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

Good morning, everyone. Welcome to our earnings call for the second quarter of '25. We are going to begin with the presentation of our earnings for the quarter and after we'll have time for Q&A. [Operator Instructions] The webinar will be recorded and provided in both languages on the company's IR website. I'm going to share the presentation and quickly go over the numbers in the quarter. And then after we will open up to the results here. In the second quarter, we had an operational revenue of BRL 413.774 million and the adjusted EBITDA BRL 127.535 million and a net income of BRL 112 million and an EBITDA margin of 30.8%. The ROIC in the last 12 months was 11.8%. The cost of the debt in the last 12 months was after the social contributions and income tax were 8.2% a year and the net debt-to-EBITDA adjusted ratio was 2.3x within our financial policy. We had 11.6% increase in the net revenue, a significant increase in prices that took place during this year. So there was [indiscernible] increase in capacity. This increase in price was really transferred to the market. And then in regards to the first quarter, there was a drop due to seasonality of 2.2%. The adjusted EBITDA and the margin here, we had BRL 127.535 million EBITDA with a margin of 30.8%, and this was 6.4% smaller than the first quarter and 6.8% higher than the same quarter last year. So the net income, we closed with a very important level, an increase of 168.5% in the profit with BRL 112.068 million and this number is when we compare the profits eliminating the effects of the biologicals and the IPI tax credits, we would be slightly lower than the profits we had in the second quarter of '24. And there's major impact here on the scraps and also BRL 76 million were of the fair value of the biologicals. We had an operation of forest purchases that gave us a significant gain. And also the nonrecurring was a lawsuit of the tax credits that we have recognized here of BRL 18.422 million recognized in this quarter. So we had profits that were very significant in the quarter. When we look at the market and how it's been behaving in corrugated cardboard in Brazil, we had in the second quarter, 1,039,000 tons. This is 1.2% lower than the second quarter of '24. So there was a slight slowdown in regards to the second quarter of last year. And in square meters, this -- we also had a slight drop compared to last year and an increase in regards to the first quarter. So this is also important to share -- in our case, this is a little worse due to the fact that we had a significant price transfer in the first quarter and the second quarter of this year. And this is a strategy that we had to work on this movement in the first quarter -- sorry, in the first semester because in the first -- in the second semester, we had seasonality that was a little better and the volumes are easier to be recovered than in the first quarter. So when we take a look at the sales volumes, we had a slight drop and a drop of 4.4% in regards to the first quarter and 2.3 in square meters in regards to second quarter and 6% less than the first quarter of '25. When we get into prices, that's a good news. We were able to cover transfers of pass along of 13.4% in corrugated cardboard and an increase of 4.1% in the average price in regards to the first quarter and the second quarter and square meters, 15.5% and 5.8% in regards to the first quarter last year. So we had a pass along that was higher than the first period, but the price of the scraps was a lot higher. And that's where you start having a slight pushback and you can see an important trend. But when we look at the paper segment, that we sell directly to the market, we had a drop in volumes of 2.3%. We had 30,984 tons against 31,725 tons and 32,921 tons in the first quarter of '25. When we look at the paper for tax, we had a slight increase in regards to the first quarter of last year, and we dropped 5.9% in regard to the first quarter. And then we had a reduction in the volumes of paper sold to the market, corrugated cardboard with an increase of our operations and also because we're stocking up on paper for the machines. And so we reduced the sale of paper for corrugated cardboard in the second quarter, 6,343 tons in the second quarter of '24. The price of paper for flexible packages, which is for bags and we had an increase of 6% over the year and a drop of 1.8% from one quarter to another, and that was impacted mainly by the dollar. We were able to transfer the prices in low width and that's paper for bakery basically, and we were able to have an increase that was even higher than the inflation, so we had an impact that was significant. In the drop of the dollar in exports and that led to a drop in the average price. And then in rigid packaging, we had -- or stiff packaging, we had a variation of 24.3% and also 4.4% more in regards to the first quarter due to the increase in the price of the scraps and to keep the profitability in the market, the market was able to keep up with this average in the market and increase its prices. So when we look at scraps, they grew in the market 71.6% in the year and 16.5% in the first quarter, to 25% in the second quarter. And it's at Irani, we had an increase of 65%, 17% more than the first quarter and 65% higher than the first -- going up to BRL 1,175 and then the market itself really had a stress in the scraps market in the beginning of this year, which was up until now. And then you begin a process with a drop this month, which is accentuated in the next few months. So we -- so the stock of scrap in the market, we have like 14.3 days of average stock in the market compared to 12 days is what we had in the past quarter so the market starts being a little less stressed because of shutdowns in recyclable materials as well and also a reduction in recent KraftLiner exports. So that led to a beginning of a cycle of drops in scraps that we believe will proceed in the next few months. And when we get into the financials, we had a leverage of 2.3x with a total debt of BRL 1.739 million, a cash balance of BRL 624 million, and this reduction is mainly due to the payment of dividends, the 25% that are complementary paid annually and another BRL 1.147 million the refurb of net debt. 1% of our debt is in foreign currency, 99% in national currency. This is also part of financial policy, 91% of our debt is in the long term, only 9% in the short term. And when we look at the ROIC, we had a ROIC of 11.8%, and that's been going up in the last two months as investments start being return, we start capturing these returns on invested capital, and this should be going up and get back to the historical levels, close to 20% in the next quarters. And so our buyback program has already fulfilled 82.5%. It's maturing now in the month of September, and we'll continue buying back considering our perception of the intrinsic value of these shares being a lot higher than what's being negotiated in the stock. And we know that efficient capital allocation today is mainly considering this buyback program. Well, we distributed a lot of dividends throughout this year due to the profits that we've had, especially in the second quarter. Overall, we had BRL 168,516,000 in the last 12 months, a total of BRL 0.66254 per share and a yield of 7.82%. Then when we look at the Gaia platform investments, which is the investment cycle we've been developing ever since 2021. We're at the completion phase. We have only two projects that are still not complete, which is the installation of a printer here in the unit of Campus Alegria today, I'm actually here in this unit. And the machines are already installed. It's the machine performance curve and almost completed this project and then the refurbishing of the steam machine is already prepared also. So as I mentioned, starting up on paper as well to be able to handle this shutdown of almost 30 days that will take place in the beginning of next year. In the PCHs, we have good news that we've had all of the licensing process at São Luiz, which is the biggest investment in PCHs and Cristo Rei is also at the final phase for environmental licensing. So these took longer than what we imagined, but we should be seeing this project at São Luiz till this year. We're getting some budget quotes, and we should be sending this in the next few months. And then we'll just be waiting on the project at Cristo Rei, which is going to help us complete all the projects with Gaia platform. Then in this quarter, we had important recognition also in Minas Gerais in the fifth place in the ranking for the best companies to work at in Minas Gerais. And our IR team is supporting all of our investors. Odivan, is our CFO and Investor Relations and André is, our Investor Relations Manager, Mariciane is our analyst for Investor Relations and Daniela, also Ítalo as well for new business and Giovana as well with new business. And then we have the guys from the accounting area, Evandro, Alex. And in the financial area, we have Marcos and Emanuel, our financial specialists. So this is a vision of our main numbers in the quarter. And from now on, we will be available to get into any questions and answers that you may have. Thank you so much.

Well, Sérgio, just -- we already have our first question here. How's it going, Edgard? We also have Henrique and Fabiano. They haven't appeared on the screen yet, but Henrique is our Paper & Forestry Director; and Fabiano is our Director for People, Strategy & Management. And so now we're available to get into Q&A. Well, Edgard has already raised his hand. And Edgard, please feel free to hop in with your questions.

Great. Thank you, Sérgio, Odivan, everyone. Congratulations on your results in this quarter. We have two questions. The first one is about the strategy that you guys have of the value over volume. This quarter, we've heard this more and more from companies, which is interesting, right, not only in paper pulp, but also in mining and steel and other industries where companies are trying to preserve margins and trying to pass along prices to the detriment of volumes. But I want to understand your mindset when it comes to demand for corrugated cardboard and the company's strategy ahead. We saw this tariff movement. There's a lot of uncertainty in the market still, have a lot of products with reduced tariffs versus those 50% of the initial expectations. And other sectors that are very relevant via exports through cardboard boxes such as beef, et cetera, still have tariffs of 50%. So I want to understand what you guys' mindset is about this, if you guys have already felt any effect when it comes to orders, of course this decision is very recent, but I want to know if the strategy is going to continue to prioritize margins or if you would consider something that maybe a little more aggressive to get back to recovering this?

Thanks, Edgard, for the question. And about the price strategy. This was intentional with the objective of maybe reducing the economic activity in the second quarter. We anticipated this process. And although we knew we could maybe lose a little bit of volume, which is what happened, but we were able to keep profitability at a good level. And now with the scrap starting to have a dropping cycle, we'll get into the second semester with a level of profitability that is getting better month after month. And so we've adopted this. It really depends on the market moment. And typically, we pass along prices in July and August, which are months that are very strong for demand. But this year, we decided to anticipate the price increases a bit because we were afraid that the second semester could be a little lower because of the interest rates and reduction of the economic activities. I think that was good. It was a good strategy and the volumes end up being offset naturally in the second half of the year because of the greater demand. So we see very similar demand as it was last year despite a market that is a little less heated. We've seen a drop of 1%, 1.5% in regards to last year, and this guarantees a very good demand for the second half -- for the second half of last year was very good as well. About impacts on tariffs. What we felt this quarter was really a bit of the bird flu impact in some of the poultry farms and production. And now it's getting back to normality. It did affect a little bit of our volumes in Santa Catarina, especially. We've had our operation here in this cluster of companies that have poultry and pork. But these tariffs of 50% should reach some segments where corrugated cardboard services. And we are not exposed to beef production. But indirectly, there could be some volume adjustment due to this lower demand of corrugated cardboard for beef should this really represent a demand reduction in the next month. I think that was it, right? What about any other aspects? Is that it, Edgard? Did I answer that correctly?

Okay. So let's move on. We'll head to the next one. Here, we have Stefan. He has three questions. First, the prices for DPO and price flexible packaging we expect a movement for margins to recover and also the flexible cardboard prices had a slight drop in the second quarter. How are you looking at the demand for the prices? And then you have scraps and -- so this increase could also be reversed. And then you have the demand and then it was a little more impacted considering its location and we could expect -- could we expect an improvement with this episode? I think part of this was already solved. But first, we need to consider the prices for DPO, the flexible packaging.

Well, we had an increase in the last year. It was a lot higher than the official inflation, maybe a little lower than the internal inflation due to the cost of the scraps. But as I mentioned in the presentation, they start this drop cycle. There was already a drop in the month of July, and there's a drop that's going to take place in the next few months. That's already expected and negotiated. We have a drop now so on the 1st of August, and we should also have successive drops every two weeks if we keep these higher stocks as we've seen in the market. So we hope that the recovery of the margin in corrugated cardboard happens exactly due to the reduction in costs. Of course, if we have a strong demand, that's one thing. But if not, we can maybe have another price adjustment, let's say, in the second semester. But I'm not going to count on that. I think what's most important is that we should have this cycle dropped really becoming more material and we get back to levels that are more in line with historical levels. So about flexible packaging, the impact was for the dollar. We've been exporting about 30% of our papers in the market and the dollar affected us directly. But the good news is that with these papers, we have a pretty good return in Argentina with the purchase of papers throughout this year. And I'll actually pass this on to Henrique so he can talk about the market for paper and the expectations he's seeing up ahead.

Well, just to add on, I think the good news -- it's good news from Argentina, right, with higher prices, and we can reduce a bit of our exports to Asia. In the internal market, we will also be benefited in regards to the drop of the scraps because we have papers with mixed fiber. And now in the second half, we also have a stronger demand for papers for bags and that will help the volumes also go up and possibly this prices with certain stability and perspective of an increase without these guarantees yet. And then I think that's it, right?

So for the paper segment, we've been working on a slight price adjustment. But we don't consider a significant price. So more of a volume recovery and there's profitability that is a lot higher than the profitability of exports for Asian markets, for example.

Well, about the demand, he's asking about the bird flu and...

Well, this issue did affect us. There was a significant drop from our customers here in Santa Catarina. But with the return to normality of the exports of birds, that doesn't hinder us as much. We're keeping our eye open, however, on the impact that could exist the tariffs in the segment of beef. It doesn't affect us directly, but maybe indirectly, it could affect us, right?

Perfect. So the next question is from Santiago and he wants to know when there's going to be a reduction in the debt-to-EBITDA ratio.

Well, that's going to depend a lot on the journey and trend of our EBITDA and debt. But our expectation is that this has probably been the peak of the leverage and that will begin in the next quarter with a drop in leverage. Our estimates are that the leverage will drop significantly until the beginning of next year and throughout the next year as well.

Great. So now we have a question from Evan. When Irani will begin the Nails platform construction?

Do you want to talk about that, Henrique, about the engineering?

Well, the Nails platform, we are in the phase where we're wrapping up with the engineering work, and we should finish the engineering work by the end of the second half. And then we'll assess and understand what would be the next step. We're at a market moment, let's say, because of the tariffs, you have companies that have a difficulty to get the final quotes due to the tariffs here and there with steel as well and also competition with other projects in Brazil. But engineering work should finish by October, November, and then we'll assess the next steps.

So we have all the engineering works that we plan the investments and we get the budgets and the quotes and get the approval. But of course, at this moment with Selic rate at 15%, we'll have to have a very significant return to get immediate approval. We have to be very careful with the capital allocation, right, especially when the interest rates are so high.

Well, I think that's it. This moment is not favorable for decision for investments due to the level of interest rates. And we're really being careful doing homework and as soon as we see the scenario being more favorable, we'll begin a monetary closing cycle and then we can even propose to the Board and keep on our expansion process, right? But the goal now is to focus in-house and wait for the scenario to get better. So then the next one is on [indiscernible] which is the demand for corrugated cardboard and a bit of the dynamic on the pricing and which sectors have really been impacting the demand, right? And what are the expectations for volumes and pricing in the second half? And the other point is we've seen good performance in approximately over the last quarters, although we've seen a bit of pressure in the price of scrap. So I want to know what you guys expect over the next quarters. And if we do expect a possible correction in these prices that could benefit in some way the perspective of the costs. And so I think we've already answered this one, but if you want to discuss this a bit more.

Just to reinforce that our expectation is very similar to what we've had last year in the second half. And the month of August is quite dynamic. It's one of the months that's most strongest in the year. And the scrap cycle is -- well, we're starting this process and our expectation that the conditions for this have been provided, where you have the reduction in the exports of KraftLiner paper and also without pressure because the expeditions that happened in the last few periods are [ enough ]. So we believe that this cycle of drops will continue throughout the second half, and that's going to increase our profitability quite a bit. So I think that's it, right?

Yes. I think that's it. So we've already talked about scraps and that seems to be clear. The next question is from Luciano, what's the impact on the American rates and European rates and what are the countermeasures?

Well, we indirectly may have some impact. But of course, we're always going to be working -- we're very close to our capacity really. And so a possible drop in volumes, we'll try to recover this, but we also always have to be very careful because we don't want to provoke a cycle of drops in prices in the market. And so we don't want to compromise our prices just because of idle capacity, right, because pricing recovery is going to be a lot more difficult to achieve, right, in a market with less demand. And if you look for volumes in a moment where there's a weaker market, you're going to end up becoming protagonist in the drop of prices, which is not anyone's interest.

So back to the European and American rates, the impact is pretty neutral till now, and we're kind of immune to this because we don't export to the U.S. But we also -- our customers also are not exposed to these segments. So what protects us in regard to this is like a secondary factor, and we can't really understand if there's going to be more of a relevant impact. But what we've noticed is that there won't be anything too significant.

Well, and then someone asked what our minds say about corrugated cardboards. Our focus is the contribution margin. When you have a variation in the price of scrap, et cetera, sometimes we have goals for contribution margins and this is because of this profitability, which is going to be a lot stronger even more than the volume/price vision as well.

Well, heading to the other one here, Angelo is asking about -- he says, congratulations on the results and good luck. Do you imagine any kind of continuity on the adjustments of prices?

Well, as I mentioned, for corrugated cardboard, no, I don't really see this increase of prices anymore. But there could be maybe some contract or something where you have some anniversary or something that we're going to renegotiate. Of course, there could be some effects in the prices of these negotiations, but an increase in prices in a structured manner, we don't really think it's going to happen in the second half. So unless the demand is very, very strong, which I don't think is the case.

And then, well there's something else -- there's another question identified yet about what you -- and if you could talk about what you expect so that we could help project this and design this up ahead. But if you also plan to share any details if the revenue of the operation should be kept at the levels seen throughout the second half of 2025.

Well, I can help with that. Maybe actually you're referring to the operation [indiscernible] if I'm not mistaken, right? The forest in Santa Catarina [ are ready ] for pulp production. So we don't have revenue, we don't sell wood. What we produced is for internal consumption, considering biomass and also for wood and pulp so the leasing also continues now. And we're going to disclose the results of this when we complete the first cycle. This is around October, November. And that's when we're going to start disclosing the results of this operation as well.

Well, perfect. [indiscernible] talked about how -- well is there room for gaining more efficiency in the SG&A?

Well, I think so. We have to create room for these advances, right? And we have our own [ public ] goals. And SG&A, well, we've been working on some initiatives throughout this year for cost controls, and we had a Phase 0 budget with support from [ Falcone ] and that is already reflected because we're going up less in the inflation, right? So we're going to continue with this. And we'll also try to work on better structures and costs. We've already focused on fixed costs, and we intend to keep them very well controlled.

Well, I think that's always a focus, right? Looking at this, and we've been working on some initiatives with [indiscernible] methodology with base zero budgets and really containing the evolution of these expense lines, right? So we've -- it's actually pretty well behaved, but we always have to try to reduce it a bit more. We have other things going on, technology, et cetera. So we have to be very careful about this. But in a broad manner, I'd say we can't say there's like big spaces for cost reduction [ clients ]. We've done pretty good work in the last few years. And two more questions come in. We have Daniel. Congrats on the results, and you already mentioned that this is probably the peak in leverage in the next of the company. But do you have any guidance for the closing in 2025? Do you think there's an improvement in the EBITDA and maintenance of the net debt? Well, we don't provide the guidance forward. But as we did mention, considering that we reached the peak, the trend would be to deleverage from now on. And due to the level of debt, deleveraging would come more from the EBITDA than it from an actual reduction of the net debt. But both combined effects really going to take us to an important level in the next quarters.

So do you want to talk about anything else here?

So what's the impact if there's any plans for organic growth and if we intend to monetize this in any way with carbon credits? Well, first, about the IPI credits. We can monetize this up until middle of next year. So yes, there is an impact. So those are the [ BRL 18 million ]. And if there's plans for inorganic growth?

I think that's always -- and so actively as well. But it's something that doesn't depend on us, right? We do have -- we do desire to have inorganic growth, but we're only going to start engaging with this when we see that there may be a better alternative, right, and that strategically really makes sense or add value to the current shareholders.

Well, and the third working on managing forest assets, et cetera. Well, actually Fabiano can add on and Henrique as well. But just to take advantage of this ball bouncing here, it is the first company in the sector that generated carbon credits way before. And back in 2007, actually we had issued that. And up until and even today, we have this second project as well, and we still sell carbon credits, right? So ever since 2025, we've started this and it worked really well. But then after 2015, we had the Paris Agreement, and we had a drop in the values we're monetizing. So we are already pretty old, let's say, in this market. But when we talk about carbon credits and forestry, then that's not developed yet. So for planted forests, there are different criterias and methodologies and when this started to grow and it's still not so clear how we can measure the carbon credits from the native forest. I think there's also a big discussion going on there. It's in the sixth article of the Paris Agreement, right? Of course, we plan, but we don't really know when, and we also know -- although we work on credits inventory, we see like the volume of carbon credits that the bars generate. But we don't really have visibility on -- about the monetization of these credits. So Fabiano, Henrique, do you guys want to ask anything?

Well, I think that's it. You've covered it.

Great. So we have one last one here. Actually two last ones. We see competitors closing down their factories, the price of scraps. Is there idleness in the factories or any expectations that this could happen as well?

Well, we have a little bit of idleness in our plants, but it's very little due to the price increase. And these are volumes that are recovered in the second half easily. As I mentioned before, we focus in the first quarter -- sorry, in the first half with profitability through an increase in prices and now profitability will come through variable costs, especially with the scraps throughout the next quarter.

And so for the factory, there's no plans, right?

Yes. What helped us is that there were a few shutdowns for maintenance, but also for the factory closed down and that really generated some relief and that began a process with a drop and higher stocks as well.

And then Lucas also talked about if they're planning on buying a new buyback program.

Well, we always assess this. It's a Board decision, right? We think it's a very efficient mechanism for capital allocation at this moment. And we actually didn't propose this program to the Board because we're still in the final phase, but we have a strategy of having buyback programs, especially at moments where stocks maybe not representing the intrinsic value of the company.

Well, great. Our questions are done. So we've been able to service everyone.

We are available here with IR [indiscernible] especially with this drop in scraps and that kind of kept us awake at night in the first half. But now it's going to start favoring us and helping us in some way because they justified the increase in prices at a moment where the market was a little weaker. So the perspectives are very positive in the next quarters. Thank you so much, everyone, and see you next time. Bye.

Bye, guys. Thanks.

Bye-bye. Take care. [Statements in English on this transcript were spoken by an interpreter present on the live call.]