state of the north american pulp & paper industry · outlook – na market overview the north...

11

State of the North American State of the North American Pulp & Paper Industry Pulp & Paper Industry –– An Update & Outlook An Update & Outlook ––

Unstable Times Unstable Times –– Problems or Opportunities?Problems or Opportunities?---- Q2 2006 DataQ2 2006 Data––

Value Resolution Group Value Resolution Group –– Dan Cenatempo AVA, CMCDan Cenatempo AVA, CMCCenter for Paper Business and Industry Studies (CPBIS) Center for Paper Business and Industry Studies (CPBIS) –– Jim McNuttJim McNutt

22

OverviewOverviewNorth American Pulp & Paper Industry North American Pulp & Paper Industry ––

An Update & OutlookAn Update & OutlookWhere are We?Where are We?How Competitive? How Competitive? The Economy?The Economy?GradeGrade--ByBy--Grade DiscussionGrade DiscussionIndustry SpendingIndustry SpendingInvestment DecisionsInvestment Decisions’’ DriversDriversWrapWrap--up and Q&Aup and Q&A

33

Outlook Outlook –– Where Are We?Where Are We?North American Paper Industry:North American Paper Industry:

Remains one of the largest world regions for paper Remains one of the largest world regions for paper consumption and enjoys significant fiber resources . . .consumption and enjoys significant fiber resources . . .Competitiveness has been boosted by weaker U.S. dollar, Competitiveness has been boosted by weaker U.S. dollar, but is being strained by aging assets . . .but is being strained by aging assets . . .Has enjoyed a moderate, cyclical upturn, but solid returns Has enjoyed a moderate, cyclical upturn, but solid returns are still lagging & are still lagging & volumes are struggling . . .volumes are struggling . . .With prices, and financial performance improving With prices, and financial performance improving moderately moderately –– maybemaybe can extend through 2006 into 2007 . . .can extend through 2006 into 2007 . . .……Many companies Many companies maymay have have –– for a timefor a time –– more resources more resources and opportunities to invest in their businesses since 1995.and opportunities to invest in their businesses since 1995.

44

Outlook Outlook –– Where Are We?Where Are We?2005 Volume Was Flat To Down 2005 Volume Was Flat To Down –– But Prices ImprovedBut Prices Improved

North American North American Grade

2005 Change In 2005 Change In NA ProductionGrade NA Production

2005 vs. 2004 2005 vs. 2004 Average PriceAverage Price

Printing & Printing & WritingWriting 0%0% +11%+11%

BoxboardBoxboard --1%1% +4%+4%

ContainerboardContainerboard --3.4%3.4% +5%+5%

NewsprintNewsprint --1.7%1.7% +19%+19%

Chemical Paper Chemical Paper Grade Pulp 0%0% +2%Grade Pulp +2%

55

Outlook Outlook –– Where Are We?Where Are We?Selected Current Prices Report Selected Current Prices Report –– Continuing to ImproveContinuing to Improve

GradeGrade DateDate LatestLatest Year AgoYear Ago % Chg% Chg

50lb UFS 50lb UFS (US$/ton)(US$/ton) 06/01/0606/01/06 865865 730730 18.5%18.5%

60lb #3 CFS60lb #3 CFS(US$/ton)(US$/ton) 06/01/0606/01/06 940940 900900 4.5%4.5%

42# Kraft Liner42# Kraft Liner(US$/ton)(US$/ton) 06/01/0606/01/06 525 525 -- 535535 425 425 -- 435435 23.3%23.3%

30lb Newsprint30lb Newsprint(US$/tonne)(US$/tonne) 06/01/0606/01/06 660660 595595 10.9%10.9%

Pulp NBSK ListPulp NBSK List(US$/tonne)(US$/tonne) 05/12/0605/12/06 690 690 -- 720720 630630 11.9%11.9%

66

Outlook Outlook –– How Competitive?How Competitive?Competitiveness Is Multidimensional:Competitiveness Is Multidimensional:

Mill Performance vs. International CompetitionMill Performance vs. International Competition(i.e. North American vs. South Am. vs. European (i.e. North American vs. South Am. vs. European vs. Asian millsvs. Asian mills’’ productivity and quality)productivity and quality)Product Performance vs. SubstitutesProduct Performance vs. Substitutes ((i.e. i.e. paperboard folding cartons vs. plastic packaging paperboard folding cartons vs. plastic packaging –– newspaper vs. TV, etc.)newspaper vs. TV, etc.)EndEnd--User Performance vs. International User Performance vs. International CompetitorsCompetitors (i.e. domestic vs. international (i.e. domestic vs. international manufacturers)manufacturers)Financial Performance vs. Other InvestmentsFinancial Performance vs. Other Investments (i.e. (i.e. returns on paper investment vs. alternatives of returns on paper investment vs. alternatives of similar risk)similar risk)

77

Outlook Outlook –– How Competitive?How Competitive?Based On These Dimensions, Industry Participants Based On These Dimensions, Industry Participants Must Recognize:Must Recognize:

OffOff--shoring and substitution by alternative mediums shoring and substitution by alternative mediums are driving longare driving long--term demand below current levelsterm demand below current levelsNorth America North America has become increasingly has become increasingly uncompetitiveuncompetitive in pulp and paper productionin pulp and paper productionThe industryThe industry’’s cost based competition and capital s cost based competition and capital rationing strategies rationing strategies have eroded its asset base.have eroded its asset base.The composite financial performance of the industry The composite financial performance of the industry has been pitiful looking back has been pitiful looking back –– and without a and without a sustained upturn will further dissuade future sustained upturn will further dissuade future investment investment –– even with the improved shorteven with the improved short--term term environment . . .environment . . .

88

Outlook Outlook –– How Competitive?How Competitive?Absent Strength of the US Dollar IssuesAbsent Strength of the US Dollar Issues –– North North

America Does Not Enjoy Low Cost Producer America Does Not Enjoy Low Cost Producer Status In Most GradesStatus In Most Grades

Grade CategoryGrade Category Low Cost Production CentersLow Cost Production Centers

BrazilBrazil,, Chile, Argentina, Indonesia Chile, Argentina, Indonesia and and CanadaCanada (selected)PulpPulp (selected)

Printing & Writing Printing & Writing Papers

BrazilBrazil,, Russia, Indonesia, Thailand, Russia, Indonesia, Thailand, Scandinavia, Western EuropePapers Scandinavia, Western Europe

Eastern Europe, Eastern Europe, BrazilBrazil,, Chile and Chile and CanadaNewsprintNewsprint Canada

Premium Folding Premium Folding Carton Grades

BrazilBrazil,, Russia, Sweden, Chile and Russia, Sweden, Chile and FinlandCarton Grades Finland

99

Outlook Outlook –– How Competitive?How Competitive?High Volume North American GradesHigh Volume North American GradesHave Significant Substitution ThreatsHave Significant Substitution Threats

Grade CategoryGrade Category SubstitutesSubstitutes

ReRe--usable shipping containers, usable shipping containers, offshoring of manufacturingContainerboardContainerboard offshoring of manufacturing

Packaging GradesPackaging Grades Flexible packaging, offshoring of Flexible packaging, offshoring of manufacturingmanufacturing

Printing & Writing Printing & Writing Papers

Electronic communications, Electronic communications, alternative advertising mediumsPapers alternative advertising mediumsElectronic communications, Electronic communications, alternative advertising mediumsNewsprintNewsprint alternative advertising mediums

TissueTissue No major substitutesNo major substitutes

1010

Outlook Outlook –– How Competitive?How Competitive?Trade Patterns Have Weakened For North American Trade Patterns Have Weakened For North American Producers In P&W, Containerboard and NewsprintProducers In P&W, Containerboard and Newsprint

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1990 1993 1996 1999 2002 2005

Shar

e (%

)

P&W Net Imports vs. DemandContainerboard Net Exports vs. CapacityNewsprint Net Exports vs. Capacity

1111

Outlook Outlook –– How Competitive?How Competitive?Substitutes, The Early 2000s Recession & International CompetitiSubstitutes, The Early 2000s Recession & International Competition on

Together Suppressed Domestic Production and ConsumptionTogether Suppressed Domestic Production and Consumption-- Off 3% to 4% in 2006 From Its 1999 Peak Off 3% to 4% in 2006 From Its 1999 Peak –– In Spite Of Modest Recent ReboundIn Spite Of Modest Recent Rebound

75,000

85,000

95,000

105,000

115,000

125,000

135,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Nor

th A

mer

ican

Pap

er &

Boa

rd (S

T 00

0s)

Domestic Consumption Total Production

1212

Outlook Outlook –– How Competitive?How Competitive?Worldwide Print Advertising Has Lost Nearly 10 Worldwide Print Advertising Has Lost Nearly 10

Points of Market Share Since 1991 Points of Market Share Since 1991 –– And And Expectations Are For This Trend to ContinueExpectations Are For This Trend to Continue

1991

Television, 33%

Radio, 8%

Print, 54%

Outdoor, 5%

Cinema, 0%E-Advertising, 0%

2002

Television, 40%

Radio, 9%

Print, 46%

Outdoor, 4%

Cinema, 0%

E-Advertising, 1%

19911991 TodayToday

1313

Outlook Outlook –– How Competitive?How Competitive?

0

5

10

15

20

25

30

1916-'20 '26-'30 '36-'40 '46-'50 '56-'60 66-'70 76-'80 85-'90 96-Present

Year of Original PM Installation

Num

ber o

f Con

tain

erbo

ared

PM

s

Economic Obsolescence (37% of PMs)

Large Share of North American Assets Are Approaching Large Share of North American Assets Are Approaching The End of Their Economic LivesThe End of Their Economic Lives

---- Containerboard Example Containerboard Example ----

1414

Outlook Outlook –– How Competitive?How Competitive?

Source: CPBIS

0

50

100

150

200

250

300

350

400

450

1890-1899

1900-1909

'10-'19 '20-'29 '30-'39 '40-'49 '50-'59 '60-'69 '70-'79 '80-'89 '90-''99

2000-'03

Num

ber o

f Pap

er M

achi

nes

North America (1,102) Europe (1,861)

Europe Is Facing Similar Demand & Competitive Issues Europe Is Facing Similar Demand & Competitive Issues –– But Has A Newer Asset Base But Has A Newer Asset Base ----

1515

Outlook Outlook –– How Competitive?How Competitive?2005 Returns 2005 Returns

Were Were Best Since Best Since 19951995 –– But Have But Have Been 4.3 Points Been 4.3 Points Below Target Below Target ––

Rational Rational InvestorsInvestors Will Will Not AllocateNot AllocateCapital To A Capital To A

Poorly Poorly Performing Performing

Industry Industry –– Key Key Question = Is Question = Is The Industry The Industry

Situation Situation Changing?

0%

5%

10%

15%

20%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 Q22005

Return On Total Capital Cost of Capital

ROTC averages 6.7% vs. 11.0% cost of capital

Changing?

1616

Outlook Outlook –– How Competitive?How Competitive?Increased Debt Levels Across Time Increased Debt Levels Across Time

Significantly Limit Investment Opportunities & FlexibilitySignificantly Limit Investment Opportunities & Flexibility

20%25%30%35%40%45%50%55%60%65%70%

1975 1979 1983 1987 1991 1995 1999 2003

Deb

t To

Cap

ital R

atio

Debt % of Invested Capital

1717

Outlook Outlook –– How Competitive?How Competitive?In essence then In essence then –– the industry has been a poor the industry has been a poor performer since the 1970s performer since the 1970s –– it faces a continually it faces a continually tough business environment tough business environment –– in spite of todayin spite of today’’s s decent upturndecent upturnAnd, as Noted And, as Noted –– the North American Pulp and Paper the North American Pulp and Paper IndustryIndustry

Is Is not the lownot the low--cost producercost producer on most grades, and on most grades, and HighHigh--volume grades have volume grades have significant substitution and significant substitution and global market place threatsglobal market place threats

Wherein Wherein –– traditional business models have been traditional business models have been stretched to the limitstretched to the limit withwith

The emergence of the The emergence of the global marketplaceglobal marketplace, and, andThe new power of rapidly moving The new power of rapidly moving knowledge and knowledge and knowledge transferknowledge transfer

1818

Outlook Outlook –– How Competitive?How Competitive?Accordingly Accordingly –– participants must learn how to participants must learn how to thrive under these often thrive under these often intense, negative, intense, negative, and rapidly changing conditionsand rapidly changing conditions

……but individual companies but individual companies cancan excel if they use the excel if they use the current short to midcurrent short to mid--term upturn to chart a new term upturn to chart a new

course looking out . . .course looking out . . .

1919

Outlook Outlook –– The Economy?The Economy?

Overall Overall Economic Economic

Growth Growth Projections Projections Do Favor Do Favor

Continued Continued Demand Demand

GrowthGrowth In The In The IndustryIndustry

Real GDP Growth By RegionReal GDP Growth By Region 20032003 20042004 20052005

3.5%3.5%

1.4%1.4%

2.4%2.4%

1.7%1.7%

3.0%3.0%

2.8%2.8%

3.1%3.1%

6.4%6.4%

5.3%5.3%

4.3%4.3%

7.8%7.8%

5.4%5.4%

4.1%4.1%

3.0%3.0%

0.5%0.5%

2.5%2.5%

2.2%2.2%

2.0%2.0%

2.4%2.4%

3.0%3.0%

6.1%6.1%

4.3%4.3%

4.5%4.5%

7.7%7.7%

6.0%6.0%

20062006

Advanced EconomiesAdvanced Economies

1.8%1.8%

4.4%4.4%

2.2%2.2%

4.4%4.4%

3.4%3.4%

2.9%2.9%

4.3%4.3%

5.5%5.5%

6.6%6.6%

4.5%4.5%

5.5%5.5%

7.6%7.6%

5.1%5.1%

4.6%4.6%

3.4%3.4%

2.2%2.2%

2.0%2.0%

2.5%2.5%

3.2%3.2%

3.3%3.3%

4.5%4.5%

6.1%6.1%

4.5%4.5%

4.6%4.6%

7.2%7.2%

5.0%5.0%

3.8%3.8%

USUS

Euro AreaEuro Area

JapanJapan

UKUK

CanadaCanada

Other Advanced EconomiesOther Advanced Economies

Newly Industrialized AsianNewly Industrialized Asian

Other Emerging MarketsOther Emerging Markets

AfricaAfrica

Central / Eastern EuropeCentral / Eastern Europe

Developing AsiaDeveloping Asia

Middle EastMiddle East

Latin AmericaLatin America

2020

Outlook Outlook –– The Economy?The Economy?NA Sectors That Directly Drive Pulp & Paper Demand Are NA Sectors That Directly Drive Pulp & Paper Demand Are

Projected To Be Weaker Than Overall GDP Projected To Be Weaker Than Overall GDP –– But Remain PositiveBut Remain Positive

Economic IndicatorEconomic Indicator Industry Segment Industry Segment ImpactedImpacted

19901990--19951995

19951995--20002000

20002000--20042004 20052005 20062006--

20102010

Real GDPReal GDP AllAll 2.5%2.5% 4.1%4.1% 2.5%2.5% 3.5%3.5% 3.0%3.0%

Implicit Price DeflatorImplicit Price Deflator AllAll 2.4%2.4% 1.6%1.6% 1.9%1.9% 3.0%3.0% 2.2%2.2%

Personal Consumption Personal Consumption ExpendituresExpenditures AllAll 2.6%2.6% 4.4%4.4% 3.2%3.2% 3.5%3.5% 2.8%2.8%

Industrial ProductionIndustrial Production AllAll 3.5%3.5% 6.0%6.0% 0.1%0.1% 3.7%3.7% 2.5%2.5%

Indust. Prod. Indust. Prod. -- NonNon--DurablesDurables ContainerboardContainerboard 1.8%1.8% 1.3%1.3% --0.6%0.6% 0.1%0.1% 0.8%0.8%

Indust. Prod. Indust. Prod. -- DurablesDurables PackagingPackaging 4.9%4.9% 9.5%9.5% 0.7%0.7% 7.7%7.7% 5.3%5.3%

Food & Beverage SalesFood & Beverage Sales BoxboardBoxboard 1.9%1.9% 3.2%3.2% 3.6%3.6% 5.1%5.1% 3.1%3.1%

Food services and drinking placesFood services and drinking places TissueTissue 4.8%4.8% 5.5%5.5% 6.3%6.3% 7.1%7.1% 2.9%2.9%

Computer & Peripheral SalesComputer & Peripheral Sales P&W PapersP&W Papers 21.6%21.6% 5.2%5.2% 2.0%2.0% 32.9%32.9% 4.6%4.6%

Professional Employment & Professional Employment & Business ServicesBusiness Services

P&W Papers, P&W Papers, TissueTissue 3.4%3.4% 5.3%5.3% --0.4%0.4% 3.4%3.4% 2.7%2.7%

US HouseholdsUS Households Tissue, Building Tissue, Building ProductsProducts 1.2%1.2% 1.1%1.1% 0.2%0.2% 1.0%1.0% 1.0%1.0%

Housing StartsHousing Starts Tissue, Building Tissue, Building ProductsProducts 2.5%2.5% 2.9%2.9% 5.5%5.5% 3.8%3.8% --2.0%2.0%

2121

Outlook Outlook –– GradeGrade--byby--Grade DiscussionGrade DiscussionNorth American MarketNorth American MarketNA BoxboardNA BoxboardNA ContainerboardNA ContainerboardNA NewsprintNA NewsprintNA Printing & Writing PapersNA Printing & Writing PapersNA Market PulpNA Market PulpNA TissueNA Tissue

2222

Outlook Outlook –– NA Market OverviewNA Market OverviewThe weakness in primary pulp and paper demand in The weakness in primary pulp and paper demand in the 2000s the 2000s has as noted somewhat correctedhas as noted somewhat corrected –– due in due in part part –– to improving domestic economic conditionsto improving domestic economic conditions

This This –– combined with the closure of significant combined with the closure of significant capacity within the industry capacity within the industry –– has put supply has put supply relatively in balance with demand for now . . .relatively in balance with demand for now . . .

And as shownAnd as shown –– producers have been successful at producers have been successful at implementing price increases in this environmentimplementing price increases in this environment

The net result is a cyclical upturn in the NA pulp and paper industry that could reverse circa late 2006 / 2007The net result is a cyclical upturn in the NA pulp and The net result is a cyclical upturn in the NA pulp and

paper industry that could reverse circa late 2006 / 2007paper industry that could reverse circa late 2006 / 2007

2323

Outlook Outlook –– NA Market OverviewNA Market Overview

The North American Pulp and Paper industry is The North American Pulp and Paper industry is a mature a mature web of businessesweb of businesses generally characterized by:generally characterized by:

Highest per capita consumption in world across all gradesHighest per capita consumption in world across all gradesSlower growth than real GDPSlower growth than real GDPHigh capital intensityHigh capital intensityCost and price based competition Cost and price based competition Below cost of capital returns Below cost of capital returns Cyclical pricing and profitability . . .Cyclical pricing and profitability . . .

Historically – the NA industry expanded after each cyclical peak. Excess capacity was then been pushed onto international markets

– This pattern has changed

Historically Historically –– the NA industry expanded after each cyclical peak. the NA industry expanded after each cyclical peak. Excess capacity was then been pushed onto international markets Excess capacity was then been pushed onto international markets

–– This pattern has changedThis pattern has changed

2424

Outlook Outlook –– NA Market OverviewNA Market OverviewToday the NA Industry business environment Today the NA Industry business environment has has stabilized due to a combination of factors:stabilized due to a combination of factors:

A weakening US dollar,A weakening US dollar,Rebounding domestic demand,Rebounding domestic demand,Improving returns, Weakening competitiveness of Improving returns, Weakening competitiveness of European producers, and European producers, and Moderating industry growth in developing regionsModerating industry growth in developing regionsBetter understanding by industry leaders of the role of Better understanding by industry leaders of the role of capacity and spending managementcapacity and spending management

This represents This represents a substantive change from the past five a substantive change from the past five yearsyears of persistent weakening overall market place and of persistent weakening overall market place and industry performanceindustry performance

2525

Outlook Outlook –– NA Market OverviewNA Market OverviewThis has generated This has generated a much needed breath of a much needed breath of

fresh airfresh air for the NA Industry to take stock, and for the NA Industry to take stock, and determine its path forward under more stable determine its path forward under more stable

and positive circumstances.and positive circumstances.

Accordingly – the North American industry does have a window of opportunity to further restructure and innovate

to better compete in the changing global market looking out – but the business environment for such enhancement

moves is transient – and time is likely essential

Accordingly Accordingly –– the North American industry does have a the North American industry does have a window of opportunity to further restructure and innovate window of opportunity to further restructure and innovate

to better compete in the changing global market looking out to better compete in the changing global market looking out –– but the business environment for such enhancement but the business environment for such enhancement

moves is transient moves is transient –– and time is likely essentialand time is likely essential

2626

Outlook Outlook ---- NA Market OverviewNA Market Overview

Change in Capacity (Tons/Tonnes)

Compound Annual Growth Rate

Grade Segment2000-2005

2005-2010

2000-2004

2005-2010

NA Boxboard -69 347 -0.2% 0.7%

U.S. Containerboard -1,073 639 -0.9% 0.3%

NA Newsprint -2,844 -1,541 -3.3% -2.4%

NA Printing & Writing -970 -930 -0.8% -0.5%

NA Tissue 952 247 2.2% 0.8%

NA Market Pulp -342 532 -0.4% 0.5%

Industry Industry Surveys And Surveys And Projections Projections

Indicate That Indicate That Capacity Capacity

Growth Will Be Growth Will Be Minimal Minimal

Between 2005 Between 2005 And 2010And 2010

2727

Outlook Outlook –– NA BoxboardNA BoxboardBoxboard is Boxboard is a weak but stabilizing NA segment a weak but stabilizing NA segment ----

Slow growth in industries that consume boxboardSlow growth in industries that consume boxboard, increased , increased competition from overseas producers and competition from overseas producers and widespread widespread substitutionsubstitution by plastics and alternative packaging materials by plastics and alternative packaging materials have hurt producershave hurt producers

Profitability/returns Profitability/returns are better than industry averageare better than industry average despite despite these poor fundamentals due to a relatively concentrated these poor fundamentals due to a relatively concentrated supply base supply base

Facility closures have brought Facility closures have brought supply and demand in linesupply and demand in line

Implications – Slow capacity growth is projected but carries a relatively high risk of falling demand & additional facility closures

ImplicationsImplications –– Slow capacity growth is projected but carries a Slow capacity growth is projected but carries a relatively high risk of falling demand & additional facility clorelatively high risk of falling demand & additional facility closuressures

2828

Outlook Outlook –– NA BoxboardNA Boxboard

0.5

0.75

1

1.25

1.5

1.75

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Rel

ativ

e G

row

th In

dex

(199

0 =

1)

Real GDP NA SBS Total Boxboard

NA NA Boxboard Boxboard Demand Demand

Growth Now Growth Now Significantly Significantly Lags GDPLags GDP ––

Bleached Bleached Board Board

Growth Growth Slightly Slightly

Outpaces Outpaces RecycledRecycled

2929


3,000

5,500

8,000

10,500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

Box

boar

d Vo

lum

e Vo

lum

e (S

hort

Ton

s M

illio

ns)

NA Demand NA Capacity Total Shipments

Both Both Demand Demand

And Supply And Supply Have Have

Resumed Resumed GrowthGrowth But But Will Take Will Take Several Several

Years To Years To Reach Reach

Historic Historic LevelsLevels

3030

Outlook Outlook –– NA BoxboardNA BoxboardNA Boxboard NA Boxboard

Has Has Consolidated Consolidated & Reduced & Reduced

Excess Excess Capacity Capacity ––But May Be But May Be Tempted To Tempted To

Add CapacityAdd CapacityIn The OutIn The Out--

years If years If Demand Demand

Continues To Continues To Grow

8%9% 9%

6%5%

3%

8%7% 7%

5% 5% 5% 5% 5%5%

6% 6%

9%8%

9%

7%

0

100

200

300

400

500

600

700

800

900

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

Box

boar

d - E

xces

s C

apac

ity (S

hort

Ton

s 00

0s)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Box

- %

Exc

ess

Cap

acity

Excess Capacity % Excess Capacity

Grow

3131


$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

1990 1992 1994 1996 1998 2000 2002 2004 2006YTD

SBS

15 p

oint

Pric

e ($

Sho

rt T

on)

Real Price ($2005) Nominal Price Linear (Real Price ($2005))

LongLong--term term Prices Prices

Continue Continue To To Trend Trend

DownwardsDownwards

3232

This NA Containerboard segment has undergone one of the most This NA Containerboard segment has undergone one of the most extensive restructurings within the industry extensive restructurings within the industry ----

Concentration of top producers Concentration of top producers has gone from one of the has gone from one of the lowest to highest in the industrylowest to highest in the industry –– improved capacity improved capacity utilization and expansion discipline has followedutilization and expansion discipline has followedFurther acquisitions by large players Further acquisitions by large players will be difficultwill be difficultHowever, However, NA producers have lost export marketNA producers have lost export market to new to new overseas capacity, especially in China and Germanyoverseas capacity, especially in China and GermanyProfitability and returns are Profitability and returns are lower than industry averagelower than industry averageSlack capacity Slack capacity absorbed quicklyabsorbed quickly with improved economy

Outlook Outlook –– NA ContainerboardNA Containerboard

with improved economy

Implications – Producers are expected to grow capacity slowly with demand – risks of further closures persist from

loss of volume in export markets and to substitutes

ImplicationsImplications –– Producers are expected to grow capacity Producers are expected to grow capacity slowly with demand slowly with demand –– risks of further closures persist from risks of further closures persist from

loss of volume in export markets loss of volume in export markets and to substitutesand to substitutes

3333


NA ContainerNA Container--board Demand board Demand Continues To Continues To

GrowGrow At A Rate At A Rate Closely Tied To Closely Tied To Domestic Domestic NonNon--Durables and Durables and

DurablesDurablesProduction

0.5

0.75

1

1.25

1.5

1.75

2

2.25

2.5

2.75

3

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Rel

ativ

e G

row

th In

dex

(199

0 =

1)

US Linerboard US MediumUS Durable Production US Non-Durable ProductionReal GDP

Production

3434


15,000

20,000

25,000

30,000

35,000

40,000

45,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

U.S

. Con

tain

erbo

ard

Volu

me

(Sho

rt T

ons

Mill

ions

)

Demand Capacity Total Shipments

NA Capacity NA Capacity Is Expected Is Expected To Be Well To Be Well Controlled Controlled Relative To Relative To

DemandDemand

3535


6% 5%4% 5%

3%

6% 6%

9%

4%

6%

4%5% 5% 5% 6%

10%

14%

9%9%

5%

7%

-

1,000

2,000

3,000

4,000

5,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

U.S

. Con

tain

erbo

ard

- Exc

ess

Cap

acity

(Sho

rt T

ons

000s

)

0%

5%

10%

15%

20%

25%

U.S

. Con

tain

erbo

ard

- % E

xces

s C

apac

ity


NA NA ContainerContainer--

boardboard’’s s Excess Excess

Capacity Is Capacity Is Relatively In Relatively In

BalanceBalance

3636


$200

$300

$400

$500

$600

$700

1990 1992 1994 1996 1998 2000 2002 2004 2006YTD

Kra

ft Li

nerb

oard

42l

b. P

rice

($ S

hort

Ton

)


NA Capacity NA Capacity Reductions Reductions

Helped Helped Containerboard Containerboard

Producers Producers Maintain & Maintain &

Prices Prices –– But But Profits Remain Profits Remain Below Required Below Required

LevelsLevels

3737

Outlook Outlook –– NA NewsprintNA NewsprintNewsprint is the Newsprint is the weakest overall industry NA segment weakest overall industry NA segment ----

ShortShort--term publishing and printing declines have been term publishing and printing declines have been exacerbated exacerbated by substitution to alternative mediaby substitution to alternative media

National and local papers continue to National and local papers continue to reduce page sizereduce page size

Newsprint Newsprint is in declineis in decline in the longin the long--termterm

Opportunities for further consolidation exist and Opportunities for further consolidation exist and significant significant capacity reductions and grade conversions will continuecapacity reductions and grade conversions will continue

Implications – Rational players will spend a minimum of capital and seek value added grade conversions. No new NA

Newsprint mills are likely to be built – at least by rational sector players . . .

ImplicationsImplications –– RationalRational players will spend a minimum of players will spend a minimum of capital and seek value added grade conversions. No new NA capital and seek value added grade conversions. No new NA

Newsprint mills are likely to be built Newsprint mills are likely to be built –– at least by rational at least by rational sector players . . .sector players . . .

3838

Outlook Outlook –– NA NewsprintNA Newsprint

0.5

0.75

1

1.25

1.5

1.75

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Rel

ativ

e G

row

th In

dex

(199

0 =

1)

Real GDP NA Newsprint Demand

NA NA Newsprint Is Newsprint Is A Declining A Declining SegmentSegment In In

LongLong--Term Term ––A ShortA Short-- to to MidMid-- Term Term

Improvement Improvement May OccurMay OccurBut Is Not But Is Not ProjectedProjected

3939


7,000

9,000

11,000

13,000

15,000

17,000

19,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

New

sprin

t Vol

ume

(Met

ric T

ons

000s

)

NA Demand NA Capacity Total Shipments

Demand, Demand, Capacity, Capacity, Exports, & Exports, & Shipments Shipments

Are All Are All Sliding Sliding

DownwardDownwardAt A At A

Relatively Relatively Quick RateQuick Rate

4040


4%

6%5%

4% 3%5%

6%

4%

6%

10%11%

6%7%

8%

6%

4%

10%

12%

8%

7%

9%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

New

sprin

t - E

xces

s C

apac

ity (M

etric

Ton

s 00

0s)

0%

5%

10%

15%

20%

25%

NA

New

sprin

t - %

Exc

ess

Cap

acity


The Supply The Supply And And

Demand Demand Situation Situation

Has Has ImprovedImproved

4141


$300

$400

$500

$600

$700

$800

$900

1990 1992 1994 1996 1998 2000 2002 2004 2006YTD

New

sprin

t Pric

e ($

Per

Met

ric T

on)


Capacity Capacity ReductionReduction

s Have s Have Helped Helped Boost Boost

Prices Prices ----But A But A

Downward Downward Trend Trend

Persists Persists

4242

Outlook Outlook –– NA P&W PapersNA P&W PapersRecent Recent Economic Slowdown & Alternative Media Economic Slowdown & Alternative Media SubstitutionSubstitution Have Impacted P&W Demand Negatively Have Impacted P&W Demand Negatively ––

Uncompetitive Uncompetitive capacity being closedcapacity being closed & modest demand & modest demand increases will tend to reign in excess capacityincreases will tend to reign in excess capacity

CF, CGW, UCF & GW Grades CF, CGW, UCF & GW Grades have seemingly collapsedhave seemingly collapsed into into one relatively interone relatively inter--changeable/somewhat flexible grade changeable/somewhat flexible grade structure structure from consumersfrom consumers’’ perspectivesperspectives

In this context In this context ---- CF quickly became commoditized CF quickly became commoditized ----displaced by improved CGW grades displaced by improved CGW grades –– changes still expectedchanges still expected

Implications – Significant repositioning / redeployment of assets – continued M&A & financial constraints

ImplicationsImplications –– Significant repositioning / redeployment Significant repositioning / redeployment of assets of assets –– continued M&A & financial constraintscontinued M&A & financial constraints

4343

Outlook Outlook –– NA P&W Papers NA P&W Papers (cont.)(cont.)

In Addition In Addition –– High End Uses High End Uses –– Auto Brochures/Annual Auto Brochures/Annual Reports Reports –– Are Being Replaced By Website VersionsAre Being Replaced By Website Versions

High volume UCF under pressure from overseas High volume UCF under pressure from overseas competitors, and Newsprint producers competitors, and Newsprint producers are converting are converting capacity to UC and CGW gradescapacity to UC and CGW grades

Financial returns & growth prospects Financial returns & growth prospects are similar to are similar to industry averageindustry average & room exists & room exists for continued M&A activityfor continued M&A activity

Implications – Certain segments will suffer net capacity reductions and the grade turmoil will continue to create an

unstable overall grade-to-grade business environment

ImplicationsImplications –– Certain segments will suffer net capacity Certain segments will suffer net capacity reductions and the grade turmoil will continue to create an reductions and the grade turmoil will continue to create an

unstable overall gradeunstable overall grade--toto--grade business environmentgrade business environment

4444

Outlook Outlook –– NA P&W PapersNA P&W Papers

P&W Paper P&W Paper Demand Demand

FundamentalsFundamentalsBegan To Began To

Change In The Change In The MidMid--1990s 1990s ––Minimal And Minimal And Risky Growth Risky Growth Is Expected Is Expected

Going Going Forward

0.5

0.75

1

1.25

1.5

1.75

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Rel

ativ

e G

row

th In

dex

(199

0 =

1)

Real GDP NA UCFS Demand Employment - WC ProffessionalsForward

4545


Rising Imports Rising Imports Have Have Slowed Slowed ShipmentsShipmentsRelative To Relative To Domestic Domestic

Demand And Demand And Further Further

Capacity Capacity RationalizationRationalization

Is Likely20,000

25,000

30,000

35,000

40,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

P&

Writ

ing

Pape

rs

Volu

me

(Sho

rt T

ons

000s

)

Demand Capacity Shipments

Is Likely

4646


8%

10%

8%

4%

7%

8%

7%

16%15%

14%13%12%

12%

8%

13%

9%

14%

11%13%

12%11%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

P&

W P

aper

s - E

xces

s C

apac

ity (S

hort

Ton

s 00

0s)

3%

8%

13%

18%

23%

NA

P&

W -

% E

xces

s C

apac

ity


Significant Significant NA P&W NA P&W

OverOver--Capacity Capacity PersistsPersists

4747


$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1990 1992 1994 1996 1998 2000 2002 2004 2006YTD

Rea

l Pric

e ($

2005

Sho

rt T

on)

CFS No. 3 60lb. UCFS No. 4 Xerocopy CGW No. 4 50lb.

Collapsed Collapsed Real Price Real Price

Trends Trends Continue Continue

DownwardDownwardAnd Recent And Recent

Pricing Pricing Improvements Improvements

Have Been Have Been Slow & Less Slow & Less Than DesiredThan Desired

4848

Outlook Outlook –– NA Market PulpNA Market PulpMarket Pulp Is An Intermediate Good In The Production Of Market Pulp Is An Intermediate Good In The Production Of The Other Paper And Paperboard Grades The Other Paper And Paperboard Grades ––

Pulp Investment returns Pulp Investment returns ---- among the poorestamong the poorest in the industry in the industry ––which in some circles is baffling . . .which in some circles is baffling . . .Environmental restrictions Environmental restrictions ---- new capacity additions difficultnew capacity additions difficultInternational producers International producers –– continue tocontinue to import pulp competitively import pulp competitively to USto USDIP pulps presently relatively more financially attractive than DIP pulps presently relatively more financially attractive than virgin pulpsvirgin pulps

Implications – Some capital to be spent on integrated DIP facilities. Capacity will creep up with incremental improvement

projects – Wild card here is China’s fiber demand . . .

ImplicationsImplications –– Some capital to be spent on integrated DIP Some capital to be spent on integrated DIP facilities. Capacity will creep up with incremental improvementfacilities. Capacity will creep up with incremental improvement

projects projects –– Wild card here is ChinaWild card here is China’’s fiber demand . . .s fiber demand . . .

4949

Outlook Outlook –– NA PulpNA Pulp

0.5

0.75

1

1.25

1.5

1.75

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Mar

ket P

ulp

vs. P

aper

Gro

wth

Inde

x

NA P&W Papers + Tissue Total NA Market PulpNA BSKP NA BHKP

Demand Demand For Market For Market

Pulp Pulp Follows Follows Other Other

Grades Grades ––But WatchBut Watch

China China Needs and Needs and Demands Demands Looking Looking

OutOut

5050

Outlook Outlook –– NA PulpNA PulpSupply And Supply And Demand For Demand For

Chemical Chemical Market Pulp Market Pulp Is Expected Is Expected

To Be To Be Relatively Relatively FlatFlat –– But But Again Again ––Watch Watch

ChinaChina’’s s Needs Needs

Evolve . . .

-

2,500

5,000

7,500

10,000

12,500

15,000

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

NA

Mar

ket P

ulp

Volu

me

(Met

ric T

ons

000s

)

BSKP Shipments BHKP ShipmentsBSKP Capacity BHKP Capacity

Evolve . . .

5151

Outlook Outlook –– NA BHKPNA BHKP

6%

12%11%11%

10%

3%

9%

6%5%

7%8%

3%

1%

2% 3%

12%

10%

4%

10%

6%5%

(200)

(100)

-

100

200

300

400

500

600

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

BH

KP

- Exc

ess

Cap

acity

(Sho

rt T

ons

000s

)

0%

5%

10%

15%

20%

25%

30%

BH

KP

- % E

xces

s C

apac

ity

Metric Tons % of Capacity

NA NA BHKP BHKP Capacity Is Capacity Is

In CheckIn Check But But Is Expected Is Expected To Creep Up To Creep Up Over Time Over Time ––Increasing Increasing The Risk Of The Risk Of

Capacity Capacity ClosuresClosures

5252

Outlook Outlook –– NA BSKPNA BSKP

9%

12% 12%14%

3%

9%

7% 7% 7% 6%

14%

1%

0%

4%7%

12% 11%

4%

11%

8%

5%

(500)

-

500

1,000

1,500

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

BSK

P - E

xces

s C

apac

ity (S

hort

Ton

s 00

0s)

-5%

0%

5%

10%

15%

20%

25%

30%

BSK

P - %

Exc

ess

Cap

acity

Metric Tons % of Capacity

NA BSKP Is NA BSKP Is Carrying Carrying Relatively Relatively

More More Capacity Capacity

Than BHKP Than BHKP –– Making It Making It

More More Sensitive To Sensitive To

SwingsSwings In In DemandDemand

5353

Outlook Outlook –– NA Market PulpNA Market Pulp

Market Pulp Market Pulp Prices Have Prices Have Flattened & Flattened & LongLong--term term

Fundamentals Fundamentals Still Not Still Not

StrongStrong Going Going Forward

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

1990 1992 1994 1996 1998 2000 2002 2004 2006YTD

Rea

l Pul

p Pr

ice

Per M

etric

Ton

($20

05)

NBSKP Deliv. To US NBHKP Deliv. To US

Forward

5454

Outlook Outlook –– NA TissueNA TissueTissue Is Tissue Is Strongest Overall SegmentStrongest Overall Segment In North America In North America ––

EndEnd--product demand is mature product demand is mature ---- Americans highest perAmericans highest per--capita consumers in world & capita consumers in world & incremental demand is slowincremental demand is slowDemand growth is slowing Demand growth is slowing ---- but still expanding per capitabut still expanding per capitaHowever, overall company financial returns However, overall company financial returns less sensitive to less sensitive to supply / demand dynamicssupply / demand dynamics at mill level than other gradesat mill level than other gradesRegulatory considerations Regulatory considerations will limit large M&A activitywill limit large M&A activityBoth technology changes and Both technology changes and new entrepreneurial entrantsnew entrepreneurial entrantswill drive spendingwill drive spendingExcess capacity is building Excess capacity is building –– but likely to be absorbedbut likely to be absorbed

Implications – Segment may be losing some luster – is a day of reckoning coming or will historical market

dynamics win out?

ImplicationsImplications –– Segment may be losing some luster Segment may be losing some luster –– is a is a day of reckoning coming or will historical market day of reckoning coming or will historical market

dynamics win out?dynamics win out?

5555

Outlook Outlook –– NA TissueNA Tissue

0.5

0.75

1

1.25

1.5

1.75

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Rel

ativ

e G

row

th In

dex

(199

0 =

1)

Real GDP NA Tissue U.S. Households

NA Tissue NA Tissue Has Has

Innovated Innovated To Keep To Keep Demand Demand Growth Growth

Ahead Of Ahead Of Household Household FormationFormation

5656


Constraint Constraint Is Needed Is Needed

As As Capacity Capacity Growth Is Growth Is

Now Now Outpacing Outpacing DemandDemand ––But Some But Some Structural Structural

Protections Protections Remain

5,000

6,000

7,000

8,000

9,000

10,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

Tis

sue

Volu

me

(Sho

rt T

ons

000s

)

Demand Capacity Shipments Remain

5757


4%

10%11%

8% 8%

6%7%

5%4%

10%9%10%10%10%9%

7%

9%9%

12%

12%

7%

0

200

400

600

800

1,000

1,200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NA

Tis

sue

- Exc

ess

Cap

acity

(Sho

rt T

ons

000s

)

0%

5%

10%

15%

20%

25%

NA

Tis

sue

- % E

xces

s C

apac

ity


Excess Excess Tissue Tissue Is Is Building Building But Will But Will

ModerateModerate If If The Rate The Rate

Of Capacity Of Capacity Additions Additions

SlowSlow

5858


Consumer Consumer Level Level

Pricing Pricing Is Is Trending Trending Upward Upward ––The AwayThe Away--from Home from Home

Market Market Trends Trends Are Are

Less Less Favorable

70

80

90

100

110

120

130

140

150

160

1993 1995 1997 1999 2001 2003 2005

Hou

seho

ld P

aper

Pro

duct

sPr

ice

Inde

x

Real Price ($2005) Nominal PriceLinear (Real Price ($2005))

Favorable

5959

Outlook Outlook –– Oil and Natural GasOil and Natural Gas

$60+ Bbl Oil $60+ Bbl Oil & $7/Mcf & $7/Mcf

Natural Gas Natural Gas Will Create Will Create

GDP & GDP & Industry Industry

InstabilityInstability ––But Also But Also

Raise Value Raise Value Opportunity Opportunity For Wood To For Wood To

Fuel . . .

$-

$10

$20

$30

$40

$50

$60

$70

1/84 1/87 1/90 1/93 1/96 1/99 1/02 1/05

Nom

inal

Dol

lars

Per

Bar

rel

$-

$2

$4

$6

$8

$10

$12

$14

$ Pe

r Tho

usan

d C

ubic

Ft.

Oil Price Industrial Gas Price Fuel . . .

6060

Outlook Outlook –– Recycled FiberRecycled Fiber

$45

$36

$64 $64

$50

$67

$54

$62

$70$76

$82

$80$84

$46

$20

$45

$70

$95

2000 2001 2002 2003 2004 2005 2006YTD

Rea

l Rec

over

ed F

iber

Pric

e - U

.S. M

idw

est

($20

05 P

er S

hort

Ton

)

OCC#11 ONP#8

Recycled Recycled Fiber Cost Fiber Cost Pressures Pressures

Mitigated in Mitigated in Q1 2006Q1 2006

6161

US Industry SpendingUS Industry SpendingHistory, Issues, and Directions History, Issues, and Directions ––

Capital Spending Capital Spending –– Overview & OutlookOverview & OutlookProfitability & Capital TurnoverProfitability & Capital TurnoverROTC Versus Cost of CapitalROTC Versus Cost of CapitalDebt LevelsDebt LevelsProduction Capacity ExpectationsProduction Capacity ExpectationsCapital Spending/DepreciationCapital Spending/DepreciationCapital Spending LevelCapital Spending Level

6262

US Industry US Industry –– Capital SpendingCapital Spending

US US Capital Expenditures Will Continue to Be DepressedCapital Expenditures Will Continue to Be Depressed By By Poor Financial Performance & Slowing of Capacity Growth Poor Financial Performance & Slowing of Capacity Growth ––

M&A crowded out CAPEX on PPE last 5 years M&A crowded out CAPEX on PPE last 5 years ---- Should ease Should ease within largest firmswithin largest firms ---- antitrust constraintsantitrust constraintsHowever, asset swaps & However, asset swaps & businessbusiness--line spinline spin--offs likely to offs likely to accelerateaccelerate + second+ second--tier players consolidationtier players consolidationThere is risk that unexpected international acquisitions There is risk that unexpected international acquisitions activity activity will interrupt capital spending patternswill 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 yet

Overall, net M&A impact should be better (less impacting) for Overall, net M&A impact should be better (less impacting) for CAPEX than the last 5 years CAPEX than the last 5 years –– but not enough to offset weak but not enough to offset weak

investment fundamentals yetinvestment fundamentals yet

6363


Combination Of Economic, Pulp And Paper Market, And Combination Of Economic, Pulp And Paper Market, And Financial / Investment Realities Drove US Capital Financial / Investment Realities Drove US Capital Expenditures Down Expenditures Down From $8+ Billion In 2000 To $6+ BillionFrom $8+ Billion In 2000 To $6+ BillionBy 2001 By 2001 ––

2005 capital expenditures 2005 capital expenditures fell againfell again to $6 billion and then to $6 billion and then likely cycle between $6.0 billion and $8.5 billion through likely cycle between $6.0 billion and $8.5 billion through 20062006The following table and graphs summarize these The following table and graphs summarize these historical trends and projectionshistorical trends and projections

6464


2,500

4,500

6,500

8,500

10,500

12,500

14,500

1975 1979 1983 1987 1991 1995 1999 2003

U.S

.Cap

ital E

xpen

ditu

res

Real ($2005) Nominal

Capital Capital Expenditures Expenditures (CAPEX) (CAPEX) On On Pulp & Paper Pulp & Paper

Property, Property, Plant & Plant &

EquipmentEquipment

6565

US Industry US Industry –– ProfitabilityProfitability

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Net

Ope

ratin

g Pr

ofit

Mar

gin

Afte

r-Ta

x

Profitability Profitability Is the Is the

Highest Its Highest Its Been Since Been Since 2000 2000 –– But But Still Low Still Low

Relative To Relative To Historic Historic LevelsLevels

6666

US Industry US Industry –– Capital TurnoverCapital Turnover

80%

100%

120%

140%

160%

180%

200%

1975 1979 1983 1987 1991 1995 1999 2003

Sale

s / T

otal

Inve

sted

Cap

ital

Capital Capital Turnover Turnover

Has Has Improved Improved But Is Still But Is Still TrendingTrending

DownwardDownward

6767

US Industry US Industry –– Capital Spending/DepreciationCapital Spending/Depreciation

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

PP&

E C

apita

l Exp

end

% o

f Dep

rec.

US Capital US Capital Expenditures Expenditures

Remain Remain Significantly Significantly

Below Below Depreciation Depreciation LevelsLevels –– But But

Seem To Seem To Have Have

StabilizedStabilized

6868

US Industry US Industry –– Investment DecisionsInvestment Decisions’’ DriversDriversAttractive Opportunities = More Likely To InvestAttractive Opportunities = More Likely To Invest

Strong ROTCStrong ROTC == Proven capability to identify/execute Proven capability to identify/execute value creating projects value creating projects –– more likely to attract & invest more likely to attract & invest capital capital than poor performersthan poor performersGood Outlook Product MixGood Outlook Product Mix == More likely to invest (i.e. More likely to invest (i.e. tissue, selected P&W) tissue, selected P&W) than poorly performing than poorly performing segmentssegments (i.e. boxboard, containerboard, newsprint, (i.e. boxboard, containerboard, newsprint, market pulp)market pulp)Geographic MixGeographic Mix == Firms in Higher growth geographic Firms in Higher growth geographic markets (i.e. Asia & Latin America) more likely to markets (i.e. Asia & Latin America) more likely to invest than US and Canadian invest than US and Canadian (and now some (and now some European)European) focused playersfocused players

6969

US Industry US Industry –– Investment DecisionsInvestment Decisions’’ DriversDrivers

Greater Capital Availability = More Likely To InvestGreater Capital Availability = More Likely To InvestDebtDebt--ToTo--Capital RatioCapital Ratio == High debt % High debt % –– the more likely to the more likely to divert cash to lower debt instead for capital expendituresdivert cash to lower debt instead for capital expendituresDebt CapacityDebt Capacity = = Low debt % Low debt % –– creates real opportunities creates real opportunities to use to use new low cost debtnew low cost debt for innovative investment for innovative investment movesmovesCash Flow Available For ReinvestmentCash Flow Available For Reinvestment == More cash More cash generated by operations, the more funds generated by operations, the more funds typically typically invested in the businessinvested in the business & to stimulate investors& to stimulate investors

7070

Recap & Final ThoughtsRecap & Final ThoughtsThe NA industry financial performance The NA industry financial performance has been poor on an has been poor on an absolute basis and persistently weak absolute basis and persistently weak in the late 90in the late 90’’s through s through todaytoday –– But we are seeing improvementsBut we are seeing improvementsThese shortThese short--term performance improvements are a welcome term performance improvements are a welcome relief for the industry relief for the industry but could be transientbut could be transient if industry if industry management is again tempted to significantly increase management is again tempted to significantly increase major major capacity orientedcapacity oriented capital investmentscapital investmentsThe quality of The quality of pending investment decisions, basic pending investment decisions, basic economic and demand factors and the industryeconomic and demand factors and the industry’’s motivation s motivation to pursue to pursue innovative structural change via enterprise innovative structural change via enterprise transformationtransformation will drive industry performance in the midwill drive industry performance in the mid--to to longlong--termtermChanges in the industry direction will in turn obviously Changes in the industry direction will in turn obviously impact all aspects of the industry impact all aspects of the industry –– producers and suppliers producers and suppliers alike . . .alike . . .

7171

Recap & Final ThoughtsRecap & Final ThoughtsThe essential focus we should have at The essential focus we should have at this place in our industrythis place in our industry’’s path forward s path forward is that the future is ours to create is that the future is ours to create ––timidity will undermine our efforts . . .timidity will undermine our efforts . . .

And . . . In this context And . . . In this context –– our challenge is our challenge is really to seize the opportunities instead of really to seize the opportunities instead of simply enjoying our respite simply enjoying our respite –– to refocus to refocus and restructure in new and novel ways . . .and restructure in new and novel ways . . .

7272

And Remember . . . . And Remember . . . . Even though the Current Industry State of Even though the Current Industry State of Affairs is Still Unstable & Many Systemic Affairs is Still Unstable & Many Systemic Problems Remain Problems Remain ---- As that Famous Arm As that Famous Arm Chair Philosopher Ziggy Once Said . . . .Chair Philosopher Ziggy Once Said . . . .

““You can Complain Because You can Complain Because Roses have Thorns, or you can Roses have Thorns, or you can Rejoice Because Thorns have Rejoice Because Thorns have

RosesRoses””

7373

Recap & Final ThoughtsRecap & Final Thoughts

Thank You! -- Copies Available At

www.cpbis.gatech.eduwww.valueresolution.com -- And –

Contact Information

Dan CenatempoPresident -- Value Resolution Group, Inc.770-522-8972 -- [email protected]

Jim McNuttExecutive Director – Center for Paper Business & Industry Studies404-894-5733 – [email protected]

http://www.valueresolution.com/

http://www.cpbis.gatech.edu/

mailto:[email protected]

mailto:[email protected]

state of the north american pulp & paper industry · outlook – na market overview the north...

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