Suzano Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 12 speakers on the call.

Operator

Audio, you can press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese room. After that, select mute original audio. Before proceeding, please be aware that any forward looking statements are based on the beliefs and assumptions of Suzuno's management and non information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. You should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Suzano and could cause results to differ materially from those expressed in such forward looking statements.

Operator

Now I will turn the conference over to Mr. Beto Abril. Please, you may begin your conference.

Speaker 1

Thank you. Hello, everyone. Very happy to be here interacting with all of you now. Now as part of the Susanoo's team. And I really would like to thank you for all of you attending the call.

Speaker 1

So I will start here the presentation. And my first slide will be highlighting to you a couple of important achievements movements on our related to our strategic avenues and implementation of our strategy. As you can see here, we made investment in 2 assets. The first one was in Lanzi in Austria, a good moment to understand and to test the market in Europe. Here we are talking about the textile market.

Speaker 1

And the other movement was impactive in U. S. On the packaging business, also important movement to understand the market. The team here personally like the movements that we are doing. I think a few things it's important to share with you.

Speaker 1

The first one, it's important movement with no impact in our balance sheet, but huge opportunity to understand those geographies in those markets. It's like we are testing the water on those geography and markets. The other one is how able we are to implement and to use all the knowledge that we have on those kind of operation to extract value. And then of course, are also markets and segments that we can scale in the future. So that's those things that we'd like to share here.

Speaker 1

In the case of Lenses, small acquisition, which sits on the board, enormous opportunity to understand the business and with a call for the future if we decide to execute. In the case of Pactiv also business with 420 tons of capacity in the paperboard business, also a fair price to test the market, understand the environment and start planning other movements in the future. So that's the kind of movement that again we understand that's our the right one that was in our pipeline and since last year and we are bringing now we should have the closing the last quarter of this year. The other highlight that I also would like to share with you is the Cerrado project all of you are familiar with. I would say that this is a unique milestone of the company that will bring us to even stronger position in terms of relevance in the market pool and also competitive advantage in terms of cost.

Speaker 1

And this is something that it's a kind of a mantra for us that we will always keep in our agenda, is keeping our relevance in the market group and also keep working very hard every day on the cash cost to keep our level of competitiveness against other competitors. And then we can see this in the next slide in some of the highlights related to the costs against in this third in this quarter. This is something that we're going to keep working very hard to keep and to even use further levers to keep reducing this in the future. The other one is, of course, the EBITDA. We see a number of BRL 6,300,000,000 that shows the resilience of our business.

Speaker 1

And I think important point to highlight here is that as we can see, we stopped deleveraging the company even not taking all the opportunities that Sahad will bring for us in the future. So the company is already deleveraging before we have Ceradu operating and bringing the extra volume that we have. So a lot of good news here in the Q2 in our view related to those figures. We're going to go through most of those information here with the team and also we're going to go deeper on the Cerro projects. But let me hand over to the team now to go on the details, starting with Fabio and then I will go back to you.

Speaker 2

Thank you, Alberto, and good morning, everyone. Please, let's turn to the next page on the presentation. On the Q2, we had a solid performance, supported by better market conditions domestically and abroad, albeit challenged in international logistics. On the domestic markets, according to Ibar, retail right demand increased 12% in the 1st 2 months of the Q2 on a year over year basis. Growth occurred in both uncoated and coated paper grades.

Speaker 2

Demand benefits from the election cycle tailwind, which will take place at the end of the year. Demand for paperboard increased by a strong 14% during the 1st 2 months of the quarter compared to the same period from last year. The significant growth was primarily driven by increased packaging consumption from the food and beverage and pharmaceutical sectors. We have also seen the end of the destocking process that had impact on previous quarters. On international markets, demand in the quarter was healthy in North America, Latin America and other markets we serve.

Speaker 2

Prices were slightly up in dollar terms, supported by higher pulp prices in our markets, coupled by higher container freight rates and lower logistics cycle in most international routes. Looking now to Susano's figures. Our sales volume in the quarter were 3% higher year over year and almost 6% above 1st quarter performance, pushed by higher sales volumes into the domestic market. Our export volumes in the quarters have been impacted by difficulties with vessels delays and port permissions, hampered by port conditions in most container terminals in Brazil. The average net price growth during the quarter was over Q1 was led by implementation of previously announced price increase in the external market and favorable FX.

Speaker 2

On a year over year comparison, the price decline was given by the abnormal price levels witnessed in the first half of twenty twenty three. Looking at the EBITDA performance, the 14% increase quarter over quarter was driven by higher top line and lower costs in the period, also benefiting the EBITDA per ton. When compared to the Q2 2023, the EBITDA dropped 15%, led by lower prices in both the domestic international markets despite higher sales volume. Looking ahead, we expect better demand for print and writing and carton board in the domestic market when compared with the first half of the year favored by seasonality. The upcoming elections in Brazil should keep playing a role for higher demand in Q3, mainly for coated paper.

Speaker 2

Rising costs continue to push paper produce globally New price increases have been announced in most regions. It's also worth mentioning that a strong dollar over BRL raised prices on imported papers in the domestic market while providing better price in local currency from our exports. As disclosed on the earnings release, in the Q3, the annual maintenance downtime will take place on the Suzano and Limeira mills. We expect our cash costs in the coming quarters ex downtimes to remain stable when compared to the past quarter. Now I will turn over to Leo, who will be presenting our business results.

Speaker 3

Thanks, Fabio, and good morning, everyone. Please moving to the next slide of our presentation. I would like to begin by sharing some facts related to this past quarter. Market dynamics were quite strong in North America and Europe, where paper production and pulp demand were healthier compared to a low 2023 level and pulp inventories were still below historic volumes. In China, paper and Ivoryboard production has been solid since the beginning of the year with a 4% growth year to date, benefited by paper exports, which posted a 16% growth in the same period.

Speaker 3

Also in China, similar to other regions, pulp inventories have been trending below normalized levels throughout the chain. Despite that, paper producers' margins and again in China, which kept getting squeezed as the quarter evolved and a pricing sentiment coming from the new supply on the horizon made paper buyers reduce the rhythm of their pulp purchases since April and most importantly, by the end of the quarter. We have navigated Q2 by focusing on positioning our products in Europe and North America, as stated previously, to comply with our pulp supply agreements and our customers' needs and also on an operational push to reduce our order backlogs to other markets like Asia, Middle East and Africa, improving our delivery schedules to our customers in these regions. This dynamic resulted in a strong invoicing during the quarter, keeping our inventories at low levels very similar to the end of the Q1 of 2024. Even with the invoicing push, our order backlogs were only recovered to normalized levels by the end of July.

Speaker 3

This quarter was also marked by the conversion of our previously announced price increases into the P and L, which resulted in an average export price of $701 per ton, 12% higher than that of the Q1 of the year. The combination of higher prices, favorable FX, solid volumes and a good cost performance made us achieve an EBITDA of BRL 5,500,000,000, a 60% EBITDA margin. Now looking forward, I would like to highlight the following points. First of all, we are extremely excited with the start up of our Cerrado project of our brand new rebas mill. As per our production and operational plan, our contracts and volume agreements have taken into consideration a ramp up of sales by year end, time when we expect the bulk of our new pulp supply to start arriving in the major markets.

Speaker 3

For the second half of twenty twenty four, we forecast healthy demand in all regions. As this third quarter begins, North America and Europe continue to post solid paper productions and pulp inventories have still not recovered to historic normalized levels. In China, paper production should continue at a positive trend, especially as of September due to a stronger market seasonality. As usual, tissue and packaging producers should increase their productions even further in preparation for the November 11 shopping out. And we also expect that paper and board export should continue to post favorable figures during the next months, consequently helping producers' operating rate.

Speaker 3

As per our checks in the ground in China, pulp inventories across the chain continue below balanced levels. And very important, taking into consideration the effect of a lower order entry in Q2, we expect that pulp inventories in Chinese ports or and in the hands of our paper customers or paper producers and traders in this market should continue remaining below normalized levels during the next months. Despite all dispositive market fundamentals, which I have mentioned regarding Q2 and also expected for Q3, in order to reestablish an active market in the region, we have repositioned our prices in the second half of July and consequently order intake has rebounded since then. It seems very clear that we have entered in an environment of lower pulp prices. And at Suzano, we are prepared to timely navigate this cycle.

Speaker 3

Additionally, I would like to confirm that we are determined to keep our inventories at the current low levels with no absolutely no major increase to the set points during the cycle. As already stated in previous occasions, at Suzano, we manage our business not by an average cost and margins of our assets portfolio, but on a very detailed event basis analysis. As such, and as Batya can later explore during our Q and A, our financial team will continuously analyze the returns of our marginal production costs at different price levels of this new cycle. And in case returns are inappropriate, production should be adjusted accordingly, impacting our volume availability and our commercial strategy. With that said, I would now like to invite Iris to address with you the cash cost performance during the quarter.

Speaker 4

Thank you, Raul. Good morning, everyone. We are in Slide 7. Looking at the flattish performance quarter over quarter, we faced a negative impact on wood supply mix due to a higher average from forest to mill distance close to 200 kilometers and a higher share of 3rd party wood around 35%. On the positive side, we achieved better efficiency in the harvesting activities, which mitigated the pressure.

Speaker 4

Additionally, while the BRL depreciation is beneficial for the company since it increased the EBITDA, It took a it does take a toll on the cash cost level as some chemicals are dollar linked. Still on chemicals, the cost decline was mostly driven by a lower energy consumption and a lower price for natural gas, caustic soda and lime. The BRL 828 per ton level in the Q2 came pretty much in line with our budget. Looking ahead to the Q3, we anticipated a low single digit increase due to a likely higher FX and Cerrado's start up. By year end, assuming no weather related input cost issues, we foresee cash cost performance improving with the new Rebus operation.

Speaker 4

Moving to the following slides about Cerrado. A few weeks ago, we were able to deliver on time and on budget the largest single line pulp mill in the world after hopefully 3 years of execution. The fiscal and financial progress along the way were frankly disclosed to you all, and with the same transparency, we share what to expect ahead on the learning curve phase. As you can also see on the slide, there is still SEK 2,400,000,000 CapEx to be disbursed from the total of 22,200,000,000 with the mill already running. And I take this opportunity to share that Ribas is running, as we speak, at 4,000 tons of pulp per day, being fully aligned with target for August.

Speaker 4

Now I hand you over to Bacci.

Speaker 5

Thank you, Iris. Moving to the next page, I'd like to highlight that we are taking the opportunities that the market is providing to us to keep strengthening our balance sheet. In terms of leverage, as mentioned by Beto in the beginning, the peak leverage related to the Cerro project is behind us, and we are starting the leveraging process that will likely continue in the coming months. We are now at 3.2 times net debt to EBITDA with a flat net debt at $12,000,000,000 In terms of our amortization schedule, we took advantage of the curve in Brazil to issue domestic notes and improve the quality of our portfolio by increasing the tenors and reducing the rates. We are constantly looking at the other alternatives to keep improving this profile with transactions below the bond curve.

Speaker 5

On the following page, I'd like to highlight our discipline in terms of capital allocation. We have been going through 4 consecutive repurchase share repurchase programs in which we bought already 93,000,000 shares And we are approaching the end of this 4th program where we still have about 7,000,000 shares still to be bought. And we have decided this morning to launch a 5th share buyback program with another 40,000,000 shares to be bought over the next 18 months. And we also will cancel 40,000,000 shares of the current program. So with that, we have been over the last 3 years returning to our shareholders between dividends, interest on equity and the share repurchases more than BRL 10,000,000,000.

Speaker 5

With that, I will turn back to Pato. Thank you, Marcelo.

Speaker 1

In the last slide, we have a few takeaways, but I would like to reinforce a few of them. The first one is related to operating performance. So solid results and operating in a very good way what is under our control is the best way in our view to make sure that we can keep delivering despite the kind of scenarios that we might face in the future. So this is what's under control and this is where we're going to keep putting a lot of focus. The other one, it's related to the Cerrado project.

Speaker 1

I think Hari has already talked a lot about the project, but what I want to highlight here is how capable this team is to deliver very challenging tasks. So it's and I would like to invite you not only for the Suzane Investor Day by end of the year but also to visit the site. Is the only thing to really understand what was implemented. And the other thing that I also would like to relate is what Marcelo Bacci just presented, which is related to our discipline related to capital allocation and the focus that we will always have on maximizing the long term returns. So with that, I will appreciate if we move for the Q and A.

Speaker 1

Thank you very much.

Operator

We will now begin the Q and A session for investors and analysts. Raise hand. If your question has already been answered, you can leave the queue by clicking on put hand down. Our first question comes from Daniel Sasson with Itau BBA. You can open your microphone.

Speaker 6

Hello, everyone. Good morning. Thank you so much for taking my questions. My first question is on on pulp prices. I know that you you cannot discuss, forward looking statements in regards to your expectations to what's going to be the price for for pulp prices, but if you could help us think about it by telling us, what's your view on on current demand from China at the current price levels, right?

Speaker 6

I mean, prices have declined by more than $100 per tonne over the past couple of weeks. Was that enough to bring buyers back to the negotiating table? Or, thinking differently, are your customers able to skip purchases waiting for prices to decline more or maybe they do not have enough inventories or they have only normalized level of inventories and not excess levels of inventories. And therefore, at some point, they will have to, go back to the negotiating table and and restart purchasing volumes? And my second question is related to capital allocation.

Speaker 6

If you could explain what the effective acquisition brings to the table in terms of your strategy to go further downstream, if there is room to test fiber to fiber substitution with some, products in the US. And along the same lines, doing the the, talking a little bit about lensing, you clearly, the integrated dissolving plus visco seems the way to go, right, in this industry. If you could comment on, if growing to dissolving is a an option that you're studying, eventually converting one of your plants in to, dissolving production, that would be great. Thank you so much for taking my questions.

Speaker 3

Hi, Daniel. This is Leo here. Thank you for your questions related to pulp prices. I will start with maybe the mid part of your question when you ask if our customers are able to skip 1 more month. I personally believe that the answer is no because, as I mentioned, they have been reducing order orders or order intakes in the perspective of suppliers since April.

Speaker 3

And we see public information related to pulp inventories at ports, and we have our market intel of pulp inventories in the hands of the customers and we believe they are below normalized level. So as September starts a big seasonality period of the year with higher production levels, I believe it's important that they recover purchases. And that was our big objective when we announced a couple of days or a week ago this adjustment, this big adjustment in price levels in order to get customers back to the table, right. Our objective is how could we get the market into activity again. And that's why we made such a big move positioning our prices in what we believe is correct in a correct proportion to softwood prices and also getting closer to local Chinese producers, renminbi prices as well.

Speaker 3

So this was the main intention of our movement, which I believe was successful. As of the day that we made the announcement, several customers in different segments of the market and sizes have become active or interested in buying pulp again from us. I wouldn't say that order intake has fully recovered. I would say that at the first moment in July, order intake was roughly at a 50% level. But I believe that market confidence will keep getting better and better as we speak.

Speaker 3

And then we're going to see them purchasing back to their normalized rates. We believe that the decision of increasing orders above their normalized rates in that movement, that's usually usual when they feel that prices are low so that they can restock is quite difficult to set to give a set point at this cycle because it's so different than previous cycles. First, we are coming from low inventories of the chain. 2nd, unexpected closures are still having a big effect because we have a carryover of the volumes of announcements of permanent closures in previous quarters affecting availability as we speak. 3rd, we have obviously the startup of Cerro and our competitor in China, but ramp up curves are always uncertain.

Speaker 3

And when we add up and factor all these uncertainties, it's quite hard to predict when. And this will trigger additional demand for pulp, especially because as we all know, there's a big part of the Chinese industry, which is the integrated pulp and paper producers, which have a higher cash cost, I believe quite close to the $600 set point and that should also start buying pulp once this level is broken. So a lot of variables to be following. We will actively be monitoring and acting accordingly.

Speaker 5

Daniel, this is Marcelo speaking. I will answer the Lansing part and start the back of answer heading over to Fabio after that. On the lasing deal, we see that the same phenomenon that has been happening in other products in terms of fiber We also take place on the textile market with an increase. And it's actually already happening with increasing participation of short fiber, replacing long fiber. In addition to that, we see a big potential for the increase of demand of the fiber based products in replacement of the chemical products based on fossil material.

Speaker 5

So that's the reason why we decided to position Suzano in that sector. And being a sector that we have no experience with, we thought it would be wise to establish our position with a minority stake in a leading company in the sector that is positioned very well throughout the chain with the production of pulp and also the final products, including very specific and high end products that Lansing has because of its R and D capabilities. So we are starting with a 15% participation, who sits on the Board, having the ability to increase our participation to 30%, being the largest shareholder of the company over the next years if we decide to do so. The plan is to learn about that market with the leading company that Lansing is. We don't have any immediate plans of any conversion of our facilities into dissolving pulp.

Speaker 5

That can be a potential development or greenfields or other things. But everything that we are going to do in this market will be done through the participation we have with Lensing. So that's the plan. We are waiting for the regulatory approvals to start participating in the decisions of the company and the intention is to learn about the new market that potentially can be very relevant for us in the future. When it comes to the assets in the U.

Speaker 5

S, in Pine Bluff and Waynesville, I think from the capital allocation point of view, what we saw there was a very good a very well positioned asset in terms of its commercial presence with a very strong presence in a segment of the market, which is due to continue to grow with industrial assets that are not best in class but has a lot of potential. And we believe that we can work building on what's already being done over the years in that asset to position it on a very good place in terms of the cash curve cash cost curve. And we also will inherit a team of 850 people that are very knowledgeable about the operations and about that market. So the combination of the assets, the market position and being in a region that has a lot of potential for growth that gave us the confidence to go in that with that transaction. And I'll move here to fiber to comment on the fiber to fiber opportunity.

Speaker 2

Daniel, thank you for your question. As you may know, today, the portfolio that these 2 mills are producing pretty much targeting the liquid packaging segment in which they are marked leaders for the fresh liquid package segment. These products are built today with the majority of using softwood fiber. You need softwood fiber for that type of product, although they use a little bit of hardwood. Softwood is abundant and also very cost competitive in the region in the state of Arkansas.

Speaker 2

Hardwood on the other hand is not that cost competitive. So although we did not based our move on a fiber to fiber only fiber to fiber could be moving forward a benefit for us when we start discussing additional products for the product portfolio and also production increases at the mill.

Speaker 6

Perfect. Thank you, Bacci, Leo and Fabio.

Operator

Our next question comes from Jon Brandt with HSBC.

Speaker 7

Hi, good morning. Thanks for taking my questions. Leo, I just I had a follow-up on the pulp market question. I mean Europe and the U. S.

Speaker 7

As you indicated is strong. Prices are a little bit better there. I'm wondering how much of your volumes you can shift away from China towards those regions. Is that something you're actively doing or are you sort of maxed out with the mix there? And then you sort of mentioned if prices I'm assuming if prices get worse, you're prepared to take some production downtime like you did last year.

Speaker 7

I realize you're not going to sort of quantify at what price you would do that. But I mean at current spot levels, is that something that you're actively doing or do we need to see much lower prices for you to start taking production downtime? And my second question, I I guess, Roberto, just on the capital allocation and sort of your portfolio, there's been a lot of discussion in the past about needing to make the packaging and tissue segments relevant. Tissue, I think for obvious reasons, it's going to be hard to grow sort of outside the areas that you are now and will struggle to become relevant within your portfolio. So I'm wondering, what are the plans with the tissue segments, maybe more medium term?

Speaker 7

And on the packaging side, obviously, there are plans to grow that both organically and inorganically. But where is the level that we need to I mean, does the Packaging segment, do you envision that being sort of 25% of EBITDA, 50% of EBITDA? How should we think about that going forward? And then, Bachi, maybe just a quick one. On the share buyback, you said you're canceling the 40,000,000 shares.

Speaker 7

But if I'm not wrong, you've bought more than the 40,000,000 shares in the current program. So I'm just wondering why aren't you doing all of the shares? Why aren't you canceling all of them? Thanks, guys.

Speaker 3

So, John, this is Leo here. I'm going to start with the first part of your questions, which is how much volumes we could eventually move to Europe and North America, hence the strong market, solid markets and even more solid in the tissue segment in this region. Obviously, I'm going to try to limit my answer in terms of what I can disclose without affecting our commercial strategy as this is quite sensitive to it. But in these markets, we usually sell based on contracts. And despite our contracts, as I had mentioned in my opening speech, had already foreseen for the latest part of 2024 and 2025 with Cerro, a ramp up in their volumes.

Speaker 3

So our negotiations with customers already foresee this increase. In the short term is very little space of movement that we can do. Obviously, customers contracts allow for a small variation, but it's a minor variation compared to the size of the volumes that Suzano has. So our objective in terms of what I mentioned during the Q1 call and also now was to how to reposition our volumes in these markets to supply or to attend the customer's already contractual volumes with us. I'm not foreseeing any bigger volumes or spot volumes in these markets that will allow us to move additional tons out of other markets and into the U.

Speaker 3

S. Or to Europe as well. You also asked regarding our decisions in terms of production or eventually curtailing that. And as this is a financial decision, Susan, I'm going to hand it over to Batya to answer that, okay?

Speaker 5

Okay. In terms of the decision about production and sales, we have this methodology of always looking at the marginal cost and the marginal price. And we will decide on the volumes that we will produce in each individual plants, taking into consideration the industrial balance of the plants and also how profitable the marginal production is according to the marginal allocation to clients. This is the methodology that we've been using over the last years, taking trying to maximize the value of each of our assets.

Speaker 1

Sean, this is Beto here. Just going through your capital allocation question regarding Tissue and Packaging. Let me start with Tissue. This is not a focus with us in terms of investment. We have different ways to keep working very well positioned in terms of tissue, which is the contract that we have for many customers around the globe.

Speaker 1

So and our job here is to keep offering, servicing those customers with the level of quality that we do it today. So this is related to PIKI. On the other hand, packaging, considering opportunities to differentiate ourselves and to scale the business, this is, yes, is streams and is a segment that we'd like to grow. And as you said, organically or inorganically, so we're going to keep looking for both opportunities. In terms of share of the package business in our, let's say, total EBITDA, I have to say to you that I'm not going to share this kind of information.

Speaker 1

But anyway, what is important here, it's that those movements will give us the right level of return and maximize value on the long term. So we are really looking for creating value here and not necessarily reach a specific level of percentage of our EBITDA in the whole business. Thank you, Joao.

Operator

Our

Speaker 8

A couple of follow ups here on my side as well. Batu, you just laid out the strategy for when and how you think about production, potential adjustments and obviously sales as well. If I remember well last year around May prices touched at low levels, we've announced a 4% or around 400,000 tons production cut. But again, prices were at 450 back then, right? When you look at sales for the last 12 months, running at 10,200,000 tons, It still feels like you are still 600,000 tons below where it could have been.

Speaker 8

Right? And that's despite the fact that prices in China were 7.50 up to May at least, 8.40, 8.50 in Europe on a net price as well, which is quite high. And obviously, I think consensus agree it's above long term prices, I should say. So trying to understand here, does that mean you have marginal tons that's around the price levels that you saw over the last couple of quarters? Is there any mills or assets that have at least temporary fiber availability that you're saving for the future because it does feel like at the price levels that we saw at least over the last 6 to 9 months, I would have expected at least Suzano to be at full capacity.

Speaker 8

And then second question, Beto, I think you've taken office just a month ago, but a lot has happened, right? A lot of discussions around potential IP deal, Lens Inc, Pactives, how they start up. Poll prices are just lower now. Obviously, a lot going on. And it feels like you are you agree with the strategy today.

Speaker 8

So it seems like there's going to be a continuation at the company versus the former administration as well, right? So just thinking about where we are and going forward, just trying to understand from your side, in terms of strategy, is there anything else that you think you'd focus more, you'd like to add, you'd like to change or switch gears to one side or to other versus where we were, let's say, 6 months ago. And also, I think you are very successful at least talking with investor in delivering the right pricing strategy on your former company. So just trying to understand how your past experience can be applied here to Suzano to generate value as well. Thanks, everyone.

Speaker 5

Thanks, Marshall. This is Marcelo speaking. Let me just come back to last question that John asked because we didn't answer that yet. The share buyback, we are canceling all the shares we're buying. This is a 40,000,000 shares program that we are approaching the end, and we are canceling 40,000,000.

Speaker 5

We are just leaving as outstanding shares in treasury, the shares we need for our incentive programs, which is a small amount. In terms of Marceline, in terms of your question about production, the first, we don't give guidance or information on our actual production. But if you look at what happened in the last 12 months, this is a reflection of the decision we took 1 year ago of reducing by 4%. So what you see is the realization of the strategy that was announced back then. We don't have today if you look at the prices of the last quarter, we of course, we don't have any marginal production that would not be profitable at that price.

Speaker 5

But you have to understand that we cannot adjust every day the production level. What we're doing today reflects the decision that we took a while ago.

Speaker 1

Didi, thank you for the question. Let me start with the strategy. You are completely right. This is a company with, I would say, a very robust business platform, not replicable by the way. And our plan here is really to continue the strategy and not only base it on moving forward the streams in the downstream, but we cannot forget keeping our relevance in the pulp market and our competitiveness as well.

Speaker 1

So this is something that is clear. I know that we talk a lot about M and A and inorganic growth. But the other, let's say, pillar of the strategy, which is keeping the scale, the relevance and the competitiveness that we have in the pulp market for us is also very important. You also asked about the pricing strategy. I see honestly pricing as our capability to have NSX data and to treat the data from different, let's say, sourcing the market.

Speaker 1

And it is exactly what the team had been doing here using technology, using algorithms to improve our awareness, our level of knowledge to keep, let's say, improving our pricing system. I think we are exactly on this journey, and I really support the way that we are doing, the way that we are improving the pricing, not only the strategy, but also the way that we use the tactic depending on the moment. And of course, using our size sometimes will help us taking the decision.

Operator

Our next question comes from Caio Ribeiro with Bank of America. You can open your microphone.

Speaker 9

Thanks and good morning everyone. So my first question going back to capital allocation, right. Over the past months, I mean, we've seen the company announcing a few smaller M and A transactions like the ones that have been talked on the call, Lensing stake acquisition, Active Evergreen, following the company's decision to not proceed with what would be a relatively much larger transaction in the containerboard market. And going forward, I know the company continues to be vocal about internationalization, diversification into the downstream with complementary products. But if you could give us some more color on whether it's more likely that you would proceed in the same direction with the smaller transactions like the 2 recently announced ones, which ultimately lead to immaterial impacts on the balance sheet from a leverage standpoint or whether you would still be looking to evaluate larger transformational acquisitions, that would be helpful.

Speaker 9

And then secondly, the company is generating ex growth CapEx, free cash flow yield, which on an annualized basis is quite robust, right? And at comparable prices could increase even more once the how does fully ramped up and you capture the benefits of the cash cost reduction there on a consolidated basis. You've already announced a new buyback program, right? But could you look to boost dividends as well, especially if large M and A transactions don't materialize? And could you look to adopt a dividend formula pegged to free cash flow generation ahead to provide more visibility on potential dividend distributions based on that cash generation?

Speaker 9

Those are my questions. Thank you.

Speaker 1

Thank you, Caio. This is Beto. Let me start and then I'll hand over here to Marcelo to cover all the other points. Related to the capital allocation, you mentioned a lot of, let's say, deals that we are trying to make in the recent. But when you look to the future, I think we have to concentrate ourselves and what is really important.

Speaker 1

For us, it's looking for assets that again, we can have the right scale considering the size of the company. We can differentiate ourselves. We can put all the knowledge that we have on those assets. Fiber to fiber is always a huge opportunity that we're going to keep looking. But it's we cannot disclose more than that regarding size and any kind of potential deals that we might have in the future.

Speaker 1

So this is a sensitive, let's say, issue and we have to keep working here again with the level of discipline that this company has in its track record, implementing projects that generate, create value, and this is what we're going to keep doing when we talk about capital allocation. And as Marcelo said in his presentation, we always have the opportunity to invest in ourselves through the buyback programs when this is the best, let's say, allocation for our capital. So that's it, Caio. Let me hand over to Marcel to cover the other points.

Speaker 5

You're right that, Caio, we are having and due to probably have in the future a very robust free cash flow that will be dedicated to first reduce our indebtedness a little bit to bring us back into the range of 2 to 3 times net debt to EBITDA that we want to keep over time. And the decision that on capital allocation, we'll keep following the framework that we disclosed to the market a few months ago. We will decide based on the best potential returns, and that includes the buybacks, the dividends, the potential projects for growth, M and A or organic. So we will be following on a very disciplined way that framework, which means that, yes, we could we just announced another buyback program. We could boost dividends if that's the case, like it happened 2 years ago when we had a very high return over the year in terms of cash and we decided to pay more dividends.

Speaker 5

But for the time being, the preference will be given for the share buybacks, given the fact that we believe that the current share price is not a good reflection of the true value of the company. We do have a minimum dividend formula pegged to cash flow generation, And we are not considering changing the dividend policy at this time.

Speaker 9

That's fair enough. Thank you very much.

Operator

Our next question comes from Rafael Barcelos with Bradesco BBI. You can open your microphone.

Speaker 10

Hello. Good morning and thanks for taking my question. I have a question to Beto. Beto, you officially joined Susana in early July, right? So firstly, I think this is your first conference call at Susano.

Speaker 10

So welcome and of course we wish you good luck. And so my question here is really to understand what were your first conclusions. Of course, Suzano has delivered good results and improved a lot in several areas over the past few years, but in which as you understand, that the company has to maintain a focus on it and of course, can still improve in the coming years. And my second question is about costs. It would be interesting to understand how we are seeing costs evolving now in the second half of the year and of course, how the Cerrado project will affect the cost now in the coming quarters?

Speaker 10

Thanks.

Speaker 1

Thank you, Rafael. Thank you for your question. Firstly, I have to say that as all of you know, I found here extremely well managed company with amazing track record in terms of delivery. I'm very glad to see the focus on the execution, the focus on operation and the focus on cost. So we have a future of performing.

Speaker 1

And this is not something easy to replicate. This is not something easy to find. It's completely part of the future of the team. So and this is very powerful for any kind of business. We also have a very large talent pool with multi skills and with the right strategy and with the level of business platform that we have.

Speaker 1

Also, this is a very strong combination in my view. So this is again is what we found. And I have I also would like to mention this is something else, which is the level of reliability of our facilities. I think I had the opportunity to manage facility in other industries, as you know, in the sugar can business. And really, what we have here in terms of reliability is really outstanding.

Speaker 1

So it's benchmark and it's very difficult to find in different industry. So this is the kind of overview of the business. And looking for the future, as you know, the kind of role that we have is really looking all the time about future, about people, about strategy and about capital allocation. So with the great team that we have here, those are the areas that we're going to keep focused, that we're going to keep looking for new levers to keep improving our competitive position, to keep improving this outstanding way to operate our facilities and also to keep taking the best decision in how allocate the extra cash and the current cash that this resilient business are able to generate. So, Rafael, this is my comment here.

Speaker 1

Anything else? I think I've almost Serhado, project, I will hand over here to Irish.

Speaker 4

In terms of cash cost, we are foreseeing a 3rd quarter a little single digit increase in our cash costs. The main reason for this is that the FX will be probably increased in this quarter. And with the start up of Cerado, our 3rd part supply woods, will increase in the 3rd party and the share of this together with FX and our risk of hurricane seasons in Mexico could increase the totsk soda. We see this possibility of another increase in the cash cost. But for the Q4, probably after the ramp up of Cerrado, when we start to have a surplus running with 78% of nominal capacity.

Speaker 4

Probably the share of volume also added in our total volume. We hope we are foreseeing our best performance in terms of cash cost in the Q4 and for next year. We foresee a stability and some decrease with that new projects and the stability of the new plant will bring to the cash cost.

Operator

Our next question comes from Eugenia Cavaliero with Morgan Stanley. You can open your microphone. I believe Evgeny is having some problems. We're going to go to the next question from Igor Gegis with Genio. You can open your microphone.

Operator

Sir, can you hear us?

Speaker 11

Hello. Good morning, everyone. Thank you for taking my questions. I would like to understand why in your cash flow table you put working capital variation line and include capitalized loan costs in that line. Generally, there is a separation of the variation in working capital with debt payment flow, such as borrowing and disbursement.

Speaker 11

The way you do it, I found it difficult to separate what was debt flow and what was actually variation in working capital due to the difference in current balance sheet accounts. If you can tell me why do you separate in that order,

Speaker 5

I would

Speaker 11

appreciate it. Thank you.

Speaker 5

Thank you, Igor. This is Marcelo speaking. This is a very technical item, but capitalized interest is related to the CapEx, is the interest related to the Cerrado project execution that has to be according to the accounting rules capitalized during the execution the construction phase. So as this number is not appearing on the CapEx side, we have to adjust it on the statement of the cash flows. But if you want more details on that, our Investor Relations team, we will be happy to help you reconcile the numbers.

Speaker 11

Okay. Thank you very much.

Operator

The Q and A session is over. We would like to hand the floor back to Mr. Beto Abreu for his final remarks.

Speaker 1

Yes. I would like to thank you for being here with us on the call today and for your interest in Susano. And as always, our IR team remains available for any additional question you may have. And I wish you a great day. Thanks very much.

Operator

The Suzano S. A. 2nd quarter of 2024 Conference Call is concluded. The Investor Relations department is available to answer further questions you may have.

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Key Takeaways

  • Investments in a 15% stake in Lensing (Austria) and in Pactiv’s US paperboard business allow Suzano to “test the waters” in textile and packaging markets with minimal balance sheet impact and potential for future scale-up.
  • The Cerrado project—the world’s largest single-line pulp mill—was delivered on time and budget and is ramping up to 4,000 t/d, enhancing Suzano’s cost competitiveness and setting the stage for higher volumes.
  • In Q2 Suzano posted an EBITDA of BRL 6.3 billion, up 14% QoQ, driven by higher sales volumes, implemented price increases and lower costs, enabling deleveraging even before volumes from Cerrado come on stream.
  • Domestic demand for printing, writing and paperboard rose 12–14% thanks to election-driven tailwinds, while export volumes faced logistics headwinds; recent pulp price resets were designed to reactivate under-stocked Chinese buyers, with production to be adjusted based on marginal cost returns.
  • Suzano remains disciplined on capital allocation, with net debt/EBITDA at 3.2x, four share repurchase programs completed (93 million shares) and a 5th program for another 40 million shares announced, while pursuing only value-accretive downstream partnerships.
AI Generated. May Contain Errors.
Earnings Conference Call
Suzano Q2 2024
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