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  1. 1. Where Are We Headed? A Look At The Containerboard & Corrugated Box Industry Deutsche Bank Securities Inc. Mark Wilde 212-469-5570 IMPORTANT : PLEASE READ DISCLOSURES AND DISCLAIMERS AT THE END OF THIS PRESENTATION
  2. 2. Broad Overview <ul><li>The North American Macros Remain Very Tough </li></ul><ul><ul><li>Two consecutive years of declining box consumption in the U.S.; 2000 (-1%) & 2001 (-5%) </li></ul></ul><ul><ul><ul><ul><li>Not a typical downturn </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Only comps - 1982 (-5%) & 1975 (-10%) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Boxes have lagged the economy since the mid-1990s </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Recent economic momentum waning? </li></ul></ul></ul></ul><ul><ul><li>Offshore demand mixed </li></ul></ul><ul><ul><li>A strong U.S.$ has hurt directly & indirectly - what now? </li></ul></ul><ul><ul><ul><ul><li>Directly: U.S. board producers less competitive globally </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Indirectly: More imported goods, less domestic box demand </li></ul></ul></ul></ul>Deutsche Bank Securities Inc.
  3. 3. The Current Environment Deutsche Bank Securities Inc.
  4. 4. The Current Environment <ul><li>Box volumes are showing signs of life </li></ul><ul><ul><li>The key question at the moment? </li></ul></ul><ul><ul><ul><ul><li>Will it last? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Industrial production slipped in August </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>ISM (purchasing managers) figures have slipped </li></ul></ul></ul></ul></ul>Source: Fibre Box Assoc.
  5. 5. The Current Environment <ul><li>Inventories are in good shape </li></ul><ul><ul><li>Can inventories alone drive a rebound? </li></ul></ul><ul><ul><ul><ul><li>Too much focus on inventories </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Not enough focus at demand </li></ul></ul></ul></ul>Source: AF & PA
  6. 6. A Bit of Perspective... <ul><li>Relationship between the U.S. economy & box demand has changed </li></ul><ul><ul><li>In the mid/late 1990’s, the economy roars, the box business snores </li></ul></ul>Deutsche Bank Securities Inc. Source: Fact Set and Fibre Box Assoc.
  7. 7. A Bit of Perspective ... <ul><li>Slower domestic growth - - - why? </li></ul><ul><ul><li>A better indicator is activity in nondurable goods </li></ul></ul>Deutsche Bank Securities Inc. Source: Fibre Box Assoc. and Fact Set
  8. 8. A Bit of Perspective ... <ul><li>Linerboard exports have evaporated - and won’t completely come back </li></ul><ul><ul><li>Growing offshore supply and strong U.S. $ will limit export rebound </li></ul></ul>Deutsche Bank Securities Inc. Source: Pulp & Paper North American Fact Book and American Forest & Paper Association
  9. 9. A Bit of Perspective ... <ul><li>Part of the issue - - - growing imports of consumer nondurables </li></ul><ul><ul><li>Deteriorating balance of trade is hitting box business </li></ul></ul><ul><ul><li>For example: food products account for over 40% of U.S. box demand </li></ul></ul>Deutsche Bank Securities Inc. Source: Fact Set
  10. 10. A Bit of Perspective ... <ul><li>Conversely, box volumes look better outside the U.S. </li></ul>Deutsche Bank Securities Inc. Source: ICCA
  11. 11. A Bit of Perspective ... <ul><li>The supply side of the global equation is also changing </li></ul><ul><ul><li>Healthy demand, strong U.S.$ and capital are all feeding new capacity </li></ul></ul><ul><ul><li>Probable Outcomes? </li></ul></ul><ul><ul><ul><li>Higher OCC costs and altered economies </li></ul></ul></ul><ul><ul><ul><li>Market dislocations? </li></ul></ul></ul>Deutsche Bank Securities Inc. Source: Paperloop, Company information DBSI estimates
  12. 12. A Bit of Perspective ... <ul><li>Other elements of change </li></ul><ul><ul><li>Increased concentration among your customers </li></ul></ul><ul><ul><ul><li>Consolidation in food & consumer products means more leverage for box customers </li></ul></ul></ul><ul><ul><ul><li>Reverse auctions pressuring prices in some cases </li></ul></ul></ul><ul><ul><li>Consolidation among containerboard producers </li></ul></ul><ul><ul><ul><li>Some players betting heavily on ability to drive out costs </li></ul></ul></ul><ul><ul><li>Substitution </li></ul></ul><ul><ul><ul><li>Shrink wrap & reusable plastic containers </li></ul></ul></ul><ul><ul><li>New technologies can increase competitive pressure </li></ul></ul><ul><ul><ul><li>Mini-mills have reduced barriers to entry </li></ul></ul></ul>Deutsche Bank Securities Inc.
  13. 13. How Has the Business Responded? Deutsche Bank Securities Inc.
  14. 14. How Has the Business Responded? <ul><li>The industry has held up remarkably well - despite tough fundamentals </li></ul><ul><ul><li>Fundamentals suggest a fiasco… reality is better </li></ul></ul>Deutsche Bank Securities Inc. Source: Fibre Box Assoc., Pulp & Paper North American Fact Book, American Forest & Paper Assoc.
  15. 15. How Has the Business Responded? <ul><li>The industry has consolidated </li></ul><ul><li>The consolidation process hasn’t run its course yet. </li></ul>Deutsche Bank Securities Inc. Source: Pulp & Paper North American Fact Book
  16. 16. How Has the Business Responded? <ul><li>Flow of new capital investment has been restricted </li></ul><ul><ul><li>Historically, industry has created most of its own problems </li></ul></ul><ul><ul><li>Across the industry, capital spending is well below D&A </li></ul></ul>Deutsche Bank Securities Inc. Source: American Forest & Paper Assoc.
  17. 17. How Has the Business Responded? <ul><li>Widespread shutdown of marginal capacity. </li></ul><ul><ul><li>Partially offset by higher-than-expected “creep” </li></ul></ul><ul><ul><li>Lots of small machines still in operation </li></ul></ul>Deutsche Bank Securities Inc. Source: NLK Associates and company information
  18. 18. <ul><li>“ Flat-out” production mentality has changed </li></ul><ul><ul><li>Getting past the “covering cash-cost” mindset </li></ul></ul><ul><ul><li>Running at 100% in a low growth/ strong U.S.$ setting is like building in the flood plain </li></ul></ul>How Has the Business Responded? Deutsche Bank Securities Inc. Source: Company reports and DBSI estimates
  19. 19. How Has the Business Responded? <ul><li>… Has The Industry Changed? </li></ul><ul><ul><li>Based on what we’ve seen last 2 1/2 years… </li></ul></ul><ul><li>“ We’re encouraged, but it’s tough to claim victory yet!” </li></ul>Deutsche Bank Securities Inc.
  20. 20. Summing It All Up ... Deutsche Bank Securities Inc.
  21. 21. Where does it leave the independent converters? <ul><li>Board and box prices will be less volatile - “stable” prices are a fantasy. </li></ul><ul><ul><li>Integration remains the strategy “du jour” among integrateds </li></ul></ul><ul><ul><ul><li>They’ve bid up valuations on converters </li></ul></ul></ul><ul><ul><ul><li>Any better about customers and service? </li></ul></ul></ul><ul><ul><ul><ul><li>“ Unclear… unlikely?” </li></ul></ul></ul></ul><ul><ul><ul><li>Any smarter about pricing? </li></ul></ul></ul><ul><ul><ul><ul><li>“ I’ll give you two words…” </li></ul></ul></ul></ul>
  22. 22. Where does it leave the independent converters? <ul><li>Your issues? </li></ul><ul><ul><li>Competing for a small piece of the pie in a mature business </li></ul></ul><ul><ul><li>Pressured by structural changes in the business </li></ul></ul><ul><ul><ul><li>Consolidation, imports, reverse auctions, etc. </li></ul></ul></ul><ul><ul><li>There will continue to be a place for independent converters </li></ul></ul><ul><ul><ul><li>It may be a smaller place </li></ul></ul></ul><ul><ul><ul><li>Hitting “niches” is critical </li></ul></ul></ul><ul><ul><ul><li>Customer service is essential </li></ul></ul></ul>
  23. 23. Where does it leave the entire industry? <ul><ul><li>Industry must learn to operate differently… fewer “outs” exist </li></ul></ul><ul><ul><ul><li>Less ability to grow out of overcapacity situations </li></ul></ul></ul><ul><ul><ul><ul><li>Domestic growth is on a lower track </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inability to export way through soft markets </li></ul></ul></ul></ul><ul><ul><li>Industry discipline can mitigate downside & provide a better platform for recovery </li></ul></ul><ul><ul><ul><li>Avoiding the long climb out of the “cash-cost” hole </li></ul></ul></ul><ul><ul><ul><li>Investors understand this to be a “mature” business, but they would reward greater stability and improved returns </li></ul></ul></ul>Deutsche Bank Securities Inc.
  24. 24. Summing It All Up <ul><ul><li>Shift toward “value” focus - away from production mentality </li></ul></ul><ul><ul><ul><li>Industry provides packaging; it shouldn’t focus strictly on mills </li></ul></ul></ul><ul><ul><li>Consolidation won’t eliminate the need to drive out costs </li></ul></ul><ul><ul><ul><li>“ Real” prices go down over time </li></ul></ul></ul><ul><ul><ul><li>Industry must remain/ increase competitive vs. other forms of packaging </li></ul></ul></ul><ul><ul><ul><ul><li>World without packaging? Doubtful. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>World without paper? Possible. </li></ul></ul></ul></ul><ul><ul><li>Globally, “the industry” needs to think from portfolio perspective </li></ul></ul><ul><ul><ul><li>Supply discipline is a global issue </li></ul></ul></ul><ul><ul><ul><li>Relative currency moves can lead to decisions w/ long-term implications </li></ul></ul></ul><ul><ul><ul><li>State subsidies prompt overcapacity and contribute to low returns </li></ul></ul></ul>Deutsche Bank Securities Inc.
  25. 25. Summing It All Up <ul><li>Industry must benchmark against alternative investments </li></ul><ul><ul><li>Industry represents less than 1% of U.S. equity market - few investors must own this sector </li></ul></ul><ul><ul><li>Reduce volatility & provide improved returns </li></ul></ul><ul><ul><ul><li>If you can’t invest cash flow effectively return it to shareholders </li></ul></ul></ul><ul><ul><ul><li>Make employees act/think like shareholders </li></ul></ul></ul><ul><ul><li>The industry “re-rating” hasn’t happened… yet. </li></ul></ul>Deutsche Bank Securities Inc.
  26. 26. Discussion Deutsche Bank Securities Inc.
  27. 27. Additional Information Available upon Request Deutsche Bank Securities Inc. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public offering for this company, for which it received fees. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company. 3. Deutsche Bank and/or its affiliate(s) acts as a corporate broker or sponsor to this company. 4. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company or derivatives thereof. 5. An employee of Deutsche Bank and/or its affiliate(s) serves on the board of directors of this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 8. Deutsche Bank and/or its affiliate(s) expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 9. Deutsche Bank and/or its affiliate(s) was a member of a syndicate which has underwritten, within the last five years, the last public offering of this company. 10. Deutsche Bank and/or its affiliate(s) holds 1% or more of the share capital of this company, calculated under computational methods required by German law. 11. Please see special footnote below for other relevant disclosures.
  28. 28. Deutsche Bank Securities Inc. The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable, but Deutsche Bank makes no representation as to the accuracy or completeness of such information. Important Information Regarding Our Independence. The research analyst s responsible for the preparation of this report receive compensation that is based upon, among other factors, Deutsche Bank’s overall investment banking revenues. In addition, Deutsche Bank: (i) may be a market maker or specialist in securities issued by companies mentioned herein, (ii) may act as an adviser, underwriter or lender to companies mentioned herein, (iii) may have received or intend to seek compensation for investment banking services from the company mentioned herein, (iv) along with its respective officers, directors and employees, may affect transactions and/or hold long or short positions in securities, derivatives thereon or other related financial products of companies mentioned herein, (v) may engage in securities transactions in a manner inconsistent with this research report, and (vi) with respect to securities covered by this report, will sell to or buy from customers on a principal basis. Certain additional details regarding these and other potential conflicts of interest , if any, are discussed at the end of the text of this report or on the Deutsche Bank website at . Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD and SIPC. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this report is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. Copyright 2002 Deutsche Bank AG <ul><ul><li>Buy: Total return expected to appreciate 10% or more over a 12-month period </li></ul></ul><ul><ul><li>Hold: Total return expected to be between 10% to –10% over a 12-month period </li></ul></ul><ul><ul><li>Sell: Total return expected to depreciate 10% or more over a 12-month period </li></ul></ul>Rating Key Rating Dispersion and Banking Relationships