TORONTO, June 24 /CNW/ - The Top 100 Forest, Paper and Packaging (FPP) companies from around the world saw net income tumble from positive $13.8 billion in 2007 to record losses of $8.0 billion in 2008, the first time this metric has been negative since 1996, the date PricewaterhouseCoopers (PwC) began the annual PwC Global Forest, Paper & Packaging Industry Survey. This year's survey shows that:
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- Total sales were $357 billion in 2008, up from $333 billion in 2007.
- Cash flow from operations totaled $26 billion in 2008, down from $31
billion in 2007.
- Operating income of $21 billion represented a decrease of 19% compared
to 2007.
- Average ROCE (return on capital employed) dropped from 4.9% in 2007 to
2.4% in 2008. Only six companies earned a return of 10% or more in
2008, compared to 14 in 2007.
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"The sharp decline is mainly due to the impact of losses realized by major players in many of the mature markets as a result of low demand, goodwill and fixed asset impairments, restructuring, severance and high operating costs," says said
Craig Campbell , leader of PwC's Performance Improvement practice for the global forest and paper industry, and author of the PwC survey. "This year's Survey results reflect the significant challenges faced by the sector, with the PwC Top 100 companies' net income sliding deep into the red, as well as return on equity and ROCE falling sharply from the already low levels seen in 2007."
According to the Survey, six companies made the list of 2008 ROCE leaders achieving ROCE greater than 10%. Only two companies from China made the shortened list in 2008 compared to three in 2007 reflecting the widespread impact of the global slowdown. In 2007 emerging market producers were among the leaders in ROCE - a key measure of performance. In 2008 Emerging Asia ROCE for 2008 remained flat at 7.2% (2007: 7.7%). Chinese companies ROCE at 8.1% showed resilience compared to Latin American producers, who's ROCE dwindled to 3.0% from 9.0% in 2007.
According to Campbell, "Large sections of the FPP industry are struggling to survive in the current global recession and there can be little doubt that major changes will need to occur in order for companies to remain competitive in the face of falling global demand. Whether or not the industry will truly be transformed - either via long-overdue consolidation, notably in Europe, or a shift in business models, or both - remains to be seen."
The ROCE leaders for 2008 - greater than 10% - from the Survey include:
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- Kimberly-Clark Mexico (Mexico): 22.3% in 2008 vs. 20.3% in 2007
- Kimberly-Clark (US): 14.8% in 2008 vs. 15.2% in 2007
- Sino Forest (China/Canada): 12.7% in 2008 vs. 12.8% in 2007
- Lee & Man Paper (China): 12.4% in 2008 vs. 15.0% in 2007
- Sonoco (US): 10.3% in 2008 vs. 10.5% in 2007
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Country specific results
Canada
While Canada's forest and paper industry realized improvements in product prices during the first half of the year, the onset of the global financial crisis and reduction in demand resulted in inventory increases and reductions in sales volumes for the last half of the year.
"Many companies recorded write downs and asset impairments, as companies looked to restructure and clean up their balance sheets," says Campbell. "Not only did the much anticipated recovery in the US markets served by Canadian producers not materialize in 2008, a number of Canadian producers actually described the year as the most difficult and worst downturn in recent history."
The 11 Canadian companies accounted for 8.4% of PwC Top 100 sales. Their sales value of $30 billion was 8.7% greater than the comparable value of the 11 in 2007, however much of the $2.4 billion increase in sales is attributable to the inclusion of full year results for Abitibi, which merged with Bowater in October 2007. If the AbitibiBowater results are excluded, sales remained flat compared to prior year.
Net losses rose 355% to $4.0 billion (2007: $0.9 billion). All 11 Canadian companies reported a net loss in 2008 while only eight of them experienced net losses in 2007. Net losses were deepened by a stronger Canadian dollar, goodwill and other asset impairments charges. AbitibiBowater reported the most significant decline in profitability, with a net loss of $2.2 billion in 2008, compared with a 2007 net loss of $0.5 billion. The company sought creditor protection proceedings in April 2009.
Overall ROCE decreased to -5.0% in 2008, down from 0.0% in 2007. Cascades (primarily packaging) was the only Canadian company in the PwC Top 100 to report a positive ROCE in 2008 at 0.9% (4.6% in the previous year), followed by Domtar (primarily fine paper) at 0.0% (4.5%). All other companies reported a negative ROCE.
Europe
The big story in Europe in 2008 was cuts in production and capacity nearly across the board. Temporary and permanent reductions in production capacity have improved the supply and demand balance in the paper industry, especially in newsprint, magazine and coated fine papers.
"Most of the European companies in the PwC Top 100 have portfolios which are dominated by pulp, paper and packaging businesses," says Campbell. "However, 2008 was nearly universally as grim for those in wood products as oversupply in the face of falling construction demand caused prices to fall. Despite massive efforts to reduce capacity, it will take some time to establish a stable supply and demand balance in the European market."
Sales by the 30 European-based companies included in the PwC Top 100 amounted to $128 billion, up 5.1% from the $122 billion reported for 2007. However, when reported in Euros, 2008 sales actually decreased by 1.9% to (euro) 87 billion from (euro) 89 billion, due to the 7% depreciation of the US dollar against the Euro in 2008. European companies' sales were higher than US companies for the second year in a row.
Net losses amounted to $1.5 billion, reversing the net income of $3.3 billion reported in 2007. Fourteen European companies posted net losses in 2008, compared to only four of those companies reporting losses in 2007. The sharp decrease in net income is attributed to both market conditions and asset impairments; in some cases there were significant foreign exchange losses.
Sequana Capital (fine and specialty paper production and paper merchanting) showed the steepest decline, moving from $195 million in net income in 2007 to a net loss of $630 million in 2008. Stora Enso (paper, packaging and wood products) was next at $991 million in net losses, down $697 million from the $294 million in net losses reported in 2007. Sequana's losses were mainly due to discontinued operations, impairment and restructuring charges which amounted to (euro) 500 million, while Stora's losses from restructuring and impairments amounted to (euro)1 billion.
SCA (tissue and personal care, packaging, graphic papers and wood products) was the most profitable European company in 2008 with net income of $857 million (2007: $1.1 billion). SCA's net income benefited from its strong exposure to the less-cyclical hygiene segment.
ROCE was 2.9% in 2008, down from 5.0% in 2007. DS Smith (mainly packaging) and Heinzel Group (mainly pulp) earned the highest ROCE in Europe at 10% and 9.9% respectively. Results for DS Smith are based on a company year-end of April 30, 2008, so do not reflect the impact of global downturn later in the year. Heinzel Group benefited from the favorable pulp markets until the third quarter, as well as gains on exchange derivative values.
United States
As in Europe, many American companies reduced or shifted capacity. The AF&PA reported an overall capacity reduction of 0.8% for the year, with the sharpest drops coming in newsprint (8.6%) and printing and writing paper (3.9%). Capacity for uncoated mechanical actually increased, as some machines were shifted to this grade from newsprint.
According to Campbell, "In recent months the industry has focused quite intently upon a provision of the US tax laws that provide tax refunds and credits for alternative energy. Some paper manufacturers who use a bio-fuel known as black liquor are eligible for the credits and some estimates suggest the industry could receive as much as $6 billion in tax credits from the US government by the end of 2009, and many paper-makers have already collected millions of dollars in the first few months of 2009."
The 24 US-based companies in the PwC Top 100 reported aggregated sales of $104 billion. Collectively they represent 29% of the total sales of the PwC Top 100. This compares with $100 billion or 30% of total sales in 2007. Overall sales performance increased by a modest 3.8% compared to last year.
Net income decreased sharply from positive $5.6 billion in 2007 to $2.9 billion in net losses in 2008. Eleven out of the 24 US companies reported net losses totaling $5.5 billion in 2008 and only eight of those reported collective losses of $0.5 billion in 2007.
US companies with positive results saw a decline in their net income, with the exception of Buckeye Technologies ($17 million increase, cellulose-based products) and Rock-Tenn (results unchanged from 2007, packaging). The net losses line was dominated by Smurfit-Stone's $2.8 billion loss due primarily to goodwill and other intangible assets impairment charges of $2.7 billion, and International Paper's $1.3 billion net losses, which include $1.8 billion of goodwill impairment charges and $179 million of restructuring and other charges.
ROCE amounted to 2.9 % in 2008, down from 5.2% in 2007. Kimberly-Clark at 14.8% (2007: 15.2%) and Sonoco at 10.3% (2007: 10.5%) were the only two companies that earned a ROCE greater than 10%.
Japan
The severe impact on Japan can be traced to falling demand and the sharp appreciation of the Yen by 25% in Q4. In 2008 Japan experienced the sharpest export decline in the country's post-war history. Forecasts suggest that a turn-around is not imminent, but as in other markets, the outlook is uncertain.
Japanese FPP companies all have their fiscal years ending on March 31. Their financial data included in this Survey are for the 12 months ended March 31, 2008. Consequently, the results included in the Survey are not reflective of the calendar year 2008, especially the deterioration of the economy starting September 2008.
Sales for the 12 Japanese companies for the 12 months ended March 31, 2008 rose by 18.2%, however net income for the year decreased to $597 million from $765 million in 2007. The increase in sales was mainly due to the appreciation of the Yen against the dollar during the first quarter of 2008. When reported in Yen, sales increased slightly to (Yen)5,150 billion from (Yen)4,987 billion in 2007, and net income decreased by 32% from (Yen)90 billion in March 31, 2007 to (Yen)61 billion in 2008. The average ROCE decreased to 2.1% in 2008 from 2.5% in 2007.
The slow down in global economic activity has also impacted the Japanese companies' performance for the fiscal year ended March 31, 2009. A preliminary review of recent financial information indicates that net income dropped markedly from $597 million to close to $50 million for the 12 months ended March 31, 2009.
Latin America
Pulp markets closed 2008 in an oversupply situation despite market curtailments. Performance of Latin American companies is unlikely to show major improvement until pulp demand and prices pick up.
The nine Latin American based companies on the PwC Top 100 list reported aggregate sales of $17.8 billion, or 5.0% of total sales of the PwC Top 100. This compares with $17 billion in 2007.
Net losses amounted to $1.3 billion in 2008, a sharp drop from the $3.8 billion in net earnings achieved in 2007. Much of the drop can be attributed to Aracruz, which reported a charge of $2.1 billion from exposure to foreign currency derivatives. Five companies reported net losses in 2008, versus only Durango (Mexico) in 2007.
Latin American companies did not replicate the 2007 return on capital employed average of 9.0%, return on capital employed dropped to 3.0% in 2008. Kimberly-Clark Mexico was the only exception, reporting the highest ROCE in 2008 at 22.3%, up from 2007's 20.3%. The company benefited from strong exposure to the tissue papers segment, where demand has been less severely impacted by the economic crisis. Arauco kept second place with 2008 ROCE at 6.8%, down from 11.9% in 2007. VCP's ROCE fell to -3.9% from 10.9% in 2007 mainly due to losses on foreign currency derivatives and an equity investment loss in Aracruz.
Emerging Asia
China continued to face fibre deficits during 2008, whereas India has been driving growth in the region in recent years with healthy rates of growth, yet is now seeing huge challenges.
Companies in this region increased their sales to $14 billion in 2008, 19% higher than the $12 billion in 2007. Net profits were $1.04 billion in 2008 compared to $0.97 billion in 2007. While the results for Emerging Asia initially appear to be significantly better than those of peers in other regions, it should be noted that Nine Dragons and Ballarpur both have June 30 fiscal year-ends, while Lee & Man's is March 31, 2008. Consequently, 2008 results for these companies do not reflect the adverse market conditions that occurred in the second half of 2008.
The performance of this group was dominated by the six Chinese companies. Sales by the Chinese based companies included in this group amounted to $8.0 billion, up by 31% from the $6.1 billion reported in 2007, and representing 58% of the total sales of the group. The increase in sales was led by Lee & Man Paper and Nine Dragons Paper (both mainly containerboard) posting increases of 75% and 57% respectively.
ROCE was 7.2% slightly down from 7.7% in 2007. Sino Forest (mainly Chinese plantations investor and trader) had the highest ROCE at 12.7% followed by Lee & Man at 12.4%. They were the only companies that achieved over 10% ROCE in 2008. Overall, ROCE of the six Chinese companies was 8.1% down from 10.4 % in 2007. Shandong Chenming was the only Chinese company that recognized a modest growth in its ROCE at 7.8% (2007: 6.3%), in addition to Ballarpur (India) and Hansol (Korea) at 8.6% (2007: 8.3%), 2.9% (2007: 1.2%) respectively. This improvement is mainly due to higher production and sales volumes. Production efficiency was improved by continued closures of old capacity and the benefit of new, more efficient capacity coming on stream.
Other regions
Our PwC Top 100 includes companies from some regions not addressed in this analysis, notably Australia and South Africa. Sales for the one Australian and two South African companies remained flat at $13.3 billion, compared to $12.9 billion in 2007. Net profit dropped notably for the two South African companies, declining from $241 million in 2007 to $72 million in 2008, primarily as a result of impairment and restructuring charges.
All figures are in US dollars unless otherwise indicated.
For more information, please visit http://pwc.com/fpp/annualsurvey2009 or visit here
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Issue date: June 24th, 2009
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