Fibria Celulose SA Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.23.13 | About: Fibria Celulose (FBR)

Fibria Celulose SA (NYSE:FBR)

Q1 2013 Earnings Call

April 23, 2013 10:00 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

João Felipe Carsalade - Former Executive Officer of Commercial & International Logistics and Member of Board of Executive Officers

Analysts

Thiago Lofiego - BofA Merrill Lynch, Research Division

Carlos de Alba - Morgan Stanley, Research Division

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

Lucas Ferreira - JP Morgan Chase & Co, Research Division

Renato Antunes

Natalia Corfield

Josh Milberg - Deutsche Bank AG, Research Division

Juan G. Tavarez - Citigroup Inc, Research Division

Chelsea Konsko

Viccenzo Paternostro - Crédit Suisse AG, Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the conference of Fibria about the earnings of the first quarter 2013. If you need a copy of the company's press release, please go to Fibria's Investor link at www.fibria.com.br/ir. We would like to inform you that this is being webcast and simultaneously translated into English. [Operator Instructions]

Before going on, we would like to let you know that any statements made during this conference call related to Fibria's business outlook, projections, operating and financial goals are based on the company's management's beliefs and assumptions and rely on information currently available. Forward-looking statements involve risks, uncertainties and promises because they relate to future events and depends on circumstances that may or may not occur. Investors should understand that general economic conditions and other operating factors may affect Fibria's future performance and leads to results that materially differ from those expressed in such forward-looking statements. Mr. Castelli, CEO, will start the presentation. Then the conference call is going to be opened for the Q&A session. Please, Mr. Castelli, you may go on.

Marcelo Strufaldi Castelli

Well, thank you very much. Good morning, everyone. Thank you for taking part of the conference call of the first quarter 2013 of Fibria. Here with me are Guilherme Cavalcanti, CFO and IR Officer; and João Felipe, Commercial and Logistics Officer, as well as other members of Fibria's Executive Committee.

Going on to Slide 4 of the presentation, I would like to start by highlighting that the management's action aimed at achieving investment grade. The results of Q1 2013 show that we are on the right path given that we reduced our gross debt and continue to generate free cash flow. The markets and momentum are positive, and we have seen a continuous rise in pulp prices in the period, which enabled us to reach an EBITDA in the last 12 months of BRL 2.440 million (sic) [BRL 2.440 billion], above what we have in 2012. As regard to leverage, the net debt-to-EBITDA ratio in reals had an important reduction of 5.2x in the first quarter of 2012 to 3.1x in the first quarter of 2013. The upgrade of Standard & Poor's rating and the rating of the outlook by Fitch from stable to positive reflected this result.

As you can see on Slide 5, while hardwood pulp production capacity is expected to drop by 910,000 tons in 2013, it's scheduled maintenance downtime removed 348,000 tons from the market, thus contributing to limit supply during the quarter.

In terms of demand, capacity expansion, especially in the Asian market is another factor that contributes to the maintenance of favorable market fundamentals. As you can see in this graph, we expect that at least 1.1 million tons of paper tissue capacity is expected to come online between 2013 and 2014.

Now I'm going to turn the call over to Mr. Cavalcanti that will go on with the slide presentation.

Guilherme Perboyre Cavalcanti

Good day, everyone. Going to Slide 6, we are going to talk about our results in the quarter. In Q1 2013, Fibria had scheduled maintenance downtime in the Veracel unit and in the C Plant of its Aracruz unit. Both took place according to the yearly plan and company budget and were successfully completed. Relative to 4Q 2012, there was a drop in the volume produced, especially due to the fact of the no downtime in the quarter and a lower number of production day. Year-on-year, the variation can be explained by the downtime in the C Plant of the Aracruz unit. In 2012, it was performed in the second quarter, and there was also 1 day less of production in Q1 2013. Year-on-year, sales volume dropped by 10%, mainly as a result of lower availability of pulp because of scheduled maintenance downtime. With regards to the fourth quarter of 2012, in addition to lower production, the variation can also be explained by seasonality.

First quarter net revenue was BRL 1.4 billion, a 14% growth relative to Q1 2012. This is basically explained by a higher net average pulp price. Compared to the fourth quarter of 2012, the reduction has to do mostly with the lower sales volume and the effect of the appreciation of the average dollar. The cash cost of producing pulp in the quarter was BRL 500 per ton, a 14% increase relative to the fourth quarter of 2012, due mainly to scheduled maintenance downtime and the higher cost of wood. Relative to the same period last year, the 11% increase has to do with the maintenance downtime of the C Plant in Aracruz that took place in the second quarter of 2012, the higher price of chemicals and the effect of 13% appreciation of the average dollar on both items exposed to the dollar.

In both periods, the impacts were partially offset by the government program to reduce payroll taxes. If we exclude the effects of the downtime, the cash cost stood at the BRL 463 per ton, 4% higher than the same period of the previous year, although lower than the inflation rate for the period, 6.6%. As a result of this factor, the quarterly EBITDA was BRL 565 million, thus lower than 4Q mostly because of lower sales volume. As compared to the first quarter of 2012, EBITDA grew by 50%, with the margin up 9 percentage points relative to Q1. Going now to Slide 7, about Fibria's indebtedness.

In Q1, Fibria geared actions to reduce debt, we used the first payment received from the sale of Losango in the amount of BRL 470 million to pay our most expensive debt just bringing our gross debt down to BRL 9.9 billion. That is 10% or BRL 1.1 billion lower than in the same period. We reached the lowest level since inception of Fibria. Therefore, even considering the appreciation of the dollar vis-a-vis the reais, net debt stood at BRL 7.5 billion, 3% and 16% lower than in Q4 2012 and Q1 2012, respectively.

The net debt/EBITDA ratio in reais in the last 12 months went from 5.2x to 3.1x. At the end of Q1 2013, the company had BRL 2.4 billion in cash, which amounted to 2.9x the short-term debt. This reinforces the company's ability to fulfill its commitments over the next 12 months.

Moving on to the next slide, we will talk about the free cash flow generation in the first quarter of 2013. The free cash flow in the first quarter of the year totaled BRL 167 million. The graph shows the negative variation in working capital, which can be explained by the rebuilding of pulp inventories as expected in this period of the year. Additionally, the company is assessing the renewal of some of the programs implemented in Q4 2012, which may become recurrent as of Q2 2013. In the last 12 months, the free cash flow was BRL 782 million.

I now turn the floor over to the moderator to begin our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Thiago Lofiego from Merrill Lynch.

Thiago Lofiego - BofA Merrill Lynch, Research Division

I have 2 questions. The first one is the following: Can you talk about your freight line, which there is an 11% drop, and what levels should we expect in the line from now on? And then the cash cost, can you comment in more detail the cost -- on the cost of third-party wood, why is it higher in this quarter and what can we expect in the next quarters?

Guilherme Perboyre Cavalcanti

This is Guilherme speaking, Thiago. As regards to freight, lower sales and also we had the effect of a higher foreign exchange rate. As regards to the cost of wood, we had a higher percentage of third-party wood, but this is seasonal. There is no structural change to account for that.

Thiago Lofiego - BofA Merrill Lynch, Research Division

And as regards to freight, so per ton, there was no major change, is that correct? Can you give us some more color about the contracts that you have? Has there been any change? Is the freight cost per ton in the contract going to remain the same?

Aires Galhardo

This is Aires speaking, Thiago. And in fact, in the first quarter, as you all know, this is a quarter where we have to operate in a stronger way. But in the first quarter, we have only 2 ships operating for us. So this doesn't change the scheme with which we worked last year, that's why you haven't been able to see a major change. In the future, there might be a change, and this will depend on the speed at that which we receive the ship and also the business that we recover with this new ship from STX.

Thiago Lofiego - BofA Merrill Lynch, Research Division

And just a bit on that topic, when do you expect to receive the ship? When are you going to receive the last ship?

Aires Galhardo

We had 8 ships by the end of the year. And the 12 orders will be received in 2014.

Operator

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

Carlos de Alba - Morgan Stanley, Research Division

The first question is regarding the nonrecurring operating items that were highlighted as part of the lower volumes on Page 6 of your release. Could you comment what this nonrecurring occurrences were in the quarter? And if you can also break down what was the volume impact of the maintenance downtime, and obviously this nonrecurring items will be great. And my second question is, if you can tell us what the volume impact do you expect for the second quarter of 2013 given that you have maintenance downtime in 3 lines versus only 2 in first quarter.

Marcelo Strufaldi Castelli

This is Castelli speaking. Thanks for your question. And as regard the nonrecurring items and the cash cost items, these are effects of the maintenance downtime. Most of them have to do with the set up and the restart of the plant. When you look at our release in greater detail, the ITR, you see that there is an increase from the first quarter of 2013 relative to the first quarter of 2012. And that increase had to do with a greater percentage of maintenance and fuel, which weighs on the structure. And so, you spend more fuel then you stop the plant and then to restart it. In addition to the maintenance cost, we invested more because of the stoppage of the C Plant which did not happen last year. These are basically the 2 points. And as regard to guidance, we don't give guidance for sales volume, but you see that in our ITR. We see the downtime already scheduled, and the A Plant in Aracruz and the B Plant, and also Três Lagoas in June. So we will have downtime in practically half the plant of Veracruz and that plant of Três Lagoas.

Carlos de Alba - Morgan Stanley, Research Division

All right. Just to come back to my first question. I was talking really more about the volumes, the nonrecurring issues that you highlight that affected the volumes in the first quarter. Can you comment on what those are and what the impact was in terms of the production volumes?

Marcelo Strufaldi Castelli

Now I understand your question better. So this nonrecurring impact at a lower scale had to do with things that we defined in our operational plan. We are going to do washings in boilers in -- under a scheduled maintenance. Nothing that will change our flight plan, so to speak, for the year.

Operator

Our next question comes from Mr. Marcos Assumpção from Itau BBA.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

This question goes to Aires. I would like you to comment on the demand and supply balance as of the second quarter, and please focus on some sectors. First, you said that the quarter should be strong in terms of downtime for maintenance but reducing supply. Can you make a comment, please, about what you envisage in terms of the impact of the increasing supply coming from Eldorado? Eldorado is close to its maximum capacity in the second quarter. And also as of the end of the second quarter, a reduced demand in the U.S. summer in the Northern Hemisphere. So how will this balance play out at the end of the second quarter and the beginning of the third quarter?

Aires Galhardo

As you rightly said, we see that supply is a bit tight. And Eldorado is now more visible in the market, but we don't think that they are close to their full capacity. And we see that when we look at the shipment from Eldorado, so this doesn’t have a big impact on the market. There is no oversupply or an imbalance in supply because of the coming online of Eldorado. Much to the contrary, what we see is that there is an imbalance between supply and demand. Demand in Asia is very good. And when I -- we did the call with the press, I explained that we began the year with very low inventories because of lesser days of production in the first quarter. We had downtime, and this contributes to make supply tighter. There are some problems in the production of the industry as a whole and delays in the shipment and the ships, therefore delays in the shipments to Asia. And I hear comments sometimes and I read comments in the press that they say shipments to Asia are smaller because the demand is smaller. No, shipments decreased because there is no pulp, and that has an impact on the agenda of ships. So the ships are being delayed, but demand is still very strong. The implementation of new plants in paper tissue are happening. We are looking at that from a very close range. Some others will take place in 2013. And the packaging industry is growing, and this is all very positive or us. And I would dare say that we see that Printing & Writing is going really well. We have clients which are giving us signals that they will increase their orders in Q2 and Q3. That is Marcos, we are very positive relative to demand and to the balance of supply and demand as a whole.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

And my second question go to Castelli, or Guilherme and has to do with liquidity events and the sale of forest. Would you be able to talk more about that? Do you have any update to give us? Are you moving forward in the negotiations in this year? Will you be able to complete any deals in that sense? Meaning, the purchaser and the seller are getting to an agreement relative to the rates necessary to close the deal.

Guilherme Perboyre Cavalcanti

Marcos, this is Guilherme speaking. First of all, we have 2 types of assets here. Nonoperational assets, which we continue to sell. So these are farms that was sold in Minas Gerais, for example, in the past and this generates cash for the company. Not as we saw last year, but there is some cash coming in as a result of these sales of these farms. But in a larger scale, we would like -- we would have to sell operational assets that we would sell and then lease them back. We continue to talk to investors, people who are interested in that. We are negotiating. But it's very difficult to envisage an end because the lease rate should generate value for Fibria shareholders. This is what we have been pursuing, but we have no date to complete those deals.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

And when you compare the rate, do you compare with your debt cost?

Guilherme Perboyre Cavalcanti

Actually, the WACC of the company today is in the region of 7%. It's very close to the cost of our most expensive debt, bonds at 7.5%. So we can compare it with the cost of that and with WACC.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

One last question. Can you give us an update relative to the expansion of the port?

Marcelo Strufaldi Castelli

This is Castelli speaking. The extension of the port is according to the business plan. It's our understanding that the provisional measure of the port make us feel comfortable because there will be no impact on our business plan. And much to the contrary, what the government wants with this provisional measure is to have more Portocels coming up in Brazil. So we continue to talk to some people who are interested in it. We continue with our business plan. The logistics cargoes whether inbound or outbound, they are being monitored. We are working on that, and we should have a business case ready as soon as we have the results of this study. We believe we are going to have a very good business case in hand.

Operator

Our next question comes from Lucas Ferreira from JPMorgan.

Lucas Ferreira - JP Morgan Chase & Co, Research Division

I have 2 questions with regard to the pulp market. The first, something that drove our attention, is that price increases were relatively early and very high. So I would like to know how much the seasonality of the year contributed for that. And if this factor of lowering inventory levels will continue in your opinion in this next quarter and the beginning of the next quarter. And the second question, also about the market. If you could comment more specifically about the U.S. and Europe about demands in those regions. One thing that drove our attention is the Printing & Writing and the non-coated paper. It seems that prices are relatively low. Do you think this is going to be an impairment for an increase to demand this year?

Marcelo Strufaldi Castelli

Lucas, well, to answer your first question, you are talking about when we announced this so early. Well, generally, we announce raises in May. And this year, we did it in April. And basically because our customer base have been complaining a lot that we announce price increases at the last minute. So they are asking for more visibility. So we decided to announce months before, which is not really much. As for inventory levels, we believe that we are going to have the supply versus demand in good balance. So inventories are low. They are going to continue low. We are having a carryover phenomenon from January to today, so we are having more sales than what we are able to deliver. So every month that we are delivering products that had been closed -- business that had been closed 2 months before. So the demand is good, inventory levels are tight, and they are not even tighter because we cannot work in a very smooth manner with less than 51 days, and so we are keeping that. That's why your second question, Printing & Writing, yes, that's for prices of Printing & Writing in Europe, and well, you're right. We cannot just deny that the gap between pulp and eucalyptus prices and Printing & Writing are narrowing. But pulp prices are related to a world global demand. We were 50% of our market in tissue, so our price is a result of the segment and their respective demand. So we hope that our position will enable Printing & Writing to increase prices as well.

Operator

Our next question comes from Renato Antunes from Brasil Plural.

Renato Antunes

The first question is about the scenario of the income capacity of hardwood. So you're talking about possible delay in the startup of new plants. I know it's very hard to talk about third parties, but is it something that you fear in terms of customer order? What do you see in this scenario? And also about working capital. We saw in this quarter hardwoods picking up a bit of inventory again after you released a lot of working capital. I would like to know if you're going to resume some programs that ended in the previous quarter? If you could talk a bit about that.

Marcelo Strufaldi Castelli

This is Castelli. I'm going to answer your first question. What we said in our release is precisely this consensus that we want to have better information that we receive from the market. So in our competitive intelligence, we see that there is consensus that projects are delayed. This is the information that we have so far. We don't know how late they are. What happens is that we see and then he already mentioned, some clients of ours asking us to increase their share of wallet, saying that they do not have pulp because of some downtimes that took place this quarter and also telling us that they will have increases in the second and third quarters. So this is a fact. The market rumors are having an effect in our marketplace.

Guilherme Perboyre Cavalcanti

As for working capital, well, basically, the BRL 200 million of working capital that we released last year -- precisely in December, BRL 70 million were discounts in duplicates that were one-time or one stage event. We are thinking of having that as a program. With that, we would have more working capital release, and we could even increase the amount. In addition to that, we have some operations with our suppliers, and we are not going to get -- to release guidance on that. But I think that you will have improvement in the discount in duplicates and in suppliers.

Operator

Our next question comes from Natalia Corfield from Deutsche Bank.

Natalia Corfield

I would like to know more about your indebtedness. You have -- doing very good work with this regard, but I would like to know what measures are you thinking of taking to reduce indebtedness further on? And also you're talking about recovering your investment grade. That requires net indebtedness of 2.5x. So how would you be able to get to this number?

Guilherme Perboyre Cavalcanti

Well, basically, with generation of cash. We have been showing positive consistent cash generation, and this is our main leverage to continue decreasing our leverage. Other than that, it's just that sale of assets, but we do not have anything relevant to talk about in this regard. So basically, cash generation of the company that will make it continue its de-leverage process.

Natalia Corfield

And with that, do you expect to get to 2.5x?

Guilherme Perboyre Cavalcanti

Well, we are not disclosing our guidance. You have to know the analyst ratings. But I think a firm like Fitch and Moody's do not require this level. S&P does require 2.5x.

Operator

Our next question comes from Josh Milberg from Deutsche Bank.

Josh Milberg - Deutsche Bank AG, Research Division

I have 2 first questions. The first is about tax benefits, if you could talk about any news? And the second is about the evolution of your sales mix. There was major increase in the percent of world and a drop in the north in the fourth quarter. And I would like to know how much is explained by seasonality and how much is explained for other factors?

Marcelo Strufaldi Castelli

Well, thank you, Josh. I'm going to answer your first question [indiscernible]. We still do not have any news. We are monitoring the issue. And you know, we have already mentioned that in other calls, that the full year price, we could have about BRL 90 million to BRL 100 million. That would depend on a percentage of suitability to the granting of those amounts. So not only us, but the whole of the market is expecting a decision from the government. We expected that the first window to be in the end of March. It went by, but we are just monitoring the issue.

Guilherme Perboyre Cavalcanti

Josh, as far as our sales mix, we don't have anything in particular to comment. It is more related to our sales seasonality to each one of our clients. Americans tend to buy more towards the end of the year than in the first quarter. And the opposite is true for European clients. So we don't have any specific news with this regard.

Operator

Our next question comes from Juan Tavarez from Citigroup.

Juan G. Tavarez - Citigroup Inc, Research Division

My first question is regarding the pulp market, specifically given the price increase from May which is a global price increase, could you give us some color on kind of the regional mix of demand? Where are you seeing the most strength among the 3 regions and where are you seeing a bit more of difficult environment?

João Felipe Carsalade

This is Felipe speaking. Well, undoubtedly, the strongest demand is in Asia. This has been our case in the past 9 months. But I wouldn't like that to be interpreted as a message to say that the demand in Europe and the U.S. is slow. No. Demand in the U.S. is very regular, and it has been so in recent years. This year, we're doing nothing new in this regard. Europe, as I say, has already adopted to the prices 1.5 years ago. And since then, we have had regular volumes and lower inventory levels. So in terms of price increases, Europe does not resist much to the prices. It's because they lack pulp. And the demand may be not as high as it was 3 years ago, but it has been regular for the last 1.5 years. So we don't see much resistance. But the higher demand comes from Asia, specifically from China.

Juan G. Tavarez - Citigroup Inc, Research Division

Okay, good. And my second question is regarding the second half of the year. Again, on pulp fundamentals. Given that most of your down time, you accelerated towards the first half of the year and your inventory levels are, I believe, you said around 51 days, which is a normal level, would you be willing to take market-related downtime during the second half if we do have this additional supply entering the market? Or are you not considering anymore downtime or any market-related downtime for the second half of the year?

Marcelo Strufaldi Castelli

Well, the way we see the market, we believe that we wouldn't have any downtime related to the market more specifically. We are having maintenance downtime, regular ones, but in our assessment of the market, until the end of the year, we are not really considering a downtime for the market. If the market would justify this position, we would be ready to evaluate the possibility. But it's not the case so far. I would like to say what I mentioned to another analyst here today, we have been having carryovers, that is businesses that are closed in a certain month, and then that are delivered in subsequent month. So in March, I delivered demand from January and February. So this situation continues. Demand is being impacted by us, but a very good demand. And that because of the new capacities that are opening in China and continue to happen in China. We expect 1.5 million more in tissue capacity for 2012. And we are thinking of another 1.1 million tons for 2013. So the demand for us continues to be very good.

Juan G. Tavarez - Citigroup Inc, Research Division

So should we expect, I guess, your inventory levels to continue to creep downwards I guess in the second quarter given that you're taken downtime and that if you're going to be delivering on stronger demand activity for March in the second quarter, should we expect your inventories to come down a bit in your view or not?

Marcelo Strufaldi Castelli

Well, we cannot disclose guidance in terms of sales volumes or inventory levels. But we tend to continue with very tight inventories. In the case of hardwood, it's difficult to operate with less than 51 days because we have problems with clients, we have our ship, the price of ship, our schedules. All that require minimum inventory. So what I can say that 51 days is the limit for us not to have any operating problems, and the trend is to continue close to this level until the end of the year.

Operator

Our next question comes from Chelsea Konsko from TIAA.

Chelsea Konsko

Related to the new paper capacity and tissue capacity in China, you mentioned 1.1 million tons in 2013. But what does this translate to roughly in terms of pulp demand?

Marcelo Strufaldi Castelli

I'm sorry, I didn't hear the number you said. Could you repeat that?

Chelsea Konsko

It was mentioned 1.1 million tons of additional paper capacity in China expected in 2013. So I was just wondering what this translates to in terms of pulp demand?

Marcelo Strufaldi Castelli

Okay, now I got. So you're talking about our capacities, new capacities in tissue for China. We generally say that for each ton of tissue, we have 0.8, 0.9 tons of fiber. So that has a very important impact in the demand for pulp. Have I answered your question?

Chelsea Konsko

Yes.

Operator

Our next question comes from Carlos de Alba from Morgan Stanley.

Carlos de Alba - Morgan Stanley, Research Division

Just wanted to follow-up with you Aires. If you can help me understand your comments about the fact that shipments of pulp have not increased and in fact, have declined year-to-date more because of lack of pulp than because of reduction in demand. Because when I look at the inventories, at least up to February, the global inventories have increased year-on-year from 34 days of supply to around 39 in hardwood. And from 33 to 35 if we looked at all grades. So it seems like inventories globally have increased year-on-year. And so I don't see, I just cannot reconcile that with the fact that you mentioned that there is lack of pulp globally and so if you can help me understand that I would appreciate it.

Aires Galhardo

Well, thanks for your question. I understand your concern. Well, what I would like to explain to you is that inventory levels announced in the PPP increased, but that is also a picture of inventory at a certain point in time. I also mentioned in addition to tight inventory levels because of the lack of pulp, the delay that, that causes in the scheduling of our ships. So when a pulp producer does not have pulp, and ship is coming, sometimes they ask for the ship to wait a week. And of course, that generates extra cost for the producer. But still they ask for you to wait, and with that, we have a delay in our ship schedule, especially when we are talking about Asia because the trip there takes from 45 to 60 days. So you have a delay in the ship and sometimes, the fact that they are scheduled to get to the end of the month because of sales they get in the middle of the next month. So the picture can say that the inventory is going up, but that has an impact. So this is my explanation, because indeed I can tell you that the industry as a whole lacks pulp. And Castelli would like to add comments to that.

Marcelo Strufaldi Castelli

Well, just to add to what then he said, I would like to let you know something that is a characteristic of the new operation. The more ships that we have, these are very modern ships. They are ready for the transportation of pulp. And each ship carries 53,000, 54,000 tons, which is equivalent to 3 days of production in Fibria. So if the ship delays a month, we have delayed days here, the inventory can increase by up to 3 days. So do not worry much about variations of 2, 3 days. Until this level for Fibria, it is normal because this is normal type of operation. What we have to pay attention more and more is inventory a long time. So it is much more the trend of 2, 3 months than what you have on a month-by-month basis. Just for you to not to have any question that the market is positive or negative, just looking in the short term, that's not the right way to go.

Aires Galhardo

Also, I would like to add another comment. We cannot forget that our inventory levels are also being calculated on the previous months. The average of shipments, shipments that decrease because of a lack of pulp. So again, the denominator is smaller than the result that we have in inventory days.

Operator

Our next question comes from Viccenzo Paternostro from Crédit Suisse.

Viccenzo Paternostro - Crédit Suisse AG, Research Division

My question is about your tax liability with the government related to the profit of this subsidiary abroad. I know that the decision of the Supreme Court did not refer directly about Fibria. But I would like to know if there is a perception of risk is higher. Do you really think that the risk of losing the suit is very low? And do you see the risk impairing your investment grade if you have to pay those amounts are going to long-term risks?

Marcelo Strufaldi Castelli

So with regard to the decision of the Sup Court about the taxes paid on subsidiaries overseas, Fibria is not directly affected by that because it has structures in countries with regular taxation, which is then to avoid a taxation in Brazil and in the country abroad. So there are still many points that have to be discussed. And the appeals are going to be analyzed on a cases-by-cases basis. And so, we are waiting for the final judgment. But it's important to remind you that out of the BRL 1.7 billion, BRL 662 million are our main amount. BRL 1.2 billion are interest and penalties.

Viccenzo Paternostro - Crédit Suisse AG, Research Division

Okay, do you believe the government is going to exempt taxes as well? Because I understand, they can exempt penalties, but do you think they will exempt taxes?

Marcelo Strufaldi Castelli

Well, it's case by case again, as I told you. You have cases in the past where penalties and interest were excluded. But that depends. One thing that may happen is that you can pay that installment in 15 years timeframe for instance. This is also a possibility, and penalties are reduced.

Operator

Our next question comes from Marcos Assumpção from Itau BBA.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

It's just a follow up. Castelli mentioned that the market was tight. Clients and others suppliers were asking more volumes due to the difficulty of supply. Are they less in America in supplier? European, American? If you could give us a bit more color on those information that I think is very relevant.

Marcelo Strufaldi Castelli

Well, what I can tell you is the following. These are clients from the Printing & Writing segment.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

That had which kind of the supplier from where, can you tell us?

Marcelo Strufaldi Castelli

I don't know. Or I know where they are, but I don't know who they're suppliers were. But this is a fact in the market. We feel that there is a lack of supply and also good demand in the Printing & Writing segment, which makes us think about perhaps there is a good prospect for the increase of prices.

Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division

But this reduction of supply, is it structural or is that something that is connected to a problem in production or people that are leaving the market, and therefore you are having more clients?

Marcelo Strufaldi Castelli

Well, it can be both. We talked about some capacity closed on Slide 5, and you might have some producers with specific problems. The matter of the fact is that pulp is missing in the market.

Operator

[Operator Instructions]

Guilherme Perboyre Cavalcanti

The level of leverage necessary for us to achieve investment grade. If that would be 3x or 2.5x. As I said, it depends on the rating agency. Each agency has its own criteria. So for some rating agencies, below 3x would be investment grade. The only one that was more explicit about it was S&P, and they want 2.5x. But Moody's and Fitch have not put a figure on that. And we don't give guidance on that. We have to look at the market and the consensus to see when we can reach that level -- according to the estimations of the analyst. We also don't give guidance on pulp for the market.

Operator

[Operator Instructions] The Q&A session for analysts and investors is now closed. I would like to turn the floor over to Mr. Cavalcanti for his final remarks. You may proceed, sir.

Guilherme Perboyre Cavalcanti

I would like to thank you all for your support and for participating in this conference call, and make myself and our team available to take any questions you might have. Have a nice day.

Operator

Thank you very much. Fibria's conference call to announce the result of Q1 2013 has now ended. Please disconnect your lines. Thank you.

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