Suzano S.A. (NYSE:SUZ) Q3 2024 Earnings Call Transcript

Suzano S.A. (NYSE:SUZ) Q3 2024 Earnings Call Transcript October 25, 2024

Operator: Ladies and gentlemen, thank you for holding, and welcome to Suzano’s Conference Call to discuss the results for the Third Quarter of 2024. We would like to inform that all participants will be in a listen-only mode during the presentation that will be addressed by the CEO, Mr. Beto Abreu and other executive officers. This call will be presented in English with simultaneous translation to Portuguese. 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’s and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Beto Abreu. Please, you may begin your conference sir.

Beto Abreu: Thank you. Hello, everyone. Thank you for attending our call for the third quarter results. I will start with the highlights. So, let me start with sales. Sales volumes improved as you saw in our business. And here, I want to highlight that was a very well-defined and commercial strategy from the team. This strong sales with a better FX allowed us a strong EBITDA of BRL6.5 billion, despite the higher cash costs. Indeed, the cash cost was higher than the previous quarter and in the previous quarter in the last year, but that was planned, as you know. And I want to reinforce here that considering the performance that we have been seeing at the Ribas in the ramp-up, considering the efficiency level, which is higher than we planned, I have to say that the such peak of higher cost is already behind us.

So, we will see further detail during the presentation. My last comment on the financial side is related to leverage, which is still declining as planned, now with 3.1 and still on the leverage top book, I would like to share with you that on the capital allocation side, I do not see Suzano going through any transformational in the near future. So, leverage will keep declining, it’s click declining trend going forward. Also during the quarter, we also had the closing of Lenzing, the closing of forestry assets from BTG that we acquired. And in the beginning of October, we also had the closing of Suzano Packaging U.S. So, Suzano Packaging U.S., the former Packaging assets in Pine Bluff. So, looking forward, the focus of Suzano for the next quarters will be generating value from those assets that we brought to our portfolio, delivering what we’re planning for the Cerrado project and also keep deleveraging the business as a whole.

So, that’s the main highlights from Suzano in the third quarter. So, let me hand over to Fabio, which will cover the Paper and Packaging business. Fabio, please go ahead.

Fabio Oliveira: Thanks Beto and good morning everyone. Please let’s turn to the next page on the presentation. Through the combination of good commercial execution and logistics flexibility, we were able to deliver the highest EBITDA since the three quarter last year, despite growing operational challenges related with bottlenecks in our export supply chains. On the domestic market, according to EBA, print and writing demand, considering imports increasing 7% in the first two months of the three quarters on a year-over-year basis. Sales from domestic producers grew 8% on the same comparison base. Demand was solid in all product lines, supported by better economic activity and from the election cycle tailwind on the coated paper grades.

Demand for paperboard continued to grow, increasing a strong 18% during the first two months of the quarter compared to the same period of last year. Paperboard demand has been strong this year in all market segments, supported by the growth in paper packaging consumption and better economy overall. In the international markets, demand was sustained in North America and LatAm. Higher in Europe, demand per paper has shrunk during the summer due to seasonality. Prices in U.S. dollars were mostly flat in international markets during the period. Looking now to Suzano’s figures. Our sales volume in the quarter was 8% higher year-over-year and 9% above Q2 performance pushed by higher sales volumes in the domestic market. Our export volumes were mostly flat versus the same period of last year, an increase versus last quarter.

Although we have seen a continuous deterioration of the container supply chain with congestions at parts domestically and abroad relate to poor service levels and higher cost for non-container carriers. This is a result of a mix of different events, red sea traffic restrictions, low water level Panama channel, weather-related restrictions at Brazilian ports, which seems to be creating the perfect storm for Brazilian export companies that rely on containers. Suzano is seeking our alternatives to continue to serve its international customers despite these issues. In 3% net price growth over Q2 was led by slightly better prices in the domestic market and favorable FX on our exports. On a year-over-year comparison, prices were lower by 3.8%, reflecting market adjustments after the normal price levels of the first half of 2023.

Looking at the EBITDA performance, the 13% quarter-over-quarter was driven by higher sales volumes and better prices. In the quarter, we had the annual maintenance downtime as we made in Suzano mills, which are the two largest paper mills Suzano have, pressure in the COGS in line with the budget. Compared to Q3 2023, Suzano EBITDA decreased by 8% due to lower price in both Suzano Paper and Packaging EBITDA decreased by 8% by lower price in both domestic and international markets, despite higher sales volumes. Looking ahead, we expect a strong seasonal demand in Q4 from our domestic market for uncoated papers and paperboard. For coated grades, we anticipate a return to structural decline as the election cycle impact fades. On international developed markets, we foresee demand returned to a structural decline trend.

In Latin America, we expect demand to be more resilient, albeit also declining. Cost-wise, logistics expenses are expected to remain high due to ongoing disruptions and geopolitical uncertainties, which could offer support to paper prices in most markets. Regarding our cash costs, we anticipate improved performance on COGS in Q4 following the lack of maintenance stoppage. We also foresee stable cash cost ex-downtimes net coming quarter. On October 1st, Suzano kicked off its operations of the Pine Bluff and Waynesville packaging assets acquired from Pactiv Evergreen. Our first weeks went quite well so far, focused on support in our new colleagues, customers, and suppliers through this transition. We remain very excited about the business opportunities that this move will bring Suzano in the future.

Now, I’ll hand it over to Leo, who will be presenting our Pulp business results

Leonardo Grimaldi: Thanks, Fabio and good morning everyone. So, moving to the next slide of our presentation, I would like to begin by sharing some facts related to this past quarter. It was indeed a very special moment for us as we had started to operate in later to sell the first volumes of our brand-new Ribas mill. During these past months, we have first built up pulp inventories in the outbound logistics change from Mato Grosso do Sul to Santos port in order to be able to operate Ribas efficiently. These new volumes were the only additions in the Q3 to our previously announced — or previous inventory levels, which, as we have been stating, were quite low and stays on the same operational levels as we speak. Our first shipments from Ribas pulp have taken place during the latest part of the quarter.

During Q3, we have noticed quite a challenging market, led especially by headwinds from China. There, paper producers in ability to increase paper prices during previous quarters, squeeze their margins and the new pulp purchases came to a halt almost a complete halt in July, right when the news of the start-up of Ribas and the local Chinese mill [Indiscernible] were announced. As the quarter evolved, a sharp decrease in softwood prices led the way to a wave of intense price reductions in hardwood grades, both in local resale markets as well as for new negotiations from imported pulp. Prices declined sharply, much faster than in previous cycles, reaching a set point, which triggered customers to reestablish their purchases, especially by the end of the quarter.

In Europe and North America, despite better dynamics in terms of demand, prices started to correct following the trend posted by China. We have navigated Q3 by focusing on maximizing our sales in Europe and America, while also positioning pulp in these markets to cope with higher seasonal demand in Q3 and Q4 and also reestablishing our service levels to regions and customers for whom we invoice directly once cargo is shipped out of Brazil, reducing, therefore, our backlog from previous quarters. This dynamic, which includes the sales of Ribas’ first volumes resulted in a strong invoicing during the quarter. Our realized prices were mostly affected by a higher concentration of our sales during the second half of the quarter once the significant price drop was already in place as well as a higher mix into Asia, where most of Ribas initial volumes were sold.

Despite lower prices in U.S. dollar terms in Q3, the combination of higher volumes and favorable FX resulted in a 3% increase of our EBITDA margin now reaching BRL5.7 billion. Now, looking forward, I would like to highlight the following points. Coming into the fourth quarter, we forecast healthy demand in all regions due to market seasonality consequently favoring operational rates of paper producers globally. Tissue production rates have been the highlight in most global markets and latest production figures have shown its demand resilience, despite eventual geopolitical or macroeconomic challenges. As usual, in this time of the year, Chinese tissue producers are now boosting up their production as they’re getting prepared for the 11 Shopping Gala.

For several weeks and counting, mid-$500 price levels in China should have over end profitability thresholds of marginal cost producers based on consultant estimates of their marginal cash cost delivered to China. Not surprisingly, we have already noticed some integrated Chinese pulp and paper producers buying market pulp since August, and their purchases of market pulp have been increasing with Suzano ever since. Despite higher volumes coming into the stream, it is our belief that prices in China are either at the bottom of the cycle or quite close it, grounded by low to equalized pulp levels, pulp inventory levels in Chinese ports and in the hands of Chinese customers. Solid paper production figures being further incentivized by mid- and small-sized customers who have recovered their operating rates once their margins increase and above average price gap between softwood and hardwood, incentivizing fiber substitution.

Customers in China and Asia recovering their buying patterns and actually increasing order intake over historic figures. And on top of that, the fact that current price levels in Asia are below marginal cash cost of producers likely triggering a new round of unplanned downtimes as seen recently in later cycles. To give you some color on our October sales in China, negotiations are coming in line with our expectations, which includes Ribas volumes, and our order intake is being confirmed above historic average, which has enabled us to reestablish our operational backlogs, all of that with completely stable prices. Looking forward and focusing on the supply side of the equation, just this week, reliable independent sources from the sector have confirmed that ASIC have confirmed a significant delay in the startup of the main pool project expected for Indonesia, for which the start-up of the first line was delayed from Q1 2025 to November 2025, and the second line for now push forward for 2026.

In addition, I wouldn’t be surprised if we should continue to see further conversions of paper grade pulp into dissolving pulp just as again announced by a leading dissolving pulp producer to take place in Q1 2025. These factors should ground a healthier market outlook for the coming months and beginning of 2025. 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. Regarding our performance of cash production costs, I would highlight the three main factors that explain the 4% increase versus last quarter. The first off is related to the higher consumption of energy at Aracruz Mill due to a non-recurring event that brought lower operations [Indiscernible] in the period. This occurrence have already been overcome, and we are now back to the performance foreseeing in our operation plan. The second one, the startup of a new Ribas mill in July also caused a temporary increase in costs. In this case, in the wood and chemicals components, which were totally in line with the expected performance. In addition to these factors, the higher FX, although it benefits the company’s cash generation also pressured the cash cost this quarter, given that some inputs like are linked to foreign currency.

Third quarter marked the pick of the cash cost in 2024. As looking now forward to the fourth quarter, the solid progress of Ribas ramp-up allow us to estimate a middle single-digit reduction in the consolidated cash production cost when compared to the third quarter. In the year-over-year analysis, the stable performance of the cash cost can be basically explained by a 14% FX depreciation in the period, which offset the cost reduction of attaining the wood in turn to better harvest productivity, average radius, and specific consumption and inputs mainly due to lower cost [Indiscernible] and natural gas prices. Moving to the next slide, I would like to share with you some important aspects about the first months of operations of our new plant.

In the chart on the upper left, it should be noted that we had one-off effect of BRL25 per tonne in the COGS in the third quarter, fully related to the start-up costs of the new mill, which, therefore, no longer exist in the fourth quarter. When we look at the mills cash cost performance in the chart right below, we see that based on June’s cost performance, Ribas has already started to benefit the company’s consolidated cash costs since September due to the successful evolution of the plants ramp up. Issue on the Ribas ramp up at the end of the third quarter, it reached 8% completion of the learning curve above the 71% forecast for the period. And the last but not least, it’s also worth mentioning that the CapEx disbursement is according to the guidance already announced by the company.

Now, I turn the floor to Marcelo Bacci, who will continue the presentation.

Marcelo Bacci: Thank you, Aires and good morning everyone. On the following page, Page 8, we see that the behavior of our capital structure in the quarter has been shaped by some strategic capital allocation initiatives. We had a very robust operational cash flow generation. And we spent a significant amount of cash in this quarter in initiatives that had already been announced before and had its closing during the quarter, especially the purchase of forestry assets and the participation in Lenzing. And we also made a significant investment in share buybacks in the period of close to $500 million that helped lead our net debt position to $12.88 billion vis-à-vis $12 billion in the beginning of the period. Despite the increase in the absolute amount of the net debt, which was expected since we took these decisions on the capital structure side and capital allocation side, we saw a reduction in our leverage in terms of net debt to EBITDA from 3.2% to 3.1%.

— marking the end of the investment period of the Cerrado project with a leverage ratio below what we had expected before. As I as mentioned on the previous page, the payments related to Cerrado will be minor from now on and this will help the company to continue in its deleveraging process. In terms of our liquidity, we continue to have a significant amount of liquidity, which is probably more than what we need since the Cerrado project came to the end and there has been a very significant derisking of our capital structure coming from that. So, we will be working on the coming months to reduce our liquidity. Although we are not in a rush to do that because the market conditions today are favorable to carrying more cash. So, we’re going to do that according to the opportunities that we have and that we’re going to see in the market.

So, with that, I conclude the presentation here, and I’ll turn it back to Beto for final considerations.

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

Q&A Session

Operator: Thank you. We will now begin the Q&A session for investors and analysts. [Operator Instructions] Our first question comes from Jon Brandt from HSBC. Please Mr. Brandt, your line microphone is open.

Jon Brandt: Can you hear me okay?

Beto Abreu: Yes.

Operator: Yes. Yes, we can

Jon Brandt: Perfect. Thank you. Congratulations on the results. It was a great quarter in terms of transformation and all the initiatives that you were able to achieve. I guess my first question is really sort of a debt capital allocation question. So, Marcelo, now that Cerrado is bigger with the Ribas mill coming on, is there any change to your debt policy either in terms of leverage ratios, targeted gross debt, targeted net debt? I know you briefly mentioned it in your remarks. I’m hoping you can sort of expand on it. And sort of what does that mean for capital allocation, CapEx looks like it will fall in 2025, pretty substantially depending on pulp prices. So, I guess I’m just trying to figure out sort of what’s next, right?

You should be able to come down into your targeted leverage ratios pretty quickly depending on pulp prices. So, should we see sort of increased dividends, maybe share buybacks? Are there other sort of initiatives that you’re working on in terms of where some of this capital could be spent? I guess that’s my first question. And then sort of my second question, just briefly, you mentioned the pulp production, the 4% capacity reduction. I’m just wondering if we don’t see a rebound in prices later this year or next year, is there any sort of other capacity that might be at risk of stopping? Thank you.

Marcelo Bacci: Well, thank you for your questions. This is Marcelo speaking. With the end of the Cerrado project, and the start-up of the Ribas mill, we will continue and accelerate our deleverage because CapEx, as you mentioned, is reducing. We are still working on the CapEx guidance for next year, but for sure, it’s going to be a lower number than this year that will be released in December. And the first, I would say, goal is to bring the leverage of the company back to the levels of — that we need to have outside of investment periods, which is below 3 times net debt to EBITDA — between 2 times and 3 times. And this is going to come very fast in the coming quarters. Of course, the speed will depend on the behavior of pulp prices.

So, this is the first priority to bring the company back to this normal level. We — on the CapEx side, as I said, we will have in December, the number for next year, and this is going to be a lower number than this year. We are still working on the other capital allocation alternatives. As Beto said in the beginning, at this point, we are not seeing any potential transformation initiative that could change in a material way our direction of deleveraging the company. The buybacks will continue to be an option for us. We have an open program that still — we still have, I think, something like 28 million shares open to be bought. This will be completed in the time frame of the program, which still has more than 12 months to be completed. So, we’re not going to anticipate to the market at what speed we’re going to execute the buybacks.

This will depend on the cash flow generation of the company vis-à-vis its valuation in the market. So, what you can expect in terms of capital allocation is the company to be — to reduce CapEx, to reduce indebtedness in the coming months, and to be very selective as we always are in terms of selecting new investments. On the pulp production side, the announcement that we made a few weeks ago, has in the background, the current stage of the market prices. And this is a decision that we made for the year 2024 and even if the price changes from now on, it’s going to be very hard to change that because this is a very long chain that we have two programs since the harvesting activity up to the delivery to the clients. So, I think for 2024, that’s the number.

For 2025, we are still working on that. I would just say that for the current market scenario, this is the decision we have. But of course, this will depend on the expectations.

Jon Brandt: Thank you very much.

Operator: Our next question comes from Rodolfo Angele from JPMorgan. Left the queue. Our next question comes from [Indiscernible] from BTG Pactual. Please Mr. [Indiscernible], your microphone is open.

Unidentified Analyst: Hello, gentlemen. Can you hear me?

Beto Abreu: Yes.

Unidentified Analyst: Okay. Perfect. Yes. So, a couple of questions on my side. The first one for Beto. Beto, in your initial remarks, I guess the message was super clear to us at least that you’re trying to convey a message of deleveraging. And you’re also trying to convey a message that there’s no M&A transformational moves in the pipeline. So, I just wanted to check with you. I mean if an understanding is right, that Suzano will continue to pursue the smaller bolt-on acquisitions like you did with Pactiv and Lenzing and the game plan is to continue to — obviously, to assess market opportunities, but this will be, let’s say, in the $1 billion range at most. I mean I just wanted to understand exactly what you mean when you say no transformational moves because I guess the market is obviously a concern on bigger M&A at Suzano.

So, if you can quantify a bit what you mean with that? I think it would be very helpful for everyone. The second point on pulp cash cost, right? I mean I think it was super clear the explanation on why the numbers were a bit higher this quarter. And I guess with — obviously, with how the ramping up and with I mean much lower pulp cash cost platform being consolidated in your overall cash cost numbers, these numbers would decline going forward. I just wanted to confirm, Aires, you mentioned something in the single-digit range of reduction for the fourth quarter. How are you viewing this for 2025? I mean what is the potential for further cash cost reductions in pulp? I think that would be very helpful if you can add a bit clarity on that for 2025.

Thank you very much

Beto Abreu: Yes. Thank you for the question. Maybe I should start with Aires, please complete if you want. But on the cash cost, we see 2025 in the same good level as Aires said, regarding the next quarter. So, what do we have for the next quarter and the end of the day is the company delivery exactly what was planned for Ribas project, which is — which was the 900,000 tons in the first, let’s say, 12 months of operation. So, we are completely confident that this target will be delivered. So that will help us in terms of cash cost next year even further. But I think Aires already gave us a kind of, let’s say, vision regarding that. Going back to the capital allocation process, I think you read in a very clear way. What I’m trying to say is that we are not planning any big ticket movement in the near future.

That’s what I’m trying to say. It’s — we have a lot to do with the assets that we already brought to the portfolio. We must extract all the value from Cerrado this time. We have all the potential to keep deleveraging the business. And we do not see any movement that can change significantly or in an important way the plan that we have to deleverage in the company. So, that’s what I’m trying to say. And I think Marcelo also was very clear regarding liquidity. We think with this scenario, the level of liquidity that we have in the companies may be higher, it’s very high. It’s higher than we need, consider the plan that we have for the near future. So, that’s it. And regarding the way that we that you mentioned, the movement on U.S., the bolt-on strategy is something that seems a very, let’s say, healthy way to move in the U.S. market, as you mentioned.

So, I think this is what we see regarding transformation move in the near future.

Aires Galhardo: Just in addition to Beto said, we are very confident that we are able to deliver to 2024 double-digits reduction when we compare with the third quarter that we’ll have the results of cash costs considering, of course, the same level of FX and branch price. That’s very important and impacts our costs. But considering the full ramp-up in Ribas, the mix of production on every of the year, we are very confident where the show of double single-digit. Of course, we have specific quarters with more challenged. We have double times predicted to trade like a Line 1 and 2 and Ribas inspection shut down, we have six months that’s very important to evaluate the assets and have the confidence to pull the campaign of 12 months. But what we have noticed in the asset and the results and to this moment that we are running very well in a good pace and perspectives are good. Just to clarify, a double single-digit to 2025 being compared with the third quarter of 2024.

Operator: Our next question comes from Caio Ribeiro from Bank of America. Please Mr. Caio Ribeiro, your microphone is open.

Caio Ribeiro: Great. Thank you for the opportunity. So, my first question is on the wood chip market in Asia, where we note availability of which has been picking up, particularly in China, as a result of the downturn in the property market. There’s also this force of farmland policy. And while we note integrated paper supply additions are happening, wood chip import prices into China haven’t really increased recently, which also suggests that, that domestic wood chip availability has increased right? So, I just wanted to get your views if possible, right, on whether you perceive this to be a structural phenomenon for the industry, right, this increase in availability of wood chips in China. And what impacts the addition of this integrated capacity that we see year-after-year in China will have on the industry cost curve and the demand outlook?

And then my second question is more on the softwood market and the implications there for hardwood, with some players right in the softwood market already attempting price hikes lately, do you perceive that we’re at an inflection point for softwood, right? And what implications do you see for hardwood, if that’s the case? Is there room for hikes in the coming months for hardware as well? Or do you see substitution into hardwood at the very least favoring a demand recovery for that fiber as well? Thank you.

Leonardo Grimaldi: Caio, this is Leo here. Thanks for your questions. I’m trying to organize myself here to be able to answer all of them. First, regarding your question on wood chip into China or for Chinese production. You are correct, there is more availability in the short term that we had foreseen or that was planned. And that is in our view, is due to two major reasons; first of it is the housing market downturn. And obviously, that we leased a lot of wood that was originally used for furniture, which is now being used for other products such as pulp and paper. And second is a program in China that we are monitoring, which is a conversion of planted tree area to agriculture, and this program we will last until the end of 2025.

We don’t think it’s structural. We believe that in the future, once these two factors have leveled out, China will be more dependent on imported wood as it was before. As you know, imported wood reach 71% of the pulp wood consumed in China and now it has reduced to 60%. Obviously, this difference being conquered by local Chinese wood, but we believe that the trends would should be reestablished once we see these two variables coming back to normality. The impacts of verticalization as we have seen during now the Q4 and the beginning of next year, we have three or four important paper producers who are backward verticalizing, we are going to give a lot of details on that in our Suzano Day and actually trying to forecast that and not only for the end of this year and 2025, but until 2028 as well.

But obviously, they are — they will have a push in the pulp demand to market. But there are variables, which are very uncertain, which is the exact start-up date of these projects, then obviously, the ramp-up rhythms of this project, which will start verticalizing. And all of them, just to make it clear that were announced for Q4 and onwards are fully verticalized. There’s no up-drying capacity. So, they will affect us not as competitors into pulp, but by eventually reducing the demand side of the equation. Now, they are all high-cost production, right? So, if they’re going to be based on either Chinese or imported wood into China, the cost base of this new addition will be high. We expect them to be all over $550 to $600 cash cost — I mean, pulp cash cost, meaning that as we have seen in several other cycles, where pulp pull prices got below these levels, these guys, these new volumes will also now come into market to buy pulp creating and generating additional demand for pulp as well.

And I’m going to move into the softwood and hardwood part of your question. What we believe softwood is — or has reached an inflection point. We are tracking very closely what’s going on in software into China. As I mentioned in my speech, the price decreases that we have seen in July were led by softwood. They were first happening on software in followed by us in hardwood. But at this mid-$700 price delivered to China, we noticed and as per our estimates, several producers, Canadian producers, Nordic European producers are already below breakeven delivered into China. So I believe this will force an inflection point. And that’s why we see this $20 price increase announcement of several of them into China coming into October and November. The first reflection of this move will be helping us even further in terms of fiber substitution.

As you know, the price difference today is $200 on a net base between software and hardware, then I believe if they are successful in implementing this price increase, this can increase further. And obviously, as you can imagine, we have several customers who are coming to our teams in China, in Europe and U.S., in Brazil for support in terms of knowledge and guidance in terms of how we can support them in this fiber substitution and migration from software to hardwood. So the first effect will be and additional demand for hardwood. And regarding your question, if this would be an inflection point for hardwood prices, I think it’s too early to say, as I mentioned in my speech, I believe we are either at the bottom or very close with, but I think we need to let a little bit of time buy so that we can define if this is a turning point or not.

But the first effect will certainly be additional demand.

Caio Ribeiro: That’s super clear. Thank you very much, Leo.

Operator: Our next question comes from Daniel Sasson from Itaú BBA. Please Mr. Sasson, your microphone is open.

Daniel Sasson : Thank you so much. Good morning everyone. Most of my questions have been answered. Maybe just a follow-up from a previous question. You mentioned Leo, the some integration movements in China and the potential new capacity additions coming from them. Can please shed some light on potential marketable projects in Asia? I know that there’s a lack of visibility or transparency, let’s put it this way. But whenever you guys have or forecast, for instance, for Oki’s expansion, I think that could help us to build our supply-demand models. That could be great. And piling up on the discussion regarding wood chips, you know that Oki 1 took maybe four, five years to fully ramp up, do you think that despite the increased availability of wood chips because of the downturn in the housing property sector, as you mentioned, there is this chance that this project is going to be delayed or at least the ramp-up is going to take much longer than would be normal for a project like that.

Thank you so much.

Leonardo Grimaldi : Hi, Daniel, thanks for your question. As I mentioned in my speech, I guess this is extremely recent news coming from consultants — prestige consultants to our business, which we just got earlier this week, which is a significant delay in Oki 2 project. As you know, and as some of you or your colleagues have stated, the original start-up date for Line 1 was March. This is now being pushed to November 2025, and Line 2 as of now, going into 2026. The information that we have in the project is that it’s supposed to be a verticalized project. To begin with at 50% integration and verticalization with every board over 1 billion tons, print underwriting, believe it or not and also tissue all of that in Indonesia.

But this, again, is all based on market information, which I believe you have the same access that I have as well. And up to now, I’m just talking about start-up, right? So now we see the significant delay on start-up, and then there is a question of how much wood will be available and what will be the ramp-up curve. I totally agree with you. We — in our BI area tracked, obviously, the start-up of Oki 1. And it took four to five years, I guess, more 5 than 4 to reach full capacity. And that can be the case again for Oki 2. It’s hard to say again. It’s always hard to estimate in too much details or what’s going to happen in Indonesia or in China when it comes to pulp production due to such a difficult position in terms of wood supply. But we expect that based on the previous track record, something similar could happen as well for Oki 2.

Daniel Sasson : Thanks, Leo. Sorry, you mentioned 55% of the Oki line would be integrated. Is that right? And then maybe the second thing still on this front, do you have an estimate on the production cash cost of the recent projects in China, for instance, Lenzing, do you have an estimate on the year current cost base right now? Thank you.

Leonardo Grimaldi : Okay. Yes. So Oki, again, Daniel, based on market information, which we have read or received through our BI teams either in China or in Brazil, is that the second project for Oki 2 to start to be 50% verticalized into paperboard, printing, writing papers and tissue. So this is to start 50%, verticalized 50% market pull, okay? So that’s the info in Oki 2. Regarding Chinese cash costs based on this unforeseen availability of wood related to the two factors that I mentioned previously. We estimate that the Chinese cash cost today is close to $500 is maybe ranging from $4.90 to $5.10, which, as you see, or can note is lower than our marginal cash cost scenarios delivered to China, which is at $560 and to $580, showing that at this time, of the production curves and — which wood cost to different markets.

The marginal cost producers are not Chinese, rather other Asian even Americans or Europeans delivered to China. So Chinese producers today, it is our view that have this, I would say, $50 advantage of costs below marginal cash cost, but still at $500 range.

Daniel Sasson : Perfect, Leo. Thank you so much for the very detailed answer helps us a lot. Thank you.

Operator: Our next question comes from Marcio Farid from Goldman Sachs. Please Mr. Farid, your microphone is open.

Marcio Farid : Thank you. Good morning everyone. Thanks for the opportunity. My first question, maybe to Fabio. Fabio, seen about the active recent acquired assets, my understanding is that profitability was not clear when you first acquired the assets a lot then we have taken over, right? I think I mean the idea wanted to understand what are the initial findings so far in terms of how the news of rating in terms of, obviously, potentially early days, but what’s the future of those assets, what’s is do in terms of improving the operations and eventually expand as well into the U.S. And your first assessment of the U.S. markets, that would be great. And secondly, maybe going back to the decision to restart 4% of the volumes. I think I had a similar question in the second quarter, but my understanding is that, I mean, the cycles are becoming shorter, right?

If you’re talking about six months, up and six months now and that 12-month decision feels like it’s always going to be live, right? Prices were at a high of 750 a belt last year, you did not have the opportunity to raise production because you had earlier last year, decided to 4%. And then prices fall again, and obviously, the decision was basically maintained. So at 12 months, the suture feels like it’s always going to be lagging a cycle that tends to be shorter and shorter by nature, so how should we think about that? I mean how do you reconcile the nature of the cycle with more longer-term decision. We seem to make a lot of sense from strategic perspective as well. Thank you.

Fabio Oliveira : So Marcio, and thank you for your question. It’s Fabio here. I’m going to take the first one about active, just to briefly update, we have been here. I’m currently in Pine Bluff sitting here at the mill as we speak. We have been here since beginning of October when we transitioned the business from factor to [indiscernible] and as you know, this is an old mill built in the ’50s and the mill active was more concerned about its converting business. So the mill lacks today a good maintenance. It needs to be well taken care of. And that’s what Suzano knows how to do. So there’s a turnaround story here for us on the industrial side. And we already have started with short-term, medium-term plans to bring this mill back into the level of operational stability that we believe we can achieve.

The first signs are very positive. A good sign is that the raw materials basket here, especially the cost of wood, it’s very competitive. So there’s abundant a pine announcement at a very competitive price in the state of Arkansas. I’ve been visiting some of the forces and talking to people and this is a good start gives us good hopes that we can have a very competitive operation here in the near future. So right now, our focus has been on focusing our — on the people here, the transition on taking care of our customers and suppliers and also the community that we interact here at Pine Bluff and putting all the efforts necessary to do the turnaround operation stability. But the perspective is a positive one. Regarding the market, it’s — as you know, the mill — it’s serving the liquid packaging market in North America is one of the large suppliers for that, the specific market space.

It’s a good market of long-term contracts and also good prices. It’s very stable in terms of demand and price wise as well. We’re looking at opportunities to expand the portfolio to serve other markets like Cupstock and food service. We do have a good product for that. We resell a little bit to this other market space, and we want to increase as start in 2025. We have plans to increase our participation in this market space, which gives us more flexibility. And also, we understand that we can get even better margins serving these other market space. So it’s — in a short deal March, we’re excited. We have a plan here for the turnaround and industrial turnaround of the mill and also looking at a strategy to increase our participation in different market spaces from Pine Bluff and Waynesville.

Marcelo Bacci : Marcio, this is Marcelo. Speaking about the question on the production cuts, of course, there’s a lag between when we take the decision and when we can implement it, because of the nature of our supply chain. But there is no other way to manage this then to look constantly at what’s happening in the market. Reach our conclusions about the trends on prices and then make the decisions on the production. The lag will always be there. But on the other hand, we have our tools also to try to anticipate what’s going to happen in the market. So for the time being, the decision is that one, and we are working on the scenario for next year. And if we have a major change in the middle, we always have the flexibility to adapt.

Marcio Farid : Thanks, Fabio. Thanks Marcelo.

Operator: Our next question comes from Rafael Barcellos from Bradesco BBI. Please Mr. Barcellos, your microphone is open.

Rafael Barcellos: Hello. Good morning and thanks for taking my questions. So both my first question, I wanted to go back to your capital allocation strategy. Beto, I know that you mentioned during the presentation that Suzano will not do any transformational movement. But I just wanted to discuss it in more detail. For example, so after the acquisition of the acquisitions of Lenzing and Pactiv, could you please give us more details on which type and size of the assets that you are now looking for? Other than that, also, given the lack of big M&A initiatives in the pipeline, I mean, I wanted to understand whether the company could bring a new dividend policy in the future. And then my second question is about your investment in Lenzing.

I know that it’s still quite recent to ask this type of question, but you’re now probably following Lenzing closely. So could you please comment on your thoughts on how you could generate synergies with these assets in the future, of course, in a scenario that you acquired the control in the future? And how do you see these assets inside Suzano’s portfolio?

Beto Abreu : So, Rafael, thank you for your question. This is Beto. Let me take the first question regarding the capital allocation. And then the month of October, we already have the two Board members, which today is Marcelo and Carlos already sitting. They already took their position in the Board of Lenzing. So I will hand over then to Marcelo, so then he can share with us his first impression regarding the business since we already have the first board meeting at Lenzing. But regarding the capital allocation, it’s very simple. What I said is that Suzano is not going to any, let’s say, transformation move. What I’m trying to say is that any kind of tickets the size of ticket that we might do in the, let’s say, near future will not impact on the important way our declining trend in terms of leverage.

So that’s what I’m trying to do. I’m trying to say, it’s very simple. It’s — we have these two movements, Lenzing was impacted, which is for us is time to extract value from those. And again, a bolt-on strategy is something that we can pursue in the future. Again, in the medium and long-term, keeping our trend of reducing our leverage. That’s it.

Marcelo Bacci : This is Marcelo speaking. Just complementing on we don’t foresee any change in our dividend policy as a result of this moments that we live today, and we need to keep in mind that our cash flow generation is volatile by nature, and we have to deal with that in our — in managing the capital structure of the company. In relation to Lenzing, we took our position as a shareholder, and we, as Beto mentioned, now started to participate in the Board meetings of Lenzing. We don’t have a direct impact on the management of the company. We will be a shareholder with two seats on the Board. We understand that Lenzing is a company with an incredible reputation and an incredible portfolio of products, very high technology in the sector and well recognized by the clients.

So the access that the company has to the most important clients in the world, the power of its brands and the reputation of the company is great. It has a very important industrial footprint. And it has to work and as it has been working on improving its operational efficiency, reducing costs and becoming more efficient over time. This is the journey that we will embark and try to help the company to continue in that direction. And I think it’s too early to go into more details. What they have been trying to do, I think, is in the right direction. And it is going to be up to us to try to speed up that process and extract value. And more important than that, I think starting now, we have between year one after completion of one year and up to the completion of the fourth year, we are going to have a window to decide whether or not we want to increase our participation and become the main shareholder of the company.

We’re going to take our time in this beginning to understand better the — of course, the industrial part in the beginning of the process. The dissolving pulp part is very similar to what we do. But from that point onwards, it’s a completely different process, both on the industrial side and also on the commercial side. So we need to learn before we make the more important decision that we’re going to have to make in the coming months, which is whether or not we want to become controlling shareholders of Lenzing.

Rafael Barcellos: Super clear. Thank you, Beto and Marcelo.

Operator: Our next question comes from Lucas Laghi from XP. Please Mr. Laghi, your microphone is open.

Lucas Laghi : Good morning everyone. Congratulations on the results. I would like to go back with follow-up question on the integration trends in China. I mean, Leo, you provided a very good color on the local availability in China of wood chips. But I would like to go back to the imported part of wood, especially thinking of like low-cost supplier regions like Vietnam and already closing the peak levels that we saw in 2022. But when we look at the wood chip import prices, they’re still significantly lower compared to the peak that we saw two years ago. So my question is, I mean, how do you see this availability of wood chips in this low-cost suppliers of wood to China. And if it’s reasonable to think that the incremental volumes to feel this integration expansion in China in the upcoming months would come from high-cost suppliers of wood like Australia and other regions rather than a low-cost region Vietnam.

I mean, is it reasonable to expect that Vietnam is reaching its limits to provide further wood chips of China and increase these expansion trends that we are seeing from these vertical players? That would be my question. Thank you.

Leonardo Grimaldi : Hi, Lucas. This is Leo here. Thank you very much for your question. First, I would like to point that Vietnam lower cost, not low cost, right? By the end of the day, yes, it is lower than what — from Australia delivered to China, but it’s still will bring cash costs of any Chinese producer to the low 500s to mid-500 cash cost regardless of the difference of peak to cycle to the lows that we see today. Today, we see a bit more availability in Vietnam, despite growth in imports of imported wood as well, as you probably know, last year, there was a decline of almost 30% of imported wood into China. That’s when we saw the bulk of this local Chinese wood being used in the short term. This year, we already see a recovery of imports.

Again, growing almost 30%, but still a bit lower than the levels that we saw in 2022. So we see space still of some Southeastern Asia would supply to China. But we believe our base scenario is that once we have the two variables that I mentioned, which is housing market, we’re establishing and the program that we see today in China of forestland into agriculture, which will end by the end of 2025, these structural changes will make this verticalized pulp to paper production in China or Chinese market pulp players more and more dependent of imported wood. And then we believe that we’re going to see a higher cost scenario compared to where it is today. But Vietnam should still be one of the major sources to comply with the growth of demand of wood from China.

Lucas Laghi : That’s perfect Leo. Thank you for the answer.

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

Beto Abreu : Yes. Thank you. I just want to remember that we’re going to have our seasonal Investor Day on December 12, also our visit to the bus project on December 13. And I’d 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 questions you may have, and I wish you all a great day. Thank you very much.

Operator: Suzano S.A. third quarter of 2024 conference call is concluded. The Investor Relations department is available to answer further questions that you may have. Thank you and have a wonderful day.