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Sustainable growth with value creation and solid returns. Jan - Mar 2005. Integrated Businesses: Overview. Focus on two main businesses: Market Pulp and Paper (P&W and Specialty). Production Capacities (per product) ( x1000 tons). Paper production capacityIQ05 (x1000 tons). 1400.
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Sustainable growth with valuecreation and solid returns Jan - Mar 2005
Integrated Businesses: Overview Focus on two main businesses: Market Pulp and Paper (P&W and Specialty) Production Capacities (per product) ( x1000 tons) Paper production capacityIQ05 (x1000 tons) 1400 1400 1150(1) 850 635 655 610 655 3% 2005 2003 2002 2004 Eucalyptus Pulp P&W and Specialty Papers * Not including 75kt off-machine coater (1) Learning curve
Uncoated Paper - Domestic Coated/chemical paper - Domestic Uncoated / coated paper - Exports Pulp - Exports Pulp - Domestic Integrated Businesses: Overview Product Mix (Sales Volume) Value Mix (Revenue) IQ05 - (US$251M) IQ05 - (350k tons) 2004 (1,459k tons) 2004 - (US$1,010M)
Integrated Businesses: Overview Vertically-integrated operations Forestry Data (Dec 04) Total Area: 258,000ha Planted: 134,000ha Luiz Antonio Mogi Wood Pulp Specialty Papers 20k tpa Pulp Wood Uncoated Papers 340k tpa Jacareí Chemical Papers 70k tpa Coated Papers 100k tpa Piracicaba Uncoated Papers 105k tpa KSR Distribution Direct Sales Branches Warehouse Sales Office Market Pulp 900k tpa Private Terminal Santos Port
Pulp Business: Global Player • Global scale production - 1.4 million tons • Sales volume grew 81% in 2003 and another 39% in 2004 • Average pulp prices increased 1% in 2004 vs. 2003 and 11% in IQ05 vs. 1Q04 • Production cost competitiveness • Growth opportunities, both organically and through M&A • 2020 Outlook: 4 million tons of market pulp over the next 15 years (CAGR 11% p.a.) Source: VCP * Annualized
Pulp Business: Global Player • Exporter profile (lower exposure to macroeconomic fluctuations) • Commercial alliances with strategic customers • Approximately 95% of sales volume is linked to long-term contracts at market prices • China accounts for 2/3 of sales to Asia and is expected to continue to be a an important pulp purchaser Pulp Sales Volume (IQ05 – 206,4 ktons) 9% 91% Source: VCP Prices BEKP list US$/ton in April 2005
Pulp Business: Cost Competitiveness Breakdown of pulp cash cost (VCP IQ05) • Natural and technological wood cost advantages • Global scale • Low energy costs Pulp production cash cost - VCP
Pulp Business: Market trends Market in recovery - 2004/2005 • Pulp price increases in April/05 to US$600 in Europe, US$635 N. America and US$570 in Asia • Paper demand, inventory rebuilding and capacity shutdowns reinforce the positive momentum • Price gap between NBSK and BEKP at US$100/t sustained by greater hardwood supply and by higher production costs for softwood (Canada), partially offset by the effect of substitution • Weak US$ increases costs in US$ for Europeans and Canadians, raising minimum price levels Price vs. operating costs BEKP x NBSK Source: VCP, Hawkings Wright
Paper Business: Regional and Global Presence • Strong regional market share • Efficient distribution and integrated logistics • Value added product mix • “Client Focus” – Relationship and loyalty program for strategic local and international customers • Growth in cut-size exports • Operating margin stability • Cost competitiveness with paper / pulp integration • 2020 Outlook: 2 million tons over the next 15 years (CAGR 8% p.a.) * Annualized Source: VCP
Paper Business: Regional and Global Presence Domestic Market • 1Q05 X 4Q04: 11% reduction in sales volume due to decrease in demand • 1Q05 X 4Q04: average paper prices declined 4% due to increase in ten rates Source: VCP
Paper Business: Regional and Global Presence Market Share Brazil – 2004 Uncoated Paper (rolls/sheets) Cut Size International Ripasa Paper 22% 33% VCP Suzano Bahia 22% Sul 23% Coated paper Chemical (carbonless/thermal) VCP Imports 33% Imports 20% 5% VCP Others 77% 5% Others 18% Ripasa Suzano 21% 21% Source: Bracelpa
Wood Forestry objective: Produce and supply wood for pulp and energy needs with quality adjusted to usage, competitive costs in a socially and environmentally responsible manner. Brazil Uberlândia-MG Paraíso-MG Altinopolis-SP Amazon Rainforest 3,500km Luiz Antônio-SP Luiz Antônio-SP Bauru-SP Piracicaba-SP Capão Bonito-SP 197,000 ha in SP Jacareí-SP São Paulo-SP Mogi das Cruzes-SP Private Terminal in Santos Port - SP 61,000 ha in RS Forestry Area Pulp and Paper Plant New Forestry Base Paper Plant
Planting the Future • Strategic goal to guarantee wood supply and ensure VCP’s long-term growth • ongoing investments in land purchases and development of planted Eucalyptus areas in the state of São Paulo • creation of a new forest area in the state of Rio Grande do Sul with 62,000 ha currently. Growth in this region is driven by the following factors: • Availability of land at attractive costs (land substitution for cattle raising) • Proximity to Northern Uruguay (wood availability) • Proximity to Rio Grande port (export platform) • Forestry productivity similar to São Paulo forests • Inter-modal transportation options (ex. Wood transport by railway) • Qualified labor force • Politically, socially and environmentally favorable (ex. Agro-silviculture, supply program, 35% preserved areas versus 20% required by law)
Wood High productivity and a combination of technology and natural advantages Today 1970s • Favorable climate and soil conditions, mechanized forest operations and investments in technology have yielded among the highest productivity levels in the world • Eucalyptus genome mapping projects are expected to continue to improve productivity Yield20m3/ha/year Yield50m3/ha/year Wood costs and % of third-party wood purchases Country Harvest Yield (yrs) (m3/ha/yr) Brazil 7 45-50 Argentina 7-12 25 Chile 10-12 20 Indonesia 7 20-25 Australia 7 20-25 Iberia 12-15 10-12 Sweden 35-40 5,5 Finland 35-40 4 USA 25 10 Canada 45 7 Source: VCP
R&D / Technology: Forestry Genetic Improvements 1970 Species/Origin Selection 1980 Population Selection 1990 Tree and Family Selection Vegetative Propagation 1995 Clone planting Selection as per end use 2000 and beyond Molecular Markers Genome Project: Trees with specific traits tailored to end use
Integrated Logistics VCP’s logistics expenses - US$/ton Breakdown of logistic costs Raw materials 3% Paper Wood 25% 38% Pulp 34% Source: VCP
Integrated Logistics • Initiatives to reduce logistics costs in the forestry, pulp and paper areas are offsetting higher freight costs associated with exports to keep VCP’s logistics costs under control • Contract 2 logistics operators (Wilson Sons and TNT) to assume all of the operational activities associated with material flow from the raw materials receiving up to delivery to end customers. The benefits have translated into lower costs, scale gains, lower asset, asset divesting, and specialization of customer services • MRS – Pulp shipping from the plant to Santos port by train – A 25% reduction in logistics costs with the substitution of truck shipping to rail transport • Rail shipping for wood eliminates direct relationship between cost and average radius • Break Bulk: paper loading on boats outside of containers. The objective is to reduce logistics costs related to paper exports, which increased drastically with the competition for containers that came about with the increase in Brazilian exports • With this new form of loading, VCP frees itself of its dependence on container ships and avoids problems associated with partial loading of shipments on time, which results in loss of sales abroad. • For this project, VCP is loading its paper directly on top of its pulp, taking advantage of pre-established pulp transport contracts (competitive market advantage).
Solid Financial Position Consistent earnings growth and strong cash generation • Net profit has grown at an average of 25% p.a. over past 5 years • Stable EBITDA margin of over 40% (significantly higher than European peers) and net margin of approximately 30% in the same period EBITDA (US$m) and EBITDA Margin (%) 20% Source: VCP, Company Reports * Annualized
Solid Financial Position Consistent value creation and return for shareholders • VCP applies GVA (value added management) and has created value even during cycle troughs Source: VCP
Solid Financial Position Consistent value creation and return for shareholders • New dividend policy offers greater transparency and yield visibility • Considered a combination of 3 factors: cash returns for shareholders, future growth opportunities and requirements for “investment grade” status • Dividends will be calculated from a base of 60% free cash flow as per the following formula: • FCF = EBITDA – Working capital variation – Taxes – Investments Dividends (US$m) and yield (2) % Source: VCP / Note: (1) Based on average shareholders’ equity for period / (2) Based on stock price at end of period / (3) Proposed dividend distribution based on FX rate of R$2.70/USD
Solid Financial Position Strong balance sheet, competitive financing costs * Includes Ripasa acquisition Source: VCP
1Q2005 Highlights CAPEX IQ05 Expected for 2005 (US$ Million) Expansion Projects 3 68 Modernization 6 24 Forestry 20 106 Maintenance, IT, Others 7 58 Total 36 256 Debt Debt Dec 31,2004 Mar 31,2005% (US$ Million) Cost(%)Total - Short term 376 326 27 % In Reais TJLP* + 3%3029 2 % In Dollars US$ + 3.2% 346 29625 % - Long Term 569868 73 % In Reais TJLP* + 3% 102 96 8 % In Dollars US$ + 5.5% 467 773 65 % Total Debt 945 1194100 % (-) Cash (476)(481) Net Debt 469713 *TJLP = 9.75% p.a. in Mar, 2005
Acquisition of Ripasa • Transaction (50/50 VCP/Suzano Bahia Sul) • Acquisition of66.67% of the common shares and 17.68% of the preferred shares • US$ 480 million, up to march 31, 2005 • Acquisition of33.33% of the common shares and of8.57% of the preferred shares • US$ 240 million, up to 6 years • Total transaction- 59.5% of total capital • US$ 720 million • Transaction Schedule • Purchase agreement - November 10, 2004 • Step I - Up to the conclusion of the transaction - Keep Ripasa running “as is”. • Step II – After conclusion of the transaction • Stockholding restructuring • De-list Ripasa from Bovespa • Transform Ripasa into a production unit • Capture of potential synergies • Independently commercialize each company’s share of the production
Sales volume 153 326 Domestic Market 110 235 Pulp 34 34 Paper 76 201 Export (paper) 43 91 Total Assets 2,087 Equity 1,041 Net debt 573 EBITDA 46 EBITDA margin 14% Acquisition of Ripasa Ripasa adds 24% to VCP’s capacity Consolidated figures 3M05 • FoundationOctober 22, 1959 • 2,822 employees • 4 production units • Annual capacity: • Total pulp 455,000 ton • Paper 525,000 ton • Forest – 86,400 ha (76% for plantation) Description Tons R$ (000)
Shareholder Structure % of Total Capital Stock March 31, 2005 BNDESPAR Votorantim Group Free Float 4% 55% 41% VCP Listed on Bovespa and NYSE VCP Trading Aracruz 100% 12.4% Preferred Shares ADRs Local 63% Investors Foreign Investors 14% 78% BNDESPar Bovespa 8% 15%
VCP – Evolution of Best Practices Results 2002 2003 R$ 250 1999 2000 Eurobond IBF Project R$ 225 Organizational ADR III 2004 US$125m 2a Restructuring NYSE 5.85%aa Audit Committee Ethics Committee R$ 200 Incorporation of USGAAP Celpav And BRGAAP Continuous revision New dividend CVM 358/02 Quarterly Of ethics policies policy R$ 175 Sale of Papel Reporting 2001 Salto Apr 2004 Issue Secondary Edgar Filing R$ 150 US$350m Level I Share offering (electronic info) 7 years Corporate US$285 mln R$ 125 Governance 8.8% Libor + 2% Bovespa Sarbanes- 7.7% R$ 100 Oxley R$ 75 R$ 50 4.2% 3.8% R$ 25 3.6% 3.2% 3.0% Debt cost linked to Libor R$ 0 Jan-04 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03