Fibria reports Q3 loss of 1.1B reais from profit of 303M reais in year-ago period, citing reduced pulp price, economic uncertainties, dollar appreciation against reais; sales down 8.3% to 1.45B reais

Kendall Sinclair

SAO PAULO , October 26, 2011 (press release) –
Highlights of the Quarter

Conclusion of the sale of the Piracicaba Unit for US$313 million.
Net debt totaled R$9,542 million, up 20% over 2Q11 and down 6% over 3Q10, due to the 19% appreciation of
the dollar against the real in the quarter.
Short-term debt fell to 9% from 14% in 2Q11 and down 19% in 3Q10 after the payment of the last installment to
former Aracruz shareholders.
Cash balance represented 1.7x short term debt in 3Q11.
Cash earnings (excludes exchange variation and depreciation, among others) of R$ 0.9 per share, down 6%
quarter-on-quarter and 37% year-on-year (more information on page 10).
Approved CAPEX for 2011 reduced by R$201 million to R$1,440 million.
Successful scheduled maintenance downtimes at the Jacarei and Tres Lagoas Units.
Pulp production reached 1.3 million tons, stable quarter-on-quarter and up 7% over 3Q10.
Cash cost of pulp production of R$481/t. Excluding the effects of the downtimes, cash cost was at R$446/t, up 2.5% year-on-year and below the inflation of 7.3% in the period.
EBITDA totaled R$476 million, down 3% and 34% quarter-on-quarter and year-on-year respectively.
Losses of R$1,114 million, due to the impact of the dollar's appreciation on the financial result, in large part an accounting effect.
Fibria was chosen as the world industry leader with its inclusion on the 2011/2012 Dow Jones Sustainability Index (DJSI World).
Fibria obtained the installation license for theTres Lagoas II Project.

Executive Summary(1)

The crisis in Europe and the United States in the third quarter impacted the global demand for commodities and drove a reduction in the pulp price in the period. Economic uncertainties also caused the appreciation of the dollar against the real, mainly in September, increasing Fibria’s leverage as 92% of its debt was dollar-denominated in 3Q11. On the other hand, as an export-oriented company (more than 90% of sales are exports), the dollar’s appreciation will positively affect the operating result.

In May of 2011, Fibria approved its Indebtedness and Liquidity Management Policy that provides financial discipline in any market context. As previously mentioned, external factors impacted the Company’s leverage, exceeding the limit of 3.5x Net Debt/EBITDA but still compliant with debt covenants.

The Company has maintained its focus on the Competitiveness Project through initiatives such as the structural optimization, review and simplification of processes and expense reduction, evidenced by the reduction in production cash costs in 3Q11. A R$201 million reduction was approved for 2011 CAPEX, which is now R$1,440 million. Fibria is planning an additional CAPEX reduction for 2012, to be confirmed after the Budget is approved by the General Shareholders Meeting in early next year. The Company has also focused on actions to promote liquidity events, through the Losango forest asset, and other non-core assets. Other initiatives have focused on the reduction of working capital investments.

Pulp production in 3Q11 was impacted by maintenance downtimes to a lesser extent, as compared to the previous quarter. Maintenance downtimes were carried out at the Jacareí and Três Lagoas units (the latter started at the end of June). Pulp sales remained stable quarter-on-quarter.

Fibria’s cost control initiatives and the operational stability of its units have allowed positive results, demonstrated by the increase in cash cost of production below inflation. In addition, accumulated synergy gains captured since Fibria's creation through 3Q11 suggest that the Company will realize its goal of R$3.4 billion in synergies at net present value by the end of 2011. Pro-forma EBITDA (excluding Conpacel and KSR results in 3Q10) declined quarter-on-quarter and year-on-year, mostly due to the lower pulp price in reais and the higher cash costs of goods sold as a result of a higher cost of production in 2Q11.

The net financial result was negative, chiefly due to the effect of the dollar’s appreciation against the real in the 3Q11, largely an accounting effect (that is, no cash effect) from the conversion of the dollar denominated debt into reais at the end of September. Operational hedge totaled negative financial result of R$558 million, R$541 million of which represented an accounting change between 3Q11 and 2Q11 and, therefore, a cash disbursement of R$17 million.

In August, Fibria received the installation license authorizing the industrial expansion of the Três Lagoas Unit, in Mato Grosso do Sul State. The expansion will be defined, in late 2012, when the Company will evaluate market conditions.

In September, Fibria concluded its repositioning as a pulp producer with the sale of the Piracicaba Unit (the last paper mill) to Oji Paper Co. Ltd., for the price of US$313 million.

Industry Intelligence Editor's Note: In an omitted table, Fibria reported Q3 net sales of 1.45 billion Brazilian reais. For the same period a year ago, the company recorded net income of 303 million reais and net sales of 1.58 reais.

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