Competitivenessand Economic Results – Klabin

Competitiveness
and Economic Results

KLABIN’S FLEXIBILITY DEMONSTRATED BY ITS PRODUCT DIVERSITY AND COST COMPETITIVENESS, AS WELL AS ITS FOCUS ON OPERATIONAL EFFICIENCY, HAVE BEEN KEY TO THE COMPANY’S GROWTH TRAJECTORY. IN 2018, RESULTS SHOWED A 20% INCREASE OVER THE PREVIOUS YEAR.

Sustainable
Development
Goals

<i>2 - </i>Eradication of hunger 2 - Eradication of hunger
<i>5 - </i>Gender equality 5 - Gender equality
<i>7 - </i>Renewable energy 7 - Renewable energy
<i>8 - </i>Decent jobs and economic growth 8 - Decent jobs and economic growth
<i>9 - </i>Innovation and infrastructure 9 - Innovation and infrastructure

—  Summary of the 2018 economic scenario

(GRI 102-7, 103-1, 103-2, 103-3)

Early 2018 was marked by increased confidence regarding the recovery of the Brazilian economy, with drops in inflation and interest rates, greater exchange rate stability, and Ibovespa appreciation. The truckers’ strike in May, however, anticipated pre-electoral tension, causing volatility in the foreign exchange and stock markets, especially due to uncertainties regarding fiscal reforms, which curtailed the downward trend in internal interest rates. This, coupled with increased risk aversion to emerging economies, rising interest rates in global markets and the still uncertain consequences of the US-China trade war, maintained the highly volatile scenario through the end of the year.

In this context, the domestic scenario showed underwhelming economic growth early in the year and was further impacted by the depreciation of the Brazilian currency. Brazilian shipments of corrugated board followed the trend and frustrated market expectations. In the kraftliner, hardwood, softwood and fluff pulp markets, international prices at high levels influenced the domestic market, impacting prices and creating a more favorable environment for producers.

On the international stage, concerns about trade frictions, especially between China and the United States, and the possible increase in U.S. interest rates were not globally reflected in the prices of packaging paper and pulp. These markets still show positive signs of continued demand, mainly from emerging countries, coupled with the increased restrictions on the use of non-recyclable materials for environmental reasons.

In 2018, Klabin once again proved its effective performance under conditions of instability and increased volatility. With a challenging domestic market, its diverse product line and cost competitiveness enabled the company to focus on markets that had demonstrated greater stability throughout the year. In this context, the strong kraftliner and pulp results are worth mentioning, with revenues growing 35% and 52%, respectively, when compared to 2017. The pulp results confirm the efficiency of the Puma Unit as an important driver of cash generation for the company.

Growth in these segments, coupled with Klabin’s strong positioning in the packaging markets, boosted the company’s EBITDA to a total of BRL 4.0 billion in 2018, a 47% increase over the previous period, and an EBITDA margin of 40%. As earnings expanded, the Net Debt/EBITDA ratio increased from 4.1x at the end of 2017 to 3.1x in late December.

—  Highlights of 2018

  • DRIVEN BY THE SURGE IN PRICES, ESPECIALLY KRAFTLINER AND PULP, NET SALES REVENUE CAME IN AT BRL 10.016 BILLION, 20% HIGHER THAN IN 2017.

  • ADJUSTED EBITDA TOTALED BRL 4.024 BILLION, A 47% INCREASE COMPARED TO 2017.

  • THE EBITDA MARGIN WAS 40%, 7 P.P. HIGHER THAN THE PREVIOUS YEAR.

  • AT THE END OF THE YEAR, THE NET DEBT/EBITDA RATIO WAS 3.1X, A 1.0X DROP COMPARED TO THE END OF 2017, REFLECTING THE COMPANY’S STRONG CASH GENERATION IN THE PERIOD.

—  Klabin’s main financial results

Klabin’s main financial results (in BRL millions)

2018  2017 2016
Sales volume (K tons) 3,189 3,220 2,650
Domestic market 1,589 1,564 1,316
Export 1,601 1,656 1,333
% Domestic market 50% 49% 50%
Gross revenues 11,517 9,727 8,204
Net revenues 10,016 8,373 7,091
Domestic market 5,534 5,020 4,230
Export 4,483 3,353 2,861
% Domestic market 55% 60% 60%
Change in fair value of biological assets 628 790 533
Cost of products sold (6,342) (6,427) (5,227)
Gross profit 4,302 2,736 2,397
Gross margin 43% 33% 34%
Sales (764) (657) (586)
General & administrative (558) (528) (467)
Other operating income (expenses) (2) (12) 5
Total operating expenses (1,325) (1,197) (1,048)
Adjusted EBITDA 4,024 2,738 2,288
EBITDA Margin 40% 33% 32%
Net profit 137 532 2,482
Net indebtedness 12,399 11,278 12,005
Net indebtedness/EBITDA¹ 3.,1x 4.1x 5.2x

¹ The EBITDA margin is calculated on pro forma net revenue, which includes revenue from Vale do Corisco.

 

Distribution of economic value generated (in BRL millions)

(GRI 201-1)

The year 2018 was marked by improving results and value generation, and distributed value indicators showed consequent positive evolution. Community investments are not reported here, as they are not included in the financial statements.

Generated 2018 2017 2016
Revenue R$ 12,449.58 R$ 10,784.83 R$ 8,965.28
Distributed economic value 2018 % 2017 % 2016 %
Operating costs 5,683.85 58.4 5,583.23 52 4,441.77 41
Salaries and employee benefits 1,418.80 14.6 1,373.26 13,6 1,249.76 11.5
Payments to capital providers 236.18 2.4 532.17 5,3 2,481.95 22.9
Payments to suppliers 2,002.90 20.6 1,564.68 15,5 1,279.84 11.8
Payments to the Government 391.18 4 1,031.74 10,2 1,378.07 12.7
TOTAL 9,732.91 100% 10,107.44 100% 10,831.39 100%
Retained 2018 2017 2016
“direct economic value generated” less “distributed economic value” 2,716.67 677.39 -1,866.11

 

—  Operating results

(GRI 102-7)

The sales volume (excluding wood) totaled 3,189 thousand tons in 2018, the same level as 2017, reflecting, on the one hand, the higher pulp sales volume of the Puma Unit, and, on the other hand, the impacts of the truckers’ strike in May and the lower volume of paperboard sales. In addition to the 3% increase in pulp sales, the 4% hike in kraftliner sales also deserves mention, reflecting the product’s positive market momentum, as it serves as an input for packaging both in Brazil and abroad.

>> NET REVENUE (WOOD INCLUDED) REACHED BRL 10,016 MILLION, AN INCREASE OF 20% COMPARED TO 2017, DRIVEN BY HIKES IN VOLUME AND PRICES, MAINLY PULP AND KRAFTLINER. <<

Additionally, for the other paper and packaging products, Klabin used its flexibility to focus on markets with higher profitability, which also contributed to the revenue expansion seen throughout the year.

The total unit cash cost, which includes the sale of all the company’s products as well as sales and general and administrative expenses, came in at BRL 1,879/t, 6% higher than in 2017. The truckers’ strike and an extended maintenance stoppage of the pulp unit were offset by the strong performance of the Puma Unit for the remainder of the year, especially due to the greater generation and sale of electricity from the plant.

Sales expenses totaled BRL 764 million, compared to BRL 657 million in 2017, less than proportional to the company’s revenue increase. Thus, these expenses accounted for 7.6% of the net revenues for the period, down 0.2% from the amount reported in the previous year.

General and administrative expenses totaled BRL 558 million, 6% higher than the previous year. This one-off increase is explained by the provision based on the estimated increase in variable compensation for the delivery of higher-than-expected results, in accordance with the approved compensation plan.

As costs and overhead were controlled, the operating cash generation (Adjusted EBITDA) in 2018 was leveraged by the overall surge in prices, especially for pulp and kraftliner. Thus, the adjusted EBITDA was BRL 4,024 million, 47% higher than the previous year (also benefiting from a higher exchange rate), and the EBITDA margin was 40%.

Adjusted free cash flow (less dividend and expansion project amounts) in the year came in at BRL 1,932 million, up from BRL 1,760 million in 2017, mainly explained by the company’s greater operating cash generation.

—  Income and debt

Consolidated gross indebtedness at the end of the year reached BRL 19,446 million, in line with the 2017 end-of-year figures, even with a 17% higher exchange rate that directly impacted dollar-denominated loans. This was possible due to the early settlement of old securities, partially replaced by new funding with more attractive terms and costs. Such debt management model should be strengthened throughout 2019, further tailoring Klabin’s debt profile to address future investments.

Cash and financial applications on December 31 totaled BRL 7,047 million, a decrease of BRL 1,225 million compared to the end of 2017, also due to the early payment of Klabin’s debt.

Consolidated net debt amounted to BRL 12,399 million, an increase of BRL 1,121 million in the year, mainly influenced by the accounting effect of the foreign exchange variation on foreign-currency loans, partially offset by the strong cash generation throughout 2018. The net debt/adjusted EBITDA ratio closed the year at 3.1x, compared to 4.1x at the end of 2017, reinforcing the deleveraging trend triggered by the start-up of the Puma Unit.

—  Business performance

FORESTRY BUSINESS UNIT

Klabin’s forestry unit operations have been evolving to address the higher production volumes of pulp, paper and packaging resulting from the company’s capacity increases. In 2018, about 15.7 million tons of pine and eucalyptus logs and chips and waste for energy were handled, supplying the domestic demand for pulp and paper production, in addition to the amount of wood sold to sawmills and rolling mills throughout the year.

This focus on the availability of wood to supply an increased domestic consumption of the pulp and paper operations reduced third-party log sales to 2.1 million tons, compared to 2.6 million in the previous year; the net revenue reached BRL 331 million.

 

PULP BUSINESS UNIT

The year 2018 was marked by the consolidation of Klabin’s pulp unit through the continuous operational evolution of the Puma Unit, which reached production levels above its nominal capacity in the second half of the year. Operational efficiency, in addition to the positive impact on the produced volume, was also reflected in improved costs and greater energy efficiency.

Such improvement in the Puma Unit operations was leveraged in the company’s results by the continuous increase in pulp prices, reflecting the positive market momentum (stronger demand).  The average hardwood pulp list price in Europe rose from USD 819/t in 2017 to USD 1,037/t in 2018. This increase was also seen in the softwood pulp market, where the average pulp price in Europe climbed from USD 881/t to USD 1,166/t in the period.

The hardwood, softwood and fluff pulp sales volume, despite the effects of the truck drivers’ strike in May, reached 1,401 thousand tons, a 3%-increase against the previous year. Along with the aforementioned price increase and the higher exchange rate, the higher volume sold led to a total pulp revenue of BRL 3,674 million in 2018, 52% higher than in 2017.

Another milestone was reached in November 2018, when the anticipated termination of the pulp trading agreement with Fibria was announced, after an evaluation of the market and strategic benefits of trading hardwood pulp. Klabin has an adequate commercial structure, as well as proper logistics and expertise in the distribution of a wide range of products and, with that move, took a step forward to establish itself as an independent and competitive supplier in the international market of Bleached Eucalyptus Kraft Pulp (BEKP), foreseeing even better profitability, price and term conditions regarding sales of the product.

 

PAPERS BUSINESS UNIT

The year 2018 was a positive year for the global packaging paper market, both due to the continuous demand, that was once again reflected in rising kraftliner prices, and the emergence of opportunities to enter new markets and develop new products. In this sense, increasingly frequent news on plastic use regulations, although still difficult to quantify, have prompted packaging paper producers to reposition themselves for new opportunities. Klabin is an example, as it started producing and selling paperboard for cups in 2018, in addition to boosting research through its R&D+I area, while also acquiring a share in the Israeli startup Melodea, a pioneer in the development of a sustainable process for the extraction of nanocrystalline cellulose (CNC).

Klabin maintained consistent results in the kraftliner market throughout 2018, with a 4% volume increase and a 35% revenue increase against 2017. Figures were positively influenced by the significant 39% expansion in sales volumes in Brazil, demonstrating the strong positioning of the company to address the strengthening domestic market, as expected for 2019.

Regarding paperboard sales, Klabin sought more profitable markets, also reallocating volumes to position itself in sectors with good prospects for the coming years. For this reason, even with a 12%-drop in sales volume, also impacted by the truck drivers’ strike, net revenue remained stable with respect to 2017 figures. Among these sectors, it is worth mentioning the beer and other carbonated beverages market, in which Klabin has been establishing itself as a major supplier of six-pack packaging papers.

 

PACKAGING BUSINESS UNIT

Forecasts by the Brazilian Association of Corrugated Cardboard (ABPO) in early 2018 accounted for a 3.5% sector growth in the year, which ended up suffering impacts from the truck drivers’ strike and the economic uncertainties due to the political scenario. Accordingly, the year ended with a growth of 1.6%, as per prior ABPO data, in line with Klabin’s increased sales.

In the industrial sacks market, the country’s construction sector maintained a slow recovery pace, according to data from the National Union of the Cement Industry (SNIC). Meanwhile, results in Klabin’s industrial bag segment were boosted throughout 2018 by the company’s strategy to seek new markets, such as fertilizers, food and coffee, in addition to growing bag exports, especially to Mexico and the United States.

Within such context, the company, once again seeking to maximize profitability among the different paper and packaging markets, obtained a volume increase of 1%, followed by a 7% revenue increase, totaling BRL 2,803 million.

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—  Investments

Klabin invested a total of BRL 956 million in 2018, of which BRL 272 million were allocated to its forestry operations, BRL 462 million were invested in the operational continuity of the plants and BRL 222 million were directed to special projects and expansions, especially in high-return projects that seek to improve the company’s performance in all segments in which it operates.

The investment amounts represent the cash view and do not consider the investments arising from the subsidiary Guaricana Reflorestadora S.A. (Special Purpose Entity – SPE), established in December 2018. It is worth mentioning that Klabin contributed to the formation of the SPE’s assets with 4,511 hectares of planted pine forests in Santa Catarina (not including land). Timber Investment Management Organization (TIMO), in turn, contributed with BRL 191.6 million in cash, with Klabin holding the majority of the SPE’s voting capital.

Main investments in operations (in BRL millions)
  2018 2017
Forestry 272 228
Operational continuity 462 399
Special projects & expansions 222 121
Total 956 925

 

—  Capital markets

In 2018, Klabin’s shares (KLBN11) fell by 10%, against a 15% appreciation of the IBOVESPA. The Company’s Units were traded during all B3 trading sessions, with 2.6 million transactions involving 832 million securities and an average daily trading volume of BRL 64.4 million at the end of the period.

Klabin’s capital stock comprises 5,410 million shares, of which 1,985 million are common shares and 3,425 million are preferred shares. Klabin’s shares are also traded in the U.S. market. As Level I ADRs, the securities are listed on the OTC (over-the-counter) market under KLBAY. Klabin has received a BB+ credit rating by Fitch Ratings and Standard & Poors.

—  Investor advantages

Klabin’s sustainability governance practices were internationally recognized in 2018. The company was featured on the “A List” of the Carbon Disclosure Project (CDP) for the first time (See Straight As for Klabin). For the sixth consecutive year, Klabin was included in B3’s Corporate Sustainability Index (ISE), which highlights the actions of companies that stood out for their high degree of commitment to the sustainability of business and the country. ISE aims to create an investment environment compatible with the sustainable development demands, as well as to promote ethical responsibility by acknowledging best business practices. The criteria are established by the School of Business Administration of São Paulo at Fundação Getulio Vargas (EAESP-FGV) and Klabin is part of the portfolio in effect until January 2020.

 

Green Bonds ensure allocation of over USD 29 million

In 2018, Klabin concluded the allocation of resources obtained with the first issuance of Green Bonds in 2017. The transaction totaled USD 500 million, with maturity in 10 years. The funds were earmarked for initiatives that were proven by the Sustainalytics agency to meet the Green Bond Principles eligibility criteria.

The use of resources comprised the period from September/2015 to June/2018. In 2018, USD 29.8 million was allocated to projects in the following areas: renewable energy, energy efficiency, sustainable forest management, products, technology and production processes that are eco-efficient and/or adapted to the circular economy, native forest restoration and conservation of biodiversity. Learn more here.