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

Good afternoon, everyone. Welcome to our webinar for our earnings release for the third quarter of 2024. We're going to start off with the presentation of the results of the quarter and then after we'll provide time for Q&A. The earnings call is following a webinar format where participants will have their microphones and videos closed. [Operator Instructions] So we are also providing simultaneous translation to English and you can just select this option. And the webinar is being recorded and will be provided in both languages in the IR website. Today, we have the other directors, Henrique Zugman is our Director for Paper business and Lindomar of Packaging, and Odivan Cargnin is our CFO and Investor Relations Director. We can move on. And then at the end, of course, it will take about 30 minutes, and then we'll have time for Q&A. All right. So about the results, the main numbers in the third quarter of '24. We had a net revenue of BRL 426 million, 4.5% compared to the third quarter of '23, great evolution, BRL 125 million, BRL 256 million 6% below the third quarter of [ '26, ] but above what we had achieved in the second quarter of '24 and a net income of BRL 37, 41.8% compared to the third quarter of '23. And here, we had an impact of the peak in the scraps that was really significant in the last months. And then we also had depreciation of the investments in the Gaia platform that has been impacting this. And in this quarter, we also had a lower amount of the biologicals and all of these factors affected the profits of this quarter. So the ROIC in the last quarter was 11%. And so 7% per year and our leverage of 2.26. And we -- this should lead to a deleveraging process at the beginning of the next year. When we look at this in comparison, the revenue went up 8.4% compared to the second quarter. So a significant evolution considering the increases of volumes and prices as we'll see up ahead and 4.5% compared to the third quarter of '23. So here, you have the share on the exports. You have -- sorry, the net income, which was 13% compared to 15% in the last quarter and 9.7%, and then you have the percentage of exports. The adjusted EBITDA and the margins, which was -- just a minute, BRL 125, 266, a margin of 29.4%, 6.1% above the second quarter which is BRL 118 million with a 30% margin. And in regards to the third quarter, it dropped to 6% and there was a margin of 32.7%. This margin was mainly affected by the increase of the scraps at this point in the past 4 months, basically. So the profits, as I mentioned, had a drop of 6.1% due to the main factors I mentioned, the biologicals and the depreciation of the Gaia platform projects. And so with this 41% below in the [ third quarter of '23. ] And volume of sales, we have had significant performance this year when it comes to volumes, 5.3% above what we had in the second quarter and 4.2% above the third quarter of '23. So when it comes to the volume, the market has been surprising us month after month with all-time highs in shipments and in square meters also the same case and 4.4% compared to the same quarter last year. When we look at Irani, we see growth that was above market with 10.9% compared to the second quarter and 6.1% in regards to the third quarter of '23. And here, we also take advantage of this moment with higher volumes in the market and occupying the different capacities, including the Gaia platform capacity in the Gaia II platform. So in square meters growing [ 9.8% ] in regards to the second quarter. So the average prices, we had an evolution of 1.5%, so it's a significant evolution if we consider that the price increases started off in the month of September. And so we had an increase that was very significant in the month of September and also in the month of October. And so we consider price replenishment considering the inflation for the scraps and other items. And it's an ideal moment for price increases if you consider the end of the second quarter and the end of the third quarter and beginning of the fourth quarter. And in regards to last year, we had, in comparison, we have a drop of 2%. We had a drop in the scraps and then it went up. And then first, we had a slight price drop, but now we started this process to recover pricing. In square meters, the increase is even more significant, 2.5% and a drop of 1.3% compared to the third quarter of '23. When we look at the paper market, that we sell to the market. We have paper for flexible packaging, which are packaging for bags and also rigid packaging, which is for corrugated cardboard that we sell in the market. When we look at the volume of papers for flexible packages, there was a significant growth compared to the second quarter, 3.7% in volume, 26,000 tonnes and 1.1% better than what we had in the same period last year. When we look at rigid or stiff packaging, the drop of 1,200 tonnes is due to greater consumption of this paper in our units, and that's why we had a lower sales in the quarter. When we look at the average prices, we had a peak of 3.9% in the average prices for flexible packaging. And here, you have an influence of the dollar and also a better mix than what we had in the second quarter. Packaging papers with better pricing, which makes the average price in the quarter go up and 0.8% compared to the third quarter of '23. And the average prices for rigid packaging, which is 9% higher due to the scraps. And so the pass over in the prices takes place quicker than in the packaging. And so there's already a growth of 9% in pricing. There are some adjustments happening still this month and the biggest adjustment was in the month of September. So here is the average price, and we have an increase of 9% and 8% compared to the same period last year. When we look at the evolution of the scrap prices, which ends up being like the [indiscernible] the results in the last 2 quarters, we had 81.6% in the scrap and we also had this increase -- and 30.8% in regards to the second quarter of '24, closing off with a price of BRL 931 per tonne. And then when we get into the Rosin business, we're in a low period. We had a volume that was lower than the second quarter and also volume that's a little smaller than what we had in the third quarter last year. We had good price evolution considering the increase of the dollar prices and also -- and this helps, right, because the products are export related, so growing 36.6% and 15.7% compared to the second quarter of '24, demonstrating a recovery in this business that had a really difficult year. And last year was also very difficult, but now it's demonstrating some level of recovery with prices that are a little better in the international market. And when you look at the level of debt, we ended with a debt of BRL 1,652,060, BRL 586,089 as a balance and a net debt of BRL [ 1,000,065 ] with a leverage of 2.26, an average cost of debt prior to income tax of 11.3% per annum in the last 12 months and 98% in national currency and only 2% in foreign currency and 91% of the debt is long term. Only 9% short term. So the debt profile is really adequate below our leverage target, which is 2.5x net debt to EBITDA. The ROIC in the last 12 months was 11% compared to the 12.9% in the second quarter, and this drop is due to the Gaia platform projects that are starting off with their depreciation trend. And that -- the returns are being captured as they get back to the typical levels of ROIC that we had in 2021. So that in the beginning of next year, we should already have an inflection point when it comes to the ROIC curve due to better results and also the depreciation that will happen with our assets. The buyback program, we understand that the value of the shares does not represent the intrinsic value of the company. We've already completed 36.6% of this buyback program, which we started on the 25th of March. There's a deadline of 18 months, and we have a limit of [ BRL 10,681 ] that could be bought until the 30th of November, we already bought this amount. So when we look at the dividend yield, and so BRL 132 million of profits. And so we have 4.36%. And so in the third quarter, we had BRL 0.04260 per share due to the profit of BRL 37 million we already mentioned. Well, when we look at the investments in the Gaia platform, they've all been completed. We're just in the final phases, Gaia I, Gaia II, and Gaia III. The [ re-potentiality, ] we're starting the PCHs and we had extended this a little more than what we imagined. But -- we have this waiting at the environmental authority in Santa Catarina. And we also have the new printer for Santa Catarina that's also in transit. And we should install this in the beginning of next year in Santa Catarina and the refurbishing of Machine 5 where we're in the engineering phase for the beginning of this project in 2026. And so in this quarter, we had some important prizes. For the fourth time, we've conquered the Transparency Trophy, a very well-known prize with people that -- companies that have the best financial statements that are most transparent with up to BRL 5 billion in revenue. We received this for the fourth consecutive year, the Best Companies to Work at, Great Place to Work, and we were considered the 32nd best company to work in the company. And for the second consecutive year, we're in this ranking. Then we also had the best in Sao Paulo. We're in the eighth place, a major evolution compared to last year. Now we were selected by the [indiscernible], the third company that's most innovative in the paper and pulp sector. Here's our team also to support investors. We have Odivan, our CFO and Investor Relations Director; [indiscernible] is our Investor Relations Manager, and these are the people that are always available to interact with the market, participating in the live sessions and broadcast, and our analysts for Investor Relations, [ Madi and Italu. ] And then we also have [ Daniela ] supporting with new business and our financial managers, Emanuel, our financial specialists, our accounting managers, Alex and [ Jana, ] our new business analysts. So we have this full team available to support our investors with any questions or doubts they may possibly have. Well, that's what we had to present today, and now we can already hop into the Q&A.

Well, good afternoon, everyone. I'm pleased to be here with you guys for another quarter whoever has questions can add them to the Q&A or in the chat here on Zoom and we'll move along. The first one is from Stefan at Citibank, and he says -- he has 2 questions actually, right? One is the corrugated cardboard prices and flexible paper prices. Could we expect an adjustment in the margins considering that the price of the scraps are pretty stable? And what about for flexible paper? How are you looking at these 2 markets for 2025? That's the first part. And then you have the next question about the [indiscernible] platform and if we have any updates that we can share.

Great. So about the corrugated cardboard market and in the market, of course, add on, but we're in this phase where we're performing adjustments in the pricing. We started these adjustments in the month of August was a little weaker then September was a bit stronger. And in October, we had an important payment in November. We have a few other things going on. So yes, we should replace inflation in this period and maybe not all of it, but we imagine that the scraps are pretty stable, and they should start off a period with a drop by the end of this year, but we have already seen an increase in the scrap stock in the overall system. So we imagine that from January or December, we already have this drop. And with this, we'll have prices replenish when it comes to this and probably the scraps will start dropping in the beginning of next year. So the market is doing really well in this quarter, just as well as it had been in the third quarter. It continues to have very strong volumes. And our expectation is that this should be stable, right, and kept in the -- because corrugated cardboard is really connected to the food sector. So with an increase in salary, low unemployment, all of this will lead to like more consumption of food and, of course, affecting our level of shipments. We have over 70% of the volumes of corrugated cardboard in the food sector. Lindomar, any comments on corrugated cardboard?

Okay, Sergio. Flexible packaging, the markets are a lot more difficult with the bags above 80 grams. And so these papers are -- at this moment, we have a bigger difficulty with these because of the international market that hasn't recovered entirely and the companies that normally export or export kraft papers kind of direct these volumes to the internal market. So it's been a little more difficult with papers for bags that are above 80 grams, which are machine 1. So we have a bit more of a difficulty with this. We hope to replace this. And this year, we don't expect to have an increase in the papers of machine 4, which are the lower-width ones. We've already done this and with also with the papers on Machine 2, which are mainly for bags that we've already performed some transfers and we should maybe transfer on or pass along a bit more due to this. But the market has been really having high demand, but we still have major offerings of paper in the internal market because the international market hasn't recovered yet. We have China growing less than normal. Europe has low growth. The U.S. also is a bit of hope that the economy is doing okay. With this, they would have less papers in the international market, which kind of helps the performance of papers around the world, but China and Europe continue to be pretty weak compared to the previous consumptions, which also affects the exports of paper and that, of course, affects the transfer of paper in the market. So you have the advantages of the dollar, what's helping us this. But in the internal market, the papers in machine 1 have a bit more of a difficulty. Henrique?

No, I have nothing else to add. I think what you mentioned is perfect.

Perfect. So then about the [indiscernible] platform. This is our next cycle. We're in the engineering phase for these projects. And so as soon as the engineering is complete, we will disclose this to the market with the schedules and estimated values probably by the beginning of next year. So we're preparing for this, and we plan to have information on -- at the Investor Day of next year.

Perfect. So you also, I think, just answered the question by [ Arbor Luis. ] He says that afternoon, could the company provide more details on the processes for the next expansion program in the company?

Well, it's kind of like what I just mentioned, right? We're in this engineering phase, conceptual engineering so that we can have an estimate for these values and also the deployment of these projects and so that we can plan adequately with the funding, with the leverage within our targets, and it's a really detailed plan so that we can have the necessary safety for this execution. But it's a pretty broad plan involving all of the value chain in the company.

Great. So Lucas [indiscernible] is also asking something here. He says, look, could you guys talk about the normalization you're expecting for the scraps and how we can consider this as a benefit for dividends still December '24.

Well, we haven't seen a drop in the scraps until the month of December, right? So we're probably going to keep it at this level. Then we'll start a period with a drop by the end of December and beginning of January. That's our expectation. But what we're going to have, of course, as an improvement in profitability in the fourth quarter comes from this evolution in the prices that we consider going on in the corrugated cardboard segment and also the dollar that's favoring the sales in this quarter.

Well, this is Guilherme Nippes from XP. And he has 4 questions. And so I'm going to read one by one to make things easier. So the demand for corrugated cardboard, I'd like to understand the dynamic for this demand for corrugated cardboard and you guys are also going to be benefited by this. I wanted to hear about what you've seen as an improvement in the demand and if we could expect strong numbers in the fourth quarter this year. Do you want to talk about this?

You've already talked about this previously in the market. There's been really high levels of demand, and we noticed this in our business as well with our factories basically operating at full capacity when it comes to packaging production for sustainable packaging, eco-friendly packaging, and corrugated cardboard packaging. And we consider that the fourth quarter is going to keep up the same pace with really strong forecasts for the fourth quarter.

Great. And then his second question, and just to add on, one of the segments that has a growth projection that's really significant, which is the meat segment, in Animal Protein segment, where we have quite a bit of exposure, especially in the Santa Catarina unit, which favors our projections for the next year. Then we have a second one on prices. We heard about possible price pass-along throughout the period of -- from September to October. And could you mention if these were really adjusted and what's the magnitude of these investments?

Yes, prices have been adjusted. In the last quarter, we had an average increase of 1.5%, but the concentration of these was more in the last 40 days of the quarter. And we also have an important adjustment that's taking place in the months of October, November. We still don't have an estimate finally of these increases, but our estimate is that inflation in the period will be more than covered by this -- the investments that are being made.

Then on costs, we saw there's a pretty good performance of costs throughout the last quarters, although we have seen growth -- pressure in the prices of the scrap. So I wanted to know what you guys expect throughout the fourth quarter and what you would explain as the identity costs dropping less than what we've seen at Anguti.

Well, Anguti is more like a technical issue because our price is like a full price in the quarter. And if you look at Anguti, you can see they always have like in the last week, they update it with a greater frequency and then that leads to some kind of a difference. But you always consider the FOB price, which is always very similar to Anguti. But anyway, since we're a major consumer, but it tends to be very similar to Anguti.

Then the other question is about the [ Neos ] platform, if there's any kind of update.

Well, we actually committed to disclosing this in the next Investor Day with the details of the values and schedules that are really complete.

So Well, if possible, we would like you to talk about the beginning of the boiler operation. And could you expect a reduction in energy costs for 2025?

Well, the boiler is working normally throughout the year. We had an occasional shutdown in this month of October, and that led to some losses, but thought that the boiler has been operating normally. We already had a reduction in the cost of energy because we're not buying power from third parties, but we should proceed with this in the next year. So we're producing about 83% of the power consumed at the Santa Catarina site. So the purchase is pretty low, and this percentage can vary a bit due to the higher or lower hydropower plant generation.

Any add-ons about costs in the Gaia platform?

No, that's it.

Perfect. Great. So just getting back to the point from Guilherme. He says that the [ Adani ] costs are dropping less than Anguti.

So Irani actually increased less than Anguti. And I think there was a mistake with your question, right?

Yes. Exactly. All right. So let's see. So -- also about the [ Neos ] Platform. So [ Bruno Oliveira, ] also he talks about the following. He says, okay, thank you for the opportunity. And so what's the plan for the completion of the Gaia platform? And once we complete the cycle, what's the ROIC you guys consider to be normal for the company?

2025 in our assessment should be very similar to what's going on in 2024, right, considering strong volumes all year. We expect some kind of a recovery in the international market, especially in Argentina, an important market for us. And with this, we should be able to improve our sales a bit to Argentina with better pricing and also get a mix between the exports and internal market that's a little better. And that could help us when we consider profitability in the machine 1 and also with less paper from other players, considering a more favorable external market. But overall, we think 2025 is going to be very positive because the question is always the first semester, right? But we see a second semester that's really strong, we can already guarantee that the first quarter next year will be really positive when it comes to volumes. And this is so important because the good volumes in the first quarter guarantee good prices all year because the pressure for the reduction in prices where seasonally the capacities are less occupied is the first quarter. So the biggest challenge that the recycling companies have is keeping their prices in the first quarter from the second quarter onwards, volumes are greater and capacities are better occupied. And so there's not that much pressure for price reduction. But one important fact is that customers start feeling a lack of products in some situations, and that ends up being a really important topic because it makes the pressure for price reductions. Even with lower seasonality drops a lot because customers are worried about switching players and not have a corrugated cardboard supply in the second semester, although you have new capacities and all the factories always have some kind of a bottleneck that can be released throughout the year. But we already see that the market is really pressured when it comes to volumes, which guarantees greater prices and less pressure. And so to be very direct, we expect a better 2025 compared to what 2024 was when it comes to pricing and margins. And so when we consider the ROIC, we can see that there's still 2% packaging less in the third quarter. And so on the other hand, we also lost this -- with the price adjustment. And now this is what you're going to be recovering. So we expect this to perform better. And so we expect the expansion in the ROIC, maybe not at those levels, but kind of moving towards a double-digit -- high digits.

Well, now we have [ Justin Flechman ] with a question here. Despite the high investments, is there some change in the investment policy for 2025?

No, no changes in the sense. And then we should be close to 2.5 and -- at this moment, we're considering it should reach about 3.5x leverage. So we haven't gone over 2.5x ever since 2020, when we had our re-IPO, we've always kept our leverage below 2.5, and we're very conservative normally with our financial policies to be able to be -- to have this dividend payment that is robust for our investors because when the leverage is up to 2.5x, we have a payout of 50% of the profits.

So [ Josaces'is ] hands raised. Could you please open up his mic?

I'm sorry if any of my questions are ignorant, but the shares you buy are they placed at the treasury and then you cancel them or if there's an opportunity if the shares go up too much, can you sell them at market prices and pocket the profit basically?

Well, in the last buyback program, this is a decision that was -- that is made at the end. But in the last program, we canceled this. And this is the trend that we should most likely cancel. And with this, we have direct benefits to our current shareholders. Typically, we cancel. We have no issues of selling this in the market, but it's a Board decision. Eventually, they could do it differently, but we still haven't had this decision. But normally, our suggestion is always that we cancel them.

Our next question [indiscernible]. How do you expect the cost dynamic for 2025 to be competitive dynamic? Could you explain how the share is expanding?

Well, we have a small share evolution but that's because of the new capacity in the next year. We don't have new capacities being added on, but we do expect to work with the capacities for the well-occupied throughout the entire year. Our expectation of scrap should have some kind of a drop at the beginning of the year, and then they should keep stability at a level that's a little lower than what they're at now. We think they kind of went out of curve or out of the average ideal point. So we should have a slight drop in the beginning of the year and the permanence of this at a more stable level, which could lead to some additional price adjustments replacing inflation in this period, okay?

Stefan had another question here. How we could think about the evolution in the mix of papers, flexible and rigid. And we had 2024 that postponed the reduction in the mix. This is our biggest struggle, right? So these are papers that are connected to the civil construction dynamic. And why is that?

Well, because the companies that compete with us are -- we don't sell papers for cement. So at this moment, when the market is weaker, and then they have other uses. So when you recover civil construction, especially in Argentina, we can consider an improvement of improving the mix. This is not simple. We knew this would -- and we had this performance curve in Gaia 1. We knew it was going to be a process that would take some time, right? So we're moving in this direction, and we expect that 2025 will be better than 2024. 2024 was very, very difficult to sell paper for Machine 1 because we hadn't experienced something this in the last 10 years, maybe. It was never difficult to sell Machine 1 papers. This year, we had a bit of a challenge, and we had to redirect paper for corrugated cards and stop buying. What happens is we lose profitability per tonne, but we still produce paper. We just stock up on paper for packaging in the first semester and then we consume it in the second quarter because sometimes we even have to buy a bit of paper because of seasonality factors. I hope that's clear.

Yes, that was clear. So now we have Marcelo Arazi from BTG. [indiscernible] is foreseeing the company allocating capital in buybacks and organic growth. Is there a possibility for some dividend distribution? Or is there a trend that you're going to allocate capital focused on these projects? Which would be the levels of leverage that the company plans to work with during the cycle?

Well, our levels of leverage and our target for leverage is 2.5x net debt to EBITDA. We've always been below this, especially after the re-IPO in 2020, where we were able to keep below 2.5 net debt to EBITDA even during the Gaia platform launch. But as a policy during the more robust investment period, we can reach 3.5x. And that's where you have a reduction, of course, in the dividends to 25% payout in this period. But at this moment, we've been trying to keep below 2.5x, guaranteeing a 50% payout. The Gaia platform is -- sorry, the [ Neos ] platform is in the -- it's the main capital allocation and the [ Neos ] platform in these new investments and the completion also of the Gaia platform investments. So we have no plan to pay extraordinary dividend payments, at least up until now, we haven't got any definition in this sense. We like working with a robust cash position. We understand it's important to have this level of liquidity to be able to, at any moment in the economy, really be ready to have a good balance in our cash position and in our financial policy.

Now we have [ Alvaro Luiz ] asking about if the company could provide more details on the performance in the sector for Rosin that was at a deficit in this quarter, and it's a lower percentage than compared to the paper business.

Well, the Rosin business is a noncore business, it represents less than 10% of our revenue. It already represents about 10% before, then it went through a very good year in 2021 and 2 very difficult years in 2022 and '23, '24. So 2024 was very difficult. We saw a bit of a recovery. There was an accentuated drop in the demand. Rosin is our international commodity. We sell Rosin and Terpentine, and there was a significant drop in this peak announced in 2021 and '22. And then we have a significant drop in dollars due to a lack of demand from China, but we're starting to see improvements in the demand, especially for turpentine and a bit of an improvement in the performance of this business for the next year, but still going through a moment of difficulty with the demand, and that should get a lot better with the recovery in the growth in China. And these are the -- that's the destination for exports.

Yes. Do you have any comments? No, that's exactly it. Well, great. Now we have [ Xing ] with one more. Saying, how are we thinking about the capital structure in the [ Neos ] project?

We still haven't defined this, Xing, but as soon as we have possibilities, we'll share them. And most likely, we'll work with the debt instrument -- public debt instruments and also the equity issue could be considered, right? But for now, we're working with a debt perspective due to the deleveraging that starts happening in the beginning of next year. And also because the projects have cadency and we'll be able to keep the leverages at the levels projected performing projects throughout the years.

So finally, we have one last one, no questions. Now what would be the normalized margin at [indiscernible] after the Gaia platform, this level could it already be achieved in 2025?

Well, we're at this ramp-up of results and one of the segments that's really important that wasn't captured yet is really the paper on Machine 1. And so the other items are being captured almost entirely with power machine 2 with performance a lot better than what we expected, the Santa Cat unit with all of the capacity occupied and bringing significant results. And then we should have a 2025 that's a lot better than 2024 when it comes to results with less cost pressure. But basically, that's it. Any add-ons, Lindo or Henrique?

No.

No.

At the moment, no, Sergio.

All right. That's it. That was my last question, and we have no other questions. So that's it, guys. Great. So I want to thank you all for your presence and say that we are really excited with this process for price transfers, and this is always a challenge for us when we have a significant drop or peak of the scraps. It takes normally about 2 to 3 quarters, and we've been able to do this quicker. And so we're replacing prices. And so the negotiations must respect contracts and the anniversaries for each account. So these are done account by account according to the profitability of each customer, we're super excited that the stronger market is providing for better negotiations and volumes that are really interesting in the market. And when it comes to the Rosin's business, we start seeing a recovery in 2025 and for machines 1 and 2 papers is doing very well -- sorry, 2 and 4 and doing very well. Machine 1 provides a little more of a challenge for the end of this year and beginning of next year. But I think that's it. And so up until the Investor Day, we'll disclose the complete [ Neos ] platform. Thank you. Have a great weekend. Thanks, guys. Bye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]