Suzano S.A. (NYSE:SUZ) Q2 2024 Earnings Call Transcript

Suzano S.A. (NYSE:SUZ) Q2 2024 Earnings Call Transcript August 9, 2024

Operator: Ladies and gentlemen, thank you for holding, and welcome to Suzano’s Conference Call to discuss the results for the Second 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. 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 known 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 will turn the conference over to Mr. Beto Abreu. Please, you may begin your conference.

Beto Abreu : Thank you. Hello, everyone, very happy to be here interacting with all of you now or now as part of the Suzano’s team. And I really would like to thank you, for all of you to attending the call. So I will start here the presentation. And my first slide will be highlighting to you a couple of important achievements and movements on our — related to our strategic avenues and implementation of our strategy. As you can see here, we made investment in two assets. The first one was in Lenzing in Austria, a good movement to understand and to test the market in Europe, here we are talking about the textile market. And the other movement was in Pactiv in US on the packaging business, also important movement to understand the market.

The team here personally like the movements that we are doing. I think a few things it’s important to share with you. The first one, it’s important movement with no impact in our balance sheet but huge opportunity to understand those geographies and those markets. It’s like we are testing the water on those geography and markets. The other one is how able we are to implement and to use all the knowledge that we have on those kinds of operation to extract value. And of course, are also markets and segments that we can scale in the future. So that’s those things that we’d like to share here. In the case of Lenzing, small acquisition with seats on the Board, an enormous opportunity to understand the business and with a call for the future if we decide to execute.

In the case of Pactiv, also a business with 420 tons of capacity in the paperboard business, also a fair price to test the market and understand the environment and start planning other movements in the future. So that’s the kind of movement that again we understand that’s the right one that was in our pipeline since last year and we are bringing now. We should have the closing in the last quarter of this year. The other highlight that I also would like to share with you is the Cerrado project, all of you are familiar with. I would say that this is a unique milestone of the company that will bring us to even a stronger position in terms of relevance in the market pulp and also competitive advantage in terms of cost. And this is something that it’s a kind of mantra for us that we will always keep in our agenda is keeping our relevance in the market pulp and also keep working very hard every day on the cash cost to keep our level of competitiveness against other competitors.

And then we can see this in the next slide in some of the highlights related to the results. One of the things that we are very glad to show is the level of cash costs again in this quarter. This is something that we’re going to keep working very hard to keep and to even use further levers to keep reducing this in the future. The other one is of course the EBITDA. We see a number of R$6.3 billion that shows the resilience of our business. And I think important point to highlight here is that as we can see, we start deleveraging the company, even not taking all the opportunities that Cerrado will bring for us in the future. So the companies are deleveraging before we have Cerrado operating, bringing the extra volume that we have. So a lot of good news here in the second quarter in our view related to those figures.

We’re going to go through most of those information here with the team, and also we’re going to go deeper on the Cerrado projects, but let me hand over to the team now to go on the details, starting with Fabio, and then I will go back to you.

Fabio Oliveira : Thank you Beto and good morning everyone. Please, let’s turn to the next page on the presentation. On the second quarter, we had a solid performance supported by better market conditions domestically and abroad, albeit challenged international logistics. On the domestic markets, according to Ibá, print and write demand increased 12% in the first two months of the second quarter on a year-over-year basis. Growth occurred in both uncoated and coated paper grades. Demand benefits from the election cycle tailwind, which will take place at the end of the year. Demand for paperboard increased by a strong 14% during the first two months of the quarter, compared to the same period from last year. The significant growth was primarily driven by increased packaging consumption from the food and beverage and pharmaceutical sectors.

We have also seen the end of the destocking process that had impact on previous quarters. On international markets, demand in the quarter was healthy in North America, in Latin America, and other markets we serve. Prices were slightly up in dollar terms, supported by higher pulp prices in all markets, coupled by higher container freight rates and longer logistics cycle in most international routes. Looking now to Suzano’s figures, our sales volume in the quarter were 3% higher year-over-year and almost 6% above first quarter performance pushed by higher sales volumes into the domestic market. Our export volumes in the quarters have been impacted by difficulties with vessels delays and port permissions, hampered by port congestions in most container terminals in Brazil.

The average net price growth during the quarter was — over first quarter was led by implementation of previously announced price increase in the external market and favorable FX. On a year-over-year comparison, the price decline was given by the abnormal price levels witnessed in the first half of 2023. Looking at the EBITDA performance, the 14% increase quarter-over-quarter was driven by higher top line and lower costs in the period, also benefiting the EBITDA per ton. When compared to the second quarter 2023, EBITDA dropped 15% led by lower prices in both the domestic and international markets despite higher sales volume. Looking ahead, we expect better demand for print and writing and cartonboard in the domestic market, when compared with the first half of the year, favored by seasonality.

The upcoming elections in Brazil should keep playing a role for higher demand in Q3, mainly for coated paper. Rising costs continue to push paper produced globally, and new price increases have been announced in most regions. It’s also worth mentioning that a strong dollar over BRL raised prices on imported papers in the domestic market by providing better price in local currency from our exports. As disclosed on the earnings release in the Q3, the annual maintenance downtime will take place on the Suzano and the [Mato] mills. We expect our cash costs in the coming quarters, ex-downtimes to remain stable when compared to the first quarter. Now I will turn it over to Leo, who will present on our pulp business results.

Leonardo Grimaldi : Thanks, Fabio, and good morning, everyone. Please, moving to the next slide of our presentation, I would like to begin by sharing some facts related to this past quarter. Market dynamics were quite strong in North American and Europe, where paper production and pulp demand were healthier compared to a low 2023 level, and pulp inventories were still below historic volumes. In China, paper and ivory board production has been solid since the beginning of the year, with a 4% growth year-to-date benefited by paper exports, which posted a 16% growth in the same period. Also in China, similar to other regions, pulp inventories have been trending below normalized levels throughout the chain. Despite that, paper producer’s margins and again in China, which kept getting squeezed as the quarter evolved, and a pricing sentiment coming from the new supply on the horizon made paper buyers reduce the rhythm of their pulp purchases since April, and most importantly, by the end of the quarter.

We have navigated Q2 by focusing on positioning our products in Europe and North America, as stated previously, to comply with our pulp supply agreements and our customers’ needs, and also on an operational push to reduce our order backlogs to other markets like Asia, Middle East, and Africa, improving our delivery schedules to our customers in these regions. This dynamic resulted in a strong invoicing during the quarter, keeping our inventories at low levels, very similar to the end of the first quarter of 2024. Even with the invoicing push, our order backlogs were only recovered to normalized levels by the end of July. This quarter was also marked by the conversion of our previously announced price increases into the P&L, which resulted in an average export price of $701 per ton, 12% higher than that of the first quarter of the year.

The combination of higher prices, favorable FX, solid volumes, and a good cost performance made us achieve an EBITDA of R$5.5 billion, a 60% EBITDA margin. Now looking forward, I would like to highlight the following points. First of all, we are extremely excited with the startup of our Cerrado project of our brand new Ribas mill. As per our production and operational plan, our contracts and volume agreements have taken into consideration a ramp up of sales by year end time, when we expect the bulk of our new pulp supply to start arriving in the major markets. For the second half of 2024, we forecast healthy demand in all regions. As this third quarter begins, North American and Europe continue to post solid paper productions, and pulp inventories have still not recovered to historic normalized levels.

In China, paper production should continue at a positive trend, especially as of September, due to a stronger market seasonality. As usual, tissue and packaging producers should increase their productions even further in preparation for the November 11th shopping out. And we also expect that paper and board exports should continue to post favorable figures during the next months, consequently helping producers’ operating rates. As per our checks in the ground in China, pulp inventories across the chain continue below balance levels. And very important, taken into consideration the effect of a lower order entry in Q2, we expect that pulp inventories in Chinese ports, or and in the hands of our paper customers or paper producers and traders in this market should continue remaining below normalized levels during the next month.

Despite all these positive market fundamentals, which I have mentioned regarding Q2 and also expected for Q3, in order to reestablish an active market in the region, we have repositioned our prices in the second half of July and consequently, order intake has rebounded since then. It seems very clear that we have entered in an environment of lower pulp prices. And at Suzano, we are prepared to timely navigate this cycle. Additionally, I would like to confirm that we are determined to keep our inventories at the current low levels with no, absolutely no major increase to the set points during this cycle. As already stated in previous occasions, at Suzano, we manage our business, not by an average cost and margins of our assets bought forward, but on a very detailed event basis analysis.

As such, and as Bacci can later explore during our Q&A, our financial team will continuously analyze the returns of our marginal production costs at different price levels of this new cycle. And in case returns are inappropriate, production should be adjusted accordingly, impacting our volume availability and our commercial strategy. With that said, I would now like to invite Iris to address with you the cash cost performance during the quarter.

Aires Galhardo : Thank you, Leo. Good morning, everyone. We are in Slide 7, look at in a flash, performance quarter-over-quarter. We face a negative impact on wood supply mix due to a higher average from forest to mill distance close to 200 kilometers and a higher share of third-party wood around 35%. On the positive side, we achieved better efficiency in the harvesting activities which mitigated the pressure. Additionally, while the BRL depreciation is beneficial for the company since it increases the EBITDA, it does take a toll on the cash cost level as some chemicals are dollar-linked. Still on chemicals, the cost decline was mostly driven by a lower energy consumption and a lower price for natural gas, caustic soda and lime.

The R$828/ton level in the second quarter came pretty much in line with our budget. Looking ahead to the third quarter, we anticipated a low single-digit increase due to a likely higher FX and the Cerrado’s startup. By year end, assuming no other related input cost issues, we foresee cash cost performance improving with the new Ribas operation view. Moving to the following slides about Cerrado, a few weeks ago, we were able to deliver on time and on budget the longest single line pulp mill in the world after hopefully three years of execution. The physical and financial progress along the way were frankly disclosed to you all. And with the same transparency, we share what to expect ahead on the learning curve phase. As you can also see on the slide, there is still R$2.4 billion CapEx to be disbursed from the total of R$ 2.2 billion with the mill already running.

And I take this opportunity Ribas is running as we speak at 4000 tons of pulp per day, being fully aligned with target for August. Now I hand you over to Bacci.

Marcelo Bacci: Thank you, Aires. Moving to the next page, I’d like to highlight that we are taking the opportunities that the market is providing to us to keep strengthening our balance sheet. In terms of leverage, as mentioned by Beto in the beginning, the peak leverage related to the Cerrado project is behind us, and we are starting deleveraging process that will likely continue in the coming months. We are now at 3.2 times net debt-to-EBITDA, with a flat net debt at $12 billion. In terms of our amortization schedule, we took advantage of the curve in Brazil to issue domestic notes and improve the quality of our portfolio by increasing the tenors and reducing the rates. We are constantly looking at other alternatives to keep improving this profile with transactions below the bond curve.

On the following page, I’d like to highlight our discipline in terms of capital allocation. We have been going through four consecutive share repurchase programs in which we’ve bought already 93 million shares. And we are approaching the end of this fourth program where we still have about 7 million shares still to be bought. And we have decided this morning to launch a fifth share buyback program with another 40 million shares to be bought over the next 18 months. And we also will cancel 40 million shares of the current program. So with that, we have been over the last three years returning to our shareholders between dividends, interest on equity, and the share repurchases more than R$ 10 billion. With that, I will turn back to Beto.

Beto Abreu : Thank you, Marcelo. In the last slide, we have a few takeaways, but I would like to reinforce a few of them. The first one is related to operating performance. So, solid results and operating in a very good way, what is under our control is the best way in our view to make sure that we can keep delivering despite the kind of scenarios that we might face in the future. So this is what’s under control and this is where we’re going to keep putting a lot of focus. The other one, it’s related to the Cerrado project. I think Aires already talked a lot about the project, but what I want to highlight here is how capable this team is to deliver very challenging tasks. So it’s, and I would like to invite you not only for the Suzano Investor Day by end of the year, but also to visit the site.

It’s the only thing to really understand what was implemented. And the other thing that I also would like to relate is what Marcelo Bacci just presented, which is related to our discipline related to capital allocation and the focus that we will always have on maximizing the long-term returns. So with that, I will appreciate if we move for the Q&A. Thank you very much.

Q&A Session

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

Daniel Sasson: Hello everyone. Good morning, thank you so much for taking my questions. My first question is on pulp prices. I know that you cannot discuss forward-looking statements in regards to your expectations to what’s going to be the price floor for pulp prices, but if you could help us think about it by telling us what’s your view on current demand from China at the current price levels, right? I mean, prices have declined by more than $100 per ton over the past couple of weeks. Was that enough to bring buyers back to the negotiating table? Or thinking differently, are your customers able to skip purchases waiting for prices to decline more, or maybe they do not have enough inventories, or they have only normalized level of inventories and not excess levels of inventories, and therefore at some point they will have to go back to the negotiating table and restart purchasing volumes.

And my second question is related to capital allocation. If you could explain what the effective acquisition brings to the table in terms of your strategy to go further downstream, if there is room to test fiber to fiber substitution with some products in the US. And along the same lines, doing the — talking a little bit about Lenzing, you clearly integrated dissolving plus viscose seems the way to go, right, in this industry. If you could comment on if growing to dissolving is an option that you’re studying, eventually converting one of your plants into dissolving production that would be great. Thank you so much for taking my questions.

Leonardo Grimaldi: Hi, Daniel. This is Leo here. Thank you for your questions related to pulp prices. I will start with maybe the mid part of your question when you asked if our customers are able to skip one more month. I personally believe that the answer is no, because as I mentioned, they have been reducing orders or order intakes in the perspective of suppliers since April. And we see public information related to pulp inventories at ports. And we have our marketing tell of pulp inventories in the hands of the customers. And we believe they are below normalized levels. So as September starts a big seasonality period of the year with higher production levels, I believe it’s important that they recover purchases. And that was our big objective where when we announced a couple of days or a week ago, this adjustment, this big adjustment in price levels, in order to get customers back to the table, right?

Our objective is how could we get the market into activity again. And that’s why we made such a big move positioning our prices in what we believe is correct, in a correct proportion to softwood prices and also getting closer to local Chinese producer’s renminbi prices as well, So this was the main intention of our movement, which I believe was successful. As of the day that we made the announcement, several customers in different segments of the market and of different sizes have become active or interested in buying pulp again from us. I wouldn’t say that order intake has fully recovered. I would say that at the first moment in July, order intake was roughly at a 50% level, but I believe that market confidence will keep getting better and better as we speak.

And then we’re going to see them purchasing back to their normalized rates. We believe that the decision of increasing orders above their normalized rates in that movement, that’s usually usual when they feel that prices are low so that they can restock. It’s quite difficult to set, to give a set point at this cycle because it’s so different than previous cycles. First, we are coming from low inventories on the chain. Second, unexpected closures are still having a big effect because we have a carryover of the volumes of announcements of permanent closures in previous quarters affecting availability as we speak. Third, we have obviously the startup of Cerrado and our competitor in China. But ramp up curves are always uncertain. And when we add up and factor all this uncertainties, it’s quite hard to predict when.

And this will trigger additional demand for pulp, especially because as we all know, there’s a big part of the Chinese industry, which is the integrated pulp and paper producers, which have a higher cash cost, I believe quite close to the $600 set point. And that should also start buying pulp once this level is broken. So a lot of variables to be following, we will actively be monitoring and acting accordingly.

Daniel Sasson: Thank you so much.

Marcelo Bacci: We will, Daniel, this is Marcelo speaking. I will answer the Lenzing part and start the Pactiv answer, heading over to Fabio after that. On the Lenzing deal, we see that the same phenomenon that has been happening in other products in terms of fiber substitution will also take place on the textile market with an increase. And it’s actually already happening with increasing participation of short fiber, replacing long fiber. In addition to that, we see a big potential for the increase of demand of the fiber-based products in replacement of the chemical products based on fossil material. So that’s the reason why we decided to position Suzano in that sector. And being a sector that we have no experience with, we thought it would be wise to establish our position with a minority stake in a leading company in the sector that is positioned very well throughout the chain with the production of pulp and also the final products, including very specific and high-end products that Lenzing has because of its R&D capabilities.

So we are starting with 15% participation through seats on the board, having the ability to increase our participation to 30%, being the largest shareholder of the company over the next years if we decide to do so. The plan is to learn about that market with the leading company that Lenzing is. We don’t have any immediate plans of any conversion of our facilities into dissolving pulp. That can be a potential development or green fields or other things, but everything that we are going to do in this market will be done through the participation we have with Lenzing. So that’s the plan. We are waiting for the regulatory approvals to start participating in the decisions of the company. And the intention is to learn about a new market that potentially can be very relevant for us in the future.

When it comes to the assets in the US, in Pine Bluff and Waynesville, I think from the capital allocation point of view, what we saw there was a very well positioned asset in terms of its commercial presence with a very strong presence in a segment of the market, which is due to continue to grow with industrial assets that are not best in class but has a lot of potential. And we believe that we can work building on what’s already being done over the years in that asset to position it on a very good place in terms of the cash cost curve. And we also will inherit a team of 850 people that are very knowledgeable about the operations and about that market. So the combination of the assets, the market position, and being in a region that has a lot of potential for growth, gave us the confidence to go with that transaction.

And I’ll move here to Fabio to comment on the fiber-to-fiber opportunity.

Fabio Oliveira : Daniel, thank you for your question. As you may know, today, the portfolio that these two mills are producing are pretty much targeting the liquid packaging segment, in which they are marked leaders for the fresh liquid package segment. These products are built today with the majority of using softwood fiber. You need softwood fiber for that type of product although they use a little bit of hardwood. Softwood is abundant and also very cost competitive in the region in the state of Arkansas. Hardwood on the other hand is not that cost competitive. So although we did not base our move on a fiber to fiber only, fiber to fiber could be, moving forward, a benefit for us when we start discussing additional products for the product portfolio and also production increases at the mill.

Daniel Sasson: Perfect. Thank you. Thank you, Bacci, Leo and Fabio.

Operator: Our next question comes from Jon Brandt with HSBC.

Jon Brandt: Hi, good morning, thanks for taking my questions. Leo, I just — I had a follow up on the pulp market question. I mean Europe in the US as you indicated is strong. Prices are a little bit better there. I’m wondering how much of your volumes you can shift away from China towards those regions. Is that something you’re actively doing or are you sort of maxed out with the mix there? And then you sort of mentioned if prices, I’m assuming if prices get worse, you’re prepared to take some production downtime like you did last year. Yeah, I realize you’re not going to sort of quantify at what price you would do that, but I mean, at current spot levels, is that something that you’re actively doing or do we need to see much lower prices for you to start taking production downtime?

And my second question, I guess, for Beto, just on the capital allocation and sort of your portfolio, there’s been a lot of discussion in the past about needing to make the packaging and tissue segments relevant. Tissue, I think for obvious reasons, it’s going to be hard to grow sort of outside the areas that you are now and will struggle to become relevant within your portfolio. So I’m wondering, what are the plans with the tissue segments, maybe more medium term and on the packaging side, obviously there are plans to grow that both organically and inorganically. But where’s the level that we need to see? I mean, does the Packaging segment, do you envision that being sort of a 25% of EBITDA, 50% of EBITDA, how should we think about that going forward?

And then Bacci, maybe just a quick one on the share buyback, you said you’re canceling the 40 million shares, but if I’m not wrong, you’ve bought more than the 40 million shares in the current program. So I’m just wondering why aren’t you doing all of the shares? Why aren’t you canceling all of them? Thanks guys.

Leonardo Grimaldi : So Jon, this is Leo here. I’m going to start with the first part of your questions, which is how much volumes we could eventually move to Europe and North America, hence the strong markets, solid markets, and even more solid in the tissue segment in this region. Obviously, I’m going to try to limit my answer in terms of what I can disclose without affecting our commercial strategy, as this is quite sensitive to it. But in these markets, we usually sell based on contracts. And despite our contracts, as I had mentioned in my opening speech, had already foreseen for the latest part of ’24 and ’25 with Cerrado, a ramp up in the volumes. So our negotiations with customers already foresee this increase. In the short term is very little space of movement that we can do.

Obviously, customers’ contracts allow small variation, but it’s a minor variation compared to the size of the volumes that Suzano has. So our objective in terms of what I mentioned during the Q1 call and also now was to how to reposition our volumes in these markets to supply or to attend the customers already contractual volumes with us. I’m not foreseeing any bigger volumes or spot volumes in these markets that will allow us to move additional tons out of other markets and into the US or to Europe as well. You also asked regarding our decisions in terms of production or eventually curtailing that. And as this is a financial decision at Suzano, I’m going to hand it over to Bacci to answer that. Okay?

Marcelo Bacci : In terms of the decision about production and sales, we have this methodology of always looking at the marginal cost and the marginal price. And we will decide on the volumes that we will produce in each individual plant, taking it into consideration the industrial balance of the plants and also how profitable the marginal production is according to the marginal allocation to clients. This is the methodology that we’ve been using over the last years trying to maximize the value of each of our assets.

Beto Abreu : Jon, this is Beto here. Just going through your capital location question regarding tissue and packaging, let me start with Tissue. This is not a focus with us in terms of investment. We have different ways to keep working a very well position in terms of tissue, which is the contract that we have for many customers around the globe. So, and our job here is to keep offering and servicing those customers with the level of quality that we do it today. So this is related to PQ. On the other hand, packaging, considering opportunities to differentiate ourselves, and to scale the business, this is yes, is the streams, and is a segment that we’d like to grow. And as you said, organically or inorganically. So we’re going to keep looking for both opportunities.

In terms of a share of the package business in our, let’s say, total EBITDA, I have to say to you that I’m not going to share this kind of information, but anyway, what’s important here, it’s that those movements give us the right level of return and maximize value on the long term. So we are really looking for creating value here and not necessarily reach a specific level of – percentage of our EBITDA in the whole business. Thank you, Jon.

Operator: Our next question comes from Marcio Farid with Goldman Sachs. You can open your microphone.

Marcio Farid : Morning, everyone. Thanks for the opportunity here. A couple of follow ups here on my side as well. Bacci you just laid out the strategy for when and how you think about production, potential adjustments and obviously sales as well. If I remember well, last year around May, prices touched the low levels, you announced a 4%, around 400,000 tons production cut. But again, prices were at $450 back then, right? When you look at sales for the last months, running 10.2 million tons, it still feels like you’re still 600,000 tons below where you could have been, right? And that’s despite the fact that prices in China were at $750 up to May at least, $840, $850 in Europe on a net price as well, which is quite high. And obviously, I think consensus agree it’s above long-term prices, I should say.

So trying to understand here, does that mean you have marginal tons that’s around the price levels that you saw over the last couple of quarters? Is there any mills or assets that have at least temporary fire availability that you’re saving for the future? Because it does feel like at the price levels that we saw at least over the last six to nine months, I would have expected at least Suzano to be at full capacity. And then a second question, Beto, I think you’ve taken office just a month ago, but a lot has happened, right? A lot of discussions were on potential IP deal, Lenzing, Pactiv, Cerrado startup, pulp prices are just lower now. Obviously a lot going on and it feels like you agree with the strategy today. So it seems like there’s going to be a continuation at the company versus the former administration as well, right?

So just thinking about where we are and going forward, just trying to understand from your side, in terms of strategies, is there anything else that you think you’d focus more, you’d like to add, you’d like to change or switch gears to one side or to other versus where we were, let’s say six months ago. And also, I think you are very successful, at least talking with investor, in delivering the right pricing strategy on your former company. So just trying to understand how your past experience can be applied here to Suzano to generate value as well? Thanks everyone.

Marcelo Bacci : Thanks, Marcio. This is Marcelo speaking. Let me just come back to last question that Jon asked, but because we didn’t answer that yet. The share buyback, we are canceling all the shares we’re buying. This is a 40 million shares program that we are approaching the end and we are canceling 40 million. We are just leaving as outstanding shares in treasury, the shares we need for our incentive programs, which is a small amount. In terms of, Marcio, in terms of your question about production, first, we don’t give guidance or information on our actual production, but if you look at what happened in the last 12 months, this is a reflection of the decision we took one year ago for reducing by 4%. So what you see is the realization of the strategy that was announced back then.

We don’t have today, if you look at the prices of the last quarter, we of course, we don’t have any marginal production that would not be profitable at that price. But you have to understand that we cannot adjust every day the production level. What we’re doing today reflects the decision that we took a while ago.

Beto Abreu : Farid, thank you for the question. Let me start with the strategy. You are completely right. This is a company with, I would say, a very robust business platform. Not [recalculable], by the way. And our plan here is really to continue the strategy and not only based on moving forward the streams in the downstream, but we cannot forget keeping our relevance in the pulp market and our competitiveness as well. So this is something that is clear. I know that we talk a lot about, you know, M&A and inorganic growth, but the other, let’s say, pillar of the strategy, which is keeping the scale, the relevance, and the competitiveness that we have in the pulp market for us is also very important. You also asked about the pricing strategy.

I see honestly pricing as our ability to have and assess data and to treat the data from different, let’s say, sources in the market. And it is exactly what the team had been doing here using technology, using algorithms to improve our awareness, our level of knowledge to keep, let’s say, improving our pricing system. I think we are exactly on this journey and I really support the way that we are doing, the way that we are improving the pricing, not only the strategy, but also the way that we use the tactic, depending on the moment. And of course, using our size sometimes to help us taking the decision.

Marcio Farid : Great. Thanks a lot, Bacci and Beto.

Beto Abreu : Yeah.

Operator: Our next question comes from Caio Ribeiro with Bank of America. You can open your microphone.

Caio Ribeiro : Thanks and good morning, everyone. So my first question going back to capital allocation, over the past months. I mean, we’ve seen the company announcing a few smaller M&A transactions like the ones that have been talked on the call, Lenzing stake acquisition, Pactiv Evergreen, following the company’s decision to not proceed with what would be a relatively much larger transaction in the container board market. And going forward, I know the company continues to be vocal about internationalization and diversification into the downstream with complementary products. But if you could give us some more color on whether it’s more likely that you would proceed in the same direction with these smaller transactions like the two recently announced ones, which ultimately lead to immaterial impacts on the balance sheet from a leverage standpoint, or whether you would still be looking to evaluate larger transformational acquisitions, that would be helpful.

And then secondly, the company is generating X growth CapEx, free cash flow yield, which on an annualized basis is quite robust, right? And at comparable prices, it could increase even more once they have this fully ramped up and you capture the benefits of the cash cost reduction there on a consolidated basis. You’ve already announced a new buyback program, right? But could you look to boost dividends as well, especially if large M&A transactions don’t materialize? And could you look to adopt a dividend formula pegged to free cash flow generation ahead to provide more visibility on potential dividend distributions based on that cash generation? Those are my questions, thank you.

Beto Abreu : Thank you, Caio. This is Beto, let me start, and then I’ll hand over here to Marcelo to cover all the other points. Related to the capital allocation, you mentioned a lot of, let’s say, deals that we are trying to make in the recent. But when you look to the future, I think we have to concentrate ourselves and what is really important for us is looking for assets that, again, we can have the right scale, considering the size of the company, we can differentiate ourselves, we can put all the knowledge that we have on those assets, fiber to fiber results is always a huge opportunity that we’re going to keep looking. But it’s — we cannot disclose more than that regarding size and any kind of potential deals that we might have in the future.

So this is a sensitive issue and we have to keep working here. Again, with the level of discipline that this company has in its track record, implementing projects that generate great value, and this is what we’re going to keep doing when we talk about capital location. And as Marcelo said in his presentation, we always have the opportunity to invest in ourselves through the buyback promise when this is the best allocation for our capital. So that’s it, Caio. Let me hand over to Marcelo to go over the other points.

Marcelo Bacci : You’re right that, Caio, we are having and due to probably have in the future a very robust free cash flow, that will be dedicated to first reduce our indebtedness a little bit to bring us back into the range of two to three times net debt-to-EBITDA that we want to keep over time. And the decision on capital allocation, we’ll keep following the framework that we disclosed to the market a few months ago. We will decide based on the best potential returns and that includes the buybacks, the dividends, the potential projects for growth, M&A or organic. So we will be following on a very disciplined way that framework, which means that, yes, we could, we just announced another buyback program. We could boost dividends if that’s the case, like it happened two years ago when we had a very high return over the year.

In terms of cash and we decided to pay more dividends. But for the time being, the preference will be given for the share buybacks, given the fact that we believe that the current share price is not a good reflection of the true value of the company. We do have a minimum dividend formula packed to cash flow generation and we are not considering changing the dividend policy at this time.

Caio Ribeiro : That’s fair enough. Thank you, Beto and Bacci.

Operator: Our next question comes from Rafael Barcellos with Bradesco BBI. You can open your microphone.

Rafael Barcellos : Hello, good morning and thanks for taking my question. I have a question to Beto. Beto, you officially joined Suzano in early July, right? So, firstly, I think this is your first conference call at Suzano, so welcome. And of course, we wish you good luck. And so my question here is really to understand what were your first conclusions. Of course, Suzano has delivered good results and improved a lot in several areas over the past few years, but in which areas you understand that the company has to maintain a focus on it and of course, can still improve in the coming years? And my second question is about costs. It would be interesting to understand how we are seeing costs evolving now in the second half of the year. And of course, how this Cerrado project will affect the costs now in the coming quarters? Thanks.

Beto Abreu : Thank you, Rafael. And thank you for your question. Firstly, I have to say that as all of you know, I found here extremely well managed company with amazing track record in terms of delivery. I’m very glad to see the focus on the execution, the focus on operation, and the focus on cost. So we have a future of performing. And this is not something easy to replicate. This is not something easy to find. It’s completely part of the future of the team. So, and this is very powerful for any kind of business. We also have a very large talent pool with multi skills and with the right strategy and with the level of business platform that we have. Also, this is a very strong combination in my view. So this is, again, this is what we found.

And I have, and I also would like to mention, this is something else, which is the level of reliability of our facilities. I think I had the opportunity to manage facility in other industries, as you know, in the sugar cane business. And really what we have here in terms of reliability is really outstanding. So it’s benchmarking, it’s very difficult to find in different industry. So this is the kind of overview of the business. And looking for the future, as you know, the kind of role that we have is really looking all the time about future, about people, about strategy, and about capital location. So with the great team that we have here, those are the areas that we’re going to keep focused, that we’re going to keep looking for, and new levers to keep improving our competitive position, to keep improving this outstanding way to operate our facilities and also to keep taking the best decision in how allocate the extra cash and the current cash that this resilient business are able to generate.

So, Rafael, this is my comment here. Anything else? I think I’ve — Cerrado project I will hand over here to Aires.

Aires Galhardo : Rafael, good morning. Thank you for your question. In terms of cash cost, we are foreseeing a third quarter, a little single digit increase in our cash cost. The main reason for this is that the FX will be improving, increased the next quarter. And with the startup of Cerrado, our third part supply will increase in the third quarter and the share of this together with FX and our risk of hurricane seasons in Mexico could increase the caustic soda. We see this possibility of an increase in the cash cost. But for the fourth quarter, probably after the ramp up of Cerrado, when we start to have an energy surplus running with 78% of our nominal capacity, probably the share of volume also added in our total volume.

We hope we are at — we are foreseeing our best performance in terms of cash cost in the fourth quarter. And for next year, we’re foreseeing a stability in some degrees with that new projects and the stability of the new plant will bring to the cash cost.

Rafael Barcellos : Super clear, thanks. Thank you.

Operator: Our next question comes from Eugenia Cavalheiro with Morgan Stanley. You can open your microphone. Eugenia, can you hear us? I believe Eugenia is having some problems, we’re going to go to the next question from Igor Guedes with Genial. You can open your microphone. Sir, can you hear us?

Igor Guedes : Hello, good morning everyone. Thank you for taking my questions. I would like to understand why in your cash flow table, you put a working capital variation line and include capitalized loan costs in debt line. Generally, there is a separation of the variation in working capital with debt payment flow, such as borrowing and disbursement. The way you do it, I found it difficult to separate what was debt flow and what was actually variation in working capital due to the difference in current balance sheet accounts. If you can tell me, why do you separate in that order, I would appreciate it. Thank you.

Marcelo Bacci : Thank you, Igor. This is Marcelo speaking. This is a very technical item, but the capitalized interest is related to the CapEx, is the interest related to the Cerrado project execution that has to be, according to the accounting rules, capitalized during the execution, the construction phase. So as this number is not appearing on the CapEx side, we have to adjust it on the statement of the cash flows. But if you want more details on that, our Investor Relations team will be happy to help you reconcile the numbers.

Igor Guedes : Okay. Thank you very much.

Operator: The Q&A session is over. We would like to hand the floor back to Mr. Beto Abreu for his final remarks.

Beto Abreu : Yeah, I would like to thank you for being here with us on the call today and for your interest in Suzano. And as always, our IR team remains available for any additional question you may have. And I wish you a great day. Thank you very much.

Operator: The Suzano S.A. second quarter of 2024 conference call is concluded. The Investor Relations Department is available to answer further questions you may have. Thank you and have a good afternoon.