Suzano SA (SUZ) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Suzano Papel e Celulose's third quarter 2004 earnings results conference call. Today we have a simultaneous webcast with slide presentation on the Internet that could be accessed at the website, www.suzano.com.br. There will be a replay facility for this call on the website. [Operator's 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 over to Mr. Gustavo Poppe, Investor Relations Manager, for his opening remarks. Please, Mr. Gustavo, you may proceed.

Good morning everyone. Certain statements in this presentation and during the Q&A session on the 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.

We experienced some technical problems on our website connections this morning. So I would please ask those that are connected on the webcast to press the refresh, so that you then will have access to the third quarter presentation on the webcast. Thank you. I'll pass the floor on to Bernardo. Thank you.

So, good morning everybody for this conference call on the third quarter results of Suzano Pulp and Paper. We had a very interesting quarter, reflecting some of the improvements that we have been implementing in the Company. 1 of them that I'd like to mention is the increase in our capacity that is taking place since December last year, with the new pulp capacity. And also in April this year with the start-up of the revamped -- one of our revamped paper machines in Suzano.

There is also the improvement of the Brazilian market also. We had a quarter in which our EBITDA reached BRL308m, and our accumulated income for the 9 months reaching BRL467m. Our EBITDA margin went up to 41.5% in the third quarter of this year. We had a recovery of the Brazilian economy, leading to our domestic market sales back to a proportion of 64% of our total paper sales volume. Which we consider is a bit more [in an equity], in between exports and domestic sales.

Also in this quarter as a highlight, we issued BRL500m in debentures with a maturity of 10 years. And in addition to that, Suzano's shares entered the IBrx-50 index as of September '04, reflecting the improvement in our liquidity since the second half of last year.

Moving now to slide 4, with some comments on the export market. In general what we see in all of the comparisons between this and the last -- this period than the previous periods - be it the 9-month period or the third quarter of the 2 years or the third quarter this year and/or the second quarter of this year. We had an increase in capacity -- sorry, in volume exported in all these comparisons.

Whereas in terms of prices we had some mixed figures, mainly in the last -- in the 9 months of this year compared with the 9 months of last year. We had a decrease in average prices in reais, and this reflects 2 main things - the decrease in pulp prices, and also the strengthening of the real against the dollar, which we have been experiencing.

In terms of net sales by market, in the 9 months of '04 we are reaching BRL2.072b, with a split of 48% with the export market and 52% for the domestic market, compared with a 50/50 percent split in 2003.

Moving now to slide 5, some comments on the domestic market for paper and paperboard. We had, as we mentioned already, 64% of the paper volume was sold in the domestic market in the third quarter of '04. We also showed there that there was an increase in sales volume in all of the comparisons of this period with the previous period.

And also in this case, an increase in domestic prices - a small increase when we compare the 9 months '04 with the 9 months '03. And a better increase in prices when you compare the other 2 periods, the third quarter this year with the previous year, and the third quarter of this year with the previous quarter. In terms of paper and paperboard sales, we are up in the comparison of the 9 months, from 543,000 tons in '03 to 587,000 tons in '04.

Moving now to the consolidated financial results on slide 6. The comments that I would like to make refer, first of all, with the evolution of the exchange rate. The exchange rate at the end of the period is very important for our income because of the effect that it brings to the -- our exposure in -- of our balance sheet to the dollar.

And as you can see, when you compare the first 2 columns of this table, on the line called monetary and exchange variation - it's the third from the bottom in the first block. You'll see that this year we had a positive contribution of BRL128.7m, against a negative contribution of BRL128.6m in the previous quarter. And this has to do with the movements of the exchange rate in this quarter. We had an appreciation of the real against the dollar in the quarter, compared with a depreciation of the real against the dollar in the previous quarter.

On a comparison of the EBIT, we see here an improvement of the quarter of BRL257m against BRL205m, reflecting the good operational performance. I would like to point out an interesting conclusion of these tables. When you look at the 9-month column referring to the 9 months '04 and 9 months '03, we see that in '04 we had a very interesting period, by the fact that the exchange rate at the beginning and at the end of this 9-month period was about the same, slightly -- a very small difference.

So that you can see that in the monetary and exchange variation row, the third from the bottom in the first block, there is a very small variation there of negative BRL14m. So that all of the -- most of the net income that you can see, the good net income of BRL466.7m, has practically no influence on the exchange rate variation. This is a very -- I think it is a very interesting period to observe the performance of the Company, in which you can see no effect at the end of the period on our debt.

Of course, there is an effect on the average exchange rate, which was lower in this 9-month period of '04 against the 9-month period of '03. In this 9-month period we had BRL2.97 as the average exchange rate, as you can see at the bottom of this table. And then also for 9 months of '03, BRL3.24 to the dollar in which we see then an appreciation of real which affects negatively our EBIT.

But anyway, it was a very good period with a reasonable EBIT, considering these adverse effects of the exchange rate. On the -- On an average base it was reflecting the strengthening of the operational conditions of the Company.

Moving now to slide 7, our consolidated debt and comparison of the 2 quarters. Our net debt is now at $596m and you'll see that, in terms of the composition of the debt, the portion of non-trade finance debt - the first block - has had an increase from $355m to $437m. And this is mainly the effect of the issuance of debentures of BRL500m, as we mentioned, and also the repayment of the syndicated loan of our previous Eurobond issue.

So, the main increase of proportion of non-trade finance debt in the total amount of our debt. Also, I would like to point out that, for the issuance of this BRL500m debentures, we have a rating, a local rating of AA minus for the Company. Also already reflecting our excellent growth plans, which we think is a -- was a very good result of this re-evaluation carried out by the rating agency, reflecting the strength that the Company has.

With this I finish my presentation at this point in time, and we're ready for discussion -- for questions that you may have. Thank you.

Thank you. [Operator's Instructions]. Our first question is coming from Daniella Guanabara of Pactual. Please go ahead.

Hi Rogerio, hi Bernardo. I first would like to know how are Asian purchases of pulp during the fourth quarter? Are they increasing compared to the third quarter?

Yes, good morning Daniella. Yes, I think there's a demand that -- I would say that the project from [Heinen] has been postponed for January next year, the start-up. So that's another 1m ton capacity that was supposed to be starting during the third quarter, and now it's postponed for the first quarter next year.

So, the client that was expecting to buy start-up pulp from this project during this last quarter, now are facing problems in terms of their inventories. So they are back in the market and buying more volumes. That did encourage us, you might say, to increase prices, maybe for November 1.

As it is today, we are selling at an average price of $450 in Asia, and there was an announcement for November 1, as you know, for Europe already for $520. So we are expecting now an increase in demand, as we are facing in the month of October, to repeat in November and December. And that did encourage us to increase prices for November 1.

Is financial constraint still an issue for the fourth quarter? Where there's constraint in China, I mean.

Financial you mean, for to get the letter of credit and things like that?

Yes.

No. As a matter of fact, we didn't face that much during the third quarter as well. They diminished their purchasing in terms of volumes because of their demand, and also because they were expecting to reduce their inventories, waiting for this new line. But it didn't happen and looks like the new line will face problems, even after the start-up.

Just to refresh because they are very short of wood and ships. They could not get full supply of their needs. Market is commenting that they have only 35% of their needs so far. So this has also postponed their -- all the start-up. So in terms of letter of credit, the trading companies are still open up and we credit to open up a letter of credit to us.

Okay, thanks.

Thank you.

Thank you, our next question is coming from [Marcus Assumpow] of [Ethau Creditora]. Please go ahead.

Hi everybody. In third quarter '04, you presented a considerable improvement in EBITDA margins. Do you think you can further improve your profitability from the next quarters? And if so, what should we consider the run rate for Suzano's EBITDA margin?

Well, Marcus, the improvement that we have experienced now in this third quarter reflects, to our understanding, some improvements in our operational performance, starting with additional capacity and additional production as we can see. We are running right now at a level of our new capacity levels, which are close to 1.3m tons per year for all products, compared with slightly -- around 1.2m tons by the end of last year.

This -- In this period we had the start-up of new -- not really the start-up of new facilities but the start-up of modernized facility in our Suzano facility, and in our Suzano plant. And this is reflecting the increased amount of production and sales. By December this year, we'l also have the start-up of the new -- of the modernized facility in our Mucuri Mill.

We are increasing the capacity of that -- of pulp-making capacity in that mill by 60,000 tons per year. The start-up is in December. The plant will shut down in November for the -- for making all of the new equipment, and start-up will be in December. So that we will be also increasing capacity as we move along the learning curve of the Mucuri plants, over the next -- over the months after December.

So here again, we expect that, given the additional production levels that we'll enjoy, our EBITDA will increase. And given that we are maintaining the same fixed costs and SG&A, what we have is that the margin has a tendency to increase also. Of course, that will depend on prices in general and exchange rate - this is also a major influence. But all things maintained equal, the tendency is to increase the performance.

Okay, thank you.

Thank you, our next question is coming from Edmo Chagas of UBS. Please go ahead.

Thank you. Good morning. I have 2 questions. The first 1 is in the press release today, about the Mucuri expansion, 1.2m tons. Could you give us an update of how that stands now? What is still undecided, and if there is any potential changes to what it was informed in the press release?

And second question is, could you give us an update on the paper markets in Brazil? What you are seeing in the beginning of the fourth quarter, October, so far? And what kind of expectations you have in terms of volumes and prices for the local market, please?

Good morning, Edmo. I'll start with the expansion in Mucuri, then Rogerio will talk about the markets. What we have -- In the project we are in the following stage. Our Board has received -- has considered all of the work that has been in the first months of this year. Mainly it was the basic engineering and the preliminary structuring of the funding for the project and the evaluation; the result was a positive one.

On the basic engineering front I think that these are the interesting news. What we have done in the first half of the year, was to review all of the state-of-the-art, all of the technology for pulp-making around the world, and from the different manufacturers. Looking at the plant that are under construction and the new technologies, and the updated -- the upgrades in technology.

As a result of that analysis, we also asked all the manufacturers to present their technical proposals for the different pieces of the -- or different components of the plant. And based on that -- on those proposals and discussion with the technical -- with the manufacturers, we arrived at the configuration of the capacity, of the optimal capacity of this new plant.

As a result of that, there was an increase in what we call the potential capacity that we will get from the second -- from this second pulp mill. Namely, we are now seeing that this plant, starting with a nominal capacity of 1m tons per year, will move to 1.1m tons per year without any additional CapEx 2 years after the start-up. And also we have decided to have the dimensioning of the different components to be able -- so that the plant may reach 1.250m tons of pulp-making capacity with minor, additional, marginal CapEx.

So this was the result of the engineering. On the other front -- on the funding front, we also discussed what we had already obtained in terms of the funding discussion. And with a main focus on the fact that [BNDS] has already [picked 1 in 5]. As we say in Brazil, we've got an input of the project in -- by the Board of BNDS, which is one of the 2 main things that we had to accomplish.

And based on these results and also on the, let's say, the updating of the economic technical feasibility study, that the Board approved that we go ahead with the project. And the next phase now is to ask for the commercial proposal from the manufacturers. This is going to be done now. After receiving these proposals and putting together and evaluating the final cost of the plant, our Board will make its final decision on the final go-ahead.

This is expected to take place in the first half of next year, and then construction in the beginning of the second half of 2005. So what we have been doing then, is to take all of the steps necessary for a plant -- for this large magnitude. And then we have been then also very comfortable with the feasibility, and all of the necessary steps to have the best plant possible. And also considering all of the wood base that we have that is needed for this project. So things are moving steadily in this direction.

So, talking about paper prices and demands for the fourth quarter in the domestic market. I may say that there is no major announcement or practice of increases in prices. Even though the fourth quarter is back to [same] quarter for season -- production season. So this is usually a very good quarter in the domestic markets.

But we have announced price increases during the third quarter, and some of them will be fully implemented in some paper divisions during the fourth quarter as well. So demand looks very good at the time, and the prices we think that they are going to be just implemented, the ones that were not reached the price that was indicated during the first quarter.

Okay. Thank you.

Thank you.

Thank you. [Operator's Instructions]. Our next question is coming from George [Beristino] of Deutsche IXE. Please go ahead.

Hi, good morning Bernardo. George Beristino with Deutsche IXE. My question is regarding the timing of the project. It would seem that by launching it more into the third quarter of 2007, that you're deferring up to 500,000 tons of production which would otherwise been incurred in that year. Has the recent announcements of other major projects in the region had any influence on Suzano's decision for the timing of this project?

In other words, are you responsive to other players' potential capacity [inaudible] as well, when you're looking at bringing this project on?

Good morning, George. In fact the reason for the -- let's say, postponement has -- did not have to do with the market considerations. It had to do with the timing that we had to have to arrive at the basic engineering dimensioning. We carried out a very thorough evaluation of state-of-the-art technology in different -- with different plants and different manufacturers.

We also invited technical proposals from the suppliers -- from the equipment suppliers, and they were all analyzed by our engineering team and our consultants. And some of the components of the project were also revised, in terms of their capacity, reflecting the new technologies available.

That took a long -- a little longer than we expected but we decided that that was very important, because it's very important to have the best plant and the most competitive plant. So that's why we had to postpone a little bit. Now we're -- our Board -- since -- with the approval of our Board, we are moving out with the following step, which is in writing the commercial proposals.

So the timetable had more to do with the internal, let's say, logic of building a competitive plant, rather than looking at market considerations. In fact, at this point in time, it's not really possible to forecast in detail what's going to be the market conditions at the time that we start up. So the main reason was really a technical and economic feasibility of the plant.

Okay. My second question is, what is the long run average eucalyptus price of this project is predicated on? And has there been any change to that underlying price of [inaudible] [you can buy]?

We are working -- We have this standard scenario of $500 per ton as the basis for calculating the feasibility of the project. And we also have other scenarios which tend to be a little more pessimistic than those looking at the possible supply and demand for -- condition in the future.

So we are evaluating the project under all of these different scenarios, and the results that we have seen are still consistent with getting an adequate return for the project. And it stays mainly on the competitive position of our facility in Mucuri, especially with regard our cash cost and our wood availability. So we continue to obtain returns under all of these different -- adequate returns under all of these different scenarios.

Sorry, that was eucalyptus? You're saying $500 for eucalyptus?

Yes.

Thank you.

This is this price before discounts.

Okay, thank you.

Thank you. [Operator's Instructions]. Our next question is coming from [Roselle Maugham] of Paperloop. Please go ahead.

Hello. Good morning. It's Roselle from Paperloop. My question was referring to the expansion project and also to the piece of news that appeared recently, linking Suzano with a potential takeover or association with [Repazza]. This is surprising, considering the huge expansion project going ahead. Is that an area of interest for Suzano still to grow through acquisition? And do you have any comments to make on that, those market reports?

No, we are not -- we don't comment on rumors in the market. There is no confirmation of the sale of Repazza, and our policy is not to comment on any rumors that we may have in the market.

Okay, thank you.

Thank you.

[Operator's Instructions]. Our next question is a follow up coming from George Beristino with Deutsche IXE. Please go ahead.

Okay. Could you just comment then on the project or your expected returns, in terms of return on capital employed?

We are -- In this project, we are working with a return which -- an internal rate of return which is about 2 percentage points above our weighted average cost of capital, which in this case is 11.5%. This is our weighted average cost of capital, as calculated from today.

The project return is 13.5%?

Yes.

And that stays under $500 again? Under the sensitivity analysis that you performed, what is the probability that the project would earn a lower than your weighted average cost of capital?

It's a zero probability at this point in time.

Okay, thank you.

Thank you. [Operator's Instructions]. There appear to be no further questions. I'll turn the floor back over to the Suzano management for final remarks.

Well, my closing remarks is to thank everybody for their interest and their presence in this conference call to discuss the second quarter -- third quarter results. Which, again, we think were very interesting, reflecting the strength of the operational performance of the Company. And also taking advantage of the announcement of our expansion in Mucuri.

We have a Board meeting on Friday and we announced the results of that Board meeting for this very important project for us. We are proceeding then for the next stages of this. We are very confident that to have a competitive position in the market the Company will continue to grow. We'll double our capacity by 2008. So it's a very important period in our -- Company wise.

And we thank you very much for your interest, and we will be available for any further questions that you may have with our IR people and ourselves. Thank you very much again.

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