•
State of the North American
Pulp & Paper Industry
Pulp & Paper Industry
Looking Out From Chaos
February 2009 ~ ’08 Q4 Preliminary Data
CIBC W
World
ld M
Markets
k t
~ Don Roberts
Center for Paper Business and Industry Studies (CPBIS)
~ Dr. Jacquelyn McNutt
•
Today’s Headlines ~ Compounding the y
p
g
Unprecedented Times
2
•
Today ‘ss Headlines
Today Headlines
Conventional weapons can't fix financial mess
Conventional weapons can't fix financial mess
Smurfit‐Stone receives delisting notice from Nasdaq after Smurfit‐
packaging company files for Chapter 11 packaging company files for Chapter 11 bankruptcy protection
bankruptcy protection
U S d ili
U.S. dailies newsprint consumption falls by 1 million tonnes ~ i t
ti f ll b 1 illi t
~
industry downtime industry downtime attempts to shore up market
attempts to shore up market
Framing lumber composite falls to US$197/mbf, Framing lumber composite falls to US$197/mbf, concern grows g
p
f
/ f, concern grows g
over market conditions
U.S. containerboard production drops 3.7% in 2008 after plunging U.S. containerboard production drops 3.7% in 2008 after plunging 26.1% in December
in December
AbitibiBowater selling assets to raise funds while AbitibiBowater selling assets to raise funds while share prices drop
share prices drop
Tembec
Tembec tells suppliers they must cut prices
Tembec tells suppliers they tells suppliers they must cut prices
must cut prices 10%
10%‐‐20%
3
•
Today ‘ss Headlines
Today Headlines
Printing paper prices in Europe face downward price pressure
Printing paper prices in Europe face downward price pressure
World market pulp year‐‐over
World market pulp year
over‐‐year year shipments fall by 16%
shipments fall by 16%
T b ’ h
Tembec’s three French pulp mills to take weeks of market downtime
Tembec’s three French pulp mills to take weeks of F
h l
ill
k
k f market downtime
k d
i
GP will idle PM No. 3 at Cedar Springs, Ga., GP will idle PM No. 3 at Cedar Springs, Ga., lay off 20% of workforce
lay off 20% of workforce
SCA i t cut capital spending
SCA aims to cut capital spending
SCA aims to t
it l
di b
by US$124M in 2009, says CEO
US$124M i 2009
CEO
US wood fiber prices fall
US wood fiber prices fall in 4Q in 4Q ‐‐ pulpwood prices down more than 10% in Northwest
High inventories force Chinese papermakers to reduce production, purchase fewer raw materials and curtail expenses to improve purchase fewer raw materials and curtail expenses to improve performance
4
•
Overview
North American Forest Products Industry
North American Forest Products Industry
~ Looking Out From Chaos ~
The Current Context
The Current Context
The Current Chaos
Looking Out from the Chaos
Looking Out from the Chaos
Transformation Needed
So
So Where Does This Leave Us?
Where Does This Leave Us?
Closing Remarks
Open Forum Discussion
Open Forum Discussion
5
•
The Current Context
The Current Context
` Setting The Stage `
6
•
The Current Context
The Current Context
Even before
Even
Even before the onset of the current financial crisis
before the onset of the current financial crisis
the onset of the current financial crisis ~ The The
global forest sector was experiencing some of the most fundamental changes in markets and public policies since the fundamental changes in markets and public policies since the end of the Colonial Era
Take A Look ~
 Explosion of the Asian wood deficit…
 Revolution in electronic communication…
 Prospective pricing of carbon…
 Wildly escalating energy costs…
 Fundamental forest tenure reforms in Russia, China, India…
7
•
The Current Context
The Current Context






8
Mature largely commodity NA industry ~ slow growth & Mature, largely commodity NA industry slow growth &
struggling in current economic downturn…
Older NA asset base ~ has improved with rationalization ~ has improved with rationalization ~ but but more is to come
more is to come…
Organizational structures have gone and will go through Organizational structures have gone and will go through additional stresses…
Recession driving down grade demand ~ for now…
Recession driving down grade demand ~ for now…
After a relatively strong upturn ~ in pricing ~ prices, enterprise value, capital spending and shareholder returns are declining , p
p
g
g
substantially ~ this current downturn is dramatic…
Cost pressures from fiber, natural gas, oil, pulpwood and recovered paper are easing rapidly ~ for now…
recovered paper are easing rapidly for now…
•
The Current Context
The Current Context
Returns on Book Value of Total Capital Employed
H
Have Experienced a Sustained 3 Decade Decline
Have Experienced E
i
d a Sustained 3 Decade Decline
S
i d 3 D d D li
20.0%
ROTC averages 6.5% vs.
10.2% cost of capital
15.0%
10.0%
5.0%
0.0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Return On Total Capital
Cost of Capital
9
•
The Current Context
The Current Context
Debt To Capittal Ratio
D
Which Has Led to a Climbing
Debt to Capital Ratio Over
Debt to Capital Ratio Over the Past 3+ Decades
Debt to Capital Ratio Over the Past 3+ Decades
the Past 3+ Decades
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Debt % of Invested Capital
10
•
The Current Context
The Current Context
 NA Forest Products Stock Values have taken a substantial substantial
tumble the past two years…
Source: Forestweb
•
The Current Context
The Current Context
Commodity Prices (January 2000 = 100)
180
Uncoated Freesheet
Linerboard
NBSK Pulp
Lumber
Source: RISI,, Random Lengths
g
and CIBC World Markets Inc.
Inc
12
Sep-2008
8
8
May-2008
Jan-2008
Sep-2007
7
7
May-2007
Jan-2007
Sep-2006
6
Jan-2006
May-2006
6
Sep-2005
5
5
May-2005
Jan-2005
Sep-2004
4
4
May-2004
Jan-2004
Sep-2003
3
Jan-2003
3
May-2003
Sep-2002
2
2
May-2002
Jan-2002
Sep-2001
May-2001

Jan-2001

100
Lumber already unsustainably low
unsustainably low 80
Pulp in free
in free‐‐fall
60
Paper grades have 40
been at cyclical y
peaks, but starting to weaken
Sep-2000
0

0
May-2000
Thus far ~ Thus far ~ commodity commodity prices in the forest 160
industry have 140
performed very performed very performed very
120
differently ~
Jan-2000

•
The Current Context
The Current Context
Capital Spending Indeex (Q1 2001 = 100)
Quarterly Capital Spending At Lowest Point In 2000s ~ And Falling
At Lowest Point In 2000s And
And Falling
Falling
125.0
105.0
85.0
65.0
45.0
25.0
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
13
•
The Current Context
The Current Context
Moving On…
g
 Weak US Dollar helped improve competitiveness in the US and hurt Canada 

For a capital intensive, mature commodity industry like the paper industry…
paper industry…



Credit crisis & recession Credit crisis & recession have created a very difficult environment
have created a very difficult environment
Significant near term improvements absolutely essential
Significant near term improvements absolutely essential for individual companies to sustain through this recession let alone
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 But let’s also remember ~ The NA Industry Still enjoys significant
g

14
But
But now in the US now in the US ~ strengthening US dollar
strengthening US dollar will erode this again will erode this again
in 2009 for the US ~ but help Canada…
in 2009 for the US ~ but help Canada…
Fiber resources, logistics & world’s major marketplace…
•
The Current Context
The Current Context
And just so we keep our mindset right ~ let’ss all remember the current chaotic let
all remember the current chaotic
situation we find ourselves in actually started over three decades ago and as g
such no quick exit route will be at hand ~ resolute transformation will be f
essential…
15

The Current Chaos
The Current Chaos
16

The Current Chaos
The Current Chaos

Significant credit crunch
g f



Many of the off
Many
Many of the off‐
of the off‐
off‐shore economies are shore economies are now in worse shape than shore economies are now in worse shape than now in worse shape than
the US…
Still lots of macro
Still lots of macro‐‐economic unknowns


Could we be facing a “lost decade” of growth like Japan experienced?
At the same time we are seeing an unprecedented level of co
At the same time we are seeing an unprecedented level of co‐‐
ordinated fiscal stimulus
di
d fi l i l



17
Difficult for even companies with strong balance sheets to operate due to capital rationing…
$825 billion in the US – 6% of GDP
$825 billion in the US
$725 billion in China
$725 billion in China – 16% of GDP
f
$325 billion in the European Union
$325 billion in the European Union – 2.5% of GDP

The Current Chaos
The Current Chaos
Oil Price Spikes Preceded
Oil Price Spikes Preceded 4 Out of Last 5 Global Recessions
160
2008$/bbl
140
120
100
80
60
40
20
0
70
75
80
85
Global Recessions*
18
90
95
00
Real Oil Price
05

The Current Chaos
The Current Chaos
A number of pressing issues are at play in the current chaotic economic and business climate. For example:
• Volatile prices of fossil fuel (and related) commodities
• Dramatically
Dramatically shifting cost structures –
Dramatically shifting cost structures shifting cost structures – both within and across both within and across
regions. Driven by changing prices and volumes.
• Different transportation patterns
• Disruptions in supply chains due to insolvency/bankruptcy
• Evolution in public policies wrt energy pricing and carbon
• Potential rise of protectionism Potential rise of protectionism
• Re
Re‐‐assessment by governments of the forest industry’s “social contract”.
• Evolving role of government in general
19

The Current Chaos
The Current Chaos
So with that in hand ~ we must be mindful of So with that in hand we must be mindful of
today’s chaotic realties…
Economic turbulence is creating
Economic
turbulence is creating
 Enormous global pressures with long term
Enormous global pressures with long term
consequences…
consequences
 The global economic crisis is changing the The global economic crisis is changing the competitive stage
competitive stage…
 Even if you survive, the landscape will likely be quite different in the next recovery
quite different in the next recovery.

20

The Current Chaos
The Current Chaos
Inventory of Homes For Sale
12
 The housing market drives the 11
actually been coming down since November
 If this trend continues (and
If thi t d
If this trend continues (
ti
(and
d
mortgages begin to flow, and mortgages begin to flow, and more foreclosures are avoided), the “months of supply” could the “months of supply” could drop dramatically in late 2009.
21
10
9
8
7
6
5
4
3
2
1
0
J a n -0 4
M a r-0 4
M a y -0 4
J u l-0 4
S e p -0 4
N o v -0 4
J a n -0 5
M a r-0 5
M a y -0 5
J u l-0 5
S e p -0 5
N o v -0 5
J a n -0 6
M a r-0 6
M a y -0 6
J u l-0 6
S e p -0 6
N o v -0 6
J a n -0 7
M a r-0 7
M a y -0 7
J u l-0 7
S e p -0 7
N o v -0 7
J a n -0 8
M a r-0 8
M a y -0 8
J u l-0 8
S e p -0 8
 The The absolute inventory
absolute inventory has M o n th s o f S u p p ly , S in g le F a m ily
demand for solid wood products, and a good part of the US economy
 The “months supply of homes
for sale” is still more than double the historical level

The Current Chaos
The Current Chaos
Home prices have already come down substantially, and interest rates p
y
y,
are low ~ affordability is the best in 15 years
are low ~ affordability is the best in 15 years
However, going forward, the key problem facing the housing markets However, going forward, the key problem facing the housing markets is foreclosures
is foreclosures ~ and they could delay the US housing recovery until and they could delay the US housing recovery until
2012
Over the past two years, most of the default/foreclosure problems came from the Sub
came from the Sub
came from the Sub‐‐Prime category
Prime category

Over the next 3‐
Over the next 3‐4 years we could well see more of the same due to the reset of two other categories of mortgages ~ the reset of two other categories of mortgages ~ ALT A and Adjustable ALT A and Adjustable ARMS

 Sub
Sub‐‐Prime mortgages were issued to people with Prime mortgages were issued to people with poor credit history/FICA poor credit history/FICA scores < 600)
 ALT A and Adjustable ARMS were made to people with good credit j
p p
g
history/FICA scores ~ but with some interesting twists
history/FICA scores ~ but with some interesting twists
22

The Current Chaos
The Current Chaos
23

ALT A refers to loans given to people who were not required ALT A
refers to loans given to people who were not required
to show or prove income or ability to pay off the loan

Adjustable/Option ARMs refers to home loans where the consumer gets a rate on the loan that starts out low and he/she can also choose how much they want to pay each month

These two categories are sometimes called These two categories are sometimes called “NINJA loans”
“NINJA loans” ~ no income, no job, no assets
j

Over time, these loans “reset” ~ and this is where the Over time, these loans “reset” ~ and this is where the problem begins…
problem begins…

The Current Chaos
The Current Chaos

Sub‐‐Prime totals about Sub
totals about
$1 trillion; ALTA A
$1 trillion; ALTA A $1 trillion; and Option ARMS about $600 million

Resets on most of the ALTA A and Option ARMS are still ahead of ARMS are still ahead of us (and even some more Sub‐‐Primes to come)
Sub
Housing problems could continue well into 2012 if something
something is not done to is not done to
deal with upcoming foreclosures stemming from resets to the ALT A and ARMS
and ARMS

24

The Current Chaos
The Current Chaos
Since 2000, the growth in NA demand for paper & paperboard Since
Since 2000, the growth in NA demand for paper & paperboard has been anemic at best
2000 the growth in NA demand for paper & paperboard has been anemic at best
has been anemic at best
 In the case of newsprint and uncoated free sheet paper In the case of newsprint and uncoated free sheet paper ~ the two largest grades of paper ~ the two largest grades of paper ~ we are now seeing the cyclical contraction in demand reinforce a secular downward trend
 Expect meaningful price declines in 2009
Expect meaningful price declines in 2009

Demand Data (January 2001‐
Demand Data (January 2001‐November 2008)
CAGR
Year-to-Date 2008
Change
November 2008
YoY Change
Newsprint
-7.4%
-11.0%
-18.6%
Printing & Writing Paper
● Coated Woodfree
● Coated Groundwood
● Uncoated Woodfree
● Uncoated Groundwood
-2.7%
2 7%
-3.9%
-5.2%
0.6%
-6.9%
6 9%
-15.9%
-7.4%
-0.8%
-17.0%
17 0%
-33.1%
-18.5%
-21.5%
Source: Pulp and Paper Week, PPPC and CIBC World Markets
25

The Current Chaos
The Current Chaos
World Currency Movements (Against the US$): Average Q1/2008 vs December 31, 2008
 Due simply to changes in D
i l t h
i
exchange rates ~ the cost competitiveness of the US forest industry has declined forest industry y has declined against most major producing countries 13.2%
Japan
China
1.9%
Euro
-11.8%
-20.8%
Canada
Russia
 Downward pressure
Downward pressure being being
exerted on prices denominated in $US
-24.4%
Sw eden
-30.8%
A ustralia
-33.9%
New Zealand
-34.1%
 However ~ the ability to pay y p y
higher US$ prices has actually increased in Japan actually increased in Japan (and China)
Brazil
-50%
-39.5%
-45% -40%
-35%
-30%
-25% -20%
-15%
-10%
-5%
0%
5%
10%
Source: Bloomberg and CIBC World Markets
26
15%
20%

The Current Chaos
The Current Chaos
Average Delivered Conifer Pulpwood Prices: (Q2/08 g
p
( /
average vs Dec 31/08)
 The
The change in change in
27
220
200
180
160
140
120
100
80
60
40
20
December 31, 2008 Ex change Rates
2008 Q2 Ex change Rates
Source: Wood Resources International, Bloomberg and
Source: Wood Resources International Bloomberg and
CIBC World Markets
Japan (ddom)
Germ any
Sweeden
Fraance
US North west
Canada East
S pain
B razil
Canada W
West
N.Z.
US S
South
0
Aust ralia
US$
currencies has shifted the global cost curve down ~ biggest drops down ~ biggest drops down ~ biggest drops
in Brazil, Sweden and Oceania
 While the US South is still pretty competitive ~ the PNW is now ~ the PNW is now among the highest cost regions ~ but prices there are now coming down sharply

The Current Chaos
The Current Chaos
 Transport costs Transport costs are typically Transport costs are typically are typically
Handy-Size Freight Index, 5/2006 - 12/2008
20%‐30% of the total 20%‐
delivered cost of forest products
4000
3500
 Cost of ocean freight transport 28
500
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
0
Jan-07
recessions ~ there is now h
more off‐‐shore pulp & paper more off
capacity which is modern and capacity which is modern and low cost
1000
Nov-06
 And compared to previous 1500
Sep-06
bigger role
2000
Jul-06
 International trade will play a International trade will play a 2500
May-06
 The world The world has become smaller
has become smaller
May 2006 = 1,000
has fallen through the floor
3000

The Current Chaos
The Current Chaos

With
With all of this, the industry’s financial ll f thi th i d t ’ fi
i l
performance is dramatically compromised…
performance is dramatically compromised…


A rapid escalation of A rapid escalation of 3+ decades of eroding 3+ decades of eroding performance…
Now is the time for dramatic action –
Now is the time for dramatic action – the current y
industry model is broken. 29

Looking Out From The Chaos
Looking Out From The Chaos
30

Looking
Looking Out From The Chaos
Out From The Chaos

The financial crisis is causing mayhem throughout the global industry…..but it also may have a “silver
global industry…..but it also may have a “silver‐‐lining” for N. American producers:
for N American producers:




Caused capacity expansions in S. America to come to a screaming halt
Caused capacity expansions in S. America to come to a screaming halt;;
Added fury to the “Perfect Storm”
Added fury to the “Perfect Storm” that has moved onto Europe after hitting Canada;
Revealed that the Chinese industry is much more dependent on direct (& indirect) export markets than thought;
Exposed the “weak‐‐underbelly” of the Russian oligarchs
Exposed the “weak
Implication? Future off‐
Implication? Future off‐shore competition may be less than we had thought –
shore competition may be less than we had thought –
at
at least for awhile. M
at least for awhile. Markets will be tighter when the recovery does least for awhile Markets
Markets
arkets will be tighter when the recovery does will be tighter when the recovery does
eventually come due to reduced capacity
31

Looking
Looking Out From The Chaos
Out From The Chaos
Don’t confuse the cyclical with the secular move in oil prices.
And ~ Given the shape of the global cost curve for oil And Given the shape of the global cost curve for oil ~ a a “normalized”
normalized oil oil
price in the $60‐‐80/bbl range seems reasonable
price in the $60
160
US$/bbl
140
120
100
80
Cdn Oil
Offshore
60
Brazil
40
Deepwate
r,
West Africa
20
0
USA (Magnolia)
Jan-04
Jan-05
Jan-06
Actual Crude Oil Price
32
Sands
Jan-07
Jan-08
Jan-09
Marginal Cost of New Supply

Looking
Looking Out From The Chaos
Out From The Chaos

Strong signals that the Obama Administration will put a price on carbon
p
p



33
Cap‐and
Cap‐
and‐‐trade system for NA trade system for NA within 2 years?
within 2 years?
Support for international measures at Copenhagen
Support for international measures at Copenhagen meetings in December 2009
Wh t
What are the implications?
th i li ti ?

Looking
Looking Out From The Chaos
Out From The Chaos
Expect higher electricity prices in those regions where fossil fuels are the in those regions where fossil fuels are the
.  Expect higher electricity prices
main source of electricity
 In general, Canada’s position should improve
In general, Canada’s position should improve relative to the US and Europe (Europe < 20%)
(
p
)
Hydro And Nuclear Component Of Electricity Generation Mix
100%
80%
60%
40%
20%
0%
QC NB BC WA ON ID OR NY SC NB VA TN PA NC AR AL CA MI MT MN ME GA WI MS FL LA NS KY
34

Looking
Looking Out From The Chaos
Out From The Chaos

Exposure to fossil fuels?
f il f l ?



In their manufacturing operations ~ the direct exposure of most paper companies to fossil fuels is meaningful, but not huge
fuels is meaningful, but not huge
The
The indirect exposure through transport costs and chemicals is significant
The indirect exposure through transport costs and chemicals indirect exposure through transport costs and chemicals is
is significant
significant
Best opportunity to generate revenue Best opportunity to generate revenue is in those jurisdictions where prices are high and is in those jurisdictions where prices are high and you can sell electricity back to the grid
AbitibiBowater Energy Mix
International Paper Energy Mix
Other, 1%
Fossil Fuel, 17%
Fossil Fuel, 30%
Biomass, 40%
Biomass, 61%
Ex ternal
Internal Electricity ,
5%
35
Electricity , 38%
Electricity , 8%
•
Looking
Looking Out From The Chaos
Out From The Chaos
Our traditional business approaches will not suffice…Yet improvements are possible if we understand we are not dinosaurs and can do business d
d
d
d
d b
better and significantly differently…
Which implies ~ participants must embrace Which implies ~ participants must embrace more innovative more innovative ways of doing business to not only weather this storm of doing business to not only weather this storm ~ but to but to
truly re‐‐learn how to then thrive…
truly re
36
•
Looking
Looking Out From The Chaos
Out From The Chaos
Wh t I Mi i ?
What Is Missing?
What Is Missing
Learning From Others
Learning g From Others
Intelligent Risk Taking & Risk Management
With … Innovative Behaviors
That Allow Us To Truly Transform
37
•
Looking
Looking Out From The Chaos
Out From The Chaos


As participants in and suppliers to the Pulp & Paper
As participants in, and suppliers to, the Pulp & Paper Industry
 We all want to enjoy the benefits of strong financial performance
 We want to grow, be profitable, generate good returns, etc.
 We all want to create value!
We all want to create value!
The value created in a business is generated by The value created in a business is generated by acquiring, acquiring, building, maintaining and exploiting markets, investments and ideas as well as assets
This requires learning, risk taking, innovative b h i
behavior and transformation
d
f
i
38
•
Looking
Looking Out From The Chaos
Out From The Chaos
Innovative Behavior Is Risky ~ Innovative Behavior Is Risky ~ But Required But Required To Secure And Sustain Superior Returns
To Secure And Sustain Superior Returns
Expected Return
Commodities
C h
Cash
Working Capital
Tangible g
Assets
Innovative Risk
Ri k
Expanded Creativity
Product & Project Portfolios
Risk
39
•
Looking
Looking Out From The Chaos
Out From The Chaos
40

Companies that are limited to management of Companies that are limited to management of commodity assets will will No longer
No longer be able to create value for any sustained period of time due create value for any sustained period of time due to the competitive nature of commodities…

They must have something special ~ the ability to move beyond assets management
to move beyond assets management….
•
Looking
Looking Out From The Chaos
Out From The Chaos
As Such ~ The pulp & paper industry’ss continued focus on industry
continued focus on
a commodity asset strategy h
has not and can not result in t d
t
lt i
acceptable performance
41
•
Looking
Looking Out From The Chaos
Out From The Chaos
Industry Market Realities
 Maturing
M t i demand
d
d
 Substitute products
 Offshore growth
Financial market realities
 Capital
p
portability
p
y
 Short
Short--term earnings focus
 R&D “expensed” & curtailed
 Shift from industrial to service to
knowledge economy
Poor Decisions In The Pursuit of Cost Based Competition
Cost Based Competition
Good Intentions
 Perform well
 Be “World Class”
 Increase Productivity
Increase Productivity
42
Industry culture
 Low conflict tolerance
 Risk averse Risk averse – marginal behavior
marginal behavior
 Management from operating background –– enamored with background equipment & improved technology
 Implementation oriented
l
i
i
d
 Parochial vs. System thinking
•
Looking
Looking Out From The Chaos
Out From The Chaos

Cost
Cost Based Competition
Based Competition

R&D is an expense ~ cut it
R&D is an expense ~ cut it ~ push it off on suppliers and research consortiums!

Risk is bad ~ reduce it!
Risk is bad ~ reduce it!

Profits are down, debt is up ~ cut capital spending!
Profits are down, debt is up ~ f
,
p cut capital spending!
p
p
g

Build market power ~ spend to acquire!
Build market power ~ spend to acquire!

Lower cost ~ spend to increase scale!
Lower cost ~ spend to increase scale!
p

One major outcome ~ stagnation of capital investment!
Yields ~ Lost Proprietary Values!
Yields Lost Proprietary Values!
43
•
Looking
Looking Out From The Chaos
Out From The Chaos
Relative Paper Industry Returns Are
Returns Are Minimal to Negative ~ Absent Creative Approaches to
Approaches to Management
Source:
Sou
ce Reuters
eute s –
2007 Data
44
Company
Coca‐Cola Corp.
Coca‐
P&G
Microsoft
Kimberly‐‐Clark
Kimberly
Intel
N
Nucor
US Steel
Weyerhaeuser
GP
IP
MeadWestvaco
Smurfit‐‐Stone
Smurfit
Bowater
ROTC
Trailing 12 l
Month 5 Year 23.7%
14.4%
25.1%
12.5%
22.2%
23 8%
23.8%
11.1%
2.2%
3.9%
0.0%
1.4%
‐3.9%
‐2.7%
25.9%
15.6%
13.8%
13.6%
13.3%
11 8%
11.8%
4.1%
2.3%
1.4%
0.9%
0.8%
‐1.1%
‐1.9%
•
Transformation Needed
Transformation Needed
45

Transformation Needed
Transformation Needed
What can we learn from the past?
ROCE of the Top 10 Public Firms in the Global Industry: 1997‐
ROCE of the Top 10 Public Firms in the Global Industry: 1997‐2007
Shandong Sun Paper
11%
Siam Pulp & Paper
All of the top 10
All of the top 10
have beaten their cost of capital
12%
ITC (Paper Division)
12%
W est Coast Paper Mills
13%
Ainsworth
13%
Procter & Gamble Paper
13%
Kimberly Clark (North America)
14%
Norbord
14%
Sino Forest
15%
KC Mexico
16%
10%
46
11%
12%
13%
14%
15%
16%
17%

Transformation Needed
Transformation Needed

I th
Is there a pattern among the top 10?
tt
th t 10?







47
4 specialize in 4 specialize in P&W paper in Asia
P&W paper in Asia
3
3 specialize in tissue paper in NA
3 specialize in specialize in tissue paper in NA
tissue paper in NA
2 specialize in 2 specialize in OSB in NA
OSB in NA
1 specializes in 1 specializes in timber in China
p
timber in China
None of these companies produce the bulk pulp & paper grades
None are from Europe or South America
Are these companies special? If so, for how long?
p
p
,
g

Transformation Needed
Transformation Needed
Asian P&W Paper…
 Shandong Sun, Siam, ITC, West Coast





Strong local demand
Unconventional product mix?
p
Complex distribution channels Poor transportation infrastructure transportation infrastructure
Limited Capital Employed
All of these companies face among the highest fiber and energy All of these companies face among the highest fiber and energy costs in the world
48

Transformation Needed
Transformation Needed
North American Tissue Products...  P&G Paper, KC, KC (Mexico)




49
Limited substitution from other products
Limited import competition
p
p
due to bulky product / yp
/
high transport costs
Consumer exposure ~ opportunity to brand, and not just compete on price
Economies of scale in marketing (and anti‐
in marketing (and anti‐trust regs limit further large M&A activity)

Transformation Needed
Transformation Needed
North American Oriented Strandboard…
 Norbord, Ainsworth



50
Strong secular growth in demand
Offers low cost substitute
Offers ff low cost substitute to competing product p
gp
(plywood in past, wide dimension lumber in the future?)
Transport costs are a meaningful barrier to inter
Transport costs are a meaningful barrier to inter‐‐
continental transportation

Transformation Needed
Transformation Needed
Chinese timber company…
 Sino
Sino‐‐Forest



51
Physically at the epicenter of the global scarcity of Physically at the epicenter of the global scarcity
timber, and logs are relatively expensive to transport
Access to capital
Local knowledge & contacts

Transformation Needed
Transformation Needed
What makes an exciting story for investors?
 The fundamentals are in place to earn an abnormally high ROCE…
 It is difficult for your competitors to duplicate
It is t s difficult for your competitors to duplicate
d ff cu t fo you co pet to s to dup cate
your strategy…
What do you need to do so that your company can make these claims?
52
•
Transformation Needed
Transformation Needed
Creativity involves breaking out of established patterns in order to look
established patterns in order to look at things differently. ‐ Edward De Bono Edward De Bono ‐‐
Creativity is the sudden cessation of stupidity. ‐ Edwin H. Land Edwin H. Land ‐
53
•
Transformation Needed
Transformation Needed
Know that our industry efforts with M&A, assets’ consolidation product line focus & related assets
consolidation, product line focus & related assets management + first order synergies extracted have been essential necessary
have been essential necessary steps to create value going forward . . . Yet, they are . . . Yet, they are not sufficient
not sufficient alone to capture value over the long haul
54
•
Transformation Needed
Transformation Needed

The limits of these “today’s market
The limits of these “today’s market” short ” short p
y
term steps are demonstrated by ~

The flattening of cost curves that go with The flattening of cost curves
consolidaiton and asset closures . . .



55
Which can in turn actually wreck new havoc on a Which can in turn actually wreck new havoc
commodity industry . . .
The lackluster stock markets reactions
The lackluster stock markets reactions
The laundry list of the aforementioned headlines…
•
Transformation Needed
Transformation Needed
Wh
What else is at play here? l i
l h ?
 At least At least two other arenas
two other arenas of reality ~
y



56
Externalities (over which (over which we have little control)
we have little control) but can position ourselves to respond to favorably if we are wise) ~ and are wise) ~ and Operations Management Transformation/ Operations Management Transformation/ enhancement (
enhancement (which we do control
which we do control) across the ) across the entire production platform . . . entire production platform . . . For differentiation
For differentiation
•
Transformation Needed
Transformation Needed

Without positioning ourselves to understand critical externalities such as ~






57
Highly volatile oil and other raw materials’ costs…
Evolutions of the new economies such as in China…
Credit markets and highly volatile exchange rates…
introduction of new competitive products and technologies
introduction of new competitive products and technologies outside the pulp and paper industry…
New legislation and regulations that pertain to climate g
g
change issues, and the like . . .
We do not have a prayer of capturing the value across time that our asset management moves will have put before us
h
ill h
b f
•
Transformation Needed
Transformation Needed

Without an operations management transformation ~ a Without an operations management transformation a
makeover of how we run our businesses day‐
of how we run our businesses day‐to
to‐‐day ~ Not just extract one time event consolidations and synergies (e.g.) ~ we will fail to…
(e.g.) ~ we will fail to…



58
Effectively put in place mechanisms we control crucial to capturing value consistently across time
t i
l
i t tl
ti
. . .
Change the way we work from the mill floor up
Change the way we work from the mill floor up, not just as , not just as driven from top down macro structural changes p
g
. . . And ~ drive out . . . And ~ drive out a needed internal enterprise a needed internal enterprise transformation within a given or set asset mix and product li /
line/ customer mix focus
t
i f
•
Transformation Needed
Transformation Needed
First ~ Know That…
i
h
An Investment Mentality Is Required
An Investment
An Mentality Is Required
59

Capital spending = Investment

Investment = spending with a potential to Investment = spending with a potential to generate returns beyond the current period

Just because accountants expense it doesn’t mean its not an investment
•
Transformation Needed
Transformation Needed
For an Investment Mentality ~
For an Investment Mentality 



60
Owners move far beyond assets management
Owners move far beyond assets management
and
and traditional operations improvement…
traditional operations improvement
Investors are Investors are portfolio
portfolio managers
Th
They mix a number of investments (projects) with i
b
fi
t
t ( j t ) ith
a range
a range of correlations, risks and expected returns
They focus on the return and risk
They focus on the return and risk of their of their overall
overall
portfolio ~ not the individual investments
portfolio not
not the individual investments
the individual investments
•
Transformation Needed
Transformation Needed
High
Expected
p
Portfolio
Return
Traditional Investments’ Focus
Industry Focused On Low Risk Low Return
Low Risk, Low Return, Highly Correlated Projects
Tangible Assets
W ki
Working Capital
Cash
Low
61
Risk
High
•
Transformation Needed
Transformation Needed
Become Creative Investors ~ To Raise Overall Outcome
Become Creative Investors ~ To Raise Overall Outcome
High
Hi h
Expected P tf li
Portfolio Return
Cash
Low
62
Innovative Risk
Raising The g
Expanded Bar Requires Creativity
Focus On A Mix of Product & Investments Project With Portfolios
Enriched Tangible Balance Of l
Of
Assets
Working Risk & Capital
Returns
Risk
High
•
Transformation Needed
Transformation Needed
Technology Pushed
Technology Pushed Inventing
Technologists
Patent Attorney’s
Product Developers & Fi
Financial Experts
i lE
t
Marketer
63
Traditional Industry Techno‐‐Focus
Techno
Traditional Technology Pushed Approach ~
Results In A Low Hit Rate on Creating Sustainable Significant
Sustainable Significant Value
•
Transformation Needed
Transformation Needed
Al
Altered Approach
dA
h
Market Driven Focus
Market Driven Focus
Market Driven Approach
Increases The Odds That Efforts Will Create Value ~
Whether it is a product, service, process, organization or strategy innovation … but still likely y
takes years to yield results
Marketer
Technologists, Patent A
Attorneys & Financial & Fi
i l
Experts
Product Developers
Marketer
64
•
Transformation Needed
Transformation Needed


65
Open Up Our Culture
Open
Up Our Culture ~ accept that creative accept that creative
companies are often inefficient and annoying places to work. Reward risk and failure ~ punish inactivity.
Focus on more than just asset management & product development ~ product development ~ Train key participants on Train key participants on process to value and pursue creativity
process to value and pursue creativity…
Become Investors ~ Manage a portfolio of product & p j
projects with a diverse range of expected returns, g
p
,
risks and correlations. Do all that you can to make each portfolio piece a success but keep in mind that it’ th
it’s the overall portfolio performance that matters…
ll
tf li
f
th t
tt
•
Transformation Needed
Transformation Needed


Get Market Focused
k
d ~ Leverage Market Driven k
Outcomes to increase hit
Outcomes to increase hit‐‐rate . . . And to . . . And to ensure financial success . . .
fi
i l
Pursue Creatively Generated Opportunities
Biotechnology & Biorefining
 Nanotechnology
 …….

66
•
Transformation Needed
Transformation Needed

Food for thought ~ 2 transformation concepts ~
g
p
 Inside
Inside‐‐out ~ 

Transform the enterprise by changing processes within the existing organization, including changes in
the existing organization, including changes in manufactured products
Outside‐‐in Outside
in ~

Core vision, mission and strategies are changed to create a new focus to outside markets that is sustainable, using new and integrated delivery techniques and with vastly improved bottom‐
techniques and with vastly improved bottom‐line results
For example ~ transformation to the forest p
f
f
biorefinery implies both types
biorefinery implies both types of transformation

67
•
Transformation Needed
Transformation Needed


DUPONT
204 Years of Innovation
Core business transformation ~ by Maturity
product portfolio
product portfolio adjustments related Maturity Growth
to market evolution
Cyclical adaptation li l d
i
to reinvent the business and transform the
transform the enterprise ~ while avoiding declining revenues
1 9 Sep t 0 6
68
Growth
Birth
Birth
3
Maturity
Growth
Birth
Chemistry,
Energy
Chemistry,
Bi l
Biology,
Materials Science
Explosives
1802 1830 1850 1900 1925 1945 1990 2000 2050 2090
•
So ~ Where Does This Leave Us?
So ~ Where Does This Leave Us?
69
•
So So ~ Where Does This Leave Us?
Where Does This Leave Us?





70
Being Creative is imperative to create value
Being Creative is i C
i i imperative to create value…
i
i
l …
Typical Pulp and Paper companies have Pulp and Paper companies have shutdown or shutdown or lost their
their ability to be creative…
ability to be creative
As a result, in part ~ industry performance has been As a result, in part ~ industry performance has been dismal by most measures…
by most measures
Investment has spiraled downward and industry competitiveness has eroded…
p
However, individual companies and suppliers However, individual companies and suppliers can can leverage creativity to outperform the industry and create value over time…
•
So So ~ Where Does This Leave Us?
Where Does This Leave Us?
The essential part of creativity is not being afraid to fail. ‐ Edwin H. Land ‐
If all else fails, immortality is guaranteed by one humongous error. ‐ Anonymous by one humongous error.
Anonymous ‐
71

So So ~ Where Does This Leave Us?
Where Does This Leave Us?
~ CONTEXT ~
Tremendous Difficulties At Present, And It Will Likely Get Worse Before It Gets Better
We Are Experiencing Large Changes on Multiple Playing Fields (But Do Not Confuse the Cyclical With The Secular Changes)
Different Models Are Essential For The Future Of Our Beleaguered Industry –
Industry – There Can Be No “Sacred Cows”
Do Not Ignore The Fact This Crisis May Have A More Negative Impact On The Industry Off‐‐shore Than In North America
The Industry Off
Within Canada Do Not Be Surprised To See The Provincial Governments
Within Canada, Do Not Be Surprised To See The Provincial Governments Reassess the Forest Industry’s “Social Contract”
New Opportunities Will Emerge, But the “Noise
New Opportunities Will Emerge, But the “Noise‐‐to
to‐‐Signal” Ratio Is Currently Very Strong
Currently Very Strong
72

So So ~ Where Does This Leave Us?
Where Does This Leave Us?
~ GUIDING PRINCIPALS ~
~ GUIDING PRINCIPALS ~
Devote More Resources To Thinking, Being Creative & Innovative
Be Willing To Take Intelligent Risk
Arbitrage Ideas/Models Across Industries Arbitrage Ideas/Models Across Industries –– Explore More Inter‐‐Sectoral JVs
Inter
Ensure Your Transformation Is Driven By the Market Instead of Technology & Be Willing To Transform
Instead of Technology & Be Willing To Transform
73

So So ~ Where Does This Leave Us?
Where Does This Leave Us?
O
Our Collective Challenge ~ What will Our Collective Challenge ~ C ll i Ch ll
Wh
What will ill
Such Major Change Mean For ~
The Industry?
Society?
How You Work?
How You Work?
You?
74
•
Closing Remarks
Closing Remarks
75
•
Closing Remarks
Closing Remarks
The essential focus we should have now is that and capture . . .
p
~ the future is ours to create ~ ~ the future is ours to create ~ and capture . . .
Our challenge is to realize that getting here was is to realize that getting here was a long a long pathway in and it will be and it will be a long pathway out
a long pathway out ~ where true value capture
true value capture requires requires transforming the way we transforming the way we work long term as well as smart asset management . . . . In spite of today’s chaos . . .
In spite of today’s chaos . . .
76
•
A dR
And Remember . . . .
b
Even though the Current Industry State of
Affairs is Very Chaotic & We Face Many Very
Complex Problems & Issues ~ As that Famous
Arm Chair Philosopher Ziggy Once Said . . . .
“You can Complain Because
Roses have Thorns, or you can
Rejoice Because Thorns have
Roses”
77
Open Forum Discussion
p
78
Disclaimer
This presentations is a written companions to live lectures. Therefore, content of this presentations should only be considered in conjunction with its oral presentations and only in
presentations should only be considered in conjunction with its oral presentations and only in tits entirety.

Certain statements made in the presentation 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
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. Th
Therefore, parties using these presentations should accordingly exercise due diligence when f
ti
i th
t ti
h ld
di l
i d dili
h
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 g p
group, customer group or otherwise related industry;
g p
y

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
and strategies, and encourage investors to seek the advice of a financial adviser. The 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
Contact Information
Don Roberts
CIBC World Markets
Dr. Jacquelyn-Danielle McNutt
Executive Director ~ Center for Paper Business & Industry Studies
404 894 5733 ~ jacquelyn.mcnutt@cpbis.gatech.edu
404-894-5733
j
l
tt@ bi
t h d
80
Reference Slides
Reference Slides
The following slides are further provide further reference material for this presentation
81
Advanced
Advanced Economies
Economies’ Recession Into 2009
Recession Into 2009
Real GDP Growth By y
Region
2005
2006
3.2%
2 6%
2.6%
1.9%
1.9%
2.9%
3.3%
3 2%
3.2%
2.2%
2.8%
2.7%
5.8%
Africa
C t l/
Central / Eastern Europe
Developing Asia
Middle East
Latin America
Advanced Economies
US
Euro Area
Euro Area
Japan
UK
Canada
Oth Ad
Other Advanced d
Economies
Emerging Markets
2007
2008E t
2008Est
2009E t
2009Est
2010E t
2010Est
2.2%
2 6%
2.6%
2.1%
3.1%
2.7%
1.2%
0 0%
0.0%
‐0.4%
‐0.7%
‐0.5%
‐2.2%
‐0
0.1%
1%
0.3%
‐0.5%
.2%
1.5%
0 9%
0.9%
0.9%
1.7%
2.9%
5.7%
4.6%
0.2%
0.2%
2.2%
5.8%
5.6%
6.5%
3.3%
3.0%
4.2%
6.0%
6.8%
5.6%
4.4%
2.5%
4.4%
9.0%
9.5%
10.0%
8.2%
7.7%
8.8%
4.3%
4.7%
5.0%
5.5%
5.9%
5.6%
4.2%
5.3%
2.1%
3.0%
3.8%
4.5%
NA Sectors That Directly Drive Pulp & Paper
Demand ~ Negative Going Into 2009
Demand ~ Negative Going Into 2009
IIndustry Segment d
S
Impacted
2008
2009
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%
Containerboard
‐1.2%
1.2%
NA
Indust. Prod. ‐ Durables
Packaging
‐2.0%
NA
Food & Beverage Sales
Boxboard
+5.6%
NA
Tissue
+4.2%
NA
P&W Papers
‐2.7%
NA
P&W Papers, Tissue
‐0.5%
‐1%
Tissue, Building Tissue,
Building
Products
‐41%
‐13%
Economic Indicator
Indust. Prod. ‐ Non
Indust. Prod. Non‐Durables
Durables
Food services and drinking places
Computer & Electronic Sales
Professional Employment & Business Services
Housing Starts
i
JDM
Paper Grades Volume
Paper Grades Volume
For Paper Industry Grades ~
2009 Volume Now Falling From 2008 Peaks
2009 Volume Now Falling From 2008 Peaks
2009 Volume Now Falling From 2008 Peaks
2008 Volume Change (est.)
Nov‐Dec ’08 Volume Nov‐
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%
Grade
84
North
h American P
Paper & Boa
ard (ST 000s))
Volume
Volume Relatively Steady in 2000s Until Q4 2008
Relatively Steady in 2000s Until Q4 2008
150,000
150
000
140,000
130,000
120,000
110,000
100,000
90,000
80,000
70,000
60 000
60,000
50,000
40,000
30,000
20 000
20,000
10,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
D
Domestic
i C
Consumption
i
D
Domestic
i Shi
Shipments
C
Capacity
i
JDM
Paper Grades Pricing
Paper Grades Pricing
Prices Still Comparable To Strong 2008 Averages
~ But Now Falling From Peak Levels
~ B N
But Now Falling From Peak Levels
F lli F
P kL l
86
Grade
2008 Avg.
2008 Peak
Jan. 2009
Jan. ’09 Jan. ’
vs Peak
UFS #4 Xero (US$/ton)
$1,139
$1,180
$1,150
‐2.5%
60lb #3 CFS
(US$/ton)
$1 068
$1,068
$1 175
$1,175
$1,060
$1 060
‐9.8%
9 8%
42# Kraft Liner
(US$/ton)
(
)
$568
$605
$575
‐5.0%
30lb Newsprint
(US$/tonne)
$671
$740
$745
+0.7%
Pulp NBSK Trans
Pulp NBSK Trans.
(US$/tonne)
$
$745
$
$778
$
$613
‐21%
DR
Profitability
Rising Costs Then Then Sharply Falling Volume
Sharply Falling Volume
Drove Down Profitability in ’08
D
D
P fit bilit i ’08
Proofit Margin = E
EBITDA / Salees
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2001
87
2002
2003 2004 2005 2006 2007
Pulp & Paper
S&P 500
2008
2008 Revenue
2008 Revenue
Dragged Down By Very Poor 4th Quarter
Co
ompound A
Annualized R
Rate
20.0%
10.0%
12.5%
6.5%
2 5%
2.5%
7.3%
0.0%
-4.3%
-10.0%
-20.0%
-30.0%
30.0%
-28.9%
28 9%
-40.0%
Latest Quarter
1 Year
Pulp & Paper
5 Year
S&P 500
EBITDA
Com
mpound An
nnualized Rate
Very Poor Q4 Profits (EBITDA) Pull Pulp and
Paper Back Towards 2003 Levels
10.0%
3.4%
5.4%
0.0%
7.8%
0 4%
0.4%
-10.0%
-16.6%
-20.0%
-30.0%
30 0%
-31.3%
-40.0%
Latest Quarter
1 Year
Pulp & Paper S&P 500
5 Year
Asset Turnover
Asset Turnover
Asset T
Turnover = S
Sales / BV Asssets
Improving ~ Now Exceeds S&P 500 By 11pts.
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
Q1 '01
01 Q1 '02
02 Q1 '03
03 Q1 '04
04 Q1 '05
05 Q1 '06
06 Q1 '07
07 Q1 '08
08
Pulp & Paper
S&P 500
Spending
Expenditures Reelative To Salees
M&A Spending Rebounding Again ~
C it l Spending
Capital
S
di Down
D
~ R&D Up
U Slightly
Sli htl
10.0%
9.0%
8.0%
7.0%
6.0%
5 0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Capital Invesment
Acquisitions
R&D
Grade‐‐Medium Substitutes
Grade
Medium Substitutes
Grade Category
Grade Category
Potential Substitutes
Potential
Substitutes
Re‐usable shipping containers, Containerboard
offshoring of manufacturing
offshoring of manufacturing
Flexible packaging, offshoring of Packaging Grades
manufacturingg
Printing & Writing Electronic communications, Papers
alternative advertising mediums
Electronic communications, Newsprint
alternative advertising mediums
Tissue
No Major Substitutes
Printed Media Time
Printed Media Time
Time Spent By US Consumers With Printed
M di i D
Media is Down ~ Except Books & Yellow Pages
E
B k & Y ll P
500
450
Hou
urs Per Person Per Year
400
350
Total Printed Media
Newspapers
Consumer magazines
Consumer books
Yellow Pages
300
250
200
150
100
50
0
2000
2002
2004
2006
2008
2010
Electronic Media Time
Electronic Media Time
Time Spent By US Consumers With Electronic Media Is Up ~ Except Radio and Recorded Music
3,500
3 000
3,000
Hours Per Person P
Per Year
Total Electronic media
2,500
Television
2,000
R di
Radio
1,500
Internet, video games and
mobile media
Recorded music
1,000
Box office and home video
500
2000
2002
2004
2006
2008
2010
Paper
Paper Resiliency In Face of New Technology
Resiliency In Face of New Technology
Domestic Paper Demand ~ Resilient Given
The Rate of Adoption of New Technologies
275
Num
mber of Peoplle (millions)
250
225
200
175
1995-'06 Annual
Growth
Line Item
Cell Phone Subscriptions
Pay TV Subscriptions
Internet Usage (18+)
Current Population
233
19%
10%
17%
300mm
158 158
150
125
109
103
111
100
5
75
56
40
50
25
34
28
5
0
1990
Cell Phone Subscribers
1995
2000
Pay TV Subscribers
2006
Internet Users 18+
Asset Quality
Asset Quality
NA Producers Have Improved Asset Quality Through
NA Producers Have Improved Asset Quality Through Incremental Investment/ Closure of Uncompetitive Lines
North American Paper Machine Lines ~ Averages
Characteristic (Median)
1999 2007
% Change
Age
53
53 41
‐23%
23%
Maximum Speed (fpm)
600 800
+33%
Width (inches)
174 240
+38%
Capacity (tons per day)
200
200 240
+20%
Trade Balances
Trade Balances
Dollar Value of P
D
Pulp, Paper and Paperboard Trade
US Total Pulp, Paper and Paperboard
p, p
p
Export Growth Continued
p
To Outpace Imports = Reduced Net Imports in 2008 ~ But With A Stronger US Dollar This Can Turn The Other Way Quickly in 2009…
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
-$5,000,000
-$10 000 000
-$10,000,000
1989
1991
1993
1995
1997
US EXPORTS
1999
2001
US Imports
2003
2005
Net Balance
2007
JDM
Enterprise Value Enterprise Value ~ Revenue Multiple
Revenue Multiple
EOY Enterprise Value ~ Revenue Multiple ~ Trails S&P 500 and Trending Sharply Downward
Trails S&P 500 and Trending Sharply Downward
2.5x
Value / R
Revenue
2.0x
1.5x
1.0x
0 5x
0.5x
0.0x
2001 2002 2003 2004 2005 2006 2007 2008
Pulp & Paper
98
S&P 500
Enterprise Value ~ EBITDA Multiple
Enterprise Value EBITDA Multiple
Median Ttl. Enterprrise Value / EB
BITDA
EOY Market Value ~ EBITDA Multiple ~
Comparable To and Now Trending Downward With S&P500
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
20
2.0x
0.0x
2001 2002 2003 2004 2005 2006 2007 2008
Pulp & Paper
S&P 500
Recession Impacts
Recession Impacts
Bo
ook Return on
n Capital / Cos
st of Capital (6
66% Avg.)
Impacts Of Recessions And / Or Economic Slowdowns On Industry ROTC ~ Have
Slowdowns On Industry ROTC ~ Have Been Mixed
Slowdowns On Industry ROTC ~ Have Been Mixed
Been Mixed
100
140.0%
120.0%
100.0%
80.0%
'73-'75
60.0%
'90-'91
40.0%
20.0%
'80-'82
'01-'03
Red = Recession
and / or slowdown
0.0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Performance Near Or Above Average In Average In ‘73‐
73‐’75
75 ~ And And
‘73
‘01 To ‘03 ~
Below A erage In ’80 Average In
’80
To ’82 And To ’82 And 90 90 To ’91
Book Value of Debt
Book Va
alue of Debt T
To Capital Rattio
Book Value of Debt ~
Trending Downward Over Last 7 Years ~ Now Lifting
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Debt % of Invested Capital
Market Value of Debt
Market Value of Debt ~ Once Again
Rising Relative To Equity
$100,000
75.0%
65.0%
$90 000
$90,000
$80,000
45.0%
$ 0 000
$70,000
3 0%
35.0%
25.0%
$60,000
15.0%
$50,000
5.0%
$40,000
Q1 '01 Q
Q
Q1 '02 Q
Q1 '03 Q
Q1 '04 Q
Q1 '05 Q
Q1 '06 Q
Q1 '07 Q
Q1 '08
Total Debt - Dollars
Debt % of TEV
-5.0%
Share o
of TEV
Dollars M
Millions
55.0%
JDM
Pulpwood Prices
Pulpwood Prices
$200
PPI Inde
ex - U.S. Pulpw
wood
$180
$160
$140
$120
$100
$80
$
$60
$40
$20
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
103
Nominal Price
Pulpwood
Pulpwood Prices
Real US Pulpwood Prices Risen Over Past Six Years ~ We Years ~ We Now Expect To See Them Fall
See Them Fall With Other Commodities
JDM
Real Recovered Fiber Price - U
U.S. Midwest
($2007 Per Short Ton)
Recovered
Recovered Paper Prices
Paper Prices
$140
$120
$102
$
$100
$80
$88
$69
$67
$69
$72
$84
$60
$54
$49
$93
$74
$
$65
$46
$40
$78
$78
$66
$61
$39
$20
$22
$3
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 Spot
OCC#11
OCC#
104
ONP#8
O
#8
Recovered Fiber Prices
After Unprecedente
d Increases ~
d Increases ~ OCC & ONP Costs Have Fallen Dramatically
JDM
Natural Gas Prices
Natural Gas Prices
Natural Gas
s Deliv. to Ind
dustrial
($ pe
er Ths. Cu. ft.)
$
$11
$10
$9
$8
$7
Spot
$6
$5
$4
$3
$2
$1
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
105
Nominal Price
Natural Gas Pi
Prices Have H
Also Fallen ~ Into The $7
Into The $7 Per Thousand Cubic Foot Range
JDM
Oil Price: Domesttic West Texa
as Intermed.
($
$ per Bbl)
Oil Prices
Oil Prices
$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Spot
1990
1993
1996
Real Price ($2007)
106
1999
2002
2005
2008
Nominal Price
Oil Prices Have Fallen Dramatically
From Daily Peak Of $145
Peak Of $145 Per Barrel In July 2008 To $40 +/‐‐ Per $40 +/
Barrel Today
Industrial Electricity Prices, 2008 (C$/MWh)
Industrial Electricity Prices 2008 (C$/MWh)


You may not like your electricity prices ~ but be thankful your mill is not in You may not like your electricity prices but be thankful your mill is not in
Scandinavia (or Maine)
This is last year’s snap‐
This is last year’s snap‐shot shot ~ but what will it look like in 2010?
~ but what will it look like in 2010?
B C
B.C.
25
Quebec
43
Ontario*
52
Nova Scotia**
60
U.S.A.***
62
New Brunswick
62
92
Sweden
Maine
108
111
Finland
0
20
40
60
80
100
C$/MW h
* R
Reflects
fl t IIndustry
d t Rebate
R b t P
Program ffor Nothern
N th
O
Ontario
t i which
hi h reduces
d
rate
t ffrom $65
$65.
** Reflects negotiated rate offered to the Port Hawksbury groundwood paper mill.
*** Reflects rates in 22 "forest intensive" states.
107
120
Renewable and Nuclear Energy
Renewable and Nuclear Energy
Percentage Of Electricity Generated From
Percentage Of Electricity Generated From Renewable and Nuclear Sources
100%
80%
60%
40%
20%
108
Alberta
U .S.
Europe
M aritim es
Ontario
British
C olum bia
N ew ffoundland
Quebec
M anitoba
0%