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Edited Transcript of SUZB5.SA earnings conference call or presentation 1-Nov-19 1:00pm GMT

Q3 2019 Suzano Papel e Celulose SA Earnings Call

São Paulo Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Suzano SA earnings conference call or presentation Friday, November 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Anibal Fernandes de Almeida

Suzano S.A. - Executive Officer of Commercial Pulp Business Unit

* Leonardo Barretto De Araujo Grimaldi

Suzano S.A. - Executive Officer of Paper Business Unit

* Marcelo Feriozzi Bacci

Suzano S.A. - CFO & IR Director

* Walter Schalka

Suzano S.A. - CEO

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Conference Call Participants

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* Antônio Heluany Neto

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Caio B. Ribeiro

Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Daniel Sasson

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Jonathan L. Brandt

HSBC, Research Division - Head of LatAm Cement, Construction & Real Estate Equity Research Team

* Leonardo Correa

Banco BTG Pactual S.A., Research Division - Research Analyst

* Marcio Farid Filho

JP Morgan Chase & Co, Research Division - Research Analyst

* Thiago K. Lofiego

Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to Suzano's conference call to discuss results for the third quarter of 2019. (Operator Instructions) During the presentation of Messrs. Walter Schalka, Chief Executive Officer; Marcelo Bacci, Financial and Investor Relations Executive Officer; Carlos Anibal, Pulp Commercial Executive Officer; and Leonardo De Grimaldi, Paper Executive Officer. (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 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 the results to differ materially from those expressed in such forward-looking statements.

Now I would like to turn the floor over to Mr. Walter Schalka. Please, Mr. Walter Schalka, you may proceed.

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Walter Schalka, Suzano S.A. - CEO [2]

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Good morning, everyone. It's a great pleasure to have you joining us with the third quarter results of Suzano. I think I'd like to -- in addition to the names that the host mentioned to us, we have Pablo Machado, we have Fernando Bertolucci, we have Christian Orglmeister and Alexandre Chueri, and we have (inaudible) as well. We are here to answer in the end of the presentation all the required questions.

I think the highlights of this quarter is very positive. We are very pleased with the operational performance. But of course, we are a little bit frustrated not delivering enough return to our shareholders due to the lower pulp prices that we have been facing on the last month. I think I would like to highlight some specific points to you.

The first of all is the sales volumes that were in the pulp side, 2.5 million tons, 15% higher than the previous quarters. The sales volumes on paper, there is 288,000 tons, showing our flexibility. Since the local market is not performing as expected, we increased our exports on this quarter. On the results of that, we have an EBITDA of BRL 2.4 billion and a free cash flow of BRL 1.5 billion. Even on this more asset -- market scenario, we are delivering cash flow returns and decreasing our leverage.

In addition to that, I think it's very important to highlight our pulp reduction on inventory. We had roughly 450,000 tons on reduction and we will continue to reduce this number on the fourth quarter. We announced today that our net debt is even on this scenario, have been going down from $13.7 billion to $13.3 billion on this quarter. And since our EBITDA on the last 12 months is going down due to the lower pulp prices, our leverage is 4.3x, and we are going to announce today, Marcelo Bacci is going to go in more details, our plan that was presented and approved by the Board of Directors yesterday, to address the situation on our financial policy since we are extremely conservative on that.

Our cash cost on this quarter was BRL 654 per ton, lower than the previous quarter that was BRL 697, and showing a positive trend and synergies that we are capturing on this process. And we'd like to announce to the market that we will deliver the expected synergies that we announced when we merged the 2 entities.

Now I'm going to hand over to Leo De Grimaldi, who is going to present our paper results.

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Leonardo Barretto De Araujo Grimaldi, Suzano S.A. - Executive Officer of Paper Business Unit [3]

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Thanks, Walter, and good morning, everyone. I would like to present the results of Suzano's paper business unit for the third quarter of '19. The figures presented on this next slide are specific to our paper division, therefore, excluding Suzano's consumer business units results and enabling us to have a better comparison with the past quarters.

Beginning with the top left graph, we can see our production figures. As of this quarter, and from here onwards, we will note the effect of the full conversion of our Suzano's mill coated paper machine into Eucafluff. Just as a recap, we used to produce approximately 100,000 tons annually of coated paper at our Suzano mill, and this conversion will present an 8% reduction in our paper production capacity. Additionally, during the quarter, we had the maintenance downtime at our Mucuri (L1) pulp line and paper machine, and consequently, our production for the quarter totaled 286,000 tons and 1.17 million tons for the last 12 months.

Moving now to the top right graph and looking at our sales figures, we can note that we have sold 288,000 tons in the third quarter, a 2.5% increase compared to the second quarter '19 and a 6.5% decrease compared to the third quarter '18, mainly due to a smaller production allocation, as I have explained previously.

As you can note on the darker side of the graph, our sales in Brazil have increased 11% when compared to the second quarter '19 but decreased 14% when compared to the third quarter '18. This trend is much in line with the latest statistics published by Ibá, our pulp and paper association, which showed that the total demand of printing and writing and paperboard grades have decreased 9.3% in the third quarter '19 when compared to the third quarter '18 and 6% -- and 6.5% decrease during the first nine months of 2019 affected both by the reduction of publishing paper consumption in Brazil and also by the postponement of the Brazilian government tax cut program.

By anticipating this challenging scenario in our domestic markets, we have again used our commercial flexibility to best allocate our volumes in several international markets, and our paper exports, as mentioned by Walter, have increased 12% when compared to the third quarter '18.

Now looking at the lower right side, we can note that our average prices during the quarter have totaled BRL 3,855 per metric ton. This is 1% decrease when compared to the second Q '19, but still 3% higher than the third quarter '18.

Now at the lower left side, we can see that there's an effect of the lower production and total sales volumes and slight price erosion during the quarter, our EBITDA margin is still very resilient, totaling BRL 1,202 per ton. Even in a more challenging global scenario, our EBITDA for the last 12 months was BRL 1,233 per ton, totaling BRL 1.4 billion on the last 12 months, which is 23% higher than the same period last year.

I would now like to invite Carlos to present the result of our pulp business unit.

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [4]

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Thanks, Leo, and good morning, everyone. So let's go to Page 5 of our presentation. I would like to start by sharing with you some comments related to the pulp market in Q3.

Actually, we continue to navigate through a challenging industry landscape if you characterize it by not supportive market fundamentals, although some minor improvements start to materialize at the end of the quarter. Global pup markets weakened quarter on quarter, as low demand and abundant supply were a factor that's still at play in all key pulp markets.

The unfavorable macroeconomic conditions and pulp industry-specific unbalanced fundamentals in Q3 explains a sharp reduction or a deterioration when compared to the previous period. The decline experienced for the quarter has brought global price for both soft and hardwood down to the cash cost of the high cost producers.

On the demand side, tissue continued to show resilience despite all the challenged economic scenario and has grown in the first 8 months of the year by 3% according to PPPC. On the other hand side, demand for specialties and printing and writing in North America and Europe still need to show improvement signals. Main positive news comes from China, where the demand has accelerated moving to the stronger seasonal period.

Now in China, fine paper operating rates have improved steadily as local players have enhanced their competitive position, coupled with recent price uptick. Some paper mills are already starting to restock recognizing current softwood prices have fallen below and are, therefore, unsustainable, below the cash cost.

On the other side of the market equation, despite the oversupply in the market, most producers is still run at full capacity, maximize their output in Q3. We also understand that some integrated European players continue to deliver more market pulp volumes to compensate a weaker graph paper market. Supply disruptions remained at much lower levels when compared to 2018.

Now I'll go through some of the main figures. Let me start by the top line. In the third quarter of 2019, the pulp business delivered revenues of BRL 5.3 billion, which means roughly $1.35 billion. We produced 2.1 million tons in Q3.

In the first 9 months of the year, our production amounted to 6.5 million. That compares to over 7.7 million tons we produced in the same period last year, which means a production drop of over 1.2 million tons in the first 9 months of 2019. Year-on-year, the quarter reduction was more than 600,000 tons.

On the sales side, our volume was 2.55 million for Q3 and that was [15%] higher than Q2. For the first 9 months of the year, sales volume amounted to 6.5 million tons.

Our average pulp price for the export market for Q3 was $526 per ton. Given challenging market conditions, prices were up 16.5% when compared to Q2. In Q3, we were able to deliver a total adjusted EBITDA of BRL 2 billion, which means roughly EBITDA per ton of BRL 857.

Our inventories at the end of September were reduced by approximately 450,000 tons, and we expect it to go even further down at the end of this year. I would like to say that we fully implemented in Q3 our plan to reduce our Brazilian exports for inventory replenishment in Asia, given our high stock built-up there.

Our export volumes to inventory replenishment was just 1/5 of what we did in Q2. We will keep our commercial strategy of pricing for adjustment to the prevailing market condition, allowing us to close the year with a decrease in inventory.

We are still operating in a very challenging environment, but we expect market conditions to improve in the short, medium term. We realized some positive development in the global pulp market for September. We have the seasonally weak months behind us.

Demand for pulp and paper has begun to show some signs of life. Limited consumer inventories and the seasonal improvement in demand could take buyers to increase orders in pace with the gains in their demand.

Structural and long-term market fundamentals have not changed, and we should start seeing the market find its balance over the coming months and quarters.

Looking for 2020, there are no major expansions [projected], only incremental CapEx gain, and there might be the potential of the market experience supply disruptions, which were common before and has not played out this year so far. Not to mention, high cost producers extending for longer their shutdowns due to poor or even existing profitability.

Now I turn it over to Marcelo, who will cover our cash cost.

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [5]

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Good morning, everyone. Turning to Page 6. I'd like to comment that our cash cost for the quarter was BRL 654 per ton, which is 6% below the number of the previous quarter, but still 10% above the number of the same quarter of last year.

We saw significant improvements in fixed cost, chemicals and energy, but we still don't see the contribution coming from wood, that we expect to see in the coming quarters. The trend of the cash cost for the coming quarters is down. And this comes -- the downward trend will come, especially from the contribution of the wood cost.

Turning to Page 7. Our leverage ratio came as measured in dollars from 3.6x to 4.3x in the quarter. But that came together with a reduction in our net debt from $13.7 billion to $13.26 billion, as a result of an acceleration on our sales that contributed to the reduction on the net debt. Of course, the reduction on EBITDA was more pronounced than the reduction on the net debt, and that caused a deterioration on the ratio that came to 4.3x.

Our average cost of debt continues to be 4.8% a year. The average term is now 85 months. And we now have 78% of our debt maturing from 2023 and onwards. We have a significant cash position and also standby facilities that add almost BRL 12 billion, which is more than enough to cover the next 3 years of maturities, even if we don't generate any cash. And we would like to continue to emphasize the fact that we don't have any financial covenants on our debt.

Of course, we have a very resilient and robust financial situation, but we have a leverage ratio, which is above what is established by our financial policy. And we are now announcing to the market what is the plan that we have to address this situation over time.

We have a very firm commitment to our financial policy. And in order to bring our net debt-to-EBITDA ratio back to 3x, we have 4 main measures that we are announcing today.

The first is that we will limit our CapEx to the sustaining level, plus the commitments already made, which means that for next year, our CapEx will be significantly lower than this year. We will announce to the market the CapEx for next year at the end of this year after we complete our budgeting process, but we expect it to be lower than this year. And we will continue to be limited to sustaining any commitments till we reach the 3x net debt-to-EBITDA ratio.

In addition to that, we will continue to reduce our inventories. And during the last quarter of this year and during 2020, we expect to collect about $500 million of cash coming from the sale of the excess inventory that we still have.

The synergies, as mentioned by Walter in the beginning, they continue to be in line with our expectation, and we confirm that we will be capturing next year, 90% of the potential that we announced by the time of the merger, and that will enhance our ability to generate cash in 2020.

We're also announcing that we will be selling non-core assets, meaning basically, forest and land that are not used today for our operations. We will be working in the next years to continue to sell and to accelerate the sales of those noncore assets. This plan should be enough to bring our net debt-to-EBITDA ratio back to 3x and lower in 2021. We will be periodically reviewing these projections according to the market scenario, and we may adjust these measures as the market scenario changes. But in any scenario, we don't anticipate any need for equity. And this is very important to be well understood by the market. We believe that those measures should be enough to bring us to the desired ratio.

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Walter Schalka, Suzano S.A. - CEO [6]

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Now we can go to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Thiago Lofiego from Bradesco BBI would like to ask a question.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [2]

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I have 2 questions. Carlos, could you comment more on the current state of markets in Asia? Do you see papermakers already starting to restock, taking advantage of the lower prices? And also, do you see the still weak dynamics in Europe impacting sentiments in the market in general and also, specifically in Asia?

The second question, maybe to Walter. We know that Brookfield is selling land in different regions in Brazil. Are you guys considering the purchase of those at all? Or because of the deleveraging target, you're dis-considering that potential deal?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [3]

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Thiago, good morning. This is Carlos. Thanks for your question. Let me start giving you an overall picture of our supply and demand, and then I can go to the Europe and the Asia specifically.

So on the demand side, the seasonally strong period for demand is just up on us, and there are good signs of re-acceleration there in China. We have already seen some very good positive develop in that market. I would say that I believe the consumer inventory as I said before, and this seasonal improvement in demand could incentivize buyers to increase orders in pace now with the gains in their demand.

Another very important positive factor for short fiber is the current price spread between long fiber and short fiber, that certainly creates an additional incentive for substitution, pushing up the short fiber volumes. So good perspective on the demand side.

On the supply side, usually, this is a period where we have lower production mainly in (inaudible) as many mills in the northern hemisphere take their scheduled maintenance downtime. Specifically this year, there might be also some extended downtimes in Sweden and Canada.

Talking about Canada, a big issue right now there is the availability of logs. So that'll put a big pressure on the fiber costs.

Moving to China, based on the available information that we have, most of the major paper grades have been posting growing figures since March and April. So operating rates are improving mainly for uncoated paper, all the grades that have a high exposure to virgin fibers are performing well.

Just to give you numbers that we just released yesterday. Printing and writing Q3 on Q2 grew 5%. Ivory board in the same comparison grew 7%. We understand that finished paper stocks are at a normal level in the whole supply chain to support this high season that is just starting.

In Europe, we expect to see some improvement in the demand for the coming months, but we haven't seen that yet. We do see some customers starting to restock mainly there in Asia and more specifically on the softwood side.

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [4]

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Thiago, this is Marcelo speaking on your question about the Brookfield potential deal. We have been following this, the news that are coming up on the press. Of course, those assets are important for us. We have an existing contract that is in place. But we will consider any possibility of using this movement in our -- to our advantage of reducing the cost of these assets in -- for us, but always according to our financial policy.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [5]

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But if I may, do you think that your non-core asset sales might eventually offset this potential acquisition of the Brookfield assets?

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [6]

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Not necessarily in terms of timing. Difficult to know at this point.

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Walter Schalka, Suzano S.A. - CEO [7]

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We are considering -- it's Walter answering here. We are considering to have around BRL 1 billion on forest and land, say on the next 5 years. This is what we have in mind, just to let you know.

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Operator [8]

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Mr. George Staphos would like to ask a question.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [9]

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Gentlemen, 2 questions around inventory. First of all, you have relatively limited outages scheduled for the fourth quarter and first quarter. Can you comment about any additional strategies related to this as you seek to reduce inventory?

The second question is, Marcelo, on your financial discipline slide, you talked about monetizing your inventory and that's contributing roughly $500 million. Round numbers taking the current price for hardwood, that's roughly 1 million tons, and you've already reduced in the third quarter by about 450,000 tons.

You're more or less saying what you've been saying before, which is you want to eliminate about half of your inventory, the 1.5 million that's excess. So what else is incremental to this monetization plan that you'd have us take away? It just seems to be you're stating what you said before that you hope to get inventories down 1.5 million between now and the end of 2020. And I had a quick follow-on.

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Walter Schalka, Suzano S.A. - CEO [10]

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George, good morning. It's Walter answering your first question related with the inventory. We will reduce inventory combining production plus sales. Of course, we do not want to give any kind of guidance on production. We explained yesterday our production guidance. We don't like to show the information to our competitors in the benefit of our shareholders. But it's our aim to continue our process to de-stocking to reduce our inventory in the third quarter -- sorry, in the fourth quarter and in the next year. We'd like not to give any specific guidance on volumes that we are going to reduce in the fourth quarter.

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [11]

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George, this Marcelo speaking. And according to Walter, what Walter just said, basically, the gains in working capital coming from inventory sales are related to the pulp inventories, but we cannot give you details on how much we're going to be reducing.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [12]

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Okay. One question, if I might follow-on, and then I'll turn it over. Your price realizations were, relative to our forecast, better than expected and above the FOEX price for hardwood. How much of that was mix, geographic mix? How much of that, if anything, is related to any type of timing effect whereby pricing might continue to head lower just because of a lag effect? Said differently, do you expect your pricing to more or less follow FOEX from here on out?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [13]

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George, this is Carlos. That has more to do with the timing of the drop in some of the markets.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [14]

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Carlos, so there'd be some follow-on that we might expect in the fourth quarter then?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [15]

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You're right.

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Operator [16]

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Mr. Daniel Sasson from Itaú would like to ask a question.

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Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [17]

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My first question. Carlos, if you could comment on your commercial strategy approach to Chinese customers. In the conference call thus far you mentioned that you were pretty pleased with the results of offering volumes for the full quarter for fixed prices. How do you see that strategy evolving? Are you repeating that in the fourth quarter? If you could comment a bit on what you are seeing in the margin with this slight restocking of the Chinese customers, that would be great.

And Walter, maybe if you could comment a bit on your synergies? You mentioned that they are on time and on budget. I'd like to know what is offsetting the potentially lower synergies from the wood -- from your wood costs or logistic costs, considering that they have probably been temporarily lower with your lower production volumes, right, or at least the production volumes being lower than what you expected in the beginning of the year, what has been offsetting that in terms of -- for it to still be on track with your original plan?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [18]

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Daniel, this is Carlos. So on China pricing policy, our pricing policy for Q4 is exactly the same that we adopted for Q3. We have kept our commercial strategy and approach, offering our customers the option to lock the volumes for the whole quarter at an agreed price and, of course, individual negotiations with customers. This movement has been successful in our view, allowing us to secure with most of them our volume for the fourth quarter, and securing the customers that we have great price. So we are doing exactly what we did in Q3.

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Walter Schalka, Suzano S.A. - CEO [19]

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Yes, Daniel, thank you very much for your question. I think you used the right word, that is offsetting. We have all the synergies in place. But of course, we had some specific contract with suppliers on the logistics side, and/or on the wood side, that is not allowing to have the full benefit of this year. We are accomplishing with all the contracts that we have in place during the merge, and this is the reason that we are not seeing the benefit of this. We are increasing the third-party wood, as you saw in our presentation. Since we are saving our own wood, then we are going to have the benefit of this in the coming quarters. We are very pleased with the fact that we have been seeing major biological asset gains on our operations, and this will enhance our competitiveness for the future. It's our mentality and our culture that we are going to use. We are never going to compromise the long-term just to benefit the short-term results. We are always looking on our NPV result to improve the value to our shareholders. Then we, of course, we are not having the full benefit of the synergies on the wood side on this quarter -- on these quarters, but we are going to see in the near future.

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Operator [20]

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Mr. Carlos De Alba from Morgan Stanley would like to make a question.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [21]

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So the first question is maybe for Carlos. What we saw in the third quarter is that you guys came out with same commercial strategy. You locked on -- locked in your volumes that resulted in a higher price, ready-to-fight, as it was alluded before, but the FOEX continuing to decline. And what we understand is some of the competitors had to offer lower prices than perhaps the ones that you -- which you locked in your third quarter volumes? How do you see, Carlos, the strategy repeating -- the strategy in the fourth quarter playing out for the pulp market prices in general? And is it fair to say that the reason why you are offering the same deal or the same option in the fourth quarter as you did in the third quarter has to do with the need to reduce inventories, but we might continue to see a deterioration in the FOEX pulp prices as a result of what your competitors might do. And I understand that is difficult for you to talk about what they will do, but just based on what we experienced in the third quarter, I would like to see if you have any comments.

And then, maybe for Marcelo, we also saw a significant reduction in receivables, and obviously, cash flow generation from working capital because of that. How do you see this evolving going forward, Marcelo? Do you think that we will continue to see both inventories and receivables contributing to cash flow generation in the coming quarters? Or it will be mostly from inventories?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [22]

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This is Carlos speaking. Your question is very sensitive. All I can say to you that we closed October business at the same price level that we did in September. We do see, as I said before, important improvement that is there in China. We have realized a growing pickup rates at the major China ports over the last few weeks. So that shows that the market is getting stronger. I can take the opportunity to share with you that, as I said before, our global stocks dropped 460,000 tons in Q3. And a large amount of debt was in the Asia supply chain. In China, we closed September with the lowest inventory level this year and that will go even further down until December. I expect to have closer -- close of October with very limited available pulp inventory in some of the key ports in China. In 2 major ones there, I'll not mention the name, I expect to have no inventory at all at the end of October. By that, I mean unsold products sit at the port to be sold to customers. Nevertheless, we believe our global inventories should be sufficient to full and properly serve our customer demands.

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [23]

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Carlos, in terms of the receivables -- this is Marcelo speaking. The -- in this quarter, we had a higher participation of China in our sales. And our policy in China is basically to discount the receivables because we have no conditions to assess the credit of most of our clients there. So the higher participation of China meant, at the end of the day, that we sold more than the average of the previous quarters, in terms of receivables. Looking forward, we will continue the same policy, which means that probably no significant new contribution from receivable sales should be seen in working capital gains.

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Operator [24]

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Mr. Marcio Farid from JPMorgan would like to ask a question.

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Marcio Farid Filho, JP Morgan Chase & Co, Research Division - Research Analyst [25]

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I have a couple of follow-ups. Carlos, you mentioned that you do expect inventories in October and going into the end of the year to be very probably normalized and down significantly in China. But when we look at the numbers of the Chinese ports specifically and if you add even European port inventories in there, we see that inventories actually increased in the third quarter versus the second quarter. So I was just wondering if that's the result of sold volumes that were not picked up by your clients? And if that's the case, is there a risk that sales are going to be weaker next quarter? Or if that's the result of your competitors increasing their own inventories because you're gaining market share?

And my second question is maybe to Walter. Walter, you've been talking about the importance of Suzano's reducing earnings uncertainty, earnings volatility, since, over the past few years, right? But what we've seen this year is the opposite really, right? We've seen some -- a lot of uncertainties ahead of quarterly earnings. We understand that this is part of a very challenging market, but looking forward when can we expect this earnings uncertainty to be reduced? What can the company do? And if the view of better -- less volatility is still there?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [26]

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So Marcio, this is Carlos. Good morning, and thank you for your question. So as I said, we have realized a growing pickup rate for all the major Chinese ports. In our case, the transaction time, I mean, the time between the invoicing and when customers are ready to move the pulp out of the port is usually 15 -- no, 20 days. That has to do with whatever the documentation process. So we do expect to see the pulp that we sold and have sold since late September to be moved out of the ports. As I said before and let me be very clear in that -- on that, we closed September with the lowest inventory level this year and that will go even further down into December. As I said, in 2 major ports, we have 0 pulp sitting there to sell in the beginning of November. So that shows, somehow, in our view, an improvement of demand. Also, I would recommend you to be careful when you look at the stock at the end of the month, and 2 or 3 vessels arriving late in the month could change that number in 200,000 tons, easily. So bear that in mind, I would say that the numbers that we gave are precise when you look at that in a broader range. But in my view, when you look at 1 specific week, that's not so precise as -- when, again, as I look at the broader range.

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Walter Schalka, Suzano S.A. - CEO [27]

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Marcio, thank you very much for your question. It's Walter answering. I think we all recognize and our study shows that volatility is not creating value for all the supply chain. We have been showing to our customers that lower pulp prices does not mean higher paper margins. And the reason behind that is that the fragmentation of the paper industry in one side. And the other side is the fact that we have several players fight into market share in the industry. If that -- every time that the pulp price is going down for a lagging period of time, paper prices will go down as well. In the opposite side, it's on a very fast pace that pulp prices -- faster pace that pulp prices are going down, and paper producers are not able to increase price on the same pace. This is the reason, if you see the graph that we present and we'll show to some of our customers, volatility is not providing very good results to the industry as a whole. Then our aim is to have lower volatility. Unfortunately, we are not able to deliver lower volatility at this point of time. And of course, we are little bit frustrated with the fact that we have right now, pulp prices, that is not delivering the expected returns to our shareholders. And some of our competitors, they're below the cash cost -- their cash cost, and that's not very positive for them as well. But this is the market that we are facing at this point of time. And Suzano have a very robust position, not only on our balance sheet, but on our cash cost and our competitiveness to face this situation, that is not the best strategy alternative for us.

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Operator [28]

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Mr. Caio Ribeiro from Crédit Suisse would like to make a question.

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Caio B. Ribeiro, Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team [29]

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So my first question, in light of the contingency plan, which you already provided some details on, given you'll be striving towards a net debt-to-EBITDA of 3x, over the next year or so, and given that you said that CapEx will remain at sustaining levels until you do so, is it safe to assume that you would not make any decisions on a potential expansion until at least 2021? Which in that case, it would indicate that the earliest that you could see a new project coming online from Suzano would be perhaps 2023 and 2024? And also, related to this, how does the decision of some of your competitors to expand in the market throughout 2021 and '22 impact any potential decision on this front?

And then secondly, on the potential of other players shutting down capacity, and as you mentioned, some players, they are already underwater at these pricing levels, yet we haven't seen any real material announcements yet in terms of shutdowns. So I just wanted to hear from you why you think that is? And whether you think that your decision to reduce production this year could have impacted or could generate any impacts on the decisions of other players to shutdown capacity or not?

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Walter Schalka, Suzano S.A. - CEO [30]

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Thank you very much, Caio, for your question. Let me start with the issue related to the expansion. I think we are extremely conservative on our policy. We have a financial policy approved and to -- from our Board and public to the market that we -- our target is to stay between 2x and 3x. Of course, we are going to track every time the combination of EBITDA and net debt to see what is going to be our next investments for the future. At this point of time, we are going to be more conservative, but we are going to track this on a quarterly basis. Really on a monthly basis, we are tracking this to see when we are going to be ready for a new expansion program. Related with the planned shutdown capacity, Carlos is going to answer part of that and then I'm going to add some comments.

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [31]

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So Caio, good morning, and thank you for your question. What we hear in the market is that we have several producers reducing their output without making any formal announcement. So again, we hear about that in Asia, in Europe and, mainly, in Canada. So this is all I can say, I can share with you about that.

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Walter Schalka, Suzano S.A. - CEO [32]

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We -- Caio, it's very important to add on this that, of course, we cannot have -- and we do not have enough details on all the producers in the world. But it is very clear to us that wood chips coming from Southeast Asia or Australia to China and/or Indonesia, Indonesia is going down. We are seeing that some non-wood producers in China is reducing their production. We are seeing that some softwood producers in the Northern Hemisphere are going to be shutting down in some of their lines or capacities. Then we are seeing a combination, and even on short fiber as well, we are seeing the same. Then we do not have all the numbers. We are not going to show to the market all the numbers, but we are very comfortable that since we are extremely competitive, we would be able to reduce our inventory on the next quarter.

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Operator [33]

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Mr. Leonardo Correa would like to make a question.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [34]

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Can you hear me?

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Walter Schalka, Suzano S.A. - CEO [35]

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Yes.

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [36]

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Yes.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [37]

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Okay. So my first question, just -- sorry, if I'm repeating something guys. I've been having some problems with my lines -- with my line, but just still on the production guidance -- on the production outlook, right? I know that there's no more guidance, and I just wanted to confirm if you will not give any more guidance on production numbers for 2020? I assume not, but I just wanted to hear from you whether this will be something sustained. I mean again, I understand that you're managing your production profile quite cautiously, but for 2020, would you be willing, assuming markets remain depressed, I mean, I just wanted to get a sense on whether you could maintain production levels relatively where they are? So just a bit more color if possible on how you're going to manage your production profile and whether the guidance will never be used again over the medium term? The second question for Carlos, just still on markets, Carlos, you spoke a lot about the outlook and some of the indications. I think the big question has been on restocking in China, right? What exactly will be the trigger for the Chinese paper industry to restock, let's say, to those old normalized levels? Is there anything that you're looking into as that event, as a specific catalyst, that you can share with us because it's -- I think there's a lot of confusion in the market on what exactly will trigger a restocking in China? And finally, for Bacci. Bacci, the numbers -- I think these numbers on free cash flow are very tricky, right, because I think Suzano will materially reduce CapEx for 2020 and I know that you didn't give a number, but if you can shed some light, if BRL 3 billion, BRL 3.5 billion is something good to work with on a preliminary basis? And you also have a lot of de-stocking from inventory reduction. So is there any updated breakeven on a free cash flow basis, pulp price? So in other words, what do you see as being the breakeven pulp price for free cash flow? Any update on that front will also be helpful, given this big CapEx reduction and also this working capital gain that you can sustain in 2020 as well? Those are the questions.

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [38]

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So Leo, this is Marcelo speaking. On the production outlook, you're right. It is our intention not to discuss production guidance in the future. And therefore, we cannot give you any hint about the production of 2020 at this point. Before Carlos goes into the China question, I'll take the chance to answer your second question. We will discuss and release to the market the CapEx number for 2020 in December after we complete our budgeting process. At this point, I cannot give you a range other than saying that it's going to be significantly lower than this year. We also -- we will not give guidance to the market about what is the breakeven point for us because that bears very sensitive information about our trend in terms of cash cost and CapEx.

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [39]

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Leo, good morning. This is Carlos. So on restocking, our perception is that customers, there in China, they are already restocking mainly, mainly on the softwood side. And that has to do with the fact that they believe price cannot go further down as those high-cost producers are delivering a lot to date. I was just reading some listed companies' results this week, and some of them are showing very negative numbers in their softwood business. So that's why we believe customers in China have taken the opportunity to start restocking the softwood side.

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Operator [40]

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Mr. Jon Brandt from HSBC would like to make a question.

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction & Real Estate Equity Research Team [41]

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So I just wanted to come back. I know you're not giving production guidance anymore. But I'm wondering if you could conceptually discuss sort of how you -- what you think your role is in supporting the market. I mean we saw you take some volumes off the market this year, is that something conceptually you're willing to do? Or do you think perhaps that was a mistake and given your financial situation that if you can sort of generate some incremental EBITDA by increasing production, but that's sort of the priority at the moment. So I guess, that's my first question. And then second question. So Carlos, you talked a lot about sort of the positive impacts that you've had and -- that you've seen in China with inventory coming down potentially some restocking, tissue being strong, so I'm wondering sort of what you would need to see in order to announce your own price hikes? The premium of softwood is going up, so if you could talk a little bit about sort of -- if you could envision any sort of price hike in the coming months. And then lastly, Bacci, so I know you're giving the 2020 CapEx number in December, but is there any change to the 2019 CapEx number?

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Walter Schalka, Suzano S.A. - CEO [42]

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Jon, thank you very much for your question. It's Walter answering your first question. As we mentioned, we are not going to give any guidance on our production for the next year. But it's very clear that our volumes for the next year on production are going to be higher than this year. We are not going to give numbers, but the trend is to have higher volumes on production side. On the other hand, we continue to make an analysis, what we call the last ton. We have been analyzing for every single plant what will be the last ton cost for us because we are not managing the company by average, we are managing the company by event. And certain specific tons is not delivering the expected return to our shareholders, then we are not discarding the possibility to have lower volumes than our full capacity. But we are not going to announce numbers for the next year.

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [43]

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Jon, this is Carlos speaking. You're right. The current spread between long fiber and short fiber has been very positive for us. We believe that we'll push up the demand for hardwoods. And on price, we cannot give any guidance on what we're going to do.

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Marcelo Feriozzi Bacci, Suzano S.A. - CFO & IR Director [44]

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Jon, this is Marcelo. On the 2019 CapEx, for the time being, we keep the existing guidance, which is BRL 5.9 billion.

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Operator [45]

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Mr. Antônio Heluany from Bank of America would like to make a question.

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Antônio Heluany Neto, BofA Merrill Lynch, Research Division - VP & Research Analyst [46]

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Just a quick follow-up. First to Carlos. Can you comment if you've gained market share in Q3? And what are you looking for Q4? And also, how are the pulp inventories and the paper trend in China? And how -- also the paper inventories in China? And the last one, on pulp, we discussed previously your potential strategy of some integrated papers shifting to use market pulp, how does that evolve during the quarter? And if you are still seeing this playing out going forward?

And a second one to Grimaldi on the -- can you comment on the paper trends and volumes and prices? And how is the competition on both in domestic market and then also for exports? And potential guidance for 2020?

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Carlos Anibal Fernandes de Almeida, Suzano S.A. - Executive Officer of Commercial Pulp Business Unit [47]

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Antônio this is Carlos speaking. Thanks for your questions. Some of them are quite sensitive, so I'm going to comment only on paper and pulp stocks. So paper stocks, the information that we have is that those stocks are at a normal or even low level, taking into account that we are just starting the high season there in China. Pulp, we believe that, it's ranged from minimal to medium level. So we believe that customers, mainly the small and the medium-size producers, they are running with stocks below what should be their normal level. So all in all, between minimum and normal.

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Leonardo Barretto De Araujo Grimaldi, Suzano S.A. - Executive Officer of Paper Business Unit [48]

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Okay. Antônio, this is Leonardo. Thank you for your question regarding the paper market. I'll give you some information -- additional information. Ibá, our Paper and Pulp Association in Brazil has just posted the third quarter results. As I mentioned, they were 10% below the third quarter '18. Now when you look at printing and writing papers, this decrease is almost 11% and paperboard grades also posted a decrease during the quarter of 9%. When we add up and look at the 9 first months of the year, the domestic sales of printing and writing grades and paperboards were down 6.5%, being 8% roughly in printing and writing grades and 2% in paperboard. And imports also reducing in Brazil at the same period at 6.3%. We have noticed a different market seasonality this year due mainly to the postponement of the purchases of the Brazilian National Textbook Program, the PNLD, which will be pushed more to the fourth quarter of the year. We expect that this fourth quarter will be the strongest quarter of the year due to expected market seasonality, as we have observed in previous years, and additionally, for the purchases of the PNLD, as I mentioned.

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Walter Schalka, Suzano S.A. - CEO [49]

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Antônio, thank you very much for your question for Leo. He was a little bit sad here to not being able to -- as there were no questions for him in this session.

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Leonardo Barretto De Araujo Grimaldi, Suzano S.A. - Executive Officer of Paper Business Unit [50]

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Thank you, Antônio.

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Operator [51]

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

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Walter Schalka, Suzano S.A. - CEO [52]

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Thank you very much for the opportunity to be with you. I'd like to give a highlight to you that the company is preparing even better for the future. We have been working on several dimensions on the organization. We have been working on integration of process and systems. We are working on synergies. We are working on the culture issue that for us is quite important, and all of them are going in the right direction with the right trend. We are extremely happy with that. We are extremely happy as well to be able to show the society that we can have a very good impact on the sustainability issue. I think we can have a source of fiber that could replace fossil sourced products, and we will be able to be a major positive impact on the society. We have been working as well on other issues on the organization, and the results are very good. Of course, this everything offsets by the pulp price and we recognize this, and we are frustrated with that. But we are preparing an even better company for the future not only to our shareholders, but to all the stakeholders. Thank you very much. I hope you have a very nice weekend.

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Operator [53]

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Thank you. Suzano's second (sic) [third] quarter results conference call has finished. Have a nice day.