Irani Papel e Embalagem S.A. (RANI3.SA) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome. As we begin our earnings call for the Third Quarter of '25, we'll begin with a quick presentation of our results in this quarter. And then after we'll open up to Q&A. And this can be done by the chat or even by mic open. We also have simultaneous translation into English and this will be a very -- provided on the company's IR. And so this will -- we will start up with our presentation. We had a net revenue of BRL 433,463 thousand with an adjusted EBITDA of BRL 446 million and a margin of 33.7% and a net income of BRL 42,060 and the ROIC in the last 12 months ended with 12.9% and the cost of debt also in the last 12 months for income tax and social contribution of 8.8% a year. Then the adjusted net debt-to-EBITDA ratio at 2.06, an important drop, which had dropped from 2.3. And then when we look at the total, we have an elevation and 4.7% regards the third quarter of '24. Then we have 10.5%, which was the representation of the exports in the third quarter, 10.7% in '25 and 7.4% in this quarter. And the EBITDA, we had an elevation of 15.9% compared to the third quarter of '24 and 14.6% regards to the second quarter of '25. So, this is a very significant result and a margin of 33.7%. When we look at our net income, we had an increment. Just to give you an idea, the dark green is the recurring profit without biological assets, the light green are the biological greens and they have a tax credit of IPI that are not recurring as we had a loss in the second quarter of 2025 that we won and we were registered, right? So, we had a recurring profit of 72.3% compared to the second quarter and 32.8% in regards to the third quarter of '24. Biologicals had significant increase in value, which was lower than in the previous quarter where we recognized also the acquisition of a forest asset that we have in Rio Grande do Sul for the losses in the third quarter ended with a total of BRL 42,076 thousand of net income. When we get into the second one for packages, within the packaging, imported cardboard, the market as a whole had major evolution in regards to the third quarter of '24, 0.9% and in versus second quarter, 7.5%, which is mainly due to the seasonality in the period. So, in square meters, the evolution was significantly similar and we had 7.5% in regards to the second quarter of '25, sorry. So, when we look at again specifically, we had a drop in volumes in regards to last year and an evolution of 2.5% in regards to the second quarter of '25. This drop is mainly due to our policy to value profitability the detriment of volumes. We had a drop in volumes because we were very firm in price transfers over the last year that we'll see up ahead. This was an evolution that was very significant and the recovery of the volumes that takes place naturally as the market becomes more heated in the second semester. So, when we look at this in square meters, we had an evolution of 3% and a drop of 8.3% absolute over the third quarter of '24. So that represents about BRL 83 million. And our prices, as I mentioned, we had an evolution we closed with BRL 692 per ton and 2.1% above the second quarter, and we had an elevation in the pricing, which is the residual of the price increase we had. And then in regards to the second quarter of '24, we had an evolution of 14.1%. So, this is very significant, quite higher -- a bit higher than the inflation in the period and also due to the increase in scraps, which elevated our cost and that made our price transfer become a little more intense. And this is the average price and that's 1.6% above the second quarter and 14.6% above the third quarter of '24. So, sort of one of our main reasons for the profitability to evolve. However, this price transfer was really important for our profitability in the company over the period. Now when we get into the paper for packaging, which is what we sell to the market, we had an evolution in our total sales of 0.8% in regards to the third quarter of '24 with 33,165 sorry, and [ BRL 0.27 ] from the flexible packaging and 6,125 of rigid cardboard. And most of this is transferred -- there's still volume that we sold. And so, it was a little bit better than in the second quarter because we transferred a bit more paper, but we had substantial evolution also in the sale of paper for flexible packaging of 7% and a bit above what we did in the third quarter of last semester. And so, then we see the paper for flexible packaging, and we had a drop of 1.6% in regards to the second quarter in '25 and an evolution of 0.3% in regard to the third quarter of '24. This drop in regards to the second quarter is mainly due to the depreciation of the dollar. So that influences revenue from exports due to the drop that the dollar has during this period. And the average prices of the rigid packaging had an evolution of 15.6% in regards to the third quarter of '24, and that's mainly due to the increase in the scraps. And so the scraps were a lot higher than inflation in the period. And in regards to the second quarter, we had an evolution of 1.4%, reaching BRL 3,839 per ton. The price of the scrap was a significant evolution of 17.1% in 1 year. We ended the third quarter with BRL 1,199, and that's overall market, Anguti is the statistical agency that works with the numbers of the scraps in the market and a drop of 5.6% in regard to the second quarter of '25. So that was very significant. And this drop is going to remain in the next months due to a bigger offer of scraps in the market. When we look at Irani, we had an evolution of 17.4% in the year and a drop of 7% compared to the previous quarter, ending at BRL 1,093 per FOP. When we look at the leverage, we had a drop that was very significant, 2.26 to 2.06. And this drop in leverage was already foreseen in our projections, financial projections, the cycle of investments is here, as you can see in the Gaia platform. This was done after the re-IPO in 2020, and there is a final stretch with some projects that are still being conducted within the Gaia platform, but most of the investments already happened and now we'll enter in the phase of deleveraging before we begin any new cycle for investments. So, we have a gross debt of BRL 1.752 thousand, a cash position of BRL 181 million and a net debt of BRL 1,071,516 and most of this is in national currency, only 1% is foreign currency and most 89% is long term and only 11% is short term. So, our financial situation is very stable and very well controlled within parameters we've established in our financial policy management policy. Our ROIC starts evolving when it comes to the worst moment, let's say, when we were still performing investments in 2024. So, there is a substantial drop, but now we start off with a peak trend. And this quarter, we ended at 12.9% and the cost of debt was at 8.1% after income tax and social contribution. So, we had 1.1 percentage points in regards to the second quarter and 2.1 percentage points in regards to 2024. So, this evolution is also expected to happen and should take place throughout the next quarters. And when it comes to dividend, we distributed in the third quarter [ BRL 26,318 ] reaching 0.3%. And in the last 12 months, which were completed in the third quarter, we distributed BRL 169 million and 0.79, a dividend yield of 9.5%, and that's considering the price of the shares at the closing date of the 30th of September 2024. Then we completed the buyback program and we were able to wrap up this and we canceled 9,328,000 ordinary common shares and the average price is at BRL 7.62 per share and the share capital was after the cancellation of the shares 230,501 and this is a measure that we've been implementing over the last few years as we understand that the value of the shares in the market does not reflect the intrinsic value of the company and that ends up being the capital allocation of trade for share at this moment. And so, we relaunched a buyback program in 2025, which began in the same day in the transformation in the prior program with a period of 18 months and a limit for acquisition with a total amount of ordinary shares. So, we also have an addition of debentures to be able to handle the Gaia V project as well our small hydropower plant. And this is what was already expected among the Gaia platform, but we also had the license to begin with this longer than what we expected. But we were able to get the license and this issuance of 120 million investments over 15 years from the date of mission, we were able to have an IP plus a year 6.7 year, and that's considering CDI minus 1.13 per year, which is a very significant cost is very competitive and that really improves our debt level as this cost of debt is lower than the average cost we have the debt as a whole. So, this was important fundraising for us and really help us handle this investment. So, when we look at the Gaia platform projects, we have our main initiatives complete, but we're also beginning with the repotentialization of Gaia V and we're wrapping up on the last phase of Gaia IV and that's why we try to begin this. And so we had BRL 125 million in year one. And so we have 2 projects that are at the final phase and the new printer, [indiscernible] which is a final or cutting-edge version from Mitsubishi with 87% progress, it's already in the performance phase and we -- where we already have 65% advancing the machine has a planned shutdown for January 2026, and that's how we're going to be completing this our main machine, which is going to increase paper for corrugated cardboard and it's very competitive machine. And so with this, we were able to complete the 11 projects expected in Gaia platform and we had two investment tranches and we're completing the second round. So, in the third quarter, we had some important highlights. For the third consecutive year, we were able to conquer [ acknowledger ] from the Epoca magazine on diversity along with ethos, that's on diversity, equity and inclusion. We're the best company in the paper and pulp segment. For the fifth consecutive year, we were recognized and acknowledged at the Transparency Trophy every five in the liquid category of up to BRL 5 billion. And this year, we were among the 10 companies, and we were the highlighted company for the year, 5 years winning the prize. And this year, we were the highlight. So that means we were the company that has, let's say, the best performance among those that had revenue below BRL 5 million among the third company that's most innovative in the paper and pulp sector for 2025, and we were able to keep up with this position. And then we were finalist also an award for best practices in ESG and this recognizes ESG practices that are very innovative in different companies in the sector. So, then our team here also for IR and Investor Relations and accounting and financial company, which is always available to our investors and Odivan, our CFO; and Andres, our Investor Relations Manager, [ Mario ] is our Investor Relations Analyst, as well as [indiscernible] an analyst and Investor Relations and new business. And then we have [ Evamdo ] our Accounting Manager and Alex and in the financial area, we have Marcos, our Financial Manager and Emmanuel is a specialist as well that's working on behalf of our investors. So great guys. When it comes to presentations, that's pretty much it. And now we'll open up to have a period for Q&A to answer any questions that the team might have.

Thank you, Sergio. Good afternoon, everyone. It's a pleasure to be with you guys once again and we welcome our, if it's a need questions you have in the Q&A, in the chat or raise hand, open up your mind. And so, the first question comes from Guilherme, XP inching, look on the demand for corrugated cardboard and he want to hear a little bit of the dynamic on this and the prices and which sectors have been really pushing demand and what's the expectation for volumes and prices throughout the fourth quarter this year? And also if you could talk about the expectation for 2026.

And then you have, first we can talk about demand and then we'll get into the second one on costs. That's okay. Yes, the demand for the second quarter, as expected, has come in line with expectations. The month of October was really good when it comes to closing for the market as a whole. And so the numbers disclosed by Papel were in line with expectations. And so they're all in line with the seasonality expected for the second semester. And our expectation is that this will be kept till the end of the year. So, no big surprises. But for next year, the projections that Irani Papel has disclosed, they have a projection from supported by the [indiscernible] Foundation and the projection for this was about 2% growth in 2026. Sectors that have really been levering demand. One of them is one where we have pretty good exposure to, which is the batteries and animal protein sector. So, even with rate, the American rates has been redirecting to other markets. And we've really had excellent demand besides, of course, the food sector, which has had significant performance as well. And so that's mainly due to the salary levels that have been kept at a peak. Numbers were disclosed yesterday. Unemployment continues at historical minimum rates. And this, of course, helps a lot with the segment in the food sector. And of course, so the debt level among families, which is concerning. So, we don't see -- we haven't been feeling any kind of stress for demand in the food sector, which is probably 70% of our specific demand and another 50%, I'd say, of the market as a whole. So, Lindomar? He's also asking about the prices. Sure. We'll already cover that.

Yes. So, I think you were very clear on the evolution of this segment for corrugated cardboard. I would just add on that in regards to prices, we've been able to keep up with our prices and adjustments and that have been implemented in the beginning of the year. We don't see any perspectives on drop when it comes to pricing, but we'll consider the maintenance of the prices until the end of the year. So, I don't think we're going to have any major pressure considering that the demand in the second semester is basically occupying the capacity in the market as a whole. And if it's – if there's still some capacity, it's very small, right? But our concern is always, as you can see in the beginning of the year, lower seasonality and even the drop in scrap also generates a bit of pressure. But we do have a policy of not reducing prices. And we believe this is something that's conquered and it's going to be very difficult to recover concrete prices, right? So, we are really firm with managing our prices, and we should keep these stabilized during the next quarters.

Perfect. Well, the second part of this question is from Guilherme is about costs and a few quarters ago, we're talking about the reduction of the price of scraps and we were starting to cover the numbers hidden and margin performance in the company. So, we can imagine part of this is mainly due to the reduction in volumes into these some players stop their production. I wanted to understand with you all, what you guys think what's the balance point on the price of scraps that would not encourage the recovery in the production of recycled goods considering the price of carbon at the current level, right?

Well, when consider the level of the price of scraps that will maybe motivate or restart machines and recycled goods well, that's one point. And another point is, what you've been seeing when it comes to the price of the scrap and if you could -- if we should expect more reductions ahead. Well, the scraps got into a rupture cycle, let's say, the trend is that there should be a reduction in the first quarter and probably in the beginning of 2026 normally the drops between this point of dropping cycles and increasing cycles. But we imagine this will remain since we haven't seen much pressure in this market even at this moment with higher demand. So, we do expect scraps to continue to drop at a pace very similar to what has gone on in the last few months is the expectation. Of course, this will help us when it comes to profitability in the next quarter. So, what else towards the balance point. The average price of scrap historically is BRL 900 per ton. And so today, we're above BRL 1,000. So, the expectation that this should be close to the average price. Of course, you can remember that this is a market that has a bit of volatility. So, it's around some peak moment, right, downwards and upwards. And so it's also related to the KraftLiner dynamic and consider while you have space with the KraftLiner and clearing the packages this can lead to the closure of recycled builds. So, it's not just a proxy of the scrap prices, but also related to the KraftLiner prices. Well, as market and exporters of KraftLiner have had relevant exports in the last months, if they redirect paper to the internal market because externally, the market is a little weaker, this would end up making scraps prices go down. But we've seen some closings in recycled operations and we've also been adding more virgin fiber paper into the market. So that helps also with the scraps market to intensify the drops.

Well, thank you. Here we have Edgard from Corretora, has a green berry, can you open your line?

Great. Congrats on the results and sharing a bit of your deleverage journey, returns to shareholders and the buyback strategy. And so -- let's get back to questions. The first question is, if you could explore a bit of the value over volume strategy and becomes very clear in the company's result that you guys have been able to retain pricing. There is an increase in average price of corrugated cardboard, but on the other hand and so I want to understand up until what point you guys would accept losing market share to the detriment of pricing. So is there some like optimal calculation of what would be the volume we should be operating with when it comes to this and so operational capacity versus installed capacity really makes sense maybe to give up on market share to the judgment of price. I wanted to hear you guys talk about this a bit and how you consider the strategy and how the decision-making takes place in the sense and even how this should be in 2026. Then I also wanted to get into a little more details about the scrap, right? Obviously, we have this balance point, maybe the historical price of BRL 100 per ton, but also a point that ends up being a driver for the market dynamic, which is the spread between the price for cardboard boxes and scrap. And I think maybe there's a sweet spot maybe there's a delta that makes sense and then from one point in time, you would start having more pressure, right? But of course, the other factors of demand and all this. But if we consider this level, is there already some pressure maybe on reduction of prices in the industry? And that kind of meets the first question was the strategy of value over volume, right? So, what's the scrap price that would be a sweet spot for you guys that wouldn't pressure price and would still maybe bring in an increase in profitability, let's say. And last, if possible, I would just like to know if there's an update on the [ nails ] platform. We see you guys are getting close to the completion of major Gaia projects and of course you still have few PCA to close to completing most of the fabrics now, for now as did expect some news this year for these uncertainties in the market maybe have led to a decision as upper hand. And so, is there likely day that you where you expect to make a decision, if you have any update in this regard, it would help a lot.

Okay. Thanks, Edgard. And that really clarifies a lot of our strategy and valuing profitability to the judgement of volumes and this is in a strategy that we have been implementing historically. And so we have a lot of experience when it comes to this corrugated carbon market. And whenever there is an opportunity to have an increase in prices, we'll always give up on volumes momentaneously to not generate any losses due to price increase processes that can be implemented vigorously. And as soon as the price cycle is complete, we start the recovery of the volumes in a very careful manner. And so, we start learning with volumes that have smaller profitability in the portfolio, trying to readjust prices and search for more volume. And we're going to work on prospecting as well. So, we're very careful with new prospects, right, especially when it comes to seasonality periods that are lower to avoid a market price reductions that could be retrofitting a systemic value destruction process. So, we try to do this in a very cautious manner after the price increase cycle. So, we have a price maintenance strategy. We try to not perform price reductions, especially in the box market, then that the sheets are maybe a little more related to the scrap or closer ratio. But when it comes to prices of boxes, we don't want to perform any adjustment with this variation of the scrap prices. And with this, we recover volumes and taking advantage of the seasonality moments that are a little better. So it could be that we'll go through the next quarter with a little less volume than what we had last year or this year, maybe in the first quarter. But focusing on from the second semester next year with a bit more of a recovery in volumes if the seasonality helps, of course, right? So, this strategy of co-existing capacity and keeping up with the prices modified really helping you to have a bigger control on the cost variables and performing some adjustments here and there, working with less extra hours and that all makes your process more efficient. So bringing in volumes with profitability that's lower maybe and maybe would lead to a destruction of value so that we're very careful in this process when it comes to implementing prices that we could really get the most out of the price increase cycle and also the volume reduction process we're very careful as we know, the market has seasonality in the second semester and volumes in the – we have the covering. So, part of the volumes we are seeing that are lower in the third quarter are going to be recovered in the fourth quarter due to seasonality and part of them throughout next year. So, when it comes to the price of scrap that you referred to, typically, this relationship between the price of corrugated cardboard and the scrap price around 6x of the historical average. We had some important variations in a few months, right? And so that went to about 12x where the scraps dropped a lot and corrugated carbon prices also went up a lot, but this is atypical, right? If you look at this long-term horizon, you'll see the average of 6x is -- seems to be more consistent than the variation that took place in the short term. So, we're very close to this balance point between the price of scraps and corrugated carbon prices. But considering the market dynamic, we believe there's going to be a drop in scrap prices and it should be closer to stability in the next quarters. And so the last question is about Nails, this is really what we were talking about, we have the engineering work done all the partnership planning and this is all part of this initial planning process in the Nails platform. But we're just going to start disclosing contract at the moment when we understand this is adequate and the current moment is really bad due to the high interest rates and also a lot of uncertainty on the horizon. So, we plan to be more cautious as we launch the new cycle and make the deleveraging happen really stronger with probably next year. And with this, we're prepared and we have the right engineering to launch the Nails platform as soon as we see a more intense drop in interest rates and of course, the uncertainties we're all experiencing.

So, the next we'll start with from Citi from Stefan.

And so, first I wanted to explore about the flexible segment and paper price in the quarter that was impacted by value of the dollar, but you wanted to look at what you guys are seeing in the first quarter of 2026 and cost as well. I think that was already pretty well explored with the drop in staffs and possible continuation of the trend. But correct me if I'm wrong, this movement in the third quarter seem to be a little more accelerated in the end of last quarter. And so that will consider that in fact the drop in the quarter is there still something that was kind of impacted by the fourth quarter. So once again, the drop in costs in the third quarter already reflected the lower scrap prices, is there still a little more to come? Those are my 2 questions.

What we discussed is the average price. So naturally we have in the first quarter the new level price and you have this dropping curve and then you also have in the fourth quarter more of a drop in scrap that we're expecting to happen due to the market dynamics with a lower average price. And then we also have a expected drop this month. So, and then in regards to flexible packaging, you have to split this market with paper first for packaging and also printer show backs, we have papers and machine to try to papers fill back and there we have papers for machine for. We try to thin our papers and that's where we had the price transfers that are and above inflation and this is a market where we have beta and those are the papers that, that for bakeries and other paper, other businesses that use this kind of thinner paper. We've been able to transfer prices from actually, then we have bags machine too there we refurbish and in Gaia Platform. And then we have access departments and the market has had very good dynamics, so they were to transfer prices and there's also this other ingredient scrap in the composition of the papers. But most is virgin fiber, we're able to transfer prices and pass on prices the machines from paper for machines one have been a little more challenging. And that's because companies that have the diet conversion, they have a market that is maybe a little worse than what we expected and they then placing spot papers in the market, which has been leading to a bit more of a difficulty to pass on prices in this specific segment, which is that of industrial bags. This is important for us, and we have a premium price towards the average in the market, considering our leadership in this segment, but also because we are the only company that provides paper in a safe manner to small and medium-sized converters because the companies that produce this type of paper typically have a conversion operation, especially for cement bags and they come in and out as the market becomes better or worse. So, at this moment, there's been a bigger offering of this type of paper in the market. With this, we've had a bigger challenge to transfer prices in the market where we have leadership in premium prices. So, I think it's just to add on the fourth quarter is maybe very similar to the third, but maybe as a slight variation we have the Christmas period. October and November really been strong. And in the other segments, as mentioned, if you have this variation from the third to the fourth, it's going to be very small. And then the biggest influence in this issue is the dollar, of course which had a significant drop.

And so sorry, I have two quicks here…

But we have still other questions here to answer. And we have Angelo here, he also has a question.

Congratulations on [indiscernible] profitability in the end of this year, considering the increase recently in prices and the scenario with the drop in scrap prices.