Temple-Inland (TIN)

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Temple-Inland Corp. (TIN) is a cardboard and timber company based in the American South. The majority of its sales (78% in 2007)^[1] came from selling Corrugated Packaging, or cardboard, used to make cardboard boxes. The smaller Building Products segment produces materials used in residential construction, such as lumber, particleboard, and various grades of fiberboard.

• Prior to 2007, the "Old" Temple-Inland was a holding company consisting of the aforementioned two segments, as well as unrelated real estate and financial services divisions. In response to shareholder pressure, the company announced in February 2007 that it would spin off its real estate and financial services divisions as separate public companies. From then on, the "New" Temple-Inland has focused on its core wood fiber-based businesses.
• The related October 2007 sale of Temple-Inland's timberland assets left the company without its own sounce of forest / timber, so the company now purchases wood pulp on the open market rather than growing its own, which leaves it exposed to the volatile wood fiber markets. In the first quarter of 2008, wood pulp prices rose 8%-16% compared to 1Q2007 (depending on the type of fiber),^[2] pushing operating costs to $950 million from $873 million in 4Q2007.^[3]
• The Building Products segment is tied to the health of the U.S. housing market, as Temple-Inland's products are most commonly used for new residential construction. Fluctuations in demand, with related increases or decreases in prices, are an influential force for the segment's revenues and operating margins. New home construction was down 25% in 2007, and there was a 10.7-month supply of available homes on the market as of April 2008.^[4]

[edit] Corporate Overview & Business Metrics

TIN's 2006 revenue by operating segment^[5]

[edit] "Old" Temple-Inland

Prior to the 4th quarter of 2007, Temple-Inland was a holding company that owned and operated a diverse set of subsidiaries. Its four principal business segments were involved in the corrugated packaging, forest (building) products, real estate, and financial services sectors. The largest segments were corrugated packaging and forest (building) products, together responsible for over 75% of the company's 2006 revenues.^[6]

In late 2006 and early 2007, Temple-Inland faced a challenge in the form of widespread investor sentiment against the company's conglomerate structure. In response to these concerns, Temple-Inland's Board of Directors announced in February 2007 that the company would be spinning off its real estate and financial services segments as new publicly-owned companies Forestar Real Estate Group (FOR) and Guaranty Financial Group (GFG), respectively.^[7] The "new" Temple-Inland would retain the core corrugated packaging and building products segments. To that end, the company also announced the sale of its timberland assets for $2.38 billion in October 2007.^[8]

TIN's 2007 revenue by operating segment (post spin-off)^[9]

[edit] "New" Temple-Inland

Since the completion of the spin-off of Forestar and Guaranty in December 2007, Temple-Inland has focused on its corrugated packaging and building products segments. In 2007, sales in the U.S. accounted for 95% of total sales, while Mexico accounted for the remaining 5%.^[10]

[edit] Corrugated Packaging

The Corrugated Packaging segment is vertically integrated, owning and operating both mills and facilities for converting wood pulp into finished products. This segment manufactures corrugated goods, which are typically used for packaging, and has customers in nearly every manufacturing industry. All of Temple-Inland's orders are customized according to customers' specifications, unlike most of its chief competitors.^[11] The company also produces more intermediate product than it needs for its own production (such as extra containerboard), and it sells this surplus stock to other companies.^[12] Sales from this segment totaled 77.5% of 2007 revenues.^[13]

[edit] Building Products

The Building Products segment produces various intermediate and finished materials used in the construction industry, primarily in residential structures. Chief products include lumber, gypsum wallboard, particleboard, and fiberboard.^[14] Sales of building products accounted for 20.5% of 2007 revenues, with the majority of sales concentrated in the American south.^[15]

[edit] Business Financials

[edit] Trends and Forces

[edit] Exposure to volatile commodities markets for vital inputs potentially shrinks operating margins

The largest input to Temple-Inland's production process is wood fiber, much of which was previously provided through the company's timberlands holdings.^[18] While the company reports that it has enough long-term contracts to supply approximately 50% of its 2008 wood fiber needs, the rest must be purchased on the open market. In the first half of 2008, both timber and pulpwood have maintained a steady trend of increasing prices.^[19] Wood Resource Quarterly, which tracks wood fiber prices, reports that prices in the first quarter of 2008 have risen from 8% to 16% over their levels in the first quarter of 2007 (depending on the type of fiber).^[20]

Chart graphing the Random Lengths Framing Lumber Composite Index, an indicator of current pricing levels for various types of finished lumber goods. Prices hit a 5-year low in the 2nd quarter of 2008.^[23]

[edit] US new home construction down 25% in 2007 with trend continuing into 2008^[24]

The majority of goods offered through Temple-Inland's building products segment are geared towards the residential housing market.^[25] Demand for TIN's products is thus closely and positively correlated with conditions in the U.S. housing market; when the housing market slows down, so do the sales of TIN's building products.

An example of such a scenario is rooted in the subprime lending panic of 2007, followed by a credit crunch and a sharp slowdown in the U.S. housing market starting in late 2007. As a result of lower demand for residential construction materials, finished lumber prices were at a 5-year low as of the second quarter of 2008.^[26] Additionally, Temple-Inland's senior management reported a significant across-the-board decrease in prices for all of the building products it offered as of the fourth quarter of 2007.^[27]

[edit] Growing Asian packaging industry poses threat to domestic producers' market shares

In the past few decades, Asia has witnessed strong growth in both its consumption and production of packaging materials, becoming the second-largest market for packaged goods in the world by 2003.^[28] In order to satisfy this strong demand, the region's packaging producers have been increasing production, with regional annual output growing at a rate of approximately 6% since the beginning of the new millennium.^[29] Most of this growth has been used to meet the equally strong demand, which has grown at an annual rate of approximately 8% since 2003.^[30] While Temple-Inland's products are sold only in the North American market, the rapid growth of Asian packaging producers poses a potential threat to domestic producers if U.S. consumers begin to import foreign packaging material instead of buying from domestic firms. The magnitude of this potential threat depends mainly on two factors: the difference between production and consumption growth in Asia (if production growth outpaces demand, the excess will be free for export), and the exchange rates between the U.S. and Asian countries (a strong U.S. dollar encourages exporting to the U.S., and vice versa).

Internet retail has grown across the globe^[31]

[edit] The growth of Internet-based shopping offers new opportunities for packaging use

Internet retail has grown strongly since the beginning of the new millennium, with Nielsen reporting that by 2007 over 85% of internet users worldwide had purchased at least one item through the internet.^[32] This trend is beginning to accelerate, as this figure represents a 40% increase within 2 years.^[33] 77.5% of TIN's 2007 revenues came from its packaging segment, closely tying the company's total revenues to fluctuations in the demand for consumer packaging.^[34] The growth in Internet usage and technology in the 1990s opened up a new marketing tool for all kinds of retailers and merchants, making it possible to reach interested consumers in all parts of the world without the need to invest in physical retail space but with more rapidly and efficiently than with catalogs or mail-order. Customers who use the Internet to purchase goods usually have their orders shipped to them, which opens up new opportunities for packaging to be used in the retail industry. With approximately half of Internet users not falling within Nielsen's category of "regular online shoppers" (making online purchases at least once a month), an increase in the amount of such online shoppers increases demand for packaging as well.

[edit] Competition

Key competitors to Temple-Inland's Corrugated Packaging segment (the largest business segment by revenue within the company, as well as where most of its resources are concentrated) are Smurfit-Stone Container (SSCC), International Paper (IP), Packaging Corporation of America (PKG) and Meadwestvaco (MWV).

The chief competitors to TIN's Building Products segment are Weyerhaeuser (WY) and Plum Creek Timber Company (PCL).

According to the company's 2007 10-K, Temple-Inland is the third-largest producer of corrugated packaging in North America, responsible for 12.5% of total industry shipments in 2007.^[35] Its corrugated packaging segment, however, is not only in competition with other such manufacturers for customers, but also with companies that produce different forms of packaging, such as paper, plastics, woods, and metals.

[edit] References

1. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
2. ↑ 'Global Pulpwood Prices Reached New Records in 1Q 2008, According to the Wood Resource Quarterly,' PR.com
3. ↑ Temple-Inland Financial Statements | Stocks | Reuters.com
4. ↑ Housing Supply Declined in May - WSJ.com
5. ↑ TIN 2007 Form 10-K, Item 1, 'Business,' pgs. 1-10
6. ↑ TIN 2007 Form 10-K, Item 1, 'Business,' pgs. 1-10
7. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
8. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
9. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
10. ↑ TIN 2008 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 39-79
11. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
12. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
13. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
14. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
15. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
16. ↑ TIN 2008 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 39-79
17. ↑ TIN 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 55-117
18. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
19. ↑ 'Lumber and Paper Mills Struggle As Timber Stands Tall,' Seekingalpha.com
20. ↑ 'Global Pulpwood Prices Reached New Records in 1Q 2008, According to the Wood Resource Quarterly,' PR.com
21. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
22. ↑ Energy Information Association: Official Energy Statistics from U.S.
23. ↑ Random Lengths Lumber Market Report
24. ↑ 'New-Home Construction Drops Most Since 1980,' Washington Post (using US Dep't of Commerce figures)
25. ↑ TIN 2008 Form 10-K, Item 1, 'Business,' pgs. 1-8
26. ↑ 'Lumber and Paper Mills Struggle As Timber Stands Tall,' Seekingalpha.com
27. ↑ Temple-Inland (TIN) Q4 2007 Earnings Call Transcript
28. ↑ 'Market Statistics and Future Trends in Global Packaging,' World Packaging Organisation
29. ↑ 'Market Statistics and Future Trends in Global Packaging,' World Packaging Organisation
30. ↑ 'Market Statistics and Future Trends in Global Packaging,' World Packaging Organisation
31. ↑ 'Trends In Online Shopping: A Global Nielsen Consumer Report,' Nielsen Consumer Reports
32. ↑ 'Trends In Online Shopping: A Global Nielsen Consumer Report,' Nielsen Consumer Reports
33. ↑ 'Trends In Online Shopping: A Global Nielsen Consumer Report,' Nielsen Consumer Reports
34. ↑ TIN 2008 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 39-79
35. ↑ TIN 2008 Form 10-K, "Business", pages 1-10
36. ↑ TIN 2008 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 39-79
37. ↑ IP 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 43-92
38. ↑ MWV 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 36-77
39. ↑ SSCC 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data,' pgs. 32-79