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

Good morning, everyone, and welcome to Empresas Copec's Second Quarter 2025 Results Conference Call. Today's presentation and the second quarter 2025 earnings release are available on the company's Investor Relations website at https://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 management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depends 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. Good morning, everyone, and thank you for joining us today in this conference call where we're going to be taking a look at the results for the second quarter of 2025 for Empresas Copec. I'm going to flip through the presentation. It's a brief presentation, roughly 20 to 30 minutes long. And then we're going to open it up for the Q&A session. So at that point in time, I'm going to be joined by Mr. Gianfranco Truffello and Mr. Cristian Palacios from Arauco and Empresas Copec, respectively, and they will be helping us out with any questions you might have at the end of the session. Having said all that, let me begin flipping through the presentation that we have prepared for you. So let me move towards the first page, which is sort of an executive summary with the main figures and the main developments for the quarter. We recorded an EBITDA of $712 million for the second quarter 2025. This is 7.5% below the comparable quarter 2024, driven essentially by a lower performance in Forestry and offset to some extent by a very good performance in energy. Energy in general has been doing very well during the last few quarters. You can see the main factors there. Year-on-year, we had higher volumes at Copec, a very strong commercial performance at Copec. Likewise, for Abastible, where we have seen higher volumes basically all across the Board. In all geographies, we have seen a growth in volumes with the exception of Chile, in particular, for particular reasons here in Chile. Together with that, we are consolidating the results of the recently acquired company in Europe, Gasib. Q-on-Q, we have a drop with respect to the first quarter of 2025, which was an exceptional quarter, actually one of the quarters with the largest EBITDAS in the history of Copec. So compared to that, we had a drop driven by low industrial margins, unfavorable inventory revaluation effects and also decreased volumes because of seasonality in Chile. Regarding Forestry, we had a drop year-on-year and Q-on-Q. Year-on-year, we had lower pulp prices. As you know, pulp prices during this year have been quite low. This was partly offset by a good performance at the wood division. Likewise, Q-on-Q, we have lower pulp volumes, which is also partly offset by this performance in the Wood segment. In terms of the main developments of the quarter, we take a look at the progress in Sucuriú. This is already reaching 13.2%. Good news regarding our risk ratings. We were confirmed by Fitch, BBB international rating and our AA local rating. We have continued to place bonds in the local market, once again with a very good issuance recently in the local market. Regarding ESG, we continue to make progress in electroterminals for city buses, this time in Concepción in the South of Chile, a large city in the south of Chile. And Copec continues to make progress in its battery storage system in the north of Chile linked to its Granja Solar project. Some more detail on all of this to follow. The main figures for the quarter are shown on screen there. The EBITDA, as I said before, $712 million, which is down with respect to both comparable quarters. The net debt to EBITDA is standing at 2.9x, still within the desired ranges and within the expected ranges, but of course, with an upward trend because of the investment that we are going ahead with at Sucuriú. CapEx is up to $591 million, out of which most, of course, has been devoted to the Forestry sector because of the Sucuriú projects. Pulp EBITDA is down because of lower pricing scenario. Wood Products EBITDA doing quite well at $138 million. Copec and Abastible also performing very well and Mina Justa with a very good quarter as well. If you see the evolution of EBITDA and net income there, you can see EBITDA standing at $712 million, net income at $228 million. Both figures are pretty much in line with what we had been recording over the last few quarters. If you take the accumulated EBITDA as of June this year, so for the first semester this year, we have $1.5 billion approximately, which is in line with the $3 billion figure that we have communicated as a mid-cycle figure for the company. So pretty much in line with what we were expecting so far. Then some additional financial figures there on screen. You can see cash holdings at $2.7 billion, quite significant cash holdings. Together with that, a good balance of maturities for the years to come. Net debt-to-EBITDA standing now at 2.9x. As we can see there, we have an upward trend, of course, because of the investment that is being made in Sucuriú essentially. So this is something to be expected, still at very healthy levels and within our desired range and our projected range as well. In terms of debt by company and by type, you can see that -- the debt is very well distributed among our different subsidiary companies, all of them complying with their respective financial policies. In terms of type of debt, we have bonds, we have bank debt and other kinds of debt as well. As usually, we like to keep all financing channels open, especially for times of high investments such as the one we are facing now. In terms of financial ratios and returns, you can see EBITDA margins and return on capital employed pretty much in line with what has been the case for the last few quarters. So roughly 10% margin for EBITDA and roughly 9.5% for return on capital employed. Let us dig further into the Forestry division, some further detail on Forestry showing on screen there. Arauco recorded an EBITDA of $355 million for the second quarter 2025, which is down with respect to the comparable quarter '24, driven, of course, by the lower pulp price environment, but partially offset by increased pulp volumes with respect to the second quarter 2024 and a good performance, as we said before, in the Wood division, driven by higher volumes and prices for sawn wood. Together with that, we are seeing lower unit selling costs basically across the Board for the different fibers. Some more detail on pulp there. Pulp has recorded an EBITDA as informed by our subsidiary Arauco and EBITDA of $259 million, which is pretty much in line with the previous quarter, but of course, quite significantly down with respect to the second quarter of 2024 because of the lower price scenario. Regarding selling costs, you can see that year-on-year, there's a drop in costs basically all across the different fibers. Q-on-Q, we have a drop in bleached softwood and dissolving pulp, offset to some extent by an increase -- a very slight increase in bleached hardwood and a more significant increase in unbleached softwood because of the maintenance that took place at our Constitución mill during the quarter. In terms of prices and volumes, you can see there that prices are 12% down with respect to the second quarter '24. Volumes are up, however, prices are up with respect to the first quarter, but volumes are 12% down with respect to the first quarter 2025. Some comments regarding the situation for pulp during the quarter. We had a quarter basically of low prices, mainly in short fiber. Long fiber also trended somewhat down, but continue to be way above with a significant gap with respect to short fiber. In China, in general, we have seen an active market with quite a lot of demand, but at the same time, a lot of cautiousness from the paper buyers and also a lot of supply coming on stream. So -- but the bottom line is that prices have remained weak during the quarter. In Europe, we have seen a slightly different situation with a demand that is not strong, and we have seen also a lower consumption in nearly all fibers in Europe, together with quite a strong presence of supply in the different fibers. So in spite of some mill closures, we have seen a downward pressure on prices in Europe in general. In terms of dissolving pulp, basically a lot of uncertainty stemming from the trade situation around the world and cautiousness on the side of buyers. So that has also contributed to downward price pressure. The outlook for prices going forward, we continue to see a weak environment for prices. However, there are some signals that prices could be reaching a bottom and some potential positive signals in terms of a potential beginning of recovery going forward. Some room for further drops in prices in terms of long fiber. Local demand in China continues to be active, but buyers continues to be cautious and therefore, weakness -- this general sensation of weakness and cautiousness expected to continue for a while. Some seasonality factors could begin to show some positive effects. In Europe, we continue to see a weak situation as well with low demand across the Board for different fibers and also a lot of supply. In general terms, we continue to see the tariff situation around the world, continue to bring uncertainty and therefore, to bring some downward pressure on prices. You can see the pulp prices, the net Arauco pulp prices in China standing around $500 or $510 for the last few weeks, and that compares to $720 for long fiber and $800 approximately for dissolving pulp. Let me move to the Wood Products. As we said, we recorded a good EBITDA here, $138 million which is a little bit above the historic levels, so in line with historical average, but a little bit above. This has been driven by good performance in terms of volumes and prices in general. We can see prices increasing a bit for panels and volumes decreasing year-on-year, but showing stability Q-on-Q. And in terms of volumes for solid wood increasing Q-on-Q and year-on-year. But all in all, a good EBITDA in terms of wood products. And looking at our main markets here, you can see North America, which is 50% of our total sales. You can see, in general, uncertainty, cautiousness once again, we are seeing for most of our products, some oversupply and some price pressures. That's the case for MDF, for example, the case for particle boards as well. In the case of remanufactured products, the markets have been affected by higher interest rates and consequently, a lower index of housing starts. However, in the case of plywood, we have seen a strong market, which could continue showing stability and strength, solid demand and eventually an upward trend in prices. Probably in contrast to the North American market, we are seeing a stronger situation -- sorry about that, we are seeing a stronger situation in our main markets in LatAm. Brazil is showing a stronger market, and we could expect that to follow for the next few months, stability in volumes and also some potential price increases. In the case of Chile, we still see uncertainty in terms of construction and therefore, uncertainty in wood products. But we have been able to go ahead with some price hikes in spite of this uncertainty in demand. Some particular product lines such as particle boards and plywood are performing well. Argentina shows a very strong potential, but still a lot of uncertainty and demand volatility, which makes it a challenging market. Let me move on to energy. Energy has been performing quite well over the last few quarters. You can see the consolidated EBITDA for Copec there standing at CLP 255 billion, which compares well with the CLP 236 billion that we recorded in the second quarter of 2024. Of course, it is a drop with respect to the first quarter 2025, where we had an exceptional figure, probably one of the highest figures ever for Copec. So Q-on-Q, we see higher volumes in Chile, very strong commercial performance in terms of increasing volumes. This is, to some extent, offset by unfavorable inventory revaluation effects and also a lower industrial margin. But all in all, a very good performance at the consolidated level. Some further detail on the commercial figures are shown there on screen. In terms of gas station volumes, they are up by 4.3% year-on-year, which is a very healthy figure. In the case of the industrial channel volumes, it is up by 13.7% year-on-year and pretty much in line with the also very high figure that we reported in the first quarter 2025. So a very good industrial performance. Let me remind you that this is a volatile segment. It depends on the different bidding processes that we are able to win. In this particular case, we have been very active in terms of mining clients and that has brought about this very important growth with respect to the figures last year. Solid performance in general in Copec, very solid positioning in both channels. Likewise, in the case of Terpel, we continue to see very strong figures. The EBITDA is up to COP 433 billion, which is slightly down with respect to the figure last year, which was COP 463 billion, but still at very good levels. The drop is driven basically by higher distribution and administration costs and an unfavorable inventory and revaluation effect, which, as you well know, tends to be very volatile. But this is offset by a solid commercial performance, higher volumes essentially driven by Colombia and Peru. And also what has been a common factor over the last few quarters is the very good performance of lubricants. Lubricants is a segment that has performed very strongly following the acquisition of the operations of ExxonMobil that we went ahead with some years ago, and that is already maturing and bringing about very good results. So as you can see in the evolution of EBITDA there, Copec, Terpel has shown over the last 8 quarters or so in a row, a very high level of EBITDA generation driven by essentially a very good logistics optimization, together with the strong performance of the Lubricant segments and in general, a very solid commercial performance. There's a higher nonoperating income as well in Terpel worth mentioning. In this particular case, we had a onetime write-down of the assets that were held for sale in Ecuador last year in the second quarter. So that's a onetime negative effect that we had last year, which is not there anymore during this quarter. Moving on to Abastible, this is another company that has shown a solid performance across all geographies in general during the last few quarters. We have better volumes basically across all geographies with the exception of Chile because of higher temperatures essentially, but strong performance in terms of growth of volumes in Peru, Ecuador and Colombia. Together with that when comparing with the second quarter 2024, we are seeing for the first year, the consolidation of the Gasib operations in Spain and Portugal, which obviously contributes significantly to the consolidated EBITDA. All of that is more than offset by higher taxes, which leads to a lower net income actually during the quarter when compared to the second quarter '24 because of higher taxes, driven in this particular case by a particular foreign exchange effect. Looking at the operational figures for Abastible for different geographies, you can see that in general, we have been recording very strong volume growth in the different geographies. So 9% up, very strong in Colombia, which is basically associated with a very good pricing strategy in the Bulk segment. In the case of Ecuador, we also see a strong 9.9% increase in volumes, driven essentially by the Bulk segment with the substitution of other types of fuels. In the case of Peru, also a strong growth, 13.6% in this case, 13.6%, very strong, and that is driven by growth in the poultry industry, which is a strong industry in Peru, also coupled with substitution of other types of fuels. And all of that, to a certain extent, offset by Chile, where we had a drop in the Bottled segment essentially following higher temperatures during the winter. In Spain and Portugal, the Gasib operations have been doing very well, actually with higher margins than expected because of regulatory issues and also higher volumes than expected because of both lower temperatures for the season and also higher volumes because of, once again, other substitution of other types of fuels. So Gasib, the new company performing very well for Abastible. Moving on to other investments. A couple of comments to make here. Sonacol, very stable company, very solid with a net income that is in line with volumes transported by the pipelines with a slight increase with respect to the second quarter '24. Our Fishing division in Igemar hit by lower prices and higher costs for its main products. Metrogas showing quite a significant decrease in terms of net income recorded for the quarter, but that has to do with a onetime effect, a onetime positive effect that we recorded in the second quarter '24, which had to do with an update or a reversal of a provision for a lawsuit that we had with a supplier in Argentina, dating back to the years of the natural gas supply crisis with Argentina. This lawsuit was finally resolved. But at this point in time, the second quarter '24, we went ahead with this reversal of the provision, which yielded a very strong positive result. That, of course, is not there in this quarter 2025. AGESA Natural Gas, the trading company for natural gas, the wholesale trading company with a very stable net income for the quarter. Mina Justa with a very strong performance in the quarter, EBITDA of $225 million and net income of $139 million for the quarter. This has to do with an increase in physical sales, also with a very strong pricing scenario and also particularly with low cash costs stemming in this particular quarter with a very strong presence of byproducts, essentially silver, very strong presence of silver, which is credited against the total level of cash costs. That's why you see a low $1.3 per pound cash cost there. That has to do essentially with this presence of -- very strong presence of silver during the quarter. So very good performance by Mina Justa. Main developments during the quarter. We have -- Arauco has been making progress in Sucuriú. The Sucuriú project is already standing at 13.2% progress as of June. So a good figure of progress for Sucuriú. 4,800 workers on site already out of a total of more than 14,000 employees that are expected during the construction phase and around 6,000 workers when fully operational for the project. Works have begun at what is called the balance of plant, which had to do with the associated infrastructure for the auxiliary infrastructure for the mill, basically pipe racks and chimneys. Also work has begun on the water and effluent treatment plants. Regarding plantations, still making progress and already secured more than 70% of the required total forestry land that's already in place. And the wood supply for the first few years of operations is already secured as well. Finally, both the authorization is in place, the regulatory authorization and an agreement is signed with a logistics operator for transporting the pulp by railway to the Santos port. So all in all, good progress for Sucuriu. Another piece of good news here, Fitch confirmed the ratings for Empresas Copec, the risk ratings for Empresas Copec, BBB international and AA locally, both with a negative outlook and highlighting the robust credit profile of Empresas Copec and its subsidiaries. So good news here. In line with that, we have continued to issue in the local market this time with a $54 million bond that was placed with a maturity of 21 years, a rate of 3.4% on top of the UF, which is the inflation-linked currency in Chile, which means a spread of 85 basis points on the base rate, which is one of the lowest corporate spreads that has been achieved during the year. And this is basically to refinance liabilities in our subsidiaries. Moving on to ESG. We have continued to make progress in terms of our positioning in electromobility. One of the pillars here is being the most important actor in the supply of electricity for city buses. And that's exactly what we've done with the inauguration of a new terminal this time in construction, which is a large city in the south of Chile. So the first electric terminal for public transportation in construction, which has been carried forward by Copec, which is also supplied in terms of the electric power supplied by Emoac, which is also a subsidiary of Copec. Arauco has joined an international task force here to go ahead with the standard for the valuation of natural assets. So what is being done here is a pilot plan, which seeks to come ahead with a framework for a standard for measuring and reporting the value of natural assets. This is being done in conjunction with capital coalition and also with TNFD, which stands for Taskforce on Nature-related Financial Disclosures. So this is a very serious effort by Arauco and other institutions in order to be able to quantify in a standard form, quantify the benefits provided by forest, which, as you well know, are many environmental benefits such as carbon sequestration, carbon capture, biodiversity conservation, water regulation, timber production and so on and so forth. Interesting initiative here for standards of valuation. Copec continues to make progress in its positioning in the electrical power generation segment. This is a battery energy storage system that is carried forward together with Transelec. It is 64% complete already, and it is linked to the Granja Solar asset that Copec acquired last year. So this will allow Copec to inject in a steady and stable form, a total capacity of 105 megawatts. This is expected to start in 2025. And finally, an invitation here for the investment community. All investors more than welcome to the new edition of our Investor Day. We have already set the date for the 19th of November. This is going to take place at Club Cinquenta, which is right next to our corporate headquarters here in Santiago. So please save the date and all the investors more than welcome to attend this new edition of our Investor Day. So having said all that, let me open up the floor for the Q&A session. And let me ask Cristian and Gianfranco to please join me. Thank you.

Thank you. We will now start the Q&A [Operator Instructions]

Okay. Hello, everyone. Thank you for attending this webcast. I'm going to start reading the questions here. I have Emerson Vieira of Goldman Sachs. This goes to Gianfranco. Can you please comment on the pulp -- lower pulp volumes recorded in the second quarter? And what was the production due to the stoppage of the Constitución mill?

Well, we had about 11% lower sales volume on the second quarter, and that was basically because of market conditions. We -- there was a softer market during the second quarter, and we were more, let's say, advanced selling in the first quarter. So that's why the volumes sold were lower. The production levels were similar, as you can see in about 1.1 million tonnes. So basically, market that we increased a little bit the inventories, but then we started selling more normal volume at the end of the quarter. In terms of Constitución, there was a normal annual program stoppage for the mill. Normally, the stoppage for Constitución are 20, 21 days. So it's a normal stoppage of production, and we have a program that lost production because of the annual stoppage. So no big impact in our plans or in our targets of production for Constitución.

And can you comment on urban sales plan, if you are planning to have another move like that going forward? And if you -- what measures are you considering because of the increased leverage in this high CapEx space because of Sucuriu?

Well, we normally are selling land that has a higher value for urban or uses. I mean in this case, it was in Brazil in Curitiba, we used to have a particle board mill in Curitiba regional that it was closed many years ago. So we had some land that was very attractive for other uses. And we sold that in -- I think it was like $20 million with a profit of $15 million. It's a small amount, but there's a lot of value creation by other uses of that land. It was inside the urban perimeter of Curitiba. So nothing to do with forestry or whatever. In terms of alternatives for decreasing leverage, of course, we are always analyzing what type of divestitures we can do to decrease leverage. We did last year a big divestment of land and forest. We are not planning to sell more land in big amounts, but we could do some selling of forestry assets, biomass, standing increase with a contract to repurchase probably in the future in order to decrease leverage. We are thinking about that. We haven't done anything yet, but that could be done in case necessary to increase liquidity and decrease leverage.

We have Tathiane Candini. She's asking about the pulp market. Some players are planning to announce some price increases for this month, is Arauco will share this view on a better market and if we're going to announce also follow a price hike?