Perspectives on the global crisis and opportunities for pulp in - - PowerPoint PPT Presentation

Perspectives on the global crisis and

• pportunities for pulp in Europe

Kirsten Lange, The Boston Consulting Group

17 September 2009

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

Disclaimer

This document has been prepared for a presentation to Europulp and Utipulp on September 17 2009 Analyses have been based on public information and hypotheses fit at system level, but no access has been provided to entities' reserved information. This deck has been prepared for an oral presentation. Therefore, it will be incomplete without the appropriate supplementary comments This document contains The Boston Consulting Group's intellectual property resulting from the investments made in concept development and from the experience accumulated throughout other similar projects The Intellectual Property Act bans any third party from accessing this document or mentioning it in the media without the relevant express authorization by BCG

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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

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0,8 0,9 1 1,1 1,2 1,3 1,4 1,5 1,6 1,7 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 core markets

• Stagnant or declining in

some grades in WE

• Despite improving operating

rates in some grades still

• ver-capacities

2

Low-cost pulp supply (M tons)

"Natural" shifts in competitiveness

• Strong capacity growth of

low-cost fiber

Cost (€)

3 "Financial" shifts in competitiveness

• P&L effects
• Trade flows

4

'99 '00 '01 '02 '03 '04 '05 '06 '07 50 100 150 200 250

Share index

Jan 04 Jan 06 Jan 02 Jan 08

Sappi Stora Enso M-Real UPM Holmen Norske Skog MSCI World MSCI World Materials

Loss of financial flexibility for many players

• Share price developments
• Ratings
• Debt/equity

5

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

Index prices1 Germany (2000 = 100)

Significant recent cost increases in Europe — and more to come

Cost increases 1

Cost of production factors

Actual Outlook Energy Virgin fibre Labour Recycled fibre2 Chemicals 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 Paper

Source: 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

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11 23 16 25 24 84 52 60 5 603 2004 1,727 2012 3,000 2020 Other RES3 Other solid biomass4 Forest biomass (wood)2 100 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 increases 1

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280 81 178 51 40 200 400 600 800 Recovered wood Estimated supply 200–260 Estimated gap Estimated demand 7 65–130 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 30–35 40–45 70–80 Technical potential mobilized Net wood imports Solid wood products production

(Mm3)

Sawlogs Pulpwood and

• ther industrial

round wood Fuel wood Roundwood Transportation Electricity 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, UK

Source: 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 increases 1

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Paper demand growth fuelled by Asia while WE/NA stagnates

2 Low demand growth

• 4

4 8 12 16

CAGR 2004–15 (%)

China Eastern Europe Other Asia Latin America Western Europe NAFTA Japan Rest of the World New China1 Ø4.8% Ø5.1% Ø4.2% Ø3.3% Ø1.0% Ø0.4% Ø0.2% Ø3.4% Ø9.0% Carton board Tissue Coated Woodfree Corrugated Coated Mechanical Uncoated Woodfree Uncoated Mechanical Newsprint 10 M t Demand 2004

• 1. Mills with capacity > 50k t

Source: Pöyry; BCG analysis

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

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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 Sweden Source: Hawkins Wright; Pöyry; Valois Vision; BCG analysis

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

61 81 39 19 50 100 2006 2015 High cost countries1 Low cost countries2

(%)

19 37 81 63 50 100 2006 2015 High cost countries3 Low cost countries4

(%)

308 250 612 499 400 800 2006 2015 +249 +304 ($/ton) 432 329 706 577 400 800 ($/ton) 2006 2015 +248 +274 High cost country5 Low cost country5 High cost country5 Low cost country5 23 33 22 25 Global capacity (Mt) Global capacity (Mt) BHKP BSKP

Shift more critical for integrated players from high cost countries

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The impact of this might go beyond market pulp

BHKP market pulp supply scenarios (2015) BHKP market pulp supply scenarios (2015) Base case:

+10Mt capacity 2006-2015

High case:

+17Mt capacity 2006-2015

Brazil 800 400 13Mt 800 Brazil 400 20Mt

Low cost capacities increase due to additional announced but unconfirmed capacity

Demand 49 Demand

40Mt 33Mt US$ US$

Announced and confirmed capacity according to Hawkins Wright plus necessary extrapolations

Potential impact Potential 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 costs might 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% rebates Source: Hawkins Wright, Pöyry, RISI; BCG analysis 262

WE NA WE NA

3 Natural shifts

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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 hedges

Source: 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 31.12.1999 31.12.2000 31.12.2001 31.12.2002 31.12.2003 31.12.2004 31.12.2005 31.12.2006 31.12.2007

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

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European share prices under pressure

5 Limited financial flexibility

• 1. Indexed since January 2005

Source: Thomson Reuters; Broker reports; BCG analysis

Falling share prices Falling share prices Polarization of European industry Polarization of European industry

50 100 150 200 250 Share index Jan 04 Jan 06 Jan 02 Jan 08 Sappi Stora Enso M-Real UPM Holmen Norske Skog MSCI World MSCI World 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

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• 20
• 15
• 10
• 5

5 10 15 20 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sappi Holmen 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) * 100

Source: Thomson Reuters Datastream, BCG analysis

WACC range

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Potential impact: Changing market environment

One 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 ...

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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

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There is not one crisis but three

Three 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

• verleveraging 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

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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 debt

US 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

50 100 150 200 250 300 350 400 In % 1915 Q1 2009 1925 1935 1945 1955 1965 1975 1985 1995

Stock market crash 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

• verly 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

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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 their

expectations 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 declines in major economies Industrial output showing deep declines in major economies

• 70
• 60
• 50
• 40
• 30
• 20
• 10

10 20 30 Japan Germany Italy Brazil Eurozone France US UK Mexico South Korea Australia China India Manufacturing output2—annualized quarterly percentage change in volume, Q1 2009 2 4 6 8 10 GfK Consumer Climate Index for Germany1

• 77%

Mar ' 08 – Mar '09 Dec 2006 Juli 2009 Jul 2007 Mar 2008

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Enough macroeconomic talk …

If interested, please read BCG's "Collateral Damage" series

Source: www.bcg.com

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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

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

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 CWF Mechanical uncoated Mechanical coated M t

13.1

Change 2007–2013 Change 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

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• 1. Data from Jan 1, 2008–July 31, 2009

Note: 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

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No better picture for pulp this time

• 60
• 40
• 20

20 40 2007 01.01.08-15.09.08 15.09.08-28.02.09

TSR (%)

Median TSR performance by industry Median 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 Consumer Goods Chemicals Transportation and Logistics Travel and Tourism Machinery and Construction Multibusiness Paper Mining and Materials Pulp Automotive and Supply Banking

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

Stora Enso Sappi Portucel Rottneros Altri ENCE Holmen SCA UPM Iberpapel M-Real Mondi 31.12.2007 14.09.2009

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

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As a result, the industry faces different challenges

Post-crisis world will be different

How to cope with all these challenges?

Industry consolidation New mindsets: individuals New mindsets: investors Governments get more involved Companies restructure Post-crisis world Reduced cash flows New global market order Changing business models

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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

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The current situation is not entirely new

Disturbing similarities to Great Depression (but governments have acted quickly this time)

World industrial output World industrial output World stock markets World stock markets World trade World 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 = 100

What can we learn from the Great Depression?

% % %

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• 1. 1929 peak to 1932 trough cumulative total return 2. 1929 peak to 1936 peak cumulative total return

Source: 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 Pont

• Comm. Solvents

Union Carbide

GE

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 Smelting Anaconda Copper Homestake Mining International Nickel Kennecott Copper National Lead Texas Gulf Sulphur Phelps Dodge Paramount-Publix Loew’s Fox Warner Bros.

Inland Steel

U.S. Steel Youngstown Sheet & Tube Goodrich Goodyear Firestone American Tobacco Liggett & Myers Reynolds Tobacco Burroughs 80 940

• 100
• 40

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

10

IBM

Remington Rand NCR 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 Zellerbach

• Int. Paper

20

• At. Top. & Sta Fe

Canadian Pacific

• Chesap. and Ohio

NY Central Norfolk & Western Pennsylvania Southern Pacific Union Pacific Baltimore and Ohio

• As. Dry Goods

Gimbel Brothers

• S. S. Kresge

Macy Montgomery Ward

Woolworth

• J. C. Penney

Bethlehem Steel Pillsbury Nash Motors

Chrysler

Hudson 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 average

Out-performers

GM

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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

• pportunity 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

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• 1. Protect cash: optimize working capital

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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

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0.1 0.2 0.3 2.0 1.4 Actual WCR Potential Target In B€

• 30%

Receivables and prepayments received Inventories 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 ≈ 50% of potential ≈ 30% of potential

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4./10. Capacity management/M&A

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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 value

Outperformance of boom time sample by +14.5 percent RTSR in the longer term

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

5.9% 10.4% 14.5% 104.5 94.1 108.3 93.8 110 90 95 100 105 Cumulative relative TSR performance (Announcement date of deal = 100) 100.0 100.0 97.8 97.4 101.4 95.5 T-5 T+5 End of announce- ment year Year 1 Year 2 Announce- ment effect

Looking at announcement alone proves short-sighted

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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)

Cost Cost Price Price Profitability Profitability

• 1. Nominal prices for Germany – representative for Western Europe

Source: RISI; BCG analysis

1 2 1 2 f

Min-max cost range (depending

• n grade)

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Operating rate is key driver for ability to influence price

Source: BCG analysis

Overcapacity further analyzed

Likely secondary drivers Likely secondary drivers

Market and buyer concentration Market and buyer concentration

• Relative number and market share
• f competitors
• Historical consolidation
• Level of integration
• Relative distribution and volume of

customers and segments

Price corridor Price corridor

• Price is dependent on prices of final

product and costs of raw materials

Technological innovation Technological innovation

• Relative rate of technological

innovation

• Patent protection

Price outlook Overcapacity Overcapacity

• Δ capacity — Δ demand

– Growth expectations

Product substitution Product substitution

Likely primary drivers Likely primary drivers

• Cost factors
• Differentials

Supply cost Supply cost

• Relative value (price, quality)

– Within industry (across grades) Driver evaluated

f 2

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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 price Some ability to pass on cost increase

Prices respond with time lag on change of operating rates

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2003 2004 2005 2006 2007 2008 2009 70 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 containerboard Example containerboard

Source: BCG analysis

Price Testliner Price Kraftliner Operating rate Cost increase fully and quickly passed on

Two thresholds exist Two 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

• vercapacity

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Source: BCG analysis

Weakened demand leads to overcapacity in all grades

Closures of 1.2M – 3.8M t per grade required to reach 95% operating rate

Fine paper Fine paper Mechanical paper Mechanical paper Containerboard Containerboard Newsprint Newsprint

2 4 0.9 2007 0.9 2008 0.9 2.7 2009 0.9 2.5 2010 Additional overcapacity compared to 100% operating rate Overcapacity compared to 95% operating rate M t 2 4 0.5 0.2 2007 0.5 0.2 2008 0.5 1.2 2009 0.5 1.3 2010 M t 2 4 0.9 2009 1.3 0.8 2008 1.3 3.8 2009 1.3 M t 4.1 2010 95 100 80 90 % 2010 81 2009 93 2007 95 2008 80 87 2009 86 2010 93 95 100 80 90 % 2007 2008 93 2007 92 2008 80 2009 90 80 100 95 96 2010 % 80 2007 2008 76 2009 75 2010 91 95 % 100 80 91 90

Overcapacity Operating rate

2 4 1.0 0.7 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%

• perating rate

Close 3.5M t (18%) to get 95%

• perating rate

Close 1.2M t (12%) to get 95%

• perating rate

Close 3.8M t (15%) to get 95%

• perating rate

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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 overcapacity Degrees of freedom in implementation Buying of

• vercapa-

cities "Bad bank" 1 2 3 4

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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

compared to interest expense Predator?

• Low net debt and high EBITDA

compared to interest expense 100 40 Liquidity: EBITDA/Interest Expense Median 25 5 Portucel International Paper Mondi Sappi SCA Billerud Current capital structure: Net Debt in % of EV Mayr-Melnhof 60 StoraEnso UPM Ahlstrom Sequana M-Real Smurfit Kappa Norske Skog Holmen 80 DS Smith Question marks

• High net debt and

EBITDA to interest expense rate

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

No big player in a position to acquire competitors

Mayr-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 expectation Some 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

2 4 6 8

Smurfit Kappa Norske Skog

2 14 16 18

Holmen Svenska Cellulosa Billerud Ahlstrom Mondi Sappi Portucel Altri

10 12

Mayr-Melnhof Rottneros Median

Current RoA2 332 4 6 8

• 72

Latest Debt1/EBITDA

Ence M-Real Stora Enso UPM Sequana DS Smith

330

• 70
• 60
• 50
• 40
• 30
• 20
• 10

10 20 30

• Int. Paper

Billerud Mondi Sappi Portucel

15 10

M-Real Stora Enso UPM Ahlstrom Sequana DS Smith Smurfit Kappa

5

Rottneros

560 25

• 60

1yr Ø TSR (Apr08–Apr09) Current EV1/EBITDA 20

Altri Norske Skog Mayr-Melnhof Ence Median Svenska Cellulosa Holmen

30

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

How will the future landscape look like?

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

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

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 worst Make the best out of it

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

Please contact me in case of questions/need for further discussions

Kirsten Lange Partner & Managing Director, Worldwide Sector Leader Pulp&Paper The Boston Consulting Group

• Tel. -49-170-33 44 375

Email: lange.kirsten@bcg.com