Suzano SA (SUZ) 2005 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. At this time we would like to welcome everyone to the Suzano Papel e Celulose first quarter 2005 earnings results conference call.

Today we have simultaneous webcast with a 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 over to Mr. Gustavo Poppe, Investor Relations Manager for his opening remarks. Please Mr. Gustavo, you may proceed.

Good afternoon everyone. Certain statements made during this conference call may constitute forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that cause the Company's actual results to differ materially from those set forth in the forward-looking statements.

I will now pass the floor now to Mr. Szpigel who will start today's conference call. Thank you.

Good afternoon everybody. In this presentation we will be using the presentation that is available on our website, starting with the highlights on slide 3. For this quarter I would like to point out first of all the better eucalyptus pulp prices. Prices increased during the quarter and we are now in April at a price of $600 per ton in Europe - CIF Europe.

Of course these better prices in our case were a little bit affected by a stronger Real against the dollar in other -- comparing an average exchange rate in this quarter of BRL2.67 against BRL2.79 in 4Q04 and BRL2.92 in 1Q04.

As a second highlight I would like to point out the increased production levels. In fact we had a record of production in terms of both pulp and final products in March '05. This reflecting our increased capacity over the recent quarters. We have been increasing our capacities both at the Suzano mill and at the Mucuri mill. And this reflects our new production levels, reaching -- we had a total of 101,000 tons of pulp in the month of March and 72,000 tons of papers in our mills.

A third highlight. The acquisition of the control of Ripasa jointly with VCP with payment of $549m - 50% for Suzano and 50% for VCP. The closing was on March 31, 2005, as already announced.

Next point. We had a relatively weak domestic market. In the first quarter our paper sales volume in the domestic market were lower than in previous quarters. Comparing with our total paper sales, the proportion of domestic market fell to 56% against 62% for the whole of the year of 2004 and 65% for the fourth quarter of '04. Rogerio is going to be commenting on those.

And as a last highlight, we earned a very important award for us which was the Animec Award in 2004. Animec is a National Association for Capital Market Investors. And we understand that this was a recognition of all of the work and effort that we have been making and putting on, putting forward in terms of increasing the transparency and the corporate governance of our activities.

I will ask now Rogerio to talk about the markets in this first quarter '05. Rogerio please.

Good afternoon. We are on slide number 4. There is a little mistake there. Instead of markets in fourth quarter 2004, please read it as first quarter 2005.

During this first quarter, especially in the month of February that we have the figures already published, the inventories continued to be stable. On a stable level around 32 days for market pulp. I personally believe that they will remain like this with a little increase due to the difficulties sometimes in getting shipments. They may increase a little bit. But demand will continue to be a good demand during the whole quarter in the markets of China and North America.

These also were affected by, during the first quarter, of some suppliers like the Chilean Arauco Mill had a one month shut down. Helped us also to enhance this scenario and increased the pattern of prices that we did which was in December as we may recall we entered the month with $520. In January we practiced in Northern Europe $550 and also in March $580. And now in the month of April, April is fully implemented the $600 price without any restriction whatsoever from the part of our customers. They bought all the tonnage that was contracted before with also some customers asking for more volume, which was a very positive sign. And also in North America where we practiced $635 and in China $570. So all these were fully implemented during the month of April.

We also had a high value of the oil, which has helped the increases in dollar value during the first quarter and continues at the $1.30 level, which is the forecast by Roger White, MDL and NG, which are the forecasters of the pulp and paper business. They are forecasting this dollar to be the average dollar/euro ratio exchange rate for the year 2005.

So it is a positive scenario during the first quarter and also continued to be positive during the first month of the second quarter, as we speak.

In terms of paper, the demand level continues to be stable in the international market with a higher demand that we can highlight is in the United States. In North America, especially in the United States where we implemented also a price increase during the month of April. It started in the month of March and was fully implemented now in the month of April, which is about $3.00 per 100 weight, which is corresponding to about $66. And the demand continues to be quite good. Last week we had a Paper Week organized by the AFPA, which is the American Forest and Paper Association in New York and we left with a very good impression. The demand continued to be good and also a positive aspect is that the demand for high brightness in North America is finally picking up. Which is a product that we produce here in Brazil, which is the European Standard shape, which is [92 97] plus ISO brightness.

As you know, in North America, the standard is 82 84 and now finally it is [92 97] brightness is in high demand, which is good for our products in terms of paper and also is good in terms of pulp because there is a higher demand for our quality of pulp to produce this kind of paper as well in North America.

There was a decrease in domestic demand during the first quarter as Bernardo mentioned above. This decrease in the domestic market was due to the fact that most of the people said that the carnival was too early this year and we had it in the -- right at the beginning of February. But the truth of the matter is the market was weak during the first whole quarter and we've felt some increase in the month of March. We feel that in the month of April we have a better demand than was the month of March, but not in comparison of what we had last year. So the market continued to be growing in a smaller pace than we would have expecting for this time of the year.

In terms of price, prices are stable in Brazil even though we had some adjustment in price due to the demand, which was about 6% or 7% on the average prices, decreased. But on the contrary, in Europe also we had a bigger increase during the month of April in terms of all papers due to the fact that the currency also was a major effect on that. That helped us to increase in about 3 to 4% in terms of dollars the price during the month of April, which is quite positive in dollar wise for us. And also in North America, as I mentioned before. So there is a positive scenario on the international market for this month of April as well.

On slide number 5 we have here the pulp prices CIF Europe for a comparison. I don't have the color here with me. But I think the green line, the first line you see there, is the 2004 lease price of eucalyptus pressed pulp in Northern Europe. So in the blue line, which is the second line, is the eucalyptus price also in Europe during this first quarter, during these 4 months of 2005. As you can see, the increase, as I mentioned before. And in the red line we can see the Northern bleached soft wood which is decreasing prices now. And in the month of April still very much under attack because of some lightweight coated also are not performing so well. So this group is very much now suffering from some price pressure and maybe in the range of $605 or $600 very close to the price of eucalyptus.

Maybe later on I can answer any further questions that you may address. Thank you. I'll pass it back to Bernardo Szpigel who is going to continue the presentation on slide number 6.

So talking a little bit about our figures and I will skip number 6 for sure.

Sorry about that.

Move straight to 7 and 8 where we have an analysis of the figures on table 6 showing the main components of the variations that we experienced in EBIT and net income in 1Q05. Sorry for the mistake on the table here. The 1T05 stands for, T stands for Q in Portuguese, in the quarter.

So comparing 1Q05 with 1Q04 in terms of EBIT on this first chart, the left hand side portion of it, we see that we had a change of BRL49m from 1 quarter to the other. A decrease of 24% in EBIT. And you can see there that the main components there are volumes both in the domestic and in the export markets which were lower in this quarter as compared with the same quarter of the previous year. These are the main elements. We already mentioned that a weaker domestic market. That is the main reason for that.

We also had here -- I'll talk just a little bit when I go to the next chart. But we also did not export as much as maybe we could have in this first quarter '05 when we compare with first quarter '04. One of the reasons was that we were expecting a much better market in the domestic market and to redirect our sales to the export market. This is something that takes a number of weeks to do and we only could do that towards the end of the quarter by March. So that these are the reasons for these 2 lower performances in volumes in both domestic and export markets in 1Q05.

Moving now to the right hand side of the table and looking at what impacted our net income. First of all EBIT that we have just discussed less BRL49m. That was basically the main component, the negative component.

Then we had net financial expenses and here mainly the reasons are we had less interest income in this quarter because of less cash to earn some income.

The other component was smaller and all of them positive. I would like to point out the small participation of the exchange variation and income tax and social contribution, +7% and +4%. This is due to the fact that in both quarters, 1Q05 and 1Q04, exchange rates have -- the opening and closing exchange rates which affect very much our exchange rate variation impact, that these variations were very small in both quarters. So very little impact on the exposure in dollars of our balance sheet.

So in terms of the impact on net income in the first quarter of '05 compared with first quarter '04, it was a larger impact of EBIT relative to the other components.

When we move now to first quarter '05 against fourth quarter '04, we have a slightly different picture as you can see. First, in terms of the -- of our EBIT component, we have a very large element here of negative impact of domestic sales volumes, representing BRL91m of the reduction of EBIT between one quarter and the other. And the reason here is the one that we have just talked about. First of all, it's always important that there is a seasonal component in this. That the fourth quarter is normally a strong quarter in the domestic quarter whereas the first quarter of the year is a weak, normally a weak quarter. But in addition to that, we had an exceptionally weaker, or exceptionally weak domestic market. Very likely this is reflecting a deceleration of the growth in the Brazilian economy. So some inventory adjustment took place. We sold very well in the fourth quarter '04, but then some of these volumes that were down in the pipeline because of the demand of our consumers -- at the consumers' level were affected by a weaker market. This inventory has got to be reduced, so our sales were also reduced in this quarter.

The other element we just mentioned. We had a positive contribution of export volumes, but not enough because this is something that although we can do it with some flexibility, we cannot do it instantaneously. So exports in fact started to move better in March.

Our cost of sales of course reflect the fact that we sold less volumes. This is an important component. And a positive one when we compare quarter to quarter is that SG&A had an improvement of BRL43m. We have especially our administrative, general administrative expenses at levels which are much better and are sustainable. Something like BRL50m per quarter.

So the impact on EBIT was around BRL12m negative in this quarter for all of these different effects that we just mentioned.

In the case of net income, here when we compare the 2 quarters, the main aspect that shows up here is the effect of exchange rate variation and this is because in the fourth quarter '04 we had a -- we opened the quarter with an exchange rate of 2.86 and we ended the quarter at 2.65. A strong variation which for us is a positive contribution to our net income. Rather, in this quarter, we had practically no change in the opening and closing exchange rate.

Well the last slide that I would like to comment on is consolidated debt. This debt is slightly different than the one that we have been looking at because it consolidates also the debt of the Ripasa. The net debt of Ripasa. The gross debt and the cash and equivalent.

The changes are not very significant in the case of -- and this is not all of the debt, but our share of it, which is 23.03% of the net debt of Ripasa.

To have an idea of how much is this in terms of gross debt, that means some $59m additional debt for Ripasa and this shows in the line here "Others" and $9m in cash. So when you look at this, this is not very large. But the figures already reflect these consolidated figures.

But really what you can see by looking at this table here on the top left hand side is the fact that we financed -- well the increase in net debt is mostly due to the acquisition of Ripasa. And you can see also the way we financed it, which was mostly by raising long-term trade finance debt, which was made in this first quarter '05.

In terms of debt structure, we renew this 71% long-term and 29% short-term and not very significant changes in the currencies in which we hold our debt and our cash.

I guess a final remark here is that the acquisition of Ripasa to our understanding could be made with a payment of close to $280m. It could be made with the very comfortable way by both using some of our cash and raising some of our trade finance which we have still a very large capacity to use if we had the need. But of course we don't have it any more. And the financial position of the Company remains very strong.

There was an impact in the net debt to EBITDA ratio. If you go back to slide 6 and in considering all of the impact of Ripasa's debt, but not of Ripasa's EBITDA, and our portion of that debt, our net debt to EBITDA ratio moved to 2.5. If we were to include Ripasa's EBITDA we would be at the level of 2.1 considering the last 12 months of Ripasa's EBITDA.

So I guess the acquisition went very well. Also from a financial point of view.

So I would like then to stop for now and make us available for all questions that you may have. Thank you very much.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Ivan [Sidel] with CSFB. Please proceed with your question.

Hi Bernardo, Gustavo, Rogerio. Good afternoon. My question is that if you could tell us your views on the pace that the paper demand in the domestic market might recover along the year and how would you see the pricing scenario for paper in the short to medium-term in this case?

Hi Ivan. It's Rogerio speaking. Yes we see a positive trend of growth from now to the end of the year. And as Bernardo mentioned, usually the cyclical market, domestic market for paper is better during the second quarter of the year, especially during the last -- the second half of the year, especially in the fourth quarter. Why is it? Because of the back-to-school season and where we have a lot of demand for the paper for the back-to-school.

So we are working on this scenario. We saw some positive signs also in our distribution during the month of March. And during the first 15 days of April was better than the previous month, which is encouraging us on the zero until the end of the year.

So it is fair to say that it's very likely that this first quarter should be the weakest in the year?

Usually the first quarter is the weaker and as I mentioned before, it was not a true [due]. But of course that the impact of the carnival being in the first week of February. And also due to the fact that all the important taxes that accrue on back-to-school and school books and everything during the month of January together with the vacation period. We saw some decreased demand due to the fact also that the dollar was down and also people have traveled more abroad which made the consumption to decrease a little bit.

That also happened in Argentina. We saw the same trend happening there. So the first 2 months of this year, the demand was weaker than previous years. Usually is the weaker quarter of the year.

And do you believe that paper consumers might destock even further, or do you believe that the stock level, the inventory level at the consumers are now at a good level?

From what we saw in the last quarter, we believe that they are now in a position to start to bounce back and start to purchase again to replace some of the inventories that are down. So we can see that in a much -- let's say not much, but in a growth pattern. But we can see an improvement during the first 15 months -- 15 days of this month.

So we believe that the trend is positive from now on.

Alright. Just the last question. How would you, because you're saying in the press release, that you will consolidate Ripasa in the income statement as well. Would you just get half of each of the Ripasa's product? Half of the sales will be booked in your result beginning in April. Is that correct?

No. Well just to -- this is Bernardo. The way we are let's say accounting for the acquisition of Ripasa, we acquired -- we and VCP acquired 46.06% of the shares of Ripasa. So in March, in this quarter, we are just in a proportional basis, each one of us is taking 23.803% of the balance sheet position of March 31. And from now on we will consolidate proportionally, including the income from Ripasa in our case of 23.03% of the future income of Ripasa and VCP to the same proportion.

Right, okay. So I just was not clear enough I think. But from your stake with VCP you're saying that basically you're not going to divide the products differently? For example, you have your stake so you're going to get your stake of each different product and booked as your sales and get the proceeds from those sales right?

No, no. Ripasa continues operations. This is very important to understand. A very good question Ivan. Ripasa continues as it has been so far as a company with fully -- with its own sales and pursuing its own objectives in the market. Nothing of the product is being sold by any of the new shareholders. We would likely do that only after we can move to the next and final stage of the whole process which would be to have Ripasa working as an incorporated joint venture. Something like that.

Only then we will have a situation in which each shareholder will take its proportion of the output let's put it this way and then sell it in the market according to its normal commercial strategy and to its commercial sales channels. Distribution channels.

Before that, Ripasa continues to sell independently.

Alright. Is there a timeframe for you to conclude this operation?

The main element here to be able to move into that position would be to be ready to operate as an incorporated joint venture. Of course one of the, and this is something that we have to work with the tax authorities which we are already doing. We have to put Ripasa, all of the control systems and structure in a position to do that, which may take a number of months. We are trying to speed up that process. But we haven't -- we don't have a final timetable.

And of course before that we would like to delist. We will have to delist Ripasa which, as we already announced. So the whole time, we don't have a final let's say date for that yet. We are working on all of the different fronts. We would like that to happen as soon as possible. But at this point in time we cannot precisely define a date for that.

Alright. That was very helpful. Thank you very much.

For sure.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Edmo Chagas with UBS. Please go ahead.

Hi. My question is related to your cash flow from the second quarter onwards. Given that you have already disbursed some money for the acquisition of Ripasa, whether you still have the delisting of the company plus some expansion there. Could you more or less give an idea of how your projects today are lined up and what kind of CapEx you're forecasting for the second half of the year and into 2006 on top of this Ripasa acquisition?

Hi Edmo. Well the main CapEx elements here are of course for the what we call the expansion of our capacity at Mucuri. This is a total for the whole project right now is $1.283m to be spent up to 2007. A little bit up to 2008.

Most of this CapEx will be spent in 2006 and 2007. For this year of 2005 is a much smaller proportion because the timetable for us right now is to start construction by the end of the third quarter of '05. So that we will be spending not very much.

Right now at this very, very moment the only major CapEx -- the major disbursement for investment was in fact what you mentioned. You mentioned Ripasa. Other than that it was a quarter of very low CapEx because we have practically finished our -- well we have finished our optimization and the phase of P1 and Q1 that was going on in Suzano and we are gearing up now for the major expansion project.

The figure for this year I imagine, I recall. Gustavo do you remember it? $225m and most of it, there is a portion of it for the forestry base. And then starting construction at the fourth quarter of '05 and down payments for equipment that will occur in the fourth quarter of '05.

Okay. Alright. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Verena Wattman with Hero Price. Please proceed with your question.

Hi. Good afternoon. My question was regarding the pulp market. What were your expectations regarding pulp prices? There has been some comments that Arauco Valdivia plant is closing again. Do you think that could lead to higher prices, or do you think they're at the peak right now?

It's hard to say. I think if we look for the demand that we are seeing now, especially on the eucalyptus [front] and also to the inventory drive us to a conclusion that the price should continue to be on that level.

The only constraint that I have is that the paper prices in Europe, especially in Europe, have not yet increased on the same level as the pulp prices have increased in the first quarter of this. The first 4 months of this year. Which is leaving a very small margin to some of the paper producers.

So I believe that the next step now is to have this paper price increase during the months of May and June and that is the summertime which can be a little bit more difficult to implement price increases, especially in Europe and North America.

On the other hand, China continues to be strong. Deliveries are, and shipments continue to be high and production also continues to be high. So there is if I would have it yesterday, there are room for another price increase maybe in some cases. In other areas we have to wait a little bit. But inventories continue to be down in the hands of the producers. There are some buyers saying that they have some inventories on their hands. But we have not seen it yet to the publication of the real numbers.

So right now, to jump to any conclusion and further conclusion to the end of the year, is very difficult as usual. But the forecast from Roger White that recently arrived in our hands last week is a much positive scenario than he forecast for the November forecast. He has corrected his number on an average of $50 of his previous forecast for 2005 from the forecast that he published last week.

So the scenario in this respect is positive as well. We don't have any big volumes coming on stream, except from [Duracell], which is a very integrated pulp mill that is starting up next month or so. But is a learning curve and we will drive on into 300,000 tons next month of this year, which is 150,000 tons to be absorbed by the start up group and the other 150,000 will be sold into the market by Aracruz.

The [Highman] project also had a very good start up. They still have found some very difficult times. So we don't see too much supply coming on in order to fulfill the demand that we saw in the first quarter. We continue as it is today.

So those are the factors that put some analysis of the market to increase their forecast, revise their forecast for a $50 better scenario this year than they were forecasting at the end of last year.

Great. Thank you.

[OPERATOR INSTRUCTIONS]. There appear to be no further questions. I'll turn the floor back over to you for any further or final remarks.

Well thank you very much from all the team here. We of course we are available for any questions that you may have and contact us directly. And once again thank you very much. Bye bye.

Thank you.

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