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Deutsche Bank Securities Inc.
Where Are We Headed?
A Look At The Containerboard & Corrugated Box Industry
IMPORTANT: PLEASE READ DISCLOSURES AND DISCLAIMERS AT THE END OF THIS PRESENTATION
Mark Wilde 212-469-5570 [email protected]
Deutsche Bank Securities Inc.
Broad Overview
The North American Macros Remain Very Tough
 Two consecutive years of declining box consumption in the U.S.; 2000 (-1%) &
2001 (-5%)
– Not a typical downturn
– Only comps - 1982 (-5%) & 1975 (-10%)
– Boxes have lagged the economy since the mid-1990s
– Recent economic momentum waning?
 Offshore demand mixed
 A strong U.S.$ has hurt directly & indirectly - what now?
– Directly: U.S. board producers less competitive globally
– Indirectly: More imported goods, less domestic box demand
Mark Wilde · 9/3/02 · page 2
Deutsche Bank Securities Inc.
The Current Environment
Mark Wilde · 9/3/02 · page 3
The Current Environment
Box volumes are showing signs of life
Box Volumes, Avg Week Changes
15%
10%
% change y/y
5%
0%
-5%
-10%
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
Dec-97
Jun-97
Dec-96
Jun-96
Dec-95
Jun-95
Dec-94
-15%
Source: Fibre Box Assoc.
 The key question at the moment?
– Will it last?
– Industrial production slipped in August
– ISM (purchasing managers) figures have slipped
Mark Wilde · 9/3/02 · page 4
The Current Environment
Inventories are in good shape
Total Containerboard Inventories
3,200
3,100
3,000
thousands of tons
2,900
2,800
2,700
2,600
2,500
Source: AF & PA
 Can inventories alone drive a rebound?
– Too much focus on inventories
– Not enough focus at demand
Mark Wilde · 9/3/02 · page 5
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
2,400
Deutsche Bank Securities Inc.
A Bit of Perspective...
Relationship between the U.S. economy & box demand has changed
 In the mid/late 1990’s, the economy roars, the box business snores
Source: Fact Set and Fibre Box Assoc.
Mark Wilde · 9/3/02 · page 6
Deutsche Bank Securities Inc.
A Bit of Perspective ...
Slower domestic growth - - - why?
 A better indicator is activity in nondurable goods
Source: Fibre Box Assoc. and Fact Set
Mark Wilde · 9/3/02 · page 7
Deutsche Bank Securities Inc.
A Bit of Perspective ...
Linerboard exports have evaporated - and won’t completely come back
Source: Pulp & Paper North American Fact Book and American Forest & Paper Association
 Growing offshore supply and strong U.S. $ will limit export rebound
Mark Wilde · 9/3/02 · page 8
Deutsche Bank Securities Inc.
A Bit of Perspective ...
Part of the issue - - - growing imports of consumer nondurables
 Deteriorating balance of trade is hitting box business
 For example: food products account for over 40% of U.S. box demand
Food & Beverage Imports
14%
12%
10%
8%
6%
4%
2%
0%
-2%
1988
1989
Source: Fact Set
Mark Wilde · 9/3/02 · page 9
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Deutsche Bank Securities Inc.
A Bit of Perspective ...
Conversely, box volumes look better outside the U.S.
Source: ICCA
Mark Wilde · 9/3/02 · page 10
Deutsche Bank Securities Inc.
A Bit of Perspective ...
The supply side of the global equation is also changing
 Healthy demand, strong U.S.$ and capital are all feeding new capacity
Company
Confirmed
Propapier
Oudegem Papier
Visy Paper
Roman Bauernfeind
CMPC
Compania Papelera del Pacifico
Shandong Bohui
Zhongshan Ren Hing Paper
Hebei Jiteng
Zhejiang JingXing Paper
Solvay Paperboard
Asia Kraft Paper
Papierfabrik Palm
Arab Paper Manufacturing
Middle East Paper Company
Location
Capacity Startup Company
Location
Burg, Germany
Dendermond, Belgium
Tumut, Australia
Raubling, Germany
Puente Alto, Chile
Chile
Zibo, China
Zhongshan, China
Tangshan, China
PingHui, China
Solvay, NY USA
Samut Sakhorn, Thailand
Worth, Germany
Dammam, Saudi Arabia
Jeddah, Saudi Arabia
330,000
110,000
265,000
115,000
165,000
140,000
110,000
165,000
110,000
220,000
175,000
200,000
660,000
135,000
110,000
Cartiera del Polesine
Lee & Man Paper
W Hamburger Group
Nine Dragons Paper
Long Chen Paper
Nine Dragons Paper
Adolf Jass
Sun Paper & Jianhau JV
Loreo, Italy
Dongguan, China
Austria, Germany & Hungary
Dongguan, China
Jiansu, China
Taicang, China
Thuringen, Germany
Dongguan, China
Speculative
Nine Dragons Paper
Papierfabrik Rieger (W Hamburger sub)
Beijing New ay Economical
Wonder Group
Wonder Group
Taicang, China
Germany
Jiangsu, China
Guangdong, China
Jiangsu, China
2001
2001
2001
2001
2001
2001
2001
2001
2001
2001
2002
2002
2002
2002
2002
Source: Paperloop, Company information DBSI estimates
 Probable Outcomes?
– Higher OCC costs and altered economies
– Market dislocations?
Mark Wilde · 9/3/02 · page 11
Capacity
155,000
385,000
405,000
440,000
260,000
605,000
495,000
380,000
2,500,000
130,000
660,000
170,000
180,000
Startup
2002
2002
2003
2003
2003
2004
2004
2004
NA
NA
NA
NA
NA
Deutsche Bank Securities Inc.
A Bit of Perspective ...
Other elements of change
 Increased concentration among your customers
– Consolidation in food & consumer products means more leverage for box customers
– Reverse auctions pressuring prices in some cases
 Consolidation among containerboard producers
– Some players betting heavily on ability to drive out costs
 Substitution
– Shrink wrap & reusable plastic containers
 New technologies can increase competitive pressure
– Mini-mills have reduced barriers to entry
Mark Wilde · 9/3/02 · page 12
Deutsche Bank Securities Inc.
How Has the Business Responded?
Mark Wilde · 9/3/02 · page 13
Deutsche Bank Securities Inc.
How Has the Business Responded?
The industry has held up remarkably well - despite tough fundamentals
 Fundamentals suggest a fiasco… reality is better
U.S. Containerboard Data
1991
320.1
1992
335.7
1993
353.8
1994
374.8
1995
373.0
1996
377.8
1997
390.1
1998
395.5
1999
405.0
2000
401.3
0.6%
4.9%
5.4%
6.0%
-0.5%
1.3%
3.3%
1.4%
2.1%
-0.9%
-5.4%
-1.0%
3,141
3,139
2,994
3,163
2,899
3,978
4,805
3,951
3,383
3,068
2,801
1,729
2.4%
-0.1%
-4.6%
5.6%
-8.3%
37.2%
20.8%
-17.8%
-14.4%
-9.3%
-8.7%
8.5%
Linerboard Operating Rate 94.8%
Linerboard Prices
336
94.9%
345
94.8%
306
96.7%
375
93.7%
510
92.4%
380
93.0%
340
90.6%
370
96.4%
401
89.8%
468
85.0%
420
87.3%
421
-9.4%
2.7%
-11.3%
22.5%
36.0%
-25.5%
-10.5%
8.8%
8.4%
16.7%
-10.2%
-7.1%
102.7
104.8
103.3
109.3
136.5
118.5
105.8
112.9
115.2
129.1
128.2
123.9
-4.1%
2.0%
-1.4%
5.8%
24.9%
-13.2%
-10.7%
6.7%
2.0%
12.1%
-0.7%
-4.7%
Box Shipments (b.sq.ft.)
% Change
Containerboard Exports
% Change
% Change
Corr. Box Price Index
% Change
Source: Fibre Box Assoc., Pulp & Paper North American Fact Book, American Forest & Paper Assoc.
Mark Wilde · 9/3/02 · page 14
2001 YTD2002
379.6
220.5
Deutsche Bank Securities Inc.
How Has the Business Responded?
The industry has consolidated
Capacity (1984)
Weyerhaeuser
Stone Container
International Paper
Champion International
Union Camp
000 s.tons Market Share
1,979
8.0%
1,844
7.5%
1,830
7.4%
1,443
5.9%
1,340
5.4%
Capacity (2002)
Smurfit-Stone
Weyerhaeuser
International Paper
Temple-Inland
Georgia-Pacific
000 s.tons Market Share
7,784
19.2%
6,134
15.2%
4,640
11.5%
4,010
9.9%
3,742
9.2%
Source: Pulp & Paper North American Fact Book
The consolidation process hasn’t run its course yet.
Mark Wilde · 9/3/02 · page 15
Deutsche Bank Securities Inc.
How Has the Business Responded?
Flow of new capital investment has been restricted
 Historically, industry has created most of its own problems
 Across the industry, capital spending is well below D&A
North American Containerboard Capacity Growth
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.0%
0.4%
0.5%
0.3%
0.0%
0.1%
0.3%
0.0%
-0.5%
1992-2001
2000
2001
Source: American Forest & Paper Assoc.
Mark Wilde · 9/3/02 · page 16
2002
2003
2004
Avg. 02-04
Deutsche Bank Securities Inc.
How Has the Business Responded?
Widespread shutdown of marginal capacity.
Major Containerboard Capacity Closures
Company
Temple-Inland
Packaging Corp.
Smurfit-Stone
Smurfit-Stone
International Paper
Smurfit-Stone
Smurfit-Stone
Smurfit-Stone
Temple-Inland
International Paper
American Tissue
Location
New ark, CA
Filer City, MI
Port St. Joe, FL
Port Wentw orth, GA
Gardiner, OR
Jacksonville, FL
Alton, IL
Circleville, OH
New port, IN*
Roanoke Rapids, VA
Harriman, TN
Tons (M)
65,000
70,000
445,000
370,000
315,000
320,000
210,000
115,000
250,000
90,000
80,000
Year
1998
1998
1998
1998
1998
1999
1999
1999
2000
2000
2001
Company
International Paper
Georgia-Pacific
Smurfit-Stone
Smurfit-Stone
Smurfit-Stone
Weyerhaeuser
Weyerhaeuser
International Paper
Temple-Inland
Temple-Inland
Weyerhaeuser
Location
Savannah, GA
Toledo, OR
Missoula, MT
Fernandina, FL
Hodge, LA
Springfield, OR
Plymouth, NC
Osw ego, NY
Antioch, CA
Bogalusa, LA
Haw esville, KY
* conversion still largely producing corr. medium
Source: NLK Associates and company information
 Partially offset by higher-than-expected “creep”
 Lots of small machines still in operation
Mark Wilde · 9/3/02 · page 17
Tons (M)
610,000
240,000
200,000
200,000
150,000
248,000
215,000
100,000
425,000
170,000
200,000
5,088,000
Year
2001
2001
2001
2001
2001
2001
2001
2002
2002
2002
2002
Deutsche Bank Securities Inc.
How Has the Business Responded?
“Flat-out” production mentality has changed
1,200
Reported Economic Dow ntime in U.S.
1,000
1,200
1,000
800
800
600
600
400
400
200
200
0
0
%of M arket
1Q00
1Q00
2Q00
2Q00
3%
5%
3Q00
3Q00
11%
4Q00
4Q00
11%
1Q01
1Q01
8%
2Q01
2Q01
9%
3Q01
3Q01
7%
4Q01
4Q01
8%
1Q02
1Q02
2Q02
2Q02
8%
3%
Source: Company reports and DBSI estimates
 Getting past the “covering cash-cost” mindset
 Running at 100% in a low growth/ strong U.S.$ setting is like building in the
flood plain
Mark Wilde · 9/3/02 · page 18
Deutsche Bank Securities Inc.
How Has the Business Responded?
…Has The Industry Changed?
 Based on what we’ve seen last 2 1/2 years…
“We’re encouraged, but it’s tough to claim victory yet!”
Mark Wilde · 9/3/02 · page 19
Deutsche Bank Securities Inc.
Summing It All Up ...
Mark Wilde · 9/3/02 · page 20
Where does it leave the independent converters?
Board and box prices will be less volatile - “stable” prices are a fantasy.
 Integration remains the strategy “du jour” among integrateds
– They’ve bid up valuations on converters
– Any better about customers and service?
– “Unclear… unlikely?”
– Any smarter about pricing?
– “I’ll give you two words…”
Mark Wilde · 9/3/02 · page 21
Where does it leave the independent converters?
Your issues?
 Competing for a small piece of the pie in a mature business
 Pressured by structural changes in the business
– Consolidation, imports, reverse auctions, etc.
 There will continue to be a place for independent converters
– It may be a smaller place
– Hitting “niches” is critical
– Customer service is essential
Mark Wilde · 9/3/02 · page 22
Deutsche Bank Securities Inc.
Where does it leave the entire industry?
 Industry must learn to operate differently… fewer “outs” exist
– Less ability to grow out of overcapacity situations
– Domestic growth is on a lower track
– Inability to export way through soft markets
 Industry discipline can mitigate downside & provide a better platform for
recovery
– Avoiding the long climb out of the “cash-cost” hole
– Investors understand this to be a “mature” business, but they would reward greater
stability and improved returns
Mark Wilde · 9/3/02 · page 23
Deutsche Bank Securities Inc.
Summing It All Up
 Shift toward “value” focus - away from production mentality
– Industry provides packaging; it shouldn’t focus strictly on mills
 Consolidation won’t eliminate the need to drive out costs
– “Real” prices go down over time
– Industry must remain/ increase competitive vs. other forms of packaging
– World without packaging? Doubtful.
– World without paper? Possible.
 Globally, “the industry” needs to think from portfolio perspective
– Supply discipline is a global issue
– Relative currency moves can lead to decisions w/ long-term implications
– State subsidies prompt overcapacity and contribute to low returns
Mark Wilde · 9/3/02 · page 24
Deutsche Bank Securities Inc.
Summing It All Up
Industry must benchmark against alternative investments
 Industry represents less than 1% of U.S. equity market - few investors must
own this sector
 Reduce volatility & provide improved returns
– If you can’t invest cash flow effectively return it to shareholders
– Make employees act/think like shareholders
 The industry “re-rating” hasn’t happened… yet.
Mark Wilde · 9/3/02 · page 25
Deutsche Bank Securities Inc.
Discussion
Mark Wilde · 9/3/02 · page 26
Deutsche Bank Securities Inc.
Additional Information Available upon Request
Disclosure Checklist
Company
Ticker
Price 9/18/02
Disclosure
Georgia-Pacific
International Paper
Packaging Corp.
Smurfit-Stone
Temple Inland
Weyerhaeuser
GP
IP
PKG
SSCC
TIN
WY
$15.41
$33.55
$17.69
$14.27
$44.57
$49.78
6,8,9
1,6,7,9
6,9
2,6,7,8
6
1,6,7,8,9
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Mark Wilde · 9/3/02 · page 27
Deutsche Bank Securities Inc.
Rating Key
Buy: Total return expected to appreciate 10% or more
over a 12-month period
Hold: Total return expected to be between 10% to –
10% over a 12-month period
Sell: Total return expected to depreciate 10% or more
over a 12-month period
Rating Dispersion and Banking Relationships
400
300
200
100
0
Bu y
Co m p an ies Co v ered
Ho ld
Sell
Co s . w / Ban k in g Relat io n s h ip
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Mark Wilde · 9/3/02 · page 28