Yahoo Finance Suzano S.A. (NYSE:SUZ) Q4 2023 Earnings Call Transcript
Suzano S.A. (NYSE:SUZ) Q4 2023 Earnings Call Transcript February 29, 2024
Suzano S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for holding and welcome to Suzano’s conference call to discuss the results for the first quarter of 2023. [Operator Instructions] They will be addressed by the CEO, Mr. Walter Schalka, and other executive officers. This call will be presented in English with simultaneous translation to Portuguese. [Operator Instructions] Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano’s management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. You should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Suzano and could cause results to differ materially from those expressed in such forward-looking statements.
Now I’ll turn the conference over to Mr. Walter Schalka. Please, you may begin your presentation.
Walter Schalka: Good morning, good afternoon, good evening to everyone that is joining us for the session of the fourth quarter results of Suzano. It’s a great pleasure to be with you. Guys today is a very emotional day for me. As you know, yesterday, we announced the transition of Suzano’s role as a CEO, to be part of the Board of Directors, and to be on several committees. Of course, I’m very proud from the 11 years contribution that I have been delivering to the company and being part of the transformation of this company for the last 11 years. I’d like to start some issues. First, to welcome Alberto Abreu, I think it’s a person that is going to have an important contribution to the company on the next coming years.
I think and I recognize that he has the right skills to continue and the word is like that is continuing the transformation of Suzano. I’d likely as well to thank you the 20,000 people that is working every single day on Suzano to being transforming Suzano on a better company that is impacting the society. Of course, I would like to thank you the leaders and the management team, our Silevo that have been with me for the last many years and being part of this transformational journey that has been very positive to all stockholders. As you may know, one of our main points on our culture is to create value in sharing with all the stakeholders, and they have been amazing on this process. I’d like to thank you, the Board of Directors for the support that I got from the period that we have been here and the reference shareholder as well that we implement a very good governance where the roles of everyone were very clear during the process.
I’m very positive about our future about Suzano and going to be part of that. And it’s very clear that capital allocation is quite important issue for us. And I’m going to be on the Board of Directors to help to continue to look for alternatives that would create value for everyone. Our policy of looking for new investments in one side, but we have a very financial discipline in one side and very disciplined on capital allocation will continue on the next coming years. It’s not related with me related with the all the governance system of the company. Now I’m going to turn to the results of the fourth quarter and 2023 results. I’m very pleased to announce a very good year for Suzano and a very good fourth quarter. I think we had an extremely good operational performance on the fourth quarter.
But it’s very important to bring to your attention the main strategic achievements that we had last year. First, related with expanding our role in different verticals. We increased the addressable market on the fiber to fiber on the fluff market announcing an expansion with a swing line in the Limeira plant. On the other hand, it is very important to mention that our Tissue business last year had major additional volumes with the acquisition of the tissue business of Kimberly Clark in Brazil, and we announced a new plant in Aracruz that is going to be commissioned on 2025. Regarding growth and modernization, and competitiveness, we have been working to retrofit Aracruz in Jacarei, extremely important projects for us. We never had on our history, so much expansion in terms of land banking and forest base.
We were close to 300,000 additional – sorry, 300,000 hectares of planted areas last year, and we are going to have the same amount for this year. Aires is going to share with us today good news about the Cerrado project. And I think this is a transformational project for our history. We are going to increase volumes on a very competitive base for the future. And we continue to have shareholder compensation. We concluded the third buyback program, and we had now the fourth program that we announced a few weeks ago. There is going to so the market that we believe that we are under value. And the best capital allocation for us would be to buy back shares and show to the market that we can keep creating value to our shareholders. And we announced last year, we pay in January the interest of equity payment of BRL1.5 billion.
In terms of results on the Page #4, we had last year, 10.2 million tons of pool, 1.1 million tons of paper. We had the lowest-ever inventory in the company showing that the market is demanding volumes for us. Aires is going to explain in detail what is the market conditions for us right now. We had an adjusted EBITDA of BRL18.3 billion. The cash cost for the last quarter last year was BRL816 per ton. We have been decreasing every single quarter our cash cost on the last year, and our very robust balance position. Marcelo is going to go in more details about that. But we have a very good liquidity. Our net debt is not growing even at a very high pace, even considering the largest CapEx on our history, showing that we are able to deliver new projects without expanding our net debt on a very high level.
And our leverage was 3.1x net debt over EBITDA. Of course, this is regarding a lower EBITDA due to the lower prices that we had last year. Now I’m going to turn to Fabio, who is going to explain a little bit more about the paper business. Fabio, the floor is yours.
Fabio Oliveira: Thank you, Walter, and good morning, everyone. Please let’s turn to the next page on the presentation. 2023 was a challenging year for paper and packaging markets globally. Excess of inventories led to a much lower level of demand in most markets. Normalized supply chains coupled with excess capacity on print and writing and paperboard mainly in Asia, increased competition, which turned into higher price over paper price international markets. Despite these challenged conditions, we were able to deliver solid results, full operational flexibility, and revenue discipline, achieving the second-best EBITDA in our history. On the domestic market, according to EBA, print and right demand decreased 13% on a quarter-over-quarter basis.
In a full-year comparison, we see 11% decrease in print and right demand, quite above its secular trend caused by destocking from 2022 levels and paper substitution, mainly in the promotional advertisement segment. Our core markets, uncoated wood-free and cut-size products performed better than our paper grades and demand was more resilient. On international markets, print, and right demand was also hampered by the destocking cycle, but also by micro-colon certainties that limit economic activity and a faster advancement of digitalization. Print and with demand has shown above 20% in the mature markets such as U.S. and Europe, foreseeing adjustments in capacity to match new demand levels. Regarding paperboard, we have seen inventory adjustments as supply normalized, mainly the pharmaceuticals and domestic segments, which start early in the third quarter and continue through the end of the year.
As a result of that, IVAS data shows an 8% reduction in domestic demand on quarter-over-quarter. When you look at the full year, we see that paperboard demand almost flat compared to 2022 on a stronger first half of the year. Suzano’s total sales volumes in Q4 were 17% higher than last quarter due to seasonality. Compared to year-over-year sales volume increased 5%, driven by higher volumes for the external market. Our annual sales volume compared to 2022 decreased 6% due to lower sales in the domestic market, which represents 67% of total sales. The average net price during the quarter was 7% lower than our average price in Q3 and 50% lower than Q4 on 2022. But when looking at 2023 versus 2022, our average net price remained 3% higher. It is important to mention that lower net price in the second half of the year reflect lower price in international markets.
Suzano’s domestic prices were more resilient and were only 1.4% lower year-over-year due to seasonal product mix. Looking at now at EBITDA, the 11% decrease quarter-over-quarter and 29% year-over-year were both driven by lower prices despite higher sales volumes. The same factors led to lower EBITDA per ton. Our full-year EBITDA was $2.6 billion, a 9% decrease versus 2022, but still much higher versus pre-pandemic levels, as it can be seen in this slide. Looking ahead for 2024, we expect to see normalized levels of demand as inventory levels seem healthier than compared to 2023. The structural trend of digitalization, permanent shifts in consumption behavior will continue to impact demand, but we expect purchase trends to go back to its historical pattern.
Cost inflation over the past year had eased and settled, and we should expect flat cost for paper products in 2024, a bite the stress of global geopolitics, which could impact supply and demand balance in the future. Now I will turn over to Leo, who will be presenting our pupa business results.
Leonardo Grimaldi: Thanks, Fabio, and good morning, everyone. Let’s move to the next slide of our presentation in order to address with you our Pulp business unit results for the fourth quarter and full year 2023. I would like to begin by sharing with you some facts on the supply side of the pulp fundamentals. Despite incoming volumes from the main 2023 projects in the [indiscernible] inventories in major markets reached low levels along the fourth quarter of 2023 coming to even more critical set points at some key port terminals in Europe. We have also noticed that permanent capacity closures in bridge chemical pulp reached almost 2 million tons during 2023 with a substantial share of this volume curtailment already affecting markets during the second half of the year.
When considering the supply factors and adding demand drivers such as the recovery of paper production and pulp demand in Europe and a healthy demand and order intake in Asia, aside fundamentals have triggered new rounds of full price increases in all markets. As you can note on the upper left graph, our fourth quarter sales were quite strong, much aligned with Q4 2022, despite the fact that we had lower production availability. Our pulp inventories, as Walter mentioned, have now reached the lowest – the lowest levels ever, which have demanded us to push and stress our operations to the limit in order to ensure the maintenance of the supply chain excellence and the established commitments in our contracts with our customers. The combination of strong volumes with price recovery, FX, and lower cash costs have resulted in a higher EBITDA margin for the quarter, reaching BRL3.8 billion or 48% margin.
Now looking forward, I would like to highlight the following points. Both print and writing and specialty paper producers operating rates have been recovering in Europe at a stronger pace than expected. As a consequence, most of our customers have been revising up their book demand for the next months and quarters. In order to best serve our customers in Western markets, our business therapy is different than those for Asian markets, meaning that we have to build up and carry more pulp inventories close to or even within the customers’ facilities in Europe and North America, stressing further our current logistics constraints. As we speak, we are in the process of reestablishing inventories in Europe and North America, but this effort should take a few months, especially because we have to combine this initiative with ongoing invoicings to other markets like Asia, Africa and Middle East, for which today, we have significant backlogs.
This has been further intensified by logistic headwinds due to the Red Sea conflict and challenges also in other routes. For the upcoming months, we are limiting our offers to Asia, to Middle East, and to Africa to better manage our inventories globally and to recover the backlog caused by late shipments. This means that we have been fully booked in January, and we also have been fully booked in February, and expect that this scenario will last some more months before the whole system is restabilized. Talking about the demand side of the S&D equation in China, January paper and oil production was positively has possibly surprised both market participants and now post Chinese New Year, initial signals show that demand for pulp has been recovering over expectations as market contenders are preparing for higher seasonality and consequently higher paper production months, led by increase in commercial printing and spring publishing season in China.
Such positive dynamics is also being benefited by the implementation of several price increases for paper, specialty papers, and packaging grades in Asia and in other key markets of the world. Demand in Europe continued to positively surprise our forecast with an additional short-term upside coming from the lower paper imports from other markets due mainly to logistic constraints. As you already know, considering all of the above, we have announced earlier this week a new round of price increases to all global markets and expect that they are successfully implemented during the next weeks. Our market sources indicate that Chinese BHKP resale prices as well as Chinese local hardwood prices are trending up with conditions to close the gap to imported pulp in the very short term, reinforcing the tighter-than-expected market environment.
With that said, I would now like to invite Aires to move forward with our presentation.
Aires Galhardo: Thank you, all. Good morning, everyone. We are on Slide 7. Look to our cash cost performance in the fourth quarter compared to the previous quarter. The middle single-digit decline was driven by lower wood costs mostly due to shorter from forest to new distance, improved wood consumption per ton of pulp, and supply mix, lower chemical price being Kaskida highlights, lower input consumption on the back of greater operational efficiency of our mills and a reduction of fixed costs with increased production volume. On a year-over-year comparison, the 13% improvement was benefited by lower input costs with a fall in commodity price, lower consumption of inputs leveraged by energy efficiency project carried out at Sakari, and several improvements in wad KPIs, such as lower diesel price, better efficiency in the harvest in the logistics, lower average distance as well as a lower wood consumption per ton of pulp produced.
Looking forward, we expect a flattish cash cost performance throughout 2024 compared to four quarter ‘23. The benefit of Cerrado project food stock should be seen in the end of the year as the ramp-up progress. Moving to the next slide. As you can see, Chad project has involved as planned in ‘23 and we are very confident for its startup by June this year. Now I turn the floor to Marcelo Bacci to continue the presentation.
Marcelo Bacci: Thank you, Aires. Moving to Page 9. I’d like to start by giving a retrospective view of our indebtedness. As you can see on the top of the slide, we have gone through during the years of ‘20 and ‘21 through a deleveraging cycle right after the merger with Fibra. And since the end of ‘21, we have been generating a significant amount of capital through our operations and gone through a very relevant investment cycle with $4.6 billion being invested in modernization and growth. But on top of that, we have been able to return to our shareholders $1.4 billion and – which was a significant return when compared to previous years. And if you look at the behavior of our net debt over the years, we now stand at $11.5 billion, which is more or less the same level that we had 3 years ago and $2 billion below the year of 2019.
With that, we have been able to keep our leverage ratio under control. We now stand at 3.1x net debt to EBITDA in dollar terms. And we expect this ratio to go up in the first half of this year before we start the Sahad project and then start to decrease after we start the new mill and then see the revenues coming from the new bill affecting positively our revenues. In terms of liquidity and amortization schedule, we have been improving this number constantly. We now have between cash-enhanced standby facilities and signed contracts that are still to be drawn, $6.8 billion of liquidity, which corresponds to 4.5 years to the next 4.5 years of maturities. This is a very comfortable position that we keep improving all the time, seeking for opportunities of new transactions.
As we had said before, we have a significant amount of our debt at fixed rate. And constantly, we are starting to move back to some floating rates to benefit from the expected reduction in interest rates that we will probably see in the coming years. Moving to the following page, which is the last page of the presentation, we’d like to touch on the guidance for total operational disbursement that we gave last year. At the end of last year, we signaled to the market that we expect the total operational disbursement to reach BRL1,75,000 at the end of 2017. And we are now reaffirming the same number, 1.753 toward the end of 2023 currency, which means that we have been offsetting the inflation of the last year of ‘23 into the number and keeping the same guidance with a slightly different split between the three components, sustaining CapEx, SG&A, freight and cash costs.
With that, we conclude the presentation, and we can move to the Q&A session.
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