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

Good morning and welcome to Klabin's conference call about Project Caetê. [Operator Instructions]. As a reminder, this conference call is being recorded and also being broadcast on simultaneously via webcast and can be accessed through Klabin's Investor Relations website where the presentation is also available. Any statements eventually made during this conference call in connection with Klabin's business outlook, projections, operating and financial targets and potential growth to be understood as merely forecasts based on the company's management expectations in relation to the future of Klabin. Such expectations are highly dependent on market conditions on Brazil's overall economic performance and on the industry and international markets and therefore, are subject to change. Present with us today are Mr. Cristiano Teixeira, CEO; Marcos Ivo, CFO and RO; Sandro Avila, Forestry Director; and Mariangela Bartz, Legal Officer; and Gabriela Woge Officer for Corporate Finance and Investor Relations. Initially, Mr. Teixeira and Mr. Ivo will comment on the Caetê project. After that, all of the officers will be available to answer your questions. Now I'll turn the floor over to Mr. Cristiano. Cristiano, you may proceed.

Thank you. Good morning, everyone. Since the approval of the Puma II project and more recently at our Klabin Day, we've been communicating to you our wood supply plan for Parana with a great deal of transparency and consistency. Now I'm very pleased myself, Marcos Ivo, and the entire office of Klabin, I'm delighted to announce the signing of the agreement for the acquisition of 85,000 hectares of Arauco's in Parana, the productive forest in the sum of $1.16 billion. With this operation, we will anticipate the achievement of Klabin's wood self-sufficiency target, and we'll also conclude the expansion of land in Parana. Among the benefits of the acquisition, I would like to highlight the significant reduction in future CapEx and the significant gains in operating synergies. After the first wood harvest cycle, the operation will also provide the opportunity to monetize this excess land in line with Klabin's 75% target for self-sufficiency in Parana. This is yet another move that reinforces the company's focus on operating efficiency, diligent capital allocation, value creation and financial responsibility. Now I would like to turn the floor to Marcos Ivo who will present the details of the transaction, and then we will come back with the Q&A.

Thank you, Cristiano. Good morning, everyone. I'm very pleased to talk to you this morning about this important move by Klabin. We have a presentation for you, which is quite long, but that is only because we wanted to provide all of the detailed information to the market so that you will be able to analyze this in more depth. Thus, in order for us to also have some time for the Q&A session, I will only go over the main slides of the presentation and the complete deck of slides will be available for download later on. On Page 4 of the presentation, I have a detail of the scope of this transaction. We acquired Arauco's forest operation in Parana. This contemplates 150,000 hectares of total area, 85,000 hectares of productive areas. 31.5 million tons of wood. Standing wood, meaning the wood that is planted in this forest. This forest is certified by FSC and the acquisition price is USD 1.16 billion to be paid in full at the closing of the transaction. We believe that all the approvals will be in place in the next few months and the closing of the transaction will take place in the second quarter of 2024. I would like to highlight that there is no wood supply contract from Klabin to Arauco. We acquired with no other linkages in terms of providing woods to Arauco. Still on Page 4, on the left-hand side, we have the profile of that standing wood that is in place at 31.5 million tons of wood is pines and eucalyptus and 69% is pine. The average age of the forest is quite good, meaning that there is a large volume of wood to be harvested starting in 2024. Now moving to Slide 5. And you will notice an important effort on the part of the company in terms of being very transparent so that the market can evaluate the transaction. Now in this slide, we break down the elements of the transaction. The transaction involves 3 important value creation drivers. The first is the replacement of third-party wood that would be acquired throughout the next few years as we've been communicating to you since the project was approved. Puma II was approved in 2019, we are no longer acquiring wood from third parties in a spread way and we are buying wood from Arauco. So the first value creation driver is the volume of wood that is no longer coming from third party. And the second driver is operating synergies. Despite the fact that we bought market price when we talk about third-party wood price that we would pay from other suppliers. Arauco's acquired areas are very favorable because they are located very close to Klabin's mills, which means less transportation cost. It's very -- it's a very flat area and the forestry roads are quite consolidated. All this put together leads to harvesting, transporting and logistics of wood to be significantly lower when compared to other sources of wood supply. In addition, the third value creation leverage is the land excess that Klabin will have vis-a-vis our self-sufficiency target in Parana. This information is well known to all of you. Klabin works with efficiency target in Parana of 75%. Once we harvest this first wood cycle, these -- from these assets acquired from Arauco. In parallel we are growing the forest that Klabin acquired at least in the last few years to supply to Puma II. So what will happen going forward? We will have land -- some excess land in Parana vis-a-vis my 75% self-sufficiency target, which means that we will have 60,000 exceeding land of productive area. So once we put all of these leverages of value creation together, the estimated value of the acquisition for Klabin is BRL 8 billion, discounting the acquisition price including exchange rate of BRL 5 per dollar. Value creation via by NPV. NPV Is about 2 million -- BRL 2.8 billion. I mean the project is unleveraged. So based on our assumptions, we estimate that unleverage to be about 13% in actual terms and a very short payback when compared to typical investments in our industry. So payback will be lower than 6 years. Moving to the next slide, Slide 6. We have a breakdown of the purchase price. We paid BRL 5.8 billion for the asset. Once we conduct a very objective evaluation of the standing wood, I mean, knowing the standing wood value, multiplying that by market price using third-party sources, we arrived at the amount of BRL 3 billion for the wood that we acquired. So when we look at the value of the land per difference, we have BRL 2.8 billion to be allocated in the land. And if we divide that by 85,000 hectares of productive area, then we arrive at the price of BRL 33,000 per hectare in this transaction, which is a price below market reference, and I here mentioned 2 public sources, DERAL and FNP. On Page 7, I'm not going to go over the details of this slide, but the main message is quite visible in the slide. The light green areas represent Klabin's current assets in Parana, and the areas in other colors are the areas that we are acquiring from Arauco. Therefore, the main message here has to do with the proximity of the acquired areas vis-a-vis our previous assets. And in many cases, we are referring to adjacent farms and this is translated into great operating leverage. Also, it means that these acquired assets are located in the same region and a region that has the largest productivity in the world, both for pine and eucalyptus. Now moving on to Page 8. You might recall that the same slide was presented during our last Klabin Day on November 30. And we also showed that last year. And this communication has been very consistent since 2019 since the day of the approval of the Puma II project. Moving now to Page 9. Here, you have a better view of how this acquisition transforms the supply metric of Klabin. This transformation leads us to two things. One, we will significantly anticipate the achievement of that 75% self-efficiency target. For eucalyptus, this target will be reached in 2026. And for pine, we were able to significantly reduce our dependency from third-party wood. In addition, it's also important to notice that synergies stemming from this transaction are not just happening in the period between 2024 and '28 because it will continue throughout the following years and mostly given to all of the impacts previously presented because from 2029 to 2037, we will continuously reduce our reliance on third-party wood because of the acquisition. Now going to Page 10, on the left-hand side of the slide, we have a summary of the forestry expansion of Klabin to supply to Puma II project. I think you were very familiar with the fact that Klabin needed to expand land and plant forests in 85,000 hectares of productive area just to supply the expansion of the Puma II project. We had already expanded in 75,000 -- 70,000 hectares, and there were still 15,000 hectares remaining to be completed. With the acquisition, we will conclude that 15,000 hectares is still pending, and then we conclude 100% of our forestry expansion in Parana to provide for the Puma II project. And as we harvest and as the forests mature, Klabin will then have 60,000 hectares of excess productive land that could be monetized in the future. And we will soon give you more details about that. On the right-hand side of Slide 10, I would also like to highlight the structural competitiveness that this acquisition will bring to Klabin's cash cost. Klabin's average radius of the 2 forests and the 2 mills in Parana is 179 kilometers. Right after the acquisition, I mean, with the acquisition of the Project Caetê that average radius will go to 121 kilometers. And as we start harvesting in the expanded areas. And if we remove that excess of 60,000 hectares from our supply metric, Klabin's average radius will be 180 kilometers in Parana which is highly competitive, especially bear in mind that we are located in a forest region with the highest productivity in the world for eucalyptus and pine. Now going to Slide 11. This is a good example of our efforts to extensively communicate this to the market. And together with the material fact of the acquisition that was signed yesterday, Klabin also communicated another material fact giving a formal guidance of 3 numbers. The first number refers to CapEx. We provided you with a CapEx formal guidance for the next 5 years. This really shows how much we trust the fact that this acquisition will bring about a significant reduction to our CapEx and this will also bring important synergies to the company's cash cost. Now speaking about CapEx alone, you would notice that CapEx for 2024 that we announced in our Klabin Day was BRL 4.5 billion. Now this new number has been adjusted to BRL 3.3 billion. Mainly given the fact that we are reducing the purchases from third parties. So after that, from 2025 onwards, the numbers keep falling because of the synergies of Caetê project. Also, this chart only -- I mean, we only went into 2025 and only may not be the right word because there are not too many companies that can give you a very long CapEx guidance. But CapEx synergies will continue after 2029, maybe at a lower level, but it will continue gradually. And you can establish that connection when you look at the pine supply metrics that I showed you a few slides back. Now moving to Slide 12. We have two other guidances that were given to the market yesterday. On the left-hand side, we have the production cash cost per ton for 2024 of Klabin, 3,100 per ton, which means that there was a drop of 4% vis-a-vis the accumulated numbers for the first 9 months of 2023. In addition, we also provided CapEx in terms of savings and cash cost for the period ranging from 2025 to 2028. That means an yearly savings in that period between BRL 550 million to BRL 400 million -- again, BRL 350 million to BRL 400 million. That's why we feel so certain because this does not depend on market price. This cost reduction does not depend on market price. It only depends on our execution of the forestry operation in the region where we master. And this will come due to drops in logistic costs because the areas are adjacent to Klabin's mills and the areas are quite consolidated in addition to lower harvesting costs. And given the fact that we have large forestry blocks and favorable topography, flat areas, all of that can be [indiscernible]. Now moving on to Page 13. Here, we give you some details about how we intend to monetize the exceeding land given our 75% self-sufficiency target. Klabin will use 100% of the wood [indiscernible] and as we harvest the wood, and at the same time, as the forest mature, I mean on a yearly -- on an annual basis, we will have an amount of exceeding lands that can be monetized in two different ways. One way would be the selling of the areas throughout the year. So on the left-hand side of the chart, you see the number of hectares that will be available per year from 2025 until 2038. Also, I would like to highlight the features of the areas. 1/3 of the areas that will be available for monetization are areas that are -- that have an agricultural vocational, topography and quality of the soil. Meaning that the price of the land is very attractive, especially in the state of Parana. Another evaluation. I mean, you're very familiar with our history -- a track record of continuous partnerships and Klabin has been involved in that very successfully since 2018. Our forest expansion in Parana was done with key resources, and we're very pleased with our partnerships. And as of tomorrow, given the fact that now this acquisition has been concluded, and it has become public. Of course, everything is still subject to regulatory approvals. But we will initiate our dealings with TIMOs and another potential monetization of this excess land is also through partnerships with TIMOs. Now moving to Page 15. I just skip Slide 14 in the benefit of time. But Slide 15 brings one additional look at the value creation of this transaction. We already talked about the 13% IRR when compared to the company's WACC of 7%. we can see a spread over [ WACC ]. We also simulated several stress scenarios, considering lower price of land, considering lower capture synergies and in all scenarios, you find a very good value creation. In the annex of this presentation, we posted a table with a sensitivity analysis. And in any given case, we certainly have value creation. Now moving to Slide 16. Here, we talk about our liquidity position and debt and leverage profile. First, on liquidity on the left side of the chart, the pro forma cash position of the company today is BRL 11.5 billion. This cash part starts from a public number of BRL 5.8 billion at the end of September of this year. And also this is added to 2 other funding that were mentioned to the market. And with that, we arrived at BRL 11.5 billion, discounting the amount of the transaction and then Klabin will still have cash of BRL 5.8 billion, which is our regular cash position between BRL 5 million and BRL 6 billion. Once we compare this cash that will be with the company after the full payment of the acquisition, this is enough to pay all of the debt that should mature in the next 3 years. Therefore, the message here is very robust liquidity after the payment and the company does not need to get into new funding in the short run, be it to pay for the acquisition or even to keep a very good liquidity profile. On the next page, Slide 17, on the left-hand side, we carry a projection in the light green line on the left, we have our projection of what would be Klabin's leverage measured through net debt over EBITDA denominated in U.S. dollars before the acquisition. And in dark green, we have Klabin's leverage measured by the same indicator with the acquisition. So what do we see here? Naturally, there will be an increase in leverage in 2024. However, given the strong CapEx reduction brought about by the acquisition in addition to cash flow synergies that we turn into EBITDA. Then in 2025, we will find ourselves at a very similar level that when compared to what we had before the acquisition. And after 2026, this acquisition is already a deleveraging acquisition. So I would like to highlight again that in any scenario, we will work in compliance with the debt policy of the company that was approved by the Board, and that is also available for you in our website. In terms of the rating agencies, S&P already posted a report this morning, updating the transaction and maintaining Klabin's rating with no changes in the outlook. The S&P report clearly sees what I just said. Deleveraging happening very quickly due to the benefits brought about by the project in addition to the mitigation of several risks that the company had in the past. Now moving towards the end of the presentation on Slide 18. Here, we have a timeline until the conclusion of the transaction, the signing [indiscernible]. So given the importance of this transaction, we need the approval of the general meeting -- shareholders' general meeting. We also need CAGEs regulatory approval, and we expect that all our approvals will take place in the next coming months with the closing payment and the fact that we will take over the asset, everything should be in place by the second quarter of 2024. And now I'll turn the floor over to Cristiano.

Thank you, Marcos. I understand that now. We go to the Q&A. Is that it?

Okay, Cristiano. [Operator Instructions]. Our first question is from Daniel Sasson with Itau BBA.

Congratulations. I think this is a conclusion of hard work and many months of negotiations. So congrats. My first question has to do with the tax part of the business. I would just like to get a better understanding because part of the drivers of value creation are related to the sale of those excess hectares that you mentioned. Do you anticipate -- I mean, your business case anticipates the payment of income tax on capital gains for the sale of the land? Are you already calculating some goodwill in that calculation given the fact that apparently, the price you paid is way below the market prices for the region? And my second question, just to have more clarity and to know whether my understanding is correct. Another point you mentioned when you talk about your value creation guidance, it has to do with cash cost synergies, about BRL 350 million to BRL 400 million a year. Do you believe that with this transaction that you just announced, you were able to have a lower level that you would have in case you hadn't announced the plan to buy BRL 1 billion a year of standing wood by 2028? I mean the average radius after the transaction with Arauco will be lower than what you envisioned 2 weeks ago when you gave us more detail about that standing wood CapEx?

Marcos, can you start?

Certainly. Sasson, yes, in our business case, we anticipate payment of 34%. Therefore, the rate is full for SES in terms of capital gains related to land monetization. And I take this opportunity to mention something that was not considered in our business case. After taking over the company, there is a potential goodwill that could also generate some tax benefits to Klabin. And this was not contemplated. We were conservative, we do not contemplate that in our valuation, but we will study that in the coming months. Cristiano, can you talk about the radius?

Yes, about that. Well, first of all, thank you for your questions. And yes, this asset and -- if you allow me, I would also take this opportunity to thank Arauco, to Matias Domeyko. Arauco is a brilliant company. They delivered a brilliant asset to us. There were 18 months of extensive conversation as you mentioned the period. We had 18 months of very respectful conversations. And that really shows the high level of discussion between the companies when it comes to an asset of such a high added value. So therefore, yes, this acquisition, in addition to a lower average radius, I think Marcos shows during the presentation. I'm in a different location, so I couldn't see the presentation, but I think he mentioned 180 kilometers, which is the medium radius -- the final medium radius for the plan. But little by little, we're bringing a lot of information in a very transparency way. I mean, we try to work in block something that is analog to Klabin. This farm is a productivity icon in the world. And with the acquisition of the new farms that came with this new asset. They are also beacons of productivity within that microbiome in that region. So yield is spectacular. So we bring the benefit of a lower average radius when compared to what we had in the past. But moreover, this brings significant operating advantages going forward that are still very hard to calculate. Once the numbers are in place, we can share the numbers with you.

Our next question comes from Lucas Laghi from XP Investments.

Congratulations on the transaction. And also congratulations for your transparency and the quality of the information. That was very complete. We have two questions. The first question, I think, I mean, your value leverages and CapEx reduction, cost reduction, that was very clear. I would just like to revisit the previous question related to the cost reduction leverage. When we look at the wood composition between these different blocks, we see that a significant part was more distant from the [indiscernible] mills with an average radius of about 203 kilometers when compared to the forestry operation. I know that the current 139 average radius. I know that this number is only for your own [ wit ]. But how do you intend to utilize -- I mean, to utilize that -- I mean, harvesting is probably -- you I think that probably your harvest will come from the more mature farms and how the dynamic will work? And what about the 203 kilometers from the Caetê project is comparable to the average radius of Klabin now considering the purchase of wood from third parties? Maybe my second question I can ask later because my first was very long already.

Okay, Lucas , Thank you. Marcos, I apologize because Marcos and I are not in the same location. But I would also like to ask Sandro to join us in answering your question.