Company Quick10K Filing
Fibria Celulose
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 554 $8,093
20-F 2018-02-27 Annual: 2017-12-31
20-F 2017-02-23 Annual: 2016-12-31
20-F 2016-02-24 Annual: 2015-12-31
20-F 2015-02-27 Annual: 2014-12-31
20-F 2014-02-28 Annual: 2013-12-31
20-F 2013-02-28 Annual: 2012-12-31
20-F 2012-02-29 Annual: 2011-12-31
20-F 2011-04-01 Annual: 2010-12-31
20-F 2010-04-30 Annual: 2009-12-31
FBR 2015-12-31
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on Fibria
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Conduct
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Changes in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-12.1 a16-5035_1ex12d1.htm
EX-12.2 a16-5035_1ex12d2.htm
EX-13.1 a16-5035_1ex13d1.htm
EX-13.2 a16-5035_1ex13d2.htm
EX-23.01 a16-5035_1ex23d01.htm

Fibria Celulose Earnings 2015-12-31

FBR 20F Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
TW 9,176 5,072 618 190 0 25 65 8,861 0% 135.5 0%
LEVI 8,797 3,909 2,588 5,733 3,072 402 716 8,946 54% 12.5 10%
CRWD 8,438 1,172 443 204 143 -78 -76 7,705 70% -100.8 -7%
FBR 8,093 38,693 24,043 0 0 0 0 4,853 0%
DCTH 7,928 6 35 1 2 -34 -33 7,937 196% -238.4 -596%
GLDW 7,880 826 0 0 0 91 91 7,880 86.5 11%
CQH 7,546 1 0 106 0 357 358 7,546 0% 21.1 40,650%
SCG 6,991 17,654 6,357 4 0 -589 -609 13,783 0% -22.6 -3%
GXP 6,623 12,448 3,898 0 0 201 986 9,090 9.2 2%
DCT 6,436 4,083 2,007 434 0 125 360 8,200 0% 22.8 3%

20-F 1 a16-5035_120f.htm 20-F

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended DECEMBER 31, 2015

 

Commission file number 1-15018

 

Fibria Celulose S.A.

(Exact name of Registrant as specified in its charter)

 

N/A

(Translation of Registrant’s name into English)

 

Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

 

Rua Fidencio Ramos, 302, 3rd floor

04551-010, São Paulo, SP, Brazil

(Address of principal executive offices)

 

Guilherme Perboyre Cavalcanti

Chief Financial Officer and Investor Relations Officer

Phone: (55 11) 2138-4565

Fax: (55 11) 2138-4065

Email: ir@fibria.com.br

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class:

 

Name of each exchange on which registered:

Common Shares, without par value

 

New York Stock Exchange*

American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of Common Stock

 

New York Stock Exchange

 


*      Not for trading purposes but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those common shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 



Table of Contents

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

The number of outstanding shares of each class of stock of Fibria Celulose S.A. as of

 

 

December 31, 2015:

 

 

 

553,934,646 Shares of Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes   x No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
x

 

Other o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1

 

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

1

 

 

ITEM 3. KEY INFORMATION

1

 

 

ITEM 4. INFORMATION ON FIBRIA

22

 

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

61

 

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

61

 

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

89

 

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

98

 

 

ITEM 8. FINANCIAL INFORMATION

100

 

 

ITEM 9. THE OFFER AND LISTING

106

 

 

ITEM 10. ADDITIONAL INFORMATION

108

 

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

119

 

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

122

 

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

123

 

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

123

 

 

ITEM 15. CONTROLS AND PROCEDURES

123

 

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

123

 

 

ITEM 16B. CODE OF ETHICS

123

 

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

124

 

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

125

 

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

125

 

 

ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT

125

 

 

ITEM 16G. CORPORATE GOVERNANCE

125

 

 

ITEM 16H. MINE SAFETY DISCLOSURE

127

 

 

ITEM 17. FINANCIAL STATEMENTS

127

 

 

ITEM 18. FINANCIAL STATEMENTS

127

 

 

ITEM 19. EXHIBITS

127

 

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Table of Contents

 

INTRODUCTION

 

All references in this annual report to:

 

·                  “Fibria”, “we”, “our”, “us” and the “Company” are to Fibria Celulose S.A. (formerly Votorantim Celulose e Papel S.A.) and its consolidated subsidiaries (unless the context otherwise requires);

 

·                  “Votorantim Group” are to the group of companies, controlled by the Ermírio de Moraes family;

 

·                  “Votorantim Participações S.A.” or “VPar” are to the holding company of Votorantim Industrial S.A which was merged into Votorantim S.A. on January 1, 2016;

 

·                  Votorantim S.A. (current corporate name of Votorantim Industrial S.A.), “Votorantim Industrial S.A.”, or “VID,” are to one of our controlling shareholders;

 

·                  “Aracruz” are to Aracruz Celulose S.A. and its subsidiaries;

 

·                  “Aracruz Acquisition” are to our acquisition of 100% equity interest in Aracruz as a result of (1) Fibria’s acquisition in the first half of 2009 of (a) Arapar S.A., or Arapar, and São Teófilo Representações e Participações S.A., or São Teófilo, whose sole assets consisted of 12.35% of the total share capital, including 28.0% of the voting share capital, of Aracruz and (b) 12.35% of the total share capital, including 28.0% of the voting share capital, of Aracruz from Mr. Joseph Yacoub Safra and Mr. Moises Yacoub Safra, or the Safra Family, (2) the acquisition of 13,828,307 common shares of Aracruz, representing 3.04% of the outstanding common shares of Aracruz and 1.34% of the total share capital of Aracruz, in the mandatory tender offer launched by Fibria that took place on July 1, 2009, (3) the acquisition of 56,880,857 common share of Aracruz from BNDES on May 27, 2009, and (4) the Stock Swap Merger as described in Item 4. Information on Fibria — A. History and Development of Fibria;

 

·                  “BNDES” are to the Brazilian National Bank for Social and Economic Development owned by the Brazilian federal government;

 

·                  “BNDESPar” are to BNDES Participações S.A., a wholly owned subsidiary of BNDES, the Brazilian economic and social development bank owned by the Brazilian federal government;

 

·                  the “Ermírio de Moraes family” are to the families of Antônio Ermírio de Moraes, Ermírio Pereira de Moraes, Maria Helena de Moraes Scripilliti and José Ermírio de Moraes (in memoriam);

 

·                  the “Brazilian government” are to the federal government of the Federative Republic of Brazil and its agencies;

 

·                  Real,” “Reais” or “R$” are to Brazilian Reais, the official currency of Brazil;

 

·                  “U.S.$”, “Dollars” or “U.S. Dollars” are to United States Dollars;

 

·                  “ton” and “MT” are to one metric ton (1,000 kilograms). One kilogram equals approximately 2.2 pounds;

 

·                  “kiloton” are to one thousand metric tons (1,000 tons);

 

·                  “BEKP” are to bleached eucalyptus kraft pulp;

 

·                  “ADSs” are to our American Depositary Shares, each representing one of our common shares;

 

·                  “CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities commission;

 

·                  “Central Bank” are to the Brazilian Central Bank, the monetary authority of Brazil;

 

·                  “VCP” are to Votorantim Celulose e Papel S.A. or Fibria before the merger of Aracruz;

 

·                  “Fibria Trading” are to Fibria Trading International KFT;

 

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Table of Contents

 

·                  “Fibria — MS” are to Fibria — MS Celulose Sul Matogrossence;

 

·                  “Portocel” are to a port facility in the State of Espírito Santo, which is operated by Portocel — Terminal Especializado de Barra do Riacho S.A., a subsdiary with 51% interest held by Fibria and 49% interest held by Celulose Nipo-Brasileira S.A. — CENIBRA;

 

·                  “Parkia” are to Parkia Participações S.A.

 

·                  “Commission” are to the Securities and Exchange Commission;

 

·                  “IFRS” are to International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB);

 

·                  “NYSE” are to the New York Stock Exchange; and

 

·                  “BM&FBOVESPA” are to BM&FBOVESPA S.A - Bolsa de Valores, Mercadorias e Futuros, the Brazilian Stock Exchange.

 

As used in this annual report, one hectare equals approximately 2.471 acres and one kilometer equals approximately 0.621 miles. References in this annual report to nominal production capacity or production capacity mean annual projected capacity for which the facility was designed, with the facility operating under optimal conditions, 24 hours a day, for 365 days a year and subject to reductions in rates of production for scheduled maintenance only. Actual production capacity may vary depending on operating conditions, the grades of pulp produced and other factors.

 

PRESENTATION OF FINANCIAL AND OTHER DATA

 

We have prepared our consolidated financial statements as of and for the years ended December 31, 2015, 2014 and 2013 included herein in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The selected financial information should be read together with our consolidated financial statements, including the notes thereto, included elsewhere in this annual report.

 

The Brazilian Real is our functional currency including all our subsidiaries, and is also the currency used for the preparation and presentation of the consolidated financial statements.

 

We make statements in this annual report about our competitive position and market share in, and the market size of, the market pulp industry. We have made these statements on the basis of statistics and other information from third-party sources that we believe are reliable. We derive this third-party information principally from monthly reports published by Bracelpa — Associação Brasileira de Celulose e Papel (the Brazilian Association of Pulp and Paper), RISI (Resource Information Systems Inc.), PPPC (Pulp and Paper Product Council), Brian McClay, Poyry and Hawkins Wright, all of them specialized consultants in the pulp market. Although we have no reason to believe that any of this information or these reports are inaccurate in any material respect, we have not independently verified the competitive position, market share, market size or market growth data provided by third parties or by industry or general publications.

 

FORWARD-LOOKING STATEMENTS

 

This annual report includes forward-looking statements, principally in “Item 3. Key Information — D. Risk Factors”, “Item 4. Information on Fibria — B. Business Overview” and “Item 5. Operating and Financial Review and Prospects”. We have based these forward-looking statements largely on our current expectations about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including among other things:

 

·                  our direction and future operation;

 

·                  the implementation of our principal operating strategies; including our potential participation in acquisition or joint venture transactions or other investment opportunities;

 

iii



Table of Contents

 

·                  general economic, political and business conditions, both in Brazil and in our principal export markets;

 

·                  industry trends and the general level of demand for, and change in the market prices of our products;

 

·      existing and future governmental regulation, including tax, labor, pension and environmental laws and regulations and import tariffs in Brazil and in other markets in which we operate or to which we export our products;

 

·                  the competitive nature of the industries in which we operate;

 

·                  our level of capitalization, including the levels of our indebtedness and overall leverage;

 

·                  the cost and availability of financing;

 

·                  our compliance with the covenants contained in the instruments governing our indebtedness;

 

·                  the implementation of our financing strategy and capital expenditure plans;

 

·                  inflation and fluctuations in currency exchange rates, including the Brazilian Real and the U.S. Dollar;

 

·                  legal and administrative proceedings to which we are or may become a party;

 

·                  the volatility of the prices of the raw materials we sell or purchase to use in our business;

 

·                  other statements included in this annual report that are not historical; and

 

·      other factors or trends affecting our financial condition or results of operations, including those factors identified or discussed in “Item 3. Key Information — D. Risk Factors.”

 

The words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “hope”, “intend”, “may”, “might”, “should”, “would”, “will”, “understand” and similar words are intended to identify forward looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur and are not guarantees of future performance. Our actual results and performance could differ substantially.

 

iv



Table of Contents

 

PART I

 

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.  KEY INFORMATION

 

A.                                    Selected Financial Data

 

IFRS Summary Financial and Operating Data

 

The following table presents a summary of our selected financial and operating data at the dates and for each of the periods indicated. The following information should be read together with our consolidated financial statements, including the notes thereto, included elsewhere in this annual report, “Presentation of Financial and Other Data” and “Item 5. Operating and Financial Review and Prospects”.

 

1



Table of Contents

 

 

 

Year ended

 

Year ended

 

Year ended

 

Year ended

 

Year ended

 

CONSOLIDATED STATEMENT OF PROFIT OR

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

LOSS 

 

2015

 

2014

 

2013

 

2012

 

2011

 

(in thousands of Reais, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

10,080,667

 

7,083,603

 

6,917,406

 

6,174,373

 

5,854,300

 

Cost of sales

 

(5,878,209

)

(5,545,537

)

(5,382,688

)

(5,237,258

)

(5,124,269

)

Gross profit

 

4,202,458

 

1,538,066

 

1,534,718

 

937,115

 

730,031

 

Operating income (expenses):

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

(702,874

)

(650,836

)

(647,669

)

(584,054

)

(605,353

)

Equity in results of joint-venture and associate

 

393

 

(622

)

 

(592

)

(414

)

 

 

 

 

 

 

 

 

 

 

 

 

Other operating income (expenses), net

 

24,347

 

770,007

 

823,398

 

354,026

 

253,395

)

 

 

(678,134

)

118,549

 

175,729

 

(230,620

)

(352,372

)

Income before financial income and expenses

 

3,524,324

 

1,656,615

 

1,710,447

 

706,495

 

377,659

 

Financial income

 

221,679

 

133,950

 

110,723

 

167,646

 

217,000

 

Financial expenses

 

(569,793

)

(1,040,597

)

(1,016,526

)

(944,405

)

(873,005

)

Result of derivative financial Instruments, net

 

(830,128

)

(6,236

)

(215,313

)

(184,465

)

(276,877

)

Foreign exchange loss and indexation charges, net

 

(2,507,023

)

(721,842

)

(932,907

)

(735,001

)

(935,789

)

 

 

(3,685,265

)

(1,634,725

)

(2,054,023

)

(1,696,225

)

(1,868,671

)

Income (loss) from continuing operations before income taxes

 

(160,941

)

21,890

 

(343,576

)

(989,730

)

(1,491,012

)

Current income tax (expense) benefit

 

(684,246

)

(46,280

)

(619,606

)

(42,167

)

67,835

 

Deferred income tax (expense) benefit

 

1,202,172

 

186,942

 

265,600

 

333,927

 

314,408

 

Net income (loss) from continuing operations

 

356,985

 

162,552

 

(697,582

)

(697,970

)

(1,108,769

)

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

 

364,629

 

Income tax expense, net

 

 

 

 

 

(123,974

)

Net income from discontinued operations

 

 

 

 

 

240,655

 

Net income (loss)

 

356,985

 

162,552

 

(697,582

)

(697,970

)

(868,114

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to shareholders of the Company — continuing operations

 

342,185

 

155,584

 

(706,422

)

(704,706

)

(1,113,277

)

— discontinued operations

 

 

 

 

 

240,655

 

Net income attributable to non-controlling interest

 

14,800

 

6,968

 

8,840

 

6,736

 

4,508

 

Net income (loss)

 

356,985

 

162,552

 

(697,582

)

(697,970

)

(868,114

)

Basic earnings (loss) per share or ADSs (in Brazilian Reais) (1):

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

0.62

 

0.28

 

(1.28

)

(1.34

)

(2.38

)

Discontinued operations

 

 

 

 

 

0.51

 

Diluted earnings (loss) per share or ADSs (in Brazilian Reais) (1):

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

0.62

 

0.28

 

(1.28

)

(1.34

)

(2.38

)

Discontinued operations

 

 

 

 

 

0.51

 

Weighted average number of shares outstanding (in thousands):

 

553,591

 

553,592

 

553,592

 

524,925

 

467,592

 

Dividends per share (in Brazilian Reais:

 

0.54

 

0.07

 

 

 

 

Dividends per share (in U.S. Dollars) (2):

 

0.14

 

0.03

 

 

 

 

 

2



Table of Contents

 

Note:        Following a change in the classification of profit-sharing and bonus plans in 2015from “Selling, general and administrative expenses” to “Other operating income (expenses), net”, the Consolidated Statement of Profit or Loss for the years ended December 31, 2014, 2013, 2012 and 2011, presented above, were adjusted for purposes of comparability by also reclassifying such amounts, totaling R$20,001 thousand, R$15,917 thousand, R$11,714 thousand and R$5,736 thousand, respectively. Please see Note 2.19 (c) to our consolidated financial statements.

 


(1)                 Based on the weighted average number of shares outstanding for each year.

(2)                 Amount translated at the average rate of each year into U.S. Dollars for convenience. You should not construe this translation as representations that the Real amount actually represents these U.S. Dollar amounts or could be converted into U.S. Dollar at the rates indicated or at any other rate.

 

3



Table of Contents

 

CONSOLIDATED BALANCE SHEET

(in thousands of Reais)

 

 

 

As at

 

As at

 

As at

 

As at

 

As at

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1,077,651

 

461,067

 

1,271,752

 

943,856

 

381,915

 

Marketable securities

 

1,411,864

 

682,819

 

1,068,182

 

2,351,986

 

1,677,926

 

Derivative financial instruments

 

26,795

 

29,573

 

22,537

 

18,344

 

31,638

 

Trade accounts receivable, net

 

742,352

 

538,424

 

382,087

 

754,768

 

945,362

 

Accounts receivable - land and buildings sold

 

 

 

902,584

 

 

 

Inventory

 

1,571,146

 

1,238,793

 

1,265,730

 

1,183,142

 

1,178,707

 

Recoverable taxes

 

462,487

 

162,863

 

201,052

 

209,462

 

327,787

 

Assets held for sale

 

 

 

589,849

 

589,849

 

644,166

 

Other assets

 

168,283

 

147,638

 

103,228

 

194,526

 

108,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,460,578

 

3,261,177

 

5,807,001

 

6,245,933

 

5,295,563

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

68,142

 

51,350

 

48,183

 

 

 

Derivative financial instruments

 

273,694

 

161,320

 

71,017

 

26,475

 

43,446

 

Related party receivables

 

11,714

 

7,969

 

7,142

 

6,245

 

5,469

 

Deferred taxes

 

2,399,213

 

1,190,836

 

968,116

 

879,606

 

995,368

 

Recoverable taxes

 

1,511,971

 

1,752,101

 

743,883

 

657,830

 

677,232

 

Advances to suppliers

 

630,562

 

695,171

 

726,064

 

740,310

 

760,611

 

Judicial deposits

 

195,344

 

192,028

 

197,506

 

157,567

 

137,060

 

Assets held for sale

 

598,257

 

598,257

 

 

 

 

Other assets

 

92,714

 

91,208

 

252,135

 

172,612

 

95,060

 

Investments

 

137,771

 

79,882

 

46,922

 

40,674

 

7,506

 

Biological assets

 

4,114,998

 

3,707,845

 

3,423,434

 

3,325,604

 

3,264,210

 

Property, plant and equipment

 

9,433,386

 

9,252,733

 

9,824,504

 

11,174,561

 

11,841,247

 

Intangible assets

 

4,505,634

 

4,552,103

 

4,634,265

 

4,717,163

 

4,809,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,973,400

 

22,332,803

 

20,943,171

 

21,898,647

 

22,636,657

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

29,433,978

 

25,593,980

 

26,750,172

 

28,144,580

 

27,932,220

 

 

 

 

As at

 

As at

 

As at

 

As at

 

As at

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

Loans and financing

 

1,072,877

 

965,389

 

2,972,361

 

1,138,005

 

1,092,108

 

Trade payables

 

668,017

 

593,348

 

586,541

 

435,939

 

373,692

 

Payroll, profit sharing and related charges

 

170,656

 

135,039

 

129,386

 

128,782

 

134,024

 

Taxes payable

 

564,439

 

56,158

 

55,819

 

41,368

 

53,463

 

Derivative financial instruments

 

302,787

 

185,872

 

106,793

 

54,252

 

163,534

 

Liabilities related to the assets held for sale

 

 

 

470,000

 

470,000

 

 

Dividends payables

 

86,288

 

38,649

 

2,374

 

2,076

 

1,520

 

Other payables

 

90,235

 

124,775

 

125,081

 

204,833

 

142,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,955,299

 

2,099,230

 

4,448,355

 

2,475,255

 

1,960,708

 

 

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Table of Contents

 

 

 

As at

 

As at

 

As at

 

As at

 

As at

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

Loans and financing

 

11,670,955

 

7,361,130

 

6,800,736

 

9,629,950

 

10,232,309

 

Derivative financial instruments

 

825,663

 

422,484

 

451,087

 

263,646

 

125,437

 

Taxes payables

 

 

124

 

159

 

77,665

 

76,510

 

Deferred taxes

 

270,996

 

266,528

 

235,896

 

227,923

 

739,878

 

Related parties payable

 

 

 

 

 

 

 

Provision for legal proceeds

 

165,325

 

144,582

 

128,838

 

104,813

 

101,594

 

Liabilities related to the assets held for sale

 

477,000

 

477,000

 

 

 

 

Other payables

 

253,420

 

207,197

 

193,847

 

194,521

 

163,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,663,359

 

8,879,045

 

7,810,563

 

10,498,518

 

11,438,824

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

16,618,658

 

10,978,275

 

12,258,918

 

12,973,773

 

13,399,532

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

9,729,006

 

9,729,006

 

9,729,006

 

9,729,006

 

8,379,397

 

Share capital reserve

 

15,474

 

3,920

 

2,688

 

2,688

 

2,688

 

Treasury shares

 

(10,378

)

(10,346

)

(10,346

)

(10,346

)

(10,346

)

Statutory reserves

 

1,639,901

 

3,228,145

 

3,109,281

 

3,815,584

 

4,520,290

 

Other reserves

 

1,378,365

 

1,613,312

 

1,614,270

 

1,596,666

 

1,611,837

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity attributable to shareholders of the Company

 

12,752,368

 

14,564,037

 

14,444,899

 

15,133,598

 

14,503,866

 

Equity attributable to non-controlling interests

 

62,952

 

51,668

 

46,355

 

37,209

 

28,822

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

12,815,320

 

14,615,705

 

14,491,254

 

15,170,807

 

14,532,688

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

29,433,978

 

25,593,980

 

26,750,172

 

28,144,580

 

27,932,220

 

 

Note:        The Consolidated Balance Sheet as at December 31, 2012 and 2011 were restated due to the retrospective impact of the adoption of IAS 19 (R), as mentioned in Note 2.26 to our 2013 consolidated financial statements.

 

5



Table of Contents

 

OTHER FINANCIAL DATA

 

 

 

Year ended

 

Year ended

 

Year ended

 

Year ended

 

Year ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

(in thousands of Reais, unless otherwise indicated)

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

41.7

%

21.7

%

22.2

%

15.2

%

12.5

%

Operating margin

 

35.0

%

23.4

%

24.7

%

11.4

%

6.5

%

Capital expenditures(3) 

 

2,357,915

 

1,591,002

 

1,286,684

 

1,078,267

 

1,416,668

 

Depreciation, amortization and depletion

 

1,827,097

 

1,790,628

 

1,751,947

 

1,720,067

 

1,838,827

 

Cash flow provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

4,479,018

 

2,226,756

 

2,163,530

 

1,914,333

 

1,348,200

 

Investing activities

 

(3,315,200

)

(356,018

)

(433,849

)

(1,160,803

)

(727,666

)

Financing activities

 

(852,642

)

(2,643,993

)

(2,275,991

)

(258,250

)

(649,133

)

 

OPERATIONAL DATA

 

 

 

As at and for

 

As at and for

 

As at and for

 

As at and for

 

As at and for

 

 

 

the year ended

 

the year ended

 

the year ended

 

the year ended

 

the year ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of employees

 

4,197

 

4,294

 

4,192

 

4,136

 

4,301

 

Nominal production capacity (thousand metric tons)

 

 

 

 

 

 

 

 

 

 

 

Pulp

 

5,300

 

5,300

 

5,300

 

5,250

 

5,250

 

Paper

 

 

 

 

 

 

Sales volumes (thousand metric tons):

 

 

 

 

 

 

 

 

 

 

 

Domestic market pulp

 

499

 

517

 

447

 

531

 

509

 

Export market pulp

 

4,619

 

4,788

 

4,751

 

4,826

 

4,632

 

Total market pulp

 

5,118

 

5,305

 

5,198

 

5,357

 

5,141

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic market paper

 

 

 

 

 

88

 

Export market paper

 

 

 

 

 

12

 

Total paper(4) 

 

 

 

 

 

100

 

 


(3) Relates to cash disbursed for the acquisition of property, plant and equipment and intangible assets and forests and advances for acquisition of timber from forestry partnership program.

 

(4)               The decrease in the paper sales volume reflects the sale of the Piracicaba unit in 2011. See “Item 4. Information on Fibria — A. History and Development of Fibria — Strategic Business Agreement (SBA) with Oji Paper”. Production capacity data is measured as of December 31 of each year.

 

Exchange Rates

 

Since 1999, the Brazilian Central Bank (Central Bank) has allowed the U.S. Dollar-Real exchange rate to float freely, and since then, the exchange rate has fluctuated considerably. The Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict the Central Bank’s behavior related to the exchange rate market. The Real may depreciate or appreciate significantly against the U.S. Dollar in the future.

 

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Table of Contents

 

The following tables set forth the exchange rate, expressed in Reais per U.S. Dollar (R$/U.S.$) for the periods indicated, as reported by the Central Bank.

 

 

 

Exchange Rate of Reais per U.S.$ 1.00

 

Year Ended December 31,

 

Low

 

High

 

Average(1)

 

Period-end

 

 

 

 

 

 

 

 

 

 

 

2011

 

1.5345

 

1.9016

 

1.6746

 

1.8758

 

2012

 

1.7024

 

2.1121

 

1.9550

 

2.0435

 

2013

 

1.9528

 

2.4457

 

2.1605

 

2.3426

 

2014

 

2.1974

 

2.7403

 

2.3547

 

2.6562

 

2015

 

2.5754

 

4.1949

 

3.3387

 

3.9048

 

 

Month Ended

 

Low

 

High

 

Average(1)

 

Period-end

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

3.6725

 

4.1949

 

3.9065

 

3.9729

 

October 31, 2015

 

3.7386

 

4.0010

 

3.8801

 

3.8589

 

November 30, 2015

 

3.7010

 

3.8589

 

3.7765

 

3.8506

 

December 31, 2015

 

3.7476

 

3.9831

 

3.8711

 

3.9048

 

January 31, 2016

 

3.9863

 

4.1558

 

4.0524

 

4.0428

 

February 11, 2016

 

3.8653

 

3.9986

 

3.9449

 

3.9642

 

 


Source: Brazilian Central Bank.

(1)           Represents the daily average exchange rate during each of the relevant periods.

 

B.                                    Capitalization and Indebtedness

 

Not applicable.

 

C.                                    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.                                    Risk Factors

 

We are subject to various risks resulting from changing competitive, economic, political and social conditions that could harm our business, results of operations or financial condition. The risks described below, although not being the only ones we face, are the most important ones.

 

Risks Relating to our Business

 

The market prices for our pulp products are cyclical.

 

The prices we are able to obtain for our products depend on prevailing world prices for market pulp. World pulp prices have historically been cyclical and subject to significant fluctuations over short periods of time depending on a number of factors, including:

 

·      global demand for pulp products;

 

·      global pulp production capacity and inventories;

 

·      strategies adopted by major pulp producers; and

 

·      availability of substitutes for our pulp products.

 

All of these factors are beyond our control.

 

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Table of Contents

 

Price fluctuations occur not only from year to year but also within a given year as a result of global and regional economic conditions, capacity constraints, mill openings and closures, supply of and demand for both raw materials and finished products, among other factors. As a reference, we use prices published by RISI for North America and prices released by FOEX for Europe and Asia. Through 2011, the global economy impacted the pulp market, which had an uptrend in the first half of the year, but ended the year in a lower level than it started with BEKP average prices at U.S.$865 per ton, U.S.$810 per ton and U.S.$699 per ton in North America, Europe and Asia, respectively. In 2012, the uncertainties surrounding the economic recession in Europe provided an unstable BEKP price environment. After following an upward trend in the first half of 2012, prices presented consecutive weekly decreases during the third quarter, but regained strength in the last three months of the year, leading BEKP prices to an annual average of U.S.$815 per ton in North America, U.S.$751 per ton in Europe and U.S.$635 per ton in Asia. In 2013, prices continued to climb during the most part of the first half of the year, due to relatively stable supply levels and strong demand. Nevertheless , as the summer in the Northern Hemisphere approached, slower seasonal demand introduced prices to a new cycle of decline that lasted until November, when prices started to show signs of recovery, ending the year at an annual average of U.S.$870 per ton in North America, U.S.$791 per ton in Europe and U.S.$673 per ton in Asia. In the beginning of 2014, however, prices were pressured by the new pulp capacities expected to come online during the first half of the year. Prices in all regions dropped until September, when the combination of more robust demand and low inventories levels led producers to implement a price increase effective from the fourth quarter. In 2014, average annual BEKP prices were U.S.$846 per ton in North America, U.S.$745 per ton in Europe and U.S.$609 per ton in Asia. In 2015, prices followed an upward trend for most of the year, reflecting both buoyant demand in all main markets and unexpected supply disruptions. The structurally well balanced market encouraged many BEKP producers to announce four price increases during the year. In the fourth quarter of 2015, the economic downturn in China placed strong pressure on prices and, as a result, the average annual BEKP prices were U.S.$890 per ton in North America, U.S.$784 per ton in Europe and U.S.$641 per ton in Asia.

 

Discounts from list prices are frequently granted by sellers to significant purchasers. Although we have long-term relationships with many of our customers, no assurance can be given that the prices for pulp will stabilize or not decline further in the future, or that demand for our products will not decline in the future. As a result, no assurance can be given that we will be able to operate our production facilities in a profitable manner in the future. A significant decline in the price of one or more of our products could have a material adverse effect on our net operating revenues, operating income and net income.

 

China’s importance in the global pulp markets has increased in recent years, driven by increasing domestic consumption. Any negative economic development in China could rapidly impact exports, adversely affecting our revenues, cash flow and profitability.

 

According to market statistics (PPPC), Chinese demand represented 30% of the global market pulp demand in 2015 and this consumption has increased at an annual average growth rate of 10.2% since 2005, above the global average of 2.1%. The recent investments in paper and board machines in China have been boosting pulp demand in China; however, the volatility of Chinese demand due to speculative buying movement is a key risk for any short-term demand forecast.

 

Global crises and subsequent economic slowdowns, similar to those that occurred during 2008 and 2009 may adversely affect global pulp demand. As a result, our financial condition and results of operations may be adversely affected.

 

Demand for our pulp products is directly linked to overall economic activity within those international markets in which we sell our products. After a steady period of growth between 2003 and 2007, the marked drop in demand resulting from the global economic crisis of 2008-2009 once again demonstrated the vulnerability of the pulp market to international volatility. From mid 2009 through 2010, the global economy recovered and provided improved conditions for the pulp market. In 2011, the market pulp industry had two distinct phases. During the first half of the year, the global market pulp demand increased by 7.7% over 2010, mostly due to strong Chinese demand. Beginning in July, the European crisis and its effects on the global economy negatively impacted world pulp demand. In 2012, the unstable economic environment continued pressuring pulp demand; however, positive results in emerging regions offset the losses in mature markets, leading to higher pulp demand compared to the previous year. In 2013, however, despite the persistent tepid economic climate, pulp demand grew by 3.2% with improvements seen in almost all major regions of the globe, especially due to higher investments in new paper capacity. According to PPPC, 39 new tissue paper machines were installed in 2013 and other 59 new tissue paper machines were forecast to enter the market in 2014. The weak economic environment persisted through 2014 but the impact of the capacity expansions happened in 2013 in all regions, mainly focused in the tissue market, combined with the installation of other new paper capacities mainly in China during the year, resulted again in higher pulp demand, which presented a 1.5% increase. In 2015, global pulp demand increased by 2.4%. In contrast to previous years, the gradual improvement of developed economies, primarily due to positive results in the main European economic indicators, was one of the key drivers of pulp demand growth, along with the continuing paper capacity expansion in China.

 

8



Table of Contents

 

A continued decline in the level of activity in either the domestic or the international markets within which we operate could adversely affect both the demand for and the price of our products and have a material adverse effect on us.

 

The deterioration of global economic conditions could, among other things:

 

·                  further negatively impact global demand for paper, reducing investments in new paper capacity and/or leading to paper mills closures, which would directly impact pulp consumption, or further lower market prices for our products, which could result in a continued reduction of our sales, operating income and cash flows;

 

·                  make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;

 

·                  impair the financial condition of some of our customers, suppliers or counterparties to our derivative instruments, thereby increasing customer bad debts or non-performance by suppliers or counterparties;

 

·                  decrease the value of certain of our investments; and/or

 

·                  impair the financial viability of our insurers.

 

New projects that have started up and others that are expected to reach the market in the next years may adversely affect our competitiveness.

 

Market players have concluded the new pulp production capacity installations in South America and Asia. Better than expected demand and some adjustments in the supply base, with closures of old and inefficient capacities, supported the balance of market fundaments. It is important to note, however, that there is a risk that the installation of new capacities could result in a possible loss of market share, reduction of pulp prices and shortage of raw materials resulting in increase in wood and others input prices. Therefore, our results of operations and financial condition could be adversely affected.

 

We may not be able to adjust production volume in a timely or cost-efficient manner in response to changes in demand.

 

If we have to operate at significant idle capacity during periods of weak demand, we may be exposed to higher unit production costs since a significant portion of our cost structure is fixed in the short-term due to the high capital intensity of pulp operations. In addition, efforts to reduce costs during periods of weak demand could be limited by labor regulations or previous labor or government agreements. Conversely, during periods of high demand, our ability to rapidly increase production capacity is limited, which could render us unable to satisfy demand for our products. If we are unable to satisfy excess customer demand, we may lose market share.

 

Our consolidated indebtedness will require that a portion of our cash flow be used to pay the principal and interest with respect to that indebtedness.

 

As of December 31, 2015, our total consolidated indebtedness amounted to R$12,744 million, of which 91.6% represented long-term indebtedness.

 

The level of our indebtedness could have important consequences to the holders of our ADSs, including the following:

 

·                  the debt service requirements of our indebtedness could make it more difficult for us to make payments of dividends and other distributions to our shareholders, including the holders of our ADSs;

 

·                  Investment in pulp production requires a substantial amount of funds in order to form forests, maintain or production capacity, build infrastructure and preserve the environment. This need for significant capital is an important source of financial risk for the pulp industry. Our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes could be limited;

 

·                  a portion of our cash flow from operations will need to be dedicated to the payment of principal and interest on our indebtedness and may not be available for other purposes;

 

·                  our level of indebtedness could limit our flexibility in planning for, or reacting to changes in, our business; and

 

·                  our level of indebtedness could make us more vulnerable in the event of a downturn in our business.

 

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Table of Contents

 

Our exports expose us to political and economic risks in foreign countries.

 

Our sales outside Brazil accounted for 91%, 91% and 92% of our total consolidated net revenues during the years ended December 31, 2015, 2014 and 2013, respectively. Our exports, primarily to Europe, North America and Asia, expose us to risks not faced by companies operating solely in Brazil or any other single country. For example, our exports may be affected by import restrictions and tariffs, other trade protection measures and import or export licensing requirements.

 

Additionally, the international pulp industry is highly competitive. Certain of our competitors may have greater financial strength and access to cheaper sources of capital, and consequently have the ability to support strategic expenditures directed to increase their market share.

 

Our future financial performance will depend significantly on economic conditions in our principal export markets. Other risks associated with our international activities include:

 

·                  significant fluctuations in global demand for pulp products, which could impact our sales, operating income and cash flows;

 

·                  the entrance of new pulp producers or mergers and acquisitions between existing producers, which could limit our competitiveness in the market;

 

·                  the inability to successfully continue to expand our production capacity at the same pace as our competitors could negatively affect our market share;

 

·                  the deterioration of global economic conditions could impair the financial condition of some of our customers, suppliers or counterparties to our derivative instruments, thereby increasing customer bad debts or non-performance by suppliers or counterparties;

 

·                  the downward pressure on pulp prices may affect our profitability;

 

·                  changes in foreign currency exchange rates (against U.S. Dollar) and inflation in the foreign countries in which we operate;

 

·                  exchange and international trade controls;

 

·                  changes in a specific country’s or regions economic conditions;

 

·                  crisis in financial markets and the threat of a global economic slowdown;

 

·                  cultural differences; such business practices;

 

·                  adverse consequences deriving from changes in regulatory requirements, including environmental rules, regulations and Certification requirements;

 

·                  difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex international laws, treaties, and regulations;

 

·                  adverse consequences from changes in tax laws; and

 

·                  logistics costs, disruptions in shipping or reduced availability of freight transportation.

 

While we attempt to manage certain of these risks through the use of risk management programs, it cannot and does not fully eliminate these risks. An occurrence of any of these events may negatively impact our ability to transact business in certain existing or developing markets and have a material adverse effect on our business.

 

We are subject to regulatory risk associated with our international operations.

 

Fibria is subject to local, regional and international laws and regulations in such diverse areas as product safety, product claims, trademarks, competition, employee health and safety, the environment, corporate governance, listing and disclosure, employment and taxes.

 

Failure to comply with laws and regulations could expose Fibria to civil and/or criminal actions leading to damages, fines and criminal sanctions against us and/or our employees with possible consequences for our corporate reputation.

 

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Table of Contents

 

Exchange rate instability may adversely affect our financial condition and results of operations and the market price of our shares and ADSs.

 

Our production costs and operating expenses are substantially denominated in Brazilian Reais and most of our revenue and some assets are denominated in U.S. Dollars. In addition, 90% of our total debt, including swap transactions, is denominated in U.S. Dollars. As a result, exchange rate instability may adversely affect our financial condition and results of operations. It may also affect the amount of dividends we can distribute to our shareholders, including the holders of our ADSs and the market price of our shares and ADSs.

 

In September 2011, the worsening crisis in the Eurozone caused the sudden appreciation of the U.S. Dollar against the Real. As a result, the U.S Dollar appreciated by 12.6% against the Real in 2011. In 2012, the Brazilian Central Bank intervened several times to protect the Real from overvaluation. As a result, in 2012 the U.S Dollar appreciated by 8.9% against the Real. In 2013, the positive outlook of a recovering economy in the US and in the Eurozone caused a rapid depreciation of several Emerging Markets currencies, including the Real. As a result, in 2013 the U.S Dollar appreciated by 14.6% against the Real. In 2014, mainly as a result of Brazil’s macroeconomics scenario and general global uncertainties, the U.S Dollar appreciated by 13.4% against the Real. In 2015, the worsening in Brazil’s economic, political and fiscal conditions resulted in the rating agencies S&P, Fitch and Moody’s downgrading the Brazil sovereign rating below investment grade. As a result the U.S Dollar appreciated by 47% against the Real. See item 11. Quantitative and Qualitative Disclosures About Market Risk.

 

Our business may be adversely impacted by risks related to hedging activities.

 

We regularly enter into currency hedging transactions using financial derivatives instruments, through future contracts, options and swaps, in accordance with our Market Risk Management Policy. Hedging transactions aim, among others, to (1) protect our revenue (which is primarily denominated in U.S. Dollars) when converted to Brazilian Reais (our functional currency); (2) convert part of our debt which is denominated in Brazilian Reais into U.S. Dollars; (3) swap floating interest rates of our debt to fixed interest rates; and (4) swap floating monetary variation of our debt to fixed rate.

 

We account for our derivative instruments at fair value, in accordance with IFRS. The fair value of such instruments may increase or decrease due to fluctuations in currency exchange rates, interest rates, among others, prior to their settlement date. As a result we may incur unrealized losses due to these market risks factors. These fluctuations may also result from changes in economic conditions, investor sentiment, monetary and fiscal policies, the liquidity of global markets, international and regional political events,   acts of war, terrorism, among others.

 

In the event the Company ceases undertaking hedging transactions to the extent necessary, the Company may be exposed to commodity price and exchange and interest rate risks. As a result, the Company’s financial performance could be adversely affected.

 

We may be adversely affected by the imposition and enforcement of more stringent environmental regulations that would require us to spend additional funds. Furthermore, violations of environmental law, regulations and authorizations could result in significant penalties that could materially adversely affect our results of operations and financial condition.

 

Brazilian environment regulation applicable to forestry assets and to production operations is complex because they encompass federal, state and municipal regulations which involve different requirements and restrictions for each location where the Company operates. As such, the Company can be obligated, among other requirements, to obtain specific permits issues by governmental authorities. The requirements of the laws and regulations that cover these permits can increase the operating costs in order to limit or adjust effects or potential effects on the environment or the health of the Company’s employees.

 

Furthermore, violations of those laws, regulations and authorizations could result in administrative, civil or criminal penalties for the Company, its management and its employees. The administrative and criminal penalties assessed in the case of non-compliance with environmental legislation are applied independently of the obligation to repair any eventual environmental damage that results. On the civil side, entities that are proven to have contributed to the harm can be held liable for its remediation, which could result in substantial costs for the Company. As a consequence, when the Company engages third parties to act in connection with its operations, such as final disposal of waste, it can be held liable for eventual environmental damage cause by the these third parties.

 

Administrative infractions can result in substantial fines, suspension of operations, suspension of operating permits and imposition of restricted rights (such as barring entering into contracts with public entities, credit restriction, among other), in addition to criminal penalties for the Company.

 

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Failure to fulfill these laws, rules and authorizations also can result in the loss of certifications of forestry managements— Forest Stewardship Council® (FSC®) and Cerflor/Programme for the Endorsement of Forest Certification (PEFC) — and the certification of environmental management — ISO 14001 — resulting in restrictions on the export of cellulose.

 

In addition, environmental laws and regulations in certain countries may be more stringent than the ones we are subject to in Brazil, which may lead to such countries imposing trade related sanctions against Brazil or our industry. Furthermore, our limited ability to comply with more stringent foreign environmental laws and regulations may prevent us from seeking lower financing cost from foreign governmental related or multilateral development organizations, which may condition future financing on our compliance with more stringent environmental laws and regulations.

 

Actions by federal or state legislatures or public enforcement authorities may adversely affect our operations.

 

In the past, the State of Espírito Santo, where our Aracruz mill is located, has enacted laws to restrict the planting of eucalyptus forests for purposes of pulp production. Although injunctive relief against those state laws has been obtained, and new state legislation has revoked them, there can be no assurance that similar laws will not be enacted in the future which would impose limitations or restrictions on planting eucalyptus in the region where we operate.

 

We may be materially adversely affected if operations at the transportation, storage, distribution and port facilities we own or utilize were to experience significant interruption.

 

Our operations are dependent upon the uninterrupted operation of transportation, storage, distribution and port facilities that we own or utilize. Operations at these facilities could be partially or completely shut down, temporarily or permanently, as a result of any number of circumstances that are not under our control, such as:

 

·                  catastrophic events;

 

·                  strikes or other labor difficulties;

 

·                  other disruptions in means of transportation; and

 

·                  suspension or termination of concessions granted to us or to our commercial partners or independent contractors relating to the right to provide a specific service.

 

Any significant interruption at these facilities or inability to transport products to or from these facilities (including through exports) or to or from our customers for any reason may materially adversely affect us.

 

Our insurance coverage may be insufficient to cover our losses.

 

Our insurance may be insufficient to cover losses that we might incur. We have comprehensive insurance with leading insurers to cover damages to our facilities caused by fire, general third-party liability for accidents and operational risks, and international and domestic transportation. We do not maintain insurance coverage against any risks related to our forests, such as caused by pests and diseases, fire or drought. The occurrence of losses or other damages not covered by insurance or that exceed our insurance limits could result in unexpected additional costs and shortage of wood supply to our mills. “See Item 4. Information on Fibria — B. Business Overview — Insurance.”

 

We face significant competition in some of our lines of business, which may adversely affect our market share and profitability.

 

The pulp industry is highly competitive. In the international pulp market, certain of our competitors may have greater financial strength and access to cheaper sources of capital, and consequently have the ability to support strategic expenditures directed to increase their market share. Our market share may be adversely affected if we are unable to successfully continue to expand our production capacity at the same pace as our competitors.

 

In addition, most markets for pulp are served by several suppliers, often from different countries. Many factors influence our competitive position, including mill efficiency and operating rates and the availability, quality and cost of wood, energy, water, chemicals, logistics and labor, and exchange rate fluctuations. Some of our competitors may have greater financial and marketing resources, and greater breadth of product offerings than we do. If we are unable to remain competitive with these producers in the future, our market share may be adversely affected.

 

In addition, downward pressure on the prices of pulp by our competitors may affect our profitability.

 

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Delays in the expansion of our facilities or in building new facilities may affect our costs and results of operations.

 

As part of our strategy to increase our international market share and improve our competitiveness through greater economies of scale, we may expand our existing production facilities or build one or more production facilities. We are currently expanding our facilities at Três Lagoas Unit through a brownfield project called Horizonte 2 with a nominal production capacity of 1.85 million metric tons, including the creep capacity of 100 thousand tons. The project is scheduled to start up in the fourth quarter of 2017 and it is currently on time and on budget. For further details please see “Item 4. D —Expansion. Horizonte 2 Project”. The expansion or construction of a production facility involves various risks. These risks include engineering, construction, integration with the existing mill on brownfield projects, regulatory and other significant challenges that may delay or prevent the successful operation of the project or significantly increase our costs. Our ability to complete successfully any expansion or new construction project on time is also subject to financing and other risks.

 

We may be adversely affected because:

 

·                  we may either not be able to complete any expansion or new construction project on time or within budget or be required by market conditions or other factors to delay the initiation of construction or the timetable to complete new projects or expansions;

 

·                  our new or modified facilities may not operate at designed capacity or may cost more to operate than we expect;

 

·                  we may not be able to sell our additional production at attractive prices; and

 

·                  we may not have the cash or be able to acquire financing to implement our growth plans; and

 

·     we may have a negative impact on the existing mill that can result on operational instability.

 

Any downgrade in our credit ratings could adversely affect the availability of new financing and increase our cost of capital.

 

In late 2008 and early 2009 Fitch, Moody’s and Standard & Poor’s  reduced our rating to BB+/Negative, Ba1/Negative and BB/Negative, respectively. On October 13, 2009, Fitch further reduced our rating to BB/Stable. After the announcement of the sale of Conpacel and KSR in December 2010 (See Item 4. Information on Fibria — A. History and Development of Fibria) our rating outlook was changed from Stable to Positive by both Fitch and Moody’s. In March 2011, Fitch raised our rating to BB+/Stable. In November and December 2011, respectively, S&P and Moody’s both revised the outlook from positive to stable due to a slower deleverage path. In February 2012, Fitch affirmed Fibria’s rating at BB+/Stable based on the expectation that we will lower debt and leverage during 2012. In February 2013 Fitch changed the rating outlook for Fibria to positive from stable. In March 2013 S&P upgraded Fibria’s rating from BB/positive to BB+/stable. In September 2013 Moody’s changed our outlook from stable to positive. In February 2014 Fitch Ratings upgraded our credit rating to BBB- with a stable outlook, thereby achieving Investment Grade status for this agency. In March 2014 S&P revised our credit rating outlook from stable to positive. In April 2015, S&P upgraded our rating to BBB- with a stable outlook and in November 2015, Moody’s upgraded our rating to Baa3 with a stable outlook, giving us the status of an Investment Grade company for the three rating agencies. S&P and Fitch downgraded Brazil’s sovereign rating from BBB- to BB+ in September 2015 and December 2015, respectively, and also in December 2015 Moody’s placed Brazil’s sovereign rating Baa3 for downgrade.  In February 2016, S&P downgraded Brazil’s sovereign rating from BB+ to BB with a negative outlook. After the downgrade actions on Brazil’s sovereign ratings, S&P, Moody’s and Fitch have reaffirmed their BBB-/stable and Baa3/stable ratings for Fibria.

 

The global scale ratings currently assigned to our foreign currency debt are BBB-/Stable by Fitch, BBB-/Stable by S&P and Baa3/Stable by Moody’s. If our ratings were to be downgraded by the rating agencies due to any external factor (which could include a downgrade of the Brazilian sovereign rating), our own operating performance and/or increased debt levels, our cost of capital may increase. Any downgrade could also negatively affect our operating and financial results and the availability of future financing.

 

Our financing agreements include important covenants. Any default arising from a breach of such covenants could have a material adverse effect on us. In the event of a breach of such covenants, or for other factors affecting our financial condition, we may not be permitted to pay, or elect not to pay dividends.

 

We are party to several financing agreements that require us to maintain certain financial ratios or to comply with other specific covenants. These covenants and restrictions, some of which are subject to certain important exceptions, include among others:

 

·                  limitations on making certain restricted payments;

 

·                  limitations on entering into certain transactions with affiliates;

 

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·                  limitations as to mergers or consolidations with any other person or selling or otherwise disposing of all or substantially all of our assets;

 

·                  the maintenance of maximum net debt to Adjusted EBITDA ratios; and

 

·                  the maintenance of minimum debt service coverage ratios.

 

Any default under the terms of our financing agreements that is not waived by the affected creditors may result in a decision by such creditors to accelerate the outstanding balance of the relevant debt. This may also result in the foreclosure on collateral and accelerate the maturity of debts under other financing agreements due to cross acceleration provisions. Our assets and cash flow may be insufficient to pay the full outstanding balance under such financing agreements, either upon their scheduled maturity dates or upon any acceleration of payments following an event of default. If such events were to occur, our financial condition would be adversely affected.

 

Defaults under the terms of our financing agreements may result in our inability to pay dividends.  In addition, in accordance with its bylaws, the Company should pay its shareholders 25% of its adjusted annual net income as a compulsory dividend.  The net income can be capitalized, used to compensate for a loss or even retained, as contemplated by Law 6,404/76, and therefore not be made available for payment of dividends.  The Company can elect to not pay a dividend to its shareholders in its fiscal year if its management demonstrates, and if the general shareholders’ meeting approves, if that such payment would be inadvisable given the financial condition of the Company.

 

Unfavorable outcomes in litigation may negatively affect our results of operations, cash flows and financial condition.

 

We are involved in numerous tax, civil and labor disputes involving significant monetary claims.

 

In December 2012, a tax assessment in the amount of R$1.7 billion (see Note 24 to our 2015 Financial Statements) was issued by the Brazilian Federal Tax Authority, or RFB, against us, with respect to Corporate Income Taxes (Imposto de Renda Pessoa Jurídica), or IRPJ, and Social Contribution on Net Income (Contribuição Social Sobre o Lucro Líquido), or CSLL taxes as a result of an agreement signed between Fibria (on that occasion VCP) and International Paper. The subject matter of which was the exchange of industrial and forestry assets between the two companies. We filed an appeal against this decision. See note 24 to our 2015 consolidated financial statements.

 

In October 2013, a tax assessment in the amount of R$271 million, was issued by the RFB against us with respect to IRPJ and CSLL, during the period from 2010 between Fibria Trading International — FTI and Fibria. See note 24 to our 2015 consolidated financial statements.

 

In June 2014, a new tax assessment in the amount of R$272 million, was issued by the RFB against us, with respect to IRPJ, and CSLL, during the period from 2010, between Fibria Trading International — FTI, NORMUS and Fibria. See note 24 to our 2015 consolidated financial statements.

 

In October 2014, a new tax assessment in the amount of R$73 million, was issued by the RFB against us, with respect to IRPJ, and CSLL, on the earnings from investment in offshore subsidiaries during the period from 2009, between VCP Overseas Holding Kft. and Normus in 2009. We filed an appeal with the Brazilian Federal Revenue Service. See note 24 to our 2015 consolidated financial statements.

 

In November 2015, a new RFB tax assessment in the amount of R$52 million, was issued for IRPJ and CSLL related to the taxation of the profits earned in the fiscal year of 2011 by FTI (Fibria Trading International) and FAF (Fibria International GMBH) in Brazil. (See note 24 to our 2015 consolidated financial statements).

 

In December 2015, a new RFB tax assessment in the amount of R$549 million was issued for IRPJ and CSLL, as a result of alleged non-deductibility of depreciation, amortization and depletion expenses, during the fiscal year 2010. (See note 24 to our 2015 consolidated financial statements).

 

Additionally, we are continuously being audited by the Brazilian Federal Tax Authority with regard to our international structure, merger and acquisition transactions and the use of tax credits related to our raw materials.

 

If unfavorable decisions are rendered in one or more of these lawsuits, we could be required to pay substantial amounts, which could materially adversely affect our results of operations, cash flows and financial condition.

 

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Competition for land for use as eucalyptus forests for purposes of pulp production or for other crops, such as soy beans, sugar cane and other commodities, may affect any eventual expansion.

 

Greater global demand for certain commodities, especially for grains, bio-fuel and animal protein, may impact our forestry operations in two ways:

 

·                  greater competition for land could impact its price. Grain, bio-fuel and animal protein production generally are economically superior to forestry activities, and as a result, prospective increases in land values may inhibit expansion of new forests.

 

·                  for the same reason, we may face difficulties in convincing third-party partners to begin or to expand eucalyptus production for use in the pulp industry.

 

We conduct certain of our operations through joint ventures that we do not solely control.

 

In October 2000, Aracruz acquired a 45% stake in Veracel, a joint venture that operates a pulp plant and forests in the south of the State of Bahia. In January 2003, Aracruz increased its equity interest in Veracel to 50%. Stora Enso OYJ, or Stora Enso, owns the remaining 50% of the equity interests in Veracel. We, as legal successor by the merger with Aracruz, and Stora Enso are party to a shareholders’ agreement with respect to Veracel, pursuant to which the parties have the right to nominate an equal number of board members. Under this shareholders’ agreement, each shareholder may be required to make capital contributions and, if any of the parties fails to comply with any of its obligations regarding Veracel’s funding needs in connection with a pre-agreed investment and capital contribution plan, the other shareholder shall have the right to require the defaulting shareholder to transfer all of its equity interests in Veracel to the other shareholder at a discounted market value.

 

In view of our shared control of Veracel as described above, we may not unilaterally make major decisions with respect to this entity. In addition, the existing contractual arrangement with respect to Veracel may constrain our ability to take actions that would be in our best interests, and may prevent us from refraining them from taking actions that would be adverse to our interests.

 

If we are unable to manage potential problems and risks related to acquisitions, and alliances, our business and growth prospects may suffer. Some of our competitors may be better positioned to acquire other pulp business.

 

We may, as part of our business strategy, acquire other businesses in Brazil or elsewhere or enter into alliances. Our management is unable to predict whether or when any prospective acquisitions or alliances will occur, or the likelihood of a material transaction being completed on favorable terms and conditions. Our ability to continue to expand successfully through acquisitions or alliances depends on many factors, including our ability to identify acquisitions and negotiate, finance and close transactions. Even if we complete future acquisitions, we could fail to successfully integrate the operations, services and products of any acquired company. If we attempt to engage in future acquisitions, we would be subject to certain risks, including that:

 

·      we could fail to select the best partners or fail to effectively plan and manage any alliance strategy;

 

·      the acquisitions could increase our costs;

 

·      our management’s attention could be diverted from other business concerns; and

 

·      we could lose key employees of the acquired company.

 

Our failure to integrate new businesses or manage new alliances successfully could adversely affect our business and financial performance. Furthermore, the global pulp and paper industry is undergoing consolidation, and many companies compete for acquisition and alliance opportunities in our industry. Some of our competitors have greater financial and other resources than we do. This may reduce the likelihood that we will be successful in completing acquisitions and alliances necessary for the expansion of our business. In addition, any major acquisition we consider may be subject to regulatory approval. We may not be successful in obtaining required regulatory approvals on a timely basis or at all.

 

The loss of certain of our customers or their ability to pay us could cause a significant impact on our results of operations, cash flows and financial condition.

 

Our three largest customers represented 54% of our net revenue in 2015. Although such sales are supported by long-term contracts, if we are unable to replace the sales volumes represented by any of these important customers, the loss of any of these customers could have a material adverse effect on our results of operations, cash flows and financial condition.

 

As part of its relationship with its clients, the Company grants payment terms in accordance with its internal evaluation as to the capacity of payment of each client. In the event of a deterioration in such payment capacity, where the credit risk is not covered by

 

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trade credit insurance or other credit enhancement, such as letters of credit, including changes that result from the economic, political or regulatory situation of the Company’s clients at any time, such clients capacity to meet their payment obligations could be adversely affected. If a significant number of the Company’s clients become incapable of paying, the Company’s results of operations, including its cash flow, could be materially impacted.

 

We may be subject to labor disputes from time to time that may adversely affect us.

 

Most of our employees are represented by unions or equivalent bodies and are covered by collective bargaining or similar agreements which are subject to periodic renegotiation. In addition, we may not successfully conclude our labor negotiations on satisfactory terms, which may result in a significant increase in the cost of labor or may result in work stoppages or labor disturbances that disrupt our operations. Any such cost increases, work stoppages or disturbances could materially adversely affect us.

 

Social movements and the possibility of expropriation may affect the normal use of, damage, or deprive us of the use of or fair value of, our properties.

 

Activist groups in Brazil advocate land reform and property redistribution by invading and occupying rural areas. Fibria has been working alongside the Landless Workers’ Movement (or MST), the Federal Land Reform Agency (INCRA) and the government of the State of Bahia, and have agreed to design and implement an agroforestry production and settlement model project in 2011. In 2012, the project was launched, benefiting hundreds of families in areas occupied by the MST. We cannot assure that our properties will not be subject to invasion or occupation by these or other activist groups. A land invasion or occupation could materially impair the normal use of our lands or have a material adverse effect on our results of operations, financial condition or the value of our common shares.

 

In addition, our land may be subject to expropriation by the Brazilian government. Under Brazilian law, the federal government may expropriate land that is not in compliance with mandated local “social functions”, including rational and adequate exploitation of land, adequate use of available natural resources, preservation of the environment, compliance with labor laws, etc. If the Brazilian government expropriates any of our properties, our results of operations may be adversely affected to the extent that the government’s compensation proves inadequate. Moreover, we may be forced to accept public debt bonds, which have limited liquidity, instead of cash as compensation for expropriated land.

 

Our controlling shareholders have entered into a Shareholders´Agreement which regulates their power to control us.

 

We are jointly controlled by Votorantim S.A. (current corporate name of Votorantim Industrial S.A.) and BNDESPar. Our controlling shareholders have entered into the First Amendment to the Shareholders Agreement dated October 29, 2014 that regulates their power, including the power to:

 

·                  elect some members of our Board of Directors; and

 

·                  determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations and dispositions and the timing and payment of any future dividends.

 

Votorantim S.A. and BNDESPar have entered into the First Amendment to the shareholders’ agreement dated October 29, 2014 under which the approval of certain matters will depend on the affirmative vote of BNDESPar. See “Item 10. Additional Information — C. Material Contracts — Shareholders’ Agreement of Fibria”.

 

In addition, BNDES was the creditor with respect to approximately 15% of our consolidated indebtedness as of December 31, 2015 and we expect to continue to obtain loans from BNDES. As one of our significant shareholders and the subsidiary of one of our important creditors, BNDESPar may exercise a significant influence over our business and corporate decisions, and its actions may be influenced by the policies of the Brazilian federal government, which may conflict with the interest of our shareholders and holders of our ADSs.

 

We currently engage in, and expect in the future to engage in, commercial and financial transactions, from time to time, with our controlling shareholders or their affiliates. Commercial and financial transactions between our affiliates and us create the potential for, or could result in, conflicts of interests. For a discussion of certain related party transactions, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions.”

 

An impairment of goodwill or other intangible assets would adversely affect our financial condition and results of operations.

 

As a result of the Aracruz Acquisition, we have recognized R$4,230 million of goodwill and have recorded several intangible assets from the Aracruz business (including database, patents, chemical supplier and other supplier relationships) with a fair value of

 

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R$779 million at the acquisition date (R$230 million as of December 31, 2015 and R$291 million as of December 31, 2014). Under IFRS, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually or more often if an event or circumstance indicates that an impairment loss may have been incurred. Other intangible assets with a finite life are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment whenever there is an indication of impairment. As of December 31, 2015 we performed our annual impairment test of the Goodwill, which is allocated in Cash Generating Units (CGUs) Aracruz, Portocel and Veracel. In addition, as required by IAS 36, when the book value of the net assets of the Company exceeds its market capitalization, an impairment analysis of long-lived assets must be performed. As a result, we performed an impairment analysis of our long-lived assets. The recoverability test did not result in the need to recognize any impairment of goodwill and fixed assets. See “Item 5. Operating and Financial Review and Prospects — B. Discussion of Critical Accounting Policies” and Note 37 to our 2015 consolidated financial statements.

 

Changes in the value of the key assumptions used in the impairment tests could result in impairment charges in the future that could be significant and that could have an adverse effect on our results of operations and financial condition.

 

New laws and regulations relating to climate change and changes in existing regulation, as well as the physical effects of climate change, may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.

 

In 1997, an international conference on global warming concluded with an agreement known as the Kyoto Protocol, which has formed the basis for a range of international, national and sub-national proposals and regulations focusing on greenhouse gas reduction based on historical responsibility. . In 2009, Brazil among other countries adopted voluntary targets. Brazil had committed to cut its emissions below projected levels in 2020 and to set domestic targets for curbs on deforestation in its Amazon and Cerrado regions. In December of 2015, countries signed a new global accord, the Paris Agreement, adopting Nationally Determined Contributings (NDCs) as the actions to reduce their emissions after 2020. The Brazilian Intended NDC states increment of biofuels and other renewables in the national energy mix, zero illegal deforestation, reforestation and forest restoration and native forest management enhancement.

 

Although we cannot predict how future climate legislation or regulatory initiatives, whether international or local, or when will be adopted, Fibria has been recognizing these risks, and the Paris Agreement scenario does not substantially change them. We expect that there will be increased regulation related to greenhouse gases and climate change that may materially affect us, directly through increased capital expenditures and investment to comply with such laws, and indirectly, by affecting prices for transportation, energy and other inputs. In addition, the physical effects of climate change also may materially and adversely affect our operations, for example by changing air temperature and water levels, and subjecting us to unusual or different weather-related risks.  Both the new laws and regulations related to climate change, changes in existing regulations and the physical effects of climate change could result in increased liabilities and capital expenditures, all of which could have a material adverse effect on our business and results of operations.

 

Various other risks could have a material adverse effect on our operational and financial results.

 

Our operations are subject to various other risks affecting our forests and manufacturing processes, including fire, drought, disease, strikes, port closings, shipping costs, electrical failures and factory explosions, and limited supply, increased cost and poor quality of inputs in our manufacturing process such as chemicals, any of which could have a material adverse effect on our operational and financial results.

 

Risks Relating to Brazil

 

Brazilian economic and political conditions and perceptions of these conditions in the international market have a direct impact on our business and our access to international capital and debt markets, and could adversely affect our results of operations and financial condition.

 

Our production operations are conducted in Brazil but our pulp is mainly sold to international customers in Europe, North America and Asia. Accordingly, our financial condition and results of operations are in some ways dependent upon economic and political conditions in Brazil. The general cost of human capital, the cost of land (renting or buying) and the other general local supplies are points of concern. Nonetheless, future developments in the Brazilian economy may affect Brazil’s growth rates and, consequently, such supplies. As a result, these developments could impair our business strategies, results of operations or financial condition. The Brazilian government tries to limit unusual market conditions, like supply prices, abnormal speculation and the foreign exchange-rates, frequently intervening in the Brazilian economy and occasionally makes material changes in policies and regulations. Our business, financial condition and results of operations may be adversely affected by changes in government policies as well as general economic and political factors, including but not limited to:

 

·                  currency fluctuations;

 

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·                  interest rates;

 

·                  liquidity of domestic capital and lending markets;

 

·                  availability of experienced labor;

 

·                  policies impacting Brazil’s logistical infrastructure;

 

·                policies affecting Brazil’s forestry sector;

 

·                  tax policy;

 

·                  exchange control policies;

 

·                  other political, diplomatic, social and economic developments in or affecting Brazil; and

 

·                  inflation

 

Brazil has historically experienced high rates of inflation. Inflation, as well as government efforts to combat inflation, had significant negative effects on the Brazilian economy, particularly prior to 1995. Inflation rates were 5.9% in 2013,6.4% in 2014 and 10.67% in 2015, according to the Brazilian National Consumer Inflation Index (Índice Nacional de Preços ao Consumidor Amplo) or IPCA. Our cash production costs and operating expenses are substantially denominated in Brazilian Reais and tend to increase with Brazilian inflation because our suppliers and providers generally increase prices to reflect the depreciation of the currency. If the rate of Brazilian inflation increases more rapidly than any rate of appreciation of the U.S. Dollar, then, as expressed in U.S. Dollars, our operating expenses may increase. Inflation, actions to combat inflation and public speculation about possible additional actions also may contribute materially to economic uncertainty in Brazil and accordingly weaken investor confidence in Brazil, thus impacting our ability to access the international capital markets.

 

Historically, Brazil’s political scenario has influenced the performance of the Brazilian economy and political crises have affected the confidence of investors and the general public, which resulted in economic slowdown and heightened volatility in the securities issued abroad by Brazilian companies. Brazil’s gross domestic product, or GDP, in real terms, grew by 2.3% in 2013 and 0.1% in 2014, according to Instituto Brasileiro de Geografia e Estatística — IBGE, Brazil’s official statistics agency. In 2015, GDP had a downturn of 3.71%, according to the Focus Report estimates published by the Brazilian Central Bank.

 

Currently, Brazilian markets are experiencing heightened volatility due to the uncertainties derived from the ongoing Lava Jato investigation, being conducted by the Office of the Brazilian Federal Prosecutor, and its impact on the Brazilian economy and political environment. Members of the Brazilian federal government and of the legislative branch, as well as senior officers of large state-owned companies as well as privately held companies, have faced allegations of political corruption, since they have allegedly accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. The profits of these kickbacks allegedly financed the political campaigns of political parties of the current federal government coalition that were unaccounted for or not publicly disclosed, and personally enriched the recipients of bribes under this bribery scheme. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. Brazil’s political scenario is further complicated by the ongoing impeachment proceedings against Brazil’s president, Dilma Rousseff.

 

We cannot predict whether such allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future. In addition, we cannot predict the outcome of any such allegations nor their effect on the Brazilian economy. Furthermore, future developments in policies of the Brazilian government and/or the uncertainty of whether and when such policies and regulations may be implemented, all of which are beyond our control, could have a material adverse effect on us.

 

Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to our business

 

The Brazilian government frequently implements changes to tax regimes that may affect us and our customers. These include changes in prevailing tax rates and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes.

 

Some of these changes may result in increases in our tax payments, which could adversely affect industry profitability and increase the prices of our products, restrict our ability to do business in our existing and target markets and cause our financial results to suffer. There can be no assurance that we will be able to maintain our projected cash flow and profitability following any increases in Brazilian taxes applicable to us and our operations.

 

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We may be impacted by governmental actions affecting the Brazilian markets and economy.

 

The Brazilian government has exercised and continues to exercise substantial influence over many aspects of the private sector. The Brazilian government, for example, could impose some restrictions for the export market, by creating export duties for any product, including our main source of revenues (market pulp), affecting the margins and the profitability of exporting companies. In addition, the Brazilian government through BNDES owns or controls many companies, including some of the largest in Brazil. For example, the BNDES, through its wholly-owned subsidiary company, BNDESPar, is a joint controlling shareholder of our Company together with Votorantim S.A., as per shareholder agreement terms, and so has historically been one of our important creditors.

 

Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance.

 

Our financial results are affected by changes in interest rates, such as the London Interbank Offered Rate (LIBOR), the Brazilian Interbank Deposit Certificate (Certificado de Depósito Interbancário known as CDI) and the Brazilian Long Term Interest Rate (Taxa de Juros de Longo Prazo known as or TJLP). The CDI rate has fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation control purpose, Brazilian government policies and other factors. The CDI rate was 14.14% p.a., 11.57% p.a. and 9.77% p.a. as of December 31, 2015, 2014 and 2013, respectively. The TJLP was reduced from 5.5% p.a. on June 27, 2012 to 5.0% p.a. on December 31, 2012 until December 31, 2014. After gradually increasing during 2015, the TJLP rate as of December 31, 2015 was 7.5% p.a.

 

A significant increase in interest rates, particularly TJLP or LIBOR, would have a material adverse effect on our financial expenses due to the fact that a significant part of our debt (BNDES loans and Export Prepayment Facilities) is linked to these rates. On the other hand, a significant reduction in the CDI rate could adversely impact the financial revenues derived from our investment activities since a relevant part of our cash is invested in Brazilian money market, linked to CDI. In order to mitigate these risks and benefit from the abnormal lower interest rates, we have contracted several swaps from LIBOR and TJLP to Pre Fixed rates. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.

 

Economic and market conditions in other countries, including in developing countries, may materially and adversely affect the Brazilian economy and, therefore, the market value of our ADSs.

 

The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil, and, to varying degrees, market conditions in other countries, including Latin American and developing countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or conditions in other countries, including developing countries, have at times significantly affected the availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil. It has also limited access to international capital markets, all of which may materially and adversely affect our ability to borrow funds at an acceptable interest rate or to raise equity capital when and if there should be a need for us to do so. The volatility in market prices for Brazilian securities has increased from time to time, and investors’ perception of increased risk due to crises in other countries, including developing countries, may also lead to a reduction in the market price of our ADSs.

 

An electricity shortage and related electricity rationing may adversely affect our business and results of operations.

 

Hydroelectric power is a major source of energy for Brazilian industry. Low levels of investment and below average rainfall have in the past resulted in low reservoir levels of critical hydroelectric capacity in Brazil’s southeast, central west and northeast regions. Alternative sources of power generation have often been delayed due to regulatory and other issues. During the period of 2000 and 2001, for example, the Brazilian government instituted a rationing and consumption reduction program to reduce electricity consumption from mid-2001 to early 2002. This program established limits on energy consumption by industrial, commercial and residential users.

 

In 2015, we generated internally approximately 117% of the electric energy requirements for our pulp production process. Of the total amount of thermal and electrical energy we self-generated, 90% was from renewable fuels, such as biomass and black liquor that are byproducts of the pulp production process, and 10% was from non-renewable fuels that we purchased, such as fuel oil and natural gas. Nonetheless, if Brazil experiences shortages in available electricity (whether due to hydrological conditions, infrastructure limitations or otherwise), similar or other policies may be put into place to limit or ration electrical power utilization. Although we believe we are adequately prepared with respect to energy since we are self-sufficient and even sell the overflow electric energy to the Brazilian grid, our sales may be adversely affected by the negative effect the energy shortage may have on the macroeconomic environment. In addition, we may also be adversely affected by the impact of the energy shortage on the activities of our main suppliers of raw materials. Any such shortage and related electricity rationing could have a material adverse effect on our business and results of operations.

 

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Drought in some regions of Brazil, resulting in water scarcity and related rationing, may adversely affect our business and results of operations. Other impacts on water supply, such as environmental problems and regulatory restrictions, could adversely affect our business and result of operations.

 

Some regions of Brazil are currently experiencing drought conditions, resulting in acute shortage of water and the implementation of rationing to control usage. Although we believe that not all of our operations will be affected by these conditions, certain of our units are located in the affected areas. Although our units are already very efficient is water use, we continue to improve the mill’s efficiency in water consumption and have defined a contingency plans for all the possible affected units, if required.  Nevertheless, we cannot assure that very severe droughts or governmental measures to address drought conditions will not have the effect of impacting our units’ operations, with the resulting adverse effect on our business and results of operations.

 

Other impacts on the water supply, such as the recent environmental catastrophe affecting the Rio Doce, or regulatory actions to limit access to water could have a significant and adverse effect on our business operations. For example, as a consequence of the mine tailings contamination of the Rio Doce, our Aracruz unit was required to suspend its use of water from that river for its operations for a short period of time. No impact was recorded, however, because the Aracruz Unit has a reservoir sufficient to sustain it for up to five months, which had at the time of the accident at least 90 days of water supply. Nonetheless, no assurance can be given that future environmental events or governmental regulatory action will not materially adversely affect the access to sufficient water for our operations.

 

Risks Relating to Our Shares and ADSs

 

Exchange controls and restrictions on remittances abroad may adversely affect holders of our ADSs.

 

One may be adversely affected if the Brazilian government imposes restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and, as it has done in the past, on the conversion of the Real into foreign currencies. These restrictions could hinder or prevent the conversion of dividends, distributions or the proceeds from any sale of shares or ADSs, as the case may be, into U.S. Dollars and the remittance of U.S. Dollars abroad. We cannot assure that the government will not take this type of or similar measures in the future. Holders of our ADSs could be adversely affected by delays in, or a refusal to grant, any required governmental approval for conversion of Real payments and remittances abroad in respect of the shares, including the shares underlying the ADSs. In such a case, our ADS depositary will distribute Reais or hold the Reais it cannot convert for the account of the ADS holders who have not been paid.

 

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

 

We are organized under and are subject to the laws of Brazil and all our directors and executive officers and our independent registered public accounting firm resides or is based in Brazil. Substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, our ADS holders may face greater difficulties in protecting their interests due to actions by us, our directors or executive officers than would shareholders of a U.S. corporation.

 

The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our ADSs.

 

Investments in securities, such as our common shares or ADSs, of issuers from emerging market countries, including Brazil, involves a higher degree of risk than investments in securities of issuers from more developed countries. The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States. These features may substantially limit the ability to sell the common shares underlying the ADSs at a price and time at which holders wish to do so. At December 31, 2015, the aggregate market capitalization of the 60 companies listed on the São Paulo Stock Exchange Index (Ibovespa) was equivalent to approximately U.S.$408 billion, and the ten largest companies listed on the São Paulo Stock Exchange Index represented approximately 62% of the market capitalization in the year.

 

In comparison, the 504 companies listed in the S&P 500 had a market capitalization of approximately U.S.$18 trillion as of December 31, 2015. A liquid and active market may never develop for our common shares or ADSs, and as a result, the ability of our ADS holders to sell at the desired price or time may be significantly hindered.

 

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Holders of our ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.

 

Holders of ADSs are not direct shareholders of our Company and are unable to enforce the rights of shareholders under our Bylaws and the Brazilian law. Our corporate affairs are governed by our Bylaws and the Brazilian law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, or elsewhere outside Brazil. Under Brazilian law, the rights of a holder of our common shares to protect its interests with respect to actions by us, our directors or executive officers may be fewer and less well-defined than under the laws of other jurisdictions.

 

Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares or ADSs at a potential disadvantage. In addition, the disclosure required of public companies in Brazil may be less complete or informative than that required of publicly-held companies in the United States or in certain other countries.

 

Holders of our ADSs may not be able to exercise their voting rights.

 

Holders of our ADSs may only exercise voting rights with respect to their underlying common shares in accordance with the provisions of the deposit agreement for our ADS program, or the Fibria Deposit Agreement. Under this Agreement, ADS holders may only vote by giving voting instructions to our Depositary. Because our Depositary appears on our share register and not the ADS holders, such holders are unable to exercise their right to vote without the representation of our Depositary unless they surrender their ADSs for cancellation in exchange for our common shares. In addition, pursuant to the Fibria Deposit Agreement, our Depositary will only notify our ADS holders of an upcoming vote and arrange to mail proxy cards to those holders if we request our Depositary to do so. Pursuant to our bylaws, the first call for a shareholders’ meeting must be published at least 15 days in advance of the relevant meeting, and the second call must be published at least eight days in advance of the meeting, in the case of insufficient quorum to approve the matters included in the first meeting. As a result, there may not be enough time for ADS holders to surrender their ADSs and withdraw underlying common shares, or for them to receive a proxy card in time to ensure that they can provide our Depositary with voting instructions. Our Depositary and its agents are not liable for failure to mail proxy cards in time for ADS holders to vote the common shares underlying their ADSs or to carry out voting instructions in the manner as instructed or at all. As a result, holders of ADSs may not be able to exercise the voting rights attached to the common shares underlying their ADSs.

 

An exchange of ADSs for shares risks the loss of certain foreign currency remittance and Brazilian tax advantages.

 

The ADSs benefit from the certificate of foreign capital registration, which permits our Depositary to convert dividends and other distributions with respect to common shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for common shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under Resolution No. 2,689/00 of the National Monetary Council (CMN - Conselho Monetário Nacional), which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration. If holders of ADSs do not qualify under Resolution No. 2,689/00, they will generally be subject to less favorable tax treatment on distributions with respect to our common shares. There can be no assurance that the certificate of registration of our Depositary, or any certificate of foreign capital registration obtained by holders of ADSs, will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.

 

Holders of our shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of shares or ADSs.

 

Brazilian Law No. 10,833/03 provides that gains on the disposition of assets located in Brazil by non-residents of Brazil, whether to other non-residents or to Brazilian residents, will be subject to Brazilian taxation. The common shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of common shares, even by non-residents of Brazil, are expected to be subject to Brazilian taxation. In addition, the ADSs may be treated as assets located in Brazil for purposes of the law, and therefore gains on the disposition of ADSs by non-residents of Brazil may also be subject to Brazilian taxation. Although the holders of ADSs outside Brazil may have grounds to assert that Law No. 10,833/00 does not apply to sales or other dispositions of ADSs, it is not possible to predict whether that understanding will ultimately prevail in the courts of Brazil given the general and unclear scope of Law No. 10,833/03 and the absence of judicial court rulings in respect thereto.

 

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Holders of our ADSs may not be able to exercise the preemptive rights relating to the shares.

 

Holders of our ADSs may not be able to exercise the preemptive rights relating to the common shares underlying their ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended (the “Securities Act”) is effective with respect to the rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares or other securities relating to these preemptive rights and we cannot assure holders of our ADSs that we will file any such registration statement. Unless we file a registration statement or an exemption from registration applies, holders of our ADSs may receive only the net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, the rights will be allowed to lapse.

 

Judgments of Brazilian courts with respect to our shares will be payable only in Reais.

 

If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other than Reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than Reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares or the ADSs.

 

ITEM 4.  INFORMATION ON FIBRIA

 

A.                                    History and Development of Fibria

 

We are incorporated under the laws of the Federative Republic of Brazil under the name Fibria Celulose S.A., as a publicly-held company with unlimited duration. We have the legal status of a stock corporation, operating under the Brazilian corporate law. Our headquarters and principal executive offices are located at Rua Fidencio Ramos, 302, Torre B, 3rd floor, 04551-010, São Paulo, SP, Brazil (telephone: 55 11 2138-4565). Our website address is www.fibria.com.br/ir. Information contained on our website is, however, not incorporated by reference in, and should not be considered as part of this annual report.

 

Our operations began in 1988 when the Votorantim Group, one of the largest privately held group of companies in Latin America, acquired Celpav Celulose e Papel Ltda., or Celpav, a pulp and paper producer based in the State of São Paulo. We began production in 1991 after expanding and modernizing our facilities. In September 1992, the Votorantim Group purchased Indústrias de Papel Simão S.A., or Papel Simão, which was listed on the BM&FBOVESPA. Celpav and Papel Simão subsequently merged and, in 1999, Papel Simão was renamed Votorantim Celulose e Papel S.A. On November 5, 2009 we adopted the corporate name Fibria Celulose S.A. and on December 31, 2009, we and Aracruz were merged to form Fibria (the surviving entity). See “Item 4. Information on Fibria — A. History and Development — The Aracruz Acquisition”.

 

On April 19, 2000, we completed a registered offering of 7,920,000 ADSs. Each ADS represented 500 preferred shares, and the ADSs were listed on NYSE, under the symbol “VCP.” Of the 7,920,000 ADSs being offered at that time, we sold 2,047,648 ADSs and certain of our shareholders sold the remaining 5,872,352 ADSs. Concurrently, 440,000,000 preferred shares were sold in Brazil.

 

Because VCP changed its name to Fibria on November 5, 2009, with the Aracruz Acquisition, the last trading day of VCP shares on the NYSE under the ticker symbol VCP was November 17, 2009. From November 18, 2009 on, the ticker symbol has changed to “FBR”.

 

We have grown and expanded our operations through the organic expansion of our pulp mills and paper production facilities, selective acquisition of equity interests in other pulp and paper companies and then streamlined our operations with the disposition of assets and lines of business we deemed not a part of our core business.

 

Bahia Produtos de Madeira

 

In 1998, as part of a strategy of diversification into other forest product businesses, Aracruz acquired Tecflor Industrial S.A or Tecflor, for the production of solid wood products. Tecflor was then renamed Aracruz Produtos de Madeira or APM. In 2001, APM sought to expand the presence of its Lyptus® brand of high-quality sawn wood in domestic and international markets and established a commercial partnership with the U.S. based Weyerhaeuser Co., or Weyco, one of the largest forestry companies in the world, for the exclusive distribution of Lyptus® in the North American markets. In October 2004, Aracruz sold two thirds of its shares in APM to Weyerhaeuser do Brasil Participações Ltda., a subsidiary of Weyco, for a total purchase price of U.S.$18.6 million. After the Aracruz Acquisition, APM was renamed Bahia Produtos de Madeira or BPM. We currently own 33.33% of the shares in BPM and have certain voting rights as set forth in the APM shareholders’ agreement. On July 31, 2014, we acquired 100% of the capital of WOP — Wood Participações Ltda., formerly Weyerhaeuser do Brasil Participações Ltda, for R$6,716 million, which held 66.67% of the capital of

 

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our associate Bahia Produtos de Madeira S.A. As from that date, the Company holds indirectly, 100% of the capital of Bahia Produtos de Madeira S.A.

 

Acquisition of Interest in Ripasa

 

In 2005, we purchased through a 50% joint venture with Suzano Bahia Sul Papel e Celulose S.A., or Suzano, the common and preferred shares of Ripasa S.A. Celulose e Papel or Ripasa. On March 31, 2005, we finalized the acquisition, through a 50% joint venture, of 77.59% (our interest — 38.80%) indirect interest in the voting capital and 46.06% (our interest — 23.03%) indirect interest in the total capital of Ripasa, for U.S.$275 million. In addition, a purchase option was executed for the option to purchase within six years common shares and preferred shares, totaling 22.41% of the voting stock and 13.45% of the total stock of Ripasa. We acquired our stake in these additional shares for R$298 million. At the time of this acquisition, Ripasa’s principal assets were the Americana pulp and paper mill and three other paper mills located in Embu, Cubatão and Limeira in the State of São Paulo.

 

In April 2006, Ripar, the joint venture between us and Suzano, was liquidated by dissolution and its only assets, the shares in Ripasa, were distributed equally to both us and Suzano.

 

In May 2006, the shareholders of Ripasa approved a corporate restructuring transaction in which the shareholders (other than us and Suzano) received shares of our Company, shares of Suzano and cash in exchange for their shares of Ripasa. In this transaction we issued 12,532,009 preferred shares to the former Ripasa shareholders. Following this transaction, we owned 50% of the share capital of Ripasa.

 

In March 2007, we sold our 50% interest in the paper mill located in Embu to Suzano for R$41.1 million. The Embu paper mill had an annual production capacity of 48 kilotons of cardboard. See “Item 4. Information on Fibria — A. History and Development of Fibria — Formation of Conpacel”.

 

In November 2007, we and Suzano sold our interests in the paper mills located in Cubatão and Limeira to MD Papéis for a total of R$122 million. The Cubatão paper mill had a production capacity of approximately 61 kilotons per year of graphic, editorial and special printing & writing papers. The Limeira paper mill had a production capacity of approximately 58 kilotons per year of cardboard.

 

The Losango Project

 

In 2005, we announced the beginning of the environmental licensing process for the implementation of a bleached eucalyptus pulp mill with an overall nominal capacity of 1.5 million tons of pulp per year to be built in the State of Rio Grande do Sul (named “The Losango Project”). As a result of the Aracruz Acquisition in 2009, we had a different portfolio of possible expansion projects, including two former Aracruz Units (Veracel II and a fourth pulp production line at the Aracruz Unit) and this together with the Três Lagoas Unit which started up in March 2009, were all brownfield projects. In view of that, we considered several alternatives for the Losango Project, including a full divestiture of the lands and forest. On June 30, 2011, Management approved the divestiture of the Losango project assets, and established a specific program to identify a potential buyer. As from June 30, 2011, we had classified the assets of the Losango Project as held for sale.

 

On September 10, 2012, we received and accepted a binding offer from CMPC Celulose Riograndense S.A. for the purchase of forestry assets and lands of Losango, consisting of approximately 100 thousand hectares of owned areas and nearly 39 thousand hectares of forestland of eucalyptus in these owned areas and in third parties leased areas, for a total amount of R$615 million. The transaction did not include the partnership program agreements developed in Losango areas, which will be maintained and honored by Fibria. On December 28, 2012 we announced the conclusion of the Purchase and Sale Agreement and the approval of the operation by the Economic Defense Council, the receipt of the first installment in the amount of R$470 million and the deposit of the second installment in the amount of R$140 million in an escrow account to be disbursed after the remaining applicable government approvals and other conditions precedent have been fulfilled. On November 2014, we received an additional R$7 million as an advance from CMPC. The remaining installment of R$5 million will be paid to us upon the effective transfer of existing contracts related to the asset and applicable government approvals.

 

The sale and purchase agreement establishes a period of 48 months, renewable at the option of CPMC for an additional 48 months, to obtain the required government approvals. If this approval is ultimately not obtained, we will be required to return to CMPC the amount of R$477 million paid to us, plus interest, and the escrow deposits made by CMPC will revert.

 

Since the signing of agreement with CMPC, we have taken action to obtain the approvals needed, such as the fulfillment of all conditions precedent, the partial renewal of the area operating license and filing the documentation required by the government agencies. We are confident that approval will be granted. However, the completion of the sale is not under our sole control and it depends on various government approvals, which have been slower than expected. Because of prolonged delays in obtaining all

 

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regulatory permits and licenses, at December 31, 2014, we reclassified the Losango Project as assets held for sale and liabilities from current asset/liabilities to long-term asset/liabilities.

 

We have concluded that these assets should remain classified as “assets held for sale” as non-current assets at December 31, 2015. The classification of these assets and liabilities on our Consolidated Balance Sheet as ‘held for sale’ has not had a significant effect on our Consolidated Statement of Profit and Loss.

 

Asset Exchange with International Paper

 

In February 2007, we transferred our Luiz Antonio pulp and paper mill and approximately 60,000 hectares of forest located in the State of São Paulo to International Paper Investments (Holland) B.V., a wholly owned subsidiary of International Paper, in exchange for the Três Lagoas pulp mill, which was then under construction, and approximately 100,000 hectares of surrounding forest. At the time that we received the Três Lagoas pulp mill, International Paper had fully funded the construction of this mill under a turn-key contract.

 

The Luiz Antonio mill had an annual production capacity of 410 kilotons of pulp and 355 kilotons of uncoated paper. As part of this transaction, we agreed to purchase 100 kilotons of BEKP per year on competitive terms for our use in other facilities under a long-term supply agreement.

 

In March 2009, we started operating our Três Lagoas mill located in the State of Mato Grosso do Sul. This mill successfully achieved its predicted capacity increasing our annual capacity by 1.3 million tons of market pulp. The total amount invested in this project was R$3,991 million. This amount includes disbursements made directly from Fibria, and the assets we received through our Asset Swap Agreement with International Paper.

 

As part of this transaction, we granted International Paper the right to construct, at its cost, up to two paper machines adjacent to, and integrated with, the Três Lagoas pulp mill. International Paper exercised this option with respect to one of the paper mills and has constructed a paper mill with annual production capacity of 200 to 250 kilotons of printing & writing paper adjacent to the Três Lagoas pulp mill. This paper mill commenced production in the first quarter of 2009. In connection with the exercise of this option, International Paper has entered into a long-term supply agreement under which we will provide International Paper with pulp and utilities and other services at rates based on our actual operating costs.

 

If International Paper exercises its right to build the second paper mill adjacent to the Três Lagoas pulp mill, the contract conditions follow the ones established for the first paper mill:

 

·                 we will be obligated to transfer certain parcels of real property to International Paper upon which the paper machine and ancillary facilities will be constructed; and

 

·                 International Paper will enter into a long-term supply agreement under which we will provide International Paper with pulp and utilities and other services at rates based on our actual operating costs.

 

In 2012, Fibria and International Paper agreed to extend International Paper’s option to build a new paper machine at the Três Lagoas unit. The new agreement gives International Paper the option to start-up the second paper machine between 2016 and 2018.

 

Disposition of Mogi das Cruzes Paper Mill

 

In May 2007, we sold our specialty paper mill located in the city of Mogi das Cruzes in the State of São Paulo to the controlling shareholder of Comércio e Indústria Multiformas Ltda. for R$57 million. The Mogi das Cruzes paper mill had an annual production capacity of 20 kilotons of industrial and specialty papers.

 

Joint-venture with Ahlstrom

 

In May 2007, we announced an intended joint venture agreement with the Finnish company Ahlstrom for the paper production in our facility located in Jacareí, State of São Paulo. The agreement was concluded in September 2007 and Ahlstrom acquired a 60% interest of this new joint venture for the paper assets in Jacareí mill, denominated Ahlstrom VCP Indústria de Papéis Especiais S.A. (“Ahlstrom VCP”), with an option to purchase the remaining 40% within two years.

 

In September 2008, pursuant to a series of options which were part of the agreement with Ahlstrom, we sold to Ahlstrom our remaining 40% equity interest in the joint-venture company for U.S.$42 million.

 

The parties also signed a long-term agreement whereby Fibria will supply eucalyptus pulp, utilities and other services to Ahlstrom VCP at the Jacareí mill at competitive prices, in order to partly support an annual production capacity of approximately 105,000 tons of uncoated wood-free papers.

 

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Strategic Business Agreement (SBA) with Oji Paper

 

In August 2007 we announced the execution of a long term SBA with Oji Paper Co. Ltd or Oji Paper. The agreement allowed us to further our offering of thermal paper technologies in Brazil and the region of Latin America, while allowing Oji Paper to expand its worldwide presence as a market leader in thermal technology. Through the execution of the SBA, we were able to draw on the technologies of Oji Paper as well as its global subsidiaries including the technology of Kanzaki Specialty Papers, Inc (KSP), Kanzan Spezialpapiere GmbH (Kanzan) and Oji Paper Thailand Ltd. (OPT). The SBA agreement coupled with the completion in 2008 of our Piracicaba mill expansion permitted the continuation of enhanced quality products and improved value to our customers.

 

On August 11, 2011, we signed a term sheet granting exclusivity to Oji Paper to negotiate the sale of the assets comprising the industrial plant and building, which constituted the complex known as the Piracicaba Unit. The closing of the sale was accomplished on September 29, 2011 for the agreed amount of U.S.$313 million. After the sale of Piracicaba, Fibria concentrates its operations on pulp production.

 

Due to the sale of Piracicaba to Oji Paper in September 2011, the SBA has been terminated and all royalties were duly paid by Fibria to Oji Paper.

 

Formation of Conpacel

 

In August 2008, Ripasa contributed its assets, other than the Americana pulp and paper mill, to Asapir Produção Florestal e Comércio Ltda., a newly formed company in which we and Suzano each owned 50% of the share capital.

 

In September 2008, Ripasa was transformed into Conpacel, a cost and production sharing unit, or consortium, in which we had an undivided 50% interest in the assets, liabilities and operations.

 

On December 21, 2010, we entered into a binding agreement with Suzano regarding the sale of our 50% interest in Conpacel, consisting of (1) a pulp and paper mill located in the city of Americana, State of São Paulo and (2) land totaling approximately 76 thousand hectares associated with the mill, and approximately 71 thousand hectares of forestland (of which 53 thousand hectares were owned and 18 thousand hectares were leased), for an aggregate purchase price of R$1,450 million. We consummated the sale on January 31, 2011. The Conpacel pulp and paper mill consisted of a pulp mill with an annual production capacity of 650 thousand tons and a paper mill with an annual production capacity of 390 thousand tons.

 

On December 21, 2010, we also entered into a binding agreement with Suzano for the sale of KSR, our paper distribution business unit, for an aggregate purchase price of R$50 million. The closing of the KSR sale occurred on February 28, 2011.

 

Disposition of Guaíba Unit

 

On October 7, 2009, we entered into a purchase and sale agreement with Empresas CMPC S.A. (CMPC) for the sale of (1) our pulp and paper mill located in the city of Guaíba, in the State of Rio Grande do Sul, (2) land totaling an area of approximately 212 thousand hectares of forestland associated with this mill (of which 32 thousand hectares were leased, under partnerships), (3) licenses and authorizations for a project to expand the pulp mill’s production capacity to approximately 1.85 million tons a year, including the creep capacity of 100 thousand tons, and (4) all of the share capital of Aracruz Riograndense, which we refer to collectively as the Guaíba Unit, for an aggregate purchase price of R$2,416 million, which generated a capital gain of R$33 million.

 

The Guaíba pulp and paper mill consisted of a pulp mill with an annual capacity of 450 kilotons and a paper mill with an annual capacity of 60 kilotons of printing & writing paper.

 

Primary Public Offering of Common Shares

 

On March 8, 2012, Fibria announced a primary public offering of common Company-issued shares. On April 30, 2012, 86,000,000 shares were issued at a unit price of R$15.83/share (U.S.$8.43/share) totaling R$1,361 million (without placement of a supplementary lot). The Public Offering was in accordance with the strategy to strengthen our capital structure.

 

Disposition of forestry assets and land

 

On March 8, 2012, as part of our strategy to strengthen our capital structure, we entered into a binding agreement with Fundo Florestas do Brasil (the “Fund”), through its subsidiary Caravelas Florestal S.A., for the sale of certain forests and land located in the south of Bahia, consisting of 16.2 thousand hectares of forests of eucalyptus for timber and pulp with an average annual production of 660 cubic meters of wood.

 

On June 29, 2012, Fibria signed a purchase and sale agreement for these assets in the total amount of R$235 million. A cash payment of R$200 million was received as an advance at the same date. As result of the due diligence process conducted by the purchaser, the sale price was adjusted to R$200 million. On December 7, 2012, the transaction was completed upon receipt of an acceptance notice signed by the buyer.

 

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On November 15, 2013, we entered into a Share Purchase Agreement and Other Covenants with Parkia, for the sale of certain land located in the states of São Paulo, Mato Grosso do Sul, Bahia and Espírito Santo, for a total of approximately 210 thousand hectares. On December 30, 2013, after obtaining the mandatory regulatory approvals as well as the completion of an audit by Parkia, the First Amendment to the Share Purchase Agreement and Other Covenants was concluded and signed, under which the total area subject to the transaction was adjusted to approximately 206 thousand hectares of lands, for the total amount of R$1,402,584 thousand, of which R$500,000 thousand has been received by the Company upon signing the agreement. The remaining balance, in the amount of R$902,584 thousand, was received by us during the first quarter of 2014, after the fulfillment of certain obligations and legal registers performed by the Company.

 

We may be entitled to an additional amount, not to exceed R$247,515 thousand, in three separated payments, each payment being up to one third of the amount, on the 7th, 14th and 21st anniversaries of the agreement. The entitlement to this amount is contingent on the appreciation of the land at each of such anniversaries, measured according to predefined measurement assumptions established in the agreement and adjusted by the variation of the IGP-M index through the actual payment dates.

 

We concurrently entered into forestry partnership agreements with Parkia for a period of up to 24 years, during which we will continue to manage our forests in the land sold. In exchange for the right to use the land by us for our forestry activities, the forestry partnership agreement grants to Parkia the right to receive 40% of the volume of wood (in cubic meters — m3), produced by us on the land during each harvesting cycle, limited to a “cap” contractually established. The transaction is in line with our strategy to strengthen our capital structure through debt prepayment. See Note No.1 (e) of our 2014 consolidated financial statements.

 

Equity Investment — Ensyn

 

In 2012, with an initial investment of U.S.$20 million, Fibria acquired 6.66% of Ensyn’s share capital and the option to invest additional US$10 million in its capital in the future. Furthermore, Fibria and Ensyn agreed to set up an equally-owned joint venture (F&E Technologies LLC), which was duly incorporated in Delaware for future investments in the production of liquid fuels and chemicals from biomass in Brazil. In 2014, Fibria entered into an Amendment to the 2012 Share Purchase Agreement, for the acquisition of approximately 3% of Ensyn’s capital for US$10 million, increasing our interest to 9.56% of Ensyn’s capital, and also providing us with certain rights which, if exercised, would allow us to subscribe additional US$5 million in Ensyn’s capital. In 2015, Fibria executed a new agreement for the purchase of approximately 3% of Ensyn’s capital, by the payment of US$5 million in exchange for the warrant issued in favor of the Company in 2014. As a result of the acquisition of additional capital in 2015, the Company holds 12.62% of the share capital of Ensyn and has the option to invest in the future additional US$10 million in its capital.

 

Aracruz Acquisition and Related Transactions

 

Overview of Aracruz

 

Prior to its acquisition, Aracruz was the world’s largest producer of market pulp according to Hawkins Wright, with an annual pulp production capacity of approximately 2.9 million tons as of December 31, 2008, including 50% of the annual pulp production capacity of Veracel. As of that date, Aracruz’s forestry base consisted of total forests of approximately 403.7 thousand hectares located in three Brazilian states, including 50% of the forestry area of Veracel, consisting of approximately 258.5 thousand hectares of planted areas and approximately 145.2 thousand hectares of preserved areas.

 

Aracruz produced BEKP at its Aracruz and Guaíba pulp mills, and owned a 50% interest in Veracel, which owns and operates a pulp mill with an annual production capacity of 1.1 million tons as well as the related forestry assets. Aracruz produced uncoated paper at its Guaíba paper mill, which had an annual production capacity of 60 kilotons.

 

In 2008, Aracruz produced 3,106 kilotons of eucalyptus pulp, recorded consolidated net revenues from pulp sales of R$3,539 million, produced 56 kilotons of paper products and recorded consolidated net revenues from paper sales of R$115 million.

 

Aracruz Acquisition

 

In October 2001, we purchased 127,506,457 common shares of Aracruz, representing 28.0% of the voting share capital and 12.35% of the then total share capital interest in Aracruz in order to increase our exposure to the international pulp market, and we accounted for this investment under the equity method.

 

In January 2009, we acquired Arapar and São Teófilo, whose sole assets consisted of an aggregate of 12.35% of the total share capital, including 28.0% of the voting share capital, of Aracruz, for R$2,710 million. Under the purchase agreement, the purchase price was payable in six semi-annual installments without interest as follows: (1) R$500 million was paid in January 2009; (2) R$500 million was paid during the period of April, May and July 2009; (3) R$500 million was paid in January 2010; (4) R$500 million was paid in June 2010; (5) R$410 million was paid in January 2011; and (6) R$300 million was paid in July 2011.

 

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In April 2009, we purchased 12.35% of the total share capital, including 28.0% of the voting share capital, of Aracruz from the Safra Family for R$2,710 million. Under the purchase agreement for these shares, the purchase price was payable in six semi-annual installments without interest, except as noted below, as follows: (1) R$600 million was paid in cash in April 2009; (2) R$500 million was paid in January 2010; (3) R$500 million was paid in June 2010; (4) R$400 million was paid in October 2010, together with interest from July 2009 at the rate of 105% of CDI per annum; (5) R$410 million was paid in January 2011; and (6) R$300 million was paid in July 2011.

 

Following the Aracruz Acquisition, we owned 37.05% of the total share capital, including 84.00% of the voting share capital, of Aracruz. As a result of these purchases, in accordance with IFRS, we have fully consolidated the assets, liabilities and results of operations of Aracruz and its consolidated subsidiaries in our consolidated financial statements as from January 1, 2009.

 

Capital Increase

 

In April and May 2009, we issued and sold (1) 62.1 million common shares to our controlling shareholder, VID, for R$1,180 million, which was paid through the application of R$1,000 million of previously issued advances for capital increases and R$180 million in cash, (2) 43.6 million preferred shares to BNDESPar in exchange for 56.9 million common shares of Aracruz, representing 12.49% of the total share capital, including 5.51% of the voting share capital, of Aracruz, (3) 95.8 million preferred shares to BNDESPar for R$1,820 million in cash and (4) an aggregate of 9.3 million preferred shares to the Lorentzen, Moreira Salles, Almeida Braga and Safra families for an aggregate of R$180 million.

 

In connection with this capital increase, BNDESPar subscribed to debentures issued by VID that were convertible into common shares of our Company held by VID. Under these debentures, VID was obliged to invest the net proceeds it received from BNDESPar to purchase shares of our Company. On September 3, 2009, BNDESPar exercised its option to convert the VID Debentures. As a result of this conversion, VID transferred 30,526,316 common shares of our Company to BNDESPar, following which VID owned 35.2% and BNDESPar owned 41.8% of our total share capital, as of September 30, 2009.

 

Conversion of VCP Preferred Shares to Common Shares

 

In connection with the Aracruz Acquisition, we began to implement a corporate reorganization to simplify our capital structure. On May 30, 2009, in order to prepare our Company for the eventual migration of our common shares to the Novo Mercado listing segment of the BM&FBOVESPA, our shareholders approved the conversion of all of our outstanding preferred shares into common shares at the exchange ratio of 0.91 common shares for one preferred share. This conversion became effective on August 12, 2009, as a result of which we now have a single class of stock comprised solely of common shares. As a result of this conversion, the interests of VID and BNDESPar in the total share capital of our Company changed from 40.7% and 35.4%, respectively, to 35.2% and 40.8%, respectively.

 

Mandatory Tender Offer

 

On June 1, 2009, we announced the commencement of a mandatory tender offer for any and all outstanding common shares of Aracruz. The auction with respect to this tender offer took place on the BM&FBOVESPA on July 1, 2009. In the auction, we acquired 13,828,307 common shares of Aracruz, representing 3.04% of the outstanding common shares of Aracruz and 1.34% of the outstanding share capital of Aracruz, for an aggregate purchase price of R$236.6 million, payable according to the same payment schedule agreed to by the Safra family and the former shareholders of Arapar and São Teófilo in connection with the Aracruz Acquisition. Following this transaction, we owned 43.89% of the total share capital, including 99.53% of the voting share capital, of Aracruz.

 

Stock Swap Merger

 

As part of our corporate reorganization, on August 24, 2009, Fibria and Aracruz each held extraordinary shareholders’ meetings at which the Stock Swap Merger was approved. Pursuant to Stock Swap Merger (1) each issued and outstanding common share of Aracruz (other than common shares held directly or indirectly by Fibria or with respect to which the holder exercises withdrawal rights) was exchanged for 0.1347 Fibria common shares; (2) each issued and outstanding preferred share of Aracruz (other than preferred shares held by Fibria) was exchanged for 0.1347 Fibria common shares; and (3) Aracruz became a wholly-owned subsidiary of Fibria. The settlement of the Stock Swap Merger occurred on November 17, 2009, through the facilities of the BM&FBOVESPA.

 

Under the Brazilian Corporation Law, holders of common shares and class A preferred shares of Aracruz who did not vote in favor of the Stock Swap Merger, including those who abstained from voting or did not attend the Aracruz Extraordinary Shareholders’ Meeting, were entitled to withdraw their capital from Aracruz during a withdrawal period that was scheduled to expire on

 

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September 28, 2009. On September 28, 2009, we and Aracruz announced that the deadline for the exercise of withdrawal rights was extended until November 12, 2009. On October 28, 2009, we filed an F-4 registration statement with the SEC, which was declared effective by the SEC on November 12, 2009, to register the issuance of our shares to holders of Aracruz’s class B preferred shares (including the class B preferred shares of Aracruz that were represented by ADRs) that were residents of the United States.

 

Following the Stock Swap Merger, VID owned 29.3%, and BNDESPar owned 33.6% of our total share capital. The last trading day for one Aracruz ADR was November 17, 2009 and its final market price was U.S.$21.25. As of December 31, 2008 the market price for one Aracruz ADR was U.S.$11.28.

 

Merger of Arapar and São Teófilo into Fibria

 

As part of the corporate reorganization, the general shareholders’ meetings of each of Fibria, Arapar and São Teófilo approved on December 21, 2009, the merger of Arapar and São Teófilo with and into Fibria, with Fibria as the surviving entity. This merger was effective as of December 31, 2009.

 

Merger of Aracruz into Fibria

 

As part of the corporate reorganization and in order to maximize the synergies from the Aracruz Acquisition, effective as of December 31, 2009, Aracruz merged with and into Fibria, Fibria being the surviving entity.

 

Our Ownership Structure

 

We are jointly controlled by Votorantim S.A. (current corporate name of Votorantim Industrial S.A.) and BNDESPar, a subsidiary of BNDES. Votorantim S.A. in turn is controlled by Hejoassu Administração S.A. or Hejoassu, which is controlled by the Ermírio de Moraes family. As a result of the purchase of an additional equity interest in Aracruz and corporate re-organization of Fibria, both of which occurred during the first semester of 2009, our exchange offer for outstanding Aracruz shares and the merger of Aracruz into us, our ownership structure and principal investees as of December 31, 2015 is presented in the following chart.

 

 

As of December 31, 2015, our total shares amounted to 553,934,646 common shares.

 

B.                                    Business Overview

 

Pulp Industry Overview

 

The world pulp industry is mainly divided in two groups of grades: mechanical, which is the pulp produced only through the use of mechanical energy processes, and chemical, which is the pulp produced after the wood chips have been chemically treated with

 

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caustic soda. In the whole world, currently 169 million metric tons are consumed every year, from which 82% is chemical pulp, according to market statistics.

 

Both grades are sub-divided in: integrated pulp, which is the pulp produced for captive paper production in the same company or group, and market pulp, which is pulp produced to be sold in the market. Market pulp consumption currently sums up to 57 million metric tons, which represents 41% of all chemical pulp grade.

 

Chemical market pulp can be broken down in many different grades, depending on the wood species. The two main groups are Hardwood, which is composed by the species with short cellulose fibers, and Softwood, assembling the other species, composed by long cellulose fibers. Short fiber pulp is more prone to be produced in tropical areas, while long fiber pulp is only produced in temperate areas. Hardwood represents 54% of total market pulp demand with 31 million metric tons.

 

Fibria produces pulp from Eucalyptus, which is a species originally from Australia, but extremely well adapted to the Brazilian climate. Brazil is the country where Eucalyptus trees develop the highest yield in the whole world. Eucalyptus pulp is 70% of the whole Hardwood market, with a demand of 21 million metric tons in 2015.

 

 


(1)         Fiber Consumption, Recycled Fiber and Pulp: RISI | Market Pulp, Hardwood and Eucalyptus: PPPC Global 100 Report December 2015

 

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Market Pulp Capacity

 

We are the world’s largest producer of market pulp, according to Hawkins Wright, with an aggregate pulp production capacity of approximately 5.3 million metric tons of eucalyptus per year, as shown in the chart below.

 

Market Pulp Capacity Ranking
(000 tons)

 

 

Source: Hawkins Wright — December 2015

 

Eucalyptus pulp capacity has outgrown all other market pulp grades, having grown 103% between 2006 and 2015, to a total of more than 23.5 million metric tons, with most of this growth taking place in Latin America. Increased volumes by Latin American producers, who hold much larger buffer and in-transit stocks (as new mills in the region are further inland), bigger vessel space, Supplier Managed Owned Inventories where invoicing is made upon pulp consumption rather than delivery, and the increase in both distance and reach of the pulp geographical distribution with the increasing importance of China in the market in recent years, have increased the minimum inventory necessary for eucalyptus distribution. According to the Special Research Note released by the Pulp and Paper Products Council (PPPC), the global balanced level of the hardwood pulp producers inventories is currently 39 days, an increase of 10 days since 2000. However, for Latin American producers the average inventory stands at 43 days as almost 90% of Latin America’s hardwood production is exported outside the region compared to only 38% of North American and Nordic regions.

 

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Evolution of Bleached Hardwood Pulp producer’s inventory

(days of supply)

 

 

Source: PPPC (World-20)

 

Market Pulp Demand

 

Market pulp is used basically to produce four types of papers: Printing & Writing, Tissue, Specialty and Packaging. Printing & Writing papers are used for newspapers, magazines, catalogs, books, commercial printing, business forms, stationeries, copying and digital printing. Tissue paper is a lightweight paper basically used for personal hygiene. Types of tissue paper are hygienic tissue, facial tissues, paper towels, wrapping tissue, toilet tissue and table napkins. While specialty papers are papers that are made with specific qualification for a very unique purpose. Types of specialty papers are carbon less paper, decorative paper, security paper, self - adhesive papers, and cigarette papers. Packaging includes all types of papers used by protecting products for distribution, sales and use, including containerboard, folding boxboard and liquid packaging board.

 

As the global economy started to recover from the 2008 credit crunch crisis, in 2010 a growth of 2.3% or 1.0 million metric tons took place.

 

In 2011, despite all the uncertainties with the European and American economy, global market pulp demand reached a total volume of 52.5 million tons which represents an increase of 4.7% or 2.4 million tons over 2010. The same unstable economic environment remained in 2012, but stocking movement, especially in China, led market pulp demand to post approximately 1.2% of growth during the year. The European region was the major market pulp consuming region totaling 17.8 million metric tons followed by China with 14.4 million metric tons in 2012.

 

Pulp demand continued to grow in 2013 driven mainly by new paper capacity that entered the market during the year. The  3.2% increase (or 1.3 million extra tons) was supported mainly by hardwood sales to China (due to a strong growth in the tissue and woodfree paper sectors) and a surprising rebound in North America (resulting from new tissue capacities, an improvement in consumer spending and the replacement of integrated pulp by market pulp).

 

In 2014, the pulp demand increased by 1.5% (or 807 thousand tons). The main markets for pulp, North American, Europe and China, registered growth in pulp demand during the year as a result of the continuation of the wave of investments in new paper machines that started in 2013, especially in China. The favorable hardwood price level also contributed to pulp demand growth due to a certain level of substitution of other fiber sources such as recovered paper and nonwood pulp.

 

In 2015, the positive 2.4% growth in pulp demand (or 1.3 million extra tons) was due to improved economic environment mainly in Europe and North America, while China continued to see its paper capacity base expanding.

 

Eucalyptus demand increased by 7.8% in 2011, 2.3% in 2012 7.8% in 2013, 8.7% in 2014 and 5.0% in 2015. PPPC projections for Eucalyptus global demand show an average growth of 4.2% between 2015 and 2016 much higher than the global market pulp demand average of 1.7% for the same period. The growth in the tissue paper grades and Printing & Writing expansions in Asia is expected to support this growth.

 

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Total Market Pulp Demand & Eucalyptus Market Share

 

 

Source: PPPC

 

Pulp Price Dynamics

 

As a global commodity, market pulp prices are impacted by macroeconomic dynamics, as are the prices of any other commodity. The graph below is a comparison of the trend of eucalyptus market pulp prices against the Economist Commodity Index since 1980.

 

 

Source: Hawkins Wright and The Economist, January 2016

 

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The main variable that is responsible in the formation of market pulp prices is the balance between supply and demand. This is the relationship between the availability of the pulp in the market for sale against the real demand for pulp in the market. This relation may be analyzed in the short term, medium term, and long term.

 

Short term for the pulp industry is normally defined as the next 12 months, through this period the variables that will impact the balance are: the operating rates of the pulp mills installed, the performance of the installed paper machines that will result in pulp consumption and the pulp inventory level in the whole supply chain. The most recent event that restricted pulp mills supply was the earthquake in Chile in 2010. Because of the earthquake, production in Chile had to stop, constraining supply and impacting directly the prices. Also, the paper machines can affect the pulp demand as they adjust their productivity output to variations on the economic scenario and market seasonality. Printing & Writing papers demands are more affected by economic changes and seasonality than the demand for tissue paper, because tissue papers are part of human hygiene. As demand weakens and supply continues constant inventories can increase and result in a negative impact in prices.

 

In the pulp industry we generally consider medium term a period from 1 to 5 years ahead. The result between the supply and demand in the medium term will be a reflection basically of the paper mills and pulp mills project announcements. The short term scenario and on the expected relative growth rate between the supply and demand, impact the pulp price projected to that period. This medium price expectation is of great importance, since companies use this value to decide about new mill projects.

 

The long term for the pulp industry is defined as above 5 years. Although production cost structure must be monitored in the short and medium term, the major impact come from the formation of pulp prices over the long term. The cost structure of the pulp industry will define the pulp equilibrium price, establishing a floor as a reference against which to measure the returns expected from the higher cost producers in developing their activities. The graph below shows cash production cost against production capacity tonnage, which impacts the pulp price:

 

Delivered Cash Cost in U.S.$/t and BHKP cumulative capacity

 

(BHKP Supply Curve CIF Europe - 2015)

 

 

Source: Hawkins Wright ( December 2015)

 

Pulp prices are quoted by region and depending on its International Commercial Terms - Incoterms™. Regions have their own dynamics but the price that is used as a reference in the pulp industry continues to be the European prices as it continues to be the major consuming market pulp region. The graph below shows hardwood prices in the European market since 2006 and its historical volatility, resulted by the factors described above.

 

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Hardwood FOEX Europe

 

(U.S.$/t)

 

 

Source: FOEX

 

Fibria’s Profile

 

We are the world’s largest producer of market pulp, according to Hawkins Wright and PPPC, with an aggregate pulp production capacity of approximately 5.3 million metric tons of eucalyptus pulp per year. We believe that we are one of the lowest-cost producers of BEKP in the world, primarily due to our economies of scale, state-of-the-art and strategically located production facilities, the short harvest cycle of our trees and our use of high-end technology in our operations. During the first half of 2009, we acquired control of Aracruz and have fully consolidated the results of operations of Aracruz into our consolidated financial statements as from January 1, 2009. In September 2009, we adopted the trademark “Fibria” for our pulp and paper operations.

 

Our forest base is broad and diversified. As of December 31, 2015, it was comprised of approximately 969 thousand hectares (owned and leased, excluding the forestry partnership program areas, the forest base linked to the sale of forest assets in Southern Bahia State and Losango) located in seven Brazilian states. Approximately 568 thousand hectares of our total forestry land consisted of planted areas, approximately 338 thousand hectares of conservation areas with native vegetation, or preserved areas, and 63 thousand hectares related to other uses such as roads.

 

We produce bleached eucalyptus kraft pulp at the following three pulp mills, 100% owned by us:

 

·                  the Aracruz mill, located in the State of Espírito Santo with an annual production capacity of 2.34 million metric tons and which we acquired as part of the Aracruz Acquisition;

 

·                  the Três Lagoas pulp mill, located in the State of Mato Grosso do Sul with an annual production capacity of 1.3 million metric tons and whose operations started on March 30, 2009; and

 

·                  the Jacareí pulp mill, located in the State of São Paulo with an annual production capacity of 1.1 million metric tons.

 

In addition, we have a 50.0% interest in Veracel, which owns and operates a pulp mill in the municipality of Eunápolis, State of Bahia, with an annual production capacity of 1.12 million metric tons. Under IFRS, we include our proportionate share of the results of operations of Veracel in our consolidated results of operations.

 

In 2015 we produced 5,268 kilotons of pulp (including 50.0% of the pulp production of Veracel) and recorded consolidated net revenues of R$10,081 million. In 2014, we produced 5,274 kilotons of pulp (including 50.0% of the pulp production of Veracel) and recorded consolidated net revenues of R$7,084 million.

 

In 2015, our pulp production had the following end-use destination: Tissue 50%, Printing & Writing 35% and Specialties 15%. This analysis shows our sensitivity and exposure to the tissue segment and to a lesser extent the Printing & Writing segment.

 

Export sales accounted for 90% of our pulp sales volume in 2015 and 91% of our pulp sales volume in 2014. We export pulp products from terminals and a warehouse that we operate at the port of Santos, in the State of São Paulo. On December 9, 2015, we

 

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participated in a public auction promoted by the regulatory agency “Agência Nacional de Transportes Aquaviários - ANTAQ”, for the leasing of the public areas and infrastructures for handling and storage of paper, pulp and general cargo at port of Santos. The Company was awarded the contract based on its proposal for the Macuco Terminal (STS07 or Terminal 32), in the amount of R$115 million. The Company is awaiting the approval of the results of the public auction and the adjudication of the object by the Concession Authority, which is expected to be granted during the first quarter of 2016. Once the approval is received, we will have 45 days to fulfill the requirements stated in the auction notice and at which time, the Concession Authority will invite us to sign the lease contract. We also export our pulp products from Portocel, a specialized port terminal that is operated by our subsidiary, Portocel Terminal Especializado de Barra do Riacho S.A., or Portocel, which is located approximately 3 kilometers from our Aracruz mill, in the State of Espírito Santo. We also operate a port terminal located in the city of Caravelas in the State of Bahia, from which we transport wood to our Aracruz mill, and a port terminal in the city of Belmonte, in the south of the State of Bahia, from which we transport pulp produced by Veracel to Portocel.

 

The following map sets forth the location of the production facilities and the port terminals we operate:

 

 

Our Strengths

 

Global leadership in market pulp

 

We are the world’s largest producer of market pulp according to Hawkins Wright and PPPC, with a total pulp production capacity of approximately 5.3 million metric tons as of December 31, 2015 with regular annual sales about 91% to the international markets. According to market statistics, in 2015 we accounted for approximately 25% of the world demand of BEKP, approximately 17% of the world demand of bleached hardwood kraft market pulp and approximately 9% of the world demand of chemical market pulp. Our leadership is based on the sustainability of our forest operations (as a result of the shorter harvest cycle in Brazil as compared to other major producing countries), our state-of-the-art technology (including modern facilities and advanced cloning methods), our high productivity, our strong customer base and our long-term relationships with our customers.

 

Low production costs

 

Our efficiently structured operations in Brazil result in relatively low cash production costs. We believe that we are one of the lowest-cost producers of BEKP in the world. Our low production costs relative to many of our competitors are due to a number of factors, including:

 

·                  our significant economies of scale;

 

·                  our advanced forestry techniques in managing the planting, maintenance and harvesting of our forests;

 

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·                  our modern industrial plants;

 

·                  the comparatively short harvest cycle of our trees; and

 

·                  relatively low energy and chemical costs.

 

Climate and soil conditions in Brazil enable us to harvest our eucalyptus trees between 6 to 7 years after planting, while harvesting cycles of other forest species in the southern United States, Canada and Scandinavia can last from 25 to 70 years. Harvesting cycles of our main non-Brazilian competitors in the BEKP market (Spain, Portugal and Chile) are approximately 8 to 10 years.

 

In 2014 we enhanced our cost management culture with the implementation of the Zero Based Budgeting (ZBB) methodology, including operating expenses and capital expenditures as scope for the 2015 budgeting cycle. The ZBB annual budgeting is a very detailed, structured, and interactive process in order to facilitate meaningful financial debate among managers and executives. The ZBB process is based on developing deep visibility into cost drivers and using that visibility to set budget targets. We have hired the consulting firm Catalitica Experience to assist us on the ZBB implementation.

 

State-of-the-art production facilities

 

Our mills have adopted the latest designs, technologies and production processes as a result of significant investments we have made. The advanced technology and production processes used in our mills allow us to use a lower level of raw materials, mainly chemicals, which consequently reduces our production costs. In addition, our mills have advantages over older mills, particularly with respect to reduced emissions and solid waste disposal, providing for a more streamlined, efficient and environmental-friendly pulp production process. The Três Lagoas and Veracel mills, have one of the lowest production costs of market pulp per ton in the world according to market consultants statistics when compared to Hawinks Wright 2015 chart presented above on page xx. This is the result of state-of-the-art technology, including modern processes and equipment associated with efficiency in forests and industrial operations, as well as short distances between forests and mills.

 

State-of-the-art research and technology

 

Fibria started its eucalyptus plantations at the end of the 1960s using seeds from the Rio Claro Forest Nursery (SP). At that time, four species were considered appropriate: Eucalyptus grandis, Eucalyptus saligna, Eucalyptus urophylla, and Eucalyptus alba. During the 1970s specific provenances of E. grandis and E. urophylla proved to be the most suited to our environmental conditions and to the pulping process. Since then, many superior interspecific hybrid trees (E. grandis x E. urophylla) were generated and selected through classical breeding and used as clones for commercial plantations establishment. These eucalyptus improved clones presented significant gains in productivity, uniformity, and wood quality, giving Fibria an outstanding position on the world market. Fibria currently uses a different group of elite clones for each operational unit, which are replaced by new ones from time to time to ensure productivity evolution as well as sufficient genetic diversity at the landscape level. State-of-the-art classical breeding technologies are constantly updated and applied for developing successive advanced generations of Eucalyptus clones.

 

In addition, Fibria is constantly working on alternative silvicultural methods to boost plantations productivity. The combination of silviculture and genetic improvement are essential to ensure sustainable production and the health of the ecosystems in the long term, which represents an extra challenge due to climate and economic uncertainties. The development of adapted genotypes along with the improvement obtained via silvicultural practices is critical for the sustaining of the environmental services provided by the forests for the generations to come. Thanks to continuous progress, the land currently used to supply our pulp mills is half the area that would be required 40 years ago when forest productivity levels were much lower.

 

Product development has kept pace through the study of new processes intended to enable the design of new products and enhance our existing ones, including alternatives to improve customers’ processes and/or product performance, especially with regard to softness and strength. This has permitted us to continuously offer differentiated products notwithstanding that we operate in a commodity market. Our collaborations with other world-class companies have led to efforts to develop different products from our biomass and by-products that may represent new business opportunities in future.

 

Integrated operations

 

Our operations are vertically integrated. The process starts with the production of eucalyptus seedlings at our nurseries from where they are taken to our extensive forests. In the forests, seedlings are planted and after that harvested and transported to our production facilities where pulp is produced. After that, pulp is transported to port terminals that we own and operate for distribution to our clients.

 

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Our transportation and logistics activities are efficient and diversified. The strategic location of our forests and production facilities allow us to have lower transportation costs. The average distance from our forests to our mills is less than that of many of our domestic and international competitors, resulting in logistical efficiencies (for example, certain of our competitors in China meet their raw material needs with wood imported from Russia). Portocel, the port terminal we operate in the State of Espírito Santo, is located approximately 3 kilometers from our Aracruz mill. This allows us to efficiently export pulp produced at that mill and to receive pulp from Veracel. In addition, we export pulp from a terminal and warehouse that we operate at the port of Santos, in the State of São Paulo.

 

Customer base

 

We have long-term relationships with leading global paper manufacturers, particularly in the tissue segment. We have traditionally focused on paper producers who value pulp quality and reliable supply, some of which have been our customers for decades.

 

On May 4, 2015, Fibria (as intervening party and guarantor); Fibria International Trade GmbH and Klabin S.A. entered in a Eucalyptus Pulp Offtake Agreement for the supply of hardwood pulp that will be produced at the Klabin plant currently under construction in the city of Ortigueira in the state of Paraná (Puma Project), with the operational startup planned for 2016. The agreement establishes a firm commitment for acquisition by Fibria or its subsidiaries of a minimum of 900,000 tons per year of hardwood pulp, for exclusive sale by Fibria or its subsidiaries in countries outside South America. The additional volume produced by the new plant will be sold by Klabin directly as follows: hardwood pulp in Brazil and South America, and softwood pulp and fluff in the global market. The agreement term is six (6) years, four (4) of which at a minimum volume of 900,000 tons and two (2) years of a gradual reduction of volume (phase out). The volumes for the fifth and sixth years shall be equivalent to 75% and 50%, respectively, of the volume delivered in the fourth year of the agreement. The sales volume envisaged in the agreement may be reduced at any time, through prior notification, by up to 250,000 tons for a future possible integration in packaging paper (waiver). The agreement may also be renewed by mutual agreement. The selling price shall be equal to the average net price charged by Fibria, FOB (Free on Board) Paranaguá. On July 30, 2015, the agreement was approved without any reservations by the Brazilian antitrust authority (Conselho Administrativo de Defesa Econômica — CADE).

 

Conducting our operations in a sustainable way

 

We are committed to operating our businesses and resources in a sustainable manner in accordance with world-class sustainability standards. In 2015, Fibria was included in the 2015/2016 portfolio of the Dow Jones Emerging Markets sustainability Index (DJSI Emerging Markets). We were also awarded as Silver Class for the Dow Jones Sustainability Index — World (DJSI World), which means that our score on the sustainability assessment is very close to the worldwide leader. Additionally, Fibria was once again listed in the Corporate Sustainability Index (ISE) — a list of companies whose shares are listed at the BM&FBOVESPA, the Brazilian stock exchange, and that demonstrate a high level of commitment to best practices in the areas of sustainability and corporate governance.

 

We consider sustainability as an essential dimension of our corporate strategy and have implemented a corporate governance for sustainability to ensure that it is considered throughout our processes. We have a Sustainability Committee that plays a consultative role to the Board of Directors and is coordinated by our Chairman. This Committee meets three times a year to assess our sustainability strategy and its implementation, and includes independent experts. Linked to the Executive Officers, the Internal Sustainability Commission, comprised of managers from our various departments, seeks to operationalize the strategy defined by the Sustainability Committee and embed sustainability into our organizational culture. Finally, at each Unit, we have Local Relationship Commissions, that evaluate risks and opportunities in the relationship with local stakeholders.

 

At the end of 2015, we made further progress with the formalization of a Sustainability Policy, approved by the Board of Directors and available at the Company’s Investor Relations website, making further contribution to the governance of our aspirations which are already an integral part of our business proposition.

 

In 2013, we updated our Materiality Matrix, which identifies the most relevant issues for the Company and for society, taking into account its strategy and the vision of its stakeholders and this Matrix is still considered relevant. The Materiality Matrix was designed based on interviews with 28 people, of whom 10 occupy key posts in Fibria and 18 represent individuals from organizations, sectors or communities that have close ties with the Company. The latter group was composed of customers, suppliers, investors, government officials, members of NGOs, residents of neighboring communities, independent wood suppliers, certifying professionals and researchers. The work resulted in the definition of 24 themes, divided into four dimensions: economic, governance and management, environment and social. Of this total, the ten most material themes were selected by the stakeholders:

 

·      Certifications, voluntary commitments to the sector, and regulations

·      Local development and community impact

·      Business expansion

 

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·      Value generation through innovation

·      Financial Management

·      Social and environmental management of the supply chain

·      Forestry Management - biodiversity, land use

·      Government relations

·      Transparency and stakeholder engagement

·      Use of water

 

Long-term sustainability targets

 

In 2011, upon the recommendation of the Sustainability Committee, Fibria reinforced its commitment to this issue by introducing a set of Long-Term Targets that signal our path to 2025. The definition of these targets was based on a systems thinking methodology, carried out through a series of workshops over three months involving 40 executives from our 12 different departments with the coordination of experts from the Universidade do Vale dos Sinos (UNISINOS).

 

The discussions, took into consideration priority issues outlined in Fibria’s Materiality Matrix and social and environmental risks identified in the Enterprise Risk Management (ERM) tool, and identified a set of 90 variables that directly or indirectly affect the management of forests and the production and sale of pulp. These variables have been grouped and form six key themes that will guide Fibria’s activities towards 2025: market and return to shareholder; ecoefficiency; forest management model; relationship and communication with stakeholders; social acceptance and legitimacy; management of personnel and organizational culture.

 

The intersection of these issues led us to establish Long-Term Targets for 2025, which are annually monitored by the Executive Board. These targets are not exhaustive or static and can evolve or include new commitments, as the market, we or society demand it. Additionally, the Long-Term Targets do not replace the conventional tools of management, including Short-Term Targets, which will be aligned with the Long Term.

 

The 2025 Long-Term Targets are the following:

 

Optimize the use of natural resources

 

Our target is to reduce by one-third the amount of land required for the production of pulp, by increasing productivity from 10 tons of pulp per hectare per year, in 2011, to 15 tons of pulp per hectare per year with new clones planted in 2025, through:

 

·      traditional genetic improvement

·      improvement in forest management

·      increase in industrial productivity

 

Benefits:

 

·      lower concentration of land

·      greater availability of land for other purposes

·      increased competitiveness and greater return to shareholders

 

2015 results: 11.7 tons of pulp per hectare per year (potential of new clones effectively planted in 2015).

 

The graph below shows the expected productivity gains until 2025:

 

 

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Contribute to the mitigation of the greenhouse effect

 

Our target is to double the carbon absorption from the atmosphere, by increasing net capture from 5.5 million tCO2eq, in 2011, to 11.1 million tCO2eq, in 2025, through:

 

·      increase in forest areas (eucalyptus plantations and native reserves)

·      restoration with native species of degraded pasture areas

 

Benefits:

 

·      reducing atmospheric concentrations of greenhouse effect gases

 

Note: net annual capture is defined by the difference between the total capture by planted and native forests and the direct and indirect carbon emissions from forestry, industrial and logistics operations throughout the cycle of production of pulp, from the nursery to the customer.

 

2015 results: net capture of approximately 7 million tC002eq.

 

Protect biodiversity

 

Our target is to promote environmental restoration in 40 thousand hectares of own land, between 2012 and 2025 through:

 

·      plantation of native species

·      stimulate the natural regeneration of native species

 

Benefits:

 

·      enrichment of fauna and flora, including endangered species, in the Atlantic Rainforest and the Cerrado biomes

·      expansion of environmental services - carbon capture and water availability and quality, among others - areas whose original features have been altered due to human activity

 

Note: target does not consider Fibria’s support in restoration projects in third party land, developed in partnerships with other organizations.

 

2015 results: 13.9 thousand hectares under restoration from 2012 to 2015.

 

Increase ecoefficiency

 

Our target is to reduce by 91% the amount of industrial solid waste disposed at landfills through:

 

Decrease from 60 kg per tonne of pulp in 2011 to 5 kg per tonne of pulp in 2025:

 

·      reduction in the generation of waste by the mills

·      reuse of waste in the soil

 

Benefits:

 

·      reduction of the impacts and risks caused by industrial landfills

·      increase in ecoefficiency of our production processes

·      reduction in costs for the disposal of waste and substitution of supplies

 

2015 results: 46% reduction in industrial solid waste to landfills in relation to 2011.

 

Strengthen the interaction between business and society

 

Our target is to reach 80% of approval rate in neighboring communities through:

 

Elevation of the approval rate in neighboring communities from 50%, in 2011, to 80%, in 2025, through:

 

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·      improvement in the quality of relationship with the communities

·      support for local development projects

·      inclusion of the community in our value chain

 

Benefits:

 

·      harmonious coexistence with the neighboring communities

·      enabling environment for local development

 

Note: approval rate measured through research.

 

2015 results: 72.6% of approval on average (research is conducted bi-yearly, and the next result will be released in 2017)

 

Strengthen the interaction between business and society

 

Our target is to help the community make self-sustaining 70% of income generation projects supported by Fibria per:

 

Increase of self-sustaining projects from 5% in 2011 to 70% in 2025, through:

 

·      expansion of the Rural Territory Development Program (PDRT)

·      promotion of technical and management training, through partnerships and support of consultants

·      attraction of other partners

 

Benefits:

 

·      social inclusion of communities, reducing their socioeconomic vulnerability

·      protagonism of the community in its development

·      increased managerial and technical skills of community members

·      autonomy of the communities in relation to the private and public sectors

·      stimulation of the construction of social capital

·      reduction of conflicts and maintenance of good relations with neighboring communities

 

2015 results: 9% of the projects are considered self-sustainable.

 

Corporate Governance

 

We have a robust Governance, Risk and Compliance (GRC) department, which is directly linked to the CEO and reports to the Statutory Audit Committee, that embraces the following processes: compliance of risk policies; derivatives, debt and investments pricing; market and credit risk analyses; crisis management; business continuity planning and Enterprise Risk Management (ERM). The goal of the ERM is to ensure through a well-defined methodology that all significant risks are mapped and analyzed, with the appropriate treatment and control determined, in accordance with the Risk Management policies approved by the Board of Directors. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions” and “Item 16B — Code of Ethics”.

 

In 2015 we developed the Dividend Policy, the Policy of Authorities and our Sustainability Policy, all of which were approved by the Board of Directors and are available at our website, in order to maintain our business within the highest levels of integrity and transparency.

 

The Dividend Policy marks an advance in our corporate governance, and one of its main purposes is to indicate to the market that the Management will base its dividend payment proposal on our cash flow generation, with respect to its indebtedness and liquidity policies, maintaining its commitment to investment-grade status and considering its strategic plan. In accordance with such policy, dividends in addition to the mandatory minimum will be announced in the annual financial statements. Throughout the year, if our financial situation exceeds the envisaged scenario, management may propose an extraordinary dividend.

 

In 2015 we also enhanced the Competition Law Compliance Policy (Antitrust) and the Anticorruption Policy trainings. We reviewed our Code of Conduct in 2014, in order to continuously improve governance and ethical standards, we, among other governance improvement initiatives. The third edition of the document includes new specific topics, such as “Corruption” and brings important updates on the already existing ones. The Code of Conduct is the basis of our identity. It is where we express our

 

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fundamental, non-negotiable values that indicate the directions we should take in order to maintain an honest and positive work attitude. In view of the current business challenges and in line with its Values and Beliefs, we reinforced our Compliance Program through several training programs in 2015. For Fibria, being in compliance means to comply with and enforce internal and external, laws, rules, regulations and commitments, whether they have been assumed voluntarily or imposed on the organization. This initiative represents the maturation of our governance model, an evolution resulting from the existing culture of compliance. The Compliance Program assumes the adoption of preventive compliance measures, creating positive evidence of protection for the organization, contributing to mitigating possible sanctions and preserving our reputation as an intangible asset.

 

In line with the Compliance Program, we implemented in 2015 a Conflict of Interests Evaluation process to identify related parties risks that may arise from shareholders, employees and suppliers. Also during the year, the GRC department developed a monitoring cockpit, which is a dashboard with the main Company’s obligations and business requirements. According to the seven program pillars, it includes: Laws and Regulations; Licenses; Permits and Certifications; Contracts and Agreements; External Reporting; Support to Competition / Antitrust; Prevention of Losses and Fraud; and Anti-Corruption. The new booklet was distributed to employees and outsourced workers, who are being trained through compliance workshops about the importance of the items reviewed, as well as to strengthen their knowledge about the internal and external rules of organizational compliance. The focus of the training course was based on the Corruption Prevention and Antitrust pillars.

 

The entire monitoring process and environmental review is properly documented and reported to senior management on a quarterly basis, with the annual sign-off of the control chart rated by all governing bodies through a specific tool, GRC Process Control, which increases adherence to best governance practices. In compliance with section 404 of the Sarbanes-Oxley Act and CVM Instruction 480/92, the effectiveness of internal controls of the Company’s financial information is based on criteria established in COSO Internal Controls - Integrated Framework (2013).

 

Our Strategies

 

Increase our market share in the international pulp market

 

We intend to take advantage of our competitive strengths to further increase our market share in the international pulp market. We have focused our marketing efforts on the sale of BEKP to tissue manufacturers, a market segment that, in addition to being more stable than other market segments, has experienced global consumption growth at a cumulative aggregate annual growth rate of approximately 3.2% for the period from 2008 to 2015.

 

According to a recent survey by RISI, global tissue consumption growth is expected to accelerate at a 3.7% annual rate from 2015 to 2020, with China accounting for roughly 40% of the total tissue consumption increase during this period.

 

We believe that we can further increase our market share by leveraging our long-term customer relationships and focusing on customer service and product customization. We continue to strive to meet our customers’ needs by supplying customized pulp products with specifications that facilitate their manufacture of specific paper products. We strive for a high degree of customer satisfaction and are working to further improve the management of our inventory, which we believe will allow us to reduce the timing of our deliveries and better service our customers.

 

On May 4, 2015, we entered into an offtake agreement with Klabin for the supply of eucalyptus hardwood pulp that will be produced at the Klabin plant currently under construction in the city of Ortigueira in the state of Paraná (Puma Project), which comprises a pulp production capacity of 1.5 million tons of hardwood and 400 thousand tonnes of softwood and fluff, with the operational startup planned for the end of the first quarter of 2016. The agreement establishes a firm commitment for our acquisition of a minimum of 900,000 tons per year of hardwood pulp, for exclusive sale in countries outside South America. The additional volume produced by the new plant will be sold by Klabin directly as follows: hardwood pulp in Brazil and South America, and softwood pulp and fluff in the global market. The agreement term is six (6) years, with the last two years being a gradual phase out period, and may also be renewed by mutual interest. The pulp volumes derived from the deal with Klabin will be included on Fibria’s global commercial strategy. Besides our business rational that Klabin’s volumes will be placed into the market in a smoother way regarding pulp prices impact than if by a newcomer in the hardwood market pulp industry, due to our commercial and logistics expertise, the deal will allow us to obtain logistics and commercial optimization and synergies, support our customers’ growth, enhance our ability to meet customers’ needs and also represents potential for the development of new customers.

 

Enhance our financial strength and corporate governance

 

Our total consolidated indebtedness as of December 31, 2015 and 2014 amounted to R$12,744 million and R$8,327 million and 91.6% and 88.4% of which represented long-term indebtedness, respectively. We have been implementing a consistent and disciplined approach focused on reducing debt and its cost aiming to improve our capital structure, recover and maintain our investment grade rating and secure financing for our growth strategy under favorable market conditions.

 

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After applying concentrated efforts, in 2015 Fibria has reached a debt level that is adequate for its size at a cost that is in line with what is practiced by other low-risk Brazilian companies with access to international capital markets. As a credit quality recognition, Fitch has granted the Investment Grade rating for Fibria in late 2014 and during 2015 the Company was upgraded to Investment Grade by S&P and Moody’s. For a more detailed description of our Liability Management Plan, see “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Liability Management Plan.”

 

In addition, in order to improve our access to capital sources, in 2010 we upgraded the listing of our shares to the Novo Mercado (New Market) listing segment of the BM&FBOVESPA. The Novo Mercado listing segment imposes the most stringent corporate governance rules of any listing segment of the BM&FBOVESPA. In achieving this objective, we have implemented all of the administrative adjustments required to comply with the listing segment’s rules, including the appointment of independent members to our Board of Directors and making required changes to our bylaws.

 

In 2015, Fibria launched a Dividend Policy, approved by the Board of Directors, which is available on our website. One of its main purposes is to indicate to the market that the Management will base its dividend payment proposal on our cash flow generation, with respect to its indebtedness and liquidity policies, maintaining its commitment to investment-grade status and considering its strategic plan. In accordance with such policy, dividends in addition to the mandatory minimum will be announced in the annual financial statements. Throughout the year, if our financial situation exceeds the envisaged scenario, management may propose an extraordinary dividend.

 

Increase operating efficiencies

 

We intend to maintain the focus on our low-cost operations through greater operating efficiencies and economies of scale. To this end, we intend to continue to:

 

·                  focus on reducing our wood costs through increased eucalyptus yields by continuing to invest in the genetic improvement of our trees;

 

·                  take advantage of climate and soil conditions in Brazil and the short harvest cycle of eucalyptus trees; and

 

·                  improve the efficiency of our operations through further investment in harvesting equipment, production facilities and advanced information technology.

 

During 2015 we started to implement a new trailer to transport wood logs and woodchips, internally called PIFF, which is lighter than the regular trailer available in the market and allows a 10% yield increase on wood volume transportation. The PIFF trailer was developed by us with the Brazilian university UFSCAR and currently we are under process for intellectual property registration. With such new trailers we are reducing our wood costs, which are among the most relevant of our pulp production costs and therefore a priority for us. Considering all the wood logs transportation by truck we have, the PIFF is currently operational on 100% of our Três Lagoas, 50% of our Jacareí unit and 18% of our Aracruz unit.

 

 

In 2015 we implemented a harvest mechanization project in our hilly forested areas of Vale do Paraiba located in Sao Paulo state, which provides wood for our Jacareí unit. Previously, the mechanized harvest was locked up at 24 degrees steep. With the project, we increased our harvest productivity through mechanized operation in hilly areas until 35 degrees. Therefore, harvest

 

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with manual staff decreased significantly to areas extremely steep only. Besides the operational gain, mechanized operations also represents an improvement in safety.

 

 

In 2015 we launched a maritime shipping new project at Portocel to increase the wood cargo handling for our Aracruz unit, which is expected to startup in early 2017. With the project, we will be able to improve our competitiveness by the reduction on wood costs.

 

 

With the aim to maximize forestry operations productivity in the long-term, during 2015 we classified our forest base by categories, from “Diamond” to “Lead”, using an economic geo-model. We mapped all leased and owned forestry land using key indicators for silviculture, harvest and transportation activities on a current and future perspective approach on risks and opportunities, such as soil conditions, declivity, altitude, conservation areas, proximity to urban zones, roads availability, and transportation efficiency, among others. By gathering all such data and combining it, we were able to classify our forest base and settle targets towards a future category distribution as you can see on the chart below.

 

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With the structural change on our forest base from current to the target composition of categories, that we expect to achieve in 10 years, we will be able to reduce our wood operating costs and capital expenditures and therefore increase our competitiveness. The dynamics of forest base change related to such goal means that we will seek for opportunities to purchase or lease more attractive areas, divest from unattractive tracts, as well as implement technologies that will lead us to the structural wood cost.

 

In December 2015, we have executed a real estate purchase and sale commitment with VID, for: (i) the selling by us of the rural real estate located in the cities of Votorantim and Sorocaba, in the State of São Paulo, totaling 5,042 hectares, for the amount of R$172 million and (ii) the purchase from VID of the rural real estate located in Capão Bonito and Itapeva, also in the State of São Paulo, totaling 33,994 hectares, for the amount of R$452 million. Such transaction was intrinsically in accordance with our target composition of land categories.

 

Continue to develop state-of-the-art technology in the forestry area

 

Technological research and development has made it possible to improve our productivity while reducing the impact of our operations on the environment. In the forestry area, an intense research program and the adoption of modern forestry practices have significantly increased our competitiveness. The genetic improvement of eucalyptus trees through classical breeding has allowed us to use superior clones in our plantations, resulting in higher productivity. We currently perform 100% of our planting operations with improved clones. Higher process efficiency and better seedling’s quality were achieved due to a pioneering procedure for eucalyptus vegetative propagation (cloning). In the decade ending 2010, the average annual amount of pulp produced by our forests was about 11 tons per hectare per year, compared to 6.4 tons during the 1970s. One of Fibria’s long-term targets is to reduce by one-third the amount of land required for the pulp production, through increasing productivity by classical breeding. The goal is to reach 15 tons of pulp per hectare per year in plantations established with new clones deployed by 2025.

 

By continuing to focus on cutting-edge technological research and development, we aim to strengthen our position as one of the leading developers of technology in the forestry area, maintain our record as a low cost producer while meeting our standards of high quality production, increase the range of products that we offer to our customers and maintain our reputation as an environmentally friendly and socially responsible manufacturer. Altogether, this positioning has led to a deep analysis on increasing the value from our forestry biomass where biofuels is one of the most prominent. In 2012, with an initial investment of US$20 million, Fibria acquired 6.66% of Ensyn’s share capital. Furthermore, Fibria and Ensyn agreed to set up an equally-owned joint venture (F&E Technologies LLC), which was duly incorporated in Delaware for future investments in the production of liquid fuels and chemicals from biomass in Brazil. After 2012, the Company has exercised the options to increase its share of Ensyn’s capital and currently holds 12.62% of its share capital. The goal of the Ensyn-Fibria joint venture is to combine the strengths of each party in creating a producer of renewable liquid fuels from cellulosic feedstocks. In 2015, the basic engineering project for a Rapid Thermal Pyrolysis unit was put in place and finalized, allowing the JV to decide for the investment whenever pertinent. Also, in 2015, the Company recorded a major

 

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advance in the lignin research front by acquiring the assets of the Canadian company Lignol Innovations, now Fibria Innovations. As a result, Fibria became the owner of substantial intellectual property regarding the subject and established an important link with one of Canada’s leading universities, the University of British Columbia, expanding its options for the pursuit of new scientific knowledge. We are now working on making the best possible use of the quality of our patent portfolio and developing higher added value applications for lignin.

 

Sustainability

 

For Fibria sustainability involves incorporating social and environmental aspects, long term value generation strategies and stakeholder views resulting from dialogue into the business strategy and management. We are part of a value chain that gives importance to numerous aspects beyond traditional operations, such as developing a skilled and engaged workforce, managing and promoting projects that promote the growth and welfare of neighboring communities, preserving and recovering native forests, sequestering carbon, sustainable pest control, reducing waste, managing with transparency, and strengthening communication channels with civil society, the government and media. Sustainability embodies the recognition of public opinion, customer loyalty, employee pride and trust of partners and neighbors. Furthermore, it decreases risks, creates opportunities and makes us stronger to meet the needs of an increasingly demanding market that is mindful of the planet’s delicate balance.

 

At the end of 2015, we made further progress with the formalization of our Sustainability Policy, approved by the Board of Directors and available on the Company’s Investor Relations website, making a further contribution to the governance of our aspirations which are already an integral part of our business proposition.

 

Community Relations

 

We operate in seven Brazilian states and in over 230 municipalities, where Fibria owns mills, eucalyptus plantations and conservation areas. Neighboring our areas, there are independent wood suppliers with whom we hold long-term contracts for the supply of raw material for pulp. We have forged a wide range of relationships with diverse communities (traditional or otherwise), which are primarily impacted by its forestry activities. Therefore, quality relations with communities in the vicinity of our operations are crucial to our performance. We have continuously investing in community engagement processes and socio-environmental projects designed to foster social inclusion and improve the quality of life of neighboring populations. These are programs that help to strengthen its social capital, generate jobs and income, improve the locals’ quality of life, and above all establish a constructive dialogue in search of common solutions. Fibria seeks to ensure social legitimacy for its business by encouraging the integration of these communities into its forestry business, while seeking to establish planning and monitoring mechanisms aimed at identifying, preventing and mitigating the impacts of its activities.

 

Fibria’s Strategy for Community Relations and Social Investment includes five levels: survey and diagnosis of impacted communities, Relationship Prioritization Matrix, dialogue enhancement, relationship methods and tools, and monitoring. In 2015, over 5,500 families were benefited in multiple ways from their involvement in Fibria’s social-environmental programs. Since 2009, Fibria has invested over R$127 million in its programs of social development. In 2015, over 500 new families joined Fibria’s social projects, totaling 5,500 families with evidenced income being generated from these projects. In 2015, 3,035 families were involved in the Rural Territory Development Programme (PDRT) in the states of São Paulo, Mato Grosso do Sul, Bahia and Espírito Santo. The increase in wages since the beginning of the project is equivalent to approximately 2 to 4 minimum monthly wages per family. These funds come from Fibria and third parties such as the BNDES, the Votorantim Institute and members of the Responsible Network, comprised primarily of the Company’s suppliers and customers.

 

Relationship with specific communities

 

Fibria’s relationship with some communities particularly in the north of Espírito Santo and the south of Bahia, require special attention because they are historically more susceptible to conflicts, or are socially vulnerable. Fibria develops initiatives in which different entities - such as other companies, governments, third sector organizations and the communities themselves - are engaged, and seek to build, together, solutions of common interest. We have served the communities either directly or through engagement with other entities who can also contribute to finding solutions, such as the government, in its various echelons, NGOs and other companies. Some communities have received special attention from us, which has been developing specific social inclusion projects, often with input from government agencies and independent socioenvironmental agencies. This is the case of communities known as quilombolas (descended from former runaway slaves) and Indigenous communities of the Tupiniquim and Guarani ethnicities. Members of the Landless Workers’ Movement (MST) and families of local fishermen are yet other cases in point.

 

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Engagement with Landless Movements

 

An area of approximately 11,000 hectares owned by Fibria in Prado (BA), comprised of five farms, occupied by members of the Landless Rural Workers Movement (MST) since 2000, has ceased being a point of social tension and has been transformed into a pioneering sustainable rural production experience. In partnership with the government of Bahia and the Escola Superior de Agricultura Luiz de Queiroz (Esalq/USP), Fibria has prepared a project for the production of a mix of agroforestry crops, maximizing the soil use in plots distributed to hundreds of registered families. Named the Alvorecer (Dawning) Project, the sustainable settlement is assisted by a specialized technical team whose members reside at the site. In 2013, the project gained new momentum with the startup of a mid-level agricultural school with capacity to teach 300 students per shift.

 

The Alvorecer Project initiative began in 2011 when the Company agreed to negotiate with the National Institute for Settlement and Land Reform in Bahia (INCRA/Bahia) and facilitate the expropriation of land. Since then, the project has been consolidating itself as the most advanced model of a cooperative agricultural production system in the country. During this period, 100 technicians were trained through the program “Yes You Can”. The subprojects “Plantas Medicinais e Medicamentos da Biodiversidade em Sistemas Produtivos Agroflorestais” and “Monitoramento e Análise das Condições de Vida e Saúde e Fortalecimento das Ações de Saúde”, achieved excellent results in 2015 contributing to a significant improvement in the participant´s health.

 

Relations with Governments

 

Fibria contributes to the development of public policies by means of various organizations of which it is a member, representing the forestry and the pulp and paper sectors.

 

Annual Report

 

Fibria adheres to the Global Reporting Initiative G4 guidelines for disclosure Comprehensive level, as well as the framework of the International Integrated Reporting Council (IIRC) and undergoes external verification. Through this process we seek to annually account for how we are addressing challenges and achieving results, with regard to sustainability strategy and a vision for the future, as well as our role in society. The Annual Report includes details of commitments and performance on the governance, economic, financial, social and environmental aspects of the business following the principles of Materiality, Stakeholder Inclusiveness, Sustainability Context, Completeness, Balance, Comparability, Accuracy, Timeliness, Clarity and Reliability. The Annual Report is widely distributed to all of Fibria’s stakeholder groups, from community leaders to ESG and long-term investors and analysts.

 

Our Products

 

Pulp

 

In 2015, we produced 5,185kilotons of pulp representing 30% of total Brazilian hardwood pulp production. In 2014, we produced 5,274 kilotons of pulp representing 32% of total Brazilian hardwood pulp production.

 

The following table sets forth the breakdown of our BEKP net revenues by region for the periods indicated.

 

 

 

2015

 

2014

 

2013

 

 

 

(million
Reais)

 

 

 

(million Reais)

 

 

 

(million Reais)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

4,312

 

43

%

2,935

 

42

%

2,680

 

39

%

North America

 

2,468

 

25

%

1,707

 

24

%

1,931

 

28

%

Asia

 

2,390

 

24

%

1,769

 

25

%

1,708

 

25

%

Brazil/Others

 

818

 

8

%

592

 

9

%

526

 

8

%

 

 

9,988

 

100

%

7,003

 

100

%

6,845

 

100

%

 

Pulp Production Process

 

The pulp production process can be summarized in the outline below, and is comprised of three main activities: Forestry, Industrial and Logistics:

 

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Table of Contents

 

Forestry

 

We only produce bleached eucalyptus kraft pulp from planted eucalyptus trees. Bleached eucalyptus kraft pulp is a high-quality variety of hardwood pulp. Eucalyptus is a hardwood tree, and its pulp has short fibers and is generally better suited to manufacturing tissue, coated and uncoated printing & writing paper and coated packaging boards. Short fibers are optimal for manufacturing wood-free paper with good printability, smoothness, brightness and uniformity.

 

Our pulp production is solely from wood extracted from eucalyptus trees grown in sustainable forest plantations. Eucalyptus trees are among the fastest-growing trees in the world given that climate and soil conditions in Brazil allow for eucalyptus tree harvest rotations of approximately 6 years, as compared to harvest rotations of approximately 10 to 12 years in Chile, and up to 25 years in the southern United States.

 

Our forestry operations are composed of four major activities: nurseries, silviculture, harvesting and transportation of wood from the forestry to the mills.

 

The process begins in the nurseries, where the seedlings are cultivated. We operate four nurseries located in the states of São Paulo, Mato Grosso do Sul, Espírito Santo and Bahia, with an aggregate annual production capacity of approximately 89 million seedlings. Our seedlings are 100% produced with cloning technology, one of the most advanced genetic processes for the formation eucalyptus trees in the world. Seedlings take between 70 to 120 days to be completely developed and set for planting in the forests when the silviculture process starts.

 

Eucalyptus planting is made respecting the most advanced technology related to soil cultivation combining the best practices of natural resources conservation and high productivity planting. As a result, it is possible to implement our forest base with minimum soil interference maintaining micro-organisms and protection against erosion. Silviculture is responsible for the planting and maintenance of the forests until the harvesting process starts.

 

After approximately 6 to 7 years, the eucalyptus trees are harvested. We use advanced and automated harvesting equipment in our forests. After harvested, the wood logs are transported either by truck, rail or barge (or a combination of these) from the forests to our production facilities. During harvesting all barks, tree tops and other biomass sources remain on the ground to preserve soil fertility. The logs are then transported to our production facilities where they are unloaded and then taken by conveyor belt to be debarked and chipped as will be described below.

 

Our forestry base is broad and diversified, comprised of total forestry area of approximately 969 thousand hectares as of December 31, 2015 located in 7 Brazilian states, consisting of approximately 568 thousand hectares of planted areas, approximately 338 thousand hectares of preserved areas (excluding the forest base linked to the sale of forest assets in Southern Bahia State and Losango), and 63 thousand hectares related to other uses such as roads.

 

The following table describes the location and the area of our forest base as of December 31, 2015:

 

State

 

Plantation

 

Conservation

 

Other

 

Total

 

 

 

(in hectares)

 

 

 

 

 

 

 

 

 

 

 

São Paulo

 

78,041

 

56,081

 

9,647

 

143,769

 

Minas Gerais

 

13,441

 

11,454

 

1,199

 

26,094

 

Rio de Janeiro

 

1,636

 

1,520

 

221

 

3,377

 

Mato Grosso do Sul

 

229,755

 

97,807

 

18,217

 

345,779