State of the North American
Pulp & Paper Industry
~ Weathering a Tough Economy ~
~ Q2 2008 Data ~
~ August ~ 2008 ~
Center for Paper Business and Industry Studies (CPBIS)
~ Dr. Jacquelyn McNutt ~
FairValue
Advisors, LLC ~ Dan Cenatempo AVA ~
1
Overview
North American Forest Products Industry
Review ~ The Industry Context
Where Are We?
Financial Performance
Outlook ~ How Competitive
Outlook ~ The Economy
Outlook ~ Grade-By-Grade Focus
Outlook ~ Key Raw Materials
Key Takeaways
2
Where Are We?
North American Industry Context ~

Enjoys significant fiber resources & logistics. . .
 A weak US Dollar helps improve competitiveness but
still dealing with an older asset base. . .
 Has enjoyed an upturn - in pricing, investments and
shareholder returns
 But substantial rising cost pressures at the same time
 How long will the upturn last is one key question?
 And the other is ~ will players be able to find ways to
secure necessary margins in a rapidly escalating cost
environment?
3
Where Are We?
North American Industry Context ~





4
Still a major player in US and global economy
NA sector still largest in the world ~ supply &
demand
Mature industry ~ slow growth
Organizational structure changing
Significant improvements essential for
individual companies to outperform the market
& industry to reassert dominance
Where Are We?

Paper manufacturing book returns have been
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
5
Where Are We?

Volume has been relatively flat overall in the
2000s
With some grades growing ~ Tissue ~ and
Others declining ~ Newsprint

Pricing has rebounded significantly with ~
Most grades approaching historic or making
new highs

6
However ~ cost pressures from rising wood/
energy costs have ~
Stopped pulp and paper players from fully
realizing the profits from these increased
prices
Where Are We?
North American Pulp, Paper & Board (ST 000s)
Volume Has Been Relatively Steady In the 2000s
130,000
120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Domestic Consumption
7
Total Production
Where Are We?
2008 Volume Mixed By Grade
– Pricing and Revenues are Up
8
NA Grade
2008 YTD Change In
NA Production
Current vs. 2007
Average Price
Printing & Writing
-2.8%
+10.0% to +21.4%
Boxboard
+0.6%
+2.7%
Containerboard
-0.7%
+2.0% to +5.8%
Newsprint
-9.6%
+9.9%
Tissue
+0.5%
+4.0%
Chemical Paper Grade
Pulp
+2.6%
+6.3% to +9.8%
Total
-1.9%
+9.3%
Where Are We?
Prices Are Up On All Major Grades
9
Grade
Date
Latest
2007 Avg.
% Chg
UFS #4 Xero
(US$/ton)
07/2008
$1,180
$1,010
+17%
60lb #3 CFS
(US$/ton)
07/2008
$1,090
$925
+18%
42# Kraft Liner
(US$/ton)
07/2008
$550
$520
+5.8%
30lb Newsprint
(US$/tonne)
07/2008
$690
$575
+20%
Pulp NBSK Trans.
(US$/tonne)
07/2008
$790
$735
+7.5%
Financial Performance
Comparative Trends ~ Revenue & Profits
Return on Capital Employed & Debt
Investment Spending
Other Financial Measures
[Asset turnover, EBITDA, enterprise value, & role of intangibles]
10
Financial Performance
Total Shareholder Returns ~ Positive & Greater
Than S&P 500 Since 2001 ~ Both Falling In 2008
Total Shareholder Return Index
(2001 = 100)
250
200
150
100
Total Annual Shareholder Return
(compound annual rate)
50
Period
Paper
S&P 500
1 year
-14.5%
-12.4%
5 year
6.7%
6.4%
7 year
8.1%
3.0%
2001
2002
2003
2004
Paper
11
2005
2006
S&P 500
2007
2008
Financial Performance
Pulp & Paper Revenue Continues To Grow ~
Yet Still Lags S&P 500
Compound Annualized Rate
16.0%
14.0%
12.0%
9.3%
10.0%
7.3%
8.0%
6.0%
4.0%
2.0%
4.1%
3.2%
0.5%
1.8%
0.0%
Latest Quarter
12
1 Year
Pulp & Paper
5 Year
S&P 500
Financial Performance
Value / Revenue
Market Value ~ Revenue Multiple ~
Trails S&P 500 and Both Trending Downward
2.0x
1.8x
1.6x
1.4x
1.2x
1.0x
0.8x
0.6x
0.4x
0.2x
0.0x
Q2 '04
Q2 '05
Q2 '06
Pulp & Paper
13
Q2 '07
S&P 500
Q2 '08
Financial Performance
Rising Costs Pushing Down Profitability in ’08
Despite Rising Prices ~ Profitability Trails S&P 500
Profit Margin = EBITDA / Sales
25%
20%
15%
10%
5%
0%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Pulp & Paper
S&P 500
14
Financial Performance
Pulp & Paper Profits Off In Latest Quarter but
Growing Faster / Less Volatile Than S&P 500
Compound Annualized Rate
15.0%
10.0%
2.7% 1.5%
5.0%
0.0%
-2.7%
-5.0%
-10.0%
-15.0%
-7.5%
-10.3%
-20.0%
-25.0%
-26.8%
-30.0%
Latest Quarter
15
1 Year
Pulp & Paper S&P 500
5 Year
Financial Performance
Median Ttl. Enterprise Value / EBITDA
Market Value ~ EBITDA Multiple ~ Currently Below
S&P 500 But on A Less Volatile Earnings Base
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
Q2 '04
Q2 '05
Q2 '06
Pulp & Paper
16
Q2 '07
S&P 500
Q2 '08
Financial Performance
Returns on Book Value of Total Capital
~ Cover Debt But Below Cost of Capital ~
Cash Returns To Shareholders Now Positive
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
17
Financial Performance
Debt To Capital Ratio
Book Value of Debt ~
Flat vs. Investment Since Early 1990s
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
18
Financial Performance
Market Value of Debt ~ Rising Relative To Equity
But Remains Below 2002-’06 In Absolute Dollars
$100,000
75.0%
65.0%
$90,000
$80,000
45.0%
$70,000
35.0%
25.0%
$60,000
15.0%
$50,000
5.0%
$40,000
-5.0%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Total Debt - Dollars
19
Debt % of TEV
Share of TEV
Dollars Millions
55.0%
Financial Performance
Expenditures Relative To Sales
Capital & M&A Spending ~
Both Down vs. Recent History ~ R&D Up Slightly
10.0%
9.0%
8.0%
7.0%
6.0%
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
20
Acquisitions
R&D
Financial Performance
Capital Spending Index (Q1 2001 = 100)
Capital Spending Down in 2007-’08 ~
Has Recovered From 2001/ 2002 Drop
130.0
120.0
110.0
100.0
90.0
80.0
70.0
60.0
50.0
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
21
Financial Performance
Asset Turnover ~ Improving ~
Now Exceeds S&P 500 By 11pts.
Asset Turnover = Sales / BV Assets
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Pulp & Paper
S&P 500
22
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?
23
Outlook ~ How Competitive?
We Need to Understand That Competitiveness
Is Multidimensional ~
24

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
 NA’s lost cost leadership in pulp/ paper production ~ is
being lifted by a weak dollar & performance improvements
 The industry’s capital rationing strategies did erode its
asset base
 The composite financial performance weakened
 Yet with the upturn of the past few years and improving &
changing economics ~ there is real potential
25
Outlook ~ How Competitive?
High Volume NA Grades
Have Substitution Threats
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
Electronic communications, alternative
advertising mediums
Tissue
26
No Major Substitutes
Outlook ~ How Competitive?
Time Spent By US Consumers With Printed Media
is Down ~ Except Books & Yellow Pages
500
450
Hours Per Person Per Year
400
350
Total Printed Media
Newspapers
Consumer magazines
Consumer books
Yellow Pages
300
250
200
150
100
50
0
2000
27
2002
2004
2006
2008
2010
Outlook ~ How Competitive?
Time Spent By US Consumers With Electronic
Media Is Up ~ Except Radio and Recorded Music
3,500
3,000
Hours Per Person Per Year
Total Electronic media
2,500
Television
2,000
Radio
1,500
Internet, video games and
mobile media
Recorded music
1,000
Box office and home video
500
2000
28
2002
2004
2006
2008
2010
Outlook ~ How Competitive?
Domestic Paper Demand ~ Resilient Given
The Rate of Adoption of New Technologies
275
Number of People (millions)
250
225
200
175
150
Line Item
Cell Phone Subscriptions
Pay TV Subscriptions
Internet Usage (18+)
Current Population
233
1995-'06 Annual
Growth
19%
10%
17%
300mm
125
109
103
158 158
111
100
75
56
40
50
25
34
28
5
0
1990
Cell Phone Subscribers
29
1995
2000
Pay TV Subscribers
2006
Internet Users 18+
Outlook ~ How Competitive?
NA Producers Have Improved Asset Quality
Through Incremental Investment & Closure of
Uncompetitive Lines
North American Paper Machine Lines
Characteristic
(Median)
30
1999
2007
% Change
Age
53
41
-23%
Maximum Speed
(fpm)
600
800
+33%
Width (inches)
174
240
+38%
Capacity (tons per
day)
200
240
+20%
Outlook ~ How Competitive?
US Total Paper Product Export Growth ~
Outpaced Imports ~ Reducing Net Imports in 2007
Dollar Value of Paper Trade ($000s)
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
1995
1997
1999
Exports
31
2001
Imports
2003
Net Imports
2005
2007E
Outlook ~ How Competitive?
US Converted Paper Product Import ~ Growing
Faster Than Exports ~ Leading To Trade Parity
$9,000,000
Dollar Value of Converted Paper
Product Trade ($000s)
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
1995
1997
1999
Exports
32
2001
Imports
2003
2005
Net Exports
2007E
Outlook ~ How Competitive?
US Primary Pulp / Paper Mill Product Exports ~
Gained Ground On Imports In Recent Years
Dollar Value of Pulp, Paper Mill
and Paperboard Mill Products ($000s)
$18,000,000
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
1995
1997
1999
Exports
33
2001
Imports
2003
2005
Net Imports
2007E
Outlook ~ How Competitive?
 The
industry has had periods of strong and poor
performance since the 1970s ~ yet even though it faces a
continually tough business environment ~ long-term
improvements are truly possible
 Yet
~ we need to be mindful of constraints ~
 High-volume grades substitution and global market place threats
 Rising costs of production ~ Impacting net returns
 The US economy is down/ unstable & at risk for recession
 Also
note ~ traditional business models have been
stretched to the limit with
 Emergence of the global marketplace
 New power of rapidly moving knowledge and knowledge transfer;
plus
34
 New technologies ~ such as bioenergy, nanotechnology, etc.
Outlook ~ How Competitive?
Accordingly ~ participants must ~ and can ~
learn how to thrive
…Individual companies can excel if they use
the current upturn & chart a new course
looking out ... In some cases a VERY NEW
looking course …
35
Outlook ~ The Economy
Overall Economic Growth
NA Economy Sectors Outlook ~
[Implications for the Industry]
36
Outlook ~ The Economy
Overall Economic Growth Projections ~
Indicate Slower Growth In The Industry Through 2009
Real GDP Growth By Region
2004
2005
2006
2007
2008 F
2009F
US
3.9%
3.2%
3.3%
2.2%
1.3%
0.8%
Euro Area
3.2%
2.6%
3.2%
2.6%
1.7%
1.2%
Japan
2.7%
1.9%
2.2%
2.1%
1.5%
1.5%
UK
3.3%
1.9%
2.8%
3.1%
1.8%
1.7%
Canada
3.3%
2.9%
2.7%
2.7%
1.0%
1.9%
Other Advanced
Economies
4.3%
5.8%
5.7%
4.6%
3.3%
3.3%
Emerging Markets
6.6%
6.7%
7.3%
8.0%
6.9%
6.7%
Africa
4.5%
5.8%
5.6%
6.5%
6.4%
6.4%
Central / Eastern
Europe
5.5%
6.0%
6.8%
5.6%
4.6%
4.5%
Developing Asia
7.6%
9.0%
9.5%
10.0%
8.4%
8.4%
Middle East
5.1%
4.3%
5.0%
5.9%
6.2%
6.0%
Latin America
4.6%
4.7%
5.5%
5.6%
4.5%
3.6%
Advanced Economies
37
Outlook ~ The Economy
NA Sectors That Directly Drive Pulp & Paper Demand ~
Generally Negative vs. 2007
Industry Segment
Impacted
2007
2008E
Real GDP
All
+2.3%
1.3%-1.6%
Implicit Price Deflator
All
+2.7%
+5.0%
Personal Consumption Expenditures
All
+2.9%
+0.0%
Industrial Production
All
+1.7%
+0.2%
Containerboard
+2.7%
+0.6%
Indust. Prod. - Durables
Packaging
+1.0%
-0.7%
Food & Beverage Sales
Boxboard
+5.0%
+4.1%
Tissue
+5.2%
+2.6%
P&W Papers
+1.7%
-1.0%
P&W Papers, Tissue
+2.1%
-1.1%
Tissue, Building
Products
-26.0%
-13.0%
Economic Indicator
Indust. Prod. - Non-Durables
Food services and drinking places
Computer & Electronic Sales
Professional Employment & Business
Services
38
Housing Starts
Outlook ~ Grade-by-Grade Focus
Printing & Writing Papers
Boxboard
Containerboard
Newsprint
Market Pulp
Tissue
39
Outlook ~ NA P&W Papers
Recent Economic Slowdown & Alternative Media
Substitution ~ Impacted P&W Demand Negatively
 Large base of demand
 Industry closing of uncompetitive capacity & modest
demand increases tend to reign in excess capacity
 Substitution among CF, CGW, UCF & GW Grades have
compressed the pricing structure
 In this context ~ CF has quickly became commoditized
~ as it has been displaced by improved CGW grades
40
Outlook ~ NA P&W Papers
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 ~ similar to industry
average & room exists for continued M&A activity
Implications ~ Certain segments will suffer net capacity
reductions and others will grow some within a relatively
stable overall sector
41
Outlook ~ NA P&W Papers
40,000
NA P& Writing Papers
Volume (Short Tons 000s)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Demand
42
Capacity
Shipments
P&W Paper
Demand
Began To
Change In The
Mid-1990s –
Slow Total
Growth Is
Expected With
Risk of
Sustained
Declines In
Volume
Outlook ~ NA P&W Papers
23%
5,000
4,000
18%
14%
3,000
13%
11%
11%
13%
2,000
13%
12% 13%
10%
10%
9%
1,000
0
8%
8%
8%
8%
7%
9%
7%
8%
8%
7%
4%
3%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
43
8%
% Excess Capacity
NA P&W - % Excess Capacity
NA P&W Papers - Excess Capacity
(Short Tons 000s)
6,000
NA P&W
Capacity Is
presently In
Balance
With
Demand
Outlook ~ NA P&W Papers
$1,800
Price ($ Per Short Ton)
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
1990 1992 1994 1996 1998 2000 2002 2004 2006
CFS No. 3 60lb.
44
UCFS No. 4 Xerocopy
08
YTD
CGW No. 4 50lb.
Nominal
Prices Have
Increased To /
Near Historic
Peak Levels
~ But prior
grade
differences
are largely
gone
Outlook ~ NA P&W Papers
Real Price ($2007 Short Ton)
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
1990 1992 1994 1996 1998 2000 2002 2004 2006
CFS No. 3 60lb.
45
UCFS No. 4 Xerocopy
08
YTD
CGW No. 4 50lb.
Real Prices
Have Been
Rebounding
Since
2002/2003
Reversing
Steady
Decline of
the 1990s
Outlook ~ NA Boxboard
Boxboard is a relatively stable segment
 Slow growth in domestic industries that consume boxboard
 Increased competition from overseas producers = limited
growth
 High oil prices and environmental concerns dissuade further
substitution by plastics
 Profitability/returns are better than industry average due to
relatively concentrated supply base
 Facility closures have brought supply and demand in line
Implications ~ Slow growth is expected going forward
46
Outlook ~ NA Boxboard
2
NA
Boxboard
Demand
Growth Has
Been
Positive But
Significantly
Lags GDP
Relative Growth Index (1990 = 1)
1.75
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP
47
Total Boxboard
Outlook ~ NA Boxboard
12,500
NA Boxboard Volume
Volume (Short Tons Millions)
10,000
Demand is
up through 6
months of
2008 ~
Supply and
Demand
Remain In
Balance
7,500
5,000
2,500
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
NA Demand
48
NA Capacity
Total Shipments
Outlook ~ NA Boxboard
900
25.0%
20.0%
700
600
15.0%
500
400
9%
300
8%
9% 9%
8%
200
100
8%
6%
6%
7%
7%
9%
10.0%
6% 7%
5.0%
5%
5%
4%
Box - % Excess Capacity
NA Boxboard - Excess Capacity
(Short Tons 000s)
800
5%
3%
3%
2% 2%
0
0.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
49
% Excess Capacity
NA Boxboard
Excess
Capacity is
Now In Check
Outlook ~ NA Boxboard
SBS 15 point Price ($ Short Ton)
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
1990 1992 1994
Real Price ($2007)
50
1996 1998
Nominal Price
2000 2002
2004 2006
08
YTD
Linear (Real Price ($2007))
Nominal
SBS Prices
Near
Historic
Highs
~ Now
Flattening
in Real
Terms
Outlook ~ NA Containerboard
This NA Containerboard segment has undergone one of
the most extensive restructurings within the industry
 Concentration of top producers has gone from one of the
lowest to highest in the industry ~ improved capacity
utilization and expansion discipline has followed
 Further acquisitions by large players will be difficult
 NA producers export market has been supported by the weak
US Dollar
 Profitability and returns have improved with strong capacity
management
Implications ~ Producers are expected to grow capacity
slowly with demand ~ risks of further closures possible
with economic or market downturn
51
Outlook ~ NA Containerboard
3
Relative Growth Index (1990 = 1)
2.75
NA Containerboard Demand
Continues to
be Closely Tied
To Domestic
Non-Durables
and Durables
Trends
2.5
2.25
2
1.75
1.5
1.25
1
0.75
0.5
1990
52
1992
1994
1996
1998
2000
2002
2004
2006
US Containerboard
US Durable Production
US Non-Durable Production
Real GDP
Outlook ~ NA Containerboard
45,000
40,000
U.S. Containerboard Volume
(Short Tons Millions)
35,000
NA Capacity
Is Expected
To Be Well
Controlled
Relative To
Demand
30,000
25,000
20,000
15,000
10,000
5,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Demand
53
Capacity
Total Shipments
Outlook ~ NA Containerboard
5,000
20%
4,000
15%
14%
3,000
9%
2,000
10%
9%
10%
9%
1,000
6% 5%
7%
6%
6%
4%
6%
5%
5%
7%
7%
3% 5% 5%
5%
4%
3%
-
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
54
% Excess Capacity
U.S. Containerboard - % Excess Capacity
U.S. Containerboard - Excess Capacity
(Short Tons 000s)
25%
NA
Containerboard’s
Excess
Capacity is
Low By
Historical
Standards
But Now
Increasing
Kraft Linerboard 42lb. Price ($ Short Ton)
Outlook ~ NA Containerboard
$700
$600
$500
$400
$300
$200
1990
1992
1994
Real Price ($2007)
55
1996
1998
2000
Nominal Price
2002
2004
2006
08
YTD
Linear (Real Price ($2007))
Nominal
Linerboard
Prices ~ At
Historic
Highs ~ Real
Prices
Recovering
Upward
Since 2002 /
2003
Outlook ~ NA Newsprint
Newsprint remains the weakest overall NA
industry segment
 Short-term publishing and printing declines have been
exacerbated by substitution to alternative media
 National and local papers continue to reduce page size and
basis weights
 Opportunities for further consolidation exist and significant
capacity reductions and grade conversions will continue
Implications
~ Ongoing
consolidation
and capacity
 Ultimate
demand floor
for Newsprint
is uncertain
rationalization to improve efficiency and match supply and
demand ~ Sustained sector pressures
56
Outlook ~ NA Newsprint
Relative Growth Index (1990 = 1)
2
1.75
NA
Newsprint
Demand ~
Continues To
Decline
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP
57
NA Newsprint Demand
Outlook ~ NA Newsprint
20,000
18,000
16,000
Newsprint Volume
(Metric Tons 000s)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
NA Demand
58
NA Capacity
Total Shipments
Demand,
Capacity,
Exports, &
Shipments ~
Are All
Sliding
Downward
At A
Relatively
Rapid Rate
Outlook ~ NA Newsprint
2,000
25%
1,600
20%
1,400
1,200
1,000
15%
12%
11%
10%
800
10%
9%
10%
7%
8%
600
7%
400
5%
200
4%
7%
6%
6%
5%
4% 3%
4%
4%
7%
3% 3%
0
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
59
5%
% Excess Capacity
NA Newsprint - % Excess Capacity
NA Newsprint - Excess Capacity
(Metric Tons 000s)
1,800
Substantial
Capacity
Rationalization
~ Has Kept
Supply And
Demand In
Balance ~
Despite Falling
Volume
Outlook ~ NA Newsprint
Newsprint Price ($ Per Metric Ton)
$900
$800
$700
$600
$500
$400
$300
1990
1992
1994
Real Price ($2007)
60
1996
1998
2000
Nominal Price
2002
2004
2006
08
YTD
Linear (Real Price ($2007))
Nominal
Newsprint
Prices Are
Again
Approaching
Historic
Highs ~ Real
Prices
Flattening
Outlook ~ NA Market Pulp
Market Pulp Is Intermediate Good In The Production
Of The Other Paper And Paperboard Grades
 Internationally traded commodity with growing world-wide
demand ~ especially in developing regions
 Environmental restrictions ~ new capacity additions difficult
 NA is a large net exporter
 DIP pulps presently relatively more financially attractive than
virgin pulps ~ But this is a constantly changing reality
Implications ~ Some capital to be spent on integrated DIP
facilities. Capacity will creep up with incremental improvement
projects ~ Wild cards here are China’s fiber demand . . . And
South America’s capacity expansions
61
Outlook ~ NA Pulp
Market Pulp vs. Paper Growth Index
2
1.75
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
NA P&W Papers + Tissue
NA BSKP
62
Total NA Market Pulp
NA BHKP
Demand
For Market
Pulp
Follows
Other
Grades –
But Watch
China
Demand
and South
American
Capacity
Additions
Outlook ~ NA Pulp
15,000
NA Market Pulp Volume
(Metric Tons 000s)
12,500
Demand
Relative to
Supply
Remains
Relatively
Tight
10,000
7,500
5,000
2,500
1983
1986
1989
BSKP Shipments
BSKP Capacity
63
1992
1995
1998
2001
2004
BHKP Shipments
BHKP Capacity
2007
2010
Outlook ~ NA BHKP
16%
15%
1,400
14%
12%
12%
12%
11%11%
10%
1,000
8%
800
600
10%
9%
10%
10%
10%
7%
4%
6%
5%
400
7%
6%
4%
3%
3%
200
2%
1%
-
0%
1983
1986
1989
1992
Metric Tons
64
8%
7%
6%
2%
10%
9%
1995
1998
2001
2004
% of Capacity
2007
2010
BHKP - % Excess Capacity
BHKP - Excess Capacity
(Short Tons 000s)
1,200
12%
NA BHKP
Excess
Capacity is
Relatively
Low
Outlook ~ NA BSKP
2,500
BSKP - Excess Capacity
(Short Tons 000s)
2,000
12%
12%
12%
11%
11%
12%
13%
11%
10%
9%
9%
8%
1,500
7%
1,000
15%
14%
14%
5%
10%
7%
8%
7%
4%
3%
5%
5%
4%
500
1%
3%
3%
0%
-
0%
1983
1986
1989
Metric Tons
65
1992
1995
1998
2001
% of Capacity
2004
2007
2010
BSKP - % Excess Capacity
14%
NA BSKP
Excess
Capacity is
Relatively
Low
Outlook ~ NA Market Pulp
Pulp Price Per Metric Ton
$1,200
$1,100
$1,000
Nominal
Market Pulp
Prices
Continue To
Rise Towards
Historic Highs
$900
$800
$700
$600
$500
$400
$300
1990 1992 1994 1996 1998 2000 2002 2004 2006
NBSKP Deliv. To US
66
NBHKP Deliv. To US
08
YTD
Real Pulp Price Per Metric Ton ($2007)
Outlook ~ NA Market Pulp
$1,200
$1,100
$1,000
Real Market
Pulp Prices
Are
Rebounding
$900
$800
$700
$600
$500
$400
$300
1990 1992 1994 1996 1998 2000 2002 2004 2006
NBSKP Deliv. To US
67
NBHKP Deliv. To US
08
YTD
Outlook ~ NA Tissue
Tissue Has Been the Strongest Overall Segment In North
America in Recent Years – Demand is Catching Supply
 End-product demand is mature ~ Americans highest percapita 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
68
Outlook ~ NA Tissue
2
Relative Growth Index (1990 = 1)
1.75
NA Tissue
Demand ~
Resuming
After a Decline
in 2007
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP
69
NA Tissue
U.S. Households
Outlook ~ NA Tissue
12,000
11,000
Demand Is
Growing
Again ~
Relative to
Capacity
10,000
9,000
NA Tissue Volume
(Short Tons 000s)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Demand
70
Capacity
Shipments
Outlook ~ NA Tissue
25%
NA Tissue - Excess Capacity
(Short Tons 000s)
1,200
20%
1,000
15%
13%
800
12%
13%
600
9%
11%
10%
400
8% 8%
4%
11%
10%
9%
6%
200
12%
7%
7%
7%
7%
6%
5%
5%
4%
0
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
71
10%
% Excess Capacity
NA Tissue - % Excess Capacity
1,400
Excess
Capacity Is
Falling
Back
Towards
Historic
Average
Levels
Outlook ~ NA Tissue
200
Household Paper Products
Price Index
190
180
170
160
150
140
130
120
110
100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 08
YTD
Real Price ($2007)
Linear (Real Price ($2007))
72
Nominal Price
Prices
Strong
Since 2004
- 2008 ~
Finished
Product &
Roll Stock
Are Up In
Nominal
And Real
Terms
Outlook ~ Key Raw Materials
Pulpwood
Recovered Paper
Oil
Natural Gas
73
Outlook ~ Pulpwood
$200
PPI Index - U.S. Pulpwood
$180
$160
$140
$120
Spot
$100
$80
$60
$40
$20
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Real Price ($2007)
74
08
YTD
Nominal Price
There is
upward
pressure on
US Pulpwood
Prices ~ but
they Remain
Low By
Historic
Standards
Real Recovered Fiber Price - U.S. Midwest
($2007 Per Short Ton)
Outlook ~ Recovered Fiber
$140
$130
$120
$107
$102
$100
$80
$60
$88
$78
$101
$72
$69
$67
$49
$93
$69
$84
$46
$61
$74
$65
Spot Prices
$54
$40
$39
$20
$0
2000 2001 2002 2003 2004 2005 2006 2007
OCC#11
75
$85
ONP#8
08 Spot
YTD
Overall
recovered
paper costs
remain very
high by
historical
standards ~
ONP
continues to
rise while
OCC prices
have fallen
back some
Oil Price: Domestic West Texas Intermed.
($ per Bbl)
Outlook ~ Oil
$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Spot
Price
1990
1993
1996
Real Price ($2007)
76
1999
2002
2005
08 YTD
Nominal Price
$120+ Bbl Oil
Puts Cost
Pressure on
Manufacturers
~ But
Dissuades
Use of Plastic
Packaging ~
Stimulates
biofuels
~ Some short
term easing
Outlook ~ Natural Gas
$10
Natural Gas Deliv. to Industrial
($ per Ths. Cu. ft.)
Spot
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Real Price ($2007)
77
08
YTD
Nominal Price
$9+ per MCF
Natural Gas
cost is new
peak ~
creates cost
pressures
but
Stimulates
Biofuels
Key Takeaways
Overall ~ The NA Industry Has Performed
Relatively Well Over The Past Five To Six Years
But industry participants will continue to be challenged
to produce strong financial performance in a slow
demand growth environment and weak current
global and domestic economies
Rising prices improve profitability but can suppress
future demand
Rising costs are offsetting some of the benefits of high
pricing in the short-term
78
Key Takeaways
Looking Out
79

The NA industry financial performance has been
adequate but not compelling for a number of years

Improvements in recent years are a relief ~ yet are
sensitive to significantly capacity increases ~ managed
or new

Quality of investment decisions, economic & demand
factors + industry’s motivation for changed business
models ~ will drive performance mid-to long-term

Changes in industry direction will impact all aspects of
the industry ~ producers and suppliers alike ...

There is light on the horizon ~ but it will come from new
and evolving sources ~ stay tuned ...
Disclaimer





80
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.
Contact Information
Thank You! ~Copies Available At
www.fairvalueadvisors.com ~ And ~ www.cpbis@gatech.edu
Contact Information
Dan Cenatempo
President ~ FairValue Advisors
888-212-0495 ext. 101 ~ dan@fairvalueadvisors.com
Dr. Jacquelyn-Danielle McNutt
Executive Director ~ Center for Paper Business & Industry Studies
404-894-5733 ~ jacquelyn.mcnutt@cpbis.gatech.edu
81