Rethink

1
Rethink Discovery - IIIOpening Doors to
Innovation and Learning-- A Thought Leadership
Program Richard Phillips -- Keynote
North Carolina State University Pulp Paper
Foundation Annual Meeting -- October 10, 2002
Raleigh, North Carolina

2
Program Overview

• Introductory Remarks -- Background Program
  Overview Kathy Buckman Davis
• Keynote Richard Phillips
• Panel Session 1
• Innovation Pathways or Dead ends? Ben Thorp
• Panel Session 2
• Learning Doorways or Roadblocks? Mike Kocurek
• Summary Wrap-up Jim McNutt
• Adjourn

3
Rethink and Discovery III Keynote Where will
paper be made in the future?
Richard B. Phillips Senior Vice President
Technology International Paper
4
Product Life Cycle
Slowing Demand
Market Saturation
Market Decay
Growing Demand
Initial Market Penetration
Demand
Time
5
Global Demand for Paper Board
W. Europe
Asia
North America
E. Europe
Africa
Australasia
Latin America
Source Pulp Paper International July, 2001
6
Per Capita Demand
W. Europe
North America
Asia
E. Europe
Latin America
Australasia
Africa
Source Pulp Paper International July, 2001
7
Growth in Demand -- 1999-2001
Asia
E. Europe
W. Europe
North America
Latin America
Africa
Australasia
Source Pulp Paper International July, 2001,
2002
8
Relationship between PB Consumption and GDP
per Capita
Developing Economies
Developed Economies
Source ConsumptionPPI International Fact
Price Book, 2000 GDP Data
Euromonitor 2002
9
Relationship of Growth in --P B Consumption
and GDP 96 -02
Developed Economies
Developing Economies
Source ConsumptionPPI International Fact
Price Book, 2000 GDP Data
Euromonitor 2002
10
Slowdown of Growth in -- Mail
Source Jimenez and Morelli 10th Conference on
Postal Delivery and Economics Potsdam, June 2002
11
Consumption Growth -- 1996-2001
Developing Economies
Developed Economies
12
United States Growth in Demand -- 1990-2000
Source AFPA 2001 Statistics, October 2001
13
Growth of Packaging Materials
Plastics
Paperboard
Source Beverage Industry, Jan. 2002
14
Demand Summary

• Demand in Developed economies is stagnant and may
  be declining
• Demand in Developing economies will grow with
  expansion in GDP
• Developing economies represent the future demand
  growth

15
A New Dynamic

• Currency Valuations
• Rising Labor Costs in Developed Nations
• Investment in Asia in New Large-Scale Paper and
  Board Machines
• Industry Consolidation
• Asset Rationalization

16
Supply Side Basics
(1- Tax Rate) X Capital Turnover X Operating
Margin
Return on Investment

Where Capital Turnover Operating Margin
Profit Sales
17
Supply Side Basics
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Starting Out
I. Low Turnover High Margin
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Maturing
II. Higher Turnover High Margin
I. Low Turnover High Margin
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Aging
III. High Turnover Lower Margin
II. Higher Turnover High Margin
I. Low Turnover High Margin
21
Failed
III. High Turnover Lower Margin
II. Higher Turnover High Margin
IV. High Turnover Low/No Margin
I. Low Turnover High Margin
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Whats Changed?
III. High Turnover Lower Margin
II. Higher Turnover High Margin
IV. High Turnover Low/No Margin
I. Low Turnover High Margin
23
Personnel Costs Uncoated Paper
Source Jaakko Poyry
24
Consequences
Source AFPA 2001 Statistics, October 2001
25
Linerboard Closures North America
High Turnover Lower Margin
Higher Turnover High Margin
High Turnover Low/No Margin
Low Turnover High Margin
Source Deutsche Bank Securities Report, July 1,
2002
26
Trim/Speed Analysis for Linerboard
Source Jaakko Poyry
27
Change in Exports -- to China
China
USA
28
Capacity Changes -- 2002-2004Annual Tonnes
W. Europe
North America
Asia
E. Europe
Latin America
Africa
Australasia
Source Various Company Announcements
29
Change in U.S. Dollar ExchangeRate vs.
Competitors
30
Keys to Excellence

• Companies must Excel in Three out of Four
• Superior Technology
• Customer Focus
• Engaged Workforce
• Efficient Assets

31
Top 10 Imperatives for the USAPaper Industry --
10
32
Additional Revenue Potential
Inventory and growth exceed removals for
foreseeable future (Southern Forest Resource
Assessment, 2001)

• Leverage forest and product resources to capture
  CO2 credits and revenue
• Generate revenue from other land assets
  wetlands, wind farms, recreational uses

33
Top 10 Imperatives for the USAPaper Industry --
9
34
Paper and Board Recycling -- Surpass all other
Materials
2000 Recycling Rates
50.0
45.0
45.4
40.0
35.0
35.4
30.0
25.0
20.0
23.0
15.0
10.0
5.0
5.4
0.0
Paper
Metals
Glass
Plastic
Source EPA MSW 2000
35
Recycling More Used Paper
Generation
Potential
Recovery
Source EPA 2000 MSW data
36
Top 10 Imperatives for the USAPaper Industry --
8
37
Top 10 Imperatives for the USAPaper Industry --
7
38
Subsidies
Source Fiber Pulp Industry July, 2002
39
Top 10 Imperatives for the USAPaper Industry --
6
40
Sustainable vs Unsustainable Forestry
700
600
500
400
Non-certified
(million cubic meters)
Fiber
300
Certified
200
Fiber
100
0
Internationally Traded Timber
(WWF, G8 and China combined)
41
Top 10 Imperatives for the USAPaper Industry --
5
42
Product Technology

• Protecting our Markets
• Corrugating Packaging Alliance
• Corrugated v. Returnable Plastic Containers
• Growing Market Share
• Creating a competitive advantage with product
  enhancement
• Expanding our markets
• Entering areas typically serviced by other
  products

43
Shift to Lighter Basis Weight Linerboard
44
Top 10 Imperatives for the USAPaper Industry 4
45
New Markets Where Water Costs More than
Gasoline
46
Top 10 Imperatives for the USAPaper Industry --
3
47
Branding can make a difference
48
Top 10 Imperatives for the USAPaper Industry 2
49
Asset Portfolio
50
Top 10 Imperatives for the USAPaper Industry
51
U.S. Labor Cost Higher Than Competitors
Source Jaakko Poyry