Aracruz Celulose S.A. Business Information, Profile, and History

Company Perspectives:

Growth Strategy: Establish a stronger presence in the world's pulp market, through acquisition of existing pulp operations and/or capacity expansion, both at the right time and cost.

History of Aracruz Celulose S.A.

Brazil-based Aracruz Celulose S.A. is the world's leading producer of bleached eucalyptus pulp for the paper industry and one of the world's largest wood pulp producers. The company has an annual production capacity of 2.4 million tons, through two mill sites. Barra do Riacho, the company's main site located in Espirito Santo, produces two million tons of pulp with three full-scale production units, including boilers, digesters, and bleach and drying lines. The company also operates its own private port, Portocel, in Espirito Santo. Aracruz's other site, Riocell, was acquired in 2003; located in Rio Grande do Sul, it produces 400,000 tons of bleach eucalyptus pulp each year. The company is also constructing a third site, through its 50/50 Veracel Celulose joint-venture with Stora Enso, at Eunapolis, in Bahia, which will have a production capacity of 900,000 tons upon completion in 2005. Aracruz produces its own wood through its management of nearly 190,000 hectares of planted eucalyptus--a fast-growing hardwood not native to Brazil. The company has played an active role in developing new genetic varieties of eucalyptus to meet its production needs. As part of its longstanding commitment to sustainable development, the company's eucalyptus plantations are interspersed by native tree species. The company's eco-friendly policies extend to its production facilities, which are outfitted with chemical recovery systems, water treatment facilities, and biomass power generating systems making use of the company's own waste production. In addition to pulp, Aracruz has diversified, launching its own line of hardwood products. Aracruz is led by Luiz Kaufmann. Founder Erling Lorentzen and family remain major shareholders in the company.

Planting a Wood Pulp Giant in the 1960s

Born in 1923, Erling Lorentzen had been forced to flee his native Norway after that country was occupied by the Nazis during World War II. Lorentzen, part of a shipping family with interests in Brazil, joined the Norwegian resistance and was sent to Great Britain, where he received military training. Lorentzen then returned to Norway, and, undercover as a farmer, took command of some 800 resistance fighters.

Following the war, Lorentzen, who had not been able to complete high school, was granted the right to enroll in the M.B.A. program at Harvard University. Returning to Norway, Lorentzen began working for his father's shipping company, acting as a representative in Brazil. Lorentzen also found a wife--Princess Ragnhild Alexandra, daughter of then King Olaf V and sister of the future King Haakon. The marriage marked the first time a member of European royalty had married a commoner.

Yet Erling Lorentzen proved no common businessman. The Lorentzens moved to Brazil during the 1950s and set up a gas distribution business in conjunction with the family's holdings. By then, interest was beginning to grow in developing a wood pulp industry in Brazil. The country offered a number of natural advantages, including plenty of space and low wages. But most importantly, Brazil boasted a climate of year-round sun and warm weather. Whereas the planting-to-pulping time span of trees planted for pulp production in northern climates ranged from 15 years to as much as 50 years in northern Europe, Brazil's climate offered the possibility to grow trees with a five-year turnaround rate.

Initial attempts by another company to begin wood pulp production failed, however, due to the poor choice of tree--although eucalyptus had been introduced to Brazil in the early part of the 20th century, Jari had chosen a different species, imported from Indonesia, that did not react well to Brazil's soil. In the meantime, Brazil's forest continued to be devastated. With no coal deposits of its own, the country cut down its trees in order to produce charcoal. The situation was particularly dire in the northern coastal state of Espirito Santo, where most of the forests had been destroyed, sinking the population further into poverty.

Lorentzen began gathering funding from private investors and government sources and began buying up land in Espirito Santo with the intention of developing new eucalyptus plantations. Lorentzen quickly decided on using a variety of eucalyptus, in part for its quick growth cycle of just seven years in Brazil's climate. Eucalyptus presented other advantages, particularly in that a tree will grow back from the stump after it has been cut down, enabling the same tree to be harvested up to three times, lowering the investment and reducing the length of the growth cycle.

By 1967, Lorentzen had formed Aracruz Florestal S.A. and begun planting its first eucalyptus forests using seed produced in Brazil. Because these trees were not genetically developed, the initial planting presented a number of difficulties, including a susceptibility to trunk rot and irregular growth and shape patterns. Nonetheless, by 1972, the company began its first harvest and began eyeing the start-up of pulp production. As part of that development, Lorentzen formed a new company, Aracruz Celulose, which absorbed the original Aracruz company as its subsidiary. Aracruz Forestal was fully merged into its parent in 1993.

Yet Aracruz was not satisfied with the quality of its eucalyptus forests. In 1973, the company launched a research and development program in order to enhance the quality of its forests by developing varieties of eucalyptus adapted to Brazil's soil and climate conditions. In particular the company sought to develop fast-growing, disease-resistant species with uniform growing cycles, straight trunks, and few side branches--which would allow more dense planting.

From the start, however, Aracruz emphasized the need for environmentally friendly plantation policies, including the interspersing of its eucalyptus plantations with significant acreage set aside for native species. This move not only protected native plant species in the area, it also helped limit the effects of insect and disease on Aracruz's eucalyptus forests. The company also began seeking financing for construction of its own pulp mill, a difficult task in the slumping market of the mid-1970s.

Aracruz launched actual production of wood pulp only in 1978. The company's production unit at Barra do Riacho, in Espirito Santo, initially had capacity of 400,000 tons per year. Aracruz's timing proved fortunate: soon after it launched production, worldwide pulp prices began to rise again, and by the mid-1980s had paid off its debts. Aracruz quickly developed into one of the world's lowest-cost producers of wood pulp, with per-tonnage prices as much as one-third or more that of competing world markets.

Aracruz continued developing its own eucalyptus species, producing seeds for its own plantations. In the early 1980s, however, its seeds began attracting outside interest, and the company began selling seeds to third parties as well. As the company perfected its seed stock, it began developing its own cloning program for commercial development. By selecting superior seeds for its cloned trees, the company was able to make significant strides in improving not only growth rates, but also in uniformity and quality, helping it to reduce its own costs still further. Cloning presented its own disadvantages, such as a greater vulnerability to certain diseases, requiring the development of special planting techniques, including interspersing with native tree species.

Aracruz found other ways to reduce its costs, including locating its production close to its forests. The company also used waste byproducts, and especially wood bark, as fuel, providing nearly 90 percent of its own energy needs. In 1985, Aracruz built its own private port, called Portocel, in order to service its production unit, a move that helped it reduce its production costs still more.

Erling Lorentzen stepped down from a day to day role with the company in 1987, becoming company chairman. By then, Aracruz had grown into the nation's number two pulp producer, trailing Industrias Klabian de Papel a Celulose, which weighed in at twice the size of Aracruz. Yet Aracruz turned out high profits--in 1988, the company posted net profits of $147 million on revenues of $227 million.

Drive for Growth in the 1990s

Aracruz's strong profits and low debt rate encouraged it to begin building for the future. Kaufmann had become convinced of a coming boom in pulp demand, particularly from the rapidly growing Asian and South American markets, and sought to position Aracruz as a major producer to meet that demand. The company began construction on a second pulp mill to boost its total production capacity to more than one million tons per year. That facility, in Espirito Santo, came online in 1991. The total cost of the project, at $1.2 billion, also included an investment of more than $170 million on expanding Aracruz's forest holdings.

The slumping worldwide economy and falling pulp prices caught up with Aracruz in the early 1990s, however. The company was forced to restructure, slashing a number of jobs in a wide cost-cutting effort. Nonetheless, the company went ahead with a public listing, becoming the first Brazilian company to place its shares on the New York Stock Exchange in 1992. The following year, the company brought in a new CEO, Luiz Kaufmann.

Under Kaufmann, Aracruz continued its drive to increase profitability, aided by a new surge in world pulp prices. By the end of 1994, Aracruz was once again producing profits. Nonetheless, Kaufmann had become convinced of the need to diver- sify the company beyond its pulp business. In 1997, Aracruz teamed up with the United States' Gutchess International Group in order to launch a joint venture company, Tecflor Industrial, and build a $45 million sawmill in Posto da Mata, in Brazil's Bahia. The joint venture, held at 60 percent by Aracruz, brought the company into the production of lumber products, under the brand name Lyptus.

Meantime, Aracruz continued to expand its own production facilities, adding 200,000 tons per year capacity in 1998, bringing its total to 1.3 million tons annually. In 1999, the company extended its diversification effort, renaming subsidiary Tecflor as Aracruz Produtos de Madeira, and beginning production of hardwood products for the flooring and furniture industries.

In 2000, the company launched a new expansion effort, with an extension of its Espirito Santo operations, including construction of a third production unit. Built at a cost of $923 million, the new pulp mill added 700,000 tons of capacity per year to the company. Aracruz also added to its own tree stand as well, earmarking some $220 million to expand its land holdings and tree plantations. It also paid $83 million to acquire a 45 percent stake in Veracel, a pulp mill joint venture between Stora Enso and Odebrecht.

Aracruz's third unit allowed it to claim the spot as the world's leading producer of eucalyptus wood pulp, with production totals of more than two million tons per year. Meanwhile, the company played a key role in the consolidation of Brazil's pulp industry. In 2001, the company joined with Votorantim Celulose e Papel, the number four pulp producer in Brazil, to acquire majority control of the number two company, Celulose Nipo-Brasileira, also known as Cenibra, for $670 million. That acquisition gave Aracruz a stake in Cenibra's production capacity of some 800,000 tons per year.

With the launch of production at its new C unit in 2002, Aracruz topped 1.65 million tons of production for the year, with full capacity expected to be reached in 2003. In that year, however, Aracruz stepped up its expansion effort, starting with the launch of a joint venture project with Veracel partner Stora Enso to build one of the world's largest pulp production plants, in Bahia. The plant, to be built at a cost of $870 million, was expected to start production in 2005 and reach a capacity of 900,000 tons per year.

One month after the agreement with Stora Enso, Aracruz struck again, reaching an agreement to acquire longtime rival Klabin's pulp production unit, Riocell S.A., for $610 million. Aracruz was expected to continue Riocell's $500 million expansion program, started under Klabin. The completion of that project, as well as the addition of the new Veracel plant, was expected to push Aracruz's total production beyond 3.5 million tons per year. The company also expected its revenues to top $1 billion in 2003. A pioneer in Brazil's eucalyptus pulp industry, Aracruz now took a place among the industry's global giants.

Principal Subsidiaries: Aracruz (Europe) S.A.; Aracruz Celulose (U.S.A.), Inc.; Aracruz Empreendimentos Sociedade Civil Ltda.; Aracruz Nordeste S.A.; Aracruz Produtos de Madeira S.A.; Aracruz Trading S.A.; Mucuri Agroflorestal S.A.; Portocel Terminal Especializado de Barra do Riacho S.A. (51%); Terra Plana Agropecuária Ltda.; Veracel Celulose S.A. (45%).

Principal Competitors: Companhia Suzano de Papel e Celulose; Industrias Klabin de Papel e Celulose S.A.; Votorantim Celulose e Papel S.A.; Bahia Sul Celulose S.A.; Ripasa S.A. Celulose e Papel; Igaras Papeis e Embalagens S.A.; Inpacel Industria De Papel Arapoti S.A.; Jari Celulose S.A.; Celucat S.A.

Chronology

• Key Dates:
• 1967: Erling Lorentzen establishes Aracruz Florestal S.A. and begins planting eucalyptus trees for pulp production.
• 1972: Aracruz Celulose is formed, regrouping Aracruz Florestal as its subsidiary.
• 1978: Company begins production of wood pulp.
• 1985: Company constructs private port, Portocel.
• 1988: Aracruz begins construction of second pulp mill, which comes on line in 1991.
• 1992: Company lists shares on New York Stock Exchange as ADRs.
• 1997: Company forms Tecflor joint venture with U.S.-based Gutchess.
• 1998: Company adds 200,000 tons production capacity.
• 2000: Aracruz launches construction of new $930 million pulp mill to expand production to 1.3 million tons; acquires 45 percent stake in Veracel joint venture.
• 2001: Company joins with Votorantim Celulose e Papel, the number four pulp producer in Brazil, to acquire majority control of the number two company, Celulose Nipo-Brasileira, also known as Cenibra, for $670 million.
• 2003: Company forms joint venture with Stora Enso to build new production facility at Veracel; acquires Riocel pulp production unit from Klabin.