Empresas Copec SA

SGO:COPEC

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, everyone, and welcome to Empresas Copec's First Quarter 2018 Results Conference Call. Today's presentation and the 1Q '18 earnings release are available on the company's website at www.empresascopec.cl and also in our Investor Relations website, investor.empresascopec.cl.

Before we begin, I would like to remind you that this presentation may include market outlooks and forward-looking statements, which are based on the beliefs and assumptions of Empresas Copec's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Empresas Copec and could cause results to differ materially from those expressed in such forward-looking statements. This presentation contains certain performance measures that have been adjusted with respect to IFRS definitions, such as EBITDA.

I would now like to turn the conference call over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.

[Rodrigo Alvarado, executive]

Okay, thank you very much. Thanks, everyone, for joining today and welcome to this conference call where we will be taking a look at the results for the first quarter 2018. I am joined here by Cristián Palacios [indiscernible] who is our Director of IR; and also by Gianfranco Truffello, the CFO of Arauco and his IR team.

Let me start by going to Page 4 where we will be presenting the results of this quarter in relation to the historical results. You can immediately see here that this an EBITDA that is very high in historical terms. It's actually one of our record EBITDA in the last few years of the company. And likewise, the net income is also at a very high level. It compares very well with the fourth quarter 2017 where we had several one-off effects, especially -- or negative in the net that brought the net income of the company down to $106 million. And it also compares very well to the first quarter last year where we had the very large negative effects of the wildfires that affected Arauco in the first quarter and which brought the net income down to $49 million. So we are recording $280 million in net income and $681 million in EBITDA for this quarter.

Moving on to Page 5. You can see here to the left-hand side, in terms of the valuations that explain the increase in net income that most of the gain with respect to last year comes from our subsidiary, Arauco. Arauco has the 2 more important effects that explain our increase in this particular quarter, operational and nonoperational. In operational terms, we had a very good performance in Arauco, lead essentially to sales of the different products. In regard to nonoperational effects, the most important one that we had is the negative effect that we recorded last year in relation to the wildfires. Together with that, we are increasing slightly the EBITDA in some of our fuel associates, some of our fuel affiliates, basically Abastible. And to the contrary, we are decreasing somewhat in a couple of associates, particularly Metrogas and AGESA for reasons that we will explain further on.

In EBITDA terms, which is shown on Page 6, the analysis is very similar. Most of the increase comes from Arauco once again and have to do with the very good performance of Arauco in of the business lines and particularly in pulp related to the good levels of prices that we've seen in the last few months. In terms of EBITDA breakdown, you can see that our EBITDA is explained basically by Arauco, Copec, Abastible and Sonacol. Usually, the fuel sector plus the forestry sector make up the bulk of our EBITDA generation.

Moving on to the detail of the income statement, which is shown on Page 7. You can see that, as we mentioned before, we have increases in both the operating income and the nonoperating income. And I think the nonoperating income, in particular, we have a less negative effect. In terms of operating income, once again, the very good performance of Arauco which relates to sales in all business lines, particularly pulp. In the case of nonoperating income, the most important effect, as we already mentioned, has to do with the wildfires recorded in the first quarter 2017. This was composed in terms of 2 different effects. One was recorded in other expenses and that was offset, to a certain extent, by the deferred tax effect that was recorded in taxes in the first quarter 2017. The net effect of those 2 was a hit of approximately $130 million in our net income. This was back in the first quarter 2017. That, of course, is not there anymore. So that explains most of the increase or better results that we've seen in nonoperational terms. Together with that, offsetting that, to a certain extent, we have higher financial expenses in Terpel which basically relates to the one-off acquisition expenses recorded in relation to the closing of the ExxonMobil operation. We will come to that later on.

In what has to do with our financial ratios, which are listed on Page 8, we can see that net debt-to-EBITDA increases a bit with respect to the 2.3 level at which we closed last year. We have increased our debt levels in relation precisely to the ExxonMobil operations. So this is new debt that we have at Terpel and this brings our net debt to EBITDA slightly up to 2.4. You can also see that our EBITDA margin goes up to 11.8% and that basically comes from the very good performance of our pulp division. Going forward, you can see a well-balanced debt schedule which was improved further after the refinancing operation that Arauco went ahead with at the end of last year.

On Page 11, we are going into the details for the forestry division. Arauco recorded a net income of $198 million compared to a loss of $46 million in the first quarter 2017. The stronger operating income comes from increased revenue, in particular, at the wood pulp business. And together with that, we are showing very strong sales volumes for the panels division.

In terms of nonoperating income. Once again, the main effect here is the negative charge that we took in the first quarter 2017 related to the wildfires, offset with a positive deferred tax effect. Together with that, we are showing lower other income, slightly lower other income, which essentially relates to our revaluation of biological assets. And we're also showing a drop in financial expenses, which is a result of the refinancing operation that Arauco has completed by the end of last year.

Moving on to the pulp division, which is shown as from Page 12. You can see that the EBITDA coming from the pulp division has risen quite strongly and is closing this quarter with a figure of $343 million. So EBITDA for the pulp division is $343 million, which compares very well with both the first quarter 2017 where we had $161 million and the fourth quarter 2017 where we had $254 million.

So the basic explanation here relates to prices. The increase in price with respect to the first quarter 2017 on average, the average [ bid ] in the quarter increased by 42.7%. And with respect to the fourth quarter 2017, it increased by 13.3%. So very strong pricing environment that has generated these results in pulp. Costs have gone up a bit with respect to the first quarter 2017 but have decreased somewhat with respect to the fourth quarter 2017.

A few comments on Page 15. A few comments about the pulp division outlook. We are basically seeing stability in wood markets for pulp, stable in China and very good signals in Europe. In Europe, we are seeing an active demand. Paper producers operating at full capacity. Costs being passed on to final customers. And also some supply restrictions that have also helped sustain prices at a high level. These restrictions basically have to do with Scandinavian producers that have had their access to plantations made more difficult by a mild winter, basically, a month and a few -- very few -- the snow has made their access more difficult and therefore has limited their production.

In Asia, in general, we have seen high demand, stability after the Chinese New Year and also in general, stability in the quarter, the second quarter, which is usually characterized by low seasonality. So all in all, seeing those price levels that might basically remain at these levels for the months to come. We are now selling in China at $890 per ton for softwood and $800 per ton for hardwood.

Regarding the world indexes, in this case now standing at 1.1 or $1,170 per ton, and the [ HKP ] at $1,050 per ton. So as you can see, good price levels and signals of stability in general.

In terms of inventories, which are shown in the graph in Page 14. We are seeing that stability as well, levels which are quite in line with historical levels. So no signals of abrupt changes coming from the inventory data.

In terms of growth of global demand, we are seeing demand stable and growing at 0.2% but on a very high base. We already had a very high base of demand in the first quarter 2017. And on top of that, we're still growing by 0.2% with some parts of the world, as we said, especially in Europe, showing very interesting levels of growth.

On Page 15, a word about our wood products. Wood products. The performance of wood products during this quarter was basically determined by a very interesting growth in volumes. As you can see, panels have grown at 11% with respect to the first quarter last year and at 8.4% with respect to the last quarter last year. And in terms of sawn timber, we are seeing very good performance in terms of prices. All in all, our EBITDA generated in the quarter, which amounts to $92 million, is stable with respect to the first quarter last year and up with respect to the $87 million generated in the fourth quarter of last year.

On Page 16, we are showing a brief analysis of the main markets in which we sell our wood products. North America continues to show a good trend. Housing starts are now standing at 1.3 million units per year as of April. And yet, demand remains stable. We are expecting and we are seeing good signal in terms of MDF moldings and also remanufactured products where demand is recovering. And things are especially good for plywood where we are seeing strong demand and also high volumes and prices.

North America accounts for 46% of our total sales in that division. Our next most important market is South and Central America with 35%. In this case, we have incorporated the operations of Masisa in Brazil. We acquired these assets at the end of last year and we have already incorporated the operations of the Masisa assets into our operations in Brazil. The market has shown some signals of recovery. However, we remain cautious because of the new plants or new mills that are eventually entering the Brazilian market in the second part of the year.

Argentina has continued to show stability and good signals. Positive first quarter. And Chile, we also see a good scenario for both panels and sawn timber and also especially for remanufactured products. Both Asia and Europe and also the Middle East are stable, steady and showing some opportunities for increases in price.

We're now moving to our fuels division on Page 19. We had a decrease in operating income. We were comparing with a very high base, in particular, in Chile in the first quarter of 2017. We had a couple of very positive effects. So base was really high. And therefore, the drop in operating income is explained to a large extent by results going down operationally speaking in Chile. And this turn is explained, by a large extent, by the FIFO effect which is negative compared to a very slight positive effect that we had in the first quarter last year. Together with that, we have seen a reduction in some other -- some of the other components that lent some volatility to our margins such as the margins related to the import of fuels in order to be sold in Chile.

In Terpel, we have seen a lot of stability. The EBITDA is very, very close to what we achieved last year. In this particular case, we have a slight increase in distribution costs which is offset by a very good performance in terms of growth in volumes.

In Mapco, we have seen a decrease in EBITDA as well. This stems from lower margins and higher administrative expenses. But it's worthwhile to note that volumes have been growing at a very high rate. In terms of nonoperating income, there is one important effect to note here which is the fact that the financial expenses in Terpel have increased quite significantly this quarter but this is -- most of it has financial effect -- a one-time effect related to the acquisition to the closing of the ExxonMobil operation.

Some operational figures on Page 20. We can see here that the fuels market in Chile, the volumes sold by Copec in Chile have grown at 0.5%. Very different performance of the industrial and the gas station channel. In the case of gas stations, a very strong 5.1% increase in volumes. This is usually linked to GDP plus new cars in the system plus the price of gasoline, and that basically explains performance of volumes in the gas station channel.

In turn, the industrial channel is showing an decrease which is basically linked to 2 things. One of them is the loss of an important mining customer by mid-2017. So we will have a higher base of comparison, both this quarter and next quarter in terms of volumes sold to mining customers. And together with that, we have seen a lower demand coming from power generation. This, as we have discussed before, is like a volatile demand which relates to the weather conditions and pricing conditions prevailing in the Chilean electrical system. So lower volumes in mining and power generation explain the drop in the industrial segment.

Going forward, we should see margins at quite a stable level with the exception of the FIFO effects and also the possible effects of some increases or decreases in relation to import margins. In gas stations, we are seeing stability -- we are seeing growth and stability in margins. In the industrial segment, we should see volumes gradually picking up, in turn -- in relation or linked to the performance, the economic performance of the country in general. We have also included a comment on Mapco there. Mapco has shown a very interesting growth in volumes, 12% growth in volumes. But we still have to manage margin stabilization and also operational efficiency in order to actually achieve better financial results. But some operational and financials such as volumes and also margins at convenience stores have been improved.

On Page 21, some more operational figures related to Terpel. We're seeing EBITDA, as you see, that is, as we mentioned, very stable with respect to last year. And this is driven by, on one hand, a very important increase in volumes, 5.1% increase overall. Colombia and Ecuador have been very strong in terms of growth. In the case of Colombia, which is our main market, the most important drivers there are, on one hand, the performance of gas stations and in particular, company operated gas stations and also the performance of the aviation segment. All of this is partially offset by a slight increase in operational expenses giving, as a result, an EBITDA which is very stable in terms of -- measured in Colombian pesos.

Probably one thing to note here is that we do not -- we're not recording the EBITDA coming from Mexico anymore. Just remember, we sold the NGV, natural gas for vehicles division for Mexico last year and that amounts to approximately $1 million in this quarter of less EBITDA. So Mexico is not there anymore.

Abastible, which is shown on Page 22. We have seen quite significant increase in EBITDA and in operating income. This is related to a very good performance, both in Chile and Ecuador, partially offset by volumes going down in Peru and a very stable [indiscernible]. Part of this increase has to do with one-off accounting changes, accounting criteria, basically related to some provisions for years of service.

In terms of nonoperating results, we have a slight increase in financial expense. Operationally speaking, we are showing some more data on Page 23. Chile growing very strongly. The bottled channel basically growing at 16.3%, offset to a certain extent by an industrial or bulk channel that has decreased a bit, 2.5%. Overall, Abastible has increased its sales by 9.9%, a very impressive figure during the first quarter. A little more than the market. The market goes up by approximately 8% and Abastible is up by 9.9%.

We are seeing stability in Colombia. Good levels of EBITDA generation, 0.2% increase in physical sales. In Peru, we have a challenge in Peru. A lot of informality there has caused volumes to decrease by 7%. We still have to manage the best way of -- we have to optimize the management of all distribution channels and we have to wait for [ informatics ] to be controlled in Peru. We see this a, as we have said before, as a short-term problem but a long-term opportunity as [ informatics ] improve.

In Ecuador, we are doing very well. Volumes have increased by 7% -- 7.4%. This is basically in line with the fact that a program of electrification which has been pushed by the government is -- has lost strength and this has provided for more opportunities for propane to grow. In the particular case of Duragas, our subsidiary in Ecuador, we have consistently been gaining market share.

In our pipeline division, Sonacol, on Page 24. As always, this is very stable with an operating income that is in line with last year and that basically is also in line with the slight growth, the 1% growth in volumes that we have seen during the first quarter.

Moving on to our other investments. In the case of our fishing division, Igemar, which is our fishing division company, we are seeing an increase or improvement in the results. It's less negative results and this relates basically to better operating performance which has to do with increased catches and higher prices for most of the products.

In the case of Corpesca, which operates in the north of Chile, profit goes down a bit basically because of higher selling costs.

Laguna Blanca, which is our coal operation in the south of Chile, it has a higher profit basically as a result of exchange differences. Operationally very stable with respect to last year, selling at good price levels.

And finally, in the case of our 2 companies in the natural gas business, Metrogas and AGESA. In Metrogas, we had a one-off effect. Quite significant which relates to extraordinary expenses in lawsuits and arbitration which are basically historical. This has to do with historical judicial processes that have been carried on in relation to the very old events that took place in -- from 2004 and onwards when Argentina cut the provision of natural gas to Chile. And so we took a hit from those very long arbitration [ and laws and ] processes. In the case of AGESA, basically we have lower result related to lower sales to the electricity segment.

That's it for the numbers. Now we move to the main announcements and main developments that happened -- that took place during this quarter.

First of all, we announced an updated figure for our investment plan for 2018. This comes up to $2.1 billion. This includes the figure that was already incurred for the acquisition of the ExxonMobil assets, [ $716 million ] included in this figure. The remaining $1.4 billion approx. is roughly half for maintenance and half for expansion. Within the expansion projects, probably 2 or 3 things to highlight. The Valdivia dissolving pulp project, we will be devoting approximately $100 million during this year for that project. Similarly for the Grayling Project, a little more than $200 million going to that. And also, some couple of hundred million dollars going to increase our plantation, stock of plantations, especially in Chile. This $2.1 billion figure does not include 2 operations that have been announced, that have not been closed, which are the acquisitions of the Masisa assets in Mexico which amounts to approximately $240 million and the acquisition of the Mina Justa project in Peru in mining which amounts to approximately $170 million. That's it for the total CapEx figure for 2018.

On Page 29, very briefly, the status of the 2 main projects that Arauco is now going forward with. In the case of Grayling, the project is at 60% completion. Just as a reminder, this is an 800,000 cubic meter per year project with a CapEx attached to it of $400 million. We are expecting operations to start by late 2018. So by the end of the year, we should have beginning of operations at Grayling. In the case of Valdivia dissolving pulp, we are showing a progress of 20%. The total CapEx for this project is $185 million. It takes 2 years and we should expect the beginning of operations for late 2019.

More on the forestry sector on Page 30. We have updated the production capacity for Montes del Plata in terms of environmental permits. We have moved from 1.45 million to 1.52 million tons per year. The project was initially designed for a capacity of 1.3 million [indiscernible] 1.3 million tons per year. We have been producing approximately 1.4 million tons per year. We -- just to remind you, we sold 50% of this asset in a joint venture with Stora Enso.

Certification. FSC certification has been renewed. This is a very demanding, [indiscernible] process that basically reviews our forestry operations and that is key to have access to the world markets in terms of forestry products. So this has been [ the region's ] -- in a very important development.

On Page 31, we have some details about the Mina Justa project. We are buying a stake, a 40% stake in a mining project called Mina Justa. This is a project which is going to be controlled by a Peruvian company called Minsur, which is going to hold 60% -- the remaining 60%. This is going to be done through a Peruvian company called Cumbres Andinas. We're going to have 40% of that company, Cumbres Andinas. And in turn, the vehicle that we will use from Chile will be a company related to our mining division, Alxar. Cumbres Andinas in turn is the controlling shareholder of a company called Marcobre, also in Peru, and this, in turn, is the owner of the Mina Justa project, which is the asset that we are buying. This is a very interesting asset. We are making an initial payment of $168.5 million that is subject to adjustment, depending on the final closing date. This is an estimate as of April 30 and is using that balance sheet. It is a very interesting project, which is in the south of Peru. We have estimated production at around 100,000 tons per year of fine copper. The total resource base is 432 million tons and the grade is 0.75%. That gives a commercial life of approximately 18 years. This is excluding the growth potential coming from nearby mining concessions which we are also going to have access to. Total CapEx for development of this project is $1.6 billion, which is going to be incurred around 3 years. Construction is expected to start in the second half of this year. The construction is going to be financed partly, half of it approximately, with a project finance debt facility which is going to amount to between $800 million and $900 million. In relation to that, we have to go ahead with extraordinary shareholders meeting that took place a couple of weeks ago and where the granting of guarantees for this project finance was approved by shareholders.

So in the initial part of the project when the project is being built and up until completion, the debt is going to be guaranteed by both sponsors proportionally. So both Minsur and Copec are going to guarantee the project financing in the initial part of this project. We see this as a very important asset, a very interesting asset on a standalone basis. It is -- we will give some more information when we close the operation. But for the time being, what we can say is that it is a project we have very competitive cash costs, a low development risk and a significant exploration potential. So all of those attributes that we consider when making this decision of going into this mining opportunity.

We think -- and the world consensus seems to be that there is a good time to develop copper projects. Since there are very few copper projects being developed around the world and very few ready to start projects in the world. We are partnering with a Peruvian company that is a very important player in different industries in Peru and a very like-minded partner with a character of doing business which is very similar to the controlling shareholders at Copec.

So a strong cultural fit with the partner. Of course, we are entering in attractive financial conditions. We think that the industry fits very well with the other industries in which we take part. We have the experience of handling large-scale projects. We know how to take part in commodity markets. There is financial similarity of this industry with our other industries. We have been in mining for more than 30 years. And finally, we think -- and this is very important, we think that it is a prudent, a very prudent step into a sector that differs a bit from our 2 most important core sectors which are forestry and fuels but that has many similarities to the core sectors. So we are investing, once again, I said, prudently. We're coming up to a total of approximately 5% -- sorry, approximately 2% of our assets along 3 years and that does not crowd out opportunities for investment that we might have in our other core segment. So all in all, very enthusiastic about these steps that we're taking into the mining industry.

And finally, on Page 32, some more detail about the closing of the operation in Colombia, Peru and Ecuador. The acquisition of assets from ExxonMobil in these 3 countries. We had announced this operation at the end of 2016. We were waiting for the final authorization of the Colombian authorities. And as soon as this was obtained, we went through with the closing of the operation. What we are acquiring here, just to remind you, are 30% of the lubricant markets in Colombia, 30% of the lubricant markets in Peru and 9% of the lubricant market in Ecuador. Together with that, it is 25% of the liquid fuels market in Colombia, 19% of the aviation market in Peru and 6% of the Ecuadorian fuels market which is going to add up to the 9% approximately that we hope to [ get ] in Ecuador. One of the resolutions of the Colombian authority, as we expected, was the need to sell the fuels assets in Colombia, so the 25% market share that we're acquiring, we're going to sell it to a third party. We have 9 months to do that and we are doing that through a blind trust that has been -- who is going to carry out the task of selling these to a third party. What we did here is acquire the assets from Mobil. We immediately incorporated the Peruvian and Ecuadorian assets into the balance sheet of Terpel and to the operations of Terpel. But regarding the Colombian assets, we sold them to this blind trust. The blind trust has basically 2 tasks. One is separating the lubricants business in Colombia from the fuels business in Colombia, operationally speaking. Once that separation is achieved, then they're going to transfer the lubricant assets back to Terpel. They're going to stay with the fuels assets and they're going to carry out the sales process to a third party. And finally, transfer the proceeds obtained from that sales process back to Terpel. So that's the figures that we have implemented in order to be able to go ahead with the resolutions which were coming from the Colombian authorities.

In terms of financing and total [ results ] in both, what we -- the total outlay here was $714 million. That included $230 million in cash. Terpel had gone ahead with a bridge loan for the total amount of the operation. Part of the bridge loan which amounted to COP 1.7 billion, part of the bridge loan was immediately prepaid with the cash that came with the operations. In terms of the other part of the bridge loan, it will be refinanced at least in part with the bond issuance that is already underway in Colombia.

All in all, very optimistic about the incorporation of these operations and the contribution of these new assets. As we said before, the contribution of the incremental EBITDA contribution should amount to around 70, 7-0, $70 million for this division. We expect that figure to grow as we are able to leverage on the synergies that there should be between the fuels and lubricants operations. So ExxonMobil [ access ], the operations had been finally closed.

With that, we are ending what we have prepared for you. And we will be happy to take whatever questions you might have.

[Operator]

[Operator Instructions] Ladies and gentlemen, at this time, I'm showing no additional questions. I would now like to turn the floor back over to Mr. Huidobro for any closing remarks.

[Rodrigo Alvarado, executive]

Okay. Thank you very much for joining today. We expect to be back with you sometime in August with the second quarter results. Thank you very much.

[Operator]

Thank you. And this will conclude today's presentation. You may disconnect your lines at this time, and have a nice day.