U.S. Markets closed

Edited Transcript of KLBN4.SA earnings conference call or presentation 28-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Klabin SA Earnings Call

São Paulo May 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Klabin SA earnings conference call or presentation Friday, April 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cristiano Cardoso Teixeira

Klabin S.A. - CEO and Member of Executive Board

* Eduardo de Toledo

Klabin S.A. - CFO, IR Officer and Member of Executive Board

* Fabio Schvartsman

Klabin S.A. - Former CEO and Member of Executive Board

* Francisco Cézar Razzolini

Klabin S.A. - Planning, Project & Industrial Technology Officer, Executive Officer and Member of Executive Board

================================================================================

Conference Call Participants

================================================================================

* Bruno Giardino Roschel de Araujo

Santander, Equity Research - Head of Education and Healthcare

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Ivano Westin

Crédit Suisse AG, Research Division - Director of Latin American Metals and Mining Research

* 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

* Karel Luketic

BofA Merrill Lynch, Research Division - Associate

* Lucas Ferreira

JP Morgan Chase & Co, Research Division - Analyst

* Thiago K. Lofiego

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to Klabin's conference call. (Operator Instructions) I would like to remind you that this call is being recorded and also broadcast simultaneously on the Internet via webcast. You may access it at http://cast.comunique/se.com.br/klabin/2017, where you will find the presentation as well.

Before we proceed, we would like to clarify that forward-looking statements that might be made during this call related to the business perspective of the company, projections, operating and financial targets relating to the growth potential of the company are just forecasted assumptions based on the expectations of the management in relation to the future of Klabin. These expectations are highly dependent on market conditions, on the general economic performance of the country, of the industry and of international markets. And therefore, they are subject to change.

Today with us in São Paulo, we have: Mr. Fabio Schvartsman; Mr. Cristiano Teixeira; Mr. Eduardo de Toledo; and Mr. Francisco Razzolini. Fabio and Eduardo will make presentations. And afterwards, they will be answering questions that you might wish to formulate.

Mr. Fabio Schvartsman, you have the floor.

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [2]

--------------------------------------------------------------------------------

Thank you very much. Good morning. Good morning, everyone. And thank you for participating in this new Klabin conference call about the first quarter of 2017.

This quarter was a tough year in general, I believe, and especially due to the fact that we have to work against the exchange rate because we saw an appreciation of the real vis-à-vis the first quarter of 2016 of $0.77 or 19% over the whole export revenue. And in spite of all that and despite of the fact that all announcements regarding the price increases that are occurring, in fact, they impacted the performance of the company more ahead. And in spite of all that, the company was able to do a very important effort regarding improvement and our mix and our cost. We were able to offset the EBITDA. And particularly, I was very happy for the fact that we were able to do that in such an adverse scenario such as the one that we had.

And I would like to say a few words about Puma. Puma, as we have already mentioned in the last call, reached 90% of its capacity. And this happened until the stoppage that occurred in March. And after the stoppage, we had the regular ramp-up in the last few days. And in the last 15 days, Puma is already operating at a 100% of its capacity. And everything showed the fact that from now on, Puma will be able to deliver all the volume that it can deliver in nominal terms. Of course, the endeavors of the company will be focused on making this expense. That is to say so that we may work beyond this capacity. And in the next few quarters, this could be the case. And of course, we will be communicating this to you.

I would like to mention especially the endeavors made by the company in order to reduce its indebtedness. According to the public commitment that we have taken on, in spite of all these difficulties you can see that we had a major reduction in our indebtedness, 5.2 to 4.9 in the quarter or 5.9 if we take as a reference the first quarter of 2016 to 4.2x now -- 4.9x, this represents our efforts to be very careful and prudent in all the investments that we make with a very strong management of our working capital, with a huge concern in terms of working below its possible level of inventories. And all this is translating into a reduction in our indebtedness as you could expect.

Regarding our mix, I would like to mention the improvement in the sales of LPB in the company that were very good, very strong in this quarter as well as the sale of corrugated boxes and other converted products that grew by 13% on a year-on-year basis. In spite of this scenario in which(inaudible), we do see a modest evolution in the ABPO numbers and civil construction with no signs whatsoever of improvement, rather going down an additional 5% in this quarter compared to the same quarter last year.

And as we always do very quickly, I would like to mention our expectations regarding the next quarter. First of all, due to the successful ramp-up of Puma, we could see an important increase in our sales volume and production of pulp as of now. And of course, this will be translated into lower production costs because we will have a higher stability in the whole operation. Together with that, we have the fact that with the prices of pulp sold by Klabin, both hardwood and softwood as well as fluff, we have been seeing major increases in prices. And that gradually will start to be showing in our results as of the second quarter of this year. And the same will be occurring with kraftliner, especially in the export market, where these price increases will also start to appear.

Together with that, we have the fact that conversion will continue to have a good performance with a major increase in volumes. Having said all of that, what we can say is that the company's expectation is to see an acceleration of the EBITDA increase on a comparable basis of 1 digit that we grew in the first quarter to 2 digits in the second quarter. And then after that, we will have a major growth in the third and the fourth quarters of this year. And due to this reason, we will be able to close the year in a much better condition than in 2016. Overall, this is what I had to say to you.

But before giving the floor to Eduardo, who will be talking in detail about our performance in the first quarter, I would like to officially introduce to you my successor, Cristiano Cardoso, who is here, and that as of the next call, will be presenting the results so that he may introduce himself to you.

--------------------------------------------------------------------------------

Cristiano Cardoso Teixeira, Klabin S.A. - CEO and Member of Executive Board [3]

--------------------------------------------------------------------------------

Thank you very much for participating in the first quarter of '17 conference call. First and foremost, I would like to express my thanks to those who placed their trust on me. And following these great 6 months that Fabio was able to carry out this transformation and to my great friend, I thank very much from the depth of my heart and unconditional support. So it's a great privilege for me to be with Klabin.

Klabin is positioned in the right direction in this sector of pulp and paper and the extremely important player in these markets. And it is with this certainty that I take on this position at Klabin. And I commit myself to continue to generate value, be it on the current platform or the next growth platform that will happen at the beginning of my administration. Thank you very much.

--------------------------------------------------------------------------------

Eduardo de Toledo, Klabin S.A. - CFO, IR Officer and Member of Executive Board [4]

--------------------------------------------------------------------------------

Good morning, everyone. It's a pleasure to be with you in this call. And I would like to use the presentation or the slides that we have prepared.

Starting with the sales cycle. Sales volume growth in this quarter, 304,000 tonnes vis-à-vis the same quarter last year and a very expensive growth 67% was made possible due to the startup of Puma, as Fabio mentioned, had a good performance in the first quarter and even before the first general stoppage. So it was a good volume. We need again to account the fact that we're talking about a quarter with the general stoppage of Puma.

In terms of net revenue, it went from BRL 1,464 million to BRL 1,867 million, in line with the evolution of the sales volume. And in terms of mix, now we have 40% of our revenues coming from exports and 60% from our domestic market. I think it's important to mention this balance of Klabin because it's a very unique situation in the sector, where it allows Klabin to be much more resilient from the viewpoint of results.

Let's go to the next page, where we have details about the Puma cash cost. As Fabio mentioned, we are achieving good progress there. And we went from a cash cost of 768 tonnes -- BRL 768 per tonne to BRL 733 per tonne, a drop by 5%. And still again before the general stoppage, before all the adjustments that were made in the first maintenance stoppage of Puma, we can see that there is an important progress in the consumption of chemicals and the consumption of wood and fiber.

A very important evolution in energy generation already(inaudible) in this quarter. Energy generation, when the plant is more stabilized, of course, you can further optimize it. And it is one of the last items to be optimized. And much to our joy, the better energy generation started already when the energy market was under pressure and the spot price with these changes. And we believe this will have an important impact on our results in the next few quarters.

Now let's go to the adjusted EBITDA slides. We achieved a 23rd consecutive growth in quarters. It's a very impressive story. And it has everything to do with Fabio's management of Klabin, Fabio's administration. And we are sure that we will be able to continue on this path in the next quarters.

On the next slide, we talk about our debt. As Fabio mentioned, we were able to reduce to 4.9x net debt/EBITDA ratio in this quarter. Basically, this was possible because we were able to deliver a good EBITDA in spite of the appreciation of the exchange rate. And on one hand, this helps us in regard to our net debt. And also the delivery of a good EBITDA, on the other hand, makes this indicator have this kind of evolution and which is rather positive for a quarter.

On the next slide, we talk about dividends. I would like to draw your attention to this because sometimes people do not really notice that. Klabin has been adopting, paying out 20% of the EBITDA on a quarterly basis in such a way that if we look at the last 4 quarters, the total of dividends paid out was BRL 0.50 per unit. And if we take the current price of our stock, it would be a dividend yield of 3.33%. And imagining the evolution of the EBITDA, as Fabio mentioned, which is what we expect, of course, we can imagine that the dividend yield will also have a great development if you consider the price of the stocks now and what we expect for the next few quarters. And this is a big highlight for Klabin in relation to other companies in general, the players, I would say, in the equity market as well.

And the last slide of the presentation reinforces the work that we have been carrying out in terms of delivering results on the short and the medium run. And it has to do with our focus on cost and the initiative that we carried out in the industrial and in the forestry areas, together with (inaudible) with very good results being delivered, even higher results than our expectations. It has been working very well. And at the same time, we continue to seek consistently, with efforts from our engineering area, I have been talking to some of you. And I said that during last year and 2 years ago, all our efforts were focused on delivering Puma regarding the time frame and the price, et cetera, on time and on budget. And now we are focusing our attention to improve our unit both in terms of engineering, production cost, et cetera. So we have already been reaping results from all these efforts. And we will be reaping additional results in the short and the medium run.

Now I would like to open for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Ivano Westin from Crédit Suisse.

--------------------------------------------------------------------------------

Ivano Westin, Crédit Suisse AG, Research Division - Director of Latin American Metals and Mining Research [2]

--------------------------------------------------------------------------------

The first question is about the Puma Project, about the utilization rate. After the stoppage, you said that the plant is ready to reach 100% of its nominal capacity. I would like to know if this is going to be achieved in May. And you said that you could even increase that to 1.65 million with a small investment of $20 million. So when could this be done? And could you talk about volume in terms of every quarter this year? One question about kraftliner. We saw in the first quarter a price increase and a strong demand for virgin fiber papers and some stoppages in the supply. And I would like to know what do you expect for kraftliner in the international markets as of May. And also maybe you could talk about the difference in terms of profitability between the domestic market and the export market? And lastly, Fabio, as the CEO of the company, you did a wonderful job and you improved the company. You've improved return to shareholders and you went ahead with the Puma Project. And now you are going to have Cristiano replace you. So which challenges do you expect Cristiano to face?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [3]

--------------------------------------------------------------------------------

Thank you very much for all your questions. But starting a practice that, I believe, will be more common as of now, I will forward your question about Puma to Francisco, perhaps to Cristiano. And I will be answering your remark about Cristiano, your question about Cristiano, in fact.

--------------------------------------------------------------------------------

Francisco Cézar Razzolini, Klabin S.A. - Planning, Project & Industrial Technology Officer, Executive Officer and Member of Executive Board [4]

--------------------------------------------------------------------------------

This is Francisco Razzolini. This general stoppage came to an end at the end of March. And of course, we made the necessary adjustments regarding the startup, beginning of operation. And we saw the results of that as of the second half of April, the operation at full capacity. And this should continue over the year. And so we -- the quality is excellent. The operation is really onstream as well as energy generation. The investments that we expect is $50 million. And it should occur part still during 2017 and part of that during 2018 because we depend on the general stoppages in order to implement to the necessary changes. These are relatively small changes. They do not really interfere in our daily operations. However, we need to stop the plant in order to make the connection so that we do not lose production. And this should happen as of the middle of next year, the flex operation.

--------------------------------------------------------------------------------

Ivano Westin, Crédit Suisse AG, Research Division - Director of Latin American Metals and Mining Research [5]

--------------------------------------------------------------------------------

Just a follow-up. Could you talk about the cash cost for the quarters until the end of the year?

--------------------------------------------------------------------------------

Eduardo de Toledo, Klabin S.A. - CFO, IR Officer and Member of Executive Board [6]

--------------------------------------------------------------------------------

I can make a remark. From the viewpoint of cash cost, our view is to reach the targets that we had already established when we talk about that in the second quarter of '16. So we gave you a guidance regarding cost. And we knew that we will be able even to exceed these targets over this year.

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [7]

--------------------------------------------------------------------------------

Thank you for the question about kraft. As of May, all the signs are positive, all the orders and all the capacity for May is totally sold by Klabin. The international market as of the United States continues to be very active, mainly due to cash consumption. So the demand for April and the inventories of kraftliner have all that have positive signs. And we believe that the prices of kraftliner for this year will continue to be positive. The outlook is positive for prices.

--------------------------------------------------------------------------------

Ivano Westin, Crédit Suisse AG, Research Division - Director of Latin American Metals and Mining Research [8]

--------------------------------------------------------------------------------

And domestic markets vis-à-vis exports?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [9]

--------------------------------------------------------------------------------

Exports. Well, for the last few months, we have positive signs. I have already have talked about the increased demand from export markets. And this brings us more flexibility and an additional alternative to start buying recycled paper in the domestic markets and maintaining our export volumes as the prices are attractive. Your question about the challenges to be faced by Cristiano. Well, let's place it in 2 perspectives. Structurally speaking, Klabin in normal conditions should naturally deliver an EBITDA growth, a consistent EBITDA growth, consistent in the sense of always having growth, however, accelerating this growth over the next 2 quarters. And I think it should be reasonable to consider that we have at least an additional 5 quarters of EBITDA growth. And I mean, major EBITDA growth. So Cristiano's challenge is to prepare for what comes after these quarters because then you will have everything in hand, everything that was done during all this time. And this has to do with what Eduardo called a focus on the current operations, where there is a very important room for us for improvement. And we are looking after that in all fronts. And this should be translated gradually into more and more results. But important, growth for this company will only happen with new investments. After the several quarters that I mentioned, there is only one way to continue growing, either you have additional capacity or you end up staying at this level that you have reached. And of course, you have to prepare for the future expansion of Klabin. And this is what Cristiano will be focusing on. And always, of course, taking into account in a very careful and prudent manner the reduction in the company's indebtedness, that comes first, and together with that, the situation of the markets. If you have noticed, you can see that is started into, when they published their results, the quarterly results they informed that they decided not to go ahead with the project of a paper machine that they estimated doing because of a very uncertain international scenario. And it is not reasonable to invest in paper machines when you have an uncertainty in the markets because the idea is to create value, of course, everything we do is to create value. So I believe focus on the current operations; the second point, future investments for growth; and the third front, as important as the 2 others, the internationalization of Klabin. Klabin, because of its size and because of all the markets it operates, is too big for the Brazilian market. So Klabin really has to establish a process to become international gradually over the next few years. And Cristiano as well as the other members of the team are focused on building this plan, this business plan that will lead Klabin to become more and more international. So I would say that these are the main challenges that will be faced by Cristiano.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Thiago Lofiego, Bradesco BBI.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Fabio, first, I would like to congratulate you for everything that you have done at Klabin. It was crucial for the turnaround of the company and value generation. So congratulations, and I wish you the best of luck at Vale. And I would like to wish the best of luck to Cristiano as well. Now let's go to my question. Fabio, if you allow me to ask Cristiano. Cristiano, what is the most probable path towards growth, the growth that Fabio has just mentioned. We know that you have on the table 2 very interesting projects both coated board and kraftliner. So how do you see Klabin's growth strategy from now on? And what about the time frame for that? The second question is about fluff. I would like to better understand the approval. Have you received all the approvals? And what kind of volume could we expect? And what about exports of fluff? So could you give us some more color?

--------------------------------------------------------------------------------

Cristiano Cardoso Teixeira, Klabin S.A. - CEO and Member of Executive Board [12]

--------------------------------------------------------------------------------

Thiago, thank you for the questions. The most probable path -- well, let's put everything in context and also following what Fabio has already said. First, the current platform of Klabin still has important opportunity for value generation. We have studies together with our engineering team about the opportunities to focus more on our own units as we have already delivered Puma on time and on budget. So engineering is now focused on analyzing all our assets and check where we still have value and more important returns to be achieved based on what we already have in our current production base. So I think we still have a lot to extract from them. Now talking about the machines, in other calls, Fabio has already said that. And this is a recurrent matter. The coated board, as you know, we are in the LPB market. And it is the high end of the pulp and paper market. And this is a very small sector in terms of worldwide volume. And because of that we must have an alliance with a major account or with key accounts, key clients. And this is what we have been doing. This is what we are still doing. And as we and our clients believe that the time has come, so the machine will be placed. In terms of kraft, let's say you want to choose 3 to stay in a very small group, 3 candidates to place the packaging board machine, Klabin is among the 3 always, Klabin ranks first probably. In the cost of paper production, the kraft is not different in terms of cash cost. And as we have this situation, we have all it takes to be candidates for a new kraftliner machine with capacity to compete worldwide. Regarding fluff, I would like to ask Francisco to take the floor because he will answer your question about fluff.

--------------------------------------------------------------------------------

Francisco Cézar Razzolini, Klabin S.A. - Planning, Project & Industrial Technology Officer, Executive Officer and Member of Executive Board [13]

--------------------------------------------------------------------------------

About fluff we have a very good performance, a very good quality. We get approval from all the clients to whom we have submitted our product. 88% of the Brazilian market with approval for fluff from potential clients, respective clients. And we already export to over 20 countries. There was an interesting change in terms of fluff in the end of March and beginning of April with a very strong worldwide demand. We have more orders in our portfolio -- in our order book than we can supply. And we have to give priority to some markets and to some clients. And the demand for fluff is excellent right now. Prices are pointing to an upward curve. And we are converting more fluff now than the bales for softwood. At the moment, it's very good for fluff. And we are achieving a very quick penetration in markets, both domestic market and abroad.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

Can you talk about the volume of fluff for this year and for next year?

--------------------------------------------------------------------------------

Francisco Cézar Razzolini, Klabin S.A. - Planning, Project & Industrial Technology Officer, Executive Officer and Member of Executive Board [15]

--------------------------------------------------------------------------------

We expect 250,000 tonnes this year, total volume of fluff. And we will probably get to between 300,000 and 350,000 in the next year. Depending on market variations, we have the flexibility of going to bales or to fluff, depending on what happens in the market, depending on the one that brings more results to the company. But this is our expectation.

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [16]

--------------------------------------------------------------------------------

And what is surprising about what Francisco said and that drew our attention was the change in the market. All of a sudden, the Klabin product is being demanded internationally from many different places and places that we did not accept and with surprisingly good prices all over the world. And because of that, Klabin is considering how to address this point because we were expecting something much more focused on the Brazilian domestic market and with less alternatives in the international market. And now we have a good problem, let's say, which is the fact that we have a strong demand in the domestic market and also very good demand coming from the international markets. And this is leading us to revisit this point. And probably very quickly, we will get to the total fluff that we can produce having this kind of demand remaining.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Carlos De Alba, Morgan Stanley.

--------------------------------------------------------------------------------

Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [18]

--------------------------------------------------------------------------------

My first question is how do you see the evolution of kraftliner prices given that some of the reduced supply in the U.S. that we saw in the beginning of the year is starting to normalize slowly. Do you expect prices to stay in the current levels, maybe come down and also what is the view in terms of spread between local prices in Brazil for kraftliner and the export prices? And then, also are there any specific vitals or thresholds or metrics that the company is looking at, Cristiano, in order to decide went to go for the investments of the new paper machines? And then finally, on dividends, you've given the still very strong expectations for EBITDA growth going forward and the dividend policy [obtain] percentage of EBITDA in dividends every year. Do you expect to see a threshold for the dividend payment and -- or the dividend yield or it would continue to increase just together with EBITDA?

--------------------------------------------------------------------------------

Cristiano Cardoso Teixeira, Klabin S.A. - CEO and Member of Executive Board [19]

--------------------------------------------------------------------------------

Thank you Carlos. First, about the prices of kraftliner. Could you [see] announcement and some attempt on the part of our competitors in terms of prices and where we are also going towards price increases. So the sign that we have are signs of increase in market, so I see no negative signs at all regarding kraft prices. We still have a very good expectation for the whole year. Be it in terms of the increase that(inaudible) we will have now and also the others at the average for the year so our expectation is high. Regarding the timeframe of investments in the machines, as I said before, and Fabio always repeat this, it will be done when the investment -- when we are all sure about that, not in the long run because we're already sure in the long run, but what I mean is that to be sure that in the next few years it will be generating value to the company. So it will be done when we really see this value for the company. And now about dividends, I would like to ask Eduardo de Toledo to answer.

--------------------------------------------------------------------------------

Eduardo de Toledo, Klabin S.A. - CFO, IR Officer and Member of Executive Board [20]

--------------------------------------------------------------------------------

Carlos, good morning, and thank you for the question. In terms of dividend, our policy has been consistent for many years already. Because at the end of a quarter we payout 20% of the EBITDA, and this policy is reasonably healthy. I believe that by doing that, we can have the necessary room for the company CapEx and we were able to do that even in a phase of extremely strong investments, which was the Puma Project, BRL 8.5 billion, so in spite of that we were able to pay out the dividend. So our basic view is to maintain this policy of payout, 20% of the EBITDA at the end of each quarter for the foreseeable future. Carlos, I would like to add something to my answer because I forgot to answer a part of that about the metrics that we use, and somebody reminded me for kraft exports vis-a-vis the products sold in the domestic market. As I said, at the beginning of my presentation about kraft, as kraft has this positive expectation that I have already referred to. We have opportunities being identified at a very timely moment of acquiring recycled paper in the domestic market which is very good for Klabin as well because it is fiber that you could (inaudible) you take it from the market, it generates expectations, generate demand and it support the price adjustments in the conversion unit. So the scenario is always a positive where the metrics that we use is the opportunity itself. So if the opportunity is to export, okay, we go after it. If the opportunity is in the domestic market we go after that.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Jon Brandt, HSBC, in English.

--------------------------------------------------------------------------------

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 [22]

--------------------------------------------------------------------------------

Fabio, first I wanted to ask you, I understand your contract -- you're not renewing your contract was very unexpected and certainly the next opportunity there that you're going to is a great one. But I'm wondering if you could elaborate a little bit on the reasons for deciding to leave and to go to your next opportunity and if you envision staying involved in the company in some form, whether it's on the board or some in other way. And secondly I wanted to ask about your international [relations] out of Klabin. Could you elaborate a little bit on that? And would you go outside of Latin America, would you do it through M&A or organically and what sort of leverage would we need to see before you start to embark on your next [corporate] whether M&A or organically?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [23]

--------------------------------------------------------------------------------

Jon, thank you for your questions. Well, first the reason for my change, and I have already been mentioning this in the presentation, the previous presentation, is that it was really a big surprise to everybody and to me as well. I was very happy here at Klabin, I had no intention whatsoever of leaving the company and I was negotiating the renewal of my contract with Klabin. What happened is that at this moment I was approached by Vale to participate in the process that I was appointed to this process. And Vale is the biggest possible challenge, professionally, in Brazil. So I cannot deny that this challenge is extremely attractive and I was very in doubt whether I should remain at Klabin and whether I should accept Vale and I decided to accept Vale and there is another reason as well. Vale is such an important company in Brazil. So important for the country that if we're able to improve Vale it will be very good for Brazil. So as a Brazilian citizen, it will be an opportunity for me to be able to give back to this country in terms of everything I have received in this country. And everything I received here in Klabin and trying to make it successful and I would like to add that Klabin is the best company I have ever worked for in the pulp and paper sector. It is the most important, it's a benchmark worldwide. And I can that -- I can say that because I traveled all over the world representing Klabin and this is something that I hear from everybody in every country and the quality of Klabin's asset is top. It is placed -- it is present in fantastic markets and with the eloquent management as it has said and will continue to have, it should be delivering a lot of value creation and a great joy to all shareholders of Klabin. Going to national -- to nationalization is as follows. Klabin today has a much more installed capacity than the domestic demand. So this is a reality up to a certain point, it can work on that, just exporting to international clients and that's it. However, now Klabin has reach a point in which it is important to be very sure of your penetration in all the markets that you have a presence in and if you want to continue on this virtuous cycle. So international expansion will happen, whether it will be by means of an M&A or organic expansion, everything is on the table. It will depend on the evolution of our negotiations and as the opportunities arise and were an important focus of the company is on that and Cristiano will continue to focus on this path, because this is really unavoidable. As Cristiano said and Eduardo said as well, the situation of cash cost, which is extremely competitive and that we have at Klabin, gives us the possibility of being anywhere with this combination of cost and quality. Of course, there is a difficulty in terms of having significant presence in significant markets and this is the reason why you need a local presence in order to occupy the space and this is what Klabin will be doing because this is really inevitable. I expect, I have -- I hope I have answered your question.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Karel Luketic, Merrill Lynch.

--------------------------------------------------------------------------------

Karel Luketic, BofA Merrill Lynch, Research Division - Associate [25]

--------------------------------------------------------------------------------

I would like to start by congratulating Fabio and the whole team of Klabin for the work done in the last few years. Fabio, we are sad that you are leaving but I'm very happy for you because you will be heading Vale and I'm certain that Klabin will continue to be on this very successful track of the last few years. Now going on to the question. The first one is a follow-up about Puma. Now that Puma has reached a 100% capacity, can you give us a volume guidance for this year, 1.4 as you had mentioned and with tempered product and regarding cost-reduction? You had many initiatives besides Puma in the paper area. So what is the potential benefit for 2017 in these areas?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [26]

--------------------------------------------------------------------------------

I would like to answer these question myself if I may also because I do not want my colleagues to be responsible or accountable for what I am going to say. Puma will exceed the guidance that you have, however it will be more clear as quarters followed. I know that my colleagues are very conservative and they do not want to make this kind of statement and this is the reason why I decided to make this statement myself. This is the way I believe this process will continue. Your second question is about cost initiatives. Well this is another point where I can give you excellent views. The more recent evaluation of forestry will be delivering the cost reduction for the whole company, and not to mention the cost reduction that just happened in each one of our businesses. If anything, we will exceed, by far, the cost reduction that we expected. And in fact, it already -- it is already reflected in part in the results of the first quarter because in order to offset the huge appreciation of the currency it has to be with a lot of initiatives regarding cost and mix and this is where we have been placing our focus very rightly so. And producing significant gains as well. And I would like to reiterate that the figures for the next quarter will be relevant growth vis-a-vis this current quarter that we're leaving now. Regardless of appreciation of the exchange rate or any other external help so to say, this will happen anyway in any scenario. Thank you.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Lucas Ferreira, JP Morgan.

--------------------------------------------------------------------------------

Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [28]

--------------------------------------------------------------------------------

I would like to wish the best of luck, both to Christiano and to Fabio, in their new positions. Fabio, you said during the call that we would be having positive news, one would be the cost lower-than-expected and when you look at the budget that you drafted last year and you compared to the outlook that you have today, both regarding cost and prices, how do you see that? Do you believe there is room? Well, do you believe that the budget was very conservative, the one that you closed last year -- at the end of last year? And the second question has to do with the growth line for the medium and the long run. How does it fit into the plans of the controlling shareholders, the generations of the shareholding family, so how do you see this will develop?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [29]

--------------------------------------------------------------------------------

Thank you for your questions, Lucas. Regarding the budget exception made to the exchange rate that we had no expectation whatsoever to have such a strong exchange rate such as it is today. So exception made to that we will, by far, exceed our budget. And of course, the exchange rate will have a certain weight on that, but anyway it means delivering a result which is better than expected and with a reasonable degree of certainty regarding that. Regarding the growth plan and the family, well, the ones that really want this growth are the shareholders, the family, and this is really the reason why these long-term investment plans that Klabin has been putting into place. You see Puma is a huge investment and the return will come in many, many years to come. And the other investment in the sector, be it in forest so be it investments in machines. They always have a very high CapEx and the return is not in the short-term. And the major advantage that you had over all these years was the fact that the controlling family, the controlling shareholder, the family, they have given us the consistent support and even much more than support. This is the way they see themselves in the business. So they transition from one generation to another and whatever happened regarding the changes in the family because of the force of nature, they'll not have a bearing on this evolution because this is in their DNA. This thing of growing pulp and paper is something that they seek all the time and this is exactly the reasons why we were able to do that. So there is no contradiction in terms there between one thing and the other. Thank you.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Bruno Giardino, Santander.

--------------------------------------------------------------------------------

Bruno Giardino Roschel de Araujo, Santander, Equity Research - Head of Education and Healthcare [31]

--------------------------------------------------------------------------------

Congratulations Fabio, for the job done at Klabin, I have not been covering this sector for a long time, but everything says wonderful things about you and I did also wish Cristiano a big success.

Recycled paper. How do you see the evolution of prices of recycled paper and does this bring more opportunities for M&A in the sector such as you did last year? And how do you see profitability in the export of bags with this appreciation of the real.

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [32]

--------------------------------------------------------------------------------

Thank you, Bruno. Just putting things into context in recycled papers. Klabin is the largest producer of recycled paper in Brazil and it is all integrated in our own operations.

--------------------------------------------------------------------------------

Bruno Giardino Roschel de Araujo, Santander, Equity Research - Head of Education and Healthcare [33]

--------------------------------------------------------------------------------

How do we see this market?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [34]

--------------------------------------------------------------------------------

More from the tactic view point for prices for this product, we see an upward trend for those who sell the paper, which is not our case. Once the seasonal curve regarded the higher cost which is the OCC as of May, already received some signs, but as of May the price of OCC starts to go up because of seasonality. Could you please repeat your question regarding bags? Oh, still talking about M&A. Also clarifying another point. The M&A that we did last year that we made 2 acquisitions. That I would call "surgical". They improved Klabin's footprint, they were acquisitions in states where we did not have operations before and they did not have recycled paper. They were, what we call, nonintegrated companies. They improved Klabin's footprint because we were able to integrate them, be it in the book (inaudible) supply in the North, be it in the Paranaguá unit in Santa Catarina, supplying the new conversion unit in Paranaguá. So they were surgical operations so to say and that improved our Brazilian footprint and we are very pleased with the result of these acquisitions. Regarding new opportunities, there is nothing on the table right now, we are not focusing on that and the corrugated box sector is a sector in which M&A deals have to be especially careful and today we have nothing on the table. Now going back a little bit, I would like to ask my friends who helped me regarding bags. Competitiveness and the export of bags with the higher appreciation of the Real whether you will continue to export. Well the good thing, I know that I'm repeating myself, but maybe repetition is due to the fact that Klabin at every step reinforces flexibility. The historical flexibility of the company, be it in the Puma unit that brought fluff as a soft market and the new path for growth of Klabin, albeit in the good news that we had 2 years ago when strategically we focus on the international market and our bags were very well positioned in the markets that we targeted. And we have been very successful in this endeavor. And in fact, we have another opportunity in our market front and opportunities for future growth studies. Bags are already an export reality for Klabin, another export item for Klabin.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

[Lenay Leena, PDP].

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

Couple of question. Fabio, what about the negotiation regarding you becoming a member of the board of Klabin?

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [37]

--------------------------------------------------------------------------------

As far as I am concerned regarding being a board member of Klabin, I expressed the members of the controlling family and the other shareholders, my willingness to help them by participating in the board in case they wish. So it's not up to me, it is really up to them to evaluate this situation. They will reach a conclusion and when they reach the conclusion I will be always willing to help whenever necessary.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

(inaudible) Bank North

--------------------------------------------------------------------------------

Unidentified Analyst, [39]

--------------------------------------------------------------------------------

Do you have an estimate for your free cash flow for 2017 that you can share with us?

--------------------------------------------------------------------------------

Eduardo de Toledo, Klabin S.A. - CFO, IR Officer and Member of Executive Board [40]

--------------------------------------------------------------------------------

We do not give guidance about free cash flow, but we have mentioning our EBITDA. And I think it was very clear what Fabio said about that in terms of CapEx. We have already said BRL 1 billion for the year. It is -- we are very close to that or in this range so there is no big difference regarding the numbers that we have already published. And regarding dividends, our policy is very well known to all of you. Dividend payout at the end of each quarter and then can take your own conclusions. Then on the financial side, the net debt is BRL 11 billion. This net debt is basically dollar-denominated and 4.5% a year on average. So I think with this information you can draw your own conclusions, but we do not have, or we cannot give any guidance in this regard.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

And there are no more questions, I would like to give the floor back to Mr. Fabio Schvartsman for his closing remarks.

--------------------------------------------------------------------------------

Fabio Schvartsman, Klabin S.A. - Former CEO and Member of Executive Board [42]

--------------------------------------------------------------------------------

Gentlemen, my personal thanks for your presence in all these conference calls that we have held in the last few years. It was a very [dreadful] path for me and that comes to an end now so this is my official goodbye. In fact, today is my last day at Klabin. And I think nothing could be better than closing that with this Conference Call delivering the 23rd quarter of consecutive growth in the company's EBITDA, which is a great target, and I tell my friend Cristiano that he will really have to make his best endeavors to beat that. The challenge is placed and the company has this kind of spirit of going after performance. And what is really great about this company, and that I would like to share with you right now, is the fact that nowadays the company is a true team. Everybody works for the company, everybody hand in hand, everybody seeking the best possible result. Over the years we learned discipline in CapEx, we learned to deliver what we promise, we learned not to make investments not without being assured that the investment will create value. So in itself, this is already valuable and there is a culture in the company regarding performance and seeking results and reducing costs. Klabin is positioned to have a great future. So it is with a huge joy that I close my cycle here and giving the company in the hands of -- the very confident hands of Cristiano. Cristiano was brought to company by me, he worked with me for other companies. He had an outstanding performance and he has been in Klabin for almost 6 years. So he stayed at Klabin for almost the same time as I stayed, and he was fundamental for the delivery of the result that they have delivered in the last few years, and he was fundamental in the change of culture and the construction of this team spirit. So I could not imagine a happier succession than Cristiano because he has everything that was good under my administration. And knowing Cristiano as I know I am absolutely sure that he will bring an even better contribution than the one I gave. I believe, and I practice the fact that I will like to have people better than I am, working with me. So -- because these people who are better than me they push me up and they push me up so high, so high that I will end up at Vale. So I thank the team, the company for the support of the controlling shareholders that gave me all the freedom to do what I had to do here. So my personal gratitude to the family, and they are co-responsible for the performance of the last few years of Klabin and they will continue to be the trustees of this trust that will allow Cristiano to deliver the same quality of work. Thank you all very much. I wish you a very good day, and in the next conference call I will be broadcasting from another place.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Klabin's Conference Call is closed. Thank you for participating, and we wish you all a very good day. Thank you.