Empresas Copec SA
SGO:COPEC
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Good morning, everyone, and welcome to Empresas Copec's Third Quarter 2019 Results Conference Call. Today's presentation and the 3Q '19 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 call is being recorded and 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 will now turn the call over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.
Okay. Thank you very much. Welcome, everyone. Thank you for joining us today in this conference call, where we will be taking a look at the results for the third quarter 2019 for Empresas Copec. I'm joined here today by our Investor Relations department, led by Mr. Cristián Palacios; and also by people from Arauco, our subsidiary company Arauco, led by Mr. Gianfranco Truffello. They will all be helping us out in the final section of the conference, where we will be opening up the floor for questions.
Let us start by flipping to Page 5, please, where we will be taking a look at the results of this quarter in a historical context.
We have reached an EBITDA of $489 million, which means a 34% drop from the comparable quarter last year. And then 9.8% drop on the immediately preceding quarter. These, as we'll see further on, is explained basically by the performance of our forestry division and, in turn, explains fundamentally by a drop in pulp prices.
In terms of net income, we have reached $22 million, which is, of course, way down with respect to the $308 million that we registered back in the third quarter of 2018 and also down with respect to the $135 million that we recorded in the second quarter of this year.
On Page 6, we are presenting a brief reminder of the fact that financial statements this year are influenced by a change, quite important change, in accounting rules of IFRS 16, which basically forces companies to recognize their leases as -- in terms of net present value, as assets and liabilities. The effect that we recorded in our balance sheet as of September 2019, is $700 million approximately in assets and -- $702 million in assets and $698 million in liabilities. In terms of the effect it has on net income and EBITDA, representing that at the bottom of the page, this is accumulated as of September 2019, you can see there that we have lower leasing expenses, and at the same time, we have financial expenses that grew high depreciation and a final net income impact of $8.7 million and an EBITDA impact during the whole year as of September 2019, of $109 million.
These leases are all related to concepts such as those which are listed there, land, rolling equipment, tankers, warehouses, buildings and so on. So please bear that in mind for the explanations.
On Page 7, we are presenting the EBITDA this quarter compared with the comparable quarter last year. You can see that the EBITDA was down by 34%, pretty much all of the decrease is explained by the drop in Arauco. Once again, as we will see further on, this is related to pulp prices going down. This is offset to a very little extent by the fact that our Fuels division presents an increase in EBITDA, in spite of an increase in the exchange rate. So in spite of the appreciation of the dollar, we are seeing higher margins in both Copec and Abastible. And to some extent, explains those high margins by IFRS 16. EBITDA margins, of course.
In terms of net income, which we are presenting on Page 8, we can see that the drop is 92.9% with respect to the third quarter 2018, once again, explained mainly by the fall at Arauco. Together with that, we are recording a loss in our mining division [ coming in Eldorado ], related to our coal activities at Mina Invierno and also lower results, basically related to taxes in Abastible.
On Page 9, we are presenting the consolidated income statement. We can see a drop in operating income, which is explained by low results in Arauco. Pulp prices again. Together with that, a decrease in operating income at Copec, which basically stems from lower FIFO effects. These are the effects on inventories that are recorded as a result of variations in oil prices. Together with that, we have a lower nonoperating income. This is explained basically by other -- by the results in associates, which in turn is explained by lower results in our fishing associate Corpesca and also lower results in our natural gas trading company, AGESA, both of them associates.
Higher losses on exchange rate differences as well. We also have increased financial expenses. These are basically related to 2 factors. One is the higher level of debt. The other is the effect of the new accounting rule, IFRS 16. And all of that is partly offset by the fact that we had higher other income, both in Arauco and also in Copec.
Taxes, of course, are lower because of a lower tax base.
On Page 10, we're presenting some key financial ratios, you can see that ratios related to profitability and margins, of course, have decreased because of the drop in EBITDA. So we're standing at 7.8% EBITDA margin compared to 12%, 1 year ago.
Likewise, we have been looking at variations in our net financial debt-to-EBITDA ratio, and we are closing the quarter with $3.2 million. Part of that is explained by IFRS 16. And if we isolate those effects, we're up to 3x compared to 2x, 1 year ago. So once again, it relates to both an increasing debt related to the CapEx phase that we are facing and also a decrease in EBITDA, which is basically explained by the situation of pulp prices.
All in all, however, we have a well-balanced debt schedule for the coming years, and we are still working on that, as we will see further on through some refinancings that are taking place.
Let us go deeper into the Forestry division, and please flip to Page 13. We can see here that Arauco has recorded a net income -- a net loss of $29 million compared to a total net profit of $222 million last year. The results are largely explained by lower operating income because of pulp prices. Pulp prices are offset to some extent by an increase in sales volumes, as we will see the details further on. We also have lower divisions in the wood -- lower results in the wood division, which is basically explained by a lower performance of sawn timber.
In terms of nonoperating income, we have higher other expenses. This is basically explained by impairment provisions on PP&E. Together with that, increased financial expenses because of what we mentioned already, but with a higher debt stock and effects of IFRS 16.
Lower results in the case of Arauco, low results in associates coming from Sonae, in particular, from Spain. And together with all that, of course, less -- lower taxes because of a lower tax base.
In relation to pulp, we have some details on Page 14 and 15. We have EBITDA dropping from $395 million in the third quarter 2018 to $148 million in September, 2019. The drop is basically driven by a significant drop in prices. You can see in the figures representing, in the bottom of the page there, that prices fell by 32.5% when compared to the quarter last year and fell by 19% when compared to the immediately preceding quarter.
That is, to some extent, offset by, as we mentioned, an increase in sales volumes, which is 10% up with respect to last year and 25% up with respect to the immediately preceding quarter. With this, pretty high sales volumes Arauco is back to normal levels in terms of inventories, which is around 1 month of inventories.
There's a detail of the scheduled maintenance stoppage is also to take place during the -- what is left of this year and the first quarter of 2020.
On Page 15, a little bit more on the evolution of the pulp market. We have seen Asian markets in general, and China in particular, recovery in terms of volumes. We can see China growing by 8-point -- 8.6% in accumulated this year, which is pretty strong. That has brought about a gradual decrease in inventories, which are still high, but you can see the drop that's very patent in the graph that we're presenting to you at the bottom of the page.
So 52 days now for the inventories of hardwood. 35 days for inventories of softwood. So it's still a little high, but significantly dropping from the figures that we saw a couple of months ago.
So situation appears to be healthier in Asia and China, in particular, whereas in the case of Europe, demand has continued to fall.
On Page 16, we can see some more data on the evolution of prices. We are now standing, and those levels have been fairly stable for the last 2 or 3 months. Standing at $575 for our softwood production and $460 per ton for hardware production, all of that placed in China. We had a slight increase in softwood in October, we reached the current levels of $575, and hardwood has remained pretty stable at $460. We can see that in Asia, paper producers are attaining healthy margins in terms of the outlook. The fourth quarter is traditionally a strong quarter in terms of demand, but this year might not be that strong because of Chinese New Year starting earlier. In general, we expect stable prices. In Europe, we are seeing low demand and a lot of competition for -- in export markets from the Chinese and Indonesian paper companies.
On Page 17, we can take a look at the wood products division. You can see that EBITDA drops significantly as well from $105 million in the third quarter of 2018 to $62 million this quarter. This is basically explained by a drop in the sawn timber division, as you can see there in the table that we have placed in the bottom of the page there. Year-on-year, price falls by 7.1% and sales volumes fall by 5.8%. That is basically the explanation for the fall in EBITDA. Panels are quite stable in terms of prices and growing in terms of volumes, especially because of the incorporation of new assets during this year by Arauco.
In terms of the outlook for the wood division, we are showing some information on Page 18. Housing Starts, continues to be quite stable at levels around 1.2 million.
Demand for particleboards and MDF, expected to remain positive. Despite the seasonality, which is usually negative at this time. In general, we've had good results in Mexico following our incorporation of assets from Masisa.
In remanufactured products. Facing negative seasonality. And in general, we're seeing the markets offering the effects of oversupply in Brazil.
In terms of plywood. We are expecting an upward trend. And in general, we are seeing a well-balanced markets.
As all in our main markets, which is North America, which accounts for 57% of our sales.
In South and Central America, which represents 30% of our sales. Our main market, which is Brazil, we're seeing a challenging scenario. Trends continue to be a slow economic activity and also some oversupply. So a challenging scenario in Brazil, still.
Argentina. We are seeing some improved dynamics in terms of volumes and prices. But of course, we have exchange rate issue in Argentina. So depreciation of local currency will, of course, affect what -- the margins we record in dollars.
In the case of Chile. We have seen volumes drop because of the social crisis that has been taking place in Chile and to which we'll refer further on. And this has affected some clients. However, over the last few days, we have seen a more stable environment.
In the case of Asia. Increased demand in general because of the expectation of negotiations between the U.S. and China in relation to the trade wars. And, of course, expecting, as usual, a lower demand during the Chinese New Year.
And finally, for Europe, which is 2% of our sales, we are expecting a marginally better 4Q.
Let us move on to Fuels. We are showing some numbers on Page 21. In the case of Fuels, we have increased EBITDA by approximately 12% when compared to the third quarter 2018. And when measured in local currency, the functional currency for the division is the local currency in general, and we consolidate everything at our Fuels division in Chile, which is, of course, measured in Chilean pesos. So what we are referring there are Chilean pesos. We are seeing a better nonoperating result, which stems from favorable exchange differences and also other income that was essentially a onetime negative effect last year because of the operation of our acquisition models still taking place. All of this is offset by higher financial expenses related to IFRS 16, basically.
In terms of operating income, and in spite, we have a higher EBITDA and because of the increased depreciation, basically, we have a lower operating income. This has to do in part with a drop in margins in Chile because of lower inventories. So the FIFO effect is lower than what we recorded last year.
However -- and offsetting this to an extent, we have a positive effect in Terpel. And related to the same concept, which is called decalaje in Colombia. And this has to do with the variation again on -- of oil prices on these inventories that we hold.
In terms of operations and moving on to Page 22. We can see a good performance of the Fuels division in Chile. Actually, we had increased sales by 9% in relation to the third quarter last year. This is explained by both channels attaining quite healthy growth. In the case of gas stations, they are up by 5.7%. In the case of the industrial channel, they are up by 13%, and this is related to some large mining clients that we incorporated by the end of last year. And so this has brought up physical sales significantly in the quarter. With that, we are now -- we have been able to reach a market share of 57.7% compared to approximately 56% that we had obtained last year.
A brief mention of Mapco here, our division in the U.S., which recorded a very interesting EBITDA, much higher than the one we had recorded last year. Actually Mapco has recorded EBITDA of $18 million compared to $9 million that we had recorded last year. Mapco, that is essentially explained by the Fuels margin, which is highly volatile in the U.S. But together with that, we have been attaining a very interesting growth in terms of volumes, actually, 3.7% this year, year-to-date. And we are working on margin stabilization, trying to improve operational efficiency and also working on the product mix at convenience stores. Our strategy has gradually yielded good results, and we have already reached an EBITDA of $46 million accumulated as of September for Mapco.
On Page 23, we're showing some operational figures with Terpel. A good quarter for Terpel as well in terms of physical sales, we obtained an increase of 7.2% in volumes. This is explained by a healthy growth in Colombia, coming from the gas station channel and also related to less illegal sales from Venezuela.
Together with that, we are seeing higher margins, which are explained by the decalaje effect that we mentioned. So higher inventory revaluation effects and also higher nonoperation -- nonoperating results would have to do, as we mentioned, with lower other expenses from a base last year that was influenced by onetime effects related to ExxonMobil acquisition. And also in relation to volumes, I would like to highlight the fact that Panama has shown a very interesting increase of 15.7% in volumes, explained by 2 new large customers that we added to our portfolio.
Finally, in relation to Terpel, we can see the evolution of EBITDA contributed on a quarterly basis by the new ExxonMobil assets that we had incorporated. We are up to 30,000 -- COP 30 billion this quarter, which is approximately $9 million. So we have been gradually on a positive trend in relation to the operation that we have acquired from ExxonMobil, the figures that we are recording in terms of EBITDA are still influenced by some setup costs related to logistics, related to building up of inventories and to some very strong reactions from the competition of the countries that we are entering with this new lubricant products. We continue to see this EBITDA generated by these assets in the range of $60 million to $70 million as a stable figure for long term and for the years to come.
On Page 24, we are referring to Abastible, our LPG division. The net income of Abastible was basically influenced by taxes. This last quarter, taxes are, in turn, influenced by the effects of the dollar appreciation on the recognition of international investments that Abastible has. And together with that, we have higher operational income that is explained, basically, by good results in Colombia because of better margins. Ecuador, which has been showing higher volumes and also a positive trend shown in our division in Peru, in Solgas. All of this is offset by slightly lower operating results in Chile.
In terms of operating figures and moving on to Page 25, we are showing here the -- some elements for the 4 countries in which we take part. In the case of Chile, volumes have been growing at 2.2%, approximately. Especially strong in the industrial channel, and this is explained by a new commercial strategy, followed by Abastible to offer energy-efficient solutions to large industrial clients, which has been going very well.
The quarter in terms of Bottled or the Bottled channel has been affected by higher temperatures and also very strong competition in -- especially in the south, in southern part of Chile. Good results in general from the Autogas division because of increased -- a number of conversions to LPG.
In Colombia, even though we are seeing very high levels of competition coming from the other LPG players and also from natural gas, we are seeing good volumes and margins, related in some part to the fact that sales from Venezuela are -- have been going down.
In Peru, there is an interesting change in trend. We had seen EBITDA in Solgas decreasing for a while. Now we have seen several months of very interesting EBITDA generation. This is essentially related to some commercial strategies that have been performing very well. And related basically to geographic coverage, which has been increased, the distribution network and the number of distributors has also been gradually increased. And also a strategy of dual brand that we are using there that has yielded quite interesting results.
In Ecuador, we continue to see a good performance. There is a quite significant growth in the industrial bulk segment because of new industrial clients that have been gradually replacing diesel by LPG.
On Page 26. A very quick look at Sonacol, which is a very stable division. This is a pipeline division that we consolidate at Empresas Copec. Volumes growing by 1.3%, and both net income and EBITDA, pretty much in line with last year, very stable as usual.
Looking at our other divisions or other Investments here are presented on Page 28. In the case of Igemar, which is our fishing holding company, we are showing a loss of $7.8 million, which is a higher loss than last year. This is basically a result -- related to results at Corpesca, which is the fishing associate in the north of Chile, and also through some exchange rate effects. Alxar, which is our mining division through which we own Mina Justa in Peru has been showing a loss, which is basically related to the setup costs of the project that we are undertaking in Peru, Mina Justa. So SG&A and financial costs related to the development of the initial stages of the Mina Justa project, we're showing -- that is what explains the loss at Alxar during this quarter.
In the case of Laguna Blanca, which is the current company of our venture at Mina Invierno, the coal venture at Mina Invierno. This company has essentially been decreasing activities and gradually scaling down following the ruling by an environmental court that prohibited the use of blasting. Due to all that, sales has, of course, gone down significantly. And unit costs have, at the same time, gone up significantly, and that is the origin of the loss that we're recording at Laguna Blanca. Both Metrogas and AGESA -- in the case of Metrogas, very stable. Both are related to the natural gas. Metrogas is very stable with respect to last year. And in the case of AGESA, which is the trading division, we did lower volumes in relation to last year.
Let us move to Page 30, please, where we'll be starting to comment some developments that have taken place during the last quarter in our companies. First of all, a brief word on the developments that we are seeing in Chile. In Chile, we have a social crisis taking place. We have faced massive social movements. Composed of, in general, pacific demonstrations, very widespread, but also some looting and some violence. This has calmed down in relative terms. Basically following a wide political agreement, which is oriented to push social reforms and also to elaborate a new constitution. This is a very painful context for our country in which oil companies have been subject to some disruptions and challenges, basically logistical.
As of today, and following this relative call, however, our productive and commercial activities are largely normal. And during this painful period, our main efforts as a company, have been directed towards ensuring safety of our employees and also ensuring and doing our best efforts to ensure the continuity of supply for our clients. This is what we can comment on this subject at this time. Of course, this is ongoing, and we will be informing any major events that take place in this regard.
Moving on to Page 31. Arauco has issued $1 billion sustainable bond, the first sustainable bond in Chile. And this is $500 million -- composed of $500 million which are due in 2030 and $500 million which are due in a 30 years' time to 2050, basically, 4.2% and 5.15%, the phase rates there. This is the first forestry company in Latin America, actually, to issue sustainable bonds, which entails some commitments regarding green and social projects, environmental and social projects. This is basically used for CapEx financing also to refinance some outstanding liabilities. And also to other users. In fact, in -- follow with this operation, a tender offer was submitted for notes that were expiring in 2021 and 2022. And a total of $173 million were refinanced through that operation.
On Page 32, a brief word on the Valdivia project. Valdivia project is already up to 98% of construction completed. We are completing an investment of $195 million. And as we have said before, we are expecting this product for the beginning of 2020. This will allow us to enter a new market, which is dissolving pulp. And at the same time, maintain a flexibility to eventually switch back to paper grade pulp.
In relation to MAPA, which we are showing on Page 33. We have a 22% progress as of September, a little more than that at this time, approximately 28%. This is all in line with expected progress. We started civil and electromechanical works in July this year. And given that we are in time with expected progress -- everything is in line with expected progress, so we are expecting a start-up of the new line 3 for the second quarter of 2021. At this time -- at that time, when we complete line 3, the original existing line 1 will be shut down.
In relation to our mining projects in Peru, Page 34, Mina Justa. We are at 65% progress as of November 8. We have more than 5,000 people participating in the development in line with expectations regarding progress of the project and also regarding total CapEx, it has a final CapEx of $1.6 billion. And we expect to complete it at the end of next year. As you well know, this is financed with a project financing scheme for $900 million. And also equity contributions by the shareholders, which are Empresas Copec through Alxar. And also the breakout will be through equity -- total equity contributions for $700 million dollars, of which we own 40%. This is a project that is located in the south of Peru, in a region called Ica, and we're expecting to achieve production of up to 150,000 tons per year during the first years and a total average of 115 during the 16 years of planned operations.
And finally, a word in relation to sustainability. We have been confirmed in 4 importance of new indexes. Two of them Dow Jones, Dow Jones Chile and Dow Jones MILA, which includes Chile, Colombia, Mexico and Peru. The first one, Dow Jones Chile, for the fourth year in a row, and the second one, MILA, for the second year in a row.
We were highlighted as achieving good progress in several dimensions, environmental reporting, risk management associated to environmental dimensions, corporate citizenship, philanthropy and social reporting as well. Together with that, we have been confirmed in the MSCI index and also in the Financial Times for Good (sic) [ FTSE4Good ] index. This, of course, is very important and also contributes to highlights in the quarter that we gave to, in general, social aspects and corporate governance dimensions.
That is what we had prepared for you at this time. If you have any other -- any questions, we can now open up the floor. Thank you.
Thank you. The floor is now open for questions. [Operator Instructions] The first question is from Carlos De Alba with Morgan Stanley. Carlos, your line is open on our end, perhaps you have it muted.
Moving on, our next question is from Jens Spiess with Morgan Stanley.
Yes. Carlos had a step out. Sorry, for that.
Just one question regarding the social unrest in Chile. What do you think will be the medium-term impact, maybe in terms of regulation of land ownership, maybe taxes on fuels? And how are your operations currently in the ports. Are there any setbacks currently?
Yes. Thank you, James. It's probably very early to go ahead with any opinion on the long-term effects of this crisis. There's a wide political agreement in order to move on with a social agenda and also in order to move on with a process for a new constitution.
I -- we would prefer to wait for the development of those 2 issues before taking any stance on the potential long-term effects. We have the hope that Chile will emerge stronger and more united than before, but other than that, it's probably too soon to evaluate any potential effects.
Regarding the situation of ports, I will hand it over to Gianfranco because it essentially affects our forestry experts.
Yes. I would say that regarding the production, we haven't had any major problems. I mean only probably some logistic problems regarding getting people to the mills for the changes of shifts, but no loss in production during this week. And I think that there was like 2 days of strikes, the nation ports where we're doing in terms of supporting this movement. But rather than that, we haven't had any big impacts in terms of volumes of exports. So we say, no big impact in our operations, which are also located not in the big cities, so far away and no stops in production.
[Operator Instructions] The next question is from Martin Perez with SMBC Chile.
Rodrigo and Gianfranco, I -- a question regarding the decision by the Supreme Court that Abastible and Gasco have to sell the LPG terminal. I'm interested to see what would be -- any comments you have regarding that process. And if you expect any specific impact after the process is concluded.
Yes. Thank you, Martin. Just some context on that. We have a final ruling by the Supreme Court of Chile that has confirmed certain measures, which had previously been decreed by the Antitrust Court in Chile. The most important, probably, of those measures is the obligation of Abastible to sell its 36% stake in Gasmar, which is an LPG terminal, together with the other shareholder, which is Gasco. We -- at this point, we think that the effects of this ruling are fairly neutral. On one side, from a financial point of view, this is an infrastructure asset, which should be very attractive to long-term funds and other potential buyers. From a supply standpoint, Abastible, first of all, continues to have outstanding contracts with Gasmar. So even if the asset changes hands, some of the contracts will still be outstanding. Secondly, Gasmar will maintain an open access policy, so Abastible will have the opportunity to continue to be a client of Gasmar. And finally, Abastible has other supply alternatives, which are many, and among them, buying from ENAP, which is the state-owned refining company, buying -- buy trucks from Argentina, which also has presented historically very interesting opportunities in terms of supply. And Abastible also owns its own gas, LPG terminal in Hualpén, which is in the south of Chile. So that's the initial evaluation that we have made with respect to this final ruling by the Supreme Court.
This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Rodrigo Huidobro for any closing remarks.
Okay. Thank you very much for joining us, and we expect to meet with you again sometime during March next year to have a look at the final results for the whole year 2019. Thank you very much. Bye.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.