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 zero for 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 future growth of all economic components and on industry and international market behavior, and therefore subject to change. Present with us today are Mr. Cristiano Teixeira, CEO, Marcos Ivo, CFO and Investor Relations Officer, and the company's officers. Initially, Mr. Teixeira and 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.
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 really marvelous man. A man who was enthusiastic and curious about all aspects of life. His invaluable contributions with good humor, optimism, and development purpose 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 dedicate this call to him because we posted historical earnings for the company. Yesterday we had the first board of directors meeting conducted by the new chairman, Wolff Klabin, the eldest son of Dr. Armando. As a representative of the Klabin team, we're putting all our trust on you, Wolff. As our dear friend Dr. 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 shortage crisis in Brazil, inflation around the world, supply chains and logistic 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 to BRL 1.9 billion. Exceptional figures which renew our confidence in the trajectory that we took so far. In Q3 2021, we had the start up of PM-27 with the production of the first kraftliner produced with 100% forest fiber, eucalyptus fiber. Eukaliner, which sets a new standard for high-performance packaging paper in Brazil and around the world. In Ortigueira, we started in complex and 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 and to reducing environmental impact. Our results show increased revenue in all business lines with a reduction of leverage compared to the prior quarter and a record EBITDA reflecting efficient capital allocation, cash generation, and creation of value for our shareholders. I now turn the floor to Marcos Ivo, who will bring us detailed financials for Q3 2021.
Thank you, Cristiano. Thank you all, and thank you for joining us on this conference call. On slide three, in line with what we said before, we still delivered another quarterly positive result with record marks in several lines of the P&L. Confirming the strength of Klabin's business model in its results visibility. Among the highlights of the quarter, I mention net revenue BRL 4.4 billion, up 40% in the yearly comparison. Adjusted EBITDA per ton of BRL 2,028, up 50% over the same period of 2020. An acceleration of the leverage which ended the quarter with a net debt over EBITDA in dollars of 3.1x from 3.6x 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 Paper do Brasil in October of last year. Net revenue growth in all business lines in the year-over-year comparison, despite some cost pressure, drove our adjusted EBITDA, which totaled BRL 1.928 billion, a record for any single quarter, up 56% over Q3 2020. Of this total, BRL 1.042 billion refers to the pulp segment, which for the first time exceeded the mark of BRL 1 billion in a quarter. On slide five, benefiting from a price recovery in the year-over-year comparison, as well as benefits from a flexible sales mix in geographies and a portfolio with three types of fiber, short fiber, long fiber, and fluff. Net revenue of pulp was BRL 1.6 billion in the quarter, 48% up in the year-over-year comparison.
The cash cost of pulp production was BRL 940 per ton, 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 to inflation in the period. EBITDA per ton of pulp sold was BRL 2,605 in the quarter, a significant growth of 84% compared to Q3 2020, showing improved profitability in the pulp business, even in a challenging scenario in terms of costs. Now moving to page six. 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 Euro, 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 maintenance of current conditions in the market. That encourages the additional volume entry for PM-27. Now turning to page seven. At the end of September, Klabin's net debt was of BRL 19.9 billion, an increase of BRL 1.2 billion vis-à-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 at 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 BRL 11.5 billion. That liquidity consists of BRL 9 billion in cash and the remainder in a revolving credit line. The average debt maturity from 2021 to 2023, which is the period of Puma II construction, is approximately BRL 1.2 billion a year. A very comfortable level for the company. The average tenor for the debt at the end of September 2021 was 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 CapEx that will be disbursed by the end or by the conclusion of Puma II project as we have detailed in our release.
On page nine, adjusted free cash flow net of discretionary sectors and expansion projects was positive BRL 1.5 billion in the quarter. In addition to the strong EBITDA, the result was driven by the reduction of BRL 206 million in the company's working capital. In the last twelve months, adjusted free cash flow was BRL 4.4 billion, representing a free cash flow yield of 16%. Now on page ten. As the shareholders notice published yesterday, the company approved the earnings payment and of BRL 402 million dividends and interest on equity to be paid on November 11th. Klabin has a JCP and dividends policy that can be tracked 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 test plan. 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 plan to date. Starting from the project of Puma II, we have invested BRL 7.1 billion out of those BRL 623 million reals recurring starting the third quarter of 2021. For the last quarter of this year, we estimated investments of around BRL 1 billion, and for 2022, we estimate investing approximately BRL 3 billion.
Finally, I would like to stress some ESG actions in line with Klabin's sustainable development objectives, which are part of Klabin's agenda for 2030. Next week, we will have United Nations Climate Change Conference, COP26, to discuss climatic issues. Our CEO, Cristiano Teixeira, is an ambassador of the SDG 13, the Global Compact, and will be participating in this event as a Brazilian representative of the group COP26 business leaders. In June, we joined the CFO Task Force for the Sustainable Development Goals. By means of this initiative of the UN, the CFOs are committing themselves to the ten 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 Fórum de Empresas e Direitos LGBTI+, committing to 10 actions which are related to Klabin's actions, and to having 90% of their 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 with, that is subject to an annual performance of environmental indicator related to a cost goal. Also important, we started using the SASB framework in our ESG reporting, 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 consequence of our integration history to ESG and our strategy. To follow all ESG indicators, please check our portal.
Now, Cristiano and me and the other officers will be available to take your questions.
Our first question is from Daniel Sasson with Itaú BBA.
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 soft fiber exceedingly higher than long fiber, than hard fiber. 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? My second question has to do with costs. The results are very strong. In fact, 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 going forward? Thank you very much.
Thank you, Daniel. Nico will start, and then Marcos Ivo will answer the second part.
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 with Europe, the U.S. and even Brazil, 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.
Has been there for a little over a year. When we look at price projections for next year, that will continue. We don't expect any significant reduction. This is due mainly for the fact that long fiber is influenced 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. Actually, 100% of the shipments go in containers. So there's an expectation that producers can soon continue to produce fluff because of price and also because of demand. That will drive a reduction in the availability of long fiber in the market, so the gap will continue. As all this is massive issue.
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. There is more inflation rate and some other impacting some other items in the economy, including services. These are not under our control. At Klabin, we try to optimize consumption of raw materials and inputs and to absorb the costs and pass the extra cost to our products. These are exogenous factors. It's very hard to elaborate more. What we can say is that we will continue to work in that way very diligently.
Okay. Thank you very much.
Our next question is from Mr. Rafael Barcellos from Santander.
Good morning, everyone. Congratulations on the results. My first question is about the price dynamics in paper and packages, specifically in corrugated boxes and coated boards.
How much can we expect in terms of adjustments for coated board and corrugated boxes? I would just like to have a color on the OCC dynamic. With the drop, recent drop in the OCC price, how can you affect your prices or the dynamics for corrugated boxes? My second question is about freight. We have seen an increase, maritime freight increasing significantly in the past few months. I understand that Klabin might have long-term contracts, but I would like to check with you, what is the impact in terms of costs of these logistics changes? Thank you.
Thank you, Rafael. We start with Flavio and Douglas talking about the corrugated box market, and then our supply chain director is going to answer you.
Okay.
Okay, Rafael, good morning.
Talking about the demand, the coated board market is very much balanced in terms of supply and demand. Brazil has grown over 20% in these first nine months of the year. It's starting on a strong base, which was 29%. In other markets, Brazil, the United States and Europe have significant growth. They allow this balance to have this price performance in all the markets. This is a market of contracted prices in general, and these movements happen in the area that is more spot, like in Brazil and abroad as well. It keeps increasing in the fourth quarter. It's also an important moment, which is when we have the new year. That's when the contracts do receive the planned adjustments based on the market balance.
Rafael, good morning. This is Douglas. Thank you for your question.
Now analyzing OCCs prices are around BRL 1,000. At that level, we always analyze the OCC's prices as to how packaging prices will be, and then this balance between supply and demand. The supply and demands are balanced. Looking forward, this is an area, a sector that usually grows and higher than the GDP. Looking at the scenario, we expect to see a price stability in the next levels considering these current prices with an inflation adjustment for the next year. Anything different from that, it will be a next variation, but in this demand scenario and that level of OCC, we will keep that level of prices transferring and adding the inflation.
Rafael, this is Sandro.
About the freight behavior, what we have seen, and I believe that in the third quarter, we are in the most critical moment since last year in terms of global supply. That is, we are getting closer to the end of the year, and the problems that we have seen throughout the year of problems in ports and the Suez Canal and the high demand that we have been seeing globally is that pressure all year. I would believe the fourth quarter will be the most difficult one. What we are doing, and as you know that Klabin has flexibility in terms of volume because of high volumes with different distribution channels. That allows us to sign contracts, especially in container transportation. We also have a second possibility, which is a breakbulk mode, also with long-term contracts, that allows us to have hybrid operations.
A third possibility, so to maintain export, we are using the maritime mode, especially regarding Mercosur. These three different possibilities allow us t o work with the foreign markets and still with contracted prices. We have seen some situations where we have additional demand from clients, additional from what we had contracted, and we are already tracking how the market is. A fourth factor is the movement for internal market and conversions, and that allows us to ease the pressure that we have right now in the container market.
Okay, great. Thank you.
Our next question is from Isabella Vasconcelos with Bradesco BBI.
Good morning. Thanks for the opportunity. I would like to know more about the kraftliner market and the rental performance too, which you people mentioned that you expect this year. 90,000 tons, additional tons in volume, and I would like to understand the possibility of most of this volume being exported, taking advantage of a higher international price and a depreciated Brazilian currency. I would like to understand the outlook for the kraftliner market for 2022. I think the prices have had a good performance this year, and I'd like to hear from you the outlook for supply and demand for next year. These are my questions. Thank you very much.
Thank you, Isabella. Flavio Deganutti
Hi, Isabella. Excellent questions. The market continues with an amazing structural strength, and this is valid for all geographies.
We do see some accommodation, but that was benefited by e-commerce and by a change in packaging. Our packaging offers a number of ESG advantages compared with plastic solutions. We see a very interesting balance in Kraftliner. Now, talking about our new capacity, PM-27 produces Eukaliner white. The plant did perform very well for the first time. This month, we reached almost 50% of our target capacity. We are ending the second month of production getting close to 65% of our target, and we are moving forward towards 85% of the target in 2022. The volumes from the new machine follow the organic growth in the domestic market and growth of our packaging business. The surplus will be exported to our traditional destinations, basically markets that buy virgin fiber, kraft fiber.
Probably more than half of the volume expanded will go to these destinations. PM-27 also frees some space in the current machines to be able to export more and increase capacity. Price dynamics remain very positive. We are living a moment of historically high prices for Kraftliner and containerboard, recycled fiber products. We have an additional price in the Eukaliner paper. Eukaliner offers 10% advantage of physical performance in the corrugating machines. We're living a very special moment in terms of prices, and they will remain stable at this level in the next year.
Thank you very much. Very clear. Just a follow-on question. In terms of premium prices, I don't know to what extent you can comment. I know you also have the production of white paper that has an additional premium price.
Well, Eukaliner offers 10% advantage. You can make boxes which are 10% lighter, and you can have performance and speed that are at least 10% faster in the conversions. It's based on this platform that we negotiate with our clients a premium price.
Perfect. Thank you.
Our next question is from Mr. Marcio Farid, Goldman Sachs.
Good morning, everyone. Thank you very much for this opportunity. I have two questions. My first is for Cristiano. Cristiano, at Glasgow, at COP26, which are your expectations for the event? What do you expect to discuss with the players that will be there, and what can we expect in terms of outcomes? My second question is for Nico. You briefly talked about trying to increase. Can you give us more details? How do you see the margins of paper and inventory levels for paper and bulk? What do you see for now, October and November, and also what do you expect for the end of the year and maybe for next year as well? Thank you.
Thank you for your questions. Very well.
We're going to COP 26, highly motivated. We know the historic importance of this topic, of climate change, especially because of the relevance of the six [audio distortion] studies or the IPCC's report. The recent one that shows the climatic problem with the higher temperatures, and this is an information you all know about, of course. Especially the energy matrix of the world now regarding in coal and oil. This is an issue that has not been tackled yet. I believe that addressing that urgency and changing the energy matrix in the world is crucial. Knowing the effects that we quickly were able to see and now, already, going to need to answer in China itself. This is a global issue, and by global I mean all people, everyone in the planet. The atmosphere is the same.
The effects are there. We can already feel them, and they will be growingly impacting our routines all over the world, whether in developed countries or developing countries. This is a crucial topic. I will be with our sustainability technology and engineering officer during the COP26 meetings, and we will be participating in all the meetings that Mr. Alok Sharma refers us to. We are very motivated, but we are also concerned about the importance of this topic. Nico, the floor is yours.
Hello, Marcio. Thank you for your question. Once again, I would like to stress that China nowadays is the only market that is different from the other markets and the other countries.
All this movement of changing the volume, the volumes to other geographies, other areas, I think it has to take a higher consumption of fibers, on these other geographies. In the all-fiber FOEX index for Europe, as of yesterday, it has not changed when compared to the prior month. If we were seeing spot sales deviations, that would be translated in a difference in price by the FOEX indexes. This change in China, I think it has to do with a greater consumption of fibers, especially for the packaging sector. About China itself, obviously the market has caused some concern, because several reasons which you all know them.
I think the end of the light at the end of the tunnel is that in October is given, and when we start looking at November, we see greater stability. What do I mean by that? Now the purchase price of pulp wood in China for the first time is lower than the retail price. Of course, this has to do with an affecting factor, but usually when the purchase pulp price is lower than resale, this is part of showing signs of greater stability. Our expectation is that prices starting in November in China will have greater stability and that this is going to remain for the next few months. Also relevant that not all provinces in China have been affected by the energy outages.
There are several places that have not been affected by this power outage, and that can be translated in a higher tissue production and a possibility or an attempt to increase prices for tissue and maybe a movement to stabilize the pulp prices. Otherwise, it's going to be difficult to increase prices for tissue. In terms of inventory levels, I believe they are going to drop. That is because of volume deviations from China to other areas. I believe we will have more stability in China in the next few months.
Perfect. Thank you very much, Nico. [audio distortion] .
Our next question is in English. Carlos de Alba with Morgan Stanley. Go ahead, sir.
Good morning, everyone. Thank you very much. Could you elaborate on the European sales prices? They have been stable on FOEX, but also, these prices, are the discounts offered by producers increasing in a way that on a net basis, the spread is not as large as you would apparently conclude just by looking at the FOEX report?
Carlos. Sure. I do want to give compliment to the team. It is the very first time that we can hear Carlos de Alba's audio well. Thank you for the question. I'll refer you to Nico.
Carlos, thank you for the question. Of course, I cannot speak on behalf of other producers. In Klabin's specific case, these additional sales to Europe, as I said before, are based on an additional consumption of fiber sold at market price and under contracted conditions. No additional discounts being offered for greater volume.
That was very good to hear, Nico. You could please elaborate a little bit more just on a comment that you made on inventory. Were you talking about inventories of pulp at the port or at the customer side? Any idea how the level of paper inventories are for your customers in China? Thank you very much.
Our next question is from Guilherme Rosito of Bank of America.
Hello. Congratulations on the results. I have two questions. One quick one about Eukaliner. Where is the destination of Eukaliner? You talk about Latin America, Europe and the United States. My second question has to do with vertical integration of PM-27. It is currently at 70%. Is this what you're comfortable with or do you intend to increase it? Thank you.
Thank you, Guilherme. I'll refer you to Flavio.
Thank you. Well, our strategy follows Puma and the units which are connected to virgin Eukaliner and Kraftliner in the world and needs a light box of Eukaliner s with these business lines. The most natural destination and contracts already defined as such are South America, Central America and Southern Europe as the main destinations of volume exported. A little bit is going to North America markets. Building on your second question, benefit from that vertical integration, Klabin Packaging benefits from this paper. It has an important piece of virgin fiber market in Brazil. This is natural in our portfolio of products. Over there, we can offer box with a benefit from Eukaliner. We have contracted 60%-70% of volume already contracted, and this is contracted for the next 12 months.
Guilherme, I will just add to the question given. What we want to see is Klabin intends, of course, respecting market conditions, competitors, et cetera. We intend to be great in everything that we produce. In Kraftliner, we want to be greater than we are today. As a consequence, we want to increase our full integration. Again, with that full integration, the percentage that will stay in the market. This is already considered a long-term relationship with box manufacturers around the world. In any spec, we want to be great in packaging paper and great in integration in Brazil.
Thanks a lot. Thank you very much. Again, congratulations on the results.
We now end our Q&A session. I would like to turn the floor to Mr. Cristiano Teixeira for his final remarks.
Thank you very much. I would like to bring to you our perspective for the fourth quarter of 2021. The fourth quarter is seasonally stronger, and we should deliver a good cash generation measured by EBITDA, already boosted by the ramp-up production of PM-2 7. We will maintain our growth pace and for 2021 with consistent results, just as the ones from the prior quarters. About sustainability, I'd like to reaffirm our full commitment to private sector's best practices in the world, and I highlight the engagement of a team of Klabin's experts supporting organizations in Brazil and in the world with a global agenda of climate change. Klabin will be in COP 26 with great enthusiasm, and it's the only Brazilian company to be part of the Business Leaders Group, which is led by Alok Sharma, COP 26's president.
We will keep looking for better methodologies to measure greenhouse gas emissions in a way to ensure full implementation of the Paris Agreement. We will work towards the carbon market regulation and the tightening and acceleration of transition actions of energy matrices. Klabin so persistent in its vision of growth and value generation in the long term, focusing on people, innovation and sustainable development. Thank you all very much for your participation, and I expect to be with you again in our next call.
Conference call with Klabin has ended. Thank you very much for your participation. Have a great day.