Arauco's Q2 net income down 65.3% year-over-year to US$63.5M, mainly due to a 34.2% decrease in gross margin; net sales down 12.3% to US$1.04B, affected by lower average pulp prices, lower panel volume sales

SANTIAGO, Chile , August 30, 2012 (press release) – HIGHLIGHTS

  • Arauco’s consolidated sales reached U.S.$ 1,036.7 million during the second quarter of 2012, an increase of 2.6% compared to the U.S.$ 1,010.4 million obtained in the first quarter of 2012. This increase is mainly explained by higher sales of our pulp division by 7.0%
  • During the second quarter of 2012, consolidated Adjusted EBITDA reached U.S.$ 229.4 million, an increase of 20.2% compared to the U.S.$ 190.9 million Adjusted EBITDA obtained during the first quarter of 2012
  • Arauco’s consolidated net income for the second quarter of 2012 reached U.S.$ 63.5 million, an increase of 21.9% compared to the U.S.$ 51.4 million obtained in the first quarter of the year, mainly explained by higher sales of 2.6% or U.S.$ 26.3 million and a decrease of Other operating expenses of 61.4% or U.S.$ 21.0 million and lower financial cost of 22.0% or U.S.$12.8 million. Those effects were partially offset by a decrease in Exchange rate differences of U.S.$ 27.8 million when compared with the previous quarter
  • Capital expenditures during the second quarter of 2012 reached U.S.$ 197.2 million, a decrease of 30.7% when compared to the U.S.$ 284.7 million invested during the first quarter of 2012

Consolidated Sales

Arauco’s consolidated sales for the second quarter of 2012 reached U.S.$ 1,036.7 million, 2.6% higher than the U.S.$ 1,010.4 million obtained during the first quarter of 2012, mainly due to higher sales of pulp and forestry which increased 7.0% and 34.6%, respectively.

Compared to the U.S.$ 1,193.1 million obtained in the second quarter of 2011, consolidated sales were 13.1% lower during the second quarter of 2012.

Production

During the second quarter of this year, production volume decreased 4.1 % in our pulp division mainly due to a programed maintenance stoppage in our Constitution and Licancel mills in May and April respectively. Production volume in our panels division increased 8.8% when compared with the first quarter of 2012 mainly as a result of the Moncure production consolidation. Sawn timber division increased 10.0% when compared with the last quarter due to Argentina production in this first period of the year was lower as a result of the accident in our Piray energy plant in January 2012, that impacted sawn timber production.

Compared to the second quarter of 2011, production volume decreased 0.6% in our pulp division.Our panels production decreased 18.9%, caused by the Curitiba particleboard mill closure in December 2011 and destruction of the Nueva Aldea plywood mill in January 2012

EBITDA

Consolidated Adjusted EBITDA for the second quarter of 2012 was U.S.$ 229.4 million, 20.2% higher than the U.S.$ 190.9 million reached during the previous quarter. The main reason of this increase can be explained by accounting effect of the insurance claim of U.S.$ 17.1 millon received in April 2012.

Consolidated Adjusted EBITDA for the second quarter of 2012 was 39.3% lower than the U.S.$ 360.7 million reached in the same period of 2011.

Operating Income

Arauco’s consolidated operating income during the second quarter of the year reached U.S.$ 72.0 million, a decrease of 7.3% or U.S.$ 5.7 million compared to the U.S.$ 77.7 million obtained during the first quarter of 2012. This is explained mainly by a higher Administrative Expenses and Distribution Costs of 15.4% or U.S.$ 15.9 million and 3.2% or U.S.$ 3.3 million, respectively and partially offset by a higher Gross Profit of 4.7%.

During the second quarter of 2012, Arauco’s consolidated operating income was 67.8% or U.S.$ 152.4 million lower than the U.S.$ 224.4 million reached in the same quarter of 2011. This is a consequence of a decrease in Gross Margin by 34.2% or U.S.$155.7 million and an increase in Administrative Expenses by 10.1% or U.S.$ 10.9 million, partially offset by lower Distribution Costs of 11.9% or U.S.$ 14.6 million.

In terms of costs, the second quarter of the year had an increase in unitary costs of sales for bleached softwood, eucalyptus short fiber and unbleached softwood of 2.5%, 3.0% and 12.3% respectively when compared to the first quarter of 2012.The unbleached softwood unitary cost increase of 12.3% can be mainly explained by Constitución and Licancel programated mantenance stoppage in May and June respectively.

Net Income

Net income for the second quarter of 2012 reached U.S.$ 63.5 million, an increase of 21.9% or U.S.$ 11.4 million compared to the U.S.$ 52.1 million obtained in the first quarter of the year. This is mainly explained by higher sales of 2.6% or U.S.$ 26.3 million, a decrease of Other operating expenses of 61.4% or U.S.$ 21.0 million, other incomes of U.S.$ 16.3 million and lower financial cost of 22.0% or U.S.$12.8 million. Those effects were partially offset by a decrease in Exchange rate differences of U.S.$ 27.8 million when compared the negative Exchange rate difference of U.S.$ 17.0 million reached in the second quarter of 2012 with a positive U.S.$ 10.8 million reached in the first quarter.

Compared to the U.S.$ 183.1 million obtained in the second quarter of 2011, consolidated net income was 65.3% lower during the second quarter of 2012, mainly due to a 34.2% or U.S.$ 155.7 million decrease in Gross Margin.

REVIEW BY BUSINESS SEGMENT

1- Pulp Division

Pulp sales reached U.S.$ 507.6 million (including energy sales) for the second quarter of 2012, an increase of 7.0% compared to the previous quarter. This increase was mainly due to higher average prices and volume sales of 3.0% and 1.1% respectively.

When compared with the U.S.$ 612.7 million (including energy sales) reached in the same quarter of 2011, pulp sales decreased 17.1%. This decrease is mainly explained by lower average prices of 20.2%. and partially offset by higher sales volume of 3.1%.

The trend observed during the first quarter of 2012, that is, a moderate increase in prices of softwood and hardwood, changed during May and June. Excess of supply and less paper production in some regions put pressure to the market, and in the most important markets all the recovery gained during the first quarter was lost during the second quarter. A difficult market with lower prices is generally expected during the Northen Hemisphere summer season, paper production in general is lower during July and August, limiting the demand for pulp during the months of June and August. This seasonal effect occurred earlier than normal, and with a sharper decline when compared to the previous 3 years.

China was not the exception, putting a downward pressure to prices in May more aggressively. Chinese paper producers faced less demand and were forced to decrease their production rates, stop production lines for certain periods of time and adjust “commodity” paper inventory levels. In specialty paper or tissue, the situation was better in terms of demand, however, pulp prices still decreased due to higher pulp supply. This higher pulp supply did not only occur because of less demand for commodity paper, but also because of an important pulp supply increase coming from Scandinavian countries that have not been able to sell its pulp production in Europe. This is the main reason why the most impacted grade was softwood. In long fiber, prices in China decreased nearly 10% and in short fiber 4%. This occurred generally in all Asian markets that follow China.

Europe has followed a similar trend, but there are additional factors that negatively impacted the market, that is, favorable exchange rate for Euro zone pulp producers and demand in practically all paper grades that declined or remained stagnant, even in tissue. Long fiber supply, Scandinavian’s main pulp grade produced, increased caused by integrated paper mills that stopped its paper production due to low demand and prices, and continued its pulp production which was additional supply sold in the market. For this reason long fiber pulp prices have been under pressure, leading to prices below those of short fiber, a situation not seen in the last several years. Most part of short fiber is imported to the Euro zone, so there are no relevant short fiber producers with costs in Euros that leverage the Euro-US Dollar exchange rate as a sales tool.

In North America the printing and writing paper demand decreased, and production for specialty paper was replaced for imports, while tissue paper demand grows moderately. The market is stable but follows global price trends.

Latin America is the region with best prices and in the current situation the gap is above 10%, however, it is still a small market that may not shift much its volume.

2- Sawn Timber Division

Compared to the U.S. $188.8 million sold during the first quarter of 2012, sawn timber sales decreased by 6.9% during the second quarter of the year, reaching sales of U.S. $175.8 million. This decrease was mainly due to lower average prices and volume sales of 5.1% and 1.9% respectively.

When compared with the same period of 2011, sawn timber and remanufactured wood products sales decreased 5.3% or U.S.$ 9.9 million, mainly due to an decrease in average prices of 1.5% and lower sales volume of 3.8%.

The real estate and construction sectors in the United Sates have shown a positive upward trend during the second quarter of year 2012. The housing starts index reached in June 760,000 units per year, that is, a 6.9% increase compared to May. Current construction levels, however, continue to be low when compared to the average of the past ten years. During the second quarter of 2012 the sales price of moldings improved when compared to the first quarter of this year.

3- Panels Division

Panel’s sales (including energy sales and consolidation of Moncure) reached U.S.$ 299.7 million in the second quarter of this year, a decrease of 1.6% when compared to the U.S.$ 304.5 million obtained in the first quarter of the year. Compared with the previous quarter, prices remained relatively stable with a decrease of 0.3%. Without considering volume sales of our new Moncure unit, sales volume decreased 5.5% mainly explained by lower sales of plywood as a result of the Nueva Aldea fire, and particleboard due to the Zarate mill stoppage in May.

Compared with the same quarter of 2011, sales were 12.9% lower. This decrease in sales can be explained by lower volume sales of 26.2% (without considering volume sales of Moncure) and lower average prices 1.5%.This is mainly explained by a decrease of 46.0% in plywood volume sales to end clients, respect to the same period of 2011, mainly caused by the Nueva Aldea fire in January.

On the other hand, our MDF moldings products had an increase of 14.3% in volume sales comparing with the first quarter, that is greatly explained by an increase in sales to the USA.
Particleboard panels sales volume had a decrease of 40.7% compared to the same period of 2011, mainly caused by operational issues at our Zarate mill in Argentina and the closure of our Curitiba mill in Brazil.

Hardboard panels sales volume stood at similar levels than that of second quarter 2011. The strong demand for hardboard products was contrasted by a limited world supply, which is causing a price increase with respect to last year.

BALANCE SHEET ANALYSIS

Assets

Current Assets

Current assets reached U.S.$ 2,582.7 million at the end of the second quarter of 2012, a decrease of 9.3% or U.S.$ 264.6 million compared to the U.S.$ 2,847.2 million obtained in the first quarter of 2012. When compared with the U.S.$ 3,187.1 million reached in the same period last year, there was a decrease of 19.0% or U.S.$ 604.4 million.
  • Cash and cash equivalents:
As of Jun 2012 our cash balance reached U.S.$ 470.8 million, a decrease of 12.5% or U.S.$ 67.1 million when compared to the U.S.$ 538.0 million reached in the previous quarter, mainly due to a negative Cash flow used in Investing Activities of U.S.$ 200.7 and partially offset by a positive cash flow from Operating and Financing activities of U.S$ 81.2 and U.S.$ 56.4 million respectively.

When compared to the second quarter of 2011, there was a decrease of 34.7% or U.S.$ 250.4 million. This was mainly due to the payment of U.S.$ 387 million from our Yankee bonds due in September 2011, our capital contributions to Montes del Plata, and our Moncure and Vale do Corisco investments (both totalling approximately U.S.$ 288.0 million), partially offset by the issuance of U.S.$ 500.0 million in bonds, U.S.$ 232.0 million aproximately of local bond and U.S.$200.0 million in other long term loans.
  • Accounts receivables:
Accounts receivables reached U.S.$ 762.1 million during the second quarter of 2012, a decrease of 9.3% or U.S.$ 78.6 million compared to the first quarter of the year. This decrease in part is explained by the reduction of insurance claim receivables for damages of the Nueva Aldea panel mill caused by the January 2012 fire. When compared to the same quarter of 2011, accounts receivables decreased 19.6% or U.S.$ 185.9 million.

Non Current Assets

Non current assets reached U.S.$ 10,350.5 million at June 2012, a decrease of 1.5% or U.S.$ 150.5 million compared to the first quarter of the year. When compared with the U.S.$ 9,650.7 million reached in the same period last year, there was an increase of 7.3% or U.S.$ 699.8 million.

Financial Debt

Arauco’s consolidated financial debt as of June 30, 2012 reached U.S.$ 3,951.2 million, an increase of 7.8% or U.S.$ 284.3 million when compared to March 2012. This increase is mainly explained by the issuance of a U.S.$ 232.0 million approximately of a Local bond in April 2012.

When compared to June 2011, our financial debt increased 14.5% or U.S.$ 499.1 million. This was mainly due to the issuance of the U.S.$ 500 million 144A/RegS in January 2012, a bank loan for U.S.$ 200.0 million obtained in December 2011 and the issuance of a U.S.$ 232.0 Local bond in April 2012, partially offset by the payment of Yankee bonds of U.S.$ 387.0 million in September 2011.

Our consolidated net financial debt increased 11.2% or U.S.$ 351.4 million when compared with March 2012. Compared with the same quarter of 2011, our consolidated net financial debt increased 27.4% or U.S.$ 749.5 million.

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