where are we headed? a look at the containerboard & corrugated box industry deutsche bank...

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



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



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


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.

GDP vs Box Shipment Growth

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Corrugated Box Shipments Inflation Adjusted GDP


A Bit of Perspective ...

Slower domestic growth - - - why?

A better indicator is activity in nondurable goods


Source: Fibre Box Assoc. and Fact Set

Box Shipments vs Nondurables

-10%

-5%

0%

5%

10%

15%

20%

Corrugated Box Shipments

Nondurable Industrial Prod.



Linerboard exports have evaporated - and won’t completely come back

Growing offshore supply and strong U.S. $ will limit export rebound


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



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

-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



Conversely, box volumes look better outside the U.S.


Global Box Demand

-2%

0%

2%

4%

6%

8%

10%

12%

U.S. China Thailand Brazil France World

2000

5yr CAGR

Source: ICCA



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?


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



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



How Has the Business Responded?




The industry has held up remarkably well - despite tough fundamentals

Fundamentals suggest a fiasco… reality is better


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



The industry has consolidated

The consolidation process hasn’t run its course yet.


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%



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

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.



Widespread shutdown of marginal capacity.

Partially offset by higher-than-expected “creep”

Lots of small machines still in operation


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


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



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



…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!”



Summing It All Up ...



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…”


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


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



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



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.



Discussion



Additional Information Available upon Request


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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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 Key Rating Dispersion and Banking Relationships

0

100

200

300

400

Buy Hold Sell

Companies Covered Cos. w/ Banking Relationship

where are we headed? a look at the containerboard & corrugated box industry deutsche bank...

Documents

fibre box

economy box demand

demand source

mark wilde212

icca slide

presentation slide

af pa slide

box customers reverse