Suzano - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for holding and welcome to Suzano's conference call to discuss the results for the first quarter of 2024. We would like to inform that all participants will be in a listen-only mode during the presentation that will be addressed by the CEO, Mr. Walter Schalka, and other executive officers. This call will be presented in English with simultaneous translation to Portuguese. To change the audio, you can press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese room. After that, you can select "Mute Original Audio." Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano's management and on 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'll turn the conference over to Mr. Walter Schalka. Please, you may begin your presentation.

Walter Schalka (CEO)

Good morning, everyone. It's a great pleasure to have you with me to be part of the first quarter results 2024 of Suzano. I would like just to mention to you that we have almost everyone from the C-level with us today and will be available for a Q&A session after our presentation. It's a great pleasure to announce the results of the first quarter. Once again, we had a very good operational performance with volumes on the pulp side with 2.4 million tons. We have been improving volumes on the paper side as well and on the consumer goods. We had BRL 4.6 billion on EBITDA on this quarter. And it's and I would like just to mention to you and reinforce the point that we are continually looking forward to our competitiveness.

It's very important to mention our operational cash cost that was 812 BRL per ton, a very good performance and very close to the performance of the fourth quarter last year. Just to reinforce our positioning on our robust balance sheet with $6.3 billion in cash plus revolving position. With a net debt, there is $11.9 billion. We are reaching the peak of our leverage with 3.5x net debt over EBITDA. We are going to present Cerrado. Aires is going to present in a few minutes to you. We have been approaching the end of Cerrado with less disbursement on the future. Now I'm going to pass to Fabio that is going to talk a little bit about packaging and paper market.

Fabio Almeida de Oliveira (EVP)

Thank you, Walter. Good morning, everyone. Please let's turn to the next page on the presentation. In the first quarter of 2024, we have faced different market conditions in our domestic and international markets. Outside Brazil, we have seen demand starting to rebound if inventory replenishment builds up after the strong distocking process through most of 2023. While on the domestic market, demand started the years lower than expected. Demand for print-and-write papers in Brazil shrunk 20% in the two first months of 2024 when compared to the same period of the previous years, with the impact of the postponement of federal and state government's book programs and customers' inventory adjustments led by slower economic activity at the beginning of the year. Apart from the already expected structural reduction in quoted paper demand for the promotional segment.

Regarding paperboard, demand in Brazil has been impacted by slowdown in consumer spending, which coupled with previous inventory adjustments resulted in a 6% demand reduction in the two first months of 2024 compared to the same period of 2023 according to Ibá's available data. Suzano total volumes in Q1 were 3% higher than Q1 2023, driven by higher export volumes. Compared to the last quarter, our total sales reduced 20% due to the usual sales seasonality between such quarters. The average net price during the quarter was flattish quarter-over-quarter. We have delivered higher prices quarter-over-quarter in the domestic market due to price increases in our uncoated woodfree and cut-size product lines. In international markets, our prices were slightly lower quarter-over-quarter due to product and regional mix. Looking at EBITDA, the 19% decrease quarter-over-quarter was driven by lower sales volume.

When compared on a year-over-year basis, the 35% decrease in EBITDA was mostly led by lower prices in the external markets. Our EBITDA per ton was slightly better on a quarter-over-quarter basis. Looking ahead to the coming quarters, we expect healthier demand levels as inventory buildup continues in mature markets. In the domestic markets, we expect the seasonal cycle to support demand in the cut-size segment, a recovery in the uncoated woodfree market segment, as well as improving paperboard demand for packaging. The improvement in demand combined with current market expectations for pulp, energy, and wood prices is expected to sustain current price levels on the domestic market. While on international markets, apart from the rapidly evolving scenario, we generally expect price levels to increase as several major international players have already announced price increases for the coming months.

Despite the mounting cost pressures, the impact is not uniformly distributed across our players and regions. Looking ahead, we expect a flattish Cash Cost performance in our paper and packaging business throughout 2024, backed by our strong structural competitiveness. Now I will turn over to Leo, who will be presenting our pulp business results.

Leonardo Grimaldi (Chief Commercial Officer)

Thanks, Fabio, and good morning, everyone. Let's please move to the next slide of our presentation to see our pulp business unit results. I would like to begin by sharing with you some facts related to this past quarter. Demand for hardwood pulp was positively surprised, has positively surprised our expectations throughout the period, both in China, where the rhythm of paper production continued quite healthy, actually growing 6% to Q1 compared to Q1 2023 as per SCI, and with no pressure on paper producers' inventories, as well as in Europe, which has recovered significantly from the valley seen in the first half of 2023 and where our customers kept revising their forecasts up and up. On the supply side of the pulp fundamentals, we have noticed several disruptions.

Coming from impacts of permanent closures announced previously, added to several new and unexpected events such as strikes, wars, and climate-related events, as well as the idling of some mills, reducing the availability of pulp in the whole system. Demand from our customers and the push for order intake has exceeded our capability to serve all their requests. We had to limit and cap order intake during all months of Q1. Despite our efforts to reestablish our inventories in Europe and in North America during the quarter, optimum inventory levels were still not achieved. We forecast that this situation will still take some months to level out and for inventories to be physically repositioned and available in European and North American terminals. As I had mentioned in our previous earnings calls, our inventory levels across the systems were too low and unsustainable in the end of 2023.

During Q1, we had to start reestablishing a better operational condition. Regions and customers who are served by Suzano directly out of Brazil, like Middle East, Africa, Asia, including China, are still running with significant shipment and invoicing delays, with no improvement during the quarter and indeed even more challenging, now reaching more than 70 days of backlog at the end of this period. Coming now to the graphs on the slide, our first quarter sales were limited by inventory replenishment, as I have mentioned before. Our average export prices increased to $624 per ton, capturing only partially our price increases due to the high backlog levels, as I have also mentioned previously. Our price increase announcements during the quarter were all fully implemented in their respective markets. Our EBITDA totaled BRL 3.9 billion, with an improvement compared to Q4 due to higher prices despite lower volumes.

Now looking forward, I would like to highlight the following points. Rolling forecasts coming from our customers in Europe and America keep improving, and we still see challenges to serve all the pulp demand in the short term. It will take time to reposition our inventories accordingly. Effects of strikes and mill failures in Europe have unexpectedly generated additional pulp demand for Suzano. Our current inventory levels do not allow us to tackle absolutely any unplanned pulp demand. We expect S&D dynamics in Europe to remain quite tight during the second quarter. In China, we know that the leading paper producers are taking advantage of their financial strengths to lower paper producers and the lower paper producers' margins in general in the market to push for market share gains, consequently squeezing smaller paper producers.

Smaller paper producers' lower operating rates, as recently reported, are being compensated by higher operating rates from larger paper producers. As in China, downstream paper demand continues healthy, also supported by our customers' macro sentiment in general. We do not expect major changes to paper production rhythm. Indeed, this paper production rhythm has been quite solid during this year. Demand for our pulp came again over our expectations in April. As we speak, we are still capping order intake and refraining from offering to spot markets as an effort to recover timely shipment to our customers. As we speak, we are completely oversold. In addition to tailwind demand perspectives, our constructive view for the short term is being even more benefited from disruptions on supply chain, on the supply side of the equation, for which we are not sensing any significant improvement soon.

Reason why we feel dispositive price momentum should continue. News keep coming, and you all have read yesterday that a new permanent closure was announced. With that said, I would now like to invite Aires to address with you the cash cost performance of the quarter.

Walter Schalka (CEO)

Thank you, Leo. Good morning, everyone. We are in slide 7. The cash production cost performing in line with companies' operational plan. Presenting stability compared with the previous quarter. In addition to the benefits from the dropping in the price of diesel and caustic soda, which is the main chemical in the cash cost composition. We operate on a smaller average distance from forest to mill and had better performance in harvesting activities. Further reducing the cost of wood. These positive factors were offset by non-occurring events in some mills. Which negatively impact input consumption and fixed costs in the quarter. In the end of comparison, we see a clear benefit of the better operational performance on wood and inputs in the last quarter. When in addition to the reduction observed in the commodity price in the period. Looking ahead.

We continue to see stability in the cash production costs throughout the year, although with a small variation between upcoming quarters. Moving to the next slide. We are focused on the final sprint of Cerrado Project. Which has already reached 95%-94% physical completion and 87% of physical execution by April. The project's CapEx guidance for 2024 is maintained at BRL 4.6 billion. With more than half having already been disbursed by April. Therefore, reducing cash flow consumption in the remaining eight months of the year. On the next page. We would like to reinforce the company's vision of the expected ramp-up curve of the new plants. To be completed in nine months. Such performance means a production volume of 900,000 tons and sales volume of 700,000 tons in 2024. In the first 12 months after the startup. We expect to produce 2 million tons of pulp in the new mill.

Marcelo, the floor is yours.

Marcelo Bacci (CFO)

Thank you, Aires. As Aires has just mentioned, we are at the end of an investment cycle. That is paving the way for us for further deleveraging in the coming months. So I'd like to start on slide 9 to give you a recap on what happened with our net debt in the last 12 months. Despite the fact that we invested $2.8 billion in the period, our net debt just went up from $10.9 billion to $11.9 billion in the period. Because of a very strong operational cash flow and also because of our very consistent derivative policy or hedging policy, so that led the net debt to EBITDA ratio to the level of 3.5x at this point. Which is most likely the peak for this cycle of investment. We expect this number to start improving in the coming quarters. In terms of liquidity and amortization schedule.

We have a very comfortable position with a significant amount of liquidity, $3.9 billion of cash. Plus standby facilities and undrawn facilities that will be drawn in the coming months. With a very low level of maturities in the coming years. That will lead us to a very comfortable position when it comes to average term and also average cost of our debt. With that, I will turn back to Walter for his closing remarks.

Walter Schalka (CEO)

Now we are going for a Q&A session. Please, we are available right now to answer your questions.

We will now begin the Q&A section for investors and analysts. If you wish to ask a question, please press the button raise hand. If your question has already been answered, you can leave the queue by clicking on put hand down. Our first question comes from Danielle Sasson with Itaú BBA.

Daniel Sasson (Analyst)

Hello, hi guys. Good morning, everyone. Thanks. Thanks for taking my questions. Walter, Suzano is about to once again deliver an important growth project on time and on budget. You showed the avenues that it opens up ahead. It keeps your excellent track record and so on and so forth. But now I think all eyes will be on the next steps, right? So it would be very helpful if you could elaborate on the next potential growth avenues that you see for Suzano. And more specifically, you have stated in the past that Suzano would be willing to analyze opportunities in different geographies as well. So if you could explain to us a little bit what would be the rationale or the main positives for Suzano if it decides to diversify abroad. And my second question, Walter, is also related to capital allocation discipline.

When you became the company CEO in 2011, the industry was going through a very hard time, right? In 2012, capital increases had to be made at Suzano, at Fibria. Then you conducted what I would call a transformational change that allowed your balance sheet to be strong enough to even raise debt, consolidate the industry, create value to shareholders. Looking ahead, what do you think are the internal or the specific breaks you think that Suzano has put in place to guarantee that rationality in capital allocation decisions will always continue to be the case? Thank you.

Walter Schalka (CEO)

Thank you, Daniel. It's a pleasure to answer this question. First of all, I'd like to say to all of the next questions that we are not going to comment on possible speculations that we are seeing on the press. But it's very important to give a very clear framework from our view of the future. First, I think it's very important to mention that we are long-term viewers. We are always analyzing the opportunities to shareholder value creation all the time. That could be with organic or inorganic growth, but could be through buyback shares as well. We are value creation. It's a very important point for us, always on a more long-term view and sharing value with all shareholders all the time. Give an example to you. It's what we did when we moved to a single class share to benefit all of the shareholders.

Second, I think it's quite important to mention about our capital allocation discipline. I think this is very important to us. We are on an industry that is very intense in capital, and this is very important. We always, I'm going to reinforce, always make a very deep analysis and not based only with one person. It's a group of people discussing what the potential new opportunities that we are facing for the future. I can mention to you some of the movements that we did that was on this direction. On organic moves. Sorry, inorganic moves. We had deals such as Ibema, such as FACEPA, such as expansion of land banking, including Parkia. With Fibria deal with Kimberly-Clark tissue acquisition in Brazil. Each of them, we have been going through the discussions how we would change our value creation and improve the value creation for the future.

On organic moves. We had organic moves on the tissue business, on the fluff market, or in Cerrado. When we presented Cerrado, many of the people were asking us about the value creation and the risks of implementation of that. Now it's very clear that our team performed very well once again. With a very good track record, and we will deliver a plan that is going to transform the company for the future. A plan that is going to have 2.5 million additional tons to the company with the lowest cash cost on our system and in the industry. Around $100 per ton. With retrofits that we made on Suzano facility, on Aracruz facility, on Mucuri facility. It's another source of value creation. Then, what I'd like to reinforce, Daniel, is that we are not just looking growth for growth.

We are looking for growth for value creation that could be on retrofitting, on new avenues for the future, on organic or inorganic movements. The third issue that I'd like to bring to your attention right now, it's our financial discipline. We do have a financial discipline policy, and we will stick with this policy that we have today. It's very clear. It's public, our policy, and we will stick with our policy. And fourth and not less important, in my opinion, very important, is that we have a very strong team. We have a team that is committed, a team that is highly competent. And align with all the stakeholders. We are all the time with this team looking for opportunities to reach new boundaries, new opportunities, new situations that we would deliver value creation to all stakeholders.

All of this, it's balanced on something that is quite important to us. That we want to create differentiation all the time in every single move that we do. We are going to create differentiation and we are going to create scale. The combination of both that would deliver value to everyone for the future.

Daniel Sasson (Analyst)

Thank you so much, Walter. Thank you for all these years.

Operator (participant)

Next question from John Brent with HSBC.

John Brent (Head of Stress Testing Policy & Model Governance)

Hi, good morning, gentlemen. Walter, thank you very much for the past decade plus. I wish you the best of luck in the future and your role on the board. I guess just sticking with the capital allocation that I understand you can't make any comments about what's happening in the media or what they're reporting. But I'm just curious, could you just maybe discuss it a little bit more in terms of a size of a deal? Are there any limitations? Is there sort of an amount or a deal that might be too big for you? And on the financing side, yes, your net debt and your leverage policies are very clear. But you've also gone higher than the 3.5 times in the past and as long as there's sort of a clear deleveraging path.

I'm wondering, would you sort of break a 4.5-5 times leverage for a deal that you considered really interesting? I guess that's, and I guess also with that, would you perhaps consider equity in any deal? Or is that sort of off the table? And then my second question is just related to the pulp volumes. Pulp sales volumes were down 2% year-on-year. I understand there were some inventory builds, but you had three mills with downtime last year and there were no mills with downtime this year. So presumably production was a lot higher. So I'm wondering, can we assume that the rest of that, the rest of that production was put into inventory? And if you could sort of quantify how much more inventory builds you have to do and if it's safe to assume that you're running at 100% capacity utilization.

Thank you.

Walter Schalka (CEO)

Thank you, John, for your question. It's Walter here on capital allocation for us. As I mentioned to you, we are very disciplined on that. And we are very disciplined on our financial policy and very clear what we have right now. We are not going to change our financial policy. We could exceed at some time the 3.5, but it's very clear that we have this. We need to present a remedy on this. It's very clear on our policy. And we have happened to us, I think 1 or 2 times, and every time that we did, we present a remedy to our shareholders. Then we are very disciplined on that. We want to be between 2 and 3, and we could reach 3.5 times during an expansion program. But if we exceed that, we need to have a remedy on that.

Second, if you ask about if the potential movements for the future could bring cash and all shares, this is something depending on the opportunities that we have. But more important than that is the fact that we are always disciplined on value creation. Guys, we are not here just for the sake of growth. This is not our mindset. Our mindset, it's value creation. It's not growth in terms of egocentric for people here or the company being better or larger and things like that. We want to be, and it's very clear, delivering value creation to our shareholders. And we are very agnostic about organic or inorganic and about geographies. This is something very important to you to understand.

If we are going to use cash and shares depending on the opportunities that you have and depending on how we are going to see the potential value creation on these opportunities.

Leo Grimaldi (EVP of Commercial Pulp & Logistics)

Hi, sorry, John, this is Leo here. I'm going to answer your question related to bulk volumes and inventory build up and production. First of all, we have been stating for quite a time that we are not going to issue any comments related to our production levels. So I'm going to focus my answer on inventory rebuild and what we're seeing. First of all, the volume effect on Q1 is all related to inventory rebuild. We ended last year with a very unsustainable level of inventories, which we had to quickly address in order not to compromise our agreements with key customers.

That was the issue that generated this below expected as per analyst volumes in the quarter. We are still not there yet in terms of inventory rebuild. There's still some space to be fulfilled. There's cargo in the sea or leaving Brazil. That's in our inventories, but still not at our terminals available for our customers. And this is one of the reasons why I mentioned that we are completely oversold at this time and actually capping order intake in all markets.

John Brent (Head of Stress Testing Policy & Model Governance)

Okay, that's clear. Thank you. Walter, just a quick follow-up. How would you measure value creation? Is there a certain ROE or ROIC that you would measure that at, or is there some other way that you would measure value creation?

Walter Schalka (CEO)

Yeah, we required a spread overwalk on our projects. Of course, we are not going to open to the market what is the required spread. And this spread, it's not the same for different projects. When we have a retrofit, for example, the spread requires are lower because the execution risks are much lower. When we have Cerrado, it's a little bit higher. When it's a potential acquisition, it's even higher than that. It's a different spread for different movements that we are doing. There is required overwalk.

John Brent (Head of Stress Testing Policy & Model Governance)

Very clear. Thank you and good luck, Walter. Thanks again.

Operator (participant)

Next question from Leonardo Correa with BTG.

Leonardo Correa (Associate Partner Equity Research Basic Materials)

Good morning, everyone. Can you hear me? Yes?

Walter Schalka (CEO)

Yes, Leo.

Leonardo Correa (Associate Partner Equity Research Basic Materials)

Okay. Thank you. So I have a couple of questions here, guys. Sorry to insist on the capital allocation theme, but I guess it's going to be a bit of a monothematic discussion here today. Yeah, so the first point, maybe going back to John's issue on M&A internationalization, right, Walter? Correct me if I'm wrong. Maybe my understanding over the past quarters and years has been a bit off, but I guess the idea for me was always, look, the bar for internationalizing the company is very high. The bar for M&A is high. I mean, I guess you guys were talking about diversifying a bit away from pulp and diversifying from markets, from very big China exposure.

But I guess the issue, the main discussion point over the past week has been on size and the level of risk that management is willing, management and board is willing to take on via potential move, which would be big, right? And I know that you guys are not commenting specifically on market speculation, which I understand completely. But just to understand, I mean, if the next move would be something big or you would be still my former understanding of something more bolt-on, smaller, lower risk. I just want to see how, if anything, the strategy of the company changed and the level of diversification that you guys are looking for because I think that's key.

I don't think the market is at this point really understanding what the next move is and how the risk tolerance is in the company and how much diversification you guys are really looking for. So I think any clarity on that would be very helpful for the market. Second point, still on this related topic, right, but on the buyback, right? I mean, we've been in the middle of a big correction in shares, something completely unusual, right, for people who follow Suzano for many years. I mean, the stock is down quite a lot this week. Clearly, there's a lot of doubt, right, in the market at this point. I mean, under any metric, right, NPV, if we think of multiples, right, into 2025, I mean, the stock is highly derated, right?

I mean, the stock is probably below 5x EBITDA, which in my view at least makes very little sense, right, fundamentally. Given that you guys already have a buyback and have been active, I mean, how do you view the return, the IRR now of buying back shares stacked up to any other investment alternative? I can imagine at this point shares are looking very attractive, but I just wanted to hear you on that and whether you would be looking to increase the buyback. Thank you very much.

Walter Schalka (CEO)

Thank you, Leo. I think we are not going to comment on speculation. I'm going to repeat that, I think several times during this call. But it's very important to mention that we presented to you a framework during our Suzano Day last year on very clear what would be our positioning for the future. Of course, we had big deals such as Fibria. We have smaller deals such as FACEPA or IBEMA. But in every single deal that we are doing, we are looking for value creation to the shareholders on long term, looking for differentiation and looking for scale on the beginning or in the future. But it's very important to mention to you that in every move that we made, we were very, very disciplined on our financial policy. And we will continue to do that. I'm not understanding the reaction of the market right now.

I can, of course, from outside, from speculation on the press that the market is reacting, that we are going to do crazy things. I'm assuring you that we are not doing anything that could create any kind of risk to the company. In the other side, I'm not going to just make any movements here just for the sake of growth. We are going to be looking for value creation all the time. This is and could be bolt-on opportunities or can be large opportunities. Can be on geography A or B. Can be on organic or inorganic. It's always with this mindset. It's very clear that the market right now is challenging our long-term positioning. But our track record is always in this direction. We are going to continue on a very disciplined and very clear and humble position to continue working on that direction.

Marcelo, now your second question regarding buybacks.

Marcelo Bacci (CFO)

Yeah, Leo, thank you for the question. We have a buyback program open. Of course, during the quiet period now, we were not in a position to operate that buyback till the release of the results yesterday. And we will certainly consider that possibility for the future. And of course, this correction on the share price is an additional incentive in that direction, but we have no decision taken in that regard.

Leonardo Correa (Associate Partner Equity Research Basic Materials)

Okay, thank you very much, Walter and Marcelo.

Operator (participant)

Next question from Rodolfo Angele with J.P. Morgan.

Rodolfo Angele (Equity Research Analyst)

Hi, good morning. I'm going to switch gears. I have only one question. Isn't it great to be starting up a project like Cerrado in a time when I hear Leo saying that you're oversold for the quarter? So my question to you, and probably this is to Leo, so what's the strategy for this ramp-up? You showed the typical very fast ramp-up for the project, nine months. But if we start to see price reactions, is there flexibility to accommodate things? So can you comment a little bit on what to expect and any effects you expect to see if possible? If you can comment on pulp pricing into the second half of the year ending 2025? Thank you.

Leo Grimaldi (EVP of Commercial Pulp & Logistics)

Hi, Rodolfo. Thank you for the question about Cerrado location. Unfortunately, I'll start with the bad news. We cannot share our strategy because obviously it's quite sensitive to our commercial positioning throughout the next month. However, I can clearly state that fundamentals are indeed quite supportive as we speak.

And these unexpected events keep playing a significant role in S&D dynamics and I guess surprising all markets, right? We have a big weather-related event just now. And we have to observe what will be happening on the next weeks and months as the year progresses. It is also important to say that one of the key avenues that we have been presenting to you during our Suzano days or when we are together is our view on fiber transition, which we call fiber to fiber. Last year, there were over 2.5 million tons of permanent closures in bleached chemical pulp.

Of that, we see this year an impact of 1.7 million tons just because of the timing of the announcements. And this year so far, with yesterday's night announcement, we have reached 1 million tons of permanent closure in bleached chemical pulp. That poses a huge opportunity for us. We have been saying that hardwood has been gaining market share on fibers throughout time. And this will only accelerate the speed and the presence and the relevance of hardwood and probably allocating Suzano and Cerrado in this space, which is being left by these permanent closures as well.

Rodolfo Angele (Equity Research Analyst)

Okay, thank you very much.

Operator (participant)

Next question from Caio Ribeiro with Bank of America.

Caio Ribeiro (Director and Equity Research Analyst)

Yeah, good morning, everyone. Thanks for the opportunity here. So my first question is on paper markets in Brazil where demand started off the year quite weak. As you mentioned, your leads, with printing and writing dropping 20% year-over-year in the first two months and paper books also down around 6%. I just wanted to see, according to you, what's driving this weakness and your expectations for the coming quarters. And then also on paper prices, right, whether this weakness in demand could translate into further weakness for prices of paper. And then secondly, on your pulp cash costs, I just wanted to see, I mean, if you could share a bit more color on how you see them evolving in the coming quarters, what the drivers are there.

If you see room looking a little further ahead for your total operational expenditure guidance for 2027 to see price positive at this point? Thanks.

Fabio Oliveira (EVP of Paper & Packaging)

Hi Caio, good morning. It's Fabio here. I'm going to take the first question on the paper side. Paper demand in Brazil, we need to separate here print and writing and packaging. For print and writing, the year has started slower than expected. This is mainly due to some postponements in the books program from state and federal government. There's a discussion in Brazil now about the higher education curriculum, and that's driving also the postponement of some of the books program. But we understand that moving forward into the year, there's a chance that it's going to be even the volumes for the books program is going to be even higher due to this curriculum change. It's just a movement of demand throughout the year. So yes, the Q1, the demand was lower, mainly for uncoated woodfree. For cut-size, the demand was resilient.

We expect demand to improve throughout the year. Regarding paper prices, we did implement price increases for uncoated woodfree and cut-size in the Q1. We announced around between 4%-5% price increases, and these price increases were fully implemented. We expect these prices to keep until the end of the year. For packaging, the start of the year, as we mentioned, the demand shrunk 6%, and that's mainly due to lower economic activity in consumer spending. We believe this is seasonality in the Q1, and that's expected to change as we move forward. As a matter of fact, we started seeing changes at the end of the Q1 in March and in April. We're optimistic that it's going to continue to grow as it has been growing for the last years.

It's just a lower start of the year for different reasons here in print and writing packaging.

Aires Galhardo (Director Executive)

Hi Caio, it's Iris speaking. We continue to see stability in the cash cost projection for this year. Of course, after the Q1 and the next ones, we have a shutdown scheduled planned. Then it could affect in certain quarters the mix and the average distance from forest to the mill. But I believe that to impact a little single digit in the cash cost. And especially in the Q4, in the first part of next year, after the ramp-up of Cerrado, we run our cash cost for our best performance, especially because of the impact of Cerrado and the growth of our new forest that will reduce our average from forest to the mills, put in order with our target or review to 2027.

Operator (participant)

Next question from Marcio Farid with Goldman Sachs.

Marcio Farid (VP)

Morning, everyone. Thanks for the time. Leo, first question to you. Obviously, pulp prices have been much stronger than expected for the past few months. There has been kind of an unusual situation where Europe is a lot stronger than China, right? And I think you and I have talked about this in the past. China paper margin seems to be on the weak side, but then China paper market is always oversupplied. So it's hard to expect margins to improve significantly from here. So I think the question is, I mean, how do you treat these regional differences from a profitability perspective? And obviously, it does feel like all the incentive is for you to sell as much as possible in Europe, where margins and prices are at least or close to $100 per ton higher than China, right?

Or are we going to be seeing a more aggressive push for China pulp prices to catch up to Europe and eventually we are back to one single global market where profitability is kind of imbalanced in the different regions? And if you can comment on why pulp futures in China have been so weak? I know it's a hard one, but if you have any idea of what's driving the domestic sentiment, it would be good. And then Walter, a follow-up to you on your early comments, please. I know you mentioned some quite successful acquisitions, right? You mentioned IBEMA, Kimberly Brazil, Fibria. I think all of those they had one thing in common, which was they were all based in Brazil, right? So I think the question here is the idea of internationalization. I mean, what's the strategic rationale behind it?

Because I think Suzano was based on the foundation of having competitive and solid biological assets, right? And international companies, they either don't have that forest base or there's no closeness in terms of competitiveness to Brazil, right? So just trying to understand what will be your ability to generate value outside of Brazil, if not starting from the forest, right? Those are my questions. Thank you.

Leo Grimaldi (EVP of Commercial Pulp & Logistics)

Okay, Marcio, this is Leo here. I'm going to tackle here the first part of your question or questions. Yeah, how do we do this selection between regions and what do we expect regarding prices? First of all, we follow individual market dynamics, being respectful to our customers, understanding their strategies, their current dynamics. Obviously, we want a healthy chain throughout all major markets. This situation in China, as we have spoken previously, is typical. When prices are moving up, there's generally a market share dispute between the smaller players who usually lose market shares as they have to buy pulp from the traders or in current prices to market. While bigger customers who have inventories who have different average prices in their inventories use this financial and momentarily strength to capture this market share.

So all in all, we just see a movement of production from smaller to bigger customers. And since Suzano, as you know, supports mainly or usually these larger customers who buy directly from us, we are being benefited. And actually, as I mentioned, we are actually having even to cap the level of order entry and how we accept this push from Chinese and other customers as well. In regards to difference of prices between markets, as we have seen in several past cycles, obviously, as a commodity, prices trend towards a convergence. So we expect that prices will converge, will balance out. Obviously, they are not identical as cost to service Europe under the European model and North American model is a bit higher than what we see today in China. But obviously, they're going to tend towards a convergence.

With current S&D fundamentals, all indications would lead us to think that prices in Asia will have or still have a lot of space to catch up and to meet other regions and other prices as well. Last but not least, on your question about pulp futures in China, we cannot comment too much on what goes on in this market. We understand it's quite speculative. More than 50% of the trade is done by individuals who have daily trades and not quite related to the business, not a lot of open terms and positions in the market. But what I can say is with all the recent news that we have been reading and seeing and softwood and closures and closures and closures, my expectation is that the price gap tends to be bigger, should be bigger.

What we see and forecast for the future is that this current price gap that we see inclusive in China today makes no sense and will be at a completely different level for future years.

Walter Schalka (CEO)

Thank you, Marcio, for your question. I would like to reinforce your point of searching for competitiveness. This is critical for us. We are not going to make any kind of transaction or potential M&A transaction that do not allow us to move on transformation of that asset that could create competitiveness. For us, differentiation is a critical issue for us. We will always be looking for differentiation on our strategy. When we start moving for the tissue business, many of you ask us, "Walter, you are entering a business without branding, without any major brand, and without distribution. How are we going to perform on that?" Then we said at that time, "We have other potential competitiveness sources, but we will look for brand and distribution. Right now, we have all of that. We will not buy assets and keep them on a status quo position.

We will always transform the assets." This is part of the analysis that we are doing all the time when we are going for potential M&A transactions. This is something very important to us. You are right when you mentioned about the lack of expertise on internationalization, and you are right about that. We need to be humbled about this position. This is something new for us, and we need to do it as well with the same track record that we had in Brazil. As I mentioned to you, geography is not for us a limitation. In the future, the company will go through internationalization. This is very important to mention to you. We hope and we will work very hard to keep the same performance that we had on our track record of M&A transactions here in Brazil. Thank you very much.

Operator (participant)

Next question from Alfonso Salazar with Scotiabank.

Walter Schalka (CEO)

Hello?

Hello, go ahead, Alfonso.

Alfonso Salazar (Director)

Thank you. So Walter, a moment ago, you mentioned that Suzano is agnostic about organic or inorganic growth and also about geographies. The question that I have is, what about products? Are you agnostic also about growth in different products like pulp, tissue, or other paper grades? And related to this question is, we know that there are at least two other large pulp mills being under analysis in Brazil. And to what extent does this change the view that good forestry land for a new pulp mill is scarce in Brazil? And what are the expectations in that regard, especially because we thought that, or at least my impression is that, it's going to be more challenging to build a new pulp mill in Brazil in the future?

Walter Schalka (CEO)

Thank you, Alfonso. I'm going to start with the second question. Brazil will face opportunities for new plants for the future. But at this point of time now, with wood scarcity that we have in Brazil, and as you know, we are not seeing any construction of new plants at this point of time, we are not going to see a new plant in Brazil in the next three years. It's almost impossible to have that. Then, of course, everybody can build your land banking, then can start planting, and they can have wood for the future. This is a possibility, but not on the short term. It's very important to mention as well that new projects will require higher pulp prices. The CApEX cost per ton is going up. The wood cost is going up. The land is going up. The interest rates are high.

This is going to require higher pulp prices for the future. I'm very pleased to see that with higher pulp prices, if it happens in the future. Suzano is very well positioned to deliver very good returns to our shareholders. Regarding the first question on the products, we could have different verticals that we aim for the future. We already mentioned to you during our Suzano Day last year that the textile market, it's an important market for us in the future. The packaging market, it's an important market that we are looking for in the future. Then we will consider these possibilities. This is not a decision made at this point of time, but we will consider how we are going to expand on different verticals for the future.

Alfonso Salazar (Director)

Excellent. Very clear. Thank you.

Operator (participant)

The Q&A section is over. We would like to hand the floor back to Mr. Walter Schalka for his final remarks.

Walter Schalka (CEO)

Well, I would like to thank you very much. I would like to spend 2 or 3 minutes to thank a lot of people here. We are after more than 50 of these sessions that I had in the last 11 years with you. I'm going to hand over my position to Beto. But I would like to thank you, starting with thanking the board of directors of Suzano, that have been supporting us at the C-level for the last 11 years. I would like to thank every one of my colleagues of the C-level that have been working with us to deliver a new company, to transform Suzano all the time.

I would like to have a very big applause to more than 40,000 people that every single day have been working with us to make Suzano better and to impact the society, impact all the stakeholders, and how we can transform Suzano all the time. And more than that, I would like to thank you as well, the buy and the sell side that we have been working with us for many years, understanding the company, bringing new ideas, investors that are bringing new ideas to us, challenging our position. We are very humble all the time to hear, listen, and to implement things that you have been recommending for us several times. The good news is that the company has been improving. We are not perfect. We will not be perfect. But we have been improving a lot, this organization.

I'm very pleased with the impact that we had with the society, not only on the environmental side, but on the social side as well. On the economic side, creating value to different stakeholders. I'm very pleased with the development. Thank you very much for that. Now I'm going to pass to Beto Abreu for his few words. Not only few words, but the first words as a leader of this organization for the future.

Beto Abreu (CEO Designate)

Thank you very much, Walter. Hello, everyone. Walter, let me start by saying my congratulations to you. It's really very rare to see such a brilliant journey as a leader as you did. All the best for you in the next cycle. That's what we all deserve. I also want to say that I'm very glad to join this group, to be part of this team.

This is a unique organization. This is a very powerful team and a very broad, I would say, business platform to keep creating value for all of our stakeholders. I must say, with the same level of discipline and capital allocation. I also want to say to all of you that we're going to continue the hard work to generate this value. I'm also looking forward to meeting you, either to see you personally, to keep talking about our business. A very thank you for attending the call. I will have the pleasure to be with you in the next coming months. Thank you very much.

Operator (participant)

The Suzano S.A. Q1 of the 2024 conference call is concluded. The Investor Relations Department is available to answer further questions you may have. Thank you and have a good afternoon.