Suzano S.A. (SUZB3) Earnings Call Transcript

Ladies and gentlemen, thank you for holding, and welcome to Suzano's conference call to discuss the results of the second quarter of 2026. 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. Beto Abreu, and other executive officers. [Operator Instructions] 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 the 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 will turn the conference over to Mr. Beto Abreu. Please, you may begin your presentation.

Hi, everyone. Thank you for attending our second quarter results call. I want to start with the highlights of the following 3 points. The first one, we reported solid operational results with a strong free cash flow, once again showing resilience of the business even with a more volatile geopolitical conditions. The second point that I also would like to highlight is that on July 1, we had the Arbex closing, fully aligned with what we have previously expected in terms of time line. The governance and the management team is already 100% in place. And now we will focus on the integration and on capturing efficiency gains of this new organization. The third point, I also would like to say that Suzano will keep the focus on reducing the TOD, the total operational disbursing, and of course, on deleveraging the business. I also want to take the opportunity to say that today is the last call for Aires Galhardo, our Vice President for the industry operation and also engineering. Aires is leaving a legacy of major achievements of Suzano, and we all want to wish him every success in his next journey. So thank you very much, Aires. On the next call, we will also have -- we already have Carlos Anibal as the company's Industrial and Engineering Executive Vice President. Carlos has been with us for 23 years already, has previously held the roles of Paper Business Vice President, Commercial Vice President and also Forestry Vice President. So he has experience in many areas of the company. And he has been both a supplier and a customer to the industrial area. So we wish him great success in this new cycle. Very welcome, Carlos. Having said that, I will turn over to Fabio to talk about the paper business.

Thanks, Beto. Good morning, everyone. Please let's turn to the next slide. Our second quarter performance reflects higher sales volumes and prices as well as lower SG&A on a quarter-over-quarter basis. These positive factors were offset by inflationary pressures on wood and oil-related products and logistics as well as longer-than-expected ramp-up following our annual maintenance downtime in Pine Bluff mill. Looking at our addressable markets in Brazil, print and write demand according to Iba remained stable in the second quarter compared to the same period of last year. On a quarter-over-quarter basis, the 4% growth was driven by seasonality and higher demand for coated papers, benefiting from increased promotional and communication-related activity ahead of this year's elections. On such context, Suzano's domestic print and write volumes grew 4% on a year-over-year basis and 10% on a quarter-over-quarter basis. In the export markets, print and write demand declined 4% year-over-year in the U.S. and Europe, according to PPPC. Latin America showed stability, led by an increase in participation of Asian players in the region. Now looking at paperboard, demand in Brazil grew 8% in the second quarter when compared to the same period of last year and grew 11% against the first quarter. We note some customer inventory buildup in the first half of the year ahead of the implementation of paperboard price increases. Against this backdrop, Suzano domestic paperboard volumes grew 11% on a year-over-year basis and 28% on a quarter-over-quarter basis. In the U.S., according to FP&PA's data, SBS shipments grew by 11% year-over-year, albeit at an operating rate around 82%, which is softer year-over-year and stable quarter-over-quarter. Adjusting for recent capacity closure of the Smurfit Westrock La Tuque mill, Clearwater's Cypress Bend capacity reduction and the interruption of operations at the Nippon Dynawave facility, operating rates increased to 90% and should support better market dynamics in the second half of the year. Our Suzano Packaging sales volumes were quite stable on quarter-over-quarter and year-over-year basis. Turning to the EBITDA performance. Our Brazilian operations improved 28% on a quarter-over-quarter basis with higher volumes and better prices domestically and from our exports despite unfavorable FX. Compared to second quarter 2025, the EBITDA from our Brazilian operations declined 20% due to lower price, export volumes and FX. Suzano Packaging EBITDA was impacted by the scheduled maintenance outage in May and operational instability returning from the outage as well as increased costs due to the ongoing Middle East conflict, especially in oil-related inputs, mainly resins and logistics. Looking ahead to Suzano's paper and packaging business performance, sales volumes from our Brazilian operations tend to improve across both domestic and export markets, given historical seasonality for the quarter. In the U.S., we started Q3 with a strong order book with improvements in supply and demand dynamics. We remain focused on managing inflationary pressures related to the Middle East conflict, mainly in resin and logistics. Through initiatives already implemented or currently underway, we expect to mitigate most of these impacts going forward. Now I will hand over to Leo, who will be presenting our Pulp business results.

Thanks, Fabio, and good morning, everyone. Let me highlight the main developments in our pulp business unit during Q2 2026 and share our outlook ahead. Q2 was marked by different dynamics in pulp markets. In Europe and North America, pulp demand recurrently outperformed expectations, supported by stronger paper production due to war-related effects and inventory replenishments across the value chain as customers aim to get ahead of expected cost increases. These factors led to consistent month-over-month increases in pulp prices during the quarter. In China, the narrowing softwood hardwood price spread and the high availability of softwood pulp at Chinese ports weighed on purchasing activity from paper producers despite solid paper production, higher wood costs impacted integrated local producers and a greater clarity around the delayed start-up of OKI 2 mill. This unfavorable backdrop driven primarily by softwood dynamics affected the broader pulp market and led to hardwood pulp price concessions towards quarter end. Even at lower prices, customer purchasing activity remains subdued in June. At Suzano, our Q2 was marked by constrained production output due to a concentration of planned maintenance downtimes added to our ongoing reduced operating rate as well as an inventory rebuilding towards minimum operation levels required to support our operations as previously discussed. As a result, our sales reached 2.9 million tons during Q2, lower compared to Q2 '25 and slightly above Q1 '26. Higher prices across all markets, combined with the recovery of delayed invoicing to China and Asia drove our average export price to $601 per ton in the quarter. Turning to the right side of the slide, the BRL 4.2 billion in EBITDA with a 48% margin reflected higher prices in U.S. dollar, partially offset by higher cash costs and FX headwinds. Now looking forward, I would like to share our view on the key factors influencing pulp market fundamentals. Market dynamics in July were quite similar to those observed in the end of the second quarter, healthy demand in Europe and North America, but mounting pressure in Asia for the same reasons pointed out before. As hardwood pulp prices in China approached the mid USD 500 range, paper producers stepped up buying activity and our July order intake returned to healthy levels. In addition, our market intelligence team indicates that hardwood pulp inventory levels remain well balanced, both at Chinese ports and on the hand of paper producers in China. As we move into August, we see a more constructive environment developing in Asia. Seasonal demand is expected to strengthen. Hardwood pulp prices have moved below the cash cost of a number of Chinese producers and a wider softwood hardwood price spread enhanced the competitiveness of hardwood grades. Together, these factors should support higher order intake volumes in China and Asia, reinforcing our confidence in a stronger second half of the year. Furthermore, the prospect of paper price increase announcements in Asia should provide additional tailwind for pulp demand in the coming months. While demand indicators are becoming more constructive, the supply side also presents potential upside risk to market fundamentals. At current CIF China price levels, a meaningful share of global pulp capacity remains under economic pressure. According to a well-known industry consultancy, the just updated numbers, approximately 17 million tons of softwood and 5 million tons of hardwood capacity are currently operating below cash cost levels at the China prices, representing close to 30% of global market pulp production. Production curtailments announcements have reached the headlines during the past months, mostly in softwood pulp, but still insufficient to rebalance the market fundamentals. At the same time, industry profitability continues to be pressured by rising input costs, several of which are linked to ongoing geopolitical tensions. Still on the pulp supply side of the equation, a stronger El Nino season this year may increase the likelihood of weather-related disruptions in key producing regions with possible implications for wood availability and production costs. Together with the recent forest license revocations in Indonesia, these factors could contribute to a tighter-than-expected S&D scenario in the short term. To conclude, I would like to reiterate that Suzano's unmatched business platform supported by our best-in-class assets and unique end-to-end logistics capability provide us the agility to respond quickly to any market conditions and capture commercial opportunities. With our inventory levels already aligned with our operational needs, we remain well positioned to navigate the ongoing volatile global environment. With that said, I would now like to invite Aires to share our cash cost performance for the quarter.

Thank you, Leonardo. Good morning, everyone. Cash costs excluding downtimes reached BRL 843 per ton in the second quarter '26, broadly in line with our guidance. The 5% sequential increase mainly reflects higher input costs, particularly natural gas, caustic soda and chlorine dioxide amid continued pressure from global commodity and energy markets from the conflict in the Middle East. Wood costs also increased quarter-on-quarter, mostly driven by longer cartages and mill production mix. These effects were partially offset by stronger utilities results, supported by higher export volumes, favorable FX and fixed cost dilution from higher production volumes. The conflict in the Middle East remain a factor affecting our year-over-year cost performance, contributing to higher chemical and energy price. Wood costs were pressured by higher logistics and harvesting activities, driven by transportation mix, labor and maintenance. These headwinds were partially offset by the same positive factors discussed in the quarter-over-quarter analysis, namely favorable FX effects and stronger energy sales performance. In addition to the higher energy export volumes, energy price benefited from the excess energy auction related to Ribas mills, which became effective in January '26. Beyond the information presented on the slide, I would like to provide some additional color on maintenance downtime costs. The BRL 129 per ton this quarter, in the second quarter '26 mainly reflect a heavier maintenance schedule during the quarter, extending downtime at the Tres Lagoas mill and the remaining impact of Ribas mill downtime that began in the first quarter of '26. Looking ahead, the company remains on track to deliver an average 2026 cash cost, excluding downtime of approximately BRL 800 per ton, in line with its guidance and disclosure assumptions, supported by the gradual cash cost decline in coming quarters. With that, I pass the word to Marcos to continue the presentation.

Thank you, Aires, and good morning, everyone. I'll start on Slide 7, explaining the impact of higher oil prices in our operations and the effectiveness of our hedging strategy. In second quarter 2026, our costs increased by BRL 275 million due to higher oil-related prices. And we had a positive cash impact of nearly BRL 150 million from our hedging portfolios, compensating nearly 60% of the negative impact. Looking ahead, we have 85% of coverage over our hedgeable exposure in the second half of 2026 and 35% in 2027. As a sensitivity, if Brent prices remain at today's level of $87 per barrel, Suzano will receive a positive cash adjustment of BRL 250 million over the upcoming 18 months. Moving to Slide 8. I'll show that our currency portfolio continues to protect our free cash flow. In the second quarter of 2026, we had a positive cash adjustment of BRL 480 million from our FX hedges. Our portfolio of zero-cost collar remains solid at $4.6 billion with an average put option of BRL 6.11 per dollar, covering 57% of our U.S. dollar exposure. As a sensitivity, if the BRL remains at today's level of BRL 5.19, Suzano will receive more than BRL 4 billion on positive cash adjustments in the upcoming 24 months. Moving to Slide 9. Our positive free cash flow in the quarter contributed to reduce our net debt from $13 billion in first quarter 2026 to $12.8 billion in the second quarter. Our leverage ticked up from 3.3x in first quarter 2026 to 3.4x in the second quarter, mainly explained by the contraction in our last 12-month EBITDA. Following the acquisition of Arbex in the third quarter, we will consolidate 100% of Arbex net debt and only 1 quarter of EBITDA. But we believe that the correct way of looking at this metric will be to consider the last 12-month EBITDA of Arbex. We remain highly focused on executing our strategy to reduce Suzano's leverage following the conclusion of this transaction. Lastly, we maintain a very healthy cost of debt at 5.1% in U.S. dollars with a comfortable amortization schedule of 76 months with limited amortizations in the short term. Important to mention that we continued our liability management effort in the second quarter of 2026, and we issued BRL 2.5 billion or $500 million in local instruments with an average tenure of nearly 11 years and a final cost 60 basis points below the Brazilian benchmark rate for the same period. Now I'd like to turn the call to Beto for his final remarks.

Thank you, Marcos. I want to highlight 3 main points looking forward. The first one is that we're still expecting higher demand on the second semester and then stronger sales. That's the first point. The second one is that we're still confident that we will deliver the guidance regarding the cash costs that we share with all of you. And the third one is that we are already expecting efficiency gains from the Arbex operation in the second semester since the team is already in place. So having said that, I will open for...

[Operator Instructions] Our first question comes from Caio Ribeiro with Bank of America.

So my first question is on your cash cost guidance for the year, which you kept at BRL 800 per tonne, which points to a drop to levels below BRL 800 per tonne in the second half of the year to achieve that. So I know that you guys are confident in achieving that, but I just wanted to see if you can share some more color on the main components right of that cash cost and the variables that should help you deliver that guidance. And if you can give us also some color on the general trends that you're seeing for next year, how sticky some of those cost impacts from the conflict are, that would also be great. And then secondly, a question on leverage, with the company targeting to reach that level below 2.5x debt to EBITDA in 2027 to '28, and you still have to consolidate the net debt from Arbex. Just wanted to see if you can share some color on the pathway towards achieving that level, if you believe at this point that it can be reached solely with free cash flow generation in the period or to what extent you're incorporating divestments as part of that assumption to reach that level, that would also be very helpful.

I'll start, thank you. I'll start with the leverage question. So the bulk of the free cash flow generation will continue to come from our operations. So we expect to generate that from our business. As Beto mentioned, we also expect Arbex to contribute on our deleveraging process as they will be able to generate efficiency gains over the upcoming quarters, namely in 2027 and in 2028. And on top of that, as we started mentioning in our last Suzano Day in December last year, we are also focused on a couple of divestments on noncore assets. We mentioned to you that we will have a strategy of selling land plots in Brazil that will be sold to a higher best use than being only being used by planting forestry. And we already started -- we started that in the last months and last quarters, and we expect that to also help on the deleveraging process going forward.

Caio, Aires speaking here. For second semester, there are 3 main reasons to expecting a decrease in our cash cost. First of all, we don't have significant downtimes at our facilities, that will increase our production, delaying the dilution of the fixed costs. The second one, these downtimes normally impact all the costs in the analysis because normally we bring to the general shutdowns and other maintenance that we have scheduled for the year. And the third most important factor, we expect a reduction of the consumption in the wood, especially because we've been totally in place our deal with Pangeia that we presented in the end of last year. It will take place in a good amount and reduce probably our ratios and our wood consumption in the coming years. There is another important effect, that's energy. Probably in a specific quarter we have an increase of surplus and it will deliver a better result. For next year, I prefer Carlos be in place to say what you're waiting for coming year.

Our next question comes from Marcio Farid with Goldman Sachs.

Well, first of all, Aires, I've been following your work since your Fibria times and very well done. Congrats on the great journey on Fibria and then on Suzano. It's been truly remarkable the operational deliver you guys have delivered. So congrats and good luck on the next steps. Yes, I have a couple of questions. The first one on Arbex. I've seen many link updates. Clearly you've been moving fast in terms of putting the team together. And I'm sure by now you probably have an even better idea on what the company and the assets and the markets look like versus when you did the due diligence for the acquisition. So it would be great to hear your updates, early impressions, next steps. And your ongoing conviction on the deliveries that can be expected. And secondly, maybe on the paper side, I think Fabio mentioned China imports have been hitting the market. We've been hearing about Chinese and Indonesian imports being more harmful to the Brazilian market as well. So trying to understand if you can see actions being taken by the government in terms of tariffs and how you are positioned for that? And also if you can comment on the U.S. profitability side, that would be great as well.

Marcio, this is Beto. Let me cover the Arbex and then the team here with all the other questions. I think 3 things that we should highlight on the Arbex. The first one is that the team, I'll say, the clean team from Suzano and for Kimberly-Clark have been working together during all this period of time, and they have delivered tremendous job in terms of carve-out and also in terms of writing down all the value gain streams that we had in place. So all the premises that we share once we announced the deal, we want to confirm that they are still in place. So we are now focused to deliver the premise that we also shared with you. The second thing is that the governance also it's working already. We have a board already in place with 3 members from Suzano 2 from Kimberly-Clark. They already had a first meeting. They already are working to implement the plan that we have approved. And secondly, we are very glad about the management team that we were able to put together with people from both companies and also hiring people from outside. So we are confident that we have a very strong team to extract all the efficiencies that we shared with you once we announced the deal. So the team very confident about what we are able to build with this initiative. Thank you. So let's take the -- I'll hand over to Leo -- to Fabio.

It's Fabio here. Marcio, thank you for your question. So let me take the first part about the Chinese imports. Yes, we have seen a big inflow of Chinese imports in the first half of the year. This is mainly given the stronger real, for most of the first part of the year, and also lower freights that we have seen in, especially in the beginning of the year. Things have changed a little bit. We have seen some price increases announced by Indonesian Chinese paper producers. And also, we have seen rising freight costs, mainly with the Middle East conflict. And also the Brazilian real has weakened a little bit. So let's see what happens in the second half of the year with these adjustments. Through Iba, the main players are discussing ways of protecting the domestic industry, looking at our import duties and see if we have the right level of import duties in order to protect what we are doing. So we are discussing and discussing with the Brazilian government ways of protecting the national industry here. Your second question regarding U.S. profitability, we have had a difficult second quarter. That was -- part of that was expected by the -- we had a cold maintenance outage, which is first time that we have done that in Pine Bluff. It's the one that we turn off all the utilities at the mill. And so we had some difficulties bringing the mill back to operations, and that affects our results in the second quarter. And also, we have a delay in pricing protection. We have 80% of our volume under contract and our contracts, they offer some inflation protection prices, but there's a lag of 3 months between when the cost hit us and when we can increase price to customers. So -- and that second quarter was the lag period that we had higher costs and prices start rising now in the third quarter. We are optimistic about the second half of the year, as I mentioned, there are some things happening in the market. Our main competitor had a major accident at the mill, is still down, not operating. That's Nippon Dynawave. And we have received a very strong orders book for the second half of the year. And so we now need to produce well and so that we can have this -- collect all these volumes that we have already in place here with us in terms of orders. So we're very positive about the second half of the year. We have no major event in terms of maintenance plan for that period. So -- and we see the mill running much better now in August already. So we're optimistic.

Our next question comes from Rafael Barcellos with Bradesco BBI.

Congrats Anibal for the new position. So first question on pulp markets. So Leo, your speech seemed a bit more constructive versus what we have been hearing over the past 1 or 2 months. So I just wanted to hear your thoughts on how strong you believe demand will be in this -- in the end of August as we approach a stronger demand seasonality. And if you are comfortable to call where we are in hardwood pulp as the bottom? And any other comments that you can provide on the cycle could be interesting as well. And the second question, Beto, on capital allocation. So the company still have some potential investments going forward, like you have the right to increase your share in Lenzing, in Arbex. You also have a buyback program open and you have this priority now to deleverage. So I just wanted to hear your thoughts and your framework here on which areas you should prioritize? I mean, if you can consider any sort of asset sales to accelerate deleveraging and your overall thoughts on how you're going to balance the buybacks, the potential investments in this deleveraging process.