Taking Advantage of Change in North American Paper Based Packaging Markets 2003 NPTA Leadership Conference New Orleans, LA May 5, 2003 Frank Perkowski Business Development Advisory 770-643-9081 frank@bd-advisory.com www.bd-advisory.com
Negative Dynamics Are Fundamentally Changing Industry Behaviors Negative Dynamics Reduced Domestic Demand Domestic Over-Capacity Overseas Demand Growth Industry Globalization Poor Financial Performance Aging Asset Base Higher Relative Costs Resulting Behaviors Fewer Expansion Projects Increased M&A Activity Increased Foreign Investment Declining Price Levels Focus On Capital Effectiveness Continued Capacity Reductions Shift Toward Specialty Products
Implications for Paper-Based Packaging Supply Base and Markets Industry consolidation will continue Marginal suppliers will get weaker Successful companies will focus on core markets Foreign producers will continue to penetrate some segments In some cases, changes will improve product and service delivery Prices will increase on a selective basis
Paperboard Still Represents the Largest Packaging Material Segment Share of U.S. Packaging Market Based on Total Material Cost % of Estimated Total Market of $108 Billion Glass Containers 4% Wood Containers 0% Metal Cans 13% Paperboard 40% Flexible Pkg 19% Plastic Pkg 24%
But Plastics and Flexible Packaging Materials are the Fastest Growing U.S. Packaging Material Shipment Growth Trend Nominal US $ in Millions 100,000 Average Annual % Change 4.3% 3.8% -0.3% 1.3% Millions of Dollars Annually 80,000 60,000 40,000 4.7% 8.2% 20,000 4.4% 0 Source: BLS, BDA 1987 1992 1997 2002E Paperboard Plastic Pkg Flexible Pkg Metal Cans Glass Containers Wood Containers
Coated and Laminated Papers Has Been a Growing Flexible Packaging Segment U.S. Flexible Packaging Shipments 45 $7.4 Billion $13.9 Billion $19.0 Billion 41 40 39 37 35 % of Total Sales 30 25 20 15 18 27 26 19 17 17 29 16 14 10 5 0 1982 1992 2002E Coated / Laminated Paper Laminated and Coated Plastic Bags Uncoated Paper /multiwall Bags Metal Foil and Leafs
Specialty and Industrial Packaging Papers Account for Half of the Paper Tonnage Flexible Packaging Paper Grades Share of Total Tonnage Consumed in the US (2002) Bleached Kraft Paper 6% C1S Label Paper 8% Converting & Wrapping Papers 6% Multiwall Kraft Papers 13% Specialty & Ind. Papers 49% Kraft Bag Papers 18% 5,200,000 Tons Consumed
These Papers Have Also Shown the Strongest Growth Trend 3 Historic U.S. Production Trend for Specialty and Industrial Packaging Papers Average Annual % Change: Total 3.5% 2.5 MIllions of Tons Produced 2 1.5 1 2.8% 0.5 4.7% 0 Source: RISI 1986 1991 1996 2001 Specialty Packaging Papers Industrial packaging Papers
Specialty Packaging Papers Are Sold into Six Major Market Segments Specialty Packaging Paper Segments Approximately 2.5 Million Tons Annually Building / Construction 15% Specialty Converted Papers 11% Medical Packaging 3% Product labeling / Identification 35% Product Packaging 17% Foodservice / Processing 19%
A Different Pattern is Evident With Kraft Paper Grades 2.5 Historic Consumption Trend for Kraft Bag Papers Average Annual % Change since 1991 : Total -6.0% 2 Millions of Tons Consumed Annually 1.5 1 0.5-6.1% -3.5% -6.3% 0 1986 1991 1996 2001 Unbleached Grocers' And Other Bag Bleached Grocers' And Other Bag Recycled Grocers' And Other Bag
The Decline of Kraft Paper Bag and Sack Papers Is Expected to Continue 1800 U.S. Kraft Paper Consumption Forecast 1600 AAPC = -3.5% Thousands of Tons Consumed Annually 1400 1200 1000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 Source: BDA, RISI UNBLEACHED GROCERS' AND OTHER BAG MULTIWALL SHIPPING SACK PAPER BLEACHED GROCERS' AND OTHER BAG RECYCLED GROCERS' AND OTHER BAG
Major Flexible Packaging Trends Continued growth of plastic materials Growing preference for single serve packs Competition between coated and laminated structures Barrier protection opportunities Aging asset base Aging population base
The Boxboard Segment is Highly Fragmented Boxboard Grades Consumed in the US (2002) Food Service / Other Board 9% Gypsum Wallboard Facing 12% Bleached Linerboard 1% Milk Carton Board 6% Recycled Board 23% Tube, Can & Drum Stock 13% Coated Unbleached Kraft 16% Bleached Folding Carton Stock 20% 10,650,000 Tons Consumed in Total
Folding Carton Board is the Dominant Application Within Boxboard U.S. Boxboard Production By Substrate Type and End Use 7 Bleached Recycled Unbleached 6 Estimated Tonnage Produced in 2001 5 4 3 2 1 0 Folding Carton board Gypsum Wallboard Tube, Can & Drum Other Board Food Service Board Milk Carton Board Setup Boxboard Bleached Linerboard
Projected Growth Rates Vary Greatly Depending on Boxboard Grade Projected Growth and Growth Rates for U.S. Boxboard Grades 7 2001 2007 % Change 6 2.5% 2.0% Millions of Tons Produced in U.S. 5 4 3 2 1.5% 1.0% 0.5% 0.0% -0.5% Average Annual % Change 1-1.0% 0 Gypsum Board Setup Boxes Tube Can & Drum Foodservice Board Folding Carton Board All Other Bleached Liner Milk Carton -1.5%
Major Packaging Trends --Dairy Plastics and single-serve packages driving increased milk consumption Reseal able and single-serve cheese packages Growth in ice cream SKU s and single serve options Squeezable butter containers
Major Packaging Trends --Beverages Increased demand for single serve products Packaging convenience becoming more important Plastics market penetration and share growing Market consolidation and fragmentation Continued interest in recyclability of packaging materials
Major Packaging Trends Frozen Foods Consumers still eat about 80% of meals at home Take-out meals declined in 2000 for first time in 12 years Bagged and bowl frozen foods declining in place of multi-serve items Ethnic foods and higher quality imaging driving sales Individual, microwavable packages key to growth Clear plastic bags critical in driving growth in convenience salads
Major Packaging Trends Meat Processing Active packaging opportunities Paper wraps and bags increasingly used as grocery stores develop heat and eat segment Single-serve plastic packaging moving meat into snack food category Reseal able plastic packaging spurring sales growth Plastic pouches also replacing metal tuna cans due to convenience
Folding Carton Opportunities GDP growth Mini flute technology and applications Faster / increasing new product intros Continued market segmentation Aging population Increasing product security needs Print technology developments
Kraft Linerboard Still The Dominant Containerboard Grade Containerboard Grades Consumed in the US (2002) Recycled Linerboard 15% White-top Linerboard 3% Kraft Linerboard 49% Corrugated Medium 33% 29,000,000 Tons Consumed
After A Period of Strong Growth, Containerboard Consumption Has Declined Containerboard Historic Consumption and Export Trends 25 Linerboard Corr. Medium Exports (Lin.+ Med.) Annual % Change 1.7% 20 Millions of Annual Tons 15 10 2.0% 5 3.0% 0 1987 1992 1997 2002
Packaging Outlook and Implications
Overall Packaging Trends to Watch Changing packaging requirements due to aging population Increased demand for single serve products Packaging convenience becoming more important Supply chain consolidation Need for increased product security features North American cost structures relative to developing countries
There are Many Opportunities To Improve Customer Satisfaction Based a recent customer survey, the following packaging solutions received the lowest ratings: Flour- inconvenient, messy, and can t be reclosed Meat- poor product visibility Cereal difficult to open and re-close Cookies- easily torn and difficult to re-close Crackers lack of inner packaging and difficult to open Sugar - inconvenient, messy, can t be reclosed Cheese lack of reseal ability and inconvenient pack sizes Chips inconvenient sizes and difficult to re-close Candy package tearing and product spills Salads lack of pack sizes and re-close features
Paper-Based Materials Can Take Advantage of Growth Opportunities New Microwave Packaging Concepts Active Packaging Concepts Nanotechnology RFID Applications and Potential Reactive coatings (electronic inks, micro contact inks, polymer electronics) Ink jet / variable printing Digital print technologies Variable information labels Package security features Barrier packaging
But Numerous Threats Will Threaten Existing Share Positions Film and plastic inroads in flexible packaging Plastic carton substitutes Basic paper/board product deficiencies Perceived commodity positioning Lack of innovation and R&D Liquid packaging alternatives In-mold labels and film release liners Returnable plastic containers
Outlook for Paper-Based Packaging Materials Negative Dynamics Alternative Substrates Aging Asset Base Growing Import Threats Inherent Deficiencies Commodity Perception Positive Dynamics Supply Base Restructuring Relative Cost Position Growing R&D Focus Value Adding Opportunities Value Proposition