Suzano swings to Q3 loss of 425.6M reais from profit of 272.8M reais in year-ago period, influenced by input, depreciation, depletion costs; sales up 17.2% to 1.23B reais with increased volumes partially offset by lower pulp prices
Kendall Sinclair
SAO PAULO
,
October 28, 2011
(press release)
–
Domestic market accounts for 62.7% of paper sales in 3Q11
Market Overview
Pulp: shipments were up 4.8% in 9M11
Global pulp shipments remained flat (-0.1%) in comparison with 2Q11 and increased 3.6% in comparison with the volume of shipments for 3T10. Global market shipments of pulp were up 4.8% year-to-date.
China was the highlight in the quarter. The increase in shipments to China is a result of start-up of new paper capacity and the rebuilding of inventories in the region. In Europe, demand fell due to crisis in Eurozone countries.
Global eucalyptus pulp shipments moved up 3.3% in comparison with 2Q11 and 6.6% in comparison with 3Q10. In year-on-year terms, shipments were up 3.7% vs. 9M10. The availability of eucalyptus pulp, associated with the spread between softwood and hardwood grade prices, allowed an increase in the share of eucalyptus pulp in the market. Europe is still the main destination of eucalyptus pulp, absorbing 43.8% of the shipments.
Market pulp production in 3Q11 was 2.2% higher than 2Q11 and 0.3% than 3Q10. The increase in pulp production arising from the resumption of maintenance downtimes in pulp plants during the second quarter, especially in the northern hemisphere. There are no expectations of an increase in new market pulp capacity in the next few quarter.
Average global inventory in September reached 38 days of production, 3 days lower than August global inventory. Hardwood reached 44 days and softwood reached 32 days. Hardwood inventory decreased 6 days and softwood decreased 2 days.
Hardwood pulp prices in the end of 3Q11 were on average US$78/ton lower than at the end of 2Q11. In year-on- year terms, prices decreased by 5.6% in North America, 9.3% in Europe and 15.0% in China.
In September, eucalyptus pulp prices reached US$668/ton in China, US$789/ton in Europe and US$850/ton in North America (Source: FOEX and RISI). In the same period, the spread between softwood and hardwood grade prices was approximately US$169/ton, which encouraged the substitution of softwood by hardwood.
Paper: Domestic demand for paperboard and printing and writing paper grew 9.7% from 2Q11
Higher demand for paperboard and printing and writing paper between 3Q11 and 2Q11 was the result of period seasonality. The decrease on the year-over-year comparison was the result of a cooling economy in 2011 and high base of comparison in 2010.
The reduced ratio of coated paper imports to total imports in 3Q11 was due to high import volume in the first half of the year which led to a build-up of inventories given reduced domestic demand for this type of paper. Imports are higher in this segment since Brazilian output is insufficient to cover demand.
According to the RISI, demand for printing and writing paper in North America was 0.8% higher than in 2Q11 and 7.1% lower than in 3Q10. In Western Europe, demand was 1.4% and 4.8% down on 2Q11 and 3Q10, respectively.
Economic Overview
The economic scenario in 3Q11 followed the same path initiated in the previous quarter, characterized by uncertainties over global growth, the fiscal deterioration in the EU countries and the Eurozone banking crisis. In the U.S., employment data remained weak, although industrial and consumption indicators improved, unlike in the Eurozone countries, where there is not yet a solution for certain countries‟ financial and fiscal problems and the possibility of a recapitalization of the European banks resulted in higher uncertainty and market volatility. Due to the risk of a slowdown in the developed economies, the emerging markets expects a monetary flexibility, mainly caused by a lower inflation risk.
In Brazil, despite the evident inflationary pressures, the Central Bank began a cycle to reduce the base interest rate due to risk of a prolonged period of low levels of global GDP and the worsening of the Eurozone banking crisis. In this scenario, the base interest rate closed the quarter at 12% p.a.
In a scenario of high market volatility and major deleveraging of emerging market currencies, the BRL depreciated by a substantial 18.8% in relation to the USD in the end of September, closing the quarter at R$1.85/USD.
In fact, in addition to the BRL, the USD appreciated against almost all the main currencies used to determine pulp prices, including the Chilean peso, the Canadian dollar and the Euro, which fell by 11.1%, 9.0% and 7.7%, respectively. The only exception was the Yuan, which moved up by 1.2%.
Economic and Financial Performance
Net Revenue
Net revenue totaled R$1,230.0 million in 3Q11, while total pulp and paper sales volume came to 790.9 thousand tons, 3.3% up on 2Q11 and 17.2% more than in 3Q10.
Total net revenue was mainly influenced by the following factors:
i. Pulp sales volume remained flat over 2Q11 and increased by 11.7% over 3Q10, due to the integration of the Limeira (ex-Conpacel) unit in 2011.
ii. The average net pulp price in BRL fell by 7.9% over 2Q11 and 16.3% over 3Q10.
iii. Paper sales volume moved up in relation to 2Q11 and 3Q10, due to seasonality and volume gains from the integration of the Limeira unit and KSR in 2011.
iv. The average net paper price declined by 0.8% and 6.9% over 2Q11 and 3Q10, respectively.
v. The share of domestic sales in the paper sales mix increased to 62.7%, versus 59.0% in 2Q11 and 61.6% in 3Q10.
vi. The BRL/USD average exchange rate depreciated by 2.4% over 2Q11 and appreciated by 6.6% in relation to 3Q10, impacting revenue from exports.
Pulp Business Unit
The Company sold 435.2 thousand tons of market pulp in 3Q11, including the effect of 100% of the Limeira unit. The Company's main sales destinations were Asia (33.8%), Europe (32.0%) and Brazil (21.4%)
Net revenue from pulp sales totaled R$476.4 million in 3Q11, negatively impacted by the reduction in the average pulp price.
The USD net pulp price (domestic and export) averaged US$670.0/ton in 3Q11, 10.0% down on 2Q11 and 10.4% less than in 3Q10.
The average net price in BRL stood at R$1,094.7/ton, 7.9% lower than in 2Q11 and 16.3% down on 3Q10, while the average BRL depreciated by 2.4% over 2Q11 and appreciated by 6.6% over 3Q10.
Paper Business Unit
Suzano‟s paper sales reached 355.7 thousand tons in 3Q11, including the total effect of 100% of the Limeira unit and KSR. Brazil accounted for 62.7% of total sales, versus 59.0% in 2Q11 and 61.6% in 3Q10, while South and Central America, Suzano‟s leading market, absorbed 77.9%.
Net revenue from paper sales came to R$753.5 million in the quarter, due to sales volume increases of 7.1% over 2Q11 and 24.6% over 3Q10.
The net average paper price (domestic and export) reached R$21,118.4/ton, 0.8% down on 2Q11 and 6.9% less than in 3Q10.
Suzano maintained its leadership in Brazil in printing and writing paper in 3Q11, with domestic sales volume of 167.6 thousand tons, 15.9% and 31.9% higher than in 2Q11 and 3Q10, respectively. The increase over the previous quarter was mainly due 7t0o9 seasonality, while the year-on-year growth was due to additional volume following the integration of the Limeira unit.
The net price of printing and writing paper on the domestic market averaged R$2,133.8/ton in 3Q11, 3,7% down on 2Q11 and 9.5% less than in 3Q10. The average net price of uncoated paper fell by 2.9% and 5.1%, respectively, over 2Q11 and 3Q10, due to market price pressure and changes in the product and sales channel mix. The price of coated paper dropped by 6.5% in relation to 2Q11 and by 20.7% over 3Q10, reflecting the high share of imports in the Brazilian market.
Total exports of printing and writing paper sales volume stood at 105.7 thousand tons, 7.4% lower than in 2Q11 due to domestic market growth and 17.4% up on 3Q10, chiefly due to the additional volume following the integration of the Limeira unit.
The net export price of printing and writing paper averaged R$1,821.6/ton in 3Q11, 3.7% more than in 2Q11 and 5.8% down on 3Q10. The average net price of uncoated paper increased by 3.2% over 2Q11, but decreased by 6.0% in relation to 3Q10. The price of coated paper increased by 7.7% compared to 2Q11, but declined by 8.5% over 3Q10. The BRL depreciated by 2.4% over 2Q11 and appreciated by 6.6% in relation to 3Q10.
The Company‟s domestic paperboard sales totaled 38.6 thousand tons, 11.9% higher than in 2Q11 due to seasonality, and 11.3% lower than in 3Q10, mainly due to economic slowdown in 2011 and the exceptionally high demand for paperboard in 3Q10, resulting from the period acceleration of the economy and the build-up of inventories. Paperboard prices in 3Q11 fell by 1.9% over 2Q11 and remained flat over 3Q10.
Paperboard export sales volume came to 26.9 thousand tons, 21.7% up on 2Q11 and 38.1% more than in 3Q10. The increase on paperboard export sales over the previous year reflects the 10.3% decline in the paperboard domestic market over the same period. The average net price of paperboard in BRL fell by 0.4% over 2Q11 and 0.8% over 3Q10.
The average net USD paper export price in the quarter was 0.8% and 2.0% higher than in 2Q11 and 3Q10, respectively. In BRL, prices went up by 3.2% over 2Q11 and fell by 4.8% over 3Q10, impacted by the period exchange rate variation.
Production and Costs
The integration of the Limeira unit contributed to increase production in 3Q11 over 3Q10. Although there were scheduled downtimes in line 1 of the Mucuri unit and at the Limeira unit, they had no effect on quarterly sales.
In July, line 2 of the Mucuri unit suffered interruptions in the production of market pulp, resulting in a loss of 29 thousand tons.
The cash cost of market pulp production at Mucuri in 3Q11, excluding the costs related to the depletion of the forestry base, came to R$554/ton, chiefly due to: (i) the lower share of third-party wood in the supply matrix, neutralized by the increase in the unit wood cost; (ii) reduced consumption of raw materials, especially fuel; (iii) lower raw material prices, mainly in regard to caustic soda; and (iv) lower fixed costs, due to higher output volume.
Maintenance downtime in the quarter had an impact of R$55/ton on the unit cash cost, bringing the total downtime cash cost to R$609/ton. It is important to highlight that the annualized maintenance downtime cost follows the same level (R$ 25/ton). There is no maintenance downtime scheduled for 4Q11.
The cost of goods sold (COGS) totaled R$1,022.9 million, 7.0% up on 2Q11 and 32.7% more than in 3Q10. The increase over the previous three months was mainly due to (i) the higher sales volume and mix; (ii) maintenance downtimes – responsible for 10% of the growth in COGS; (iii) the higher wood cost; (iv) inventory turnover; and (v) the period exchange rate variation.
Average unit COGS in the quarter stood at R$1,293/ton, 3.5% and 13.3% higher than in 2Q11 and 3Q10, respectively, chiefly due to: (i) the higher share of paper in the Company's sales mix; (ii) the increase in third-party paper unit COGS due to the incorporation of KSR; (iii) scheduled maintenance downtimes in line 1 of the Mucuri unit and at the1L4%imeira unit; and (iv) the increase in the wood cost.
Operating Expenses/Revenue
The increase in selling expenses over 2Q11 was chiefly due to higher logistics expenses, reflecting the growth in the domestic paper sales volume, while the 29.9% increase over 3Q10 was also due to higher personnel expenses with the KSR operation.
The 18.8% decline in administrative expenses over the previous quarter was chiefly due to: (i) reduced expenses with labor provisions; (ii) reallocating personnel expenses of the Maranhão and Piauí projects; (ii); and (iii) the decline in expenses with the integration of the Limeira unit. Administrative expenses remained flat in relation to 3Q10.
The other operating revenue account recorded a positive net result of R$17.4 million in 3Q11, impacted mainly by the sale of rights related to the Eletrobrás Standard Unit credits and negatively by other operating expenses. The variation in relation to 3Q10 was due to the same reasons.
EBITDA
Cash generation, as measured by EBITDA, stood at R$261.3 million in 3Q11, with an EBITDA margin of 21.2%, 1.3 p.p. and 14.0 p.p. lower than in 2Q11 and 3Q10, respectively.
The main factors impacting the quarter‟s EBITDA and o88p7erating margins in relation to 2Q11 include:
Positive
Higher paper sales volume (+7.1%);
The higher percentage paper sales in the domestic market (62.7% of the total in 3Q11 vs. 59.0% in 2Q11);
Lower general and administrative expenses, as explained above;
Sale of rights related to the Eletrobrás Standard Unit credits; and
The depreciation of the BRL against the USD, which impacted revenue from exports.
Negative
i. The reduction in the average BRL net pulp and paper price (-2.8%); and
ii. Higher COGS, as explained above.
Financial Result
Net financial expenses totaled R$159.8 million in 3Q11, versus R$68.3 million in 2Q11 and R$51.4 million in 3Q10, impacted by the negative result of R$91.9 million from hedge operations involving swaps, versus positive R$7.0 million in 2Q11 and a positive R$10.1 million in 3Q10 from the same operations.
Financial expenses from monetary and foreign exchange rate variations totaled R$555.5 million, due to the impact of the 18.8% depreciation of the BRL against the USD on the exposure of the balance sheet between the beginning (R$1.56/US$) and end (R$1.85/US$) of the quarter.
On September 30, 2011, the net notional value of currency transactions in the dollar futures market through conventional non-deliverable forward contracts (NDFs) totaled US$426.2 million. The maturities are distributed between October 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 of 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 loss of R$91.9 million from hedge operations through swaps in the quarter was composed primarily of: (i) gains of R$22.1 million from pulp hedge operations and R$12.0 million from interest rate and index swap operations, (ii) losses of R$108.7 million from the sale of NDFs and R$18.8 million from Libor swaps in financing agreements. For more details see note 28 of the Quarterly Information (ITR).
Net Income
The Company posted a net loss of R$425.6 million in 3Q11, versus net income of R$103.6 million in 2Q11 and net income of R$272.8 million in 3Q10. In addition to the operational factors affecting EBITDA in the year-on-year comparison, net income was impacted: (i) negatively by the foreign exchange rate variations, financial expenses, depreciation and depletion; and (ii) positively by income tax and social contribution.
Debt
Gross debt closed 3Q11 at R$8.3 billion, 52.8% of which denominated in foreign currency and 47.2% in local currency. Suzano contracts foreign- currency debt as a natural hedge, given that more than 50% of revenue comes from exports. This structural exposure allows the Company to raise export funding in U.S. dollars at more competitive costs than local lines and reconcile financing payments with the flow of receivables from sales.
The increase in the gross debt over 2Q11 was primarily due to the impact of the 18.8% variation in the exchange rate on the debt balance between the beginning (R$1.56/US$) and end (R$1.85/US$) of the quarter, although the cash effect was limited to maturities and amortizations. In 3Q11, the Company contracted US$150 million in export-backed funding through “Export Pre-payment” operations. The Brazilian Development Bank (BNDES) also disbursed approximately R$132.7 million and agricultural NCEs (Export Credit Notes) brought in R$171.3 million.
The company ended the quarter with a cash position of R$3.0 billion and a high liquidity horizon of approximately 28 months. The liquidity horizon is the time during which the Company‟s cash balance and operational cash flow, in times of product price and exchange rate stress, is capable of covering 100% of period principal and interest amortizations; in other worIdnsde, xitExispotshuerea- m9/3o0u/2n0t11of time we can support without accessing the debt markets.
On September 30, 2011, the gross debt was composed of 77.4% long-term maturities and 22.6% short-term maturities. Suzano has been concentrating its efforts on seeking out longer-term funding with attractive costs, such as the 10-year senior notes issue, and funding with highly favorable terms and conditions to projects, including grace periods and lengthier amortizations in line4%with the cash flows from the projects. In September 2011, the average cost of debt was 9.9% p.a. in BRL and24%.6% p.a. in USD, while the average term of the consolidated debt at the close of the quarter was 4.0 years.
Net debt closed the quarter at R$5,291.4 million, up 26.1% from June 2011, due to: (i) increase in the gross debt as a result of variation in the exchange rate on the debt balance between the beginning (R$1.56/US$) and end (R$1.85/US$) of the quarter, and the consequent accounting impact on foreign- currency-denominated debt; and (ii) the R$146.7 million reduction in EBITDA in the 12 months ended September 30, 2011 in comparison with EBITDA in the 12 months ended June 30, 2011. The net debt/EBITDA ratio stood at 4.2x.
Capex
The increase in investments in 3Q11 was mainly due to investments in expansion projects as the industrial investment in the Maranhão unit.
The increase in maintenance capex in 3Q11 was due to: (i) the acquisition of 50% of Conpacel; (ii) higher industrial investments in Limeira and Mucuri; and (iii) higher need for planting in order to recover the average forest age in Bahia.
In the first nine 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 Market
Suzano‟s preferred shares (SUZB5) closed September at R$8.36. The Company‟s stock is listed in the BM&FBovespa‟s Level 1 of Corporate Governance and has been included in the Corporate Sustainability Index (ISE) for six consecutive years.
The Company‟s capital stock is represented by 140,039,904 common shares (SUZB3) and 268,852,497preferred 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 September 30th, 2011, 4,154,687 preferred shares and 6,786,194 common shares were held in treasury.
Suzano‟s market capitalization stood at R$3.4 billion on September 30th, 2011 and the 3Q11 free float amounted to 43.3% of the total capital stock.
Events in the Period
Acquisition of Shareholding Interest
On July 18, 2011, the Company announced that it had received a notice from its shareholder, David Feffer, stating that, in recent weeks, he had acquired 1,255,827 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 the PNAs issued by the Company.
In addition to the above-mentioned shareholding interest in the Company, Mr. Feffer also holds: (i) 2,280 common shares; and (ii) 36,918 debentures, convertible into approximately 2,221,831 PNAs as of December 16, 2012, pursuant to the Indenture of the 5th Debenture Issue of May 12, 2011.
In said communication, Mr. Feffer declared that the increase in shareholding interest was a mere investment and that he had no intention of altering the Company‟s control or administrative structure.
Explanation on the article published in Valor Econômico newspaper on September 19, 2011
On September 19, 2011, in regard to the news item entitled SUZANO STUDYING THE SALE OF PAPER ASSETS („SUZANO AVALIA VENDA DE ATIVOS DE PAPEL‟) in the VALOR ECONÔMICO newspaper, Suzano confirmed all that has been previously announced and explained to the market:
Thus, Suzano reinforces that there is no need for short-term measures to run the business and it will continue to analyze the best alternatives for its capital structure and businesses opportunities.
Election of the Board of Executive Officers
On September 26, 2011, Suzano announced changes in the membership of its Board of Executive Officers in line with the succession plan: Bernardo Szpigel resigned from his position as Chief Financial Officer due to retirement and was replaced by Alberto Monteiro, who also accumulated the position of Investor Relations Officer.
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