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State of the North American Pulp & Paper Industry Into The Breach January 2009 ~ ’08 Q4 Preliminary Data Center for Paper Business and Industry Studies.

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Presentation on theme: "State of the North American Pulp & Paper Industry Into The Breach January 2009 ~ ’08 Q4 Preliminary Data Center for Paper Business and Industry Studies."— Presentation transcript:

1 State of the North American Pulp & Paper Industry Into The Breach January 2009 ~ ’08 Q4 Preliminary Data Center for Paper Business and Industry Studies (CPBIS) ~ Dr. Jacquelyn McNutt

2 Overview North American Forest Products Industry Review ~ The Industry Context Where Are We? Financial Performance Outlook ~ How Competitive Outlook ~ The Economy Grade-by-Grade Focus Prices ~ Key Raw Materials Key Takeaways

3 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…

4 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…

5 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…

6 Where Are We?  Volume = relatively flat overall in the 2000s until now  With all grades once again declining  Except for tissue ~ which is still show resiliency…  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 = ?

7 Where Are We? Volume Was Relatively Steady in the 2000s Until Q4 2008

8 Where Are We? Grade 2008 Volume Change (est.) Nov-Dec ’08 Volume Change (est.) Printing & Writing -6%-20% Boxboard-1%-8% Containerboard-4%-12% Newsprint-6%-7% Tissue-1%NA Chemical Paper Grade Pulp -3%-3% Total-4%-14% 2009 Volume ~ Now Falling From 2008 Peaks

9 Where Are We? Grade 2008 Avg Peak Jan Jan. ’ 09 vs Peak UFS #4 Xero (US$/ton)$1,139$1,180$1, % 60lb #3 CFS (US$/ton)$1,068$1,175$1, % 42# Kraft Liner (US$/ton)$568$605$ % 30lb Newsprint (US$/tonne)$671$740$ % Pulp NBSK Trans. (US$/tonne)$745$778$613-21% Prices Still Comparable To Strong 2008 Averages ~ But Now Falling From Peak Levels ~ But Now Falling From Peak Levels

10 Financial Performance Comparative Trends ~ Revenue & Profits Return on Capital Employed & Debt Investment Spending Other Financial Measures [Asset turnover, EBITDA, enterprise value, & role of intangibles]

11 Financial Performance Total Shareholder Returns Now Falling Sharply Back To S&P 500 Level

12 Financial Performance 2008 Revenue ~ Dragged Down By Very Poor 4 th Quarter

13 Financial Performance EOY Market Value ~ Revenue Multiple ~ Trails S&P 500 and Both Trending Sharply Downward

14 Financial Performance EOY Market Value ~ EBITDA Multiple ~ Comparable To and Now Trending Downward With S&P500

15 Financial Performance Rising Costs Then Sharply Falling Volume Drove Down Profitability in ’08

16 Financial Performance Very Poor Q4 Profits (EBITDA) Pull Pulp and Paper Back Towards 2003 Levels

17 Financial Performance Returns on Book Value of Total Capital ~ Cover Debt But Remain Below Cost of Capital ~ Cash Returns To Shareholders Positive For Now

18 Financial Performance Impacts Of Recessions And / Or Economic Slowdowns On Industry ROTC ~ Have Been Mixed Performance Near Or Above Average In ‘73-’75 ~ And ‘01 To ‘03 ~ Below Average In ’80 To ’82 And 90 To ’91

19 Financial Performance But Book Value of Debt ~ Trending Downward Over Last 7 Years ~ Now Lifting

20 Financial Performance Market Value of Debt ~ Rising Relative To Equity ~ But Remains Below 2002-’06 In Absolute Dollars

21 Financial Performance M&A Spending Rebounding Again ~ Capital Spending Down ~ R&D Up Slightly

22 Financial Performance Quarterly Capital Spending At Lowest Point In 2000s

23 Financial Performance Asset Turnover ~ Improving ~ Now Exceeds S&P 500 By 11pts.

24 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?

25 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

26 Outlook ~ How Competitive? Based On These Dimensions ~ Industry Participants ~ Must Recognize ~ 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…

27 Grade Category Potential Substitutes Containerboard Re-usable shipping containers, offshoring of manufacturing Packaging Grades Flexible packaging, offshoring of manufacturing Printing & Writing Papers Electronic communications, alternative advertising mediums Newsprint Tissue No Major Substitutes High Volume NA Grades Have Substitution Threats

28 Outlook ~ How Competitive? Time Spent By US Consumers With Printed Media is Down ~ Except Books & Yellow Pages

29 Outlook ~ How Competitive? Time Spent By US Consumers With Electronic Media Is Up ~ Except Radio and Recorded Music

30 Outlook ~ How Competitive? Domestic Paper Demand ~ Resilient Given The Rate of Adoption of New Technologies

31 Outlook ~ How Competitive? NA Producers Have Improved Asset Quality Through Incremental Investment/ Closure of Uncompetitive Lines Characteristic (Median) % Change Age % Maximum Speed (fpm) % Width (inches) % Capacity (tons per day) % North American Paper Machine Lines ~ Averages

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

33 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…

34 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… With a short term focus on cash flow, recession, crisis management, supply/demand, and operational excellence ~ which are going to be the key themes needing focus now…

35 Outlook ~ The Economy Overall Economic Growth NA Economy Sectors Outlook ~ [Implications for the Industry]

36 Outlook ~ The Economy Advanced Economies’ Recession Into 2009 Real GDP Growth By Region Est2009Est2010Est Advanced Economies US3.2%3.3%2.2%1.2%-2.2%1.5% Euro Area 2.6%3.2%2.6%0.0%-0.1%0.9% Japan1.9%2.2%2.1%-0.4%0.3%0.9% UK1.9%2.8%3.1%-0.7%-0.5%1.7% Canada2.9%2.7%2.7%-0.5%.2%2.9% Other Advanced Economies 5.8%5.7%4.6%0.2%0.2%2.2% Emerging Markets Africa5.8%5.6%6.5%3.3%3.0%4.2% Central / Eastern Europe 6.0%6.8%5.6%4.4%2.5%4.4% Developing Asia 9.0%9.5%10.0%8.2%7.7%8.8% Middle East 4.3%5.0%5.9%4.2%2.1%3.8% Latin America 4.7%5.5%5.6%5.3%3.0%4.5%

37 Outlook ~ The Economy NA Sectors That Directly Drive Pulp & Paper NA Sectors That Directly Drive Pulp & Paper Demand ~ Negative Going Into 2009 Economic Indicator Industry Segment Impacted Real GDP All+1.2%-2.2% Implicit Price Deflator All+2.4%+1.8% Personal Consumption Expenditures All+%+1.2% Industrial Production All-1.2%-3.8% Indust. Prod. - Non-Durables Containerboard-1.2%NA Indust. Prod. - Durables Packaging-2.0%NA Food & Beverage Sales Boxboard+5.6%NA Food services and drinking places Tissue+4.2%NA Computer & Electronic Sales P&W Papers -2.7%NA Professional Employment & Business Services P&W Papers, Tissue -0.5%-1% Housing Starts Tissue, Building Products -41%-13%

38 Grade-by-Grade ~ Focus Printing & Writing Papers BoxboardContainerboardNewsprint Market Pulp Tissue

39 In Addition ~ High End Uses ~ Auto Brochures/Annual Reports ~ Being Replaced By Website Versions  High volume UCF remains under pressure from overseas competitors ~ Newsprint producers still [slowly now] converting capacity to UC and CGW grades  Financial returns & growth prospects ~ below industry average where more restructuring & innovation are essential…. Printing & Writing Papers Implications ~ Certain segments will suffer net capacity reductions and others will grow some in time within a relatively unstable sector in the near term…

40 P&W Paper Demand Began To Change In The Mid-1990s ~ Volume Down In Late ‘08 With The Economy ~ Risk of Sustained Declines In Volume In 2009 P&W Paper Demand, Capacity & Shipments

41 Currently Significant Excess NA P&W Capacity ~ Will Come In Line With The Recovery P&W Papers ~ Excess Capacity

42 Nominal Prices Are At / Near Historic Peak Levels Where Prior Grade Relationships Have Shifted P&W Papers ~ Nominal Prices

43 Real Prices Have Been Rebounding Since 2002/2003 ~ But Now Starting To Decline from 2008 Peaks ~ With Potential Major Recessionary Exposure P&W Papers ~ Real Prices

44 Boxboard Has Been A Relatively Stable Segment  Slow growth in domestic industries that consume boxboard  Increased competition from overseas producers = limited growth  High oil prices and environmental concerns dissuade further substitution by plastics ~ but this can change…  Profitability/returns have been better than industry average due to relatively concentrated supply base  Facility closures have brought supply and demand in line Implications ~ Slow growth is expected going forward ~ and the recession could reduce demand significantly and create more stress Boxboard

45 NA Boxboard Demand Growth Has Been Generally Positive But Significantly Lags GDP Boxboard Demand Vs. GDP

46 Demand Was Strong Until Late 2008 Boxboard Demand, Capacity & Shipments

47 Excess Capacity Is Forming But Remains Below 2001 to 2003 Levels Boxboard ~ Excess Capacity

48 Nominal SBS Prices Staying Near Historic Highs ~ Flattening In Real Terms ~ And At Recessionary Risk Boxboard ~ Prices

49 The NA Containerboard Segment Has Undergone One Of The Most Extensive Restructurings Within The Industry  Concentration of top producers has gone from one of the lowest to highest in the industry ~ improved capacity utilization and expansion discipline has followed  Further acquisitions by large players will be difficult  NA producers export market has been supported by the weak US Dollar ~ but this can change with a stronger dollar  Profitability and returns have improved with strong capacity management but this is at great risk with a prolonged recession Implications ~ Producers are expected to manage capacity aggressively to match demand ~ risks of further closures possible with the economic and market downturn Containerboard

50 NA Container- board Demand Continues To Be Closely Tied To Domestic Non- durables And Durables Trends Containerboard Vs. Drivers

51 NA Capacity Overhang Will Be Created By Short Term Substantial Drop In Demand Containerboard Demand, Capacity & Shipments

52 NA Container- board’s Excess Capacity Is Increasing But Below 2001 Levels Containerboard ~ Excess Capacity

53 Nominal Linerboard Prices Remain Near Historic Highs ~ But The Recession Will Likely Turn This Containerboard ~ Prices

54 Newsprint remains weakest overall NA industry segment  Short-term publishing and printing declines have been exacerbated by substitution to alternative media  National and local papers continue to reduce page size and basis weights ~ and are considering in some cases to move from 7 days  Opportunities for further consolidation exist and ~ significant capacity reductions and grade conversions will continue  Ultimate demand floor for Newsprint is uncertain Implications ~ Ongoing consolidation and capacity rationalization to improve efficiency and match supply and demand is essential ~ Exacerbated and sustained sector pressures with the recession… Newsprint

55 NA Newsprint Demand ~ Continues To Decline Newsprint Demand Vs. GDP

56 Demand, Capacity, Exports, & Shipments ~ Are All Sliding Downward At A Relatively Rapid Rate Newsprint Demand, Capacity & Shipments

57 Substantial Capacity Rationalization ~ Has Kept Supply And Demand In Balance ~ Despite Falling Volume ~ This Will Be A Further Challenge In The Recession… Newsprint ~ Excess Capacity

58 Nominal Newsprint Prices Are At Historic Highs ~ But Real Prices Flattening & The Threat of Declines is Real Newsprint ~ Prices

59 Market Pulp ~ Intermediate Good In Production Of Other Paper And Paperboard Grades  Internationally traded commodity with growing world-wide demand ~ especially in developing regions being now impacted by recession…  Environmental restrictions ~ new capacity additions difficult  NA is a large net exporter ~ which is at some risk with exchange rates  DIP pulps presently relatively more financially attractive than virgin pulps ~ But this is a constantly changing reality… Implications ~ This sector will be very chaotic but has always showed resiliency ~ Wild cards here are China’s fiber demand… And South America’s capacity expansions… Market Pulp

60 Market Pulp Demand Still Follows Other Grades ~ But Watch China Demand and South American Capacity Additions Market Pulp With Other Grades

61 Market Pulp Demand Has Fallen With Overall Paper Demand Starting In Late 2008 Market Pulp Capacity & Shipments

62 NA BHKP Excess Capacity Is Increasing To Relatively High Levels BHKP ~ Excess Capacity

63 NA BSKP Excess Capacity Is Also Relatively High BSKP Excess Capacity

64 Nominal Market Pulp Prices Have Fallen Quickly And Sharply Market Pulp ~ Nominal Prices

65 Real Market Pulp Prices Are Falling Towards Historic Lows Market Pulp ~ Real Prices

66 Tissue Has Been the Strongest Overall Segment In North America in Recent Years – Demand is Catching Supply  End-product demand is mature ~ Americans highest per-capita consumers in world & incremental demand is slow  However ~ overall company financial returns less sensitive to supply / demand dynamics at mill level than other grades  Regulatory considerations ~ will limit large M&A activity  Both technology changes and new entrepreneurial entrants will drive spending  Excess capacity in recent years ~ is reversing Implications ~ Tissue remains the strongest performing grade in the sector ~ but it is not immune to the recession…. Tissue

67 NA Tissue Demand Growth Has Been More Resilient than Overall GDP Tissue Vs. GDP & Households Formation

68 Demand Is Growing Slowly and Capacity Is Once Again Managed Tissue Demand, Capacity & Shipments

69 Excess Capacity Is Falling Back Towards Historic Average Levels Tissue Excess ~ Excess Capacity

70 Prices Strong Since ~ Finished Product & Roll Stock Are Up In Nominal And Real Terms Tissue ~ Prices

71 Prices ~ Key Raw Materials Pulpwood Recovered Paper Oil Natural Gas

72 Real US Pulpwood Prices Risen Over Past Six Years ~ We Expect To See Them Fall With Other Commodities Pulpwood ~ Prices

73 After Unprecedented Increases ~ OCC & ONP Costs Have Fallen Dramatically Recovered Fiber ~ Prices

74 Oil Prices Have Fallen Dramatically From Daily Peak Of $145 Per Barrel In July 2008 To $40 Per Barrel Today Oil ~ Prices

75 Natural Gas Prices Have Also Fallen ~ Into The $7 Per Thousand Cubic Foot Range Natural Gas ~ Prices

76 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…

77 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...

78 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. 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.  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.

79 Contact Information Thank You! ~Copies Available At Contact Information Dr. Jacquelyn-Danielle McNutt Executive Director ~ Center for Paper Business & Industry Studies ~


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