Klabin S.A. (KLBN4) Earnings Call Transcript

Good morning, and welcome to Klabin's Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, and the presentation will be in Portuguese with simultaneous translation into English. Any statements eventually made during this conference call in connection with Klabin'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 Klabin. Such expectations are highly dependent on market conditions, on Brazil's overall economic performance and on industry and international market behavior and are, therefore, subject to change. With us here today are Mr. Cristiano Teixeira, CEO; Marcos Paulo Ivo, CFO; and the other company's officers. Initially, Mr. Cristiano and Mr. Ivo will comment on the company's performance during the first quarter of 2025. After that, the officers will be available to answer any questions that you may ask. Now I'll turn the floor over to Mr. Cristiano. Please go ahead.

Thank you. Welcome to our conference call discussing the first quarter of 2025. Starting with comments about our operating performance on Slide 3. We see total sales of 906,000 tons, 38% in pulp, 34% in papers and 28% in packaging. These numbers, as I was talking in the past, recently, when this becomes routine in terms of volume, it's going to be similar to 1/3 for each category. You're going to see on the new slides that I brought that looking at Klabin annually, it has more of the feature of 1/3, 1/3, 1/3. And here, seasonally, we have a period with a volume of packaging in the first quarter that tends to be below the average for the year when the peak is reached mostly in the second and third quarters. But going back to our performance, I'd like to point the conversion level, the integration actually that we have with containerboard papers of 860. I always say that this number depends on the international price for papers. This is the way we found to demonstrate to you our flexibility being able to operate both in our packaging department and industrial bags with a conversion of corrugated boxes and industrial bags in the sense of integrating more papers, depending on the cost and benefit of international markets, international prices. Another interesting point is that in the segment that we call as market paper, the coated boards and kraftliners, this trend of the volume of coated boards always with the impact of paper machine 28. The trend is for us to see a higher volume of coated board in the future, precisely with those contracts that as soon as they are implemented and the products are registered and approved, and the machines ramp-up curve, we always say that the CapEx has been done, and now we're in the process of increasing EBITDA of this volume with the ramp-up. And once it happens until we reach the company's normal levels, the trend is for the volume of coated boards to increase compared to the volume of kraftliner, at least in this operational slide. Now talking about the result, EBITDA here, what's interesting is that paper and packaging represents 63% Pulp, 37%. Paper is very important. And in this slide, in this pie chart, specifically in the pulp results, I'd like to point to the performance of fluff that is already responding to 1/3 of our pulp results. It represents 12% in volume of pulp, but 30% in our results. Considering that we have long fiber and can access markets with high added value, and I'll talk a little bit more about this in some other slides that I brought you that are new to some of you. So, moving on to Slide #4. Here, we see the breakdown and visually we bring to you. We understand that we've been provoking a change in the way we communicate with you, but always doing this very cautiously. First, talking a little bit more about operating performance. The Slide 3, we placed that opening speech, and we brought it in a more visual way so that it is easy for you to deal with these numbers. But when we look at Slide 4, an evolution of this new way of communicating with you, again, and always referring to how we do it cautiously so that we can have better and better communication. But on Slide 4, we remind you of the products that we operate in each segment. So, bringing here our partner brands where we're very honored and proud to disclose. So, on short fiber, we usually have our main clients, but we may also bring a focus in the product diversification, and we're going to evolve this presentation to also show you innovations. But in looking at the logos of the short fiber brand products, the brands that we supply and just for today, for example, on clean egg tissues in addition to short fiber and the product, there's also the presence of coated boards that's also made by Klabin in this reference. In fluff, the main reference is the major brands, especially long fiber products. The diversity of this product is incredible, considering how easy it is to operate with a product with higher added value in the fluff segment. So here, we make this reference to the high performance of our fibers, and we're going to bring you market share information, always interacting very transparently 0% of the plus market share in Brazil will always provide the market share of the Brazilian market here. Long-term partnerships with strategic partners. We're always seeking and working on long-term contracts. What makes us stand out is the fact that long fiber can be a one-stop shop for hygiene products where we are able to provide long fiber and short fiber in our products. The presence in premium segments, again, pointing at the long fiber side, noting that strategically, last year, we concluded the acquisition of a plot for long fiber here in Brazil that increased our productivity in our product portfolio and approved already, as I mentioned, in the main global brands. Now moving to Slide 5. I show you some reference of our coated boards on the top. We always mention the wide portfolio that we could have. Coated boards are a very diverse product in terms of products on shelves. These are some of the main ones here. And obviously, our containerboard as well, which is a very dynamic product in the market. We supply manufacturers of corrugated boxes in Brazil and in the world, but not only that, kraftliner today has other uses as well. And Klabin has been present in more than 50 years in various markets in Brazil and the world providing raw material to converters around the world. This is a reference to our position and always in premium markets. Our market share in the local coated board market is 40%. Our market share is close to 60% in kraftliner. The fact that we also have virgin fiber with a share of long fiber allows us to participate in products such as products for beverage, beer, milk that have a huge differential due to the long fiber. We are strongly associated with the food and beverage industry with a portfolio that is always in constant growth and also in long-term partnerships. Finally, in my first moment here with you on Slide 6, I also show you our packaging units, our packaging units with industrial bags and corrugated boxes. First, industrial bags with clients with whom we have great partnerships and the development of bags and a lot of development with our clients, important developments that as we bring you more information also in terms of innovation, this will be clearer. And in corrugated boxes, this diversity that you see here in the sector that you all know, in part, playing the role of transporting products to supermarkets, but now more and more also with that brand component, Klabin is part of the solution, bringing kraftliner paper with a higher printing quality and the product being increasingly more present in shelves as well. Here, the highlights, one of the biggest producers of industrial bags in the world. That's our reference, our benchmark as a manufacturer with 50% of market share here in Brazil, 22% of market share for corrugated boxes, noting that in our other papers business unit, containerboard, we also sell to our competitors. We are positioned in exporting resilient sectors, always tied to food and beverage or civil construction. We have a very diverse client portfolio. The share of one client in our client is managed and we always address that in a very organized way where one client cannot have a single very important effect at Klabin. So that's something that we have been following for many years. Recognized quality and service level. We have a lot of packaging systems and in the area of fruit, for example, and tobacco and others where we have equipment placed at our clients' factories, providing the full service, making the final package with equipment owned by Klabin. And finally, our strong presence in e-commerce, especially the 2 main e-commerce players in Brazil. Brazil. Klabin has a huge representativeness in corrugated boxes. So now I'll turn the floor to Marcos Ivo, and I'll come back in a second for us to conclude this first step.

Thank you, Cristiano. Good morning, everyone. On Page 7, on Slide 7, I'll give you more details for the results of the quarter. The sales volume was of 906,000 tons in the period, a decrease by 2% compared to the first quarter 2024. This reduction is explained by lower production volume due to one-off events for maintenance already addressed and resolved. I highlight that the plants are operating as usual, including with all the containerboard machines in production as highlighted in our earnings release. Net revenue in the first quarter of the year reached BRL 4.9 billion, up 10% from the same period last year. This increase was driven by higher prices for kraftliner and packaging and by the depreciation of the real against the dollar, emphasizing the benefits of Klabin's business model at the various stages of the market. The adjusted EBITDA reached BRL 1.9 billion in the first quarter of the year, up 13% as compared to the same period in 2024 with an EBITDA margin of 38%, an increase of 1 percentage point as compared to the first quarter of 2024. Let's move on to Slide 8. Total cash cost per ton was of BRL 3,335 in the quarter. The cash cost of the period was affected by lower production volume. We continue working, and we are confident in the production ramp-up for Puma II and in our initiatives toward cost optimization. We emphasize our commitment to the guidance for total cash cost per ton for 2025 according to the material fact announced on December 10 of last year. Moving on to Slide 9. Klabin ended the first quarter of 2025 with net debt of BRL 30.5 billion, a reduction of approximately BRL 2.8 billion as compared to the end of the fourth quarter of 2024. This reduction is explained by the appreciation of the real against the dollar, by receiving the first installment of the Plateau project and a positive free cash flow in the first quarter. The leverage measured by the net debt indicator over the adjusted EBITDA in dollars ended the quarter at 3.9x, stable as compared to the fourth quarter of '24 and within the parameters established by the company's financial indebtedness policy. Let's move on to the next slide, Slide 10. Klabin continues with strong liquidity, ending March at BRL 9.3 billion in liquidity. The liquidity is comprised of BRL 6.5 billion in cash and the remaining amount in undrawn revolving credit facility. We follow with a good debt profile. The average debt maturity at the end of the quarter was 88 months and the average cost of the debt in dollars of 5.7% per year. Moving on to Slide 11. Klabin delivered a sound positive free cash flow in the quarter at BRL 409 million. This result shows the current situation of the company, which is totally focused on the production ramp-up in Puma II and the discipline towards cost and CapEx and consequently generating free cash flow and deleveraging. In the last 12 months, the adjusted free cash flow totaled BRL 3.6 billion, equivalent to a free cash flow yield of 14%. Finally, Slide 12. The shareholder remuneration in the last 12 months totaled BRL 1.477 billion. This amount is equivalent to a dividend yield of 5.8%. I also highlight the approval on May 6 by the Board of Directors of dividends totaling BRL 279 million that will be paid on May 22. I give the floor back to Cristiano, who will give further details on business trends.

Thank you. So now we move to our last slide on this first part, and then we'll move on to the Q&A. I'd like to remind you again this is a thermometer form that we intend to transmit here the best way possible and transparent with the market read and the performance that we expect from Klabin for the second half of '25 compared to the first quarter of '25. So, in this first row, where we have, we call it market, it's a more neutral view from Klabin, simply looking at the market, understanding what are the trends and how we see the behavior. This is not an explicit reference in terms of price or volume. It's a combination of both. It's simply the fact of how the market is being seen as the first row. The other 2, sales volume and prices, then we do seek to provide a reference of Klabin's performance in the second quarter compared to the first. So, starting on the first row, how Klabin sees the market and the short fiber, considering everything that we've been seeing and especially bringing as the main reference in the sector, China struggling to export precisely as a result of the tariff policy implemented in these last 45, 60 days should present some difficulty to export to the United States. So how the Chinese market is going to behave if that's going to be consumed internally or exported to other markets around the world is the main question here. But right now, we see a negative trend, the low part of neutrality as we see here compared to what we can see in this first quarter. So, it's a trend of seeing a worsening in this market. That will obviously begin in China. And whether or not this will contaminate other markets depends precisely on which way this tariff policy turns to. So, there's little information, little visibility here for us to be able to discuss. Now for fluff, the result is quite the opposite, but for the same reasons, fluff, the main fluff exporter to the United States here -- actually, sorry, for China is the United States, and there will be difficulties due to the tariff policy. So Klabin at this time and any other long fiber manufacturer in the world comes up as an alternative. So, there's a trend of improvement, especially in shipments to China. China is the main driver of the pulp market without a doubt as far as market consumption and the effects here are opposite. Short fiber since it comes finished goods come out of China to the United States, we see a worse perspective than what we see today. But in terms of fluff, we see a better perspective precisely because this product will have to go to China and countries like Brazil will benefit from this. Now on papers, specifically coated boards, we see it in neutrality. This is a market also analyzing this huge tariff policy effect. And in the short term, we don't see such an effect. But probably if this continues, when we bring references in the third quarter, if the tariffs remain high, there will be an effect on coated boards. China itself will probably present coated boards with low added value due to worse technology, they're more commoditized and will be placed in other regions of the world to offset the lack of exports to the United States. And this effect carries more inertia than the short fiber pulp, but it's something we have to wait and see. Since Klabin is exposed to virgin fiber coated boards, I'm making a reference of that higher added value, especially due to technology, in that case, the effect may be positive for Klabin. As for kraftliner, here, the main question is whether the United States is entering a recession or not. we see the shipment of corrugated boxes in the United States going down. And whether this will revert into kraftliner exports, at least initially, this export volume hasn't happened as it used to happen normally. it used to be direct. There's a drop in corrugated boxes shipment in the United States. The kraftliner price goes down around the world, but this is not as clear now, especially considering production stoppages in containerboard in the United States. But definitely, the American product will be placed in alternative markets to China, for example, continuing with the same comments that I was making, especially for pulp of the products that the United States exports to China. In packaging, also on this first row, for packaging, it's a very clear segment. The peak of consumption occurs in the transition from the third to the fourth quarter between September and October, but it starts in the second quarter. The first quarter and the end of the fourth quarter are the lowest volumes. In the second and third quarters, especially the transition from the third to the fourth is where we reached peak consumption for the holidays at the end of the year in terms of corrugated boxes. So, we see a better demand in the second quarter when compared to the first. And this is simply due to seasonality. Industrial banks, we see as neutral. So, I talked about this first row. I'll repeat myself, and I apologize for repeating, but to make it clear, I was talking about the first row, market view, how we see the market irrespective of Klabin. Now, from what I'll start talking about now, the second and third rows, I'm talking about Klabin's performance. So, at Klabin, starting with short fiber pulp and sales volume, we tend to see a higher volume. So, we get out of neutrality and start to see a volume increase compared to the first quarter. This is mainly due to shipment effects. The same reason for fluff, we tend to sell and ship more in the second quarter when compared to the first, simply because of operational aspects and our commitments with clients. The trend is to have a higher volume. Coated boards are the same. kraftliner is the same. The only exception here that stays in neutrality, not a drop, but we see neutrality in the industrial bags compared to the first quarter. It's the only segment where we should sell the same or a similar shipment volume from the first quarter. So, all other segments tend to see an increase in sales volume compared to the first quarter. Now on prices, aiming towards the end of my presentation in the last row of Slide 13, we see neutrality at Klabin for short fiber, noting that Klabin has a volume in which we can focus more on the domestic market and Europe with low exposure in this case to China for short fiber. As for fluff, we see an improvement in terms of price at Klabin, where the back order or backlog will be of prices slightly worse, get out of Klabin and we start getting into the better prices. So, we see an improvement at Klabin. Coated boards, the majority of our clients are in contract. So, we also see it remaining neutral. The prices are more stable in the company in the long term. Kraftliner, based on that comment that I made of where we see the United States placing an excess of paper that they don't no longer export to China. And at Klabin, since we work with a low back order, we should probably start feeling an effect in terms of price of the shipments that will have an effect on the average price for Klabin as well, at least at that moment. Corrugated boxes, large contracts, some of them expiring the contract, there's a slight improvement in the second half compared to the first, but these are already contracts already signed with our clients. And industrial bags, with the mix, we see it slightly below neutrality. Some downward trend compared to the first quarter, a lot more due to mix rather than the drop on product price. Quite the opposite. We have been able to place it as the main benchmark. But on the other hand, that also includes industrial bags. We've been able to add the inflation, include the inflation to our prices, specifically on corrugated boxes. For some years now, I would like you to please look into this. The price in U.S. dollars of corrugated boxes in recent years and the price makeup has been showing a very positive behavior, and this is in line. If we were to analyze it strategically, this is in line with what we've been seeing in consolidation of the sector, noting that we had consolidation of international paper and in the past by Klabin in the recent past. There's also consolidation of Smart U.S. rock with Smart more recently, the market has been consolidating and the dollar price of corrugated boxes have been more competitive in Brazil compared to other periods that we saw in the past. And the re-composition of price above the inflation has been seen. So, we've been able to gain market share and convert most of our papers showing stability just as in the coated boards, the price stability at Klabin. So, with this, I conclude the fourth part, and we'll move on to the Q&A. Thank you very much.

[Operator Instructions] Our first question, Rafael Barcellos, Bradesco, BBI.

My first question is to Cristiano. I'd like to hear your view about the company's operational moment. If you could talk a little bit more about the nonrecurring maintenance stoppage at the pulp operation, especially how much you expect in terms of production for the year? And still talking about operating performance, what's your assessment of the paper machine 28 and its performance. And here specifically, I'd like to understand about the production mix for PM28 as you see it for the year, especially the volume of coated boards, how much we should expect considering the market challenges that you addressed about the increase of Chinese exports and so on. So that's my first question. My second question is more on corrugated boxes aimed towards Douglas. I caught my attention that in the market thermometer in your presentation, you say the demand is neutral. But when we look at compared to the dashboard of last quarter, it seems that the demand expectation improved a little bit. So, Douglas, if you can tell us a little bit more about this environment of higher interest rates, whether or not it affects your order portfolio and how you feel the client sentiment and this reading that the perception has improved or not, if I'm right or if it's more a seasonable thing? And finally, if it's possible, Cristiano was talking briefly now about this price re-composition, but there was also over past years, a margin re-composition as well in the corrugated boxes industry. So, if you can talk about the dynamic of the OCC, that would be good for us to understand profitability.

Thank you, Rafael. Douglas is on standby here, but I'll start answering your first question. So, in operational terms, we have a good expectation for the year. despite issues that we had at the beginning of the year. So, we see 200,000 tons of total production in Klabin in '25 compared to '24. So, the perspective is positive. The outlook is positive. The one-off issues occur, and this is not restricted to Klabin. You know the industry quite well. They are complex sites. I'd like to remind you that we have a plant that's one of the most complex in the world in Ortigueira, it's a plant that has a reputation of being one of the most competitive in the world in all products that they operate, but it does bring difficulties in the beginning, especially when operating a machine as complex as PM28. This is not structural. This is solved. Those were temporary issues and so much so that you saw in Marcos Ivo's presentation when he talked about the pursuit of the cash cost guidance of the year remaining the same. We shall continue to pursue this. And at the end of the year, we'll deliver the reference of cash cost between BRL 3,100, BRL 3,200 exceeding what we saw in the first quarter, especially in particular, due to the operational issues that are sorted and solved throughout the year. So, we'll have a good year in terms of operations with 200,000 tons at Klabin more than what we saw in 2024. Paper Machine 28, the performance is going well. The machine is a high-tech machine for coated boards. It's the machine with the highest number of sensors, not only owned by Klabin, but it's a worldwide reference. It's a very modern machine prepared to make the highest technology products, as you know, in liquid packaging, that's the high end in our industry. The machine continues along with the transition. We started with containerboards in this machine, and we're working on the transition for coated board. Once it gets approved, there's no concern here, quite the opposite. Klabin is a robust company, a company that today, if we look at decades, it's much more robust and diverse considering our product portfolio, white coated boards, brown coated boards, we're approved in the main brands of the world in all of our products. Klabin presents itself as a very robust company in terms of operations, cash costs increasingly more competitive and with an increasingly better vision is transmitted to you so that you can do your math. And so, it's a positive operational moment for Klabin right now. I'll turn the floor to Douglas, and he will talk about corrugated boxes.

Thank you, Chris. Rafael, I'll take a step back and talk a little bit about '24 to put 2025 into context. So '24, the market grew a lot in square meters, more than 5%, and we grew more than 6%. We gained market share at Klabin. So how do we see 2025? We're coming from a market with a high level of consumption. The year began more stable with a slight drop in the first 2 months. But in March, we already saw growth in the market, and we're talking about international paper was stable, closed the first quarter stable, which is a very good indication because last year, there was a very high level of growth compared to '23. Klabin in this first quarter was able to -- with our portfolio to see an increase in market share. We grew more than the market as the market remains stable. As I said, we grew 1.6%. And how do we see price? Well, price, we've been able to include the inflation and recompose the margin as well. And as has been happening in recent years. So, the weakest quarter of the year, stable market growing more, and we went through this weakest moment quite well. The coming quarters, the coming months and the year with Brazil with low unemployment rates, and we don't anticipate any issues, any problems. It's quite the opposite. The next quarters are stronger, and we see a very good year ahead of us. So, with the continuity of passing through prices above inflation in the market in coming quarters, stronger than the first quarter and Klabin gaining market share. So, we see 2025 as a very good year for packaging.

Next question. Tathiane Candini, JPMorgan.

The first question is just a follow-up from the previous question. When we talk about operational stability in pulp. Obviously, we understand the stabilities are recurring, and they may occur at a given quarter, but they are a bit more expressive in the first quarter. If I'm not mistaken, there was a maintenance stoppage at the end of the year. It's about that machine. Is there any advance of this maintenance stoppage thinking about this higher stability in the first quarter? Or was it actually solved, and the schedules maintained? And the second question is about leverage. we saw a significant reduction of the company's leverage this quarter. And I'd like to understand, I think it's something that we discussed extensively in our last conversations last quarter. But I'd like to understand whether there's any change in your positioning in terms of new investments or which parameters you're monitoring and -- or if the view remains of thinking of more investments starting as of 2027.

Thank you, Tathiane. No, there's no reason to anticipate or advance any stoppage, quite the opposite. The planning remains normal. The production curve is unfolding, and this is not restricted to Klabin. But there's nothing structural, no concerns, and there will be no change in our plan. There's no reason for that. As for the CapEx allocation or capital allocation view, new investments, nothing is going to change. We'll remain in this line of deleveraging, very confident with the free cash flow that we'll generate in the next 18, 24, 36 months, it will be robust cash generations at Klabin and free cash flow and deleverage will happen precisely due to that. So, there is no change in the company's view.

Our next question comes from Daniel Sasson from Itau BBA.

My first question is for Nicolini. He's quiet today. Nicolini, we've seen in recent weeks a very important movement among the producers of pulp, divulging drops in the prices, especially in the resale market for pulp below $500. If you could comment on the dynamics, you've seen and especially if you think that the lower volumes for the prices of pulp, the $550, for example, mentioned by some producers or the $500 on resale, if that would be enough to stimulate this comeback of the demand, especially from China. I think that's an important point. Or if you think that the problem is larger due to the uncertainties of what will happen to the production levels in China due to trade war and not so much related to affordability. So, I think that would be interesting. And my second question, you have already talked about the paper machine 28 and the expectation of converting kraftliner to coated board. Chris, if you could just remind us what is missing to ratify with the main clients or with your main one. I think that the expectation was to have this already happened or we used the curve for the shift of coated boards that you gave in '23, '24. There was a speeding up of the process. It might take more time. I want to better understand today how confident you are in terms of this migration to be done as fast as possible for a high value-added product.

Thank you, Sasson. Nico is quiet because nobody had asked him any questions, but he's right beside me. He will answer. I'll come back for the second question.

Thank you for your question. Like Cristiano said, it is a challenging moment. We have to be cautious due to China and all the circumstances of tariffs. However, the price adjustment made by a Latin American producer in April helped to have volumes for that month to flow better than what happened in March. In terms of resale, I've already said that here. The volume in resale is very low. It could even be used as a benchmark, but it is a low volume as compared to the volume that comes from the market. Talking about prices in the short term, we don't see an abrupt drop as we've seen, not below $500, for example, and for some reasons, one of which is what involves the long fiber price and the price levels in China for long fiber are price levels that don't bring margins for Nordic manufacturers or Canadian ones. That should limit or set basis for what has already been known, and we have seen this in recent years. If the price of the long fiber drops more than what we expect, and we don't see this happening right now, it will cause like the closure of some capacity. We've seen a Nordic manufacturer announcing a downtime of 5 weeks for maintenance and to remove market volume, especially because the current prices do not bring specific margin for this producer who has a new plant that is very competitive. Another important point, in spite of the marginal cost of production in China being below $500 today, it is valid for producers with new machinery. Those with old machinery still have a margin manufacturing cost above $500. If the prices reach this level, producers will be integrated and will start consuming the market pulp and not their own pulp. So, this is a challenging scenario that we need to be more cautious, but we don't see a more abrupt drop than what we've seen.