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Edited Transcript of FIBR3.SA earnings conference call or presentation 26-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Fibria Celulose SA Earnings Call

Sao Paulo Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Fibria Celulose SA earnings conference call or presentation Wednesday, April 26, 2017 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 and Member of Board of Executive Officers

* Henri Philippe Van Keer

Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers

* Marcelo Strufaldi Castelli

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

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Conference Call Participants

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* Caio Ribeiro

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

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Claudio Miori

Fitch Ratings Ltd. - Research Analyst

* Humberto Meireles

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jonathan L. Brandt

HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper

* Juan Tavarez

Citigroup Inc, Research Division - Director and Analyst

* Karel Luketic

BofA Merrill Lynch, Research Division - Associate

* Lucas Ferreira

JP Morgan Chase & Co, Research Division - Analyst

* Marcos Assumpção

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

* 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 first quarter of 2017. In case anybody needs a copy of the press release, please visit the Fibria Investor link at www.fibria.com.br/ir. We would like to inform you that this transmission is being recorded. (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 the 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 leads to results that are materially different from those expressed in these forward-looking statements.

Mr. Marcelo Castelli, CEO, will begin the conference call. At the end, the conference call will be opened for Q&A session. Mr. Castelli, you may proceed.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and 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 first quarter of 2017. With me here today are Guilherme Cavalcanti, CFO and IRO, and other members of Fibria's executive board.

Moving to Slide 4, we will now discuss the highlights for the quarter. The company closed the period with net revenues of BRL 2,074 million, EBITDA of BRL 644 million and an EBITDA margin of 37%, excluding the sales from the deal with Klabin, 1 percentage point higher than in the previous quarter. The free cash flow closed at BRL 426 million. In the last 12 months, Fibria recorded net revenues of BRL 9,294 million, EBITDA of BRL 3,132 million and an EBITDA margin of 38%. Free cash flow generation totaled BRL 1,586 million in the last 12 months.

In the first quarter of 2017, the combination of positive fundamentals of strong demand, lower level of inventories and supply volumes below expectations allowed Fibria to announce and fully implement 3 price increase for January, February and March. Inventories closing the quarter at 52 days, 5 days fewer than in the same period last year. I would like to take this opportunity to mention that the price increase for April was 1,000, fully implemented. On the liquidity and debt management front, we closed the first Q '17 with a leverage ratio of 3.79x in dollars and 3.63x in reals. And the interest coverage ratio bettered by EBITDA of over net interest expenses, in the last 12 months, it stood at 5.3x.

Given the company's financial policy, Fibria has taken initiative to manage its financial leverage. For instance, it was 45x Horizonte 2 to CapEx from 2017 to 2018, which released the pressure of the leverage during this intense period of investment.

Fibria's strong physical cash position at the end of the quarter totaled $2.1 billion. Additionally, on April 4, Standard & Poor's affirmed our investment grade rating reflecting Fibria's expectations remain within the leverage permitted in 2017 and 2018, despite Horizonte 2 CapEx. The Horizonte 2 Project startup was anticipated in comparison to the original schedule, and it's below budget.

In March, more than 87% of the orders were complete, allowing us to announce the startup to September. And now at the end of the April, reached about 89% complete. The conclusion of extension projects will make Fibria present world unit the world's largest size for market hardwood pulp and will increase Fibria's total production capacity by 37%.

Moving now to Slide 5. We will discuss the pulp market in a little more detail. The strong operating rate and level and low hardwood pulp inventories once again stood out this quarter. The increase in demand for pulp through March underlining the consistency (inaudible) in the period.

In the first quarter of 2017, Asia accounted for 42% of net revenue followed by Europe with 34%, North America with 14% and Latin America with 10%. Asia represented the largest historical concentration in net revenues since Fibria's creation indicating that we are pursuing better net prices and company's commercial strategy for ability in allocating it to global sales.

Fibria sold 1,307 tons of pulp in the first quarter of 2017, 15% more than in the same period last year, including the volume from the deal with Klabin. In view of these already mentioned solid fundamentals, given the market pulp supply reduction, for instance, as the one announced by April as well as the strong paper demand, it is expected that the positive movement for hardwood pulp market will continue through the second quarter. And with this public knowledge, we have recently announced the new price increase is valid as of first of May.

Now I would like to turn the floor over to Guilherme Cavalcanti, who will continue the presentation.

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

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Good afternoon, everyone. On Slide 6, we will discuss our first quarter results. Since we already mentioned the sales performance, which was also driven by Klabin's volume, I will begin by discussing our production volume. Production remains flat compared to the first quarter since 2016. Given there's moderate impact of the stoppage of the Aracruz offset by the scheduled downtime at Jacarei in one less production base. The second go (inaudible) scope of Aracruz in Jacarei, downtimes was extended, representing an effect of 6 days of equivalent production at those units.

Net revenue totaled BRL 2,074 million in the first quarter 2017. This year-on-year revenue decline was due to the 19% depreciation of the average dollar and a 7% reduction in the average price of both in dollars, which offset the increase in sales volume.

Adjusted EBITDA totaled BRL 644 million in the first quarter 2017, with a 37% proforma margin, excluding pulp sales from the Klabin view, as this agreement is not aimed at generating EBITDA.

In the quarter-on-quarter comparison, the EBITDA decline was due to lower sales volume, given the seasonality and the depreciation of the dollar against the real, partially offset by the 4% increase in net average pulp pricing dollars. On the other hand, the year-on-year EBITDA reduction was simply due to the 25% decline in the average net price in reais and higher cash cost.

Now let's move to Slide 7, where we will talk about Fibria's cash production cost. Year-on-year increase in the cash production cost, excluding the effect of the downtimes was mainly due to the higher wood cost, in turn as a result of a temporary transportation mix change in which there was a higher growth contribution partially with placing the maritime largest transportation due to the implementation of the maritime wood shipping project.

Excluding the effect on this schedule downtime, the cash production costs increased by 1.8%. The IPCA inflation point of period has stood at 4.6%, and the dollar depreciated 19.3%. Cash production costs, considering the maintenance downtime was 754 reais per ton, higher than the fourth quarter 2016, mainly due to the higher cost of wood in turn explained by the higher distance from forest to mill and the transportation temporary mix change.

When compared to the first quarter 2016, the valuation is due to higher cost with downtime due to the extension of the technical scope of the downtime and higher cost of wood as experienced previously. It was noting that after this quarter in 2017, there is only the downtime in (inaudible) scheduled in the fourth quarter. There are also opportunities to reduce the wood cost with the start of Horizonte 2, efficiently gained in the forest operation. For instance, the current implementation of the just mentioned project to increase efficiency on wood transportation by 3 barges and third-party wood reduction.

Moving to the next slide. We would like to talk a little about our debt. The increase in Fibria's gross debt in the first quarter of 2017 was mainly due to the issue of the new investment grade bonds, totaling $700 million, equivalent to BRL 2.2 billion at the end of March, due in 2027, and performed at 5.5% per annum.

Net debt in dollars totaled BRL 3,587 million, having increased mainly due to the CapEx related to the 82 projects. The average cost in dollars has stood at 3.8% per year, constituted debt in reals adjusted by the market swap growth as it grows of the period.

The 0.2 percentage point increase in the cost of debt was due to the higher LIBOR growth, ending 2027 bond we issued as previously mentioned. LIBOR is measured by net debt to EBITDA at the close of the quarter at 3.63x in reals and 3.79x in dollars. As disclosed to the market on the other occasions, the company has initiatives involving CapEx and working capital to manage its leverage, which are already being implemented, such as BRL 360 million CapEx postponement of disbursement from 2017 to 2018.

The bond issue in the other hand contributed to increasing the average maturity of the total debt to 57 months in March 2017, against 51 months in December 2016.

Now let's go to Slide 9, where we will analyze the company's EBITDA. The growth in the company's cash position in the first quarter 2017 further strengthened the solid financial liquidity of its balance sheet. The company's liquidity, which excludes the positive $77 million market-to-market of hedge instruments closed the first quarter of 2017 at $2,669 million. This amount is added to the unused line related to the finance of these 2 projects totally around $500 million, is sufficient go over this project to remaining CapEx and that amortization and through the end of 2019.

Another source of liquidity is represented by free cash flow, which will be keen to benefit from the Horizonte 2 revenues as of the third quarter of 2017.

Now let's move on to the next slide, where we'll talk about Fibria's first quarter 2017 net results. In the first quarter of 2017, the company posted net income of BRL 329 million, partially benefiting from the nonrecurring impact of the positive financial results due to devaluation of the dollar against the real. These effects were mainly experienced by the exchange variation on the debt and the variation in market-to-market of hedging provision and financial gains of BRL 63 million in transactions factored in the period.

Now we'll discuss our free cash flow in the first quarter of 2017. Let's move on to Slide 11. First quarter free cash flow, excluding Horizonte 2 CapEx and pulp logistics projects, totaled BRL 426 million, representing BRL 326 per ton or $104 per ton, positive working capital was mostly due to the cream of the working capital investments arriving from the agreement to sell both Klabin in the first quarter of 2017. Even excluding the impact of Klabin, free cash flow generated by the company's operations totaled over BRL 100 million. Free cash flow yield in dollars was 9.5%.

On Slide 12, we'll discuss the Horizonte 2 project. As Castelli mentioned at the beginning of the presentation, we have reached 89% of completion at the end of April, and the start-up is expected in the first week of September 2017. The financial institution remains to be low due to regional disbursement schedule with our total disbursement of BRL 4.5 billion by March 31, 2017, representing 61% of the total scheduled investment. Due to CapEx postponement, as mentioned before, 2017 presents a lower amount when compared to the previous period as shown in the chart on this slide. I will now hand over to the operator to begin our 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 Mr. Caio Ribeiro from BTG Pactual.

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Caio Ribeiro, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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My first question is regarding cash costs. In the quarter, there was still an elevated level of cash cost per ton, which of course, is a lot related to maintenance and nonrecurring higher wood costs. But looking ahead, there are 2 quarters with no program maintenance stoppages. And I wanted to get a sense from you on how you see this line evolving going forward, and whether you see a fast improvement in cash costs or perhaps more gradual and more significant once Horizonte 2 starts up. And secondly, if you can comment a bit on pricing conditions, once the June to August typical weaker seasonal period starts up, do you see prices starting to correct then on weaker demand, or do you still see that perhaps the supply side of the equation should help us set this demand decline and help sustain prices?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [3]

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Caio, thank you for your question. This is Castelli speaking. Yes, we have reached the peak in our cash cost considering in 2017. From now on, we are going to reduce the cost, and of course, after the implementation of our Horizonte 2, the cost on the last quarter '17 will be reduced more, more intensively. But for the second quarter and the third quarter, we asked -- we do consider and we project that our cash cost will be lower, lower than this BRL 754. Having the -- taking the opportunity also to explain, we had the general shutdowns. We concentrated, again, as we did in the 2016. Within the seasonality in the market, we already considered that the market will be tighter than everybody were expecting, but it's even more tighter than we expected. So we planned 8 to 9 months ago, these 2 shutdowns generally brought a more nonrecurrent scope of services in nonaccruals in Jacarei. So also, we had, during this quarter, the first Q of '17, we had an overhaul of 1 turbine that is for the Tres Lagoas, the current mill. Also to guarantee that these turbines will be in a good shape and are highly efficient when we started to commissioning and to come up online the resulted tool. So we have also reduced the energy that we generated. So we do see a nonrecurring event in these next quarters. This term's average business will be reduced, and also, the energy generation will be higher. And following the prices, the trend of the prices in the energy market that right now for the incentivized energy is something around BRL 380 per megawatt. So all in all, we do see cost reductions going forward.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [4]

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Okay, Caio, your question about the market. I would say in the next few months, we don't see any reason why the demand should decrease between June and August. I mean, we always hear about this seasonability and all that, but actually, if you look at the past, I mean, China has been -- China demand has been good most of those months. And actually, we don't see that decreasing right now. There is a real, real good final demand for the final product. I would say that we have the feeling that there is also a lot of frustrated demand actually today that might be only attended between June, July and August. So again, looking at the demand, we don't see any significant decrease. There is no indicator showing or pointing to this kind of decrease. And when it comes to the supply, you know that our project is only starting in September. So the pulp will be available, let's say, at in October, November, not before. OKI -- APP has announced that they would not supply the market with their OKI pulp this year. Actually, we don't work with this project -- with this scenario. We do feel that they might be supplying a little bit in the market, because they have some commitments for sure to attend. But even though, if you consider, I mean, our project and then it's not going to be a lot of new supply this year. So between a good demand and no real new supply, especially considering all the switches that have happened so far, mainly in April group, we are quite considered about the monsoons to come, and I would say until the end of this year.

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Operator [5]

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Our next question comes from Mr. Carlos De Alba from Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [6]

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The question is have we seen then all the negative impact on the transportation mix, basically the high overall contribution already in the first quarter? And also, do you expect to see greater operational efficiency or higher operational efficiency in coming quarters or that would reduce your cash costs for pulp or would they decline that you suggested we'll see in the second half of the year, will all come from a lower average distance and the lower presentation of third party with purchases? And then the second question that I had is, if you could quantify, we keep reading in the press release that the new maintenance parameters will reduce the cash cost or the cost of maintenance in the long run? Could you provide us with a number or a range of what is the benefit from this change in the maintenance schedules and the ratios, and we have already seen this in the numbers?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [7]

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Okay, Carlos, thank you for your question. Let me detail a little bit more the first Q cash cost. We had 2 or 3 major impact. First, we had concentrated again on the seasonality, the shutdowns, as I have been said. And we have increased the scope of this nonrecurring services. This is important to understand that we are learning how to operate in every boiler, in every mill, in every site, how to operate running for 15 months instead of 12 months. Okay, so we are updating and are bringing more resilient and more efficiency to run longer. Those are the general shutdowns. Although, I'll say it again, what's to be considered for general shutdown in a minute. Another component was the overhaul in 1 of the 2 generators in the Tres Lagoas Mill, you could make in one, that we decided, of course, to do before we enter in the commissioning phase that will be on the second quarter of 2017, that already started, I would say, in Woodyard and water treatment, enriched water treatment, compressors and pipes, so everything has been started to be commissioned, okay? And this is also imposes the lower generation, lower energy expectation exports. So reducing the mitigation in cost, less revenues from energy. The wood, let me talk about the wood. If we consider year-over-year, on the first Q '16, the percentage of the third-party wood, it was 41% with the average distance in that quarter at 307 kilometers. Comparing the first Q '17, the set of 41% of third-party wood, we dropped to 32%. But we kept the average distance from 307 to 308. What differs the cost of this mix of transportation? We are implementing one improvement project in our barge transportation that supplies Aracruz Mill. It means that it comprehend, I mean, new berth or more infrastructure on the Caravelas barge port and also in Veracel. And also, we are changing the equipments to really to load those barges. So everything is on the way. So we are doing those, I mean, adjustments. In Caravelas port and import to self-port only from the source to the end, and we are going to increase. That was imposed as that to reduce the volume of the transportation through those barges during the first Q. And this will be almost completed, and during the second quarter, we're going to return to the normality. So we do see our cost -- cash cost peak that has been reached on the first Q '17, and we'll after that, we're going to reduce, okay. If I may change to your question regarding to what kind of a benefit we can have to change these -- those campaigns of the recovery border from 12 to 15 months. It represents every, I mean, 3 to 4 years of more production, okay, and it means that we are running for that. We have 7 recovery boilers, and we did already in 6 recovery boilers, but this is the learning thing. Recovery boiler campaign is going well, but we have learnings, lessons on the other areas, because we need to make some intervention in a more frequently basis. So it's a learning process. We do believe that every 4 years, we are going to produce more 150,000 tons, okay? That's the rationale behind. So there is a learning for that learning process then we decided to run and to pursue that because at the end of the day, the local conditions after all the learning, will be -- we're going to maximize the output of the current assets. So 150,000 on top of 500 -- 5 million and 3, it represents a little, a very sound, I mean, return to the company.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [8]

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Okay. So the benefit you really do to more production rather than lower cost?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [9]

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Yes. Yes, it is.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [10]

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Every 4 years, 150,000 tons?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [11]

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You're right.

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Operator [12]

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Our next question comes from Mr. Lucas Ferreira with JPMorgan.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [13]

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My first question to [Marcelo], first, I know that you're increasing EBITDA year-over-year in spite of the increasing pulp prices, deeper margins in China, we actually have the increase in, because of also steep increase in paper prices in the region. So do you still suggest that as true, and do you think that as even with this announced price hikes, paper margins will remain at the healthy levels? And also, if you can quickly comment on the presentations in Europe, if Europe is keeping the pace of China, or at some point catching up with the China. And the second question to Castelli, Catelli, just when we come back to that discussion we had in the conference call of the Horizonte 2 updates, where you mentioned, Fibria would consider reducing capacity temporarily and also temporarily to explore or actually to regulate a bit more of the market. If you know this discussion has evolved internally in the company, if you guys have any sort of conditions for this to happen and how much could be cut, that would be great?

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

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Okay. Your question about paper price both in Asia, China and Europe. I mean, I'd like to offer very -- I mean, in a simple way. I mean, I can tell you that it might be or it might sound strange, but we have no complaint about prices. I mean, the last price increase that we announced, I mean, the people were not so complaining about it. They were expecting this price increase, and they are actually much more complaining about getting more volume. They want more volume, and they want to make sure that we don't have any delay in the deliveries. So on top of having this kind of behavior, I mean, we keep hearing from our customer base that they are managing price -- paper price increases. I'm referring to some of our customers in the printing and writing business in Europe, and also, I'm referring to my -- to our Chinese customer base. So again, we don't feel that paper prices are not going up, and there might be problem related to margins. We are really under the impression that the customers are worried about having their production stopped and may not be in a position to attend their customer demand. This is the main concern according to what we feel. I mean, we have so many customers begging. And in some cases, we have even customers saying, well, give me the volume you want, I will pay you the price you want. So this kind of comments, I mean, it's in -- you don't have that as an indicator in the market. But I can tell you that when you're involved in the sales, you feel that very much. And that any kind of demand coming from any kind of destination. I mean, it's Middle East, it's Turkey, it's Saudi Arabia, it's Australia, I mean, everywhere, you have customers, not discussing prices, but asking for more volume.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [15]

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Okay, Lucas. Thanks for your question. Let's -- when we announced it on April 3, the anticipation of Horizonte 2, we have mentioned, of course, you're right that we should -- we would like to pursue or to behave like a price shaper. And why is that, because we are going to -- when we complete the learning curve of Horizonte 2, to get the forthcoming volume. We are going to sell 8.15 -- 8.1 million tons. It's a pretty much volume of pulp in our hands. Okay, yes, every wood and everything that we do in our company should create a positive margin. And we are learning in a positive margin. What we said is that after we implement the Horizonte 2 project, we're going to have a so effective, so low cost production then depending on the macroeconomic circumstances that we are not referring to the dollars per ton of price -- pulp price, and we are not referring to the FX. We are referring to how many reais per ton we are getting to our pocket. It means that despite the volatility in the market, we are going to, yes, it's a crystallized strategy inside of our management in our company that if we do consider that the market will start to enter in a stress, and when we enter in a short supply-demand distress, we go down by elevator and we go up by stairs. So to avoid this huge volatility, we are aiming that we are able and are open to really to reduce capacity. And we, of course -- we're going to reduce capacity in all news that we need we have a lower margin contribution. The amount that we can expect can -- they can vary, I mean, I would like to say that 200,000 tons is the capacity just meant to, there'll be more than enough to offset the higher volatility. The market will be always secret, but we can interfere. The shorter mindset or it's incredible, because back to the history, (inaudible) announced that we will close the capacity. The market changed, that world changed immediately. And what happened today is that many informations are supporting that we have also the adopters from PPPC today. We have a lot, very tight market control. We are going to run at the end of the day the component for profitability, for return. And this is the behavior of a shaper, of the leader in this industry. And Fibria is enhancing an improvement in leadership, 8.1 million target pretty much reasonable to start to behave like that. So it's a crystallizing decision inside of the company. When we're going to do, and maybe, what kind of a trigger will be considered we cannot tell you.

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Operator [16]

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Our next question comes from Mr. Karel Luketic from Bank of America Merrill Lynch.

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Karel Luketic, BofA Merrill Lynch, Research Division - Associate [17]

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My first question is a follow-up for -- on the questions for Henri. First, you can please elaborate on what you're seeing in terms of inventories, not only of pulp, but also of paper if possible in China. And second, it would be great to hear your thoughts on the market in Europe as well and price differential between Europe and China. That's my first question. The second one on inventory then on sales volume. Can we think of the current inventory level at almost 900,000 tons as reasonable and consequently whatever production we can expect for the second quarter should be close to sales, is that reasonable to assume?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [18]

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Yes, your question about inventories of paper and pulp in China and Europe. I mean, we keep following some indicators, I mean, the inventories in the ports. We keep monitoring the inventories of our customers, whether visiting the mills or of course, by talking to them about the future demand and planning. I can tell you, everything is pointing at very low inventories, both in paper and pulp, both in Europe and in Asia. I mean, there is a very strong indicator, when you have customers, very big ones, who can buy between 20,000, 30,000, 40,000 tons that's a pretty much because they are delay of 2,000 tons. For me, this is a delay of 1 month of 2,000 tons. This is the best indicator. Those customers, you know the buyers, they become nervous when they feel that they might have to stop the paper machine. And this is something that we can feel everywhere. We have really customers or potential customers telling us that we need to support them. It's coming from everywhere. This is what I answered in the previous question. I mean, it's Middle East, China, Europe. And for me, I mean, of course, you have the statistics, which are already pointing at those very low levels of inventory, but you have the behavior, which in a way is much more significant in terms of reading the market. So I can tell you that very easily that we don't see any building of inventory. Much to the contrary, we see low inventories in paper pulp in Asia and in Europe and everywhere as well. Did I answer the question?

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Karel Luketic, BofA Merrill Lynch, Research Division - Associate [19]

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Yes, perfect.

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Operator [20]

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Our next question comes from Mr. Marcos Assumpcao from Itau Corretora.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [21]

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First question on the derivatives strategy, if you could comment a bit the recent increase in the exposure that you showed. Is that a trend that we will continue to see Fibria increasing its derivatives position? And you also mentioned that you are covered for 42% of your net currency exposure. Just remind us what is the limit there? So what will be the potential size in terms of this position? Second question, if you could comment a bit on the cash cost, if you really believe that this is -- the first quarter was the peak in terms of cost, like in terms of CPV per ton, like the cash cost that impacted your COGS? And moving after the Tres Lagoas too, when do you expect the project to have a meaningful impact in the cost line. Will we have to reach full capacity or even in the beginning of the ramp-up period, we should already have lower cost than the average of the company, which is suffering from higher wood cost?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [22]

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Marcos, I mean, in terms of early strategy, just remember that they will have a notion of $2.4 billion of hedging up to the end of 2018. In terms of the next of month, this represents around 50% of our revenue. And we are prospective at an average of 3.3 FX. So our protection is already in the money. As you can see in this first quarter, we have BRL 63 million in cash, including cash inputs from these hedges. Again, for the next couple of months, after (inaudible) periods of hedging in 2018, we give up the upside only as BRL 5 FX. So we can increase during this leverage period of the project. Again, as you mentioned, we have around 42% of our exposure hedges. We could increase up to 85%, but it's worth mentioning that our -- we at December, we were 75% cash on our exposure. But since we issued the bonds in the international market and we have the cash in dollars abroad, because this is important to maintain liquidity in the strong currency for rating agencies. Our exposure, now it's 42%. But in terms of revenue, it's around 50%. We are evaluating the necessity to increase it or not, because as we mentioned, we are -- the second quarter of this year will be the peak of our average. Then with the entry of the project, our leverage will start decreasing fast. So January, the (inaudible) of hedge is 20 in leverage times since our leverage will start to decrease. We may be more exposed to the currency because the only out was if you look at the other currencies, was the one that most appreciated recently. And the Bloomberg forecast is for depreciation of the real. And also, the 0 plus collar that for 2017, we have like 5.7 as the collar then to give up the upside. For 2018, it is around 4.5, 4.2. So we'll start to see if it's worth it to protect and give up upside at certain levels. But it is something that we are waiting so far. We are very comfortable with having this coverage. And we would be evaluating I think results in no reason to increase since our leverage, will start to decrease on the first quarter of this year.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [23]

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Marcos, thank you for your question. We would like to confirm that this first Q cash cost the lower peak in the year, okay? We do expect lower cash costs on the second and on the third and especially on the fourth quarter. When we see that despite the ramp-up or the non-full capacity of Horizonte 2, we are going to really to have a step change on the 4Q in our cost due to the huge influence of competitiveness of the Horizonte 2. So to summarize, the CPV was -- also in the first Q, we had an impact on the cost of goods. Because on the last quarter, our cost was BRL 727. And we had also 0 shutdowns impacting. You can see on our Page 7 on the presentation that the 2 quarters, the first of '17 and the fourth of '16, there were more than the double the impact of general shutdown. So these CPV discounts will really -- will be more -- less influential due to the fact that we have lower inventories, lower than the seasonal period of the last year. We have finished with the 52 days, and it means that I think we consider for the second quarter a smaller influence of CPV, but the cash cost per se will be lower. And we -- back to the Horizonte 2. First quarter '17 and a step change. And the optimal level of the cost by the influence of Horizonte 2 will be reached almost 100% in 2018. Of course, 100% will be in 2019. But with the start-up and ramp-up of Horizonte 2, everything as consolidated numbers in the company will be very, very efficient. We'll be much better than we are right now. So we do not believe and we do not expect for any reason that I have mentioned already that the costs will still keep increasing on the company. We have -- also, on top of the 2 general shutdowns, Jacarei and Aracruz in the first Q, we also had also an overhaul of [our one two] generators of the Horizonte 1 Tres Lagoas current mill operation that also reduced the energy that we export to [a degree]. And also, the last but not least, the price of energy is increasing, because the draw, the situation in Brazil, et cetera, the current price on the market, it rose to BRL 380 per megawatt of the incentive energy -- incentivized energy. And last year or the beginning of this year, we were talking about BRL 189, okay? So you can see that is also help us on the next quarter going forward to really to keep the cost on the right track.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [24]

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Perfect. Just as a follow-up here to Guilherme. Considering all that you said there, like so what (inaudible) said before, that pulp prices will continue to rise, right, the effect of the recent pulp price increases will impact your results. You mentioned that cost has already peaked. Volumes could also be -- could be a bit stronger in the following quarters, and you will have more energy sales revenues. Considering the EBITDA of last 12 months, we shouldn't see more, further deterioration in that ratio, right? Is that a fair assumption?

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [25]

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Yes. Maybe in the second quarter and depending of the working capital initiatives, maybe even not necessarily increase. But for sure, by year-end, we will be -- this perspective that you mentioned on prices, at the current FX, we will be back inside our policy of 3.5x net debt to EBITDA by year-end. And depending on the working cap initiatives, we can be more closer to 3, even lower than this 3.5 that I mentioned, but given more -- the level of how much lower we'll be will depend on working cap initiatives. Without any further working capital initiatives, just the pulp price expectation and FX, and as all that you mentioned, we'll be inside -- probably inside our policy of 3.5x net debt to EBITDA by year-end.

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Operator [26]

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Our next question comes from Juan Tavarez of Citibank.

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Juan Tavarez, Citigroup Inc, Research Division - Director and Analyst [27]

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I guess, my first question, if we can just touch on that working capital initiative you mentioned, Guilherme. I guess, I'm curious to see that most of the free cash flow generation we've seen over the past few quarters has really been driven by working capital. I'm curious if in accounts payable, given this Klabin effect, is this kind of 120 days of payable the sustainable level, or if you can detail a little bit there what other initiatives you find in working capital for the next coming quarters or if there is any reversal of that? And then second, maybe if, Henri, you can give us some clarity on this recent strength we've been seeing in China demand. I'm curious on how your portfolio looks in terms of allocating volume to China. Are you basically sending volume to your current contracted clients, or are you starting to sell into the spot market? Just to understand that dynamic. And especially going into the beginning of the sales from Horizonte 2, how should we think about your distribution regionally of your product sales with Horizonte 2?

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [28]

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In terms of the working capital, you're right. There have been effects really in the last 12 months around $400 million of working capital with the terms of payments. The FX of Klabin will not be relevant now going forward, because it's a once and for all effect. The reverse of this Klabin could happen only if Klabin do not renew this quarter. But this happens only in -- there is a 6-year contract and with a 2-year phaseout. So only -- if they don't renew, only after 4 years that we could see a reverse of this working capital of Klabin. So in the next 4 to 6 years, at least we will have this money already if we do not have a reverse of the working capital we needed from Klabin. We also have other initiatives in accounts receivable that is also -- that tends to function forever. For example, some clients we started inviting this port in Brazil instead of inviting this port in Europe. This means that all this pulp that was in the water that was in our inventory now is released. This effect will go forever, so unless we have a reverse of this. We have also initiatives going forward of working capital relief, basically postponing of CapEx expenditures. As you can see, we postponed BRL 350 million of CapEx of 82 projects for next year. We have a potential of more than BRL 200 million to postponing CapEx of 82 that really are, evaluating if it's going to be necessary or not. As I mentioned, given the perspectives of leverage -- of a special decrease in leverage ratios that I already mentioned maybe will not be necessary new working capital initiatives. And it will be inside of our policy, even without further working capital initiatives. And -- but in the other hand, (inaudible) this price increase. And also if our price in reais for the second quarter this year, even compared to the second quarter last year, where the effect was 3.5, it's going to be already higher, even with the effects of 3 15. So the increase in the price in reais will help and a decrease in the cash cost. As we mentioned, we will increase our free cash flow. And we will be entering the project, remember, our production with the project will be increasing 37%. But our EBITDA will be increasing 50%. And our free cash flow in 85%, given that cost in CapEx is lower for the 82 projects. So our perspective in free cash flow generation, even without working -- new working capital initiatives, is to increase.

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Henri Philippe Van Keer, Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers [29]

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Your question about our sales to Asia. I mean, I'm not sure I understood correctly your question, but if I'm not answering the right way, then please tell me. But I understand when you mentioned whether we were doing any kind of (inaudible), I understand your question as being, are you selling to traders? I can tell you we are not selling 1 ton to trader. It is absolutely out of question. This is not of our commercial strategy.

(technical difficulty)

That we believe will be reliable in the future, because they are the winners of tomorrow in their segment. This has been the strategy of Fibria for the last 30 years, and this will continue to be like this. So again, we are not selling to any trader. Did I answer your question?

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [30]

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Yes.

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Operator [31]

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Our next question comes from Mr. Thiago Lofiego from Bradesco BBI.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [32]

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Castelli, would you consider converting tonnages to the dissolving pulp market? And if so, how advanced would those discussions be within the company? And prior to that, I mean, you mentioned your price right shape and strategy could eventually withdraw 200,000 tons off the market. In that sense, would a convergence to dissolving pulp be a better way to take those tons off the market?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [33]

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Thiago, thanks for your question. Reaching now 8.1 million tons of market pulp and looking at what's going on and a trend of dissolving pulp. Yes, we have certain analysis on the way. And we also analyze what could be our positioning in terms of a multi-fiber strategy is to have less dependence on the market fundamentals, because dissolving fundamentals of the market are totally different than the market pulp, as you know. Yes, from now on, we are also considering a potential decision to convert such a 1 mill. You know that in Fibria, despite we have a bigger single lines, we have several smaller lines that, if we convert them, we can transform them for a mid-competitive cost curve to a high best cost competitive curve in dissolving. Because most parts of the conversations, they are not there yet. When they convert their production, they are still not on the first quartile of the cost competitive. Fibria has this advantage. And we are considering, not decided yet, but something that we can also start to change the portfolio trends. So dissolving, yes, it is an opportunity, especially if we combine that with the sugar platform or with other products, because we have many cellulose that we need to take out from the dissolving, to produce dissolving that we can use for other side stream in our bio strategy. So yes, not decided yet, but we are open and following the market trends.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [34]

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And would you wait for your de-leveraging to happen before taking such a decision, or not necessarily?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [35]

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Sorry, could you, could you repeat?

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Claudio Miori, Fitch Ratings Ltd. - Research Analyst [36]

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Would you necessarily wait for the de-leveraging from the Tres, Lagoas project to happen before taking such a decision, or not necessarily. You could eventually take a decision to convert the dissolving in the next, let's say, 12 months before you showed the leverage from the project, from the Tres Lagoas project?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [37]

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Okay. There are 2 things. This is a strategic thinking of the company. So it's not in a short term, okay. Even though if we decide, it's not decided. I'm not giving any guidance, any strategic decision yet. This is a trend. This is a possibility for strategic thinking. But let's figure that -- let's imagine that we have decided already to convert. We can do in a couple of months. This is not big, required depending on the mill that we decide to convert. We can have the same digester we have, the same facilities we have, but normally to produce a very decent quality of dissolving pulp that may be could get better prices in the market then we need to have a certainly small CapEx investment. But we do see -- of course, we need to take into consideration the leverage that we have according to our policy, because we have crossed 3.79, but this is not a worry, because as Guilherme said, we predict that -- we forecast that we are going to be within our policy in a very short period of time with Tres Lagoas II. So it will be automatically. We are going to ramp up Tres Lagoas II to the leverage and maybe take other -- this investment or small -- medium to big investment decision. So they will be also collected. But again, Fibria has been analyzing several alternatives to maximize the value creation in our assets. We are not going to think about profit. We are going to think always and talk about resolving at a certain point in time, when the market can give us certain opportunities to enter and conditions to enter. We are looking for the future pipeline of a bio strategy that is not a cash burden -- a huge cash burden in our P&L. So we are creating a different [platforms] for the Fibria in the future to be less dependent on the pure market paper grade player.

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Operator [38]

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Our next question comes from the Mr. Jon Brandt from HSBC.

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper [39]

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Castelli, I wanted to ask you about taking volumes off the market just to balance the market in a hypothetical scenario. If I remember correctly, 6 months ago -- roughly 6 months ago, on a call, you had mentioned that this is something that you weren't willing to do, because Fibria was the low cost producer. I'm wondering if something has changed. Why would you now potentially take volumes off to help the market? And secondly for Henri, I'm wondering about the volume strategy and sort de-emphasizing North America this quarter. Is that a seasonal thing, or should we expect sort of the U.S. to be de-emphasized? And is that -- should I take that to mean that prices in the regions continue to be unbalanced? And then sort of related to that, the $40 per ton price hike that you've announced for May, should we expect that to be implemented in a month? Or given the fact that it's a bit of a larger increase, which you expect this to take maybe 2 months to implement?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [40]

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Jon, thanks for the question. Nothing changed. I mean, at that time, first of all, a couple of years -- a couple of months ago, we do believe that the floor price will be reached. And we were talking about the obvious. We were talking about 450, 430 net price. And we didn't believe that we will reach that. So we had tested according to our hypothesis that the market floor was about 460, 465. And in that scenario, we will absolutely be sure that we are going to keep the free cash flow of the company within our pocket. Knowing that why should we at that time to announce that we are going to take out volume from the market with the eminence of the startup of the Oji project. We would have sent a wrong signal to the market. But right now, on the contrary, we have higher volume. We are -- we will be more and more competitive in terms of cost. And with this 8.1, we are going to try to follow up what is important to follow, that it's a price shaper behavior. So nothing changed, just the dynamics of the market, just a tactical positioning. And of course, Fibria will not be -- maybe we cannot be the first to reduce capacity. But Fibria, when we intend to do it, we will give the signal to the market and potentially the others will try -- will start to do it without announcement before of us. Our market intelligence will allow us to position in a diligent way. So right now, we -- it's a different story. We have our expansion project. We have to protect our expansion project. And we have more clarity in the market that we will not jeopardize and give a chance to the others to really to access our client base.

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Henri Philippe Van Keer, Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers [41]

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Your question about the volume strategy and the U.S. Are you making this question because of the volumes sold to the U.S. during the first quarter of '17, is that right?

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper [42]

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Yes, exactly. I'm just wondering if that's -- if we should take that to mean that the prices are still out of balance within the regions or if this is more of a seasonal thing?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers [43]

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It's completely about the seasonal thing. If you look at each first quarter of Fibria, the sales to the U.S. are much lower than the other products. So it's almost in line with last year. It's nothing related to any kind of difficulty for implementing prices. I mean, this I can tell you. No worry about that. No, it's really seasonal. It's the way our business is constructed with the U.S. So no worry. And about the price increases, was it about the U.S. as well?

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper [44]

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No, I mean, all the regions. I mean, is this something -- I mean, given that $40 per ton is a little bit higher than what normally gets announced, is this something that you think you can get completely implemented in May, or is this something that might take sort of 6 to 8 weeks?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers [45]

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Well, actually, you know that we've been implementing this strategy of $40 in Europe, because as I explained earlier, I mean, we have a real goal, which is to make this market more sustainable, I mean, reducing the gaps between Asia, which is paying much more right now than the other markets. So we need to have higher price increases in Europe and in the U.S. to reduce this gap. So we had already announced $40 last month, and we have repeated this strategy this -- for next month, I mean, this month for next month. In terms of implementation, as you know, I mean, PIX has dictated quite a lot of price in Europe. And PIX has, by its own methodology, is a little bit more or less reactive to the price situation. So on the way up, it goes slower, and on the way down as well. So I'm not saying that we are going to be implementing the $40 right in 1 month. But if it's not in 1 month, it could be 5, 6 months. But this is, again, much more related to the methodology of the PIX calculation than a real market indicator. And I would like to add something about it. If you look at the history of PIX fluctuations, it is the first time that we can see in the last 4, 5 months, such big implementation each week. I mean, you can see that the PIX is being increased by $10 to $15 on a weekly basis. And despite the methodology, this is happening, which means that really, I mean, the price implementation in Europe and in the U.S., to a certain extent, are being very efficient.

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Operator [46]

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Our next question comes from Mr. Humberto Meireles from Goldman Sachs.

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Humberto Meireles, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

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Apologies for another follow-up on that. My question is on Fibria pulp sales, market share and the timing of the supplier rationalization strategy. So if I think about total Brazil pullbacks per to the first quarter of this year, it's increased 0.8% versus fourth quarter of '16. Fibria pulp sales has declined 18% quarter-on-quarter. So could you help us understand sort of the strategic rational between the dispersion, and what is the kind of organic volumes that we should think about for the year, excluding Horizonte 2, right? Yes, and that's basically it.

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Henri Philippe Van Keer, Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers [48]

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Okay. If you look at the inventories, I mean, we started the year with very low inventories. If I remember correctly, 47 point something. And we have ended the first quarter with 52 days, which is also a very low level of inventory for us. So I can tell you, there is no strategy whatsoever related to lower sales. I mean, basically, we have sold whatever we could sell and recognize because, of course, we have some revenue recognition restrictions related to shipments and all that. But I can tell you that sales were optimized, and there is no strategy whatsoever in terms of, I mean, keeping inventories. 52 days is a very low inventory for us.

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Humberto Meireles, Goldman Sachs Group Inc., Research Division - Equity Analyst [49]

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Understand, understand, but kind of so with Brazil going up and Fibria going down 18%, is there any way to read this in terms of how should the company really think about the inventory strategy looking forward or to strike the right balance between shipments versus the market share loss?

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Henri Philippe Van Keer, Fibria Celulose S.A. - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers [50]

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No, no, no, I mean, you have to look at the -- of course, I don't have that -- all the numbers in mind, but you have to look at the movie. Maybe, we have sold less this quarter, but maybe we have sold more in the first quarter of 2016. So again, I don't have the right answer, but I would advise to look at the movie again, not at the picture. But again, there is no strategy in terms of inventory.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [51]

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Humberto, this is Castelli speaking to re-emphasize what Henri said. Normally, the last quarter of the year, it's a more high seasonal volume demand. And the first Q of the year, this is a regular behavior, it's a low season. So that is the reason why we have -- we brought our shutdowns, and we concentrated pretty much in this first Q '17. So that's what he said. If we produced more, not intervening in this shutdowns on the mill, we are going to sell more. Because 52 days, it's really tough and very, very tough, okay. Because we need to understand that those 52 days, they must cover their service level and the demand for the next months ahead. The demand is seasonal in the first Q, especially in January, and that's the reason why we can finish the year with 47 days of inventory, but this is not sustainable. The average inventory along the year will be higher than 47.

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Humberto Meireles, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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No, that's crystal clear. I was of the idea that the seasonal factor was impacting Brazil as a whole. So I was looking at the fourth quarter '16 versus first quarter '16 for Brazil and comparing that to Fibria. There was some kind of the market share loss there or maybe initiation of that supply rationalization in place, but that was clear.

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Operator [53]

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Our next question comes from Mr. (inaudible) from Credit Suisse.

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Unidentified Analyst, [54]

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The bulk of my questions were already addressed. Just wanted to touch bases on the prices again. So when I looked at the realized price this quarter, in spite the price hikes announced throughout the first quarter, the realized price came up by about $20 quarter-on-quarter. Just a simple one, how can we reconcile these price hikes, because is it just a matter of weeks or -- and time until the price hikes are fully implemented, or has there been any sort of discount in the meantime? And also just reconciling everything that was discussed during the call. You mentioned that demand market conditions are good. Demand is strong. Paper margins are high and inventory is relatively low. So just trying to put all of this together, is it too soon to talk about the possibility of additional price hikes in the coming weeks or can we think about these as a real possibility or just asking in a different way, how comfortable would you be to announce any additional price hike in the coming weeks or months?

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [55]

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I mean, I see 2 questions here. I mean, if you're talking about the future, I have already explained how confident we are about the next months. Of course, we don't given any guideline in terms of pricing. We have already announced for May. But if the market continues that good for the next 5, 6 months, for sure, you might see some additional price increases. So this was about to your question about the future, what could happen, what might happen. But when it comes, I understand that the beginning of your question was about the difference between the announced price and the realized price. I mean, I can tell you that all what has been announced had been implemented. But we have never hidden this in many financial calls with you, we have never hidden that. Last year, at the end of last year, we had some contract renegotiations, especially in Europe with higher rebates. And this is not only about Syria. This is the whole industry. At the time, we had the -- I mean, the market had the impression, not us. We were already saying to our customers that Asia was coming back and that this year would be much better than expected. But of course, we had some kind of market share to defend in Europe. So we had, to a certain extent, to agree to some contracts increasing our rebates, but you will see that we have for sure reduced our exposure to Europe this year, because we could foresee the better margins in Asia. But we are long-term supplier. We are not short term. We don't play this part. So of course, we couldn't end up some relationships in Europe. So basically, what you're seeing as the gap between the price increases announced and implemented, it's not related to the fact that the price increase is not implemented, but an increase of rebate, which has happened in some countries, some regions, not in Asia. Because as you know, we negotiate on a net basis. But this is by no means a concern to the market, the behavior of the market and the future price increases. Did I answer your question?

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Unidentified Analyst, [56]

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Yes. That's perfect.

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Operator [57]

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Our next question comes from Mr. (inaudible) from (inaudible).

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Unidentified Analyst, [58]

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My first question, I would like to come back to cost real quick. You guys talked a lot about the impact you're going to see in costs because of energy prices and Horizonte 2 project. I would like to hear a little bit more about wood cost, if you would be so kind. And second on inventories, Guilherme talked a little bit about the client initiatives that you guys are having about invoices and everything. I'd like to know a little bit more about it. Like when did this strategy start? And if we are going to be able to see this kind of -- see any impacts on that inventories in terms of days? And how big would that impact be if we are going to be received at all?

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [59]

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Thank you. Thanks for the question. Regarding to the cost, we have already said that cash cost will peak in the year and that we are going to start to have a lower cost for several fundamentals, especially as you said and you already know that the Horizonte 2 Project will start. When the Horizonte 2 Project starts, the third part, wood, will start to decrease by (inaudible) things. Our expectation regarding to the third-party wood will be 35% year basis 2017. If you look to the 2016, it was 37%. This is a year figure, okay? And we have that curve that -- I mean, a structural curve, the way we see and we are delivering the message to you guys from the market on the investor tool, on the Fibria Day. And we are following up that curve. We still believe that this is a very valid curve to be considered, okay? Of course, the energy will help us, because we are not going to have any more of these overhaul in -- to the generator and the price of energy, it's going up in the market. But without this benefit from energy, I would say that we are running the structural measures in the project and not only other modernization CapEx along the company -- throughout the company that will allow us to reduce this wave of cost increase.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [60]

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In terms of the inventories, we probably will see when the project it starts, generally what happens is an increase in the inventories throughout the chain. This consumes working capital. And depending on the leverage that we manage we can have working capital initiatives on the other hand, like postponement of suppliers, in order to have the leverage under control. But as I mentioned, with the perspectives that we see in the pulp price, even though it is affected, it may be not necessary to have other working capital initiatives, even though we'll be reaching reasonable leverage by year-end.

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Unidentified Analyst, [61]

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And about the client initiatives that you talked about earlier, I'm sorry, I said inventories. I meant client -- the client initiatives.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [62]

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Yes, we already implemented, because we had a part -- for example, 4 clients that have a cost of debt lower than ours. We have programs that automatically discount the receivable. In order to have leverage under control, we start discount receivables for our clients that has cost of debt is likely higher than ours. But we don't think that is necessary going forward to increase debt, because as I mentioned, leverage will start to decrease on the third quarter.

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Operator [63]

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Thank you. This concludes the question-and-answer session. At this time, I would like to turn the floor over to Mr. Guilherme Cavalcanti for any closing remarks. Mr. Guilherme, you may proceed.

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Guilherme Perboyre Cavalcanti, Fibria Celulose S.A. - CFO, IR Officer and Member of Board of Executive Officers [64]

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I would like to remind that on April 27, the ordinary shareholders meeting will deliberate, among other matters, on the distribution of BRL 393 million in dividends proposed by the management. If approved, the payment date in Brazil is scheduled for May 18. And before I conclude, I would like to hand over to Castelli for final remarks.

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Marcelo Strufaldi Castelli, Fibria Celulose S.A. - CEO, President and Member of Board of Executive Officers [65]

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Thank you, Guilherme. And thanks for all for your questions. I would like to use this 1 minute more to try to convey to you the management vision regarding to the company and the market as well, like to summarize. We do see the market (inaudible) data that the market is really tight. We have been able to implement the prices, that they will go in faster in Asia. They will be slower in Europe, but they will be implemented. This is our expectation. And Fibria is working to bring back the market equilibrium of all the regions. I'm talking about the net transaction price on comparing Asia with Europe. And that's the reason why on the last 2 price increase announcements, we decided to increase more in Europe and North America comparing to the Asia. We do see that the market's tight, and we do see that we have a huge or a good potential to have a second half of 2017 better than we were expecting, again, as the market consensus.

Our production in the first quarter was lower due to the extended service scope on the shutdowns, and we are back on track. We are still running since the March after the shutdowns in a very -- in line of the productivity. We are back on track and about almost 15,000 tons per day of production as an average. So it means that we are running very efficiently since March after the shutdown.

The project Horizonte 2, it's underway and we confirm the anticipation. And we do believe that this project will be one of the most competitive ever in the sector, because it's a higher single line in the world so far, with a inside-the-fence cost per ton, remarkable. And good so far that we are investing during the crisis. And potentially, we are going to start to ramp up this project in a very good and healthy market conditions. That means this is good for the month, the project return as well. I'm talking about the longer view, not all in '17, but in '18 and '19, because we do not see any big project that will come online due to the time of implementation.

The cash cost, it's under control. We do know that the third-party wood, it's a big concern. And we are managing it. And we are not running a company just quarter to quarter. We want to be consistent in a year base in a longer period of the time. So the wood -- the third-party wood, it's under control. Our solid finance position, this is the message, final message that we'd like to convey to you. We manage the company to reach what we have the excess of cash. Also, allowing us to be on insurance. Instead of pay, we are receiving a couple of million dollars as a year basis, because we are using and maximizing the credit under the profile we have. We are the best credit risk in this industry. We have the lower cost of debt in this industry with the right maturity. And we cannot -- we don't need to access the market until at the end of 2019. We are going to do it if we recognize that this is a credit, but we don't need -- we're not obliged to do it.

Our internal leverage policy, we crossed the 3.5, but we also would like to mention that Fibria will conclude in many aspect, many scenario that we analyzed, we are going to conclude the biggest project ever in this industry with the lower, lower level of indebtedness comparing with other peers in this industry. That means value creation, so that the leverage will start after Horizonte 2. And last, but not least, the M&A. Fibria has been mentioned, because we do see that we are in the center of these M&A discussions. And this is, of course, it's clear, because we have a good governance -- we have good synergies. If we consider one peer or another peer, we are the one that will bring synergies to the table.

And we do know that the M&A brings value for the shareholders and for the companies. We are one of the only example that proven this concept that we are a product of M&A. So we have been delivering the message to the market from the beginning in the learner stage that we prefer to consolidate. But we are not going to do it right now. We are not actively pursuing any M&A, just to be clear. Why? The reason why is because we are not in our best relative valuation right now. So in an absolute manner, and also, in the relative value comparing with the peers after the Horizonte 2 project came in line, then we're going to strengthen our position. And then we're going to absolutely increase the value of the company. So this is the comments that I'd like to address to you. Thanks for the coverage. Thanks for the interest in our company. And we are focused to start up and ramp up the Horizonte 2 Project. Thank you very much.

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Operator [66]

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Thank you. This concludes Fibria's First Quarter 2017 Results Conference Call. You may disconnect your lines at this time.