Reduced costs

• 29% of partnerships focused on controlling and/or reducing raw material costs.
• A smaller percentage of partnerships (16%) were concentrated on cost reduction through operations collaboration.
• SG&A and research and development synergies were the key benefit in 21% of the partnerships.

REDUCED COSTS: RAW MATERIAL PARTNERSHIPS
Fiber costs are one of the biggest cost buckets for paper mills, representing about half of the manufacturing costs for non-integrated mills and converting plants.

One-on-one fiber partnerships include long term strategic fiber sourcing arrangements where a mill becomes "virtually-integrated" to pulp. This strategic upstream concept is typical in the tissue parent roll market, where multiple suppliers without integrated pulp capabilities have partnered with a market pulp supplier. In the packaging area, Rock-Tenn and the Association of Independent Corrugated Converters signed a set-aside agreement in which Rock-Tenn agreed to supply 700,000 tons per year of containerboard to the independent market in 2012-2013, providing supply reliability to AICC members.

Joining forces for more efficient and effective procurement management has been another style of raw material partnerships. One of the more notable purchasing partnerships in the industry is the joint pulp purchase agreement by two non-competing industry giants Sappi Fine Paper Europe and SCA Tissue Europe implemented in May 2010. This is a perfect example of two companies utilizing "outside-the-box" thinking and working together to reduce raw material costs through logistics synergies and economies of scale, without a significant capital investment. After seeing successful results from the agreement, the companies announced in June 2011 that they would further expand their partnership to include the joint purchase of chemicals, technical goods and other major spending categories.

REDUCED COSTS: OPERATIONS
Appleton Papers, to be renamed Appvion, partnered with Domtar to improve its thermal paper manufacturing cost position and focus, by utilizing a long-term supply agreement for uncoated thermal base paper. The 15-year, $3 billion supply agreement enables Appleton Papers to shut its high cost non-integrated West Carrolton mill, as well as focus future capital investments on its core competency of coating technology and applications. The partnership on one side benefitted Appleton by reducing future capital expenditures and improving core business focus, while on the other side benefited Domtar by repurposing commodity paper production to a more specialized grade, and providing a secure, long-term sales opportunity.

Another operations-related partnership concept is the operating model where a paper mill has multiple operators. Such operations partnerships can be challenging and there are potential risks with the fact that companies may not be able to control their partner's decisions. Risks to this model, however, have not deterred companies from pursuing the concept, as "one mill-multiple operators" sites are currently under development. For example, ST Paper is planning to start a 100% recycled, 70,000 ton per year tissue machine at the International Paper Franklin, VA site that has found a second life in fluff pulp after exiting uncoated freesheet.

Partners need to be ready to also deal with potential legal battles that might unfold. Verso has an agreement to supply Thilmany with the specialty paper output from one PM at its Jay, ME mill. The agreement resulted in a law suit in 2009 over cost savings from black liquor credits. However, despite the lawsuit, the two firms continue to operate under the supply agreement, which expires in 2017.

INCREASED REVENUE: SALES PARTNERSHIPS
The pulp and paper industry has a long history in forming sales partnerships, starting with the numerous national trade promotion associations, to arrangements where two suppliers join forces to market their products more cost effectively and complement each other's product portfolio. For example, in 2005 Canfor Pulp Limited Partnership and Tolko Marketing & Sales teamed up to sell sack and kraft paper globally under the name Premium 1 Papers. By combining their sales teams, both companies were able to strengthen their offering and sales capabilities in a global market.

Alongside the more traditional partnerships, new ones embracing the modern "network organization" model are unfolding; CellMark Paper and Gorham Paper & Tissue (owned by private equity firm Patriarch Partners) is one example. In the partnership, Cellmark's pulp division sells softwood kraft pulp and recycled fiber to Gorham's mill, while Cellmark's paper distribution division sells the mill's offset, envelope, opaque, etc. paper output. Gorham Paper & Tissue receives multiple benefits from the partnership, including securing a raw material base, as well as effectively enhancing the size of its sales force. A similar structure is in place for Gorham's tissue business with Central National-Gottesman (CNG), an international pulp and paper distributor. CNG will be the exclusive distributor for the tissue parent rolls produced from Gorham's new 36,000 ton per year tissue machine starting up in September 2012.

NEW PRODUCT MARKET PARTNERSHIPS: REDUCED COSTS, INCREASED REVENUE
Creating new product markets is essential for companies in mature and declining markets. New product development, however, can be a long, arduous and often expensive process. New product market development is yet another area in which partnerships are utilized to speed up the process, mitigate risk and save costs.

Public-private partnerships are often utilized by industry players for R&D purposes. For example, Weyerhaeuser is a member on NorthWest Advanced Renewables Alliance (NARA) which is a research consortium led by Washington State University focused on establishing an aviation biofuels industry in the NorthWest. Mercer International teamed with the University of British Colombia's Department of Chemical and Biological Engineering and The Pulp and Paper Center. The 5 year, $1 million partnership provides funding for a research chair focusing on the conversion of forest resources into high value bio-products.

A current high profile area for partnering in new products and markets is the nanotechnology arena. Perhaps the most publicized and formal joint venture in this technology is Celluforce, which couples Domtar with FP Innovations in an effort to create a market for nanocrystalline cellulose (NCC). But not all joint ventures in technology have to be this definitive. More informal public-private partnerships, for example, between government or university research facilities and industry players have occurred, and continue to play a key role in development. In addition, companies rely on industry groups, such as TAPPI, or the newly developed research joint venture, Agenda 2020 Technology Alliance, which focuses on collaborative, pre-competitive research, to provide forums for sharing research information. Companies such as MeadWestvaco, Sappi, International Paper , Verso, Georgia-Pacific, NewPage, UPM and others are members of these organizations.

Product development partnerships do not have to involve public funding and do not have to develop from entirely new connections; they can evolve from existing commercial relationships.

In 2005, International Paper and Hewlett Packard teamed up to produce paper with Colorlok® technology, which enabled the production of bolder, sharper images and faster drying times of printed paper. The innovation proved so successful that in 2008 several major players (APRIL, Domtar, Epson, Kodak, Mondi, M-Real and Suzano along with HP and IP) announced support of the Colorlok® Paper Standard.