Suzano S.A. (SUZ) Q2 2019 Earnings Call Transcript

Suzano S.A. (SUZ -1.18%)
Q2 2019 Earnings Call
August 9, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for holding welcome to Suzano's conference call to discuss the results of the second quarter of 2019. We would like to inform you that all participants will be in a listen-only mode during the presentation of Messrs. Walter Schalka, Chief Executive Officer, Marcelo Bacci, Financial Investor Relations Executive Officer, Carlos Anibel, Pulp Executive Officer, and Leonardo Grimaldi, Paper Executive Officer. After the conference remarks are completed, there will be a question and answer session, when further instructions will be given. Should the participant need assistance during the call, please press *0 to reach the operator.

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 that differ materially from those expressed in such forward-looking statements. Now, I would like to turn the phone over to Mr. Walter Schalka. Please, Mr. Walter Schalka, you may proceed.

Walter Schalka -- Chief Executive Officer

Good morning everyone, it's a pleasure to have all of you as we present a conference call of the second-quarter results. I'd like to welcome everybody and tell that with us as well, in addition of the names that was listed before, we have Iris, we have Gretchen [inaudible], Pablo [inaudible], all of us will be ready to answer your questions at the end of the session. I'd like to start the presentation mentioning that we are very pleased with the results of the second quarter that Suzano is on a very difficult and turbulent market pulp scenario. We can deliver extremely good results to our shareholders. We are proving our resilience in one side and our financial, operational discipline.

At the first quarter -- the second quarter we had volumes of sales volume on pulp of 2.2 million tons and paper a little bit less than 300,000 tons, 281,000 tons. We have much more volume on export. We are presenting and adjusted EBITDA per ton on pulp of a little bit more than 1300 real per ton and on the paper side a record number of 2237 real per ton. As a consequence, we have been operating cash flow that we understand that is the right TPI to be tracked on our industry that represent EBITDA less capex sustaining of 2.2 billion reals at this quarter.

We have been increasing our financial leverage since the last 12 months EBITDA is going down due to the market pulp scenario, and now we have a 3.5-ton reals EBITDA in this quarter. It's very important, and Marcel is going to talk to you a little bit about what are the main measures that we are taking to prepare the company for the future. One of the measures is the reduction in capex for this year. We are announcing our guidance going down from 6.4 billion reals to 5.9 billion reals, and Marcel is going to disclose a little bit of the details of this reduction.

I would like to share with you very important information that we keep the same target on synergies that we established at the beginning of the merge of the two entities, that we are going to deliver between 40% this year, between 800 and 900 million reals of the synergy. Compounded on opex plus capex and not including the tax shields that we have in addition to that. Then synergies are on track and on tack, on time, on budget. Now I'm going to hand over Leonardo who's going to explain a little bit about what is our view on the paper side.

Leonardo Grimaldi -- Paper Executive Officer

Thanks, Walter, and good morning everyone. I would like to present the results of Suzano's paper business unit for the second quarter of 2019. The figures presented on this are specific to our paper business unit. Therefore, excluding Suzano's consumer business unit's results, which enables us to have a better comparison with the past quarters. Beginning with the top-left graph, we can see our production figures. We have produced 298,000 tons during the second quarter, achieving a total of 1.2 million tons in the last 12 months. With our focus on operational efficiency, we were able to increase our production by 2% during this period.

Moving on to the top right graph and looking at our sales figures, we can note that that we have sold 281,000 tons in the second quarter, which is a 10% increase compared to the first Q 2019, and a 6.4% increase compared to the second Q 2018. As you can note on the darker section of the graph, our paper sales in Brazil decreased during this quarter and have performed much in line with the latest statistics issued buy back our pulp and paper Association. According to the statistics, the total demand of printing, and writing, and paperboard grade have decreased 4.7% in the first semester 2019 when compared to the first semester 2018. Our sales in Brazil have decreased 2.9% in the same. By anticipating this challenging scenario for all domestic market, we have used our commercial flexibility to best allocate our volumes in several international markets. Consequently, our paper exports have increased 45% compared to the previous quarter.

Now looking at the lower right side, we can observe that our average prices have moved up during the quarter, reaching 3855 reals per ton. This is a 1% increase compared to the first Q 2019 and 11% increase compared to the same quarter last year. Our average prices in Brazil have increased an additional 2% in the quarter, and our international prices increased 1% rails. In this case, due to our currency depreciation, compensating lower export prices in US dollars. When we add up our operational efficiency, our source of sales volume is a new price simple mentation. We can look on the lower left side of the slide, that our EBITDA margin has reached 1237 reals per ton, the 24% increase compared to the same quarter last year. Our EBITDA margin for the last 12 months totaled 1260 reals per ton, which as Walter has said, has added a record to our paper business unit and also a 40% increase to the same period last year. I would now like to invite Carlos to present the results of our pulp business unit.

Carlos Anibel -- Pulp Executive Officer

Thanks, Leo, and good morning, everyone. So, let's move to Page 5 of our presentation. Before going over the main levers of our pulp business, I would like to start by framing what was the business environment in the first half of this year. We navigated through a changing in this landscape characterized by weak market fundamentals. Oversupply of the pulp market, coupled with geopolitical uncertainties, trade wars, and worse than expected macroeconomic conditions, ended up affecting the business. The pulp fundamentals were not favorable, and we had to deal with a major price correction for both hard and soft fibers in the first month of the year.

On the demand side, the global pulp demand growth slowed down in the period. The macroeconomic backdrop and pulp customers destocking, a process that began late last year, limited growth so far this year. Tissue demand has shown resilience despite challenging economic scenario and has grown in the first five months of the year by 2.8% in the period according to PPPC. I would like to highlight Asia, where the growth was more than 5% during the same period. On the supply side, the staggering amount of unplanted downtime that severely limited in fact of the new supply in the market in 2017 and 2018, fell considerably lower in 2019. Almost all producers run at full capacity maximizing the output.

On top of all that, we also understand that some integrated European employers deliver more market core volume to compensate for a weaker graph paper market. This supply and demand imbalance scenario that I have just described explains that graph and an expected price correction seen so far. Pulp price has been sliding throughout the whole year in all the regions. Now, will go through some of our main [inaudible] and let's start by the top line. In the second quarter of 2019, the pulp business delivered revenues of 5.45 billion reals, which is about $1.4 billion. Revenues were 9% higher versus Q1 on more volume and lower prices.

We produced 2.2 million tons in the second quarter, and in the first half of this year, our production amount is 4.4 million tons. That compares over 4.9 million tons we produced in the same period last year, which means a production drop, a production reduction of over a half million tons in the first six months of 2019. On the sales side, our volume was 2.2 million tons for Q2, that was almost 30% higher than Q1. For the first half of the year, sales amounted 3.9 million tons, and that compares to 5 million tons that was sold in the same period last year. Our sales, mainly to Asia, were stronger to the end of the second quarter, which explains a higher price drop quarter on quarter.

During Q2, as previously disclosed, we concluded the following planned maintenance shutdowns. Aracruz Line I, Line A and partially Line C, Imperatriz, Tres Lagoas Line 1 and partially Line 2. For Q3 we still have Murcuri Line 1 and Jacarei. Our average net full price could export markets for Q2 was $630 per ton. Given shallow market conditions during Q2, prices dropped 11% when compared to Q1, which was $711 per ton. Despite the price pressure, we were able to deliver revenues again 19% higher in Q2 versus Q1, supported by higher volumes.

In Q2, we were able to deliver a total adjusted EBITDA of 2.74 billion reals, an increase of 11% when compared to the last quarter, mainly supported by higher volumes. EBITDA per ton was 1305. Our inventory at the end of June were close to the end of March, and we expect it to start going down throughout the second half of this year. We expect to close 2019 with lower pulp stocks. Our price point for the second half of this year will always be adjusted to the prevailing market conditions so we can move our target volume. A combination of higher volume sold in the second half, the expiration of the agreement with Klabin and the lower production volume when compared to the second half of last year will drive our stocks down again until the end of this year.

To sum up, although there is no question we are operating in a more challenging environment, we expect market conditions to improve in the short-medium term. Short-term and long-term market for demand have not changed, and we should start seeing the markets find its balance over the coming months and quarters. Now I turn it over to Marcello Bacci, who will go over our cash costs.

Marcelo Bacci -- Financial Investor Relations Executive Officer

Good morning everyone. Still the pulp business, I'd like to comment that we are under temporary pressure on our cash costs dude mainly to this lower production rate we are having at this moment. Our cash costs in the quarter were 697 reals per ton, which is 30 reals above the number of last quarter and about 70 reals above the number of the same quarter last year. The two main factors here driving the pressure on cash costs are fixed cost reduction because of the lower production rate and increasing wood cost that comes from the fact that we're still privileging the long-term over the short term. There are some wood in our portfolio that we are saving for the future due to the highest growth rate and we are still bringing more third-party wood in terms of the mix than we had planned before. So, we are still privileging the long-term.

Moving on to the financial side, we have been preparing the company for the challenging scenario we're going through in the pulp business. Still, in the quarter that we had a lot of pressure on the prices, our net debt on a total basis when down from $13.8 billion to $13.7 billion, remembering that in this quarter we have paid dividends related to last year. Our net debt to EBITDA measured in reals is 3.5 times, 3.6 times when measured in dollars; mainly due to the fact that the EBITDA went down. So, the net debt went down, but the EBITDA went down on a larger scale. Our amortization schedule for our debt has improved significantly in the quarter. We now have an average term of 87 months in our debt when compared to 75 in the previous quarter. And we have 77% of our debt maturing in 2023 and onwards. That number compares to 55% in the previous quarter.

The cash position that we have today plus the available funds on standby facilities amount to 10.8 billion reals which is enough to cover for the liabilities that mature in the next three years and a half, which is a very comfortable position to be in. So, on the financial side, we have been working on giving a more robust situation to our balance sheet that will enable the company to continue to perform its commercial and operational strategy without any financial restriction. It's important also to mention that we have during this quarter prepaid all of our debt that had financial covenants. So, with today, 100% of our debt is in contracts that have no financial covenant.

In addition to that, we have, as Walter mentioned in the beginning, worked on capex in order to reduce the number for this year by 500 million reals. So, the new number is 5.9 billion reals. We are reducing 200 million reals in the sustaining capex basically coming from the fact that given the reduction in production we are harvesting less, so we need to replant less. And in addition, we have worked in several smaller projects on the monetization and expansion side to reduce the impact of the capex this year without any long-term impact for the company.

We still -- moving on to the next page, we still consider a production for this year of 9 million tons, so we have mentioned in the previous quarter arrange from 9 to 9.4, so we are now mentioning that the number will be closer to the bottom of this range, about 9 million tons and we will continue to work on the production reduction in the same way that we have been working in the beginning of the year. Which means that we will continue to preserve the more productive forest space. We will work on wood supply mix given the restrictions we have in the contracts that are already signed, and the volume reduction will continue to be implemented gradually throughout the year. So, I'll hand over to Walter to continue the presentation.

Walter Schalka -- Chief Executive Officer

On the internal side, we are devoting our efforts on three major pillars three major projects that we are doing. First, related to the synergies. As I mentioned before, we are reinforcing to everyone that we are on track, on-time, on budget and we will deliver the expected synergies between 800 and 900 million reals this year, 40% of that will be delivered this year; 90% of that will be delivered next year. I would like to tell that our team is highly engaged on this project and we are performing extremely well on our operations in all different areas; on procurement, on the forest side, on [inaudible] side, on logistics, every single area of the organization we are performing according to our plan as expected.

On the process and systems, we have been working harmonizing in unifying the systems of the two entities. This is going to be done in a big event January 1 next year. We are at this point time on time with this project, and we expect to have the go-live with no problems next year. They're going to allow us to operate on a single environment that will allow us to have further synergies on the organization. We are very pleased with the development of this project as well.

And last but not least, the culture. We are very pleased to show you that the engagement level that we have in the organization is very high. We have right now 88% of adherence on the survey that we did in the last few months on the organization and that was very positive across all the organization meaning that we have been able, the executive team, to create one single company to create a entity, to create a single culture that would be based on the three major pillars that we announced to the market. People that inspire and transform. We want to create and share value with all the stakeholders it it's only good for us if it's good for the world. This is the mantra that we have been working on, the organization has been very positive and have been conseminating all the corporation, all of our employees.

We are very pleased with the development on the three major pillars, synergies, process and systems, and culture, but we'll and I on these issues because that's quite important for all of us. Now, we'll be ready to answer your questions.

Questions and Answers:

Operator

Thank you. The floors now open for questions. If you have a question, please press *1. Mr. Leonard Correa from BTG Pactual would like to ask a question.

Leonardo Correa -- BTG Pactual -- Analyst

Hello gentlemen, good morning, everyone. Thank you. My first question for Anibel, still on the inventory management on the pulp side. Carlos, we saw very little inventory destocking in the second quarter, and this obviously has been I think a major overhang for the entire industry. The level of inventories that Suzano has been carrying invisibly we can see peak height inventories in Europe and in China. So, I think it's important for us to try and understand exactly the direction of Suzano. You announced some weeks ago production cuts from 9 to 9.4, now it's clear, and Bacci just mentioned that your indicating 9 million tons which is the lower of the range of the target.

So, I just wanted to see how you balance the possibility of an additional production cuts assuming the market continues week with the possibility of some pricing discounts and a bit more of an aggressive commercial strategy which is what the media has been reporting over the past days. So, I just wanted to see what the inclination is from Suzano on the commercial strategy, whether it would be for another production cut or for a more aggressive commercial strategy which would imply a potential reduction prices or higher discounts. That's my first question.

The second one is for Bacci, Marcelo, clearly I think this was a very decent result in terms of balance sheet management we saw reduction in net debt, and absolute reduction in net debt, with leveraged ratios still unchanged quarter over quarter at 3.5 times. I think the fact that that you don't have any covenants on your debts is clearly positive. But on the other hand, this is past looking because if we think of the current environment with where prices are now in the possibility of Suzano being a bit more aggressive on the commercial side, unfortunately, the reality for the second semester could be weaker in terms of EBITDA generation and we could be seeing net debt to EBITDA ratios move up to the north of 4.5 times net debt to EBITDA, right? That is a possibility.

In that context, and I know you do have some time, in that context, I just wanted to explore some of the possibilities that you're evaluating. You just announced the capex cuts of 500 million reals which is very welcome, but some are speculating that that could be insufficient. I have another hour to do Suzano's a huge company; we're talking about thousands and thousands of forestry assets, in fact, there's a forestry asset with several producing plants, logistics, operations; I just wanted to understand exactly where -- what other levers that you could be considering, assuming markets remain weak and leverage continues rising. What are the possibilities of deleveraging showing up the balance sheet? Those are the questions, thank you very much.

Carlos Anibel -- Pulp Executive Officer

This is Carlos speaking. So, let me start answering your question talking about our price policy. As I said before, we adjust our price policy according to the prevailing market conditions so we can move our product volume. We believe that a combination of higher sold volumes, the expiration of the agreement that we have with Klabin, and a lower production volume when compared to the second half of last year, that'll drive our stocks down until the end of this year. It is true that we produced in Q2 2.2 million tons and sold roughly the same, OK? But again, we should see that the number moving down mainly there are in China. In China, we're gonna see a reduction, or in Asia, we're gonna see a reduction of our shipments to that region over the coming months.

By reduction of shipment I mean we're gonna load less vessels to China, to the whole Asia region over the next three or four months. That means less arrivals in the same period which combined with more sales we're gonna see a reduction there.

Walter Schalka -- Chief Executive Officer

Leo, this is Walter. We are not planning any change in the production guidance that we mentioned to you. We will stick with volumes on this year around 9 million tons on production.

Marcelo Bacci -- Financial Investor Relations Executive Officer

Leo, this is Marcelo speaking on your second question. It seems to us inevitable that the leverage will go up in the second half just looking by the realized prices we have in the first half of the year. Clearly, in the second half were could have an order number, at least in this quarter. So, the net debt to EBITDA ratio will go up. The way we're dealing with this is in addition to what we have already done is first to further reinforce our liquidity. We are still looking for other opportunities to maybe reinforce liquidity and reduce the already very low liquidity risk we have.

The second is we are starting to work on what our capex for 2020 will look like, and there is significant room for reduction in relation to the number of this year. We are not considering at this point in the asset sale. It is not necessary given our financial strength. We are in a cyclical industry; it is normal that we go through the cycles from time to time. We have the balance sheet prepared for that and is not the best moment to sell any assets. Of course, we consider, and we continue to evaluate any transaction, any financial transaction that could involve our assets in terms of optimizing our balance sheet, but we are not considering any sale on a significant way of our plant or forest. We have some spare forest that are dedicated to potential future growth that will be kept, and of course, we have some spare forest and other areas that we don't use that we normally sell, and we will continue to look for potential buyers for those. But those are not extremely significant numbers.

Leonardo Correa -- BTG Pactual -- Analyst

Thank you. If I may, Carlos, just to elaborate a little bit on your answer; the media has been reporting that Suzano has been more aggressive on the commercial side and has been granting some discounts to accelerate destocking in China. The price range that the media has been commenting has been from 480 to 500, or maybe 470 to 500 so, there's a slight discount to current market pricing. Can you confirm that the media reports are in the right direction or that something that Suzano's not doing? So, I just wanted to get a little bit more clarity on the new reports recently, please.

Carlos Anibel -- Pulp Executive Officer

Leo, I'm not gonna comment on pricing. All I can say to you is that we have changed our commercial strategy. Our commercial approach there in China, offering our customers the option to close the bottom for the whole quarter at a fixed price. This movement has been successful, and we are pleased with our achievement so far.

Leonardo Correa -- BTG Pactual -- Analyst

Okay, thank you very much.

Operator

Mr. George Staphos from Bank of America would like to ask a question.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hi everyone, good morning. Thanks for taking my question and thanks for all of the details. Congratulations on the quarter. I had two or three questions. First of all, I recognize it's difficult to talk to this life microphone on a conference call, and things can change, if you looked at your early third-quarter shipments and you assume normal trends from here, do you think that you can be flat with second-half 2018 volumes on a Performa basis? Is there a way that you can provide us any color on how your shipments are running and what kind of inventory reduction we're seeing so far in the third quarter? That's the first question.

Relatedly, on production, I noticed that Aracruz Line B, the maintenance for next year has been pushed out about a quarter and a half given that inventories are still high, I was wondering why I was wondering why you're pushing out the maintenance when it would seem pulling forward maintenance would be a better thing to do given that you need to reduce inventories? And time allowing, I have a follow-up.

Carlos Anibel -- Pulp Executive Officer

George, this is Carlos.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Good morning Carlos.

Carlos Anibel -- Pulp Executive Officer

Good morning. We expect for the second half of this year growing volumes in all the regions compared to what we had in the first half. So again, the combination of growing volumes, the end of our agreement with Klabin, and a lower production when compared to the second half of last year; that will allow us to drive stocks down by the end of this year. Just so we're on --

George Staphos -- Bank of America Merrill Lynch -- Analyst

Carlos, can you talk to what it is year on year, what you'd expect to be second-half 2019 versus second half 2018? If you can't, I understand; but just figured I'd try to clarify.

Carlos Anibel -- Pulp Executive Officer

This is sensitive, so I'm not going to disclose that information. But just one last remark on production and considering what [inaudible] had on Slide 9 of our presentation, actually Marcelo, we will produce in the second half of this year close to 700,000 tons last than what is produced in the second half of last year. So, that is a very important number to have in mind. So, growing sales will allow us to come up with a lower stock at the end of 2019.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you. And on the maintenance with Aracruz Line B being pushed out a bit, when it would seem you'd want to pull forward maintenance to try to reduce production, just curious about that.

Walter Schalka -- Chief Executive Officer

George, this is Walter answering. We are adjusting the maintenance shut down of our plants according with the wood supply accounting for how much we are going to produce, and we are doing that not only on a closed plant but no other plant. Then you cannot just relate this to maintenance shut down, related with 15- or 18-month period that we have between the shutdown. But we are doing that but just the production depending on the wood supply in the quarter. We have been adjusting the production and the plants depending on the biological assets, value creation long-term, then what we are doing is that and probably you realize that on a presentation that we have biological asset B on the second quarter of this year and we're going to have even more on the second half of this year. And then we are preparing the company to have lower cash costs in the future. This is the mindset that we have. We are not trying to maximize short-term; we are trying to maximize the net present value of the cash costs of our operations.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you, Walter.

Marcelo Bacci -- Financial Investor Relations Executive Officer

George, this is Marcelo speaking. You're probably referring to the fact that in our maintenance schedule there is six quarters between the two-Line B maintenance shutdowns from first quarter this year to third quarter next year, right? This is a small change -- a small number of days only. It's not that we're postponing a full quarter.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Okay. Yeah, I was just comparing, Marcelo, to the slides from last quarter, that's all. My last question, if I may, very quickly, there's some news reports recently that some of the tissue companies in Brazil are changing hand. Will that affect your shipments at all in terms of some of these companies changing hands? Thank you very much and good luck in the quarter.

Carlos Anibel -- Pulp Executive Officer

We do not expect any change, George. This is Carlos.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you very much, Carlos.

Operator

Mr. Thiago Lofiego from Bradesco BBI would like to ask a question.

Thiago Lofiego -- Bradesco BBI -- Analyst

Thank you. Carlos, going back to the projection commercial inventory strategy, I'm just doing some rough math here, your inventories are now close to 2.1, 3.2 million tons. That's an excess, in our view of approximately 1.7 million tons that you're holding. So, could you give us more color on what's the pace of destocking you're expecting for the second half? And then another math, another calculation we did here is for you to destock 500,000 tons in the second half, demand needs to be -- or your shipments need to be 15% higher in the second half versus what it was in the second quarter, right? In terms of the average shipments.

So, how confident are you that this can happen and also back to a question I had covering [inaudible], why not take a more aggressive commercial stance pressuring the high-cost distributions to ship down and that eventually, you could see a quicker price rebound? That's my first question. Second question about cash costs return going forward. Should we expect the second-quarter level to be the new normal for Suzano considering the 9-million-ton reduction rate or are there any variables that we should think about here on the cash cost return? Thank you.

Carlos Anibel -- Pulp Executive Officer

Thiago, good morning, thanks for the question. This is Carlos speaking. As I have said, we will adjust our commercial policy to the prevailing market conditions so we can move our target volume. So again, this is very commercially sensitive; I can say to you that we are confident that we're going to close the year with low restocks is what I can say to you. We are very competent with that

Walter Schalka -- Chief Executive Officer

In your question, there is the cash cost return. We are considering that we are not going to have major changes on the cash costs on the coming quarters, but we are preparing the company to have lower cash costs in the future. It's very clear that when we are going to operate with a different wood supply, more our own wood, compared with third-party wood. And with higher volumes, we will mitigate and/or eliminate the issues of fixed cost of energy that is impacting us and the wood side as well. We are very pleased with the industrial synergies that we are seeing. The specific consumption per ton of several chemical products are going down, and this will allow us to have lower cash costs in the future.

Thiago Lofiego -- Bradesco BBI -- Analyst

Thank you, Walter. And then if I may, Carlos, just back to your answer. What are the signs you're seeing on the demand side in both regions, China and Europe? And also, if you can give us some color on July and August and have shipments materially improved from your June levels or only got weeklies and if you could give us some color, that would be helpful. Thank you.

Carlos Anibel -- Pulp Executive Officer

So, in order to answer your question Thiago, let me talk a bit about China. Okay? Although there isn't news showing toward the trade war tensions between the US and China, pulp demand there in China has been improving since March. We haven't seen that [inaudible]. Definitely, we see a much better-operating rates for graph paper, paperboard, and a very robust demand coming from the tissue segment. So, in terms of demand, all I can say is the global economic activity helped accelerate all of this and all the geopolitical uncertainties making any forecast very unsure at this point time. Demands in Q3 usually is a bit softer in the normal hemisphere, but we believe that improving market conditions and customer restock might boost the growth in the coming months.

I can say to you that we see, and all the regions, customers operating hand to mouth, OK? We believe that when the confidence is reestablished, we should see, or we could see a quick restocking. For July, the business took place as expected, OK? We still see some price pressure, but the volume came in according to her expectation. So, as I said before, we are confident that we're gonna see our stocks moving down toward the end of this year.

Thiago Lofiego -- Bradesco BBI -- Analyst

Thank you, Carlos.

Operator

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

Daniel Sasson -- Itaú BBA -- Analyst

Hello everyone, thanks for the opportunity. My first question is actually a follow-up on your previous answer. So, you mentioned; basically, inventories remain below normalized levels, right? Do you think we will see, at some point, the reverse to the old normal that is paper producers having more inventory throughout the supply chain or do you think that these new lower inventory levels for paper producers is actually the new normal going forward?

And regarding your immediate longer-term supply/demand expectations, how comfortable are you with the long-term trends of the industry in light of the recent capacity expansion announcements, especially from UPM for 2022? There is some other projects also coming online between 2021 and 2022. So, if you could give us some color on whether you think demand and supply are balanced for, not considering 2019 or 2020, but for 2021 or 2022 onward? That would be great. Thanks a lot for the opportunity.

Carlos Anibel -- Pulp Executive Officer

So, we still keep our forecast over the coming years; we're gonna see the demand growing around 7 million tons which is roughly 1.4 million tons per year. So far, we just have two projects announced. So, we do expect a balanced market for the period. Regarding your question about China, we understand that the finished product inventory for the major brands, printing and writing, paperboard, and tissue are at the normal levels in the whole value chains and I do not foresee any change for that with all the credit restrictions that we see in China today. We have had since late last year, a big destocking both on finished products and pulp and I believe that on finished products that is the new normal at least for the time being.

Although stocks stand today at a much higher level, I should say, or I should assure you that half of the excess that we have in the value chain today, being on the producer side is a result of a destocking of our customers. I would say that around 50% of the excess that we have today, one year ago that was in the customers' hands. So, customer destocked. So, only with that, we could, or we might expect the reverse of 1.2, 1.5 million tons moving back to our customers through the paper producers as soon as the confidence is reestablished.

Daniel Sasson -- Itaú BBA -- Analyst

Okay, so just to clarify I understood correctly. So, you do expect the customer inventories to go back to the maybe 50 to 60 days of inventories either at the news and throughout the supply chain once things normalize, right?

Carlos Anibel -- Pulp Executive Officer

I'm saying that we're gonna think they'll start restocking, I'm not to say they're gonna come back with the previous level due to all the credit restrictions that we see in China today.

Daniel Sasson -- Itaú BBA -- Analyst

Okay, OK.

Carlos Anibel -- Pulp Executive Officer

But that's if they cannot go on operating hand to mouth when the market gets better there in China. They need to have -- they need to work with a more comfortable stock level.

Daniel Sasson -- Itaú BBA -- Analyst

Okay, very clear, thank you.

Operator

Mr. Carlos de Alba from Morgan Stanley would like to ask a question.

Carlos de Alba -- Morgan Stanley -- Analyst

Great, thank you very much. Good sequence I guess because the question I have is also on the inventories, the inventory reduction from your customers over the pulp buyers. So, can I understand something, Carlos, if half of the say 3, 3.5 million accessing inventories of the world are due to the reduction of the destocking on the buyer's hand, so assuming that at some point in time they come back, they restock, inventories come down by that time. But then doesn't demand can grow by the 1.4 million tons that you just said? Just to review, so it has to grow by 1.4 million tons just to reduce the other half of the excess inventories, and that means that we don't really need much more pulp production in the next 12 to 18 months?

And the problem then is 2021, you start to see demand-supply coming again into the market with [inaudible] and then again in 2022 with UPM. So, why would prices recover much more than where we are today? The market seems to be balanced, you have no capacities coming online the next 18 months, but you have excess inventories. And then, you have capacity coming to the market around 1.2, 1.4 per year which is what demand is gonna grow at. So, why would prices look up from where we are? Or maybe, yeah, I see why flux can go a little bit more but then normalize at that level as opposed to higher levels that we were expecting before. That's my first question.

In the second question, maybe, Walter, you can break down from the 800 to 900 million reals per year on your synergies, how much is opex and how much is capex? At least a ballpark figure would be great. Thank you very much.

Carlos Anibel -- Pulp Executive Officer

Good morning, this is Carla speaking. Our estimates for the excess is much lower than your number, OK? But to answer your question, we should talk about the supply side. And I want to share with you some information. So, both [inaudible] expect market and integrated deals in the market this year; we will be forced to restock, at least temporarily, during the next few months, maybe those are depended on import of wood ship. Just around that average wood ship cost in China today is roughly $200 per BDMT. Which means about $400 per ton of wood cost to produce 1 ton of pulp.

According to information just released by [inaudible], for softer price at 560 and harder price at 485, around 1 million tons of softwood and 5 million tons of hard capacity would be at the rating below cash costs. So, market to related downtime announcement have already been made in some countries, in some regions and announced shut down might be taking place as well. I think we can expect a reduced pulp output for the coming months due to these challenging market conditions. Especially for those high-cost producers. So, the adjustment, no, would come from the supply side to answer your question.

Carlos de Alba -- Morgan Stanley -- Analyst

Carlos, why do you think they are taking so long to -- I mean I know and softwood they have been more aggressive or at least more advanced, the shutdowns. But in hard word, it has been much more limited. What do you think is taking so long?

Carlos Anibel -- Pulp Executive Officer

I think they still have no raw material in their supply chain. So, they need to finish with that raw material in order to start reducing the output.

Carlos de Alba -- Morgan Stanley -- Analyst

Understood.

Marcelo Bacci -- Financial Investor Relations Executive Officer

Carlos, this is Marcelo speaking on your second question. According to what we have already disclosed between 75% and 80% of the synergies will be on the opex side, which includes the cash cost and SG&A and 20 to 25% capex.

Carlos de Alba -- Morgan Stanley -- Analyst

Thank you very much, Marcelo, thank you.

Operator

Mr. Marcio Farid from J.P. Morgan would like to ask a question.

Marcio Farid -- JP Morgan Chase -- Analyst

Thank you, good morning, everyone. I have a few follow-ups quick wins for me. So, you mentioned your good to be shipping less to China over the next months, right? Basically, because you probably have enough inventories to cover demand needs for the next months. So, considering your guidance for production, all right, you would imply production increase of about 5% in the second half versus the first half? So, I'm just trying to understand this production going to increase, and you're gonna be shipping less to China, which is basically the largest consumer region, which regions will be shipping more and would there be demand for those extra volumes in those new regions?

And also, how should we think about Suzano's operating levels for 2020? I know it's probably too early to talk about it, but I'm just thinking if management considers running still below operating rates in 2020 or that was constructed for this year and next year we're going to be back into a normal rate and normal market share as well? And maybe the last one for me, so, I mentioned that about half of the excess inventories that you have today on the supply chain was basically destocking. So, what do you think would trigger a restocking over the next months, just considering where we are in terms of global economy cycle and sentiments in China as well? Those are my questions, thank you.

Carlos Anibel -- Pulp Executive Officer

Marcio, good morning, this is Carlos. Just to avoid any kind of confusion, when I said shipment from Brazil, I'm talking about the vessels that were loading and sailing to China, OK? We already have enough stock in China to serve our growing sales for the coming months. So, once we're gonna send less vessels to Asia, once we have the start already are there and the ones we are planning to grow our sales. That's why we should see or are gonna see a reduction of our stock there in China throughout the whole second semester of this year. Regarding restocking, I think that's gonna happen when buyers realize that prices hit the bottom and the market conditions are favorable so they can start work again with a higher inventory level.

Marcelo Bacci -- Financial Investor Relations Executive Officer

This is Marcelo speaking about 2020; we will observe how we will perform in the coming quarters in order to define the strategy for 2020. We have no guidance on that at this moment.

Operator

Mr. John [inaudible] from [inaudible] would like to ask a question.

John -- Unknown Company -- Analyst

Hi, good morning. So, just a quick follow-up on the commercial strategy that you announced for the third quarter. Could you give us more details surrounding how much volume was done with this offer to all clients, or is it just the international paper producers? My obvious concern is the local Chinese customers; they been known to break contracts. So, my concern would be if pulp prices continue to fall, that they would renege on some of those contracts. Anything you could give us on that, any more details on that agreement would be great.

And then second Bacci, I just wanted to ask about the pressure from the wood cost and your strategy there just to make sure I understand it, it seems like you're preserving maybe some of your lower costs areas and utilizing more of the higher costs. Is that right? Could you just sort of elaborate on that strategy? Thanks.

Carlos Anibel -- Pulp Executive Officer

Hey John, this is Carlos, we're very pleased with our achievements with our new strategy, and I can say to you that came, the volume came according to her expectations.

John -- Unknown Company -- Analyst

Okay, is it something that you're going to offer again in the fourth quarter resist a one-off event?

Carlos Anibel -- Pulp Executive Officer

We have not defined yet what we're gonna do for the second quarter. As I said before, we always adjust our commercial strategy, our commercial policy, according to the prevailing market conditions.

John -- Unknown Company -- Analyst

Okay, thank you.

Marcelo Bacci -- Financial Investor Relations Executive Officer

John, this is Marcelo speaking on the wood costs. That's exactly the case. We are preserving the high-growth forests, and we're using proportionally more third-party would this year in a combination of a strategy to maximize long-term value and also given the restrictions that we have with the contract that we already signed for buying some of this would and also for the transportation of it.

John -- Unknown Company -- Analyst

Okay, so is it fair to say that we should expect maybe continuation of pressure from the wood costs in the coming quarters?

Marcelo Bacci -- Financial Investor Relations Executive Officer

We expect flattish cash costs in the coming quarter and a better number for next year when we normalize the mix and also because of the synergies that are kicking and more significantly next year.

John -- Unknown Company -- Analyst

Great, thank you very helpful.

Operator

Mr. Caio Ribeiro from Credit Suisse would like to ask a question.

Caio Ribeiro -- Credit Suisse -- Analyst

Yeah, good morning everyone and thank you for the opportunity. So, my first question regarding some of the recent announcements in terms of expansion for hardwood with [inaudible] and UBM moving forward with their projects. I just wanted to see whether this impacts in any way any decision that you might make to expand further in the medium-term and whether you still believe that it makes sense to add more capacity into the market from 2021 onwards?

And then my second question regarding working capital, I just wanted to see if he could talk a little bit about specifically the receivables line and whether you did carry out a significant amount of prepayment of receivables this quarter that could've helped the working capital variation? Thank you.

Walter Schalka -- Chief Executive Officer

On the first question, this is Walter talking, thanks for your question. These announcements did not change our strategy for the future. We understand that a very competitive position in the market and if we proceed with new investments in the future were going to be even better in terms of competitiveness. We have been working, we have access for it, and we are preparing the company for the future. But at this point of time, we're not going to announce any specific projects on capex expansion. Due to the financial discipline that we have, and we have announced that a long time ago.

Marcelo Bacci -- Financial Investor Relations Executive Officer

Caio, this is Marcelo speaking on working capital. The strategy we have in terms of discounting receivables and letter of credit has not changed. Of course, as we had a higher volume on the quarter, we had more discounted at the end of the quarter, and it's important to emphasize that the strategy also deals with the credit issues. So, we are discounting not only to improve the position in the balance sheet but also to manage the credit exposure that we have. So, the larger amount of receivables discounted is coming from the fact that we have higher sales.

Caio Ribeiro -- Credit Suisse -- Analyst

Perfect, thank you.

Operator

Mr. Thiago Ojea from Goldman Sachs would like to ask a question.

Thiago Ojea -- Goldman Sachs -- Analyst

Thanks, good morning, everyone. So, my first question is regarding, again, on capex side. We saw a reduction on your capex estimates for the future. If you can elaborate a little bit more on the reasons for that? And also, we saw some announcements from competitors of new capacity additions, mainly UPM and also Roselle before you had estimated that by 2022 we would have only map of project coming in now we have two acts of projects coming. So, how do you feel long-term the supply and demand evolving? And if I can, just following up on Marcio's question, so, what you're saying regarding shipments is that you are not sending more vessels to China, but this does not mean that you are selling less this quarter because you have already have inventory there. Is that the point? Thank you.

Marcelo Bacci -- Financial Investor Relations Executive Officer

Thiago, this is Marcelo speaking about the capex. The idea is to improve our financial discipline with some reduction in our capex that we consider will not impact in any significant way our long-term strategy. So, it's just a combination of adjustments in our capex plan to deal with a more assets scenario, and we are still discussing what we're gonna do for next year with room for additional reductions in capex when compared to the number of this year.

Carlos Anibel -- Pulp Executive Officer

Thiago, this is Carlos speaking on China. You're right, with gotta maximize our sales from the stocks that we already have seated at the major Chinese ports. So, we're gonna do that. On your question about supply demand, as I said before, we still keep the focus that the demand is gonna grow about 1.4 million tons for the coming five years which means around 7 million tons, and so far we just have the two projects that I just mentioned. So, at least we have a market balance for the coming years. This is what we have for the time being.

Thiago Ojea -- Goldman Sachs -- Analyst

Thank you.

Operator

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

Walter Schalka -- Chief Executive Officer

Thank you very much to be attending our second-quarter results. We are very pleased with the developments of the company. We'd like to share with you that our team is highly engaged to pursue all the potential [inaudible] alternatives that we have in this point in time and enhancing the culture of the company in preparing the company for the future. In my closing remark, I would like to bring forth the point to you that even on these adverse markets scenario we have been performing at according to the expectations, and we understand that we will deliver the expected results to the markets. Thank you very much, and have a nice weekend.

Operator

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

 Duration: 62 minutes

Call participants:

Walter Schalka -- Chief Executive Officer

Leonardo Grimaldi -- Paper Executive Officer

Carlos Anibel -- Pulp Executive Officer

Marcelo Bacci -- Financial Investor Relations Executive Officer

Leonardo Correa -- BTG Pactual -- Analyst

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thiago Lofiego -- Bradesco BBI -- Analyst

Daniel Sasson -- Itaú BBA -- Analyst

Carlos de Alba -- Morgan Stanley -- Analyst

Marcio Farid -- JP Morgan Chase -- Analyst

John -- Unknown Company -- Analyst

Caio Ribeiro -- Credit Suisse -- Analyst

Thiago Ojea -- Goldman Sachs -- Analyst

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