Suzano SA (SUZ) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Suzano Bahia Sul Papel e Celulose S.A.'s second quarter 2004 earnings results conference call.

[Operator Instructions]

Today's speakers will be Mr. Bernardo Szpigel, CFO and Investor Relations Officer, and Mr. Rogerio Ziviani, Director of International Business. Now we would like to the pass the floor to Mr. Gustavo Poppe, Investor Relations Manager for his opening remarks.

Please, Mr. Gustavo, you may proceed.

Good morning everyone. Certain statements during this conference call 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'd like to pass on to Bernardo. Please go ahead.

Good morning, good afternoon everybody. Some are in the morning, some are in the afternoon. We are going to be using the presentation that is available on our website, starting with slide 3 with the highlights of the quarter.

I think the most important one is the merger of Suzano into Bahia Sul that occurred at the time of the approval by the shareholders meetings of Bahia Sul and Suzano at the end of June. The company -- the resulting company was renamed Suzano Bahia Sul Papel e Celulose S.A.

For the figures that we are going to be looking at -- financial figures, we are presenting the figures for the Suzano Bahia Sul Papel e Celulose after the merger for the quarter, and for comparison purposes we are going to be using those figures of Companhia Suzano on a consolidated basis for this discussion.

Also as of August 5, 2004, we had important changes in our -- in the Bovespa stock exchange: the shares of the company initiated trading on a consolidated basis. We have -- the ticker for the company is now SUZ for the preferred shares of SUZP5, replacing the previous BSUL5 for Bahia Sul. And we also had reverse split of the shares of Bahia Sul using the exchange ratio that was used in the merger, which is 18.2765 shares of Bahia Sul per one share of the new Suzano Bahia Sul Papel e Celulose S.A.

Moving on to some remarks about the markets, and Rogerio will be able to expand on those with your questions, on slide 4 we have what was the export market for us in this quarter.

First, comparing the first quarter '04 with the first -- sorry, the first half of '04 with the first half of '03, on the exports we have 20% increase in volume exported and 9% decrease in prices in reais, mainly due to exchange rate -- the depreciation of the exchange rate, the Brazilian currency in reais.

Comparing first quarter '04 -- sorry, second quarter '04 with second quarter '03, we have basically the same pattern with a 7.5% increase in volume exported and 4.1% decrease in average prices in reais.

For this year, the second quarter compared with the first quarter, we had a -- in terms of exports, we exported less in the second quarter for all of our pulp, 15% less, and we had better prices at the rate of 13% in our exports. And quarter woodfree prices for our exports increased in dollars 2.2%.

On the graph on your right hand side is this chart, we have -- in terms of net revenues, we -- they increased by -- for the half, for the first semester -- they increased to BRL 1.333 billion, and exports and domestics for the two quarters -- for the two periods, the share of the revenues remain the same at 49% for the exports and the 51% for the domestics.

Now moving to slide 5, some remarks about the domestic market for paper and paperboard. In the quarter we had 59% of the paper volume was sold in the domestic market. Comparing the six months of this year against the six months of -- the first six months of previous year, we have 7.2% increase in sales volumes and decrease in average prices in reais of 1.5%. Also some mixed effect included.

Quarter-on-quarter -- year -- quarter -- second quarter year-on-year, we also had the same pattern with an increase in sales volumes and a decrease in average paper price. In this year, the two quarters of this year, we had an increase of 12.7% in terms of sales volumes and a decrease of 0.6% in paper -- in average prices for paper.

In terms of volume we also have this chart on the -- on your right hand side with an increase from 359,000 to 384,000 tons of paper and paperboard sales shown in this graph.

Now for the financial figures, moving on to slide 6, although of all of these figures I will concentrate on some of them, please refer to the two middle columns referring to the first half of '04 and first half of '03. And I will move immediately to the EBIT line -- EBIT row there.

You have a decrease in EBIT from BRL 439 million in '03 to BRL 412 million in '04. To some extent that was reflecting the price situation in which the exports, because of the appreciation of the currency, the value in reais of our exports were lower than those of last year.

But the most important effects on our net income that you can see in the -- in this table for the two half -- for the two halves of the year, you see there was a decrease in our net income from BRL 407 million to BRL 204 million, and most of it has to do with the two rows immediately above, where you can see that we had a -- some monetary in exchange -- and especially exchange rate variations effects occurring in different directions in two -- in the two years.

In '03, we had a gain of BRL 344 million, and this was mostly a result of the impact of the appreciation of our currency that occurred in '03. We ended 2002 at the rate of BRL 3.53 to the dollar, and we ended the first half of the year with an exchange rate of BRL 2.87 to the dollars, so there was an appreciation of the currency by 23% during that period.

And that's, of course, had a positive effect on our net income, because of the exposure of our balance to currency -- to foreign currency.

Here you can see exactly the opposite effect occur in the first half of '04. In this year we ended -- we started 2004 with an exchange rate of BRL 2.89 and we ended the period with an exchange rate of BRL 3 -- almost BRL 3.11. So this devaluation of 7% of our currency had an effect of -- the effect of increasing -- of having cost of 143 -- close to BRL 143 billion.

So this basic effect -- this (inaudible) basic effect also compounded with some of the hedging operations that you have on the financial expenses on the row immediately above, and the income tax effect resulted in this variation of net income from the first half of last year to first half of this year that we just referred to.

When we compare the first half of the -- sorry, the first quarter of '04 with the second quarter of '04, we also have same type of analysis. EBIT was about the same level of BRL 205 million or BRL 206 million, whereas monetary exchange variations where much higher in the negative sense in the second quarter of '04.

And this has to do with the variation of the exchange rates in the -- that you can see in the block -- the bottom block of this table, where you see that the variation -- the devaluation of the real that occurred in the first semester was, in a sense -- in essence concentrated in the second quarter of the year with the devaluation of 6.4%. So that reflected in our monetary exchange ratio -- in exchange variation of BRL 128.6 million in the second quarter.

The changes in our gross margins and EBITDA margins that you can also see in this table, reflect what we have had in this period of the year, in the first half -- comparing the two first halves of the years. First of all, we have the question of exchange rates which apply to -- on a quarter -- when you compare last with this year very important effect of the exchange rate in Brazil.

And also in this second -- in this year we have the -- a number of elements referring to the start up of the new facilities that we have in -- especially in our Suzano Mill. We started in December the new facilities in our Suzano Pulp Mill with additional capacity at the rate of 99,000 tons per year, so we are in -- but we are in the learning curve.

And also in April we had the start up of the revamped paper machine which referred to by B8. The B8 paper machine was stopped in February, it was completely rebuilt and it started up in April. So in this period of '04, what we had is with these startups productions was less than -- because of these stoppages and also the learning curve.

So we are not at the optimal rates of -- capacity utilization rates of these -- of this equipment. This effected to some extent also our margins when we compare the two periods.

Also there are some mix variations in terms of paper and pulp. In these periods we have different participation in our sales of pulp and paper. When we have more pulp we have a higher EBITDA margin, when we have more paper we have a smaller EBITDA margin.

Finally, moving on to slide 7, consolidated debt. Looking at the consolidated debt, comparing the figures for June and March, our gross debt in June was $1.45 billion, with cash and equivalents of $462 billion and net debt of $583 billion. We maintained the same pattern in which most of our debts is trade financed which -- in the order of close to 70% of our total debt, $690 million actually.

And the other major component is BNDS with $189 million, and this reflects the increase in our CapEx for growth, in which BNDS is an important funding source, and we are -- this is going to be increasing over the next years.

The total debt -- net debt increased from $560 million to $583 million, reflecting events like the large CapEx payments that we had in the quarter, also large dividends paid in this quarter of BRL 120 million. So -- but it is inline with our current levels of net debt.

OK, so here I end my -- these initial remarks and I pass on to you for your questions.

Thank you.

[Operator Instructions]

Thank you, our first question is coming from Jennifer Corrou of Smith Barney. Please go ahead.

Yes, just two questions. Can you talk about what pulp demand was on a regional basis in terms of where your strongest demand was coming from?

Well, Jennifer, our sales of pulp is spread. About 45% goes to Europe, Northern Europe. I would say that another 32% goes into Asia, that -- mainly I would say China and Japan, those are the two countries where we concentrate our sales, in Asia, in Japan. And the rest goes to North America. In terms of total sales. So our largest market today is Europe.

In terms of demand I think Europe's growth was the highest one in the first half of this year compared to the other markets, even though China also had a important growth when you compare to 2003, which was about -- out of the total Brazilian export -- was about 30% to 35% growth.

OK, and so -- you didn't see any shift in where the demand was coming from in the second quarter versus the first quarter?

The first --

When you compare the two quarters --

When you compare the shift in the demand, we just saw a slowdown in demand at the end of the second quarter in China. Everybody saw that in terms of all the commodities grades were going -- went down, and we saw that as well, but we saw shift in growing demand because of the paper market in Europe compensated all those demands for us.

what's going on with pricing right now, have you lowered your list price at all.

Well, OK. We are following the market and, as we last month, basically the price for this month looks like it's going to remain the same, which is in Europe for eucalyptus $530, in the US $585, and in China we are doing something like $500. But I would guess by the end of this month the price can reach something like $490.

Ma'am, does that answer your question?.

Yes, it does.

Thank you.

[Operator Instructions].

Thank you, our next question is coming from Daniella Guanabara of Pactual. Please go ahead.

Hi, Rogerio and Bernardo. My question is if you could give us a guidance of sales volumes for pulp and paper for this year?

We are not going to have a significant change in what we have had because this is reflecting our capacities and, as you may remember, we are -- this year we are increasing our production compared with last year.

Last year we had a capacity of 1,185,000 tons of products. This year we will be reaching, by the second half of this year, 1,290,000 tons of capacity. So something like 100,000 tons of additional capacity. This is distributed in a -- in terms of additional capacity, we have 43,000 tons of paper -- of painting and writing coated woodfree paper and 99,000 tons of pulp.

But then we will be reaching this gradually. We'll -- we -- start -- by the end of the year where we were at this 1.185 million and by the end of the year we will be this -- with this 1.290 million. So, in terms of our sales, basically we will be following this trend.

Our -- the -- say -- in the learning curve we can say that both equipments are doing quite well, according to the plans, development. Of course for pulp the learning curve is shorter, it is faster than paper. Paper takes a longer time. But this is, let's say, the outlook.

If you look at our production -- production that we had in the first half of the year of 612,000 tons of products in total. So we were at the level of 1,224,000, we are quite well along this trend.

Just to check, for pulp its 99,000 tons of market pulp or is this --?

No, this is -- sorry to interrupt, but this is 99,000 tons of pulp. Some of it will be used to make paper and some of it will be sold as market pulp.

OK, thanks.

[Operator Instructions].

Our next question is a follow up coming from Jennifer Corrou of Smith Barney. Please go ahead.

Sorry, just -- one more question -- couple more questions. On your income statements there was a non-operating gain of BRL 60 million. Can you let me know where that came from? And then, also, can you talk a little bit about -- sorry, BRL 60 million. Can you let me know where the domestic demand is coming from, also? Just give us an idea?

For your question, it was a sales of pulp wood, OK? We have, let's say, we have -- according to -- in our -- based on our pulp -- in our wood pulp -- in our pulp wood inventories, we have a more wood than we are requiring in the coming years, so we sold some of it.

(inaudible).

Sorry?

I didn't get the question?

Hello?

Who is the buyer?

We have been selling to other paper manufacturers here in Brazil, other eucalyptus and pulp producers.

OK.

This is something which is quite normal, you sell it and you -- or you buy it, depending on who has it available, OK?

Then the domestic paper demand?

Domestic paper demand, Jennifer, in the second half is always the highest period for us in Brazil due to the scholastic season that is coming for January and books and notebooks are the highest, and also the graphics paper as well.

So traditionally in the second half at least 15% better than the first half in terms of demand in volumes, and for that reason we see some prices moving up already. For the month of August, we have announced something like 7% to 8% and have implemented already half of that for the month of August.

So things looks, in terms of the domestic demand, in (inaudible) especially in some paperboard as well, positive.

OK, thank you.

Thank you.

Our next question is coming from Edmo Chagas of UBS. Please go ahead.

Yes, thank you. Good morning.

On your margins, given that they were flat in the second quarter compared to the first quarter, what kind of guidance could you give us regarding the second half of the year? What kind of cost pressures that you make see in the third quarter and in the fourth quarter that should effect your margins considering the impact of higher paper prices that you just mentioned?

All I -- what we could say in terms of margins is that the first half of the year, and the second quarter especially, they were reflecting the entrance of new capacity and all of the corresponding adjustments that you have to have, and also the smaller production that we had, especially in the second quarter because of this new.

So this is not going to be -- of course you don't expect this things to continue to occur. They were concentrated in this second -- especially in this second quarter. So for -- as we move along we'll be going back to, let's say, to better margins. This is our basic case. And so this is -- I would assume that -- I think that this is -- the quarter had, let's say, depressed margins mainly, but this was a concentrated effect because of the startup of these new facilities.

And, of course, the other major components are prices in general and the exchange rate. They have an important effect in our margins. For the exchange rates, I guess there are all -- the market is, and also the consensus in Brazil, is that exchange rates will be at the current levels of close to BRL 3.10, which are better than the average that we had for the first, so that a plus.

In fact our margins -- well, when you look at our margins, the average exchange rate was below the BRL 3.10 that we have for most of the first half of the year. And prices as -- Rogerio may elaborate on what could expect in terms of prices for the second half of the year, domestic and --

Yes, as I said, domestic is about, you know, we are looking for -- to achieve this 8% in uncoated woodfree. Already domestic is half of this in the month of August in some segments, and also some implementation and increase in paperboard, which is also high demand for the domestic market.

At the same time, in exports we can see that the Europe, we see finally the movements on the demand. I think last quarter was -- the demand was 6% higher than the first quarter, and that is leading also to price increase that is already announced -- on the average plus 8% for September announced by Super Sale (ph) which is one of the leading uncoated woodfree producers today in Europe, where we compete very much in terms of quality and so on.

So those are the main factors that we see right now pushing prices up on the paper side.

Ok, thank you.

[Operator].

There are no further questions at this time. I will turn the floor back over to your for any further remarks.

We would like to thank you for your participation in this conference call to everybody, to Jennifer, to Daniella, and to Edmo, and we -- of course, we have pleasure to answering your questions and if you have any further questions contact us, our IR team and ourselves, Rogerio and myself.

Thank you very much.