Empresas Copec SA
SGO:COPEC
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Good morning, everyone, and welcome to Empresas Copec's First Quarter 2020 Results Conference Call. Today's presentation and the first quarter 2020 earnings release are available on the company's website at www.empresascopec.cl and also on 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 upon 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 will now hand the call over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.
Okay. Thank you very much. Welcome, everyone, to this conference call, where we'll be taking a look at the latest results for Empresas Copec, particularly those related to the first quarter 2020. I will be joined today on this call by people from our Investor Relations department, led by Mr. Cristián Palacios. And I will also be joined in the Q&A section by people from Arauco, led by Mr. Gianfranco Truffello. They will help me out with any questions you might have at the end of the presentation.
Having said that, let us go through the presentation and move straight to Page 4, please. What we are showing there is -- are the results of this quarter placed in a historical context, as we always do. This quarter, we reached an EBITDA of $429 million, which is an increase of 8% on the previous quarter and a decrease of 27% from last year's comparable quarter. In terms of net income, we recorded an income of $6 million, which is down 97% with respect to last year, but it is up with respect to what we got in the immediately preceding quarter, which was a loss of $206 million. Just to remind you, this is a loss related to nonrecurring items, basically due to some impairments we recorded at our coal division in the south of Chile, Mina Invierno. So $429 million in EBITDA, $6 million in net income.
Moving to Page 5. We can see that the main variations in EBITDA have to do basically with the forestry business, which is down by $147 million with respect to what it recorded last year. And that has to do, in turn, with a drop in pulp prices in our subsidiary Arauco. In our fuels division, we get a lower EBITDA, which essentially has to do with the depreciation of local currency, both in Chile and in Colombia. We had a strong depreciation of local currency during the first quarter of the year, and that makes our EBITDA for the fuel sector go down when compared to the last year. However, when measured in local currency, both Copec and Abastible up in their respective EBITDAs.
To the right-hand side of the graph, you can see that, as is usual, our EBITDA is made up essentially of results coming from our forestry and fuels divisions. So Arauco, Copec and Abastible make up the bulk of our EBITDA for this quarter.
On Page 6, we're presenting a similar analysis for net income. You can see that the drop is substantial, so 97% drop in respect to the first quarter last year, and that comes essentially from Arauco, and once again, has to do mainly with pulp prices and volumes coming down. Together with that, we can see drops in both Copec and Abastible in terms of net income, which have to do essentially with what we've commented about depreciation of local currencies and also that depreciation has in certain lines in the net income statement of both Copec and Abastible which have to do basically with taxes.
On Page 7, we are presenting a breakdown of the consolidated income statement. What we see here is that both operating income and nonoperating income decreased by similar figures. We can see lower results at Arauco, which once again are explained essentially by a drop of pulp prices. In the case of Copec, we had -- we recorded a drop in operating income, which is an increase when measured in local currency, but which -- but given the depreciation of the local currency, we have reported a drop of $1 million, and the same thing happens with Abastible, increasing local currency, drop of a $1 million.
In terms of nonoperating income, which also goes down significantly, our main variations have to do with other expenses, which basically relate to impairments in Arauco and also plant stoppages in Arauco and unfavorable exchange differences, which have to do with, once again, the effect of the depreciation of local currencies on some lines that are registered in local currency. Lower taxes because of lower tax base essentially.
On Page 8, we can see some of our financial ratios. Of course, we have operating margin going down with respect to the first quarter 2019, but rebounding a bit with respect to the fourth quarter 2019. Same thing goes for EBITDA margin, up from 7% to 7.9%. But down from 10% in the first quarter of 2019, and the return on capital employed also goes down as these operational returns going down.
In terms of leverage, we have reached net debt-to-EBITDA of 4x, up from 3.4 at the close of the preceding quarters. And this has to do, of course, with EBITDA coming down on a 12-month rolling basis, and at the same time, with debt that has been increasing because of resources that we have invested in our ongoing projects that we will comment further on.
If we move to Page 11. We can see further detail by business division, and then we begin, as always, with Arauco, which is, of course, the subsidiary. You can see here that net income goes down from $126 million in the first quarter 2019 to a loss of $29 million in this quarter, the first quarter of 2020. The change comes essentially from operating factors, but also from nonoperating ones. In terms of operating income, we can see a drop in result, which has to do basically as we already commented with weaker pulp prices and volumes, which are partially offset by an increase in unit costs. In the case of wood products, we have a stable result in general where panel sales basically offset lower pulp prices, so -- panel volumes offset lower pulp prices and also offset sawn timber prices and volumes, as we will see going forward.
In terms of nonoperating income, we have expenses related to impairments in Arauco Line 1. Just to remind you, we are doing a gradual impairment of Arauco Line 1 as we made progress with the MAPA project. The MAPA project will replace Arauco Line 1. So whenever -- when the MAPA project is finished, we will close down by one. Therefore, we are progressively impairing Line 1 at a rate of approximately $18 million a quarter. So that's what is recorded under other expenses for this quarter, together with some expenses related to stoppage of plants and mills that took place during the quarter.
In addition to that, we saw increased financial expenses, which is basically related to higher debt given that we have progressively invested in our ongoing projects. That is all partly offset by higher income related to evaluation of biological assets.
On Page 12, we have some more information about pulp. You can see that EBITDA coming from pulp decreased a year-on-year basis from $246 million to $80 million, although we recovered a bit from what we recorded in the fourth quarter of 2019, which was $68 million. What we see here is that prices have gone down with respect to last year -- from the first quarter last year by approximately 27%, volumes going down by 9%. All of that, to some extent, offset by costs -- unit costs going down in different proportions for different kinds of fibers, but anywhere between 2.8% and 6.3% for a year-on-year analysis.
In terms of comparison with the preceding quarter, we can see prices going down by 4.7%, volumes as well going down by 6%, and all of that offset -- more than offset by unit costs, which have decreased of 9.9% and 5.8%, respectively, for bleached and unbleached hardwood and softwood. You can also see on that page -- and on the page, you can see the scheduled maintenance stoppages for this year. And you can see that many of them took place already during the first quarter 2020.
On Page 13, some further discussion about pulp markets. During the first quarter 2020, it was a challenging market, basically because we began to see the impact of the pandemic early in the year in China. There was an underlying trend, though, during the whole quarter that was the tissue market being very, very strong due to higher demand. But at the same time, we saw printing and writing markets where demand went down significantly.
In terms of inventories, we have seen inventories coming down for several months already and definitely coming down from the highest that we saw 6 months ago. There was a clear excess of inventory in the market. Right now, we're approaching historical levels both for hardwood and softwood. We didn't have significant logistical impact disruptions because of the pandemic. And in fact, the Chinese market went very well until mid-March with a very strong increase of demand. And as you can see in the table that we've exhibited there, growth for China during the first 2 months of 2020 is 10.6%. So very strong growth which is driven to a great extent by demand coming from tissue products basically.
By mid-March, of course, we began to see a slowdown, especially in printing and writing and other specialties, which is associated by the slow economic activity related to the pandemic. Similar behavior in Europe, where we started the year with a very strong performance of pulp market in terms of volumes and demand. However, this was more than offset as from mid-March when we saw the outbreak of the pandemic in Europe and like in other markets, we saw painting and writing and other specialties coming down and more than offsetting the increase that we have seen in tissue.
Moving to the next slide, Slide 14. We can see the behavior of prices in China. And you can see that they have been quite stable for a while. So approximately 6 months of prices within the same kind of levels that we are seeing right now. So approximately $474 for hardwood and $600 for softwood. So the gap between the 2 is standing at somewhere around $110, $120 per ton. What we can see here is that for Q2 the market remains challenging, of course, because of the effects of the pandemic. We have seen the -- some paper mills actually closing down because of demand going down for certain products. In Asia, once again, we saw a very, very interesting behavior at the beginning of the year. But since mid-March, we have seen markets again slowing down and painting and writing declining in contrast with the behavior of tissue.
Basically, the same thing for Europe, where we saw a strong beginning of the year. But going forward, we could see additional growth and declines in demand for printing and writing. All in all, prices have been stable so far in spite of declining demand for printing and writing. And in spite also of the very strong depreciation of currencies in some emerging markets that are very important producers of pulp, Chile and Brazil and others. So in spite of the depreciation of currencies, the prices have held stable because a lot of -- because of demand for tissue and also in part because of some supply disruptions that we saw during the first part of the year, some producers, mainly in Finland and in Canada.
Moving on to wood products on Page 15. We can see that EBITDA held quite stable from the first quarter 2019 to the first quarter 2020 and declined a bit with respect to the fourth quarter of 2019. All that is explained basically by panels where the volumes showed a very interesting behavior, going up 6% with respect to last year. That is offset to a great extent by sawn timber, which shows declines in both prices and volumes with respect to last year. But all in all, stability in general in wood products, both panels and sawn wood for the first quarter. The aggregate of the 2 is quite stable.
In relation to the outlook for these products, we can move on to Page 16, where we can see the behavior of the most important market for Arauco right now, which is North America, which represents 60% of sales. We saw, of course, a huge drop in housing starts, which had come to a high of 1.5 million houses per year approximately and then suddenly dropped to 0.9 million units per year as of April 2020. This, of course, drives demand for panel and wood products to a large extent. So we're quite indexed to the behavior of housing starts.
In terms of particle boards and MDF, we began the year with a very good first quarter, and then we started to see the results and the effects of the virus, whose consequences we saw essentially as from April. We see that sales could recover slightly during May and probably normalize by June or July. We have been -- just to remind you, we have been undergoing a process of restructuring or supply of panels in the North American market. We brought our new Grayling mill into operations last year, and we have optimized our supply by taking away some of the older mills. As a matter of fact, we just announced a couple of weeks ago, the closure of one of the mills called -- located in Bennettsville. With all that, we should expect our margins to go up given this optimization. We expect our results and margins to go up once we begin to see demand picking up again.
In Mexico, which has become quite an important market for Arauco following the acquisition of Masisa assets. The impact of the pandemic has been a little delayed, and therefore, we should still see a couple of months with decreased activities.
Remanufactured products in general have been okay with quite a strong demand and also with less competition or less competitive players because of tariffs that have been imposed on Chinese players and Brazilian ones as well.
In plywood, we have seen a lot of stability, and therefore, we could see improved results for the coming quarters.
Moving on to Page 17, we can see the outlook -- some comments on the outlook for our second most important market, which is South and Central America. In Brazil, in particular, we continue to see a market which is complex and a bit of sluggish in demand. We have seen it a little weak for some years already. And of course, we now add the effects of the pandemic. Together with that, we have seen for some time, we have seen some oversupply in MDF and particle boards. So the market situation in Brazil remains challenging.
In the case of Argentina, after a quite good beginning of the year, we saw, as for the mid-March, we saw the effects of lockdowns. We expect normalization to gradually take place as restrictions are eased, and they should occur during the second half of 2020. We have another factor here and which is quite important, which is the depreciation of local currency, which should affect the sales price and therefore, the margins as well when measured in dollars.
In terms of Asia, in general, we have seen signs of recovery. We should see, say, second quarter and third quarter pretty balanced with increased demand and prices, particularly in some markets. However, this could be offset to some extent by increased supply coming from other markets where the local demand has been hurt. Finally Europe and Middle East, general signs of stability and plywoods doing particularly well. Though this -- these markets are very small for the Arauco portfolio.
Let us move to the figures for fuels, which are shown as from Page 19. On Page 19, actually we can see Copec. Let me remind you that when measured in dollars, EBITDA and net income coming from Copec went down quite equivalently. But that has to do essentially with the depreciation of local currency, and therefore, when measured in local currency, we can see EBITDA coming up as we can see in this particular page. So increases in basically operating income, offset, to a large extent, by a decrease in nonoperating income.
In the case of the operating income, we have -- saw stronger results in Chile, which are explained by higher margins, particularly industrial modules in this case. Also a positive effect coming from FIFO or inventory effect. When comparing it to the effect that we saw in the first quarter last year, there were both negative effects in terms of FIFO. But in this particular quarter, the effect was less negative than last year. So all in all, we saw an increased margin in Chile, together with increased volumes.
In the case of Mapco, we also saw increased unit margins, in this case, partially offset by lower volumes. The pandemic in Mapco began -- we began to see the effects as from the end of March and earlier than in Chile, and therefore, we saw some drop in volumes during the quarter in Mapco. But all in all, a good EBITDA for Mapco as well.
In the case of Terpel, we saw quite a substantial decrease in EBITDA. I think in this case, explained by the inventory effect. Just to remind you, the inventory effects have an impact that is much more immediate in the case of Colombia. And there's a delay in the impact in case of Chile because of the stabilization fund that is in place in Chile. Therefore, we took quite an important hit in Colombia, and that didn't happen in Chile because of the stabilization fund. In the case of Terpel, there's an effect of approximately $15 million in inventories for the quarter, which basically explains the whole drop in EBITDA. Together with that, we see slight drops in volumes, which are essentially explained by effects of the pandemic as from the end of March.
In the case of nonoperating results, we had an extraordinary sale of real estate assets in the first quarter of 2019, which is, of course, not there anymore, and therefore, we see a drop in other income. We see some higher other expenses. And we also see that this is partially offset by some positive exchange rate difference. But all that is offset as well by an increased tax because of the tax base which increases, but also because of some currency effect that impacts our foreign investments, those which are held from Copec from our fuels division.
In terms of operational data, and you can move on to Page 20, where we have a market share, which is up to 58.5% compared with 58.1%, which was the figure for the first quarter 2019. So market share is slightly up with respect to last quarter. Volumes going up by 1.3% in the case of the industrial channel by 1% in the case of gas stations. And this is in spite of the effects of the COVID-19, which we began to see by the end of March. So before that, volumes were performing quite well.
In terms of the outlook, as you well know, this is a stable margin business, with the exception of some extraordinary effects we can have both in inventories and in industrial margins, which are related to supply, imports and wholesale basically. Other than that, which is volatile, of course -- other than that, we see stable margins going forward -- stable commercial margins. We believe we have a very strong position in terms of our gas station network, and therefore, we should continue to move in the market.
In Mapco, we have had a good trend of results before the pandemic, of course, a very good trend of results and a good EBITDA generated during the quarter. In this case, as we have previously commented, we're focusing our efforts in giving some more stability to margins, which are very volatile in the case of fuels segment in the U.S. We are working and have achieved significant improvements in operational efficiencies and also in terms of improving and optimizing our mix in the convenience stores. And all in all, that has gone quite well in Mapco. But of course, going forward and for the months to come, everything will be indexed and will be dependent on the evolution of the pandemic in the relevant markets and the evolution of the restrictive measures that governments are taking to contain this pandemic. So once again, before the outbreak of the virus, trends were very good in terms of volumes and also with some extraordinary hedge in margins. But going forward, we will be very dependent upon what happens with COVID-19.
Moving on to Terpel, which is shown on Page 21. As we commented before, the main factor here is that we had a negative impact from the revaluation of inventories. This is called decalaje in Colombia. This happened in Colombia, Panama and Dominican Republic and explains most of the drop in EBITDA. Together with that, and given the effects as from the end of March, the declining volumes, we can see a decrease of 2.5% in the aggregate amount of liquid fuels volumes, which explained by -- essentially by decreases in the industrial segment of 9%. In particular, Terpel has a large exposure to aviation, and we saw aviation volumes coming down for -- by as much as 70%, 80% or even 90% in some countries. And that explains to a large extent that the drop -- the overall drop in volumes for Copec.
Some increase in marketing and distribution costs are very relevant. And all of that partially offset by nonoperational loss, which is related with some price adjustments still related to the ExxonMobil acquisition. So you can see the figures of Terpel there. EBITDA coming down significantly, but most of it, as I said, explained by the effect on inventories.
And volumes declining in all countries, except for Peru, where we have added some new assets essentially coming from ExxonMobil and some new gas stations as well. And therefore, volumes are up on a very low basis. As for the rest of the countries in which Terpel operates, everything is down and the aggregate volume is down by 2.5%.
On Page 22, we have the figures for Abastible. Very stable EBITDA. Actually, a larger EBITDA was measured in Chilean and local currencies in the other markets. But once again, when converting into dollars, given the local currency depreciation that took place during the quarter, we can see results going down when measured in dollars.
In terms of operating income, there's a lot of stability, where we had some weaker margins in Chile, basically related to a change in the product mix, some higher -- absent some higher administrative costs related to maintenance and advisories. All of that is -- has been more than offset by the EBITDA by increased volumes and margins in Colombia, higher volumes in Ecuador and higher margins in Peru, especially strong performance we have seen in Colombia, where both margins and volumes up significantly.
Finally, some taxes, which were pretty much like in the case of Copec, we have an impact of higher depreciated currency on the valuation of investments held outside of Chile for tax purposes.
On Page 23, we can see some discussion on operational variables. We can see that volumes in general went up quite significantly. The trend was very strong before the pandemic. So up until the end of March, we saw increases of 10% or more in Chile. Colombia, the trend has been 15% up. In Peru, we have a 9% decrease, which is explained fully by the wholesale segment, which is a segment which is a very low-margin segment. So in terms of our relevant channels, we have seen an increasing volumes also very strong, and plus 5% in Equador. So all in all, the general trend has been an increase in volumes, which has been driven since a couple of years already by a very successful commercial strategies having to do basically with increasing geographic coverage, offering -- increasing and optimizing the distribution network, introducing a dual-brand strategy in Peru, in particular, and also improving and optimizing supply to large industrial clients. So all that had got about very interesting trend in volumes.
Now of course, we're subject to -- like in liquid fuels, we are subject to the evolution of the pandemic, which has hit essentially the segment related to hotels and restaurants, of course. However, the decreases in volumes that we have seen in LPG are not nearly as important as those we have seen in the liquid fuels.
In the case of Sonacol, which is shown on Page 24, this is a company that operates the pipelines that link refineries, deposits and consumption centers in Chile, very stable business. And like until this quarter, we have seen stability in EBITDA. This is an asset that -- just remind you, we have classified as an asset held for sale in our balance sheet. We continue to consolidate the results of this asset because it is a subsidiary company that we usually consolidate. The norm says that we should continue to consolidate this. Unlike the case of Gasmar, which is another asset -- infrastructure assets that we have for sale as well, but which is held as an affiliated investment -- an equity investment. We are not consolidating this now because we have a 36% share of Gasmar. In that particular case, we are not recording -- we're not registering the results coming from the Gasmar anymore. So the routing norms in principle to be fair for subsidiary companies versus equity investment companies.
Moving on to Page 26. We have some other investments here, not a lot of changes here. In the case of Alxar, for example, that's our mining division. That is continuing to carry on. It's Mina Justa project improvement. Therefore, we are gradually recording expenses related to financial expenses and also SG&A, which are related to the development of the project.
In the case of the fishing division, not a lot of changes in both the north and the south. In the south, we saw a relatively better performance operationally, which was offset to a certain extent by dollar exchange differences, but not -- no relevant variations here.
In the case of Laguna Blanca, which is our -- the parent company of Mina Invierno, our coal division in the south of Chile. This division has shown a very important loss in the fourth quarter of 2019 related to an impairment that we carried forward in that quarter. That is not there anymore, of course, that's a one-off. But we continue to see a loss in the company related to expenses that are taking place even as operations are now stopped in the mine.
In the case of Metrogas and AGESA, this is our natural gas division, and there's a lot of stability. Margins to a certain extent reduced in Metrogas and affected by the currency depreciation when converting into dollars. But all in all, as always, a lot of stability in this division.
That's it for the results. And then moving on to highlights of the quarter, starting on Page 28. Of course, since the end of the quarter, all of our operations have been determined by the outbreak of the coronavirus, which started in Chile as from mid-March and in the other Lat Am countries as well. There's a lot of information here, but essentially, what that says is that our 3 main business lines, namely forestry, fuels and LPG have been declared essential, and therefore, we are able to go ahead with our operations in spite of the restrictive measures that have taken place in the countries in which we operate.
So given that, then we have been able to give continuity to our operations and supply our customers as needed. We have gone ahead, of course, with all requirements and protocols and measures related to health, hygiene and safety in order to ensure the safety of our workforce. Among other measures, we've gone ahead with shifts with social distancing, temperature control, remote working policies, use of face masks, face shields and everything that is required in the 3 cases of our main subsidiaries and in all countries in which we operate. But all in all, we have been able to go ahead with our operations with no significant disruptions, and therefore, we are able to supply the requirements of our customers.
On Page 29, we have also worked in trying to contribute to Chile and the other countries in terms of fighting the pandemic, and we've listed some of the many examples of contributions that have been carried forward by the different companies in terms of supplying communities with laboratories, putting equipment at everybody's disposal from going ahead with tests. Donating for the development of vaccine under the COPEC Capa University Foundation. We have committed to give away fuels for ambulances for free, donate fuel to all ambulances in the coming months. Arauco has donated hospital beds, monitors, equipment, in general. So a whole lot of activities in terms of contribution from our companies to their local communities and other countries in terms of being able to overcome this pandemic.
And then moving on to the project status. As we've commented in the previous calls, the Valdivia project is ready to start-up. We have overcome the restrictions related to by water flows, and therefore, we are now ready to get up and running, depending on commercial conditions. We expect to initiate production in June and produce in batches. So gradually tackling the new dissolving pulp market, that would be new for ourselves, producing batches, as I said, and moving eventually back to paper grade as required and as convenient in terms of economics. The other thing about this is that the mill is able to switch back and forth between dissolving pulp and paper grade.
In relation to MAPA, which is shown on Page 31, we have a progress of almost half of the project, 49% as of April 2020. This is in line with what we expected. There was a brief interruption of activities taking place at the site during 2 weeks in which Arauco basically redesigned processes and protocols and systems in order to enhance health and safety for the workers. Following that, activities were resumed on April 6 and the new protocols are in place. And now we have 60,000 -- 6,000 people approximately working on the site. We continue to expect Line 3 to get up and running and start operations in the second quarter of 2021. And at that time, as we already commented, we will have Line 1 permanently shutting down.
In case of Mina Justa, which is our mining project being developed in Peru. We were able to make steady and important progress up until March. Right now, we are up to 86% progress, which is pretty in line with the plan. We have suspended activity on-site right now and are currently working in -- pretty much like Arauco did, we are redesigning health, safety protocols, systems and measures in order to be able to restart construction as soon as possible.
Just to remind you, we are shareholders of 40% of Mina Justa, the controlling shareholder here is a Peruvian company called Minsur. This is a project that's located in south of Peru, and where we are expecting to reach a production of up to 150,000 tonnes per year in the first 8 years of operation and 115,000 tons per year in the whole commercial life of this project. Total investment is still estimated at $1.6 million (sic) [ $1,600 million ].
On Page 33, we are commenting an essential fact that we issued a couple of weeks ago. The Board of Arauco recommended and Empresas Copec as the main shareholder approved a capital increase during -- this was approved over the last few weeks. This is a capital increase that is up to a maximum of $700 million. It is equity contribution that will be made from Empresas Copec to Arauco. We are planning to give -- to contribute approximately $250 million during 2020, and the balance should be completed during 2021, but that will depend on the exact amount of resources required by Arauco which, in turn, will depend on the evolution of its main markets basically. The objective of this operation of capital increasing at Arauco is basically to strengthen Arauco's balance sheet and help finance very important projects that Arauco is carrying forward, essentially, MAPA, which means an investment of $2.3 billion in total. So we are going ahead with this capital increase from Empresas Copec to Arauco up to a maximum of $700 million between this year and next one.
In a piece of news that is related to the last one, which because you know essentially mean a source of -- a important source of funds for the Arauco capital increase. We are going ahead with the sale of 2 important assets. One is Sonacol that is showed here, and the other one that we have already announced as well is Gasmar which is an equity investment that we hold -- where we hold a 36% stake together with controlling shareholder, Gasco. Both assets, Sonacol, where we hold a 52% stake; and Gasmar, are up for sale and going through their respective sales processes. We announced this in December, and since then, we have essentially made progress in all the work that is required to start the commercial phase of this process. There's a lot of moving cards in terms of defining advisers, lawyers, contracts, and there's also a vendor due diligence process taking place. With all that, we expect to be ready to start the commercial phase of this operation very soon.
With that we have come to the end of this presentation that we had prepared for you. We are now happy to open up the floor for any Q&A there might be, any questions you might have. I will have Gianfranco Truffello from Arauco joining me in now for this final part of the presentation. Thank you.
[Operator Instructions] Our first question comes from Carlos De Alba with Morgan Stanley.
So the first question, maybe, Rodrigo, do you expect to finance the full $700 million or up to the $700 million capital increase in Arauco with the proceeds of the 2 asset sales, Sonacol and Gasmar? And given that there is obviously some uncertainties in any divestiture process, how is the company going to support the $250 million capital portion of the increase that is going to take place in 2020?
And then my second question has to do -- well, there's 3 questions, if I may. The second question is on the quarterly impairment charge of $80 million that you mentioned on Arauco's Line 1. So is this going to continue all the way to the second quarter of 2020, which is when MAPA starts to produce? And if so, why follow this approach? Typically, what I see in other cases is once you know that you're going to shut down a plant, you immediately recognize the full impairment charge.
And then finally, if I may ask on the dissolving pulp project, given the market conditions, do you -- like how do you expect to balance the production of dissolving versus paper grade? And is there any -- you mentioned that you can switch back and forth, but are there any cost in doing so and/or delay and potentially lost time in doing these conversions?
Thank you, Carlos. If that's okay with you, I will answer the first question that has to do with the funding of Arauco's capital increase. And then I will pass it over to Gianfranco, who will take questions related to impairment in Line 1 and also switching back and forth with dissolving and paper grade pulp.
In relation to the funding, yes, this is a capital increase that is up to $700 million. We have quite an important level of cash right now at the parent company. Following dividends that we have received from our subsidiary companies, we are up to somewhere around $450 million. And together with that, we are expecting the sale of the 2 assets that I've mentioned to take place within probably -- initially, we expected within a year. It will probably take longer than expected, but we still continue to think that there are very attractive assets that we should get quite interesting funds coming from them. If we finally require to delay the process of sale, we can always take on some additional debt which will be supported by the sale of those assets, so as to pay it back whenever the proceeds of those assets are received.
But all in all, we -- at this moment in time, we expect to be able to fund the whole of Arauco's capital increase with those 2 sources, namely cash held at the parent company plus the standard of assets. If additional sources were required, which I insist, at this point in time, we do not envisage that, but of course it is our responsibility to look at additional sources of funding, and therefore, we have a list of other options that we might trigger, including rebalancing debt between our subsidiary companies, including eventual additional sale of assets. This is a company that, as we have commented before, is a company that has a lot of hidden sources of liquidity because we basically own everything in the balance sheet. We own infrastructure, we own real estate, we own plantations and everything. So we do have candidates for eventually monetizing if need be.
But I insist that at this point in time, we should be done with cash on hand that we have at the parent company, plus the asset sale that we have already announced, which is that of Sonacol and Gasmar.
Gianfranco, I don't know if you want to tackle the other 2 questions?
Yes, of course. Regarding the impairment, we are doing a linear impairment of the assets of Line 1, which is currently at $5.7 million per month. That's how we designed it when we started. A linear deterioration of the asset, and that was simply by the [indiscernible]. This is supposed to stop at the end of the first quarter of 2021. That's where the accounting value will be 0. We decided to do that way. I mean you always have to test your impairment. And we'll see at the end of the year, but most probably at the end of the year, we'll be only 3-month deterioration. So -- but we will keep the lineal duration from now.
Regarding the dissolving pulp project in the mill, the mill can switch without any cost from dissolving pulp to paper grade and the other way around. There's not significant cost of doing that, and we can do -- I don't know, 1 month of campaigns of each one without any problem. Remember that before this change in technology, the mill had the option of producing softwood and hardwood, and we did campaigns of 15 days and without any problem of changing. Of course, every time you change, you have a little drop of grade, but we don't seem to have a problem doing campaigns of dissolving pulp and paper grade. Especially this year because we need to test the product. And since the delays of approval of our clients, we need to keep producing paper grade. And we will see next year what is the amount that we will produce of each product depending on the rapid prices of paper grade, hardwood in this case and dissolving pulp.
All right. Just to confirm, the impairment goes all the way to the first quarter of 2021, right?
Yes.
Our next question comes from George Staphos with Bank of America.
I know it's difficult to talk around hypothetical questions, and you've already laid out clearly what your expectations are in terms of funding Arauco and why you're doing that. So we thank you for that. But let's assume that things go better than anticipated. You don't need the $750 or MAPA ultimately comes on and produces at a level that you are very happy with, perhaps even happier than initially expected. What would you do with the excess funding? Would it change your capital allocation on a going-forward basis? Would you entertain an increase in the dividend, what you'll be looking for around that question, if it's possible to discuss?
A related question, I had 1 or 2 quick follow-ons. Can you talk to what the rating agencies are most focused on for you and for that matter, the industry, on a going-forward basis? Is it operating rates? Is it inventories? Is it just the pure level of pricing to the extent that you can comment what is most important at this juncture? And I had a couple of follow-ons.
Yes. Thank you, George. Well, that's a very good question. Of course, we have to analyze different scenarios, both the positive and the negative. At this point in time, the most probable outcome is that we will need to contribute equity to Arauco. At the same time, as I said before, the most probable outcome is that will be more than sufficient with what we have in cash now, and the cost would get from the sale of assets. If the case was that it is more than enough and we are in a more comfortable situation than we expect by the end of the year or by the end of next year, it will probably be the case that we are still at debt-to-EBITDA levels and leverage ratios in general that are quite above what we have attained traditionally and quite above the sweet spot that we have declared, which is around 2.5.
So there's a strong likelihood that we could prioritize bringing down debt faster in order to be once again very comfortable in terms of being in the investment-grade area. And once that is done, of course, we could continue to bring back dividends and continue to invest as we have historically done in projects that make sense given our strategy.
But for the time being -- but of course, it has to be discussed internally, and this is a Board decision more than a management decision. But it might be probable that we -- this scenario was better than expected, excess resources should be due towards bringing down debt quicker than expected, both in Arauco and in other subsidiary companies that we have with a high level of debt already.
Rating agencies follow very closely funds from operations in relation to debt and EBITDA in relation to debt, and that's what they're focusing basically together with other many parameters such as competitive positioning, such as eventual support from different companies, corporate governance practices and other qualitative factors. But in terms of numerical factors, they tend to focus [ and as a collective ] in both net debt-to-EBITDA and funds from operations to debt.
Gianfranco, maybe you'd like to complement that in terms of what would Arauco do in -- if the case was that it had excess cash in comparison to what is now expected.
No. I agree with you, Rodrigo. I mean our first priority is to bring down leverage to normal levels for our rating category. And since we are now in a big CapEx program, our leverage is picking up in different level than normally we do, and that is already assumed by the agencies. I think that we will be more conservative, try to bring down debt first. And then if leverage goes down quicker and the project starts well and prices are well, probably we could think of starting again, the dividends from Arauco to Empresas Copec and then monitoring the level of leverage.
In the case of what the rating agencies are looking for is the same thing. A lot of parameters in the case of Arauco, especially how the leverage will be once the project -- the MAPA project starts producing. And that is, I think, key for them in order to see how fast the leverage will go down to normal levels once we are off this big CapEx processing at Arauco.
Okay. Got it. I appreciate the very thorough answers. I'll just ask 1 follow-on to be fair. Just quickly, can you comment on how Grayling is doing? The mill came up, and obviously you weren't expecting it, but you're dealing with a pretty sharp drop-off in housing activity, and then more recently, in the states, anyway, the panel markets recognizing it's more the construction panel markets versus what Grayling is doing rebounded. Could you give us a quick update on the kind of return you're getting at Grayling, whether it's meeting your expectation or not?
Okay. Thanks. Well, before this COVID-19 thing, the mill was ramping up again from the -- you know that we had an explosion in February in that mill. So it was gaining back the production levels. It was close to 75% production capacity and then came this shifting in the demand for all the particle board and MDF products in the U.S. and most of the markets, especially in Latin America.
So we are currently constrained more of the -- most of the demand than for the supply of the mill, but continue to work in getting all bottlenecks and the things that we observe in producing in order to be prepared when the demand picks up again. So currently, we are probably a little bit below the 55%, but we hope that the demand for products in the rest of the year starts to go up again, and we can be more close to the production.
Our next question come from Thiago Ojea with Goldman Sachs.
I would like to know what you're seeing the impact of you know fuel demand in Chile? And what are you projecting in terms of current devaluation? And how could this shape the demand for the upcoming quarters?
And my second question is, would you consider that pulp prices could fall in the short term? And if it is the case, would you consider to deter some production or some shipments?
Thiago, could you please repeat your first question? I had some interference here.
So my first question is regarding the fuel business distribution. What you're thinking in terms of future impact on demand for the coming quarters and the impact of the currency devaluation, depreciation. Could you be able to pass-through to customers? Do you think you would be able to pass-through to customers if this process continues on the upcoming quarters?
Okay. Thank you. I'll take that. Yes, the fuels -- as I said before, we have been able to continue with our operations in the fuels division quite normally. The industry has been declared essential by the government, so therefore operations of the industry are not restricted at all. But of course, we are facing decreased demand, which already took place by the end of March in all of the countries in which we operate. In Colombia, it started earlier with a full quarantine unlike Chile where we had partial quarantines taking place for a while. Volumes have gone down in some particular days in April as much as 30% in Chile. And in the cases, the percentage is very similar in the case of industrials and gas stations, somewhere around 30%. At a time when in April, when quarantines were still partial and not full as we are seeing now. So now the effect should be even stronger in terms of declining volumes than that.
We already saw the effect in Colombia, as I said, where full quarantine increases of somewhere around 50% for volumes as a whole. In some particular business like aviation, volumes have gone down between 70% and 90%, depending on the exact route and exact country. The only consideration here is that aviation, although it is a large part of the volumes in general tends to be a low-margin business for fuels, and therefore, the proportion of margins that is affected is relatively low, but volumes have come down significantly.
So very hard to make projections at this point, Thiago. It will fully depend on how the debit goes on, how restrictive measures are. It has been shown that full quarantine versus partial quarantine does make a difference. It depends on the exact areas that will be quarantined at this point in time, for example, in Chile, the central zone of Chile, Santiago and its surroundings are fully quarantined. But the rest of the country is pretty much unrestricted. And therefore, very, very hard to tell. But somewhere -- in 4 periods with quarantine, we should expect decreases of anywhere between 30%, 40% for volumes as a whole. I hope that helps to a certain extent. But at this point in time, it's very hard to project any further.
And then for the pulp prices, I would like to hand it over to Gianfranco, please.
Thiago, if I understood well, you're asking if we're going to decrease production in case of decreasing demand. Just to be sure of the question.
Yes. I mean there is speculation that you could see a little bit of lower prices in the short-term pulp. First, would you agree with that? And two, if it is the case, would you consider to hold some sales for later in the year?
No. I mean our policy has always been to produce and sell, not to speculate on inventory. So we don't expect to hold inventory in order to keep prices up, and we will drive the current pulp prices. Trying to maximize, of course, the price with our clients, but we will try to sell on normal basis according to our production. So -- and we don't expect also to shut down production because we have low cash costs. So we expect to sell the same volume as we produce, probably we'll have some differences from one quarter to the other. But then on a total year, we will probably sell the same as we produce.
Okay. It's clear. If you can just touch base on my first point, do you agree with some market expectations that we could see lower pricing in the next, let's say, 6, 8 weeks?
I would say that the long fiber market is more pressured because printing and writing has gone down very sharp. And in the proportion of long fiber that goes to the tissue market, which is in better shape is smaller. And also you have seen some paper producers shutting down integrated capacity and putting some spot volumes of long fiber into the market. So I would say that long fiber is more pressured. I would say that short fiber will be more or less stable. But I'd say that in the coming months, we'll have a little bit more pressure in the softwood market.
This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Rodrigo Huidobro for any closing remarks.
Okay. Thank you very much, everyone, for joining us today, and we expect to get back to you within a couple of months for taking a look at the results for the second quarter. Thank you very much. Have a good day. Stay safe.
Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.