Fibria Celulose SA (NYSE:FBR)
Q4 2015 Earnings Conference Call
January 28, 2016 10:00 AM ET
Marcelo Castelli - CEO
Guilherme Cavalcanti - CFO
Thiago Lofiego - Bank of America Merrill Lynch
Marcos Assumpcao - Itau BBA
Carlos de Alba - Morgan Stanley
Lucas Ferreira - JP Morgan
Jon Brandt - HSBC
Alan Glezer - Bradesco BBI
Juan Tavarez - Citibank
Gabriela Cortez - Banco do Brasil
Good morning, ladies and gentlemen and welcome to Fibria's Conference Call to present the results of the Fourth Quarter of 2015. 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 listening to the conference 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 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 this forward-looking statement.
Mr. Marcelo Castelli, CEO, will begin the conference call. At the end, the conference call will be open for Q&A session. Mr. Castelli, you may proceed.
Good afternoon everyone and thank you for participating in Fibria's earnings conference call for the fourth quarter of 2015. With me here today are Guilherme Cavalcanti, CFO and IRO and other members of Fibria's Executive Board.
Moving straight to Slide 4 of the presentation, I would first like to mention that Horizonte 2 Project closed the year with an overall physical advance of 15%. This quarter, we began an accelerated civil works of the process areas as well as recording important progress in line with our schedule including the acquisition of [indiscernible].
In the period, the anticipated earth work infrastructure, site preparation and temporary buildings were virtually concluded. On the outline logistic front, we won the public bid for the Macuco Terminal that represents the Terminal 32 in the port of Santos. Currently, the construction process is moving ahead to our signature and we expect to be concluded in the first quarter of 2016. It is also worth noting that we closed 2015 with the project funding completely structured. In addition to the funds raised in the third quarter, the Company issued Agribusiness Receivables Certificates or CRA and received the commitment for its finance request from the ECA, BNDES and the FDCO, Midwest Development Fund.
Moving on to Slide 5, we will now comment on the main highlights of the fourth quarter and full year of 2015. The Company reported new operating records in the fourth quarter with net revenues of BRL3 billion; EBITDA of BRL1.6 billion, representing an EBITDA margin of 54%; and free cash flow generation of BRL866 million, excluding the extraordinary dividends paid in December, CapEx for Horizonte 2 project and December's land acquisition announced to the market at the time. Fibria's capital structure together with the favorable market fundamentals throughout the year and the appreciation of the dollar also led to new last 12 months records with net revenues of BRL10.1 billion, EBITDA of BRL5.3 billion and free cash flow generation of BRL2.9 billion.
Fibria's fourth quarter sales reflected the Company's decision to reduce its exposure to the Asian market due to the recent downward pressures on price which were not sustained by market fundamentals. Sales volumes of 1,308,000 tons exceeded period production by 1% resulting in an end of the year inventory position of 52 days. One important achievement in the end of 2015 was the granting of the investment grade status by Moody's and the reaffirmation of this rating with a stable outlook by all three rating agencies after the downgrading of the Brazil's sovereign rating by Standard & Poor's, Fitch and Moody's action took place the sovereign rating on Brazil for downgrade. Fibria's leverage closed the year at 1.78 times, below the limits established by its financial policy.
In 2015, we progressed in the corporate governance area by launching a dividend policy which was implemented in the fourth quarter with the payment of dividends totaling BRL2 billion. Later on this presentation, we will talk about the dividends proposed for the next Annual Shareholders Meeting.
Moving on to Slide 6, we will now go into more details on the pulp market. According to the PPPC's World-20 report, global eucalyptus pulp sales increased by 7% in 2015, representing organic demand growth of 1.2 million tons with all main markets reporting a healthy performance. In addition to strong growth in China, which has been one of the pillars of growing demand in the recent years, the improved macroeconomic indicators, especially in Europe, where among those factors chiefly responsible for the global result.
Despite, the positive performance for most of 2015, which allowed us implementation of three successive prices increases throughout the year, as I have already mentioned, in the final quarter, the Company decided to reduce its exposure to Asian market in an environment of Chinese pressure on price with no support from market fundamentals, especially in relation to low producers than consumers inventory.
On the supply side, the final month of the year were marked by several unscheduled stoppages by hardwood pulp producing worldwide due to technical and weather issues, which removed more than 400,000 tons in the market in the period. In 2015 as a whole, around 529,000 tons were removed from the market by unscheduled downtimes and temporarily closures alone. Given the gradual decline in consumers’ pulp inventory and the maintenance of the positive economic scenario in the material market, Fibria expects a substantial recovery in sales volume by the end of the first quarter.
I will now hand you over to Guilherme Cavalcanti who will continue the presentation.
Good afternoon everyone. Let's move on to slide 7, where we will talk about our fourth quarter results. Pulp production totaled 1,297,000 tons, 2% up on third quarter 2015, largely due to the reduced impact from the scheduled maintenance downtimes and 6% down on the fourth quarter 2014 due to this lower stabilization curve following the scheduled Jacarei maintenance stoppage and impact of the stoppage, which did not occur in the same period last year.
Moving on to the fourth quarter 2015 sales already commented on by Castelli, it is worth noting that they correspond to 101% of period output. Net pulp revenue came to BRL2.96 billion in fourth quarter 2015, 49% up on the same period the year before, due to the increase in the average net price in reais is then explained by 51% appreciation of the exchange rate and 7% upturn in the average net price in dollars, partially offset by the decline in sales volume.
Adjusted EBITDA reached the record level of BRL1.623 billion in the fourth quarter 2015, 5% more than in the third quarter 2015, due to the higher average net price in reais as a result of the 8% appreciation of the average dollar, partially offset primarily by higher cash cost. 79% upturn over the fourth quarter 2014 was due to the 51% appreciation of the average dollar and 7% increase in the average net price in dollars, which offset the upturn in cash cost and a decline in sales volume.
EBITDA margin came to 54% in the fourth quarter and 53% in the last 12 months, a new record. Given the Company's foreign exchange exposure, each 5% devaluation of the real generates an annual EBITDA increase of approximately 10%, representing growth of around BRL570 million.
Now let's move to slide 8 where we will talk about the fourth quarter 2015 production cost. The increase in production cash cost over the fourth quarter 2014 was primarily due to higher non-recurring wood costs due to the increased share of third-party wood and wood brought from Losango, as disclosed to the market on previous occasions, the impact of the schedule maintenance downtime at the Jacarei mill. There was no such stoppage in fourth quarter 2014 and the result and the effect of inflation, the exchange rate and the lower utility results due to reduced energy price.
The average dollar appreciation in the last 12 months came to 42%, an impact about 15% on the Company's cash production cost, while yearly inflation measured by IPCA consumer price index was 10.7%. Although the Company has record gains from management initiatives that partially offset the effects of period inflation and the exchange rate valuation, there are still opportunities to reduce the cash cost, especially in regard to the wood when the situation is normalized as of 2017. In 2015, the share of third wood party corresponded to 30% of the delivered volume to the mills. Total non-recurring costs, including the wood effect, came to BRL54 per ton in the fourth quarter.
Now let's go to slide 9 where we'll talk about Fibria's debt. Fibria closed the fourth quarter of 2015 with a net debt of $2.8 billion corresponding to BRL11 billion. End of quarter leverage measured by net debt to EBITDA ratio came to 1.78 times in dollars. As Castelli mentioned at the beginning of the presentation, this was below the limits established by the Company's financial policy. It is worth noting that in addition to the CapEx for Horizonte 2 project, leverage was impacted in the quarter by the dividends payments of BRL2 billion and the land deal in December as announced in a notice to the market at that time.
The Company's gross debt which was impacted in October by a funding operation with the Agribusiness Receivables Certificate CRA totaled BRL675 million, closed December at $3.3 billion with an average term of 51 months and average cost in dollars of 3.3% per annum, including the portion of a debt in reais fully adjusted by market swap curves. The Company's cash on hand, which excludes the mark-to-market of hedge instruments, closed the quarter at $655 million. The Company also has $498 million in unused revolving credit line, giving a liquidity position of $1.153 billion. Fibria's cash position included a mark-to-market of hedge instruments totaling $941 million at year-end, equivalent to 3.4 times short-term debt.
Moving on to the next slide, we will comment a little on Fibria's 2015 net results. The Company posted annual net income of BRL357 million chiefly due to the substantial increase in the operating results largely offset by the negative financial results caused by the non-recurring effect of the period appreciation of the dollar against the real and its impact on dollar denominated debt in hedging transactions. Excluding the non-recurring exchange rate variation effect, which do not occur in periods of currency stability, Fibria would have recorded annual net income of approximately BRL2.5 billion.
The dividends payment proposal representing 87% of the 2015 net income, excluding the mandatory minimum dividends was based on the Company's recently launched dividend policy. We will go into more details on dividends at the end of this presentation.
We will now talk about the Company's free cash flow generation, which you can see on Slide 11. Free cash flow excluding dividend payments, CapEx for the Horizonte 2 project and December's land deal, totaled BRL866 million in the fourth quarter 2015, with an average FX of BRL3.84 to the dollar. In the last 12 months, excluding the same effect that I've just mentioned, the free cash flow came to a record of BRL2.9 billion, representing a free cash flow yield of 10%. If we annualize the fourth quarter 2015 free cash flow of BRL866 million, the free cash flow yield would come to 12.1%.
Now let's go into the next slide where we will talk a little about the return on equity and return on invested capital return indices. In the fourth quarter 2015, the return on equity and return on invested capital return indices in reais increased to 25.1% and 22.8%, respectively. In dollars, return on equity came to 29.3% and return on invested capital to 26.7% in accordance with the calculations in the earnings release. Annualizing the fourth quarter 2015 figures, return on equity and return on invested capital in dollars would have come to 32% and 29.2%, respectively.
Now let's go to the last slide, where I will say a little more about dividends. Management has proposed a payment of BRL300 million in dividends on the 2015 net income, BRL218.7 million more than the mandatory minimum dividend of BRL81.3 million, which will be submitted for approval to the Annual Shareholders' Meeting on April 27. Fibria's dividend policy envisage the possibility of paying extraordinary dividend throughout the year in accordance with its cash generation capacity, respecting its indebtedness and liquidity policies and commitments to investment grade status. In 2015, the Company distributed dividends totaling BRL2.50 billion representing a dividend yield of 7.5%.
I will now hand you over to the moderator to begin our question-and-answer session.
Thank you. The floor is now open for questions from investors and analysts. [Operator Instructions]. Our first question comes from Thiago Lofiego with Bank of America Merrill Lynch.
Could you comment a little bit on pricing and discounts dynamics during the fourth quarter? So we basically know that discounts have increased during the quarter. Just trying to understand if we can expect the same kind of discount levels for the coming quarters? And also if you could comment on whether volumes to China have already normalized?
And the second question would be on costs; so we saw a 20% increase in cash cost in 2015, after years in which you beat inflation. So, what's the cost dynamics we can expect for 2016? What are the main variables you think we should focus on for the year, and whether you think it's possible for you to beat local inflation this year?
Hi, Thiago, this is Marcelo speaking, your question about discounts and the volumes in China. Yes, you made the calculation and our discounts have increased during the first quarter because we decided to switch some of the volume from Asia, China to Europe and the U.S. As you very well know, of course, the rebates there are higher than in China but we have to look at it in a different way.
Had we sold more to China, we would have increased even more those discounts, because, again, if you look at the methodology that we calculate those discounts, it's the net price related to the PIX/FOEX and had we sold more to China, the net price would have been lower. So, that was the different strategy from Fibria to sell more to the U.S. and Europe. Of course, in some cases, having to give higher discounts than the ones in our contract, but again, it was in order to lower this increase.
I don't know if I've made myself clear but that's the point. So, it was a functional situation. It's not that we are saying that the new discounts in the contracts are increasing; that's what's spot businesses in order not to have to allocate so much volume into Asia.
Now that's clear, but for example, if we think about Europe specifically, have you increased your discounts to your European clients during the quarter or not?
That's what I said. We have to increase, let's say -- some of the businesses we've made into Europe were spot business. So, of course, it's not related to our existing contracts. So, it was spot, it was maybe with higher discount but still much better than in China on the net price basis.
And then for the first quarter, can we expect some normalization, volumes from to China normalizing and then eventually lower discounts, average discounts?
I will not give any guideline about discount and prices for the first quarter but let's mention our view about this year. What has been happening for the last two months in Asia and maybe at the beginning of this year, though it's not related to the real fundamentals of this market, it's really related to the willingness of really dropping prices of the short fiber. But we don't feel this is related to the fundamentals in the sense that we don't have seen any decrease, any real decrease, in the pulp demand. We feel like some of the Chinese buyers are using their own inventory.
So being consistent with this view, thinking that they are decreasing their inventories and of course we still continue to have a positive outlook on the full year, we feel that the Chinese will start buying again quite heavily after Chinese New Year.
Regarding to the cost structure, I would like to re-emphasize that we should not pay attention only on the fourth quarter ‘14 comparing to the fourth quarter of ‘15. This is default [ph] and we would like to compare more the whole year. So if we consider the 2014 cash cost of BRL519 per ton and consider as well BRL618 per ton on the average of 2015, we are going to see that we had BRL99 per ton cost increase. BRL80 per ton it's explained by the FX and inflation and then totaling BRL90 per ton is explained by the energy price decrease in the market.
You can see that we were able to offset partially that, not totally, because remembering that we had more influence on the third wood part regarding to the distance, not on the percentage. On the 2014, we had 32% of third party wood cost pressure; on the ‘15, we had 30%, 2% less but in a higher business, based on the Losango. We are bringing wood as we explained it before, wood from Losango that in terms of the cash the total expenditure is much better because we already paid that spend tree. But it's long, longer than the average, and this is in compliance with what we have disclosed on the Fibria Day that is a conjunctural problem, not a structural problem.
In other hands, what we're doing here, we are doing to first of all, let's consider the FX as a perfect hedging. So the BRL33 per ton was imposed by the FX that we can live with that because we are getting benefits as you know on the revenues, on the total results of the Company. What we need to fight against is that the Brazilian inflation. Based on that, we have launched several actions to talk with the suppliers and with the partners and that we intend to reduce debt heavily or as possibly really to keep the costs under control.
After we settle the Horizonte 2 project that was our priority in those two or a couple of months ago, we're launching again a new wave of cost reductions that we are now discussing with our partners. No problems, no really huge promise, if you look comparing year-over-year. Quarter-over-quarter, we had a difference because we had a general shutdown in Jacarei and we also -- we had 43% of the third party wood helping, making the cost to increase if you look only the comparison between the fourth -- the last quarter. So, I'm pretty much comfortable with that, we are going to really keep the track, breaking a record of Fibria to really to absorb partially the inflation, I'm talking about more in Brazilian inflation rather than the FX.
Next question Marcos Assumpcao from Itau BBA.
First question is on the net debt. Net debt in dollar terms increased sequentially for the first time in several quarters. So the question here is, is there a maximum level of debt that makes the Company comfortable, even if by any chance we have a steep decline in EBITDA driven by lower pulp prices?
And the second question is if Castelli or Guilherme, do you see a risk of having this new supplies that are coming to the market expelling the high cost producers from the market in the coming years and then leading to much lower long-term prices in the future?
First, we have an increase in the net debt to $2.4 billion to $2.8 billion, but we paid around $500 million in dividends and we bought around $100 million in land. So if it was not of those events, we would have a decrease in the net debt. And again, we are generating free cash flow. We generated BRL860 million in free cash flow in the last quarter. It's worth mentioning that in the next semester, we will take the moving average quarters with our average of 2.6 FX and we'll come at an average FX of BRL4 into the estimated the moving average EBITDA. So with the expansion of the EBITDA, even with a slight increase the net debt, our leverage ratios, what matters will remain stable.
In this case, we don't have a maximum level of debt because what we use is the relation of our net debt to our cash generation and we ran a statistical exercise where the chances that we reach 4.5 which is our covenant has to be less than 0.1%. So we are very comfortable and because of the expansion of our EBITDA in cash flow generation on the moving average, even with the debt that you'll be raising for the Horizonte 2 project which is [indiscernible] BNDES and ECA, we expect that our leverage ratios will remain stable again because will be coming quarters with an average FX of BRL2.6, we'll be getting out.
Okay. About your question about the new capacities, could you be more specific? Are you making reference to Klabin or some other new capacities coming on stream?
No, just like that, the projects are becoming bigger. For example, the OKI project in Indonesia and even Tres Lagoas, so a new project is almost like 2 million tons, which is Eldorado also in the future and not necessarily Klabin. So the projects are becoming bigger and we have a steep cash cost curve for sure. We have high cost producers in the market today but if the supply continues to grow quickly, given that probably the low cost -- these projects are all going to be starting in low cost countries. You could see quickly like a lot of new low-cost supply expelling the high-cost producers out of the market, if the supply comes at a faster pace than the demand is growing. That's the question.
If you take as a premise that the supply will be growing quicker than the demand, then, of course, this is about theory, then the high cost capacity should be closing. Now it remains to be seen if the supply would be growing more than the demand, that's about it. But then I agree with you, then of course, this is putting some pressure on the high cost producers, which are not right now the U.S. producers.
This is something I would like to stress because we keep hearing from time to time that nobody sees any closure in Europe because of the euro devaluation. Yes, this is right, but we might see some closures in the coming years in the U.S., whether those names are integrated or not, I've heard quite a lot that we could consider a net price below $540, in that case, we run a very quick exercise internally and we have identified that maybe more than 3 million tons of integrated and non-integrated producer might be at risk.
Sorry, at which price?
At $540 net.
At $540 net --.
We will [indiscernible] 540, because we heard that some financial analysts are considering this price on an average. So this is why I took the example of $540, but I don't believe in this price.
And the three million tons are all in the U.S.?
Just a complement what your question is good in helping us to understand the scenario or the fundamentals of this industry. When we talk about the cash cost, of course, we have a better, bigger and much efficient lines coming on stream, if you look on the cash cost side. But I would say that the majority of them, they will be based on planted forestry, even Indonesia, they are moving from not harvest or cut the mix of tropical hardwood, they will harvest what they will plant and this is going to impose them at least more cost on the total cost on the CapEx side.
So we did on that, we do analysis, so far we will have more than 30% of the markets on the hands of the marginal cost producers. The demand is still growing more than 1.2 million or 1.5 million per year that allow us to understand that if we were disciplined in this industry, won almost 90% of one big project, more than two million, will be absorbed by the market.
We have also those fundamentals of cost structure that will the total cost of those projects that we're going to increase the size of the project requires a lot of debt to support the growth, no one in this industry can afford to pay those tickets during the construction with their current cash generation from the businesses. It is will impose a more financial discipline and the cost of money will increase and especially in Asia, they will be more cautious to invest and to request a return from those investments.
So we see structural changes that, plus and minus, determines what we have been seeing, lower volatility on the price of the pulp commodity compared with the others, why? Because the cost that we’re putting [indiscernible]. I don't see in a visible landscape, I'm talking about 5 to 10 years, the major change or big change on the price. What have we said? We did those analysis in the $540 net-net. I can tell you, it's difficult to return for the majority of the players in this business and not feasible to predict as you know what's going on happen with the Chinese production on known wood, they will disappear and another element that its let's talk about the OKI project.
OKI has announced and this is public that they got certain concessions to plant in further areas in the Indonesia and Sumatra et cetera, if they will add more value not to produce themselves pulp but to convert into packaging and board and a portion of tissue and packaging and board especially for eucalyptus, that's okay, will not compete directly with us.
So we see those more aggregated numbers and it starts to break down to really to be more precise in terms of what's going on, what's going to happen in the future. We are not afraid. We see that the price can be adjusted by supply and demand, as we said, but not an aggressive one.
And Marcos, just to complete about the net debt, I would like just to highlight that on page 9, even after paying the dividends and the land purchase, we ended the year with $655 million in cash on hand, which is around $500 million of excess cash simulation to our minimum cash, for an amortization of only $275 million for the year. So it's a very comfortable position in terms of liquidity.
All right, perfect. Just a follow-up here, if I can. As Castelli, you mentioned about China, a lot of investors are questioning here if the pulp could be the next iron-ore. If the Chinese reduce the purchasing levels, there could be a negative impact in the industry. How do you see that risk?
Okay. We had this analysis. Here also, we monitor that. We believe that, of course, absolutely, China will try -- they are trying to get a softer landing in their economy, but the metrics and the composition of their GDP will go more to consumption of the families. So we are connected with the consumption, not with infrastructure. If you were the iron-ore company or a steel company, what's going on the market capital or capital market in China, it's more reflecting the real economy in terms of the companies that are connected with the infrastructure because they have created their infrastructure. The consumption is on the opposite way. We see that despite the GDP fell to 6.-something in China, the China consumption of fiber rose 14%. That means we have a different proxy in terms of consumption of fiber per GDP, percentage of GDP. That means that reinforce our vision that we are more protected due to this movements from China that they are implementing and they are trying to implement.
Marcos, obviously, if I may add something to what Castelli mentioned, for sure, the global picture is that the Chinese economy might be having some kind of soft landing but anyway consumption is increasing and again, we are not just like iron-ore depending on investments. But on top of that, I wouldn't like you to extrapolate what has been happening in the last three months. What has been happening in the last three months in China is basically a price struggle. The Chinese want to see the price of fiber going down. Okay, that's part of the game and they are using their inventories because we don't see any real decrease in the demand. We haven't seen any real decrease in the paper and pulp production. There might have been some slowdown or shutdown due to pollution, but not market-related. This we have it for sure. So, what has been happening is a short term situation and we feel like that the inventories of short fibers in China has lowered quite significantly and since we believe that China will be back after Chinese New Year, we continue to have a great and positive outlook for this year.
Next question Mr. [indiscernible].
Good morning everyone and thank you for the opportunity. So my first question regards to the tax credits, and if you can give us an update as to how many more years you would see Fibria benefiting from a lower effective tax rate through these credits and given the significant growth in earnings, that would be useful?
And secondly, in regards to dividends, if you think there's room to continue -- first, to continue to see a similar dividend payout as what we saw in 2015 with BRL2 billion, given the CapEx for Tres Lagoas is potentially weaker pulp prices compared to 2015 et cetera?
So the first about the tax credits, we have tax credits for the next three to four years. Of course, it depends on the price and FX, but at the current price and current FX, it's around three to four years of tax credits that reduce significantly our cash taxes. In terms of the dividends, I would like to remember that our policy states that in the beginning of the year we announced around a dividend yield that is the minimum for the shareholders tends to be a conservative one and in October, we evaluate how the year was and if we have a good year, if the perspectives of ending the year with a low net debt of EBITDA ratio and we runs a statistics scenario, shows that if our finance continue to be solid, we maintain our investment grade, then we can pay again a relevant dividend, but this will depend on how the year goes. But in terms of the CapEx, it doesn't matter, because I would like to remember that we already have all the lines for the Horizonte 2 project, a project remember because the FX was revised to $2.2 billion and we have all the lines already for the project, which is [indiscernible] BNDES, ECA, export prepayments and CRA and so on. And I would like to remember that we're going to relieve the working capital for the end of finance when you starts the cutting sales, which will be another source of cash generation. So since we have all the funding for Horizonte 2 project in place, all our cash generation is not necessary for this CapEx.
So if we have competitions and to maintain investment grade, you have solid financials, we really have the ability to pay relevant dividends yet because we already have the funding for the project and our leverage ratios are stable. But we will give that to depend, and you see how the year goes when we run the exit side in October for our payments in December.
Next question is Carlos de Alba with Morgan Stanley.
Carlos de Alba
Coming back to the cash cost, clearly, we’ve seen that you're not that concerned with cost jump that we saw what the market is concerned. So Castelli, if could give us a maybe higher level comment on the initiatives that you guys are focusing on and if you still believe that you can continue as you did in prior years to see the cash costs increasing by inflation unless that inflation in Brazil? And second, there was a concession that was announced on December 28the, during the holiday basically with [indiscernible] one of your controlling shareholders where you basically swapped some land assets. Could you comment on what are the benefits of these transactions? Could you quantify them? That'll be useful. Thank you.
Of course, the management is also concerned with the cost increase. The message is that we are not concerned in the long run, because we see this is punctual cost increase due to the 43% of the wood in the quarter; that was the message. On the year per year comparing, it was at 19%, but the majority of that are explained for the FX and inflation. The FX it's a perfect hedge, but what does it mean? What you're going to do if we remain with this FX in the level we are right now?
We are going to review and that takes time and it's one of the actions that we have, we are going to review contract that were denominated in dollars and we are going to review also our global sourcing strategy. So instead of to buy outside of Brazil maybe we can return to buy things inside of Brazil. This is one of the actions, several actions in that direction that we are going to reduce the percentage in our cost as much as we can related to the dollar base. So review the strategic sourcing strategy first.
Second is to continue to implement and reinvest in modernization because we have, we did the guidance in the last Fibria Day, and also we are announcing the capital deployed for next year. And we are reserving more -- a couple of a hundred and something million reais for modernization to reinvest, because the Company recovered the ability to generate cash to pay dividends to grow and to reinvest in their businesses. We are going to do it and one of the triggers to be approved in our portfolio management of those CapEx for modernization is the minimum, it's a 1.5 NPV per investments.
Now, this 1.5 average that we can say that if you're going to invest BRL100 million, we are going to add value in an NPV of 150. So those will be majority related to the cost efficiency, et cetera. We have in the long run, also in a couple of years ago, after the Horizonte 2 came online, we are going to exchange, as we did in the bleaching line A of Aracruz we are going to do the same thing or bleaching line B, so we have a lot of measures to keep the Company in a competitive way.
And remembering that in 2017 and 2018, the percentage of the third-party wood will decrease and they will bring back to the normality. The reasons why that recovering, remembering that; one, we are having some problems in the Aracruz only. We are recovering that due to the lack of investment in 2008 during the crisis; and also, we are having to consume the wood from the third-part contractors from Tres Lagoas I because we postponed the Tres Lagoas II start up. So we are respecting the contract and we are buying more wood from third wood from the market. So, I would say that this is not the results, a good result, but this is not the cost efficiency results from the Company, because we are half pregnant. We are borrowing some costs that are more also related to the Horizonte 2 project in our balance sheet -- current balance sheet. So, that's the kind of actions that we have, we can disclose more what we are doing, we are continuous to implement the trucks, lighter trucks that we'll be able to bring more wood per voyage and we are going to introduce new innovations in our bleaching sequencing that will reduce our consumption of chemicals at separate surface. So couple of projects that we have been -- we had already announced as a whole on the Fibria Day as of last year December.
Carlos de Alba
All right. And could you just comment, perhaps briefly, on the benefits or quantify the benefits of the transactions with [multiple speakers]?
Absolutely. Remember that on the Fibria Day, we presented that we are managing the forestry, every site and we name it from the goal to plant which blocks or portion of those force that are more competitive or not, arriving at a mill gate and a total cost of ownership. So based on the free cash flow generation, remember, we have right now the end from the ore to the end we can growth, we can end, pay dividends and reinvest in the business in the short and mid-term. So we were investigating certain real estate lands -- a small portion of the land and also some of them that we want to keep in our position. So we were renting the land of Sao Paulo, its 34,000 hectares as a total. It took 22,000 hectares of planted forestry and we did -- we bought this land from a third part related that is [indiscernible] team. We will decrease about BRL15 million more or less like this per year of renting or leasing that goes to our CapEx. So this is the direct benefit.
The second benefit is that we bought for BRL7,000 per hectare this 22, this 34 and we sold BRL33,000 per hectare, one land that is not our preference. So what we did, we preserved it, we would put the force that we have. It's like a gold and we sold one plant. So we did the management of forestry as we explain it to the market on the last Fibria Day. So more transactions in that respect can happen but in a minor proportion, because those, that land was a 22,000 hectare in a block, that give us efficiency that we can increase productivity and also increase the automation, our mechanization in our forestry operations.
And I would like to remember, Carlos that in the past, all our actions was regarding to leverage of the Company, so that we would generally give preference for ramping any time we could. Now that we have our solid balance sheet, we can make our decision based on net present value. So that's how we decide today. So, if you compare, that you saw the land from market -- on a much, in dollars, it's much more expensive than what we bought today in dollars, the land.
Our next question comes from Lucas Ferreira with JP Morgan.
My question is to Guilherme. I'm still trying to reconciliate the fact that you see the demand has been solid in China, with the drop you've seen in prices. I think maybe of part of that is related to the currency depreciation in China, I am wondering if you could comment on actually just started the year with a very weak expectations on the R&D. So if that is impacting the demand for pulp and making the players wait to put more orders in order to see what's going to happen with the expectations for growth and currency depreciation. And also, trying to understand, is that a replacement of hardwood to softwood has been taking place also. In the end of the year, it's still ongoing?
And if you could comment on Europe, you just mentioned that you got better deals in Europe compared to China. If we are also seeing players selling more in the country to avoid China, this is going to add some point to make some of the prices in Europe converge to the prices we see in China. And my sort of point is on the discipline, also maybe this could explain part of the deterioration in prices. If you guys believe that we saw deterioration in the discipline of supply maybe by some of the South American players that gave discounts when the Chinese put pressure on volumes back there in October or November. If you believe that this is maybe a threat to the pulp market, especially now that China is getting bigger in terms of fallings.
Lucas, thank you for the question, actually many questions at once. I'll try to address all of them but of course, if I'm not here before that I can try to come back to those. Let's come back to our vision of the situation right now in China. What we explained is that we don't feel that the price pressure that we've been experimenting over the last three months is related to a decrease in the demand of pulp because we don't see any real decrease in the paper production, paper and packaging production. We might have heard about the Chinese government asking for paper reduction but that was mainly related to some pollution issues.
We might have heard about some request from the Chinese government reducing paper and pulp production due to market conditions and in these cases, we got the confirmation from some Chinese papermakers that there no oversupply of paper and packaging. So this is why we have the strong feeling that it's not about the paper market or packaging market being over flooded with production. We do have the impression that of course we had reached a level of price that was to serve to certain customers, unacceptable or threatening their margins. So, they started to make the use of all their weapons, which are inventories and in some cases, fiber substitution to put pressure on to some eucalyptus or fiber producers. This was successful with some of the short fiber producers with others less.
Of course, we belong to a market. We cannot pretend that we are out of this market. So we were affected by those request in price decrease but we decided to reduce our exposure to China in order to prevent the margins of the Company and also in order to prevent adding oil to the fire in China because if you want to maintain those volumes, your volumes into this market, then you have to agree on those price request and had Fibria agreed to those price request, you would have seen the pricing in Asia dropping quicker.
So we did our job in order to prevent and to protect the Company margins, and also the market itself. But we don't see this trend, the pressure on prices, as being sustainable. We don't see it, because again it's not related to weaker demand of pulp. We see it as a result of the use of inventories, pulp inventories. And if we are consistent with this view, we have the feeling that the Chinese buyers might come back to the market quite significantly after Chinese New Year.
Of course, future will tell us whether we are right or wrong but we have this feeling because we continue to have a good prospect, a good outlook of the market demand for this year. I don't know if I have answered about your questions or do you still have some doubt about it?
Yes. If you could comment on the softwood issue, you see a substitution there. And also about the discipline and the market, that would be great?
Yes, the softwood, for sure. Whenever, you ask us about the short fiber substitution by long fiber, we tend to say that we don't believe that there is much substitution. But if there is some, it's in China. And I think that there was some short fiber substitution by long fiber happening in the last quarter. As a result of that, we understand that this long fiber situation is getting much better. If you look at the shipments of long fiber during the fourth quarter, they have increased quite a lot. As a result of that, the inventories are quite under control. And as a result of that, we've heard Metsa and Stora Enso announcing a $20 price increase valued that February 1st in Europe.
So we do have the feeling that the situation of long fiber is getting better, which is of course good news for us as well. And then you mentioned about the renminbi devaluation. It might be an issue on the very short-term basis for ‘13, ‘14 to China. But I don't see it as a real issue on the medium, long-term, because I do believe that by having the renminbi devaluated, the Chinese paper makers might gain competitiveness and they might be in a situation to export more into the rest of Asia or even into Europe. We feel that the devaluation in Europe has been very positive for the European paper makers in 2015. Why wouldn't it be positive for the Chinese paper makers in 2016? So, I think that the renminbi devaluation is no issue for pulp. Much to the contrary, I think that's a good opportunity to sell more into China in 2016.
Thank you very much.
Next question Juan Tavarez with Citibank.
So just to follow-up there with some color on the outlook you're having for a substantial increase in sales volumes by the end of first quarter. It seems like this is highly dependent on China returning after the New Year holiday, but what are -- what are you seeing in trends in Europe and the U.S.in terms of demand and their own inventory cycle like can they rebuild inventories or do they still have very low inventories? And maybe specifically in China, you mentioned pulp inventories there are very low but what are you seeing in terms of paper inventories for your customers?
And then maybe second, if you could just give us an overall CapEx update and specifically for the quarters coming ahead, how will the growth CapEx be applied? Is the bulk of the growth CapEx going to be in the fourth quarter or how should we think about that line modeling?
We focused our -- we mainly talked about China because most of the questions were related to China, but we are not saying that Europe and the U.S. are not doing great. And actually, I can tell you that from the order book that we have, U.S. and Europe is still performing very well, according to our expectations, and we do expect even sales to those destinations peaking up more than expected by the end of this quarter. So we are quite confident about U.S. and Europe as well. And regarding your question about paper inventories, as I mentioned, and we don't see any increase of inventory of paper in all markets. As I said, China, we don't see an increase in those inventories and not even in Europe and U.S. So we are quite confident about that. And this is what we've been saying that we expect the demand for pulp starting to gain quite significantly after Chinese New York in the case of Asia and also in the case of Europe and the U.S., because we continue to have a good positive outlook for the year.
Don't forget, even if IMF has revised down the GDP for the world, it's still well above last year. So and there will be some additional capacities on a worldwide basis. The loan rates, not only tissue, but also printing, arriving and packaging. So again, we continue to have this positive outlook for the year. So why not starting that from second quarter or even the end of the first quarter.
Just remember that this year is where we will have most of the Horizonte 2 project CapEx which is around $1.3 billion. We had the maintenance CapEx that we announced on Fibria Day and we also have logistics that we just announced today, which is the port that we on the auctioned and some rail road investments that we also announced. Of course, this can have some variability, that for your projections, you can put it on a linear way throughout the year, but it sometimes it depends on negotiations with suppliers, it can change a little. For example, last year, we already spent less than we gave guidance in terms of the [indiscernible] we said that we would expect 7% of the Horizonte 2 project. We took out 53 and we spend around 8%. So, of course, it all depends on the negotiations because whenever we can postpone the payment. As we did last year, we have a positive carry on our cash balance.
Our next question comes from Jon Brandt with HSBC.
Just I wanted to follow up quickly on China. You mentioned that inventories are low. I'm wondering and I know it's difficult, but is there any way to quantify how much inventory that the Chinese pulp buyers have gone through and kind of where inventory levels stand now? And then related to that, what gives you the confidence that they're going to come back in and replenish those inventories? Why can't -- whatever inventory level they have now, why is that not sort of the new level of inventory? And related to that, will you be reducing your exposure to China further or the 20% that you sent to China in 4Q, will that be the lowest level that we see and gradually going back up to normalized levels throughout the year?
And then, the second question relates to the Klabin volumes that I imagine you'll start shipping in the second quarter. Could you just give us an update as to where they will grow, how much has been contracted, how much will go to existing customers versus the spot markets?
Jon, last question first, about Klabin, we cannot give any indication about where we would allocate those volumes because otherwise we would disclose our commercial strategy. So what we can tell you is that, of course, this is already being allocated that we cannot tell anybody to where and to what destination. So this is about Klabin question.
About the rest, about how much I'm sure about the levels of inventories in China, it is very difficult to quantify because we do have some statistics, but they're not always reliable. So we do have some more informal information based on qualitative reports, but which are quite trustworthy. So I would tend to tell you that we cannot quantify but we know about the situation through reliable sources.
How much I'm confident that the Chinese will get back to purchasing of course I don't have any crystal ball, but the thing is that we are looking at fundamentals. As I told you, we don't see any major issue on the consumption in China. This is what we've been explaining for the last few hours. We continue to have a good outlook on the pulp demand in all countries. So this is why we are quite confident that the demand will start again.
We keep saying we cannot look at the picture we have to look at the movie. We cannot extrapolate what has happened in the third quarter and say well, now China would stop forever. It can't be. They continue to have their capacities producing they will invest more next year. There are still some new capacities in China. So of course, there will be an increase in demand.
What is happening right now is that according to our analysis they are using their inventories and this is it. And related to your question, whether we could decrease even more the dependence on China 20% is quite a good level for us because don't forget, we continue having global contracts in China. So, it's not that we have stopped selling to China. We continue to have significant volume being delivered there through global contracts.
And how much of what went to China in 4Q, how much of that was on spot? Was there anything into the spot market in China in 4Q?
No. For sure, spot, this is what we've been avoiding, even regular business. So of course, spot businesses were directed to the U.S. and to Europe, not to China.
Our next question comes from Alan Glezer with Bradesco BBI.
I have two questions. The first one is regarding third party wood. I understand that its share is currently slightly above 30%. I understand also the Fibria was previously bringing the wood from Rio Grande do Sul state to Portocel port as this was the most competitive strategy for third party wood. Now that we have a lot of rain in Rio Grande do Sul state, we've got few disruptions in the region. I was wondering whether this strategy is still being applied or whether there were any impacts for these strategy of third party wood supplying. That's the first question. The second question, I'm sorry to insist, but this is important, is regarding China. I understand your view that there is no finals [ph] over decrease in paper production in China. But I was wondering if you could share your view regarding the impact of the Chinese Yuan depreciation on the profitability of the Chinese paper producers having in mind that the pulp prices have not come down significantly so far and that the margins have been coming down on paper producers around the globe and what's the kind of color that you guys have for the Chinese players? So, those are the questions.
This is Castelli. Thanks for the question regarding to the cost. The third-party wood, why we have, first of all, we had 32% in 2014 and we finished the 2015 with 30%. So pretty much in line what the expectations we had and directly or indirectly, we gave you that information. Let's talk about Losango, this is also helps, to answer your question, will help us also to explain much better why we had 43% of the third-party wood on the fourth quarter, because we had 25%, 20%-something of those third-party wood from the first three quarters and we rose the last quarter to 43%. The Jacarei is based on the Losango operation.
El Nino, it's real. We are having lot of raining in Rio Grande do Sul state. But remember that really to get efficiency on those operations we have prepared stocks, very good stocks of lots very close to the port facility. So we are not having -- has been affected by those interruptions in these operations. And yes, we want to continue to bring certain quantity of good third party wood from the Losango. We are using the vessels from the Rio Grande port directly to Portocel. There is a learning curve.
So, the reason why we didn't bring the wood on the third quarter because we were setting up the operation, so everything, it's running smoothly without any problem. And last but not least, with the summer in Brazil, the rain in the Rio Grande do Sul started to decrease and we started to have rains in other regions. So this is we follow up the forecast of the weather conditions and we prepare not only in Rio Grande do Sul but in all operations of forests, we have stocks, intermediate hubs that allow us to supply continuously the wood to the mill in all conditions of weather.
Alan, regarding your question about the margins in China of the paper makers, I mean of course, the devaluation is not a good news on the short-term basis because this is increasing the price in renminbi of the pulp, but even though, if look at the short-term, if you compare December with November, due to the price decrease in pulp, the margins of the paper makers have not been affected. Actually, they have increased a little bit. So even on the short-term basis, these renminbi devaluation has been more than offset by the price decrease. But I would like to look at it in a more positive way on the medium, long-term basis. We do have the impression that by having a devaluation on the renminbi, as I mentioned earlier, this could be good news for the paper makers in China and they could export more into the other markets. We've seen that 2015 with the European paper makers, they started to complain quite a lot about the pulp increases that we managed to implement in dollar terms but at the end of the day, the devaluation has been more than positive for them because they started to export much more their paper. We see the same opportunity for the Chinese paper makers. So again, maybe, a little bit of a constrain on the short-term basis but a good opportunity on the medium to long-term basis.
Next question Gabriela Cortez with Banco do Brasil.
Regarding the regular charge for 2013, which had altered period of non-stoppage rent -- of stoppage rent in this chart from 12 months to 15 months, you have mentioned there will be cost reduction and increasing production in the long term. Could you explain better the dynamics of that and can we expect any taxing cost already in 2016? Thank you.
First of all, we have regulation, the legislation in Brazil. It imposed to us on the past that we could run only 12 months. Right now, with several discussions, of course, we are allowing to run for up to 15 months and this is what Fibria is doing. We are following the legislation and we are the most important things that we are monitoring the conditions -- the safe conditions of the equipment because it is too critical to just to say let's go to 15 months if we are facing some problems. So the strategy of 15 months, it’s according to the legislation and it's based on the conditions of every single recovery boiler, okay. The idea is to when you have to stop one recovery boiler, the time and the intensity of the shutdown, it's too big and also -- it means that we expand normally 10 days every shutdown when we stop the recovery boiler and when we do not have to stop the recovery boiler, we can produce eight days minimum from those 10 days, because we just make some procedure that are very, very short on the recovery boiler without having to access the internal pressure parts, et cetera. to assembly [indiscernible]. So the strategy is always to try to run to maximize the output of the equipment based on the conditions every time on the safe side and we do -- we intend to more and more to do maintenance based on the equipment conditions is a predictive maintenance, not a chronological maintenance, just to stop every 12 months, because we need to do, and this is what we have been doing for a long time. So the strategy is that run for 15 months in an efficient way. And in 2015, we had our learning process, because we did these procedures in the three from our seven recovery boilers. So what we have discovered is it possible but require certain different approach. And we lost a couple of the productions after the shutdown on the returning of shutdowns, also due to this learning curve of how to deal with the 15 instead of 12 months. But everything was learned and we do not expect any recurring point from the 2016, and so on.
Our next question comes from [indiscernible] with UBS.
Most of my question have been taken at this point really, maybe just a quick question. You reported inventory is at 52 days, is actually below the third quarter, but considerably above the fourth quarter of 2014. Should you expect destocking through the first quarter of this year?
What was your question? Of the inventories at the end of the first quarter…
At the end of the fourth quarter, sorry?
Well, off course, we don't give any guideline about inventories at the end of the quarter, but that would be the same of giving guidelines about sales volumes. But the thing is again let's not look at the picture, but at the movie. Of course, fourth quarter 2015 was higher than 2014. What does it mean? It means that we have also more volumes of sell in 2016, not necessarily during the first quarter but all over the year. It could be good business, because we have a higher exchange rate. As a matter of fact, the average of the fourth quarter was BRL3.84.
Today, the exchange rate is around BRL4,05. So sometimes, it's a good decision to defend price put you're plotting to inventory and sell it at higher exchange rate having defended the price. So we need to have the -- inventory is not all about if it's high it's a bad news, it's about the commercial strategy whether we feel that we can sell it better later on; and if we also need to defend the pricing policy.
Just a couple of comments as well, agreeing 100% of what Henri said, if you look to the 2014, the inventory in days was 48 days and we finished 2015 with 52, four days more. The reason why is what he said. And I remember that, as we reduce it a little bit, the sales to China, this has also helped to increase two days of inventory because we are not delivering because when you go to sell from Europe and more from the U.S., you have the inventory. You keep the inventory.
The normal sales to go to China, is weighted on the letter of credit that you have not any more the procession because when you put on the vessel, the pulp belongs to the buyer. So, that’s pretty okay. Again, as you have said, don't pay attention in four days up, four day down because this is do not represent any disrupter any pressure. This is the stock is my stock we need to pay attention on that.
And I would like to also to use your question to re-emphasize the view of the Company regarding to the China. Chinese market they are price sensitive. They are trying to put the price down. We see the dynamic between the long fiber and short fiber. And we still believe that the demand is there, the inventories, we are not making reposition their inventory. They are trying to buy much more speculative way, especially the trading houses, when the price goes down.
Let's see what's going on after New Years of China, and we believe that demand will be back. If we reduce the price, the demand possibly we could be able to sell more. But why to sell more, just to finish on much better results in year that the Company don't need to put more pressure on it. And so, let's try to generate well. Our pocket margin is much better than ever. So the message of our need is clear.
If we sell and we believe we're going to sales in January and February and March, is we're going to sell with a better results for the Company. And as a leader in this industry, we will not be the one that will push the trigger and agree what the Chinese buyers are trying to say. We see that again and again we are reaching the bottom in the net price transaction in China, why you see that. The long fiber producer, they started to announce price increase. That's another signal that we believe that we are right.
This concludes the question-and-answer section. At this time, I would like to turn the floor over to Mr. Guilherme Cavalcanti for any closing remark. Mr. Guilherme, you may now proceed.
I would like to take this opportunity to announce that this month, RobecoSAM, the company that evaluates and publishes the New York Stock Exchange Dow Jones Sustainability Index, announced that Fibria was among those firms included in the 2016 year book and had received Silver Class recommendations for its excellent sustainability performance.
Finally, I would like to thank you all for your participation and interest. If you have any additional questions, please feel free to contact our Investor Relations team.
Thank you. This concludes Fibria's Fourth Quarter 2015 Results Conference Call. You may disconnect your lines at this time. Thank you.
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