Earnings Call Transcript - SUZ Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for holding and welcome to Suzano’s Conference Call to discuss the Results for the First Quarter of 2021. We would like to inform you that all participants will be in a listen-only mode during the presentation of Mr. Walter Schalka, Chief Executive Officer; Marcelo Bacci, Financial and Investor Relations Executive Officer; Fabio Almeida, Paper and Packaging Executive Officer; Leonardo Grimaldi, Pulp Commercial Executive Officer; and Aires Galhardo, Pulp Operation Executive Officer. After the company’s remarks are completed, there will be a question-and-answer session 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 Mr. Walter Schalka. Please, Mr. Walter, you may proceed.

Walter Schalka, CEO

Good morning and good afternoon to everyone. It’s a great pleasure to be with you today. Welcome to the first quarter results videoconference of Suzano. With us here, we have all the executive committee. At the end of the session, we will be ready to answer your questions during the Q&A session. Today, it’s a very important day. I think it’s a historical day for us. We are announcing not only extremely good operational results but we are preparing the company for the future. As you may know, we have been discussing vigorously for several terms about several capital allocation alternatives that we have, and one of them would be to keep our relevance in the pulp market for the future. We are announcing today, and there are certain precedent conditions, the approval of Project Cerrado that we are going to share with you during this session. I would like to start by presenting to you the operational highlights that we had in the first quarter. First, mentioning about the pulp volume. We were able to sell 2.7 million tons by the end of this quarter. There is a very positive market environment. We have not yet been able to capture all the price developments in different regions since we have certain lags in this process and its specific geographic mix. As you know, we have a very large dispersion in prices during this quarter across different geographies. On the paper market, we had an extremely good performance with sales returning to the same level that we had before the COVID-19 issue when comparing with the first quarter of 2019. Also, our coke inventories are very stable compared to the last quarter of last year. Just to remind you, the first quarter for seasonal reasons usually is not the best quarter of the year. We had an adjusted EBITDA of BRL4.9 billion in this quarter, which represents more than 60% higher compared to the first quarter of last year, extremely positive. Even so, we are not yet able to benefit from all the price increases. Our operating cash flow was BRL3.9 billion, and this could lead us to deleverage the company at a faster pace, as we will mention shortly. Our cash cost was BRL623 per ton, extremely competitive. But I’d like to warn you at this point in time that the Brent prices and exchange rate FX, combined with higher chemical costs, could lead to a marginal increase in cash costs in the next quarter. We have a very strong liquidity position of $2.4 billion. Our net debt has been decreasing at a very fast pace. Just as a reminder, at the end of last year, we had $12.3 billion. Now, we have $11.6 billion, a decrease of roughly $700 million in this quarter. This is extremely positive, showing the benefit of higher prices and better effects on our results with leverage going down rapidly. At the end of last year, it was 4.3; right now, it’s 3.8, and we are approaching the level in our financial policies of being between 2x and 3x, while also considering up to 3.5x during the expansion of projects. Our financial discipline is critical for us. We will discuss in a moment about our new project, Project Cerrado, and the conditions under this project. Now I will pass the floor to Fabio, who will share our performance on the packaging and paper business. The floor is yours, Fabio.

Marcelo Bacci, Financial and Investor Relations Executive Officer

Walter, Fabio is having problems with the connection.

Fabio Almeida, Paper and Packaging Executive Officer

I am back. Thanks, Walter, and good morning, everyone. I apologize for the connection problem here. Please let's turn to Slide #4 in the presentation. Let’s look at the paper and packaging business unit results for the first quarter of 2021. The figures presented here are specific to our paper and packaging business unit, therefore, excluding Suzano Consumer business unit results. Despite several challenges imposed by the second wave of COVID in Brazil, the paper and packaging business delivered a solid performance when compared on a year-over-year basis, indicating demand recovering in the domestic and international markets and better overall pricing. As you can see in the top graph, when looking at our sales figures, Q1 2021 has been our best first quarter in terms of volumes for the past two years, indicating demand recovering after the major impact last year. We sold 264,000 tons during the first quarter of 2021, which is a 10.4% increase compared to the first quarter of 2020, though we were 18.4% below Q4 2020 mainly due to seasonal demand in the domestic market between periods. Domestic sales represented approximately 67% of our total sales in the quarter, totaling 176,000 tons, a 13.5% increase on a year-over-year basis. The strong recovery is mainly led by our paperboard sales, which have grown 13.8% year-over-year due to the strong demand for paper packaging products in the period. Our domestic print and writing paper sales also grew by 9.6% on a year-over-year basis, reflecting continuous demand recovery that began in the second half of 2020. Our international sales totaled 88,000 tons in the first quarter of 2021, a growth of 4.7% year-over-year but with a 5.3% reduction quarter-over-quarter, mainly due to enduring logistics bottlenecks in exporting markets. Rising logistics and pulp costs pushed paper prices higher in our international markets, which, coupled with a weaker real, allowed Suzano to support more at better conditions. Looking at the lower left side, our average prices during the quarter totaled BRL4,192 per ton, which is 8% higher than our average prices in Q4 and 9.6% higher than our Q1 prices from last year. During the period, Suzano announced multiple price increases to its indirect portfolio and to all markets we serve. We expect full implementation of these price increases in the months to come. Looking at the lower right part of this slide, our EBITDA totaled BRL373 million in the first quarter of 2021, being 28.6% higher on a year-over-year basis and 8.5% lower on a quarter-over-quarter basis, mainly due to seasonality between periods. Our EBITDA margin reached BRL1,412 per ton, which is an all-time record for the paper and packaging business. Now, I would like to invite Leo to present the results of our pulp business unit.

Leonardo Grimaldi, Pulp Commercial Executive Officer

Thanks, Fabio, and good morning, everyone. Now let’s move to Page 5 of our presentation. As you will note, the results of our pulp business units were positive in this first quarter of 2021, supported by solid sales volumes with increasing prices across all regions and still low stocks. Just to recap the market during the first quarter, after the inflection point we perceived in the fourth quarter of 2020, several factors continued to align and support the positive market fundamentals present throughout this first quarter. On the supply side, we noticed low producer pulp inventories entering 2021. Additionally, production downtime during this quarter, both planned and unplanned, has shortened further the availability of market pulp. When we add the logistics constraints on container shipments, which have reached the breaking point, we note even further challenges on the supply side. On the demand side, we also observed positive consumption trends in tissue, paperboard, specialty grades, and a recovery of printing and writing rates from 2020 levels in all markets. China’s paper and paperboard production, as well as end demand, has been positive in all of these mentioned grades, supported by a strong economic recovery and increased consumption, alongside positive exports of products to other regions. Moreover, we have been noticing price increase implementation in most paper and paperboard grades in all markets, which obviously helps support these positive fundamentals. Regarding our production in the quarter, I would like to recognize all the actions that our team has been taking during this critical COVID-19 pandemic moment, remaining focused on very strict health and safety protocols for our employees and the uninterrupted operation of all of our mills and supply chain systems. Looking at our numbers for the quarter, we sold, as Walter mentioned, 2.7 million tons of market pulp, which is in line with our fourth quarter sales. These volumes consequently bring us to low inventory levels for the quarter, and we are doing our best to meet our customers’ ideal needs in this turbulent supply chain scenario caused by the logistics problems we're facing. Our total sales for the last 12 months reached 10.6 million tons of market pulp. Our average export prices reached $532 per ton in the first quarter of 2021, which is a 16% increase when compared to the fourth quarter, or equivalent to BRL2,913 per ton. When we factor in the strong sales figures presented during the quarter and the increase in prices, both in U.S. dollars and Brazilian real terms, we reached an EBITDA of BRL4.5 billion for the first quarter of 2021, corresponding to BRL1,683 per ton or a 59% EBITDA margin. Looking forward, we will continue to focus on executing our commercial strategy, taking advantage of the supply and demand fundamentals that continue to be very supportive. Supply remains tight, considering low producer inventories, production curtailments due to the spring maintenance shutdown season, mainly in the northern hemisphere, and ongoing unexpected production losses compounded by constraints in global logistics, as I mentioned before. Demand for pulp remains solid in all major markets, and our order intake is also positive and aligns with our expectations. With that said, I would now like to invite Walter back so that he can provide further news on our next bold strategic move, the Cerrado Project.

Walter Schalka, CEO

Thank you, Leo. It’s a great opportunity to share with you our view about the future. It’s very important to tell you that we have been implementing our purpose of renewing life to trees that we have been discussing with you over the last several years. Our ambition is to impact society with this project, not only on the economic side but also on the environmental and social side. This is very important for all of us. Aires will share our vision of the specific details of this project in a few moments. However, it’s crucial to mention that this project will be extremely positive for all stakeholders. We will create value for our shareholders, but we will also have significant benefits regarding environmental effects through increased carbon sequestration and renewable energy generation in the coming years. We are pleased to announce a project that will represent the lowest cash cost in our system and most probably the lowest cash cost in the world. The Board approved this project under certain specific precedent conditions yesterday, and it’s important that the first condition is to follow closely our financial policies. As you may know, we have a policy of between 2x and 3x net debt over EBITDA, but during the expansion period of the program, we can reach 3.5x and we believe that with this project and as Bacci will share with you, we will be within the approval area of our Board of Directors. Financial policies are critical for us, and we have been very disciplined about that. The second precedent condition is to reach an agreement with the major vendors of this project. We are in ongoing discussions and negotiations regarding that, and hopefully, in a short period of time, we will be able to announce how and with whom we will proceed and utilize this technology in the future. On Slide #8, you can see that we are moving ahead with our long-term strategy. One of the avenues we have been discussing during Suzano Day is our relevance in the pulp market. This is going to enhance our competitiveness in the industry since we will have better cash costs compared to our average costs in the system, being the lowest cash cost of all of our plants. We will also maintain very good resiliency in terms of delivering returns on capital employed, even in very challenging asset scenarios. We believe we will exceed 13 million tons of total capacity in our system. We believe that we can expand the addressable market with this project. As we have previously discussed, innovability and bio-economy are very important to us, and we will seize this opportunity to introduce alternative fibers, short fiber use in several other markets that could replace recycled pulp, long fiber pulp, and fossil fuel products in the future. This could be a very good opportunity, and importantly, it will contribute to our sustainability goals. We will announce our ESG results next week on our website, and we are excited to state that we will have even higher targets for the future with this project. We are committed to making significant environmental and social impacts in the specific region of this country. Now I will pass the floor to Aires, who will explain a bit more about the details of this project.

Aires Galhardo, Pulp Operation Executive Officer

Thank you, Walter. Good morning, everybody. It’s a great pleasure to be here with you, announcing this important Suzano investment in the state of Mato Grosso do Sul that will greatly contribute to the region's development and the growth of the economy in Brazil. As you already know, the Cerrado project is located in the city of Ribas do Rio Pardo in the state of Mato Grosso do Sul, approximately 100 kilometers from the capital, Campo Grande. This new plant will be able to produce 2.3 million tons of pulp per year, and it will have the lowest production cost of our asset base. This excellent cost competitiveness is the result of a combination of several factors: the leveraged total supply ratios of 60 kilometers; our energy surplus, averaging a generation of 108 megawatts; an efficient logistics system for supplying and exporting production; and a modern eco-efficient system for treating residues. Our estimate is that the Cerrado project will start up in the first quarter of 2024. The necessary CapEx for investment, including infrastructure and direct costs, is projected to be BRL14.7 billion, considering an FX of 5.5%. Now, I will give the floor to Marcelo, who will address the financial aspects of the Cerrado project.

Marcelo Bacci, Financial and Investor Relations Executive Officer

Thank you, Aires. Hello, everyone. Moving to Page 10, I’d like to emphasize that the Cerrado project is quite special in the sense that its low production cost ensures we generate value even in tougher asset scenarios. This is critical for us. Suzano will always seek to enhance its low-cost production position globally. On the following page, Page 11, we show that the CapEx will be concentrated in 2022 and 2023, with only BRL1.3 billion expected to be spent this year, in 2021. We have been preparing the company for this over the last two years. Moving forward, we have managed our maturity schedule for debt maturities to 2025 and onwards. Therefore, we’ve prepared our maturity schedule to cope with the CapEx execution that will be concentrated in years where the maturities are variable. So we are very well-prepared from the point of view of financial discipline to manage with this additional CapEx. On the following page, we update our CapEx program for 2021 as a result of this announcement, including BRL1 billion of industrial and infrastructure CapEx related to the Cerrado project, plus BRL300 million of additional forestry CapEx related to the project. So now the guidance for the year is BRL6.2 billion of total CapEx. Moving to Page 13, we would like to highlight the key points of this project. First, this project will enhance our relevance in the pulp market over the years as a consequence of the belief we hold in the continuous growth of pulp demand with current applications and new applications for pulp. Simultaneously, it will improve our cost advantage that is so important to us. Moreover, we will be significantly advancing our ESG goals with the additional forests and the very high eco-efficiency that the new plant will bring. Therefore, climate change will be impacted positively, alongside additional renewable energy exports, as well as contributing to the region's development and helping mitigate inequality. We have a very experienced team with a strong track record in implementing projects of this nature, so we are confident that we will be able to deliver this project on time and within budget. Moreover, we now have the important ability to implement a project of this size using only internally generated cash flow. We are not planning to take on any new project-specific financing but rather relying on our current cash position and the cash flow generation expected in the coming years. This is quite different from previous expansion cycles we had in the past. So with that, we conclude the presentation and are ready to move to the Q&A session.

Operator, Operator

Thank you. Our first question comes from Thiago Lofiego, Bradesco.

Thiago Lofiego, Analyst

Good morning, guys. Thank you. I have two questions on my side. The first one is how should we think about the wood supply equation for the project? You mentioned that 85% of the wood requirement is already under contracts. I would like to understand this a little better. Does this cover the first year or is it for the long-term already? As far as I know, you own roughly 100,000 hectares for the project, but the project demands something like 200,000 hectares, right? I just want to understand this equation a little more deeply and potential new CapEx involved on the forestry side. The second question relates to the project’s internal rate of return. You mentioned and you put a slide with a sensitivity analysis there. Could you give us some numbers? What would be like the more asset scenario internal rate of return, maybe a range, just to understand how the project performs even in a very negative scenario, like with $500 per ton pulp and BRL4 or BRL5, maybe a range.

Carlos Almeida, Analyst

Thanks for your question. On the wood supply side, we already have most of the volume contracted for the first cycle. By that, I mean, for the first seven years. On the wood side, we are already ready to start a new mill.

Thiago Lofiego, Analyst

Carlos, can you tell us longer term, what could be the new additional CapEx needed and the percentage of owned land versus leased land, etcetera? Maybe a ballpark estimate for us to understand a little better?

Carlos Almeida, Analyst

Yes. All I can say at this point is that we are already expanding our forest base, and the plantation pace will only increase from now onwards. By the end of this year, I can say that we will have a relevant part of our plantation established. Due to the commercial sensitivity of such information, we cannot disclose any other information like the volume or area for the time being, and we hope that you can comprehend that sensitivity.

Thiago Lofiego, Analyst

Of course. Yes, thank you, Carlos.

Marcelo Bacci, Financial and Investor Relations Executive Officer

Thiago, regarding the internal rate of return, we are not in a position to share specific numbers with you. But I read your report, and I can say that your analysis of the net present value of the project is not too different from our internal analysis. In any potential scenario, according to what history shows us about pulp prices, this project will always be generating positive cash flows after CapEx. In only a very few scenarios, this cash flow generation will be below what is necessary for a positive value generation in the sense that the return will be, in most cases, above our cost of capital. But of course, you understand this is very sensitive to pulp prices. Again, your analysis is not too different from our internal view.

Thiago Lofiego, Analyst

That’s clear. Thank you, Bacci. Thank you, Carlos, again.

Operator, Operator

Our next question comes from George Staphos, Bank of America.

George Staphos, Analyst

Hi, everyone. Good morning. Thank you for the details and good luck with the project. I wanted to go back to the cost positioning of the Cerrado mill and what makes you comfortable that it will be your lowest cost mill in the system. My guess is it’s going to be around the fiber radius, but if there’s a way that you could quantify or stack rank the logistics versus the wood basket versus the residuals, how should we think about how that contributes to the cost position of the mill? I had a follow-on question just regarding existing results.

Walter Schalka, CEO

Thank you, George. It’s Walter answering this question. It’s crucial to mention that one of our key strategic views for the future is to increase our competitiveness. As you know, our total disbursement cost is a critical factor we've been emphasizing for the future. This encompasses the combination of OpEx and CapEx in the forest, industrial, and logistical areas. We have been working on this dimension in every single plant in our system. Specifically, in the Cerrado project, it’s going to be the lowest of all others. The first and foremost reason is that wood will contribute more than 40% of our total cost, and we will operate with not only very low average distance but also with off-road exit trains. These factors are vital for us, with bigger trucks that could bring more wood per trip to the plant, consequently decreasing our total cost. In terms of the industrial side, we will be able to export much more energy, which works as a cost reduction in our total cash cost, as you may know. Moreover, our chemical costs will also be lower. If you combine all of these factors, you will see that this plant is going to achieve lower costs than any other plant in our system. This is the reason we believe, as Marcelo mentioned, that we will generate cash in any possible scenario, including FX and pulp prices in the future.

George Staphos, Analyst

Walter, thank you. Just a point of clarification: what energy assumption have you baked in, as we would say, to your energy benefit for the project over the course of the cycle? And then my other question, I will turn it over. As we sit here today in terms of pricing that has been accepted by customers, pricing that’s been reflected in the published benchmarks. What additional pricing should we bake in? I’m not asking about any new initiatives that you might have. But just based on what’s already happened, what benefit should we see from pricing in Q2? What embedded inflation do you have in inventory and cash cost expectations for Q?

Walter Schalka, CEO

Thank you, George. Just to complement your question regarding cash costs, we plan to operate this plant with major sales that will add to the energy grid. We are not going to disclose any guidance on energy prices, but I can tell you that it will not differ from what we have today, not today, but in the last years. Of course, if today the energy price is very high, but comparing the average price of the last years, this aligns with the calculations we use for the future of this plant.

Leonardo Grimaldi, Pulp Commercial Executive Officer

Yes, sure. Hi, George. Good morning. Talking a bit about our prices: as you know, we have announced $780 for China in April, with a change for May, and now a new increase of $80 for Europe and North America, bringing local prices to BRL1,090 per ton and in the U.S. at $1,320. We strongly believe that current market conditions fully support the implementation of these announced prices. It is also crucial to note that the recently announced prices are being fully implemented with no discounts from the levels I mentioned, but it's important to bear in mind that the price realization may have delays in both directions, up or down, particularly when the curves move quickly. That results from factors like delays related to price indexes that may be taking up to 50 days to catch up, also the customer geographic mix is even more impacted now due to all late shipments, and lastly, there's the different price structures offered to our customers, which are not only in China but throughout the world. That’s everything we can say for now; please rest assured all these announced prices again are being fully implemented and will lead to higher realized prices for the coming quarter.

Operator, Operator

Our next question comes from Daniel Sassoon, Itau Corretora.

Daniel Sassoon, Analyst

Hi, good morning, everyone. Thanks for taking my question and congratulations on the approval of the project. My first question is regarding the project; does potential upside exist? For instance, is there room for debottlenecking or peak capacity? Do you think that volumes could be even higher than the 2.3 million tons that is the nominal capacity of the project? Regarding the CapEx, at which point of the projects in the following four years, do you think you would have flexibility regarding potentially postponing part of the CapEx to avoid exceeding the 3.5x net debt-to-EBITDA ratio of your policy? My second question relates to the pulp price front: could you comment on your final customers' ability to pass-through the recent increase you just mentioned they have been seeing on pulp prices? Which of your clients do you think are more pressured from a margin perspective?

Aires Galhardo, Pulp Operation Executive Officer

Good morning, Daniel. Regarding your first question, the price follows the production capacity’s general dimension in order to adapt to the total production capacity. Following the learning curve, the company assesses possible bottlenecks and can propose complementary investment initiatives to increase production volume. However, at this moment, the maximum capacity we anticipate for this project is 2.3 million tons.

Leonardo Grimaldi, Pulp Commercial Executive Officer

Now hoping, Daniel, this is Leonardo. Regarding your second question related to paper producers and price increases or margin related reality: as we have seen, paper and board producers have increased their prices in recent months to recover from raw material inflation. We also observe new announcements for most grades and in low markets. The effectiveness of these price increases, along with their local currency fluctuations, will aid them and the entire market to adapt to the pulp price increases or levels. In China, printing, writing, and specialty grades have seen significant increases in RMB terms, reaching historic high levels, despite recent fluctuations. In tissue, a first round of price increase was executed in December 2020, and a new price increase was announced prior to the Labor Day holiday. This new price increase is roughly RMB400 to RMB500, and producers are attempting to push this forward as we speak. The market share competition in the tissue segment among different players with varying sizes can challenge the speed of this price increase implementation. We are closely monitoring their price implementation abilities across all major markets, as this is crucial for the equation of the fundamentals of our business.

Walter Schalka, CEO

I think Marcelo could answer a bit about the second question that wasn't answered yet.

Marcelo Bacci, Financial and Investor Relations Executive Officer

Yes, Daniel. Regarding the CapEx flexibility, we are still negotiating with the major equipment suppliers. Therefore, the CapEx schedule can still be adjusted. More importantly, one of the reasons we are not, at this point, announcing other CapEx items related to forestry or outside advance additional CapEx or logistics CapEx is that we are considering alternative structures to minimize CapEx over time if necessary. We will have some flexibility. So far, we have aimed to minimize CapEx volume in the first year in 2021, but we will certainly have room to manage the additional years.

Operator, Operator

Our next question comes from Leonardo Correa, BTG Pactual.

Leonardo Correa, Analyst

Yes. Good morning, everyone. Thank you. The first question is for Marcelo: looking at the leverage numbers, right? Marcelo, when Suzano acquired Fibria early on and started consolidating the numbers in 2019, Suzano’s net debt number was about BRL54 billion. Since then, clearly, the currency has changed, and that had an unexpected negative impact of roughly BRL6 billion. So we’ve seen an increase to BRL68 billion in net debt. Again, currency has been a significant headwind to the deleveraging effort; I would like to get your thoughts on this evolution and maybe what type of targets you might consider regarding absolute net debt. I understand that EBITDA generation has improved significantly. But as always, we never know the denominator. We have seen many cycles, and prices can fluctuate aggressively in the markets. Could you please share your perspective on net debt absolute targets, especially now with this new BRL15 billion project announcement and considering that net debt levels are still very high?

Marcelo Bacci, Financial and Investor Relations Executive Officer

Leo, thank you for your question. Regarding the debt, after the merger, our net debt was around $13 billion. We must continue observing this in dollar terms because this is the currency in which we generate our cash flow. This is the currency in which 100% of our net debt is denominated indirectly or directly in all aspects. We reduced from $13 billion through a sequence of reductions over the years. In this first quarter of this year, we presented a very significant nominal decrease in our net debt. We’ve accomplished that even in years of challenging scenarios, like last year, where we had the lowest average coal price in history. Even so, in that year, we reduced our net debt by $1.2 billion to $1.3 billion. We are progressing well toward our goal. By the time of the merger, we communicated to the market that our goal was to achieve a net debt of around $10 billion. We are approaching that number, adjusting for ton capacity. Therefore, we believe maintaining net debt around $10 billion is well manageable for us. Importantly, we are also aiming for our leverage in relation to EBITDA.

Walter Schalka, CEO

Leo, thank you for your second question. We believe that we have been preparing for this project over a period of time. We have been discussing not only the forest side but also logistics, industrial areas, and all social conditions in the region, including local government permits. Importantly, we've addressed all the necessary infrastructure. We believe that we have reached almost all the precedent conditions to proceed with this project, which will enhance our competitiveness on the global system and our asset base as well. We also believe we have all the financial conditions to move forward respecting our financial policy that is imperative, as Marcelo mentioned, in our vision for the future. We believe we can expand our addressable market in the coming years, allowing short fiber to gain market share over other materials. We have combined organic growth and higher market share, which will provide balanced demand and supply that could yield excellent returns for our shareholders. This is the reason we decided to proceed right now. We believe the commissioning of this plant in the first quarter of 2024 will align well with market conditions.

Operator, Operator

Our next question comes from Carlos De Alba, Morgan Stanley.

Carlos De Alba, Analyst

Yes, good morning, everyone. Thank you very much. Continuing on the discussion about the project, I'd like to ask if you can elaborate more on the expected production cost, even if you can't disclose a specific range for production costs. Could you comment on how much lower you expect it to be compared to your horizontal line? This would give us a sense of how attractive this is. Additionally, could you elaborate on the logistical options to deliver the pulp from the mill to the Santos Port? How much cost would that add to the production cost, and how would it compare to your current average logistics cost for the pulp system? Thank you.

Marcelo Bacci, Financial and Investor Relations Executive Officer

Thank you, Carlos. I’ll take your first question. Our current average cash cost of production has hovered around BRL620 per ton over the last two quarters. We have some dispersion among our different mills, and for strategic reasons, we do not disclose figures on a mill-by-mill basis. However, I can assure you that, after the new mill startup phase and ramp-up, this new plant will be the lowest cost-producing unit of Suzano, even lower than our current best, which is Line 2 of Três Lagoas. The reason is due to a combination of the mill’s scale, the very low average radius, and the technology applied that benefits from new equipment that improves over time. This is as far as we can share from a strategic perspective regarding cost projections.

Carlos Almeida, Analyst

Hey, Carlos. Good morning. This is Carlos speaking. Thank you for your question. On the logistics side, we have different options and alternatives, which are being studied. A part of the solution is already defined and concluded. However, due to our ongoing discussions regarding the entire system, we cannot disclose further specifics at this time. Additionally, for the same reason, we cannot share cost details right now. I hope you can understand that.

Walter Schalka, CEO

Carlos, it’s crucial to mention that we will be operating out of Santos Port, and we have two different terminals there. The terminal on the right side is D3-32 and the left side is the other project. We have not yet decided on the operational terminal. But as you know, both ports are highly competitive. It's important to note that we will move volumes from the state of Mato Grosso do Sul to Santos Port via rail. Afterward, we have two alternatives, as you may know. This is the reason Carlos refrains from disclosing this information right now. However, I can assure you that the logistics costs associated with both terminals will be at a similar level to what we experience with Três Lagoas.

Carlos De Alba, Analyst

Alright. Thank you. If I may squeeze in a last question, and I appreciate your prior responses, how much was pulp production in the first quarter?

Walter Schalka, CEO

We are not disclosing that. Go ahead, Marcelo.

Marcelo Bacci, Financial and Investor Relations Executive Officer

No, we have decided not to disclose production levels moving forward. We will continue to report these numbers to our associations, and the official statistics will be available combined with other companies. However, we will no longer disclose individual production numbers as most of our competitors do.

Operator, Operator

Our next question comes from Caio Ribeiro, Credit Suisse.

Caio Ribeiro, Analyst

Yes, good morning, everyone. Thank you for the opportunity. My first question is on the long-term sustainable prices for hardwood pulp. It seems that many of the projects coming online in the next few years are very competitive projects from a cash cost perspective. This should lead to changes in the cash cost curve in the industry. However, there are discussions regarding new projects in China that could depend on imported wood chips, leading to higher costs. In light of that, what do you believe is a sustainable long-term level of prices for hardwood pulp in China? Secondly, regarding cash costs, could you discuss your expectations throughout 2021? Moreover, how could the Cerrado Project help you achieve your 2024 cash cost goal of $560 per ton? Was the project contemplated in that guidance? Now that it’s approved, could it even start contributing to lower cash costs that very year, despite the ramp-up period?

Leonardo Grimaldi, Pulp Commercial Executive Officer

Caio, this is Leonardo. To address your first question regarding long-term prices for pulp: it’s challenging to anticipate this, as prices depend heavily on supply and demand fundamentals. We shared our position during Suzano Day regarding current market and growth, which is forecasted. All other opportunities for new additions will create future demand for bleached chemical pulp or hardwood, similar to those you mentioned in regards to fiber-to-fiber and even fossil-to-fiber alternatives. Foreseeing that long-term price is difficult. In our analysis, the demand will outpace supply, enabling us to fill in production gaps for this additional demand. Regarding your inquiry on Chinese production: we are closely monitoring many recently announced projects in the region that are reportedly incentivized in Hubei and Guangxi. However, we believe that some of these projects may encounter challenges, especially in terms of the availability of woodchips, presenting a limited resource in China.

Walter Schalka, CEO

In relation to your second question on cash cost production, we anticipate a 5% to 7% increase in cash production in the second quarter and then stable throughout the remaining quarters of the year. This negative cost pressure originates primarily from the higher wood prices, which affects fossil fuel prices and shipping. Regarding our guidance for cash costs to 2024, I should clarify that the project was not included in that estimate. However, as Marcelo mentioned in prior meetings, we plan to update this number for 2024 at the end of this year. As for the project's ramp-up, we cannot predict any early contributions toward achieving those cash cost goals.

Operator, Operator

Our next question comes from Marcio Farid, JPMorgan.

Marcio Farid, Analyst

Thank you. Good morning, everyone. I have a quick follow-up question on the project. There were a few surprises during the announcement last night. The first was obviously the timing, as many were expecting the announcement to come later in the year. I am trying to understand why now? I know you have better visibility regarding cash flow generation, but how confident are you that this is the right time to invest given the long-term supply conditions and the ongoing challenges posed by COVID? The second point pertains to the CapEx announced. In U.S. dollar terms, it seems about 20% to 30% higher than previously discussed regarding Fibra’s Três Lagoas a couple of years ago. What is driving this inflation? I assume it involves equivalent inflation and other factors, but it sounds a bit higher. Lastly, I'd like to understand from Leo about the pulp markets. I know you are not disclosing production figures anymore, but could you clarify whether you are still seeing relative tightness in the market? Are you declining some orders, or can you fulfill everyone's needs? Thank you, everyone.

Walter Schalka, CEO

Thank you very much, Marcio, for your questions. First, I want to respond to your inquiry about the timing of the project. If you analyze our projected expenditure forecasts, you’ll find that this year represents just 9% of the total amount for the project. This indicates that by the end of this year, we aim to maintain a strong cash position due to robust cash generation. With higher pulp realized prices expected in upcoming quarters, our cash generation outlook appears favorable. We believe that next year will place us in an even better position—not only concerning sanitary conditions due to COVID but improved financial positioning and higher early-year disbursements. Therefore, we are comfortable with the limited CapEx this year and are well-positioned for it. Regarding the CapEx per ton, there are several factors at play. The Três Lagoas project was a brownfield, and the infrastructure requirements are quite different for greenfield projects. Additionally, the unprecedented height of iron ore and steel prices is factored into our project assessments, designed based on current FX conditions. It is highly probable these prices may decrease in the following quarters, potentially benefiting costs that we aren’t considering right now. Overall, we believe that BRL1,200 per ton is relatively competitive for the CapEx of our project concerning other South American projects.

Leonardo Grimaldi, Pulp Commercial Executive Officer

Yes, I can address the point regarding tight market conditions. This is brought on by the record low stocks we experienced at the end of 2020, as Carlos shared in our last call. Since then, increasing logistics challenges have emerged. Since these situations set clear priorities for us, the first is to implement prices for the increases we'd made publicly, and we are doing that without exception. Our second priority is to service our customers adequately and ensure no service interruptions. While we remain committed to better serving our customers reliant on us, current supply chain challenges limit our ability to fulfill non-customer-related market demands or spot sales.

Marcio Farid, Analyst

This is very clear. Thanks a lot, Walter and Leo, and best of luck for the quarter.

Leonardo Grimaldi, Pulp Commercial Executive Officer

Thank you.

Operator, Operator

Our next question comes from Jonathan Brandt, HSBC.

Jonathan Brandt, Analyst

Hi. Good morning, everyone. Just to follow up on the previous question, Leo. It seems you’re indicating that the market is still quite tight and that you've implemented all your price hikes. Given significant price increases in the first half of the year, I’m curious why you weren’t pushing for May price hikes? Has something changed? Is the market not as tight as it was before? Or are you encountering supply chain issues? I would expect based on your comments that there could be room for further price hikes. As my second question for Marcelo: while you seem comfortable with leverage now, given the upcoming CapEx cycles and the volatility of pulp prices, have you run scenario analyses? What happens if pulp prices drop to $500 or $550 next year? Would you still be comfortable that you wouldn’t exceed the 3.5x net debt? Lastly, considering you're about to enter a CapEx cycle, have you considered hedging pulp prices in Asian exchanges? While not a perfect hedge, locking in today’s pulp prices could be beneficial given the project.

Leonardo Grimaldi, Pulp Commercial Executive Officer

Hey, Jonathan. This is Leo. I’ll take your first question about pricing. We don’t provide details on our commercial strategy or the rationale backing it, but I can comment that when we compare prices in China against those in other regions, prices are lagging in the other regions. We expect prices in these regions may continue rising. Historically, there’s a tendency for prices to balance across markets. However, it’s hard to predict pricing levels in the coming weeks or months due to various new variables this cycle. Supply challenges are exacerbated by entering maintenance downtimes in the northern hemisphere, and we have observed production losses exceeding initial expectations during these periods. Additionally, an economic recovery may create a new seasonal dynamic compared to previous years. Overall, we are closely monitoring these fundamentals.

Marcelo Bacci, Financial and Investor Relations Executive Officer

In response to your second question, Jonathan, we’ve run several different scenarios. We’ve evaluated scenarios using prices around $500 for future periods; this isn’t meant to imply we believe that forecast is likely but as part of our risk assessment for cycles. In the CapEx decision of this scale, we examine various scenarios. We’ve modeled various scenarios suggesting probabilities of lower than 3%. This is the extent of stress testing we conduct when mapping cash flows. If we were to project prices around $500 in coming years, we would predict to stay within our financial thresholds. We recognize low pricing scenarios might arise but anticipate they won’t extend over the long-term, as witnessed in scenarios like last year's low prices lasting for one year. However, we do not envision extended prices below $500. As for pulp hedging, there currently isn’t an option in the Chinese market that we pursue. Hedging generally isn’t being contemplated at this moment, not because it isn’t an effective hedge but due to liquidity constraints in the nearby maturities corresponding to our needs and because we still don’t have experience operating within that market or the ability to liquidate physically since we do not produce softwood. Thus, we do not plan to hedge pulp for now.

Jonathan Brandt, Analyst

Alright. Great. Thank you both very much.

Operator, Operator

Our next question comes from Hernán Kisluk, MetLife.

Hernán Kisluk, Analyst

Good morning, and thank you for taking my questions. I have two: the first one regarding the Cerrado Project and rating agencies. I would like to know if you have conversations with them regarding the impact on your credit ratings. That would be my first question. The second question is tied to scenario analysis: is there any downside scenario where you would have to take on more debt to finance this project?

Walter Schalka, CEO

Thank you for your questions. The answer to your first question is yes; we have been discussing this project with rating agencies. They are running assessments based on our projected CapEx and pricing scenarios. However, we do not foresee any negative ratings actions coming from the announcement of this project, as the agencies have been aware of it for a long time, so it's not a surprise to them. Concerning new debt: in our base case scenario, we plan not to add any new debt. However, we are examining the possibility of project-related debt instruments if they prove to be cost-effective and aligned with maturities—where we’d prepay other aspects related to these. In summary, we aim to avoid additional debt yet remain alert to opportunities that enhance our debt profile.

Operator, Operator

Our next question comes from Rafael Barcellos, Santander.

Rafael Barcellos, Analyst

Hey, good morning. Thanks for taking my question. My first question is about the project. Could you tell us if you will receive any tax benefits for credits in the region related to this investment? My second question deals with your long-term strategy. Now that you have announced a new low-cost pulp mill, would it make sense to convert an older, higher-cost mill to dissolving or even integrate? I would like to know your thoughts on your production footprint going forward.

Marcelo Bacci, Financial and Investor Relations Executive Officer

Rafael, thank you for your question. Regarding tax benefits, we have negotiated with the state of Mato Grosso do Sul and the city of Ribas the standard tax treatment typically granted to large investments, so there is nothing unusual. This is all public information and will be available. Still, we don't have any particular benefits relating to the monetization of tax credits or anything else; it's all within the usual incentives for substantial investments.

Walter Schalka, CEO

On your second question, Rafael, I want to clarify that our vision for the future focuses on five different avenues that we presented during Suzano Day, where we can create value for all stakeholders. Addressing various market areas for short fiber is vital to our future. We aren't ready to announce conversions for any of our mills; however, rest assured that we are analyzing various alternatives, including this strategy, as part of our innovability approach to the future.

Operator, Operator

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

Walter Schalka, CEO

Thank you very much for joining us in this session. It’s a great pleasure to be with you, and we are very pleased with today’s announcement. We ensure this year will be the best in our history regarding EBITDA and cash generation. Moreover, we are preparing the company for the future. Our ambition is to impact all stakeholders. We are focused not only on our shareholders but also our suppliers, customers, and communities. Our team has a clear vision of creating and sharing value across all stakeholders. Importantly, we believe we will significantly impact environmental goals in the years to come. This project will enhance our carbon sequestration efforts and renewable energy generation and position the company for future advancements in the bio-strategy sector. We believe that Suzano has improved its performance over the years, and our ambition is to continue enhancing our impact and value creation across stakeholders. I hope everyone remains safe, and I would like to invite you to our first ESG call on June 25, where we will announce our next goals concerning biodiversity. Thank you, everyone, and please stay safe.

Operator, Operator

Thank you. Suzano’s first quarter results conference call is finished. Thank you for your participation, and have a nice day.