Suzano S.A. (SUZB3) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to Suzano's conference call to discuss the results for the third quarter of 2024. We would like to inform that all participants will be in a listen-only mode during the presentation that will be addressed by the CEO, Mr. Beto Abreu and other executive officers. This call will be presented in English with simultaneous translation to Portuguese. [Operator Instructions] Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano's Executive Board and on information current available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. You should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Suzano's and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Beto Abreu. Please, you may begin your conference, sir.

Thank you. Hello, everyone. Thank you for attending our call for the third quarter results. I will start with the highlights. So let me start with sales. Sales volumes improved as you saw in all business. And here, I want to highlight that was a very well-defined commercial strategy from the team. This strong sales with a better FX allowed us a strong EBITDA of R$6.5 billion despite the higher cash cost. Indeed, the cash cost was higher than the previous quarter and in the previous quarter in the last year, but that was planned, as you know, and I want to reinforce here that considering the performance that we have been seeing at Ribas in the ramp-up, considering the efficiency level, which is higher than we planned, I have to say that such a peak of higher cost is already behind us. So we will see further detail during the presentation. My last comment on the financial side is related to leverage, which is still declining as planned, now at 3.1. And still on the leverage topic, I would like to share with you that on the capital allocation side, I do not see Suzano going through any transformational move in the near future. So leverage will keep declining -- its still declining trend going forward. Also during the quarter, we also had the closing of Lenzing, the closing of forestry asset from BTG that we acquired. And in the beginning of October, we also had the closing of Suzano Packaging US. So, Suzano Packaging US is the former Pactiv assets in Pine Bluff. So looking forward, the focus of Suzano for the next quarters will be generating value from those assets that we brought to our portfolio, delivering what we planned for the Cerrado project and also keep deleveraging the business as a whole. So that's the main highlights from Suzano in the third quarter. So let me hand over to Fabio, which will cover the Paper and Packaging business. Fabio, please go ahead.

Thanks, Beto, and good morning, everyone. Please let's turn to the next page on the presentation. Through the combination of good commercial execution and logistics flexibility, we were able to deliver the highest EBITDA since 3Q last year despite growing operational challenge related to bottlenecks in our export supply chains. On the domestic market, according to Ibá, Printing & Writing demand considering imports increased 7% in the first 2 months of the 3Q on a year-over-year basis. Sales from domestic producers grew 8% on the same comparison base. Demand was solid in all product lines, supported by better economic activity and from the election cycle tailwind on the coated paper grades. Demand for paperboard continued to grow, increasing a strong 18% during the first 2 months of the quarter compared to the same period of last year. Paperboard demand has been strong this year in all market segments, supported by the growth in paper packaging consumption and better economy overall. In the international markets, demand was sustained in North America and LATAM, however in Europe, demand for paper has shrunk during the summer due to seasonality. Prices in U.S. dollars were mostly flat in the international markets during the period. Looking now to Suzano's figures, our sales volume in the quarter was 8% higher year-over-year and 9% above Q2 performance pushed by higher sales volumes in the domestic market. Our export volumes were mostly flat versus the same period of last year and increased versus last quarter, although we have seen a continuous deterioration of the container supply chain with congestions at ports domestically and abroad related to poor service levels and higher costs on all container carriers. This is a result of a mix of different events, Red Sea traffic restrictions, low water level at Panama Canal, weather-related restrictions at Brazilian ports, which seems to be creating the perfect storm for Brazilian export companies that rely on containers. Suzano is seeking out alternatives to continue to serve its international customers despite these issues. The 3% net price growth over Q2 was led by slightly better prices in the domestic market and favorable FX on our exports. On a year-over-year comparison, prices were lower by 3.8%, reflecting market adjustments after the normal price levels of the first half of 2023. Looking at the EBITDA performance, the 13% quarter-over-quarter was driven by higher sales volumes and better pricing. In the quarter, we had the annual maintenance downtime at the Limeira and Suzano mills, which are the 2 largest paper mills Suzano have, pressuring the COGS in line with the budget. Compared to Q3 2023, Suzano EBITDA decreased by 8% due to lower prices in both -- Suzano Paper Packaging EBITDA decreased by 8% by lower prices in both domestic and international markets despite higher sales volumes. Looking ahead, we expect a strong seasonal demand in Q4 from our domestic market for uncoated papers and paperboard. For coated grades, we anticipate a return to a structural decline as the election cycle impact fades. On international developed markets, we foresee demand return to a structural decline trend. In Latin America, we expect demand to be more resilient, albeit also declining. Cost-wise, logistics expenses are expected to remain high due to ongoing disruptions and geopolitical uncertainties, which could offer support to paper prices in most markets. Regarding our cash costs, we anticipate improved performance on COGS in Q4 following the lack of maintenance stoppage. We also foresee stable cash cost ex-downtimes in the coming quarter. On October 1, Suzano kicked off its operations of the Pine Bluff and Waynesville packaging assets acquired from Pactiv Evergreen. Our first weeks went quite well so far, focused on supporting our new colleagues, customers and suppliers through this transition. We remain very excited about the business opportunities that this move will bring to Suzano in the future. Now I'll hand it over to Leo, who will be presenting our Pulp business results.

Thanks, Fabio, and good morning, everyone. So moving to the next slide of our presentation, I would like to begin by sharing some facts related to this past quarter. It was indeed a very special moment for us as we had started to operate and later to sell the first volumes of our brand-new Ribas mill. During the past months, we have first built up pulp inventories in the outbound logistics chain from Mato Grosso do Sul to Santos Port in order to be able to operate Ribas efficiently. These new volumes were the only additions in the Q3 to our previously announced previous inventory levels, which, as we have been stating, were quite low and stays on the same operational levels as we speak. Our first shipments from Ribas Pulp have taken place during the latest part of the quarter. During Q3, we have noticed quite a challenging market, led especially by headwinds from China. There, paper producers' inability to increase paper prices during previous quarters squeezed their margins and the new pulp purchases came to a halt, almost a complete halt to July, right when the news of the start-up of Ribas and the local Chinese mill Liansheng were announced. As the quarter evolved, a sharp decrease in softwood prices led the way to a wave of intense price reductions in hardwood grades, both in local resale markets as well as for new negotiations from imported pulp. Prices declined sharply much faster than on previous cycles, reaching a set point, which triggered customers to reestablish their purchases, especially by the end of the quarter. In Europe and North America, despite better dynamics in terms of demand, prices started to correct following the trend posted by China. We have navigated Q3 by focusing on maximizing our sales in Europe and America, while also positioning pulp in these markets to cope with higher seasonal demand in Q3 and Q4 and also reestablishing our service levels to regions and customers for whom we invoice directly once cargo is shipped out of Brazil, reducing, therefore, our backlog from previous quarters. This dynamic, which includes the sales of Ribas first volumes, resulted in a strong invoicing during the quarter. Our realized prices were mostly affected by a higher concentration of our sales during the second half of the quarter once the significant price drop was already in place as well as a higher mix into Asia, where most of Ribas' initial volumes were sold. Despite lower prices in U.S. dollar terms in Q3, the combination of higher volumes and favorable FX resulted in a 3% increase of our EBITDA margin, now reaching R$ 5.7 billion. Now looking forward, I would like to highlight the following points. Coming into the fourth quarter, we forecast healthy demand in all regions due to market seasonality, consequently favoring operational rates of paper producers globally. Tissue production rates have been the highlight in most global markets and latest production figures have shown its demand resilience despite eventual geopolitical or macroeconomic challenges. As usual in this time of the year, Chinese tissue producers are now boosting up their production as they're getting prepared for the Double 11 shopping gala. For several weeks and counting, mid-$500 price levels in China should have over and profitability thresholds of marginal cost producers based on consultant estimates of their marginal cash costs delivered to China. Not surprisingly, we have already noticed some integrated Chinese pulp and paper producers buying market pulp since August and their purchases of market pulp have been increasing with Suzano ever since. Despite higher volumes coming into the stream, it is our belief that prices in China are either at the bottom of the cycle or quite close to it, grounded by low to equalize pulp levels, pulp inventory levels in Chinese ports and in the hand of Chinese customers. Solid paper production figures being further incentivized by mid- and small-sized customers who have recovered their operating rates once their margins increase, an above-average price gap between softwood and hardwood incentivizing fiber substitution. Customers in China and Asia recovering their buying patterns and actually increasing order intake over historic figures. And on top of that, the fact that current price levels in Asia are below marginal cash cost of producers, likely triggering a new round of unplanned downtimes as seen in recent -- recently in later cycles. To give you some color on our October sales in China, negotiations are coming in line with our expectations, which includes Ribas volumes, and our order intake is being confirmed above historic average, which has enabled us to reestablish our operational backlogs, all of that with completely stable prices. Looking forward and focusing on the supply side of the equation, just this week, reliable independent sources from the sector have confirmed a significant delay in the start-up of the main pulp project expected for Indonesia, for which the start-up of the first line was delayed from Q1 '25 to November '25 and the second line for now pushed forward for 2026. In addition, I wouldn't be surprised if we should continue to see further conversions of paper grade pulp into dissolving pulp, just as again announced by a leading dissolving pulp producer to take place in Q1 2025. These factors should ground a healthier market outlook for the coming months and beginning of '25. With that said, I would now like to invite Aires to address with you the cash cost performance of the quarter.

Thank you, Leo. Good morning, everyone. Regarding our performance of cash production costs, I would highlight the 3 main factors that explain the 4% increase versus last quarter. The first of them is related to the higher consumption of energy at the Aracruz mill due to a nonrecurring events that brought lower operation stability in the period. The occurrence have already been overcome, and we are now back to the performance foreseen in our operation plan. The second one, the startup of new Ribas mill in July also caused a temporary increase in costs, in this case, in the wood and chemicals components, which were totally in line with the expected performance. In addition to these factors, the higher FX, although it benefits the company's cash generation, also pressured the cash cost this quarter, given that some inputs are linked to foreign currency. Third quarter marked the peak of the cash cost in 2024. As looking now forward to the fourth quarter, the solid progress of Ribas ramp-up allow us to estimate a middle single-digit reduction in the consolidated cash production cost when compared to the third quarter. In the year-over-year analysis, the stable performance of the cash cost can be basically explained by 14% FX depreciation in the period which offset the cost reduction obtaining the wood in turn to better harvest productivity, average radius and specific consumption and inputs, mainly due to lower caustic soda and natural gas prices. Moving to the next slide. I would like to share with you some important aspects about the first month of operations of our new plants. In the chart on the upper left, it should be noted that we had a one-off effect of R$25 per ton in the COGS in the third quarter, fully related to the start-up cost of the new mill, which, therefore, no longer exist in the fourth quarter. When we look at the mill's cash cost performance in the chart right below, we see that based on June's cost performance, Ribas has already started to benefit the company's consolidated cash costs since September due to the successful evolution of the plant's ramp-up. [indiscernible] on the Ribas ramp-up, at the end of the third quarter, we reached 8% completion of the learning curve above the 71% forecast for the period. And last but not least, it's also worth mentioning that the CapEx disbursement is according to the guidance already announced by the company. Now I turn the floor to Marcelo Bacci, who will continue the presentation.

Thank you, Aires, and good morning, everyone. On the following page, Page 8, we see that the behavior of our capital structure in the quarter has been shaped by some strategic capital allocation initiatives. We had a very robust operational cash flow generation. And we spent a significant amount of cash in this quarter in initiatives that had already been announced before and had its closing during the quarter, especially the purchase of forestry assets and the participation in Lenzing. And we also made a significant investment in share buybacks in the period of close to $500 million that helped with our net debt position to $12.88 billion vis-a-vis $12 billion in the beginning of the period. Despite the increase in the absolute amount of the net debt, which was expected since we took these decisions on the capital structure side and capital allocation side, we saw a reduction in our leverage in terms of net debt to EBITDA from 3.2 to 3.1, marking the end of the investment period of the Cerrado project with a leverage ratio below what we had expected before. As Aires mentioned on the previous page, the payments related to Cerrado will be minor from now on, and this will help the company to continue in its deleveraging process. In terms of our liquidity, we continue to have a significant amount of liquidity, which is probably more than what we need since the Cerrado project came to the end, and there has been a very significant derisking of our capital structure coming from that. So we will be working on the coming months to reduce our liquidity, although we are not in a rush to do that because the market conditions today are favorable to carrying more cash. So we're going to do that according to the opportunities that we have and that we're going to see in the market. So with that, I conclude the presentation here and I turn back to Beto for final considerations.

Thank you, Marcelo. A few takeaways from what we just heard from the team here. The first one is regarding the execution of our largest investment ever, which is the Cerrado project. So we must say that we are kicking now a new cycle with a completely different level of competitiveness and cash generation. So this is the first message here. This will put us in the completely different level of resilience. And despite the pricing scenario, as mentioned from Leo, we see the business completely prepared to face different scenarios in terms of price. And after all the progress on the business strategy, which is related to the closing of the forestry asset deal, Lenzing and also the Suzano packaging business, we are now in the moment of extracting value from those movements, and this is the focus of the company from now on. So this is a takeaway from what we heard here. Let me open for questions, and thank you to all of you.

[Operator Instructions] Our first question comes from John Brandt from HSBC.

Congratulations on the results. It was a great quarter in terms of transformation and all the initiatives that you were able to achieve. I guess my first question is really sort of a debt and capital allocation question. So Marcelo, now that Cerrado is bigger with the Ribas mill coming on, is there any change to your debt policy either in terms of leverage ratios, targeted gross debt, targeted net debt? I know you briefly mentioned it in your remarks. I'm hoping you can sort of expand on it. And sort of what does that mean for capital allocation? CapEx looks like it will fall in 2025, pretty substantially depending on pulp prices. So I guess I'm just trying to figure out sort of what's next, right? You should be able to come down into your targeted leverage ratios pretty quickly depending on pulp prices. So should we see sort of increased dividends, maybe share buybacks? Are there other sort of initiatives that you're working on in terms of where some of this capital could be spent? I guess that's my first question. And then sort of my second question, just briefly, you mentioned the pulp reduction, the 4% capacity reduction. I'm just wondering if we don't see a rebound in prices later this year or next year, is there any sort of other capacity that might be at risk of stopping?

John, thank you for your questions. This is Marcelo speaking. With the end of the Cerrado project and startup of the Ribas mill, we will continue and accelerate our deleverage because CapEx, as you mentioned, is reducing. We are still working on the CapEx guidance for next year, but for sure, it's going to be a lower number than this year that will be released in December. And the first, I would say, goal is to bring the leverage of the company back to the levels that we need to have outside of investment periods, which is below 3x net debt to EBITDA between 2x and 3x. And this is going to come very fast in the coming quarters. Of course, the speed will depend on the behavior of pulp prices. So this is the first priority to bring the company back to this normal level. On the CapEx side, as I said, we will have in December the number for next year, and this is going to be a lower number than this year. We are still working on the other capital allocation alternatives. As Beto said in the beginning, at this point, we are not seeing any potential transformation initiative that could change in a material way our direction of deleveraging the company. The buybacks will continue to be an option for us. We have an open program that we still have, I think, something like 28 million shares open to be bought. This will be completed in the time frame of the program, which still has more than 12 months to be completed. So we're not going to anticipate to the market at what speed we're going to execute the buybacks. This will depend on the cash flow generation of the company visa-vis its valuation in the market. So what you can expect in terms of capital allocation is the company to reduce CapEx, to reduce indebtedness in the coming months and to be very selective as we always are in terms of selecting new investments. On the pulp production side, the announcement that we made a few weeks ago has in the background, the current stage of the market prices. And this is a decision that we made for the year of 2024. And even if the price changes from now on, it's going to be very hard to change that because this is a very long chain that we have to program since the harvesting activity up to the delivery to the clients. So I think for 2024, that's the number. For 2025, we are still working on that. I would just say that for the current market scenario, this is the decision we have. But of course, this will depend on the expectations.

Our next question comes from Rodolfo De Angele from JPMorgan. Left the queue. Our next question comes from Leo Correa from BTG Pactual.

So a couple of questions on my side. The first one for Beto. Beto, in your initial remarks, I guess the message was super clear to us at least that you're trying to convey a message of deleveraging. And you're also trying to convey a message that there's no big M&A transformational moves in the pipeline. So I just wanted to check with you. I mean, if an understanding is right that Suzano will continue to pursue these smaller bolt-on acquisitions like you did with Pactiv and Lenzing. And the plan is to continue to -- obviously, to assess market opportunities, but these will be, let's say, in the $1 billion range at most. I mean I just wanted to understand exactly what you mean when you say no transformational moves because I guess the market is obviously concerned on bigger M&A at Suzano. So if you can quantify a bit what you mean with that, I think it would be very helpful for everyone. The second point on pulp cash costs, right? I mean I think it was super clear the explanation on why the numbers are a bit higher this quarter. And I guess with -- obviously, with Cerrado ramping up and with, I mean, a much lower pulp cash cost platform being consolidated in your overall cash cost numbers, these numbers would decline going forward. I just wanted to confirm, Aires, you mentioned something in the single-digit range of reduction for the fourth quarter. How are you viewing this for 2025? I mean, what is the potential for further cash cost reductions in pulp? I think that would be very helpful if you can add a bit clarity on that for 2025.

Yes. Thank you for the question. Maybe I should start with the -- Aires, please complete if you want, but on the cash cost. We see 2025 in the same good level as I said regarding the next quarter. So what do we have for the next quarter at the end of the day is the company delivering exactly what was planned for Ribas project, which was the 900,000 tons in the first, let's say, 12 months of operation. So we are completely confident that this target will be delivered. So that will help us in terms of cash cost next year even further. But I think Aires already gave us a kind of, let's say, vision regarding that. Going back to the capital allocation process, I think you read in a very clear way. What I'm trying to say is that we are not planning any big ticket movement in the near future. That's what I'm trying to say. It's -- we have a lot to do with the assets that we already brought to the portfolio. We must extract all the value from Cerrado this time. We have all the potential to keep deleveraging the business. And we do not see any movement that can change significantly or in the important way, the plan that we have to deleverage in the company. So that's what we're trying to say. And I think Marcelo also was very clear regarding liquidity. We think that with this scenario, the level of liquidity that we have in the companies may be higher. It's very high, it's higher than we need considering the plan that we have for the near future. So that's it. And regarding the way that we -- that you mentioned the movement on U.S., the bolt-on strategy is something that seems a very, let's say, healthy way to move in the U.S. market, as you mentioned. So I think this is what we see regarding transformational move in the near future.

In addition to what Beto said, we are very confident that we are able to deliver to 2024 a double-digit reduction when we compare with the third quarter that you have in the results of cash costs, considering, of course, the same level of FX and Brent price that's very important and impact our costs. But considering the full ramp-up in Ribas, the mix of production on average of the year, we are very confident with double single digit. Of course, we have specific quarters with more challenge. We have downtimes predicted to trades like [indiscernible] Line 1 and 2 and Ribas, inspection shutdown with 6 months, that's very important to evaluate the asset and have the confidence to pull the campaign of 12 months. But what we have noticed in the asset and the results until this moment that we are running very well in a good pace and the perspectives are good.

Just to clarify, a double single digit to 2025 in compared with the third quarter of 2024.

Our next question comes from Caio Ribeiro from Bank of America.

So my first question is on the wood chip market in Asia, where we note availability of wood chips has been picking up, particularly in China as a result of the downturn in the property market. There's also this force of pharma and policy. And while we note integrated paper supply additions are happening, wood chip import prices into China haven't really increased recently, which also suggests that, that domestic wood chip availability has increased, right? So I just wanted to get your views, if possible, on whether you perceive this to be a structural phenomenon for the industry, right, this increase in availability of wood chips in China? And what impacts the addition of this integrated capacity that we see year after year in China will have on the industry cost curve and the demand outlook? And then my second question is more on the softwood market and the implications there for hardwood with some players right in the softwood market already attempting price hikes lately. Do you perceive that we're at an inflection point for softwood, right? And what implications do you see for hardwood, if that's the case? Is there room for hikes in the coming months for hardwood as well? Or do you see substitution into hardwood at the very least favoring a demand recovery for that fiber as well?

Caio, this is Leo here. Thanks for your questions. I'm trying to organize myself here to be able to answer all of them. First, regarding your question on wood chip into China or for Chinese production. You are correct. There is more availability in the short term that we had foreseen or that was planned. And that, in our view, is due to 2 major reasons. First of it is the housing market downturn. And obviously, that released a lot of wood that was originally used for furniture, which is now being used for other products such as pulp and paper. And second is a program in China that we are monitoring, which is a conversion of planted tree area to agriculture, and this program will last until the end of 2025. We don't think it's structural. We believe that in the future, once these 2 factors have leveled out, China will be more dependent on imported wood as it was before. As you know, imported wood reached 71% of the pulpwood consumed in China, and now it has reduced to 60%. Obviously, this difference being conquered by local Chinese wood. But we believe that the trend should be reestablished once we see these 2 variables coming back to normality. The impacts of verticalization, as we have seen during now the Q4 and the beginning of next year, we have 3 or 4 important paper producers who are backward verticalizing. We are going to give a lot of details on that in our Suzano Day and actually trying to forecast that not only for the end of this year and '25, but until 2028 as well. But obviously, they are -- they will have a push in the pulp demand to market. But there are variables which are very uncertain, which is the exact start-up date of these projects, then obviously, the ramp-up rhythms of these projects, which will start verticalizing. And all of them, just to make it clear, that were announced for Q4 '24 and onwards are fully verticalized. There is no pulp drying capacity. So they will affect us not as competitors into pulp, but by eventually reducing the demand side of the equation. Now they are all high-cost production, right? So if they are going to be based on either Chinese or imported wood into China, the cost base of this new addition will be high. We expect them to be all over $550 to $600 cash cost -- I mean, pulp cash cost, meaning that as we have seen in several other cycles, once pulp prices get below these levels, these guys, these new volumes will also now come into market to buy pulp, creating and generating additional demand for pulp as well. Now I'm going to move into the softwood and hardwood part of your question. We believe softwood is or has reached an inflection point. We are tracking very closely what's going on in softwood into China. As I mentioned in my speech, the price decreases that we have seen in July were led by softwood. They were first happening on softwood and then followed by us in hardwood. But this mid-$700 price delivered to China, we notice and as per our estimates, several producers, Canadian producers, Nordic European producers are already below breakeven delivered into China. So I believe this will force an inflection point. And that's why we see this $20 price increase announcement of several of them into China coming into October and November. The first reflection of this move will be helping us even further in terms of fiber substitution. As you know, the price difference today is $200 on a net base between softwood and hardwood. And I believe if they are successful in implementing this price increase, this can increase further. And obviously, as you can imagine, we have several, several customers were coming to our teams in China, in Europe, and U.S., in Brazil for support in terms of knowledge and guidance in terms of how we can support them in this fiber substitution and migration from softwood to hardwood. So the first effect will be an additional demand for hardwood. And regarding your question, if this would be an inflection point for hardwood prices, I think it's too early to say. As I mentioned in my speech, I believe we're either at the bottom or very close to it, but I think we need to let a little bit of time go by so that we can define if this is a turning point or not. But the first effect will certainly be additional demand.

Our next question comes from Daniel Sasson from Itaú BBA.