Klabin's Q1 net income up 200.5% year-over-year to 607M reais due to higher exchange rate, favorable export market conditions, 423M reais gain from non-cash impact of variation in fair value of biological assets; net revenue up 12.9% to 1.20B reais

SAO PAOLO , April 24, 2014 (press release) – Summary

In the first quarter of 2014, the global economy continued giving signs of modest recovery in both the United States and the Euro Zone. These regions have been gradually removing the liquidity enhancing programs implemented after the 2008 crisis. Isolated facts, such as the political tension in the Crimea region, created uncertainties, which, however, were not strong enough to offset the gradual improvement in the U.S. and European economies.

Unlike these more modern markets, Brazil began the year on a pessimistic note due to signs of fiscal deterioration and low economic growth. In order to control the rising inflation, the Brazilian Central Bank maintained its policy of increasing the Selic benchmark rate, which began the second quarter of 2014 at 11% p.a. This, however, did not reduce Brazilian household consumption, which represented more than 60% of GDP at the end of 2013.

The unfavorable economic scenario affected Brazil’s various sectors in different ways.

In the packaging paper market, consumption by producers of food and other non-durable consumer goods did not fall substantially, benefiting suppliers in these segments. Preliminary data from the Brazilian Corrugated Boxes Association (ABPO) indicate that the corrugated boxes market grew by 3% between 1Q13 and 1Q14. According to the Brazilian Association of Pulp and Paper Producers (Bracelpa), domestic demand for coated boards, excluding liquid packaging boards, fell by 3% over 1Q13, led by non-food segments.

In the international markets, the downward trajectory of kraftliner prices in the final months of 2013 was maintained in 1Q14. The list price in Europe averaged €564/t in the quarter, according to the FOEX index. Due to the exchange variation, the average price in reais increased by 19% over 1Q13.

With the higher average exchange rate in the first three months of 2014, Klabin maintained its sales in the most attractive markets thanks to its product line flexibility. As a result, the Company expanded the share of exports in its sales from 30% in 1Q13 to 35% in 1Q14, increasing its export sales volume by 19% year-on-year to 154 thousand tonnes.

Of total domestic sales of 289 thousand tonnes, it is worth noting the increased share of converted product sales on the domestic market, with a 5% year-on-year upturn to 164 thousand tonnes.

As a result, net revenue from sales totaled R$1,203 million, 13% up on 1Q13. Given its solid period revenue from sales, based on the improved product and market mix, Klabin moved forward with its sustainable growth process, recording adjusted EBITDA growth for the 11th consecutive quarter. EBITDA came to R$1,602 million in the last 12 months and R$424 million in the first three months of 2014, 11% up year-on-year, accompanied by a margin of 35%.

Exchange Rate

Thanks to the reduction in the Federal Reserve’s bond repurchase program and the news of Brazil’s low economic growth and fiscal deterioration, the real continued to depreciate at the beginning of 2014, resulting in exchange rates above R$2.40/US$ at the end of January. As a result, the average dollar exchange rate was 4% higher than the 4Q13 average. Halfway through the quarter, however, there was an increase in the inflow of dollars into Brazil, following the upturn in domestic interest rates, and a higher volume of foreign investments in the stock market, bringing the exchange rate to R$2.26/US$ at the end of the period, 3% lower than at the end of 2013.

Operating and financial performance

Sales Volume

First-quarter sales volume, excluding wood, increased by 3% year-on-year, totaling 443 thousand tonnes.

Paper sales volume on the export market grew by 19% to 154 thousand tonnes, benefiting from the more favorable exchange rate. The export market accounted for 35% of total sales in 1Q14, versus 30% in 1Q13.

Due to Klabin’s capacity constraints, domestic sales came to 289 thousand tonnes, 4% down year-on-year. In Brazil, the Company concentrated its sales volume in converted products (corrugated boxes and industrial bags), 6% up on the same period in 2013, in line with the growth reported by the Brazilian Corrugated Boxes Association (ABPO) and the National Cement Industry Association (SNIC).

Net Revenue

First-quarter net revenue, including wood, increased by 13% over 1Q13 to R$ 1,203 million. The Company expanded the share of exports in total sales, benefitting from the higher exchange rate and more favorable export market conditions. As a result, revenue from exports totaled R$339 million (US$143 million), a substantial 33% higher than in 1Q13.
Despite the lower volume, revenue from domestic sales increased by 6% to R$865 million, fueled by the increased share of converted products in the sales mix
Pro-forma net revenue, including Klabin’s portion of revenue from Florestal Vale do Corisco S.A., came to R$1,218 million in 1Q14.

Operating Costs and Expenses

The unit cash cost, including fixed and variable costs and operating expenses, totaled R$1,782/t in 1Q14, 11% higher than in 1Q13, due to the upturn in the sales of converted products, which have higher costs, the end of tax benefit related to the Reintegra program, and higher provisions for employee profit sharing, as a result of higher-than-expected performance in 2013.

In March, there was a maintenance stoppage in the Correia Pinto (SC) plant, which also impacted costs in the quarter. The unit cash cost excluding the stoppage effects was R$1,759/t, a nominal increase of 9% over 1Q13.

In addition to the change in the production and sales mix, inflation and the exchange rate variation pressured cost components, including OCC, chemicals, fibers and freight in the comparison period.

In 2Q14, there will be a maintenance stoppage in the Monte Alegre (PR) plant, when board machine 9 will be debottlenecked, adding 50 thousand tonnes of coated boards to the plant’s annual capacity.

The cost of goods sold (COGS) came to R$803 million in 1Q14, 12% up on 1Q13, due to the period upturn in sales volume and the increase in the unit cash cost mentioned previously.

Selling expenses totaled R$98 million, 14% more than in 1Q13. These expenses, which are mostly variable in nature, remained stable as a percentage of revenue from sales despite the nominal increase. Selling expenses represented 8.2% of 1Q14 net revenue.

Administrative expenses amounted to R$73 million in 1Q14, 14% up year-on-year, chiefly due to the collective bargaining agreements of 2013 and higher provisions for employee profit sharing following better results.

Other operating revenue (expenses) resulted in revenue of R$9 million in 1Q14, compared to R$ 7 million in the same period last year.

Effect of the variation in the fair value of biological assets

The effect of the variation in the fair value of biological assets was a gain of R$522 million in 1Q14, versus R$62 million in 1Q13, due to the higher prices used in the assessment and adjustments to the forest cutting plan as a result of the new pulp plant.

The effect from the depletion of the fair value of biological assets on the cost of goods sold was R$99 million in 1Q14.

As a result, the non-cash impact of the variation in the fair value of biological assets on 1Q14 operating income (EBIT) was a gain of R$423 million.

Operating Cash Flow (EBITDA)

Product and market mix flexibility continued to be an essential factor in Klabin's sales strategy, enabling the Company to benefit from the higher average dollar exchange rate, which increased export revenue, and from the resilient domestic consumption of converted products despite modest economic growth.

As a result, the solid increase in revenue from sales fueled EBITDA growth, despite inflationary pressure on production costs and operating cash flow (adjusted EBITDA) came to R$424 million in the first quarter, with an adjusted EBITDA margin of 35%.

This figure includes Klabin's share of Florestal Vale do Corisco Ltda. totaling R$9 million.

Indebtedness and Financial Investments

Gross debt stood at R$7,581 million on March 31, R$617 million more than at the close of 4Q13, chiefly due to the inclusion of the present value of the interest on the debentures mandatorily convertible into Units, equivalent to approximately R$400 million, in the Company’s debt. Of this total, R$4,695 million, or 62% (US$2,075 million) was denominated in dollars, primarily export pre-payment facilities.

Cash and financial investments closed the quarter at R$4,870 million, R$1,891 million more than in 4Q13. This amount exceeds financing amortizations in the next 53 months and was reinforced by the issuance of debentures mandatorily convertible into Units totaling R$1,700 million.

Consolidated net debt totaled R$2,711 million on March 31, 2014, R$1,274 million less than the R$3,985 million recorded on December 31, 2013, mainly due to the issuance of debentures mandatorily convertible into Units in January and the impact of the exchange variation on dollar-denominated debt. The exchange rate closed March at R$2.26/US$, 3% down on the end of December. As a result, the net debt/adjusted EBITDA ratio stood at 1.7x, 0.9x down on the previous quarter.

The average maturity term came to 44 months (42 months for local-currency debt and 45 months for foreign-currency debt). Short-term debt accounted for 15% of the period total and borrowing rates in local and foreign currency averaged 7.32% p.a. and 5.00% p.a., respectively.

Financial Result

Financial expenses totaled R$106 million in 1Q14, 19% higher than in 1Q13, chiefly due to the gross debt increase, which raised the average cost of debt in reais, and expenses related to the Refis tax installment payment program.

Financial revenue came to R$121 million in the quarter, 163% up year-on-year and 87% higher than in 4Q13, impacted by increased gains from financial investments following the upturn in the Company’s cash position and higher Brazilian interest rates.

Consequently, the 1Q14 financial result, excluding the exchange variation, was a net revenue of R$15 million, versus an expense of R$43 million in 1Q13.

In a period of high volatility, the exchange rate closed the quarter 3% down on the end of December 2013. As a result, the net foreign exchange variation was positive by R$150 million. Note that the exchange variation has an exclusively accounting effect on the Company’s balance sheet, with no significant cash effect in the short term.

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