Aracruz Celulose SA result Q4 with an excecutive summary

March 27, 2009 by timbercommunity

The Brazilian company Aracruz Celulose SA, the world’s biggest eucalyptus-pulp maker, posted a fourth-quarter loss of $881 million after charges related to bad currency bets reports Bloomberg.
 
...But there are some highlights if you read the excecutive summary
 

Eucalyptus market pulp demand increased by 12%, or 1.3 million MT, in 2008 (2007: +14%, 1.4 million MT). Chemical market pulp demand declined by 1% in the same period.
Consolidated pulp production reached 3.1 million MT. Veracel's production attained 1.1 million MT, 22% above its original nominal capacity.
Pulp sales in 2008 totaled 2.9 million MT, down 6% on 2007. Sales volume reached 735,000 MT in the 4Q08, 8% higher than in the 3Q08.
Annual net revenue stable at $1.9 billion. Adjusted EBITDA of $ 763 million (40% margin).
The consolidated pulp cash production cost was $227/t in the 4Q08, down 21% ($60/t) in comparison to that of the 3Q08. Veracel's cash production cost was at $171/t.
Net loss of $1,239 billion in 2008, or $12.0/ADR, mostly caused by the derivative losses. After the elimination of 97% of the derivative exposure, occurred on Nov. 2008, Aracruz reached, last Jan. 19th, an agreement with several banks to the restructuring of the resulting debt, with a nine-year repayment term

Executive Summary
The year 2008 was a very challenging one for Aracruz, marked by the strong volatility in the global financial system and the worldwide downturn in demand for commodities. Until the middle of the year, market conditions remained tight, with global chemical market pulp shipments increasing by 5%, compared to the first half of 2007.
In the same period, Eucalyptus pulp shipments increased in almost all regions, up 20% on the same period of 2007, with the main focus on Chinese demand (up 55% on 2007). As a result, the company announced two price increases for the North American and European markets and three price increases for the Asian market. The Eucalyptus pulp price in the European market reached $840/t in April, the highest level since 2001.
As from September, amid the effects of international systemic crisis, the Brazilian currency saw a sharp devaluation against the dollar, strongly affecting the financial results through derivatives. In early November 2008, the company announced that it had eliminated 97% of its exposure to derivatives, resulting in a financial loss of $ 2.13 billion ("fair value").
Based on Aracruz's distinct operational fundamentals and the opportunities of synergies, on January 20th, Votorantim Group, through Votorantim Celulose e Papel (VCP), reported it has concluded negotiations with members of the Lorentzen, Moreira Salles and Almeida Braga families (Arapar Group) to acquire approximately 28% of the voting stock of Aracruz Celulose for R$ 2.71 billion.

Safra family exercised its tag along rights, on March 5th, selling their voting stake at Aracruz of 28%. Upon such closing VCP will own, directly or indirectly, 84% of Aracruz’s voting capital. Regarding the Company’s operational performance, total pulp production of 3.1 million MT was in line with 2007 levels. Despite having an increased nominal capacity in 2008, following completion of the Barra do Riacho unit’s optimization project, pulp production was affected by some production losses in the 1Q08 and 2Q08, as well as the market-related downtimes taken in the second half of 2008.

The production target for 2009 is 3.2 million MT, 3% below the current nominal capacity of 3.3 million MT, due to the lower demand expectations for this year. Veracel ran at 22% above its original nominal capacity, producing 1.1million MT in 2008 (Aracruz is entitled to 50% of Veracel’s production), at the world's historically lowest cash production cost (4Q 08: $171/t; 2008: $200/t).

Pulp sales in 2008 amounted to 2.9 million MT, 6% lower than in the previous year. The pulp sales volume in the fourth quarter, of 735,000 tons, was 13% lower than that of the same period of 2007 and 8% higher than that of the 3Q08. The commitments in relation to the company’s long-term customer base, along with the higher proportion of dealings with the tissue segment, which represents 60% of Aracruz's total pulp sales, helped to better overcome the lower demand observed in all markets, since the tissue business is less sensitive to economic cycles than other pulp consumers.

The average annual net pulp price in 2008 was 7% higher than that of the previous year. Pulp prices started to decline in September, following a consistently upward trend since 2002. In the 4Q08, the average net pulp price decreased by 22%, or $152/ton, in relation to the 3Q08.

The appreciation of the average exchange rate and the increased cost of raw materials led to a higher cash production cost in 2008, which was the main reason for the 19% increase in the cost of sales per ton in relation to 2007. The cash production cost in R$ was 6% higher than in the previous year, excluding the exchange rate effect, which was in line with Brazilian inflation, despite the well above average increase in the cost of certain raw materials.

The company has managed to revise some of its freight contracts, due to the lower demand for commodities worldwide. The decrease in oil prices and the renegotiating of some of the company's freight contracts has reduced the freight cost per ton by 10%, on a quarterly basis.

The adjusted EBITDA in 2008 was $763 million (a 40% margin), $124 million below the figure for 2007, mainly due to the negative impact of the increased cost of raw materials on the cost of goods sold, on a per ton basis, the higher freight costs, and the lower sales volume, which is largely explained by the demand slowdown, partially offset by the higher net pulp price.
 
In the 4Q08, the adjusted EBITDA totaled $133 million, equivalent to a 33% margin (3Q08: 39%), mainly due to the lower average net pulp prices (-22%) and the impact of the cash production cost of the 3Q08 in the cost of goods sold (COGS) of the 4Q08 (inventories turnover effect).

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