Suzano SA (SUZ) 2004 Q4 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 fourth quarter and 2004 earnings results conference call. Today we have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.suzano.com.br. There will be a replay facility for this call on the website.

We inform you that all participants will be able to listen to the conference during the Company's presentation. After the Company's remarks are over, there will be a question and answer section. At that time further instructions will be given. [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 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. They 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'll pass the word now to Mr. Szpigel. Thank you.

Good morning. In our presentation we will be using the slide presentation on our website, starting with the highlights of the fourth quarter of '04, slide 3. We had first of all the agreement for the acquisition of Ripasa together with VCP, by acquiring 59.5% of Ripasa's capital. And we have the expectation to finalize the -- close the closing of the transaction in the month of March of '05.

Secondly, we had our expansion at the Mucuri site, which is the second pulp line investor site, it was initiated again by the Board in the Board Meeting of October, with the updated feasibility study and the Board approved that we move on to the following steps. One of the most important ones is that we have asked for a commercial proposal from our -- from the manufacturers of the equipment. This has been done in December, and we are receiving these proposals now by the end of the month of February and beginning of March.

We also have in the Mucuri Mill, we have the optimization of the existing pulp line, that occurred -- final construction work occurred in December, with the timing of the [indiscernible] equipment, with an additional capacity of 60,000 tons per year of pulp, bringing the capacity of that mill now to 645,000 tons of pulp per year.

Of course during this month of December we had a shutdown for all of this construction work. And because of that you had 2 main impacts - one was reduced production in that site, and also increased costs which occur in the situation where you have an increase in unit fixed costs, and also other costs like fuel and chemicals. So this quarter was very much affected in that respect, due to this start up of the new mill -- of the optimized mill.

In addition to that, as an aspect of the quarter, we had our paper sales volume for the domestic market increased in the fourth quarter. We are returning to a level of 65% of total paper sales, which is a more normal condition for us, reflecting the improvement in the domestic market.

For the year our EBITDA reached BRL1.039b, equivalent to $365m, which compares with $325m for the previous year, which is an improvement. And lastly in this quarter, the last quarter of '04 we had -- we obtained an FSC certification, a Forest Stewardship Council certification. This is a very important certification that puts our forests in Bahia and Espirito Santo - the forests that supply our Bahia Mill - in a very excellent condition in terms of both environmental and social responsibilities.

Now I will pass on to Rogerio Ziviani to comment on the market conditions in the fourth quarter of '04. Rogerio.

Yes, thank you. Good morning to everybody. First of all the pulp, analyzing the pulp in the fourth quarter. We had a drop in the world inventories that was in the level of 35 days at the end of November, to 31 days of production by December 31, due to the fact that the demand was strong at the end of the year, driven by the Chinese market and also the European and North American market as well.

We had, on top of that, supply restrictions that was due to the maintenance shutdown of some mills, and also due to the fact that some of the mills that were supposed to start up, like Hinan in China, was postponed to the beginning of this year.

So this scenario, helped by depreciation of the euro to the dollar, may help together the pulp market to be stronger, with price increases announced for January 1, which was fully implemented during the month of January. And also drove the fact that we had made - and some of the other producers as well - announcements for March 1, which should be actually increasing about $30 in Europe and North America, and $40 in Asia.

In Asia, due to the fact that even during the holidays of the New Year the demand was very strong, and that also gave us the [incentive] to increase this $10 more.

On the paper side, the fourth quarter was with a good demand in all export markets. Latin America, where we are strong, also the demand was very good. Argentina is coming very slowly but is steadily recovering its demand. So this market is also helping to increase the inflow of exports of most of the Brazilian, to that region as well, to that place as well.

And also we had a recovery of the domestic demand, as Bernardo already mentioned, where we sold about back to the level of 65% of the paper sales during the fourth quarter to this market.

The [appreciation] of the Real improved the competition and import papers, mainly on the coated paper, where we have some lines of application, segments of application on them. And also in uncoated wood free, where you don't pay any duties to come into Brazil, and also you don't have any duties due to the application of the product to be used in books, magazines and school publications as well, which is a incentive by the Brazilian [reservation].

So this also is putting a little pressure on the market at the end of the quarter of 2004, and during the beginning of 2005 as well.

I will be free to answer any further questions later on, and I'll return to Bernard Szpigel now for the rest of the presentation.

Moving on now, looking at the income statement for the fourth quarter and the full year of 2004. If you'll refer please to slides 5 and 6. On slide 5 we point out the main factors affecting the results.

Starting with pulp and paper prices. We have in terms of the international markets, in dollars, good prices for pulp, at the rate of some 2% above the previous year. But the prices for paper were even better, at the rate of 11% when you compare 2004 and 2003.

In the domestic market, in fact prices decreased somewhat for paper and for pulp. We did have a much active domestic market, but prices in fact did not increase in reais. On the contrary, they showed a reduction of something like 5%, compared with the previous year.

In the case of the second factor that I will refer to is the exchange rate. In fact we had an appreciation of the real against the dollar in the year, and this has 2 effects in our income statement. One of them is, of course, on our revenues. We had an exchange rate for the whole -- an average exchange rate for the year which was [inaudible] lower [inaudible] the rate or the average exchange rate was BRL2.93 against BRL3.08 in 2003. That, of course, impacted the reais figures for our exports.

The other side of this appreciation of the real shows on the impact of the exchange rate variation in our balance sheet, and our exposure to the dollar, net exposure to the dollar. And in 2003, if you take the opening exchange rate and the closing exchange rate of the real, we had -- in 2003 we had an appreciation, a variation of 18% negative. Whereas in 2004 we still had a negative variation. It started at BRL2.89 to the dollar and ended up in 2004 at BRL2.65, that was an 8% negative variation.

Net impact is positive in our case, so we had a contribution to our income because of the impact of this variation on our dollar exposure. So we had these 2 sides of the exchange rate variation during the year again. Although this year the impact on the dollar exposure was much less than in the previous year, as you can see in slide 6. In the line there, monetary and exchange rate variation, if you compare 2004 and 2003, in 2003 we had BRL318m positive contribution to income and in 2004 this was BRL61m.

The other point that I would like to comment is the programmed maintenance stoppage for modernization and optimization. In the year we had 2 main events [occur]. One of them was in the second quarter, where we had the start up of the revamped modernized paper machine, our B8 machine, in our Suzano Mill, which affected that quarter in terms of costs. When you have something like this, you normally have an increase in the costs and reduced performance in production.

And we had this again in the fourth quarter, when we started up the optimization at the Mucuri Mill - additional 60,000 tons. But for December and for the quarter we had a lower production, as you can see in the slide on table 6, the production for the quarter was lower in pulp when we compare with the previous quarter.

So that also affected not only our production but the costs, and also sales in that specific quarter.

For the year as a whole in 2004, we increased our sales, our production and sales. Production increased from 1.201m tons in 2003 in terms of total products, to 1.239m. And so the year was very much affected by the influence of costs and our output capability, because of the start up -- the stoppage. So we're trying to tie in all the equipment again involved in this segment in the fourth quarter.

Also we had non-recurring expenses - moving on to SG&A impacts. We had additional provisions for tax purposes, and also some non-recurring costs related to the merger of Suzano and Bahia Sul, the acquisition of Ripasa and the issuance of debentures in the domestic market.

The last remark that I would like to make is related to a reclassification that we had -- that we made referring to -- also to changes in the tax environment in Brazil in 2004. We have a change in tax referring to Cofins. We have this new structure, an increase in the rates that apply to Cofins, and also it's non-cumulative, the change from a cumulative to a non-cumulative environment.

By the end of -- at the fourth quarter and for the year we are reclassifying the way we have been doing the Cofins. But now, since we are able to take credit for the Cofins in our materials and all the service and materials and the raw materials that we buy, we are able to take credit. And up until recently this was a -- was affecting the deduction that we were making from the gross profits -- the gross sales to net sales. And we moved those, these credits now to cost of goods, cost of sales, cost of goods sold.

That has an impact when you compare margins, gross margins and EBITDA margins. In our press release we have a table showing what's the impact on each of the previous quarters in 2004, where we have this new tax environment. This had an impact on our revenue base of increasing the margins, the EBITDA margins, by something like 2.6 percentage points.

And the next slides, 7 and 8, show what are the major variations from 1 year to the other, both on EBIT and on income. On EBIT you can see that on our prices it also reflects the exchange rate. We had a negative impact of 100 and -- I think it was [BRL106m], compensated by increased volumes from the domestic and the export markets. But the domestic market's a larger proportion; that was a positive thing for us. We were able to sell more in the domestic market in paper. And cost of sales, in SG&A, a negative contribution.

On net income variation the most important points were financial expenses, which were lower in 2004 than in 2003. In general, related to some swap transactions that we had in 2003, this is an improvement. And the exchange rate variation, which was smaller in 2004 than in 2003, when you compare these 2 variations, we had a negative effect on net income.

I guess the 1 final remark on income is that when you look at the composition of the income, we had a very good income in reais of the rate of -- for the year, of BRL603m, compared to -- sorry BRL586m in 2003. But with a much smaller participation of monetary and exchange rate variation, so the profit is more -- is more related to our operational activity.

So, I will just stop by now -- 1 last remark, it is on slide 9, where you can see the position of our consolidated debt. Not a very large variation on gross debt. We had -- on net debt we were about the same level as we were in September. The year was a year in which we continued to be investing in growth, capacity, optimization in Bahia and our new paper capacity in Suzano. So net debt levels remained at the same level, but the important thing is how much now we were able to lengthen the average maturity significantly from 2003 to 2004, reducing our rollover rate. We did that by issuing debentures, a 10-year debenture, which was a benchmark in the domestic market for a private company. It was the first time that this was done.

And also getting the balance sheet ready for the next step of the increase in capacity by our expansion at the Bahia with a second pulp mill. So that was part of the strategy to put the balance sheet and the debt structure in good condition in that respect.

So I will stop right now, and hope we are ready to answer all your questions. Thank you very much.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Thank you, our first question is coming from Edmo Chagas of UBS. Please go ahead.

Yes, good morning Bernardo. The question is related to 2005, your expectation that these partnership deals that you are going to complete by March, and I guess should start to be consolidated into your numbers from the second quarter of this year. Do you have an estimate of how much Ripasa is going to contribute to your numbers in 2005, and what kind of CapEx will they have to contribute to Ripasa through 2005 to increase capacity as planned?

Well the -- first of all [Ripasa]. Good morning Edmo. Ripasa, in terms of what they -- they were running at the rate of last year of EBITDA of close to $150m per year. We don't have the final fourth quarter figures published yet. I understand they will be published next week. We are, of course, looking at the -- doing our own estimates in trying to -- and then preparing for the budget of 2005.

These budgets will be revised by ourselves as soon as we get these shares. We don't have -- we don't own the company yet, as you know. The closing of the deal will happen in March, and we will have the shares transferred to us, and then we will have -- we will be able to review the budgets based on our own assumptions and outlines and cost outlooks. At this point in time we are not indicating any specific figures for that respect.

In terms of CapEx, what is going on for Ripasa is something like in addition to what is the normal maintenance CapEx. There is the main CapEx item there is the drying machine there for the pulp, which is fairly [cold]. Correctly the CapEx planned for all of these things is something like $50m, for what was seen as finalizing all of what Ripasa doing in terms of modernizing their own facilities.

We haven't ourselves -- we haven't reviewed this CapEx budget, the capital budget for Ripasa, because we still don't own the company.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from [Marisello Aquila] of Merrill Lynch. Please go ahead.

Hello Bernardo. A couple of questions. First regarding again Ripasa, if you can. Would you be able to give us like a timetable regarding the public offer from minority shareholders in the Company? You still believe you would be able to buy the stake of the controlling in March with no delay, and then when you believe, yourself at least, you will be ready to make a public offer for minorities.

Again, the transfer of the shares and the closing, the financial closing of the deal will take place around March. And the other elements of the timetable are still being evolved, let's say the plan that we laid out in our [indiscernible]. At this time we are still -- we are working on all of the different fronts, but we don't have specific dates to announce at this point.

Okay. Second question will be - last year we saw Suzano Petrochemica, which is owned by your own controllers, are giving [full tagalong] for minorities. I would like just to see which is the view of tagalong or what minority of Suzano Papel, in order to get the same tagalong going forward or not?

What we -- Our position has been one that we at this point we have not -- we are not announcing any in the same move for Suzano Pulp and Paper. I think it is important to notice that the controlling shareholders have been taking the position to analyze which point in time all of the possibilities there, and there were no taboos, as we have been saying. I think it's an important indication that Suzano Petrochemica, in the case of Suzano Petrochemica, this upgrade has already occurred. In the case of Suzano Bahia Sul, this is something that is constantly under evaluation, what makes sense.

So there are no taboos, but we are not announcing anything specific at this point in time also.

Okay. And the last point - clearly, your liquidity improved significantly, although the Company will continue not to have ADRs, listed ADRs in the New York Stock Exchange. And recently we saw a new President of BNDS, the Brazilian Development Bank, saying that they would be selling some of stakes they own in some mature companies in the market.

My question to you is, is Suzano management contacted by BNDS or are you seeing any negotiation regarding this issue, or are you positive on seeing a [indiscernible] offer for Suzano?

There are no negotiations with BNDS. Although the current [Board] has quite regular contacts with them, this is always, something that is on the table for something as, let's say, their own shareholding position.

But they are not indicating at this point in time and we are not conducting any specific negotiations at this point in time.

But of course, because there was a change in the Board level of BNDS, and a new team as we see are -- they are, as we understand it, they are taking, analyzing all of the future -- different aspects that they will have to take care of their new responsibilities, and that is also one of the issues in terms of what we will do, in terms of the equity markets, we could see some change. But we are not at this point able to say if this is -- if it is going and how it is going to affect our own position in terms of their shareholding. It's always a potential to increase the float and the liquidity of our shares, as they have done this in the past with other companies, so we look forward to what could happen.

In terms of an ADR listing, which is 1 other point that you asked, our position in that regard is that we have been examining this. We are getting, let's say, ready, for example by getting U.S. GAAP figures and things like that. But -- so that potentially we will know that this is going to be one of the, let's say, of the steps or the measures to further increase the float and liquidity. And our own understanding of that -- this has to be done at the right time, which is -- we have never thought that an ADR listing would solve our liquidity problems before. We have a good base and this is something that we have already in some sense, because the liquidity of our shares improved significantly.

But we are moving in that direction, but not -- again, not a defined timetable.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. There appears to be no further questions. I'll turn the floor back over to you for any further closing remarks.

Well, first of all thank you very much for your participation in this conference call for the fourth quarter 2004 and for the year. I'd like just to make a final remark.

In setting out what has been happening with the Company in the last 12 to 14 months, it was a very important period in our life, in our corporate life, and a number of things happened at an accelerated -- a fast pace, I would say. We had capacity increases already occurred from 2003 to -- December 2003 to December '04. We increased our capacity by 165,000 tons per year, considering what happened in Sao Paulo and in Bahia, going up from 1.185m tons to 1.350m tons of capacity in pulp and paper.

We are getting ready for the second -- for the construction of the second pulp line in Bahia, that according to our plans will start construction in the second half of the year, when we get the final approval from our Board and finalize the updated [indiscernible] approval.

We also, in terms of our structure, we have the merger of Suzano and Bahia Sul completed in June, that finalizes the integration of the 2 companies that started in 2001.

We had, in terms of capital markets, we had both increased improvements in liquidity, which we joined the IBX 50 and we had the issuance of debentures coming into -- entering the fixed income market in Brazil - that was also a benchmark.

We had the FSC certification, which is a tough and a very important one. And by the end of the year we had the acquisition of Ripasa, which complements our growth strategy that we have been implementing.

In the coming months, this will continue with -- the most important things will be related of course to the further integration of Ripasa, and also with the further steps of our expansion at Bahia.

So the Company has been moving fast and growing, and a very flat distribution, based on our competitive position. And we think that [was the seed of] a lot of achievements, but still a lot of work to do as we move ahead.

Once again, thank you very much and I look forward to being in touch with you as soon as possible. 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.