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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: Would you begin by telling us how you define the paper and forest products industry?

Ms. Torma: We evaluate which commodities are the primary influence from an earnings leverage perspective for particular companies, and then we will typically divide the companies into peer groups, such as newsprint, printing and writing or wood products. The companies can then also be accessed based on whether their key commodities are typically earlier cycle plays such as pulp or later cycle plays such as printing and writing papers.

TWST: How did the paper and forest products stocks perform in 2001?

Ms. Torma: The stocks traded in a fairly tight range throughout much of 2001, as investors debated the extent and depth of the economic downturn and whether the recovery would be a late fall 2001 cyclical recovery versus a spring 2002 cyclical recovery. After September 11 we saw the stocks retrench substantially, down to pure trough levels, and since then we’ve seen them recover fairly strongly in anticipation of an improved demand environment in 2002.

TWST: What is your sense of when we should see a recovery in the industry?

Ms. Torma: We continue to believe that we will start to see the signs of demand recovery in the spring of this year. Both producer and customer inventories across most grades are low and there is limited new capacity coming online. The combination of those two factors should allow producers to put through at least a technical price increase in late spring in several grades, with pricing momentum building in the fall through to a cyclical peak in 2004.

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: Would you recommend any of them as core holdings?

Ms. Torma: When it comes to assessing core holdings, we believe one of the key factors becomes the vision and strength of management. We also highlight Smurfit-Stone (Nasdaq:SSCC), which is focused in an industry that we believe in the longer term will receive a multiple lift from the substantially more stable pricing environment that we’ve seen emerge due to producer restraint in production levels and capacity closures.

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 interviews (average 2,500 words). Top management of nine sector firms examine the outlook for their firm and the sector.