The Top 100 forest, paper and packaging (FPP) companies from around the world saw net income tumble from positive $13.8 billion in 2007 to record losses of $8.0 billion in 2008.

That’s the first time industry earnings have the been negative since PricewaterhouseCoopers began its annual industry survey in 1996.

This year’s survey shows that total sales were $357 billion in 2008, up from $333 billion in 2007. Cash flow from operations totalled $26 billion in 2008, down from $31 billion in 2007. Operating income of $21 billion represented a decrease of 19% compared to 2007.

Average return on capital employed (ROCE) dropped from 4.9% in 2007 to 2.4% in 2008. Only six companies earned a return of 10% or more in 2008, compared to 14 in 2007.

“The sharp decline is mainly due to the impact of losses realized by major players in many of the mature markets as a result of low demand, goodwill and fixed asset impairments, restructuring, severance and high operating costs,” says Craig Campbell, leader of PwC’s [erformance improvement practice for the global forest and paper industry, and author of the PwC survey. “This year’s survey results reflect the significant challenges faced by the sector, with the PwC Top 100 companies’ net income sliding deep into the red, as well as return on equity and ROCE falling sharply from the already low levels seen in 2007.”

Companies achieving ROCE greater than 10% in 2008 were:

• Kimberly-Clark Mexico (Mexico): 22.3% in 2008 vs. 20.3% in 2007;
• Kimberly-Clark (U.S.): 14.8% in 2008 vs. 15.2% in 2007;
• Sino Forest (China/Canada): 12.7% in 2008 vs. 12.8% in 2007;
• Lee & Man Paper (China): 12.4% in 2008 vs. 15.0% in 2007; and
• Sonoco (US): 10.3% in 2008 vs. 10.5% in 2007

While Canada’s forest and paper industry realized improvements in product prices during the first half of the year, the onset of the global financial crisis and reduction in demand resulted in inventory increases and reductions in sales volumes for the last half of the year.

“Many companies recorded write downs and asset impairments, as companies looked to restructure and clean up their balance sheets,” says Campbell. “Not only did the much anticipated recovery in the U.S. markets served by Canadian producers not materialize in 2008, a number of Canadian producers actually described the year as the most difficult and worst downturn in recent history.”

The 11 Canadian companies accounted for 8.4% of PwC Top 100 sales. Their sales value of $30 billion was 8.7% greater than the comparable value of the 11 in 2007, however much of the $2.4 billion increase in sales is attributable to the inclusion of full year results for Abitibi, which merged with Bowater in October 2007. If the AbitibiBowater results are excluded, sales remained flat compared to prior year.

Net losses rose 355% to $4.0 billion (2007: $0.9 billion). All 11 Canadian companies reported a net loss in 2008 while only eight of them experienced net losses in 2007. Net losses were deepened by a stronger Canadian dollar, goodwill and other asset impairments charges. AbitibiBowater reported the most significant decline in profitability, with a net loss of $2.2 billion in 2008, compared with a 2007 net loss of $0.5 billion. The company sought creditor protection proceedings in April 2009.

Overall ROCE decreased to -5.0% in 2008, down from 0.0% in 2007. Cascades (primarily packaging) was the only Canadian company in the PwC Top 100 to report a positive ROCE in 2008 at 0.9% (4.6% in the previous year), followed by Domtar (primarily fine paper) at 0.0% (4.5%). All other companies reported a negative ROCE.

IE