Duratex S.A. Quarterly Information (ITR) at June 30, 2012 and report on review of quarterly information

Transcription

1 (A free translation of the original in Portuguese) Duratex S.A. Quarterly Information (ITR) at June 30, 2012 and report on review of quarterly information 1 - PARECER PWC

2 Report on review of quarterly information To the Board of Directors and Stockholders Duratex S.A. Introduction We have reviewed the accompanying parent company and consolidated interim accounting information of Duratex S.A., included in the Quarterly Information Form (ITR) for the quarter ended June 30, 2012, comprising the balance sheet as at that date and the statements of income and comprehensive income for the quarter and six-month periods then ended, and the statements of changes in equity and cash flows for the six-month period then ended, and a summary of significant accounting policies and other explanatory information. Management is responsible for the preparation of the parent company interim accounting information in accordance with the accounting standard CPC 21, Interim Financial Reporting, of the Brazilian Accounting Pronouncements Committee (CPC), and of the consolidated interim accounting information in accordance with CPC 21 and International Accounting Standard (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB), as well as the presentation of this information in accordance with the standards issued by the Brazilian Securities Commission (CVM), applicable to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim accounting information based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 1 - PARECER PWC 2

3 Conclusion on the parent company interim information Based on our review, nothing has come to our attention that causes us to believe that the accompanying parent company interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM. Conclusion on the consolidated interim information Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM. Other matters Interim statements of value added We have also reviewed the parent company and consolidated interim statements of value added for the six-month period ended June 30, These statements are the responsibility of the Company s management, and are required to be presented in accordance with standards issued by the CVM applicable to the preparation of Quarterly Information (ITR) and are considered supplementary information under IFRS, which do not require the presentation of the statement of value added. These statements have been submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that they have not been prepared, in all material respects, in a manner consistent with the parent company and consolidated interim accounting information taken as a whole. São Paulo, July 26, 2012 PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 Carlos Alberto de Sousa Contador CRC 1RJ056561/O-0 "S" SP 1 - PARECER PWC 3

4 MANAGEMENT REPORT 2Q12 SCENARIO AND MARKET Duratex's (the Company s ) performance during the period clearly reflects the negative developments which have begun to affect some sectors of the economy, marked by the worsening of the solvency crisis in countries in the European Economic Community and the rise in the delinquency rate in the domestic market. The performance of the two business divisions, the Deca and Wood Divisions, was consistent with the fact that net revenue was supported by the strength of the endconsumer segments: furniture (which demonstrated increased buoyancy in the period), metal fittings and vitreous chinaware. The positive performance of these sectors was helped by the low unemployment rate, the increase in real incomes, credit availability for the real-estate and retail furniture segments, as well as the availability of more appropriate financing repayment periods. Incentive measures continue to be adopted by the government in an effort to keep the domestic economy buoyant. Metal fittings and vitreous chinaware have benefited from the reduction to zero of the Tax on Industrialized Products (IPI). This is also the case for the furniture sector, which in addition to benefiting from zero IPI, also benefited from the change to the tax applied to employee payrolls: instead of collecting 20% in social contributions from payrolls, a fixed rate of 1% is applied to revenue. STRATEGIC MANAGEMENT Duratex carried out two strategic moves, in May, which should help place the Company in a more competitive position. The first of these was the announcement of the signing of an agreement to subscribe to and acquire a significant stake (up to 37%) in Tablemac, a leading manufacturer of MDP wood panels in the Colombian market. Tablemac s first MDF pressing machine is currently in the ramp-up phase. The investment will be approximately R$115 million, taking place in the third quarter of 2012, and will mean that Duratex will be Tablemac s largest shareholder. In this way, the Company will guarantee itself significant geographical diversification in a promising market. Over a period of 24 months, Duratex may increase its equity stake in Tablemac to 47% by deciding to exercise its share subscription rights. This follows a decision at Tablemac's General Shareholders Meeting on May 25. Duratex s management sees the possibility of a major potential return from this investment over the long term, bearing in mind the stability and growth of the Colombian economy, and the low consumption of wood panels per capita in that country (today around 1/3 of the consumption in Brazil). The second strategic move was the acquisition of an industrial valve manufacturing unit (Metalúrgica Ipê, Mipel) from Lupatech, located in Jacareí/SP, for R$45 million, also to be paid for in the third quarter of This acquisition secures Deca's entry into the industrial valve segment, and also opens up the possibility of rapidly increasing Deca s valve production, seeing that the acquired plant is currently only operating on one shift. In addition to this, ongoing investment is being carried out in expanding the Company's operations organically. This investment absorbed R$327.5 million in the period. The main investment highlights include: (i) investments made in the unit at Itapetininga/SP which will receive a new MDF plant, with an effective production capacity of 520,000 m 3 /year. It is 1

5 planned that the new plant will be installed in the first half of 2013; (ii) finalization of construction work and the start of equipment installation at the new vitreous chinaware unit located in Queimados/RJ, with commencement of operations planned for the fourth quarter of 2012, and a production capacity of 2.4 million pieces/year; (iii) installation of equipment in the metal bathroom fittings unit in Jundiaí/SP which, when completed, will provide an additional production capacity of 1.2 million pieces a year; and (iv) forestry planting and maintenance. All together, these projects are likely to absorb investment of approximately R$650 million over the year. These investments are in line with the good prospects shown by the Company's operational segments, and are aimed at strengthening the Company's competitiveness. FINANCIAL SUMMARY (in IFRS, R$ 000) 2Q12 1Q12 2Q11 1S12 1S11 HIGHLIGHTS Volume Shipped - Deca ( 000 pieces) 6,225 6,024 6,259 12,249 11,996 Volume Shipped - Panels 626, , ,146 1,230,200 1,101,470 (m 3 ) Consolidated net revenue 809, , ,181 1,546,839 1,411,046 Gross Profit 276, , , , ,874 Gross Margin 34.2% 34.5% 33.8% 34.3% 33.9% EBITDA (1) 237, , , , ,474 EBITDA Margin 29.3% 28.3% 30.1% 28.8% 28.9% Extraordinary Event (2) , ,068 Recurrent EBITDA 237, , , , ,406 Recurrent EBITDA Margin 29.3% 28.3% 28.2% 28.8% 28.0% Net Earnings 98,401 86, , , ,259 Recurrent Net Earnings 98,401 86,247 91, , ,975 Recurrent Net Margin (3) 12.2% 11.7% 12.1% 11.9% 11.8% INDICATORS Current Ratio (4) Net Debt (5) 1,253,024 1,196,102 1,170,073 1,253,024 1,170,073 Net Debt/ EBITDA (the last 12 months) Average Shareholders Equity 3,799,279 3,737,294 3,541,398 3,763,789 3,511,774 Recurrent ROE (6) 10.4% 9.2% 10.3% 9.8% 9.6% SHARES Earnings per Share (R$) (7) Closing Share Price (R$) (8) Book Value per Share (R$) Shares Held in Treasury (shares) 1,889,486 1,889,486 1,199,486 1,889,486 1,199,486 Market Capitalization 5,826,817 6,309,159 7,250,121,5 5,826,817 7,250,121,5 (R$ 000) (9) (1) EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which is a measure of operational performance. 2

6 (2) Extraordinary Event: during the second quarter of 2011 the operational result was positively impacted by (+) R$14,068,000 from the sale of fixed assets, the effect on net earnings of which amounted to (+) R$9,284,000. (3) Net margin: result obtained by dividing net earnings by net revenue. (4) Current Ratio: Current Assets divided by Current Liabilities. Indicates the availability in R$ of assets to meet each R$ of short-term obligations. (5) Net Indebtedness: Total Financial Debt ( ) Cash. (6) ROE (Return on Equity): measure of performance given by the ratio of Net Earnings in the period (annualized in the quarters) to Average Net Equity. (7) Net earnings per share is calculated by dividing the profit attributable to the Company s shareholders, by the weighted average quantity of ordinary shares in issue during the period, excluding ordinary shares held in treasury. This indicator has been adjusted for periods prior to May 5, 2011, as a result of the 20% share bonus issue, to allow comparison between the periods. (8) The share price quote (before the share bonus issue mentioned above) has been adjusted to take account of this effect, so as to permit comparison between periods. (9) Market value has been calculated based on the share price quote at the end of the period, multiplied by the quantity of shares (550,035,331 shares up to 1Q12 and 550,037,931 shares for 2Q12), net of the shares held in treasury. OPERATIONS Deca Division 2Q12 1Q12 % 2Q11 % 1S12 1S11 % SHIPMENTS ( 000 pieces) BASICS 2,091 1, ,224 (6.0) 4,032 4,201 (4.0) FINISHING 4,134 4, , ,217 7, TOTAL 6,225 6, ,259 (0.5) 12,249 11, FINANCIAL HIGHLIGHTS (R$ 000) NET REVENUE 283, , , , , DOMESTIC MARKET 272, , , , , EXPORT MARKET 11,568 9, , ,853 17, Unit Net Revenue (in R$ per piece shipped) 45,56 44, , ,21 43, Cash unit cost (in R$ per piece shipped) (26.49) (24.84) 6.6 (24.90) 6,4 (25.68) (24.37) 5.4 Sales expenses (42,967)(37,329) 15.1(38,925) 10.4(80,296)(72,097) 11.4 General and administrative (12,323)(10,561) 16.7 (9,364) 31.6(22,884)(17,735) 29.0 expenses Operating profit before 48,326 57,107 (15.4) 53,057 (8.9) 105, ,065 (7.6) financial results Depreciation and amortization 15,069 14, , ,920 25, Employee benefits (173) (108) 60.2 (233)(25.8) (281) (1,091)(74.2) EBITDA 63,222 71,850 (12.0) 66,040 (4.3) 135, ,311 (2.3) Recurring EBITDA margin 22.3% 26.6% % % 26.8% - A combination of Higher Volumes and Unit Net Revenue resulted in an increase of approximately 5% in Net Revenue (to R$283.6 million) compared to the immediately preceding quarter (and the same quarter in 2011). For the year-to-date, Net Revenue 3

7 totaled R$553.7 million, up 7.2% compared to the Revenue reported in the same period in Over the preceding six months, this performance was better than the sector average, as measured by the indicator from ABRAMAT which showed an increase of 2.6%. This reflects the strength of the Deca brand and demonstrates the benefit of Duratex s geographical diversification which began in 2008, and has brought the Company closer to its consumers. Having seen a strong increase in shipment volume between 2008 and 2011(at an annual average rate of 13.2%), Deca reported an increase of 2.1% in this semester, and an increase of 3.3% over the immediately preceding quarter. The level of shipments is practically unchanged compared to the second quarter of 2011, which was itself the third best quarterly result in Deca's history. Cost pressure during the 2 nd quarter of 2012, principally associated with labor and natural gas, in addition to increased advertising and marketing expenses(relative to the previous period), were the main reason for the retraction seen in the EBITDA margin to 22.3%, with reported EBITDA of R$63.2 million for the quarter and R$135.1 million for the year. On an annual comparison, it should be pointed out that there was a comparative increase in General and Administrative ( G&A ) expenses as a consequence of a change to the apportionment criteria adopted until that time. Previously, apportionment was carried out as a proportion of Net Revenue. From 2012, apportionment has been applied on the basis of event/time allocation. For the year-to-date, Duratex s expense in this category came to a total of R$53.4 million, equivalent to 3.5% of Net Revenue for the period. By comparison, in 2011, expenses in this category came to a total of R$50.9 million in the first half of the year, or 3.6% of Revenue. This clearly demonstrates the stability of the Company s G&A expenses. Of particular note in the period, was Deca's participation at Expo Revestir 2012, a benchmark in the international event calendar and recognized as one of the largest architecture and construction trade fairs in the world. At the event, Duratex carried out relationship initiatives with the Company's public audiences (architects, building professionals, interior designers, and others), announcing 74 products launched in 2012, 31 from the vitreous chinaware segment and 43 from the metal bathroom fittings segment. The trade fair attracted approximately 43,000 visitors. 4

8 Wood Division 2Q12 1Q12 % 2Q11 % 1S12 1S11 % SHIPMENTS (in m 3 ) STANDARD 368, , , , , COATED 257, , , , , TOTAL 626, , , ,230,2001,101, FINANCIAL HIGHLIGHTS (R$ 000) NET REVENUE 525, , , , , DOMESTIC MARKET 500, , , , , EXPORT MARKET 24,734 23, , ,541 44, Unit net revenue (in R$ per m 3 shipped) (0.6) Cash unit cost (in R$ per (459.40)(444.41) 3,4(458.14) 0,3 (452.04) (464.51) (2,8) m 3 shipped) Sales expenses (51,745)(46,786) 10.6(49,545) 4.4 (98,531) (93,531) 5.3 General and Administrative (16,970)(13,594) 24.8(17,597)(3.6) (30,564) (33,235) (8.0) expenses Operating profit before financial results 101,560 78, , , , Variation in fair value of biological assets (36,413)(32,923) 10.6(27,694) 31.5 (69,336) (63,296) 9.5 Depletion tranche of biological assets 41,096 34, , ,681 69, Depreciation, amortization and depletion 68,367 56, , , , Employee benefits (549) (149)268.5 (546) 0.5 (698) (1,987)(64.9) EBITDA 174, , , , , Extraordinary Event(¹) (14,068) - 0 (14,068) - Recurrent EBITDA 174, , , , , Recurrent EBITDA margin 33.1% 29.3% % % 28.6% - (1) Sale of fixed assets The Wood Division's performance was the most notable feature of the period. Both from the standpoint of shipment volumes and revenue, new records were set in 2012, both in terms of 2nd quarter results and year-to-date results. Shipments totaled 626,100 m 3 in the quarter, up 3.6% and 7.5% compared to the immediately preceding quarter and the same period in For the year-to-date, the increase amounted to 11.7%, to 1,230,200 m 3. By way of comparison, shipment performance for the industry, as measured by the indicator from Brazilian Industry Association of Wood Panels - ABIPA, showed an increase of 11.6% over the six month period, compared to the performance in The combination of gains in scale, as result of the increase in Unit Net Revenue, and the management of the Cost of Goods Sold, resulted in a significant improvement in recurring EBITDA (to R$174.1 million). There was a 27.1% improvement compared to the 5

9 immediately preceding quarter and a 19.3% improvement compared to the same period in EBITDA margin showed a strong improvement in the period, reaching 33.1%. For the year-to-date, EBITDA was up 21.5%, to R$311.0 million. Contributing to this performance was the year-on-year reduction in G&A Expenses, a result of the change to the recognition criteria, as mentioned earlier. This event, however, should not be allowed to overshadow the highly positive performance which resulted from the recovery in the furniture industry saw the introduction of more manageable financing terms in the retail furniture segment, as well as tax incentives which put the competitive conditions in this segment in line with those for white goods consumer durables. As a way of strengthening competitive advantages by increasing the variety of products offered to the market, in line with international trends, 18 new panel finishes were developed during the quarter. These will be presented at Formóbile, a major trade fair which brings together companies from Brazil and abroad, who represent the various supply sectors in the furniture industry. These new panel finishes will be launched at the event, which is held during the period July 24-27, in São Paulo. The panel finishes are marked by innovation, high technology and quality design, in tune with international decoration trends. VALUE ADDED Value added in the semester totaled R$864.9 million, an increase of 16.0% compared to that in the previous year. Of this amount, R$303.2 million, equivalent to 15.2% of the revenues obtained, and 35.1% of the total value added, went to the federal, state and municipal governments in the form of taxes and contributions. Distribution of Value Added in 1S12: Remuneration for Labor: 31.5% Remuneration to Government: 35.1% Remuneration in Terms of Financing: 12.1% Remuneration to Shareholders: 21.3% DIVIDENDS /INTEREST-ON-EQUITY Shareholders have a statutory guarantee of a minimum dividend of 30% of adjusted net earnings. On June 29, 2012, a dividend provision was made of R$62,032,000, in the form of interest-on-equity, to be distributed to shareholders on August 15, The shares started to be negotiated "ex-rights" on July 27, Gross remuneration to shareholders will come to a total of R$ per share. CAPITAL MARKETS AND CORPORATE GOVERNANCE In June 2012, 260 debentures were converted into 2,600 new ordinary shares, thus increasing the quantity of outstanding shares to 550, At the end of June 2012, Duratex therefore had a Market Capitalization of R$5,826.8 million, based on the share price quote at the end of the month of R$ For the yearto-date period, the share price showed an appreciation of 19.2%, while the Bovespa Index depreciated by 4.2%. 6

10 On the BM&FBovespa spot market, 510,900 trades of Duratex s shares were recorded in the year-to-date, with million shares changing hands, representing a total trading volume of R$2,073.2 million, or an average daily volume of R$16.6 million. This level of liquidity has ensured the presence of the shares in the Ibovespa, an index which is composed of approximately 60 shares, the main inclusion criteria for which are aspects related to share liquidity. Another important index in which the Company s shares are included is the ISE the Corporate Sustainability Index. This index consists of 51 companies that are outstanding in their application of the international sustainability Triple Bottom Line concept, which evaluates social, environmental and economic-financial aspects in an integrated manner, incorporating practices related to corporate governance, business characteristics, the nature of the product and climate change. Duratex s shares are listed on the BM&FBovespa Novo Mercado, a differentiated part of the spot market for companies that, on a spontaneous basis, are outstanding for the adoption of the highest standards of corporate governance. To be part of this part of the market, the Company commits itself to arbitration through the BM&FBovespa Novo Mercado Arbitration Chamber to resolve any and every dispute or controversy arising among the Company, shareholders and managers. In addition to the pre-requisites required by the Novo Mercado, the Company has a differentiated dividend distribution policy, equivalent to 30% of adjusted net earnings. 1/3 of its Board of Directors consist of independent members. The Company also adheres to the Abrasca code for self-regulation and good practices. In April, the Company published its sustainability report, solely in a digital format, in accordance with Global Reporting Initiative (GRI) standard level A+. This means that the entire report was verified by an external party (PwC), thus ensuring greater transparency in relation to the information provided. The report can be accessed at the following website address Shareholding structure as at June 2012 Itaúsa and Families: 39.9% Ligna and Family: 18.5% Pension Funds: 2.5% Foreign Investors: 26.2% Others: 12.6% Treasury: 0.3% SOCIAL AND ENVIRONMENTAL RESPONSIBILITY At the end of the period, the Company had 10,615 employees, to whom a total remuneration of R$84.2 million was allocated in the quarter, totaling R$163.6 in the year. (Values in R$ 000) 2Q12 1Q12 % 2Q11 % 1S12 1S11 % EMPLOYEES (quantity) 10,615 10,624 (0.1) 10, ,615 10, Remuneration 84,217 79, , , , Obligatory legal charges 48,698 41, ,841 8,6 90,322 88, Differentiated benefits 16,471 17, , ,527 28, The Company implemented a series of environmental initiatives during 2012, spending a total of R$13.0 million in this area (13% more than in 2011). Of particular note in this 7

11 connection was the treatment of effluents, the collection of residues, and the maintenance of the Company s forestry areas. In addition, a series of projects with a socio-environmental focus are planned for 2012, including incentives for culture and sport. The following projects are currently ongoing: (i) the "Community Library" project, which involves the installation of three libraries in municipal schools in Botucatu - SP, Uberaba MG, and Cabo de Santo Agostinho - PE, as well as the revitalization of two libraries already in existence in the municipalities of Taquari - RS and Estrela do Sul - MG; (ii) the Annual Activity Plan of the São Paulo Modern Art Museum MAM project; (iii) the "Swimming, Athletics and Weightlifting Championships" project, which intends to provide the best training conditions for disabled athletes to participate in the 2016 Paralympics; (iv) the One step forward for education project, which will benefit needy children and adolescents in the community of Paraisópolis by involving them in football and supporting activities, and integration with the community and society; (v) the Judo of the Future project, which teaches Judo to needy children and adolescents based on a work methodology which stimulates cognitive and intellectual development, tolerance, living together and concentration; (vi) the Cinema Cine Moviola and Casinha de Filmes" (little house of films) project, through which complete structures for the showing of digital films and professional staff will be trained to operate them. In the second quarter of 2012, additional funds were provided to ongoing projects and cultural and sports projects which will be implemented this year and in Investments in the period equaled approximately R$ 2,184,000. The highlights are as follows: (i) 1 o Bienal Iberoamericana de Design (1 st Bi-annual Ibero-American Design Show), which will be held at the Museu da Casa Brasileira (Brazilian House Museum). This will be one of the most important meetings for the promotion of contemporary design; (ii) "Exposição Fronteiras" (Frontier Exhibition), by which pieces of Brazilian art and a collection of objects developed by designer Marcelo Rosenbaum with the community of Chapada do Araripe, in the state of Piauí, have been put on show at Palazzo Giureconsulti/Affari, in Milan, in Italy, during Design Week ; (iii) "Ação Educativa - Fundação Bienal de São Paulo" (São Paulo Bi-annual Foundation Education Initiative) which will promote meetings between teachers and cultural professionals, with the object of expanding the role of educators and involving art in all educational situations. Initiatives in this project will also be developed during the 30ª Bienal de Arte de São Paulo (São Paulo 30 th bi-annual art show); (iv) "Música e Cidadania" (Music and Citizenship), which involves the Repertory Chamber Orchestra which plays a combination of popular music and children's music, with the aim of stimulating the study of music and providing training in technical matters, style, repertoire, cooperation, commitment, leadership and improvisation; (v) "Girassóis",(Sunflowers) which involves a contemporary dance show inspired by the works of Van Gogh and art-education workshops, with practical teaching proposals. These will be used in classrooms, and integrate dance, music, theatre, art and the circus; (vi) "Gols - Artilheiros do Futuro" (Goals Center-forwards of the Future), which will provide theoretical and practical lessons on football and complementary activities, with particular emphasis on strengthening schooling, foreign languages, information technology, general knowledge, psychological support, providing dental and medical check-ups, and providing seminars and guidance sessions; (vii) "Rugby Cidadão (Citizen s Rugby), in partnership with the Municipal Secretary for Education of São Paulo, which will provide children and youngsters with a chance to play rugby at Unified Educational Centers (CEUs), with complementary activities 8

12 focused on the teaching of values and behavior to students; (viii) "Center for Olympic Cycling Training - BMX", which will establish a center for sports training for Olympic and Paralympic cycling, with the object of providing training in respect of techniques and the basic elements of this sport, as well as to perfecting and improve their abilities in the sport. The center will also provide people with the opportunity of participating in official events (national and international). In addition, worthy of note is the carrying out and completion of the Greenhouse Gas Emission Inventory for the period 2011, which for the first time was audited by an independent company. In this way, Duratex responded voluntarily to the Carbon Disclosure Project (CDP), a European financial sector initiative which encourages companies to publicize their commitments and policies designed to mitigate the effects of climate change. Another event of note in the period was the launching of the Duratex Supplier Management program, aimed at managing the Company s relationships with its suppliers. This program is a structured program which involves reference to socio-environmental, economic, quality and service-level criteria all of which are important aspects for consideration in supplier relationships. In the first stage of the program, an information assessment will be carried out with respect to suppliers labor policies, socioenvironmental practices and stances. In addition scheduled visits and document controls will also be carried. Also envisaged is the development of a program to monitor and improve our suppliers practices. OMBUDSMAN SERVICE In connection with improving processes and procedures related to good corporate governance practices, Duratex's Ombudsman Service was launched in May. The objective of the Service is to establish a dialogue channel between the Company and its public audiences, to ensure the fulfillment of the Company's Code of Ethics and Values. The channel also allows for the identification of opportunities for improving processes, policies and behavior, based on analysis of complaints received. INDEPENDENT AUDITORS In accordance with CVM Instruction 381, dated January 14, 2003, and the Circular Letter CVM/SNC/SEP nº 02/2006 of December 28 th 2006, Duratex and its subsidiaries reports that they did not hire from PwC any other services than those related to the audit for the period ended June 30, The Company's policy for procuring services from our independent auditors that are not related to external audits is based on internationally accepted principles that preserve the independence of auditors and mean that: (a) the auditor should not audit their own work, (b) The auditor should not provide management functions within the client, and (c) the auditor must not promote the interests of the client. ACKNOWLEDGMENTS We are deeply grateful for all the support received from our shareholders, the dedication and commitment of our employees, the partnerships we have with our suppliers and the confidence placed in us by our clients, consumers and shareholders. 9

13 The Management 10

14 ASSETS Duratex S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / BALANCE SHEET (In thousands of Reais) PARENT COMPANY CONSOLIDATED (IFRS) LIABILITIES AND STOCKHOLDERS' EQUITY PARENT COMPANY CONSOLIDATED (IFRS) 06/30/ /31/ /30/ /31/ /30/ /31/ /30/ /31/2011 CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents Loans and financing Trade accounts receivable Debentures Inventories Suppliers Other receivables Personnel Recoverable taxes and contributions Accounts payable Other credits Taxes and contributions Dividends payable NON-CURRENT ASSETS NON-CURRENT LIABILITIES Related parties Loans and financing Linked deposits Debentures Other credits Provisions Pension plan credits Deferred income tax and social contribution Recoverable taxes and contributions Related parties Deferred income tax and social contribution Others Investments in subsidiaries Other investments STOCKHOLDERS' EQUITY Property, plant and equipment Capital Biological assets Costs on issue of shares (7.823) (7.823) (7.823) (7.823) Intangible assets Capital reserves Revaluation reserves Revenue reserves Treasure shares (23.032) (23.032) (23.032) (23.032) Carrying value adjustments Equity attributable to equity holders of the parent company Noncontrolling interests TOTAL ASSETS TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY The accompanying notes are an integral part of these interim financial reporting

15 Duratex S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / Quarters ended June 30 (In thousands of Reais, except for net income per share) STATEMENT OF INCOME PARENT COMPANY CONSOLIDATED (IFRS) 06/30/ /30/ /30/ /30/2011 Net sales revenue Variation in the fair value of biological assets Cost of products sold ( ) ( ) ( ) ( ) Gross profit Selling expenses ( ) ( ) ( ) ( ) General and administrative expenses (46.835) (45.134) (53.448) (50.970) Management expenses (6.188) (7.129) (6.318) (7.407) Other operating income (expenses), net (14.667) (3.076) (6.883) Operating profit before financial result and results on investments Financial income Financial expenses (80.482) (72.472) ( ) (96.828) Equity in the results of investees Profit before income tax and social contributions Income tax and social contributions - current (47.039) (31.680) (64.421) (53.446) Income tax and social contributions - deferred Net income for the period Net income attributable to: Owners of the company Minority interest The accompanying notes are an integral part of these interim financial reporting

16 DURATEX S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / Quarters ended June 30 (In thousands of Reais) STATEMENT OF COMPREHENSIVE INCOME PARENT COMPANY CONSOLIDATED 06/30/ /30/ /30/ /30/2011 Net income for the period Other components of comprehensive income Participation in the comprehensive income of subsidiaries (3.462) (1.011) (3.462) (1.011) Comprehensive income for the period, net of tax Attributable to: Owners of the company Minority interest The accompanying notes are an integral part of these interim financial reporting

17 DURATEX S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Consolidated (In thousands of Reais) Capital Costs on issue of shares Capital reserves Revaluation reserves Revenue reserves Carrying value adjustments Treasury shares Retained earnings Total Total Stockholders' Minority interest equity Balances as at December 31, (7.823) (8.890) Comprehensive Income for the period Net Income for the period Participation in the comprehensive income of subsidiaries (1.011) - - (1.011) - (1.011) Total comprehensive income for the period (1.011) Share options granted Acquisition of treasury shares (7.479) - (7.479) - (7.479) Capital increase by revenue reserves ( ) Realization of revaluation reserve (2.836) Appropriation of net income Allocated to the legal reserve (8.854) Dividends (63.693) (63.693) - (63.693) Appropriation to reserves (90.855) Balances as at June 30, (7.823) (16.369) The accompanying notes are an integral part of these interim financial reporting

18 DURATEX S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Consolidated (In thousands of Reais) Capital Costs on issue of shares Capital reserves Revaluation reserves Revenue reserves Carrying value adjustments Treasury shares Retained earnings Total Total Stockholders' Minority interest equity Balances as at December 31, (7.823) (23.032) Comprehensive Income for the period Net Income for the period Participation in the comprehensive income of subsidiaries (3.462) - - (3.462) - (3.462) Total comprehensive income for the period (3.462) Share options granted Adjustment of debentures convertible into shares Capital increase Interest on capital complement (682) (682) - (682) Realization of revaluation reserve (3.283) Appropriation of net income Allocated to the legal reserve (9.218) Interest on capital 1st half-year (62.032) (62.032) - (62.032) Appropriation to reserves ( ) Balances as at June 30, (7.823) (23.032) The accompanying notes are an integral part of these interim financial reporting

19 DURATEX S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / STATEMENT OF CASH FLOW (In thousands of Reais) PARENT COMPANY CONSOLIDATED 06/30/ /30/ /30/ /30/2011 Operating activities: Net income for the period Items not affecting cash: Depreciation, amortization and depletion Variation in the fair value of biological assets - - (69.336) (63.296) Interest, foreign exchange and monetary variations, net Equity in the results of investees (64.889) (66.529) - - Provisions, disposal of assets (10.240) (407) Investments in working capital: (Increase) Decrease in Assets Trade accounts receivable (73.398) (32.559) (75.841) (66.868) Inventory (5.715) (33.566) 627 (32.596) Other Assets (2.714) (17.715) Increase (Decrease) in Liabilities Suppliers (52.983) (3.301) Personnel liabilities Accounts payable (1.935) (289) Taxes and contributions (730) Other liabilities (9.508) (1.227) (9.629) Cash provided by operating activities Investing activities: Investments in biological, fixed and intangible assets ( ) ( ) ( ) ( ) Advance for future capital increase in subsidiaries ( ) Net cash received on the merger of subsidiary Dividends received from subsidiaries Cash used in investing activities ( ) ( ) ( ) ( ) Financing activities: Financing Debentures Amortization of financing ( ) ( ) ( ) ( ) Interest on capital/ Dividends (60.455) (93.082) (68.588) ( ) Treasury shares and others - (7.479) - (4.572) Cash used in (provided by) financing activities (65.239) (10.036) Exchange variations on cash and cash equivalents (381) Increase (decrease) in cash for the period (57.280) Opening Balance Closing Balance The accompanying notes are an integral part of these interim financial reporting

20 (Demonstration mandatory by accounting practices adopted in Brazil and supplementary information under IFRS) Duratex S.A. - Listed company National Register of Corporate Taxpayers - (CNPJ) No / STATEMENT OF VALUE ADDED (In thousands of Reais) PARENT COMPANY CONSOLIDATED 06/30/ /30/ /30/ /30/2011 Revenue Gross sales revenue Other revenue Allowance for doubtful accounts (2.059) (1.298) (2.271) (1.575) Inputs acquired from third parties ( ) ( ) ( ) ( ) Cost of sales ( ) ( ) ( ) ( ) Materials, energy, outsourced services and others ( ) ( ) ( ) ( ) Gross value added Depreciation, amortization and depletion ( ) ( ) ( ) ( ) Net value added Value added received through transfer Financial income Equity in the results of investees Value added to be distributed DISTRIBUTION OF VALUE ADDED Personnel compensation Direct compensation Benefits Severance indemnity fund (FGTS) Others Government compensation (taxes) Federal State Municipal Financing remuneration (interest) Stockholders' remuneration Interest on capital/ Dividends Retained earnings Minority interest Total value added distributed

21 Note 1 Operating context a) General information NOTES TO THE FINANCIAL INFORMATION AS AT JUNE 30, 2012 (All amounts in Brazilian Reais (thousands), unless otherwise indicated) Duratex S.A. (the Company ) is a publicly-held corporation headquartered in the city of São Paulo - SP, Brazil. Its controlling shareholders are Itaúsa - Investimentos Itaú S.A., which has significant operations in the financial, chemical and information technology sectors, and Companhia Ligna de Investimentos, which operates principally in the retail market and in the distribution of civil construction and woodworking materials and also operates in property construction and property rental. The main activities of Duratex and its subsidiaries (collectively the Group ) comprise the manufacture of wood panels (through its Wood Division), vitreous chinaware and sanitary ceramic and metal products (the Deca Division). Duratex presently has fourteen industrial plants in Brazil and one in Argentina, and maintains branches in the main Brazilian cities. Duratex also has commercial subsidiaries in the United States and Europe. The Wood Division operates five industrial plants in Brazil, responsible for the production of hardboard, medium density particle (MDP) panels, medium, high and super density fiberboard (MDF, HDF and SDF) panels, Durafloor laminate flooring and components for the furniture industry. The Wood Division also operates an industrial resin production plant. The Deca Division operates eight industrial plants in Brazil and one in Argentina, responsible for the production of sanitary ceramic and metal products under the trademarks Deca, Hydra, Belize, Elizabeth and Deca Piazza (in Argentina). b) Approval of Interim financial statements The Condensed Interim Financial Information of Duratex S.A. and subsidiaries (Parent company and Consolidated) was approved by Duratex S.A s Supervisory Board on July 26, Note 2 Basis of preparation and significant accounting practices The Condensed Interim Financial Information has been prepared in accordance with pronouncement nº 21 - Interim Financial Reporting, issued by the Brazilian Accounting Pronouncements (CPCs) as well as and in accordance with International Accounting Standard (IAS) nº 34 Interim Financial Reporting, issued by the International Accounting Standards Board (IASB). The Condensed Interim Financial Information is being presented according to the applicable standards of the Brazilian Securities Commission (CVM). Accordingly, and as described in CVM s Circular Letter CVM/SNC/SEP 03/2011, the Company has opted to present the explanatory notes in this Condensed Interim Financial Information in a summarized manner when the information is the same as that presented in the annual financial statements. Thus this Condensed Interim Financial Information should be read together with the annual financial statements for the year ended December 31, Accounting policies The accounting policies adopted in preparing the Condensed Interim Financial Information are the same as those used to prepare the annual financial statements for In addition to the Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

22 accounting practices of the last annual financial statements, the note related to debentures is particularly relevant to this Condensed Interim Financial Information. As at January 15, 2012 the First Private Issue of Debentures convertible into ordinary Company shares took place. The total amount of the financial liability and equity instruments was measured on initial recognition (as described in Note 16). Note 3 Critical accounting judgments and estimates During the preparation of the Condensed Interim Financial Information, accounting judgments, estimates and assumptions have been utilized to record certain assets and liabilities and other transactions. The estimates and accounting judgments adopted by management drew on the information available at the date the financial statements were prepared and involved experience of past events and forecasts for future events. The Condensed Interim Financial Information includes several estimates, such as: the useful lives of property, plant and equipment items, the realization of deferred tax credits, allowance for doubtful accounts, inventory losses, the evaluation of the fair value of biological assets, and a provision for contingencies and impairment losses. The following are the main estimates and assumptions that involve risk, as to the likelihood of requiring adjustments to asset and liability book values: a) Risk of variations in the fair value of biological assets The Company adopted several estimates to evaluate its forestry reserves, in accordance with the methodology established by CPC 29/IAS 41. These estimates were based on market references, which are subject to changes which would impact the Company's financial statements. Specifically, a 5% reduction in standing wood prices would result in a reduction in the fair value of biological assets of about R$ 35,936, net of tax effects. If the discount rate presented a 0.5% increase, this would result in a reduction in the fair value of biological assets of about R$ 8,616, net of tax effects. b) Estimated loss (impairment) of goodwill The Company and its subsidiaries test the possible impairment of goodwill annually. The goodwill balance can be affected by changes in the economic or market scenario. c) Pension plan benefits The current value of assets related to pension plans depends on a number of factors that are determined based on actuarial calculations. These calculations rely on a series of assumptions. Among the assumptions used in determining these values are the discount rate and current market conditions. Any changes in these assumptions will affect the corresponding book values. Note 4 Financial risk management 4.1 Financial risk factors The Company and its subsidiaries are exposed to market risks related to fluctuations in interest rates, exchange rates and credits. Consequently, risk management follows the policies approved by the Supervisory Board and is monitored by the Audit and Risk Committee. The Company and its subsidiaries have procedures to manage these fluctuations and can use hedging instruments to reduce the impact of the risks in this regard. These procedures include the monitoring of levels of exposure to each market risk, in addition to establishing decision-making levels. All hedges created by the Group are intended to protect its debts and investments. The Group does not utilize leveraged financial derivatives. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

23 (a) Market risk (I) Exchange rate risk: Exchange rate risk arises from the risk that there will be a reduction in the values of the Group's assets or an increase in its liabilities due to an alteration in the exchange rate. The Group has an exchange rate risk policy establishing the maximum amount in foreign currency by which it can be exposed to exchange rate variations. In view of the risk management procedures, the objective of which is to minimize the foreign exchange exposure of the Company and its subsidiaries, hedging mechanisms are maintained, in order to mitigate, in large part, the foreign exchange exposure. (II) Derivatives: In respect of the derivative instruments, no verifications, monthly settlements or margin calls are made, and the contracts are settled on maturity and recorded at fair value, considering the market conditions for terms and interest rates. The outstanding contracts as at June 30, 2012 were as follows: a - US$ vs. Interbank deposit certificate (CDI) swap agreements The Company had four agreements of this nature, with an aggregate notional amount of US$ 22,997,000, with varying maturities up to April 10, 2014, an asset (purchase) position in US Dollars and a liability (sale) position in CDI. The Company made these agreements in order to convert its debts denominated in US Dollars into debts indexed to the CDI. b - Fixed rate vs. Interbank deposit certificate (CDI) swap agreements The Company had six agreements with an aggregate amount of R$ 266,225, maturing through April 28, 2015, with an asset position at a fixed rate and a liability position at a percentage of the CDI. The subsidiary Duraflora S.A. had two agreements with an aggregate amount of R$ 190,000, maturing on September 30, 2013 with an asset position at a fixed rate and a liability position at a percentage of the CDI. The Company made these agreements in order to convert its total fixed interest rate debts into CDI-indexed debts. c - Non-Deliverable Forward (NDF) Agreement The Company had one agreement of this type, the total contractual amount of which was US$ 12,800,000, maturing on July 31, 2012, with a purchase position in US Dollars. The Company made this agreement in order to convert its US Dollar liabilities into Brazilian Reais. The agreement is settled on the maturity date, considering the difference between the forward exchange rate (NDF) and the end-of-period exchange rate (Ptax). d - Calculation of the fair value of positions The fair value of the financial instruments was calculated by utilizing pricing calculated by reference to the estimated present value of both liability and asset positions, where the difference between the two represents the market value of the swap. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

24 The gains or losses on the transactions listed above were offset by the liability and asset positions in interest rates and foreign currency, the effects of which were recognized in the Condensed Interim Financial Information. e - Sensitivity analysis The table below sets out a sensitivity analysis of the financial instruments, including derivatives, describing the risk scenarios which could generate material losses for the Group. The analysis involves a Probable Scenario (Base Scenario) plus two other scenarios (under the terms determined by CVM No. 475/08) representing a 25% and 50% deterioration in the risk variables. For the rates of risk variables used in the probable scenario, BM&FBOVESPA (São Paulo Stock, Futures and Commodities Exchange)/ Bloomberg quotations for the respective maturity dates were used. (III) Cash flow or fair value risk associated with the interest rate Interest rate risk is the risk that economic loss will be suffered due to adverse changes in interest rates. This risk is continually monitored to evaluate a possible need to contract derivative transactions to hedge against interest rate volatility. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

25 (a) Credit Risk The Group's sales policy is directly associated with the level of credit risk it is willing to accept in the course of its business. The procedures adopted to minimize default or realization losses on accounts receivable involve: the diversification of the Group s portfolio of receivables, the selection of its customers, and the monitoring of sales financing terms and individual position limits. In respect of temporary cash investments and all other investments, the Company follows the policy of working with blue-chip institutions and not concentrating its investments in only one economic group. (b) Liquidity risk The Company and its subsidiaries have a debt policy which defines the limits and parameters for debt and the minimum funds which should be maintained, the latter being the higher of the following: an amount equivalent to 60 days of net revenue or the amount of the debt serviced plus dividends and/or interest on capital forecast for the following six months. The management of the liquidity position takes place on a daily basis, in the form of monitoring the cash flow. Listed below are the maturities of the Company and its subsidiaries contracted financial liabilities as presented in the Condensed Interim Financial Information: The budget projection for the next fiscal year, approved by the Board of Directors, shows the Company's cash generating capacity for meeting its obligations (if the budget is achieved). 4.2 Capital management The Company and its subsidiaries manage their capital with the objective of ensuring the continuity of their operations, as well as providing shareholders with a return on their investment. This is achieved through capital cost optimization and control of the level of indebtedness as a result of monitoring the financial leveraging index which records the ratio of net debt to total capital. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

26 The financial leverage did not present a significant change from that calculated in December Fair value estimate It is assumed that the book values of accounts receivable from customers and accounts payable to suppliers, less the provision for loss (impairment), are close to their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate which is available to the Company and its subsidiaries in respect of same financial instruments. The Company and its subsidiaries apply CPC 40/IFRS 7 for financial instruments measured at fair value. CPC 40/IFRS 7 requires disclosure of the measurement criteria used. As the Company has only Level 2 derivatives, it uses the following evaluation techniques: The fair value of the interest rate swap is calculated as the present value of the estimated future cash flows based on yield curves adopted by the market The fair value of future foreign exchange contracts is determined based on future exchange rates at balance sheet dates, with the resulting amount discounted to its present value. The financial instruments (by category/level) are presented below: (*) The derivative financial instruments are presented at the net value, asset or liability, and are all Level 2 financial instruments. Note 5 Cash and cash equivalents The financial investments balance includes bank deposit certificates, remunerated by reference to variations in the CDI rate, and foreign securities in US Dollars, remunerated by an interest rate. Although they have long-term maturities, bank deposit certificates can be redeemed at any time without loss of remuneration. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

27 Note 6 Trade accounts receivable The Company and its subsidiaries have a Credit Policy, the objective of which is to establish the procedures to be followed when granting credit on in respect of business operations, and sales of products and services, both domestically and abroad. The credit limit is determined as a result of credit analysis, considering the history of a company, its capacity as a borrower, and market information. The credit limit is defined with reference to a percentage of net revenues and the stockholders equity, or a combination of these. Consideration is also given to the average volume of monthly purchases. The decision as to the credit limit is always supported by an evaluation of the economic and financial situation, relevant documents and company s conduct. Customers are classified as A, B, C and D based on the length of the Company s relationship with them and their payment history. The maximum credit risk exposure at the date of this report is the book value of each class of trade accounts receivable listed above. The Group holds no securities as a guarantee. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

28 Note 7 - Inventory Note 8 Recoverable taxes and contributions The Company has recoverable federal and state tax credits, the compositions of which are as follows: (*) The recoverable amounts for State Value-Added Tax (ICMS), Social Integration Program (PIS) and Social Contribution on Revenue (COFINS) were mainly generated on the acquisition of property, plant and equipment items for the industrial plants. Under current legislation, the offsetting of PIS/COFINS will be effected within 12, 24 and 48 months, and the offsetting of ICMS within 48 months. Note 9 Deferred income tax and social contributions Deferred income tax and social contributions are calculated on income tax and social contribution losses, temporary differences between the calculation bases of tax on assets and liabilities, and adjustments implemented to comply with the CPCs/ IFRS. The tax rates applied in this respect are 25% for income tax and 9% for social contributions. Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available to be offset by temporary differences, considering projections of future income. These projects are prepared on the basis of internal assumptions and on future economic scenarios, and are, therefore, subject to change. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

29 Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

30 Note 10 Related parties a) Transactions with subsidiaries b) Other related parties Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

31 (*) Refers to the costs of the rural leasing agreement with Ligna Florestal Ltda. (controlled by Ligna de Investimentos) entered into by the subsidiary Duraflora S.A. in connection with property used for reforestation. The monthly charges for this lease are R$ 1,091. This agreement will expire in July 2036 and may be renewed automatically for a further 15 years and will be readjusted annually based on the Company s average price for the sale of MDP panels. The transactions with related parties are trade purchases and sales, in the normal course of the Company s business, realized in market conditions. Financial investments in Banco Itaú S.A are made in normal financial market conditions and the limits set by the Company s management. The amounts presented as financial income are related to earnings on investments, and financial expenses refer to fees for the collection of receivables. c) Management remuneration The remuneration paid or payable to the executives of the Company and its subsidiaries for the second quarter of 2012 was R$ 6,318 in fees (R$ 7,407 June 30, 2011), R$ 4,508 in the form of profit sharing (R$ 1,721 June 30, 2011), and R$ 2,867 in the form of long-term remuneration based on stock options (R$ 1,457 - June 30, 2011). Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

32 Note 11 Investments in subsidiaries Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

33 Note 12 Property, plant and equipment Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

34 Assets in progress refer mostly to buildings, machinery, and equipment that is in the process of being installed. The Company and its subsidiaries have formalized contracts for the acquisition of equipment and services, totaling approximately R$ million in obligations assumed up to June 30, The annual depreciation rates are presented below: Note 13 Biological assets (forest reserves) Through its wholly-owned subsidiary Duraflora S.A., the Company is the owner of eucalyptus and pine forestry reserves, which are principally utilized as raw materials for producing wood panels, floors and components, and also for sale to third parties. These reserves guarantee supplies to the factories, and also protect against the risk of future wood price increases. Integrated with the manufacturing facilities, these reserves, together with a supply network, provide the Company with a high degree of self-sufficiency in terms of wood supplies. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

35 As at June 30, 2012 the Group had roughly 140 thousand hectares of planted areas (December 31, 2011: 138 thousand hectares), in the State of São Paulo, Minas Gerais, and Rio Grande do Sul. a) Fair value estimate The fair value is calculated based on an estimate of the volume of wood ready for harvesting, at current prices for standing wood. In this respect there is an exception for (i) forests which are up to one year old, which are stated at cost (because of a decision that cost value approximate fair value in such cases), and (ii) forests in formation, for which the discounted cash flow method is employed. Biological assets are measured at fair value, less selling costs at the time of harvesting. Fair value is determined by valuing the estimated ready-to-harvest volumes at current market prices, based on volume estimates. The assumptions utilized were: i. Discounted cash flow the estimated volume of ready-to-harvest wood considering current market prices, net of planting costs to be realized and the capital cost of the land in the planting (brought to present value). ii. Prices - Cubic meter prices in R$ are obtained from market surveys carried out by specialized firms surveying regions and products similar to those with which the Company deals, in addition to prices from third-party transactions in active markets. iii. Differentiation - the volumes harvested were categorized and valued according to: (a) speciespine and eucalyptus, (b) region, (c) destination: sawmill and processing. iv. Volume the estimated volumes ready for harvesting (ie in the 6th year for eucalyptus trees and in the 12th year for pine) is based on projected average productivity for each region and for the two species. Average productivity may vary based on age, rotation, climatic conditions, quality of seedlings, fires, and other natural risks. In the case of mature forests, the actual volumes of wood are utilized in arriving at the estimate. Rotating physical inventory is realized from the second year of a forest's life, and the effects are incorporated in the financial statements. v. Regularity - expectations regarding future wood prices and volumes are reviewed at least every quarter, or when the rotational physical inventory is concluded. b) Composition of Balance The biological assets balance is composed of the cost of forest formation and adjustments to fair value, as shown below: The forests are unencumbered by any third-party liens or warranties, including those of financial institutions. In addition, none of the Company s forests have a restricted legal title. c) Changes in balance The following are the changes in the balance from the beginning to the end of the period: Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

36 The investments in forests in formation result from an increase in planted areas to support the expansion of the Company's operations. The positive adjustment to the value results from higher prices in the present value of standing wood, and higher productivity. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

37 Note 14 Intangible assets Average amortization rate 20% 0% 0% 6.67% Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

38 Average amortization rate 20% 0% 0% 6.67% Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

39 Note 15 Loans and financing Sureties and letters of guarantee securing loans and financing to Duratex S.A. were granted by Itaúsa S.A., totaling R$ 395,349 (R$ 364,278 as at December 31, 2011), Companhia Ligna de Investimentos, amounting to R$ 300,706 (R$ 324,254 as at December 31, 2011), Duratex Comercial Exportadora S.A., totaling R$ 657,900 (R$ 717,996 at December 31, 2011) and Duraflora S.A., totaling R$ 34,096 (R$ 34,556 as at December 31, 2011). In the case of loans and financing obtained by subsidiaries, sureties were granted by Itaúsa S.A., totaling R$ 28,613 (R$ 20,036 as at December 31, 2011), Duratex S.A., totaling R$ 323,196 (R$ 260,908 as at December 31, 2011) and Duratex Comercial Exportadora S.A., totaling R$ 79 (R$ 586 as at December 31, 2011). Restrictive clauses Loans and financing from the National Bank for Economic and Social Development (BNDES) are subject to restrictive covenants in accordance with usual market practices. On June 30, 2012 these covenants were met. Loans and financing designated at fair value Certain loans and financing (identified in the table above as SWAPS) were designated at fair value through profit or loss. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

40 Note 16 Debentures convertible into shares On February 8, 2012 the first private issue debentures, with a floating guarantee, convertible into ordinary shares of the company were approved. These were and are to be issued through private subscription. The proceeds from the debentures are to be allocated as follows: (i) Fixed investment for the establishment, at the company's industrial unit in Itapetininga SP, of a new production line for the manufacture of medium density reconstituted wood fiber panels (MDF), a new low pressure coating line, and a new low pressure line for the impregnation of laminated paper (ii) The acquisition by the company of locally manufactured machinery and equipment needed for (i). Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

41 General characteristics of the debentures The fair value of the liability component, included in the non-current borrowing, was calculated using a market interest rate for an equivalent bond without conversion rights. The residual amount, representing the subscription bonus, is included in the stockholders equity in the carrying value adjustments. Note 17 - Contingencies The Company and its subsidiaries are party to judicial and administrative processes relating to labor, civil, and tax matters which arise in the normal course of business. Provision for contingencies in respect of these processes takes into consideration an evaluation of the likelihood of loss, conducted by the Company's legal advisors. Based on the opinion of its legal advisors, the Company's management believes that the recorded provision for contingencies, presented below, is sufficient to cover any potential losses relating to these processes. Tax contingencies principally relate to legal discussions in relation to the Plano Verão and PIS sixmonthly credits. In the period concerned no new facts or events occurred which affects the estimates made by the Company's management in this regard. Contingent Assets The Company and its subsidiaries are contesting in court the refunding of taxes and contributions. According to legal counsel the likelihood of success in this respect is high. Because the amounts, presented below, represent contingent assets, they have not been recognized in the financial statements: Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

42 Note 18 Rural lease The rural lease refers to an agreement entered into by the subsidiary Duraflora S.A. with Ligna Florestal Ltda (controlled by Companhia Ligna de Investimentos), in connection with property in Minas Gerais and Rio Grande do Sul, where the Company s forests are located. The monthly charges for this lease are R$ 1,091. This agreement will expire in July, 2036 and may be renewed automatically for a further 15 years, and will be readjusted annually with reference to the average price practiced by the Company for the sale of MDP panels. The minimum future payments are as follow: In compliance with CPC 06 - Leases, the subsidiary Duraflora S.A. records the costs of the rural lease agreements using the straight line method. Note 19 Stockholders equity a) Capital As decided in the Supervisory Board Meeting held on June 12, 2012, the capital was increased from R$ 1,550,000 to R$ 1,550,034, through the issue of 2,600 common shares subscribed and paid-up by debentures. The Duratex S.A. s authorized capital is 920,000,000 (nine hundred and twenty million) shares and the fully subscribed and paid-up capital is R$ 1,550,034, represented by 550,037,931 registered common shares with no par value. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

43 b) Treasury Shares Based on the most recent market quotation on June 29, 2012, the value of Company s treasury shares is R$ 20,085 (R$ 16,854 as at December 31, 2011). c) Equity Reserves The amount presented in the Capital Reserves balance as a premium on the subscription of shares refers to the additional amount paid by the shareholders in relation to the nominal value per share at the time of the subscription for the shares. The amounts for Options Granted in the Capital Reserves balance represent the recognition of the award of the options on the grant date. As provided in the bylaws, the balance appropriated by the statutory reserve will be utilized for: (i) the Reserve for Dividend Equalization, (ii) the Reserve for Increasing Working Capital, (iii) the Reserve for Capital Increases in Associated Companies. d) Dividends Under the bylaws, the stockholders are assured a minimum mandatory dividend corresponding to 30% of net income. As at June 30, 2012 the Company provisioned dividends in the amount of R$ 62,032 as interest on capital. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

44 Note 20 Insurance coverage As at June 30, 2012, the Company and its subsidiaries had insurance coverage against fire and various risks relating to property, plant and equipment, inventory and civil liabilities totaling R$ 3,260 million. The Company does not have insurance coverage for its forests. To minimize the risk in this regard it maintains an internal fire brigade, fire trucks and motorized guards. The Company has not suffered losses in relation to forest fires. Note 21 Net sales revenue The reconciliation of gross and net sales revenue is as follows: Note 22 Expenses, by nature Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

45 Note 23 Financial income and expenses Note 24 Other operating income (expenses), net Note 25 Income tax and social contributions Reconciliation of income tax and social contribution expenses The statement of reconciliation of income and social contribution tax expenses, at nominal and effective rates is as follows: Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

46 Note 26 Stock Option Plan As provided for in the bylaws, the Company has a Stock Option Plan the objective of which is to integrate Company executives into the Company's medium- and long-term development process, enabling them to participate in the value that their work and dedication brings to Duratex s shares. These options grant their owners the right, pursuant to the Plan's conditions, to subscribe common shares of Duratex s authorized capital. The rules and operating procedures of the Plan are proposed by the Committee designated by the Company s Supervisory Board. This Committee submits to the Supervisory Board proposals in respect of the implementation of the Plan. Options will only be granted for the fiscal years during which sufficient profits were earned to permit the mandatory minimum dividend distribution to shareholders. The total quantity of options to be granted during each fiscal year should not exceed 0.5% (one-half percent) of the total number of shares owned by the controlling and non-controlling shareholders at the end of that same fiscal year. The exercise price payable to Duratex will be defined by the Committee when granting the option. In order to define the exercise price, the Committee will consider the average price of Duratex s common shares in the BM&FBOVESPA trading sessions for a period of five to ninety days prior to the options' issue date. This will be at the discretion of the Committee, which may add or subtract an adjustment of up to 30%. The prices established will be readjusted until the month prior to the exercise of the options by the IGP-M index, or, in its absence, by an index specified by the Committee. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,

47 Statement of value and appropriation of the options granted: As at June 30, 2012, the Company had 1,889,486 treasury shares that could be utilized for the exercise of options. Note 27 Private pension plan The Company and its subsidiaries form part of a group of sponsors of Fundação Itaúsa Industrial, a non-profit organization which has as its objective the administration of private plans for granting pensions or supplementary income benefits, similar to those of National Social Security. The Fundação manages a Defined Contribution Plan (DC Plan) and a Defined Benefit Plan (DB Plan). Note 28 Earnings per share (a) Basic The basic earnings per share is calculated by dividing the net income attributable to the Company s stockholders by the weighted average number of common shares outstanding during the period, excluding common shares purchased by the Company as treasury shares. Duratex S.A. Notes to the Condensed Interim Financial Information at June 30,