Global Uncertainties Can Affect Stability of
Credit Quality in Forest Products Industry
Investor Presentation (Brazil)
Tobias Crabtree, CFA
Associate Director, Corporate Ratings
March 2012
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Global Forest Products Ratings Outlook Dispersion
Outlook Distribution
(All Issuers)
Stable
71%
Outlook Distribution
(Non-Investment Grade)
Stable
60%
Positive & C.W.
Pos
6%
Negative & C.W.
Neg
23%
Positive & C.W.
Pos
8%
Negative & C.W.
Neg
32%
• Rating outlooks mostly stable for the 55 publicly rated entities
• All of the 15 investment-grade issuers have stable rating outlooks
• Downgrades could outpace upgrades for non-investment grade issuers
– 32% of non-investment grade issuers have negative ratings outlooks or
CreditWatch negative placements
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2.
Baseline Economic Scenario
• Sluggish economic growth in the U.S.
– Real GDP growth of 2.1% in 2012 and 2.3% in 2013
– Cautious consumer spending outlook
– Total housing starts of 730,000 in 2012 & 990,000 in 2013
• Recession in the Eurozone during the first half of 2012
– Eurozone should gradually climb out of its mild recession in second half of 2012
– Real GDP growth of 0% in 2012 and 1% in 2013
• China growing at a slower pace
– Real GDP growth of 8% in 2012, compared to 9.5% in 2011
• We expect input cost inflation to be less of a headwind than in 2011
– Near-term decreases in pulp & recycled fiber costs
– Higher chemical and petroleum-based input costs
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3.
Just How Stable Is Credit Quality?
• Most issuers’ financial performance has strengthened post 2008
• Demand risks
– Differs by forest products subsectors
• Supply risks
– New supply additions are targeting growth in Asia and Latin America
• Regional differences in our rating outlooks
– Recession in Eurozone
– Depressed housing market conditions in the U.S.
– Slowing growth in China
– Significant potential capital expansions in Latin America
• Key risks to our rating outlooks
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4.
Most Issuers’ Financial Performance Has Strengthened Post 2008
• Cash flow from operations has recovered post 2008/2009
recession
– Potentially lower 2012 free cash flow as capital expenditures,
acquisitions & shareholder rewards increase from 2011 levels
• Most companies should have “strong” or “adequate” liquidity
– Companies have strengthened their balance sheets to withstand
systemic shocks & cautious demand environment
– We view refinancing risk over the next 2 years as manageable
• Nine issuers have “less than adequate” or “weak” liquidity
– Concentrated in the ‘CCC’ rating category due to potential covenant
breaches or default risk
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5.
Demand Risks Differ By Forest Products Subsectors
• Food & beverage packaging and tissue paper sectors relatively more
stable even under a recession scenario
– Food & beverage packaging segments less susceptible to a recession scenario
– Tissue demand driven more by economic and demographic growth
• GDP growth-driven sectors could see some pricing pressure
– Containerboard, paper-based packaging would likely see modest demand
declines with potential for pricing pressure
• Secular demand decline for printing & writing papers could accelerate
– We believe North American & European printing and writing paper demand is
most vulnerable to a recession with the potential for double-digit declines
• Pulp markets driven mostly by global demand
– A “hard landing” in China could pressure global pulp pricing
• A limited improvement in U.S. housing could negatively affect ratings
on wood products companies
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6.
Demand Risks Differ By Forest Products Subsectors
U.S. & Canadian Forest Products Sector Outlook By Product Type
For The Next 12 Months Vs. The Past 12 Months
Product
Uses
Demand
Pulp
Broad range, including tissue,
Neutral
freesheet paper, specialty papers
Supply
Unfavorable
Pricing
Unfavorable
Containerboard &
Corrugated Products
Packaging containers (i.e., "brown
boxes")
Neutral
Neutral
Neutral
Bleached paperboard
(SBS)
Boxes/cartons/cups/paper plates for
food & consumer products; Packaging
containers
Boxes/cartons for food & consumer
products; Packaging containers
Neutral
Neutral
Neutral
Neutral
Neutral
Neutral
Unfavorable
Neutral
Neutral
Coated groundwood
(CGW)
Commercial printing, direct mail,
brochures, annual reports,
magazines, catalogs
Magazines, catalogs, books, inserts,
coupons, direct mail
Unfavorable
Favorable
Neutral
Uncoated freesheet
(UFS)
Forms, envelopes, printing paper,
office copy paper
Slightly unfavorable
Neutral
Neutral
Newsprint
Newspapers
Unfavorable
Neutral
Neutral
Tissue
Tissues, paper towels
Favorable
Slightly unfavorable
Favorable
Wood products
Logs - housing construction & pulp for
paper mills; Lumber/Panels - housing
construction
Slightly favorable
Slightly favorable
Neutral
Recycled paperboard
(CRB)
Coated freesheet
(CFS)
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7.
Supply Risks
• Consolidation in North America & Europe supports supply-side
discipline
– North American containerboard largely consolidated following significant
M&A activity in 2011
– Printing and writing papers in North America largely consolidated and
supply is expected to be balanced with demand over the near-term
• New capacity additions occurring in China and Latin America
– China adding significant new paperboard and paper capacity
– Latin America expansions target its low-cost advantage in pulp
– New capacity additions in North America limited to tissue and specialty
pulp
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8.
Regional Differences In Our Ratings Outlooks
Outlook Distribution
(All Issuers)
Stable
71%
Positive & C.W.
Pos
6%
Outlook Distribution
(U.S. & Canada)
Stable
70%
Negative & C.W.
Neg
23%
Negative & C.W.
Neg
23%
Outlook Distribution
(EMEA)
Stable
80%
Positive & C.W.
Pos
7%
Outlook Distribution
Stable (Latin America)
86%
Positive & C.W.
Pos
10%
Negative & C.W.
Neg
10%
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9.
Negative & C.W.
Neg
14%
Key Risks To Our Rating Outlooks
• Double-dip economic scenario resulting in reduced demand,
pricing & profitability
– Would expect real GDP to decline 0.2% in U.S. & 2% in Eurozone
• Rise in input costs not able to be offset with price increases
• Pricing deterioration due to supply additions
• More aggressive financial policies (i.e., increased shareholder
rewards and acquisitions)
• Stagnant U.S. housing starts into the 2013 building season
• Global macro events (i.e., Euro banks) could have negative
impact on consumer confidence and demand
• Downgrade pressure more likely to occur for non-investment
grade issuers & wood products focused companies
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10.
Appendices
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11.
Global Forest Products Ratings Distribution
8
7
6
# of Issuers
5
4
3
2
1
0
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
Rating
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12.
B
B-
CCC+ or
below
70%+ Of Forest Products Issuers Are Non-Investment Grade
Ratings Category Distribution
(Overall)
Ratings Category Distribution
(U.S. & Canada)
BB
35%
A
2%
A
2%
D
4%
CCC
5%
BB
36%
BBB
29%
BBB
27%
D
4%
B
27%
B
29%
Ratings Category Distribution
(EMEA)
BB
40%
BBB
30%
Ratings Category Distribution
(Latin America)
BBB
29%
BB
57%
B
30%
B
14%
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13.
Related Criteria And Research
• “Credit Themes: Prospects For U.S. And Canadian Forest
Products Are Stable, But Economic Uncertainty Lingers,” Feb. 7,
2012
• “Industry Economic And Ratings Outlook: A Less Optimistic
Picture For U.S. Natural Resources,” Jan. 26, 2012
• “Issuer Ranking: North American Forest Products Companies,
Strongest To Weakest,” Jan. 9, 2012
• “Latin American Corporates Should Maintain Their Credit
Quality Despite A Sluggish U.S. Economy And Europe’s Debt
Woes—For Now,” Aug. 29, 2011
• “Key Credit Factors: Criteria For Rating The Forest Products
Industry,” Dec. 11, 2009
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14.
Analysts
• U.S.
– Tobias Crabtree, tobias_crabtree@standardandpoors.com, (212) 438-6503
– James Fielding, james_fielding@standardandpoors.com, (212) 438-2452
• Canada
– Jatinder Mall, jatinder_mall@standardandpoors.com, (416) 507-2544
• Europe
– Jacob Zachrison, jacob_zachrison@standardandpoors.com, +4684405920
• Latin America
– Reginaldo Takara, Reginaldo_Takara@standardandpoors.com, 55-11-3039-9740
– Luciano Gemone, Luciano_Gremone@standardandpoors.com, 54-11-4891-2143
• Asia
– Brenda Wardlaw, brenda_wardlaw@standardandpoors.com, 61-3-9631-2074
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15.
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