Global Uncertainties Can Affect Stability of Credit Quality in Forest Products Industry Investor Presentation (Brazil) Tobias Crabtree, CFA Associate Director, Corporate Ratings March 2012 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2012 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Global Forest Products Ratings Outlook Dispersion Outlook Distribution (All Issuers) Stable 71% Outlook Distribution (Non-Investment Grade) Stable 60% Positive & C.W. Pos 6% Negative & C.W. Neg 23% Positive & C.W. Pos 8% Negative & C.W. Neg 32% • Rating outlooks mostly stable for the 55 publicly rated entities • All of the 15 investment-grade issuers have stable rating outlooks • Downgrades could outpace upgrades for non-investment grade issuers – 32% of non-investment grade issuers have negative ratings outlooks or CreditWatch negative placements Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 2. Baseline Economic Scenario • Sluggish economic growth in the U.S. – Real GDP growth of 2.1% in 2012 and 2.3% in 2013 – Cautious consumer spending outlook – Total housing starts of 730,000 in 2012 & 990,000 in 2013 • Recession in the Eurozone during the first half of 2012 – Eurozone should gradually climb out of its mild recession in second half of 2012 – Real GDP growth of 0% in 2012 and 1% in 2013 • China growing at a slower pace – Real GDP growth of 8% in 2012, compared to 9.5% in 2011 • We expect input cost inflation to be less of a headwind than in 2011 – Near-term decreases in pulp & recycled fiber costs – Higher chemical and petroleum-based input costs Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 3. Just How Stable Is Credit Quality? • Most issuers’ financial performance has strengthened post 2008 • Demand risks – Differs by forest products subsectors • Supply risks – New supply additions are targeting growth in Asia and Latin America • Regional differences in our rating outlooks – Recession in Eurozone – Depressed housing market conditions in the U.S. – Slowing growth in China – Significant potential capital expansions in Latin America • Key risks to our rating outlooks Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 4. Most Issuers’ Financial Performance Has Strengthened Post 2008 • Cash flow from operations has recovered post 2008/2009 recession – Potentially lower 2012 free cash flow as capital expenditures, acquisitions & shareholder rewards increase from 2011 levels • Most companies should have “strong” or “adequate” liquidity – Companies have strengthened their balance sheets to withstand systemic shocks & cautious demand environment – We view refinancing risk over the next 2 years as manageable • Nine issuers have “less than adequate” or “weak” liquidity – Concentrated in the ‘CCC’ rating category due to potential covenant breaches or default risk Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 5. Demand Risks Differ By Forest Products Subsectors • Food & beverage packaging and tissue paper sectors relatively more stable even under a recession scenario – Food & beverage packaging segments less susceptible to a recession scenario – Tissue demand driven more by economic and demographic growth • GDP growth-driven sectors could see some pricing pressure – Containerboard, paper-based packaging would likely see modest demand declines with potential for pricing pressure • Secular demand decline for printing & writing papers could accelerate – We believe North American & European printing and writing paper demand is most vulnerable to a recession with the potential for double-digit declines • Pulp markets driven mostly by global demand – A “hard landing” in China could pressure global pulp pricing • A limited improvement in U.S. housing could negatively affect ratings on wood products companies Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 6. Demand Risks Differ By Forest Products Subsectors U.S. & Canadian Forest Products Sector Outlook By Product Type For The Next 12 Months Vs. The Past 12 Months Product Uses Demand Pulp Broad range, including tissue, Neutral freesheet paper, specialty papers Supply Unfavorable Pricing Unfavorable Containerboard & Corrugated Products Packaging containers (i.e., "brown boxes") Neutral Neutral Neutral Bleached paperboard (SBS) Boxes/cartons/cups/paper plates for food & consumer products; Packaging containers Boxes/cartons for food & consumer products; Packaging containers Neutral Neutral Neutral Neutral Neutral Neutral Unfavorable Neutral Neutral Coated groundwood (CGW) Commercial printing, direct mail, brochures, annual reports, magazines, catalogs Magazines, catalogs, books, inserts, coupons, direct mail Unfavorable Favorable Neutral Uncoated freesheet (UFS) Forms, envelopes, printing paper, office copy paper Slightly unfavorable Neutral Neutral Newsprint Newspapers Unfavorable Neutral Neutral Tissue Tissues, paper towels Favorable Slightly unfavorable Favorable Wood products Logs - housing construction & pulp for paper mills; Lumber/Panels - housing construction Slightly favorable Slightly favorable Neutral Recycled paperboard (CRB) Coated freesheet (CFS) Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 7. Supply Risks • Consolidation in North America & Europe supports supply-side discipline – North American containerboard largely consolidated following significant M&A activity in 2011 – Printing and writing papers in North America largely consolidated and supply is expected to be balanced with demand over the near-term • New capacity additions occurring in China and Latin America – China adding significant new paperboard and paper capacity – Latin America expansions target its low-cost advantage in pulp – New capacity additions in North America limited to tissue and specialty pulp Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 8. Regional Differences In Our Ratings Outlooks Outlook Distribution (All Issuers) Stable 71% Positive & C.W. Pos 6% Outlook Distribution (U.S. & Canada) Stable 70% Negative & C.W. Neg 23% Negative & C.W. Neg 23% Outlook Distribution (EMEA) Stable 80% Positive & C.W. Pos 7% Outlook Distribution Stable (Latin America) 86% Positive & C.W. Pos 10% Negative & C.W. Neg 10% Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 9. Negative & C.W. Neg 14% Key Risks To Our Rating Outlooks • Double-dip economic scenario resulting in reduced demand, pricing & profitability – Would expect real GDP to decline 0.2% in U.S. & 2% in Eurozone • Rise in input costs not able to be offset with price increases • Pricing deterioration due to supply additions • More aggressive financial policies (i.e., increased shareholder rewards and acquisitions) • Stagnant U.S. housing starts into the 2013 building season • Global macro events (i.e., Euro banks) could have negative impact on consumer confidence and demand • Downgrade pressure more likely to occur for non-investment grade issuers & wood products focused companies Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 10. Appendices Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 11. Global Forest Products Ratings Distribution 8 7 6 # of Issuers 5 4 3 2 1 0 A- BBB+ BBB BBB- BB+ BB BB- B+ Rating Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 12. B B- CCC+ or below 70%+ Of Forest Products Issuers Are Non-Investment Grade Ratings Category Distribution (Overall) Ratings Category Distribution (U.S. & Canada) BB 35% A 2% A 2% D 4% CCC 5% BB 36% BBB 29% BBB 27% D 4% B 27% B 29% Ratings Category Distribution (EMEA) BB 40% BBB 30% Ratings Category Distribution (Latin America) BBB 29% BB 57% B 30% B 14% Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 13. Related Criteria And Research • “Credit Themes: Prospects For U.S. And Canadian Forest Products Are Stable, But Economic Uncertainty Lingers,” Feb. 7, 2012 • “Industry Economic And Ratings Outlook: A Less Optimistic Picture For U.S. Natural Resources,” Jan. 26, 2012 • “Issuer Ranking: North American Forest Products Companies, Strongest To Weakest,” Jan. 9, 2012 • “Latin American Corporates Should Maintain Their Credit Quality Despite A Sluggish U.S. Economy And Europe’s Debt Woes—For Now,” Aug. 29, 2011 • “Key Credit Factors: Criteria For Rating The Forest Products Industry,” Dec. 11, 2009 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 14. Analysts • U.S. – Tobias Crabtree, tobias_crabtree@standardandpoors.com, (212) 438-6503 – James Fielding, james_fielding@standardandpoors.com, (212) 438-2452 • Canada – Jatinder Mall, jatinder_mall@standardandpoors.com, (416) 507-2544 • Europe – Jacob Zachrison, jacob_zachrison@standardandpoors.com, +4684405920 • Latin America – Reginaldo Takara, Reginaldo_Takara@standardandpoors.com, 55-11-3039-9740 – Luciano Gemone, Luciano_Gremone@standardandpoors.com, 54-11-4891-2143 • Asia – Brenda Wardlaw, brenda_wardlaw@standardandpoors.com, 61-3-9631-2074 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 15. www.standardandpoors.com Copyright © 2012 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. 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