Klabin S.A. (OTCPK:KLBAY) Q2 2022 Earnings Conference Call July 28, 2022 10:30 AM ET
Company Participants
Cristiano Teixeira – Chief Executive Officer
Marcos Ivo – Chief Financial Officer and Investor Relations Officer
Alexandre Nicolini – Chief Operating Officer, Pulp Business Unit
Flavio Deganutti – Director, Sales and Purchase
Conference Call Participants
Thiago Lofiego – BBI
Caio Greiner – BTG Pactual
Rafael Barcellos – Santander
Carlos De Alba – Morgan Stanley
Daniel Sasson – Itau BBA
Caio Ribeiro – BofA
Operator
Welcome to Klabin’s Audio Conference. [Operator Instructions] 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 business outlook, 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 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 any answers or 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 earnings call for the second quarter of 2022. Before turning to the quarter’s results, I would like to talk about Project Figueira, the most recent step of Klabin’s sustainable growth trajectory. The 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 5 years, with the profile change in consumption, the corrugated boxes performance was even more significant when compared to the Brazilian GDP, the average annual growth of 4.1% vis-à-vis 1% of the GDP. So based on the security of a resilient and defensive market, we announced Project Figueira in a material fact on July 20. Project Figueira asserts how much we believe in the value of integration of this company. Thus, we stress that the investment in a new modern corrugated box production plant will 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 has low volatility. Also, reassertion of our market-leading position in corrugated boxes, as well as high service level provided to clients; efficiency and operating productivity gains, which should reduce conversion cost.
Project Figueira also provides a growth platform in the Southeast region of Brazil, for a larger recycle 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 10 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 BRL184 million and we also approved a payment of around BRL400 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 on 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 in the period, I should mention three of them: first, record sales volume totaling 1,009,000 tons, also net revenue of BRL5 billion, up 24% in the annual comparison and dividends and interest on equity of BRL1.5 billion in the last 12 months.
On Page 4, the sales volume increased 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 BRL5 billion in the quarter, 24% higher in the annual comparison. Adjusted EBITDA net of non-recurring effects totaled BRL1.843 million in the second quarter of 2022, up 2% vis-à-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.
And the next slide. Pulp sales volume was up 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 3 types of fibers: hardwood, softwood and fluff, average net price per ton was $859, 21% higher than the second quarter of 2021, driving up pulp EBITDA, which reached BRL1 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 BRL1,273 per ton considering all three fibers.
Now turning to Slide #6. Adjusted free cash flow, net of discretionary factors and expansion projects was positive in BRL784 million in the quarter. In the last 12 months, the adjusted free cash flow was of BRL3.8 billion, a free cash flow yield of 14.5%.
Now turning to Page 7. At the end of June, Klabin’s net debt was BRL20.5 billion, up BRL2.6 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 2.7x, stable vis-à-vis the prior quarter and close to the minimum level for the company’s financial indebtness 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 BRL10 billion. This liquidity consists of BRL7.4 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 disbursed 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 BRL399 million to be paid on August 11. On an accrual basis, the proceeds paid to shareholders over the last 12 months totaled BRL1,524 million, 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 practiced consistently and combined with its business model has transformed the company’s 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 30 last year, is ramping up as planned. The second phase of the project, which will include a coated board machine is still under construction on schedule, having reached 47% of the physical work according to the measurement performed on July 17. Start-up is scheduled for the second quarter of 2023. Since the beginning of the project, BRL9.4 billion have been disbursed, of which BRL882 million were disbursed in the second quarter of 2022.
Finally, on Slide 12, I’d like to mention a couple of initiatives and acknowledgments in the ESG arena that took place in the last few months. I highlight that we approved and implemented a 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
[Operator Instructions] Our first question is from Thiago Lofiego from BBI.
Thiago 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 is needed for this specific project. And as you well said, this is a platform for future growth. So I – well, 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 question, 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 U.S., a deceleration in Europe? I would like to hear more from you there, please.
Cristiano Teixeira
Thank you, Thiago. 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 walk, it’s better than walk. 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 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 and the return of the corrugated box return today. So in another fashion, this is better than the company’s walk. And our vision and the whole chain vision when we create this future growth platform, we 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 the only stress is what we have been talking about these additional 100,000 tons. And I mentioned the total capacity of 1 million tons – 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 to talking about Figueira, we have additional 100,000 tons that will help 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 we have done. About liner – okay.
Thiago Lofiego
I am 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 what – could we consider for an isolated analysis of the project, whether it’s 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, Thiago, this is Marcos Ivo. I will add with some specific figures. But first, let me remind you that we have BRL200 million in recoverable taxes. Most of them will be recovering immediately. Second, we also clearly said that we have BRL90 million within this CapEx, which is to prepare the site for the future recycled paper machine. This BRL90 million will be spent now, and they will allow us to have an important cost reduction and will also turn the future project much easier. Additional within this CapEx, and Cristiano mentioned, we have a land of 1 million square meters. And in the stage of the project, we will use a more share of it, around 10% of the land. And clearly, that shows that we have another share of CapEx that is related to future projects. As far as ROIC is concerned, as usual, in all Klabin’s projects, we do not publish the specifics of the project, but this is what Cristiano said, that this project will generate value. It has an ROIC that is higher than capital cost of the company.
And also, it has a return when analyzed in an isolate fashion when you do not consider the integration in Klabin’s chain. And that’s not how we like to look at it, but let me just add this disclaimer. If we were to analyze it isolately, it will generate value, but it has a return that is lower than the average ROIC of Klabin, but it’s important to be part of the business model of Klabin, which is a business model that allows Klabin to deliver a ROIC of 20% as we had last year. And Thiago, now turning to the operating side, I would like to say that this 100,000 tons that apparently don’t see much. Monthly exports of Klabin’s kraftliner, is 35,000. So it is obvious that when I bring in this additional capacity, that allows us to have more flexibility of something that we always mention, which is the characteristic of our operations. Is that fine, Thiago?
Now about liner, let me start answering this question. But we have Flavio and Soares on it, but they are not here right now. So I will start the question, but if they believe my question was not complete, they might add to it. But the current situation, as we always mentioned, liner has a direct impact, especially when kraftline turns virgin, and we have an impact coming from the American exports. American exports were coming down on a monthly basis. And then this was a historical reduction in the past years and in 12 years and more recently, because there is a growth of boxes shipment in the U.S. more recently. So they were reducing these exports, and this is the first part of the history, the whole story. So this really helped the international prices for liner. And obviously, we did see the positive effect here. But adding to that, and I’m giving you a brief history on the full side of the glass here. We did have stoppages – factory stoppages in the U.S. There were also climatic issues also in the North Hemisphere. There were some fires events in manufacturers in the world. More recently, there was an energy crisis. So there is a market situation here. And I could say that in the short-term, this is allowing us to sustain prices so far.
It is obvious that from now on, we cannot overlook the higher interest rates in the world and obviously in the U.S. as well. And this is our main focus, I believe. And that will somehow cause the lower consumption. It will bring down consumption and this reduction in consumption of corrugated boxes in the U.S. should be reverted to this exporting coming back, and that is going to affect the market. And I believe liner probably will have a lower price than what we have now. We obviously can’t have the exact timing of all of this, but this is the trend we foresee. The same situation also happens in Europe, and we will see their higher interest rates, and therefore, the reduction in consumption. Therefore, the global inflation will affect the price curve of liner and also other products that have that commodities characteristic. Therefore, I can say that look, investment in corrugated boxes, which has a curve that is very close or higher than inflation in terms of price over time and which is also very resilient was even in Brazil, although we already see the inflection curve of inflation. Even in Brazil, we might see an income impact, obviously. So we will use corrugated boxes to convert paper, offsetting the drop in international prices and also corrugated boxes because they are related to 70% of the food consumption. We know that the food consumption is much more resilient than anything else. So, even if we have a loss in income in the next year, and we do not expect that, but if that happens, what we see in practice is that we are going to have a change in tickets. I always explain that the migration from red protein to white protein, but the volume of corrugated boxes is very resilient considering the figures that we presented to you. So Soares and Flavio, one of you, if you want to add to this, please feel free to do so.
Flavio Deganutti
Thank you. Cristiano, I think you talked about everything. We see that we have something that is very structural and the markets are very strong. We have a price pressure, as you mentioned, and this possible accommodation of prices that might be slow.
Thiago Lofiego
Perfect. Thank you very much, Cristiano, Flavio and Ivo.
Operator
Our next question comes from Caio Greiner with BTG Pactual. Please go ahead.
Caio Greiner
Hello, good afternoon, everyone. Cristiano, I’m sorry to insist on this point about the project, but I believe all analysts online here know this is a big discussion topic with investors, and it has been so for the last few weeks and days. So I think it was important to have a lot of information from you. Actually, I have two questions. First, I would like you to clarify a little bit about the difference of CapEx per ton in this project vis-a-vis others in the industry, the information that you disclosed in the IP acquisition, we also have to take into account inflation rates and the future expansion. So I believe this is clear. However, a second point – and actually, my question is the following. Why should we do this project right now considering well, I would say, generating all this noise? We really want to know, understand the company’s timing and motivation. If we think about the approval process, independent stakeholders, sometimes some negative scenarios or type conditions. And despite of that, if we do the math, conclusion is very similar. So my question is, why approve the project under these conditions? We understand this is part of the strategic road map of the company, but wouldn’t it make sense to consider another alternative right now and maybe postpone the investment for the future? You have excellent projects in the south of Brazil. What about expanding Starkraft or kraftliner or expand pulp, softwood? We know how the demand is catching the market. So I just want to understand the driving force and the timing behind this approval, anything about maybe being positioned in order not to let competition come in? So could you give us more color about this topic about the project because discussions – recent discussions have been very relevant? And the second question, a brief question. Nico, could you give us an outlook in the short-term for pulp? I think the burning question from investors, not only for Klabin but commodities in general, when will things go back to normal? We can see opposing trends, and we’d like to hear from you how you envisage the short-term demand. Do you think there is still room for prices to remain at a slightly higher level for long? Thank you.
Cristiano Teixeira
Thank you, Caio. Great question. It will give us an opportunity to talk about these points. Why don’t we do the following? First, let us talk about pulp, and then I’ll feel free to answer the first part, that seems to be longer. But let us begin with Nico.
Alexandre Nicolini
Hello, Caio. Good morning, thank you for the question. Caio, if you think about the short-term, this quarter scenario, the expectation is very positive. As you can see, the market remains very resilient. We highlight geographies like Europe, the U.S., Asia Pacific, Middle East, Africa, all these countries and geographies have been performing very well when it comes to consumption of fiber in general, more specifically the three fibers: softwood, hardwood and fluff. And maybe more different is China, but this is more related to the macro scenario. I think you have an even better understanding than I do. But despite of that, China, when it comes to consumption and demand in general, it goes well with no serious problem. So the outlook for the third quarter is very positive.
Cristiano Teixeira
Okay, Caio. So now maybe let’s try to explore and tap into all the points you mentioned, starting with Figueira. Look, the first point when it comes to CapEx, you probably know that when we’re about to make an assessment of investments, we make a comparison. We compare it with M&A, for instance. The cost of acquisition of a competitor per ton, for instance, just as we check investments compared to other corrugated box investment in Brazil and in the world, so this number is absolutely in line with investment in equipment, absolutely in line with any other investment that we might have in the world today on a tonnage basis. Cost inflation rates that have been represented both by production costs, ferrous material and all electro-electronics that will make up or be part of a state-of-the-art plant. So if you consider this context, be here or anywhere else. And by the way, I would like to say that not only considering cost but also the delivery capacity, and I’m not disconsidering or disregarding any other project in the world. But if you consider Klabin’s project, we are proud to say that the delivery promised and the price achieved just to focus on the recent history of a company that is 123 years of age, the commitment and delivery of our projects in terms of cost and time, increasingly underscore our expertise to deliver plants.
As for the recent moves, like IP and if we look backwards, we had another two companies like a company in Manaus and another in Parana state. These M&As, obviously, these are events that happen. Many of these companies are family business, smaller Brazilian companies. We’re always keeping our eyes open and very fortunate or happy whenever there is an opportunity to add these companies through Klabin’s portfolio. Klabin focuses on a percentage market share, considering consistent growth in the future. So we always had this vision. So if we decided, as we speak, to invest in plants, compared to M&A or in contrast to M&A, obviously, it was because the market was not available for a potential M&A or an M&A of the magnitude that we had in the past. But not only that the Southeast of Brazil, more specifically requires competitiveness.
I don’t want to talk too much about geography, but you know about our continental dimensions, and Southeast has more fierce competition. So it’s up to Klabin, which is the market leader, to own the best pieces of equipment, the lower cost, the best optimization in logistics in their plants and deliver the best level of service to its customers, considering we are suppliers of the most important global end-users in the Southeast of Brazil. Therefore, this investment is consistent. We are walking the talk. It represents the purpose of integration. And this is expected by the way, once I increase the paper capacity for corrugated box, and I decide to sell it worldwide. Part of it will always be integrated. And as we have an increase in the volume of paper, the same will happen with a level of integration in order to assure the number that we consider optimum within Klabin, focusing on stable results and naturally dividend payout, which is the focus of the company. So we will keep on growing, also in conversion considering top priorities in order to ensure stability in the company.
I think you used the word noise, if I’m not mistaken. I have the following opinion. We had very important contributions. We are constantly addressing diversity in opinions and they will truly enrich the governance of the company. This company was transformed into governance in recent years. We have rich debate on strategy at the company, represented by all directors of the Board and naturally the Board in recent years has a full group of people, the right group of people to assess investments and recommendations by the Board, by the officers at least since 2018, 1 year after my appointment. So this vision is a long-term vision. And it shouldn’t be different in a company like this. And I have a question, think about a company that is 123 years of life, basically, a forest-based company, which prepares fields and areas, so we may invest for the next 5 to 10 years. We have to think strategically in the long run. I know we could be just talking about this, but this is really represented by the constant increase and focus of the company and all officers of the company, the Board, the management focusing on how to improve the company’s capital – return on invested capital.
As for better investments, I think that’s how you put it. Look, we truly have an investment pipeline that is very promising. They will all bring improvement, including improvement in the company’s ROIC. We’ve been studying it thoroughly, studying how to improve and increase our capacity significantly in existing sites, so diluting fixed costs and also making use with the installed CapEx because that’s a brownfield. So we are underscoring the ROIC that double in the next – of the previous years, and we will keep on improving because we are sure about the investment for the future, but why corrugated box now and not the others? Simply owing to the commitment to deliver to our customers. So we did not have any mark on land. This is sheer mathematics. The move of the GDP in Brazil, these investments are mature. They have 2 years to be built, and we consider that at given time we will need more capacity because corrugated box – think about this here. In the first half of the year or the first quarter, mostly, it was a poor delivery compared to the first quarter of last year, if I’m not mistaken, a different of 10%, and the whole installed capacity was below. But when you come back to the third quarter of the previous year, actually, at that time, we reported – well, in the media, there was a shortage of corrugated box. So this is accurate mathematics in order to deliver the level of service to our customers. So that’s the need right now. Other investments are going through engineering studies. They are being submitted to area studies, so we can grow forest. And once this is mature, there is no doubt that we will be submitting this to the Board of Directors for the necessary considerations.
Operator
Our next question is from Rafael Barcellos, Santander.
Rafael Barcellos
Good morning, everyone. Thank you very much for taking my questions. My first one is about the spreads and fibers. Klabin in the past few years is special in this fiber mix. And especially in the last quarters, it has benefited from favorable spreads there. And I would like to know how you see these dynamics for the second half of the year now? And the second question is a follow-up on Project Figueira and I’m sorry about going back to it once again, but you talked a lot about efficiency gains that this project might bring, and also capacity that might be a replacement of 140,000 tons, but 100,000 of net capacity. But having said that, I would like to understand your vision how low are this cost would be for the operation or even margins in terms of current operations? It would be interesting to understand that. Thank you.
Cristiano Teixeira
Thank you, Rafael. So let’s start with the spread analysis and then Marcos Ivo will take over. Okay, good morning. Thank you. And I am going to divide this question in two, because when we – we also have a fluff and softwood and also based. The significant spread in fibers in the case of a fluff of $400 per ton now, it has to do with the context that fluff is, we already said, is a segment that is greatly dependent upon containers shipment, and we know that the availability of containers freight also were significantly impacted. I should also say, less capacity in the U.S., which had an impact of 280,000 tons among other problems and production problems in Argentina and the U.S., which ended up favoring the market in general. Fluff, if we look at it in the long-term, is a product that should have a good performance and detach from other fibers, considering we do not have any new capacities coming into the market. About hardwood and bales, when compared to softwood, the history usually points to a gap of $80 to $100 per ton. This gap in the beginning of the year was over $200 per ton, and the moderation for that is that the softwood had an acceleration in prices at the end of last year and the first quarter of this year. And eucalyptus took a little bit longer to go up. Today, the gap in Europe is around with this new price increase for August, $40 per ton. So softwood is at the level of $1,520 and we will have a gap of $140 per ton between softwood and bales and eucalyptus and we believe this is a gap that we will see until the end of the year.
Marcos Ivo
Rafael, this is Marcos Ivo and I am going to address your question in qualitative terms. It is clear that we will have an efficiency gain with the new factory for Project Figueira. We have gains both in fixed costs as well as in variable costs. So talking about fixed costs, the largest corrugated boxes factory of Klabin in Jundiai has around 120,000 tons. Therefore, we have several other plants that are smaller than that. This plant will have a capacity in this new stage of 240,000 tons. So clearly, it will be a factory with a fixed cost per ton of corrugated box that is going to be lower because we will have the dilution of fixed costs. And remember, over time, when we carry out all our visions for the site with a strategic location within the largest consuming market for corrugated boxes in Brazil, this dilution is going to be even greater. Now talking about variable costs, this is the state-of-the-art plant in terms of equipment with the best technology available, and we also have a variable cost that is lower than Klabin’s average because of less waste. So we will have the same paper, but in practice, we’ll have less waste. So therefore, we will be using less paper per each ton of boxes that we manufacture. Therefore, we will have a significant gain in the margin per ton or in the EBITDA margin for boxes that are manufactured in Project Figueira site.
Rafael Barcellos
Great. Thank you.
Operator
The next question will be in English. Carlos De Alba, Morgan Stanley.
Carlos De Alba
Yes, thank you very much. Just maybe another aspect on Figueira project, could you elaborate a little bit – and sorry, if I missed this earlier, but could you elaborate a little bit as to why the net capacity increase is only 100,000 tons, when the capacity of the plant is 240,000 tons. You could give us some color as to why this brings the gap? And if that, in any way, has an impact on these sort of discrepancies and difference of opinions that the management team and the majority of the Board members have versus the independent Board members that voted against the project or at least expressed serious concerns about the returns? And then the second point is on the cost front. All the companies that we have been discussing the second quarter results with have been posting cost pressures or are seeing cost pressures and have been posting higher costs. What do you see going forward for the company? You see continuous increases, single-digits, double-digits or more of a stable performance from what we saw in the second quarter? Thank you very much.
Cristiano Teixeira
Thank you, Carlos. I will begin to answer your question. And if Marcos find it appropriate, he will add information on cost. But speaking of the net capacity of 100,000, the main purpose with a super site, that’s how we call it, we could have a third corrugated box machine in the future. This super site allows us to turn off smaller machines that are found in other units. And should that happen in the future, and therefore, the assumption of the project is conservative in the sense that in the future, if we feel the need of 100,000 only, we will be working on this additional amount and optimize it in a smaller machine. We bought a lot of units lately and there are smaller machines distributed in all these units. So that’s the business case. Assuming down the road, the market is favorable or better than what we expected, maybe not even these smaller machines would be shut down. As you well know, we plan the best way possible. So we are considering a conservative business case. And that’s a number to optimize cost. However, if the margin allows us in the future – well, by the way, this is going to be ongoing in Klabin in the future. That’s important in our industry, one, to always optimize the super sites and always focusing on the level of service, which is increasing our footprint. So, it’s just trying to do a little bit of everything, optimization, delivery and decisions will be made in the future. So in the assumption, well, I can assure you that it’s the most conservative model possible as it happened in all our latest business cases introduced in the last decade.
Now before I turn it over to costs, look, this debate was very, very discussed by the Board, and we thank the members. We knew how much they contributed in this assessment. And this debate, personally speaking, this debate focused a lot on this attitude of trusting this business model, this integrated business model in which we have to continue to invest to cater to our customers’ needs. And at the same time, a vision that is absolutely favorable, considering then a higher protection should we have another crisis, for instance, or more stringent crisis compared to what we already foresee for future years. And the assessment by the group, as all of us, we are a large group, we listen to other people’s input and we view the solution together. The Board, the management is just one thing, and it is consistent in this debate. And at the end of the day, the conclusion of the company’s management was to keep on focusing on the company’s business model, delivering to our clients and confirming the improved ROIC that happened in the last decade and will continue as such because this corrugated box project, therefore, integration project brings integration of volatility of other markets, as you know, exposure to the international paper industry. So it was a very positive rich debate. As for costs, well, I talked a little bit about inflation and I think somehow I answered part about the cost expectation. Marcos Ivo definitely can tell you more about it.
Carlos, about cost for the second half of the year, if we consider maintenance – by the way, this is an assumption. If we consider maintenance or prices of raw materials that we use in our production process at the level they are today – and by the way, I’m specifically addressing oil and chemicals and byproducts. If this assumption becomes true, Klabin’s expectation is that the cash cost of pulp and paper production, net of scheduled downtime effects, they should be in the same level in the second half of the year compared to what we had in the first half of the year. Carlos, just adding to what he said, Marcos was very accurate in his answer. However, let me try also to share a structural viewpoint. We mentioned several times with all of you, and I apologize if I sound redundant. However, Klabin is going through a growth process. We trust the ability to grow organically in the region where we run our operations in the south of the country, oriented to the products that showed us recent success, fluff for instance. It’s a highly successful product at the company and even Eukaliner and others and Starkraft was also mentioned here. So if you look at the company with potential organic growth, just as we did with Puma II project, this means that we would rather be agile in the market and invest in machines and buy third-party wood in a first cycle, so to speak, when it comes to eucalyptus, for instance, 7 years. And this third-party wood came from further away. And obviously, for the 7 years, we’ve been buying areas, so then we can work on planting and a second crop or a second cycle. So the structural cost of wood will go down. So this message, this positive message that we want to convey to you is that the company anticipated growth benefiting from the wood that was further away. However, doing a lot of structural work, so we can come back pretty close to the average radios that we recently had at Klabin. So if we only consider the 10 years that we’re speaking so much about with you, it moved from 1.5 million tons to 4.7 million tons, basically already using the Machine 28 capacity, which is the last phase of Puma II project. So, considering this volume and the size of growth that we achieved with very little change in the structural average radio, so I just wanted to show you a glimpse of the structural cost, but not on your company. Your question was more focused on what Marcos showed us. Thank you.
Carlos De Alba
Got it. Thank very much. Great discussion and congratulations on the transparency which you handle the discussions about Figueira with the Board, it really shows commitment to transparency. Thank you.
Operator
Our next question is from Daniel Sasson, Itau BBA. The floor is yours.
Daniel Sasson
Thank you. Good afternoon, everyone. Thank you very much for taking my question. And I would like to know more about realized price. I know you have a good performance vis-à-vis the competition in terms of discounts and prices and the benchmark. Can you comment on what – how do you explain that improvement? If that is because of your geographic mix or if you think that you had a lagging to invoice your Asian orders and that is a little bit lower or faster, and therefore, you have been able to seize this opportunity and realize this recent price increase in pulp? If you can comment also how much of your sales are more exposed to a 100% spot market, if this is more connected to a few months contracts with larger clients. I would like to better understand your mindset regarding possible long-term contracts with your clients in order to reduce volatility in pulp prices or if this is something that doesn’t make any difference for you? Thank you.
Cristiano Teixeira
Thank you, Daniel and Nico was going to answer your question.
Alexandre Nicolini
Hello, Daniel. Thank you for your question and your comments. Well, revenue management is the flagstaff of all discussions related to the business units of the company. Like you said, the long-term contracts and the spot market, the spot market is not something that we are focusing on. We mentioned that in the first quarter, we have over 90% of our production now already contracted. These contracts are carried out from the beginning to the end, but we do have a greater exposure to Asian markets. Today, as we said before, this wasn’t a strategic decision of the company to bring down the exposure to Asian market considering that at the time, we realized that this market – that market was going to have a hard time in terms of prices. So this is a combination of prices or contracts signed in the U.S., in Europe. You know that Klabin also has a strong footprint in Brazil. This is the largest pulp supplier in Brazil. Considering all production capacity of Klabin and Brazilian prices follow the prices – reference prices of Europe. And considering all that context, our average price was higher in the period. And the spot market is not a market that we are strong and because we do not have the capacity for that market, considering all the contracts already signed.
Daniel Sasson
Thank you very much, Nico.
Operator
Our next question comes from Caio Ribeiro, BofA. Please go ahead.
Caio Ribeiro
Thank you. Good afternoon everyone. First of all, coming back to the Figueira project vis-à-vis future expansions, I would like to hear from you if you have any preliminary study on which CapEx per ton would be necessary to unleash new expansions on this site. It could even be a range, just to have us better understand what kind of economic improvement you might see for future projects on the site? As for future assets, 40,000 tons, I’d just like to know if you give us some color on the margin, the average of these assets, the EBITDA margin, more specifically, some are running with a negative margin. Thank you.
Cristiano Teixeira
Thank you, Caio. Look, first of all, we cannot give you an estimate on CapEx, not for lack of transparency, quite the opposite. Look, this map is arithmetic, if we look at recent investments in Brazil or worldwide, dividing investment by the installed volume at the plant. If we consider this number, then we have a ratio of steel, labor etcetera. Freight are very much affected. So at the end of the day, this will come in quotations for new investments that we might consider. So I recommend that the best way, because I cannot give any guidance right now, but once again, not for – not because I don’t want to give any numbers, but simply because that’s a number – well, if we consider instability in Brazil and in the world, these numbers doesn’t make so much sense. So our engineering will dedicate to the scope of investments and then proposals have a very short timeframe owing to instability. So unfortunately, I cannot give you any figures, but I can at least share with you our trust in being very efficient in these investments. And Ivo is going to answer the last part of the question.
Marcos Ivo
Caio, like I answered Rafael, we have a qualitative response. Gain will come from higher dilution of fixed cost, lower scrap impact on variable costs. Cristiano already says that it comes from a potential shutdown of machines, spread over 6 sites in the region, which are older machines and we could also disconnect inefficient shifts. So, this is a list of items connected to efficiency, but naturally, this site has an EBITDA margin of reais per ton or metric ton that is higher at Klabin.
Caio Ribeiro
Perfect. Thank you, Cristiano and Marcos.
Operator
If there are no further questions, I will turn the floor to Mr. Cristiano Teixeira for his final remarks.
Cristiano Teixeira
Thank you. I now share the outlook for the third quarter, which actually has already started. In the third quarter, we will deliver even stronger results than in the second quarter. The quarter is seasonally good, especially for corrugated box, a segment in which we expect to increase our sales volume in the second half of the year compared to the same period of the previous year. Still celebrating 123 years of Klabin’s history, we remain confident to deliver EBITDA growth for the 13th consecutive year and committed to our vision of growth and generation of shared value in the long run. Thank you all for joining us and we look forward to seeing you in Klabin’s next earnings conference call.
Operator
This concludes Klabin’s SA earnings conference call. Thank you all for joining us today. Have a great day. Thank you.
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