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Paper & PackagingChip Dillon, CFA
PartnerPhone: (212) 257-6159Fax: (203) [email protected]
James ArmstrongAnalystPhone: (212) 257-6157Fax: (203) [email protected]
Anna DeGregorioExecutive AssistantPhone: (212) 257-6158Fax: (203) [email protected]
May 5, 2023
Analyst Certification
Vertical Research Partners analyst(s) whose name(s) appears on the front page of this research report hereby certifies that the recommendations and opinions expressed in the research report accurately reflect the research analyst's personal views about any and all of the subject securities or issues discussed herein.
Transacting Disclosures
Vertical Research Partners is not a broker dealer, so does not trade or carry proprietary positions with firm capital in any covered or other stocks. We have fully flexible payment mechanisms available to our institutional clients, including CSA and CCAs in place with all larger broker dealers and execution-only firms in the US.
Employees and partners of Vertical Research Partners LLC may from time to time, own beneficial positions in securities we publish on. Vertical Research Partners' employees and partners are prohibited from transacting in such securities within 48 hours of a change in recommendation. All employee and partner transactions in covered securities are required to be pre-approved and monitored by VRP LLC.
Other Disclosures
Although the information contained herein has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. The information and opinions contained herein are subject to change without notice, and Vertical Research Partners, LLC assumes no responsibility to update or amend any information or opinions contained herein. Copyright 2012 Vertical Research Partners, LLC. All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Vertical Research Partners, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Vertical Research Partners, LLC. This report is limited for the sole use of clients of Vertical Research Partners, LLC. Authorized users have received an encryption decoder with regulates and monitors the access to Vertical Research Partners content. Any distribution of the content produced by Vertical Research Partners, LLC will violate the understanding of the terms of our relationship. The content of Vertical Research Partners website and reports is provided as general and impersonalized investment information and commentary does not constitute a specific recommendation or solicitation that you should purchase or sell any particular security or investment advisory services. Vertical Research Partners is not responsible for trades executed by subscribers to its content. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Vertical Research Partners, LLC does not provide individually tailored investment advice. Vertical Research Partners’ research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Vertical Research Partners’ research may not be suitable for all investors. Vertical Research Partners, LLC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. The securities, instruments or strategies discussed in Vertical Research Partners, LLC reports may not be suitable for all investors.
Disclosures
N.C. State UniversityPulp and Paper FoundationSeptember 12, 2013
Where Will the Best Returns Be Found in Paper and Forest
Products?
Page 4
The VRP Team
Jeffery T. SpragueManaging Partner
Ryan EdelmanAnalyst
Andrew NooriganAnalyst
Jessica SchenendorfAnalyst
Brian KonigsbergVice President
Rob WertheimerPrincipal
Joe O'DeaAnalyst
Chip DillonPartner
James ArmstrongVice President
Electrical Equipment & Multi-Industry
Engineering & Construction
Engineering & Construction
Paper & Packaging
Brendan ByrneInstutional Sales
Jack CallahanInstutional Sales
Chris DonnellyInstutional Sales
William HennigInstutional Sales
Will NewellInstutional Sales
Nicole M. ParentManaging Partner
David SulpizioVice President
Anna DeGregorioExecutive Assistant
Operations
Sales ABB ADT AMEATU DHR DOVEMR ETN GEHON HUB/B IEX
IR MMM PHROK ROP RXN
SIE-DE SPW SU-FPTXT TYC UTXWHR
BWC CBI CRFLR FLS FWLTGDI ITT JECKBR MDR PNR
SHAW XYL
AGCO ALSN CATCMI DE ITW
JOYG LII MTWNAV PCAR STTEX WNC
ATR BLL BMSBKI CLW CCKUFS IP KSKMB LPX MWVNBD OI PKGGLT PCL PCHRYN RKT SEE
SLGN SKG ID SONWY
Electrical Equipment & Multi-Industry
Enginnering & Construction
Machinery
Paper & Packaging
Coverage List
Page 5
Chip Dillon• Kimberly-Clark (KMB)• MeadWestvaco (MWV)• Packaging Corp (PKG)• Sealed Air (SEE)• Silgan Holdings (SLGN)• Rayonier (RYN)• Rock-Tenn (RKT)• Aptar (ATR)• Sonoco (SON)• Weyerhaeuser (WY)• Potlatch (PCH)• Plum Creek Timber (PCL)
• Owens-Illinois (OI)• Louisiana-Pacific (LPX)• International Paper (IP)• Domtar (UFS)• Crown Holdings (CCK)• Bemis (BMS)• Ball Corp (BLL)
James Armstrong• PH Glatfelter (GLT)• Norbord (NBD.CN)• KapStone (KS)• Clearwater Paper (CLW)• Smurfit Kappa (SKG.ID)
Key Points:
Page 6Source: AF&PA and Vertical Research Partners
Containerboard – Paper’s First “Real Business” Since the 1950’s (as long as OCC stays tight). Also sees benefits from (1) recent consolidation and (2) global growth in demand – that has exceeded real GDP.Paperboard – Crosscurrents near-term; US should maintain advantage LT.Market Pulp – North America could see a sustainable advantage in softwood grades. However, hardwood will continue to be pressured by Latin American capacity. One “wild card” in hardwood is currency -- a super-strong Brazilian Real almost eliminated their advantage in Spring 2011.Tissue – Huge secular changes in North America; good with private label.Printing Papers – Continued, gradual slide in uncoated free sheet (-2%-4% per year). Coated paper could fall faster, especially as effectiveness of full catalogs declines. The fate of mass-read magazines long-term is already clear; specialty “rags” will provide some relief.Wood is Good – But timberland is NOT an inflation hedge.
Containerboard
Page 7
US Paper and Paperboard Returns
Page 8
1950's 1960's 1970's 1980's 1990's 2000's 2010's
Retu
rn o
n In
vest
men
t
“Better To Be Lucky Than Good”
Key Changes We See
Page 9
• Kraft Linerboard is Critical to the Global Fiber System
• Kraft Linerboard also Required for Certain Applications (Fruits/Vegetables, High-Value)
• OCC Will become More Dear, the Faster Box Demand Grows
• No Room at the Inn – The Americas and Europe Win, Asia Loses
Containerboard Production by Region
Page 10Source: RISI and Vertical Research Partners
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
United States China Japan Europe Others
1993 - 2014E CAGR: 4.6%
Global Containerboard Capacity
Page 11Source: RISI and Vertical Research Partners
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Recycled CapacityVirgin capacity
Cap
acity
(000
met
ric to
ns)
United States OCC Market
Page 12Source: Fibre Box Association, AF&PA, US Department of Commerce, Bureau of the Census
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
-20%
0%
20%
40%
60%
80%
100%
120%
140%Total OCC Collected
Exported to China
OCC Collected as % of US Production
China as a % of Total Collections
Tons
Col
lect
ed a
nd E
xpor
ted
(tho
usan
ds)
OCC %
of US Production and China % of Collections
Global Containerboard Supply Chain
Page 13Source: RISI
AssumptionsCollection rate: 75%
Fiber Loss: 12%
Total Supply
2.5 MM Tons 99.0 MM Tons
48.5 MM Tons
13.5 MM Tons
112.5 MM Tons
37.5 MM Tons
Unbleached Kraft Pulp Recycled Board Fiber Loss
Virgin Board
Old Board Collected
Old Board Not Collected
Theoretical Total CapacityActual Total Capacity
Difference
150.0 MM Tons173.0 MM Tons
22.9 MM Tons
Global OCC Recovery Rates
Page 14Source: RISI
2000200120022003200420052006200720082009201020112012
68.0%
70.0%
72.0%
74.0%
76.0%
78.0%
80.0%
82.0%
84.0%
86.0%
Recovery Rates of OCC in China as Percent of Production
Page 15Source: RISI
19921993199419951996199719981999200020012002200320042005200620072008200920102011
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
German & US OCC Prices in USD
Page 16Source: RISI
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 $-
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
US OCC German OCC (In USD)
Pric
e Pe
r Sho
rt T
on
Fiber Cost Per Ton of Containerboard
Page 17Source: Plum Creek, RISI and VRP Estimates
1Q023Q021Q033Q031Q043Q041Q053Q051Q063Q061Q073Q071Q083Q081Q093Q091Q103Q101Q113Q111Q12
$-
$50
$100
$150
$200
$250
OCC Delivered Pulpwood
Mill Cash Production Cost, Europe vs. ROW
Page 18Source: RISI
Note: All costs per short ton.
North Amer-
ica
Africa Oceania
Europe LatinAmer-
ica
Asia GlobalAver-age
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500 2Q 2011 OtherFiber
North Amer-
ica
Africa LatinAmer-
ica
Europe Oceania
Asia GlobalAver-age
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500 2Q 2012 OtherFiber
OCC Imports
Page 19Source: RISI
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
2
4
6
8
10
12
14
16
18
20
ChinaOther Far EastLatin America
OCC
Impo
rts (
Mill
ion
Met
ric T
ons)
In 2010, North America and Europe equally supplied the
Asian shortfall.
Where to Build New Kraftliner?
Page 20
• Canada – Insufficient Fiber, Slow-Growing Trees, Pine Beetle Issue, High Costs
• Latin America / Asia – Almost Totally Hardwood-based (ex. Chile, Southern Brazil and NZ)
• Scandinavia/Central Europe – Possible, competing fiber demands (energy), sustained yield
• Russia – Clearly part of the Solution, but there are Infrastructure and Capital Constraints
• US South – Clearly part of the Solution, but Permitting takes 3-5 Years
Tissue
Page 21
North American Tissue Market Share
Page 22Source: RISI
Market Position Name Tons (000's) Market Share
1 Georgia-Pacific 2,556 29.2%2 Procter & Gamble 1,390 15.9%3 Kimberly-Clark 1,329 15.2%4 Cascades Tissue 597 6.8%5 SCA Tissue NA 521 6.0%6 Clearwater Paper 476 5.4%7 Kruger Tissue Group 352 4.0%8 First Quality Tissue 243 2.8%9 Irving Tissue 217 2.5%
10 Soundview Paper Co. 127 1.5%Top 10 total 7,807 89.2%All others 944 10.8%Total 8,750
Tissue Capacity Changes in US and Canada
Page 23Source: RISI
Company Location Notes Furnish Date Tons
Blue Heron Oregon City, OR Mill shut down V&R 2011:Q1 (32,000) First Quality Tissue Anderson, SC New greenfield TAD mill; first PM V 2011:Q4 70,000 Kimberly-Clark Everett, WA Mill shut down V 2011:Q4 (208,000) Kruger Products New Westminster, BC PM1 & PM2 closures V 2012:Q3 (25,000) First Quality Tissue Anderson, SC New greenfield TAD mill, second PM V 2012:Q3 70,000 Georgia-Pacific Green Bay, WI Restart of PM7 at the Day Street mill V 2012:Q3 35,000 *White Mountain Tissue Gorham, NH New PM from ABK Italia V 2012:Q4 36,000 Clearwater Paper Shelby, NC New greenfield TAD mill V 2012:Q4 70,000 Georgia-Pacific Naheola, AL Restart of PM1 V 2012:Q4 25,000 *Wausau Paper Harrodsburg, KY New Voith "ATMOS" PM R 2012:Q4 75,000 K.T.G. (USA)/Kruger Memphis, TN New PM; TAD V 2013:Q1 66,000 Tak Investments Franklin, VA Rebuild of a free sheet PM to tissue R 2013:Q1 70,000 Irving Tissue Toronto, ON Rebuild to TAD tissue on PM6 (?) V 2013:Q3 * 25,000 *First Quality Tissue Anderson, SC New Voith "ATMOS" PM (third PM) V 2014:Q2 * 75,000 *Confidential Confidential New Metso "Advantage DCT 200TS" PM V* 2014 * 80,000 Confidential Confidential New Metso "Advantage DCT 100+" PM V&R* 2014 * 35,000 Confidential Confidential New Metso "Advantage DCT" PM V* 2014 * 70,000 *Procter & Gamble Box Elder, UT New PM; TAD from Andritz; on hold V 2014:Q3 * 80,000
R = RecycledTAD = Through-Air-Dried* = estimated
North American Tissue Industry
Page 24Source: AF&PA, RISI and VRP Estimates
80%
82%
84%
86%
88%
90%
92%
94%
96%
98%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Ope
ratin
g Ra
te
Prod
uctio
n ('0
00 to
ns)
Overcapacity
Consumption
Producer Price Index
Operating Rate
Tissue Private Label Market Share
Page 25Source: Company Reports
0%
10%
20%
30%
40%
50%
60%
70%
US Europe2005 2012
Pulp
Page 26
NBSK Price in USD and Euros
Page 27Source: Bloomberg, RISI and Vertical Research Partners
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
€ 300
€ 400
€ 500
€ 600
€ 700
€ 800
€ 900
€ 1,000
€ 1,100
NBSK Price in US DollarsNBSK Price in Euros
Historical Forecast
Source: Bloomberg and Vertical Research Partners.
Page 28
Pulp Expansion Projects Underway
• 2012 Ramp Up• CMPC – 100k Tonnes Softwood in Laja, Chile: 2012
• 2013 Ramp Up • Ilim (IP) – 720k Tonnes Softwood in Russia: 2nd Half 2012• Eldorado Celulose – 1,500k Tonnes Hardwood in Brazil: 1st Half 2013• Stora/Arauco – 1,500k Tonnes Hardwood in Uruguay: 2nd Half 2013• Oji Paper – 350k Tonnes Hardwood in China: CANCELLED
• 2014 Ramp Up• Stora/Guangxi – 450k Tonnes Hardwood in China: Delayed Until 2016?• Suzano – 1,300 Tonnes Hardwood in Brazil: 2014
• 2015 Ramp Up• CMPC – 1,300k Tonnes Hardwood in Brazil: 1st Half of 15• Shandong Sun – 300k Tonnes Hardwood in Laos – Delayed from2013
Source: RISI and Vertical Research Partners Estimates
Paper
Page 29
Uncoated Free Sheet Market Share
Page 30Source: RISI and Vertical Research Partners
Interna-tional Paper
29.8%
Georgia-Pacific12.8%Boise Cascades
9.0%Weyerhaeuser
7.4%
Willamette7.2%
Domtar6.1%
Fraser Papers4.2%
Appleton Papers3.6%
Fort James2.9%
P.H. Glatfel-ter
2.3%Other14.7%
UFS Market Share - 2000
UFS Market Share - 2013Domtar
32%
International Paper24%
Boise Paper11%
Georgia Pacific
9%
Glatfelter7%
All Other16%
Coated Free Sheet Market Share
Page 31Source: RISI and Vertical Research Partners
Coated Market Share - 2000
Coated Market Share - 2012
NewPage35.0%
Verso Paper17.5%
SAPPI14.8%
Abitibi-Bowater
8.4%
UPM4.7%
Sequana Capital4.7%
Kruger3.3%
Belgravia3.1%
Catalyst Paper2.9% FutureMark Paper
2.4%
Other3.1%
Inter-na-
tional Paper20.1%
Stora Enso
15.6%Mead11.4%SAPPI
9.3%Westvaco5.7%
Repap En-ter-
prises4.2%
UPM-Kymmene
4.1%
Potlatch3.2%
Bowater3.0%
Crown Vantage
2.6%Other20.8%
Uncoated Free Sheet Apparent Consumption
Page 32Source: AF&PA and Vertical Research Partners
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
Appa
rent
Con
sum
ption
('00
0 To
ns)
Conclusions:
Page 33Source: AF&PA and Vertical Research Partners
Containerboard – Paper’s First “Real Business” Since the 1950’s (as long as OCC stays tight). Also sees benefits from (1) recent consolidation and (2) global growth in demand – that has exceeded real GDP.Paperboard – Crosscurrents near-term; US should maintain advantage LT.Market Pulp – North America could see a sustainable advantage in softwood grades. However, hardwood will continue to be pressured by Latin American capacity. One “wild card” in hardwood is currency -- a super-strong Brazilian Real almost eliminated their advantage in Spring 2011.Tissue – Huge secular changes in North America; good with private label.Printing Papers – Continued, gradual slide in uncoated free sheet (-2%-4% per year). Coated paper could fall faster, especially as effectiveness of full catalogs declines. The fate of mass-read magazines long-term is already clear; specialty “rags” will provide some relief.Wood is Good – But timberland is NOT an inflation hedge.
Timberland & Wood Products
Page 34
Page 35
Timberland• Not an Inflation Hedge, But a Deflation Hedge• Regions Matter• Outside of Northwestern US Douglas Fir, Plenty
of Headwinds
Wood Products• Strong Outlook based on Secular Housing
Trends• Supply Chain Constraints• Consolidation
Return on Southern Timberland
Page 36Source: RISI, Factset and VRP Estimates
1998 1999 2013EPrice per Acre $400 $1,034 $1,400EBITDA 40 41 30EBITDA 35 36 25
Current Return 8.8% 3.5% 1.8%
10-Year Bond 8.6% 5.2% 2.9%S&P 500 Yield 3.7% 1.1% 2.0%
Timber REIT Returns and Change in 10-Year Treasury Yield since May 21st
Page 37Source: RISI, Factset and VRP Estimates
5/21/2
013
5/28/2
013
6/4/20
13
6/11/2
013
6/18/2
013
6/25/2
013
7/2/20
13
7/9/20
13
7/16/2
013
7/23/2
013
7/30/2
013
8/6/20
13
8/13/2
013
8/20/2
013
8/27/2
013
9/3/20
13-30%
-25%
-20%
-15%
-10%
-5%
0% 0%
10%
20%
30%
40%
50%
60%
Plum CreekPotlatchRayonierWeyerhaeuser10-Year Yield
Stoc
k R
etur
ns
Cha
nge
in 1
0-Ye
ar Y
ield
Timberlands
Page 38
Why is Timber Not an Inflation Hedge? - The logic is simple. If the rate of general price inflation rises to 5% from, say, 2%, one would hope and expect average wages to rise at least 5% to allow workers to maintain overall purchasing power. Of course, the prices of goods/services would not all move up at the same rate. For example, the price of corn might rise by 10% while the next generation of laptops or smart phones may fall a bit. What about the price of timber and, by extension, timberland? The short answer is that timberland values would fall sharply, we believe for two reasons. First, the demand (and price) of mature (ready-to-cut) timber and logs would fall as wood products (lumber) demand would likely fall as fewer houses can be afforded and built. To illustrate, consider that most of the cost of a house is the monthly mortgage payment. If 30-year mortgage rates are, say, 4% with 2% inflation, one would expect them to jump to 7% with 5% inflation. This would raise the monthly payment by nearly 40% (to $8,059 from $5,783). With home prices still down quite a bit from levels seen 7-10 years ago - and near replacement costs - we see little room for home prices to decline in a functioning home market. Therefore, assuming flat home prices, 5% inflation (and thus 5% higher average wages), many fewer could afford to buy a house given the 40% jump in monthly payments! This means fewer homes would be built, less lumber would be needed, and thus fewer logs/less timber would be demanded, leading to lower log/timber prices. Second, timberland values would incur a second hit (in addition to lower cash flows from lower log/timber volumes and price): higher discount rates would lower what a buyer of land would pay for those cash flows.
Timberlands
Page 39
In Fact, Timber is a Deflation Hedge - Until recently, markets were pricing in no inflation and some risk of deflation. During the post March 2009 bull market, the timber REITS, and pure-play Plum Creek in particular, have experienced strong price performance (especially for low-beta "yield" stocks). In a perverse way, this makes some sense. While log prices have remained quite soft (given the undercutting and resulting inventory increases in recent years), the discount rates applied to current and expected future cash flows fell along with long-term interest rates in general. Also, in a deflationary period, buyers hold out for lower prices that are forced upon sellers - especially with perishing goods (food) and services (empty airplane seats). On the other hand, trees can last decades and sellers (not needing cash) can merely wait for better markets before selling.
Wood Products
Page 40
Softwood Lumber Market
Page 41Sources: Statistical Yearbook of the Western Lumber Industry, Wood Markets: The Solid Wood Products Outlook, Random Lengths, Canada Mortgage & Housing Corp., and Vertical Research Partners
0
500
1,000
1,500
2,000
2,500
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Thou
sand
s of
Hou
sing
Star
ts
Thou
sand
s of
Squ
are
Feet
Lumber Production Lumber Imports Lumber Consumption Lumber Exports Housing Starts
Panels Market Supply and Demand
Page 42Source: APA Economics Report E60, Statistical Yearbook of the Western Lumber Industry, Wood Markets: The Solid Wood Products Outlook, Random Lengths, Canada Mortgage & Housing Corp., Vertical Research Partners
84% 77% 84% 85% 91% 87% 86% 90% 93% 94% 91% 89% 92% 93% 98% 97% 93% 86% 71% 61% 71% 76% 85% 94% 98% 96% 90% 89%0
500
1,000
1,500
2,000
2,500
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Thou
sand
s of
Hou
sing
Star
ts
Thou
sand
s of
Squ
are
Feet
Plywood Capacity OSB Capacity Plywood Production OSB Production Housing Starts
North American OSB Market Share
Page 43Source: Norbord 3Q 2012 Presentation
Louisiana Pacific 20%
Georgia-Pacific17%
Norbord16%
Weyerhaeuser14%
Ainsworth10%
Huber7%
Tolko5%
Other11%
Paper & PackagingChip Dillon, CFA
PartnerPhone: (212) 257-6159Fax: (203) [email protected]
James ArmstrongAnalystPhone: (212) 257-6157Fax: (203) [email protected]
Anna DeGregorioExecutive AssistantPhone: (212) 257-6158Fax: (203) [email protected]
May 5, 2023
