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Three analysts and top management from nine sector firms examine the paper & forest products sector in this special 42-page Paper & Forest Products issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info507.htm.

TWST: What were the major challenges the industry faced in 2001?

Ms. Torma: The key challenge the industry faced was to manage inventories in a severe demand downturn compounded by a challenging trade environment due to the strength of the dollar. In the last year and a half producers have been very focused on taking substantial amounts of downtime or, in other words, reduced production levels to keep inventories low. This should allow producers to limit pricing declines and to respond with pricing momentum much sooner once the economic recovery begins. In historical cycles we’ve often had periods of tremendous overcapacity and producers have not shown as much discipline. As a result, producers have previously started the cyclical recovery from a position of trough pricing combined with high inventory levels that have had to be worked down before pricing momentum could begin. The result is shorter periods of profitability. A key difference in the coming cycle should therefore be that in grades in which producers have been successful at this challenge, earnings should be much stronger through a longer time frame.

TWST: What did you see in M&A activity in 2001?

Ms. Torma: Consolidation continued to be a key theme, and we saw a very contentious hostile takeover by Weyerhaeuser (NYSE:WY) of Willamette (NYSE:WLL), which was the focus of much of last year. We continue to believe that consolidation is going to be a key theme in the next two years once the recovery gets under way.

TWST: There was a lot of speculation over the Weyerhaeuser-Willamette transaction last year. What happened?

Ms. Torma: In our view, the acquisition of Willamette was strategically important for Weyerhaeuser to enhance the company’s competitiveness in uncoated freesheet and to provide greater market concentration and flexibility in containerboard. The acquisition allows for improved overall industry dynamics and also creates the opportunity for Weyerhaeuser to improve its own competitiveness relative to its peers. Willamette was very adamant that it could offer shareholders greater value by pursuing independent alternatives. However, in our view, the structural shifts that have been driving industry consolidation would have made it very hard for Willamette to compete effectively in the long term and enhance shareholder value on a stand-alone basis. So we always felt that this combination would be the eventual and preferred outcome. We saw strong defensive moves by Willamette, including the potential acquisition of Georgia-Pacific's building products assets. And while we felt that acquisition could have delivered value, the risk to Willamette shareholders of asbestos liability and the addition of a substantial amount of debt at that point in the cycle, in our view, would have been too high. Hence we saw Weyerhaeuser’s bid as successful at the end of the day.

TWST: Did the expiration of the Softwood Lumber Agreement have an impact on the industry?

Ms. Torma: The termination of the Canada/US Softwood Lumber Agreement in 2001 added increased volatility to lumber pricing by creating greater market uncertainty. Negotiations continued throughout the year regarding the dispute. However, currently we believe that the two sides remain very far apart, and it’s unlikely that a resolution will be reached in the near term. Without a negotiated settlement, we should see a final anti-dumping and countervailing duty determination by the ITC put in effect that could be as high as 20%-30%. That will likely further buoy lumber pricing in the near term, in effect raising the floor of lumber pricing as that tariff is passed through at least partially to consumers. Ultimately there will be a resolution to this matter, whether Canada seeks resolution through the WTO/NAFTA or, more likely, by a negotiated settlement.

This special issue includes:

1) Paper & Forest Products - In an in-depth (5,900 words) Analyst Interview, Matthew Berler, Managing Director at Morgan Stanley, examines the outlook for the sector including and shares specific stock recommendations.

2) Paper & Forest Products - In an in-depth (3,100 words) Analyst Interview, Anna E. Torma, North American Paper & Forest Products Analyst at Merrill Lynch Global Securities, examines the outlook for the sector including and shares specific stock recommendations.

3) Paper & Forest Products - In an in-depth (3,500 words) Analyst Interview, Mark Wilde, Managing Director at Deutsche Banc Alex. Brown, examines the outlook for the sector including and shares specific stock recommendations.

4) CEO