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Good morning. My name is Christina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Empresas CMPC Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you.
Ignacio Goldsack, you may begin your conference.
Thank you, and welcome, everyone, to our second quarter 2019 results conference call.
Starting on Slide #3 of the presentation, the second quarter of the year was challenging given the global pulp market scenario. Consequently, hardwood and softwood prices decreased compared to the last quarter. Softys result showed a positive trend during the quarter, with EBITDA increasing 44% quarter-on-quarter as a result of sales and lower administrative expenses. Even though we saw an increase in the net debt-to-EBITDA ratio during the quarter, we continue to have a conservative capital structure and a solid liquidity position. Therefore, we continue to be in good shape to execute our strategy going forward. Now turning to Slide #4. As I mentioned earlier, pulp market conditions were challenging during the second quarter and even though we increased our pulp sales volumes by 8% quarter-on-quarter, revenues fell as a result of the decrease in hardwood and softwood prices. Also, the Packaging division saw a decrease in volumes and therefore in revenues and EBITDA partly due to corrugated boxes seasonality and lower average prices.
On the other side, the Softys business had an important increase in terms of EBITDA during the quarter levered by higher sales volumes, especially of personal care products and higher prices. As a result, second quarter EBITDA reached $325 billion down 3% quarter-on-quarter and 36% year-over-year.
I would like to turn the call over to Colomba Henr?quez, our Head of Investor Relations, who will provide more details on our results. Please, Colomba, go ahead.
Thank you, Ignacio, and good morning, everyone. Please turn to Slide 5 of our presentation where we provide more color on consolidated operating costs and other operational expenses for the second quarter of 2019. Cost of goods sold reached $928 million, a 1% increase compared to the previous quarter and to the previous year. Consolidated operating costs represented 64% of total revenues, up from 63% in 1Q '19 and 57% in 2Q '18. The 1% sequential increase was primarily due to the higher pulp and forestry products and personal care sale volumes compensated by lower cost in the Pulp division related to planned maintenance downtime and the cost of forest fire prevention efforts that took place in 1Q '19. The slight year-over-year increase in cost of goods sold is primarily due to the higher costs in Softys related to higher sale volumes and the higher raw material costs compensated by lower hardwood sale volume.
Consolidated Other operating expenses reached $189 million for the quarter, a 3% sequential decrease and a 4% decrease from the previous year, representing 13% of total revenues which is the same level reported in 1Q '19 and slightly higher than the 12% reported in 2Q '18. This quarter-over-quarter decline is due to lower administrative expenses in Softys while the year-over-year decrease is related to lower distribution costs in pulp as a result of the lower hardwood sales volumes. Moving now to Slide 6 where we will take a look at the Pulp business. Pulp production 1,078,000 tons, increasing 23% quarter-on-quarter as we did not carry out any maintenance downtime during the quarter. Pulp prices during the second quarter of 2019 reached $629 per ton for hardwood and $633 per ton for softwood decreasing almost 10% since the last quarter. Total pulp market sales volume increased by 8% quarter-on-quarter and decreased 4% year-over-year. Looking at our quarter-over-quarter performance, we saw a 7% increase in hardwood sales and a 14% increase in softwood sales. The quarter-over-quarter increase, as a result of the higher production led to a higher exports to Europe, China and Latin America in the case of hardwood and to Asia and Europe in the case of softwood. For the year-over-year comparison, sales volumes were up 6% for softwood as a result of higher exports to China and for hardwood 6% down due to the challenging market scenario for hardwood pulp. Third-party Forestry sale volumes grew by 22% quarter-over-quarter due to a significant increase in sales of pulpwood in the local Chilean market and Argentinean market as well as a 15% increase in sawing logs' volumes in Chile, and 9% higher volumes of remanufactured wood due to higher sales in Chile and increased exports to the U.S. A 10% increase in plywood sales in Chile, Latin America and the U.S., partly offset the positive effect during the quarter. Year-over-year Forestry sales volumes to third parties grew by 1%. During the quarter, we saw a significant increase in pulpwood volumes with higher sales in Chile and a 14% increase in remanufactured wood sale volumes as a result of higher sales in Chile and the U.S. On the other hand, plywood sales volumes decreased by 23% due to lower sales in Chile and exports to U.S., Europe and Latin America.
Sawn wood sales decreased 15% in Chile and China and sawing logs decreased 14% with lower sales in Chile and Argentina. Due to the previously highlighted effects, revenues for Pulp & Forestry business decreased by 1% sequentially and 21% compared to 2Q '18. EBITDA was 3% lower sequentially and 38% lower compared to 2Q '18.
Breaking down the quarter-over-quarter EBITDA decrease, we can see that it was primarily due to lower pulp and Forestry product prices, partially compensated by higher hardwood sale volumes and lower Forestry protection and maintenance costs. In the year-over-year comparison, the decrease resulted largely from lower pulp prices. Also there were lower hardwood volumes as well as lower Forestry product prices. Moving to Slide 7, where we will take a closer look at the Softys business. Softys revenues increased by 3% quarter-over-quarter and by 5% year-over-year reaching $512 million. Tissue paper sale volumes were stable compared to the prior quarter and increased 3% compared to 2Q '18. Year-over-year the increase was due to higher sale volumes in Mexico related to the growth in market share in that market. Personal care sales volumes grew by 3% compared to 1Q '19 and 16% compared to 2Q '18. Our quarter-over-quarter increase was due to higher diaper volumes in Argentina, Brazil, Peru, Colombia and Chile, in addition to an increase in wet wipe volumes in Chile. The year-over-year comparison of personal care sale volumes were materially impacted by sales growth in all product categories across the majority of the countries in which we operate. Average sales prices measured in U.S. dollars were up 3% for tissue paper and remains stable for personal care products which is due to higher prices in local currencies, revenue management initiatives and sales mix optimization. Softys EBITDA reached $46 million during the quarter, a 44% sequential increase and a 6% decrease compared to 2Q '18. The quarter-over-quarter increase relates to higher personal care volume as well as higher tissue paper and personal care product prices. Also, there were lower costs in Brazil and lower expenses associated with internal efficiency initiatives. The year-over-year decrease is due to a higher direct cost due to increased recycled paper prices and the purchase of jumbo rolls from third parties in Chile and Mexico partially offset by higher sales volumes of both tissue paper and personal care products. Let's now move to Slide 8 where we can take a closer look at the Packaging business. Sale volumes to third parties decreased by 4% quarter-over-quarter due to lower corrugated boxes and corrugated paper volumes and 3% year-over-year as a result of lower corrugated paper, molded pulp trays and paper bags. Average sale prices decreased by 3% both sequentially and annually. As a result of those figures, revenues decreased by 7% quarter-over-quarter and 6% year-over-year, reaching $220 million. The Packaging business EBITDA reached $17 million showing a 43% decrease quarter-over-quarter and a 29% decrease year-over-year. The sequential decrease is mainly due to lower revenues from the sales of corrugated boxes, corrugated paper and boxboard. The annual decrease is also related to lower revenues from corrugated paper and boxboard as well as higher administrative expenses. Ignacio will now share a review of our financial position. Thank you.
Thank you, Colomba. Please turn to Slide 9. The reduction in the free cash flow quarter-over-quarter is mainly related to an increase in the payment of taxes, dividends, and capital expenditures. The annual comparison is mainly affected by the lower EBITDA generation as well as higher dividends and tax disbursements. Our cash position decreased during the quarter as a result of the negative free cash flow generation. We closed the quarter with $521 million compared to $858 million last quarter and $639 million in the second quarter of last year. CapEx reached $158 million during the second quarter, higher quarter-on-quarter and year-on-year. Expenditures were largely related to Forestry maintenance and disbursements associated with the Zarate project, the acquisition of Papelera Panamericana and the purchase of forest planations in Brazil are also included in this figures.
Finally, moving to Page #10. As closing remarks, as we have described, during the second quarter, we continue to face a challenging pulp market, but we remain fully committed with the execution of our strategy. We will continue working on the implementation of operational excellence programs in all of our business divisions. We took an important step toward this objective with agreements to acquire Sepac, a relevant Brazilian tissue producer. This acquisition after the fulfillment of the conditions present, will contribute to advancing our objectives to become a leading player in the tissue Latin American business. Also, the Zarate mill is advancing according to our expectations and we are expecting to start the new machine early next year. In part, we'll maintain our focus to analyze alternatives to increase our productivity with a special focus in Brazil.
And finally, in packaging, we are currently focusing the efforts on capital synergies and improving efficiencies. Finally, it is important to remark that we are committed to continue advancing in the execution of these initiatives by always maintaining a prudent approach regarding our financial methods. Before starting the Q&A, I would like to mention that Mr. Gonzalo Darraidou, Softys CEO; Mr. Jaime ?lvarez, Pulp CEO; and Mr. Raimundo Varela, Commercial Pulp Director are also joining the conference. They will be available to answer any questions you may have. Operator, please open the floor now for questions.
[Operator Instructions] Your first question comes from George Staphos from Bank of America.
My first question and I'll turn it over, can you talk a little bit about what you found particularly attractive about Sepac aside from the fact that it adds to your market share in Brazil? And how quickly, I assume, you'll be producing pulp for Sepac at some point? How quickly do you think those tons will transition to CMPC? So why was it attractive aside from the share and how do you see the pulp buy from Sepac over time to CMPC?
George, this is Colomba. I would take the second part of your question. You know that all our intercompany sales are at market prices. So pulp doesn't necessarily have to flow from our operations, it may be from any other producer. As of that is one thing and I will now leave Gonzalo, who will take the first part of your question.
In terms of what we were looking for in this acquisition, if you analyze, Brazilian market is one of the third of the Latin Am market. We're talking about 1.3 million of tons in Brazil. The second reason is the tissue consumption in Brazil is around 6 kg/capita in a year so that show us huge opportunities. And the third, that is Sepac is the leading tissue player in the south of Brazil and we think that we have a lot to learn from them and that is why we believe this is a great opportunity for us to consolidate our leading presence in Brazil.
Just a follow-on to the tonnage recognizing that you may ship it from your own operations or they may purchase it outside, how many tons does Sepac buy? Could you share that?
Unfortunately, we don't disclose that information.
Our next question is from Thiago Lofiego from Bradesco.
Two questions, well actually you mentioned one question, so I'll do one question. On pulp market dynamics, we've been hearing market reports of Suzano potentially negotiating a fire sale with large paper producers in China. Have you seen this dynamic really playing out and how are you responding to that? And also if you could comment on what you're seeing in terms of demand for the short-term? Are you seeing a good recovery that would allow the excess inventory you give them to come down or not really?
Thiago, this is Raimundo. I think we have seen a dynamic market in China. I think the prices have reached a level now where it's not very far, where some producers' cash costs, especially those based on wood chips. And therefore, we have seen good demand in June and July and certainly in August as well. And I think regarding Suzano's activities, I mean, we cannot comment much really, but what we see it's a good level of demand in both fibers, short fiber and long fiber. I think in long fiber, you see that the prices have maintained stability in June and July. It is about $550 net price China for our radiata fiber. And even in August there is a chance that, that price may bounce back a little bit. We might see some increase in the radiata price in China. In the short fiber, we see reasonable demand at this low price of about $480, and we believe that it's a good level for customers to start to restock because their stocks are very low.
You think restocking is already happening?
I think with some customers probably, yes. I think they're slowly starting to restock.
Your next question comes from Thiago Ojea from Goldman Sachs.
Could you discuss a little bit on your CapEx? It was a little bit higher than first quarter and also your leverage now is 2x. Where do you think you could go in your leverage and still feel comfortable? And my second question is related to the pulp market. We saw some announcements from UPM and also Lwarcel in Brazil of new capacity additions. How do you see the market in the long-term? Do you think that there will be more supply coming than expected? If you can comment and elaborate a little bit on that it would be great.
Thiago, this is Ignacio. Regarding the CapEx, as we explained, this quarter has been a bit higher due to acquisition of our plantations in Brazil and the closing of Panamericana in Peru. We maintained the guidance what we provided in the range of $500 million, that includes cost of maintenance and the completion of Zarate and some minor investments. Regarding the net debt-to-EBITDA level, we expect to maintain our commitment to be in our target, which is being in the lower part of the range. Of course, we will debate the pulp prices and deliberate but we expect to be in that range.
Regarding the second question, Jaime ?lvarez speaking, yes really we see some increases in the capacity in the next -- not for the next 2 years, but after that, we see that there are some announcements from UPM, also from Lwarcel and also, there are other suppliers who are thinking about the new capacity increases, yes. Also in our case, we are starting that. So we are expecting some capacity increases, but not now for the next 2 years, but for the future.
Our next question comes from Carlos De Alba from Morgan Stanley.
So first question is could you comment a little bit on the multiple that CMPC paid for the recent acquisition in Brazil? And also what was the level of net debt that company had when you close the transaction, when you expect to close the transaction? And then on pulp, we saw little bit of inventory increasing presumably on pulp, given the difference between volumes sold and produced. Would you expect to close some of your capacity or extend a little bit of maintenance downtime just to contribute to a little bit of supply discipline, trying to reduce the excess level of inventories before new capacity starts to come in the first half of 2021 given that, while you point out the demand has recovered a little bit, the global outlook is not looking pretty good, and so the faster the industry can normalize inventories the better.
Carlos, Ignacio here. Regarding valuations, we already provide the level of sales on to the capacity. This is information that we can share with you at the moment. But as a reference, the level of EBITDA we consider for this offering is in the range of $30 million to $40 million. Regarding the debt, it's not material.
Jaime ?lvarez, again. Regarding the second question, we see that the market demand is good but we don't think that is apparent from the demand. It's really unusual from the offer point of view because the offer this year is being much better than years ago, mainly because of the highest utilization rate in the last 2 years. So really, we are not obsessed about the demand. We think the demand is working well, but we are really thinking about controlling the offer also from our side. To be fair, recently in August we had to stop for 5 days in Guaiba line I and we had to prolong our shutdown for maintenance reasons after this -- after a breakdown that we had. So really, we are thinking now in prolonging our shutdowns that we have in Q4 in Laja and Guaiba line I in order to increase the stocks and also the control our production. So really, we are now in the position to think about having a limitation production for the rest of the year. And if the market does enable you the direction that we expect, also we are starting in anticipating our shutdowns for Guaiba line II and Santa Fe also for the end of 2019, those shutdowns, which were planned for 2020. So really, we are studying that. Some things are already done and we are thinking in doing more additional actions in reducing our production this year, if the market doesn't evolute in the direction that it is beginning to evolute now.
Our next question is from Marcio Farid from JP Morgan.
I have a couple of follow-up questions. Maybe you highlighted some forest acquisitions in Brazil and I remember during the CMPC Investor Day as well you did mention that you're thinking about expanding the forest base in Brazil for potential new products right? I was just wondering how much more can we expect in terms of forest acquisitions in Brazil. Should we expect a more aggressive approach over the next quarters or years? And secondly, my follow-up question to the comment that you just made now. In a recent report that Suzano seems to be a little bit more aggressive on their commercial strategy trying to sell or to restock some of their high inventories. I know you can't comment on their strategy, but I mean does it make sense for you guys to reduce operating rate or reduce production if other guys are increasing supply to the market anyways. I mean do you think that would have a market impact if Suzano has really decided to be a little bit more aggressive over the next months? Those are my questions.
This is Ignacio. Regarding the plantations as we mentioned the intention of the company is to continue analyzing different ideas to increase our forest base in Brazil. We don't have a specific target, but we will continue moving in that direction.
For the second question, we don't actually have a stock problem. We have the stock level a little bit higher than what is normal for us, but it is just slightly high. So really we don't have a problem on that. We are just selling what we produce, so we are very comfortable with that. But also to be fair by this price levels that we're facing now, we are starting to anticipate some maintenance works and ordering to do these shutdowns now when the market is at this low level. That is our scenario, that we're starting now.
Our next question comes from Pedro Pereira from Santander.
I was just wondering, after this Sepac acquisition in Brazil, do you still have a strong cash balance? Where do you plan to grow next? Do you have more market share of tissue in Brazil or will you turn your focus into Mexico? And as a follow-up question, what will you do regarding the brand that Sepac holds? They have a strong brand in the south of Brazil and you're doing a consolidation of brands throughout South America, so I was just wondering if you could give more color regarding this.
Pedro, as we have already mentioned, we will continue advancing in the execution of our growth initially in the 3 business divisions. Regarding Softys, as we already stated, we just announced this agreement, of course, it's subject to the fulfillment of the condition present, but we expect to focus here on that regard. But always maintaining a prudent approach in our financial metrics and liquidity.
This is Gonzalo. As we know Sepac's brands are Duetto with 6 point market share points, Paloma with 4 and they have another 2, Stylus and Maxim, which are very well known in the south of the market. We consider that [ Stylus ] in comparison to Sepac's brands complement and strengthen our current brand portfolio.
Our next question comes from Leopoldo Silva from LarrainVial.
So I have two questions. My first question goes in line with the forest investment that you're carrying out in Brazil. During your Investor Day you said you were raising a fund in order to be able, as a Chilean company, to invest in the country. So I would like you guys if you could give us more color in the specifics of this fund. For example, the time lapses, the money you need raise, who might be your investors and when we should see next announcements of these timelines? And my second question is regarding the raw material costs that you reported on your Tissue and Packaging businesses. You mentioned that paper for recycling is still a burden on your Tissue segment, right? And knowing that your share of supply in Packaging of recycled paper is higher, why it's not being a burden on that business? What has been the difference between those 2 in terms of costs of recycled paper?
Leopoldo, Colomba here. Regarding your first question, unfortunately at the moment we can't disclose further information about the Forestry funds. Important to remind on the forest plantation is what we bought right now was only the Forestry assets, not the land itself. Regarding your question about the recycled paper and tissue, recycled papers or packaging and tissue use different types of recycled paper. There is some availability in the OCC in Chile, so it's not a burden for packaging. But from the wipes, we are short in Chile, so we have to import some recycled paper, and of course, that is more expensive. And in Mexico, of course, the situation is different. We don't have a big network of collection. So we need to buy at higher prices.
[Operator Instructions] Our next question comes from George Staphos from Bank of America.
You had mentioned, if I heard correctly, that inventories are not really that much of a concern for you. They, maybe, moved up a little bit, yet given where pricing is, your considering maybe adjusting your maintenance schedule. Now with that comes the inference that you will have much less maintenance or less maintenance next year and therefore, you need to have an outlook in terms of demand for 2020 in pulp. Otherwise you would wind up with more production than you need if the market isn't cooperating. So if you could update us on what your long-term demand forecasts are in pulp, have they changed at all? What is giving you confidence or some concern about the demand outlook next year given what's been happening from a macroeconomic standpoint? Then I had a quick follow on.
This is Raimundo. We're positive about the demand of pulp for next year. I think this year has been challenging, but we don't expect the challenging conditions to remain this time for next year. We are optimistic about next year. We believe that this excess of the stock that the market has now will be consumed during the next months. In part because of the restock that the customers are starting to do and I think at this level of prices that will continue in the next months. And then because I think the demand of paper, all the studies that we have are positive for next year, better than 2019. And therefore for us it makes sense to produce a bit less pulp this year and a bit more pulp next year. We are optimistic about next year.
Is there any kind of global GDP forecast that's embedded in your demand forecast or whatever the macroeconomic environment that is built into your forecast if you could share a little bit of detail around it because obviously the markets have been more concerned about the growth outlook for the next year just given what's been going on with the yield curve and the like. Could you comment to that effect?
I mean I can comment on what we expect for the pulp demand, not on the GDP. On the demand, we expect 1.5 million tons of growth for next year. So that's what we look and that number we are quite confident of that number. Regardless of the GDP, people are much better than us on doing that calculation.
Okay. I would assume you have to have a little bit of a macro look to drive the demand outlook that you have, but I appreciate the thoughts on that Raimundo. A quick comment if I can or question, given your expectations for production and everything else you see for the third and fourth quarter, what should we be looking for directionally in terms of a cash cost in pulp the next quarter or 2?
So really we are having very good results in cash cost during the whole year. So really we are quite confident that we will continue with this good evolution for the next months. So surely if we increase our shutdowns that will have an impact, but really we are thinking that we can compensate that with the good operations that we are driving this month, so we are not seeing any big impact -- almost any impact in the cash cost because of this effect.
Our next question is from Rodrigo Godoy from Citi.
Yes. I have two questions. The first one is looking at the pulp production level in second quarter of 1.08 million tons and considering that we're not mills maintenance, it seems that some plants were running above nominal capacity. So could you give us some color on that? And the second question is based on the expectations of EBITDA for Sepac of around $30 million to $40 million, the increased EBITDA margin is about 15% to 20%, so could you tell us what explains the higher EBITDA of that company versus Softys division, please?
Okay. Coming to the first question, I'm Jaime. So I was commenting we are performing very well our promise in the first part of the year, so really we're doing very well in cost and also in production. That is why we are also confident in having some increases of shutdowns during the second part of the year because in the end, what we don't want to do is to press much the market with more offer. But really we think that the performance is behaving very good because we're doing a lot of continuous improvement work. And that result will be maintained. That is where we're trying to take actions to control this oversupply that we had during the first half of the year for the second half of the year. Regarding the Sepac if you compare, comparison in terms of the dollars per ton with others, because of the quality of the assets, we think it is an attractive potential transaction for us. Also, because it gives us the unique opportunity to increase our footprints in the south of Brazil.
I would now like to turn the callback over to Colomba. Please go ahead.
I would like to thank you all for being with us today, and have a nice weekend.
This concludes today's conference call. You may now disconnect.