Suzano Papel E Celulose SA ADR (SUZBY) CEO Walter Schalka on Q2 2019 Results - Earnings Call Transcript

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About: Suzano Papel E Celulose SA ADR (SUZBY)
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Earning Call Audio

Suzano Papel E Celulose SA ADR (OTCPK:SUZBY) Q2 2019 Earnings Conference Call August 9, 2019 6:00 AM ET

Company Participants

Walter Schalka - Chief Executive Officer

Leonardo Grimaldi - Paper Executive Officer.

Carlos Aníbal - Pulp Executive Officer

Marcelo Bacci - Financial & Investor Relations Executive Officer

Conference Call Participants

Leonardo Correa - BTG Pactual

George Staphos - Bank of America

Thiago Lofiego - Bradesco BBI

Daniel Sasson - Itaú BBA

Carlos de Alba - Morgan Stanley

Marcio Farid - JPMorgan

Jon Brandt - HSBC

Caio Ribeiro - Credit Suisse

Thiago Ojea - Goldman Sachs

Operator

Ladies and gentlemen, thank you for holding and welcome to Suzano's conference call to discuss the results of the Second Quarter of 2019. We would like to inform you that all participants will be in a listen-only mode during the presentation of Mr. Walter Schalka, Chief Executive Officer; Marcelo Bacci, Financial and Investor Relations Executive Officer; Carlos Aníbal, Pulp Executive Officer; and Leonardo Grimaldi, Paper Executive Officer.

After the company’s remarks are completed, there will be a question-and-answer session when further instructions will be given. [Operator Instructions]

Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano management and the 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 would like to turn the floor over to Mr. Walter Schalka. Please Mr. Walter Schalka, you may proceed.

Walter Schalka

Good morning, everyone. It's a pleasure to have all of you as we present a conference call of the second quarter results. I'd like to welcome everybody and tell that we have with us as well in addition of the names that was listed before, we have Aires, we have Christian, Alexandre Chueri, Pablo and Louis Barano [ph]. All of us will be ready to answer your questions at the end of the session.

I'd like to start the presentation mentioning that we are very pleased with the results of the second quarter that Suzano is on a very difficult and turbulent market pulp scenario. We can deliver extremely good results to our shareholders. We are proving our resilience in one side and our financial operational discipline.

At the first quarter -- at second quarter, we had volumes of -- sales volume on pulp of 2.2 million tons and paper a little bit less than 300,000 tons, 281,000 tons with much more volume on export. We are presenting an adjusted EBITDA per ton on pulp of a little bit more than 1,300 per ton, and on the paper side, a record number of 2,237 per ton.

As a consequence we have an operating cash flow that we understand the right CPI to be tracked on our industry that represent EBITDA less CapEx sustaining of R$2.2 billion this quarter.

We have been increasing our financial leverage since the last 12 months EBITDA is going down due to the market pulp scenario and now we have a R$3.5 times EBITDA net debt-to-EBITDA in this quarter.

It's very important and Marcelo is going to talk to you a little bit about what are the main measures that we are taking to prepare the company for the future. One of the measure is the reduction in CapEx. For this year, we are announcing our guidance going down from R$6.4 billion to R$5.9 billion and Marcelo is going to disclose in a little bit the details of this reduction.

And I would like to share with you a very important information that we keep the same target on synergies that we established in the beginning of the merge of the two entities that we are going to deliver between 40% this year between R$800 million and R$900 million of the synergy. Compounded -- on OpEx plus CapEx and not including the tax shields that we have in addition to that. Then synergies are on track and on track, on time, on budget.

Now I'm going to hand over to Leo Grimaldi, who's going to explain a little bit about what is our view on the paper side.

Leonardo Grimaldi

Thanks, Walter, and good morning, everyone. I would like to present the results of Suzano's paper business unit for the second quarter of 2019. The figures presented on this next slide are specific to our paper business unit. Therefore, excluding Suzano's consumer business unit's results, which enables us to have a better comparison with the past quarters.

Beginning with the top-left graph, we can see our production figures. We have produced 298,000 tons during the second quarter, achieving a total of 1.2 million tons in the last 12 months. With our focus on operational efficiency, we were able to increase our production by 2% during this period.

Moving on to the top right graph and looking at our sales figures, we can note that we have sold 281,000 tons in the second quarter, which is a 10% increase compared to the first Q, 2019 and a 6.4% increase compared to the second Q, 2018.

As you can note on the darker section of the graph, our paper sales in Brazil decreased during this quarter and have performed much in line with the latest statistics issued buy back our pulp and paper Association. According to the statistics, the total demand of printing and writing and paperboard grade have decreased 4.7% in the first semester 2019, when compared to the first semester 2018.

Our sales in Brazil have decreased 2.9% in the same period. By anticipating this challenging scenario for our domestic market, we have used our commercial flexibility to best allocate our volumes in several international markets. Consequently, our paper exports have increased 45% compared to the previous quarter.

Now looking at the lower right side, we can observe that our average prices have moved up during the quarter reaching R$ 3,855 per ton. This is a 1% increase compared to the first Q 2019 and 11% increase compared to the same quarter last year. Our average prices in Brazil have increased an additional 2% in the quarter and our international prices increased 1% in reals. In this case, due to our currency depreciation compensating low export prices in US dollars.

When we add up our operational efficiency, our reported sales volume is a new price implementation. We can look on the lower left side of the slide that our EBITDA margin has reached R$ 1,237 per ton, a 24% increase compared to the same quarter last year. Our EBITDA margin for the last 12 months totaled R$ 1,260 per ton, which as Walter has said has added a record to our paper business unit and also a 40% increase to the same period last year.

I would now like to invite Carlos to present the results of our pulp business unit.

Carlos Aníbal

Thanks, Leo, and good morning everyone. So let's move to page 5 of our presentation. Before going over the main figures of our pulp business, I would like to start by framing what was the business environment in the first half of this year. We've updated a great change in this landscape characterized by weak market fundamentals. Oversupply of the pulp market coupled with geopolitical uncertainties, trade wars and more than expected macroeconomic conditions ended up affecting the business. The pulp fundamentals were not favorable and we had to deal with a major price correction for both harder and softer fibers in the first month of the year.

On the demand side, the global pulp demand growth slowed down in the period. The macroeconomic backdrop and pulp customers destocking that process began late last year limited the growth so far this year. Tissue demand has shown resilience despite challenging economic scenario and has grown in the first five months of the year by 2.8% in the period according to PPPC.

I would like to highlight Asia where the growth was more than 5% during the same period. On the supply side, the staggering amount of unplanted downtime that severely limited in fact of the new supply in the market in 2017 and 2018 fell considerably lower in 2019. Almost all producers run at full capacity maximizing the output. On top of all that, we also understand that some integrated European employers deliver more market core volume to compensate a weaker graph paper market. This supply and demand imbalance scenario that I have just described explains that graph and an expected price correction seen so far. Pulp price has been sliding throughout the whole year in all the regions.

Now will go through some of our main business and let's start by the top line. In the second quarter of 2019, the pulp business delivered revenues of R$ 5.45 billion, which is about $1.4 billion. Revenues were 9% higher versus Q1 on more volume and lower prices. We produced 2.2 million tons in the second quarter and in the first half of this year, our production amount 4.4 million tons. That compares over 4.9 million tons we produced in the same period last year, which means a production drop, a production reduction of over a half million tons in the first six months of 2019.

On the sales side, our volume was 2.2 million tons for Q2. That was almost 30% higher than Q1. For the first half of the year, sales amounted 3.9 million tons and that compares to 5 million tons that was sold in the same period last year. Our sales mainly to Asia were stronger through the end of the second quarter, which explains a higher price drop quarter-on-quarter.

During Q2 as previously disclosed, we concluded the following planned maintenance shutdowns. Aracruz Line I, Line A and partially Line C, Imperatriz: Três Lagoas Line 1, Eunápolis Line 2. For Q3, we still have Murcuri Line 1 and Jacareí. Our average net pulp price could export markets for Q2 was $630 per ton. Given challenging market conditions during Q2 prices dropped at 11% when compared to Q1, which was $711 per ton. Despite the price pressure, we were able to deliver revenues again 19% higher in Q2 versus Q1 supported by higher volumes.

In Q2, we were able to deliver a total adjusted EBITDA of R$2.74 billion, an increase of 11% when compared to the last quarter, mainly supported by higher volumes. EBITDA per ton was R$1,305.

Our inventories at the end of June were close to the end of March and we expect it to start going down throughout the second half of this year. We expect to close 2019 with lower pulp stocks.

Our price point for the coming months -- I mean for the second half of this year will always be adjusted to the prevailing market conditions, so we can move our target volume.

A combination of higher volume sold in the second half, the expiration of the agreement with Klabin, and the lower production volume when compared to the second half of last year will drive our stocks down again until the end of this year.

To sum-up, although, there is no question we are operating in a more challenging environment, we expect market conditions to improve in the short-medium term. Short-term and long-term market fundamentals have not changed and we should start seeing the markets find its balance over the coming months and quarters.

Now, I turn it over to Marcello Bacci who will go over our cash costs.

Marcelo Bacci

Good morning, everyone. Still the pulp business, I'd like to comment that we are under temporary pressure on our cash costs due mainly to this lower production rate we are having at this moment.

Our cash costs in the quarter were R$697 per ton which is R$30 above the number of last quarter and about R$70 above the number of the same quarter last year. The two main factors here driving the pressure on cash costs are fixed cost reduction because of the lower production rate and increase in wood cost that comes from the fact that we're still privileging the long-term over the short term.

There are some wood in our portfolio that we are saving for the future due to the highest growth rate and we are still bringing more third-party wood in terms of the mix than we had planned before. So, we are still privileging the long-term.

Moving on to the financial side, we have been preparing the company for the challenging scenario we're going through in the pulp business. Still in the quarter that we had a lot of pressure on the prices, our net debt on a total basis went down from $13.8 billion to $13.7 billion, remembering that in this quarter we have paid dividends related to last year.

Our net debt to EBITDA measured in reals is 3.5 times, 3.6 times when measured in dollars; specially -- mainly due to the fact that the EBITDA went down. Still the net debt went down, but the EBITDA went down on a larger scale.

Our amortization schedule for our debt has improved significantly in the quarter. We now have an average term of 87 months in our debt when compared to 75 in the previous quarter. And we have 77% of our debt maturing in 2023 and onwards and that number compares to 55% in the previous quarter.

The cash position that we have today plus the available funds on standby facilities amount to R$10.8 billion which is enough to cover for the liabilities that mature in the next three years and a half which is a very comfortable position to be in.

So, on the financial side, we have been working on giving a more robust situation to our balance sheet that will enable the company to continue to perform its commercial and operational strategy without any financial restriction. It's important also to mention that we have, during this quarter, prepaid all of our debt that had financial covenants. So with today 100% of our debt is in contracts that have no financial covenant.

In addition to that we have, as Walter mentioned in the beginning, worked on CapEx in order to reduce the number for this year by R$500 million. So, the new number is R$5.9 billion. We are reducing R$200 million in the sustaining CapEx, basically is coming from the fact that given the reduction in production, we are harvesting less, so we need to replant less.

And in addition we have worked in several smaller projects on the modernization on expansion side to reduce the impact of the CapEx this year without any long-term impact for the company.

We still -- moving on to the next page, we still consider a production for this year of nine million tons, so we have mentioned in the previous quarter a range from 9 to 9.4, so we are now mentioning that the number will be closer to the bottom of this range about 9 million tons and we will continue to work on the production reduction in the same way that we have been working in the beginning of the year, which means that we will continue to preserve the more productive forest space.

We will work on wood supply mix given the restrictions we have in the contracts that are already signed and the volume reduction will continue to be implemented gradually throughout the year.

So I'll hand over to Walter to continue the presentation.

Walter Schalka

On the internal side, we are devoting our efforts on three major pillars, three major projects that we are doing. First, related to the synergies, as I mentioned before we are reinforcing to everyone that we will – we are on track, on-time, on budget and we will deliver the expected synergies between R$800 million and R$900 million this year, 40% of that will be delivered this year; 90% of that will be delivered next year.

I would like to tell that our team is highly engaged on this project and we are performing extremely well on our operations in all different areas; on procurement, on the forest side, on industrial side, on logistics, every single area of the organization, we are performing according to our plan as expected.

On the process and systems, we have been working to harmonizing in unifying the systems of the two entities. This is going to be done at a – in a big event January 1, next year. We are at this point time on time with this project, and we expect to have the go-live with no problems next year. They're going to allow us to operate on a single environment that will allow us to have further synergies on the organization.

We are very pleased with the development of this project as well. And last, but not least the culture. We are very pleased to show you that the engagement level that we have in the organization is very high. We have right now 88% of adherence on the survey that we did in the last few months on the organization and that was very positive and is across all the organization meaning that are – have been able the executive team to create one single company to create a single entity, to create a single culture, that would be based on the three major pillars that we announced to the market.

People that inspire and transform, we want to create and share value with all the stakeholders and it's only good for us, if it's good for the world. This is the mantra, that we have been working on the organization has been very positive, and have been consolidating all the populations all of our employees. We are very pleased with the development on the three major pillars synergies, process and systems and culture, but we'll keep an eye on these issues, because that's quite important for all of us.

Now, we'll be ready to answer your questions.

Question-And-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Mr. Leonard Correa from BTG Pactual would like to ask a question.

Leonardo Correa

Hello, gentlemen. Good morning, everyone. Thank you. My first question for Aníbal, still on the inventory management on the pulp side, Carlos we saw very little inventory destocking in the second quarter and this obviously has been I think a major overhang for the entire industry. The level of inventories that Suzano has been carrying and visibly we can see peak high inventories in Europe and in China, right? So, I think it's important for us to try and understand exactly the direction of Suzano?

You announced some weeks ago production cuts from 9 to 9.4, now it's clear and Bacci just mentioned that you are indicating 9 million tons, which is the lower of the range of the target. So I just wanted to see how you balance the possibility of an additional production cuts assuming the market continues week with the possibility of some pricing discounts and a bit more of an aggressive commercial strategy, which is what the media has been reporting over the past days? So I just wanted to see what the inclination is from Suzano on the commercial strategy whether it would be for another production cut or for a more aggressive commercial strategy, which would imply a potential reduction prices or higher discounts. That's my first question.

The second one is for Bacci, Marcelo I mean, clearly I think this was a very decent result in terms of balance sheet management and we saw reduction in net debt, and absolute reduction in net debt, with leveraged ratios still unchanged quarter over quarter at 3.5 times. I think the fact that that you don't have any covenants on your debts is clearly positive. But on the other hand this is past looking, because if we think of the current environment with where prices are now in the possibility of Suzano being a bit more aggressive on the commercial side, unfortunately, the reality for the second semester could be weaker in terms of EBITDA generation and we could be seeing net debt to EBITDA ratios move up to the north of 4.5 times net debt to EBITDA, right? That is a possibility.

In that context – and I know you do have some time. In that context, I just wanted to explore some of the possibilities that you're evaluating. You just announced the CapEx cuts of R$500 million, which is very welcome. But some are speculating that that could be insufficient. Right?

Suzano's a huge company; we're talking about thousands and thousands of forestry assets – or hectares of forestry asset with several producing plants, logistics, operations; I just wanted to understand exactly where -- what are the levers that you could be considering, assuming markets remain weak and leverage continues rising. What are the possibilities of deleveraging showing up the balance sheet? Those are the questions. Thank you very much.

Carlos Aníbal

This is Carlos speaking. So let me start answering your question talking about our price policy. As I said before, we adjust our price policy according to the prevailing market conditions, so we can move our product volume. We believe that a combination of higher sold volumes, the expiration of the agreement that we have with Klabin and a lower production volume when compared to the second half of last year, that'll drive our stocks down until the end of this year.

It is true that we produced in Q2, 2.2 million tons and that is sold roughly the same, okay? But again, we should see that the number moving down mainly there, are in China. In China, we're going see a reduction or in Asia we're going to see a reduction of our shipments to that region over the coming months.

By reduction of shipment, I mean, we're going load less vessels to China to the whole Asia region over the next three or four months. That means, less arrivals in the same period which combined with more sales, we're going to see a reduction there.

Walter Schalka

Leo, this is Walter. We are not planning any change on the production guidance that we mentioned to you. We will stick with volumes on this year around 9 million tons on production.

Marcelo Bacci

Leo, this is Marcelo. Speaking on your second question, it seems to us inevitable that the leverage will go up in the second half, just looking by the realized prices we have in the first half of the year. Clearly in the second half we’re going to have a lower number at least in this quarter. So the net debt to EBITDA ratio will go up.

The way we're dealing with this is in addition to what we have already done is, first, to further reinforce our liquidity. We are still looking for other opportunities to maybe reinforce liquidity and reduce the already very low liquidity risk we have. The second is, we are starting to work on what our CapEx for 2020 will look like and there is significant room for reduction in relation to the number of this year.

We are not considering at this point any the asset sale. It is not necessary given our financial strength, we are in a cyclical industry; it is normal that we go through the cycles from time to time. We have the balance sheet prepared for that and it’s not the best moment to sell any assets.

Of course, we consider and we continue to evaluate any transaction any financial transaction that could involve our assets in terms of optimizing our balance sheet, but we are not considering any sale on a significant way of our plant or forest.

We have some spare forest that are dedicated to potential future growth that will be kept and of course we have some spare forest in other areas that we don't use that we normally sell and we will continue to look for potential buyers for those. But those are not extremely significant numbers.

Leonardo Correa

Thank you. If I may, Carlos just to elaborate a little bit on your answer. The media has been reporting that Suzano has been more aggressive on the commercial side and has been granting some discounts to accelerate destocking in China. The price range that the media has been commenting has been from 480 to 500 or maybe 470 to 500. So there's a slight discount to current market pricing.

Can you confirm that the media reports are in the right direction or that something that Suzano's not doing? So I just wanted to get a little bit more clarity on the new reports recently, please?

Carlos Aníbal

Leo, I'm not going to comment on pricing. All I can say to you is that we have changed our commercial strategy. Our commercial approach there in China offering our customers the option to close the bottom for the whole quarter at a fixed price. This movement has been successful and we are pleased with our achievement so far.

Leonardo Correa

Okay, thank you very much.

Operator

Mr. George Staphos from Bank of America would like to ask a question.

George Staphos

Hi, everyone. Good morning. Thanks for taking my question and thanks for all of the details. Congratulations on the quarter. I had two or three questions. First of all, I recognize it's difficult to talk to this live microphone on a conference call and things can change. If you looked at your early third quarter shipments and you assume normal trends from here, do you think that you can be flat with second half 2018 volumes on a Performa basis? Is there a way that you can provide us any color on how your shipments are running and what kind of inventory reduction we're seeing so far in the third quarter? That's the first question.

Relatedly on production, I noticed that Aracruz Line B, the maintenance for next year has been pushed out about a quarter and a half, given that inventories are still high, I was wondering why I was wondering why you're pushing out the maintenance when it would seem pulling forward maintenance would be a better thing to do given that you need to reduce inventories? And time allowing I have a follow-up.

Carlos Aníbal

George, this is Carlos.

George Staphos

Good morning Carlos.

Carlos Aníbal

Good morning. We expect for the second half of this year growing volumes in all the regions compared to what we had in the first half. So, again the combination of growing volumes, the end of our agreement with Klabin and a lower production when compared to the second half of last year; that will allow us to drive stocks down by the end of this year. Just so we're on…

George Staphos

Carlos, can you talk to what it is year-on-year? What you'd expect to be second-half '19 versus second half '18? If you can't I understand; but just figured I'd try to clarify.

Carlos Aníbal

This is sensitive, so I'm not going to disclose that information. But just one last remark on production and considering what Walter said on slide 9 of our presentation, actually Marcelo said, we will produce in the second half of this year close to 700,000 tons last than what is produced in the second half of last year. So, that is a very important number to have in mind. So growing sales will allow us to come up with a lower stock at the end of 2019.

George Staphos

Thank you. And on the maintenance with Aracruz Line B being pushed out a bit when it would seem you'd want to pull forward maintenance to try to reduce production just curious about that.

Walter Schalka

George, this is Walter answering. We are adjusting the maintenance shutdown of our plants according with the wood supply accounting for how much we are going to produce and we are doing that not only on a closed plant, but no other plant. Then you cannot just relate this to maintenance shutdown related with 15 or 18-month period that we have between the shutdown.

But we are doing that but just the production depending on the wood supply in the quarter. We have been adjusting the production and the plants depending on the biological assets value creation long-term then what we are doing is that and probably you realize that on our presentation that we have biological asset B on the second quarter of this year and we're going to have even more on the second half of this year.

And then we are preparing the company to have lower cash costs in the future. This is the mindset that we have. We are not trying to maximize short-term; we are trying to maximize the net present value of the cash costs of our operations.

George Staphos

Thank you, Walter.

Marcelo Bacci

George, this is Marcelo speaking. You're probably referring to the fact that in our maintenance schedule, there is six quarters between the two-Line B maintenance shutdowns from first quarter this year to third quarter next year, right? This is a small change -- a small number of days only. It's not that we're postponing a full quarter.

George Staphos

Okay. Yeah I was just comparing Marcelo to the slides from last quarter that's all. My last question if I may very quickly, there's some news reports recently that some of the tissue companies in Brazil are changing hand. Will that affect your shipments at all in terms of some of these companies changing hands? Thank you very much and good luck in the quarter.

Carlos Aníbal

We do not expect any change, George. This is Carlos.

George Staphos

Thank you very much, Carlos.

Operator

Mr. Thiago Lofiego from Bradesco BBI would like to ask a question.

Thiago Lofiego

Thank you. Carlos, going back to the projection commercial inventory strategy, I'm just doing some rough math here, your inventories are now close to 2.1, 2.2 million tons. That's an excess in our view of approximately 1.7 million tons that you're holding. So, could you give us more color on what's the pace of destocking that you're expecting for the second half?

And then another math, another calculation we did here is, for you to destock 500,000 tons in the second half, demand needs to be -- or your shipments need to be 15% higher in the second half versus what it was in the second quarter, right in terms of the average shipments. So, how confident are you that this can happen. And also back to a question that has already been not, why not take a more aggressive commercial stance pressuring the high-cost distributions to ship down and then eventually you could see a quicker price rebound? That's my first question.

Second question about cash costs return going forward. Should we expect the second quarter level to be the new normal for Suzano considering the 9-million-tonne reduction rate or are there any variables that we should think about here on the cash cost return? Thank you.

Carlos Aníbal

Thiago, good morning. Thanks for the question. This is Carlos speaking. As I have said, Thiago, we will adjust our commercial policy to the prevailing market conditions, so we can move our target volume. So, again, this is very commercially sensitive. I can say to you that we are confident that we're going to close the year with low restocks, is what I can say to you. We are very competent with that

Walter Schalka

Thiago, to answer your question, there is the cash cost return. We are considering that we are not going to have major changes on the cash costs on the coming quarters, but we are preparing the company to have lower cash costs in the future.

It's very clear that when we are going to operate with a different wood supply, more our own wood compare with third-party wood. And with higher volumes, we will mitigate and/or eliminate the issues of fixed cost of energy that is impacting us and the wood side as well. We are very pleased with the industrial synergies that we are seeing. The specific consumption per tonne of several chemical products are going down and this will allow us to have lower cash costs in the future.

Thiago Lofiego

Thank you, Walter. And then, if I may, Carlos, just back to your answer. What are the signs you're seeing on the demand side in both regions, China and Europe? And also, if you can give us some color on July and August? And have shipments materially improved from your June levels, or only the guide increase and if you could give us some color, that would be helpful. Thank you.

Carlos Aníbal

So in order to answer your question, Thiago, let me talk a bit about China. Okay? Although, the recent news not showing any business, the trade war tensions between the U.S. and China, pulp demand there in China has been improving since March. We have been seeing that in all the grades. Definitely we see a much better-operating rates for graph paper, paperboard and a very robust demand coming from the tissue segment.

So in terms of demand, all I can say is, the global economic activity that has accelerated a bit and all the geopolitical uncertainties making any forecast very challenging at this point time. Demands in Q3 usually is a bit softer in the northern hemisphere, but we believe that improving market conditions and customer restock might boost the growth in the coming months. I can say to you that we see in all the regions customers operating hand to mouth. Okay? We believe that when the confidence is reestablishing, we should see or we could see a quick restocking.

For July, the business took place as expected. Okay? We still see some price pressure, but the volume came in according to our expectation. So as I said before, we are confident that we're going to see our stocks moving down toward the end of this year.

Thiago Lofiego

Thank you, Carlos.

Operator

Mr. Daniel Sasson from Itaú BBA would like to ask a question.

Daniel Sasson

Hello, everyone. Thanks for the opportunity. My first question is actually a follow-up on your previous answer. So you mentioned that paper producer's inventories remain below normalized levels, right? From hand to mouth. Do you think we will see at some point a reversal to the old normal that is paper producers having more inventories throughout the supply chain, or do you think that these new lower inventory levels for paper producers is actually the new normal going forward?

And regarding your immediate longer-term supply/demand expectations, how comfortable are you with the long-term trends of the industry, in light of the recent capacity expansion announcements, especially from UPM for 2022? There are some other projects also coming online between 2021 and 2022. So if you could give us some color on whether you think demand and supply are balanced for -- not considering 2019 or 2020, but for 2021 or 2022 onward? That would be great. Thanks a lot for the opportunity.

Carlos Aníbal

So, we still keep our forecast that over the coming years we're going to see the demand growing around seven million tons, which is roughly 1.4 million tons per year. So far we just have two projects announced. So we do expect a balanced market for the period.

Regarding your question about China, we understand that the finished product inventory for the major brands printing and writing, paperboard and tissue are at the normal levels in the whole value chain, and I do not foresee any change for that with all the credit restrictions that we see in China today. We have had since late last year a big destocking both on finished products and Pulp. And I believe that on finished products that is the new normal at least for the time being.

Although, stock are -- stand today at a much higher level, I should say or I should assure you that half of the excess that we have in the value chain today may know the producer side is a result of a destocking of our customers. I would say that around 50% of the excess that we have today, one year ago that was in the customers' hands. So customer destocked. So only with that we could or we might expect the reverse of 1.2 million tons -- 1.5 million tons moving back to our customers, to the paper producers as soon as the confidence is reestablished.

Daniel Sasson

Okay, so just to clarify – sorry, I understood correctly. So you do expect the customer inventories to go back to the maybe 50 days to 60 days of inventories either at the news and throughout the supply chain once things normalize, right?

Carlos Aníbal

I'm saying that we're going to see customers restocking. I'm not to say they're going to come back with the previous level due to all the credit restrictions that we see in China today.

Daniel Sasson

Okay, okay. So…

Carlos Aníbal

But that would be cannot go on operating hand to mouth -- when the market gets better there in China. They need to have -- they need to work with a more comfortable stock level.

Daniel Sasson

Okay, very clear. Thank you.

Operator

Mr. Carlos de Alba from Morgan Stanley would like to ask a question.

Carlos de Alba

Great. Thank you very much. Good sequence, I guess because the question I have is also on the inventories, the inventory reduction from your customers over the pulp buyers. So can I understand something Carlos, if the -- if half of the say 3million -- 3.5 million access inventories in the world are in the hand -- are due to the reduction of the destocking of Pulp on the buyer's hand.

So assuming that at some point in time they come back, they restock. Inventories come down by that time. But then don’t demand -- or doesn't demand can grow by the 1.4 million tons that you just said? Just to review so it has to grow by 1.4 million tons -- just to reduce the other half of the excess inventories and that means that we don't really need much more pulp production in the next 12 months to 18 months? And the problem then is 2021, you start to see demand-supply coming again into the market with MAPA and then again in 2022 with UPM.

So why would prices recover much more than where we are today? The market seems to be balanced you have no capacities coming online the next 18 months, but you have excess inventories. And then you have capacity coming to the market around 1.2, 1.4 per year, which is what demand is going to grow at. So why would prices look up from where we are, or maybe yeah -- I see why flux can go a little bit more but then stabilize at that level as opposed to increase to higher levels that we were expecting before. That's my first question.

In the second question maybe Walter, if you can break down from the 800 million to 900 million reals per year on your synergies how much is OpEx and how much is CapEx? At least a ballpark figure would be great. Thank you very much.

Carlos Aníbal

Carlos, good morning. This is Carlos speaking. Our estimates for the excess is much lower than your number, okay? But to answer your question I should -- we should talk about the supply side. And I want to share with you some information. So both mark uncertain, expect market and integrated deals in the Northern Hemisphere; we will be forced to restock at least temporarily during the next few months mainly those are depended on import of wood ship. Just around that average wood ship cost in China today is roughly $200 by per BDMT, which means about $400 per ton of wood cost to produce one ton of pulp.

According to information just released by [indiscernible] for softer price at 560 and harder price at 485 around 1 million tons of softwood and 5 million tons of hard capacity would be at the rating below cash costs. So market to related downtime announcement have already been made in some countries in some regions and announce that shut down might be taking place as well. I think we can expect a reduced pulp output for the coming months due to these challenging market conditions, especially for those high-cost producers. So the adjustment no would come from the supply side to answer your question.

Carlos de Alba

Carlos, why do you think they are taking so long to -- I mean, I know and softwood they have been more aggressive or at least more advanced the shutdowns. But in hardwood it has been much more limited. What do you think is taking so long?

Carlos Aníbal

I think they still have no raw material in their supply chain. So they need to finish with that raw material in order to start reducing the output.

Carlos de Alba

Understood.

Marcelo Bacci

Carlos, this is Marcelo speaking. On your second question, according to what we have already disclosed between 75% and 80% of the synergies will be on the OpEx side, which includes the cash cost and SG&A and 20% to 25% CapEx.

Carlos de Alba

Thank you very much, Marcelo. Thank you.

Operator

Mr. Marcio Farid from JPMorgan would like to ask a question.

Marcio Farid

Thank you good morning everyone. I have a few follow-ups quick wins for me. So you mentioned, you’re going to be shipping less to China over the next months, right? Basically because you probably have enough inventories to cover demand needs for the next months. So considering your guidance for production, right, you would imply production increase of about 5% in the second half versus the first half? So I'm just trying to understand this production is going to increase and you're going to be shipping less to China, which is basically the largest consumer region, which regions will be shipping more and would there be demand for those extra volumes in those new regions?

And also how should we think about Suzano's operating levels for 2020? I know it's probably too early to talk about it, but I'm just thinking if management considers running is still below operating rates in 2020 or that was a target for this year and next year, we're going to be back into a normal rate and normal market share as well?

And maybe the last one for me, so I mentioned that about half of the excess inventories that you have today on the supply chain was basically destocking. So what do you think would trigger a restocking over the next months, just considering where we are in terms of global economy cycle and sentiments in China as well? Those are my questions. Thank you.

Carlos Aníbal

Marcio, good morning. This is Carlos. Just to avoid any kind of confusion, when I said shipment from Brazil, I'm talking about the vessels that we are loading and sailing to China, okay? We already have enough stock in China to serve our growing sales for the coming months. So once we're going to send less vessels to Asia, once we have the start already are there and the ones we are planning to grow our sales. That's why we should see or are going to see a reduction of our stock there in China throughout the whole second semester of this year.

Regarding restocking I think that's going to happen when buyers realize that prices hit the bottom and the market conditions are favorable, so they can start work again with a higher inventory level.

Marcelo Bacci

And this is Marcelo speaking. About 2020, we will observe how we will perform in the coming quarters in order to define the strategy for 2020. We have no guidance on that at this moment.

Operator

Mr. Jon Brandt from HSBC would like to ask a question.

Jon Brandt

Hi, good morning. So just a quick follow-up on the commercial strategy that you announced for the third quarter. Could you give us more details surrounding that how much volume was done with this offer to all clients, or is it just the international paper producers? My obvious concern is the local Chinese customers, they been known to break contracts. So my concern would be if pulp prices continue to fall that they would renege on some of those contracts. Anything you could give us on that. Any more details on that agreement would be great.

And then second, Bacci, I just wanted to ask about the pressure from the wood cost and your strategy there, just to make sure I understand it. It seems like you're preserving maybe some of your lower costs areas and utilizing more of the higher costs. Is that right? Could you just sort of elaborate on that strategy? Thanks.

Carlos Aníbal

Hey, Jon. Good morning. This is Carlos. We're very pleased with our achievements with our new strategy, and I can say to you that came -- the volume came according to her expectations.

Jon Brandt

Okay. Is it something that you're going to offer again in the fourth quarter or is it a one-off event?

Carlos Aníbal

We have not defined yet what we're going to do for the second quarter. As I said before, we always adjust our commercial strategy, our commercial policy according to the prevailing market conditions.

Jon Brandt

Okay. Thank you.

Marcelo Bacci

Jon, this is Marcelo speaking on the wood costs. That's exactly the case. We are preserving the high growth forests that we have, and we're using proportionately more third party with this year. In a combination of a strategy to maximize long-term value, and also given the restrictions that we have with the contracts that we already signed for buying some of this would and also for the transportation of it.

Jon Brandt

Okay. So is it fair to say that we should expect maybe continuation of pressure from the wood costs in the coming quarters?

Marcelo Bacci

We expect flattish cash costs in the coming quarter, and a better number for next year when we normalize the mix and also because of the synergies that are kicking-in more significantly next year.

Jon Brandt

Great, thank you. Very helpful.

Operator

Mr. Caio Ribeiro from Credit Suisse would like to ask a question.

Caio Ribeiro

Yeah. Good morning, everyone and thank you for the opportunity. So my first question regarding some of the recent announcements in terms of expansion for hardwood with ulQueen and UBM moving forward with their projects. I just wanted to see whether this impacts in any way, any decision that you might take to expand further in the medium-term? And whether you still believe that it makes sense to add more capacity into the market from 2021 onwards?

And then my second question, regarding working capital. I just wanted to see if you could talk a little bit about, specifically the receivables line and whether you did carry out a significant amount of prepayment of receivables this quarter that could've helped the working capital variation? Thank you.

Walter Schalka

On the first question -- Caio, this is Walter talking. Thanks for your question. These announcements did not change our strategy for the future. We understand that we have very competitive position in the market, and if we proceed with new investments in the future, it going to be even better in terms of competitiveness. We have been working -- we have access for it, and we are preparing the company for the future. But at this point of time, we're not going to announce any specific projects on CapEx expansion due to the financial discipline that we have and we have been announced that for a long time ago.

Marcelo Bacci

Caio, on -- this is Marcelo speaking on working capital. The strategy we have in terms of discounting receivables and letter of credit has not changed. Of course, as we had a higher volume on the quarter, we had more discounted at the end of the quarter, and it's important to emphasize that the strategy also deals with the credit issues. So, we are discounting not only to improve the position in the balance sheet, but also to manage the credit exposure that we have. So the larger amount of receivables discounted is coming from the fact that we have higher sales.

Caio Ribeiro

Okay, thank you.

Operator

Mr. Thiago Ojea from Goldman Sachs would like to ask a question.

Thiago Ojea

Thanks. Good morning, everyone. So my first question is regarding, again, on CapEx side, we saw a reduction on your CapEx estimates for the future. If you can elaborate a little bit more on the reasons for that? And also we saw some announcements from competitors of new capacity additions mainly UPM and also Roselle, before you had estimated that by 2022 we would have only map of project coming and now we’ll two extra projects coming. So how do you feel long-term the supply and demand evolving? And if I can just following up on Marcio's question, so what you're saying regarding shipments is that you are not sending more vessels to China, but this does not mean that you are selling less this quarter because you have already have build inventory there. Is that the point? Thank you.

Marcelo Bacci

Thiago, this is Marcelo speaking about the CapEx. The idea is to improve our financial discipline with some reduction in our CapEx that we consider will not impact in any significant way our long-term strategy. So it's just a combination of adjustments in our CapEx plan to deal with a more asset scenario and we are still discussing what we're going to do for next year with room for additional reductions in CapEx when compared to the number of this year.

Carlos Aníbal

Thiago, this is Carlos speaking. On China, you are right, we got to maximize our sales from the stocks that we already have seated at the major Chinese ports. So we're going to do that. On your question about supply and demand, as I said before, we still keep the focus that the demand is going to grow about 1.4 million tons for the coming five years, which means around 7 million tons and so far we just have the two projects that I just mentioned. So at least we are going to see the market balance for the coming years. This is what we have for the time being.

Thiago Ojea

Thank you.

Operator

As there are no questions, I'd like to turn the phone over to Mr. Walter Schalka for final considerations. Please Mr. Walter Schalka, you may proceed.

Walter Schalka

Thank you very much to be attending our second quarter results. We are very pleased with the development of the company. We'd like to share with you that our team is highly engaged to pursue all the potential value creation alternatives that we have at this point of time and enhancing the culture of the company and preparing the company for the future.

Operator

Thank you. Suzano second quarter results conference call is finished. Have a nice day.