Earnings Call Transcript - SUZ Q2 2023

Operator, Operator

Ladies and gentlemen, thank you for holding, and welcome to Suzano's conference call to discuss the results for the second quarter of 2023. We would like to inform you that all participants will be in a listen-only mode during the presentation that will be addressed by the CEO, Mr. Walter Schalka, and other executive officers. After the company's remarks are completed, there will be a question-and-answer section when further instructions will be given. 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 would like to turn the floor over to the company's CEO. Please, Mr. Walter Schalka, you may proceed.

Walter Schalka, CEO

Good morning, everyone. It's a great pleasure to be with you. Welcome to the second quarter results presented by Suzano. With me here, we have a large part of our team. Please feel free at the end of the session to ask questions. I would like to highlight the resiliency of the company. We are well prepared to navigate this cycle with lower pulp prices. The company has been preparing itself. We know there is part of the volatility process that we are facing in our industry, and we are well prepared for this moment. The company has been devoting capital allocation to different initiatives to prepare for the future. During this session, we will go further into these discussions. On the sales side, we had normal volumes during this seasonal period in pulp and paper. Our inventory levels continue to be below optimal levels. In this quarter, we achieved BRL 3.9 billion in EBITDA, and our operating cash flow was BRL 2.2 billion. This is a very important KPI for us. Our cash cost is going down with a 2% decrease during this quarter. We have very strong liquidity at this point, and our net debt is increasing at a very slow pace compared to our investment volumes. We are less than one year before we start up the operations of a new project. We are happy with the performance of our engineering team. It’s important to note that on June 1, we closed a deal with Kimberly-Clark for tissue assets in Brazil. This combination is bringing synergies that will add value to our shareholders. The company is now the leader in the tissue business in Brazil, a significant change from our position just five years ago. Now I will turn it over to Fabio, who will mention a bit about our Packaging and Paper business.

Fabio Almeida de Oliveira, Executive Officer

Thank you, Walter, and good morning, everyone. Let's turn to the next page of the presentation. As seen in the chart at the bottom, the Paper and Packaging business unit has delivered stable EBITDA and margins on a year-over-year basis despite challenging paper market conditions. As illustrated in the top left chart, Suzano’s sales volume was 5% higher than the previous quarter but 10% below the same period last year. Demand for print and writing papers in export markets has been affected by a significant destocking cycle during the first half of 2023, combined with lower consumption of printing materials in the same period. This trend is particularly intense in mature markets, such as North America and Western Europe, mainly for coated papers. Demand for packaging and uncoated grades has been more resilient, however. Latin America, our main export region, has shown positive growth in uncoated grades for the period. On the domestic market, according to BA, print and writing demand decreased by 18% in the first two months of Q2 compared to the same period in 2022, with most of this decline centered around coated papers. For uncoated papers, demand remains resilient at the same level as last year, mainly driven by sales in the packaging segments. For paperboard, demand showed a 2% decrease in the first two months of Q2 compared to the same period last year, which we attribute to inventory normalization across the supply chain, although demand for packaging and consumption of recession-resistant goods remained solid.

Leonardo Grimaldi, Executive Officer

Thank you, Fabio. Let’s please move to the next slide of our presentation to address the second quarter results of our pulp business unit. Our Q2 sales were 6% lower compared to Q2 '22 but 2% above the preceding quarter. The lower sales volume in comparison to 2022 was a result of reduced production due to higher planned downtime during the quarter. Demand has shown mismatched patterns in different regions. In China, demand for hardwood pulp was strong, driven by low price levels, stimulating a restocking movement among small and midsized paper producers, as well as additional pulp purchases from integrated producers. Tissue was a significant highlight this quarter, with a 9% production increase versus Q1 '23. Europe has faced challenges, with printing and writing grades lasting lower order intake, affecting production rates significantly. Due to this situation and the new project volumes, we've redirected hardwood pulp volumes to Asian markets, significantly impacting pricing dynamics. Our average export price for Q2 of $562 was 13% lower than Q1 '23, impacting our EBITDA for this quarter, which reached BRL 3.2 billion, resulting in a 45% EBITDA margin.

Aires Galhardo, Executive Officer

Thank you all. Good morning, everyone. Moving to the next slide. Cash production costs in the second quarter stood at BRL 918 per ton, 2% lower than the first quarter. This performance was driven by lower input prices, especially for energy and chemicals, as well as a decrease in input consumption due to improved operational stability. In the second half of 2023, we anticipate cash production costs will trend downward, with a mid-single-digit reduction from the second quarter level. Regarding the Cerrado project, we achieved 7% physical progress. Important product milestones were reached, allowing us to have a more optimistic view for the project, with production start now expected in June 2024.

Marcelo Bacci, Executive Officer

Thank you, Aires. Moving to the following page, we show a long-term recap of our capital allocation and structure. In the last two years, from June 2021 to June 2023, we generated about $9.8 billion of EBITDA and $5.1 billion of capital for allocation after the payment of sustaining CapEx, working capital changes, and interests. This $5.1 billion has been deployed, with 70% in modernization and growth, including the Cerrado project, and 30% to dividends and share buybacks. Our net debt remained stable with a slight shift from $11.4 billion to $11.3 billion. The financial schedule is on track, with $9.8 billion remaining to be disbursed by 2024.

Walter Schalka, CEO

It's clear that the company is well-prepared for the future. We have been investing in retrofitting our plants and expanding our land bank. We are extremely disciplined in terms of capital allocation. I am pleased with the company’s results, even if the current pulp prices are not ideal, but we understand and are prepared. This process will see improvement in the future. We are continuously preparing for what's upcoming and inviting everyone to join us at our Investor Day on October 27.

Daniel Sasson, Analyst

Hi. Good morning, everyone. Thanks for the presentation and opportunity. Congrats on the progress with the Cerrado project. Most of the interactions I have with investors focus around capital allocation, especially in the context of cash generation post-Cerrado. In an ideal world, in which business line would you like to expand or focus your efforts on? Do you have an appetite to enter new businesses that are not directly linked to pulp and paper? Or should we expect new applications for pulp or new products? How do you assess the attractiveness of such investments versus share buybacks?

Walter Schalka, CEO

Thank you very much for your question. Capital allocation is critical for our organization. Our track record is very good, and we're not going to become complacent. We continuously analyze cash returns and explore new investments, both organic and inorganic. We plan to reinvest 90% of our operating cash flow for future growth and allocate the rest for dividends. Our focus remains in areas related to pulp and paper business. Now I will allow Fabio to address your question on paper competition.

Fabio Almeida de Oliveira, Executive Officer

Regarding imports, we see them growing, mainly in coated paper due to decreased logistics bottlenecks. However, this impacts a small part of our business, primarily in coated paper, which is less than 20% of our sales. For uncoated paper and paperboard, we do not expect significant import needs. The risk is concentrated in coated paper, and we are attempting to match our pricing accordingly. For tissue, the Brazilian market is growing at a rate of 3% on average, but the announced capacity increases may not all be deployed in Brazil, thus stabilizing supply-demand.

Luis Renato Costa Bueno, Executive Officer

The Brazilian tissue market has 1.4 million tons, and the growth is steady. The 240,000 tons of new capacity may create some imbalances in supply and demand in the short term, but we expect stabilization in the medium to longer term. Suzano is well-positioned concerning cash costs and has developed strong brand equity over the past five years.

Thiago Lofiego, Analyst

Two questions from my side. First on wood prices in Brazil, can you comment on market dynamics and how that may impact your near-term results? Also, Aires, just to clarify, you mentioned pulp cash costs are projected to be mid-single digits lower for the end of the year.

Carlos Anibal Fernandes de Almeida, Executive Officer

Regarding wood prices in Brazil, we have been experiencing an increasing trend. We do not expect any major changes in that direction. Our forestry program is set for operations mainly in Mato Grosso do Sul, with a strong plantation program underway.

Aires Galhardo, Executive Officer

Regarding cash costs, yes, I indicated that we expect middle single digits lower compared to the second quarter level.

Leonardo Correa, Analyst

Looking into the supply side issues impacting the market for pulp, how do you see the supply-demand balance? How easy has it been to pass through price hikes? Regarding Cerrado, what milestones made you advance the startup timeline to June?

Leonardo Grimaldi, Executive Officer

We’ve observed significant unplanned downtimes leading to supply constraints. Thus far, our price increases have been tentatively successful. Regarding the Cerrado project, we’ve seen strong performance from our team and suppliers, which gives us confidence to anticipate a start in June.

Caio Ribeiro, Analyst

With the Cerrado startup pushed to June of next year, how much do you expect to produce in 2024? Also, do you foresee a risk of integrated producers returning to the market as prices rise?

Aires Galhardo, Executive Officer

We are maintaining our initial predictor of producing 2 million tons in the first 12 months at Cerrado.

Walter Schalka, CEO

We are not managing by averages; we focus on specific events creating shareholder value. We won't plan on curtailing production unless market conditions warrant it. We continuously evaluate options to generate the best possible outcomes for our shareholders.

Rafael Barcellos, Analyst

Regarding capital allocation, after the completion of the buyback programs, will the company focus more on cash returns for shareholders next year? And should a new hardwood mill be a priority, or will you move toward niche products?

Marcelo Bacci, Executive Officer

Regarding your first question, we see the completion of the buyback programs, and there are no immediate plans for new ones. We will monitor conditions and only proceed if advantageous. Our policy focuses on returning cash flows to shareholders. Now about your second question, we are exploring various growth initiatives, including potential niches like fluff and dissolving pulp.

Jens Spiess, Analyst

For integrated paper producers in China, how has demand evolved? Also, regarding the BRL 5.1 billion you plan to deploy next year, could you provide clarity on the timing?

Leonardo Grimaldi, Executive Officer

We see an increase in demand from integrated pulp and paper producers, estimating it to be around 50,000 to 100,000 tons a month. For the BRL 5.1 billion, it will be concentrated mainly in the first half of the year, but there will also be significant expenditures in the second half.

Walter Schalka, CEO

Thank you for your questions. I invite everyone to check out the video of the Cerrado project; it's impressive. The company is focused on long-term value creation, and while we don't prefer volatility in pulp prices, we’re prepared for current challenges. Our long-term outlook is positive, and we look forward to our future endeavors.

Operator, Operator

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