• Q2 20A saw adjusted EBITDA increase by 35% y/y (38% q/q): This was driven by the Pulp segment, where sales volumes increased by 25% y/y (-3% q/q) supporting a robust EBITDA margin of 52%, despite bottom of cycle pulp pricing. Unfortunately, bottom line looks messy due to high gearing and hedging (40-75% of FX exposure), with a net loss for the quarter.
  • Worst seems to be over for their Paper business: Industry domestic sales of P&W and paperboard decreased by 36% y/y, while imports decreased by 40% y/y. With downtime in May and June, all of their paper machines are operational again. Worst is over but they still see uncertainty due to municipal elections postponed and whether demand will bounce back for school textbooks.
  • Pulp volumes have outpaced market expectations for the last three quarters: Suzano acknowledge that their current run rate of 11.2mtpa (above name plate capacity of 10.9mtpa) is unsustainable. However, they continue to signal that they will produce and sell more volumes than in 2019. With Pulp EBITDA margin of 55% and bottom of cycle pricing, this provides a great opportunity to flush out high cost producers, in our view. Suzano remains well positioned, with their asset base and cost structure tough to replicate.
  • Q3 pulp cash costs (80% USD) are likely to track H1 despite planned downtime: Suzano still see more upside to improving cash costs due to synergies from the Fibria/Suzano merger. Q2 pulp cash costs was stable q/q but down 14% y/y. This was supported by lower wood cost (main cost driver: 41% of total cash costs) due to lower harvest costs from an improved operational performance, higher operating productivity and lower diesel costs.
  • “Very poor pulp price environment”: Current pulp prices are unsustainable, in their view and for Suzano, ROIC’s are not high enough. According to RISI, there is 3.8mt of HW capacity in China with cash costs higher than spot. For SW, this is even higher at 6.4mt. Suzano expects many players to announce closures.
  • Suzano inventory policy is to provide best service level to support customers: Suzano were able to reduce their pulp inventories by 220kt and deem their current inventory levels on the low side of their ideal range. Suzano are pointing to balanced global inventories with Asian terminals having seen port inventories reduced.
  • Balance sheet should de-lever quickly once pulp prices start moving: No equity raise on the cards, with some disposals planned. Zero refinancing risk until FY 22e and USD 2.5bn of liquidity on tap. Net debt/EBITDA reduced slightly q/q to 4.7x (USD) and expect to de-gear in Q3. CapEx guidance unchanged and mostly focussed on maintenance.
  • Carbon sequestration provides further upside: Planting eucalyptus in pasture areas captures 282t of Carbon per hectare.
  • Q3 likely to see stable pulp prices: Q3 is generally seasonally weak and Suzano is expecting lower demand in Europe, some recovery in P&W and strong demand for tissue in North America. There is likely to be more market related downtime due to poor industry profitability and planned maintenance shifted to H2 globally. RISI estimates planned downtime of up to 2.5mt this year (400kt in Brazil).

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