State of the North American
Pulp & Paper Industry
– An Update & Outlook –
October 27, 2003 – Fall, 2003 TAPPI Conference
-- Revitalizing The Paper Business II – Charting A Path Forward -Center for Paper Business and Industry Studies – CPBIS – Jim McNutt
Value Resolution Group – Dan Cenatempo
1
Overview
„
„
„
„
„
„
2
North America P&P Industry
– An Update & Outlook –
Where Are We?
Industry Performance
Industry Outlook
Grades’ Outlook -- Grade-By-Grade
Major Industry Issues
Summary, Wrap-up and Q&A
Where are We? – Stakeholders’
Perspectives On The N. Am. Industry . . . .
„
Has Persistent Flaws the Eyes of Many . . .
9 Capital Intensive and fragmented . . .
9 Monolithic & slow to adapt . . .
9 Focus is more on what it does instead of
figuring out what it should be doing . . .
9 Key into lower costs, economies of scale,
market share, marginal returns . . .
9 Production technology & production output
driven . . .
9 Very open information flows . . .
9 Yet -- highly insular . . .
3
Where Are We? – Market Perspective
„
The North American Pulp and Paper Industry Is Mature
Web of Businesses Generally Characterized of Late By:
9
9
9
9
9
9
9
Highest per capita consumption in world across all grades
Slower growth than GDP & slowing overall GDP growth
High capital intensity
Intense Cost and price based competition
Cyclical and declining pricing and profitability. . . . .
Below cost of capital returns
Depressed investors’ values and returns
Where
WhereHistorically
Historically––The
TheN.
N.Am.
Am.industry
industryhas
hasexpanded
expandedafter
after
each
eachcyclical
cyclicalpeak.
peak. Excess
Excesscapacity
capacitypushed
pushedto
toInt’l
Int’lMarkets
Markets
4
Where Are We? – Market Perspective
„ However
– Looking Back – Combination Of –
9 A strong US dollar
9 Maturing N. Am. Demand
9 Unifying European markets;
9 Aggressive industry growth in developing
regions -- Asia & Latin America; and
9 The European & Developing Regions ‘new’
producers increased imports into N. Am. --
Interrupted This Growth Pattern
5
Where Are We? – Market Perspective
„ However -- The N. Am. Industry Did Not Recognize
This Competitive Landscape Change Until Mid
1990s and -9 Continued to behave as it did in the past –
investing available cash in new capacity in 1980’s
& early 1990s
„ This New Capacity Relied on Increasingly
Competitive Export Markets to Maintain Volume
„ Yet – Simultaneously -- Developing Regions &
Europe Began Aggressive Imports into N. Am.
6
Where Are We? – Market Perspective
The Result Was Persistent Over-capacity,
Globalization of Markets -- Which Undermined &
Sustained Weak Balance Sheets, Debt Levels,
Pricing, Profitability & Shareholder Returns
In
Inresponse
response––The
TheN.
N.Am.
Am.Industry
Industryhas
hasnow
nowbegun
begunto
to
restructure
restructureto
tobetter
bettercompete
competein
inthis
thischanged
changedglobal
global
market
market environment
environment –– but
but the
the challenges
challenges and
and stakes
stakes
are
aregreat
greatand
andthe
theprogress
progressmoderate.
moderate.
7
Where Are We? – Current Realities
„
North America’s Paper Industry Pressures Continue
9 CEOs remain under the microscope
9 Performance continues to lag – but seeming to stabilize some
9 Excess Capacity & older/inefficient technology being addressed
9 Yet retained capacity = declining asset quality w/o reinvestment
9 Substitution (imports & alternative products to meet consumers
needs) = persistent issue
9 Balance sheets still out of balance – with moves to improve
9 Reinvestment in revenue generation steps continues to lag
9 Competitive landscape remains Intense – some order emerging
Let’s
Let’sNow
NowLook
Lookat
atsome
someof
ofthe
theSituational
SituationalAspects
Aspects
of
ofthe
theUS
USIndustry
Industry&&Their
TheirImportance
Importance........
8
Industry Performance – ROTC Vs. Cost
of Capital
20%
averages
ROTC ROTC
Averages
7 7%
% vs.
vs.
11% cost of capital
11% Cost of Capital
Return & Cost of Capital
15%
10%
5%
0%
1975
1978
1981
1984
1987 1990
Return On Total Capital
9
1993
1996
1999
Cost of Capital
2002
Returns
Average 4
Points Below
Target -Rational
Investors Will
Not Allocate
Capital To The
Poorly
Performing
Sector & Firms
Monthly Total Shareholder Return (TSR) Index
Industry Performance -- Total
Shareholder Returns Still Trail S&P 500
400
P&FP Shareholder
Returns Have
Trailed S&P 500
Risk of P&FP Stocks = Market (Beta = 1.0)
S&P 500 TSR = 10.3% Per Year
P&FP W. Avg TSR = 8.5% Per Year
P&FP Avg. TSR = 7.5% Per Year
L.T. Government Bond = 6.2% Per Year
350
300
Yet -- Stocks
Rebounding With
Overall Market
250
200
150
100
50
0
'92
'93
'94
S&P Return Index
10
'95
'96
'97
'98
'99
P&FP Company Avg.
'00
'01
'02
'03
P&FP Company W. Avg.
Investment
Services Don’t
Expect Full P&P
Earnings Rebound
Until 2004
Industry Performance – Debt Levels
70%
Debt To Capital Ratio
60%
50%
40%
30%
20%
1975
1978
1981
1984
1987
1990
1993
Debt % of Invested Capital
11
1996
1999
2002
US Companies
Are
Maintaining
Debt Levels
Near 50% Which Will
Likely Limit
Future
Investments
Industry Performance – Capital
Spending Level – Real USD
Total
U.S. Real Capital Expenditures ($2002 Millions)
15,000
12,500
10,000
7,500
5,000
2,500
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
Total
12
US Pulp &
Paper Capital
Expenditures
Will Continue
To Languish
Until The
Cyclical
Recovery
Circa 2004
Industry Outlook – NA Capacity
8,000
Change In NA Pulp & Paper Capacity
(Short Tons 000s)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
1991
13
1993
1995
1997
1999
2001
2003
2005
Lack of
Growth /
Decline Will
Continue In
US Paper &
Board
Capacity
For
Immediate
Future
Industry Performance – Less Capital Being
Invested In Primary Industry Assets
Share of Pulp & Paper Capital Spending
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1980
1982
1984
IT & Communic.
14
1986
1988
1990
1992
Facilities, Machinery & Infra.
1994
1996
1998
2000
Office Buildings & Furnish.
Facility
Related
Spending
Accounts For
Declining
Share of P&P
CAPEX-- IT =
More
Industry Performance – Profitability
Net Operating Profit Margin
12%
10%
8%
6%
4%
2%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
15
US Pulp &
Paper
Profitability
Continues Its
Declining
Path In Real
Terms Since
1970s
Industry Performance – Capital Turnover
Sales / Total Invested Capital
200%
US Pulp &
Paper
Capital
Turnover To
Continue Its
Downward
Trend
180%
160%
140%
120%
100%
80%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
16
Industry Performance – Capital
Spending/Depreciation
Capital Expenditures % of Depreciation
275%
250%
US CAPEX
Likely To
Remain
Significantly
Below
Depreciation
Levels
225%
200%
175%
150%
125%
100%
75%
50%
25%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
17
Industry Outlook – The Economy
Line Item
2003
2004-2006
US Real GDP
Growth
2.2%
3.6%
US Inflation
(PPI Index)
2.6%
0.7%
European Real
GDP Growth
1.3%
2.0%
European
Inflation (GDP
Deflator)
1.0%
0.4%
18
Overall
Economic
Forecast Now
Calls For
Continued
Recovery With
US Leading
Europe
Industry Outlook – Performance Direction
Line Item
U.S.
Europe
2003 Sales
Growth
-3.0%
-4.5%
2003 Income
Growth
-16%
-33%
2001-2003E
ROTC
4.0%
19
6.0%
European & US
Industry Firms’
Performances Are
Converging – But
Both Regions Now
Under-performing –
Yet Asian & Latin
American Share
Growth Continues
Industry Outlook – The Drivers
Economic
Segment
Industry Segment
Impacted
20012002
Real
Growth
Q2 2003
Real
Growth vs.
2002
Food & Beverage
Boxboard/Containerboard
-2.0%
+3.6%
Restaurant /
Recreation
Boxboard, Tissue
-3.0%
+1.6%
Durable Goods
Containerboard
-5.1%
+8.2%
Non-Durable
Goods
Containerboard
-4.1%
+3.3%
Computer &
Peripheral
Investment
P&W Papers
-11.5%
+31%
Advertising
P&W & Newsprint
-29.5
+6.8%
Housing Starts
Tissue, Forest Prods
+5.7%
+11.8%
Private Investment
All Mfg. Industries incl.
P&P
-21.7%
+8.0%
Industrial
Production
All Mfg. Industries incl.
P&P
-4.0%
0.0%
20
Demand
Growth
Drivers
Accelerating –
Just Now
Being Realized
By
Manufacturing
Sector
Industry Outlook – Market Overview
„ Weakness in Demand Drivers
-- Is Improving – Which Is
Significant for The Pulp & Paper Industry
„ However, Weak Downstream Demand Past Two Years
--
Plus Range of Competitive Factors Have Resulted in
Significant Excess Capacity & Inventories
„ This Excess
Capacity [& Inventories] Has In Turn,
Undermined Pulp & Paper Prices & Returns – Which Still
Needs Correction
The
Thenet
netresult
resultis
ispersistent
persistentpoor,
poor,but
butnow
nowimproving
improving
performance,
performance,in
inthe
theNorth
NorthAmerican
Americanpulp
pulp&&paper
paper
industry
industryduring
duringthe
theoutlook
outlookperiod.
period.
21
Industry Outlook – The Grades
Grade Segment
2001-2003
2004-2006
Containerboard
-1,319
-150
Newsprint
-1,388
-491
Printing &
Writing
-1,820
476
587
377
-435
-250
Pulp
-1,714
-875
Total Change
-6,089
-913
Tissue
Packaging &
Industrial
22
Change In Capacity
(Short Tons 000s)
Net Effect for N.
Am. Pulp & Paper
Capacity Is
Decline Through
2003 – Partially
Offset By “Creep”
Through 2006.
Several Scenarios
Possible Where
Net Capacity
Reductions Do
Continue
Industry Outlook – Offshore Capacity
2003-2005 Change In China's Capacity
(Short Tons 000s)
Containerboard
Newsprint
Printing & Writing
Tissue
23
2,035
781
1,480
33
Packaging & Industrial
2,387
Pulp
1,513
Total Change
8,228
Offshore
Capacity
Additions Will
Continue to Put
Significant
Pressure on the
Global Export
Markets
N. Am. Grades’ Outlook – Grade-by-Grade
„ Newsprint
„ Printing & Writing Papers
„ Packaging & Industrial
„ Containerboard
„ Market Pulp
„ Tissue
24
Grade Outlook – Newsprint
Newsprint Remains As Weak N. Am. Industry Segment
„
Substitution to Alternative Media Remains an Issue
„
Reduced Page Size Also Remains an Issue
„
Newsprint Decline is Moderating, But is Long Term Issue
„
Need for Further Capacity Reductions Will Continue
Implications:
Implications:This
ThisGrade
Gradesuffered
sufferedsevere
severeend
enduser
user
demand
demanddecline
decline&&excess
excesscapacity.
capacity. Rational
Rationalplayers
players
have
havespent
spentminimum
minimumcapital.
capital. No
Nonew
newNewsprint
Newsprintmills
mills
likely
likelyto
tobe
bebuilt
builtin
inN.
N.Am.
Am.soon
soon----or
orever.
ever.
25
Newsprint Volume (Metric Tons 000s)
Grade Outlook – Newsprint
N. Am.
Newsprint’s
Decline Has
Moderated &
Modest
Recovery
From 2002
Lows Is
Expected
17,500
15,000
12,500
10,000
1990
1992
1994
NA Demand
26
1996
1998
2000
NA Capacity
2002
2004
Total Shipments
2006
Grade Outlook – Newsprint
35%
30%
2,000
1,874
1,817
1,727
1,631
1,500
25%
1,501
1,069
1,396
20%
456
1,000
963
961
610
809
11%
928
10%
598
553
500
755
11%
4%
4%
1992
1994
6%
3%
1996
1998
Excess Capacity
27
6%
5%
5%
3%
0
1990
6%
6%
5%
10%
10%
9%
6%
15%
954
12%
2000
0%
2002
2004
2006
% Excess Capacity
Newsprint - % Excess Capacity
Newsprint - Excess Capacity (Metric Tons
000s)
2,500
Excess N. Am.
Capacity
Persists – But
At Lower
Levels -Supply &
Demand May
Balance By
2004
Grade Outlook – Newsprint
$800
Newsprint ($ Metric Ton)
$700
$600
$500
$400
$300
1990
1992
1994
1996
Real Price ($2001)
28
1998
2000
2002
2004
Nominal Price
2006
Newsprint
Has
Experienced
Historic Low
Prices –
With Weak
End-User
Demand –
But Some
Relief In
Sight
Grade Outlook – P&W Papers
Recent Economic Slowdown & Alternative Media Substitution
Have & Will Continue to Impact P&W Demand
„
Uncompetitive Capacity Being Closed & Modest Demand
Increases Will Tend To Reign In Excess Capacity
„
The Perceived Value Of CF, CGW, UCF & GW Grades Has
Collapsed With Significantly Increased Substitution Among
The Freesheet, Groundwood And Coated Grades
„
This Development – With The Collapsing Price Structure Of
Grades On Top Of Each Other -- Is A Major Sea Change
„
In This Context -- CF (E.G.) Has Become Commoditized And
More Exposed To Displacement By Improved CGW Grades
29
Grade Outlook – P&W Papers
In Addition -- High End Uses -- Auto Brochures/Annual Reports
Are Still Being Replaced/Substituted for by Electronic Versions
„ High Volume UCF Remains Under Pressure From Overseas
Competitors, and Newsprint Producers Are Converting
Capacity to UC and CGW Grades
„ Financial Returns & Growth Prospects Are Similar to
Industry Average & Room Does Exists for Continued M&A
Activity
Implications:
Implications:Grade
Gradegrouping
groupinghas
hashad
hadmajor
majorsea
seachange
changewith
with
grades’
grades’prices
pricescollapsing
collapsingonto
ontoone
oneanother
anotherleading
leadingto
toassets
assets
repositioning
repositioning&&redeployment,
redeployment,continued
continuedM&A
M&A&&financial
financial
constraints.
Certainsegments
segmentswill
willcontinue
continueto
tosuffer
suffernet
netcapacity
capacity
constraints. Certain
reductions
reductions&&others
otherswill
willbenefit
benefitby
bygrade
gradeencroachment
encroachment
30
Grade Outlook – P&W Papers
N. Am. P&W
Demand &
Capacity
Contracted
2000-2002 –
But A
Moderate
Recovery
Has Begun In
2003
P&W Volume (Short Tons 000s)
43,500
41,000
38,500
36,000
33,500
31,000
28,500
26,000
1990
1992
1994
NA Demand
31
1996
1998
NA Capacity
2000
2002
2004
Total Shipments
2006
Grade Outlook – P&W Papers
25%
4,387
4,500
4,187
4,116
20%
4,000
3,500
3,352
3,461
3,800
2,498
2,258
3,122
3,059
3,000
2,701
2,732
2,004
15%
2,745
3,059
3,150
12%
2,500
11%
10%
10%
2,000
11%
10%
1,191
9%
1,500
8%
8%
8%
7%
7%
6%
1,000
8%
8%
7%
5%
5%
500
3%
0
0%
1990
1992
1994
1996
Excess Capacity
32
1998
2000
2002
2004
% Excess Capacity
2006
P&W - % Excess Capacity
P&W - Excess Capacity (Short Tons 000s)
5,000
Significant
N. Am.
P&W Overcapacity
May
Dissipate
By 2004
Grade Outlook – P&W Papers
1,600
Real Prices ($2003 - Short Ton)
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
1990
1992
1994
1996
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
33
1998
2000
2002
UCGW Average
CGW No. 4 50lb.
2004
2006
N. Am.
P&W Real
Pricing
Remains At
Historically
Low Levels
With Grade
Prices
Converged
Grade Outlook – P&W Papers
1,300
Nominal Prices ($ per Short Ton)
1,200
1,100
1,000
900
800
700
600
500
400
1990
1992
1994
1996
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
34
1998
2000
2002
UCGW Average
CGW No. 4 50lb.
2004
2006
N. Am.
P&W
Nominal
Prices Will
Improve
Some In
2003 &
2004
Grade Outlook – Packaging & Industrial
Grade Grouping Remains A Weak N. Am. Segment
„ Slow Growth in Industries That Consume These Grades,
Increased Competition From Overseas Producers & Widespread
Substitution by Plastics and Alternative Packaging Materials
Has Hurt Producers
„ Profitability/returns Better Than Industry Average Despite Poor
Fundamentals Due to Relatively Concentrated Supply Base – &
Over Capacity Seems to Be Moderating
Implications
: No
Implications:
Nosubstantive
substantiveexpansions
expansionson
onhorizon.
horizon.
Expect
Expectmore
morecapacity
capacityadjustments
adjustments----productivity
productivityand
and
product
productimprovement
improvementinitiatives
initiatives––But
Butgrade
gradestill
stillfaces
faces
serious
seriouschallenges
challengeslooking
lookingout.
out.
35
Grade Outlook – Packaging & Industrial
Other Paper / Paperboard Volume (Short Tons 000s)
19,000
18,000
17,000
16,000
15,000
14,000
13,000
12,000
1990
1992
1994
NA Demand
36
1996
1998
NA Capacity
2000
2002
Total Shipments
2004
2006
N. Am.
Demand,
Shipments
and
Capacity
Have Fallen
Four Years
In A Row –
Some
Recovery
Likely – But
To Be Slow
Grade Outlook – Packaging & Industrial
Other Paper & Board - Excess Capacity (Short
Tons 000s)
1,595
1,600
1,434
1,350
1,400
20.0%
1,388
1,301
1,200
1,200
1,305
1,044
959
1,000
790
850
810
904
770
800
660
8.1%
600
8.3%
9.0%
8.5%
10.0%
9.2%
7.5%
410
490
8.0%
400
6.1%
5.1% 5.0%
200
5.0%
3.8%
3.0%
5.6%
5.0%
5.1%
4.4%
2.3%
0.0%
0
1990
1992
1994
1996
Excess Capacity
37
15.0%
1998
2000
2002
2004
% Excess Capacity
2006
Other Paper & Board - % Excess Capacity
25.0%
1,800
N. Am. Grade
Has Struggled
With
Significant
Overcapacity
Which Seems
to Be
Moderating
Some – But
More Is
Needed
Grade Outlook – Packaging & Industrial
SBS 15 point Price ($ Short Ton)
$1,200
Low N. Am.
Prices Are
Will
Improve By
2004 – But
Are Still
Weak
$1,100
$1,000
$900
$800
$700
$600
$500
$400
1990
1992
1994
1996
Real Price ($2003)
38
1998
2000
2002
Nominal Price
2004
2006
Grade Outlook – Containerboard
This N. Am. Segment has Undergone Significant Restructuring:
„
Concentration of Top Producers Shifted From One of Lowest
to Highest in N. Am. Industry – Improved Capacity Utilization
and Expansion Discipline Has Followed
„
Further Acquisitions by Large Players Will Be Difficult
„
However, N Am. Producers Have Lost Export Market to New
Overseas Capacity, Especially in China and Germany
„
Profitability and Returns Are Lower Than Needed & Expected
„
Slack Capacity Absorbed Quickly With Improved Economy
Implications:
Implications: This
Thisgrade
gradehas
hashad
hadgreat
greattransition
transition––synergies
synergies
still
X
stillkey.
key. Expect
Expectmore
moreasset
assetmoves
moves&&quality
qualityinitiatives.
initiatives. CAPE
CAPEX
to
tobe
beminimal.
minimal. Major
Majorissue
issueis
issurplus
surplusconverting
convertingcapacity.
capacity.
39
Grade Outlook – Containerboard
Containerboard Volume (Short Tons 000s)
40,000
N. Am. Demand
Improvement &
Significant
Blocks Of
Capacity
Retired Between
1998 and 2003
Have Helped
Grade Greatly
37,500
35,000
32,500
30,000
27,500
25,000
22,500
20,000
1990
1992
NA Demand
40
1994
1996
1998
NA Capacity
2000
2002
Total Shipments
2004
2006
Grade Outlook – Containerboard
25%
4,406
4,500
20%
4,000
3,790
3,500
3,279
3,000
1,500
2,954
15%
12%
2,170
2,111
1,212
2,320
1,622
1,4011,363
10%
1,469
10%
9%
9%
10%
9%
7%
1,000
6%
500
583
5%
6%
6%
8%
6%
5%
5%
5%
3%
2%
0
1990
1992
1994
0%
1996
Excess Capacity
41
3,196
2,615
2,500
2,000
3,461
3,213
1998
2000
2002
2004
% Excess Capacity
2006
Containerboard - % Excess Capacity
Containerboard - Excess Capacity (ST 000s)
5,000
N. Am.
Containerboard’s
Excess
Capacity
Is Coming
Back In
Line
Grade Outlook – Containerboard
Linerboard 42 lb. Price ($ Short Ton)
600
N. Am.
Capacity
Reductions
Have Helped
Better Balance
The Market &
Prices Going
Forward
500
400
300
200
100
1990
1992
1994
1996
Real Price ($2003)
42
1998
2000
2002
Nominal Price
2004
2006
Grade Outlook – Market Pulp
Market Pulp Is an Intermediate Good in the Production of the
Other Paper and Paperboard Grades
„
Pulp Investment Returns -- Among the Poorest in the Industry
„
Environmental Restrictions -- New Capacity Additions Difficult
„
International Producers -- Import Pulp Competitively to US
„
Inventory Management – Remains Major Issue Going Forward
Implications:
Implications:This
Thisgrade
graderemains
remainsin
inserious
seriousdifficulty
difficultydue
dueto
to
commodity
commoditynature
nature&& global
globallow
lowcost
costproducers.
producers. Further
Further
N.
N.Am.
Am.capacity
capacityreductions
reductionsneeded
needed&&expected.
expected. Pricing
Pricingwill
will
remain
remainstrained
strainedand
andlow.
low.
43
Market + Integrated Pulp Volume (Metric Tons 000s)
Grade Outlook – Market Pulp
95,000
90,000
N. Am
Market
Pulp
Tends to
Follow
Other
Grades
85,000
80,000
75,000
70,000
65,000
60,000
55,000
50,000
1990
1992
1994
NA Demand
44
1996
1998
NA Capacity
2000
2002
Total Shipments
2004
2006
Grade Outlook – Market Pulp
25%
10,575
10,834
9,711
10,000
20%
8,917
8,824
7,954
7,727 7,603
8,000
7,170
6,432
6,000
7,333
7,208
6,695
15%
12%
5,455
6,154
9%
4,000
12%
10%
8%
8%
8%
8%
7%
7%
6%
2,000
10%
11%
10%
9%
9%
5,293
4,344
5%
6%
5%
0
0%
1990
1992
1994
1996
Excess Capacity
45
1998
2000
2002
2004
% Excess Capacity
2006
Pulp - % Excess Capacity
Market + Integ. Pulp - Excess Capacity (Metric
Tons 000s)
12,000
N. Am. Pulp
Excess
Capacity
May Be
Moderated
By Rebound
In Demand
& Capacity
Closures
Grade Outlook – Market Pulp
1,100
NBSKP Deliv. To U.S. ($ Metric)
1,000
900
800
700
600
500
400
300
200
1990
1992
1994
1996
Real Price ($2003)
46
1998
2000
2002
Nominal Price
2004
2006
Market Pulp
Prices Should
Rise As
Excess
Capacity Is
Resolved -Fundamentals
Still Not
Strong Going
Forward
Grade Outlook – Tissue
Tissue Remains Strongest Overall Segment in N. Am.
„ End-product Demand Is Mature (Americans Highest Percapita Consumers in World & Incremental Demand Is Slow)
„ Demand Is steady --yet Excess Capacity Could Build
„ However, Overall Firm Financial Returns Less Sensitive to
Supply/Demand Dynamics at Mill Level Than Other Grades
„ Regulatory Considerations Will Limit Large M&A Activity
„ Technology Changes and New Entrepreneurial Entrants Will
Drive Spending - & TAD Proliferation = Potential Problem
Implications:
Implications: This
Thissegment
segment has
hasperformed
performedbest
best––aasolid
solid
success
successstory
story&&expansion
expansion&&upgrades
upgradeswill
willcontinue
continueto
tolead
lead
the
-like commoditization
theindustry
industry––but,
but,TAD
TAD-like
commoditizationcould
couldbe
beissue.
issue.
47
Grade Outlook – Tissue
Tissue Volume (Short Tons 000s)
10,000
9,000
8,000
7,000
6,000
5,000
1990
1992
1994
US Demand
48
1996
1998
2000
US Capacity
2002
2004
Total Shipments
2006
N. Am.
Tissue
Demand Is
Steady & Still
Generally
Evolves with
GDP &
Household
Formations
Grade Outlook – Tissue
25%
776
800
750
685
676
700
565 565
600
500
433
400
546
15%
550
11%
288
301
384
10%
300
10%
8%
9%
8%
200
100
592
495
20%
657
666
663
6%
7%
7%
8%
7%
7%
6%
5%
4%
8%
7%
4%
0
0%
1990
1992
1994
1996
Excess Capacity
49
5%
1998
2000
2002
2004
% Excess Capacity
2006
Tissue - % Excess Capacity
Tissue - Excess Capacity (Short Tons 000s)
900
Excess N.
Am. Tissue
Capacity
Built Up In
2001 / 2002
Is Returning
to More
Normal
Levels
Major Issues Facing the N. Am. Industry –
Despite
Despitedifficult
difficultsituation
situation––The
TheN.
N.Am.
Am.industry
industryis
ispositioned
positionedfor
for
some
someperformance
performanceimprovements
improvementsduring
during2003
2003and
andmore
moreIn
In2004.
2004.
„
But There Remain Significant Risks To A Sustained
Profitable N. Am. Industry Sector -1. Expanded Substitution of N. Am. produced P&P by Int’l
competitors and non-fiber based products,
2. Continued over capacity – globally & domestic – with
Failure to maintain capacity management discipline,
3. Declining N. Am. Asset Quality [w/o renewal investments]
4. Not seeking innovative & new ways of operating, and
5. Failure to address fundamental question = How do N. AM.
manufacturers of commodity products remain profitable
long term against lower cost int’l competition?
50
Major Issues Facing the Industry –
Even
Evenwith
withthis
thisrebound
reboundat
athand
hand––The
TheN.
N.Am.
Am.P&P
P&Pindustry’s
industry’s
Future
Futureremains
remainsaapoint
pointof
ofextensive
extensivedebate
debate
„
Some Believe The P&P N. Am. Industry Sector Has Begun
A Long-term, Irreversible Decline And As Such -9Will follow in the path of US steel and textiles –
9Others believe it will restructure and reassert itself – like
some parts of textiles & steel have begun to . . .
„
In Truth – The Real N. Am. Industry Path Is Not Clear –
9The degree to which N. Am. demand returns, & N. Am.
capacity fulfills the demand and the way firms operate . . .
9Plus – the way the global industry extends & exerts itself
will collectively have major impacts on this Path . . .
51
Also We Must Understand –
Paper Is Still Essential To Society
Paper Is an Essential Building Block of Society –
Permeating Modern Civilization’s Social Fabric
„ Meets a Cornucopia of Mankind’s Needs
9 From Books and photocopies . . .
9 Tissue and sanitary products . . .
9 And newspapers, magazines . . .
9 To packaging products and on and on . . .
9 Even in surgical gowns, gas mask filters, ice
cream, toothpaste, and . . . .
„
52
And – There Are Three Important
Points . . .
„
Winds of Change Have Buffeted the Paper Industry
-- Causing a Shift From one Paradigm to Another -An as Yet Unfinished Task . . .
„
Paper Industry Executives Are Not Unmindful of
These Issues & Need for Change -- Yet, Much
Remains to be Done . . .
„
One Undeniable Truth – All Stakeholders -- Inside
and Outside the Firms -- Are All in the Same Boat –
And Pulling Our Oars Together is Crucial
53
And Think About This . . . .
Vladimir Lenin Once Noted – I’m going
to hang all the capitalists, and they’re
going to sell me the rope I need to do it.
There is a lesson here for all of us in
the paper industry – Let’s not be our
own worst enemy – let’s stop
providing rope for our own demise!
54