------------------------------------------------------------- Thank you for the question. There are many effects. Concerning the physical volume of sales, we must recover during the quarter. So in March, our clients also stopped. It was structural. Mexico has a lot of problems. The U.S. also had. So we had a stock around 2 weeks, depending on the type of asset. The main effect is the cost of distribution. We're working to share this with our partners and suppliers to have a lower impact. So we're working on this number. But in practice, we had 2 weeks in which production stopped in Mexico. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- (Operator Instructions) We would like to close the Q&A session. I would like to pass the floor to Mr. Fernando for his final comments. -------------------------------------------------------------------------------- Fernando Cestari de Rizzo, Tupy S.A. - CEO & Member of the Board of Officers [20] -------------------------------------------------------------------------------- Thank you, Priscilla. Well, I'd like to thank all the participants for their interest in the company. We had a very challenging year. And we see how our business model of Tupy is resilient based on a solid commercial strategy with flexible production, and this has shown its value during these quarter -- this quarter, and also with the support of a new purchasing structure. In February, we announced a new Vice President for purchasing. It will be global. We're preparing the company in a more organized and efficient way. All of this makes Tupy a more agile company and capable of adapting itself to different scenarios. In Q4, we had record results in many lines due to seasonality, but I would like to make clear that we preserved the efficiencies that we reached in Q3. And we will benefit with these efficiencies. We began the year with the loan, with low interest rates, and the rate -- the interest rate was 4.5%. This shows the trust in our strategy and execution. We are hiring employees in Brazil and Mexico. We are activating new work shifts in Brazil and new work shifts in Mexico because our volume is growing, and our sales portfolio is very strong. When we showed the graphs for commodities, we showed the strength of the economic activity in the country. And this is -- we saw this due to the price of scrap. And it is the highest price of scrap we had since 2008, and this shows strong economic activity and also a reduction in the rates of contamination in the pandemic. And we hope the volumes will continue growing strongly this year and in the next few years. So we're very motivated with the opportunities, with the acquisition of Teksid, and it is more -- we are becoming more and more strategic to our clients in their journey in the direction of decarbonization. So we are sure that all these efficiencies will be shared with clients. We want to become more and more flexible as we showed since 2017, increasing flexibility, and this brought important results for us. Now in Q3, Q4 in the same way, we are also allocating products to different plants to have the lowest cost. So Tupy continues growing. It is very strong. It is capturing new business. And we have great expectations for this year. I'd like to thank you all for your participation, and we wish you a good day. Thank you very much for participating. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- The conference call of Tupy is concluded. We thank you very much for your participation, and we wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]