Fibria Celulose SA (ADR) (FBR) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.24.13 | About: Fibria Celulose (FBR)

Fibria Celulose SA (NYSE:FBR)

Q2 2013 Earnings Call

July 24, 2013 10:00 am ET

Executives

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

Guilherme Perboyre Cavalcanti - Chief Financial Officer, Member of Board of Executive Officers, Investors Relations Officer and Coordinator of Finance Committee

Henri Philippe Van Keer - Commercial & International Logistics Officer and Member of Board of Executive Officers

Analysts

Lucas Ferreira - JP Morgan Chase & Co, Research Division

Felipe Martins Silveira - Coinvalores Ccvm Ltda., Research Division

Jonathan L. Brandt - HSBC, Research Division

Thiago Lofiego - BofA Merrill Lynch, Research Division

Carlos de Alba - Morgan Stanley, Research Division

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Juan G. Tavarez - Citigroup Inc, Research Division

Renato Antunes

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

Viccenzo Paternostro - Crédit Suisse AG, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to Fibria's conference call to present the results of the second quarter of 2013. In case anybody needs a copy of the press release, please visit the Fibria Investor link at www.fibria.com.br/ir. We would like to inform you that this transmission is being recorded and simultaneously translated. [Operator Instructions]

Before we go on, we would like to clarify that any statements that may be made during this conference 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 operating factors, may affect Fibria's future performance and leads to results that are materially different from those expressed in these forward-looking statements.

Mr. Marcelo Castelli, CEO, will begin the conference call. At the end, you may ask questions and receive answers.

Mr. Castelli, you may proceed.

Marcelo Strufaldi Castelli

Thank you. A very good morning to all of you. Thank you for taking part in this second quarter results for Fibria. Here, I have with me Guilherme Cavalcanti, who is CFO and IR Officer; Henri Philippe, who is Commercial and International Logistics Director; and other members of the Fibria board.

Moving on to Slide 4 of the presentation. I would like to start by pointing out that the company has delivered significant results in the second quarter of 2013, which are aligned to the strategy of reducing leverage and focus on achieving investment grade. The appreciation of the dollar had a major effect on the company's operating results, highlighting the increase in net revenue, EBITDA and free cash flow. The market fundamentals are also positive with controlled inventory levels and increased demand for eucalyptus pulp, driven by capacity closings and new paper mill special retail.[ph]

With respect to the debt management, we will talk in more detail throughout the call on the actions taken to reduce gross debt in dollars with a consequent reduction in the cost of the dollar debt to 4.7% per year. The net debt-to-EBITDA ratio was reduced to -- by 3x the lowest level since the opening of Fibria.

Moving on to Slide 5, we will talk about the pulp market. The demand for eucalyptus pulp grew by 3% in the 5 years -- in the 5 months of 2013 compared to the same period of last year with emphasis on North America and China with an increase of 15% and 9%, respectively. The key drivers for the growth in demand for eucalyptus pulp are the closings of pulp capacities in the northern hemisphere and increases in production in China.

The volume of global stocks of producers of hardwood set low -- maintained a downward trend during the second quarter, despite the fluctuation of inventories and days of sales. The inventory levels at the end of May was 39 days, in line with the historical average according to the PPPC.

This quarter, sales to Europe totaled 43% of the sales volume, followed by North America with 28% and Asia with 21%. A reduction of size percentage points in the allocation of sales to Asia compared to last quarter is related to the traditional seasonality of the period.

I now give the floor to Guilherme Cavalcanti, who will continue with the slide show.

Guilherme Perboyre Cavalcanti

Good morning, everyone. On Slide 6, we discuss the results of the quarter. Pulp production in 2Q totaled 1.291 million tons, which is up by 2% compared to the first quarter. Despite the greater impact of scheduled downtime for maintenance at the Três Lagoas units and A and B Aracruz units in the second quarter of this year. Compared to the second quarter of last year, the volume produced was 1% higher due to the higher number of plants performing scheduled downtime.

Sales volumes saw an increase by 7% compared to the first quarter of this year due to the higher production availability and seasonality of the period. In the last 12 months, previous sales totaled 5.234 million tons, representing 100% of the production of the period.

Net revenue for the quarter was BRL 1.669 million, 15% higher than the first quarter, mainly due to higher sales volumes and a higher pulp price in Brazilian reais. In turn, this was due to the increase in the dollar price and the appreciation of the dollar average. Compared to the same period of last year, there was an increase by 12% explained by the appreciation of the dollar and increased pulp price in dollars.

The cash cost of pulp production in the second quarter was BRL 546 per ton, which is up 8% compared to the first quarter mainly due to the scheduled maintenance downtime. It is worth noting that the increased reserve between the periods was lower than the increase between the first quarter of 2012 and the second quarter of 2012 due to lower number of units setting down into the second quarter of this year compared to the last year. In comparison between the second quarter '13 and the second quarter of '12, an increase of 8% in cash cost was mainly due to the higher cost of woods and the impact of the shutdown of Três Lagoas, which is concentrated in the second quarter of '13. And in the past year, this took place in the second -- between the second quarter and -- of '12 and the second quarter of '13.

We emphasize that our goal is to maintain control of cash cost below inflation. And these factors were influencing EBITDA for the quarter, totaling BRL 647 million, an increase by 15% compared to the first quarter of '13 In comparison with the second quarter of '12, EBITDA growth was 18%, of which represented an increase of 2 percentage points of margin.

Moving on to Slide 7. In line with the strategy of debt reduction, Fibria conducted in the second quarter an early settlement of BRL 1.378 million related to debt rates considered unattractive. We performed the repurchase of the debt due to 2020 with a coupon bond of 7.5% per year and also liquidated a credit export note, whose cost was higher than the average cost of debt as a company.

These operations contributed to a reduction of 24% of the gross debt in dollars in 12 months with a consequent reduction in the average cost of debt from 5.4% in the second quarter of '12 to 4.7% in this quarter. Fibria will continue to pursue opportunities to reduce debt and continue seeking the degree of investment. The increase in that, in Brazilian reais, compared to the first quarter of '13 is related to the appreciation of the dollar and foreign currency. Please note that this is in effect, which is mainly accounting related and has no cash impact, which occurs due to the export profile of the company that holds more than 90% of its debt in dollars.

The debt to EBITDA ratio stood at 3x, the lowest level since the creation of Fibria. The company's cash ended the second quarter '13 at BRL 1.683 million, representing 2.6x the short-term debt by improving the compliance of the commitment in the next 12 months. Furthermore, the long-term debt profile demonstrates that the low risk is in the short term.

On the next slide, we will discuss the company's hedge strategy. Aligned with the hedge strategy announced in the previous quarter, the operations of instrument non-deliverable forwards that matures in the period were not being renewed, which is offset by the increase in the notional options -- notional dollar options. These operations have become even more attractive during this cycle because the dollar was appreciated, and this allows catch rates while minimizing negative impacts in the events of the high appreciation of the dollar.

And this has not caused any losses because of the exchange rates, the exchange rate interval paid. Fibria does not receive and pay the adjustments, and this enables the company to capture a greater advantage in export revenues in a possible scenario of high dollar rate. And at the same time, Fibria can be protected against the backdrop of the dollar rates.

And also, our financial instruments are contracted according to the parameters established in the policy management market risk with conventional instruments in the area of governance, risk and compliance, which operates independently of the treasury and reports directly to the CEO and is responsible for monitoring and compliance policy management of market risk.

Moving on to Slide 9, we'll talk about the generation of free cash flow. The free cash flow in the second quarter totaled BRL 234 million. The increase in cash flow was primarily due to an increase of 15% in EBITDA and because of the actions implemented to improve working capital at the operations, discounted receivables and installments of suppliers. Please note that the line of interest increased by 8% compared to the second quarter of '12 as a result of actions to reduce debt, especially the early settlement of credit export notes, totaling BRL 53 million. And excluding this effect, the free cash flow would have been BRL 287 million. And in the last 12 months, the free cash flow totaled BRL 956 million.

Moving on to Slide 10, we'll talk about net income. In the second quarter of '13, the company recorded a loss of BRL 593 million, largely explained by the negative financial results, which occurred as a result of the appreciation of the dollar on the debt, totaling BRL 650 million, and also by the effects of the financial statements and repurchases of the bonds during the quarter. Please note that the expense from repurchasing the 2020 bond is nonrecurring and will provide an annual savings of $36 million -- reais as of -- sorry, dollars, as of the second quarter of '13. Excluding these effects, the net income for the quarter would have been a profit of BRL 80 million.

I turn now towards the moderator to begin our question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Lucas Ferreira from the JPMorgan.

Lucas Ferreira - JP Morgan Chase & Co, Research Division

My first question is concerning the cost performance in the second quarter, excluding the maintenance downtime, and profit were above inflation in this quarter. And I know even excluding the downtime effect, when you do the downtime, you also carry out some service at the plant and this cause these other effects. And the schedule for downtime is a bit different, and therefore, the results were distorted. I would like to know about the comments on the consumption of chemicals and inflation effects on -- in energy. And I would like to know what is within your reach or what else -- what can we expect from now onwards as related to these impacts and concerning your strategy of keeping costs below inflation? What can we expect for the next quarters since we are going to have less downtime?

Marcelo Strufaldi Castelli

Okay, now it's Castelli, and I would like to compare the second quarter '13 against the first quarter. Bear in mind that the cost of the first quarter in comparative terms and we had the downtime in Veracel and Aracruz. I mean, the second quarter, we had the downtime of plant A and B at Aracruz, and we moved forward the downtime of Três Lagoas for June, which usually took place in July. This was a marketing and a maintenance strategy. And with that, we had an 8% increase which corresponds to BRL 39 of delta. The BRL 15 are a result of the early downtime at Três Lagoas. The other BRL 13, they are specific. It's a difference of access in Três Lagoas where we also included the range of transportation that went from 167 to 179, but it doesn't change our fight plan for the rest of the year. But it's important to mention that BRL 10 was a result of 2 events that took place where we lost the sales revenue of utilities in the marketplace in the second quarter due to the 2 downtimes and the overhauls of the generators and turbines, one in Veracel and another in Jacareí, and then this maintenance to have an addition of BRL 10. From the cost management point of view, we are firm and we want to cost to go up lower than inflation. It has nothing to do with the wood and the increasing size of wood. So they are within normal limits. I would like to stress that what is out of our strategy is precisely the maintenance downtime for the 2 turbines. But when the energy market is very high, this has pressured our cost at BRL 10 per ton.

Felipe Martins Silveira - Coinvalores Ccvm Ltda., Research Division

My second question has to do with CapEx. In the end of last year, you said would be 1,200 and 1,230 due to a forest reformation. And now looking at the CapEx of the last 6 months, this implies that there is a slowdown in the CapEx in the second half of this year. To reach the range of 1,250 if -- even if the foreign exchange rate's going up and so we can have 1,250 throughout this year or will be higher than that due to the foreign exchange rate.

Guilherme Perboyre Cavalcanti

The CapEx is still are focused on our forecast is 1,250. Sometimes we have the seasonality of the demand [ph] where you spend more in one than the other. It depends on the climate conditions, where you plant more if you have the appropriate climate. But nothing will change the view for the year, and our focus is continue being in 1,250 and around this figure.

Operator

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

Jonathan L. Brandt - HSBC, Research Division

Firstly, on pulp prices, we started to see a little bit of pressure coming down from a high of $820, down to about $800 or so. I was hoping to get your thoughts on that, if you think that the September shutdowns will bring prices back up to $820, and sort of what your overall expectation is for the second half of this year. And then secondly, I just wanted to ask about the debt levels. And I noticed in the second quarter you were able to decrease the working cap, primarily through discounting some receivables. If you could sort of quantify how much more is left, and over what time period you're looking to decrease the working capital some more?

Unknown Executive

Excuse me, Mr. Jon Brandt, could you please repeat your question?

Jonathan L. Brandt - HSBC, Research Division

Yes. So the first question was on pulp prices and the expectation for the second half of the year, if you think that the September shutdowns that you're expecting will lead to an increase in pulp prices. And the second question was on continued debt paydown, if we can continue to see working cap being decreased and sort of over what time period we can expect that.

Henri Philippe Van Keer

Okay, John. Thank you for your question. Here is Henri speaking. I can say that our evaluation for the second half is quite positive. We can see some signs in July of an uptake in China, not very significant, but above the forecast. And our scenario has always been on continue with this reuptake of the demand. Everything indicates we are in the right path. And this, combined with a decrease of production due to the downtime estimated for September, and we estimate a positive balance between supply and demand.

Guilherme Perboyre Cavalcanti

As regards to the repayment of debt, we are going to continue evaluating market opportunity since we have a positive cash ratio, and therefore, we can continue the process for reducing debt and leveraging of the company. As to the working capital, we are going to continue performing actions, to continue improving the company's working cap. So in our relation with suppliers, it's very hard to quantify. But last year, we had a positive effect of BRL 200 million in working capital. And this year, again, we are going to also have a positive effect along these lines. Is it clear, or do you have any doubts?

Jonathan L. Brandt - HSBC, Research Division

Yes. No, no, that's very clear.

Operator

Our next question comes from Mr. Thiago Lofiego from Merrill Lynch.

Thiago Lofiego - BofA Merrill Lynch, Research Division

I have 2 questions. And the first one is in relation to cost and expenses. Just to make it clear, concerning the wood costs, do you expect regularization of the price? It went up this quarter. And should we expect normal rates in the high low? And what about the expenses, the major expenses with terminals? And I would like to know, has the ratio of expenses as regards to the revenues -- what can we expect down the road?

Marcelo Strufaldi Castelli

Now here's Castelli. As regards to wood, we changed the charge to carry the woods that were collected far away in place like the woods. There is no change in the structural access in the company when you take into account the whole year. The port expenses, basically, they cannot be explained. So that's a slight variation that they upward or downward, and this is a result of the collective bargaining agreements, tariff adjustments, nothing to worry about. Sometimes we face yearly paying for customs, but honestly, nothing that worries us in terms of structure.

Thiago Lofiego - BofA Merrill Lynch, Research Division

The second question to Henri. If you could like -- if you could talk about your price, we can see that ForEx, every year, we see a slight drop in the European and Asian prices. If your list price is still $850, so how will that be the next in the next few months?

Henri Philippe Van Keer

Thiago, thank you very much for your question. We are not going to try to deceive and want the list price of $850 did not go up. We had a forest increase in volume in May and June, but it did not move forward. And you are following the peak, it was around 6 2 or years -- 2 days ago and it's maintained between $110 (sic) [$810] and $820. We don't usually talk about our prices, but you may be sure that since we're -- was above the fixed price, by definition, I mean, Fibria were below 10, the market would be low and we would have a more significant decline time. Without answering directly your question, so we are slightly above in the majority of the cases.

Operator

Excuse me, our next question comes from Mr. Carlos de Alba from Morgan Stanley.

Carlos de Alba - Morgan Stanley, Research Division

Guilherme, selling [ph] expenses [indiscernible] will remain the same at the same level as a percentage of revenues, they continue to increase in absolute term -- numbers in line with revenues. And what I would like to understand is there any scope to squeeze some expenses out of the selling activity so you can further increase your margins? And the second question is regarding the scheduled strategy. Now with the currency in Brazil weakening and most market followers predicting that the real will weaken even further, would you use your level of hedges so that you benefit more from the weaker currency?

Marcelo Strufaldi Castelli

Castelli speaking, thank you for your questions. I would like to say that the movement of the administrative expenses of the G&A part of them are not recurrent. We are continue to introduce changes in our strategy. So it's a result of the indemnification of these movements. In the long run, this will be reversed and will help the company to come control its costs. So it's a day-to-day cost control with a revision of our organizational structure.

Guilherme Perboyre Cavalcanti

Carlos, this is Guilherme. As regard to hedging strategy, we do not need to reduce it because since March of last year, we have not had -- sold the future dollar. We changed our strategy to protect the cash flow through the zero cost collar operations. Today, the operations protect us in the case the real appreciates to below BRL 2, but it allows us to have an upside of up to BRL 2.76 today, that is we can maintain our hedge strategy and still continue to benefit from new devaluations of the Brazilian real.

Carlos de Alba - Morgan Stanley, Research Division

So you are now renewing the hedge -- the zero cost collars? Is that the case? And also, just to confirm, the range of the collar now goes from BRL 2 to BRL 2.73, and I think before it was from BRL 2 to BRL 2.60, right?

Guilherme Perboyre Cavalcanti

Well, we continue renewing the zero cost collar operations today. The range is between BRL 2 and BRL 2.66.

Operator

Excuse me, our next question comes, Mr. Diogo Miura from Goldman Sachs.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

This is Marcelo Aguiar. In relation -- Guilherme, I would like you to talk about your view of the company's rating, looking to the deleveraging in the next quarters. So when do you think the company would be level where would be eligible of having an investment grade? And as regards to first question, how much more do you think you can reduce the cost of your debt in the next quarters?

Guilherme Perboyre Cavalcanti

Thank you, Marcelo. In relation to the rating, S&P published in its report that we will reach 2.5x the debt-to-EBITDA ratio. So we may reach these levels within 6 to 12 months and for the other metrics to achieve investment grade. Our cash generation has improved, and the ability to pay our debts has also improved. So then, we believe, we are going to achieve it in the short period of time. As regards to the debt cost, we have a lot of opportunities. This is one of the value leverages of the company. We ended the debt of 4.7%. But today, we have $1.5 billion of debt, let's say the coupon around 7.5% in dollars, so you can make the calculation. As we have a strong cash generation, we are using the cash to pay the expenses, that the trend is for the average debt cost to drop significantly next year.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Excellent. The second question is in relation to the decrease of your assets through land monetization. I would like to know how feasible is the strategy with a higher Brazil real and an increased interest rates locally. And is there any possibility for you to do anything the next 12 months in using the assets? And I would like to know if this possibility has remained the same in this scenario, or how are -- how do you intend to go about?

Guilherme Perboyre Cavalcanti

Thank you, Marcelo. In fact, we should bear in mind that we have achieved a significant deleveraging only with the cash generation and would indicate we can be more selective in our negotiation. We have talked to 2 or 3 players. But the stronger our balance sheet, the more selective we can be.

Operator

Excuse me, our next question comes from Mr. Juan Tavarez from Citigroup.

Juan G. Tavarez - Citigroup Inc, Research Division

My first question is mainly regarding pricings. Could you give us a sense -- given that you weren't unable to fully implement the price increase that you announced a few months ago, are you still continuing to pursue that implementation? And just to get a sense of your negotiations, are you feeling any pushback from your customers of -- for a sense of a FX adjustment in your price, given that consumer importing countries are also seeing a bit of a weakness in their currencies?

Henri Philippe Van Keer

Thank you for questions, Juan. Yes, for sure, we can see the possibility of going after the price increase in the next month. As I have said before, we have a highly positive scenario until the end of the year. And again, the demand -- China is showing signs of a pickup of demand in July, while we expect it only in August or beginning of September. And this makes us not to wait the announcement we made in May. For the time being, we are managing the price in the market. We don't want it to go down, and obviously, we don't have a total control over it. We have competition and there are some volumes marketed at a lower price. But this does not mean our market declined. This is a result of some competitors who need to sell, and they are taking advantage of a more favorable foreign exchange. I did not quite understand your second question about the pick up or the resumption. I did not understand your question very well. Could you please repeat?

Juan G. Tavarez - Citigroup Inc, Research Division

It was more on, if you're feeling any pressure from your customers within Europe and in Asia to a FX adjustment in your prices, given that they're also feeling some pressure importing the dollar commodities in their regions?

Henri Philippe Van Keer

That's precisely what I have just talked about. In July, we made some sales that were not anticipated in our plans above the fixed, according to ForEx. What we think, it's highly positive. And that's why we had this evaluation. There was a drop of demand in China due to the seasonality and because they had some inventory levels. But we have this confirmation from the market that there is no hardwood pulp in China. We are very optimist. And in August, we are think we are going to have a pickup and the demand in this market, which will support our actions.

Juan G. Tavarez - Citigroup Inc, Research Division

Okay, great. And just follow-on, just to confirm. So could we say that your list prices that you have here in your report for June are the same in July? Is that correct?

Henri Philippe Van Keer

Yes, they are aligned, precisely. As I said, we believe that the market has good foundation. What would be waiting -- when the foundations are not very good, we are identifying a slightly lower demand according to the visibility. But we believe the market will pick up. So the price in dollar will be this one.

Operator

Excuse me, our next question comes from Mr. Renato Antunes from Brasil Plural.

Renato Antunes

So when we talk about strategy, in the long run, I would like to understand you have always been very clear when you talk about organic expansions in pulp and M&A movements. I would like to know what is your view. And the foreign exchange is depreciating, this will improve the return of your downfield. And the second one is about Portocel, how are your conversations and your frame of mind to expand Portocel?

Marcelo Strufaldi Castelli

Renato, thank you for question. The issue concerning the organic growth, our view is to continue to have a shipper behavior based on our capacity. The marketing window, and not so much macroeconomic, irrespective of the foreign exchange, we have to position our plan according to the market window. And we see that this window for Fibria the next entry would be in 2015, as we mentioned. We have time. The project is still feasible of Três Lagoas to that Madeira is throwing. We have lands with leasing, surplus forest, licenses. This is an extremely competitive project in terms of forest that will reduce the ways at average cost of Fibria. But this is not the only reason for our decision. We want to have a greater certainty of a positive market window, less macroeconomic issue but concerning the suppliers. We are still alert concerning any consolidation movement. History tells us that these are periods where the industry, sooner or later, will understand that the greater value generation is to adjust your portfolio, connect the dots in chain and market chain. We believe that this scenario at this stage is a stage of opportunity for M&A. Portocel, Portocel after the understanding of MP 595, which is the port law, it's still absolutely feasible from the legal point of view. And the business plan for Portocel to have this activity has expanded. I cannot give you some details. We are still talking to some partners, be they investors or strategic partners, that in addition to investing, would like to have their business linked to this undertaking with a broader view. Bear in mind that in a port, undertaking will add value, be it into the existing infrastructure for the port that an operations that market 70% of the pulp produced in Brazil. We have a guaranteed cash flow stability, and it also has a chance of boosting many other cargoes that would be complemented in addition to pulp. Our intention is still firm in pursuing this business to add value to Fibria's shareholders.

Operator

Excuse me, our next question come from Mr. Marcos Assumpção from Itau BBA.

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

If you could talk a little bit about the new paper plant, A and B, at Três Lagoas plant, if you could compare the profitability of the pulp sold to IP and the export in pulp. So how is that inside the company today?

Marcelo Strufaldi Castelli

Marcelo Castelli speaking. Thank you for your question. Marcos, the new window for IP window is from 12, 16, 18 if they should continue and they are requesting the licenses from the new machine. And this was considered by Fibria's consummated facts. There's the decision for exchanging assets in the past. The profitability is balanced when you think from the point of view of total cost over ownership, the cost of service to find. Bear in mind that pulp that you don't carry in inventory, new pulp is a premium risk. Based on the customer's features, you don't need any insurance. So the profitability is comparable to the market average for Fibria.

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

One last question. Henri, could you tell -- talk a little bit about the paper market in Europe? How is the scenario of the paper industries in Europe if they are -- if you expect the closing down more in order to improve the scenario for the paper makers?

Henri Philippe Van Keer

So the paper scenario, writing and printing is not very positive. But I think we have reached the bottom. There are some plants that are for sale or about to be closed down. But we have to see things in general. If you look at last year, the new plants in printing and writing plants closed down in Europe and in the U.S. were offset for the new plans in China. But answering your question specifically for Europe, closing down -- the bulk of the closing down of plants has taken place. It's hard to know. This is a decision of the owners of the machine. But the bulk of it is past and gone. And again, even with these close downs, they are offset by the growth in Asia, and I don't see why this trend would continue. And as regards to our clients in this line of business, we cannot see specifically any close down in Europe.

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

One last question. Looking to the pulp market in 2014, last year, we were looking a year ahead and there was a risk of drop in price due to the answering to the market of new plants. The market is tighter due to the close down. And so how do you see the year of 2014? Do you think that the price will be adjusted of slightly below with the entry of new plants? Are we going to have other closing down? And will the price will be more reasonable than we expect today?

Henri Philippe Van Keer

So we cannot be so optimistic as we were a year ago. This does not mean that we are not going to have a drop in average dollar because the foreign exchange of the emerging countries can be appreciated. We work with a conservative scenario with the a drop in price of 2014 on average, but not very significant, that is we are being more optimistic than the majority of the analysts. It's precisely because we see that there are always some adjustments. We only see the new plants coming online, and we cannot deny that there will be 2 significant plants on line. But we may have some closing downs that we cannot speak today as usual. And again, there will be an increased capacity in China. There were [indiscernible] in a hundred [indiscernible] around the world, and for 2014, 1.9 million. And this cannot be disregarded from our rationale. When we see the balance between supply and demand, again, a scenario -- a marketing scenario under pressure next year, but nothing too extreme.

Operator

Excuse me, our next question come from Mr. Viccenzo Paternostro from Credit Suisse.

Viccenzo Paternostro - Crédit Suisse AG, Research Division

My first question is whether with this change in scenario, especially the improvement of your leveraging in a more foreign exchange-favorable scenario, if there is any change strategy concerning your expansion project, or if your preferences is still the M&A. And my second question is not a question, is if you could comment on if there is any update concerning the tax assessment noted though concerning the profit of the subsidiary abroad and also concerning the exchange of assets with International Paper.

Marcelo Strufaldi Castelli

Thank you for question. My name is Castelli, and I will be answering your question concerning the strategy. Even with the foreign exchange improvement scenario, our proposal for value generation as it happened to Fibria, our preference will be for consolidation and not organic growth. And the Três Lagoas project for organic growth, it's still being worked on, and there is a visibility with the market window for 2016. Fibria's position is very clear. We are guaranteeing what we have in our hands. There is the growth of the company with discipline and value generation, since this is a brownfield and the decision depends on us. But we are going to continue to pursue our preferred consolidations that, in our view, add more value to our shareholders. As regards to the asset question, we in the process -- still continues in the first level at the administrative. As the year, we are in the very beginning. Concerning abroad, we don't have anything different from what has already been mentioned previously.

Operator

[Operator Instructions] Excuse me, our next question comes from Ms. Aliana Gill [ph] from JPM.

Unknown Analyst

I'd like to understand whether if your -- since you are anticipating and aiming at increasing leveraging, if you -- if the sales of assets is still a plan? That's it.

Marcelo Strufaldi Castelli

Yes, the sales of assets is still a plan. We have been doing this, and they were going to be allocated through expansions, closing Aracruz, a number of place. And these farms became non-strategic assets, and therefore, we are still selling them.

Unknown Analyst

And can we expect any cash generation still this year from these assets, from these nonstrategic assets?

Marcelo Strufaldi Castelli

Yes, I think so because we have the resources that are not -- despite having these assets, they are not relevant amounts.

Operator

The Q&A session for analysts and investors is now closed. I would like to give the floor to Mr. Guilherme Cavalcanti for any closing remarks. Mr. Guilherme, you may proceed.

Guilherme Perboyre Cavalcanti

I'd like to thank you, all of you, and I would like to invite you again for the second investor tour on October 2, which will be in Três Lagoas. If you have any additional questions, please contact our I&R department.

Operator

Thank you. This concludes Fibria's Second Quarter 2013 Results Conference Call. Have a good day.

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