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Hello, everyone, and welcome to the Empresas CMPC 2018 Second Quarter Earnings Results Conference Call. On the call with us is Ignacio Goldsack, Chief Financial Officer; and Colomba Henríquez, Head of Investor Relations. [Operator Instructions] As a reminder, this conference is being recorded. Please note that statements made today during the presentation and Q&A may include forward-looking statements to assist you in understanding our expectations for future performance. These statements are subject to some risks and could cause actual results and events to differ materially. And I'll refer you to the company's press release and regulatory filings for discussions of those risks. In addition, statements during this call, including statements related to conditions in the global pulp, personal care, forest products and paper markets, are based on management's views as of today, and it is anticipated that future developments may cause these views to change. Please consider the information presented in this light. The company may, at some point, elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so, except where required by law. It is my pleasure to turn the floor over to Mr. Ignacio Goldsack, Chief Financial Officer. Please, Mr. Goldsack, you may proceed.
Thank you, operator. Welcome, everyone, to our second quarter results conference call. I want to start on Page #3 of the presentation. In the second quarter of 2018, CMPC continued to benefit from supportive pulp market conditions. Operations were running at full capacity leading us to have our regular quarterly production and without any maintenance difficulties at our mills this quarter, we were able to take full advantage of the paper pulp market environment and, therefore, have a very positive result. We continue to execute our specific plan with discipline and diversification is a fundamental part of this plan. [ This ] risk is fundamental to continue growing in the Tissue business. This quarter, we saw the start of the construction of a new tissue machine in the Zarate mill that will consolidate our leadership efficiently in Argentina. Our Tissue business is facing more volatility with currency depreciations and increasing fiber costs, but our customer business is resilient. And we saw volume and revenue growth this quarter. In the second quarter, we also continued to strengthen our capital structure, another fundamental part of our strategy. Our leverage continues to decrease as we generate strong cash flows, and our net debt-to-EBITDA ratio was 2.2x by the end of the quarter. This ratio was decreased every quarter since the first quarter of 2017, in line with our commitment to being a financially solid investment-grade company. Finally, I am pleased to confirm that in June we made the final disbursement of $158 million to SERNAC, the final step in our restitution agreement with the Chilean authorities and consumer representatives. SERNAC has already started making payments to our consumers. Let's now to page #4. As I mentioned, in the second quarter pulp market fundamentals continued to be supportive as it had been for some time. Prices rose for both hardwood and softwood. And with all our pulp mills operating at capacity, market pulp sales volumes rose again by double digits to a record 927,000 tons, an 11% increase from the first quarter and a 19% increase for the second quarter of 2017. We also saw volume growth in all our business divisions and as a result, consolidated revenues grew to over $1.6 billion, 8% percent higher quarter-over-quarter and 26% higher year-over-year. Being disciplined in the execution of our strategic plan made us more efficient and enable us to take advantage of the current market conditions. As a result of this, we saw record-high EBITDA for the second consecutive quarter with $507 million in EBITDA this quarter is 27% higher than the previous quarter and 75% higher than the second quarter of 2017. The 31.3% EBITDA margin in this -- is 463 basis points higher sequentially and 865 basis points higher than a year before. I would like now to ask Colomba Henríquez, Head of Investor Relations, to cover our results in more detail. Please Colomba, go ahead.
Thank you, Ignacio, and good morning to everyone. Please move on to Page 5 of our presentation, where we have more detail on consolidated operating costs and other operational expenses for the second quarter of 2018. Cost of goods sold reached $915 million, stable compared to the previous quarter, and up 13% year-over-year. Consolidated cost of goods sold represented 57% of revenue, a positive change from 61% of revenues in the previous quarter and 63% in the past year. The quarter-over-quarter comparison shows that the impact of higher sales volume was offset by lower costs in Pulp division as we had lower mill maintenance and forestry protection costs. Higher sales volumes, particularly in pulp and higher fiber prices, were the main causes for the year-over-year rise in cost of goods sold. Consolidated other operating expenses came to $196 million for the quarter, up 9% from the previous quarter and 8% from the previous year, representing 12% of total revenues, which is a similar level we had in the previous quarter, but down from 13% the year before. Higher administrative expenses in Pulp and Tissue and higher general expenses in Tissue, partly offset by the depreciation of local currencies explained these results. The year-over-year increase was caused by higher administrative expenses in all business divisions. Please turn to Slide 6 of the presentation for more detail on the business lines, starting with the Pulp business. We continued to ride the positive pulp price cycle that has lasted for a while. Pulp prices ended higher in the second quarter of 2018 with hardwood prices reaching $757 per ton and softwood reaching $853 per ton. As we had no maintenance downtime at our pulp mills this quarter, we were able to operate at full capacity for the whole 3 months. As a consequence, pulp production was 8% higher quarter-over-quarter and 7% year-over-year. Supported by the strong production figures and favorable market conditions, total pulp sales volumes rose 11% sequentially and 19% year-over-year. Bulk price of pulp performed well sequentially with hardwood benefiting from higher exports to all markets, while softwood improvements was more concentrated in exports to Asia and Europe. Rise in exports to China in both grades of pulp explained year-over-year increase. Forestry sales volumes to third parties rose 22% sequentially, more than compensating for the 1% fall in forestry average sale prices. The 9% year-over-year volume increase, however, was compounded by an 8% increase in average sales prices as we continued to see the product mix improving, most notably in plywood. Revenues in the Forestry and Pulp business rose by 14% over 1Q '18 and by 49% compared to 2Q '17. EBITDA was 33% higher sequentially and a 101% higher year-over-year. Turning to Page 7. We will look at the performance of our Tissue business. Tissue sales volumes were slightly higher during the second quarter of 2018 sequentially, with the volumes up by 3% with higher volumes in most countries. Year-over-year, positive 1% increase as a net result of higher volumes in Chile, Peru and Colombia and lower volumes in Mexico and Brazil. Sanitary product sales volumes also ticked higher. Quarter-over-quarter sales volumes were up by 3% on higher baby diaper sales in all countries, except from Brazil, and higher wet wipe sales in Chile. Compared to 2017, volumes were 2% higher as diaper sales volumes picked up in Argentina, Brazil, Mexico and Chile. Average sales prices measured in dollars, however, were impacted by the depreciation of local currencies in most countries in which we operate. As a result, average prices were down by 1% for tissue paper and 2% for sanitary products when compared to the previous quarter. The net result was still positive on revenue, which increased by 2% both quarter-over-quarter and year-over-year. However, higher SG&A expenses related to higher labor costs, brand investments and higher fiber costs negatively impacted EBITDA, which was 4% over quarter-over-quarter and 16% lower year-over-year. Moving now to the Paper business on Page 8. Sales volumes to third parties were slightly higher quarter-over-quarter, helped by higher volumes of boxboard. Year-over-year, volumes where 11% higher with significant volume increases in corrugated paper and boxboard. Average sale prices were flat sequentially, resulted in second quarter revenues that were 1% higher quarter-over-quarter. Lower volumes in corrugated boxes and higher operating costs, however, resulted in EBITDA coming at 2% lower sequentially. Year-over-year, average sale prices increased 7%, while revenues were 6% higher. EBITDA benefited further from higher volumes across all products, particularly boxboard and corrugated boxes. Please turn to Slide 9 for our discussion of the global pulp market. During the first half of 2018, demand for hardwood pulp continued strong, increasing over to 680,000 tons or 4.1% over 2017. Eucalyptus was again the fastest-growing grade with over 520,000 tons or 5.6% above last year. Softwood pulp demand, which started the year at a slower pace, also gained momentum, closing the first half of 2018 with a small 0.3% increase over 2017. As a result, total pulp demand during the first 6 months of 2018 increased by 2.5% or 766,000 tons. China was again the driver of global demand growth, but also Eastern Europe contributed after several years with no growth. There was also positive contributions from Western Europe, Japan and Other Asia/Africa, which more than compensate decrease in North America and Latin America. At the end of June 2018, global market pulp producer stocks decreased slightly to 28 days for softwood from 29 days in June 2017, and increased 2.3 days in hardwood from 39 days in June 2017. Ignacio will now give us a review of our financial position. Thank you.
Thank you, Colomba. Please go to Page #10. Free cash flow generation totaled $103 million in the second quarter of 2018, up from $70 million in the previous quarter and $19 million in the second quarter of 2017. The strong operational performance of [indiscernible] extraordinarily high EBITDA more than compensated for the additional investments in working capital and high-risk disbursements of payments and taxes. We ended the second quarter with a cash position of $639 million, down 24% sequentially and 49% compared to last year as we made the final disbursement of the $158 million related to the -- to a restitution to Chilean tissue consumers. The CapEx reached $99 million during the second quarter, but should pick up over the second half of 2018 as construction progresses in the Zarate mill in Argentina. Finally, the leverage ratio has decreased for the past 6 consecutive quarters and now stands at 2.2x. Pulp prices have contributed to this result, but they are also the result of our consistent and disciplined efforts. Finally, I ask you to look at Page 11. We will continue to take additional steps to increase operational efficiencies and improve cost controls as we have always successfully done. We will continue executing our growth strategy in our Tissue business, focusing on Mexico and Brazil. Despite recent volatility, we have a long-term view in the Latin American tissue business and we are confident that we have the expertise to be a leading player in this industry. We are now committed to being an investment-grade company, and we will maintain our solid capital structure while continuing to analyze different initiatives to execute our growth strategy and consolidate our leadership position in the markets in which we participate. Now I would like to introduce Mr. Francisco Ruiz-Tagle. As you know, he is the new CMPC CEO since August. Francisco has a solid trajectory in the company. He has served during the last 27 years in several positions, not only leading the Pulp and Forestry units, but also in finance, tissue and packaging. Francisco and Raimundo Varela, CMPC's Pulp Commercial Manager, are also available to answer any questions you may have. Okay. Operator, please now open the floor for questions.
[Operator Instructions] Our first question comes from the line of Thiago Lofiego with Bradesco.
I've two questions. The first one for Raimundo. What's your view on the short-term prospects for the pulp market? We've been hearing about some price discounts, especially for softwood in China. So if you could comment a little bit about that and also about the overall balance of the market inventory situation and demand outlook for the short term. So at the end of the day, do you guys think that there is any chance of that prices drop for hardwood specifically in the short term? Second question more on the capital allocation side. CMPC's net debt-to-EBITDA now is at close to 2x. You're developing a new tissue line, but CapEx is relatively low there. So what are the next steps in terms of capital allocation? Could we see any growth projects -- sizable growth projects be announced? Or should we expect higher dividends? What should we expect from the use of cash going forward?
Thiago, thank you for the questions. This is Raimundo. We see a healthy pulp market, and we have seen it for several months. And we believe we will continue for a while. We see -- we have seen very stable prices in China, in Asia, in particular. And yes, the paper price in China have been suffering a little bit in the last few months, but we see that more of -- as a correction than a permanent movement. In the other Asian countries, we've seen very strong demand in both fibers, long and short. We have also positively surprised with the demand we have seen in Europe for both fibers as well as in the U.S. So prices in Europe and the U.S. have been sort of closing the gap or getting closer to the Asian prices, which is very good. We have -- we believe that the pulp prices are very likely to stay at current levels for a while. In particular, the short fiber as we see very good demand. I mean, customers are taking their regular volumes in all geographies. In the case of long fiber that you mentioned, we see some small weakness in Asia, but I think, it's normal. I mean, you remember that the long fiber to short fiber differential has been over $100 for a while, that's unusual, it's probably a bit too large. So it is normal. I think that there's some correction on that differential, but it's not really a weakness of demand. We see more of a substitution of buyers using a bit more -- short fiber than the long. And that creates a little bit of correction on the long fiber price that we might see in the next few weeks or months. But other than that, we see a very healthy market and that's what we are seeing, again, in Asia and elsewhere.
Raimundo, if I may, what about the inventory situation, especially in China? Do you have a plan for that?
Yes, the inventories are, what we see, are normal levels and what we have seen from the market, the different terminals where we arrive with our pulp. We see normal levels. And again, customers taking the regular volumes, we can say that from our own experience and also what we see in these terminals where we operate in Asia. So we don't -- we see -- and the statistics of the main analysts also showed the same sort of softwood inventories are around 30 days and hardwood around 40, 41 days. So it is normal. I think, we don't -- at the moment, we don't see that as a concern.
And I'm sorry to just go on the same subject here. September, I imagine, volumes should increase basically due to the seasonality and then going to the fourth quarter, shipments are usually stronger as well. So then if inventories are stable and from your feedback, it seems like the market seems to be balanced now than during in August. So could we imagine some possibility of price hikes like in next few months or maybe in the fourth quarter or that's scratched for now?
It's hard to say. I think -- remember that the production has been, worldwide, has been relatively low for the first 6 months of the year, several sort of supply shocks in several geographies. I wouldn't expect that to be repeated in the second half of the year. So demand would be a bit stronger than say, seasonality, but probably production will be stronger, unless continue to be like a huge supply shocks as we have seen during the first 6 months of the year. So again, I think, it's hard to say, whether prices will go up. Hopefully, they do, but we see more of a stability, rather than main changes.
Thiago, Ignacio, here. I will answer your second question. Of course, at this current pulp prices, it is absolutely effective that the ratio of net debt-to-EBITDA will go even below 2x for a while, and we are absolutely fine with that. Due to our prudent approach regarding our financial metrics and also our commitment as a company to maintain solid investment grade, right? But at the end, it will depend on pulp prices and distribution of new projects that may come, right? What we expect -- looking forward, we expect to take advantage of this strong operational result and continuously getting our growth strategy. We are analyzing different initiatives that are in the final stages of analysis and approvals, it may come in the coming quarters, right? Up to now, the CapEx for the year, the guidance is around $500 million and that means, of course, Zarate in maintenance and some small projects.
Ignacio, then if I may, these different alternatives you're analyzing, could we expect like big tickets growth options there? Or you're talking mostly about smaller ones?
Well, it will depend. We have others, right? That -- we expect to continue growing in the Tissue business focusing the airport, right, in Mexico and Brazil. And it could be, I mean, either way organic, right, greenfield, or by acquisitions. Also, the company has mentioned it is analyzing some alternatives to grow in the South of Brazil in the -- in order to having us forestry, right, to continue growing in the long run, right?
Our next question comes from the line of Carlos De Alba with Morgan Stanley.
So similar to the last question, but maybe talking or asking Francisco in particular -- and welcome Francisco. All the best in your tenure as CEO.
Gracias.
How do you -- I mean, the focus seems to be mostly on tissue. And so the question is why would you like to do so as right now is probably a good time to refocus on pulp and forestry? Pulp prices are really high, they'll probably come down by the time a new mill is up and running, maybe the prices have -- are already on the way back up. So could you just lay it out for us what is behind this strategy of -- that seems to be mostly focused on tissue paper, rather than pulp? And second, what is your philosophy or your approach regarding the capital allocation besides growth? With this strong cash generation for the second half of the year, maybe 2019, the low net debt-to-EBITDA, the company has set all the issues on the tissue investigation. It seems that now you have a lot of flexibility to potentially pay a higher dividend or do something else. Could you just lay it out also for us, what is your vision on capital allocation?
Of course. Thank you for your questions, Carlos. And well, first of all, I would say that CMPC S.A. now have a different line of business. And it is necessary that we have focused our intentions in growing our Tissue business in Latin America, particularly in Brazil and Mexico because of the size of those markets. So we have important challenges there, but it does not mean that we are not looking at other opportunities for our business. And the thing is in the case of pulp, we have a -- we're interested in growing also that business, but as we have said before, we have important challenges to solve in, for instance, in Brazil for growing forestry before having a new pulp mill. So it will take more years, and having probably a new pulp mill there. But we're open to see opportunities. And it happens for all of our business. And I would say tissue is interesting for CMPC. Also stressing for CMPC, of course, because of the diversification. We have mentioned that before on a [indiscernible] business that we don't talk very often that it is connected with our paper business. It's also an interesting business for us to explore and in order to grow in a different quality of paper we are producing. And in particular, in the Tissue business, we have defined to be a leader -- a leading seller in Latin America, and we are really strong behind that goal.
And what about potential dividends, Francisco?
No news in that regard. This is a matter that has to be discussed in the Board of Directors.
Our next question comes from the line of Marcio Farid with UBS.
So we've talked about potential growth opportunities on the Tissue business. I just wanted to touch base on the current operations. So what are the actions you're taking or you could take on the tissue side to improve the current profitability of the business? I mean, in terms of challenging pulp costs, right, what is the potential for further price growth for cost cutting on this business? My second question, just in terms of pulp volume growth for the year. You delivered, of course, strong volumes in the second quarter of the year, but just wondered what is the guidance for third part sales for pulp in 2018 considering that why the production has normalized, but maybe you still have to adjust inventories on the supply chain?
Marcio, Colomba here. I would like -- I would take the tissue -- your tissue question. It's true that tissue operations this year have been more challenging, mainly because of the increased pulp prices and also because of the depreciation of local currencies. Of course, we are making an important effort in order to offset this chill effects in our operation. One way is to increase prices in local currencies. We've been able to do that in most of the countries, but of course, it's a difficult thing to do and it takes time. Also, we are making an important, here -- a big program in terms of cost reduction in all the countries in which we operate, but mainly in the countries that have been more challenging. So that's Argentina and Brazil. In order to cost -- or reduce costs and also to position our brands in a regional way, so positioning the Elite brand in a regional way also doing revenue management in that front and different other initiatives that should help to improve our margins going forward.
It's Raimundo. I will answer your second question regarding pulp volumes for the remainder of the year. We think that our pulp mills have been running very well. I think some of the productivity initiatives we have developed are sort of paying off, and we've seen that during the first half of the year. Second half of the year, I think, Q3, we would probably see similar levels. Our inventories have reached a comfortable level, meaning that the level we need in order to serve our customers according to our commitments. So Q3 should be normal. Q4 should be slightly lower because we have maintenance at Guaíba mill in November. So that will probably affect a little bit the -- by the end of the year, December sales. But, again, that's normal. I mean, all mills have to be maintained. So again, we expect, hopefully, to maintain volumes of sales.
Our next question comes from the line of Pedro Pereira with Santander.
I was just wondering if in Asia, are you all suffering any slowdown in terms of demand due to this commercial trade wars between America and China? It has been already 2 months in this third quarter. So I was just wondering if you're seeing any slowdown?
This is Raimundo. Not really. I think we hear noise, a lot of comments, et cetera, but at the end of the day, customers have taken regular volumes. That's what we see. If these things continue, who knows; it could potentially affect the demand for this [indiscernible] flows. It could be positive for us, eventually. But at the end of the day, we don't know really what will happen. But we see our customers and the market taking regular volumes, a bit more noise in China, of course, but not really affecting demand so far. And the other Asian countries nearby, China, Korea, Japan, Taiwan, we've seen a little bit better demand than before because of the whole recovery paper thing that affects China. It benefits the surrounding countries. So that's so far so good.
Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Thank you, everyone, who participated in the call. Hope we see you again next quarter.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.