Strategy and Competitive Strengths

Strategy

Suzano’s goal is to consolidate its position as one of the most profitable and competent business organizations in the forestry industry. The Company pursues continuous development through a set of measures and innovations that enable it to deliver consistent economic and financial results. Cash generation allows it to execute strategic initiatives aimed at maximizing return on invested capital and creating more value for shareholders, based on the pillars of structural competitiveness, adjacent businesses and reshaping of the industry.

Structural Competitiveness:
Continuous improvement in operating efficiency and in the competitiveness of its assets

The Company aims to improve its operating efficiency and the competitiveness of its assets by continually improving its product quality, investing in research and development and conducting initiatives to promote excellence in the management of its industrial and forestry operations. To achieve this, it invests in modernizing and streamlining assets to reduce unit production costs and increase the productivity of its forestry, industrial and administrative operations, and continues to analyze and implement actions to capture operating efficiency gains.

The main initiative under this pillar, consists of retrofitting and debottlenecking the Imperatriz Unit in the state of Maranhão. The investment will enable the Company to reduce its production cash cost by reducing its consumption of raw materials and diluting its fixed costs, which consequently will help us reach what we consider our optimum cost structure.

The Company’s management practices and processes include:

  1. using gene-enhancement and cloning technology to boost forestry yields; and
  2. implementing a matrix budget to streamline fixed costs and expenses.
Adjacent Businesses:
Focus on developing innovative and paradigm-shifting products using the forest base with high profitability and with scalability

Suzano constantly invests in the research and development of innovative and paradigm-shifting products to maximize the profitability of its forest base. The pillar of adjacent businesses pursues new uses for the asset base by diversifying the Company’s product portfolio. The Company announced investments in biotechnology (FuturaGene), lignin, fluff pulp production and entering the tissue segment.

Reshaping of the industry:
Strategy to reduce variability in industry returns

The pillar Reshaping of the Industry seeks ways to reduce the volatility in the Company’s returns. In capital-intensive industries, ROIC is highly dependent on external variables (FX rate and pulp prices). The goal is to build a company which returns have lower volatility through M&A transactions, adopting a vertical orientation, expanding internationally, forging commercial agreements among other initiatives.

The long-term strategy remains centered on profitability with the aim of becoming an even more innovative company that combines operational excellence and sustainability in its operations. The Company aims to ensure its economic, social and environmental sustainability by creating more value for its shareholders and continually enhancing its corporate governance practices.

Strengths

Vertically integrated operations and low production costs

The Company’s vertically integrated operations assure it the flexibility needed to adjust its production and pulp and paper sales according to market conditions. Suzano produces approximately 3.6 million tons of market pulp. The Company, during the 1Q18, registered a production cash cost for market pulp of R$573/ton (equivalent to US$178/ton, at a BRL/USD exchange rate of R$3.22), which, according to studies by the consulting form Hawkins Wright, is one of the most competitive production cash costs in the world.

Due to the high level of integration between its pulp and paper production, the Company has a low cost for converting pulp into paper. Its low production costs reflect the following factors:

High forestry yields

the Company uses advances cloning techniques and silviculture practices to manage its renewable planted forests, which enable its eucalyptus trees to reach maturity in only seven years (a significantly shorter period compared to the wood grown by its competitors abroad). The acquisition of a controlling interest in the biotechnology company FuturaGene, combined with its competence in eucalyptus research and development, enables the Company to accelerate its capture of productivity gains in its forestry operations and to expand beyond its own operations by applying this technology on the planted forests of third parties.

Proximity between planted areas and industrial facilities

the Company’s forests are located close to its mills. The forests that supply wood to the Mucuri Unit are located within 74 km from the unit, while the forests supplying wood to the Imperatriz Unit are on average 184 km from the unit. For the units in São Paulo, the average wood supply distance is approximately 190 km.

High own power generation

the electricity generated during the pulp production process ensures the energy self-sufficiency of its production units.

 

FuturaGene, a wholly owned subsidiary of Suzano Papel e Celulose, is a leader in plant genetics research and development for the forestry, bioenergy and biofuel industries. With research facilities in Brazil, China and Israel, the company develops sustainable technologies to meet the growing demand for fiber, fuel and energy crops. In 2015, Brazil’s National Biosafety Technical Commission (CTNBio) approved the commercial use of the higher-yield eucalyptus developed by FuturaGene.

The economic benefits from higher-yielding, genetically enhanced eucalyptus include boosting the competitiveness of Brazil’s forestry industry. From the standpoint of environmental gains, the main gain is lower carbon emissions from the reduction in freight operations due to the shorter distance between the forests and mills. Other significant benefits include a reduction in the use of inputs and the increased availability of land for other uses, such as preservation or food production.

In terms of social benefits, the new technology will be made available to small rural producers who are already partners of Suzano Papel e Celulose through its forest development program and have already benefited from the Company's superior eucalyptus varieties for many years.

Superior production quality and technological training

Sheets of printing and writing paper made from eucalyptus fiber present better formation and distribution, higher printing quality and improved opacity, uniformity, softness and bulk compared to paper produced using other fibers. Likewise, our paperboard is recognized for its exceptional printing quality, surface smoothness, stiffness and for its superior performance during printing, cutting, folding and packaging processes, which are characteristics essential to packaging production. Due to the characteristics conferred by eucalyptus pulp to printing and writing paper and sanitary tissue, demand for the fiber grew by 6.8% in 2016 compared to 2015, according to the Pulp and Paper Products Council (PPPC).

The Company is constantly investing in the research and development of new products and applications to meet the needs of its clients.

The following chart shows the competitiveness of eucalyptus fiber compared to other fibers:

Fiber Volume (million tonnes)

Diversified products and markets with solid operating cash generation

By producing pulp and paper for the domestic and international markets, the Company enjoys benefits from diversification, which effectively positions it to capture the growth potential of the domestic market and to take advantage of opportunities in the international market.

These factors support:

Leadership and a strong brand in the Brazilian paper market

The Company believes that its leadership position and the strength of its brands, such as Report, Reciclato and Paperfect, are key drivers of its paper businesses in Brazil.

Well positioned for exports

On 1Q18, more than 71% of the Company’s net revenue came from exports, which are shipped to over 90 countries. Around 91% of its market pulp sales volume and approximately 34% of its paper sales volume are exported.

Solid operating cash generation

Despite the high volatility in pulp prices, the Company maintained strong operating cash generation, which has generated funds and enabled it to secure financing for its operations. In addition to its history of consistent operating cash generation, supported by its export operations, the Company usually enjoys access to export financing facilities at competitive interest rates for both shorter and longer-term commitments.

Diversified and complementary product portfolio

Suzano has a balanced and complementary product portfolio comprising market pulp, fluff pulp, paperboard, coated and uncoated paper and tissue paper, with market pulp accounting for more than half of its net revenue. The following flowchart shows all of the products developed by Suzano and their respective contribution to its net revenue in 1Q18:

Suzano also was the world’s first company to use hardwood fiber to produce fluff pulp, which is used to make diapers and feminine hygiene. Suzano first entered this market in December 2015. Some of the project’s advantages include the increased flexibility to produce either fluff pulp or printing and writing paper in relation to its current production capacity as well as lower costs for customers.

High social and environmental standards

In addition to contributing to its sustainable development and social responsibility, the Company believes that its success in defining and complying with high social and environmental standards give it an additional competitive advantage, especially for sales to clients in Europe and North America. The Company was one of the first to produce recycled offset paper in Brazil on an industrial scale, which is marketed under the brand Reciclato. It also was one of the world’s first pulp and paper companies and the first in the Americas to receive the international certification ISO 14001 for compliance with environmental management standards at its Mucuri Unit, which is also certified by the Forest Stewardship Council (FSC). The Suzano Unit has been FSC-certified since December 2006. The Imperatriz Unit has been FSC-certified since its startup.

Suzano is dedicated to providing services to the community by participating in and providing financial support to various projects, including through the Ecofuturo Institute, a non-governmental organization sponsored by the Company that promotes environmental and education activities, among other initiatives.

Experienced management team focused on value creation

The Company is managed by a highly experienced team of professionals and many of its directors and senior executives hold many years of experience in the pulp and paper industry. Its business management model is aligned with global standards of business excellence and is focused on creating value for all shareholders. The Company is constantly enhancing its corporate governance practices, with the main initiatives including:

  1. listing on the Level 1 Special Corporate Governance Practices listing segment of the São Paulo Stock Exchange (BM&FBovespa) since 2004, in keeping with the commitments assumed by Suzano since 2003;
  2. implementation of a Code of Conduct applicable to all Suzano Group companies in 2006;
  3. creation of three advisory committees to the Board of Directors (Sustainability & Strategy, Management and Audit); and
  4. reformulation of its Board of Directors to include four Independent Directors, in conformity with the standards of the Brazilian Corporate Governance Institute (IBGC).

Financial policies focused on mitigating liquidity risks

Our financial management is oriented by policies and guidelines focused on mitigating liquidity risks. Consequently, we maintain a balance of cash and cash equivalents that we believe is sufficient to cover our short-term debt liabilities, which reduces the risk of needing to roll over debt and access debt markets during stress scenarios. For the same reason, we only contract derivative operations for the purpose of hedging cash flow, and in all cases through basic (plain vanilla), linear and liquid instruments. We maintain low leverage levels in the normal course of business, with additional debt limited to the need to fund growth projects, considering the servicing of this debt and the project’s cash generation.

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