Suzano S.A.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Suzano S.A. is a Brazilian paper and pulp producer, primarily focused on the production of eucalyptus pulp and paper products, with a significant global market presence, especially in the Brazilian market.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Suzano is a leading player in the global pulp and paper market, primarily producing eucalyptus pulp, paperboard, printing, writing, and tissue paper. The company operates mostly in the Brazilian market, but is aggressively expanding its footprint internationally. Its business is mainly focused on the end-product made of eucalyptus, but its business covers other products too.

  • Product Focus: Suzano primarily uses eucalyptus wood as the raw material for the production of paper and pulp. They classify their products into:
    • Pulp: Includes bleached eucalyptus kraft pulp, used in a variety of paper and hygiene products.
    • Paper: Including printing and writing paper, paperboard, and packaging paper.
    • Tissue paper: A smaller but growing part of the business.

  • Revenue Distribution: Suzano’s revenue mix is diverse, with most of its revenues stemming from the Brazilian market, though they also export to major economies in Europe, North America, and Asia. They are actively growing their sales in regions outside Brazil. Notably, sales in China is a major point of focus.

  • Industry Trends:
    • A growing focus on sustainability is forcing companies to develop more environmentally responsible products and processes.
    • The demand for packaging papers and tissue is increasing with e-commerce growth and urbanization.
    • Global competition is intensifying in the pulp and paper sector, putting pressure on pricing.
    • Consolidation in the industry leads to mergers and acquisitions among major players.

  • Margins: The pulp industry tends to be highly cyclical and commodity-based. However, a better cost structure can allow companies to post better results. It is worth keeping in mind the price of wood raw material has shown a substantial increase in the past years. Because of that, the earnings may also be highly volatile.

  • Competitive Landscape:
    • The global pulp and paper market is highly competitive, with significant players from Europe, North America, and Asia. Key competitors include International Paper, Domtar, and Smurfit Kappa.
    • Competition from smaller, regional players, and the increasing emergence of low-cost producers in Asia, also intensifies competitive pressures.
    • There is a growing focus on technology and quality, which is increasing competition.
  • What Makes Suzano Different?
    • Low-Cost Producer: Suzano leverages the fast growth of eucalyptus trees in Brazil, which helps to keep costs down.
    • Integration and Technology: The company has invested heavily in integrating its pulp and paper operations. They are also focused on improving their production technologies, mainly using the digital transformation.
    • Sustainable Practices: The company is committed to sustainable sourcing, production, and operations, in line with growing environmental consciousness.

Financial Deep Dive

  • Profitability and Efficiency:
    • The company has achieved robust revenues in the past years. Net sales rose to R$ 40.1 billion in 2022, but the company made a loss of R$ 22.1 Billion, due to the recognition of losses on financial instruments and foreign exchange and derivatives losses.
    • Operating costs have also risen, including production costs and financial expenses.
    • Suzano’s historical ROIC has fluctuated. In 2022, it is negative.

  • Key Financial Metrics:

    • Current Ratio: In 2022, the company had a current ratio of 1.27. This ratio demonstrates the company can cover its short-term obligations.
    • Debt-to-equity: As of 2022, this ratio is 1.51, indicating higher leverage.
    • Net Debt to EBITDA: This measure shows how many years it would take for the company to repay its debt using EBITDA. This ratio was 4.0 in 2022. It shows a high leverage.
    • Earnings Per Share: The company reported a negative loss per share (LPS) of R$15.74.
    • Dividend: the company declared a mandatory dividend of R$ 393 million in December 2022, however a dividend for 2022 as a whole, there is no dividend distribution.
  • Balance Sheet Health:

Suzano’s balance sheet is considered healthy as the company has enough assets and low current liabilities compared to the overall assets. However, the amount of debt has increased. The company must focus on reducing its debt, and that would make its balance sheet healthy. For these reasons, I rate it as 4/5.

Recent Concerns / Controversies and Problems

  • Debt and Leverage: The company has high net debt with a debt-to-equity ratio of 1.5. A good portion of this debt is related to their 2022 operations and from acquisitions. They need to reduce this debt, which increases the vulnerability of its business in case of any major economic downturn. This also increases interest expenses, leading to higher financial costs.
  • Volatility in Earnings: The company has a history of reporting volatile results, which may or may not be predictable. The main reason is the variability in pulp and paper prices.
  • Fluctuating Prices and Demand: Prices of pulp and paper, key factors in determining Suzano’s revenue, can fluctuate significantly, influenced by global demand and supply. This is also a risk factor.
  • Currency Risk: The company is exposed to fluctuations in Brazilian currency, which can impact the earnings significantly. This is particularly important because the company generates a decent portion of its revenues in Brazilian real but reports in US dollars.
  • Global supply chain disruption: Recent geopolitical events, such as Russia-Ukraine conflict, have created uncertainties in energy and commodity prices, which can hurt the company and cause volatility in supply chains.
  • Management View: Management has reiterated the company is continuing on its path to reduce debt, despite the 2022’s poor results. They also mentioned they are seeing a strong recovery in demand. Also, management is focusing on investing and strengthening the operations, which will lead to more stable results in the future.

Moat Analysis

  • Intangible Assets: Suzano possesses a strong brand in the global market. It also holds multiple patents and has developed proprietary technologies. This creates a barrier to entry for new competitors.
  • Cost Advantages: Suzano has the distinct advantage of owning a significant portion of its own eucalyptus forests, which provide wood at a lower cost, and this reduces the production costs significantly. Also, its integrated manufacturing process helps maintain a strong cost structure.
  • Scale: They have a big presence in the global paper and pulp market. Although they don’t dominate the market, their size helps them operate efficiently.
  • Switching Costs Although these products can be of good quality, they are mostly commodity-based and switching costs are low.
  • Network Effects: Network effects are minimal in their business.

While there are a few sources of competitive advantages, it is not always obvious to see if there is a strong competitive edge. For this reason, I rate their moat as 2 out of 5.

Understandability

  • The business is complex because it is a large industrial company, with multiple product segments and a complicated global operations. Also, their financials are tricky to follow and analyze.

  • Because of the factors mentioned, I rate the understandability as 3/5.

Overall Summary

Suzano is a large player in a highly cyclical paper and pulp industry, with high-quality products and strong market share. The company has a few sources of economic moats. However, the company also faces significant challenges, including intense competition, exposure to fluctuating commodity prices, high leverage, and currency risk. Their financials are tricky to evaluate and analyze, which makes it harder for investors to understand the value of the company.

Books used for references:

  • The Little Book That Builds Wealth by Pat Dorsey
  • The Essays of Warren Buffett by Warren Buffett
  • The Intelligent Investor by Benjamin Graham
  • Valuation by McKinsey & Company