Recovery at Most North American Forest and Paper Producers Continued Through 2013

Total revenues in 2013 for nine of the largest US forest products companies increased 4.8% relative to 2012.

May 5, 2014 - The recovery of the forest and paper industry continued through 2013 for the majority of North American forest products companies. Total revenues for nine of the largest US forest products companies increased 4.8% relative to 2012, while increases for selected producers in Western Canada and Eastern Canada were up year over year by 16% and 6.3%, respectively. Net earnings were also up for the majority of the North American companies in 2013.

However, the story wasn't as good for forest products companies in the rest of the world, as financial results were generally down in 2013, based on a sample of the larger producers. European producers showed revenues off by 3.8% in 2013 while revenues of Japanese forest products companies were down by 6.9% in 2013. Net earnings were also down in Europe; however, the Japanese producers reported increases in earnings due to cost savings.

The financial results for the first quarter ("Q1") of 2014 for the largest public forest products companies have not all been reported yet, but so far there have been mixed results. The strongest performance was in the U.S., where all nine of the largest companies sampled continued their upward trend in earnings. The downward trend in revenues continued in Europe and Japan in Q1 of 2014, compared with the same period in 2013, although earnings increased in both regions. Canadian forest products companies generally reported lower revenues and net earnings in Q1 of 2014 vs Q1 of 2013. In Western Canada, while results varied by company, companies that have reported to date show an aggregate decline of 14% in Q1 net earnings, dropping to CAD127.8 million for the quarter. Aggregate revenues were also down by 2%. Eastern Canadian producers reporting thus far have posted an aggregate loss of CAD45.8 million in Q1 of 2014, and revenues for the quarter were down by 1% over the same period last year. Difficult winter building conditions in Eastern regions have been blamed for some of the declines during the quarter.

"One of the big stories in Q1 of 2014 for global forest and paper producers is the remarkable financial performance of the U.S. players, with strong earnings growth in 2013 which continued through the first quarter of 2014," said Bruce McIntyre, partner and leader of PwC's forest, paper & packaging practice in Canada. "The aggregate net earnings for nine of the largest U.S. producers this quarter are USD1.28 billion, up a whopping 19% from the same quarter last year. Revenues were also up by 3% over the same period."

McIntyre added: "The financial strength of some forest and paper companies and generally positive outlook for the sector despite longer term economic uncertainties, has opened up opportunities for them to go on the acquisition trail."

The year of the big deal
The aggregate value of mergers & acquisition deals that closed in 2013 more than doubled from USD4.8 billion in 2012 up to USD10.4 billion in 2013. However there were fewer deals closed in 2013; 65 compared to 85 in 2012.

"2013 was definitely 'the year of the big deal', with the highest aggregate value of deals in the last 5 years," said Jason Boyer, a Vice President in PwC's Deals practice. "We believe the drivers for these deals are the availability of debt at low rates, strategic acquisitions to secure fibre supply, and the increase in demand for wood products in the U.S. housing sector and in Asia."

The deals occurring in the U.S. accounted for USD7.9 billion, or 76% of the 2013 total. Examples of large deals which closed in 2013 are the sale of Longview Timber to Weyerhaeuser for USD2.7 billion; Georgia-Pacific's purchase of Buckeye Technologies for USD1.6 billion, and KapStone Paper and Packaging's purchase of Longview Fibre for USD1.5 billion. In addition, there were a number of large deals announced in 2013 that have not yet closed, including Plum Creek Timber's acquisition of part of MeadWestvaco for USD1.1 billion.

Boyer added: "The big industry deals aren't done yet. We believe there will be more large deals in 2014. In fact, just days ago Oji Holdings and Innovation Network Corporation of Japan announced the purchase of Carter Holt Harvey's pulp and paper business and other related assets in New Zealand. That deal is estimated to be worth close to NZ$1 billion."

Transformative global trends
Along with a return to a more positive financial picture and increased M&A activity in the sector, CEOs at some of the world's largest public forest and paper companies identified three major trends that are transforming their businesses:

  • Technological advances, such as the digital economy, social media, mobile devices and big data.
  • Resource scarcity, coupled with climate change and the need to minimize their environmental footprint.
  • Demographic shifts, including growth in the emerging markets, urbanization and an aging workforce.

McIntyre concluded: "The CEOs PwC recently surveyed said one key aspect of meeting the challenges of these major trends is to invest in technology and people who will drive innovation. Innovative ideas, combined with the right investments, are needed to create new products, expand markets, and provide a pipeline of fresh opportunities for the future. Some companies are already taking steps in this direction."

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