Suzano S.A. Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for holding, and welcome to Suzano's conference call to discuss the results for the first quarter of 2022. Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano's management and on 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. Now I will turn the floor over to the company's CEO, Mr. Walter Schalka. You may proceed.

Good morning, good afternoon, and good evening to everyone. It's a great pleasure to have you all joining us for the first quarter section of discussions of our results. It's a great pleasure to be with you. I think the main highlight that we have on the first quarter is related to the strong cash generation that we have despite the cost pressures we have in lower volumes regarding the annual shutdowns on several of our facilities in the first quarter of this year. We in the pulp business had lower volumes since our inventory is quite low. We are not able to increase our sales, then we have to sell just the amount that we have producing, which was around 2.4 million tons. In the paper business, we had a very good quarter in terms of production and sales compared with the previous quarters. In this scenario, we had BRL 5.1 billion on adjusted EBITDA. Even considering the cost pressures of the cash cost that was over BRL 860, we were able to generate cash in a scenario where we invested almost BRL 1.2 billion in our Cerrado Project. With dividends of BRL 1 billion, we kept our net debt almost at the same level as the previous quarter. It's also very important to mention our developments in ESG. In governance, now we have more than 50% of our board with independent members, and with 3 women out of 9 members, that represents more than 30% in gender diversity. Now I'm going to pass to Fabio, who is going to tell us a little bit more about our Paper and Packaging business.

Thanks, Walter, and good morning, everyone. Let's move to Page number 4. We have had the best Q1 results of our Paper and Packaging business unit. Strong volumes and prices have led to record Q1 EBITDA and the highest EBITDA per ton for a given quarter. Demand for paper-grade products continues to be strong, both in the domestic and international markets served by Suzano. The return to in-person activities and the rebound in commercial printing have been positive drivers for demand in most markets. Additionally, production disruptions in major mills coupled with logistics bottlenecks and geopolitical tensions contribute to the tightening of supply. Raw materials, logistics, and notably energy inflation continue to pressure production costs globally, elevating cash costs and pushing for higher price energy surcharges. According to IBA, print and writing demand in Brazil has grown 1% in the first 2 months of 2022, compared to the same period of 2021, mainly due to a 27% reduction in imported papers. Sales by domestic players have grown a solid 4.6%. Paperboard demand has shrunk 9% in the first 2 months of 2022 on a year-over-year basis, given the strong comparison period in 2021. Our Q1 sales volumes were 6% higher than Q1 of 2021. Domestic sales represented 67% of our total sales in the quarter, totaling 187,000 tons, a 6% increase compared to the same quarter of last year. Our average net price during the quarter was 10% higher than our average price in Q4 and 28% higher than in Q1 last year. As a result of strong volume prices, revenue management, and operations stability, our EBITDA has reached BRL 525 million in the first quarter, a 41% increase compared to the first quarter of 2021. Our EBITDA per ton has reached a new high. Looking ahead, our major short-term challenges reside in minimizing the pressure of inflation while overcoming the continuous logistics disruptions of maritime shipments and ports and by passing events or disruptions caused by geopolitical tensions. Our e-commerce platform accounted for 24% of our total revenues and 54% when considering medium and small-sized customers in the last quarter. We're also on track to deliver sales from our innovation pipeline, as we shared during our Suzano Day presentation. Strong demand for our products has led to a reduction of our paper inventories, which are currently running below optimal levels. Now I will turn over to Leo, who will be presenting our pulp business results.

Thank you, Fabio. Good morning, everyone. Let's move to Page 5 of our presentation to review the results of our pulp business unit for the first quarter of 2022. Our sales performance reached 2.4 million tons in the first quarter. During this period, we experienced several planned maintenance downtimes in our pulp mills, along with some unexpected events when production resumed on a few pulp lines after their planned downtimes. Our production is now fully back on track, and we expect to meet our annual production targets. However, because our inventories were and are still below optimum levels, we were unable to offset the lower production availability, which is adding pressure on our global supply chains to meet customer demands. As I mentioned during our Suzano Day presentation, we have exited all spot markets and are solely focused on fulfilling our customers' needs. This first quarter was characterized by a tightening supply-demand balance due to various supply disruptions worldwide stemming from both planned and unplanned downtimes, sanctions on Russian hardwood, European pulp production challenges, and ongoing logistic constraints, resulting in low pulp stocks along the supply chain. Pulp inventories in European ports ended the quarter 2% lower than in the fourth quarter of 2021 and 26% below historical monthly averages since 2018. In China, March pulp inventories dropped 17% compared to February, matching the low levels seen in December 2021. This situation is proving challenging for pulp, paper, and paperboard producers globally, as they are operating with low inventories while production levels and order books remained strong throughout the quarter. The tightening supply-demand balance has led to increased floor prices in all markets. Our average price for export markets this quarter rose to $639 per ton. Due to the timing of sales volume concentrated at the end of the quarter and significant foreign exchange appreciation, the average exchange rate does not accurately reflect our invoice prices to customers, which were around $655 per ton in the first quarter of 2021. This base price also does not capture the full effect of our price increases, largely due to invoicing carryover from previous quarters' orders. I can confirm that our order intake and sales this quarter aligned perfectly with our announced price increases. Our EBITDA reached BRL 4.6 billion, representing a 2% increase over the first quarter of 2021, primarily driven by higher prices despite lower volumes, foreign exchange depreciation, and cost pressures. Looking ahead, I want to emphasize the unexpected downtimes in the overall pulp market which have become more frequent in recent years, affecting market dynamics significantly. We estimate that from January to April 2022, over 1.5 million tons of pulp production were removed from the market unexpectedly, compared to historical figures of about 700,000 tons per year. This figure does not account for recent reports of production limits from a major Russian producer for April and May. When factoring in our planned downtimes, project delays, and challenging global logistics, we anticipate continued significant supply restrictions in the market pulp for the upcoming months. We are closely monitoring the potential impact of the restrictions on Russian wood for European pulp producers and the additional risks this may pose for the supply of bleached hardwood kraft pulp. Demand remains robust in Europe and North America, with sectors like packaging and specialty papers reporting order books exceeding 90 days. In China, however, visibility has been reduced recently due to COVID containment measures. We have seen early signs of a decrease in downstream demand in the tissue business, but it is essential to note that the paper industry is operating at a low rate, and any regional production restrictions due to lockdowns can potentially be offset by producers in other areas. A similar trend was observed at the end of 2021 when energy restrictions were imposed in certain regions in China. In packaging, our customers in the ivory board sector, where bleached hardwood kraft pulp accounts for 35% of their fiber supply, report solid production levels benefiting from the recovery of exports since the start of the year, even as greater uncertainty looms over the print and writing segment. We expect that hardwood inventories will remain low, and our sources in China indicate that the BHKP imports to the country will continue to be below historic levels in the coming months. We believe that the primary concern for paper producers worldwide is ensuring the reliability of their raw material supply chains, as indicated by our customers across all regions increasing their order books with us and operating at the maximum limits of their contracts. More specifically in China, the risk of short-lived lockdowns, combined with an anticipated government stimulus program, is encouraging customers to aggressively pursue volumes, leading to healthy order intake. With that, I would like to turn it over to Aires to present our cash cost performance for the quarter.

Thank you, Leo. Good morning, everyone. We are on Slide #6. Cash costs, excluding downtime in the first quarter of 2022, were BRL 868 per ton, which is 16% higher than in the fourth quarter of 2021 and above our expectations discussed during the last quarter’s earnings call in early February, prior to the unforeseen Russia and Ukraine conflict. The primary factors contributing to cash cost pressure were similar to previous quarters, with the war impacting commodity prices in the first quarter. High input costs significantly affected us, particularly due to increased prices for chemicals like caustic soda, followed by chlorine dioxide and Brent prices for natural gas and fuel. The rise in fixed costs was associated with more downtime during peak seasons, which also affected energy export sales. Wood costs remained stable, as the negative impact from rising diesel prices was balanced by lower average forest ranges and a reduced share of third-party wood during the period. Despite the Brazilian real appreciating against the U.S. dollar this quarter, there was no influence from exchange rate changes on cash costs because of the inventory turnover effect, leading to a roughly one-month delay between purchasing and usage. Year-over-year, cash production costs excluding downtime in the first quarter of 2022 were 39% higher than the first quarter of 2021, driven by the same inflationary pressures previously mentioned in the quarter-over-quarter comparison. Rising wood costs are attributed to increased diesel prices affecting harvesting and transportation, without any offsets in forest operations. The increase in fixed costs and reduction in energy sales were due to the absence of downtimes in the first quarter of 2021. Looking ahead to the remainder of 2022, while internal factors may lead us to lower cash production costs, the commodity environment poses challenges. Therefore, our latest forecast suggests cash costs will stabilize moving forward. As discussed recently at the Suzano Day at the end of March, the Cerrado Project is progressing as planned, closing the first quarter of 2022 with 'inside the fence' execution, which includes industrial and infrastructure investments, showing a fiscal progress of 10%, consistent with our financial disbursements. Overall progress is also on track, with no new major risks identified to meet our product delivery target in the second half of 2024. Now, I will pass it on to Marcelo Bacci to continue the presentation.

Thank you, Aires. Moving to Page 8. Our net debt and average leverage ratio in dollars remained stable during the quarter. Despite the increased disbursements for the Cerrado Project and business developments, we are in a strong liquidity position with $5.3 billion and a minimal amortization schedule for the next three years, with an average cost of debt at 4.4% per year and an average tenor of 87 months. Ninety percent of our debt is at a fixed rate, which is significant. Moving to Page 9, it was a quarter marked by considerable foreign exchange volatility and a notable appreciation of the Brazilian Real toward the end of the quarter. We continue to manage our hedging portfolio according to our policy. By the end of Q1, the mark-to-market of our portfolio turned positive as we started receiving favorable cash adjustments from the cash-flow hedge portfolio. Our cash-flow hedge portfolio now stands at $3.7 billion, providing us with substantial downside protection averaging 5.52 and maintaining strong cost advantages. For the Cerrado Project's hedging portfolio of $600 million, the average protocol levels are even higher due to its longer-term nature, as illustrated in the graph. Moving to Page 10, we made BRL 2.6 billion in CapEx during Q1, with BRL 1.2 billion linked to the Cerrado Project. This is slightly below our expectations; however, we are maintaining our annual guidance at BRL 13.6 billion, the same figure we discussed previously. We have not yet included the disbursement related to the Parkia acquisition, which we will address in the next slide. On Slide 11, we announced an agreement to purchase the Parkia vehicles for a total of $667 million in two installments, contingent on approval from the general shareholders' meeting and CADE. The shareholders' meeting will be convened in the coming days, but since we do not control the timing, we cannot specify when this disbursement will occur, although we anticipate it happening in the upcoming months. This acquisition will reduce our annual CapEx by $51 million per year over the next 16 years, increasing with PPI over time. It has a very positive net present value impact due to our lower cost of capital and will also expand our land base by 260,000 hectares in the key states where we operate. Finally, moving to Page 12, our favorable cycle allows Suzano to pay additional dividends of BRL 800 million, as approved in the shareholders' meeting, as well as approximately BRL 1 billion for a share buyback program we recently announced. These initiatives will adhere strictly to our financial policy, maintaining our strong financial discipline. Now I'll turn it back to Walter for the conclusion.

Thank you very much. I think the takeaways we have on this quarter is that we have a very good and solid strong cash generation and capital allocation, which is critical for us. We are a highly capital-intensive company. We have been investing in the Cerrado Project. Now we have a very clear program and dividend policy. We have now this capital allocation on the buyback program that we have right now and many other areas that we are investing. The company is preparing itself for the future in many different areas. It's very important now after 2 years that the cash flow hedging policy is very consistent with us. We are not here speculating on currency. We are here to prepare our cash flow for our needs in the near future. In terms of the price environment that we have, we are going to see prices going up in the next months since we have not yet reflected all of them in the results. I am very pleased that our Cerrado Project is on time, on budget, and I am very pleased that our ESG agenda continues to progress on the right track and at the right speed for the future. With that, I would like to invite all of you to our second ESG call on June 23 here in Sao Paulo. Thank you very much. Now let's go for the Q&A session.

Mr. Leonardo Correa with BTG Pactual would like to ask a question.

My first question is for Leo. Leo, we were anticipating Suzano to announce the $30 price increase for China, right? Some might find it unusual for an industry leader to delay such an announcement. I’d like to hear your perspective on what’s happening in China, especially with recent challenges like lockdowns and pressures on the paper segment. What led you to hold off on announcing the price hike in China? Do you see the conditions favorable for implementing it, given the ongoing risks and uncertainties related to supply chains and lockdowns? We're also observing a slight decline in the resale price in China, making it a tricky market. There seems to be some confusion around the rationale for the delay in announcing this price increase in Asia. Now, for Walter, Suzano has often been compared to other companies in the basic resources sector, which typically have robust cash-return policies. It seems that investors sometimes criticize Suzano for focusing heavily on growth at the expense of cash returns and dividends. This has given the impression that the stock is underperforming compared to pulp prices, leading investors to explore alternatives with better short-term cash return prospects. I understand this is a challenging balance. We’ve supported Suzano's high-return projects, but I recognize there may be pressure from shareholders to find equilibrium between cash returns and growth. Considering the recent buyback, I’d like to hear your thoughts on how you’re navigating this balance between buybacks and growth. That’s all from me, guys.

Thank you for your question. The first part of it regarding the timing of our announcement. Obviously, we had already decided on the price increase prior to yesterday night. It was just a question of timing of the announcement, the profile of our customers, the large paper producers in China; we didn't expect that any of them would make any decisions regarding the order intake during Labor Day holiday, so we thought it was prudent to announce price increases before them. So that's how we put together our strategy and decision regarding the timing of the announcement. Regarding conditions for implementation, we see the market as supportive as it has been up to now from January to April; the supply-demand fundamentals are very strong. There's significant supply constraints citing two main factors: these unexpected downtimes, which I mentioned just in 4 months already exceed 1.5 million tons. This is substantial, and the logistics constraints seem to be worsening as we speak. In addition to that, our market sources on the ground in China report that the risks of lockdowns being short-lived, as I mentioned in my speech, together with plans from the government to stimulate the economy have made our customers very bullish in a sense that they want to guarantee they'll have access to raw material, which is challenging the supply chain for their third quarter production and sales. Just remembering that what we sell in April and May will arrive in China in the third quarter, so they're preparing for that. In recent news right after the end of Labor Day, our office and market sources again reported a much better sentiment than before the holidays. While the region that had issues with lockdowns previously is now fully operational, the internal logistics scenario has improved, and we see a spike in exports of printing, writing, and also paperboard from Chinese producers, mainly to the Southeast Asian markets. So these conditions are making sentiment on the street significantly improved compared to what was anticipated.

Leo, thank you very much. It's a very important question. Thank you for giving us the opportunity to tackle one thing that is very sensitive to our shareholders: how we create value for them. We believe that we are in the industry that is growing at a much faster pace than any other materials company in the stock market. Our industry is growing through different dimensions; we are gaining market share on hardwood. We are expanding our addressable market and gaining market share, what we call fiber-to-fiber, to gain market share over long fiber. We are gaining market share compared to other materials but we are moving faster to fiber, expanding our addressable markets to replace plastics and other materials. As we are in a growth industry, we are able to present very good projects to the market that are delivering extremely good returns. Just remembering what we present several times to our investors in different moments is that this project is going to be the lowest cash cost in our system. There is the lowest in the world, and we are going to be extremely competitive, even more competitive in the near future on a very good project that we are going to deliver to the market in a little bit more than 2 years from now. On the other side, we understand how important the cash returns are to our shareholders; we have been improving the cash returns. Now with higher dividends this year, there’s BRL 1.8 billion in dividends. On the other hand, we announced this buyback program, but we have financial discipline as well. We are very aware that we cannot increase our net debt in the coming years, so we have to balance everything. I think our track record in terms of delivering value to our shareholders is very critical. We have the merger with Fibria, we have the Imperatriz project, and we had the Três Lagoas project. The industry is performing value to our shareholders. We expect that this will become clearer in the near future when we show the results after the Cerrado Project. Thank you for the question.

Mr. Rafael Barcellos with Santander would like to make a question.

So my first question is about cost. I mean could you please comment a little bit more about your expectations in terms of pulp cash costs in the coming quarters? I mean would it make sense to believe that the worst thing in terms of cost pressure is already behind us? And my second question is related to pulp production. Could you please elaborate further on your production run rate in the second quarter? Also, do you believe that the ongoing logistical bottlenecks can significantly affect your pulp sales volumes in the second quarter?

Thank you, Rafael. Aires speaking. Regarding cash production costs, our best part was the most challenging quarter represented that because we had five important plant shutdowns in our most competitive mills in terms of cash cost. In a normal scenario, we could expect dilution of fixed costs; the surplus in increased line — and wood costs could be in the same line. But how the commodity scenario is so uncertain in the future, we are considering delivering a flattish level of cash cost in the next quarters. In terms of production, as I mentioned, we have five important shutdowns in this last part. It's not simple to have this stoppage in our mills. And normally, we have a learning curve to restart the pace in the operations that we like to have before the stoppage. However, when you consider that in the second half, we only have two plant shutdowns in our cruise lines, and we believe that we have enough room to recover any considerable loss that we had in the first quarter and deliver the same level of volumes that we had last year.

Let me tag along to Aires' explanation on production and getting to your question, Rafael, regarding how logistics can or will affect Suzano in the second quarter. We don't see that for several reasons. First of all, we own our terminals in Brazil. We have dedicated vessels to Suzano, and all our production volume is already planned regarding how it's going to be delivered to our customers globally. So we do not see any risks of not delivering our increased production volumes, as Aires said, to our customers in the second quarter.

Our next question comes from Caio Ribeiro with Bank of America.

So my first question is on fluff markets. I just wanted to see if you could talk a little bit about current supply and demand conditions in this market, which seems very tight with prices continuing to move up and whether you would consider an expansion in capacity here? And then the second question, more specific to some of the risks in pulp markets right now, with refill prices dropping in China, seasonally weaker demand in the coming months, the impact of the lockdowns. I know you already talked a little bit about this, but the impact of the war in Europe as well. I just wanted to hear from you whether you believe that these current prices, which are migrating to $810 per ton, are sustainable and if you expect a drop in prices at some point in the coming months or not?

Okay, this is Leo here. I'm going to address both of your questions. First, regarding our Eucafluff, it's performing exceptionally well. We have been oversold for over 18 months and are adjusting our pricing in international markets and in Brazil, consistent with recent global trends. We're very satisfied with the product's reception and the quality appreciated by our customers; major brand owners are already utilizing it. This opens the door for us to consider our next steps. Currently, our Executive Committee is evaluating future investments and conversions for presentation to our Board. We’re thrilled with the progress of this business and innovation. As for your second question about the sustainability of current prices, we believe there are strong fundamentals supporting them, particularly significant supply constraints that are unlikely to resolve quickly. However, we will need to monitor a few factors as we move into the second half of the year—specifically, how effectively Chinese producers implement price increases and the potential impact of COVID on demand. We've noticed price movements in China, including adjustments during the Labor Day holidays for tissue prices, which are currently experiencing notable increases. This trend is observed across most, if not all, grades. When we assess our customers' margins, we find that they differ from the claims made by some competitors regarding margins in China. Our large customers order well in advance, resulting in a delay in the system, which means they are still working with low-cost pulp. This gives them the time to implement price increases downstream, allowing them to gain market share over smaller competitors, although we don't share this advantage. Therefore, we expect their implementation efforts to be successful.

The next question comes from Daniel Sasson with Itau BBA.

My first question is on price realization in the pulp business. I know that you mentioned that the recent improvements in pulp prices have not yet reflected in your results. But if you could give us more color on the most important factors that impacted your price realization in the first quarter. I mean if it's purely related to the fact that you had more pulp sales concentrated in a period in which the BRL was stronger or if there are some lagging volumes from previous periods in which the prices were not as high as they are right now, that would be pretty interesting. And my second question, regarding the expected impact on supply from the Russia-Ukraine tension, if you could elaborate a bit more on what you expect— even if the war is over, probably sanctions on Russia will not be lifted in the very short term. So if you could give us more color, more numbers in regards to how dependent on Russian wood is European supply or European pulp production today, that would also be helpful from our end.

Okay. Daniel, good morning. This is Leo here. I'm going to answer both of your questions. The first one regarding pulp price realization in the first quarter. There are two main reasons. We usually invoice our customers in U.S. dollar terms, and at the end of the quarter, we calculate the price back to U.S. dollars for reporting purposes using the average FX of the quarter. This quarter, we had a particular situation that due to our maintenance downtimes and production schedules and the program times of vessels to arrive and be shipped out of Brazil, we had a bigger concentration or a very great concentration of our invoicing in the third month or in March, when FX was particularly strong. Therefore, our price of $639 has distanced itself from our actual price of $655 when we add our invoice in U.S. dollars. The second issue is related to the timing of the invoicing. We face a situation for our, obviously, direct sales, mainly our sales to Asian markets that today, we have a carryover on invoicing of over 30 days. So, we're running late with this invoicing, and with our planned production, we were unable to recoup that. So when we add those two effects, we get to the price I have just stated before. Now in terms of the Russia-Ukraine war's impact on supply, we see two main factors playing out — the first is related to the sanctions on Russian wood. There are two optics to consider. First, it's related to certifications. You all know that FSC has canceled certification of Russian wood. So this is an important factor to consider. And second is the fact that 30% of the wood necessary for the finished pulp production was coming from Russia. That's a bit over 4 million cubic meters or maybe approximately 1.2 million to 1.5 million tons of pulp production a year. That was birch wood crossing the border, and now the finished producers have a challenge to find alternative wood supply. We still haven't seen solutions for the upcoming months. The second issue in Russia that will also affect supply is due to Russian producers, at this moment, facing difficulties getting supplies into their mills. And the issue we see being the greatest restriction is chemicals, or bleaching chemicals. For example, Fastmarkets RISI just reported last week that it is relevant for the most relevant Russian producer who was a big exporter to China ran April only with 50% offerings of their volume of bleached hardwood pulp and will not offer any volumes in May due to a 30-day maintenance downtime. We do not know exactly the reasons. We know the reasons are in the news, and we read the same. This will obviously create a big impact on the market.

Perfect. Just to clarify, in regards to your carryover of invoicing that you mentioned a bit over 30 days, this is something that is continuing to take place, right? And should, therefore, have an impact on your second quarter realized prices as well?

Sorry, I had a problem here with the microphone. Yes, we continue to see that taking place, but it's important to state that, as I mentioned, all our price announcements have been fully reflected in our order intake. So it's just a question of delay in terms of price realization.

Mr. Thiago Lofiego would also like to make a question.

First question, Bacci, I believe you mentioned the Cerrado Project CapEx was lower than expected this quarter. Can you comment a bit more on that? Are there any issues regarding suppliers, any bottlenecks at all? And the second question about the domestic paper market in Brazil. So what’s the outlook for the remainder of the year, especially regarding cardboard and premium writing grades?

Thank you, Thiago. No, there are no issues or delays related to Cerrado. It’s just the work that we continuously do with the suppliers to postpone payments and to improve our working capital, but no effects are coming from the physical side of the project.

Thiago, it’s Fabio here. Thanks for your question. Regarding the paper markets, we continue to see strong demand in Q2 and moving forward into the second half of the year. As you know, we have seasonality in the paper business, which is usually stronger in the second half of the year. This year, we have elections, which is also a driver for paper print and writing demand. As of this year, the first quarter was very strong, so the comparison basis with last year's first quarter is not favorable. However, the market has shrunk in the first quarter of this year, but it is still 20% above what we had in 2019 before the pandemic. So it is growing above historical trends. We believe that the market for board is going to gain momentum now in the second quarter moving along with the seasonal trend.

The next question comes from Carlos De Alba with Morgan Stanley.

So first question, maybe continue on the paper side. Clearly, very strong pricing power you have experienced, so could you comment on the outlook for paper price hikes potentially in the different markets and/or products? And then on pulp, something that makes it quite difficult for us to forecast sometimes the pulp price is the discounts that are embedded in different markets. So we have seen the nominal price increases at a very rapid pace. Can you comment a little bit about any trend? And I understand that you need to be vague on this, but if you can give us a little bit of color on any trends that we should be aware of regarding the discounts in the different markets.

So Carlos, thanks for the question. It's Fabio here. On the paper side, regarding prices, we have implemented the prices that we announced during the last Q4 that were supposed to be implemented in Q1. In Q1, we announced new price increases that we start implementing now in Q2 here in Brazil for uncoated and cut size. We have recently announced a price increase for board — a 13% price increase for board, which is also 13% for uncoated and cut size. And for board, we start to implement that as of June. Additionally, we have announced price increases in all the markets that we serve internationally, in the order of $100 per ton, starting to be implemented from May. We continue to see the markets unbalanced, which is due to supply shortages, which is supporting these price increases. As I mentioned in my presentation, we have the impact of inflation, which is affecting the cash cost of paper producers, also leading to the need for more price increases. So we see the market supportive of these price announcements that we have just made.

Okay, Carlos, this is Leo here, jumping into your question on pulp, regarding discounts to provide better clarity in terms of net prices. Starting with Asia and China, our view is that the discounts on the indexes are anywhere from 3% to 5%, but on average, 3%. That's what we consider to be a good indication of net prices in the market. In the rest of the world, meaning excluding Asian markets, we see a consolidated discount of roughly 33%. This is our view on how to better translate to net prices globally, and I’m talking about hardwood, obviously, right?

Right. Yes, correct. Okay. And have they been increasing a little bit or relatively stable?

We saw last year an increase of roughly 1%, mainly on the Western world, but stability in the Asian markets.

The next question comes from Marcio Farid with Goldman Sachs.

I have a couple of questions. I'm sorry to go back on the cost discussion again. Aires, I just wanted to understand from you, what would be the driver of the flattish cost because we see diesel prices in Brazil increased by about 25% in March. Our analysts, at least, are saying that Petrobras diesel prices in Brazil are still 20% below what it should be if the company decides to increase prices again. So it's obviously a major cost inflation driver. And we saw wood costs being flat in the quarter probably because we produced less or we had to use less further away wood as well. So I would expect that wood costs could go up as well. But then you are guiding for flattish costs, so which is quite good. So just trying to understand what are the offsetting factors? And my second question, maybe to Walter. Walter, we — from time to time, we see commodity companies being very flexible in terms of capital allocation, right, being able to do dividends, buybacks, growth projects, and acquisitions. It sounds like Suzano is doing all of that, obviously, in different magnitudes for the different strategies. I am just wondering how you're seeing the current cycle we are at. I mean are we in a cycle that commodity companies can do all these things, or is it just a punctual opportunity that you didn’t want to miss like the acquisition of Parkia, for example, or the buybacks? Is it punctual or is it a new trend in terms of capital allocation strategy?

Thank you, Marcio. Let's try to explain. For our following quarters, we will increase our production volume in our best performance mills. In the first quarter, we shut down Três Lagoas line 1, Três Lagoas line 2, and Imperatriz. Those are our mills that we have our best performance in terms of cash cost. When we increase the volumes in these mills, the mix of costs will be better in the next quarters. That's the first reason. The second reason is with bigger volumes in the following quarters, we will deliver better fixed costs and produce more energy surplus to sell in the open market, which will positively affect our underlying cash cost. The third important impact is that we had shutdowns in these mills in the first quarter that will reduce our maintenance expenses in the next quarters. Normally, when we have general shutdowns, we take the opportunity to do some small maintenance that we have planned for the next quarters. You are correct that the wood has a benefit of our reduction in the average distance from forests to the mills, which offsets the impact of diesel. Our current forecast is that in a regular scenario, we could see our cash cost reduce, but we must be prepared for the worst-case scenario and hope to achieve the best outcomes. That’s why I say it should remain flattish in terms of cash cost.

Marcio, thank you very much for your question. Just remember that when we merged Suzano and Fibria, at that time, our net debt was $13.7 billion. We announced to the market that our target would be to reach $800 per ton as our target net debt, which at that time was roughly $10 billion. We are now aiming to reach a net debt. We are getting closer; our current net debt is at $10.5 billion, very close to the previous quarter, which was $10.4 billion. We believe that now after we have development on our Cerrado Project, our target, as announced during our Suzano Day, would be a little bit more, around $12 billion of net debt since we are getting close to 15 million tons of total capacity. We believe that with that, we open up possibilities on capital allocation. We have the capital allocation regarding buybacks and higher dividends in the future. We also have the potential to reinvest in projects that could deliver very good returns to our shareholders. I think our track record on investments in retrofitting our facilities or our forest, as we are doing now with our Parkia Project, shows that we can create value for our shareholders. We are bringing in more than 200,000 hectares of land into our system. In addition to that, we will avoid paying more than $50 million on biological assets each year. I think this is a very positive combination of value creation for our shareholders. Our avenues for investment and capital allocation are much higher now that we have reached our net target. This should enable us to provide higher cash returns to our shareholders, while also allowing us to allocate capital towards growth-generating projects.

Mr. Cadu Schmidt with UBS would like to make a question.

Two questions on my side. Leo, can you please share some views on Suzano's inventory position? Can we expect production to surpass sales this year considering low inventories at the moment and another massive concentration of downtimes in the second quarter of next year? And my second question to Walter. Walter, can you please comment on the law proposal that would allow private companies the right to have the concession of public forest in Brazil and explore carbon credits from these assets? Is Suzano interested in acquiring any of these concessions assuming that the law is approved? And do you have any initial estimates on the benefits in cost for a transaction like this?

Cadu, regarding inventory, for obvious reasons, we cannot disclose our forward strategy as it is very linked to our commercial strategy. What I can tell you is that we have been running for several quarters in a row with suboptimal stock levels, which is putting a lot of pressure on our operations team to maintain the excellence and service levels that we need to provide.

Thank you, Cadu, for your question. We believe that we need to impact all stakeholders. One key stakeholder is society, and we believe that regeneration is part of the solution for the future. We need to address the issue of climate change. To do that, we need to reduce our emissions, and we are working in this area at Suzano. We would like to invite all other companies and consumers in the world to join us in this initiative — we need to act immediately and cannot postpone the situation of higher emissions. At the same time, we need to boost our carbon sequestration efforts. We believe regeneration is part of the solution. We are engaging our team in these discussions, and we believe these concessions for public areas, especially degraded public areas, can significantly contribute to the solution. We welcome the government's consideration of this situation, and we are incentivizing them. Brazil has the potential to be a major player in the world in terms of forest regeneration, which would benefit the Brazilian economy and help address social problems across different biomes. Furthermore, it is essential for us to tackle the climate crisis we are currently facing. So I believe that covers your question. Thank you.

As there are no more questions, I would like to turn the floor over to the company's CEO for final considerations. Please, Mr. Walter Schalka, you may proceed.

Thank you very much for joining us for this session. I think it's very clear that Suzano is on the right track to create value and share that value with all our stakeholders. This approach is part of our culture and our aim. We believe that we have a very good track record of delivering value to our shareholders. We also want to demonstrate to society that we can deliver even better value to all remaining stakeholders. We are confident that we are on the right track and at the right pace to achieve our objectives, and we are committed to doing it even better. Thank you very much, and let's keep in touch.

Thank you. Suzano's first quarter results conference call is finished. Have a nice day.