2006 Annual and Sustainability Report
Carlos Alberto Vieira Chairman of the Board of Directors
Carlos Augusto Lira Aguiar President and CEO
Message from the Management
In 2006, Aracruz was able to take advantage of the favorable conditions of the world economy and the pulp market to proceed with its sustainable development. We consolidated our position in key markets and expanded our presence in rapidly growing ones.
The increase in the price of pulp during the year was due to a favorable ratio between supply and demand in the main consuming centers.
On the supply side, we witnessed the closure of pulp mills in the northern hemisphere. High production costs, aggravated by the appreciation of currencies against the U.S. dollar and the ending of the useful life of some production units, led producers to deactivate their operations. No new pulp lines started up in Latin America, where an increase of 600,000 tons had been expected over the past two years. As a result, there was a reduction in pulp supply of about 4.6 million tons between 2004 and 2006.
On the demand side, it was another good year for the sector. According to the latest statistics from producer associations, the worldwide demand for eucalyptus pulp rose 13%, substantially higher than the market average of about 5%. This boosted world demand for the product to over 11 million tons per year, of which Aracruz supplied 27%, maintaining its position as market leader.
Consolidated sales reached three million tons of pulp and the generation of operating cash (measured by the EBITDA, adjusted for other strictly accounting events and without impact on cash flow) reached a record level of US$735.7 million, 10% higher than the US$668.9 million posted in 2005.
As a result, net earnings totaled US$455.3 million, 33.5% higher than the net earnings of US$341.1 million in 2005, mainly due to the appreciation of the Brazilian real against the dollar.
We achieved important recognition from the financial markets. Once again, Aracruz was included in the Dow Jones Sustainability Index 2007 (DJSI World), which highlights the best corporate sustainability practices in the world. In Brazil, the Company was included in BOVESPA’s Corporate Sustainability Index (ISE), the only listing of its kind in Latin America.
We received investment grade ratings issued by Moody’s and Fitch rating agencies, joining the restricted group of Brazilian companies that have been awarded investment grade ratings by the most important international risk classification agencies (Moody's, Fitch and Standard & Poor's). This rating should help reduce Aracruz’s cost of capital over the medium-term and increase its market capitalization.
Veracel, a joint venture between Aracruz and Stora Enso (50% each), exceeded its nominal production capacity of 900,000 tons during the year by 8%. Our Barra do Riacho (in the State of Espírito Santo) and Guaíba (in the State of Rio Grande do Sul) Units set new records, which led to a total production volume during the year of more than three million tons.
We initiated the expansion of Portocel, which will have the capacity to ship 7.5 million tons of pulp per year as of 2009.
All of Aracruz’s forests are certified by the Brazilian Forest Certification Program (CERFLOR), as are the chains of custody at the Barra do Riacho and Guaíba Units, which attest to the sustainable origin of our wood.
Unfortunately, the land dispute with indigenous communities in Espírito Santo, whose members are calling for an 11,000 hectare increase in the size of their reservation – nearly all of this from forestlands belonging to the Company – worsened in 2006, with invasions of Aracruz property and the destruction of over 170 hectares of eucalyptus plantations. Aware of the complexity of the situation, Aracruz is seeking to achieve a stable solution based on the clear definition of the legal rights of the parties involved and on dialogue, designed to achieve harmonious coexistence over the long-term.
The confrontations generated by this conflict demonstrated the need to deepen our stakeholder relationships and to increase the transparency of our communication process. Consequently we revamped our corporate website and reinforced the disclosure of our positions on important issues such as biodiversity, climate change, forest certification and the use of pesticides, as well as the indigenous question itself.
In the environmental area, we invested more than US$16 million to improve our operations. Over the course of the year, we increased our preservation areas by some 15,000 hectares and, at the end of the period, Aracruz was responsible for an area of over 154,000 hectares of native forests, most of which are located in Atlantic Forest domains.
As it celebrated its 15th year of activities, our Forestry Partners Program reached a landmark of 88,000 hectares of forest plantations through contracts signed with local farmers in 156 municipalities in eight states. This program is responsible for the maintenance of more than 5,000 jobs and has been helping keep rural manpower in the countryside.
For the third year in a row Aracruz was chosen as one of the best companies to work for in Brazil, a reflection of our commitment to value our professionals and to constantly improve the work environment.
In 2006, the Fundação Getúlio Vargas Projetos of São Paulo prepared a study analyzing the generation of income, jobs, foreign exchange and taxes throughout Aracruz Celulose's value chain, demonstrating the important social and economic role that the Company plays in the regions of the country where it has operations.
For the near future, we are evaluating important capital expenditures, such as the doubling of capacity of Veracel and the construction of a new pulp line at the Guaíba Unit, which will boost the capacity of the unit to 1.8 million tons per year.
As Aracruz progresses, all the questions relating to our role in society and our social license to operate must demand our increasing attention, as will the future of our project as a sustainable source of wealth, environmental protection and quality of life.