Lightweight Containerboard

1. Implications for Containerboard Producers Lightweight Containerboard Sarilee Norton July 2011

2. Containerboard Market Share by Company Interstate Resources Atlantic Packaging 1.0-1.5% each KapStone Kraft Simpson Paper Corrugated Services Sonoco Products US Corrugated 0.5-1.0% each Durango Group

3. Industry Basics and Terms • Corrugated is the most commonly used type of paper packaging—over 90% of the goods produced in the U.S. get to market using corrugated packaging. Corrugated shipments in 2010 were 357 billion square feet, down 10% from just five years ago. • Containerboard is made from two types of heavy paper, linerboard and medium. Linerboard is used for the two flat outer facings while medium is used to form the fluted inner, or middle layer of the corrugated sheet. • Kraft linerboard and semi-chemical medium are made from virgin fiber. By industry definition, kraft linerboard must contain no less than 80% virgin fiber and semi-chemical medium not less than 60%. All other containerboard is referred to recycled. Today, material sold as kraft linerboard may be as high as 30-40% recycled. • Fabricating the corrugated sheet and producing the container are both done at converting plants, which may be corrugator plants, sheet plants or sheet feeders. Corrugator plants perform both combining and converting. In the combining process, medium is fluted and laminated on each face to linerboard to produce corrugated sheets. In the box making operation, the combined sheets are printed, cut, folded and joined to create the finished boxes. Sheet plants purchase already combined sheets and make them into finished boxes. Sheet feeders only produce combined board, for sale to sheet plants or others who make finished product.

4. Less Fiber, More Sustainable, Less Cost? The Logic of Lightweights

5. About RULE 41 – Performance versus Weight • Beginning of the end for ‘standardized’ grades • Variability in performance from mill to mill, machine to machine now a real consideration • Proliferation of new, lighter weight grades and introduction of ring crush specifications • Mid-weight and heavier grades have migrated to high-performance, lighter versions • Not much has changed with the lightest grades

6. Liner Basis Weights – Then and Now SOURCE: Future of Lightweight Containerboard in North America, 2010

7. Sustainability – It’s Not Going Away • Company policies and public statements – they’ve made sustainability too visible to fail • Packaging a major plank in many platforms • Common themes: • Lighter weight materials • Reducing amount of materials • Leaner manufacturing, more efficient processes • Rethinking packaging’s role in supply chain

8. Influence of Mega-Retailers • Buying power and ability to shape the market are enormous • The push to private label and direct control of their suppliers • Globalization of their business model • They set the bar very high – quality, consistency, reliability, flexibility, industry savvy – yes, they want it all  A relentless focus on reducing costs

9. Retail-Ready – Lots of Benefits for Retailer… An ‘holistic’ approach to packaging in the retail environment, integrating: • marketing  materials cost and efficiency • sustainability  operations data SOURCE: Institute of Grocery Distribution Report, 2007

10. …And Impact on Lightweights “One of the most interesting technological developments over the past few years has been the development and use of lighter weight liners and flutings. Improved papermaking technologies have ensured that the overall structural properties of the corrugated container can be maintained…to produce economic and environmental benefits.” …PIRA International SOURCE: Wal-Mart Retail Ready Packaging Guidelines

11. A Scenario for Change • Time is right for lightweight investment • Black liquor credits • Restrained spending climate in recent years • Generally good balance sheets • Hard strategy for major integrated to embrace • Who will step up • Mid-sized integrateds, recycled positions • Independent consortium • European supplier—though not at current exchange rate

12. A Scenario for Change (cont.) • North American companies with underutilized graphics paper assets • Cost to convert • Economics versus competitors • Incremental upgrades • What are the limiting factors for lightweights • Market impact of more of the same grades

13. Back to the Future? RISI Capacity Forecast

14. Mill Operating Rates — Commentary • Mill operating rates (production divided by stated capacity) are generally considered to have reached an upward price support tipping point at 95+%. This statistic is tracked closely and is used as a fundamental indicator of market strength. The downside tipping point is not as frequently referenced, but is in the range of 91-92+%. • There can be a lot of noise in the monthly numbers; operating rates have actually exceeded 100% in a given month. We believe a quarterly comparison is a better indicator of strengthening or deteriorating market conditions. • Many mills also achieve incremental productivity gains, called ‘creep’, that may not be reflected in their capacity numbers. Noted changes in capacity usually show major upgrades, product conversions or shutdowns. Creep is estimated to be between 1.0% and 2.0% a year for well operated, well-maintained assets, though today, that may be a little optimistic.

15. Capacity and Operating Rates SOURCE: RISI, Norton Associates • This chart clearly shows capacity reductions and the impact on operating rates in the period since 1999. The forecasted numbers for 2010-2013 period have been adjusted to reflect more current information, e.g., Greenpac investment.

16. RISI Capacity Changes Detail (Acknowledgement and Thanks to Ken Waghorne, VP Packaging, RISI)

17. Operating Rates — the Bellwether Indicator? • Mill operating rates have traditionally been thought of as the leading indicator of market strength. • After dipping below 95% in the third quarter of 2008, operating rates did not return to 95+% until the second quarter of 2010. • First quarter 2011 rates have been struggling to reach the 95% tipping point. Some of the decline reflects temporary mill outages, but soft demand is also a real factor We believe efforts to keep operating rates looking favorable have run out of momentum in the face of sluggish box shipments and at best, uncertain economic conditions. We don’t see much to indicate that the remainder of 2011 will be a better environment for operating rates, unless there is another round of capacity rationalization. 

18. Still Struggling to Recover Volume Box Plant Activity

19. Box Plant Activity — Commentary • Box plants shipments track well with overall economic activity, as measured by industrial production, especially for non-durables. About two-thirds of shipments are to non-durables segments, with food and beverage being the largest category. Recent softness in the economy hasn’t had as sharp an impact on box shipments compared with some other manufactured products since people continue to eat, drink and use disposable packaging. But the industry still hasn’t recovered from 2009. • Discrete events, such as a hurricanes or crop failures, can have significant impact on quarterly numbers. • Box plant capacity utilization isn’t a meaningful measure of market activity, since most plants operate well below their nameplate capacity. While the corrugator is, in a broad sense, the limiting factor, bottlenecks often are often caused by short-term mix shifts or machine center downtime. • We think a better benchmark is shipments activity, tracked in aggregate for the period or on an average week basis to account for changes in the number of workdays in a month or quarter.

20. Box Plant Activity — Average Week Shipments  Since 2008 box plant shipments have yet to get close to the ‘magic’ 7.5 BSF average week benchmark. RISI notes that if the first quarter rate of growth is annualized, it would translate to 5+% for the balance of 2011. However, if key economic indicator forecasts become stagnant, we think 2011 will be no better than 1.5-2.5% growth.

21. It Makes Good Sense for THEM Norampac’s New Machine

22. The Basics • 7 machines, 1.1 million tons, 3% share of market • Primarily recycled grades, no kraft linerboard • Machines generally narrower trims and slower speeds; largest machine ranks ~70 of ~140 in capacity • 328-inch multi-fourdrinier recycled linerboard machine; 540,000 tons capacity--among top 10 in North America • Basis weight range 20-35#; will trim 3-out to meet modern corrugator requirements

23. The Economics • Investment $430 million (US) • Land purchase/site work* 7% • Building construction* 12% • New equipment* 55% • Metso contract ~$91 million • Other project costs* 26% • Benchmarks • Greenpac, Niagara Falls ~$796/ton of capacity • Pratt, Shreveport ~$417/ton of capacity • IP Pensacola conversion $145? million for 500K tons (150K incremental) l/w kraft linerboard * Percentages based on 2010 data from Niagara County Industrial Development Agency, project total cost estimate of $407.5 million

24. Who Else To Consider? • The tier-two players • Pratt – a distinctive strategy, adding convertor capacity, two big corrugators in Indiana • Boise – DeRidder newsprint machine conversion should look even better with the benefit of Tharco’s cut-up • Longview – Who might eventually own the assets and what would they do with them? • Other ‘buzz’ • KapStone, Atlantic Packaging, Interstate Resources • Multi-plant independents/sheet feeders, e.g., USCorrugated, Schwarz Group, Corrugated Synergies

25. A Point of View What Does It All Mean

26. Capacity Creeping Back to 2003-2005 Levels… …But Not Box Shipments

27. The Relationship Between Demand and Price… …But What’s Happened Since 2008?

28. History Would Suggest… …That Prices Can’t Be Sustained