Suzano S.A. (NYSE:SUZ) Q1 2024 Earnings Call Transcript

Suzano S.A. (NYSE:SUZ) Q1 2024 Earnings Call Transcript May 10, 2024

Suzano S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for holding and welcome to Suzano’s Conference Call to discuss the results for the First 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. Walter Schalka and other executive officers. This call will be presented in English with simultaneous translation to Portuguese. To change the audio, you can press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese Room. After that, you can select mute original audio. Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano’s management and non-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’ll turn the conference over to Mr. Walter Schalka. Please, you may begin your presentation.

Walter Schalka: Good morning, evening. It’s a great pleasure to have with you to be part of the first quarter results 2024 of Suzano. I would like just to mention to you that we have almost everyone from the [ph] with us today and will be available for a Q&A session after our presentation. It’s a great pleasure to announce the results of the first quarter. Once again, we had a very good operational performance with volumes and pulp side with 2.4 million tons. We have been improving volumes on the paper side as well and on the consumer goods. We had R$4.6 billion on EBITDA on this quarter. I would like just to mention to you and reinforce the point that we are continually looking-forward to our competitiveness. It’s very important to mention our operational cash cost.

That was R$812 per ton, a very good performance and very close to the performance of the fourth quarter last year. Just to reinforce our positioning on our robust balance sheet with $6.3 billion in cash plus revolving position. With a net debt, there is $11.9 billion and we are reaching the peak of our leverage with three and a half times net debt over EBITDA. We are going to present Cerrado. Aires is going to present in a few minutes to you and we have been approaching the end of Cerrado with less disbursement on the future. Now, I’m going to pass to Fabio that is going to talk a little bit about packaging and paper market.

Fabio Oliveira: Thank you, Walter. Good morning, everyone. Let’s turn to the next page on the presentation. In the first quarter of 2024, we have faced different market conditions in our domestic and international markets. Outside Brazil, we have seen demand starting to rebound if inventory replenishment builds up after the strong destocking process through most of 2023. While on the domestic market, demand started the year slower than expected. Demand for printing and writing papers in Brazil shrunk 20% in the two first months of 2024 when compared to the same period of the previous years. With the impact of the postponement of federal and state governments book programs and customers’ inventory adjustments led by slower economic activity at the beginning of the year.

Apart from the read expected structural reduction uncoated paper demand for the promotional segment. Regarding paper board, demand in Brazil has been impacted by slowdown in consumer spending, which coupled with previous inventory adjustments resulted in a 6% demand reduction in the two first months of 2024 compared to the same period of 2023 according to EBAS available data. Suzano total volumes in Q1 were 3% higher than Q1 2023, driven by higher export volumes. Compared to the last quarter, our total sales reduced 20% due to the usual sales seasonality between such quarters. The average net price during the quarter was flattish quarter-over-quarter. We have delivered higher prices quarter-over-quarter in the domestic market due to price increases in our uncoated and cut-size product lines.

In international markets, our prices were slightly lower quarter-over-quarter due to product and regional mix. Looking at EBITDA, the 19% decrease quarter-over-quarter was driven by lower sales volume. When compared on a year-over-year basis, the 35% decrease in EBITDA was mostly led by lower prices in the external markets. Our EBITDA per ton was slightly better on a quarter-over-quarter basis. Looking ahead to the coming quarters, we expect healthier demand levels as inventory buildup continues in mature markets. In the domestic markets, we expect the [indiscernible] cycle to support demand in the coated segment, a recovery in the uncoated market segment, as well as improving paper board demand for packaging. The improvement in demand, combined with current market expectations for pulp, energy and wood prices, is expected to sustain current price levels on the domestic market.

While, in international markets, apart from the rapidly evolving scenario, we generally expect price levels to increase, as several major international players have already announced price increases for the coming months. Despite the mounting cost pressures, the impact is not uniformly distributed across all players and regions. Looking ahead, we expect a flattish cash cost performance in our paper and packaging business throughout 2024, backed by our strong structural competitiveness. Now, I will turn over to Leo, who will be presenting our pulp business results.

Leonardo Grimaldi: Thanks, Fabio, and good morning, everyone. Let’s please move to the next slide of our presentation to see our pulp business unit results. I would like to begin by sharing with you some facts related to this first quarter. Demand for hardwood pulp was positively surprised, has positively surprised our expectations throughout the period, both in China, where the rhythm of paper production continued quite healthy, actually growing 6% to Q1 compared to Q1 ’23 as per SEI, and with no pressure on paper producers’ inventories, as well as in Europe, which has recovered significantly from the value seen in the first half of ’23, and where our customers kept revising their forecasts up and up. On the supply side of the pulp fundamentals, we have noticed several disruptions, coming from impacts of permanent closures announced previously, added to several new and unexpected events, such as strikes, wars, and climate-related events, as well as the idling of some mills, reducing the availability of pulp in the whole system.

Demand from our customers and the push for order intake has exceeded our capability to serve all their requests, and we had to limit and cap order intake during all months of Q1. Despite our efforts to reestablish our inventories in Europe and in North America during the quarter, optimum inventory levels were still not achieved, and we forecast that this situation will still take some months to level out and for inventories to be physically repositioned and available in European and North American terminals. As I had mentioned in our previous earnings calls, our inventory levels across the systems were too low and unsustainable in the end of 2023, and during Q1 we had to start reestablishing a better operational condition. Regions and customers who are served by Suzano directly out of Brazil, like Middle East, Africa, Asia, including China, are still running with significant shipment and invoicing delays, with no improvement during the quarter, and indeed even more challenging, now reaching more than 70 days of backlog at the end of this period.

Coming now to the graphs on the slide, our first quarter sales were limited by inventory replenishment, as I have mentioned before. Our average export prices increased to $624 per ton, capturing only partially our price increases, due to the high backlog levels as I have also mentioned previously. Our price increase announcements during the quarter were all fully implemented in their respective markets. Our EBITDA totaled R$3.9 billion, with an improvement compared to Q4 due to higher prices despite lower volumes. Now looking forward, I would like to highlight the following points. Rolling forecasts coming from our customers in Europe and Americas keep improving, and we still see challenges to serve all the pulp demand in the short term. It will take time to reposition our inventories accordingly.

Effects of strikes and mill failures in Europe have unexpectedly generated additional pulp demand for Suzano, and our current inventory levels do not allow us to tackle absolutely any unplanned pulp demand. We expect S&D dynamics in Europe to remain quite tight during the second quarter. In China, we know that the leading paper producers are taking advantage of their financial strength to lower paper producers’ and the lower paper producers’ margins in general in the market to push for market share gains, consequently squeezing smaller paper producers. Smaller paper producers’ low operating rates, as recently reported, are being compensated by higher operating rates from larger paper producers. As in China, downstream paper demand continues healthy, also supported by our customers’ macro sentiment in general, we do not expect major changes to paper production rhythm, and indeed, this paper production rhythm has been quite solid during this year.

Demand for our pulp came again over our expectations in April, and as we speak, we are still capping order intake and refraining from offering to spot markets as an effort to recover timely shipment to our customers. As we speak, we are completely oversold. In addition to tailwind demand perspectives, our constructive view for the short term is being even more benefited from disruptions on supply chain, the supply side of the equation, for which we are not sensing any significant improvement soon, a reason why we feel this positive price momentum should continue. News keeps coming, and you all have read yesterday that a new permanent closure was announced. With that said, I would now like to invite Aires to address with you the cash cost performance of the quarter.

Aires Galhardo: Thank you, Leo. Good morning, everyone. We are in slide seven. The cash production costs performed in line with company’s operational plan, presenting stability compared with the previous quarter. In addition to the benefits from the drop in the price of diesel and caustic soda, which is the main chemical in the cash cost composition, we operate on a smaller average distance from forest to mill, and had better performance in harvesting activities, further reducing the cost of wood. These positive factors were offset by no recurring events in some mills, which negatively impact input consumption and fixed costs in the quarter. In the end of comparison, we see a clear benefit of the better operational performance on wood and inputs in the last quarter, in addition to the reduction observed in the commodity price in the period.

Looking ahead, we continue to see stability in the cash production costs throughout the year, although with a small variation between upcoming quarters. Moving to the next slide, we are focused on the final sprint of the Cerrado project, which has already reached 94% physical completion and 87% of physical execution by April. The project’s CapEx guidance for 2024 is maintained at R$4.6 billion, with more than half having already been disbursement by April, therefore reducing cash flow consumption in the remaining eight months of the year. On the next page, we would like to reinforce the company’s vision of the expected ramp-up curve of the new plant to be completed in nine months. Such performance means a production volume of 900,000 tons and sales volume of 700,000 tons in 2024.

In the first 12 months after the startup, we expect to produce 2 million tons of pulp in the new mill. Marcelo, the floor is yours.

Marcelo Bacci: Thank you, Aires. As Aires has just mentioned, we are at the end of an investment cycle that is paving the way for us for further deleveraging in the coming months. So, I’d like to start on slide nine to give you a recap on what happened with our net debt in the last 12 months. Despite the fact that we invested $2.8 billion in the period, our net debt just went up from $10.9 to $11.9 billion in the period because of a very strong operational cash flow and also because of our very consistent derivative policy or hedging policy. So that led the net debt to EBITDA ratio to the level of 3.5 times at this point, which is most likely the peak for this cycle of investment. We expect this number to start improving in the coming quarters.

In terms of liquidity and amortization schedule, we have a very comfortable position with a significant amount of liquidity, $3.9 billion of cash, plus standby facilities and undrawn facilities that will be drawn in the coming months with a very low level of maturities in the coming years. That will lead us to a very comfortable position when it comes to average term and also average cost of our debt. With that, I will turn back to Walter for his closing remarks.

Walter Schalka: Now we are going for a Q&A session. Please, we are available right now to answer your questions.

Operator: We will now begin the Q&A section for investors and analysts. [Operator Instructions] Our first question comes from Daniel Sasson with Itau BBA.

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Q&A Session

Daniel Sasson: Hello. Hi, guys. Good morning, everyone. Thanks for taking my questions. Walter, Suzano is about to once again deliver an important growth project on time and on budget. You showed the avenues that it opens up ahead. It keeps your excellent track record and so on and so forth. But now I think all eyes will be on the next steps, right? So, it would be very helpful if you could elaborate on the next potential growth avenues that you see for Suzano. And more specifically, you have stated in the past that Suzano would be willing to analyze opportunities in different geographies as well. So, if you could explain to us a little bit what would be the rationale or the main positives for Suzano if it decides to diversify abroad.

And my second question, Walter, is also related to capital allocation discipline. When you became the company CEO in 2011, the industry was going through a very hard time, right? And in 2012, capital increases had to be made at Suzano, at Fibria. And then you conducted what I would call a transformational change that allowed your balance sheet to be strong enough to even raise that, consolidate the industry, create value to shareholders. So, looking ahead, what do you think are the internal or the specific breaks you think that Suzano has put in place to guarantee that rationality in capital allocation decisions will always continue to be the case? Thank you.

Walter Schalka: Thank you, Daniel. It’s a pleasure to answer this question. First of all, I’d like to say to all of the next questions that we are not going to comment on possible speculations that we are seeing on the press. But it’s very important to give a very clear framework from our view of the future. First, I think it’s very important to mention that we are long-term viewers. We are always analyzing the opportunities to shareholder value creation all the time. That could be with organic or inorganic growth, but could be through buyback shares as well. Value creation is a very important point for us, always on a more long-term view. And sharing value with all shareholders all the time. To give an example to you, it’s what we did when we moved to a single class share to benefit all of the shareholders.

Second, I think it’s quite important to mention about our capital allocation discipline. I think this is very important to us. We are in an industry that is very intense in capital, and this is very important. We always — I’m going to reinforce, we always make a very deep analysis and not based only with one person. It’s a group of persons discussing what are the potential new opportunities that we are facing for the future. And I can mention to you some of the movements that we did that were on this direction. On organic moves, sorry, inorganic moves, we had deals such as IBEMA, such as FASEPA [ph], such as expansion of land banking, including Parkia, with Fibria deal, with Kimberly Clark, a tissue acquisition in Brazil. Each of them, we have been going through the discussions, how we would change our value creation, improve the value creation for the future.

On organic moves, we had organic moves on the tissue business, on the fluff market, or in Cerrado. When we presented Cerrado, many of the people were asking us about the value creation and the risks of implementation of that. Now it’s very clear that our team performed very well once again, with a very good track record. And we will deliver a plan that is going to transform the company for the future. A plan that is going to have two and a half additional million tons to the company, with the lowest cash cost on our system and in the industry, around $100 per ton. With retrofits that we made on Suzano facility, on Aracruz facility, on Mucuri facility, it’s another source of value creation. Then, what I’d like to reinforce, Daniel, is that we are not just looking growth for growth.

We are looking for growth for value creation that could be on retrofitting on new avenues for the future, on organic or inorganic movements. The third issue that I’d like to bring to your attention, right now, is our financial discipline. We do have a financial discipline policy and we will stick with this policy that we have today. It’s very clear, it’s public, our policy, and we will stick with our policy. And fourth, and not less important, in my opinion, very important, is that we have a very strong team. We have a team that is committed, a team that is highly competent, and aligned with all the stakeholders. We are all the time with this team looking for opportunities to reach new boundaries, new opportunities, new situations that we would deliver value creation to all stakeholders.

Then, all of this is balanced on something that is quite important to us, that we want to create differentiation all the time in every single move that we do. We are going to create differentiation and we are going to create scale. The combination of both that will deliver value to everyone for the future.

Daniel Sasson: Thank you so much, Walter. Thank you for all these years.

Operator: Next question from John Brandt with HSBC.

Jonathan Brandt: Hi, good morning, gentlemen. Walter, thank you very much for the past decade plus. I wish you the best of luck in the future in your role on the Board. I guess just sticking with the capital allocation, and I understand you can’t make any comments about what’s happening in the media or what they’re reporting. But I’m just curious, could you just maybe discuss it a little bit more in terms of a size of a deal? Are there any limitations? Is there sort of an amount or a deal that might be too big for you? And on the financing side, yes, your net debt and your leverage policies are very clear, but you’ve also gone higher than the three and a half times in the past. As long as there’s a clear deleveraging path, I’m wondering, would you break a four and a half, five times leverage for a deal that you considered really interesting?

Also with that, would you perhaps consider equity in any deal? Or is that off the table? My second question is just related to the pulp volumes. Pulp sales volumes were down 2% year-on-year. I understand there was some inventory builds, but you had three mills with downtime last year, and there were no mills with downtime this year. So, presumably production was a lot higher. So, I am just — I’m wondering, can we assume that the rest of that production was put into inventory? If you could quantify how much more inventory builds you have to do, and if it’s safe to assume that you’re running at 100% capacity utilization. Thank you.

Walter Schalka: Thank you, John, for your questions. It’s Walter here on capital location for us. As I mentioned to you, we are very disciplined on that, and we are very disciplined on our financial policy, and it’s very clear what we have right now. We are not going to change our financial policy. We could exceed at some time the three and a half, but it’s very clear that we have this. We need to present a remedy on this. It’s very clear on our policy, and it has happened to us, I think, one or two times. Every time that we did, we presented a remedy to our shareholders. Then, we are very disciplined on that. We want to be between two and three, and we could reach three and a half times during an expansion program. But if we exceed that, we need to have a remedy on that.

And second, if you ask about if the potential movements for the future could bring cash and all shares, this is something depending on the opportunities that we have. But more important than that is the fact that we are always disciplined on value creation. Guys, we are not here just in the sake of growth. This is not our mindset. Our mindset is value creation. It’s not growth in terms of egocentric for people here or the company being better or larger and things like that. We want to be — and it’s very clear, delivering value creation to our shareholders. We are very agnostic about organic or inorganic and about geographies. This is something very important to you to understand. If we are going to have use cash and shares, depending on the opportunities that you have and depending how we are going to see the potential value creation on these opportunities.

Leonardo Grimaldi: John — hi, sorry, John, this is Leo here. I’m going to answer your question related to volumes and inventory buildup and production. First of all, we have been stating for quite a time that we are not going to issue any comments related to our production levels. So, I’m going to focus my answer on inventory rebuilt and what we’re seeing. First of all, the volume effect on Q1 is all related to inventory rebuilt. We ended last year with a very unsustainable level of inventories, which we had to quickly address in order not to compromise our agreements with key customers. So, that was the issue that generated this below expected as per analysts’ volumes in the quarter. We are still not there yet in terms of inventory rebuilt.

There’s still some space to be fulfilled. There’s cargo in the sea or leaving Brazil that’s in our inventories, but still not at our terminals available for our customers. And this is one of the reasons why I mentioned that we are completely oversold at this time and actually kept in order to take in all markets.

Jonathan Brandt: Okay. That’s clear. Thank you. Walter, just a quick follow-up. How would you measure value creation? Is there a certain ROE or ROIC that you would measure that at, or is there some other way that you would measure value creation?

Walter Schalka: Yeah. We require the spread over walk on our projects. Of course, we are not going to open to the market what is the required spread. And this spread is not the same for different projects. When we have a retrofit, for example, the spread required is lower, because the cushion risks are much lower. When we have Cerrado, it’s a little bit higher. When it’s a potential acquisition, it’s even higher than that. It’s a different spread for different movements that we are doing that is required over walk.

Jonathan Brandt: Very clear. Thank you and good luck, Walter. Thanks again.

Operator: Next question from Leonardo Correa with BTG.

Leonardo Correa: Good morning, everyone. Can you hear me? Yes?

Walter Schalka: Yes, Leo.

Leonardo Correa: Okay. Thank you. So, I have a couple of questions here, guys. Sorry to insist on the capital location theme, but I guess, it’s going to be a bit of a monothematic discussion here today. Yeah. So, the first point, maybe going back to John’s issue on M&A internationalization, right, Walter? Correct me if I’m wrong. Maybe my understanding over the past quarters and years has been a bit off. But I guess, the idea for me was always, look, the bar for internationalizing the company is very high. The bar for M&A is high. I mean, I guess, you guys were talking about diversifying a bit away from pulp and diversifying from markets from very big China exposure. But I guess the issue — the main discussion point over the past week has been on size and the level of risk that management is willing, management and board is willing to take on via potential move, which would be big, right?

And I know that you guys are not commenting specifically on market speculation, which I understand completely. But just to understand, I mean, if the next move would be something big or you would be still my former understanding of something more bolt-on, smaller, lower risk. I just want to see how, if anything — the strategy of the company changed and the level of diversification that you guys are looking for, because I think that’s key. And I don’t think the market is at this point really understanding what the next move is and how the risk tolerance is in the company and how much diversification you guys are really looking for. So, I think any clarity on that would be very helpful for the market. Second point, still on this related topic, right?

But on the buyback. Right? I mean, we’ve been in the middle of a big correction in shares, something completely unusual, right, for people who follow Suzano for many years. I mean, the stock is down quite a lot this week. Clearly, there’s a lot of doubt in the market at this point. I mean, under any metric, right, NPV, if we think of multiples, right, into 2025, I mean, the stock is highly derated. I mean, the stock is probably below five times EBITDA, which in my view, at least makes very little sense, right, fundamentally. Given that you guys already have a buyback and have been active. I mean, how do you view the return — the IRR now of buying back shares stacked up to any other investment alternative? I can imagine at this point, shares are looking very attractive.

But I just wanted to hear you on that and whether you would be looking to increase the buyback. Thank you very much.

Walter Schalka: Thank you, Leo. Yeah. I think, it’s — we are not going to comment on speculation. I’m going to repeat that, I think, several times during this call. But it’s very important to mention that we present to you a framework during our — Suzano’s Day last year on very clear what would be our positioning for the future. Of course, we have big deals such as Fibria. We have smaller deals such as FASEPA [ph] or IBEMA. But in every single deal that we are doing, we are looking for value creation to the shareholders on long-term. Looking for differentiation and looking for scale on the beginning or in the future. But it’s very important to mention to you that in every move that we made, we were very, very disciplined on our financial policy.

And we will continue to do that. I’m not understanding the reaction of the market right now. I can — of course, from outside, from speculation on the press that the market is reacting, that we are going to do crazy things. I’m assuring you that we are not doing anything that could create any kind of risk to the company. And on the other side, I’m not going to just make any movements here just on the sake of growth. We are going to looking for value creation all the time. This is and could be both on opportunities or can be large opportunities, can be on geography A or B, can be on organic or inorganic. It’s always with this mindset. And it’s very clear that the market right now is challenging our long-term positioning, but our track record is always on this direction.

And we are going to continue on that very disciplined and very clear and humble position to continue working on that direction. Marcelo, now your second question regarding buybacks.

Marcelo Bacci: Yeah. Leo, thank you for the question. We have a buyback program open. Of course, during the quiet period now, we were not in a position to operate that buyback till the release of the results yesterday. And we will certainly consider that possibility for the future. And of course, this correction on the share price is an additional incentive in that direction. But we have no decision taken in that regard.

Leonardo Correa: Okay. Thank you very much, Walter and Marcelo.

Operator: Next question from Rodolfo Angele with JP Morgan.

Rodolfo Angele: Hi, good morning. I’m going to switch gears. I have only one question. Isn’t it great to be starting up a project like Cerrado in a time when I hear Leo saying that you’re oversold for the quarter? So, my question to you and probably this to Leo, what’s the strategy for this ramp up? You showed the typical very fast ramp up for the project, nine months. But if we start to see price reactions, is there flexibility to accommodate things? So, can you comment a little bit on what to expect and any effect to expect to see if possible on pulp pricing into the second half of the year, ending 2025? Thank you.