Suzano's Q1 net income up 16.9% year-over-year to 143.8M reals and 8.9% increase in sales to 1.06B reals on increased pulp and paper prices and volumes; currency fluctuations a factor in export revenues

SAO PAULO , May 11, 2011 (press release) –

  • The Company’s consolidated information reflects the partial effect of Conpacel (as of 01/31/2011) and KSR (as of 03/01/2011) assets acquisition.
  • Total production of 765 thousand tons: 456 thousand tons of market pulp and 309 thousand tons of paper.
  • Sales volume of 678 thousand tons: 431 thousand tons of market pulp and 246 thousand tons of paper.
  • Net revenue of R$1,057.1 million in the quarter.
  • Net debt/EBITDA ratio of 3.3x in March 2011.
  • Cash and cash equivalents of R$1.8 billlion and net debt of R$5.2 billion on March 31st, 2011.
  • Stable pulp list price throughout the quarter (Source: FOEX).
  • World pulp inventories of 32 days in March, below the historical average (33 days).
  • Agreements with Metso and Siemens for Maranhão Unit construction.

Market Overview

Pulp: Demand growth in Europe and China

Global pulp shipments moved up 6.1% on 1Q10 and were in line with the volume of shipments for 4Q10. In the annual comparison, all the markets presented growth, except for North America. Eucalyptus pulp shipments presented the same trend: growth came to 10.6% in Europe and 5.1% in China compared to 1Q10, boosted by the strong growth in March (+13.2% vs. March 2010).

This scenario, added to the difference in price between hardwood and softwood, allowed the announcement of a US$30/ton eucalyptus pulp price increase as of April.

Market pulp supply in 1Q11 was 9% higher than in 1Q10 and 1% higher than in 4Q10. Historically, temporary downtimes in pulp factories occur in the second quarter, especially in the Northern hemisphere. Therefore, the market is expected to stabilize in the next quarter.

Average inventory in 1Q11 reached 33 days of production, peaking at 35 days in February and falling to 32 days in March, remaining below the historical average (33 days). The inventory drawdowns in March were a direct result of the higher shipments in the period.

Hardwood pulp prices in 1Q11 were flat in relation to 4Q10 closing. In year-on-year terms, prices increased 8.5% in North America and 7.6% in Europe and fell 4.9% in China.

Softwood pulp prices reached US$980/ton in Europe, US$895/ton in China and US$990/ton in North America (Source: FOEX, TerraChoice and RISI). In the same period, the difference between softwood and hardwood list prices was approximately US$130/ton, which encourages the substitution of softwood by hardwood.

Higher demand for printing and writing paper in 1Q11 over 1Q10 was due to the economic upturn and the higher volume of paper allocated to government programs. Seasonality explains the decline in demand in 1Q11 from 4Q10. In 1Q10, the demand for paperboard was strong, since there was rebuilding of inventories in the chain after the 2009 crisis.

The only paper line in which imports recorded an increased share of total imports was coated paper. The share of imports is higher in this segment as the Brazilian production does not meet demand. The increased share of imports in this segment was mainly due to the appreciation of the Real against the Dollar in the period.

The share of uncoated paper and paperboard imports in relation to total imports fell despite the appreciation of the Real against the Dollar in the period.

Demand for printing and writing paper in the main global markets, according to the PPPC (Pulp and Paper Products Council): (i) in North America, demand was 2.7% and 3.1% lower than in 4Q10 and 1Q10, respectively; (ii) in Western Europe, it was 3.5% and 3.1% lower than in 4Q10 and 1Q10, respectively; and (iii) in Latin America, sales in 1Q11 were 4.5% lower than in 4Q10 and 12.6% higher than in 1Q10.

Business Environment

The global economic scenario did not feature major surprises in 1Q11. There was a scenario similar to the previous quarter, with emerging markets, specially China and Brazil, recording robust economic growth and central countries following a trajectory of economic recovery. Geopolitical events in Northern Africa and the Middle East increased the volatility and the price of oil, intensifying the concern with inflation risks around the world.

In Brazil, the economy remained robust, with industrial production indicators rising and unemployment reaching low levels. Unfavourable inflation prospects and recent credit restriction measures corroborate to the new cycle of increase in the basic interest rate, which closed 2010 at 10.75% p.a. and is currently at 12.00% p.a.

With interest rates above international levels, the Real appreciated by 2.3% against the USD in the quarter. The exchange rate closed the quarter at R$1.63/US$.

In the quarter, the U.S. dollar weakened against the main currencies used to determine pulp prices. Accordingly, in addition to the Brazilian real, the Euro, the Canadian dollar and the yuan gained 5.8%, 2.8% and 0.6% against the USD, respectively, while the Chilean peso depreciated by 2.1% against the USD.

Economic-Financial Performance

Net Revenue

The Company’s net revenue was R$1,057.1 million in 1Q11. The Company’s total pulp and paper sales volume in the quarter was 677,7 thousand tons, 7.0% lower than in 4Q10 and 5.5% higher than 1Q10.

Net revenue in the period was basically influenced by the following factors:

i. The reduction in paper sales volume in relation to 4Q10 and 1Q10:

ii. The 2.5% drop in the average net pulp price in relation to 4Q10. In relation to 1Q10, this price increased by 2.1%.

iii. The average paper price increased by 1.1% compared to 4Q10 and 8.8% compared to 1Q10.

iv. The increase in the share of domestic sales in the paper sales mix: 58.1% in 1Q11, versus 53.9% in 4Q10 and 53.7% in 1Q10.

v. The variation in the BRL/USD exchange rate: BRL strengthening by 1.8% (average exchange rate) in the quarter and by 7.6% in relation to 1Q10, which affected revenue from exports.

vi. Pulp sales volume represented 63.7% of total sales volume in 1Q11, up from 56.5% in the prior quarter and 60.0% in 1Q10. As a percentage of net revenue, the share of pulp sales stood at 48.5% in the quarter, in comparison with 42.0% in 4Q10 and 46.2% in 1Q10.


Pulp Business Unit

The Company sold 431.5 tsd tons of market pulp in 1Q11. This volume considers the partial effect of 100% of Limeira Unit: (i) Conpacel’s acquisition conclusion occurred on 01/31/2011, in other words, in 1Q11 only two months of production are considered for sales purposes; and (ii) part of the paper production was designed to rebuild inventories. The Company's main sales destinations were Europe (35.2%) and Asia (34.5%).

Net revenue from pulp sales was R$512.5 million in 1Q11 (up 2.2% from 4Q10). Despite the volume growth (+4.8%) in relation to 4Q10, net revenue was impacted by the stronger BRL versus the USD. In year-on-year terms, the increase in sales volume and the successive increases in pulp price occurred in the period had a positive impact on revenue.

The average net pulp price (domestic and export) in USD was US$712.3/ton in 1Q11, 0.8% lower than in 4Q10 and 10.4% higher than in 1Q10. Pulp prices remained flat in relation to 4Q10 closing pulp price; however, there were successive price increases along the year 2010.

In BRL terms, the average net price was R$1,187.7/ton, decreasing by 2.5% from 4Q10 and increasing by 2.1% from 1Q10.

Paper Business Unit

Suzano’s paper sales reached 246.2 tsd tons in 1Q11: Brazil and South/Central America absorbed 78% of the sales volume. This volume considers the partial effect of 100% of Limeira Unit: (i) Conpacel’s acquisition conclusion occurred on 01/31/2011, in other words, in 1Q11 only two months of production are considered for sales purposes; and (ii) part of the paper production was designed to rebuild inventories.

Net revenue from paper sales reached R$544.7 million in the quarter. This performance was due to the lower sales volume in relation to both periods. Seasonally, paper sales volume is at its lowest in the first quarter.

The average net paper price in the 1Q11 (domestic and export market) was R$2,212/ton, 1.1% and 8.8% higher than in 4Q10 and 1Q10, respectively.

The average net paper price practiced by Suzano in Europe was US$1,050/ton at the close of 1Q11, which represents an average spread over the net pulp price of US$334/ton, or US$96/ton above the historical average of the past ten years of US$238/ton.

Suzano maintained its leadership in Brazil in printing and writing paper in 1Q11, with domestic sales volume of 110.2 thousand tons. Printing and writing paper sales volume was 16.0% lower than in 4Q10 and 7.0% higher than in 1Q10. In the export market, sales volume was 80.5 tsd tons, 35.6% and 13.2% lower than the volume recorded in 4Q10 and 1Q10, respectively.

The average net price of printing and writing paper in the domestic market was R$2,328/ton in 1Q11, 1.5% down from 4Q10, due to the higher share of imported papers, and 4.9% up from 1Q10, mainly due to the higher activity level of this segment compared to 1Q10. The average net price of uncoated paper decreased by 0.9% from the previous quarter and increased by 1.3% from 1Q10. The price of coated paper decreased by 2.3% from the previous quarter and increased by 18.9% from 1Q10.

The average net price of printing and writing paper in the export market in 1Q11 was R$1,844/ton, 1.8% and 6.0% higher than in 4Q10 and 1Q10, respectively. The average net price of uncoated paper increased by 1.7% and 5.7% compared to the previous quarter and 1Q10, respectively. The price of coated paper increased by 1.7% and 9.1% compared to 4Q10 and 1Q10, respectively.

The Company’s domestic paperboard sales totaled 32.9 tsd tons in 1Q11, down 17.2% and 6.5% from 4Q10 and 1Q10, respectively. The decline in sales volume compared to 4Q10 was due to seasonality and to 1Q10 was due to the rebuilding of inventories in the chain occurred in that period. Paperboard prices in 1Q11 increased by 0.9% and 12.6% in relation to 4Q10 and 1Q10, respectively. In the export market, sales volume was 22.7 tsd tons in 1Q11, 6.8% up on 4Q10 and 13.1% down on 1Q10.

The average net export price in USD in the quarter was 3.1% and 18.3% higher than in 4Q10 and 1Q10, respectively. In BRL, prices increased 1.2% and 9.4% in relation to 4Q10 and 1Q10, respectively, impacted by the appreciation of the Real against the Dollar in the period.

Production and Costs

The quarter production incorporates the partial effect of the Conpacel’s assets acquisition (as of 01/31/2011). In addition to 2 months of Conpacel’s production, the total production registered an increase compared with 4Q10 due to the lower maintenance downtime: 1 day in 1Q11 and approximately 6 days in 4Q10.

The cash cost of market pulp production at Mucuri in 1Q11, excluding the costs related to depletion of the forestry base, was R$469/ton, mainly due to: (i) the increase in wood costs arising from the higher share of third-party wood in the supply matrix; (ii) the increase in consumption of raw materials as a result of the temporary downtime in the calcination furnaces and ovens, which was partially offset by the decline in the average raw materials’ price; and (iii) lower fixed costs due to higher production output.

The unit cash cost with downtime was R$472/ton in 1Q11 due to the beginning of the programmed maintenance downtime of line 2 of the Mucuri unit on March 31st, 2011. The following maintenance downtimes are scheduled for 2011: line 2 of the Mucuri and Suzano units in 2Q11; and line 1 of the Mucuri and Limeira units in 3Q11.

The cost of goods sold (COGS) in 1Q11 was 11.0% lower than 4Q10 and virtually in line with 1Q10. The decline in relation to 4Q10 was mainly due to: (i) the 22.3% decline in paper sales volume; (ii) the higher share of third- party wood; (iii) the increase in raw materials consumption; and (iv) lower downtime costs.
Average unit COGS in the quarter was R$1,093/ton, 4.3% and 4.4% lower than in 4Q10 and 1Q10, respectively.

Operating Expenses / Revenues

This reduction in sales expenses in 1Q11 from the previous quarter was mainly due to: (i) lower logistics expenses, due to lower paper sales volume; and (ii) lower provisions for doubtful accounts, considering the non- recurring effect in 4Q10. In relation to 1Q10, the main item responsible for the decline in this account was the reduction in provisions for doubtful accounts in 1Q11.

In relation to 4Q10, the decline in administrative expenses was mainly due to expenses with provisions for non-recurring labor contingencies occurred in 4Q10, non-recurring expenses in 1Q11 with the integration of Conpacel / KSR, in the amount of R$6.2 million, and the increase in the profit sharing account. The 33.6% increase in the comparison with 1Q10 was due to the increase in the profit sharing account and expenses with the integration of Conpacel / KSR. The Company estimates additional expenses of R$6.0 million in 2Q11 related to the integration of Conpacel / KSR.

The variation of sales, general and administrative expenses was lower than the inflation recorded in the analyzed periods. Total expenses represented 11.8% of net revenue in 1Q11, 1.7 p.p. and 0.4 p.p. down from 4Q10 and 1Q10, respectively.
The other operating revenue account presented a net positive result of R$5.9 million in 1Q11 due to the sale of fixed assets and other products, such as wood, shavings and scrap. In 4Q10, this account presented a net positive result of R$34.8 million, mainly due to the adjustments to biological assets, in the amount of R$28.1 million. In year-on-year terms, this account declined by R$247.3 million due to the revenue from the sale of assets in Minas Gerais state in that period.

EBITDA

Cash generation, as measured by EBITDA, totaled R$349.3 million in the quarter, with an EBITDA margin of 33.0%, expanding by 1.4 p.p. in relation to 4Q10 and by 0.6 p.p. in relation to 1Q10 adjusted EBITDA margin.

The main factors impacting EBITDA and operating margins in the quarter in relation to 4Q10 include:

Positive

i. Higher pulp sales volume; ii. Higher percentage of paper sales in the domestic market (58% in 1Q11 vs. 54% in 4Q10);

iii. Higher paper average net price in Reais (+1.1%) and in Dollars (+2.9%); iv. Reduction in operating expenses, as explained on page 10.

Negative

i. Reduction in paper sales volume in the period; ii. Reduction in the average net prices in USD (-0.8%) and BRL (+2.5%);

iii. Increase in cash cost;

iv. Appreciation in the BRL against the USD; and

v. Adjustment of biological assets to fair value in 4Q10.


Financial Results

Net financial expenses in the quarter stood at R$64.8 million in 1Q11, impacted by the positive result of R$16.1 million in hedge operations involving swaps, in comparison to R$3.9 million loss in 4Q10 and to R$32.5 million loss in 1Q10 from those operations.

Financial income from monetary and foreign exchange rate variations in the quarter reached R$63.4 million, resulting from the 2.3% variation of the exchange rate on the exposure of the balance sheet between the beginning and end of the quarter.

On March 31st, 2011, the net notional value of currency transactions in the dollar futures market was US$170.7 million, of which US$145.7 million was through conventional non-deliverable forward (NDF) contracts, including US$25 million through dollar put and call options to protect export net revenue without initial costs for the company (zero cost collar structures). The maturities are distributed between April 2011 and January 2014 in order to secure attractive operating margins for a minor portion of sales over the course of this period. The cash effects related to these operations occur only on the respective maturity dates, when the contracts generate cash disbursements or proceeds for the Company, as the case may be. In addition, the Company uses swap contracts to exchange floating interest rates for fixed interest rates and contracts to set pulp prices, which reduce the effects of potential variations on the Company’s cash flow.

Accordingly, the gain of R$16.1 million from hedge operations through swaps in the quarter was composed primarily of: (i) gain of R$7.1 million from the sale of NDFs, R$5.0 million in Dollar coupon swaps for a percentage of the 3-month Libor and R$2.9 million in WTI operations to hedge bunker exposure, and (ii) loss of R$1.9 million in pre fixed swaps for a percentage of the DI. For further information, see note 28 of Quarterly Information (ITR).

Net Earnings

In addition to the operational factors impacting EBITDA, net income was impacted: (i) positively by net monetary and foreign exchange rate variations; and (ii) negatively by income tax and social contribution.

Debt

The Company’s gross debt on March 31st, 2011 was composed of 80.8% long-term maturities and 19.2% short-term maturities. Debt denominated in foreign currency represented 45.5% of the Company’s total debt while debt denominated in local currency represented 54.5% The Company did not contract new relevant funding operations in 1Q11 other than the planned disbursements.

Net debt at the close of the quarter was R$5,159.8 million, 50.8% higher than net debt in December 2010 due to the decline in cash as a result of the payment of the assets of Conpacel and KSR.

The net Debt/EBITDA ratio stood at 3.3x. This ratio reflects: (i) the payment of Conpacel e KSR assets acquisition; (ii) the partial cash generation of the acquired assets; and, (iii) does not reflect the 5th debentures issuance.

In March 2011, the average cost of debt in Real was 8.8% p.a. and in Dollar was 4.6% p.a. The average term of consolidated debt at the close of the quarter was 3.8 years.

The increase in investment in 1Q11 was mainly due to the conclusion of the acquisition of Conpacel and KSR in the period, in the amount of R$1.5 billion.

Maranhão Unit

The Board of Directors approved the beginning of the industrial construction of the Maranhão Unit in 2011. The total estimated investment in the Maranhão Unit is US$2.9 billion, US$2.3 billion for the industrial part and US$575 million for the forestry base. Agreements were entered into with Metso and Siemens for the acquisition of the main equipment. The Maranhão unit will have an annual capacity of 1.5 million tons of market pulp and surplus energy generation of 100MW. The start-up is scheduled for 2013.

Suzano Renewable Energy

Suzano Renewable Energy will invest in three wood pellet production plants in the northeastern region of Brazil; each plant will handle 1 million ton each, will begin operations between 2013 and 2014 and Suzano Pulp and Paper will provide forest-management services.

Total investment will come to approximately US$800 million. The Company is evaluating alternative capital structures for Suzano Renewable Energy.

Piauí Unit

The Piauí unit will have an annual capacity of 1.5 million tons of market pulp and surplus energy generation of 100MW. The total estimated investment in the Piauí Unit is US$3.0 billion, US$2.3 billion for the industrial part and US$710 million for the forestry base. The forestry base is being developed and the decision on industrial investment in Piauí is expected in the first half of 2012.

Capital Markets

At the end of March, the preferred shares SUZB5 were quoted at R$15.05. The Company’s stock integrates the Level 1 of Corporate Governance and the Corporate Sustainability Index (ISE) of BM&FBovespa for the sixth consecutive year.

Suzano’s market cap was R$6.5 billion on March 31, 2011. In 1Q11, the stock’s free float was at 45.4%.

The Company’s capital stock is represented by 140,039,904 common shares (SUZB3) and 268,852,497 preferred shares (SUZB5 and SUZB6), with a total of 408,892,401 shares traded in the São Paulo Stock Exchange (BM&FBovespa). Out of this total, on March 31, 2011, the Company had 4,154,685 preferred shares and 6,786,194 common shares held in treasury.

Dividends

Our bylaws, in line with the principles of the prevailing legislation, establishes a minimum mandatory dividend of 25% of adjusted net income for the year The amount granted to class A and B preferred shares will be 10% higher than that granted to common shares.

The Company distributed R$220.8 million in proceeds for the fiscal year of 2010: (i) R$207.7 million as interest on equity, R$58.9 million of which paid on September 10th, 2010 and R$148.8 million paid on March 15th, 2011; and (ii) R$13.1 million as dividends paid on May 9th, 2011.

Events for the Period

Conpacel's Assets Acquisition

On January 31st, 2011. Suzano Pulp and Paper announced an agreement with Fibria Celulose S.A. to conclude the acquisition of Conpacel assets, which comprises 50% of the pulp and paper mill, owned land and owned and leased planted forests, through the payment on that same date of the total price of R$1,450 million.

Acquisition of KSR Paper Distribution Operations

On February 28th, 2011 Suzano Pulp and Paper announced an agreement with Fibria Celulose S.A. to conclude the acquisition of the KSR paper distribution operations, through the payment of the total price of R$50 million on March 1st, 2011, amount which shall be adjusted after final confirmation of the working capital.

The acquisition of KSR, Brazil’s largest distributor, will expand Suzano’s presence and reach to different regions around the country, strengthening the distribution channel and directly benefiting its clients. The transaction shall confer the Company the Latin American leadership position in company-owned distribution network.

Board of Directors Authorized the Acquisition of Key Equipment for the Construction of the Industrial Unit in Maranhão

On February 28th, 2011 the Board of Directors of Suzano Pulp and Paper authorized the Executive Board to conclude negotiations and enter into agreements with Metso and Siemens for the acquisition of key equipment for the construction of the industrial unit in Maranhão, with production capacity of 1.5 million tonnes, based on established targets.

The agreement for the acquisition of the key equipment with Metso will basically cover the following areas: (i) Wood Handling; (ii) Cooking and Washing; (iii) Fiber Line; (iv) 2 Driers, Bailing and Expedition; (v) Biomass and Recovery Boilers; (vi) Causticizing and Lime Kiln; and (vii) Evaporation. The scope of the agreement shall include the supply of equipment and other correspondent activities.

The agreement to be entered into with Siemens shall comprise the acquisition of the turbo generators, contracted in the EPS (Engineering Procurement and Supervision) modality.

Total estimated investments remain at US$2.3 billion.

Subsequent Events

Execution of Agreements with Metso and Siemens

On April 18th, 2011, Suzano Pulp and Paper announced it has entered into agreements with Metso and Siemens for the acquisition of key equipment for construction of the industrial unit in Maranhão.

The acquisition of the key equipment with Metso will basically cover the following areas: (i) Wood Handling; (ii) Cooking and Washing; (iii) Fiber Line; (iv) 2 Driers, Bailing and Expedition; (v) Biomass and Recovery Boilers; (vi) Causticizing and Lime Kiln; (vii) Evaporation; and (viii) Integrated Automation Solution (DCS - Distributed Control System) for all process areas. The value of the order is not disclosed, but is conforming to the typical value for contracts falling within this scope that range between US$1.0 billion – US$1.2 billion.

The agreement with Siemens comprises the acquisition of 2 turbo generators, which will furnish the mill’s energy needs, as well as provide the unit with 100 MW energy surplus for sale. The value of the agreement is of approximately US$40 million – US$50 million.

Approval for the 5th Convertible Debenture Issuance

On April 26th, 2011 the Board of Directors of Suzano Pulp and Paper has recommended the approval at General Shareholders’ Meeting of a private issuance of compulsorily convertible debentures by the Company, in the total amount of R$1.2 billion, maturing on 12/16/2013, and yield of 4.5% p.a + IPCA. The controlling shareholders shall exercise their preemptive rights to subscribe for all the debentures that they are entitled to acquire, and BNDES, under the abovementioned underwriting commitment it has taken, shall subscribe for the debentures that it is entitled to acquire in exercising preemptive rights, as well as for any debentures eventually unsubscribed by other shareholders of record, in the maximum amount of R$561.8 million.

For additional information about the debenture issuance, see the Management Proposal attached to the Call Notice for the Extraordinary General Shareholders’ Meeting to be held on May 12th, 2011, in accordance with Brazilian Securities Commission (CVM) Instruction 481/2009, Attachment 15, both available at the Company’s and CVM’s website.

Dividends Payment

On April 29th, 2011 Annual General Meeting has approved the Executive Board’s proposal for the payment of dividends regarding 2010 fiscal year results, in the amount of R$13.1 million. The amount were paid to shareholders on May 9th, 2011.


Forestweb Editor's Note:  In an omitted table, Suzano Pulp and Paper recorded Q1 net income of 143.8 million reals.  For the same period a year ago, the company reported net income of 123 million reals and net revenue of 970.6 million reals.

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