Klabin S.A. (KLBN4) Earnings Call Transcript & Summary

Thank you, Nico. Sasson, when it comes to M&A, I think you particularly mentioned corrugated box. I would like to consider like this. For instance, Klabin's position is consistent when it comes to integration and the intention to increase integration of our actions and papers, specifically, I'm referring to 4 boxes. When it comes to bags, we're already 90% integrated. To what extent we will manage to have this integration 70%, well, if the number is not correct, maybe Marcos and Douglas please correct me if I'm wrong. But to what extent can we evolve to 19% to 95% integration for packaging? That's the question for the future. Maybe for the coming years. I guess the intention is to reach a level of integration around 80% or 85%. This percentage cannot be totally settled now, but we just want to say that our intention is to improve integration. However, despite having grade corrugated box manufacturers in Brazil, the level of technology from all manufacturers with modern machines and corrugators. At the end of the day, Brazil stands out, if you follow up the market for 30 years, for instance, today, Brazilian corrugated -- corrugators, they are second to none, including family companies or SMEs. We are always keeping our eyes open. Nothing right now. I think we don't know if Klabin will consider an M&A right now. But when it comes to structure and the concept of our business will stick to our vision.

Next question, Guilherme Rosito with Bank of America.

My first question is about wood cost. This quarter, we had a significant increase year-on-year, quarter-on-quarter. So what's the idea of the cost per tonne for pulp in general? Is it to maintain the coming quarters? Or do you expect to see an increase or a drop? What is the magnitude? And the second question is about the container board market. Could you give us some color about domestic and foreign markets. Kraftliner are a little bit weaker. So should we expect the conversion rate to be higher in 2023 compared to 2022 for example?

Thank you, Guilherme. Marcos is going to answer your question, and we also have our forest officer, Sandro Adelaide, he may also add something. So Marcos Ivo is going to talk about wood cost.

Guilherme, first, answering your question being to the point, the total cash cost at Klabin or total COGS, we follow with this indication of growth in 2023 vis-a-vis 2022 of low 2-digit, Like I said in the first question in the call or answering Thiago Lofiego's cost. And this includes wood. Now just diving deeper into wood. We remain consistent in our explanation about wood because we've been actually working within our plans and our forecast. If you recall, Klabin days in December, Sandro, our Forest Officer, he made a deep presentation about the mix of third-party and our own wood over the years. We could clearly see that the peak of share of third-party wood and Parana system is for 2023 and '24. This is where we expect to see the peak in wood price. And it begins to go down 2025, which is a small drop. And this drop comes more strongly as of 2026. And the essence behind all that was a means to deliver efficient capital allocation and therefore, the full first supply cycle for Puma to start with third-party wood. And as of the second cycle, we use our own wood, which was planted in areas that we already purchased and therefore, are close to our plans. So we remain consistent within our plans are scheduled and very bullish about the future of wood. Guilherme, Douglas Dalmasi, our Packaging Officer, is going to add some comments to your second question. You said it makes sense to have container board and packaging, but Flavio, who is the Paper Officer, he could also make some comments.

Let me talk about conversion for bags and corrugated box. For banks Cristiano already said that we had high integration levels. start-up of the new line and the volume behavior is expected to be similar to what we had in the first quarter. We work with full capacity, and the behavior will remain as such for the full year. So funhouse, domestic market for market will remain as usual. For [indiscernible] box, similar behavior to what we saw in the first quarter for the market, growth of 2% in the market, and that's what we consider for the rest of the year, including paper, and we consider to keep on following up the market growth. So our repeat remark that I made -- in the previous quarter, we have to keep our eyes open, not only for tonnes when we consider corrugated box prep Klabin. We have to focus on square meters. For square meters, the behavior was similar to the market behavior when it comes to growth. So for the coming quarters, we also follow up the market behavior and growth market, which achieved 2% growth. That's our outlook, and this allows us to measure our integration level.

Can I just add to the comment Guilherme about Douglas answer ported per meter. And for those of you who haven't followed this up, let me explain the merit behind this. MP27, as you know, was the [indiscernible] product, a product that being launched 100% with Eucalyptus and also with Klabin art equipment. As a result, it was state-of-the-art equipment, process with highly qualified people and naturally the pulp and fiber, which allowed us to come to Parana's plant with 100% [indiscernible] running in the machine. This machine [indiscernible] delivers from 10% to 15% less fiber or per square meter. So the box made from this paper. The structure is preserved with less raw material. Therefore, here, we can see the competitive cash cost of the product. At the same time, this product offers to box manufacturers, further efficiency, like, for instance, a reduction of energy used in the corrugators. So when Douglas says that we will focus on square meters, that's because Klabin has reduced the weight of gram in Brazil with a more technological paper. This is important in terms of cost reduction and also important when it comes to CO2 emission from transportation or trucks with fewer tonnes with the same efficiency in transport. So I just decided to touch upon this, and I hope I haven't affected your as answer Guilherme.

Next question from Marcio Farid Filho Goldman Sachs.

My first question is a little more structural, thinking about coated boards and kraftliner in the global competitive market. Everything we see in here makes us excited with the expected demand. I think that most companies and your customers would agree with that. What we have seen in recent years are announcements of great capacity expansion in all regions. In Latin America, United States, Europe and particularly China. I'd like to see how do you envision demand? I mean I think that demand should be positive, but we could be a little worried with supply because China, every month, there's a new ton being produced of coated board or in Russia, the United States and also in Latin America. So how can we understand this? How should we think about this scenario looking forward? And my second question, perhaps to Marcos Ivo. Ivo, the forest piece, I just want to understand the conditions of supply and demand. Is it in a worse margin or less tight than in the last 2 years because the competitive landscape is a little bit tighter. So how do you see this? Should we expect any significant change? And finally, on the side of costs, I think you spoke a lot about this, but we have been positively surprised with a decline in the price of diesel oil and chemicals. So perhaps we could see a better cost landscape than 3, 4 months ago when you gave us a guidance. Could we expect a reflection of these lower commodities prices on your results, perhaps improving your guidance a little bit?

Farid, the sound was a little hard. So let me make sure I understand your question correctly. The first part of your question addressed to Marcos Ivo would be regarding wood. And then you talked about a tight market of wood supply is that it?

Actually, I had talked about wood. But my first question was regarding coated boards and kraftliner. And then I spoke about wood in Brazil.

Okay. Okay. It is clear now for Farid. Thank you. I just wanted to make sure I have understood. All right. I will ask Flavio to speak a little about coated boards, and then I'll answer the second part.

This is going to be a little longer explanation regarding your structural question in splitting the consumer market and the container board. The kraftliner container board market is facing some new entries of recycled fibers. But in another recent announcement, they talked about closing down less competitive assets. So the supply that is coming in less market stops kind of balanced the price landscape that we see now, which is at the limit of the marginal cash cost. So we have Brazil that continues to be very competitive. We see specialization of products, so Klabin operating, particularly in the exports market, where it makes sense. In other words, fruits, vegetables, protein exports markets that talk directly with the virgin fiber market. But of course, naturally, now we have a more difficult balance in the horizon of the next 12 months for this market with the fact that Klabin is operating here, producing coated board at very competitive prices. And I'm not going to repeat Cristiano's comments on new Carolina. Now let's talk about coated board. You talked about coated board with greater capacity from China Folding Box Board, most of it not integrated, so part of the acquisition of fiber and wood from abroad. So that capacity will get into the last quartile of the cash cost and it competes in the world of more general boards. Short fiber and of course, experts will depend on the logistics possibilities. And Klabin, with this 1.2 million tonnes of coated boards considering paper machine 28. We are in the long fiber board for liquid foods and beverages, experts are linked to beer, milk, et cetera. That's its essence. And we have another important piece that is gain momentum, which would be boards with barrier. So special third boards linked to industrialized cold chain products. That's where we're growing a lot, and that's where we do not have direct competition from typical coated board produced globally. Here, there's another important element regarding demand. Even in a market where demand starts to settle, we have an important substitution. The main winner to replace plus next single use is board that is taking up important space and again, in the beverage world. And to bring one last element, Klabin made an investment, and this is underway. The transformation of the Machine 28 production, adding white boards. So very soon, we'll be acting in the market of special boards with long fiber and also in white boards. And in test with those earlier signed contracts come into play regarding this paper machine. So we don't see any important issues in this world where we are navigating.

[indiscernible], I will continue with the answers. I will start talking about wood and then Marcos Ivo will speak about inflation. I will probably add somewhere to that, taking advantage of a trip that we took last week, and we were speculating about inflation from of our peers. And Sandro is also here that can add to my wood comments. So let me get started. You see, I have a relatively controversial view regarding wood availability in Brazil. Regarding with planted area in Brazil, I see an opportunity, and I think I have mentioned this in earlier calls, perhaps after productivity and I ask for a poetic lies to speak a little about structural aspects of countries. But I think that the first point to unlock capacity in Brazil is productivity, and this involves education and so on and so forth. But in terms of creating value in the country, specifically in Brazil, given our characteristics. I see that if we have more planted areas, this would be one of the main ways to unlock value in this country through planting in pasture areas. Pasture productivity in Brazil is very, very low. And this is one of the major protein produced as Klabin. I know that Brazil is a continental country. I know that every Brazilian region has a different real will move. But in the context of time and perhaps we can talk more about that in another moment. Brazil in productivity, it's less than 1 half per hectare, one cow per hectare. And this number could tighten triple or 4x given the reality of the country. So with just information alone, we have 9 million hectares pointed in Brazil data from our EBA, the association of our industry. What we for to see, just considering 9 million of hectares planted compared with and I'm not going to mention any names, but the biggest protein produced in Brazil, [indiscernible] alone manage in terms of buying cattle from pursuers, something like 19 million hectares in time. The pasture area is 10x the size of planted help areas with plants planted for our industry and some other industries such as industrialized world and [indiscernible]. Why I'm I mentioning all of this? Because countries like [indiscernible] the government has an expectation of opening planted area and there are opportunities and other items of Brazil. So you see our sector pretty much abide by the regulation of the industry abides by global certifications. We are benchmark around the world in a Brazilian or foreign player operating in Brazil. Our main marks in terms of forestry management and unlocking this value was gained with the tapering transferring areas to planting a forest. This will put more productivity for the current capital rating experience and it would make us an opportunity to increase the area of planted trees in Brazil. So especially speaking, I see this as a great opportunity in Brazil in the coming decades. I truly believe that planted area in Brazil for our industry should double in size. Now that does not mean that in the short term, we will not view circumstantial cost pressures. And now speaking more about Klabin. Klabin in the south of Brazil, I'd like to remind you that we have 2 fibers, 50% long fiber, 50% short fiber. And we operate primarily in the state of Santa Catarina and Parana. In these states, well, [indiscernible] exports worried to the United States linked to several construction numbers or housing construction in Brazil. So the south of Brazil is the export. This kind of wood would impact the demand and the price of [indiscernible] South of Brazil. And it's kind of a forecast. And everybody is hoping that this will not happen. But in this forecast of the reduced economic activity in global markets, including in the United States perhaps that there will be an opportunity or a balance of price and third-party wood in the next 12 to 18 months. Of course, this depends on many other circumstances. Talk about the wood forward in Brazil with consumption in the United States, and you probably understood the relationship. But in this context, I should say that right now, the worst is behind us in terms of wood price. And in the long term, I see an opportunity. My last point is that in terms of the cost of wood. The cost of wood has an economic relationship with the cost of land. I'm not going to get into the merit of that so -- because this would be too long. But let's talk about economic cost, land cost, and I'm going to speak about distance. Distance is the same for everybody to see these new pulp units, which is to have one single product. Now they are trying to pursue very high production capacities, having wood traveling long distance in this long distance is perpetuated in [indiscernible] with relatively or productivity compared to the south of Brazil. And they have wood travelling systems to maintain the production, the dynamic of better machines. In the case of Brazil, we have said this over and over, and we have shown this in our numbers. And Marcos just has spoken about this. As we get third-party wood in the first retention in the word, this fetch rotation, therefore, third party wood traveling for longer distances so cost increases due to longer distances. But in this interval of time, we have acquired areas near Klabin, in which we are already planting. And for the second rotation, the structural cost will drop. It's due to discuss. I have spoken a lot in my answer, Arco Sandro, if you want to add anything, but I just wanted to explain this to you, Farid and I apologize for being too long. But I think that the debate regarding wood price in Brazil, seems confused with planting and path even opportunities that exist in our industry. I'll turn the floor for the Marcos to speak about inflation.

I mean to just add to that, Farid, we continue with the same indication of increase in cost per tonne for the year of 2023. Of course, if we have a price reduction that is more intense in commodities, which are raw materials for Klabin, this will also be reflected in our cost. But right now, from what we can see at the beginning of May, we continue with the guidance that we gave you in the prior conference call. It is important to remember that part of the cost per tonne in the second quarter of the 2 in April, we had the general shut down our biggest site with [indiscernible] Puma, where we have the production of pulp and Puma 2 in the first phase already in production. We had a stoppage -- a scheduled stoppage with a greater scope, which means more days of downtime, and that impacts the COGS per tonne because we're going to have a lower dilution of production and fixed costs in the second quarter. This is just as a reference, our general shutdown in the Puma unit asset 6 more days than last year, especially because of interconnections, there were planned debottle necking for the startup of the promotion [indiscernible]. And Farid, I will just make a comment on something that I forgot regarding cost and inflation. Monaco's NI last week Klabin era. We were visiting 6 of the major players of our industry in Europe. I just wanted to understand your global view of the world, expectations, threats, geopolitics instance and how each company sees all these. We kind of normally do this to maintain healthy understanding of the world in our industry. And in that context, we left ending within impression, which is no different from ours. We were concerned about cost of labor, Europeans and Americans of say salary adjustments, and we're not exactly how should I put this? They're routine after or in the post or context. And of course, an increase in the cost of power, et cetera. And all of that has a reflection on us. So our concern regarding inflation continues to exist for all of us in the industry here and globally.

Good luck and keep up the good work.

This concludes the question-and-answer session. We move now to the final remarks.

As for the second quarter of 2023, our outlook remains of a challenging market. For the global scenario of inflation and continued deterioration in pulp and kraftliner prices minimized by Klabin's integrated business model in the packaging unit and the demand from the consumer segment. Additionally, in April, early second quarter, we had a general shutdown of the expanded Puma plant with reduced slightly our production volumes, but successfully interconnected with the new coated board machine. For that, we achieved 92% of the implementation schedule for MP28 with start-up schedule for next June, strengthening Klabin's position in highly resilient stagments with growing global demand. Given a complex market context, we remain vigilant in our focus on operating efficiency with cost control and optimization of the mix of products and markets. I thank you all for your participation, seeing you all in Klabin's next earnings conference call.

This includes Klabin's S.A. conference call for today. Thank you very much for joining us, and have a great day.