Empresas CMPC SA

SGO:CMPC

Earnings Call Transcript

[Fernando Hasenberg, executive]

Hello, everyone, and welcome to the Empresas CMPC Third Quarter 2022 Earnings Webinar. Please note that the 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.

Third quarter results continue to represent an all-time record in terms of EBITDA, with $602 million in the quarter as we continue to face favorable market conditions in all our business lines as well as a strong operational performance in all our facilities. The Pulp business continued to have a strong result on the back of higher pulp prices even though our pulp sales volume decreased on a quarterly basis. The Biopackaging business posted a lower EBITDA because of the stoppage of the corrugated paper machine, which resulted in a higher operational cost, as we had to purchase corrugated paper from third parties to supply our corrugated boxes business.

Finally, the Softys business continued to post an improvement in terms of EBITDA as prices continue to move upwards and were able to compensate the increase in raw materials we continue to face in these businesses. We were also able to increase both tissue paper and personal care products volumes.

Revenues for the third quarter posted a 6% sequential growth, mainly driven by higher average prices in all businesses' divisions as well as higher tissue paper and personal care product volume sales. Compared to the third quarter of last year, revenues increased 28%, also because of higher average prices in addition to higher sales volumes in Softys and Biopackaging.

Operational costs reached $1.2 billion, increasing 8% compared to the previous quarter and 27% compared to the same period last year, which represented 59% of total revenues compared to 58% in quarter in the second quarter of 2022 and 60% in the third quarter 2021. The quarter-on-quarter increase is mainly related to higher costs in Softys related to higher sales volumes, remember that we took control of Carta Fabril in June, as well as higher raw materials. There were also higher costs in Biopackaging related to the stoppage of the corrugated paper machine. The year-on-year increase is mainly related to higher sales volumes as well as higher fuel and chemical cost for all businesses as well as fiber costs for Softys and Biopackaging.

Consolidated other expenses reached $253 million for the quarter, 5% higher quarter-on-quarter and 32% higher year-on-year, representing 12% of total revenues, stable compared to second quarter '22 and third quarter 2021. The quarter-over-quarter result is explained by higher distribution and marketing expenses in Softys as well as higher administrative expenses in Biopackaging. The year-on-year comparison is the result of higher administrative expenses as well as higher logistic costs at all business divisions. There were also higher marketing expenses in Softys.

On a consolidated basis, as I mentioned earlier, the company's third quarter EBITDA reached $602 million, increasing 3% compared to the previous quarter and 27% compared to the same quarter last year. Net income reached $309 million, posting a significant increase compared to the $225 million registered in the second quarter 2022 and the $130 million registered in the third quarter of 2021. In both cases, this is the result of the higher EBITDA, lower income taxes and higher indexation unit results.

Now I would like to turn the presentation over to Colomba Henríquez, our Investor Relations Officer, who will provide more details on our results by businesses.

[Colomba Benavente, executive]

Thank you, Fernando, and good morning, everyone. I will start with the Pulp business. Pulp production reached almost 1.1 billion tons, up 9% quarter-on-quarter and 8% year-over-year. Hardwood production increased 11% quarter-on-quarter and 7% year-on-year. As [indiscernible] maintenance during the quarter compared to the Sante Fe I and the Guaiba in 2Q 2022 and Santa Fe II in 3Q '21. Softwood production increased 2% on a quarterly basis and 14% on an annual basis, which is mainly explained by [indiscernible] at Pacifico in 3Q '21 as well as the better operational performance of that mill.

Total market pulp sale volumes decreased by 8% quarter-over-quarter. We decreased 9% for softwood and 8% for hardwood in both cases with lower exports to Europe and China. Market pulp volumes decreased 2% year-over-year, with hardwood decreasing 5% given lower volumes in Asia and softwood increasing 13% as a result of higher exports to China.

Softwood cash costs totaled $356 per ton, decreasing 1% quarter-over-quarter and increasing 11% year-over-year. The quarterly result is explained by lower pulp wood costs as well as lower oil consumption, while the year-over-year results is explained by higher harvesting costs as well as higher energy and chemical prices. Hardwood cash costs totaled $226 per ton, increasing 1% and 25% compared to the previous quarter and the same quarter of last year, respectively. This is mainly explained by the cost involved in the scheduled maintenance downtime as well as higher chemical and energy prices and higher pulp wood costs. In both hardwood and softwood, there is also a positive effect because of the depreciation of the Chilean peso and the Brazilian real during the quarter.

Pulp prices during the third quarter of 2022 reached $971 per ton for softwood and $871 per ton for hardwood, a 2% and a 9% increase, respectively, compared to the previous quarter and compared to the third quarter of last year, prices continued to show an important improvement, increasing 14% for softwood and 24% for hardwood. As a result of this, revenues for the Pulp business totaled approximately $830 million, decreasing 1% quarter-on-quarter and increasing 18% year-over-year.

Looking into the forestry segment, third-party forestry sales volumes increased by 23% quarter-over-quarter, mainly due to higher sales of pulp wood and sawing logs in Argentina. There was also a relevant increase in solid wood sales volumes with higher exports to the U.S., Latin America and Europe. On a year-on-year basis, sales volumes decreased 3%, driven by lower pulp wood and solid sales in Argentina, which was offset by higher sales of solid wood products. Forestry sales increased 10% quarter-on-quarter and 48% year-over-year, reaching $185 million, which is mainly the result of the higher solid wood product sales volumes.

Revenues for our Pulp and Forestry business increased 1% compared to the previous quarter and 22% compared to last year, reaching around $1 billion. EBITDA improved 4% sequentially and 31% annually, reaching approximately $520 million, while EBITDA margin stood at 51%. The quarter-over-quarter result was due to higher average prices as well as lower maintenance and administrative expenses, which was offset by the lower pulp sale volumes. On a year-on-year basis, the EBITDA increase is also primarily due to higher average prices, which were able to offset higher operating costs, driven by higher cash costs as well as higher SG&A.

In the Biopackaging business, sales volumes to third parties were stable quarter-over-quarter and increased 10% year-over-year. In both cases, driven by the incorporation of Iguaçú's paper sacks, Sack Kraft and specialty paper volumes, which were offset by lower corrugated paper and corrugated boxes volumes as a result of the stoppage of the corrugated paper machine. Average sales prices increased 3% sequentially with all products posting increases, with the exception of corrugated paper and a change in the product mix and posted a 34% annual increase with all products showing significant increases in prices. As a result, revenues increased by 4% quarter-over-quarter and 31% year-over-year reaching $317 million.

The Biopackaging business EBITDA totaled $35 million, decreasing 11% compared to 2Q '22 and 20% compared to 3Q '21. EBITDA margin reached 11%, decreasing from the 13% from the previous quarter and 18% of the same quarter of last year. The sequential and annual decrease in EBITDA is mainly from the stoppage of the corrugated paper machine, which affected both sales volumes and operating costs since it was necessary to buy paper from third parties to supply our corrugated boxes operation. This was partly offset by the integration of Iguaçú. This was also compensated by the advanced payment of $21 million from the insurance of the Papeles Cordillera paper machine.

Now moving to Softys. Revenues increased by 15% quarter-over-quarter and 34% year-over-year, reaching $771 million. Tissue paper volumes increased 6% compared to the previous quarter and 10% compared to the third quarter of 2021. Quarter-over-quarter, we registered higher volumes in Brazil, mainly explained by the consolidation of Carta Fabril as well as higher volumes in Argentina. [Audio Gap] quarter of last year. In both cases, the increase relates to higher prices in local currencies and several initiatives to offset the cost increase.

Softys EBITDA reached $69 million during the quarter compared to $64 million in 2Q '22 and $43 million in 3Q '21. EBITDA margin reached 9%. The quarter-on-quarter increase comes mainly from higher average prices as well as higher tissue paper and personal care product volumes. The year-over-year increase also relates to higher sales from higher average prices and sales volumes. This was partly offset by increased operating costs due to higher fiber costs, especially pulp and other raw materials for personal care products as well as higher SG&A.

Fernando will now go through the cash generation and financial execution for the quarter.

[Fernando Hasenberg, executive]

Thank you very much, Colomba. Capital expenditures during the third quarter totaled $179 million, decreasing compared to the $385 million during the second quarter of 2022 when we took control of Carta Fabril and Iguaçú. Free cash flow was negative by $130 million compared to the negative $498 million last quarter and negative $136 million in the third quarter '21. Main difference on a quarter-on-quarter basis comes from the lower investment and working capital during the quarter, compensated by higher dividend payments.

We closed the third quarter of the year with $4.4 billion in total debt and cash of approximately $640 million, leaving our net debt at approximately $3.8 billion, increasing compared to the previous quarter and last year because of the lower cash level. The net debt-to-EBITDA ratio closed the quarter at 1.83x, improving compared to the 1.9x and 2.1x of last quarter and the same quarter of last year, respectively. The improvement comes mainly from the higher EBITDA figure, partially offset by the higher net debt level.

We also like to mention that on October 18, we issued a 20-year bullet green bond in the Chilean market for USD 7 million, approximately $250 million with an annual rate of 3.54%. Among others, this money will finance projects that will bring relevant improvement in terms of greenhouse emissions and water usage. Also, on October 23, acting through our pulp subsidiary in Brazil, CMPC closed an ECA financing for $174 million with a 12-year term. The proceeds will be used to finance equipment for the BioCMPC project.

As we announced and commented on the last conference call, Softys Mexico is acquiring Mabe from Ontex for an agreed price of MXN 5,450 million and MXN 500 million deferred payment. The transaction is still subject to condition present, including the approval of antitrust authorities, and we are expecting it to be completed by the first quarter of 2023. Also, the BioCMPC project continue to advance according to our expectations. And by the end of the third quarter, reached a 50% physical completion and accumulated disbursement for almost $200 million.

Finally, it's important to comment that the Papeles Cordillera paper machine resumes its operation on September 28 and that during the quarter, we received an advanced payment for approximately $23 million from the insurance company.

Third quarter results continue to support a year with record results on the back of the strong operational performance and positive market trends we have seen throughout the year. We have also been working on a new strategic plan looking into 2030 that is based in these 5 pillars: Sustainability. We aim to be a leading company in the sustainability landscape being a social development factor in the places where we operate. Growth and innovation. We want to grow internationally being close to our clients and explore new business opportunities in the back of innovative solutions. Clients. we intend to place our client needs in the center, innovating and codeveloping new products. Competitivity. We seek to be a leading player in terms of competitivity focusing on end-to-end efficient processes, leverage on innovation and technology. Talent. To accomplish all the previous pillars, we need to focus on talent development, always putting people at the center. We will go into further details of our 2030 strategy at our Investor Day later this week. So we welcome you all to join us.

We will now open to the floor for questions.

[Colomba Benavente, executive]

[Operator Instructions] We'll start with the question from Isabella Vasconcelos from Bradesco.

[Thiago Lofiego, analyst]

It's Thiago here. Can you hear me?

[Colomba Benavente, executive]

Yes, go.

[Thiago Lofiego, analyst]

I guess I have Isabella's link, so technical issue on our side here. But thank you for the call and for the questions. I'm not sure if Raimundo is there, but...

[Colomba Benavente, executive]

Yes. We have Raimundo here and also Francisco Ruiz-Tagle is joining us as well.

[Thiago Lofiego, analyst]

Great. Great. Thank you. So yes, my question is about -- the first question is about the pulp market. So Raimundo, we've been hearing about the backlogs for some producers. The backlogs have been decreasing and inventories have, as a consequence, started to increase. So are you seeing that happening as well on your side? And maybe on the competitor side, if you could comment about these dynamics? And do you think this could trigger a price correction in the near term?

And then also tied to that question, we also have been hearing about the floating inventories and normalization of supply chains and how those factors could put pressure on pulp prices. So if you could comment on that as well, I would appreciate. And then my final question on the tissue side. You guys have been implementing price hikes very successfully. Do you think that this momentum should continue or we are at a pretty much peak level here for tissue prices?

[Raimundo Varela, executive]

Okay. Thanks, Thiago. It's Raimundo. Regarding the backlog that you mentioned, I think this year has been very marked by supply disruptions throughout the year, delaying projects, and then the problems in Finland. So I think in general, it has been a year with a lot of unplanned downtime. We are seeing some of that normalize. I think inventories are still relatively low, but they are starting to normalize in some markets. I think China is more or less close to normal now, has been low throughout the year. And Europe is still low. It will probably normalize in the next few weeks or months. So I think prices have been very high throughout the year and it's likely that they will have a correction sometime. I think we -- in the logistics side, we still see delays in shipments, less than before, but it's not yet normal. It's not yet normal. So I think we should see this normalizing in the next weeks and months. But it's still sometimes a struggle to ship all the committed volume every month. We still have delays on a global basis, I would say.

[Thiago Lofiego, analyst]

But Raimundo, back to this point. We heard different players in the industry talking about the floating inventories, right? We heard numbers 1 million to 2 million tons. And then once logistics normalize, we would see that additional flow hitting the market. What is your view on that? And is that really a big factor?

[Raimundo Varela, executive]

No, I don't think so, to be honest. I haven't heard of that kind of future volumes. I think that will be an enormous amount of vessels working everyone. No, to be honest, I don't see that. As I said, I do think that supply has been getting more normal and shipments slowly as well. So we should see inventories getting back to normal levels in the different markets. But that's not still the case.

[Thiago Lofiego, analyst]

Okay. Thank you.

[Fernando Hasenberg, executive]

Thiago, maybe now answer your question regarding the tissue business. Of course, last year and this year have been a tough year for tissue, where we have been suffering a lot of cost pressures, not only from the pulp side but also on other important raw material for personal care products. We have been passing through those higher costs. We have been increasing prices. And we see those price corrections to continue. Still margins in the industry are low. So we expect that margins to improve in the coming months.

[Thiago Lofiego, analyst]

Thank you, Fernando. And a very quick follow-up here. One, probably we might see a lower pulp price environment in 2023, right? I mean that's -- we don't know exactly what will happen, but I think it's reasonable to expect that pulp prices are going to be lower. So do you think that you might be able to keep your tissue prices at a higher level, continue to increase for now and then keep it a higher level where -- and then pulp prices will eventually fall and then you're going to expand the margins? Or you might have to give out discounts along 2022 on the tissue side?

[Raimundo Varela, executive]

You want to answer that, Fernando?

[Francisco Edwards, executive]

Okay, please. Thiago, this is Francisco. We know tissue prices in general are much more stable, I would say. So, in that sense, probably, I don't see any important correction in prices if something happens with the pulp prices. So as Fernando said, our goal there is to continue improving margins because the business has been really affected because of the raw material during the last couple of years.

[Colomba Benavente, executive]

[Operator Instructions] Okay. Thiago, you can go back, there's no one else.

[Thiago Lofiego, analyst]

I'll take advantage. No, yes, just one more question on pulp, now thinking more about CMPC's strategy medium to long run. Can you update us on what your views are on in terms of capacity additions, any other potential regions that you might look at to grow? Or are we only talking about Brazil? Just to refresh here the strategy on pulp growth side.

[Francisco Edwards, executive]

Okay. Thiago, in connection with the strategy, I would say we have been focusing our growth in Brazil. We are now ow having progress. We're in the middle of a project called BioCMPC that should be starting in the last quarter of next year. As you know, we're adding there 350,000 extra tons. And we'll continue looking in the future as a leading company. We have continued increasing our forest in order to preparing our forest base actually for the future. But answer now, we haven't approved any project till now. But of course, CMPC will continue with its strategy in the pulp as a core business looking for the future.

[Thiago Lofiego, analyst]

Okay. But I know we haven't approved anything for now, Francisco, but do you continue to buy land in Brazil? And could we see a large pulp mill coming from CMPC in the next maybe 5 years in Brazil? Is that the idea?

[Francisco Edwards, executive]

Actually, we are not buying land. We are doing more [indiscernible]. And then so with other parties investing. And it's hard to say now, Thiago, say, in 5 more years, we haven't defined when, but yes, we are preparing the company for growing its capacity. But I don't want to establish now 5 more years, 4 more years or 6 more years. We have to decide that. And we are somewhat conservative in transmitting this information.

[Thiago Lofiego, analyst]

Great. And then if I could also, again, take advantage of your time here. Back to the Tissue division. So can you guys help us think about what the synergies are at the Carta Fabril level as you consolidate. So what do you expect that you can extract from there?

[Francisco Edwards, executive]

Carta Fabril is important because we have an important position in the region of Rio de Janeiro. As you know, we have defined and CMPC to be a leader and to have an important participation, and they also have important brand names to add to the CMPC portfolio. So I would say the synergies between what we have there and Softys now adding Carta Fabril, will create a strong position looking from the brand-name standpoint and also to connect it with the customers, they are participating now. So I would say it makes CMPC a strong competitor in the region of Brazil.

[Colomba Benavente, executive]

So we'll now take a question from Sebastián Ramírez. Sebastián.

[Sebastián Ramírez, analyst]

I got one question more on a general thing. We have seen the company very active on the M&A side during the last 18 months. And a lot of parts that were blanker spaces within the portfolio have been filled. So what should we expect forward in terms of further M&A? Is it the Paper division, the one that we should expect more activity? Or are you seeing more opportunities on further adding value added on the pulp side, which what you did recently with the finished startup. What is kind of the direction on that side?

[Francisco Edwards, executive]

Well, thank you for the question, Sebastián. Yes, we have been acting in mainly in the Tissue business and Biopackaging in Brazil also, we acquired Iguacu. I would say the company is really open to take opportunities, organic or inorganic, especially connected with our core businesses, that is, connected with our strategy. But it is also true that we have done several M&As, and we are really concentrating in making them and consolidating them. But the company still open to see opportunities. In part, we have defined to continue with a more organic growth than it was our project in BioCMPC. And the answer is also -- my answer is going to with what I already said before, with the view of Brazil looking to the future and some of our challenges there.

We're also working a lot on operational excellence in the different mills. But yes, the study is also considered to continue to see in the market and seeing opportunities. And so this is the answer. We have defined our main businesses, and we are really interested in seeing opportunities there.

[Sebastián Ramírez, analyst]

That's great. And if I may add, is it reasonable to think that on midterm, one should expect that we should leave a bucket for M&A of $200 million to $400 million this year? I'm just trying to sense if the pipeline of opportunities? Is it big enough in order to sustain something like that?

[Francisco Edwards, executive]

I wouldn't mention a special number, a special amount because it depends on the opportunity. So this year was around, if you consider Carta Fabril and Iguacu, probably was around $500 million, but it doesn't mean that the next year would be something similar, could be different.

[Colomba Benavente, executive]

So the next question comes from the chat. So how do you think about the competitive environment in Brazil's tissue market, especially after Suzano's Kimberly-Clark Brazil segment acquisition? How do you think about the competitive environment in other parts of Central South America? Fernando, you want to take the question?

[Fernando Hasenberg, executive]

Yes. Yes. Of course, the announcement of Suzano acquiring Kimberly Clark operation in Brazil is something we were expecting somehow, it was part of the news. So it didn't surprise us. Suzano is already an important player in the Brazilian market. So in that sense, the consolidation of the market, as Francisco mentioned, is important and it's good, we see that as positive. In terms of the competitive environment, it's -- we have been -- the competition has been very strong in Brazil, and that's part of the reasons margins in general have been low, but we expect that to normalize now that we have been able to increase prices and that cost pressure is more stable.

[Colomba Benavente, executive]

We'll take another question from the chat and this one's for Raimundo. Can you please comment on your impressions after Pulp Week? How have this come through and how things have been evolving?

[Raimundo Varela, executive]

Yes. Thank you for the question. I think we had a very good Pulp Week, and we also visit customers afterwards in Europe. I think the cycle that we are in is coming to an end, and we will probably enter a new cycle. I think the difference now is that the cost of producing pulp, the marginal cost is much higher than before. In particular, I think the wood chips are very high and in very high demand. So I think those that produce pulp, and there is every day more that produce pulp based on woodchips, are having high cost, and we expect that to sustain those high cost levels. I think overall, it's very difficult to say only one view from Pulp Week because different segments, different customers that operate in different segments or continents have different opinions about how they see the next month.

So I said, some segments are more affected like the decor segment. But in general, many other segments are performing quite well, and they are expecting good demand for the next month. So we're very positive about our business. We do understand and we are very much aware that we are in a commodity environment within pulp and that the cycles do move and the prices move, et cetera. We're working very hard on our cost, in our operations to always remain very, very competitive and to further develop the relationship with our customers. So I think it was a very good week, as I said, and I think the sentiment is, our sentiment is very positive for the business.

[Colomba Benavente, executive]

We'll take more questions from the chat. So regarding shareholders' value creation. Is there any plan to increase dividend policy or any strategic plan to increase the shareholder value creation in the coming years? I think Fernando can take this one.

[Fernando Hasenberg, executive]

Well, we just announced that for this year, we will be paying 60% dividend. And after that, we will return to what we have been normally been paying, about 40%. so regarding value creation in general, we believe we have been doing things in the right way. We have been focusing our effort on businesses that bring value to the company. And those are the reasons for the CapEx, the focus on the CapEx and also on the acquisitions we have been making both in the Softys and in the Biopackaging divisions. We have our 2030 strategic plan, and we are very confident that. that strategic plan will bring value.

[Colomba Benavente, executive]

So another question from the chat. Can you please refer to cash cost in pulp and the trajectory that we should look at midterm?

[Raimundo Varela, executive]

I think our cash costs have increased like many producers. But we are seeing that kind of also reaching a level and starting to normalize. They are much more stable now. Some of our raw materials are -- some of them are starting to show some decrease. So we still have a pressure, but much less than before. We would expect cost to drop a bit in the next months, but not a huge drop. I think it would be a slow drop.

[Colomba Benavente, executive]

Here is another question. I think this one's for Fernando. What is the target in terms of leverage in the future? Where do you think about the appropriate level in the pulp prices or in the pulp declining prices?

[Fernando Hasenberg, executive]

Well, we believe having a strong balance sheet is an asset itself. So in that regard, we try to maintain a low leverage through all the cycle. As Francisco mentioned, we are always looking for opportunities in order to take advantage of those opportunities, we need to have a strong balance sheet. So we expect in the coming months to be -- to have a net debt-to-EBITDA ratio in the range of 2.5 and 3.5 and not moving from there.

[Colomba Benavente, executive]

So that was the last question. I don't know if there is any more questions. [Operator Instructions]

So I'd like to thank you all for being here at the presentation of our third quarter results. So thank you all, and have a great rest of the day.