THE NEW INDUSTRY DYNAMICS

Transcription

1 WHAT S INITFORTHEINDEPENDENTS? THE NEW INDUSTRY DYNAMICS Sarilee Norton April 2012

2 IMPLICATIONS FOR THE LATEST ROUND OF CONSOLIDATIONS CONTAINERBOARD S CHANGING LANDSCAPE 2

3 2011 A BANNER YEAR FOR TRANSACTIONS RKT/SSCC; IP/TIN Long-term positive for the industry But a lot has to happen first Discipline in the containerboard and corrugated box markets TIN and SSCC 5 th and 6 th out of six Someone has to do it TIN better cost structure and high integration strategy 3

4 RKT A LOT TO GET ITS ARMS AROUND Virgin mills, a major benefit for fiber costs [now] What might be rationalized? Look at older, smaller medium mills, e.g., Matane, Uncasville, St. Paul and 4

5 RKT A LOT TO GET ITS ARMS AROUND and at least one larger, high cash-cost-per-ton recycled mill, i.e., Jacksonville 5

6 IP HOW MUCH MORE IS 10%? (CIRCA NOVEMBER, 2011) TIN a better cost structure out of the gate Freight opportunities into the Northeast Capacity and grade optimization in the Southeast 6

7 X IP HOW MUCH MORE IS 10% 6%? XX X D of J consent decree: 970,000 tons to be divested Ontario and Oxnard high-cost recycled, mills New Johnsonville also recycled, middle range of the IP cost curve 7

8 KAPSTONE ACQUIRES U.S. CORRUGATED Founded in 2005 as a Special Purpose Acquisition Corporation that should tell us something about their strategy Value buyers 6X EBITDA multiples, preferably less Addition of converting facilities puts KS in competition with some of their containerboard customers Improve converting results by selling excess capacity what does that mean for local competitive environment? A suitor for IP mills? 8

9 BOISE PUMPS UP INTEGRATION ~600,000 tons of linerboard capacity in LA, ~150,000 tons of medium in WA, potential to convert newsprint machine (~200,000 tons?) Acquisitions of Tharco and Hexacomb should raise integration to over 90% Tharco adds sheet plant capacity in Austin, TX, and Atlanta GA a corrugator or sheet feeder next? Hexacomb is complementary to our existing packaging business and creat[es] value by increasing margins and reducing our reliance on linerboard export markets. 9

10 WHAT S NEXT? G-P/PCA? Cultural history Attractive geography But what does Koch want? If ain t it broke Pratt marches to its own tune Boise, a buyer or a seller? Still a lot of 1-2% players out there Multi-plant independents and sheet feeders 10

11 CONTAINERBOARD MARKET SHARE BY COMPANY Shown in 3 unlabeled wedges: Interstate Resources Atlantic/New Forest % each Simpson Paper Shown in All Other : Orange County Cont. Sonoco Products Rand Whitney % each Durango Group 11

12 ACCESS TO NEW LOCAL MARKETS, PLANT CONSOLIDATIONS, OR BOTH? REGIONAL CONVERTING IMPLICATIONS 12

13 SIZE MATTERS For the large integrateds, it s usually about scale and synergies IP had 140 plants after Weyco, closed over a dozen Smurfit-Stone ~110 in 2008, RKT about 100 today TIN closed several, probably a lot more to come Pick the best facility in overlapping local markets or shut down and start over For smaller integrateds and regionals, a good way to enlarge capabilities and extend geographic reach For the independents, a great time reinforce quality, service and responsiveness you provide 13

14 THE CURRENT ROCK TENN Package Even more capacity along the Route 95 corridor MA, NJ and into the Carolinas Legacy Rock Tenn presence in TN, GA, AL Mega resources in Chicago-to-Milwaukee stretch Only US based supplier with major position in Canada 14

15 ALL OVER THE EASTERN US, AND CANADA TOO 15

16 THE NEW IP BOX PLANT NETWORK Package Southern CA and Chicagoland thickets of box plants Northern CA, upper Midwest, eastern PA, the Carolinas, northwest GA, TN, central FL and LA- TX are also capacity pockets. Except for the Dakotas, the Rocky Mountain states and sparse coverage in New England, they are EVERYWHERE! And 10 box plants in Mexico 16

17 SEEING RED? 17

18 WHAT DOES THIS MEAN FOR INDEPENDENTS For converters, not really about reducing capacity For consolidators, synergies imply fixed cost reductions headcount, bricks and mortar, services, property obligations, inventory baseload Where are the two major networks saturated? Shutdowns always put some accounts in jeopardy For most customers, this is still a local business For the containerboard supply, may be fewer mills, but capacity not likely to shrink proportionately VOLUME = REVENUE = PROFIT mindset 18

19 PLEASE CHECK THE SECURITY OF YOUR SEATBELT INDUSTRY KEY DRIVERS 19

20 RECENT FLUTTERING IN THE PURCHASING MANAGERS' INDEX UNDERSCORES UNCERTAINTY Light Bars Indicate Manufacturing Sector Contracting 12-Month Moving Average

21 US BOX SHIPMENTS FELL 13% Steepest decline for the market since the 1970s Shipments recovered 3.5% 2010, far more subdued than the growth in manufacturing Growth slowed to 0.5% rate in 2011 and expected to be X1.8% flat in 2012; continued strong headwinds for the US economy will prevail before market accelerates to 3% growth in 2013 and 2014 Long-term growth in box shipments averages 1.6% Containerboard to grow at a more sedate 1.0% rate Shift to lightweight liner takes hold in North America 21

22 CONTAINERBOARD EXPORT MARKETS WERE VOLATILE IN , BOOMED IN FIRST HALF 2011, STABLE NOW? due to numerous factors Global credit crisis and economic shocks Black liquor credit for US mills Shortages that developed following capacity closures Fluctuating domestic demand By and large, exports supported containerboard prices at higher levels than the historical norm but growth in China s capacity may have a dampening impact going forward Latin America a growing export market, but can it make enough of a difference 22

23 OPERATING RATES INCREASED DRAMATICALLY IN 2010, EASED IN 2011, STABLE GOING FORWARD?

24 2011 CONTAINERBOARD INVENTORIES BALANCED, WEEKS OF SUPPLY HAS SWELLED IN 2012 Million Short Tons Million Tons Weeks of Supply (R) Weeks of Supply J99 J00 J01 J02 J03 J04 J05 J06 J07 J08 J09 J10 J11 J

25 WHEN THE ECONOMICS SHIFT, SO DOES THE STORY VIRGIN VERSUS RECYCLED 25

26 IF ASIAN DEMAND WEAKENS, SO WILL US OCC PRICES $/Short Tons

27 HOW DOES THIS ALL PLAY OUT? CONTAINERBOARD PRICES 27

28 CONTAINERBOARD PRICING HELD UP REMARKABLY WELL IN 2009, AND RALLIED SHARPLY IN 2010 Producers took an unprecedented amount of preemptive downtime during late 2008, early 2009 Operating rates averaged 80% from December to April Prices fell just $80 per ton by September 2009 And remained at least $150 higher than the cost floor that was hit in past recessions Prices surged in 2010, with two successful increases Exceptionally low inventories at the end of 2009 Nearly 2 million tons of capacity closures at start of year Operational issues from wet winter in the South August 2010 increase failed to take hold, but prices have remained stable since then 28

29 ARE PRICES STAGNANT OR UNSUSTAINABLE? 29

30 WHAT S NEWS? LIGHTWEIGHT CONTAINERBOARD UPDATE 30

31 MAJOR LIGHTWEIGHT INITIATIVES SINCE 2006 KapStone is also focused on lightweight kraft linerboard and Longview also markets lower basis weight grades Company Location Capacity Material Origin International Paper Pensacola, FL 500,000 Kraft linerboard Conversion from uncoated free sheet New Forest Scarborough, ON 250,000 Recycled liner/ medium Pratt Industries Shreveport, LA 350,000 Recycled liner/ medium Greenfield Greenfield KPAQ St. Francisville, LA 180,000 Kraft linerboard Conversion from fine paper Abitibi Bowater Coosa Pines, AL? Recycled containerboard/ paper Greenpac Niagara Falls, NY 540,000 Recycled linerboard Conversion from newsprint New machine adjacent to existing site 31

32 GREENPAC BASICS Partnership which includes Norampac (60%): Canadian based, 6 machines, primarily recycled, ~3% share of North America Jamestown Container, Tencorr and affiliated box plants Integration of newly purchased Bird Packaging 328-inch multi-fourdrinier recycled linerboard machine; 540,000 tons capacity; will represent almost 2% of N.A. linerboard capacity in Basis weight range 20-35#; will trim 3-out to meet modern corrugator requirements 32

33 WHY WOULD THEY DO IT? Separate what s good for the industry from what s good for the company 3% of the market, will be 6 th, after PCA and Pratt 5 mills; 1.1 million tons, mainly recycled (inc. Trenton) No virgin liner capabilities Machines are narrower, slower, older Will trim only 2 or on some just 1 roll for 98- and 110- inch corrugators Highest cash costs of the top six 33

34 LIGHTWEIGHTS SOME MIGRATION, NO INFLUX YET The Norampac machine is months away not too soon for them to be developing customer opportunities and marketing strategy Pratt is producing lightweight recycled liner and medium at three mills, day in, day out Kapstone, Longview, Atlantic and others are marketing lightweight grades Reports that additional companies are quietly running lighter weights for specific customers Some Europeans would love to find a way to serve the US market. 34

35 LIGHTWEIGHTS TAKEAWAYS The case for lightweighting Technological considerations Lightweights are mainstream in Europe The pull of global CPGs and retailers Virgin versus recycled who wins? Will Norampac be the first or the only? 35

36 WHAT S INITFORTHEINDEPENDENTS? THE NEW INDUSTRY DYNAMICS Sarilee Norton