This Week in Paper by Joe Masters (TMF Master) Charleston, SC (May 30, 1997) -- Paper/Forest took a little breather this week, as did the broader market. After four consecutive weeks of exceptional gains (3.63, 3.69, 2.42 and 4.76%), our index gained a less impressive, but still very respectable, 0.61%. Meanwhile, the Dow ended its winning streak by losing 0.20% for the week, but the S&P500 did manage to squeeze out a 0.15% gain. The big winners this week were those in the containerboard segment, especially GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, rising 14.92%, and STONE CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STO)") else Response.Write("(NYSE: STO)") end if %>, up 14.58%, which benefitted from an analyst upgrade. Also doing well were WILLAMETTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLL)") else Response.Write("(NYSE: WLL)") end if %>, gaining 3.83%, BOISE-CASCADE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %>, tacking on 3.75%, JEFFERSON SMURFIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %>, up 3.60%, and GEORGIA-PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %>, rising 3.07%. The big loser this week was KIMBERLY-CLARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>, which dropped 10.67% on an analyst downgrade spurred by news of some upcoming production curtailment. Also in the doghouse were BOWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %>, down 2.23%, CONSOLIDATED PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDP)") else Response.Write("(NYSE: CDP)") end if %>, off 1.58%, CHAMPION INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHA)") else Response.Write("(NYSE: CHA)") end if %>, declining 1.25%, and WEYERHAEUSER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %>, dropping 1.24%. All the News that Fits the Print: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $550.09 per ton, up from $548.75 last week. On Tuesday, CS First Boston raised the rating on Gaylord Container, Jerfferson Smurfit, and Stone Container to "buy" from "hold". Also Tuesday, WESTVACO CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: W)") else Response.Write("(NYSE: W)") end if %> reported second quarter sales were $725 million, a 4.7% decrease compared to the year earlier period. Sales for the first six months of 1996 were $1.5 billion, down 3.2% compared to the first half of fiscal 1996. Second quarter 1997 earnings were $38 million, or $0.37 per share, a 25% decrease from $51 million, or $0.50 per share, recorded for the 1996 second quarter. Earnings for the first six months of fiscal 1997 totaled $73 million, or $0.72 a share, representing a 35% decline from the $113 million, or $1.11 per share, earned during the first half of 1996. Reported on Tuesday: The tentative deadline between the Canadian government and the Communications, Engineers & Paperworkers Union of Canada (CEP) and the Pulp, Paper & Woodworkers of Canada (PPWC) draws near. The big battle is expected in the contract negotiations for British Columbia's coastal logging and lumber workers. The contract -- by far the biggest of the three regional contracts the two sides must negotiate -- is the first to expire, on June 15. It will set the pattern for the other two contracts, which expire June 30. The result of the negotiations could have a big effect on pulp and lumber prices this summer. A strike would push prices higher, by curtailing production and reducing supply. On Wednesday, Sappi Ltd. announced the closure of the acquisition of an additional 22% stake in S.D. Warren Holdings, boosting its total holding to 97%. Sappi said it plans to acquire the remaining 3% within 120 days. And Wednesday, OWENS CORNING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OWC)") else Response.Write("(NYSE: OWC)") end if %> and FIBREBOARD CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FBD)") else Response.Write("(AMEX: FBD)") end if %> announced that they have entered into a definitive merger agreement providing for Owens Corning to acquire all of the outstanding shares of Fibreboard Corporation for $55 per share (all cash). The merger is expected to be accretive to Owens Corning in 1997 and on an ongoing basis, excluding one-time, non-recurring fees. The companies expect the transaction to close early in the third quarter of 1997. On Thursday, the shareholders of both ABITIBI-PRICE and STONE-CONSOLIDATED nearly unanimously voted in favor of the proposed merger. The new company, ABITIBI-CONSOLIDATED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABY, A.TO)") else Response.Write("(NYSE: ABY, A.TO)") end if %>, is expected to be effective on Friday. Abitibi-Consolidated's combined capacity will be approximately 2.9 million metric tons of newsprint and about 1.5 million tons of uncoated groundwood paper. Together our company will have 18 mills (14 in Canada, 3 in the US and 1 in the United Kingdom. Abitibi-Consolidated will be the biggest paper maker in Canada in terms of market capitalization and the 12th-largest in the world based on revenues. Also Thursday, Bear Stearns' Linda Lieberman said she lowered her second-quarter and full-year estimates for Kimberly-Clark because of a production cut in the company's commercial tissue business as the company restructures that particular segment of operations. The analyst cut her second-quarter number to $0.63 a share from $0.65 and 1997 estimate to $2.65 from $2.75. Lieberman estimated the production cut will cost Kimberly between $50 million to $75 million in revenues. Salomon's Chip Dillon estimated the cost at $50 million in revenues, which would be 5 cents to 6 cents per share in earnings over two quarters. Kimberly is shifting commercial tissue sales to larger distributors and eliminating the smaller buyers it inherited from the merger with Scott Paper Co. The shift to larger distributors will help sales with more volume and stability in the long run, but hurt volumes in the short run, according to Dillon. And Thursday, the Canadian Pulp and Paper Association (CPPA) reported that Canadian newsprint output rose 12.5% in April, to 816,000 metric tons from 725,000 tons a year earlier, with Canadian mills operating at 98% of capacity during April, up from 91% a year earlier. Total shipments rose 20.8%, to 823,000 tons from the year-earlier 681,000 tons. Shipments to the U.S. were up 14.0% and shipments within Canada rose 11.3%, while shipments to other countries rose 40.2%. Consumption by U.S. daily newspapers was up 5.7%, to 792,000 tons from 749,000 tons a year earlier. Total U.S. newsprint consumption rose 4.6%, to 966,000 tons from 924,000 tons. Total U.S. consumers' stocks fell to 1.28 million tons at the end of April, or 42 days of supply, from 1.32 million tons, or 42-days' supply, a month earlier. Canadian producers' stocks fell to 470,000 tons in April from 477,000 tons a month earlier. Also Thursday, the Newspaper Association of America (NAA) announced that first quarter advertising revenue for 1997 brought the industry $8.9 billion, an increase of 8.9% over the same time period last year and the best single quarter showing for the industry in 10 years. First quarter results show classified advertising up 9.8% to $3.5 billion. Retail grew by 7.1% to $4.2 billion. National rose 12.7% to $1.2 billion. More information may be found at http://www.naa.org. Containerboard inventories in the US (box plants and mills) declined by 161,000 tons in April to a total of 2.847 million tons, or approximately 4.8 weeks' supply. While down sharply from February's level of 3.101 million tons, or 5.6 weeks' supply, April's level is still comparable to that held during most of the second half of 1996. For reference purposes, the most recent peak in inventories was in July of 1995 (3.256 million tons, 6.1 weeks' supply) and the most recent trough in inventories was in October of 1994 (2.119 million tons, 3.4 weeks' supply). Not surprisingly, containerboard prices rose significantly starting in 1994 and peaked in mid-1995. Current inventory levels, while heading in the right direction, do not seem supportive of more than a modest increase in containerboard prices at this time, and the excitement over Gaylord, Stone and Smurfit seems a little overdone (in my humble opinion). "Model Portfolio" Update: Added to our port-faux-lio this week was THERMO FIBERTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TFT)") else Response.Write("(AMEX: TFT)") end if %>. The company, a public subsidiary of the THERMO ELECTRON CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMO)") else Response.Write("(NYSE: TMO)") end if %>, is involved in the design and manufacture of machinery and accessories for use in the papermaking industry. Their main staples are systems utilized to prepare wastepaper for use as a fiber source in the production of "recycled" paper and miscellaneous apparati (e.g., doctor blades) used as cleaning devices on papermaking machines. Looking at recent sales/earnings reports, one is not immediately impressed. Revenues over the past 10 quarters have been $47.2, 43.7, 49.6, 56.2, 57.2, 49.0, 48.6, 46.1, 48.5 and 44.7 million. Earnings over this same period have been $3.6, 3.6, 4.6, 6.0, 6.0, 5.2, 4.9, 4.2, 5.6 and 3.5 million. However (there's always a "however"), their recent acquisition of Black Clawson's stock-preparation business will strengthen their presence in this area, especially in the international arena. In addition, I feel recycling will continue to be a high-growth segment which could additionally benefit from pending regulations surrounding environmental waste as this equipment could provide an attractive, non-chlorine alternative for companies which must expend capital anyway to meet govermental requirements. Our other "holdings", as with the index and the market in general, were flat this week. Purchase: IP = $40.50, CDP = $49.13, CSAR = $29.00, TFT = $10.75 Last Trade: IP = $47.88, CDP = $54.50, CSAR = $28.88, TFT = $10.94 This Week: Year-to-Date: Model = + 0.16 % Model = + 31.66 % SP500 = + 0.15 % SP500 = + 14.52 % FSPFX = + 0.96 % FSPFX = + 7.82 % Commentary: Following several years of discussion and judgment, it appears the "Cluster Rules" are closer to becoming reality. The standards, proposed by the EPA in December 1993, are aimed at reducing discharges of dioxins and other toxins into the air and water and will require the industry to spend billions of dollars in capital improvements and millions of dollars each year in added operating costs. Though the EPA has made no official decision on which of the two proposed options will be enacted, it is widely speculated that the agency will select the less complex and less costly, and nearly as effective, solution of replacement of chlorine with chlorine dioxide, thus bypassing the additional requirement for oxygen delignification prior to the fiber bleaching process. If this is the case, it would be a boon to the paper industry which could have been saddled with a much larger financial burden (almost three-fold). Based upon estimates made by the American Forest and Paper Association, the "simpler" settlement will initially cost the industry around $2 billion for the equipment and modifications needed to achieve compliance. Additional operating expense resultant from the change is predicted to cost the industry some $275 million annually. While final decision is expected by August, there is a possibility Congress may become involved as environmentalists will most assuredly oppose a "reduced" regulation, if that is what is decided upon. Congress might also be called upon by the paper industry should standards toughen beyond the speculated scope. Either way, further delays might be incurred. As an example of how the new laws might effect individual companies, Georgia-Pacific said it could be required to invest up to $50 million annually over the next decade, presuming that delignification is mandated. More likely, it would probably cost GP about $15 million annually, which would still be a healthy $0.16 or so per share off the bottom line. Keep them presses rolling !!! TMF Master

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