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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

Juan G. Tavarez - Citigroup Inc, Research Division

Josh Milberg - Deutsche Bank AG, Research Division

Roy Yackulic - BofA Merrill Lynch, Research Division

Chelsea Konsko

Sarah R. Leshner - HSBC, Research Division

Consuelo Baraona

Fibria Celulose SA (FBR) Q3 2013 Earnings Call October 23, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to Fibria's conference call to present the results of the third 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. [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. At the end of the conference call, we'll be open for the Q&A session. Mr. Castelli, you may proceed.

Marcelo Strufaldi Castelli

Good morning, everyone. Thank you for participating in Fibria's 2013 Third Quarter Results Conference Call. Here with me are Guilherme Cavalcanti, CFO and IR Officer; Henri Philippe, Commercial and International Logistics Officer; and the other members of Fibria's Executive Board.

Moving to Slide 4. I would like to start by highlighting that the management's actions remain focused on achieving the investment grade. The reductions in gross debt continued with the repurchase of bonds maturing in 2020 and 2021, resulting in a further drop in foreign currency debt cost now at 4.5 per year. In September 2013, Moody's revised Fibria's rating outlook to positive. The company is currently rated to 1 notch below investment grade by the 3 rating agencies. Stabilization of the dollar at higher levels during the quarter contributed to quarterly EBITDA reaching a record level of BRL 762 million.

The solid operating results of the last 12 months, coupled with the liability management, resulted in a decrease in the net debt per EBITDA ratio in dollar to 2.9x, the lowest level since the company's creation. Despite there's more increase in inventories during the seasonally weaker periods in the industry, as anticipated in the second quarter 2013 conference call, demand showed significant recovery toward the end of the third quarter 2013 which resulted in an increase in Fibria's sales when compared to the second quarter 2013 and to the third quarter 2012.

Moving to Slide 5. Let's talk about the pulp market in more detail. Sales of eucalyptus pulp grew by 5% year-to-date during the first 8 months of 2013 when compared with the same period in 2012. The increase in sales has been significant in most of the regions of the world, especially North America, which grew by 16.7%; and in China, with 15.5% in the period. The tissue market is the primary driver for the strong demand for eucalyptus pulp, which has been mainly supported by the rollout of new machines. The shutdowns during the year and the postponement start up of the announced new capacities should keep supply levels restricted up to the end of the year. On the other hand, the traditionally strong demand over the final month of the year will keep a healthier market during the last quarter of 2013. Over the last 12 months, sales to Europe accounted for 39% of the total sales, followed by North America with 28%, and Asia with 24%. The end use of Fibria's pulp remains strategically concentrated in Tissue, followed by Printing & Writing and Specialties. Now I will hand it over to Guilherme Cavalcanti, who will continue the presentation.

Guilherme Perboyre Cavalcanti

Good morning, everyone. Moving on to Slide 6. We will now comment on the quarterly results. Pulp production totaled 1,347,000 tons, 4% more than in the second quarter 2013. Primarily due to the reduced impact on the scheduled maintenance downtime in the Jacareí Mill. In relation to the same period last year, production moved up by 2% given that in addition to the Jacareí stoppage third quarter 2012 performed [ph] partially the maintenance downtime in the Três Lagoas Mill.

There are no scheduled maintenance downtime for Fibria's units in the fourth quarter 2013. Pulp sales increased by 3% over both second quarter 2013 and the third quarter 2012, due to the higher production availability and higher sales in North America and Asia. In the last 12 months, Fibria sold 5,267,000 tons, equivalent to 100% of period output. Net revenue totaled 1,841,000,000, 18% up year-on-year, due to higher pulp price in reais, in turn caused by the average dollar appreciation and the dollar price increase.

In the last 12 months, total net revenue climbed 10% over the 12 months through September 2012. The pulp production cash cost was at BRL 501 per ton in the third quarter 2013, 8% down on the previous quarter, mainly due to the lower impact of scheduled maintenance downtime. In comparison with the third quarter 2012, the cash cost added up by 2%, primarily as a result of higher wood costs and the period appreciation of the average dollar.

As Castelli has already mentioned, the company's third quarter 2013 EBITDA reached a record of BRL 762 million, with a margin of 41%. In relation to the second quarter 2013, there was an increase of 18%, largely due to higher sales volume and the upturn in the average net price in reais, as a result of the average 11% appreciation of the dollar against the reais.

In the year-on-year comparison, EBITDA moved up by 33%, accompanied by a 4 percentage points margin expansion strictly due to the same factors that pushed up net revenue in the same period. The 15% rise in the average net of price in reais is due to the 13% average dollar appreciation against the reais and the 4% rise in dollar pulp price.

Now let's go to Slide 7, where we look at the cash cost in more detail. In comparison with the second quarter 2013, it is worth noting that the 8% decline in previous production cash cost on BRL 546 per ton to BRL 501 per ton was partially offset by a period upturn of BRL 8 per ton as a result of the dollar appreciation, given that around 15% of the company's cash cost is tied to the dollar. In relation to the third quarter 2012, the 2% increase was due to higher wood costs, greater share of wood from third parties and higher transportation cost, as well as the 13% average appreciation of the dollar.

These effects were partially offset by the reduced impact of the maintenance and stoppage and the lower specific consumption of chemicals and energy. The reduction was in turn due to the Fibria's initiative to modernize its use, such as Energy Master Plan at Jacareí, which is designed to improve energy efficiency and reduce gas and fuel consumption. Excluding the maintenance downtime impact, the third quarter 2013 cash cost was at BRL 482 per ton, 1% less than the second quarter 2013, and only 5% up on the third quarter 2012, due to the effects I have just mentioned. It is worth noting that consumer price inflation index in the last 12 months, as measured by IPCA, was 5.9% and the dollar upturn average 13%. As we mentioned previously, no new maintenance stoppage are scheduled for the fourth quarter 2013.

We will now comment on previous debt, so let's move on to the Slide 8. The company closed September 2013 with a net debt of BRL 8.2 billion, equivalent to $3.7 billion, representing a net debt-to-EBITDA ratio of 3x in reais and 2.9x in dollars. The Fibria's lowest ratio since its creation in 2009. In line with its debt reduction strategies, throughout the third quarter, Fibria undertook new bond repurchases totaling $223 million, mainly those maturing in 2020 and 2021 leading to a 21% reduction in the dollar debt in the last 12 months. This debt repayment helped bring down the dollar-denominated average cost from 5.2% in the third quarter 2012 to 4.5% per annum this quarter, with no significant reduction in the average term. Fibria will continue to seek opportunities for reducing its debt and remain strongly committed to achieving investment-grade rating.

In line with the operational foreign exchange hedging strategy announced in the previous quarters, the company continues to undertake zero cost collar operations, which are designed to provide protection against the excessive depreciation of the reais and do not lead to losses from the continued appreciation of the dollar at a determinate exchange level. Within the contracted exchange range, Fibria does not pay or receive the amount of the adjustments. This attribute allows the company to obtain great benefits in export revenues if the dollar moves up, while at the same time, be protected against a dollar downturn.

The company closed the third quarter 2013 with a cash position of BRL 1,246,000,000 including the negative market-to-market hedging instruments totaling BRL 367 million. It also had around BRL 1.4 billion in unused revolving credit line, giving a liquidity position of close to BRL 2.6 billion. As a result, the cash for net short-term debt ratio was at 1.7x at the end of September, in true compliance with Fibria's minimum cash policy.

We will now comment on our third quarter net income, so let's move to Slide 9. The company posted net income of BRL 57 million in the third quarter 2013, largely due to improvement in the period financial results. Thanks to the reduced effects of the closing dollar appreciation, and the lower accounting and financial impact of the bonds we purchased. It is worth noting that the financial expense generated by the bond buyback is nonrecurring and will lead to annual savings of $60 million in interest expenses as of the third quarter 2013. Excluding this effect, third quarter net income would have reached BRL 144 million.

On the next slide, we will talk about the third quarter 2013 free cash flow. The company recorded free cash flow of BRL 922 million in the last 12 months, and CapEx in line with our 2013 guidance. Working capital was substantially impacted by the receivables increase generated by higher revenues tied to letters of credit in the end of the third quarter 2013 when there was no time available to forfeit such invoices totaling BRL 161 million. If such transaction, whose cash impact was felt in the beginning of the fourth quarter 2013, had taken place in the third quarter, free cash flow would have reached BRL 1,083,000,000, representing a free cash flow use of 7.7%.

I will now hand you back to the operator so we can begin our question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] We will proceed to the next question. It comes from Juan Tavarez of Citi.

Juan G. Tavarez - Citigroup Inc, Research Division

Two questions. My first question is on the cost initiatives that you highlighted have helped to offset some of the wood cost. Could you give us a sense of how much more can we capture from the energy program and further cost initiatives? And if there's any CapEx linked to that going forward that we should be expecting? And tied to it as well, how much third party wood should we be expecting for the next quarter? I know you mentioned that you've seen an increase so far on a sequential basis. Should we expect that to continue to go up or we will see reversals?

Guilherme Perboyre Cavalcanti

Juan, for the fourth quarter, we expect a reverse on a cash cost. But for next year, we're not giving guidance yet. And it's worth mentioning that on the fourth quarter, we have no maintenance stoppage.

Juan G. Tavarez - Citigroup Inc, Research Division

Okay, so you expect cash cost to go down in the fourth quarter, just to be clear?

Guilherme Perboyre Cavalcanti

Yes, because we don't have a maintenance downtime. And also, we can expect some reversal in the wood cost.

Juan G. Tavarez - Citigroup Inc, Research Division

Got it, okay. And regarding the cost initiative. Is there any CapEx that is still expected going forward to execute those cost initiatives?

Guilherme Perboyre Cavalcanti

No, we have plans, we already -- but no, so far, we have no guidance on that.

Juan G. Tavarez - Citigroup Inc, Research Division

And just my second question regarding the pulp market, maybe if Henri can give us some color. I know you mentioned that you're expecting a better activity here into the fourth quarter. Could you help us assess that in terms of how much will you attribute the rebound and demand you're seeing to restocking or how much is actual consumption? And any sense that you can give us, I guess, in inventories in China, both on the pulp side and on the paper side?

Henri Philippe Van Keer

Juan, always very difficult question to answer about inventories because we are not spying on all the customers' warehouses. But according to our information, I mean, there is -- it is really related to real demand. I'm sure you've seen that the Chinese GDP has been revived now to 7.8% on the third quarter. And this is for sure, reflects, I mean, this demand, this increasing demand for pulp is, for sure, related to this good activity, good production activity from Asia, from China. So again, very difficult to tell you if there is a kind of a restocking, maybe. But most probably, this is related to real demand.

Operator

The next question we have comes from Paolo Belatti [ph] of Brasil Plural.

Unknown Analyst

My first question is about working capital. We saw an increase in accounts receivable in the quarter. I'd like to hear more details on that, if you may. And then my second question is on the company's biofuel projects, any update on that will be helpful as well.

Guilherme Perboyre Cavalcanti

Okay. On the working capital, we saw an increase on the receivables line, mainly because we sold 2 letters of credit. It was September sales. But in order to process those letters of credits, it took some days, and the cash came in, in the beginning of October. That was an impact of BRL 161 million that would have increased our free cash flow of the third quarter if those letter of credits had been discounted in the same month of September.

Marcelo Strufaldi Castelli

Okay, Paolo, this is Castelli speaking, thank you for your question. Regarding to the biofuel project, we're still talking about it internally. And we intend really to suggest or to present to our board some decisions for the next year to maybe to start up the new mill, new biofuel mill in Aracruz site, depending on the conditions of the technical final assessments, investment level, et cetera. But we are very optimistic in that respect.

Operator

Next, we have Josh Milberg of Deutsche Bank.

Josh Milberg - Deutsche Bank AG, Research Division

My first question is on taxes. On the Portuguese call, you discussed the issue of potential payment of the assessed amounts under the REFIS program just related to foreign subsidiaries, and I was just hoping you could explore this issue a little further and comment on what you think your ability is going forward to continue garnering fiscal benefits under -- using a system of transfer pricing? And just also comment on how any possible change in your policy could affect your cash tax rate, both looking out in the medium term and also looking out in the longer run? I know you still have other credits arising from goodwill and also recoverable PIS and COFINS taxes, but I just wanted to see if you could just give kind of a fuller picture of what might be the medium and longer term outlook for your effective tax rate?

Guilherme Perboyre Cavalcanti

Okay, Josh. So let's divide the question in 2. First, on the REFIS situation, so I said on the Portuguese call that we have: in principle, BRL 556 million; in fines BRL 417 million; in interest, BRL 593 million. So far, what we have is that we could pay the principal and if we pay principal, we don't need to pay fines and interest. We don't have any decision made yet on that but it's worth mentioning that the period from 2009 to 2012, the value would increase on a non-significant amount. So we are still evaluating if we will pay or not. But we have no decision yet. Okay. And also I even talked on the Portuguese call that there's nothing -- there's no measure yet announced by the government, but there's a possibility that we could use tax loss carryforwards that amounts up to 30% of the principal. If this happens, we have tax loss carryforwards enough to decrease this value, the principal value in 30%. Going forward, also, there's no definition about what will be the next law or how would be -- what the government would allow to do in terms of transfer pricing. But it's worth mentioning that for us, even in the worst-case scenario that we don't have any transfer of profits abroad, we still have a goodwill amortization that works as a tax shield for us. So even in the worst case, that I would have to leave all my profits in Brazil, I would not pay cash taxes for the next 5 to 6 years, okay.

Josh Milberg - Deutsche Bank AG, Research Division

Okay, that's very helpful perspective. My second question just related to the new pulp product that you highlighted at the Investor Day which has some softwood type characteristics. At that point, you weren't ready to give much guidance on what the scale of the opportunity could be. But you did mention that there would be a commercial launch next year. I was just hoping you might be able to give a little bit more color today on perhaps what you see the scale of the opportunity as being?

Henri Philippe Van Keer

Okay, Henri speaking. Again, I mean as we mentioned during the investor tour, I mean, this product is under development. And we do have some expectation, great expectation, on the development of this product. But so far, still under development and we cannot give any indication on the potential of this product so far because we are still in the process of evaluating this potential together with customers. No date since the investor tour.

Operator

The next question we have comes from Roy Yackulic of Bank of America.

Roy Yackulic - BofA Merrill Lynch, Research Division

I'm wondering if you can comment on potential landfill [ph] felt from leaseback transactions and what the status of it is and what progress you might see and when it might occur? And given the amount of short-term debt, what can we expect in terms of debt pay down in the remainder of this year or next year?

Guilherme Perboyre Cavalcanti

First on the sale leaseback, we are still in negotiations, so we have no news on this front. And in terms of debt repayments, we are always looking at the market and see if there's a good opportunities to buy back at the good prices for the company. So we are -- always look at the market and evaluate the opportunities to buyback.

Roy Yackulic - BofA Merrill Lynch, Research Division

Do you have cash liquidity to do that in your opinion now or not?

Guilherme Perboyre Cavalcanti

Sorry?

Roy Yackulic - BofA Merrill Lynch, Research Division

Do you have the excess or available cash to do that now, in your opinion, given what the cash balance is, how it's been reduced?

Guilherme Perboyre Cavalcanti

Yes, we ended up the quarter with BRL 1.2 billion in cash position and our minimum cash would be between BRL 800 million to BRL 1 billion, so we have excess cash to pay if we think that's good opportunity at a good price of our debt. It's worth mentioning that we also have revolving facilities on amount of BRL 1.4 billion. So our liquidity at the end of the third quarter was BRL 2.6 billion.

Operator

Next, we have Chelsea Konsko of TIAA-CREF.

Chelsea Konsko

My other questions have been answered but I was just wondering, can you please repeat the principal amount of the taxes on foreign subsidiaries?

Guilherme Perboyre Cavalcanti

The principal amount is 506 -- BRL 556 million.

Chelsea Konsko

Okay, I thought that was the fines. Can you just repeat the 3 numbers you provided?

Guilherme Perboyre Cavalcanti

Yes, sure. Yes, yes. Principal, BRL 556 million; fines would be BRL 417 million; and interest BRL 593 million.

Operator

The next question we have comes from Sarah Leshner of HSBC.

Sarah R. Leshner - HSBC, Research Division

I was wondering if you could give us an update on your quest for an investment-grade rating. We know that each agency is using a slightly different target for leverage and debt reduction and I assume that you're tracking those pretty closely. So I was just wondering if you have a sense of timing for possible rating actions?

Guilherme Perboyre Cavalcanti

Okay. You know that all rating agencies has different metrics. But the most common and the one that S&P put on his report is that we should reach 2.5x net debt-to-EBITDA in order to get an investment grade. So our target is to reach, of course, as soon as possible this level.

Sarah R. Leshner - HSBC, Research Division

Do you have any sense on when that might happen? Are you thinking that 2014 is still realistic?

Guilherme Perboyre Cavalcanti

It all depends on pulp prices and exchange rate. It's worth mentioning that 80% of our EBITDA variation is due to FX and pulp prices. So it's difficult to say because it will all depend on those variables.

Operator

[Operator Instructions] The next question we have comes from Consuelo Baraona of MetLife.

Consuelo Baraona

Yes, I'm just seeing the amortization is scheduled for the following month, and I'm seeing around BRL 1.2 billion in debt amortization for next year. Why are you thinking about -- are you planning to come to the market again or do you think it will be more with banks?

Guilherme Perboyre Cavalcanti

Okay. First of all, it's worth mentioning that this short-term debt, it's very cheap debt, so that's why we didn't pay this debt before. Just for you to have an idea, our average cost of debt in dollars are 4.5%, and considering that we have bonds that pays $1.5 billion in bonds that pays between 7% and 7.5%. So this gives you an idea how cheap are the short-term debt, and that's why we didn't pay it before and instead we paid bonds. We are not worried about that because if you look at this, the amortization schedule, the BRL 1.2 -- BRL 1.3 billion is mainly trade finance in the NDF. Currently, around 40% of our CapEx are in the NDF finances. So -- and also create -- we have a huge credit limits with banks that could easily roll over this trade debt. However, it's also worth mentioning that we generated, on the last 12 months ended in the third quarter, around BRL 1 billion in free cash flow. So we also have free cash flow enough to amortize all the short-term debt, if necessary, and also considering our excess cash position. Okay.

Operator

[Operator Instructions] At this time, it appears that we have no further questions. I would now like to turn the floor back over to Mr. Guilherme Cavalcanti for any closing remarks. Mr. Cavalcanti, you may proceed, sir.

Guilherme Perboyre Cavalcanti

Thank you, all, for your participation and support. If you have any additional questions, please do not hesitate to get in touch with our Investor Relations team. I will see you on the coming December 3 when the company will host its Annual Investor Day at the New York Stock Exchange.

Operator

Thank you, sir, and for the rest of the management team for your time. The conference call has now concluded for Fibria's Third Quarter 2013 Results Conference Call. At this time, you may disconnect your lines. Thank you, and have a great day, everyone.

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