Impact of Financial Market Developments and Economic Downturn

As at November 2008, the FPP sector was feeling the twin impact of the credit crisis and the impact of the economic downturn, but that impact varies according to a company's position in the FPP value chain. For example wood products producers have already suffered due to the downturn in building activity, producers of printing papers will likely suffer due to contraction in advertising spend and accelerated substitution with low cost digital alternatives; and moving closer to the consumer, packaging for FMCG products and tissue can be expected to be more resilient.

The industry's response to the downturn will focus in the short term on cash generation, as businesses seek to cut or defer capital spend, unessential maintenance and reduce working capital. Companies with high debt levels and/or weak cash generation are the most vulnerable, as are those already under severe margin pressures coming into the downturn .

Moving through the downturn, production downtime can be expected to increase, followed by cost and permanent capacity adjustments, focusing on companies’ highest cost capacity. In some cases these steps will be essential to ensure the survival of the business. As the downturn proceeds, companies will be spurred to start or continue with business simplification and operational efficiency programmes. Commercial and supply chain cost will be particular targets.

Initially, many businesses will be helped by falling raw material (fibre, resins, metals, recyclates), energy and other input prices. These will pass through into sales prices, but where there is no contractual pass through mechanism (notably in paper products), expect producers to resist price reductions. Success here will depend upon supply discipline; sectors with higher supply concentration, or at least better management discipline, can be expected to chase down prices less than where supply is fragmented.

Despite tough conditions, some deal activity can be expected to continue, with both the acquisition of distressed businesses by stronger players and more strategic deals could happen at low values where consolidation is already well overdue.

Smart companies will be using this period to undertake more rigorous scenario planning and possibly corporate reorganisation and restructuring.

In short, in the sectors worst affected especially, the immediate focus will be on survival; after that leading companies will be aiming to come out of the downturn in a fitter condition.

How PwC can help

PwC Forest Paper & Packaging network of specialists bring an expert understanding of the sector throughout the value chain and are well positioned to consult on the strategic response needed to manage the effects of the downturn, both in the short and long term.

With our corporate strategy expertise, we assist companies with, among other matters, scenario planning, competitive cost assessment, option generation, portfolio reviews as well as with restructuring and reorganisation.

Our experts undertake treasury, debt and working capital reviews to help you realise or unlock cash generation potential both in the short term and sustainably.

We also support companies facing immediate or prospective liquidity crises, to deliver financial restructuring solutions and help to build a platform for recovery.

Our Performance Improvement practice leverages our knowledge of forest, paper and packaging industry business processes to address cash generation and cost reduction through operational improvements.

PricewaterhouseCoopers Transaction Services and Corporate Finance teams bring unparalleled strength – in people, knowledge and services – to ensure your deal decisions are informed ones and your investments are successful.

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