Creating Lasting Value in the Paper Industry

Transcription

1 Creating Lasting Value in the Paper Industry Ketil Gjerstad, Partner und Managing Director (Oslo) Roland Haslehner, Partner und Managing Director (Vienna)

2 Creating Lasting Value in the Paper Industry 1 The paper sector has been under pressure for the entire past decade. While the MSCI World Materials Index has risen by 71% since 2 a development that can be attributed largely to the exploding demand in China the MSCI Paper & Forest Products Index shrank by 37% over the same period. In addition, among the 21 industry sectors included in the annual BCG Value Creators Report 1, the paper sector generated the lowest average total shareholder return (TSR) of the past five years. However, the paper and forest product industry also has its winners and losers, as shown in Exhibit 1. Exhibit 1: Paper and forest product segment under long-term pressure Declining share prices... and broadly dispersed value creation Share price index (2 = 1) Preboom Commodity boom Decline MSCI World Materials Index MSCI Paper & Forest Products Index % -37% First quarter = 19.4% Median= 12.3% Third quarter = 4.% Three-year TSR 1 Smurfit 14% Metsa Board 13% Weyerhauser 22% Ahlstrom 2% IP 17% Canfor P&P 27% DS Smith 37% Mondi 34% West Fraser 3% PCA 22% SCA 18% Domtar 17% K-C 14% RockTenn 13% (5) (25) 25 Annualized TSR (Dec 29 Dec 212) 1. Background of the curve: S&P 5, based on data as of December 212; all TSRs are indicated in the primary trade currency of the respective company Source: Bloomberg; Compustat; Thomson Reuters Datastream; BCG ValueScience Center Of course, the picture differs considerably depending on the paper quality, region, and company some companies also show a positive development, driven by a very low base in 29. A closer look at the details is therefore required. In a recent study, we attempted to identify the key drivers of value creation in the TSR of 42 leading companies in paper and forest products over the past three years (21 212), across different paper qualities and different regions. 1 The 14th annual BCG Value Creator Report was published in September A player who operates several business units in the forest/paper sector.

3 Creating Lasting Value in the Paper Industry 2 We arrived at three insights, which are presented in Exhibit 2. First, packaging paper and cardboard generate the highest TSR over the year which is hardly surprising. However, what is remarkable is that it is also possible to achieve an attractive TSR as a (paper) conglomerate2 or in other paper qualities besides pure newspaper printing, printing, and writing paper companies, which generate considerably lower returns. Second (and this is less obvious), paper companies in North America achieved higher returns, both on average and in the minimum and maximum values. This is partially driven by the previous economic downturn, but also by the partially successful restructuring efforts (e.g., Weyerhauser). European companies were subject to a higher dispersion, but here, too, the average TSR was higher than in Asia. Finally, if you look at the winners in the respective subsegments, what do they do differently? In short: They create balance and act accordingly. The companies with the best value creation not only grow faster than the market, they also take wellbalanced steps. In particular, they implement consistent cost programs, refocus their portfolios, and ensure continuous moderate revenue growth as well as sustainable EBITDA margins, which earns the confidence of the financial markets. The sum of these (small) steps leads to a top position in value creation. Exhibit 2: Broken-down view on value creation By quality By geography By value driver Three-year TSR 4% 2% Three-year TSR 4% 2% Broken-down three-year TSR dispersion 12% = Segment = Top 5 8% 4% % % % -2% -2% -8% Forest product Newspaper, printing, and writing paper Packaging paper and cardboard Woven fabric Source: BCG ValueScience Center; BCG analysis Consolidated North America Europe Asia Latin America -12% Revenue increase EBITDA margin change Multiple EV/ EBITDA changes Cash flow contributions 1

4 Creating Lasting Value in the Paper Industry 3 So in light of the volatility in the industry, overall it is about balanced and flexible measures, but also about the commitment to changing and actively shaping the sector. The paper and forest products sector is one of most "unpredictable" in the industry (measured by the average error rate in EPS forecasts over a 1-year period) and shows a moderate degree of "manipulability" (measured based on multiple factors such as market concentration/fragmentation, growth, and size effects), which can be seen as a reference value for a company's capacity to influence the industry as a whole. Exhibit 3 shows the paper and forest product industry in comparison to other industries and illustrates typical strategy approaches per quadrant. Exhibit 3: Paper sector impacted by instability and manipulability Industry classification Unpredictability Adaptive strategy "Adaptive" Biotechnology "Shaping" Shaping strategy Computer and peripherals IT services Flexibly react to an unpredictable Paper and forest products Metals and mining Proactively shape an unpredictable Automotive components Classical strategy Media Drugs Visionary strategy Choose a position within a stable Automotive Insurance Food Hotels, restaurants, and leisure Energy sectors Work towards realization of a long-term vision "Classical" "Visionary" Manipulability Note: Unpredictability = volatility of market capitalization returns; manipulability = industry concentration - economies of scale + earnings increase; rank based on an industry/ matrix 2 From the point of view of adaptive strategy, manufacturers of paper and forest products should define their measures based on a catalog of seven questions and actively shape their competitive position: 1. Is your strategy flexible enough to be successful also in a changing market or are you "placing your bets" on a specific market development? 2. Do you evaluate your portfolio based on several different future value potential scenarios, or based on a single market forecast? 3. Are you developing quantifiable competitive advantages or ones that can only be described in qualitative terms? 4. Does your cost program only improve efficiency or also effectiveness? 5. Does your pricing reflect the individual market potential per product and customer, or do you implement standardized list prices? 6. Have you put your business model and organization up for discussion, or are your structures the same as five years ago?

5 Creating Lasting Value in the Paper Industry 4 7. Have you defined clear elements for achieving your ambitions in terms of TSR and have you also achieved them in the past? A critical and honest reflection along these questions is often the starting point for an adaptive strategy. You may contact the authors by at: Gjerstad.Ketil@bcg.com Haslehner.Roland@bcg.com