The New Industry Dynamics - Sarilee Norton

WHAT’S IN IT FOR THE INDEPENDENTS?
THE NEW INDUSTRY DYNAMICS
Sarilee Norton
NORTON ASSOCIATES
April 2012
IMPLICATIONS FOR THE LATEST ROUND OF
CONSOLIDATIONS
CONTAINERBOARD’S CHANGING LANDSCAPE
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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—5th and 6th out of six
– Someone has to do it
– TIN—better cost structure and high integration strategy
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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…
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RKT—A LOT TO GET ITS ARMS AROUND
– …and at least one larger, high cash-cost-per-ton
recycled mill, i.e., Jacksonville
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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
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IP—HOW MUCH MORE IS 10%
X 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
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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?
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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.”
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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
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CONTAINERBOARD MARKET SHARE BY COMPANY
Shown in 3 unlabeled wedges:
Interstate Resources
Atlantic/New Forest
1.0-1.5% each
Simpson Paper
Shown in ‘All Other’:
Orange County Cont.
Sonoco Products
0.5-1.0% each
Rand Whitney
Durango Group
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ACCESS TO NEW LOCAL MARKETS, PLANT
CONSOLIDATIONS, OR BOTH?
REGIONAL CONVERTING IMPLICATIONS
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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
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THE ‘CURRENT’ ROCK TENN
 Even more capacity along the Route 95
corridor—NJ and 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
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ALL OVER THE EASTERN US, AND CANADA TOO
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THE ‘NEW’ IP—BOX PLANT NETWORK
 Southern CA and Chicagoland ‘thickets’ of box
plants
 Northern CA, upper Midwest, eastern PA, the
Carolinas, northwest GA, TN, central FL and LATX 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
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SEEING RED?
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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
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PLEASE CHECK THE SECURITY OF YOUR SEATBELT…
INDUSTRY KEY DRIVERS
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RECENT FLUTTERING IN THE PURCHASING MANAGERS'
INDEX UNDERSCORES UNCERTAINTY
Light Bars Indicate Manufacturing Sector Contracting
66
62
12-Month Moving Average
58
54
50
46
42
38
34
30
0
1
2
3
4
5
6
7
8
9
10
11
12
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US BOX SHIPMENTS FELL 13% 2007 – 2009
 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 1.8% flat in 2012; continued strong
headwinds for the US economy will prevail before
market accelerates to 3% growth in 2013 and 2014
X
 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
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CONTAINERBOARD EXPORT MARKETS WERE VOLATILE IN
2009-2010, BOOMED IN FIRST HALF 2011, STABLE NOW?
 2009-2010 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
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OPERATING RATES INCREASED DRAMATICALLY IN 2010,
EASED IN 2011, STABLE GOING FORWARD?
1.03
1.00
0.97
0.94
0.91
0.88
0.85
0.82
0.79
0.76
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13
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2011 CONTAINERBOARD INVENTORIES ‘BALANCED’, WEEKS
OF SUPPLY HAS SWELLED IN 2012
Million Short Tons
Weeks of Supply
3.2
6.0
Million Tons
Weeks of Supply (R)
3.0
5.5
2.8
5.0
2.6
4.5
2.4
4.0
2.2
3.5
2.0
3.0
1.8
J99
J00
J01
J02
J03
J04
J05
J06
J07
J08
J09
J10
J11
J12
2.5
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WHEN THE ECONOMICS SHIFT, SO DOES THE STORY
VIRGIN VERSUS RECYCLED
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IF ASIAN DEMAND WEAKENS, SO WILL US OCC
PRICES
$/Short Tons
250
200
150
100
50
0
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12
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HOW DOES THIS ALL PLAY OUT?
CONTAINERBOARD PRICES
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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 $70 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
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ARE PRICES STAGNANT…
…OR UNSUSTAINABLE?
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WHAT’S NEWS?
LIGHTWEIGHT CONTAINERBOARD UPDATE
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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
Greenfield
Pratt Industries
Shreveport, LA
350,000
Recycled liner/
medium
Greenfield
KPAQ
St. Francisville, LA
180,000
Kraft linerboard
Conversion from fine
paper
Abitibi Bowater
Coosa Pines, AL
?
Greenpac
Niagara Falls, NY
540,000
Conversion from
Recycled
containerboard/ newsprint
paper
Recycled
linerboard
New machine adjacent
to existing site
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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 2013.
 Basis weight range 20-35#; will trim 3-out to meet
modern corrugator requirements
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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 6th, 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 110inch corrugators
– Highest cash costs of the top six
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LIGHTWEIGHTS—SOME MIGRATION, NO INFLUX…YET
 The Norampac machine is 12-18 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.
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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?
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WHAT’S IN IT FOR THE INDEPENDENTS?
THE NEW INDUSTRY DYNAMICS
Sarilee Norton
NORTON ASSOCIATES
www.nortonassociatesri.com