Suzano's Q2 net income down 15.5% year-over-year to 103.6M reais, net revenue up 3% to 1.22B reais with increased paper sales, share of domestic sales in paper sales mix

SAO PAULO , August 10, 2011 (press release) – Suzano Pulp and Paper posts 34.9% growth in paper sales volume compared to 1Q11.

  • The Company’s consolidated information includes the total effect of the acquisition of the assets of Conpacel (as of January 31st, 2011) and KSR (as of March 1st, 2011).
  • Maintenance downtimes at line 2 of the Mucuri plant and the Suzano unit.
  • Sales volume of 766 thousand tons: 433 thousand tons of pulp and 332 thousand tons of
  • paper.
  • Net revenue of R$1,224.5 million in the quarter.
  • Increased cash cost due to an increase in the share of third parties wood supply, maintenance downtimes, higher consumption of raw materials and higher fixed costs.
  • EBITDA of R$276.0 million, with an EBITDA margin of 22.5%.
  • Cash and cash equivalents of R$3.0 billion and net debt of R$4.2 billion on June 30th, 2011.
  • Net debt/EBITDA ratio of 3.0x in June 2011.
  • 5th issuance of mandatory convertible debentures completed and accounted for.
  • Pulp prices remain stable throughout the quarter, up US$ 30/ton from 1Q11 (Source: FOEX).
  • Global pulp inventories of 34 days in June.

Market Overview

Pulp: accumulated demand up 5.3% in 1H11

Global pulp shipments were down 1.9% from 1Q11, while increasing 4.4% in comparison with pulp shipments in 2Q10.

Chinese demand fell by 10.1% in comparison with 1Q11. According to consultants in the sector, the main reasons behind the decrease were: (i) the falling price of cotton, leading to a resumption in demand for dissolving pulp to historic levels; and (ii) the consumption of the softwood pulp inventory accumulated during the past quarter.

Global eucalyptus pulp shipments were down 2.5% from 1Q11, while increasing 2.8% in comparison with shipments in 2Q10.

With the increase in paper production capacity in 1Q11 (China) and greater demand for eucalyptus as a substitute for softwood, demand in the region was higher than usual. However, demand resumed to historic levels in 2Q11.

Global market shipments of pulp were up 5.3% year-to-date, with China standing out with a 29.6% increase, while eucalyptus pulp shipments increased by 2.6%, with Europe posting the highest growth (+10.4%).

Market pulp supply in 2Q11 was down 2.4% from 1Q11, and 7.7% higher than in 2Q10, as a result of maintenance downtimes at pulp plants in the second quarter of the year, especially those located in the northern hemisphere, and the earthquake in Chile in 2010.

There are no expectations of an increase in new market pulp capacity in 3Q11, which should ensure a more stable market. After the maintenance downtimes, pulp producers should return to historic production levels.

The average global inventory in the quarter stood at 33 production days, with a peak of 34 days in June, all within the industry’s historic average (33 days).

Hardwood pulp prices in 2Q11 were on average US$30/ton higher than at the end of 1Q11 in North America and Europe, while Chinese prices remained stable in both quarters. In year-on-year terms, prices decreased by 3.2% in North America, 4.8% in Europe and 11.2% in China.

Eucalyptus pulp prices reached in June US$874/ton in Europe, US$746/ton in China and US$920/ton in North America (Source: FOEX, TerraChoice and RISI). In the same period, the spread between softwood and hardwood grade prices was approximately US$150/ton, which encouraged the substitution of softwood by hardwood.

The increase in domestic demand for paperboard between 2Q11 and 1Q11 was the result of period seasonality. The decrease on the year-over-year comparison was the result of a buoyant economy and, especially, the rebuilding of inventories throughout the supply chain in 2Q10.

Lower imports of coated printing and writing paper in 2Q11 led to a period decrease in sales volume of printing and writing paper as a whole in the period.

The lower proportion of coated paper imports in relation to total imports in 2Q11 was the result of a build-up of inventories in the supply chain during 1Q11. The share of imports is higher in this segment, as Brazilian production does not completely meet demand. The increased share of imports was mainly due to the appreciation of the Real against the U.S. Dollar in the period.

Demand for printing and writing paper in main global markets, according to the PPPC (Pulp and Paper Products Council): (i) in North America, demand fell 2.6% and 5.6% from 1Q11 and 2Q10, respectively; (i) in Western Europe, demand was 3.8% and 6.8% lower than in 1Q11 and 2Q10, respectively; and (ii) in Latin America, sales in 2Q11 were down 3.1% and 2.1% from 1Q11 and 2Q10, respectively.

Economic Overview

The economic scenario in 2Q11 continued to suffer from the influence of the global economic slowdown, especially in the U.S. and Chinese economies, and the financial crisis in secondary Eurozone countries. The weak recovery of employment and consumption in the United States and financial and fiscal problems in Greece, combined with a high level of public debt among a number of nations, led to lower expectations of growth for the global economy. Among the emerging markets, indicators pointed to weaker economic growth in China, as well as possible problems in the credit market and higher-than-expected inflation.

In Brazil, the economy began to show signs of smooth deceleration, underlined by falling industrial production indicators and a constant, although low unemployment rate. In the quarter, inflation indexes posted a slight improvement due to seasonality. However, inflation is expected to increase, pointing to further increases in the basic interest rate, which ended the quarter at 12.25% p.a.

With interest rates above international levels, the Real appreciated by 4.2% against the U.S. dollar in the quarter. The exchange rate closed the quarter at R$1.56/US$.

The U.S. dollar weakened against all the main currencies used to determine pulp prices. Accordingly, in addition to the Brazilian real, the Euro, the Chilean peso, the Yuan and the Canadian dollar gained 2.4%, 1.8%, 1.3% and 0.7% against the USD in the period, respectively.

Economic and Financial Performance

Net Revenue

The Company’s net revenue was R$1,224.5 million in 2Q11, while total pulp and paper sales volume came to 765.6 thousand tons, 13.0% higher than in 1Q11 and 6.8% more than in 2Q10.

Total net revenue was mainly influenced by the following factors:

i. An increase in paper sales volume compared to 1Q11 and 2Q10, due to seasonality and volume gains from the integration of Conpacel and KSR.
ii. The 3.5% reduction in the average net paper price in comparison with 1Q11. In relation to 2Q10, this price increased by 0.6%.
iii. Pulp sales volume remained stable in comparison with 1Q11. iv. The average net pulp price, in Real, remained stable in comparison with 1Q11 and fell by 10.6% compared to
v. An increase in the share of domestic sales in the paper sales mix: 59.0% in 2Q11, versus 58.1% in 1Q11 and 53.3% in 2Q10.
vi. The variation in the BRL/USD exchange rate: BRL strengthening by 4.3% (average exchange rate) in the quarter and by 11.0% in relation to 2Q10, affecting revenue from exports.
Pulp Business Unit

The Company sold 433.4 thousand tons of market pulp in 2Q11, including the effect of 100% of the Limeira unit. The Company's main sales destinations were Europe (34.0%) and Asia (31.3%).

Net revenue from pulp sales was R$515.1 million in 2Q11. Revenue remained stable compared to 1T11, despite an increase in the list price, impacted by the 4.3% appreciation of the BRL against the USD in the period. In comparison with 2Q10, sales volume was up, however pulp prices were down and the 11.0% appreciation of the BRL resulted in a 7.8% drop in net revenue between the periods in question.

The average net pulp price (domestic and export) in USD was US$744.9/ton in 2Q11, up 4.6% on 1Q11 and 0.5% on 2Q10.

The average net price in BRL stood at R$1,188.3/ton, stable in relation to 1Q11 and 10.6% lower than in 2Q10, while the BRL appreciated by 4.3% and 11.0% in comparison with 1Q11 and 2Q10, respectively.

Paper Business Unit

Suzano’s paper sales reached 332.2 thousand tons in 2Q11, including the total effect of 100% of the Limeira unit and KSR. In 2Q11, sales in Brazil accounted for 59.0% of total sales, versus 58.1% in 1Q11 and 53.3% in 2Q10.

Net revenue from paper sales reached R$709.4 million in the quarter, due to sales volume increases of 34.9% compared to 1Q11 and 11.9% compared to 2Q10.

The average net paper price in the 2Q11 (domestic and export market) was R$2,135.6/ton, down 3.5% from 1Q11 and 0.6% higher than in 2Q10.

The average net uncoated paper price (reels) practiced by Suzano in Europe was US$1,066.4/ton at the close of 2Q11, which represents an average spread over the net pulp price of US$192/ton, or US$36/ton below the historic average of the past ten years of US$228/ton.

Suzano maintained its leadership in Brazil in printing and writing paper in 2Q11, with domestic sales volume of 144.6 thousand tons. Printing and writing paper sales volume was 39.3% and 28.3% higher than in 1Q11 and 2Q10, respectively. The increase compared to 1Q11 was mainly due to seasonality and to the additional volume provided by Conpacel. As for 2Q10, the increase was the result of the additional volume provided by Conpacel.

The average net price of printing and writing paper in the domestic market was R$2,216.6/ton in 2Q11, down 2.6% from 1Q11 and 2.7% from 2Q10, due to competition from imported paper in the Brazilian market. The average net price of uncoated paper remained stable (+0.8%) in comparison with 1Q11 and fell 1.9% from 2Q10, due to variations in the mix of products sold. The price of coated paper was down 13.3% from 1Q11 and 4.5% from 2Q10. It is important to note that Brazil does not produce coated paper to meet domestic demand.

Total exports of printing and writing paper sales volume stood at 114.2 thousand tons, 41.9% up from 1Q11, mainly due to the additional volume from Conpacel, and stable (+0.5%) in relation to 2Q10.

The average net export price of printing and writing paper was R$1,757.0/ton in 2Q11, 4.7% and 4.2% lower than in 1Q11 and 2Q10, respectively. The average net price of uncoated paper decreased by 4.7% and 4.4% compared to the previous quarter and 2Q10, respectively. The price of coated paper increased by 0.7% compared to 1Q11, but fell 4.0% in comparison with 2Q10. The BRL appreciated by 4.3% compared to 1Q11 and 11.0% compared to 2Q10.

The Company’s domestic paperboard sales stood at 34.5 thousand tons in 2Q11, up 5.0% on 1Q11 as a result of seasonality, and down 16.7% from 2Q10, mainly due to the exceptionally high demand for paperboard in 2Q10, resulting from the period acceleration of the economy and build-up of inventories. Paperboard prices in 2Q11 were down 3.2% from 1Q11, while increasing 6.4% in comparison with 2Q10.

Paperboard export sales volume totaled 22.1 thousand tons, down 2.8% from 1Q11 and 11.8% from 2Q10. The average net price of paperboard, in BRL, was up 0.3% from 1Q11 and 13.7% from 2Q10.

The average net export price in USD in the quarter was 0.2% and 10.8% higher than in 1Q11 and 2Q10, respectively. In BRL, prices fell 4.2% and 1.4% in relation to 1Q11 and 2Q10, respectively, impacted by the appreciation of the Real against the Dollar in the period.

Production and Costs

The acquisition of Conpacel led to an increase in production between 2Q11 and 2Q10. Nonetheless, there were scheduled downtimes on line 2 of the Mucuri unit and at the Suzano unit. After the general downtime, line 2 of the Mucuri unit suffered interruptions in the production of market pulp, resulting in a loss of 48 thousand tons. However, the downtimes had no effect on quarterly sales, although they did impact the Company’s cash cost, as explained below.

The cash cost of market pulp production at Mucuri in 2Q11, excluding the costs related to depletion of the forestry base, was R$598/ton, chiefly due to: (i) increase in wood costs arising from the higher share of third-party wood in the supply matrix and higher operational costs; (ii) the increase in consumption of raw materials, especially for fuel, resulting from the resumption of production following the downtimes, and sodium chlorate price increase; and (iii) higher fixed costs due to lower production output.

Maintenance downtime in the quarter had an impact of R$37/ton on the unit cash cost, thereby bringing the total downtime cash cost to R$635/ton. Maintenance downtimes on line 1 of the Mucuri unit and on the Limeira plant are scheduled for 3Q11.

The cost of goods sold (COGS) in 2Q11 totaled R$956.4 million, up 29.1% on 1Q11 and 17.8% on 2Q10. The increase in comparison with 1Q11 was mainly the result of: (i) a 34.9% increase in the volume of paper sold – responsible for 67% of the increase in COGS; (ii) maintenance downtime - responsible for 15% of the increase in COGS; (iii) the higher share of third-party wood in the Company’s supply matrix; and (iv) production instability, which resulted in higher raw material consumption and fixed costs, given the decrease in volume produced.

The average unit COGS in the quarter stood at R$1,249/ton, up 14.3% and 10.4% on 1Q11 and 2Q10, respectively, due to paper share increase in the Company’s sales mix, besides higher unit pulp COGS.

Operating Expenses/Revenue

The increase in selling expenses in 2Q11 compared to the previous quarter was mainly due to: (i) KSR operation; (ii) higher expenses with logistics because of the 34.9% increase in paper sales volume; (iii) an increase in expenses with third-party services, such as consulting and advising, sales commissions and marketing; and (iv) higher personnel expenses. The 28.0% increase in relation to 2Q10 was due to the same factors.

In comparison with 1Q11, the increase in administrative expenses was due to: (i) the reversal of the provision for labor contingencies in 1Q11 (non-recurring); (ii) change in Conpacel accountability criteria – before it was registered in COGS; (iii) expenses with third-party services, such as consulting, advising and IT services; (iv) expenses with educational and environmental projects; (v) non-recurring expenses in 2Q11 related to the integration of Conpacel / KSR, in the amount of R$4.0 million; and (vi) the positive effect of the decrease in personnel expenses, due to the booking of profit sharing in 1Q11.

The 58.4% increase in administrative expenses compared to 2Q10 was the result of: (i) higher expenses with personnel, due to the change in Conpacel accountability criteria; (ii) third-party services, such as consulting, advisory and IT services; (iii) the integration of Conpacel / KSR; and (iv) educational and environmental projects.

The other operating revenue account posted a positive net result of R$2.6 million in 2Q11, due to the sale of fixed assets and wood. In comparison with 2Q10, this account was down by R$6.1 million as a result of a decrease in the volume of wood sold.


Cash generation, as measured by EBITDA, stood at R$276.0 million in 2Q11, with an EBITDA margin of 22.5%, 10.5 p.p. and 12.2 p.p. lower than 1Q11 and 2Q10, respectively.

The main factors impacting the quarter’s EBITDA and operating margins in relation to 1Q11 include:


i. Higher paper sales volume (+34.9%); ii. Higher percentage of paper in the domestic market (59.0% in 2Q11 vs. 58.1% in 1Q11); and
iii. An increase in the average net price, in BRL, of paper and pulp (+2.5%).


i. Higher COGS, as explained on page 10; ii. Higher selling, general and administrative expenses, as explained on page 10; and
iii. Appreciation of the BRL against the USD, which impacted revenue from exports.

Financial Result

Net financial expenses in the quarter stood at R$68.3 million in 2Q11, impacted by the positive result of R$9.5 million in hedge operations involving swaps, versus the positive result of R$16.1 million in 1Q11 and the R$13.2 million loss in 2Q10 from the same operations.

Financial income from monetary and foreign exchange rate variations in the quarter reached R$86.1 million, resulting from the 4.2% variation of the exchange rate on the exposure of the balance sheet between the beginning and end of the quarter.

On June 30th, 2011, the net notional value of currency transactions in the dollar futures market through conventional non-deliverable forward (NDF) contracts totaled US$338.3 million. The maturities are distributed between July 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$9.5 million from hedge operations through swaps in the quarter was composed primarily of: (i) a gain of R$20.3 million from the sale of NDFs; and (ii) a negative R$8.2 million in Libor swaps to in financing agreements, R$3.4 million in pulp hedge operations and R$1.9 million in WTI (West Texas Intermediate) operations to hedge bunker exposure. For further information, see note 28 of Quarterly Information (ITR).

Net Income

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


The Company’s gross debt on June 30th, 2011 was composed of 79.3% long-term maturities and 20.7% short-term maturities. Debt denominated in foreign currency represented 48.9% of the Company’s total debt, while debt denominated in local currency represented 51.1%.

In 2Q11, the Company contracted R$200 million in export-backed funding through “Export Pre-payment” operations, which had a more competitive USD cost. The Brazilian Development Bank (BNDES) also disbursed a total of R$45 million, while FINEP (Research and Project Funding) disbursed R$13 million and agricultural NCEs (Export Credit Notes) brought in R$60 million.

Net debt closed the quarter at R$4,196.4 million, down 18.7% from net debt in March 2011, as a result of: (i) increased cash due to the 5th issue of convertible debentures; and (ii) a R$136.7 million reduction in EBITDA in the 12 months ended June 30th, 2011 in comparison with EBITDA in the 12 months ended March 31st, 2011. The net debt/EBITDA ratio stood at 3.0x.

In June 2011, the average cost of debt was 9.9% p.a. in BRL and 4.6% p.a. in USD. The average term of consolidated debt at the close of the quarter was 3.8 years.


The reduction in investments compared to 1Q11 was mainly due to recognition of the acquisition of Conpacel in that quarter. The increase in industrial investments was due to 2Q11 maintenance downtime.

The increase compared to 2Q10 was due to: (i) higher maintenance capex at Mucuri; (ii) increase the planting program in order to recover the average forest age in Bahia; and (iii) investments in the Maranhão project and other expansion projects.

In the first six months of the year, the increase in investment was mainly due to (i) the completion of the acquisition of Conpacel and KSR in 2011, totaling R$1.5 billion; (ii) the investments for Suzano’s expansion projects; and (iii) the start of industrial investment in the Maranhão unit.

Capital Markets

At the end of June, the preferred shares SUZB5 were quoted at R$11.29. 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.

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 on the São Paulo Stock Exchange (BM&FBovespa). Of this total, on June 30th, 2011, 4,154,685 preferred shares and 6,786,194 common shares were held in treasury.

Suzano’s market capitalization stood at R$4.6 billion on June 30th, 2011 and the 2Q11 free float amounted to 45.4% of the total capital stock.

Events in the Period

Agreements with Metso and Siemens

On April 18th, 2011, Suzano announced agreements with Metso and Siemens for the acquisition of key equipment for the construction of the Maranhão industrial unit.

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$ 1.0-1.2 billion.

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

Approval of the 5th Convertible Debenture Issuance

The Annual Shareholders’ Meeting of May 12th, 2011, approved the Company’s 5th private issue of mandatorily share-convertible debentures, in the amount of R$1.2 billion, on the issuance date of December 15th, 2010, maturing on December 16th, 2013 and yielding the IPCA + 4.5% p.a. On June 27th, 2011, 1,200,000 debentures from the issue had been subscribed, giving a total of R$1.279 billion. The controlling shareholders exercised their preemptive rights to subscribe to all of the debentures to which they were entitled, and BNDESPAR subscribed to a total of 537,642 convertible debentures in the second series of the 5th issuance.

The Shareholders’ Agreement signed by Suzano Pulp and Paper, Suzano Holding, its controlling shareholders and BNDES Participações S.A. became effective on June 27th, 2011, the date of payment in full of all debentures to which BNDESPAR was entitled within the issue.

Dividend Payment

On April 29th, 2011, the Annual and Extraordinary Shareholders’ Meeting approved the Executive Board’s proposal for the payment of R$13.1 million in dividends related to fiscal year 2010. Payment was effected on May 9th, 2011.

Investment Plan

On June 8th, 2011, the Company announced: (i) total estimated investments for 2011 of R$3.5 billion; (ii) the start-up of the Maranhão Unit in November 2013, as originally announced; (iii) the postponement of the decision to purchase industrial equipment for the Piauí Unit until the first six months of 2014; and (iv) estimated leverage in 2011 of between 3.0x and 3.5x of net debt/EBITDA.

These decisions were the result of a constant evaluation of investment plans in light of the current competitive and macroeconomic scenario which involve a number of variables, including currencies and leading commodity prices. This evaluation seeks to reflect the Company’s commitment to economic and financial equilibrium.

The continuity of the Company’s investment plan is tied to the profitability of projects and the discipline of investments, aided by financial solidity and appropriate financing conditions.

The above information was discussed in a conference call held on the same date. The presentation and other documents are available on the Company’s Investor Relations Website (

Subsequent Events

Acquisition of Shareholding Interest

On July 18th, 2011, the Company announced that it had received a notice from its shareholder, David Feffer, informing it that, in recent weeks, he had acquired 1,255,825 class A preferred shares issued by the Company and now holds 13,498,756 shares of this class and type, corresponding to 5.06% of all PNAs issued by the Company.

In addition to the aforementioned shareholding interest in the Company, the Shareholder holds: (i) 2,280 common shares; and (ii) 36,918 debentures, convertible into approximately 2,221,831 PNAs as of December 16th, 2012, pursuant to the 5th Debenture Issue Indenture dated May 12th, 2011.

In the notice in question, the Shareholder stated that the increase in shareholding interest was a mere investment and that he had no intention of altering the control or administrative structure of the Company.

Suzano Papel e Celulose S.A., with annual revenue of R$4.5 billion in 2010,is one of Latin America’s largest vertically integrated producers of eucalyptus pulp and paper, with annual production capacity for 1.3 million tons of paper and pulp annual production capacity reaching 1.9 million tons of market pulp/ year. It offers a broad range of pulp and paper products for domestic market and exports, with leadership positions in key Brazilian markets. It has four product lines: (i) eucalyptus pulp; (ii) uncoated woodfree printing and writing paper; (iii) coated printing and writing paper; and iv) paperboard.

Industry Intelligence Editor's Note: In an omitted table, Suzano reported Q2 net income of 103.6 million Brazilian reais.  For the same period a year ago, the company recorded net income of 122.5 million reais and net sales of 1.19 billion.

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