where are we headed? a look at the containerboard & corrugated box industry deutsche bank...
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Where Are We Headed?A Look At The Containerboard & Corrugated Box Industry
Deutsche Bank Securities Inc.
Mark Wilde212-469-5570 [email protected]
IMPORTANT: PLEASE READ DISCLOSURES AND DISCLAIMERS AT THE END OF THIS PRESENTATION
Mark Wilde · 9/3/02 · page 2
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
Deutsche Bank Securities Inc.
Mark Wilde · 9/3/02 · page 3
The Current Environment
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Mark Wilde · 9/3/02 · page 4
The Current Environment
Box volumes are showing signs of life
The key question at the moment?– Will it last?
– Industrial production slipped in August– ISM (purchasing managers) figures have slipped
Source: Fibre Box Assoc.
Box Volumes, Avg Week Changes
-15%
-10%
-5%
0%
5%
10%
15%D
ec-
94
Jun
-95
De
c-9
5
Jun
-96
De
c-9
6
Jun
-97
De
c-9
7
Jun
-98
De
c-9
8
Jun
-99
De
c-9
9
Jun
-00
De
c-0
0
Jun
-01
De
c-0
1
Jun
-02
% c
ha
ng
e y
/y
Mark Wilde · 9/3/02 · page 5
The Current Environment
Inventories are in good shape
Can inventories alone drive a rebound?– Too much focus on inventories– Not enough focus at demand
Total Containerboard Inventories
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200Ja
n-9
8
Ap
r-9
8
Jul-
98
Oct
-98
Jan
-99
Ap
r-9
9
Jul-
99
Oct
-99
Jan
-00
Ap
r-0
0
Jul-
00
Oct
-00
Jan
-01
Ap
r-0
1
Jul-
01
Oct
-01
Jan
-02
Ap
r-0
2
Jul-
02
tho
usa
nd
s o
f to
ns
Source: AF & PA
Mark Wilde · 9/3/02 · page 6
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
Deutsche Bank Securities Inc.
Source: Fact Set and Fibre Box Assoc.
GDP vs Box Shipment Growth
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Corrugated Box Shipments Inflation Adjusted GDP
Mark Wilde · 9/3/02 · page 7
A Bit of Perspective ...
Slower domestic growth - - - why?
A better indicator is activity in nondurable goods
Deutsche Bank Securities Inc.
Source: Fibre Box Assoc. and Fact Set
Box Shipments vs Nondurables
-10%
-5%
0%
5%
10%
15%
20%
Corrugated Box Shipments
Nondurable Industrial Prod.
Mark Wilde · 9/3/02 · page 8
A Bit of Perspective ...
Linerboard exports have evaporated - and won’t completely come back
Growing offshore supply and strong U.S. $ will limit export rebound
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Source: Pulp & Paper North American Fact Book and American Forest & Paper Association
U.S. Linerboard Exports
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Mark Wilde · 9/3/02 · page 9
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
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Food & Beverage Imports
-2%
0%
2%
4%
6%
8%
10%
12%
14%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Fact Set
Mark Wilde · 9/3/02 · page 10
A Bit of Perspective ...
Conversely, box volumes look better outside the U.S.
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Global Box Demand
-2%
0%
2%
4%
6%
8%
10%
12%
U.S. China Thailand Brazil France World
2000
5yr CAGR
Source: ICCA
Mark Wilde · 9/3/02 · page 11
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
Probable Outcomes?– Higher OCC costs and altered economies– Market dislocations?
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Company Location Capacity Startup Company Location Capacity StartupConfirmedPropapier Burg, Germany 330,000 2001 Cartiera del Polesine Loreo, Italy 155,000 2002Oudegem Papier Dendermond, Belgium 110,000 2001 Lee & Man Paper Dongguan, China 385,000 2002Visy Paper Tumut, Australia 265,000 2001 W Hamburger Group Austria, Germany & Hungary 405,000 2003Roman Bauernfeind Raubling, Germany 115,000 2001 Nine Dragons Paper Dongguan, China 440,000 2003CMPC Puente Alto, Chile 165,000 2001 Long Chen Paper J iansu, China 260,000 2003Compania Papelera del Pacifico Chile 140,000 2001 Nine Dragons Paper Taicang, China 605,000 2004Shandong Bohui Zibo, China 110,000 2001 Adolf J ass Thuringen, Germany 495,000 2004Zhongshan Ren Hing Paper Zhongshan, China 165,000 2001 Sun Paper & J ianhau J V Dongguan, China 380,000 2004Hebei J iteng Tangshan, China 110,000 2001Zhejiang J ingXing Paper PingHui, China 220,000 2001 SpeculativeSolvay Paperboard Solvay, NY USA 175,000 2002 Nine Dragons Paper Taicang, China 2,500,000 NAAsia Kraft Paper Samut Sakhorn, Thailand 200,000 2002 Papierfabrik Rieger (W Hamburger sub) Germany 130,000 NAPapierfabrik Palm Worth, Germany 660,000 2002 Beijing Neway Economical J iangsu, China 660,000 NAArab Paper Manufacturing Dammam, Saudi Arabia 135,000 2002 Wonder Group Guangdong, China 170,000 NAMiddle East Paper Company J eddah, Saudi Arabia 110,000 2002 Wonder Group J iangsu, China 180,000 NA
Source: Paperloop, Company information DBSI estimates
Mark Wilde · 9/3/02 · page 12
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
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Mark Wilde · 9/3/02 · page 13
How Has the Business Responded?
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Mark Wilde · 9/3/02 · page 14
How Has the Business Responded?
The industry has held up remarkably well - despite tough fundamentals
Fundamentals suggest a fiasco… reality is better
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Source: Fibre Box Assoc., Pulp & Paper North American Fact Book, American Forest & Paper Assoc.
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 YTD2002Box Shipments (b.sq.ft.) 320.1 335.7 353.8 374.8 373.0 377.8 390.1 395.5 405.0 401.3 379.6 220.5 % Change 0.6% 4.9% 5.4% 6.0% -0.5% 1.3% 3.3% 1.4% 2.1% -0.9% -5.4% -1.0%
Containerboard Exports 3,141 3,139 2,994 3,163 2,899 3,978 4,805 3,951 3,383 3,068 2,801 1,729 % Change 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% 94.9% 94.8% 96.7% 93.7% 92.4% 93.0% 90.6% 96.4% 89.8% 85.0% 87.3%Linerboard Prices 336 345 306 375 510 380 340 370 401 468 420 421 % Change -9.4% 2.7% -11.3% 22.5% 36.0% -25.5% -10.5% 8.8% 8.4% 16.7% -10.2% -7.1%
Corr. Box Price Index 102.7 104.8 103.3 109.3 136.5 118.5 105.8 112.9 115.2 129.1 128.2 123.9 % Change -4.1% 2.0% -1.4% 5.8% 24.9% -13.2% -10.7% 6.7% 2.0% 12.1% -0.7% -4.7%
U.S. Containerboard Data
Mark Wilde · 9/3/02 · page 15
How Has the Business Responded?
The industry has consolidated
The consolidation process hasn’t run its course yet.
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Source: Pulp & Paper North American Fact Book
Capacity (1984) 000 s.tons Market ShareWeyerhaeuser 1,979 8.0%Stone Container 1,844 7.5%International Paper 1,830 7.4%Champion International 1,443 5.9%Union Camp 1,340 5.4%
Capacity (2002) 000 s.tons Market ShareSmurfit-Stone 7,784 19.2%Weyerhaeuser 6,134 15.2%International Paper 4,640 11.5%Temple-Inland 4,010 9.9%Georgia-Pacific 3,742 9.2%
Mark Wilde · 9/3/02 · page 16
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
Deutsche Bank Securities Inc.
North American Containerboard Capacity Growth
2.0%
0.0%
0.4% 0.3%0.1%
0.3%
2.5%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1992-2001 2000 2001 2002 2003 2004 Avg. 02-04
Source: American Forest & Paper Assoc.
Mark Wilde · 9/3/02 · page 17
How Has the Business Responded?
Widespread shutdown of marginal capacity.
Partially offset by higher-than-expected “creep”
Lots of small machines still in operation
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Source: NLK Associates and company information
Major Containerboard Capacity ClosuresCompany Location Tons (M) Year Company Location Tons (M) Year
Temple-Inland Newark, CA 65,000 1998 International Paper Savannah, GA 610,000 2001Packaging Corp. Filer City, MI 70,000 1998 Georgia-Pacific Toledo, OR 240,000 2001Smurfit-Stone Port St. J oe, FL 445,000 1998 Smurfit-Stone Missoula, MT 200,000 2001Smurfit-Stone Port Wentworth, GA 370,000 1998 Smurfit-Stone Fernandina, FL 200,000 2001International Paper Gardiner, OR 315,000 1998 Smurfit-Stone Hodge, LA 150,000 2001Smurfit-Stone J acksonville, FL 320,000 1999 Weyerhaeuser Springfield, OR 248,000 2001Smurfit-Stone Alton, IL 210,000 1999 Weyerhaeuser Plymouth, NC 215,000 2001Smurfit-Stone Circleville, OH 115,000 1999 International Paper Oswego, NY 100,000 2002Temple-Inland Newport, IN* 250,000 2000 Temple-Inland Antioch, CA 425,000 2002International Paper Roanoke Rapids, VA 90,000 2000 Temple-Inland Bogalusa, LA 170,000 2002American Tissue Harriman, TN 80,000 2001 Weyerhaeuser Hawesville, KY 200,000 2002
*conversion still largely producing corr. medium 5,088,000
Mark Wilde · 9/3/02 · page 18
Reported Economic Downtime in U.S.
0
200
400
600
800
1,000
1,200
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02
“Flat-out” production mentality has changed
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
How Has the Business Responded?
Deutsche Bank Securities Inc.
Source: Company reports and DBSI estimates
% of Market 3% 5% 11% 11% 8% 9% 7% 8% 8% 3%
Reported Economic Downtime in U.S.
0
200
400
600
800
1,000
1,200
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02
Mark Wilde · 9/3/02 · page 19
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!”
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Mark Wilde · 9/3/02 · page 20
Summing It All Up ...
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Mark Wilde · 9/3/02 · page 21
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 22
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 23
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
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Mark Wilde · 9/3/02 · page 24
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
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Mark Wilde · 9/3/02 · page 25
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.
Deutsche Bank Securities Inc.
Mark Wilde · 9/3/02 · page 26
Discussion
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Mark Wilde · 9/3/02 · page 27
Additional Information Available upon Request
Deutsche Bank Securities Inc.
Disclosure ChecklistCompany Ticker Price 9/18/02 DisclosureGeorgia-Pacific GP $15.41 6,8,9International Paper IP $33.55 1,6,7,9Packaging Corp. PKG $17.69 6,9Smurfit-Stone SSCC $14.27 2,6,7,8Temple Inland TIN $44.57 6Weyerhaeuser WY $49.78 1,6,7,8,9
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Mark Wilde · 9/3/02 · page 28
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0
100
200
300
400
Buy Hold Sell
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