Empresas CMPC S.A. (CMPC) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Empresas CMPC Fourth Quarter Earnings 2020 Results Conference Call. On the call with us today are Ignacio Goldsack, Chief Financial Officer; and Colomba Henriquez, Head of Investor Relations. [Operator Instructions] Please note, this event 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 that 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, forestry products and paper and packaging markets are based on management's views as of today, and it is expected to be -- it is to be expected 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. And now I'll turn the floor over to Mr. Ignacio Goldsack, Chief Financial Officer. Please, Mr. Goldsack, you may proceed.

Thank you, and welcome, everyone, to our fourth quarter 2020 results conference call. Starting on Slide #3 of the presentation. Results for 2020 reflects a strong operational results, despite the headwinds we faced throughout the year by the pandemic and low pulp prices. We were able to adapt to the new conditions by putting our people, operations and communities first, while maintaining a strong focus on our liquidity position by lowering CapEx and expenses. Even in this scenario, our financial discipline let us continue executing our strategy at a slower pace, while taking advantage of market opportunities like the acquisition of Samcarsa in Mexico and forestry assets in Brazil. The productivity and efficiency initiatives we have been implementing during the last years contributed to strong operational results by marginally increasing our production while lowering our costs. The improvement in Biopackaging business during 2020 is a good reflection of this. We ended the year with a solid financial position, with our net debt lower than a year ago and our leverage decreasing from the peak in the third quarter of 2020. Now turning to Slide #4. Pulp prices finally increased during the fourth quarter, resulting on a 2% increase for hardwood and an 8% increase for softwood compared to the previous quarter. The higher prices, together with a strong production and increase on sales volumes generated a good result for the pulp business. Biopackaging volumes increased 12% quarter-on-quarter, with a strong increase in the most product categories, while Softys volumes increased 1% quarter-on-quarter with away-from-home volumes still affected by the pandemic. As a result, the company's fourth quarter EBITDA reached $257 million, stable compared to last quarter and up 15% compared for the fourth quarter of last year. Net income was $85 million, increasing compared to $0.6 million recorded on the third quarter. The net debt-to-EBITDA ratio reached 3.13x compared to 3.27x in the previous quarter and within our corporate policy. I would like to turn the call over to Colomba Henriquez, our Head of Investor Relations, who will provide more details on our results. Colomba, please go ahead.

Thank you, Ignacio, and good morning, everyone. Please turn to Slide 5 of our presentation, where there is more information on consolidated operating costs and other operating expenses for the fourth quarter of 2020. Cost of goods sold reached $958 million, a 12% increase compared to the previous quarter and a 2% increase compared to the same period of last year. Consolidated operating costs represented 68% of total revenue compared to 67% in 3Q '20 and 69% in 4Q '19. The sequential increase was primarily due to higher sales volumes, higher direct costs in the Softys division and higher manufactured cost in pulp. The year-over-year result is primarily due to higher manufacturer costs in pulp and Softys, partially offset by lower direct costs in all business areas related to higher efficiency and raw material costs as well as the positive effect of local currency depreciation. Consolidated other operating expenses reached $193 million for the quarter, up 8% quarter-on-quarter and down 7% year-over-year, representing 14% of total revenue, stable compared to the third quarter of 2020 and down compared to the 15% in 4Q '19. This quarter-over-quarter result is explained by higher expenses in all businesses, driven by the appreciation of the Chilean peso, compensated by lower COVID-19 expenses. While the year-on-year decrease is related to lower administrative expenses in all business areas, driven by the positive effect of the depreciation of local currency and lower marketing expenses in Softys. This was offset by higher expenses related to COVID-19. Please move to Slide 6, where we can see more details on our Pulp business results. Pulp production reached 1.1 million tons, increasing 7% quarter-over-quarter and 10% year-over-year. Pulp production was higher, as we only had the Laja schedule maintenance during the quarter compared to Pacifico and Guaíba II in 2020; and Santa Fe I, Guaíba I and Laja in 4Q '19. Pulp prices during the fourth quarter reached $590 per ton for softwood and $465 per ton for hardwood, an 8% and a 2% increase, respectively, compared to the previous quarter. Year-over-year, hardwood prices declined 2%, while softwood prices increased 9%. Total market pulp sales volumes increased by 9% quarter-over-quarter and by 7% year-over-year. Looking at the quarter-over-quarter performance, we saw a 3% decrease in softwood sales with lower sales to China, partially compensated by higher exports to Europe and a 12% increase in hardwood sales with higher shipments to China. For the year-over-year comparison, sales volumes increased 3% for softwood as a result of higher exports to Europe, Latin America and China and 7% for hardwood with higher exports in China. Revenues for the pulp business totaled $512 million, increasing 17% quarter-on-quarter and 8% year-on-year. Third-party Forestry sale volumes increased by 20% quarter-over-quarter due to higher volumes in most categories. We saw significant increases in sawlogs and pulpwood during the quarter and decreases in sawn timber and plywood. Year-over-year, forestry sales volume to third party increased by 47%, driven by an volume increase in sawlogs and to a lesser extent in millwork. Forestry revenues totaled $134 million, showing a 2% sequential decrease, driven by lower average prices and a 13% annual increase driven by the previously mentioned increase in sale volumes. Revenues for our pulp and forestry business increased by 12% sequentially and 9% compared to 4Q '19. The EBITDA increased 7% sequentially and 25% compared to 4Q '19. Breaking down the quarter-over-quarter EBITDA increase, we can say that it was primarily due to higher sales volume during the quarter as well as slightly higher prices and lower SG&A expenses. This was partly offset by the maintenance downtime expenses during the quarter. In the year-over-year comparison, the increase resulted largely from higher pulp sales with higher prices and sales volumes. Also, there were lower administrative expenses. Now let's move to Slide 7, where we will take a closer look at the Softys business. Softys revenue increased by 5% quarter-over-quarter and decreased by 6% year-over-year, reaching $526 million. Tissue Paper sale volumes increased 1% compared to the previous quarter until 4Q '19. Quarter-over-quarter, we registered higher sale volumes in Mexico, offset by lower sales in Argentina, Chile and Brazil. Year-over-year, the increase was mainly the result of higher sales volumes in Argentina, driven by the ramp-up of the new tissue machine in Paraguay, offset by decreases in Peru, Chile and Colombia. It is important to note that the away-from-home segment continues to be impacted by the COVID-19 pandemic in all countries of operation. Personal Care sales volumes decreased by 3% compared to 3Q '20 and increased by 8% compared to 4Q '19. The quarter-over-quarter decrease was driven mainly by lower feminine care product sales as well as lower diaper sales, mainly in Chile. In the year-over-year comparison, Personal Care sale volumes benefited from higher sale volumes in all categories with diaper increases in Argentina and Mexico, and feminine care in Argentina and Uruguay as well as wet wipes in all countries where Softys operates. Average sales prices mentioned in U.S. dollars increased 6% for tissue paper and 3% for personal care products compared to 3Q '20, an increase in prices is related to the appreciation of the Chilean and the Mexican peso as well as higher prices in local currency. Softys EBITDA reached $55 million during the quarter, decreasing from $59 million in 2020 and $64 million in 4Q '19. EBITDA margin reached 10.5%. The quarter-on-quarter decrease relates to higher operating costs related to higher unit costs on the personal care segment, partly offset by higher prices in U.S. dollars. The year-over-year decrease is driven by lower prices measured in dollars and higher production costs needed to the production of facemasks. These effects were compensated by lower SG&A expenses related to the depreciation of local currency and lower marketing expenses. Now let's look to Slide 8 to see further detail on the Biopackaging results. Sale volumes to third parties increased by 12% quarter-over-quarter as a result of higher volumes of boxboard, corrugated boxes and paper sacks. Year-over-year, volumes increased 8%, explained with significant increases in most product categories. Average sales prices decreased by 1% sequentially and was stable annually. As a result, revenues increased by 11% quarter-over-quarter and 8% year-over-year, reaching $236 million. The packaging business EBITDA reached $30 million, stable compared to 3Q '20 and increasing $17 million compared to 4Q '19. EBITDA margin reached 12.6%. The sequential result is mainly driven by higher sales volumes, offset by higher operating costs and lower average prices. The annual increase is mainly from lower operating costs related to the better operational performance and lower fiber costs. Ignacio will now go over our financial position. Thank you, all.

Thank you, Colomba. Please turn to Slide #9. Free cash flow was positive $24 million during the fourth quarter. This is the result of a positive working capital variation, offset by the higher CapEx as a result of the acquisition of the forestry assets in Brazil. Our gross debt decreased 2% to approximately $4 billion, and our cash position continues to be solid at $891 million at the end of the year. This way, our net debt decreased by 1% compared to the previous quarter, and our net debt-to-EBITDA ratio stood at 3.13x, decreasing from 3.27x the third quarter. Moving to Page #10 of the presentation. Now that we are seeing a more positive market conditions with increases in pulp prices, we are confident that we are in good shape to continue executing our strategy and analyzing growth initiatives. But we also continue advancing on the operational efficiency and productivity plans that we have been implementing over the past years. In addition, we remain committed to our investment-grade rating and to maintain a solid capital structure. Now I would like to mention that Mr. Francisco Ruiz-Tagle, CMPC's CEO; Mr. Raimundo Varela, Pulp CEO; and Mr. Felipe Arancibia, Softys CFO, are also joining the conference call. They will be also available to answer any questions you may have. Now, operator, please open the floor for questions.

[Operator Instructions] The first question comes from Carlos de Alba with Morgan Stanley.

So a couple of questions. First, we noticed that it is the second consecutive quarter where pulp production is higher than shipments or third-party shipments at least. What are the expectations for this year or the current quarter and the first half of the year? The maintenance in the first quarter is a little bit -- affects more tonnage than in the fourth quarter, but it's only around the 60,000 tons difference. So I wonder if you want to continue to increase inventories, if you need to replenish those or if you are -- I mean, what are you seeing in terms of the market there and why the inventories have been increasing in the last 2 quarters? And then the other question is regarding CapEx for 2021. If you can give us an update on what you are seeing in terms of CapEx for growth and sustaining? And is there any significant or more important projects behind those numbers, if you can remind us that would be great.

Thank you, Carlos. This is Raimundo Varela. The first question, I will take it. In the Q1, we have the maintenance of our Guaíba I. And in January, we had some maintenance -- not total maintenance, but we have some equipment maintenance in Santa Fe I. Therefore, it's a little bit higher than, as you mentioned, than in Q4, but not significant. Our stocks, I mean, we're not increasing the stocks. I think we have -- our sales are very, very strong, and we -- previously to maintenance, we always increase a little bit of stock in order that we can comply with the shipments in the following months. So I think what you are seeing in the numbers is probably a little bit of that. And I think -- so sales wise, I would say is a very strong -- has been since August last year. And I think that shipments sometimes are -- that move from 1 month to another one because of delay in shipments, et cetera. But it's not related really with any plan to increase the stock.

Hello, and good morning, everybody. This is Francisco Ruiz-Tagle. In connection with the second question, regarding the CapEx for this year, our plans, I mean, away should be in the range of $500 million. This is considering the 3 main business of CMPC. Also like to add that the last year, 2020, we reduced our original target because of the COVID. We finally ended investing around $350 million. So this year, we are recovering some of the initiatives where we had last year. And so this will be more or less the range 100 -- between -- around $500 million.

May I ask if you can suggest or tell us how much of the $500 million is sustaining? And what are the most important growth projects that are baked into the number, please?

Yes. Carlos, Ignacio here. That includes -- that projection looks maintenance and some projects that are still under analysis.

The next question comes from Jonathan Brandt with HSBC.

First wanted to ask you about the pulp market, in particular, the hardwood. We've heard common prices are between $700 and $730. I'm just wondering if you can confirm that's where your prices are for March? And I guess more importantly, what the pushback has been from your customers? Have they generally been accepted or are you seeing more pushback, the higher prices increase? And I guess I'm wondering sort of what your outlook is for the coming months or coming quarters, if we could see prices even higher. And sort of related to that, with the development and, I guess, improvement of liquidity in the Shanghai futures market. Would you consider or has there been any discussion about potentially hedging softwood pulp prices at this level? And I guess my second question, just to follow-up on sort of capital allocation and projects. With the higher prices, are there any pulp projects that you would have under consideration or anything that you're analyzing or is it sort of still all related to the nonpulp segment?

Thank you, Jonathan. This is Raimundo. I think the pulp market, the levels you mentioned, the $730 actually is the level we are selling in China, the hardwood in March. And in China, there has been no pushback for that level. We have been able to sell almost all our March volume at that level, and I think we will have no problem to sell the remaining at that level for March. And we will probably sell it very soon. So I think China, at the moment is really pushing the prices up very much. The demand is very, very strong. But at the same time, I think you have to keep in mind that the market is -- China is very important, but the market is much more than just China and the prices in the other markets are much lower. They are also going up, but the levels are much lower. We expect, for example, in Europe, the price during March to reach about $610 net for hardwood, so much lower than China. I think you asked about price outlook. I think at the moment, China looks like the prices will probably increase again in April. Of course, we have not started those negotiations yet, but there is strong interest. So I wouldn't be surprised if the prices goes up again in China in the month of April. In that sense, I think we like healthy markets, markets that move, that are dynamic and that they go up and down. But at the same time, the bubbles are always a little bit of a concern. And I think in China, from time to time, you may get the impression that there's a little bit of a bubble going on. So that's the only concern. I mean, of course, we like the market, how it's developing. But you mentioned about the futures exchange in China. In general, I think that has been a good development for the market. Overall, I think it keeps -- gives the local players more tools. But we, as an international player, we do not have plans to participate in that exchange.

Okay. Jonathan, this is Francisco. Well, first of all, as Raimundo said, we are not, I would say, taking any conclusion about the price of the pulp. There are some unstability and differences between the markets. So hard to conclude something concrete about that for the medium and long term. And in connection with the question is, if we are activating an initiative -- investment initiative because of the situation with the prices, I have to say that the company normally take decision to look in the long term. So we have a long-term strategy, I would say, very well built. And so we do not take decisions because we are seeing now a good moment with the pulp prices. So in general terms, we are not changing probably the way we created for the company and so acting according with the long-term strategy of the company.

The next question comes from George Staphos with Bank of America.

Congratulations on the progress during the year. First question that I had relates again to pulp. And we're obviously seeing very, very strong pricing. Can you comment at all in terms of how customer stocks, customer inventories are trending in China? Are we seeing inventory building because of pricing, and we're getting into a circular pattern here or in fact, our customer stock is declining, and we're seeing good sell-through of their products, requiring more pulp, and that is what is driving pricing? So that's my first question. Second, I want to move to Softys. Can you give us some color in terms of what if we adjust for the -- I think the remaining comparison from SEPAC was in the quarter, what your underlying volume would have been between both away-from-home and at home? And why we're not seeing somewhat better volume out of the business? And looking ahead, are you anticipating increasing any of your marketing spending to increase your Softys volumes on a going-forward basis? I think I heard during your remarks that marketing spending was down a bit in the quarter.

Thank you, George. This is Raimundo. I'll take the first question. I think the stocks in China, they are going up. But you have to take into consideration that we just have the Lunar New Year. So if you compare with any other year, always after Lunar New Year, you have higher stocks. So I see that as part of the normal behavior of the Chinese pulp market. We take a lot of attention also to the withdrawals of the pulp from the terminals into the customer, and that figures are healthy. I think they were very good in second half of last year, Q4, in particular, and they were very good in January. And then, of course, they slow down dramatically during the Lunar New Year, which created this highest stock at the port. But now we are already seeing back a regular, good -- very good shipments of those volumes into customers. So I would think that the stocks will come down again. I think that you have to take into consideration that there is quite a problem with shipments everywhere, in particular, container shipments. The ports -- port congestion have increased everywhere. And there is -- therefore, there's more delay, in particular, for containers but also for break-bulk. Record vessels are showing up a little bit later than expected. So that creates some fear from time to time from customers to that they might run out of pulp and create that need to be the first one to buy, and that's creating a little bit of frenzy. Of course, the price is going up, that's one that by nature, push customers to buy sooner. And then you have this logistic problems that are affecting pulp, and they are also affecting, of course, many other products. Paper demand has been good in China. And show that is -- that the paper prices are behaving very well, and they're going up almost all paper prices. So the Chinese are able to pass the raw material increase into the paper price to -- up to a certain level. That's where I made the comment before about the bubble because at the end of the day, you need the underlying asset, which is the paper to really have good behavior in terms of volumes and in terms of price. We are seeing good behavior, but I think pulp is running a little bit ahead of itself in China in that sense, yes. But overall, we see that the paper demand in China and not only China, in several other parts of the world, it has been surprisingly strong. I think, in China, very strong since September, October last year. And I think in the rest of the world, the U.S., in general, good demand, very steady. Stronger at the end of the year. Very strong at the beginning of the year. And Europe, that was sluggish, and it started much better. I think December was good, better than expected, and January and February has also been better-than-expected paper demand.

That's fair. Even in the U.S., one of the companies was talking about the market getting tighter more quickly than they had expected into the second quarter. Just wanted to throw that in there, but keep going.

Yes. No, but that has to do at the end of the day, with customers. Everybody is seeing the price going up, and they wanted to -- everybody wants to buy a little bit ahead of the other one. And that sort of pushes.

I want to take your second question. This is Felipe Arancibia speaking. Related to the last quarter, if you compare with year-over-year, the away-from-home business suffered quite significantly, mainly due to COVID-19 lockdown and restriction of movement. However, this would have been increasing for a while. So I would say that the main issue year-over-year related to volumes was in away-from-home business. However, quarter-over-quarter, consumer tissue was under pressure, particularly in Chile and in Argentina. So -- and also, because of the cost pressure in the last quarter, we increased price in these 2 countries in order to offset the inflation -- the cost inflation. So I would say that the volumes -- the consumer volumes in Q4 compared with the previous quarter was under pressure. But looking ahead, we remain quite confident that consumer tissue has been increasing on a single digit, I would say, the same as Personal Care business. And related to away-from-home, we expect to recover at least 50% of the decline in 2020 compared -- when you compare with 2019. So I would say that we are, let's say, facing a better scenario in the coming months. And related to the -- your question of marketing, as you know, in 2020, we decreased the rate as a percentage of the net selling marketing, but we expect it to recover as a normal basis, a normal rate in 2021.

[Operator Instructions] The next question comes from Isabella Vasconcelos.

I just have one question on pulp and then another one on tissue. So on pulp, you mentioned that there is the chance of pulp prices increasing once again in April. Pulp's future already close to $1,000 per ton. What are the key risks that you are monitoring right now in the market? You mentioned paper prices as being key, but if you are monitoring other issues, it would be interesting to know what they are. And then on tissue and especially on local prices, you already implemented price increases in the fourth quarter. I was wondering if you have further room to increase prices along the year, considering cost pressures for the market that are very significant, possibly? So these are my questions.

Thank you, Isabella. This is Raimundo. I think you asked about risk in the market. Yes. I mean, you're seeing the prices that are being indicated now through the futures market and through our channels for April, and they indicate a new significant increase. So that, again, as I mentioned before, is good news, but we put a note of caution on those prices that go a little bit ahead of itself. We're happy with the paper demand in almost all continents, that's improving, which is a good sign. We -- in general, we are -- we feel that the market is developing well. However, I mean, we still have the COVID everywhere, no -- maybe not in China, but everywhere, we have COVID. How effective the vaccines are going to be still is a question mark. We are optimistic about it, but the process is just starting now. So how the real demand will behave for the economy -- how the economies are going to behave, no, I think is still -- there's a little bit of risk associated with that. And the third one is the logistic issues. These congestions and this delay in shipments is affecting raw materials and creating a sense of emptiness in the supply chain. That's -- those are the things that we are closely monitoring besides the paper behavior for each segment and in each market that we always do. Currencies, of course, are relevant in commodities. That's also helping the weakness of the dollar, in general, help the commodities that's more or less normal. And then we also have a strong -- a very strong winter in some parts of the U.S. that also create a little bit of a noise in some of the commodities, including pulp. Those are the main issues.

Isabella, this is Felipe speaking. As you mentioned, costs are projected to increase broadly in most areas, I would say, including pulp, recycling fiber, resins, superabsorbent and many others. So let me give you on a more prospective answer. We have seen a strong consumption, particularly on consumer tissue in the last month, mainly due to the people are in home driven in more consumption, but also the people are more focusing on hygiene. So we believe this dynamic could remain in some extent. So this is the first part of my answer. Secondly, regarding pricing, as always, we take some select pricing action and with revenue management, how we get more efficient on our trade funding in order to keep margins, but also continue offering affordable product mix. This is my priority, right, the economic situation right now. And also related to due to this environment, economic environment, we expected lower promotion activity levels in the market. So yes, according to what we have seen so far, there is still room for price increase in order to offset the cost inflation.

The next question comes from Leopoldo Silva with LarrainVial.

I have a question regarding your pulp. So on 2019, on your Investor Day, you announced that you were acquiring land in Brazil to develop an organic growth over there. Thinking loud and considering that in Brazil, eucalyptus needs 7 to 8 years to be developed. Could you think that to plan and build a new pulp mill, maybe would take 5 years down the line? One might think that you could announce something as soon as this year in that space. In that context, could you share with us any color on the development of that forest base in Brazil? Any environmental approval time lines in Brazil? And how aggressive do you see yourselves in that space for the 2 years to come?

Thank you, Leopoldo, for your question. This is Francisco Ruiz-Tagle. Actually, we haven't decided about the new project -- new plant in Brazil. It's not approved. But we have said before that Brazil is a very important country for us. It's a crucial place where we are developing our businesses. In the case of pulp, we are, of course, looking to the future. We have been incorporating new forest in the south of Brazil and in order to be prepared for the next steps. According -- taking into account the question you ask about within the next 2 years, we could be informing something. It's early to say now. And I cannot confirm that. But I can say that Brazil is a place where we are thinking in developing our -- also our pulp business.

This concludes our question-and-answer session. I would now like to turn the conference back over to Ignacio Goldsack for any closing remarks.

Thank you all of you for attending this conference call. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.