Klabin's Q3 earnings stumble 40% year-over-year to 197M reais, hurt by foreign exchange variation, higher operating costs; Q3 net revenue up 11% from year ago, to 1.2B reais, on 3% year-over-year increase in sales volume, to 453,000 tonnes
October 29, 2013
The United States dominated the international headlines in the third quarter. Tensions in Syria, the extension of the bond buyback program and the budget negotiations in Congress unsettled the international markets, generating excessive volatility. However, these factors did not jeopardize the year-to-date strengthening of the US economy or the slow recovery of the Eurozone.
In Brazil, second-quarter GDP exceeded market estimates, diminishing the pessimism triggered by the weak indicators in 2012 and raising expectations for 2013. After the real fell to its lowest level since 2008, the government implemented an exchange rate policy to control the appreciation of the dollar and maintained its ongoing policy of curbing inflation, increasing the Selic benchmark rate to 9.5% in October. Despite the structural and trade balance problems this year, these measures partially restored market confidence, reflected in the recent appreciation of the real and the reduction in inflation over 2012.
The signs of a domestic market slowdown observed at the end of 2Q13 dwindled throughout the third quarter and the packaging paper market maintained the upward trajectory apparent in the first half. According to the Brazilian Association of Pulp and Paper Producers (Bracelpa), national demand for coated boards, excluding liquid packaging boards, increased by 3% year-on-year in the first nine months of 2013. In the same period, according to the Brazilian Corrugated Boxes Association (ABPO), the corrugated box market also grew by 3%.
International kraftliner list prices maintained the upward trend observed in previous quarters, reaching €595/t at the close of September, according to the FOEX index, and averaging €594/t, for the quarter, 9% up on 3Q12. The period increase in the average exchange rate increased the competitiveness of domestic products and continued to inhibit finished product imports. This scenario of solid markets in Brazil and growing export revenue thanks to the appreciation of the dollar allowed the Company to benefit from its diversified mix of markets.
Third-quarter sales volume moved up by 3% year-on-year to 453 thousand tonnes and Klabin recorded net revenue from sales of R$1,203 million, 11% up on 3Q12. Domestic sales remained flat, while the appreciation of the dollar and the increase in international prices pushed up export volume and revenue by 12% and 30%, respectively.
Most of the upturn in sales volume was allocated to the paper and coated board export markets. As a result, domestic paper transfers to the conversion units, which increased in 2013, were relatively unaffected. Converted product sales moved up by 7%, while paper unit sales remained flat.
Productivity and efficiency levels improved in 3Q13, after the scheduled maintenance stoppages at the Monte Alegre (PR) and Otacílio Costa (SC) plants in 2Q13.
In addition, the strategic composition of the product and market mix, favored by higher dollar prices in the quarter, once again fueled the Company's performance, increasing adjusted EBITDA by 14% over 3Q12. In this context, Klabin has been consolidating sustainable cash flow growth every quarter, culminating in the ninth consecutive quarterly upturn and record LTM EBITDA of R$1,504 million.
In mid-August, the real reached R$2.44/US$, its lowest level since December 2008. As a result, the average exchange rate was 11% higher than in the previous three months and 13% more than in 3Q12. However, at the end of August, with the announcement of daily dollar auctions by the Brazilian Central Bank, the real gained strength and closed the quarter at R$2.23/US$, very close to the R$2.22/US$ recorded at the end of 2Q13. This scenario helped Brazilian exporters due to the higher average exchange rates throughout the quarter and the low accounting impact on their dollar-denominated debt.
Operating and financial performance
Sales volume moved up in the third quarter, led by exports, which increased by 12% year-on-year and whose share of the total widened from 28% to 31%, as expected, thanks to the improved export conditions. Total volume, excluding wood, increased by 3% to 453 thousand tonnes.
On the domestic market, where sales volume remained flat in relation to 3Q12, sales of higher added value converted product sales (corrugated boxes and industrial bags) moved up by 7%. Paper sales (kraftliner and coated boards) fell by 11% due to the increase in domestic kraftliner transfers to the conversion units and the expected upturn in export volume.
Year-to-date sales volume totaled 1,313 tonnes, 2% more than the 1,290 tonnes recorded in 9M12.
Mainly due to the upturn in exports and the change in product mix, third-quarter net revenue, including wood, increased by 11% over 3Q12 to R$1,203 million, influenced by more favorable export market conditions. Net revenue from paper sales grew by 8%, while net revenue from converted products increased by 13%.
Net revenue from exports came to R$313 million (US$137 million), 30% up on 3Q12, primarily reflecting the upturn in sales volume, the more favorable exchange rate and higher international kraftliner prices. Net revenue from domestic sales, which accounted for 74% of total net revenue in the quarter, increased by 5% to R$890 million.
In the first nine months, net revenue grew by 9% over 9M12 due to higher sales volume and the improved sales mix.
Pro-forma net revenue, including Klabin's portion of revenue from Florestal Vale do Corisco S.A., came to R$1,219 million in 3Q13 and R$3,406 million in 9M13.
The improved mix also impacted the regional distribution of net revenue in 9M13, and Latin America became the most representative market, accounting for 49% of the total, versus 46% in the same period in 2012.
Operating Costs and Expenses
Conversion pushed up the share of higher added value items, which also have higher costs, in the Company's production mix. Consequently, the increased sales of converted products were reflected in higher costs throughout the current year and the 3Q13 unit cash cost totaled R$1,737/t, 6% more than in 3Q12.
In addition to the change in the production and sales mix, the foreign exchange variation and inflation pressured the price of certain cost components, such as scrap, chemicals, pulp and freight during the comparison period.
There were no significant non-recurring effects on the cash cost in the third quarter.
The cost of goods sold (COGS) came to R$835 million in 3Q13, 17%, more than in 3Q12. In addition to the upturn in the unit cost, COGS was impacted by the 41% increase in depreciation, depletion at fair value and amortization, as well as the 3% upturn in sales volume.
Selling expenses totaled R$93 million, 13% more than in 3Q12. Given that most of these expenses are variable in nature, the year-on-year upturn was proportional to the period revenue increase. Selling expenses represented 7.7% of 3Q13 net revenue, versus 7.5% in 3Q12.
Administrative expenses amounted to R$73 million, 2% down year-on-year due to non-recurring expenses with indemnifications in 3Q12.
Other operating revenue (expenses) resulted in revenue of R$0.8 million in 3Q13, versus revenue of R$1.2 million in 3Q12. There were no non-recurring impacts.
Effect of the variation in the fair value of biological assets
In 3Q13, the effect of the variation in the fair value of biological assets was a gain of R$148 million, due to the higher volume of wood recognized at fair value.
The effect from the depletion of the fair value of biological assets on the cost of goods sold was R$137 million in 3Q13.
As a result, the non-cash impact of the variation in the fair value of biological assets on operating income (EBIT) was a loss of R$11 million.
Operating Cash Flow (EBITDA)
The privileged positioning of Klabin's product mix in Brazil and abroad played a fundamental role in the quarter, allowing the Company to benefit from the increase in the average exchange rate, which pushed up export revenue, as well as seasonality in the domestic market. This strategic market positioning generated a consistent increase in net revenue over the same period last year, reflected in EBITDA growth, despite pressure on production costs from inflation and the upturn in the dollar.
Operating cash flow (adjusted EBITDA) came to R$426 million in the third quarter, with an adjusted EBITDA margin of 35%. This figure includes Klabin's share of Florestal Vale do Corisco Ltda. totaling R$9 million.
Indebtedness and Financial Investments
Gross debt stood at R$6,013 million on September 30, very close to the R$6,094 million recorded at the close of June. Of this total, R$4,215 million, or 70% (US$1,890 million) was denominated in dollars, primarily export pre-payment facilities.
Cash and financial investments closed the quarter at R$2,418 million, exceeding financing amortizations in the next 27 months. The payment of dividends and suppliers impacted cash and cash equivalents in the quarter, which fell by R$239 million.
Consolidated net debt totaled R$3,595 million on September 30, R$158 million more than the R$3,437 million recorded on June 30, mainly impacted by dividend payments of R$140 million in the quarter. Despite the dollar appreciation, the exchange rate closed at R$2.23/US$, virtually flat in relation to the previous quarter and with little impact on dollar-denominated debt. The net debt/adjusted EBITDA ratio stood at 2.4x, identical to the 2Q13 figure.
The average maturity term came to 39 months (30 months for local currency debt and 43 months for foreign-currency debt). Short-term debt accounted for 19% of the period total and the average borrowing rates in local and foreign currency stood at 7.06% p.a. and 4.66% p.a., respectively.
Financial expenses totaled R$104 million in 3Q13, 10% lower than in 3Q12.
Financial revenue came to R$55 million, versus R$76 million in 3Q12, mainly due to the period reduction in the cash position. Financial revenue climbed by 15% over 2Q13, impacted by the increase in interest rates throughout the year.
Despite the third-quarter volatility, the exchange rate closed September in line with June. As a result, the net foreign exchange variation was negative by R$40 million. Note that the exchange variation has an exclusively accounting effect on the Company's balance sheet, with no significant cash effect in the short term.
The 3Q13 financial result, excluding the exchange variation, was a net expense of R$49 million, versus an expense of R$39 million in 3Q12.
BUSINESS UNIT - FORESTRY
The increase in the U.S. construction industry indices and the dollar appreciation in 2013 continued to fuel wood product exports by Klabin's clients. Improved harvesting and transport conditions pushed up log production, with a direct impact on third-quarter sales.
As a result, log sales to third parties moved up by 6% over 3Q12, reaching 794 thousand tonnes. In addition to sales volume growth, higher wood prices throughout 2013 increased net revenue from wood sales, which totaled R$91 million, 17% up on 3Q12.
Wood sales in the first nine months fell by 3% year-on-year, chiefly due to excessive rainfall, which affected harvesting in the first half. Nevertheless, revenue from these sales moved up by 6% in the same period.
BUSINESS UNIT - PAPER
According to FOEX, international kraftliner list prices averaged €594/t in the third quarter, 9% up on the 3Q12 and the highest figure since April 2011. Similarly, mainly due to higher domestic demand for corrugated boxes, the continuous increase in scrap prices throughout the year increased kraftliner prices in Brazil.
Net revenue increased by 14% over 3Q12 to R$153 million. Kraftliner sales totaled 93 thousand tonnes in 3Q13, 2% down year-on-year, due to higher internal transfers to the conversion units. However, given improved conditions on the export market, the depreciation of the real against the dollar and higher international prices, kraftliner export volume increased by 24%, pushing up export revenue by 59%.
In the first nine months, the strategy of increasing kraftliner transfers to the conversion units, together with the improvement in the market and product mix, generated sales of 261 thousand tonnes, 9% down on 9M12, while net revenue grew by 8% to R$411 million.
The improved export market conditions and the appreciation of the dollar against the real also influenced the third-quarter coated board mix. Given this scenario, exports of coated boards, including liquid packaging boards, moved up by 6% over 3Q12 to 77 thousand tonnes, while domestic sales fell by 5% to 97 thousand tonnes.
As a result, total sales volume came to 174 thousand tonnes, stable in relation to the same period last year, while net revenue grew by 6% to R$427 million.
According to Bracelpa, year-to-date domestic demand for coated boards, excluding liquid packaging boards, increased by 3% over 9M12, reaching 500 thousand tonnes, unchanged from the same period last year, while net revenue climbed by 6% to R$1,178 million.
BUSINESS UNIT - CONVERSION
The third-quarter increase in overall exports, especially by the meatpacking and fruit industries, favored the competitiveness of virgin fiber in the production of corrugated boxes and boards, given the restrictions on using recycled paper in contact with food. Similarly, the upturn in packaged product exports reduced domestic scrap supply. As a result, according to Anguti Estatística, O.C.C. (old corrugated containers) prices continued to increase, exceeding R$500/t in September and recording year-to-date growth of 36%. It is also worth noting ABPO's preliminary figures, which showed to corrugated box export growth of 2.7% in 9M13 over the same period last year.
In regard to Klabin's industrial bag unit, Brazilian cement sales increased by 2.3% year-to-date over 9M12, according to the National Cement Industry Association (SNIC). It is worth noting that in the Northeast, an important market for the Company, sales moved up by 6%. As a result, Klabin will transfer an industrial bag line to its plant in Goiana (PE), expanding production from the current 14 million to 20 million bags per month. In addition, the new sack kraft machine in Correia Pinto will come on stream in November 2013, producing lower-density paper as of 2014, thereby enabling production of industrial bags for new markets.
Combined with the Company's strategy of increasing transfers for conversion, this market recorded sales volume of 175 thousand tonnes and net revenue of R$518 million, 7% and 13% up on 3Q12, respectively. Year-to-date sales totaled 518 thousand tonnes, with revenue of R$1,494 million, up by 9% and 13%, respectively, over 9M12.
Klabin invested R$270 million in 3Q13. Of this total, R$88 million went to the continuity of mill operations, R$27 million to forestry operations, R$13 million to special projects, R$105 million to expanding sack kraft and recycled paper-making capacity and R$36 million to the Puma Project.
Investments in the first nine months totaled R$616 million, R$256 million of which went to projects to expand paper production capacity.
The new sack kraft machine in Correia Pinto (SC) is already in the test phase and start-up is still programmed for mid-November, on schedule and within budget.
In the Northeast, the foundations of the new recycled paper machine at the Goiana Unit have been laid.
As for the Puma Project, the Company has concluded 40% of the earthmoving works in Ortigueira (PR) for the installation of the new pulp plant.
On October 21, 2013, the Company published a Material Fact announcing that the Board of Directors had decided to proceed with the capitalization process for the construction of a new hardwood and softwood pulp plant in Ortigueira (PR), the so-called Puma Project.
The Board of Directors decided to call shareholders' meetings to resolve on the controlling shareholders' proposal to create a Units program and list the Company on the BM&FBovespa's Corporate Governance Level II trading segment, as described in the Material Fact of June 11, 2013. These meetings will be called within 15 days as of the disclosure date of the material fact (October 21, 2013).
Klabin also altered the estimated industrial investment amount to R$5.8 billion after updating the scope, revising the suppliers' proposals and taking account of the variation in the exchange rate. It will also expend R$0.8 billion on recoverable taxes on equipment and R$0.6 billion on infrastructure, also recoverable via ICMS credits.
In addition to the capitalization, the project will be financed by the BNDES and the International Development Bank (IDB), as well as multinational export agencies (ECAs). Recently, the Puma Project obtained provisional funding of up to R$4 billion from the BNDES and US$300 million from the IBD, whose final approval is tied to the success of the capitalization.
Klabin's preferred shares (KLBN4) appreciated by 5% in 3Q13, while the Ibovespa index moved up by 10%. Klabin stock was traded in all sessions of the BM&FBovespa, registering 403,000 trades involving 187 million shares, giving average daily traded volume of R$33 million, 11% down on the previous quarter.
Klabin's capital stock is represented by 918 million shares, comprising 317 million common and 601 million preferred shares. Klabin stock is also traded on the U.S. over-the-counter market as Level 1 ADRs, under the ticker KLBAY. Dividends The Board of Directors' Meeting of July 25, 2013, approved the distribution of dividends totaling R$140 million, corresponding to R$148.21 per lot of one thousand common shares and R$163.03 per lot of one thousand preferred shares. Payment began on August 15.
Industry Intelligence editor's note: In an omitted table, the company reported Q3 earnings of 197 million reais. For the same period a year ago, the company reported earnings of 331 million reais.