Klabin S A : Transcrição da Teleconferência 1Q24

Local Conference Call

Klabin S/A (KLBN11)

1Q24 Earnings Results

April 26th, 2024

Operator: Good morning. Welcome to Klabin's conference call.

At this time, all participants are in listen-only mode. Later, we will conduct a question- and-answer session when further instructions to participate will be provided. Should you require assistance during the call, and in benefit of time, please limit yourselves to two questions. As a reminder, this conference call is being recorded and being broadcast simultaneously via webcast, which can be accessed through Klabin's Investor Relations website, where the presentation is also available.

Forward-looking statements eventually made during this conference call in connection with Klabin's business outlook, projections, operating and financial targets, and potential growth should be understood as merely forecasts based on the company's management expectations in relation to the future of Klabin. Such expectations are highly dependent on market conditions, on Brazil's overall economic performance, and on industry and international market behavior, and therefore are subject to change.

Present with us today are Mr. Cristiano Teixeira, CEO, Marcos Ivo, CFO and IRO, as well as company officers. Initially, Mr. Cristiano Teixeira and Mr. Marcos Ivo will comment on the company's performance during the first quarter of 2024. After that, the officers will be available to answer any questions that you may have.

I now turn the call over to Klabin's CEO, Mr. Teixeira. Please go ahead.

Cristiano Teixeira: Thank you. Good morning. Welcome to Klabin's Earnings Conference Call to discuss the results of the first quarter of 2024.

I'd like you to be with me on slide three, I will make some comments on the first quarter of 2024 performance and then you will hear more detailed information by our business officers.

For starters, let's speak about long fiber. At the top, on the left-hand corner, I'd like to draw your attention to the fact that 1/3 of the sales of fibers in Q124 was long fiber with a price differential of almost US$300 of one fiber over the other. We have been debating this thesis with you, it's kind of a conceptual thesis, but it takes into account some factors, which I will mention here with a direct link with Klabin's intention to

extend our long fiber product portfolio, which combines and couples with our Caetê Project.

Last year, the long fiber market had about 25 million tons a year. Last year, almost 3 million tons were out due to shutdown of production, basically following companies in the North Hemisphere manufacturing long fiber, and with this price differential, this was a relatively stable curve, considering principaly the price of fluff worldwide. We saw price deterioration mainly because of the North Hemisphere cash cost. So this started happening last year, and there has been no announcements of investments in long fiber worldwide, so it's a sector of 25 million tons, and in this context, Klabin stands out with a product with the same quality characteristics as the long fiber in the Northen Hemisphere and we're among the main brands that use our long fiber products.

So considering the strategic design of the company and our resilience, we operate in niche markets which are more resilient, more stable, with greater competitiveness vis-à-vis the Northern Hemisphere, se we are the only company in the Southern Hemisphere offering this kind of differential. So our thesis is not that there are no possibilities of replacement of long fiber by short fiber. On the contrary, we benefit from that, we showed that in Eukaliner - and I'll be talking more about that - but in the replacement of fluff, which will benefit us as well, we like to draw your attention to the fact that in this market we've been working more and more with products with greater added value of fluff, with greater competitiveness. This is indeed a differential that we have that we always like to draw your attention to.

In short fiber, just for your reference, is a market of about 45 million tons. We always like to point out the loss of more than 1 million tons last year due to unscheduled stoppages, which shows that we can canister this in our calculations. We believe that this will be more and more reflected in the curves of the companies that work with pulp price curves. This will be considered; this will be a reference in the price curve. In other words, this non-recurring loss in short fiber.

So we had an important quarter, and Marcos Ivo will speak more about this, in terms of pulp cash cost, and it shows efficiency that we have been pursuing at the company, not just in G&A and wood, but also in other areas of the company.

As regards coated boards and Kraftliner, of course, we have to mention the moment we had in Brazil and in Latin America. This is a theme that has been debated in many segments, the overcapacity of China and its effect in many regions of the world. Brazil was not an exception in this context. We also suffered just like other industries with the offering of Chinese products in Brazil.

This will be mentioned by our coated boards office later, but I'd like to point out that even in this scenario with deflation due to an overproduction in China, which has impacted many sectors around the world and also ours, in this kind of situation still Klabin posted growth in Brazil in the shipment of coated boards, showing that the Chinese coated boards that arrive in Brazil competed with less added value products,

and Klabin is now focusing with the technology of PM28 in more added value products. So this reinforces what I said about pulp. We are going to niche products with higher added value, and of course, this also applies to coated boards, not to speak about LPB, which we know is the high-end product of every sector.

Speaking a little about the Kraftliner, we're now transitioning also to packaging. I would also like to mention the level of integration and conversion at Klabin, 63%. I'd like to point out something that you should not overlook; we have been using as much as possible the paper of paper Machine 27, which is a highly technological paper. And again, we spoke about that fiber transition using short fiber, and this used to be long fiber in the past, but leaving this for products that can and need to work with a lower paper weight, and especially because of market conditions, there's a demand for better surface quality for printing. So again, it's another niche product.

So I'd like to mention how the conversion of Klabin's paper integrating the whole benefit of a low paper weight, but the value that this can represent to you by the measurement in square meters. So I'd like to point out the benefit we've been able to deliver in competitiveness and cash cost. We followed the market in terms of sales, the market of packaging and paper, so we follow the market in terms of growth in Q1, but the box sold in area in square meter or considering units, we follow the market in volume of 5.6%, but we produce less in tons. So the differential between the area in a lighter box and fewer tons, this differential is cost, and it's competitiveness that we can include in our result.

And lastly, I'd like to make a reference - that we'll soon be getting more information from our packaging director - I'd like to draw your attention to Figueira Project. Well, Figueira Project, I had the pleasure of visiting Project Figueira just yesterday, we started production and billing. We have a first line team, another great project team at Klabin being able to deliver the project before the deadline.

In the last 15 years at Klabin, you've seen as an excellent company in terms of delivering projects, and I'd like to mention something about this project; I hope that soon you will have an opportunity to see it in person, but we were able to make one of the great leaps in productivity in packaging. Most likely the biggest leap in Klabin's history because at this site we'll produce double when compared to another same high-technology unit at Klabin, but with half the team. So the productivity by ton ship by person at this plant is most likely the most efficient in the world, it's most likely the highest, the greatest leap in competitiveness that Klabin ever had. You'll get more data on the project soon.

So I will end my part and I will turn the floor to Marcos Ivo to speak about the quarter and then we'll come back.

Marcos Ivo: Thank you, Cristiano. Good morning, everyone. Thank you for joining us.

On page four of the presentation, net revenue in the quarter was R$4.4 billion, down 8% year-on-year. This decrease is due to drops in pulp and Kraftliner prices, in

addition to the appreciation of the Brazilian currency against the dollar, which was partially offset by the higher sales volume. Adjusted EBITDA was R$1.652 billion in the first quarter of 2024 with a margin of 37%.

Moving to page 5, pulp sales volume was of 362,000 tons in the period, impacted by a non-recurring maintenance stoppage in the production line. The average price of long fiber and fluff driven by fluff was US$949 per ton in the period, representing a spread of US$290 over short fiber, showing the high added value of long fiber fluff that Cristiano talked about excessively in the opening remarks.

The cash cost of pulp production was R$1,263 per ton in the quarter, down 7% from the same quarter last year and down 4% quarter-on-quarter.

On page 6, in the paper and packaging segment, the highlights are the increase on production of paper Machines 27 and 28 and the strong demand for Kraftliner and corrugated boxes. In paper, the volume sold increased 16% year-on-year, reflecting this production ramp-up, the strengthening of Kraftliner demand and access to new markets in coated board. Net revenue of this segment grew 3% in the first quarter of 24 versus the same period in 2023. In packaging, the sales volume of corrugated boxes rose 6% in Q1 2024 versus Q1 2023 mainly driven by increased demand from processed foods and dairy products. Net revenue of corrugated boxes grew 1% year- on-year.

Moving on to slide 7, total cash cost per ton was R$2,984 in the quarter, representing

1. 9% decrease year-on-year and a 1% decrease quarter-on-quarter. Note that this cost is below our total cash cost guidance of R$3,100 per ton for the year 2024.

Moving on to page 8, Klabin ended the first quarter of 2024 with net debt of R$21.3 billion, an increase of approximately R$1.2 billion quarter-on-quarter. This increase is substantially explained by the negative effects of the appreciation of the US dollar against the BRL on our net debt in foreign currency with no material cash effect in the period and also by the negative free cash flow in the quarter.

Leverage measured by net debt over adjusted EBITDA ratio in US dollars ended the quarter at 3.5 times, within the parameters established in the company's financial indebtness policy.

Moving on to the next page, Klabin's liquidity remains robust and ended the quarter at R$14.3 billion. This liquidity is made-up of R$11.8 billion in cash and the remainder in an undrawn revolving credit facility. Note that this cash position already reflects the funds in dollars that will be used for the payment of the Caetê Project scheduled for the end of Q2 2024, as mentioned in a material fact of December 20, 2023.

It is worth remembering that the closing of Caetê Project still depends on the usual suspensive conditions for this type of deal. As for the average maturity of the debt, at the end of the quarter was 90 months, and the maturities of 2024 and 2025 totaled R$3.1 billion.

Moving on to page 10, according to the notice to shareholders published yesterday, the company approved the payment of dividends in the amount of R$330 million, to be paid on May 16. On an accrual basis, the dividends distributed to shareholders in the last 12 months ended in March totaled R$1.281 billion. This amount represents a dividend yield of 5.3%.

I now turn the floor to Douglas Dalmasi, who will bring us details about this important project that is Project Figueira.

Douglas Dalmasi: Thank you, Marcos. Good morning to everyone.

We're here on slide 11 and we're very happy to share with you and other major milestone in Klabin's history: the startup of the Figueira Project, our new corrugated box plant that started operating on last Monday, April 22nd on time, on schedule, on budget, and at a moment of high demand in the market.

On the left of the slide, as you can see, we have the production information, the new unit has a production capacity of 240,000 tons, as we told before, and now we're talking about an added capacity of 190,000 tons. For this year, we're expecting 70,000 tons of additional production for our 2024 capacity.

At the center of the slide, the investment planned for the plant is also important information. Considering what has been done and what's going to be disbursed towards the end of the project, we're seeing a reduction of 4% of the planned investment, so R$1.5 billion at today's value, that we approved in the beginning of 2022, 1.570. o in addition to the 4% reduction, there is the monetary correction at today's value at 1.500, so it's an important effect, for the NPV and the IRR of the project..

On the right side, we're showing that the plant is coming at a very good moment at heated demand. We always follow that; this is an industry that grows above the GDP. The market according to data from Empapel grew 5.7% in the first quarter in terms of square meters compared to the same period of last year, and what's projected for the GDP this year is 2 percentage points of growth, and according to projections by Empapel, who projects the sector for the year, and even Risi, they're both protecting higher growth, 3.4% projected by Empapel, 1.4% percentage points above the expected GDP growth, and Risi estimates growth of 4.3%, so 2.3% percentage points higher than the GDP. So as I said in the beginning, on time, on budget and in a very good moment for the market.

I'll now move on to slide 12 with some important pictures that make us very proud. In the upper left-hand corner, there's a photo of our team, the project team and operation at the plant. On the right, we see the corrugator machine, a state-of-the- art equipment with optimization and monitoring features for performance quality. This machine has a speed of 450 meters per minute, it's a German machine running, it's a new technology that is capable of running up to 3 orders simultaneously, so it's a triple output that brings important efficiency gains for the equipment and for the

operation. Noting that we're starting now with one corrugator machine, but the site will have 2 corrugators and the second is expected to start operating in the second half of this year.

At the lower left-hand corner, we have the conversion equipment that's Flexo Folder Gluer printer, that's a Japanese machine with 4 printing colors, a speed of 20,000 boards per hour. The factory will have 5 printers like this. On the other side, we see a Bobst printer, this equipment brings leading technology with high capacity that can print on the inside and outside of boxes. It's an additional technology for us.

And I'd like to take this opportunity to thank everyone involved in this project, our Board, our directors, all of our employees, investors. We're very happy to deliver this achievement for Klabin and this reinforces our belief in our integrated business model. We are confident that this plant will be a fundamental pillar for Klabin future growth, very competitive cost and one of the best in the world, as Cris said in the beginning.

I'll turn the floor back to Cristiano, who continued with the presentation.

Cristiano Teixeira: Thank you. Actually, thank you, Douglas, thank you, Marcos. Now we will turn to the Q&A, and we'll get back to you at the end.

Question and Answer Session

Operator: Ladies and gentlemen, we will now begin the Q&A session. If you want to ask a question, please click on the button "raise hand". If you want to remove yourself from the queue, please click on "lower hand".

Our first question comes from Rafael Barcelos with Bradesco BBI. Go ahead Sir.

Rafael Barcelos: Good morning, everyone, and thank you for taking my questions. My first question is to Cristiano. Would like to understand if this more favorable pulp cycle could bring forward the decision for a new project that would require most significant investments by the company now that we've had the startup of Figueira Project. That's number one.

Second question, Nicolini, about the pulp market, I'd like to hear from you what your expectation regarding the implementation of pulp prices is announced for May, and in long fiber understand why is it that Klabin opted for not announcing a price increase. And still and long fiber, we saw some players announcing an increase, but it was more concentrated in China, not in Europe. So perhaps if you could comment on this difference between China and Europe, that would be much appreciated. Thank you very much.

Cristiano Teixeira: Thank you, Rafael. Regarding new projects, the answer at this point is we are 100% focused on the ramp-up of PM 28. Of course, now, as Douglas presented, we are focused on using as much as possible the ramp-up of corrugated

boxes. So we're always pursuing efficiency, particularly in the forestry area. We are consolidating a work to reduce fixed costs that started last year, so we are truly focused now.

We are not considering at this point taking anything new to the Board of Directors.

Nico?

Alexandre Nicolini: Hello, Rafael. Good morning. Thank you for the question. As regards price announcements for the month of May, these were recent announcements made last week by Klabin. The expectation is that we will implement these prices in all geographies given the current market context that you've been following.

Basically, looking at the geographies, Europe and mature countries in general continue to perform above the expectations. I'd like to remind you that we always work with a quarterly consumption forecasts, so the numbers for Q2 are very positive numbers, above what Klabin can supply today in terms of eucalyptus, so the trend continues to be very positive.

It is a little different than the current situation in China. I'd like to remind you that in terms of demand, China is not at the same par of Europe, United States and even Latin American countries, but China involves a supply restriction. You have followed that China stocks remain low. There were volume deviations from China, from South Pacific to other geographies because of a higher demand elsewhere.

So there's a supply restriction, and also there are some logistics involved. The supply chain which remains very challenging, the expectation remains positive for implementation of new price adjustments in May.

As regards your question on long fiber, unlike eucalyptus, in eucalyptus, we don't hear official announcements of price increases in long fiber. Still, these announcements were made last month. You should remember that in the prior earnings conference call by Klabin I mentioned that the trend is that the spread of prices between long and short fiber will increase.

We already see this happening. More than two million tons of capacity were shut down in the last two years. In this first quarter alone because of also a supply restriction and operating problems, basically 600,000 just vanished from the market.

The expectation is that for the coming months from now onward we'll start seeing a gap difference between long and short fiber in a range of about US$150 per ton. This should have an impact on fluff prices.

And just to answer your probable next question, fluff prices have been showing to be resilient. The price increase was announced were more timid compared to pulp in

bales, but soon we'll start seeing the impact of long fiber being transferred to new price increases for fluff.

Rafael Barcelos: Excellent. Thank you very much.

Operator: Our next question is from Caio Grener, from BTG Pactual. You may proceed, Sir.

Caio Grener: Hello. Good morning to all. I have two questions. First, about packaging, you mentioned your growth forecast, a demand forecast for this year of 3 to 4% by Empapel and Risi. So could you assure your volume growth expectation for this year for Klabin, specifically what your strategy will be with the startup of Figueira? You mentioned that you're expecting to have 70,000 tons from Figueira and have that in the market. So comparing it with what you produced and sold in 2023 that would be an 8% increase. Is this a fair statement or did I misunderstand, and you intend to perhaps turn off another machine and grow a little bit lower?

I just want to understand the strategy of the company this year for packaging. Will you focus on gaining market share? And if so, you might have to give up some of the price. I just want to understand your strategy.

Second question about cost Ivo mentioned in his initial remarks a cost falling 1% quarter-on-quarter, the cost is below the company's guidance for the year, and perhaps this was mainly driven by pulp, and he said this because of a reduction of third-party wood. And I'd like to know if this is a reflection of the initiatives related to Caetê Project.

And this first quarter below the guidance of the year, can we end up having an upside, a revision downward in terms of cost expectations for the year? Does the guidance continue to make sense, or do you think it's too conservative? These are my questions. Thank you very much.

Cristiano Teixeira: Thank you, Caio. Douglas?

Douglas Dalmasi: Well, Caio, thank you for the question. You see, we will monitor market conditions and market growth and you will seek efficiency in our other operations which were included in Project Figueira from the start. Figueira comes in as a satellite in São Paulo state, it brings us great efficiency in the region, it supplies a little bit of the South, the Midwest, and São Paulo and Minas Gerais, so we reduce higher costs, and we follow the market growth.

This is how we will operate during the year, with this expectation of market growth.

Marcos Ivo: Well, regarding costs, well, we need to connect this with what we have been talking to you about since mid-last year. Since mid-2023, we've been saying that with the startup of paper Machine 28, we will have a dilution of fixed cost impacting the cash cost of the company. Since then, we've been explaining a number of

initiatives, both in administrative functions and in our operational areas here, particularly in forestry. In Klabin Day, we spoke at length about this, about what we were doing in the Forestry Department, and these initiatives are now showing in Klabin's numbers. This has definitely been helping us, it's a pool of effects in our cash cost per ton.

As regards the expectation for the year, we maintained the guidance that was published on December 20th when we mentioned the cash cost return of R$3,100 for the year. This number is maintained. As for Q1, of course, we ran below that, but that's not the right timing to review this because, as you know, along the quarters there's some seasonality involved. So we maintain the cash cost guidance for 2024.

Caio Grener: Thank you. Excellent.

Operator: Next question, Daniel Sasson, Itaú. Please, you may go ahead.

Daniel Sasson: Good morning. Thank you for this opportunity. My first question may be for Ivo. It's just a follow-up about Caetê. Ivo, you said that the conclusion is still pending that suspensive conditions, as is usual in this type of transaction. But if you could try and share with us a little bit whether you're already thinking about strategic alternatives to eventually accelerate the monetization of that excess hectas that you acquired, of the land acquired in this negotiation, or if what you intend to do is to do this a little bit later, so that would help us understand and maybe price a little bit better the value that you have to unlock.

And my second question is a follow-up, maybe to Douglas, with the startup of Figueira

-congratulations for the startup on time and on budget, even below -, but if you can talk a little bit about the market conditions. Do you think there's room for maybe a consolidation movement or the large scale of informality in this industry, more with family-owned companies that are not as structured, if that would prevent it growing in this sector, and the only way to grow in this market is a more organically way? I think it'd be nice to understand.

And on the same point, if you could share with us how it's been, I mean, one year since the ramp-up of Horizonte, if you're already on the level of using the capacity that you expected, or if there's any lessons learned from that ramp-up of Horizonte that could help in the Figueira ramp-up? Thank you.

Cristiano Teixeira: Thank you, Sasson. Marcos?

Marcos Ivo: Sasson, as for Caetê, the suspensive conditions are being met in time, everything is moving along as expected, we continue to estimate the conclusion to the end of the second quarter.

As for the strategic alternatives to monetize the land surplus or maybe partnership with the TIMOswe've been working, we have been looking at it, we have studies and

ongoing discussions about this, and we're using time to our favor so that we can get to good designs for the company.

What we can say is that, as for the base scenario, that's the business case paired with the market that generated the reference return rate for the market, we are very confident we will deliver that, and there is the possibility of advancing this. The directors are dedicating their time to this, so this discussions, the studies are at the directors' level, it is an important part of our agenda, but we don't have anything sound to share with you yet. As soon as we do, we will share the information with you.

But to summarize, the base scenario published make us very confident. The Forestry Department is very prepared for the day this asset comes in, and that includes monetizing the surplus land, and a lot of discussions going on with the directors to see how we can advance that.

Cristiane Teixeira: Douglas?

Douglas Dalmasi: Good morning, Sasson. Thank you for your question. Talking about the markets, how do we see it, since the end of last year, we've been seeing an acceleration of the packaging market, most of it in the domestic market, especially starting in September/October, we saw the market growing greatly and that happens in the first quarter as well. So the market conditions are very good as concerns the domestic market in particular. So the consumption level, the confidence level of people is really happening.

As you know, we project what's happening in the economy and we see this industry going well for packaging. The seasonal markets, those that depend on export of fruits, for example, or proteins, we also see that it is accelerated. The fruit market, Brazil is gaining market share compared to other countries doing very well, growing at double-digit, and for the differentials that we have in the different fibers, we do have a special competitive edge for our products that Klabin has a great pair of this market.

So we are enjoying this growth and our fair and product differentiators. And for proteins, it's no different. You probably saw information about the Brazilian slaughterhouses being able to export to China, so accelerating protein export, and this product requires a specific fiber, virgin fiber, and we do have a higher market share of this market, as we do with fruit. So it's excellent market condition for us.

The second part of your question, about the consolidation, what we see in monitoring the market is what you saw in the world regarding the consolidation of Smurfit Kappa and Westrock that is developing here in Brazil. It's not a change yet, but on Klabin side, there's nothing happening. I mean, there's a lot going on to deliver that was Puma II, Horizonte, Figueira, and we're delivering always better than expected. Better than our projections of IRR and NPV.