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

Hello, everyone. I am Fernando Hasenberg, CFO of CMPC, and I would like to welcome you to our Third Quarter 2024 Earnings Webinar. Today, we have a full house. We have Francisco Ruiz-Tagle, CEO of CMPC; Gonzalo Darraidou, CEO of Softys; Raimundo Varela, CEO of CMPC Pulp; 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. Third quarter 2024 sales totaled $1.984 billion, EBITDA was $433 million and net income was $147 million. The Pulp business generated an EBITDA of $317 million with an EBITDA margin of 37%. EBITDA increased 26% quarter-over-quarter, primarily due to higher sales volumes. Softys business show an EBITDA of $109 million with an EBITDA margin of 13%, decreasing from 17% quarter-over-quarter and 31% year-over-year. In both cases, there were unfavorable exchange fluctuation in some important markets and macro consumption trends. Biopackaging generated an EBITDA of $26 million during the period with an EBITDA margin of 9.4%, this represents an 8% increase quarter-over-quarter, driven by higher sales and controlled production costs, supported by favorable exchange rate effects. Year-over-year, the EBITDA increased 44%, explained mainly due to higher volumes and lower costs. In the third quarter, sales were close to $2 billion, representing a 5% increase compared to the previous quarter and 1% lower than the same period last year. Quarter-over-quarter, the increase was a result of a combination of higher sales in Pulp and Biopackaging, partially offset by lower Softys sales. In Pulp, in the quarter, there were higher volumes, which were partially offset by lower selling prices. Biopackaging experienced increased revenues due to higher prices and sales volumes. On the other hand, Softys faced a tough quarter on the consumer side and on the FX side, which resulted in lower sales. Compared to the third quarter of last year, revenues decreased by 1%, primarily due to lower sales in Softys for the same reasons behind the quarterly comparison. This was combined with growth in Pulp given a higher average price and flattish Biopackaging sales. Operating costs reached $1.2 billion, reflecting a 3% increase quarter-over-quarter and a decrease of 12% year-over-year. This represented 62% of total revenues in the third quarter of 2024, which compares to 63% in the second quarter of 2024 and 70% in the third quarter of 2023. This improvement is in part the result of the implementation of our competitiveness, a strategic pillar. Other operating expenses, account that comprises distribution costs, administration expenses and other expenses by function amounted $320 million in the third quarter, increasing 2% quarter-over-quarter and decreasing 3% year-over-year. Compared to the third quarter of 2023, administrative expenses decreased in Softys, remained stable in Pulp segment and increased in Biopackaging. The ratio of other operating expenses to revenue also improved and was 16% in the third quarter of 2024 compared to 16.6% in the second quarter of 2024 and 16.5% in the third quarter of 2023. Given the aforementioned effects, on a consolidated basis, the company's third quarter EBITDA was $433 million, where the contribution of the Pulp segment was 69%, Softys was 25% and Biopackaging remained at 6%. Net income reached $147 million during the period, up from $125 million in the previous quarter and increasing from the $84 million recorded in the 3Q 2023. This better result is explained mainly from a much better operational result. 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'll start with the Pulp business. Pulp production was 1,050,000 tons, increasing 3% quarter-over-quarter and decreasing 3% year-over-year. Out of it, hardwood production was 839,000 tons, up 2% quarter-over-quarter and down 3% year-over-year. The quarterly variation is explained to reduced production complexities after maintenance was performed at the mills. Softwood production was 211,000 tons, increasing 6% quarter-over-quarter and 1% year-over-year. Regarding Pulp sales volume increased by 20% quarter-over-quarter and was 1% down year-over-year, reflecting a normalization in the speed of exports from Brazil following the previous quarter's disruptions due to floodings in Rio Grande do Sul, along with increased dynamism in some markets. Year-over-year, hardwood volumes increased by 2% on higher exports to China and North America. In the case of softwood, a decrease of 10% is the result of a combination of reduced exports to China and the rest of Asia, partly offset by increased exports to Europe. Pulp prices during the second quarter of the year were in average $764 per ton for softwood and $689 per ton for hardwood. This is a quarter-over-quarter decrease of 5% for softwood and 6% for hardwood. Compared to the third quarter of last year, prices were higher by 18% for softwood and 33% for hardwood. As a result, revenues for the Pulp business totaled $691 million, increasing by 12% quarter-over-quarter and 20% year-over-year. Regarding the Forestry business, sales volume was 917,000 cubic meters, up 15% quarter-over-quarter as a result of higher pulpwood and sawn timber sales. Additionally, volumes of sawlogs and millwork increased, while plywood remained stable and other products declined. Year-over-year, an 8% decrease is a reflect of lower sawlogs and other products, which was combined with strong pulpwood and sawn timber. With this, revenues for our Pulp and Forestry business totaled $857 million, increasing 14% quarter-over-quarter and 15% year-over-year. For hardwood, cash cost reached $242 per ton in the third Q '24, increasing 5% quarter-over-quarter and decreasing 3% year-over-year. The Q-on-Q increase was driven by higher wood cost. Increases were also recorded in material and labor costs. For softwood, cash cost reached $356 per ton in the third Q '24, increasing 1% from the second Q '24 and decreasing 1% year-over-year. Compared to the previous quarter, higher wood costs were offset by lower energy and chemical costs. Year-over-year, cash costs decreased mainly from lower energy, chemical and labor costs. This was accompanied by increases in wood and material costs. EBITDA of the Pulp business increased 26% quarter-over-quarter and 194% year-over-year, recording $317 million with an EBITDA margin of 37%. The quarterly growth was driven by higher sales volumes, along with stable cash costs and controlled operational and sales expenses. Year-over-year, the improvement was mainly due to higher sales prices. And now moving to Softys. Revenues totaled $848 million, reflecting a 3% decrease compared to the second Q '24 and a 13% decrease compared to the third Q '23. Compared to the previous quarter, Tissue Paper revenues decreased by 1% and were 13% down year-over-year. The decline from the previous year is mainly explained by a lower market activity in the region. This was accompanied by a 3% lower average selling price in U.S. dollar terms. In the Personal Care segment, sales decreased 7% quarter-over-quarter and 14% year-over-year. In the year-over-year comparison, the decrease is explained by lower volumes and price decrease in U.S. dollar terms. Softys EBITDA for the third quarter reached $109 million with a margin of 12.9%. EBITDA decreased 17% quarter-over-quarter and 31% year-over-year. The Q-on-Q variation is mainly due to unfavorable exchange rate fluctuations along with an increase in fiber costs. In the year-over-year comparison, the 31% decline is primarily attributed to unfavorable exchange rate fluctuations and lower sales volume. Now on the Biopackaging business, Quarter-over-quarter, sales volume to third parties increased by 4%, mainly due to higher sales in boxboard and other papers along with a recovery in paper sacks. This was partially offset by lower sales of corrugated paper and molded pulp trays. Year-over-year, sales volume increased 8%, driven by boxboard, corrugated paper, corrugated boxes and other papers. Revenues amounted $277 million, representing a 7% quarter-over-quarter increase. This is attributed to higher volumes and average selling prices. Year-over-year, revenues increased 1%, reflecting a higher sales volume. As a result, in the third Q '24, EBITDA increased by 8% quarter-over-quarter, driven by higher sales volume, cost control and favorable exchange rate effects. Year-over-year, EBITDA reported a 44% increase, reflecting a recovery in sales volumes and lower costs. The EBITDA margin for the segment was 9.4% in the third Q '24, higher than the 9.3% in the second Q '24 and exceeding the 6.5% recorded in the third Q of 2023.

Thank you very much, Claudia. Capital expenditures in the third quarter totaled $194 million, an increase from the $146 million reported in the second quarter of 2024 and a decrease from the $243 million recorded in the third quarter of 2023. The year-over-year comparison relates to the BioCMPC project, while the quarter-over-quarter comparison is explained by higher investments in Forestry assets, land and plantations related to the Natureza Project and maintenance. Regarding free cash flows during the period, there was a net inflow of $61 million compared to an outflow of $22 million in the second quarter of 2024 and $87 million inflow in the third quarter of 2023. When comparing quarter-over-quarter, the better free cash flow is attributed to higher EBITDA generation in the quarter and that the working capital this quarter remained flat. Year-over-year, the difference referred to a higher EBITDA and lower investments. We closed the third quarter of the year with $4.7 billion in net debt. Gross debt was $5.5 billion. Cash and cash equivalents, including financial investments with short-term maturities were at $776 million. The net debt-to-EBITDA ratio closed the quarter at 3.3x, lower than the 3.75x in the last quarter and 2.83x in September of 2023. As anticipated, we expect this number to continue to improve by the end of the year and in the coming quarters. Regarding our debt profile, the average rate is 4.8% and the average maturity is 5 years. I would like to highlight some important events that occurred during the third quarter and up to date. First, our BioCMPC project was internationally recognized as the Project of the Year 2024 by the Project Management Institute, or PMI, in the engineering, construction and infrastructure category. This prestigious award highlights CMPC project in Brazil for its complexity, efficient management, innovative approach and with a positive impact in society. Notably, this recognition marks a significant milestone as it's the first time a project from Brazil has received such an honor. We feel very proud because this is a recognition of the great track record CMPC has in executing complex projects. CMPC has been named by Institutional Investor as the #1 most honored company in Chile in 2024 based on votes from over 1,000 investors and analysts. It also positions CMPC among other leading Latin American companies. This recognition reflects that the financial market highly values our activities with investors such as the Investor Day. Also, our ESG program and our Executive Management were highly rated. Thanks for your support. Additionally, on October 10, CMPC held its 2024 Investor Day at the Cordillera plant in Puente Alto, Chile. The event brought together key analysts and investors who joined our management team to review the year's achievement, the Natureza Project and the progress on the 2030 strategy. Attendees also toured this biopackaging plant to learn about the manufacturing process. I want to thank all of you who were able to attend and join us for this important event. Finally, in October, we announced a new acquisition by Softys in Brazil. It will reinforce our presence in this market with the acquisition of Falcon, a subsidiary of Ontex. This is a personal care business with a plant in Senador Canedo, Goias, and it has leading brands in incontinence products and baby diapers. The purchase price was agreed in approximately $120 million; and the closing is expected for the end of the first quarter of next year. Now I will turn [Technical Difficulty]

Francisco Ruiz-Tagle, Gonzalo Darraidou, Fernando Hasenberg, Guilherme Viesi, Raimundo Varela available for your questions today. [Operator Instructions] And the first question comes from Marcio Farid from Goldman Sachs.

So [ questions ] on my side. I think the first one is obviously, [ softy ] has been strong especially...

You know what, we cannot hear you very well.

Marcio?

Sorry. We cannot hear you well. There is some problem with the connection, I guess. Sorry about that.

I can try, but I think it's the connection, no my side.

Now it's okay. Go ahead again, please.

Yes? Okay. Let's try again. So yes, the question was related to competitive [Technical Difficulty] seems to be related to new acquisition, which seems to be in line with you. [Technical Difficulty] Just trying to understand what is the strategy behind regaining competitiveness and softy review. And then second question on Pulp. Obviously, [ quarter ] significantly down. It seems to be the result of the bio project ramping up, but there also seems to be more upside to volumes yet, right? Volumes are yet to pick up. So if you can give us some clarity in terms of how much more cost improvement and volumes you can see for pulp, going forward, that would be great. And obviously, Guilherme, if you can comment on your views on the Pulp market, that would be great as well.

Okay. Marcio, thank you very much for your question. All of us, we know that we are facing a very special situation in the Brazilian market because Brazil -- [ pulp ] capacity, we are talking about 240,000 tons that they have decided to go into the market. And obviously, this excess of capacity will need, we hope that probably 18 months to rebalance all the market shares between all the industry. And what we have been doing is to -- first, to reinforce all our marketing execution. And for that, it's very important what we are doing in the personal care because when you begin to run leading brands and you go to all our customers with this new portfolio of brands in terms of personal care, it will help a lot all of the Tissue category. In the other hand, we have been developing a program to execute a reduced cost in all our process, logistics, in terms of -- in our factories, et cetera. So understanding that if we reinforce the way that we are going to serve our markets in terms of a more powerful portfolio of brands in Personal Care, plus reducing all our logistic costs, taking advantage of our footprint in all our country, in all the Brazil country, we believe that we can recover some market share points that we have been losing in the last month. And we see and we hope that this rebalance, it will need between 18 months to come back a normal situation in the Tissue market.

Yes. Regarding the cost in pulp, we're happy with our improvement in our costs. This is a result of our -- it's part of our strategy to increase our competitiveness. And therefore, we have -- we are developing in all our mills and across the company, a cost improvement program that has several stages and tools that we apply. And that program is progressing well. And therefore, you see the cost improvement. Of course, in the case of Guaiba, the BioCMPC project also help us, now because we have new equipments and more efficiency. We still have room to keep improving our cost during the next years, and we are very focused on that. Regarding sales volumes, we do see some room for increase our sales volumes in the next couple of months as our inventories have come down, but we still have some room to increase our sales a bit more. And now Guilherme will comment about the market.

Marcio, thank you for the question. Well, I think the -- if we look at the softwood market in China, it has certainly gained some momentum. We have had a $20 net increase last month, and there seems to be more room for improvement on the softwood side. And having the gap widening even further, that could possibly generate some possibilities for the hardwood because the gap will be so large that it could generate demand for hardwood. This incentive that the Chinese government has announced as well seems to have changed the mood in the Chinese population and consequently, the Chinese society, and it could eventually impact on the real estate and impacting on the real estate, we could see some improvements on the pulp consumption in China. We know that China drives the pulp market in the world, and that would be then reflected across the world. This would be a positive view. Apart from that, I see a rather stable market from here until year-end, let's say.

Thank you, Marcio. I just want to recall that we have our top executives today here available for your questions. So just you have to raise your hand and we can take your question. The next question comes from Tathiane Candini, JPMorgan.

Can you hear me?

Yes.

Okay. I think there is a little bit of -- I can hear myself. I'm not sure if you can listen me. Okay. So I'm going ahead. I just have some follow-up questions on Farid's question here. On the first one, when you are talking about the pulp prices, we know that the gap on softwood is increasing. However, we do see some pressure, especially when it comes to China on production on hardwood, right? So we had the Chinese project, Liansheng now in place in China, and we know that this have been pressuring a little bit of the negotiations. So my first question for you is how much of this pressure due to the increase on pulp capacity in China, you have been facing it? And how much of that you can -- you are thinking about, how much of an impact do you see for next year as we have more capacity going in for a little bit of the local projects as well as of other companies? So that's the first one. And the second one, if I can explore just a little bit on Softys. We know that it was a little bit of a tough quarter for the segment. I would just like to understand a little bit more on the cost initiatives that you have been doing on the segment. And since we have some pressure on demand, this should be like a little bit of a better approach for the segment to improve the margin. So if you just can explore a little bit more on that, I would be grateful.

I'll take the first one. Thank you, Tathiane. I think the pressure of Liansheng and other projects that came online over the year, have already been impacted in the market. We've seen a significant price drop over summer, hundreds of dollars plummeting, and we believe that we have now reached the bottom, obviously, talking with a little margin up or down $10 or something like that, but we do not foresee any significant drop in prices any longer in China. So that's more or less what we -- our view of the market. The Liansheng impact has already been absorbed. As of next year, it's still early to tell what's going to happen next year. We are slightly more positive when it comes to pricing compared to the current prices that we see today in China.

In terms of softness we are facing in some markets, mainly is Brazil. If we exclude the exchange rate, and we analyze our volumes and our margin, they have been increasing year-over-year. Now understanding that even if they are increasing, we have to develop some special programs in terms to improve our margins. We have working in a very deep way in procurement. We are working in all our logistic process. And as like I already said, taking advantage to reinforce our one-stop shopping in terms to increase our mix in personal care. When you put all of those process together, we strongly believe that we have a very strong program in terms to come back with our margins.

So now we have a next question coming from Eugenia Cavalheiro, Morgan Stanley.

Net debt -- can you hear me?

Eugenia, yes, we just started to hear you well, please. Could you repeat?

Yes, of course. So the first question would be on your net leverage and the path to deleveraging. Where would you like to see the company before any additional investments such as the Natureza [ won, ] and how do you plan to get there? And the second one would be on working capital. So we saw kind of like a neutral impact this quarter. So I just wanted to see how you're thinking that in the coming quarters? And if there is any specific line or business units that you plan to improve that?

Thank you, Eugenia, for your question. First of all, well, as you saw, we have been reducing our net debt-to-EBITDA ratio. Now it's at 3.3, and it should continue to go down as we move forward in the coming months. Regarding where we expect that number to be before we start the project, we haven't defined a specific number yet because we don't have defined or financial program for the project. So what I can tell you about that right now is that CMPC will -- as we have done in the past, we are very committed to maintain our investment grade and to maintain a strong balance sheet through all the execution of big projects. So of course, that number should improve. We are very focused on using the resources in the right way. We are still in the process of approving our CapEx program for next year, and that program will consider an improvement on our leverage. And the same for -- with our dividend policy that was approved in the last annual assembly that the dividend policy was reduced to 30%. Regarding working capital, we have different initiatives, but the main one that moves our working capital, and it's not an initiative, it's the result of market is pulp prices. And so the reduction of pulp prices we saw at the end of this quarter and will continue to affect our fourth quarter should reduce our working capital by the end of the year. So that's what we are expecting on that regard.

[Operator Instructions] And we have a new question from Camilla Barder from Bradesco.

Just a follow-up on market dynamics here. We have seen some paper price hikes announcements in China recently, including one today. However, paper inventories remain high, and there is an overcapacity that remains a concern in the sector. So my question is how challenging do you think it will be to implement those price hikes initiatives?

Thank you for the question, Camilla. We see this as positive paper price announcements in China, especially as a positive sign. Paper prices in China have been struggling for quite a while. Some of the segments having their prices below pulp prices, so that cannot be sustainable for too long. We see this as positive, and we see this alongside the Chinese incentives, financial incentives as positive as well. So I would say they are correlated. They are connected and the paper industry is trying to improve its pricing that has been very low for a while. China has an overcapacity. It's true, but also it's related to the mood of the market. If -- the mood in China has been very low for a while. And if that improves, I think that's going to be reflected on paper consumption.

Now we have a new question coming from Marcelo Furlan from Itau.

Can you hear me? I have 2. The first one is related to a follow-up with the Natureza project. I mean, we have seen a wave of capacity additions in the pulp market in Brazil coming to -- many projects coming online also by 2028, 2029. So I'd like to understand how are you guys seeing potential challenges of wood supply, land supply for new projects coming online in pulp in Brazil? So this is my first question. And the second one is related to Softys. If you guys could give a little bit more color regarding potential regions that you guys still see as accretive avenues for growth, maybe Mexico, maybe further growth in Brazil. So I'd like to understand on a strategic view, if you guys what are the main regions that you guys see as a potential regions to continue growing in the Softys business? So that's pretty much it from my side.

Well, thank you, Marcelo. We'll take the first question regarding Natureza. Well, as you know, we announced Natureza at the end of last April. Yes, very much committed with developing this project. We announced the beginning of the study of this project. We now are under the -- working on the environmental permits in Rio Grande do Sul. So working with our team on that. And hopefully, to present for an approval during the first quarter of 2025 -- for the approval -- starting the approval of the environmental permits. And then also working on the engineer and general engineering initiatives. So I would say the place is totally under the -- the dates that we organize for developing the project. And in connection with the wood supply, I would say we are -- today, we have today probably around 60% of the wood that we will need for the project and growing and doing in a very organized way during -- within the next 3, 4 years with that. Also, I can say that we are working -- we are working very -- strongly working in the connection with the local owners because our ideas to involve, to include the participation of the local owners and these good opportunities for the mill. The other thing I want to mention is that you asked me about the other projects that are now in Brazil under study. We perfectly understand that. And it is true that probably in considering the increase of the demand year-by-year, we are seeing several initiatives in more or less at the same time. So yes, hopefully, we -- when those projects enter to the market, we can see a more balanced situation. But in our case, we are -- our project will be probably presented to the Board during the first semester of '26 and will be in place at the beginning of '29, more or less, this is what we are calculating for our project.

Marcelo, in terms of Softys growth opportunity, if we analyze by category, our huge opportunity is in personal care because our market share penetration as well because in terms of margins. Now if you analyze by countries, our huge opportunity, it's Mexico and Brazil because of the size of the market and again, because of our market share. So we are totally being focused on those -- in that category and in those countries.

We'll go to the next question. [Operator Instructions] The next question comes from Bank of America, Guilherme Rosito.

Claudia, so I have a question for Guilherme. You mentioned that you're seeing stable pulp market until the end of the year, but then see some upside for prices into next year, which I agree [ as I ] recall here. My question is, what signals are you watching to see a trigger to pulp price hike? Like what are you watching that could signal that we could start a [ pulp ] price trend into the coming months and maybe later next year?

Thank you, Guilherme. Well, I think the main signal is that the prices are unsustainably low. They are very low. They have dropped to levels where we believe they can't go any further. This starts impacting on other mills that have high cash costs, and we could see further closures. On the softwood side, I firmly believe that we're going to continue seeing closures. And that's going to widen the gap to hardwood, and it could potentially pull the price of hardwood up. And also, we -- I mean, the recent announcements of the stimulus in China, that comes as very good news. And China is the price driver in the world. And if China picks up, that will affect the whole world.

I see another question coming from [ Edward Palma from BCA ]

Can you hear me?

No really, Edward.

Can you hear me now? I have one question related to the prices. We see that for 2 [ segments ] in a row, the resale prices in China has gone down and it's not very aligned to the current price.

Sorry, Edward, we cannot hear you well. I think you have surrounding noise. Maybe you can do something to reduce the noise surrounding there.

Now it's okay?

We can hear another person speaking. Maybe you can send your question through the chat box, Edward? If not possible to reduce the noise there? Thank you. Okay. I don't see more questions. [Operator Instructions] So just -- no more questions. I don't see more questions here. So just wanted to thank you all for joining us today in this earnings call. I hope you enjoyed this presentation, and I wish you have a great day.