Suzano Papel E Celulose SA ADR (OTCPK:SUZBY) Q2 2016 Earnings Conference Call August 3, 2016 9:30 AM ET
Walter Schalka - CEO
Carlos Anibal - Executive Officer, Pulp and Paper Business Unit
Marcelo Bacci - CFO
Philippe Hartl - Merrill Lynch
Carlos De Alba - Morgan Stanley
Caio Ribeiro - BTG Pactual
Jon Brandt - HSBC
Lucas Ferreira - JPMorgan
Juan Tavarez - Citi
Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Suzano Papel e Celulose conference call to discuss the second quarter of 2016 results. All participants will be in listen only mode during the presentation to be made by Mr. Walter Schalka, CEO of the Company. After that, we'll have a question and answer session when further instructions will be given. [Operator Instructions] Certain statements in this presentation may constitute projections or forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that could cause the expectations expressed not to materialize or the actual results to differ materially from those expected results. These risks include changes in future demand for the Company's products, changes in factors that affect domestic and international product prices, changes in cost structures, changes in the seasonality of markets, pricing actions by competitors or in currency fluctuations and changes in the political and economic environment in Brazil in emerging markets or internationally.
Now I would like to turn the floor to Mr. Schalka who will start the presentation. Thank you very much.
Good morning, everyone. It is a great pleasure to be here for the conference call for the second quarter results of 2015 of Suzano Papel e Celulose. I would like to start introducing our officers. Here I have Marcelo Bacci, CFO and IR Officer, Carlos Anibal, Pulp and Paper Business Unit Officer, Carlos Griner, our HR Officer, Alexandre Chueri Neto, our Forest Business Unit Officer, and [indiscernible], our Treasury Officer. After the presentation, we will be available for questions and answers that you might have. I would like to start the presentation by saying that this was another quarter in which Suzano has shown two main items - first, about the improvement in operating activities both in transformation as well as routine management. We did have good results in all of these areas and we'll share those with you. On the other hand, we focused strongly on capital discipline as well as value generation for our shareholders. We understand that this is fundamental for Suzano to deliver value and return on invested capital for our shareholders. That's how we have been working.
We have a cash generation in the quarter of BRL723 million, totaling in the last 12 months, BRL3.8 billion. We understand that this is the best KPI, the best indicator that measures our industry. We have a sustaining CapEx that is high in industry, because we have forestry replanting. Therefore it generates operating cash generation as a relevant indicator. We also have a reduction of our debt from 5.2 times after [indiscernible] project and, in a consistent manner, reaching 2.1 times now in the second quarter. Also we had an EBITDA of BRL967 million in the quarter and year-to-date in the last 12 months, more than BRL4.9 billion. Adjusted EBITDA per ton of BRL803 per ton, that shows resilience of the paper industry and how important the paper industry is in Suzano's equation. A continuous performance in cash cost and once again a lower cash cost than the cash cost that we had in the first quarter of this year with a drop of BRL18 from BRL654 to BRL636 [indiscernible] with an increase of only 0.5% vis-a-vis the same quarter of last year. Therefore we offset almost everything and the inflation [indiscernible] lower nominally to the second quarter of last year.
In terms of liability management, a continuous structuring of our financial soundness in terms of our debt with several liability managements. We had a new CRA funding done, totaling BRL900 million, operating below CDI. We also had, as a subsequent event in July, an incoming of funds from the green bonds we have issued for 10 years of $500 million. In July, we decided to do the debt dollarization and we are very close to 100% of our debt dollarized, therefore protecting the Company from eventual appreciation of the FX. In paper, we have a quarter that was very good in terms of improvement. Brazilian demand is still impacted. We had a drop of 5.7% in the second quarter vis-a-vis the second quarter of last year. We have implemented, as announced, our prices slowly [ph] in printing and writing paper uncoated as well and paperboard, so all the programs for price increases that we have announced are already implemented. Prices have increased 6.6% from the first to the second quarter. We continue working with our Suzano Plus program.
This is a very important program and we look for the loyalty of our clients at the end. The number of clients is increasing quarter on quarter and it has been very positive for Suzano. We are still working with our market share program in the coated paper segment, replacing imports. This program is happening continuously and should go on. This is a decision from the Company to work so that we can have a larger market share specifically in this area. Also we wanted to mention all the effects of the fire at Suzano Mill. There was an event that caused a loss of 15,000 tons approximately. Between semi-finished and products being introduced, that is going to impact the first quarter of this year. The evident impact happened in a non-recurring manner, because as everything was under insurance, obviously we will have to pay for the insurance deductible. Human side which is the most important, people that were in the accident, we have only two people that are in full recovery, so we are comfortable there. These were the financial burdens due to the fire that happened in the mill.
Talking about pulp, the quarter had significant sales. It was a record high in terms of sales volume with 910,000 tons sold in the quarter. We had a downtime in the operation of Imperatriz so that not only did our end [ph] go downtime, but also we started the 5.1 Project in implementation, which is the [indiscernible] of Imperatriz line [ph]. The global demand for pulp is still robust. We have an increase of 8.7% in the second quarter vis-a-vis the second quarter of last quarter for eucalyptus pulp. Pulp shipments in general have increased in 4.2%. The pulp industry to the market has increased 4.2%. We also had an inventory reduction in this quarter of 94,000 tons. The production was 816,000 tons. After Imperatriz's downtime, we are doing a slow ramp-up so that we do not pressure the volume to the market, because clearly we have an excess of supply in the pulp market. Therefore the prices are not remunerating the employed capital. About cash cost, we had another improving quarter. As an objective - and we still have this objective to nominally operate during the year of 2016 with cash costs that are below the ones that we had in 2015. We are working towards that.
In the second quarter of this year, the cash cost with no downtime was BRL636 per ton with a drop of, comparing to the quarter of last year, of 2.7% and an increase of 1.5% only vis-a-vis last year. This is because of some important facts. The first one we already mentioned before. It is because of the average distance of Mucuri wood. Because of that, we have been having operating gains, considering the investments we are doing in the plants so that we can have better chemical consumptions, lower chemical consumptions and also consumption of other materials as well as about cost, considering that there has been an FX appreciation. So chemical costs for us are dropping in the last month. The combination of all these effects is causing Suzano to continue in this reduction of the cash cost process. This is fundamental for Suzano. When we analyze the medium and the long runs, this factor will determine our structural competitiveness. We still aim the FX at 3.80 that was defined at the time, a cash cost of $150 in 2018 and $125 at the same goal of 3.80 in 2021. So this is a focus that the Company has and we are working towards that goal.
That consistency in cost that we have been showing and expenses below inflation in our SG&A, for instance, was 9% lower than the same quarter of last year for an inflation of 8.8%. More relevant even is a gradual drop of SG&A per ton that today is of BRL171 per ton. The fact that we have [indiscernible] just with a 0.5% of increase at an inflation of 8.8%, which shows our focus and really our obsession in the continuous improvement of our operating results. Obviously our sales has been impacted by the pulp in fact as well as by the FX. In fact, we have an average FX rate of 3.51 [ph] and a continuous reduction of pulp, average pulp price. Therefore this is impacting the Company's results. But then I would like to turn to the next slide and show you the resilience that the paper business brings to Suzano. In the quarter, we had an increase of the EBITDA per ton for paper. We have had a base of BRL1000 and BRL70,000, 40% more from paper in the EBITDA per ton and a reduction of 257 from pulp. That combination of prices from pulp and also exchange rate causes our cash costs to be lower.
Also in costs, we have an impact because of the fire event and also Imperatriz downtime. So we are very comfortable to show you that paper is stressing the resilience that we have in terms of results for Suzano. The operating cash generation has been a fundamental factor for us. Paper has a contribution that is even higher in the operating cash generation per ton because it has a lower sustaining CapEx. On the financial side, we still are working on the allegation [ph] that we have a gross debt of BRL14.4 billion already in July and a gross debt over adjusted EBITDA of 2.9 times and a net debt of 2.1 times. This figure is in reais. In dollars, our net debt over EBITDA is already in 2.3 times and in dollars this is perceiving when we consider reals. So we'll continue see a drop in our net debt in the Company, but we should have a gradual reduction of our EBITDA in the last 12 months. Because of the exchange rate and pulp prices, we have a position of 2.6 years for average debt maturity and a cash position of BRL4.2 billion.
I would like to highlight something very important which is the cost of our debt. We have decided at a subsequent event in July to dollarize our debt. We now turn to a debt of 4.4% in dollars. This is a very competitive debt that shows that the Company is very well prepared with very high financial soundness to look to the future. We understand that we might have volatility in the exchange rate in the next month. We are prepared to the possibility of the exchange rate going up in the next month. Right now we are announcing a guidance CapEx reduction for 2016. We had said before that the CapEx would be of BRL2.4 billion. We are reducing as a capital discipline, considering this market scenario, to BRL2.1 billion, so this is the CapEx now. It's important to say that this is thanks to three main reasons - first, a better negotiation of investments in CapEx with our suppliers. Also, this is thanks to the FX considering that part of our investments are dollarized. Third is we had the results from [indiscernible]. It's important to say that the capital discipline that Suzano is reinforcing right now is even having all the financial conditions that does not impact the scope and the project.
All of them are maintained and all of the budget is still there. That flexibility in capital allocation that the Company has, the flexibility and operational flexibility between paper and pulp. The possibility of continued working in the structural competitiveness as a fundamental factor of our strategy in the adjacent business and that, little by little, they are growing and they will keep on growing next year on when we have [indiscernible] operations, we are sure that we will still keep on generating value to our shareholders. So we are very proud about the results that we are bringing to you right now, but then we're also very determined to keep on working on our structural competitiveness and also looking for that flexibility of investments that will allow Suzano to have lower results volatility a long time, always creating value for our shareholders and always once again having that philosophy. We should be humble enough to know that we should be better every day. That is the spirit that Suzano wants to bring to our stakeholders with which we have any relationship.
So I now conclude my initial presentation about the results of the second quarter of 2016. I myself am available and also the whole team. We are available to answer any questions you might have.
Ladies and gentlemen, we'll now start the Q&A session. [Operator Instructions] Our first question is from Mr. Philippe Hartl at Merrill Lynch.
Good morning, everyone. I have two questions. First, about cost, Walter, you said a little bit about your idea of having a low cash cost in 2016 vis-a-vis 2015. Can you be more specific? What do you consider in terms of cost reduction quarter on quarter, especially taking into consideration what you already have today? You already have one of the lower costs of the industry. The second question is for Carlos Anibal. Can you tell us a little bit about the price dynamics, especially in China? Recently you have been price dropping, although you also have announced prices increase. Thank you.
Good afternoon, Philippe. This is Walter. I will talk about costs. Our cost trend is to have costs that are nominally lower than the ones that we had in the second quarter. The reason for that is the continuous reduction of the average rate as in Mucuri and the reduction of chemicals consumption. We are working on those. So we still should have improvements there in order to have lower cash costs in the third and fourth quarter, considering what we had in the second quarter. We are not going to give you figures, guidance right now.
Hello, Philippe. This is Carlos. The second quarter was marked by two major events. First we had Chinese buying again. That started happening at the end of the first quarter and the second quarter as well and now also a strong adjustment of prices both in North America as well as in Europe. We saw along May and, by the end of the month of May, an improvement in the fundament. That improvement made us announce a price increase for June. We started that price implementation in June. We had different results in distinct geographies. In July, we had a volume - both in North America as well as in Europe - that wasn't expected. We found in China a higher pressure and prices.
Therefore we had orders that were lower than expected. So at the end of July, really we saw a pressure from the Chinese buyers. We understand when we analyze the inventories disclosed by PPPC at the end of June is that we have a balanced inventory level, 41 levels for hardwood. For us, this shows a good balance in the market, but we should consider that there is a perspective of increase of physical inventories in China, maybe in August, because of strong shipments that we had from Brazil in June. Also structurally we have a perspective of inventory increase [indiscernible] in July and August because of lower demand. This is a seasonality of the North hemisphere. Also we have the supply side working at full capacity differently from what happened in the second quarter where we had planned and unplanned downtimes that limited the supply of softwood. Thank you very much.
Next question [indiscernible].
Good morning. I have two questions. Carlos, can you tell us a little more about the pulp price? Just about the net price, today we see a discount or a premium on the prices when we compare Europe and China that's very high. So they are having more discounts in Europe or are you realizing higher prices in Europe vis-a-vis China in a net [ph] basis? I would like to understand the dynamics and what is sustainable from now on?
My second question, it's about the domestic paper market. Considering these price increases of 24% and between 15% and 25% for some lines, I would like to understand, in this new FX scenario, do you already see any customers or clients pressure asking you to go back with discounts because of the higher potential domestic price or the pressure on the domestic price?
[Indiscernible], good morning. What we have today and the result of our net average price in the second quarter came from a strong adjustment that we had in prices in North America and Europe and also because of the fact that we had, along the second quarter, a difference between net prices from China and Europe that were much higher than what we have had in 2014 and 2015. So we have a specific net price. Then when compared to Europe's price, it generates that perception of discount increases. That's not exactly what's been happening.
It's trapped in our situation because of an important share that we have in the Chinese market. Our pricing process and the domestic price is defined by several variables that include supply and demand in the domestic market, in the international market, the prices of paper in the international market, the parity of the currencies, especially countries that export to Brazil [indiscernible]. We recently have had a significant growth of maritime freight from China to Brazil. All these variables and [indiscernible] make us believe that right now we have our pricing in the domestic market just right, but obviously we're always monitoring all those items. We are playing close attention to the events so that we can adjust our prices so that we can put our strategy into practice.
Obviously we have to pay attention to the coated paper market where the share of the imported products is higher, but as Walter has mentioned, we had another quarter in which we were successful in our strategy. Just to give you an idea, our production of coated paper [indiscernible] in the second quarter was almost 40% higher than the second quarter of last year. So that higher production, that strategy of maximizing the use of our assets to produce coated paper has allowed us to occupy successfully that room that was created by the significant drop of import of paper and specifically the import of coated paper.
Can you go back, Carlos, to the first question? I understand that the list price when you compare it to your price will have a higher discount. That is only natural. But I would like to understand if the net price that you have in Europe right now is too different from the net price that you have in China, if there is any type of connection there or if this net price is already defined.
[Indiscernible] I will address your question conceptually. In the longer period of time, there is a trend to convert net prices among regions and that profitability among regions as well. In a lower period of time, we might have a difference that ends up being balanced a long time. Thank you very much.
Thank you, Carlos.
Our next question is from Marcos Assumpcao, Itau BBA.
Good morning. Actually this is Danielle Sazon [ph]. Thank you. My first question is about a possible redesign of the industry. In the last quarter, you were reducing [indiscernible] diversifying revenue, capitalizing the Company with the recent ambitions of 10 year bonds. So it looks like today you have a stronger balance position than your competition and maybe considering your lower dependence on pulp that might become [indiscernible] more difficult [indiscernible] that relative position of balance could even become better or stronger. Under that scenario, do you see consolidation in the industry? Do you see Suzano as a consolidator in this industry? Can we go back to [indiscernible] M&A talks about that?
And about that, would you be considering maybe to join or share [indiscernible]? Is that something that the market always asks you? My second question is about the Fluff Project. It's already up and running since the beginning of the year, so I would like to better understand it now that we already have a few months after start-up. How is that being accepted by clients? How has the demand been in the prior quarters? [Indiscernible] said that some clients were starting to use a mix of 50% of softwood and hardwood of products, even better than what you were expecting. So if you can comment a little that future perspective of the Fluff project, I would appreciate. Thank you.
Danielle, this is Walter. Thank you very much for your question. And I will address the first one about the redesign of the industry. We will not comment on M&A operation. It's not up to us to do that. We cannot even do that now. Obviously M&A operations are a value to the industry because of synergic values are extremely relevant, but we rather decline answering the question about the industry's reshaping. About the second question which is on Fluff, we have had a continuous improvement every month. The volumes are growing. Our sales of Fluff are growing. We are very happy about the results. The approval process has been a little bit longer than what we would like to see, but it is very clear that we have had no client so far that rejected our product. So either the products are already approved or are under approval, being approved. But no client said that they do not want to operate with hardwood.
Obviously those have very good benefits in the operation. The energy consumption is much lower than a softwood. And the hardwood has two advantages in terms of the final product, which is liquid dispersion and also liquid retention. That has been proven to all of them, not only in the lab but also to have practical effects, that is shown with the test that we have done with clients. And that has been recognized. Therefore, the acceptance level is increasing. Specifically today we are producing fluff, we have been doing long campaigns for our fluff business. The demand is increasing gradually. And we intend to continue growing volumes for the next quarter. So the speed of improvement for sales has been a little bit lower than what we expected, but - because of the approval process that happened, but the acceptance level has been very positive. Therefore, we are very happy about it.
Next question, in English, from Carlos De Alba, Morgan Stanley.
Carlos De Alba
Yes, good morning. First question has to do with CapEx, clearly very positive, but for this year came down. But I'm going to ask you if this reduction that we saw has any implication for higher CapEx in 2017? And do you already have a view or a guidance [indiscernible]? Second question is, sorry, the cash flow generation in the quarter was a little bit on the weak side initially versus our expectations, and it seems to have been driven by working capital increasing a little bit more than what we have modeled. What are the expectations going forward in terms of cash flow generation in particular in the working capital? Thank you.
Carlos, thank you very much for your question. This is Walter. I will start talking about CapEx. As I have mentioned, the CapEx reduction for this year represents our focus and determination to have capital discipline and to have a cash generation that will cause the continuous reduction of our debt level - our net debt levels in the Company, by doing the payment postponement of BRL300 million in cash, part of that is reduction and part of that is payment postponement. The reduction comes from better negotiation with our suppliers to reduce the total CapEx of the project.
And also we are benefited from the FX rate because part of the investments are dollarized. I think that a small share of BRL300 million that we are reducing, that you should have an impact last year, which is - which are the payment postponements. And that might happen next year or in 2018. So our focus on capital discipline and having a cash generation that is significant and constant along time, is determining - determinant in our CapEx process. So this has been our focus. So I'll turn to Marcelo Bacci that is going to talk a little bit about cash generation.
Good morning, Carlos. I don't know exactly what is the math that you have done to mention that weak cash generation. But for us, we had a cash generation that was adequate for the EBITDA in the period, and even a little bit better because of the working capital reduction in fact. That is also not very relevant because it happened because of a negative FX variation in receivables and also a variation in our inventory levels. So for us, we really have a cash generation that was adequate to the EBITDA minus the CapEx that we had, and a little bit of a mismatch in our financial accounts because the interest that we have paid in the period are higher than the accrued interest in the period. But this is a - this is something that just happened at this time and will be offset a long time.
Carlos De Alba
So maybe just temporary differences, thank you for that. If I might add another question. Marcelo, could you work over the rationale of dollarizing 100% of the debt when the Company still has around 30% of revenues in the domestic market? Do you see feel confident that the domestic prices will move in line with the currency, so that basically 100% of the [indiscernible] will be dollarized?
This is a great question. Thank you, Carlos. In fact, we do have one-third of our revenue in reals, basically that is the revenue from paper in the domestic market. On the other hand, we have around 85% of our costs and total expenses, including pulp, that are also in reals. So when we analyze our cash generation and also our CapEx, all of that is in real. When we analyze cash generation per currency, the net cash generation is all in dollars. So what we receive in reals is lower than what we pay in reals in our cost and expenses. So in terms of the net cost, it does make sense to have 100% of our debt in dollar. And also to make it clear, when we say that we are 98% or 100% of our debt in dollars, we are talking about net debt. We still have debt in real that are lower or very equivalent to our reals cash position. But the flow situation will continue as it is for the future, because we are net dollar generators.
Our next question, from Caio Ribeiro, BTG Pactual.
Good morning everyone. Thank you for this opportunity. I just would like to know if you can tell us about your expectations about [APP] project, if you do expect for this year, and how much do you expect to have in terms of additional volume entry this year? And second, how do you see Chinese clients' appetite to restock today? The figure from June seems to be very strong in terms of Chinese demand. But do you believe that this is sustainable for the next month? Or do you see a trend to wait to see if this APP project is going to come in or not this year?
Good morning, Caio, this is Walter. We will address APP matter. We do not have intelligence on that that is much better than the market intelligence. We haven't heard the whole set of information from several sources about it and that should be very similar to what the market already has heard as well. And we rather not comment on something that we have not enough intelligence to discuss. So it is very difficult to speculate in a call about something that we don't have much information, no more information than what you have. So we would like to decline any comments on APP's entry, because we do not have a better view than you would have. So I'll turn to Carlos to talk about the Chinese market.
Good morning, Caio. The best information that we have and that allows us to understand the inventories movement in China are data from Chinese customs import, the analysis of hardwood and softwood import in the first six months of this year. When we compare to the six months of last year show a slight growth of imports, very compatible with the organic growth of the demand. That makes us believe that, in addition to information that we have from our team, that inventories in China now are, or at least at the end of June, were at a level that was very close to normal. Now we have in China, especially in July and August, those are the period of seasonality. And we had also - the market works with an expectation of pulp coming from Brazil in August, because of the shipments that we had in June. And as you well said, these shipments are reported in the PPPC's [ph] number.
So we have Chinese buyers that need to buy to adjust their inventories so that we can have that demand coming back and that should happen in the mid-September. So we expect that at the moment we'll see a higher movement. In July, as they said, we found some pressure. The pressure actually started with a movement and the drop of the price of the softwood, and a producer of hardwood announced a reduction of prices there. And that caused some stress in the market. And once again, analyzing all the bases, the inventory positions in chain, we have decided to work with a volume that was lower than we expected to close July. So we expect that at a certain moment in the next month we will find the Chinese coming back differently from the concern that we had in the beginning of the year where China did have a significant growth in the first quarter, CCPT's [ph] number showed the demand reaching almost 6.6 million tons, a growth of 16.5%, and a growth in the demand of eucalyptus shipment 27%. So, structurally we are preparing ourselves to have in the second half of the year a regular demand from China.
Our next question, in English, from Jon Brandt, HSBC.
Hi, good morning. Thanks for taking my questions. First, I wanted to ask you just about net debt, you're 2.1 times. How comfortable are you with that? And should we consider that to be your target net debt level? And secondly, I wanted to ask you, I know you don't want to comment on M&A, but conceptually, does it make sense or would you be interested in doing acquisition or mergers with companies or assets outside of Brazil? And then conversely, I'm wondering if there's any comment from you on the potential removal of foreign ownership limits and what impact that might have on new pulp capacity in Brazil. Thank you.
Jon, this is Marcelo. Thank you for your question. I will go back to the net debt topic. We had a significant reduction of the net debt over EBITDA along this period, reaching 2.1 times. And this is a figure with which we are very comfortable about. But we have to recognize that the trend for the debt is to increase a little bit in the next month. We had a year-to-date EBITDA in the last 12 months that was close to BRL5 billion, and the trend in current FX prices and pulp prices is that the year-to-date EBITDA will decrease. So even if the net debt as a whole goes down, the net debt/EBITDA ratio should convert to a figure more or less of 2.2, 2.5 times, depending on the FX in the next quarters. That figure, around 2.5, is a figure with which we are very comfortable, and that is very sound also to face a possible difficult moment of the industry in the next quarters.
Jon, this is Walter. I will talk about the M&A topic. Conceptually, Suzano analyzes the reshape and the redesign of the industry. M&A is one of the leverage this year, and we see eventual possibilities that might come up. We do not have distinctions in terms of geographic regions in Brazil, outside of Brazil, about that matter. We do understand that this is an industry with volatility of results that is not proportional to invested capital the data of the industry is very high. And if you compare the situation six to eight months ago, you will see that the FX rate and the pulp conditions were totally different from today. Suzano's position is to have financial soundness, is to be prepared for volatility scenarios on the one side. And on the other side, we also should be prepared for eventual changes in the industry where Suzano intends to be a long time a protagonist. But obviously we'll not comment on operations or any specific opportunities.
Okay, thank you. And just to follow up on that, is there any concern about the Brazilian government's plan to remove the foreign ownership limits, that you could see foreign pulp producers and pulp and paper producers coming in and adding to all the capacity?
Yes. This is Walter again. We do support the request that is being done to the Brazilian government to remove that limitation. We do not understand this as being fundamental for national domestic producers. We understand the free trade as being basically a natural matter. We do not understand, on the other hand, that there is a possibility of placing no capacity in the market in an environment where we have an excess of supply right now. So we do not understand that there'll be a risk to the Company.
Okay. Thank you, Walter.
In terms of the removal of that foreign rights to have land in Brazil.
Next question, from Lucas Ferreira, JPMorgan.
Good morning everyone. For a series of reasons, but maybe because of the real's appreciation, probably the Company will generate a higher taxable profit. My question is that, if you have reviewed your perspective for tax payment for the next year as we should see higher tax payments. And along the same lines, what is the situation of dividends? Will be paying more dividends following the rule of the 25%, but do you have room to make that more flexible? And if you can comment on that, and even considering that message of capital discipline. And my second question is for Carlos Anibal. Carlos, you have already talked about the Chinese scenario, but I want to go back there. I would like to understand what you have in terms of feedback from your clients in terms of paper demand. So, how is the paper market? How do they see the demand from now on? We have seen several commodities that are going weaker. And if you analyze Chinese producers, also there was a change, and that also impacts in the market for you and the perspective of your clients, the clients that you serve in China. Thank you.
Good morning, Lucas, this is Marcelo. I will talk about the profit and taxes and dividend. Yes, in fact, we had high profits, especially because of the FX variation in that and also derivative that we have contracted to protect the revenue. And that profit has caused an income tax provision that is high, but our provision so far was low, especially [indiscernible] companies which are small ones. We should not have in the second half of the year regardless of the FX also significant payments for income tax. That is because of the fact that we still have part of the accelerated depreciation of Imperatriz is still in our figures. We used a lot of that in the first half of the year, but we also have a large amount to be used. We also have a significant number of tax loss carryforward that can be used as well.
We have always to remember that we have an income tax reduction in our activities in the north and northeast that reduces our tax [indiscernible] 75% income tax, but not in social contribution. And finally, we have also in the second quarter reduction that we can use to offset tax payments. So on the second half of the year we'll not be paying taxes. Obviously in the next few years, depending on the FX scenario, we will gradually increase our cash tax payments, but we have no forecasts for next year. But for this year we should not have payments there. About dividend, we intend to keep dividend payment according to the cash generation of the Company. So we are assessing this matter that you just mentioned, that is very important, that along time we should balance the dividend payment with our cash generation in the next month. Therefore we're going to this matter deeply and we'll bring back a proposal that will be debated, therefore, informed to the market.
Lucas, this is Carlos. Our interactions with our Chinese clients allow us to have a very positive vision of the demand for the next years, a natural growth in the demand at lower rates than what we had in the past, but not less important. We see in China today a strong trend in the demand growth by quality paper, a special paper, superior quality paper. This paper will only be produced from virgin fibers. So it is only natural that we see the demand growing strongly for quality papers. And those papers will then have an impact in the demand of virgin fiber, especially eucalyptus pulp.
Next question, in English, from Juan Tavarez, Citi.
Hi. Thanks. Good morning everyone. My first question is just around cost. I know you mentioned that you're expecting cash costs to come down over the next few quarters, specifically with third-party [indiscernible] in average distance. Could you put some numbers around that? How much currently of your work cost is coming from third parties? And also what's the average distance today, and if you have a specific target over the coming quarters? And then my second question is around paper demand. Could you give us a sense if you're starting to see any signs of improvement of underlying demand in Brazil? And I guess I'm trying to think of the imports that could continue to come through given the BRL appreciation. Could we see some of that being absorbed by local demand? You mentioned that your strategy is to focus on market share, so I'm just curious there how aggressive you may be in market share gains if demand doesn't come back.
Juan, good morning. This is Walter. I would tell you a little about costs. We did in the second quarter of 2016 a small reduction of the average distance in our operations on the use of third-party wood. That should be expedited in the third and fourth quarters, and that's part of the equation to reduce our cash costs. The second part of the equation is to reduce specific consumptions. We are investing in all plants aimed to reduce specific consumption, especially of chemicals, and also to have energy gains in the operations. Those investments that we have announced to the market in a recurring fashion and that we have already done [indiscernible] in Suzano, in Limeira, biomass boiler in Limeira, investments in Imperatriz, and the debottlenecking of the plant, and increasing capacity, reduction in specific consumption.
This is a continuous program that will keep on happening. Now in January we'll have the crystallizer working in Mucuri. So these are a series of actions being taken that, little by little, will reduce the specific consumption, therefore reducing cash costs. So it is a program that is endless in Suzano. We have established a target of $150 for 2018. And we understand that it is possible to meet these $150 [indiscernible] and that would reach BRL570 for cash costs in 2018. So we are concentrated on that. We'll keep on working there. Obviously in the short term we cannot tell you how much we are going to reach still in 2016. But the trend is that the cash cost in the third and fourth quarters are lower than what we already had in the second quarter.
Juan, good morning, this is Carlos. The data that we have from Iba [ph] show an apparent demand by printing and writing paper and paperboard going down 27% this year vis-a-vis the same period of last year. In the year to date we have a drop of 5.8%. This is the lower drop that we have had in the last six quarters. Therefore, we believe that the market has already reached its lower - its bottom in terms of demand. These first six months of the year, the domestic industry grew share in the volume in 1.8% and imports dropped 36.5%. And as we have said before, we were successful in our market share gain. It's important to stress that this market share gain is based on the coated [ph] paper line because the strategy that we use to maximize the use of our install capacity is something that we - is hard for us in the past because of high levels of imports and also because of the tax-exempt paper. Obviously in the second quarter we have higher demand, we have the expectation for the next quarters or months to have higher volumes being delivered for government programs, and then we believe that we could have demands in the second half of the year that did better than the demand that we had in the second half of last year. But we don't have any evidence, any elements that really found that will make us believe that there are signs of recovery of the demand by - for paperboard and printing and writing paper.
We'll now end the Q&A session. I would like to turn the floor to the Company for their final remarks.
I would like to thank you all for your participation in this conference call for the result of the conference call for the results of the second quarter. We continue to have position for structural competitiveness and operating improvement as basis of our future. Another dimension that is very important is the flexibility of products and the range of products that we have to work with, and that flexibility generates more resilience in our results. Also fundamental is our capital discipline. We understand that, in an industry with results volatility, it's crucial to have capital discipline. And we continue working there so that we are sure to be delivering value to our shareholders in the long term. And a fourth topic that is also fundamental is our financial structure and soundness.
We have a clear determination to keep on working in a capital structure that will provide an equation to the size of our debt, also the cost of our debt and the terms of our debt. So this is very important. The financial soundness is part of our equation and our strategy. We are happy and we are proud for our results and also we are very humble, when we recognize that we have more to be done, and we are concerned about the FX and pulp price volatility a long time. These are issues in which we are working and I am sure that along time we will be delivering even better results to our shareholders. This is our focus. This is a determination of our team and the cultural change that is at the base of this transformation is fundamental really for our process and the long-term horizon. So, thank you all very much. And I wish you all a very nice day.
The conference call of Suzano Papel E Celulose has been concluded. Thank you for your participation, and have a nice day. Thank you.
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