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

Hello, everyone, and welcome to the Empresas CMPC Fourth Quarter Earnings 2021 Results Conference Call. On the call with us today are Fernando Hasenberg, Chief Financial Officer; and Colomba Henriquez, Head of Investor Relations. [Operator Instructions] 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 refer you to the company's press release and regulatory findings 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 packaging markets are based on management's views as of today, and it is to be expected that future developments may cause these views to change. Please consider the information presented in this slides. 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 will turn the floor over to Mr. Fernando Hasenberg, Chief Financial Officer. Please, Mr. Hasenberg, you may proceed.

Thank you, and welcome, everyone, to our fourth quarter 2021 results conference call. I'm Fernando Hasenberg. Starting on Slide 3, the presentation. Fourth quarter results continue to reflect good operational environment. The Pulp business had a strong result with production reaching over 1 million tons for the quarter, totaling 4.1 billion tons annually, which is a record in terms of annual production. Sales volumes also improved, offsetting part of the decrease on pulp prices, driven by the decline we saw in China and the rest of Asia. The Biopackaging business continued to post solid results with EBITDA margin reaching 18.3% on the fourth quarter and 17% for the whole year on the back of the strong volumes, high average prices and improved operational efficiencies. EBITDA for the year reached $1.7 billion while net income reached approximately $540 million, showing an important improvement compared to last year's results. Now turning to Slide 4. Revenues for the fourth quarter post a 2% sequential growth driven by the higher sales of the Biopackaging business, which increased 16%. Also, as I mentioned earlier, the Pulp business continued to show good revenues during the fourth quarter as the lower pulp prices were offset by higher sales volumes. Operational costs reached a little over $1 billion, increasing 8% compared to the previous quarter and 11% compared to the same period last year, which represented 63% of total revenues compared to 60% in 3Q '21 and 68% in 4Q '20. The sequential increase is mainly explained by higher sales volumes in pulp and Biopackaging as well as higher forest protection costs. In Softys, we continue to see raw material cost increases. The year-on-year increase is also related to higher raw material costs in Softys and Biopackaging as well as higher maintenance cost in Pulp. Consolidated other operating expenses reached $210 million for the quarter, up 9% quarter-on-quarter and year-on-year, representing 13% of total revenues, stable when compared to the third quarter 2021 and down from 14% in the fourth quarter 2020. The quarter-over-quarter and year-over-year results is mainly explained by higher administrative expenses in pulp and Softys. Moving to Slide 5. On a consolidated basis, the company fourth quarter EBITDA reached close to $410 million, decreasing 14% compared to the previous quarter and improving 58% compared to the same quarter last year. Net income reached $91 million, decreasing compared to the $130 million posted last quarter, mainly driven by the lower EBITDA generation during the quarter. I would now like to turn the call over to Colomba Henríquez, our Head of Investor Relations, who will provide more details on our results.

Thank you, Fernando. Please move to Slide 6, where we can see more detail on our Pulp business results. Pulp production reached over 1 billion tons, up 3% quarter-on-quarter but down 3% year-over-year. Main reasons we had in the results are maintenance downtime. As during the quarter, we carried out the scheduled maintenance of Guaíba II and Laja compared to Santa Fe II and Pacífico in 3Q '21 and Laja in 4Q '20. Total market pulp sale volumes increased by 4% quarter-over-quarter and decreased 6% year-over-year. Looking into results by fiber, softwood third-party sales increased by 22% quarter-over-quarter and 11% year-over-year in both cases related to higher sale volumes to Asia. Hardwood, on the other side, was stable on a quarter-on-quarter basis but decreased 19% compared to the fourth quarter of last year. It is relevant to mention that shipment delays driven by the logistics difficulties globally throughout the year resulted in the accumulation of approximately 70,000 tons of inventory. Pulp prices during the fourth quarter of 2021 reached $758 per ton for softwood and $658 per ton for hardwood, an 11% and a 6% decline respectively compared to the previous quarter. The quarterly decline comes mainly from the declining prices we saw in China and the rest of Asia compensated by strong prices in the rest of the world. Compared to the fourth quarter of last year, prices show an important improvement, increasing 28% in softwood and 41% for hardwood. As a result of this, revenues for the Pulp business totaled approximately $680 million, decreasing 4% quarter-over-quarter and increasing 32% year-over-year. Looking into the Forestry segment, third-party forestry sale volumes decreased by 9% quarter-over-quarter, mainly due to lower sales of sawlogs and decreased 27% year-over-year, driven by lower sales of pulpwood and sawlogs. Despite this, Forestry sales increased 22% quarter-over-quarter and 13% year-over-year, reaching $150 million. This is an important improvement related to higher average prices and higher volumes of solid wood products. Revenues for our Pulp and Forestry business were stable compared to the previous quarter and increased 28% compared to last year, reaching almost $830 million. EBITDA on the other side decreased 12% sequentially but increased 89% compared to the fourth quarter of 2020 while EBITDA margin reached 42%. The quarter-over-quarter EBITDA decrease was primarily due to higher administrative expenses as well as higher operating costs related to higher hardwood cash costs and seasonally higher forest protection costs. In the year-over-year comparison, the increase mainly comes from higher pulp prices, partially offset by higher administrative expenses and higher operating costs resulting from higher cash costs and higher maintenance costs. Now let's move to Slide 7, where we will take a closer look at the Softys business. Softys revenues decreased by 1% quarter-over-quarter and increased 8% year-over-year, reaching $570 million. Tissue paper sale volumes decreased 1% compared to the previous quarter and increased 4% compared to 4Q '20. Quarter-over-quarter, lower volumes in Peru and Brazil were offset by higher sale volumes in Mexico and Chile. Year-on-year, mostly increased from Chile driven by improvement in the away-from-home category. Personal care product sale volumes decreased by 6% quarter-over-quarter and increased 6% year-over-year. The quarter-over-quarter decrease was mainly driven by lower diaper sales in Brazil, Peru and Chile, where the year-over-year increase comes from higher wet wipes volumes in Peru and Chile. Average sales prices measured in dollars increased 1% for tissue paper and personal care products compared to the third quarter of 2021 and increased 4% for tissue paper and 2% for personal care products compared to the fourth quarter of last year. In both cases, the increases related to higher prices in local currencies, compensated by the depreciation of local currencies. Softys EBITDA reached $20 million during the quarter compared to $43 million in 3Q '21 and $55 million in 4Q '20. EBITDA margin reached 3.5%. The quarter-on-quarter quarter decrease was mainly from higher operating costs as we continue to be impacted by higher raw material costs as well as higher administrative and marketing expenses. The year-on-year decrease also relates to higher operating costs due to higher fiber costs, especially pulp and raw materials for personal care products as well as higher administrative expenses. Now, let's move to Slide 8 of the presentation to see further details on the Biopackaging business. Sale volumes to third parties increased by 12% quarter-over-quarter as a result of higher seasonal volumes of fruit boxes as well as higher boxboard sales with higher exports to Europe and Latin America. Year-over-year, volumes decreased 3%, explained by lower corrugated paper volumes driven by higher sales to our corrugated boxes business. This was partially offset by higher sales of corrugated boxes and paper sacks, those were driven by operational efficiencies as well as new capacity in the case of paper sacks. Average sale prices continued to increase this quarter, posting a 3% sequential growth and a 22% annual growth. As a result, revenues increased by 16% quarter-over-quarter and increased 18% year-over-year, reaching $280 million. The Biopackaging business EBITDA reached $50 million, increasing 19% compared to the third quarter of 2021 and 71% compared to the fourth quarter of 2020. EBITDA margin reached a record of 18.3%. The sequential increase in EBITDA is mainly driven by the higher sales volumes as well as higher average prices. The annual increase is mainly from higher average prices, which were able to offset the increase in raw materials, especially higher pulp prices and conversion paper. I will now turn the call back to Fernando. He will go through cash generation and financial execution for the quarter.

Thank you very much, Colomba. Please turn to Slide 9. Capital expenditures during the fourth quarter totaled close to $115 million. Half of it relates to maintenance and the other half to several projects. Here, I would like to highlight the start of the BioCMPC project in Brazil. Free cash flow was positive and reached close to $30 million during the fourth quarter of the year. This is the result of lower dividend payments during the quarter as well as positive working capital variation during the quarter. Working capital benefited in relative terms from lower inventories and higher accounts payables. Please turn now to Slide 10, where we see our financial execution and debt profile. We closed the fourth quarter of the year with $4.3 billion in total debt and cash of $1.5 billion, leaving our net debt in approximately $3.2 billion, very similar to the last quarter and the end of 2020. The net debt-to-EBITDA ratio closed the year at 1.87x, continued to decrease compared to the previous quarter and the end of 2020, mainly related to the increase in the last 12 months EBITDA. Moving now to Slide 11 of the presentation. I would like to comment some relevant events that happened during the fourth quarter. In December 2021, we started the construction of the BioCMPC project, which is now advancing according to our schedule. This project should be operational by the fourth quarter of 2023 and increased capacity by 350,000 tons of hardwood pulp. Also, Standard & Poor's Global maintained our international rating at BBB- with a positive outlook, which reflects our commitment to maintaining a solid financial position throughout pulp cycles. On the sustainability front, we received important recognitions such as the second most sustainable company in the forest product sector by the Dow Jones Sustainability Index as well as the inclusion in the Chile, Mila Pacific Alliance and Emerging Markets Index. We also entered the A List in the Climate Change and Forest CDP questionaries. In addition, CMPC joined the Business Ambition for 1.5 degrees Celsius and the Race to Zero, both important global initiatives that combat climate change. All these reflect our long-term sustainability commitment through a robust environmental awareness, information transparency, management against deforestation and climate resilience. Moving to Slide 12 of the presentation. We closed 2021 with a strong financial and liquidity position, which allow us to continue advancing in the execution of our strategy during 2022. Operational excellence continues to be an important pillar of our strategy as we need to keep improving our mills' productivity as well as continue extracting the benefit of being a large-scale Latin American company in terms of procurement. We are also focusing on commercial excellence, putting the customer at the center and responding to market trends. We also need to continue growing to maintain our leadership and the Carta Fabril and Iguazú acquisition as well as the BioCMPC projects point towards that direction. Innovation and digitalization are also an important pillar as we need to continue generating innovative solutions that complements our product portfolio and use technology to improve our production processes. Finally, sustainability is at the center of everything we do and will continue to guide us towards our long-term goals and the creation of shared value to our stakeholders. I'd like to mention that Francisco Ruiz-Tagle, CEO of the company; Raimundo Varela, Pulp CEO; and Gonzalo Darraidou, Softys CEO, are also joining the conference call. They will be available to answer any questions you may have. Please, all, proceed now with the questions.

[Operator Instructions] And the first question is coming from Caio Ribeiro from Bank of America.

So my first question is on the material fact that you announced this morning. Just wanted to get some more color, if possible, on what's the strategic rationale behind this new potential for [indiscernible] -- just wondering if the intention would be to ship product from Guaíba to have another option in terms of a port or for the Guaíba expansion itself. Or would the intention here be to unlock additional port capacity for future pulp expansion? And then secondly, in light of all of those recent pulp supply disruptions that we're seeing in the industry and the delay of UPM's project, just wanted to get a sense from you on how likely you consider another pulp price hike for March in China.

So Fernando will take the first question and then Raimundo, you can take the second part.

Thank you, Caio. Well, today, we export most of our production from Guaíba from the Port of Rio Grande. And we are looking for alternatives. We use most of the capacity of the Board. And given that we are increasing our capacity, we want to be more flexible. In that sense, we are working on developing and eventually moving forward to have a port in Rio Grande do Sul and that's why we enter into this JV with -- well, we signed an MOU with Neltume, that's most we can share with you today, that is basically to be more flexible in our capacity to export the pulp production from Guaíba.

This is Raimundo. I will take the second part of the question regarding pulp development in China. I think we have seen a few supply shocks in the system in the last few months. We have the Canada situation, the Russia also situation with China, meaning that they couldn't export for a while. And we have the Finland strike, some production issues at Brazil and now the UPM delay, the new mill capacity. So I think all of that cash are creating momentum for price increases, which are already happening now. The China price have increased short fiber from December to January, increased about $40 and January into February, probably will take another $60 to $70, reaching $100 in 2 months. And as much we will see, I think there is a possibility that [indiscernible] will increase again in March year. I think that's part of the part of the equation. But of course, we need to see also the development in the demand side in China, which is improving but still, I think, maybe not strong enough. But it is much better than what it was in the second part of last year.

And the next question is coming from Thiago Lofiego from Bradesco.

I have 2 questions for Fernando. Fernando, what's the outlook for tissue margins? In the quarter, you saw a bit of a compression there. Are there any price hike initiatives in the regions in countries that CMPC operates? And how do we reconcile that with the pulp price momentum that we are seeing, potential new hikes in the near future? So how are you guys thinking about the margin evolution for the Tissue division in 2022? And then the second question as well to Fernando. What's your view, Fernando, on the structural leverage for CMPC? And how high can it go if you guys decide to take on a more aggressive approach in terms of either M&A or greenfield/brownfield expansions?

Thank you, Thiago. I will answer the second question now, and then I will pass to Gonzalo, so he can answer about the tissue margins. Regarding the leverage, we have been working, of course, on the budget for next year. And we will be moving with our leverage net debt-to-EBITDA between 2.5 and 3.5. We don't see we'll be outside of that range. Today, we are below that. But probably by the end of the year, we'll be somehow in-between the range. Gonzalo, now if you want to answer Thiago's questions?

Yes. Regarding our -- to develop pricing increasing per country, per category, but this is a -- I would say that the problem is that it will take time. We are facing a very aggressive increasing in all of our raw materials in terms of the rate of increase as well as the timing of that increase. And for that, you need some time to pass that to the consumer price. We are working that, and we believe that in the second semester of this year, we are going to be able to recover our margin in terms of tissue as well as baby care. And the second one is that we already launched a program that we named Softys [ Mass ] that include 9 initiatives trying to improve the performance in our margins. And in those initiatives, we are talking about efficiencies, we're talking about cost, we are talking about servicing and we are talking about as well as [indiscernible] management. And to dedicate 100% of our top management in that program, we made some relevant changes in our structure. So we allocated we believe our best team to develop this program. So in summary, price increases and developing our program that we call Softys Max. That's very clear.

[Operator Instructions] The next question is coming from Rafael Barcellos from Santander.

My first question is related to the Pulp division. I mean in the release, you mentioned that local inventories in December this year were above the level seen in December 2020. So I'm just wondering if you could comment if your inventories also increased quarter-over-quarter. And also, what can we expect for the first Q? My second question is related to the Biopackaging division. I mean the Biopackaging division has shown strong results recently, right? So how relevant do you believe that this division could be in the future? I mean how much could it represent of total EBITDA going forward? Other than that, do you continue to analyze M&A opportunities into this packaging segment?

Raimundo, can you take the first question? And then we'll take the second one.

Okay. Very good. This is Raimundo. Thank you, Rafael. Regarding the stocks or inventories, our stocks, I think the reason behind the higher stocks has to do with logistics bottleneck that I think the system is -- has been suffering, and we as well. I think ports are operating much slower than normal, vessels are arriving late. And everything is taking a little bit more time, also the destination of these [ molecules], charge, et cetera, et cetera. The whole system is affected. And this situation continues. I think in Q4 or in December, we were -- we had about 2 months. But overall, I think this logistics bottleneck continues. So we do have about 80,000 tons of stocks above our normal level. It's part that is very soft and committed as a customer but we kind of invest because we have some [ pulp ] delays, sorry [ investing ] delays, which continued in January. I don't expect it to be solved anytime soon really, I think it will last for a few more months, maybe at least until this half of this year, in this situation.

Well, the connection with your second question about Biopackaging, well, I'd say that -- I can say that this is a very core business for CMPC. I've said before, we have been investing in improving our operation everywhere. We are making an inorganic investment in [ Brazil ] but was fortunately approved by the CADE yesterday. And so -- which is Iguazú. And so from today's standpoint, we see this business as a very strategic business for CMPC. This is a possibility of a packaging based on natural fiber. And we have seen this market is really growing. And we have a lot of possibilities and opportunities in the market where we are participating. You see the participation on the EBITDA of the company this year is around 10%. But I see this percentage will be higher in the future. still far from pulp or -- but definitively, we -- it's hard to say a specific percentage has been considered as part of the EBITDA now. But looking to the future, we expect to grow this business 5 more percentage points in terms of -- as part of the EBITDA in terms of -- kind for more stability in the mix and the portfolio of CMPC.

[Operator Instructions]

We will now take the questions from the webcast. The next question comes from [ Ricardo ] -- on Pulp, so this one's for Raimundo. Can you please share your view on what has changed on the pulp market to stimulate new hikes not only in China but Europe and North America?

What has changed in the market? Okay. I think what we have seen -- I think in China, I already commented the markets have improved in part because of the supply shops that I mentioned. Within that supply shock I also include the logistic bottlenecks that affects all the markets. So I think that's one part of the equation in China. And the second part is that the demand has actually improved. As I said, nothing dramatic, but we are seeing a slightly better demand in China. I think basic prices in China have also been increasing, and that's always a good sign, I think pulp stocks are stable in China. On the other hand, in Europe, we see a few things. We see that the paper demand is very strong. And therefore, the pulp demand continues to be strong. We see that the stocks -- pulp stocks are still low, I think historically low. And that reflects the difficulty that I mentioned on the logistics side. I think European paper producers are also increasing their prices. They are affected by high cost, not only in pulp but also mainly in energy. And therefore, they are increasing their -- increasing prices. So the demand in Europe, we foresee that to continue strong. I think pulp prices in Europe might increase slightly, small increases, I would say. And I think the gap that we have seen between China price and Europe price is decreasing mainly because of the big increase in the Chinese price. In the U.S., I think the market is also strong, not as strong as Europe but demand in general has been good, also affected by the logistic bottlenecks, as the availability of pulp is limited. And therefore prices have remained relatively strong. As I said, not as strong as in Europe. But in general, the U.S. market is also quite [ high ].

Thank you, Raimundo, for your answers. Ricardo did have one question about the Softys business, but it has already been answered by Gonzalo. So I'll now take the question from Robin. Could you give some color regarding the idea of the constitutional convention for how much of your EBITDA do you see high, medium and low risk out of this idea? And Francisco will take this question.

Okay. Thank you, Robin. Well, as you said, we're still far away. But I would say that still, there are some discussion in progress now. I cannot say now, I would prefer not to express something concrete now because it is not clear this will be medium or low risk. What I can say is that this industry is a very crucial industry for this country. And of course, some aspect could be observed and considering the discussion, but it's still too early to talk about that. That would be my answer.

We did have a couple more questions coming to the queue. The first question is from Thiago Lofiego from Bradesco.

Just a quick follow-up to Raimundo. Raimundo, what do you think about the paper market, especially in China but also globally? Do you think paper makers are going to be able to increase prices in line with pulp prices? It seems like pulp market dynamics are -- seem to be tighter versus paper market, right? So there might be some margin squeeze there for paper makers or that's not your read. So I just wanted to get your view on that. And then also paper maker inventory and -- paper inventories with the paper makers, do you know if that level is relatively low and there might be a restocking in the coming months?

Thank you, Thiago. I think paper makers have been for the [indiscernible] -- they have been, in general, suffering of higher cost, fiber cost, but also some of the other components, energy being a relevant one and Gonzalo mentioned exactly, there are also other component they had as they tougher price increases -- significant prices. So I think overall, if it's making [ happen ] increasing prices with different speeds in different markets, when the demand is better like in Europe and in the U.S., they have been more successful in passing that in to the customers. I think in China, they were successful in the first half of last year. And then the second half, the price came down. And now they're recovering the price increase. So I think they are, in general, increasing prices overall in the different markets, responding to the dynamics that they have from the raw materials and also from their demand. And I think that we continue because I think fiber will remain -- as we mentioned before, fibers will remain relatively high, higher than originally expected because of this supply shocks and these logistic bottlenecks. And I think that energy is also a big concern, I think for all players in [indiscernible] energy chemical [indiscernible]. I think paper inventories, I think they are also affected by de-stabilities because of the bottlenecks in the logistics. So I think a lot of the paper is committed and it's being shipped. In some places, it takes a little bit more time to reach the destination et cetera. So I think paper inventories are, at the moment, at relatively normal levels. And I don't see those inventories increasing pretty much.

The next question is coming from Alfonso Salazar from Scotiabank.

Two questions. The first one is regarding CapEx. If you can provide some CapEx guidance for the year and the breakdown? And the second one is also regarding the pulp market. Yes, it looks to be a bit rounded for now. But how sustainable do you think it's going to be? If you can talk a little bit more when do you think this could be there, or what are your expectations for the second half of the year or probably for 2023? A little bit more color on the risks ahead, and you were just discussing the case of profits better in China, which is certainly something you'll need to monitor compared -- anything else that you can say that is concerning in your view for the pulp business?

Yes. This is Francisco. Raimundo will take the second part of your question. Regarding CapEx for this year, we are expecting, including the acquisitions that we've made in the order of $1 billion, regular CapEx and maintenance and some growing opportunities will be around $600 million to $700 million. And the difference is going for paying the inorganic acquisitions.

Okay. Thank you. Alfonso, I'll take the second part. I think the expectations of prices have improved for 2022, given that I mentioned before now the supply shocks, and lately with the UPM announcement of the delay and the continuation of this logistics bottleneck. I think for second half of the year -- I mean, to be honest, I think it will depend a lot on the logistics situation, whether the prices will soften or not. I think now I am more inclined to think that the price softening will come in 2022 more than in the second half of '22. But a lot will depend on the logistics bottleneck situation, which, as you know, is a global situation that is impacted by different products, different supply and demand and, of course, the COVID and the [indiscernible] are operating.

A follow-up on cost. You mentioned raw materials in your press release several times. Any concerns about other inflation risks, labor and other? I don't know if there's anything you can mention about that, that is also pressing your costs.

I think the chemicals have increased. The wood have also increased, and the energy has increased. Overall, I think all pulp producers, including us, we are making [indiscernible] trying to control those cost inflation. I think we have been successful in -- to some extent, but we have to continue in the same line, trying to -- we have improved a lot in our consumption -- electricity consumption trying to mitigate the price impact, and we have to continue in that line with the operational excellence, trying to control our -- the part that we can actually do that.

Thank you, Raimundo. We will now take a question from the webcast, and it's from [ Monica Luengo ]. How many hectares does the company have that are claimed to be from [indiscernible] Fernando will take this question.

I will take that. This is Francisco Ruiz-Tagle. Actually, my answer here is a formal claim is not important. It's -- there are some general claims -- when I say formal claim to the institutional system that the government has. But it's very low. Actually, it's not material at all. And there is not a concrete number, but it's low.

Thank you, Francisco. We'll take another question from the webcast from [ Rodrigo Roy ] Can you please give us some color on the progress related to the acquisition of Iguazú and Carta Fabril? Do you expect any resolution from the [indiscernible] shortly?

Thank you, Rodrigo. This is Fernando. We are -- this is a work in progress. Regarding Carta Fabril, we are still working on the CADE resolution. We are waiting for that. Regarding Iguazú, we got the positive resolution the day before yesterday. So for that specific transaction, we are still working on other conditions precedent that has to be solved. And probably, we can anticipate that the Iguazú transaction is expected to be closed by -- during March or early April.

Okay. Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.