Restructuring The Fiber Supply Chain – An Inclusive
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Restructuring The Fiber Supply Chain – An Inclusive Perspective – International Perspectives On Forestry 2 – Center for Paper Business and Industry Studies – CPBIS – At Georgia Tech & – North Carolina State University – College Of Natural Resources – Jim McNutt – 1 Restructuring The Fiber Supply Chain Prolog . . . The Recent Withdrawal Of Timberland Ownership And Related Forest Investments By Major Corporations Are But ADDITIONAL Steps In Years Of “Change” That Have Collectively Shifted Timber Supply And Fiber Supply Chain Management To Separate [Outsourced] Entities. It Is The Inclusive Shift, Not Just The Recent Timberland Investment Structures That Has Led To A Restructuring Of The Fiber Supply Chain. We Must Look At The Whole Picture – Not Just One Part . . . 2 Overview – Restructuring The Fiber Supply Chain Performance Pressures – The Context Evolving Issues – New Realities The Parable – So Where Are We? 3 Performance Pressures – The Context Where Are We Now? Key Issues Lagging Returns Where to Next? The Forest Products Industry – “A Rich Demand & Fiber Basis” 4 Industry Performance – Where Are We Now? The North American forest products industry is currently enjoying a cyclical rebound – helped greatly by capital constraints & capacity rationalizations plus strong economic factors – such as the housing market . . . However, the industry remains at risk from: 9Slowing -- but improving of late -- domestic demand growth 9Rising international competition – but some changes evolving 9Substitution pressure from alternative substrates & medias 9Aging domestic asset base – requiring investment attention 9Nagging poor -- but improving – balance sheets 9Lure of pent up expansion plans in an improving market – risks of past behavior still overhanging 5 Industry Performance – Where Are We Now? Rebounding s, aa Reboundingforest forestproducts productsdemand, demand,closure closureof ofunviable unviablefacilitie facilities, weaker weakerUS USdollar dollar&&strong strongeconomic economicgrowth growthare aredriving drivingmoderately moderately increased increasedvolume, volume,(erratic) (erratic)prices pricesand andprofitability profitabilityin inthe the NA NAindustry. industry. Rebounding demand growth has been modest and erratic – uncertainty remains – differences by grades . . . The present supply and demand balance currently favors producers but could shift back to customers circa 2007 as higher prices dissuade consumption and capacity could again begin to expand These improved fundamentals do create opportunities to stabilize the NA Industry platform looking out . . . Yet . . . 6 Industry Performance – Key Issues Creating shareholder value is the goal of the firm Successful companies continuously identify and successfully execute investments with returns greater than cost of capital The industry has not made target returns and, therefore not attracted necessary capital investment – balance sheet issues persist . . . Performance has traditionally followed excess capacity and pricing – yet will we learn and how will we respond? Lagging Laggingindustry industryperformance performanceand andshareholder shareholderreturns returns are arestill stillbelow belowlevels levelsrequired requiredby byinvestors investorsto tomake makeaafair fair return returnat atthis thistime time......Creating Creatingpressures pressuresfor forchange change...... 7 Industry Performance – Lagging Returns 20% ROTC averages 6.7% vs. 11.0% cost of capital 15% 10% 5% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 Return On Total Capital 8 Cost of Capital Q2 2005 With A History of Not Meeting Returns’ Targets -- Rational Investors Will Not Allocate Capital To A Poorly Performing Industry Industry Performance – Balance Sheet Issues 70% Debt To Capital Ratio 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 1975 1979 1983 1987 1991 1995 Debt % of Invested Capital 9 1999 2003 Increased Debt Levels Across Time -- Have Significantly Impacted Balance Sheets And Limited Investment Opportunities & Flexibility Industry Performance – Underperforming Index of Monthly Total Shareholder Returns Total Shareholders’ Returns Still Trail S&P 500 400 S&P 500 TSR = 9.1% Per Year P&FP W. Avg TSR = 6.9% Per Year P&FP Avg. TSR = 6.1% Per Year L.T. Government Bond = 6.2% Per Y 375 350 325 300 275 250 225 200 175 150 125 100 92 10 93 94 95 96 97 98 99 S&P Return Index P&FP Company W. Avg. 00 01 02 03 04 05 P&FP Company Avg. The S&P 500 Rebound Still Leaves Forest Products Industry Shareholders Wanting – Underperform ing The Index By 2-3 Points Per Year Since 1992 Industry Performance – The Economy NA Sectors That Directly Drive Forest Products Demand Are Projected To Be Weaker Than Overall GDP – But Remain Positive Industry Segment Impacted 19901995 19952000 20002004 2005 20062010 Real GDP All 2.5% 4.1% 2.5% 3.4% 3.0% Implicit Price Deflator All 2.4% 1.6% 1.9% 3.6% 2.2% Personal Consumption Expenditures All 2.6% 4.4% 3.2% 3.1% 2.8% Industrial Production All 3.5% 6.0% 0.1% 3.7% 2.5% Indust. Prod. - NonNon-Durables Containerboard 1.8% 1.3% -0.6% 2.2% 0.9% Indust. Prod. - Durables Packaging 4.9% 9.5% 0.7% 5.7% 5.3% Food & Beverage Sales Boxboard 1.9% 3.2% 3.6% 5.0% 3.1% Food services and drinking places Tissue 4.8% 5.5% 6.3% 7.4% 2.9% Computer & Peripheral Sales P&W Papers 21.6% 5.2% 2.0% 15.0% 4.6% Professional Employment & Business Services P&W Papers, Tissue 3.4% 5.3% -0.4% 3.4% 2.7% US Households Tissue, Building Products 1.2% 1.1% 0.2% 1.0% 1.0% Housing Starts Tissue, Building Products 2.5% 2.9% 5.5% 1.0% -2.0% Economic Indicator 11 Industry Performance – The Economy Real GDP Growth By Region 2002 2003 2004 2005 US 1.9% 3.0% 4.4% 3.4% Euro Area 0.8% 0.5% 2.2% 2.2% Japan -0.3% 2.5% 4.4% 2.3% UK 1.8% 2.2% 3.4% 2.5% Canada 3.4% 2.0% 2.9% 3.1% Other Advanced Economies 3.6% 2.4% 4.3% 3.5% Newly Industrialized Asian Economies 5.0% 3.0% 5.5% 4.0% 4.8% 6.1% 6.6% 5.9% Africa 3.5% 4.3% 4.5% 5.4% Central and Eastern Europe 4.4% 4.5% 5.5% 4.8% Commonwealth of Independent States 5.4% 7.8% 8.0% 6.6% Developing Asia 6.6% 7.7% 7.6% 6.9% Middle East 4.3% 6.0% 5.1% 4.8% Latin America -0.1% 1.8% 4.6% 3.6% Advanced Economies Other Emerging Markets 12 Overall Economic Growth Projections Do Favor Continued Demand Growth For Our Industry Industry Performance – Where To Next The NA industry financial performance has been poor on an absolute basis and persistently weak from the late 90’s through today – even though we see improvements today These short-term performance improvements could be transient if industry management cannot fix their financial structures and keep them fixed . . . In fact, the history of not keeping financial structures healthy has shifted key decisions to forces outside the firm . . . Investors have demanded and will continue to demand changes to enhance their returns . . . As a consequence, firms remain under the gun to make structural changes . . . Balance sheets, outsourcing . . . 13 The Evolving Issues – New Realities Fiber Supply Chain Components The Realities of Fiber Costs The Realities of Logistics The Realities of Biology? Issues Needing Attention 9 At The Mill 9 On the Road 9 In the Woods 9 In the Laboratory 14 New Issues The Wood Fiber Supply Chain -- “A Changing Arena for Value Extraction” Fiber Supply Chain Components Timberland Ownership – Being Outsourced Land and Site Preparation -- Outsourced Tree Development – Largely Outsourced Stand Management & Tree Growth -- Outsourced Harvesting -- Outsourced Hauling -- Outsourced Handling and Processing – Mixed Bag Conversion to End Product – Largely Retained Who WhoControls ControlsThe TheFiber FiberSupply SupplyChain ChainComponents? Components? Is IsThere ThereNow NowAALack Lackof ofAppreciation Appreciationfor forValue ValueChain Chain Components ComponentsBackward BackwardFrom FromThe TheMill Mill Except ExceptFor ForEnd End Products ProductsConversion? Conversion? 15 The Realities of Fiber Costs Is Fiber Really = 25-50% of End Product Costs? 9 No – Fiber is only = 10-25% -- Still Major . . . 9 But -- Cut-Haul-Handle-Process is = 15-25% Does Management Understand All This? – Not Likely Would Understanding This Change Perspectives? – Very Likely How? 9 Better Focus On The Right Supply Chain Components 9 More Success In Managing Fiber Supply Chains as Opposed to Managing Timberland Ownership, Fiber Supply Deliveries & End Products Conversion . . . 9 More Competitive Fiber Sourcing Systems – Instead of Either Just Holding Land or Now Fixing Balance Sheets 16 The Realities of Logistics 17 Supply Chain Logistics Are A Key Arena For Value Creation – For Any Supply Chain Logistics Account for Nearly 50% (+) of Delivered Wood Costs . . . Halving Logistics Costs Would Have Major Impact On Regional & Domestic Competitive Positioning . . . But Can You Manage Logistics If You Have Outsourced Your Fiber Supply Chain From The Woods To The Mill? If You Do Not Manage The Fiber Supply Chain, Then Who Is . . . Who Will . . . Who Will Capitalize? The Realities of Biology Those Affecting Stand Management & Development We Know Well . . . 9 But We are NOT Successful In Implementation On NonCorporate Lands . . . 9 Long Standing Issue – Yet Not Capitalized On – Who Will? Note – Potential for Loblolly at 15-18 Years Rotation with 20 (+/-) M3 / Hectare-Year – Who Will Capitalize? Those Tied to Bio-Engineering are Just Emerging Substantial Potentials . . . Who Will Capitalize? Other . . . New Technologies . . . Who Will Capitalize? 18 Issues Needing Attention – At The Mill 19 Shortwood versus treelength systems – horizontal versus vertical (dropfeed) chipping Chipper maintenance – Knives’ sharpness Freshness of Wood – Inventory Management Consistency of Wood Fiber Characteristics Clean Chips – bark, dirt, other contaminants Woodyard Scales/Unloading – Queues Remote woodyards – need, style, equipment Value of – Correct – Outsourcing . . . Without A Controlled Fiber Supply Chain Strategy – Who Capitalizes? Issues Needing Attention – On The Road 20 Transportation Planning – Mill Coordination . . . Scheduling & Cycling of Transport Vehicles / Carriers . . . Optimal Transport Choices – Mill Systems – Roads / Rail / Water – In the Woods Matching . . . Most Efficient Style of Transport . . . Equipment Maintenance & Asset Utilization . . . Continual & Enhanced Operator Training . . . Value of – Correct – Outsourcing . . . Without A Controlled Fiber Supply Chain Strategy – Who Capitalizes? Issues Needing Attention – In The Woods 21 Timberland Ownership – Who Controls the Fiber Tree Development, Planting, Site Preparation, Enhanced Stand Management – Optimal Yields Systems Engineering/Harvesting Layouts & Harvest Efficiencies – Optimize Capital, Labor And Fuel . . . Decking, Queuing, Cycles . . . Management Of Materials Flows Out Of The Woods – Systematic Layout And Scheduling In The Woods Storage – Coordinating With Mill Needs And Inventories . . . Value Of – Correct – Outsourcing . . . Without A Controlled Fiber Supply Chain Strategy – Who Capitalizes? Issues Needing Attention – In The Lab Innovations – tree selection . . . Innovations – Understanding Tree/Wood Properties . . . Understanding the Value Proposition – Linked with Mill/Process Modeling . . . Linking the Laboratory with the Woods . . . New developments – Softwood bio-engineering, biorefineries . . . Evolving Arena – Needs to be a Staple of Tomorrow’s Focus . . . Value Of – Correct – Outsourcing . . . Without A Controlled Fiber Supply Chain Strategy – Who Capitalizes? 22 New Issues – Needing Attention The Evolving Pressures on The Recovered (RCP) Fiber Supply The Emerging Energy Price Escalation The Potential of the Evolutionary New Biorefineries Technologies & Opportunities 23 Real Recovered Fiber Price - U.S. Midwest ($2004 Per Short Ton) Recovered Fiber – No Longer A Gift $100 $81 $83 $75 $62 $80 $78 $67 $50 $44 $62 $46 $54 $35 $25 $0 2000 OCC#11 24 $62 2001 2002 2003 2004 ONP#8 2005 Recovered Fiber Is Creating Upward Cost Pressures Across Grades – & With China’s Needs – Pressure Expected to Sustain $70 $12 $60 $10 $50 $8 $40 $6 $30 $4 $20 $2 $10 $- $1/84 1/87 1/90 1/93 Oil Price 25 1/96 1/99 1/02 Industrial Gas Price 1/05 $ Per Thousand Cubic Ft. Nominal Dollars Per Barrel Energy – Oil & Natural Gas – New Pressures $70+ Bbl Oil & $8/Mcf Natural Gas Will Create GDP & Industry Instability – But Also Raise Value Opportunity For Wood To Fuel . . . New Issues -- Implications 26 Recovered Fiber Changes -- Raising the pressures on wood fiber supplies and fiber (wood/timber) supply chain management Energy Prices – Raising the pressure on logistics costs for fiber supply chains Energy Prices – Raising the opportunities for wood to energy – which creates a whole new set of issues as to who controls the wood supply & who capitalizes . . . The Parable – So Where Are We? At a Juncture? In The Middle of A Journey? Bio-Eng ineering At The End of The Road? All Of The Above – On The Roadway to There From Here – Just With More Turbulence . . . But We Cannot Avoid This Turbulence – This Uncertainty – As Willie Sutton Said He Robbed Banks – “Because That’s Where the Money Is” . . . So For Fiber Supply Chain Management We Need a Good Strategy Regardless 27 Materials Handling Logis tics Efficiencies gy Biolo The Parable – So Where Are We? The Short-term Impact of “Turbulence” In Our Fiber Supply Chain is Relatively Clear A Good Strategy to Deal With It Is Less So: 9 Competition and control of fiber supply chain components have moved outside of traditional areas 9 The means of production is shifting from known fixed assets (just land) to enhanced engineering & biology knowledge 9 Knowledge is fast becoming more specialized, portable and the difference maker in supply chains 9 Opportunity is no longer unique to just who controls the timberland base or to special global regions. 28 The Parable – So Where Are We? In This Environment “Successful Players” Must Change & Consider Strategies That Focus Resources Where Value Can Be Added Not Just Where Control Can Exist Today – Companies Cannot “Own” the Entire Fiber Supply Chain & All Support Activities – and Expect to Create Value Over Sustained Periods – A New Reality Confederations of Organizations That Are Leaders in Their Value Adding Areas – Key Concept That Must Be Exploited – Change to Adapt To New Realities Different Management Skills and Technologies Are Required – Change -- Seek Them, Create Them, Reward Them 29 The Parable – So Where Are We? So Where Are We – In The Midst of a Fiber Supply Chain Restructuring Environment – With Turbulence and Uncertainty . . . But – “Turbulence” Is A Necessary Catalyst For Change – We Need to Use Today’s Turbulence As the “Handwriting on the Wall!” To Attack the Value Opportunities in Our Fiber Supply Chain Moving Forward With Change Strategies That Create Value For All Participants For Success 30 The Parable – Value is Where We Find It The Value is Still There . . . But We Have To Look . . . Bio-Eng ineering Logis tics If We Just Accept Where We Are . . . If We Do Not Adjust To Change. . . Efficiencies gy Biolo We Will Not Change Enough . . . If We Do Not Change Enough . . . The Fiber Supply Chain Game Is Lost! 31 Timberland Ownership And Think About This . . . Change is one thing, progress is yet another. "Change" is more scientific; "progress“ is ethical; change is indisputable, whereas progress is most often a matter of controversy – Bertrand Russell – 1950 To Find the Value in The Fiber Supply Chain — Change is Essential — To Both Extract Value & Maintain Control of The Fiber Supply Chain 32 Recap & Final Thoughts Thank You! -- Copies Available At www.cpbis@gatech.edu Contact Information Jim McNutt Executive Director – Center for Paper Business & Industry Studies 404-894-5733 – jim.mcnutt@cpbis.gatech.edu Senior Executive In Residence – North Carolina State University 919-515-5321 – jim_mcnutt@ncsu.edu 33
