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Edited Transcript of CMPC.SN earnings conference call or presentation 8-Nov-19 2:30pm GMT

Q3 2019 Empresas CMPC SA Earnings Call

Santiago Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Empresas CMPC SA earnings conference call or presentation Friday, November 8, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Colomba Henríquez Benavente

Empresas CMPC S.A. - Head of IR

* Ignacio Goldsack Trebilcock

Empresas CMPC S.A. - Finance Manager

* Raimundo Jose Varela Labbé

Empresas CMPC S.A. - Supply Chain Manager

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Conference Call Participants

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* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Leopoldo Silva

LarrainVial S.A., Research Division - Analyst

* Marcio Farid Filho

JP Morgan Chase & Co, Research Division - Research Analyst

* Thiago K. Lofiego

Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Empresas CMPC Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Ignacio Goldsack, Chief Financial Officer. Please go ahead, sir.

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Ignacio Goldsack Trebilcock, Empresas CMPC S.A. - Finance Manager [2]

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Thank you, and welcome, everyone, to our third quarter 2019 results conference call.

Starting on Slide #3 of the presentation. During this quarter, we were able to achieve good operational results with higher sales volumes of both hardwood and softwood pulp, which allow us to increase inventories during the quarter as well as higher volumes of tissue paper and personal care products in most markets in which we operate.

EBITDA for the quarter totaled $286 million with pulp EBITDA declining as a result of lower pulp prices and Softys EBITDA increasing due to a higher sales volume and lower pulp costs. We are also glad to announce that Sepac acquisition recently materialized, and we already took control of the company. This is a milestone acquisition for CMPC as it allows us to become a leading tissue producer in the Brazilian market.

Finally, it is important to highlight that we closed the third quarter with a prudent net debt-to-EBITDA level and a strong liquidity position. This is important for us because it demonstrates our commitment to maintaining a conservative financial structure despite the current volatility in the pulp market.

Now turning to Slide #4. Pulp market conditions continued to be challenging during the third quarter. And even though we increased our pulp sales volumes by 11% quarter-on-quarter, pulp revenues fell as a result of the decrease in hardwood and softwood prices. The Biopackaging division also had a challenging quarter with lower average prices and lower corrugated sales offsetting the overall increase in volumes. On the other side, the Softys business had a significant increase in terms of EBITDA during the quarter led by higher sales volumes and lower operating costs. As a result, company's third quarter EBITDA reached $286 million, down 12% quarter-on-quarter and 44% year-over-year.

Another positive highlight of the quarter is the free cash flow generation, which was positive at $261 million with working capital bringing most of the positive variation. As I already mentioned earlier, the net debt-to-EBITDA ratio continues to be in a healthy level despite a minor increase of 0.2x quarter-on-quarter, reaching 2.2x.

I would like now to turn the call over to Colomba Henríquez, our Head of Investor Relations, who will provide more detail on our results. Colomba, please go ahead.

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Colomba Henríquez Benavente, Empresas CMPC S.A. - Head of IR [3]

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Thank you, Ignacio, and good morning, everyone. Please turn to Slide 5 of our presentation where we provide more color on consolidated operating costs and other operating expenses for the third quarter of 2019.

Cost of goods sold reached $921 million, a 1% decrease compared to the previous quarter and flat compared to the previous year. Consolidated operating costs represented 65% of total revenue, up from 64% in 2Q '19 and 57% in 3Q '18. The 1% sequential decrease was primarily due to lower operating costs in the Softys division related to lower pulp prices, partially offset by higher direct costs as a result of higher sale volume. The year-over-year result is primarily due to lower direct cost in Biopackaging related to lower sale volumes, offset by higher pulp and Softys sale volume. In addition, there is a positive effect in cost of goods sold, both quarter-on-quarter and year-on-year related to the depreciation of local currencies.

Consolidated other operating expenses reached $200 million for the quarter, a 6% sequential increase and a 4% increase from the previous year, representing 14% of total revenues, slightly higher than the 13% reported in Q2 '19 and above the 12% reported in 3Q '18. This quarter-over-quarter increase is due to higher administrative expenses and distribution costs in pulp and Softys, while the year-over-year increase is related to higher administrative expenses in pulp and Softys, partially offset by lower distribution costs in Softys.

Moving to Slide 6 now. We will take a closer look into our Pulp business results. Pulp production reached 1,053,000 tons, decreasing 2% quarter-over-quarter and 1% year-over-year. Pulp prices during the third quarter of 2019 reached $554 per ton for softwood and $522 per ton for hardwood, decreasing almost 13% and 17%, respectively, since the previous quarter. Total market pulp sales volumes increased by 11% quarter-over-quarter and 7% year-over-year.

Looking at our quarter-over-quarter performance. We saw a 13% increase in hardwood sales and a 2% increase in softwood sales. The quarter-over-quarter increase is explained by higher exports to Asia, the U.S. and Europe in the case of hardwood and to Asia, excluding China, and Latin America in the case of softwood. For the year-over-year comparison, sales volumes were up 12% for softwood as a result of higher exports to Asia and 6% for hardwood with higher exports to most markets.

Third-party Forestry sales volumes decreased by 5% quarter-over-quarter due to a decline in sale volumes of sawn wood with lower exports to China and the Middle East; and remanufactured wood with lower sales in Chile; increases of 10% in plywood relate to higher exports; 44% in pulpwood, with higher sales in Chile and Argentina; and 11% in sawing logs as a result of higher sales in Argentina partially compensate the negative effect during the quarter.

Year-over-year, Forestry sale volumes to third-party grew by 27%. During the quarter, we saw a significant increase in pulpwood and sawing logs volumes with higher sales in Chile and Argentina and 6% higher remanufactured wood sale volumes as a result of higher exports to the U.S. compensated the lower sales in Chile. On the other hand, sawn wood sale volumes decreased by 23% due to lower sales to China, Latin America and the Middle East. And plywood volumes decreased 7% with lower sales in Chile and exports to Europe. Due to the previously highlighted effects, revenues for our Pulp and Forestry business decreased by 7% sequentially and 25% compared to 3Q '18. EBITDA was 19% lower sequentially and 52% lower compared to 3Q '18.

Breaking down the quarter-over-quarter EBITDA decrease, we can see that this was primarily due to lower pulp prices, partially compensated by higher hardwood and softwood sale volumes. In addition, there were lower sales in the Forestry segment as a result of lower volumes and average prices. In the year-over-year comparison, the decrease resulted largely from lower pulp prices, which decreased by 35% for softwood and 31% for hardwood. Higher pulp sale volumes partially compensated the negative effect of lower pulp prices.

Moving to Slide 7. We will take a closer look at the Softys business. Softys revenues increased by 3% quarter-over-quarter and by 6% year-over-year, reaching $529 million. Tissue paper sales volumes increased 4% compared to the previous quarter and 3% compared to 3Q '18. Quarter-over-quarter, we registered higher sale volumes in all countries, highlighting the increases in Brazil, Peru and Argentina. Year-over-year, the increase was due to higher sales in Mexico, Argentina and Peru.

Personal care product sale volumes grew by 4% compared to 2Q '19 and 13% compared to 3Q '18. Our quarter-over-quarter increase was due to higher diaper volumes in most countries in which we operate. In the year-over-year comparison, personal care volumes were materially impacted by higher diaper sales growth with significant increases in Brazil, Argentina and Colombia. Also there were higher sales of feminine care products and wet wipes in most of the countries in which we operate.

Average prices measured in U.S. dollars were down 2% for tissue paper and increased 4% for personal care products. The decline in tissue paper prices is related to the depreciation of local currencies, which offset the increases in local currencies. Softys EBITDA reached $60 million during the quarter compared to $46 million in 2Q '19 and $29 million in 3Q '18. The quarter-over-quarter and year-on-year increases relates to higher tissue paper and personal care product volumes as well as lower direct costs as a result of lower pulp prices. This was partially offset by the negative effect of local currency depreciation.

Let's now move to Slide 8, where we explore the Biopackaging business further. Sales volumes to third parties increased by 4% quarter-over-quarter as a result of higher boxboard sale volumes, partly compensated by lower volumes of corrugated paper, corrugated boxes, molded pulp trays and paper bags. Year-over-year, volumes decreased 5% as a result of lower sale volumes in all categories. Average prices decreased by 6% sequentially and 5% annually. As a result of those figures, revenues decreased by 2% quarter-over-quarter and 10% year-over-year, reaching $215 million.

The packaging business EBITDA reached $11 million, showing a 34% decrease quarter-over-quarter and a 52% decrease year-over-year. The sequential decrease is mainly related to lower revenues from the corrugated segment and lower average prices across products. In addition, there were higher operating costs in corrugated paper related to the maintenance downtime carried out in June, July this year. The annual decrease is mainly from lower revenues from the corrugated paper and boxboard segment. In addition, we saw a positive effect in operating costs as a result of decreased pulp prices, both quarter-over-quarter and year-on-year.

Ignacio will now go over our financial position. Thank you all.

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Ignacio Goldsack Trebilcock, Empresas CMPC S.A. - Finance Manager [4]

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Thank you, Colomba.

Please turn to Slide #9. Free cash flow reached a positive $261 million during this quarter compared with a negative $276 million last quarter and positive $312 million in the third quarter of last year. This positive free cash flow generation during this quarter is partly related to a positive working capital variation driven by a $230 million decrease in accounts receivables and a decline in inventories. In addition, there were lower tax and dividend disbursements during this quarter. Our cash position improved as a result of the positive free cash flow, reaching $869 million. As a result of this, our net debt cost in the quarter, almost a bit less than $3 billion, decreasing 7% compared with the last quarter. CapEx reached $99 million during the quarter. Expenditures were largely related to Forestry maintenance, disbursements associated with the sale of (inaudible).

Moving to Page #10. To sum up, our operating results remained strong, showing a positive sales volume variations and decreasing costs during the quarter, which is in line with the operational efficiency and productivity initiatives we have been implementing during the last years and that we plan to continue executing going forward. We also maintained a strong liquidity position and a conservative financial metrics, which allow us to continue executing our strategic plan. With the closing of the Sepac acquisition, we are one step closer to our goal to become a leading player in the tissue business in Latin America. Also in the Pulp business, we maintain our focus on increasing our forestry base with a special focus in Brazil.

Finally, we would like to reiterate our commitment to continue executing our strategy while maintaining our commitment to maintain a disciplined approach regarding our financial metrics.

Now I would like to mention that Mr. Raimundo Varela, our Pulp Commercial Directors, are also joining the conference. They will be available to answer any questions you may have. Operator, please open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from George Staphos from Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [2]

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Thank you for all the details, and congratulations on the progress in the quarter. My question, kind of a 2-part question related to pulp. One, can you comment at all in terms of how the disruptions in Chile may be affecting your operations and your ability to ship?

And then relatedly, last quarter, you had built up some inventory in anticipation of third quarter. Based on your shipments, it would appear that you managed those well, and they've been worked down. But if you could provide some additional clarity on that, that would be great. And I'll turn it over.

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Ignacio Goldsack Trebilcock, Empresas CMPC S.A. - Finance Manager [3]

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Okay. Mr. Raimundo Varela will handle your question.

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Raimundo Jose Varela Labbé, Empresas CMPC S.A. - Supply Chain Manager [4]

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Regarding the disruptions in Chile and our ability to ship, we had some delays in the shipments at the end of October because of this disruption, some ports strikes and some days where they were operating at a much lower productivity. I will -- I estimate about 50,000 tons that were delayed in shipments. And that those -- but they were already shipped now in November.

So we don't expect any more disruptions on that front. And your second question, our stock, we -- it's true that during Q3, we sold a bit more than normal. But we still have some stocks in normal -- above our normal level. So in that sense, provided that the market allow us, we will continue to sell that additional volume in the months to come.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [5]

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Raimundo, can you mention how much in excess you have right now?

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Raimundo Jose Varela Labbé, Empresas CMPC S.A. - Supply Chain Manager [6]

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About 70,000 tons.

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Operator [7]

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Your next question comes from Thiago Lofiego from Bradesco.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [8]

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First question to Raimundo. Could you please comment, Raimundo, on pulp market dynamics, specifically in Asia? So we've been hearing paper makers have now up to 3 to 6 months of inventories in hands now. Do you see this impacting any potential pulp price recovery in the coming months?

We also heard that some producers might be considering price hikes in the very near term. Do you see room for that to happen?

Second question. On the tissue strategy, if you guys could just give us some update on the strategy there. Are you still looking into potentially increasing market share in other markets like Mexico? Could we expect some M&A on tissue in 2020? Or is it a year where you're going to be focusing on Sepac and on the current operations?

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Raimundo Jose Varela Labbé, Empresas CMPC S.A. - Supply Chain Manager [9]

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No. Okay. Sorry. This is Raimundo. So regarding the pulp market dynamics in Asia, we have seen a better market in the last few months, especially regarding volume. I mean price-wise, I think the price is still deteriorating in the last few months. But I think we have reached a level of stability. And talking about hardwood, we see now very good demand at the current levels of price of hardwood in Asia, I mean not only in China but also in the other countries in Asia.

And I think the papermakers are making very good money in Asia right now with these pulp prices, and you have seen also that they have been able to raise some of their paper prices. So I think they're having a -- they're enjoying that -- a good ride. In that sense, we see -- I don't -- I haven't seen a number that shows huge inventories in the hands of producers -- sorry, of consumers. I think at the moment, they have a reasonable stock, but their demand for paper is relatively good. So I expect to have a period of time where pulp prices will be stable. I don't see a price increase in the short term. But I do think that after this inventory overhang, work is weighed out maybe in the next -- I don't know, by January, February, we will probably see some price increase, probably not before that. But I don't see any price decrease. I think definitely prices have reached a bottom in Asia and also in several other markets. That's regarding the pulp.

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Ignacio Goldsack Trebilcock, Empresas CMPC S.A. - Finance Manager [10]

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Thiago, this is Ignacio speaking. Regarding Softys, we just took control of Sepac. This is an important step for us, right? So we are focusing the effort in consolidate our leading position in the Brazilian market, right?

So with that, I would say that the strategy will continue focusing the effort in revenue management, in brands, having more strong brands. And production-wise, the strategy has been centered in improving efficiencies and gaining substantial economies of scale in procurement.

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Operator [11]

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Your next question comes from Marcio Farid from JPMorgan.

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Marcio Farid Filho, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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I have a couple of follow-up questions. The first one, Raimundo, if you can please comment on your expectation for production going to the end of the year and also in 2020. I remember you mentioned earlier, maybe on the call in the second quarter, the potential for -- to extend the maintenance downtime at Guaíba Line I and maybe to bring forward some maintenance downtime as well. I just wanted to understand if this is still the plan and how much of overall production for the year you're expected to deliver.

And also if you can comment a little bit on the softwood market dynamics. You just mentioned that you don't see room for price increase on hardwood, but neither price declines as well. What is the situation on the softwood market in Asia? And also how is the demand situation in Europe, you're seeing at the moment? Those are my questions.

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Raimundo Jose Varela Labbé, Empresas CMPC S.A. - Supply Chain Manager [13]

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Okay, Marcio. And we are doing what we said we were going to do regarding the maintenance. So we do have 3 maintenance in Q4, and 2 of them are going to be longer than normal, given the situation in the market. And therefore, the impact of that is about 70,000 tons, which is what we said last time. So in that sense, there's no change, and we are going ahead with what we said previously.

In 2020, at the moment, we have planned the normal, the regular maintenance in our factories. But we, of course, we will continue to monitor the market and the situation to see whether it is necessary to do -- to make any change to that. We are sensitive to what happened in the market. And in that sense, we -- as we did this year, we will continue to analyze whether it's necessary to make any change.

Regarding the softwood, we have seen a much better dynamic in softwood in the last 3, 4 months. The prices have increased in China, about $30 from the bottom, now from $540 to $570 in between July and October. With good demand -- good demand, I mean again, in China, but also in the other countries in Asia, I expect probably some stability in that price. I think the spread between the 2 fibers in Asia is already quite large, $120, $110. And so it's difficult to think that, that will increase further. However, I do not expect the softwood to decrease. I eventually expect the hardwood to increase. As I said before, that will take a few more months.

And then in Europe, the demand for pulp has been weak whole year, in general. A bit better lately, a bit better lately. And so I also see -- I believe that in Europe, the prices have reached the bottom there. As you know, the softwood has come down further than in Asia. It's about $520 now. And so the spread there between the 2 fibers is very small, maybe $20. So that is -- I mean you would expect to increase eventually. But again, the European economics are still slow. As I said, a bit better lately, but still, I think nothing great.

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Operator [14]

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And your next question comes from Carlos De Alba from Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [15]

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Could you please comment as to how you see working capital in the fourth quarter? And maybe a first sign or a first forecast for CapEx next year? And then finally, on the cost side in the Biopackaging business, do you expect a reduction in -- or what is the magnitude of the reduction in operational costs that you expect in the fourth quarter after the maintenance downtime that you experienced in the third quarter?

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Ignacio Goldsack Trebilcock, Empresas CMPC S.A. - Finance Manager [16]

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Carlos, this is Ignacio speaking. Regarding working capital, we had a positive impact in account receivables and inventories. In account receivables, we sold $100 million through our receivable purchase program we have in place in order to increase our cash position before the disbursements of the Sepac acquisition. This is a one-off effect. The remaining amount was due to internal efforts in the 3 business divisions. Regarding inventories, mainly due to our pulp production during the quarter. Looking forward, in CapEx, we'll have our guidance for the next year. We're working on that, but it should be in the same range that this year gave guidance. That means around $500 million.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [17]

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And then just in the fourth quarter, do you see any material changes in working capital?

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Ignacio Goldsack Trebilcock, Empresas CMPC S.A. - Finance Manager [18]

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Well, we expect -- well, of course, this receivable purchase program is a one-off so -- but this positive trend, we expect to maintain this effort. We already did during this quarter.

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Operator [19]

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Your next question comes from Leopoldo Silva from LarrainVial.

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Leopoldo Silva, LarrainVial S.A., Research Division - Analyst [20]

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So I have several questions. First, on the tissue segment. The cost, I was kind of positively impressed on the margins. And you said it was mainly due to a decline in the cost of pulp. When we saw in the previous years that pulp was kind of sticky in the going on the way up, meaning that the costs were slow to climb, it was like a kind of surprise that we have seen a fast decline this time. So would this mean that we should see further declining cost for the fourth quarter, given the stickiness of the pulp, the kicking in of the pulp price to your tissue costs? That's number one.

Then number two is regarding the social unrest in Chile. Have you seen any additional threat to your forests in the south? Meaning, that we, in Chile, are used to seeing problems and arson attacks appearing more on the areas that you are located, given the Mapuche complex near the Araucanía region. And now we've seen that those arson attacks have been happening in Santiago. Don't you believe that they will soon start happening over there? Or aren't you surprised that they haven't started over there? And my question is are you allocating more people or doing preventive efforts on the stone as of what is happening?

And lastly, just on the pulp volumes. Have you -- your downstream sales volumes stayed regular or have they declined? Because I've seen that your third-party volume sales have increased strongly, very surprisingly, like at record levels. That's -- that are my questions.

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Colomba Henríquez Benavente, Empresas CMPC S.A. - Head of IR [21]

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Leopoldo, Colomba here. I will take your one and the third question. So regarding tissue cost, I would say this is the first quarter where we started seeing the impact of the lower pulp prices even though pulp prices have been decreasing since more than a year now, so I would say this is the first quarter. We should still have some additional effect for the fourth quarter, maybe even more for the first part of next year. Of course, it will depend how pulp prices continue evolving, but we should have some additional impact because of that.

And regarding your third question that's on pulp volumes and intercompany sales. Our intercompany sales are usually very stable. So they don't move a lot from quarter-to-quarter. So the increase in third-party sales volumes is just an increase. We -- as Raimundo mentioned earlier, we reduced our inventories this quarter, so that explains the increase in third-party sales.

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Raimundo Jose Varela Labbé, Empresas CMPC S.A. - Supply Chain Manager [22]

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Regarding the contact in Chile and our operation, what I can say that we have been running -- we are running our business in a regular basis. All our factories have been running well. We are taking measures now, and we are being as flexible as we can now with our people to help them, et cetera. But we have people which is extremely committed to the business. And in general, we take good care and we are taking precaution measures in our operations. And we are doing that maybe with a bit of more effort, with a bit of more strength, but in general, all of our factories are running very well on all our operations as well.

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Leopoldo Silva, LarrainVial S.A., Research Division - Analyst [23]

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And just to pick up on the T2 question, do you foresee any targets on the EBITDA margin, maybe higher than what we saw this quarter?

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Colomba Henríquez Benavente, Empresas CMPC S.A. - Head of IR [24]

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We don't give guidance in terms of EBITDA margins in our business divisions. So sorry about that.

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Operator [25]

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There are no further questions. I'll turn the call back over to the presenter for closing remarks.

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Colomba Henríquez Benavente, Empresas CMPC S.A. - Head of IR [26]

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Well, thank you all for joining us today in this third quarter conference call, and please have a nice weekend. Bye-bye.

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Operator [27]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.