Fibria Celulose's (FBR) CEO Marcelo Castelli on Q2 2016 Results - Earnings Call Transcript

| About: Fibria Celulose (FBR)

Fibria Celulose SA (NYSE:FBR)

Q2 2016 Earnings Conference Call

July 25, 2016 11:00 AM ET

Executives

Marcelo Castelli - CEO

Guilherme Cavalcanti - CFO

Henri Philippe - Commercial and International Logistics Officer

Analysts

Felipe Hirai - Bank of America

Carlos de Alba - Morgan Stanley

Lucas Ferreira - JPMorgan

Leonardo Correa - BTG Pactual

Thiago Lofiego - Bradesco BBI

Marcos Assumpcao - Itau BBA

Jon Brandt - HSBC

Viccenzo Paternostro - Credit Suisse

Julian Larson - Millennium Bank

Juan Tavarez - Citi

Luis Prieto - Deutsche Bank

Herman Funk - MetLife

Presentation

Operator

Good morning, ladies and gentlemen and welcome to Fibria's Conference Call to present the results of the second quarter of 2016. In case anybody needs a copy of the press release, please visit the Fibria Investors link at www.fibria.com.br/ir.

We would like to inform you that this transmission is being recorded and all participants will be only listening to the conference call during the Company's presentation. We will then move on to the Q&A session for industry analysts when further instructions will be given. We inform that each participant will only be allowed to ask two questions with a five-minute time span [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, forecast 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 occur. 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 this forward-looking statement.

Now, I would like to turn the floor over to Mr. Marcelo Castelli, CEO, who will begin the conference call. At the end, the conference call will be open for Q&A session. Mr. Castelli, you may proceed.

Marcelo Castelli

Good afternoon everyone and thank you for participating in Fibria’s earnings conference call for the second quarter of 2016. With me here today are Guilherme Cavalcanti, CFO and IRO and other members of Fibria’s Executive Board.

Let's go to Slide 4 of the presentation where we will comment on the main period highlights. I would like to begin by emphasizing that the Company delivered important results in the second quarter. The good operating performance was mainly due to a strong sales volume. The reduction in the cash production costs and the improved performance of the mills especially in May and June following the completion of retrofit on the recovery boiler Mill C in the Aracruz unit among other factors. May saw the successful beginning of the operation with Klabin resulting from the agreement entered into the last year for the exclusive sales of hardwood pulp from the Puma project to countries outside South America.

Given that the contract doesn't have as a scope generation of EBITDA, we have begun to report Fibria's pro forma EBITDA margin, which excludes the revenues impact of Puma Project pulp sales which achieved 43% in the second quarter and 52% in the last 12 months. In regard to the pulp market which we will be talking about in more details in later on, demand for hardwood moved up specially in China where sales climate by 7% year-over-year in the first five months according to the global sales figures in the PPPC Global 100 Report.

Fibria's pulp inventories including the one from Klabin fell to 54 days. On the investment front, this quarter we issued Brazil's biggest ever agribusiness receivables certificate operations of R$1.35 which was a great success not only in terms of demand which reached to R$2.4, but also in regard to the prices which Guilherme will be talking about later. We closed second quarter ’16 with a strong liquidity position, net debt in dollars virtually flat over the previous quarter and leverage ratio of 2.1 times in dollars in line with expectations and within our financial policy parameters. The quality of Fibria's credit is reflected and meets investment grade BBB minus rating with a stable outlook granted by Standards & Poor's and Fitch.

Moving onto Slide 5, we will now say a few words about the pulp market. The second quarter was marketed by the resumption on Chinese demand for hardwood pulp following the beginning of year decline in sales volume and prices light. Throughout the quarter, the fundamentals of the hardwood pulp market improved substantially, fueled by good global demand and increasing gap between hardwood and softwood pulp prices. As a result, a price was announced as from June 1st.

Also, it's estimated that around 300,000 tons of hardwood pulp were removed move from the market in second quarter ’16 due to scheduled maintenance downtimes and unscheduled stoppage worldwide. At the end of the June the Fibria's inventory were 54 days representing a controlled level which is favorable given to new capacity coming on stream from the Puma project. Europe accounted for 36% of the total sales including the volume from Klabin and its worth noting the increasing importance of China which accounted for 33% of the quarter's net revenue.

I will now hand you over to Guilherme Cavalcanti who will proceed with the presentation.

Guilherme Cavalcanti

Good afternoon everyone. Let's go through Slide 6, where we will talk a little about our second quarter results. As we already have addressed this sales performance. I will now comment on production volume. The 3% decline over the second quarter 2015 output was mainly due to this lower stabilization curve following the stoppage in line with the adaption of the boiler cycle to 15 months and the residual effect of the Aracruz's Plan C, recovery body retrofit which was concluded in April. Net revenue increased by 3% over the second quarter 2015. Thanks to higher sales volume and the 14% [ph] appreciation of the average dollar which offset the 13 [ph] percentage rise in the pulp price in dollars.

Adjusted EBITDA totaled R$925 million in the second quarter 2016 with a pro forma margin of 43%. The reduction over the second quarter 2015 was due to higher cash COGS and the 1% reduction in the average net pulp price in reais while the decline over the previous quarter was chiefly due to the 16% decrease in the average net price in reais in turn impacted by the 10% devaluation of the dollar against the reais and this 6% downturn in pulp price in dollars and the higher cash COGS partially offset by the upturn in sales volume.

Now let's go to Slide 7 where we will talk about our cash production cost. The cash production cost fell by 5% over the first quarter primarily due to reduced effect of the scheduled maintenance downtime including the retrofit of the recovered by the boiler C in the Aracruz Mill concluded in April, lower chemical consumption thanks to the improving operation stability and the foreign exchange appreciation partially offset by higher cost as a result of a non-recurring increase in third party wood.

I would just like to reemphasize that the wood cost variation was within expected levels and that the company is currently experiencing higher non-recurring wood costs as disclosed on previous occasions to the market with filing at the stock exchange commissions and on events with investors. The healthy second quarter operating performance was [audio gap] cost in May and June which came to R$639 per ton, 4% down on the cash cost x down times in the first quarter 2016 despite the pressure from wood cost.

Moving onto the next slide where we'll talk a little bit about the company's indebtedness. The increase in Fibria's gross debt this quarter was mainly due to the initial withdrawal of funding from the Finnvera export credit agents for the Horizonte 2 project and the R$1.35 billion issue of agribusiness receivable certificates which in addition to recorded demand of 1.8 times the book had a highly comparative cost comprising one trench of R$880 million at 97% of the CDI interbank rate maturing in four years and another trench of R$470 million at the IPCA consumer price index plus 5.98% per year within a time of seven years.

The Company's cash position exceeded upturn in gross debt in reais thanks for the cash flow generation as a result in the period net debt in reais fell, while net debt in dollars remained very close the previous quarter level. The average debt term in cost in dollars also remained virtually flat at 49 month and 3.4% per year respectively. Leverage measured by net debt to EBITDA ratio closed the quarter at 1.82 times in reais and 2.1 times in dollars in line with the expectations and within the limits established in the financial policy. I would just like to conclude, this is like emphasizing that Fibria currently has a very comparative financial cost that will be even lower with the funding of the Horizonte 2 projects, reducing the impact of the interest expenses on cash flow, even if leverage moves up.

Now let's go to Slide 9, where we analyze Company's liquidity. The Company's cash on hand which excludes the market-to-market of hedge instruments closed the second quarter 2016 at $932 million, it also had a $545 million in unused revolving credit facilities, giving a total liquidity of $1.477 billion. Fibria also has in addition to operating cash generation, the funding line for the Horizonte 2 project which have yet to be withdrawn as shown in the graph at the bottom of this line.

As you can see the current cash position plus the Horizonte 2 funding line yet to be used are sufficient to cover H2 CapEx plus debt amortization in 2016 and 2017 while the revolving credit facilities are sufficient to cover amortization in 2018. In order words, the current cash position plus the already contracted H2 funding lines and the revolver lines provides sufficient liquidity to meet debt and H2 obligations through 2018 when the Company's cash flow will be already been benefiting from the entry of the new mill. Thus operating cash generation in this period can be used to pay dividends and other investments that generate returns for the shareholders as long as the leverage remains in line with Fibria's dividend and investments policies.

Now let's move on to the next slide where we will talk about Fibria's second quarter 2016 net result. The Company posted second quarter 2016 net income of R$745 million partially benefiting from the non-recurring impact of the positive financial result due to the devaluation of the dollar against the reais who's effects were mainly felt by the exchange variation on debt and devaluation in the market-to-market of hedge operations. In the quarter adjusted hedge settlements totaling R$47 million all of which related to debt hedge operation.

Now let's talk about free cash flow in the second quarter 2016, which you can see on Slide 11. Second quarter free cash flow excluding Horizonte 2 CapEx and dividend payments in May totaled R$413 million equivalent to $180 million [ph], the upturn in interest payments in the second quarter 2016 was essentially due to the same annual payments of the interest in the bonds in the agribusiness receivables certificates issued in October 2015 to finance the Horizonte 2 project. Positive working capital is already beginning to reflect the working capital release arising from the commercial settle with Klabin.

Now let's move onto the Slide 12 where we talk about the Horizonte 2 project. The project closed in the second quarter, 45% physically complete, as it is ahead of schedule we now estimate the start up of the new mill in the beginning of the fourth quarter of 2017. Financial execution is below the original budgets schedule with only 25% having been disbursed. As we'll mention later on, total Horizonte 2 CapEx was reduced to R$7.9 billion, 800 million less than previous estimate of R$8.7 billion. We will go into more detail on CapEx in the coming slides, so let's move ahead to Slide 13.

2016 CapEx previously estimated at the R$8.2 billion in the CapEx expenditure budget proposal published on January 31st of this year has been revised down by R$1.5 billion to R$6.7 billion being the revision cost created on the Horizonte 2 Project and on pulp logistics project. Such reduction demonstrates the Fibria's flexibility on CapEx management, some of the initiatives of 2016 CapEx reduction were announced to the market on the Horizonte 2 Project update conference call on May 31st.

Moving onto the next slide we will say a little more about Horizonte 2 CapEx. As I mentioned previously total CapEx for the Horizonte 2 Project was reduced by R$800 million and is currently estimated at R$7.9 billion while dollar remains unchanged at $2.4 billion. It is worth nothing that the CapEx postpone of the Horizonte 2 Project has no effect on the physical execution of the work which are ahead of schedule with startup expected for the beginning of the fourth quarter of 2017.

Now let's go to the next slide which summaries Fibria's 2014-2016 CapEx revisions. Using the CapEx expenditure budget proposal published on January 31st of this year as a base, we can see the pulp logistics projects CapEx estimated at R$690 million has been rescheduled to the coming years representing a reduction of around R$500 million in the 2016 CapEx. According to the same analysis, CapEx of R$1 billion in the Horizonte 2 originally scheduled for 2016 were postponed and there was an effective reduction of R$800 million in total project CapEx. Looking at the CapEx disbursement curve for this project, the result is a R$1.5 billion reduction in 2016 CapEx as we have already mentioned and an effective reduction of R$800 million.

I will now go to the final slide to reinforce certain important aspects that we have covered in the call. Fibria's focus on operational excellence and financial discipline has led to important results in the second quarter 2016. On the cash cost management front, the Company improved it’s operating performance specially after concluding the boiler retrofit of the Mill C in the Aracruz unit in April leading to an average cash production cost of R$639 per ton in May and June.

It is also worth noting that the cash cost is still suffering non-recurring pressure from the increasing need for third party wood as we already mentioned in previous occasions. On the CapEx management front we obtained a reduction of R$1.5 billion in 2016 CapEx, R$500 million in logistic project and R$1 billion in the Horizonte 2 project with no impact on startup and reduced total Horizonte 2 CapEx by R$800 million maintaining it at $2.4 billion. Also in regard to Horizonte 2 we reached 45% fiscal completion mark allowing us to estimate startup at the beginning of the fourth quarter 2017.

I would also like to reaffirm as we have seen that the Company’s strong liquidity position considering the funding lines of the Horizonte 2 project is sufficient to cover all debt and project obligations through 2018 and these without considering operating cash generation which can be used to pay dividends and for modernization project as long as is in compliance with the company's financial policy. Fibria’s focused on financial discipline means that it has alternatives for using its assets to manage its leverage as well as existing CapEx flexibility.

I will now hand you over to the operator to begin our question-and-answer session.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions for investors and analysts. [Operator Instructions] Our first question comes from Felipe Hirai from Bank of America.

Felipe Hirai

So, just two questions from our side, if you could just explain a little bit better how you were able to get the reduction on the CapEx and really what happened in the last two months because when you announced the recent update on the Horizonte 2 we were not expecting or we didn't see such a decline in the cost. The second question is how you're looking at your leverage going through the end of this year given your revised CapEx?

Marcelo Castelli

This is Castelli speaking, going directly straightforward we reassessed the CapEx expenditure after the completion of the final negotiations of the project and considering that we have reached 45% of the progress of the project. Also during this time it's known that you can be more clear in your hands and review what's going on in terms of the CapEx expenditure in what we call the more contingency as well. So, in general R$100 million reduction comes from two main blocks, one that represents R$250 million, it's mainly inflation and FX.

Inflation we started to review down based on the Central Bank provisions for the future that we did not have couple of weeks ago. That’s explained from this 100 and 250. Inflation and FX. The other really came from positivity, lower risks and the negotiations that we did after the final acquisition of the of the equipment and the packages, this is it.

Guilherme Cavalcanti

In term of leverage for this year, we don’t give guidance and of course it's all depends on the pulp pricing effect. But we hope -- we expect that it will be inside our amount [ph] there is and remain and remember that we had management and we have a policy that states that we should pursue to stay within our limits which is 3.5 time of net EBITDA in expansion period and 2.5 in regular period. But of course going forward it depends on these two main variables, of that is pulp price and FX.

But anyways we think that even if the leverage goes up it will be punctual with the very -- just a few quarters because once the project start remember that our EBITDA expands, the production expands in 37%, the EBITDA expands in 50% and the free cash flow expands in 85% bringing the leverage down very quickly after the project starts. And I think that the main points that we tried to stress in this presentation is that we have -- we ended up with almost R$3 billion in cash on hands this quarter. If we -- this is enough to pay for the remaining CapEx of H2 and the amortization for the rest of the year.

If -- I didn’t withdraw any BNDES yet, not FDCO. If I -- counting the BNDES money, FDCO half of this sale [ph] is due to be withdraw and the working capital of Klabin, that is being used. We really -- we have enough resources to pay for the entire project remained and all the amortization of the debt up to 2018, with no need of new debt nor use our cash generation, that can be used to be pay dividends or other investments.

With a very strong liquidity position that makes us very comfortable that there is no chance that this project will not go ahead because of money. We have enough money to finish it, with our lines that we have and I am not even counting on new funding that can be opportunistically like the last grab that we did.

So it's a very strongly liquid position as you can -- you couldn’t see in any other project of this spectrum.

Operator

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

Carlos de Alba

First question has to do with net debt to EBITDA. Again it was very clear that there is not an issue in terms of liquidity to finance the project whatsoever. The question then comes on net debt to EBITDA and the 3.7 self-imposed limit, at the peak of the CapEx cycle. What are the -- I mean is it possible on the certain scenarios that the Company will breach that self-imposed level or limit? What would be the measures that the company would take? And what would be the impact in net debt that you could derive from them in order to stay within the limit? And alternatively would the company consider temporary hall-pass or a temporary withdrawal of the self-imposed limit?

And then the second question has to do with cost, given that the results were below consensus in the last couple of quarters and you can attribute at least some of that to higher cost, clearly there is, the market is not getting -- may be how quickly or how long will it take for the cost to normalize down in terms particularly of the lower third party wood that the company is using. Could you give us some more details to better estimate and model that costs with option going forward? Thank you.

Guilherme Cavalcanti

Hi Carlos. In terms of the leverage if we passed the 3.5 there is no consequence. Just the management has to pursue to try to bring it back again, remember that the project itself will do this job for us, but anyway even though we have ordered CapEx flexibility we can postpone CapEx, we can perhaps make other measures in order to bring it down. But, again it's going to be very few quarters, if it happens and because it relatively start soon and it starts generating EBITDA.

Marcelo Castelli

Hey Carlos thanks for your question regarding to the cost. We -- I would like to reemphasize that mainly it is below consensus or above the consensus regarding to the cost is explained for the recovery boiler retrofit that we did, that’s also affected first quarter of 2016 and also the second, partially the second quarter of 2016. We give a guidance regarding to the last two months in terms of costs that we have reduced for 662, okay -- 639, I am sorry.

So that represent our regular or recurring costs and in that level also we are running from the third party wood year basis about 40% in debt leverage according to our guidance in the coming -- in the beginning of the year. So, this is that what we can comment right now and knowing as well that if the FX stays where it is than the inflation will reduce, we're going also to have a chance to even further reduce the cost. But I think that we're under control and the third party wood is the most important thing, it's absolutely according to expectations.

Operator

Our next question comes from Lucas Ferreira from JPMorgan.

Lucas Ferreira

I just wanted to get an update on the market situation especially regarding this price increases that you announced, how much of that was implemented already, your expectations of also seeing higher prices in the coming months and what is the situation in offer for July, August which is typically a low season if you expect prices to remain at those levels or some of your competitors already announced a decline in prices if you think this is something that we will see broadly and especially the situational of demand out of China? That will be great. Thank you very much.

Marcelo Castelli

Thanks Lucas for the question. Basically, as I had said previously that was very important to see that the demand from Asia and especially from China started to recover as from March onwards. That was a very new and it was even better when it consolidated through the second quarter.

So we had a very good demand coming back from China, from Asia and this is the reason why we’ve decided to announce this slight increase as from June the 1st. We managed to increase partially this price in Asia over the course of June and we’re still in this process in July. As you know, July-August is more like a summer season period not only in Europe but also in China and of course the demand is not as urgent I would say, not slower, but as urgent as it is previously but we are quite confident that this demand that recovered two-three months ago will continue to go on.

As far as Europe is concerned, the situation is a little bit different because we had at the beginning of the second quarter, we had a huge gap between Europe and Asia and of course we needed to bring Asia back to the level of Europe and we are about to achieve that before we manage to really implement this price increases in Europe. So it’s about rebalancing the two markets so far. It’s a global market achievement to think that we can have a much higher margin one market for quite a long time, it has to be balanced.

So we are in this process and we are quite confident that due to the good demand and not only in Asia but globally we will be in the position to increase prices but of course we cannot give any guideline. But there is another point I would like to share that there are some people announcing that the price might be decreasing, but if you look at the number, there is not so much room for price decrease. I mean we have, whether it’s in Europe or in Asia, we have reached kind of a bottom pricing, not much room for lower prices. So there is only one way which is up according to us and again the demand is supporting this way.

Lucas Ferreira

Okay, just a follow up and specifically talking about Klabin’s volume, so I just wonder if you could comment on how easy it’s been to sell that additional volume, if you’re getting any push back from clients from having this additional tonnage to sell in this balance markets and in this markets you mentioned you see your clients have no urgency to buy. So can you comment on how easy has it been to place those, that additional tonnage in the market?

Marcelo Castelli

That’s a good question because it’s important that we talk about Klabin. Of course Klabin is starting the -- we are starting the commercialization of Klabin also, it’s normal that we introduce the belt to the market, the quality, the grade itself. But as far as the demand and the volume is concerned, there was no big issue. I mean we treat the two grades, Klabin and Fibria the same way, we only deliver to some region and of some customers according to the optimization of the occupation.

So we have to consider that Klabin volume is part of Fibria volume. But again in some cases we had to find some agreements with some older customers are involved. So while of course you have some qualification rebate which is normal to happen in such a consensus, but I can tell you that there was no restriction at all to this volume and when we say that we have finished the quarter with 54 days of inventories, this is of course already including the Klabin results, this is of course very good signal to the market.

54 days and by the way we have some carryover, so it could have been even lower, it could have been closer to 52 days, this is a very low inventory for us. We cannot go any below this number because otherwise we're risking some delivery to our strategic customers.

So I would like to say that and to make it very clear Klabin is part of Fibria's volume, we cannot be considered -- we have some optimization by countries by region depending on the logistics, and 54 days including Klabin, means that the demand will have a good positive rate.

Operator

Our next question comes from Mr. Leonardo Correa from BTG Pactual.

Leonardo Correa

I have a couple of very specific questions for the Guilherme, just on the tax rate, the effective tax rate and cash tax payments slightly dynamic, there has been some changes right just given this new level of currency in pulp prices and expectations of taxable income being generated. So I just wanted to get your sense on how long -- under these new parameters, how long can Fibria continue to sustain these close to zero cash tax payments please?

And the second question, again sorry for the detail, but most of my questions have been answered, on the hedging strategy I mean you came out with a very clear explanation on the zero cost collar and talking about net exposure of only 30%, my question is given the rising volatility that we've been seeing on the currency, would you be considering increasing that net exposure to try to protect EBITDA from further appreciation of the BRL going forward? Those are the questions, thank you very much.

Guilherme Cavalcanti

Hi, Leonardo, regarding the tax issues that we have, let me explain it previously the good amortization tax law carry forward, all the scheduled tax credit apart, it depends on the level of tax and the pulp price. This can last longer on first quarter. Currently, I would say we can estimate 3 to 4 years with very low cash taxes using those tax sheets and after that remember that for pulp we still have the treaty and the special price in for pulp changes. So it will depend what will be the regulation that will be prevailing by them.

So but of course we always have tax credits in many state credits -- special credits. We will never pay a full effective tax rate of 34, so for forecast purpose, I would say that 20% to 25% effected tax rate after the 4 to 5 year [ph] is a reasonable estimate.

Now, the second question was [multiple speakers] zero cost collar, there is a zero cost collar for the next 12 months. We do have 40% of our exposure protected and on the horizon of 18 months it's 30%. The good levels are around the short-term on the 325, so we’re still protected, but there are not doing -- using the positive -- having positive gains here, but we're protected on those levels. Remember that our exposure in the short term increased because 70% of the project CapEx are in reais, that's why we today have around $1.5 million in zero cost collars because we have are protecting the total currency exposure including the reais as part of the project.

So, we didn't change that. We are seamlessly [ph] in the put and cost now that the probability of the currency to appreciate is higher. So, we are not doing the same levels of zero cost collars that we did in the past, for example for this quarter we have one time a month we’re [indiscernible] 325 level to our call when they give up the upset only at seven [ph] now digits more closer to 4.8, 4.5, 5.8 for our three plants within level. But we still have this symmetry over the forward. So for next quarter it's still worthwhile to do zero cost collar. So, we’ll continue to be doing that as we have opportunities and have the opportunity to do as long as we have this symmetry we've continue to do. For an hour we can be on the range of 40% to 50% protection of our currency exposure on the next government.

Leonardo Correa

Just finally, just a very quick follow-up from the questions before on leverage. What are the options that could be discussed going forward assuming the situation remains complicated on the BRL and core pricing front? What are the options that you could have to release -- to bring some cash in, in the scenario assuming that thing is continues stressed as it potentially could be?

Guilherme Cavalcanti

We can always postpone CapEx, remember that the three deals, when the FX was 260 and we were forecasting 2.8 for the project, now we had 45% of the projected CapEx in 2016. Now we have 53% because the FX is higher. So, if the FX depreciates so we can always postpone part of the CapEx following the project we start. We have also amortization CapEx, other CapEx, of the company that we can also have some flexibility, maybe it’s not good for net preset net present value, but we have this flexibility to postpone CapEx proceeding the cost of the money and the time. So, also we can -- either you can also remember, we can also sell assets if necessary, but I don't foresee any scenario that asset sales will be needed. So, only postponing of CapEx is enough for us to comply with the matters.

Operator

Our next question comes from Mr. Thiago Lofiego from Bradesco BBI.

Thiago Lofiego

I have two questions for you, could you comment on what you're hearing on the supply side. Maybe more specifically on key projects, if you could give us the color you have in terms of startup of the project, tonnages that you expect to flow into the market in the first half of ’17 maybe?

And the second question just following up on Lucas’s question, are you noticing higher push for discounts from customers now that you have more volumes to place in the market due to the clubbing volumes or you're not feeling that at all? Just to understand and conform that please.

Marcelo Castelli

Okay, about your question about our key projects, I’ve been hearing what the market has been hearing and not to difference. But actually it seem that the outcome APP starting to get in touch with customers in Asia. But according to my -- our team in Asia it seem that even customers don’t believe that the project will start according to the official date. Everybody expect this product to be delayed it’s still not official, but you may all know that’s its going to be very difficult for APP to start before the end of this year.

There has been other questions, once they start, at what level, we have the impression that they are facing also a good issue, they are trying to find in all places some wood supply, not from Asia but everywhere. And we understand that this will be becoming a problem not only to APP, but to the other Asian producers. So some arising acquisition, we don’t expect the impact of our key project to be the one that is expect by the market. It will be delayed and when it comes to hit the market it will at the maximum level than expected in terms of volume. And once the market will realize this fact, I am sure it will relieve quite a lot of pressure of that we are facing right now. Of course, I cannot speak on behave of APP, this is our vision.

When it comes to the rebate, when I mention about the rebate, I was mentioning about the qualification rebate. Its not a fix rebate that we are having in a contract. It's a one shop rebate. When a customer tries a product for the very first time since he doesn’t know what’s going to be the quality and the impact on this production, he gets an incentive and as a matter of fact this incentive that we’re getting from customers was not really significant. So it means that the price in Asia for example was already very close to the bottom. So I was not making any reference to the contract rebate. So let's not get into any confusion about that.

But in general -- generally speaking I mean every time we have a new project for sure, buyers, they try to get advantage of additional offers to get higher rebates and these has been the case for the last four, five years, it's not new, it's not related to Klabin, it was the same when competition came over, I mean LatAm, Chidano, El Dorado. I mean every year on a yearly basis we had increase of the rebate, but at the same time you had also an increase of the gross price. So at the end of the day, the net price was not so effective and this is what is important. Did I answer your question?

Thiago Lofiego

Yes that’s clear, thank you.

Operator

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

Marcos Assumpcao

Just a quick comment on the pulp price, sorry on the pulp production volumes, we saw in the first of the year production totaling 2.5 million tonnes with only one stoppage at Aracruz line C. What is your view for production in the second half of the year? If could see also because that if you could see sales volumes also increasing on a first half -- second half over the first half excluding clubbing volumes? And second question, if you could comment -- if you could remind us on the internal rate of return for the logistic projects that you were investing before that you are just delaying a little bit probably bringing these projects in the future? Thank you.

Marcelo Castelli

Hi Marcos. Thanks for the question. First, if we consider, if you look to the first half of the year ’16 we see that only one general shutdown was done, but this was a massive shutdown. Because when you see we stopped the Mill C for a long, long time in our Aracruz to really to make -- to perform the retrofit. Remembering that this is, it was a tactical decision from our side knowing that during the first quarter of 2016 the market will be tight and we’ll be pricing power or fight, et cetera.

So we decided to anticipate that this retrofit getting the benefits of the materials and labors that we hired together with the Horizonte 2project. And also we did an overhaul of tube generate another six of Aracruz that also affected the energy but the cost as well. So, we see that from now on we're going to produce, we're going to have -- we did already the event -- subsequent events from the quarter. We did -- we perform the shutdown of their SL was very successful returning to operate and that we're going to have the other mills from Aracruz Mill B and Mill A and are quick stop of, or shutdown also to perform connections with the project in December for Tres Lagoas and this is exactly -- we do not intend to stop because we're going to run for 15 months. So, now in aspect we don't see that we are going to have a minor production impacted.

Regarding to your second question, you were referring to the Klabin volume? Could you remake your question Marcos?

Marcos Assumpcao

The second question is related to the investments in logistics that you are postponing -- the R$700 million. If you could remind us the internal rate of return for this type of projects?

Marcelo Castelli

Okay. First, we don't deliver, we don't do guidance regarding to the IRR of those projects but remember that what we're doing this is another metrics from the management to keep the company in a resilient mode. We are able to postpone investments, we're able also to access different kind of sources that we have a lot of opportunities to find infrastructure in Brazil as you know.

So, we're keeping the pace of the project, we're not interfering of the learning curve or on the big impacting costs of the project, but we're trying to navigate in the scenario finding opportunities, especially in Santos port because Brazilian economy is not doing well and we have lot of opportunities to accomplishing centers, not only the three 332 terminal that we won last year but also on the 332 we can also postpone and guess what, we were operating that terminal some months ago and we can also operate from the first moment that we got the contract signed, we got any investments and we can operate during the investments in phases.

So we are obliged to accomplish, to finish the investments that we presented to the authorities only in 2019. So it gives us a another flexibility from our side and based on that we are not giving you the guidance for IRR, but I can assume that this is also calculated that’s needed for the Horizonte 2 project approvals. So we are very happy so far because we are able to increase the project capacity, reduce the cost of them to differentiate the capital disbursement in a very effective cost approach. So it’s that, we are very flexible.

Operator

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

Jon Brandt

First question for me is for any. We saw -- I think you mentioned there was something around 300,000 tons of capacity being shut down in the first half. But it seems to me that that was more temporary shutdown. So I guess I'm wondering a couple of things. First, have you heard of any permanent shutdowns taking place probably in China, but really anywhere? And secondly, a lot of the temporary shutdowns were brought forward to take advantage of the weaker market in the first half. So I'm wondering, are we not going to see as many maintenance shutdowns in the second half? And does that not put some pressure on the market?

And then my second question is really related to wood costs. I know you don't give guidance, but could you just remind us what our expectations should be in the second half and maybe in 2017 for third-party wood and the average radius?

Guilherme Cavalcanti

Hi Jon, [multiple speakers] okay just answering your question about the shutdowns, I mean it is like we have about 300,000 tons of maintenance or exceptional shutdowns. Of course we are not talking about a definitive shutdown and we haven’t heard of any in the near future. So if we all depend on the price, let’s say developments, but as I said since we are having quite, not very optimistic in the sense that we will not recover what we lost at the beginning of the year easily and still this year, but we are confident about the price going up until the end of this year.

I have to be consistent with my scenario and I don’t see any shutdown, at least not definitive for sure and I don’t see not even let’s say exceptional shutdown for the rest of the year. But this is something, it’s only a guess. I mean we don’t know the situation of everybody, I mean prices are quite for sure at the bottom of the price curve, but since we are working with a price trend I cannot say that I am expecting any shutdown in the second semester.

Marcelo Castelli

John, this is Castelli right now, just to complete what he said, we would like to bring your attention to what's going on in the Indonesia as a whole, not only with OKI project, but you know that the country of Indonesia singed a commitment toward climate change and also the two companies that is April, this is a public information APRIL and APP, they also signed a commitment not to harvest or to cut more mixed tropical hardwood. Seems to be that this balance of supply wood is not easy, if they don't cut in more mixed tropical hardwood. So on top of probably temporary shutdowns maybe -- there are some potential adjustments on the production if they follow that agreement with the Greenpeace and others. So this is important and we need to pay attention on it.

Okay, regarding to, your question was, regarding to the wood cost. We keep the guidance that we did in our last Fibria Day in New York, when we published the current not only for 2016 but beyond that and we are all the time reassessing that curve and in a certain point in time maybe until the end of the year, we're going to review and publish again the curve for the next year, not for this year. This year we maintain the range of 40% of the third party wood that is absolutely what we did in first semester.

Operator

Our next question comes from Mr. Viccenzo Paternostro from Credit Suisse.

Viccenzo Paternostro

My first question is on the working capital. You had positive R$127 million working capital this quarter. I'd like to understand what were the main reasons for these positive working capital, whether this is related to the Klabin's contract? And if so, if we should expect higher working capital -- positive working capital in the next quarters? So that would be my first question.

My second question is for Guilherme. It seems that in the very short-term, we have a, let's say, a more challenging outlook in the sense that we have an unfavorable seasonality in July and August. And also, we had a very strong shipment to China in May and June. It can be seen as a restocking. I'd like -- I'm happy to share with you our view on -- your thoughts on this very short-term outlook for pulp price. Thanks.

Henri Philippe

Hi, Viccenzo. Yes, the working capital, the positive working capital was due to the Klabin's due. Remember that this is depending on the pulp price and effectively we have potential to release $450 million in working capital during this period after Klabin start the full production. So, this year has started selling Klabin pulp, we're already releasing working capital. So, we have potential also far the next quarter as Klabin production is increasing and we're selling more, we will continue to see this increase in working capital -- this positive working capital going forward.

Guilherme Cavalcanti

About your question about the short term outlook, you're right when you say that normally July and August is -- we face slower demand. It is right. It can be interpreted as being a challenge through the price increase. It might be be that we have to implement it on a, let’s say slower pace, but there is -- I'd like to say that there's not much room for price decrease. I mean we have reached the bottom, whether it's in Asia, whether it's in Europe. We have reached the bottom.

So, it might take a little bit longer if not July, maybe July-August to have the full implementation that we announced for the 1st of June, but that's the only way to go. I mean the demand might be lower than during the second quarter, but it shouldn’t be lower than last year. So, we're not negative in that sense. But you're right I mean it's always a question but seems the demand is lower, the solution I can tell you, is not to decrease twice. Normally when you have this kind of situation, it’s better to wait and see, forcing the demand by decreasing prices is not the solution and this is not what we need intend to do.

Operator

Our next question comes from Julian Larson from Millennium Bank.

Julian Larson

This is Julian Larson. That's why I didn't understand. Thanks for the call. Really quickly I understand the liquidity but I was curious, given where the bonds are trading, do you view the international debt capital markets as attractive to sort of clear out and preserve liquidity and sort of the downside scenario that one of the previous callers had mentioned? And secondly, would you take any steps to sort of limit dividend payments even if you are below the leverage threshold? Or will we see those continuing to be paid out so long as you are in compliance with your internal requirements? Thank you.

Marcelo Castelli

First on the bond side, it's true our bonds are trading at above par and we had lot of the demand for our credit. But I think it seems we don't have the use of these proceeds, we're not -- that doesn't make sense for us to raise the bonds because we'll be having a negative carry on the coupon against the money that I can in the time deposits. So, it doesn't make sense for us, since we don't need the money to issue bonds.

However our local markets in Brazil, local debentures the last one that we did, since it is a very cheap insurance because the negative the impact, there is no negative carry, there's positive carry because it was issued below the base rate. This is something that I can conclude to use it if I want to even improve my liquidity. So probably opportunities in local markets are more probable than bond issuance going forward.

And in terms of these dividend payments of course our dividend falls in our indebtedness products we have these limits on net EBITDA. But the Brazilian corporate law says that we have to be 25% of our net profits, this is the loss we cannot prevent to doing that. Since we have been in very strong profits owing this first semester we had R$1.7 billion in net profit, of course we probably we will have to pay a decent amount of dividends next year because of this 25% required by the Brazilian corporate law. Okay.

Julian Larson

Got it. You would always pay in the form of dividends. You would never enact share buybacks?

Marcelo Castelli

No, by the time that we will have to pay dividend, we can discussion with the finance committee what if we do dividends or share buyback. But remember this Brazilian corporate law states that we have to dividends, they not saying share buyback. So since I’ll have to pay 25% of the net profit, my net profit has been very high, so probably I’ll be doing dividends because of the -- to comply with the Brazilian corporate law, but if not for that, if we were below the 25% then we have always this discussion. But because of the Brazilian corporate law chances are that it's going to be only dividends.

Operator

Our next question comes from Mr. Juan Tavarez from Citi.

Juan Tavarez

So my first question is more about the CapEx reduction. Does this change the returns for the Horizonte 2 project? I'm not sure if you updated as well your BRL and pulp price forecasts for the operating results. So just curious there on how this CapEx reduction is impacting your view for returns of Horizonte 2?

And also, one for Henri, could you give us a sense of how you are seeing inventories at the customer level? You know, with the weaker euro and the nearing capacity from OKI [ph] I'm wondering if your customers could probably wait around longer in order to finally get a lower price. I know you mentioned you are not looking to incentivize new demand by lowering prices, but how long for the customer holdout in your view in the short-term? Thanks.

Marcelo Castelli

In terms of the return of the project, remember that the project was back to the threshold of the hurdle rates at the FX of 2.8 at a time. But again I think we disclose in our presentation that you can see on the website, the cash cost of the project, we disclosed the maintenance CapEx of the project. And you gave of that [indiscernible] is also a public. You can estimate very simple order of cost up to the customer and you can make forecast of pulp price. You see that for sure you have free cash flow per ton that you can multiply by the 1.95 million tons you see the pay back and the return of these unleveraged projects. It's very easy to do this calculation, you can get it on the presentation on our website and put your forecast of pulp price as we don’t give guidance.

So in fact we can -- and these days you get on [indiscernible] rate of return of the project, I would like to remember that we leverage 100% of this project with third party resources at a very low cost, at 2.1% in dollars because it's all ECA [indiscernible] was all very cheap rate. So, remember to leverage this project at a very cheap rate that you boost the return when you do this account.

Juan Tavarez

So there was no real change in the operating assumptions that you guys have on your side, aside from just the CapEx reduction? Is that how I should read it?

Marcelo Castelli

No, no. And again, if you look at the CapEx reduction in dollars, it remains at $2.4 billion which means around $1,200 per tons. So if you make all the calculations in dollars you don't need to change anything.

Juan Tavarez

Okay. I've understood.

Guilherme Cavalcanti

Juan, your question about inventory actually we don't keep track of our U.S. sales and U.S. customers' inventories because by their policy they don't hold any inventories, with most of them we work on just on time delivery. What we do keep track of is inventories in China and according to our information the inventories at the port are for the time being not high. Of course remains to be seen the shipments that will arrive in August, but the only information we have so are is that the inventories of the chemicals are not high. Rather under medium low side of the historical curves.

So, that's not a good turn and what I can tell you is that as I said previously, our inventories are pretty much on the lower side this [indiscernible], we have some carry over which will update Iin the account in our results during the second quarter because of shipments that happened early July. So our inventories could have been close to 52 days and this is priced on low level according to our experience. So we’re not concerned about the inventory levels.

Juan Tavarez

That's great. Thank you very much very helpful.

Operator

Our next question comes from Luis Prieto from Deutsche Bank

Luis Prieto

Just a couple questions regarding the tons for the Klabin agreement. Can we -- the first one is -- can we expect a steady flow of shipments on a per-month basis? Or do you expect some seasonality from these shipments? And then the second one is, how do the Klabin shipments impact, let's call it, the legacy Fibria shipments? Do you expect to ship at the same operating rate as in previous years? Or should we expect a slight decline as you are more disciplined when it comes to volumes in the market, given these soft turn conditions? Thank you.

Marcelo Castelli

Hi, this is Castelli speaking. Could you repeat again your questions because the sound it's really not good? Sorry.

Luis Prieto

Oh, okay. No problem. So, the first question is, can we expect a steady flow of shipments per month for the Klabin agreement? Or do we expect to see some seasonality in the shipments? And the second one is, how do these Klabin times impact, let's call it, the legacy Fibria shipments? Do you expect to ship at the same operating rate as shipped in previous years? Or could we expect, let's say, less shipments from legacy Fibria facilities, given the soft current conditions in the market and the fact that you’re remaining disciplined when it comes to volumes?

Marcelo Castelli

If you allow me, I’d like to answer your question. I mean Klabin shipments is not an issue for us, I mean as I said previously this is, we consider Klabin sales as part of our sales. We deliver more Klabin sales and more Fibria sales according to the logistics. Sometimes it’s more efficient for us to ship Klabin sales to some destination than our own sales, therefore we decide to do so.

So we have to look at Fibria shipments as a whole, it doesn’t really make sense to look only at Klabin. If we have to put in some Klabin sales because it makes more sense to sale Fibria sales and its not a big deal and the other way around is also valid. So I wouldn’t focus on Klabin shipment, but if you make, if you want to make reference to the way Klabin will deliver to us is gonna be -- of course we are still in the learning curve, but it’s going to be regular on a monthly basis. I don’t know if I have answered your question.

Luis Prieto

Right. Just because -- the reason I'm asking that is, do you see no EBITDA from Klabin's tons? And that's why kind of I was trying to make the distinction. But I guess that answers it. Thank you very much.

Marcelo Castelli

You’re right that sometimes, sometimes on a short-term basis by selling more Klabin sales we might lower in percentage of our EBITDA but then after once we sell Fibria sales and we put into inventing Klabin sales, this is of course balancing out. So it would be on a very short-term basis, on a yearly basis, even on a quarterly basis, we shouldn’t see that much, this kind of impact. Again, we focus on the optimization of the durations related to the logistics.

Operator

Our next question comes from Herman Funk from MetLife

Herman Funk

Kind of a follow-up from the previous one. It's regarding Klabin. I note that you have discussed it in the past, but I think now we've started working, it's worth revisiting. So, given that it relates no EBITDA and no free cash flow for Fibria, I would like to know what the value is for Fibria in the deal?

Marcelo Castelli

Okay, remember that the idea develops from us is that we have to support the clients of Fibria because they were expecting it to result to two years ago today now or this year. So this is a first relatively fuel the supply chain of Fibria in our hands. Second, to avoid a new cover because Klabin is a very well established company, but it’s not a player of market pulp or from eucalyptus and when a new customer despite EDs has good company the price to participate on the market is higher than that. So there is a cost avoidant significant cost avoidance in our view.

Secondly, we are going to liberate to free R$0.5 million on the free cash flow, secondly we're benefiting from our logistics adopts given that we have more power of bargaining to negotiate the shipping owners and this is the true, this the real case. We're reducing the cost of that, okay. Secondly -- another point is that we're receiving some commission incentives. We're on top of this they're paying for that each product we sold they're paying 1 x-dollar per ton, okay.

But based on that this is a very interesting example that we decided not to get as much directly revenues from it, but indirectly benefit for Fibria, it's really good. So we're very happy with that and we're also ready to continue to discuss further third party commercialization but in a different strategy in Klabin. Klabin was a new color. So more and more players started to talk to us, Klabin is a hypothesis that we would like to create and it generates benefits for both. For Fibria and for Klabin.

Guilherme Cavalcanti

Just to compliment on the working capital once and for all, but it's coming when we most need the money on the project, so it's a very good timing to release this working capital.

Herman Funk

Okay. So the implementing of working capital coming from Klabin, we can assume that it's here to stay? Or will it reverse once you stabilize bulk shipments from Klabin?

Guilherme Cavalcanti

No, it's not for -- money can come in and it would only go out if we stop the contract. Remember the contract, a six years contract on the 40 years start to phase out. So in the case that we don't renew the concept on the 40 year we will start giving the money back in negative working capital only in case of not renewing the contract.

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. Please, Mr. Guilherme, you may proceed.

Guilherme Cavalcanti

Thank you all for your participation and interest. If you have any additional question, please feel free to contact our Investor Relations team. I hope to see you at the Investment Tour which you take place in Aracruz near Espiritu Santo in the September 21st and 22nd. This year, there is an addition of the event to include presentation by [Indiscernible] Rod Taylor, head of Forest at the WWF and one of the world's most renowned forest experts worldwide. Thank you.

Operator

Thank you. This concludes Fibria's Second Quarter 2016 Results Conference Call. You may disconnect your lines at this time. Thank you.