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Edited Transcript of FIBR3.SA earnings conference call or presentation 24-Oct-18 3:00pm GMT

Q3 2018 Fibria Celulose SA Earnings Call

Sao Paulo Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Fibria Celulose SA earnings conference call or presentation Wednesday, October 24, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guilherme Perboyre Cavalcanti

Fibria Celulose S.A. - CFO, IR Officer & Member of Board of Executive Officers

* Henri Philippe Van Keer

Fibria Celulose S.A. - Executive Director of Commercial & International Logistics

* Marcelo Strufaldi Castelli

Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers

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Conference Call Participants

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* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Juan Tavarez

Citigroup Inc, Research Division - Director and Analyst

* Leonardo Correa

Banco BTG Pactual S.A., Research Division - Research Analyst

* Marcos Assumpção

Itaú Corretora de Valores S.A., Research Division - Sector Head

* Renan Criscio

Crédit Suisse AG, Research Division - Research Analyst

* Thiago K. Lofiego

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Fibria's conference call to present the results of the third quarter of 2018.

In case anybody needs a copy of the earnings release, please visit the Fibria investor link at www.fibria.com.br/ir.

This event will be held in English, being simultaneously translated to Portuguese and live broadcasted via webcastand may be accessed through Fibria's website at www.fibria.com.br/ir, where the presentation is also available. (Operator Instructions)

Before we go on, we would like to clarify that any statements that may be made during this conference call related to Fibria's business prospects, forecasts and operating and financial goals constitutes beliefs and assumptions of the company's management as well as information currently available. They involve risks, uncertainties and assumptions, as they refer to future events, and therefore depend on circumstances that may or may not take place. Investors should understand that overall economic and industry conditions as well as other operational factors may affect Fibria's future performance and lead to results that are materially different from those expressed in these forward-looking statements.

Marcelo Castelli, CEO, will begin the conference call. At the end, the conference call will be opened for a Q&A session.

Mr. Castelli, you may proceed.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [2]

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Good afternoon, everyone. Thank you for participating in Fibria's earnings conference call for the third quarter of 2018.

With me are Guilherme Cavalcanti, our Chief Financial and Investor Relations Officer; Henri Philippe Van Keer, our Sales and International Logistics Officer; and other members of our executive board.

I invite you all to turn to Slide 4, where I will begin with the highlights in the quarter.

Fibria set new records in the quarter for net revenues, adjusted EBITDA, EBITDA margin and leverage ratio. Production cash cost in the quarter was BRL 584 per ton, down from the ex downtimes and ex truckers strike cash cost in the second quarter of this year and from the third quarter of last year. Free cash flow before dividends; no recurring CapEx for H2, land acquisitions and pulp logistics in the last 12 months came to almost BRL 4 billion, which also was a new record for Fibria. The pulp market remained solid in the period. Good demand in key markets and stable supply relieved the pressures from seasonality, with Fibria posting record sales in the quarter. In terms of liability management, the ratio of net debt to EBITDA in U.S. dollar continued its downward trends to 1.18x, which is Fibria's lowest leverage ratio ever.

Let's go now to Slide 5, where I will comment briefly on the pulp market.

The solid demand performance in the main markets also was supported by the low inventories at the end of the previous quarter. In this scenario, even though the seasonality usually marks the period, Fibria's sales volume grew to reach a record of nearly 2 million tons sold. The hardwood pulp price in Europe wasn't changed, while the softwood pulp price continued its upwards progress, which increased the spread between the 2 fibers in Europe to $180 per ton at the end of September. For the next months, the new paper machines slated to come online in all regions, not just in China, will continue to play an important role, coupled with the lack of new pulp capacities coming online.

I will now pass the call over to Guilherme Cavalcanti, who will continue the presentation.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer & Member of Board of Executive Officers [3]

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Good afternoon, everyone.

Let's go to Slide 6.

Production volume in the quarter posted strong growth which is mainly explained by the lack of any scheduled shutdowns or truck driver strike such as last quarter, by operating efficiency gains and by the completion of the learning curve at Horizonte 2. Production growth in relation to the third quarter of last year is explained by learning curve of line 2 at Três Lagoas and by operating efficiency gains.

Our adjusted EBITDA, which set a new record in the quarter, grew by 31% on the second quarter, driven by sales volume growth, the weaker Brazilian real against the dollar, partially offset mostly by cash costs which in turn is explained by higher volumes.

Regarding the analysis per ton, there was a reduction on cash cost, but if you take the EBITDA per tons: EBITDA margin excluding the revenues from Klabin stood at 53%, which is Fibria's highest margin ever. Year-on-year, EBITDA had an increase of 160%, while EBITDA margin grew 14 percentage points.

Let's move on to Slide 7, where we will comment on Fibria's cash production cost in the quarter.

Compared to the second quarter, cash costs fell 13% mainly due to the lack of scheduled shutdowns, the better result from energy sales, the lower consumption of chemicals and energy and operating efficiency gains. Wood costs also declined due to the higher production on line 2 at Três Lagoas. Compared to the third quarter of 2017, the lower cash cost was due to the high competitiveness of the new line Horizonte 2, which led to lower wood costs, economies of scale and the better result from energy sales. Operating efficiency gains contributed to the lower consumption of chemicals and energy. Higher prices for chemicals and energy in dollar, especially caustic soda and natural gas, and the appreciation of the average dollar were factors that pressured cash production costs in the quarter compared to the same period of 2017.

Let's go to next slide, where we will comment briefly on the company's debt.

The quarter was marked by continued decline in financial leverage, which ended the quarter at 1.18x, which as Castelli mentioned was Fibria's lowest ratio ever. The interest coverage ratio measured by the EBITDA in the last 12 months over the net interest expenses in the last 12 months reached 11.2x. Fibria's net debt in U.S. dollars fell till the end of the quarter to $3.2 billion. The average debt cost fell to 3.9% per annum, while average debt terms stood essentially flat at 55 months.

Derivative operations using 0-cost collars in the quarter produced a negative cash effect of BRL 20 million. In the last 12 months, the settlements of 0-cost-collar operations amounted to a positive cash effect of BRL 142 million. As part of its ongoing liability management actions, I take the opportunity to inform that the company prepaid the VOTO IV bond, which explains the transfer of the balance of BRL 386 million to the short term. The bond has a coupon of 7.75% per annum, $96 million outstanding and was originally due to 2020. Payment is expected to be made on October 30, 2018; and is estimated in $106 million, including premium and interest.

In early October, Fibria announced to the market that they had obtained approval for waiving the rights to declare any early maturity on its CRAs for 6 of the 9 series outstanding by paying a premium on the date of consummation of the deal with Suzano. The outstanding of the 6 series that approved such waivers corresponds to BRL 3.3 billion, and the payment of the premium should result in a total amount of BRL 14 million.

Let's go now to Slide 9, which shows the company's liquidity in the period.

Fibria's liquidity position, excluding the mark-to-market adjustment of hedged operations of $44 million, ended September at $2,450,000,000, which is more than sufficient to cover debt amortization till 2021, with these figures not considering any free cash flow. The funds to be resolved of the Horizonte 2 project financing total $80 million, while the remaining CapEx amounts to $46 million.

Moving on to the next slide shows Fibria's net income in the third quarter. Fibria reported net income of BRL 1.1 billion, reversing its net loss in the second quarter which is basically explained by the lower exchange variation compared to the previous quarter and the better operating results which were partly neutralized by the higher expenses with income tax.

Turning now to free cash flow in the third quarter, let's go to Slide 11. Compared to the third quarter of last year, free cash flow grew 180%, supported mainly by the EBITDA growth of BRL 2 billion. Compared to the prior quarter, the working capital and the net interest expense explain most of the BRL 1.5 billion in free cash flow. The negative variation in working capital was mainly due to the [line of clients] due to the higher invoicing and due to temporary and nonrecurring impact of a few days in discounting credit letters operations related to the sales to Asia. The receivables credit on the cash positions until last week totaled $129 million or BRL 531 million, which if had not been postponed would increase free cash flow to BRL 2.1 billion, a record for a single quarter. The increase in interest expenses was due to the interest amortization schedule, with a higher impact of export credit notes and bonds.

Free cash flow in the last 12 months was a record of BRL 3.96 billion. Free cash flow yield stood at 9.5% in Brazilian reals and 10.8% in U.S. dollars, while return on equity was 39.4% and return on invested capital was 20%.

I will now pass the call over to the operator to start the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Lofiego with Bradesco BBI.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [2]

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Two questions. The first one, on pulp supply and demand in the short term, especially specifically in China. We are hearing demand have been weaker than expectations, although still relatively healthy but weaker than expectations, while inventories seem to have increased recently in China. Could you provide your own color about those issues? And basically just looking at the next few months, do you see a risk of prices eventually declining? And second, about the outlook for costs, could you comment on what was the average distance for the quarter and what's to expect for the fourth quarter?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [3]

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Thiago, Henri Philippe speaking. Answering the question about the pulp and supply, demand short term. You mentioned 2 things. You said demand seems to be weaker than expected and inventory is quite high. Our view is the following. We do agree that we have higher inventories right now, but as I mentioned previously, I mean, we see directly related to the fact that there will be like 5.1 million tons of new capacities, all paper grades included, coming during the third and fourth quarter; and most of it, like 3.3 million tons, in China. So we see no problem. I mean everybody knows here that, when you start a new paper capacity, you need some inventories to start those new machines. So we don't see it related to weaker demand, and this was my second point. We agree with higher inventories, this affirmation, but we don't agree with the fact that the demand has been lower. So we continue to be quite confident about the short and medium terms. And for the next 3 months, you might see some people trying to take advantage of these higher inventories to put some pressure, but as I said, these inventories should be committed to the new capacities. And if there are some customers or any player in this market trying to put pressure and use these higher inventories, of course, being consistent with our scenario, we have no problem to put a little bit more pulp into our inventories because again we see that next year is going to be a very good year. Actually, we had to deny some of our contract negotiations. We had to deny the full volume to some customers. We had to reduce the volumes allocated to some of the customers. So being in line with this scenario, we could very know -- very much decide to put some of these pulp into inventory, especially knowing that, the beginning of next year, normally you have more maintenance and downtime. So one should look at the movie, not the picture. So this is how we view it. I hope I have answered your question, Thiago.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [4]

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Yes, you did. Second, if I may follow up. You're -- considering the positive outlook for the movie, as you mentioned, for 2019, do you think the environment for discount negotiations is a favorable one for the producers at this point?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [5]

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Yes. I mean, yes, it's a tight market. So of course, it could be positive, but again this is still going on, so I wouldn't like to make any comment. But of course, that's a positive market for us.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [6]

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Cleared. And sorry, I mean, just the last one, could you just repeat the numbers you mentioned about the paper capacity starting up? You mentioned 3.3 million tons in China and 5-point-something outside of China. And what's the time line for...

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [7]

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No, no, no. Wait. 5.1 million would be worldwide. Out of this -- no, all grades, mainly tissue and wood-free specialties. So 5.1 million worldwide and 3.3 million only in China. So the rest will be the rest -- 1.8 million are rest of the world. You do have new capacities in Europe coming on as well.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [8]

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Yes. And then what's the time, the -- like the time frame for those startups?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [9]

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Q3, Q4 this year, Q3, Q4. So this is why we are saying -- we are seeing quite these inventories, these higher inventories right now. We are seeing that quite related to these new capacities. And actually we know that because we have customers asking for more pulp related to these new capacities.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [10]

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Thiago, this is Castelli speaking, and I'm going to talk about your question regarding to the average distance between a forest and mill. For this quarter, we had 266 kilometers, exactly the same that happened in the second quarter '18. So from the second quarter in a row, we are keeping this average distance in the range of 265, 266. In a near base, not looking only on this, I mean, part of the year, we had a minor -- I mean a distance on the 1Q '18 a little bit minor to -- that was 257. So we do expect a little bit marginal increase in the 4Q, but looking to the year, you can assume that we are going to have -- the extremity will be about 255 to 260 kilometers, the average distance for the whole operations at Fibria. So we're pretty much consistence, less in the 1Q and having the regular in the second or -- in the third and a little bit higher on the fourth. Everything will depend on the climate; and the rains, et cetera that we can move to keep the operations [that move]. So always paying attention that we don't see any [rupture], but it can move a little bit during the rainy seasons. That happens on the first and on the fourth quarter of the year, seasonality of the rain season, as I mentioned.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [11]

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So if we consider the fact that you don't have any maintenance shutdowns in the fourth quarter either, is it fair to assume that cash costs are going to be similar to maybe slightly higher in the fourth quarter? Is that a fair assumption?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [12]

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It's going to be in the range but can be a little bit higher due to the seasonal -- the fourth quarter due to this potential up in the average distance but keeping the year, as I mentioned, within that range. So yes, it can be a little bit higher, but I mean we have several other, I mean, impacts that -- like labor costs [held in us on the full year]. And that could impact. We are measuring the CPV impact, not only the cash costs and managing the cash costs. But this is -- those are the 2 main points. The rest of operations are really smooth, very good. The ramp-up of the Três Lagoas is optimally completed, and we are operating full. So we don't have an expectation for shutdowns or disruption in our operations.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer & Member of Board of Executive Officers [13]

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Just an external factor which worth mentioning is that energy price is falling, and these can have a slightly impact.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [14]

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Yes. The effect is also a factor of 20% of our costs.

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Operator [15]

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Our next question comes from Marcos Assumpção with Itaú BBA.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [16]

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First question, for the own inventories. What do you think should be the normalized level of inventories for Fibria post Horizonte 2 expansion and the potential increase in sales volumes to Asia?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [17]

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Answering your question about normalized inventories for Fibria. And it's a difficult one, but I will say that, so far, we've been ending -- last quarter, for example, the second quarter, we ended up with 56 days. And that was pretty much in line what's -- with what should be our normal inventories if we want to make sure that we are honoring all the commitments that we have with the customers and taking into account some of the limitations of our supply chain. So 56 would be a good number.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [18]

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Perfect, Henri. And last question, for Castelli. I would like to understand a bit, what are your views on potentially new projects? And like understand a bit also, if you were to issue for the environmental license for Horizonte 2, how long the -- it will take -- how long it will need to -- it will take to get? So to understand when Fibria could start to position themselves -- Fibria or the new company could start to position themselves for growth or an expansion project.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [19]

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Well, Marcos, this is a very good question. Everything depends on the where we are applying this -- to request this environmental license. Let me talk about Mato Grosso do Sul state because they have a very -- I mean, a clear economic and environmental zone. They have, I mean, prepared the ground or the environment to really sort of get more efficient analysis, but having said that, I assume 6 months should be the best, since you started to apply until you get this license. 6 months in Mato Grosso do Sul; for the other, I mean, country; other states here in Brazil. And other countries can be up to 9 months, even those to whom that they have already the licensing in their hands in general. Let me talk in that perspective. So in 6 months from the initial licensing to the startup, for the projects that we don't have a licensing, environmental licensee, ready to go. And if we'll go and have a licensing ready to go 29, 30 miles, that's the normal range. Figuring out that the company has decided to move on with a project and they announced the decision with their board, are they prepared to buy? Because to buy a mill, a very efficient and very high-scale mill, requires pre engineering. So that's an important point, not only the pre engineering but the wood assessment, the forest assessment. So in general, if you have a potential for wood and forestry almost ready, you cannot consider it 30 to 36 months.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [20]

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Perfect, Castelli. And is there any downside of starting the environmental process like in the short term?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [21]

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No, no, no, exactly not. Your question is, if you have intentions it doesn't matter when but you are sure that you're going to pursue in the future a project, expansion project, you can start the licensing agreement before. This is a good practice. We did that with Horizonte 2. And we have also the possibility to renew for a certain period of time. So this is never, never -- nothing lasts forever, but if you have to calibrate that, "Maybe I will push the trigger between, let's say, in the 3 to 4 years," you can start the licensing right now. Why not?

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Operator [22]

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The next question comes from Leonardo Correa with BTG.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [23]

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My first question is on the -- on supply discipline. Last year -- or this year, we've seen both Fibria and Suzano remove some of the high-cost capacity in the system. Fibria removed some capacity from Aracruz, so my question is whether you will be considering this similar approach to managing your volumes into 2019. My second question is regarding the Klabin contract. I know that -- I think they're changing with the, well, with the consolidation in the industry, but I just wanted to see on -- your thoughts on whether this contract will be maintained going forward or not? And what are the expectations on the latest for the Klabin contract? 2 questions for now.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [24]

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Leonardo, thank you for your questions. The first is to the capacity. Yes, we did it, the capacity adjustment, due to the stress on the wood supply just in Aracruz. We are still -- we did that decision in terms of forest replanting in a long filter, mid to long filter. And also, it was very easy or no regret in the past that the margin -- contribution margins at -- of this. I mean extra-mile pulp was not that good. Today, we are living in a current -- different, total different environment, so it's worth to have this. I mean bringing the wood forest from the mill. That will generate profits. That will hit good margin, but having said that, we don't think like on and off. We think in a near to long term, to plan, to transport and to understand the operations. So we are keeping -- that's the reason why, even though with the tight market, we are keeping this capacity reduction in 2018. What's our decision for 2019? We are under evaluation. We don't have decided if you are going to keep or you are going to change. So this is our current discussions looking to the budget for the next year and the forest replanting. But the good news that we have from the forestry point of view is that the inventories and forestries are responding corresponding to our expectations. So we do see that, that wave of -- third wood participation wave that we always present to you absolutely is more, I mean, secured than ever. So we have been sure that we are leaving that more stressful period of the time. Your second question is -- sorry...

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Unidentified Company Representative, [25]

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Klabin.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [26]

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The Klabin contract, okay. Klabin, so far, we don't have any notice from Klabin that they will decide to continue or not. So we are planning together. We are, I mean, managing the logistics planning together, so there are no signals that they will continue -- or sorry, they will discontinue this contract. So far, normal life for us.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [27]

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Perfect. If I may for Henri, my final point here. And I think, feel free to answer in one word basically, but just to help sort of map out pulp prices in 2019. Are you expecting pulp prices on average to be higher, in line or lower on a year-over-year basis in 2019 here, please?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [28]

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And as you know, we normally don't give any guidelines even on the trends, but I will say that we are quite optimistic. So I think that would be in average, if you think about the average '18 compared to '19, we'll see the average of next year higher than this year, the average.

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Operator [29]

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The next question comes from Carlos De Alba with Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [30]

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First one is, Guilherme, maybe you could go back and explain in more detail what happened to working capital in the third quarter. There is a note in the release saying that you see this as a temporary, nonrecurring impact on trade receivables, but if you can give us any more details, that will be great. And also maybe, Castelli, we saw a nice development on SG&A. Particularly in -- also in the release you attribute that to lower expenses with terminal, which I assume is port terminal. Could you explain what is happening there? And what are the trends that you see going forward? And then if I may squeeze a third question in there: Coming back to the Aracruz wood cost, how do you see the evolution of the average wood cost for that mill in coming -- in the coming months or quarters?

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer & Member of Board of Executive Officers [31]

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Carlos, thank you for the questions. Of the BRL 612 million of negative working capital in this quarter, we have most -- the major impact was sales that was done in September but the cash came in only in October. Up to October 19, we -- this number was BRL 530 million. So that was sales that was done in September but we discounted the letters of credit only in October. So it's the major part of the negative working capital. If this around BRL 500 million had entered in September or if we had discounted those letters of credit inside September, the free cash flow of the quarter instead will -- being BRL 1,540 million will be around BRL 2 billion in free cash flow for the third quarter.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [32]

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Carlos, this is Castelli. I will start to answer the wood cost trend for Aracruz. And if you don't mind, later after my answer, you could rephrase your question about Santos. But the wood cost of Aracruz, remember that third-part wood curve that we have been presenting. The good news that -- as I mentioned before, is that the inventory over the forestry has been good and a story that we are really recovering the [path] that we have. So we are predicting that 2021 will be the year that we are going to start heavily to go to the average. That will be currently the average distance for that mill is about 480, 520 kilometers, okay? We're going to bring back to 250, 260, okay? So this is going to be 2021. Could you rephrase your question about Santos terminal?

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [33]

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Yes, sure. Well, not necessarily Santos terminal, but in the explanation of selling expenses and of the good performance in selling expenses, you mentioned or the company mentions lower expenses with terminals, which I assume is port terminals, but if you can give us further details, that will be great.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [34]

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Okay, got it. Thank you. Thanks for that. I mean we -- comparing the evolution of the costs of the company and also our logistics costs from the mill -- especially from Três Lagoas mill to the port and Santos operation, Portocel, we don't have any -- I mean, any problems, any -- we are increasing and lowering our terminal expenditure due to the fact that we are improving and pushing our bottleneck, if we compare to the last year, when we started. And you know that we have anticipated. So we are still not operating in this logistic from the mill to Santos port in our regime, in our best guess, because Embraport or DPW will be finished around the beginning of 2020. So and -- when this -- we finish that strategic move, we're going to have a very efficient costs. So right now, even though -- in an efficient way, we are reducing and we are decreasing the expenditure in these terminals.

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Operator [35]

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The next question comes from Juan Tavarez with Citi.

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Juan Tavarez, Citigroup Inc, Research Division - Director and Analyst [36]

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My first question is just maybe on pulp again just to kind of get your sense of how price sensitive are customers today. And then you mentioned inventories today are somewhat above what you would consider normal. You mentioned new paper capacity is arriving and that would kind of see this potential increase in some competition. So can pulp prices hold stable in this environment, in your view? And my second question is more on cash flow use. You mentioned earlier in the call that you've reached the leverage at a record low. And you were also able to waiver the early maturity of the CRAs. And you also noted that free cash flow could have been BRL 2 billion if it wasn't for the delayed in receivables. So in this cash environment at Fibria, is there the potential to maybe get a special dividend before the close of kind of the deal?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [37]

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Yes, so answering your question about can pulp prices remain stable. I mean, yes, of course, they can. I mean we don't see any structural change to the demand right now. And we do see a lot of new capacities coming onstream on the paper side and none on the pulp side. So again there is everything. I mean we haven't changed our view of the market. And as I said, we should, one should look at the movie, not the picture. And there are some rumors in the market that customers would like to see prices to go down for sure. Then of course, this statement is based on the higher inventories, but as we said, we see these inventories related to the new capacities. And if worst comes to worst and there is some pressure on volume because again there are some actors in this market willing to see prices going down, then being in line with our view of the market, again, on the short, medium term, we could very much decide to put more inventories into and more pulp into our inventories. Because again, beginning of next year, you will see those new capacities running full. At the same time, there will be maintenance shutdown from the pulp industry, not only us but the whole pulp industry, so we have to be consistent. And we shouldn't be driven only by quarterly results. We should look at the movie, again. So yes, we do see pulp prices remain -- potentially remaining stable, but of course it will all depend on what the competition is doing as well. We cannot be out of this market, but we see everything, all the fundamentals for that.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer & Member of Board of Executive Officers [38]

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Juan, you're right. Our leverage is very low and our cash flow generation is very robust. And it was also worth mentioning that we end up with our cash -- fiscal cash position in the third quarter of BRL 8.8 billion, which is much above the minimum cash that we need for our cash conversion cycle. So there is the possibility of extraordinary dividends, and this topic is already under discussion in our governance.

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Operator [39]

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The next question comes from Renan Criscio with Crédit Suisse.

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Renan Criscio, Crédit Suisse AG, Research Division - Research Analyst [40]

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So 2, basically 2 follow-ups here. The first one is that you -- Henri, you mentioned that paper capacity is increasing worldwide. You mentioned the 5.1 million total paper capacity, 3.3 million of that coming from China. Should we be worried about the potential loss of pricing power from paper makers in China, for instance; and potentially that causing paper prices to decline in this country? Or do you think that demand, paper demand, there is enough to support this amount of new capacity coming into the market? And also -- or the second question is also on costs. The -- you mentioned in the release the lower consumption of chemicals and that, that partially explained the lower costs in the quarter. Was this reduction in the consumption of chemicals a strategic one-off event because of the higher price of chemicals in the quarter? Or do you think you can sustain this new level of chemicals that you are consuming?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Executive Director of Commercial & International Logistics [41]

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Your question about the pricing power of the Chinese producers. Yes, of course, more capacity is coming onstream. I mean more competition. It's more supply in the world, in one word. This is never good for pricing. And then there will be -- there might be some pricing war for market share, but this is not going against demand for pulp. Of course, there will be margins even [squidder or more squid] in China, but you have to know that, apart from the board, ivory board, segment in China, I mean, the rest of the industry is not doing bad in terms of margins. They might not be gaining as much money as they would like to, but I mean printing and writing is not doing bad. Tissue, they're struggling a little bit more, but they are still making some money. And coated is doing quite well. So there is still some room, I would say. I mean, in a way, the Chinese are -- margins are much better than the Europeans', if we look at the statistics. So yes, there will be some pressure on the margins of the Chinese, but as far as we understand, so far they will -- the situation of those Chinese paper producers is not so dramatic. So that would be my answer, but we cannot deny: More supply, more pricing move, no doubt, but also more demand for pulp. Because I don't see anybody deciding to stop producing in order to let his competitor gain some market share.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President & Member of Board of Executive Officers [42]

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And this is Castelli. Regarding to the chemical consumption that we have mentioned, yes, we can sustain those levels. It doesn't mean that we are going to keep reducing or -- I mean, significantly, but that reduction was mainly due to the startup and ramp-up of Três Lagoas II. That is a very high-efficient new mill. And we have something further to improve, but that will not change dramatically or significantly the current chemical consumption there. Of course, dependent on when you compare -- if you compare 1 quarter without shutdowns, general shutdowns, with a quarter that we have shutdowns: Of course, during the shutdown period, we have not the optional consumption. This is the norm. Let me use your -- also your question to address to you all guys that we have been decreasing heavily our energy generation, surplus energy that we sell to the grid with the tower 2 disability and the ramp-up of the second line of Horizonte 2. So having said that, we are benefiting, of course, for the current prices of energy in the market. And looking to the 4Q, it is the energy prices, have been said, will decrease because we are entering in a rain season. So all in all, we do see that one thing could partially compensate the other, but we are improving as well of the efficiency from the generation and the surplus of energy that we sell to the grid.

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Operator [43]

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(Operator Instructions) This concludes today's question-and-answer session. At this time, I would like to turn the floor over to Mr. Guilherme Cavalcanti for any closing remarks. Please go ahead.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer & Member of Board of Executive Officers [44]

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Thank you all for participating in today's call and for your interest. If you have any more questions, feel free to contact our investor relations team.

Thank you.

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Operator [45]

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This concludes Fibria's 3k (sic) [3Q] '18 Results Conference Call. You may disconnect your lines at this time. Thank you.