Pulp and PaperPulp and PaperProducts

10/24/2007 1

Products

Topics

Industry AnalysisWeyerhaeuser AnalysisEconomic EnvironmentRecommendations Macro Impact

10/24/2007 2

Objective

Present the relevance of the forest and paper products industry to the US economy. Propose a shift and change in strategy for companies in the Forest and Paper industry due to the changing economic condition

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Forestry and Paper Products Industry

Wood Products – 45% of IndustryPrinting and writing paperBoxboardContainerboardTissue NewsprintReal EstateRecycling

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Top 10 Industry Firms

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Rank Company Country 2006 Net Sales (MM)

2006 Net Income (Loss)(US$M)

11 International International PaperPaper

USUS 24,97624,976 (880)(880)

22 Koch Koch IndustriesIndustries--GPGP

USUS 23,27123,271 (735)(735)

33 WeyerhaeuserWeyerhaeuser USUS 16,77116,771 1616

4 Kimberly-Clark US 13,566 1,1675

5 Stora Enso Finland 12,090 (211)

6 Procter & Gamble US 11,877 954

7 UPM-Kymmene Finland 9,907 520

8 Nippon Unipac Japan 9,696 (5)

9 Oil Paper Japan 9,635 (142)

10 SCA Sweden 9,091 588

Forest and Paper Industry in US Economy

10/24/2007

The entire Industry does $260B in sales

The entire industry employs approximately 1 million workers

North America accounts for more than 25% of Worldwide Market Share

Industry Represents 1.96% of US GDP

6

Demand Factors for Forest and Paper Products

Housing StartsDirect Correlation to Demand for Wood Products segment in Forestry and Paper ProductsAlso effected by Interest Rates as a lagged negative correlation

0

500000

1000000

1500000

2000000

2500000

199619

9719

9819

9920

0020

0120

0220

0320

0420

05

Year

Hous

ing Sta

0

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

10,000,000,000

12,000,000,000

WY Lu

mbe

r Sa

HousingStartsWY Lumber

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Demand Factors for Forest and Paper Products

Exchange Rates- International TradeValue of Dollar directly impacts the price of lumber and raw materials. Imports rise as the dollar value increasesChina is largest trading partner for wood products

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Exchange Rate vs Imports and Exports

02000

40006000

800010000

199619

9719

9819

9920

0020

0120

0220

0320

0420

05

Year

Impo

rt and

Exp

o

8.18.15

8.28.25

8.38.35

Rate

Wood Pulp ExportsWood Pulp ImportsChina Exchange Rate

Demand Factors for Forest and Paper Products

Increasing Level of SubstitutesLumber Demand is being addressed by alternate materialsPaper demand is decreasing as electronic means take hold and shrinking need for newsprint as newspapers lose readers

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Forest and Paper Industry Costs and Production Issues

Energy PricesEnergy PricesApproximately 10% of all companies costsCompanies generally cannot increase prices relative to change in energy costs because products are commodities

Industry Operating Industry Operating EfficiencyEfficiency

Generally running 98% capacity

Raw Materials CostsRaw Materials CostsTrees, Solvents, Harvesting

Capital Outlays for MillsCapital Outlays for MillsLumber and Paper Mills are capital intensive to build and may become unneeded if supply increases and/or demand lowers

Oil Prices vs COGS

$-

$10.00

$20.00

$30.00

$40.00

$50.00

96 97 98 99 00 01 02 03 04 05

Year

Oil

Pric

0

5,000,000

10,000,000

15,000,000

20,000,000

WY

CO

GS

(In B

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Industry Non Economic Factors

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Government and Environmental Regulations

Ecological and animal habitat regulations have hindered ability to utilize timberlandsEnvironmental impacts of plants

Natural DisastersHurricanesForest Fires

Weyerhaeuser Introduction

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US Based Company$22.629 Billion in Sales$733 Million in Net Income49,900 Employees#3 in Industry Market Share#2 in Wood Products

WY Market Share of Total Industry

93%

7%

Industry Sales

WY Sales

Market PowerWeyerhaeuser is the 2nd largest North American Company in the Forest and Paper Industry with revenues of $22.629B in 2005. They currently have a pending purchase of Domtar Inc which will give WY more Canadian assets

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Weyerhaeuser Financial Performance

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Weyerhaeuser Business Units

Product Sales

Other22%

Lumber Sales48%

EngineeredLumber Products

8%

P&P Sales22%

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Weyerhaeuser Strategies and Goals 2007

Maintain focus on reduction in costs of productionSelective market expansionFund selective growth opportunitiesContinue capital spending disciplineSouth American growth

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Economic Environment- Future

Housing Starts- Expected to see slight declines and then stability over next three years Housing Starts with 3 Year Forecast

0

500000

1000000

1500000

2000000

2500000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Year

Ann

ual S

tar

Housing Starts

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Economic Environment- Future

Interest Rate- will remain constant based on pull back of investment in housing market and strong potential Fed activity

Interest Rate with Three Year Forecast

0.001.002.003.004.005.006.007.00

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Year

Rat

e

Interest Rate

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Economic Environment- Future

Correlation of Interest Rates and Housing Starts

Housing Starts vs Interest Rates

0

500000

1000000

1500000

2000000

2500000

19961997199819992000200120022003200420052006200720082009

Year

Starts

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Rates

Housing Starts Nominal Interest Rates

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Economic Environment- Future

Energy Prices- will remain stable over next three years pending no significant impact on supply

Oil Prices with Three Year Forecast

$-$10.00$20.00$30.00$40.00$50.00$60.00$70.00

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Year

Pric

e pe

r Bar

Oil Prices

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Economic Environment- Future

Exchange Rate- current trend is indicating a stronger US dollar to most currencies. Also import increases indicate the position for a stronger US Dollar

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Weyerhaeuser Forecasts

Demand for lumber will fall due to decrease in housing starts which started 4Q of 2006 which = lower salesEnergy price stability will not allow for reduced costs of productionDue to decrease in demand and stable energy prices WY’s profits will decreaseInterest Rate stability will no fuel a surge in housing starts

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Weyerhaeuser Recommendations

Maintain operating capacity at 97% or aboveIncreased expansion into Asian markets-China

Take advantage of stronger dollarChina Demand for Wood and Paper Product has tripled- including newsprint

Continued divesting of timberline assetsMove focus out of Real Estate Business Sector

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Weyerhaeuser Recommendations

Focus on Substitute and Compliment Products to capitalize on demand and lower production costs

Higher Demand and lower production cost in Raw Materials and Energy for Engineered Wood ProductsEucalyptus Pulp available to harvest year round and primarily based in AsiaProducts are not as elastic as current portfolio

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Weyerhaeuser Recommendations

Expand and utilize transportation businessMake more vertical supply chain to Asia expansion and streamline cost structureUtilize to take advantage of risk and changes in exchange rates along with import an export fluctuations

Weyerhaeuser can hedge against potential interest fluctuations by managing a portfolio of variable and fixed rate debt composed of short and long term instruments. This will help balance the Corporations cost of financing with it's interest rate risk.

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Thank You

QUESTIONS

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