Earnings Call Transcript - SUZ Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for holding and welcome to Suzano’s Conference Call to discuss the results for the Third Quarter of 2021. 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 session and 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’d like to turn the floor over to Mr. Walter Schalka. Mr. Walter Schalka, you may proceed.

Walter Schalka, CEO

Good morning and good afternoon to everyone. Welcome to the conference call of the third quarter results of Suzano. It’s a great pleasure to be with you. I would like to start just telling you, we have here today, we have several officers of the company and I would like to introduce to you our new Chief Sustainability Officer of Suzano, Ms. Cristina Gil that has joined us at this moment and will participate in the event with us today. Today is a historical day for Suzano. We are announcing at the same time the best ever record EBITDA, quarter EBITDA in our history with $6.3 billion. In addition to that, it’s a very important day as well because we are announcing the new projects we have that yesterday were approved by our Board of Directors. On November 5, we will announce the details of the Cerrado project. We just shared some information today that this will be a project of 2.55 million tons of pulp, with an investment of 14.7 billion AIs, and the commissioning of this project will happen in the second half of 2024. All the additional information will be provided to you on a special event that you are invited to join us on November 5 next week. We are very pleased to announce the results of the third quarter. In addition to the record EBITDA, we had extremely good volumes on pulp and paper. Our inventory levels on the pulp side are below normal levels. We are operating all of our logistics very well despite the shipping problems that the world is facing. We had very good volumes, a good price realization and the combination of good volumes and price realization created this situation that we have our record EBITDA. In addition, and as a consequence of that, we had a very good free cash flow this quarter and we deleveraged at a very fast pace. Our net debt came down from $11.4 billion to $10.7 billion in this quarter. Our net debt over EBITDA right now is 2.7 times in dollar terms. Our liquidity is extremely good. We have right now $3.5 billion of cash in hand and an additional standby line of $500 million. In addition to that, we announced last week that Christine will share with you the information related to our carbon sequestration targets from 2013 to 2025 as part of our call to action for the world. We will be part of COP26 next week and it’s very important that all of us, 8 billion people work together towards the direction of decarbonization of our world. This is a must. We cannot procrastinate the situation and we are going to advocate this position during COP26. Now I’m going to hand over to Fabio who will talk about our paper division. Fabio, the floor is yours.

Fabio Almeida, Executive Officer

Thanks Walter and good morning everyone. Let’s look at the paper and package business unit results for the third quarter of 2021. During the quarter, market conditions have improved significantly in major Latin economies with the advance of COVID-19 vaccination. Demand for Brazil's writing papers, according to Aeo, has grown 29% until August compared to the same period last year, recovering to pre-pandemic levels. Demand for paperboard has grown 21% in the same period, showing that the historical growth trend for the sector has persisted. On the supply side, paper markets have been forced to adapt to the constraints in global supply chains, which has reduced the flows of paper products between regions and strengthened inter-regional trade. Demand for wood-free papers in the metro market has grown on a year-over-year basis when compared to 2020 yet is still below 2019 levels. Our paper package business unit demonstrated strong operational performance this quarter. Our sales were 6% higher compared to Q3 2019, demonstrating solid growth even compared to pre-pandemic levels. Domestic sales represented 69% of our total sales this quarter, totaling 209,000 tons, an 8% increase compared to the second quarter of 2020 reinforcing the improvement in market fundamentals. On a quarter-over-quarter basis, our domestic sales grew 50% in volume, due to better seasonality and the continued strong demand for packaging papers. I would also like to highlight that our export volumes were 13% higher on a quarter-over-quarter basis despite severe and persistent headwinds in international logistics. Our average net price during the quarter was 22% higher than our price in Q3 2020 and 5% higher quarter-over-quarter. During the period, Suzano successfully completed the implementation of a round of previously announced price increases for our product lines across all markets. At the same time, we also announced upcoming price increases: 14.6% for paperboard and 21% for cap stocks for the Brazilian market as of November 21, $50 per ton for all Latin exports, and 6% to 8% for all North American exports as of October 21. As a result of strong volumes and pricing, revenue management and operational stability, our EBITDA has reached a new record of 545 million in the quarter, a 31% increase quarter-over-quarter and a 53% increase year-over-year. Our EBITDA margin reached 1,789 Reals per ton, also marking a new high. Looking ahead in the short term, we see better seasonality in Q4 as our challenge lies in successfully managing the external pressures of inflation and continuing to find alternatives amidst international logistics bottlenecks. In the long term, we will continue to work on our go-to-market strategy with investments in technology and digitalization, as well as boosting our innovation pipeline to benefit from market trends accelerated by the pandemic. Now, I’ll turn over to Leo, who will be presenting our top business results. The floor is yours Leo.

Leonardo Grimaldi, Executive Officer

Yes, thanks Fabio. And good morning everyone. I will invite you all to move to page five of our presentation. The results of our pulp business were quite positive for the third quarter of 2021, supported by strong sales volumes, despite all logistic challenges, and also supported by increasing prices. As you can note on the top graph, sales performance totaled almost 2.7 million tons in the quarter, marking a record third quarter since the merger. I would like to emphasize that our inventories are well below optimum operational levels. Our teams successfully overcame supply chain constraints to guarantee a high service level to our customers, maximizing our invoicing during the quarter. Pulp consumption exceeded our expectations across all paper grades in Europe and rebounded in North America. In China, our order intake levels from our strategic customer base recovered back to normal, despite slower than expected paper and board demand recovery in the region. We would like to highlight, as published by AeoPulp, that pulp stocks in European ports closed the quarter 14% below the historic monthly average since 2018, placing a significant challenge to paper and paperboard producers who are running in this region at high upgrading rates. In China, according to UM statistics, pulp stock remained quite stable during the quarter. Our average prices for export markets, as you can see, have increased to $654 per ton, with major markets behaving in different directions due to each specific region's fundamentals. Our prices in Europe and the Americas increased compared to Q2 and aligned with our announced price levels, while in China, prices began to correct since July. Our average price was influenced by strong sales volume in Asia during the quarter. Looking at our EBITDA performance, we reached an all-time high of 5.7 billion Reals in the quarter, with a 63% EBITDA margin favored by the high price levels in BRL terms, even higher than our prices in local currency in the third quarter when the pulp market was especially tight. Now looking ahead, we expect the fundamentals to remain tight in Europe, supported by stronger paper demand and slower stock replenishment. In North America, demand is healthy in all segments, including tissue, where we see the end of channel just stocking along with improving the away-from-home segments. In China, we acknowledge lower visibility as the macroeconomic environment becomes more challenged. Nevertheless, we point out factors that might contribute to more positive pricing dynamics going forward. On the demand side, we see several downstream paper consumption opportunities, consequently low intermediary paper stocks after recent production curtailments triggered by the energy crisis. Simultaneously, we see the intent to quickly improve operating rates as paper producers prepare for a high seasonality quarter. Price increases are also being announced and implemented across all paper and packaging grades, improving margins. On the supply side, logistics are expected to impose even higher risks for global market players and upcoming capacities. We may also see above average unexpected downtimes as increasing energy, chemical, and logistic costs should impact producers’ operating rates not only in China but worldwide. With that said, I invite Aires to provide more information on our cash cost performance.

Aires Galhardo, Executive Officer

Thank you Leo. Good morning everyone. In this slide number six, the third quarter 2021 cash cost performance both quarter-over-quarter and year-over-year was impacted by the external pressures from rising commodity prices mainly affecting inputs and wood costs, followed by significant impacts on chlorine dioxide again on input costs and issues in packaging wires. The quarter-over-quarter performance resulted in a low single-digit increase in line with our recent discussions. As you can see, the impact of commodity prices accounted for virtually all cash cost pressure. Other factors negatively contributing to the third quarter figure are related to higher fixed costs due to more intensive maintenance routines during scheduled downtimes in the quarter. Looking at year-over-year performance, commodity prices also took a toll on cash production costs, representing 74% of the total increase. The fixed costs increase can be mainly explained by the COVID-19 pandemic impact previously recorded directly in COGS. For the coming quarters, the company expects that cash production costs, ex-downtime, should remain flat. Now I pass the floor to Marcelo Bacci to continue the presentation.

Marcelo Bacci, Executive Officer

Thank you Aires. Good morning everyone. On page seven, we see that this quarter represents a significant step in our deleveraging process. Our net debt decreased by $700 million this quarter alone and by $1.5 billion in the last 12 months, which is an exceptional performance that allows us to bring our leverage ratio back to 2.7 times, well within the limits of our financial policy and creating conditions for a new investment cycle. Our liquidity position is extremely robust. We have $4 billion of liquidity at this point and our debt amortization schedule is very comfortable until the end of 2024. 80% of our cash position is in hard currency, and our liquidity is sufficient to cover all of our debt maturities in the next four years, even if we don’t generate any more cash. On page eight, we show our current FX cash flow hedge portfolio. In the last 12 months, we have been able to change dramatically the protection levels taking advantage of the opportunities presented by the market. Our average put is now at 532 and calls at 613, with a special note to the long term hedges, which have benefited from particularly higher interest rates and increased volatility seen in the marketplace today. Turning to page nine, our CapEx program has evolved according to our plan, with 1.5 billion Reals disbursed last quarter. We maintain the same guidance for the year, targeting total investments for 2021 of 6.2 billion Reals. With that, I call my new colleague Christina to the floor. Welcome Christina.

Cristina Gil White, Chief Sustainability Officer

Thank you, Marcelo. It’s a great pleasure to be here at Suzano. As Walter mentioned, we believe that tackling climate change is one of the biggest challenges of our generation, and if we wish to leave a better world, we must embrace a coordinated effort now. COP26, the Climate Change Conference, starts next week. It is indeed an opportunity for world leaders to gather and become true global pioneers. This must be achieved through mutual agreement on a concrete framework from which nations can move forward together to combat the climate emergency. Among the measures that we expect is the implementation of a regulated carbon market as included in the Paris Agreement. This is fully aligned with the imperative to collectively preserve biodiversity through financing nature-based solutions. Aware of Suzano’s potential and convinced that addressing climate change must be a priority, we reinforce our commitment to capturing more carbon dioxide from the atmosphere than we emit. As we understand the urgency, Suzano has advanced its long-term goal. We will remove 14 million tons of carbon dioxide from the atmosphere five years earlier. We will deliver this goal by 2025 instead of our original target year of 2030. This new goal will be supported by a combination of more efficient and expanded forest cover, as well as increasing conservation areas from degraded land to be restored. Very importantly, Suzano will maintain its focus on reducing carbon emissions across its own operations and supply chain. This is in fact fully aligned with our joining the science-based target initiative and the 1.5 degree business ambition. In parallel, the company remains committed to discussing new methodologies for reporting greenhouse gas emissions and renewables, such as the greenhouse gas protocol guidance on land use. Avoiding climate disaster, however, is not a task that we can tackle alone or execute by one company or industry by itself. Hence, we encourage our peers in the business community to join us. This is a race where if we join forces, we will all win. Walter, back to you.

Walter Schalka, CEO

Thank you Christina. It’s a great opportunity to be with you here and work together in the direction of regeneration. This is a critical issue that we need to tackle for society in the near future. I am very pleased to share with you that we are achieving extremely good operational results. We are showing records to you. In addition to that, we have been working to mitigate our cash costs amidst the inflation we are seeing in the commodity business. On the other hand, we are preparing the company for the future. We have a very robust balance sheet and a very low cost of debt with long-term debts. We are well prepared for the next cycle of growth that we are announcing today, namely the Cerrado project. We are very pleased to observe the robustness of our engineering team as we prepare for this target and for the new projects coming online. Furthermore, the company is committed to addressing environmental issues, which we believe is our responsibility and a mission for our generation. We are dedicated to mitigating climate change. Now we will transition to the Q&A session. Regarding the Cerrado project, please remember that you are invited to receive additional information only on November 5 next week.

Operator, Operator

Now the floor is open for questions. Would anyone like to ask a question?

Unidentified Analyst, Analyst

Hi, good morning. Congratulations on the results and thank you for the opportunity. I have two questions. First, could you please comment on your perception of how pulp inventories throughout the chain, especially in papermakers’ hands in Europe and China, are right now? The second question, still on pulp market dynamics, I would like to hear your thoughts on supply and demand dynamics in 2022. Of course, I know there’s a lot of uncertainty still, but it would be great to hear your view. These are my questions. Thank you.

Leonardo Grimaldi, Executive Officer

This is Leonardo. Thank you for your questions. Regarding European inventories, we see that hardwood stocks in European ports are actually low, as I mentioned in my presentation, ranging 14% below historic averages. We sense that the demand in Europe is very strong, and our sources indicate that our customers present us with extremely high operating rates. At the same time, we see that stocks are quite challenging to support this higher operating rate. This is mainly due to logistics constraints we’re seeing globally. It’s very hard to divert vessels from one route to another. Regarding the market for 2022, this will depend on the fundamentals at that time. But since we are months from that, let me share what might happen in terms of demand and supply dynamics. We have seen that some projects were delayed and due to logistics constraints, existing volumes from current producers and upcoming producers will arrive in the market at a much slower pace. This is likely to contribute to lower expected supply in 2022. On the demand side, we see several opportunities in addition to the organic growth of the market. There are opportunities in fiber substitution as hardwood and softwood still have a significant pricing gap. Our customers are increasingly interested in substituting softwood fibers with ours. We're also noticing similar trends with recycled grades, especially sorted office papers and higher range recycled grades due to low availability and increasing costs of those, which are getting close to prices of bleached chemical pulp, particularly in Asia. There is a significant intent to substitute recycled grades with virgin fibers. Additionally, we have the fossil-to-fiber initiatives that we discussed, where many brand owners are reaching out to us to develop projects substituting single-use plastics with more sustainable alternatives, like paper packaging. We also recognize the gap between dissolving pulp and paper grade pulp is above historic averages, suggesting the potential for businesses to convert flex capacities between pulp types. Lastly, we should consider the broader context of industrial inflation. We’re facing pressures globally with rising energy costs affecting producers elsewhere. This could increase marginal costs, which would bring some operational challenges and unexpected downtimes. Overall, I’m confident about what’s coming ahead.

George Staphos, Analyst

Good morning and good afternoon, everybody. Thanks for taking my questions and congratulations on the result. I had two or three questions. First, Leo, thanks for the rundown on the pulp market. How do you gauge the impact that pricing is having in terms of the slower pace of supply from existing and new suppliers into the pulp market? Potentially at a higher price, if you saw that we’d maybe be seeing more supply into the market. On the paper side, Fabio, can you remind us what price increases you’re announcing in the market? You went through that very quickly in your remarks. Why are you not worried that the continued escalation in paper pricing might at some point negatively affect demand? Lastly, Christina, could you review quickly how Suzano is going to hit its goals five years earlier? You mentioned efficiency, culture, and conservation lands, but if you could give us a bit more detail, that would be great. Thank you very much, and good luck in the quarter.

Leonardo Grimaldi, Executive Officer

Thanks George. Let me take your first question. This is a very interesting inquiry. We don’t believe there's a strong correlation right now. Most of the announced projects come from producers betting on the increased organic growth and other fundamentals that may further boost pulp demand. On the other hand, we are seeing actions geared toward integrating capacity, especially in other types of fibers, like viscose. So we don’t expect any strong correlation for the time being. Now I’ll hand it over to Fabio.

Fabio Almeida, Executive Officer

Thanks Leo. And thanks, George, for your question. Regarding the price announcements that I went through in my presentation, we have applied a price increase for paperboard in the Brazilian market, close to 15%, 14.6 to be precise, as of November this year. We have also announced a $50 price increase per ton for our product rates in Latin exports and a 6% to 8% increase in all our North American exports, effective from October 21. Regarding your concerns about the impact of paper price increases on demand, we have observed paper prices in Brazil operating below international markets, in dollar terms. The trend suggests that Brazilian prices will catch up to international price levels given external pressures from logistics and raw materials inflation, which are pushing paper prices higher. Therefore, we believe that in order to adjust for inflation and logistics, paper prices will need to continue to increase in both the international and Brazilian markets.

Leonardo Grimaldi, Executive Officer

Sorry, we didn’t answer the third question. Christina, the floor is yours.

Cristina Gil White, Chief Sustainability Officer

Thank you, Walter. Thank you, George, for the question. It’s a complex answer. We are expanding our ecliptic plantations to the Cerrado project, increasing from 150,000 hectares to approximately 290,000 hectares. We also have a 500,000 hectare biodiversity target, and we have refined our methodology to include carbon removal from natural cover in our preservation areas. Additionally, we are reducing emissions in our operations. This strategy should help us achieve around 5 million tons of carbon dioxide removal per year, though there will be variations. We had a 15 million ton reduction in 2020, so we’re confident of reaching our goal.

Leonardo Correa, Analyst

Yes, on market outlook, I have two questions. First, we received weekly numbers showing reselling prices for the first time now above the fixed price in China. Leo, could you share your thoughts on this? Does it signal we could be close to pricing floor levels? Secondly, I think we overestimated Chinese demand outlook earlier this year. Can you explain why demand is so weak? Any signs of stabilization? It would be interesting to hear your thoughts.

Leonardo Grimaldi, Executive Officer

Thank you for both questions. Regarding reselling prices, we agree that trend is one of the best proxies for the market direction. As of now, it shows stability in pricing in the short term. The main reason is the destocking throughout paper grades in China recently. Producers in the fourth quarter are pushing to recover their stock levels and that’s leading to more new orders and strengthening demand signals for pulp. We remain optimistic about changing dynamics in the coming weeks.

Daniel Sasson, Analyst

Hi, everyone. Good morning. My first question is about the COP26 expectations. What do you think will be the main topics? Any developments to share on voluntary carbon markets would be great. My second question, Leo, I think Suzano’s inventories likely declined further this quarter. Have you learned to work with inventory levels lower than historical averages? Or will there be an increase down the road?

Walter Schalka, CEO

Thank you, Daniel, for your question. On COP26, I think we need to address NDC standardization and more short-term targets. A standardized NDC for every country will be crucial. Additionally, there needs to be commitment from developed countries to invest in developing nations beyond the $100 billion goal. A global regulated carbon market is necessary for investment in decarbonization across the world. These points are critical for the COP26 discussions.

Leonardo Grimaldi, Executive Officer

On inventory policy, we cannot give guidance if we will operate at higher or lower levels. Our stock levels are currently very low, and we are actively following market dynamics and fundamentals to capitalize on opportunities while servicing our customers effectively. So while we are operating below normal inventory levels, we are managing to maintain high service levels for our customers.

Jonathan Brandt, Analyst

Hi, good morning. Could you share insights on European demand? Is it possible for you to increase shipments to Europe for incremental pricing? Moreover, is there concern about European demand falling due to higher natural gas and manufacturing costs? On the freight situation, I know you have long-term contracts, but are you expecting pressure there? Lastly, what was behind the timing change for the Cerrado project? Is it equipment delivery times or a strategic decision based on market fundamentals?

Leonardo Grimaldi, Executive Officer

Regarding European demand, we see it as strong. European producers are currently running at very high rates due to supply issues, including logistics constraints. They have high order books, which we believe will continue for some time. As for increasing shipments to Europe, it is challenged by logistical issues. Regarding freight, our long-term contracts protect us to some extent, but the future remains uncertain regarding rates.

Walter Schalka, CEO

For the Cerrado project, we approached several suppliers and established delivery times that are longer than expected due to commodity and logistics challenges. This was the reason for postponing the commissioning of this project to the second half of 2024. We remain confident in the quality of our suppliers and committed to delivering the right market information.

Marcio Farid, Analyst

Thank you. On cost inflation, have we reached a turning point, or are there potential carriers going into the next quarters? Any insights on forestry and plantation costs? Additionally, Bacci, how should we think about hybrid financing? What will your capital allocation look like going into the next CapEx cycle?

Walter Schalka, CEO

Hi Marcio, good morning. It's tough to predict commodity prices in coming quarters. We have no delays in cost implementation, so I believe the next quarters will be flat with Q3 2021. We're working on initiatives to reduce structural cash costs like energy efficiency and reducing third-party wood transport. We might have hit the peak of commodity prices.

Leonardo Grimaldi, Executive Officer

On the forestry side, we are facing significant impacts coming mainly from fertilizers and services. This situation prompts us to improve our efficiency and explore alternative operational methods to minimize costs.

Marcelo Bacci, Executive Officer

Regarding the Cerrado financing, we will provide more details next week, but the general idea is to finance the project through internally generated cash and our existing cash position. We presently have no plans to undertake specific financing for this project.

Operator, Operator

There are no more questions. I would like to turn the floor back to the company CEO for final considerations. Mr. Walter Schalka, you may proceed.

Walter Schalka, CEO

Thank you very much for the opportunity to be with us here during this third quarter call. We are pleased with the moment the company is in and are preparing for the future. We are exploring avenues of value creation for our shareholders, emphasizing our relevance in the pulp market, structural cost management, vertical integration, and enhancing our bio-economy efforts. We are committed to impacting the world and society positively. Thank you, and let’s keep in touch.

Operator, Operator

Suzano's third quarter results conference call has concluded. Have a nice day.