Suzano Papel e Celulose S.A.
Financial Statements at
December 31, 2017 with Independent Auditor’s Report.
(A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE)
Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
MANAGEMENT REPORT
MESSAGE FROM MANAGEMENT A year that will be forever remembered in the history of Suzano. That is how we see 2017. In addition reporting its highest EBITDA ever during the year, Suzano attained a whole new level of governance with its migration to the Novo Mercado listing segment and grew even larger with its investments and entry into a new business segment with the startup of its tissue mills. On the financial front, Suzano obtained an investment grade credit rating, rewarding its efforts to deleverage and deliver solid cash generation. These and other achievements were accompanied by continued progress on its three strategic pillars (Structural Competitiveness, New Businesses and Redesigning the Industry) and by a favorable international scenario. In the pulp business, the healthy environment was supported mainly by demand from Asia, unscheduled shutdowns at certain producers and conversions not anticipated by the market. Fundamentals enabled the Company to increase by more than US$250/ton the price of its commodity over the year, which was fully implemented in all regions. Suzano also remained focused on its strategic pillar of Structural Competitiveness, seeking to improve every day and to optimize its cost and expense structure. Pulp cash cost has followed a downward trend in the last twelve months, and the Company has kept unchanged its target cash costs for 2018 and for 2021-22. In 2017, in the paper business, the Brazilian market continued to suffer pressure from the macroeconomic scenario. Despite this less favorable environment, the Company delivered important advances in its Suzano Mais Program that enabled it to keep its margins stable, which also benefitted from the flexibility to allocate volumes between the domestic and export markets. Furthermore, in the second half of the year, the Company began producing and selling tissue paper produced at its units in Mucuri, Bahia and in Imperatriz, Maranhão, announced the acquisition of tissue producer Facepa – Fábrica de Papel da Amazônia S.A. and launched its first brand of toilet paper, Max Pure®. In 2018, the company will launch sales of finished goods in key markets of Brazil’s North and Northeast regions. The expansion of the Company’s product portfolio creates sustainable value, maximizes its asset base and narrows its relationship with end consumers. Financial discipline made possible liability management operations that helped to lengthen its debt maturity profile and reduce its debt cost. Important capital market transactions in the year included the 30-year Bond issue, the re-tapping of the 2026 and 2047 Bonds and the repurchase of a significant portion of the 2021 Bonds. Suzano’s performance in the year was recognized by Fitch Ratings, which upgraded its credit rating to ‘BBB-’ (investment grade), which reflects, among other things, the deleveraging process driven by strong cash generation. Suzano also concluded the capacity expansion project at the Imperatriz Unit, the installation of a new Cut Size line, a new Crystallizer and a new Wastewater Treatment Plant at the Mucuri Unit. All projects were delivered on-time and on-budget. A milestone in Suzano’s history and in the capital markets was its migration to the Novo Mercado listing segment of the São Paulo Exchange (B3). Reinforcing the commitment and long-term vision of the controlling shareholders, the migration was completed without any premium for control and left the Company even better prepared for new growth cycles.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Other highlights included Suzano garnering first place in the ranking of the Best Companies to Start a Career in 2017, sponsored by the magazine Você S/A, and the in-house Engagement Survey, which confirmed the Suzano’s team identification with the Company. The survey showed that 95% of the employees are proud to work at Suzano, a figure that is much higher than the industry average, and that 9 out of 10 employees feel personally realized in their work. Sowing care to harvest pride, these very same employees participated in the process of revealing Suzano’s Purpose: Pioneers Cultivating Life. In 2017, the Company blazed new trails to deliver solid and consistent results, achieved advances in its strategic pillars and cultivated life by consolidating its corporate culture, growing as a team, sharing value with all stakeholders and building the foundations for the future. For 2018, Suzano continues to open up new growth paths, while always observing its capital allocation criteria: ROIC, Scalability, Difficult to Replicate and Competitive Advantage. Suzano will continue to prioritize and seek the most profitable projects with the potential to create value not just for its shareholders, but for everyone in its value chain. For this 2017, the Management of Suzano thanks its clients, investors, suppliers, the communities with which it interacts, partners and employees, who helped make this year one that will go down in its history. In 2018, Suzano will continue to move forward, preserving its Strong-and-Kind way of doing things, Pioneering and Cultivating Life.
The Management.
OVERVIEW Recognized for innovation and a pioneering spirit for over 94 years, Suzano is a 100% Brazilian company that is a global reference in the development of products made from planted eucalyptus forests and one of the largest vertically integrated producers of eucalyptus pulp and paper in Latin America. Its product portfolio includes coated and uncoated printing and writing paper, paperboard, tissue paper, market pulp and fluff pulp. Our products come from industrial units located in Suzano, Rio Verde and Limeira in the state of São Paulo; Mucuri in the state of Bahia; and Imperatriz in the state of Maranhão. Our mills have annual pulp and paper production capacity of 5.0 million tons. In addition to its registered offices in Salvador, Bahia and headquarters in São Paulo, the Company has representative offices in China and the United Kingdom, as well as subsidiaries in the United States, Switzerland, Argentina and Austria. Suzano is one of the largest companies with a structure for distributing paper and printing products in South America. At the end of 2017, it employed over 8,000 people and had 12,000 outsourced workers. In Brazil, Suzano’s forestry base spans approximately 1.2 million hectares, with 587,000 hectares set aside for preservation on own and leased areas in the states of São Paulo, Bahia, Espírito Santo, Minas Gerais, Piauí, Tocantins, Pará and Maranhão. The owned forests hold international certifications that attest to the Company's commitment to sustainable management and to the environment.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
STRATEGY AND INNOVATION Suzano’s goal is to consolidate its position as one of Brazil’s most profitable, innovative and competent business organizations producing goods from renewable resources. This strategy, which aims to create sustainable value, is based on three pillars: Structural Competitiveness, Adjacent Businesses and Reshaping of the Industry. In Structural Competitiveness, Suzano strives to continually improve all of its operations, with the ambition of becoming a reference in each of its market segments. To achieve this, it invests in modernizing and streamlining assets to reduce unit production costs and to increase the productivity of its forestry, industrial and administrative operations, while continuing to analyze and implement actions to capture operating efficiency gains. The main initiative in this pillar is the retrofitting and debottlenecking of the Imperatriz Unit in Maranhão state, which was concluded in the second half of 2017. The investment enables it to lower its production cash cost by reducing the consumption of raw materials and diluting fixed costs, and consequently will help the Company move towards what it considers its optimum cost structure, a target set for the period 2021-22. In Adjacent Businesses, Suzano opened new avenues to the future by investing in innovation and developing businesses that have scalability and support diversification and value creation. That is the case of the startup of the production and sale of jumbo rolls of tissue paper, the opening up of new markets to Eucafluff®, the world’s first eucalyptus-based fluff pulp, and lignin, a green chemical platform that with the capacity to substitute the use of fossil-based raw materials. In the case of lignin, commercial production is slated for early 2018. In the pillar Reshaping of the Industry, Suzano continues to explore new paths and to seek opportunities for reducing its business exposure to market volatility.
FORESTRY BUSINESS UNIT Suzano’s forestry assets are spread across eight Brazilian states, each with a different climate, soil type and genetic heritage. This complexity of scenarios requires a high-level of forestry management with a permanent focus on sustainability and reducing costs. And that is precisely what the Company has been doing, by constantly improving its forestry processes, seeking new technologies and better management practices. In addition, Suzano’s commitment to sustainable stewardship and to the environment enables it to hold rigorous international certifications that attest to the world-class practices it adopts. Important advances were made in reducing forest formation cost and wood cash cost, which is fundamental for an industry based on planted eucalyptus forests. Mechanizing and automating the silviculture operations, capturing productivity gains, shortening the average supply radius and optimizing the wood supply mix were some of the initiatives adopted to further improve the Company’s Structural Competitiveness. New lease agreements in the states of São Paulo and Maranhão are some examples of the strategy to substitute distant areas with cultivation zones that are more productive and located closer to mills, which reduces the average supply radius and makes the operations even more sustainable. The ongoing Silviculture Structural Competitiveness Program (CESI) has been able to reduce costs in all forest formation activities by mechanizing and automating agricultural operations. The adoption of precision silviculture in certain activities has brought significant results in recent quarters. The main improvements include auto- piloted tillage activities and georeferenced planting, which ensures precisely parallel planting rows and consequently optimizes soil use. Other highlights in the year were the investments made in the nursery in Alambari, São Paulo to automate seedling selection, and the development of the mechanized continuous planter, with a focus on uniform plantations and boosting yields. With an eye on the long term, Suzano has dedicated efforts to increasing productivity, which has positive impacts on its own wood production costs and on total planted area. Genetic enhancement and biotechnology played key roles in leveraging gains in forestry yields. In addition to genetic enhancement, forestry technology also has created the pillars for accelerating the productivity program by creating natural management units and implementing ecophysiological modelling.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
PULP BUSINESS UNIT Recent data from the “World 20” report published by the Pulp and Paper Products Council (“PPPC”) show that market pulp shipments grew by 3.3% in 2017 compared to 2016, to 50.6 million tons. In the same period, eucalyptus pulp shipments increased 4.1% to 21.0 million tons (+828,000 tons vs. 2016), driven by higher demand from China (+414,000 tons vs. 2016). Suzano’s pulp production and sales volumes reached record levels in 2017, with 3.5 million produced (+2.0% vs. 2016) and 3.6 million tons sold (+2.4% vs. 2016). The higher production volume was mainly due to the conclusion of the debottlenecking of production at the Imperatriz Unit in Maranhão state, whose annual installed capacity increased from 1.5 million to 1.65 million tons after the project. In 2017, net revenue from Suzano’s pulp sales amounted to R$ 6.9 billion, advancing 12.2% on 2016, due to the higher international pulp prices, which was partially offset by the stronger Brazilian real. Net revenue from pulp exports in 2017 came to R$ 6.3 billion, up 15.4% from the previous year. The share of pulp revenue derived from exports was 91.0%, while the domestic market accounted for 9.0%. Suzano’s revenue from pulp sales was distributed as follows in 2017: 46% from Asia, 29% from Europe, 14% from North America and 1.2% from Latin America. With regard to distribution for final applications, 62% of pulp sales were allocated to the production of paper for sanitary purposes, 15% for printing and writing papers, 14% for special papers and 7% for packaging. The average net pulp sales price in 2017 was US$598/ton, increasing 19.9% from 2016. In Brazilian real, the average net price was R$ 1,908/ton, or 9.7% higher than in 2016. In addition to the improvement in the global pulp market, the Company registered a significant decrease in its production cash costs. In 2017, pulp cash cost ex-downtime was less than R$ 600/ton, down 3.8% from the prior year and the lowest level since 2014.The increase in cash cost between 2014 and 2017 was 12%, below the inflation registered in the same period (21%). In 2017, the pulp business unit received important investments, such as: construction of the new Wastewater Treatment Plant and the installation of a new Crystallizer which allows the reduction of chemical consumption, both at the Mucuri Unit. At the Imperatriz Unit, its completed the debottleneck and increased production capacity from 1.5 million to 1.650 million tons, thereby increasing efficiency and diluting fixed costs. All projects were concluded on-time and on-budget.
PAPER BUSINESS UNIT According to data from the Forestry Industry Association (“IBÁ”), Brazil’s domestic paper sales fell 1.2%, while paper imports rose 20.8%. Suzano’s paper production amounted to 1.15 million tons, down 2.8% compared to 2016, explained, by the higher production of fluff pulp on the flex machine. Paper sales amounted to 1.18 million tons, down 1.3% from the volume sold in 2016, reflecting the lower production volume. Domestic sales amounted to 806,000 tons in 2017, decreasing 3.3% from the previous year, while paper exports grew 3.4% to 374,000 tons in the year. In 2017, Suzano's net revenue from paper sales was R$ 3.6 billion, down 3.0% on the prior year. Of this revenue, 71% came from domestic sales and 29% from exports. The share of Suzano's total revenue from paper sales in 2017 was 88% in South and Central America (including Brazil), 7% in North America and 5% in other regions. Net revenue from sales in the domestic market decreased 2.0% compared to 2016, impacted mainly by the macroeconomic scenario in Brazil, while net revenue from exports fell 5.4%, reflecting the weaker international paper price. The average net paper price in 2017 was R$ 3,074/ton, 1.7% lower than in 2016. In the domestic market, the average net paper price was R$ 3,184/ton, increasing 1.4% in relation to 2016. The average net price of paper exports stood at US$88/ton, stable compared to 2016. In Brazilian real, the average price in the international market was R$ 2,839/ton, down 8.5% from 2016. In a scenario still marked by the caustic macroeconomic scenario, we continued to benefit from the impacts of the Suzano Mais program, which essentially strengthens our relations with those at the end of our value chain; in other words, we continue to strengthen relations with end clients. In 2017, we served over 32,500 clients and
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
registered over 188,000 incoming/outgoing phone calls per month. We also successfully allocated volumes between the domestic and international markets, taking advantage of the Company’s flexibility.
ECONOMIC AND FINANCIAL PERFORMANCE
Results The consolidated financial statements were prepared and are presented in compliance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the accounting practices adopted in Brazil (BR GAAP), including the pronouncements issued by the Accounting Pronouncements Committee (CPC).
Net Revenue The Company's net revenue in 2017 amounted to R$ 10.5 billion, advancing 6.5% from R$ 9.9 billion in 2016, supported by the higher hardwood pulp list price (average FOEX in Europe in the year of US$819 vs. US$696 in 2016) and by the stronger sales volume. In 2017, Suzano set new records for its total pulp and paper sales volume 4.8 million tons, compared to 4.7 million tons in 2016. These gains were partially offset by the stronger Brazilian real and by the lower paper export price in the local currency.
Cost of Goods Sold (COGS) Cost of goods sold in 2017 amounted to R$ 6.4 billion, down 1.9% from R$ 6.5 billion in 2016. Unit COGS in 2017 was R$ 1,345/ton, compared to R$ 1,391/ton in 2016. The 3.3% decrease lagged inflation in the period (+3.0%) and attests to the Company's capacity to neutralize the effects from inflation on its cost structure.
Gross Profit As a result of the aforementioned factors, gross profit in 2017 amounted to R$ 4.1 billion, increasing 23.0% from R$ 3.3 billion in 2016. Selling and Administrative Expenses Selling expenses amounted to R$ 430.8 million in 2017, up 5.4% from R$ 408.8 million in 2016. Selling expenses as a ratio of net revenue stood at 4.1%. Administrative expenses amounted to R$ 529.0 million in 2017, increasing 23.9% compared to 2016, due to higher expenses with variable compensation. Administrative expenses as a ratio of net revenue stood at 5.0%.
Other Operating Income/Expenses Other operating expenses, net stood at R$ 140.5 million in 2017, and were affected primarily by the adjustment to fair value of biological assets, which amounted to R$ 192.5 million (non-cash). The adjustment is mainly related to the higher gross wood price in the states of Maranhão and Pará, which was partially offset by the reduction in forest productivity, as well as by other operating and economic impacts, such as changes in planted area, inflation, discount rate, future costs with forest formation, etc.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Adjusted EBITDA Cash generation, as measured by EBITDA adjusted for non-recurring items, amounted to R$ 4.6 billion in 2017, up 18.2% from the prior year. The growth in Adjusted EBITDA is explained by the higher pulp list price, increased pulp sales volume and cost discipline, with these effects partially neutralized by the stronger BRL and lower price of paper exports. Adjusted EBITDA per ton was R$ 962/ton in 2017, up 16.4% from the prior year.
Net Financial Result The net financial result was an expense of R$ 1.0 billion in 2017, compared to the net financial income of R$ 1.1 billion in 2016. The result mainly reflects inflation adjustment, exchange variation and the gain/loss from derivatives. Inflation adjustment and exchange variation generated a negative impact on the result for 2017 of R$ 179.4 million, compared to the positive impact of R$ 1.4 billion in 2016. Contributing to this result was the effect from exchange variation on balance sheet exposure between the opening and closing balances of the year, with an accounting effect on the mark-to-market adjustment of the portion of debt in foreign currency, though with cash effects limited only to debt maturities or amortizations. Derivate operations recorded a gain of R$ 73.3 million in 2017, compared to a gain of R$ 528.8 million in 2016. The net financial expense stood at R$ 912.7 million, up 14.8% from the net financial expense recorded in 2016. Excluding non-recurring effects from debt prepayments, the net financial expense was R$ 748.9 million, down 5.7% from the expense recorded in 2016. This performance is mainly explained by the lower leverage ratio and by liability management operations, which reduced the cost of debt.
Income Tax and Social Contribution Income tax and social contribution in fiscal year 2017 amounted to R$ 431.6 million, compared to R$ 726.2 million in 2016. In 2017, the Company disbursed R$ 38 million for tax payments. The amount is substantially lower than that reported in the financial statements, due to tax benefits enjoyed by the Company. Net Income (Loss) As a result of the aforementioned factors, the Company recorded net income of R$ 1.8 billion in 2017, up 6.8% from the net income of R$ 1.7 billion in the previous year.
Debt Gross debt on December 31st, 2017 amounted to R$ 12.2 billion, composed of 82.7% long-term maturities and 17.3% short-term maturities. Debt denominated in foreign currency accounted for 71.7% of the Company's total debt, while debt denominated in local currency accounted for the remaining 28.3%. The percentage of foreign- denominated debt, considering the adjustment for derivatives, was 78.5%. Suzano contracts foreign-denominated debt as a natural hedge, since a significant portion of its revenue is derived from exports. This structural exposure allows it to contract export financing in USD to match financing payments with receivable flows from sales. In 2017, the average cost of debt in Brazilian real was 6.9% p.a. or 99.6% of CDI, and in U.S. dollar was 5.1% p.a. The average maturity of consolidated debt ended the year at 84 months. On December 31st, 2017, net debt amounted to R$ 9.5 billion (US$2.9 billion). Net debt in foreign currency, considering the adjustment of derivatives, accounted for 100% of total net debt on December 31st, 2017. The net debt/Adjusted EBITDA ratio stood at 2.1 times.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Suzano actively and expressly demonstrates its commitment to deleveraging, ensuring sustainable debt levels and adopting structures and costs that are adequate and efficient considering its market position and operating and managerial capacity. The Company successfully concluded several liability management operations in the year, especially through operations in the capital markets, such as: issue of 30-year bonds (US$300 million), re-tapping of the 2026 and 2047 Bonds (US$200 million), repurchasing a significant portion of the 2021 Bonds (US$456 million) and prepaying liabilities (US$235 million and R$ 550 million) not aligned with the Company’s current debt cost and maturity profile.
RATING During 2017, Suzano attained an investment grade credit rating, after its rating was upgraded from ‘BB+’ to ‘BBB-’ by Fitch Ratings on the global scale, with a stable outlook. Standard & Poor’s assigned a ‘BB+’ rating and changed its outlook from stable to positive. Moody’s assigned a ‘Ba1’ rating and changed its outlook from stable to negative, which was solely due to downgrade in Brazil’s sovereign rating.
INVESTMENTS Investments amounted to R$ 1.8 million in 2017, of which R$ 1.1 billion was allocated to industrial and forestry maintenance. Investments in Structural Competitiveness and Adjacent Businesses projects amounted to R$ 490 million and were allocated mainly to the debottlenecking project at the Imperatriz Unit in Maranhão and to the Tissue projects in Maranhão and Bahia. Other investments amounted to R$ 166 million, which was mainly allocated to the following projects: installation of a new Cut Size line, new Crystallizer and new Wastewater Treatment Plant in Mucuri, Bahia.
OPERATING CASH GENERATION AND ROIC¹
ROIC (R$ million) 2017 2016
Adjusted EBITDA 4,615 3,906
Sustaining CAPEX 1,100 1,158
Cash Taxes² 38 12
Capital Employed 23,957 23,076
ROIC1 (%) 14.5% 11.9%
¹ ROIC = (Adjusted EBITDA – Sustaining Capex – Cash taxes) / Capital Employed. | ² Income and Social Contribution taxes Suzano’s operating cash generation (Adjusted EBITDA less Sustaining Capex) amounted to R$ 3.5 billion in 2017, up 27.9% from R$ 2.7 billion in 2016 and the highest amount ever recorded by the Company. The variation compared to the previous year is explained by the increase in Adjusted EBITDA, due to the higher pulp list price, stronger pulp sales volume and cost discipline, with these effects partially neutralized by the stronger Brazilian real and lower paper export price in the local currency.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
CAPITAL MARKETS In 2017, the Company solidified its commitment to cultivating the highest governance standards by migrating to the Novo Mercado listing segment of the São Paulo Exchange (B3 - Bolsa Brasil e Balcão). With this migration, all preferred shares were converted into common shares at the ratio of 1:1, with all shares now entitled to voting and tag-along rights. The migration was approved unanimously by the Shareholders Meeting. On December 31st, 2017, the Company’s capital stock was represented by 1,105,826,145 common shares (SUZB3) traded on B3, of which 13,842,004 were treasury shares. The Company’s shares ended the year quoted at R$ 18.69 per share. In 2017, the average number of trades per day in our stock was 11,300 and our average daily financial trading volume was R$ 58.9 million. Suzano stock (SUZB3) is a component of the Bovespa Index (Ibovespa) and the Brazil Index (IBrX-50).
DIVIDENDS Suzano’s Bylaws establish a minimum mandatory dividend equivalent to the lowest amount between 25% of net income after constitution of legal reserves for the fiscal year or 10% of operating cash generation in the respective fiscal year.
In 2017, Suzano distributed R$ 370.8 million in dividends related to fiscal year 2016 and R$ 199.8 million of interim dividends in the form of interest on equity related to fiscal year 2017. For fiscal year 2017, the Company's Management will propose to the Shareholders’ Meeting the payment of dividends of R$ 380.1 million, with distribution in 2018, from which will be discounted the amounts of interest on equity prepaid in 2017, in the amount of R$ 199.8 million, therefore leaving a balance of dividends payable, in 2018, of R$ 180.3 million.
SUSTAINABILITY Consistent with the construction and publication of Suzano’s Purpose, sustainability is considered the foundation of our entire business model. Supported by corporate governance mechanisms and adequate practices, we assess the impact of our activities and undertake commitments with our stakeholders that fully address environmental, social and economic aspects. Since natural resources and healthy relations with the parties with which we interact are the foundation of our Company’s perpetuity, we understand the growing importance of seeking out the best people and environmental practices as well as of the reach of our actions, which extend far beyond the walls of our the Company. Our environmental policy establishes a commitment to preserve the environment by reducing our consumption of natural resources and mitigating the impacts of our operations. In 2017, we updated our controlled wood policy to ensure even more effectively that we are sourcing products responsibly. With a focus on regional development, we also published our policy on Supplier Relations Policy, through which we undertake to hire local partners defined as hyposufficient (i.e. micro and small companies, from the industrial, retail and services sectors, whose supply scope meets Suzano’s contracting needs, with little adaptability to financial fluctuations, and which are physically located within Suzano’s radius of influence). In terms of conscientious consumption, we maintained the proactive management of water consumption and its reuse, seeking to adopt tools and technologies that support the rational use of water resources, which is key to pulp and paper production in terms of both the industrial operations and forestry yields. The Company also invested in the installation of new equipment and processes, such as the new Wastewater Treatment Plant (using activated sludge technology, which reduces the discharge of organic materials into the Mucuri River) and the new Crystallizer (which reduces consumption of chemicals, such as sodium hydroxide and sodium sulfate), both at the Mucuri Unit. Regarding waste management, in addition to the Corporate Commitment to Recycling (Cempre), we also participate actively in discussions on the industry’s plans related to the federal government’s National Solid Waste Plan. The hydrogen peroxide plant, which was inaugurated in October in Maranhão through a
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Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
partnership with Solvay, has the capacity to meet 100% of our mill’s demand for the input. The plant also enabled us to eliminate freight operations between Curitiba and Imperatriz, which generated significant environmental gains (reduced use of fossil fuels and tires and lower greenhouse gas emissions) as well as cost reductions. To measure and comprehend more analytically and strategically the impacts caused by our production activities and the opportunities to improve processes, we resumed Lifecycle Analyses of some of our products and launched new ones, and also become part of the LCA Network (a multi-industry group that discusses the advances and challenges of the methodology and practice). In 2017, we also continued the efforts to leverage our initiatives through important partnerships, such as the one with The Nature Conservancy (“TNC”), the world’s largest environmental organization. Through the Mucuri River Headwaters Project, we launched activities to ensure the perpetuity of the river, while supporting actions to protect its headwaters. The region harbors remaining tracts of Atlantic Forest, one of the planet’s biomes containing the highest biodiversity, of which only 12% of the original area remains. To care for our relationship with local communities, this year we strove to further promote and consolidate our participatory land development practice, which is made possible by the formation of Community Councils. The process seeks to identify and maximize regional initiatives, and to prevent and mitigate any social and environmental impacts. In 2017, we achieved the mark of 11 active councils in the states of Bahia and Espírito Santo, and four active councils in Maranhão and Pará. Through such actions, Suzano supports greater independence for local communities, strengthens their organizational structure and fosters proactive and coordinated actions for implementing initiatives. Our traditional programs for generating income (beekeeping, community agriculture and fish farming), which embrace the particularities of the local situation (by gradually adopting the rationale of increasingly coordinated land development), mobilize and create opportunities for hundreds of families. In another effort to promote local cultures, we continued the Palm Nut Workers Project, working alongside the A Gente Transforma Institute, which aims to reposition the culture of babassu palm nuts, which is an important and recognized cultural asset of our operation region in Maranhão state. During the year, we underwent a process of local immersion, aiming to understand the possibilities for value perception and to open up new markets for the product. Lastly, complementing our cultural promotion program, we enjoyed important results in our work with indigenous communities. The project Coisa de Índio is an initiative in partnership with the Coordination for the Indigenous Peoples of Brazil (APIB) to strengthen indigenous communities by training young multipliers in the field of communication. Based on the use of various creative languages (fine arts, photography, music, literature and cinema), the program sponsors fun workshops, editorial projects, documentaries, animations, illustrations and art exhibitions. These materials, which value the culture and relevance of indigenous peoples, promote dialogue, address prejudice and propose new and humanized representations of Indigenous Populations. In all these actions, the priority is not just to encourage communities to be more proactive, but also to share values, such as better social practices and transparency. This is the same transparency that leads Suzano to publish an annual Sustainability Report drafted in accordance with the GRI guidelines, which is filed at the CVM through the Regular and Special Information (IPE) system, in the category “Sustainability Report.” In 2017, Suzano also began publishing a report detailing the use of proceeds obtained from the issue of green bonds. This content is available on the Company’s website, in the Publications section.
GOVERNANCE The corporate governance of Suzano Pulp and Paper S.A. is exercised through the Board of Directors, which is supported by the Management, Sustainability & Strategy and Audit committees and by the Board of Executive Officers. The Corporate Governance Policy is grounded in the good governance principles and practices adopted by the Company: transparency, accountability, legal compliance and respect for shareholders, employees and other
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stakeholders. They also are grounded in Suzano’s Mission, Vision and Values, and in its organizational documents. The policy defines the composition and objectives of the internal boards and committees, and of the Shareholders’ Meeting. It also establishes the guidelines for conducting business activities and addresses relevant topics, such as corporate risk management, conflicts of interest, confidentiality of information and sustainability. The Code of Conduct is the document that guides the business conduct of Suzano Pulp and Paper. It aims to generate commitment and to disseminate the Company’s values and ethical principles among employees, shareholders, communities, clients, suppliers, government agencies and the relationship network. Suzano has an area dedicated to receiving reports of misconduct, the Ombudsman, which is guided by its own policy and supported by the Conduct Committee. The area’s goal is to ensure compliance with the Code of Conduct and healthy relations in the company’s activities and business interactions. Furthermore, the Company proactively promotes its policies and guidelines, which include the policies on “Information Disclosure,” “Securities Trading,” “Anticorruption,” “Internal Controls,” “Integrated Risk Management,” “Debt” and “Derivative Management.”
PEOPLE In 2017, we continued our process of cultural transformation, which involves strengthening autonomy, expanding decision-making down to the base, continuously exchanging experiences across areas and developing inspiring leaders. We made progress in the program Together and Combined, which is the link between the physical and psychological aspects of the transformation we seek. Through the program, we gradually expanded the practice of home office (offering employees the same conditions to work from home, such as telephone and computer) and redesigned the layout of workplaces to facilitate interaction among people and increase their satisfaction. Meanwhile, we worked to reinforce the new concepts (joint decisions, autonomy, etc.). As a result of this comprehensive work, the Company received 16 awards for its technical competencies and those of its employees. Among them, the magazine Você S/A elected Suzano as the “Best Company to Start a Career" in 2017.
AUDIT AND INTERNAL CONTROLS We use external auditors and the internal audit to evaluate our results, internal controls and our accounting practices. The findings of these analyses are presented to the Audit Committee. To assist with the independent audit, we retain the services of PricewaterhouseCoopers Auditores Independentes, whose work has enabled us to improve our internal controls, especially those related to tax, accounting and information technology aspects. In accordance with CVM Instruction 381/2003, we inform that, in the fiscal year ended December 31, 2017, we engaged various services related to the work of the external audit: (i) review, accounting diagnosis and compliance services in the amount of R$ 166,000; and, (ii) tax consulting and compliance services in the amount of R$ 483,000, which corresponded to 6.0% and 17.4%, respectively, of the external audit fees. The engagement of these services, with execution period of less than 1 year, is effective after internal verification and approval by the external auditors that it does not affect the independence and objectivity of the external audit services. Our external auditors confirm that they formalized with the Company’s governance bodies that, as per their understanding, the rendering of other services did not affect the independence and objectivity of the external audit services.
Note: Non-financial data, such as volumes, quantity, average prices and average quotes in Brazilian real and U.S. dollar, were not examined by our Independent Auditors.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Balance Sheets
Parent Company Consolidated Assets Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Current assets Cash and cash equivalents 5 490,701 841,056 1,076,833 1,614,697 Financial investments 6 1,579,981 2,021,298 1,631,505 2,080,615 Trade receivables 7 2,579,919 3,078,423 2,303,810 1,622,171 Inventories 8 926,358 968,234 1,207,961 1,313,143 Recoverable taxes 9 263,945 390,962 306,426 425,758 Unrealized derivative gains 4 77,090 294,143 77,090 367,145 Advances to suppliers 10 15,911 16,414 49,235 493,025 Receivables from subsidiaries 11 2,369 - - - Other receivables 121,954 106,077 132,480 112,952 6,058,228 7,716,607 6,785,340 8,029,506
Non-current assets held for sale 15 11,535 - 11,535 -
Total current assets 6,069,763 7,716,607 6,796,875 8,029,506
Non-current assets Receivables from other related parties 11 - 13,000 - 13,000 Recoverable taxes 9 283,757 349,536 283,757 349,536 Deferred income and social contribution taxes 12 - - 2,606 4,624 Unrealized derivative gains 4 56,820 58,494 56,820 77,035 Advances to suppliers 10 221,555 216,578 221,555 216,578 Judicial deposits 21.5 108,107 81,584 113,613 87,097 Receivables from land expropriation 17 60,975 56,721 60,975 56,721 Other receivables 26,072 37,243 31,466 36,947 757,286 813,156 770,792 841,538
Biological assets 13 4,700,344 4,198,382 4,548,897 4,072,528 Investments 14 768,003 233,083 6,764 873 Property, plant and equipment 15 15,881,105 15,864,199 16,211,228 16,235,280 Intangible assets 16 113,334 118,505 188,426 219,588 21,462,786 20,414,169 20,955,315 20,528,269
Total non-current assets 22,220,072 21,227,325 21,726,107 21,369,807
Total assets 28,289,835 28,943,932 28,522,982 29,399,313
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Balance Sheets
Parent Company Consolidated Liabilities Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Current liabilities Trade payables 18 581,810 549,513 610,476 582,918 Loans and financing 19 1,329,753 1,393,446 2,115,067 1,594,720 Unrealized derivative losses 4 23,819 190,488 23,819 250,431 Tax liabilities 85,537 49,989 125,847 78,175 Payroll and charges 189,793 159,150 196,467 165,030 Debits payable to related parties 11 760,366 113,928 - - Commitments related to asset acquisitions 24 76,781 76,069 83,155 85,748 Dividends payable 25.6 180,550 370,998 180,550 370,998 Advance from customers 86,409 511,251 92,545 514,766 Other payables 180,717 85,839 280,437 187,088
Total current liabilities 3,495,535 3,500,671 3,708,363 3,829,874
Non-current liabilities Loans and financing 19 4,111,295 6,756,670 10,076,789 12,418,059 Unrealized derivative losses 4 104,077 205,292 104,077 221,047 Debits payable to related parties 11 5,973,085 5,628,259 - - Commitments related to asset acquisitions 24 460,467 517,064 502,831 609,107 Provision for contingencies 21 310,153 236,561 317,069 246,634 Actuarial liabilities 22 351,263 339,009 351,263 339,009 Deferred income and social contribution taxes 12 1,711,254 1,480,390 1,789,960 1,559,096 Share-based payments 23 36,539 18,850 38,320 18,850 Provision for losses of investments in subsidiaries 14 101,857 103,529 - - Other payables 12,756 14,143 12,756 14,143
Total non-current liabilities 13,172,746 15,299,767 13,193,065 15,425,945
Total liabilities 16,668,281 18,800,438 16,901,428 19,255,819
Equity Capital stock 6,241,753 6,241,753 6,241,753 6,241,753 Capital reserves 394,801 203,714 394,801 203,714 Treasury shares (241,088) (273,665) (241,088) (273,665) Profits reserve 2,927,760 1,657,125 2,927,760 1,657,125 Equity valuation adjustment 2,298,328 2,314,567 2,298,328 2,314,567
Total equity 25 11,621,554 10,143,494 11,621,554 10,143,494
Total equity and liabilities 28,289,835 28,943,932 28,522,982 29,399,313
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Statement of Income
Parent Company Consolidated Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Net sales revenue 27 9,397,728 9,134,718 10,520,790 9,882,313 Cost of goods sold 29 (5,628,498) (5,704,552) (6,449,468) (6,571,622) Gross profit 3,769,230 3,430,166 4,071,322 3,310,691
Operating income (expenses) Selling expenses 29 (884,447) (868,729) (430,825) (408,810) General and administrative expenses 29 (484,309) (380,331) (528,974) (427,100) Equity pick-up in subsidiaries and affiliates 14 492,671 167,436 5,872 (7,127) Other operating income (expenses), net 29 159,184 (921,214) 140,510 (1,150,561) Operating profit before net financial income 3,052,329 1,427,328 3,257,905 1,317,093
Net financial income (expenses) 26 Financial income 362,931 2,132,348 379,049 2,257,304 Financial expense (1,189,601) (1,114,760) (1,397,889) (1,156,204) Net income before income and social contribution taxes 2,225,659 2,444,916 2,239,065 2,418,193 Income and social contribution taxes 12 Current (188,781) (170,656) (202,187) (188,817) Deferred (229,445) (582,262) (229,445) (537,378) Net income for the period 1,807,433 1,691,998 1,807,433 1,691,998
Net earnings per share for the period 25.5 Basic - Common 1.64562 1.55223 1.64562 1.55223
Diluted - Common 1.64358 1.54913 1.64358 1.54913
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Statement of Comprehensive Income
Parent Company Consolidated Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Net income for the year 1,807,433 1,691,998 1,807,433 1,691,998 Other comprehensive income (loss) 40,760 (81,639) 40,760 (81,639) Exchange variation on conversion of financial statements and on foreign investments 14 38,006 (45,720) 38,006 (45,720) Actuarial gain (loss) 22 4,173 (54,422) 4,173 (54,422) Deferred income and social contribution taxes (1,419) 18,503 (1,419) 18,503
Total comprehensive income 1,848,193 1,610,359 1,848,193 1,610,359
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Statement of Changes in Equity
Capital reserves Profit reserve
Equity valuation Stock Reserve for Special adjustment / Tax Costs with Treasury Legal Retained Total Note Capital stock options capital statutory Other incentives share issue stock reserve earnings granted increase reserve comprehensive income
Balances on December 31, 2015 6,241,753 75,317 23,091 (15,442) (288,858) 231,926 474,211 - 2,450,083 - 9,192,081 Total comprehensive income (loss) Net income for the year ------1,691,998 1,691,998 Actuarial loss net of deferred income and social contribution taxes ------(35,919) - (35,919) Exchange variation on conversion of financial statements and on foreign investments ------(45,720) - (45,720) Equity transactions with shareholders: Stock options granted - - (3,337) ------(3,337) Treasury stock used to meet the share-based payments - - - - 15,193 - - - - - 15,193 Dividends paid ------(300,000) - - - (300,000) Reversal of time-barred dividends ------26 26 Internal changes in equity: Partial realization of equity valuation adjustment, net of deferred income and social contribution taxes ------(53,877) 53,877 - Reserve for tax incentives Sudene-reduction of 75% - 124,085 ------(124,085) - Special statutory reserve ------116,639 - (116,639) - Legal reserve - - - - - 84,600 - - - (84,600) - Capital increase reserve ------1,049,749 - - (1,049,749) - Minimum mandatory dividends ------(370,828) (370,828) Balances on December 31, 2016 25 6,241,753 199,402 19,754 (15,442) (273,665) 316,526 1,223,960 116,639 2,314,567 - 10,143,494 Total comprehensive income (loss) Net income for the period ------1,807,433 1,807,433 Actuarial gain net of deferred income and social contribution taxes ------2,754 - 2,754 Exchange variation on conversion of financial statements and on foreign investments ------38,006 - 38,006 Adjustment in conversion of financial statements of subsidiaries abroad ------Equity transactions with shareholders: Stock options granted - - (5,517) ------(5,517) Treasury stock used to meet the share-based payments - - - - 15,552 - - - - - 15,552 Treasury shares acquired - - - - (82) - - - - - (82) Payment of interest on equity 25.7 ------(199,835) (199,835) Reversal of time-barred dividends ------29 29 Internal changes in equity: Partial realization of assets' deemed cost adjustment, net of deferred income and social contribution taxes ------(56,999) 56,999 - Cancelation of class B preferred shares 25.3 - - - - 17,107 - - - - (17,107) - Reserve for tax incentives Sudene-reduction of 75% - 196,604 ------(196,604) - Special statutory reserve ------118,024 - (118,024) - Legal reserve - - - - - 90,372 - - - (90,372) - Capital increase reserve ------1,062,239 - - (1,062,239) - Minimum mandatory dividends 25.6 ------(180,280) (180,280) Balances on December 31, 2017 25 6,241,753 396,006 14,237 (15,442) (241,088) 406,898 2,286,199 234,663 2,298,328 - 11,621,554
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Statement of Cash Flows
Parent Company Consolidated Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Cash and cash equivalents from operating activities
Net income for the period 1,807,433 1,691,998 1,807,433 1,691,998
Adjustment to reconcile net income (loss) to cash and cash equivalents from operating activities 1,202,943 1,756,777 2,750,128 2,322,580 Depreciation, depletion and amortization 1,391,592 1,387,109 1,402,778 1,403,518 Income from sale of property, plant and equipment and biological assets 29 (24,751) (9,771) (29,005) (9,767) Equity pick-up in subsidiaries and affiliates 14 (492,671) (167,436) (5,872) 7,127 Exchange and monetary variations, net (870,834) (1,632,342) 2,273 (1,442,918) Interest expenses, net 720,347 975,695 874,975 1,000,287 Derivative gains, net 26 (70,396) (515,931) (73,271) (528,839) Adjustment to fair value of biological assets 13 (192,504) 780,666 (192,504) 780,666 Expenses from deferred income and social contribution taxes 12 229,445 582,262 229,445 537,378 Interest on actuarial liabilities 22 38,022 36,856 38,022 36,856 Addition to provision for contingencies 21 37,146 14,176 35,645 20,498 Addition to provision for share-based payments 23 31,943 2,808 33,715 2,808 Addition to allowance for doubtful accounts, net 7 37,253 8,101 39,897 9,505 Reversal of/(addition to) provision for discounts - loyalty program (2,419) 2,463 (9,497) (35,497) Provision for inventory losses and write-offs 8 24,384 9,564 24,384 9,564 Provision for losses and write-off with property, plant and equipment and biological assets 29 63,861 160,188 66,707 316,646 Partial write-off of intangible assets - - 18,845 78,799 Other provisions 282,525 122,369 293,591 135,949
Changes in current and non-current operating assets and liabilities 937,802 1,313,649 (1,607,567) (1,011,403) Decrease/(increase) in related parties 2,261,121 1,592,946 - - Decrease/(increase) in accounts receivable 527,918 371,445 (662,459) 190,377 Decrease/(increase) in inventories 13,058 (114,728) 76,364 (39,304) Decrease in recoverable taxes (287,309) (22,678) (282,600) (39,689) Decrease/(increase) in other current and non-current assets (44,286) (23,781) 410,879 (483,406) Increase/(decrease) in trade accounts payable 48,825 18,701 63,236 (4,696) Increase in other current and non-current assets 384,516 1,148,365 430,469 1,103,688 Payment of interest (1,382,354) (1,068,993) (1,006,869) (1,102,090) Payment of other taxes and contributions (557,991) (504,661) (598,617) (545,751) Payment of income and social contribution taxes (25,696) (82,967) (37,970) (90,532)
Net cash and cash equivalents provided by operating activities 3,948,178 4,762,424 2,949,994 3,003,175
Cash and cash equivalents from investing activities Additions to investments, net of cash received 11,147 - - - Additions to property, plant and equipment 15 (856,562) (885,013) (859,880) (885,999) Additions to intangible assets (8,054) (11,604) (8,054) (11,640) Additions to biological assets 13 (934,992) (1,448,397) (912,368) (1,426,699) Proceeds from asset divestment 84,694 35,235 84,694 35,235 Additions (reduction) in financial investments 673,883 (1,047,965) 687,274 (1,053,381) Capital increase in subsidiaries 14 (43,021) - - -
Net cash and cash equivalents used in investing activities (1,072,905) (3,357,744) (1,008,334) (3,342,484)
Cash flow and cash and cash equivalents from financing activities Funding 19 242,740 3,702,577 2,561,954 5,665,635 Settlement of derivative operations 4 21,240 80,977 39,695 117,261 Payment of loans 19 (2,927,471) (4,624,901) (4,533,736) (4,853,038) Payment of dividends (570,568) (299,926) (570,568) (299,926) Dividends from own shares 8,514 8,514 8,514 8,514 Repurchase of own shares (83) - (83) -
Net cash and cash equivalents used in financing activities (3,225,628) (1,132,759) (2,494,224) 638,446
Exchange variation on cash and cash equivalents - - 14,700 (161,686)
Increase (reduction) in cash and cash equivalents (350,355) 271,921 (537,864) 137,451
Cash and cash equivalents at the beginning of the period 5 841,056 569,135 1,614,697 1,477,246 Cash and cash equivalents at the end of the period 5 490,701 841,056 1,076,833 1,614,697 Statement of the increase (reduction) in cash and cash equivalents (350,355) 271,921 (537,864) 137,451
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Statement of Value Added
Parent Company Consolidated Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Income Sale of goods, products and services 27 10,500,925 10,212,164 11,635,788 10,969,878 Other (expenses) income, net 263,701 (770,082) 245,027 (999,430) Income from construction of own assets 719,801 518,295 719,801 518,295 Addition to allowance for doubtful accounts, net 7 (37,253) (8,101) (39,897) (9,505) 11,447,174 9,952,276 12,560,719 10,479,238 Input acquired from third parties Cost of products and goods sold and services rendered (4,080,631) (4,098,613) (4,080,631) (4,098,613) Supplies, electricity, outsourced services and others (1,821,504) (1,989,559) (2,247,511) (2,375,104) (5,902,135) (6,088,172) (6,328,142) (6,473,717)
Gross added value 5,545,039 3,864,104 6,232,577 4,005,521 Depreciation, amortization and depletion (1,391,592) (1,387,109) (1,402,778) (1,403,518) Net added value produced by the Company 4,153,447 2,476,995 4,829,799 2,602,003 Added value received through transfers Equity pick-up in subsidiaries and affiliates 14 492,671 167,436 5,872 (7,127) Financial income 694,776 551,110 808,662 823,430 1,187,447 718,546 814,534 816,303 Distribution of value added 5,340,894 3,195,541 5,644,333 3,418,306
Personnel 1,075,168 955,351 1,122,991 984,707 Direct compensation 869,192 766,468 910,152 792,683 Benefits 164,774 150,466 171,637 153,607 F.G.T.S. (Government Severance Indemnity Fund for Employees) 41,202 38,417 41,202 38,417 Taxes, fees and contributions 858,513 944,290 802,491 944,886 Federal 729,287 1,040,288 702,940 1,068,751 State 124,038 (101,191) 94,491 (128,918) Municipal 5,188 5,193 5,060 5,053 Value distributed to providers of capital 1,599,780 (396,098) 1,911,418 (203,285) Interest 1,521,446 (466,478) 1,827,502 (277,670) Rentals 78,334 70,380 83,916 74,385 Value distributed to shareholders 1,807,433 1,691,998 1,807,433 1,691,998 Dividends 380,515 370,828 380,515 370,828 Retained earnings in the period 1,426,918 1,321,170 1,426,918 1,321,170
Distribution of value added 5,340,894 3,195,541 5,644,333 3,418,306
The accompanying notes are an integral part of the financial statements.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
1 Company Information
Suzano Papel e Celulose S.A., hereinafter referred to as the “Suzano”, together with its subsidiaries hereinafter referred to as “Company”, with registered office in the city of Salvador, state of Bahia, Brazil, is a corporation whose shares are traded on Novo Mercado segment of B3 S.A. – Brasil, Bolsa, Balcão (“B3”).
Suzano has five (5) industrial units in Brazil: one each in Bahia and Maranhão and three in São Paulo. These industrial units produce hardwood pulp from eucalyptus and paper (coated paper, paperboard, uncoated paper, cut size paper) and jumbo rolls of sanitary paper (consumer goods – tissue paper), paper to serve the domestic and international markets, in addition to generating energy for the Company’s consumption and selling surplus energy to third parties. Pulp, paper and consumer goods are sold in the international market directly by Suzano, as well as through its subsidiaries in Argentina, the United States and Switzerland and its sales offices in China and England.
The Company's corporate purpose also includes the commercial operation of eucalyptus forest for its own use and for sale to third parties, the operation of port terminals, and the holding of interest, as partner or shareholder, in any other company or project.
The Company is controlled by Suzano Holding S.A. and Controlling Shareholders and Management, which holds a 33.24% and 23.26% interest in the common shares of its capital stock, respectively.
The issue of these financial statements was approved by the Company’s Board of Directors on February 7, 2018.
1.1 Major events in 2017
i) Repurchase of Senior Notes (“Notes 2021”)
In the second half of 2017, the Company, through its subsidiary Suzano Trading Ltd. (“Suzano Trading”), repurchased Senior Notes due 2021, in the total amount of US$456 million.
Repurchases were carried out through a market transaction, based on the value in the secondary market plus a premium of 0.50 percentage points.
This transaction reaffirms the Company’s commitment to effective debt management by constantly seeking opportunities with adequate structures and costs and in accordance with its market position.
The original value of Notes 2021 was US$650 million, with repurchase transactions since 2015, the outstanding balance on December 31, 2017 is US$190 million.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
ii) Start of tissue production and sale – Mucuri Unit (BA) and Imperatriz Unit (MA)
On September 11, 2017, the Company started the production and sale of tissue paper.
On November 22, 2017, the Company started to produce tissue at the Imperatriz (MA) unit.
The total estimated investment is R$ 540,000 and considers the total production capacity of 120,000 tons/year of tissue, with a maximum conversion capacity of 60,000 tons.
iii) Reopening of bond issues (“Notes 2026 and 2047”)
On September 5, 2017, the Company reopened Senior Notes 2026 and Senior Notes 2047 and Suzano Áustria GmbH (“Suzano Áustria”) priced the additional bond issues, in the additional volume of: i) US$200 million, with interest corresponding to 4.625% p.a., to be paid semiannually, in January and July, and maturing on July 14, 2026 (“Notes 2026”); and ii) US$200 million, with interest corresponding to 6.300% p.a., to be paid semiannually, in March and September, and maturing on March 16, 2047 (“Notes 2047,” and together with Notes 2026, referred to as “Notes”).
Suzano plans to use the proceeds from the Notes 2026 issue to finance or refinance its capital needs and to invest in Eligible Green Projects, and the proceeds from the Notes 2047 for general corporate purposes and to repurchase US$146 million in the Senior Notes due 2021 bonds (Note 1.1 a), i)).
iv) Structuring of Receivables Investment Fund (“FIDC”)
On March 13, 2017, the Company signed a partnership agreement with Banco Rabobank to structure a FIDC, under the closed co-ownership arrangement, which will enable an additional credit offer to clients in the domestic market of up to R$ 100,000. (Note 7.4).
v) Senior Notes Offering (“Notes 2047”)
On March 9, 2017, the Company issued in the international market, through its wholly- owned subsidiary Suzano Áustria, Senior Notes in the aggregate principal of US$300 million. The 30-year Notes were issued for a coupon (interest) of 7.0% p.a., which will be paid biannually as from September 2017.
Suzano will invest the proceeds in Notes offering, net of issuance costs for general corporate purposes (Note 19, (d)).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
b) Corporate events
i) Acquisition of companies in the Tissue segment
On December 3, 2017, the Company entered into a Purchase Agreement and Other Covenants for the direct and indirect acquisition of approximately 92.84% of the total capital and 99.99% of the common stock of FACEPA Fábrica de Papel da Amazônia S.A. (“FACEPA”), which is subject to certain contractual and legal conditions that are typical to transactions of this nature, including approval by Brazil’s antitrust authorities.
The total consideration for the shares acquired is R$ 310,000, subject to adjustments.
FACEPA produces and markets a wide range of paper products including paper towels, napkins, diapers, tissue paper and tissues under various brands, with a strong presence in the Northern and Northeastern regions of Brazil. FACEPA has plants located in the cities of Belém, Pará and Fortaleza, Ceará, with installed capacity of around 50,000 tons/year.
The acquisition is in line with Suzano’s goals of expanding its operations in pulp adjacent markets and will strengthen its consumer goods business unit in the tissue segment.
ii) Migration to Novo Mercado, conversion of preferred shares into common shares
On September 29, 2017, the Company approved: i) the proposed migration of the Company to the special listing segment called Novo Mercado of B3 and the consequent admission of its shares for trading on the Novo Mercado; ii) the conversion of all preferred shares issued by the Company into common shares at the ratio of one (1) preferred share, class “A” or class “B”, for one (1) common share; iii) the restatement of Bylaws to adapt them to Novo Mercado Rules; and iv) the change the methodology to calculate mandatory dividends, also reflecting best corporate governance practices.
On November 10, 2017, the migration of the Company to Novo Mercado segment of B3 was concluded.
iii) Full merger of subsidiary Amulya Empreendimentos Imobiliários Ltda. (“Amulya”).
On August 31, 2017, the Extraordinary Shareholders Meeting of Suzano discussed and voted on the merger of the subsidiary Amulya, whose net assets total R$ 37,106.
iv) Operation with Ibema Companhia Brasileira de Papel (“Ibema”)
On January 1, 2017, Suzano acquired from Ibema Participações S.A., 2,120,560 registered common shares without par value, for R$ 21, corresponding to 11.9% of the investee’s equity, thereby increasing its interest to 49.9% (Note 14).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The control of the investee is shared (joint venture), and this investment is classified as a joint arrangement.
2 Presentation of the Financial Statements
2.1 Preparation basis and presentation
The individual and consolidated financial statements were prepared in accordance with the accounting practices adopted in Brazil, including the pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC) and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and present all significant information that should be reported in the financial statements, and only it, which is consistent with that used by the Management of the Company in its functions.
The main accounting practices applied in the preparation of these financial statements are presented in Note 3.
The financial statements were prepared using the historical cost as the basis of value, except for available-for-sale financial assets, financial assets and liabilities and biological assets that are measured at fair value.
The preparation of financial statements requires the use of certain significant accounting estimates and the exercise of judgment by Management in applying the Company’s accounting practices. The areas requiring a higher level of judgment and which are more complex, as well as areas in which assumptions and estimates are significant for the financial statements, are disclosed in Note 3.27.
2.1.1 Consolidated financial statements
The consolidated financial statements were prepared based on the information provided by Suzano and its subsidiaries on the reference date, as well as in accordance with consistent accounting practices and policies.
The subsidiaries are consolidated as from the date of ownership control up to the date control ceases to exist. In the case of joint control (joint venture) with other companies, these investments are measured by the equity method for both the individual and consolidated financial statements.
In the consolidation process, the balances in the balance sheet and income statement accounts corresponding to the transactions carried out with subsidiaries are eliminated, as well as the unrealized gains and losses and the investments in these subsidiaries and their respective equity accounting results.
Companies included in the Company’s consolidated financial statements are the following:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Interest in capital (%) Investee Nature of the main operation Type of interest 12/31/2017 12/31/2016 Amulya Empreendimentos Imobiliários Ltda ("Amulya") (a) Land lease Direct - 100% Asapir Produção Florestal e Comércio Ltda ("Asapir") Loan agreement Joint venture 50% 50% Comercial e Agrícola Paineiras Ltda ("Paineiras") Land lease Direct 100% 100% FuturaGene Ltd ("Futuragene") Biotechnology research and development Indirect 100% 100% Ibema Companhia Brasileira de Papel ("Ibema") (b) Production and sale of paperboard Joint venture 49.9% 38% Ondurman Empreendimentos Imobiliários Ltda ("Ondurman") Land lease Direct 100% 100% Paineiras Logística e Transporte Ltda ("Paineiras Logística") Commissioning of road transport Direct 100% 100% Stenfar S.A. Indll. Coml. Imp. Y. Exp. ("Stenfar") Sale of paper and plastic materials Direct/Indirect 100% 100% Sun Paper and Board Limited ("Sun Paper") Shared expenses Direct 100% 100% Suzano Áustria GmbH ("Suzano Áustria") Capital raising Direct 100% 100% Suzano Pulp and Paper America Inc ("Suzano América") Sale of pulp and paper Direct 100% 100% Suzano Pulp and Paper Europe S.A. ("Suzano Europa") Sale of pulp and paper Direct 100% 100% Suzano Trading Ltd ("Suzano Trading") Sale of pulp and paper Direct 100% 100%
(a) See Note 1.1 b), iii).
(b) See Note 1.1 b), iv).
2.2 Statement of Value Added (“DVA”)
The Company prepared the individual and consolidated Statements of Value Added – DVA as part of the financial statements, as required by the Brazilian corporate law and the accounting practices adopted in Brazil, in accordance with the criteria defined in Technical Pronouncement CPC 09 – Statement of Value Added. IFRS standards do not require the DVA, therefore, they are considered as supplemental information, without prejudice to the financial statements as a whole.
2.3 Functional currency and presentation currency
The items included in the financial statements of each of the Company’s subsidiaries are measured using the currency of the main economic environment in which the subsidiary operates (the “functional currency”).
The individual and consolidated financial statements are presented in Brazilian real, which is Suzano’s functional currency, and Company’s presentation currency.
a) Foreign-currency translation
Monetary assets and liabilities denominated in foreign currency are translated into the functional currency using the exchange rate effective on the respective balance sheets dates. Gains and losses resulting from the adjustment of these assets and liabilities, verified between the exchange rate effective on the date of transaction and end of years are recognized as financial income or expenses in the income statement.
b) Foreign subsidiaries
Foreign subsidiaries prepare their individual financial statements in the functional currency.
When these consolidated financial statements are translated for presentation, these subsidiaries have their monetary assets and liabilities translated from their functional
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
currency to Brazilian reais, using the exchange rates of balance sheets closing dates and respective revenues and expenses accounts are translated by the monthly average rates of the years. Concerning non-monetary assets and liabilities, they are translated from their functional currency to Brazilian reais by exchange rate of the accounting transaction date (historical rate).
Gains and losses from exchange variation on investments in foreign subsidiaries are measured under the equity accounting method, and gains and losses from exchange variation calculated in the translation process for consolidating the financial statements are recognized in asset valuation adjustment and presented in other comprehensive income.
The functional currency applied when translating the financial statements of foreign subsidiaries are the following:
Subsidiary Country Currency name
Suzano Trading Cayman Islands Suzano América United States U.S. Dollar Suzano Áustria Austria
FuturaGene United Kingdom Pound Sterling Sun Paper
Suzano Europa Switzerland Swiss Franc
Stenfar Argentina Argentine Peso
2.4 Presentation of information by operating segment
Management defined Pulp and Paper as the Group’s operational segments.
i) Pulp: comprises production and sale of hardwood eucalyptus pulp and fluff mainly to supply the export market, with any surplus destined to the domestic market.
ii) Paper: comprises production and sale of paper to meet the demands of both domestic and export markets. Consumer goods (tissue) sales are classified under this segment due to its immateriality.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
3 Critical accounting practices
Suzano, its subsidiaries and joint operations adopted the accounting practices described below consistently in all the years reported in these financial statements.
3.1 Cash and cash equivalents
Cash and cash equivalents include balances of cash, banks and marketable securities maturing within 90 days from their initial contracting date, which are subject to insignificant risk of change in their value.
3.2 Financial assets and liabilities
a) Overview
Financial instruments are recognized as of the date the Company becomes party of financial instruments contractual provisions. These are initially recorded at their fair value, plus transaction costs which are directly attributable to their acquisition or issue, except for the financial assets and liabilities classified under the fair value category through profit or loss, where these costs are directly recorded in financial income line. Their subsequent measure occurs every balance sheet date according to the rules set forth for each type of financial assets and liabilities classification.
The Company does not adopt hedge accounting as required by CPC 38, 39 and 40.
The fair value of financial instruments actively traded on the organized markets is determined based on the market quotes on the balance sheets closing dates. In the lack of an active market, the fair value is determined through valuation techniques, which include the use of recent market arm’s length transactions, benchmark to the fair value of similar financial instruments, discounted cash flows analysis or other valuation models.
The gain or loss from the initial recognition of financial assets and liabilities, arising from the difference between the fair value and present value of cash flows from the instrument discounted at the contractual rate, called day one profit or loss, is recognized as profit or loss proportionally to the duration of the operation until the full amount is considered at maturity, if the fair value is not observable directly in an open market.
b) Financial assets
Financial assets are classified among the categories below according to the purpose to which they were acquired or issued:
i) Financial assets measured at fair value through profit or loss
These include financial assets held for trading and those assets designated in the initial recognition at fair value through profit or loss and derivatives. These are classified as held for trading if originated with the purpose of sale or repurchase in the short term. These are measured at their fair value at every balance sheet date. Interest rates, monetary restatement, exchange variation and those variations deriving from fair
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
value valuation are recognized as financial income or expenses in the income statement when incurred.
ii) Loans (granted) and receivables
These include non-derivative financial assets with fixed or determinable payments, but not quoted on the active market. After initial recognition, these are measured by the amortized cost through the effective interest rate method. Interest rates, monetary restatement, exchange variation, less impairment, when applicable, are recognized as financial income or expenses in the income statement when incurred.
The Company does not hold financial assets that would be classified in the held-to- maturity investments category.
c) Financial liabilities
Financial liabilities are classified between the categories below according to the nature of financial instruments contracted or issued:
i) Financial liabilities measured at fair value through profit or loss
These include financial liabilities usually traded before maturity, liabilities designated in the initial recognition at fair value through profit or loss and derivatives. They are measured by their fair value at every balance sheet date. Interest rates, monetary restatement, exchange variation and those variations deriving from fair value valuation, where applicable, are recognized in the income statement when incurred.
ii) Loans and financing
Loans and financing are initially recognized at fair value, net of any attributable transaction costs and, subsequently, stated at the amortized cost through the effective interest rate method. The interest rates, monetary restatement and exchange variation, where applicable, are recognized in the income statement when incurred.
3.3 Trade receivables
Accounts receivable from customers are booked at the nominal amount billed on the sale date in the normal course of the Company’s activities, plus exchange rate variation in case of amounts denominated in foreign currency. Considering the average term for receipt of accounts receivable, their amount corresponds to fair value. If the receivables term is equivalent to one year or less, receivables are classified under current assets. If the receivables term is longer, they are presented in non-current assets.
Based on an individual analysis, an allowance for probable loss is accrued in an amount considered sufficient by the Management to cover eventual losses in the accounts receivable realization, as a contra entry to selling expenses.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
3.4 Inventories
Inventories are shown at the lowest value between average acquisition or production cost, net of recoverable taxes, and its net realization value. Imports in progress are presented at the cost incurred until the balance sheet date. Cost of wood transferred from biological assets is equivalent to its fair value plus harvest and freight costs.
The balance of inventories is presented net of estimated losses established to cover probable losses identified or estimated by Management.
3.5 Non-current assets held for sale
Net non-current assets held for sale are classified as such if it is highly probable that they will be recovered primarily through sale instead of their continuous use and when sale is virtually assured.
These assets are normally measured by the lowest amount between their book value and their fair value less selling expenses.
Possible impairment loss is initially allocated to goodwill, in the case of investment, and then to remaining assets and liabilities. Losses arising from this valuation are recognized in profit or loss. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortized or depreciated.
3.6 Biological assets
Biological assets (reforestation eucalyptus forests, with a seven-year growth cycle from planting to harvest) are measured at fair value, less estimated sales costs during the cutting process. Fair value was calculated using the discounted cash flow method in accordance with the yield cycle of these assets.
Significant assumptions in calculating the fair value of biological assets are shown in Note 13. The fair value of biological assets is measured semiannually, because the Company considers that this interval is sufficient to avoid significant difference in fair value of biological assets registered in its financial information.
Gain or loss from changes in fair value of biological assets is recognized in the period they occur, in other operating income/expenses. The depletion value of biological assets is measured by the quantity of agricultural product cut / sold, assessed at its fair value.
3.7 Investments
Investments are represented by the Company’s interest in other subsidiaries or in jointly-controlled companies (joint venture) and measured by the equity method of accounting. The exchange variation on investments abroad is recorded as asset
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
valuation adjustment in shareholder’s equity and realized upon the disposal or write-off of the investment.
Gains and losses from such transactions between these companies are excluded in the consolidation for equity accounting and the consolidated balance sheet.
3.8 Business combination
Business combinations are recorded using the acquisition method when control is transferred to the Company. The consideration is generally measured at fair value, as well as identifiable net assets acquired. Any goodwill calculated in the transaction is tested annually for impairment. Gains from a beneficial purchase are recognized immediately in profit or loss. Transaction costs are recorded in profit or loss as incurred, except for costs related to the issue of debt or equity instruments.
Acquisitions of interest with shared control of net assets traded are subject to guidelines complementary to CPC 15 (R1) – Business Combination, the CPC 19 – Joint Ventures and CPC 18 – Investment in Affiliates, Subsidiaries and Joint Ventures.
Based on the equity method of accounting, an investment in a joint venture is initially recorded at cost. The book value of the investment is adjusted for recognition of variations in the Company's interest in the shareholders' equity of the joint venture as of the acquisition date. The goodwill associated with the joint venture, if any, is included in the book value of the investment; however it is not an intangible asset nor is it subject to amortization. Other intangible assets identified in the transaction must be proportionally allocated to the Company’s interest, based on the difference between the book values recorded in the company traded and the calculated fair values (asset surplus value), being subject to amortization.
3.9 Property, plant and equipment
Property, plant and equipment items are recorded at the cost of acquisition or construction, net of recoverable taxes, including interest and other financial charges incurred during the project design or development, less accumulated depreciation and accumulated probable impairment losses, when incurred.
Items of property, plant and equipment are depreciated using the straight-line method in the profit or loss statement of the year, based on the economic-useful life of each item (Note 15) and leased items are depreciated by the shortest period between the estimated useful life of the asset and the term of the contract.
Property, plant and equipment from financial lease agreements are recognized by the lower amount between the present value of minimum lease payments and the fair value of the related assets, plus, when applicable, initial direct costs incurred in the transaction.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
On December 31, 2017, the Company revised the useful life of its assets based on use and estimated use of assets and did not identify the need for adjustments to the used economic useful life.
Maintenance and repair expenses of key industrial equipment that do not significantly increase the useful life of these assets, referred to as General Stoppage costs, are booked directly as profit or loss in the year when they are incurred in costs of goods sold.
3.10 Intangible assets
i) Goodwill based on expected future profitability
Goodwill is the positive difference between the amount transferred for acquisition and the net fair value of assets acquired from a company. Goodwill balance should be attributed to one or more cash generating units, which are subject to impairment tests at least once a year and are not amortized. ii) Intangible assets with defined useful life
Other intangible assets acquired by the Company and that have defined useful lives are measured at cost, less amortization based on the useful lives and accumulated impairment losses, when incurred.
3.11 Impairment of non-financial assets
Assets with indefinite useful life, such as goodwill, are not subject to amortization and are tested annually to identify possible need for impairment. Goodwill impairment is reviewed annually or more frequently if events or changes in circumstances indicate possible impairment.
Assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the book value cannot be recovered. An impairment loss is recognized when the book value of an asset exceeds its recoverable value, which is the highest between the fair value of an asset less its disposal costs and value in use.
For the purposes of impairment evaluation, assets are grouped in the lowest levels for which cash flows are identified separately (Cash Generating Units (CGU)). For this test, goodwill is allocated to the Cash Generating Units or groups of Cash Generating Units that should benefit from the business combination from which the goodwill originated, and are identified according to the operating segment.
Non-financial assets, except goodwill, which have been adjusted for impairment, are reviewed subsequently for analysis of a possible reversal of impairment on the balance sheet date. Goodwill impairment recognized in profit or loss is not reversed.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
3.12 Dividends and interest on shareholders’ equity
Distribution of dividends or interest on equity is recognized as liabilities, pursuant to corporate law and the Company's bylaws, up to the limit of minimum mandatory dividends. The surplus dividends declared by Management are presented under proposed dividends, together with the profit reserves in shareholders' equity. When the surplus is approved by shareholders, the portion is transferred to current liabilities.
3.13 Other assets and liabilities (current and non-current)
Assets are recognized only when it is probable that the economic benefit associated with the transaction will flow to the entity and its cost or value can be measured reliably.
A liability is recognized when the Company has a legal or constructive obligation arising from a past event, and it is probable that an economic resource will be required to settle this liability.
3.14 Trade payables
Trade payables are obligations payable for goods or services that were acquired in the normal course of business. They are classified as current liabilities if payment is due in up to one year, or non-current liabilities if payable in a longer term.
They are initially recognized at their fair value and, subsequently, measured at amortized cost using the effective tax rate method.
3.15 Loans and financing
Loans are initially recognized at their fair value, net of costs incurred in the transaction and are subsequently stated at amortized cost. Any difference between the amounts raised (net of transaction costs) and the total amount payable is recognized in the statement of income during the period in which the loans are outstanding, using the effective tax rate method.
Loans are classified as current liabilities unless the Company has an unconditional right to defer the settlement of liabilities for at least 12 months after the balance sheet date.
General and specific loan costs directly attributed to the acquisition, construction or production of a qualified asset, which is an asset that necessarily demands a substantial period of time to be ready for use or sale, are capitalized as a part of the cost of asset when it is probable that they will result in future economic benefits for the entity and that these costs may be measured with reliability. Other loan costs are recognized as expense in the period they are incurred.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
3.16 Current and deferred corporate income tax (“IRPJ”) and social contribution on net income (“CSLL”)
Income tax and social contribution in the period include current and deferred taxes. These taxes are calculated based on the tax laws in force on the balance sheet date in countries where the Company operates, and are recognized in the income statement, except at the proportion they are related with items directly recorded in shareholders' equity.
Deferred income tax and social contribution are recognized using the balance sheet method on temporary differences between the tax bases of assets and liabilities and their amounts in the financial statements, except in business combinations whose initial recognition of an asset or liability does not affect the accounting or tax result.
Deferred tax assets and liabilities are net in balance sheet when there is a legal right and intention to offset them upon the calculation of current assets, and when they are related to the same tax authority and the same legal entity.
Deferred income and social contribution taxes arising from recognized for tax losses, tax credits and unused deductible temporary differences are recognized when it is probable that future profits subject to taxation will be available to be used against such assets.
Deferred income and social contribution tax assets are revised at each reporting date and will be deducted as their realization is no longer probable.
3.17 Contingent assets and liabilities
Contingent assets are recorded only when court decisions favorable to the Company are final and unappealable and whose amount can be reliably measured.
Contingent liabilities are recognized according to following criteria: i) Contingent liability whose probability of loss is remote is not recorded in provision or disclosed; ii) Contingent liability whose probability of loss is possible is not recorded in provision, but disclosed in the notes to the financial statements; and, iii) Contingent liability whose probability of loss is probable is recorded in provision for an amount deemed sufficient by the Management and its legal advisors to cover future cash disbursements.
3.18 Provisions
Provisions are recognized when: (i) the Company has a current and constructive obligation as a result of past events; (ii) it is probable that an outflow of funds is necessary to settle the obligation; and (iii) the value can be estimated with reliability. Provisions do not include future operating losses.
3.19 Employee benefits
The actuarial liabilities are evaluated by an independent actuary in order to determine the commitments with health care plans and life insurance provided to active employees and retirees, at the end of each year.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Actuarial gains or losses are recognized directly in shareholders’ equity. The interest rates on actuarial liability are directly recorded in the income statement under financial expenses.
3.20 Share-based payments
The Company’s executives and managers receive their compensation partially as share-based payment plans to be paid in cash and shares, and alternatively in cash.
Plan-related expenses are firstly recognized in the income statement as a corresponding entry to financial liabilities during the vesting period (grace period) when services will be rendered. The financial liability is measured by its fair value every balance sheet date and its variation is recorded in the income statement as administrative expenses.
However, at the option exercise date, if such options are exercised by executive in order to receive Company shares, financial liabilities are reclassified to a shareholders’ equity account called “Stock options reserve”. In case of option exercise paid in cash, the Company settles the financial liability on behalf of the officer.
3.21 Government grants and assistance
Government grants and assistance are recognized when it is reasonably certain that the conditions established by the granting governmental authority were observed and that these subsidies will be obtained. These are recorded as revenue or expense deduction in the income statement for the period of enjoyment of benefit and subsequently are allocated to the tax incentives reserve under shareholders’ equity.
3.22 Adjustment at present value of assets and liabilities
The monetary assets and liabilities are monetarily restated, therefore, they are adjusted by their present value. The present value adjustment of current monetary assets and liabilities is calculated and only recorded, if deemed as relevant when compared to the financial statements taken as a whole. For the purposes of recording and determining materiality, the present value adjustment is calculated taking into account contractual cash flows and explicit interest rates, and implicit interest rates in certain cases, of respective assets and liabilities.
3.23 Capital stock
Common shares are classified under shareholders’ equity.
Incremental costs directly attributable to the issue of new shares or options are stated under shareholders’ equity as a deduction from the amount raised, net of taxes.
3.24 Revenue recognition
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Revenue comprises the fair value of consideration received or receivable for the sale of products and services in the normal course of the Company's activities. Operating revenue from product sales are stated at their net amounts excluding taxes, returns, unconditional discounts and bonus to clients.
Sales revenue is recognized when its amounts can be measured reliably, significant risks and rewards inherent to the product are transferred to the buyer, that is, the Company no longer has any relation with the goods sold and it is probable that the economic benefits will be generated for the Company. Revenues are not recognized if there is significant uncertainty to their realization.
Sale of products
Suzano manufactures and sells a variety of products in the forest segment (hardwood pulp from eucalyptus, paper (coated paper, paperboard, uncoated paper and cut size), and jumbo rolls of paper for sanitary purposes (consumer goods)) in the domestic and foreign markets. Sale of products are recognized whenever the Company transfers control of the asset to the end client (third party), which assumes total control over the products, and there is no unsatisfied obligation that can affect the acceptance of products by the client.
Sale of energy
The Company sells, indirectly, the surplus energy produced as a by-product of the industrial process.
Financial income
Financial income is recognized according to the term elapsed on an accrual basis using the effective tax rate method.
3.25 Leases
The Company leases certain property, plant and equipment items. Leases of property, plant and equipment, in which the Company has substantially all risks and benefits of ownership, are classified as financial leases. These are capitalized at the start of the lease at the lowest value between the fair value of the leased asset and the present value of minimum lease payments.
Each lease installment paid is allocated partially to liabilities and partially to financial charges, thereby obtaining a constant rate on the debt balance payable. The corresponding liabilities, net of financial charges, are included in loans. Interest on financial expenses is recognized in the statement of income during the lease period, to produce a constant periodical interest rate on the balance of liabilities for each period. Property, plant and equipment acquired through financial lease is depreciated during the useful life of the assets.
Payments of operating leases (net of any incentives received from the lessor) are recognized in the statement of income during the lease period.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
3.26 Related-party transactions
To conduct business and operations with related parties, the Company establishes that these operations must observe typical market prices and conditions for this type of transaction as well the corporate governance practices adopted by the Company and those recommended and/or required by law.
3.27 Estimates, judgments and significant accounting assumptions
When preparing these financial statements, the Management used estimates, judgments and accounting assumptions about the future affecting the application of the Companies’ accounting policies and practices and the amounts of assets, liabilities, income and expenses. Actual results may differ from such estimates.
The Company reviews its estimates and assumptions continuously and any change thereof is prospectively recognized.
See below information on judgments and assumptions used while applying accounting practices and policies that have significant effects on the amounts recognized in the financial statements and which have significant risk of causing material adjustment:
i) Fair value measurement
The Company selects methods and uses judgments in the assumptions for determining the fair value as well as defining the sensitivity analysis scenarios.
When measuring the fair value of an asset or liability, the Company uses market data as much as possible. Fair values are classified at different hierarchy levels based on the inputs used for valuation techniques (Note 4.7).
Significant changes in the assumptions used may affect the Company’s equity position.
Additional information on the assumptions used to measure relevant fair values are included in the following notes to the financial statements:
i) Note 4 – Financial instruments and risks;
ii) Note 13 – Biological assets;
iii) Note 23 – Long-term share-based compensation plan.
ii) Financial instruments (derivative and non-derivative)
Valuation techniques are used by the Company to calculate the fair value of financial instruments not traded in the active market.
The Company uses recent operations contracted with third parties, related to other substantially similar instruments, analyzes cash flow and uses other operations with a minimum of information generated by Management. It also depends on its own judgment to establish the sensitivity analysis scenarios (Note 4).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
iii) Biological assets
The discounted cash flow methodology is used to calculate the fair value of forest biological assets, whereby several critical economic and forest assumptions are made with a high level of judgment (Note 13).
iv) Useful life and recoverable value of tangible and intangible assets
The useful life of relevant tangible assets was defined by independent experts and in the specifications of machine and equipment manufacturers, at the operational level of industrial units and the quality of preventive and corrective maintenance. The intangible assets with defined useful life are based on reports of independent valuation experts. All this material involves a high degree of judgment and uncertainties.
In the case of events or changes in circumstances signaling that the book value of an asset or group of assets may not be recoverable based on future cash flows, Management will re-evaluate and adjust the asset’s useful life according to the new outlook. (Notes 15 and 16).
v) Deferred income and social contribution taxes
The recognition and amount of deferred tax assets depend on the future generation of taxable income, which requires the use of estimates related to the Company’s future performance.
These estimates are part of a long-term plan, which is reviewed annually by Management and submitted to Board of Directors for the approval. This plan is drawn up using several macroeconomic variables, such as exchange and interest rates; variables in the market segment, such as curves of expected offer/supply and projected sale prices; operating variables, such as expected production costs and volumes. This set of variables evidences the Company’s level of judgment regarding the expected materialization of these assumptions and uncertainties.
Management understands that, based on projected results and recorded results, the realization of deferred credit assets is probable (Note 12).
vi) Actuarial liability
The Company has actuarial commitments of post-employment benefits related to health insurance for former employees. These commitments and costs depend on a series of economic and demographic assumptions, mainly discount rates, long-term inflation, variation in medical and hospital costs, and variability in the actuarial table used, which imply some level of judgment regarding the assumptions adopted.
These and other estimates are reviewed annually by independent experts and can differ from the actual results due to changes in market and economic conditions (Note 22).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
3.28 New standards, revisions and interpretations not effective yet
The following standards were issued and approved by IASB, which are not effective yet and the Company has not early adopted while preparing these financial statements.
The Management evaluated or is evaluating and measuring the impacts of the adoption of the following standards:
i) IFRS 9 (CPC 48) Financial instruments – It replaces IAS 39, except for recognition and derecognition of financial instruments. It also includes reviewed requirements for classifying and measuring financial instruments, a new model for expected loss of credit for calculating the impairment of financial assets. IFRS 9 becomes effective for annual periods beginning on or after January 1, 2018.
The Company evaluated the changes introduced by this new standard and, based on analyses conducted up to the conclusion of these financial statements, concluded that the mapped impact expected on estimated losses with doubtful debts in the line Clients will be immaterial in relation to the line Receivables. For other financial instruments, the Company did not identify any impact in relation to its current structure of financial instruments. ii) IFRS 15 (CPC 47) Revenue from contracts with customers – It replaces the existing IAS 18 / IAS 11 guidelines and mainly determines that revenue be recognized through transfer of control to the client instead of transfer of risks and benefits, because the former establishes that the achievement of performance obligations, recognized over the time or in a certain moment, identified in agreements are crucial for evaluating the consideration to which it expects to be entitled in exchange for the control of goods or services, hence the portion of revenue to be recognized. IFRS 15 is effective for the years beginning on January 1, 2018.
The Company evaluated the changes introduced by this new standard and, based on analyses, did not identify any changes that cause any impact on its financial statements, given that: (i) all the revenue recognition criteria are already met; and (ii) the Company does not have performance obligations after the delivery of assets, that is, the Company meets the performance obligation by transferring the asset promised to the customer in a specific moment. This procedure is applicable to the Company for the domestic and export markets. iii) IFRS 16 – Leases – replaces IAS 17 and essentially requires that lessees recognize future payments in liabilities and the right to use a leased item in assets for practically all lease agreements. Also, financing lease and operating lease agreements receive the same accounting treatment, although certain short-term leases or small items are outside the scope of this standard. This standard will be effective as of January 1, 2019.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The Company, based on preliminary assessments, believes that the biggest impact of this standard is related to the recognition on the balance sheet of the lease agreements for land used to plant eucalyptus forests, with terms of up to 3 cycles of forest formation, that is around 21 years (Note 20.3 i)), but for the reporting date, the Company is analyzing these and other lease agreements to choose the transition criterion to the new Standard.
4 Financial Instruments and Risks
4.1 Management of financial risks
a) Overview
The Company's Management is focused on generating consistent and sustainable results over time. Factors of external risk related to fluctuations in market prices, exchange variations and volatility of macroeconomic indexes may introduce an unwelcome level of volatility in the Company’s cash flows and income statement. To manage this volatility, so as to not distort or hinder its consistent growth over a long time, Suzano has policies and procedures for managing market risk.
These policies aim to: (i) protect the Company’s cash flows and assets against fluctuations in the market prices of raw material and products, exchange rates and interest rates, price and restatement indexes, or other assets or instruments traded in liquid or other markets ("market risk") to which the value of the assets, liabilities and cash flows are exposed; and (ii) optimize the process of contracting financial instruments for protection against exposure to risk, drawing on natural hedges and correlations between the prices of different assets and markets, avoiding any waste of funds used to contract inefficient operations. All financial transactions entered into by the Company have the objective of protecting it against existing exposures, with the assumption of new risks prohibited, except those arising from its operating activities.
The process to manage market risk comprises the following sequential and recurring phases: (i) identification of risk factors and the exposure of the value of the assets, cash flows and results of the Company to market risks; (ii) measuring and reporting the values at risk; (iii) evaluating and formulating strategies for managing market risks; and (iv) implementing and monitoring the performance of strategies.
The Company uses the most liquid financial instruments and: (i) does not contract leveraged transactions or other types of embedded options that alter the ultimate purpose of hedging; (ii) does not hold duel-index debt or other forms of implicit options; and (iii) does not hold operations that require margin deposits or other forms of guarantees for the credit risk of the counterparties.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The main financial risk factors considered by Management are:
Liquidity risk; Credit risk; Currency risk; Interest rate risks; Risk of changes in commodity prices; and Capital risk.
The Company does not adopt hedge accounting. Therefore, all results (gains and losses) from derivative operations (settled and outstanding) are fully recognized in the Parent company and Consolidated statements of income, as presented in Note 26.
b) Valuation
All operations with financial instruments are recognized in the Company's financial statements, as shown below. No reclassifications between categories were made during the fiscal year.
Parent Company Consolidated Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016 2 Assets
Fair value through profit or loss Financial investments 6 1,579,981 2,021,298 1,631,505 2,080,615 Unrealized gains from derivative operations 4.3 133,910 352,637 133,910 444,180
Loans and receivables Cash and cash equivalents 5 490,701 841,056 1,076,833 1,614,697 Trade accounts receivable 7 2,579,919 3,078,423 2,303,810 1,622,171
4,784,511 6,293,414 5,146,058 5,761,663
Liabilities
Liabilities through amortized cost Trade accounts payable 18 581,810 549,513 610,476 582,918 Loans and financing 19 5,441,048 8,150,116 12,191,856 14,012,779 Loans with related parties 6,722,399 5,732,759 - - Commitments related to asset acquisitions 24 537,248 593,133 585,986 694,855
Fair value through profit or loss Unrealized losses from derivative operations 4.5 127,896 395,780 127,896 471,478
13,410,401 15,421,301 13,516,214 15,762,030
c) Fair value versus book value
The financial instruments recorded on the balance sheets, such as cash and banks, loans and financing, are stated at their contractual values. The marketable securities and derivative agreements, which are used solely for hedge purposes, are valued at their fair value.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
To determine the fair value of assets or liquid financial instruments traded in public markets, the closing market quote on the date of the balance sheet was used. The fair value of interest rate and index swaps is calculated as the present value of their future cash flows, discounted at the current interest rates available for operations with similar conditions and remaining terms. This calculation is made based on the B3 and Brazilian Financial and Capital Markets Association (ANBIMA) quotes for interest rate operations denominated in Brazilian real, and the British Bankers Association and Bloomberg quotes for operations in London InterBank Offered Rate (“Libor”). The fair value of futures or forward currency contracts is determined using forward currency rates prevailing on the dates of the balance sheet, according to B3 quotes.
In order to determine the fair value of assets or financial instruments traded on the over-the-counter markets or without liquidity, several assumptions and methods are used based on normal market conditions (and not for settlement or forced sale) at each balance-sheet date, including the use of option pricing models, such as Black & Scholes, and estimates of future discounted cash flows. The fair value of agreements for pulp and paper pricing is obtained through the price quotes for corresponding instruments with similar conditions and remaining terms with major players in this market. Finally, the fair value of agreements for oil bunker pricing is based on the Platts index quotes.
The result of financial instruments trading is recognized on the closing or contracting dates of the operations, on which the Company undertakes to buy or sell these instruments. The liabilities deriving from the contracting of financial instruments are eliminated from our financial statements only when these instruments expire or when the risks, obligations and rights deriving therefrom are transferred.
The comparison between the fair value and carrying value of outstanding financial instruments is shown below:
Consolidated 12/31/2017 12/31/2016 Book Value Fair Value Book Value Fair Value
Assets Cash and cash equivalents 1,076,833 1,076,833 1,614,697 1,614,697 Financial investments 1,631,505 1,631,505 2,080,615 2,080,615 Trade accounts receivable 2,303,810 2,303,810 1,622,171 1,622,171 Unrealized gains from derivative operations (current and non-current) 133,910 133,910 444,180 444,180 5,146,058 5,146,058 5,761,663 5,761,663
Liabilities Trade payables 610,476 610,476 582,918 582,918 Loans and financing (current and non-current) 12,191,856 13,755,352 14,012,779 14,334,732 Commitments related to asset acquisitions (current and non-current) 585,986 564,292 694,855 700,754 Unrealized losses from derivative operations (current and non-current) 127,896 127,896 471,478 471,478 13,516,214 15,058,016 15,762,030 16,089,882
4.2 Liquidity risk
The Company’s guidance is to maintain a strong cash and financial investment position to meet its financial and operating obligations. The amount kept as cash is used for payments expected in the normal course of its operations, while the surplus amount is invested in highly liquid financial investments.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The following tables show the maturities of financial liabilities settled with cash, including the estimated payment of interest and exchange variation, relating to the remaining term on the base date of the financial statements up to the maturity of the agreement.
The amounts disclosed below refer to contracted cash flows not discounted and, therefore, may not be reconciled with the amounts disclosed in the balance sheet.
12/31/2017 Total Book Total Future Up to 1 1 - 2 2 - 5 More than 5 Consolidated Value Value year years years years
Liabilities Trade payables 610,476 610,476 610,476 - - - Loans and financing 12,191,856 15,897,299 2,704,902 2,686,542 4,930,467 5,575,388 Commitments related to asset acquisitions 585,986 713,723 95,284 9,698 187,686 421,055 Derivatives payable 127,896 97,412 24,092 63,971 9,349 - Other accounts payable 293,193 293,193 280,436 12,757 - - 13,809,407 17,612,103 3,715,190 2,772,968 5,127,502 5,996,443
12/31/2016 Total Book Total Future Up to 1 1 - 2 2 - 5 More than 5 Consolidated Value Value year years years years
Liabilities Trade payables 582,918 582,918 582,918 - - - Loans and financing 14,012,779 17,262,517 2,231,491 3,215,466 9,356,691 2,458,869 Commitments related to asset acquisitions 694,855 806,967 87,239 9,517 190,616 519,595 Derivatives payable 471,478 386,459 245,865 130,787 9,807 - Other accounts payable 201,231 201,231 187,088 14,143 - - 15,963,261 19,240,092 3,334,601 3,369,913 9,557,114 2,978,464
4.3 Credit risk
The Company has sales and credit policies, determined by the Management, which aim to mitigate any risks arising from their clients’ default. This is achieved through meticulous selection of the client portfolio, which takes into account payment capacity (credit analysis) and diversification of sales (risk pooling), as well as the guarantees or financial instruments contracted to reduce these risks, such as credit insurance policies, both for exports and domestic sales.
The Company’s credit evaluation matrix is based on an analysis of the qualitative and quantitative aspects for determining credit limits to clients on an individual basis. After analyses, they are submitted for approval according to established hierarchy. In some cases, the approval from the management’s meeting and the Credit Committee is applicable.
The Company accrues provisions for all amounts overdue more than 90 days and not renegotiated by clients, and for which there are no real guarantees. The Company also accrues provisions for outstanding amounts from clients under judicial reorganization.
To mitigate credit risk, the Company maintains its financial operations diversified across various banks, with most of these operations concentrated in prime banks rated high grade by the main risk rating agencies.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The book value of financial assets representing the exposure to credit risk on the date of the financial statements was as follows:
Parent Company Consolidated Note 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Assets Cash and cash equivalents 5 490,701 841,056 1,076,833 1,614,697 Financial investments 6 1,579,981 2,021,298 1,631,505 2,080,615 Trade receivables 7 2,579,919 3,078,423 2,303,810 1,622,171 Derivatives receivable 133,910 352,637 133,910 444,180
4,784,511 6,293,414 5,146,058 5,761,663
The Other Parties, mostly financial institutions with whom the Company conducts transactions classified under cash and cash equivalents, financial investments and derivatives receivable, are rated by the rating agencies Fitch Ratings, Standard & Poor’s and Moody’s. The risk rating is as follows: Consolidated Cash and cash equivalents Derivatives received and financial investments
Risk rating 12/31/2017 12/31/2016 12/31/2017 12/31/2016
AAA 2,168,810 1,559,566 65,510 92,490 AA+ 169,881 1,759,006 51,231 73,768 AA 207,925 133,741 3,143 - AA- 113,623 242,985 14,026 266,650 A+ - - - 11,272 A 45,753 2 - - A- 2,330 - - - BB 16 12 - -
2,708,338 3,695,312 133,910 444,180
The risk rating of accounts receivable transactions is classified according to the clients’ level of delinquency, pursuant to Resolution 2682 of the Central Bank of Brazil (“Bacen”), as follows:
Consolidated
12/31/2017 12/31/2016
Accounts Receivable (a) 2,268,675 1,571,349 Low Risk 21,016 21,358 Average Risk 52,859 66,481 High Risk 2,342,550 1,659,188
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
(a) The amounts do not consider the Allowance for Doubtful Accounts of R$ 38,740 and R$ 37,017 on December 31, 2017 and 2016, respectively.
4.4 Market risk
The Company is exposed to several market risks, the main ones being the variation in exchange rates, interest rates, inflation rates and commodity prices that may affect its results and financial situation.
To reduce the impacts on results in adverse scenarios, the Company has processes to monitor exposures and policies that support the implementation of risk management.
The policies establish the limits and instruments to be implemented for the purpose of: (i) protecting cash flow due to currency mismatch, (ii) mitigating exposure to interest rates, (iii) reducing the impacts of fluctuation in commodity prices, and (iv) change of debt indexes.
The market risk management process comprises identification, assessment and implementation of the strategy, with the actual contracting of adequate financial instruments.
An independent area monitors if the limits established in the Company’s financial policy are met for the maximum volume of operations contracted.
4.4.1. Exchange rate risk
The contracting of financing and the currency hedge policy of the Company are guided by the fact that around 70% of net revenue comes from exports with prices negotiated in U.S. dollar, while most of the production costs is tied to the Brazilian real (BRL). This structure allows the Company to contract export financing in U.S. dollar and to reconcile financing payments with the flows of receivables from sales in foreign market, using the international bond market as an important portion of its capital structure, and providing a natural cash hedge for these commitments.
In addition, the Company contracts short positions in the futures markets, including strategies involving options, to ensure attractive levels of operating margins for a portion of revenue. Sales in the futures market are limited to a percentage of the net surplus foreign currency (net exposure) over an 18-month time horizon and therefore are matched to the availability of currency for sale in the short term.
The following table shows the net exposure of assets and liabilities in foreign currency:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Consolidated 12/31/2017 12/31/2016
Assets Cash and cash equivalents 585.541 787.888 Accounts receivable 1.544.749 957.269 Derivatives receivable 133.910 444.180
2.264.200 2.189.337
Liabilities Trade payables (36.018) (24.630) Loans and financing (8.616.807) (9.367.865) Commitments related to asset acquisitions (332.193) (354.664) Derivatives payable (126.781) (397.468)
(9.111.799) (10.144.627)
Net liability exposure (6.847.599) (7.955.290)
Sensitivity analysis – foreign exchange exposure
For market risk analysis, the Company uses scenarios to jointly evaluate the long and short positions in foreign currency, and the possible effects on its results. The probable scenario represents the amounts already booked, because they reflect the conversion into Brazilian real on the reporting date.
The other scenarios were created considering the depreciation of the Brazilian real against the U.S. dollar at the rates of 25% and 50%.
The following table presents the potential impacts on results assuming these scenarios:
12/31/2017 Consolidated Probable Possible Incr. ( ∆ 25%) Remote Incr. ( ∆ 50%)
Cash and cash equivalents 585,541 146,385 292,771 Accounts receivable 1,544,749 386,187 772,374 Trade payables (36,018) (9,004) (18,009) Loans and financing (8,616,807) (2,154,202) (4,308,405) Commitments related to asset acquisitions (332,193) (83,048) (166,096) Derivatives Swap (18,692) (243,371) (486,742) Derivatives Options 25,821 (320,243) (964,545)
(6,847,599) (2,277,296) (4,878,652)
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
4.4.2 Interest rate risk
Fluctuations in interest rates could result in increase or decrease in costs of new financing and operations already contracted.
The Company constantly seeks alternatives to use financial instruments in order to avoid negative impacts on its cash flows.
Sensitivity analysis – exposure to interest rates
For market risk analysis, the Company uses scenarios to evaluate the sensitivity that variations in operations impacted by the rates: CDI, TJLP and Libor may have on its results. The probable scenario represents the amounts already booked, because they reflect Management’s best estimates.
The other scenarios were developed considering appreciation of 25% and 50% in the market interest rates.
The following table shows the potential impacts on the results in the event of these scenarios:
12/31/2017 Possible Remote Consolidated Probable Incr. ( ∆ 25%) Incr. ( ∆ 50%)
Interbank deposit certificate ("CDI") Cash and cash equivalents 449.254 8.065 16.264 Financial investments 1.673.541 30.042 60.587 Loans and financing (2.907.908) (52.201) (105.275) Derivative Swap (18.692) 24.198 48.180 Derivative Options 25.821 (24.908) (47.526)
(777.984) (14.804) (27.770)
Long-term interest rate ("TJLP") Loans and financing (209.954) (3.674) (7.348)
(209.954) (3.674) (7.348)
London InterBank Offered Rate ("Libor") Loans and financing (3.701.405) (16.086) (32.173) Derivative Swap (1.116) 1.116 1.116
(3.702.521) (14.970) (31.057)
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
4.4.3 Commodity price risk
The Company is exposed to commodity prices that reflect mainly on the pulp sale price in the foreign market. The dynamics of opening and closing production capacities in the global market and the macroeconomic conditions may have an impact on the operating results.
It is not possible to guarantee that the price will be maintained at levels favorable to the results. The Company can use financial instruments to reduce the sale price of a part of its production; however, at times, contracting a hedge for pulp price may not be available.
The Company is also exposed to international oil prices, which reflects on logistical costs for selling to the export market.
On December 31, 2017, there is no long position in oil bunker (long position of R$ 2 million on December 31, 2016) to hedge its logistics costs.
4.5 Derivative financial instruments
The Company determines the fair value of derivative contracts and recognizes that these amounts can differ from the amounts realized in the event of early settlement. The difference in amount can occur due to liquidity reasons, dismantling costs, interest of the counterparty in early settlement, among other aspects. The amounts reported by the Company are based on a calculation made by a specialized consulting firm and are reviewed by Management.
a) Outstanding derivatives by type of contract
On December 31, 2017 and 2016, the consolidated positions of outstanding derivatives are presented below:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Notional value in US$ Fair value Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Cash flow hedge Exchange hedge Zero-cost collar (R$ vs. US$) 1,485,000 800,000 25,822 123,122 Fixed Swap (US$) vs. CDI 50,000 - 5,356 - Fixed Swap CDI vs. US$ 50,000 - (2,485) - NDF (MXN vs. US$) - 331 - 95 Subtotal 1,585,000 800,331 28,693 123,217
Commodity hedge Bunker (oil) - 1,526 - 2,861 Subtotal - 1,526 - 2,861
Debt hedge Exchange hedge Swap CDI vs. Fixed (US$) 291,725 291,725 (21,562) 709 Swap CDI vs. Libor (US$) - 150,000 - (157,773) Swap Fixed (US$) vs. CDI - 29,500 - (5,668) Subtotal 291,725 471,225 (21,562) (162,732)
Interest hedge Swap Libor vs. Fixed (US$) 19,841 46,312 (1,117) (3,627) Swap Coupon vs. Fixed (US$) - 220,000 - 12,983 Subtotal 19,841 266,312 (1,117) 9,356
Total result in derivatives 1,896,566 1,539,394 6,014 (27,298)
Accounting classification In current assets 77,090 367,145 In non-current assets 56,820 77,035 In current liabilities (23,819) (250,431) In non-current liabilities (104,077) (221,047)
6,014 (27,298)
Fair value does not represent an obligation for immediate disbursement or cash receipt, given that such effect will only occur on the dates of contractual fulfillment or on the maturity of each transaction, when the result will be determined, depending on the case and market conditions on said dates.
Contracts outstanding on December 31, 2017 are over-the-counter operations without any margin or early settlement clause imposed due to mark-to-market variations.
Next, each existing contract and respective protected risks are described: i) DI vs. US$ Swap: positions in conventional swaps exchanging the variation in the Interbank Deposit (“DI”) rate for a fixed rate in dollars. The purpose is to change the currency of debt indexes from reais to dollars;
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
ii) DI vs. Libor Swap: positions in conventional swaps exchanging the variation in the Interbank Deposit (“DI”) rate for a floating rate in dollars. The purpose is to change the currency of debt indexes from reais into dollars; iii) US$ vs. DI Swap: positions in conventional swaps exchanging the variation in the fixed rate in dollars for Interbank Deposit (“DI”) rate. The purpose is to revert debts in dollars to reais; iv) Libor vs. Fixed Swap: positions in conventional swaps exchanging the floating rate for a fixed rate in dollars. The purpose is to hedge the cash flow from fluctuations in the US interest rate;
v) Coupon vs. US$ Swap: positions in swaps exchanging dollar coupon for a fixed offshore dollar rate in order to reduce debt costs; vi) Zero-Cost Collar: positions in an instrument consisting of a simultaneous combination of purchase of put options and sale of call options in dollars, with the same principal amount and maturity, in order to hedge cash flows from exports. According to this strategy, a range is fixed where there is no deposit or receipt of a financial margin on position adjustments; vii) US$ vs. MXN$ NDF: long positions in dollars and short positions in Mexican peso in order to protect the sale of products in the Mexican market; viii) Bunker (oil): long positions in oil bunker in order to protect logistics costs related to contracting maritime freight.
b) Fair value by maturity
Derivatives mature as follows:
Fair value
Maturity of derivatives 12/31/2017 12/31/2016
In 2017 - 113,957 In 2018 53,270 (40,936) In 2019 (16,064) (49,690) In 2020 (31,192) (50,629)
6,014 (27,298)
c) Long and short position of outstanding derivatives
On December 31, 2017 and 2016, the consolidated positions of outstanding derivatives are presented below:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Notional value Fair value
Consolidated Currency 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Debt hedge Assets Swap CDI vs. Fixed (US$) R$ 950,000 950,000 22,525 73,590 Swap CDI vs. Libor (US$) R$ - 331,335 - 347,900 Swap Fixed (US$) vs. CDI US$ - 29,500 - 95,447 Swap Libor vs. Fixed (US$) US$ 19,841 46,312 65,517 149,210 Swap Coupon vs. Fixed (US$) US$ - 220,000 - 88,682 Subtotal 88,042 754,829
Liabilities Swap CDI vs. Fixed (US$) US$ 291,725 291,725 (44,087) (72,881) Swap CDI vs. Libor (US$) US$ - 150,000 - (505,673) Swap Fixed (US$) vs. CDI R$ - 100,374 - (101,115) Swap Libor vs. Fixed (US$) US$ 19,841 46,312 (66,634) (152,837) Swap Coupon vs. Fixed (US$) US$ - 220,000 - (75,699) Subtotal (110,721) (908,205)
Total swap agreements (22,679) (153,376)
Cash flow hedge Zero-cost collar (US$ vs. R$) US$ 1,485,000 800,000 25,822 123,122 Swap Fixed (US$) vs. CDI US$ 50,000 - 5,356 - Swap CDI x Fixed (US$) US$ 50,000 - (2,485) - NDF (MXN x US$) US$ - 331 - 95 Subtotal 28,693 123,217
Commodity hedge Bunker (oil) US$ - 1,526 - 2,861 Subtotal - 2,861
Total result in derivatives 6,014 (27,298)
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
d) Settled derivatives
In the year ended December 31, 2017 and 2016, the consolidated positions of settled derivatives were as follows:
Settlement value (accumulated on) Consolidated 12/31/2017 12/31/2016
Cash flow hedge Exchange hedge Zero-cost collar (R$ vs. US$) 28,159 10,805 NDF (R$ vs. US$) 11,110 (151,199) NDF (MXN vs. US$) 39 (52) NDF (ARS vs. US$) - 17,069 Exchange lock (US$ vs. R$) - 34,118 Subtotal 39,308 (89,259)
Commodity hedge Pulp - (475) Bunker (oil) 2,631 902 Subtotal 2,631 427
Debt hedge Exchange hedge Swap CDI vs. Fixed (US$) 78,411 24,726 Swap Fixed (US$) vs. CDI (8,809) (69,039) Swap CDI vs. Libor (US$) (162,769) 28,792 Subtotal (93,167) (15,521)
Interest hedge Swap Libor vs. Fixed (US$) (2,588) (6,026) Swap Coupon vs. Fixed (US$) 15,824 14,774 Subtotal 13,236 8,748
Total result in derivatives (a) (37,992) (95,605)
(a) On December 31, 2017 and 2016, refers to the receipt of premium on derivatives amounting to R$ 77,687 and R$ 212,868, respectively, from short positions on unexpired options and is hence not presented in the table above.
4.6 Capital management
The main objective of Company’s capital management is to ensure it maintains a solid credit rating, in addition to mitigating risks that may affect capital availability in business development.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The Company monitors constantly significant indicators, such as: i) consolidated financial leverage index, which is the total net debt divided by adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”); ii) management of contractual financial covenants, maintaining safety margin to not exceed these covenants. Management prioritizes new loans denominated in the same currency of its main cash generation source, in order to obtain a natural hedge in the long term for its cash flow. The Company manages its capital structure and makes adjustments based on changes in economic conditions.
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Loans and financing 5.441.048 8.150.116 12.191.856 14.012.779 (-) Cash and financial investments (2.070.682) (2.862.354) (2.708.338) (3.695.312) Net debt 3.370.366 5.287.762 9.483.518 10.317.467
Shareholders' equity 11.621.554 10.143.494 11.621.554 10.143.494
Shareholders' equity and net debt 14.991.920 15.431.256 21.105.072 20.460.961
4.7 Fair value hierarchy
The financial instruments and other financial statement items assessed at fair value are presented in accordance with the levels defined below:
All the information relevant to Company’s financial statements, and only this information, is reported and corresponds to that used by the Management for its activities.
Level 1 – Prices quoted (unadjusted) in active markets for identical assets or liabilities;
Level 2 – Inputs other than the prices quoted in active markets included in Level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices); and
Level 3 – Inputs for assets or liabilities that are not based on observable market variables (unobservable inputs).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
12/31/2017 Consolidated Fair value Level 1 Level 2 Level 3
Assets Financial investments 1,631,505 - 1,631,505 - Derivatives receivable 133,910 - 133,910 - Biological assets (a) 4,548,897 - - 4,548,897 6,314,312 - 1,765,415 4,548,897
Liabilities Loans and financing 13,755,352 - 13,755,352 - Commitments related to asset acquisitions 564,292 - 564,292 - Derivatives payable 127,896 - 127,896 - 14,447,540 - 14,447,540 -
12/31/2016 Consolidated Fair value Level 1 Level 2 Level 3
Assets Financial Investments 2,080,615 - 2,080,615 - Derivatives receivable 444,180 - 444,180 - Biological assets (a) 4,072,528 - - 4,072,528 6,597,323 - 2,524,795 4,072,528
Liabilities Loans and financing 14,334,732 - 14,334,732 - Commitments related to asset acquisitions 700,754 - 700,754 - Derivatives payable 471,478 - 471,478 - 15,506,964 - 15,506,964 -
(a) Changes in fair value of biological assets and other details regarding assumptions used to measure such values are shown in Note 13.
4.8 Guarantees
The Company has letters of credit and credit insurance policies as guarantee.
On December 31, 2017, consolidated accounts receivable operations linked to exports amount to US$429 million, equivalent to R$ 1,421,446 (US$274 million, or R$ 893,435, on this date).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
5 Cash and Cash Equivalents
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Cash and banks In Brazil 18,533 4,758 19,124 5,308 Abroad - 15,623 583,604 787,888 18,533 20,381 602,728 793,196 Financial investments In Brazil 472,168 820,675 472,168 821,501 Abroad - - 1,937 - 472,168 820,675 474,105 821,501
490,701 841,056 1,076,833 1,614,697
Financial investments in local currency are low risk and highly liquid, and correspond to investments indexed to the Interbank Deposit Certificate ("CDI"). On December 31, 2017 and 2016, yield rates ranged from 94% to 110%.
6 Financial Investments
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Financial assets measured at fair value through profit or loss held for trading Investment funds (a) 1,542,068 1,453,265 1,593,066 1,512,582 Bank Deposit Certificates ("CDB") (b) 37,913 568,033 38,439 568,033
1,579,981 2,021,298 1,631,505 2,080,615
(a) Investment funds invest in fixed income instruments, diversified between private institution bonds and government bonds, and are remunerated at a CDI percentage that varies between 74.4% and 105.1%. Investment portfolios are frequently monitored by the Company for the purpose of checking compliance with the investment policy, which seeks low risk and high liquidity of securities. The risk classification of these assets is described in Note 4.3.
(b) Bank Deposit Certificates ("CDB") were remunerated at a percentage of Interbank Deposit Certificate ("CDI") of 102.48% (December 31, 2017, 101.99%).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
7 Trade Receivables
7.1 Breakdown of balances
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Domestic clients Third parties 739.858 667.451 741.558 667.450 Receivables Investment Fund ("FIDC") 25.825 - 25.825 - Subsidiaries (a) - 339 - - Related parties (a) 28.652 32.759 28.652 32.759
Foreign clients Third parties 45.572 35.116 1.546.515 958.979 Subsidiaries (a) 1.775.848 2.378.067 - -
Allowance for doubtful accounts ("PELCD") (35.836) (35.309) (38.740) (37.017)
2.579.919 3.078.423 2.303.810 1.622.171
(a) See Note 11.
7.2 Overdue securities
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Amounts overdue: Up to 30 days 38.270 36.105 67.239 69.778 Overdue between 31 and 60 days 9.418 10.310 16.066 12.822 Overdue between 61 and 90 days 3.825 6.296 3.949 6.535 Overdue between 91 and 120 days 2.949 3.444 2.831 6.966 Overdue between 121 and 180 days 9.959 4.355 9.423 3.514 Over 180 days 36.402 55.822 39.905 56.959 100.823 116.332 139.413 156.574
% Total overdue receivables, excluding PELCD 4% 4% 6% 9%
7.3 Changes in allowance for doubtful accounts
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Opening balance (35,309) (44,587) (37,017) (45,024) Credits accrued in the year (43,247) (9,674) (45,986) (11,078) Credits recovered in the year 5,994 1,573 6,089 1,573 Credits definitively written-off from position 36,726 17,379 36,726 17,379 Foreign exchange variation - - 1,448 133
Closing balance (35,836) (35,309) (38,740) (37,017)
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The Company has guarantees for overdue securities in its commercial transactions, through credit insurance policies, letters of credit and collateral. Part of these guarantees is equivalent to the need to recognize an allowance for doubtful accounts, in accordance with the credit policy (Note 4.3).
7.4 Receivables Investment Fund (“FIDC”)
In March 2017, Suzano began operating the FIDC with the specific purpose of acquiring receivables originating from installment sales made by Suzano in order to ensure greater availability of credit to clients in the domestic market. The fund is established under the closed co-ownership arrangement and is governed by Resolution 2907/2001 of the National Monetary Council (“CMN”) and CVM Instructions 356/01 and 531/13.
The FIDC will be composed of 100,000 units of ownership in the amount of R$ 100,000, of which 97,000 senior units will be held by Banco Rabobank (Lead Manager of the Fund) totaling R$ 97,000, and 3,000 subordinated units held by Suzano totaling R$ 3,000. The term of the fund is two years and may be renewed.
On December 31, 2017, the FIDC’s equity is composed of 29,395 units, of which 26,395 are senior units and 3,000 are subordinated units, amounting to R$ 28,575 and R$ 3,000, respectively. Suzano’s interest in the fund is presented under financial investments. The outstanding balance of assignment of receivables made by Suzano to FIDC totaled R$ 25,825 recorded as trade accounts receivable and R$ 24,665 recorded as loans and financing, net of transaction cost.
In the period ended December 31, 2017, the financial expenses related to the rate of discount used totaled R$ 1,733.
Suzano acts as a collection agent in case of delinquency of receivables and continuously manages the portfolio after its transfer to the fund.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
8 Inventories
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016 Finished goods Pulp Domestic 81,829 82,532 81,829 82,532 Foreign - - 198,380 263,681 Paper Domestic 196,944 210,326 196,944 210,326 Foreign - - 67,146 69,043 Consumer Goods Domestic 6,376 - 6,376 - Work in process 63,797 57,708 63,797 57,708 Raw materials 388,383 427,783 388,383 427,783 Warehouse materials and other 153,994 161,946 170,020 173,855 Advances to suppliers 35,035 27,939 35,086 28,215 926,358 968,234 1,207,961 1,313,143
On December 31, 2017, inventories are net of provision for losses amounting to R$ 51,911 (R$ 28,206 on December 31, 2016). Additions to and reversals of provision and direct write-offs are recognized under profit or loss, in cost of goods sold, amounting to R$ 24,384 and R$ 9,564 in the fiscal year ended December 31, 2017 and 2016, respectively.
No inventory items were given as collateral for or guarantee of liabilities for the years presented.
9 Recoverable taxes
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
IRPJ and CSLL - advances and withheld taxes 50,239 269,448 58,823 282,073 PIS and COFINS - on acquisition of fixed assets (a) 58,767 62,232 58,767 62,232 PIS and COFINS - other operations 54,360 22,584 55,515 23,761 ICMS - on acquisition of fixed assets (b) 71,603 68,393 71,603 68,393 ICMS - other operations (c) 250,006 284,326 280,384 301,578 Reintegra Program (d) 71,376 32,514 71,376 32,514 Other taxes and contributions 1,934 12,402 4,298 16,144 Provision for losses of ICMS credits (e) (10,583) (11,401) (10,583) (11,401)
547,702 740,498 590,183 775,294 Total current assets 263,945 390,962 306,426 425,758
Total non-current assets 283,757 349,536 283,757 349,536
(a) Credits whose realization is linked to the depreciation period of the corresponding asset.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
(b) Credits from the entry of goods destined for property, plant and equipment are recognized in the ratio of 1/48 from the entry and on a monthly basis, as per the bookkeeping of ICMS Control on Property, Plant and Equipment – CIAP.
(c) ICMS credits accrued due to the volume of exports and credit generated in operations of entry of products. Credits are concentrated in the states of Bahia and Maranhão, where the Company realizes the credits through “Transfer of Accrued Credit” (sale of credits to third parties), after approval from the State Ministry of Finance. Credits are also being realized through consumption in its consumer goods (tissue) operations in the domestic market that are already operational in Bahia and Maranhão.
(d) Special Regime of Tax Refunds for Export Companies ("Reintegra").
(e) Provision for ICMS losses related to negative goodwill obtained from sales to third parties of accrued credit mentioned in item "c” above.
10 Advance to suppliers
10.1 Development Program
The Development Program is a partnership system encouraging regional forest production whereby independent producers plant eucalyptus at their own farms in order to supply the agricultural product (timber) to Suzano. The purpose is to achieve the social and economic development of the regions where the Company operates.
Suzano supplies eucalyptus seedlings, subsidy in inputs and cash advances, the latter not being subject to measurement at present value as they will be preferably settled in exchange for goods. Furthermore, the Company supports producers by providing technical assistance in forest management; however, it does not have joint control over the decisions actually taken.
At the end of production cycles, the Company makes a contract-based offer to buy the agricultural products (wood) at market value, after deducting the subsidies granted earlier. However, the Company does not impede producers from selling their produce to other market players, provided the subsidies are repaid.
On December 31, 2017 and 2016, the balance of advances of funds and inputs for timber development amounted to R$ 237,466 and R$ 232,992, respectively, classified in the balance sheet according to the expected realization, among current and non- current liabilities.
10.2 Advance for the purchase of finished product
On December 31, 2017, the Company had paid advance for the purchase of finished product through its subsidiary Suzano Trading in the amount of US$10 million, equivalent to R$ 33,324 (R$ 476,611 on December 31, 2016) .
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
11 Related parties
11.1 Balances and transactions at December 31, 2017
ASSETS LIABILITIES RESULT Circulante Circulante Não circulante Trade Trade Receivables from Payables to Loans and Payables to Income Expenses receivables - receivables - Trade payables related parties related parties financing related parties Item of balance sheet subsidiaries related parties With subsidiaries Suzano Trading 1,732,080 (b) - - - 661,643 (a) - 1,978,014 (a) 5,494,909 (b) (180,876) Suzano Europa 49 ------49 (237) Suzano Austria - - - - 90,946 (a) - 3,995,071 (a) - (357,308) Paineiras ------(5,611) Paineiras Logística - - 2,369 - 2,749 - - - (245,884) Stenfar 43,719 (b) - - - 1,001 - - 92,936 (b) (3,441) Ondurman ------(15,986) Amulya ------(6,745) Futuragene - 20 - - - - - 446 (94) Sun Paper - - - - 4,027 - - - (227) 1,775,848 20 2,369 - 760,366 - 5,973,085 5,588,340 (816,409) Check ########### 2,349 0 0 With related parties Holding company - - - - - 141 - 374 (14,177) IPLF ------28 - Central ------(4,056) - Nemonorte ------(1,233) Mabex ------(294) Bexma ------13 - Lazam - MDS ------(378) Ecofuturo - 4 - 45 - - - 5 (3,789) Ibema - 28,628 (b) - 6,954 - - - 83,706 (b) - - 28,632 - 6,999 - 141 - 80,070 (19,871)
1,775,848 28,652 2,369 6,999 760,366 141 5,973,085 5,668,410 (836,280)
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
11.2 Balances and transactions at December 31, 2016
ASSETS LIABILITIES RESULT CurrentNon-current Current Non-current Trade Trade Receivables Payables to Payables to Income Expenses receivables - receivables - from other Item of balance sheet related parties related parties subsidiaries related parties related parties With subsidiaries Suzano Trading 2,363,438 (b) - - 60,122 4,024,108 (a) 5,585,128 (b) (981,456) Suzano Europa 232 - - - - 237 - Suzano Austria 2,417 - - 44,381 1,604,151 (a) - (48,411) Paineiras 115 - - 835 - - (4,545) Paineiras Logística - - - 7,018 - - (252,979) Stenfar 12,204 (b) - - 1,572 - 65,065 (b) (1,391) Ondurman ------(15,146) Amulya ------(10,307) Futuragene - 259 - - - 265 - 2,378,406 259 - 113,928 5,628,259 5,650,695 (1,314,235)
With related parties Holding company - 1,000 - 31 - 776 (19,752) IPLF - 11 - - - 22 - Central - 9,036 (b) - - - 47,273 (b) - Nemonorte ------(287) Mabex ------(171) Lazam - MDS ------(343) Bexma - 12 - - - 13 - Ecofuturo - - - 400 - - (4,499) Ibema - 22,441 (b) 13,000 7,591 - 94,381 (b) (22,502) - 32,500 13,000 8,022 - 142,465 (47,554)
2,378,406 32,759 13,000 121,950 5,628,259 5,793,160 (1,361,789)
(a) New loans through subsidiaries (Note 19 (d)). (b) Pulp and paper sales operations.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Related parties Type of operation Bexma Comercial Ltda. ("Bexma") Administrative expenses Central Distribuidora de Papéis Ltda. ("Central") Sale of paper Instituto Ecofuturo - Futuro para o Desenvolvimento Sustentável ("Ecofuturo") Social services IPLF Holding S.A. ("IPLF") Shared corporate costs and expenses Lazam MDS Corretora e Adm. Seguros S.A. ("Lazam-MDS") Insurance advisory and consulting Mabex Representações e Participações Ltda. ("Mabex") Aircraft services Nemonorte Imóveis e Participações Ltda. ("Nemonorte") Real estate advisory Suzano Holding S.A. ("Holding") Grant of suretyship and administrative costs
11.3 Management compensation
On December 31, 2017 and 2016, expenses related to the compensation of key management personnel include the Board of Directors, Audit Board and Board of Executive Officers, in addition to certain executives, recognized in profit or loss for the year.
Parent Company and Consolidated 12/31/2017 12/31/2016
Short-term benefits Salary or compensation 24,774 20,593 Direct and indirect benefits 2,959 1,997 Bonus 26,819 20,181 54,552 42,771
Long-term benefits
Share-based compensation 33,554 29,323 33,554 29,323
88,106 72,094
Short-term benefits include fixed compensation (salaries and fees, vacation, mandatory “13th salary” bonus), and payroll charges (company share of contributions to social security – INSS) and variable compensation such as profit sharing, bonus and benefits (company car, health plan, meal voucher, grocery voucher, life insurance and private pension plan).
Long-term benefits include the stock option plan and phantom shares for executives and key Management members, in accordance with the specific regulations (see Note 23).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
12 Current and deferred income and social contribution taxes
The Company, based on expected generation of future taxable income as determined by a technical study approved by Management, recognized deferred tax assets over temporary differences, income and social contribution tax loss carryforwards, which do not expire.
Deferred income and social contribution taxes are originated as follows:
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Tax losses 572,356 690,186 575,248 694,810 Social contribution tax loss carryforward 29,830 81,199 29,830 81,199 Provision for tax, civil and labor contingencies 103,631 78,610 103,631 78,610 Operating provisions and provisions for other losses 203,831 180,733 203,831 180,733 Provision for non-recovery of goodwill - 158,921 - 158,921 Foreign exchange variation - taxation at cash method (a) 82,793 - 82,793 - Biological assets - fair value - 18,895 - 18,895 Losses with derivatives 29,943 156,804 29,943 156,804 Other temporary differences 109,788 94,380 109,503 94,380
Non-current assets 1,132,173 1,459,728 1,134,779 1,464,352
Goodwill – Tax offset on goodwill not amortized in books 10,063 162,671 10,063 162,671 Property, plant and equipment - deemed cost adjustment 1,525,281 1,530,027 1,603,987 1,608,733 Biological assets - fair value 90,461 - 90,461 - Incentivized accelerated depreciation 1,183,115 1,100,239 1,183,115 1,100,239 Gains with derivatives 31,988 143,459 31,988 143,459 Other temporary differences 2,519 3,722 2,519 3,722
Non-current liabilities 2,843,427 2,940,118 2,922,133 3,018,824
Total non-current assets, net - - 2,606 4,624 Total non-current liabilities, net 1,711,254 1,480,390 1,789,960 1,559,096
(a) Starting from January 1, 2017, the Company adopted the exchange variation at cash method for calculating income tax and social contribution.
Except for tax losses, the social contribution tax loss carryforwards and accelerated incentivized depreciation, which is obtained only through IRPJ, the other taxable income was obtained by both taxes.
The breakdown of accumulated tax losses and social contribution tax loss carryforwards is shown below:
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Tax losses 2,289,425 2,760,745 2,300,993 2,779,241 Social contribution tax loss carryforward 331,445 902,216 331,445 902,216
The projected realization of deferred taxes was prepared based on the Management’s best estimates and on projected results approved by the Company’s corporate governance bodies. However, since there are diverse assumptions over which the Company has no control, such as inflation indices, exchange volatility, international
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
market prices and other economic uncertainties in Brazil, future results may materially differ from those considered in this projection.
Year Consolidated
In 2018 415,446 In 2019 239,565 In 2020 183,830 In 2021 121,923 In 2022 106,962 2023 to 2027 67,053
1,134,779
12.1 Reconciliation of the effects of income tax and social contribution on profit or loss
Parent Company Consolidated
12/31/2017 12/31/2016 12/31/2017 12/31/2016
Income before income and social contribution taxes 2,225,659 2,444,916 2,239,065 2,418,193 Income and social contribution taxes at the nominal rate of 34% (756,724) (831,271) (761,282) (822,186)
Tax effect on permanent differences: Taxation on profit of subsidiaries abroad (104,918) (7,880) (104,918) (7,880) Tax effects of Law 11,941/09 and IFRS - 4,749 - - Tax incentive - Reduction SUDENE (a) 196,604 124,085 196,604 124,085 Equity pick-up in subsidiaries and affiliates 167,508 56,928 1,996 2,422 Taxation difference - Subsidiaries (b) - - 151,504 20,327 Reintegra credit 39,180 1,812 39,180 1,812 Interest on equity 67,944 - 67,944 Taxation on transactions with subsidiaries (11,789) (20,135) (11,789) (20,135) Other (16,031) (81,206) (10,871) (24,640) (418,226) (752,918) (431,632) (726,195)
Income tax Current (68,919) (180) (80,607) (16,502) Deferred (184,066) (520,046) (184,066) (486,426) (252,985) (520,226) (264,673) (502,928) Social Contribution Current (119,862) (170,476) (121,580) (172,315) Deferred (45,379) (62,216) (45,379) (50,952) (165,241) (232,692) (166,959) (223,267)
Income and social contribution tax expenses in the periods (418,226) (752,918) (431,632) (726,195)
Effective rate of income and social contribution tax expenses 18.8% 30.8% 19.3% 30.0%
(a) The Company used the benefit of reducing 75% calculated based on Exploration Profit of Mucuri (BA) and Imperatriz (MA) units.
(b) Refers mainly to the difference between the nominal rate used by the Company and that used by its subsidiaries in Brazil and abroad.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
12.2 Tax incentives
Suzano has tax incentives involving partial income tax reduction and Incentivized Accelerated Depreciation (“DAI”) produced by operations conducted in areas of the Northeast Development Superintendence (“SUDENE”) in the regions of Mucuri and Imperatriz. The income tax reduction incentive is calculated on the profit from the activity (profit from exploration) and takes into account the allocation of operating profit at the incentivized production levels during the periods defined for the benefit for each product, which in general are 10 years. The Incentive for Lines 1 and 2 of Mucuri expires in 2024 and 2018, respectively.
The DAI Benefit is applicable to acquisitions of property, plant and equipment items from calendar year 2006 to December 31, 2018 and consists of full depreciation of the asset, within the year of acquisition or up to the 4th year after the acquisition, for the unit in Maranhão, which can be deducted from the income tax calculation basis.
At the Mucuri (BA) unit, full depreciation of property, plant and equipment acquired for Line 2 took place with the operational start-up of the Line. For other items of property, plant and equipment of the units of Bahia and Imperatriz (MA), the tax incentive obtained, which applied to acquisitions taking place until December 31, 2018.
13 Biological assets
Below are the changes in the balances of biological assets in the years ended on the respective dates:
Parent Company Consolidated Balances on December 31, 2015 4,234,664 4,130,508 Additions (a) 1,448,397 1,426,699 Depletion for the year (565,331) (565,331) Loss on adjustment to fair value (b) (780,666) (780,666) Disposal of forests (24,341) (24,341) Other write-offs (c) (114,341) (114,341) Balances on December 31, 2016 4,198,382 4,072,528 Additions (a) 934,992 912,368 Depletion for the year (551,135) (551,135) Gain on adjustment to fair value (b) 192,504 192,504 Disposal of forests (28,030) (28,030) Other write-offs (c) (46,369) (49,338) Balances on December 31, 2017 4,700,344 4,548,897
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
(a) Refers to formation and acquisition of forests. In 2016, the Company acquired forests from Queiroz Galvão for approximately R$ 507 million. Leased land costs incurred with subsidiaries in the amount of R$ 22,624 (R$ 21,789 on December 31, 2016) were excluded from the consolidated statements;
(b) The loss recorded in 2016 is manly composed of reduction of IMA in the regions of Bahia and Pará, reduction in the average gross market price of wood in São Paulo, other economic effects and operating forest turnover. The gain reported in 2017 is mainly due to the gross wood price in the regions of Maranhão and Pará and the maintenance of other assumptions;
(c) Represent operational write-offs of forests during the forest formation period.
The Company’s biological assets are mainly made of eucalyptus forest for reforestation used to supply wood to pulp and paper mills and are located in the states of São Paulo, Bahia, Maranhão, Minas Gerais, Pará and Tocantins. Permanent preservation and legal reserve areas were not included in the calculation of fair value due to its nature.
The fair value of eucalyptus forests is determined semiannually through the income approach method by using the Discounted Cash Flow method.
The assumptions used in determining the fair value of biological assets were:
i) Average cycle of forest formation of 7 years; ii) Forests are measured at their fair value as of the plantation year; iii) Mean annual increment – IMA consists of the estimated volume of production of wood with bark in m3 per hectare, ascertained based on the genetic material used in each region, forestry practices and forest management, production potential, climate factors and soil conditions; iv) The estimated average standard cost per hectare includes expenses on forestry and forest management each year of formation of the biological cycle of the forests, plus costs of land lease agreements and own land opportunity cost; v) The average eucalyptus gross sale prices were based on specialized research on transactions made by the Company with third parties, and/or weighted by the cost of formation plus cost of capital plus estimated margin for regions where there is no market benchmark available; vi) Discount rate used in cash flows is calculated based on capital structure and other economic assumptions for a participant in the independent business of selling timber (forests).
The pricing model considers net cash flows, after deduction of taxes on profit at the applicable rates.
Main assumptions for calculation of fair value of the biological assets:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Assumptions Used 12/31/2017 12/31/2016 Planted useful area (hectare) 470,338 450,474 Mature assets 106,008 84,084 Immature assets 364,330 366,390 Mean annual increment (MAI) - m3/hectare/year 33.06 33.80 Average gross sale price of eucalyptus - R$/m3 69.19 53.45 Utilization cost of Company's assets that contribute - % 4.44% 5.00% Discount rate - % 9.11% 10.54%
The Company manages the financial risks related to agricultural activities in a preventive manner. To reduce risks from edaphoclimatic factors, the weather is monitored through meteorological stations and, in the event of pests and diseases, our Department of Forestry Research and Development, an area that specializes in physiological and phytosanitary aspects of the Company, has procedures to diagnose and act rapidly against any occurrences and losses.
Sensitivity analysis
The calculation of fair value of the biological assets falls under Level 3 in the hierarchy set forth in CPC 46 (equivalent to IFRS 13) – Measurement of Fair Value, due to the complexity and structure of calculation.
The main assumptions, MAI and Average Price are the most sensitive, given that any increase in these assumptions causes significant gains and any reduction thereof causes significant negative impacts on fair value measurement.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
14 Investments
Subsidiaries Joint ventures Paineiras Suzano Suzano Suzano Suzano Amulya Ondurman Paineiras Stenfar Sun Paper Asapir (c) Ibema Total Logística America Áustria Europa Trading Investment on December 31, 2015 12,557 (57,427) 255,559 4,440 20,717 6,214 (54,180) 63 (148,429) (44,923) 1,293 - (4,116) Equity pick-up (27,730) (9,288) (81,698) (6,502) 10,049 244 42,374 (2,147) 162,293 86,219 749 (7,127) 167,436 Foreign exchange variations in investees - - (1,209) - (10,894) (1,923) (7,748) (3) (12,448) (11,494) - - (45,720) Capital increase - - - 4,000 ------4,000 Share acquisition ------8,000 8,000 Capital reduction - - (47) ------(47)
Provision for losses on December 31, 2016 (15,173) (66,715) - - - - (19,554) (2,087) - - - - (103,529) Investment on December 31, 2016 - - 172,605 1,938 19,872 4,535 - - 1,416 29,802 2,042 873 233,083 Equity pick-up in subsidiaries and investees 9,279 (7,921) (14,495) (1,504) (426) (382) (7,282) 3,332 (6,305) 512,558 (55) 5,872 492,671 Foreign exchange variations in investees - - (437) - (3,935) 469 748 153 3,756 37,123 129 - 38,006 Share acquisition (a) ------21 21 Capital increase 43,000 ------43,000 Merger of subsidiary (37,106) ------(37,106)
Provision for losses on December 31, 2017 (b) - (74,636) - - - - (26,088) - (1,133) - - - (101,857) Investment on December 31, 2017 (b) - - 157,673 434 15,511 4,622 - 1,398 - 579,483 2,116 6,766 768,003
(a) See Note 1.1 b) iv).
(b) Includes unrealized profit from intercompany transactions and provision for investment losses.
(c) Shared control with 50% consolidation.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
The financial information of subsidiaries and joint ventures is shown below:
Subsidiaries Indirect subsidiaries Joint ventures
Paineiras Suzano Suzano Suzano Suzano Amulya Ondurman Paineiras Stenfar Sun Paper Stenfar Futuragene Asapir Ibema Logística America Áustria Europa Trading Equity interest % - 100% 100% 100% 90% 100% 100% 100% 100% 100% 10% 100% 50% 49.9% Total assets - 90,302 273,630 12,198 93,632 5,026 383,546 4,100,345 2,849,785 5,008,020 93,632 33,473 12,856 334,827 Total liabilities - 49,331 79,450 11,763 66,960 402 338,383 4,098,948 2,778,875 4,428,393 66,960 38,311 8,616 334,009 Adjusted equity (a) 9,279 (74,636) 157,673 434 18,177 4,622 (26,088) 1,398 (1,133) 579,483 18,177 (4,838) 4,232 818 Net income (loss) for the year 9,279 9,694 (9,487) (1,504) 2,004 (382) 3,342 3,332 8,135 512,673 2,004 (59,538) (110) 9,790
(a) Adjusted equity considers the elimination of unrealized profits.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
15 Property, Plant and Equipment
Parent Company
Machinery Total property, Land and Work in Buildings and Other assets plant and farms progress equipment equipment
Annual average depreciation rate 3.45% 5.25% 17.52% - - - Cost Balances on December 31, 2015 2,624,312 15,057,270 273,510 3,819,315 216,506 - 21,990,913 Transfers 59,153 278,749 17,609 229,269 (584,780) - Transfers between other assets (b) - 32,593 - - (27,577) 5,016 Additions - 87,392 11,099 - 783,074 881,565 Write-offs (a) (1,774) (120,191) (12,787) (4,159) - (138,911) Provision for losses (impairment) - - - (36,080) - (36,080) Interest capitalization - - - - 3,448 3,448 Balances on December 31, 2016 2,681,691 15,335,813 289,431 4,008,345 390,671 22,705,951 Transfers 141,161 485,182 3,297 3,920 (633,560) - Transfers between other assets (b) (4,500) 4,434 (7,035) - (8,705) (15,806) Additions 4,500 104,402 5,895 1,739 731,740 848,276 Write-offs (a) (9,463) (95,277) (13,520) (10,561) (4,697) (133,518) Merger of Amulya - - - 25,793 - 25,793 Interest capitalization - - - - 8,286 8,286 Balances on December 31, 2017 2,813,389 15,834,554 278,068 4,029,236 483,735 (c) 23,438,982
Depreciation Balances on December 31, 2015 (684,884) (5,326,980) (161,397) - - (6,173,261) Transfers (41) 1,830 (1,789) - - - Write-offs (a) 759 111,525 12,552 - - 124,836 Depreciation (77,558) (690,699) (25,070) - - (793,327) Balances on December 31, 2016 (761,724) (5,904,324) (175,704) - - (6,841,752) Transfers 8 270 (278) - - - Write-offs (a) 3,172 64,536 13,140 - - 80,848 Depreciation (70,037) (700,416) (26,520) - - (796,973) Balances on December 31, 2017 (828,581) (6,539,934) (189,362) - - (7,557,877)
Residual value Balances on December 31, 2017 1,984,808 9,294,620 88,706 4,029,236 483,735 (c) 15,881,105 Balances on December 31, 2016 1,919,967 9,431,489 113,727 4,008,345 390,671 15,864,199
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Consolidated
Machinery Total property, Land and Work in Buildings and Other assets plant and farms progress equipment equipment
Annual average depreciation rate 3.45% 5.25% 17.52% - - - Cost Balances on December 31, 2015 2,626,470 15,065,858 283,294 4,336,084 216,506 22,528,212 Transfers 59,153 278,749 17,609 229,269 (584,780) - Transfers between other assets (b) - 32,593 - - (27,577) 5,016 Additions (22) 88,561 11,018 (80) 783,074 882,551 Write-offs (a) (1,774) (120,191) (12,790) (4,159) - (138,914) Provision for losses (impairment) - - - (192,538) - (192,538) Interest capitalization - - - - 3,448 3,448 Balances on December 31, 2016 2,683,827 15,345,570 299,131 4,368,577 390,671 23,087,775 Transfers 141,161 485,182 3,297 3,920 (633,560) - Transfers between other assets (b) (4,500) 4,434 (7,035) - (8,705) (15,806) Additions 4,648 106,422 6,527 2,257 731,740 851,594 Write-offs (a) (9,463) (95,277) (13,525) (26,162) (4,697) (149,124) Interest capitalization - - - - 8,286 8,286 Balances on December 31, 2017 2,815,673 15,846,331 288,395 4,348,592 483,735 (c) 23,782,726
Depreciation Balances on December 31, 2015 (685,681) (5,330,746) (165,551) - - (6,181,978) Transfers (41) 1,830 (1,789) - - - Write-offs (a) 759 111,525 12,552 - - 124,836 Depreciation (77,723) (691,552) (26,078) - - (795,353) Balances on December 31, 2016 (762,686) (5,908,943) (180,866) - - (6,852,495) Transfers 8 270 (278) - - - Write-offs (a) 3,172 64,536 13,145 - - 80,853 Depreciation (70,315) (701,822) (27,719) - - (799,856) Balances on December 31, 2017 (829,821) (6,545,959) (195,718) - - (7,571,498)
Residual value Balances on December 31, 2017 1,985,852 9,300,372 92,677 4,348,592 483,735 (c) 16,211,228 Balances on December 31, 2016 1,921,141 9,436,627 118,265 4,368,577 390,671 16,235,280
(a) In addition to disposals, write-offs include obsolescence and scrapping;
(b) Includes transfers between the lines of inventory, intangible assets and non-current assets held for sale, of which: i) Semi-trailers (R$ 7,035); and ii) Commercial property (R$ 4,500);
(c) The balance of Construction in Progress comes from investments made in line with the strategy to maximize return for shareholders, of which: i) adjacent business - R$ 134,299; ii) structural competitiveness - R$ 264,606; and iii) other investments - R$ 84,830 (On December 31, 2016, i) adjacent business - R$ 143,677; ii) structural competitiveness - R$ 187,626; and iii) other investments - R$ 59,368).
Machinery and equipment include amounts recognized as financial leasing outlined in Note 20.1.
On December 31, 2016, the Company did not identify any event that implied impairment of its assets.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
15.1 Assets given as collateral
On December 31, 2017, the Company and its subsidiaries had property, plant and equipment given as collateral in loan operations and lawsuits amounting to R$ 11,571,632 (R$ 11,155,204 on December 31, 2016).
15.2 Capitalized expenses
During 2017, interests were capitalized in the amount of R$ 8,286 referring to the investments in adjacent business and structural competitiveness (December 31, 2016 the amount of R$ 3,448 referring to the same investments).
The amount considers acquisitions net of investments at the average rate of 0.79% per month.
16 Intangible Assets
On December 31, 2017, intangible assets totaled R$ 113,334 (R$ 118,505 on December 31, 2016) and R$ 188,426 (R$ 219,588 on December 31, 2016), respectively, in the Company and Consolidated financial statements.
In 2017, the subsidiary Futuragene discontinued the remaining two research and development agreements with third parties totaling R$ 18,845, in which the parties did not express interest in continuing with the research.
17 Receivables from land expropriation
On July 1, 1987, the merged subsidiary Companhia Santista de Papel filed an Action for Damages for Indirect Expropriation, in order to obtain indemnification for property owned by it, which had been declared as a public use area (property included in the State Serra do Mar State Park, in the city of Cubatão, state of São Paulo). On December 2, 2004, the action resulted in a final and unappealable decision in favor of the Company.
Suzano’s Management and legal advisors expect the expropriation amount to be transferred by 2020, notwithstanding the discussion on extending the payment term to 2024, when all expropriation amounts must be settled.
On December 31, 2017, the amount was R$ 60,975 (R$ 56,721 on December 31, 2016).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
18 Trade payables Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Domestic suppliers 567,306 519,411 574,458 558,288 Foreign suppliers 14,504 30,102 36,018 24,630
581,810 549,513 610,476 582,918
19 Loans and Financing
Annual average Parent Company Consolidated interest rate Index Maturity 12/31/2017 12/31/2016 12/31/2017 12/31/2016 on 12/31/2017 Property, plant and equipment:
BNDES - Finem (a) (b) Fixed rate /TJLP 7.19% 2018 to 2026 311,836 1,068,482 339,798 1,096,648 BNDES - Finem (b) Currency basket / US$ 6.52% 2018 to 2023 165,125 490,718 165,125 490,718 BNDES - Finame (a) Fixed rate /TJLP 5.55% 2018 to 2024 4,708 18,548 4,708 18,548 FNE - BNB (b) Fixed rate 6.28% 2018 to 2026 244,452 218,937 244,452 218,937 FINEP (b) Fixed rate 4.00% 2018 to 2020 20,577 35,263 20,577 35,263 Financial lease CDI/US$ 2018 to 2022 19,686 23,632 19,686 23,632 Export Credit Agency - ECA (b) (c) US$/Libor 3.05% 2018 to 2022 864,761 1,078,696 864,761 1,078,696 1,631,145 2,934,276 1,659,107 2,962,442
Working capital:
Export financing US$/Libor 4.89% 2018 to 2022 844,388 1,940,764 844,388 1,940,764 Export credit note CDI 6.89% 2018 to 2020 2,907,200 3,242,035 2,907,200 3,242,035 Senior Notes (d) US$/Fixed rate 6.22% 2021 to 2047 - - 4,730,800 3,787,755 Trade notes discount-Vendor 2018 33,363 32,957 33,363 32,957 Syndicated Loan (e) US$/Libor 3.32% 2018 to 2020 - - 1,986,691 1,950,463 Fund of Investments in Receivables 2018 24,665 - 24,665 - Other 2018 287 84 5,642 96,363 3,809,903 5,215,840 10,532,749 11,050,337
5,441,048 8,150,116 12,191,856 14,012,779
Current (including interest payable) 1,329,753 1,393,446 2,115,067 1,594,720
Non-current 4,111,295 6,756,670 10,076,789 12,418,059
Non-current loans and financing mature as follows:
2018 - 1,833,525 - 2,488,976 2019 1,236,638 1,696,671 2,122,767 2,569,759 2020 2,160,696 2,368,459 2,599,279 2,807,001 2021 494,345 636,983 1,121,216 2,733,599 2022 119,750 123,309 123,745 105,600 2023 49,164 56,536 53,160 60,531 2024 30,089 39,484 34,084 43,479 2025 onwards 20,613 1,703 4,022,538 1,609,114 4,111,295 6,756,670 10,076,789 12,418,059
(a) Transactions at 6% p.a. of the Long-term Interest Rate (“TJLP”) published by the Central Bank of Brazil. The model of operation of the term of capitalization, that is, exceeding 6% p.a., is merged into the principal and subject to the interest rate mentioned.
(b) Loans and financing are secured, depending on the agreement, by i) plant mortgages; ii) rural properties; iii) fiduciary sale of the asset being financed; iv) guarantee from shareholders, and (v) bank guarantee.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
(c) Suzano contracted a US$150 million agreement to finance import of equipment for the Mucuri Unit and obtained funds through two import financing operations (Export Credit Agency (“ECA”)) for equipment to be installed in the future pulp producing unit in Maranhão. The total amount contracted is equivalent to US$535 million, for a term of up to 9.5 years, with guarantee furnished by the Export Credit Agencies Finnvera and EKN. These agreements establish covenants regarding the maintenance of determined levels of leverage, which are verified for compliance after 60 and 120 days of the closing of the months of June and December of each fiscal year, respectively. With regard to the results of June 2017, the Company met all covenants established in the agreements.
(d) In September, November and December 2017, Suzano, through its subsidiary Suzano Trading, repurchased Senior Notes in the amount of US$146 million, US$309 million and US$623 thousand, respectively, and, through Suzano Áustria, reopened the issues of Senior Notes in the amount of: i) US$200 million, maturing on July 14, 2026, with interest corresponding to 4.625% p.a., to be paid semiannually, in January and July; and ii) US$200 million, maturing on March 16, 2047, with interest corresponding to 6.300% p.a., to be paid semiannually, in March and September. In March 2017, Suzano, through its subsidiary Suzano Áustria, issued US$300 million in Senior Notes due on March 16, 2047, with semiannual interest payments of 7.00% p.a. and final return for investors of 7.38% p.a. (Note 1.1 a), i), iii) and v)).
(e) In May 2015, the Company, through its subsidiary Suzano Europa, contracted a syndicated loan in the amount of US$600 million, with payment of quarterly interest and amortization of the principal between May 2018 and May 2020. This loan has clauses establishing the maintenance of certain levels of leverage, which are verified and have compliance confirmed after 60 and 120 days from the end of June and December of each fiscal year, respectively. With regard to the results of June 2017, the Company met all the established levels.
Certain financing agreements have financial and non-financial covenants. Financial covenants establish some maximum levels of leverage, normally expressed as a ratio of Net Debt to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), which are met by the Company on the date of these financial statements. Non-financial covenants establish the maximum level of assignment of receivables, guarantees to third parties and sale of operating assets, which are also met.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
19.1 Changes in loans and financing
Parent Company Consolidated Balances on December 31, 2015 10,002,341 14,917,342 Funding 3,702,577 5,665,635 Recognized interest 714,214 948,918 Exchange variation (831,521) (1,651,688) Settlement of principal (4,624,901) (4,853,038) Settlement of interest (822,989) (1,012,334) Negative goodwill - (15,236) Amortization of negative goodwill - 570 Funding costs (25,518) (33,978) Amortization of funding costs 35,913 46,588 Balances on December 31, 2016 8,150,116 14,012,779 Funding 242,740 2,561,954 Recognized interest 526,720 993,702 Exchange variation (7,754) 81,849 Settlement of principal (2,927,471) (4,533,736) Settlement of interest (565,514) (1,025,117) Goodwill - 115,165 Negative goodwill - (44,718) Amortization of negative goodwill - 1,559 Amortization of goodwill - (1,887) Funding costs (2,683) (18,315) Amortization of funding costs 24,894 48,621 Balances on December 31, 2017 5,441,048 12,191,856
19.2 Transaction costs and premiums of securities issues
Consolidated Balance to be amortized Nature Total cost Amortization 12/31/2017 12/31/2016
Senior Notes 81,268 (53,988) 27,280 29,694 NCE 67,845 (44,769) 23,076 33,322 Import (ECA) 101,811 (75,425) 26,386 38,896 Syndicated Loan 20,015 (13,536) 6,479 11,780 Other 5,574 (3,150) 2,424 1,878 276,513 (190,868) 85,645 115,570
The cost of funding in foreign currency is amortized on the contractual dates based on the effective interest rate and the currency of origin, and is converted into Reais for reporting purposes.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
19.3 Guarantees for loans and financings
Some loan and financing contracts have clauses of guarantee of the financed equipment itself or other fixed assets indicated by the Company (Note 15.1).
20 Lease
20.1 Financial lease agreements
The Company has financial lease agreements related to equipment used in the pulp and paper industrial process, in which the Company assumes the risks and benefits inherent to the property. Some agreements are denominated in U.S. dollar or the CDI overnight rate and contain purchase option clauses for these assets upon the expiration of the lease term, which varies from 5 to 15 years, for a price substantially lower than their fair value. Management intends to exercise the purchase options on the dates estimated in each agreement.
The amounts booked as property, plant and equipment, net of depreciation, and the present value of mandatory installments of the agreement (financing) corresponding to these assets are stated below:
Parent Company and Consolidated 12/31/2017 12/31/2016
Machinery and equipment 108,160 108,565 (-) Accumulated depreciation (99,452) (97,617) Property, plant and equipment, net 8,708 10,948
Present value of mandatory installments (financing):
Less than 1 year 4,632 4,796 From 1 to 5 years 15,054 18,836 Total present value of mandatory installments (financing) 19,686 23,632
Financial charges to be recognized in the future 2,770 5,937
Total mandatory installments at the expiration of agreements 22,456 29,569
20.2 Operating lease agreements
The Company maintains operating lease agreements related to the lease of areas, offices, properties, vehicles, call centers, hardware equipment and installation services, whose agreements were executed in Brazilian real. Management has no intention of buying the assets at the end of the agreement, and the term of the agreements are not equivalent to a significant portion of the useful life of assets.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Operating lease payments are recognized as operating expenses in the Company’s income statement.
installment Description Index Maturity amount Administrative offices and deposits 1 to 1.170 IGP-M and IPCA/IBGE 1/30/2018 to 1/27/2024 Call center and licenses 1 to 149 IGP-DI 9/30/2018
The minimum payments of maturing operating were as follows:
12/31/2017 Less than 1 year 25,555 From 1 year to 3 years 19,891 From 3 years to 5 years 13,938 Total installments due 59,384
20.3 Other Commitments
In the normal course of its operations, the Company enters into contracts and commercial commitments to guarantee better operating conditions to expand its business. The most relevant are:
i) Land lease agreements to form eucalyptus forests, the terms of which can be as much as 21 years (3 cycles of forest formation) and have renewal option clauses. Payments made are recorded as cost of forest formation under “Biological Assets”, recognized in income when the forest base is depleted. The installments falling due on the date of these financial statements are equivalent to R$ 1,224,679 in installments adjusted for inflation.
ii) Contracts for future sale of finished products, backed by performance sale operations recorded in the short term. The amounts are initially recognized in "Advances from Customers” and are recorded in income as these products are delivered. On December 31, 2017, the amount of R$ 63,201 was recorded in “Advances from Customers” (R$ 495,918 on December 31, 2016).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
21 Provision for Contingencies
21.1 Changes in provisions for contingencies
Parent Company
Balance on Inflation Settlement of Balance on New lawsuits Reversals 12/31/2016 adjustment lawsuits 12/31/2017 Tax and social security 199,232 31,329 (2,428) 42,401 (1,880) 268,654 Labor 35,490 9,033 (2,331) 9,351 (13,426) 38,117 Civil 1,839 1,880 (337) - - 3,382
236,561 42,242 (5,096) 51,752 (15,306) 310,153
Consolidated
Balance on Inflation Settlement of Balance on New lawsuits Reversals 12/31/2016 adjustment lawsuits 12/31/2017 Tax and social security 206,365 32,672 (4,738) 42,400 (3,375) 273,324 Labor 38,430 9,888 (3,720) 9,467 (13,702) 40,363 Civil 1,839 1,880 (337) - - 3,382 246,634 44,440 (8,795) 51,867 (17,077) 317,069
21.2 Tax and Social Security Suits and Proceedings
On December 31, 2017, the Company was a defendant in administrative proceedings as well as tax and social security lawsuits in which the disputed matters related to diverse taxes such as IRPJ/CSLL, PIS, COFINS, IPI, pension contributions, ITR, ICMS, ISS and IPTU, whose amounts are provisioned for when the likelihood of loss is deemed probable by the Company’s external legal counsel and the Management.
The Company joined the Tax Recovery Program (REFIS) – Law 11,941/09, regarding certain lawsuits, totaling an inflation-adjusted principal of approximately R$ 13,665, which is duly provisioned for, and the related interest and fines will be paid using the tax loss and negative social contribution, which were already informed by the Company to the Federal Revenue Service of Brazil and are awaiting consolidation.
With the issue of Provisional Measure 783/2017, subsequently converted into Law 13,496/2017, due to benefits of reduction in the interest, fines and legal charges, the Company opted to migrate some debts covered by REFIS – Law 11,941/09, not consolidated yet, and settle other debts whose loss is deemed probable. These debts are recorded in provision amounting to R$ 5,367 on December 31, 2017, already considering legal deductions and amounts prepaid to the Federal Revenue Service of Brazil and the Office of the General Counsel for the Federal Treasury, whose consolidation must probably occur in the first quarter of 2018.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
21.3 Labor claims
On December 31, 2017, the Company was a defendant in 3,208 labor claims.
In general, labor claims are related primarily to matters frequently contested by employees in agribusiness companies, such as certain wages and/or severance payments, in addition to suits filed by outsourced employees of the Company.
21.4 Civil claims
On December 31, 2017, the Company is a defendant in approximately 405 civil claims.
Civil proceedings are related primarily to payment of damages, such as those resulting from contractual obligations, traffic-related injuries, possessory actions, environmental claims and others.
21.5 Judicial deposits
On December 31, 2017, the Company has judicial deposits of R$ 113,613, of which R$ 69,599 refer to labor lawsuits and R$ 44,014 to tax and social security lawsuits (on December 31, 2016, the amount was R$ 87,097, of which R$ 37,663 refer to labor lawsuits and R$ 49,434 refer to tax and social security lawsuits).
21.6 Lawsuits with possible probability of loss
The Company is involved in tax, civil and labor lawsuits, for which there is no reserve, as they involve risks with a possible probability of loss, according to Management and its legal counsel.
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Tax and social security 1,026,950 193,922 1,026,950 193,922 Labor 14,268 37,909 14,268 38,667 Civil 23,666 1,310 23,666 1,310
1,064,884 233,141 1,064,884 233,899
The Company is a defendant in lawsuits whose likelihood of loss is deemed possible, in the approximate amount of R$ 1,026,950, for which no provision is recorded. Of this amount, R$ 810,401 refers to a tax-deficiency notice of PIS and COFINS, from 2007 to 2013, which was not considered yet in the lower court by the Federal Revenue Service of Brazil. The other tax and social security lawsuits are related to a variety of taxes such as social security, IRPJ, ITR, ICMS, IRRF, PIS and COFINS, mainly due to differences in the interpretation of the applicable tax rules and information provided in ancillary obligations.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
22 Actuarial Liabilities
22.1 Defined benefits plans
The Company guarantees coverage of healthcare costs for former employees who retired by 2003 (until 1998 for former employees of Ripasa, current Limeira unit), as well as their spouses for life and dependents while they are minors.
For other group of former employees, who exceptionally, according to the Company’s criteria and resolution or according with rights related to the compliance with pertinent legislation, the Company ensures the healthcare program.
The Company offers life insurance benefit provided to retirees.
22.2 Key actuarial economic and biometric assumptions used in the calculations of liability
12/31/2017 12/31/2016 Discount rate - health plan 5.39% p.a 5.65% p.a. Discount rate - life insurance 5.39% p.a 5.65% p.a. Medical cost growth rate above basic inflation 3.25% p.a 3.00% p.a. Economic inflation 4.40% p.a 5.50% p.a. Biometric table of general mortality AT-2000 AT-2000 Biometric table of mortality of disabled persons IAPB 57 IAPB 57
On December 31, 2017, the sensitivity of the balance of actuarial liabilities to the changes in the main assumptions used, considering that all others remain unchanged, is as follows:
Change Increase in assumption Decrease in assumption
Discount rate 0.50% Decrease of 5.71% Increase of 6.31% Medical cost growth rate 0.50% Increase of 6.46% Decrease of 5.90% Mortality 1 year Increase of 0.64% Decrease of 0.51%
Page 95 of 121 (A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE)
Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
22.3 Changes in actuarial liabilities
Parent Company and Consolidated Opening balance on December 31, 2015 263,141 Interest on actuarial liability 36,856 Actuarial loss 54,422 Benefits paid in the year (15,410) Opening balance on December 31, 2016 339,009 Interest on actuarial liability 38,022 Actuarial gain (4,173) Benefits paid in the year (21,595) Closing balance on December 31, 2017 351,263
23 Long-term Share-Based Payments
In the year ended December 31, 2017, the Company has two (2) share-based compensation Plans: i) Payment in phantom shares in cash; and ii) Payment in class-A preferred shares or alternatively in cash.
Certain executives, management and employees (beneficiaries) are entitled to the plan. The general acquisition conditions, such as exercise price, number of shares, vesting period and grant of stock options to these executives (beneficiaries) are defined in specific regulations in accordance with the guidelines and conditions established by the Company’s Bylaws and the Board of Directors.
These plans did not undergo any changes in their characteristics and measurement criteria since the financial statements of December 31, 2016.
23.1 Phantom Stock Options (“PSO”)
The Company has a long-term remuneration plan for certain executives and Management’s key members linked to the Company share price and paid in cash.
During 2017, the Company granted the Share Appreciation Rights (SAR) and PLUS 2017 Programs of phantom share options. In this program, beneficiaries should invest 5% of the total amount corresponding to the number of options of phantom shares at the grant date and 20% after three years to acquire the option. The Company also granted Long-Term Incentive (LTI) programs to its key members as part of its retention policy. In this program, the beneficiary does not make any investment.
The vesting period of options may vary from 3 to 5 years, as of grant date, in accordance with the characteristics of each plan.
The amount of the share is calculated based on the average share quote of the 90 previous trading sessions starting from the closing quote on the last business day of the month prior to the month of the grant. The installments of these programs will be
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
adjusted by the variation in the price of the Suzano’s shares (SUZB5) between the granting and the payment period. On dates when the SUZB5 stock is not traded, the quote of the previous trading session will be considered.
The phantom share options will only be due if the beneficiary is an employee of the Company on the payment date. In case of termination of the employment by initiative of the Company or by initiative of the beneficiary, before the vesting period is completed, the executive will not be entitled to receive all benefits, unless otherwise established in the agreements.
12/31/2017 12/31/2016 Shares (No.) Shares (No.) Available at the beginning of the year 3,048,991 3,570,103 Granted during the year 3,035,488 1,092,921 Intercompany transfer - 32,061 Exercised (a) (695,532) (1,144,900) Exercised due to dismissal (a) (161,270) (138,896) Abandoned / prescribed due to dismissal (172,158) (362,298) Available at the end of the year 5,055,519 3,048,991
(a) For share options exercised and those exercised due to employment termination, the average prices on December 31, 2017 and 2016 were R$ 19.84 and R$ 10.63, respectively.
On December 31, 2017, outstanding phantom shares option plans are as follows:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Parent Company and Consolidated 12/31/2017 2nd Fair price No. of options Program Grant date exercise on the granted date grant date ILP 2012 3/1/2012 3/1/2018 R$7.49 13,426 Deferral 2014 3/1/2015 3/1/2018 R$10.80 208,727 Deferral 2014 3/1/2015 3/1/2019 R$10.80 208,727 SAR 2015 4/1/2015 4/1/2020 R$11.69 594,239 SAR 2015 - September 9/1/2015 9/1/2020 R$15.99 4,340 ILP 2015 9/1/2015 9/1/2021 R$15.99 25,016 Deferral 2015 3/1/2016 3/1/2019 R$16.93 76,992 Deferral 2015 3/1/2016 3/1/2020 R$16.93 76,992 SAR 2016 4/1/2016 4/1/2021 R$15.96 611,713 PLUS 2016 4/1/2016 4/1/2021 R$15.96 204,673 SAR 2016 - October 10/3/2016 10/3/2021 R$11.03 8,934 SAR 2017 4/3/2017 4/3/2022 R$13.30 1,019,186 PLUS 2017 4/3/2017 4/3/2022 R$13.30 255,627 ILP 2017 - 36 4/3/2017 4/3/2020 R$13.30 406,016 ILP 2017 - 48 4/3/2017 4/3/2021 R$13.30 406,016 ILP 2017 - 60 4/3/2017 4/3/2022 R$13.30 406,016 ILP 2017 - H 4/4/2017 4/4/2022 R$13.30 11,278 ILP 2017 - CAB 5/1/2017 5/1/2020 R$13.30 307,141 ILP 2017 - 36 Oct. 10/2/2020 10/2/2020 R$15.87 126,444 ILP 2017 - 48 Oct. 10/2/2021 10/2/2021 R$15.87 42,008 ILP 2017 - 60 Oct. 10/2/2022 10/2/2022 R$15.87 42,008 TOTAL 5,055,519
23.2 Class A preferred stock options or alternatively in currency
The options granted cannot exceed 2% of the Company’s total paid-up and subscribed capital stock, and must derive from: i) the issue of new shares, within the limit of the Company’s authorized capital; and/or ii) treasury shares.
The Program III gives beneficiaries the right to acquire the Company shares at a fixed price, provided targets related to the following aspects are met: i) appreciation of the Company's shares; ii) Net Debt/Earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio; and iii) Return Over Invested capital (ROIC). If these targets are exceeded, the vesting period will be reduced by 12 months.
During the vesting period of options exercise, the beneficiary is prohibited from selling or encumbering these options.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
1st 2nd exercise Price on Total in Granted Granted Exercised Program Grant date exercise date and the grant effect on series shares shares date expiration date 12/31/2017 Series I 1/18/2013 1/18/2015 4/18/2015 3.53 1,800,000 1,800,000 - Series II 1/18/2013 1/18/2016 4/18/2016 3.71 1,800,000 1,800,000 - Program 3 Series III 1/18/2013 1/18/2018 4/18/2018 3.91 1,800,000 1,800,000 - Series IV 1/18/2013 1/18/2019 4/18/2019 3.96 1,800,000 1,800,000 - Series V 1/18/2013 1/18/2020 4/18/2020 3.99 1,800,000 - 1,800,000 Total 9,000,000 7,200,000 1,800,000
On December 31, 2017, there were 13,842,004 common treasury shares to guarantee the options granted by the Plan.
23.3 Measurement assumptions
In the case of the phantom shares plan, since the settlement is in cash, the fair value of options is measured again at the end of each period based on the Monte Carlo (MMC) method, which is multiplied by the Total Shareholder Return (“TSR”) in the period (which varies between 75% and 125%, depending on the performance of SUZB5 in relation to its peers in Brazil).
Class A preferred stock option plan of Program III, the fair value was estimated based on the binomial probability model, which considers the dividends distribution rate and the following assumptions:
Indexes
Description of assumptions Options SAR 2016 and SAR 2017 and Program III SAR 2014 SAR 2015 Plus 2016 Plus 2017 Calculation Model Binomial Monte Carlo Monte Carlo Monte Carlo Monte Carlo
Asset base price (per share) R$7.73 R$ 18.88 R$ 18.88 R$ 18.88 R$ 18.88
Expectation of volatility (a) 40.47% p.a. 36.82% p.a. 34.77% p.a. 33.85% p.a. 38.35% p.a Phantom stock/options average life expectancy (b) Equal to option life Dividends expectancy (c) 3.49% p.a. 2.94% p.a. 2.94% p.a. 4.80% p.a. 5.94% p.a.
Risk-free weighted average interest rate (d) 8.99% 11.90% 12.83% 14.33% 10.23%
(a) The expectation of volatility was calculated for each exercise date, taking into account the remaining time to complete the vesting period, as well as the historical volatility of returns, considering a standard deviation of 745 observations of returns;
(b) The expectation of average life of phantom stocks and stock options was defined by the remaining term until the limit exercise date;
(c) The expectation of dividends was defined based on historical earnings per share of the Suzano;
(d) Risk-free weighted average interest rate used was the BRL yield curve (DI expectation) observed on the open market, which is the best comparison basis with the Brazilian market risk-free interest rates. The rate used for each exercise date changes according to the vesting period.
The amounts corresponding to the services received and recognized in the financial statements are presented below:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Consolidated
Liabilities and equity Result
12/31/2017 12/31/2016 12/31/2017 12/31/2016
Non-current liabilities Provision for phantom stock plan 38,320 18,850 (32,192) 529
Shareholders' equity Stock option reserve 14,237 19,754 (1,523) (3,337)
Total general and administrative expenses from (33,715) (2,808) share-based transactions
24 Commitments Related to Asset Acquisitions
24.1 Real estate receivables certificates (“CRI”)
On December 31, 2017, the commitments related to the acquisition of land, farms, reforestation and houses under construction in Maranhão totaled R$ 53,321 in the Parent Company and R$ 102,059 in the Consolidated, presented under Commitments from acquisition of assets in current and non-current liabilities (R$ 57,735 and R$ 159,457, respectively, on December 31, 2016).
24.2 Acquisition of Vale Florestar Fundo de Investimento em Participações (“VFFIP”)
The Company acquired VFFIP in August 2014, due in August 2024 and August 2029, for the sum of R$ 528,941, with a down payment of R$ 44,998 and the outstanding balance, a portion restated at the variation of the Broad Consumer Price Index (“IPCA”) and the other portion restated at the variation of the U.S. dollar exchange rate, plus average coupon of 5.07% p.a.
On December 31, 2017, the restated outstanding balance is R$ 483,927 and at the Parent Company and Consolidated, registered under Commitments with acquisition of assets in current and non-current liabilities (R$ 535,398 on December 31, 2016).
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
25 Shareholders’ Equity
25.1 Capital stock
On December 31, 2017, the capital stock of Suzano is R$ 6,241,753, divided into 1,105,826,145 thousand registered, book-entry common shares without par value.
The composition of the capital stock is presented below:
Common Shares Shareholder Number (%) Suzano Holding S.A. 367,612,234 33.24 Controlling Shareholders and Management 257,167,925 23.26 Subtotal 624,780,159 56.50 Treasury 13,842,004 1.25 BNDESPAR 75,909,985 6.87 Mondrian Investment Partners 72,878,900 6.59 Other shareholders 318,415,097 28.79 Total 1,105,826,145 100.00
By resolution of the Board of Directors, the capital may be increased, independent of an amendment to the Bylaws, up to the limit of 780,120 thousand common shares, all exclusively book-entry shares.
On December 31, 2017, SUZB3 common stock ended the year quoted at R$ 18.69 (on December 31, 2016, SUZB5 preferred stock was quoted at R$ 14.20).
25.2 Reserves
Profit reserve
The Reserve for Capital Increase is composed of 90% of the remaining balance of net income for the year, after dividends, and legal reserve and aims to ensure the Company adequate operational conditions.
The Special Statutory Reserve includes the remaining 10% of the remaining balance of net income for the year and aims to ensure the distribution of dividends.
Capital reserve
The Capital Reserve is composed of the balances of the tax incentive reserve, the stock option reserve, the treasury shares the and the costs directly attributable to the Share Offering, which are primarily composed of the expenses with the fees and commissions charged by legal counsel, consultants and auditors.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
25.3 Treasury shares
Number of shares R$ Average price per share Common Pref. A Pref. B Total ('000) (R$) Balance on December 31, 2015 6,786,194 10,644,997 1,909,699 19,340,890 288,858 14.94 Shares sold (a) - (1,800,000) - (1,800,000) (15,193) 8.44 Shares transferred - 1,935 2,833 4,768 - - Balance on December 31, 2016 6,786,194 8,846,932 1,912,532 17,545,658 273,665 15.60 Shares sold (a) - (1,800,000) - (1,800,000) (15,552) 8.64 Shares transferred (b) 7,055,810 (7,055,810) - - - - Shares canceled (c) - - (1,912,532) (1,912,532) (17,107) 8.94 Repurchase of shares (d) - 8,878 - 8,878 82 9.24 Balance on 12/31/2017 13,842,004 - - 13,842,004 241,088 17.42
(a) Treasury shares used to meet the share-based compensation plan (Note 23).
(b) See Note 1.1 b), ii).
(c) On April 28, 2017, the Annual and Extraordinary Shareholders Meeting approved the cancellation of 1,912,532 class B preferred shares.
(d) Repurchase of shares related to withdrawal rights exercised by shareholders who did not adhere to the conversion of preferred shares to common shares.
25.4 Equity valuation adjustment
Conversion of Realization of Actuarial Conversion debentures - attributable Total gains/losses reserves 5th issue cost Balances on December 31, 2015 (45,745) (19,584) 34,336 2,481,076 2,450,083 Actuarial losses net of deferred income and social contribution taxes - (35,919) - - (35,919) Losses from conversion of operations abroad - - (45,720) - (45,720) Partial realization of cost adjustment attributed to assets, net of deferred - - - (53,877) (53,877) income and social contribution taxes Balances on December 31, 2016 (45,745) (55,503) (11,384) 2,427,199 2,314,567 Actuarial gain net of deferred income and social contribution taxes 2,754 2,754 Gains from conversion of operations abroad - - 38,006 - 38,006 Partial realization of cost adjustment attributed to assets, net of deferred - - - (56,999) (56,999) income and social contribution taxes Balances on December 31, 2017 (45,745) (52,749) 26,622 2,370,200 2,298,328
25.5 Earnings (losses) per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to the Company’s shareholders by the weighted average common shares issued during the period, excluding the common shares acquired by the Company and held as treasury shares.
As described in Note 1.1 b) ii), in November 2017, the Company migrated to the Novo Mercado segment. Thus, all preferred shares were converted into common shares at the ratio of one preferred share for one common share; Considering that there was no
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
change in capital stock, with mere conversion of preferred shares, for the purposes of calculation and presentation of earnings per share, this conversion was made retrospectively.
12/31/2017 12/31/2016
Earnings attributed to shareholders 1,807,433 1,691,998
Weighted average number of shares in the year 1,106,297 1,107,739 Weighted average treasury shares (7,965) (17,693) Weighted average number of outstanding shares 1,098,332 1,090,046
Basic earnings per common share 1.64562 1.55223
Diluted
Diluted earnings per share is calculated by adjusting the weighted average of outstanding common shares assuming the conversion of all common shares that would cause dilution. The Company presents dilution potential: call options exercisable at the discretion of the holder.
12/31/2017 12/31/2016
Earnings attributed to shareholders 1,807,433 1,691,998
Weighted average number of outstanding shares 1,098,332 1,090,046 Adjustment by stock options 1,360 2,182 Weighted average number of shares (diluted) 1,099,692 1,092,228
Diluted earnings per common share 1.64358 1.54913
25.6 Allocation of net income from the year and dividends
In accordance with the Company’s Bylaws, Article 26, item c), the Management proposes the payment of minimum mandatory dividends based on the net income for the year, as shown below:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
12/31/2017 12/31/2016 Net income for the year 1,807,433 (i) 1,691,998 Recording of legal reserve - 5% (90,372) (84,600) Recording of tax incentive reserve (196,604) (124,085) Dividend calculation base 1,520,457 1,483,313 Minimum mandatory dividends - 25% 380,115 370,828
Prepaid dividends as interest on equity (a) (199,835) - 180,280 370,828
(a) See Note 25.7.
25.7 Interest on Equity
On November 24, 2017, the Company, at the Board of Directors’ Meeting, approved the proposal to pay shareholder remuneration in the form of interest on equity, in the total gross amount of R$ 199,835, corresponding to R$ 0.183 per share issued by the Company, except treasury shares. The amount was paid to shareholders on December 11, 2017.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
26 Net Financial Result
Parent Company Consolidated 12/31/2017 12/31/2016 12/31/2017 12/31/2016
Interest income 277,889 327,754 285,888 333,168 Other financial income 14,646 22,149 19,890 28,016 Total financial income 292,535 349,903 305,778 361,184
Loan interest expenses (543,649) (746,791) (1,035,986) (991,796) Loan interest expenses with related parties (338,606) (226,690) - - Other interest expenses (99,938) (93,792) (108,410) (104,023) Other financial expenses (60,210) (47,487) (74,080) (60,385) Total financial expenses (1,042,403) (1,114,760) (1,218,476) (1,156,204)
(192,514) 1,637,133 (163,418) 1,619,202 Monetary and exchange variations on loans and financing Monetary and exchange variations on other assets and 45,316 (370,619) (15,995) (251,921) liabilities Monetary and exchange variation, net (147,198) 1,266,514 (179,413) 1,367,281
Derivative income (loss) 70,396 515,931 73,271 528,839
Financial income 362,931 2,132,348 379,049 2,257,304 Financial expenses (1,189,601) (1,114,760) (1,397,889) (1,156,204) Net financial income (expenses) (826,670) 1,017,588 (1,018,840) 1,101,100
27 Net Revenue
Parent Company Consolidated
12/31/2017 12/31/2016 12/31/2017 12/31/2016
Gross sales revenue 10,562,500 10,275,204 11,700,172 11,056,340 Deductions Sales taxes (a) (1,103,197) (1,077,447) (1,114,998) (1,087,566) Present value adjustment (7,596) - (7,596) - Returns and cancelations (47,394) (53,232) (50,199) (76,654) Discounts and rebates (6,585) (9,807) (6,589) (9,807)
Net revenue 9,397,728 9,134,718 10,520,790 9,882,313
a) Includes 1% up to November 2015 and 2.5% as of December 2015 of gross revenue from domestic sales, relating to the social contribution paid to Brazil’s National Institute of Social Security (INSS), valid indefinitely, as per Law 12,546/11, Article 8, Annex I and its amendments.
The table below shows the breakdown of consolidated net revenue by foreign and domestic markets, specifying the countries where sales in the export market are more significant:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Consolidated 12/31/2017 12/31/2016 % Total net % Total net Net revenue Net revenue revenue revenue
Domestic market 3,187,159 30% 3,324,299 34% Foreign market 7,333,631 70% 6,558,014 66% China 1,786,629 17% 1,279,134 13% United States 1,392,159 13% 1,359,651 14% Hong Kong 1,230,631 12% 1,001,465 10% France 475,442 5% 479,386 5% Germany 441,506 4% 377,619 4% Italy 378,874 4% 611,150 6% Canada 310,726 3% 74,830 1% Spain 246,184 2% 129,128 1% Turkey 197,880 2% 144,031 1% United Kingdom 195,828 2% 184,804 2% Netherlands 178,647 2% 241,008 2% Argentina 160,207 1% 158,425 2% Peru 128,083 1% 101,807 1% Other countries 210,835 2% 415,576 4% Total net revenue 10,520,790 100% 9,882,313 100%
28 Information by Segment and Geographic Areas
28.1 Criteria for identifying operating segments
The Company evaluates the performance of its business segments through the operating result. The information presented under “Not Segmented” is related to income statement and balance sheet items not directly attributed to the pulp and paper segments, such as, net financial result and income and social contribution taxes expenses, in addition to the balance sheet classification items of assets and liabilities.
The operating segments defined by Management are as follows:
i) Pulp: comprises the production and sale of hardwood eucalyptus pulp and fluff mainly to supply the export market, with any surplus destined to the domestic market.
ii) Paper: comprises the production and sale of paper to meet the demands of both domestic and export markets.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
28.2 Information on operating segments
Consolidated 12/31/2017 Not Pulp Paper Total segmented Net revenue 6,891,589 3,629,201 - 10,520,790 Domestic market 620,415 2,566,744 - 3,187,159 Foreign market 6,271,174 1,062,457 - 7,333,631 Asia 2,976,504 32,950 - 3,009,454 Europe 2,237,162 139,572 - 2,376,734 North America 966,789 255,086 - 1,221,875 South and Central America 90,719 608,445 - 699,164 Africa - 26,404 - 26,404 Cost of products sold (3,906,088) (2,543,380) - (6,449,468) Gross profit 2,985,501 1,085,821 - 4,071,322 Gross margin (%) 43.3% 29.9% - 38.7%
Operating expenses (income) (104,985) (756,949) 48,517 (813,417) Selling expenses (163,879) (266,946) - (430,825) General and administrative expenses (185,141) (343,833) - (528,974) Other operating income (expenses) 244,035 (152,042) 48,517 140,510 Equity pick-up - 5,872 - 5,872
Operating income or loss (EBIT) 2,880,516 328,872 48,517 3,257,905 Operating margin (%) 41.8% 9.1% - 31.0%
Net financial result - - (1,018,840) (1,018,840) Income or loss before taxes on profit 2,880,516 328,872 (970,323) 2,239,065
Income and social contribution taxes on profit - - (431,632) (431,632)
Net income for the year 2,880,516 328,872 (1,401,955) 1,807,433 Profit margin for the year (%) 41.8% 9.1% - 17.2%
Depreciation, depletion and amortization 1,007,280 395,498 - 1,402,778
Total assets (a) 18,901,493 6,336,499 3,284,990 28,522,982 Total liabilities (a) 637,451 643,594 15,620,383 16,901,428 Total equity (a) - - 11,621,554 11,621,554
Products sold (in tons) 3,614,865 1,180,465 - 4,795,330 Domestic market 3,240,992 374,232 - 3,615,224 Foreign market 373,873 806,233 - 1,180,106
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Consolidated 12/31/2016 Not Pulp Paper Total segmented Net revenue 6,141,891 3,740,422 - 9,882,313 Domestic market 706,488 2,617,811 - 3,324,299 Foreign market 5,435,403 1,122,611 - 6,558,014 Asia 2,502,344 32,054 - 2,534,398 Europe 1,957,569 143,036 - 2,100,605 North America 898,442 327,718 - 1,226,160 South and Central America 71,725 568,253 - 639,978 Africa 5,323 51,550 - 56,873 Cost of products sold (4,077,292) (2,494,330) - (6,571,622) Gross profit 2,064,599 1,246,092 - 3,310,691 Gross margin (%) 33.6% 33.3% - 33.5%
Operating expenses (income) (1,347,490) (638,981) - (1,986,471) Selling expenses (177,098) (231,712) - (408,810) General and administrative expenses (149,485) (277,615) - (427,100) Other operating income (expenses) (1,020,907) (129,654) - (1,150,561) Equity pick-up - (7,127) - (7,127)
Operating income or loss (EBIT) 717,109 599,984 - 1,317,093 Operating margin (%) 11.7% 16.0% - 13.3%
Net financial result - - 1,101,100 1,101,100 Income or loss before taxes on profit 717,109 599,984 1,101,100 2,418,193
Income and social contribution taxes on profit - - (726,195) (726,195)
Net income for the year 717,109 599,984 374,905 1,691,998 Profit margin for the year (%) 11.7% 16.0% - 17.1%
Depreciation, depletion and amortization 1,006,222 397,296 - 1,403,518
Total assets (a) 17,765,172 6,830,676 4,803,466 29,399,313 Total liabilities (a) 815,332 704,409 17,736,078 19,255,819 Total equity (a) - - 10,143,494 10,143,494
Products sold (in tons) 3,530,116 1,195,601 - 4,725,717 Domestic market 3,117,486 361,996 - 3,479,482
Foreign market 412,630 833,605 - 1,246,235
(a) Company evaluation based on operating segments is only made for assets and liabilities comprising the measurement of Return on Invested Capital (“ROIC”), since this is used in the decision-making process.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
29 Expenses by Nature
Parent Company Consolidated
12/31/2017 12/31/2016 12/31/2017 12/31/2016
Cost of Product Sold Personnel expenses (546,090) (507,311) (546,090) (507,311) Variable cost (2,944,432) (2,877,801) (2,994,349) (2,907,344) Logistics cost (284,117) (242,172) (963,379) (944,119) Depreciation, depletion and amortization (1,358,476) (1,358,974) (1,367,856) (1,373,355) Other costs (495,383) (718,294) (577,794) (839,493) (5,628,498) (5,704,552) (6,449,468) (6,571,622)
Selling expenses Personnel expenses (71,155) (68,915) (106,083) (111,022) Services (68,008) (59,603) (45,593) (39,854) Logistics cost (684,742) (685,554) (220,944) (198,973) Depreciation and amortization (3,095) (2,841) (3,547) (3,439) Other expenses (a) (57,447) (51,816) (54,658) (55,522) (884,447) (868,729) (430,825) (408,810)
Administrative expenses Personnel expenses (293,842) (221,921) (309,019) (235,153) Services (92,595) (71,060) (105,522) (85,911) Depreciation and amortization (30,021) (25,294) (31,375) (26,724) Other expenses (b) (67,851) (62,056) (83,058) (79,312) (484,309) (380,331) (528,974) (427,100)
Other operating (expenses) income Result from disposal of other products (3,314) 5,648 4,765 13,952 Result from disposal of property, plant and equipment and biological assets 24,751 9,771 29,005 9,767 Provision for loss and write-off of property, plant and equipment and biological assets (c) (63,861) (124,108) (66,707) (124,108) Provision for land losses (impairment) - (36,080) - (192,538) Amortization of intangible assets - (754) (8,303) (15,136) Adjustment to fair value of biological assets (d) 192,504 (780,666) 192,504 (780,666) Partial write-off of intangible assets - - (18,845) (78,799) Tax recovery 4,760 14,201 5,613 15,672 Land lease with subsidiaries (7,722) (10,307) - - Receipt of royalties 2,603 - 2,603 - Other operating income (expenses), net 9,463 1,081 (125) 1,295 159,184 (921,214) 140,510 (1,150,561)
(6,838,070) (7,874,826) (7,268,757) (8,558,093)
(a) Includes provision for doubtful accounts, insurance, materials (use and consumption), expenses with travel, accommodation, participation in trade fairs and events.
(b) Includes corporate expenses, insurance, materials (use and consumption), social projects and donations, expenses with travel and accommodation.
(c) The amount referred to R$ 49,338 in write-offs related to losses and claims with biological assets, R$ 17,369 with property, plant and equipment, and R$ 2,846 in reversal of provision for write-off of biological assets.
(d) Note 13.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
30 Insurance Coverage
Suzano’s insurance coverage is considered sufficient to cover possible liability risks, material losses and loss of profits. The maximum limit of damages for material assets is R$ 5,320,000; for Directors and Officers Civil Liability (D&O) the insured amount is R$ 220,000, and for civil and general liability the insured amount is R$ 20,000.
Eucalyptus forests are not covered by insurance policies given the unique features of this asset. The Company is constantly monitoring them through strategically located watchtowers and fire alarm systems and fire brigades are maintained and trained to avoid and fight these risks in forest areas.
31 Supplementary cash flow information
Payments made during the year and non-cash transactions
Parent Company and Consolidated 12/31/2017 12/31/2016
Offsets of other taxes payable (363,614) (413,053) Acquisitions of property, plant and equipment through transfer of spare part inventories 4,434 32,593 Write-off of property, plant and equipment through availability for sale of inventories (11,535) - Write-off of property, plant and equipment through transfer of intangible assets (8,705) (27,577) Actuarial liability gains (losses) 4,173 (54,422) Exchange variation on investees 38,006 (45,720) Reversal of time-barred dividends 29 26 Minimum mandatory dividends (180,280) (370,828)
32 Events subsequent to the reporting date
Acquisition of FACEPA – Approval by CADE
On January 19, 2018, Brazil's antitrust agency CADE approved, without restrictions, the acquisition of around 92.84% of the total capital of FACEPA mill by Suzano, as mentioned in Note 1.1 b) i). The conclusion of the acquisition is still subject to other contractual conditions.
Acquisition of land and forests in the state of São Paulo
On February 5, 2018, the Company entered into an Agreement for the Purchase of Forestry Assets, Purchase of Rural Properties, Purchase Option and Other Covenants, with Conditions Precedent, with Duratex S.A. (“Duratex”), through itself or its affiliates, under which:
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
(i) it acquired around nine thousand and five hundred (9,500) hectares of rural land and one million and two hundred thousand cubic meters (1,200,000 m³) of forests, which refllects the potential of production of existing and already implemented forests in the areas acquired, in the na central region of the state of São Paulo, for R$ 308.1 million; and (ii) it acquired an option to purchase approximately twenty thousand (20,000) hectares of rural properties in the same region and five million and six hundred thousand (5,600,000) cubic meters of forests, which refelects the potential of production of esxisting and already implemented forests in the properties subject- matter of the oprtion, for the price of R$ 749.4 million, with the option able to be exercised, at the sole discretion of Suzano, through July 2, 2018.
The consummation of the transaction is subject to certain conditions applicable to transactions of this kind, including approval by the antitrust agency CADE (Conselho Administrativo de Defesa Econômica). Complementing Suzano’s solid forest base in the central region of the state of São Paulo, where it already has approximately sixty- one thousand (61,000) hectares, the transaction optimizes its forest base, reduces the average wood supply radius for the industrial unit in Limeira and gives it the option of a potential project for expanding its pulp production in the state of São Paulo.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
AUDIT BOARD REPORT
Dear Shareholders, the members of the Audit Board of Suzano Papel e Celulose S.A. (“Company”), at a meeting held on February 7, 2018, in the exercise of their duties pursuant to law and the Bylaws, examined the Management Report, the individual and consolidated Financial Statements of the Company, and the corresponding Notes relating to the fiscal year ended December 31, 2017, accompanied by the unqualified report of PwC Auditores Independentes, and, having found said documents in compliance with applicable legal requirements, recommended their approval by shareholders at the Shareholders Meeting.
São Paulo, February 7, 2018.
Rubens Barletta
Luiz Augusto Marques Paes
Eraldo Soares Peçanha
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Reports and Declarations / Management Statement on the Financial Statements
FOR THE PURPOSE OF ARTICLE 25 OF CVM RULE 480/09
I declare, in the capacity of Executive Officer of Suzano Papel e Celulose S.A., a corporation headquartered in the city of Salvador, state of Bahia, located at Avenida Professor Magalhães Neto, 1752 – 10º andar, salas 1010 e 1011, CEP 41810-011, corporate taxpayer ID (CNPJ/MF) 16.404.287/0001-55 (“Company”), pursuant to items V and VI of Paragraph 1 of Article 25 of CVM Rule 480 of December 7, 2009, that jointly with other members of the Company’s board of executive officers, I reviewed, discussed and agreed with the Company’s financial statements related to the fiscal year ended December 31, 2017.
São Paulo, February 7, 2018.
Walter Schalka Chief Executive Officer
Alexandre Chueri Neto Executive Officer of the Forest Business Unit
Carlos Anibal Fernandes de Almeida Júnior Executive Officer of the Pulp Business Unit
Fabio Luiz Novoa Prado Executive Officer of the Consumer Goods Business Unit
Julia Ruback Fernandes Pirola Executive Officer of People and Management
Leonardo Barreto de Araujo Grimaldi Executive Officer of Paper Business Unit
Marcelo Feriozzi Bacci Chief Financial and Investor Relations Officer
Renato Tyszler Executive Officer of Innovation and Business Development
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Reports and Declarations / Management Statement on the Independent Auditor’s Report
FOR THE PURPOSE OF ARTICLE 25 OF CVM RULE 480/09
I declare in the capacity of Executive Officer of Suzano Papel e Celulose S.A., a corporation headquartered in the city of Salvador, state of Bahia, located at Avenida Professor Magalhães Neto, 1752 – 10º andar, salas 1010 e 1011, CEP 41810-011, corporate taxpayer ID (CNPJ/MF) 16.404.287/0001-55 (“Company”), pursuant to items V and VI of Paragraph 1 of Article 25 of CVM Rule 480 of December 7, 2009, that jointly with other members of the Company’s board of executive officers, I reviewed, discussed and agreed with the independent auditors’ report related to the fiscal year ended December 31, 2017.
São Paulo, February 7, 2018.
Walter Schalka Chief Executive Officer
Alexandre Chueri Neto Executive Officer of the Forest Business Unit
Carlos Anibal Fernandes de Almeida Júnior Executive Officer of the Pulp Business Unit
Fabio Luiz Novoa Prado Executive Officer of the Consumer Goods Business Unit
Julia Ruback Fernandes Pirola Executive Officer of People and Management
Leonardo Barreto de Araujo Grimaldi Executive Officer of Paper Business Unit
Marcelo Feriozzi Bacci Chief Financial and Investor Relations Officer
Renato Tyszler Executive Officer of Innovation and Business Development
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Independent auditor's report
To the Board of Directors and Stockholders Suzano Papel e Celulose S.A.
Opinion
We have audited the accompanying parent company financial statements of Suzano Papel e Celulose S.A. (the "Company"), which comprise the balance sheet as at December 31, 2017 and the statements of income [or operations], comprehensive income, changes in equity and cash flows for the year then ended, as well as the accompanying consolidated financial statements of Suzano Papel e Celulose S.A. and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2017 and the consolidated statements of income [or operations], comprehensive income, changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Suzano Papel e Celulose S.A. and of Suzano Papel e Celulose S.A. and its subsidiaries as at December 31, 2017, and the financial performance and the cash flows for the year then ended, as well as the consolidated financial performance and the cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Basis for opinion
We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Parent Company and Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiaries in accordance with the ethical requirements established in the Code of Professional Ethics and Professional Standards issued by the Brazilian Federal Accounting Council, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Matters financial statements of the current period. These matters were addressed in the context of our audit of the parent company and consolidated financial statements as a whole, and in Why it is a Key Audit forming our opinion thereon, and we do not provide a separate Matter opinion on these matters.
How the matter was addressed
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Why it is a Key Audit Matter How the matter was addressed in the audit
Fair value of biological assets (Note 13)
The Company measures the biological assets at fair Our audit procedures included, among others, the value, by applying the discounted cash flow understanding of the internal controls established by methodology. This method makes use of significant management to measure those assets, as well as the assumptions involving judgement by Management, fair value method and assumptions used in the including average growth rate of forests, shipping costs corresponding calculations. and especially the price of wood in different regions, We engaged our experts on valuations of biological including those without an active market or observable assets, who supported us in the analysis of the prices. calculations and the assumptions used. We also Additionally, consistent with industry practice, this evaluated the consistency of these calculations and calculation involves information with great level of assumptions with those of the previous year. detail, since there are several planting areas at different Especially as regards wood prices in regions where stages of growth, accumulated in the forest there was no active market, we assessed the management systems and eventually consolidated in reasonableness of the estimates and criteria adopted spreadsheets. by Management. This is an area of attention of our audit, considering We assessed whether the information disclosed in the the risk associated with the characteristics described financial statements were consistent with the in the previous paragraph and the inherent risk in the requirements of the accounting standards and the measurement and recognition of those assets. The assumptions used in the calculations. resulting management judgments and estimates may As result of the above procedures, we observed an have a significant impact on the determination of the increase in the importance of management judgment, fair value and, consequently, on the Company’s especially due to the lack of information on certain income for the year. areas where the Company practically has exclusivity in the negotiation and purchase of wood. We also noticed the use of wood prices supported by management assessment and applied in a manner consistently with the previous year.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Why it is a Key Audit Matter How the matter was addressed in the audit
Deferred taxes (Note 12)
The Company’s records as of 31 December 2017 show Among other procedures, we obtained an significant amounts of deferred income tax and social understanding of the internal controls established by contribution assets and liabilities. These deferred taxes Management to identify the amounts of the temporary arose from deductible and taxable temporary differences and their recognition in the auxiliary differences and tax losses. The movement of these records, as well as the resulting deferred tax balances amounts derives from auxiliary records kept manually, and their expected realization. involving several bases, generated in several previous We obtained an understanding of the nature of these years. temporary differences and for those with the highest The materiality of these amounts, their historical amounts involved, we verified the reasonableness of formation and the manual records, together with the their historic accumulation. fact that this is our first year as auditors of the With the support of our tax specialists, we carried out Company, leads us to draw our attention to this area. tests on the calculations of current and deferred income . tax and social contribution, assessing aspects such as tax rates, tax benefits, temporary differences movement and recent questioning by tax authorities. We verified also whether the disclosures contained in the financial statements are in line with the requirements of the relevant accounting standards. Applying the audit procedures described above, we obtained evidence that the determination and presentation of these taxes are consistent with our understanding and supported by auxiliary records, when applicable.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Why it is a Key Audit Matter How the matter was addressed in the audit
Provision for contingencies (Note 21)
The Company is a party in judicial and Our audit procedures included, among others, administrative proceedings of different natures: obtaining an understanding of the internal controls taxation, social security, labor and civil. They arose established by Management to identify and assess from the normal course of its operations. Those these contingencies. involving tax matters relate to tax credits and tax Together with our tax specialists, we obtained an assessments, among others. Management, with the understanding of the objects of the main support of their internal and external tax contingencies and pending cases. We obtained the consultants, estimated the possible outcomes for supporting documentation of Management’s these various subjects, provided for those assessment, including the determination of the considered as probable loss and disclosed those amounts at stake, and the opinions of the external considered as possible loss. experts hired by the Company, and assessed and Determining the risks of loss and the amounts discussed the reasonableness of Management’s under dispute involve Management's judgment, conclusions. taking into consideration subjective aspects and We requested and obtained direct confirmations from trends in case law, which can change throughout the legal advisers responsible for the Company’s the process. Management can neither maintain defense in the administrative and judicial spheres. control of the timing of the final decision nor of the We tested through sampling the calculations of the outcome of the cases. Therefore, the outcomes and amounts disclosed or recorded as provisions and the actual amounts payable or recoverable may assessed whether the disclosures made are in differ from those recognized as provision or accordance with the relevant accounting standards disclosed. For this reason, we concluded this to be and supporting documentation. an area that warranted special attention from the We observed that Management’s conclusions and the audit. supporting documentation, including the opinions of . internal and external advisors, are consistent with each other and with our understanding of the objects of the disputes, and with the disclosures included in the financial statements.
Other matters
Statements of Value Added
The parent company and consolidated Statements of Value Added for the year ended December 31, 2017, prepared under the responsibility of the Company's management and presented as supplementary information for IFRS purposes, were submitted to audit procedures performed in conjunction with the audit of the Company’s financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in Technical Pronouncement CPC 09 - "Statement of Value Added". In our opinion, these Statements of Value Added have been properly prepared in all material respects, in accordance with the criteria established in the Technical Pronouncement, and are consistent with the parent company and consolidated financial statements taken as a whole.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
Audit of prior-year information
The financial statements of the Company for the year ended December 31, 2016, presented for comparison purposes, were audited by another firm of auditors whose report, dated February 8, 2017, expressed an unmodified opinion on those statements.
Other information accompanying the parent company and consolidated financial statements and the auditor's report
The Company’s management is responsible for the other information that comprises the Management Report.
Our opinion on the parent company and consolidated financial statements does not cover the Management Report, and we do not express any form of audit conclusion thereon.
In connection with the audit of the parent company and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the parent company and consolidated financial statements
Management is responsible for the preparation and fair presentation of the parent company and consolidated financial statements in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the parent company and consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the financial reporting process of the Company and its subsidiaries.
Auditor’s responsibilities for the audit of the parent company and consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the parent company and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the parent company and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the parent company and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the parent company and consolidated financial statements, including the disclosures, and whether these financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
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Suzano Papel e Celulose S.A.
Notes to the Standardized Financial Statements At December 31, 2017 (In thousands of Brazilian real, unless otherwise stated)
São Paulo, February 7, 2018
PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5
Tadeu Cendón Ferreira Contador CRC 1SP188352/O-5
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