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Good morning, ladies and gentlemen, thank you for waiting. Welcome to the conference call of Suzano Pulp and Paper to discuss the results for the second quarter of 2018. Participants will be in a listen-only mode during the presentation. Mr. Walter Schalka, Chief Executive Office; Mr. Marcelo Bacci, Financial and Investor Relations Executive Officer; Carlos Anibal, Pulp Executive Officer; Leonardo Grimaldi, Paper Executive Officer; and Mr. Fabio Prado, Consumer Goods Executive Officer.
Afterwards, we'll begin the questions-and-answer session and further instructions will be provided. [Operator Instructions] We inform that this communication contains certain statements that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of these forward-looking statements are identified with words like belief, may, could, would, might, possible, will, should, expect, intend, plan, anticipate, estimate, potential, outlook or continue, the negative of these words, other terms of similar meaning or the use of future dates.
Forward-looking statements in this communication include, without limitation, statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans. The direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are example of forward-looking statements.
Such statements reflect the current views of management and are subject to a number of risks and uncertainties. Such statements are qualified by the inherent risks and uncertainties surrounding future expectations generally, and actual results could differ materially from those currently anticipated due to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur.
These statements are based on many assumptions and factors, including general economic and market conditions, industry conditions and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations. Suzano does not undertake any obligation to update any forward-looking statement as a result of new information, future developments or otherwise, expect -- except as expressly required by law. All forward-looking statements in this communication are qualified in their entirety by this cautionary statement.
I will hand over the call now to Mr. Schalka, who will begin. Thank you.
Good morning, everybody. Thank you for attending our second quarter results, Suzano Pulp and Paper. With us here, we have all the management team of Suzano and today we have included our General Counsel Pablo Machado, if you have any additional questions to him on the end. We are pleased to present our second quarter results. We had in this quarter on operational cash flow close to BRL 1.3 billion, as you -- as we have been insisting this is our main KPI in our organization that represent EBITDA less CapEx sustaining and this compares with the capital employed in the organization to see how much is our return on operational invested capital. Our EBITDA in this quarter was close to BRL 1.6 billion. And this was affected by 2 different events. First of all, it was affected by the nonexpected event of the truck drivers' strike. We decided to improve our working capital in the last year to reduce our inventory on raw material and semifinished and finished goods. And this implies that we are affected by the strike, affecting around 105,000 tons of production and sales on pulp and paper. The second major event is a recurring event but with large impact on this quarter, is the adjustment on the provision on the long-term incentive plans. Since it's based on our share price, and share price went up a lot on this quarter. This has an application of BRL 50 million on our quarter results.
Our leverage is at the 1.7x net debt over EBITDA. Bacci -- Marcelo Bacci is going to explain a little bit more about what is our financial position right now.
And we had one impact on the hedge initiative that we are doing. We had recurring hedge on our operations and swapping to U.S. dollars. As you may know, the FX came from BRL 3.32 to BRL 3.86 on this quarter. And on the other hand, we have the hedge on the Fibria transaction. And this creates much more impact on our results and we are going to detail you during our presentation.
Now I'm going to hand over to Leo, who's going to present the paper results.
Thanks, Walter, and good morning, everyone. I would like to present the results for Suzano's paper business unit for the second quarter of '18, which was another positive quarter for us, despite the challenges that we have faced in Brazil. The figure presented on the slides are specific to the paper business unit, therefore, excluding Suzano's consumer business units results for the quarter. Beginning with the top left graph and looking at our production figures, we can see that, even with the loss of 25,000 tons due to the truckers' strike in Brazil, our production in the quarter was 280,000 tons. In fact, when we add up the first 6 months of 2018, our production was 2% higher than in the same period of last year.
Moving on to the top right and looking at our paper and paperboard sales. Due to a strong commercial execution in June, we were able to compensate almost most of the effect of the truckers' strike. Sales in Brazil decreased 1.7% when compared to the second Q '17, while our total sales, including exports decreased 2.8%, when compared to the same period last year. When we consider the first 6 months of the year, our sales in Brazil have totaled 352,000 tons. This is 1.4% above the same period last year, driven mainly by the stronger sales of packaging rates.
For the same period, the latest Ibá report show a 0.5% growth in Brazilian domestic sales of printing and writing and paperboard grades. When we include our exports, our total sales for the first half of '18 have increased 1.3% compared to 2017. During the second quarter, our average prices in Brazil have increased 3.8% when compared to the first quarter '18, and 9% when compared to the second Q '17.
Our average prices in international markets in U.S. dollars have increased 4.7% when compared to the first Q '18 and 11.4% when compared to the second Q '17.
That is a 25% price increase in Brazilian real. As a result of production stability, strong sales volumes and successful price increases, both on domestic and international markets, our adjusted EBITDA margin has reached BRL 1,000 per ton. This is a 41% increase in EBITDA margin when compared to the second Q '17, and adds up to BRL 520 million of adjusted EBITDA for our paper business unit so far. Our ROIC has also increased, reaching 15.4% in the second Q '18.
I would now like to invite Carlos Anibal to present the results for our pulp business unit.
So thanks, Leo, and good morning, everyone. So let's move to Page 5 of our presentation. So we can cover the pulp result business. The second quarter was characterized by solid pulp market fundamentals and a strong U.S. dollar that affected our results. We continue to believe that the current tightness in the pulp market is a function of a steady demand from paper and its producers and the constrained global fiber supply. We are still seeing increased level of an unscheduled and unexpected, and I would like to reinforce that, an unexpected downtime throughout the key market. In the second quarter, it was also impacted by the truckers' strike in Brazil. China's environmental initiatives that include a shutdown of highly polluting pulp and paper mills, and the legislation on its recycled fiber imports have created additional supply tensions in the market. In the second quarter, our production was 821,000 tons, lower quarter-on-quarter and year-on-year. And that is explained by a scheduled maintenance shutdown at Mucuri Line 1 and mainly by the truckers' strike that happened end of May. Sales volume in the quarter amounted 802,000 tons. Such low levels is explained again, mainly by the impact of the truckers' strike that reduced our production. Usually, such kind of impact would be partially absorbed by inventories throughout the supply chain. Nevertheless, as we mentioned, in our Q1 conference call, we are running at low levels of inventories. And this situation hinders our ability to manage a such relevant external client. It is important to say that we are still running below 30 days of production, that brings operational challenge to us. Our revenues were up 4% quarter-on-quarter and 27% year-on-year, reaching BRL 2.16 billion as a function mainly of a weaker real, which depreciated 11% quarter-on-quarter. Our adjusted EBITDA for Q2 was BRL 1.32 billion, and EBITDA per ton reached BRL [ 1.64 ], driven mainly again by a weaker real. Finally, the return on invested capital for the last 12 months for the pulp business was slightly over 20%.
Now moving to the Slide #6. Cash cost, excluding maintenance downtime for Q2, was BRL 630 per ton, up BRL 43 quarter-on-quarter. The increase in cash cost is explained by mainly higher price and consumption of chemicals, especially caustic soda and sulfuric acid, which represented BRL 15 per ton. Other important impact is increase in fixed cost that represented BRL 22 per ton, and such effect is due to the lower volumes.
Finally, in the last 12 months, we are running below 2017 cash cost that was BRL 5.99 per ton. Food is impacting positively by BRL 24, while chemicals are partially compensate these effects.
Now I'll turn it over to Marcelo Bacci.
Good morning, everyone. We'll be talking about some key indicators of our financial position, starting with capital expenditures. Our CapEX in the quarter was BRL 573 million, totaling for the year BRL 1.3 billion. And our guidance for 2018 is BRL 2.8 billion, which is basically the number that we had before, plus the exercise of the option on the Duratex land that was announced in the previous month.
Moving to the next slide. We'll be talking about our debt situation. We closed the quarter with $2.6 billion of net debt, approximately BRL 9.9 billion, with an average debt maturity of 90 months and an average cost of debt in dollars plus the real parts swapped into dollars of 4.6% a year, which is a very competitive cost. Our leverage in terms of reals was 1.7x, in dollars 1.5x with the continuous evolution over the previous quarters. Our amortization schedule continues to be very comfortable in our cash position of BRL 8 billion, we already see some transactions related to the Fibria deal that we'll be talking about later on. But in any case, the amortization that we have in the rest of '18 and the coming years is a relatively low number, which gives us a lot of comfort in terms of debt management.
Talking about the Fibria business combination. We'll start with the time line. As you all know, the agreement was signed back in March. On the corporate side, we had last month the approval of the protocol of justification and incorporation by the Board of Directors and -- of Suzano and Fibria. And yesterday, we received the confirmation by the SEC of our registration there, which allows us to call the shareholders meeting of Suzano, which was done today. As you may have seen the relevant fact that we filed this morning. So the shareholders meeting will be held on September 13. So we now have completed the filing on the registration process with the SEC, and we are working -- still working on stock compliance that will be necessary starting January 1, 2019. Remember that in the first year of registration, there's a waiver for stock compliance.
On the financing side, we have issued debentures of BRL 4.7 billion and credit notes -- export credit notes of BRL 770 million, already in relation to this transaction, which allowed us to reduce the amount of the bridge loan -- of the committed bridge loan from $6.9 billion to $4.4 billion, which was also done during the course, this last month.
On the antitrust side, we have received the unrestricted authorization by the U.S. antitrust authority. And we continue to work in the process in Brazil in China with European commission and in Turkey. In addition to all that, we have started in June the integration planning process with the constitution of a workgroup that is planning how the companies will work together. And the idea is that, by the end of October, beginning of November, this plan will be ready, of course, taking into consideration all the restrictions that we have on the legal side in terms of exchange of information between the 2 companies.
In terms of the financial closing of the transaction, we have 2 important aspects to discuss. Here, the first is hedging, and the second is financing.
On the hedging side, the table that you see on Page 10 starts with the situation in March 15. Back then, the amount that we have to pay for the Fibria shares, the BRL 52.5 per share x the number of shares, totaled BRL 29 billion. The FX rate back then was BRL 3.29. So the amount on March was roughly $8.8 billion. As we are a company that generates cash in dollars, we needed to hedge these amounts in dollar terms because the situation we had in March was one that every $0.10 of variation in the FX rate would increase or decrease the amount of finance needed by $277 million, which was a situation that we felt not very comfortable. So we started to hedge this position with many different instruments in the market. And by the end of June, the amount payable to Fibria is now BRL 29.5 billion because there is a correction by CDI. And at that date, we have hedged 74% of that amount in dollar terms, approximately $6 billion of hedging with an average exchange rate of roughly $3.6. And the situation in June was one that every $0.10 of variation in the FX rate would change the payable, not by $277 million anymore, but only $54 million. And just as an additional information, the situation at the end of June -- July, we hedged a little bit more. We now have $6.6 billion of hedging with an average exchange rate of $3.63. And the sensitivity of the financing through the FX rate is only $41 million, that's a situation that we feel much more comfortable than the one we had in the past.
Of course, this additional hedging that we did added to the normal position that we have on our balance sheet. So on Page 11, you see the position that we had on June 30, and the results. So our notional of dollar-related derivatives was the total of $9.18 billion, which was composed of $2.3 billion of normal cash flow hedging that we always have in our balance sheet, according to our policy of hedging the following 18 months of mismatch between dollars and reals. We also had, back then, debt-related hedges, which were transactions in reals hedged into dollars -- debt transactions in reals that hedged into dollars of $800 million. And that -- those 2 kinds of transactions we always have in our balance sheet and that's normal course of business. We added to that position that $6.05 billion of Fibria-related hedges. That totals the $9.18 billion. And the result generated by those transactions that have to go directly to our P&L was a loss of BRL 2.55 billion, of which, BRL 1.75 billion is related to the position of -- related to the Fibria deal. Of course, we have to record in our balance sheet this as a loss. The opposite side of the equation, which is the reduction on the payable in dollar terms is something that we will show up in our balance sheet over time.
On the financing side. We have here a walk-through of the original situation and where we are today. So we start by showing that back in March, the amount payable was BRL 29 billion. Correction by CDI from March to June, BRL 534 million, totaling BRL 29.6 billion. Now in addition to the amount that we have to pay to the Fibria shareholders, we have to liquidate the BRL 1.75 billion of losses that we have on the hedges. So the total payable is BRL 31.3 billion when you add what we're going to pay to the shareholders plus what we're going to pay for the hedges.
How we're going to finance that amount? The first part is, of course, the $2.3 billion term loan that we hired since the beginning of the transaction, the part that is long-term -- that we announced together with a transaction that represents about BRL 8.9 billion. We added to that, the debenture that was issued last month of BRL 4.7 billion. So the amount still to be financed was in June, BRL 17.7 billion. Since June, we have also issued export credit notes of BRL 770 million. And now the amount to be financed is approximately BRL 17 billion. And therefore, we reduced, as I mentioned, the committed line that we had originally for BRL 6.9 billion to BRL 4.4 billion, which is approximately BRL 17 billion.
Our idea is that during the course of the next month, before closing, we'll continue to work on financing this deal in -- with other sources being the cash that we have available in the company or transactions with the international capital markets for potential bond issuance, some other finances that we may find in the domestic and international market. So there is a possibility that the amount that we're going to draw from the bridge loan will be lower when we close this transaction.
With that, we conclude our presentation. We thank you very much for your attention, and we open for questions.
[Operator Instructions] Our first question comes from Thiago Lofiego with Bradesco BBI.
So 2 question. First one on the deal. If you guys could give us a little bit more color, to the extent if possible, on the approval processes within CADE, the European Commission and the China Ministry of Commerce? And do you have any update on those? How they are evolving? And what's your level of confidence that a deal will get done still in 2018? Second question, regarding the forestry deal with Duratex. So what's the rationale for you guys having exercised the call option with Duratex? Is that solely a defensive move? Or do you plan to use that land in a potential project going forward? Those are my questions.
Triago, this is Pablo Machado speaking. Thank you for your questions. As to the development of antitrust approvals, I think, we are following as expected, both in terms of timing and in terms of our communication with various antitrust authorities. The situation we are now at CADE was disclosed earlier, on this week by, Valor where the market could see the main responses from -- or the main feedback from customers, competitors and suppliers. Things are moving as expected in Brazil. And market test is about to be completed. In China, the proceeding follows a confidential procedure. So the parties do not have access to the market test feedback. We know that the market test feedback is underway. We expect that to be completed in the next coming days or weeks. And in Europe, we are still liaising with the European Commission. Things are moving there as expected. The commission is undertaking what they call an informal market test. And we expect to move ahead to filing as soon as we agree that with the commission. So I can tell you that the procedures are going as expected in all the jurisdictions, and we do not expect, at this point, any surprise.
Related with the second question, Triago, thank you for your questions, this is Walter speaking. The exercise of the option on Duratex land and forest is related to upgrading optimality for us for the future. We do -- we are facing the fast deleverage process than we imagine before. And we could open possibilities for us for the future. And the exercise is creating an optionality for us, if we decided in the future to have a new organic growth or new project. On the other hand, we do not know, because we are not allowed to know, all the supply wood on the Jacarei plans on Fibria. And that could be a possibility to use this land and forest, if necessary to supply Jacarei, if necessary, we don't know the detail because we do not have access on their information.
Our next question comes from Caio Ribeiro with JPMorgan.
So my first question is regarding the potential 25% tariff on recovered paper imports from the U.S, that China is thinking of implementing on August 23. I just wanted to get your view on the potential impacts that this could bring to both demand and prices going forward. Just given that recovered paper imports into China have been declining quite significantly this year already, with the current restrictions with some shortages being reported even. And then secondly, if you could give us some color as well on what you expect in terms of the evolution of pulp cash cost going forward that would also be very helpful?
Caio, this is Carlos, thanks for the question. Let me start give you an overview about the China pulp market. And we can say that the demand grew in the first half of this year, 4.5%. And that means roughly 11.7 million tons. Hardwood is growing 8.5%. We understand that the pulp stocks are at normal level throughout the chain from producers to customers there in China. By that I mean, stocks still at the ports or at the customers' warehouse are at the standard and normal levels. Regarding your question about a possible potential 25% tariff, that was just announced. And we believe it is too early to make any comment about that. That was announced 2 days ago. So the market is still analyzing what might be the outcome. You also mentioned that there was a reduction on recycled paper imports, that is true. Today the market expectation for this year taking for account the imports up to June is a volume of 15 million tons, 16 million tons, and that compares to 26 million tons last year. So definitely, that could impact the virgin fiber market in the coming months. The cash cost, we cannot give any guidance about that at this point in time.
Our next question comes from Juan Tavarez with Citi.
Just my first question just touch again on current pulp market. I mean, if you can give us some visibility of what you're hearing in China from your customers? We been hearing that paper prices have been falling for the last few months. And I think this week, we just heard that there's some discussions about rebates on pulp prices into August. I'm just curious how you're seeing that scenario and how those discussions are going now into August. And also if maybe you can just touch on your paper cost with the ramp-up of the consumer goods business? I'm just curious there, maybe if you can discuss what was the margin in your consumer goods business this quarter. And kind of where we should expect margins to be in your consumer goods, when it's fully ramped up? Should it be above where your normalized paper business is? Or just kind of understand how much of the drag this ramp-up is being right now into that segment?
This is Carlos. So let me start with your question related to pulp. So I would say that the supply and demand fundamentals for pulp remains generally and temporarily tight. July business was according to our expectation. And by that I mean regular volume and flat BKP prices across the key markets. Despite the seasonality of July and August in the Northern Hemisphere, the low level of inventories at both pulp and paper producers, in our view, that supports some understanding between buyers and sellers of a large market. It is true that we have heard about some soft wood weakness in China. And we understand, that is not supported by the current market fundamentals. And why do we say that? Again, as I said before, stocks are at a normal level at both producers and consumer side. Important also to remind that we have -- right now, we priced the spread between soft and hardwood there in China of around $90 to $100, already considering a possible -- a potential price drop for soft wood. So it remains to be seen what's going to happen with the soft wood. And that we are confident on the hard wood side of the business.
It's Pablo here. Regarding the consumer business, we're still busy ramping volume, which means I think it is very difficult to determine the right margin that we have at the moment.
Do you have a sense of when you'll be fully ramped up in that business, maybe?
Yes. We are doing -- ramping up the volumes. And from third quarter onwards, we are going to publish results.
And just to understand there, so once you're fully ramped up, how should we think about profitability in that business? Do you expect it to be notable premiums to what the previous paper business was? Just to understand again, I'm trying to gauge here if this level of EBITDA per ton in your paper business this quarter. How much of that is being pressured by just the ramp-up in consumer goods?
Juan, this is Marcelo speaking. Unfortunately, at this point we cannot give guidance to the future result of consumer goods. Starting next quarter, we will be publishing the results. But we cannot give you any indication of future results at this point.
Our next question comes from Marcos Assumpcao with Itaú BBA.
First question to Carlos. You mentioned in the press release that inventories are at the comfortable level, with 35 days. What would be the level that comes a little bit -- becomes a concern for you in terms of inventories of pulp, softwood and hardwood? The second question to Walt is, we have been seeing the deleveraging of the company happening very quickly. Also the deleverage on a pro forma basis with the Fibria acquisition also happening very quickly. So at what leverage ratio, eventually, would Suzano be comfortable on going ahead with the new pulp expansion project?
Marcos, it's Carlos. You said that 35 days was the total in stock for softwood or hardwood stock, right? I would say, a number above 40 days would draw our attention.
Related -- Marcos, thank you very much, it's Walter speaking. Related with the deleverage and pace that we are facing right now, we will be strict with our financial policy for the future. We -- as we mentioned on the day of the deal or transaction with Fibria on March 16, we announced at that day that our focus would be on deleverage the company as fast as possible. We continue to have this in mind. And we continue to make the company working on the financial policy that we are not going to change the company. There is going to be between 2 and 3x net debt over EBITDA. And this is our target, and we are aiming this target. After the closing of this transaction, we will discuss internally, what would be the potential revenues for us on the future. But we are not seeing any major implication or announcements to be done on the short term, related with the potential growth opportunities.
Perfect. Walter. And just as a follow...
We do have already another issue that is quite important, that is the total net debt of the new entity. We do not have very large debt, not only related with EBITDA but not a very large debt. We want to decrease the total debt of the new entity for the near future.
Perfect. And just as a follow-up on new expansion projects in the market. When do you expect the MAPA project that was just announced to start up?
We do not have additional public information than you. What I heard in the market is that could be the second or third quarter of 2021. But it is a public information that I have. I do not have any additional information.
Our next question comes from Renan Criscio with Credit Suisse.
So my -- just 2 questions on my side. The first one on paper prices, like the results this quarter were well supported by the prices in Brazil. So can you remind us, first, what was already implemented in terms of the paper price hikes that were announced? And if we can see like further carryover impacting in the next quarter, so in terms of your realized price for the third quarter? And the second question is on the working capital. So you did mention that you had a decline in inventories or an increase in inventories due to the truckers' strike. But can you quantify this is already normalized? Or if you can see like a further decrease in your inventory levels in the next quarter?
Renan, this is Leonardo, thank you for your question regarding our paper business. As I mentioned, our prices in this quarter have moved again up, 4% compared to the first quarter '18, which is roughly 9% above the same quarter of last year, which is what we expected and what we had announced previously in terms of price increases. And now due to market fundamentals, we have announced new price increases in Brazil, that's range from 9% to 14% for the second half of the year. And the implementation up till now is developing as we expected. But unfortunately, we cannot disclose the expected implementation rate for the upcoming months.
Renan, this is Carlos. Regarding your question about inventory. I would say that we would like to increase slightly our inventory. But I'm not sure, if we're going to be able to do that due to our current market scenario. We are -- we see that the demand should not allow us to do that movement. This is what I can say right now.
Our next question comes from Carlos De Alba with Morgan Stanley.
So my question is to again with inventories. If I understood correctly, the company right now is running with around 30 days of pulp inventories, which, I think you have said that, that represents operational challenges. So in the third quarter, there is no maintenance downtime at the pulp units. Do you expect them to perhaps -- to produce obviously at full capacity and increase your inventories of pulp, and before that will -- that means that the available pulp for shipments to customers would be reduced? And second question that I have is related to the cost impact from the truckers' strike. Do you think that we have seen the worst of that negative impact? Or we still should expect something to come through in the second -- in the third quarter, just to given the normal flow of cost of production into cost of goods sold? And if you can give us any sense of the magnitude of these nonrecurring and special cost pressure, that will be helpful.
So Carlos De Alba, this is Carlos speaking. Thanks for the question. Right now, we are running below 30 days and it is a very challenging number for us. I would say that technically, we'd like to slightly increase that number. We should work with a higher number. But again, at this point in time, I'm not sure if we're going to be able to do that now in Q3 due to our expected demand, okay? We might have a minor increase but not enough to bring us at a comfortable level. Regarding the impact of the truckers' strike, in my view, we have already seen some impact in the market. And there is more to come. We have just received the Brazilian exports statistics related to July. And I'm going to show you just some numbers, some public information. Total shipments from Brazil of BKP dropped about 25% compared to June. I mean, for the previous month. And that means that roughly 360,000 tons of market fall. If you're comparing to June. Europe was $0.29 lower, and again, I'm talking about shipments from Brazil to the key markets. So Europe was $0.29 lower and the shipments from Brazil into China was 23% lower. So that's definitely, will impact those markets in the coming weeks or months.
We are now closing the question-and-answer session. I will pass the call back over to the company for the closing remarks.
Thank you very much for everyone to attending this conference call. It's Walter speaking. We are very pleased from what the development of the company on the last month. We are preparing ourselves to the closing view with Fibria and not only in terms of hedging, on financing, on synergies, preparing the synergies for the future through a clean team. We are working on the fact -- we work on the facts and we conclude that with the SEC, now we have the stock that we are working. We have several initiatives. And the company is in on the scenario of delivering the expected results considering the actual market scenario. Then, we are very pleased from what we have right now. But we are very committed and we've a lot of energy to prepare the company for the future. Thank you very much for attending and have -- hope you have a nice day and week.
That concludes the conference call of Suzano Pulp and Paper. Thank you, everyone, for participating, and have a good day.