Suzano SA (SUZ) 2017 Q1 法說會逐字稿

(interpreted) Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Suzano Papel e Celulose's conference call to discuss the first quarter of 2017 results. All participants will be in listen-only mode during the presentation to be made by Mr. Walter Schalka, Suzano's CEO. Afterwards, we will start the question-and-answer session, when further instructions will be given. We would like to mention each participants will be allowed two questions only. (Operator Instructions).

We inform you that some statements that might be made during the call are projections or assumptions about future expectations. Forward-looking statements are subject to known and unknown risks and uncertainties as well which might lead these expectations not to materialize or be substantially different from these projections or assumptions. These risks include, among others, changes in the future demand for the Company's products, changes in factors affecting domestic and international prices of these products, changes in the cost structure, in market seasonality, in prices charged by competitors, exchange rate variations, changes in the Brazilian political and economic scenario as well as in emerging and international markets.

Now, we would like the floor over to Mr. Schalka, who will begin the presentation. Thank you.

(interpreted) Good morning, everyone. It's a great pleasure to have you here during this conference call about the results of the first quarter of 2017 for Suzano Papel e Celulose. I would like to mention to those of the laws that would like the presence of officers Alexandre Chueri,

Forestry Business Unit Officer; Carlos Anibal, Pulp and Paper Business Officer; Marcelo Bacci, our CFO and Investor Relations Officer; Carlos Griner, Human Resources; and Renato Tyszler, in charge of New Businesses and Strategy and Development; and Michelle Corda, Investor Relations Manager.

In order to give you an overview about the results of the first quarter of 2017, I would like to start by saying that I bring very good news and even better perspectives. I believe that the results achieved by Suzano in the first quarter show a consistency and resilience of results which is very to the point and this is being shown quarter after quarter. Always in the direction that we announced the three strategic pillars that we announced and I'm very positive regarding the future based on these consistent results coming from the actions that we are putting in place and that are preparing us to new conquests. I believe that the macroeconomic scenario is very positive and benign as far as pulp is concerned, and this will allow us to achieve better and better results over the next few quarters. I would like to say that we continue with our philosophy and our discipline, both in the financial area, our capital area, product portfolio more and more encompassing and hedging the possible volatility that might happen in exchange rate or in the price of pulp. We continue with our philosophy of discipline in terms of our supply, should this be necessary, and a very strong on cost discipline, expenses discipline as we will be showing during this presentation.

Starting by financial discipline, I would like to mention that it's important to say that we had a reduction of BRL600 million in our debt in this quarter going to BRL9.7 billion of net debt. Also it's important to mention that we extended our average debt maturity, which is now 62 months, with the issuance of a 30-year bond in very favorable conditions issued by the Company. And as we prepaid and we amortize future debt, we created an amortization schedule which is much more balanced for the next few years.

Our successive liability management efforts that we have been putting in place over the year and increasing the debt maturity and reducing the cost of debt, which is 4.9% in dollars, 100% dollar-denominated. This allows the Company to have a stronger and stronger balance sheet and better prepared to face the future. Our net financial expenses dropping consistently quarter on quarter due to our successive liability management effort and we have two things to announce to the market. The first is the approval by the Board yesterday of an exchange rate policy and our cash flow going from 40% to 75% and just remind you, we had a policy to protect our flow limited to 40% in the first 18 months and now we continue to maintain the 18 months of protection of hedging but we increased the limit to 75% and we have been doing this by means of zero color cost. This has allowed us to have additional gains and additional protection to our results.

Our net debt to EBITDA ratio was 2.8 times and we are also announcing to the market that yesterday the Board approved an indebtedness policy limiting our indebtedness to a net debt to EBITDA ratio of 3 times, in some moments in the investment cycles limited to 3.5 times and should we have a higher figure than that, we would have to have an adjustment policy immediately proposed by the executive board to the competent agents. The financial discipline that we are making evident over time leads us to have fund-raising compatible with other investment-grade companies. Today we are traded in the secondary debt market at parameters that are very similar to other investment-grade companies and this proves that the Company has all the conditions that are recognized by the market in order to have this investment grade recognized by the industry.

On the CapEx discipline side, we continue to work with flexibility in our investments. We announced to the market at the end of last year during the Suzano Day that we would be giving a guidance of BRL1.8 billion in investment for this year and BRL1.1 billion in sustaining CapEx and BRL0.7 billion in structural competitiveness and [adjacent] businesses and we are keeping this guidance. We had investments of over BRL300 million in the first quarter, a little bit more than that, and we concluded in this quarter the investments of the new Mucuri lines, a 100,000 ton increase in capital. We have 150,000 tons of conversion capacity in Mucuri now. We have the new crystallizer of Mucuri, which is part of the 5.1 Mucuri project that we split in order to capture value immediately in Mucuri and this was concluded now at the beginning of April. We will have the de-bottlenecking of Imperatriz going to 1,650,000 tons in Imperatriz, and already in the general downtime that we will have in the second half of this year and the idea is to conclude Mucuri in the third quarter according to our schedule and the two tissue machines of Mucuri and Imperatriz are on schedule and we will be operating the first Mucuri machine in the third quarter and afterwards, Imperatriz machine in the fourth quarter of this year.

I would like to highlight the fact that the Company is always looking to the future and is always making investments thinking about capturing value and at the end of this year, we will have invested BRL1.5 billion approximately, with no capture of value. At the end of the year, we acquired the Queiroz Galvao forest and purposely we are not harvesting [expressively] in these forests because we are waiting for a higher degree of maturity in these forests so that we may have a lower cash cost in the future. Up to the end of this year we will have invested BRL540 million in the tissue project without having captured any value yet. So this means that the Company could consider that these projects that we are doing are projects that we will be capturing value over time. So the Company always looks to the future, preserving the Mucuri forest in the past and always looking at the VPL and not the maximization of the immediate result of the Company.

We would like to mention that the maintenance CapEx, which is very expressive at Suzano, we are looking at the efficiency of investing these resources. We have BRL1.1 billion per year invested in sustaining CapEx and BRL250 million on the industrial side and approximately BRL850 million in replanting our forest areas. BRL221 per ton of sustaining CapEx per volume produced and this way of gaining efficiency in all lines is also reproduced in the maintenance CapEx that is reasonably confident in spite of inflation in the last few years, sustaining CapEx.

We are always looking to have a portfolio of products that might give us more added value and less volatility in our results. One critical example that we have is tissue. We decided and we made investments in two tissue machines, one in Imperatriz and one in Mucuri, as I said before, and they should be started up by the end of this year and then we made the decision of making investments so that we may produce finished products and not only double rows. So we acquired four conversion machines, two for each one of the sites, and we will be doing conversion with our own brand in the market when we start this product. This should be generating -- as we said to the market before, this should generate quite a lot of value. We have an industrial competitiveness that is very high, a very good logistics position and we will be investing in the creation of trade marketing brand and a better and more encompassing relationship with our clients also in the tissue area. Both Mucuri and Imperatriz are on time and on budget.

I would like to mention one important difference of Suzano, which is our focus on cost efficiency and expense efficiency. We are showing you this chart with a very expressive figure in terms of productivity gain. Between 2013 and 2017 we had inflation in Brazil of 26.4% and our COGS per ton went up 6% in this period. And this shows more than 5% increase in productivity per year and this is the target that we are establishing to continue in the next few years. This is an ongoing efficiency gain that the Company intends to continue having.

On the SG&A side, this figure is even stronger during this period. We had a nominal reduction of 8.7% reals per ton, so whereas inflation was 26.4% and this gives the dimension of how the concept of cost and expenses and discipline is built into the Company's culture and is part of our actions, actions with investment and structuring gains on one side and operating efficiency on the other side and this should continue to reproduce. And as you can see on the next slide, we had a cash cost of BRL585 and we have actions in place that allow us to have a level of comfort about the target that we have established for ourselves, which is BRL570 for pulp in 2018 and BRL475 between 2021 and 2022. And the next steps that we have to capture are the de-bottlenecking of Imperatriz, the crystallizer of Mucuri and the optimization of the average radius of our forests. It's very important to mention that the Company that has 3.5 million tons of capacity today for pulp production, BRL100 of variation in the cash costs represents [BRL315 million] more in our EBITDA over time. Therefore this creates a very significant value for our shareholders and the trend that we have in terms of cash costs already in the last few quarters should continue to happen in the next few years with the actions that we have been putting in place and we are very pleased with the evolutions that the Company has been delivering.

Now talking about each one of our businesses, the paper business had a slight decrease in sales vis-a-vis the same quarter of last year and everybody knows that seasonably this is the worst quarter of the year for paper. The EBITDA per ton was slightly lower due to nonrecurrent expenses in the Suzano unit and downtime that we had in Mucuri, a cold stoppage of the whole plant, so affecting the paper business as well. It's important to mention the resilience in the paper business in ROIC. ROIC the last 12 months was 14.5% and the Suzano Mais Program is something that has been increasing significantly quarter after quarter. We had a new progress this quarter as well. We would like to highlight the volumes in the quarter. The volume of coated paper was a positive result in volume this quarter.

In relation to pulp, we are very bullish about this market and we would like to make it clear that we were surprised positively by a better price condition that we did not foresee at the end of last year and the price of pulp has been going up month after month and therefore we will have a second quarter much better than the first quarter in terms of pricing? We also had a production according to the parameters that we expected because we had this scheduled stoppage in Mucuri this quarter and we had a slight gain of EBITDA per ton in pulp going to BRL723. Of course, pulp depends very much on the exchange rate and price and 9.4% was our ROIC because of that. And the positive news that I would like to give you is that we are looking at the market for the next few months with a very important volume and better and better prices and this should bring about very good results to Suzano in the second and the third quarters of this year and the operational performance improvement of the Company allows us to mitigate the impact of external factors. In the presentation that we published for the market we presented an adjusted EBITDA per ton in the last 12 months of BRL737, even though it dropped vis-a-vis previous years because of price and also because of exchange rate. It is rather resilient compared to the industry and the operating cash flow of BRL522 so the Company is very good in terms of operating cash flow divided by the base of assets gives us our consolidated ROIC in this quarter -- in the last 12 months, I'm sorry -- was 10.6% below what we would like to see but very well placed in relation to the market as a whole. And this shows once again consistency and resilience in our results.

Having said that, I end the presentation of our results for the first quarter and I place myself and all my colleagues at your disposal in order to answer your questions.

(interpreted) Ladies and gentlemen, we will start now the question-and-answer session. (Operator Instructions). Thiago Lofiego, Bradesco BBI.

(interpreted) Good morning and thank you for the question. Walter, could you talk about the cash cost dynamics for the next quarters and the average radius in this quarter and what is the evolution that you expect for the next few quarters to understand when and where you will get to your objective? So maybe now we can have maybe a slight volatility, maybe not with a very strong drop as we had in the last few quarters but could we expect volatility or not?

And the second question, to Anibal. What about acceptance of prices in China and Europe and what is the Company's bias in this regard for the next few months, especially because of seasonality in demand and more supply from the market in the second half?

And Walter, I'm not sure I understood correctly but you said that you were very bullish about the pulp market. What has changed in your mind? What changed in your mind regarding this? Thank you.

(interpreted) Thank you for your questions and we will be talking about the cash cost and the average radius. The average radius in the first quarter was 177 km and it would be close to what we will see over 2017, 184 km of average radius for the whole year 2017. This downward trend for the next few years will happen as we have deliberately made a decision to utilize more distant forests in order to preserve the forests that are closer so that they may achieve a higher maturity so that we may have growth in the average -- in the Company. With a reduction in the average radius of forests and with the gains that we are achieving in the industrial area, we believe that it will be possible to reach 570 next year. This year we will have some slight variations regarding what we had in the first quarter. It will be around the figure that we are at today, which means that we will have an additional year of a nominal reduction in the cash cost in relation to last year, another year of efficiency gains showing our consistency in results.

Now I would like to give the floor to Carlos and then afterwards I will come back.

(interpreted) Good morning, everyone. Thank you, Lofiego, for your question. I will take this opportunity to share with you our broader understanding of the market fundamentals. These fundamentals have been showing very sound in the last few months and we believe that the next few months will not be different but a sound demand from all regions highlighting also the strength of China and the numbers recently published by the [PPBC] reinforce the demand in the first quarter this year growing around 6% if we compare to the same period last year. China, 21% growth on the supply side. We had scheduled maintenance stoppages and we will have more in the second half, mainly in the second quarter, mainly in the northern hemisphere. Delay in the startup of new capacities and other grades of pulp with a higher volume than the market estimated and all these factors contributed to reduce the availability of pulp and the same will occur in the next few months.

In inventories we have the understanding and the perception that inventories are at low levels and the point of equilibrium in the supply chain in many regions and the PPBC numbers reinforce that. 33 days in March, a reduction of 5 days vis-a-vis the close of 2016. Hardwood 38 days, 8 days less vis-a-vis March 2016 and our prices did not reflect yet fully the increases announced over the quarters and the prices realized came from our geographic mix and mainly from a dynamic of price evolution for each one of the regions. The prices in the first quarter went up quicker in China than in other regions. The market fundamentals, as we said, continue to support our announcements and we were totally successful in implementation of the increases that we announced for April. We believe that we will have no difficulty whatsoever to implement the prices announced for May. So we work with a positive price scenario for the second quarter and the numbers should reflect our view. And for the second half of the year, as we have seasonality in the northern hemisphere, there will be no big variation in demand and the new entrants could impact this supply and demand ratio. So corroborating what Walter said before, we are bullish about the pulp market for the next few months.

(interpreted) Thiago, Carlos summarized the reason why we are bullish because we did not estimate a growth and demand of this magnitude and of course we didn't know of the delay of the startup of new capacities and specific problems in some other companies regarding capacity. So on the demand side this generated a number which is higher than we expected and on the supply side, a lower figure, creating a very positive situation for pricing. By means of these increases we have been evidencing this, the increases that we have announcing, and today I have a perspective that is different from last year's, more bullish than I had at that time.

(interpreted) Thank you, very clear. Thank you.

(interpreted) Ivano Westin, Credit Suisse.

(interpreted) Good morning, Walter and other officers. Thank you for the call and for the questions. About the paper segment, looking at the sales volume in the first quarter we see a drop year on year and quarter on quarter as well, and Walter, at the beginning of your presentation you mentioned seasonality. So could you talk about your outlook for the remainder of the year, the evolution for the next few quarters in terms of volume and also the outlook for prices in the domestic market for paper? And also you referred to nonrecurrent expenses during your presentation that impacted the results of the first quarter with the adjusted EBITDA, which was slightly lower than the one that you had been achieving. So including the nonrecurrent effects and looking at the possible volume increase and maybe price increase, when do you think the paper market will go back to normal?

(interpreted) This is Carlos Anibal. Good morning. We published the Iba data very recently about the domestic demand in the first quarter for printing and writing paper and also for paperboard and we saw a reduction of about 2.3%, a reduction that was much smaller than the one that we saw in the first quarter of 2016 and also of 2015. We understand that the domestic demand once again for printing and writing and also paperboard have already reached their lower level and we believe that the supply chain where we operate is already with very low inventories. So any sign of concrete recovery of the economy we believe that we will be seeing an immediate recovery in the volumes of paper. So we have a positive view, a positive outlook with the concrete recovery of our economy, provided there is a recovery of our economy.

I would like to draw your attention to another victory that we had in the first quarter in our paper business. 2016 was very important in terms of advancing our client base. We reached over 35,000 clients in our paper business in the first quarter this year, even more progress in the volume showed for what we call more scattered accounts and the new expansion of our client base. We were able to grow the number of clients in the first quarter approximately by 10% vis-a-vis the growth that we had already achieved in the first quarter of 2016. Now, talking about prices, we announced prices for uncoated paper and for paperboard and this is [so the way] and we always pay attention to the market conditions, exchange rate conditions and also the level of imports.

(interpreted) This is Walter. I would like to answer your second question about nonrecurrent costs. We are investing in our operations in all areas, also in paper and specifically in Suzano. We had an impact on the Suzano unit, I mean a higher impact of costs in the first quarter and that is reflected in the COGS per ton but allocated basically to the paper business, which in the Suzano unit is the main unit of production and this led to a reduction of the EBITDA per ton in the quarter and we will clearly -- as of this quarter we will see a recovery in this figure that should be equal or higher than the last quarter of last year. So we will have again a normal EBITDA, close to BRL800 per ton.

(interpreted) Very clear, thank you. Walter and Carlos Anibal, could we go back to one point? You talked about the positive outlook that you have for the market and the number of clients that you have in your base. I would like to know if you already see demand increasing in talks with clients?

(interpreted) We do not have any concrete signs of recovery of demand yet, just to make it very clear, and we believe that there is a very low inventory in the whole chain, so any sign of improvement in demand at the end, this will have repercussions in our chain and we will see a quick recovery of our volumes. But this is conditioned to a recovery of the economy as a whole. We have no concrete signs yet.

(interpreted) Very clear, thank you.

Marcos Assumpcao, Itau.

(interpreted) Good morning, everyone. My first question is about the de-bottlenecking of Mucuri. Do you know when you will be able to go back to this project?

And the second question to Schalka. Looking more to the future we can see very clearly results improving and companies already generating cash and deleveraging happening in terms of the Company's reaches and there seems to be a very clear trend and no way back. So what is the perspective for the use of your cash generations [outlook]?

(interpreted) Marcos, thank you for the question. About Mucuri first, the investment in de-bottlenecking of the line one of Mucuri, we decided to split this investment in part and we are doing this in part and we have just started up the first stage which is the crystallizer. This is an investment that we made of about [BRL60 million] in the Mucuri unit and we will start to capture value as of the second quarter already with a certain ramp-up of course and there are other investments on the way. The final phase of the project has not defined yet. We will be defining this by June, which is the deadline for us to finalize the last part of the Mucuri project, and always giving more importance to investments that may give us a higher ROIC and that depend less on volume increases, and there could be some turbulence regarding volume with the startup of new capacities.

Regarding deleveraging, you are correct. We will continue to delever the Company and we believe that we have already reached the peak of the net debt to EBITDA ratio this year with these 2.8 times and as of now, we will have an EBITDA higher than the one that we had in equivalent quarters last year. So our total EBITDA for the last 12 months will resume growth and because it was dropping and now we have lower EBITDA because of the impact of the price of pulp and the exchange rate and as of now, considering that the exchange rate remains stable and with the pulp price going up and the cost and the expense metrics improving, we will see EBITDA going up vis-a-vis last year. Therefore, the absolute EBITDA for the last 12 months will be going up and the net debt to EBITDA ratio will be dropping because net debt is dropping as well. So this trend is true and we will continue to invest in the development of our plans, our mills, our forests and our balance sheet will become more and more robust, preparing the Company for the future, preparing ourselves for any changes that might happen in the industry. So this is the policy that we have been adopting. Our dividend policy is very reasonable. We are paying out about [BRL370 million] in dividends and this should not be changed significantly for the next few years.

(interpreted) Thank you very much, Schalka. Another question, please. You said in your presentation that Suzano has not yet reached the ROIC level that you want. What is your target in terms of ROIC?

(interpreted) The figure, Marcos, we do not disclose to the market but we can give you the following. We have been analyzing the industry. You analysts on the sell side in general, you know that the average of our industry is a WACC between 10 and 10.5. Therefore, 10.6 of ROIC, in my opinion, is quite poor, so to say. We are above the WACC with a positive spread but we want to have a much higher spread than the one that we are having right now. Thank you very much.

Lucas Ferreira, JPMorgan.

(interpreted) Good morning, everyone. My first question is to Carlos Anibal. Carlos, how do you see the paper market in China and in Europe? I would like to understand if you believe this price movement is sustainable for paper, how much of that is sustainable and what will help these prices to stay at these high levels? Do you believe there will be some speculation regarding prices or do you believe there is demand to sustain this because of more operations in China or lower capacities? This is my first question.

And regarding the working capital of the Company, how much do you believe would be the expected working capital level for this year? Maybe you have to use it partly for tissue or for the de-bottlenecking. So could you talk about working capital for this year?

(interpreted) Good morning, Lucas, and thank you for the question. As far as we understand, we do not expect any major growth in demand of printing and writing paper in China. What happens in fact is a migration of demand for papers produced by non-virgin fibers to virgin fiber and we are benefiting from this move. So we see our clients who work with virgin fiber gaining market share in the Chinese market as a whole, although this growth is not very big. And also, because of this movement, there is a very expressive increase in prices. Prices in China for printing and writing paper produced with virgin paper and also paperboard went up 20%, 30%, 35% since October. This has been helping to sustain this wave of price increases in pulp and also coming from the price increases in pulp we see price increases in Europe, as well. Mainly printing and writing producers and paperboard and tissue in Europe have already announced price increases, which is very good for pulp. I would like to remind you, as I said before, that we announced in the last few weeks also price increases for our printing and writing paper and paperboard in Latin America, about $30, $50 increase.

(interpreted) Lucas, this is Marcelo. Talking about working capital, our need for working capital is around BRL2.2 billion and we do not foresee any relevant change looking ahead. Although there might be some small changes, the inventory level that we have for pulp is quite low today. Maybe in a normal situation we could have a higher inventory but it is low because of the market dynamics that my colleagues have already explained to you. And the relation to pulp price, as the price goes up the need for working capital goes up because accounts receivable goes up and there's more an accounting effect than anything else and tissue should consume some working capital. But as we believe there will be a very gradual ramp-up, I do not believe it will be a very relevant impact for the next few years.

(interpreted) Thank you very much.

Jon Brandt, HSBC, in English.

Hi. Good morning. Thanks for taking my question. First, I wanted to touch upon the tissue segment. You mentioned that you would be ramping up slowly. Could you give us an idea as to maybe what 2017 and 2018 tissue sales volumes will look like, what sort acceptance you have for the tissue?

Then I'm curious as to your decision to go into branded rather than private label. If you could give us an idea as to why you decided to do Suzano tissue rather than private label tissue.

Then my second question relates to something that you mentioned back in the Suzano day late last year. Could you give us an update as to where things stand with the potential Novo Mercado listing or an ADR listing? Is that something that's still being discussed at the shareholder level and is there an expectation as to when that will be decided? Thank you.

(interpreted) Jon, thank you very much for the question. This is Walter answering the tissue question. We made the decision to start producing the final product and this means that we will have branded products, yes, but we could also operate with private label. So we can work in both categories, no problem.

And in terms of volume, we understand that our competitiveness in the north and the northeast will be very significant. We do not want to create a disruption in the market, a very significant one. Of course we will be creating a certain turbulence in the market and for this reason we will have a gradual ramp-up. We are not giving guidance about the volume for the next year yet but the margin per ton that we deliver in Suzano today is very relevant. The one that we presented in Suzano for tissue, the operating cash flow, because besides having an expressive gain on the pulp price, it's important to mention that we will not transfer the pulp at cost. It will be at prices of the international market to tissue. But in spite of that, we will still achieve an operating gain and logistic gain working with pulp, with all utilities inside our company and all the logistics in order to have expressive margins and a higher monetization of the VAT tax that we have accumulated in both plans. The VAT is the ICMS. So it will be a project with a very high cash generation per ton.

In relation to the Novo Mercado, this is being discussed. The shareholders are discussing this and we are waiting for their decision about how and when to go when continuing this direction.

Thank you, Walter. Just quickly, to follow up on the tissue side, with your decision to produce the final product, is there any pushback from your pulp clients that you are now competing with them, or were they more understanding?

(interpreted) Jon, we are being extremely careful in regard to this. We are getting into the market in the north and the northeast and all clients in the north and the northeast that we supply with pulp, they know about our intention of competing in the final market and we might have some loss in terms of pulp volumes. However, these volumes are very small and we will be able to reposition these volumes and channeling them to the markets, either locally to other clients or abroad. We do not believe we will have problems with our clients. Many of them said that we will continue to buy pulp normally from us. But let's say one client decides not to buy pulp from us anymore. It will be very easy for us to allocate this volume to other regions.

Great. Thanks, Walter.

(inaudible), Merrill Lynch.

(interpreted) Good morning, everyone. Thank you for the questions. Walter, my first question has to do with what you said about supply discipline. Considering that the exchange rate will be stable, what will the range of prices that will be critical and that could really make you go ahead with your supply discipline regarding Eucafluff? What about the test with client and what about the possibility of ramp-up of volumes? Thank you.

(interpreted) Thank you for your questions. The first one has to do with the supply discipline. I believe it's mandatory to mention to all of you that 9.4% ROIC, which is what we had in pulp for the last 12 months, is insufficient and below what is necessary to compensate or to remunerate the investment that we have been making. So ROIC has to go up. Of course, during these last 12 months, the price increase that we started to practice is not totally reflected yet, because prices were dropping last year and only as of October last year, they started to go up again so they are not reflected yet. So if you look at the snapshot of April and May about our pricing, you will see that our ROIC will be much higher than 9.4%. In any way we believe that our gauge should be the one of price, a price that brings adequate remuneration to the Company as a whole, a good return to the Company, and we will be tracking this consistently. Of course, we cannot say anything about that because this could lead our competitors to change their pricing strategy and make some moves in the direction. So this is the reason why we cannot bring this information to the market. However, we will be tracking this at all times and the level of prices that we have in place today do not justify any rigorous supply discipline. We are very comfortable with the price levels that we have. Regarding Eucafluff, we have broken the record of sales once again in the first quarter and once again we will be breaking this record in the second quarter. We are exporting Eucafluff to many countries and we have approval in many markets and many different industries and we are doing this gradually. Eucafluff will be very -- we have (inaudible). As of April we will start producing Eucafluff again because orders keep coming in and acceptance is increasing. It's important to mention that this is an innovative product, so we must be very resilient and understand that this will not be accepted immediately. We have to carry out market tests. We have to have the approvals of clients and this happened with hardwood pulp in the past. We are very comfortable with that. When hardwood pulp got the market everybody said, well, it doesn't work. It's not good and only softwood is good and today after many years, you can see that the hardwood pulp represents over 50% of the total market for pulp and growing expressively in the last few years and it will continue to grow in the next two years. And many applications that people said, well, this cannot be done with hardwood like tissue today, it is produced with 100% hardwood and it's the same in Eucafluff. There are clients that do not accept it first and some competitors say that it doesn't work and we are very comfortable with that. This is a gradual process and we are consistently improving the quality of our product and the acceptance of the local client base and global client base because we are already exporting to Europe, to China, to the US shows that this is a product that will be successful over time. So we are very comfortable in terms of the reaction on the part of competition, which is very normal vis-a-vis our clients, but looking in the long term this product will be very important in the pulp and paper industry. Eucafluff will be a big hit.

Thank you, Walter.

Bruno Giardino, Santander.

(interpreted) Good morning, everyone. I would like to know about paper prices. Is there a lot of pressure because of the import of paper with the exchange rate that we have today?

And regarding tissue, what about your first talks with potential buyers for the product? Thank you.

(interpreted) This is Carlos Anibal. Imports of paper are stable in the first quarter and the fourth of last year so the first price increases are still underway and as you said, we are paying keen attention to the market conditions and exchange rate and levels of imports. So we are working to implement the prices that we have announced.

(interpreted) Thank you. This is Walter. We have a lot of experience in the production of paper and production of pulp, Bruno. But we have a small experience in the B2C business, [exception made to the report] that brings a certain level of experience, our experience is not long and we recognize that and for this reason, we will be bringing to our business somebody who has this experience. So we're bringing to our executive committee somebody who has experience in B2C. We have not started the contact with our clients yet. We are working with all variables in the process; however, we still have to mature this to operate this business. You must not forget that in the third quarter we have a ramp-up of the jumbo roll production and in the fourth quarter we will see the finished product in the market. So we do have some time to develop this and we are working on that and we will certainly have tissue as a relevant product for us, with an upward curve for volume and market share as well. Undoubtedly we will be the market share leaders in the north and the northeast market in the next few years.

(interpreted) Thank you, Walter. Just a follow-up. So you're looking for somebody, an officer to be in charge of that?

(interpreted) Yes, that is correct.

Thank you.

Next question in English from Carlos De Alba, Morgan Stanley.

Good morning. Walter, have your views on the pulp business changed? Do you think that it is possible to generate ROICs above the cost of equity, cost of capital over the cycle? And if not, then how do you see the situation could potentially be improved or fixed?

Then second, could you comment about the certainty about the strength of the Chinese pulp demand? How do we know that a big part of the imports of pulp into China in the last few years have not gone to inventories or to repair the inventory levels? Because the Chinese economy, while it's growing, the government is trying to tighten up some monetary policy and also reduce the level of growth to probably a more sustainable situation. So I would appreciate if you can comment on that.

Then just finally, maybe for Anibal, if you could repeat or let us know how much were prices in the domestic paper business increase which you mentioned the Company is in the process of being -- of implementing? Thank you.

(interpreted) Carlos, thank you very much for your question. Just to remind you, at the beginning of the year we announced increases of about 10% for paper and coated paper and the implementation is underway and we are paying attention to all the market conditions.

(interpreted) Carlos, thank you for your question about pulp and paper. Your first question has to do with the ROIC over the cycle. Carlos, we are working on the two sides of the variables -- the cost side, to guarantee that even in situations in which prices are lower, we will have a better ROIC for pulp. And the dimension of that is very significant and I said that during my presentation. I said that BRL100 of cost reduction per ton and we had more than that in the last few years and we will still have in the next few years, represent [BRL315 million], representing over 2 points of ROIC gain in our business. So on the cost side we have something very important that we are working on and on the price side, of course, it depends on supply and demand and demand now is very strong.

I will start to answer your second question. Demand from China is real. Personally, together with Carlos, we were in China in the last few weeks and we talked to our whole client base and our whole client base has been gaining market share over recycled fiber, not only in issue but also in paper. So it's a matter of demand and not inventory. The inventory levels that our clients mentioned to us are low and the inventory level at the ports mentioned in all the analysis that we have are low. So it is not a matter of storage or inventory on our client base. All our clients, all of them have been requesting, ordering higher volumes than the ones that we have in our contracts with them, so demand is very strong right now.

And going back to the supply side, the supply of pulp is less predictable because we have the entry of new projects coming and the impact of these new initiatives will tell us about the impact that we will have in the next few quarters. The scenario is very positive. I understand that the work that our Asian competitors are doing, going to dissolving pulp or even converting to the sale of paper, some of our competitors having a ramp-up much slower than we expected in their plans, all that allows Suzano to have a very positive pricing environment. Taking into account the industry as a whole, on the demand side I'm consistently bullish and on the supply side of course we will have different situations, depending on the entry of new capacities that could impact the supply side, we expect to have ROIC for pulp with a positive spread over the WACC and a very positive spread. It would be nonsense for us to have the size of investment that we make in order to have ROIC close to the WACC so we must have a much more positive spread and we're working on that.

And is it possible to quantify or [detail] guidance on the potential improvement on the total company's ROIC from the integration into tissue?

Carlos, it's very significant ROIC because based on the capital invested that we have, over BRL22 billion, an investment of BRL540 million is not so big. It's 2.5% of our investment base but the ROIC for issue will be very positive, very positive, because it not only integrates the chain as a whole and therefore we will not be selling products hundreds of dollars but in thousands of dollars, with a conversion cost that will be very low because we're investing in the state-of-the-art technology for that, with little labor involved. It's not labor-intensive. And at the same time, we will be bringing the monetization of the ICMS or VAT credits so the operating cash generation of the tissue business is very significant and the ROIC of issue is very high. But as it only represents 2.5% in this initial phase of our overall investments, it's not going to bring about a very big change in the consolidated ROIC of the Company.

Thank you very much.

(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 very much for participating and I would like also to thank all the associates of Suzano who consistently have been delivering better and better results every single quarter. So it's really a reason for us to be very proud to see the implementation of the strategy that we decided and the actions and the tactics and the structuring and operational changes and the results are there. We are showing the market that it is not a one-off result for one quarter. It's a consistent result, cost and expenses going down, revenue management very precise in the paper area, with consistent gains in the paper business bringing adequate ROICs and creating new paths for the future, such as Eucafluff and the tissue business that we will be starting this year. So there's a whole range of actions that are very positive in all areas of the Company, with a better and better balance sheet and results in the financial area that deserve to be congratulated by all of us. This is all very positive and I'm very happy. I'm very proud and very bullish regarding the future of the Company.

Thank you very much and wish you all a very good day.

(interpreted) Suzano Papel e Celulose, the conference call is closed. Thank you very much for participating and have a good day.