Fibria Celulose SA Management Discusses Q4 2012 Results - Earnings Call Transcript

Jan.31.13 | About: Fibria Celulose (FBR)

Fibria Celulose SA (NYSE:FBR)

Q4 2012 Earnings Call

January 31, 2013 9:00 am ET

Executives

Marcelo Strufaldi Castelli - Chief Executive Officer and Member of Board of Executive Officers

Guilherme Perboyre Cavalcanti - Chief Financial & Investors Relations Officer and Member of Board of Executive Officers

Aires Galhardo - Executive Officer of Foresty Operations, Member of Board of Executive Officers and Member of Sustainability Committee

Analysts

Josh Milberg - Deutsche Bank AG, Research Division

Daniel Sensel - JP Morgan Chase & Co, Research Division

Thiago Lofiego - BofA Merrill Lynch, Research Division

Lucas Ferreira - JP Morgan Chase & Co, Research Division

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to Fibria's conference call to present the results of the fourth quarter of 2012. In case anybody needs a copy of the press release, please visit the Fibria Investors 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, constitute beliefs and assumptions of the company's management as well as information currently available. They involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not take place. Investors should understand that overall economic and industry conditions as well as other operational factors may affect Fibria's future performance and lead to results that are materially different from those expressed in these forward-looking statements.

Mr. Marcelo Castelli, CEO, will begin the conference call. Mr. Castelli, you may proceed.

Marcelo Strufaldi Castelli

Thank you very much. Good morning, everyone. Thank you for joining us for Fibria's fourth quarter 2012 results conference call. With us today are Guilherme Cavalcanti, CFO and IRO; João Felipe, Commercial and International Logistics Officer; and the other members of Fibria's Executive Board.

On Slide 4 of our presentation, I would like to highlight that 2012 was a year in which we accomplished operational excellence, debt reduction and continuous evaluation of growth opportunities.

Our actions aligned with our strategy of recovering investment grade.

The greater operation, operating efficiencies and synergies captured since the company's foundation have been crucial to breaking our own production record set in 2011. The increase in production volume also allowed for record sales at a favorable timing in terms of foreign exchange rates and pulp prices. Operating stability and cost control initiatives brought stability to cash costs in 2012 as compared to the previous years, even considering inflation and the averages -- average dollar's appreciation against the real in the period. In addition, we kept CapEx under control, in line with our target, and continued our efforts to improve working capital. These actions resulted in a free cash flow of BRL 836 million in 2012.

In terms of debt, we will discuss in more detail each initiative that helped us generate BRL 2.9 billion in liquidity events, including the BRL 1.4 billion equity offering and the Losango sales, for which we recently announced the receipt of the first payment. The initiatives were critical to bringing net debt/EBITDA in reais down to 3.4x at the close of 2012.

In 2012, we worked on several fronts in order to generate value from our asset base. The new technology center was inaugurated in Jacareí Unit, featuring biorefinery and biotechnology laboratories, as well as a nursery dedicated to research.

Until last year, the Innovation Committee was established mainly to advise the Board of Directors in analyzing initiatives related to the technological research and innovation. In this context, we made a significant advance in our strategy with our partnership with Ensyn Corporation, a company that holds the rights of technology for producing renewable liquid fuel.

Additionally, Fibria increased its roll of partnerships in the arboreal technology area. With these partnerships, the company plans to apply its forestry expertise to complement its global leadership and excellence in pulp production.

In November, Fibria operated its first ship of a fleet of 20 under the logistics partnership with STX Pan Ocean. The Arborella left the Portocel in Aracruz, Espírito Santo State with a record shipment of 53,000 tons bound for the United States. The arrival of the first shipment marks the beginning of Fibria's partnership with the South Korean company that seeks to ensure revenue shipments with high quality and ocean freight control. In 2013, Fibria will continue to focus on reduction of its leverage and achievement of investment grade.

Now I would like to hand it over to Guilherme Cavalcanti who will present the results [ph].

Guilherme Perboyre Cavalcanti

Good morning, everyone. Going out to Slide 5, we will start with our fourth quarter results. Driven by the fourth quarter 2012 production of 1.4 million tons, a record for quarterly production, our annual production of 5.3 million tons in 2012 grew 2% over 2011 and 5% over 2010. For their part [ph] sales totaled 5.4 million tons, a record for Fibria's creation in 2009 with Europe accounting for 41% of total sales.

Net revenue in the quarter was BRL 1.9 billion, another record and up 19% over the previous quarter, primarily explained by better sales in the period. Year-on-year, net revenue was up 33% on increased sales and a 24% hike in the average net price in reais.

Another important highlight was the stability of cash costs in 2012 as compared to the previous year. Cash control initiatives and increased operating efficiency were effective in offsetting the effects of inflation and foreign exchange. Cash costs for the year was BRL 473 per tonne, up BRL 2 per tonne over 2011.

In the quarter, cash cost was BRL 446 per tonne, stable over the fourth quarter 2011 and down 9% over third quarter 2012, mostly because there were no scheduled maintenance downtimes in the fourth quarter 2012. As a result, EBITDA was greater -- as a result, EBITDA in the quarter grew 93% year-on-year and the margin 13 percentage points to 41%.

Now on Slide 6, let's talk about Fibria's debt. This quarter, we received the first payment from the sale of the Losango forest in the amount of BRL 470 million, which, together with the other liquidity events through the year, helped to increase Fibria's cash position and reduce net debt to BRL 7.7 billion, its lowest since Fibria was founded. With this, leverage, as measured by net debt/EBITDA in reais, fell to 3.4x at the close of 2012 when the closing dollar was 2.04 compared to 3.6 at the close of 2010 when the closing dollar was at 1.67.

As you can see on this slide, target [ph] on Fibria's debt fell sharply 25% over the previous year. This comparison and the effect of the closing effects on the company's total debt expressed in reais show our efforts to reduce leverage over the recent years.

The company had a total of BRL 1.1 billion in debts maturing in 2013, most of which is composed of export credits and the MBS [ph] facility. In the [indiscernible] we will seek to refinance this debt and, at the same time, remain alert to opportunities to pay down more expensive debt.

On the next slide, we will analyze the company's hedging strategy. This quarter, we reduced the notional value of our non-deliverable forward operations, which was offset by an increase in the nominal value of dollar options, also known as Zero Cost Collar. Zero Cost Collar's operation has become more attractive than MBS [ph] in the current foreign exchange scenario, mainly with dollar's reduced volatility, as it allows us to lock in an exchange rate as the same time that it minimizes the negative impact should the real falls sharply. This feature allows the company to capture greater benefits in export revenue should the dollar appreciate and, at the same time, protect it from a dollar depreciation precision. Fibria's hedging strategy seeks to protect it from foreign exchange volatility, some others that are less likely, and in the line with Market Risk Management Policy.

Moving now to Slide 8, let's talk about free cash flow and liquidity events in 2012. The increase in the free cash flow from 2011 to 2012 is mainly the result on the rise -- of the rise in EBITDA, lower CapEx and efforts to improve working capital, especially with receivable discount operations that were appropriate in terms of costs for the company.

In addition, liquidity events, such as BRL 1.4 billion equity offering, the sale of land and forest asset in the south [ph] Bahia state and the Losango sale helped to generate approximately BRL 2.9 billion, as you can see on this slide.

Now I would like to hand it over to our moderator so we can start our question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Josh Milberg, Deutsche Bank.

Josh Milberg - Deutsche Bank AG, Research Division

My first question is just on your cost performance. You addressed this on the Portuguese call, but I was just hoping you could give some color on your ability to keep cash cost growth to below inflation in 2013, assuming a fairly stable FX scenario. It would seem that potential to replicate last year's success would be difficult just given that there may not be so much upside now in terms of operating stability. That's my first doubt.

Marcelo Strufaldi Castelli

Josh, this is Castelli speaking. Thanks for your question. I'll try to elaborate what we had said in the Portuguese conference call. It's really impressive how great we were in 2012 regarding to 2011. But we still are committed to pursue further operational stability and the cost control, remembering that we had several actions that when we talk about the NPV of more than BRL 5 billion of synergies, we're still having some of them then that will mature into 2013. Other point is that only for consumer, some measures from the Brazilian Government that is lower tax on the labor costs will give us a chance to minimize -- to save about BRL 50 million -- BRL 45 million, up to BRL 50 million in the 2013 figures. This is -- it's called Brazilian and in Portuguese [indiscernible], and that's less tax on top of the labor ages [ph] and so on. Another point is that we were waiting for some green light is [indiscernible] Reintegra [ph]. It's another action that the Brazilian Government took in 2011 to -- that was validated [ph] in 2012, that they also -- [indiscernible] this is -- will remain to incent the exporters in 2013. Our expectation is that in this 2013 phase, the pulp will be included within the segments that will get benefits from this Reintegra [ph]. If this will happen, this will help us another extra BRL 90 million, something like that, let's say, among the export volumes in terms of reais. Energy, the government took some actions also to lowering the energy fee. That will not help Fibria directly but will help some of our suppliers. And we are trying to understand right now what should be the good impact in our cost structure. Of course, we have several other that are putting pressure to -- our costs to go up. So in this scenario, what -- consider that Fibria will keep the philosophy of excellence -- operational excellence. So we can't predict that it's really possible, not possible scenario, that we will keep the ability again to reduce our cost at the end of the year, lowering -- lower debt with inflation. That's something that I said in Portuguese. And thanks for the question because I can clarify much better for you, too.

Josh Milberg - Deutsche Bank AG, Research Division

Okay, great, Castelli, very helpful. My second question is just on your pricing. We've heard some indications that some pulp producers may have negotiated higher price discount levels relative -- higher discount levels relative to list for 2013, compared to what was in place in 2012. So can you just comment on whether that's -- that may be true in your case? And if so, just perhaps give us some sense of what the magnitude of the difference could be.

Aires Galhardo

Aires here speaking. Well, actually, I cannot comment on what the competition is doing. What I can tell you is that we are increasing prices. So I know what Fibria is doing, and I can tell you that we are increasing the prices according to our announcements. This is what I can tell you. And if competition would not be doing the same, it would be difficult for us. So -- and I cannot confirm your comment.

Josh Milberg - Deutsche Bank AG, Research Division

Okay. I understand that you're increasing prices, and we have seen some meaningful upward movement, obviously, in the last number of months in the fixed values. But if, in fact, discounts have increased, then that means that the fixed values, to some extent, could give a distorted sense of what's really happening in terms of effective prices. So that's what I was trying to get at. But I understand if you can't comment.

Aires Galhardo

Well, again, I can only talk on behalf of Fibria. I can tell you we are not increasing discounts. So it's really [indiscernible]. But the competition, I don't know.

Operator

Our next question is from Alesolis Noguera [ph] Brazil Pro [ph].

Unknown Analyst

My first question is related to the new growth roots [ph] that the company is developing. Last year, Fibria announced the partnership with Ensyn and also that it was looking for further opportunities to generate additional value apart from the pulp business. So I would like to know if there is any update about the Ensyn partnership and if you could expect the announcement of new initiatives or projects? Are you seeing like anything in the short, medium term? That will be my first question. And my second question is related to production costs. In a more medium to long-term perspective, and correct me if I'm wrong, but we believe that the company expects to reduce its costs mainly as a result of relevant productivity gains on its forest base. So I would like to know if it's already possible to quantify some of these gains and how much time it may take until we can see some results derived from these initiatives. That's my second question.

Marcelo Strufaldi Castelli

Okay, Alesolis, thank you for your question. And it's Castelli speaking. First of all, regarding to the Ensyn, right, you know that we did this move following our complete bio strategy analysis that we did last year. And we started to play in this segment that we consider as complementary of the pulp -- that's our pulp business -- because we use the potential, maximize the potential from the forestry. Updates. We have concluded the equity transaction. We have formed a joint venture with Veeco [ph]. And it's this joint venture with Veeco [ph] that we'll have the exclusivity rights to claim in Brazil, Brazilian market. We are on the middle of the fine-tuning of the business plan, trying to understand what kind of sources of previous pulp we have. So these things we will be concluding in the first quarter of 2013. And that's it. But we're proceeding to this explaining regarding to the Ensyn. Others actions -- other actions, you know that -- we noticed that we have created the Innovation Committee to support the Board of Directors. And this is -- it's only helpful to -- really to follow up our technological road map. We have several other technologies that have been analyzed, and -- but no further actions. I cannot comment anything so far regarding that, okay? But we are pursuing our strategy to diversification of the pulp but using the forest. Production costs. I mean, the cash costs will be -- our challenge is to minimize inflation. In fact, as I mentioned before, with total cost, this include the CapEx, especially the CapEx because our strategy to improve the productivity of the forestry will be more related to potential savings in our CapEx. We have several targets for the long term that we have described in that they're increasing in the field of the forestry that also is one of the -- our 2025 targets for sustainability. We will have the -- a chance to give you further disclosure about that, where we are regarding to our expectation in the next times, but remembering that when we reduce the area that we need to manage, we reduce the expenses -- this is the idea behind of that -- and also creates some potential upsides for organic expansion, if we decide to do it and when, because this will require less land needed to produce more pulp and/or also give us a chance to get more land free to a potential monetization. That's our thinking.

Operator

Our next question is Daniel Sensel, JPMorgan.

Daniel Sensel - JP Morgan Chase & Co, Research Division

I have a quick question regarding the debt and liability [ph] management. You have mentioned that you were going to continue to work on getting an investment-grade rating of AB [ph], got the cash on hand, that you had at the end of the quarter and the CapEx that you expect to invest in 2013. If it's so you're to have going a lot of cash, are you planning to launch another tender?

Guilherme Perboyre Cavalcanti

In fact, we have higher cash than our minimum cash balance. However, we will always be analyzing the market to see what's the best strategy in terms of repurchasing debt, if it's a tender or a market purchase. This -- it's -- we'll always be analyzing, and it will depend on market conditions.

Operator

Our next question is from Thiago Lofiego, Merrill Lynch.

Thiago Lofiego - BofA Merrill Lynch, Research Division

I've got one follow-up question, basically going back to the growth discussion. You have made it clear that M&A is your preferred option for growth. But when we look at 2014 and '15, there's a potential scenario that prices do not plummet. I mean, given the cost support that we see on the global cost curve, there's a chance that prices do not plummet and then probably we won't see distressed assets out for sale. So the question is, when do you think could be a good timing for you to decide on whether to grow organically or through M&A? Because if there's not distressed assets for sale, then it might be a bit too late for you to announce or to take a decision to grow organically as it would probably imply a 2017 start-up. If you decide to grow to -- on a new pulp plant by 2014 or '15, that would imply a 2017 start-up, which is a bit far way. So that -- how do you see the situation going?

Marcelo Strufaldi Castelli

This is Castelli again. Our strategy -- our tactical approach is that 2013 and 2014 will be the 2 years that we should decide which way we are going to use. Remember that this is -- they are not excluded, I mean, they are not excluding. I mean, we cannot decide to go organically and also always by keeping our cash hoards on potential M&A. Only comment regarding to your time frame is that we will not wait until the end of 2015 or 2016 to taking a feel for [indiscernible] to growth because those strategies are not exclusive, as I mentioned. So 2013, 2014, wait-and-see mode for the company to be strengths. We're looking to the potential opportunities of M&A, but keeping the organic growth available at least to enter -- to access the market in 2016 as the latest window, market window. So this is our intention so far.

Operator

Our next question is from Lucas Ferreira, JPMorgan.

Lucas Ferreira - JP Morgan Chase & Co, Research Division

If you could remind us of the remaining opportunities of another liquidity -- other liquidity events in the company? You've previously mentioned selling more land, but I think this will be in a much less representative side than it was in 2012. And you also mentioned some possibility of doing a kind of a sale and leaseback of part of your land assets and if it's something that's still being analyzed and if it makes sense. And if you anticipate the cash and probably reach investment grades up before the expected? And my second question that relates to the first question is if you have a sense on how much your land and forestry base is worth in market value today so we can have a sense on how much -- how big is the -- or how valuable is the assets that you have today because I have been seeing -- historically see that trading at a discount to your present value, and I think it continues to be the case. Or, in other words, your assets are basically or almost worth the same probably market cap of the company today. So in other words, you'd be -- you may have some opportunities to monetize this asset in some point in the future. These are my questions.

Guilherme Perboyre Cavalcanti

Okay. Yes, we have still some farms that we've -- selling [indiscernible]. But as I mentioned, it's not a significant amount as the previous non-operational asset sales that we did in 2012. And we are always exploring [ph] possible monetization of our lands. This is understood. We have not -- so far, we didn't reach a leasing fee resulting for the deal that would be value accretive for the company. But if we find a format, which, after selling the land, having a leasing fee that will be value accretive for the company, that we -- that's what we could do. The amount we have in our balance sheet for land and forest. If we have -- if you sum up the biological asset of BRL 3.3 billion plus the land, we would reach almost BRL 8 billion in land and forest. Of course, there are land and forest that are strategic for the company that we would not be doing deals with these lands, especially around the use [ph]. But the potential of a deal like that, if we find the format, as I mentioned, which has a leasing fee that makes sense, I would say that the BRL 1 billion could be a possible range that we could be raising, if, again, if we find an investor which will be willing to have a return that makes sense for both parties, okay?

Lucas Ferreira - JP Morgan Chase & Co, Research Division

Do you have any -- but I suppose there is a significant gap between the market value of the land that you have and the book value? And also, I don't know if you have a sense on how much would be the market value of the land that you own.

Unknown Executive

[indiscernible]

Guilherme Perboyre Cavalcanti

You're right, the land will be their historical value, while the forests are just pegged to the fair value. The amount of capital gains that could be raised will depend on which land in the region that we'd be going to deal. So it's difficult to say right now, what could be the difference.

Operator

[Operator Instructions] The next question is a follow-up, Alesolis Noguera [ph] Brazil Pro [ph].

Unknown Analyst

I have 2 quick questions for you. The first one is related to the Portocel expansion project, if you could share an update first. And the second one, about the dedicated shipping fleet that the company has started operating, if you could share also, first, what we should expect -- what impact we should expect from this initiative.

Marcelo Strufaldi Castelli

Okay, thank you. Regarding Portocel, we keep our intention to create that business for Fibria not only to be very competitive but advantageous in cost and exports. But again, creating a business. You know that we have a new, NB5 [ph], Line 5 [ph]. It's a preliminary legislation that are under discussions here. But that are not clear as well, not clear yet what should be the changes in the business environment. You know that in this preliminary legislation, this proposition, right now they have more than 600 amendments to -- really to create a more clear understanding, to really to be able to real -- to address in the marketplace. So our intention right now is unchanged. We want to keep pursuing that business potential for Portocel. But meanwhile, we are analyzing what should be the end game of this relation in the marketplace so that -- for the -- for investments, I think Aires will give the details.

Aires Galhardo

With regard to the fleet, I mean, to the STX vessel, I will not remind you what were the strategic objective of the decision, which is a long-term strategic decision to not depend on the shipping market and ship owners the way it was structured. Now on the short term, there is nothing much to expect because actually, today, we have only one vessel, and we are going to receive the second one at the end of February. And by the end of this, we will have only 8 vessels in our hands. So the target for foreigners [ph] is to learn how to operate these vessels and mainly in determining -- well, of course, we are not operating vessels themselves, but we have to learn how to [indiscernible] them, discharge them and actually to [indiscernible] the vessels so far. So 2013 is about knowing the operation.

Operator

Our next question is Marcelo Aguiar, Goldman Sachs.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Aires, can you comment a little bit on the -- what you see in terms of paper machines starting up in Asia and China? I mean, we have a large amount. I mean, do you have a -- did you quantify? I mean -- or did we -- and do you think we are already past the peak of terms of paper machine start-up in China and Asia given the antidumping measures that have been put in place in Europe and U.S. over Chinese paper?

Aires Galhardo

Thank you for your question. With regard to China, I mean, nothing new. I mean, we keep seeing the start-up of this tissue machine. Again, I'd like to remember the number. We are talking about 1.8 million tons in 2012 and 1 million tons only in tissue segment. This is been being implemented. We can see -- and we can see other grades or the paper machine grades like board being also starting up and printer writing. Again, nothing new. But what I can tell you is that we haven't seen the peak. I mean, this is still being implemented. And this, in fact, on market, well, demand will continue to increase because -- not everything is running, [indiscernible] so far. So this is why we are quite positive. I mean, the demand will just continue to increase. And then on the other side, I mean, you know the Australian drought. Eldorado will be in, but we don't think they will be impacting the market before the end of the first semester. So overall, 2013 continues, in our view, to be quite well balanced. And I can tell you that the inventory levels we are working with for the first quarter are quite high.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Yes, no, that's clear. And maybe I was not that clear on the question right now. I was referring more to the amount of paper machines starting up this year and next. I mean, you guys deal a lot, I mean, with different clients across China. So I think they're probably the better -- best ones to quantify which are the -- which is the amount. The million ton, another -- on paper machine this year? It's 500? It's 2 million? That was the point I was trying to refer, sorry.

Aires Galhardo

That's the number I gave you at the beginning, about 1.8 million tons in 2012 and 1 million tons 2013. And this is happening.

Operator

[Operator Instructions] Having no further questions, this concludes the question-and-answer section. At this time, I would like to turn the floor over to Mr. Guilherme Cavalcanti for any closing remarks. Mr. Guilherme, you may proceed.

Guilherme Perboyre Cavalcanti

Thank you all for the participation and for your support. If you have any additional questions, please feel free to contact our Investor Relations team. Thank you.

Operator

Thank you for attending. The conference has now concluded. You may now disconnect.

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