B i
Business
Insights,
I i ht Innovation,
I
ti
and
d Investment
I
t
t
– 66th IPST Executives’ Conference --
North American Pulp & Paper Industry
-- Update & Outlook --
Jim McNutt – Center for Paper Business and Industry Studies (CPBIS)
And
A d Dan
D Cenatempo
C t
– Jacobs
J b C
Consultancy
lt
September, Atlanta, Georgia
O
Overview
i
North America Pulp & Paper
Industry -- Update & Outlook







2
Where Are We?
Industry Performance
E
Economy
Grade--By
Grade
By--Grade Discussion
I d t Spending
Industry
S
di
Investment Decisions’ Drivers
S
Summary,
Wrap
WrapW
-up and
d Q&A
O tl k – Where
Outlook
Wh
Are
A We?
W ?
 The future of the U.S. p
pulp
p and paper
p p industry
y is a p
point of
extensive debate within management circles
 Some believe the industry has begun a longlong-term decline and
will
ill ffollow
ll
in
i the
th path
th off U.S.
U S steel
t l and
d textiles
t til -- Others
Oth
believe it will restructure and reassert itself
 True U.S. industry path is not clear -- degree to which U.S.
demand returns, and U.S. capacity fulfills the demand -when overall economy improves will be a good early indicator
of the industry
industry’s
s fate
U.S. industry is plagued with overover-capacity, weak
pricing, poor cash flows & dismal returns
returns..
Capacity actually contracted in 2001 and 2002.
2002.
3
O tl k -- Where
Outlook
Wh
Are
A We?
W ?
Despite bleak situation -- rebounding U.S. pulp & paper
demand, closure of unviable facilities, weaker U.S. dollar &
improving overall economic conditions expected to drive
U.S. industry performance improvements starting in 2003
2003..
 Further, U.S. industry’s capacity will begin to grow again
through productivity improvements
improvements, equipment upgrades and
replacements. Net impact -- increase in investment beginning
in 2004
 Scenario has two significant risks – prolonged overall
economic downturn and / or greater than anticipated
substitution of U.S. produced pulp and paper by international
competitors or non
non--fiber based products
4
O tl k – Industry
Outlook
I d t Performance
P f
 Creating
g shareholder value is the goal
g
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 has,
not attracted capital investment
 Performance
P f
has
h followed
f ll
d excess capacity
it and
d pricing
i i
 However, total shareholder returns have held up better than
some standard industry benchmarks
benchmarks.
Industry performance and shareholder returns are
poised for a rebound if the economy improves and
capacity constraint is maintained
maintained..
5
O tl k – Industry Performance
Outlook
Return & C
Cost of Capital
20%
ROTC = 7% vs.
11% Cost of Capital
15%
10%
5%
0%
1975
1978
1981
1984
1987
1990
Return On Total Capital
6
1993
1996
1999 2002F 2005F
Cost of Capital
Returns Have
Been 4 Points
B l
Below
T
Targett -Rational
Investors Will
Not Allocate
Capital To The
Poorly
Performing U.S.
Pulp & Paper
I d t
Industry
O tl k – Industry Performance
Outlook
9.0%
8.1%
8.0%
8.0%
Return on Total Capital
7.0%
7.8%
6.9%
6.5%
6 2%
6.2%
6.1%
6.0%
6.1%
6.4%
5.4%
5.7%
6 8%
6.8%
5.9%
6.0%
5.4%
5.0%
5.0%
4.6%
4.5%
4.0%
4.4%
3.9%
3.3%
3.0%
2.9%
2.0%
1.0%
0.0%
1996
1997
1998
1999
2000
Europe
7
2001 2002F 2003F 2004F 2005F 2006F
U.S.
E
European
Pulp & Paper
Company
p y
Returns Are
1.5--2.0
1.5
Points Better
Than The
U.S. – But
Still Below
B l
The Cost of
Capital
O tl k – Industry
Outlook
I d t Performance
P f
But Weighted
g
Shareholder Returns Outpaced
p
S&P 500
Period
DJI
S&P 500
P&FP
Avg.
P&FP W.
Avg
1988--1997
1988
15.1%
12.2%
10.3%
12.9%
Outperformed S&P 500
1998--2000
1998
10.9%
12.3%
0.5%
5.1%
Underperformed
2001- Sept
200111, 2001
-23.2%
-26.2%
-3.2%
-9.4%
Outperformed
PostP t-Sept
Post
S t 11
-9.7%
9 7%
-25.3%
25 3%
-4.5%
4 5%
-6.0%
6 0%
O t
Outperformed
f
d
1988 – Sept.
2002
10.1%
6.8%
6.4%
8.6%
Outperformed S&P 500
8
Based on total shareholder returns of 18 largest publicly traded pulp and
paper companies (does not include P&G or KC)
Comment
O tl k – Industry Performance
Outlook
Total Shareholder Returns Outpaced S&P 500
‘88-’97 Matched S&P
‘88500: Two Industry
y
Peaks & Troughs
500
Total Return IIndex
T
400
‘98-2000 Underperformed:
‘98Persistent overover-capacity,
tech & telecom bubble
300
200
’01
01--’02
01
02 Outperformed:
Recession, capacity
constraint, tech/telecom
bubble burst, 99-11, back
to basics
100
0
'88
9
'89
'90
'91
'92
S&P Return Index
'93
'94
'95
'96
'97
P&FP Company Avg.
'98
'99
'00
'01
'02
P&FP Company W. Avg.
O tl k – Industry
Outlook
I d t Performance
P f
Total Shareholder Returns Underperformed DJI
700
600
Total Return Index
500
400
300
200
100
0
'88
10
'89
'90
'91
'92
Dow Jones Industrial Index
'93
'94
'95
'96
'97
P&FP Company Avg.
'98
'99
'00
'01
'02
P&FP Company W. Avg.
O tl k – Industry
Outlook
I d t Performance
P f
Overall:
 U.S. industry financial performance has been poor on an
absolute basis and persistently weak in the late 90’s through
today
 Total shareholder returns have been respectable on an a
weighted average basis – poor on average.
average
 Investor expectations are down across the board but stronger
for p
pulp
p and paper
p p than the overall market
 The economy, supply & demand and industry management will
make the difference in shortshort- to mid
mid--term future performance.
11
O tl k -- The
Outlook
Th Economy
E
Line Item
12
2002
2003
2003--2006
U.S. Real GDP
Growth
1.5%--2.8%
1.5%
2.5%2.5%-4.0%
U.S. Inflation
(GDP Deflator)
1.5%--2.0%
1.5%
2.0%2.0%-3.0%
European
Real GDP
Growth
2.0%--2.5%
2.0%
European
Inflation (GDP
Deflator)
1.5%--2.0%
1.5%
2.0%2.0%-3.0%
The Overall
Economic
Forecast Calls
For A Gradual
Recovery
-- Risk of a
“Double
Double Dip
Dip”
Recession
Persists
e s sts --
O tl k -- The
Outlook
Th Economy
E
1999- 2000
1999Real Growth
2000--02
2000
Real
Growth
Food & Beverage Mfg. Boxboard
+5%
+2%
Restaurants & Hotels
Boxboard, Tissue
+6%
+5%
General
Manufacturing
Containerboard
+10%
-5%
Office & Computing
P&W Papers
Papers,
Containerboard
+75%
0%
Electric Appliances &
House Wares
Boxboard,
Containerboard
+11%
-5%
Business Services
P&W Papers
+9%
+6%
Publishing & Printing
P&W Papers, Newsprint
+4%
-13%
Construction
Tissue, Forest Products
+1%
-1%
Household Formation
/ Starts
Tissue
-3%
+3%
Economic Segment
13
Industry Segment
Impacted
North
American
Pulp &
Paper
Demand
Growth
Drivers
Have
Stalled
O tl k -- The Economy
Outlook
Pulp & Paper
Segment
Return To
Trajectory
Boxboard
2005 / 2006
Containerboard
2004 / 2005
Newsprint
N
i t
2006
P&W Papers
2003
Tissue
2003
Pulp
Forest Products
14
2004 / 2005
2004
It Will Take
Several Years
For These
Economic
Segments To
Push Pulp &
Paper Demand
Back To Their
Pre--Recession
Pre
Trajectories
O tl k -- Grade
Outlook
Grade--by
by--Grade Discussion
 North American Market
 NA Boxboard
 NA Containerboard
 NA Newsprint
 NA Printing & Writing Papers
 NA Market Pulp
 NA Tissue
15
O tl k -- N. Am. Market Overview
Outlook
 Weakness in demand drivers just reviewed is
expected to improve 2003 - 2006
 However,
However weak downstream demand 2001 - 2002
plus a range of competitive factors has resulted in
significant excess capacity
 This excess capacity has, in turn, undermined pulp
& paper prices
The net result is persistent poor, but improving
performance, in the North American pulp & paper
industry during the outlook period
period..
16
O tl k -- N.
Outlook
N A
Am. M
Market
k tO
Overview
i
 The North American Pulp
p and Paper
p industry
y is a mature
web of businesses generally characterized by:






Highest per capita consumption in world across all grades
Slower growth than real GDP
High capital intensity
Cost and price based competition
B l
Below
costt off capital
it l returns
t
Cyclical pricing and profitability. . . . .
Historically, the N. American industry has expanded after
each cyclical peak
peak.. Excess capacity has then been pushed
onto international markets – This pattern may be changing.
changing.
17
O tl k -- N.
Outlook
N A
Am. M
Market
k tO
Overview
i
 However -- combination of a strong dollar, maturing
domestic demand, poor returns, unifying European markets
and aggressive industry growth in developing regions, like
Asia & Latin America,
America have interrupted this growth pattern
 The North American Industry did not recognize this
competitive landscape change until the mid 1990s
 The Industry continued to behave as it did in the past investing available cash in new capacity in the late 1980’s
and early 1990s
 This new capacity was reliant on increasingly competitive
export markets to maintain volume. Simultaneously,
developing regions began to aggressively export back to
North America
18
O tl k -- N.
Outlook
N A
Am. M
Market
k tO
Overview
i
The result has been persistent overover-capacity,
globalization of markets and, as a result,
sustained weak pricing and profitability
I response, the
In
th North
N th American
A
i
i d t is
industry
i restructuring
t
t i
t
to
better compete in the changing global market -- and was
poised for greater profitability & increased capital spending
going
i
i
into
2000..
2000
H
However,
the
h subsequent
b
2001//2002
2001
recession undermined this position.
position.
19
O tl k -- N.
Outlook
N A
Am. M
Market
k tO
Overview
i
Grade Segment
Change In Capacity
(Short Tons -- 000s)
2000--2002
2000
2003
2003--2006
Boxboard
-220
-25
Containerboard
-925
1,325
-1,215
-350
-700
2,165
590
475
Pulp
-2,410
-505
Total Change
-4,880
4 880
3,085
3 085
Newsprint
Printing & Writing
Tissue
20
The net effect is a
decline in North
American p
pulp
p&
paper capacity
through 2002 with
growth through
g
g
“creep” through
2006.. Several
2006
scenarios are
possible where net
capacity reductions
will continue
O tlook – N.
Outlook
N A
Am. B
Boxboard
b
d
Boxboard is one of weakest overall segments in North America
 Slow growth in industries that consume boxboard, increased
competition from overseas producers and widespread
substitution by plastics and alternative packaging materials has
hurt producers
 Profitability/returns are better than industry average despite
th
these
poor fundamentals
f d
t l due
d to
t a relatively
l ti l concentrated
t t d
supply base – But, Facility closures and over
over--capacity persist
Implications:
Implications
p
: Don’t expect
p
significant
g
expansion
p
any
y time
soon.. Expect more closures, productivity and product
soon
improvement initiatives.
initiatives. Continued net declines in
capacity are possible
possible..
21
O tl k – N. Am. Boxboard
Outlook
19 000
19,000
Boxboard Volum
B
me (Short Tons 0
000s)
18,000
17,000
16,000
15,000
14,000
13,000
12,000
1990
1992
1994
NA Demand
22
1996
1998
NA Capacity
2000
2002
Total Shipments
2004
2006
N A
N.
Am.
Boxboard
Demand
Shipments
and
Capacity
Have Fallen
Three Years
In A Row –
Recovery
Likely To Be
Slow
3,000
25.0%
2,760
2,500
20.0%
2,010
2,000
15.5%
15.0%
1,451
1,500
1,350 1,310
1,408
11.2%
1,200
1 330
1,330
10.0%
1,000
9.0%
8.3%
790
8.6%
810
850
810
770
8.3%
660
8.0%
775
675
7.4%
490
500
5.1% 5.0%
5.0%
5.0%
5
0%
3.8%
4 5%
4.4% 4.5%
4.4%
3.8%
3.0%
0
0.0%
1990
1992
1994
1996
Excess Capacity
23
1998
2000
2002
2004
% Excess Capacity
2006
Boxboard - % Excess Capacity
y
Boxbo
oard - Excess C
Capacity (Shorrt Tons 000s)
O tl k – N. Am. Boxboard
Outlook
N. Am.
Boxboard Is
St
Struggling
li
With
Significant
Overcapacity
Which Will
Require
Additi
Additional
l
Rationalization
O tl k – N. Am. Boxboard
Outlook
$1,200
SBS
S 15 point Pric
ce ($ Short Ton)
$1,100
$1,000
$900
$800
$700
$600
$
$500
$400
1990
1992
1994
1996
Real Price ($2001)
24
1998
2000
2002
Nominal Price
2004
2006
N. Am.
Boxboard
Prices Are
Near
Historic
Lows But
Will
Improve
By 2004
O tl k – N. Am. Containerboard
Outlook
This segment
g
is undergoing
g
g significant
g
restructuring
restructuring:
g:
 Concentration of top producers has gone from one of the
lowest to highest in the industry – improved capacity
utilization and expansion discipline has followed
 Further acquisitions by large players will be difficult
 However, N Am. producers have lost export market to new
overseas capacity, especially in China and Germany
 Profitability and returns are lower than industry average
 Slack capacity absorbed quickly with improved economy
Implications: No major expansions. Expect more
closures & some asset quality initiatives
initiatives.
Producers spend minimal capital.
25
O tl k – N. Am. Containerboard
Outlook
Containerboard Volu
ume (Short Ton
ns 000s)
40,000
N. Am.
Containerboard
Demand Has
Improved In
2002 –
Significant
Blocks Of
Capacity
p
y Were
Retired Between
1998 and 2002
37,500
35,000
32,500
30,000
27,500
25,000
22,500
20,000
1990
1992
1994
1996
NA Demand
26
1998
2000
2002
NA Capacity
2004
2006
O tl k – N. Am. Containerboard
Outlook
25%
4,446
4,500
4,000
20%
3,777
,
3,301
3,500
2,881
3,000
12%
2,500
1,574
1,485
1,317
6%
10%
9%
7%
6%
6%
5%
4%
500
8%
7%
6%
5%
10%
1,520
849
1 000
1,000
2,406
2,368
2,000
2,104
2,025
2
025 2,077
2 077
1 347
1,347
2 054
2,054
1,500
15%
2,671
6%
6%
%
5%
4%
3%
0
0%
1990
1992
1994
1996
Excess Capacity
27
1998
2000
2002
2004
% Excess Capacity
2006
Co
ontainerboard - % Excess Ca
apacity
Conta
ainerboard - Ex
xcess Capacity
y (ST 000s)
5 000
5,000
N. Am.
Container-Container
board’s
Excess
Capacity
Is Coming
Back In
Line
O tl k – N. Am. Containerboard
Outlook
Line
erboard 42 lb. P
Price ($ Short T
Ton)
600
500
400
300
200
100
1990
1992
1994
1996
Real Price ($2001)
28
1998
2000
2002
Nominal Price
2004
2006
N. Am. Capacity
Reductions
Helped
Containerboard
Producers
Maintain Prices
– Will Facilitate
Price Increases
Going Forward
O tl k – N. Am. Newsprint
Outlook
Newsprint is the weakest overall industry segment
 Short
Short--term publishing and printing declines have been
exacerbated by
y substitution to alternative media
 National and local papers continue to reduce page size
 Newsprint is in decline in the longlong-term
 Opportunities for further consolidation exist and
significant capacity reductions will continue
Implications: Rational players will spend a
Implications:
minimum of capital
capital.. No new Newsprint mills are
likely to ever be built in North America
America..
29
News
sprint Volume (Metric Tons 000s)
O tl k – N. Am. Newsprint
Outlook
17,500
15,000
12,500
10,000
1990
1992
1994
NA Demand
30
1996
1998
2000
NA Capacity
2002
2004
Total Shipments
2006
N A
N.
Am.
Newsprint
Is A
Declining
Segment In
L
LongLong
-Term
T
– But A
Recovery
y
From 2002
Lows Is
Expected
O tl k – N. Am. Newsprint
Outlook
3 500
3,500
35%
3,000
30%
2,500
25%
21%
2,000
20%
1,817
1,631 1,069
610
1,626
454
1,396
1,500
1 354
1,354
1,123
1,163
11%
961
1,000
10%
553
500
6%
4%
10%
7%
8%
6%
5%
4%
1992
9%
9% 755
1994
5%
5%
3%
3%
0
1990
15%
13%
10%
809
598
1996
1998
Excess Capacity
31
2,035
2000
0%
2002
2004
% Excess Capacity
2006
Newsprint - % Excess Capa
N
acity
Newsprint - Excess
s Capacity (Me
etric Tons
000s)
0
3,164
E
Excess
N A
N.
Am.
Capacity
Persists
Despite
Significant
Facility
Closures –
Supply &
D
Demand
d Will
Balance By
2004
O tl k – N. Am. Newsprint
Outlook
$800
Newsprint ($
$ Metric Ton)
$700
$600
$500
$400
$300
1990
1992
1994
1996
Real Price ($2001)
32
1998
2000
2002
Nominal Price
2004
2006
Newsprint
p
Is At
Historic
Low
Prices –
Weak End
End-User
Demand
Will
Dampen
Price
Increases
O tl k – N. Am. P&W Papers
Outlook
Recent economic slowdown & alternative media substitution
have impacted P&W demand negatively:
 Uncompetitive capacity being closed & modest demand
increases will tend to reign in excess capacity
 CF, CGW, UCF & GW Grades seemingly collapsing into one
relatively
y interinter-changeable/somewhat
g
flexible grade
g
structure from consumers’ perspectives
 In this context -- CF quickly becoming commoditized -di l
displaced
d by
b improved
i
d CGW grades
d
Implications: Significant repositioning and
Implications:
redeployment
p y
of assets – continued M&A &
financial constraints.
constraints.
33
O tl k – N. Am. P&W Papers (cont.)
Outlook
I addition
In
dditi
-- high
hi h end
d uses -- auto
t b
brochures/annual
h
/
l reports
t -are being replaced by website versions

High volume UCF 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: Certain segments will suffer net capacity
Implications:
reductions..
reductions
34
O tl k – N. Am. P&W Papers
Outlook
N. Am. P&W
Demand &
Capacity
Contracted
Between
2000 and
2002 – A
Moderate
Recovery Will
Begin In 2003
P&
&W Volume (Sh
hort Tons 000s
s)
43,500
41 000
41,000
38,500
36,000
33,500
31,000
28,500
26,000
1990
1992
1994
1996
NA Demand
35
1998
2000
2002
NA Capacity
2004
2006
O tl k – N. Am. P&W Papers
Outlook
25%
5,610
5,000
20%
4,387
4,187
4,116
4,000
15%
3,208
3,059
12%
3,000
14%
2,498
3,352
2,258
2,701
2,732
2,832
2 745
2,745
2,004
10%
2,636
11%
1,191
2,000
2,197
11%
8%
8%
8%
7%
7%
6%
1,000
7%
%
7%
7%
5%
5%
5%
3%
0
0%
1990
1992
1994
1996
Excess Capacity
36
10%
1998
2000
2002
2004
% Excess Capacity
2006
P&W - % Exc
cess Capacity
y
P&W - Excess Capac
city (Short Tons 000s)
6,000
Significant
N Am
N.
Am.
P&W Over
Over-capacity
Will
Dissipate
By 2004
O tl k – N. Am. P&W Papers
Outlook
1 600
1,600
Real Prices ($
$2001 - Shortt Ton)
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
1990
1992
1994
1996
1998
CFS N
No. 3 60lb
60lb.
UCFS No. 4 Xerocopy
37
2000
2002
UCGW Average
A
CGW No. 4 50lb.
2004
2006
N. Am.
P&W Real
Pricing Is
At
Historically
y
Low Levels
– Grade
Prices
Have
Converged
g
O tl k – N. Am. P&W Papers
Outlook
1300
N. Am.
P&W
Nominal
Prices
Will
Improve
I 2003 &
In
2004
No
ominal Prices
s ($ per Short Ton)
1200
1100
1000
900
800
700
600
500
400
1990
1992
1994
1996
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
38
1998
2000
2002
UCGW Average
CGW No. 4 50lb.
2004
2006
O tl k – N. Am. Market Pulp
Outlook
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 U.S.
 Deinked pulps relatively more financially attractive than virgin
pulps
Implications: Some capital to be spent on integrated DIP
Implications:
facilities.. Virgin pulp mill investments only if forced for
facilities
maintenance & environmental p
purposes.
purposes
p
.
39
Market + Inttegrated Pulp Volume (Metrric Tons 000s)
O tl k – N. Am. Market Pulp
Outlook
92,500
90,000
87,500
85,000
NA Pulp
Follows
Other
Grades
82,500
80,000
77,500
75,000
72,500
70,000
67,500
65,000
1990
1992
1994
NA Demand
40
1996
1998
NA Capacity
2000
2002
Total Shipments
2004
2006
O tl k – N. Am. Market Pulp
Outlook
25%
10,834
10,575
10,000
20%
8,824
7,954
7,727 7,603
8,000
7,234
7,170
6,432
6,695
15%
5,909
5,815
12%
6,000
5,455
5,333
6 154
6,154
5,293
4,344
12%
9%
4,000
10%
9%
9%
10%
8%
8%
8%
7%
6%
2 000
2,000
7%
6%
6%
7%
7%
0
0%
1990
1992
1994
1996
Excess Capacity
41
5%
5%
1998
2000
2002
2004
% Excess Capacity
2006
Pulp - % Ex
xcess Capacity
Market + Integ. Pulp - Excess Capac
city (Metric
Tons
s 000s)
12,000
Excess N.
Am. Pulp
Capacity
Will Be
Eliminated
By Rebound
In Demand
& Closure
of Capacity
O tl k – N. Am. Market Pulp
Outlook
1,100
NBSKP Deliv. To U.S. ($ Metrric)
1,000
900
800
700
600
500
400
300
200
1990
1992
1994
1996
Real Price ($2001)
42
1998
2000
2002
Nominal Price
2004
2006
Market Pulp
p
Prices Will
Rise As
Excess
Capacity Is
Made
Productive –
But the
Fundamentals
are Still Not
Strong Going
Forward
O tl k – N. Am. Tissue
Outlook
Tissue is strongest overall segment in North America:
 End
End--product demand is mature (Americans highest per
per-capita consumers in world & incremental demand is slow)
 Demand is off in 2002 and excess capacity is building
 However, overall company financial returns less sensitive to
supply
pp y / demand dynamics
y
at mill level than other g
grades
 Regulatory considerations will limit large M&A activity
 Both technology changes and new entrepreneurial entrants
will
ill drive
d i spending
di
Implications: Segment may be losing some luster, but
Implications:
expansion
p
& upgrades
pg
will continue to lead the industry.
industry
y.
43
O tl k – N. Am. Tissue
Outlook
Tiss
sue Volume (S
Short Tons 000s)
10,000
N. Am. Tissue
Experiencing
p
g
A Rare Drop
In Demand In
2002 -- But
Will Resume
Growth In
2003
9,000
,
8,000
7,000
6,000
5,000
1990
1992
1994
1996
US Demand
44
1998
2000
2002
US Capacity
2004
2006
O tl k – N. Am. Tissue
Outlook
1,000
25%
900
776
800
777
20%
736
676
700
565 565
600
554
592
495
500
550
433
11%
301
384
288
400
10%
10%
300
10%
11%
9%
8%
9%
8%
7%
200
100
15%
518
7%
7%
6%
6%
5%
4%
6%
4%
0
0%
1990
1992
1994
1996
Excess Capacity
45
5%
1998
2000
2002
2004
% Excess Capacity
2006
Tissue - % Ex
xcess Capacitty
Tissue - Excess Capa
acity (Short To
ons 000s)
939
876
Excess
Tissue
Capacity
Will Build
B ild
In N. Am.
Through
2004
Before
Coming
Back In
Balance
O
Outlook
-- European Market - Quick Look
Grade Segment
Change
g In Capacity
p
y
(Metric Tons -- 000s)
2003--2006
2003
2000--2002
2000
Boxboard
1,070
1,345
Containerboard
3,545
4,275
Newsprint
1,145
990
Printing & Writing
4,810
4,495
Tissue
Pulp
695
4,260
1,010
0
15,525
12,115
Total Change
The European
p
Comparative Data
Indicates a
Continued
Expansion Through
2006 -- but at a
S
Slower
Rate Than
the Last Three
Years
European market fundamentals resemble U.S. Market in 70
70s
s&
80s
80
s U.S. market.
market.
Significant risk of over
over--expansion and
weakening financial fundamentals may delay expansion
expansion..
46
U S IIndustry
U.S.
d t -- Spending
History Issues,
History,
Issues and Directions - Capital Spending – Overview & Outlook
 Profitability & Capital Turnover
 ROTC Versus Cost of Capital
p
 Debt Levels
 Production Capacity Expectations
 Capital Spending/Depreciation
 Capital Spending Level
47
U S IIndustry
U.S.
d t -- Capital Spending
U S capital expenditures will continue to be depressed by
U.S.
poor financial performance & slowing of capacity growth:
 M&A crowded out CAPEX on PPE last 5 years -- Should
ease within largest firms -- antitrust constraints
 However, asset swaps & businessbusiness-line spinspin-offs likely to
accelerate + secondsecond-tier p
players
y
consolidation
 There is risk that unexpected international acquisitions
activity will interrupt capital spending patterns
Overall, net M&A impact should be better (less impacting) for
CAPEX than the last 5 years – but not enough to offset weak
investment fundamentals
fundamentals..
48
U S IIndustry
U.S.
d t -- Capital
C it l Spending
S
di
The combination of economic,, pulp
p p and paper
p p market,, and
financial / investment realities drove U.S. capital
expenditures down from $8 billion in 2000 to $7 billion in
2001:
 2002 capital expenditures will fall again to $6 billion and
cycle between $6.0 billion and $8.5 billion through 2006
 These historical trends and projections are summarized
in the following table and graphs
Converting CAPEX has been relatively consistent.
consistent. Pulp, Paper
Plant and Equipment CAPEX has been the most variable.
variable.
49
U S IIndustry
U.S.
d t -- Capital
C it l Spending
S
di
Capital Expenditures (CAPEX) On Pulp & Paper
Property, Plant & Equipment (Nominal $ Millions)
1999
2000
2001P
2002F
2003F
2004F
2005F
2006F
7,050
8,145
6,905
5,870
6,000
7,400
8,510
7,300
Expected –
High
6,165
6,900
8,510
9,787
8,395
Expected –
Low
5,575
5,100
6,290
7,234
6,205
Expected
Expenditures
Primary
Pulp & Paper
4,470
5,165
4,380
3,795
3,820
4,715
5,430
4,665
Converting
2,580
2 580
2,980
2 980
2,530
2 530
2,075
2 075
2,180
2 180
2,685
2 685
3,080
3 080
2,635
2 635
50
U.S. Industry -- Profitability & Capital Turnover
15%
180%
Net Operating Profit Marrgin
13%
140%
10%
120%
100%
8%
80%
60%
5%
40%
3%
20%
0%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002F 2005F
Net Operating Profit Margin
51
Sales / Invested Capital Ratio
Sales To Inve
ested Capital Ratio
160%
U.S. Pulp &
Paper
Capital
T
Turnover
Will
Continue Its
Downward
Trend
Profitability
Will Improve
/ Stabilize
U S IIndustry
U.S.
d t -- Debt Levels
70%
Debt To C
Capital Ratio
60%
50%
40%
30%
20%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002F 2005F
Debt % of Invested Capital
52
U.S.
Companies
Are Making
Debt
Reduction A
Priority – But
Debt Levels
Are Still
Constraining
g
Needed
Business
Investments
U.S. Industry -- European Relative Debt Level
60%
Debt To C
Capital Ratio
55%
50%
45%
43%
43%
44%
43%
40%
40%
43%
41%
39%
39%
37%
37%
35%
30%
1996 1997 1998 1999 2000 2001 2002F 2003F 2004F 2005F 2006F
Sales To Capital Ratio
53
The
European
D bt Burden
Debt
B d
Is Lower
Than For the
U.S. And Will
Support
Future
Capital
Spending
U.S. Industry – Production Capacity Expectations
4,500
3,750
Short Tons - 000s
3,000
2,250
1,500
750
(750)
(1,500)
(2,250)
(3,000)
1976
1979
1982
1985
1988
1991
1994
1997
Change In Capacity (Tons)
54
2000 2003F 2006F
T t l U.S.
Total
US
Paper &
Board
Capacity
Will
Resume
Growth
– But At
1/2 It
Its
Historical
Rate --
U.S. Industry -- Capital Spending/Depreciation
Capita
al Expenditure
es % of Deprec
ciation
275%
U.S. Capital
E
Expenditures
dit
Will Remain
Significantly
Below
Depreciation
Levels
l
250%
225%
200%
175%
150%
125%
100%
75%
50%
25%
0%
1975
1978
1981
1984
1987
1990
1993
1996
Capex % of Depreciation
55
1999 2002F 2005F
U.S. R
Real Capital Ex
xpenditures ($2
2001 - Millions))
U S IIndustry
U.S.
d t -- Capital Spending Level
15 000
15,000
12,500
10,000
7,500
5,000
2,500
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002F 2005F
Total
56
Primary Pulp & Paper
Converting
Real U.S.
U S Pulp
& Paper
Capital
Expenditures
Will Continue
To Languish
Until The
Cyclical
Recovery
Circa 2003 /
2004
U.S. Industry -- Investment Decisions’ Drivers
Attractive
tt act e oppo
opportunities
tu t es = More
o e Likely
e y to Invest
est
 Strong ROTC = Proven capability to identify/execute
value creating projects/more likely to attract & invest
capital than poor performers.
 Good Outlook Product Mix = More likely to invest (i.e.
ti
tissue,
selected
l t d P&W) th
than poorly
l performing
f
i
segments (i.e. boxboard, containerboard, newsprint,
market pulp)
 Geographic Mix = Firms in Higher growth geographic
markets (i.e. Europe, Asia & Latin America) more likely
t invest
to
i
t than
th U.S.
U S and
d Canadian
C
di focused
f
d players.
l
57
U.S. Industry -- Investment Decisions’ Drivers
Greater Capital Availability = More Likely to
Invest
 Debt
Debt--To
To--Capital Ratio = High debt % -- the more
likely to divert cash to lower debt instead for
capital expenditures
 Cash Flow Available For Reinvestment = More
cash generated by operations, the more capital
typically invested in the business
58
O tl k – Summary, WrapOutlook
Wrap-up and Q&A
 The
Th U.S.
US P
Paper IIndustry
d t Continues
C ti
to
t Struggle
St
l
 CEOs are under intense pressure
 Performance is lagging
 Capacity excesses still exist
 Substitution (imports & alternative products to meet
consumers needs)
d ) is
i an every presentt issue
i
 Balance sheets are out of balance
 Reinvestment in revenue generation steps is lagging
 The competitive landscape is Intense
 The Global Market Place & Competitive Arena is
U
Upon
us . . . B
Butt . . .
59
B tR
But
Remember
b ....
I Spite
In
S it off the
th Current
C
t Industry
I d t
State of Affairs -- As that Famous
A
Arm
Ch
Chair
i Philosopher
Phil
h Ziggy
Zi
Once
O
Said . . . .
“You can Complain Because
Roses have Thorns, or you can
Rejoice Because Thorns have
Roses”
60
Acknowledgment Is Made to Jacobs Consultancy
for the Data Utilized in This Presentation Package
Package..