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
Outlook Outlook –– NA BoxboardNA Boxboard
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
Outlook Outlook –– NA BoxboardNA Boxboard
$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
Outlook Outlook –– NA ContainerboardNA Containerboard
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
Outlook Outlook –– NA ContainerboardNA Containerboard
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
Outlook Outlook –– NA ContainerboardNA Containerboard
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
Excess Capacity % Excess Capacity
NA NA ContainerContainer--
boardboard’’s s Excess Excess
Capacity Is Capacity Is Relatively In Relatively In
BalanceBalance
3636
Outlook Outlook –– NA ContainerboardNA Containerboard
$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
)
Real Price ($2005) Nominal Price Linear (Real Price ($2005))
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
Outlook Outlook –– NA NewsprintNA Newsprint
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
Outlook Outlook –– NA NewsprintNA Newsprint
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
Excess Capacity % Excess Capacity
The Supply The Supply And And
Demand Demand Situation Situation
Has Has ImprovedImproved
4141
Outlook Outlook –– NA NewsprintNA Newsprint
$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)
Real Price ($2005) Nominal Price Linear (Real Price ($2005))
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
Outlook Outlook –– NA P&W PapersNA P&W Papers
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
Outlook Outlook –– NA P&W PapersNA P&W Papers
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
Excess Capacity % Excess Capacity
Significant Significant NA P&W NA P&W
OverOver--Capacity Capacity PersistsPersists
4747
Outlook Outlook –– NA P&W PapersNA P&W Papers
$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
Outlook Outlook –– NA TissueNA Tissue
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
Outlook Outlook –– NA TissueNA Tissue
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 Capacity % Excess Capacity
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
Outlook Outlook –– NA TissueNA Tissue
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
US Industry US Industry –– Capital SpendingCapital Spending
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
US Industry US Industry –– Capital SpendingCapital Spending
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]