Empresas Copec S.A. (COPEC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Empresas Copec's Investor Meeting. Today's presentation is available on the company's Investor Relations website, investor.empresascopec.cl. Before we begin, I would like to remind you that this presentation may include market outlooks and forward-looking statements, which are based on the beliefs and assumptions of Empresas Copec's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Empresas Copec and could cause results to differ materially from those expressed in such forward-looking statements. This presentation contains certain performance measures that have been adjusted with respect to IFRS definitions, such as EBITDA. [Operator Instructions] I will now turn the call over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.

Okay. Thank you very much. Hello, everyone, and welcome to this conference call. Thank you for joining where we will be talking about the Sucuriú project. This is one of the largest initiatives that has been announced ever by the company and its subsidiary companies. So we decided to make a special call to give you some more details about the project that we are launching. I'm joined here today, as you can see by Gianfranco Truffello, CFO of Arauco; and Cristián Palacios, our Director of Investor Relations. So we will be -- at the end of the presentation, we will be tackling any questions you might have. I will hand it over to Gianfranco, who will give you some facts and some details about the project itself. Then I will take you on myself to give you some considerations on a consolidated standpoint, and we will end the conference with the questions that you might have. Thanks very much. And Gianfranco, please go ahead.

Okay. Thanks, Rodrigo. Here, we have the presentation, and I will advance on the project. So we are very happy to have announced that the Board of Directors of Arauco and also Copec approved this week, the largest project in the history of Arauco and Empresas Copec, and this is a project Sucuriú in Brazil. It's a new pulp mill, and I'm glad to give you some details about it. Starting with the capacity of the mill. This will be 3.5 million tonnes of BHKP pulp is located in the state of Mato Grosso do Sul. The Mato Grosso do Sul is located at the West Coast state of São Paulo, you can see there in the map. And the mill will be at 47 kilometers from the senior Inocência that is marked there at the map. As usual in this big pulp project, we will generate a lot of clean energy, 400 megawatts. From that, we consumed about 180 megawatts, and the rest will be sold with the Brazilian interconnected system. And we expect to deliver the first bale in the last quarter of 2027. The investment involved has been announced is $4.6 billion for inside defense and some other small investments outside defense. That is equivalent to BRL 25.3 billion at the exchange rate of that was exchange rate. As I mentioned, this is a 3.5 million tonnes of capacity. It will involve at the peak up construction about 14,000 in new jobs during the construction of the mill. And once it starts operation, it will involve 6,000 people working not only in the mill, but also in other activities in forestry and logistics associated with the operation of this mill in Mato Grosso do Sul. For the operation of the mill, we will have an area of about 400,000 hectares of eucalyptus plantation that will supply this mill in the long term. One thing very important to mention is that we chose to go with a 100% proven technology. So for the capacity that we wanted to achieve, we work with the vendors to -- with a design that involves 2 fiber lines and 3 drying machines. So we will have a single recovery boiler. But since there was not proven technology for a digested size of this capacity, we prefer to go with 2 digesters and then going to 3 drying machines, we will give you more security that the mill has a proven technology. And also, if we have any problem during operation, we will not have the whole mill going down 100%, but would allow us to operate at a different capacity. Also, we will have 3 turbo generators or the 400 megawatts of capacity. And the lime kilns, we won't be burning fuel oil, we will be only using a gasification based on chips and we will have their part of fuel oil or gas only for option if something that goes wrong. We will have -- of course, since it's the latest mill, the best-in-class in automation, we will not produce any solid waste that we work to a landfill. And also, we have a secured very good environmental parameters that will allow us not only to comply with the Brazilian legislation also to have access to the best technology and to possibly apply to all of the green financing that we expect to get. Regarding the vendor, the main vendor for the main item of production was awarded to Valmet. Valmet is a very recognized -- a lot of machines for pulp and paper, and we are very happy to be partnered with that because we have, of course, at a good price and also a guarantee of production for the complete mill and also the ramp-up. And we -- of course, this is an EPC construction project to give us more security about the total price. And we have negotiated incentives and penalties regarding the trailing or better target of production that will align the incentives for this project that we expect to be. Regarding the diversification before and after the completion of the project, you can see in the upper part of the table, the graph showing that diversification by product. You can see there that currently, we have 55% of EKP bleached kraft pulp eucalyptus production. The rest is softwood basically divided in BSKP paper grade softwood unbleached, we're producing in [ construction ], 7%. We have the solid pulp that we produced from producing in Valdivia. And then we have flat production that we have in Argentina. After the project, we will go, of course, more concentrated to eucalyptus pulp, where we go up to 72%, still having a proportion of softwood, of course, that have a niche products, but we will be concentrating in the growing part of the demand for pulp, which is eucalyptus. And very important, you can see the diversification of country production. Now currently, we have almost 80% of our production coming from the Chilean mills. Of course, we have the joint venture with Stora Enso in Uruguay, that is exist 14% of our capacity and then we have Argentina. After the Sucuriú, we'll be more diversified, and we will have 47% of capacity in Brazil, and we don't know that it's most competitive country in terms of pulp production but give us more security in the supply for our clients since it's going to be producing in four different countries in the world. How will be our position in the short fiber landscape. After the completion of the different projects that are announced, of course, [indiscernible] already started, but there's a project of OKI or project Sucuriú and the project from CMPC will be ranked in the top 4 in the market of hardwood, which is, for us, is very important to be a big player in the market that is growing at [indiscernible]. This graph, it's very important not because of trying to show the correlation between adding capacity and the price of pulp. But just to show all the projects have been developed since 2006. The green bars are showing the projects that were constructed in Brazil. This is only showing short fiber. And you can see that the projects have been every time bigger than the first one. But the most important thing here is that the gap that is going to happen between project São Paulo Sucuriú is one of the biggest that we have in the history. So we expect to have good market conditions in the construction years in terms of the correlation between demand and supply that we'll expect to have good pricing for that. So I'm also to mention the size of the project compared to the other project, it's a very big project that give us very good economies of scale in terms of cash cost and also in terms of CapEx per tonne. In this slide, we are showing the CapEx intensity of Sucuriú that is a little bit lower than $1,300. And this very well compared to other projects and especially some projects there that are expansions. Guaiba II was an expansion on the greenfield pulp mill. And so that is showing that how good is our project in terms of the layout, in terms of the technology that we got, and in terms of the negotiation that we were -- that we obtained with Valmet. And also, of course, compared to MAPA, it's not lower, but you have to remember that in MAPA, we have different conditions. We will build in the middle of the pandemic with all the inflation in construction costs of all the restrictions that we had in Chile, especially in construction. And also in Chile, you have seismic conditions, you have earthquake. So the construction normally is higher cost than in Brazil. Another good thing about this project is that there's a lot of experience of building projects in Brazil in terms of construction companies, building there, with very good results in terms of timing and budget in Brazil. And also, this is an EPC contract so it give us more comfort in the delivery of the price and the time of the project. The total investment $4.6 billion is divided more or less in how we expect to spend during the coming years. You can see that this year, we have to pay some prepayments for the contract. We're talking about $200 million that some of that we already spent what we are spending in the earthworks, there are movements that we're already doing that you can see the photograph there. And the biggest cash flows are coming in 2025, '26 and '27 and then the ramp-up also was some that have to be done. So total is $4.6 billion. In terms of financing, our calculations are that with a CapEx of $4.6 billion and substracting the equity that maximum it committed by Empresas Copec and also subtracting the expected free cash flow that we could do in the 3 years of construction about [ $300 billion ] a year normal pricing for Arauco for the existing capacity and operation that we have. We have to finance probably 2.5 billion or 3 billion of extra debt. And we expect that we will obtain that with good financing, alternatives like ECAs, multilaterals. And of course, the bond issuance there in the international markets than in the local markets. We have a lot of capacity and reach and experience in the market. The last time we went to the market for international bond was 5 years ago. So we had some of the appetite for bonds for Arauco and we are able to issue bonds up to 30 years we have done in the past. So we expect to don't have any problem with that. And of course, we have to refinance our decisions that are due during the construction, and that is a normal thing and that we do, and that could involve another $1.7 billion and $2 billion of refinancing that we have to do anyway if we don't have the project. But the good thing is that we have a lot of clean room ahead in terms of amortization in the long term. So if you think about new financing for 10 years, 15 years, there's a lot of space in between of getting amortizations allocated in those periods, okay? So financing, and that's more or less what we are thinking about. And we -- of course, we are now getting in and we have been discussing with banks and ECAs, and we will continue doing that more in a speeding way now that the project has been improved. And finally, just a takeaway. This project is very important for us for our long-term strategy. We will -- we're willing to expand globally. We were looking at Brazil for a long time. We have been in Brazil for 20 years with the panel operation. We were -- we have been planting eucalyptus for the last 10 years with an existing land we had in Mato Grosso do Sul, so we have been preparing a lot for this project. And this help us maximize the value of the company and also the social, environmental, economical responsible way and continue to be pioneer in sustainability. We will increase our diversification by location, allowing us to produce in four different countries and a very competitive market like Brazil, which is most competitive in terms of cash flows. And also after the ramp-up of the mill, we will have extra volumes that will consider our position in the market as key players. And of course, we will get very good economies of scale and very low cash costs coming from Brazil that will allow us to improve our average cash flows. And as I mentioned, our long-term debt amortization profile give us ability to use those gaps that we have in financing in the medium to long term to put our organization in is invisible. Okay. So that's my presentation. I think you have some slides.

That's great. Thank you, Gianfranco, for this very interesting facts on the Sucuriú project. I will have add comments from the consolidated and from the current company perspectives. We believe that the projects Sucuriú fits in perfectly well with the strategy that we have announced for our growth going forward. As we have said in previous presentations, we have defined clear rounds of growth for our two main business areas. Forestry and energy. In energy, we are focused in energy transition. So our main subsidiaries there, Copec and Abastible are taking steps in order to gradually move into other forms of energy, push electro mobility. They are doing initiatives to venture capitals, and they're also exploring complementary business lines that may add value to their existing businesses. And in forestry, we have always said that we would be looking for opportunities of growth in those countries, which present competitive advantages for the forestry business. Brazil is clearly one of them. We prefer to build our projects bottom up. That means, first of all, securing land and plantations and then going ahead to build the facilities. We have done so, as Gianfranco said, we have been buying and setting up plantations in this area in Brazil since more than 10 years ago. So in that way, we have been generating optionalities in order to build projects, and we believe that the time has come to build on those optionalities and therefore go ahead with the Sucuriú project. So it is a project that fits in very well with the strategy that we have previously announced and which is our way to move forward. It is also in line with our sustainable investment and management model. As we have also presented in the past, we have a clear model for sustainability. We have our own metrics and goals. But beyond that, we believe that Empresas Copec is a company that is very differentiated in terms of sustainability because we think that sustainability is embedded in our business decisions. A number of companies can say that. As a matter of fact, as you know, Arauco is a net absorber of CO2 and opportunity products called -- and Wood products which substitute other products which are less friendly with the environment. And clearly, Sucuriú will come to boost Arauco's position in this regard. So it's also a contribution to the environment. And we will also generate social value as we look for in our business decisions. And thirdly, we believe that this is a project that even though it is a large project, probably the largest in the history of the company and its subsidiary companies, it can be financed within the boundaries and the restraints that we have set in our financing policies. As you well know, as we have announced and published since a few years ago, we had a financial policy, which sets some restrictions. We aim to have a leverage in terms of net debt-to-EBITDA, which should be in the range of 2x to 3x when measured on a 5-year horizon. This is important because we have a lot of our cash flow coming from commodity business, and therefore, we look at long-term average in what in line with what rating agencies do. So in this 5-year time frame, we aim to be at 2x to 3x net debt-to-EBITDA. We never -- we reached 3.5x. We have forced ourselves to take some additional measures in order to never to go up -- never to surpass for -- or never to exceed 4x EBITDA, net-debt-to-EBITDA. We believe, as I said, that we can finance this project at a consolidated level within these constraints, and therefore, we can potentially hold on to our investment grade as we would like to do with the measures that we will detail in a while. We have also set some limits for our net debt to equity. We aim to be below 1x. And we have also set some considerations regarding the maturity of our debt, the liquidity levels and the fact that our debt has to be in the function of currency of each of our business areas. All of those considerations should be net as we go ahead with the Sucuriú project, and therefore, we have decided to support our core business decision and go ahead with these projects through our subsidiary company. In terms of the commitment that we have made as a parent company, we should be supporting the development of project Sucuriú by contributing up to $1.2 billion in equity to Arauco within a time frame of up to 3 years. We believe that with that in mind, we should be able to meet the criteria that we have set in our financial policy, both at the consolidated level. And as Gianfranco said before, Arauco should also be pretty comfortable in terms of meeting their own goals in terms of finance. From the parent company perspective, we aim to finance this $1.2 billion equity contribution to Arauco by existing cash, we currently hold approximately $600 million in cash at the current company level. Together with that, we aim to collect dividends from our other affiliates and associate companies. And finally, we should go ahead with a temporary reduction of our dividend policy during 3 years so we should go ahead with the distribution of their dividends, which is going to be equivalent of 30% of net income are generated in years '24, '25 and '26. Thereafter, we aim to go back to our historical 40% dividend policy. So we should be cutting dividends for 3 years, and thereafter, going back to our historical policy, which has been in place for many, many years with very few exceptions. At this point in time, we estimate that no other measures for financing the equity contribution to Arauco are the necessary according to current projections and available information. Any additional actions will only be considered strictly part to comply with the company's financing policy. But I repeat, according to current information, available information and projections. We estimate that no other measures will be required to finance the equity contribution. Arauco, other than the ones listed ahead, which are existing cash dividends and relate to be received from other subsidiary companies and affiliate companies and the temporary reduction of dividends paid out to our own shareholders. Having said all that, we are going to open it up for any questions you might have, either on the Sucuriú project itself or on the consolidated and per-company consolidations that I have just described. Thank you very much. Cristián, please, you can go ahead.

Thank you, Rodrigo. We have the question coming from Rodrigo Carvallo, BTG Pactual. And also Joaquin Palma the same question, and from the other. Why you announced the project sooner than expected, it was year-end? And why you changed the size of the Sucuriú from 2.5 to 3.5?

Well, good question. I mean we initially part of in the conceptual engineering, about a mill of 2.5 because that is not the size of the way that was delivered the biggest mill. And when we started doing the detailed engineering that we have been doing for more than a year, we thought that we could do to 2.8 million tonnes. Then we started negotiating with the vendors. And in the negotiation and during our different configurations of the mill, it came up that we could do a 3.5 million tonnes per year, and that was a very important in terms of approval of the project. At the same time, we decided to do it earlier because there was no competition from other mills being negotiated at that time. And so we decided it was good timing to bring the two main vendors to the negotiation table here in Santiago. And we had a very successful negotiation in like 2 weeks. And since we get a handshake with one of them. We need to have the Board meeting approval in order to sign it with the main vendors. So that's what we decided to carry out because we had very good numbers, and very good negotiation with the vendors. If we have not reached the number we wanted to reach, probably we have delayed until a further negotiation with the approval of [indiscernible]. We got what we wanted, and that's what we've decided to go earlier to announce it and to start working on -- continue to work on the project because as you know, we have been doing the land work and all the rest of the engineering, and we have some work to do also the balance of plan or things a lot [indiscernible]. For us the earlier, the better.

The next one comes from Jonathan Brandt, HSBC. Can you please provide more details on the expected unit cost, cash cost and the ramp-up schedule and also where's the $1.2 billion equity income equity coming from?

Okay. The equity part, I think it was already explained by Rodrigo, but in terms of cash cost, of course, the scale will be very competitive. It's 3.5 million tonnes state-of-the-art mill. So it would be very competitive, especially also for the wood cost in Brazil. As you know, the cycle of eucalyptus in Brazil is very short. The land is very flat. So harvesting is very efficient, and the size of mill, the technology, the consumption that will give us a very competitive cash cost as that would be very similar to the most modern mills that we have been developing in Brazil, and of course, lower than the ones that we have in Chile. So that is expected to be very good. We're thinking of probably lower than $120 per tonne cash cost in the mill because when you compare to the Brazilians, to the other competitors, so you have to be very careful what they consider cash flows, depends on what you have internalized or done by the subcontractor or OpEx. But we want to be in the range of what we think is going to be the most competitive mill in the world.

And Guilherme Rosito at Bank of America, would it make sense to look for a partner to Sucuriú to service and CapEx?

At this point, we feel very comfortable with the project. We have done big projects for ourselves. We have a very good team in the project and the engineer with a lot of experience. And at this time, we are not thinking of partners. We think we can do it alone. We have been in Brazil for more than 20 years, operating there, of course, not in pulp but in panels. We have four mills in Brazil. So we have a good knowledge of the country. At this point of time, we're going along. We don't think we need one partner that we have to check it up towards, but we think we have the financial capacity, the experience, definitely, to deliver this mill by ourselves.

Next one from Alfonso Salazar of Scotiabank. What are the risks that you consider before pulling the trigger in particular future demand growth in China? What's the pulp price you consider in the future, and what level of ROIC do you expect to achieve?

Well, of course, every project has risk and everything has to be taken into account, of course, the CapEx of the projects [indiscernible] we think we have very, very control on that based on the experience that we have and also based on the EPC contract and the experience of construction companies in Brazil. Of course, the price, something that we cannot, I mean, predict exactly, but we are basing our assumptions in average prices that are conservative enough to give us room for our future development in the price of pulp. We have considered the supply curve of short fiber that has been flattening out as new project comes and we are expecting -- and let's say, average price, we are not risking too much on price we think. But, of course, the most important part here has been the most competitive mill, the one that give us a lot of growth in terms of capacity closures, the price go down at any time of the profit cycle. The IRR of the project, of course, we're going to disclose exact number, but it's a good enough IRR. It is double digits in real dollars. So for us it's very good in terms of giving us the confidence to go ahead and invest this amount of money.

Can you provide more details on the reduction ramp-up scale?

Yes. The ramp-up schedule is expected to more or less in 12 months. Of course, it depends how you measure it. When you have like 1 month of full capacity or reach a total amount of 3.5. We expect probably a 12-month as experienced with MAPA. And so we expect that after that, probably another 12 months to reach the optimum cash cost once we do the first shutdown of the mill of the ramp-up and you optimize all the processes. But normally, it takes about 12 months to reach 100%.

And the final question here, if you can count on the amount of hectares needed for supplying this, this [indiscernible]? And what should be the ownership structure of those hectares?

Yes. As I mentioned, the total hectares is more or less 400,000 hectares to supply a mill of this size with a rotation that is normally 7 years in Brazil. We had our own land already, and we have been negotiating long-term leases with owners of land in Brazil, which is very normal for the operation in Brazil. And currently, we have about 66%, 67% of the land already contracted. We are doing, of course, leases every time then, and we have been planting for more than 3 years at a rate that is close to 55,000 meters a year. So we are in order to be self-sufficient, but probably not at the start-up because the mill is bigger than we have planned. But probably 2 years after the start-up, we will be 100% self-sufficient with our own plantations in Brazil. We have been having a good experience in kind of mechanized plantations. And of course, we're going to apply all the knowledge in generics, and to have a good deal of the plantations that we are delivering in Mato Grosso do Sul.

Thank you, Gianfranco. Rodrigo, you want to go to your final remarks.

Okay. No further questions. So thank you, Gianfranco, for your very clear presentation and very clear answers to the questions posed by the audience. Let me end up this call by just two invitations to you. Let me invite you to join us for our conference call on the third quarter results, which is going to take place during the first days of November, probably around November 10 or somewhere around that. Be attentive, please, to the final date we published it on our website. And also an invitation to our 2024 Investor Day that we have scheduled for November 19. We are going to have some very interesting presentations on the company there and it's different business lines. Of course, we are going to continue talking about Sucuriú there and some very -- some other very interesting subjects. You should have received an implication by now. If not, please feel free to go into our website and register there. So more than invited for this Empresas Copec Investor Day, which is going to take place in 2 days, one of presentations and the other one with a visit to MAPA in the south of Chile, more than welcome to join. Okay. So having said all that, we are ending this presentation. Thank you for joining today, and have a good afternoon. Goodbye.

Thank you. This does conclude today's presentation. You may disconnect now, and have a nice day.