Arauco's Q4 net income drops to US$45.5 million from US$81.7M a year ago, sales up 5.6% to US$1.27B; company says figures now include 50% proportional consolidation of jointly owned Montes del Plata pulp mill so quarterly periods may not be comparable

Diane Keaton

SANTIAGO, Chile , March 12, 2014 (press release) – • According to the new IFRS-11, our Montes del Plata Joint Venture is considered a “joint operation” so starting year 2013 (and also applicable to year 2012) we are including proportionally our 50% share of assets, liabilities, revenues and costs of Montes del Plata in our Financial Statements. Hence, quarterly periods shown in this report may not be comparable. In some cases we only will include full year figures

• Arauco’s consolidated sales reached US$ 5,145.5 million for FY2013, a 19.7% increase compared to that of 2012. This increase is mainly explained by higher average pulp prices and volume sales and the full year consolidation of Flakeboard

• Our FY2013 Adjusted EBITDA reached US$ 1,143.4 million, an increase of 32.7% compared to the US$ 861.7 million obtained in FY2012

• Arauco’s consolidated net income for FY2013 reached US$ 418.6 million, an increase of 191.6% or US$ 275.1 million compared to the US$ 143.5 million obtained in FY2012
• Capital expenditures during 2013 reached US$ 864.5 million, a decrease of 36.8% when compared to the US$ 1,368.8 million invested during 2012

Consolidated Sales

Arauco’s consolidated sales for the fourth quarter of 2013 reached US$ 1,269.6 million, 4.9% lower than the US$ 1,334.9 million obtained during the third quarter of 2013. The main variances during this quarter were (i) a decrease in total sales of our pulp business, with an 11.0% decrease in volume sales partially offset by a 4.2% increase in average prices; (ii) a decrease in panels, mainly explained by a decrease of 1.0% in average prices, and a decrease of 4.8% in volume sales; and (iii) a decrease in total sales of our sawn timber business, with a 0.4% decrease in average prices and a 1.0% increase in volume sales.

Compared to the US$ 1,201.9 million obtained in the fourth quarter of 2012, consolidated sales were 5.6% higher, mainly explained by a 11.8% increase in total sales of our panels business, a 31.1% increase in total sales from our forestry business and a 3.7% increase in total sales of our sawn timber business.

Production

During the fourth quarter of 2013, production volume of our Pulp business decreased to 668 thousand Adt, an 18.2% decrease compared to the 817 thousand Adt produced in the previous quarter. This was mainly due to a longer than expected maintenance stoppage at Nueva Aldea mill during the fourth quarter of 2013. Production volume in our panels division decreased 4.0% or 53 thousand m3 when compared to the previous quarter. The production volume from our Sawn timber division was steady at 733 thousand m3, the same as the third quarter of 2013.

Compared to the fourth quarter of 2012, production volume decreased 10.8% in our pulp division, our panel’s production increased 7.1% and our sawn timber production increased 10.9%.

EBITDA

Consolidated Adjusted EBITDA for the fourth quarter of 2013 was US$ 242.1 million, 24.2% or US$ 77.3 million lower than the US$ 319.4 million reached during the previous quarter. In terms of EBITDA by business, during the fourth quarter of the year we had a decrease in our Sawn Timber and Panels divisions of 16.4% and 12.3%, respectively, and a decrease in our pulp and forestry division of 22.0% and 32.0% respectively. Our Pulp business was impacted by a decrease in pulp sales volumes of 11%, along with higher unitary costs of pulp. Our panels business dropped in sales volume (4%), impacting its quarterly EBITDA. Also, our 4Q EBITDA includes the indemnification provision agreed with the National Defense Council of the Valdivia mill case of near US$ 10 million.

Consolidated Adjusted EBITDA for the fourth quarter of 2013 was lower by 10.2% or US$ 27.6 million than the US$ 269.7 million reached in the same period of 2012.

Adjusted EBITDA of 4Q2013 includes the consolidation of Montes del Plata, while Adjusted EBITDA of 3Q2013 does not.

Operating Income

Arauco’s consolidated operating income during the fourth quarter of the year reached US$ 110.4 million, a decrease of 22.5% or US$ 32.1 million compared to the US$ 142.5 million obtained during the third quarter of 2013. In terms of costs, during the fourth quarter of the year we had an increase in unitary cost of sales for bleached softwood pulp and bleached hardwood pulp of 3.3% and 8.1% respectively, when compared to the third quarter of 2013, explained by a longer than expected maintenance stoppage in Nueva Aldea Mill. As a percentage of revenues, our Selling and Administrative Expenses was 22.0%, an increase if compared to the previous quarter that reached 19.9% of total revenues.

During the fourth quarter of 2013, Arauco’s operating income was 100.5% or US$ 55.4 million higher than the US$ 55.1 million reached in the same quarter of 2012. This is mainly due to an increase in Gross Margin by 42.4% or US$ 115.9 million.

Net Income

Net income for the fourth quarter of 2013 was US$ 45.5 million, a decrease of 61.1% or US$ 71.5 million compared to the US$ 117.0 million obtained in the third quarter of the year. This is mainly explained by a decrease in Operating income of 22.5% or US$ 32.0, an increase in Other operating Expenses by 234.6% or US$ 55,8 million, a 58.7% increase in taxes of US$ 55.8 million, a 33.4% or US$ 29.9 million decrease in Other income and was partially offset by a 33.4% or US$ 29.9 million increase in Other income, mainly explained by sales of non-core assets.

Consolidated net income in the fourth quarter of 2013 was 74.7% or US$ 134.4 million below the same period on 2012, where we had US$ 179.9 million. This is mainly explained by a decrease in other income on 56.4% or US$ 158.4 million; other operating expenses increased in 75.2% or US$ 34.1 million; depreciation increased in 31.4% or US$18.9 million; this effect was partially offset by an increase in the Operating income, of 100.5%, rising from US$ 55.1 million in the fourth quarter of 2012 to US$ 110.4 million on the same period in 2013.

Net Income of 4Q2013 includes a 50% proportional consolidation of Montes del Plata.

REVIEW BY BUSINESS SEGMENT

1- Pulp Division

The fourth quarter of 2013 showed a steady global demand. Some markets had a lower activity but the demand was compensated with higher demand in other zones. For example Europe still is in a difficult situation but in North America we had a better scenario, and Asia is steady. Prices of long fiber in Asia, the biggest market of this type of fiber, rose in the fourth quarter; the prices for short fiber were steady with some small increases.

Regarding the world inventories in the fourth quarter, long fiber inventories stood stable compared to the prior quarter, 27 days, but there was a decrease in October that helped with the rise of prices. Short fiber inventories decreased in 3 days, from 42 to 39 during the period, but the prices were not affected because the inventories remained at relatively high levels, 12 more days than long fiber and a market size slightly bigger.

Asia showed a stable demand and the main factor influencing prices was supply. The supply in long fiber was lower than expected partly due to startup problems in a new Russian mill. Prices rose more than 7% in the period. Supply of unbleached long fiber, during the first half of the year was already restricted due to the closure of production lines, and the consumption of the inventories resulted in a more than 10% price increase. Even in China the local prices of this product exceeded the price of Northern bleached softwood kraft pulp (NBSK).

However, short fiber prices only had a little increase, between 1.5% and 2%, mainly explained by an oversupply and new capacity start-up expectations: Montes del Plata and the new mill of Suzano in Brazil. The Asian paper market remains under heavy pressure and even when the inventories decreased, it was not enough to raise prices; therefore producers in general remained having low margins, except the case of Tissue margins have decreased but remain attractive.

In Europe the situation in general is more complex due to the decrease in economic activity reflected in lower demand for graphic paper and the closure of paper production lines, releasing even more pulp to the market. The above mentioned restricted the price increase even for the long fiber that only rose 4%, resulting in a price approximately 4% lower than the price in Asia, this gap was only 1.5% at the end of the third quarter. The short fiber situation is similar. Prices stood stable therefore the price gap with Asia increased, but in a lower grade than long fiber, reaching approximately the range of 2% and 3.5%.

Latin America followed world trends, with more attractive prices, but it is a relatively small market with low opportunities to increase sales volume. However, it is a relatively important market for unbleached long fiber.

The Fluff pulp market is very competitive, especially the Brazilian market which can be reached, with quite competitive conditions, by the capacity expansions of producers in the south of EEUU. In fact, it is more expensive to reach the north of Brazil with the mill of Alto Parana, north of Argentina, than with the mills in the south of EEUU.

During the fourth quarter, the production levels of Arauco were affected by the startup of the Nueva Aldea mill after the annual scheduled maintenance stop. This influenced the productions levels in October and partly November. The other mills of our Company kept normal production levels.

2- Sawn Timber Division

The real estate market and the construction market in the United States had an upturn during the year 2013, closing the year with 999,000 Housing Starts, which represent a growth of 17.5% when compared with the previous year. The actual levels of construction are still below the last 10 year average.

During the fourth quarter in the United States the price of moldings was steady without variations when compared with the third quarter, on the other hand the sales of molding in the United States showed a decrease, which is normal for this time of the year.

The markets showed a steady behavior during the fourth quarter. Prices did not show an important difference when compared with the previous quarter. Production volumes was in line with sales volume.

3- Panels Division

The sales of our panel division (MDF, PBO, Plywood and HB) during 2013 closed with a 46% increase respect to the prior year, while the sales in the fourth quarter of 2013 increased an 11% compared to the same quarter of 2012.

On the other hand, volume sales during 2013 increased 66% compared to 2012, and a 6% increase in the 4th quarter respect to the same quarter of 2012. This strong growth in volume is explained by supply of MDF and PBO from Flakeboard in North America and also because of the new MDF line in Jaguariaiva, Brazil.

During the fourth quarter of the year, plywood sales volume had a 4% drop compared to the third quarter of this year, and a 25% decrease in 2013 respect to 2012. This is mainly explained by higher sales from inventories that the Nueva Aldea mill had before the 2012 wildfire, and a lower production at the last months of 2013 due to the installment of new equipment in Arauco’s mill.

In the case of MDF, sales volume during the last quarter of 2013 decreased 6% respect to the prior quarter of the year due to lower shipments because of seasonal effects, and respect to the fourth quarter of 2012 the sales volume increased 11%. The accumulative volume sales during 2013 was nearly 50% higher than 2012. It is worth mentioning the recovery that has shown the MDF moldings, which is directly related with the recovery of the North American housing market, this recovery resulted in a 20% sales increase compared to 2012.

Sales volume of PBO experienced a decline of 4% compared to the third quarter of this year, explained by lower sales in the Argentinian and North American domestic market mainly in December. On the other hand when compared to the fourth quarter of 2012, volume sales increased 7% and the cumulative sales during 2013 grew 85% respect to the prior year. This increase was driven by our supply growth from the North American operations.

Current assets reached US$ 2,808.3 million at the end of the fourth quarter of 2013, an increase of 0.7% or US$ 20.1 million compared to the US$ 2,788.2 million obtained in the third quarter of 2013. When compared with the US$ 2,785.5 million reached in the same period last year, there was an increase of 0.8% or US$ 22.8 million.

•Cash and cash equivalents:

As of December 2013 our cash balance reached US$ 667.2 million, a increase of 22.7% or US$ 123.5 million when
compared to the US$ 543.7 million reached in the previous quarter.

In the fourth quarter of 2012, our cash and equivalents reached US$ 488.5 million. This was lower by 36.6% or US$ 178.7 million compared to December 2013.

•Accounts receivables:

Accounts receivables reached US$ 711.7 million during the fourth quarter of 2013, a decrease of 2.7% or US$ 19.8 million compared to the third quarter of the year. When compared to the same quarter of 2012, accounts receivables decreased 14.9% or US$ 124.3 million.

Non-Current Assets
Non-current assets increased to US$ 11,685.1 million at December 2013, a US$ 891.6 million increase compared to the third quarter of the year, explained by the 50% proportional consolidation of Montes del Plata. When compared with the US$ 11,474.1 million reached in the same period last year, there was an increase of 1.8% or US$ 211.0 million.

Financial Debt

Arauco’s consolidated financial debt as of December 31, 2013 reached US$ 5,026.5 million, an increase of 1.3% or US$ 64.4 million when compared to 2012. Montes del Plata debt increased 30.2% or US$ 167.7 million from December 2012 to December 2013.

Our consolidated net financial debt decreased 1.8% or US$ 114.3 million when compared with December 2012.

FOURTH QUARTER AND SUBSEQUENT EVENTS

Nueva Aldea ́s Plywood Mill start up

In December 2013 we completed the reconstruction of our Nueva Aldea’s plywood mill, which had been destroyed after a wildfire in January 2012. The new facility has an annual production capacity of 350,000 m3, and it required an investment of approximately US$ 190 million.

Sierra Pine

In January 2014 Arauco announced the intention of acquiring 3 panel mills from the company Sierra Pine in the USA. The mills are located in Medford, Oregon (MDF production), Martell, California (PBO production) and Springfield, Oregon (PBO production). This acquisition will represent an investment of US$ 107 million, and an estimated US$ 13 million in inventories. This deal is still pending the approval of the antitrust authorities.

MAPA Project received environmental approval

Chilean’s environmental entity approved the MAPA project, which includes among others, the construction of a 3rd pulp line in the Arauco mill with an annual capacity of 1.3 million Adt of short fiber pulp, and a cogeneration plant that will be able to generate up to 166 MW of surplus to be delivered to the national grid. The project also includes the closure of Arauco ́s line 1, currently with an annual capacity of 300,000 Adt of short fiber. This project is still under technical and economic feasibility studies, and financing design, among other studies and pending approvals, which need to be completed before being presented to the board. This project will demand an investment of approximately US$ 2.100 million.

Montes del Plata Update

Montes del Plata, a joint venture between Stora Enso and ARAUCO in Uruguay, is giving its best effort to begin the start up process in March 2014. As of February it had 98% of completion.

DISCLAIMER

This news release may contain forward-looking statements concerning Arauco’s future performance and should be considered as good faith estimates by Arauco. These forward looking statements reflect management’s expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, many of which are outside Arauco’s control and could materially impact Arauco’s performance.

Readers are referred to the documents filed by Arauco with the United States Securities and Exchange Commission, specifically the most recent filing on Form 20-F which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. All forward-looking statements are based on information available to Arauco on the date hereof and Arauco assumes no obligation to update such statements. References herein to “U.S. $” are to United States dollars. Discrepancies in any table between totals and the sums of the amounts listed are due to rounding. This report is unaudited.

Click here for full press release:  http://www.arauco.cl/_file/file_7021_press_release_4q13.pdf

Industry Intelligence Inc. editor's note: In an omitted table, Celulosa Arauco y Constitución stated, "FY2013, FY2012 and 4Q2013 include a 50% proportional consolidation of Montes del Plata."

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