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Pulp and Paper Products 4/30/2017 1 Topics Industry Analysis Weyerhaeuser Analysis Economic Environment Recommendations Macro Impact 4/30/2017 2 Objective Present the relevance of the forest and paper products industry to the US economy. Propose a shift and change in strategy for companies in the Forest and Paper industry due to the changing economic condition 4/30/2017 3 Forestry and Paper Products Industry Wood Products – 45% of Industry Printing and writing paper Boxboard Containerboard Tissue Newsprint Real Estate Recycling 4/30/2017 4 Top 10 Industry Firms Rank Company Country 2006 Net Sales (MM) 2006 Net Income (Loss) (US$M) 1 International Paper US 24,976 (880) 2 Koch Industries-GP US 23,271 (735) 3 Weyerhaeuser US 16,771 16 4 Kimberly-Clark US 13,566 1,1675 5 Stora Enso Finland 12,090 (211) 6 Procter & Gamble US 11,877 954 7 UPM-Kymmene Finland 9,907 520 8 Nippon Unipac Japan 9,696 (5) 9 Oil Paper Japan 9,635 (142) 104/30/2017 SCA Sweden 9,091 588 5 Forest and Paper Industry in US Economy The entire Industry does $260B in sales The entire industry employs approximately 1 million workers North America accounts for more than 25% of Worldwide Market Share Industry Represents 1.96% of US GDP 4/30/2017 6 Demand Factors for Forest and Paper Products Housing Starts 2500000 12,000,000,000 2000000 10,000,000,000 8,000,000,000 1500000 6,000,000,000 1000000 4,000,000,000 500000 WY Lumber Sales Housing Starts Direct Correlation to Demand for Wood Products segment in Forestry and Paper Products Also effected by Interest Rates as a lagged negative correlation Housing Starts WY Lumber Sales 2,000,000,000 0 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 0 Year 4/30/2017 7 Demand Factors for Forest and Paper Products Exchange Rates- International Trade Value of Dollar directly impacts the price of lumber and raw materials. Imports rise as the dollar value increases China is largest trading partner for wood products 10000 8.35 8000 8.3 6000 8.25 4000 8.2 2000 8.15 Wood Pulp Exports Wood Pulp Imports China Exchange Rate 8.1 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 0 Rate Import and Exports Exchange Rate vs Imports and Exports 4/30/2017 Year 8 Demand Factors for Forest and Paper Products Increasing Level of Substitutes Lumber Demand is being addressed by alternate materials Paper demand is decreasing as electronic means take hold and shrinking need for newsprint as newspapers lose readers 4/30/2017 9 Forest and Paper Industry Costs and Production Issues Energy Prices Industry Operating Efficiency Generally running 98% capacity Raw Materials Costs Approximately 10% of all companies costs Companies generally cannot increase prices relative to change in energy costs because products are commodities Trees, Solvents, Harvesting Capital Outlays for Mills 4/30/2017 Lumber and Paper Mills are capital intensive to build and may become unneeded if supply increases and/or demand lowers Oil Prices vs COGS $50.00 20,000,000 $40.00 15,000,000 $30.00 10,000,000 $20.00 5,000,000 $10.00 $- WY COGS (In Bill) Oil Price 0 96 97 98 99 00 01 02 03 04 05 Year 10 Industry Non Economic Factors Government and Environmental Regulations Ecological and animal habitat regulations have hindered ability to utilize timberlands Environmental impacts of plants Natural Disasters Hurricanes Forest Fires 4/30/2017 11 Weyerhaeuser Introduction US Based Company $22.629 Billion in Sales $733 Million in Net Income 49,900 Employees #3 in Industry Market Share #2 in Wood Products 4/30/2017 WY Market Share of Total Industry 7% Industry Sales WY Sales 93% 12 Market Power Weyerhaeuser is the 2nd largest North American Company in the Forest and Paper Industry with revenues of $22.629B in 2005. They currently have a pending purchase of Domtar Inc which will give WY more Canadian assets 4/30/2017 13 Weyerhaeuser Financial Performance 4/30/2017 14 Weyerhaeuser Business Units Product Sales P&P Sales 22% Other 22% Engineered Lumber Products 8% 4/30/2017 Lumber Sales 48% 15 Weyerhaeuser Strategies and Goals 2007 Maintain focus on reduction in costs of production Selective market expansion Fund selective growth opportunities Continue capital spending discipline South American growth 4/30/2017 16 Economic Environment- Future Housing Starts- Expected to see slight declines and then stability over next three years Housing Starts with 3 Year Forecast Annual Starts 2500000 2000000 1500000 Housing Starts 1000000 500000 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 0 Year 4/30/2017 17 Economic Environment- Future Interest Rate- will remain constant based on pull back of investment in housing market and strong potential Fed activity 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Interest Rate 1996 Rate Interest Rate with Three Year Forecast Year 4/30/2017 18 Economic Environment- Future Correlation of Interest Rates and Housing Starts Housing Starts vs Interest Rates 2500000 7.00 6.00 2000000 1500000 4.00 1000000 3.00 Rates Starts 5.00 2.00 500000 1.00 0 0.00 19961997 1998 19992000 2001 20022003 2004 20052006 2007 20082009 Year Housing Starts 4/30/2017 Nominal Interest Rates 19 Economic Environment- Future Energy Prices- will remain stable over next three years pending no significant impact on supply $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Oil Prices 1996 Price per Barrel Oil Prices with Three Year Forecast Year 4/30/2017 20 Economic Environment- Future Exchange Rate- current trend is indicating a stronger US dollar to most currencies. Also import increases indicate the position for a stronger US Dollar 4/30/2017 21 Weyerhaeuser Forecasts Demand for lumber will fall due to decrease in housing starts which started 4Q of 2006 which = lower sales Energy price stability will not allow for reduced costs of production Due to decrease in demand and stable energy prices WY’s profits will decrease Interest Rate stability will no fuel a surge in housing starts 4/30/2017 22 Weyerhaeuser Recommendations Maintain operating capacity at 97% or above Increased expansion into Asian marketsChina Take advantage of stronger dollar China Demand for Wood and Paper Product has tripled- including newsprint Continued divesting of timberline assets Move focus out of Real Estate Business Sector 4/30/2017 23 Weyerhaeuser Recommendations Focus on Substitute and Compliment Products to capitalize on demand and lower production costs Higher Demand and lower production cost in Raw Materials and Energy for Engineered Wood Products Eucalyptus Pulp available to harvest year round and primarily based in Asia Products are not as elastic as current portfolio 4/30/2017 24 Weyerhaeuser Recommendations Expand and utilize transportation business Make more vertical supply chain to Asia expansion and streamline cost structure Utilize to take advantage of risk and changes in exchange rates along with import an export fluctuations Weyerhaeuser can hedge against potential interest fluctuations by managing a portfolio of variable and fixed rate debt composed of short and long term instruments. This will help balance the Corporations cost of financing with it's interest rate risk. 4/30/2017 25 Thank You QUESTIONS 4/30/2017 26