Suzano SA (SUZ) 2003 Q4 法說會逐字稿

This is for the Suzano [inaudible] conference call recorded on February 19, 2004 at 10:00 am Eastern Time with your host Bernardo Szpigel. Good morning ladies and gentlemen, at this time we would like to welcome everyone to the Companhia Suzano de Papel e Celulose and Bahia Sul Celulose S.A. Fourth Quarter 2003 Earnings Results Conference Call. Today, we have a simultaneous webcast with slide presentation on the internet that could accessed at the site www.suzano.com.br. A replay of this call will available on the website. We inform you that all participants will be on a listen-only mode, during the company's presentation. After the company's remarks are over, there will be Q&A session. At this time, first instructions will be given, should any participant need assistance during this conference, please press "*" "0" for an operator. Today's speakers will be Mr. Bernardo Szpigel, CFO and Investor Relations Officer; and Rogerio Ziviani, Director of International Business.

Now, we would like to pass the floor to Mr. Gustavo Poppe, Investor Relations Manager for his opening remarks. Mr. Gustavo, you may proceed.

Hello everyone, certain statements in this presentation and during the Q&A session may constitute forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that could cause the Company’s actual results to differ materially from those set forth in the forward-looking statements. I pass the word to our CFO, Bernardo Szpigel. Please go ahead, Bernardo

Good morning everybody. It’s morning for us here in Brazil. In our presentation here, I will be following the slides on that you have available on our website. We start with some highlights of the year. We had a record net income in Reais 586m in 2003 with a background of an appreciation of our currency in the Reais, which affected positively our exposure in our balance sheet in terms of dollars. EBITDA of $325m in 2003 compared with the 287.9m in 2002 with an increase of 13%. We -- in December we started up our project two in our Sao Paulo factory -- Suzano factory in which we are modernizing and the pulp making capacity and paper making capacity and we are now having an additional capacity increase of 99,000 tons per year which would be available when we reach full capacity after the [learning] curve. In terms of cost, I think it's important to highlight the -- our pulp cash cost or market pulp cash cost, which for the year was $143 per ton with a fourth quarter value of $148 per ton and again in a background of appreciation Brazilian currency -- of an appreciating Brazilian currency.

As a final remark -- highlights, we had primary and secondary stock offering with the aim of increasing liquidity, which represented $442m Reais and the [free] floats reached 33% with the value of $1.1b Reais.

Moving on to the next slide, we talk about the export markets. We had an average Eucalyptus pulp price increase of about 10% considering the list prices or a CIF Northern Europe basis in 2003, which will of course was very positive and reflected in the other paper grades in the industry. When we compare the fourth quarter of 2003 with 4Q02 , we had a -- considering all of products an increasing volume exported of 35.8% and let me remind everybody that we are talking here about consolidated products including Suzano and Bahia Sul and market pulp [status].

Also in the fourth quarter, we have a rather decrease in average prices. When we compare fourth quarter with fourth quarter, a decrease of 13.2% and now average prices in Reais and these had to do with the effect of the exchange rates appreciation when we compare the two quarters. In 2003 versus 2002 full year, we had an increase of 10% in volume exported and an increase in 12.5% on average prices in Reais combining better improvement [with those] prices in the international markets, as well as, the fact that on an average basis the exchanges rates in Brazil did -- had a small devaluation. On an average basis year-on-year, we had an average exchanges rate of Reais 2.92 in 2002 and Reais 3.07 in 2003.

In terms of products markets prices, for this quarter we had an increase in eucalyptus pulp prices of $30 per ton implemented in February '04 in Europe and Asia, which are in place. In terms of our net sales evolution we should -- we'd like to remark that in 2003, when you looked at our net sales of Reais 1,000, 50% was related to exports and 50% sales in the domestic markets, a slight increase over the last year, which 49-51%. Destination of our exports -- both market pulp and paper -- Europe was the largest destination with 35.7%, Asia was second with 21.9%, North America 18.5%, and northern markets including Latin America 24%.

In the domestic market, the -- we had a decrease in the consumption of paper in the domestic market, very important one because of the performance of the Brazilian economy. So what we did was export more as we’ve described in the first -- in the previous chart. So we had a smaller a lower sales volume in the market for the year. But prices compensated to some extent, they remained at about the same levels throughout the year. When you recompare the fourth quarter of 2003 with fourth quarter of 2002, we had a decrease of 16% in sales volume in the quarters and we had an increase of 34.5% in average prices quarter-on-quarter basis. And considering -- and this was of course the reflect of the accumulated inflation over the year that -- and also a component of improved mix in the Brazilian market. In the fourth quarter of 2003, we exported 48% of our paper sales. When you looked at the chart on your right hand side on this slide, you see that the average for the year in terms of paper was exports of 44% of total paper sales and domestic sales of 56%. But the fourth quarter we had an increase in the proportion that was exported, again because of the performance of the Brazilian market. Year-on-year basis 2003 compared with 2002, we had a decrease in sales volume in the domestic market of 13% and an average price increase of 33.5% considering the mix -- improved mix that I just mentioned.

Moving on to the next slide, we look at our consolidated financial results for Suzano. We have four quarter '03 and '02 compared and we also have the year 2003 and 2002. Starting with the year, in the last columns to your right, and we see that net profit was Reais 586m compared with the previous year of 2003 -- compared with Reais 65m in 2002 was a very significant increase in profit. And the most important factor is just lined above where you see that our monetary and exchange variation which was negative Reais 576m in 2002 become positive with a value of Reais 318m in 2003 and that had to do, of course, with the variation of the exchange rate which in 2003 decreased from Reais 3.53 at the end of 2002 to Reais 2.89 at the end of 2003. EBITDA of Reais 1b we just referred to -- EBITDA margin remained about the same level around 40 -- between 40-41% for both years. The net debt-to-EBITDA ratio had a very significant improvement from -- at the end of 2002 we had a ratio of 2 of 3, which at the end of 2003 was 1.6, a very good development. When we look at the fourth quarter figures, we see a picture in which we had smaller net profits and smaller EBITDA, so it requires some careful explanation here, examination here.

First of all when we look at the net profits in 2002 -- fourth quarter 2002, had 209m Reais compared with 99m Reais in '03. A significant portion of that comes from the exchange rates, the average exchange rates prevailing in both quarters. We had an appreciation of a Real that we just mentioned and you can see the effect of that just above of the monetary exchange rates variation line there, in which in 2002 we had a 215m Reais positive contribution for the appreciation of the Real that occurred in that specific quarter. In this quarter, the last quarter we didn’t have a very significant variation so we lined the, this component was very small. On EBITDA, one of the important effects here is of course again the change in the exchange rates, which was, lets say, one of the important elements here, but we also had in this specific quarters -- in this specific quarter some factors that reduced our EBITDA margins as you can see of 34 -- 35.1% below the average of the year of 40.4%, and some of these elements are occurred specifically in this quarter like some administrative expenses. We had a -- this is the quarter in which we have the annual labor costs -- labor contract negotiation, and there was an increase of 17.5% in these costs in the -- as well as a lump sum payments which was made -- which was not going to be reflected in the following quarters, but this -- effect of this lump sum payment was one of the elements here.

The order is the -- most of the costs of the offering are primary and secondary also following this quarter. Some restructuring costs, we have reduced the number of people, some of them and also some donations which are fully deductible from our income tax payments, which had a compensation in that respect in our income tax expenditures. Also a smaller element of it -- as I just mentioned the exchange rate but also it's important to when we compare the full year of 2003, the exchange rate in -- for the fourth quarter was below -- we had a -- that was a quarter in which we have the strongest Real in the whole year, so there was also this elements, and the one -- the element here is the increase in the proportion of exports that I mentioned previously. We had a higher volume of exports, especially in places with 48% the [admission] which put some pressure in our EBITDA margin.

Moving on to the next slide, we look at consolidated debts. Comparing the three years as of December ’03 and September ’03, on the net debts result there you’ll see that there was a reduction of around close to $20m in our net debt position. I think it’s important also to mention we had a -- this year we had an increase in the Reais index loans that this is related to our CAPEX, the modernization that is going on in filtration of the forestry base for our growth in population capacity over the coming years, where this is mostly been funded by BMBS which means borrowing money in Reai. A very positive development also was where lower interest rates reflecting the international conditions and also the more positive view of the Brazilian market for foreign investors that had a lowering of the interest rates. And we also managed to increase the average maturity duration of our borrowings this year. We are also indicating this chart that we have -- we are our keeping our debt at 80% or 83% in dollars -- denominators in dollars and that has to do with our basic financial policy and hedging policy using because we use our use our trade funds, as you can see there it is about two-thirds of our total debt, close to 70% of our debt is related to traded funds, and we use our natural hedge condition because of our exports, so this is in line with our policy.

Then we move on to the -- some very fast comments on the financial results of Bahia Sul on the next chart. We had a net profit of Reais 409m compared with Reais 171m in 2002. Also you see in the line above, the effect of the monetary and exchange variation from a negative of close to Reais 150m in 2002 to a positive contribution of Reais 140m in 2003. EBITDA margin for the year improved from 52.4% to 53.9% in Bahia and our net debt-to-EBITDA ratio came down form 2.7 to 0.7, very, very low. In the fourth quarter, when you look at the fourth quarter, we have some of the elements that I just mentioned in the case of the consolidated figures. The net profit came down from Reais 142m to Reais 95m. A component of that was -- were the monetary and exchange rate variation elements. EBITDA also came down -- exchange rate is an important component, EBITDA margin came down from 56.9% to 48.7%.

Finally some comments on our -- some highlights of our outlook for 2004. We -- our Board approved in December the continuation of our preparation of our expansion project for the Mucuri mill that -- this is going to be 1m tons per year pulp-making capacity addition to that mill. We are now moving on to the detailed engineering and putting together the funding package to bring to the Board again by the middle of this year for a final go ahead. We had a price increase of $30 per ton in February, which we have already, we already alluded to in Europe and Asia. Rogerio Ziviani our commercial Director will be talking about this or answering your questions about the outlook of the markets as we see.

Assumptions for our budget in 2004, we’re using a GDP, Brazilian GDP growth of 3%, inflation of 6%, interest rates -- domestic interest rates at 15% and the exchange rate at the end of the year of Reais [inaudible] at the end of 2004. We'll also be adding -- we’ll be having capacity additions, as we just mentioned in pulp, as well as in painting and writing and coated woodfree papers. We are modernizing one of our paper machines in San Paulo and we’ll be adding in this the start of these new, of these modernized machines in April of this year with a capacity of 40 -- additional capacity of 43,000 tons when we reach full capacity after the learning curve.

And finally in the stock markets, the -- we had a very important offering for us in November with the aim of increasing liquidity and specifically to be able to join the Bovespa index by improving elements like the number of trade and the volume traded daily -- all of them are doing -- both of them are doing very well since then and we expect that our shares will be included in the Bovespa index before the end of 2004 in one of the reviews that is done every 4 months by reporters. So I would like to thank you very much for this -- for your attention at this point in time and we will be moving on to the questions and answer session.

Thank you. The floor is now open for questions. If you do have a question, please press the numbers "1" followed by "4" on your touchtone telephone at this time. Once again the floor is open for questions. If you do have a question, please press the numbers "1" followed by "4" on your touchtone telephone at this time. Please hold while we poll for questions. Yes, we do have a question coming from Jennifer Crowe (ph.).

Hi. Good morning; I just have two quick questions, and the first one is if you could go over your market share right now -- you have got a paper market in Brazil? And then second one is if you could say briefly the Capim Bronco project.

Well Rogerio is looking at the figures here to get to -- answer the both the paper market share talk about Capim Bronco, this is a project Jennifer that is a -- it’s a hydroelectric power plants, there are two its there -- its composed of two hydroelectric power plants so with a total capacity of 450 mega watts is being built by a construction in which we have -- we are participating together with CVRD [inaudible] and Companhia [inaudible]. We have a share over close to 18% of the power that is being -- that’s going to available, the project is under construction. It will be completed by 2007. We -- and our strategy here is that with the power that -- the energy that will be available from that will be self-sufficient also in our Sao Paulo mills, since we are self-sufficient in Bahia and the book review will be 100% sufficient for all our need in terms of electric energy. The total CAPEX -- our portion of total CAPEX would be 183m Reais and it is -- we have the project -- the construction of the project started this year of 2003, and in 2003 we spent -- we have invested 16m Reais.

Regarding the coated paper, our market share in the domestic market is about 24%, we did about 70,000 tons in the year 2003.

Okay. Thanks.

Sure.

Thank you. We have a question coming from Paul Weaver (ph.).

Yes. This is Paul Weaver (ph.) from Bear Stearns. I would like just to understand a little bit of dynamics in the local market. You mentioned that volumes fell by about 16% but yet you increased prices pretty high I would say during the year. I mean, could you just give us some background on, number one, why -- what's the reason behind the increase if we see demand falling? And number two, how do you see 2004 shaping out if Brazil is in fact going to be -- if it's going to be a growth year here in Brazil, are you going to redirect more to the local markets, how do you see that playing out? Thank you.

Hello, this is Bernardo. It is very -- the point that you make is very important and very interesting. The fact that you see an increase in average paper prices in Brazil has that to do with the environment of very high inflation that we had from 2002 to 2003, and 2002 was we all remember we had this debt period of in which there was a concern about the political developments and the exchange rates in Brazil, there was a very big depreciation of the currency during the year. We started 2002 with Reais 2.32 to the dollar. We ended the year at Reais 3.53 to the dollar, reaching close to 4 Reais to the dollar by the end of September. The variation in the exchange rates from 2.32 to 3.53 was something like 53% in the currency. That had an effect on inflation in Brazil, which measured by the wholesale price index was very, very high. Of course, it was not 50% but it was not -- I think it was something like 35%. So, when you compare and what you see also is that in these situations in our markets that we see that prices tend to lag, let’s say if you measure the effect of exchange rate. So, we had a gradual -- prices started to increase to reflect the new environmental -- inflationary environment by these in the second half of the year of 2002. So, for the -- in the average for 2002 those prices were low and were below and even if you compare in terms of international prices they were below the levels of international prices measured in dollars. In 2003, what you have is now a year in which prices have aligned themselves with international prices and -- but when you compare the values in Reais you see this very large increase in the face of a falling demand. So what in fact happened was that price in the -- let's say realigned themselves with international prices given the exchange rates, and they remained there at some stable levels what -- and what we as a Brazilian producer and several of our -- and most of our also the other producers also exported more because the domestic market was not absorbing our capacity or our production. And then I'll pass on to Rogerio and he can talk about the -- how w see the outlook for the year.

The outlook for 2004 -- the startup of the year was about 5-6% better than the year 2003 in the same period that were to say January. So we've now putted up a price increase in February of about 8% in the domestic market due to the consumption is peaking up. So we, like Bernardo said, realigned the prices in the domestic market over the international market. Out forecast is that the year 2004 in terms of demand in the local market should go along with the economy that is growing as well. So it's well related to that. So we can see some demand picking up at least during the first 2 months of the year.

Thank you.

Most welcome.

Once again the floor is open for questions. If you do have a question please press numbers "1" followed by "4" on your touchtone telephones at this time. Please hold while we poll for questions. We do have a question coming from Katerina Petroca (ph.).

Yeah good morning. Could give us little bit of an outlook on pulp prices as you see it especially for 2005 and 2006 when your new pulp line comes online at the same time as that our sales?

Yeah. Well right now the forecast that we are looking at together with some of the international analysts on the market is that 2004 and 2005 there is a little growth in prices as we see, from February we started with plus $30 and 2005 as well because we don't have any new capacity coming on steam except the one coming out of Chili which is about 50% short fiber and 50% long fiber. So this is the only big project, which is about 700,000 tons grow -- new capacity coming on steam. The [real fact] of china is coming back as we all know and the growth is quite high and the demand continues to be grew during the first 2 months of the year, including the holidays that they usually lower tonnages, but this year has been completely different. They have continued to buy and buying big volumes. So the perspective for this year and the year 2005 continues to be good. But we see some impact after the second half of 2005. There are some forecast that the prices would come down by -- the reasons that may be there is going to be a new line in China coming on steam and about -- new capacities that we'll -- should starting up in 2006 and anticipating that. So those are the forecast that we are working right now and together with Hawkins Wright and [VV] and [MG] and all those items.

So would you say that after this $30 increase now in February you will have new price increases along the year started?

There are some rumors today in the market that the price can go up again another $30 for next month, especially in Asia. The reason for that is the high demand in China and also some [inaudible] freight that are going up and the demand is very strong. There are some announcements today from Canadian mills of softwood of another $30 increase, and the gap between the long fiber and eucalyptus is becoming too wide. So there is a sign that there can be another price increase for eucalyptus too.

Okay. And another question if I may, you looked into the privatization of [inaudible] again after selling out of the participation you held. Why would you be interested in that once more?

Why do you think we are interested?

What I mean is that the conditions that the Portuguese Government gave did not allow you to have control, so why are you going after this again, has something changed?

No, we are going after that, let me just [Katerina] -- let me just clarify that. We are not going after what is with -- when we were in Portugal, shareholders of Portucel, we -- what we were aiming at was the -- getting the -- reaching the control of the company together with [Caima] that was possible at the time given the legal framework that the Portuguese Government had established before and that was our -- that was the situation when we invested there. That framework was changed by the end of 2002 with the new -- there was a new government, a new legal framework was established achieving the -- reaching the control of Portucel together with [Caima] was not possible anymore and we exercised a good option and we left the process. That has not changed since then. In the new framework, there were some steps that the government wanted to take and one of them was not successful which was to bring a new shareholder which would be contributing some assets to Portucel that was not approved by I think by September last year and then the law was agreed. The Portuguese Government agreed, also established that the Government would move on by selling a stake of 30% of its 55% of its share, which is now going on. It was decided and announced by the end of 2003 and there is a -- the process for preparation of -- presentation of proposals was first to occur on February 11, and it was then postponed to February 25. But our own position in this was respect is that we as a matter of our normal studies here we continue to look at go to sell just as a following up and see what's going on that we have not changed our position in terms of participating in that costs.

Okay. Thank you.

Sure.

Thank you. We do have a follow-up question coming from Paul Weaver (ph.).

Yes. You mentioned the widening gap between softwood and eucalyptus, since we know that most of the future capacities are going to be coming from hardwood, why do you think eucalyptus prices still chase NBFK? I mean is there a possibility in the long-term that these new hardwood capacities and I am talking of 2005 and 2007 will cause downward pressure on the market as a whole? Thank you.

Okay, Paul. Why do we have to have remind as well is the substitution that the customers can make to a certain level, of course, but they played quite well with that in the [furnish]. So, if they gap continues to increase to you know $80 or $100 differential then they again start to substitute and use more eucalyptus or any short fiber. To avoid that, we have to either wait for the market to start to pick-up and demand more volume naturally or we increase price and continue to follow sales. At least today, we don’t have you know besides the new capacity of one [inaudible] mill coming on steam, we don’t have any other new capacity coming in before the year 2005. So, I think the demand is speaking up as well around the world, of course that is a skill some pulp available in short fiber you can find everywhere but the prices also will have to increase due to the effect that the substitution can happen at any time and is happening now.

Yeah, you bring up a good point. Apparently the differential between the two pulp rates is at a historic high of maybe a $100 or maybe a little bit more and it seems like the historic is something in the neighborhood of around $30. I mean do you expect that gap to widen from the current from 100 to 30, I mean in the shorter term or during the [field] effect?

Well, I don’t know if it will go down to 30 but cannot continue to be on the range of 80-100 for sure because then there is going to be more substitution. But I think this is going to be in line with something like $40-50, then we see less substitution, that’s what some of the customers tell us.

Okay. Thank you.

You are welcome.

Once again, the floor is open for questions. If you do have a question please press the numbers "1" followed by "4" on your touchtone telephone at this time. Once again the floor is open for questions. If you do have a question please press the numbers "1" followed by "4" on your touchtone telephone at this time. At this time, gentlemen there appear to be no further questions, I'll turn the floor back over to you for any closing remarks you may have.

Since there are no questions, we would like to thank you very much for your interest and attention. It's always a very important opportunity for us to be able to first of all to tell you what -- how we see our figures and how we analyze them, but also it's very important to get your questions, the -- this is a very important feedback on things that we should be looking at and being able to answer to you, and so it is a very important event for us, in my name and the name of team here -- Rogerio and Gustavo and our people here, we would like to thank you again and tell you that we are always available in our -- with our IR people and we ourselves if you need in the future, and thank you very much. See you shortly. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.