The Company Letter to Shareholders
Dear Shareholders: I am pleased to submit for your consideration our Annual Report and the Company’s Financial Statements for the fiscal year recently ended. The year 2006 presented a complex and challenging macroeconomic scenario for CMPC. The expansion of the international economy had a generally favourable effect on demand for the products we sell. However, this same dynamism drove up prices of certain commodities like oil, which increased our energy costs; and copper, which contributed to the revaluation of the Chilean peso, and consequent decrease in the profit margins of CMPC’s export business. The performance of the Chilean economy was relatively weak, considering the favourable international climate, which together with fierce competition in some sectors of the domestic market, had a negative impact on the Company’s results. Within CMPC, several expansion projects were completed and came on stream in 2006, which involved operational stoppages and some cost increases. These one-time events also had a negative impact on operations for the period. With this scenario as background, CMPC achieved consolidated sales of Ch$ 1,201,892 million (US$ 2,269 million)* in 2006, 7.9% above the previous year and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) of Ch$ 275,187 million (US$ 520 million)*, 13.4% up compared to 2005. Net Income reached Ch$ 109,300 million (US$ 206 million)*, 13% down on the previous year due primarly to a lower non-operating income due to greater net financial expenses and because the previous year‘s results had an extraordinary gain of US$ 24 million arising from assets sale. I would like to refer briefly to our operations to highlight the key features of the market and to draw to your attention the investment projects undertaken. In the forestry business, considerable work was done throughout the year to prepare the organization for an increase in the eucalyptus harvest from 2007, following the operational launch of Line 2 of the Santa Fe pulp mill.
* Figures denominated in US Dollars as of the averages of the year.
The wood product markets continue to accept more and more products derived from Pine. However, a slow-down in the US construction sector has affected demand in the last few months, particularly in the market for mouldings. Investments have been focussed on our continuing strategy to monetize the value added to our forest with a longdated silvicultural management program. For this purpose we built the US$ 70 million plywood board manufacturing plant in Mininco, next to the Pacífico Mill. This plant is in its final phase of construction and about to come on stream. The pulp business commanded better export prices than the previous year, with the average increase around US$ 70 per tonne more than the 2005 average. In mid December last year, Line 2 of the Santa Fe mill produced its first bale of pulp. This was an important milestone for CMPC, crowning a great effort of investment and work over many years to develop and build the project. It is worthy of note that the number of workers on the project exceeded, on average, 5,000 during the whole of 2006, rising to 8,000 per day in the third trimester of the year. We are particularly proud of our performance in terms of safety and environmental commitments, which the project team adhered to strictly. This investment enabled CMPC to reach a production capacity of 2 million tonnes per annum, practically doubling its exports volume. To achieve this, promotional work was done on pulp from the new line and contracts signed for 2007 with more than 150 clients in 30 countries, covering more than 80% of annual production. The paper business, which includes newsprint, folding boxboard and corrugating paper experienced a robust price environment. Newsprint for example reached its highest price for the last five years, though this showed signs of slowing down towards the last quarter of 2006. The folding boxboard business continues to consolidate in the Latin American and European markets after manufacturing and marketing a product of excellent quality. A project to expand capacity at the Valdivia mill was completed during the year, which together with the