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Digitization a Test of Dynamism for Printing Paper Companies

Published Date 8/26/16 5:23 AM

Backgrounder

In our previous blog – ‘Digitization of Content – a bane for the Paper Industry’, Televisory brought out the decadal change within the operational environment of the paper industry, with respect to the printing and related segments. And highlighted in the conclusion that the companies continue to look for alternatives for survival. Exploring further with this background, we are underlining the measures adopted by the affected paper companies whilst they face a decline in demand for the printing paper and related segments.

Summary

During the past decade, revenue for the printing paper and related segments was stagnant in the first half and tumbled significantly in the second half. The industry responded to the decline in demand by closing down excess capacities and sell-offs to behemoths, few relocated capacities in developing countries – a better-growing market.

The above measures resulted in the growth of the operating margins for the printing paper segment by 150-200 basis points during 2007–2015.

A few affected companies also converted excess capacity in this segment to more profitable paper products. This resulted in the revenue composition to change over the time period. This also led to improvement in their performance outlook.

Printing Paper – the Largest Contributor to the Revenue Continue to Decline

Televisory examined 13 companies (refer appendix) which had large exposure to printing paper segment, a decade ago. This segment formed almost 60 per cent of the total revenue for these companies, making them heavily reliant on this segment. However, as indicated in the previous blog, revenue from printing paper segment declined at about 4 per cent CAGR between 2007 to 2015.

Industry Moulded its Methods to Cope with Declining Demand in Printing Paper Segment

The companies adopted a slew of measures which enabled them to stay afloat:

1.Cost optimisation:

Rationalization of employee costs
Backward integration to reduce volatility and overall pulp costs
Installation of new machinery to improve efficiency

2.Capacity consolidation:

Companies which could not find a market for their print paper production gradually reduced capacities.

3.Launch of value added products:

To sustain the declining prices in newsprint segment, companies launched newer variants like lower grammage, high-value print paper.

4.Relocation:

Relocation/acquisition of capacities in high-growth emerging markets.

5.Conversion of capacities:

Conversion of printing paper capacities into more profitable paperboard, labels, packaging paper capacities, tissues.

Declining prices for Print Paper nudged companies to other lucrative segments

Barring a few volatile periods, the print paper segment has been on a decline due to the emergence of the digital media. However, other segments of the paper market like labelling, packaging – corrugated and paperboard, etc., are on the rise. This is due to increase in demand for quality and branded products, for which packaging plays an important role.

Prices of Print Paper Segment on decline….

(Source: Televisory Research, Bloomberg)

….. while Prices for Packaging Paper on slow uptrend

(Source: Televisory Research, Bloomberg)

Higher profitability in the Packaging and other segments as compared to Print Paper

Televisory examined the operating margin trend in the print paper as well as the packaging segment of 13 companies which represented a well-distributed revenue range from USD 275 mn to USD 6,658 mn (FY2015). (Packaging segment comprises Paperboard, Cardboard, Corrugated Boards, Labelling, etc.).

Operating Margin for Packaging continues to grow while Print paper stagnates

(Source: Televisory Research, Bloomberg)

(Companies considered: Refer appendix)

A shift in consumer preference from physical to digital media, increased digitization of content and declining demand for print paper has squeezed the revenue of the print paper segment. Although, the companies have tried to contain costs and improve profitability, the efforts were not much helpful. Meanwhile, packaging segment has emerged as a knight in the shining armor, supported by an increase in demand. Televisory’s research estimates that operating margins for the print paper have grown only 150 – 200 bps against the estimated growth of 550 – 600 bps for the packaging paper segment between 2007 to 2015. (100 bps = 1 percentage point).

Packaging segment – a savior for the plunging paper companies

In the wake of the declining demand, dipping revenue and stressed margins, paper producers have gradually moved away from the print paper segment and diversified in the packaging segment.

Share of Print paper in industry revenue makes way for Packaging segment

(Source: Televisory Research, Bloomberg)

(Companies considered: Refer appendix)

Televisory’s research estimates that the loss in the proportion of revenues from printing paper segment (14% point) has been gained through the packaging and related paper segment, during 2007-2015 (the two segments contributed 83% of the revenues between 2007 to 2015). We expect this inevitable shift to continue further due to:

Change in consumer preferences from print media to digital media
Increasing internet penetration in developing nations
Increasing demand for quality, branded retail and food products
Higher operating margins in packaging segment as compared to the print paper segment

Financial strength of the companies improved despite decline in revenue

The total revenue of 13 companies was examined by Televisory’s research and this reflected a decline of 5 per cent points between 2007 to 2015. Moreover, despite the fall in total revenue, outlook towards these companies improved. This is shown in the table below:

Median Rating profile for the 13 Companies

(Source: Televisory Research, Company reports, Bloomberg)

The companies are reducing their exposure in the print paper while diversifying into other segments. This has resulted in comforting their credit outlook, which improved from speculative grades to moderate credit risk.

Appendix