Suzano Papel E Celulose SA (OTCPK:SUZBY) Q1 2016 Earnings Conference Call April 27, 2016 9:30 AM ET
Walter Schalka - Chief Executive Officer
Carlos Anibal - Commercial Director, Paper & Pulp
Carlos Griner - Human Resources Officer and Institutional Relations
Alexandre Chueri - Forestry Officer
Thiago Lofiego - Bank of America Merrill Lynch
Caio Ribeiro - BTG Pactual
Daniel Sasson - Itaú BBA
Jon Brandt - HSBC
Lucas Ferreira - JPMorgan
Viccenzo Paternostro - Credit Suisse
Alan Glezer - Bradesco BBI
Juan Tavarez - Citibank
Good morning, ladies and gentlemen and thank you for waiting. Welcome to Suzano Papel e Celulose Conference Call to discuss the results of the First Quarter of 2016. All participants will be in listen-only mode during the company’s presentation to be made by Mr. Walter Schalka, CEO of the company. [Operator Instructions]
We would like to inform you that some statements in this presentation are projections of 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 demands for the company’s products among others and changes in factors that affect domestic and international product prices, changes in the cost structure, changes in the seasonality of markets, pricing actions by competitors, foreign currency fluctuations and changes in the political and economic environment in Brazil and emerging markets and international markets.
Now, I would like to give the floor to Mr. Walter Schalka, who will start the presentation.
Good morning, everyone. It’s a great pleasure to be with you to present the results of Suzano Papel e Celulose for the first quarter of 2016. I would like to mention that we have Carlos Anibal, our Commercial Director for Paper & Pulp; Carlos Griner, our Human Resources Officer and Institutional Relations; Alexandre Chueri, our Forestry Officer. Today, we do not have Marcelo Bacci, because he is undergoing a small procedure, nothing very serious. However, unfortunately, he will not be able to join us today. He will be available as of next week to answer any questions that you might have to him.
I would like to start the presentation by saying that this was a very positive quarterly result in all the areas of the company. We saw significant progress and internally with exception made to the pulp price that frustrated the expectations of all of us, which because it was lower than what we expected, we saw evolution in all the areas of the company.
I would like to mention three fundamental points. The first one is leverage. We reached a leverage level of 2.3 times net debt EBITDA, but 2.9 times gross debt EBITDA. This was a goal that we had established to be achieved after the Imperatriz project was concluded. And I had always said to the market that this would depend on the speed of pulp prices and the exchange rate and these two factors favored us for a long time and we were able to meet our expectations before the timeframe that we expected, for 2.5 and we are already lower than 2.5. This shows the financial strength that we have and this shows the future perspective of the company.
On the other hand and I would like to highlight how much paper has been important in our strategy. Paper has been showing the anti-cyclical vis-à-vis margins in pulp and was a significant contribution to our results in this quarter and this has to do with the strategy that we adopted in the past in the company of seeking a higher base for our sales and also being closer to our clients. With that, we are able to have better margins and a very positive situation of sustainability in our results and more specifically in this quarter, we had an expressive gain of market share in [indiscernible] paper. And lastly but not less important is cash cost. We have been telling the market that we had a gradual reduction in the distance and the use of third-party wood in Mucuri and this will bring about benefit in our cash cost. Our cash cost went from R$706 to R$654 in this quarter.
And we continue to give you this outlook that our internal objective is to reach $150 of cash cost in 2018 and $125 of cash cost in 2021 considering a dollar rate of R$3.80. Regarding the most important figures, a very important thing among the multiple records that we achieved is the operational cash generation, which is the most important, most significant variable in our evolution.
In the last 12 months we had R$3.7 billion of operating cash generation, which is EBITDA minus the sustaining CapEx and this metric is the one that we will be tracking all the time. On the EBITDA side, we had a record EBITDA of R$4.93 billion in the last 12 months and R$1,269 million for the quarter with a 47% margin in the quarter, 46% in the last 12 months. Record revenues, $10.8 billion and I have already mentioned sustainability of the paper segment and the advancement of the Suzano Go-To-Market project in Brazil and it will continue to bring about new progress in the next few quarters.
The cash cost reduction in the quarter, I would like to highlight the fact that we continue with our philosophy of successive liability management and we launched CRA with R$600 million deal at 98% of the CDI and this was settled in April. Therefore, it is not included neither in cash neither in our indebtedness.
Paper is a very important highlight as well. We had the Brazilian – well, there was a 6% drop according to IBA and sales growing by 12% in the internal market. If we exclude – which was transferred to Ibema and so we had an important gain in market share and the sales evolution in the federal market, which is the Brazilian market. We also saw an evolution of our sales in the export market in this quarter vis-à-vis the first quarter of last year and the gradual price increase that we implemented partially in February and part in March and April it reaches the total of the increase that we had already announced to the market. And when we compare the price of April to December, we will see the total price implemented in the cardboard line and [indiscernible] line and offset that.
Pulp, we had a very good quarter, 912,000 tons. As we didn’t have any downtime, our average production was about 10,000 tons per day of pulp. And if we annualize this figure, we will reach a level of 3.5 million tons per year, which is what we did in the last 12 months, 3,489,000 tons. We had record historical sales of 906,000 tons. But with the concentration of sales at the end of the quarter and this led to a weighted average price, which was lower because the price dropped during the quarter over the quarter. The market as of the end of March chose to be quite favorable. We see already an important increase in the sales volume in several regions, mainly in Asia and we are very bullish regarding the fact that the price has already reached its bottom in March and so there is a possibility of the prices going up as of now.
Looking at our costs, the cash cost, pulp cash costs, we saw a very important evolution as I mentioned from R$706 to R$654, but more important than that is the trend that we will see in terms of gradual reduction of mix and distance for the supply of wood in Mucuri. And this leads to an evolution in our cash costs and COGS showing that the decision that we made last year of using more third party wood was very effective and is bringing about satisfactory results to us during the third quarter and will continue to give us this in the next few quarters. Looking at the COGS, currently we are below inflation in the period and this has to do with the operating retrofit that we have been carrying out in our plants and the evolution that we see in our harvesting and wood transport costs and the evolution that we see as well in operating efficiency in all the areas of the company.
SG&A per ton also growing less than inflation, regarding the first quarter of last year, we had 3.7% evolution vis-à-vis an inflation of 9.4% in the period. It shows that the program that the company has been establishing on the expenses side has been bringing about consistent results. And this leads to an increase in our margin both operational margin and cash generation. We had R$3.7 billion in cash generation, adjusted EBITDA of R$4.9 billion and R$1,269 million in the quarter and the units, R$1,076 the adjusted EBITDA and the same amount of R$1,075 per ton in the last 12 months.
Looking at the CapEx side of the operation, the good news is that we have already contracted all the projects, all the significant projects, all the equipment of 5.1 tons, the de-bottlenecking of our plants in Imperatriz and Mucuri and reduction of costs, reduction basically in what we call 5.1 tons, which means 5.1 million tons that we want to reach in 2018 and we have already bought the equipment for the two plants for Mucuri and Imperatriz. We have already acquired the tissue machine both for Imperatriz and Mucuri and the lignin project all the equipment already contracted, basically. So we are on time, on budget in all of the projects and we are on budget regarding CapEx as planned. We had given you the estimate that we would have a CapEx of a little bit less than R$2.4 billion during 2016 and we maintained this projection for this year.
Now, looking at our indebtness, we have excellent news to impart. In March 2016, our debt in reais was 83.5% of the CDI, the weighted average of our debt and in dollars 75% of the total debt at 4.1% a year. Net debt to adjusted EBITDA ratio, this metric has a constant evolution both in dollars and in reais 2.3x net debt to EBITDA ratio and gross debt to EBITDA 2.9x. We have a very robust cash positions right now of R$2.8 billion this before the TRA. So with the projection, this would be R$3.4 billion if we consider this inflow, so a very comfortable cash position. And therefore, we are very comfortable regarding the financial strength of our company for the next few periods.
To conclude the first part of the presentation, I would like to say that we are very pleased with the evolution of the internal dynamics of the company and the engagement of the company and bringing new alternatives to us so that we may continue to deliver better and better results from our programs. And we put everybody together to work hand in hand in construction projects, in solutions and of problems and opportunities that we identify and this all generates a very good energy in the company and this has been leading to very good and consistent results to the company. In relation to the financials of the company, just to end the presentation, we understand that we have all the parameters complied with so that we may have an upgrade on the part of the rating agencies. And of course this is a unilateral decision on the part of the rating agencies, but we understand that we have a very good evolution and very good evidence for these agencies because of the consistency of our strategy and the operational efficiency that we are delivering consistently. All this shows very clearly what we had defined as our objective a while ago. All these objectives are being met. So this is what I had to say.
And now, I will be available to you to answer any questions that you might have addressed to me or the other officers of the company. Now we will start the Q&A session.
[Operator Instructions] Our first question comes from Thiago Lofiego from Bank of America-Merrill Lynch.
Good morning everyone. This is Lofiego Thiago from Merrill Lynch. I have two questions, the first one has to do with the pulp market, could you say few words about Walter you talked about the scenario of price recovery, you believe that the bottom has already been reached, so could you talk about the dynamics, do you see a possibility of price increase because we have been reading something about that. And my second question has to do with paper prices, the average prices have already gone up a little bit in the first quarter and is there an effect of the mix that helped this price increase and how much could we expect in terms of price increases for the second quarter? Thank you.
Good morning everyone. Thank you. Lofiego, this is Carlos Anibal. Let’s start by pulp. As Walter has shared, we had a very strong quarter both in the production and in sales. We sold 906 tons, 22% increase vis-à-vis the fourth quarter, 6% increase vis-à-vis the first one. And we see a more stressed correction of prices of pulp, they started last year in China and it was extended to the other regions as well. We understand that the fundamentals for softwood will be more balanced now. To the extent of producers in many regions being announcing already price increases in April and we see a new wave of prices announced for May. So this behavior which is different between hardwood and softwood, hardwood going down and softwood going up, this creates a bigger spread between the two fibers and today we are talking about $100 in China of list price and $83 in Europe. And of course the spread ends up favoring or spurring a higher consumption of hardwood.
In China more specifically, today we already see a difference between the net prices of hardwood and softwood of about $100. And we have been seeing a movement on the part of Chinese buyers that we flagged this change in more orders placed for hardwood. And we believe that the prices of hardwood eucalyptus fiber have already reached a minimum in China and the figures that we can see that were published yesterday confirm that 1,200,000 tons to China in March with a 23% growth vis-à-vis March 2015 and shipments to China of 527,000 tons. 34% increase vis-à-vis March 2015. Today we have this perception of a sound demand from all the regions. China, North America, Europe, we see that buyers are very active and even higher than our expectation for this period of the year. Recently in China, we had two announcements of price increases. Hardwood produces more $20 and we are evaluating what we will be doing in the next few days in Europe. We do not have the month closed yet. The prices are usually announced in the last or the one before last day and prices in Europe have been dropping, but more slowly than in China and we say that markets are always looking for convergence of values, always taking into account the logistics area, variables of course.
From the demand view point, we have a very positive reading of the situation for the next few months and we see now the beginning of the period of scheduled downtime in the Northern Hemisphere, which brings a limit to the availability of softwood and we have important downtime for hardwood as well. So, we believe that the market starts to look for a balance between supply and demand for hardwood. Paper, as you said yourself, we saw a major growth in our prices 9.5% vis-à-vis the first quarter of last year and 5.6% vis-à-vis the fourth quarter. And entering specifically your questions, in the first quarter we had an unfavorable mix effect, because we had an expected growth in the sales of coated paper and this was the only line for which we did not announce a price increase for the first quarter. If we had to exclude the coated paper line, we would see more than 5.6% hike. We are very disciplined and we are very rigorous in the implementation of our price increases and these increases were established respecting our commercial strategy and the specifics of our products, sales channels and seasonality. But as we told you during the last call, our expectation is to see a hike in the average price for the second half unless we have an excessive change in our mix or channels. The expectation is that in the second quarter we should see an additional increase in average prices for the domestic markets.
Thank you very much, Carlos.
Our next question Caio Ribeiro, BTG Pactual.
Good morning. I would like to know the evolution of discount vis-à-vis the list price in the quarter. It was different from the fourth quarter and we understand that it was because sales were more concentrated in March when the price list dropped more steeply. Do you see these discounts being repeated and going back to historical levels of 20%, 25% and with leverage close to 2 and a strong cash generation, a strong cash position, could you say what are your top priorities regarding cash allocation, capital allocation, if you are going to increase payout in the short run or looking for a Greenfield or an M&A opportunity?
Hello, Caio. Good morning. Thank you. This is Carlos Anibal. I would like to take the opportunity to put this issue into context. In fact, we saw a drop in our prices explained fundamentally by an expressive correction of the list price of [indiscernible] in the regions, but we understand this calculation is commonly used by the capital markets in order – it will be by the average peaks in Europe. And in a market with more steep variations there are some imperfections that could distort conclusions totally. These imperfections could be related, Caio, to the experience in the speed of price drops and the geographic mix, the mix of clients. And we saw an important participation of China and this participation in China was fundamentally in March. And in March, we had another effect that was equally important, because we had the lowest average exchange rate in the period. So in spite of all the points that I have mentioned for 2016, certainly we will see discounts mainly in North America and in Europe because of the inflation that we have been observing in the last few years caused fundamentally by the fact that these markets do not show any growth in demand. And in the last few years, we see an increase of supply mainly coming from Latin America in these markets. So not differently from the last years, we see a renewal in the signature of contracts last year, at the end of last year with an increase in discount inflation, not different from the previous years and this will certainly be reflected during this year.
This is Walter. Thank you for your question about our leverage and the consequences of a reduction in our leverage. We have been discussing this very extensively and in a very conservative fashion due to the possible volatility that the exchange rate could bring to our results and the issue of the pulp price that is not adequately stabilized yet, because of all that, we decided to have a less aggressive dividend payout policy right now. If the scenario becomes more favorable, we could have additional dividend being paid out in the second half of the year depending on cash generation and depending on our positions regarding price, pulp. And looking into the future of the company, the company believes that it could be possible to work in the Three Pillars, we will be reinforcing our position in the Three Pillars looking for structure, competitiveness in line with projects that bring about cost reductions structurally bringing return better ROICs for the organization. These projects continue. Either way, we will continue to explore adjacent businesses in order to create other revenue sources for the company. ROIC scalability and the third that is the redesign of the industry, we are working and we will continue to work in this alternative. We do not consider, Caio, the possibility of Greenfield and right now, it is not in our plans to work in Greenfields right now. So, this is the dynamics that we are considering in our financial strategy for the next few periods. If we have a more benign situation, most probably we will be more benevolent so to say regarding our dividend payout policy and we will be more aggressive in the redesign of the industry, of the company.
Perfect. Thanks very much.
Daniel Sasson from Itaú BBA.
Good morning, everyone. Thank you for the questions. My first question is a follow-up on with the spread between the fibers probably this will encourage the use of hardwood fiber. So, how do you see the volume in April as at the end of March this was quite strong, do you believe that the trend will continue in April? And there some competitors have announced price increases in hardwood for this week. Are you considering any price increases as well? Do you intend to announce any price increases in the next few days or not yet? And my second question has to do with fluff, if you could give me more details about the projects and I think you are about to begin to sell the product, so could you give us an update about the stage of the fluff project? Thank you very much.
Daniel, thank you. This is Carlos. The sales in April occur in line with our expectations in all regions reflecting our understanding of a sound demand in all markets. Our expectation is that we will be signing our contract in China. I will say a little bit higher than the historical average reinforcing our understanding that the prices today are at a very low price and our clients, Chinese buyers, have been tapping into the situation. Nevertheless, we do not have a definition yet about what we will be doing the next few days. At the end of this week we have an important event of the industry. In Canada, the market pulp associations and certainly during this event, we will have a more clear view and have the opportunities to have to make a decision.
This is Walter. Thank you for the question. Regarding fluff, we have positive news. We have already started our sales of fluff in January. We had a marginal sales in December but stronger in January. And every month our sales have been growing up at very high level. We have been signing contracts with clients in a recurring fashion in a systemic fashion, so these contracts are piling up so to say. So the volumes are growing month-by-month. On the technical side, the result is very favorable. We had another very positive information on the technical side of the issue, because we had already seen that retention of hardwood for sanitary pads and diapers was better than softwood. And we have concluded technically studies carried out abroad that dispersion is always – also better in hardwood fiber than in soft [ph]. And so with these three segment – the absorption, in the other two stages, hardwood is better. And we have been achieving a very high approval level. Some companies take longer to approve a new technology and new progress. And the good news is that those who approved so far are already running with 50% softwood and 50% hardwood in diaper manufacture. So we already have a participation higher than we estimated before. And this leads us to believe that we will have a bigger market than we estimated globally. Please do not forget that the global fluff market is growing at 4.5% a year and this is 5.6 million tons per year. So this hope is a new horizon for hardwood. A very positive one and we are very enthusiastic about the fluff project. Thank you.
Our next question is in English. Jon Brandt, HSBC.
Hi. Good morning. Thanks for taking my question. First Carlos, I wanted to ask you about the spot market and your spot sales, I understand that volumes in the first quarter were concentrated in March, are you able to quantify of the 900,000 tons you saw during the quarter, how much were actually sold in March. And on prices, I understand that you think prices could increase over the coming months, I am wondering if you could sort of quantify how much, I mean $20, $40 and what happens with the APP project when that comes online potentially later this year, is the expectation that pulp prices will then start falling again. And my second question I guess is for Walter, just a follow-up to a previous question about M&A, the M&A with three pillars that you spoke about, will they need to be – will any M&A activity need to be within Brazil or within Latin America or would you potentially look outside of the country or the region? Thank you.
Jon good morning, this is Carlos. Thank you for the questions. We are pleased with the results obtained in pulp in the first quarter in volumes and as Walter said, we were a bit disappointed because of the price drop. It is a very strong quarter and a major part of this volume was built in March when our clients in China decided to come back to the market. I would rather not mention the percentage because this is a very sensitive information commercially. But a major part of our revenues happened in March when we had besides the drop of prices in all markets, we had an exchange rate real-dollar less favorable vis-à-vis the average of the quarter as a whole. The information about the project of Indonesia is not very clear yet. Some people say that one line would start at the beginning of this year and some people say that only next year. There are many doubts regarding the availability of wood in the region. So I am just sharing with you what I have been hearing in the market. We have no precise information about the project.
Jon, thank you for the question. This is Walter talking about your M&A question. I would like to clarify something that was published in the newspapers recently. A journalist asked me whether we considered the possibility of an M&A and I said that we will always consider that as we have enough financial strength to do that. And she said but where, and I said, well it could be either in paper or pulp, either in Brazil or abroad. It could be either in the consolidation or verticalization. So Jon, we are not closing any doors. We are considering all the alternatives regarding the potential actions that we have available to us in so far as M&A goes. Of course we will never disclose anything before we have a material operation. But it’s very important to redesign the industry to generate sustainable results. I have been repeating this consistently. And we have a high data in our industry because of the volatility of the exchange rate and our participation is quite small. And volatility of pulp is lower than in other commodities, but it does happen such as is the case right now. So Suzano’s position is to seek out sustainable ROIC. We had 15.4% last quarter with an expressive spread of [indiscernible] and we want to maintain a relatively stable ROIC. Going up of course is relatively stable and it’s very difficult with the exchange rate that the volatile exchange rate. So this will be the focus of our M&A activities.
Okay. Thank you.
Lucas Ferreira from JPMorgan.
Good morning everyone. Carlos you said that you are analyzing the market in order to make decisions regarding your pricing strategy, so what is the point of concern, is it the inventory position in the industry, the inventories were very high in Italy and China and do you believe this prevents prices from going up again, is this your main concern because I understand that orders are being placed and consumers are buying again and we should have two stronger months ahead of us, so what is your opinion regarding the main stumbling blocks in the path of prices going up. And in the paper market, the dollar price went down and exports went down, so when we look at the dollar prices, to which extent do you believe that the export price will continue to go down and what’s the reason for that, is it because of more competition or you are going to new markets and you have to give bigger discounts in order to get into the market and with the current exchange rate with the new prices, could you explain this please?
Hello Lucas, good morning. Thank you for the question. Let’s start by your pulp question. The major point of concern is the fact that we have a very little pulp price today. It took us six months last year to go up or to increase the price $50, $60. And we will have even more than that in the last six months. So the major concern is prices and when we look at the inventories the hardwood inventory closed at 46 days in March, six days higher than the average for the last 5 years. However in the last 5 years we had practically every year the coming onboard of new capacities in Latin America. And this makes it necessary to have a higher volume of inventories along the chain. So, I would say that the breakeven points would be between 40 days and 46 days, closer to 46 days. And today in fact, the point of attention to us is the inventories in Europe, mainly in the south of Europe. Well, we understand the levels are still slightly higher than historical levels. So this I would say is the major challenge that we have for the next few weeks and months looking for a balance between supply and demand. In paper once again, we had the results that lead us – very happy with the performance, because we really reaped the fruits of this strategy that we have been implementing over the last few years, what we call internally the Suzano Mais or the Go-To-Market project which means that we have to be closer and closer to our clients with important gains in logistics, in operations and also increased loyalty on the parts of our clients, and of course profitability, which was a good quarter if we compare it to the market. The market had a drop of 5.5% according to information, 6% according to information by IBA.
And in the same period, the sales in the domestic industry grew by 5.5% and we had a major participation in this overall growth due to the fact that during this quarter we made great strides in our strategy to maximize the use of our paper capacity, our coated paper capacity. And the strategy is proving right. We are maximizing production and we are tapping into the initiatives of the Go-To-Market projects to have a better distribution of the project throughout the domestic markets. Today, we have a model under construction and we understand that this creates a unique competitive position and we have already started to reap the fruits as I said before.
Just to give an idea of the size of that, today we can cater to our clients who buy 2,000, 3,000 tons per month and even a client that buys only 500 kilos and that buys three times a month. All of them count on 60 CDOs. These are local distribution centers. These are the older branches of SPC. We have four of these centers of regional distribution, four. And most of these centers have paper conversion operations and techniques. Suzano Mais or Go-To-Market carried out this capacity getting closer and closer to our client’s conversions and because of that we have a unique advantage, because the client can count on the higher availability of paper from our inventories in a much shorter lead time. And of course we continue to service our clients from our four plants. And one figure that draws attention than the – is very representative of the success of our Go-To-Market initiative in the last 12 months we reached over 30,000 clients serviced by Suzano, an expressive growth vis-à-vis the last two years and stemming from the implementation of the strategy of having a higher base or a bigger base.
Talking about the external markets, we saw a small growth in volume and a drop of 5% in prices if compared to the fourth quarter. And this drop can be explained fundamentally by three factors. First, the variation on the geographic product mix that can vary according to the markets and the regions and another relevant point was the devaluation of currencies of some countries that are producers in Latin America. In the last two quarters, we had made the devaluations in Argentina, in Colombia and in Mexico. And because of that, we had to readapt our prices in dollars in order to continue to be competitive in these markets. And there is a third factor coming into place, which is a real loss in prices because of the more fierce competition with products coming mainly from Europe, that is to say European benefiting from a more competitive Europe and Asia. And most of the drops that we saw in the first quarter is in the paperboard line and this is related to higher pricing situation of the Chinese in our markets. And also new capacities installed in North America that start to look for more important positions in the Americas as a whole and even stronger in Latin America.
Our next question comes from Viccenzo Paternostro, Credit Suisse.
Good morning, Walter, Carlos, everybody. My first question is to Carlos. You said during the presentation that the bottom of pulp prices has been reached. Do you refer to this year to the short run or would you say this is valid for the longer run as well? Because I believe that in the short run it does makes sense, because there is a strong demand and you really have a more favorable seasonality for the next three to six months, but if you look ahead, we still see oversupply, especially with the Indonesia project coming on stream and there is also two projects in the next two years. So, I would like to understand if this is valid for 2017 or not?
And my second question is to Walter, it’s almost a follow-up on what you said before. Walter, you said that there was a significant change in some assumptions such as the exchange rate because of the potential political changes and the pulp prices at the lower level than one year ago. I would like to understand how you evaluate this and how could this impact Suzano’s strategy from now on once with these variables playing against you, maybe it would make more sense to have paper becoming more and more important in your mix or more focused on your products regarding investments, future investments? Thank you.
Viccenzo, thank you for the question. This is Carlos. I said before that we believe that prices in China have already reached their bottom and we still do not have a definition in Europe as the businesses in April will be concluded between next Thursday and Friday. And when we look at the pulp, market pulp structure in China, China has about 5 million tons of bleached market pulp. And most of this capacity is supplied by chips coming from Vietnam, Thailand, Indonesia, Australia. According to the consultancy companies that covered our sector, the cost of chip per ton produced is something between $330, $350 delivered to China. And if we add to this amount, the chemicals and according to these companies we would have a cash cost of $460, $470, $530, $520 in China. Theoretically, let’s say the price of chips are maintained and the oil barrel as well. It’s important to define the logistics of the chips that come from Southeast Asia and go to China. So, let’s say the situation is maintained parity of currencies. We understand that they could consider in the medium run $470, $480, and it bottoms for China prices. Besides the fact that we know that at this price level, we have integrated producers that will certainly exchange the production of pulp, their own poor market pulp. And there are in China two additional elements that could favor a higher consumption of pulp at these price levels.. But first is the high consumption of pulp, the non-wood. There is no precise figure about the current production of non-wood in China, it’s something like between 3 million tons and 6 million tons. So at this price levels we would have a replacement in part of this volume and with pulp at the current prices we start to see some clients substituting recycled fibers for virgin fibers. So the whole dynamics lead us to believe that if the current situation or conditions are maintained the prices couldn’t go beyond 470 or 480 in the medium run in China.
Viccenzo, thank you for the question. This is Walter. I would like to highlight our strategy in mentioning to you that we have been insisting on this thesis over the last few years. The thesis that the company cannot make an expressive investment in Greenfield or increase in capacity based on passing price conditions. Investors, four months or five months ago asked me why I was not doing a Greenfield because it seemed obvious to them that at exchange rate at the pulp price that we had any project would stand up. And now after just a few months, we are discussing that at 3.50 exchange rate and the pulp price that most probably has reached its bottom just a few projects would stand up. So, the company cannot take this risk of volatility regarding ROIC over time. So I see strategic alternatives for the company and we are exploring them such as seeking higher competitiveness and seeking adjacent businesses and the redesign of the industry, but always trying to create sustainable value for our shareholders. We do not want to be a door to the volatility of prices. We want to deliver value ongoing and increasingly and sustainably. This is what we intend to do over time for our investors and our investment dynamics will always be as I am describing to you. So it’s very difficult to make assumptions about the exchange rate in a country that has a very high volatility economically and politically, such as Brazil. So I would rather not do that because we have to protect ourselves and of what we do in order to protect us. This has – doing zero caller operations and this has brought about benefits to the company in this quarter, of course it’s not in the EBITDA line, it’s a financial line item because it is a financial instrument. And we do that in order to guarantee flow and also guarantee debt. And our debt as we are in long in dollars, our debt is comfortable. We are comfortable with the generation of dollars that we have with the level of debt in dollars that we have. So when we do zero caller, we are basically hedging our capital flow over time. These measures are mitigating measures, but looking at the strategy as a whole we want to deliver our investors consistent results and growing results, always having a ROIC higher than our WACC. Thank you.
Alan Glezer, Bradesco BBI
Good morning everyone. Two questions, the first regarding the volume of pulp sales, in the first quarter both the sales volume and the production were very high, but I would like to talk about the pulp inventory that you had in the fourth quarter, you produced more than you sold, so you had some inventory, so I would like to know how much of this inventory that was created in the fourth quarter is still available to be sold over 2016, so this is the first question. The second question has to do with costs, we saw a relevant drop in the cost of wood quarter-on-quarter, dropping R$59 per ton and the cost went up because of that, so how sustainable was the drop in wood costs. And I would like to have an update regarding the use of third party and your own wood, so could you give me a breakdown? So these are my two questions. Thank you.
This is Carlos, Alan. Thank you for the questions. We told you at the end of our fourth quarter call that we had been operating in 2015, in the first three quarters we had extremely low inventories, much lower than what we considered as optimal. And we tapped into the market moment to allow for this increase in our inventory for the close of the fourth quarter. And I said to you that the inventories were at a very satisfactory level so that we could have a good ratio between the volume in inventories and a good service to be delivered to our clients over the third quarter. We had a variation of 6,000 tons between production and sales. Therefore our inventory was practically unchanged. And I reiterate that the inventory levels are totally adequate so that we may deliver satisfactory level of service to our clients in the next few months.
Alan, this is Walter. I would like to talk about costs to you. We had a reduction in the third party mix vis-à-vis the previous periods. And I would like to remind you that of our own wood in the first quarter Mucuri we had 54% vis-à-vis 49% our own wood in Q4 ‘15. And the trend continues, which means that we will be further increasing the percentage of our own wood. And in relation to distance in Mucuri, our distance reached its peak last year, a third party wood of 560 kilometers over the percentage of third party wood and now its 523 kilometers and the distance will continue to shrink. So if you draw a comparison of the first quarter 2015 to this first quarter of 2016, you will see that we have an even higher participation of third party wood and a higher distance, but we reached the peak in the fourth quarter, in the third quarter and fourth quarters and gradually we are reducing this figure quarter-over-quarter. Of course there is an inventory that runs over time and this helps us regarding benefits to be reaped. And the cash costs there are many other important benefits which are the retrofit that we are gradually carrying out at the plant. In June between the first part of the Imperatriz retrofit where we will be increasing our capacity in Imperatriz and reducing the consumption of chemicals in Imperatriz. We are already – we made running with a new digester and as of February or March it started to bring about an important reduction in the consumption of chemicals in the operations. So this projects continued to deliver results and leading to better and better results. And quarter-on-quarter we have had the energy price issue that dropped a lot and the volume of exports in energy increased, so our strategy regarding energy export is good and because of the drop in prices, we – our revenues from that dropped. So we are very satisfied with the operations of all the plants of the company and also regarding wood bringing about better and better results. So in a nutshell, about the trend of wood prices it is consistent and it will be even more consistent for the next quarter.
Thank you for these answers.
Juan Tavarez from Citibank.
Thank you for the question. Good morning. One question, about the recovery of demand for pulp in China in March what is the reason for that, are they building up inventory or is it because of a structural improvement in the paper market in China?
Good morning. This is Carlos. In our understanding, the buyers in China have been operating with extremely low inventories of hardwood expecting lower prices and they understand that with the current price levels for hardwood, $480 the market value, they do not believe that there is further room for prices to drop. So, they are tapping into the opportunity to build their inventory, very much helped by the spread that we see vis-à-vis softwood, which is about $100. So, March was very strong and the data of PPPC that were published yesterday show this. And April so far, we see Chinese buyers buying more than historical levels for April.
The Q&A session is closed. Now, we would like to give the floor back to the company for the closing remarks.
We would like to reiterate our thanks for your presence in this call and say that we are very pleased with the evolution of Suzano quarter-on-quarter. We have been delivering better and better and consistent results and then also progress in all the areas of the company. And this is a collective work done by 8,000 people who produced solutions and implement solutions with effectiveness, with determination, with courage, with engagement. And all this builds a very positive energy in the company and because of that we are reaping these positive results. We have new seeds being planted and in spite of the fact that we are very pleased with this movie, we are not very pleased with the photo. We still have to tap into many of the results and we are very comfortable in this very sensitive moment of Brazil and also of the global pulp market. We have a long-term view and we have the result and our commitment to the Brazilian society and with the pulp and paper industry. So, thank you very much to everyone and have a very good day.
Suzano Papel e Celulose conference call has closed. Thank you for participating and wish you all a very good day. Thank you.
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