Fibria Celulose SA Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Fibria Celulose (FBR)

Fibria Celulose SA (NYSE:FBR)

Q1 2014 Earnings Call

April 24, 2014 11:00 am ET

Executives

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

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

Analysts

Carlos de Alba - Morgan Stanley, Research Division

Thiago K. Lofiego - BofA Merrill Lynch, Research Division

Paulo Valaci

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

Eric Ollom

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

Natalia Corfield

Viccenzo Paternostro - Crédit Suisse AG, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Fibria Conference Call to present the results of the First Quarter of 2014. In case anybody needs a copy of the press release, please visit the Fibria's 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 risk, 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 will be begin the Q&A session. Mr. Castelli, you may proceed.

Marcelo Strufaldi Castelli

Good morning, everyone. Thank you for participating in Fibria's First Quarter '14 Earnings Conference Call. Here with me are Guilherme Cavalcanti, CFO and IRO; and other members of Fibria's Executive Board. Moving on to Slide 4, I would like to begin by saying that the company delivered important results in the first quarter of 2014, in line with its leverage reduction strategy and its focus on retaining investment-grade status. The gross debt reduction was chiefly due to the total repurchase of the 2020 bond, equivalent to $690 million, announced last year and concluded in this quarter.

Further on this call, we will detail the company's liability management initiatives, whose efforts were recognized throughout the quarter. These integrated Fibria's rate into investment-grade, BBB-/Stable and Standard & Poor's revised its rating outlook from BB+/Stable to BB+/Positive. Fibria's pulp sales volume in the first quarter historically marked by the demand seasonality remained stable year-on-year, totaling 1.2 million tons. Europe was the main destination, accounting for 46% of the total sales. The 19% appreciation of the average dollar against the real in the year-over-year comparison strongly contributed to the 13% increase in the company's net revenues, and the 20% upturn in EBITDA in relation for the first quarter '13. Fibria maintained the EBITDA margin above 40% in the first quarter 2014, and in the last 12 months.

Moving on to Slide 5, we will go into more details on the pulp market. We expect 2014 to be a challenging year for the market pulp industry. That the start up delay of new capacities prevented the oversupply previously expected for the first month of the year. The demand recorded a positive result from January to February 2014 when compared with the same period in 2013. The North America was impacted by the adverse climate conditions that hindered both pulp and paper flow. In the coming month, the industries' scheduled maintenance downtimes will play an important role in the balance of pulp supply in the market, as capacities begin their operations and the volumes are physically available. As for demand, the list of projects for new paper machines to be installed in 2014 is extensive, favoring a better balance between supply and demand throughout the year.

Now I will give the floor to Guilherme Cavalcanti, who will proceed with the slide presentation.

Guilherme Perboyre Cavalcanti

Good morning, everyone. Moving on to Slide 6, we will talk about the results of the first quarter. In the first quarter 2014, Fibria executed a scheduled maintenance downtime at Unit C of Aracruz Unit C, and started such downtime at Veracel unit. Both occurred within the company's budget and duration. When compared to the fourth quarter 2013, the 6% reduction in production volume was mainly due to the scheduled downtimes and the fewer numbers of days of production. In relation to the first quarter 2013, a 1% increase in production volume results from a scheduled downtime at the Veracel, which was concluded in that quarter as opposed to this year. Pulp sales volume this quarter was stable compared to the same period in 2013. In relation to the fourth quarter 2013, the variation arises from the industry's typical seasonality. In the last 12 months, Fibria 's sales totaled 5,199,000 tons, equivalent to 99% of the production in the same period. Fibria closed the first quarter with net revenue of BRL 1.64 billion, 13% up on first quarter 2013 due to the higher average net pricing in reais, in turn, arising from the 19% average exchange rate appreciation in the period. Compared to the fourth quarter 2013, the reduction was mainly due to the lower sales volume, resulting from the above mentioned seasonality.

It is also worth noting that the company's net revenue was a record of BRL 7.1 billion in the last 12 months. In the first quarter 2014, the cash production cost was BRL 549 per ton, 18% up on fourth quarter 2013, chiefly due to the scheduled maintenance downtimes and to the high wood costs, in turn explained by the higher transportation cost and higher wood from third parties. In the year-on-year comparison, there was an 8% upturn in cash cost, chiefly due to the higher transportation cost and the appreciation in the average dollar in the period. Later on, we will give more details on the cash cost of production. Despite the higher cash production cost, the 13% increase in the average net price in reais in the annual comparison contributed to the previous first quarter EBITDA of BRL 679 million, which means a 20% upturn when compared to the first quarter 2013, as Castelli already mentioned. EBITDA margin expansion to 41% represent a 2 percentage points growth over the first quarter of 2013. In the last 12 months, EBITDA was a record of BRL 2.9 billion.

Now please move on to Slide 7 so that we can talk about cash cost again and deepen our analysis. The increase in the cash cost over the fourth quarter 2013 to BRL 549 per ton results for maintenance downtimes, including transportation of third-party wood and higher transportation cost. When compared to the first quarter of 2013, 8% cost increase was chiefly explained by the higher transportation cost and the exchange rate effect.

Fibria continued to carry out initiatives in line with its focus on operating excellence, pursuing the 2014 target of cash production cost increase below inflation. This year, we expect an increase of excess energy sales, reducing the previously discussed cost pressures. Fibria's properly structured to neutralize any impacts resulting from the impending energy rationing scenario, considering that its separation is self-sufficient in electric and thermal energy generation, and its water supply comes from larger water sources and reservoirs In 2013, Fibria produced 115% of the energy necessary to the process of pulp production, being 91% of which obtaining from renewable sources.

Moving on to Slide 8. We will talk about Fibria's indebtedness. The company's net debt at the end of the first quarter of 2014 was BRL 6,970 million, equivalent to $3,080 million. These amounts represents a 7% or BRL 547 million net debt reduction. This decrease, together with increasing EBITDA, led to Fibria’s leverage, measured through net debt to EBITDA ratio to close to the period at 2.4x within the target set forth in the investments in liquidity products, and the lowest historical level since the company's creation.

Fibria's gross debt measured in dollars fell by 11% in the last quarter, and declined 24% in the last 12 month, closing March 2014 at $3,732,000,000, equivalent to BRL 8,445,000,000. The conclusion of the repurchase of 100% of the outstanding 2020 bonds for $690 million, who's coupon was 7.5% per annum, resulted in a material reduction in the average cost of debt denominated in foreign currency to the current 4.6% to 4.1% per year and annul interest rate of around $52 million. The main source of the funds for the repurchase of the 2020 bonds was the proceeds from land sale transaction. In the quarter, Fibria received from Parkia an addition BRL 882 million, and the remaining BRL 20 million is expected to be received in the coming quarters. The company's cash position, including the market-to-market of hedge in instruments, closed the first quarter of 2014 at BRL 1,475,000,000. Also, the company has approximately 1.5 billion in unused revolving credit lines, giving a liquidity position of approximately BRL 3 billion, equivalent to 2x its short-term debt.

Moving on to the next slide, we will talk about Fibria's net result for the first quarter 2014. Profits for this quarter stood at BRL 19 million, representing a BRL 5 million downturn over the net result for the same period the year before. These result were materially impacted by expenses arising from the total redemption of the 2020 bonds, which totaled BRL 303 million in the period. Excluding this effect, profit for the period would have been BRL 290 million.

I give the floor over to the moderator to begin our question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Carlos de Alba of Morgan Stanley.

Carlos de Alba - Morgan Stanley, Research Division

The first question is if you could help us understand in more detail what are the actions to reduce cash cost, going forward, or at least to try to offset all of the energy sales the pressure that we saw in Q1 during the remainder of the year? And second question is what are your expectations in terms of price discounts again in the coming months? We are hearing that the pressure on lower prices in China is quite strong right now, and the fear is that this starts to permeate into other markets like Europe and the U.S.?

Marcelo Strufaldi Castelli

This is Castelli speaking. Let's talk about, first, regarding to your first question, the actions we have to reduce the cash cost. First of all, we would like to reemphasize that the third part will affect majority, the CapEx that we did in the guidance. So the BRL 1.5 billion of CapEx, are still our forecast, and this is -- it's important because we'll absorb the majority of the impact of the third-party wood. In the cash cost, if we compare the first quarter '14 with the first quarter '13, the third-party wood, it's represents just BRL 5.2 per ton, okay. That explain a little bit more than 10% from the difference that it's BRL 42 per ton. Okay, the action is we have been looking for chemical consumptions. We have been looking for several projects that are including lower CapEx that will mature, especially on the second semester of this year that will bring us more competitiveness regarding chemical consumptions, energy consumption, et cetera, et cetera. We had one impact that is not a recurrent impact. We have been this first quarter, that's the dredging of the port, Caravelas port, that we use to transport wood and barges. Okay, and so this dredging affected the ability of Fibria to transport more wood from barge. So we had to transport more wood from the trucks. So the costs are a little bit higher for trucks. So the energy situation in Brazil represents an opportunity for Fibria. More we produce, more we generate extra energy. We have mentioned we regenerate 115% energy. So we have a 15% of surplus of energy that we sent to the market. And part of that is based on the long-term contracts that will not be favorably affected by the spot market that it is about BRL 817 per megawatt. But a small part, not the majority, but a small part from the normal energy duration that we have exposure to this pulp market. That's good for us. What we are doing? On top of it, we are maximizing the energy generation or cogeneration in our facilities to increase more. If we -- normally, we generate 100% -- 115%. We want to increase that range to really to go towards to the spot market. So this is very interesting. We do not give you -- give to you guidance in our cost. What I think the energy will be considered from now on as the major actions to really to reduce the cost pressure to keep our tracking that is to have the cost below inflation even considering the impact of the third wood in our balance. Talking more about the expectation of the price discount. You are right, the pressure from China, it's as always, is the worst we have. I do not believe in contamination in the market for eucalyptus. I believe in contamination in the market for long fiber because the gap, it's on the high level. It's around $150 per ton. This represent that more and more pressure will come to the guys from -- that runs long fiber. It's a time to wait. It's a time to be conscious because the pressure, they will always request bigger discounts, but the volume is not there. The oversupply -- the real oversupply is not there. Remembering that, Kerinci mill in Sumatra have announced that they will make a market-related downtime due to the fact that they don't have wood. So all-in-all, we have one trigger in the price, net-net transaction price, that will put a pressure. And again, this -- that non-compete or noncompatible, small-scale, high-pollution mills in inner China will start to really to stop. So I see more pressure, real one, in the second semester. I see that we are almost balanced. And on top of it, we're going to have a lot of shutdowns, maintenance shutdowns in the second quarter that is typical, as announced as explained. So this is real key for the balance in a good level.

Operator

Our next question comes from the Thiago Lofiego of Merrill Lynch.

Thiago K. Lofiego - BofA Merrill Lynch, Research Division

I have two questions. First one on your leverage levels, what kind of leverage levels would you like to preserve considering an eventual expansion in Três Lagoas or an eventual M&A? So what's your limit leverage on a sustainable basis? The second question is an update on further potential divestments to bring you further deleveraging. Are there any other opportunities on this front? And also if you could give us an update on the -- on Portocel, what's your strategy there, how the expansion plans are and if you're still considering to bring a partner to the port?

Guilherme Perboyre Cavalcanti

First, the leverage, as you know, we have a policy approved by the board, which states that our -- optimal capital structure states that we should be maybe 2, 2.5 net-debt EBITDA. In case of an expansion and this considers both organically or M&A, we can reach up to 3.5x. But look, with the commitment that going back to 2 -- between 2 and 2.5 as soon as possible. So that's what we have in our policy, and that's our limits that generally we consider, okay? In terms of divestments, we still have some small farms that we keep divesting each year. But it's not a significant amount, as we have been doing in the previous years. In Portocel, we are realizing studies, and we are also -- we don't decide the format that we want to have in the future. So we have been studying what kind of cargoes that we can put there, what kind of CapEx, so we are still in the study phase for them later in the process to bring a partner for it, okay?

Operator

Our next question comes from Paulo Valaci of Brasil Plural.

Paulo Valaci

My question is about the spread between softwood pulp and long wood pulp, hardwood pulp, if you guys could comment on how much substitution could contribute to an eventual closing of the gap, that will be very helpful.

Marcelo Strufaldi Castelli

Paulo, thank you for the question. I mean, knowing that the recycled paper feeds are most -- in the limit, and we have a potential really to address the market growth only with these new investments coming from planted forest, okay? As you know, we don't have any re-boost [ph] or a big announcement so far that are for softwood. On the contrary, we have made a lot of changing, modifications in terms of softwood pulp, et cetera, et cetera. Going directly to your question, we see that we still have a room for improvements, and Fibria is preparing itself to really to be -- to maximize that. I would say that, easily, I would say that, no doubt, that at least 500,000 tons of very fast and commercially wise, technically possible, we can really improve the substitution per year or this year.

Operator

Our next question comes from Marcos Assumpção of Itaú BBA.

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

My first question is related to the increase in cost given the increase in third-party wood. If you could comment, Castelli, to what level you expect the third-party wood to reach throughout the year, like we already saw an increase in the first quarter, what would be the peak level throughout the year?

Marcelo Strufaldi Castelli

Marcos, thanks for your question. Let me recap our history here, and the tracking record of Fibria regarding third-party wood. In 2012, we had a very close to 20% participation. In '13, we had about 25%, I mean, a 5% increase. And we did the guidance to the market, explaining the CapEx, the majority of the increase in the CapEx we had to reach the BRL 1.5 billion that is the current CapEx announced in the forecast for 2014. We see something about 40% from 55% -- 25% to 40% from third-party wood. This will be the limit. We are forecasting right now 38% rather than 40% more precisely. In the first quarter, this is seasonal. We had 26%. Again and again, the majority impact of it, it's on the CapEx, okay. So I would say that we're going to reach a peak of 40-something-percent, and -- but I will say that 38% as average of the year, it's the forecast that we maintain.

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

Okay, perfect. One question regarding the pulp market. How do you see the level of purchases from China in the recent months? Do you think that the Chinese buyers are ready, like reducing inventory levels in anticipation of lower prices? And like when do you expect them to come back to the market?

Marcelo Strufaldi Castelli

Typically, after the -- after this period over the first quarter, so remembering that the Chinese, they don't buy weekly or daily. They buy normally they have to address the letter -- LC, letter of credit, et cetera, et cetera, by the last week of the month. This is the typical behavior of the Chinese buyers. What's good for Fibria? 60% or 50% of our volume that we export to China is based on the global account, the global contract. So this would give us a very interesting and good flow in terms of logistics. Okay, they are trying to -- the telephone is ringing again. They are ringing the telephone and trying to sensitize the market regarding price. If I put an order, what's my best offer? Fibria is same. The best offer is unchanged. The price for March is unchanged from price of April. So this is -- it is what it is. This is the typical behavior and the standard behavior from the Chinese, the way of buying things. So the telephone is ringing again. I don't see that those Chinese, they have a lot of stocks, inventories in their hands. I see more pressure from long fiber because long fiber, rather than eucalyptus fiber, they are more on the hands of the trading houses. Typically, eucalyptus producer, they go directly to customers. They don't go with trading.

Operator

Our next question comes from Eric Ollom of Citi.

Eric Ollom

On the Portuguese call, you discussed potentially some acquisitions as well as potential bond issuance. Can you just tell us, what those plans, if any, are?

Guilherme Perboyre Cavalcanti

In terms of the bond issuance that we discussed, we just mentioned that, recently, the markets have been favorable for issuance of -- Brazilian issuance specifically, and we are looking closely and -- but we didn't decide yet if we are going to the market or not, but in case that we decide to go, it's for liability management. It's not pre-funding for any project or any acquisitions. It's just liability management. It will be just an exchange for other more expensive debts.

Eric Ollom

Okay. And as far as acquisitions?

Marcelo Strufaldi Castelli

This is Castelli speaking. Just to really to confirm, during the Portuguese call, we had a question regarding Três Lagoas, our organic growth or consolidations, like M&A or acquisitions. I said that we're firm in our project of Três Lagoas II, but we are always open to really to understand potential mergers and acquisitions, typically M&A. I've not said -- I don't wanted to say that, we're going to acquire somebody. I strongly believe that, in this kind of industry, the size of the company's potential consolidation should be a big M, that's merger, and a small A, that is acquisition.

Operator

Our next question comes from Marcelo Aguiar of Goldman Sachs.

Marcelo Aguiar - Goldman Sachs Group Inc., Research Division

So a lot has been asking about China. Can you comment a little bit about North America and Western Europe? I mean, when do we see global shipments, year to date, the majority of the weakness in a year-over-year basis in volumes were coming off from those 2 markets. And if I'm not wrong, we were discussing in the previous call, earnings call, a potential good momentum for Western Europe. So can you comment a little bit of what has happened? I mean, we know the winter in the North America may have impacted it, but if can you elaborate a little bit more? The other thing is regarding the new paper capacity. Are you guys really seeing clients in those ramping up the new mills as is expected or because of another even high inventories, for example, in China for paper, they are postponing those ramp-ups or start-up for later in the year? Or anyway, so just like to get a sense from you guys if you seek customers really delivering what has been planned or what has been on paper?

Marcelo Strufaldi Castelli

Marcelo Castelli speaking. Thanks for your question. Regarding to the demand that you can see on the PPPC report, North America, and for us, it's a more question regarding to the climate, a severe winter we had that affected pulp and paper and the majority of operations. You can see also, following that, the conference calls for one rail cargo company, they said exactly this. They had an impact because they could not travel across the U.S. So this is the real figure that we see that happened in North America. Western Europe, it's bitter and sweet because the majority of the demand of pulp is shrinking, as you know, in all the Printing & Writing. The tissue has remained okay, positive, unchanged. So this is good Fibria portfolio that we are less concentrated in the Printing & Writing. We are more concentrated in tissue and specialties or specialties on Europe, okay? Your other question is, sorry, could you repeat the other one?

[Technical Difficulty]

Operator

My apologies. It appears that they have dropped out of the queue. And in the mean time, we will move on to a follow-up question by...

Marcelo Strufaldi Castelli

Sorry. Can I -- okay, we have recovered the question from Marcelo Aguiar. One is regarding to the paper project that has been announced. The way we see, they are moving on. The inventories on paper, it's more concern in China. It's more concentrated on packaging, ivory board and Printing & Writing. And the majority of the projects that has been announced, they are concentrated on tissue. So they are moving on. And the way we see they behave, they just start up. They just tested the machine, and later, they balance the market with an operating rate level. So all projects, they are proceeding, specially on tissue.

Operator

And our next question is a follow-up question from Carlos de Alba of Morgan Stanley.

Carlos de Alba - Morgan Stanley, Research Division

Castelli, can we please reconcile your comment that currently the market doesn't have oversupply conditions? With the latest number from the PPPC this morning of an increase in inventories, I think fire wood went up from 45 days in February to 48 in March. And we looked at the adjusted numbers, it was 44 to 50, and also, the increase that we saw in Fibria's own stocks from 50 days last quarter to 56 days. Just help me understand how can we reconcile these numbers and how bad can we get then once we get into our supply conditions in the second half of the year?

Marcelo Strufaldi Castelli

Okay, Carlos. Let me start to talk about our case, Fibria. Remember that in the first quarter of 2013, we had the base, the final inventories of 2012. We have reached 46 days, okay, 46 days. So we had also in this 46 days, we had some extra sales that it was a carryover due to the letter of credits, the revenue recognition, et cetera. So it was in a very positive moment in the market. So anyway, seasonality was there as well. We rose from 46 to 50 days, okay? Right now, in the end of 2013, we had an inventory level in the end that was bigger than 46 days. So we rose almost the same amount of days if we compare like that. So we sold the same -- I mean, same production and same sales in the first quarter '14 compared into '13. When you look specifically to the inventories of hardwood, especially, this is -- it's a very important points to understand that the inventory will increase before the sales because when you start up one big projects like this, if you produce, you have to keep an inventory to fill-in the pipeline, rail transportation or outbound on the pulp, for the port, for shipping. So the majority portion of the production that was produced since the start-ups is typically that -- to understand that they are on the way, okay? This is one analysis that can be potentially considered. If you look through the hardwood demand, you will see that eucalyptus rose 2.1% of shipments. The total hardwood decreased 2.3%, with eucalyptus increased for almost on the same level. The same thing happened with softwood. The shrinking of both 1.3%. The other area, it's 2.5% increase. So it means that the Latin America producers, they are producing and selling as much there as they can because supporting by the terms of the demand, supported by in terms of the GAAP, especially eucalyptus, among a lot of hardwood and softwood. So I feel -- I see the market it's not really oversupplied yet. So I think it's under-balanced. So -- and according to how I understand it, Chinese, they don't have inventories enough to really to speculate. They had to buy, but they are trying to drop the price. This is their common behavior, okay? I see more pressures on the second semester, following and confirming our vision that we had since the last months of the last year.

Operator

[Operator Instructions] Our next question comes from Natalia Corfield of JPMorgan.

Natalia Corfield

Just to follow-up on Três Lagoas, do you already have a final decision if Três Lagoas is going to happen, is going to start this year or are you still analyzing it?

Marcelo Strufaldi Castelli

Natalia, thanks for your question. Três Lagoas, it's -- we are on the stage that we are detailing the engineering that we are receive in the proposals, technicals. We are analyzing, make comparisons, and what's our intention? The target is to access the board on June or July, okay, and suggest these approval, formal approval to proceed with the project, okay? That means that if we approve with the board, normally, we revert to the final competitors or tried to really to convert the final agreements into a commercial contract, and we install the purchase order, the first purchase order. So let's figure out that if we decide on July, we like to move on. We're going to conclude the contracts within 1 or 1.5 months. And the purchase, well, they will be in the end of August or in the middle of September. So this is it. So at the moment, the project will be alive potentially sooner in the last -- in the middle of September. But we don't have approval yet.

Natalia Corfield

All right. And is this including your BRL 1.5 billion CapEx for 2014?

Marcelo Strufaldi Castelli

No. It's not. The BRL 1.5 billion is just the normal CapEx for the acquisition operations.

Natalia Corfield

All right. So if that happens...

Marcelo Strufaldi Castelli

Of course, 5 -- Sorry, to make more clear, the BRL 1.5 billion considers the investments we already did on the forest. So in other words, we can assume that, BRL 1.5 billion is for the existing capacity, plus the forest reformation or renting land that we did for Três Lagoas II, but the majority of the CapEx that will involve typically inside the fence is not included.

Natalia Corfield

All right. So could I expect if the product is approved, as you mentioned, can I expect an increase in the CapEx for this year or the BRL 1.5 billion covers everything?

Marcelo Strufaldi Castelli

The BRL 1.5 billion do not cover everything. But the increase in 2014 regarding CapEx will not be big. Because if we take the purchase orders, the first ones, that is not the whole product. It's only the critical tasks and the major equipments will be not a big impact in the CapEx in 2014, an extra CapEx on top of BRL 1.5 billion.

Operator

Our next question is a follow-up question from Marcos Assumpção of Itaú BBA.

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

Just a quick follow-up here on the derivative strategy from you guys. We saw that the notional for the derivatives declined from December to March, but now, considering that the currency actually appreciated, that we have appreciated in the beginning of this quarter, and pulp prices are declining a little bit, are you starting to increase a little bit the hedging position to the end of this quarter?

Guilherme Perboyre Cavalcanti

You're right that our strategy is always looking at protecting a minimum margin. So whenever the affect, the real appreciates or the pulp price decreases, we should be looking more in order to protect a minimum EBITDA margin. However, the real didn't appreciate that much, not the pulp price for enough for us to change our strategy or start doing more derivatives. So we still -- the notional of our operational hedge is still 40% of our exposure that means -- and again, since the average range is between 2.10% and 3.3%, the delta hedge effectively is less than 5%. So which means that there is still the benefit for almost everything on the real depreciation, and we are protected from the appreciation, okay?

Operator

And our next question comes from Viccenzo Paternostro of Crédit Suisse.

Viccenzo Paternostro - Crédit Suisse AG, Research Division

I'd like -- basically, do you have any update on the biofuels investments based on the acquisition of Ensyn? Do you have any update when should we expect the start-up of the potential new biofuels news? I just want this update.

Marcelo Strufaldi Castelli

We are moving on the analysis here in Brazil, as we headed the joint venture with Ensyn here in Brazil, an exclusive one, to install and to operate biofuel projects. Our first option is to install the first mill in Aracruz because it's a perfect feet in terms of logistics, in terms of possibilities. And the residues from the forestry available, as we have our plan over energy efficiency, and they're one potentially -- one power boiler will be out of our operation, okay? This is on the way. We think that our decision will be until the end of the year, but this requires a small, a small CapEx comparing to Três Lagoas, for instance. And that the majority of the CapEx, and that is pretty small, will be happening in 2015 if we decided in the second semester.

Operator

Thank you. This concludes the question-and-answer session. At this time, I would like to turn the floor over to Mr. Guilherme Cavalcanti for any closing remarks. You may proceed, sir.

Guilherme Perboyre Cavalcanti

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

Operator

Thank you. This concludes Fibria's First Quarter 2014 Results Conference call. You may now disconnect your lines at this time.

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