Suzano SA (SUZ) 2015 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you very much for waiting. Welcome to the earnings conference call of Suzano Papel e Celulose to discuss the results of the second quarter of 2015.

The participants will be on listen-only mode during the presentation of Mr. Walter Schalka, CEO of the Company. After that, we will initiate the question and answer session when further instructions will be provided.

I would like to emphasize that each participant is entitled to ask only two questions. (Operator Instructions).

We would like to inform you that certain statements in this presentation may constitute projections or forward-looking statements based on future expectations. Such statements are subject to known and unknown risks and uncertainties that could cause the expectations expressed to not materialize or the actual results to differ materially from the expected results.

These risks include changes in future demand for the Company's products, changes in factors that affect domestic and international product prices, changes in the cost structures, changes in the seasonality of markets, pricing actions by competitors, foreign currency fluctuations and changes in the political and economic environment in Brazil, emerging markets and internationally.

Now, I would like to give the floor to Mr. Walter, who will begin the call.

Good morning everyone. It's a great pleasure for me to be here with you and thank you very much for participating in this earnings conference call to discuss the results of the second quarter of 2015 of Suzano Papel e Celulose.

Here with us today is Mr. Carlos Anibal, our Commercial Officer, both for Paper and Pulp; Marcelo Bacci, our CFO and IR Officer; Alexandre Chueri, our Forestry Business Unit Officer; also Mr. Carlos Griner, our Human Resources Officer; and Ernesto Pousada, our COO, our Officer for Logistics, Supply and Industry. I would also like to mention Michelle Corda, the Manager in-charge of Investor Relations.

At the end of the presentation, we will be available to take your questions.

I would like to begin the presentation on slide number 1, the focus goes to operating cash generation of the Company. Our EBITDA in the last 12 months was BRL3.3 billion, but we understand that EBITDA is not the most adequate metric for our industry. The most adequate metric is operating cash generation. And we are pleased to inform you that we had almost BRL2.1 billion of operational cash generation in the last 12 months.

This KPI is very relevant and as such as of last year, we now use this as one of our main KPIs when it comes to variable compensation to our officers.

The main objective of the Company is that in time we want to grow gradually our return on capital employed to our shareholders. To that end, we understand that closing the higher level of sustained CapEx in the industry the operational cash generation becomes the leading factor. The very strong cash generation allowed us to reduce our debt and net debt in the last quarters.

The growth in net debt in the last quarters, we have to celebrate because our net debt over EBITDA ratio was 3.3 times and this represents a significant reduction in the last eight months. After the end of the Imperatriz project, it was 5.2 times and now it is -- the ratio is 3.2 times or 2.9, if we consider it in dollar terms. And the downward projection should continue to occur due to the gradual EBITDA increase that we have been experiencing quarter on quarter.

I would also like to mention another important measure which is the reduction of the net debt of the Company going from BRL15.3 billion to BRL13.9 billion. We have adopted a program of cash reduction to allow for a reduction of interest arbitration that we had, and so today our gross debt is BRL13.9 billion and net debt is BRL11 billion.

In addition to that, with the liability management program of the Company we were able to reduce the debt cost. In June of this year, the debt was little bit below of 90% of CDI of real-denominated debt, and the dollar-denominated debt was 4% a year.

Throughout the quarter, now going to slide number 4, we developed further liability management actions and there were two very important aspects. One was a syndicated lower operation that cost us LIBOR plus 2% with a term of five years. And CRA of BRL675 million, the cost was 101% of CDI with a total term of four years. With that, we were able to prepay the debt in a total amount of BRL3.3 billion debt which had a higher cost. And because of that, we were able to lengthen the debt maturity profile while at the same time we were able to reduce interest rates. This will allow us to promote a reduction of around BRL70 million a year in our financial expenses.

And this is a continuous process and we are calling this process of liability management the (inaudible) of the liability management program. And we are also introducing other measures. This is a pursuit of the Company to reach a cost of capital that is more adequate to the Company with the lengthening of the debt maturity profile.

Now on slide number 5, I would like to refer to our EBITDA. We had a record high adjusted EBITDA of BRL959 million, with 40.2% margin. But as part of our policy of total transparency with the market, in humbleness we believe that we are below our full potential of BRL60 million. And this difference is explained by some factors, and most of them are non-recurrent.

One of the factors is the fact that we had a startup of the new digester, which was started on May 15, according to plan and this is just -- just to remind you, this digester replaces the other five digesters that we had at Suzano. So we replaced five old ones by one new digester. The learning curve was a bit longer than expected for the new digester, but the good news is that this is already solved. It was solved as of June, but we didn't capture any benefits in the second quarter. But certainly the benefits will be more clearly apparent in the third quarter because now the digester then will be running according to plans.

The second effect that we had in the quarter was the effect of energy. In April and May, there were different energy prices between markets in North and Southeast, and this led us to have a difference in energy capture between what we sold in the North in our Maranhao units and what we bought in the Southern market in the Southeast through our Suzano unit. This has been solved in June, but as of July there was a drop in energy prices in (inaudible) markets. And this will certainly affected us in the third quarter.

We also have the adjustment of the long-term incentive plan in Portuguese ILP and this is based on the price of shares as we had a significant increase in the price of the stocks. The other side of that is that we estimate increases in our allowance for doubtful debt in the quarter. We also made adjustments in allowance for doubtful debt when it comes to commercial expenses related to paper domestic market.

We are taking all necessary adjustment measures to be able to take full advantage of our full potential. And the Company is totally immersed in this process of continuous operational gain.

Now speaking about pulp in the next slide, the good news is that the market is highly demanding of pulp. In the last 12 months, we touched almost 3.4 million tons of pulp and our production in the second quarter was higher when compared to last year's production, and our sales production was also much higher, 16% higher than that of last year. Our inventory reduction was 60,000 tons during that period. This is very positive.

Inventories are at very low levels, which allow us in a timeline to expect further reduction during the period.

In terms of paper, what is happening is that we had a production loss related to maintenance downtime in Suzano. This was a one-off situation and only happened in the second quarter. And we also had a lower domestic market sales of about 6% and you might remember that in the first quarter of this year we referred to a drop of 5% in the first quarter but this now has been reduced down to 6% in the second quarter. Therefore we believe that we will have less significant drops now already in the third quarter.

Also there was an increase in the average net price that was flat versus the first quarter of last year. The difference in the volume of paper production is now being allocated in the domestic market because the volumes are growing now to offset reductions in the foreign markets.

The cash cost, now on slide 8, we had an increase from BRL565 per ton to BRL626 per ton in this quarter vis-a-vis the same quarter of the year before. We will see the evolution in year's wood is the main impact that we have in the cost equation and energy is the other element.

With wood, we have the advanced purchase of third-party wood to supply Mucuri. This was a deliberate decision by the Company and very positive to shareholders. That refers to the decision we made to purchase wood from third-party.

Another important element is the average distance increase at Maranhao mill. This is here to stay and it will not be reverted in the short run.

Now referring to energy, there was a difference in price in the submarkets, as I mentioned before and also we had an overhaul downtime, something that happens once every seven years that is for turbine number 5, which lowered the volume of exported energy during that quarter. The turbine resumed operation on July 15 and therefore after that the volume of energy will increase again in the third quarter of this year.

We had two downtimes in the quarter. So we should not expect to have any more downtimes in the next (inaudible) and more consumption after they are resumed.

The Company continues to focus on cost and expenses discipline. We had a record-high revenue in the last 12 months. We had 2.69 and our revenue was BRL8.7 billion despite all of the effects that we mentioned before in taxes, our nominal COGS between June 2014 and June 2015 is still low. Meaning that despite all of the effects we had with wood and energy, our cost in nominal terms continues to drop and this is a very positive element and admin expenses with sales reached an even lower level accounting for 8.8% over sales. Therefore that the focus of the Company and the Company's discipline to manage costs and expenses continues to go on and this will give us ever more positive results from now on.

Now referring to investments, in the last six months was BRL945 million and we are now revisiting our CapEx growth for this year for something close to BRL1.7 billion and BRL1.8 billion. Part of that refers to purchase of wood from third parties which is quite positive and this will be explained further in the next slide.

This is a decision made by the Company in view of the positive signs from the markets concerning exchange variations and price of pulp, and therefore we decided to advance the purchases of wood from the third parties to avoid any drastic variation.

In addition, we are engaged in several retrofitting projects in our facilities. The most recent projects approved involves the retrofitting of the digester of the Limeira unit, also the retrofitting of the biomass boiler of Limeira unit and also the purchase of light carrier for vehicles. These are continuous programs of the Company and we will continue to pursue these programs in the next quarters.

The next slide, slide number 11. I would like to call your attention to this slide because it's very relevant to our analysis. This slide shows a comparative analysis. On the upper side of the slide, we have our cash cost in 2012 and then the cash cost in the last six months of 2015.

As you can see, the cash cost has progressed. The CAGR or the average annual growth was 1.8% a year which was much lower than inflation in the period. But more significant than that is the fact that despite this growth below inflation, the wood cost was up by BRL84 per ton. So we grew BRL31 per ton in terms of the total cash cost and the wood cost accounted for BRL84 per ton out of the -- from the total cost. So out of all the cost, we had a nominal drop of BRL53 per ton despite inflation and despite the exchange adjustments that we promoted in the six months of 2015.

Therefore this is a focus and the discipline of the Company towards reducing consumptions in the different mills and this is part of a continuous program. We do that during through two ways, one is a program where the managers have total independence to bring about new ideas and on the other side we also have more encompassing structural programs that are in place in several mills.

Now, speaking about wood and this appears on the lower part of the chart, all of the effect is concentrated at Mucuri mill. For strategic reasons, we were not giving you any disclosure about how we were operating in purchases of wood from third parties, and the reason for that is that we still had to buy wood from third parties for the future.

As we are almost concluding that purchase of third-party wood, we now today are able to give you the disclosures about the fact that Mucuri -- in Mucuri, we went from 98 kilometer of average radius in 2012, the structural radius is 95 kilometers, so we were above the average radius. And today, it's 298 kilometers in Mucuri and this has been impacting our cash cost and that's why the cash cost, as you can see on the upper side of the chart, this impacts wood in a very relevant way.

So we went from 45% of wood from third parties and arrived at 62% of wood from third parties in this lower chart in the first six months of 2015. What I can tell you is that after the second half of the year, this will drop dramatically.

We will experience a dramatic drop before we decided to buy more wood from third parties and the situation will become more aggravated in the third and fourth quarters of this year, meaning that we will be bringing more wood from third parties to be able to preserve our forests and therefore have a drastic drop of wood from third parties and also the average distance. We made all of the analysis and the return on employed capital is therefore very significant to our shareholders.

And so the good news is that with productivity gains that we are able to get at Mucuri in a gradual fashion, we will be able to operate below our structural cash cost in the Company for a certain time. So next year, we will expect a drop for less than half of third-party wood purchases vis-a-vis this year in terms of longer distances. And in addition to that, we will also have significant productivity gains in our forestry operation at Mucuri.

So we really wanted to disclose these figures and I would like to re-emphasize that we didn't disclose it sooner because we still had to buy more wood from third parties and we were afraid that by disclosing it too soon, this could impact the prices of wood.

But as we almost got everything we needed, now is the good time to disclose the numbers. This a very important chart because this really shows how the Company is performing and how important cash cost is for us from now on.

We are making good progress in terms of our industrial cash cost. We also made significant strides towards our harvesting cash cost and third party wood at Mucuri and the average distance improved, but the good news is that in a very short period of time all of these would be reduced and this is quite positive.

And just for your knowledge, this really impacted our CapEx because buying more wood from third parties this impacts OpEx -- so our -- impacts our CapEx and our OpEx because we have to pay more for transportation cost, but the short-term combination more than offsets the benefits that we will be able to have in the long term.

The next good piece of news I have for you is a third area where we will be working with. As I said before in our strategic pillars, one of the pillars refers to a gradual reduction in our structural cost. The second important pillar of the process refers to a surge of new business that can have a good scalability, possibility for the future, this is -- they are adjacent to the ones where we are already operating and the asset base is higher than our current asset base.

The next that we have in mind is lignin. If you look at the lower part of the chart, you see the manufacturing, the production process of lignin. The tree consists of lignin, pulp and inner pulp and we extract lignin and we produce the black liquor and we put it in the recovery boiler for burning and energy recovery. The idea now is to take this lignin and turn it into silicone products that can replace the carbon chain of oil.

What we've done is quite positive. We already have several applications such as rubber, phenolic resins, cement additives, which would have a return that -- surpasses the return of energy. In our Limeira unit, we anticipate a scale up of 20 months on the pilot plant. We have a very small plant of 1 ton a day and we will upgrade it to a plant of 20,000 tons a year. And this capacity will happen in the next 12 months with the CapEx of BRL70 million approximately.

This is quite significant because it accounts for three times more of the sale of energy that we have in terms of return on capital employed. The good piece of news is that this project, as other project has been and the project of (inaudible) and the three adjacents that we already have today we have high scalability. These are projects that allow us to bring higher volumes in the future, especially in lignin, our potential in all of the plants if we fully operate with investments in our plants, we will be able to have approximately 185,000 tons of lignin. This is a new product, this is an innovation at Suzano, this is part of our DNA and this is part of our constant innovation program. And we are now introducing this new program to the market and that was a decision by the Board.

With that, I conclude our presentation, and myself and my team are now available to take your questions.

Ladies and gentlemen, we will now initiate our Q&A session. (Operator Instructions).

(Inaudible), BTG Pactual.

I have two questions. First, if you can comment on the short-term scenario for pulp, now looking towards the next few months how do you see demand in the different regions and whether you also see any room for further price increases?

Also, could you please comment on the yuan depreciation from China that we saw recently, whether you see any impact on the supply and demand landscape?

Secondly about the paper market, how do you see the evolution in the short run and what are the expectations in terms of closing the domestic demand for this year and whether you see any room for increases in paper?

This is Carlos Anibal, thank you for your question, (inaudible). Currently, our view is very positive in terms of the basics because they fully support the current prices in our market. The global demand grew by 4%, eucalyptus grew 19% and inventories are at their very lowest, 31 days even though there is no new capacity in the last few months.

But there is one thing that may change the market dynamics in the next few months, which is the situation at (inaudible). I will just briefly comment on the different elements and the exit, and at the end I will refer to your question about renminbi.

So in the second quarter, we experienced a growth of 2.7% of pulp demand growth, an increase of about 3.2% growth vis-a-vis the first quarter. So the year-to-date growth is 4%. We also see a strong demand of pulp from eucalyptus. In the last six months, the growth was 10%. China performed well in the first half of the year growing 2% vis-a-vis the same period of last year. Eucalyptus is the highlight because it grew 17%.

In July, demand was quite robust in all regions and the volumes performed as expected in the area. We had the closing of the business in August, so once again we have a very positive reading of this market.

When it comes to supply in the first half of the year, we had an operating rate of 2 percentage points above the numbers of the same period of the last year before, hard wood in June in terms of CapEx was about 101% and this shows a very clear perception of a robust performance of eucalyptus pulp.

In the northern hemisphere, the numbers -- I mean, the lower -- contribute to our lower inventory. Rizhao is a plant of 1,600,000 tons located in Shangdong, two lines, one line of 1.5 million that started up in the last quarter of 2010. The plant is located in the midst of the city. The plant is supplied by water coming from artesian wells. The region has been severely affected in the last few months for a lack of rainfall and as a consequence the availability of water was quite low.

So today the local model is trying to deal with this low availability to supply the population, therefore, the local government decided to stop their small line of 300,000 tons in the first part of June and the second line of 1.5 million in the second half of the month. There are a lot of rumors about the starting up again of the unit whether its operations will be resumed by October until they conclude the construction of a new canal that will pump water into the region.

But there is also another rumor that says that the plant should be resumed any minute because of the strong rainfall of the last few days. But again, there are many uncertainties, but I believe that what is more important regardless of the plant in China is that the investments will be able to support all of the prices, the current prices. And the only -- the other aspect is that we are closing businesses in China at price levels that were part of our plan.

Inventories again are low in all chains. The industry and producers have low inventories, our clients have low inventories, 38 days of short, short wood in my understanding is a very low number at the end of June; 38 days is the lowest number in the last five years.

In last five years, I think we had 4 million tons to 5 million tons in addition that should probably increase that number of balance of inventories of short wood. So [growth] again is a very low inventory level.

We had a reduction of 60,000 tons of inventories in the first half of the year. In the second quarter, we sold everything we produced. We are operating with inventories at very low levels, much lower than we would like to be operating with.

Current prices today are 810, the list price in Europe, 700 in Asia, and in US. so once again, there is a positive reading. The prices are supported by all fundamentals in China in the last few days. We had an increase of about $20 to $30 of prices in the spot market of short wood. And that was also due to (inaudible).

Now, about yuan, the Chinese currency, we had 3% to 4% depreciation in the past few days, and pulp and paper prices are managed according to supply and demand as it happens in the beginning of the year. You know the euro price has changed, so I don't see in the short run any impact from the depreciation of the renminbi. Well, we will have differences in the Chines prices. But we will benefit from imports. China exports more than 2 million tons of paper.

So in the short run, well I don't see any major impact coming from renminbi. But it is important that we keep monitoring those relationships between the hard wood and short wood, and also it's important that we monitor the margins of paper producers. We haven't seen any -- we haven't experienced such significant pressure as we are seeing today.

In the case of paper, demand continues to be impacted by the macroeconomic situation and this was mentioned earlier on in the presentation. There was a drop of 7.5% in the demand of the products that we sell. Well, it was lower than the 12% that we posted in the first quarter. There was also a better performance in our market in terms of printing and writing paper.

In the second quarter, the performance was very positive. There was also an advancement in a part of the volume of the national program of textbooks. And particularly, we may see a stronger trend in the next few months, which refers to gains of market share.

So we gain market share in the second quarter, but we believe that we will continue to gain more market share in the forthcoming quarters. Imports came down by 31% in the last quarter vis-a-vis the second quarter of the year before. In July, coated paper, which was the bulk of our exports-imports, was down year to date by 35%, July 2015, and July 2014 had a 67% reduction.

So once again we are prepared to absorb this decrease -- in increasing our sales, and as a consequence we will then increase our market share. We are also taking advantage of the good exchange momentum. We grew volumes in the second quarter vis-a-vis the first quarter of this year and also vis-a-vis the second quarter of 2014. Therefore, for the third quarter in terms of exports, we anticipate stronger exports, stronger than the second quarter and it's stronger when compared to the third quarter of the year before.

We are announcing a series of price increases as of August 1st, we increased the credit size line by 9.5% as of September 1st. We will also increase by approximately 10% non-coated paper to 7 and as of September, we will also increase the prices of paper boards.

Therefore, our strategy is well elaborated, looking our metrics, product channel and this is aiming at having a successful operation as we had improved these areas. We see the need coming from demand, but we can support this increase in the domestic market and this also brings about another additional incentive coming from exports, more exports.

So at the current exchange rates, we have a large volume of our exports based on this current exchange rate, but we still have more in our domestic [chart]. Therefore, we see good opportunities to be more rigorous in this implementation.

We won't be able to immediately capture all of this potential, but there is a deployment curve that will certainly assure us the gradual recovery of our prices in the next month and next quarter.

We had a gain of 5.5% in the second quarter versus the second quarter of 2015 in the domestic market. This gain could have been higher if not -- if we're not for the mix we had. We had a great variation in our sales mix. So paper on the demand side, we do not anticipate any improvement at least for the moment. And our feel is that our chains are still working with very low visibility in terms of future demand.

That's why I would rather not be committed to any demand projections for the end of 2015, but on the other hand, we will certainly pursue greater disciplines to start implementing the announced prices.

Thank you very much. It's very clear. Thank you.

Lucas Ferreira, JP Morgan.

I also have two questions and the first refers to production cost. It is very clear that that BRL60 million is a one-off impact liquidated, settled in the quarter, and so the cost should come down in the second half of the year. I think this is the major reading.

I just want to understand whether my reading, given the fact that now the stock price is close to BRL100, and lower now in the second quarter, at the end of the second quarter and the impact coming from the exchange rate. So my question is can we conclude that your cost of production of pulp should be nominally lower in the second half of the year?

Lucas, this is Walter. No, our cost should still rise in the second half of the year and the reason for that is what I explained earlier during my presentation. It's because we will still bring more wood from third parties at Mucuri, and this will affect our cash cost through wood.

In terms of chemicals consumption, we are evolving. This will bring us an increase in the second half of the year, the cash cost as of next year. We experienced a significant drop as of the second half of next year because we had a significant amount of third party wood, but we will see an increase in -- one-off increase in the cash cost in the second quarter stemming from a larger volume of third-party wood.

Well, we have available wood to cut and use at Mucuri, but what we want is to preserve that Mucuri wood to reduce the average (inaudible) next year. And in terms of energy, as you mentioned, it's something that depends on pricing and in terms of energy volume, our expert position is why prices of energy, as terrible in July and August, prices just fell. It was about BRL130 per megawatt.

We do not know how it will perform, because it varies week on week, but we are now buying future energy to our Suzano unit taking advantage of the current situation of the market right now. So we are buying future energy to preserve our exports going to markets in the next coming years.

I have another question related to working capital. In this quarter, I think great part of that was due to your receivables, the account as exchange variations, et cetera. Can you elaborate more on that or what do you expect for the second half of the year or you anticipate differences, any other variations?

This is Marcelo Bacci. This is the really effect, both the exchange rate and price in the case of pulp are rising and this is causing working capital to perform as such. Considering current market conditions, this should continue in the third quarter but for good reasons and this also means that we'll have better profits in our business.

Marcos Assumpcao, Itau BBA.

My first question refers to the wood that was in Maranhao. You talked a lot about Mucuri, but can you give me any visibility in terms of the percentage of third-party wood and the average radius for 2015 and 2016?

How should we expect the progress to occur? And also I would like Carlos to talk about allowance for doubtful debt. You referred to the domestic market, therefore we were talking about paper prices.

Is the ADD increase more focused on this first half of the year or do you think that this will continue and we should be alert?

And also I would like you to compare that with other critical moments that occurred in the domestic market or whether this is a level, a normal level and we shouldn't be so concerned?

This is Walter. I will talk about wood in Maranhao and thank you for your question. Wood in Maranhao, we have a contribution in third parties in the second quarter of 30% and this number from third party should continue to be the same in the next quarter.

So it's nothing that indicates any changes, the trend is very similar and the average radius in Maranhao shouldn't change in a significant way in the next coming quarters. We are increasing our forestry base in Maranhao. We are planting closer and this is something that we will be able to get the effect further on. But in the short run, we don't think -- we do not see any relevant effect in Maranhao.

This is Marcelo, Marcos. Referring to allowance for doubtful debt, we only have some one-off situations thus far. There was an increase in ADD of about BRL6 million in the first half of the year which is not very relevant. But this is a matter of concern to us, the chain has been pressured by low volumes. We have low availability of credit in the market for all kinds of credit especially regarding mid-sized companies in the paper industry. Therefore, we've been concerned that we haven't noticed any relevant effect to date, but this has meriting our attention.

Very well then. I just have a follow up question about wood, Walter. Looking forward and taking into account your current forestry base, so is this a normal level in terms of third-party woods, 30% from third parties and the remaining would be your own wood or you think that this ratio should change if you look at the mid and long range?

No, I think this is the normal range, maybe a little bit less wood from third parties but this is a normalized figure.

Just one last follow up. With this current profitability level that we see today at Suzano and in the industry as a whole with the cash generation that you currently have, how do you see your return on invested capital of the Company? I remember that you questioned the return of the industry, but do you believe that at these levels the return is satisfactory?

Well, return of employed capital currently are very positive. Well, we have to understand capital employed as being something that is denominated in reais, but a part of it should be denominated in dollars because they refer to investments denominated in US dollars but we are pricing it in real.

And then the capital employed of today at the exchange rate and the pulp price that we have today the returns are very positive but the issue refers to how sustainable this is in the long run. We are adopting a very clear strategy and also quite positive to the market. And first, that refers to a continues the reduction of our cost through our time. Therefore, we do believe that we still have room for further cost reductions and we are working in projects to meet that goal, both in terms of forestry coming from harvest and forestry logistics, as well as on the industrial side and others. So, therefore we are deploying several actions.

On the other hand, we have to look for adjacent businesses that will add value to our asset base. A combination of all of these activities would provide us with a less volatile return on employed capital. Currently, this is very positive, but we have to be humble enough to understand that considering the industry as it is today, we have to look for sustainable growth. Instead of only celebrating one-off situations and good returns of capital employed, we have to get -- to be prepared for the future. That's why we are very determined to go into that direction.

Thank you very much.

Viccenzo Patemostro, Credit Suisse.

My first question refers to CapEx, CapEx related to wood at Mucuri mill. I don't know whether you can give me more details about how you've calculated that CapEx and how can we calculate that in terms of positive return. I mean you increased by BRL300 million your CapEx. And at first is this purchase -- with that purchase of wood. So is it possible to say that in the next few years we will see lower CapEx because you will no longer have to buy wood in the future?

Can you also give me an idea of how much that would be responsible for reducing the cost of pulp in Mucuri? So this is my first question.

This is Walter. Thank you for the questions. The additional investment of wood in Mucuri is about BRL100 million in addition to -- I mean it's higher than what was anticipated before. Our sustained CapEx will still remain at the same level of BRL1 million or BRL1.1 million. So this is our sustained CapEx and this is recurring and it will continue to happen.

The difference between this CapEx and the total CapEx comes from two different lines. One refers to purchases of third-party wood and we have a high number this year and in addition we are also adding another BRL100 million.

And the other part which is not irrelevant, but quite relevant refers to retrofitting of our operations that will bring a return of capital employed of at least 20%. In order to capture that in your model, I think you may consider that we have approximately today a wood consumption at Mucuri of about 6.5 million cubic meters a year. And this 6.5 million cubic meters a year also considers the average distance from 2012 until now by 200 kilometers, it was increased by 200 kilometers.

But once it comes down, with time we will go down, decrease another 200 kilometers. Therefore, that we will come down by 200 and some kilometers in terms of reduction.

If you analyze the impact of that, you will then have the impact of the cash cost at Mucuri and this will also have an impact on the total cash cost of the Company.

In terms of CapEx, just to clarify I think that the number was BRL1.5 billion and about BRL1.1 billion was recurrent or sustained. And there was BRL400 million in high-return projects that you talked about, that's how -- now the number is BRL1.7 billion, BRL1.8 billion. So BRL100 million refers to wood and the difference refers to new high-return projects, right?

Yes. It was BRL1.530 billion and now is BRL1.7 billion or BRL1.8 billion, depending on the volume of wood and the speed of which the projects are deployed and the difference between BRL1.530 billion to this new level means some part comes from wood and the other part comes from other projects with high returns.

My second question is about the capital allocation. After I did some calculations, I'm assuming that the exchange rate will be as it is today and by the end of the year your debt level is low. So for next year debt level -- I mean, do you still expect to have high cash generation?

I just want to understand whether you can tell me something about your priority cash or allocation of cash, whether you have some project in mind or if you have any project in current analyze or whether you intend to pay the most expensive debt or increase dividends, I just want to have an idea about your cash generation for next year.

This is Marcelo. Yes, we will see an acceleration of the net debt over EBITDA ratio. So next year, we are focusing on the strategic areas. First, additional projects that can be deployed to increase the long-term return of our assets, bottleneck, et cetera. We are looking into several alternatives that can be implemented.

Next year also we see some investment alternatives that can help us to reduce them further the average radius of our operations.

We will continue to invest in adjacencies and products like lignin that was announced today and the investment will take place next year. So, projects of this magnitude, this is what we are looking at. In our radar, we do not intend to do upfield of downfield or line duplication or anything like that because we still believe that the risk return ratio of these projects is not adequate yet. And if we had adequate market conditions, the return will be good. But slight changes in market conditions can really change the return and it could differ materially from what we might have expected.

Increase in dividends is another possibility. The trend is that we will recover in time a dividend payout that would be more in keeping with the historical dividend yield of the Company. In the last three years we paid out very low amounts.

Thank you very much.

Thiago Lofiego, Merrill Lynch.

I have two questions. Concerning costs, how much of that variation of BRL61 per ton in your cost with no downtime is recurrent? If you can give me the numbers in reais per ton, and how much of the downtime cost, which was BRL36 per ton, how much of this BRL36 is out of the curve for a downturn? I would just like you to elaborate more on that.

And now revisiting the average ratios, can you please reinstate the actual number for the average radius for Mucuri and whether you can quantify the impact?

And my last question, if you allow me, refers to capital allocation. Going back to Viccenzo's question, the acquisition in other non-pulp markets, is there a possibility that you would look at other paper markets in Brazil? I just want to understand your rationale.

You're talking about our cash cost. I would just like to elaborate on that. Our cash cost is BRL626 in this quarter, BRL594 year to date. The cash cost in the third and fourth quarters of this year should increase. And the only two reasons and the main reasons are increases in the average distance in Mucuri and the decrease in energy prices, these are the main reasons.

And as of the third quarter of next year, we will see a drastic drop in the average distance of the Mucuri forest. We acquired third-party wood and we will start cutting early this year and the end of -- early next year and the end of this year. And then as of the second half of next year, we will have very little wood to acquire. That's why we should expect a very strong drop as of the second half of next year in the cost of wood of Mucuri and the cash cost of Mucuri and the general cash cost of the Company.

So, I would like to reiterate that this is a deliberate decision of the Company in terms of the wood operation because further on, we will experience a significant drop.

Our structural cash cost is certainly lower than the cash cost that we have today. Today's cash cost have a significant burden coming from wood in Mucuri and this impacts our cash cost. That's why we see an evolution from 2012 to date in terms of capital allocation, which was also part of your question.

Marcelo says that we will look at the other structural projects towards the future both in terms of forestry and industry. And it's possible to assume an increase in dividend payout because I think we have to remunerate our shareholders accordingly considering our cash generation, but even then we will have a significant deleveraging.

We will start paying the most expensive debt. The reduction of our cash level, we have a policy to reduce the cash level of the Company because while we have the Imperatriz project, we decided to have a higher cash position. But today given the fact that the Company promoted a deleveraging, this is no longer necessary. Therefore, we will probably reduce our cash position.

We are also looking at the redesign of the industry, which is the third pillar of our strategy. There are several alternatives about how we will allocate capital in the future. I've always been very clear with the market saying that we would not look at M&A as long as two other presiding conditions were established.

The first being an increase in the value of the share, which we thought that the share did not really quite represent the value of the Company, but now the value of the stocks increased significantly and certainly I will not comment on what I think will happen to the price of the stocks because it's not up to me to say that.

And the other issue is that our debt position now is much better than what we had before and this has been happening gradually. We went from 5.2 times and now it's 3 times and with a relevant trend towards the next quarter.

Therefore, our position will be much more comfortable as of next year and this will allow us to discuss more encompassing issues related to the industry redesign.

Thank you very much.

Alan Glezer, Bradesco BBI.

I have two questions, the first about paper. We've noted a 20% increase in sales in the domestic market this quarter at the same time imports are falling. I would like to understand whether you see any more room to gain share from imported products considering current measures with importers are pleased with the current exchange rate, or whether you saw some movement from other players in terms of increasing prices as you say that you will do in August and September, the other prices will also go in that same direction? This is my first question.

The second question refers to the regional drop. We saw increase of sales to Europe. Do you believe that this helped your effective cost and whether this should be maintained throughout the second half of the year?

This is Carlos Anibal. Thank you for your question. We experienced a significant drop in exports especially in July, especially coated paper, 67% vis-a-vis the same period of last year. I mean, coated paper is the bulk of our export.

So, certainly we've been able to gain market share in the second quarter and we are considering the fact that we do believe that we continue to gain market share in the second half of this year. Our contribution has increased, our share has increased when compared to what we had last year.

What I have been hearing from our clients and competitors is that some of them have already increased their prices. Therefore, I think it's natural that they do it, especially the non-integrated producers. They are suffering with margin pressures due to a significant increase in the price of pulp in the last few months.

In terms of pulp, we have a geographic mix and we experienced a growth coming from Europe and a decrease coming from Asia. That's why we have to look at that every quarter. There are variations due to our commercial strategy and our volume availability. Therefore, I think that our expectation is that we will continue to operate with the mix very close to the mix that we had in the last 12 months. There is nothing that could justify stronger contribution coming or stronger share coming from China or Europe.

Thank you and congratulations for your results.

Now, we conclude the Q&A session. I would like to give the floor to the officers of the Company for their final remarks.

This is Walter. I would like to thank you very much for participating in this conference call. I would like to say that the Company is very pleased with some of the results that we had this quarter. The operational cash flow of the Company is growing significantly. The deleveraging of the Company is also taking place.

The progress in our operating unit is bringing about better results. Our investments as a whole have given us returns on the capital employed, even higher than what we planned.

We are also progressing in terms of our relationships with our employees. We are training them, educating them, giving them better conditions in our plans. We are working in a very encompassing way to improve IT.

We are introducing liability management progress in terms of our relationship with our customers. We still see room for further improvement. Therefore, I am very pleased to see how the Company is performing, but I am also very humble to recognize that our results were below our potential in the second quarter. But we are working hard to change that situation, to reverse that situation.

I believe that the transparency that we always pursued with shareholders, investors, analysts, banks and the society as a whole, is what will certainly prevail in the Company. And this has become a very positive move on the part of the Company.

So my final message is very positive. The Company is going through a very positive moment and especially towards the future we see very positive days.

Thank you very much for your participation and Michelle and Marcelo will be available further on, later on to answer questions that you may still have.

Thank you very much and have a good day.

Suzano Papel e Celulose's conference call is now concluded. I would like to thank you very much for your participation.

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.