Teleconference 3Q21 Transcript

Local Conference Call

Klabin S/A (KLBN11)

3Q21 Earnings Results

October 27th, 2021

Operator: Good day everyone and welcome to Klabin's conference call. At this time, all participants are in listen-only mode. Later on, we will conduct a question-and- answer session, when further instructions to participate will be provided.

We kindly ask you that for the benefit of time, each analyst asks a maximum of two questions. Should you need assistance during the conference call, please dial star 0 by the operator. As a reminder, this conference call is being recorded and also broadcast simultaneously via webcast, which can be accessed through Klabin's Investor Relations website, where the presentation is available.

Any forward-looking statements made during this conference call in connection with Klabin's business outlook projections, operating and financial goals and potential growth, should be understood as merely forecasts.

In relation to the future of Klabin, such expectations are highly dependent on market conditions and Brazil's overall economic performance and only industry and international market behavior and therefore, subject to change.

Present with us today our Mr. Cristiano Teixeira, CEO, Marcos Ivo, CFO and investor relations officer, and the company's officers. Initially Mr. Teixeira in Mr. Ivo will comment on the company's performance during the third quarter of 2021. After that, all of the management of Klabin will be available to answer questions that you might have.

I now turn the floor over to Mr. Teixeira. Mr. Teixeira, please go ahead.

Cristiano Teixeira: Welcome everyone to Klabin's conference call to discuss third quarter 2021 results.

To start, I would like to pay a tribute to our dear friend Armando Klabin. It might sound too intimate to refer to Dr. Armando as my dear friend, but that's how I felt in my relationship with such an authentic person. Dr. Armando was a leader who inspired me and with whom I could count throughout my history at Klabin. I always resorted to him in difficult moments. Dr. Armando believed in people as very few people do. He believed in consensus, in conversation, in alignment, his absence is felt not only by myself, but by all people who had an opportunity to have a relationship with this relentless man.

A man who was enthusiastic and curious about all aspects of life, his invaluable contributions with good humor, optimism and development focus will continue to be present in Klabin's Board of Directors and will continue to guide us in building the future of this company that made him so proud.

On behalf of all Klabin's employees, I say my thank you to him and I devote this call to him, because we posted historical earnings for the company. Yesterday we had the first Board of Directors' meeting contacted by the new chairman Wolff Klabin, the oldest son of Dr. Armando.

As a representative of the Klabin team, we are putting all our trust in Wolff. As our dear friend Doctor Armando said, "let's move forward, folks".

Well, during the third quarter of 2021, while the global economy was still recovering from the economic impacts of the COVID-19 pandemic, there was some concern with the water stress crisis in Brazil, inflation around the world, supply chains and logistics chains and the energy crisis in China.

Even in an adverse situation, at Klabin we posted the very best quarter in our history with cash generation measured by EBITDA margin to R$1.9 billion, substantial figures, which renew our confidence in the trajectory that we took so far. In Q3 2021, we had the startup of PM 27 with the production of the first Kraftliner produced with 100% short eucalyptus fiber, Eukaliner, which sets a new standard for packaging paper, high-performance packaging paper in Brazil and around the world.

In Ortigueira, we started in the complex of the Puma unit the operation of our container rail terminal, the largest in capacity of volume transportation for a single company worldwide. It will support us in another paper expansion cycle at Klabin and will optimize the current operation of Monte Alegre. In addition to increasing operating efficiency of the company, this project reinforces Klabin's commitment to sustainability because it reduces environmental impact.

Our results show increased revenue in all business lines with a reduction of leverage compared to the prior quarter and a record adjusted EBITDA reflecting efficient capital allocation, cash generation and creation of value for our shareholders.

I now turn the floor to Marcos Ivo, that will bring us detailed financials for Q3 2021.

Marcos Ivo: Thank you Cristiano, thank you all and thank you for joining us in this conference call.

On slide 3, in line with what we said before, we delivered another quarter with very positive results, with record marks in several lines of the P&L, confirming the strength of Klabin's business model and its results predictability.

Among the highlights of the quarter, I mentioned net revenue of R$4.4 billion, up 40% in the yearly comparison. Adjusted EBITDA per ton of R$2,028, up 50% over the same period of 2020, and acceleration of the leverage, which ended the quarter with a Net over EBITDA in dollars of 3.1 times from 3.6 times in June of 2021.

On slide four, sales volume increased 4% over Q3 2020, totaling 951,000 tons, this growth stems from the contribution of assets acquired from International Papers of Brazil in October of last year. Net revenue growth in all business lines in the early comparison despite some cost pressure, drove our adjusted EBITDA, which totaled R$1,928 billion, a record for any single quarter, up 56% over Q3 2020. Of this total, R$1.42 billion referred to the pulp segment, which for the first time exceeded the mark of R$1 billion in a quarter.

On slide 5, benefiting from a price recovery in the yearly comparison, as well as benefit from a flexible sales mix between geographies and a portfolio with three types of fiber, short fiber, long fiber and fluff, net revenue of pulp was R$1.6 billion in the quarter, 48% up in the early comparison.

The cash cost of pulp production was R$940 per turn, up 24% over the same period of last year. This cost increase is explained mainly by an increased price of chemicals and fuel in addition of inflation in the period. EBITDA per ton of pulp sold was R$2,605 in the quarter, a significant growth of 84%, when compared to Q3 2020, showing improved profitability in the pulp business even in a challenging scenario in terms of costs.

Now moving to page 6, Kraftliner net revenue in the quarter was up 16% in the annual comparison, benefiting from favorable conditions of the market, which have driven the price of this product. Measured by FOEX Europe, the price in dollars per ton increased 30% when compared to the same period of 2020.

The balance between supply and demand for this product is well balanced out, showing the maintenance of current conditions in the market, and that encourages the additional volume entry for PM 27.

Now turning to page 7, at the end of September, Klabin's net debt was of R$19.9 billion, an increase of R$1.2 billion vis-a-vis the prior quarter. This increase is explained by the Brazilian currency depreciation, which affects the dollar denominated debt, and that is partially offset by cash generation in the period.

Leverage measured by net debt over EBITDA in dollars was down 3.6 times by the end of June to 3.1 times in September, confirming the deleveraging movement mentioned in our last earnings call.

Now moving to the next slide, Klabin's liquidity is still robust and has ended the quarter in R$11.7 billion, that liquidity consists of R$9 billion in cash and the remainder in a revolving credit line. The average maturity debt from 2021 to 2023, which is the period of Puma II construction, is of approximately R$1.3 billion a year, a very comfortable level for the company.

The average tenor of the debt at the end of September of 2021 was of 108 months or 9 years, the same level as we had in the prior quarter. Klabin also has not yet drawn credit lines, which are in a similar amount to the CAPEX that will be dispersed by the

end or right at the conclusion of the Puma II project, as we have detailed in our release.

On page 9, adjusted free cash flow net of discretionary factors and expansion product was positive in R$1.5 billion in the quarter, in addition to the strong EBITDA, the result was driven by the reduction of R$206 million in the company's working capital. In the last 12 months, adjusted free cash flow was of R$4.4 billion, representing a free cash flow yield of 15%.

Now on page 10, so shareholders notice published yesterday, the company approved the earnings payment of R$402 million, dividends and interest on equity to be paid on November 11th. Klabin has a JCP and dividends policy that can be checked on our website of Investor Relations.

On slide 11, the first stage of Puma II started up production on August 30 and is following its ramp-up as planned. For this year we expect to ship 90,000 tons of paper produced in PM 27. The second stage of the project that will have a coated board machine is moving on with construction, within the schedule, and should start up working in the second quarter of 2023, that is the planned date.

Starting from the project to Puma II, we have been disbursed to R$7.1 billion out of those R$623 million are regarding to the third quarter of 2021. For the last quarter of this year, we estimated disbursement of around R$1 billion, and for 2022 we estimate disbursing of approximately R$3 billion.

Finally, I would like to stress some ESG's actions in line with KODS, Klabin's Sustainable Development Objectives, which are part of Klabin's agenda for 2030. In the next weeks, we will have the United Nations Climate Change conference, COP26, to discuss climatic issues. Our CEO Cristiano is an ambassador of the SDG 13 by the global pact and will be participating in this event as a Brazilian representative of the group COP26 business leaders.

In June, we joined to the CFO task force for the sustainable development goals. By means of this initiative of the UN's, the CFOs are committing themselves with the 10 principles of the global compact with the objective of integrating the sustainable development in terms of investments and financing.

Another front, Klabin has become a signatory of the forum of LGBTQI+ companies and rights committing to 10 actions which are related to KODS actions and having 90% of employees coming from diversity groups, analyzing positively the conditions of equality and respect in the company.

Recently, we also contracted a revolving credit line of $500 million characterized as Sustainability-Linked that is subject to an annual performance of environmental indicators linked to a KODS goal. Also important, we started using the framework SASB in our ESG release and that is going to follow the international standards, making it easier to follow it up and analyze it.

These and other actions are the consequences of our integration history to ESG and our strategy. To follow all ESG indicators, please check our portal. Now Cristiano, me and the other officers will be available to take your questions.

Question and Answer Session

Operator: Thank you. We will now begin the question-and-answer session. If you want to ask a question, please dial star *1. if you want to remove your question from the queue, please dial star *2.

Our first question is from Mr. Daniel Sasson with Itaú BBA.

Daniel Sasson: Hello, good day everyone. Congratulations on the results. My first question has to do with the gaps between fibers. We have seen the price of solid fiber exceedingly higher than long fiber, than hard fiber, and I would like to know when you think this price gap will continue between Europe and China and when do you think this gap will close?

And my second question has to do with costs. The results were very strong, but perhaps the cost item is the only one that was a little higher than we estimated. There was a foreign exchange impact caused by chemicals and fuel prices. Could you elaborate on the outlook for Q4 2021 and for 2022 in terms of the carryover of higher costs, higher production costs looking forward? Thank you very much.

Cristiano Teixeira: Thank you, Sasson. Nico will start and then Marcos Ivo will answer the second part.

Alexandre Nicolini: Good day, Daniel. Thank you for the question. It's really hard to forecast when this price gap between China and other markets will close. China is still a market that stands out compared with other geographies, we see Europe, the United States, and even Brazil, with very strong markets from the standpoint of demand and we don't see this changing in the coming months.

This price gap between long and short fiber have been there for a little over a year, when we look at price projections for next year, the gap will continue, we don't expect any significant reduction, and this is due mainly for the fact that long fiber is influenced the by fluff producers that have the ability to swing.

Fluff market remains in high demand, it is a market that has been very much impacted by logistics constraints, because practically 100% of the shipments go in containers, so there's an expectation that producers that can swing will continue to produce fluff because of price and also because of demand. That will drive a reduction in the availability of long fiber and the markets, so the gap will continue.

Marcos Ivo: Sasson, this is Marcos Ivo. From the standpoint of cost, indeed, we see in the earnings of the quarter that there was some cost pressure on some raw materials, particularly some commodities which are dollar denominated. And there is more inflation rate impacting some other items in the economy, including services.