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

Good morning, everyone. We are beginning our webinar, the earnings at Papel e Embalagem for the first quarter of '23. I'm, Sérgio Luiz Ribas, I'm the CEO. Together with me, we have Fabiano Oliveira, Personnel, Strategy and Management Director; Henrique Zugman, our Paper, Forestry and [indiscernible] Business; Director, Lindomar Lima, Director for Packaging; and Odivan as our CFO. Our earnings call is a webinar, where participants for their video and mics off, but we'll begin with a presentation of our results. soon after, we'll provide time for questions. So the questions may take place through Q&A on the chat or we open up your mic. We're also providing simultaneous translation into English, just select the option and the webinar is being recorded and will be provided in both languages on the IR website at Irani. I'll share the presentation. So going over the earnings in the first quarter the last 12 months, we had net operational revenue of BRL 1,000,685,606, and this is 1.7% higher than the previous 12 months. And the last 12 months, we had a net income of BRL 349,000, 000, 2.4% higher than the 12-month period before. The adjusted EBITDA of BRL 529,000,630, pretty much in line with the previous 12 months, 0.1% lower and investments in the GAIA platform, which were BRL 767,536,000 up until the 31st of March this year. So the net debt-to-EBITDA ratio is 1.51x. The ROIC was -- in the last 12 months was 22.8%. And the cost of the debt in the last 12 months was 13.8%. So when we look at the earnings in the quarter, we had an operational net revenue of BRL 406,000,884. It's 0.3% lower than the first quarter of 2022. And the adjusted EBITDA was BRL 128,000,210. This number is 6.1% lower than the first quarter of '22. The net income was BRL 82,958,000, 26% lower than the first quarter. And investments performed in the GAIA platform in the first quarter were BRL 56,093,000. So when we take a look at the comparison with the fourth quarter and the first quarter -- sorry, the fourth quarter and the first quarter of '22, 1 year ago, we have a revenue of [ BRL 406,000,884 ], 0.4% lower and 0.4% below the fourth quarter of 2022. Our EBITDA was BRL 128,000,210. It was 7.5% lower than the fourth quarter of '22 and 6.1% lower than the first quarter with an EBITDA margin of 31.5%. So the net income was BRL 82,000,958; 3.4% lower than the fourth quarter and 26% lower than the first quarter. When we take a look at the volume of corrugated cardboard packaging and sustainable cardboard in regards to the first quarter of '22, we're having a market perspective here. The market had a peak of 2% compared to the first quarter of '22 and a drop of 2.6% compared to the fourth quarter. And this is due to the seasonality of the last 3 months in the year, normally stronger. And with this, we end up having a bit of a drop in shipping compared to the fourth quarter. But the good news is that we had some evolution in the first quarter compared to the first quarter of '22. In square meters, it's pretty much the same. A peak of 2.4% and a drop of 2.1% compared to the first quarter of '22 with 1,838,203,000 square meters shipped. We had the performance that was better than market, mainly due to the new capacity for the unit in Santa Catarina with a GAIA II projects that we're going to be discussing. We had an average of 10.7%. We shipped 38,103 tonnes, and this is 4% lower in the fourth quarter of '22, mainly due to seasonality. And in square meters, we had a peak of 6.2% with 75,911,000 square meters, a 4.3% lower than the fourth quarter of '22. So then the prices in regards to the first quarter of '22, the packaging prices had a drop of 3.3%. And basically, they were stable compared to the fourth quarter of '22 in tonnes. When we look at square meters, there is a peak of 1% from an annual perspective and an increase of 0.3% compared to the fourth quarter of '22. So it's a pretty stable scenario for the prices compared to the last quarter of '22. While we began to work with the paper business specifically, the sales were smaller than the first quarter and this is mainly due to market issues, but also because of shutdowns we had in machinery at the factory because of our GAIA I project, which will start up from the next month. So throughout this quarter, we did have some shutdowns in our paper machines that did affect our total sales as well besides the market issues in the first quarter, which was a quarter that was super challenging when it comes to volumes. So we had a drop in regards to the first quarter of 1.7% in paper for flexible packaging, which is what this top column has. This would be a paper for bags, packaging, industrial bags overall that we sell directly to the market to have independent conversions in Brazil and the U.S. And we sell 6,492 tonnes of paper for corrugated cardboard which is lower than what we sold in the first quarter of '22, but a little higher than what we sold in the fourth quarter of '22. Due to the seasonality, we had to transfer a little more paper to our packaging units, and we sold a little less. When we look at prices. The prices for paper bags and packaging that we sold in the market, mostly virgin fiber packaging. We had an increase of 14.7% and 2.5% compared to the fourth quarter of '22. A total of BRL 6,745 per tonne. It's an important evolution. We were able to -- throughout the first quarter of '23 perform all the price transfers expected for papers and fiber that we had expected in '22. So when it comes to paper for rigid packaging, which is basically for corrugated cardboard packaging, which is like TestLiner and the pulp, then we're talking about a drop of about 8.8% compared to the first quarter '22 and 10.5% compared to the fourth quarter of '22. So the prices of these papers are really correlated to the price of the scraps. These scraps have been going into a drop in prices, which was really intensified in the first quarter and continues to have this drop trend. When we look at the scraps and an annual vision, when you look at all of the Anguti data the scraps prices dropped 15.1% versus the first quarter of last year. And this is 11.8% compared to the fourth quarter. So the drop was accentuated. And in our case, the drop was quite similar, 15.8%. It was a little bit more than market levels and 10.5% compared to the fourth quarter. So the drop in the scraps has been contributing to our earnings in the recycled product supply chain. Since prices were kept pretty stable and scraps had this significant drop. And I believe that this remains in the second semester of '23. In the case with the CIF prices, the drop in the Santa Catarina unit was 13.5% and 8.7% compared to the fourth quarter. And in the Minas Gerais unit, the drop was 10.1% and 10.4% compared to the fourth quarter ending with BRL 733 per tonne. And I just want to remind you that this is the CIF price. And in Total Irani had a drop of 12.4% reaching BRL 823 per tonne and 8.7% compared to the fourth quarter of '22. When we get into the resin business, this has been a real difficult business throughout the last year and this -- beginning of this year because resins are like international commodities, so the prices are determined by the worldwide market, and there was a significant drop in the prices throughout '22, which were increased in the first quarter of '23. So we had a significant drop in the production and volume of sales of 4.1%. and ended with 3,900 units sold and 71% higher than the fourth quarter due to the seasonality of the business. The last quarter is normally the quarter where we have the lowest volume of sales on the first quarter as when you recover the next batch. And typically, this is a significant sales phase. So prices had a very big drop throughout '22, 37.3% and a drop that was really accentuated from the fourth to the first quarter of '23. And also even levered by the currency exchange rate. So we also had a drop of 35.4%. The turpentine costs and 12.1% compared to the fourth quarter of '23 adding up to BRL 13,377 (sic) [ BRL 13,337 ] per tonne. So this is a significant drop. And basically, the difference of the EBITDA that we've noticed in regards to the same period last year is mainly due to the resin business since the paper and packaging business has been appearing to be a little more resilient when it comes to volumes and prices. Now when we look at the financial aspects, the net debt-to-EBITDA increased a bit as planned due to the investments in the GAIA platform. So we reached 1.51 and we're even better than what we had planned initially due to the fact that our earnings have been progressing very well, and we ended with a gross debt of BRL 1,000,833 and BRL 1.033 billion as a balance, a bit of a drop compared to the fourth quarter of '22, and a net debt of BRL 799,694,000 and a leverage of 1.51 net debt-to-EBITDA ratio. So 98% of our debt is in national currency and 2% in foreign currency, whereas most of our revenue comes from Reals, 87% is long term, and we only have 13% of our debt as short term. I want to look at the return on invested capital. There's a bit of a drop compared to the last quarter, going to 22.2%. But it's a pretty significant level. Most of the paper companies worldwide and 2.6% lower than what we had in the first quarter of '22, which was basically the peak of the ROIC due to the higher earnings and the nonactual use of the investments for the GAIA platform that are basically taking place until the second quarter of '23. So the buyback program that we launched last year, we've already fulfilled 44.77% of this buyback program. Well, the limit of acquisition of 9,833,806 common shares, and that represents 10% of the total common shares issued by the company. And so until March 31, we already had brought 4,402,700 shares representing 44.77% of the program that we had completed. It's still in progress because we understand the share price currently does not represent the intrinsic value of the company. And thus, it is a very important investment for the company. And therefore, it's also something very important for our shareholders. So when it comes to -- we paid BRL 21.197 million dividends of BRL 0.08 per share. In the last 12 months, we had BRL 164 million in dividends. And we had BRL 0.66 in dividend per share, which would be a dividend yield of 9.75%. Very significant in the last year due to the significant results that the company achieved in the last 12 months. When we take a look at the GAIA platform, which is this investment cycle that we're currently working on at this moment, we did have 2 phases in the GAIA platform. The first phase was 5 projects. The second cycle was also from another 5 projects and the main projects in the GAIA platform when it comes to values or earnings for competitive advantages, other projects are GAIA I, GAIA II and GAIA III, which are already going through their final phase for completion. The GAIA platform as a whole, has an impact in our productive capacity for paper and pulp of about 29% and increase in production of corrugated cardboard that represents about 23% due to the expansion in the Santa Catarina unit , and we're going to increase the energy production by 56% with GAIA I. And we have another 10% with GAIA IV, 33% with GAIA V. So there's a significant increase in the production of energy with these investments. With GAIA I becoming self-sufficient in our Santa Catarina and the releveraging of our PCH is in all of the production plants at Irani with some leftover power for the greater rain periods or hydric power energy production basis. So we already have this approval of BRL 1,000,000,600 when BRL 877 million are net investments. We invested BRL 56 million in the first quarter of '23. And overall, ever since the beginning, we've invested from this total amount, BRL 767 million in the GAIA platform. So most of our investments have already been performed. And the most disruptive projects that have higher values are taking place already and they're at this final completion phase which is GAIA I. The expansion project to recover chemicals and utilities and the boiler, which is the main investment that will bring substantial returns for power generation, paper and pulp production, improving the mix of the fiber paper mix, the expansion of the Santa Catarina packaging with the expansion of the factory and some other box conversion machines and refurbishing of the machine to where we produce paper for bags and packaging, a segment that grew a lot in the market, and we're leaders in this market for Kraft paper bags and also the expansion of machine 2, we'll be able to work with this market niche even more. So basically, when we take a look at the schedule, GAIA I, which is the main project in the cycle, is at this completion phase, right? So the boiler should start up by the end of the first quarter. We should be from June onwards, start to have a performance curve until the end of the year. But the investment as a whole with the physical actual execution is pretty much complete, and now we're going to be starting up the equipment performing the natural adjustments in this project as a whole. So the expansion of this Santa Catarina's packaging is also almost complete. We have some final adjustments. And it started up in October last year. We're working on a performance curve at this moment. The machine has had production that's above what was imagined initially. We're still working with the PCHs to receive the environmental licensing. We still rely on these licenses for the basin -- the river water basin around the regions where the PCHs are. But we've already gone through the process to receive the licenses from [indiscernible] and we'll have this authorization also from the environmental authority. And after we get this license, we should start investing already as these should be started till the end of this year. So we have this process and system to manage processes as well that we'll promote the digitalization of our equipment in this 4.0 industry. This is an investment that's pretty broad. We've been working on all of our production plans, and it should be complete until the end of this year. And then we'll get into the performance curve throughout next year in the first semester. So then the expansion of the ET is under is in progress, and we should be completing this. We can have more pulp production and paper production and new printer that's already been acquired 100% of this project is pretty much complete. Automation of the intermediary stock that's going to be completed now in the second semester of this year. Then we'll get into a performance curve. And with this, we'll have the full factory in Indaiatuba completely automated. And it's going to -- it's a region we have a big competition for labor. So we're going to take our Indaiatuba unit to a higher automation level. And the flex folder printer for the Santa Catarina unit was already negotiated, and we should be receiving it by the second semester of next year. So we have the potential for physical execution. The 3 fresh projects already completed. The new print is pretty much completed as well. So the 4.0 industry, half of the project will be complete this year. And for the ETE half of the project will also be complete this year. So we have the performance curve as well up ahead. Great. So here, you have some complementary data for the quarter in the last 12 months. And we recycled 241,000 tonnes of paper. And in the first quarter, we recycled 59,000 tonnes. And the plastic with the scraps, we were able to recycle 1,407 the last 12 months and 385 tonnes in the quarter -- in the first quarter of '23. So in this quarter, we also had some important recognitions and acknowledgment. We were acknowledged as one of the best companies to work at in Brazil for people above 50, which is a diversity category. So we've been recognized -- and how it's recognized as one of the best companies to work with people that are over 50. Once again, we're recognized by the National Foundation for Quality as one of the best companies in management this time with the silver award and trophy. So last time we got bronze. But this year, we got silver. So it was an important advance in our score, and we should be moving towards even higher award, which would be the gold trophy. Continuing with this process to achieve management maturity with the best-in-class practices. We also received last year the Entrepreneur of the Year award, 25-year anniversary of this award is promoted by Ernst & Young [ EW ], and we were classified in the master category, and we also had the Embanews which was a package that was awarded by the Roberto Hiraishi trophy as well. So then we have our Investor Relations team always available to support our shareholders and investors. Odivan as our Investor Relations and CFO Director. André is our Investor Relations Manager. And then we have our team supporting them Mariciane, Ítalo, and Daniela, Investor Relations analysts. And then the support areas, Marcos and Emanuel. And accounting, we have Evandro and Alex. And then a new business, we have Giovanna. So this is the team that's always available to help and assist our shareholders as possible. So that was it for the presentation. This is what we wanted to share with you. And from now on, we'll open up to have our Q&A session that any of our questions that the audience may have.

Well, Sérgio we do have a question now from [ Guillermo Nipiz ]. But before that, I would like to say good morning, everyone. Please feel free to add your questions on chat, Q&A or ask us to open up your mic if you would like to ask live. First question from [ Guillermo Nipiz ] is you would like to hear about the demand for corrugated cardboard in the month of April and May and how you're looking at the prices of the scraps in this period?

Well, the demand in the first quarter, as you mentioned, was even better than what we imagined. Actually, we were already foreseeing that it would be a difficult quarter. comparing with last year, and even so it was 2% higher than the first quarter of '23, which demonstrates that the demand for corrugated cardboard continues to be resilient in April that was also moving towards the same direction. And in May, we still have not much information to discuss, but the portfolio seems to be pretty positive with volumes that very similar to what we've seen in the past months. So we see the demand for corrugated cardboard pretty good, but the market is a little more competitive when it comes to pricing. So really, there is some more competition with the new bids and demand, especially from big accounts to reduce prices at a moment where the scraps did have a significant drop. So the scraps became the most important justification to have price increases during the pandemic, especially when scraps reached almost BRL 2,000 per tonne and now they are about BRL 600, BRL 650 per tonne. So there was a very big drop in scraps. And the prices had an initial drop, but they've been keeping up with this level of BRL 7,000, BRL 7,500 per tonne. And this is at a moment where the scraps went up at real high, all-time high levels, right? So we expect that -- so we think this dropped below historical levels. And so throughout the pandemic, really with the exuberant amount of demand, there was small increases in capacity. There was no big factory starting up. But all of the big players had some kind of a measured their investment to reduce their bottlenecks in the production plants. And these capacities are placed in the market which makes this even with this increase that we've seen in the demand in the first quarter. It makes the demand a lot more competitive. So we do hope that the second quarter will be a bit more difficult when it comes to demand. But due to the seasonality, the second semester should be naturally a positive because the first quarter didn't really demonstrate much of a drop in demand compared to last year. So the second semester should have a full occupation of the capacity and the price behavior should be a lot more positive throughout the second semester. Lindomar, do you have something else you would like to add on to on the demand for corrugated cardboard?

Well, that's exactly it.

Well, now with [ Angelo's ] question, we wanted to say good morning, you noticed there is a drop in scraps in the first quarter and the average price for sales of packaging were pretty stable. So would this scenario be kept in the second quarter?

Well, no, I think we've noticed a small drop, and there should be a drop in prices. Of course, but it's -- one of the important points to consider here in our strategy is preserving the profitability. So the concessions made are very small. And if there's a drop in prices, it's going to be small, but it could exist compared to the first quarter.

Okay. Great. And Marcus also has his hand raised here. [indiscernible] could you open his mic, please?

Can you hear me?

Yes. We can hear you.

Great. So congratulations on the earnings guys. What I would like to know about is it was clear in the presentation, there was a drop in prices. Basically, all of the products sold by Irani. So I wanted to get your feeling on the continuity of this drop trend? Or if you think you reached the price that should be stable from now on? So we can work on our projections here.

Well. Thank you so much for that question, Marcus. In line with the previous answer. Also, I think it's important to mention that we're at this moment where the margins of recycled product chain is at a historical peak and prices are way above the historical average. So with the demand in this second semester where you have capacity, we shouldn't see much of a difference. But if there's a drop in demand, that's more significant, then we could, of course, have a drop in prices, it's more significant. So it's really difficult to have a precise notion of this, but the second semester is very close. So I don't think we'll have too many changes throughout this year. But if there is a recession, however, the margins will probably drop a bit compared to what we're seeing today, what we're looking at today. So for the other products like fiber paper, we had an increase of almost 15% in the year. So it's very important. We're able to anticipate the increase expected for '23 because we already have this prognosis that we would have a first quarter that was very difficult. So we started with the increase of prices close to October last year. And we completed this price increase for all of the fiber paper products, which brought us a bit more comfort in regards to profitability of the segment this year. We never had in the historical history of the company, any kind of rupture in the prices which normally replace the inflation. So we don't notice much of a drop in prices for the paper for the market. The prices that are connected to the scraps, then they do have some drops because of the correlation with the paper from scraps and the pulp as well as very significant, but we already had a drop. And if the scraps continue to be in a dropping trend then we should have some kind of a drop as well in the papers for corrugated cardboard, but for the products and papers from the market that are around those 25,000 tonnes in the first quarter, then no, we should keep the prices for these throughout the year. And in the second semester, if we have a typical scenario, we should repeat the price transfers that we had by the end of this year as well. So...

Sérgio, you when you look at the midterm, we also had the arrival of the return of investments in the GAIA platform. So if on one side, you may have some kind of a margin reduction. There's also the entrance of the returns on investments that also kind of offsets this in worst-case scenarios. So we're investing almost BRL 800 million, as you saw. But not much is impacting results for these investments. So especially with GAIA I.

Yes, no, for sure. I understand perfectly.

And the idea is not to try to disregard the efforts that Irani has had in the last 4 years. You actually deserve compliments, right? But it's just about the overall market really and understanding how the prices abroad are behaving. And what you guys are looking at up ahead? And I even saw that the resin prices dropped. But of course, all of this depends on economic factors. But since we do have wars going on, inflation going up, a peak in interest rates around the world, although our cycle is with a drop in interest. We don't know up until when. So -- it's really just to understand what you guys feeling is about prices over time up ahead due to the market, and that's pretty much it.

Yes. Great, [indiscernible]. So just to add on we have significant share in the food sector. So about 70% is in the food sector, which is a segment that is more resilient when it comes to demand. And there's no pressure really on price reductions at this moment, except for like the big accounts that maybe have the bids and this context could end up in some kind of situation where you lead to some drop in prices in that market as a whole, not necessarily us, right, but the overall market. So the international market, you could add on to this, of course, is a lot more challenging because of the worldwide situation as a whole, right, regardless of the war and the post COVID scenario, but also because of the Argentina situation, which is a very important market. Argentina is short in paper and the Brazilian companies supply the Argentina market. And Argentina is one of our main markets, and we stopped selling due to the currency situation in Argentina at the this moment. So this has been contributing to exports and with a price drop in these countries, especially in Asia. Henrique, please, can you contribute with your vision?

Yeah. Okay, so hi guys, this is a business -- the resin business, went through an important peak during the pandemic period. So the customers in Europe had this feeling of like a full lack of products, especially considering the fact that the main producer was China and the harvest there was really bad. So of course, this benefited Brazil and the use of resin and turpentine was also really benefited. The customers bought huge volumes in '21 and '22. But in the end of '22, with the war and the inflation scenario, customers were hyper stocked with high prices. And that's what made prices started to drop from the fourth quarter of '22, as you've seen. And then you had a reduction in production overall for this product. And so this remains at an even more stable scenario. In the first quarter, we already recovered a bit of a volume, but we're still in a situation where prices are stable, but the raw materials that are part of this product, which would be also the scraps dropped a bit and of course, improved the margins. So when we talk about the paper market, it's really what Sérgio mentioned. So Argentina is short in paper. They really need Brazilian paper. And we've been exporting a lot less due to the issue with the receipts. So we've been exporting to more distant markets and we haven't been able to export the same volumes. So then we did have a bit of a drop in prices considering that we're a little more distant with the freight, et cetera. But I do see a scenario that's a little bit more stable. Before -- we were a little more afraid with the external scenario, but now I notice that there are more interest with a little more stability. But it's not like an improvement we can celebrate, but it is a stability. It's a little better where we can have some more predictability.

Well, we have 9 more questions here. Well, thanks guys. So we're going to continue. Now we can continue. So anyway, [ Bruno David ] is asking about what are the perspectives in regards to the leverage considering that the GAIA investments are in their final phase.

Well, our expectation is that it should be below our target, which would be 2.5x leverage. That's our expectation. If we were to consider the maintenance of these results in the next quarters at pretty much the same level as the fourth quarter last year, the first quarter of this year.

Okay. Perfect. And [ Matto Suba ] has a question about reducing dividends to be able to expand the buyback program? Is that on the radar?

No, we have a dividend policy, and we would like to follow this policy continuing to pay 25% dividend at every quarter and adding on to 25% at the end of the year. As long as leverage is below 2.5x and all of our forecasts and projections and investments have been following this dynamic of keeping leverage below 2.5x and with this being more attractive with our shares in the market through the payments of dividends besides the value of the companies. So our policy is to be 50% and throughout the period, we should -- of course, we could have some kind of a leverage going over 2.5x. But we're not looking at this kind of situation at this moment -- at this -- so we should keep our leverage below 2.5x and we should start the deleveraging process pretty quickly from 2024 onwards. And the buyback program is taking place actually at a pretty good pace. So it's already 44% delivered. And it's going to go until the beginning of 2024. So it's pretty much the two -- both things. So optimization of the capital structure and the buyback. So this is what we're doing at the moment.

And then we have [ Osavo Santana ] congratulating us on results and is asking if we have any forecast for dates of when Irani will be 100% self-sufficient with power.