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Suzano SA (NYSE:SUZ)
Q1 2020 Earnings Call
May 15, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for holding and welcome to Suzano's Conference Call to discuss the Results for the First Quarter of 2020.

We would like to inform that all participants will be in a listen-only mode during the presentation of Mr. Walter Schalka, Chief Executive Officer; Marcelo Bacci, Financial and Investor Relations Executive Officer; Carlos Anibal, Pulp Commercial Executive Officer; Aires Galhardo, Pulp Operations Officer; and Leonardo Grimaldi, Paper Executive Officer.

[Operator Instructions]

Before proceeding, please be aware that any forward-looking statements are based on the beliefs and assumptions of Suzano's management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. We should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Suzano and could cause the results to differ materially from those expressed in such forward-looking statements.

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

Walter Schalka -- Chief Executive Officer

Good morning to everyone.

Welcome to the participation on the first quarter results of Suzano in 2020. I would like to mention to you that all of us will be ready for a Q&A session after the presentation of the Company.

Let me start telling you about the three major pillars -- and bring to your attention the three major pillars that we have in our culture. The first part of our culture is related with people that inspire and transform; the second is, create and sharing value among all the stakeholders; and the third one is related with the -- it's only good for us if it's good for the world. This is the major pillars that we are working right now to go through this pandemic that we all live in at this point of time.

And the consequence of that is related with our resilience. It's very important to mention to you that we enhanced our competitiveness during this period. We have 15,000 people engaged on the process of transforming, of inspiring, of helping and supporting and mitigating the fact to all the stakeholders and affecting the world on a positive manner.

On the business resilience and the robust balance sheet that we have right now, we are operating with higher pulp volumes on the first quarter of this year. It's a record pulp volumes that we had with roughly 2.9 million tons of pulp and 240,000 tons of paper. On this scenario, we were able to deliver in this quarter EBITDA of BRL3 billion on the quarter and mainly to reduce selling inventory -- and Carlos is going to tackle on this point -- on roughly 500,000 tons, bringing our inventory to a normalized level.

We had operating cash generation of BRL2.3 billion on this quarter, and this is the most important KPI that we are tracking because it's showing that we are keeping generating cash even on this difficult market environment. We are very pleased -- and Aires is going to share with you the fact that we are keeping reducing our cash costs. We had a cash cost of BRL596 on this quarter, and we are going to be even more conservative on our capex policy, reducing from BRL4.4 billion to BRL4.2 billion on this quarter.

On the liquidity. And Marcelo is going to tackle on this point with you. We have a very high liquidity on this point, $2.4 billion on a pro forma basis, considering the withdrawal of the revolving credit facility that we have of $500 million end of March. Our net debt have going down to $12.7 billion. Our leverage on dollars have been from 4.9 times to 4.8 times. And our debt is very low. Our average term is 82 [Phonetic] months or almost seven years.

On this situation that we have on this quarter -- on the slide number 4, we decided to tackle this situation with three different dimensions: on people, on support the society and keep running our essential business to the society. On the people, we have working in the dimensions of hygiene and health. On this, we have been protecting our people on the sanitary situations, with all the necessary measures to protect our teams. We have people that is over 60 and with pre-existing conditions that is not on the operations. They are at home. We have people -- since the beginning, 4,000 people, we are working on home offices at this point of time. And we are supporting our people as well, anticipating the [Technical Issues] month and supporting with several other conditions in our team.

In the society, we decided that we are going to invest BRL50 million to support bringing new ventilators -- importing ventilators, importing hospital masks and distributing these on several states where we operate. But on top of that, we are helping a Brazilian company to produce 6,500 ventilators in the period of three months and serving these to the federal government that is going, on a discretionary basis, to distribute on different states of Brazil.

But we are helping our small suppliers with working capital, and we are supplying as well -- we have guaranteed 100% of the salaries of everyone that is not able to be on our operations.

On the business continuity, we are very happy to mention to you there is very smooth operation right now that we are doing. Till today, May 15, all of our operations are doing on a very positive manner. Our forest team, our industrial team, and logistics team have been operating extremely well in this point of time. We are able to reach this record volumes on pulp even on the very difficult scenario that we have all over the world. And we keep the situation in April and May. And on a very conservative manner, we are in the process of reducing our capex and opex at this point of time. And we do have a very robust credit structure right now. We are not facing any major problems on the credit side as well.

Now I'm going to hand over to Leonardo who is going to explain a little bit about our paper business.

Leonardo Grimaldi -- Executive Officer-Paper Business

Thanks, Walter, and good morning, everyone.

I would now like to present the results of Suzano's paper business unit for the first quarter of 2020. The figures presented on slide number 5 are specific to our paper business unit, therefore excluding Suzano's consumer business unit's results and enabling us to have a better comparison with the past quarters.

Beginning with the top left graph, we can see our production figures. We have produced 278,000 tons of paper and paperboard during this quarter, which is a 3% increase compared to the first quarter of 2019. During the first quarter of 2020, we have performed maintenance downtime only at our Limeira mill, resulting in higher production and lower costs in comparison with the same period last year when we had maintenance downtimes in Limeira and Suzano mills.

Moving on to the top right graph and looking at our sales figures, we can note that we have sold 239,000 tons in the first quarter, which is a decline from the levels of the fourth Q '19 due mainly to the seasonality effect of the demand in the Brazilian market. Our total sales were 6% below the first Q '19 within which our international sales grew 9% and our sales in Brazil were 13% lower in a year-over-year comparison. As of mid-March, we have started to feel the first effects of the printing and writing unprecedented demand reduction caused by the COVID-19 pandemic and quarantines in many cities in Brazil. I will return to some sales statistics in Brazil in a few moments.

Now looking at the lower right side, we can note that our average prices during the quarter totaled BRL3,825 per ton. Our prices in Brazil increased 4% during this quarter, and our export prices fell 1% in US dollars but posted an increase of 7% in reals due to our currency depreciation. Our average price therefore increased 5% compared to the fourth Q '19 and was quite steady compared to the first Q '19.

Looking at the lower left side of the slide, we can note that our lower cost during the quarter as well as price recovery compensated the lower sales volumes. Our EBITDA margin during the first Q '20 was BRL1,212 per ton and totaled BRL290 million in the quarter and BRL1.4 billion for the last 12 months.

Now coming back to sales. We foresee a very challenging scenario concerning the demand of printing and writing papers in many regions of the world and also in Brazil due to the COVID-19 pandemic and consequences of the lockdowns and quarantines. In Brazil, the first effects were felt on the week of March 23. Consumption dropped significantly across all printing and writing grades even further than the 12% decline accrued by our pulp and paper association, Iba, for January and February. Printing and writing demand fell 23% in March, with Brazilian domestic sales dropping 22% and the imports 24%. The resulting compounding statistics were 15% drop in the Brazilian demand for printing and writing papers in the first Q 2020.

Now, our expectation is that the demand will see further declines during the second quarter, even below March levels. As a consequence of this drastic decline in consumption, our stocks have risen significantly and we have decided to stop paper production at our Mucuri and Rio Verde mills during the months of May and June, totaling approximately 50,000 tons paper production curtailment which will enable us to match production with market demand. Our operational flexibility will allow us to redirect the resulting pulp from the stoppages to other markets and products. Despite this commercial downtime, we do not foresee any interruptions on the paper supply to our customers in Brazil or internationally as our stocks are fulfilled and our four paper machines at the Suzano and Limeira mills allow us to have production flexibility between paper grades in these sites.

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

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

Thanks, Leonardo, and good morning, everyone. Hope everybody is well.

So, let's start with pulp business, going to page 6 of our presentation. I would like to start by sharing with you some comments about our pulp business and the pulp market in Q1. Despite increasing challenges in our global operations due to the COVID outbreak in Q1, our teams have done an incredible work. We did run our mills and supply chains very effectively while benefiting from strong cost control. Aires will provide later details on production and cash cost figures.

Having had such good performance in our industrial operations, we successfully executed our business course. We produced more, we sold more than what we produced, and therefore our inventories were again substantially reduced by around 0.5 million tons at the end of Q1. Our pulp stocks are back to the normal levels and were considerably reduced across our value chain. We ended up with very low inventory in Asia but enough to support local key customers with the required contractual service level. Our stocks have been reduced in Brazil, North America and Europe, again across the whole supply chain, and we are very pleased with that.

Now let's talk about market fundamentals, demand and supply, and I'm going to start with the demand side. The demand development was positive in all key markets and notably strong on the second half of March, driven by the tissue segment. The surge in demand for tissue, hygiene products and carton board has not changed the pace and remains still today quite strong across all the major markets.

Still on the demand side, sorry cost for recycled fibers and very restricted availability in some regions are likely to support extra demand for virgin fiber in the near term as well. It is also true that unexpected stronger contraction in print and write demand will have a negative impact on pulp demand onwards. So far, higher pulp demand from the tissue segment due to pantry loading, recycled fiber replacement and also some structural higher consumption in some regions have more than compensated any decline in the print and writing sector.

On the supply side, several unexpected events ended up removing from the market around 1 million tons of pulp so far. That includes events in Asia, Europe, and more recently, also in South America. Some of them related to the COVID but also related to weather, strikes and lack of fiber. The lack of fiber in British Columbia, Canada; the current poor profitability for some producers at either [Phonetic] hemisphere; and COVID and unexpected related events can change drastically the supply equation in the second half of 2020.

British Columbia producers are highly dependent on receipts from lumber manufacturing and extended downtime could render many mills uneconomic. At the same time, we cannot ignore some moving parts that could increase the pulp supply: dissolving pulp producers possibly migrating to paper grade pulp, paper integrated producers increase market pulp sales volumes and also extra availability due to maintenance deferrals.

On the logistic side, our number one priority has been to allocate resources and put in place a plan to protect our customers for an eventual supply chain disruption. Our team has worked relentlessly to move our pulp close to our customers worldwide [Indecipherable] at the major ports. Despite our actions, stocks at the ports located in Europe and North America have gone down lately due to higher-than-expected demand. Europulp data related to stocks at the major European ports at the end of March '20 shows a 30% plus reduction compared to March '19 and also 11% reduction compared to the previous month. It has declined in Europe for the seventh straight month.

For Asia, since a couple of months ago, we have shipped only the sought volume, which means we carry very little local inventory. We have no uncommitted stocks there. What it means is that any new order must be shipped out of our stocks in Brazil. The volumes to be shipped to our contract customers in Asia have been stored at our ports in Brazil as much as we can to avoid the vessels -- to make the vessels loading faster according to their needs, minimize any potential domestic logistic disruption arising, for instance, out of lockdown or other restrictions.

This combination of lingering supply constraints and solid demand across all the key markets have supported our price initiatives. We announced it for April in Asia $30 more, and all the business concluded fully capture the $30 that we announced. We also announced a $30 list price increase for Europe and North America, and we believe the conditions are in place to support full implementation.

Looking at our major figures at the right-hand side of our slide, we realized solid sales numbers. Record sales volumes for Q4 '19, Q1 '20 and also for the last 12 months, with a remarkable 10.5 million tons. Export price in US dollars [Indecipherable] last quarter, and again, over BRL150 per ton due to a weaker real. On the left side, in terms of geographic and end use mix, we realized a very powerful setup. Europe plus Americas volumes are similar to Asia, and sales into the tissue segment accounts for over 60% of our total sales. In Q1, we had strong volumes in all the regions.

Finally, looking at the end of 2020 and comparing that with the end of 2019, we have not changed our plans as we speak. We plan to produce more, to sell more and close the year with a much lower pulp inventory.

Now I turn over to Aires who will cover pulp cash costs and production.

Aires Galhardo -- Executive Officer-Pulp Operation

Thank you, Carlos.

In terms of industrial performance, Suzano once again has demonstrated its resilience in times of great challenges. Our industrial production, spread over seven different industrial sites, with forest base in different regions of the country and export logistics distributed among three different ports certainly do provide Suzano with a unique flexibility in the pulp sector. Our pulp production in the first quarter, for instance, was 2.337 million tons. This result represents an increase of 7.5% posted in the same period in 2019. Such increase in production is mainly due to the lower effects of scheduled maintenance shutdowns. When compared to first quarter '19, we can identify an increase of 3% in total production, and such increase is resulted from a higher production rate at our factories, aligned with the Company's objective of gradually increasing the production [Indecipherable] to the market.

With respect to cash costs, Suzano has incredibly competitive assets due to the synergies resulting from the merger and the improvement of its operational performance. Cash costs in the first quarter '20 was BRL596 per ton. When comparing the cash cost of first quarter '20 to the same period of 2019, we identify a reduction of 11%, and such reduction derives from two main drivers. The first one is the lower wood costs due to the smaller average distance between the forest and the mill as well as the lower necessity of third-party wood. The second one, of no less importance, are better reduction of fixed costs [Technical Issues]. With regards to the chemicals, the consolidation of synergies was the main factor for better performance, despite the pressure resulting from the 18% exchange rate devaluation in the period.

The cash cost in the first quarter '20 in relation to the fourth quarter '19 decreased by 6%. Likewise, the reduction in the average distance of forest to the mill, the reduction in the share of third-party wood and the dilution of fixed costs as a result of a higher production rate were the main drivers to this reduction. Regarding chemicals, despite the better operational performance in the period due to the synergies, the average appreciation of the dollar by 8% in the period translated to this better performance.

The most important message in relation to the cash cost is that the reductions present in comparison to the previous quarters are structural and we will remain benefiting from them in the next periods.

Now I would like to invite Marcelo to continue the presentation.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

Thank you, Aires. Good morning to everyone.

I'd like to move on to page 8 to discuss with you the FX effect on our results. This quarter has been marked by a very sharp change in the FX rate of the real in relation to the dollar, and that has had a very significant impact in our operation and financial numbers. First, it's important to qualify that our cash flow profile is locked [Phonetic] dollar based. You can see on the left-hand side of the table here that our revenues are 88% in dollars and there were costs or cash outflows including costs, expenses and capex, ranges from 11% to 27% in dollars.

So when we look at the cash flow profile of the Company, we have been and will continue to be a net generator of dollar cash flows. So, at the current pulp prices, the sensitivity of our EBITDA to FX is in the order of magnitude of BRL500 million of EBITDA change for each BRL0.10 of FX variation on an yearly basis, which means that in this quarter we had a BRL1.2 per $1 change, so you can imagine the magnitude of the change that we're going to see in the coming quarters if the FX stays where it is in terms of cash flow generation. For this specific quarter, this was one of the main drivers for the performance of our pulp business.

Our margin in the pulp business went from 38% to 49% EBITDA margin in the quarter, and still, we are talking about a quarter where the average FX rate that marked our sales was BRL4.46 per $1, which means that there is a significant upside in relation to the current level of the currency at this point. In the last 12 months, the margin was 45% with an average FX of BRL4.12, again, significantly lower than where we are today.

Moving to the following page. I'd like to emphasize that our balance sheet remains very robust. We have decided to increase our cash position with the withdrawal of one of our revolving facilities of $500 million that is included in the table on the right-hand side of this page despite of the fact that we did this transaction on the first day of April. So you don't see that number in our balance sheet, but we did a pro forma here to better understand our liquidity situation. So we had, on April 1, $2.4 billion of cash at hand, more than half of it in US dollars held outside of Brazil, and we keep having another $200 million of revolving credit facilities that we can still withdraw if necessary, totaling $2.6 billion of liquidity.

That liquidity is enough to pay for the next two to three years of maturities. We have total maturities of $2.1 billion between now and the end of 2002, and if we don't generate a single dollar in terms of cash flow, which is unthinkable in our situation, even in that scenario, we would have enough cash to pay all the maturities of this period without having to roll over any piece of that. 91% of our debt matures from 2022 onwards, with an average cost in dollars of 4.5% a year, average tenure of seven years. 100% of our debt is free of financial covenants. So the combination of this, the absence of financial covenants with the long-term profile for our debt and a sizable liquidity position gives us a very robust situation to deal with the leverage that is still relatively high but coming down.

On the left-hand side of the page, we see that our net debt to EBITDA ratio measured in dollars came slightly lower from 4.9 times to 4.8 times. It is indeed in the direction of being reduced. We keep our guidance of reducing this to 3 times through the end of 2021, and of course, a weaker real will help us on that direction.

On the following page, this quarter has been marked by, as I said, a very sharp variation of FX of BRL1.2 per dollar. And that variation generated a sizable accounting effect on our results. It's important to remember our FX strategy before discussing these results. On the left-hand side of the page, we see that our FX management policy has two main components. The first is the dollarization of our net debt. We continue to carry and we will continue to carry 100% of our net debt in dollars, and that's because of what I showed two slides before, which is the fact that more than 100% of our cash flows are dollar based. So we consider that we need to have dollar based debt because the cash flows that we will generate to pay down this debt are all dollar based.

In addition to that, we have a short-term hedging strategy that looks into a horizon of 18 months where we try to increase the predictability of our cash flows in local currency and also in foreign currency. We look at the gap of dollar-based revenues and expenses that we have in this period of 18 months and we hedge up to 75% of that gap. The combination of these two policies, which have been applied with consistency over the years, gives us the result that we see on the right-hand side of the page. We had a financial result of negative BRL22.4 billion in the period, which is composed of several different items, and I'd like to go through each one of them to provide a better understanding and a lot of transparency in relation to this result.

We have, first, the interest over the debt, which is a very simple calculation. It's the application of the interest rate over the size of the debt for a single quarter, and that's BRL800 million. The second component here is two-fold. First, we have the FX variation on the debt that is originally contracted in dollars. Out of our total debt, $11 billion roughly is dollar based debt originally. So if we apply BRL1.2 times $11 billion, that gives us an accounting loss of BRL13.2 billion in terms of mark-to-market of this debt. In addition to that, we have part of debt originally in reals hedged into dollars, using swaps as the mechanism. That provided another BRL5.7 billion negative result of the financial result coming from the mark-to-market of those swaps. So the fact that we carry 100% of our net debt in dollars created BRL18.9 billion of negative accounting impact in our results in the quarter. Moreover, we have, as I said, the cash flow hedges for the short term. Those cash flow hedges, they cover the period of 18 months, and it is a portfolio of about $3.5 billion of hedges, and, given the delta below 1 [Phonetic] that those hedges have, the negative result was BRL3.2 billion in the quarter.

Important to emphasize that from all these numbers that I mentioned, only BRL200 million, which is the second to last bullet on this page, is actually what we disbursed on the quarter, which means that there is a perfect matching in our hedging strategy and also on our debt between the cash flow generation and the maturities. As I said in the previous slide, BRL4.46 was the average FX rate for the first quarter, which means that we have not benefited significantly from the FX yet. And on the other hand, the negative effect on cash outflows to settle those hedges is also a small number, meaning that, in the second quarter, if we continue to have the FX at the level where it is today, of course, we're going to have a much greater benefit on our revenues and also a much greater cash disbursement to settle the hedges that matures in the period.

Important to emphasize, our hedging operations, they have all maturities that match perfectly with the flows that they predict, first. And second, zero of our hedging contracts have margin calls. We don't have to make any cash disbursement that could be mismatched from the cash flow generation of the Company. Of course, if FX comes down during the coming quarters, we're going to have the opposite accounting effect, with a gain, but of course, this would mean that the prospects of our margins for the future would be to the opposite, relatively negative.

Moving on to the following page. I would like to show to you what is the structure of our hedging transactions and our debt and what this means in terms of protecting our cash flow. It's important to come back to when our cash flow hedges that are generating these accounting effects we now have been dealt. Back in the second half of 2018 [Phonetic], we had a spot rate of about BRL3.70, BRL3.80, and a concern that a potential appreciation with the real could come after the result of the presidential election. The prospects of the real rate for 2020 and '21 back then was between BRL3.60 and BRL3.70. So when we built this portfolio of zero cost collars, we had a concern that an appreciation of the currency could lead the Company to reduce the cash flows that it generated over time. So we needed to protect our cash flows as we have always been doing for several years.

So when you look at this table here, let's first focus on the left-hand side, which shows the situation for 2020. If we had the real at BRL4 during the whole year of 2020 as a base case, we would already have cash disbursements related to the hedges of BRL1.1 billion negative, which comes from the fact that part of our zero cost collars and part of our swaps have been contracted at a rate below BRL4. So the situation would be a given EBITDA with a negative adjustment of BRL1.1 billion. All the numbers that you see to the right are dealt us in terms of the original situation. So let's see what would happen if the real went to BRL3 for the rest of this year.

In that case, our EBITDA would reduce from the initial number by BRL3.8 billion. Conversely, if the real went to BRL5 and stayed at BRL5 through the end of the year, our EBITDA would improve by BRL3.8 billion. And the swaps -- the zero cost collars, and of course the dollar based interest, would go in the opposite direction. So, with the dollar at BRL3, we would lose -- we would reduce our EBITDA by BRL3.8 billion, but we would compensate part of that with a positive result of the hedges, resulting on the cash flow net effect of negative BRL1.2 billion.

On the other hand, if the real goes to BRL5 or to BRL6, in these two scenarios -- let's say BRL6, which is closer to where we are today, our EBITDA for the rest of the year would be BRL7.5 billion above where we would be at BRL4. And on the other hand, our hedging strategy and our debt strategy would compensate -- lead to a net cash flow gain of BRL1.9 billion.

So what we've been trying to do successfully over the years is to reduce the volatility of our cash flows in the short term, short term meaning up to 18 months. And of course, we keep having the profile that in the long term, the Company is a dollar based company. For 2021, that impact would be larger because we have relatively lower amount of hedges for '21 than we have for 2020. So when we compare what would happen with a real of BRL6 in '21 vis-a-vis a real of BRL4, we would have an EBITDA of BRL10 billion above what would be at BRL4. And on the other hand, we would pay $2.7 [Phonetic] billion of zero cost collars or $100 million of swaps and $1.1 [Phonetic] billion of additional net interest, which would mean that our cash flow would be BRL5.8 billion above where we would be with a real of BRL4.

So the takeaways of this are the following. First, we have a very conservative and very consistent policy that we've been applying over the years. And by coincidence, the policy that the two companies that form the current Suzano had in the past were very similar and also had been applying very consistently over the years. Second, directionally, a more depreciated FX is always better for us. And the more you go into the future, the more that is true because we have short-term hedges up to 18 months only. Third, we have been protecting short-term downside giving up part of the upside, and that's part of our strategy to reduce the volatility and to increase predictability.

Fourth, liquidity is always preserved. We work in a way that the maturity of our hedges perfectly match what we're trying to hedge. So we don't have in any situation any cash disbursement caused by the hedging strategy or the hedging position that would mismatch from the cash flow generation of the Company. Fifth, on the long term, we are a dollar-based company. The more depreciated the real is, the better it is for us, and the opposite. And sixth, which is again from the fifth point: a weaker BRL means that we deleverage faster. Our deleveraging pace at a real close to BRL6 where we are today is way faster than it would be with a real of BRL4. So, as a result of all that, we keep seeking a leverage below 3 times before the end of 2021. And, ceteris paribus, it is going to be faster than we had been envisioning before.

Moving on to the following page. And as a last piece of information that we're giving related to the robustness of our balance sheet, we also decided to enhance our financial discipline by reducing by 5% our capex guidance for this year. We keep having the same scope for the sustaining capex that we -- it's very important for us that we keep our operations up and running. And the source of this reduction in capex is basically better conditions and a review of some schedules for the different capex programs that we have for the year. So this will increase our financial discipline and help us go in the direction of bringing our net debt to EBITDA leverage ratio to 3 times up through the end of 2021.

I turn back to Walter after that.

Walter Schalka -- Chief Executive Officer

Thank you, Marcelo.

Now I'm going to have the takeaways on the last page of our presentation. We will keep our focus on people, society and business. This is quite important, these three dimensions, to us. We are essential to the society. We will keep working and keep producing, keeping delivering the products to our customers and end customers. [Technical Issues] our global presence. We will keep our volumes running to different markets, into different applications. And we will have very important volumes in the last 12 months, reaching 10.5 million, 10.6 million tons in the last 12 months.

Our competitiveness is enhancing all the time. We will keep working to reduce our costs. We are reducing our cost and delivering the synergies, and it's a very important focus on our organization.

FX is always helping our cash generation. We have a very good cash position at this point of time, and we will keep this liquidity in order to protect the Company of uncertain conjunctures. Our debt is very long, roughly seven years, with no financial covenants, and we will keep our financial austerity.

It's very important that the combination of culture, competitiveness and financial robustness giving a very important resilience to the Company in this current uncertain environment.

Now we are going to the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Daniel Sasson, Itau BBA.

Daniel Sasson -- Itau BBA -- Analyst

Hi, everyone. Good morning. Thanks for taking my questions. First of all, congrats on the measures you announced to help fighting the current crisis in the communities where we operate and, operationally, for concluding the destocking process during this quarter. My first question is regarding your deleverage [Phonetic] strategy. I was wondering if it makes sense at this point to rethink your hedging strategy or at least the size of your free cash flow that you want to protect that should be always around 75%. Maybe part of your investors would like to have not exposure to a dollarized commodity indeed. So, do you think that makes sense in the same lines? Do you consider start doing hedge accounting, maybe to soften the impact of the FX variations in your income statements, right, maybe trying to move that impact. So that would be my first question to Bacci.

And my second question is still on the free cash flow generation. If you could comment a bit about your working capital -- you're not going to have further positive impacts from your inventory reductions, right, which is a good problem, given that you are now at normalized inventory levels, but your receivables have actually increased. So, if you could comment on how you see that evolving? I mean, are you giving more time for your clients to pay you? Is that part of the effect of the end of the commercial agreement with Klabin? So, if you could comment on these two topics, that would be great. Thanks a lot for taking my questions.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

Thank you, Daniel. We have reviewed with our management and financial committee and also with the Board our hedging strategy, and it is not the idea to change it. And it's important to emphasize the following. As we have more dollar cash flows yeah -- and so our real cash flow is a negative one, meaning that we pay more reals in our costs and expenses than we receive in our real sales, actually we would have to have some sort or some level of short-term hedging to make sure that we have a dollar-based company and not a leveraged dollar-based company, so meaning that if we have zero position of short-term hedging, our leverage to the FX would be excess. And we consider at that level is probably something like 50% of the gap.

So, by having 50% of the gap hedged into dollars, we make sure that we have a fully dollar-based company. If we have more than 50%, like we have today, about 75%, we have part of our short-term cash flows in dollars and part in reals, and we believe this is important to have the room to manage this between around 75% to make sure that we give more predictability to the cash flows. So, it is not our intention to change the hedging policy, and we will keep being in the short term a company that part of the cash flow will be real based and part dollar based, and in the long run we are a dollar-based company.

In terms of hedge accounting, we don't see at this point the benefit of using that. That adds a lot of complexity and adds also some noise to the operational results that would make it more difficult to explain and to compare with our competitors. The effect on the P&L, of course, would change, but the effect on the balance sheet is actually the same. So, at this point we don't see a benefit from using hedge accounting.

On your question on working capital, it is very simple to explain. As we have increased the pace of our sales, part of the inventories became accounts receivable, and most of those accounts receivable are dollar based. So when you apply an FX rate to the receivables, you increase the size of the receivables which means that it's accounting effect. That doesn't mean that we are using more working capital. It's just the fact that it is a dollar based business.

Daniel Sasson -- Itau BBA -- Analyst

Thanks a lot, Bacci.

Operator

Our next question comes from Marcio Farid, JP Morgan.

Marcio Farid -- JP Morgan -- Analyst

Thank you. Good morning, everyone. I have a few follow-up questions. First one to Bacci. Bacci, you mentioned the plan to get to the 3 times net debt to EBITDA by next year-end. When I run a sensitivity here in order to get to that level, you need to see pulp prices averaging at $600 per ton next year. We [Indecipherable], right? I mean, it's anybody's guess what's going to be price next year, but is there anything else being considered on this deleverage pace for next year? I mean, lower capex, maybe asset sales or anything else that could help you get to the 3 times next year which are more conservative approach?

And maybe the second one to Carlos Anibal. Carlos, can you tell us -- you mentioned that demand in Europe and in China was -- is still relatively very good during May, similar to what it was in the first quarter. Can you just highlight to us how has been the conversation so far for the price increases in Europe? What are the buyers telling you? And what are you hearing from the Chinese customers as well? Thank you very much.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

Okay, Marcio. Of course, we're not going to give any guidance on pulp prices, but we need to consider that with an FX at the level where it is today, and if we consider some reasonable recovery on pulp prices, which doesn't mean in our accounts to reach $600 -- it is less than that -- we would reach 3 times by the end of next year. And the other factors that will help us push the indebtedness [Phonetic] into that direction is, first, the capex, that will probably continue to be closer -- very close to the sustaining level, up to the point that we reach 3 times, and also the asset sales that we announced, which are basically transactions related to land and forestry of which we made a small part and we're still working on completing the additional transactions to reach the number that we called to the market last year.

Another part of the deleveraging process, which was the reduction in the inventory is already completed. The inventory is at the normal level right now. But part of that is still in the accounts receivable. So we still have -- we're going to have a gain on working capital that we will help in that direction. And again, we need to emphasize that when we talk about 3 times net debt to EBITDA, we're always talking about the ratio in dollars. If you're looking reals, there is a lot of noise involved in that. But in dollars, we keep the guidance that we're going to reach 3 times by the end of next year.

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

Marcio, this is Carlos...

Marcio Farid -- JP Morgan -- Analyst

Okay. And just a follow-up. Sorry, Carlos. Just to make sure on one point before you start. Sorry about that. Bacci, you mentioned on your speech as well about the hedges being part of a strategy to make the Company more dollarized. This might be a bit -- maybe, if you please, call a stupid question, but why not hedging the balance sheet in US dollars instead of in BRL? Maybe the volatility would be reduced. Sorry again, Carlos.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

You are right. That's something that we've been analyzing for a long period of time. It is a very complex change to make, but it's something that we consider for the future.

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

So, good morning, Marcio. Thanks for your question. So I'm going to split my answer in two parts. Demand, and after that I'm going to talk about the price.

So, on the demand side, we see it as solid in all the regions, mainly for the tissue segment that has shrunk, as I mentioned before, a strong uptick since the second half of March in all the major markets. That upward trend year-on-year has not changed so far, so we still see that. We have some customers in North America saying that they expect the demand to continue for several quarters and of course at a lower rate than a 9% [Phonetic] increase they faced between end of March and beginning of April.

Also important to say or to share with your our view on the supply chain, and that applies mainly to the US and Europe. We believe that the supply chain has been quite empty and we have all the players are working on a hand-to-mouth basis, which means, in our view, that the pulp and finished products' stocks are pretty low throughout the entire chain. So even after the demand cools down, if that is the case, we're going to have the opportunity to fulfill all that, again, with pulp and finished products. For print and writing, we didn't see any major change in April, but we believe that it will be the case for May and afterwards. But so far, all that we have been seeing on the tissue side has more than compensates what has happened on the print and writing specialties.

Still on the demand side, I want to bring to you two relevant information, first about recycled fiber that has played out an important role. It has been in short supply since all the local governments issued those shelter-in-place orders in March keeping people at home rather than going to office or going to school. That has impacted the recovered paper generation and collection, and we have been seeing, since then, tissue producers migrating from recycled fiber to virgin fiber. Last but not least important, it is the information that the spread between the long fiber and the short fiber stands today above $100 and that creates additional incentive for a higher short fiber consumption, and that's where we believe that the Suzano pulp makes even more difference with our special characteristics that provide our tissue customers much more softness compared to the competition.

On price, we announced for Europe and North America $30 more. The discussions are taking place now, and we believe the market fundamentals support the full implementation. In Europe, all the discussions will be concluded by the end of the month. But again, the conditions are in place and we're going to pursue the full implementation of the $30. In Asia, as I said before, we concluded 100% of our business in April with an additional $30, taking our minimum net-net price in Asia for $480. We didn't have any price lower than $480. And also there in Asia, the discussions for the May business are still taking place.

Marcio Farid -- JP Morgan -- Analyst

Perfect. Thanks. Thank you very much.

Operator

Our next question comes from Thiago Lofiego, Bradesco BBI.

Thiago Lofiego -- Bradesco BBI -- Analyst

Thank you. Good morning, everyone. Two questions here. One on the inventory side, and also looking at production strategy. By our calculations, your inventories are now close to 1.5 million tons, which seems to be within a normalized range. So what should we expect in terms of production and shipments in the coming quarters? Should we expect those two data points being closely matched in the coming quarters? Or could we think about us working with even lower inventory levels ahead? And also, considering the fact that most of the maintenance shutdowns are going to be concentrated in the second half of the year, so how do we think about those variables here?

Second question about your operating cost guidance of BRL1,300 per ton for 2024. How does that change given the new currency level in Brazil? Those are my questions. Thank you.

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

So, Thiago, good morning. I can take the first one. This is Carlos speaking. As I said in the beginning of my presentation, look at the end of 2020 and comparing that to 2019, we will produce more, we will sell more and therefore we're going to close 2020 with a much lower inventory. We will not give any guidance besides that.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

Thiago, thank you for your question. I'm going to answer the second part of your question. Our guidance that we gave in operational cost, we'll track that once in a year. But, of course, some of the issues are impacted by the FX. When we made the analysis, the FX was completely different than today. But we are tracking on the right direction on the cash cost. As you saw during the presentation, even on the FX rate of BRL4.46 that we had in the first quarter this year, we had a cash cost of BRL596 per ton. We are very pleased with the developments that we are doing, and we are going south in terms of total cost of the system on the previous FX analysis.

Thiago Lofiego -- Bradesco BBI -- Analyst

Okay. Thank you.

Operator

Our next question comes from George Staphos, Bank of America.

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

Everyone, good morning. Thanks for taking my question, and thanks for all that you're doing with COVID. Gentlemen, a couple of questions, and a lot of them have already been answered already. Can you comment to the degree that your shipments to customers in the first quarter, you think, represented true consumption -- true takeaway by your customers and the degree to which your customers might have been stocking up? I recognize, Carlos, you said that you think the supply chain is relatively lean. But if you could provide any more discussion around that point.

Secondly, in terms of wood cost for the quarter -- again, congratulations on the progress there -- was there anything aberrational in 1Q on wood cost or should we assume that was a relatively normal level of performance? And whatever happens in terms of production synergies, etc., that is the appropriate level to base from to start?

And my last question -- I apologize for the very basic question. Marcelo, thank you for the review on hedging. It was really, really good, and appreciate it. Could there be any time within a quarter, short-term, where in fact the hedging could create a mismatch of cash? I recognize that's ultimately the goal of the hedging to actually to avoid that. But what circumstances could create a short-term mismatch of cash flow, if anything at all, perhaps around working capital? Thank you, guys. Good luck in the quarter.

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

Hey George, this is Carlos. Thank you for your question. So let me share with you our view on pulp stocks. So, as we mentioned before, pulp inventories at the major European ports fell again in March, and that has been the case for seven months straight. So we believe that the ports -- their stocks there in Europe are at a normal level. When you go to China and when I look at the inventories at the major Chinese ports like Qingdao and then Guangzhou, those ports settled lower in March and April after having jumped higher in Feb. We understand that most of the stock at the Chinese ports, they are wanted by customers, and producers, they hold a very little, almost no position in that total.

We agree that the volume at those Chinese ports are still a little bit above what should be the normal level. And the way that we explain that, that has to do with the production loss related to the COVID outbreak that took place between end of Jan and beginning of March. So, at that time there was a big production loss and somehow that impacted the pulp demand. And I mentioned that to you before. At the same time, we had all the Chinese ports working very well. And the in-chem [Phonetic] pulp did not change the pace. So that combination of lower production and unchanged in-chem pulp volume explain the stocks that are still above what should be the normal level at those ports today.

Very important to mention that we believe the Chinese buyers, they seem to want to hold a higher than normal stocks due to potential supply chain disruptions. They are facing a containers' availability issue, and that has been reportedly a critical issue in pulp shipment from Canada and Europe to China. Any possible COVID-related production loss or port issue anywhere in the world might represent a big risk for the Chinese buyers due to a much longer transit time, and we believe that is the reason they are today trying to hold a higher than normal position at the ports as well. So this is how we see all that.

Walter Schalka -- Chief Executive Officer

George, related with the wood cost, it's Walter answering, we believe that we are at a normalized level. We do not believe any major changes on the wood cost on the coming quarters.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

George, in relation to the potential mismatch. The thing is designed not to have -- the only situation where we could have a slight mismatch, it's in a situation where we have sales below what we have projected. Remember that we forecast the cash flows in dollars as a base for the hedging strategy 12 to 18 months in advance. So, if our sales, even in volume or in price, significantly differ from what we have projected, we can have a bit more or less hedges. But those changes tend to be minor, and the fact that we can go up to 75% makes sure that even if we have a 25% change in the projection, we still are going to be protected from being over-hedged.

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

Thank you very much. Good luck in the quarter.

Walter Schalka -- Chief Executive Officer

Thank you, George.

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

Thank you.

Operator

Our next question comes from Carlos De Alba, Morgan Stanley.

Carlos De Alba -- Morgan Stanley -- Analyst

Good morning, everyone. Thank you very much. So, a few questions, if I may. First on pulp. Carlos, we have seen the spread between softwood and hardwood at an elevated level for some time already. How long do you think it takes for the substitution effect to actually kick in and see people switching more toward hardwood and therefore reducing potentially the spread? And then, sticking with the subject of pulp dynamics, just maybe a clarification for me and maybe for the audience. When you mentioned that you see better or higher volumes this year in production and shipments and lower inventory, are you talking at the end of 2020 versus the end of 2019 or the end of 2020 versus the end of the first quarter? Because I understood that you have already reached or Suzano has already reached the normalized or the normal level of inventories that would imply than you don't see too much destocking in the remainder of the year.

And then, maybe this is a naive question from an analyst, but how does the conversation with clients go when the pulp margin that a company reach in Q1 is 49% and is probably much higher in the second quarter? And also, I understand that the share that printing and writing represents of total paper business and therefore pulp demand is greater than tissue. How do the conversations to high prices go? That's what I am a little bit puzzled, and any of your perspective would be really helpful.

And then one last one, if I may, for paper. Given the situation that is happening in the world and also in the Brazilian market, how do you see the evolution, not only in Q2, but beyond? And why would you need to see in order to restart those two lines that were shut down? And do you expect a double-digit decline in paper production and shipment this year in Brazil? Thank you very much.

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

Okay, Carlos. Thanks for your questions. I'll try to answer all. But before that, just to complement one information that was asked by George. George, we believe that all customers, mainly in Europe and North America, are working with lower than what should be their normal level for pulp stocks, OK?

So, on pulp price, an increase with the situation that you just described, we believe that pulp price is a matter of market fundamental, it is supply demand. As I said, we have a combination of those two factors, creating conditions to increase the prices, and this is a conversation that we are having with our customers in Europe and North America, and there was a conversation that we had last month there in China. And as I said, all the business that we concluded were at the new price level, representing a $30 price increase.

It is hard to quantify what is the price spread between longer and short fiber that will change the demand. I would say at $40, $50, we should see customers paying more or buying more softwood or reducing their hardwood consumption moving back to the softwood. Important always, always to remind, we have, in the short fiber, special characteristics that give our tissue products a much better performance, mainly in terms of softness.

And your last question -- and let me rephrase that or repeat that. When we look at the end of 2020 and compare that to the end of 2019 -- and this is what I said, OK?, we plan to produce more, we plan to sell more and close 2020 with much lower inventory. This is what we have been saying to you since late last year. We will not give any guidance about what we're going to do on a quarterly basis.

Leonardo Grimaldi -- Executive Officer-Paper Business

And, Carlos, good morning. This is Leonardo talking about your -- answering your question related to paper. As I have mentioned, we have seen in Brazil a demand decline of 23% in March, and our expectation is that demand in the second quarter will decline even further. Even though some of our products, our premium writing papers were classified as essential and they are used in hospitals, clinics, medical leaflets and also food packaging, obviously the general effect of the reduced demand in offices, commercial businesses, of course, is generating an unprecedented decline in demand.

There are no official forecasts for Brazil or Latin America concerning demand in the second quarter. But as a comparable reference, RISI Fastmarket has just posted their paper traded report dated April 30 regarding North America, and the expectation is that this decline in the second quarter will be of 42%. In Brazil, there are additional uncertainties such as the level of investments of the Brazilian government in public education and the National Textbook Program as well as the maintenance of the municipal elections which are originally scheduled to take place this October. We believe that the production curtailment that we have done so far is enough, but we will further track timing of demand recovery, speed of this recovery and to what levels the recovery will be in order to make future decisions on production curtailment.

Carlos De Alba -- Morgan Stanley -- Analyst

Thank you very much. I appreciate it. I'll leave it there.

Operator

As there are no additional questions, the Suzano first quarter 2020 results conference call is finished. Have a nice day. Thank you.

Duration: 71 minutes

Call participants:

Walter Schalka -- Chief Executive Officer

Leonardo Grimaldi -- Executive Officer-Paper Business

Carlos Anibal de Almeida -- Executive Officer-Pulp Commercial Business

Aires Galhardo -- Executive Officer-Pulp Operation

Marcelo Feriozzi Bacci -- Chief Financial Officer and Investor Relations Director

Daniel Sasson -- Itau BBA -- Analyst

Marcio Farid -- JP Morgan -- Analyst

Thiago Lofiego -- Bradesco BBI -- Analyst

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

Carlos De Alba -- Morgan Stanley -- Analyst

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