Klabin S A : Conference Call Transcript

Local Conference Call

Klabin S/A (KLBN11)

2Q22 Earnings Results

July 28th, 2022

Operator: Good morning. Welcome to Klabin's audioconference. At this time, all participants are in listen-only mode. Later we will hold a Q&A session when further instructions will be given.

In benefit of time, we kindly ask analysts to limit questions to two. Should you require assistance during this call, please press start zero to reach the operator. As a reminder, this conference is being recorded and broadcast live via webcast and you may access it at Klabin's IR website, where you will find the presentation for download.

Forward-looking statements that might be made during this call in relation to Klabin's his business outlooks, projections, operating, and financial targets regarding to potential growth should be understood as forecast based on the company's expectations in relation to Klabin's future. Such expectations are highly dependent on market conditions, on the overall economic performance of the country, of the industry, and international markets, therefore they are subject to change.

With us today, Mr. Cristiano Teixeira, CEO, Mr. Marcos Ivo, CFO and IR Officer, and officers of the company.

Mr. Teixeira and Mr. Ivo will comment on the company's performance on the second quarter of 2022. After that, the officers will be available to answer any questions that you might have.

Now I would like to turn the call over to Mr. Teixeira. Sir, you may begin.

Cristiano Teixeira: Welcome to Klabin's earning call for the second quarter of 2022.

Before returning to the quarter's results growth, I would like to talk about Project Figueira, the most recent step of Klabin's sustainable growth trajectory. Statistics for Empapel about the Brazilian corrugated boxes market show that in the last 16 years the market for corrugated boxes grew stronger than the Brazilian GDP annual average, 2.6% year on year vis-à-vis 1.8% for the GDP. Analyzing the last five years with the profile change in consumption, the corrugated boxes performance was even more significant when compared to the Brazilian GDP, an average annual growth of 4.1% vis-à-vis 1% of the GDP.

Therefore, based on the security of a resilient and defensive market, we announced Project Figueira in a material fact on July 20th. Project Figueira asserts how much we believe in the value of integration of this company. Thus, we stress that investment in a new modern corrugated box production plant we'll bring us total capacity of corrugated box conversion of 1.3 million tons a year, also results' stability in different economic cycles by integrating paper and corrugated boxes, which historically is resilient and also has slow volatility. Also, reassurance of our market leading position in corrugated boxes market, as well as high service level provided to clients. It will also bring us efficiency and operating productivity gains, reducing our conversion cost.

Project Figueira also provides a growth platform in the southeast region of Brazil for larger recycled paper and corrugated box site, allowing for more efficiency with logistic optimization, FX cost dilution. Klabin has a history of projects with high return and diligent capital allocation proving that the return on invested capital measured by ROIC doubled in the last ten years, reaching around 19% a year by the second quarter of 2022. In addition to that, we should deliver the 13th year of consecutive growth in the company's EBITDA.

About the second quarter of 2022, we had good results with an EBITDA of 1.84 billion and we also approved payment of around R$ 400 million in dividends to shareholders. We trust in our capital allocation strategy always aiming at consistent value generation for shareholders.

I now turn the floor to Marcos Ivo, who will go into the financial details about the second quarter of 2022.

Marcos Ivo: Thank you, Cristiano, and good morning, everyone, thank you for being here with us in this call.

We delivered another quarter with growing results, showing once again the strength of Klabin's business model, as well as its results predictability. Among the highlights and the period, I should mention three of them: first, record sales volume totaling 1,000,000 and 9,000 tons; also, net revenue of R$ 5 billion, up 24% in the annual comparison; and dividends and interest on equity of R$1.5 billion in the last 12 months.

On page 4, the sales volume increased the 7% compared to the same quarter of 2021 driven by the production volume of machine 27. Thanks to its flexibility, exports accounted for 47% of sales volume in the quarter, 6 percentage points higher than the second quarter of 2021. Driven by higher sales volume and price increases in the last quarters, net revenue reached R$ 5 billion in the quarter, 24% higher in the annual comparison. Adjusted EBITDA, net of nonrecurring effects, totaled R$ 1.843 million in the second quarter of 2022, up 2% vis-a-vis last year's second quarter. EBITDA was benefited by higher volume and sales and price adjustments, which more than offset the Brazilian currency appreciation vis-à-vis the dollar and cost increases.

In the next slide, pulp sales volume was of 424,000 tons in the quarter, the second highest volume since the beginning of Puma I, accounting for 6% growth when compared to the second quarter of 2022. Benefiting from higher prices in the annual comparison as well as the flexible sales mix among different geographies and the portfolio with three types of fibers (hardwood, softwood and fluff), average net price per ton was US$ 859, 21% higher than the second quarter of 2021, driving up pulp's EBITDA, which reached R$ 1 billion in the period. Confirming our last call's statement, the production cash cost for pulp was stable vis-à-vis the prior quarter, totaling R$ 1,273 per ton considering all three fibers.

Now turning to slide number 6, adjusted free cash flow net of discretionary factors and expansion projects was positive in R$ 784 million in the quarter. In the last 12 months. The adjusted free cash flow was of R$ 3.8 billion, a free cash flow yield up 14.5%.

Now turning to page 7, at the end of June Klabin's net debt was of R$ 20.5 billion, up

2.6 billion compared to March of 2022. This increase is explained by the negative impact of the FX variation on the dollar-denominated debt and also by the negative free cash flow in the period. Leverage measured by net debt over EBITDA indicator in dollars ended June at 2.7 times, stable vis-à-vis the prior quarter and close to the minimum level for the company's financial indebtedness policy.

I should remind you that Klabin has a financial indebtedness policy that clearly states its target capital structure. This policy is available at the company's IR website.

Moving now to the next slide, Klabin's liquidity remains robust and ended the quarter at R$ 10 billion. This liquidity consists of R$ 7.4 billion cash and the remainder in a revolving credit facility. The company's cash position is enough to amortize the debt maturing in the next 5 years. The average debt maturity at the end of the second quarter was 102 months, equivalent to approximately 8.5 years, the same level as in the previous quarter.

Klabin has contracted financing and has not yet been withdrawn, the amount is greater than the Capex that will still be dispersed until the completion of the Puma II Project, as detailed in the earnings release.

Turning to page 9, as shown in the notice to shareholders published yesterday, the company approved a dividend payout of R$ 399 million to be paid on August 11th. On an accrual basis, the proceeds paid to shareholders over the last 12 months totaled R$ 1.524 billion, a clear evidence of Klabin's ability to combine growth and dividend payout while maintaining financial discipline in its capital structure.

Klabin has a dividend and interest on equity policy which defines in a clear and straightforward manner the target amount to be paid to our investors through proceeds. This policy can also be found on our investor relations website.

On slide 10, we show our return on invested capital measured by ROIC, which totaled 18.6% in the last 12 months, in line with the same period of the previous year. In a

transparent, consistent manner, Klabin communicates to capital markets how it envisions its capital allocation through financial indebtedness and dividend policies in addition to its long-term growth strategic plan. This efficient and diligence allocation of capital is practice consistently and combined with its business model has transformed the companies ROIC over the last decade and will continue to shape Klabin's next steps.

On slide 11, the first stage of the Puma II Project, which started production on August 30th last year, is ramping up as planned. The second phase of the project, which will include a coded board machine, is still under construction on schedule, having reached 47% of the physical work according to the measurement performed on July 17th. Startup is scheduled for the second quarter of 2023. Since the beginning of the project, R$ 9.4 billion have been dispersed, of which R$ 882 million were disbursed in the second quarter of 2022.

Finally, on slide 12, I would like to mention a couple of initiatives and acknowledgements in the ESG arena that took place in the last few months. I highlight that we approved and implemented the new corporate life protection policy, a set of guidelines, criteria, and sanctions related to employee safety now unified for all plants and businesses. Safety is among the growth pillars and core values of the company and this initiative underscores our relentless quest for the well-being of those in charge of Klabin's growth on a daily basis. In June, we released the 2021 sustainability report and updated the ESG panel, which brings together all indicators on environment, social, and governance topics, and explains in a transparent manner the company's evolution along its sustainability journey.

In addition, this quarter Klabin was acknowledged for the third consecutive year one of the top performers of CDP's climate resilience index. By building a sustainable future and following the path of diligence allocation of capital with solid return to shareholders, Klabin will carry on its strategic plan towards long-term growth.

Now Cristiano, the other officers and I will be available for the Q&A session.

Question and Answer Session

Operator: We will now start the Q&A session. To ask a question, please choose star 1 on your dial pad. To remove your question from the queue, please press star 2.

Our first question is from Tiago Lofiego, from BBA.

Tiago Lofiego: Thank you and good morning, everyone. I have a question about project Figueira. Cristiano, can you comment on the ROIC of the project in an isolated analysis? Because I understand that you acquired the land that is larger than what's needed for this specific project, and as you well said, this is a platform for future growth. So, you said that you have other projects for the same piece of land, so you also mentioned capacity for corrugated boxes of 100,000 tons, so I would like to have a better understanding there.

So, my question is: which items we can exclude to run an isolated analysis of the project? And in doing that, what will be the ROIC of the project in a stress scenario and in a base case?

And my second question, you know, now more towards an outlook and the global Kraftliner price, what is your mindset about this market? Especially if we consider a possible recession scenario in the USA, a deceleration in Europe. I would like to hear more from you there, please.

Cristiano Teixeira: Thank you, Tiago. OK, about the specific ROIC for Figueira, if we don't look at it considering the whole chain, which is what we highlighted that we wanted to double the ROIC of the company in the next years, but analyzing Figueira by itself, it will pay WACC, it's better than WACC, and also this project has a characteristic which is to allow a possibility of adding to the same site considering here we have 1 million square meters a third corrugated box machine and also a two large recycled paper machines. So, part of this investment, which is already considering part of the use of this future growth is already included in the return of the corrugated box return today.

So, in an isolated fashion, this is better than the company's WACC and in our vision, in the whole chain the vision, when we create this future growth platform it will also follow the same trajectory of improving the whole chain's ROIC. So, we are confident, we are sure about what we are doing and this only stress what we have been talking about, this additional 100,000 tons, and I mentioned the total capacity of 1.3 million tons, this 1.3 million tons is to represent the capacity and the resiliency that we have to be able to convert paper in Brazil if there is a volatility.

And then I already turn to your other question on the liner, but still talking about Figueira, we have additional 100,000 tons that will help us towards that capacity, but in addition to that capacity, as I said in the beginning, we will also have a possibility of diluting fixed costs in the site, we will have more technology, modern equipment, it will reduce our conversion cost, and we also have this platform that I mentioned for future growth.

So, we are very sure about what we have done.

About liner…

Tiago Lofiego: I'm sorry, I'm sorry to interrupt you before you turn to the next question. Is there a possibility of quantifying or giving us a range of this ROIC in a base case or a range or could we consider for an isolated analysis of the project, what is the efficiency gain, how many more percentage points in the margin you expect to have of this isolated business so that we can do the math here and be more realistic there?

Marcos Ivo: Well, Tiago, this is Marcos Ivo. I will add with some specific figures, but first let me remind you that we have R$ 200 million in recoverable taxes, most of them will be recovering immediately, second, we also clearly that we have R$ 90 million