MANAGEMENT REPORT

MESSAGE FROM MANAGEMENT

Given the less favorable global economic scenario, 2012 opened a new cycle of strategic revisions and it was absolutely essential for implementing in Klabin better and more mature management processes. In recompense for all our efforts, we recorded our best ever result, with an excellent performance across all our operating segments. The consolidation of a structured cost reduction program in all areas, combined with highreturn investments and the adoption of an aligned commercial approach in all our market segments, led to record cash generation, resulting in EBITDA of R$1.4 billion. Throughout the year, we developed a series of industrial improvement processes, aiming to boost efficiency and productivity. We invested R$76 million in debottlenecking the Monte Alegre (PR) unit, which will add an additional 30 thousand tonnes of pulp bleaching capacity per year, eliminating the need to purchase the product on the market. On another front, we continued to invest in the operational start-up of two new corrugators at the Jundia (SP) and Goiana (PE) Units. The 400 meter Jundia machine is the largest of its kind in Brazil in terms of width and speed. Through well-defined commercial strategies, we made inroads into several new segments in the industrial bag business, allowing us to increase sales volume. We approved investments in a new sack kraft paper machine, with a capacity of 80 thousand tonnes per year, which is scheduled to begin operation in 2013, making our product even more competitive, as well as creating new jobs. In the forestry area, new harvesting machines and soil preparation equipment began operations, along with significant advances in labor reversing of outsource. The forestry cost reduction program, which involved expense matrix management, began to produce results in the second half and played a vital role in maintaining our nominal cash cost in 2012. On the logistics front, we introduced key procedures and a more effective truck tracking system that optimized routes and reduced freight costs. 2012 was also marked by a new vision in relation to the human resources area, which is now called People & Management. In addition to permitting increased dynamism and efficiency in the construction of a culture of engagement, development and results among all employees, the new nomenclature emphasizes our mutual respect and the importance we give to human capital, the lynchpin of our business. Based on our process improvement management, we made considerable progress in the development of projects to optimize the use of natural resources, mitigate environmental impacts and develop an energy matrix that is increasingly clean and sustainable. Among other examples adopted in 2012 is the operational start-up of the new biomass boiler at Correia Pinto (SC), which reduced the units fuel consumption. 1

We continued to invest in research, development and innovative products and technologies. In 2012, we undertook studies in the genetic improvement, nanotechnology and biorefining areas, among others. Executed in partnership with important research institutes in Brazil and abroad, these studies focused on productivity and the generation of more resistant, durable and energy-efficient products in the continuous pursuit of more added value. As with our management processes, our commitment to sustainability and sustainable practices also matured. In addition to the Sustainability Committee, composed of top management and one independent member, we now have a specific Sustainability Management area, which is part of the Strategic Planning Area and is designed to ensure the alignment of sustainability issues across the entire company through a long-term strategic vision. As recognition for our commitment, we received several important awards during the year. We were elected the Best Company in the Pulp and Paper Segment by Exame magazines 2012 Biggest & Best yearbook, and the most admired company in the Pulp and Paper sector by the 15th edition of Carta Capital magazines The most admired companies in Brazil yearbook. In addition, Dinheiros Best Companies rankings, published by Isto Dinheiro magazine, ranked the Company first in the Pulp and Paper category, among other important awards we received in 2012. Jointly, these efforts represent a new dimension of value creation in our entire production chain. As a result, we have become more competitive and flexible, thus better equipped to diversify products and logistics alternatives through innovation-oriented human and technological resources. These aspects, together with exceptional teamwork, show that we are on the right path and have strengthened our belief in the potential of our competitive advantages. Looking ahead, we believe that in 2013 we will consolidate the bases for Klabins sustained growth. Finally, we would like to thank our clients, suppliers, investors and business partners, and especially our employees, without whom we could not have achieved such solid results in 2012. Management

2012 SUMMARY
In 2012 the Company recorded its best ever performance thanks to a combination of reduced costs, the increased efficiency of its mills, and the improved product and market mix. Expectations of a recovery in global economic growth were frustrated, given lower-thanexpected growth in China and apathy in certain segments in Europe due to the after-effects of the crisis. In Brazil, GDP growth was lower than in 2011, and industrial production actually fell by 2.7%. However, at the beginning of the year Klabin had stated that it would perform well regardless of the economic situation and that proved to be true. The Brazilian packaging paper market recorded a moderate performance. Benefiting from the favorable change in the exchange rate in May, which inhibited imported goods, demand for corrugated boxes and coated board was strong in the second half and moved up by 3% in the year. Government measures to stimulate the economy, including tax breaks and interest rate cuts, also helped to fuel consumption, while the heating up of the construction market drove up cement sales, which posted annual growth of 7%. The Company, which is operating at full capacity, maintained the same level of sales volume, but with a better mix. Sales totaled 1,727 thousand tonnes in 2012, 69% of which on the domestic market, versus 66% the year before. Domestic kraftliner sales climbed by 16%, while domestic sales of coated boards, including liquid packaging boards, increased by 4%. Net revenue from sales exceeded R$4.1 billion, 7% higher than in 2011. In addition to the higher share of domestic sales in total sales, revenue was impacted by the change in the level of the exchange rate, which favored exports. The result of the efforts to reduce costs following the 2008 crisis also became apparent throughout the year. Aiming to prepare for a more adverse economic scenario, the Company undertook a number of high-return investments, such as the biomass boiler in the Otaclio Costa (SC) mill, which was designed to reduce fuel oil consumption by burning the Companys own wood and forest waste. The Company also debottlenecked production at the Otaclio Costa evaporation plant, thereby increasing steam output, and concluded the new high-tension transmission line in Monte Alegre (PR), which helped reduce energy acquisition costs. These investments came on stream throughout 2011 and generated substantial cost reductions in 2012. Also in 2011, the Company disseminated the expense matrix management model in the Monte Alegre unit, which began to generate consistent results as of September of the same year and had an even bigger impact on 2012 results. In addition, part of the outsourced labor force was insourced in 2012, resulting in lower costs and more appropriate equipment. The cost reduction program continued in 2012. The expense matrix management tools, which had proved so successful at Monte Alegre the year before, were implemented in the forestry 3

area. The results began to become apparent in the third quarter and should have a significant impact on 2013 costs. Two important projects also started up the second biomass boiler in the Correia Pinto (SC) unit in the first half, and the debottlenecking of the bleaching line in the Monte Alegre (PR) mill in December. The measures to trim costs, together with the operational stability of the mills, favored production costs. The nominal unit cash cost remained flat and, consequently, operating cash flow (EBITDA) reached the record amount of R$1,352 million, with a margin of 32%. Adjusted EBITDA increased by 31% over 2011. The Company announced two investments during the year. The new machine to manufacture kraft paper for industrial bags will have a capacity of 80 thousand tonnes per year and is scheduled for start-up in the final quarter of 2013. It will be installed in the Correia Pinto (SC) unit and is designed to meet growth in the industrial bags market. The new machine for making recycled paper for corrugated boxes will begin operations in 2014. With a capacity of 110 thousand tonnes per year, it will be installed in the Goiana (PE) mill and will supply the growing packaging market in the Northeast. The net debt / EBITDA ratio fell from 2.5x to 2.4x, despite the hefty appreciation of the dollar, which increased dollar-denominated debt, and part of the new equipment investments. Net debt closed the year at R$3.3 billion and the Companys debt profile remained healthy, with 81% of financing due in the long term. Once again, Klabin posted substantial earnings growth and remains firm in its pursuit of a better performance, aiming to prepare the Company for a new growth cycle.

BUSINESS PERFORMANCE
Business Unit Forestry In 2012, the Brazilian wood market remained stable in relation to the previous year and the forestry area focused on reducing costs, optimizing existing processes and identifying new development fronts in order to generate higher returns. The areas cost reduction program began producing its first results in September. The measures involved benchmarking, implementing expenses matrix management and the insourcing of the planting, wood transportation and harvesting. Reversing outsource of harvesting processes in Santa Catarina was concluded in the first quarter and of silviculture will be concluded in Monte Alegre in 2013. The soil preparation process was also completed in 2012. Since the entry of new machinery, the soil preparation has been of higher quality and more productive and costs have been reduced.

The Company continued to invest in R&D to create and improve species and increase the returns from its forests and, consequently, yield, measured in tonnes of pulp per hectare of planted forest per year, moved up strongly in 2012. Klabin sold 2.9 million tonnes of pine and eucalyptus logs in 2012, 5% more than the year before, while net revenue increased by 11%, reaching R$293 million, mostly as of the second half due to the depreciation of the real against the dollar, which made wood exports more attractive to clients. Florestal Vale do Corisco, in which Klabin retains a 51% stake, recorded wood sales of 1.4 million tonnes. The Company closed 2012 with 505 thousand hectares of land, 242 thousand of which planted forest and 213 thousand preserved native forest. During the year, it planted 14 thousand hectares, 13 thousand of which on its own land and 1 thousand on third-party land (incentive program). Business Unit Paper Despite the sluggish economy, the Companys Paper Unit performed well in 2012, recording total sales volume, including kraftliner and coated boards, of 1,056 thousand tonnes, virtually identical to 2011, while net revenue came to R$2,027 million, up by 10%. At the beginning of the year, international kraftliner prices retained the previous years downward trend, but this scenario began to change as of February. In the second half, capacity shut-downs in Europe reduced supply and producers announced new price increases. According to FOEX, at year-end international prices were 9% higher in euros over the close of 2011. Kraftliner sales volume totaled 387 thousand tonnes, 8% down on the year before, but with a notable gain in the mix. Domestic sales accounted for 45% of the total, versus 36% in 2011. Given the volume downturn, net revenue only fell by 2%. As of the second half the Brazilian board packaging market staged a major recovery, thanks to the governments consumption incentive measures, including tax and interest rate reductions, and reduced imports of packaged products due to the depreciation of the real against the dollar. According to Bracelpa, Brazilian coated boards shipments, excluding liquid packaging boards, reached 531 thousand tonnes, 2.6% up on 2011. The Company accompanied the upturn in demand and coated board sales volume amounted to 670 thousand tonnes, 3% more than in 2011 (4% up on the domestic market). Thanks to the diversified coated board line, which favors the Companys strategy of pursuing higher margins, net revenue totaled R$1,499 million, 14% up on the previous year. Klabins domestic coated board market share was 50%, including liquid packaging boards.

Business Unit Conversion Klabins Conversion Unit posted 2012 sales volume of 638 thousand tonnes, stable comparing to the 2011 figure, despite the unfavorable economic scenario, while net revenue moved up 4% to R$1,782 million. According to the Brazilian Corrugated Boxes Association (ABPO), the corrugated boxes market grew by 2.8% over 2011, mostly in the second half due to the reduction in imported goods. The process of implementing the new corrugator in Jundia-DI (SP) restricted corrugated boxes shipments in that mill and sales remained close to 2011 levels. Klabin acquired new advanced technology equipment throughout the year, including the corrugator in Jundia-DI (SP), which began operations on July 10th and is currently undergoing its learning curve, and two new printers which will start up in Jundia (SP) in the first half of 2013 and will absorb part of the new corrugating capacity. In 2012, sales of corrugated boxes and boards totaled 494 thousand tonnes, while net revenue came to R$1,217 million, stable in relation to 2011. Brazils cement industry, the main consumer of Klabins industrial bags, has been prioritizing the domestic market and investing heavily in expanding production capacity. Preliminary figures from the National Cement Industry Association (SNIC) and market estimates indicate domestic cement sales of around 68 million tonnes, higher than the 64 million posted in the previous year. In 2012, the Companys industrial bags unit underwent strong growth, thanks to the changes to sales procedures begun in 2011. Industrial bag sales volume by the Brazilian and Argentinean units came to 144 thousand tonnes, generating net revenue of R$565 million, a 6% and 16% improvement, respectively, over 2011.

FINANCIAL PERFORMANCE
R$ Million Sales Volume (thousand tonnes) Domestic Market Exports 2012 1,727 1,183 544 69% 4,997 4,164 3,169 995 76% 886 (2,823) 2,227 53% (345) (274) 10 (608) 1,352 1,352 32% 752 5,421 3,278 2.4x 2010 1,739 1,151 587 66% 4,686 3,889 3,017 872 78% 271 (2,827) 1,332 34% (321) (249) 35 (535) 1,077 1,028 26% 183 4,958 2,735 2.5x -1% 3% -7% 3 pp. 7% 7% 5% 14% -2 pp. 227% 0% 67% 19 pp. 7% 10% -71% 14% 26% 31% 6 pp. 311% 9% 20%

% Domestic Market
Gross Revenue Net Revenue Domestic Market Exports % Domestic Market Variation in the fair value of biological assets Cost of Products Sold Gross Profit Gross margin Selling Expenses General & Administrative Expenses Other Revenues (Expenses) Total Operating Expenses EBITDA Adjusted EBITDA EBITDA Margin Net Income Stockholder's Equity Net Debt Net debt/EBITDA

Notes: Due to rounding, some figures in tables may not result in a precise sum. Notes: EBITDA margin is calculated over a pro-forma net revenue, which includes revenues from Vale do Corisco.

Operating Income In 2012, sales volume, excluding wood, totaled 1,727 thousand tonnes, the same level as in 2011 since the Company is operating at full capacity. The upturn in coated boards and industrial bags sales was offset by the reduction in the sales of kraftliner and corrugated boxes. The sales mix improved significantly, with the domestic market accounting for 69% of the total, versus 66% in 2011. Annual net revenue (including wood) came to R$4,164 million, 7% more than in 2011, 76% of which on the domestic market, slightly less than the 78% recorded in 2011. Exports revenue in 2012 was favored by the increase in the exchange rate. In 2012, the variation in the fair value of biological assets had a non-cash effect of R$886 million, chiefly due to the reduction in the Companys weighted average cost of capital used to calculate the fair value of its forests, as well as the increase in wood prices. The cost of goods sold (COGS) was R$2,823 million in 2012, virtually flat over 2011. Unit COGS remained equally stable at R$1,635/t, despite period inflation of around 6%, according to the Brazilian Institute of Geography and Statistics (IBGE). The increase in labor costs and the impact of inflation on production inputs were partially offset by the Company-wide costreduction programs. Selling expenses amounted to R$345 million. Given that most of these expenses are variable in nature, their increase over 2011 was proportional to the upturn in sales revenue. In both years they represented 8.3% of net revenue. 7

General and administrative expenses totaled R$274 million, 10% more than in 2011, mainly due to the indemnifications, the upturn in labor costs and higher provisions for profit sharing thanks to the Companys improved performance. Operating cash flow (EBITDA) reached the record level of R$1,352 million, 31% higher than adjusted 2011 EBITDA, with a margin of 32%. This amount includes EBITDA of R$27 million related to the sale of wood from Florestal Vale do Corisco Ltda. Financial result and indebtedness Financial expenses remained flat over 2011, while financial revenue dropped by 15%, chiefly impacted by the reduction in the Selic benchmark interest rate. The annual financial result, excluding the exchange variation, was a net financial expense of R$170 million, while the net foreign exchange variation was negative by R$378 million due to the devaluation of the real. Consolidated gross debt stood at R$6,035 million on December 31st, 19% of which (R$1,121 million) short term. Cash and financial investments totaled R$2,757 million on December 31st, 8% more than at the close of 2011, due to funding operations throughout 2012. This amount exceeds financing amortizations due in the next 33 months. Consolidated net debt amounted to R$3,278 million, impacted by the appreciation of the dollar on foreign currency debt. The improvement in the Companys results offset the impact of the exchange variation on foreign-currency debt and reduced the year-end net debt / EBITDA ratio to 2.4x. Net Income Net income totaled R$752 million, versus R$183 million in 2011. In addition to the increase in operating cash flow, annual net income was fueled by the bigger variation in the fair value of biological assets, as described previously, partially offset by the depreciation of the real.

CAPITAL EXPENDITURE

R$ million Forestry Maintenance Special Projects Expansion Subtotal Vale do Corisco Total

2012 93 298 107 157 654 654

2011 117 159 54 109 439 428 866

Focusing on process optimization in order to generate efficiency gains and reduce operating costs, as well as social and environmental impacts, Klabin invested R$654 million in 2012. The years main industrial improvement projects are listed below:

New biomass boiler in Correia Pinto (SC), which began operations in May, replacing an older boiler powered by fuel oil, thereby increasing efficiency and generating

environmental gains from the reduced use of non-renewable fossil fuels and lower GHG emissions; Debottlenecking of the bleaching line in Monte Alegre (PR), with a focus on increasing bleached pulp capacity. This project came on stream in December; New corrugator in the Jundia-DI (SP) plant, with an annual capacity of 100 thousand tonnes; New harvest mechanization equipment in Santa Catarina. Acquisition of an 80 thousand tonne per year sack kraft paper machine to expand capacity in Correia Pinto (SC), scheduled for start-up in the final quarter of 2013; Acquisition of a 110 thousand tonne per year recycled paper machine for the Goiana (PE) mill, due to begin operations in mid-2014.

CAPITAL MARKET
Klabins preferred shares (KLBN4) appreciated by 60% in 2012, versus a 7% upturn for the IBOVESPA. Daily traded volume averaged R$25 million, 61% more than in 2011. On June 18th, 2012, Fitch Ratings gave the Company an investment grade BBB- rating, with a stable outlook, in recognition of its high liquidity, strong cash position and indebtedness consistent with historical levels. Standard & Poors maintained its BB+ rating, but upgraded the outlook to positive. An Extraordinary Board of Directors Meeting held on October 11th, 2012, authorized a Preferred Share Buyback Program involving up to 44.3 million of the Companys shares. It will remain in effect for 365 days. i.e. until October 13 th, 2013. In 2012, the Company repurchased 1.4 million shares and closed December with 31 million, preferred shares in treasury, equivalent to 5% of the total preferred stock. In 2012, the Company paid complementary dividends of R$80 million related to fiscal year 2011, and interim dividends of R$195 million related to fiscal year 2012, totaling R$275 million. Management is proposing complementary dividends of R$76 million for 2012 to be approved by the Annual Shareholders Meeting to be held in April 2013. Klabin's capital stock is represented by 918 million shares with no par value, consisting of 317 million common and 601 million preferred shares.

CORPORATE GOVERNANCE
Klabins corporate governance model follows strict principles of transparency and equitable treatment. Since 2002, it has been included in the BMF&Bovespas Corporate Governance Level 1 listing segment, and in 2011 it became a signatory to the Code of Self-Regulation and Good Practices of Publicly Held Companies of the Brazilian Association of Publicly Held Companies (Abrasca), which lays down the principles, rules and recommendations for improving corporate governance practices. The Companys shares have been traded on the So Paulo Stock Exchange (BM&FBovespa) for over 30 years. In accordance with good practices, the Company also assures its preferred shareholders 70% tag along rights upon disposal of the Companys control. This right does not eliminate the right of preferred shareholders to dividends 10% higher than those paid to common shareholders.

SOCIO-ENVIRONMENTAL RESPONSIBILITY
Sustainability Klabin adopts strict sustainability principles within a clearly-directed strategy in order to ensure a solid operational and financial position, discipline in the use of capital, and respect for ethical, legal and socio-environmental principles, aiming to achieve long-term value creation with its stakeholders (shareholders, clients, employees, suppliers and communities). In 2011, Klabin created a Sustainability Commission made up of representatives from different areas, responsible for ensuring that sustainability is an integral part of the Companys strategy and management processes. Continuing with this trend, in 2012 it created a Sustainability Management area to ensure that Klabins existing economic, social and environmental initiatives and processes permeate the entire Company. Environment Klabin addresses the issue of environmental conservation on various fronts. In the Business Units (both production and forestry units), it applies a rigorous policy of minimizing the impacts of its operations, as well as promoting the efficient management of natural resources. It also develops initiatives to raise societys awareness of issues such as the proper use of natural resources, reforestation, biodiversity conservation, waste disposal and recycling, among others, as well as taking part in debates on legal aspects with regulatory bodies. To assist environmental management in monitoring the achievement of targets, in 2012 the Company developed an environmental corporate portal. Information on the performance of each Business Unit related to aspects such as water and fuel consumption, effluent quality and waste generation is stored in a database where it is at the disposal of managers, also serving as an efficient tool for the exchange of experience between the units.

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Research and Development Klabin invests continuously in research and development, pioneering products and technologies to make its operations more competitive. Through its Corporate R&D area, the Company conducts intensive research aimed at innovating and continuously improving production technology, as well as reducing product and industrial process development costs. This structure provides technical assistance for direct and indirect clients, helping solve problems that are common to paper packaging in regard to its physical properties. The area also encompasses issues related to the environment, quality, productivity, health and security in the execution of Company projects. In 2012, the R&D area acted in conjunction with the process engineering and supply areas to develop products and optimize suppliers processes, aiming to improve the flexibility of units regarding the purchase of inputs and services. Social Assuming its responsibility in the development of a more just and equal society, Klabin supports and carries out environmental education programs, geared especially towards young people in the communities where it operates. One example is the Caiubi Program, through which specialists train public school teachers in Paran and Santa Catarina to educate future generations on environmental preservation. Klabin is also the biggest supporter of the Winter Clothing Campaign and maintains initiatives that foster economic development in its operational regions and help people generate income. The Company also carries out initiatives aiming to take advantage of the potential of the rich flora in its forestry areas, while preserving biodiversity and exercising social responsibility by supporting the production chain and structuring the rational and controlled use of its forests. People Management In 2012, the human resources department was repositioned in order to make the Company an even better place to work in. Now known as the People & Management Area, its aim is to strengthen the strategy of developing competencies and promoting a results-driven culture through initiatives such as: 360 Performance Evaluation and executive development; Alignment of Variable Compensation metrics, aligning Managements interests with those of the shareholders; Structured training program to consolidate Klabin competencies.

At the end of 2012, the Company had 14,604 employees, 9,376 of which on its own payroll, 4,900 outsourced and 328 temporary.

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Suppliers Klabins relations with its suppliers are based on respect, trust and long-lasting relationships. To make the whole process more transparent, the Company makes its Code of Conduct available to these stakeholders, in which it establishes socially recognized principles and guidelines for ethical conduct. The Supplies, Logistics and Materials Division, created in 2011, is responsible for negotiations, the transportation of raw materials, the acquisition of equipment and services, contract management, imports and logistics for the entire Company. All contracts are subject to ratification. In addition to meeting specific technical requirements, suppliers must comply with quality criteria, be punctual in the delivery of products and services, have a good credit history, comply with the applicable legislation, be up to date with their tax payments and, most importantly, maintain good sustainability practices, e.g. prohibiting the use of child or forced labor and adopting environment protection measures. In 2012, the area was subjected to certain structural changes, especially in the logistics area, focused on generating efficiency gains and reducing process costs.

RELATIONSHIP WITH THE INDEPENDENT AUDITORS

The Companys policy for hiring independent auditors to perform services not related to the external audit is based on principles that preserve the independence of the auditors. During fiscal year 2012, the external auditors provided only those services directly related to the auditing of the financial statements.

IN MEMORIAM
Klabin deeply regrets the loss of the exemplary professional and admirable human being Antonio Andrucioli in August 2012. Mr. Andrucioli was head of the Industrial Bags Unit, and represented Klabin for 34 years with the utmost skill, steadfastness, and honesty.

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