PaperAge Magazine

Fibria Reports Second Quarter 2016 Results

Fibria logo Following a challenging beginning of year, demand for hardwood pulp in China began to pick up, confirmed by the pulp sales figures presented by Global 100 Report of PPPC (+7% year-on-year in the first five months).

July 25, 2016 - Brazilian market pulp producer Fibria today reported results for the second quarter of 2016.

EXECUTIVE SUMMARY

Following a challenging beginning of year, demand for hardwood pulp in China began to pick up, confirmed by the pulp sales figures presented by Global 100 Report of PPPC (+7% year-on-year in the first five months). Unscheduled maintenance downtimes and the widening gap between hardwood and softwood pulp prices also contributed to the more balanced market fundamentals. Thanks to the improved scenario, Fibria announced a price increase in all regions (Europe: US$710/t, North America: US$870/t, and Asia: US$550/t) as of June. The quarter was also marked by a decline in the production cash cost (especially in May and June) and a reduction in projected 2016 capex.

The previous 2016 capex estimated at R$8.2 billion, according to the original budget released on January, 31, 2016, was revised to R$6.7 billion, a decrease of R$1.5 billion attributed to Horizonte 2 Project and projects of logistics. In relation to the total capex of Horizonte 2 Project, the amount was reduced to R$7.9 billion, a decrease of R$800 million over the previously projected capex of R$8.7 billion. The capex related to in progress logistics projects, which were R$690 million in the capital budget announced on January, 31, were reprogrammed for the next year, triggering a reduction of about R$500 million in capex 2016. It is important to remember that in May, the Company announced an increase in the nominal capacity of the Horizon Project 2, from 1.85 million tonnes to 1.95 million tonnes.

On June 29, Fibria informed its shareholders and the market in general that it filed the announcement of the conclusion of its capital market funding operation with the Brazilian Securities and Exchange Commission. This operation involved the public distribution of agribusiness receivables certificates (CRAs) of the 80th and 81st series of the 1st issue of Eco Securitizadora de Direitos Creditórios do Agronegócio S.A., totaling R$1.35 billion, backed by export credit notes issued by the Company. The 80th series issue of CRAs amounted to R$880 million, maturing in 4 years, with six-monthly interest payments equivalent to 97% of the accumulated variation in the CDI interbank rate and amortization in a single installment in June 2020. The 81st series totaled R$470 million, maturing in 7 years, with annual interest payments equivalent to the IPCA consumer price index + 5.9844% and amortization in a single installment in June 2023.

In May 2016, the Company began commercializing hardwood pulp produced by Klabin S.A. in its unit in Ortigueira, Paraná, in accordance with the supply agreement entered into between the parties and disclosed to the market on May 4, 2015. The contract is for six years (with the possibility of renewal by mutual agreement), four of which with a minimum volume of 900 thousand tons, followed by two years of gradual reduction (phase out) with volumes equivalent to 75% and 50%, respectively, of the volume delivered in the fourth year. The purchase price will be based on the Company's average net Paranaguá FOB sales price and the volume acquired will be sold to countries outside South America.

Pulp production totaled 1,287 thousand tons in 2Q16, 7% more than in 1Q16, due to the reduced impact of scheduled maintenance downtimes, including the mill C retrofit in the Aracruz Unit. The 3% reduction over 2Q15 was largely due to: i) the slower stabilization curve following the stoppage, in line with the adaptation of the boiler cycle to 15 months and ii) the residual effect of the Aracruz Mill C retrofit, which was concluded at the end of April. Sales volume came to 1,342 thousand tons, 18% up on 1Q16 as a result of additional volume from the commercial agreement to sell Klabin's pulp and the upturn in sales to Asia and North America. In the year-on-year comparison, the impact of the Klabin agreement was the main factor behind the improvement. Pulp inventories closed the quarter at 54 days.

The production cash cost was R$662/t, 5% down on 1Q16, due to the lower effect of scheduled maintenance downtimes and the reduced consumption of chemicals, partially offset by higher wood costs. Excluding the impact of the 1Q16 stoppage, the cash cost would have fallen by 1%. The 14% upturn over 2Q15 was mainly due to higher costs with wood (wider average transportation radius and more wood acquired from third parties), the lower utilities result (electricity sales) and the appreciation of the average dollar against the real (see page 8 for more details). The average for May and June was R$639/t, in line with advances in the use of process tools, which have been improving mill stability in recent months. These two months recorded the lowest cash cost since December 2015, despite the decline in energy prices and higher wood cost.

Adjusted 2Q16 EBITDA totaled R$925 million, 26% down on 1Q16, due to the lower average net price in reais and higher cash COGS, partially offset by higher sales volume, while the EBITDA margin, excluding the sale of pulp from Klabin, stood at 43% (39% including these sales). In relation to 2Q15, the 20% decline was due to increased cash COGS per ton and the 1% slide in the average net price in reais. Free cash flow for the quarter before expansion capex and dividend payments amounted to R$413 million, 33% and 16% less than in 1Q16 and 2Q15, respectively, due to the EBITDA reduction and higher interest paid, partially offset by the positive variation in working capital. It is worth noting that the operation with Klabin has no impact on EBITDA or free cash flow.

The 2Q16 financial result was positive by R$1,095 million, versus a positive R$922 million in 1Q16 and R$321 million in 2Q15 — chiefly due to the 10% depreciation of the end-of-period dollar against the real, resulting in income from the impact of the exchange variation on debt and hedge instruments. Gross debt in dollars totaled US$3,958 million, 23% and 36% more than in 1Q16 and 2Q15, respectively. Fibria closed the quarter with a cash position of R$2,983 million, including the mark-to-market of derivatives.

As a result of all the above, the Company reported 2Q16 net income of R$745 million, versus R$978 million in 1Q16 and R$614 million in 2Q15.

PULP MARKET

The second quarter was marked by the resumption of Chinese demand for hardwood pulp following the beginning-of-year decline in sales volume and price slide.

Throughout the quarter, the fundamentals of the hardwood pulp market improved substantially, fueled by good global demand and the increase in the gap between hardwood and softwood pulp prices. As a result, price increase was announced as of June 1. Also, it is estimated that around 300 thousand tons of hardwood pulp were removed from the market in 2Q16 due to scheduled maintenance downtimes and unscheduled stoppages worldwide. The price difference between the two types of pulp exceeded US$100/t in China and reached US$124/t in Europe (according to PIX/FOEX) in the last week of June, versus US$14/t at the close of 2015.

The data from Global-100 report of PPPC show acceleration of hardwood sales starting in March. While global harwood pulp sales remained stable in the first two months of the year when compared to the same period of 2015, by the end of 1Q16 there was an acceleration of growth, especially in China. Considering the accumulated of the first five months of the year, there was a 1.9% increase in global sales of hardwood pulp. As a main highlight, the hardwood pulp sales to the Chinese market grew 7.4% during the period.

The full version of Fibria's second quarter 2016 results, along with tables, is available on the following link: Fibria 2Q 2016 Earnings (770k, pdf).

Fibria is the world leader in the production of eucalyptus pulp with the capacity to produce 5.3 million tons per year. To learn more, please visit: www.fibria.com.br.

SOURCE: Fibria