Chairman’s Statement

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Dear shareholders:

 

In 2017, Empresas Copec continued along the corporate expansion path that it has been building for decades, consistent with a strategy that may be sustained in time, which will continue marking its trajectory in the coming years. Our company is changing, taking a more relevant position in global markets, and facing great challenges arising from modern time.

 

During the past financial year, the operations of Empresas Copec and its affiliates took place in a more optimist international scenario, where financial and currency volatility are disappearing and economy is normalizing. However, there is still some tension in global politics, and the traditional way of leading countries is being questioned, threatening the commercial opening of important economies, even those leading world trade. Notwithstanding this, impact in commodity prices has been positive until now, transversally influencing our export businesses.

 

 

 

 

 

At a national level, after a slow start, economic activity accelerated at the end of last year, expectations improved and trust grew. In this context, our challenge as companies is to rethink our role in society, with a long-term vision, evolving and understanding the new requirements, in order to find the best answers. We want to help build a new platform of credibility and legitimacy of corporate activity, ensuring growth and welfare for everyone; globalization and local development; industrialization and environment, among others. For this, however, is essential to resume the path of stability of legal structures, institutional cooperation and unity as a country around shared projects.

 

In this sense, giving a new impetus to the entrepreneurial activity requires reducing the uncertainties in projects’ approval processes. These are no longer valid, markets evolve and technologies change. Thus, investing is not possible, and many years may go by with no clarity on the viability of business initiatives. Good projects must be approved in a rapid and final manner; those that do not meet the requirements must be rejected early, avoiding conflicts and futile and unnecessary efforts. As companies, we must use our best efforts to propose sustainable projects that respect the interests of communities, protect the environment and contribute to general welfare.

 

As for our operations, I cannot review 2017 without mentioning the human, social and economic damages caused by the terrible fire that affected the south-central area of our country at the beginning of the year. Despite the enormous resources that we always allocate to prevent and fight fire, both in our own properties and in those surrounding them, the magnitude of this disaster, that affected nearly 80,000 hectares of Arauco, exceeded all response capacities, striking the heart of our forestry activity. Losses far exceeded insurance coverage, and thus, our final charge to income was more than US$ 100 million.

 

In this regard, we sincerely appreciate the work of the fire brigades, firefighters, service companies and our own staff, who worked non-stop in this long and hard struggle, always prioritizing the safety of people and communities. Hundreds of thousands of hectares of forests, both ours and of third-parties, cultivated for several years and that supplied our industrial facilities, disappeared in the flames, along with the homes, assets and properties of many of our collaborators and neighbors.

 

Since then, we have focused on recovering, in the best possible away, and as soon as possible, the damaged heritage, helping people affected by the fires, and becoming part of or leading the general reconstruction plans, thinking about the future of the forestry activity and of all of us who are part of this field. In parallel, we redoubled our monitoring and response efforts and capacities, in order to anticipate the occurrence of similar events in the future. In this way, we have created our forest renewal plan “De Raíz”, which allows us to better deal with fire prevention challenges, the protection of plantations, the reforestation of damaged areas and the promotion of the forestry sector’s development.

 

The rest of the year brought better news, with a more balanced supply and demand of pulp and panels that led to a price rise, and more dynamic fuel markets, driven by vehicle fleet growth and by the low winter temperatures in the central zone of Chile, among other factors. In this context, Empresas Copec posted profits of US$ 639 million, 15% more than in 2016, and an operating flow of US$ 2,220 million, reaching its historic maximum and experiencing an annual increase of almost 28%. These data illustrate the favorable evolution of the cash generation capacity of our activities, as a result of years of well-focused investments, carefully designed business strategies, as well as the effort and commitment of our executives and collaborators.

 

We have continued laying the foundations for future growth, guided by the same long-term vision. Investment in 2017 totaled US$ 1,109 million. More than 96% went to the forestry and fuel sectors, our main businesses, and almost half (48.5%) went abroad, a clear proof of the decision to continue giving solid steps towards operational internationalization in all business areas, focused on natural resources and energy, along with a permanent will to continue investing in Chile.

 

Little by little, Empresas Copec has become a multinational company, with presence in several countries, which deepens and complements our competitive advantages. For many years now, forestry, fishing and mining products have reached over 80 international destinations, through commercial offices. Today, we are also structuring an extremely relevant industrial and operational base in all America, as well as giving more solid steps in other continents. The productive presence of our companies currently covers 15 countries. As mentioned above, it is Chile in the world.

 

In this regard, during 2017, the affiliate Arauco continued to significantly strengthen its operational internationalization process. In the first place, it acquired from the Chilean company Masisa the entire company Masisa do Brasil, for an approximate amount of US $ 103 million, before adjustments. This transaction involves 2 industrial complexes located in Ponta Grossa (Paraná) and Montenegro (Rio Grande do Sul), with one MDF board line with an installed capacity of 300,000 m3 per year, and another MDP board line with 500,000 m3 per year.

 

The company also agreed to purchase Masisa’s industrial assets in Mexico, which includes 3 particle board lines with an installed capacity of 519,000 m3 per year, an MDF board line of 220,000 m3 per year, 3 melamine coating lines, one chemical plant of resins and formalin, and a veneer line. All of them distributed in 3 industrial complexes located in Chihuahua, Durango and Zitácuaro. The operation will require a US$ 245 million investment, and it is subject to several conditions precedent customary in this type of transactions, expected to materialize during 2018.

 

In the United States, Arauco made progress in the construction of its panel plant in Grayling, Michigan, which will have a production capacity of 800,000 m3 of wood panels per year. The investment will amount to US$ 400 million, and it is expected to begin operating at the end of 2018. We must not forget the positive reception of this project by local communities and the authority, which carried out a rigorous but very quick approval process.

 

In Chile, regarding the project “Modernization and Expansion of the Arauco Plant (MAPA)”, after several years, the affiliate Arauco finally obtained a favorable decision from judicial authorities. This allows us to prepare all necessary information for the Board’s technical and economic evaluation of this initiative, that involves about US$ 2,500 million. In the meantime, the company made progress in the implementation of the new state-of-the-art biological effluent treatment system in Nuevo Horcones Industrial Complex, works that will require a total investment of US$ 160 million, and will be completed in 2018.

 

On the other hand, in Valdivia, Arauco announced that it will materialize the dissolving pulp project, allowing for the company to be the first in the country to manufacture this type of pulp, used as raw material to manufacture textile fibers, cellophane paper and filters, among other final products. Given the original design of this plant, its transformation into this new type of fiber can be carried out in a highly efficient manner, for merely a fraction of the cost involved in modifying any other facility of the industry and, additionally, with a more environment-friendly production process, and that will allow to inject an additional 30 MW of electricity into the Central Interconnected System (SIC). It is a transformation aimed at generating an innovative product with higher added value, which diversifies Arauco’s offer, allows it to enter a new and growing market, and that at the same time involves the entire value chain of the local suppliers that participate in its development.

 

On the other hand, our fuel affiliates are also expanding their presence and service philosophy in the different latitudes of the American continent in which they operate. In addition to the 9 new service stations that Copec inaugurated in Chile during 2017, there are 22 new service stations in Colombia and 4 in Panama, through Terpel, and also 4 new sales points of Mapco, in the United States. In this way, Copec deepens the internationalization of its value offer, based in an excellent service, quick comprehension of changes and generation of the best consumer experience. In fact, this implies adapting to the reality of each market, avoiding mechanical translations and rigid business models, strengthening all of its networks and relying on the strength of each one of its brands.

 

In this same line, at the end of 2016, Copec executed a regional agreement with ExxonMobil for the production and distribution of Mobil lubricants in Chile, Colombia, Ecuador and Peru, an important supplement to the fuel business we already operate in the region. This convention materialized at the beginning of 2018, with the Colombian authority’s approval, after a very thorough analysis. The operation is based on a long and solid relationship between both companies, that goes back to 1959, where the North American company assigned the marketing of its lubricants to Copec, in 2003, the first time that it entrusted this relevant function to a third-party. This successful collaboration of decades is thus expanded, beyond our frontiers.

 

The agreement totals a US$ 747 million investment and also contemplates the operation and marketing of aviation fuels in Lima’s international airport, a relevant regional aeronautical hub, as well as the acquisition of the fuel business of ExxonMobil in Ecuador, both markets where we already operate through Terpel. It also involves the liquid fuel distribution platform of ExxonMobil in Colombia, assets that were always considered to be sold to a third market player, thus fulfilling the objective of allowing, at all times, conditions for an open and deep competition in the Colombian fuel sector.

 

On the other hand, Abastible, continued developing in the region the necessary infrastructure to provide its customers with an efficient, timely, innovative and safe service. In 2017, together with other Colombian distributors, the affiliate Inversiones del Nordeste inaugurated a new import terminal in Cartagena, Colombia; whereas the Peruvian affiliate Solgas made progress in expanding its terminal in Callao. Both logistic pieces play a significant role, in addition to the key role that the associate Gasmar has always played in Chile in the liquefied petroleum gas logistics chain, guaranteeing security and continuity of supply, at minimum cost.

 

In the natural gas sector, in 2017, Metrogas took the first steps for its ambitious gasification plan in Chile, aimed at supplying natural gas to another 7 regions of the country, under a new regulation allowing to invest with a broad horizon, to provide this energy alternative to more than 800 thousand families in 10 years. During the financial year, the first two urban satellite regasification plants were inaugurated in Puerto Montt and Osorno, and a third one has been planned for 2018 in Puerto Varas, along with 57 kilometers of new networks for these 3 cities.

 

A similar logic, consisting in raising the gaze from traditional markets to broader ones, is what has driven the evolution of our fisheries. From the production of raw materials, they have been slowly moving towards greater participation in the protein market, which also includes products for direct human consumption, functional foods, nutraceutics and even pharmaceutics. All of this, based on the commercial power of its brands for new segments of the food market.

 

More than fisheries, our companies Orizon, Golden Omega and Corpesca are aimed at being key players in the feeding sector, a sophisticated, attractive and extremely competitive market, which drives us to go one step further, achieving new efficiency and productivity levels, and helping to face the global food challenge too.

 

This vision led Corpesca to invest in Brazil in 2014, taking control of Selecta, a company engaged in the production of non-genetically modified soy protein. After a significant effort to optimize its management, in an industry currently dominated by large specialized transnational companies that operate plants in different latitudes, in 2017, Corpesca sold 60% of the shares of this company to the Korean giant CJ Cheil Jedang Corporation, for US$ 218 million, posting a profit of US$ 123 million. Concrete proof of the increasingly global reach of our initiatives and the need to reinvent ourselves permanently.

 

Maintaining a long-term trajectory and, furthermore, growing in a challenging and continuously evolving environment, requires anticipating changes and having enough adaptive capacity to timely face them. This is the basis of our permanent commitment to innovation, a key factor in any company and an essential pillar of the business of Empresas Copec.

 

In addition to developing and incorporating new technologies, products and services into our activities, innovating also means challenging the frontiers of what has traditionally been understood as doing business, extending our field of action beyond the immediate production focus.

 

Today, we must understand and adapt ourselves to the so-called “Fourth Industrial Revolution”, an essentially disruptive process, characterized by the confluence of digital, physical and biological technologies. It has an exponential nature, and unprecedented scope and impact, both in systems and in organizations, testing our response capacities. It is an unprecedented phenomenon, which imposes a new rhythm to the changes in the entrepreneurial DNA, in light of which we must open and multiply the connectivity channels of companies with the rest of society, in order to shorten distances and try to reach the desired convergence of purposes.

 

This requirement for adaptation means, of course, accepting unconventional modifications in structures, people, forms of collaboration and work areas, among many other fields. A true culture of change, with open doors, where everything may be done in a different way, but without renouncing the values that have always guided our actions.

 

Some examples of this are the i-Now open innovation program launched by Abastible; or the agreement announced between Arauco and ETEX Group to develop new wood construction solutions; or the alternatives that Copec is exploring in order to incorporate new technologies and forms of mobility into its network. In addition to this, there are initiatives in fields such as artificial intelligence, robotics, big data and the internet of things, which our companies have been gradually exploring to apply in their processes. All of this, in addition to the great innovative efforts in other areas, of which you are already aware, such as those carried out by Bioforest and Golden Omega, which require mastering cutting-edge knowledge of engineering and biology.

 

Likewise, and beyond our companies, the Fundación Copec UC and its Risk Capital Fund and, of course, the Anacleto Angelini UC Innovation Center, have been promoting ideas, enhancing talents, coordinating efforts and catalyzing initiatives for years now.

 

In an environment of accelerating changes, the flexibility of companies has more value than ever and opening options is essential to continue growing efficiently, relying on the competitive advantages valued by customers. That is why we permanently evaluate new projects in areas where we have the necessary skills to develop them, and where we can add value from our experience or complementary activities. The most extensive geographical presence also guides us towards the search for new associations. Where there is compatibility of interests, skills that complement each other and a common vision. Part of the challenge is to find new areas of growth that integrate well with our activities, which allow us to leverage the knowledge acquired in the numerous ventures we have developed, that present similar challenges to those that we have already addressed, have similar financial profiles to those that we master well, that constitute, at the same time, prudent investments and interesting potential growth paths. This is the case, for example, of the metallic mining developments that Alxar is exploring.

 

Adapting also means modifying our internal structures, in order to face the challenge involved in the integration of the new operations that we keep adding. In this sense, 2017 stood out for the incorporation of the multiple operations that we added in 2016, a particularly prolific year in acquisitions.

 

I would like to take this opportunity to thank, especially, the executive teams of our companies, who have successfully managed the integration of Tafisa, Mapco, Solgas and Duragas (the most relevant of the year), and prepared the forthcoming landing in the operations of ExxonMobil. It is incredible how the same group of people who a decade ago managed an operation that was barely starting in the Southern Cone, currently leads an actual multinational conglomerate on 3 continents. How we have grown in recent years. How Empresas Copec has changed. I would like to thank all of them and the shareholders for their support.

 

In addition to the immediate challenge involved in integration, this rapid growth has been an additional incentive to continue improving our corporate governance structures, in order for the latter to guarantee an efficient and sustainable management of each of our business areas, consistent with our values and governance principles. This is how we have made progress in the incorporation of independent directors in each business, favoring the operation of more specific committees, relying on training and external evaluations to improve the operation of these corporate bodies, incorporating new and more effective control instances, and improving information access and delivery, in a timely fashion, among many other initiatives. We have also opened channels to better leverage of the knowledge in our investors base, which are increasingly sophisticated and interconnected, as we have also drawn an even clearer line between our company’s activity and the role that business guilds are entitled to and bound to play.

 

Governance, environment care and the relationship with all our counterparties and with society, are explained with further detail in our Annual Sustainability Report. I invite you to please read this report, published on the Company’s website, which is annually prepared under the GRI standard and the result of an important effort to collect, consolidate and systematize the experience of all our affiliates in these matters.

 

There, you will find more details on the numerous initiatives in which we participate, that provide a long-term vision, helping us face our great challenges as society, with financial resources, human capital, technology, innovative capacity and management. Permanent contributions to culture, sports, social housing, among many others, for several decades now, beyond trends and with the profile characterizing us.

 

We believe that this approach is the reason why we were chosen to join the select Dow Jones Sustainability Index, FTSE4Good Index and MSCI Sustainability Index, 3 of the main global sustainability and responsible investment indices. These practices are also reflected in the numerous recognitions that our companies receive every year, in multiple dimensions, and among which I highlight the LEED ND v4 certification obtained in 2017 by Inmobiliaria Las Salinas for its Master Plan , the first project in America to have this standard and the third worldwide; or the recognition of Terpel as Industry Mover 2017 in the RobecoSam yearbook, for being the company that made the most progress in economic, social and environmental matters; or the awards usually given to Copec, Abastible and Metrogas, for customer service quality. We should be proud of these achievements, which are also an incentive to continue improving our way of doing business.

 

This is year 2017 in a nutshell. All of this would not have been possible without the support of the financial markets, which this year, among other things, allowed us to issue 30-year debt, through our associate Arauco, under very favorable conditions. I would also like to thank, once again, the permanent support of our shareholders, directors, executives and workers, who always ratify their trust in us, accompanying us in our business.

 

Empresas Copec is going out into the world with a proposal generated and developed in Chile for decades, and enriched by the knowledge that comes from understanding and assimilating other cultures, other institutional systems, other ways of doing business. We are growing, humbly and with a sense of future.

 

The current challenge is to strengthen our operation in production sites and make progress in the intercultural processes of working with groups of people of diverse origins, successfully incorporating a shared dream into communities, around the same vision, based on our usual principles and values.

 

We remain attentive to what the times and the environment demand from us, and we believe we have been called to help lead the changes that the social and political panorama is experiencing towards the common good.

 

Today, we are not only providing markets with products, technologies and industrial processes, but also with a vision. A vision that is nothing but doing business with meaning, with a purpose. An enormous task that continues progressing thanks to the tremendous commitment, talent and effort of a great team: the team of Empresas Copec.

 

 

 

Roberto Angelini R.
Chairman