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Perspectives on the global crisis and opportunities for pulp in EuropeKirsten Lange, The Boston Consulting Group

17 September 2009

1Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

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Agenda

The situation pre-crisis: dark clouds ahead

The crisis explained: in the middle of the storm

The implications for pulp players: mixed weather

New strategies for value creation: here comes the sun


0,80,9

11,11,2

1,31,41,51,61,7

US-$/EUR

Europe under pressure – industry structure changing?

European supply (M tons)

Demand

Cost(€)

Price

Cost increases• Competition for raw

materials• Russian wood tariffs• Additional environmental

requirements

1 Low demand growth in coremarkets• Stagnant or declining in

some grades in WE• Despite improving operating

rates in some grades still over-capacities

2

Low-cost pulp supply (M tons)

"Natural" shifts incompetitiveness• Strong capacity growth of

low-cost fiber

Cost(€)

3 "Financial" shifts incompetitiveness• P&L effects• Trade flows

4

'99 '00 '01 '02 '03 '04 '05 '06 '07 0

50

100

150

200

250 Share index

Jan 04 Jan 06Jan 02 Jan 08

Sappi Stora Enso M-Real

UPM Holmen Norske Skog

MSCI WorldMSCIWorld Materials

Loss of financial flexibility formany players• Share price developments• Ratings• Debt/equity

5


Index prices1 Germany (2000 = 100)

Significant recent cost increases in Europe —and more to come

Cost increases1

Cost of production factors

Actual Outlook

Energy

Virgin fibre

Labour

Recycled fibre2

Chemicals

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1. Year end prices 2. Mixed P&B sorted/Mixed Paper or Soft Mixed PaperSource: Destatis; VEA; VCI; RISI; BCG analysis

07–12 (outlook)

07–12 (outlook)

02–07 (actual)02–07

(actual)

7.6

9.9

1.8

1.8

2.2

6.3

7.9

3.9

8.0

1.6

CAGR (%)CAGR (%)Excluding effects of Russian wood tariffs


1123

16

2524

84

5260

5

603

2004

1,727

2012

3,000

2020

Other RES3

Other solid biomass4

Forest biomass(wood)2

0

100

20

40

60

80

%

1. Based on existing and projected penetration of RES technologies in Green-X least cost scenario 2. Assume 50% share of forest biomass in 2004 in RES-E and RES-H grid and 100% in RES-H non grid-estimates based on Green-X report 3. Assuming significant further growth in wind (550TWh, 60.000 windmills), 2006: ~100 TWh installed in EU25 4. e.g. corn, sugar cane, wheat, etc.Source: CEPI, Green-X model

4% 12%

8%3

Share of renewables in total final energy consumption EU-25, 2020

Renewables share in final energy consumption EU -251,TWh

22%

13%

CAGR 2004-20

20%

Stronger demand for wood EU-25 targets to achieve 20% share of renewable in total energy consumption by 2020

Fast increase of forest biomass

Cost increases1


28081

178

51

40

0

200

400

600

800

Recovered wood

Estimated supply

200–260

Estimated gap Estimated demand

765–130

Bio-energy production based on

forest biomass

Pulp and paper

production

Saw mill by-products to

market

65–70

125–130

165–170

355–370

Current forest removals

30–3540–45

70–80

Technical potential mobilized

Net wood imports

Solid wood products

production

(Mm3)

Sawlogs

Pulpwood andother industrialround wood

Fuel wood

Roundwood

TransportationElectricity

Heat

Projected wood demand and supply 2020, CEPI-161

50% lower assumptions than Green-X model

Supply view Demand view

Gap in EU wood supply could further drive demand for South American pulp

1. CEPI-16 include Austria, Belgium, Czech Republic, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, UKSource: CEPI; Energy demand forecast based on EU-Commission Green-X model

Forest residues

245–310

~720–800 ~340–420

Estimated supply of forest biomass (RW

and residues) in 2020

~515–540

Cost increases1


Paper demand growth fuelled by Asia while WE/NA stagnates

2 Low demand growth

-4

0

4

8

12

16

CAGR 2004–15 (%)

China Eastern Europe

Other Asia

Latin America

Western Europe

NAFTA Japan Rest of theWorld

New China1

Ø4.8%Ø5.1%

Ø4.2%

Ø3.3%

Ø1.0%

Ø0.4%Ø0.2%

Ø3.4%

Ø9.0%

Carton boardTissue CoatedWoodfreeCorrugated Coated

MechanicalUncoatedWoodfree

UncoatedMechanicalNewsprint 10 M t Demand

2004

1. Mills with capacity > 50k tSource: Pöyry; BCG analysis

Are existing forecasts even too optimistic?Independent BCG research suggests even lower growth for WE/NA


Pulp supply shifts significantly to low-cost countries and cost differential increases

3 Natural shifts

1. Portugal, Spain, France, Belgium, Sweden, Finland, Canada, USA 2. Brazil, Indonesia, South Africa, Russia, Chile (countries below global average production cost 2015) 3. Canada, USA, Germany, Sweden, Finland 4. Chile, Russia (countries below global average production cost 2015) 5. BHKP: 2006: Brazil versus Canada East — 2015: S Africa versus Spain; BSKP: 2006: Chile versus Canada East; 2015: Chile versus SwedenSource: Hawkins Wright; Pöyry; Valois Vision; BCG analysis

Low/high cost country capacity shareLow/high cost country capacity share Low/high cost country cost differentialLow/high cost country cost differential

61 81

39 19

0

50

100

2006 2015

High cost countries1

Low cost countries2

(%)

19 37

81 63

0

50

100

2006 2015

High cost countries3

Low cost countries4

(%)

308 250

612 499

0

400

800

2006 2015

+249+304

($/ton)

432 329

706 577

0

400

800 ($/ton)

2006 2015

+248+274

High cost country5Low cost country5

High cost country5Low cost country5

23 33

22 25

Globalcapacity (Mt)

Globalcapacity (Mt)

BHKP

BSKP

Shift more critical for integrated playersfrom high cost countries


The impact of this might go beyond market pulp

BHKP market pulp supply scenarios (2015)BHKP market pulp supply scenarios (2015)

Base case:+10Mt

capacity2006-2015

High case:+17Mt

capacity 2006-2015

Brazil

800

0

400

13Mt

800

0Brazil

400

20MtLow cost capacities increase due to additional announced but unconfirmed capacity

Demand

49

Demand

40Mt

33Mt

US$

US$

Announced and confirmed capacityaccording to Hawkins Wright plus necessary extrapolations

Potential impactPotential impact

European (integrated) mills become uncompetitive

South American players currently with superior profitability and low cost fibre access

Some risk of flattening BHKP supply curve endangers margins (in high case) – depending on development of integrated European mills

Other growth option could be in paper: integrated mills to serve overseas market

Increasing commoditization and low transport costsmight facilitate process

Highest likelihood in fine paper (CWF, UCWF), less in packaging/tissue (which are more local)

Impact could go far beyond market pulp

Note: Prices including 10% rebatesSource: Hawkins Wright, Pöyry, RISI; BCG analysis

262

WENA

WENA

3 Natural shifts


High value of Euro puts profit under pressure directly and indirectly

4 Financial shifts Backup

1. According to Stora Enso Annual Report 2007 2. Calculation before currency hedgesSource: BCG analysis, Stora Enso Annual Report 2007

0,8

0,9

1

1,1

1,2

1,3

1,4

1,5

1,6

1,7

31.1

2.19

99

31.1

2.20

00

31.1

2.20

01

31.1

2.20

02

31.1

2.20

03

31.1

2.20

04

31.1

2.20

05

31.1

2.20

06

31.1

2.20

07

US-$ / Euro

Ongoing strong Euro affects European players

Ongoing strong Euro affects European players

Direct P&L effects

Indirect effects on trade flows and competitiveness


European share prices under pressure

5 Limited financial flexibility

1. Indexed since January 2005Source: Thomson Reuters; Broker reports; BCG analysis

Falling share pricesFalling share prices Polarization of European industryPolarization of European industry

0

50

100

150

200

250 Share index

Jan 04 Jan 06Jan 02 Jan 08

Sappi Stora Enso M-Real

UPM Holmen Norske Skog

MSCI WorldMSCIWorld Materials

Few strong players• Low D/E ratio• Recent restructurings/divestitures• Investors confidence• Waiting for best timing to buy

Many weak players• High D/E ratio• Mixed assets• Deteriorating debt rating• Hoping for fast consolidation

Backup


-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

SappiHolmen

Grupo Empr. Ence

UPM

Portucel

Iberpapel

Stora Enso

M-Real

Rottneros

ROIC (%)

As a result, many established companies have unsatisfactory profitability – they need to act

ROIC1 development

1. ROIC = (Net Income * (1-Tax Rate)) / Average of Last Year's and Current Year’s (Total Capital + Last Year's Short Term Debt & Current Portion of Long Term Debt) * 100Source: Thomson Reuters Datastream, BCG analysis

WACC range


Potential impact: Changing market environmentOne scenario for 2015/2020

Pulp is mostly being supplied from South America and Russia• Many European integrated mills have shut down and pulp prices increase before they decrease again

The basics of competitive advantage have shifted from assets to resources• Access to low-cost fibre• Access to the right people/management skills

Players have restructered and consolidated significantly• Players have much clearer competitive advantage and are more focused on certain (customer) segments

(e.g. print vs. packaging or paper vs. conversion)• Market is clearly divided in commodity paper products (with no complexity) and speciality products

New (global) alliances have been built, but on a different logic than previous acquisitions• Not synergy-based• But on raw material access...• ... and new value chain splits

– between pulp production and paper production and marketing/sales– also between supplier and customers (as paper industry understood limited potential for passing on

price increases without further accelerating substitution)

But in between came the crisis ...


Agenda






There is not one crisis but threeThree gambles mixed a deathly cocktail for the financial system and the economy

The need of banks for deleveraging and de-risking spawns a vicious circle

The real-estate market bubble

and overleveraging of

U.S. and other economies

Asset devaluation

The leverage in banks' balance

sheets

Low capital ratios

The reliance of banks on short-

term funding

Liquidity squeeze

1 2 3

Source: BCG analysis


Source: Thomson Financial Datastream; Federal Reserve; Bureau of Economic Analysis; Barron's; Elliot Wave International; The Gabelli Mathers Fund; BCG estimate

The true background: record levels of debtUS consumer deleveraging might drag growth for years

Indebtedness of private U.S. households, municipalities and corporations as % of GDP

Indebtedness of private U.S. households, municipalities and corporations as % of GDP

0

50

100

150

200

250

300

350

400In %

1915Q1

20091925 1935 1945 1955 1965 1975 1985 1995

Stock marketcrash of 1929

U.S. GDP shrinks: depression

Start of 1982 bull market

Dotcom bubble popped

Reverting U.S. household debt alone from 96% of GDP to long-term averages of 68% or 55% meant a decrease of ~ $4–6T in debt

Additional deleveraging by overly indebted companies will lead to decrease in asset values, causing further deleveraging pressure

Deleveraging might drag growth for years

Deleveraging might drag growth for years


Clear effects: a collapse in consumer confidence and dramatic fall in industrial output

1. The GfK Consumer Climate Index is based on ca. 2,000 monthly consumer interviews. The consumers are asked to give their assessments of their current economic situation and theirexpectations for the next twelve months. E.g., a value of 4 could be interpreted as a 0.4% growth expectation of private consumption 2. Annualized percentage change in industrial value added

Source: Thomson Datastream; Global Insight; The Wall Street Journal – 4 Feb. 2009; Federal Reserve; U.S. Census Bureau; Philadelphia Federal Reserve Autodata

Consumer confidence dropping everywhere(Example Eurozone—Germany)

Consumer confidence dropping everywhere(Example Eurozone—Germany)

Industrial output showing deep declinesin major economies

Industrial output showing deep declinesin major economies

-70 -60 -50 -40 -30 -20 -10 0 10 20 30

Japan

Germany

Italy

Brazil

Eurozone

France

US

UK

Mexico

South Korea

Australia

China

India

Manufacturing output2—annualized quarterlypercentage change in volume, Q1 2009

0

2

4

6

8

10

GfK Consumer Climate Indexfor Germany1

-77%

Mar ' 08 – Mar '09

Dec 2006

Juli2009

Jul 2007

Mar2008


Enough macroeconomic talk …If interested, please read BCG's "Collateral Damage" series

Source: www.bcg.com


Agenda






For P&P, we expect the impact of the downturn to be significant and longlasting

0

20

40

60

22.2

9.2

7.5

9.1

3.0

14.0

65.0

2005

23.0

9.6

8.9

9.4

3.1

14.5

68.4

2006

23.6

9.4

8.7

9.5

3.0

14.6

68.7

2007

22.9

9.3

8.4

9.3

2.9

14.5

67.3

2008

20.6

7.8

7.0

7.6

2.3

11.6

56.9

2009

21.0

7.9

7.1

7.8

2.4

11.8

58.0

2010

21.5

8.1

7.2

8.0

2.5

12.2

59.5

2011

22.0

8.3

7.2

-17%

2.6

12.7

61.2

2012

22.6

8.7

7.3

8.5

2.6

8.3

62.8

2013

Containerboard

Newsprint

UCWF

CWFMechanical uncoated

Mechanical coated

M t

13.1

Change 2007–2013Change 2007–2013

Level of confidence

-7%

-16%

-10%-12%

-10%

-4%

Additionally, economic slowdown accelerates shift in usage/buying behavior

Base case scenario• Growth between previous paper growth and GDP growth• Consumers partly change to electronic media


1. Data from Jan 1, 2008–July 31, 2009Note: Total shareholder return (TSR) based on calendar year data (MSCI world industry indices and Dow Jones Total Market World Iron and Steel Index)Source: Thomson Financial Datastream; BCG analysis

Industry TSR performance 2002–2007 p.a.Industry TSR performance 2002–2007 p.a. Industry TSR performance 2008–20091 p.a. Industry TSR performance 2008–20091 p.a.

39.0%Steel

24.5%Metals & mining

15.1%Chemicals

11.9%Construction materials

7.5%Containers & packaging

1.4%Paper & forest products

∅ 16.5%

Change p.a.

Metals & mining

Paper & forest products

-24.2% Steel

-28.0%

-18.4% Chemicals

∅ -21.5%

-19.7%

-24.7% Construction materials

Containers & packaging-13.7%

Change p.a.

Investor confidence and financial performance (again) low


No better picture for pulp this time

-60

-40

-20

0

20

40200701.01.08-15.09.0815.09.08-28.02.09

TSR(%)

Median TSR performance by industryMedian TSR performance by industry

Note: All TSR values based on median per industry.Source: Thomson Reuters, Datastream, Bloomberg, BCG analysis

2008 saw the worst stock market drop since the Great Depression

Utilities

Retail

Technology and Telecom

Pharmaceuticals

Media and Publishing

ConsumerGoods

Chemicals

Transportationand Logistics

Travel and Tourism

Machinery and Construction

Multibusiness

Paper

Mining andMaterials

PulpAutomotive and Supply

Banking


European P&P companies on average lost about 35% of their market cap since 12/2007

Stora Enso Sappi

Portucel

Rottneros AltriENCE

Holmen

SCA

UPMIberpapel

M-RealMondi

31.12.200714.09.2009

Source: Bloomberg; BCG analysis

Market capitalization in M€ as of

-74% -42% -59% -40% -57%

-23% -42% -73% -13%

-4% -38% -36% -26%

Billerud

Lost market capitalization


As a result, the industry faces different challengesPost-crisis world will be different

How to cope with all these challenges?

Industryconsolidation

New mindsets: individuals

New mindsets: investors

Governmentsget more involved

Companies restructure

Post-crisis world

Reduced cashflows

New globalmarket order

Changing business models


Agenda






The current situation is not entirely new Disturbing similarities to Great Depression (but governments have acted quickly this time)

World industrial outputWorld industrial output World stock marketsWorld stock markets World tradeWorld trade

Source: Barry Eichengreen and Kevin H O'Rourke, "A Tale of Two Depressions", April 6, 2009, http://www.voxeu.org/index.php?q=node/3421; League of nations monthly bulletin of statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

60

70

80

90

100

1 11 21 31 41 51

Months

30

50

70

90

110

1 11 21 31 41 51

Months

60

70

80

90

100

110

1 11 21 31 41 51

Months

June 1929 = 100

April 2008 = 100What can we learn from the Great Depression?

% % %


1. 1929 peak to 1932 trough cumulative total return 2. 1929 peak to 1936 peak cumulative total returnSource: Calculated based on data from CRSP US Stock Database 052009 Center for Research in Security Prices (CRSP), The University of Chicago Booth School of Business; BCG analysis

Some companies outperformed in 1929 through 1936

Company performance (total return) relative to industry

Underperformers

Allied Chemical

Du PontComm. Solvents

Union CarbideGE

RCA

Westinghouse

Eastman-Kodak

Lambert Co

Gillette

P&G

Colgate-Palmolive

J. I. Case

Int. Harvester

Deere & Co

Coca-Cola

National Dairy

National Biscuit

Standard Brands

United Fruits

Wm Wrigley Jr

Sears Roebuck

General Foods

Borden

General Mills

Alaska Juneau Gold

American SmeltingAnaconda Copper

Homestake Mining

International Nickel

Kennecott Copper

National Lead

Texas Gulf Sulphur

PhelpsDodgeParamount-Publix

Loew’s

Fox Warner Bros.

Inland SteelU.S. Steel

Youngstown Sheet & Tube

GoodrichGoodyear

Firestone

American Tobacco

Liggett & Myers

Reynolds Tobacco

0

Burroughs

80 940-100 -40

Peak-to-peak2 difference to industry average in %, 1932–1936

0

10

IBM

Remington RandNCR Atlantic Refining

Sandard Oil NJ

Phillips Petroleum

Shell Union Oil

Sinclair--Consol.

Sandard Oil CA

Texas Corp

Socony-Vacuum

Sandard Oil IN

American can

AT&T

Alleghany Corp Transamerica

Crown ZellerbachInt. Paper

20

At. Top. & Sta Fe

Canadian Pacific

Chesap. and Ohio

NY Central

Norfolk & Western

Pennsylvania

Southern Pacific

Union Pacific

Baltimore and OhioAs. Dry Goods

Gimbel Brothers

S. S. Kresge

Macy

Montgomery Ward

Woolworth

J. C. Penney

Bethlehem Steel

Pillsbury

Nash Motors

ChryslerHudson Motors Car

Packard Motor Car

150

-10

-30

Peak-to-trough1 difference to industry average in %, 1929–1932

Badly hit, but out-performed in the upturn

Industry average

Industry averageOut-performers

GM


Outperformer followed clear "roadmap to success"Stringent program management key to succeed—bold and quick actions required

Strong leadership and focus Bold moves and decisive program management

Protect revenues

1. Protect cash

2. Strengthen the core

3. Increase flexibility

4. Cut cost/capacity quickly and strongly

Invest in the future

5. Adapt product offering in line with changing preferences

6. Review sales/marketing opportunity carefully

7. Accelerate promising product launches

8. Invest selectively in R&D

9. Reprioritize portfolio (biomass, etc.)

10. Keep an eye out for value-adding M&A

11. Retain the best talent

Control cost

Value-oriented culture and balance actions

Conflicting at first glance,complementing at second look


1. Protect cash: optimize working capital


Working Capital management is an important lever to protect cash during crisis

Liquidity management is key in actual context• Difficult access to financing

– it is necessary to ensure enough liquidity to cover company's operations• Uncertainty about market scenarios

– when uncertainty is higher, you need to have more liquidity for caution• Having cash strengthens negotiating power and allows taking advantage of opportunities. For

e.g.– negotiation with suppliers or clients– opportunistic M&A

Working capital management is an important lever to improve liquidity• Working capital reduction is an attractive source of cash in a moment that is more difficult to

access the traditional sources such as banks and capital markets


0.10.2

0.3

2.0

1.4

Actual WCR Potential Target

In B€

- 30%

Receivables and prepayments receivedInventories

Payables and prepayments made

Example for typical industrial goods company Example for typical industrial goods company

Note: Working capital figures indexed to 100; including prepayments Source: BCG analysis

Most relevant improvement levers Most relevant improvement levers

50% of potential often realized already in the first year

Typical impact of improved working capital management: Reduction of NWC by 20 to 40 percent

• Reduce cycle times and idle times

• Improve stockholding• Review supply concepts

Inventories

• Improve invoicing and dunning process to customers

• Re-negotiate payment schedules and conditions

Receivables

• Improve payment process to suppliers

• Re-negotiate terms and conditions in purchasing

Payables

≈ 20% of potential




4./10. Capacity management/M&A


Downturn acquirers perform cumulatively 14.5% better in terms of Relative Total Shareholder Return than boom acquirers

Downturn M&A creates value

Boom M&A destroys value

Downturn acquisitions create more valueOutperformance of boom time sample by +14.5 percent RTSR in the longer term

Note: Sample size = 277, values based on averagesSource: VM research system; SDC; BCG analysis

5.9% 10.4%

14.5%

104.5

94.1

108.3

93.8

0

110

90

95

100

105

Cumulative relativeTSR performance

(Announcementdate of deal = 100)

100.0100.0

97.8

97.4

101.4

95.5

T-5 T+5 End of announce-ment year

Year 1 Year 2Announce-ment effect

Looking at announcement alone proves short-sighted


Low profitability results from rising cost and weak prices

Profitability

ROCE below WACC for eight years

Cost

Cost increasing

Price

Prices stagnating for most grades

2002 2004 2006 2008

100

120

80

Cost index1 (2002=100)

2002 2004 2006 2008

SC

UCWF

Cartonboard

Kraftliner

CWF

Newsprint

LWC

100

120

80

Index prices Germany (2002=100)

CostCost PricePriceProfitabilityProfitability

1. Nominal prices for Germany – representative for Western EuropeSource: RISI; BCG analysis

1

2

1 2

fMin-max

cost range (depending on grade)


Operating rate is key driver for ability to influence price


Overcapacity further analyzed

Likely secondary driversLikely secondary drivers

Market and buyer concentrationMarket and buyer concentration

• Relative number and market share of competitors

• Historical consolidation• Level of integration• Relative distribution and volume of

customers and segments

Price corridorPrice corridor

• Price is dependent on prices of final product and costs of raw materials

Technological innovationTechnological innovation

• Relative rate of technological innovation

• Patent protection

Price outlook

OvercapacityOvercapacity

• Δ capacity — Δ demand– Growth expectations

Product substitutionProduct substitution

Likely primary driversLikely primary drivers

• Cost factors• Differentials

Supply costSupply cost

• Relative value (price, quality)– Within industry (across grades)

Driver evaluated

f

2


Operating rates of 95% enable producers to fully pass on cost

Operating rate

Medium operating rate High operating rate Full utilization

Price

Inelastic price Elastic price Inelastic price

~93% 98%

Cost coverage not

secured

95%

Full ability to increase

priceSome ability to pass on

cost increase

Prices respond with time lag on change of operating rates


2003 2004 2005 2006 2007 2008 200970

75

80

85

90

95

100

300

400

500

700

Price € Operating rate %

90

100

110

120

2003 2004 2005 2006 2007 2008

Cost index

Immediate price response above 95%-threshold

Example containerboardExample containerboard


Price Testliner

Price Kraftliner

Operating rate

Cost increase fullyand quicklypassed on

Two thresholds existTwo thresholds exist

Operating rate of 95% gives ability to fully and quickly pass on cost increase

Ability to partly pass on cost increase starts at 92% – 94%

• Depending on grade– 93% for containerboard

• Price increase follows operating rate with time lag, depending on

– Duration of contracts– Expectations on future

overcapacity



Weakened demand leads to overcapacity in all grades Closures of 1.2M – 3.8M t per grade required to reach 95% operating rate

Fine paperFine paperMechanical paperMechanical paper ContainerboardContainerboardNewsprintNewsprint

0

2

4

0.9

2007

0.9

2008

0.9

2.7

2009

0.9

2.5

2010

Additional overcapacity compared to 100% operating rateOvercapacity compared to 95% operating rate

M t

0

2

4

0.50.2

2007

0.50.2

2008

0.5

1.2

2009

0.51.3

2010

M t

0

2

4

0.9

2009

1.3

0.8

2008

1.3

3.8

2009

1.3

M t

4.1

2010

95100

80

0

90

%

2010

81

2009

93

2007

95

2008

8087

2009

86

2010

93 95100

80

0

90

%

2007 2008

93

2007

92

2008

80

2009

90

0

80

10095

96

2010

%

80

2007 2008

76

2009

75

2010

91 95

%

100

0

80

9190

Ove

rcap

acity

Ope

ratin

g ra

te

0

2

4

1.00.7

3.5 3.7

2009

0.8

2007

0.9

2008

1.0

0.9

2010

M t

Capacity to be closed to get 95% operating rate

Close 2.7M t (15%) to get 95%

operating rate


operating rate


operating rate


operating rate


What is the best way for restructuring the industry?

Single company Centrally facilitated

Actions:

Standalone capacity closure

Acquire competitor

Merger with competitor

"Allow" restructuring

• Govern-ments

• Banks

Public-private funded capacity management

Strategic alliances

Chances for successful reduction of overcapacityDegrees of freedom in implementation

Buying of overcapa-cities"Bad bank"

1 2 3 4


Only selective players in a position to take on further debt

Equals €1.5B market cap

Note: Reported data as of 31.12.2008; except: Mayr-Melnhof (2008 Q3), M-Real, Sappi und StoraEnso (2009 Q1), DS Smith (2009 S1)Source: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; company disclosures; BCG analysis

Question marks• Low net debt• Low EBITDA

compared to interest expense

Restructuring case?• High net debt• Low EBITDA


Predator?• Low net debt and high EBITDA


100

40

Liquidity: EBITDA/Interest Expense

0

Median

0 255

Portucel

InternationalPaper

MondiSappi

SCA

Billerud

Current capital structure:Net Debt in % of EV

Mayr-Melnhof

60StoraEnso

UPM

Ahlstrom

SequanaM-Real

Smurfit KappaNorske Skog

Holmen

80

DS Smith

Question marks• High net debt and

EBITDA to interest expense rate


No big player in a position to acquire competitorsMayr-Melnhof, DS Smith, Portucel and Mondi are potential predators

1. Includes pension accruals and capitalized leases 2. Defined as an post-tax return on average gross assets Note: Data as of 27.04.2009 or reported data as of 31.12.2008; except: Mayr-Melnhof (2008 Q3), M-Real, Sappi und StoraEnso (2009 Q1), DS Smith (2009 S1)Source: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; company disclosures; BCG analysis

Who is in a position to act?Who is in a position to act? Some companies need to fulfill value expectationSome companies need to fulfill value expectation

Equals €1.5B market cap

Restructuring case?• High debt burden• Low earnings

Predator?• Low debt burden• High earnings

On the sidelines?• Low debt burden• Low earnings

Downturn target?• High debt burden• High earnings

Predator?• High valuation• Low value creation

Safe position?• Expansive• Value creator

Prey?• Cheap• Value

creator

Restructuring case?• Cheap • Low value creation

-8

-6

-4

-2

0

2

4

6

8

Smurfit Kappa

Norske Skog

2 14 16 18

Holmen

Svenska Cellulosa

Billerud Ahlstrom

MondiSappi

PortucelAltri

0 10 12

Mayr-Melnhof

Rottneros

Median

Current RoA2

3324 6 8-72

Latest Debt1/EBITDA

Ence

M-Real Stora Enso

UPM

SequanaDS Smith

330

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

Int. Paper

BillerudMondi

Sappi

Portucel

15100

M-Real

Stora EnsoUPM

Ahlstrom

Sequana

DS Smith

Smurfit Kappa

5

Rottneros

56025-60

1yr Ø TSR (Apr08–Apr09)

Current EV1/EBITDA

20

Altri

Norske Skog

Mayr-Melnhof

Ence

Median

Svenska Cellulosa

Holmen

30


How will the future landscape look like?

"Believe me! We are just about to make a huge breakthrough ..."


Summary

Sector has been in crisis for years

Demand declines for all grades in 2009, leading to even larger overcapacities

Competitiveness of many European players significantly weakened

Rigorous capacity management needed – industry restructuring required• Most likely, merger/alliance and central facilitation successful ways to restructure industry

European P&P industry can be profitable in 2015 if• Operating rate of at least 95% are reached

– likely pre-requisite for above: more consolidation• They have established/found new revenue pools• You have secured access to energy and cheaper wood resources

Prepare for the worstMake the best out of it


Please contact me in case of questions/need for furtherdiscussions

Kirsten LangePartner & Managing Director, Worldwide Sector Leader Pulp&Paper

The Boston Consulting Group

Tel. -49-170-33 44 375Email: [email protected]

perspectives on the global crisis and opportunities for … consulting group... · 2009-09-29 ·...

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