State of the North AmericanPulp & Paper Industry–An Update & Outlook–May2004Center for Paper Business and Industry Studies (CPBIS)Center for Paper Business and Industry Studies (CPBIS) –Jim McNuttJim McNuttValue Resolution GroupValue Resolution Group –Dan CenatempoDan CenatempoJ bE i i GB b Ki tJacobsEngineeringGroup–BobKinstreyOverviewNorth America P&P Industry–An Update & Outlookn Update & Outlook –Where Are We?Industry PerformanceCapacitIssuesyIndustry OutlookGrades’Outlook--Grade-By-GradeOutlookMajor Industry IssuesS &W2Summary&Wrap-upWhere Are We?WhereAreWe?3What Are North America’–WhatAreNorthAmerica s?America s?Stakeholders’ PerspectivesHasPersistent Flawsin the Eyes of Manypital Intensive,fragmentedCaital Intensive,technology,ggybased–monolithic &monolithic &slow to adaptFocus ismore on what it doesinstead offiguring out what itshould be doingKey into lower costs, economies of scale,market share,marginal returnsVery openinformation flows4HighlyinsularWhat Is North America’sWhat Is North America’s –The North American Pulp and Paper Industry IsMatureMarket Perspective?Web of BusinessesGenerally Characterized of Late By:Highest per capita consumptionin worldacross all gradesSlower growththan GDP &slowing overallGDP growthSlowergrowththanGDP&slowingoverallGDPgrowthHighcapital intensityIntense Costandprice based competitionCyclical and decliningpricing and profitabilityBelow costof capital returnsDepressedinvestors’ values and returnsWhere Historically – The North American industryhas expanded after each cyclical peak. Excess5capacity was pushed into International MarketsWhat Is North America’s–WhatIsNorthAmerica sAmerica sMarket Perspective?HoweverHowever –Looking BackLooking Back –Combination OfCombination Of –AstrongUS dollar;MaturingNorth American Demand;Unifying European markets;Aggressive industry growth in developing regions--Asia & Latin America; andThe European & Developing Regions ‘new’producersincreased importsinto North America-6-Interrupted This Growth PatternWhat Is North America’sWhat Is North America’s –However--The North American IndustryDid NotMarket Perspective?HoweverTheNorthAmericanIndustryAmericanIndustryDidNotRecognizeThis Competitive Landscape ChangeUntil Mid 1990s andUntil Mid 1990s and --Continued to behave as it did in the pastContinued to behave as it did in the past –investingavailable cashin new capacity in 1980’s & early1990sThis New Capacity Relied on IncreasinglyCompetitiveExport Marketsto Maintain VolumeExportMarketstoMaintainVolumeYet–SimultaneouslySimultaneously --Developing Regions &Developing Regions &EuropeBeganAggressive Imports into North7EuropeBeganAggressiveImportsintoNorthAggressiveImportsAmerica.What Is North America’s–The Result Was Persistent Over-capacity,Market Perspective?ResultWasPersistentOverThePersistentcapacity,Globalization of MarketsGlobalization of Markets --WhichUndermined &SustainedWeakBalanceSheets,DebtLevels,ed eaa ce S eets, ebt e e s,Pricing, Profitability & Shareholder ReturnsIn response – The North American Industry has nowbegun to restructure to better compete in this changedglobal market environment –but the challenges andstakes are great and the progress moderate.8What Are North America’s–WhatAreNorthAmerica sAmerica sCurrent Realities?N th A i ’ P I d t P C tiNorthAmerica’sPaperIndustryPressuresContinueressuresCEOs remainunder the microscopePerformancecontinues tolag–but seeming to stabilize somePerformancecontinuestobutseemingtostabilizesomeseemingstabilizeExcess Capacity&older/inefficient technologybeing addressedSubstitution (imports & alternative products to meet consumersneeds)=persistent issuepersistentissueBalance sheets stillout of balance–with moves to improvewith moves to improveReinvestment in revenue generation stepscontinues to lagCompetitive landscaperemains Intense–some order emergingsome order emergingLet’s Now Look at some of the Situational Aspects of9theUS/NA Industry& Discuss Their Importance . . . .Industry PerformanceIndustryPerformance10Industry Performance–IndustryPerformanceROTC Vs. Cost of Capital20%ReturnsAverage 4Points Below15%20%

i talROTC averages 7% vs.11% cost of capitalROTC Averages 7 % vs.11% Cost of CapitalTarget--RationalInvestorsWill10%

Cost of Cap iInvestorsWillNot AllocateCapital To The5%

Return &PoorlyPerformingSector & Firms0%1975 1978 1981 1984 19871990 1993 1996 1999 2002Return On Total CapitalCost of Capital11Industry Performance--TotalIndustryPerformanceShareholder Returns Still Trail S&P 500P&FP ShareholderReturnsHaveTrailed S&P 500350400

S R) IndexRisk of P&FP Stocks = Market (Beta = 1.0)S&P 500 TSR = 10.3% Per YearP&FP W. Avg TSR = 8.5% Per YearP&FP Avg. TSR = 7.5%Per YearTrailedS&P500Yet--StocksReboundingWith200250300

d er Return (T S& g S 5% e eaL.T. Government Bond = 6.2% Per YearOverall MarketInvestmentServices Don’t100150200

o tal Sharehol dServicesDon tExpect Full P&PEarnings ReboundU til 2004050'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Monthly T o12Until2004S&P Return IndexP&FP Company Avg.P&FP Company W. Avg.Id t P fD bt L lIndustryPerformanceormance–DebtLevelsUSCompaniesAre60%70%MaintainingDebt LevelsNear 50%50%

Capital RatioNear50%-WhichWillLikely Limit30%40%

Debt ToLikelyLimitFutureInvestments20%1975 1978 1981 1984 1987 1990 1993 1996 1999 2002Debt % of Invested Capital13Debt%ofInvestedCapitalIndustry Performance–CapitalS&IndustryPerformanceCapitalSpending LevelSpending Level –Real USDReal USDTotalUSPulp&Paper CapitalE ditTotal12,50015,000

$ 2002 -ExpendituresWillContinueT L ih7,50010,000

p enditures ( $ o ns)ToLanguishUntil TheCyclical2,5005,000

a l Capital Ex p Milli oCyclicalRecoveryCirca 2004-1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

U.S. Re aTotal14Circa2004TotalIndustry PerformanceLess Capital Being100%IndustryPerformance–LessCapitalBeingCapitalInvested In Primary Industry Assets70%80%90%100%

a l SpendingFacilityRelated40%50%60%70%

& Paper Capit aSpendingAccounts For10%20%30%40%

h are of Pulp &DecliningShare of P&P0%10%1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

S hIT & Communic.Facilities, Machinery & Infra.Office Buildings & Furnish.CAPEX forIT=More15Id t P fP fit bilitIndustryPerformanceormance–ProfitabilityUSPulp &Paper10%12%

M arginProfitabilityContinues Its6%8%

t ing Profit MDecliningPathInReal2%4%

Net Opera tTerms Since1970s0%1975 1978 1981 1984 1987 1990 1993 1996 1999 200216Industry Performance–Capital TurnoverUSPulp &Paper180%200%

C apitalapeCapitalTurnover To140%160%

a l Invested CContinue ItsDownward100%120%

Sales / Tot aTrend80%1975 1978 1981 1984 1987 1990 1993 1996 1999 200217IndustryPerformance–CapitalUSCAPEXypSpending/Depreciation275%Likely ToRemainSignificantly200%225%250%275%

p reciationSignificantlyBelowDepreciation125%150%175%200%

res % of De ppLevelsAndAre Now50%75%100%125%

a l ExpendituBelowMaintenanceL l0%25%50%1975197819811984198719901993199619992002

Capit a18Levels1975197819811984198719901993199619992002Capacity IssuesCapacityIssues19C it IM j T d ChapacityIssues–MajorTrendChangeU.S. ShipmentsOff 14% In 2003From 1999 Peak90,000100,000110,000

d (ST 000s)60,00070,00080,000,

Paperboar d30,00040,00050,000

o tal Paper &-10,00020,000

U.S. T o201975 1978 1981 1984 1987 1990 1993 1996 1999 2002CapacityShipmentsCapacity Issues–Declining NA SharePaper and Paperboard CapacityPaperandPaperboardCapacity(1,000 short tons)300,000350,000400,000450,000100 000150,000200,000250,000WorldwideNorth America-50,000100,00021Capacity Issues–Growth Outside NACapacity Change 1995 to 2001100 0%120.0%60 0%80.0%100.0%Total Paper & Paperboard20 0%40.0%60.0%TotalPaper&PaperboardPrinting & WritingWrapping & Packaging0.0%20.0%World North Europe Asia + Latin22America JapanAmericaCapacity IssuesCapacity Issues –NA PM ChangesG dShutsNewShutsNewGrade1980-891980-891990-031990-03News51978P & W734413724Packaging &Converting4425610ConvertingTissue46307039Paperboard44177734PaperboardConstructionPaper & Board94211223Total306114358114C it IPM A Di t ib tiapacityIssues–PMAgeDistribution--North America vs. EuropeA Di t ib ti f P M hi350400450AgeDistribution ofPaperMachinesEconomicObsolescence250300350Proxy1001502000501890-18991900-19091910-19191920-19291930-19391940-19491950-19591960-19691970-19791980-19891990-19992000-200324North America (1102)Europe (1861)Industry OutlookIndustryOutlook25Industry OutlookMarket OverviewWeakness in the Economy & Demand DriversWeakness in the Economy & Demand Drivers --IsIndustryOutlook–MarketOverviewImproving–WhichIs Significantfor Pulp & Paper IndustryHowever, Weak Downstream Demand Past Two YearsHowever, Weak Downstream Demand Past Two Years --Pl R f C titi F tDidR lt iPlusRange ofCompetitiveFactors--esultinSignificant Excess Capacity & InventoriesThisCapacity [& Inventories]In Turn UnderminedExcessCapacity[&Inventories]ExcessCapacityInventories]InTurnUnderminedUnderminedPulp & Paper Prices & ReturnsPulp & Paper Prices & Returns –Which Although Improving--Still Need More CorrectionStill Need More CorrectionThe net result is persistent poor, butnowimprovingperformance, in the North American pulp26& paper industry during theoutlookperiod.Industry OutlookThe EconomyIndustryOutlook–TheEconomyOverallLine ItemLine Item 20032004-2006OverallEconomicF tNUS Real GDPGrowth2.2%3.6%ForecastNowCalls ForC ti dUS Inflation(PPI Index)2.6%0.7%ContinuedRecoveryWithEuropean RealGDP Growth1.3%2.0%US LeadingEuropeEuropeanInflation (GDPDeflator)1.0%0.4%27)Industry Outlook–The DriversIndustryOutlookTheDriversDemandEconomic SegmentIndustry Segment2001-2002 RealQ22003RealDemandGrowthDriversEconomicSegmentImpacted2002RealGrowthRealGrowthvs. 2002Food & BeverageFood & Beverage Boxboard/ContainerboardBoxboard/Containerboard-2.0%+3.6%AcceleratingAccelerating –Just NowRestaurant / RecreationRestaurant / Recreation Boxboard, TissueBoxboard, Tissue-3.0%+1.6%Durable GoodsDurable Goods ContainerboardContainerboard-5.1%+8.2%ND bl G dC ti b d4 1%+3 3%Being RealizedByManufacturingNonDurableGoodsContainerboard-4.1%+3.3%Computer & PeripheralInvestmentP&W Papers-11.5%+31.0%ManufacturingSectorAdvertisingAdvertising P&W & NewsprintP&W & Newsprint-29.5%+6.8%Housing StartsHousing Starts Tissue, Forest ProdsTissue, Forest Prods+5.7%+11.8%Private InvestmentPrivate Investment All Mfg. Industries incl. P&PAll Mfg. Industries incl. P&P-21.7%+8.0%28Industrial ProductionIndustrial Production All Mfg. Industries incl. P&PAll Mfg. Industries incl. P&P-4.0%0.0%Industry OutlookIndustry Outlook –Performance DirectionLine ItemLine Item U.S.EuropeEuropean & USIndustry Firms’PerformancesAre2003 SalesGrowth-3.0%-4.5%PerformancesAreConverging–ButBoth Regions2003 IncomeGrowth-16.0%-33.0%ButBothRegionsNow UnderNow Underperformingperforming –2001-2003EROTC4.0%6.0%YetAsian & LatinAmerican ShareGrowth Continues29GrowthContinuesIndustry Outlook–Price & Volume--ImprovingPerformance EmergingPerformance Emer--North AmericanGradeQ1 2004 Change InDemandQ1 2004 Change InPricep g ggNewsprint+ 1.9%+14.0%Printing & Writing+2.2% to +4.7%+2.2% to +4.7% Mixed-5% to +1.5%5% to +1.5%Chemical MarketChemicalMarketPulp1% to +7.7%1% to +7.7% 0% to +12%0% to +12%Containerboard+3.3%+14% to 28%+14% to 28%30I d t O tl kNA C itIndustryOutlook–NACapacity8,000TotalUS5,0006,0007,000

r Capacity )Paper &Board2,0003,0004,000

A Pulp & Pape r o rt Tons 000s )CapacityWillContinue toS Li it d-1,00001,000

Change In N A (Sh oSeeLimitedto No NetGrowthFor-3,000-2,0001991 1993 1995 1997 1999 2001 2003 2005GrowthForImmediateFuture31Industry OutlookIndustry Outlook –Global Capacity Changes10 0%12.0%Projected Capacity Change, 2001 - 20056.0%8.0%10.0%Total Paper and Paperboard0.0%2.0%4.0%Printing & WritingWrapping & Packaging-2.0%%World NorthAmericaEurope Asia +JapanLatinAmerica32Industry OutlookThe NA GradesNA ExperiencedIndustryOutlook–TheNAGradesGrade SegmentChange In Capacity(Short Tons 000s)NAExperiencedPulp & PaperCapacity DeclineThrough 2003GradeSegment(ShortTons000s)2001-20032004-2006Containerboard1 320150Through2003--With Some GrowthThrough “Creep”C i Th hContainerboard-1,320-150NewsprintNewsprint -1,390-490Printing &ComingThrough2006.Yet--Several ScenariosP ibl WhPrinting&WritingWriting -1,820475Tissue590380PossibleWhereNet CapacityReductions DoPackaging &IndustrialIndustrial -435-250Pulp-1,715-87533Continuep,Total ChangeTotal Change -6,090-910Industry Outlook–Offshore CapacityIndustryOutlookOffshoreCapacity2003-2005 Change In China's Capacity2005 Change In China's CapacityThe Noted(Short Tons 000s)ContainerboardContainerboard 2,035TheNotedOffshoreCapacityNewsprintNewsprint 780Printing & WritingPrinting & Writing 1,480CapacityAdditionsWillContinueto PutTissue35Packaging & Industrial2,390ContinuetoPutSignificantPressure on thePackaging&Industrial2,390Pulp1,515PressureonthePressureGlobalExportMarkets34Total ChangeTotal Change 8,235MarketsIndustry Outlook–CompetitivenessIndustryOutlookCompetitivenessNorth America Does Not Enjoy Low Cost Producer StatusOn Most GradesOn Most Grades –Which Clouds The Outlook PeriodGrade CategoryGrade Category Low Cost Production CentersLow Cost Production CentersPulpBrazil, Chile, Argentina, Indonesiaand Canada (selected)Printing & WritingPapersBrazil, Russia, Indonesia, Thailand,Scandinavia, Western EuropeEastern Europe Brazil Chile andNewsprintEasternEurope,Brazil,ChileandEasternCanadaPremium FoldingBrazil,Russia,Sweden,Chile andChile and35gCarton Grades,, ,FinlandIndustry Outlook–CompetitivenessIndustryOutlookCompetitivenessHigh Volume NA GradesHave Significant Substitution ThreatsWhich Clouds The Outlook Period--WhichCloudsTheOutlookPeriodOutlook--Grade CategoryGrade Category SubstitutesSubstitutesContainerboardRe-usable shipping containers,usable shipping containers,offshoring of manufacturingP k i GdFlexiblepackaging,offshoringofFlexibleoffshorinPackagingGradesp g g, gmanufacturingPrinting & WritingPapersElectronic communications,alternative advertising mediumsalternativeadvertisingmediumsNewsprintElectronic communications,alternative advertising mediums36TissueNo major substitutesNo major substitutesGrades’Outlook37North American Grades’OutlookNorthAmericanGradesOutlookAmericanOutlook--Grade-by-Grade--NewsprintPrinting & Writing PapersPrinting&WritingPapersPrintingWritingPackaging & IndustrialContainerboardMarket PulpMarketPulpTissue38Grade OutlookNewsprintNewsprintRemains a Weak North American IndustrySegmentGradeOutlook–NewsprintSegmentSubstitution to Alternative MediaRemain an IssueReduced Page SizeAlso Remains an IssueNewsprintDeclineis Moderating, But is Longis Moderating, But is Long-Term IssueTerm IssueNeed for FurtherCapacity ReductionsWill ContinueImplications:This Grade suffered severe end userdemand decline & excess capacity. Rational playershave spent minimum capital. No new Newsprint millslikely to be built in North America soon--or everpdemand decline & excess capacity. Rational playershave spent minimum capital. No new Newsprint millslikely to be built in North America soon--or ever39likelytobebuiltinNorthAmericasoon--orever.AmericaGrade OutlookNewsprintNorthGradeOutlook–NewsprintAmericanNewsprint’s17,500

Tons 000s)Decline HasModerated&Md t15,000

lume (MetricModestRecoveryFrom 200212,500

N ewsprint VoFrom2002Lows IsExpected10,0001990 1992 1994 1996 1998 2000 2002 2004 2006

NNA D dNA C itT t l Shi t40ExpectedNADemandNACapacityTotalShipmentsGrade OutlookNewsprintExcess NorthGradeOutlook–Newsprint2,50035%AmericanCapacity1,8171,6311,8741,7272,000

(Metric Tons25%30% C apacityPersistsPersists –ButAt LowerL l1,3966109611,5019549631,0694568091 0001,500

e ss Capacity 000s)15%20% - % Excess CLevels--Supply &DemandMay9285535987558096%6%6%6%10%9%11%12%6%10%11%5001,000

w sprint - Exc e5%10% NewsprintDemandMayBalanceBy20044%6%5%4%3%5%6%6%6%6%3%01990 1992 1994 1996 1998 2000 2002 2004 2006

Ne w0%5%E C it% E C it41ExcessCapacity%ExcessCapacityGrade OutlookNewsprintNewsprintGradeOutlook–NewsprintpHasExperiencedHi i L$700$800

n )HistoricLowPrices–With Weak$600

t ($ Metric To nWithWeakEnd-UserDemand–$400$500

Newsprin tButSomeRelief InSight$3001990 1992 1994 1996 19982000 2002 2004 2006Real Price ($2001)Nominal Price42SightRealPrice($2001)NominalPriceGrade OutlookP&W PapersRecentEconomic Slowdown & Alternative Media SubstitutionHave & Will Continue to Impact P&W DemandGradeOutlook–P&WPapers&WillContinuetoImpactP&WDemandHaveContinueUncompetitive Capacity Being Closed & Modest DemandIncreases Will Tend toin Excess CapacityIncreasesWillTendtoIncreasesReigninExcessCapacityReignCapacityCF, CGW, UCF & GW GradesHave Collapsed Into OneRelativelyInterchangeable / Flexible Grade StructureFromConsumers’ PerspectivesThese Changes Brought on byCollapsing Price Structuresof Grades on Top of Each OtherIs a Major Sea ChangeIn This ContextIn This Context --CF Has BecomeCF Has BecomeCommoditized /Di l db I d CGW G d43DisplacedbyImprovedCGWGradesGrade Outlook–P&W PapersIn AdditionIn Addition --High End UsesHigh End Uses --Auto Brochures/annual ReportsAuto Brochures/annual ReportsAre Still Being Replaced/Substituted for by Electronic VersionsGradeOutlookP&WPapersHigh VolumeUCF Remains Under PressureFrom OverseasCompetitors, and Newsprint Producers Are ConvertingCapacity to UC and CGW GradesCapacitytoUCandCGWGradesCapacityFinancial Returns & Growth Prospects Are Similar toIndustryAverae & Room Does Exists forContinued Mergerg& Acquisition (M&A) ActivityImplications:Grade grouping has hadmajor changeswithgrades collapsing onto one another leading to assetsgradescollapsingontooneanotherleadingtoassetsrepositioning & redeployment, continued M&A & financialconstraints. Certain segments will continue to suffer netcapacity reductions & others will benefit by grade encroachmentgradescollapsingontooneanotherleadingtoassetsrepositioning & redeployment, continued M&A & financialconstraints. Certain segments will continue to suffer netcapacity reductions & others will benefit by grade encroachment44capacityreductions&otherswillbenefitbygradeencroachmentcapacityreductionsbenefitencroachmentGrade OutlookP&W PapersNorthGradeOutlook–P&WPapersAmericanP&W Demand&C i41,00043,500

s 000s)&CapacityContracted2000-200236,00038,500

e (Short Ton s20002002ButAModerate31,00033,500

P&W VolumRecoveryHas Begun In200326,00028,5001990 1992 1994 1996 1998 2000 2002 2004 2006452003NA DemandNA CapacityTotal ShipmentsGrade OutlookP&W PapersGradeOutlook–P&WPapers4 3875,00025%SignificantNorth4,1163,3523,4614,3873,8004,1872 2583,1222,4983,5004,0004,500

r t Tons 000s)20% p acityAmericanP&WOvercapacity3,1503,0592,7322,2583,0591 1912,0042,7452,70111%10%10%12%11%2 0002,5003,000

C apacity (Sho r10%15% % Excess Ca pcapacityMayDissipate1,1917%5%6%9%8%8%8%7%8%8%7%1,0001,5002,000

W - Excess C5%10% P&W - %DissipateBy 20043%05001990 1992 1994 1996 1998 2000 2002 2004 2006

P& W0%E C it% E C it46ExcessCapacity%ExcessCapacityGrade OutlookP&W PapersNorthGradeOutlook–P&WPapers1,600NorthAmericanP&WReal1 2001,3001,4001,500

o rt Ton)PricingRemains At9001,0001,1001,200

s ($2003 - Sh oHistoricallyLow LevelsWith G d600700800

Real Price sWithGradePricesConverged4005001990 1992 1994 1996 1998 2000 2002 2004 2006CFS No. 3 60lb.UCGW AverageUCFS N 4 XCGW N 4 50lb47ConvergedUCFSNo.4XerocopyCGWNo.450lb.Grade OutlookP&W PapersGradeOutlook–P&WPapers1,300NorthAmericanP&W1 0001,1001,200

ort Ton)NominalPricesWill8009001,000

i ces ($ per ShPricesWillImproveSome In500600700

Nominal Pr i2003 &20044005001990 1992 1994 1996 1998 2000 2002 2004 2006CFS No. 3 60lb.UCGW AverageUCFS No 4 XerocopyCGW No 4 50lb48UCFSNo.4XerocopyCGWNo.450lb.Grade OutlookPackaging & IndustrialGrade Grouping RemainsA Weak North American SegmentGradeOutlook–Packaging&IndustrialPackagingIndustrialSlow Growth in Industries That Consume These Grades,Increased Competition From Overseas Producers &Widespread Substitutionby Plastics and AlternativePackaging Materials Has Hurt ProducersProfitability/returns Better Than Industry Average DespitePoor Fundamentals Due to Relatively Concentrated SupplyPoorFundamentalsDuetoRelativelyConcentratedSupplyFundamentalsRelativelyConcentratedBase–&Over Capacity Seems to Be Moderating SomeImplications:No substantive expansions on horizonNosubstantiveexpansionsonhorizon.Expectmore capacity adjustments-- productivity andproduct improvement initiatives -- But grade still facesserious challenges looking outImplications:Nosubstantiveexpansionsonhorizon.Expectmore capacity adjustments-- productivity andproduct improvement initiatives -- But grade still facesserious challenges looking out49seriouschallengeslookingout.seriouschallengeslookingDC25Slide 49DC25Dan Cenatempo, 9/25/2003Grade OutlookPackaging & IndustrialNorthGradeOutlook–Packaging&Industrial19,000

s )AmericanDemand,Shipments17,00018,000

S hort Tons 000 sandCapacityHaveFallen15,00016,000

b oard Volume ( SFour YearsIn A Row–Some13 00014,000

r Paper / Paper bRecoveryLikely–ButTo Be Slow12,00013,0001990 1992 1994 1996 1998 2000 2002 2004 2006

Othe rNA DemandNA CapacityTotal Shipments50NADemandNACapacityTotalShipmentsGrade OutlookPackaging & IndustrialGradeOutlook–Packaging&Industrial1,80025.0%North AmericanGradeHasS1 2001,3501,3011,4341,5951,3881,4001,6001,800

p acity (Short20.0%25.0%

s s CapacityStruggledWithSignificantOvercapacity1,2008108507709591,3051,0449047908001,0001,200

r d - Excess Ca p o ns 000s)15.0% o ard - % Exce sOvercapacityWhichSeems toBe Moderating6604904108.3%9.0%8.5%5.1%5.0%6.1%5.6%5.0%8.0%9.2%7.5%8.1%5 1%400600

r Paper & Boa r T o5.0%10.0% er Paper & B oBeModeratingSome–ButMore Is Needed5.0%3.0%3.8%4.4%2.3%5.0%5.1%02001990 1992 1994 1996 1998 2000 2002 2004 2006

Othe r0.0% OthExcess Capacity% Excess Capacity51ExcessCapacity%ExcessCapacityGrade OutlookPackaging & IndustrialLow NorthGradeOutlook–Packaging&Industrial$1,200LowNorthAmericanPrices$1,000$1,100$ ,

o rt Ton)WillImproveBy$800$900

t Price ($ Sh opy2004–ButAreStill$600$700

SBS 15 poin tAreStillWeak$400$5001990 1992 1994 1996 1998 2000 2002 2004 2006R l P i ($2003)N i lPi52RealPrice($2003)NominalPriceGrade Outlook–ContainerboardThis N. Am. Segment hasUndergone Significant Restructuring:Concentration of Top Producers Shifted From One of LowestGradeOutlookContainerboardConcentrationofTopProducersShiftedFromOneofLowestConcentrationProducersShiftedto Highest in North American Industryto Highest in North American Industry –Improved CapacityUtilizationand Expansion Discipline Has FollowedF th A i iti b L PlB Diffi ltFurtherAcquisitionsbyLargePlayersWillBeDifficultWillHowever, North American Producers HaveLost Export Marketto New Overseas Capacity,Especiallyin China and Germanyto New Overseas Cain China and Germany, p y yProfitability andReturns Are LowerNeeded & ExpectedSlack CapacityAbsorbed QuicklyWith Improved EconomyImplications:This grade has hadgreat transition– synergiesstill key. Expect more asset moves & quality initiatives. CAPEXto be minimal Major issue issurplus converting capacityImplications:This grade has hadgreat transition– synergiesstill key. Expect more asset moves & quality initiatives. CAPEXto be minimal Major issue issurplus converting capacity53tobeminimal.Majorissueissurplusconvertingcapacity.minimalsurplusconvertingcapacityGrade OutlookContainerboardNorth AmericanGradeOutlook–Containerboard40,000

s )DemandImprovement &35,00037,500

o rt Tons 000 sSignificantBlocks OfC it30,00032,500

Volume (Sh oCapacityRetiredBetween1998 and 200322 50025,00027,500

n tainerboard1998and2003HaveHelpedGrade Greatly20,00022,5001990 1992 1994 1996 1998 2000 2002 2004 2006

Co nNA D dNA C itT t l Shi t54yNADemandNACapacityTotalShipmentsGrade OutlookContainerboardNorthGradeOutlook–Containerboard4,4064 5005,000

0 s)25%AmericanContainerContainer-3,2793,4613,2132,9543,1963,790,3,5004,0004,500

p acity (ST 00 020% s Capacityboard’sExcess2,1112,6152,170,2,3201,21212%2 0002,5003,000

- Excess Ca p10%15% a rd - % ExcesExcessCapacity IsComing1,6221,4011,363583,1,4696%5%5%5%7%6%9%10%9%8%6%9%10%6%1,0001,5002,000

n tainerboard5%10% C ontainerbo aComingBack InLine5%5%5%2%3%05001990 1992 1994 1996 1998 2000 2002 2004 2006

Co n0% C55LineExcess Capacity% Excess CapacityGrade OutlookContainerboardNorthGradeOutlook–Containerboard600NorthAmericanCapacity500

h ort Ton)ReductionsHave Helped400

lb. Price ($ S hBetter BalanceThe Market&200300

i nerboard 42PricesGoingForward1001990 1992 1994 1996 1998 2000 2002 2004 2006

L iR l P i ($2003)N i lPi56RealPrice($2003)NominalPriceGrade OutlookMarket PulpMarket Pulp Is anIntermediate Goodin the Production of theGradeOutlook–MarketPulpOther Paper and Paperboard GradesPulp Investment ReturnsPulp Investment Returns --Among the Poorestin the IndustryEnvironmental RestrictionsEnvironmental Restrictions --NewCapacity Additions DifficultInternational ProducersInternational Producers --Import Pulp Competitivelyto USInventory ManagementInventory Management –Remains Major Issue Going ForwardImplications:This grade remains inserious difficultydue to commodity nature & global low cost producers.Further North American capacity reductions needed &expected.Pricingwill remain strained and low.due to commodity nature & global low cost producers.Further North American capacity reductions needed &expected.Pricingwill remain strained and low.57gGrade OutlookMarket PulpGradeOutlook–MarketPulp95,000

0 0s)NorthAmerican80 00085,00090,000

M etric Tons 0 0Market PulpTends to70,00075,00080,000

u lp Volume ( MFollowOther60,00065,000

+ Integrated P uGrades50,00055,0001990 1992 1994 1996 1998 2000 2002 2004 2006

Market +NA D dNA C itT t l Shi t58NADemandNACapacityTotalShipmentsGrade OutlookMarket PulpNorthGradeOutlook–MarketPulp10 83410,57512,000

t ric25%AmericanPulpExcess7,7277,6037 2089,7117,9548,9177,3337 1708,82410,834,8,00010,000

C apacity (Me t20% p acityCapacityMayBeModerated7,2085,2936,6956,1545,4556,4324,3447,17011%12%9%12%6,000,

u lp - Excess C T ons 000s)10%15% % Excess Ca pModeratedBy ReboundIn Demand8%9%6%5%7%7%%10%8%8%6%10%9%9%8%2,0004,000

k et + Integ. P u T5%10% Pulp - %InDemand&CapacityClosures01990 1992 1994 1996 1998 2000 2002 2004 2006

Mar k0%E C it% E C it59ExcessCapacity%ExcessCapacityGrade OutlookMarket PulpMarket PulpGradeOutlook–MarketPulp1,100pPrices ShouldRiseAs9001,000,

Metric)ExcessCapacity IsR ld600700800

v . To U.S. ($Resolved--FundamentalsStill Not400500

NBSKP Deli vStillNotStrongGoingForward2003001990 1992 1994 1996 1998 2000 2002 2004 2006Real Price ($2003)Nominal Price60RealPrice($2003)NominalPriceGrade Outlook–TissueTissue RemainsStrongest Overall Segmentin North AmericaEnd-productemandIsMatureD(AmericansHighestPerGradeOutlookTissuedp oducte a d s atu e( e ca s g est ecapita Consumers in World & Incremental Demand Is Slow)Demand Issteady--yet Excess Capacity Could Buildyet Excess Capacity Could BuildH O ll Fi Fi i l R tL S iti tHowever,OverallFirmFinancialReturnsowever,LessSensitivetoSupply/Demand Dynamicsat Mill Level Than Other GradesRegulatoryConsiderations WillLimit Large M&A ActivityyyTechnology Changes andNew Entrepreneurial EntrantsWillDrive Spending &TAD Proliferation = Potential ProblemImplications:This segment hasperformed best– a solidsuccess story & expansion & upgrades will continue to leadthe industry–but TAD-like commoditization could be issueImplications:This segment hasperformed best– a solidsuccess story & expansion & upgrades will continue to leadthe industry–but TAD-like commoditization could be issue61theindustry–but,TAD-likecommoditizationcouldbeissue.industrycommoditizationGrade OutlookTissueNorthGradeOutlook–Tissue10,000AmericanTissueD dI9,000

ons 000s)DemandIsSteady & StillGenerally7,0008,000

u me (Short TGenerallyEvolves withGDP &6,000,000

Tissue Vol uHouseholdFormations5,0001990 1992 1994 1996 1998 2000 2002 2004 200662US DemandUS CapacityTotal ShipmentsGrade OutlookTissueExcess NorthGradeOutlook–Tissue900

s )25%AmericanTissue676776663546565592565666657685750600700800

ort Tons 000 s20% a pacityCapacityBuilt Up To54630155028843349538411%400500

Capacity (Sh10%15% - % Excess C a2001Is Returning to4%8%8%6%7%7%4%8%8%7%7%6%7%9%5%10%100200300

s sue - Excess5% Tissue

-More NormalLevels4%01001990 1992 1994 1996 1998 2000 2002 2004 2006

Ti s0%Excess Capacity% Excess Capacity63Major Industry IssuesMajorIndustryIssues64Major Issues Facing the IndustryMajorIssuesFacingtheIndustryIndustry–Despite the difficult situation – The US industry is positionedforsome performance improvements during 2004ButThereRemainSignificant Risks To A SustainedProfitable Industry Sector--forsomeperformanceimprovementsduring2004.performanceimprovementsProfitableIndustrySectorProfitableIndustry1.Resumed economic downturnResumed economic downturn –globally & domestic2ExpandedSubstitutionof US produced P&P by.ExpandedSubstitutionofUSproducedP&PbyproducedInternational competitors and nonInternational competitors and non-fiber based products,fiber based products,3.Continued over capacit–globallyas well as domesticyy4.Failure to maintaincapacity managementdiscipline, &5.Notcontinuingto seekinnovation & new waysof65gyoperatingMajor Issues Facing the Industry–MajorIssuesFacingtheIndustryIndustryEven with this rebound at hand – The North American P&Pindustry’sFuture remains apoint of extensive debateEven with this rebound at hand – The North American P&Pindustry’sFuture remains apoint of extensive debateSome Believe The North American Industry Has BegunALong-term Irreversible DeclineAnd As Such--ypLongterm,IrreversibleDeclineAndAsSuchWill follow in the path ofUS steel and textiles–Others believe it willrestructure and reassert itselfrestructure and reassert itself –likesome parts of textiles & steel have begun to. . .In TruthIn Truth –The Real N. Am. Industry PathThe Real N. Am. Industry PathIs Not Clear–The degree to which N Am demand returns &N AmThedegreetowhichN.Am.demandreturns,&returns..capacityfulfills the demand & the way firms operate . . .Plus–the way the global industry extends & exerts itself66will collectively have major impacts on this Path . . .Summary & Wrap-upSummary&Wrap67We Must UnderstandWeMustUnderstandUnderstand–Paper Is Still Essential To SocietyPaper Is anEssential Building Blockof Societyof Society –Permeating Modern Civilization’s Social FabricMeets aCornucopiaof Mankind’s NeedsFrom Books and photocopies . . .Tissue and sanitary products . . .And newspapers, magazines . . .To packaging products and on and on . . .Even in surgical gowns, gas mask filters, icecream toothpaste and68cream,toothpaste,and. . . .toothpaste. . . .A dTh A Th I t tn–ThereAreThreeImportantPoints about North America . . .Winds of Change Have Buffeted the Paper Industry--Causinga Shift From one Paradigm to Anotherm to Another --gAn as Yet Unfinished Task. . .Paper Industry ExecutivesAre Not UnmindfulofPaperIndustryExecutivesIndustryExecutivesAreNotUnmindfulThese Issues & Need for Change . . .O U d i bl T thAll St k h ldI idOneUndeniableTruth–AllStakeholdersnseand Outsidethe Firmsthe Firms --AreAllin the Same Boatin the Same Boat –And Pulling Their Oars Together is Crucial69AndPullingTheirOarsTogetherisCrucialPullingTogetherCrucialA d Thi k Ab t ThiAndThinkAboutThis . . . .s . . . .Vladimir Lenin Once Noted–I’goingVladimirLeninOnceNotedVladimirmto hang all the capitalists, and they’regoing to sell me the rope I need to do itgoingtosellmetheropeIneedtodoit.There is a lesson here for all of us inthe paper industrythe paper industry –Let’s not be ourown worst enemy–let’stopownworstenemysproviding rope for our own demise!70Thank YouE-mail contacts:mail contacts:Jim McNuttJim McNutt –Jim.McNutt@CPBIS.gatech.eduDan CenatempoDan Cenatempo –dan@valueresolution.comBob KinstreyBob Kinstrey –bob.kinstrey@jacobs.com