BRUSSELS, July 1, 2014 (PPI Magazine) - Fibria's CEO, Marcelo Castelli, has been named the 2014 Latin American CEO of the Year by RISI. Analysts nominated Castelli because of the company's consistent financial performance, with one saying: "Marcelo Castelli has presided over the company during a tremendous 2013. Fibria was successfully able to de-lever its balance sheet, reduce its cost of funding and improve its credit ratings. In addition, there was good shareholder value creation from the Parkia deal, while at the same time keeping very tight cost controls".
Under Castelli's leadership, Fibria, a giant among Brazil's pulp producers, has continued to consistently perform and has significantly improved its financial position over the recent past. Castelli has been CEO of Fibria since July 2011 and has over 25 years' experience in the pulp and paper sector and has held various positions of leadership in a number of major companies, including Aracruz and VCP. Before becoming CEO of Fibria, Castelli headed what was the new company's Integration Project and was responsible for developing conceptual and administrative guidelines.
The award will be presented to Castelli at the 9th Annual RISI Latin American Pulp and Paper Outlook Conference on August 12, 2014 in São Paulo, Brazil. The conference, which will be held August 11-13 this year, will feature presentations from industry leaders and experts, along with RISI's economists and engineers, who will give their outlooks for key segments of the Latin American and global forest products industry.
PPI: Congratulations on being named RISI CEO of the Year. Fibria had an excellent 2013. Is there any one reason for the success (if so, what) or is it a culmination of management efforts over the past few years?
Castelli: First, I would like to thank the nomination. I am very proud of Fibria and of its rapid success story and achievements in these five years. The reason for Fibria's success is its clear strategy, financial discipline, innovation, and cost efficiency, which we have implemented over the years. With this strategy, we have reduced debt, generated robust cash flows in operations, opened new strategic horizons from forestry (Fibria's bio-strategy) and "retaken leadership in the game." Today, Fibria has solid options at hand and this translates into value for shareholders. An example of this was the innovative operation, materialized at the end of the year, when we sold about 206,000 hectares of land to Parkia, thus generating revenues of R$1,65 billion ($729 million). Part of this resource helped us repurchase R$897 million ($396.6 million) in bonds, whose rates were considered unattractive; this will afford us annual savings of R$67 million ($29.6 million) in interest. This is good for our financial strategy and is in line with the new "asset light" business model, which aims to reduce the amount of capital employed in the business.
You have said earlier this year that you expect a "stressed" pulp market later in 2014 because of additional capacity. Has anything happened to change your mind? If so, what?
Industry fragmentation results in decisions that are correct individual investments, but wrong for the global scenario.
In other words, many projects that are coming out concurrently create imbalance in supply and demand. This is the scenario in 2014. However, a large amount of pulp is needed along the entire chain to supply the market consistently, especially on water. And so far the new capabilities that have been announced have not actually come to market on account of project delays and/or inventory being built throughout the chain. Therefore, there has been no structural change in the scenario as of yet, only a reduction in the stress level caused by the delays.
A factor to be considered is each player‘s pricing strategy at this moment of oversupply, i.e., how far prices may drop in contrast to the surge in the entire industry‘s cost structure worldwide. We must keep in mind that the new forestry-based projects arrive in need of resources in order for such forests to be formed. In the past, forests were already ready when the projects were created, before the industry, and this cost had already been equated.
Therefore, we should pay attention not only to the industry‘s cash cost curve, but to all lines that require cash, including debt servicing, forests, etc.
Also noticeable are reductions in capacity because of a lack of sustainable wood due to pressure from international NGOs, as well as because of the revision of a number of industry subsidies in this sector.
On the demand side, the entry into operation of the new tissue paper machines in Asia will help create an additional short-term demand, as these machines run on virgin fiber, and not on recycled paper.
I see a limited effect on sustainable price drops due to the aforementioned issues.
Going forward, in this stress scenario and with the countries‘ inability to provide subsidies, we will see a reorganization of the pulp and paper industry and of several other sectors.
How close is Fibria to making a decision about a second pulp line at Três Lagoas?
Fibria‘s board will submit the project to expand production capacity at its plant in Três Lagoas (MS), inaugurated in 2009, to the board of directors.
We have an excellent project at hand, one that fits into the vision of growing with discipline, seizing a window of opportunities for the entry of new pulp capacity in the fourth quarter of 2016.
Project activities are on schedule and involve, in addition to the Fibria team, upwards of 36 equipment and engineering vendors who, since January 2014, have worked hard to assist the board in making its decision.
Thus, the Três Lagoas expansion project is expected to be analyzed and a decision made between July and August this year; this will allow our Três Lagoas site to produce more than three million tonnes of pulp per year.
The forest base for this project has been equated in order for it to be brought on stream, reinforcing our discipline to not put the plant ahead of the forest. There are things we have innovated on, and others that we have not set aside for being vital to the overall outcome of the project.
You have spoken about Fibria being able to customize pulp to a client's special demands. What are customers asking for? How can you move Fibria's pulp away from being viewed as a commodity?
Technological innovation is one of the axes of business, and the company has been working on everything from forest productivity to product application, whether to keep current business sustainable or to develop new business.
We have structured the company to adopt a pluralistic platform, with various pulp units and production lines capable of producing specificities for strategic customers. This customization includes services and products designed to meet the characteristics of certain applications, resulting in a competitive advantage on the market for Fibria.
In addition, the company, which now produces short eucalyptus fiber, is working on creating a new type of fiber called Eucastrong, which maintains the best features of eucalyptus allied with greater resistance.
This product is still undergoing industrial trials. However, we have a research pipeline that seeks to alter the eucalyptus fiber morphology, perhaps creating a future medium fiber, something between short and long, making it more flexible for use in various products.
Can you explain the reasoning behind the Parkia deal? According to the report, Fibria will still receive 60% of the wood produced. Will Parkia supply Fibria exclusively with wood from the other 40% or is it free to sell it/use it as it sees fit?
The transaction with Parkia Participações represented the sale of about 206,000 hectares of land located in the States of São Paulo, Mato Grosso do Sul, Bahia and Espírito Santo, for a total value of R$1.65 billion. As part of the transaction, Fibria signed a lease that guarantees the company control over the same areas for 21 years. Fibria is the priority customer for all of the wood supply coming from Parkia‘s areas.
This transaction makes the company lighter in owned assets, underpins the idea of reducing the capital base employed, and is aligned with the concept of managing forests, not land. We are a forestry-based company, not a land company. Increased forest productivity helps us produce increasingly more with less. In other words, more pulp with less effective planting area.
Fibria is joining the bioeconomy with its Polynol project as well as with a biofuel project with Ensyn. What are the reasons for these moves? What is Fibria looking to achieve? At present is there any objective for commercialization in a set time frame or are these more exploratory projects to see what possibly may be possible?
Fibria‘s long-term strategy as a renewable forestry-based company seeks to maximize value creation through economic, environmental, and social balance in all of our operations. What we want with these projects is to create a new business platform that is complementary to pulp. Fibria has a defined strategy that involves different technologies at different stages of maturity, all mapped with different case-dependent approaches. In some, we will be the protagonists of development, in others co-authors for development; in a few cases, we may be followers, while in others first movers. Thus, what is expected is a Fibria that is more connected to the renewable, low-carbon forestry base, a generator of utilities for the new society of well-being that will have to meet the needs of the planet sustainably. More renewable, complementary, efficient and high-tech products, with a less intensive demand for capital than pulp.
In fact, we see a platform to generate value for Fibria, which will continue to maintain its leadership in pulp adding other revenue to the business.
Go-to-market depends on each technology, and in Ensyn's case, we expect this to happen within two years.
The woes of Brazil's infrastructure (road, rail, ports) are well documented. Dilma Rousseff announced a large stimulus program in 2012. Has this come to pass? Have these problems affected Fibria and how do you cope with the problems? Fibria has announced it will bid on pulp handling terminals at the Port of Santos in 2014. Is this related? If successful, what type of investment will Fibria need to make and what does it plan for these terminals?
Infrastructure in Brazil is a key issue, especially for companies handling large volumes for exports. We are aware of this fact and see Brazil‘s current infrastructure condition as a risk and an opportunity. Fibria has a privileged position in its operations on account of the fact of having a long-term approach, with projects that allow cost and service predictability over time. That is how it is with Portocel, with our maritime cabotage terminals (transport of wood and pulp), our contracts with railway concessionaires, and with our long-term contracts with highway logistics companies. We do not sign on short-term contracts or solutions.
Fibria plans to develop a new business from Portocel in Espírito Santo (which currently handles 70% of all pulp exported by Brazil) and continue with long-term solutions in Santos. The investments for these projects are in Fibria‘s long-term business plan, and there may be creative solutions through partnerships that avoid large direct investments. In other words, in a Brazil that has attracted many players, we can build infrastructure solutions in partnerships.
Where do you see Fibria being in five years?
We work so that Fibria will become an even bigger undertaking in the pulp market, open to industry consolidation opportunities and more connected in the value chain with our customers, with most of its revenue now coming from new businesses (ports, infrastructure, energy and various bio-products). Five years from now, Fibria will be an even more comprehensive company, acting in segments different from the forestry one and entering into new businesses, while yet maintaining its sustainability strategy in the decision axis. That is what we work towards every day.
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