Bumper Top 150 performance

by Rhiannon James

The industry rightly deserves a round of applause for the numbers it turned out in 2000. According to the PPI Top 150, pulp and papermakers pulled off double-digit growth in both sales and earnings. Net sales for pulp, paper and converting operations climbed by an impressive 12% on 1999 levels, while consolidated figures jumped 10% on the year-earlier period. The icing on the cake was net earnings though, which showed an even more impressive performance as they soared by 18% last year.

Even at the start of 2000, papermakers seemed to know that the year ahead would be a good one (PPI, January 2000). But few would have guessed just what a cracker it turned out to be. Despite the fact that fourth quarter numbers started to look a bit shaky, producers had already taken advantage of strong demand and high prices to fill their coffers and it was too late for the last quarter of the year to spoil the earnings party to any great extent.

Undoubtedly, the numbers for 2000 have been boosted by extremely strong demand and healthy economic conditions around the globe. Even so, producers deserve some praise for the hard work they put in over the year. Their efforts to push ahead with consolidation across the industry, strong campaigns to curb capacity and impressive efforts to stabilize prices all contributed to the success seen in 2000.

Before getting too self-congratulatory about the 2000 results, it might be a good idea to temper our enthusiasm just slightly and look ahead to next year's PPI Top 150. Judging by the industry's performance so far this year, annual reports may not be painting too pretty a picture for many papermakers. Sales and earnings reported so far in 2001 have been significantly lower than the numbers for last year. This in itself is hardly surprising given the current economic climate, but the fact that the bottom of the dip seems to be stretching further off into the future with each new day's economic reports is a worry.

There have been some bright spots along the way though. For example, US second quarter figures came in higher than some analysts expected. Equally, the investment world praised European papermakers' second quarter results, which were considered strong 'under the circumstances'.

Surviving well

Whatever the eventual outcome, at least one thing is certain - PPI's Top 150 will look a lot different in 2002 no matter what happens to the markets. In a process that appears to have accelerated in recent years, many famous faces will disappear from the list forever, while consolidation will continue to push the well managed (or just plain lucky) survivors ever higher up the list.

It has already proved a tough task compiling the Top 150 this year given all the changes taking place due to merger and acquisition moves. But next year could be even more of a nightmare. Pacifica Papers, Alliance Forest Products, Zanders and Haindl will all have to be replaced and quite where Asia Pulp & Paper will feature is anyone's guess for the moment.

One bright spot for smaller producers though, is that entry requirements for the Top 150 have gotten easier in the past few years. The threshold used to be at $150 million for net sales of pulp, paper and converting operations, but next year the barrier is likely to be dropped toward the $100 million mark.

Although the consolidation moves are causing challenges for PPI's Top 150 team, we can see the positive impact in terms of the bigger picture. Already in 2000, evidence of producer discipline was becoming apparent across many of the results. For example, Smurfit-Stone's production was down in 2000 compared to 1999 as a result of the company's downtime and capacity control efforts. This year, the pioneer has been joined by most of its competitors in the downtime battle and 2001 results should prove stronger as a result. This is not to say that the financial results will be healthier than last year. Far from it in fact. But they won't be as disastrous as they might have been in the 'bad old days' of market share battles and short-term opportunism.

This may be especially true on the paper side, where producers are convinced that they have stopped the price rot in 2001. While pulp prices have slipped considerably, paper prices have not suffered nearly as much, partly due to downtime measures taken across the industry.

This is great news for papermakers, but the volatile earnings at pulp producers still need to be addressed. Just take a look at the swings in the pulp companies' earnings between 1999 and 2000, some of the percentage changes are in the three-digit zone. To their credit, pulp producers have worked hard to control capacity and pitch their product as a specialized item rather than a commodity, but the rollercoaster earnings ride is not over for them it seems.

New look

Analysts are starting to recognize the efforts that the industry is making and urging investors to come back and look again at pulp and paper stocks. At the end of the mid-year vacation, analysts on both sides of the Atlantic were urging investors to jump on the pulp and paper bandwagon.

According to the investment experts, the market had reached the bottom of the cycle, or was close to it, and investors were advised to take advantage of the potential upside across many stocks. Some analysts predict that commodity markets will rebound in 2002 and the measures taken by producers now to cut capacity, trim down costs and so on, will leave them in a good growth position at that time.

The message seems to be more positive than just "buy stocks while they're cheap". Instead, analysts are pointing to the changes in the industry and talking of longer term benefits that will impact results long into the future.

Inevitably, the final test rests with the markets. And even if high tech stocks are no longer the only show in town, much work is needed to convince investors that pulp and paper is worth serious investigation ahead of medium and large cap stocks in other sectors. Some powerful arguments will still have to be made, but this year's results will show something of the market's potential.