Suzano SA (SUZ) 2016 Q3 法說會逐字稿

(interpreted) Good morning ladies and gentlemen and thank you for waiting. Welcome to Suzano Papel e Celulose conference call to discuss the results of the third quarter of 2016.

All participants will be in listen-only mode during the Company presentation to be made by Mr. Walter Schalka, CEO of the Company. (Operator Instructions) We would like to mention that each participant will be allowed two questions only. (Operator Instructions)

We would like to inform that some statements contained in this call are projections or assumptions about future expectations. These forward-looking statements are subject to known and unknown risks and uncertainties that may lead these expectations not to materialize or be substantially different from what was expected.

These risks include among others changes in future demand for Company products or in the factors that affect domestic and international prices of products, or changes in the cost structures, changes in the seasonality of markets, changes in prices charged by competitors, exchange rate variations, changes in the political economic scenario both in Brazil, in emerging markets, and the international market.

Now we would like to give the floor to Mr. Walter Schalka who will start the presentation. Thank you.

(interpreted) Good morning everyone. It's a great pleasure to have you here during this call about the third-quarter results of Suzano Papel e Celulose. With me I have Marcelo Bacci, our CFO; Renato Tyszler, our Strategy, Innovation, and Business Development Officer; Carlos Anibal, Officer In-charge of Pulp and Paper Business; Alexandre Cheuri, Forestry Business Unit Officer; and Carlos Griner, Human Resources Officer besides Michelle Corda, our Investor Relations Manager.

Today we have quite a lot to talk about with all of you and I would like to start by showing you the results of the third quarter. As we had already mentioned to all of you, our parameter is the ROIC for our analysis and the ROIC is based on the operational cash generation. Suzano had in the last 12 months an operational cash generation of BRL3.1 billion compared to our approximately BRL23 billion in capital invested. This leads us to ROIC of 3.5% in the last 12 months.

We had an adjusted EBITDA in the last 12 months of BRL4.2 billion, sustaining CapEx of BRL1.1 billion. In the third quarter of 2016 we had an EBITDA result of BRL767 million and BRL507 million of operating cash generation for the quarter. The result of the third quarter was impacted -- negatively impacted by the exchange rate. In the second quarter, it was BRL3.51 and in this quarter we had BRL3.21.

The price of pulp dropped slightly in the international market although our pulp price was stable, and this is due to geography. We have a better geographical situation this quarter and we have the impact of a lower production of pulp because of the scheduled stoppages in Mucuri and Suzano, and also due to the reduction in the production pace of Imperatriz (inaudible) on one side, inadequate remuneration in the pulp price and also because of some operational issues that have already been tackled.

And at the end of the quarter we had a delay in shipping of about 40,000 tons which will be posted in the fourth quarter of 2016. Results of the third quarter was positively impacted by paper. In spite of the Brazilian demand still dropping, we continued to achieve positive result with higher and higher footprint in our client-bases increasing market share in the quarter in coated paper and with stable prices in paper, and we announced an increase in our prices for Latin America of about 4% as of October 2016.

In pulp, demand is very healthy. We had an increase of 1.1 million ton in the global pulp market in the first eight months of 2016. And due to the possible postponement of the coming of (inaudible) in Indonesia in the [ATP] plant, we announced a price increase in China to $530 that we are already implementing partially in October and then partially in November this year.

The good news that we have additional good news is cash cost. In spite of the lower production that we had in the third quarter, our cash cost was kept stable vis-a-vis the second quarter, but with a drop of 4.7% nominal drop vis-a-vis last year and the other one is vis-a-vis last quarter.

And we would like to give our view about the cash cost. This continues to drop during the fourth quarter of 2016 and there is still a downward trend for the coming quarters in 2017. Our view is that we will have a cash cost in 2017 lower than the cash cost of 2016.

The Company has been working on many areas in order to look for a higher degree of discipline in many areas. The additional supply of pulp could provoke a degree of (inaudible) for the industry's returns and we are working in the discipline of supply cost capital and also financial and also regarding the product portfolio. This leads us to have a higher resilience in our balance sheet and our results. And today I will be talking to you about each one of these initiatives in each one of these fields.

In terms of supply, we are announcing today the postponement of the 5.1 project in Mucuri. It's going to be postponed to 2018. It was programmed for 2017. And by doing that we reduce our CapEx for 2017 on one hand, and we also postpone these additional tons to 2018 in a window of opportunity that will be less impacted by supply.

And as we are managed based on ROIC and not on EBITDA, our view is to work always based on the concept of not managing the Company based on the average, but on event that is to say the last ton, and for this reason it is possible that we might adapt our production in 2017 depending on the market conditions or in other words if the exchange rate or price conditions do not remunerate the capital employed adequately, although they always generate positive EBITDA, but as the EBITDA is not our criterion, but the ROIC, we do consider the possibility of reducing our production in 2017 in order to have a better market environment and also a better environment for pricing.

On the cost side, we continue our work and you have already seen our cash cost presentation, but also in the SG&A in the first nine months of the year in spite of an 8.5% inflation in the period, we achieved a 0.1% increase in SG&A per ton so that the 5.2% increase in the cash per volume sold in spite of the fact that we have a higher volume of paper vis-a-vis pulp which has a higher CPD COGS per ton, and in spite of this situation, we are below inflation.

We are announcing today an important acquisition for us which is the -- [created] for our shares. We are acquiring land and forest, we are acquiring $145 million, approximately 9 million cubic meters of wood, and at the same time we are acquiring 75,000 hectares of total area, and of the 75,000 hectares, 40,000 hectares are planted areas and we are acquiring for $100 million these assets.

And these assets have an average distance of 176 kilometers and Suzano will be able with this acquisition to reach a shorter distance over time and the possibility of demobilizing more distant forest -- distant from the plant and they have a very high [IMA]. So we will have a higher yield in our forest and the yield is of about 38 cubic meters per hectare here in these forests.

We will see a reduction in our forestry CapEx as well because our idea would be to increase our forestry base in order to get closer and closer over time to our plant, and with that we reduce our forestry CapEx over the years and a 100% of our forest of our need will be supplied by our own forests or others, 85% ours and 15% the others that have an incentive.

And more important than that, this is the last milestone that we had to achieve in our structural cost so that we may consider our structural cost as optimal in 2021 and 2022 of BRL475 per ton or in dollars as we had already mentioned. And looking for operational efficiency, we have all the structural conditions in place in order to reach this target in 2021 or 2022.

In terms of capital discipline, looking at our CapEx, we had given the guidance to the market at the end of last year ended the first quarter of 2016 that we would have a CapEx of BRL2.4 billion for this year, and in the last call, we reduced to BRL2.1 billion, and now we are further reducing this to BRL1.9 billion.

This does not change the 5.1 project in Mucuri. The start-up of all the other units is according to our schedule, tissue, lignin, and 5.1 Imperatriz, and we are also revising of the 5.1 BRL1.14 billion to BRL0.9 billion, and this has to do with better negotiations achieved on one hand with the exchange rate on the other hand, and also with the removal of the forestry CapEx that because of this acquisition that we are announcing today will no longer be necessary.

So we are revising this project to BRL0.9 billion and right now we are giving you the guidance about which should be our CapEx for next year.

Our CapEx ex this acquisition should be BRL1.7 billion, BRL1.1 billion of sustaining and BRL0.3 billion the 5.1 project and BRL0.2 billion in adjacent businesses totaling BRL1.7 billion. And besides we have this acquisition that we have just announced where the signing of it was last night and the closing of the deal should happen between 30 days and 40 days, in between 30 days and 40 days. So the total would be BRL2.5 billion for 2017.

And I would like to anticipate to you that there is a possibility of the BRL0.8 billion happen this year and not next year. So there could be a variation one month more or less, but this will have no impact whatsoever on the situation.

In financial discipline, we continue better and better prepared. Our balance sheet becomes more and more robust and the decision that we made of 100% dollarization of our net debt is [correct] due to the appreciation of the real and due to the bond that we issued. We had an increase in our liquidity and we wrote out our overall debt. We have BRL4 billion cash today with a low funding cost, but the average cost of the interest is 4.6% a year and the rollover of the debt to 3.5 years.

We are right now mentioning that our dividend will be based on cash generation. This is information that we are giving you now and this is very important.

And we had a nominal reduction in our net debt that went from BRL10,191 million to BRL10,016 million, a BRL175 million drop in spite of the devaluation of $0.03 approximately in exchange rate generating an impact of about BRL90 million in our indebtedness. And the leverage had a growth from 2.1 to 2.4 in spite of the nominal reduction of our net debt. We had a reduction in our -- in our EBITDA and this is why we had an increase in our leverage.

And lastly, we continue with a very protected product portfolio, paper generating margin higher than pulp, and this is due to the volatility -- the lower volatility of paper than pulp as you can see on this chart in the presentation. So we have an ongoing increase in the price of paper over time, in spite of the big devaluations in the exchange rate and we do not have big steps or differences in the price of paper. So this is very gradual. And pulp at a more volatile situation or situation is more volatile and this generates a level of profitability which is lower than the ROIC required by the Company.

On the last slide, I would like to mention to you that we understand that the cash flow yield is the best indicator in order to compare value creation for the shareholders and Suzano today has the best result in the sector.

If you compare in the last 12 month, the operating cash generation of Suzano BRL3.1 billion to the EV of Suzano, you will see equity plus debt amounted to 14.3%, showing the potential of appreciation of our shares higher than the competition.

With this, I end the first part of the presentation. And we would like to open for your questions that may be addressed to all the officers of Suzano who were present here. Thank you.

(interpreted) Ladies and gentlemen, we will start the question-and-answer session now. (Operator Instructions) Marcos Assumpcao, Itau BBA.

(interpreted) My first question is about the acquisition (inaudible). Could you please tell us how much do you intend to reduce the average radius in Maranhao because of these acquisition and how much you can release in terms of forest or land that was located farther away and that you will no longer be using and that you will probably sell and how much do you intend to get from these sales?

(interpreted) The situation is as follows. We will have an average radius in the first years which will be higher than the 186 kilometers that we mentioned here. And this will allow us to reduce the average radius in the first years, but it does not change the structural situation of the Imperatriz plant in the long run that we would be looking for with the expansion of our forestry base.

We will be able to waive areas equivalent to the ones that we acquired in other regions that are farther away and that have a worse IMA. And with that we will be able to reduce our forestry base and our future CapEx as well. And last but not least, I will be reducing the CapEx and OpEx BRL110 million annually with this transaction as I will no longer have to acquire new areas or plant new areas.

(interpreted) Thank you very much. And what about the breakdown that you gave us regarding -- between land and wood? You said $145 million to buy 9,000 cubic meters of wood, is that correct? That would be BRL50 per cubic meters. Just to confirm this figure and what is your wood cost in the region?

(interpreted) Well, you're reasonably correct in your calculation. Its proxy is correct I would say. It's more or less the price that we have been paying for other areas such as Eco Brasil. Eco Brasil was acquired more or less for the same amount.

(interpreted) And about your own forests, what about your wood cost? Is it close to this one?

(interpreted) No, no, it's lower. In our own forest, it's lower. We are making an acquisition here and there is an important point here of the other $100 million from this acquisition part of that are reserved 35,000 hectares of reserve and the other 40,000 hectares are plantable areas.

(interpreted) Thank you.

(interpreted) Thiago Lofiego, Bradesco BBI.

(interpreted) My first question has to do with the postponement of the de-bottlenecking of Mucuri. Even being a brownfield, do you believe that the ROIC does not cover your cost of capital or are you being more conservative looking at the Company's leverage? I would like to better understand the rationale.

Could you mention something about 2017 already? And correct me if I'm wrong, you are considering the possibility of decreasing production in 2017 because of your ROIC, to preserve your ROIC. And I would like to understand the rationale. I understand you have more efficient and less efficient tonnages and that give you a higher or lower ROIC, but the -- but you continue with your production in the first quartile of the cost curve. So why would you be reducing operation because you might be opening some space for other competitors?

(interpreted) Your questions are very important. First one regarding Mucuri, the Mucuri project even in the current conditions of exchange rate and price, it has a spread over the WACC, so the ROIC is higher than our WACC. So we should continue with the same condition that we had planned, but due to capital discipline reasons as the investment is quite relevant and due to a discipline in supply in order to postpone and put less pressure, less volume pressure, we decided to postpone the project to 2018.

We have two relevant facts to happen in the sector. The first one is (inaudible) and Fibria who will be coming to the market and this could cause a price pressure. And we do not believe that would be adequate otherwise. So the second -- or the second part of your question, why we consider the Suzano in all tons has a positive cash generation.

And ladies and gentlemen and Thiago, if we in the industry, we do not have a discipline regarding our supply and if we do not remove additional supply put in the market, we could be generating a situation in which the industry's ROIC could be lower than the required ROIC and required by all the players. So we have to leave this model in which people only think about the EBITDA and operating cash generation. People have to think about ROIC and in the current conditions of price and exchange rate, the ROIC is already lower than the WACC, the WACC.

So expanding capacity, the industry as a whole is destroying value by increasing capacity and we have to show that Suzano is proactive in the sense of looking at the whole situation and remove from the market the lots of good tons in order to allow better prices and a better generation of cash to all players, and of course to Suzano as well.

(interpreted) And in relation to the shutdown of capacity, let's say you have a situation in which Fibria or other local competitors do the same in the first quartile, don't you think you're going to help other people farther away in the cost curve, and what about potential closures because of the situation in the sector?

(interpreted) Well, let me answer the first part and Carlos will answer the second part. Our view, Thiago, is that this industry is too volatile in terms of results coming from these two exogenous factors, price and exchange rate. And this has been impacting the industry as a whole.

Suzano has been protecting itself looking for adjacent businesses and with optimal cost structure and also using paper as a cushion, as a buffer to -- for this volatility. But this is not enough and of course the whole industry suffers with that, all the players. And our objective is not to help or to hinder any player in the industry, our objective is to give our shareholders adequate profitability and we want to do this in a sustainable fashion.

This is what we are working on and our energy is focused on that. So removing the worst (inaudible) from the system could marginally generate a lower EBITDA, but very clear for the future we want to give signs that we want -- we need to generate a higher ROIC, a sustainable one for the whole industry.

(interpreted) Given the current price condition and the currency of producing countries and the price of oil, we understand that the room for closures is limited right now. If we see a scenario with worse prices in the longer run, then of course we will be seeing some closures or more closures, more shutdowns in the North America and in Asia and then part in Europe as well.

(interpreted) Thank you very much, Carlos.

(interpreted) Felipe Hirai, Bank of America.

(interpreted) I have two questions, the first one having to do with production adjustment. 2017 (inaudible) -- what is the potential adjustment? Some dozens or hundreds or thousands of tons, could it be even bigger than that? And still talking about pulp, Carlos, what about the price negotiations? Regarding price increases, could you tell us how they are occurring in the market?

(interpreted) The first part of your question, I will be answering. And I would like to tell you that we are not announcing formally any volume reduction. We are just telling you that we believe this could be a possibility for 2017. And when we carried out analysis, we considered between a 100,000 tons and 150,000 tons.

We have not made any decision about this yet. We are still maturing our decision and this will depend on the market conditions between price, pulp, and exchange rate in order to guide us in this decision.

(interpreted) This is Carlos, Felipe. I'm going to put this into context so that I may answer your question correctly. Right now we see a very sound demand from all the main markets where we operate. Of course July and August were stronger -- that is to say weaker seasonally in September, we see a resumption in demand, it bounced back already and this is our expectation for the fourth quarter.

We should be receiving the numbers of the Pdpc today. But the numbers published until August support this understanding on our part. And Walter said that we had a growth of 1,150,000 tons or 3.7% increase, and this is very close to the eight months of 2015 or eight month of 2014. And the shipments to China grew by 15% year-to-date. Eucalyptus, almost 7%.

China continues to play an important role in demand. China continues to buy. And August was the month in which we had the highest volume of short and long or hard and softwood, and so we see the new capacities of tissue and replacement of local fibres and at this level of prices, we still see producers who are integrated and that prefer to buy market pulp instead of producing this themselves in Asia.

We have the replacement of local fibres and also another factor that has been helping a lot which is the higher use of pulp -- paper grade pulp to produce or replace dissolving pulp. So it's very positive in the third quarter. There was a lower number of stoppages because the scenario is a little bit different from the [forward].

So we have here a sound demand, a supply which is slightly lower than the third quarter and analyzing the market conditions what we saw in China at the close of the third quarter, we decided to make an announcement regarding our price increase, $530, and we have been implementing this increase gradually and we believe that we will be successful to achieve the implementation of this amount in the next few weeks. So our reading is quite positive for demand for the fourth quarter of 2016.

(interpreted) Thank you very much Carlos.

(interpreted) Carlos De Alba, Morgan Stanley.

Walter, I really praise you and commend you for your focus on ROIC, but I would like to come back to that point because clearly we just heard Carlos saying that demand is sound and yet prices have come down significantly. So supply seems to be the issue and what I -- I want to make clear that I understand what Suzano is proposing here because if you want to focus on ROIC, but you stop your production, that generates positive cash in all tonnage, that means that your -- the number, numerator in your return will go down and unless you do something with your invested capital to reduce it by a larger amount, Suzano's ROIC is going to suffer.

So am I correct in understanding that Suzano is willing to go through a period of lower ROIC in order to try and enforce supply discipline in the sector? That's the first part of my question.

And the second part of my question is what is the ultimate gain with that strategy because unless higher cost production than Suzano's exceed the market permanently, at some point Suzano will have to bring back its low cost volumes and therefore we're going to go back to where we started. So I would appreciate any further details that you can say on this.

And then I had an additional question, just if you could please tell us the rationale for the purchase of Mucuri Energetica, I know it's a very small price tag for it, only BRL14 million, but it would be good if you can share your thoughts there. And then finally, if I may, there is a guidance -- sort of guidance to a lower structural cost of BRL475 per ton by 2021, 2022. So the question is how do you see Suzano getting to that lower cost? Do you see a stable reduction or you see a different path to get there?

(interpreted) I will answer each one of them. I would like to start by answering your first one regarding the discipline in supply. Of course your math is correct. If in the short run I remove volume, I will worsen my ROIC because I have a positive contribution margin in all the tons that I produce, and therefore this should have a negative impact on our result.

Of course we will be monitoring this 100% of the time because we don't want to be the only ones that will remove from the market. We will be analyzing the reaction on the part of our competitors, and if at some point in time we reach the conclusion that we will be the only ones to do this, then we will come back with these tons, and we will continue to operate with our total capacity.

So it is much more a sign or a possibility that we are taking into account and not a decision made. This is just a possibility to see if there could be a wider scope including all the players.

Okay. So the second question that you asked was about the acquisition of Mucuri. This was a condition that was put by the selling price party as the group is the same as the one of the forest and land in Maranhao, so that was a condition to have a package, and this Mucuri power plant has an energy generation of 19 megawatts of potential, but as physical guarantee it has 11 megawatts, and it has already been sold for a certain period.

So it's part of a package I would say. And you asked about the BRL475 or $125 at 3.8 today. The investments that we are making in the Maranhao and Bahia operations reducing the average wages and with the investment that we have been making in harvesting and priority logistics and the retrofitting of our plants and the reduction in the consumption of chemicals with a project that we have for many different plants, with all that, if we operate at full efficiency, we will get to this level of BRL475 of cash cost.

This cash cost will steadily drop over time and it will not be quarter on quarter because it depends on the average wages of that specific quarter, but the trend is downward gradually in order to obtain BRL475 cash cost, the same way we want to get to 2018, at BRL570 of $150, $150 of BRL570 are totally feasible with the view that we have today.

(interpreted) Jon Brandt, HSBC.

My first question is related to supply. Could you talk a little bit -- you mentioned that the (inaudible) project was delayed. I'm wondering if you could give us a little bit more about what your expectations are for the start and ramp-up of this project?

And then you also mentioned that you think with the OK project and Fibria project that supply could bring prices down. If you could sort of quantify that for us, how much further you think prices could fall over the next couple of years? And on your own supply, I just wanted to look at the question before in, is it fair to say that you would reduce your capacity even without sort of others reducing capacity at least in the short term?

So I guess I'm wondering if you reduce capacity in 2017, is it not just entirely on market conditions? Would it also -- would you need to have some sort of guarantee from other pulp companies that they will also reduce capacity?

And then my second question relates to paper imports. We saw a bit of a pick-up in third quarter. So I guess I'm wondering how concerned are you that if Brazilian paper demand does return going forward that some of this market share is taken up by imports and not necessarily by the domestic producers?

(interpreted) This is Carlos. All the information that we have -- all the information available to the media in general and the trade media, specialized media, this is all we have, so we would rather not speculate about OK, and we would rather refrain from making any remarks about the OK project. Regarding the prices expected for 2017, we would rather not give any price guidance for any period whatsoever.

Now, regarding paper, we had very positive news. We analyzed the demand data known by Iba, which is the association of pulp and paper producers, and ever since the beginning of 2015 we saw a positive variation quarter on quarter. In the third quarter it grew 0.8% vis-a-vis the third quarter of 2015, that is to say year on year.

This is a positive sign and in the year-to-date we might have a drop of 3.7%, 3.8% in printing and writing, and 2.6% of drop in paper board. We have not seen any concrete signs that allow us to believe in a fast recovery of demand, but once again we understand that the fact that we have registered a first positive variation, demand is very good vis-a-vis the third quarter of last year in spite of a still difficult market.

In spite of that we believe that we had a good performance in the domestic market. We sold 228,000 tons equivalent to 2.7% increase on a year-on-year basis. And if we exclude the volumes of the Embu unit that was sold at the beginning of this year, this growth would have been 7.5% stable prices in the third quarter and year-to-date a price increase of about 13.6%.

And growth would have been higher, if it were not, the growth in our volume in the coated paper line where we grew our production in the first nine months of this year by about 25%, that is to say our strategy to maximize the use of our installed base for coated papers has been working very well. We are placing volume in the market, we are growing our share and we have been very successful in all product lines and even more so in this line and with our initiatives are selling more and more to the domestic market, increasing our footprint in this market.

Okay. Thank you.

(interpreted) Lucas Ferreira, JP Morgan.

(interpreted) Regarding the delay in the shipment of pulp this quarter, it seems to be a one-off event. Could you say why this happened? I would say that this was a surprise in your results. And about the paper market, Carlos, exports went down probably because of the exchange rate and do you expect it to drop any further in the next few quarters? And how do you see the domestic prices for paper vis-a-vis the international prices with BRL3.1 exchange rate and this increase in 20%-24% happened in April.

(interpreted) This is Carlos. We had approximately 40,000 tons that should have been shipped at the end of September and due to delays in the ships, it only was possible in late October. So this has already been posted through October. So we have no loss there when we look at the half year or the year. In the third quarter in paper we sold 310,000 tons.

As we said before, we had a growth in the domestic market and a drop in exports. And this drop in exports can be attributed to two factors, one, the impact that we had of the fire in the Suzano unit and at that time during the second quarter call we said that we would be feeling the effect of this event in the third quarter and this is what happened. And the other part of the variation is related to the sale of the Embu plant that decreased our availability of paper board both for the domestic and the export market.

Regarding the prices, as we said we saw over 13% increase in the first nine months and this figure would have been much higher if it were not the fact that we had a higher growth in the coated paper line where the percentages of increases were lower. And not differently from what we always say, our pricing is related to variables regarding supply, demand, and international, domestic market, seasonality, currency of producing market, logistics cost. And we are always paying keen attention to all the variables in order to adjust our prices up or down as the case may be and our expectation right now is of stable prices in the domestic market.

(interpreted) Thank you.

(interpreted) Juan Tavarez, Citigroup.

My first question is just to clarify one point on the production adjustments that you could make. I think you mentioned that it will depend on market conditions including both pulp prices and currency. So I'm curious if the pulp price doesn't change from where we are today, and the currency does appreciate let's say another 10%-15%, you still would be willing to take downtime for the entire market, just to clarify that.

And my second question is just on the pulp market in terms of pricing regionally. We know you've been successful here at partially implementing the China price hike. I'm curious if you're seeing any room to make an increase in Europe or the US, any time soon?

And also lastly, if I may, you showed in your release BRL100 million write-down. Could you clarify exactly what that was related to, just for (inaudible)?

(interpreted) I will answer your question, Juan, regarding production. We are announcing right now the possibility of a reduction in our volume depending on the price and exchange rate conditions that we might see. Currently the price conditions for pulp are slightly more benign, that is to say in the last few weeks, and we saw an increase in pulp prices in the last few weeks.

And should this continue, it -- we might not be interested in doing this or the commercial move. On the other hand you have the appreciation of the exchange rate, that has been happening in the last few weeks, and we do not know whether this is something that will last or not, if it has any relation to the program established by the government regarding the inflow of funds to Brazil.

This is why we will be tracking very closely both these factors, pulp prices and exchange rates. At the current situation, the ROIC of the industry for low cost producers such as Suzano is lower than required and this is the reason why our view is that we should bring this price to another level. If the price goes to another level, we will not be interested in removing any volume from the market and we will be operating at full capacity. This is just a possibility that we are considering for next year.

(interpreted) This is Carlos. Over the third quarter we had another period of lower prices in Europe and in North America, and the average in the third quarter was $23 abroad. And in spite of that we practically kept unchanged our own prices quarter on quarter around $494.

As we said before we see a window of opportunity or we saw a window of opportunity in China which caused our announcement and we are being successful and we expect to reach our full objective. We had a very good evolution in October in this regard and I reiterate the fact that we are seeing a very sound demand in China.

And in the other regions in Europe and North America, we are following very closely everything that is happening in the market in order to position ourselves. We have not made any decisions regarding other geographies right now.

(interpreted) Juan, this is Marcelo. I would like to answer your third question about the adjustments. 80% of the volumes or close to BRL80 million refer to a write-down of goodwill regarding the acquisition of Futuragene that happened six years ago and part of the goodwill was allocated to certain contracts of research with third parties.

And as this is not an activity whose results can be pre-established, part of the research that the Company is carrying out, that's not the expected results. So as the goodwill was allocated to some research contract and some of them did not bear fruit, we have to write-down this goodwill according to the accounting rule and of course we are making other research, but we cannot reconstitute this goodwill.

So it is an accounting effect, 80% of the adjustment, and the remainder 20% most of that is because of some mortality events in the planting of trees and also some fires and we have to recognize this result which is not recurrent.

Okay. Thank you very much.

(interpreted) Bernardo Carneiro, Brasil Plural.

(interpreted) This is the first time I participate in the call and I have just started to cover the sector. Most of my questions have already been answered. Very good answers and the only doubt I have has to do with the 5.1 project which caused a slower pace of production in the third quarter. And regarding the removal of bottlenecks in production, do you believe this will remain in the fourth quarter and go to the 2017 as well and does it -- will it continue to affect the volumes in Imperatriz?

(interpreted) This is Walter. We made some changes in the stoppage of Imperatriz to [prepare] for the 5.1 that will be the general stoppage that will happen in September-October 2017. In these changes that we have to carry out, this generated conditions that were different from the operation conditions that we had before, and it took us a while to learn or the learning curve took a while and in September we operated normally, October normally as well.

So I see no reason for this situation to repeat itself in the fourth quarter or in 2017 in Imperatriz. And after this general stoppage next year we will have 1,650,000 capacity. Part of the acquisition of forest that we are announcing today will be used to bridge this gap of production.

So we have all the conditions in place and after the general stoppage next year we will be operating with 1,650,000 and we are not changing the 5.1 time schedule in Imperatriz.

(interpreted) Thank you Walter.

(interpreted) [Bruno Satini], Santander.

(interpreted) Regarding the acquisition of the power plant, what kind of cost reduction do you intend to obtain if any with this acquisition? Can you price or quantify this?

(interpreted) This is Walter, Bruno. Just for you to understand, the energy is 11 megawatts already sold. This is a long-term contract with (inaudible) sold at BRL205 per megawatt. This is the generation that the Company should have by means of the sale of energy in this SPP.

(interpreted) Thank you.

(interpreted) Humberto Meireles, Goldman Sachs.

(interpreted) Two questions, the first one about leverage. This is the third consecutive quarter in dollars, 2.7 if we consider the acquisition, it will be almost 3 times net debt/EBITDA, and with the challenging scenario for pulp as you said yourself and with the exchange rate that is more appreciated and that was the average for the second quarter, so what is Suzano's strategy regarding leverage looking ahead?

And within this context how much of the postponement has to do with discipline and how much does it have to do with leverage? And what about the strategy of cutting volume next year? What is the relationship with the leverage of the Company for the next 12 months?

And my second question is more on the qualitative side. Your discipline in production as you mentioned result over time many commodities where the players were price takers and in spite of having the incentive to cooperate, the low-cost producers have always competed with low -- and with pulp due to the cost curve the situation is not so different. So why do you believe this would be different and could we see in the pulp industry a discipline in supply coming from these low-cost producers?

(interpreted) This is Marcelo. About leverage, there are a few things there. Net debt has been dropping consistently reaching BRL10 billion this quarter and increase in leverage has to do with the drop in the EBITDA because of our calculation formula.

The acquisition that we are making now should have an impact when the payment is made, and this is not included in this leverage yet. In the current market conditions I think this should stabilize around this level after the acquisition.

What we have been doing in order to manage leverage is more or less what we said during the presentation. First, our net debt is in dollar so that we may have a better hedge in terms of cash generation and from the revenue viewpoint we have 50%, but in terms of cash flow it's 100% in dollar.

Besides we rode over our debt and we issued a bond and we are working with a much higher cash level in order to deal with the uncertainty that come from the market, mainly things that are totally out of our control, that is to say the price of pulp and the exchange rate. And we will continue to work with a high cash level and we will continue to work to promote the rolling over of this debt as the market gives us the opportunity to carry out new transactions.

The question of postponing Mucuri, the 5.1 project as Walter said, is more related to capital discipline and supply discipline than leverage. It will have a positive impact on leverage because we will not spend a significant amount, but the main driver was not leverage, but capital discipline and supply discipline.

And about the potential adjustments in our volumes next year, should it occur, it will not be relevant to our leverage. The margin that we will not be bringing to the Company let's say we make the decision will not change anything regarding our leverage. Humberto, about the conceptual side, that is to say the sector as a whole the industry, the pulp and paper industry has not been delivering to shareholders recurrently a sustainable level of profitability compared to other industries.

We see that the profitability of this sector has not been positive lately although cash generation is very high. On the other hand we really must analyze the fact that the CapEx of the sector is quite high. We are very capital-intensive, heavily capital-intensive, and because of that we must have enough cash generation to remunerate our shareholders.

The decision that we are making, we are not sure that this will bring other companies to follow in terms of the supply strategy, but what is clear to us is that Suzano has the responsibility of showing the path to be followed in order to seek profitability for the whole industry. So we will be making a decision in the future depending on the market conditions and should we see that the decision was not effective, then we can just go back and revert our decision. So it's more a decision as a guideline and not beyond that, nothing beyond that.

(interpreted) Thank you.

(interpreted) The question-and-answer session is closed. We would like to give the floor back to the Company for closing remarks.

(interpreted) I would like to thank you all for participating and in very positive fashion I would like to say that in this difficult market environment we have better conditions than we used to have and we see a drop in cost over time and we see a situation in which paper has been representing a very positive operational cash generation and this shows that this brings resilience to the Company. We have a very robust balance sheet and long-term debt with low cost we have capital discipline, once again evidence now with the drop in the CapEx projected for this year and for next year as well vis-a-vis the guidance that we had given you, and we are looking for structuring solutions so that over time we may have lower and lower cost.

And the acquisition that we announced today is evidence of that and our objective is to reach BRL70 or a BRL150 and our cash cost in 2018 a $125 or BRL475 at the exchange rate of today cash cost 2021 and 2022. And we continue to look after other areas, tissue projects will be started up next year as planned and the lignin project will be coming onboard and fluff growing as well every single month.

So the project is showing that it has a very successful potential. So we are very bullish about Suzano, about the relative position of Suzano in the industry. We see Suzano evolving in all aspects and the main aspect has to do with people. We are having better and better prepared people. They are very motivated and we believe that the result that is being delivered by Suzano to shareholders is and will continue to be a recurrent result and that will give our shareholders the confidence and give us credibility and sustainability.

So thank you very much and we wish you all a very good day and a very good week. Thank you.

(interpreted) The Suzano conference call is closed. Thank you very much for participating and have a good day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.