071022 parthasarathy financial tappi jacksonville

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FINANCIAL AND VALUE METRICS BASED PERFORMANCE EVALUATION OF NORTH AMERICAN PULP AND PAPER COMPANIES AND IDENTIFICATION AND ADJUSTMENT OF DEFICIENCIES TO COMPETE IN THE GLOBAL MARKET PLACE V.R. (PERRY) PARTHASARATHY, PhD WEYERHAEUSER COMPANY PORT WENTWORTH, GA 31407

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Page 1: 071022 Parthasarathy Financial TAPPI Jacksonville

FINANCIAL AND VALUE METRICS BASED PERFORMANCE

EVALUATION OF NORTH AMERICAN PULP AND PAPER COMPANIES

AND IDENTIFICATION AND ADJUSTMENT OF DEFICIENCIES TO

COMPETE IN THE GLOBAL MARKET PLACE

V.R. (PERRY) PARTHASARATHY, PhD

WEYERHAEUSER COMPANY

PORT WENTWORTH, GA 31407

Page 2: 071022 Parthasarathy Financial TAPPI Jacksonville

“YOU CAN’T MANAGE WHAT YOU CAN’T MEASURE.”Knowledge @ Wharton, September 6, 2006

Page 3: 071022 Parthasarathy Financial TAPPI Jacksonville

In any industry cyclical or otherwise, the winners are the “Atomizers” focusing

on segments where they can achieve dominant position even though they may

hold only a small fraction of the assets or revenue. The companies that create

value become “Leaders” irrespective of their size, and the “Under Achievers”

of the industry have to follow the model of the “Leaders” even though they

may be the largest; this is the only way the companies can deliver the

promised “value proposition” to their stakeholders.

Campbell and Hulme, The McKinsey & Co

Page 4: 071022 Parthasarathy Financial TAPPI Jacksonville

There is not a single perfect measure to describe different aspects of

performance of a Company. It is recommended that a framework of economic

and accounting measures is used to describe performance. In using these

metrics, it is important to understand the impact of factors outside

management’s control and exclude them in accessing how a company is

doing.

Copeland, Koller and Murrin in “Valuation – Measuring and Managing the Value of Companies”.

Page 5: 071022 Parthasarathy Financial TAPPI Jacksonville

FINANCIAL METRICS

OPM = Operating Profit Margin, %

NOPLAT= Net Operating Profit Less Adjusted Taxes, %

ROI = Return on Investment, %

ROE = Return on Equity, %

VALUE METRICS

EVA = Economic Value Added

MVA = Market Value Added

TSR = Total Shareholder Return

SVC = Shareholder Value Creation (Risk Adjusted Basis)

FCF = Free Cash Flow (Current and Future (Forecasted))

To take the “CAP” effect, Value Metrics are calculated as ratios.

EVA/TIC = Economic Value Added/Total Invested Capital

MVA/MV of E = Market Value Added/Market Value of Equity

TSR = Total Shareholder Return

SVC/CR = Shareholder Value Creation/Return on Capital

FCF/EBITDA = Free Cash Flow/Earnings Before Interest, Taxes,

Depreciation and Amortization

Page 6: 071022 Parthasarathy Financial TAPPI Jacksonville

Common equity is the cheapest yet the largest value distribution in the Enterprise

Valuation (EV) of a company with multiple business segments. With continued poor

performance, a company will eventually lose significant shareholder equity (common EV)

which would force it to raise capital from other sources (like junk bond, etc.). Such a

capital is expensive and would make it difficult for the company to post positive EVA.

Value of the

Operating Units

750*

450

350

250

200 250

1750

400

200

1150

Corporate

Overhead

TOTAL = 2000

Enterprise

Value

Value

Distribution

Common

Equity Stock

Preferred

Stock

Debt

Operation A

Operation B

Operation C

Operation D

Convertible Securities

*all values in million US$

EXHIBIT 1.

Valuation of an

Enterprise with

Multi-Business

Segments

Source: Copeland, Koller and Murrin in “Valuation – Measuring and Managing the Value of Companies”. John Wiley Press, NY 2003.

EQUITY FLIGHT IS REAL

Page 7: 071022 Parthasarathy Financial TAPPI Jacksonville

By any stretch of measurement, value and/or financial, the performance of North

American P&FP Industry, to put it mildly, is anemic. The industry destroyed EVA over the

years and even with the current price support for its products, it will take a long time for

the industry to gain positive EVA.

THE STATE OF NA P&FP INDUSTRY

Comparative EVA Analysis

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

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ILE

S*

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US

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illi

on

s

* Non-Alcoholic Beverage

** Basic and Diversified

FO

OD

PR

OC

ES

SIN

G

*** Specialty Textiles and Non-Wovens

EXHIBIT 2.

NA P&FP Destroyed

EVA of More than

US$ 20 Billion

Page 8: 071022 Parthasarathy Financial TAPPI Jacksonville

For a 10-year period (1994 to 2004), the ROTC was 5.8% in comparison to a WACC of

8.6%. In all, the industry earned only twice over a 30 year period higher ROTC than

WACC and only once between 1994 and 2004. The industry has returned 37% less than

the WACC during this period.

THE STATE OF NA P&FP INDUSTRY

EXHIBIT 3.

ROTC is Lower Than

the Cost of Capital:

Value is Being

Destroyed

1988 19921990 19961994 1998 2000

0

12.0

9.0

6.0

3.0

15.0

Industry WACC = 10.8%

Industry ROTC Average = 7.1%

% R

etu

rn

Source: BDCI Date Base. Value Performance Based on 47 NA/ Canadian/ European Companies

Value is Being Destroyed – The Industry’s Returns are 37% Below the

Weighted Average Cost of Capital (WACC)

2002 20041988 19921990 19961994 1998 2000

0

12.0

9.0

6.0

3.0

15.0

Industry WACC = 10.8%

Industry ROTC Average = 7.1%

% R

etu

rn

Source: BDCI Date Base. Value Performance Based on 47 NA/ Canadian/ European Companies

Value is Being Destroyed – The Industry’s Returns are 37% Below the

Weighted Average Cost of Capital (WACC)

2002 2004

Page 9: 071022 Parthasarathy Financial TAPPI Jacksonville

o The industry’s record on MVA (Market Value Added) is no better than its record on EVA.

o The MVA in 2003 was US$ 9.71 billion in 2003. The up tick in MVA/EC (the so called “Rate of

Market Capitalization” = an efficiency measure as to how the Economic Capital (EC) is

converted to market value) between 2002 and 2005 is an indication to shareholders guarded

belief that future performance would be better than in previous nine (9) years

o The ratio of MVA/EC, if greater than (>) 1 indicates value being created but less than (<) 1 is an

indication of value destruction.

THE STATE OF NA P&FP INDUSTRY

EXHIBIT 4.

ROTC is Lower Than

the Cost of Capital:

Value is Being

Destroyed

Page 10: 071022 Parthasarathy Financial TAPPI Jacksonville

o In 1988 to 2004, P&FP industry’s Return to Risk were worse than that of the other benchmarked

industries except textiles. Even the steel and homebuilding sectors that were lagging the P&FP

industry, have reversed course in the past 10 years, improving their value position and out

performed the P&FP industry significantly

THE STATE OF NA P&FP INDUSTRY

EXHIBIT 5.

P&FP Industry Has

Returned Poorly

Relative to the Risk

of Investment(Source: VLI Data Base and

BDCI Data Base)

Comparative Risk versus Return Analysis

30

50

70

90

110

130

150

170

HO

US

EH

OLD

PR

OD

UC

TS

FO

OD

PR

OC

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SIN

G

BE

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GE

*

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EC

IA

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CH

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PU

BLIS

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CH

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WS

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MIN

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BU

ILD

IN

G

ST

EE

L

P&

FP

TE

XT

ILE

S

Re

turn

/Ris

k (

ER

/WA

CC

), %

* Non-Alcoholic Beverage

** Basic & Diversified

Page 11: 071022 Parthasarathy Financial TAPPI Jacksonville

o Given the drubbing that the investors had taken in investing in new technology start-ups and other

dot com investments, one troubling aspect of the P&FP Industry is that it suffers poor valuation

relative to investment in other industries but for textiles.

o The driving factor behind this poor valuation is the Capital Turnover (CT = Sales/EC) which is one

of the lowest among the benchmarked manufacturing industries

THE STATE OF NA P&FP INDUSTRY

EXHIBIT 6.

Capital Turnover

(Indexed) for the

Other Manufacturing

Industries as

Compared to P&FP

Industry

Capital Turnover (CT) for the Industry Considered

(1994-2003)

0

0.5

1

1.5

2

2.5

3

3.5

Ca

pit

al T

urn

ov

er,

CT

(Sa

les

/EC

)(R

ati

o)

CT is indexed with respect P& FP Industry (P&FP Index =1.0)

Page 12: 071022 Parthasarathy Financial TAPPI Jacksonville

o The P&FP industry could never be able to exploit shifts in supply and demand situation because

the producers have always invested their excess cash flow back into capacity increases rather

than investing in product development, R&D, developing new markets for the products or priming

the supply chain.

o The new capacities in the P&FP industries have often come on line all at once in big chunks and

that too at the start of the recovery from the trough in business cycle, thereby chocking off any

sustainable recovery. This has perpetuated price and earnings volatility ( see the next exhibit).

THE STATE OF NA P&FP INDUSTRY

EXHIBIT 7.

Capital Spending is

Decreased and R&D

Spending is Flat but

Insignificant

1990 19941992 19981996 2000 2002

0

8.0

6.0

4.0

2.0

10.0

Capital Spending as % of Sales = 4.45% (Average)

R&D Spending as % of Sales = <0.85% (Average)

% o

f N

et

Sale

s

Source: BDCI Date Base. Value Performance Based on 14 NA/Canadian Companies

NA Capital Spending as a % of Sales has Fallen to its Lowest Point and

R&D Spending as a % of Sales is Flat but Miniscule

2004

Page 13: 071022 Parthasarathy Financial TAPPI Jacksonville

o These boom and bust cycles have consequential effect on valuation and the viability of the

industry in many ways.

(1) Cash is “Automatically” and unjustifiably reinvested when available, thus tipping the

supply-demand balance.

(2) The Return on Invested Capital (ROIC) is very sensitive to early year cash flows and

the volatility of the cycle makes project timing and therefore adequate returns

difficult.

(3) The industry continues to grow value destroying businesses instead of re-deploying

the assets or fixing them.

(4) Operating profit volatility increases the risk of equity investment in the business and

therefore, increases the cost of equity capital

THE STATE OF NA P&FP INDUSTRY

EXHIBIT 8.

Volatility of Net

OPM for the

P&FP Industry (Source: VLI Data Base, BDCI

Data Base and 2005 Pulp&Paper

Global Fact & Price Book)

Net Operating Profit Margin (NOPM)

0

1

2

3

4

5

6

7

8

9

Pe

rce

nt

Average = 4.7%

Page 14: 071022 Parthasarathy Financial TAPPI Jacksonville

o The industry performance is the cumulative performance of individual companies. Despite the fact

that the industry performance is poor, there are individual companies within the industry that

performed better or superior to its peers. In this study, 27 individual P&FP companies were

compared and their performance ranked. To keep the anonymity of the companies, they are

represented by letters A to AA with their 2005 revenue (audited) detailed . Most of the data used

in preparing this research came from public domain documents including annual reports,10K

filings, etc., The companies were ranked based on certain Value and financial metrics with each

metric weighted to their relative importance to the “Valuation” process (see next exhibit)

INDIVIDUAL COMPANY PERFORMANCE

EXHIBIT 9.

List of 27 Companies

with their FY 2005

Revenue

Page 15: 071022 Parthasarathy Financial TAPPI Jacksonville

FINANCIAL METRICS

OPM = Operating Profit Margin, %

NOPLAT= Net Operating Profit Less Adjusted Taxes, %

ROI = Return on Investment, %

ROE = Return on Equity, %

VALUE METRICS

EVA = Economic Value Added

MVA = Market Value Added

TSR = Total Shareholder Return

SVC = Shareholder Value Creation (Risk Adjusted Basis)

FCF = Free Cash Flow (Current and Future (Forecasted))

To take the “CAP” effect, Value Metrics are calculated as ratios.

EVA/TIC = Economic Value Added/Total Invested Capital

MVA/MV of E = Market Value Added/Market Value of Equity

TSR = Total Shareholder Return

SVC/CR = Shareholder Value Creation/Return on Capital

FCF/EBITDA = Free Cash Flow/Earnings Before Interest, Taxes,

Depreciation and Amortization

Page 16: 071022 Parthasarathy Financial TAPPI Jacksonville

o Weighted ranking of the companies based on four key financial metrics (see previous exhibit for

the list of value and financial metrics) is summarized below. Companies S, T are ranked lower

than the Company M (index = 1.00) and Companies G, B, C and K while ranked above M, only

slightly. These companies are weak performers in all the four key financial metrics and were

responsible for pulling down the average performance of the P&P industry as a whole.

RANKING BASED ON FINANCIAL METRICS

EXHIBIT 10.

Weighted Ranking

(Indexed) For NA

P&FP Companies

Based on Four Key

Financial

Performance Metrics

Financial Metrics = % OPM, %

NOPLAT, % ROI and %ROE

Page 17: 071022 Parthasarathy Financial TAPPI Jacksonville

ROE VERSUS ROI

EXHIBIT 11.

ROE versus ROI

Matrix for the

P&P Companies

(PG and KMB is

included for

comparison)

o Return on Investment (ROI) is a long-term financial performance metric and used to calculate

the value metric EVA. Return on Equity (ROE) is a short-term performance metric and decides

the market capitalization (MVA/MV of E) and forward Price to Earning ratio (P/E) of the

company.

o The matrix between ROE and ROI can be used to compare the short- and long-term

performance of the companies. The companies that registered strong short- and long-term

performances (1st quadrant, I), companies that recorded strong short- but weak long-term

performance (2nd quadrant, II), companies that are lackluster in short- but strong in long-term

performance (3rd quadrant, III) and companies that are mediocre in both short- and long-term

performance (4th quadrant, IV)

-10

-5

0

5

10

15

20

25

-10 -5 0 5 10 15 20 25 30 35

%ROE

%R

OI KMB

PG

Z

D

T

S GM

A

C

W

E

U

L

H

I, Q

O

FK

B

Y

LOW HIGH

LOW

HIGH

J

N

I

II

III

IV

Page 18: 071022 Parthasarathy Financial TAPPI Jacksonville

VALUE METRICS

VALUE METRICS

EVA = Economic Value Added

MVA = Market Value Added

TSR = Total Shareholder Return

SVC = Shareholder Value Creation (Risk Adjusted Basis)

FCF = Free Cash Flow (Current and Future (Forecasted))

Page 19: 071022 Parthasarathy Financial TAPPI Jacksonville

EVA VERSUS MVA

EXHIBIT 12.

EVA versus MVA

Matrix for the

P&FP Companies

(PG and KMB is

included for

comparison)

o EVA decides the ROI realized by the company and dictates the cost of borrowing.

o MVA is an indirect measure of ROE, because any added market value would ultimately result in

top line (revenue) growth and significant bottom line profit (NOPLAT) under constant DDA

resulting in substantial increase in cash flow from operations.

o Increased revenue and NOPLAT growth will attract equity flow into the company. Also, an

increase in equity flow under constant debt will change the Debt to Equity ratio of the company

thus helping the companies to consistently post positive MVA.

o The relationship between EVA and MVA is depicted below and resembles the ROE

versus ROI matrix closely as depicted in Exhibit 11.

Page 20: 071022 Parthasarathy Financial TAPPI Jacksonville

VALUE METRICS: SVC OVER TSR

VALUE METRICS

TSR = Total Shareholder Return

SVC = Shareholder Value Creation (Risk Adjusted Basis)

SVC is an indexed metric and in a sense is the true TSR delivered by the

companies. To eliminate the influence of the size of the company (the so-

called “CAP Effect”), each company’s equity volatility (beta) is weighted and

indexed relative to the industry and sector volatility.

Page 21: 071022 Parthasarathy Financial TAPPI Jacksonville

SVC OVER TSR

There are at least three advantages in using SVC over TSR.

(1) SVC is an intrinsic metric like TSR but unlike TSR measures the

economic impact in absolute dollar terms. This allows the easy

comparison of companies of different sizes within the industry group.

(2) While the TSR reflects only the return to common shareholders, SVC

reflects the value created for all shareholders including the preferred

shareholders.

(3) SVC challenges the very notion that only large corporations have the

resources to realize their objective of focus or specialization.

SVC = ∆MC – Required ROIMEC1 – Shares Issued2 + Other Equity

Events3

1. The Required ROIMEC is calculated by compounding company’s initial equity market

value by the beta (ß) adjusted market index return; the same value adjustment is

made for share issuances, dividends and spin-offs starting on the issue date.

2. Includes both common and preferred issues

3. Other equity events include dividends, share (stock) buy-backs, spin-offs, etc.,

Page 22: 071022 Parthasarathy Financial TAPPI Jacksonville

SHAREHOLDER VALUE CREATION (SVC)

EXHIBIT 13.

The Big Three

Companies

Destroyed More than

US$ 27 Billion in SVC.(Source: ZACKS Investment

Research 2003, Forrester

Research 2003, BDCI Data Base,

Annual Reports 1998 -2005)

0

1 0

2 0

3 0

4 0

6 0

5 0

7 0

9 0

8 0

1 0 0

-1 0

-2 0

-3 0 U S $ -1 4 .4 B illio n

U S $ 1 .4 B illio n

U S $ 6 6 .5 0 B illio n

U S $ 5 5 .8 B illio n

U S $ 5 .7 B illio n

R e v e n u e

S V C

U S $ -1 4 .7 B illio n

T O P 35

1.9

4%

4.4

5%

N E X T 7

M ID D L E 1 7

in U S $ , B illio n s

43

.59

%

0

1 0

2 0

3 0

4 0

6 0

5 0

7 0

9 0

8 0

1 0 0

-1 0

-2 0

-3 0 U S $ -1 4 .4 B illio n

U S $ 1 .4 B illio n

U S $ 6 6 .5 0 B illio n

U S $ 5 5 .8 B illio n

U S $ 5 .7 B illio n

R e v e n u e

S V C

U S $ -1 4 .7 B illio n

T O P 35

1.9

4%

4.4

5%

N E X T 7

M ID D L E 1 7

in U S $ , B illio n s

43

.59

%

o The total SVC lost by the 27 P&FP companies over a 8-year period is about US$ 41.23 billion.

o Out of the 27 Companies, only five had a positive SVC

o The two of the largest P&FP companies (Companies K and M) had a negative SVC of about

US$ 14.4 Billion.

o It is not easy to compare the disposition of P&FP companies share prices to their FCF because

traditional value proposition models cannot be applied to valuation of cyclical industry. One such

process is comparison of market-to-capital to TSR ratio and as an extension, MC to SVC

Page 23: 071022 Parthasarathy Financial TAPPI Jacksonville

MARKET TO CAPITAL VERSUS TSR

EXHIBIT 14.

Market-to-Capital and

TRS for 15 leading NA

P&FP Companies.

o It is not easy to compare the disposition of P&FP companies share prices to their FCF

because traditional value proposition models cannot be applied to valuation of cyclical

industry. One such process is comparison of market-to-capital to TSR ratio and as an

extension, MC to SVC

0.0 0.2 0.4 0.6 0.8 1.0

M

1

43

2

T

K

W

H

Z

Market-to-Capital (Dec.2005) (Indexed)

Average Annual TSR (Jan.1989-Dec.2005) (Indexed)

-1.0

-2.0

3.0

2.0

1.0

0.0

4.0

Source: 1990 to 2005 Annual Reports

5.0

Kimberly-ClarkProcter & Gamble

L

S

A

D

B C

N

E

0.0 0.2 0.4 0.6 0.8 1.0

M

1

43

2

T

K

W

H

Z

Market-to-Capital (Dec.2005) (Indexed)

Average Annual TSR (Jan.1989-Dec.2005) (Indexed)

-1.0

-2.0

3.0

2.0

1.0

0.0

4.0

Source: 1990 to 2005 Annual Reports

5.0

Kimberly-ClarkProcter & Gamble

L

S

A

D

B C

N

E

Page 24: 071022 Parthasarathy Financial TAPPI Jacksonville

o Weighted ranking of the companies based on four key financial metrics (see previous exhibit for

the list of value and financial metrics) is summarized below. Companies S, T are ranked lower

than the Company M (index = 1.00) and Companies G, B, C and K while ranked above M, only

slightly. These companies are weak performers in all the four key financial metrics and were

responsible for pulling down the average performance of the P&P industry as a whole.

RANKING BASED ON VALUE METRICS

EXHIBIT 15.

Weighted Ranking

(Indexed) For NA

P&FP Companies

Based on Four Key

Value Performance

Metrics

Performance Metrics = EVA/TIC,

MVA/MV of Equity, SVC/CR and

TSR

Company

Weighted Scale Indexed Scale Rank

Kimberly-Clark 34.65 20.61 **

Procter and Gamble 39.38 23.42 **

D 43.03 25.60 1

Z 16.53 9.83 2

L 11.14 6.63 3

E 9.43 5.61 4

I 9.30 5.53 5

Q 9.30 5.53 5

H 9.07 5.39 7

F 5.86 3.48 8

U 4.96 2.95 9

C 4.75 2.82 10

N 2.49 1.48 11

O 1.68 1.00 12B 0.34 0.20 13

S 0.14 0.08 14

T (3.37) (2.00) 15

Y (3.56) (2.12) 16

G (4.24) (2.52) 17

K (4.94) (2.94) 18

A (6.73) (4.00) 19

M (10.46) (6.22) 20

W (24.89) (14.81) 21

Page 25: 071022 Parthasarathy Financial TAPPI Jacksonville

o Weighted ranking of the companies based on four key financial metrics (see previous exhibit for

the list of value and financial metrics) is summarized below. Companies S, T are ranked lower

than the Company M (index = 1.00) and Companies G, B, C and K while ranked above M, only

slightly. These companies are weak performers in all the four key financial metrics and were

responsible for pulling down the average performance of the P&P industry as a whole.

QUARTILE RANKING OF NA P&FP COMPANIES

EXHIBIT 16.

Quartile Ranking of

North American

P&FP Companies

Based on the

Weighted Strength

Index of Eight

Financial and Value

Performance

Metrics

Assigned

Proportional

Weight

0.45 0.52 0.03 1.00

Financial Metrics Value Metrics FCF/EBITDA Weighted

Scale

Strength

Index1

Quartile

Rank

COMPANY COMPANY Quartile Rank

Kimberly-Clark 24.60 20.61 0.94 21.82 4.50 Kimberly-Clark 1

Procter & Gamble 22.12 23.42 0.59 22.15 4.60 Procter & Gamble 1

1 Company A 3.55 (4.00) 1.65 (0.43) (0.14) 4 Company D 1

2 Company B 2.46 0.20 0.00 1.21 0.25 4 Company Z 1

3 Company C 2.62 2.82 0.50 2.66 0.55 3 Company E 2

4 Company D 13.98 25.60 0.59 19.62 4.07 1 Company H 2

5 Company E 7.84 5.61 0.83 6.47 1.34 2 Company I 2

6 Company F 3.94 3.48 2.85 3.67 0.76 3 Company L 2

7 Company G 1.98 (2.52) 3.64 (0.31) (0.06) 4 Company Q 2

8 Company H 6.70 5.39 3.06 5.91 1.23 2 Company U 2

9 Company I 6.70 5.53 0.00 5.89 1.22 2 Company C 3

10 Company K 2.79 (2.94) 0.00 (0.27) (0.06) 4 Company F 3

11 Company L 7.97 6.63 1.02 7.06 1.46 2 Company N 3

12 Company M 1.00 (6.22) 0.00 (2.78) (0.58) 4 Company O 3

13 Company N 4.17 1.48 0.57 2.66 0.55 3 Company A 4

14 Company O 4.73 1.00 2.12 2.71 0.56 3 Company B 4

15 Company Q 6.45 5.53 0.00 5.78 1.20 2 Company G 4

16 Company S (1.36) 0.08 0.11 (0.57) (0.12) 4 Company K 4

17 Company T (2.35) (2.00) 0.58 (2.08) (0.43) 4 Company M 4

18 Company U 9.64 2.95 0.76 5.89 1.22 2 Company S 4

19 Company W 3.14 (14.81) 1.81 (6.23) (1.29) 4 Company T 4

20 Company Y 4.59 (2.12) 0.90 0.99 0.21 4 Company W 4

21 Company Z 8.94 9.83 0.00 9.13 1.90 1 Company Y 4

Mean 4.74 1.98 1.00 3.19 0.66

Std.Error of Population Mean 0.85 1.71 0.25 0.71

Strength Index Ranking

Strength Index Quartile Position

>1.8 1

< 1.7 but > 1.2 2

< 1.2 but > 0.3 3

<0.3 4

Page 26: 071022 Parthasarathy Financial TAPPI Jacksonville

CONCLUSIONS

o

o On a micro level the health of the industry is dictated by the

performance of individual companies within its sector.

o The recent events in the equity market suggest that it is the

“winner-takes-all” economy and the P&FP industry is no exception.

o Across NA P&FP sector, a select few companies are creating

almost all of the new shareholder value; two of its largest players

are not presently among them.

o Two indicators were used.

o One is the ranking using five key financial measures, %OPM,

%NOPLAT, %ROE, %ROI and %FCF.

o The other is a measure using value metrics, EVA and MVA,

supplemented with TSR and SVC.

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CONCLUSIONS

o The profit drivers distinguish the “Leaders” from the

“Followers” and the “Trailers”. Profit drivers include, Capital

Turnover (CT), %OPM, %NOPLAT, ROI and ROE.

o Financial indicators like revenue growth and ROIC though

useful should be supplemented with strategic value drivers

like MVA to gauge where a company is heading and to

decide the course of action to maximize performance and to

enhance TSR.

o Almost 50% of the companies in the P&FP sector are value

destroyers including two of its largest. The P&FP industry

over an 8 year period destroyed EVA of more than US$ 20

billion, which makes barrowing capital for project financing

expensive; compounding with low ROI, the equity inflow to

the industry is one of the lowest among all manufacturing

industry as reflected in the poor MVA to MV of Equity.

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CONCLUSIONS

To become a global leader again, the

NA P&FP industry should focus on

delivering decent numbers on the five

key financial measures and the four

value measures.

Page 29: 071022 Parthasarathy Financial TAPPI Jacksonville

Thanks.

V.R. (PERRY) PARTHASARATHY, PhD

WEYERHAEUSER COMPANY

PORT WENTWORTH, GA 31407