Suzano SA (SUZ) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Suzano Papel e Celulose conference call to discuss the results of the second quarter of 2017. (Operator Instructions)

We would like to inform you that some statements made during this call are projections or forward-looking statements about -- these assumptions 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 the future demand for the company's products, changes in the factors affecting domestic and international product prices; changes in the cost structure; changes in market seasonality; change in competitive prices, exchange rate variations, changes in the Brazilian political economic scenario and emerging and international markets. Now I would like to give the floor to Mr. Schalka. Thank you.

Good morning, everyone. And thank you very much for participating in the second quarter of 2017 earnings conference call Suzano Papel e Celulose. I would like to introduce Marcelo Bacci, our CFO and IRO; Michelle Corda, our Investment Relations Manager; Carlos Anibal, Pulp Executive Officer; Leonardo Grimaldi, Printing and Writing Paper Executive; Renato Tyszler, Innovation and New Business Strategy Officer; and Julia Fernandes, our People and Management Officer. It is with great pleasure that we present to you the results of the second quarter of Suzano Papel e Celulose.

Reinforcing our consistency of results, we are bringing you the broad figures. Adjusted EBITDA in the quarter of BRL 1,157,000,000. The figure is 20% higher on a year-on-year basis and 37% higher on a quarter-over-quarter basis. And as we always say EBITDA is not the KPI criteria that is the most adequate for our industry. We understand that operating cash valuation is a much better KPI and we had BRL 910 million, a 46% growth on a year -- on the quarter-on-quarter basis and 26% on a year-on-year basis.

Our ROIC of the last 12 months was 11.3%. And we would like to continue to grow this ROIC. And for us, it is fundamental to have sustainability and predictability of results. This is why we are always looking at ways to reduce volatility in our results over time, and also growing our spread over the ROIC over time. This is what we are seeking at Suzano Papel e Celulose.

Pulp cash cost in this quarter was very positive BRL 568 per ton, driven by production stability, reduction in the consumption of chemicals and a higher generation of energy but also a very positive result because of the forestry point where we had less third-party wood and a shorter average distance in the quarter.

Our debt-to-EBITDA ratio was 2.7x. And the figure is going down over the year and we must not forget that we closed the previous quarter at 3.31 exchange rate. That is to say we had an effect of the monetary variation due to this exchange situation and that is changing now because of the appreciation of the real the last few weeks. And the results' consistency is driven by a whole set of actions inside and outside the company.

In pulp, we have a very robust demand, a very major increase in the volume of pulp in the first half of this year 970,000 tons of growth in the global market of pulp -- market pulp. And this allows us to have a price increase that is being captured quarter-on-quarter. We had a price realization in this quarter that was rather positive. And we understand that we will have a third quarter also very positive in this regard because the prices are going up gradually every single month, and this is reflected also in the results of July.

We understand that we have a price level that is rather good and very stable. Afterwards I know that you're going to ask questions later that we'll be talking about pricing.

In paper, the volumes were lower than what we expected part due to fluff that we grow in the volume of fluff and that cannibalizes part of the paper volume. However, the Brazilian market is rather stable. So it does not allow a growth in volume and prices in the adequate fashion. And it is important to remind you that in paper there was a postponement of the [P&LD] volumes from the first to the second quarter. So Leo will be available to you to answer questions about paper.

We continue with cost discipline, capital discipline, our CapEx -- our sustaining CapEx is at adequate levels and we are announcing today the maintenance of our guidance for CapEx for the year of BRL 1.8 billion and BRL 1.1 billion of sustaining CapEx and BRL 700 million in retrofitting and extension of our operation.

Tissue. Also good news in this regard, on time and on budget. Third quarter of this year we'll be operating in jumbo roll in Mucuri and in the fourth quarter in Imperatriz. And as of January 2018 already in operation with our sales to the final consumers. And this will -- and I think the price -- the market has not priced this adequately yet but this will generate an important increase in our cash generation for the next few quarters. And we continue with financial discipline in reducing our gross debt. Our cost of debt is very adequate. And interest on debt is dropping gradually every quarter. And this thing of transforming and evolving the company is represented on slide -- in a slide where we show that inflation in a period of 5 years was about 27% and all the indicators, cash cost, SG&A, COGS grew much less.

The cash cost grew by 1.6% during this whole period. Cost of goods sold 3.6% per ton. SG&A going down 7.1% per ton. And this expected gain in productivity that we are achieving during this period is part of our structural competitiveness pillar and part of our strategy of focusing more and more on efficiency and be better and better, seeking a protection on the cost side to the possible volatility of prices. So the strategy is really built into the company and we continue to work in this direction, seeking competitiveness and this has been reflected in our operating cash generation per ton that evolved 62% in the last 5 years.

2017 is a year of many deliveries. We continue to reduce our cost and expenses. We have other initiatives that happened this year: implementation of the crystallizer in the Mucuri Unit; we -- the Effluent Treatment Station that we delivered. But it does not have a financial effect but a very big environmental effect.

The expressive investment of BRL 100 million in Mucuri and we are in operation we cut size -- the second line of cut size in Mucuri. And now in August, we will be operating and debottlenecking as of August 20, with the annual stoppage that will be extended this year. We will be debottlenecking Imperatriz that will go from 1.5 million tons to 1.65 million tons and also working on the reduction of the average distance of our forest -- the tissue business will become a reality in 2017. And we are growing the volumes of Eucafluff every single quarter.

We continue to strengthen the company balance sheet. And recently, we announced, in a subsequent event last Monday, the migration to the Novo Mercado, preparing the company for the future. We continue evolving but we want more. We are rather restless and we want to seek always and -- always challenge our objectives.

We are reducing the nominal cash cost in the last 12 months, BRL 589 per ton and we want to reach BRL 570 per ton. But we want to reach 2021, 2022 and we have established this purpose for us for BRL 475 per ton, making it very clear that the cash cost of the second half of this year should be higher for 2 reasons because of the downtimes that we will have both in Imperatriz, a longer one, and in Mucuri. And this reduces the volume and therefore, reduces the denominator in terms of fixed cost.

And also we have average radius or distances in the second half that are longer than in the first one and a higher participation of third-party but BRL 570 for next year and BRL 475 afterwards. These are our targets and when we reach these targets, we will be talking about over BRL 100 of progress of cash cost per ton for the treatment -- tons that we have every year. We are talking about BRL 360 million, BRL 380 million per year more in our EBITDA, which is our target over time. Therefore, a huge value creation for all shareholders.

We restructured our organization, and the objective of this restructuring is to increase the speed and increase autonomy. Today, we have the pulp operation coordinated by Carlos Anibal. Paper, Leonardo Grimaldi. We created a new executive department of consumer goods with Fabio Prado leading it, the executive that will be joining us in the next few weeks. And Forestry continues with Alexandre Chueri. And for Innovation and New Businesses strategy, Renato Tyszler.

And Julia Fernandes, Marcelo Bacci and Pablo Machado doing the cross-operation with all the units. This will allow the company to have more speed in its decision-making process and also keeping the focus on each one of the businesses. And so this year, the demand by analyst and investors was that we started to disclose our results per each unit. And as of a certain size, we will be doing this for Tissue as well so you will have visibility about each one of our businesses.

I would like to say a few words about the Tissue business. We had a board meeting this quarter in Mucuri. We visited the plant, the plant is very close to start up in the third quarter this year. We will be starting up for the production of jumbo roll in the fourth in Imperatriz. And by the end of this year we will be starting up our operations for conversion as well. This means that we will be placing a lot of focus there, and the figures that we had mentioned to you as our target are being maintained.

We are on time and on budget with this project, and we want to have an accelerated growth as of 2018 in our tissue business. And already, answer your question that I know you will be asking about brands, we are working with the development of brands. And we will have our own private label, our own brand next year in order to be closer to our final consumers. And we are setting up our commercial teams and our marketing teams as well for this operation. And this consistent result and the ongoing transformation that we are carrying out continue to be focused on the 3 strategic pillars that we have and that we announced: the market structural competitiveness; redesign of the industry; and we continue with our discipline in cost, supply, capital and financial and the portfolio of products.

It's important to mention as well that in the third quarter of this year, we will see a reduction of about 100,000 tons of pulp basically for the Asian market that should generate a reduction of the pressure on pulp supply in the market. And many of our competitors are having their annual downtime in this quarter and we understand that the -- anything a competitor does will not generate a huge pressure due to the market situation and the production also by many competitors in the industry.

And I know that you're going to ask another question and I'm going to answer it, about Eldorado. I would like to tell you that we have already stated and we will continue to state this, we are here to be better and in order to be bigger -- to be better, being bigger is one option and if it is one option, okay. Our balance sheet is prepared for this kind of growth. However, we are not going to pay any overprice for any asset and we are not going to grow just for the sake of growing. The capital discipline that we have is being exercised fully by the company.

So about the Eldorado asset, okay, it's a good asset. It does make sense. In terms of consolidation of the industry, we are not going to participate in an auction and we will not be -- pay any overprice for this asset. So should these conditions be understood, then we could consider this possibility. However, this is not the focus of the company. There is a competitor of ours that has the exclusivity and we understand that other competitor wants to make a move in this direction. So we are considering ourselves as not be the natural buyers of this asset.

And for the whole market, the announcement that we made about the migration to the Novo Mercado was very positive as the subsequent event to the first quarter. And now talking about the second quarter and now talking about this one, we announced the decision of the Board of Directors of the company in terms of migrating to the Novo Mercado after the approval by the BNDES as a preceding condition and also submitting this to the General Shareholders' Meeting that we will be holding after the approval by the BNDES about the migration of the company to Novo Mercado, exchange 1 preferred share for 1 common share.

We understand that this is an evolution in governance and we believe that this should allow us to achieve the re-rating of the company. And I think this is very possible and probable and very positive as well. And in public, I would like to reinforce the praise to our controlling shareholders and the Board of Directors that made the courageous decision with a long-term view with this change and the condition that we are mentioning.

And this opens a new perspective that Marcelo Bacci mentioned about new operations and new situations for the future, in which we will have a more and more robust balance sheet and now having equity as a currency for the future as well. Or the company has prepared itself and has given the necessary strides to become stronger and stronger and also kinder, I would say. And the view that the company has looking and paying attention to all stakeholders, our headcount, our shareholders and the community and the environment has been more and more intense. And the engagement of all the employees of Suzano, that is becoming more and more active.

And all these actions being built into the company generate a positive or a virtuous cycle for the company that would be generating even more value for everybody. And this is what we are working for and consistently delivering results. So this is what we wanted to convey to all of you.

And now we will be available to answer all the questions that you might have. All the executives will be here with me to answer any questions.

(Operator Instructions) Our first question comes from Karel Luketic from Bank of America.

I have 2 questions on the operating side. Carlos, first one, could you give us an overview of what you've seen in the pulp market? Maybe more specifically, what is your expectation or -- about the last price increase and of the increase in demand in Europe and Asia and the inventory levels?

And the second question to Leonardo about paper. What is the visibility for the second half? What about the volume for July and August? Do you think we will still be seeing a reflex of the price increase impacting the third quarter, and what is your expectation in terms of cost for the paper unit for this half year?

Thank you. The first quarter in pulp was marked by a sound growth of demand approximately 1 million tons. Unprogrammed, unscheduled stoppages limited the supply and this allowed us, over the first half, to have price increases of -- less prices of $200 in Europe; $210 in North America; approximately $150 in Asia. Asia at the lower level because in this region we started the price recovery in October last year and we announced for July. An additional $20 for Europe, also for North America, increase in the price to $880 in Europe, North America $1,070 and these 2 increases were fully implemented already. So we close July with the full application of the new prices both in Europe and in North America. Slightly different situation in China where we announced an additional $20 for June and it is still underway. We're working so that we may implement it over the next few months.

Looking at the third quarter, we see, still, a sound demand by all regions observing seasonality especially in Europe, July and August. But we understand that the reductions in supply due to scheduled and unscheduled stoppages allowed us to sustain the current prices up to the end of the quarter. And what we expect is to have the third quarter with 1 additional increase in our net prices coming from the last implementation.

The inventories are low. I'm talking about hardwood and the numbers of the association reinforced the 37 days compared to 41 days at the close of June last year. So when we look at the supply chain in the main geographies, we can see low inventories, especially in Europe and in North America. In China, we understand that the inventories at the ports between low and normal and we believe that the clients do not have high inventories of hardwood. And this explained a stronger month that we had in July in terms of orders coming from China. In China we closed with the volume of orders around, well, higher than June and July. And of course, we have a very bullish view about the fundamentals of pulp for the third quarter.

Good morning, Karel, this is Leonardo. Regarding paper, we have not seen an improvement in demand yet in July that could affect our second half. The Brazilian market continues to be very similar to the 2016 about the prices in the domestic market and the increases, price increases are still underway according to the strategy of the end of the year. It is a little bit more diluted because of the lower conditions of the Brazilian market. And in international area and exports, we are being able to put in force the price increases according to what's expected. In terms of cost there are still opportunities to reduce cost and this will be presented in the second half of this year, we believe.

Very good. Could you quantify the price increases that you mentioned, and for what kind of paper? And also quantify the drop in cost, if you could?

About increases, we do not give guidance per line of products but they are underway. And what we see is that it comes from our strategy of mix and channels, and it is a little bit less visible in this quarter.

Leonardo Correa from BTG Pactual.

And I would like to start by a strategic question about your dividend payout policy that is being discussed by the market in the last few months. What is the potential to increase dividend payout?

I believe that there is potential to increase dividend payout. Suzano has been working with a very deleveraged balance sheet.

And I would like to know how this compares to your appetite for M&A because as having a more robust cash situation, are you going to focus on M&A? And with the migration to Novo Mercado as you will have a more appreciated stock maybe you will not need to have such a high cash position. So I would like to know your opinion about that. And 2 other points.

The first one, about the EBITDA contribution any help that you might give us because the market has difficulty in terms of mapping this upside for Suzano and there is very good upside on the table that we are not being able to identify very well. So any help that you might give us regarding the contribution of the new project would be very much welcome.

And lastly, regarding cost, it was very clear during the introduction that you're doing quite a lot of work and what we can expect in terms of cash cost for the second half. But I would like to ask, given the result that we have seen, very strong one in cost reduction, could we imagine an even more bullish scenario than your guidance regarding cash cost for 2018 and on?

Leo, thank you for the questions. I will start by talking about dividends, M&A and cash and then Walter will answer the other.

Regarding dividend and M&A and the size of our cash, the reason for us to work with a high cash position is not because we are considering an immediate M&A possibility. It's a risk management possibility or position because of the price of pulp and exchange rate having a direct impact. So we need to have a comfortable cash position so that we may not be obliged to roll out our debt. So we manage this over time.

There is room to reduce our cash but the reason why we have a high cash position has nothing to do with M&A. The migration to the Novo Mercado gives us the stronger position for M&As. But as Walter said, we have a lot of discipline, capital discipline and right now, we do not consider the possibility of making any acquisitions with any return lower than what we expect, of course, from now on. Let's say we do not have an opportunity for M&A with these characteristics, of course, then we turn our eyes to organic growth.

We are working with the debottlenecking of Imperatriz and there are other alternatives that we are starting. So organic investments are still a possibility. And also because of the growth of the tissue business that will start now, we could have something in the future but these would not be very relevant amounts. And also if we do not have opportunities with an aggregate return, we might consider increasing our dividend payout. In the last few years, we have been increasing gradually and our yield today is very similar to the other peers in the industry in Brazil and abroad. So the level of dividend payout that we have is reasonable. We might increase it if we do not see an investment opportunity with the correct return. But that's all I can say for the moment.

Thank you for the question. Talking about the EBITDA contribution by the adjacent businesses. We are not giving guidance about fluff yet because fluff is increasing volume quarter-on-quarter. And again, we had a very positive quarter in terms of growth. We are exporting fluff to many regions [and the plan in] China, Europe, U.S. and selling in the local market as well. This business has been growing. But as we knew since the beginning, this is a business that [is new in] ramp up and you have to consider the qualification of the product and the evolution of our operations.

The tissue business will be generating a very expressive cash flow. As of next year, we have not defined our budget for next year yet in terms of volume, and we are working on that. Of course, we have already wrapped the business case when we had this approval by the board but we are not disclosing it to the market yet.

At the moment, we said what would be the margin of contribution per ton, which is rather important because we will not only have a good EBITDA in this operation as we have a cash cost for the production of tissue which is rather low. We have wet pulp, energy, steam and water treatment, effluent treatment, so the cost of operation will be very low. We invested in a state-of-the-art technology for the machines, and we have a transformation cost, a processing cost, that is low and also raw material -- low cost and we are acquiring expertise in the commercial area, marketing area, attracting people to participate in the program.

We are very motivated by our Tissue business and we understand that it will be important. And as soon as we have a certain level of maturity in the operation, then we will start to give you a disclosure about the tissue data in terms of profitability so that you have more visibility.

In relation to the pulp cash cost, which is the other question that you asked, our philosophy is underpromise and overdeliver. We do not want to promise things about which we have a low visibility of how to attain that. And we have placed targets, very excessive targets for ourselves for the next few years. And of course, the pulp cash cost has a major factor of influence that is wood that has a big weight in the cost. And quarter-on-quarter or half-year-on-half-year, you can see volatility in the use of third-party wood and our own wood in relation to the distance. But the most important is the trend and this is very important for Suzano, it will continue to be positive for the next few years. So for the time being, we would rather keep our objectives of BRL 570 for next year and BRL 475 for 2122.

Ivano Westin, Credit Suisse.

First about paper. Walter, you made it clear in your opening remarks that the market is really going sideways. And Leonardo, you talked about the second half. Could you talk about the outlook for 2, 3 years and not 6 or 12 months about the normalized profitability of the segment? BRL 700 with the first half, last year a little bit higher than BRL 1,000. So when do you believe you will reach this normalization of the profitability? And about CapEx, Walter, you talked about 1.8 for this year -- 1.7. And the -- for '18 and '17, could you break this down and explain what do you expect?

Ivano, thank you very much for your questions. About paper, clearly we have an opportunity to evolve about our EBITDA per ton. We consider that it is below our expectations and there [are] 2 reasons that are the cause for that.

The first one is the local market in relation to pricing and volume. And this has not been growing the way we would like. And we understand that in the next few years, the growing implementation of the go-to-market program of Suzano will give us an advantage in this field and we are gradually exchanging bigger clients with lower profitability for smaller clients with a higher profitability in terms of revenue management and this is something that has been in place for quite some time. And the exchange rate also affects the situation. And another factor that affect is the import tariff price. And we have to look at what is happening with global prices. The increase in pulp prices is leading to an increase in global paper prices. And our exports prices already reflect that. And it depends on what will happen the next few years.

I do not want to give you a guidance regarding a certain value but I can tell you that BRL 700 per ton is low, and it's lower than what we consider as adequate in order to create value for our shareholders. Although we have our ROIC in paper of 13% in the last 12 months but there is a possibility, given the work of de-intermediation that we are carrying out over time, to create more value. And I would like to make it clear and very transparently with you that we are not pleased with our costs in our paper operations in the first half. They were slightly worse than we would like. And with the same transparency, I would like to say that we are working to capture more value over time.

CapEx. We have not defined the CapEx for the next year yet. And today, if I could give you a view, the sustaining CapEx should be at the same magnitude. This is not a guidance, mind you. And we do not have any major project to be implemented next year. So there should be a drop in the refurbishing CapEx. If we do not bring another project for approval. Of course there is a carryover that should go from this year to the next but we do not foresee right now any major projects of refurbishing or expansion. But we are analyzing many of them so that we may submit them to the Board of Directors.

Carlos De Alba, Morgan Stanley.

My question really is, Walter, you guys have had an outstanding performance in terms of cost, productivity has improved, you have expanded the pulp business or at least seeing the completion or the ramp up of the pulp business expansion. The company has debottlenecked -- is working on a couple of debottlenecking projects. The Tissue project is going well, had a great start and the fluff business seems to be ramping up nicely.

So what is next now? The corporate governance announcement was very well received, surprised positively. You seem not to -- you seem to believe you are not a natural buyer for Maranhao. So could you tell us where do you see the company going in the future? Is there opportunity to go outside the field to add more into the paper business? When do you think you will be in a position to lay out the next phase from a strategic perspective for Suzano?

Carlos, I would like to thank you for your question and tell you that we are humble enough to recognize that we still have many evolutions to progress and in order to meet the needs of all stakeholders, we are working on that. And on the other hand, we have a lot of energy, the energy of transformation, the energy of doing better and doing things differently from what we were doing before. And this process is really inbuilt into the company. It does not depend on a small group of executives that lead the company. And I have been seeing this -- I have been seeing this, I saw this on Monday and Tuesday in Mucuri. I see that everybody is very much involved in that.

So I have no doubt whatsoever that the company -- the whole company wants to do more and better all the time. And all our programs for variable compensation, our program of incentive and people development and new leader development, all the programs that we have to attract and to train people and to retain people will allow the company to become stronger and stronger over time.

And now answering your question, which is totally correct, okay, okay, so what's next? And I would like to say that we have 3 major lines of business right now. We have a pulp line, we have a printing and writing paper line and now a consumer goods line. All these lines are being observed, so that we may analyze what are the opportunities for growth in each one of them, growth of value and growth of businesses. And the question that was asked before by Leonardo, he asked about our dividend payout policy. This is -- of course, this is our escape valve in case we do not have any significant growth projects for the company. However, Renato Tyszler is coordinating a work in terms of strategy of generating new opportunities in all our businesses. So we have no limitation whatsoever regarding product or geography.

So the thing that is rather obvious, that is to say a merger operation between us and Fibria would generate a lot of value. Okay, so this is one alternative that could be considered for the future; however, it should not be considered as the only alternative. We are not going to place our bets on an alternative that depends only on Suzano. And Suzano is taking attention to all our stakeholders and we have shown our preferred shareholders that we can create value together. We believe in shared value creation among all stakeholders and this is what we are doing on an ongoing basis.

The inorganic growth that the company could have by means of an M&A is also an alternative that we are considering very thoroughly. So yes, we consider the possibility of growing in pulp, growing in paper and growing in consumer goods in Brazil or outside Brazil. So this is a work in progress and as soon as we have news, we will be telling you about it. And of course, we cannot say anything before we have a fact to report to the market. So I thank you for the question, but I would like to reinforce the thesis of the transforming energy that we have inbuilt in Suzano, so this is going to make Suzano better, Brazil better, and a better society as well. So this is what we want to leave as a legacy for the company.

All right, and then if I may -- I'll ask a second question there. Clearly you guided for a slightly higher or higher cost for pulp in the second half of the year. In the first half, it was BRL 576 excluding the maintenance downtime. And then for 2018, it is BRL 570. Is there any more color or range of how much do you see the increase in the second half of the year where you could come out?

Carlos, we do not give guidance of cash cost per quarter or per half year. Of course, we do have this analysis and in the second half, our cash cost will be higher than in the first half. But due to these 2 variables, more wood from third parties and longer distances because something that is specific in the quarter and in the half year and also because of the downtime that we will have, mainly Imperatriz, that should be a longer downtime. So this is a snapshot for us and we're interested in the whole film and not in a snapshot and the film is a film of constant evolution.

Lucas Ferreira, JPMorgan.

The first question is to Carlos Anibal. Carlos, going back to your remarks, something that draws attention is the dollar movement in the last few months as well as news about the price increases for softwood for August and maybe also for the paper. And one of your competitors announced more maintenance downtime as well. So how do you see the possibility of going back to price increases like June and maybe increase your prices further? What do you expect in terms of demand for the next few months because seasonally they are weaker, but do you believe that this year you could have a more balanced third quarter?

And my second question is very specific about G&A. There was an increase in the quarter and I would like to understand if this is a one-off situation regarding compensation or could we believe or imagine that this would be the level of G&A from now on?

Lucas, thank you for the question. As I said before, we have a very positive reading of the third quarter. We were very successful in the implementation of the last increases in Europe and North America. I believe that we will have a clear view of the market as of September. We could have surprises, as you said yourself, coming from facts and events on the supply-side. As the market said one competitor will be extending a scheduled maintenance of downtime. So I would rather wait until September. But we do have a better view of the prices and the market behavior until the end of this year.

Lucas, this is Marcelo. About G&A, the main effect is other administrative expenses and the biggest effect has to do with the correction of the phantom shares because of the increase in the share prices. On the operational side, there is no relevant change. We should see relatively relevant changes because of the Tissue startup. So then we will have to look at it as a separate business, but the profitability will be more than the increase in this expense. But so far, we have no effect coming from that.

Thiago Lofiego, Bradesco.

Carlos, going back to China, what is the main stumbling block for the implementation of price increases for July? Because you said that demand in July in China was better than June; however, the implementation of the price increase was not full. So is there a psychological factor or maybe do you think the spread between softwood and hardwood impacts this negotiation? I would like to understand the dynamics regarding China and the prices.

Leonardo, I would like to understand the price dynamics here in the domestic market. You talked about some initiatives of price increases, but from even before the change in the exchange rate, the export market was taking share from the domestic market. So I would like to know your frame of mind now considering the dollar rate and the imports still heavier. Would it make sense to continue with price increases for the second half?

Thiago, this is Carlos speaking. Thank you for the questions. We started price recovery for the Chinese market in October last year. Ever since then, until May, all the prices announced were effectively implemented very successfully. In June, we saw pressure on softwood. Softwood lost between May and June approximately $40, $50 and this created in the local market an expectation that we could see a contamination of hardwood, which is something that did not happen. I would say that buyers were trying to weaken softwood -- hardwood and this was wrong.

The hardwood chain in China is undersupplied. There is not enough inventory at the port and we believe that their inventories are lower than historical levels. So in my understanding, this is an explanation for the fact that in June, we had a number of orders that was well higher than June. So now in August, we will be working to go back to the implementation of this $20. And my reading is positive in this regard -- regarding -- and -- for the next weeks and months. The announcement made yesterday that a certain competitor is extending a downtime will certainly have impact on the Chinese market in the next few weeks.

Thiago, Leonardo. Regarding imports, it's important to understand that major part of that is made by Suzano with the go-to-market program with uncoated products that supplement our line of products. And even though -- even that it is very small in relation to what was imported last year. So the increases that we announced will be executed and the term will be a little bit more diluted, I would say, than we expected at the beginning.

Marcos Assumpcao, Itau BBA.

My first question to Walter. Could you talk about the pulp cash cost in the second quarter, more or less? How much do you imagine that it could be if you were using your Maranhao point more intensively? And Bacci, regarding deleveraging in the third quarter, we see the EBITDA of the last few -- 3 months improving significantly and maybe the cash generation as a whole also improving once we don't expect dividend payout and working capital could be better in the quarter along these lines. What optimal level of leverage do you see for the company?

And lastly, Walter, with the higher cash generation and with the deleveraging of the company, more intense one, when you look at the pulp market as of 2020, 2021 with no projects announced, what would you like to see in the market? What does Suzano need to see as market conditions do approve the expansion of the Maranhao brownfield project in the company?

Marcos, thank you for the questions. As always, not very easy to answer. Cash cost. We are not using the forest that we have recently acquired late last year from Queiroz Galvao. We made the decision 2.5 years ago of not using our Mucuri forest and saving them and bringing more distant wood -- third-party wood that -- with a higher cost at that point in time. And we said to you that what was important for us was the NPV and on maximization in the short run. And this is what we are using now. We are saving the wood that we acquired from Queiroz Galvao and we're using third-party wood.

Looking at our Maranhao unit, we are saving these forests so that they may have a higher average age and then we will be tapping into this value later on. This is part of the equation so that we may reach BRL 475 in 2021 and '22. We are not going to give guidance to the market of what would have been the effect if we had an immediate utilization of this wood. But of course, the cash cost would be lower than what we have today. But part of our objective of the BRL 475 is linked to that.

And the other part is the debottlenecking of the Imperatriz plant that will allow us to have a higher production and lower consumption of chemicals and less specific consumption of many different products. So we will gain in variable cost and fixed cost besides the higher volume as of mid-September when we go back to our operation. So the cash cost, our objective of BRL 475 is maintained and one of the variables is the utilization of these forests as well as other forests in the region that will be maturing during this period. You must not forget that we are expanding our forestry base in the region and of course we are expanding it with forests that are better and better and we're going to tap into that overtime. Now Marcelo will answer your question.

Marcos, about deleveraging. Our expectation is to have a deleveraging in the third quarter, additional one to what we did until now and of course I leave aside the exchange rate because we never know how much it's going to be and this has a direct impact. But if everything remains constant, we should generate a higher one than the one that we have now. And as you said yourself, we are not going to pay dividends in this quarter and this impacted a lot the second quarter. And also the relative weight of the CapEx in the second half is higher than in the first, but not a very big difference. So the cash generation will be higher, the EBITDA will be higher. We are going to deliver a little bit of that in our working capital because the pulp prices are going up. So you accumulate the receivables. This is just a temporary effect, that is to say, over time it is offset.

But in spite of all these factors, we will see deleveraging. And according to the policy that we disclosed some time ago, the optimal one is between 2x and 3x. We are slightly lower than 3 and we are getting closer to 2. So within this range -- if we stay within this range, we are within the level of efficiency and also we will continue to work to reduce the cost of the debt.

In relation to the future cash generation, you are correct, Marcos. It will be rather major in the next few years. If we do not have any retrofitting project or expansion of our capacity project, our total CapEx tends to go down and with an even more robust cash generation with Tissue coming into stream, deleveraging will increase. So we're going to accelerate the deleveraging of the company. And you've asked, well, couldn't this generate brownfield in Imperatriz? And I can tell you that we are analyzing other alternatives. This is not our priority; however, we do not leave aside any future possibilities to create value. So Marcos, we want to maintain a view of many options and this is what we are creating by migrating to the Novo Mercado.

We create other options for the company for the future. So we are increasing this array of options. And every time I have a new option, if it does have a cost, however, if it gives the return, we give all the shareholders, as I mentioned, a value accretion. We track many KPIs, and one of the fundamental KPIs is ROIC. And this is based on this ROIC that we carry out a whole analysis regarding variable compensation for our executives and of course we want to increase ROIC over time. So we will be looking at actions that lead to an increase in ROIC and we've not leave aside any option whatsoever for the company.

Bruno Giardino, Santander.

About Tissue. Could you share with us the rationale for tissue paper and with your own brand, your private label? And regarding paper, do you expect any significant changes as of 2019?

Well, Leo will answer about the paper and I will answer about Tissue. About the [PNLD] for 2019, the new rules were published some weeks ago -- and the new rules were published few weeks ago and we're still evaluating the impact of that on paper. So we do not have a final figure to give you. Regarding the one for this year, Walter has already said that they have postponed the execution of the delivery of volumes and this is very much concentrated in the last months of the year. Regarding Tissue, thank you for the question, Bruno.

The rationale started with the chronic problem that the pulp industry has in Brazil which is the issue of the ICMS tax. We have accumulated credits of the ICMS as well as the other players in the plants that export more. So Mucuri and Imperatriz have a very significant ICMS credit. And the idea was to look at the way to monetize this credit in the local market.

So we started with this idea of manufacturing jumbo rolls and selling them to our potential consumers in the local market. And the reaction was positive on their part. We had many offers but none led to a maximization of value for the company in our view. 120,000 capacity of tissue and 60,000 in conversion starting with the implementation and the investments was already announced for both plants. So we are going to sell part jumbo roll and part conversion.

And we realize the fact that we start with a pulp cash cost of about BRL 570 per ton. And in these plants, it's slightly lower than that. And consumers pay BRL 10,000 per ton on the shelf for the tissue paper. So there is a huge value chain to be tapped into in this process as a whole, part with expressive operating gains and part with a philosophy of sale and quality of product -- differentiated product. So we decided to get into this business of consumer goods of Tissue and we are sure that this is going to create a lot of value over time for all our shareholders.

Jon Brandt from HSBC.

So first I wanted to ask you about the Tissue segment with the upcoming start in the second half. Could you give us a little bit more detail on whether or not you've signed contracts? If you expect to have to put these Tissue products into the market at a discount given you're just breaking into the segment? And maybe what the reaction is of some of the other tissue players who are also your customers on the pulp side.

And then secondly, just returning to one of the previous questions about strategy. Walter, you mentioned you wanted to -- as well as increasing ROIC, you also wanted to reduce the volatility. My assumption is that as you head into the consumer segment that that should reduce a bit of the volatility. So I'm wondering if we look out 5 to 10 years, what the strategy is of Suzano. Or do you want to be significantly more exposed to the consumer market or reducing pulp? But sort of how do you see Suzano in the next 5 to 10 years?

Jon, thank you for the question. I'm going to start about Tissue and the way to conduct the business. We are right now discussing the sale of jumbo rolls in the local market -- the local tissue market. We have already received important offers and we of course consider the hypothesis of in case we do not conclude these volumes, this is another possibility that we have exports because clients abroad have already said that they would be interested in buying jumbo roll from us and up to the end of this year. And as of January next year, we will have the product already on the shelves and creating more value and the volume of monetization of ICMS increases. And of course -- and the competitive advantages that we have vis-a-vis local players in the north and the northeast are rather significant. So we are very encouraged to do that.

We recognize our low expertise about trade marketing and branding. And this is why we are attracting people who have the necessary skills to lead this business.

Looking at the future of Suzano, as I said before, we're looking for options. We understand that the consumer goods business could become more important over time. But we also consider investing in our traditional businesses, printing and writing paper and pulp in Brazil and abroad. Jon, we're very clear about that.

There is a fundamental intrinsic advantage for Suzano that is represented by our forest and based on this intrinsic advantage, we will understand the value chain as a whole and see where the opportunities lie to -- for value accretion. And we will try to tap into these opportunities over time. So there is no limitation on the part of Suzano about where we are going to invest, in geography or in product. And by having these options, we create value over time.

I have just given you the disclosures of the cost of 1 ton of pulp and to transform it into tissue, it's 1.07; so that would be BRL 600 per ton of pulp into tissue for a product that is sold at BRL 10,000 on the shelf. So we certainly will be tapping into part of this amount and we are investing in a low transformation cost and then branding and we would be investing in the adequate logistics operation. So Suzano's position is looking at all the whole value chain starting from our advantage, which is the forest. This is where our competitiveness lies.

The question-and-answer session is closed. We would like to give the floor back to Mr. Schalka for his closing remarks.

I would like to thank you all for participating and say that our team, represented here by all the executive officers, is extremely motivated in continuing this transformation, this positive energy that we see at all levels of the company. And this is being represented by the figures that we are delivering quarter after quarter.

Consistency, visibility, predictability are words that we want to give to our shareholders and the analysts continuously. We want to convey to you the perception that we will be considering each one of the stakeholders and trying to understand each one of them better and better. The visibility that you have in the figures that we are delivering on one hand has to be translated to the communities where we operate. And all our employees, the possibilities that they have in terms of career development and also attracting good people to the company and providing our clients increasingly better services and products. And you see that the price realization work done by Carlos during this quarter was very positive and revenue management for instance, looking at each one of the geographies in a different fashion and looking at each one of the stakeholders and we are in constant evolution. This gives us energy and we are proud of that. And this means a lot of responsibility on each one of our shoulders.

Suzano will continue to work to transform itself, transform the business, producing the intermediation and producing more value for the value chain as a whole and sharing this value with everybody. So this is our philosophy, and that is implemented and that is another way at Suzano. So we are very happy with what we are delivering and we are very much committed and we want to do more and more in the future. So thank you very much.

Suzano's conference call is closed. We thank you for participating and wish you all a very good day. Thank you.