Executives: Cristiano Teixeira - CEO Eduardo Toledo - CFO Francisco Razzolini - Planning, Project & Industrial Technology

Officer
Analysts: Thiago Lofiego - Bradesco BBI Carlos de Alba - Morgan Stanley Ivano Westin - Credit Suisse Lucas Ferreira - JPMorgan Paulo Valaci - Citi. Milton Sullyvan -

XP
Operator: Good morning, and welcome to Klabin's Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and also being webcast live via webcast. And it may be accessed

at http://cast.comunique/se.com.br/klabin/2q17, where the presentation is also available. Before proceeding, we would like to clarify that forward-looking statements that might be made during this call in connection to Klabin's business outlook, projections, operating and financial targets and potential growth should be understood as mere assumptions based on the company management expectations in relation to the future of Klabin.

Such assumptions are highly dependent on market conditions, on digital’s overall economic performance of the industry and international markets. Therefore they are subject to change. With us today in Sao Paulo, we have Mr. Cristiano Teixeira, Mr. Eduardo Toledo and Mr.

Francisco Razzolini. Initially, Mr Teixeira and Mr. Toledo will comment on the Company's performance during the second quarter of 2017. After that, they will be answering questions that you might wish to ask. Now, I would like to turn the floor over to Mr.

Teixeira.

Cristiano Teixeira: Okay. Thank you very much, and thank you for your presence in Klabin's call referring to the second quarter of 2017. This is my first call as CEO of Klabin. Therefore a special moment for me.

In Klabin, my first big challenge was to guarantee with my direct people, the executive committee as well as the associates of Klabin, the sense of an impressive company, very strong one and the movement and always seeking better and better results, guaranteeing the continuity of the achievements of the last few years and it is with great pleasure that I bring to you another quarter of consistent and important growth, keeping the growth pace for the next few quarters as well. Now I would like to talk about the highlights of our businesses. First, [important] very well known Puma Project where we’ve delivered a strong performance with cash, cost and production levels in line with the best expectations at the beginning of the Puma Project, and I would like to mention that the trend for the cash cost through the third quarter, which is just slightly is better than the one that we saw in the second quarter. As to the market, I would like to say that in hardwood fiber, we still have good expectations to maintain the prices for a longer period than we imagined. And this will also help us in the estimate for the result of this third quarter.

In relation to fluff. The demand for the product is maintained and even more important than that we are already ratified globally with the main players and we also reached the milestone of over 30 countries that have already received that softwood fluff of Klabin. Now about the paper market, we have positive signs in all these markets. In cultured boards, very much driven by the higher demand for LTV, kraftliner demand, international demand continues to be very strong and this has been giving a good margins. And then Sack Kraft, also active international market, also giving us excellent margins.

Now regarding conversions, we maintained growth of 8% in the second quarter, vis-à-vis the second quarter last year, probably more than the marketing of corrugated boxes. We had excellent way of shipping of corrugated boxes and very much supported by our key accounts. In industrial bags, in spite of deterioration of the civil construction market in Brazil, Klabin has been maintaining the diversive case and strategy in this business area, extending sales to new markets, preferably food in the domestic market, but also exports to strong markets such as U.S. All-in-all, with these two commercial businesses, we had 8% growth as I said before. In terms of news, I would like to mention two.

First, the important inauguration of our technology center an investment of R$70 million in what we believe is a milestone for Klabin. A milestone, because it consolidates and strengthens the culture of the research and science in Klabin. And with that, we are trying to strengthen all the technology initiatives of Klabin in one single site with dedicated researches from the different routes of research such as forest productivity, fibers, products and processes for pulp, for papers, for packaging environment and utilities. And the second point, that I would like to bring to you and some of you have already read about it in [Indiscernible] Economic newspaper. What we're calling a new road cycle, Klabin positions itself as one of the main contenders to investments in packaging paper in the world, be it by the quality of our products or due to the relationship that we have with our clients or due to the productivity or the yield of our [Forex], our logistics our technology.

And I would like to strengthen the fact that we believe more and more in the strengthening of paper packaging for the future. Due to the unquestionable advantages because it is a recyclable material above all, due the of the fact that it is biodegradable. And with that, our engineering areas and market intelligence and the economic areas are dedicated to studies about investments in the kraftliner and corrugated board markets. I always bring to you, our view of investment, in fluff, which is an excellent news because it opens another path for growth for Klabin. Ladies and gentlemen, this new growth cycle of Klabin has the same size of Puma.

However, with lower market risk, because we already operate and we are already benchmarking all these markets, including fluff. Beside the fact that Klabin today is twice the size of Klabin when the Puma project was announced. Well, with that I would like to give the floor to Eduardo Toledo, our officer here, and he's going to talk about the figures.

Eduardo Toledo: Cristiano, thank you very much. Good morning, it's a pleasure to be with you.

Talking about the figures for the quarter, we obtained in the big gap of R$595 million, 11% growth, vis-à-vis the same period last year. Another highlight of the sales of pulp, we reached 337,000 tonnes in the quarter, an increase of 12% vis-à-vis the first quarter. So, we are continuing our ramp-up and very successfully of the Puma Project. And revenue from sales reached almost R$2 billion on that revenue, 17% growth vis-à-vis the second quarter of 2016 and finally, the conversion sales volume in boxes and bags 119,000 tons, 8% increase vis-à-vis the second quarter 2016 Now going to next slide. Slide number three about our sales volume.

We reached 777,000 tons this quarter and I would like to highlight that the divisions between domestic and external market is 50%, 50% so it is a 50/50. And this differentiates Klabin from the other players in the sector, because we have a higher degree of balance between domestic and external market and this generates further resilience in the results of the company. In terms of net revenue, this proportion changes to 60% domestic market and 40% foreign market because in the domestic market we have conversions that has more added value. On the next slide, we talk about the cash cost. An excellent evolution in this quarter, we were able to reach R$673 per tonne, a reduction of R$70 per ton vis-à-vis the first quarter of this year and the cash cost of four month is the cash cost that we have mentioned.

In the first quarter of the Puma operations, we said that we would be reaching a reduction of 25% in that cash cost and until the end of 2017 or by the end of 2017, and in fact we were be able to reach this target in the second quarter of 2017 and I think it is evidence of the success of Puma's ramp up that I was referring to. And we all reach 363,000 tons of production in the quarter, a very significant volume, taking into account the fact that this is a quarter in which we are exiting the first general stoppage of Puma that happened in the end of March and going a little bit towards so into April. Now, cash cost for the company as a whole. The cash cost had a reduction of 4% in the quarter in line with our expectations and show the evolution of the company and the constant search for cost reduction on our part. On the next slide.

We talk about the consistent performance of the company, we have already reached the 24th consecutive quarter of growth, and I think this is the real feat and from the viewpoint of our sales volume as Cristiano said, reaching 3.1 million tons in the last 12 months. I think these are very important milestone in this consistent growth of the company. On the next slide, we talk about our net debt and our deleveraging. Net debt EBITDA ratio in the last twelve months was 4.9%, the same level of the previous quarter in spite of a higher final dollars exchange-rate and the net debt of Klabin is basically in dollars, denominated in dollars and of course, the final dollar of each quarter has an impact on our net debt in this way. So you will see this kind of effect, and in this quarter more specifically the final dollar was R$ 3.31.

So of course you have this kind of impact, and this is the reason why it was maintained and did not drop, but anyway the downward trend is very clear one and it will be even stronger in the next few quarters due to the stronger evolution of the EBITDA that we will have as of the next quarter. On the next slide, we talk about dividends. Klabin has a consistent policy of dividend payout linked to the EBITDA of the company on a quarterly basis and of course with the evolution of the EBITDA that we have been delivering, dividend have also been evolving. In such a way that our dividend yield has already raised 3.2% and this should continue on this path with the evolution of the company's EBITDA. While these were my first three months and now we would like to open for questions -- to answer any question that you might have.

Operator: Ladies and gentlemen we will start the Q&A session. [Operator Instructions] The first question comes from Karel [Indiscernible].

Unidentified Analyst: Good morning, thank you for the questions. I have two questions. The first one has to do with Puma and the Puma cost.

Can you give us the guidance regarding this cost? How much it could go down in the second half and the road strategy, could you share a note? When do you believe your strategy will be defined in this regard? And do you have an idea of what would be the priority of your next project including kraftliner and fluff, so that we may imagine the potential for growth and the timing for that?

Francisco Razzolini: Thank you very much Karel. I will answer the first one and Cristiano will answer the second one about the strategy. The first part regarding cash cost. We must remember that in this quarter as I said before, this quarter the second quarter, similar quarter in which we so suffered the attack of the first general stoppage, which is a major one during which you make many adjustments. It is first year of operation of Puma.

So with that, we still feel expect an evolution in the cast cost. However, this will be smaller than the one that we saw between the first quarter and the second one, but they will still be important. So we will see progress in this area and I imagine that the level that we will be reaching will be in the third and the fourth quarter and after that it will stabilize, but there is still room to reduce this cost in the third quarter. Thank you for the question.

Cristiano Teixeira: And I will answer question about growth.

I'd like to help you and all the others. Making a remark that has nothing to do with the last five or six years. It’s a long standing thing as it inherited it, probably knew that they would have to give a very important step forward in the green field project, Puma, which was mandatory for the utilization of the forest. And the growth that we see now -- well in the past Klabin already wanted to make the current site that our significant sites are ready and they are champions of cash cost in the segment, both in craft and in coated board. And we already knew that these sides could be further improved by new technologies and new investments.

And the same team that made Puma would be competent that they did that, the same team is dedicated to these Klabin sites in order to further improve them, to dilute fit cost and put more capacity in these sites and gain in the quality of the papers. And brining more capacity to these sites and this means that we will be improving these sites a lot through this new cycles and that are brownfield investments and we very much dedicated to these brownfield investments. And they are very much focused on kraft and coated board. And we cannot really tell you what is the timing for that, the timeframe and whether when we’ll start in the second quarter or one year or the other one another year or another quarter or may be together. So this is not possible.

Our IT offices has already anybody contracted, the all the engineering contracted and by the end of the year we'll be able to answer your question. And besides we have our market team observing everything regarding the price and demand of these products to understand the target for these investments. So there is a priority between the initial investment. And it is important to tell you that by the end of this year and beginning of next year we will have a lot of information in our hands to bring to you, to share with you and then everything will be brought to our board to discuss that. So about fluff now -- fluff does not have this historical view that I mentioned that existed for kraft and coated board in the past, but fluff is a good news and great news for all us.

The productivity of our pine and the dedicated machine for fluff allowed us to produce a fluff that is now present in over 30 countries and practically all the other players in the sector and we were able to place our fluff directly in the higher end of this product. And so we are extremely pleased that we are very comfortable knowing that this is a great path for growth for Klabin.

Francisco Razzolini: Great. Thank you very much.

Operator: Thiago Lofiego, Bradesco BBI.

Thiago Lofiego: Good morning. I have two questions, Cristiano. One regarding the coated board project and what is the dynamics of the market that you imagine for the machine? Has anything changed because you talked about focus more on exports and also the U.S. market?

Francisco Razzolini: That was a strange noise, but it's okay. You said you would focus more on the rates market, and I would like to note if anything has changed in your mindset regarding those machine.

You We intend to focus more in the domestic market, I'm still talking about project? I know that everybody ask that. But I would like to move the rationale for the three projects that are potentially relevant. And how do you believe the balance for that and regarding the domestic market, could you talk about the performance of the third quarter. How do you see the performance of the product that are more focused on the domestic market so far?

Cristiano Teixeira: Thank you Thiago. Thiago, I will talk about the coated board and the domestic market and then I will turn the floor over to Eduardo Todelo and he will talk about the debt, okay.

First, about the coated board machine. This is a machine dedicated to the external market, the foreign market the exports. And that we probably it will have white product and today our product is one side white and one side brown. So we will have the two sides as white and so part of that will come to the domestic market, but it's the smaller parts, because most of that is really for exports and the configuration of the machine -- continues very much linked to our big partner in this area of liquid packaging board and they are going to say when this will happen, when the demand -- the word demand for this product and when the market demands we will be prepared to deliver the product. And this refers basically to the one third of the machine and the other third of the machine continues to be dedicated to be demand for coated board for consumption.

Our supply is not enough to cater to the whole demand that we have. Be it for carrier or the other consumer items for folding boxes. So we intend to cater to this demand that we are not able to cater to today, not only in the Brazil but for exports as well. And then a very important part, which is food service. More and more we believe in this segment and I like to make my examples more material so to say and I think you recognize that ice cream for instance, is going towards paper more in the world than in Brazil as well.

So this is a trend in Brazil and in other countries it's almost completely paper board -- or coated board. So we believe in the food service sector and the machine. We'll have three main lines of product, liquid packaging board, folding and food service that includes the cup stock. Now to talk about the domestic market. Well let me say a few word about the domestic market and then I would give the floor to Eduardo.

In the domestic market, we do not want to be like strangers in this area, because our capacity is practically full already and then conversion, this is exactly the same case. I can tell you that starting by the corrugated boxes, we have a very important brand and we are in the main global brands in Brazil. And we are present in all of them, with our corrugated boxes. So the growth of the brands, strong brands is translated into stability of consumption and we are very pleased with the corrugated box volumes in Brazil. It is true that the corrugated boxes Association of Brazil, if you only look at that, ABPO keeps the pace of those vis-à-vis last year.

I don't remember now, but I believe that the estimates for the end of the year is close to 3% of the corrugated box association. So the association itself has growth vis-à-vis last year in Klabin has a substantial growth higher than that and a little bit because of the acquisitions made. And now talking about the domestic market and facts of bags. We are very proud to say that when our packaging is compared to any other, we have a sustainable environmental basis which is really unbeatable and when you talk about flower and weed and seeds and animal feed, we can have a very good rationale for all of that. So no problem of volume because we diversified a little bit, leaving a little bit civil construction and going towards lease markets and our volumes also in the domestic market for industrial banks due to the diversification is very strong.

And finalizing the two things together are delivering 8%, and what do we expect for the end of this year for the corrugated boxes, the pace of growth that ABPO has and outpace will be maintained in our view higher than the ABPO itself. And in the industrial bags, we lost a certain adherence through the construction with the new developments in the market. But nevertheless, we are very comfortable moving that by the end of the year, we will be delivering the same growth that we have already shown you which is a group problem, because when civil construction goes back, recovers, of course, the margins for industrial bag, [Indiscernible] will have to pay the margin that I am obtaining in other markets. Now I would like to give the floor to Eduardo.

Eduardo Toledo: Thank you, Cristiano.

Thiago, thank you for the question. In relation for the balance sheet of the company and indebtedness, I have been talking about this with many analysts and investors. And our view is that one can only really understand the company's indebtedness post Puma when we have 12 month of Puma operating close to the rated capacity, the nominal capacity and this would only happen around the middle of next year, the first quarter or the second quarter of 2018. And this is when we will have 12 months of Puma operation and it will be then that we will be able to have a more clear view and our view about this thing is that this clear view will be a level of indebtedness that will allow us to make these new investment because once the decision is made to make the investment, the disbursements are made when you are afterwards or for 18 months afterwards, after this decision is made, so there's no immediate impact on the company's cash. So we understand that you can deal with that overtime, that is to say the balance sheet of the company.

And what Cristiano said, we believe that possibly all these projects will have a certain order overtime, so this will be diluted overtime. However, if we read the conclusion that this is so important that we want to rush with the three projects. Of course, we will have to study other mechanisms to fund these investments, but as Klabin has already done in the past with Puma and should the situation repeat itself, I am actually too sure that we will be able to get the right funding for this new cycle of investment.

Francisco Razzolini: Very clear, thank you that.

Operator:
Carlos

De Alba: Yes, good morning, everyone.

Thank you for the [Indiscernible]. I just wanted to maybe Cristiano, if you could comment a little bit more out on the fluff project. And I understand this is probably the latest trend that the company maybe making out. But it is entirely focused to the external market. Do you have already an idea of what the regions and geographical regions of that of customers would just be [Indiscernible] contract.

And just to give us a better understand what is behind the rationale of this project? And then finally, if you could comment on maybe potential pricing increases in your domestic market for the inventory products? Thank you very much.

Cristiano Teixeira: Thank you Carlos. The rationale for the fluff machine. I am going to separate thing because we work in a certain order so let me start by saying that the first -- that it doesn't go faster than the other, but the first point that we like to stress is the fact that the fiber or our forest, our pine and the productivity of our pine and the quality with which we have to transformed it with the technology that we obtained that was state-of-the-art technology for conversion into fluff made us be very certain that our fluff has golden acceptance. So this is the first point.

And for me it's the most important and difficult result that we had the fiber -- and our fiber -- for our fiber we obtain the technology to deliver a product that is accepted globally and not only that, but that got -- that mostly in the the high end of this product. So this is the first point of our rationale and the second one is the future. You will see that all investments made by Klabin have a very consistent view of the future. And I could talk about of the future of other products as well but if we take fluff as the example because you mentioned it and you have access to and this is public information. The way the market growth, for diapers, for adult diapers in the world, in the first world, not to mention the growth of diapers for babies and female pads in other countries as well.

So, obviously the future of consumption are female pads, hygienic pads, and baby diapers in the peripheral countries. So to say and add it to that, we see a growth in elderly people in both that is to say in the first world and peripheral countries we are very sure about the possibility for this product for the future. So the rationale is the following; we are champions, I’m sorry to say this but we are very competitive in cash cost, we are champions and we are very good in fiber, very competitive in cost and we are recognized by our clients as having the necessary quality to really be players in this market globally, so this is about fluff. The second question, I think it was about price in the domestic. Was it?
Carlos

De Alba: Right.

That’s correct.

Cristiano Teixeira: Okay. Going to the more sensitive one and I don’t really like to measure my words, but the most difficult one to place prices is the corrugated box segment because although we are leaders in this sector in Brazil. We have 18% or 19% of the market share and the second has half of what we have the second ranking. But in spite of being the leaders this is a very scattered market from the fourth and the fifth player on, and the size of the market is about 1% for each player or less.

So you can see that it is very scattered. And in spite of that we are rather sure that the level of service that we deliver to key accounts in Brazil. With this level of service we can ensure the transfer of the inflation cost in this market, but it’s a tough market because of all the competition and mainly because the corrugated box sector still has a low occupancy compared to 2013 and the level in 2013, and in our [Indiscernible] we believe that we will go back to this level in 2019, 2020, then the prices will be better. In the bag's area, the alternative is exports of sack kraft and today we are very sure of the margins obtained with sack kraft. So the domestic market we have to pay for the cost of opportunity and it's paying.

So we will be able to transfer the necessary adjustments.

Operator: Ivano Westin, Credit Suisse.

Ivano Westin: Good morning, Cristiano and Eduardo, Francisco. Thank you for the questions. First I would like to ask a question about Puma, the explanation about the cash cost is very clear.

Now with relation to volumes, you are already been at a 100% capacity after the stoppage. And what could we expect in terms of volume for the second half of the year? And there is an alternate question about a possible investment to increase capacity an additional 10% tax. Are you going to make this investment and how much would be the risk stated amount for this investment? And the second about kraftliner, the global market, is very positive. We see prices increasing 15% in the second quarter vis-à-vis the first. So, what you expect in terms of your sales with this breakdown between domestic and external market and prices?

Cristiano Teixeira: Ivano, thank you for the question.

I'm not having a lot of discipline here. I'm going to start by the second question and then I will give the floor over to Francisco and he will talk about the volumes and therefore talk. Talking about kraft. What should be dynamic with kraft? I think this very well which is simpler than you can imagine. So let's just go over it.

International markets okay. International prices, for kraft have significant points in terms of consumption in periods of the year per harvest, because kraft is very much in demand mainly for protein and foodstuff, but a very strong relation, a major one in terms of the Americans supply of krafts. When U.S. offers a higher volume of kraft there is an impact on prices unless the global demand is very strong. But the fact is that the U.S.

and you’ll see this together with that. The west seems the second half of last year and continues this year has been delivering or shipping more corrugated boxes vis-à-vis the previous periods and this has been consuming more kraftliner in the west and thereby avoiding a surplus in these suppliers this product in the world. And this product may be the 100% virgin fiber kraft. And Klabin and the Americans are the most important this sector. This product is very elastic in terms of pricing, because the supply or the demand is very big as well, but very much in line so to say.

Supply and demand are very close, they are the big match. If you see supply going down for instance, the price reacts very quickly as you are able to seen in the last couple of months. So, this is a little bit of the price dynamics that we expect for kraft and we have -- in the case of the U.S. very specific as I said. Now Francisco will answer your question about the health volume.

Francisco Razzolini: Good morning everybody. Puma has been having a very performance according to what we expected. Maximum capacity was achieved in the period and having reached, the maximum production, we can identify where the bottlenecks are in the plants mainly. And we have been working on some engineering in order to solve these bottlenecks and potentially gathering an additional capacity gain. So, we have not gotten there yet, we were still working with essentially in part in parallel with a study that were mentioned by Cristiano and Eduardo, but we believe that around 10% is feasible and then this cases of the bottlenecking, they are marginal investment and this makes it very attractive.

Potential they should be done during the next year and in 2019, you should be seeing the result.

Ivano Westin: And how much would that investment be?

Francisco Razzolini: We do not have the figure yet because we are working at maximum capacity and we have already identified the potential bottlenecks as we're still working with engineering and with our suppliers, trying to work out a budget for those the bottleneck and see what is feasible. So, together with the other project we should have this prepared to be discussed in terms of budget for the next year. And probably by the end of the year we will know the size of the investment and Puma as well.

Ivano Westin: Thank you very much, Francisco and Christiano.

Operator: Lucas Ferreira from JPMorgan

Lucas Ferreira: Good morning everyone. My first question is a follow-up on the questions about extension and puma and fluff and kraftliner. How much wood do you have available to support all these expansions? If you could de-bottleneck one and make one coated board machine, how much fiber do you have available to support this growth and may be you would have to increase your planting or do you have third-party wood available. And could you talk about softwood as well. Do you have enough softwood for your fluff production and now international prices how much OCC has gone up and kraft has gone up? And all the regions China, U.S., Europe and export prices seems to be going up as well and we see you focusing a little bit more on focusing on exporting less craft in order to convert for the domestic market.

So should you be doing the opposite moment now taking advantage of the positive price scenario in other regions of the world?

Cristiano Teixeira: Thank you, Lucas. Okay. Let's talk about the wood or the fiber that we have available. The first point -- the first positive point that would like to stress used productivity or yield. Klabin here every single year we improve the yield of our forests consistently.

And we're very satisfied and pleased to say that our technology center that put these funds together in research and science, we will be continuing those. So the first point is forest yield. The second point is -- it is a fact that we might need some additional area. And this is not something -- this is not a point of concern of us because we are rather conservative in this regard. We are practically really self-sufficient in Paraná.

It's very close to self sufficiency in Santa Catarina as well. But we already have a very reasonable situation in terms of negotiations and we know where we can go in terms of availability of wood in the future and I guarantee to you that this is not an issue. This is not a point of concern. Now, talking about the world market and the increases in our prices in OCC and if the time has come for us to export more. Okay, I’m going to give you a more structural answer, the way we see and then I will talk about the market, on the more structural part of your question.

We see -- we have been seeing this for quite some time but there has been a major growth in the last few years in the supply of recycled paper all over the world. Europe has done this quite a lot and the west started to increase this as well. Not to mention Asia or maybe China, and this increase in the production of recycled paper in the world. Of course, brought a lot of pressure on the demand for OCC, and this is not something happening in one country or one continent, this is global and we are very comfortable seeing that the marginal supplier of OCC anywhere has a much higher price than historically have been the prices of OCC. Because of I don't remember the exact figure, I can look for it and give it to you afterwards, but paper OCC together with aluminum are some of the most recyclable or recycled material in the world, so the rate of recycling is very high and in spite of that, really the marginal price of OCC is becoming higher and higher.

Kraftliner exist in this world of containment board where kraftliner is the smallest part of this market because the major volume of this market is recycled paper and the price and market dynamics is something very close and little bit independent but very close. So, what we see on the more structural part, what we see for the future is an ongoing pressure on OCC prices. And the cash cost of recycled paper manufactures will have a high cost. And it seems to me that we're very hopeful about technology always, but I would say that technology to convert OCC into a high quality paper that has been improving over the year and the size of that fiber for recycling is reaching a level in which you have to put a lot of chemicals and that cash cost because of this, need for chemicals or due to the price of OCC itself. I would say that the market of recycled paper that it has very complex dynamics in the world, in spite of that, there is an upward trend in the cash cost.

And the kraftliner -- kraftliner right this way so to say, because once the recycled paper has different characteristics from virgin fiber paper, the virgin fiber paper is the only one that can get in contact with food and other requirements that you cannot replace it that is to say and as I said in one of the answers that I gave to a previous question, the supply is very balanced to demand. So what we see is that the pressure for the future in terms of prices for kraftliner as well as recycled paper due to this big demand for OCC we’ll continue and we are rather bullish about kraftliner and prices for the future. Of course, this is a commodity product and they suffer cycles but we are bullish about the prices for this product in the future. Thank you.

Operator: Paulo Valaci from Citi.

Paulo Valaci: Good Cristiano and Eduardo. Thank you for the questions. I have two questions. The first one is about the new cycle of growth. Do you have an internal target about return for each project in terms of internal rate of return? And is the return more attractive than kraft or industrial or what? And still talking about OCC, do you believe that the migration of retail to e-commerce could limit OCC because the original packaging is discarded at the homes, so do you think it will also contribute to an increase in OCC prices?

Cristiano Teixeira: Eduardo is going to answer your question -- the first question and then I will come back.

Eduardo Toledo: Good morning, Paulo. In relation to returns, we use the parameters that we used while we approve Puma. Basically we work with 12%, 13% IRR of rate of return for the project as a whole. Return on equity higher than that. And from the viewpoint of projects which one is more attractive.

This is the point that we will be working on during the next few months. And as Cristiano said, all of them, the three projects, the three pillars that Cristiano announced, all of them undergo changes that is to say, they [brown] so say the plants have to be adapted. So engineering in each one of the plant and even in the [Indiscernible] of where or which plant is going to receive this investment. All this has impact on the CapEx and only when our CapEx is clear, we will be able to have a clear idea about returns. So, we will only be able to say this like in the first half of next year, as Cristiano said.

Cristiano Teixeira: Paulo, talking about the OCC dynamics with the new reality of e-commerce and the fact that the OCC's are going more to home than -- this is not something new, okay, but it is still difficult to evaluate. I am going to tell you our view. We talk about that in the executive committee here among us. We are not sure and we have been reading some texts, some experts saying that the OOC that goes to homes loses contact between recycling and I confess that I am not quite sure about that. As I said before, OCC with aluminum, they are items that have a high level of recycling even the ones that are disposed by homes.

So there might be some limitations in the supplies because of that because they are not returning. However, I believe recycling is a reality not only in the [first] world countries, but again, in peripheral countries as well, because it ends up being an important point even for employment. And there is a big question mark here still. We know that e-commerce growing very fast in the world. This is the new reality in services and et cetera, and there is a little bit of waste of boxes, because when you get into the website to buy one, two, three, four different items of totally different sizes.

And you had to standardize the science of the box and sometimes or in most of the time the corrugated boxes have to be -- have to have enough space for you to put to product inside and show the rest of the box with something else. So what we see is an exaggeration with the e-commerce packaging. However, we are together with many people in e-commerce. We have a group inside Klabin that is dedicated to that about how to cater to this market in a better manner because they need high-volumes of one single unit and e-commerce requires many units with little volume. So, this is an important dilemma that we are discussing on an ongoing basis and we look for solutions.

And we have excellent ideas in order to balance this a little bit. But I would like to reiterate that e-commerce is a major opportunity and it brings a lot of pressure on demand of corrugated boxes in the world, mainly Europe and the U.S, but China has two digits growth in e-commerce as well. So this has been healthy demand for corrugated boxes and bringing pressure, of course.

Paulo Valaci: Very clear Cristiano. Thank

you
Operator: [Indiscernible] from Santander.

Unidentified Analyst: Good morning everybody. I have two questions. The first one has to do with kraftliner. What about the margins of kraftliner compared to the conversion market in the domestic market currently? And the second one about CapEx, a follow-up question on a previous one. I understand that the forest CapEx would be under pressure because of the Puma startup.

And I would like to know at this level, could be reduced in the [medium ground], of course not mentioning future projects for growth?

Cristiano Teixeira: Thank you, [Hena] to let me recap here. I am going to repeat your question, because I don't know whether I understood it or not. You were talking about the opportunity to export kraftliner vis-à-vis the domestic market and conversion.

Unidentified Analyst: Okay, perfect.

Cristiano Teixeira: I think somebody answered this question then maybe I did not answer it.

I apologize for that. But the fact is that prices improved gradually for kraft, but a good performance in the last 12 month. And because of that basically, now when I say now because mid-June, we started with this attitude of focusing more on exports. So, until the middle of the second quarter, we still saw advantages in terms of converting vis-à-vis exports. And as of June, or as of July or mid-June, we started to see this opportunity of better margins in exports.

And you will be seeing this in the next few quarters that it's a higher-volume dedicated to exports. And know I will give the floor to Eduardo, who will talk about the CapEx.

Eduardo Toledo: The first CapEx, the full level is the level that it's here to stay. Of course due to the volume that we have we almost doubled the size of the company in terms of total production. And of course our forest investment has to follow because we increased a lot, the harvesting of forest, so we have to replant more.

So this level of CapEx is more permanent from the forest review point, and what is exceptional this year and that will not repeat itself is the completion of Puma and as Francisco said on the other hand now we will be beginning at the beginning of next year investments, and the order of magnitude should similar. So this level of CapEx that you saw this year of Klabin should remain stable for the next few years.

Unidentified Analyst: Thank you very much. What is the margin of kraftliner for exports?

Cristiano Teixeira: We do not disclose this information. We only say weather it is better or worse than another market.

That's all we can say about it.

Operator: Milton Sullyvan, XP.

Milton Sullyvan: Good morning everyone. Thank you for the questions. My first question is for Cristiano, about the benchmarking metrics? As CEO of the company but already having a lot experience in the company when you have – [Indiscernible] and the best quality, best cost.

It is difficult to challenge the team regarding operating targets. So, in order to establish your benchmarks what do you do? How do you do that? And what is your view about the current situation in terms of efficiency of Klabin? And what is your view regarding where you could get to in terms of efficiency? Okay.

Cristiano Teixeira: Thank you, Milton. This first point is a following. How do we see ourselves today? We have a supply and the quality of fiber and the forest yield that we are very proud of and we like very much to talk about that with you.

And we see the possibility of further improvement even with the current situation Klabin is one of the most important benchmarks in forest production, not only [in pine] also in eucalyptus. And the second point is that we are 100% sure that in pine and eucalyptus, and that we have the best technology. Puma brought to us and to the controlling shareholder's the certainty that the technology associated to this quality of fiber can deliver quite a lot more to Klabin. So, we challenge ourselves all the time in terms of technology. We know that it is the association of modern machine for the production of both paper and pulp and plus the fiber that have, the association of all that leads us to the possibility of further improving our productivity.

So it has a lot to do with the way we seek efficiencies by means of technology and there is one point that has been a big challenge. And our technology areas together the investments that we have been making in research and development are the barriers, because we are sure that paper is the packaging of the moment and will be the packaging of the future. And also the paper with those barriers made by pulp, so we are very sure about that we are very motivated and we are challenging ourselves in technology because fiber we know very what we have.

Milton Sullyvan: Perfect. Second question, more regarding the market, pricing in the domestic market, the pricing in Brazil for fluff, and could you divide into two different aspects, the possibility of selling it at a premium, because we know that most of the product is imported.

So, can you sell this product at a premium as we are at a very high-end of consumers who have clarity with the important product and regarding the quality of the product, we saw that the quality of the product generates gains for the client and can this be transferred to the price so that you could be more competitive, yourselves?

Cristiano Teixeira: Francisco and I will be answering together. Okay, the first part, you talk about the premiums in the domestic prices. Let's talk about the market dynamics. We have always raised new flag saying that we have 400,000 tonnes of fluff which is already bigger than the domestic market. And all the equipment of fluffing has the focus on exports as well.

And we are totally available to cater to the domestic market as much as we can and as we are very proud of talking about the key account, the big clients that we have in the box markets, there are competitive that are selling to these key accounts in the world. So part of these accounts are linked to these global contracts and of course we are not going to fight for price that is to say giving discounts in order to get to this market. But what I can tell you is that we already have the 50% of the fluff market in Brazil and we are very pleased with this market share. And the difference that to say, the other half of fluff market, we are exporting to certain countries with very reasonable margin, so we are very comfortable with that, and we are consistent with our strategy. And Francisco is here and he will talk about quality, okay.

Francisco Razzolini: Just to reinforce the delivery to the multi-market. Most of these clients -- fluff clients we already -- they were already our clients with packaging, so our level of service is very intense for these clients in the domestic market and top quality better than the service that they had from imported products. So, they know that it's difficult to keep the levels of import because of the juristic and exchange rate variation of Brazil. All this concludes today's conference call makes it difficult. About quality, fluff line was the first one in the world exclusively designed for fluff.

The work that development of the fiber for that and the world that it have here is basically the [same species] that is used by the main fluff producers in the world. And the quality is equal to or even better. And when we designed the machine, we wanted to produce a pulp that could really make the more demanding clients and we were able to get at a top quality very quickly. So now, we play where are peers were the best in the world than in terms of Brazil, we give a better quality of service than the ones that also sell in the Brazilian market today.

Milton Sullyvan: Thank you.

Operator: As there are no more questions, I would like to give the floor over to Mr. Cristiano Teixeira for his closing remarks.

Cristiano Teixeira: I would like to be with you, a view that they we will have accelerated growth, significant growth in the third quarter of 2017 vis-à-vis the third quarter of 2016. And the capacities will be full in all machines and the positive effect will appear substantially in our cash cost. So, I thank you all very much.

And I hope to be with you in the next call as well. Thank you very much.

Operator: Klabin S.A. Conference Call is closed. We thank you for participating, and wish you all very good day.

Thank you.