North American Forest Products Industry Review ~ The Industry Context


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Overview



Where Are We?

  • North American Industry Context ~

  • Mature, largely commodity industry ~ slow growth & struggling in current economic downturn…

  • Recession driving down grade demand ~ for now…

  • After a relatively strong upturn ~ in pricing, investments and shareholder returns ~ this current downturn is dramatic…

  • Grade prices are strong for now ~ but starting to fall…

  • Cost pressures from market pulp, natural gas, oil, pulpwood and recovered paper are easing rapidly ~ for now…

  • Credit crisis/ recession / have created very difficult environment for capital intensive, mature commodity industry like the paper industry…



Where Are We?

  • Current North American Industry Context ~

  • Weak US Dollar helped improve competitiveness ~ but strengthening US dollar will erode this again in 2009…

  • Older asset base ~ has improved with rationalization ~ but more improvement is needed to reassert competitive strength

  • Organizational structures will go through additional stresses & need further substantial changes

  • Significant near term improvements absolutely essential for individual companies to sustain through this recession let alone outperform the market & industry to reassert dominance…

  • But let’s also remember ~ The NA Industry Still enjoys significant fiber resources, logistics & world’s major marketplace…



Where Are We?

  • Paper manufacturing book returns have been and remain below target ~

    • High enough to cover required return on debt
    • Yet not a full return on equity
  • However, the sector has ~

    • Performed well enough to generate positive shareholder returns and
    • Outperformed the S&P 500 in recent years
  • But performance is sliding rapidly again…



Where Are We?

  • Volume = relatively flat overall in the 2000s until now

  • Pricing has been strong, but now is weakening where

    • Most grades are coming sharply off recent highs
  • Cost pressures are easing though for now

    • Looking out = ?


Where Are We?

  • Volume Was Relatively Steady in the 2000s Until Q4 2008



Where Are We?



Where Are We?



Financial Performance

  • Comparative Trends ~ Revenue & Profits

  • Return on Capital Employed & Debt

  • Investment Spending

  • Other Financial Measures

  • [Asset turnover, EBITDA, enterprise value, & role of intangibles]



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Financial Performance



Outlook ~ How Competitive

  • What Is Competitiveness ~ Looking Out?

  • What Do We Need To Embrace ~ To Reassert A Competitive Based Performance?

  • How Do NA Assets Stack Up ~ Looking Out?

  • What Are Key Grade ~ Competitiveness Factors?

  • Changing Measures of Competitiveness

  • [Trade patterns, role of print, & assets’ age]

  • What Are The Competitiveness Implications?



Outlook ~ How Competitive?

  • We Need to Understand ~ Especially In This Recession ~

  • That Competitiveness Is Multidimensional ~

  • Mill Performance vs. International Competition ~ i.e. NA vs. SA/ European/ Asian mills’ productivity/ quality

  • Product Performance vs. Substitutes ~ i.e. paperboard folding cartons vs. plastic packaging, newspaper vs. TV, etc.

  • End-User Performance vs. International Competitors ~ i.e. domestic vs. international manufacturers

  • Financial Performance vs. Other Investments ~ i.e. returns on paper investment vs. alternatives of similar risk



Outlook ~ How Competitive?

  • Based On These Dimensions ~

  • Industry Participants ~ Must Recognize ~

  • Off-shoring and substitution by alternative mediums have reduced demand below peak levels and this can accelerate once again…

  • NA’s lost cost leadership in pulp/ paper production ~ was being lifted by a weak dollar & performance improvements ~ but

    • A Strengthening US Dollar and dropping capital investments will change this
    • Where too strong a focus on capital rationing strategies will further erode the asset base…
  • The composite financial performance is dramatically weakened…

  • And without strong actions to balance cash needs with cash in and to shore up the financial strength of the firm ~ all is at risk…



High Volume NA Grades Have Substitution Threats



Outlook ~ How Competitive?

  • Time Spent By US Consumers With Printed

  • Media is Down ~ Except Books & Yellow Pages



Outlook ~ How Competitive?

  • Time Spent By US Consumers With

  • Electronic Media Is Up ~ Except Radio and Recorded Music



Outlook ~ How Competitive?

  • Domestic Paper Demand ~ Resilient Given

  • The Rate of Adoption of New Technologies



Outlook ~ How Competitive?



Outlook ~ How Competitive?

  • US Total Pulp, Paper and Paperboard Export Growth Continued

  • To Outpace Imports = Reduced Net Imports in 2008 ~ But With A Stronger US Dollar This Can Turn The Other Way Quickly in 2009…



Outlook ~ How Competitive?

  • We must be mindful of today’s realties ~

    • The US economy is down/ unstable & recessionary
    • Credit markets are in freefall/disarray ~ they will not bail us out
    • Our high-volume grades are very exposed to alternative mediums’ substitution and global market place threats
    • Economic turbulence is creating ~ enormous global pressures with long term consequences
    • The global economic crisis is changing the competitive stage
    • Major volume losses and high costs of production ~ destroy cash flow
  • And even with all of this and the clear knowledge that traditional business models are stretched to the limit and will not suffice

    • Improvements are possible ~ Don’t judge the long term by today… Look at history… This is not our first economic and industry crisis…


Outlook ~ How Competitive?

  • With all these dynamics ~ participants must take dramatic action now to weather this storm before we can truly ~ learn how to then thrive…



Outlook ~ The Economy

  • Overall Economic Growth

  • NA Economy Sectors Outlook ~

  • [Implications for the Industry]



Outlook ~ The Economy



Outlook ~ The Economy



Grade-by-Grade ~ Focus

  • Printing & Writing Papers

  • Boxboard

  • Containerboard

  • Newsprint

  • Market Pulp

  • Tissue



Printing & Writing Papers



P&W Paper Demand, Capacity & Shipments



P&W Papers ~ Excess Capacity



P&W Papers ~ Nominal Prices



P&W Papers ~ Real Prices



Boxboard



Boxboard Demand Vs. GDP



Boxboard Demand, Capacity & Shipments



Boxboard ~ Excess Capacity



Boxboard ~ Prices



Containerboard



Containerboard Vs. Drivers



Containerboard Demand, Capacity & Shipments



Containerboard ~ Excess Capacity



Containerboard ~ Prices



Newsprint



Newsprint Demand Vs. GDP



Newsprint Demand, Capacity & Shipments



Newsprint ~ Excess Capacity



Newsprint ~ Prices



Market Pulp



Market Pulp With Other Grades



Market Pulp Capacity & Shipments



BHKP ~ Excess Capacity



BSKP Excess Capacity



Market Pulp ~ Nominal Prices



Market Pulp ~ Real Prices



Tissue



Tissue Vs. GDP & Households Formation



Tissue Demand, Capacity & Shipments



Tissue Excess ~ Excess Capacity



Tissue ~ Prices



Prices ~ Key Raw Materials

  • Pulpwood

  • Recovered Paper

  • Oil

  • Natural Gas



Pulpwood ~ Prices



Recovered Fiber ~ Prices



Oil ~ Prices



Natural Gas ~ Prices



Key Takeaways ~ Overall

  • The NA Industry Performed Relatively Well Over The Past Five To Six Years ~ But The Current Recession Will Reverse This

  • Industry participants will be seriously challenged to produce strong financial performance in a slow demand growth and credit crippled environment and weak global and domestic economies

  • Rising prices improved profitability but demand shortfalls will both undercut price increases and drive returns down…

  • Rising costs that offset some of the benefits of high pricing are easing in the recession and this is a very needed relief…



Key Takeaways ~ Looking Out

  • The NA industry financial performance has been adequate but not compelling for a number of years ~ but now is a big ?

  • Improvements in recent years were a relief ~ yet the dramatic nature of this recession cries out for more…

  • Quality of management decisions for short term actions to traverse the recession will differentiate the survivors and future thrivers from those who fail…

  • Short term changes in industry direction will impact all aspects of the industry ~ producers and suppliers alike ...

  • Where there is light on the horizon ~ it will come from bold crisis management actions ~ stay tuned ...



Disclaimer

  • The State of the Industry (SOI) presentations are written companions to live lectures. Therefore, content of these presentations should only be considered in conjunction with their oral presentations and only in their entirety. 

  • Certain statements made in the SOI presentation series concern past performance and the outlook for the pulp and paper industry.  These statements are made for discussion purposes only and are based on limited public information available on the presentation date.  While we believe the information contained within the presentations is reasonable, no assurance can be given that the assessments and outlooks discussed are correct.  Accordingly, actual or anticipated results with further information and analysis could differ from those herein and these differences could be material. 

  • We have no obligation to tell you when opinions or information in this presentation change. Therefore, parties using these presentations should accordingly exercise due diligence when relying on data or other information in the presentations.

  • Unless otherwise stated, trends and outlooks for the overall industry or grade segment are not necessarily applicable to any particular company, security, investment, product, supplier group, customer group or otherwise related industry;

  • This presentation is not intended to provide investment advice of any kind.  It has been prepared without regard to the individual financial circumstances and objectives of persons who use it. The industry discussed in this report and related securities may not be suitable for all investors. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.



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