KLABIN S.A. Klabin S.A.
September 2, 2022
Ratings Score Snapshot
PRIMARY CONTACT
Fabiana Gobbi
Sao Paulo
55-11-3039-9733 fabiana.gobbi @spglobal.com
ADDITIONAL CONTACT
Luisa Vilhena
Sao Paulo
55-11-3039-9727 luisa.vilhena @spglobal.com
Credit Highlights
Overview
Key strengths | Key risks |
A leading position in Brazil's paper packaging production segment, with longstanding relationships with clients.
Ability to adjust products mix and export volumes based on market demand.
Vertical integration bolsters profitability.
Exposure to cyclicality in the forest and paper products industry, which has volatile input and selling prices.
Klabin S.A.'s financial policy allows net debt to EBITDA to reach 4.5x during investment cycles, and a limited track record of the company's commitment to its financial policies amid industry downturns.
Strong profitability as a result of high prices in 2022 and continued volume growth in the coming years. Given consistent growth in all business lines in the first half of 2022, compared with the same period in 2021, Klabin posted revenue growth of 25%, mainly
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Klabin S.A.
because of the 52% jump in revenue in the paper segment. Most of Klabin's products are convenience items, therefore, demand for them should remain steady in the coming years, continuing to fuel the company's revenue growth. Additionally, Klabin's announced new projects, aside from PUMA II, will expand the packaging production starting in 2023 and will also help raise revenues for the next few years. Moreover, Klabin has the flexibility to switch production between softwood and fluff, and selling Kraftliner to the market or using in its conversion lines. This, along with adjusting exports to shifting demand trends, result in market advantages capturing higher prices depending on the product mix. With high prices across all of the company's segments this year offsetting higher input costs and inflationary pressures, we forecast EBITDA margin flat at around 42% versus 2021.
High capital expenditures (capex) pressure free operating cash flows (FOCF) in 2022, but the latter to rise in the next two years. We forecast capex of about R$5.4 billion in 2022 and R$4.8 billion in 2023, mostly to increase production fund phase two of PUMA II project, and the Horizonte and Figueira projects announced earlier this year. Klabin will fund such investments mostly with current cash position and internal cash generation, along with other credit lines amounting to $700 million possibly in 2023. Significant capex in 2022 will limit FOCF, but as investments gradually decrease, FOCF will be roughly R$1.2 billion in 2023 and jump to about R$ 4 billion in 2024 upon the completion and ramp-upof those projects.
Outlook
The stable outlook reflects our expectations of overall solid demand and high prices for the company's products to remain in the next few quarters, resulting in debt to EBITDA of about 3.0x and funds from operations (FFO) to debt around 20%. We expect such metrics despite high investments in the next two years and excluding the possible temporary foreign-exchange mismatch effects.
Downside scenario
We could downgrade Klabin in the next 12-18 months if we were to expect significantly weaker leverage metrics, with debt to EBITDA above 4.5x and FFO to debt below 12% after the completion of PUMA II. This could occur because of declining prices and appreciation of the Brazilian real or due to a more aggressive growth strategy.
Upside scenario
A positive rating action is possible if we expect Klabin's credit metrics to strengthen consistently. We would also need to see the company adhering to its financial policies, limiting the rise in leverage. Although unlikely in the next 12 months, an upgrade would depend on debt to EBITDA consistently below 3x and FFO to debt above 30% through the investment cycle.
Our Base-Case Scenario
Assumptions
- Brazil's GDP growth of 1.2% in 2022, 1.4% in 2023, and 2.0% in 2024.
- Exchange rates of about R$5.00 per $1 in 2022 and 2023, and R$5.20 per $1 in 2024.
- Average bleached hardwood kraft pulp (BHKP) listing in Europe close to $1,100 per ton in 2022, declining 10%-15% in 2023 and 5%-10% in 2024 from previous year, compared with $1,045 per ton in 2021. We apply about a 35% discount to listed prices.
- High demand and logistics difficulties resulting in higher prices in the domestic market in 2022 than in the previous year. Price of coated boards at R$4,500 - R$4,800 per ton in 2022 and growing 5%-7% in 2023-2024. Kraftliner prices in 2022 at about R$4,800 per ton but to fall to about R$4,500 per ton in the coming years. Corrugated boxes and industrial bags at about R$5,300 per ton in 2022 and growing 3%-5% in 2023-2024.
- Annual market pulp production of 1.5 million - 1.6 million tons in 2022-2024.
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Klabin S.A.
- Costs and expenses increasing due to higher costs of chemicals, transportation, fuel, and energy.
- Annual capex of about R$5.4 billion in 2022, R$4.8 billion in 2023, of which R$2 billion - R$3 billion is for the PUMA II project, and R$2.6 billion in 2024 mostly for maintenance and completion of some projects.
- Dividend distribution of R$1.5 billion - R$1.7 billion in the next three years.
Key metrics
Klabin S.A.--Key Metrics*
Mil. R$ | 2020a | 2021a | 2022e | 2023e | 2024e |
Revenue | 11,948.8 | 16,481.4 | 18,400-18,80018,400-18,800 | 20,000-20,500 | |
EBITDA | 4,704.2 | 6,879.5 | ~7,800 | 7,800-8,000 | 8,400-8,800 |
EBITDA margin (%) | 39.4 | 41.7 | ~42 | 40-44 | 40-44 |
Funds from operations (FFO) | 3,255 .6 | 4,738.2 | ~5,400 | 5,500-5,800 | 6,000 -6,500 |
Capital expenditure | 4,566 .8 | 3,446.5 | ~5,400 | ~4,750 | ~2,650 |
Free operating cash flow (FOCF) | 1,014 .1 | (169.4) | ~ (50) | ~1,200 | ~4000 |
Debt | 20,605.6 | 22,000.7 | ~22,800 | ~24,000 | ~22,500 |
Debt to EBITDA (x) | 4.4 | 3.2 | ~3.0 | 2.5-3.5 | 2.5-3.5 |
FFO to debt (%) | 15.8 | 21.5 | 20-25 | 20-25 | 25-30 |
FOCF to debt (%) | 4.9 | (0.8) | 0 | 0-5 | 15-20 |
*All figures adjusted by S&P Global Ratings. a--Actual.e--Estimate.f--Forecast.
Company Description
Klabin is one of Brazil's largest pulp and paper producers, focused on several forest products, and it's the leading producer and exporter of paper packaging in the country. The company operates 22 plants in Brazil and one in Argentina. It owns 671,000 hectares (ha) of land with 287,000 ha of planted forests (170,000 ha of which are destined for long fiber and 117,000 for short fiber). Klabin's business units consist of forestry (wood planted from pine and eucalyptus), paper (coated boards and container boards), market pulp (hardwood, softwood, and fluff), and packaging (industrial bags and corrugated boxes).
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Klabin S.A.
Peer Comparison
In the forest products segment, we compare Klabin mainly with other South American companies because their costs are affected by the same climate conditions, and they benefit from access to superior natural resources. Klabin has a smaller production capacity than Suzano S.A. and Celulosa Arauco y Constitucion S.A. On the other hand, Klabin posts more stable and higher margins than its peers outside Brazil, due to its strong presence in resilient end-markets (both regionally and globally) and its self-sufficient and integrated production lines geared towards the paper and packaging sectors, broadening its range of products. Klabin ranks behind global peers in the packaging and containers segment in terms of geographic diversification, production capacity, and revenues. However, Klabin has integrated and self-sufficient production lines, which help boost its profitability.
Klabin S.A.--Peer Comparisons
Klabin S.A. | Suzano S.A. | Celulosa Arauco y | WestRock Co. | International |
Constitucion S.A. | Paper Co. |
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Klabin S.A.
Klabin S.A.--Peer Comparisons
Foreign currency issuer credit rating | BB+/Stable/-- | BBB-/Stable/-- | BBB-/Stable/-- | BBB/Stable/A-2 | BBB/Stable/A-2 |
Local currency issuer credit rating | BB+/Stable/-- | BBB-/Stable/-- | BBB-/Stable/-- | BBB/Stable/A-2 | BBB/Stable/A-2 |
Period | Annual | Annual | Annual | Annual | Annual |
Period ending | 2021-12-31 | 2021-12-31 | 2021-12-31 | 2021-09-30 | 2021-12-31 |
Mil. | R$ | R$ | R$ | R$ | R$ |
Revenue | 16,481 | 40,965 | 35,378 | 101,650 | 107,881 |
EBITDA | 6,879 | 23,684 | 12,321 | 16,511 | 17,021 |
Funds from operations (FFO) | 4,738 | 20,345 | 11,065 | 12,781 | 10,919 |
Interest | 1,614 | 4,084 | 1,498 | 2,441 | 2,514 |
Cash interest paid | 1,635 | 3,232 | 1,901 | 2,255 | 2,754 |
Operating cash flow (OCF) | 3,277 | 17,625 | 10,195 | 13,338 | 11,961 |
Capital expenditure | 3,447 | 6,225 | 8,106 | 4,346 | 2,992 |
Free operating cash flow (FOCF) | (169) | 11,400 | 2,088 | 8,991 | 8,969 |
Discretionary cash flow (DCF) | (750) | 11,237 | (537) | 7,060 | (52) |
Cash and short-term investments | 8,422 | 21,099 | 5,633 | 1,577 | 8,580 |
Gross available cash | 8,422 | 21,099 | 5,633 | 1,577 | 8,580 |
Debt | 22,003 | 65,274 | 27,397 | 48,643 | 26,945 |
Equity | 7,086 | 15,175 | 43,561 | 63,398 | 50,601 |
EBITDA margin (%) | 41.7 | 57.8 | 34.8 | 16.2 | 15.8 |
Return on capital (%) | 21.4 | 21.3 | 13.4 | 6.7 | 11.8 |
EBITDA interest coverage (x) | 4.3 | 5.8 | 8.2 | 6.8 | 6.8 |
FFO cash interest coverage (x) | 3.9 | 7.3 | 6.8 | 6.7 | 5.0 |
Debt/EBITDA (x) | 3.2 | 2.8 | 2.2 | 2.9 | 1.6 |
FFO/debt (%) | 21.5 | 31.2 | 40.4 | 26.3 | 40.5 |
OCF/debt (%) | 14.9 | 27.0 | 37.2 | 27.4 | 44.4 |
FOCF/debt (%) | (0.8) | 17.5 | 7.6 | 18.5 | 33.3 |
DCF/debt (%) | (3.4) | 17.2 | (2.0) | 14.5 | (0.2) |
Business Risk
Klabin has a solid market position in the Brazilian paper and packaging segments and longstanding relationships with clients. The vertically integrated structure also allows the company to benefit from operational efficiencies that translate into higher margins than those of international peers. Despite these strengths, the cyclical nature of the forest and paper products industry limits the company's business. Klabin manages to diminish volatility through its capacity to increase exports or adjust its diverse mix of products towards the more profitable ones. Although Brazil's paper and packaging segment is fragmented and competitive, Klabin has a leading position with market shares of 56% in Kraftliner, 33% in coated boards, 50% in industrial bags, and 24% in corrugated boxes. We believe that longstanding relationships and the resilient nature of end markets (focused on food and consumer goods), coupled with access to rapidly growing and high-quality fiber in Brazil, gives Klabin an advantage over international players.
PUMA II is already in the second phase, 47% of the works is completed as of July 17, 2022, and the company expects it to be concluded during the first half of 2023. The project's second machine will have a 460,000 ton/year capacity after a ramp-up period of
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Klabin SA published this content on 05 September 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 05 September 2022 12:29:05 UTC.
