Q2 2015 Klabin SA Earnings Call
Jul 24, 2015 AM EDT
KLBN4.SA - Klabin SA
Q2 2015 Klabin SA Earnings Call
Jul 24, 2015 / 02:00PM GMT
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Corporate Participants
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* Fabio Schvartsman
Klabin SA - CEO
* Tiago Brasil Rocha
Klabin SA - IR Manager
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Conference Call Participants
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* Caio Ribeiro
BTG Pactual - Analyst
* Marcos Assumpcao
Itau BBA - Analyst
* Lucas Ferreira
JPMorgan - Analyst
* Thiago Lofiego
Merrill Lynch - Analyst
* Carlos de Alba
Morgan Stanley - Analyst
* Alan Glezer
Bradesco BBA - Analyst
* Viccenzo Paternostro
Credit Suisse - Analyst
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Presentation
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Operator [1]
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(interpreted) Good morning and welcome to Klabin's conference call.
At this time all participants in listen only mode. Later we will have a question and answer session when further instructions will be given for you to participate.
(Operator Instructions)
As a reminder, this conference is being recorded and broadcast live via webcast and may be accessed at http//cass.commanated-SA.com.br/Klabin/Q215 where the presentation is also available.
Before proceeding I would like to mention that forward looking statements that are made during this conference in connections to Klabin's business outlook, projections or greater financial targets and potential growth should be understood as an assumption based on the Company's management expectations in relation to the future of Klabin.
Such forward looking statements are highly dependent on market conditions, on Brazil's overall economic performance on the industry and international markets as well. Therefore they are subject to change.
With us today, exceptionally we do not have Mr. Antonio Sergio for personal reasons. Today with us in Sao Paulo we have Mr. Fabio Schvartsman, chief executive officer, Mr. Tiago Brasil Rocha investor relations manager.
Initially Mr. Schvartsman and Mr. Rocha will comment on the Company's performance during the first quarter. Afterwards they will answer questions that you might wish to formulate.
Now I would like to turn the conference over to Mr. Schvartsman. Please you may begin.
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Fabio Schvartsman, Klabin SA - CEO [2]
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Good morning. Thank you very much for your presence. It is a great pleasure for us to have you here in an another conference call for me this quarter.
It was a very challenging one for the Company due to the ongoing weakening of the domestic economy that may be represented by the deterioration that we saw in the volumes of ABPO 2.5% drop in this half year vis-a-vis the same period last year.
In coated board which is followed by IBA which shows a drop of 60% -- 6% in the coated board market in comparison to the same period last year. So it's against this backdrop that Klabin had to work and adapt, taking advantage of its flexibility in order to be able to continue to deliver good results as we have been doing in a long sequence of quarters.
So it is a pleasure for us to reach the end of this quarter being able to tell you about the 17% evolution in our EBITDA compared to the same period last year, very much focused on the increase of our exports and as you all know the Company has this possibility because as there is no domestic consumption of the papers that are produced by us, we normally try to develop our delivery to the export markets of these products which is what we have been doing.
Also I would like to mention the evolution of the Puma project that reached 75% already executed so already very well advanced especially in the last quarter the advancement was very positive, reinforcing our certainly that this project will be ready.
We should be producing pulp by the end of the first quarter of next year.
So it is a double satisfaction for us because it has always been a concern in our minds that the execution of the project should be very well done and that it should not interfere in the operation of the Company, and I believe that we have been achieving this goal, executing the project and at the same time maintaining the operation of the Company with total focus on our better and better results.
As we usually do, we say a few words about what we see ahead of us.
I would say that its' a little bit more of the same because the economy continues to be weak. We see no signs of a recovery, and as a consequence Klabin will continue to be more focused on exports in order to be able to offset the inadequate situation in the domestic market.
And we strongly believe that we will continue to deliver increasing results such as we have been doing so far.
And the best evidence of this flexibility that the Company has is the fact that we are ending the review of our budget for the year and as you may well imagine, there have been very deep changes in all our assumptions. And what I would like to share with you is that this review of our budget gives us the same results as the budget that we had drafted in September last year. which means that we have a very favorable situation - we have a very unfavorable situation and not withstanding this unfavorable situation thanks to our agility and thanks to our mix of products we are able to offset all that and deliver exactly the same results that we had forecast.
So we can tell you that we will continue to deliver the results that we have been delivering to you.
So in a nutshell, this is what I wanted to say, and now I would like to give the floor to Tiago and he will be going more in-depth into the results of the second quarter and then afterwards we will come back to answer your questions. Tiago you have the floor.
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Tiago Brasil Rocha, Klabin SA - IR Manager [3]
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(interpreted) Good morning everyone. In the second quarter the total volume sold by the Company was 435,000 tons. A 4% growth on a year on year basis, notwithstanding, the stoppages for addition of capacity in he Piracicaba plant and the ramp up of the recycle paper machine in Goiana and with its higher availability of papers and with markets going down in Brazil the volume for the domestic market was 296,000 tons, stable on a year on year basis, whereas the volume exports have grew by 13% also year on year and reached 139,000 tons.
In this quarter the classification of exports was 32%, a 3 percentage point increase in a comparison with the same period of 2014 as revenue in the second quarter of '15, including wood was BRL1.338 billion, a 16% growth on a year on year basis, and this was impacted by the higher average exchange rate that we had in the period as well as the high volume.
With relation to the unit test score, net of non-recurrent effects of other operating expenses and revenues was BRL2,193 per ton, a nominal increase of 9% in relation to the second quarter of '14, impacted mainly by higher energy acquisition costs and also dollar tax, raw materials and also higher costs due to higher volume of wood in the quarter and the effects of collective bargaining agreements during the periods that are being compared during the second quarter.
We also had the annual stoppages for maintenance in Monte Alegre and Correia Pinto
Regarding the EBITDA in the first quarter, the adjusted EBITDA amounted to BRL391,000, 17% higher than the second quarter of '14 and 16th consecutive quarter of the evolution in our results.
The consolidated net debt at the end of December amounted to BRL8.1 billion, a BRL704 million increase compared to the end of March 2015, and this increase is due to investments made in the quarter in the Puma project partially offset by the accounting impact of the exchange rate variations, on the dollar denominated part of the debt and also the cash generation by the Company.
And I think we should mention that the effects of the exchange rate variation doesn't have cash effect in the short run, a significant one, and the adjusted EBITDA net debt ratio closed the second quarter 4.5 times vis-a-vis 4.2 times at the end of the first quarter of '15, and the same ratio when measured in dollars goes from 3.3 times in March to 3.8 times at the end of June.
Investments, Klabin made BRL1.2 billion in the second quarter of '15 being BRL1.9 billion spent in Puma and the remainder in the other expansion, the Puma project work advanced in the first quarter according to schedule and up to the end of June the site had 75% of the physical resolution completed and 54% of the total CapEx already disbursed.
In April we had a stoppage to add capacity at the Piracicaba plant and this update will make available additional 15,000 tons to the recycled paper capacity of this unit and complete our investment cycle in paper capacity increases that we started in 2013.
Ever since then, it has been in the Correia Pinto, Monte Alegre, [and the Atuboo Goia next to the] Piracicaba plant since we increased Klabin's capacity, production capacity from 1.7 million tons to the current 2 million tons in craft paper and coated board.
Now Fabio and I are available to answer any questions that you might have.
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Questions and Answers
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Operator [1]
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(interpreted) Ladies and gentlemen, now we will start the Q&A session.
(Operator Instructions)
Our first question comes from Caio Ribeiro from BTG Pactual.
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Caio Ribeiro, BTG Pactual - Analyst [2]
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(interpreted) Good morning everyone. Thank you for the call and could you please give us guidance about your export mix. Exports are getting to 32% of your sales already, so do you see more room to grow your exports in the second half of the year, or do you believe it will be kept at this level and at the current exchange rate see your profitability from exports and from sales into domestic markets, are they more similar?
And could you tell us if you see a potential to increase prices for some product lines in the short run due to the higher pressure on your costs because of dollar, raw materials, the price of energy, and do you see the possibility of price increases for some of your products?
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Unidentified Company Representative [3]
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(interpreted) Thank you for your several questions Caio.
Regarding the mix between exports and domestic market sales, we tend to increase our exports in this mix. I wouldn't be surprised if we reached figures higher than these in the next few quarters.
And answering already your second question, at the level of exchange rate that we see today, the profitability of our exports is even higher than the profitability in the domestic market sales.
So we have a double incentive to continue and increase our sales to the export markets.
Regarding price increases in domestic markets, there is a mixed situation for some products. We still have some room to increase prices and the products are the ones that are more directly related to our export prices and other products that are more focused on the domestic markets.
We don't see a lot of recycled paper, for instance, which is not exported. It will be difficult to see an increase in prices for recycled paper during this period. So I think this covers your questions.
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Caio Ribeiro, BTG Pactual - Analyst [4]
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(interpreted) Yes, very clear. Thank you.
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Operator [5]
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(interpreted) Marcos Assumpcao from Itau BBA.
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Marcos Assumpcao, Itau BBA - Analyst [6]
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(interpreted) Good morning everyone. Congratulations for the results. First question Fabio regarding the competitive environment, could you talk about how you see some of your competitors?
And in some sectors we see the best and biggest companies benefiting from market share gain and the guarantee to supply products and does this happen in some sectors where companies operate?
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Fabio Schvartsman, Klabin SA - CEO [7]
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(interpreted) Marcos of course we believe Klabin benefits when you have this market situation a more difficult one because of the better quality of its products as well as because of the confidence that customers have in our products.
Whether this is going to be translated to an increase in market share, well this will be directly correlated to our exports. Because as we focus more and more exports this might not happen in the domestic markets.
So I can't tell you if we will see a significant increase in Klabin's market share.
And the second question has to do with risk?
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Marcos Assumpcao, Itau BBA - Analyst [8]
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(interpreted) Business risks. How do you see inflation and employment and the impact because of the reduction in the purchasing power and real income? Do you see an impact of that already on demand? Do you see this as a risk looking forward, or do you think the situation is already getting a little bit better?
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Fabio Schvartsman, Klabin SA - CEO [9]
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(interpreted) No, no. I don't think it's getting better. Quite the opposite. I think the crisis is getting deeper, and it is in this environment that we are basing our operations the second half. This is why we are emphasizing our exports and our answer is direct and very straightforward.
As the domestic market cannot absorb our product with the adequate margin, then we just channel our products to exports, and this has been working very well, and from this combination, we have the results obtained by Klabin and this should continue to be the same the next few months.
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Marcos Assumpcao, Itau BBA - Analyst [10]
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(interpreted) Thank you. One last question regarding liquid packaging. With the drop in oil prices and plastics becoming more competitive, do you see a risk of higher competition from other kinds of products?
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Fabio Schvartsman, Klabin SA - CEO [11]
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(interpreted) Marcos, this risk has always existed because these are two different concepts of packaging plastics. It is traditionally cheaper than coated board.
However, coated board is safer, especially when you consider dairy products and mainly milk and what we see in a moment of crisis is that the consumption of milk tends to increase, replacing other products, and there is a consequence.
I see a [resilience] in demand on the part of liquid packaging paper, especially for the Brazilian domestic market.
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Marcos Assumpcao, Itau BBA - Analyst [12]
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(interpreted) Thank you.
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Operator [13]
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(interpreted) Lucas Ferreira from JPMorgan.
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Lucas Ferreira, JPMorgan - Analyst [14]
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(interpreted) Good morning Fabio, Tiago. My question is about volume in the second half.
I have a few doubts on one hand the market is deteriorating and on the other hand you have more available capacity and you show jut about an 80,000 ton for instance in coated board in 2013 and last year was weaker because you were revamping the machines.
So are you going to bounce back to the previous level? Like the volume that you produced in the past? And my second question has to do with the economic crisis in Brazil that seems to last longer than we imagined, and does it impact your strategy in terms of your product portfolio or assets that you might maybe acquire or even divest from? Does it change Klabin's stance regarding the paper market regarding coated board, volume of coated board growth in the last years?
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Fabio Schvartsman, Klabin SA - CEO [15]
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(interpreted) The answer is positive so undoubtedly this is the answer and we have more demand than capacity both in the domestic market and the export market, so coated boards are having a very good performance, a very good situation, and this allows us to choose the best set of products to be chosen.
And regarding the impact of the crisis on our portfolio, Klabin doesn't have an unfortunistic stand. We follow our strategy, a very well thought strategy, and by means of which we build our competitive position just to remind you we increased our capacity for paper from 1.7 to 2 billion tons in the last couple years, and this gives us more flexibility to cope with the crisis and better conditions to export we can place different product mixes than we had before, so this is a benefit that we built ourselves, and now our total focus is on completing the Puma project.
The Puma project should be started up by late March 2016, and our next move from the viewpoint of new machines or acquisitions will not occur before that. It will only occur after that, because we do one thing at a time at Klabin.
We do not like to have an overlapping of risks and we are not going to change our focus and our path because of the crisis. Of course we examine all the opportunities that we see because this is our obligation, but our strategy is already set, and we have been executing consistently in the last few years, and I believe the evolution of our results is evidence of that, and our intention is to continue exactly like that.
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Lucas Ferreira, JPMorgan - Analyst [16]
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(interpreted) Thank you.
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Operator [17]
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(interpreted) Thiago Lofiego from Merrill Lynch.
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Thiago Lofiego, Merrill Lynch - Analyst [18]
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(interpreted) Good morning everyone. Congratulations for the results. Fabio I have two questions. One regarding consolidation of the paper market in Brazil. Do you see an opportunity especially now when some of your competitors, smaller players in some specific line are going through some financial distress? So do you believe Klabin would take advantage of these opportunities? And the second question is what product line do you see that demand is deteriorating and which one is not?
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Fabio Schvartsman, Klabin SA - CEO [19]
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(interpreted) Very good questions Thiago. Consolidation typically when you see a deterioration in the markets such as the case in Brazil now, this is when consolidation opportunities arise. To be theoretical, ok, I have no facts, no element that my evidence was unchanged.
But I think it's probable that smaller players get under more and more stress, the chances for consolidation increase. As I said before, we always study opportunities, but we will never be rash in the sense of putting more things inside the Company at the same time.
After Puma is up and running, then we will be able to observe the market.
And regarding your second question about which markets are suffering the most and the least? I think that the market that is weakening is the corrugated box market because we still see no perspective for stabilization there. And on the plus side, the coated board for liquids, as I said before, is the market that is developing the best among all. So I think in a nutshell, this is the global situation that we have.
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Thiago Lofiego, Merrill Lynch - Analyst [20]
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(interpreted) Going back to the first question Tiago, along the same lines, do you think you might go back to the possibility of placing the second coated board machine to the detriment of consolidation moves? Do you believe you could revisit the possibility of the second machine vis-a-vis consolidation if you had to choose?
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Fabio Schvartsman, Klabin SA - CEO [21]
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(interpreted) No. The answer is no. We couldn't. We might add something, but I have no intention whatsoever of removing the coated board machine from our strategy. As I said before, even in a moment of crisis we have extra demand for our coated board, so there is strong indication that this market is very favorable for Klabin and as a consequence, Klabin will continue to invest in this market.
There was a restriction for us to advance in this market because of the availability of pulp because Klabin didn't have it. And of course the situation changes drastically with the startup of Puma. Looking at the opportunity to go out to bat, and Klabin sees itself as a company that produces packaging and among packaging our main products are the coated boards.
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Thiago Lofiego, Merrill Lynch - Analyst [22]
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(interpreted) So you wouldn't consider a high ticket in these?
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Fabio Schvartsman, Klabin SA - CEO [23]
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(interpreted) Could you repeat the question?
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Thiago Lofiego, Merrill Lynch - Analyst [24]
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(interpreted) You do not intend to spend a lot of money in an acquisition because you are going to have the other coated board machine?
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Fabio Schvartsman, Klabin SA - CEO [25]
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(interpreted) Well Thiago, this is a theoretical question that you're asking. There is no big company or big player that I could even think about buying. So it's difficult for me to answer a question that is only theoretical.
After Puma is up and running and Klabin reaches a new cash generation level, of course the possibilities of moves on the part of Klabin will increase and of course we will be considering more than one possibility of growth in our business line. It could be the development of new business machines or acquisitions or anything at the time.
But this is all theory and can only be discussed later on. Secondly, over next year we will be debating internally, and afterwards what will be doing after Puma is up and running?
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Thiago Lofiego, Merrill Lynch - Analyst [26]
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(interpreted) Very clear, thank you.
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Operator [27]
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(interpreted) Carlos de Alba from Morgan Stanley.
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Carlos de Alba, Morgan Stanley - Analyst [28]
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Yes good morning, thank you very much. My question is regarding costs if you can comment, what are the inflation trends that you have seen when make your cost categories like labor or maintenance perhaps electricity and [clearing] cost.
And also on what do you expect to see a sustainable level of selling expansions now that exports are perhaps going to increase as well as the G&A expenses? Thank you.
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Fabio Schvartsman, Klabin SA - CEO [29]
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(interpreted) Carlos, thank you for your questions. In your question you mentioned precisely the cost item where we see more pressure coming from electricity, of course, also pressure coming from chemicals, especially due to the exchange rate effect. And some pressure on the labor side of the operation because of inflation increase.
But this is just a transfer of the inflation rate. And I trust that from now on Klabin up to the end of the year we do not believe that w3e will have cost increases higher than the inflation period. I think the situation is quite well under control in this regard here at Klabin, and very soon, maybe by the end of the year, Klabin will start to produce electric energy at Puma.
So we have the possibility of producing electricity even before the pulp operation is up and running, because we have a Biomass boiler that will be ready before the project is ready, and we also have a turbo generator that is ready and will be completed in the next few months.
So we have the possibility of starting producing energy before the end of this year, which means that next year the energy equation of Klabin will have a positive change and a dramatic one. And we will see the beginning of that at the end of this current year.
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Carlos de Alba, Morgan Stanley - Analyst [30]
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Any comments on SG&A?
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Fabio Schvartsman, Klabin SA - CEO [31]
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(interpreted) Could you repeat your question about SG&A please?
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Carlos de Alba, Morgan Stanley - Analyst [32]
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Yes. I was making the point that maybe selling expansion would increase going forward together with exports? So if you can quantify or give dimension to these potential increase, that will be helpful as well as any comment that you may have on general and administrative expenses?
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Fabio Schvartsman, Klabin SA - CEO [33]
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(interpreted) Okay now understood. Well let's separate expenses. Selling expenses first. Selling expense is typically based follow the increase in sales, so especially the export endeavor brings about a proportionate increase in selling expenses. So we see selling expenses growing in the same proportion as sales grow.
G&A. This is a different story. We only expect increases related to inflation increase. We have no reason whatsoever to expect any increases in G&A. And Klabin is doing everything possible not to have any cost increases in this regard.
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Carlos de Alba, Morgan Stanley - Analyst [34]
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Thank you very much.
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Operator [35]
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(interpreted) Alan Glezer, Bradesco BBA.
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Alan Glezer, Bradesco BBA - Analyst [36]
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(interpreted) Good morning everyone. I have two questions. The first one has to do with corrugated boxes.
What about the margin pressure that the smaller players have been suffering because of the slowdown of the industry and the corrugated box market? And the pressure with higher class paper costs and higher energy costs? How do you see this pressure that that smaller players are suffering in terms of corrugated boxes?
And the second question has to do with Kraftliners. There have been an increase in exports and I would like to know how you see the Kraftliner export market that was very healthy so far, how do you see this market for the second half?
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Fabio Schvartsman, Klabin SA - CEO [37]
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(interpreted) Thank you for your question Alan.
Regarding corrugated boxes. I can only imagine that smaller competitors maybe the least integrated ones are suffering a very big cost pressure. And on the other hand transferring this increase in this economic situation is not very simple, so I think it's reasonable to consider that the margins are being reduced in their operations, and the same situation does not occur at Klabin because if we see this kind of situation in some circumstance we just ship our focus to exports, and this leads us to the second part of your question.
The Kraftliner market is a big market, a good one, and it is good. The price reasonable prices and the exchange rate is helping us a lot there. We will continue to expand you will see in Klabin bigger than them going extension of our Kraftliner in the next month. This is what you will see.
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Alan Glezer, Bradesco BBA - Analyst [38]
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(interpreted) Thank you Fabio.
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Operator [39]
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(interpreted) Viccenzo Paternostro, Credit Suisse.
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Viccenzo Paternostro, Credit Suisse - Analyst [40]
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(interpreted) Good morning Fabio, Tiago, everyone.
My question has to do with your indebtedness. You know that the exchange rate is very positive . It generates not only for your current business but also contributes to Puma to present value, but right now it has a negative impact on your debt.
So what do you believe will be your peak leverage up to March? Because then you will have disbursed almost all the CapEx and will not have the Puma EBIT to offset that. So what do you believe will be the peak leverage during the second cycle?
And the second question, still related to the consolidation opportunity of the market. In principle, remember that in the past this has already been discussed and the Company's position was well we believe there will be consolidation, but we - our preference is to gain market share from companies that might exit the market than acquiring somebody.
This preference for organic growth or -- have you changed this position? I would like to better understand your growth strategy for the domestic market?
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Fabio Schvartsman, Klabin SA - CEO [41]
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(interpreted) Thank you, appreciate it. First about indebtedness. You said correctly so during your question. It depends on the exchange rate, and as I cannot foresee what the exchange rate will be in the future, it's very difficult for me to talk about any future indebtedness.
And if you look at our release, if you read our release, you see that we started to mention our indebtedness measures in dollars because this way we can exit this discussion about the exchange rate using as a reference the dollar, our indebtedness was 3.8 times at the end of this quarter and our expectation is that the information that we gave you in the past that we would be reaching 4.5 continues to be maintained. We believe that with this indicator we will reach 4.5.
How much of that will be indebtedness in reals depends on the exchange rate and we have no idea where it will be. So anyone can do guesswork in this regard. Now regarding consolidation. It is true that Klabin has always preferred to have organic growth.
In order to achieve organic growth you have to have a growing market. If the market is not growing, how can you grow organically? If you want to continue growing in a slouching market the only opportunity lies in acquisitions.
So in the future we will be considering possibilities in this area unless we see a recovery of the domestic market, then immediately this will change our perception.
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Viccenzo Paternostro, Credit Suisse - Analyst [42]
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(interpreted) It's just a question of adapting to the circumstances. It's crazy to talk about organic growth in a market that is in a downturn.
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Fabio Schvartsman, Klabin SA - CEO [43]
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(interpreted) Of course you need to consolidate in those kinds of situations.
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Viccenzo Paternostro, Credit Suisse - Analyst [44]
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(interpreted) Well in this difficult situation some companies could go down the drain. That's what I mean. Because I remember that in the past you said you could think about acquiring a company that had an inefficient plant or that was "informal" company, but that's okay.
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Fabio Schvartsman, Klabin SA - CEO [45]
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(interpreted) Yes you're right because informality of course it would never cross our minds. We would never be interested in a company that's not totally formal.
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Operator [46]
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(interpreted) As there are no more questions, we would like to give the floor back to Mr. Fabio Schvartsman for his closing remarks.
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Fabio Schvartsman, Klabin SA - CEO [47]
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(interpreted) Once again, thank you very much and I would like to reiterate our satisfaction on behalf the whole team of Klabin for the ongoing evolution of our results and the challenging scenario leads us to make even more and more endeavors to deliver good results.
And Klabin to its own characteristics is able to give the necessary instruments to cope with the situation. So it is with great joy that in spite of the difficult moment of the Brazilian economy that we are living, in spite of all that, we see that still we are totally capable of continuing evolving gradually, such as it has been doing for the last 16 quarters, and we hope to have all of you on our next call so that we can talk about everything that happened in this quarter. Thank you very much. Have a very good day.
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Operator [48]
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(interpreted) Klabin's conference call is closed. We thank you for participating and wish you a good day. Thank you.
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Editor [49]
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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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