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

Hello, everyone, and welcome to Empresas CMPC Fourth Quarter 2022 Earnings Webinar. I'm Fernando Hasenberg, CFO of the company and joining me today, we have Francisco Ruiz-Tagle, CEO of the CMPC, Raimundo Varela, CEO of the Pulp Division; Guilherme Viesi, CMPC Pulp, Chief Commercial Officer; and Colomba Henríquez, our Investor Relations Officer. Please note that the statements made today during the presentation and the 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. 2022 was a record year for us in many aspects. We closed the year with approximately $7.9 billion in sales $2.1 billion in EBITDA and $1 billion in net income, all of them a year record for the company. We faced favorable market conditions through the year, which contributed to the good results but we also had a record production in some of our mills, which is the result of the good operational performance of our mills as a result of the implementation of our operational efficiency program. Fourth quarter result on the other side were below the result of the last quarter, mainly as a result of the weaker figures posted by the Pulp business due to higher maintenance costs which also resulted in a lower production and thus lower sales volumes. The Softys business posted a slightly lower EBITDA on a quarter-on-quarter level, but a significant improvement on a year-on-year basis, mainly as a result of the higher average prices as well as the integration of Carta Fabril a in Brazil. On the other side, the Biopackaging business posted a relevant increase in EBITDA as we were able to restart the corrugated paper machine by the end of 3Q 2022, which contributed to lower operational costs. Revenues for the fourth quarter posted a 5% sequentially decrease, mainly driven by lower sales volumes in Pulp and Softys compared to the fourth quarter of last year, revenues increased 20% because of higher average prices in addition to higher sales volumes in Softys. Operational costs reached $1.2 billion, stable when compared to the previous quarter and 18% higher compared to the same period last year, which represented 62% of total revenues compared to 59% in 3Q '22 and 63% in 4Q '21. The quarter-on-quarter result is mainly related to higher costs in Pulp related to the maintenance and forest protection expenses, compensated by lower direct costs in Softys and Biopackaging. The year-on-year increase is mainly related to higher fuel and chemical costs for all business as well as fiber costs for Softys and Biopackaging and maintenance expenses in pulp. Consolidated other expenses reached $297 million for the quarter, 17% higher quarter-on-quarter and 42% higher year-on-year, representing 15% of total revenues compared to 12% in 3Q '22 and 13% in 4Q '21. The quarter-on-quarter result is explained by higher administrative expenses related to inflation and the Chilean peso appreciation and higher distribution costs in Pulp and Softys. The year-on-year result is also explained by higher administrative expenses driven by inflation as well as higher distribution costs in all business divisions. On a consolidated basis, the company's fourth quarter EBITDA reached $458 million, decreasing 24% compared to the previous quarter and increasing 13% to the same quarter last year. Net income reached $221 million, decreasing from the $309 million registered in the 3Q '22, mainly as a result of the lower EBITDA and increasing from the $91 million registered in 4Q '21 as the result of the higher EBITDA and the higher income from biological assets. Now I would like to turn the presentation over to Colomba who will provide you with more details on our results by businesses.

Thank you, Fernando, and good morning, everyone. I'll start with the Pulp business. Pulp production reached almost 1 billion tons, down 10% quarter-on-quarter and 5% year-on-year. Hardwood production decreased 5% quarter-on-quarter and 1% year-on-year as we carried out maintenance downtime at the Santa Fe II mill compared to Guaíba I in 3Q '22 and Guaíba II 4Q '21. Softys production decreased 30% on a quarterly basis and 23% on an annual basis, which is mainly explained by the maintenance downtime executed at Pacífico, Laja during the quarter. Total market pulp sale volumes decreased by 8% quarter-over-quarter, with hardwood decreasing 12% with lower sales to Asia, excluding China and Europe, and softwood decreasing 4% with higher sales to China. Market pulp sale volumes decreased 14% year-over-year, with hardwood decreasing 16% and softwood decreasing 3%. In both cases, related to lower exports to Asia and Europe. Softwood cash costs totaled $419 per ton, increasing 18% quarter-over-quarter and 32% year-over-year. The quarterly and annual results are mainly explained by the maintenance downtime executed during the quarter as well as higher chemical, energy and output costs on an annual basis. Hardwood cash costs totaled $241 per ton, increasing 7% quarter-over-quarter and 27% compared to the previous year. Quarterly, this is explained by the cost involved in the scheduled maintenance downtime on the Santa Fe II mill. And annually, it relates to higher chemical, energy and pulpwood costs. Pulp prices during the fourth quarter of 2022 reached $916 per ton for softwood and $865 per ton for hardwood, a 6% and a 1% decrease, respectively, compared to the previous quarter. Compared to the fourth quarter of last year, prices continued to show an important improvement, increasing 21% for softwood and 31% for hardwood. As a result of these, revenues for the Pulp business totaled approximately $771 million, decreasing 7% quarter-over-quarter and increasing 14% year-over-year. Looking into the Forestry segment, Third-party forestry sale volumes decreased by 18% quarter-over-quarter, mainly due to lower sawlogs sales in Argentina and Brazil and lower plywood exports to Europe and the U.S. There were also lower sales volumes of millwork in Chile and the U.S. On a year-on-year basis, sales volumes decreased 13%, driven by lower pulpwood sales in Argentina and plywood in Europe and the U.S. Forestry sales decreased 16% quarter-over-quarter and increased 2% year-over-year, reaching $155 million. Revenues for our Pulp & Forestry business decreased 9% compared to the previous quarter and increased 12% compared to last year, reaching around $925 million. EBITDA decreased 29% sequentially and improved 5% annually, reaching $366 million, while EBITDA margin stood at 40%. The quarter-over-quarter result was due to higher operating costs related to higher maintenance cost and forest protection costs. There were also higher sales and administrative expenses. On a year-over-year basis, the EBITDA increase is primarily due to higher average prices, which were able to offset lower sales volumes and the higher operating costs, driven by higher cash costs as well as higher sales and administrative expenses. In the Biopackaging business, sale volumes to third parties were stable quarter-over-quarter and decreased 2% year-over-year. Quarter-on-quarter, higher volumes related to the restart of the corrugated paper machine and the fruit season in Chile were offset by lower boxboard and paper stock volumes. Year-over-year, lower volumes of boxboard, corrugated boxes and corrugated paper were compensated by higher volumes from Iguaçú. Average sale prices increased 1% sequentially with all products posting increases with the exception of corrugated paper and a change in the product mix. And average prices posted at 17% annual increase, with all products showing increases. As a result, revenues increased by 2% quarter-over-quarter and 15% year-over-year, reaching $322 million. The Biopackaging business EBITDA totaled $53 million, increasing 54% compared to the third quarter of 2022 and 4% compared to the fourth quarter 2021. EBITDA margin reached 17%, increasing from the 11% from the previous quarter and decreasing from the 18% on the same quarter of last year. The sequential increase in EBITDA is mainly from lower direct costs and the slightly higher sales. Also during the quarter, we received $19 million advanced payment from the insurance of the Papeles Cordillera paper machine. The higher annual EBITDA is mainly explained by the integration of Iguaçú as well higher average prices. This was compensated by the lower production and higher costs related to the stoppage of the corrugated paper machine as well as higher raw material costs. And now moving to Softys. Revenues decreased by 2% quarter-over-quarter and increased 33% year-over-year, reaching $757 million. Tissue paper sale volumes decreased 3% compared to the previous quarter and increased 12% compared to the fourth quarter of 2021. Quarter-over-quarter, we registered lower volumes in Argentina and Peru. Year-over-year, results are explained by the integration of Carta Fabril in addition to higher volumes in Peru. Personal care product sale volumes decreased 7% sequentially with lower volumes in all segments in Brazil and increased 7% annually, mainly explained by higher feminine care products in Argentina, Peru and Uruguay as well as higher diaper sales in Brazil, Mexico and Uruguay. Average sale prices measured in dollars increased 3% for tissue paper and decreased 1% for personal care products compared to the third quarter of 2022 and increased 20% for both tissue paper and personal care products compared to the fourth quarter of last year, which is the result of several initiatives to increase prices in local currencies to offset cost inflation. Softys EBITDA reached $67 million during the quarter compared to $69 million in the third quarter of 2022 and $20 million in the fourth quarter of 2021. EBITDA margin reached 9%. The quarter-on-quarter decrease comes mainly from higher sales and administrative expenses as well as lower personal care product sale volumes. The year-over-year increase relates to higher average prices and sales volumes, related to the consolidation of Carta Fabril. This was partly offset by increased operating costs due to higher fiber costs, especially pulp and raw materials for personal care products as well as higher SG&As. Fernando will now go through the cash generation and financial execution for the quarter.

Thank you very much, Colomba. Capital expenditures during the fourth quarter totaled $162 million, decreasing compared to the $179 million during the third quarter of 2022, but increasing from the $114 million in the 4Q '21. Free cash flow was negative by almost $200 million compared to the negative $130 million last quarter and $27 million in the 4Q '21. Main difference on a quarter-on-quarter basis comes from the lower EBITDA and the higher working capital variation. On an annual basis, it comes from higher working capital as well as higher dividends, taxes and investments. We closed the fourth quarter of the year with $4.7 billion in total debt and cash of approximately $760 million, leaving our net debt at approximately $3.9 billion, increasing compared to the previous quarter because of the higher level of debt as we issued our 20-year bullet green bond in the Chilean market for approximately $250 million in October and compared to the previous year because of the lower cash level. The net debt-to-EBITDA ratio closed the year at 1.87x, stable throughout the year. We also like to mention that on November 18, we announced that we will be paying 60% of the liquid net income of 2022 as dividends. Other relevant event that happened during the quarter was that we were once more recognized by the Dow Jones Sustainability Index as the second most sustainable company in the forest product sector, and we were selected for the Chile, MILA and emerging market indices. This reflects our long-term sustainability commitment through a robust environment awareness, information transparency, management, again, deforestation and climate resilience. Also, the BioCMPC project in Brazil continues to advance according to our expectation and by the end of 2022, reached 68% of physical completion an accumulated disbursement of $255 million. Finally, I would like to comment that we reached an agreement with the insurance company regarding the 2017 stoppage event at Guaíba. The agreement is for $215 million, which should be received in the coming days. As I mentioned earlier, 2022 was a record year for CMPC on many fronts. And even though we are facing more challenging market dynamics in 2023, we reiterate our commitment to maintaining our position as a solid investment-grade company with a disciplined approach to ensure a healthy balance sheet. We believe that this path will enable us to continue executing our 2030 strategy, while creating value for our shareholders. Colomba, please now open the floor for questions.

Thank you, Fernando. We will now begin the Q&A session. And remember, we have here today, Francisco Ruiz-Tagle, Raimundo Varela, Guilherme Viesi, who are available for questions. To ask a question, please raise your hand or take the question in the chat section of the platform. The first question comes from Caio Ribeiro.

Okay. Good morning, everyone. Thank you for the opportunity. So my first question is on costs, which increased quite significantly on a quarter-on-quarter basis. I know a large part of that is attributable to the maintenance stoppages in the quarter. But I just wanted to see if you can split the impact of that inflation and costs in this quarter between maintenance and other costs that impacted the quarter as well. And what you expect in terms of the evolution in the first quarter and for 2023 as a whole versus the previous period? And then secondly, there's this new provisional measure in Brazil that was announced late last year, which deals with transfer pricing rules, to subsidiaries, related parties abroad, right, and requires companies to adhere to OECD rules, which requires that these transfers be done at market prices, right, rather than cost plus a markup. So I just wanted to see if you see any impacts, right, for your operations in Brazil, mainly Guaíba, right, due to this provisional measure.

Thank you for the question, Caio. This is Raimundo. And the first question, our costs were higher in Q4, no doubt. We have seen during the year inflationary pressures in several of our raw materials but we are seeing that, that has reached a peak. There is inertia in the cost. So we're still seeing that in the -- in our cost of goods sold. But we are already seeing that some of those raw materials have come down. So we expect our cost situation to improve. Also, you have to take into consideration that during Q4, our sales were lower volume. So therefore, there is an issue of how those costs are diluted every ton. So we -- I think that we already passed that peak of our cost and the next quarter should be better. Regarding the second question, yes, we are aware, and we do transfer our pulp at the market price. So we are aware of those that you mentioned.

I could complement what Raimundo is saying that also in the fourth quarter, we had [indiscernible] of the maintenance period of the mills so it also influenced the cost of the fourth quarter.

No, I'm just going to take complementing Caio, in order to answer regarding this change in legislation in Brazil. Today, we are compliant in everything related to OECD transfer rule prices. So yes, we will not have any impact on that regard.

Our next question comes from Isabella Vasconcelos.

Okay, great. I have a couple of questions on my side. First, on pulp market dynamics, I know we're still during the Lunar New Year, but I just wanted to pick your brains on how market conditions have been evolving in China specifically prior to the Lunar New Year and your expectations after the holiday wraps up and the Chinese paper makers are return to activity. And also in terms of sales, I think it has been underperforming a little bit. Our expectations at least over the past few quarters. So I just wanted to understand how you are your preparing sales for the first half of this year, you have a lower concentration of maintenance stoppages. So just wanted to make sure that we could see sales volumes trending up in the first half of '23. And my second question on tissue market dynamics, specifically in Brazil, if you could comment on how demand has been evolving and in terms of pricing initiatives if you have anything that could help improve margins on top of lower fiber cost pressures. Those are my questions.

Thank you for the question. I'll take the demand part from China. China has been showing some weakness since the beginning of Q4 last year, October, November, December, we have seen some softness in the demand. It has impacted us. It has impacted our volume and now they're in the Chinese New Year. It is usual to have a lower demand during this period. Although we have seen a slight pickup in the month -- during the Chinese New Year, which has surprised us a bit positively. Our expectation is that when China comes back from the Chinese New Year and China opening up its borders should contribute to an internal demand, right, airports, restaurants, hotels, they will start being filled and their capacity will generate more paper demand and consequently, more pulp demand. We remain attentions about the developments of China. But indeed, now during the Chinese New Year, we have seen a seasonal lower demand with a slight pickup that has positively surprised us.

In connection with the tissue question. My answer would be that -- we're seeing -- still Brazil is a very competitive market. We have been in the process of increasing prices during the year. And but still haven't been able to probably to trespass the -- all the cost increases we suffered during the inflation period but I would say the demand is kind of at a normal level, and we have an interesting challenge for 2023. And so I would say that we are really we feel comfortable with what we are doing there and also incorporating Carta Fabril, which was our last acquisition in Brazil.

Our next question comes from the chat section. And it says the company has maturing debt in May this year. Will you refine as in Chile or the international markets, and this one goes to Fernando.

Thank you, Colomba. Indeed, we have a $500 million that is due in May. We have an important cash position as we announced, we reached an agreement with the insurance company, we should receive $250 million in the coming days. So with that, we are well positioned actually even to pay that bond without any refinancing. However, we have a CapEx program. We have -- we're working on closing the acquisition of Mabe in Mexico. So probably we'll be in the market that we are exploring different alternatives with banks, with bonds in Chile in international markets. So yes, we are looking at different alternatives right now.

Please remember to typing your question or to raise your hand to ask a question. Okay. We have another from Isabella.

Okay. Great. Thank you for the opportunity to follow up. On top of the comments that you made on China, which were clear in terms of the demand outlook, if it was possible to also comment on the dynamics that you've been seeing recently in Europe in terms of demand and also the outlook for prices, if possible. We have heard that demand has been decreasing in Europe in late last year, but prices have been surprisingly resilient. So I just wanted to see what you've been seeing in the market and expectations for the coming months and quarters?

Thank you, Isabella. I'll take that again. Yes, your summary reflects pretty well what's happening. Europe has been more resilient compared to China, both in terms of price and demand. although we have seen a slight decline in demand towards the end of the year, mostly in December. Prices have held up pretty strongly. Expectations are, well, probably it's unsustainable, the gap we have from Europe to China now. China has started the price decline around October last year. And Europe has held up, meaning that this gap has been increasing. Expectations are that January is going to be probably a much tougher discussion end of January, and we believe that prices will tend to move trending down towards more China than holding up that will be our expectations probably during Q1.

So I don't see any more questions Okay, I see one more question here in the chat section. So they're asking how much will cost trend down during the first quarter. But of course, we're not giving any guidance on that. I don't know if there's any other questions. Okay. So I'm not seeing any further questions. So I want to thank you, everyone, that connected to the call today and also to Fernando, Francisco, Raimundo, Guilherme for joining us for the Q&A session. Thank you so much, everyone, and have a great weekend.