Klabin Sa S/Adr

Good morning and welcome to Clubbean's conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a questions and answers session and instructions will be given at that time. We kindly ask that for the benefit of time, each analyst asks a maximum of two questions. If you should require assistance during the call, please press the star followed by zero. As a reminder, this conference call is being recorded and also being transmitted simultaneously via webcast, which can be accessed through Clubin's investor relations website, where the presentation is available. Any statements eventually made during this conference call in connection with Clubin's business outlook, projections, operating and financial targets, and potential growth should be understood as merely forecasts based on the company's management expectations in relation to the future of clubbing. Such expectations are highly dependent on market conditions, on Brazil's overall economic performance, and on industry and international market behavior, and therefore are subject to change. are present with us today Mr. Cristiano Teixeira, CEO, Marcos Ivo, CFO and IRO and the company's officers. Initially, Mr. Cristiano and Mr. Ivo will comment on the company's performance during the second quarter of 2023. After that, The offices will be available to answer any questions that you may wish to formulate. Now I will pass the call over to Mr. Cristiano. Please go ahead. Welcome to Klabin's earnings conference call for the second quarter of 2023. Faced with a market scenario that has been and continues to be challenging for the pulp and paper sector, Clubbing, from a diversified product portfolio and its commercial dynamism, once again used the integrated business model, generating a beta of 1.3 billion BRL in the period, a performance relatively higher than the average of its global peers. In the pulp business, the soft food fluff once again presented a resilient demand and high prices, mitigating the price drop in the short fiber pulp products. In the paper business, specifically container board, given the market situation, we maintained market production stoppages and a higher level of integration in our corrugated box division, bringing stability and profitability with the integration. In Coated Boards, with the startup of Machine 28, we started the process of qualifying the products with our main customers. In the packaging business, we performed well in terms of volumes and profitability. And in the industrial bag segment, Clubin's relevance in the domestic market brought sound business results. Now I turn the floor to Marcos Ivo, who will bring the financial details of the second quarter of 23. Thank you, Cristiano. Good morning, everyone. Thank you for attending our conference call. Sales volume in the quarter was down 15% compared to the same period in 2022. This drop is substantially explained by the general scheduled stoppage for maintenance at the Puma unit in the month of April, and a lower demand for a craft liner in the foreign market. Net revenue in the period was 4.3 billion BRL, down 15% year on year. This reduction is the result of corrections in pulp and craft liner prices and lower sales volume. EBITDA was of 1,344,000,000 BRL in the second quarter of 2023, with adjusted EBITDA margin of 31%. Moving on to slide four, we highlight once again the flexible sales mix between geographies and the portfolio with three types of fibers, short fiber, long fiber, and fluff, which benefited the average price in the top business, driven especially by fluff and the execution strategy. The cash cost of pulp production, excluding the impacts of the maintenance stoppage, was of 1,363 BRL per tonne in the period, the same level as in the previous quarter. Adjusted EBITDA of the pulp segment was of 389 million BRL in the quarter, representing an adjusted EBITDA per tonne of 1,162 BRL. Now on page 5, in the coated board segment, sales volume was 170,000 tons in the period. The net price per ton of coated board reached 5,594 BRL in the second quarter of this year, an increase of 15% year-on-year. Driven by price adjustments, net coated board revenue reached 951 million BRL, an increase of 20% compared to the same quarter of 2022. On the next page, in the corrugated box segment, sales volume in square meters grew 1% in the second quarter of 2023, when compared to the same period in the last year. The net price per ton of corrugated boxes reached 5,925 BRL in the period, an increase of 6% compared to the same quarter of 22. Leveraged by price adjustments, net revenue for corrugated boxes reached 1.3 billion BRL in the quarter, representing a 5% year-on-year growth. I also highlight the adjusted EBITDA per ton in the paper and packaging segments. which reached 1,831 BRL per ton, showing the resilience and stability of these markets. On slide seven, adjusted free cash flow, which excludes discretionary factors and expansion projects, was positive at 787 million BRL in the quarter. In the last 12 months, adjusted free cash flow reached 4.6 billion BRL, representing a free cash flow yield of 21%. Now on page 8, at the end of June, Klabin's net debt was 19.5 billion BRL, a reduction of approximately 1.5 billion BRL when compared to the end of March. This reduction is mainly explained by the positive effect of the appreciation of the real against the dollar on foreign currency indebtedness with no material cash effect in the period. Leverage measured by the net debt over adjusted EBITDA ratio in dollars ended the quarter at 2.8 times the same level as the previous quarter and within the parameters established in the company's financial indebtedness policy. Moving on to the next page, Klabin's liquidity remains robust and ended the quarter at 8.4 billion BRL. This liquidity consists of 6 billion BRL in cash and the remainder in a revolving credit facility. The company's cash position is sufficient to repay the debt that matures over the next 44 months. The average maturity of the debt at the end of June 2023 was of 104 months. equivalent to almost nine years. Klabin has contracted and not yet withdrawn financing in an amount higher than the capex that will still be dispersed until the completion of the PUMA 2 project as detailed in our earnings release. Moving to page 10, According to the notice to shareholders published yesterday, the company has approved the payment of dividends in the amount of $269 million BRL to be paid on August 15. On an accrual basis, shareholder remuneration paid over the last 12 months totaled $1,541,000,000 BRL. This amount represents a dividend yield of 7%. On page 11, The first stage of the PUMA2 project, MP27, continues through its learning curve, having reached production of 364,000 tons in the last 12 months. On the next page, the second phase of the PUMA2 project, MP28, is on its learning curve, with the expectation of producing approximately 165,000 tons in 2023 between craft liner and coated board. Since the beginning of the project, 12 billion BRL have been disbursed, of which 433 million BRL were in the second quarter of 23. Moving to slide 13, in June, we released the 2,000th 2022 sustainability report and updated the ESG dashboard, which brings all of the indicators of environmental, social, and governance aspects, transparently sharing the company's evolution in its sustainability journey. In addition, in the second quarter, Klabin was included in the prime category of the ISS ESG corporate ratings, completing the company's leadership in the sector in the main ESG ratings. On the last slide, I share with you a photo of MB28, an important milestone of our company. Now, Cristiano, the other officers, and myself remain available for the question and answer session.

Now we're opening the question and answer session. If you want to ask questions, please press star 1. If you want to remove your question from the queue, please press star 2. The first question comes from Rafael Barcelos with Santander. Please, Rafael, you can go on. Good morning, everyone. Congratulations on the results. The first question has to do with the decisions on the companies. After Flavio Deganuti left in June, the statutory officer for paper, this position came to an end and some areas are not statutory anymore, reported to Cristiano. Cristiano, I'd like to better understand this move and in practice, what changes in terms of the company's daily routine? The second question is about capital allocation. Cristiano and Ivo, now that the second machine in Puma 2 already started up operations, what are the main discussions today in terms of capital allocation at the company? Should we really consider growth with an announcement next year? And if yes, what are the business lines of the company that are eligible for a growth project? We also realized that you had an announcement, a notice about dividends last night what about balance between growth and dividend or even if any payback or buyback products and programs could be part of the strategy thank you thank you Rafael first let me comment let me comment on the second part of your question about capital allocation and I'll be joined by Marcus Evil and then I'll conclude with more soft topic about people and management. Just to give a softer spirit to the second part of the question, when it comes to capital allocation, perhaps this is one of the main strengths of Klabin. And I'm not only referring to our recent years, but the whole history of the company. This criterion about capital allocation So the first part of the question, and I'll leave the second part of the question about the protocol and the policy. But first, let me talk about the more conceptual aspects about growth and dividend payout and also tapping into opportunities. I believe you understand and you realize a circumstance that is cyclic about commodities. And as a result, the price of commodities, prices per ton, and by the way, I'm not only referring to pulp and paper, but I'm including all commodities, including agricultural commodities, and I also talk about land price and forest price, etc. So today, We live in this moment in which we left behind a strong growth period. I guess Klabin did manage to benefit from nearly all opportunities there were for us, be it by forest expansion or involving new technologies brought by state-of-the-art machines. And also access to markets. So sometimes this is too specific to get into details today, but access to paper packaging and also innovation and research and development in recent years, which transformed the company. So I'd say that the company's growth cycle, and as you know very well, because it's a cyclic industry and within this cyclic sector, the pulp and paper industry is part of a more macroeconomic commodity cycle. As a result, sometimes it may happen that we are into a process of global market, which is precisely what's happening now in our industry. And then some opportunities begin to come up. There is no M&A being considered at Klabin as we speak. But because we have a readjustment and repricing of assets in general from fibers, commodities, agricultural assets, etc., so this repricing of assets may appear as an opportunity down the road. However, right now the sector is against cycles. drop in prices, reduction in margins, not only at Klabin, but worldwide. So now there is a dilemma of a highly capital-intensive sector. So when we are against the cycle, the discussion is very hectic because we have to allocate capital in terms of growth and also Klabin's opportunity right now. because it's becoming more diversified with highly added value products like fluff and also LPB. These are more stable products. So in times like these, there are opportunities. So this debate is necessary. And it commonly happens at the board level and in our management. But it seems to me that to date, when it comes to this dilemma, growth, versus our dividend, I guess this debate is very positive and valuable. And we are very happy to share with you, based on the figures published, what Clubin managed to do on our ROIC for the last decade. So when it comes to strategy right now, there is nothing that we have to be prepared for. However, I have to share with you that an industry that is so high capital intensive as ours and subject to cycles, these dilemmas come up regularly when opportunities come up because the real price of assets begin to go down just as the market when we have these margins and results. We don't have future numbers to justify by pure maths and financial aspects these investments. So that's a very positive discussion, and I believe clubbing has been playing its role well for many decades. So now I'll turn it over to Marcos Ivo to talk about politics and protocols, and then I'll come back to talk about management. I think Cristiano covered it well. Just for the sake of time, there are two policies approved by the board and they are available on our IR website. One of them is about capital structure and the leverage at Klabin and also a dividend policy. So everything is fully available there and the investor relations management is here for you. Okay, coming back to your question about management. First and foremost, I would like to talk about Flavio Demerucci and pay tribute to him. And we wish him well in his future challenge. And I'd also like to address our in-house team and whatever is happening, particularly for the last two years. Historically speaking, Klabin is a company with a succession process that is very rich, more and more established by processes that have lighter individual losses. And my succession and others that happen in recent years at the company, just to show you some numbers, they show a substantial growth in the company's earnings. not only absolute numbers, but also margin maintenance and the entry of new products. And this thanks to very well established processes. So within this succession context, today I'm joined by Ana Cristina, who is our people and management manager. Please feel free Ana Cristina to add any comments. But very briefly, In a very transparent manner, I share with you that Klabin, well, I've been at Klabin for 12 years. Some friends of ours have been at the company for 25 or 30 years in the company's management. If we consider the outlook or the perspective for the last 12 companies, when I joined the company, Klabin had 1 million, 1.5 million tons more precisely. And then I'll be brave, but it brought two machines, in Correa Pinto and another recycling machine in the Northeast, which is state of the art at the time. And it was so important to develop what is known today as Machine 27. We're not going to talk about this now, but we moved to 1.7 million. And then let's make a leap from 1.7 million back in mid-2011 Now we have 4.7 million tons. Therefore, 1.7 to 4.7 million tons. And I said briefly that we are focusing a lot on product portfolio that are more technological products. And Klabin's Technology and Development Center was key to the process. But just to mention the recent acquisition is the coated board machine, which among other products bring that white top liner and also adding more commercial complexity to Klabin. Klabin, if you think about and if you consider Klabin and compare it to all our global partners, all partners, you are going to see Klabin in the pole business with fluff. long fiber, which is registered and approved worldwide for best brands. And then we have short fiber, which is important in terms of efficient logistics and logistics infrastructure that is very well established and mastered by Klabin. And then in the paper section, you know, we have very complex products from beer, milk, or liquid food, and also general products, supermarket items, for instance. Now, when we move into craft paper, you know very well how complex the world of corrugated box is. Today, Klabin supplies papers for many regions in the world. And lastly, our industrial bag, production line, which is very specific. And in the past, it was in the Brazilian civil construction industry, but today nearly 50% of the volume is earmarked to North America and also other regions in the world, not only for civil construction, but miscellaneous, as we know in general, from seeds to coffee for Brazil and other regions in the world. So I just wanted to add this about complexity because from 1.7 million in mid 2011 to 4.7 and with product diversification, we previously discussed with our management area and also the executive committee that we would focus more strongly on commercial strategies at Klabin, focusing on something which is so valuable, which is niche management for the benefit of margins and also bring the industrial area, more technical area, for the same framework of weekly discussions by the executive committee. So there are two names here before I close my long answer about management, Ricardo Cardoso and Michael Souza. both have 25 years of experience at clubbing they are top line engineers in terms of project implementation at clubbing for the main clubbing machines they have their background at clubbing with operating efficiency safety and at clubbing we had already concluded that the industrial area would report directly to the general management. And at the same time, commercial divisions, considering the complexity about market coverage and naturally future intentions at Klabin, these would be separate areas. So we have the industrial management now and also the commercial management. And the names, as you know well, these are people. I'm not exaggerating. These are big names in the pulp and paper industries. Nicolini in pulp and José Suárez, you know him well. He is a professional for decades in the industry, known worldwide by the industry. So I just wanted to wish Flavio well. Best of luck. But I also want to pay tribute to the succession process at Clavin and also processes set as a whole in our company. And at the end of the day, despite all these changes, the company still manages to keep on running the strategy designed by the board of directors with the same level of delivery as before. I apologize for this long answer, but I think we haven't talked about this before. Thank you for the question, Rafael. Thank you, Cristiano and Ivo.

Next question, Leonardo Correa, BTG Pactual. Please, Leonardo, you may go ahead. Hi, everyone. Good morning. I'll focus my questions on the market. Leonardo, I'm sorry, excuse me. I'm going to ask you to speak up. Your audio is very low for us. Can you hear me better now? I'm having some audio issues. Yes, we can hear you. I apologize. So about coated boards to start talking about the market, Cristiano. You said you saw some signs of weakness in this market. If you could talk more about this or what you see in this issue, I think it would help. And the second question to Nicolini about Pope. We've been talking about this, but we saw clearly at the price level in China, 460, 480, maximum pressure level. The scenario has somehow changed. There have been three announcements of price increase in June and July. Apparently, it isn't completely clear to, but now in august we're waiting to see if we can transfer what was increased in june but the price is following this path but i'd like to ask nicolini if it's something that may be sustained over coming months or if you see it differently thank you thank you leonardo okay so I'll turn to Suarez directly, and we'll start talking about coated boards, and then Nicolini talks about the pulp market. Good morning, Leonardo. Thank you for your question. I apologize. My voice is a little hoarse. I have a sore throat. But on coated boards, what we've seen in terms of demand in the first quarter and the second quarter, rather, But we can see already an improvement in the scenario for the third quarter, which usually is a more active quarter with greater demand both domestically and internationally. Here in Brazil, we've also felt on the second quarter a stronger presence of imported products, especially from China. these coated boards do not compete directly with Klabeam's products, but in some ways it does hinder us a little and gives us this feeling of an enhanced competitiveness. However, we've been able to maintain price levels somewhat resilient, both in the international market and the domestic market. So that was the scenario that we saw in the second quarter. And for the third quarter now, we start to see a perspective of greater demand. Okay, so now Nicolini, please. Good morning, Leonardo. Thank you for your question. Well, actually, we start to see some positive signs coming from China, despite stocks at ports are still at high levels. What we've seen is that the inventory turnover is higher today than it was a few months ago. And that's due to two things. One is the domestic paper production that has been improving vis-a-vis a better demand over the past two months. We've also seen some announcements of the increase of unquoted papers, for example, and in the hardboard market that follows an increasing trend. And the other aspect is a replenishment of inventory. Dope inventory in the hands of paper producers is still considered low, so we have this formation of inventory, but it is worth noting that the inventory of finished products remains at normal levels. We're confident with the implementation of the price for August. That's nothing but the price announcement made in June, implemented in two stages, $15 in July and another $15 in August, bringing the price of short fiber to the level of $530 safe put. Excellent. Thank you.