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

Hello, everyone, and welcome to Empresas CMPC's Second Quarter 2023 Earnings Webinar. I'm Fernando Hasenberg, CFO of the company. And joining me today, we have Francisco Ruiz-Tagle, CEO of CMPC; Raimundo Varela, CEO of CMPC Pulp; Guilherme Viesi, Chief Pulp Commercial Officer; and Claudia Cavada, our Investor Relation Officer. Please note that the statements made today during the presentation and Q&A may include forward-looking statements to assist you to understand our expectations for future performance. These statements are subject to some risks and could cause actual results and events differ materially. For the second quarter 2023, CMPC reached $2 billion in sales, $288 million in EBITDA and $125 million in net income. Softys business showed a significant improvement in its results, reaching an EBITDA of $127 million with an EBITDA margin of 14%, increasing 85% quarter-on-quarter and 99% year-on-year, as a result of organic growth in sales and margins and the newly integrated personal care business in Mexico and from last year's acquisition in Brazil, Carta Fabril. The Pulp business generated an EBITDA of $156 million with an EBITDA margin of 19.1%, decreasing 66% quarter-on-quarter and 69% year-on-year, mainly as a result of lower pulp prices. On the other side, Biopackaging generated $25 million in EBITDA during the period, decreasing 38% quarter-on-quarter and 35% year-on-year due to lower sales, which were associated with weaker industry activity. Our sales in the second quarter decreased 5% quarter-over-quarter, which is mainly explained by lower sales in Pulp and Biopackaging businesses. Compared to the second quarter of last year, revenues increased 2%, boosted by Softys and with lower figures in Pulp and Biopackaging businesses. Operational costs reached $1.4 billion, increasing 9% compared to the previous quarter and 21% higher compared to the same period last year, representing 69% of total revenues compared to 60% on the first quarter of 2023 and 58% in the second quarter of 2022. The increase in operational costs in both cases is mainly related to the costs associated to the recent acquisitions in Softys, as well as from higher oil and raw material costs additional. In the second quarter, the pulp operation had higher maintenance expenses than in the first quarter according to its maintenance program. Consolidated other operating expenses reached $329 million for the quarter, 14% higher quarter-on-quarter and 36% higher year-on-year, representing 16% of total revenues compared to 14% in the first quarter of 2023 and 12% in the 2Q '22. In both cases, the variation reflects higher distribution and administrative expenses, subject to inflation and currency appreciation occurred in most of the countries where we have operations. On a consolidated basis, the company's first quarter EBITDA reached $288 million, decreasing 48% compared to the previous quarter and 51% compared to the same quarter, last year. Net income reached $125 million, decreasing from the $226 million registered in first quarter of 2023 and decreasing from the $225 million registered in the second quarter of 2022. This is explained by weaker operational figures in the Pulp business and offset partially by a strong performance in the Softys business. Now I would like to turn the presentation over to Claudia, who will provide more details on our business results.

Thank you, Fernando, and good morning, everyone. I'll start with the Pulp business. Pulp production was 980,000 tons, down by 8% quarter-over-quarter and 3% year-over-year. Hardwood production was 780,000 tons, decreasing 11% quarter-over-quarter and 2% year-over-year. Both scenarios are explained by the maintenance downtime executed during the quarter at the Guaíba II mill. Softwood production was 200,000 tons, increasing 3% quarter-over-quarter, whilst decreasing 7% year-over-year. The quarter increase was driven by improved production at the Laja mill, while the yearly decrease is due to lower production at the Pacifico mill. Regarding pulp sales volume, quarter-over-quarter increased by 14%. This was due to higher volumes of hardwood, up 18% in Asia and Latin America. Meanwhile, softwood volumes reflected relatively stable levels with minor exports to Europe. Year-over-year, pulp volumes were also higher by 2% with higher hardwood exports mainly towards China, while there were lower softwood sales due to lower exports to all regions, except for China. In terms of cash costs, for softwood, cash cost reached $392 per ton in the second quarter of 2023, in line with the previous quarter with $394 per ton and increasing 30% year-over-year. The year-over-year increase relates to higher harvesting and transportation cost of wood as well as energy and chemical products. Hardwood cash cost reached $273 per ton in the second quarter, increasing 17% quarter-over-quarter and decreasing 22% year-over-year. Hardwood cash cost reached $273 per ton in the second quarter, increasing 17% quarter-over-quarter and increasing percent 22% year-over-year. The increased cash cost in both cases are a result of higher harvesting and transportation cost of wood, as well as energy and chemical products. Pulp prices during the first quarter of the year were $682 per ton for softwood and $549 per ton for hardwood, both decreasing from the first quarter of 2023 by 21% and 27%, respectively. Compared to the second quarter of last year, price were also lower by 29% for softwood and 31% for hardwood. As a result of the priorly mentioned, revenues for the Pulp business totaled $660 million, decreasing 27% quarter-on-quarter as well as 22% year-on-year. Regarding the Forestry business, soft volume was 1,113,000 cubic meters, up by 22% quarter-over-quarter from higher sales along all wood segments except for softwood. And year-over-year volumes increased 36%, primarily from improved sales in all segments. Forestry sales totaled $157 million, 8% above quarter-over-quarter and 6% below year-over-year. With this, revenues for our Pulp and Forestry business were $817 million, decreasing 22% compared to the previous quarter and 19% compared to the last year's same period. EBITDA decreased 66% quarter-over-quarter and 69% year-over-year to $156 million with an EBITDA margin of 19.1%. The decrease in generation of EBITDA in both scenarios was caused by the decline in pulp price within international markets, which adds to higher energy costs and chemical products as well as the appreciated currency effects during the period. And now moving to Softys. Revenues increased significantly on both quarter-over-quarter and year-over-year, being up by 20% and 35%, respectively, in totaling $905 million. This occurred due to higher sales in the tissue paper segment by 7% quarter-on-quarter and 22% year-on-year. Personal care revenues also improved by 54% quarter-over-quarter and 70% year-over-year. Tissue paper sales volume decreased by 1% compared to the previous quarter and increased by 13% compared to the second quarter of 2022. Quarter-over-quarter, we registered lower volumes in Mexico and Peru. Year-over-year results are explained by higher sales volume in Brazil after the consolidation of Carta Fabril. Personal care products volume increased in all segments, both quarter-over-quarter and year-over-year driven mainly by the consolidation of Grupo PI Mabe in Mexico. Softys EBITDA for the second quarter increased compared to the previous quarters, reaching $127 million with a margin of 14%. The quarterly improvement is mainly attributed to higher average selling prices and to a more favorable currency effect, whilst the yearly increase is also driven by the 2 priorly mentioned reasons in addition to a relatively lower raw material price. In the Biopackaging business, quarter-over-quarter and year-over-year sales volume to third parties reduced by 8% both. The quarterly decrease is attributed to lower corrugated boxes, corrugated paper, cardboard and sack kraft. Year-over-year, the lower volumes range for -- from molded pulp trays, sack kraft and cardboard. These increases are explained by a damp fruit and vegetable reason in Chile. And on the other hand, corrugated paper sales increased relative -- relevantly after the normalization of the [ PM20 ]. Average sales price decreased by 1% quarter-over-quarter and increased by 4% year-over-year. As an outcome, revenues decreased by 9% quarterly and by 4% yearly, totaling $293 million. In the second quarter of 2023, EBITDA decreased by 38% quarter-over-quarter and 35% year-on-year, reaching $25 million with a margin of 8.5%, decreasing against 12.6% in the first quarter of 2023 and 12.7% in the second quarter of 2022. The quarterly decrease is mainly through lower sales volumes and average sales price. The yearly outcome is explained by lower revenues, higher unitary cost and higher administration and sales expenses.

Thank you very much, Claudia. Capital expenditures during the second quarter total $447 million, increasing from the $153 million recorded in the first quarter of 2023, up from the $385 million of the second quarter of 2022. The figures are highly related to the purchase of Grupo Mabe in Mexico by $269 million in 2023 and the acquisitions of Carta Fabril and Iguazú in the second quarter of 2022 for $185 million and $87 million, respectively. This quarter, the free cash flow was negative as well as in the second quarter of 2022. The lower Q-on-Q result is attributed to the lower EBITDA, higher investments, increased dividend payments and higher income tax payments. The lower year-on-year result is also explained by the mentioned factors, partially offset by a reduction in working capital of $20 million in the second quarter of 2023 compared to an increase of $126 million in the second quarter of 2022. We closed the second quarter of the year with $5.2 billion in total debt at cash for approximately $840 million, leaving our net debt at approximately $4.4 billion, increasing compared to this previous quarter, which is mainly explained by our recent M&A activities. The net debt-to-EBITDA ratio closed the quarter at 2.3x, higher than the 1.7x and 1.9x in the comparable periods but still below our internal policy range, which goes from 2.5x to 3.5x. Regarding our debt profile, the average interest rate of our debt instruments is 4.72%, and the average maturity is close to 5.7 years. I would like to mention some relevant events in this occasion. In May, our subsidiary, Softys, took control of Grupo PI Mabe in Mexico, a player with 30% of market shares in the baby diapers market in that country. With this, Softys is now positioned as the second largest player in personal care products in the region, with great opportunities to create value for our company. In the U.S., CMPC also integrated a new business in July, Powell Valley Millwork, a company dedicated to developing producing and marketing wood products. This reflects our interest in serving the American market with a wider product portfolio and with a more agile response to the demand dynamics. Regarding our BioCMPC project, it has made progress according to our plans, reaching 87% of physical completion as of June 2023 with an accumulated disbursements for $460 million. Finally, I would like to mention that the company has carried out important financing activities through the placement of bonds in the international markets. First, in the U.S.A. market, a 10-year term green and sustainability-linked bond for $500 million. This is the first issuance of this kind of bonds by Latin American issuer and represents our leading position in sustainable financing. And second, 2 bonds issued in the Mexican market for a total of MXN 3 billion, equivalent to almost $190 million with a maturity of 2 and 9 years. The proceeds will also use our financing green and sustainability-linked projects, which will allow us to reach our goals in the field of the sustainability and other 2030 strategic goals. Now Claudia, please open the floor for questions.

Thanks, Fernando. We will now begin the Q&A section. And remember, we have here Francisco Ruiz-Tagle, Raimundo Varela and Guilherme Viesi available for your questions. [Operator Instructions] And the first question comes from Rafael Barcellos, Santander.

My first question is about pulp markets. I mean, I just would like to understand if you have also followed the recent price hike announcements for hardwood in China. Other than that, I would also like to understand your thoughts on the implementation of these price hikes. I mean, in the end, how do you believe that it could be in terms of implementation? And my second question is about the Softys, right, your tissue division. So we saw your margins reaching 14% this quarter, right? I understand that this is a combination not only of the integration of the assets that you acquired in Brazil and now in Mexico, but it was also helped by the weaker pulp prices in the quarter, right? So how much of this 14% is sustainable going forward? I mean, mostly after the full integration of the assets in Mexico, do you believe that we can really expect a new level of EBITDA margins for Softys going forward?

Okay. I'll take the first part of the question. Thank you for the question, Rafael. Well, prices in China have been slightly increasing, over the past couple of months. They've touched the bottom, and now we went for the second implementation of a price increase. We don't expect a rally, but we also cannot underestimate the pressure that the high-cost producers are facing at the moment. We don't believe the current prices are sustainable for the long term. We've just seen, for example, strikes being announced in Canada, curtailments being announced by other hardwood producers. So, we are carefully optimistic for the future, but we also don't expect a price rally.

Thank you, Rafael. I will take the second part regarding the tissue business. Of course, we now have Mabe in Mexico and the new operations in Brazil for Carta Fabril that we didn't have last year. But regarding margins, as you know, pulp prices in the region are still reducing compared to China or other markets. So, still in our cost base, we haven't seen the full reduction of pulp prices. So the 14% you saw on our quarter results, we believe they are sustainable and probably, they should be even better in the next quarter. Of course, it will depend on our availability to maintain prices in the markets, where we participate.

And I can add also regarding that question that we are -- of course, are working hard on the integration of Mabe and the operation already acquired in Brazil, last year. And this is also a good opportunity for CMPC to improve the EBITDA margins.

Okay. Okay. now the next question comes from Leonardo Neratika from BofA.

So first, I wanted to do a follow-up on this tissue margin profile question. Can you hear me?

Yes.

Oh, cool. So this -- the first question is on the tissue profile margin as you said, we were having. Do you believe that with this consolidation of pulp margin, the other assets you did, the target of the margin of 15% in the long term could be revised at [indiscernible] because of the profile of these new segments? And then, a second question is on the cost topic. So we saw some pressure on the pulp cost this quarter, particularly for hardwood. So I wanted to talk, if you can comment on what's the trend so far and what you're expecting going forward?

Yes, I will take the first question regarding the tissue and the margins you were mentioning. And as we said before with Fernando, we believe we are in a way of getting this higher EBITDA margin, hopefully, to reach 15%. But it's -- we don't have a clear expectation about when within the next month. But it is important to consider what Fernando explained about -- the reduction of the pulp prices are not fully integrated now probably in the cost of the tissue papers. So, I would say that in a right way to get our target.

I'll take the second question regarding the pulp cost. We have -- still have during the first half of this year have pulp costs a bit higher than what we expect, influenced mainly by currency and also some of the annual shutdowns that we had during the first half of the year, especially in Q2. We are seeing a better situation in July. And we expect, therefore, that the prices during the second half of the year will tend to -- sorry, the cost will tend to come down. We're expecting that to happen. We are working very hard in different plants to control our costs, and we are already seeing some of the results.

Okay. And the next question comes from Thiago Lofiego, Bradesco.

Two questions here on my side. The first one, Guilherme, how was the purchasing pattern in China in July, compared to May and June? I believe, May and June were abnormally strong months. So, I just want to understand if that continued in July. And also what are you guys seeing in August? Just want to understand, May and June, in my understanding, is that there was a little bit of restocking, a little bit of opportunistic purchases -- purchasing because of very low prices, below $500. Just wanted to understand the pattern -- the buying pattern at this point. And then the second question, pulp inventories with paper makers in China, what's your view? Are they closer to normal at this point? And then an add-on here, what are integrated producers doing at this point? Are they buying more or not yet significant volumes from them?

Thank you for the question, Thiago. June, it was a strong month. You are correct. Typically, when prices touch the bottom, Chinese tend to restock. We have seen that phenomenon. CMPC specifically has focused on lowering its inventories. China has contributed a lot to that. I think, I alluded about it in the previous call that we were working hard on reducing our inventories. August continues to be a strong month. We've -- as a matter of fact, our hardwood in China has been pretty much closed completely for August with the new price implementation. So it continues strong. Your question regarding inventories, the majority of the pulp inventories in China are still on the hands of the producers, are not yet on the hands of the paper producers. And yes, I think that's more or less this. We've managed to lower our inventories during Q2. We find ourselves now, in a comfortable position when it comes to pulp inventories.

Then, if I may, do you think this inventory situation is because the paper makers, they know there is -- there will be more visibility on supply given the ramp-ups that we are seeing in the market? And therefore, they're opting to run with lower-than-normal inventory levels? Do you think that's the situation here?

I think it's partially that, Thiago. Indeed, they know that there are 2 new mills coming on stream. They don't necessarily need to have their inventories very high. Although it is a somewhat dangerous situation because with the current price levels, the domestic producers are curtailing, and they might find themselves in a situation where they have very low inventories and not necessarily a lot of pulp. But it's partially true. Your scenario is not totally wrong.

And then, if you could comment on the integrated producers. Do you think they are -- are they buying more or less? What's the situation there?

They are buying more, yes. At current price levels, we see more and more curtailments. Obviously, ForEx impacts a lot and the wood chip price impacts a lot on this situation. We have been following very closely, the wood chip costs. They have been going up slightly. That favors market pulp purchases. And yes, we have seen a slightly higher purchase of domestic producers.

The next question comes from Alexandra Symeonidi.

Most of my questions have been answered. I just have two. I was wondering how much of the pulp sales were to China, this quarter? And the second question is, have you already had some thoughts of how to address the 2024 dollar bond maturity?

I'll take your question. It's more or less roughly 30% of our sales have gone to the Chinese market in this quarter. I'm not sure, if I got the second part of your question.

The second question is kind of deal with the [indiscernible] dollar, I guess? The -- if you can repeat that?

Yes. Can you hear me? I'm not sure if I'm muted again. Okay, I'm not muted...

No, no, we hear you.

Sorry. So my second question was if you already have any plan to address the 2024 dollar bond maturity or you will think more of a [indiscernible] maturity, which is in a year time.

Okay. Thanks, Alexandra. Yes, I can answer that. For the year 2023, we already sold all our financial needs, but we haven't addressed yet the refinancing of the bond that is due in September 2024. That is a $500 million bond. Probably, we'll address that later this year or during the first semester of next year, depending on market conditions.

Okay. Next question comes from [ Eduardo Palma ] from [ BC Chile ].

I have three main questions. The first one is about how do you see the Softys business is having right now considering the last results? Second question is about -- are you considering more diversified bonds for U.S. and Mexico that you already have? The third question is considering the Pulp business and the lower prices that we are seeing in the market, are you considering taking more actions to make any kind of investment in Softys and Biopackaging?

You want to take the tissue question?

Well, regarding the tissue question, thank you for your questions, Eduardo, the tissue business, we actually -- if I correctly understood your question, we are seeing that business, where a lot of enthusiastic. I mean, we think that still, we are very -- one of the most important players in the region and the most important in Latin America with presence in 8 different countries. And we see great opportunities in terms of the future of these markets. So -- and also, we are taking a more important position in Brazil, in Mexico, 2 very big important countries. So, the way we are seeing this business is that we see opportunities. And now we are, of course, consolidating and integrating our last acquisitions. So this is my answer for the first question.

Yes. Regarding the second question about the financing activities, for us, issuing a bond in Mexico was important with the acquisition of Mabe in Mexico. Now, we have an exposure to the Mexican peso, so having debt in Mexican pesos makes sense to us to hedge that exposure. And regarding the issuance in the U.S., it's because that is our main market for financing the company in the long run. So probably, we will be exploring those alternatives as well as Chile and other alternatives that we -- for instance, we have in Brazil for financing the future needs of the company. And regarding the M&A activity, as we have mentioned in the past, we are always looking for alternatives in all the businesses that we have defined strategic. Of course, that include Biopackaging. But, as we have said regarding tissue, we believe we are in a stage where we need to focus on make our business more profitable and to consolidate the acquisitions we have made in the last couple of years that include Sepac, Carta Fabril, both in Brazil, and the recent acquisition in Mexico.

I can add to the last question. We believe that the current pulp prices are not really sustainable. As Guilherme mentioned, there are several producers who has high cost and who are with problems with these low prices. So, we believe these prices are not sustainable. Our investment decisions are really more taking the medium to long term than the spot situation.

Okay. And just to confirm some of your answers, considering the current scenario where the lower prices are not sustainable to the future, are you considering taking more actions or any acquisitions in Softys and Biopackaging in terms of any kind of investments?

No. As we said, Eduardo, in Softys, we are concentrating our efforts in making the business -- this business more profitable and in a consolidation process. In Biopackaging, we're also concentrated in consolidating what we acquired in Brazil, last year. It was so. And as Fernando said, and this business with the eyes open to see some other opportunities we find that.

Okay. Now next question comes from Jens Spiess from Morgan Stanley.

Can you hear me? I just wanted to ask, you mentioned that the pulp prices that you're currently seeing are not sustainable. I guess, you are referring already after implementing the August price hike or the price that we're seeing. Do you think you could increase prices further in September? I know it's a bit early, but it will be interesting to know what you're feeling is there. And also, regarding the long-term pulp price assumption, what are you assuming? Are you assuming something closer to $600, $580? It would be interesting to know what price you're considering.

Thanks for the question, Jens. I'll take that. It's not impossible to have another price increase. We were subject to many external factors here. We're subject to ForEx, wood chips costs, supply-demand. We are certainly not expecting from fundamentals that demand to drive the prices rallying up, but we also don't underestimate the pressures that the high-cost producers are facing. It's not an unbelievable scenario to think that there will be more closures, there will be more strikes, there will be more curtailments, and that could eventually support a price increase.

Regarding the long-term prices, I think -- and the current one not being sustainable, but we -- yes, we work with prices in the range of $650 to $700 for the short fiber. That's what, we see as a more long-term price.

Okay. Understood. Perfect. And on Softys, if I may, I know you mentioned you're concentrated currently on the integration of the acquisitions. But after that is behind you, where would be the next market you expect to increase capacity in -- within Latin America? And maybe -- do you already know, if you would be investing more on the personal care side? Or would it be more tissue?

Yes. Thank you, Jens. We are pretty comfortable with the position we have today in the region. And so far, we haven't defined any other plan to move into another region. So our focus today is, as Francisco mentioned, is to make the business more profitable and to take all the advantages and the synergies of the acquisition we have made. So yes, we are comfortable where we are today.

Okay. The next question comes from Rodrigo Godoy, CrediCorp.

Yes. Can you hear me?

Yes.

Okay. And concerning the Biopackaging business, could you give us some more color on what were the main drivers that are explaining the lower sales volumes on a yearly basis and also the higher production cost? And also, a related question is, are those effects expected to change in the coming quarter?

Well, in connection with the -- Rodrigo, thanks for your question. Actually, in general, we have been -- we have seen that the volumes are affected because of the activity of the manufacturer businesses. And at the end, you see what is happening with the papers that you use for producing packaging in the world like kraft liner or sack kraft or what is happening with the end product like boxes and boxboard, for instance. There are some markets that have been affected like the U.S. or Europe, even Asia in terms of volumes. So, we see less activity. And this is the reason why we -- especially in the second quarter, probably we have been seeing some effect in -- on our sales. I'm not sure to answer the whole question. Do you have any -- probably some other thing?

Yes. It's also related to what are the main explanations for having higher production costs? And also, if you see that some of this negative situation of the market can change in the coming quarters?

Yes. In terms of the situation could change in the coming quarters, well, it will depend on the growth of the economies are very well connected with that. Hopefully -- we are not seeing probably a dramatic change in the short term. Probably by the end of the year, we could be seeing some there. And regarding the costs, I would say two things in Biopackaging. One is connected with the -- in the case of boxboard, that is an important point for us. Still some higher prices in the wood that we process for producing boxboard. And also, the fact of having a stronger dollar has affected some of the costs. So, I would say those are the main 2 explanation for the higher cost in our Biopackaging business.

Okay. Thank you all for joining us today in this quarter -- second quarter '23 presentation, and have a great day.

It seems that there is a question.

No.

In the chat.

Let me see, one sec, in the chat. No, I don't see more in the chat box here. I can't see more questions, sorry.

One related with Mabe. I'm not sure, is the people still connected there or no?

Yes.

Yes, they are.

[indiscernible].

We can read that.

[indiscernible], are you there?

[indiscernible].

No. Okay. This is just for the chat. It's not in the list here to talk. So the question is about the acquisition of PI Mabe, and how it will be increasing the sales volume of the personal care products.

What is more important here with this acquisition is that this is an important move for CMPC and Softys, of course, in Mexico. And we are taking about 30% of the market of personal care in Mexico. So, this is our answer for that. More than in terms of sales, I would say that this is an important market share -- new market share for CMPC in the region.

Okay. Now we can close the call. Thanks again all for -- all of you for joining us today in the second quarter '23 earnings call, and have a great day.