Industry Reports

Deutsche Bank Reports Summaries

050701 Dr Paper's Weekly Wrap-up

Deutsche Bank - Equity Research

Containerboard appears weaker than most analysts/trade papers have acknowledged. We trimmed estimates for all 6 of the top producers. It won't have much impact on Q 2 EPS, but it does point to falling earnings in H 2.

OSB slipped again. After a big drop in mid-June, OSB prices had stabilized for a couple weeks. During the second half of this week, prices dipped $23/msf.

Another big pulp mill? Stora Enso announced plans to build a 1 MM mtons/yr greenfield softwood pulp mill in Russia by 2010. The $1.2 B project is the industry's first big greenfield mill inside Russia. Projects by GP, IP and others are much smaller.

For more information, please see the referenced document.

050627 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

LUMBER

Lumber prices remained about flat last week. The framing lumber composite fell $1/mbf to $397/mbf. Some buyers were probably spurred by announced Summer Canadian mill shutdowns and upcoming holidays. Attention continues to focus on logging issues, the US/CN trade dispute, and the CN$. Impending harvest reductions in Quebec could have a significant impact on some niches of the lumber market.

PANELS

Prices stabilized nicely last week after a big drop the week before. The structural panel composite price fell $1/msf to $378/msf. The benchmark grade of OSB (7/16" in the North Central region) actually rose $8/msf to $278/msf. With new capacity in OSB expanding North American supply by as much as 30% in the next five years, the market may come under pressure longer-term. The most recent announcements were $400 MM worth of new capacity from Grant.

MARKET PULP

Hope for producer pricing power may be diminished... NA Inventory days of supply rose from 34 to 35 days m/m in May as shipment data unexpectedly fell 2.9% y/y. Buyers are optimistic that they can further drive down prices, following $20/tonne lower NBSK and SBSK prices this month at $630/tonne and $610/tonne respectively---However we think we are close to the bottom. Anemic demand is partially offset by supply coming out of the system. Arauco's big new Valdivia mill is out indefinitely, Domtar has shuttered its Quebec mill and the ongoing strike in Finland has cost the market 376 k tonnes since late April.

For more information, please see the referenced document.

050627 Disappointing IP 2nd Quarter

Deutsche Bank - Equity Research

International Paper {Ticker: IP,}

International Paper today announced that it expects 2Q EPS to be $0.25-$0.30, well short of the Street @ $0.38 and DB @ $0.40. The company cited weaker-than-expected volumes in both its packaging and printing papers businesses, as well as high input costs. High input costs aren't a shocker. We think the bigger delta is the result of volume & price developments in IP's high volume commodities - especially uncoated white paper, containerboard and bleached paperboard.

Volumes in most packaging-related markets have weakened in the past 4-6 months. We think IP's biggest issues are in the containerboard business. Box shipment volumes were down about 2% y/y in April & May, and this warning doesn't bode well for June numbers. Most analysts were probably hoping for volumes that would be flat to higher y/y. At the same time, the failure of spring containerboard price hike & subsequent decline in containerboard prices are also negatives - - - and are likely to hit Q3 even harder. Beyond containerboard, momentum in the bleached paperboard market has also eased in recent months. With roughly 2 mm tons of annual capacity, IP is the world's largest producer of bleached board.

In printing papers, the big issue is uncoated free sheet, IP's largest volume commodity. Industry shipment volumes were down 3.7% y/y in April & 1.1% y/y in May. For IP, the impact was likely greater, because IP has closed 3 machines with 430 K tons of annual capacity and is taking 120 K tons of market downtime over 3 months. Pricing developments are also an issue. After nice increases in April, prices slipped in the trade papers in June & likely earlier in reality.

We're trimming our estimates as follows: 2Q goes from $0.40 to $0.28, '05 goes from $1.60 to $1.10, and '06 goes from $2.50 to $2.00. Implications for other companies? The most leveraged containerboard players are Smurfit Stone ($10.74) and Packaging Corp ($20.66), with Temple-Inland ($35.95) also having significant exposure. The most leveraged play on uncoated free sheet is Domtar (C$9.40). There are also negative implications for Weyerhaeuser ($65.11) & Georgia-Pacific ($31.89).

In other news, IP also announced that it's exploring strategic options for its 50.5% stake in Carter Holt Harvey of New Zealand. This continues CEO John Faraci's initiative to sell off tangential businesses to focus on the company's core operations. The sale of IP's stake will be significant catalyst for debt reduction. Even before the rise in CHH stock on takeover speculation, IP's stake was valued at almost NZ$1.5B, which translates to slightly more than US$1.0 B.

Valuation

Our $50 target price is based on 13 x our normalized EPS estimate, which is in line with our valuations of other paper companies. During the cyclical peak of 1995, IP traded as high as 10.4x earnings, which suggests that it might be worth $70 per share, based on our peak EPS estimate of $6.75. We think a 25-30% haircut to this figure is appropriate, given the risk inherent in using a peak figure.

Risks

Economic momentum needs to be sustained. We also remain watchful about capacity growth abroad as well as the movement of jobs and manufacturing facilities overseas. Internally, we'd focus on the balance sheet, acquisitions (which have seldom created value in the past), and the need for better disclosure. Other risks include energy costs and currency translation.

For more information, please see the referenced document.

050624 Dr Paper's Weekly Wrap-up

Deutsche Bank - Equity Research

Another tough month. May newsprint consumption dipped 4.8% y/y. The drop won't help efforts to boost prices this summer. To date, prices have climbed more than expected thanks to supply side constraints - - - especially from ABY & BOW. Can they do it again?

Printing & Writing paper vol's off 3.3% y/y in May. Biggest weak spot: coated free sheet (down 17.9% y/y). Inventories were up in all grades - - - except uncoated free sheet. Pricing is mixed: sloppy in uncoated free sheet & CFS, trending up in LWC.

DB's Timberland Summit the June 28th in Boston. Some of the biggest timberland investors will review state of timberland markets, valuation and capital flows. We've heard est's of $10 B available for timberland investments.

For more information, please see the referenced document.

050624 Pactive Sale of Flexible & Protective Packaging

Deutsche Bank - Equity Research

Pactive {Ticker: PTV.N, Closing Price: USD 21.75, Target Price: USD 30.00, Recommendation: Buy}.

Pactiv will sell most of its Protective and Flexible Packaging Division The deal will be for $530 MM and the assumption of certain liabilities. It is expected to close in 3 Q. The price represents a 6.8x '04 EBITDA multiple. The businesses they are selling had '04 sales of $838 mm, pre-restructuring EBIT of $60 MM, and estimated EBITDA of roughly $78 MM. Proceeds will be used for acquisitions and share repurchase.

What they keep within the Segment?

Pactiv will retain the Molded fiber operations in Europe and all operations in Asia. These businesses have higher margins than the business they are selling, but they are niche businesses outside of the company's increasingly consumer focus and we believe may become candidates for sale themselves at some point in the future.

A reasonable sale but not a blowout

The sale is in line w/ the corp. strategy of increasing a consumer products focus. The 6.8x EBITDA multiple on this sale is at a modest discount to the overall company at 7.3x, but historically the business is lower growth and far lower margin. Consumer products co's trade at higher multiples than packagers, so we think a stronger argument can be made for PTV now.

Valuation

Pactiv currently trades at 7.9x and 6.2x our respective '05 E and '06 E EV/EBITDA basis - - - roughly in-line with BEMIS ($26.80) and well below Sealed Air ($50.63). On a P/E basis, PTV is trading at 18 x and 12.1x on '05 E and '06 E, respectively.

For more information, please see the referenced document.

050623 May Newsprint Monitor

Deutsche Bank - Equity Research

May consumption was sluggish again. Consumption at the US Dailies fell 4.8% y/y. This looks like a fair "apples to apples" comparison since there was the same number of Sundays this year as last year, overall a modest disappointment, given that the April comp was down only 2.8% y/y. This returns consumption toward the sharply lower levels of March (-6.5% y/y) and February (-5.4% y/y, but w/ 1 fewer Sunday).

The inventory situation remained steady. The mills saw inventories rise by 11 K mtons m/m, but the publishers saw their inventories fall by 19 K mtons, for a net decline of 8 K mtons. This decline of 8 K mtons is spot on with the 10-year average for May. On a days of supply basis, inventories dropped from 39 to 38 days, the low end of an average range. Not a bad performance, considering a 4.8% consumption decline and a 95% operating rate.

Operating rates and the CN$. The North American operating rate fell slightly from 96% in April to 95% in May. The Canadian operating rate fell from 96% to 94%, while the US operating rate remained steady at 96%. The CN$ has strengthened again in recent weeks to about US$0.81, a strong level by historical standards. This should favor the relative position of US mills. In foreign trade, North American exports grew 3% y/y. Exports were strong to Western Europe (+15.6% y/y) and Asia ex. Japan (+46.9% y/y), while they were weak to Latin America (-22.2% y/y) and Japan (-25.9% y/y). Newsprint imports grew 8.1% y/y, but this number tends to be volatile, because of the small base.

Supply limitations continue to be the key. This is a combination of capacity conversions & closures as well as market downtime. With a strong C$ and fiber supplies/costs continuing to pressure older mills, especially in Eastern Canada, its not hard to imagine further shutdowns/ conversions. In a recent series of Montreal investor meetings, Norske Canada noted that they would continue to migrate newsprint out of the market. Once one of North America's largest newsprint producers, Norske Canada now has only about 25% of its production in newsprint. A major eastern producer (not ABY or BOW) has made us aware of the potential conversion of 2 substantial machines. Besides weak returns in newsprint, we think the conversions may also be driven by fiber conservation efforts. Either way, the result is the same. At this point, the only supply-side offset is BesciCorp's proposed mill in upstate New York.

View? While the consumption number is a modest disappointment, most of these numbers are fairly reflective of year to date trends. Despite deteriorating consumption levels, producers are managing to take enough capacity out to maintain robust operating rates and still keep inventories in check. This is leading to a surprising amount of pricing power. The spring price hike resulted in a $25/mton increase, and there is another hike of $35/mton in the market. Despite the impressive upward move in prices over the last two and a half years, rising costs and deteriorating volumes have offset much of the benefit, and newsprint producers are still struggling financially, suggesting that they need the hike.

For more information, please see the referenced document.