1. business and industrial
2. construction

 Fitch Affirms Klabin S.A.'s Ratings at 'BBB­'; Outlook Revised to Stable 22 May 2015 11:45 AM (EDT)
Fitch Ratings­Rio de Janeiro­22 May 2015: Fitch Ratings has affirmed the ratings for Klabin S.A. (Klabin) as
follows:
Klabin
­­Long­term foreign currency Issuer Default Ratings (IDRs) at 'BBB­';
­­Long­term local currency IDRs at 'BBB­';
­­Long­term national scale rating at 'AA(bra)';
Klabin Finance S.A.
­­USD500 million Senior Notes, guaranteed by Klabin, due in 2024, at 'BBB­'.
The Rating Outlook for Klabin's international IDRs is revised to Stable from Negative. The Rating Outlook for
Klabin's national scale rating remains Stable.
Klabin's ratings reflect the company's leading position in the Brazilian packaging sector, its large forestry base
that provides it with a low production cost structure, as well as its high degree of vertical integration, which
enhances its product flexibility in the competitive but fragmented packaging industry. The ratings also
incorporate Klabin's consistently strong liquidity position and capacity to generate robust operational cash flow,
even in diverse macroeconomic conditions.
The revision of Klabin's Rating Outlook to Stable is a result of the recently announced sales agreement
between the company and Fibria Celulose S.A. (Fibria), which reduces sales risk from the new pulp mill. The
Stable Outlook also reflects a positive revision to the company's future cash flows post startup of the mill due to
a weaker Brazilian real.
Fitch expects Klabin's net leverage to peak at close to 5.0x during the mill construction phase and then to return
to below 3.0x once it becomes fully operational. This new mill, which should become operational in the
beginning of 2016, is expected to add about BRL1.5 billion to the company's annual EBITDA.
KEY RATING DRIVERS
Leading Position in the Brazilian Packaging Segment
Klabin is the leader in the Brazilian corrugated boxes and coated board sectors with market shares of 16% and
50%, respectively. In the Brazilian market, the company is the sole producer of liquid packaging board and is
the largest producer of kraftliner and multiwall and industrial bags. The company's sales of liquid packaging
board are concentrated with one customer, accounting for 22% of sales.
Klabin sources much of its fiber requirements from hardwood and softwood trees grown on 237,000 hectares of
plantations it has developed on 491,000 hectares of land it owns, which assures it of a competitive production
cost structure in the future. The accounting value of the land owned by Klabin was about BRL2 billion as of
March 31, 2015, and the value of the biological assets on its forest plantations was BRL3.6 billion. The
company's size, access to inexpensive fiber and high level of integration relative to many of its competitors give
it competitive advantages that are viewed to be sustainable.
Leverage to Increase Due to Heavy Investment Cycle
Klabin's capex plan will continue to be aggressive in the near term. The company invested BRL2.9 billion in
2014 and plans to invest about BRL6.6 billion during 2015 and 2016. Fitch projects that Klabin's net leverage
will decline to below 3.0x during 2017, after the startup of the 1.5 million ton pulp. As of March 31, 2015,
Klabin's total debt/LTM EBITDA and net debt/LTM EBITDA ratios were 7.8x and 4.6x, respectively. These
metrics compare with an average of 5.0x and 2.9x between 2011 and 2013. The increase was expected by
Fitch and is a result of the pulp mill. The ratings incorporate an expectation that Klabin will allow for a period of
low capex to improve its capital structure after the new pulp mill's construction before entering into a new
investment phase.
Free Cash Flow to Remain Negative up to 2016
Klabin has been able to generate strong operational cash flow since 2012. During the LTM ended March 31,
2015, the company generated BRL1.7 billion of EBITDA and BRL1.9 billion of cash flow from operations
(CFFO). Free cash flow (FCF) was negative BRL1.9 billion due to investments of BRL3.4 billion and dividends
of BRL332 million. Free cash flow will remain negative in 2015 as the company's expenses for the mill increase.
The new mill should improve operating cash flow significantly. Klabin's sales agreement with Fibria is positive,
as the company will benefit from Fibria's scale of operations, strong client base and logistics. Fitch projects that
the new mill should generate more than USD300 per ton of EBITDA and would add about BRL1.5 billion to the
company's annual EBITDA, considering an FX rate of BRL3.0 per U.S. dollar and a production cash cost of
USD200 per ton for hardwood pulp and USD260 per ton for softwood pulp.
Solid Liquidity Position & Manageable Debt Amortization
Klabin's solid liquidity position and low refinancing risk remain key credit consideration. As of March 31, 2015,
Klabin's had BRL5.6 billion of cash and marketable securities and BRL13.5 billion of total debt, of which
BRL2.1 billion is short term debt. Klabin's liquidity is enhanced with BRL600 million of unused standby credit
facilities. The company's debt maturity schedule is manageable and evenly distributed. Klabin faces debt
amortizations of BRL1.6 billion in 2015, BRL1.4 billion in 2016 and BRL1.8 billion in 2017. Fitch expects Klabin
to continue preserving an adequate liquidity position during its expansion projects, conservatively positioning it
for price and demand volatility, which is inherent to the packaging industry.
Operational Performance to Remain Strong
Klabin's EBITDA generation should benefit from the depreciation of the Brazilian real against the U.S. dollar,
which is expected to partially offset the slowdown in demand for packaging products and difficulties to transfer
inflation to final prices. The concentration of sales to the food industry, which accounted for 68% of total sales in
2014, also adds stability to Klabin' sales, as this segment is relatively resilient to the slowdown of Brazil's
economy.
Fitch projects that Klabin will generate about BRL1.8 billion of EBITDA in 2015. The company's LTM EBITDA
generation of BRL1.7 billion was an improvement from BRL1.5 billion in 2013. Klabin's EBITDA margin of
34.4% is high for the industry and reflects its strong market position and integrated cost structure. During 2014,
Klabin sold 1.8 million tons of paper, flat compared 2013, and 2.9 million tons of wood. Coated boards
remained the company's main source of revenues, representing 34% of the total in 2014. Following completion
of the pulp mill, Fitch projects Klabin's EBITDA will increase to around BRL3.4 billion and that net leverage will
decline to around 2.5x using a net BEKP price of USD675 per ton.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer include:
­­Sales volume up 4.5% in 2015 and 5% in 2016, due to higher production capacity;
­­Startup of new pulp mill in March 2016;
­­Pulp cash cost of USD200 per ton for hardwood pulp and USD260 per ton for softwood pulp;
­­Net leverage should be close to 5.0x before construction of the mill would be completed;
­­Negative FCF in 2015.
RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action include:
­­Increase in net leverage ratios above the levels projected by Fitch of 5.0x during the construction phase of the
new mill;
­­Expectation that net leverage will be above 3.0x following the completion of its new mill;
­­Delays in the construction of its new pulp mill that result in a delay in deleveraging process;
­­More unstable macroeconomic environment that weakens demand for the company's products as well as
prices;
­­A debt financed acquisition.
Future developments that may individually or collectively lead to a positive rating action include:
­­Klabin's ratings are not likely to be upgraded until the company completes its aggressive capital expenditure
program;
­­Another substantial equity increase would also be viewed favorably.
Contact:
Primary Analyst
Fernanda Rezende
Director
+55­21­4503­2619
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 ­ Sala 401 B ­ Centro ­ Rio de Janeiro ­ RJ ­ CEP: 20010­010
Secondary Analyst
Jay Djemal
Director
+1­312­368­3134
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1­312­368­3349
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
elizabeth.fogerty@fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: ­­'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research: Corporate Rating Methodology ­ Including Short­Term Ratings and Parent and Subsidiary Linkage
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