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

Hello, everyone, and welcome to Empresas CMPC's First Quarter 2024 Earnings Webinar. I'm Fernando Hassenberg, CFO of the company. And joining me today, we have Francisco Ruiz-Tagle, CEO of CMPC; Raimundo Varela, CEO of CMPC Pulp Division; Guilherme Viesi, Commercial Director at CMPC Pulp; and Claudia Cavada, our Investor Relations Officer. Please note that the statements made today during the presentation and Q&A may include forward-looking statements to assist you in understanding our expectations for future performance. These statements are subject to some risks and could cause actual results and events to differ materially. For the first quarter of 2024, sales were $1.951 billion, EBITDA was $399 million and net income was $209 million. The Pulp business generated an EBITDA of $193 million with an EBITDA margin of 24.8%. EBITDA increased 164% quarter-over-quarter, which is explained by a higher average sales price, lower cash costs and higher sales volumes. Softys business showed an EBITDA of $165 million with an EBITDA margin of 18.8%, increasing 8% quarter-over-quarter, while increasing 139% year-over-year. The quarter-on-quarter and year-over-year increase is primarily attributed to a value-focused strategy and improved sales mix, combined with lower input costs. At the same time, Biopackaging generated $65 million of EBITDA, in part coming from an insurance compensation. When considering only the operation, the adjusted EBITDA was up 74% quarter-over-quarter and down 20% year-on-year. The quarter-on-quarter increase was a result of a normalization of inventory costs. The yearly variation was due to a weaker performance in industry activity along with higher costs. In the first quarter, sales were close to $2 billion, slightly lower than the previous quarter. This was due to lower average price in Softys offset in part by the higher sales volumes in Pulp. Compared to the first quarter of last year, revenues decreased by 8%, which is attributed to lower average selling prices in both Pulp and Biopackaging. This was partially offset by higher average selling prices in Softys. Operating costs reached EUR 1.234 billion, decreasing 12% quarter-over-quarter and 4% year-over-year. This represented 63% of total revenues in the first quarter of 2024, which compares to the 71% we had in the fourth quarter of last year and 60% in the first quarter of 2023. The decrease in operating costs compared to the fourth quarter of 2023 is attributed to lower direct cost in Softys and reduced maintenance expenses in Pulp. Other operating expenses account that comprises distribution costs, administrative expenses and other expenses by function, amounted to $318 million in the first quarter, decreasing 3% quarter-over-quarter and increasing 10% year-over-year. The ratio of other operating expenses to revenue was 16% in the first quarter of 2024, lower compared to the 17% we had in the last quarter and higher than the 14% recorded in the first quarter of 2023. The yearly valuation is driven by the increased distribution and other expenses by function, largely attributed to the integration of Grupo P.I Mabe in Mexico. However, this was offset by lower administrative expenses in Pulp. Given the aforementioned effects on a consolidated basis, the company's first quarter EBITDA was almost $400 million with a contribution of 46% from Pulp, 39% from Softys and 15% from Biopackaging. Net income totaled $209 million during the period, increasing from the $35 million in the previous quarter and lower than the $226 million recorded in the first quarter of 2023. Both figures are directly correlated with a higher and lower EBITDA generated, respectively. Now I would like to turn the presentation over to Claudia, who will provide more details on our results by businesses.

Thank you, Fernando, and good morning, everyone. I will start with the Pulp business. Pulp production was 1,043,000 tons, increasing 19% quarter-over-quarter and decreasing 2% year-over-year. Out of it, hardwood production was 853,000 tons increasing 22% quarter-over-quarter and decreasing 2% year-over-year. The quarterly variation is explained by lower downtimes of pulp mills mainly at Guaíba II after a general shutdown of 26 days in the first Q '23, which allowed the ramp-up of the BioCMPC project. Softwood production was 190,000 tons, increasing 9% quarter-over-quarter whilst decreasing 2% year-over-year. Regarding the Pulp sales volume, quarter-over-quarter increased by 9%. This is explained by higher exports to China and LatAm for both fibers. Year-over-year, both short fiber and long fiber increased by 3%. In the case of hardwood, this is attributed to higher exports to China and Latin America. On the other hand, the growth in softwood is also explained by increased exports to the same countries plus the rest of Asia. Pulp prices during the first quarter of the year were, in average, for softwood, $719 per ton and $628 per ton for hardwood. This is an increase of 1% for softwood and 10% for hardwood quarter-over-quarter. Compared to the first quarter of last year, price were lower by 16% for both softwood and hardwood. As a result, revenues for the Pulp business totaled $631 million, increasing 19% quarter-over-quarter and decreasing 30% year-over-year. Regarding the Forestry business, sales volume was 943,000 cubic meters, 4% up quarter-over-quarter as a result of higher sawlogs and pulpwood sales. This was offset in part by lower sales of sawn timber and plywood. With this, revenues for the Pulp and Forestry business totaled $778 million, increasing 13% compared to the previous quarter and 26% below when compared to the last year same period. For hardwood, cash cost reached $244 per ton in the first Q '24, decreasing 15% quarter-on-quarter and increasing 4% year-over-year. When compared to the previous quarter, lower costs were incurred across all lines, including wood, energy, chemical and other materials. However, year-over-year, cash costs increased due to higher wood costs, partially offset by lower chemical costs. For softwood, cash cost reached $371 per ton in the first Q '24, decreasing 6% from the $393 per ton recorded in the first Q '23. The quarterly variation is due to lower cost of energy and other materials. Year-over-year, cash cost decreased 6% as well, reflecting largely lower cost of wood and chemical products. EBITDA for the Pulp business increased 164% quarter-on-quarter and was down 58% year-over-year, recording $193 million with an EBITDA margin of 24.8%. The increase in EBITDA compared to the first Q '23 is mainly related to higher average selling prices, lower cash costs and increased sales volume. The lower result compared to the first Q '23 is related to pulp prices in international markets. And now moving to Softys. Revenues decreased by 12% quarter-over-quarter and increased 16% year-over-year, totaling $877 million. Tissue paper revenues decreased by 13% quarter-on-quarter and 3% year-over-year. In the quarterly comparison, average prices dropped by 7% and volume also declined 6%. In the yearly comparison, average prices increased 11%, but volume declined 18%. In both cases, the outcome is mainly attributed to reduced activity in regional countries. In the Personal Care segment, revenues declined 10% quarter-over-quarter and increased 58% year-over-year. The quarterly comparison reflects a decline of 11% in prices and 2% in volume. In the year-over-year comparison, the increase in sales is explained by a 38% increase in both volume and prices. Softys EBITDA for the first Q increased by 8% compared to the prior quarter and increased 139% year-over-year, reaching $165 million with a margin of 18.8%. These increases are explained by a value-focused strategy and sales mix as well as lower input costs. Additionally, the yearly growth is explained by stronger operations in the region and the integration of Grupo Mabe in Mexico. In the Biopackaging business, quarter-over-quarter, sales volume to third parties decreased 3% due to lower sales in paper sacks, corrugated paper and corrugated boxes. This was partially offset by higher sales in boxboard, molded pulp trays and other papers. Revenues increased by 6% quarter-over-quarter and decreased 9% year-over-year, totaling $295 million. This figure comprises $21 million in insurance compensation received during the quarter. Excluding the latter, adjusted revenues declined by 1% quarter-on-quarter and declined 15% year-over-year. The context is still challenging for several industries that we serve. In line with this, average sales price increased 2% quarter-over-quarter and decreased 15% year-over-year. As a result, in the first Q '24, EBITDA increased by 242% quarter-over-quarter and 60% year-over-year, reaching $65 million. EBITDA margin of 22% increased against the 6.9% recorded in the first Q '23. Excluding insurance proceeds, the EBITDA showed a 75% increase at a quarterly basis and a lower 20% year-over-year. This growth is mainly due to lower normalized inventory costs.

Thank you very much, Claudia. Capital expenditures during the first quarter totaled $152 million, decreasing from the $220 million recorded in the fourth quarter of 2023 and similar to the figure reported in the first quarter of 2023. Also, during the period, there was a net outflow of $176 million compared to an outlook of $144 million in the fourth quarter of 2023 and $242 million inflows in the first quarter of 2023. It is important to mention that in January, CMPC paid $116 million in dividends. We closed the first quarter of the year with nearly $5.5 billion in debt. Cash and cash equivalents, including financial investments with short-term maturities were $701 million, leaving our net debt at $4.756 billion. As anticipated on our last conference call, the net debt-to-EBITDA ratio peaked this quarter at 4x, higher than the 3.5x we had in the last quarter and the 1.7x we had in March 2023. We expect this number to improve in the coming quarters. Regarding our debt profile, the average rate is 4.88% and the average maturity is 5.26 years. I would like to highlight some important events up to date. In February, CMPC issued a $500 million green and sustainable linked bond in the United States market. The bond has a 10-year maturity, a coupon rate of 6.17% and a spread of 185 basis points over the U.S. Treasury. It is important to mention that this lower spread is explained among other things because we were able to build a strong book with more than 6x oversubscription. Also, the company received new recognitions. Standard & Poor's ranked CMPC among the top 1% of the most sustainable companies in the world. Only 2 LatAm companies were ranked in this position. Our CEO, Francisco Ruiz-Tagle, was recognized by Fastmarkets Forest Products Award as the CEO of 2024. We are very proud on all the recognitions we get from the market that encourages to continue working on the sustainable of our company. Finally, CMPC announced an MOU with the government of Rio Grande do Sul regarding a new pulp mill. The Natureza project considers the installation of an up to 2.5 million tons of hardwood pulp production in Rio Grande do Sul, Brazil. Natureza is currently under environmental and technical evaluation and is expected to be submitted for the approval of the Board of Directors by mid-2026. If approved, the mill should ramp-up operations by 2029. For this project, CMPC is considering an investment of approximately $4.5 billion. Now I will turn the word on Claudia for the Q&A section.

Thank you, Fernando. [Operator Instructions] And now we have the first question from Rafael Barcellos from Bradesco.

Given the recent tragedy in the Rio Grande do Sul state in Brazil, could you please elaborate on the impacts on your Guaíba operations. And here, if you can comment on the impact on volumes and costs would be interesting. And my second question is about the Tissue division. So Softys margins have reached 19% this quarter. So just wanted to understand whether you could continue to increase profitability in the division? Or if this level already captures all synergies from the recent acquisitions?

Thank you, Rafael. This is Raimundo. I will take the first question regarding the Rio Grande. Thank you for your sympathy. It is actually a huge tragedy what has happened in Rio Grande, it's happening still. And we are doing all what we can to help our first, our people and then the communities that surround our operation and the city -- the different cities where we operate. We are in very close contact with authorities to coordinate all this help, and we will continue to do so. Our operation is -- the mill is running at about 80% of capacity at the moment and given some restrictions in the supply of raw materials. There's several roads and highways that have been affected that are flooded and they are being repaired. So we foresee that we will stay at 80% for a few more days. And then we are evaluating this on a daily basis. And we hope to come back to 100% production soon, but we cannot provide an exact date for that.

Regarding the second question, Rafael, connected with the Tissue business. Just to mention that it is true we have increased our margins this year. Basically because we have been looking for better results and doing a lot of different actions in terms of improving these margins like reducing SKUs and working hard on costs and negotiations of some raw materials in the different countries. I wouldn't say that we are ended our plan of being more profitable in the Tissue business. We haven't captured all the synergies as you were asking. Still there are some markets where we have good opportunities.

Okay. Just a quick follow-up. I mean, are you already able to measure any potential impact in terms of volumes for Guaíba? And also in terms of costs as well?

As I said, we are running at about 80% of the mill. So that's basically 1,000 tonnes a day that we are not producing. And cost -- I mean our costs so far, I don't think they are particularly affected. We have a little bit of extra cost because we deviated some movement of our wood from one area to another one, but nothing significant. And we are -- we deal more importing the community and all the efforts in the following months. But at the moment, we also -- we cannot provide a figure for that.

Our next question comes from Marcio Farid, Goldman Sachs.

A couple of questions on my side. The first one on Guaíba. Just to confirm if outbound logistics is still running relatively well. I know you mentioned production at 80%, but just trying to understand if outbound is still running well as well. And also on Guaíba, there was a notable cost improvement in the first quarter as well. which my understanding is that is the result of the BioCMPC project ramping up and then obviously, the bottleneck and cost improvement that comes with it, right? So if you assume you are back to normal situation, right, eventually in the second or third quarter. Can we expect more cost improvements as a result of project delivery? Or have you delivered most of it in the first quarter already? And then on the Natureza project in Brazil, if you can provide us some details in terms of the next steps from here, how long can the license take? How much would you have secured for now? And how much more is needed? And then if you can, obviously, it's $4.5 billion CapEx is nearly as much as the company's market cap today, right? So can -- is it fair to assume that this is where the company is focused in terms of capital allocation is going to be for the next few years? Meaning the bolt-on acquisitions on tissue and paper that you've done in the past are likely going to be put aside for now and then obviously focus on tissue on toes. And finally, Guilherme, if you can comment on what you're seeing on the pulp markets, that would be great as well, please?

There was like 10 questions in one. This is Raimundo. I'll comment on the -- if I try to remember the first question. Outbound logistics, yes, our outbound logistics is working with some difficulties, but it's working. We have been -- we are able to load our barges and to send them to Rio Grande. The Port of Rio Grande is operating, has been operating, we have been able to load our ships. The [indiscernible] terminal -- wood terminal, that 1 is not working at the moment because the water level is too high. It was working a few days ago, but now it's not working. You should come back, but we don't know exactly when. So the outbound logistics is working with some difficulties -- it is working. I think our supply chain is very resilient. And I think this is a demonstration of that. You asked about the Guaíba cost performance. It has been good. I think the ramp-up of the mill has been exceptional really. We're extremely happy with the work that our team has done over the last few months with the start-up of the of Guaíba II bio project, extremely pleased. I think our team have done a fantastic job, really, really world-class. As a consequence of that, the production levels and the cost performance has been very good. We still see some room for better -- for cost improvements. It will be impacted, no doubt by the mill running out at 80%. But -- you take that out when we are back to 100%. I think there's still some room for -- as the mill continue to ramp up, we still have some room for cost improvement.

In connection with Natureza, your questions. First of all, just to say that we started the process of building the new project, and we are just in the really beginning of that, starting the licensing process. And so we already signed a protocol with the states for starting this process. We are not thinking in having everything ready before a couple of years in terms of the approvals. And as we said before, we have not any formal approval for the Board of Director about this. We're just preparing the -- everything we need for having a potential project in the states. We feel very comfortable about our operations in the states. We had the opportunity to really share what all of our goals with the authorities and they receive us really well there. And we're working on all this process. We are also being very open with the community about this. And so I would say, starting the process. In terms of the forest, we also are in a way, I would say, to provide the wood we need for that. We are a little bit over 50% of the wood winning for the new project. It's ready and say we continue this -- with all this process. In terms of your question about capital allocation, you have to say, well, CMPC, we actually wrote a very clear strategy for the year 2030. Natureza, of course, in our pulp business as part of our initiatives. But of course, we have other called business like tissue, for instance, we're not thinking in just focusing everything in Natureza. We are thinking also and continue our process with the other businesses. Of course, we have to balance that. We are not -- we don't have the possibility to probably to do everything at the same time, but we consider that in our balance. And probably Fernando want to add something about that.

Yes. And thanks, Marcio, and complementing on Francisco. Of course, we will be balancing our CapEx and capital allocation because we understand we need to prepare the balance sheet for a project the size of Natureza. And as always, CMPC has been very responsible in maintaining a strong balance sheet and in executing projects like this with a very strong balance sheet. So we will be working on that as well. And I know maybe.

I'll take the last one. Marcio, thank you for the question. The market remains good, I would say, stable, relatively tight. I think it's not from a demand perspective, but rather from a supply perspective. The challenges on the supply side remain mainly based on logistics. I think the 2 main arteries of supply chain in the world, which are the Suez canal and the Panama Canal are still operating relatively stressed. We also continue to see closures of pulp mills across the world, mainly in North America. We just saw yesterday another announcement of another -- a new closure, 300,000 tons off the market. According to my calculation, up to date this year, it's already 1.4 million, 1.5 million tons out of the market with yesterday's announcement. And demand remains flat. So with these closures and supply chain issues means that the price is going up. The negotiations during the months have been so far successful in -- on the softwood side. We have been able to implement our price increase. On the hardwood side, is still not 100% implemented, but we are fairly confident that this will go through given all the shock on the supply side.

Okay. I see questions that are repeated, so about the dynamics of the market price for Pulp. Could you give some color on negotiations for implementing price hikes in May, as announced by Zosano? You commented this already, Guilherme right? And related to situation with...

Clemente Svet is asking.

Clemente Svet has raised his hand. Clemente, your mic is open.

Yes, I have a few questions related to the prices. I've seen that I don't know, like 2 years ago, 1 year ago, maybe you used to sell at 100% of the spot prices. And I've seen that the recent quarters, you have seen a decline in that percentage for the previous quarters, you sell your hardwood or 92% of the spot price and this quarter at 95% of the spot price. Can you give us some color or more information about this? And what's the main reason? My next question is about the margins of Softys. I know that you mentioned that the efficiencies are getting better and better and you still have room for more improvements. Do you have any EBITDA margin on your Softys division that you're looking forward for the midterm time? Also, I have a question about related to the port strike started in April. If you have any issues about that and also about the rail strike in Canada that started, I don't know, I think the 22 May is going to start -- if you do have any I don't know, issues about that. You're getting more demand on the softwood division? Or can you give us more color about how can this affect your operation?

Okay. I'll take the first one. Thank you, Clemente for the question. That information is not really correct. CMPC is very much committed to all the markets where it operates, highly contracted in all of the markets, above 90% contractual for decades, I would say. We have contractual customers that are with us for 10, 20, 30 years in some cases. So I'm not sure maybe something in our reporting that you are reading, but discounts have evolved over the years, for sure. We follow the market. Where discounts go, we go. But no, CMPC is mainly contractual based above 90%, we sell on a contractual basis.

Actually, with the question about the Tissue margins and if we have a kind of a target for that. Actually, I would say, yes. I mean, in terms of -- in a consolidated way, we are looking for something that is around 18%, 20%.

And regarding the issues in the south of Chile, Coronel port in particular, yes, we are affected. Not in a huge way because our volumes go mainly through Lirquén. I mean we use all 3 ports, Lirquén, San Vicente and Coronel. So our wood products business that export more in containers is more affected -- if Coronel is irrelevant in container shipments. And we are concerned, mainly about what is happening in the region, and I confident that has lasted for so many days and we really hope that the owners of the port together with authorities consult with us as soon as possible. Regarding Canada, I mean, we're not directly affected by the situation you mentioned. Canada is a very relevant player in the softwood market. So whatever happen in Canada with the export or in this case, the rail transportation is relevant, creating noise and will probably tighten the market a bit more in the softwood side, but we are not directly affected. We participate in the softwood market exporting from Chile, but not -- we don't have operations in Canada.

Okay. Thank you, and thank you all for joining us today in this quarterly -- the first quarter 2024 results presentation. So have a great day.