The Top Ten Global Paper Companies: Currencies lift Europeans up the Top 10, Solutions!, Online Exclusives, June 2004

THE TOP TEN GLOBAL PAPER COMPANIES: CURRENCIES LIFT EUROPEANS UP THE TOP 10

By Jim Kenny, Contributing Editor

Editor’s Note: This Online Exclusive edition contains full commentary for all Top 10 companies, including commentary deleted due to space restraints in the print edition for company 7 through 10.

The paper industry’s global Top 10 highlights some recurring themes, but optimism is high that 2004 will prove to be the turnaround year.
Weak demand featured prominently in the Annual Reports for 2003. Around the world, the picture was much the same as pulp and paper companies struggled with weak demand and softening prices, although some dealt with the situation better than others as restructuring and cost-cutting proved to be the order of the day.

Currency movements also made an impact as the U.S. dollar weakened, particularly against the Euro. Several groups reported some positive effects as the lower dollar rate helped reduce the competitiveness of imports into the United States, but the result was less good for European multinationals reporting in Euros, who saw their North American revenues dropping over the year.

The top three remained the same as last year as International Paper (1), Georgia-Pacific (2) and Weyerhaeuser (3) all reported improved profits for the year. Although Stora Enso’s (4) turnover declined in Euro terms in 2003, the result in dollar terms pushed the group into fourth place above Kimberly-Clark (5). UPM-Kymmene (6) and SCA (7) also climbed up the league table from last year on the back of a stronger Euro, while the top two Japanese companies, Oji Paper (8) and Nippon Unipac (9) maintained similar positions to the previous year

A reorganization of Proctor & Gamble’s (10) business segments made it even harder to calculate a figure that sensibly reflects true pulp, paper and converting sales as several major brands moved to different divisions. However, it is interesting to note that the strengthening Euro pushed another European company a little closer to the Top 10 list. Even with the currency effect of a stronger Euro, M-real is still a little off the running. But the Finnish pulp and paper group’s parent company, Metsäliitto, would add Botnia, Metsa Tissue and FinnForest’s results to the total mix, which would put Metsäliitto at the number 8 spot in the Top 10. Editor’s Note: The Top 10 list is based on net sales of pulp, paper, paperboard and converted products. $ sign stands for U.S. currency unless otherwise noted. Conversions to U.S. dollars are as of May 7, 2004.

1. International Paper
www.InternationalPaper.com
400 Atlantic Street
Stamford, Connecticut 06921 USA
+1 203 541 8000
Chairman and CEO: John Faraci

Pulp, Paper & Converting Sales: $25.2 billion

Profile: International Paper is the largest company in the global paper industry operating a wide range of pulp, paper and packaging and converting plants, as well as merchanting companies, wood product facilities and specialty chemicals plants. The group is active in practically every part of the forest products supply chain, boasting a presence across Europe, Asia, Latin America, South America and Canada in addition to the USA. International Paper (IP) owns, manages, or has harvesting rights to some 19 million acres of forestland around the globe, including some 10 million acres outside the USA.

Products: IP’s output stretches across a broad range of product lines, including pulp, fluff pulp, coated and uncoated printing and writing papers, specialty papers, diapers, sanitary napkins, containerboard, bleached packaging board, converting and specialty industrial papers. Lumber and other forest products account for a major part of the product mix alongside, distribution and specialty chemicals.

Corporate Review: John Faraci took over the chairman’s role in November 2003 on the retirement of John Dillon. In his first year presenting the group’s 2003 annual report, he was able to announce the company’s first profitable year since 2000, citing a net profit of $302 million after the previous year’s loss of $880 million. Underlying profit showed a slight decline though, as earnings before income tax, minorities and extraordinary items registered at $346 million versus $371 million the previous year. Sales remained roughly stable at $25.18 billion, compared to $24.98 billion in 2002.

According to Faraci, weak demand and lower prices combined with higher energy and raw material costs to blunt the effect of the company’s restructuring plans that are designed to boost efficiency going forward.
The chairman has also stated that company is aiming for further growth in the emerging markets of Eastern Europe, Latin America and Asia, noting that North America will decline as a proportion of the group’s sales.

Faraci also believes that 2004 should offer some better prospects in terms of demand, while a weaker U.S. dollar should help boost exports and restrict competition from imports.

2. Georgia-Pacific Corp.
www.GP.com
133 Peachtree Street
Atlanta, Georgia 30303 USA
+1 404 652 4000
Chairman and CEO: Pete Correll

Pulp, Paper & Converting Sales: $20.2 billion

Profile: G-P is among the largest producers of tissue products in North America in addition to holding significant positions in markets in Europe and elsewhere. The group is also a major player in the North American containerboard market, as well as operating large-scale businesses producing and distributing building products.

Products: Georgia-Pacific’s operates across four principal business areas – tissue and disposable tabletop products such as toilet tissue, napkins, paper plates etc; containerboard and packaging; bleached pulp and paper; and the production and distribution of building products, including various industrial wood products, lumber and gypsum board.

Corporate Review: Last year saw Georgia-Pacific continue to face up to some serious challenges, with indebtedness and asbestos issues to the forefront of management agenda. The group headed off a liquidity crisis with a bond offering and sold off pulp mills in Mississippi and Georgia. However, markets were still sluggishness, U.S. commercial construction were slow and energy and wastepaper costs were higher. On the other hand, structural wood products saw soaring prices in 2003 due to supply shortage and residential housing starts climbed.

The 2002 sell-off of G-P’s 60% stake in Unisource meant that group sales were lower in 2003. But after some debt restructuring, the company managed to turn in a positive result in terms of net profit at $254 million versus a $735 million loss the previous year.

G-P’s North American Consumer Products division saw sales and profits dip as some machines were shut, but the International division reported higher sales and profits much of which can be attributed to currency effects.
Packaging is set to face further challenges this year through a combination of higher energy and raw materials costs, but sales prices could be looking up and the prospects for bleached pulp and paper look better after showing losses in 2003. Building Products reported a much better year, particularly with plywood and OSB price rises, and the Building Distribution unit also fared better. Needless to say, the group’s focus remains on cost cutting and debt reduction and G-P will be watching interest rates closely.

3. Weyerhaeuser Corporation
www.Weyerhaeuser.com
Weyerhaeuser Company
PO Box 9777
Federal Way, WA 98063-9777 USA
+1 253 924 2345
Chairman, President and CEO: Steven Rogel

Pulp, Paper & Converting Sales: $19.9 billion

Profile: Weyerhaeuser is one of the largest pulp and paper companies in North America. The group owns or leases more than 42 million acres of forestland, the majority of which is located in Canada. As well as growing, harvesting and distributing forest products, the company controls some 2.9 million metric tonnes of pulp capacity and almost 10 million metric tons of paper and containerboard capacity.

Products: Weyerhaeuser’s wood products businesses produce and sell softwood and hardwood lumber, plywood, veneer, oriented strand board, panels, engineered lumber products and treated products. The pulp and paper businesses cover pulp, coated and uncoated papers, business forms and bleached board. In addition, Weyerhaeuser produces a wide range of containerboard and other packaging and operates an extensive wastepaper collection system.

Corporate Review: Weyerhaeuser’s sales climbed by 7% to $19.9 billion in 2003. The company spent much of last year digesting the Willamette acquisition and trying to reduce the company’s debt burden, both of which were successful, according to Chairman, Steven Rogel. The group reported synergy gains of $300 million on the Willamette acquisition and managed to pay down over $1 billion in debt over the year with various restructurings and asset disposals, including the sale of 444,000 acres of timberlands and the closure of 12 manufacturing facilities.

The company reported better demand and prices for pulp in 2003 and a weaker dollar helped the group’s competitiveness. However, uncoated freesheet remained sluggish and with softer demand for boxes, significant market-related downtime was a continuing feature throughout the year. The combination produced an operating loss of $82 million for the pulp & paper unit against a numerically similar profit in 2002. Containerboard, Packaging and Recycling also saw lower sales prices in 2003. On a positive note, timber demand remained strong in 2003 and OSB produced a healthy contribution to the group’s net profits.

4. Stora Enso
www.StoraEnso.com
Stora Enso Oy
PO Box 309
FIN-00101
Kanavaranta 1, Helsinki Finland
+358 2046 131
CEO: Jukka Härmälä

Pulp, Paper & Converting Sales: Euro 12.2 billion ($14.5 billion)

Profile: According to recent figures, Stora Enso is now the world’s largest paper and paperboard producer by capacity. The integrated forest products group has employees in more than 40 countries spread across five continents and boasts over 15.7 million metric tonnes/yr of paper and board production capacity. Stora Enso’s main market is still Europe, but North America, Latin America and Asia are all in the group’s portfolio.

Products: The group is divided into three reporting units – forest products, paper and packaging. The main product groups consist of graphic and office papers, newsprint, packaging boards and wood products. Most of the production capacity is located in the Nordic countries and Europe. North America accounts for 17% of global capacity and with the Veracel pulp project underway, Latin America is likely to have a greater prominence in future.

Corporate Review: Despite depressed selling prices practically everywhere, Stora Enso managed to increase volumes in each business segment. Net profit was also positive for 2003 at Euro 147 million ($185 million), but operating profit dropped in each segment as weak demand and a sliding dollar hit the results. Currency effects meant that overall Stora Enso’s sales declined sharply in Euro terms, hitting Euro 12,172 million in 2003 compared with Euro 12,783 million the previous year. Cash flow hedging helped reduce the impact on profits though.

According to the company, demand stayed slack in 2003, hitting results. The group ratcheted up efforts to boost profitability with several strategic investments, including the startup of a new newsprint PM at Langerbrugge in Belgium and a green light for the Veracel pulp mill project in Brazil. Despite cash injections for new projects more jobs are to go in the US as the group aims to reduce its workforce to 5,000 by the middle of 2005.
The company forecasts better demand and pricing for its publication and fine paper grades as 2004 progresses. Stora Enso also pleased the markets with news that it planned to disburse half the group’s profits in dividends over the business cycle.

5. Kimberly-Clark Corp.
www.Kimberly-Clark.com
351 Phelps Drive
Irving
Texas 75038
USA
800-639-1352
Chairman and CEO: Thomas Falk

Pulp, Paper & Converting Sales: $14.3 billion

Profile: Kimberly-Clark is among the world’s largest hygiene products groups, with a raft of internationally recognizable brands in the K-C portfolio.
The company is focused on the hygiene sector and organized into three business segments - personal care, consumer tissue and business-to-business. Personal care accounts for the most profitable segment, with an operating margin in excess of 7.6%, followed by consumer tissue (5.8%) and business-to-business (4.7%). The group and its equity companies have manufacturing facilities in 38 countries, selling products in more than 150 countries.

Products: Kleenex, Huggies, and Kotex feature among a long list of major brands that Kimberly-Clark is responsible for bringing to consumers around the globe. The personal care division manufactures and markets disposable diapers, training and youth pants, feminine and incontinence care products and related ranges. Kimberly-Clark’s consumer tissue segment manufactures and markets facial and bathroom tissue, paper towels and napkins for household use, wet wipes and related products. Brand names include Kleenex, Scott, Cottonelle, Viva, Andrex and Scottex.

The Business-to-Business unit manufactures and markets facial and bathroom tissue, paper towels, wipers and napkins for the away-from-home market. Healthcare products such as surgical gowns, drapes, infection control products and sterilization wraps are part of this division, which is also responsible for printing, business and specialty papers.

Corporate Review: Wal-Mart became an ever more important customer for Kimberly-Clark as the group increased sales by 6% in 2003 to $14.3 billion. But even as sales were galloping along, operating profit dropped off slightly by 2% over the year. Currency effects helped the group and higher volumes helped offset slightly weaker sales prices, according to the group.

In the personal care segment, volumes and prices remained largely stable at the global level, although the US performed better than Europe in volume terms. Global consumer tissue sales climbed 4%, while currency movements compounded the effect into a 8.4% gain in sales. Business-to-Business also saw healthy volume increases over the year, leading to a 5.8% jump in sales after some favorable currency effects were added into the numbers.

Kimberly-Clark also consolidated some international positions. The company kicked off the first quarter of 2003 with the acquisition of Klucze Poland. The group followed that up by taking up an additional 49% of Kimberly-Clark Peru and the remaining 50% interest in its Brazilian joint venture, Klabin Kimberly.

6. UPM
www.UPM-Kymmene.com
UPM-Kymmene Group
Eteläesplanadi 2
PO Box 380
FIN-00101 Helsinki, Finland
+358 204 15 0020
President and CEO: Jussi Pesonen

Pulp, Paper & Converting Sales: Euro 9.9 billion ($11.8 billion)

Profile: UPM is a global pulp and paper producer with production facilities active in 16 countries and an extensive sales network comprising over 170 sales and distribution companies. It is also the world’s largest producer of magazine papers by volume. The company shortened its name from UPM-Kymmene to UPM recently.

Products: The company operates five main business areas. Magazine papers accounted for 32% of the company’s turnover in 2003, with fine and specialty papers making up 22% of the total and the remainder coming from wood products (15%), converting (13%) and newsprint (12%).

Corporate Review: Cautiously optimistic is how the UPM’s new CEO, Jussi Pesonen, describes the outlook for 2004. 2003 was a different story though, characterized by lower sales prices and adverse currency movements. On the plus side, UPM was successful in stripping out costs and with the aid of reasonably strong cashflow, managed to bring down the gearing ratio to 67% from 76% in 2002.

UPM kicked off 2003 with the closure of two paper machines at the Blandin mill in the US, but followed that up over the year with rebuilds at its Rauma and Miramichi mills and the startup of a new deinking plant at Shotton in the UK. The company has also decided to move ahead with the construction of a new fine paper machine at the Changsu mill in China, where work got underway in the summer.

However, U.S. authorities blocked UPM’s proposed acquisition of MACTac’s pressure sensitive business.

7. Svenska Cellulosa Aktiebolaget (SCA)
www.sca.se
SCA
Box 7827, SE-103 97
Stockholm, Sweden
+46 8 788 51 00
President and CEO: Jan Åström

Pulp, Paper & Converting Sales: SEK 85 billion ($11.1 billion)

Profile: SCA is Europe’s largest tissue producer. The group produces a broad variety of hygiene products, which account for around half the company’s total sales. Packaging solutions and publication papers are also big earners, but the packaging group is the second largest segment contributing around 35% of turnover. Germany, the UK and the US are the company’s top markets, with France, Sweden and Italy following behind.

Products: Consumer items such as handkerchiefs, toilet tissue, feminine hygiene and baby diapers provide the largest proportion of the company’s revenues. However, packaging solutions such as specialty packaging generate significant returns in addition to the company’s publication papers, including LWC, SC and newsprint. Pulp, solid wood products and timber help make up the remainder of the group’s turnover.

Corporate Review: Hygiene products and advanced packaging solutions have provided good returns for SCA in recent years, but even the Swedish group, known for its ability to harness growth, could not fight against the tide of weak economic performance across Europe and adverse currency movements elsewhere.

SCA saw 2003 sales decline by 3% to SEK 85 billion on a volume growth of 4%. As a result, the real impact came on the profitability side where net earnings dropped 11% to SEK 5 billion. According to the company, without the impact of lower prices and currency movements, net sales would have increase by 4%. But at least the group managed to keep the EBITDA margin at a respectable 17%.

The company reported that it has not always found acquisition targets at the right price, so SCA’s ambitious expansion plans are not moving as quickly as the group would like. But the company did manage to land some deals in the US in 2003, notably Alloyd and Specor Systems, two groups in the protective packaging business, and Southeastern Packaging, a corrugated manufacturer. Significant mill investments were also announced in the US AFH market and in Colombia. SCA also acquired 50% of Chile’s second largest tissue producer, PISA, a development company called Segas in France and expended its Chinese presence by taking 65% of Cenpack. The company is targeting future growth in Asia through Cenpack and has set up two new business units specifically to growth opportunities in the Hygiene and Packaging markets.

Jan Åström, SCA’s president and CEO, believes that 2004 will be the turnaround year that provides the company with a boost back toward the full profitability potential that SCA is aiming for.

8. Oji Paper
www.ojipaper.co.jp
Oji Paper
Giza 4-7-5 Chuo Ku
Tokyo 104-0061 Japan
+81 3 3563 1111
President and CEO: Shoichiro Suzuki

Pulp, Paper & Converting Sales: Yen 1,213 billion ($10.8 billion)

Profile: Oji Paper is one the largest Asian pulp and paper producers. The integrated producer is particularly active in the Japanese market, but it also boasts forest interests totaling 143,000 hectares around the globe and imports some 3.6 million BD tonnes of chips back into Japan.

Products: Like many of its Asian competitors, Oji Paper runs a wide range of diverse product lines, ranging from newsprint and publication papers to corrugating medium, tissue and thermal papers. Much of the group’s chip imports go into supporting production for domestic consumption, but Oji also promotes sales around the globe.

Corporate Review: Oji Paper did not manage to make a vast profit in the 2003 fiscal period, but it did turn in a very respectable result in a tough operating environment. Again, Japan’s moribund economy did not help, with weak demand depressing selling prices. But “aggressive” sales efforts and cost-cutting generated slightly higher revenues at Yen 1,213 billion, compared to Yen 1,204 billion the previous year, while operating profit jumped an impressive 55% to propel net profit for the year to Yen 12.2 billion

Shoichiro Suzuki is committed to even further in the future and is already on track for further cost-cutting initiatives. However, the big news from Oji Paper in the past year is the decision to build a massive Yen 200 billion integrated pulp and paper mill in China at Nantong, Jiangsu. Eventually, the plan is to raise the installed capacity to 1.2 million metric tonnes/yr. However, as the group’s 2003 fiscal year only runs up until March 2003, this move does not have any financial impact in the period under discussion here.

In the meantime, Oji’s management is still pursuing a strategic plan that will guide the company to an operating profit target of Yen 100 billion in the 2004 fiscal year.

9. Nippon Unipac Holding
www.nipponunipac.com
1-12-1 Yuraku-cho, Chiyoda-ku,
Tokyo, Japan
President and CEO: Takahiko Miyoshi
Tel: +81 (0)3-3218-9300

Pulp, Paper & Converting Sales: Yen 1,165 billion ($10.4 billion)

Profile: Nippon Unipac is the holding company created by the integration of Nippon Paper Industries and Daishowa Paper Manufacturing in 2001. It is Japan’s largest papermaker and holds large market shares in the domestic market particularly.

Products: Nippon Unipac produces practically every pulp and paper grade from tissue and containerboard to liquid packaging. Pulp and paper forms the vast majority of the company’s sales at 77%, while paper related businesses such as converting contribute 8% of total sales. But the group is also involved in building materials (8.1%) and other businesses (7%), including chemical products.

Corporate Review: Continuing lethargy across the Japanese economy translated into a slow year for most Japanese producers and so it was with Nippon Unipac. The economic background was not the best for a company still trying to push forward with formidable integration and restructuring efforts. Volumes were flat, but pulp and paper sales took a dip in the 2003 financial year as selling prices weakened, dropping from Yen 947 billion to Yen 900 billion for the latest year. The group did manage to reduce the debt/equity ratio by 6%, but as it stands at 2.0 it remains high by Western standards. On the other hand, the operating margin is moving in the right direction reaching 4.3% against 3.5% the previous year and ultimately Nippon Unipac made a small profit of Yen 4.9 billion for the year.

Nippon Unipac’s results for 2003 cover the 12-month period up until 31 March 2003, so the results are somewhat behind the economic cycle of group’s in the United States and elsewhere.

10. Procter & Gamble
www.PG.com
One Procter & Gamble Plaza
Cincinnati
Ohio 45202 USA
+1 513 983 1100
Chairman and CEO: Alan Lafley

Pulp, Paper & Converting Sales: $9.9 billion

Profile: Procter & Gamble is one of the world’s largest fast moving consumer goods companies, reporting consolidated sales of $43.4 billion in 2003. The company employs almost 100,000 people in 80 countries around the globe and boasts 13 “billion dollar brands”.

Products: The Top 10 will take into account P&G’s baby and family care business segment, which covers diapers, wipes, tissues and towels, among other products. Within this segment, P&G controls some major brands in the paper industry, including Pampers, Bounty and Charmin.

Corporate Review: P&G’s baby and family care division saw sales climb by a healthy 8% in 2003, reaching $9.93 billion. Volumes were up by 7%, but it was mainly positive currency effects that offset 3% lower selling prices over the year.

As a result, the division delivered strong net earnings growth, up 20% to $882 million, according to the company, helped extensive cost reductions. P&G fully expects tough competition across its top brands in 2004, but an economic recovery should help preserve margins.

Clearly, the fact that this division does not include feminine hygiene or a number of new nonwoven products such as Swiffer means that P&G certainly deserves a higher ranking in the Top 10. However, there is no sensible way to strip out the relevant results from the other divisions