Competitiveness
and Economic Results

KLABIN’S INCREASED PRODUCTION CAPACITY – DUE TO THE STABILIZATION OF THE OPERATIONS AT THE PUMA UNIT AND ACQUISITIONS IN THE AREA OF CORRUGATED BOARD IN 2016 – FURTHER EXPANDED THE FLEXIBILITY OF ITS PRODUCT LINE. THIS FACTOR, COMBINED WITH THE COST COMPETITIVENESS AND THE FOCUS ON OPERATING EFFICIENCY – STRENGTHENED BY THE NEW MANAGEMENT SINCE THE BEGINNING OF 2017 – WAS THE KEY FOR MAXIMIZING RESULTS, WHICH EXPERIENCED A 20% GROWTH COMPARED WITH THE PREVIOUS YEAR.

Sustainable
Development
Goals

<i>8 - </i>Decent jobs and economic growth 8 - Decent jobs and economic growth

—  Summary of the 2017 economic scenario

Early 2017 was marked by increased confidence regarding the recovery of the Brazilian economy, with dropping inflation and interest rates, greater exchange rate stability, and Ibovespa appreciation. Even with uncertainty on the approval of the reforms proposed by the Government and a troublesome political scenario, economic indicators evolved positively over the months, also reflecting in higher figures in the paper and packaging markets.

In the hardwood, softwood and fluff pulp markets, international prices at high levels also influenced the domestic market, impacting prices and creating a more favorable environment for domestic producers.

Despite political uncertainties, the international economic scenario for the year was also showing positive signs. The strong economic performance in China and the U.S., combined with the restrictions of use of mixed chips due to environmental reasons in Asian markets, boosted demand for kraftliner and pulp.

With better conditions in the domestic and foreign markets, the year 2017 brought considerable growth for Klabin. The period marked the completion of the Puma Unit ramp up in Ortigueira (PR), which celebrated the first anniversary of the new line of 1.5 million tons of pulp. Over the course of 2017, acquisitions made by Klabin in late 2016 in the corrugated board area boosted its sales, increasing the volumes of packaging and, combined with increased productivity in the main paper mills, the total volume sold by the company.

The increased production capacity expanded the flexibility of Klabin’s product line even further. Cost competitiveness and the focus on operating efficiency – strengthened by the new management since the beginning of the year – also contributed to maximizing results, which experienced a significant growth of 20% over the previous year.

With the accelerated growth of the results throughout all 12 months of the year, reduced leverage was also highlighted in 2017; the Net Debt/EBITDA ratio went from 5.2x at the end of 2016 to 4.1x at the end of December.

Klabin’s main financial results (in BRL millions)

2017 2016 2015
Sales volume (K tons) 3,220 2,650 1,833
Domestic market 1,564 1,316 1,205
Exports 1,656 1,333 627
% Domestic market 49% 50% 66%
Gross revenues 9,727 8,204 6,746
Net revenues 8,373 7,091 5,688
Domestic market 5,020 4,230 3,841
Exports 3,353 2,861 1,846
% Domestic market 60% 60% 68%
Change in fair value of biological assets 790 533 536
Cost of goods sold (6,427) (5,227) (3,982)
Gross profit 2,736 2,397 2,242
Gross margin 33% 34% 39%
Sales (657) (586) (429)
General & administrative (528) (467) (338)
Other operating income (expenses) (12) 5 (13)
Total operating expenses (1,197) (1,048) (780)
Adjusted EBITDA 2,738 2,288 1,975
EBITDA Margin1 33% 32% 34%
Net profit 532 2,482 (1,253)
Net indebtedness 11,278 12,005 12,411
Net indebtedness/EBITDA 4.1x 5.2x 6.3x

1The EBITDA margin is calculated on pro forma net revenue, which includes revenue from Vale do Corisco.

Distribution of economic value generated (in BRL millions)

(GRI 201-1)

Direct economic value generated 2017 2016 2015
Revenue BRL 10,784,83 BRL 8,965.28 BRL 7,520.30
Economic value distributed 2017 % 2016 % 2015 %
Operating costs 5,583.23 -52% 4,441.77 41% 3,438.20 84%
Salaries and employee benefits 1,373.26 13% 1,249.76 12% 927.35 23%
Payments to suppliers 1,564.68 -14% 1,279.84 12% 1,047.57 25%
Payments to the Government 1,031.74 10% 1,378.07 13% -49.62 -1%
Shareholders (dividends, interest on own capital, retained earnings) 532.17 5% 2,481.95 23% -1,253.20 -30%
Community investments 22.361 0% 0.00 0% 0.00 0%
TOTAL 4,210.74 -39% 10,831.39 100% 4,110.31 100%
Retained economic value 2017 2016 2015
Retained value 14,995.57 1,866.11 3,409.99

1Of these, BRL 5.6 million were made possible through incentive laws (learn more about it in the section entitled (link Local Development)

—  Highlights of 2017

  • With the completion of the Puma Unit ramp up, pulp sales reached 1,355 thousand tons, an increase of 70% compared to 2016, the year in which the unit was inaugurated.

  • The volume of packaging sales (corrugated boxes and industrial bags) totaled 761 thousand tons, representing an 8% increase over the previous year.

  • Driven by the higher volume of pulp, increased paper and packaging sales, and by international prices, net sales revenue reached BRL 8,373 million, 18% above the value recorded in 2016.

  • The adjusted EBITDA was BRL 2,738 million in the year, a 20% increase compared to 2016.

  • In June, Klabin opened its Technology Center in Telêmaco Borba (PR), with five research lines, completing the integration of the Research and Development fronts and expanding the company’s efforts to anticipate trends and develop new sustainable technologies and applications based on its raw materials and products.

—  Summary of the 2017 economic scenario

Early 2017 was marked by increased confidence regarding the recovery of the Brazilian economy, with dropping inflation and interest rates, greater exchange rate stability, and Ibovespa appreciation. Even with uncertainty on the approval of the reforms proposed by the Government and a troublesome political scenario, economic indicators evolved positively over the months, also reflecting in higher figures in the paper and packaging markets.

In the hardwood, softwood and fluff pulp markets, international prices at high levels also influenced the domestic market, impacting prices and creating a more favorable environment for domestic producers.

Despite political uncertainties, the international economic scenario for the year was also showing positive signs. The strong economic performance in China and the U.S., combined with the restrictions of use of mixed chips due to environmental reasons in Asian markets, boosted demand for kraftliner and pulp.

With better conditions in the domestic and foreign markets, the year 2017 brought considerable growth for Klabin. The period marked the completion of the Puma Unit ramp up in Ortigueira (PR), which celebrated the first anniversary of the new line of 1.5 million tons of pulp. Over the course of 2017, acquisitions made by Klabin in late 2016 in the corrugated board area boosted its sales, increasing the volumes of packaging and, combined with increased productivity in the main paper mills, the total volume sold by the company.

The increased production capacity expanded the flexibility of Klabin’s product line even further. Cost competitiveness and the focus on operating efficiency – strengthened by the new management since the beginning of the year – also contributed to maximizing results, which experienced a significant growth of 20% over the previous year.

With the accelerated growth of the results throughout all 12 months of the year, reduced leverage was also highlighted in 2017; the Net Debt/EBITDA ratio went from 5.2x at the end of 2016 to 4.1x at the end of December.

Klabin’s main financial results (in BRL millions)

2017 2016 2015
Sales volume (K tons) 3,220 2,650 1,833
Domestic market 1,564 1,316 1,205
Exports 1,656 1,333 627
% Domestic market 49% 50% 66%
Gross revenues 9,727 8,204 6,746
Net revenues 8,373 7,091 5,688
Domestic market 5,020 4,230 3,841
Exports 3,353 2,861 1,846
% Domestic market 60% 60% 68%
Change in fair value of biological assets 790 533 536
Cost of goods sold (6,427) (5,227) (3,982)
Gross profit 2,736 2,397 2,242
Gross margin 33% 34% 39%
Sales (657) (586) (429)
General & administrative (528) (467) (338)
Other operating income (expenses) (12) 5 (13)
Total operating expenses (1,197) (1,048) (780)
Adjusted EBITDA 2,738 2,288 1,975
EBITDA Margin1 33% 32% 34%
Net profit 532 2,482 (1,253)
Net indebtedness 11,278 12,005 12,411
Net indebtedness/EBITDA 4.1x 5.2x 6.3x

1 The EBITDA margin is calculated on pro forma net revenue, which includes revenue from Vale do Corisco.

 

Distribution of economic value generated (in BRL millions)

(GRI 201-1)

Direct economic value generated 2017 2016 2015
Revenue BRL 10,784,83 BRL 8,965.28 BRL 7,520.30
Economic value distributed 2017 % 2016 % 2015 %
Operating costs 5,583.23 -52% 4,441.77 41% 3,438.20 84%
Salaries and employee benefits 1,373.26 13% 1,249.76 12% 927.35 23%
Payments to suppliers 1,564.68 -14% 1,279.84 12% 1,047.57 25%
Payments to the Government 1,031.74 10% 1,378.07 13% -49.62 -1%
Shareholders (dividends, interest on own capital, retained earnings) 532.17 5% 2,481.95 23% -1,253.20 -30%
Community investments 22.361 0% 0.00 0% 0.00 0%
TOTAL 4,210.74 -39% 10,831.39 100% 4,110.31 100%
Retained economic value 2017 2016 2015
Retained value 14,995.57 1,866.11 3,409.99

1 Of these, BRL 5.6 million were made possible through incentive laws (learn more about it in the section entitled (link Local Development)

—  Operating results

The volume of sales (excluding wood) totaled 3,220 tons in 2017, a 22% increase compared to 2016, mainly due to the 70% increase in pulp sales. In addition to the successful ramp up of the Puma Unit, there was an 8% increase in the sales of converted products in the year, mainly due to the sales of corrugated board to the domestic market. A total of 1,656 million tons were exported in the year, representing 51% of the total volume sold, the same level as in the previous year.

Net revenues (including wood) totaled BRL 8,373 million, an 18% increase compared to 2017, mainly due to the sales of pulp from the Puma Unit and of packaging, in addition to increased international prices of most products. Prices increased even with a lower exchange rate and uniformly between the domestic and foreign markets, providing the company flexibility and an ability to operate in different markets and economic scenarios.

The greater sales volume also positively affected costs through the dilution of fixed costs. The total unit cash cost, which includes the sale of all the company’s products as well as sales and general & administrative expenses, was BRL 1,766 thousand/t, 4% lower than in 2016. In addition to the dilution effect due to the extensive growth of volume sold, the reduction of cash cost per ton in the period reflects the impact of added lower costs per ton of pulp production compared to production costs for papers and converted products within the company’s total cost.

>> NET SALES INCREASED 18% COMPARED TO 2017, MAINLY DUE TO THE SALES OF PULP FROM THE PUMA UNIT AND OF PACKAGING <<

The net effect for the non-cash related to the fair value of biological assets (exhaustion minus the variation in the fair value of forests) in EBIT was positive at BRL 730 million, compared to a positive effect of BRL 27 million in 2016. The variation is mainly due to the smaller increase in prices used in the 2017 evaluation, compared to the increase recorded in 2016.

Sales expenses in 2017 were BRL 657 million, compared to BRL 586 million in 2016, less proportional to the increase in sales volume. Thus, these expenses accounted for 7.8% of the net revenues for the period, down 0.5% from the amount recorded in the previous year.

General & administrative expenses totaled BRL 528 million in 2017, 13% higher than in 2016, mainly due to the adjustment of the structures to handle pulp operations, collective bargaining, benefit costs and the expansion of Klabin’s long-term incentive program.

Generation of operating cash flow (adjusted EBITDA) in 2017 was leveraged by the increased volume of sales, especially of pulp and packaging, and by cost control and dilution. Therefore, even with the lower exchange rate, the adjusted EBITDA in 2017 was BRL 2,738 million, a 20% increase over the previous year.

—  Financial income and debt

Consolidated gross debt at the end of the year was BRL 19,550 million, BRL 1,081 million over the amount recorded at the end of 2016. This increase is a result of the acquisition of long-term lines at competitive costs, improving the debt profile and ensuring a liquidity cushion in a year marked by great economic instability.

Cash and cash equivalents on December 31 totaled BRL 8,272 million, an increase of BRL 1,808 million compared to the end of 2016. This was made possible due to aggressive cash generation and new financing contracts.

Consolidated net debt totaled BRL 11,278 million, down BRL 727 million in the year, affected by aggressive cash generation and reduction of working capital. Thus, the net debt/adjusted EBITDA ratio closed the year at 4.1 times against 5.2 times recorded at the end of 2017.

—  Net profit

Net results were affected by Klabin’s satisfactory cash generation in 2017, totaling a net profit of BRL 532 million in the year. In 2016, mostly due to the non-cash impact on debt of appreciation of the Brazilian real against the U.S. dollar, net results were positive at BRL 2,482 million.

—  Business performance

FORESTRY BUSINESS UNIT

Operations at Klabin’s Forestry Unit evolved in order to handle the greater volumes of pulp, paper and packaging production in 2017. In the year, Klabin handled approximately 16.1 million tons of logs and chips of pine and eucalyptus and waste for energy, a 12% increase compared to 14.4 million tons transported over the course of the previous year. In addition to greater domestic demand generated by the completion of the Puma Unit ramp up in Ortigueira (PR), the amount of wood sold to saw mills and rolling mills also affected the unit’s results in 2017.

Although the availability of wood intended for third-party sales was impacted by increased domestic consumption of pulp and paper operations, the more favorable economic scenario that benefited the export of wood products from Klabin customers increased the sales of logs to third parties, which increased 5% compared to 2016, totaling 2.6 million tons. Net revenues from wood sales reached BRL 364 million, a 14% increase compared to 2016.

 

PULP BUSINESS UNIT

The second quarter of 2017 marked the completion of the Puma Unit ramp up, after the start-up of the plant’s operations in March of the previous year. After the completion of this process, pulp production increased compared to 2016, ending the year at 1,401 thousand tons, with 1,029 thousand tons of hardwood and 372 thousand tons of softwood and fluff.

After a period of pressure due to new capabilities and slower growth in demand throughout 2016, global pulp prices rose in 2017. Global economic acceleration and the restrictions implemented by the Chinese Government to unsuitable productions from an environmental point of view resulted in a growth in demand above the expected levels and increased prices of hardwood and softwood pulp in Europe.

The total volume sold in 2017 was 1,355 thousand tons, with 996 thousand tons of hardwood and 359 thousand tons of softwood and fluff. In addition to the increased volume of hardwood, whose sales were strengthened by the agreement signed with Fibria in May 2015, we can highlight the increased sales of softwood and fluff, mainly driven by the evolution of the processes to approve large domestic and international clients of Klabin’s fluff pulp in 2017.

The increased volume produced at the Puma Unit, combined with better global prices of hardwood pulp, affected the revenues from pulp sales for export and the domestic market. Thus, the total revenue of pulp, including hardwood, softwood and fluff, totaled BRL 2,418 million throughout 2017, compared to BRL 1,247 million in 2016.

 

PAPER BUSINESS UNIT

As in the previous year, the flexibility and competitiveness of its product line enabled Klabin to adapt to changing market conditions during the year. The lower average exchange rate in 2017 compared with the previous year, the upward trend of national economic indicators, and the new production capacities drove the increased use of paper at conversion plants and reduced the volume of kraftliner sales.

This factor affected the unit mainly during the first half of the year, when the scenario relating to international prices of papers was not as attractive as the improving scenario presented by the domestic market of corrugated board packaging. On the other hand, the volume of board sales experienced a slight growth in 2017 due to improvements in productivity at the plants in Monte Alegre (PR), Otacílio Costa (SC) and Angatuba (SP), as well as better export sales. Thus, the sales volume of paper for packaging and coated cartonboard in 2017 was 1,092 thousand tons, a stable performance compared to the sales volume of 2016.

In the board markets, the increased volume of sales to the foreign market was due to the quality and receptivity of the product in emerging markets such as China and other Southeast Asian countries. Thus, with slightly higher export sales and domestic market sales virtually at the level recorded in 2016, the total sales volume of boards was 698 thousand tons, 1% above the volume sold in 2016.

In relation to kraftliner sales, Klabin took advantage of its flexibility and good positioning in the conversion markets and directed a greater portion of the production of this product to its corrugated board and industrial bags plants, mainly in first half of the year. In this scenario, Klabin’s volume of kraftliner sales in 2017 was 351 thousand tons, down 12% from the previous year. It is important to note that due to the acceleration of demand in the global market, which generated high list prices throughout the second half of the year, kraftliner sales revenue evolved compared to the second half of 2016.

Year to date, revenue from sales of paper and board reached BRL 2,824 million, down 6% from the previous year.

 

CONVERTING BUSINESS UNIT

With the evolution of the country’s economic indicators, the shipping of boxes as ascertained by the Brazilian Association of Corrugated Board (ABPO) showed signs of strong recovery throughout 2017, closing the year with a 5% increase over the same period the previous year. In the period, in addition to the two recent acquisitions in the sector, Klabin took advantage of its capillarity and close relationship with large customers in the food industry, experiencing an even greater growth in sales volume in the same comparison period.

In the industrial bags market, the same speed of recovery was not duplicated by the country’s construction sector. Signs of recovery began to appear as of the middle of the second half of the year, and the National Union of the Cement Industry (SNIC) expects a growth between 1% and 2% for 2018, after an accumulated drop of 25% in the last three years. However, Klabin’s actions in the development of new markets such as fertilizer, food and coffee, as well as the growing sale of bags for export, particularly to Mexico and the United States, also boosted the volume of sales of industrial bags throughout 2017, recording a significant growth compared to 2016.

In this scenario, Klabin sought once again to use its flexibility to maximize the opportunities between the paper and converted packaging markets. Thus, the packaging sales volume in 2017 grew 8% compared to 2016, totaling 761 thousand tons. Meanwhile, sales revenue increased 14% in the same comparison period, reaching BRL 2,406 million in 2017.

—  Capital markets

In 2017, Klabin’s shares (KLBN11) fell by 1%, against a 27% appreciation of the IBOVESPA. The Company’s Units were traded during all BM&FBovespa trading sessions, with 2 million transactions involving 552 million securities and an average daily trading volume of BRL 37.5 million at the end of the period.

Klabin’s capital stock is 4,788 million shares, of which 1,860 million are common shares and 2,928 million are preferred shares. Klabin’s shares are also traded on the U.S. market. As Level I ADRs, the securities are listed on the OTC (over-the-counter) market under KLBAY. Klabin has received a BB+ credit rating by Fitch Ratings and Standard & Poors.

—  Differentials for investors

For the fifth consecutive year, Klabin was included in B3’s Corporate Sustainability Index (ISE), which highlights the actions of companies that stood out for their high degree of commitment to the sustainability of business and the country. Participating companies are selected annually based on criteria established by the School of Business Administration of São Paulo, at Fundação Getúlio Vargas (EAESP-FGV). Klabin is part of the current portfolio until January 2019.

Also in 2017, the company raised funds in the international market with its first issuance of Green Bonds, with an approximate value of BRL 1.6 billion, due in 10 years. Leader in the adoption of sustainable practices, Klabin’s operation received a High Standard rating in the independent assessment carried out by the Sustainalytics consulting firm. The offer drew great interest from investors, with a demand seven times greater than the value of the bonds offer.

—  Best practices

Green balance for Klabin

In its first issuance of green bonds on the international market, Klabin captured an amount three times higher than expected for sustainability-related projects

On the one hand, the desire to raise funds to proceed with planned investments aimed at sustainable development, an area in which Klabin is considered a market benchmark. On the other, a line of credit focused on sustainability and successful impacts. In September 2017, these two fronts converged and allowed Klabin to issue, for the first time, a high volume of Green Bonds on the international market. The action enabled the company to raise approximately BRL 1.6 billion, and the company was recognized this past January in Deals of the Year, an international award that highlights high-yield corporate operations.

Once it made the decision to go to the market and raise funds, Klabin noted that all the initiatives in which the money would be invested included projects aimed at caring for the environment, people and communities. This way, common securities – considered at first – gave way to Green Bonds, a modality with exclusive use for financing projects with positive environmental impact.

 Better than expected

Prior to contacting investors, Klabin prepared a dossier of its sustainability actions. The goal was to strengthen its commitment to the practice which, in recent years, has been recognized as an essential part of the company’s performance policy.

In September 2017, three teams took the dossier and visited investors in various parts of the world – Los Angeles, Boston, New York, Paris and London. In addition, contacts were made from its Headquarters in São Paulo.

Investors have recognized and appreciated Klabin’s sustainable performance, which resulted in an offer for the company’s securities three times greater than expected: the plan was to raise BRL 500 million, but the amount offered was close to BRL 1.6 billion – due in 10 years and with one of the lowest interest rates in the market.

The operation’s success was confirmed in the audit carried out by Sustainalytics, an international consulting firm, which ranked the company as High Standard. The action also strengthened the company’s institutional image, lending international recognition as a green company.

The project was conducted collaboratively at Klabin by a multidisciplinary team, which was split to operate on the economic & financial, green team, and investor relations fronts.

Step by step of the operation

    • Klabin chose to issue Green Bonds on the international market, since all the initiatives in which the funds will be applied will have positive environmental impact.

    • Over 100 employees dedicated themselves to prepare Klabin’s sustainability dossier, listing projects, investments, and the company’s commitment to sustainable performance.

    • The document was submitted to prospective investors in September, highlighting that Klabin is a reliable company with long-term projects.

    • Investors offered BRL 1.6 billion in securities to Klabin, an amount three times higher than the expected BRL 500 million.

    • The funds raised will be allocated to actions involving Forest Management, Restoration of Native Forests and Biodiversity Conservation, Renewable Energy, Clean Transportation, Energy Efficiency, Waste Management, Sustainable Water Management, Eco-Efficient Products Adjusted for Circular Economy, Processes and Technologies for the Production and Adjustment to Climate Changes.

    • Investments can be monitored through Klabin’s investor relations website (ri.klabin.com.br), which will be updated annually.

    • The transaction received recognition at the Deals of the Year Award Ceremony by LatinFinance, an international publication specialized in finance, winning the Corporate High-Yield Bond of the Year category.

    —  Investments

    In 2017, Klabin invested BRL 228 million in its forest operations, allocated BRL 399 million to the operational continuity of the plants, directed BRL 177 million to remaining investments to the Puma Unit, and invested BRL 121 million in special projects and expansions, especially in high-return projects that seek to improve the company’s performance in all segments in which it operates.

    In 2016, the company completed the ramp up of the Puma Unit, ending the investments on the pulp project, which received BRL 8.5 billion, including infrastructure, taxes and contractual adjustments. Of this amount, BRL 177 million were paid in 2017.

     Main investments in operations (in BRL millions)
    2017 2016
    Forestry 228 136
    Operational continuity 399 405
    Special projects & expansion 121 320
    Puma Project 177 1,707
    Total 925 2,567

    Total monetary value of financial assistance received from the Brazilian government (in BRL millions)

    (GRI 201-4)

    2017 2016 2015
    Tax credits and benefits 64.33 2.71 69
    Subsidies for investments, research and development and other relevant types of concessions 37.25 33.99 31
    TOTAL 101.58 36.70 100
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