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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

 

Commission file number 001-38755

 

Suzano S.A. (formerly Suzano Papel e Celulose S.A.)

(Exact name of Registrant as specified in its charter)

Suzano Inc. (formerly Suzano Paper and Pulp Inc.)

(Translation of Registrant’s name into English)

Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

Av. Professor Magalhães Neto, 1,752 10th Floor, Rooms 1010 and 1011 Salvador, Brazil 41810-012

(Address of principal executive offices)

Marcelo Feriozzi Bacci Chief Financial and Investor Relations Officer Telephone: +55 11 3503-9000 Email: ri@suzano.com.br Av. Faria Lima, 1,355 – 7th Floor São Paulo, Brazil, 01452-919

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class:		Name of each exchange on which registered:
Common Shares, without par value		New York Stock Exchange*
American Depositary Shares (as evidenced by American Depositary Receipts), each representing two Common Shares		New York Stock Exchange
4.000% Notes due 2025, issued by Fibria Overseas Finance Ltd.		New York Stock Exchange
5.500% Notes due 2027, issued by Fibria Overseas Finance Ltd.		New York Stock Exchange
5.250% Notes due 2024, issued by Fibria Overseas Finance Ltd.		New York Stock Exchange

 

 

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*              Not for trading purposes but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those common shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

The number of outstanding shares of stock of Suzano S.A. (formerly Suzano Papel e Celulose S.A.) as of December 31, 2018 was:

1,105,826,145 common shares, without par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

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FORWARD-LOOKING STATEMENTS			1
GLOSSARY OF CERTAIN TERMS USED IN THIS ANNUAL REPORT			2
PRESENTATION OF FINANCIAL AND OTHER INFORMATION			3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE			4
ITEM 3. KEY INFORMATION			4
	A.	Selected Financial Data	4
	B.	Capitalization and Indebtedness	9
	C.	Reasons for the Offer and Use of Proceeds	9
	D.	Risk Factors	9
ITEM 4. INFORMATION ON THE COMPANY			26
ITEM 4A. INFORMATION ON THE COMPANY			53
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS			54
	A.	Operating Results	59
	B.	Liquidity and Capital Resources	65
	C.	Research and development, patents and licenses, etc.	78
	D.	Trend Information	82
	E.	Off-Balance Sheet Arrangements	83
	F.	Tabular Disclosure of Contractual Obligations	84
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			86
	A.	Directors and Senior Management	86
	B.	Compensation	93
	C.	Board Practices	95
	D.	Employees	95
	E.	Share Ownership	95
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			96
	A.	Major Shareholders	96
	B.	Related-Party Transactions	97
	C.	Interests of Experts and Counsel	98
ITEM 8. FINANCIAL INFORMATION			99
	A.	Consolidated Statements and Other Financial Information	99
	B.	Significant Changes	105
ITEM 9. THE OFFER AND LISTING			106
	A.	Offer and Listing Details	106
	B.	Plan of Distribution	106
	C.	Markets	106
	D.	Selling Shareholders	108
	E.	Dilution	108
	F.	Expenses of the Issue	108
ITEM 10. ADDITIONAL INFORMATION			109
	A.	Share Capital	109
	B.	Memorandum and Articles of Association	109
	C.	Material Contracts	109
	D.	Exchange Controls	109
	E.	Taxation	111
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			116

 

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	119
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	120
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	121
ITEM 15. CONTROLS AND PROCEDURES	122
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	123
ITEM 16B. CODE OF ETHICS	124
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	125
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	126
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	127
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT	128
ITEM 16G. CORPORATE GOVERNANCE	129
ITEM 16H. MINE SAFETY DISCLOSURE	131
PART III
ITEM 17. FINANCIAL STATEMENTS	132
ITEM 18. FINANCIAL STATEMENTS	133
ITEM 19. EXHIBITS	134

 

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FORWARD-LOOKING STATEMENTS

 

This annual report includes forward-looking statements, principally in “ Item 3. Key Information — Risk Factors,” “Item 4. Information on Suzano — Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current expectations about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including among other things:

 

·                   our management and future operation;

·                   the implementation of our principal operational strategies, including our potential participation in acquisitions, joint venture transactions or other investment opportunities;

·                   general economic, political and business conditions, both in Brazil and in our principal export markets;

·                   industry trends and the general level of demand for, and change in the market prices of, our products;

·                   existing and future governmental regulation, including tax, labor, pension and environmental laws and regulations and import tariffs in Brazil and in other markets in which we operate or to which we export our products;

·                   the competitive nature of the industries in which we operate;

·                   our level of capitalization, including the levels of our indebtedness and overall leverage;

·                   the cost and availability of financing;

·                   our compliance with the covenants contained in the instruments governing our indebtedness;

·                   the implementation of our financing strategy and capital expenditure plans;

·                   inflation and fluctuations in currency exchange rates, including the Brazilian real and the U.S. dollar;

·                   legal and administrative proceedings to which we are or may become a party;

·                   the volatility of the prices of the raw materials we sell or purchase to use in our business;

·                   other statements included in this annual report that are not historical; and

·                   other factors or trends affecting our financial condition or results of operations, including those factors identified or discussed in “Item 3. Key Information — Risk Factors.”

 

The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “hope,” “intend,” “may,” “might,” “should,” “would,” “will,” “understand” and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur and are not guarantees of future performance. Our actual results and performance may differ substantially from the forward-looking statements included in this annual report.

 

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GLOSSARY OF CERTAIN TERMS USED IN THIS ANNUAL REPORT

 

Herein, “Suzano”, the “Company”, “we”, “us” and “our” refer to Suzano and its consolidated subsidiaries, unless the context otherwise requires. References to “Fibria” refer to “Fibria Celulose S.A.” and references to the “Companies” refer to Suzano and Fibria. All references herein to the “real”, “reais” or “R$” are to the Brazilian real , the official currency of Brazil. All references to “U.S. dollars”, “dollars” or “US$” are to United States dollars, the official currency of the United States.

 

ADENE		Agency for the Development of the Northeastern Brazil, or Agência de Desenvolvimento do Nordeste .
ADR		American Depositary Receipts.
ADS		American Depositary Shares.
ANTAQ		The Brazilian regulatory agency regulating aquatic transportation, or Agência Nacional de Transportes Aquaviários .
B3		The São Paulo Stock Exchange.
BNDES		The Brazilian Development Bank, or Banco Nacional de Desenvolvimento Econômico e Social .
BNDESPAR		BNDES Participações S.A.
Brazilian Corporation Law		Brazilian Law No. 6.404/76, as amended.
CADE		Brazilian antitrust authority, or Conselho Administrativo de Defesa Econômica.
COFINS		Contribution for the Financing of Social Security, or Contribuição para o Financiamento da Seguridade Social .
CONFAZ		National Board of Financial Policy, or Conselho Nacional de Política Fazendária.
CSLL		Social Contribution on Net Income, or Contribuição Social Sobre o Lucro Líquido.
CVM		The Brazilian Securities and Exchange Commission, or Comissão de Valores Mobiliários .
FGTS		Government Severance Indemnity Fund for Employees, or Fundo de Garantia do Tempo de Serviço .
GHG		Greenhouse gas.
IBÁ		Brazilian Tree Industry, or Indústria Brasileira de Árvores .
IBAMA		Brazilian Federal Environmental Agency, or Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis .
ICMS		Tax on Sale of Goods and Services, or Imposto sobre Circulação de Mercadorias e Serviços.
INCRA		Brazilian Institute for Land Reform, or Instituto Nacional de Colinização e Reforma Agrária .
INPI		National Industrial Property Institute, or Instituto Nacional da Propriedade Industrial
INSS		Social Security Contributions, or Instituto Nacional do Seguro Social .
IPCA		Inflation Rate Index for Consumer Goods, or Índice Nacional de Preços ao Consumidor Amplo
IPI		Tax on Manufactured Products, or Imposto sobre Produtos Industrializados .
IRPJ		Corporate Income Taxes, or Imposto de Renda Pessoa Jurídica .
ISS		Tax on Services, or Imposto Sobre Serviços .
PIS		Social Integration Program, or Programa de Integração Social .
PPPC		Pulp and Paper Products Council.
RFB		Brazilian Internal Revenue, or Receita Federal do Brasil.
SUDENE		Superintendence for Development of the Northeast, or Superintendência do Desenvolvimento do Nordeste.
TJLP		Brazilian Long-Term Interest Rate, or Taxa de Juros de Longo Prazo.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

We have prepared our consolidated financial statements as of December 31, 2018 and 2017 and for each of the three years for the period ended December 31, 2018, included herein, in compliance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected financial information should be read together with our consolidated financial statements, including the notes thereto.

 

Our functional currency and that of all our Brazilian subsidiaries is the real , which is also the currency used for the preparation and presentation of our consolidated financial statements.

 

We make statements in this annual report about our competitive position and our market share in, and the market size of, the market pulp and paper industry. We have made these statements on the basis of statistics and other information from third-party sources that we believe are reliable.

 

Because the merger of shares ( incorporação de ações ) (the “Merger”), set forth in the Merger Agreement entered into by Suzano and Fibria on July 26, 2018 (the “Merger Agreement”) was consummated in January 2019, our results of operations and financial condition for the historical periods discussed in this section do not reflect or include the results of operations or any assets or liabilities of Fibria. We began consolidating Fibria and its subsidiaries as from January 1, 2019, and, accordingly, our results of operations and financial condition in future periods may not necessarily be comparable to our results of operations and financial condition for historical periods, including those discussed below. For information on Fibria’s results of operations and financial condition for these periods, see Fibria’s audited consolidated statements at December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 that were submitted by Fibria to the SEC on Form 6-K on February 22, 2019. In this section, we include, solely for convenience purposes, certain information on Fibria’s results of operations, cash flows and financial condition, including indebtedness and other contractual liabilities, that was extracted from Fibria’s audited consolidated financial statements. However, this information is not indicative of any future results of operations or financial condition of Fibria, or of our company and Fibria operating on a combined basis.

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A.                                     Selected Financial Data

 

The following table presents a summary of our selected financial and operating data at the dates and for each of the periods indicated. You should read the following information together with our audited consolidated financial statements , “Presentation of Financial and Other Data” and “Item 5. Operating and Financial Review and Prospects.”

 

The information below does not reflect our acquisition of Fibria, which closed in January 2019. For financial and operating information on Fibria at December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016, see Fibria’s audited consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016, submitted to the SEC by Fibria on Form 6-K on February 22, 2019.

 

CONSOLIDATED STATEMENTS OF INCOME

 

		For the year ended December 31,
		2018		2017		2016		2015		2014
		(in thousands of R$), except per share data
Net sales revenue		13,443,376		10,580,673		9,839,162		10,162,081		7,264,599
Cost of sales		(6,922,331	)	(6,496,304	)	(6,563,080	)	(6,147,395	)	(5,355,664	)
Gross profit		6,521,045		4,084,369		3,276,082		4,014,686		1,908,935
Operating income (expenses)
Selling expenses		(598,726	)	(423,325	)	(416,310	)	(409,986	)	(300,796	)
General and administrative expenses		(825,209	)	(528,974	)	(427,100	)	(455,629	)	(392,761	)
Equity in earnings of associates		7,576		5,872		(7,127	)	—		—
Other operating income (expenses), net		(96,875	)	140,510		(1,150,561	)	(104,516	)	14,191
Operating profit before net financial income (expenses)		5,007,811		3,278,452		1,274,984		3,044,555		1,229,569
Net financial income (expenses)
Financial income		459,707		379,049		2,277,924		304,261		265,351
Financial expenses		(5,302,220	)	(1,397,889	)	(1,156,204	)	(4,713,885	)	(1,858,863	)
Net income (loss) before taxes		165,298		2,259,612		2,396,704		(1,365,069	)	(363,943	)
Income taxes
Current		(586,568	)	(202,187	)	(188,817	)	(19,052	)	(17,480	)
Deferred		741,084		(236,431	)	(530,072	)	454,445		119,917
Net income (loss) for the year		319,814		1,820,994		1,677,815		(929,676	)	(261,506	)
Income (loss) for the year attributed to the controlling shareholders		319,693		—		—		—		—
Income for the year attributed to non-controlling shareholders		121		—		—		—		—
Basic earnings (loss) per share (1)
Common		0.29236		1.66804		1.53922		(0.85429	)	(0.24071	)
Diluted earnings (loss) per share (2)
Common		0.29199		1.66433		1.53430		(0.85429	)	(0.24071	)

 

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(1) Basic earnings per share is calculated using the income attributable to controlling shareholders divided by the weighted average number of outstanding common shares.

 

(2) Diluted earnings per share is calculated based on the results attributable to the controlling shareholders divided by the weighted average number of outstanding common shares, subtracted from the potential dilutive effect generated by the conversion of all common shares.

 

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CONSOLIDATED BALANCE SHEETS

 

		As of December 31,
		2018		2017 (1)		2016		2015		2014
		(in thousands of R$)
Assets
Current assets
Cash and cash equivalents		4,387,453		1,076,833		1,614,697		1,477,246		3,686,115
Financial investments		21,098,565		1,631,505		2,080,615		970,850		—
Trade accounts receivables		2,537,058		2,297,763		1,548,741		1,842,561		1,207,398
Inventories		1,853,104		1,198,265		1,318,905		1,326,396		1,077,081
Recoverable taxes		296,832		300,988		425,758		596,936		475,632
Derivative financial instruments		352,454		77,090		367,145		158,930		39,266
Advances to suppliers		98,533		86,499		532,655		27,016		9,711
Other assets		169,175		119,610		112,952		132,536		114,221
Assets held for sale		5,718		11,535		—		50,000		—
Total current assets		30,798,892		6,800,088		8,001,468		6,582,471		6,609,424
Non—current assets
Receivables from other related parties		—		—		13,000		—		—
Recoverable taxes		231,498		283,757		349,536		433,070		481,626
Deferred taxes		8,998		2,606		4,624		2,583		1,143
Derivative financial instruments		141,480		56,820		77,035		36,463		20,826
Advances to suppliers		218,493		221,555		216,578		251,287		247,779
Judicial deposits		129,005		113,613		87,097		61,653		59,499
Receivables from land expropriation		63,652		60,975		56,721		56,721		56,721
Other assets		30,283		31,466		36,947		22,822		9,694
		823,409		770,792		841,538		864,599		877,288
Biological assets		4,935,905		4,548,897		4,072,528		4,130,508		3,659,421
Property, plant and equipment		17,020,259		16,211,228		16,235,280		16,346,234		16,681,253
Intangible assets		339,841		188,426		219,588		329,625		292,070
Investments		14,338		6,764		873		—		—
		22,310,343		20,955,315		20,528,269		20,806,367		20,632,744
Total non—current assets		23,133,752		21,726,107		21,369,807		21,670,966		21,510,032
Total assets		53,932,644		28,526,195		29,371,275		28,253,437		28,119,456

 

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(1) The financial statements as of December 31, 2017, presented for comparison purposes, were adjusted for a better presentation and comparison with the information for the period ended December 31, 2018. The reclassifications in the line item “current assets” did not change the total of “current assets,” nor the total of our “assets.” The reclassifications were made to “other assets” in the amount of R$ 12,870 and related to advances for the acquisition of wood for “advances to suppliers.”

 

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CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

		As of December 31,
		2018		2017		2016		2015		2014
		(in thousands of R$)
Liabilities
Current liabilities
Trade accounts payables		632,565		621,179		582,918		581,477		501,555
Loans and financing		3,425,399		2,115,067		1,594,720		2,024,964		2,046,899
Debentures		1,297		—		—		—		—
Derivative financial instruments		596,530		23,819		250,431		281,317		27,152
Taxes payable		243,835		125,847		78,175		56,285		54,525
Payroll and charges		234,192		196,467		165,030		164,782		141,489
Liabilities for assets acquisitions		476,954		83,155		85,748		91,326		79,092
Dividends payable		5,434		180,550		370,998		122		114
Advance from customers		75,159		92,545		514,766		32,058		7,822
Other liabilities		367,313		280,437		187,088		278,243		208,997
Total current liabilities		6,058,678		3,719,066		3,829,874		3,510,574		3,067,645
Non—current liabilities
Loans and financing		27,648,657		10,076,789		12,418,059		12,892,378		11,965,230
Debentures		4,662,156		—		—		—		—
Derivative financial instruments		1,040,170		104,077		221,047		353,814		100,116
Liabilities for assets acquisitions		515,558		502,831		609,107		733,538		635,598
Provision for contingencies		351,270		317,069		246,634		198,559		218,540
Employee benefits		430,427		351,263		339,009		263,141		277,463
Deferred taxes		1,038,133		1,787,413		1,549,563		1,035,663		1,479,235
Share-based compensation plans		124,318		38,320		18,850		42,722		27,619
Other liabilities		37,342		12,756		14,143		35,289		32,878
Total non—current liabilities		35,848,031		13,190,518		15,416,412		15,555,104		14,736,679
Total liabilities		41,906,709		16,909,584		19,246,286		19,065,678		17,804,324
Equity
Share capital		6,241,753		6,241,753		6,241,753		6,241,753		6,241,753
Capital reserves		674,221		394,801		203,714		82,966		85,813
Treasury shares		(218,265	)	(241,088	)	(273,665	)	(288,858	)	(303,725	)
Retained earnings		2,992,590		2,922,817		1,638,620		701,815		1,852,294
Other reserves		2,321,708		2,298,328		2,314,567		2,450,083		2,438,997
Non-controlling interest in subsidiaries’ equity		13,928		—		—		—		—
Total equity		12,025,935		11,616,611		10,124,989		9,187,759		10,315,132
Total equity and liabilities		53,932,644		28,526,195		29,371,275		28,253,437		28,119,456

 

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OTHER FINANCIAL DATA

 

		Year ended December 31,
		2018		2017		2016		2015		2014
		(in thousands of R$, unless otherwise indicated)
Gross margin (1)		48.5	%	38.6	%	33.3	%	39.5	%	26.3	%
Operating margin (2)		37.3	%	31.0	%	13.0	%	30.0	%	16.9	%
Capital expenditures (3)		2,423,698		1,780,302		2,324,338		1,664,898		1,359,178
Depreciation, amortization and depletion		1,563,223		1,402,778		1,403,518		1,419,477		1,216,132
Cash flow provided by (used in):
Operating activities		5,170,850		3,067,859		3,075,539		2,674,785		1,447,602
Investing activities		(21,962,712	)	(1,008,334	)	(3,342,484	)	(2,557,216	)	(1,393,694	)
Financing activities		20,035,049		(2,612,089	)	566,082		(2,601,821	)	(173,651	)

 

OPERATIONAL DATA

 

		As at and for the year ended December 31,
		2018		2017		2016		2015		2014
Number of employees		9,385		7,830		7,483		7,605		7,180
Nominal production (millions of tons)
Pulp		3.5		3.5		3.5		3.4		2.9
Paper		1.3		1.2		1.2		1.2		1.3
Nominal production capacity (millions of tons)
Pulp		3.6		3.6		3.6		3.5		2.9
Paper		1.4		1.4		1.3		1.3		1.3
Sales volumes (thousand metric tons)
Domestic market pulp		298,005		376,502		410,564		455,356		477,801
Export market pulp		2,927,714		3,255,329		3,117,814		2,820,579		2,372,511
Total market pulp		3,225,719		3,631,831		3,528,378		3,275,936		2,850,312
Sales volumes (thousand metric tons)
Domestic market paper		878,374		815,917		826,408		822,941		933,682
Export market paper		377,263		374,190		361,996		403,016		388,777
Total market paper		1,255,637		1,190,108		1,188,404		1,225,957		1,322,459
Total sales volumes market paper and pulp		4,481,356		4,821,938		4,716,782		4,501,892		4,172,771

 

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(1)          The gross margin calculation consists of dividing gross profit by net revenues.

(2)          The operating margin calculation consists of dividing income before financial income and expenses by net revenues.

(3)          Relates to capital expenditures cash invested for the acquisition of property, plant and equipment and intangible assets and biological assets.

 

Special Note Regarding Non-IFRS Financial Measures

 

A non-IFRS financial measure is any financial measure that is presented other than in accordance with all relevant accounting standards under IFRS. We disclose Adjusted EBITDA for Suzano in this annual report, which are considered non-IFRS financial measures in accordance with CVM Instruction 527.  EBITDA is defined by the CVM, as earnings before net financial results, taxes, depreciation and amortization, or EBITDA. We are presenting Adjusted EBITDA in this annual report. Adjusted EBITDA for Suzano is defined as EBITDA as further adjusted to add or exclude, from the amount of equity income, expenses with Fibria’s transaction (the Merger), fair value adjustment of biological assets, complement of provision for variable remuneration, provision for intangible assets — research agreement (Futuragene), provision for wood inventory damaged, provision for losses with sales and scrapping of forest machines, sale of distribution center (Anchieta), provision (reversal) for losses with property, plant and equipment, write-offs, taxes, doubtful accounts and provision of contingencies, land conflict agreement, equity in earnings of associates, land invasion — landless movement (MST — Movimento dos Sem-Terra), reconciliation adjustments, tax credits, write-off of IPI credits — (São Paulo) subsidiary, wood inventory adjustment, issue with genetic material — arrangement leasing — (Vale Florestar), Additional Provision for — Complement — share-based compensation plan (long-term), provision related to PERT (programa de regularização tributária) — tax regularization program, donations and sponsorships, tax review (PIS and COFINS), agreement Valmet, write-off of inventory, windstorm Maranhão, insurance claim (Muruci and Imperatriz).

 

The non-IFRS financial measures described in this annual report are not a substitute for the IFRS measures of net income or other performance measures.

 

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Our management believes that disclosure of Suzano’s Adjusted EBITDA provides useful information to investors, financial analysts and the public in their review of our operating performance and their comparison of our operating performance to the operating performance of other companies in the same industry and other industries. This is because Adjusted EBITDA is generally perceived as more objective and comparable measures of operating performance. For example, interest expense is dependent on the capital structure and credit rating of a company. However, debt levels, credit ratings and, therefore, the impact of interest expense on earnings vary significantly between companies. Similarly, the tax positions of individual companies can vary because of their differing abilities to take advantage of tax benefits and the differing jurisdictions in which they transact business. Finally, companies differ in the age and method of acquisition of productive assets, and thus the relative costs of those assets, as well as in the depreciation method (straight-line, accelerated or units of production), which can result in considerable variation in depreciation and amortization expenses between companies. Therefore, for comparison purposes, our management believes that Suzano’s Adjusted EBITDA is useful as objective and comparable measures of operating profitability because it excludes these elements of earnings that do not provide information about the current operations of existing assets.

 

Moreover, our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same fashion.

 

This non-IFRS financial measure is an important measure used by our management to assess our financial and operating performance. Management used the amount of Adjusted EBITDA The presentation of non-IFRS financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with IFRS. We urge you to review the reconciliations of the non-IFRS financial measures presented.

 

For information on Fibria’s Adjusted EBITDA, please see Fibria’s earnings release for the year ended December 31, 2018, submitted to the SEC on Form 6-K on February 22, 2019.

 

Suzano

 

Adjusted EBITDA (R$ million)		2018		2017
EBITDA Reconciliation
Net income (loss)		319.8		1,821.0
(+/–) Net financial result		4,842.5		1,018.9
(+/–) Income and social contribution taxes		(154.5	)	438.6
(+) Depreciation, amortization and depletion		1,563.2		1,402.8
EBITDA		6,571.0		4,681.3
Expenses with Fibria’s Transaction		126.6		—
Fair value adjustment of biological assets		129.2		(192.5	)
Complement of provision for Variable Remuneration		—		26.5
Provision for intangible assets — Research agreement (Futuragene)		—		18.8
Provision for wood inventory damaged		—		16.3
Provision for losses with sales and scrapping of forest machines		—		14.0
Sale of Distribution Center — Anchieta		—		(31.4	)
Provision (reversal) for losses with property, plant and equipment, write-offs, taxes, doubtful accounts and provision of contingencies		7.4		68.0
Land conflict agreement		—		11.8
Equity in earnings of associates		(7.6	)	(5.9	)
Land invasion - landless movement (MST Movimento Sem Terra)		—		1.9
Reconciliation adjustments		7.6		2.0
Tax Credits		2.9		—
Write-off of IPI credits - (São Paulo) subsidiary		—		0.7
Wood Inventory Adjustment		—		9.6
Issue with genetic material - Arrangement Leasing - Vale Florestar		—		(10.7	)
Additional Provision for — Complement — share-based compensation plan (long-term)		—		15.1
Provision related to PERT (Programa de Regularização Tributária) - Tax Regularization Program		—		2.4
Donations and Sponsorships		—		5.2
Review Tax (PIS and Cofins)		9.5		—
Agreement Valmet		(52.8	)	—
Write-off of Inventory		24.1		—
Windstorm Maranhão		1.6		—
Insurance claim (Muruci and Imperatriz)		(3.1	)	—
Retroactive contributions — Antidumping		—		2.2
Adjusted EBITDA		6,817.8		4,635.3

 

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B.                                     Capitalization and Indebtedness

 

Not applicable.

 

C.                                     Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.                                     Risk Factors

 

We are subject to various risks and uncertainties resulting from changing competitive, economic, political, environmental and social conditions that could harm our business, results of operations or financial condition. The risks described below, although not being the only ones we face are the most important ones according to our ability to identify material risks. Other risks that we presently believe are not material could also adversely affect us.

 

Risks Relating to the Merger

 

The expected benefits from operating as a combined enterprise with Fibria may not be achieved.

 

The integration of two large companies, such as Suzano and Fibria, presents significant challenges. We cannot provide any assurance that we will be able to integrate our and Fibria’s operations without encountering difficulties, which may include, among other things, the loss of key employees, diversion of management attention, the disruption of our respective ongoing businesses or possible inconsistencies in standards, procedures and policies. There can also be no assurance as to the extent to which the synergies anticipated or expected from the Merger, or as to the timing for their realization, or as to the expenses that will be incurred in connection with realizing synergic benefits from the Merger. In particular, we may not be able to realize anticipated cost savings from the combination of the companies’ production facilities, or anticipated synergic benefits from the joint acquisition of raw materials, sharing of improved production techniques and integration of administrative departments. If we do not realize the expected benefits or synergies from the Merger, our results of operations and financial condition and the trading price for our securities may be adversely affected.

 

We expect to record a significant amount of goodwill and intangible assets as a result of the Merger, which may be subject to impairment under certain circumstances in future periods in accordance with applicable accounting regulations.

 

We expect to recognize a significant amount of goodwill and record several intangible assets as a result of the Merger. Prior to the consummation of the Merger, we performed a preliminary analysis of the fair market value of the assets of Fibria to be acquired and liabilities to be assumed in the Merger. We currently estimate a total preliminary goodwill of R$7,897.1 million in connection with the Merger. For further information, see note 32.(i) to our audited consolidated financial statements. Under IFRS, goodwill and intangible assets with undetermined useful life are not subject to amortization and are tested annually to identify possible need for impairment, or more often if any event or circumstance indicates that an impairment loss may have been incurred. Other intangible assets that have determined useful lives are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment whenever there is an indication of impairment. In addition, under IFRS we are required to perform an impairment analysis of assets with undetermined useful life when the book value of our net assets exceeds our market capitalization. As a result, we may be required to recognize an impairment of goodwill or other intangible assets in future periods if required under IFRS, which could adversely affect our financial condition and results of operations or the trading price of our securities.

 

Following completion of the Merger, we are more leveraged than we were prior to the Merger, and a material portion of our cash flow may need to be used to service our debt obligations.

 

As of December 31, 2018, Suzano had R$35.7 billion of consolidated total debt and Fibria had R$20.7 billion of consolidated total debt. Accordingly, after giving effect to the completion of the Merger, Suzano will have a significantly higher amount of consolidated total debt, taking into consideration our and Fibria’s pre-Merger consolidated debt and the additional debt incurred by us to finance the Merger. We are subject to the risks normally associated with significant amounts of debt, which could have important consequences to

 

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investors. Our indebtedness could, among other things: (i) require us to use a substantial portion of our cash flow from operations to pay our obligations, thereby reducing the availability of our cash flow to fund working capital, operations, capital expenditures, dividend payments, strategic acquisitions, expansion of our operations and other business activities; (ii) increase our vulnerability to general adverse economic and industry conditions; (iii) limit, along with financial and other restrictive covenants in our debt instruments, our ability to borrow additional funds or dispose of assets; and (iv) place us at a competitive disadvantage compared to our competitors that have less debt. We may also need to refinance all or a portion of our debt on or before maturity, and we may not be able to do this on commercially reasonable terms or at all.

 

Additionally, a default under our financial agreements that is not waived by the relevant creditors may result in an acceleration of the maturity of the outstanding balance of such debt, and may also accelerate the maturity of other debt that benefits from cross-default or cross-acceleration provisions. For more information, see Item 5. “Operating and Financial Review and Prospects —Indebtedness.” If such events were to occur, our financial condition and share price could be adversely affected.

 

Risks Relating to the Pulp and Paper Industry

 

Our products’ prices are greatly affected by international market prices, which vary depending on a number of factors that are beyond our control.

 

Pulp markets are typically cyclical, and our pulp prices follow international market prices, which are determined by supply and demand, global pulp production capacity and global economic conditions. Such prices can also be affected by exchange rate fluctuations between the currencies of main producing and consuming countries, movement of inventories, diverging price expectations, business strategies adopted by other producers and availability of substitutes for our products, among others. All of these factors are beyond our control and may have a significant impact on the prices for pulp and, consequently, on our operational margins, profitability and ROIC. Fluctuations in pulp price may lead us to adopt changes in our commercial strategy or production, which also may adversely affect our financial condition and results of operation.

 

Paper prices are also determined by supply and demand conditions in the markets in which they are sold, and are affected by various factors, including the fluctuation in pulp prices and the specific characteristics of the markets in which we operate.

 

We cannot assure that pulp and paper market prices and demand for our products will remain favorable to us, and any adverse price or demand fluctuations, which may occur rapidly in our markets, could adversely affect our results of operations and financial conditions and our ability to operate our plants in an economically viable manner.

 

We are highly dependent on our planted forest areas for the supply of wood, which is essential to our production processes, and any damage to our forest areas may adversely affect us.

 

Most of the wood used in our production processes is supplied by our own forestry operations, which include planted forest areas located in close proximity to our production facilities. The wood market in Brazil is very limited, as most pulp and paper producers utilize wood extracted from their own planted forests to meet their wood requirements. In addition, in acquiring land for our forests, we compete with cultivators of other crops, which could ultimately raise the purchase price of land or make it more difficult to hire third parties to cultivate the eucalyptus required to meet our production needs. Still, our planted forests are subject to natural threats, such as drought, fire, pests and diseases, which may reduce our supply of wood or increase the price of wood we acquire.

 

Our planted forest areas are also subject to other threats, considering their wide territorial coverage and proximity to a significant number of neighbors and local communities, including loss of possession due to social unrest or squatter invasion, theft of our timber, or arson, which may result in real damage to our planting and transit areas and may significantly adversely affect our results.

 

In addition, the physical effects of climate change may materially and adversely affect our operations, for example by changing air temperature and water levels, and subjecting us to unusual or different weather-related risks. Our forest areas are located in regions which have ideal climate conditions for a short growing cycle. Any climate changes that negatively affect such favorable climate conditions in Brazil may adversely affect the growth rate and quality of our plantations, or our production costs. Although we cannot predict the

 

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impact of changing global climate conditions, any such occurrences may increase our liabilities and capital expenditures and adversely affect our business, financial condition and results of operations.

 

Drought in some regions of Brazil, resulting in water scarcity and related rationing, may adversely affect our business and results of operations.

 

Some regions might have drought conditions during some seasons of the year, which could result in acute shortages of water and/or implementation of rationing to restrict usage. Although some of our units are located in the affected areas, this would not affect all of our operations simultaneously. Suzano units have processes in place for the efficient use of water. In order to maintain and improve our units’ efficiency in water usage, our operations teams periodically review such processes. We also have a contingency plan in place for the units that could possibly be affected by water shortages. Nevertheless, we cannot assure that severe droughts or governmental measures to address drought conditions will not have an impact on our units’ operations, with a resulting adverse effect on our business and results of operations.

 

We face significant operational risks that can result in the partial shutdown of our operations, which may adversely affect our financial condition and results of operations.

 

We face operational risks that may result in partial or temporary suspension of our operations and in loss of production. Such outages may be caused by factors associated with equipment failure, accidents, fires, strikes, weather, exposure to natural disasters, electricity power outages and chemical product spills, among other operational and environmental hazards. The occurrence of these events may, among other impacts, result in serious damage to our property, assets and reputation, a decrease in production or an increase in production costs, any of which may adversely affect our financial condition and results of operations.

 

During the normal course of our business, we depend on the continuous availability of logistics and transportation networks, including roads, railways, warehouses and ports, among others. Such operations may be disrupted by factors beyond our control, such as social movements, natural disasters, electricity shortages and labor strikes. For example, the general strike of truck drivers in May 2018 throughout Brazil resulted in a temporary suspension of our production operations over some days, which in turn caused losses in production of our pulp and paper products. In order to end the strike, the Brazilian federal government made several concessions to the truck drivers, which may have an adverse effect on our costs of inbound and outbound logistics. Any interruption in the supply of inputs for the operation of our industrial and forestry units or in the delivery of our finished products to clients could cause a material adverse impact on our results of operations.

 

We have entered into contracts with third parties to provide transportation and logistics services. The early termination of these contracts or our inability to renew them or negotiate new contracts with other service providers with similar conditions could adversely affect our financial and operating condition. In addition, the majority of our suppliers of transportation operate under concessions granted by the Brazilian government and the loss or non-renewal of such concessions may also have a material adverse effect on our results of operations and financial condition.

 

We depend on few suppliers for certain raw materials, such as fuel oil, caustic soda, bleached chemo thermo mechanical pulp (“BCTPM”), natural gas and paper and pulp industrial capital goods, its services and maintenance.

 

We have few sources for certain raw materials that are essential for the production of pulp and paper, including fuel oil, caustic soda, BCTPM, natural gas and third-party industry technology (maintenance). We enter into medium and long term supply agreements with such suppliers. Any significant reduction in the supply or increase in prices, on behalf of the relevant supplier, of any of these raw materials could adversely affect our products’ mix, margin or availability and, consequently, our results of operations.

 

Investments by us or our competitors to enhance pulp production capacity in the future may adversely affect the market price for our products.

 

New capacity projects may create an imbalance between supply and demand that may cause a reduction in pulp prices. Investments in new capacity may have an impact on pulp prices and, consequently, on our financial condition or results of operations.

 

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We face significant competition in some of our lines of business, which may adversely affect our market share in the pulp and paper industries and our profitability.

 

The pulp and paper markets are extremely competitive. We face substantial competition in both domestic and international markets from a large number of companies, some of which have extensive access to financial resources and low capital costs. In the domestic market, we face competition from national products, produced by companies of Brazilian and international groups, and imported products. In the international market, we compete against companies with large production and distribution capacities, significant consumer base and great variety of products.

 

Pulp imports do not presently represent serious competition for us in the domestic market due to the low logistical and production costs of local producers. However, the oversupply of coated paper in the world market, the antidumping measures adopted in other countries and the use of imported coated paper for alternative purposes, especially during periods of prolonged appreciation of the real against the U.S. dollar, may increase competition in Brazil from producers of imported paper. Additionally, if the Brazilian federal government were to decrease import taxes, or in the event of sustained appreciation of the real against the U.S. dollar, competition in Brazil from international producers may increase. The occurrence or continuation of any of the foregoing events could adversely affect us.

 

Additionally, the pulp and paper markets are served by numerous companies located in different countries. If we are unable to remain competitive against these producers in the future, our market share may be adversely affected.

 

Liquidity restriction periods may increase our financial costs, limit the terms or even preclude the funding in the market, which may adversely affect our operations.

 

Brazilian paper and pulp companies have made significant investments during the last few years in order to compete more efficiently and on a larger scale in the international market. This trend towards consolidation has enhanced the need for resources and diversification of financing sources among national and foreign financial institutions.

 

In this context, we depend on third-party capital to conduct our business, by means of financing transactions to support our investments and working capital. In liquidity restriction periods, such as the ones of 2008 and 2009 that occurred due to the international financial crisis, credit lines may become excessively short, expensive or even unavailable. Under these circumstances, there is a higher risk of not achieving success in financing and refinancing transactions, meaning that there is a higher possibility of failure in obtaining financing in the market in order to pay down existing indebtedness, as well as a higher risk of raising these funds at an elevated cost, which may adversely affect our results of operations or financial condition.

 

More stringent environmental regulation could increase our expenditures, which may adversely affect our results of operations or financial condition.

 

Our activities are subject to extensive environmental regulation, including in relation to gas emissions, liquid effluents and solid residues disposal, reforestation and odor control, and maintenance of a land reserve and permanent preservation areas. Furthermore, our activities, both industrial and forestry, require periodic renewal of environmental permits.

 

Environmental standards that are applicable to us are issued at the federal, state and municipal levels, and changes in the laws, rules, policies or procedures adopted in the enforcement of the current laws may adversely affect us. In Brazil, violations of environmental laws, regulations and authorizations could result in administrative, civil or criminal penalties for us, our management and our employees, including fines, imprisonment, interruption of our activities and dissolution of our corporate entity.

 

Governmental agencies or other competent authorities may provide new rules or additional regulations even stricter than the ones in force, or they may pursue a stricter interpretation of the existing laws and regulations, which could require us to invest additional resources in environmental compliance or to restrict our ability to operate as currently done. Additionally, noncompliance with or a violation of any such laws and regulations could result in the revocation of our licenses and suspension of our activities or in our responsibility for environmental remediation costs, which could be substantial. Moreover, failure to comply with environmental laws and regulations could restrict our ability to obtain financing from financial institutions.

 

In December 2015, several countries (including Brazil) signed the Paris Agreement, a new global environmental agreement adopting the Intended Nationally Determined Contributions, or “INDCs”, as the

 

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measures taken to reduce its emissions after 2020. The INDC that applies to Brazil provides for an increase in the share of sustainable biofuels and other sources of renewable energy in the Brazilian national energy mix, as well as zero deforestation, reforestation, forest restoration and enhancement of the native forest management. We may be materially affected by the regulation related to greenhouse gases and climate change, which causes an increase in capital expenditures and investments to comply with such laws, and indirectly, by changes in prices for transportation, energy and other inputs. In addition, the physical effects of climate change also may materially and adversely affect our operations, such as by changing air temperature and water levels, and subjecting us to unusual or different weather related risks. Both the regulations related to climate change and the changes in existing regulations, as well as the physical effects of climate change generally, could result in increased liabilities and capital expenditures, all of which could have a material adverse effect on our business and results of operations.

 

Failure to obtain or maintain the necessary permits, licenses and concessions could adversely affect our operations.

 

We depend on the issuance of permits, licenses and concessions from various governmental agencies in order to undertake certain activities. In order to obtain licenses for certain activities that are expected to have a significant environmental impact, certain investments in conservation are required to offset such impact. Furthermore, we have licenses to operate our plants, which are usually valid for five years from the date of issuance and may be renewed for equal periods. The operational licenses require, among other things, that we periodically report our compliance with emissions standards set by environmental agencies.

 

Failure to obtain, renew or comply with our operating licenses as applicable may cause delays in our deployment of new activities, increased costs, monetary fines or even suspension of the affected activity.

 

Global or regional economic conditions and events may adversely affect the demand for and the price of our products.

 

Demand for pulp and paper is directly related to the growth of the world economy and economic conditions. Currently, Europe, China and North America are the main consumer markets of the industry. According to market statistics (PPPC), Chinese demand represented 34% of the global market pulp demand in 2018 and 2017 and this demand has increased at an compound annual growth rate of 10.0% since 2005, above the global average of 2.4%. The recent investments in paper and board machines in China have been boosting pulp demand in China; however, the volatility of Chinese demand due to speculative buying movement is a key risk for any short-term demand forecast.

 

Any slowing of economic growth in Europe, China and North America could adversely affect the price and volume of our exports and thus impact our operating performance and our financial results until such excess volume of supply can be allocated to other markets.

 

Our exports are subject to special risks that may adversely affect our business.

 

We export to different regions of the world, which makes us subject to special political and regulatory risks, including currency controls in countries where we have payments receivable, possible formal or informal trade barriers and incentive policies and subsidies favoring local producers in many regions.

 

Thus, our future financial performance will depend on the economic, political, environmental and social conditions of our main export markets (Europe, Asia and North America). Thus, our future financial performance will depend on the economic, political and social conditions of our main export markets (Europe, Asia and North America). As a result, factors that are beyond our control include:

 

·                   imposition of barriers to trade or the granting of commercial incentives in favor of local producers;

 

·                   changes in economic policies and/or conditions of the countries to which we export, which may affect our export capacity and, consequently, our business and operating results;

 

·                   logistics costs, including disruptions in shipping or reduced availability of freight transportation;

 

·                   significant fluctuations in global demand for pulp products, which could impact our sales, operating income and cash flows;

 

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