State of the North American
Pulp & Paper Industry
Review In Brief ~ The Context
~ Q2 2007 Data ~
Center for Paper Business and Industry Studies (CPBIS)
~ Jacquelyn McNutt ~
FairValue Advisors
Advisors, LLC ~ Dan Cenatempo AVA
1
O er ie
Overview
North American Forest Products Industry
Review ~ The Industry Context
Where Are We?
Financial Performance
Outlook ~ How Competitive
Outlook ~ The Economy
Key Takeaways
Final Thoughts
2
Where Are We?
Brief NA Industry ~ Commentary
Volume Trends
Price Trends
3
Where
Wh
Are
A We?
W ?
North American Industry Context ~





4
Enjoys significant fiber resources & logistics. . .
Competitiveness boosted by weaker U.S. dollar,
but is strained by aging assets . . .
Has enjoyed a moderate, cyclical upturn, but solid
returns still lag & volumes still struggling a bit . . .
With prices, and financial performance improved
moderately in 20062006-07 ~ Stable to OK for 2007 . . .
Maybe will rebound a bit in 2008 ~ but 2008 = ?
…Many companies are now making moderate
investments ~ however the bigger spending is for
private equity to acquire substantial industry
assets . . . Stay Tuned!
Where Are We?
North American Industry Context ~





5
Still a major player in US and global economy
NA sector still largest in the world ~ supply &
demand
Mature industry ~ financially distressed
Organizational structure in turmoil
Significant improvements essential for survival
& opportunity to reassert dominance
Where Are We?
North Ameriican Paper & Board (ST 00
00s)
Volume Off 3
3--4% from 1999 Peak ~
But Rebounded A Bit As Of Late
135,000
125,000
115,000
105,000
95,000
85,000
75 000
75,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Domestic Consumption
6
Domestic Shipments
Capacity
Where Are We?
Volume Dropping ~ Prices Mixed
7
NA Grade
2007 YTD Change In
NA Production
2007 YTD vs. 2006
Average Price
Printing & Writing
-1.6%
+1%
Boxboard
-1.2%
+2%
Containerboard
0.1%
+4%
Newsprint
-5.1%
-10%
Chemical Paper Grade
Pulp
-2.5%
+10%
Where Are We?
Selected Current Prices Report ~ Mixed Results
Grade
50lb UFS
(US$/ton)
60lb #3 CFS
(US$/ton)
42# Kraft Liner
(US$/ton)
30lb Newsprint
(US$/tonne)
Pulp NBSK List
(US$/tonne)
8
Date
Latest
Year Ago
% Chg
08/2007
$994
$937
+6%
08/2007
$901
$925
-3%
08/2007
$510
$490
+4%
08/2007
$
$586
$
$649
-10%
08/2007
$613
$564
+9%
Financial Performance
Comparative Trends ~ Revenue & Profits
Return on Capital Employed & Debt
Investment Spending
Other Financial Measures
[Asset turnover, EBITDA, enterprise value, & role of intangibles]
9
Financial Performance
Pulp & Paper Revenue Continues To Grow ~
But Significantly Lag The Total of US Companies
14.0%
12.0%
10 8%
10.8%
10.0%
8.0%
6 2%
6.2%
6.0%
4.0%
2.0%
0.0%
2.0%
%
2.3%
0.2%
Latest Quarter
Pulp & Paper
10
2.3%
1 Year
3 Year CAGR
Total U.S. Public Cos.
Financial Performance
Median - Ttl. Enterprisse Value / Re
evenue
Yet ~ Revenue Multiple ~ Pulp & Paper Valuations
Still Significantly
g
y Trail U.S. Public Companies
p
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
Q1 '01
01
Q1 '02
02
Q1 '03
03
Pulp & Paper
11
Q1 '04
04
Q1 '05
05
Q1 '06
06
Q1 '07
07
Total US Public Companies
Financial Performance
Pulp & Paper Profits Falling After A Strong Year ~
Lag
g Total of US Companies
p
In The Longer
g Term
16.0%
14.0%
12 0%
12.0%
10.0%
8.0%
6 0%
6.0%
4.0%
2.0%
0.0%
0
0%
-2.0%
-4.0%
14%
9.9%
8%
3.1%
-1.2%
Latest Quarter
Pulp & Paper
12
7%
1 Year
3 Year CAGR
Total U.S. Public Cos.
Financial Performance
Profit Margins Have Steadied After A Period Of Decline ~
But Are Still 6 Points Lower Than Total U.S. Companies
p
Profit Margin = EB
BITDA / Saless
25%
20%
15%
10%
5%
0%
Q1 '01
13
Q1 '02 Q1 '03
Pulp & Paper
Q1 '04 Q1 '05 Q1 '06 Q1 '07
Total U.S. Public Companies
Financial Performance
Returns on Total Capital Employed ~
Consistently fall far short of Cost of Capital
20.0%
ROTC averages 6.6%
vs. 11.8%
% cost of capital
p
15.0%
10.0%
5.0%
0 0%
0.0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Return On Total Capital
Cost of Capital
14
Financial Performance
Increased Debt Levels Across Time ~
Debt To Capittal Ratio
D
Significantly Limit Investment Opportunities & Flexibility
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Debt % of Invested Capital
15
Financial Performance
Pulp & Paper Debt Is Finally Being Paid Down ~
In Both Absolute and Relative Terms
$100,000
50.0%
45.0%
40.0%
35.0%
$80,000
30.0%
25.0%
20.0%
$70,000
15.0%
$60,000
10.0%
5.0%
$50,000
,
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07
Total Debt - Dollars
16
Debt % of TEV
0.0%
Share of TEV
Dollars Miillions
$90,000
Financial Performance
Exp
penditures Re
elative To Sa
ales
Capital and M&A Spending Now Increasing ~
Yet Still Remains Below 2001 Levels ~ R&D Is Flat
10.0%
9.0%
8.0%
7.0%
6.0%
5 0%
5.0%
4.0%
3.0%
2 0%
2.0%
1.0%
0.0%
Q1 '01
Q1 '02
Q1 '03
Q1 '04
Capital Invesment
17
Q1 '05
Q1 '06
Acquisitions
Q1 '07
R&D
Financial Performance
Capital Spe
ending Indexx (Q1 2001 = 100)
A Closer Look at Slowly Recovering Capital
Spending Dollars ~ After The Significant Drop In 2001/’02
130.0
120.0
110.0
100.0
90.0
80.0
70.0
60.0
50 0
50.0
Q1 '01
18
Q1 '02
Q1 '03
Q1 '04
Q1 '05
Q1 '06
Q1 '07
Financial Performance
Asset Tu
urnover = Sa
ales / BV Asse
ets
But ~ Asset Turnover Is Improving ~
Now Exceeds Total U
U.S.
S Companies By 11%
1.3
12
1.2
1.1
1.0
0.9
0.8
07
0.7
0.6
0.5
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07
Pulp & Paper
Total U.S. Public Companies
19
Financial Performance
Median
n Ttl. Enterprisse Value / EB
BITDA
And ~ EBITDA Multiples ~
Now More In Line With U.S. Public Companies
p
12.0x
10 0
10.0x
8.0x
60
6.0x
4.0x
20
2.0x
0.0x
Q1 '01
Q1 '02
Q1 '03
Pulp & Paper
20
Q1 '04
Q1 '05
Q1 '06
Q1 '07
Total US Public Companies
Financial Performance
And Yet ~ Enterprise Value Growth of Pulp & Paper ~
Continues to Decline In Both Absolute and Relative Terms
200.0
180 0
180.0
160.0
TEV Growth
Pulp & Paper
Total U.S. Public Cos.
Latest
Quarter
-4.8%
-4.6%
1 Year
7.7%
9.8%
3 Year
CAGR
-2.7%
10.8%
140.0
120.0
100.0
80.0
60.0
Q2 '04
04
Q2 '05
05
Pulp & Paper
21
Q2 '06
06
Total US Public Companies
Q2 '07
07
Financial Performance
Intellecctual Propertty & Intangib
bles
Share of A
Assets
Total Asset Value From Intellectual Property and Intangibles
y 18 Points
For P&P ~ Still Trails Other US Cos. by
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07
Pulp & Paper
22
Total US Public Companies
Outlook ~ How Competitive
What Is Competitiveness ~ Looking Out?
What Do We Need To Embrace ~ To Reassert A
Competitive Based Performance?
p ~ Looking
g Out?
How Do NA Assets Stack Up
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
mills’ productivity/
quality

Product Performance vs. Substitutes ~ i.e.
paperboard
b
d folding
f ldi cartons
t
vs. plastic
l ti packaging,
k i
newspaper vs. TV, etc.

End--User Performance vs. International Competitors
End
~ i.e. domestic vs. international manufacturers

Financial Performance vs. Other Investments ~ i.e.
returns
t
on paper investment
i
t
t vs. alternatives
lt
ti
off
similar risk
Outlook ~ How Competitive?
Based On These Dimensions ~ Industry
P ti i
Participants
t
Must Recognize ~
 Off
Off--shoring and substitution by alternative mediums are
driving long
long--term demand below current levels
 NA has become increasingly uncompetitive in pulp and
paper production
 The industry’s cost based competition and capital
rationing strategies have eroded its asset base
 The composite financial performance of the industry has
been pitiful ~ and without a sustained upturn, will further
p
dissuade future investment ~ even with the improved
short--term environment…
short
25
Outlook ~ How Competitive?
Absent Strength of the US Dollar Issues ~
NA No Longer Enjoys Low Cost Producer Status
Grade Category
Low Cost Production Centers
Brazil, Chile, Argentina,
Brazil,
Pulp
Indonesia and Canada (selected)
Brazil,, Russia,
Brazil
Russia Indonesia
Indonesia,
Printing & Writing
Thailand, Scandinavia, Western
Papers
Europe
Eastern Europe, Brazil
Brazil,, Chile and
Newsprint
Canada
P
Premium
i
Folding
F ldi
B il, Russia,
Brazil,
Brazil
R
i Sweden,
S d
Chile
Chil
Carton Grades
and Finland
26
Outlook ~ How Competitive?
High Volume NA Grades
Have Significant Substitution Threats
Grade Category
Potential Substitutes
Containerboard
Re-usable shipping containers,
Recontainers
offshoring of manufacturing
Packaging Grades
Flexible packaging, offshoring of
manufacturing
Printing & Writing
Papers
Electronic communications, alternative
advertising mediums
Newsprint
El t
Electronic
i communications,
i ti
alternative
lt
ti
advertising mediums
Tissue
27
No Major Substitutes
Outlook ~ How Competitive?
Trade Patterns Have Weakened For NA
Producers In P&W
P&W, Containerboard and
20%
Newsprint
18%
16%
Sha
are (%)
14%
12%
10%
8%
6%
4%
2%
0%
1990
1993
1996
1999
2002
P&W Net Imports vs. Demand
Containerboard Net Exports vs. Capacity
Newsprint Net Exports vs. Capacity
28
2005
Outlook ~ How Competitive?
Print Now Accounts For Only 37% of Advertising ~
D
Down
N
Nearly
l 10 P
Points
i t M
Market
k t Sh
Share Si
Since 1991
Q1 2007
Outdoor,
Outdoor
other, 4%
Internet, 8%
Radio , 7%
Television,
45%
Newspapers,
18%
Magazines,
19%
29
Outlook ~ How Competitive?
Large Share of NA Assets Are Approaching the End of Their
Economic Lives ~ Containerboard Example ~
# of Containerboare
ed PMs
30
25
20
Economic
Obsolescence
(37% of PMs)
15
10
5
0
1916-'20 '26-'30
'36-'40
'46-'50
'56-'60
66-'70
76-'80
Year of Original PM Installation
30
85-'90
96-
Present
Outlook ~ How Competitive?
Europe Is Facing Similar Demand & Competitive Issues ~
But Has A Newer Asset Base
Number of P
Paper Machines
450
400Source: CPBIS
350
300
250
200
150
100
50
0
1890- 19001890
1900 '10-'19'20-'29'30-'39'40-'49'50-'59'60-'69'70-'79'80-'89
'10 '19'20 '29'30 '39'40 '49'50 '59'60 '69'70 '79'80 '89 '90'90
1899 1909
''99
NA (1,102)
31
Europe (1,861)
20002000
'03
O tlook ~ Ho
Outlook
How Competiti
Competitive?
e?
 In
essence then ~ the industry has been a poor performer
since the 1970s ~ it faces a continually tough business
environment ~ in spite of today’s decent upturn
 And,
as Noted ~ the NA Pulp
p and Paper
p Industry
y
 Is not the low
low--cost producer on most grades, and
 HighHigh-volume grades have significant substitution and global
market place threats
 Wherein
~ traditional business models have been
stretched to the limit with
 The emergence of the global marketplace
 The new power of rapidly moving knowledge and knowledge
plus
transfer;; p
 New technologies ~ such as biobio-energy, nanotechnology, etc.
32
Outlook ~ How Competitive?
Accordingly ~ participants must learn how
to thrive under these often intense, negative,
and rapidly
p y changing
g g conditions
…yet
y individual companies
p
can excel if they
y
use the current short to midmid-term upturn to
chart a new course looking out ... In some
cases a VERY NEW looking course …
33
Outlook ~ The Economy
Overall Economic Growth
NA Economy Sectors Outlook ~
Implications for the Industry
34
Outlook ~ The Economy
y
Overall Economic Growth Projections ~
Indicate Slower Growth In The Industry
Real GDP Growth By Region
2004
2005
2006
2007F
2008F
US
3.9%
3.2%
3.3%
2.1%
2.5%
Euro Area
3.2%
2.6%
3.2%
2.7%
2.3%
Japan
2.7%
1.9%
2.2%
2.4%
2.1%
UK
3.3%
1.9%
2.8%
2.7%
2.5%
Canada
3.3%
2.9%
2.7%
2.5%
3.0%
Other Advanced
Economies
4.3%
5.8%
5.7%
4.9%
5.1%
Emerging Markets
6.6%
6.7%
7.3%
6.7%
6.2%
Africa
4.5%
5.8%
5.6%
5.8%
5.8%
Central / Eastern
Europe
5.5%
6.0%
6.8%
6.0%
5.0%
Developing Asia
7.6%
%
9.0%
%
9.5%
%
8.7%
%
8.0%
%
Middle East
5.1%
4.3%
5.0%
4.5%
4.6%
Latin America
4.6%
4.7%
5.6%
4.8%
4.3%
Advanced Economies
35
Outlook ~ The Economy
y
NA Sectors That Directly Drive Pulp & Paper Demand
Are Weakening Again ~ But Generally Remain Positive
Economic Indicator
36
Industry Segment
Impacted
199519952000
200020002005
2006
2007E
Real GDP
All
4.1%
2.5%
3.3%
2.1%
Implicit Price Deflator
All
1.6%
1.9%
3.1%
3.4%
Personal Consumption Expenditures
All
4.4%
3.2%
3.1%
3.1%
Industrial Production
All
6.0%
0.1%
3.9%
2.1%
Indust. Prod. - Non
Non--Durables
Containerboard
1.3%
-0.6%
2.1%
2.1%
Indust. Prod. - Durables
Packaging
9.5%
0.7%
7.4%
5.3%
5.3
%
Food & Beverage Sales
Boxboard
3.2%
3.6%
1.0%
-9.5%
Food services and drinking places
Tissue
5.5%
6.3%
+8.0%
6.0%
Computer & Peripheral Sales
P&W Papers
5.2%
2.0%
+5.5%
-12.5%
Professional Employment &
Business
B siness Ser
Services
ices
P&W Papers,
Tiss e
Tissue
5.3%
-0.4%
3.4%
1.9%
Housing Starts
Tissue, Building
Products
2.9%
5.5%
-13%
-25%
Key Takeaways
Overall ~ 2006 was a very good year
But 2007 demand is slowing with the overall
economy and / or in reaction to higher prices
[& 2008 is a question]
This is in turn causing erratic market dynamics
where ~ pricing is starting to weaken in some
grades
And as a caution ~ For the first time in
a number of years ~ there is a significantly
increased chance of recession
37
Key Takeaways
Looking Out
38

The NA industry financial performance has been poor
for a number of years ~ But is improving

Short-term improvements are a relief ~ but are sensitive
Shortto significantly increase major capacity additions

Q li off investment
Quality
i
decisions,
d i i
economic
i & demand
d
d
factors + industry’s motivation for changed business
models ~ will drive p
performance midmid-to longlong
g-term

Changes in industry direction will impact all aspects of
the industry ~ producers and suppliers alike ...
Final Thoughts
The essential focus we should have at
this place in our industry’s path forward
is that the future is ours to create ~
timidity will undermine our efforts . . .
And . . . In this context ~ our challenge is
really to seize the opportunities instead of
simply enjoying our respite ~ to refocus
and restructure in new and novel ways . . .
39
And Remember . . . .
Even though the Current Industry State of
Affairs is Still Unstable & Many Systemic
Problems Remain ~ As that Famous Arm
Chair Philosopher Ziggy Once Said . . . .
“You can Complain Because
Roses have Thorns, or you can
Rejoice Because Thorns have
Roses”
40
Contact Information
Thank You! ~Copies Available At
www.fairvalueadvisors.com ~ And ~ www.cpbis@gatech.edu
Contact Information
Dan Cenatempo
p
President ~ FairValue Advisors
770-522-8972~dan@fairvalueadvisors.com
Jacquelyn McNutt
Executive Director – Center for Paper Business & Industry Studies
404-894-5733 – jacquelyn.mcnutt@cpbis.gatech.edu
41