Suzano - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for holding, welcome to Suzano's conference call to discuss the results for the second quarter of 2023. We would like to inform you 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. After the company's remarks are completed, there will be a question and answer section, when further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. 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 would like to turn the floor over to the company's CEO. Please, Mr. Walter Schalka, you may proceed.

Walter Schalka (CEO)

Good morning, everyone. It's a great pleasure to be with you. Welcome to the second quarter results presented by Suzano. With me here, we have a large part number of our C-level. Please be free at the end of the session, of the presentation, to make the questions to everyone. I think I would like to highlight at this point of time, the resiliency of the company. I think the company is very well prepared, once again, to navigate on this cycle with lower pulp prices. The company have been preparing ourselves. We know there is part of the volatility process that we are facing in our industry, and we are well prepared for this month.

I think it's very clear to all of us that the company have been devoting capital allocation to different initiatives. There is the preparing the company for the future. We are going to, during this session, to go a little bit further on these discussions. I think on the sales side, the company had normal volumes on this season, seasonality period of the time in Pulp and Paper. Our inventory level are below the optimal levels, continue to be at below optimal levels. The performance of the company, we had during this quarter, BRL 3.9 billion on EBITDA. Our operating cash flow was BRL 2.2 billion. I think this is a very important KPI for us. There is many our EBITDA less sustainable investment CapEx.

Our cash cost, Aires is going to detail a little bit more on that. It's going down. We had 2% decrease during this quarter. The company, Marcel is going to explore a little bit more on that, is very well prepared for the cycle on our balance sheet. We have a very strong liquidity at this point of time. Our net debt, it's going up at a very slow pace comparing with the investment volumes that we are doing, the CapEx volumes that we are doing right now. We are less than one year prepare before we start up the Cerrado operations. Aires is going to explore a little bit with you about Cerrado, but we are very happy with our performance of our engineering team.

I think it's very important to mention and to highlight as well, that on June first of this year, we have the closing with the deal with Kimberly-Clark on the Tissue assets here in Brazil. With the combination that we have with these assets, we are facing some synergies that would bring value to our shareholders. We are going to deliver the synergies as long as the month will come. We are very pleased from the initial movements that we had, the initial opportunities that we are facing right now. The company right now is the leader on the Tissue business here in Brazil as a whole. Remembering that this was a PowerPoint operation five years ago, and right now we are already leading the Brazilian market.

Now, I'm going to turn over to Fabio, that is going to mention a little bit about our Packaging and Paper business.

Fabio Almeida de Oliveira (EVP of of Paper and Packaging)

Thank you, Walter, and good morning, everyone. Let's turn to the next page on the presentation. As it can be seen in the chart at the bottom, the Paper and Packaging business unit has delivered stable EBITDA and margins on a year-over-year basis, despite more challenging paper market conditions. As it's shown in the top left chart, Suzano's sales volume was 5% higher than the previous quarter, and 10% below when compared to the same period of last year. Demand for print and writing papers in export markets have been affected by the strong destocking cycle during the first half of 2023 combined with lower consumption of printing materials in the same period. This trend is more intense in mature markets, such as North America and Western Europe, mainly for coated papers. Demand for Packaging and uncoated grades have been more resilient, though.

Latin America, Suzano's main export region, was a positive note in such a challenging international market environment, hosting a demand growth in uncoated for the period. On the domestic market, according to Ibá, print and write demand decreased 18% in the first two months of Q2, compared to the same period of 2022. As mentioned, most of each decrease is centered around coated papers. While for uncoated papers, we still see demand resilience at the same level of last year, pushed by sales to the editorial school and off segments. For Paperboard, Ibá's public data on demand shows a 2% decrease on the first two months of Q2 versus the same period of last year. We considered that this decrease was due to inventory normalization throughout the chain, as demand for Packaging and consumption of recession goods remained solid.

Suzano paper price have been stable in the domestic market on a quarter-over-quarter basis, were 16% higher on a year-over-year basis. Our export prices, which were unusually higher than the domestic prices in the last year and a half, have decreased 20% in BRL on a quarter-over-quarter, although still 3% higher on a year-over-year basis. Export prices adjustments reflect the market fundamentals imbalance and a stronger FX in the period. Our consolidated average net price during the quarter was 11% higher on a year-over-year, 6% lower on a quarter-over-quarter basis. Looking now to the EBITDA, we see a flattish performance when compared to Q2. The 11% decrease quarter-over-quarter was due to lower price from export and stronger effects.

Looking ahead, we expect better market dynamics when compared to the first half of 2023, with demand behavior similar to pre-COVID seasonality, where second half of the year is stronger. Differently from last year, in which demand has been very linear throughout the year. In export markets, this stocking process is showing signs of coming to an end, and prices seems to have hit bottom in the main spot markets, while still higher than historical levels in mature markets. In the domestic market, demand should pick up due to the national government books program, a seasonally stronger second half of the year for Packaging, sustaining current price levels. A stronger local currency poses some risk to some product grades in the domestic market due to more competitive imports.

Still looking forward, costs should have a downturn trend in the end of the year, with more favorable raw materials and energy prices. Now, I will turn over to Leo, who will be presenting our Pulp business results.

Leonardo Grimaldi (EVP of of Commercial Pulp and Logistics)

Thank you, Fabio. Thank you, good morning, everyone. Let's please move to the next slide of our presentation to address with you the second quarter results of our Pulp business unit. As you can note on the upper left graph, our Q2 sales were 6% lower when compared to Q2 2022, and 2% above the preceding quarter. This lower sales volume, when compared to 2022, was a consequence of lower production due to a higher concentration of Suzano's planned downtimes during the quarter. As we have sold all volumes produced, our inventories are still below optimum operational levels, as mentioned by Walter. During the last quarter, demand has been quite mismatched in different regions in the world.

In China, demand for hardwood pulp was strong throughout the period, incentivized by quite low price levels, which have stimulated demand and the beginning of a restocking movement, initially from small and mid-sized regional paper producers, as well as additional pulp purchases coming from integrated pulp and paper producers who have reduced their pulp production. In China, paper and ivory board production grew 9.3% when compared to the first half of 2022. This trend was also perceived in the Q2 2023 compared to Q1, as Chinese paper and ivory board continues to grow 5% quarter-over-quarter. Tissue was the main highlight or was a big highlight in the quarter, with a 9% production increase versus Q1 2023. Europe has been the most challenging market during this last quarter.

While the Tissue segment remained healthy and resilient, printing and writing, as well as some specialty grades, continued to face lower order intake, extending the destocking movement by distributors and planners, consequently affecting production rates of most paper producers. As a result of this, inventories of Pulp, both hardwood and softwood, in European ports and in the hand of some producers, increased by quarter end. Due to this prevailing situation in Europe, and with the additional volumes coming from new projects, we have noticed more hardwood pulp volumes being redirected to Asian markets since the beginning of Q2, putting more pressure in these markets, resulting in a very accelerated pace of price reductions, reaching, by the beginning of the quarter, levels much lower than marginal cash costs.

After the April price valley in Asia, prices have started to recover in the second half of the quarter, as the price levels, which were initially reached in these markets, detached from market fundamentals, which also triggered some restocking, as I mentioned previously, of some specific players in this market. Our June price increase announcement for Asian markets was successfully implemented. As you can see in the slide, our average export price for Q2 of $562 was 13% below Q1 2023, also affecting our EBITDA for the quarter, which reached BRL 3.2 billion, and which represents a 45% EBITDA margin. Looking forward, I would like to highlight the following points, for which I ask you to move to the next slide of the presentation.

Looking at historical analysis of pulp prices, we can conclude that marginal cash costs has been a good reference of the lows of the market. Currently, prices are clearly performing below marginal cash costs, and as per Hawkins Wright, new cash cost estimates seen on the graph to the right, we can note that approximately 20% of global hardwood, hardwood market pulp capacity, representing almost 8 million tons, is burning cash at the current peak China price index. Based on BMA's and Fastmarkets public information, almost 1 million tons of market pulp supply has been reduced unexpectedly just in the second quarter of 2023. Again, 1 million tons in this last quarter. These numbers do not include eventual production reductions from integrated pulp and paper producers.

Considering current price levels, as per public information, where European net prices are now very similar to Asian prices, I wouldn't be surprised if similar situation is happening in other markets throughout the world. On the demand side, Europe remains to be a focus of our attention for the next quarter, but there is a consensus that this talking will end soon, and demand should recover after holiday seasons. Demand for Pulp in the second semester is expected to be higher than in the first half of 2023. In China, we foresee Paper production levels to remain healthy and to post positive growth figures in the upcoming months as a consequence of local demand and its seasonality, as well as increasing exports.

The unplanned shutdown of a major integrated paper and ivory board producer in China since early July, and until today, has tightened significantly the printing and writing markets. Such context reflects positively in the hardwood pulp consumption, as small and mid-sized paper producers are seeking to increase rapidly their operating rates to cope with this positive short-term demand and opportunity, and therefore need to buy pulp quickly from the resale market, where hardwood prices have rebounded back to $535 per ton. The current stability of the renminbi has played a key role to increase the confidence level of our customers. Our order intake levels have remained very healthy in July, similar to Q2 levels, also helped by additional demand coming from integrated pulp and paper producers.

This positive momentum in China is being further fostered by Chinese public policies, which were released these past days, which aim to incentivize local consumption and the housing and financial markets. With that said, I would now like to invite Aires to address with you the cash cost performance of this quarter.

Aires Galhardo (EVP of Pulp, Operations Engineering, and Energy)

Thank you, Leo. Good morning, everyone. Moving to the next slide. Cash production cost, excluding downtime in the second quarter, 2023, stood at BRL 918 per ton, 2% lower than first quarter. This performance was mainly due to the lower input price, both on energy and chemicals, reflecting in turn better brands and cost soda price. In addition, there was a decrease in the consumption of inputs coming from higher operation stability, with the conclusion of maintenance downtimes carried out in the quarter. The lower average effects also benefit cash cost performance. On the other hand, the higher fixed costs from labor and maintenance costs, combined with a lower dilution due to a lower production volume, took a toll.

It's also worth mentioning that the stability on wood cost was due to the higher operation costs arising from inflationary pressures and wood supply mix, which fully offset the benefit obtained from lower diesel price in harvest and logistical operations. Looking forward, the second half of 2023, we see cash production costs, ex downtimes, on a downward trend. End the year, a middle single digit lower than second quarter's level. Moving to the next slide, in the project, Cerrado project, we're reached 70% physical progress. Important project milestones were achieved in this period, which allow us to have a more optimistic view for the start up. Change, changing our forecast for the start of production to June 2024.

The financial schedule is also in line with the plan, reaching 57% of the expected disbursement, with BRL 9.8 billion remaining to be carried out by 2024. Now, I pass the floor to Marcelo Bacci to continue the presentation.

Marcelo Bacci (EVP of Finance and Investor Relations)

Thank you, Aires. I'd like to move to the following page, where we show a longer, longer term recap of our capital allocation and capital structure. In the last two years, from June 2021 to June 2023, we generated about $9.8 billion of EBITDA. We generated $5.1 billion of capital to allocate after the payment of sustaining CapEx, working capital changes, and interest.

That $5.1 billion of available capital has been deployed, basically 70% in modernization and growth, including Cerrado project, and 30% to dividends and share buybacks. This is a reflection of, first, our capital discipline, because the net debt has stayed, has remained stable in the period. Changing marginally from what, $11.4 billion-$11.3 billion in the period. It also reflects the growth perspective of the company that will continue in the coming quarters. During this period, we invest in the Cerrado project. We bought land with the acquisition of Pará and Caravelas.

We expanded the speed of the forestry base formation, invested in a port facility in Itaqui, acquired the operations of Kimberly-Clark, and some other investments, also in new businesses that add to this $3.6 billion in these last two years. Our average cost of debt continues to be relatively low, at 4.9% a year, reflecting the fact that our debt was basically constituted in a period of lower interest rates. Our liquidity position, including more than $2 billion of available lines, is now at $6.3 billion, which is very, very healthy. Average term of that, 75 months, and the leverage reached 2.2x in dollar terms.

Moving to the following page, I'd like to show the current situation of our FX hedging portfolio, since FX has been moving significantly in the last months. In the first half of this year, we had positive cash adjustments in our hedging portfolio of BRL 1.4 billion, reflecting the fact that we built the portfolio at a much better environment in terms of FX. If FX stays at BRL 4.82, which was the level at the end of the quarter, more or less the level that we have today, this portfolio will generate additional BRL 3.8 billion of cash flow in the next two years. Of course, this changes with the perspective of different FX scenarios.

The portfolio we have today has an average put of BRL 5.61 per dollar, which is very, very healthy, with an average call of BRL 6.51. That covers 67% of our exposure to currency in the next 24 months. This portfolio that was $6.3 billion in last quarter, is now at $4.8 billion, reflecting the fact that in the coming months, our revenues will be lower with a lower price environment in Pulp, as described by Leo. With that, I turn back to Walter.

Walter Schalka (CEO)

I think it's very clear, ladies and gentlemen, that the company is very well prepared for the future. We have been investing on retrofitting our plants, Jacareí and Aracruz. We have been investing on Cerrado. We have been investing on expanding our land banking, our forest area. We have been preparing the silviculture of the future. We have been developing efforts on the new business with investments on different areas. We have been preparing the company in terms of balance sheet. We are extremely disciplined in terms of capital allocation. We are extremely disciplined in terms of financial and robust balance sheet that we have. We are investing on new areas preparing the future.

A good example of that is the, our, consumer goods, area that we have been evolving on the last few years, with new investments almost all the time, creating a business with very good cash flow generation. Cerrado Project is ahead of us, and this is going to be extremely positive situation, because we are going to have a very good additional marginal EBITDA on these operations. Our vision for the future is a lower cash cost production, with lower input costs in one side, and a retrofit in other side. Our position on liability management is always looking for opportunities, and I think it's very clear that we have been investing with financial discipline and with very robust balance sheet.

I'm very pleased with the result of the company, for sure, not very pleased with the full price in the short term, but this is part of the game, and we understand, and we are prepared for that. This is a, is a process that for sure, will, will be better in the years to come or the periods to come. I'm very pleased as well with the strategic avenues that we have chose and shown to the market, and we are going to have a even better view on that during our Investor Day, that we are inviting at this point, all of you to be part of that, on October 22nd. Thank you very much. Now let's move to our Q&A session.

Operator (participant)

Thank you. The floor is now open for questions. If you have a question, please press star one. Mr. Daniel Sasson with the Itaú BBA, would like to make a question.

Daniel Sasson (Head of Latam Steel & Mining, Pulp & Paper, and Cement)

Hi, good morning, everyone. Thanks for the presentation and opportunity. Congrats on the ahead of pace execution on Cerrado that allowed you to bring forward the start-up date. We think that the market might start de-risking the project quicker now. But Walter, most of the interactions with-- we are having with investors hover around capital allocation, especially in the context, in the context of strong cash generation post Cerrado, right? I know that M&A activity is always opportunistic, but in an ideal world, in which business line would you like to, to expand or focus your, your efforts on?

Do you have appetite to enter new businesses that are not perhaps directly linked to Pulp and Paper, or the idea continues to seek, is to continue to seek new applications for Pulp or new products like the initiatives you have with Spinnova? How you assess the attractiveness of such potential investments versus buying back your own stock, right? I mean, you've have fully concluded the three programs you've opened. That's my question is how you'd rank your opportunities in terms of capital allocation. My second question, maybe to Fabio, the changing gears a bit here and talking about Paper. You mentioned increased competition you with imports. I guess the normalization of logistic chains allows for Chinese paper imports arriving in Brazil in a more competitive way.

We've started to see prices going down, how are you seeing the evolution of demand dynamics in Brazil? More specifically for Tissue, one of your competitors will add 240,000 tons of capacity next year. How disruptive do you think that could be to the tissue market? What could mitigate these new capacity expected to come online? Thanks a lot, guys.

Walter Schalka (CEO)

Daniel, it's Walter talking. Thank you very much for your question. I think it's very important to mention to all of our colleagues here that capital allocation is a critical issue in our organization. We have been performing very well. Our track record is very good on that, but do not meaning as arrogant for the future. We need to be very humble, to be and very deep on our analysis, where we are going to allocate capital in the future. Of course, we are always looking forward to value creation to our shareholders, and due to that, we have to make analysis on cash returns one side, and the other side with new investments that could be organic or inorganic.

Of course, we are not going to comment on inorganic moves that the company could have for the future, but it's very important to mention that our philosophy is to reinvest 90% of our operating cash flow for the future. 10% will be devoted for dividends. We do not need to reduce any more our debt level, net debt level after Cerrado. Perhaps marginal improvements on that, we will need to decide where we are going to allocate on that. Be sure that our discipline on that, it's very important, and our deep analysis on alternatives, we do it. For sure, we are not going to invest on areas there is not... for business today. Everything would be based on, on planted trees. This is critical for us.

Everything would be focused on this supply chain for the future, based on planted trees. Now, I'm going to pass to Fabio, that is going to talk a little bit about the Paper business.

Fabio Almeida de Oliveira (EVP of of Paper and Packaging)

Yeah, thank you for your question. I'm gonna take the first part of your question about the imports, I'll, I'll, I'll move it to Luis to talk about the Tissue business. Regarding the imports, Daniel, we, we see imports growing as you mentioned, with the decrease of the logistics bottlenecks that we have seen for the past year and a half, and also better exchange rate for imports. This is impacting a very small part of our business is maintaining coated paper, which is less than 20% of what we, we sell. We are the only producer of coated paper for the Brazilian market.

For the other grades that we, we, we sell more quantity as uncoated in Paperboards, we see imports, very little imports in uncoated and should continue to be like that for the foreseeable future. For Paperboard, there's more supply capacity locally here that, you know, attends the market, so there's no need for imports. The risk is concentrated in, in, in coated paper, and we, we, we have to follow international prices, and we're, we're currently doing that. At, at the point, we're matching our, our price to international levels, and I, I see very small risk moving forward with pricing for coated as well. It's well priced at the moment.

Luis Renato Costa Bueno (EVP of Consumer Goods and Corporate Relations)

Well, this is Luis. Thanks for the question. The Brazilian tissue market has 1.4 million tons, growing at a rate of 3% on average. The 240,000 tons announced will not be totally deployed in the Brazilian market. Part of this might be exported. What we, what we see is that in the short term, this might create an imbalance in terms of supply and demand, but should stabilize in the medium and longer term. In looking at Suzano, we are very well positioned in terms of cash cost. We are in the top quartile in terms of cash costs for the Tissue business.

We have a very strong brands, very resilient brands that we've been developing and creating over the last five years, and now with the acquisition of the Neve brand, which is by far the, the, the best brand in terms of awareness and loyalty in the market. I think that Suzano is very well positioned looking ahead in terms of the next three to five years.

Daniel Sasson (Head of Latam Steel & Mining, Pulp & Paper, and Cement)

Thanks a lot, guys. Very clear.

Operator (participant)

Our next question comes from Thiago Lofiego with Bradesco BBI.

Thiago Lofiego (Managing Director)

Thank you, gentlemen. two questions on my side. First one on wood prices in Brazil. Can you comment on market dynamics for wood and how that may impact your near-term results? Just to clarify, you mentioned Pulp cash costs are expected to be mid-single digits, lower in the end of the year or in the second half of this year? Just a clarification there. My second question, still on the forestry side. Just thinking about more structural, more of a structural strategy here on the forestry side, how should we model, you know, those larger forestry asset acquisitions that sometimes you guys make, right?

I understand it's, it's impossible to have a, a specific number, but what can you tell us to, to help us model, you know, those types of deals? Maybe just, you know, help us understand a little bit better, you know, the forest strategy, and how you guys are thinking about that for the next, let's say, two, three years. Thank you.

Carlos Anibal Fernandes de Almeida Jr. (EVP Europe)

Thiago, good morning, this is Carlos. Regarding the wood price in Brazil, we have been seeing that, you know, increasing over the last maybe 18 months. That has happened in the major wood markets all over Brazil. There is an increasing trend, and we do not expect any major change on that. About our forestry program, what we have today is that basically we have set our land bank for all the major operations, mainly Mato Grosso do Sul. In Mato Grosso do Sul, we already have over 600,000 hectares of land bank, and we are executing our plantation program. We have begun that years ago, and we plan to conclude that between 2024 and 2025.

Meaning that we're gonna see a higher, silviculture, CapEx in the coming quarters.

Aires Galhardo (EVP of Pulp, Operations Engineering, and Energy)

Just to clarify, the cash cost, I said, middle single digits, in the last quarter when you compare with the second quarter.

Thiago Lofiego (Managing Director)

Okay, great. Thank you, Carlos and Aires. Thank you.

Operator (participant)

The next question comes from Leonardo Correa with BTG Pactual.

Leonardo Correa (Associate Partner and Equity Research Analyst)

Hello, good morning, everyone. Thank you. The first question is, is on the pulp market for Leonardo Grimaldi. Leo, I think in your introduction and in the PowerPoint presentation, right? I mean, it was very clear that there's a lot of supply issues impacting the market nowadays, right? You talked about 1 million tons of unexpected cuts in the second quarter alone, if I, if I'm not mistaken, right, from your initial remarks. We also saw even you commenting some months ago on the Chinese vertically integrated paper mills also suffering quite a lot from these levels of pricing. Suzano, some months ago, came out with somewhat unexpected move of cutting its high cost capacity as well, right, the 4% volume adjustment.

Clearly, there's a lot of movement, right, on the supply side of this industry, which at least to me, indicates that something is not right. Right? I mean, the price is, is very low, unsustainably low, right? I mean, looking into the recent action, right, on pricing, we saw a price hike in June, July and August. Apparently, the July move was somewhat partial, right? I just wanted to hear you with everything that's happening well, especially on the supply side, how are you seeing this supply-demand balance and how easy has it been, or how challenging has it been to, to pass through these price hike announcements to more sustainable, more reasonable levels? That's the first question. The second question may be to Walter, right? On Cerrado, I think we've, we've all been talking about Cerrado for quite a while.

Unfortunately, the market takes some time to price these things in, and probably only at the end, right, of execution, we'll see this value being priced into the share price. I just wanted to hear you a bit on what exactly made you or some of the milestones and achievements that made you perhaps anticipate the startup to June versus the previous guidance of the second semester of 2024. I mean, how would you perhaps see the evolution of cost performance of that asset? How long would it take for cost to reach steady state levels for Cerrado? Those are the questions. Thank you very much.

Leonardo Grimaldi (EVP of of Commercial Pulp and Logistics)

Hi, Leo, this is Leo here also. I will try to answer the points of your very big question to me. I'm gonna try to address all of them. Let's, let's see. Just to recap, yeah, we are, we tracked the unexpected downtimes through market sources, mainly by McClay consultancy and Fastmarkets. What we are seeing is a significant increase in this unplanned downtimes in the last quarters. In the beginning of the year, in the first quarter, almost 700,000 tons of unexpected downtime, and in the second quarter, almost 1 million tons of unexpected downtime, half, half, hardwood and softwood. It's, it's very significant and very unexpected as well. Despite the fact that the...

Quite, quite the low marginal cost indicate that movements like this, which previously were mostly due to weather-related events or unplanned downtimes due to technical age of equipment, have increased during these last quarters. You asked me about how to forecast the supply side issues for the future. It's very hard and difficult because obviously they are unexpected, so it's very difficult to put numbers into that. Unless we see quite a big change in the market dynamics, again, comparing the current prices to marginal cash costs, as I showed you, we have today over 8 million tons of production capacity under, under, underwater or burning cash with this price level.

This doesn't include any reduction at all in this analysis from these two consultants of integrated pulp and paper players, which have a capacity of over 100 million tons, and in China, almost 10 million tons. It's a significant volume. It can turn out to be a big opportunity, but it's impossible to forecast because they are all unexpected. Our price increase announcements, as of June, were done because we saw and we think that the price levels, which by April were unsustainable and detached from market fundamentals. There was a huge level of order intake, at least will of ordering from customers at that time. We saw that it was a very big indication that it went too well.

We started to increase prices in China, as you know, in June, and I mentioned our price increase was successful. In July, we had announced $30, unfortunately, we didn't implement all of it, and now we are seeking to reach the full increase, and I have a very strong confidence of that by August.

Walter Schalka (CEO)

Thank you, Leo, as well to answering your second question regarding Cerrado. When we decided to proceed with Cerrado project, we had a lot of potential uncertainties at that point of time. We saw at that time the issue that we are in the end of the COVID process, and we had some of these issues to be addressed on our initial phase of the project. Then we had the issue regarding the conflict between Ukraine and Russia and the war. The third, we had the logistics, the constraining of logistics, that could create a potential risking of performing for the future. We are seeing is that we, our team and our suppliers have been performing extremely well, and we are very pleased with that.

Our very long and very mature engineering team have been performing different projects in our history, have a very long and positive track record on that. We are very well prepared for that. We are every single day, with 10,000 people working on, on the construction of the plant, de-risking the process. This is the reason that right now we have a better visibility that could allow us to tell us that we are going to be starting ramp up on June next year. Of course, we will continue to keep de-risking the operations to keep looking for opportunities. It's very clear that Cerrado project is going to be a transformational project for the company.

What we are seeing, Leo, is that we are going to increase our capacity in a little bit less than 25% with the lowest cash costs in the world. It's going to be a major improvement on the total cash cost of the organization, but with additional volume, extremely competitive volume as well, and very good as well, on environmental and social impact to the society.

Leonardo Correa (Associate Partner and Equity Research Analyst)

Thank you very much.

Operator (participant)

The next question comes from Caio Ribeiro with Bank of America.

Caio Ribeiro (Managing Director and Head of LatAm Metals & Mining, Oil & Gas, and Pulp & Paper Equity Research)

Yes, good morning, everyone. Thanks for the opportunity. My first question on Cerrado again. you know, with the project start up being pushed forward to June of next year, I was hoping you could give us some color on how much, you know, you expect you can produce at the mill in, in, in 2024, or at least, you know, how long you, you're expecting it will take for you to, to ramp up to full capacity? Then, my second question, right, which when, when, we look at the, you know, full prices moving to $530 per ton, with that $20 per ton high.

I mean, the closer we get to that $530-$550 per ton level, you know, the big question mark that we see right now in the industry is, you know, whether that encourages those integrated producers that have cut, you know, upstream output to return to the market. I know that you mentioned, you know, that you've seen, you know, a large chunk of that capacity offline. You know, so I wanted to ask you, you know, whether you perceive that to be at risk, you know, as we move closer to those, those price levels, or if you see, you know, strong reasons to believe, you know, that prices reaching those levels are feasible and sustainable?

Just, just one final question, you know, and again, going back to the topic of Cerrado. You know, you announced for this year a curtailment of your output around 4%, right? Assuming that prices are still at depressed levels by next year, you know, as you're coming closer to starting up the Cerrado project, could you look, you know, once again, to, to curtail your output at other operations, you know, once again, to, to accommodate the incoming lower cost volumes from the Cerrado project? Thank you.

Aires Galhardo (EVP of Pulp, Operations Engineering, and Energy)

Hi, Caio. Here's Ariel speaking. In terms of predicted volumes to Cerrado, we are keeping our initial predictor of 2 million tons of production in the first 12 months.

Caio Ribeiro (Managing Director and Head of LatAm Metals & Mining, Oil & Gas, and Pulp & Paper Equity Research)

Thank you.

Leonardo Grimaldi (EVP of of Commercial Pulp and Logistics)

Caio, just a second. Organizing the mic here. Caio, thank you for your question on the pulp price. This is Leo here. Obviously, we monitor very closely our price moves and when compared to the marginal cash costs and how that would incentivize more or less demand. Under today's view of the marginal cash costs, yes, indeed, we are getting close to that. It's important to understand that this level of $530 is the marginal cash cost of market pulp players. Again, you have the other part of the market, which are the integrated pulp and paper producers. 100 million tons in the world, and in China, 8 million-9 million tons.

As we have seen in public presentations, reinforced during Shanghai Pulp Week, the marginal cash costs or the cash costs of these integrated Chinese producers are much higher than these levels that we see here as the marginal cash costs of the market pulp players. That's why we see still at levels, we're approaching that, or a bit higher than that, at the beginning of this additional demand coming from this side of the business. There's a second part to this question. We are again revising the marginal cash cost analysis and view for 2023 remaining and 2024. It is our idea to present that to all of you during Suzano Day in October. This is done by a very known consulting company.

We have been sharing this information with you since our last Suzano Day. Just as a, a preview, we have seen already the re, re, uh... How can I say? The return of prices of wood or the, or the increase in prices of wood into the Chinese markets. Initial return from the Vietnam prices that had been reducing for several months, and that's the reason why the cash costs, the marginal cash costs went from $600 to this $530 level. Every $10 of increase on the Vietnam wood or any wood coming into, into China, has a $20 effect on the marginal or, or the cash cost of Chinese producers. This correlation is very important.

Tracking the price of, of wood is very important, we are gonna be disclosing all this information in Suzano Day again.

Walter Schalka (CEO)

Thank you very much, Caio, for your question. As well to answer your third question regarding next year production volume. I'd like to bring to your attention to different issues that is very relevant to you, to the market. First, we are not managing the company by average, we are managing the company by event. We are looking for every single event of the company, if it's creating or not creating value to our shareholders. Wood prices is going up, as Carlos mentioned to you, and this is the reason that we are not going to use a higher wood cost to produce lower pulp prices. This is a very important issue to mention to you. The second issue is that we are always looking for the better NPV to our shareholders.

We are looking what would be the best solution for everything. At this point of time, we are not planning any kind of curtailing for the next year, but of course, we are going to track and decide every single moment what would be the market conditions to see how we are going to operate.

Caio Ribeiro (Managing Director and Head of LatAm Metals & Mining, Oil & Gas, and Pulp & Paper Equity Research)

That's super clear. Really appreciate the detailed color, gentlemen.

Operator (participant)

Our next question comes from Rafael Barcellos with Banco Santander.

Rafael Barcellos (Senior Equity Research Analyst and Head of LatAm Metals & Mining, Pulp & Paper, and Cement)

Good morning, and thanks for taking my question. My first question is about capital allocation. The company has executed three buyback programs in a short period of time, right? Other than that, pulp prices are now back to the $500 level, your leverage is at healthy levels, and you have completed more than 50% of the financial progress of the Cerrado project. That said, I would like to understand from Walter, if you could see the company more focused on cash returns for shareholders next year. My second cash question is about capital allocation, is still on capital allocation, but more related to your long-term strategy.

I understand that Suzano can discuss several different types of growth initiatives in the coming years, but I just would like to understand if a new regular hardwood pulp mill should be a priority, or if you could move toward different initiatives, like more niche products like fluff or even a dissolving pulp. Thank you.

Marcelo Bacci (EVP of Finance and Investor Relations)

Hi, Rafael, this is Marcelo speaking about your first question. We completed three buyback programs. We don't have the intention in the short term to come with a new one, but we will be monitoring the market conditions and the cash flow generation of the company to decide that. I'd like to emphasize that, we, as Walter mentioned in the beginning, we continue to have this policy of paying back to the shareholders through dividends, around 10% of our operational cash flow, and, and reinvesting, the, the majority of the cash flow that we generate. And, providing, exceptional cash returns whenever we have exceptional returns, and this may continue to be, our policy for the future.

Walter Schalka (CEO)

Thank you, Rafael. I'm going to answer your second question regarding capital allocation. This is a very critical issue for us. Of course, we are not going to give guidance to you on the opportunity that we are facing at this point of time, but it's very clear that Suzano is extremely competitive on certain specific areas, and we are going to use our competitiveness for different reasons. To go longer on the supply chain, we have been doing this on the Brazilian market, on the tissue. We have been making developments on the fluff market. We are very pleased with our fluff project. I think if you remember, five years ago, when we start this project, everybody on the softwood market was questioning ourselves if we'd be able to replace softwood with hardwood. Right now, it's a proven theory.

Already we have been being very clear in the market that we have been developing short fiber, replacing long fiber on this industry, and this could be a potential investment as well for the future. We are always seeing cash returns to our shareholders as one of the possibility. The second possibility is organic growth, and the third one is inorganic. We are all the time disputing and challenging these alternatives to see what would be the next step of our long-term journey of value creation.

Rafael Barcellos (Senior Equity Research Analyst and Head of LatAm Metals & Mining, Pulp & Paper, and Cement)

Thanks a lot.

Operator (participant)

The next question comes from Jens Spiess with Morgan Stanley.

Jens Spiess (Executive Director)

Yes, thank you for taking my question. Just on the volumes of integrated paper producers in China, just to get a sense, how has demand from those producers evolved? Have you seen an increase, a decrease, or stable order intake from them compared to June, for example? Secondly, on Cerrado, I just wanted to ask on the $5.1 billion you expect to deploy next year, will that be mainly concentrated in the first quarter and maybe part of it in the second quarter, or what are you seeing there? Thank you.

Leonardo Grimaldi (EVP of of Commercial Pulp and Logistics)

Jens, this is Leo here to answer your first question. As I mentioned, there is roughly 8 million-9 million tons of integrated pulp and paper capacity in China. Ever since the lows or the valley that prices reached, as we came into April, we have been seeing an additional demand coming from this source and this kind of players. We estimate that this volume ranges from 50,000-100,000 tons a month of additional demand for market pulp. They are reducing, we can see they are reducing their, their pulp production, but they are not stopping it, as they still need all the utilities generated in a pulp mill to run their paper lines as well. We see some being more aggressive, some being less aggressive.

Our view is that as time goes by, and if this situation persists, where market prices are below marginal cash costs, obviously this tends to be intensified for the future.

Marcelo Bacci (EVP of Finance and Investor Relations)

Jens, this is Marcelo speaking. On your, your second question, the BRL 5.1 billion is expected for Cerrado next year.

... will be more concentrated on the first half, but there will be a significant part of the second half as well, which is related to the guarantees of the suppliers related to their performance. We don't have that timetable completed yet, but by the time we release our guidance for CapEx for next year, we'll have more details on that.

Jens Spiess (Executive Director)

Okay, perfect. Thank you so much.

Operator (participant)

As there are no further questions, I would like to turn the floor over to the company's CEO for the final considerations. Please, Mr. Walter Schalka, you may proceed.

Walter Schalka (CEO)

I would like to thank you very much for your participation on this event. I would like to, I think, invite you to visit and to see the video of Cerrado project. Guys, it's very impressive what our team is doing over there. It's largest private project in Brazil at this point of time. It's very relevant to the city, to the state, to the country, to the sector, to Suzano, and, and we are very pleased to be part of that. The video is very interesting. You, you can reach out this on our website and or on the web. I think it's a very nice opportunity. Be very clear with you, the company, it's always going to look alternatives for value creation to our stakeholders.

We have been working on that for several years. We are very disciplined on that, and we continue to be very disciplined. Volatility on the pulp price is not our aim. We do not like that, but it's what we are facing right now, what we are facing many times. The company is very well prepared for the low time, low pulp prices that we are facing right now, and we are always preparing our future. We are planting a tree today that we are going to harvest in seven years. We are the largest silviculture program in our history, in the world as well. We are planting right now 1.2 million trees every single day, preparing our future. I'm very pleased with long-term perspective of the company and very well prepared for the short term.

Thank you very much, and have a good time.

Operator (participant)

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