Suzano S.A.

Ladies and gentlemen, thank you for holding and welcome to Suzano's conference call to discuss the results for the second quarter of 2023. We would like to inform you that all participants will be in a listen-only mode during the presentation that will be addressed by the CEO, Mr. Walter Schalka, and other executive officers. After the company's remarks are completed, there will be a question and answer section when further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Susano's management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. You should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Suzano and could cause results to differ maturely from those expressed in such forward-looking statements. Now, I would like to turn the floor over to the company's CEO. Please, Mr. Walter Schalka, you may proceed.

Good morning, everyone. It's a great pleasure to be with you. Welcome to the second quarter results presented by Suzanne. With me here, we have a large part number of our C-level. Please be free at the end of the session of the presentation to make the questions to everyone. I think I would like to highlight at this point of time the resiliency of the company. I think the company is very well prepared, once again, to navigate on this cycle with lower poll prices. The company has been preparing ourselves. We know there is part of the volatility process that we are facing in our industry, and we are well prepared for this month. I think it's very clear to all of us that the company has been devoting capital allocation to different initiatives. There is the preparing the company for the future. We are going to, during this session, to go a little bit further on these discussions. I think on the sales side, the company had normal volumes on this seasonality period of the time in COVID on paper. our inventory levels are below the optimal levels, continue to be below optimal levels. The performance of the company we had during this quarter, R$3.9 billion on EBITDA. Our operating cash flow was R$2.2 billion. I think this is a very important KPI for us. There is many EBITDA-less companies sustainable investment, CapEx. Our cash cost, and Iris is going to detail a little bit more on that, it's going down. We had 2% decrease during this quarter. And the company, and Marcel is going to explore a little bit more on that, is very well prepared for the cycle on our balance sheet. We have a very strong liquidity at this point of time. Our net debt is going up at a very slow pace comparing with the investment volumes that we are doing, the capex volumes that we are doing right now. And we are less than one year before we start up the Cerrado operations. Iris is going to explore a little bit. with you about Cerrado, but we are very happy with our performance of our engineering team. I think it's very important to mention and to highlight as well that on June 1st of this year, we have the closing with the deal with Kimberly Clark on the tissue assets here in Brazil. And with the combination that we have with these assets, we are facing a some synergies that would bring value to our shareholders. We are going to deliver these synergies as long as the month will come. We are very pleased from the initial movements that we had, the initial opportunities that we are facing right now. The company right now is the leader on the tissue business here in Brazil as a whole. remembering that this was a PowerPoint operation five years ago, and right now we are already leading the Brazilian market. Now I'm going to turn over to Fábio, who is going to mention a little bit about our packaging and paper business.

Thank you, Valter, and good morning, everyone. Let's turn to the next page on the presentation. As it can be seen in the chart at the bottom, the paper package in business unit has delivered stable EBITDA and margins on a year-over-year basis, despite more challenging paper market conditions. As it's shown in the top left chart, Suzano sales volume was 5% higher than the previous quarter and 10% below when compared to the same period of last year. Demands for print and writing papers in export markets have been affected by the strong destocking cycle during the first half of 2023. combined with lower consumption of printing materials in the same period. This trend is more intense in mature markets, such as North America and Western Europe, mainly for coated papers. Demands for packaging and uncoated grades have been more resilient, though. Latin America's main export region was a positive note in such a challenging international market environment, posting a demand growth in uncoated for the period. On the domestic market, according to IBA, print and write demand decreased 18% in the first two months of Q2, compared to the same period of 2022. As mentioned, most of each decrease is centered around cold papers. While for uncoated papers, we still see demand resilience at the same level of last year, pushed by sales of the editorial, school, and office segments. For Paperboard, EBAS public data on demand shows a 2% decrease on the first two months of Q2 versus the same period of last year. We considered that this decrease was due to inventory normalization throughout the chain, as demand for packaging and consumption of essential goods remained solid. Suzano paper price have been stable in the domestic market on a quarter-over-quarter basis and were 16% higher on a year-over-year basis. Our export prices, which were unusually higher than the domestic prices in the last year and a half, have decreased 20% in reais on a quarter-over-quarter, although still 3% higher on a year-over-year basis. Export prices adjustments reflect the market fundamentals imbalance and a stronger FX in the period. Our consolidated average net price during the quarter was 11% higher on a year-over-year and 6% lower on a quarter-over-quarter basis. Looking now to the EBITDA, we see a flattish performance when compared to Q2. The 11% decrease quarter over quarter was due to lower price from export and stronger FX. Looking ahead, we expect better market dynamics when compared to the first half of 2023, with demand behavior similar to pre-COVID seasonality, where second half of the year is stronger, differently from last year in which demand has been very linear throughout the year. In export markets, this stocking process is showing signs of coming to an end, and prices seem to have hit bottom in the main spot markets, while still higher than historical levels in mature markets. In the domestic market, demand should pick up due to the national government books program, a seasonally stronger second half of the year for packaging, sustaining current price levels. A stronger local occurrence poses some risk to some product trades in the domestic market due to more competitive imports. Still looking forward, costs should have a downturn trend in the end of the year, with more favorable raw materials and energy prices. Now I will turn it over to Leo, who will be presenting our poll business results.

Thank you, Fabio. Thank you. And good morning, everyone. Let's please move to the next slide of our presentation to address with you the second quarter results of our poll business unit. As you can note on the upper left graph, our Q2 sales were 6% lower when compared to Q2 2022 and 2% above the preceding quarter. This lower sales volume when compared to 2022 was a consequence of lower production due to a higher concentration of Suzano's planned downtimes during the quarter. As we have sold all volumes produced, our inventories are still below optimum operational levels as mentioned by Walter. During the last quarter, demand has been quite mismatched in different regions in the world. In China, demand for hardwood pulp was strong throughout the period, incentivized by quite low price levels, which have stimulated demand and the beginning of a restocking movement, initially from small and mid-sized regional paper producers, as well as additional pulp purchases coming from integrated pulp and paper producers who have reduced their pulp production. In China, paper and ivory board production grew 9.3% when compared to the first half of 2022. This trend was also perceived in the Q2-23 compared to Q1, as Chinese paper and ivory board continues to grow 5% quarter over quarter. Tissue was a main highlight or was a big highlight in the quarter with a 9% production increase versus Q1-23. Europe has been the most challenging market during this last quarter. While the tissue segment remained healthy and resilient, printing and writing, as well as some specialty grades, continue to face lower order intake, extending the stocking movement by distributors and printers, consequently affecting production rates of most paper producers. As a result of this, inventories of pulp, both hardwood and softwood in European ports and in the hand of some producers increased by a quarter. Due to this prevailing situation in Europe and with the additional volumes coming from new projects, we have noticed more hardwood pulp volumes being redirected to Asian markets since the beginning of Q2. putting more pressure in these markets, resulting in a very accelerated pace of price reductions, reaching by the beginning of the quarter levels much lower than marginal cash costs. After the April price valley in Asia, prices have started to recover in the second half of the quarter as the price levels, which were initially reached in these markets, detached from market fundamentals, which also triggered some restocking, as I mentioned previously, of some specific players in this market. Our June price increase announcement for Asian markets was successfully implemented. As you can see in the slide, our average export price for Q2 of $562 was 13% below Q1-23, also affecting our EBITDA for the quarter, which reached 3.2 billion reais and which represents a 45% EBITDA margin. Now, looking forward, I would like to highlight the following points for which I ask you to move to the next slide of the presentation. Looking at historical analysis of pulp prices, we can conclude that marginal cash cost has been a good reference of the lows of the market. Currently, prices are clearly performing below marginal cash cost. And as per Hawking's right, new cash cost estimate seen on the graph to the right, we can note that approximately 20% of global hardwood market pulp capacity representing almost 8 million tons, is burning cash at the current fixed China price index. Based on BMCs and fast markets public information, almost 1 million tons of market pulp supply has been reduced unexpectedly just in the second quarter of 2023. Again, 1 million tons in this last quarter. And these numbers do not include eventual production reductions from integrated pulp and paper producers. Considering current price levels, as per public information, where European net prices are now very similar to Asian prices, I wouldn't be surprised if a similar situation is happening in other markets throughout the world. On the demand side, Europe remains to be a focus of our attention for the next quarter, but there is a consensus that the stocking will end soon and demand should recover after holiday season. Demand for pulp in the second semester is expected to be higher than in the first half of 2023. In China, we foresee paper production levels to remain healthy and to post positive growth figures in the upcoming months as a consequence of local demand and its seasonality, as well as increasing exports. The unplanned shutdown of a major integrated paper and ivory board producer in China since early July and until today has tightened significantly the printing and writing markets. Such context reflects positively in the hardwood pulp consumption, as small and mid-sized paper producers are seeking to increase rapidly the operating rate to cope with this positive short-term demand and opportunity, and therefore need to buy pulp quickly from the resale market, where hardwood prices have rebounded back to $535 per ton. The current stability of the renminbi has played a key role to increase the confidence level of our customers. Our order intake levels have remained very healthy in July, similar to Q2 levels, also helped by additional demand coming from integrated pulp and paper producers. This positive momentum in China is being further fostered by Chinese public policies which were released these past days, which aim to incentivize local consumption and the housing and financial markets. With that said, I would now like to invite Iris to address with you the cash cost performance of this quarter.

Thank you, Léo. Good morning, everyone. Moving to the next slide. Cash production costs, excluding downtime in the second quarter and three, stood at R$918 per ton, 2% lower than first quarter. This performance was mainly due to the lower input price. both on energy and chemicals, reflecting internal battery brands and caustic soda price. In addition, there was a decrease in the consumption of inputs coming from higher operation stability with the conclusion of maintenance downtime carried out in the quarter. The lower average effects also benefit cash cost performance. On the other hand, the higher fixed costs from labor and maintenance costs, combined with a lower dilution due to a lower production volume took a two. It's also worth mentioning that the stability on wood cost was due to the higher operation costs arising from inflationary pressures and wood supply mix, which fully offset the benefit obtained from lower diesel price in harvesting and logistics operations. Looking forward, the second half of 2023, we see cash production cost X down times on a downward trend. End of the year, a middle single digit lower than second quarter level. Moving to the next slide, in the Cerrado project, we reached 70% physical progress. Important project milestones were achieved in this period, which allow us to have a more optimistic view for the startup, changing our forecast for the start of production to June 2024. The financial schedule is also in line with the plan, reaching 57% of the expected disbursement, with 9.8 billion reais remaining to be carried out by 2024. Now, I pass the floor to Marcelo Batz to continue his presentation.

Thank you, Iris. I'd like to move to the following page where we show a longer-term recap of our capital allocation and capital structure. In the last two years, from June 21 to June 23, we generated about $9.8 billion of EBITDA. And we generated $5.1 billion of capital to allocate after the payment of sustaining CapEx working capital changes and interest. That $5.1 billion of available capital has been deployed basically 70% in modernization and growth, including the Cerrado project. and 30% to dividends and share buybacks. This is a reflection of, first, our capital discipline, because the net debt has remained stable in the period, changing marginally from $11.4 to $11.3 billion in the period, and also reflects the growth perspective of the company that will continue in the coming quarters. During this period, we invested in the Cerrado project. We bought land with the acquisition of Parque and Caravelas, We expanded the speed of the forestry-based formation, invested in a port facility in Itaki, acquired the operations of Kimberley Clark, and some other investments also in new businesses that add to this $3.6 billion in these last two years. Our average cost of debt continues to be relatively low at 4.9% a year, reflecting the fact that our debt was basically constituted in a period of lower interest rates. Our liquidity position, including more than $2 billion of available lines, is now at $6.3 billion, which is very, very healthy. average term of that 75 months, and the leverage reached 2.2 times in dollar terms. Moving to the following page, I'd like to show the current situation of our FX hedging portfolio, since FX has been moving significantly in the last months. In the first half of this year, we had positive cash adjustments in our hedging portfolio, of 1.4 billion reais, reflecting the fact that we built the portfolio at a much better environment in terms of FX. If FX stays at 482, which was the level at the end of the quarter, more or less the level that we have today, this portfolio will generate additional 3.8 billion reais of cash flow in the next two years. Of course, this changes with the perspective of different FX scenarios. The portfolio we have today has an average put of 5.61 reais per dollar, which is very, very healthy, with an average call of 651. That covers 67% of our exposure to currency in the next 24 months. This portfolio that was $6.3 billion in the last quarter is now at $4.8 billion, reflecting the fact that in the coming months, our revenues will be lower with a lower price environment in hope, as described by Leo. But with that, I turn back to Walter.

I think it's very clear, ladies and gentlemen, that the company is very well prepared for the future. We have been investing on retrofitting our plants, Jacareí and Aracruz. We have been investing on Cerrado. We have been investing on expanding our land banking, our projects. forest area. We have been preparing the civic culture of the future. We have been developing efforts on the new business with investments on different areas. We have been preparing the company in terms of balance sheet. We are extremely disciplined in terms of capital allocation. We are extremely disciplined in terms of financial and robust balance sheet that we have. And we are investing on new areas preparing the future. A good example of that is our consumer goods area that we have been evolving on the last few years with new investments almost all the time, creating a business with very good cash flow generation. Cerrado project is ahead of us, and this is going to be extremely positive situation because we are going to have a very good additional marginal EBITDA on these operations. Our vision for the future is a lower cash cost production with lower input costs in one side and a retrofit in other side. Our position on liability management is always looking for opportunities. And I think it's very clear that we have been investing with financial discipline and with very robust balance sheet. I'm very pleased with the result of the company, for sure. Not very pleased with the pull price in the short term, but this is part of the game. And we understand and we are prepared for that. But this is a process that for sure will be better in the years to come or the periods to come. I'm very pleased as well with the strategic avenues that we have chosen and shown to the market. And we are going to have... Even better view on that during our investor day that we are inviting at this point all of you to be part of that on October 27. Thank you very much. And now let's move to our Q&A session.

Thank you. The floor is now open for questions. If you have a question, please press star 1. Mr. Daniel Sasson with Itaú BBA would like to make a question.

Hi, good morning, everyone. Thanks for the presentation and opportunity. And congrats on the head of base execution on Cerrado that allowed you to bring forward the startup date. We think that the market might start de-risking the project quicker now. But Valter, most of the interactions we are having with investors over around capital allocation, especially in the context in the context of strong cash generation post-Sehado, right? I know that M&A activity is always opportunistic, but in an ideal world, in which business line would you like to expand or focus your efforts on? Do you have appetite to enter new businesses that are not perhaps directly linked to open paper or the idea continues to seek is to continue to seek new applications for Pope and new products like the initiatives you have with Spinova and how you assess the attractiveness of such potential investments versus buying back your own stock, right? I mean, you have fully concluded the three programs you've opened. So that's my question, is how you'd rank your opportunities in terms of capital allocation. And my second question, maybe to Fabio, changing gears a bit here and talking about paper. You mentioned increased competition with imports. I guess the normalization of logistic chains allows for Chinese paper imports arriving in Brazil in a more competitive way. We've started to see prices going down. So how are you seeing the evolution of demand dynamics in Brazil and more specifically for tissue one of your competitors will add 240,000 tons of capacity next year. How disruptive do you think that could be to the tissue market or what could mitigate this new capacity expected to come online? Thanks a lot, guys.

It's Walter talking. Thank you very much for your question. I think it's very important to mention to all of our colleagues here that capital allocation is a critical issue in our organization. We have been performing very well. Our track record is very good on that, but do not remaining as arrogant for the future. We need to be very humble to be, and very deep on our analysis where we are going to allocate capital in the future. Of course, we are always looking forward to value creation to our shareholders. And due to that, we have to make analysis on cash returns one side and the other side with new investments that could be organic or inorganic. Of course, we are not going to comment on inorganic moves that a company could have for the future, but it's very important to mention that our philosophy is to reinvest 90% of our operating cash flow for the future. 10% will be devoted for dividends. And we do not need to reduce anymore our debt level, net debt level after Cerrado. Perhaps marginal improvements on that. Then we will need to decide where we are going to allocate on that. But be sure that our discipline on that, it's very important. And our deep analysis on alternatives will do it. For sure, we are not going to invest on areas there is not for business today. Everything would be based on planted trees. This is critical for us. Everything would be focused on this supply chain for the future based on planted trees. Now I'm going to pass to Fabio that is going to talk a little bit about the paper business.

Daniel, thank you for your question. I'm going to take the first part of your question about the imports, and I'll move it to Luis to talk about the tissue business. Regarding the imports, Daniel, we see imports growing, as you mentioned, with the decrease of the logistics bottlenecks that we have seen for the past year and a half. and also better exchange rate for imports. But this is impacting a very small part of our business, mainly in coated paper, which is less than 20% of what we sell. We are the only producer of coated paper for the Brazilian market. For the other grades that we sell more quantity as uncoated and paper boards, We see imports, very little imports in uncoated and should continue to be like that for the foreseeable future. And for paper board, there's more supply capacity locally here that, you know, attends the market. So there's no need for imports. So the risk is concentrated in coated paper. And we have to follow international prices here. And we're currently doing that. So at the point, we're matching our price to international levels. And I see very small risk moving forward with pricing for coated as well. So it's well-priced at the moment.

This is Luis. Thanks for the question. The Brazilian tissue market has 1.4 million tons, growing at a rate of 3% on average. The 240,000 tons announced will not be totally deployed in the Brazilian market. Part of this might be exported. What we see is that in the short term, this might create an imbalance in terms of supply and demand, but should stabilize in the medium and longer term. And looking at Susano, we are very well positioned in terms of cash cost. We are in the top quartile in terms of cash cost for the tissue business. We have very strong brands, very resilient brands that we've been developing and creating over the last five years. And now with the acquisition of the Navi brand, which is by far the... the best brand in terms of awareness and loyalty in the market. So I think that Suzano is very well positioned looking ahead in terms of the next three to five years.

Thanks a lot, guys. Very clear.

Our next question comes from Tiago Lofieco with Bradesco BBI.

Thank you, gentlemen. Two questions on my side. First one on wood prices in Brazil. Can you comment on market dynamics for wood and how that may impact your near-term results? And just to clarify, you mentioned hope cash costs are expected to be mid-single digits lower in the end of the year or in the second half? of this year, just a clarification there. And then my second question, still on the forestry side, just thinking about more structural, more of a structural strategy here on the forestry side, how should we model those larger forestry asset acquisitions that sometimes you guys make? I understand it's impossible to have a a specific number, but what can you tell us to help us model, you know, those types of deals? Or maybe just, you know, help us understand a little bit better, you know, the forest strategy and how you guys are thinking about that for the next, let's say, two, three years. Thank you.

Good morning, this is Carlos. So regarding the wood prices in Brazil, we have been seeing that increasing over the last maybe 18 months. So that has happened in the major wood markets all over Brazil. So there is an increasing trend, and we do not expect any major change on that. About our forestry program, what we have today is basically we have set our land bank for all the major operations, mainly Mato Grosso do Sul. In Mato Grosso do Sul, we already have over 600,000 hectares of land bank, and we are executing our plantation program. We have begun that years ago, and we plan to conclude that between 2024 and 2025, meaning that we're going to see a higher silviculture capex in the coming quarters.

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

Okay, great. Thank you, Carlos.

The next question comes from Leonardo Correa with BTG Pactual.

Hello. Good morning, everyone. Thank you. So the first question is on the pulp market for low-dermalogy. Leo, I think in your introduction and in the PowerPoint presentation, it was very clear that there's a lot of supply issues impacting the market nowadays. You talked about 1 million tons of unexpected cuts in the second quarter alone, if I'm not mistaken, right from your initial remarks. We also saw even you commenting some months ago on the Chinese vertically integrated paper. It was also suffering quite a lot from these levels of pricing. Suzano some months ago came out with a somewhat unexpected move of cutting its high cost capacity as well, right, the 4% volume adjustment. Clearly there's a lot of movement on the supply side of this industry, which at least to me indicates that something is not right. The price is very low, unsustainably low. Looking into the recent action on pricing, we saw a price hike in June, July, and August. Apparently the July move was somewhat partial. I just wanted to hear you with everything that's happening now, especially on the supply side. How are you seeing this supply-demand balance and how easy has it been or how challenging has it been to pass through these price hike announcements to more sustainable, more reasonable levels? That's the first question. The second question may be to Volker, right? On Cejado, I think we've all been talking about Cejado for quite a while. Unfortunately, the market takes some time to price these things in and probably only at the end, right, of execution. We'll see this value being priced into the share price. I just wanted to hear you a bit on what exactly made you or some of the milestones and achievements that made you perhaps anticipate the startup to June versus the previous guidance of the second semester of 2024. And how, I mean, how would you, perhaps see the evolution of cost performance of that asset? How long would it take for cost to reach steady state levels for Sahabi? Those are the questions. Thank you very much.

Hi, Leo. This is Leo here also. I will try to answer the points of your very big question to me. I'm going to try to address all of them. Let's see. So just to recap, yeah, we track the unexpected downtimes to market sources, mainly Brian McClay consultancy and fast markets. And what we are seeing is a significant increase in this unplanned downtimes. in the last quarters. In the beginning of the year, in the first quarter, almost 700,000 tons of unexpected downtime. And in the second quarter, almost 1 million tons of unexpected downtime. Half-half hardware than software. So it's very significant and very unexpected as well. Despite the fact that the quite below marginal cost indicate that movements like this, which previously were mostly due to weather-related events or unplanned downtimes due to technical age of equipments, have increased during these past quarters. You asked me about how to forecast the supply-side issues for the future. It's very hard and difficult because, obviously, they are unexpected. So it's very difficult to put numbers into that. But unless we see quite a big change in the market dynamics, again, comparing the current prices to marginal cash costs, as I showed you, we have today over 8 million tons of production capacity under water or burning cash with this first level. And this doesn't include any reduction at all in this analysis from the two consultants of integrated pulp and paper players, which have a capacity of over 100 million tons and in China almost 10 million tons. So it's a significant volume. It can turn out to be a big opportunity, but it's impossible to forecast because they're all unexpected. Our price increase announcements as of June were done because we saw and we thought think that the price levels reached by April were unsustainable and detached from market fundamentals. There was a huge level of order intake, at least will of order intake take from customers at that time. And we saw that it was a very big indication that it went too low. And so we started to increase prices in China. As you know, in June, and I mentioned, our price increase was successful. In July, we had announced $30. Unfortunately, we didn't implement all of it. And now we're seeking to reach the full increase. And I have a very strong confidence of that by August.

Thank you, Lawrence Walter, answering your second question regarding Cerrado. When we decided to proceed with Cerrado project, we had a lot of potential uncertainties at this point of time, at that point of time. We saw at that time the issue that we are in the end of the COVID process and we had some of these issues to be addressed on our initial phase of the project. And then we had the issue regarding the conflict between Ukraine and Russia and the war. And the third, we had the logistics, the constraint on logistics that could create a potential risking of performing for the future. What we are seeing is that our team and our suppliers have been performing extremely well, and we are very pleased with that. Our very long and very mature engineering team have been performing different projects in our history, have a very long and positive track record on that. We are very well prepared for that. And we are, every single day, with 10,000 people working on the construction of the plant, de-risking the process. And this is the reason that right now we have a better visibility that could allow us to tell us that we are going to be starting ramp-up on June next year. Of course, we will continue to keep de-risking the operations, to keep looking for opportunities. And it's very clear that Cejado project is going to be a transformational project for the company. What we are seeing, Leo, is that we are going to increase our capacity in a little bit less than 25% with the lowest cash costs in the world. then it's going to be a major improvement on the total cash cost of the organization, but with additional volume, extremely competitive volume as well, and very good as well on environmental and social impact to the society.

Thank you very much.

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

Yes, good morning, everyone. Thanks for the opportunity. So my first question on Cerrado again, you know, with the project startup being pushed forward to June of next year, I was hoping you could give us some color on how much, you know, you expect you can produce at the mill in 2024, or at least, you know, how long you're expecting it to take for you to ramp up to full capacity. And then my second question, right, we look at the, you know, full prices moving to $530 per ton. We're at $20 per ton high, right? I mean, the closer we get to that $530, $550 per ton level, you know, the big question mark that we see right now in the industry is, you know, whether that encourages those integrated producers that have cut, you know, upstream outputs, to return to the market. I know that you mentioned that you see a large chunk of that capacity offline. So I wanted to ask you whether you perceive that to be a risk as we move closer to those price levels, or if you see strong reasons to believe that prices reaching those levels are feasible and sustainable. And then just one final question, again, going back to the topic of Cerrado. You announced for this year a fulfillment of your output of around 4%, right? Assuming that prices are still at depressed levels by next year, as you're coming closer to starting up the Sahaba project, could you look once again to curtail your output at other operations, once again to accommodate the incoming lower cost volumes from the Sahaba project? Thank you.

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

Okay. Caio, just a second. Organizing the mic here. So, Caio, thank you for your question on the pool price. This is Leo here. Obviously, we monitor very closely our price moves when compared to the marginal cash costs and how that would incentivize more or less demand. Under today's view of the marginal cash costs, yes, indeed, we're getting close to that. But it's important to understand that this level of 530 is the marginal cash cost of market pool players. Then again, you have the other part of the market, which are the integrated pulp and paper producers. 100 million tons in the world and in China, 8 to 9 million tons. And as we have seen in public presentations reinforced during Shanghai Pulp Week, the marginal cash costs or the cash costs of this integrated Chinese producers are much higher than these levels that we see here as the marginal cash costs of the market whole player. So that's why we see still at levels, still when levels were approaching that, or a bit higher than that at the beginning of this additional demand coming from this side of the business. There's a second part to this question. We are, again, revising the marginal cash cost analysis in view for 2023 remaining and 2024. It is our idea to present that to all of you during Suzano Day in October. This is done by a very known consulting company. We have been sharing this information with you since our last Suzano Day. And just as a preview, we have seen already the return of prices of wood or the increase in prices of wood into the Chinese markets. Initial return from the Vietnam prices that had been reducing for several months, and that's the reason why the cash cost, the marginal cash cost, went from $600 to this $530 level. And every $10 of increase on the Vietnam wood or any wood coming into China has a $20 effect on the marginal or on the cash cost of Chinese producers. So this correlation is very important. Tracking the price of wood is very important, and we are going to be disclosing all this information in Suzanne's day again.

Thank you very much, Caio. Your question is well to answer your third question regarding next year production volume. I'd like to bring your attention to different issues that are very relevant to you, to the market. First, we are not managing the company by average. We are managing the company by event. We are looking for every single event of the company, if it's creating or not creating value to our shareholders. Wood prices is going up, as Carlos mentioned to you, and this is the reason that we are not going to use a higher wood cost to produce lower pole prices. This is a very important issue to mention to you. The second issue is that we are always looking for the better NPV to our shareholders. then we are looking what would be the best solution for everything. At this point of time, we are not planning any kind of curtailing for the next year. But, of course, we are going to track and decide every single moment what would be the market conditions to see how we are going to operate. That's super clear.

Really appreciate the detailed call there, Jonathan.

Our next question comes from Rafael Barcelos with Banco Santander.

Good morning, and thanks for taking my question. My first question is about capital allocation. So the company has executed three buyback programs in a short period of time, right? Other than that, pool prices are now back to the 500 level. Your leverage is at healthy levels, and you have completed more than 50% of the financial progress of the Cerrado project. So that said, I would like to understand from Walter if you could see the company more focused on cash returns for shareholders next year. And my second question is about capital allocation. It's still on capital allocation, but more related to your long-term strategy. I understand that Susana can discuss several different types of growth initiatives in the coming years, but I just would like to understand if if a new regular hardwood pulp mill should be a priority or if you could move toward different initiatives like more niche products like fluff or even dissolving pulp. Thank you.

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

Thank you, Rafael. I'm going to answer your second question regarding capital allocation. This is a very critical issue for us. Of course, we are not going to give guidance to you on the opportunities that we are facing at this point of time. But it's very clear that Suzano is extremely competitive on certain specific areas, and we are going to use our competitiveness for different reasons. To go longer on the supply chain, we have been doing this on the Brazilian market on the tissue. We have been making developments on the fluff market. We are very pleased with our fluff project. I think if you remember five years ago when we started this project, everybody on the softwood market was questioning ourselves if we would be able to replace softwood with hardwood. Right now, it's a proven theory already. We have been being very clear about in the market that we have been developing short fiber replacing long fiber on this industry. And this could be a potential investment as well for the future. We are always seeing cash returns to our shareholders as one of the possibilities. The second possibility is organic growth, and the third one is inorganic. And we are all the time disputing and challenging these alternatives to see what would be the next step of our long-term journey of value creation.

Thanks a lot.

The next question comes from with Morgan Stanley.

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

This is Leo here to answer your first question. So as I mentioned, there is roughly 8 to 9 million tons of integrated pulp and paper capacity in China. Ever seen the lows or the valley that prices reached as we came into April? We have been seeing an additional demand coming from this sort and this kind of players. We estimate that this volume ranges from 50 to 100,000 tons a month of additional demand for market pulp. They are reducing, we can see they are reducing their pulp production, but they are not stopping it as they still need all the utilities generated in a pulp mill to run their paper lines as well. We see some being more aggressive, some being less aggressive. But our view is that as time goes by and if this situation persists where market prices are below marginal cash costs, obviously this tends to be intensified for the future.

Yes, this is Marcelo speaking on your second question. The R$5.1 billion is expected for Cerrado next year. We'll be more concentrated on the first half, but there will be a significant part of the second half as well, which is related to the guarantees of the suppliers related to their performance. We don't have that timetable completed yet, but by the time we release our guidance for CAPEX for next year, we'll have more details on that.

Okay, perfect. Thank you so much.

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

I would like to thank you very much for your participation on this event. I would like to, I think, invite you to visit and to see the video of Cerrado Project. Guys, it's very impressive what our team is doing over there. It's the largest private project in Brazil at this point of time. It's very relevant to the city, to the state, to the country, to the sector, to Suzano. And we are very pleased to be part of that. The video is very interesting. You can reach out this on our website and or on the web. I think it's a very nice opportunity. And be very clear with you, the company, it's always going to look alternatives for value creation to our stakeholders. We have been working on that for several years. We are very disciplined on that, and we continue to be very disciplined. Volatility on the poll price is not our priority. We do not like that, but it's what we are facing right now, what we are facing many times. The company is very well prepared for the low poll prices that we are facing right now. And we are always preparing our future. We are planting a tree today that we are going to harvest in seven years. We are the largest producer. civic culture program in our history, in the world as well. We are planting right now 1.2 million trees every single day, preparing our future. Then I'm very pleased with long-term perspective of the company and very well prepared for the short term. Thank you very much and have a good time.

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