Transcript Document

State of the North American
Pulp & Paper Industry
Into The Breach
January 2009 ~ ’08 Q4 Preliminary Data
Center for Paper Business and Industry Studies (CPBIS)
~ Dr. Jacquelyn McNutt
Overview
North American Forest Products Industry
Review ~ The Industry Context
Where Are We?
Financial Performance
Outlook ~ How Competitive
Outlook ~ The Economy
Grade-by-Grade Focus
Prices ~ Key Raw Materials
Key Takeaways
Where Are We?
North American Industry Context ~






Mature, largely commodity industry ~ slow growth & struggling
in current economic downturn…
Recession driving down grade demand ~ for now…
After a relatively strong upturn ~ in pricing, investments and
shareholder returns ~ this current downturn is dramatic…
Grade prices are strong for now ~ but starting to fall…
Cost pressures from market pulp, natural gas, oil, pulpwood and
recovered paper are easing rapidly ~ for now…
Credit crisis/ recession / have created very difficult environment
for capital intensive, mature commodity industry like the paper
industry…
Where Are We?
Current North American Industry Context ~





Weak US Dollar helped improve competitiveness ~ but
strengthening US dollar will erode this again in 2009…
Older asset base ~ has improved with rationalization ~ but more
improvement is needed to reassert competitive strength
Organizational structures will go through additional stresses &
need further substantial changes
Significant near term improvements absolutely essential for
individual companies to sustain through this recession let alone
outperform the market & industry to reassert dominance…
But let’s also remember ~ The NA Industry Still enjoys significant
fiber resources, logistics & world’s major marketplace…
Where Are We?

Paper manufacturing book returns have been
and remain below target ~



However, the sector has ~



High enough to cover required return on debt
Yet not a full return on equity
Performed well enough to generate positive
shareholder returns and
Outperformed the S&P 500 in recent years
But performance is sliding rapidly again…
Where Are We?



Volume = relatively flat overall in the 2000s until now
 With all grades once again declining
 Except for tissue ~ which is still show resiliency…
Pricing has been strong, but now is weakening where
 Most grades are coming sharply off recent highs
Cost pressures are easing though for now
 Looking out = ?
Where Are We?
North American Paper & Board (ST 000s)
Volume Was Relatively Steady in the 2000s Until Q4 2008
150,000
140,000
130,000
120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Domestic Consumption
Domestic Shipments
Capacity
Where Are We?
2009 Volume ~ Now Falling From 2008 Peaks
2008 Volume
Change (est.)
Nov-Dec ’08 Volume
Change (est.)
Printing & Writing
-6%
-20%
Boxboard
-1%
-8%
Containerboard
-4%
-12%
Newsprint
-6%
-7%
Tissue
-1%
NA
Chemical Paper Grade
Pulp
-3%
-3%
Total
-4%
-14%
Grade
Where Are We?
Prices Still Comparable To Strong 2008 Averages
~ But Now Falling From Peak Levels
Grade
2008 Avg.
2008
Peak
Jan. 2009
Jan. ’09
vs Peak
UFS #4 Xero
(US$/ton)
$1,139
$1,180
$1,150
-2.5%
60lb #3 CFS
(US$/ton)
$1,068
$1,175
$1,060
-9.8%
42# Kraft Liner
(US$/ton)
$568
$605
$575
-5.0%
30lb Newsprint
(US$/tonne)
$671
$740
$745
+0.7%
Pulp NBSK Trans.
(US$/tonne)
$745
$778
$613
-21%
Financial Performance
Comparative Trends ~ Revenue & Profits
Return on Capital Employed & Debt
Investment Spending
Other Financial Measures
[Asset turnover, EBITDA, enterprise value, & role of intangibles]
Financial Performance
Total Shareholder Returns
Now Falling Sharply Back To S&P 500 Level
Total Shareholder Return Index
(2001 = 100)
250
200
150
100
Total Annual Shareholder Return
(compound annual rate)
50
12/31/2008
Paper
S&P 500
1 year
-46.5%
-36.0%
5 year
-5.5%
-1.9%
7 year
0.3%
-1.3%
2001
2002
2003
2004
Paper
2005
2006
S&P 500
2007
2008
Financial Performance
2008 Revenue ~ Dragged Down By Very Poor 4th Quarter
Compound Annualized Rate
20.0%
10.0%
12.5%
6.5%
2.5%
7.3%
0.0%
-4.3%
-10.0%
-20.0%
-30.0%
-28.9%
-40.0%
Latest Quarter
1 Year
Pulp & Paper
5 Year
S&P 500
Financial Performance
EOY Market Value ~ Revenue Multiple ~
Trails S&P 500 and Both Trending Sharply Downward
2.5x
Value / Revenue
2.0x
1.5x
1.0x
0.5x
0.0x
2001 2002 2003 2004 2005 2006 2007 2008
Pulp & Paper
S&P 500
Financial Performance
Median Ttl. Enterprise Value / EBITDA
EOY Market Value ~ EBITDA Multiple ~
Comparable To and Now Trending Downward With S&P500
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
2001 2002 2003 2004 2005 2006 2007 2008
Pulp & Paper
S&P 500
Financial Performance
Rising Costs Then Sharply Falling Volume
Drove Down Profitability in ’08
Profit Margin = EBITDA / Sales
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2001
2002
2003 2004 2005 2006 2007
Pulp & Paper
S&P 500
2008
Financial Performance
Compound Annualized Rate
Very Poor Q4 Profits (EBITDA) Pull Pulp and
Paper Back Towards 2003 Levels
10.0%
3.4%
5.4%
0.0%
7.8%
0.4%
-10.0%
-16.6%
-20.0%
-30.0%
-31.3%
-40.0%
Latest Quarter
1 Year
Pulp & Paper S&P 500
5 Year
Financial Performance
Returns on Book Value of Total Capital
~ Cover Debt But Remain Below Cost of Capital ~
Cash Returns To Shareholders Positive For Now
20.0%
ROTC averages 6.5% vs.
10.2% cost of capital
15.0%
10.0%
5.0%
0.0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Return On Total Capital
Cost of Capital
Financial Performance
Book Return on Capital / Cost of Capital (66% Avg.)
Impacts Of Recessions And / Or Economic
Slowdowns On Industry ROTC ~ Have Been Mixed
140.0%
120.0%
100.0%
80.0%
'73-'75
60.0%
'90-'91
40.0%
20.0%
'80-'82
'01-'03
Red = Recession
and / or slowdown
0.0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Performance
Near Or
Above
Average In
‘73-’75 ~ And
‘01 To ‘03 ~
Below
Average In
’80 To ’82
And 90 To ’91
Financial Performance
Book Value of Debt To Capital Ratio
But Book Value of Debt ~
Trending Downward Over Last 7 Years ~ Now Lifting
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Debt % of Invested Capital
Financial Performance
Market Value of Debt ~ Rising Relative
To Equity ~ But Remains Below 2002-’06 In Absolute Dollars
$100,000
75.0%
65.0%
$90,000
$80,000
45.0%
$70,000
35.0%
25.0%
$60,000
15.0%
$50,000
5.0%
$40,000
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Total Debt - Dollars
Debt % of TEV
-5.0%
Share of TEV
Dollars Millions
55.0%
Financial Performance
Expenditures Relative To Sales
M&A Spending Rebounding Again ~
Capital Spending Down ~ R&D Up Slightly
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Capital Invesment
Acquisitions
R&D
Financial Performance
Capital Spending Index (Q1 2001 = 100)
Quarterly Capital Spending
At Lowest Point In 2000s
125.0
105.0
85.0
65.0
45.0
25.0
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Financial Performance
Asset Turnover ~ Improving ~
Now Exceeds S&P 500 By 11pts.
Asset Turnover = Sales / BV Assets
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
Q1 '01 Q1 '02 Q1 '03 Q1 '04 Q1 '05 Q1 '06 Q1 '07 Q1 '08
Pulp & Paper
S&P 500
Outlook ~ How Competitive
What Is Competitiveness ~ Looking Out?
What Do We Need To Embrace ~ To Reassert A
Competitive Based Performance?
How Do NA Assets Stack Up ~ Looking Out?
What Are Key Grade ~ Competitiveness Factors?
Changing Measures of Competitiveness
[Trade patterns, role of print, & assets’ age]
What Are The Competitiveness Implications?
Outlook ~ How Competitive?
We Need to Understand ~ Especially In This Recession ~
That Competitiveness Is Multidimensional ~




Mill Performance vs. International Competition ~ i.e. NA
vs. SA/ European/ Asian mills’ productivity/ quality
Product Performance vs. Substitutes ~ i.e. paperboard
folding cartons vs. plastic packaging, newspaper vs. TV,
etc.
End-User Performance vs. International Competitors ~ i.e.
domestic vs. international manufacturers
Financial Performance vs. Other Investments ~ i.e. returns
on paper investment vs. alternatives of similar risk
Outlook ~ How Competitive?
Based On These Dimensions ~
Industry Participants ~ Must Recognize ~

Off-shoring and substitution by alternative mediums have reduced
demand below peak levels and this can accelerate once again…

NA’s lost cost leadership in pulp/ paper production ~ was being
lifted by a weak dollar & performance improvements ~ but

A Strengthening US Dollar and dropping capital investments will change this

Where too strong a focus on capital rationing strategies will further erode
the asset base…

The composite financial performance is dramatically weakened…

And without strong actions to balance cash needs with cash in and
to shore up the financial strength of the firm ~ all is at risk…
High Volume
NA Grades Have Substitution Threats
Grade Category
Potential Substitutes
Re-usable shipping containers,
Containerboard
offshoring of manufacturing
Flexible packaging, offshoring of
Packaging Grades
manufacturing
Printing & Writing Electronic communications,
Papers
alternative advertising mediums
Electronic communications,
Newsprint
alternative advertising mediums
Tissue
No Major Substitutes
Outlook ~ How Competitive?
Time Spent By US Consumers With Printed
Media is Down ~ Except Books & Yellow Pages
500
450
Hours Per Person Per Year
400
350
Total Printed Media
Newspapers
Consumer magazines
Consumer books
Yellow Pages
300
250
200
150
100
50
0
2000
2002
2004
2006
2008
2010
Outlook ~ How Competitive?
Time Spent By US Consumers With
Electronic Media Is Up ~ Except Radio and Recorded Music
3,500
3,000
Hours Per Person Per Year
Total Electronic media
2,500
Television
2,000
Radio
1,500
Internet, video games and
mobile media
Recorded music
1,000
Box office and home video
500
2000
2002
2004
2006
2008
2010
Outlook ~ How Competitive?
Domestic Paper Demand ~ Resilient Given
The Rate of Adoption of New Technologies
275
Number of People (millions)
250
225
200
175
Line Item
Cell Phone Subscriptions
Pay TV Subscriptions
Internet Usage (18+)
Current Population
1995-'06 Annual
Growth
19%
10%
17%
300mm
233
158 158
150
125
109
103
111
100
75
56
40
50
25
34
28
5
0
1990
Cell Phone Subscribers
1995
2000
Pay TV Subscribers
2006
Internet Users 18+
Outlook ~ How Competitive?
NA Producers Have Improved Asset Quality Through
Incremental Investment/ Closure of Uncompetitive Lines
North American Paper Machine Lines ~ Averages
Characteristic
(Median)
1999
2007
% Change
Age
53
41
-23%
Maximum Speed
(fpm)
600
800
+33%
Width (inches)
174
240
+38%
Capacity (tons per
day)
200
240
+20%
Outlook ~ How Competitive?
Dollar Value of Pulp, Paper and Paperboard Trade
US Total Pulp, Paper and Paperboard Export Growth Continued
To Outpace Imports = Reduced Net Imports in 2008 ~ But With A Stronger US Dollar
This Can Turn The Other Way Quickly in 2009…
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
-$5,000,000
-$10,000,000
1989
1991
1993
1995
1997
US EXPORTS
1999
2001
US Imports
2003
2005
Net Balance
2007
Outlook ~ How Competitive?

We must be mindful of today’s realties ~
 The US economy is down/ unstable & recessionary

Credit markets are in freefall/disarray ~ they will not bail us out

Our high-volume grades are very exposed to alternative
mediums’ substitution and global market place threats

Economic turbulence is creating ~ enormous global pressures with
long term consequences
The global economic crisis is changing the competitive stage
 Major volume losses and high costs of production ~ destroy
cash flow
 And even with all of this and the clear knowledge that traditional
business models are stretched to the limit and will not suffice


Improvements are possible ~ Don’t judge the long term by today…
Look at history… This is not our first economic and industry crisis…
Outlook ~ How Competitive?
With all these dynamics ~ participants must take
dramatic action now to weather this storm
before we can truly ~ learn how to then thrive…
With a short term focus on cash flow, recession,
crisis management, supply/demand, and
operational excellence ~ which are going to be the
key themes needing focus now…
Outlook ~ The Economy
Overall Economic Growth
NA Economy Sectors Outlook ~
[Implications for the Industry]
Outlook ~ The Economy
Advanced Economies’ Recession Into 2009
Real GDP Growth By
Region
2005
2006
3.2%
2.6%
1.9%
1.9%
2.9%
3.3%
3.2%
2.2%
2.8%
2.7%
5.8%
Africa
Central /
Eastern
Europe
Developing
Asia
Middle East
Latin America
Advanced Economies
US
Euro Area
Japan
UK
Canada
Other Advanced
Economies
Emerging Markets
2007
2008Est
2009Est
2010Est
2.2%
2.6%
2.1%
3.1%
2.7%
1.2%
0.0%
-0.4%
-0.7%
-0.5%
-2.2%
-0.1%
0.3%
-0.5%
.2%
1.5%
0.9%
0.9%
1.7%
2.9%
5.7%
4.6%
0.2%
0.2%
2.2%
5.8%
5.6%
6.5%
3.3%
3.0%
4.2%
6.0%
6.8%
5.6%
4.4%
2.5%
4.4%
9.0%
9.5%
10.0%
8.2%
7.7%
8.8%
4.3%
4.7%
5.0%
5.5%
5.9%
5.6%
4.2%
5.3%
2.1%
3.0%
3.8%
4.5%
Outlook ~ The Economy
NA Sectors That Directly Drive Pulp & Paper
Demand ~ Negative Going Into 2009
Industry Segment
Impacted
2008
2009
Real GDP
All
+1.2%
-2.2%
Implicit Price Deflator
All
+2.4%
+1.8%
Personal Consumption Expenditures
All
+%
+1.2%
Industrial Production
All
-1.2%
-3.8%
Containerboard
-1.2%
NA
Indust. Prod. - Durables
Packaging
-2.0%
NA
Food & Beverage Sales
Boxboard
+5.6%
NA
Tissue
+4.2%
NA
P&W Papers
-2.7%
NA
P&W Papers, Tissue
-0.5%
-1%
Tissue, Building
Products
-41%
-13%
Economic Indicator
Indust. Prod. - Non-Durables
Food services and drinking places
Computer & Electronic Sales
Professional Employment & Business Services
Housing Starts
Grade-by-Grade ~ Focus
Printing & Writing Papers
Boxboard
Containerboard
Newsprint
Market Pulp
Tissue
Printing & Writing Papers
In Addition ~ High End Uses ~ Auto Brochures/Annual
Reports ~ Being Replaced By Website Versions

High volume UCF remains under pressure from overseas
competitors ~ Newsprint producers still [slowly now]
converting capacity to UC and CGW grades

Financial returns & growth prospects ~ below industry
average where more restructuring & innovation are
essential….
Implications ~ Certain segments will suffer net capacity
reductions and others will grow some in time within a
relatively unstable sector in the near term…
P&W Paper Demand, Capacity & Shipments
40,000
NA P& Writing Papers
Volume (Short Tons 000s)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Demand
Capacity
Shipments
P&W Paper
Demand Began
To Change In The
Mid-1990s ~
Volume Down In
Late ‘08 With The
Economy ~
Risk of
Sustained
Declines In
Volume In 2009
P&W Papers ~ Excess Capacity
23%
5,000
4,000
18%
15%
14%
3,000
13%
11%
11%
13%
2,000
1,000
0
13%
13%
12% 13%
10%
8%
10%
8%
8%
8%
7%
9%
7%
8%
7%
4%
3%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
8%
% Excess Capacity
NA P&W - % Excess Capacity
NA P&W Papers - Excess Capacity
(Short Tons 000s)
6,000
Currently
Significant
Excess NA
P&W
Capacity ~
Will Come In
Line With
The
Recovery
P&W Papers ~ Nominal Prices
$1,800
Price ($ Per Short Ton)
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
CGW No. 4 50lb.
Nominal
Prices Are At /
Near Historic
Peak Levels
Where Prior
Grade
Relationships
Have Shifted
P&W Papers ~ Real Prices
Real Price ($2007 Short Ton)
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
CFS No. 3 60lb.
UCFS No. 4 Xerocopy
CGW No. 4 50lb.
Real Prices
Have Been
Rebounding
Since
2002/2003 ~
But Now
Starting To
Decline from
2008 Peaks ~
With Potential
Major
Recessionary
Exposure
Boxboard
Boxboard Has Been A Relatively Stable Segment

Slow growth in domestic industries that consume boxboard

Increased competition from overseas producers = limited
growth

High oil prices and environmental concerns dissuade further
substitution by plastics ~ but this can change…

Profitability/returns have been better than industry average
due to relatively concentrated supply base

Facility closures have brought supply and demand in line
Implications ~ Slow growth is expected going forward ~ and the
recession could reduce demand significantly and create more stress
Boxboard Demand Vs. GDP
2
NA
Boxboard
Demand
Growth Has
Been
Generally
Positive But
Significantly
Lags GDP
Relative Growth Index (1990 = 1)
1.75
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP
Total Boxboard
Boxboard Demand, Capacity & Shipments
12,500
NA Boxboard Volume
Volume (Short Tons Millions)
10,000
Demand
Was
Strong
Until Late
2008
7,500
5,000
2,500
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
NA Demand
NA Capacity
Total Shipments
Boxboard ~ Excess Capacity
900
25.0%
20.0%
700
600
15.0%
500
400
9%
300
8%
9% 9%
7%
8%
200
100
10.0%
9%
8%
6%
6%
7%
7%
6% 7%
5.0%
4%
5%
5%
Box - % Excess Capacity
NA Boxboard - Excess Capacity
(Short Tons 000s)
800
5%
3%
3%
2%
0
0.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
% Excess Capacity
Excess
Capacity Is
Forming But
Remains
Below 2001
to 2003
Levels
Boxboard ~ Prices
SBS 15 point Price ($ Short Ton)
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
Nominal Price
Linear (Real Price ($2007))
Nominal SBS
Prices
Staying Near
Historic
Highs ~
Flattening In
Real Terms ~
And At
Recessionary
Risk
Containerboard
The NA Containerboard Segment Has Undergone
One Of The Most Extensive Restructurings Within The Industry

Concentration of top producers has gone from one of the lowest to
highest in the industry ~ improved capacity utilization and expansion
discipline has followed
Further acquisitions by large players will be difficult
 NA producers export market has been supported by the weak US
Dollar ~ but this can change with a stronger dollar


Profitability and returns have improved with strong capacity
management but this is at great risk with a prolonged recession
Implications ~ Producers are expected to manage capacity
aggressively to match demand ~ risks of further closures
possible with the economic and market downturn
Containerboard Vs. Drivers
3
Relative Growth Index (1990 = 1)
2.75
2.5
2.25
2
1.75
1.5
1.25
1
0.75
0.5
1990
1992
1994
1996
1998
2000
2002
2004
2006
US Containerboard
US Durable Production
US Non-Durable Production
Real GDP
2008
NA Containerboard Demand
Continues To
Be Closely
Tied To
Domestic Nondurables And
Durables
Trends
Containerboard Demand, Capacity & Shipments
45,000
40,000
NA Capacity
Overhang
Will Be
Created By
Short Term
Substantial
Drop In
Demand
U.S. Containerboard Volume
(Short Tons Millions)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Demand
Capacity
Total Shipments
Containerboard ~ Excess Capacity
5,000
20%
4,000
15%
14%
3,000
9%
2,000
9%
9%
9%
1,000
10%
10%
6% 5%
6%
7%
6%
6%
4%
6%
5%
5%
7%
7%
5%
3%
4%
3%
-
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
% Excess Capacity
U.S. Containerboard - % Excess Capacity
U.S. Containerboard - Excess Capacity
(Short Tons 000s)
25%
NA
Containerboard’s
Excess
Capacity Is
Increasing
But Below
2001 Levels
Kraft Linerboard 42lb. Price ($ Short Ton)
Containerboard ~ Prices
$700
$600
$500
$400
$300
$200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
Nominal Price
Linear (Real Price ($2007))
Nominal
Linerboard
Prices
Remain Near
Historic
Highs ~ But
The
Recession
Will Likely
Turn This
Newsprint
Newsprint remains weakest overall NA industry segment

Short-term publishing and printing declines have been exacerbated
by substitution to alternative media

National and local papers continue to reduce page size and basis
weights ~ and are considering in some cases to move from 7 days

Opportunities for further consolidation exist and ~ significant
capacity reductions and grade conversions will continue

Ultimate demand floor for Newsprint is uncertain
Implications ~ Ongoing consolidation and capacity rationalization to
improve efficiency and match supply and demand is essential ~
Exacerbated and sustained sector pressures with the recession…
Newsprint Demand Vs. GDP
Relative Growth Index (1990 = 1)
2
1.75
NA
Newsprint
Demand ~
Continues To
Decline
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP
NA Newsprint Demand
Newsprint Demand, Capacity & Shipments
20,000
18,000
16,000
Newsprint Volume
(Metric Tons 000s)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
NA Demand
NA Capacity
Total Shipments
Demand,
Capacity,
Exports, &
Shipments ~
Are All
Sliding
Downward
At A
Relatively
Rapid Rate
Newsprint ~ Excess Capacity
2,000
25%
1,600
20%
1,400
1,200
1,000
15%
12%
11%
10%
800
10%
9%
10%
8%
600
7%
400
6%
5%
200
4%
7%
6%
5%
4% 3%
4%
4%
7%
5%
3% 3% 3%
0
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
% Excess Capacity
NA Newsprint - % Excess Capacity
NA Newsprint - Excess Capacity
(Metric Tons 000s)
1,800
Substantial
Capacity
Rationalization ~
Has Kept Supply
And Demand In
Balance ~
Despite Falling
Volume ~ This
Will Be A Further
Challenge In The
Recession…
Newsprint ~ Prices
Newsprint Price ($ Per Metric Ton)
$900
$800
$700
$600
$500
$400
$300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
Nominal Price
Linear (Real Price ($2007))
Nominal
Newsprint
Prices Are At
Historic
Highs ~ But
Real Prices
Flattening &
The Threat of
Declines is
Real
Market Pulp
Market Pulp ~ Intermediate Good In Production Of Other Paper
And Paperboard Grades

Internationally traded commodity with growing world-wide demand ~
especially in developing regions being now impacted by recession…

Environmental restrictions ~ new capacity additions difficult

NA is a large net exporter ~ which is at some risk with exchange rates

DIP pulps presently relatively more financially attractive than virgin
pulps ~ But this is a constantly changing reality…
Implications ~ This sector will be very chaotic but has always showed
resiliency ~ Wild cards here are China’s fiber demand… And South
America’s capacity expansions…
Market Pulp With Other Grades
Market Pulp vs. Paper Growth Index
2
1.75
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
NA P&W Papers + Tissue
NA BSKP
Total NA Market Pulp
NA BHKP
Market Pulp
Demand Still
Follows
Other Grades
~ But Watch
China
Demand and
South
American
Capacity
Additions
Market Pulp Capacity & Shipments
15,000
Market Pulp
Demand Has
Fallen With
Overall
Paper
Demand
Starting In
Late 2008
NA Market Pulp Volume
(Metric Tons 000s)
12,500
10,000
7,500
5,000
2,500
1983
1986
1989
BSKP Shipments
BSKP Capacity
1992
1995
1998
2001
2004
BHKP Shipments
BHKP Capacity
2007
2010
BHKP ~ Excess Capacity
1,600
16%
15%
14%
1,200
12%
12%
14%
12%
12%
11%11%
10%
10%
10%
9% 10%
1,000
10%
8%
10%
800
4%
6%
600
9%
5%
400
7%
6%
2%
8%
7%
6%
4%
3%
3%
200
2%
1%
-
0%
1983
1986
1989
1992
Metric Tons
1995
1998
2001
2004
% of Capacity
2007
2010
BHKP - % Excess Capacity
BHKP - Excess Capacity
(Short Tons 000s)
1,400
NA BHKP
Excess
Capacity Is
Increasing
To
Relatively
High Levels
BSKP Excess Capacity
3,000
BSKP - Excess Capacity
(Short Tons 000s)
2,500
12%
12%
11%
12%
2,000
1,500
15%
14%
14%
9%
11%
12%
13%
11%
11%
10%
10%
9%
8%
7%
10%
9%
7%
8%
6%
5%
7%
1,000
4%
5%
5%
4%
500
3%
0%
3%
1%
-
0%
1983
1986
Metric Tons
1989
1992
1995
1998
% of Capacity
2001
2004
2007
2010
BSKP - % Excess Capacity
14%
NA BSKP
Excess
Capacity
Is Also
Relatively
High
Market Pulp ~ Nominal Prices
Pulp Price Per Metric Ton
$1,000
$900
Nominal
Market
Pulp Prices
Have Fallen
Quickly
And
Sharply
$800
$700
$600
$500
$400
$300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
NBSKP Deliv. To US
NBHKP Deliv. To US
Real Pulp Price Per Metric Ton ($2007)
Market Pulp ~ Real Prices
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
NBSKP Deliv. To US
NBHKP Deliv. To US
Real
Market
Pulp
Prices Are
Falling
Towards
Historic
Lows
Tissue
Tissue Has Been the Strongest Overall Segment In North
America in Recent Years – Demand is Catching Supply





End-product demand is mature ~ Americans highest per-capita
consumers in world & incremental demand is slow
However ~ overall company financial returns less sensitive to
supply / demand dynamics at mill level than other grades
Regulatory considerations ~ will limit large M&A activity
Both technology changes and new entrepreneurial entrants will
drive spending
Excess capacity in recent years ~ is reversing
Implications ~ Tissue remains the strongest performing grade
in the sector ~ but it is not immune to the recession….
Tissue Vs. GDP & Households Formation
2
Relative Growth Index (1990 = 1)
1.75
NA Tissue
Demand
Growth Has
Been More
Resilient
than Overall
GDP
1.5
1.25
1
0.75
0.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real GDP
NA Tissue
U.S. Households
Tissue Demand, Capacity & Shipments
12,000
11,000
10,000
Demand Is
Growing
Slowly
and
Capacity
Is Once
Again
Managed
9,000
NA Tissue Volume
(Short Tons 000s)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Demand
Capacity
Shipments
Tissue Excess ~ Excess Capacity
25%
NA Tissue - Excess Capacity
(Short Tons 000s)
1,200
20%
1,000
12%
600
9%
11%
10%
400
8% 8%
4%
13%
12%
12%
9%
6%
200
15%
13%
800
7%
7%
7%
10%
10%
7%
6%
5%
5%
4%
0
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Excess Capacity
% Excess Capacity
NA Tissue - % Excess Capacity
1,400
Excess
Capacity Is
Falling
Back
Towards
Historic
Average
Levels
Tissue ~ Prices
200
Household Paper Products
Price Index
190
180
170
160
150
140
130
120
110
100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Real Price ($2007)
Linear (Real Price ($2007))
Nominal Price
Prices
Strong
Since 2004
- 2008 ~
Finished
Product &
Roll Stock
Are Up In
Nominal
And Real
Terms
Prices ~ Key Raw Materials
Pulpwood
Recovered Paper
Oil
Natural Gas
Pulpwood ~ Prices
$200
PPI Index - U.S. Pulpwood
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
Nominal Price
Real US
Pulpwood
Prices Risen
Over Past
Six Years ~
We Expect
To See Them
Fall With
Other
Commodities
Real Recovered Fiber Price - U.S. Midwest
($2007 Per Short Ton)
Recovered Fiber ~ Prices
$140
$120
$102
$100
$80
$88
$69
$67
$69
$72
$84
$60
$54
$49
$93
$74
$65
$46
$40
$78
$78
$66
$61
$39
$20
$22
$3
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 Spot
OCC#11
ONP#8
After
Unprecedented
Increases ~
OCC & ONP
Costs Have
Fallen
Dramatically
Oil Price: Domestic West Texas Intermed.
($ per Bbl)
Oil ~ Prices
$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Spot
Price
1990
1993
1996
Real Price ($2007)
1999
2002
2005
2008
Nominal Price
Oil Prices
Have Fallen
Dramatically
From Daily
Peak Of $145
Per Barrel In
July 2008 To
$40 Per Barrel
Today
Natural Gas ~ Prices
Natural Gas Deliv. to Industrial
($ per Ths. Cu. ft.)
$11
$10
$9
$8
$7
Spot
$6
$5
$4
$3
$2
$1
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real Price ($2007)
Nominal Price
Natural Gas
Prices Have
Also Fallen
~ Into The
$7 Per
Thousand
Cubic Foot
Range
Key Takeaways ~ Overall
The NA Industry Performed Relatively Well Over The
Past Five To Six Years ~ But The Current Recession
Will Reverse This
Industry participants will be seriously challenged to
produce strong financial performance in a slow
demand growth and credit crippled environment
and weak global and domestic economies
Rising prices improved profitability but demand
shortfalls will both undercut price increases and
drive returns down…
Rising costs that offset some of the benefits of high
pricing are easing in the recession and this is a very
needed relief…
Key Takeaways ~ Looking Out
The NA industry financial performance has been adequate but
not compelling for a number of years ~ but now is a big ?
Improvements in recent years were a relief ~ yet the dramatic
nature of this recession cries out for more…
Quality of management decisions for short term actions to
traverse the recession will differentiate the survivors and
future thrivers from those who fail…
Short term changes in industry direction will impact all
aspects of the industry ~ producers and suppliers alike ...
Where there is light on the horizon ~ it will come from bold
crisis management actions ~ stay tuned ...
Disclaimer
The State of the Industry (SOI) presentations are written companions to live lectures. Therefore,
content of these presentations should only be considered in conjunction with their oral
presentations and only in their entirety.

Certain statements made in the SOI presentation series concern past performance and the
outlook for the pulp and paper industry. These statements are made for discussion purposes
only and are based on limited public information available on the presentation date. While
we believe the information contained within the presentations is reasonable, no assurance
can be given that the assessments and outlooks discussed are correct. Accordingly, actual or
anticipated results with further information and analysis could differ from those herein and
these differences could be material.

We have no obligation to tell you when opinions or information in this presentation change.
Therefore, parties using these presentations should accordingly exercise due diligence when
relying on data or other information in the presentations.

Unless otherwise stated, trends and outlooks for the overall industry or grade segment are
not necessarily applicable to any particular company, security, investment, product, supplier
group, customer group or otherwise related industry;

This presentation is not intended to provide investment advice of any kind. It has been
prepared without regard to the individual financial circumstances and objectives of persons
who use it. The industry discussed in this report and related securities may not be suitable for
all investors. We recommend that investors independently evaluate particular investments
and strategies, and encourage investors to seek the advice of a financial adviser. The
appropriateness of a particular investment or strategy will depend on an investor’s individual
circumstances and objectives.
Contact Information
Thank You! ~Copies Available At
[email protected]
Contact Information
Dr. Jacquelyn-Danielle McNutt
Executive Director ~ Center for Paper Business & Industry Studies
404-894-5733 ~ [email protected]