Suzano S.A. (SUZ) on Q1 2023 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for holding and welcome to Suzano's Conference Call to discuss the Results for the First Quarter of 2023. 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. Walter Schalka and other executive officers. After the company's remarks are completed, there will be a question-and-answer session when further instructions will be given. [Operator Instructions] Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano's management, and on information currently 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 and could cause results to differ materially from those expressed in such forward-looking statements. Now, I would like to turn the floor over to the company's CEO. Please Mr. Walter Schalka, you may proceed.
Walter Schalka: Welcome everybody to the first quarter release meeting that we are discussing today. It's a great pleasure to have all of you. With me today, we have several members of the C level of the organization. In the end, we'll be prepared to answer your questions. I think it's very clear that this quarter, we were able to generate R$3.7 billion -- or to invest R$3.7 billion on investments on CapEx. And even on this scenario, we kept our flat debt at $10.9 billion. On the commercial side, we had sales on the pulp side at 2.5 million, in line with the first quarter of last year. And the paper, we came back from our usual trends that we have lower first quarter, and we were able to increase a little bit our inventories to prepare for the second half. This trend was changed last year due to large volumes on exports. But this year, we revert to the old trend. And our inventory levels at pulp are at below optimal levels. On operational performance, we had R$6.2 billion on EBITDA, a little bit over 20% higher than the same of last year. Our operation cash generation that we believe there is the right KPI to train Suzano. There is EBITDA less CapEx sustaining, we had R$4.7 billion and our cash cost, and we are going to discuss a little bit more in details, was flat comparing with the previous quarter. We have a very strong balance sheet. We do have right now in cash and in credit lines $6.1 billion at this point of time. As I mentioned before, our net debt is $10.9 billion and very comfortable with almost seven years of average maturity, and our leverage is 1.9 times net debt over EBITDA. I would like very pleased to share with you some information regarding ESG. We are able to deliver our sustainability report before the AGM that happens this week. It was the first time that we're able to do it. It is very comprehensive and it's very detailed information. There is with full transparency to the market. And we had the carbon credits approval from the first time, the first project that we had. This is the several programs that we are going to have in place. This amount is around 1.7 million carbon credit tons. We had on this first quarter the approval of our through on the guide on the antitrust authorities of our acquisition of the Kimberly Clark Tissue operations here in Brazil, and we expect to completing this transaction on the second quarter of this year. Now, I'm going to pass to Fabio. He is going to share with you information regarding Paper and Packaging business.
Fabio Almeida de Oliveira: Thanks Walter and good morning everyone. Let's turn to the next slide on the presentation. Paper and Package business unit has delivered solid EBITDA during the first quarter of 2023, despite more challenge mark scenario in the international paper markets. Shipments for print and writing papers and paperboard have decreased in the main international markets at the beginning of 2023, giving a restocking move that has begun at the end of last year. Demand in the domestic market has been more resilient for both print and writing and packaging grades. According to [Indiscernible], demand for print and write papers in Brazil decreased by 3.2% in the two first months of 2023 compared to the same period of last year. However, this decline is largely attributed to the strong comparison base from last year when encoded papers were sold into the containerboard segment. If we exclude these volumes, we estimate the domestic demand for print and writing has still grown. Domestic demand for paperboard increased by 3% on the first two months of this year compared on a quarter-over-quarter -- on a year-on-year basis, driven by sustained consumption of essential good and even thermalization in the chain. The supply imbalance start fading and demands returned to its historical trend in mature markets. In emerging markets such as Latin America, there's still some demand growth fostered by some segments, textbooks, for example. Suzano sales volumes in the quarter were 11% lower on a year over year basis. The decrease the sales volume is explained by our commercial decision to reduce our offering to the export markets given the high level of paper stocks in the chain in most markets. This decision allowed us to replenish our own paper inventors that have been running low optimal levels for 2022. Domestic sales represented 72% of our total sales in the quarter. In the last two years, we have had higher paper prices as a result of supply restrictions coinciding with demand recovered post-COVID. However, as these factors are now fading, markets are returned to their secular demand behavior. Prices in spot markets have a red falling, but remain stable at healthy levels in North America and Western Europe. In this market, supply are just in their operating rates to match demand. In Brazil, prices have trailed behind those international markets in dollar terms for most of last year, providing an opportunity for some price increases at the end of 2022, which were implemented during the first quarter. Our price in the first quarter was 32% high on a year over year basis. Our EBITDA has reached R$708 million, a 35% increase on a year-over-year basis. This is our highest EBITDA and EBITDA per ton for a given first quarter. Looking ahead, we should expect demand for print and write rates to return to secular trends. Higher demand for packaging rates should continue to outpace GDP growth to the sustained -- due to sustainability push. Suzano's Paper business is more concentrated in the domestic market, which is less volatile to supply/demand imbalance seen in some of the international markets. Although there was still some inflation around material and energy during Q1, it showed some signs of cooling down, offering good perspectives for the remainder of the year. It's worth mentioning that the structural competitiveness of Suzano Paper and Packaging business provides a solid ground to navigate on unforeseen market demand. Now, I will turn it over to Leo, who will be presented at our Pulp business results.
Leonardo Grimaldi: Thanks Fabio and good morning everyone. Let's move to the next slide of our presentation so that we can address the results of our full business unit for the first quarter of 2023. As you can note on the upper left graph, our Q1 sales volumes were 3% higher than Q1 2022 and 11% below the preceding quarter, which has a higher seasonality effect. Due to our Q1 sales performance, our inventories are still below optimum operational levels as mentioned by Walter. During the past quarter, demand has been quite mismatched in different regions of the world. In Europe, while the Tissue segment was quite resilient, Printing and Writing as well as some specialty grades mostly related to the labor markets, continue to face lower order intake as distributors and printers continue their destocking movement. In North America, most of the hardwood consumption is concentrated on the Tissue segment, therefore, hardwood pulp demand was quite stable. In China, demand for pulp, reflecting order intake, was increasing throughout the quarter with a bigger concentration in March. Production levels in most paper segments, as well as every board were quite high, and actually above historic levels keeping pulp inventories across China's chain quite normalized and balanced. As pulp demand in Europe was lower than expected due to this paper destocking movement, we noticed both volumes being redirected to China, putting more pressure in this market where price reduction were more intense than other regions of the world. Now, coming back to the slide, our average export price for Q1 of $719 was 13% below Q4 and 13% higher than our prices in Q1 2022. During the quarter closing, actual prices in China were lower than market indexes as most orders were closed on the very last days of the month after prolonged negotiations which took place during the Shanghai Pulp Week. The Q1 EBITDA performance was mainly driven by solid sales volumes as already addressed, which despite lower prices led us to an EBITDA of R$5.3 billion, representing 57% EBITDA margin. Now, looking forward, I would like to highlight the following points. In China, we keep noticing quite an optimism from our customers with improving confidence levels and a general expectation that consumer confidence and spending will accelerate in the short-term, also helped by the recovery of paper and carton board exports. Order intake for Suzano in April should be much aligned with March, trending quite close to historic levels. In Europe, we expect that distributors and customers restocking will last a couple of months, and soon this will stimulate the recovery of purchases of paper and consequently pulp in this market. In the Tissue segment, we continue to see quite stable and resilient markets with positive downstream demand. In North America, again, focusing on Tissue, as other paper grades are mostly integrated, most major producers are reporting to be running at steady and positive rates. Looking now on the supply side of the equation, we expect this momentary reshuffling of volume between Europe to other regions should persist in the beginning of Q2 and regarding new capacities, as we have stated previously, we expect that they will reach markets gradually, possibly more significantly towards the second half of the year. We expect that unexpected downtimes will continue to put additional pressure and unforecasted pressure on supply due to the technical age of pulp producers weather related event, strikes, as well as cost pressure and availability of wood in several regions of the world. It is our view that the current price levels in China and other Asian countries are quite below marginal cost producer and we expect that this will generate a lower domestic market for production in this region, as well as we fact that several integrated BHKP and paper producers should reduce their pulp production turning to purchasing of market pulp. Indeed, since March and April, we have noticed the first inquiries from this profile of customers. With that said, I would now like to invite Bacci to address with you our cash cost performance for the quarter.
Marcelo Bacci: Thank you, Leo. Moving to page six, we see that we had a flattish performance of our cash cost in relation to the previous quarter, which is according to our expectations. And that is due to higher maintenance costs due to annual shutdowns that also impacted the fixed costs and compensated the positive effect that we start to see coming from the commodity prices. We already see lower input costs that will support similar levels of cash cost on Q2 despite the higher amount of planned shutdowns in that period. We expect cash cost on the second half of the year to be lower than the current level at current commodity prices. Moving to page seven. The Cerrado project continues to perform on time and according to the budget that we had established for the project. We now have 57% physical progress on the project. We have updated the amount of CapEx taking into consideration the inflation correction that is part of the contracts that we had -- that we have with our suppliers on the project. That inflation is R$1.9 billion between the beginning of the contracts and the end of 2023. We have also had gains of R$300 million on FX when compared to our budget to the realized payments that we made on dollar and euro-denominated parts of the project. That leads to an amount of R$20.9 billion. In addition to that, we found opportunities to make instead of buying several items of the project that will improve the return of the project, that includes chemical plants, [Indiscernible] facilities, and some forestry assets. And that leads to the possibility of keeping unchanged our guidance of cash cost for the project in the future, even taking into consideration the high inflation of the period. We keep also unchanged the guidance of CapEx for 2023 with all the difference impacting only in 2024. Moving to page eight. We see that our net debt remained flat at $10.9 billion in the period despite the $800 million CapEx that we made on the period. The leverage ratio went to 1.9 times, and our liquidity remains very high at $6.1 billion, which is more than everything that we had maturing between now and the end of 2026. Finally, on page nine, we show that we currently have a $7 billion portfolio of FX derivatives, which covers including the hedges related to the Cerrado project includes and covers 67% of our FX gap coverage in the next two years, where we have an average put of R$5.63, which gives us a very significant protection when compared to the current level of effects that we see on the market right now around R$5. With that, I turn back to Walter.
Walter Schalka: Thank you, Marcelo. I think it's very important to mention to you and to reinforce the point that we keep our avenues -- strategic avenues for the future. We have five different avenues, one of them is to keep our DNA on reducing our total cash cost. All the projects are in place right now. Next month, we have Jacareí plant retrofitted, we have [Indiscernible], and we have been working on the forest side and logistics as well to reduce our total cost. The second strategic avenue that is quite important is our relevance on the a pulp mark global pulp market, Cerrado will come next year to reinforce the point. The third one is our strategy on vertical integration, and then we have Kimberly Clark assets as one part of this view for the future. On the fourth, we have the new avenues, the new alternatives that we have to our trees, and it's -- we are very pleased to tell you that we had MFSC operating in Brazil and in Finland at this point of time, and we are looking for new opportunities on this area. And if one is sustainability and carbon certification is one of the advanced advancements that we had during this quarter. We will keep our strategy -- commercial strategy for pulp on paper. It's very important that our ambition is not to increase our inventories on the pulp side, and we reinforce the point that the company is managed by event and not by average. Like just to bring forth this point to you and we will not increase our inventories on the near future. Our cash cost is an opportunity that we will have that trend in the third and fourth quarter of this year. And just to reinforce our policy, our financial discipline and our capital discipline as well. We have a very strong balance sheet and we will keep this a very clear strategy and very clear policy that we have right now. And now we are very pleased with the Cerrado project, that is some time on budget. This is going to be a project that is going to transform Suzano. It's going to be the lowest cash cost on our system. And from our understanding, the lowest cash cost in the world, and we are on track to deliver that as we expected and related with our original track record on time and on budget. Now, we will be ready to answer your questions. Thank you very much.
Operator: Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Thiago Lofiego with Bradesco BBI.
Operator: Thank you. Our next question comes from Leonardo Correa with BTG Pactual.
Operator: Thank you. Our next question comes from Daniel Sasson with Itaú BBA.
Operator: Thank you. Our next question comes from Jonathan Brandt with HSBC.
Operator: Our next question comes from Jens Spiess with Morgan Stanley.
Operator: Thank you. Our next question comes from Marcio Farid with Goldman Sachs.
Operator: Thank you. Since there are no further questions, I would like to turn the floor back over to the company's CEO for final comments. Please, Mr. Walter Schalka, you may proceed.
Walter Schalka : Thank you very much for joining us for this session. It's very important to reinforce the point to overview that our financial discipline and capital discipline will continue on the next coming quarters and years, even on a very asset scenario, we are keeping our CapEx that we have planned for this year and next year. We are very pleased with the Cerrado project that is going to transform our self into an even more competitive company for the future. And very pleased to see that we have new avenues for the future, a new business in one side in vertical integration on the tissue business in the other side, and preparing the company for the future. I'm very pleased with the developments of the company and very clear and transparency to all of you on our trends for the future. Thank you very much, and have a very nice weekend.
Operator: Thank you. Suzano first quarter results conference call is finished. Have a nice day. You may disconnect your lines at this time.
