Fibria swings to Q1 net loss of 10M reias from profit of 389M reias in year-ago period, net sales down 18% to 1.27B reias; company cites results mainly driven by reduced net revenue from lower price, income from discontinued operations
May 14, 2012
– Highlights of the Quarter
On March 8, Fibria announced via Material Fact a primary public offering of common Company-issued shares. 86,000,000 shares were issued at a unit price of R$15.83/share. The transaction was concluded according to Governance best practices with financial settlement in the total amount of R$1.3 billion (net of incurred expenses and commissions) on April 30.
Simultaneously with the public offering announcement, the Company announced that it accepted the binding proposal made by Fundo Florestas do Brasil for certain forestry and land assets located in southern Bahia State in the total amount of R$235 million (R$225 million net of incurred expenses), subject to alterations after conclusion of the confirming due diligence. The Company plans to conclude the transaction by June 30 with full receipt of the agreed upon amount.
The equity offering is another step in the process of reducing the Company's leverage, in line with the strategy to optimize the capital structure. The equity offering together with the sale of the Bahia Produtos de Madeira (BPM) forestry assets, will result in a total liquidity event of R$1.6 billion. The Company expects to conclude other liquidity events with non-strategic forestry assets in 2012. In addition, as announced on February 1, Fibria reduced its estimated CAPEX for 2012 in approximately R$ 400 million.
Prospects for the pulp market are positive. In March and April we announced two price increases for Asia of US$30/t each. Also, we announced price increases of US$40/t for Europe and North America, and one of US$30/t for Asia (all effective from May). The European list price returned to the level of US$800/t five months after the FOEX index reached US$650/t. This recovery trend and Fibria’s inventory levels at 52 days (lower than 1Q11) confirm our view that supply and demand fundamentals remain balanced.
Pulp production reached 1.3 million tons in 1Q12, up 3% and 1% over 4Q11 and 1Q11, respectively. This result shows Fibria's continued operating excellence, as in 2011, the Company reached record production and was able to repeat this performance in the first quarter of the year, even with the scheduled maintenance downtime at the Veracel Unit (event occurred in 1Q12). Sales volume was up 4% over 1Q11. In relation to 4Q11, the 7% drop in sales is explained by the seasonality that is characteristic in the last quarter of the year.
Excluding maintenance downtime, cash cost of pulp production of R$444/t, stable over the R$443/t and R$446/t reported for 4Q11 and 1Q11, respectively. The increased volume produced and benefits of initiatives focused on cost reduction (revitalization of the Aracruz Unit’s Plant A) drove this positive result and are in line with the Company's goals of mitigating the impacts of inflation on cash cost. Including the maintenance downtime in the cash cost analysis in 1Q12, the year-on-year increase was 2%, below the 2011 and 2010 cash cost variation (4%). In the last twelve months, inflation was 5.2% (IPCA Index).
EBITDA margin increased 2 p.p. over 4Q11 to 30% as a result of the reduced cost of goods sold on a cash basis and reduced sales and administrative expenses that offset the decline in the net price and the reduced sales volume.
Considering the proceeds from the equity offering and the sale of BPM in the amount of R$1.6 billion (to be received in 2Q12), net debt would fall 22% and 7% quarter-on-quarter and year-on-year, respectively, and the net debt/EBITDA ratio would decrease to 4.3x. The positive change of the free cash flow also drove the reduction of net debt (more information on page 13).
Due to the loss reported for the fiscal year ended December 31, 2011, in the amount of R$873 million, it was decided on the Annual General Meeting not to distribute dividends.
World Printing & Writing (P&W) demand closed 1Q12 stable over the previous year. Growth has been concentrated in emerging markets like Asia, the key growth region with an increase of 2.5%. In the Tissue market, world demand in 2011 increased 3.3%, with growth projected at 2.6% for 2012, bringing total demand to a level of 30 million t.
Market pulp demand in 1Q12 remained consistent, growing 5.4% to the equivalent of 92% of installed capacity. Eucalyptus pulp demand saw the greatest increase among all market pulp types, up 11% or 260 thousand t. The Chinese appetite for BEKP seen at the close of 2011 was maintained in 1Q12. Asian demand increased 26% or 500 thousand t. The main driver of this volume growth was the rapid expansion of Chinese paper production, requiring a substantial volume of imported virgin pulp, as well as the growing Tissue market.
On the supply side, in 1Q12 we saw scheduled maintenance downtimes and unscheduled downtimes such as the occurrence of a fire at a Chilean plant, production reduction in Brazil and wood supply issues in Indonesia.
As a result of balanced supply and demand throughout 1Q12, world producers’ inventories closed the period at 31 days of supply, compared to 34 days in December of 2011.
The maintenance downtimes in the pulp industry are expected to be long over the next months; in the second quarter, downtimes are expected to take approximately 450 thousand t of softwood pulp and 500 thousand t of hardwood pulp off the market.
Despite world economic uncertainties, the expected growth in Chinese demand, together with the maintenance downtimes in the second quarter, make significant changes in the short-term supply and demand fundamentals not expected.
Production and Sales – Pulp and Paper
Fibria’s pulp production reached 1,332 thousand t in 1Q12, compared to 1,299 thousand t in 4Q11 and 1,319 thousand t in 1Q11. The increased production shows the operating efficiency of the Units as, even with the scheduled maintenance downtime at the Veracel Unit, production increased over 4Q11 and 1Q11. Pulp inventories totaled 766 thousand t (52 days), up 3% over the 746 thousand t (50 days) in 4Q11 and down 4% over the 794 thousand t (52 days) in 1Q11.
Pulp sales totaled 1,313 thousand t in 1Q12, down 7% quarter-on-quarter due to seasonality in the period, but up 4% year-on-year due to increased sales to Asia. Exports represented 90% of the total pulp sales in the quarter. The sales mix saw highest demand in 1Q12 from Europe at 44%, followed by Asia at 28%, North America at 18% and Latin America at 10%.
Fibria’s net operating revenues totaled R$1,274 million in 4Q12, down 9% quarter-on-quarter and 18% year-on-year, mainly due to the absence of the revenues from paper business. Net revenue from pulp was R$1,259 million in 1Q12, down 9% as compared to 4Q11’s R$1,380 million due to the reduced sales volume and the reduction of the average net price in reais, in turn due to the 2% depreciation of the average dollar. Year-on-year, the 11% decline in net revenue was due to the 15% lower average net pulp price in reais.
The cost of goods sold (COGS) of R$1,230 million was 8% less than in 4Q11, mainly as a result of the reduced sales volume and inventory turnover, which in turn was a result of the lower cash cost in 4Q11. Year-on-year, COGS remained stable mainly due to the absence of the paper sales volume.
The cash cost of pulp production in 1Q12 was R$455/t, a 3% (R$12/t) increase compared to 4Q11, largely explained by the higher wood cost (increase of wood from third parties) as well as the scheduled maintenance downtime in Veracel Unit. The increase of wood from third parties was expected during the first quarter of the year and is in line with the annual planning of wood supply (1Q12: 8%, 4Q11: 5% e 1Q11: 8%, assuming the volume of wood from third parties delivered at the mill). Excluding the effects of the downtime, the cash cost was R$444/t, stable quarter-on-quarter and year-on-year as a result of process optimization and reduced fixed cost. Year-on-year, process optimization and reduced chemical consumption, in part explained by the revitalization of the Aracruz Unit’s A Plant, brought Fibria’s cash cost down by R$2/t. It should be noted that in the last twelve months, inflation was 5.2% (IPCA Index).
Sales expenses totaled R$70 million in 1Q12, down 22% quarter-on-quarter chiefly due to the constitution of a provision for doubtful accounts in the amount of R$15 million in the previous quarter and the reduced sales volume. Year-on-year, sales expenses increased 8% due to the increased sales volume and contractual price adjustments for port services.
Administrative expenses totaled R$62 million, falling 24% quarter-on-quarter, mainly as a result of reduced expenditures with third party services. The year-on-year reduction of 17% was explained by increased expenses with payroll and indemnifications in that period, in addition to reduced expenditures with third party services. These reductions were the result of the retention of benefits from the organizational restructuring and processes already announced.
Other operating revenues (expenses) posted an expense of R$13 million in 1Q12, as compared to revenue of R$146 million in 4Q11. This decline was in large part the result of the R$140 million effect of the re-measurement of biological assets at their market value as per CPC 29 – Biological Assets in the previous quarter. Year-on-year, this figure remained stable.
Adjusted EBITDA totaled R$377 million in 1Q12, down 3% over 4Q11, mainly the result of the reduction in the pulp sales volume and the 2% lower average net pulp price in reais, partially as a result of dollar’s 2% depreciation against the real. However, the increased EBITDA margin from 28% to 30% in the period as a result of the decline in cash COGS and reduced sales and administrative expenses should be noted. The year-on-year adjusted EBITDA decline was explained by the 15% drop in the average net pulp price in reais and the absence of the Piracicaba Unit, operation sold in September of 2011.
Financial revenue from interest on marketable securities was R$43 million, down 11% and 4% quarter-on-quarter and year-on-year, respectively, due to reduced return (1Q12: CDI 9.5% p.a. | 4Q11: CDI 12.4% p.a. | 1Q11: CDI 11.4% p.a.) on a lesser average cash balance as compared to previous quarters. Hedge operations brought a positive R$107 million result, in large part due to mark-to-market variation in the period.
Financial expenses with interest on loans and financing totaled R$170 million in 1Q12, down R$4 million quarter-on- quarter mainly as a result of the average dollar's 2% depreciation against the real in the period. The 1% year-on-year decline was due to the effects of the liability management plan in which the company settled or prepaid operations with higher coupons.
Financial revenue from foreign exchange variation on dollar denominated debt was R$270 million, varying R$368 million, due to the real’s 3% appreciation against the dollar in the period, compared to a 1% appreciation of the dollar against the real in the previous quarter. Year-on-year, the variation was due to the dollar’s 2% depreciation against the real the period.
Other financial revenue (expense) totaled an R$26 million expense, up R$6 million as compared to 4Q11, primarily due to the reduced estimate of Tax on Financial Operations (IOF) owed on hedge operations. The year-on-year decline was chiefly due to the restatement to present value of debt with former Aracruz shareholders carried out in that quarter.
On March 31, 2012 the marked-to-market financial derivatives position was negative at R$115 million, as opposed to negative R$214 million on December 31, 2011, for a positive variation of R$99 million with a positive cash effect from maturing operations of R$8 million. Thus, the impact on financial income in the quarter was R$107 million.
The derivative instruments used by the Company seek to transform debt in other currencies to debt in dollars, floating- rate debt into pre-fixed debt or protect exposure to a given currency or index. The financial instruments were contracted in accordance with the parameters in the Market Risk Management Policy and are conventional without leverage or stipulations for margin calls, duly registered with the Securities Clearinghouse (CETIP), and cash adjustments are only recognized upon the contract’s maturity and amortizations.
In 1Q12 Fibria posted loss of R$10 million, as compared to loss of R$358 million and profit of R$389 million in 4Q11 and 1Q11, respectively. Quarter-on-quarter, the reduced loss was primarily the result of a better financial result, in turn explained by the dollar’s 3% depreciation against the real as compared to appreciation of 1% in the previous quarter. The year-on-year variation was largely driven by the reduced net revenue as a result of the lower price and income in that quarter from discontinued operations.
Analyzing income from a cash per share perspective, which excludes the effects of depreciation, depletion and monetary and foreign exchange variations, among others (more information on page 21), there was a reduction in cash earnings over 4Q11, mainly due to the decline in net revenue, partially, as a result of the lower average net pulp price in reais and the reduced sales volume. Year-on-year, the reduction was due to not only the decline in the price in reais, but also the absence of the Piracicaba Unit operation. Thus, cash earnings were R$0.8 per share, down 8% and 33% quarter-on-quarter and year-on-year, respectively.
Gross debt on March 31, 2012 was R$11,031 million, 3% million less than in 4Q11, mainly due to the dollar’s 3% depreciation against the real and amortizations in the period. Year-on-year, gross debt was up R$775 million or 8% due to the dollar’s 12% appreciation against the real in the period, impacting the portion of gross debt in dollars.
Of the total gross debt, 93% was dollar-denominated. The average cost of bank debt in domestic currency in 1Q12 was 9.0% p.a. and the cost in dollars was 5.5% p.a., both stable over 4Q11.
The average maturity of total debt was 71 months in 1Q12, compared to 73 months in 4Q11, while short term debt was at 10% of the total, the same percentage as 4Q11.
Fibria’s cash position on March 31, 2012 was R$2,066 million, including the positive R$115 million mark-to-market of hedge instruments, 74% of which were applied in public bonds and fixed income assets denominated in domestic currency. Net debt on March 31 was R$8,965 million. Considering proceeds from the equity offering and the sale of BPM in the total amount of R$1.6 billion, net debt would be R$7,400 million. The Company’s pro-forma cash position was 3.3x its short term debt, reinforcing its capacity to fulfill its obligations for 2012.