Suzano SA (SUZ) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time we would like to welcome everyone to the Suzano Pulp and Paper second quarter 2006 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. [OPERATOR INSTRUCTIONS].

Today’s speakers will be Mr. Bernardo Szpigel, CFO and Investor Relations Officer, Mr. Rogerio Ziviani, Head of Pulp Business Unit, Mr. Andre Dorf, Head of Paper Business Unit, and Mr. Ernesto Pousada, Mucuri Project Officer. Also with us today we have Mr. Antonio Maciel Neto, CEO of Suzano Pulp and Paper.

We also would like to inform that statements during this conference 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 forward in the forward-looking statements.

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

Good morning everybody. Before we start our presentation, Mr. Maciel would like to make some opening remarks.

Good morning everybody. It is a pleasure for me to participate in my first conference call where we are going to show and present the results of the second quarter, the 2006 second quarter. Today most of you know that I have been working for Suzano for one month now, and so today I will participate, listen and [bring any questions] to the presentations of our [inaudible] year and I will be available for questions at the end. I just would like to introduce myself and next time I would like to speak to all the conference calls for an hour.

Thank you, Maciel. So, proceeding with the presentation that you have on the website, highlights for the quarter. We would like to start by mentioning that pulp prices reached now in July $660 per ton, CIF Northern Europe. The highest price since February ’01, which is a good development. Rogerio will be able, will talk about this later on.

The second point to mention is we have completed, concluded the shareholder restructuring of Ripasa, a very important event for us, in two respects. One is that from now on it will be possible to see in full clarity what is the impact of Ripasa on our performance in the results, being constrained -- the restructure that we could not move on. And second, the very good performance at Ripasa is now happening. In the last quarters will be totally seen when we combine the results of the two companies.

We had an increase in the free float as a result of the restructuring and also the liquidity of our shares. On a pro forma our EBITDA for the second quarter ’06 with 50% of Ripasa reached $125m, a very good level. And also the increased EBITDA results in an improvement in our EBITDA net debt EBITA ratio that we’ll be looking at later on.

In terms of production, our own production was a very good quarter. We had records both in pulp and paper. The Mucuri Project is going very well, on schedule. Ernesto will talk about that later. We will be issuing new convertible debentures in early August. This is BRL240b. And since June 1, Antonio Maciel is our new CEO. Now Ernesto will talk about the status of the Mucuri Project.

Good morning to everyone. I’d like to give you a brief status of the Mucuri Project in Bahia. So, our CapEx for the second quarter 2006 was BRL410m, and the total we disbursed in the first half of 2006 is $310m. We are still estimating for the full year of 2006 a total disbursement of around $800m.

The basic infrastructure on the site is completed, and this is giving us lots of confidence that we’re well prepared to keep it up with our date, the start-up date of October 1, 2007. The future machine operators are also being trained as we speak, and this will also give us a handicap when we start up the new lines in terms of having a more aggressive learning curve. And plus, during the construction, safety is another important issue. We reached a new benchmark, with more than three million man hours without any serious accident. So this is a very important number as we make progress on the construction.

100% of the forests to produce the 1.1m tons of pulp which we will achieve during our learning curve, are already acquired. And we already committed 80% of the total budget for -- we didn’t disburse 80%, but we committed 80% of the total budget for the project.

In slide number four, I think you can see a couple of pictures. On the left-hand side you can see the dryer machine building, which is pretty much advanced, as well as on the right-hand side you can see the [recovery] boiler which is already being erected. So the construction is pretty much on schedule. We feel we’re getting ready for finishing up some of the seat of construction during the third quarter. So the construction is moving ahead pretty nicely and, as I said, at this point in time we feel very confident on reaching this October 1, 2007 start-up. I pass on now to Rogerio Ziviani, our Head of the Pulp Business.

Morning. During this second quarter we have an average price of $558 per ton achieved in comparison with $523 in the first quarter in the export market. That means a 6.7% increase or $35 per ton.

The strong sales volume in this quarter, we have to make the remarks here that during the first quarter of this year we had a [inaudible] to China with 11,000 tons that was supposed to be leaving in the last week of March, and due to forest congestion in Brazil, it left only at the beginning of April. So that, if we take into consideration the increase which shows 32% in this quarter would be, if we take the 11,000 tons off, is only part, we only have 11% increase, which also is a very good number that Ernesto is going to note in his remarks.

In terms of production, we have achieved in the second quarter a level of 150,000 tons, which means if we analyze this number of what we have achieved so far, we are in the range of 550 sustainable production for the year 2006 as a whole.

We also had started up a maintenance shutdown which was scheduled for last month in the mill in Suzano Mill, and will be accruing now in the month of July. We also have a favorable forecast for the year ahead, especially July where we already increased with some announcement of price increases as everybody knows. In Europe we will be having $660, as Bernardo said before. In Asia we are doing $610, and in North America, $695.

Some of the reasons why there were favorable -- favoring the market in the second half is the high cost mills continue to shut down. We are working today with 1.5m tons already announced, confirmed announced, and we have another 300 estimated from the economical side to be also shut down in the second half that everybody’s seeing. And that also we have a strong increase in eucalyptus pulp demand, especially in Asia. We have increased about 72%, if we compare to the same period of last year, mainly because in 2005 we had at the beginning of the year the start-up of [Minor] Mill, which we absorbed all the production into the domestic market and now is continue to try coming back to the level of the demand of 4.5% per annum increase in this demand.

We also had a higher demand in Europe. We see that in this summer, most of the coated producers are going to continue to maintain their production schedule. They are not going to stop during the month of August, which is quite normal. And also some of the uncoated producers will also continue to run flat during the summer.

And one more thing is that the Latin American producers, they all have a scheduled maintenance shutdown during this quarter, the next quarter now, the third quarter, which also may mitigate a little bit [in quarter four], which can help us support the price increases ahead.

If we look into the next slide, we have a comparison here on the long and short fibers. And also if we take into consideration the Canadian dollar, which is having the same effect as the Real, where since 19 -- since 2004, even though the prices have increased in U.S. dollars, in Canadian dollars they continued to have exactly the same number as they had before, which means that we are having higher costs in terms of production and less revenue on the other side. That’s what we have for the time, and I’ll pass now to Andre Dorf to speak about paper.

Morning everyone. Talking about paper, we had an increase in our domestic sales volume in the quarter. We had an increase of 5% compared to the first quarter of ’06, and 11% compared to same period of last year. This represented almost 62% of our total paper sales, which is also an increase in comparison to the last quarter. In terms of outlook for the second half of the year, we expect higher volumes in the domestic market due to the government purchases of books. Also because of the election and a positive environment due to the decrease of the interest rates.

It’s worth a mention that our higher volumes in the first half of the year was basically due to the export of notebooks at competitive prices, so we expect also a recovery in prices in the second half of the year. So this positive outlook in terms of volume will lead also to a positive outlook in terms of prices as well.

In terms of exports, we concentrated our exports in the Americas, 65%, and I’d like to highlight that our focus continues to be in the Americas and Europe, which currently present the positive outlook in terms of demand and prices for the second half of the year. Now I’ll pass back to Bernardo Szpigel.

Moving on now to quarter highlights, if you’d like to please go to slide eight, where we compare the second quarter ’06 with the first quarter of this year. The evolution sales volume, 12% higher sales volume. Paper sales in the domestic market, 5% increase as Andre already mentioned. Exports, 32% of increase. Net sales of BRL653m compared with previous quarter is an increase of 12%.

A negative note on the pulp cash cost, which increased by 3% from BRL434, excluding costs of standing wood of goes to BRL447. Main impact, the main reason for that was additional maintenance costs in our auxiliary boiler. We had a large maintenance job there and that increased our costs in the quarter.

EBITDA, an improvement of 12%, reaching BRL219m, which -- also in addition to our cost that we mentioned, but a good impact of the better prices and volumes in general and also the fact of non-recurring costs at the rate of BRL6.3m in the quarter.

People seem to notice that in dollar terms we reached $100m of EBITDA, which is a good result. The margin did not improve as much as we mentioned because of these non-recurring cost items and additional production costs. Only an improvement from 33.4 to 33.6%. And our net income decreased by 32% from BRL152m to BRL103m, basically because in this quarter we had a stable FX rate throughout the quarter and also from the beginning to the end of the quarter, so no impact in this quarter of an appreciation of the Reais under our balance sheet which had occurred in previous quarters.

So, the highlights for this quarter’s EBITDA is on the positive side, higher pulp and paper sales volume, and also paper and pulp prices in the export market. Negative factors, the non-recurring expenses of BRL6.3m, lower domestic paper prices, and an increase in our pulp cash cost.

We also show on slides 10 and 11, on a pro-forma basis, the impact of Ripasa. As we informed, the figures of -- we are consolidating 50% of Ripasa since May, so not the full quarter, and here we show with the first quarter we can see very clearly the impact of Ripasa both in our numbers, and also on the very good performance that Ripasa is having in the last quarters. And you see that on a pro-forma basis we have an impact on sales volume, domestic paper sales, pulp sales, net sales, all increased by between 15% and 30%. EBITDA reached BRL272m, an increase of 24%. In dollar terms that represents for the quarter $125m. Annualized, you are talking about $500m, which is a very good performance for Suzano.

If you move on to slide 11, we show measured on net debt EBITDA. Now we can see very clearly the impact of the performance of Ripasa. Excluding Ripasa’s EBITDA, our net debt EBITDA ratio of 3.5. If we include Ripasa’s performance of this quarter, it comes down to 2.8. So also again we believe that if from now on it will be possible to see more clearly what Ripasa has brought to us and why we have acquired it less [inaudible].

Now we end our presentation and we will be ready for any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Marcelo Aguiar of Merrill Lynch. Marcelo, if you have a question, please state it at this time. It appears that there is no question from Marcelo. [OPERATOR INSTRUCTIONS]. Our first question is coming from Daniela Guanabara of Pactual.

Hello, good morning to you all. I have a question for Rogerio. Rogerio, do you have any update about the start-up of the Chilean plants, and if in your view this could be some downward pressure for pulp prices in the second half of this year because of the start-up of the Chilean?

Morning, Daniela. They are on schedule. As far as we are informed they have Arauco coming in first and CMPC coming more towards the end of this third quarter -- fourth quarter, I mean. The effect in the market that we are forecasting is that Arauco will start with softwood, which will be very positive at this moment because there is a shortage of softwood in the market. And CMPC will start with eucalyptus, but they are only forecast to be in the international market only in the first quarter of next year. They will have all their stock up being used by their own operation in terms of paper, so we are not forecasting any negative effect at this moment, neither the analysts of the market. As you can see a new [NAL] pages came out last week, which pointed out a flat price for the third and the fourth quarter. So we are working in the same pattern, but I am a little bit more optimistic about the fourth quarter than I was before.

And regarding environmental license, do you know if Arauco is okay? You’ve got the license to operate the whole plant, in [inaudible]?

As far as they’re concerned, they have a license to operate but they are going to start in a very slow way. They don’t want to make the same mistake that they made before. So the information that we have is that they are prepared to run with a 10% diminishing capacity during the start-up period to see all the problems that they may face. But they have the license as far as we are concerned.

Okay, thanks. I have the second question for Andre. We’ve seen an improvement in the local market regarding paper demand, and will you expect the month to remain stronger in the second half of this year. What are you expecting for the year of 2007? What could be the major drivers for a good paper demand in 2007?

Well, demand in ’07 will depend basically on the economic activity of the country. If interest rates continue to decrease and we have no major impact, negative impact due to elections, we expect ’07 to be as strong as this year has been.

The mix of sales are still considering a mix of sales with over 60% to the domestic market?

For ’07, yes. We consider 60% in the domestic market, 60% plus, and it’s worth it to mention that we also expect this notebook exports program to be a stable one from now on. After the antitrust lawsuit that was filed in the U.S. against China, this incurred the local producers to increase their exports to the U.S., buying more paper from the local producers.

Okay, thank you.

Thank you. Our next question is coming from [Ed Morchadas] of UBS.

Hello, good morning. I have two questions. The first one, Bernardo, is related to expectations for the second half of this year. You mentioned that your EBITDA was affected by non-recurring expenses related to reorganization the second quarter. And on top of expected demand improvement and price improvement, what would be the drivers for improvement in your operating cost ability in the second half, coming from costs and higher utilization rates into your operations?

And the second question is related to the financing of the Mucuri extension. You are going ahead with convert the debenture insurance in the second half as well, as you already have, I guess, most of the finance guaranteed. But do you still consider that the Company could issue equity to finance part of that extension?

Good morning, Ed. On your first question regarding costs, we continue to see improvements in our cost performance. If you look at what has happened in our costs at Mucuri we have -- we were in a very good downward trend since second quarter of last year when we started to get all those capitalizations and the end of the learning curve in the Mucuri optimized plants.

This quarter in fact was not the normal one on this, we had to make this large maintenance in our auxiliary boiler. This is not the blend -- maintenance that we have every year. This was a non-recurring cost item. We continue to see improvement in the performance. We also had in our variable costs this quarter, we had to perform the boil out in our drying machine, which also increased our chemicals consumption. Other than that, things are moving very well, and we expect improvements further on.

On your second question regarding the funding for the Mucuri Project, the issuance of the BRL240m convertible debentures, this was something that was announced already. In fact this is going to help us. If you remember, BRL240m is a seven-year maturity. We amortize 30% in the year five, 30% year six and 40% year seven. So the average duration here is about six years, in terms of [NJLP] plus 250 basis points, which we compose of -- not specifically for the project, but our funding for everything other than the project.

For the project itself, we are practically completed in the -- we have concluded, we have [inaudible] already contracted and disbursing, and we are about to complete the contracting of the ECA portion for the [inaudible] equipment. This has been approved and has been finalized in the coming weeks for the -- with the issuance of, which the largest will be with Finland.

So in terms of specific requirements for the project itself, all of the necessary funding is in place. A new equity issue would not be necessarily related to needs for the project, but also we have no -- continue to pursue the improvement in our liquidity flow. So more equity in the market, we think, would be positive. Not a very large amount but continue to move into that direction. It’s a possibility, nothing is planned at this point in time, nothing defined at this point in time.

Okay, very clear. Thank you.

Thank you.

Thank you. Our next question is coming from Marcelo Aguiar of Merrill Lynch.

Hello everybody, good morning again. Related to both Marc and Rogerio, could you, if you can be a little bit more specific related to the pulp mill shutdown. We have been seeing a lot of numbers here and there about the total shutdowns estimated for this year. You guys have been talking about 1.5m tons. I would just like to check how much of that was already shut and how much should be shut down now in the second half or in the third quarter? I don’t know if you have the data now.

Hello Marcel again. We are internally working on this 1.5m, which is already confirmed by various sources what we have. Now we also have some other sources that are projecting something like 1.8m tons already now, including the integrated ones that are going to disappear from the market.

There are some numbers in between this 1.5m and 1.8m tons out of the market for analysis for this year, okay. Some of them already shut down and they are out of the market. Some of them are in the phase out. As I explained before, some days before, in one of our meetings, they cannot shut down from the date of the 9th. They have to prepare the whole infrastructure to shut down the mill, but also in terms of the [inaudible], the labor force and everything. So they had to pre-announce that at least three months in advance and some of them are in this phase right now. But internally, we are working with this 1.5m and my best estimate is that we feel we are going to be seeing something very close to 1.7m, 1.8m to be out of the market.

Okay, but I do believe most of that was already out, or--?

As far as we are concerned, I would have said that about 700,000 to 800,000 tons is already out of the market that was included in the market [pulp], and the rest is shutting down in the process from now to the end of the year. So we have the great result of the numbers that have been announced so far, but it’s going be concluded in the second half of this year.

Okay, great. Now a question for Andre Dorf related to the market, Andre. I heard you saying that you expect 2007 to be a bit stronger than 2006. A little bit more concerned because this year, as you know very well, we have some specific issues like elections, World Cup, and also much stronger government program in the case of books acquisition. So is that a bubble that occurred this year and next year won’t occur? So when you compare volume in 2006 with volume in 2007, we run the risk to have volumes falling. I just like to understand, the size of this bubble that is in 2006, that won’t happen in 2007.

Yes, this is a good question. I think this is a bubble. We had this notebook export in fact in the first half of this year, which is expected to occur from now on every year, or at least in ’07.

In terms of World Cup, this improved a little bit the volumes of paperboard in the first quarter, anticipating the World Cup, but nothing major. This is not the -- the net increase of the World Cup, it’s even, because we had a lot of temporary closures of the graphics, the printers, during the game days. So I would attribute any increase of margin to the World Cup [bursting].

The only effect that we have this year which will not occur next year is the government purchases of books, but on the other hand we have a more positive outlook in terms of the interest rates and economic growth, which is expected to offset this one-time event of the government. So, bottom line, we expect ’07 to be as strong as this year has been.

Okay, good explanation. And related to paper price in the international market, if I’m not wrong, the performance of your prices seems to be a little bit lower than your competitors in terms of export prices. I would like just to understand what we are up to see in the following quarters in terms of higher unquoted export price in your numbers. So we have a carry-over effect that did not happen, or some prices improvement that you didn’t place in the Latin America yet because you have a very significant volumes in Latin America. So just to try to understand the movement in your unquoted export price in the following quarters.

Yes, this is a combination of some effect. Actually our export prices rose 7.2% compared to the first quarter, and because also a lot to do with our export mix, and in terms of products and regions. And we export a lot to Latin America which has certain delays in terms of following the North American increases. So we expect, yes, a certain effect of this recent price increases in the next quarter or in the third quarter, and along the year.

Okay, thank you very much.

Thank you. Once again, the floor is open for questions. [OPERATOR INSTRUCTIONS]. There appear to be no questions at this time. I would like to turn the floor back over to management for any closing remarks.

I would like to thank everybody for their participation in our conference call. It’s a pleasure for us, and we will be of course available for any other questions that you may have. And until the next time thank you very much, bye bye.

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