Suzano SA (SUZ) 2014 Q1 法說會逐字稿

Good morning ladies and gentlemen and thank you for waiting, welcome to Suzano Papel conference call to discuss the first quarter of 2014 results.

All participants will be in listen only mode during the presentation to be made by Mr. Walter Schalka CEO of the company. (Operator Instructions). We would like to inform that certain statements in this presentation may be constitutions of projections and forward looking statements, such statements are subject to known and unknown risks and uncertainties that could caused the expectations expressed not to materialize or the actual results to differ materially from those expected results.

These risks include changes in the future demands for the company's product, changes in factors that effect domestic and international product prices, changes in profit structures, changes in the seasonality of market, pricing actions by competitors, foreign currency fluctuations, changes in the political and economical environment in Brazil and emerging markets, and internationally.

Now I would like to turn this over to Mr. Walter who will start the presentation.

Good morning everyone it is a pleasure to be with you for the presentation of the first quarter 2014 of Suzano Papel e Celulose. I would like to say that we have all the executive officers with me and at the end of the presentation we will be available for any questions that you might have. I believe this quarter is another quarter of the company's evolution. We had a significant evolution in almost all main perimeters of the company. And I would like to highlight a few of them on slide number two.

First, we had started in a expedited way of the leveraging process of the company. In December of last year, we had a rate of 5.2 times of net debt, adjusted EBITDA ratio and that has already dropped in this quarter for 2.8 times. That is thanks to an increase of EBITDA. We had an EBITDA of BRL489 million adjusted in the first quarter of this year. And that is a response to an increase of approximately 50% vis-a-vis the first quarter of 2013. And we had an adjusted EBITSA per ton of BRL649 per ton.

Regarding what we had in the first quarter of last year, we had BRL460 per ton. EBITDA [mark] adjusted EBITDA was \35%. I would like to highlight an increase of 7.1% at this point, vis-a-vis the first quarter of 2013.

And also as we have said before the ramp up of Maranhao, the learning curve that we have in Maranhao was according to expected and we have grown in volumes on a monthly basis within the expectations we had.

We still have logistics adjustments to be made in Maranhao that is being worked on and it is evolving therefore the sales volume for Maranhao will be increasing a long time.

Bulk Paper, we had a production increase of 150,000 tons that is thanks to production volume in Maranhao and we have a sales volume that was 5.4% higher than the first quarter of 2013. Obviously, as we are ready said before, we will have to build a pulp inventory in our factories. Maranhao, [Porto], and [Echique] and also in the terminals.

And that inventory building has happened, so now we are in a regular production phase. A solid sales phase.

About Paper, we had an increase in sales that was very significant of 7.2% vis-a-vis the first quarter of 2013, that sales increase happened in both the domestic market as well as abroad and that has brought us a net revenue with an increase of 19% vis-a-vis the first quarter of 2013. And I would like to highlight, as well, that we had an increase of the average price of 5.5% vis-a-vis for [Q42013].

It is important to mention that the sales volume that is higher is thanks to a reduction in the [tech] ink port] for the market. And a slight increase we are seeing in the presented market this year.

About Net Revenue, now turning to slide five, we had an increase of 19% in net revenue vis-a-vis the first quarter of 2013. Amounting BRL2.4 billion. And we also had a cash cost with an increase of 3.8% that is below inflation. This is a great achievement from all the operating teams of the company, That is being able even with an increase in price of wood that increased in BRL34 per ton.

We were able to have a lower increase than inflation due to operational gains, we are conducting in several plants. And that are starting from March on with Maranhao taking part of the cost. The costs already reflecting Maranhao's operation in the month of March. January and February were not accounted for for Maranhao. So I believe it is very positive if we do not have that increase in the wood price we would have a negative figure here for cash cost.

About cost, it also has increased 3.8%, vis-a-vis the first quarter of 2013. And it covers a response as we have said in terms of cash costs the evolution on the operation management of industrial assets from our various plants.

I would like to highlight that the company is still working to bring down SG&A, administrative expenses and sales expenses are dropping quarter-on-quarter on the year-to-date or the last 12 months for the first quarter of last year to this first quarter, 12.3%, that figure is already in 10.8%, so quarter-on-quarter these figures are dropping and with an increase of volume Maranhao, we expect that this downward trend will keep on happening for the next quarter. And I would like to highlight the increase in the EBITDA per ton, you can see in the top right part of the chart on slide number six, in the last 12 months. On March 2013 the EBITDA per ton was BRL424 and the figure is already reaching BRL598 this year, with an increase of 41% of margin per ton. And we have already reached in this quarter, specifically, a margin of BRL649 per ton.

So this is the work that the team is doing to implement that margin per ton and the work is paying off and it is showing on our results.

About investments. As all of you know because we already had disclosed part of investments in Maranhao, Maranhao Capex has been postponed. The payment of that has been postponed, 4/20/14 and part of that was going to happen in the first quarter. It has been done, we had the first quarter with BRL686 million of Capex within our expectations, for expansion and retrofitting. Over 80% corresponds to Maranhao and the figure now is going to come down. We will still keep those Capex items 4/20/14. And that is going to be BRL1.75 billion.

I know conclude Earnings Growth [Presentation]. I would like to say that we understand that there is a gradual evolution in the company's results and we will look for growing results for the next quarter.

So now I will open for a Q&A session. And you can ask questions to any of the executive officers.

Excuse me ladies and gentlemen now we are going [start] the Q&A session.

(Operator's Instructions)

Our first question comes from Mr. Renato Antunes from Brasil Plural.

Good morning everyone thank you for this opportunity. First cost, we clearly see an important development and I would like to understand what do you expect to be the consequences from now on? We understand that we have energy and prices involved, the energy prices a little bit lower but now you have Maranhao in the equation. What do you expect to see in terms of cost from now on actually having Maranhao come in and what is your cost performance that is expected?

The second question is about the leveraging we are seeing that ratio in EBITDA dropping, but not that [increasing a little bit], can we expect to see the net debt dropping from now on and what are the [consequences] of that that you do have that would be interesting to know as well? Thanks.

Renato, thank you very much for your question. This is Walter, about the cost. I would like to say that the company will keep on working on the cost reduction program, that we are working on. Obviously, we did have the impact and we will an impact, as we already said wood and [Mucuri] specifically. On the other hand while Maranhao grows in terms of volume that total volume will also be more significant in the total accounting considering Maranhao has a better cash cost than the average of the company's. So that is going to bring cost down.

So, considering Maranhao has had a cost performance with specific chemicals within our expectations as well, that amount will be positively impacted.

You made another comment about energy. And in terms of energy it is important to mention that when Maranhao grows in terms of volume we start exporting a higher volume of energy as well. And we are probably reaching in the second quarter of this year the volume hedging of electric power than what we have acquired in Suzano and what we are selling in Maranhao, which is important to tell you that we do not have the ability to analyze the differences of the price of market and that exists and that will exist a long time. But in terms of volume hedging that should be reached now in the second quarter of this year.

About leveraging, your second question. That should keep on evolving process, we should be deleveraging a long time. Net debt has increased marginally in the first quarter to amount paid in Maranhao's. Also due to Capex, that volume is going to drop from the second quarter on and from now on we expect to have a cash generation that is positive.

Obviously, that is going to depend upon exchange rate issues, which in fact the general net debt of the company because we have an important debt in dollars.

Marcelo Bacci here, about the covenant. In the quarter we did not have any covenants. [We checked]. The second theory of the third [dimension] issuing that is currently [being waived] about covenants will be checked again now in the second quarter. The benchmark is four times net debt EBITDA ratio and to characterize the break to the covenant that should happen in two quarters in a row. We don't see that happening now. Also, the covenant of the new debt for the [ATA] is fine now. It is [725] and should reach five times the end of the year. We don't see problems there. Thank you very much.

Excuse me, our next question comes from Mr. Lucas Ferreira, JP Morgan.

Good morning everyone. My first question is about the ramp up of Maranhao. Can you tell us what level of capacity you expect to reach at the end of the second quarter? How much do you expect in terms of production of the second quarter?

And about Capex, that is my second question. You confirmed BRL1.750 billion. But I would like to know what is your sustaining Capex and can you give us a range for 2015, what can we expect? Thank you.

Good morning, Lucas, this is Ernesto Pousada, and I will talk about Maranhao. Where as Walter has said we are doing very well in terms of our production volume in Maranhao. And our expectations for the year is to produce 1 million and 1.1 million tons in Maranhao. And our expectations is to reach 100% of nominal capacity in the third quarter. So we expect that between July and August and even September to be producing at our nominal capacity at the Maranhao plant.

About Capex and the (inaudible) the figures that we have disclosed of BRL1.750 billion includes and there have been no changes, a sustaining Capex of BRL1 billion and the remaining is for expansion and retrofitting of our operations. Including the remaining amount of Maranhao that gradually, as soon as we make our target, we are going to release residual values that are remaining.

Thank you.

Our next question comes from Mr. Marcos Assumpcao of Itau Corretora.

Good morning everyone, congratulations on your results. My first question is for Carlos Anibal. Can you tell us a little bit more about global market, we have seen global shipments of pulp dropping 2%. That is hardwood and softwood. Can we say that we are seeing a de-stocking movement, what explains that drop and how long that could take? When can we see buyers coming back to the market?

Marcos, thank you very much. Well, in terms of the supply for markets, we have two capacities that should start working in the beginning of the year. They have not and we are not sure when they are going to come in. It will be in the first or second half of the year. We have a longer period or downtime and that is happening. Especially, in North America they have a strong winter and strong adversities in logistics. Also, between March and April there were several delays of ships, especially from March to April and that has decreased shipments in the first quarter. We understand that we will still have in the second quarter some impact, the temporary closures of capacity in Asia, we see inventory at low levels in the consumers hands. We have just received information about a drop in inventories in the main China port in April.

So in terms of supply we still see a market that is very tight. Now about the demand we have improvement of macro economic conditions in the northern hemisphere, especially Europe. That should help. We understand that the new capacities that are going into China are taking and consuming. We understand that we should have, in terms of new capacity, 3 million tons, the shipments for China have increased in the fourth quarter and we [believe] this is not going to keep on increasing.

Another relevancy of data, that import of hardwood in China has increased 17% in the first quarter vis-a-vis the same period of last year. Proving that the demand by hardwood is too strong in China. We also see a higher demand in the second quarter, that was very strong. And continuing writing paper in the northern hemisphere in Europe. We see a order portfolio that is very good for uncoated paper. So the demand is good when you say we had a drop in 2.5% in the first quarter that drop is on the report of the 20 largest producers but if we analyze the 100 largest producers, that drops, then becomes 0.8%, which is really little if we consider the market as a whole.

So we do have a very favorable view in terms of that balance between supply and demand for pulp in this year.

Second question now for Walter, can you tell us the main factors that should have impacted your EBITDA per ton in April? And how do they compare to the first quarter BRL600 per ton.

Marcos, we do not provide guidance about the second quarter. With what I can tell you is analysis of what is happening in the company.

The results of [hundreds] that we have right now are [liquid] wood with an additional at the distance which which we are moving it and that should be there. And second we have the energy of the Maranhao Unit which was already contracted at the market. Now we are 100% from April on and the free market firing electric power at high costs. And on the other side we are selling electric in Maranhao that has growing on a monthly basis.

So these are the main issues we have. The main positive driver that we have are the evolution in general of all company's activities that is going to [help] that structural competitive gain. We are dropping prices in harvesting, logistics, distribution, opening efficiency gain of compliance, also the reduction of specific consumption and the evolution that we have had and the distribution program of paper, that has a better [body] in the geographic mix of pulp, that also has had a positive development.

So the whole set of actions that the company is taking is bringing results. We will keep on borrowing that program for a long time, something that is already embedded in the company, specific programs on one side and structural competitiveness and operating efficiency gain on the other side. And all of these will be continued program in the company,

Walter, just a final follow up about Capex. For the second quarter can we expect a drop, vis-a-vis the first quarter due to investments that include Maranhao project?

Yes, a significant drop you see there. As we have said during the presentation, over 80% of the expansion and retrofitting at Maranhao that we had just shown in the last part of the presentation are dedicated to Maranhao projects. There are four remaining amounts to be seen in Maranhao are lower so naturally we will have in the second quarter a significant Capex drop for expansion and retrofitting and therefore in the total Capex as well.

OK, thank you very much.

Excuse me our next question comes from Viccenzo Patemostro of Credit Suisse.

Good morning everyone. My first question actually is about, I read in a release that Maranhao maintenance is going to happen in the third quarter of 2014. And I had understood that this year you would not have maintenance because that is a new plant. I would like you to make that point clear and if it is true. If that maintenance is going to happen is it, I want to know if it is already included in the sustaining Capex of that BRL1.750 billion? So that is my first question.

My second question is I would like to understand if in the cash costs that you showed, that chemicals have represented a reduction of BRL22 per ton of cash cost. If already had to do with the fact that you were selling energy to your chemical suppliers in Maranhao or if that was just a lower price due to the international market.

Viccenzo, good morning this is Ernesto Pousada. About your first question regarding Maranhao down time. Yes, we are going to have down time in September for a maintenance down time. That is a mandatory stoppage because the boiler will then be running for one year and considering the Brazilian legislation we have to stop and inspect the boiler.

The Capex is minimum but it is already included in those BRL1.750 billion, but most of the [parts] do have mechanical warranty. So it is very low cap there. But we will stop in September.

About your second question, the reduction of chemicals as an input. There is part of that that is energy but not as relevant, what we are looking for is a very good operating performance. Therefore, specific consumption in the plants can be improved vis-a-vis what we had last year. So, that is the main factor that impacts the chemicals. A small part of it is energy.

The question about the downtime. That volume for the year 1 million and 1.1 million you already considered that stoppage.

Yes. It is considered in there. In that figure already.

OK, thank you very much.

Excuse me our next question is from Mr. Alex Sciacio from Santander.

Good morning everyone, congratulations on the results. The first question once again a bout cost. Can you give us more visibility on that. That would be interesting. First about the impact that Maranhao had in the first quarter. [Reduce] that in your presentation costs for January and February were capitalized and I would like to understand in terms of revenue of there was any impact. If that increase in volume for pulp in the first quarter was due to Maranhao and do we have a positive impacted margin coming from Maranhao the first quarter?

And I would like to understand what is the dynamic of paper costs. I know we don't disclose figures, but we saw the pulp paper going up in the quarter compared to the consolidated costs of the company [wasn't] stable. So is it possible to think that the paper division is having a cost performance favorable? I would like to understand how is that dynamic?

Good morning Alex, this is Walter. Thank you for your question. Let me talk a little bit about the Maranhao impact on the total results of the quarter is low. We had a growing volume of production, but the important part of those volumes remain in the inventory in the first quarter. Because we had to build inventory in the port and our own plant, and also in the terminals. So we had little volume, in fact, both in January and February. And marginally in March as well. The impact is not relevant, the impact started higher now after April.

About your second question. On paper yes, [pulp] is bringing an efficiency Pulp has increased 3.8% of cash costs and costs also increased 3.8% vis-a-vis the first quarter of 2013. Paper Unit has a very positive efficiency.

OK, my second question for Carlos Anibal. Carlos, can you tell us how the domestic market of paper is now, in the second quarter we saw that the first quarter was very strong in terms of volume. Can you let us know what is your expectation for the second quarter, was there an impact or the demand because of the World Cup?

And also about pulp, you had a very high share of sales in the domestic market, that is the total volume of pulp that was 23% higher than what usually sells in the domestic market? Was that something specific and why then the domestic market was higher at this period?

OK, Alex this is Carlos, thank you for your question. Let start with paper, yes we did have a good strong end of performance in the first quarter. It is difficult to say that we had any anticipation, the market has grown 1%, basically the first quarter of last year. But the first quarter of last year had already increased 3.5% so actually it was a significant growth, especially in printing and writing paper.

Our April volume was very close to margin, close to April of last year, we still don't have the market data and we expect to have a second quarter that is going to follow the seasonality of the domestic market. An increase of volume vis-a-vis the first one. We still have that expectation that for 2014 the market will grow as close to the GDP growth with a few factors that might help us. The main one, a stronger government program and we also have in the election year, as we said before, more paper consumption. Uncoated and coated.

For pulp that increase in domestic market was not as specific in terms of the profile of our volume and the demand for the first quarter is nothing different from what we have been doing before.

Thank you very much.

Excuse me our next question is from Mr. Carlos De Alba from Morgan Stanley.

Good morning, thank you very much. The first question is could you comment how much was the amount of expenses or costs that Maranhao were capitalized for January and February?

And second, going forward and I understand without viewing the specific guidance how should we think about the increase in wood costs because of the distance from the higher radius. And also the impact that you show in the bridge on the fixed costs coming from Maranhao of BRL11, going forward these BRL34 on wood and BRL11 fixed cost on Maranhao, should they continue to be there or [these] now factoring most of the increase that you were expecting to see because of these two issues into your cash cost [football]? Thank you.

Carlos good morning, thank you for your question. We will address both of them first. The amount that had been capitalized for the project in January and February we don't have those figures right now but we don't see any problems in the [close] in that. So our area is going to publish that exact figure because I would not like to give you a number that is not correct.

The second question about cash costs. The next order is recurring the situation of having wood cash costs or wood costs above the cost that we had. They are growing and that is impacting liquidity. On the other hand, Maranhao that has lower cash costs, structural cash costs, of the company and when Maranhao volume starts growing considering the specific consumption for Maranhao is doing very well, that we are reduced the cash cost.

We are not fighting that end of the market on how the average cash cost will be vis-a-vis positive and negative. In fact, that these two matter, yes. But it is also important to say that we have a dilution on fixed cost in Maranhao.

Whatever we have growing volumes, then Maranhao fixed costs are going to decrease and that is going to have a positive impact on the cash costs of Maranhao, therefore, on the global cash cost of the company.

Thank you.

Excuse me, our next question is from Mr. Juan Tavares from Citi.

Hello, thank you good morning everyone. My first question on the paper business, if you could give us a sense into the pricing into the next few quarters. I know this price would increase a quarter by quarter, for the first quarter I am curious if there is any more implementation or execution for the next few quarters?

And could you give us a sense there in the paper market as well in terms of your own volume growth. I know you mentioned you expected the market to grow in line with GDP with some benefits from the electron year and what not, but I am curious if we should also see some market share gains as you also mentioned less import pressure into Brazil. So if you could (inaudible) the paper market and bulk pricing and the volume dynamics? And on pulp I am curious if you are already seeing pressure in the second quarter on your net prices? I know there hasn't been any announcement on the list price cut but we have seen index trend downwards. So I am curious if you are already seeing impact in your net prices for this quarter or if you are seeing a different dynamic for your sales mix for pulp?

Good morning, this is Carlos. About the domestic market for paper, we have implemented the increases that we announced in the first quarter, both for uncoated paper as well as for coated paper. We don't have any increase, at least for now, along the second quarter. Eventually, we might have some residual increase from those announced increases from the first quarter that will impact positively the price in the second quarter. Those residual increments will depend upon the mix of products and channels that we have in the second quarter. We do have an expectation of market share gain, especially and fundamentally on coated paper. The import of coated paper has dropped this year, 12% vis-a-vis the prior year. Here in the first quarter the year to date was minus 13% and data of [going] forth imports of accumulated for a year to date drop of 20% on coated paper imports.

We can explain part of that drop to measures taken by state government and federal government as well, to combat the tax exempt paper and one of the measure that has had most impact was the implementation of a different package for the tax exempt papers. So when that deviation is forbidden and imports first dropped, naturally we have grown to improve our market share for coated paper. So in summary for now we don't have any price announcements to be done for the second quarter. So to it depends on supply demand on international prices as well as the effectiveness of actions that the government has taken to avoid that deviation of tax exempt paper.

About pulp, we haven't seen any changes in that price along April. Once again the first quarter had a stability in crisis. A little bit of a higher pricing in China again in the first quarter and a little bit of pressure also in China in April. But we understand that the market fundamentals are not supporting us. And the stability of prices in the for the next month.

OK, thank you very much.

Excuse me, our next question is from Thiago Lofiego, Merrill Lynch.

Good morning everyone, I have two questions. First about energy costs. I don't know if we have talked about that in the call but I got disconnected. What would be the additional [order] and to you expect more pressure on the energy cost in the next quarter?

I know you are working on prices not volumes and how is that equation going for the second quarter?

And my second question is about the paper, Carlos Anibal already talked about it, but what is the visibility that you have for demand for the third quarter? Do you see an impact coming? The market is stronger or weaker than you expected this quarter?

Good morning Thiago, this is Walter. About the energy costs. We did have an impact of BRL15 million, the energy costs in the first quarter. We understand that the figures should be similar in the second quarter. Obviously, we have that disclaimer. It is going to depend on the price difference between the sub-market that has been changing on a weekly basis. So this is the figure we think that we are going to have in terms of energy difference. And in spite of the volume metrics hedging that we have. Acquiring energy and not only selling energy in Maranhao.

Good morning Thiago, this is Carlos. About your question on the domestic market paper. Right now we have low visibility along our working chain. We have had volumes in April that were very close to the ones in March and April of last year. We also have an expectation that is very reasonable for May and low visibility of what could happen in June. When we talk to our direct customers and the consumption industry especially, the scenario we hear is a very little predictability. We believe no differently from prior years that the second quarter in terms of demand is going to be stronger than the first.

Carlos does lower visibility have something in common regular or do you see it especially this year? And why do you say you have that lower visibility?

I believe that the major reason you are seeing and our changes how much World Cup is going to impact in the month of June. We see that things are not clear, especially, for the industry of what is going to happen in that month.

So it is a very specific impact just because we have that event happening in June. But increase the volume, sales promotion, I think we are already capturing an expectation of higher paper volume, both coated and uncoated, due to higher level of activity, especially, for service. I believe part of that we are ready for seeing and capturing. But the trend is going lower. I think it is going to be very strong in June for uncoated paper, A4 paper. And very strong in services.

Thank you very much.

Excuse me our next question is from Mr. Marcos Assumpcao, of Itau Corretora.

Carlos another question about the paper market. We have seen the small increase at an import level in the first quarter, vis-a-vis the first quarter of the prior year. Can you explain what is the main reason for that, was it the exchange rate, is that an ongoing trend.

For us Marcos, this is related to the implementation of the labeling process of the [Texicamp] paper. Remember the labeling was approved by October 1. That is the period that was just prior to the new legislation and there was a strong inventory building along the train.

So everyone builds inventory because they didn't know it was going to happen in the last quarter, therefore, imports were down a lot and we had imports representing not more than 12% of the domestic demand. We understand that there has been along the first quarter a reorganization movement of inventory [of our change]. It was a very good news that import has dropped 12% vis-a-vis the first quarter of last year. The year to date up to April, we already have a drop of 20% in April of this year, vis-a-vis April of last year. Specifically for coated paper, we are talking about a drop of 40%.

So we are very optimistic about the effectiveness and the efficacy of actions taken by the government, especially the fact that now it is mandatory to have a substantial package for the tax exempt paper.

Now about liability management. We have seen other Brazilian companies doing [issues] abroad, taking advantage of low interest rates abroad. Is it part of your strategy and the objective of the company to do something stronger with liability management in the short term?

Marcos this is Marcelo. Right now we do not see an opportunity for this. Because when you work on the bond market for instance, to rebuy your bonds issuing a new one you have to do it at market value with some premiums. And we understand that today, this operation would not make sense unless we had a specific need for a roll over. Considering we are very healthy right now we do not foresee that possibility. But we are constantly monitoring the market.

Thank you very much.

Excuse me, we know conclude the Q&A session. I would like to turn the floor to the company for their final remarks.

We would like to thank you all for your participation in this call and say that the company is very determined to continue with the program to reduce leveraging. We are aiming structural competitiveness by the means of the investments and its operational efficiency gain and we are running that in all areas of the company.

In the first quarter of this year we also submitted to [CTN] bill preapproval for [Duragen] the [clone] of GMO so we will still be working on that [cloud] aiming for structural competitiveness and the company by the means of successive opportunity and the very motivated team will keep on working now for evolution process in the next quarter.

It is very difficult to know what the exchange rate situation will be that has an important impact on our results along time and the change will determine what the exchange rate will be we will keep on working on that evolution process as well as on the gradual added value creation for our shareholders.

Thank you all and have a nice day.

The conference call for Suzano Papel e Celulose is concluded. Thank you for your participation, have a nice day.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.