Aracruz slows down growth pace to face worldwide crisis
Review of investment program, reduction of operating costs and expenses and canceling of dividend payments are among the announced measures
Aracruz Celulose, the world's leading producer of eucalyptus pulp, has decided to adjust its growth strategy to the new scenario foreseen for the forthcoming years as a result of worsening of the systemic crisis in the global financial market and accompanying restrictions to lines of credit and financing, which also have become more expensive, coupled with the cooling off of the main economies.
Among the main measures that were announced to the market today (October 17) along with the third quarter's results, was the temporary halting of the investments in the Guaíba II Project (RS) and the purchase of land and forestry development for the Veracel II (BA) and Minas Gerais projects. With these measures, Aracruz is expecting to reduce its capital expenditures through 2009 by approximately US$900 million.
Aracruz remains determined to resume its investments in capacity expansion projects as soon as market conditions justify them, in order to maintain its leadership position among the global manufacturers of hardwood market pulp.
Austerity - Despite the solid fundamentals of its business - Aracruz is one the lowest-cost producers of market pulp - the company's liquidity has been severely impacted by the low availability of credit and the high perception of risk of the financial market, which has intensified over the past few weeks with a reduction in global growth and widespread uncertainty regarding the future. This movement has led to lower demand for commodities and deterioration in the value of assets.
Seeking to adjust the company to the new global credit reality, Aracruz is implementing a series of measures to gradually reduce its exposure to derivative operations and to preserve cash. Besides the postponement of production capacity expansion projects, the measures include renegotiations with banks, seeking alternatives for a definitive solution to the derivatives exposure, reductions in operating costs and expenses, and the canceling over R$84 million in dividend payments in the form of interest on shareholders net equity.
Aracruz's export revenues in 2007 totaled US$2.1 billion. Once the impact of exchange rate variations on exports directly affects cash flow, it can compensate part of the losses incurred in derivative operations.
The company expects to continue the normal course of its operations and maintain the solid fundamentals of its business throughout the crisis. At the end of the third quarter, its cash and investment position was about US$600 million and its net debt, including its 50% stake in Veracel, had average maturity of 54 months.
Currency protection and derivatives - Since 2004, the Brazil's local currency has appreciated significantly. This negatively affects Aracruz, predominantly an exporter, with virtually all of its revenues tied to the U.S. dollar, whereas 15% of its debt and approximately 75% of its production costs are incurred in Brazilian reais.
Back in 2004, in view of the depreciation of the U.S. dollar, the company decided to adopt measures to protect the portion of its cash flow exposed to local currency, mainly aimed at short-position in dollars. These instruments of protection against the appreciation of the real over the dollar, with included the use of financial derivatives, generated an accumulated US$290 million since 2004.
At the end of September of this year, the consulting company hired by Aracruz to analyze its operations with derivatives calculated a negative fair value of approximately US$1 billion (base date of September 30, 2008). When calculating fair value, the exchange rate, the volatility and the interest rate curve observed upon the closing are taken into account, and these variables were strongly affected by the instability of the world's financial markets and subsequent devaluation of the real.
Even with the result that was calculated, the effect on cash flow of the company's financial operations with derivatives in the third quarter was positive by about US$20 million.
In the third quarter of 2008, the negative fair value of the company's derivative operations had as counterpart the reversal of Income Tax and Social Contributions on Profit of US$464 million, which resulted in a lower impact on profit/(loss), totaling a loss of US$546 million, or US$ (5.30)/adr.
See the Aracruz 3rd quarter of 2008 results at www.aracruz.com.
