The Diaper Industry in the Next 25 years By Carlos Richer Richer Investment SA de CV Diaper Consulting Services Insight 2005 Minneapolis

Index of Topics How can you anticipate the future? How can you anticipate the future? A quick review of the past and the history of the diaper A quick review of the past and the history of the diaper Why so many companies are loosing money with diapers today? Why so many companies are loosing money with diapers today? What is the size of the diaper market today? How is it divided? What is the size of the diaper market today? How is it divided? Where is the future growth for baby and adult diapers? Where is the future growth for baby and adult diapers? What will be the new features of the future diaper? What will be the new features of the future diaper? What to expect in the next 20 years, who will survive? What to expect in the next 20 years, who will survive? Conclusions and time for questions. Conclusions and time for questions.

Risks predicting the future No one knows the future… but we can have an educated guess. No one knows the future… but we can have an educated guess. Sales people need to anticipate the future. (Due to ever increasing SKU’s it is starting to be impossible to operate without a good sales forecast) Sales people need to anticipate the future. (Due to ever increasing SKU’s it is starting to be impossible to operate without a good sales forecast) Industry leaders need a future vision to steer the company in the right direction. Industry leaders need a future vision to steer the company in the right direction. Regarding sales forecasts…. The use of electronic data transfers with clients and suppliers will be mandatory in order to reduce manufacturing and working capital costs. Regarding sales forecasts…. The use of electronic data transfers with clients and suppliers will be mandatory in order to reduce manufacturing and working capital costs. Predicting the short term is not hard, predicting the long term future requires similar tools and maybe a bit more of intuition. Predicting the short term is not hard, predicting the long term future requires similar tools and maybe a bit more of intuition.

A quick review to diaper History before 1960 Maria Allen Marion Donovan First Mass Production Of cloth diapers George Shroder First pin free diaper

A quick review at modern diaper history Billy Gene Harper Carlyle Harmon 1966 Vic Mills 1961 Fluff replaced Tissue 1972 Leg Cuffs 1986 Modern Diaper “Hourglass Shape” Inventors of SAP

Summary of events in modern diaper history Launch of modern disposable diaper by P&G, 1961 Launch of modern disposable diaper by P&G, 1961 Invention of Superabsorbent Polymer, 1966 Invention of Superabsorbent Polymer, 1966 First use of tapes integrated to a diaper, 1971 First use of tapes integrated to a diaper, 1971 Introduction of fluff instead of creped tissue, 1972 Introduction of fluff instead of creped tissue, 1972 First use of Superabsorbent in diapers, 1987 First use of Superabsorbent in diapers, 1987 Frontal Tape and Hook and Loop systems, 1987 Frontal Tape and Hook and Loop systems, 1987 Use of leg cuffs for leak prevention, 1989 Use of leg cuffs for leak prevention, 1989 Introduction of training pant diapers, 1994 Introduction of training pant diapers, 1994 Use of cloth like back sheets and breathables, 1994 Use of cloth like back sheets and breathables, 1994

Diaper wars 101: Diaper wars 101: What is happening today with the diaper industry? What is happening today with the diaper industry? What is a “purging cycle”? A globalized price war! What is a “purging cycle”? A globalized price war! Who starts a new purging cycle? Who starts a new purging cycle? We may like to think purging cycles start as a result of coordinated collaboration…. No! I believe they are truly random events. We may like to think purging cycles start as a result of coordinated collaboration…. No! I believe they are truly random events. How do they get started? …. They start when there is a weak link in the supply chain! How do they get started? …. They start when there is a weak link in the supply chain!

Individual Elements Pine Trees, Oil, propylene gas… Basic Materials Acrylic acid, Hydrocarbon resins, PP pellets, tackifiers, etc Finished Raw Materials SAP, Hot melts, Cellulose Pulp, Nonwovens, Spandex, BOPP, etc. Diaper Manufacturing Diapers, sanitary napkins, adult incontinence, etc Distribution Channels Wal-Mart, Carrefour, Walgreen, etc Consumer Parents buy product for their baby. The supply Chain

Diaper Wars 101 (Continued) An important disruption in the supply chain starts a new price war cycle! An important disruption in the supply chain starts a new price war cycle! An extended “fixed price” supply contract An extended “fixed price” supply contract What past experience do we have regarding these cycles? ( was the last one when pulp peaked close to $1,000 USD/Ton) What past experience do we have regarding these cycles? ( was the last one when pulp peaked close to $1,000 USD/Ton) Purging cycles will continue every 7 to 11 years. Purging cycles will continue every 7 to 11 years. How can you get ready for the next purging cycle? You need to be very well informed. How can you get ready for the next purging cycle? You need to be very well informed.

The name of the game is Information Who can provide us with the right information? Who can provide us with the right information? The enemy of my enemy is my friend …information can be free! Look for partners! Unfortunately this seldom happens. The enemy of my enemy is my friend …information can be free! Look for partners! Unfortunately this seldom happens. Industry References: Nonwovens World, Nonwovens Industry, Nonwovens Markets, web page subscriptions, etc. Industry References: Nonwovens World, Nonwovens Industry, Nonwovens Markets, web page subscriptions, etc. Prediction: One magazine will evolve to Absorbents World, Absorbents Industry or Absorbents Markets. Prediction: One magazine will evolve to Absorbents World, Absorbents Industry or Absorbents Markets.

Size of the baby diaper market today and year 2025 If you count all of the babies of the world from the age of newborn to 30 months old, there are 321 million babies. If you count all of the babies of the world from the age of newborn to 30 months old, there are 321 million babies. If every baby in the world used a disposable diaper we would need 15,600 diapers/sec (490 billion per year). If every baby in the world used a disposable diaper we would need 15,600 diapers/sec (490 billion per year). Today, only one in every 5 babies uses a disposable diaper. Today, only one in every 5 babies uses a disposable diaper. In year 2025 the world will have 328 million babies In year 2025 the world will have 328 million babies If diapers changes are reduced 5% due to better design… If diapers changes are reduced 5% due to better design… Total diaper requirement in 2025 will be reduced 2.9% Total diaper requirement in 2025 will be reduced 2.9% For year 2025 I expect that more than one third of the babies in the world will use a disposable diaper, almost doubling current volume sales of For year 2025 I expect that more than one third of the babies in the world will use a disposable diaper, almost doubling current volume sales of 2005.

What can we learn from the Table: There are twice as many babies in India today as all of the babies in the America’s (from Alaska to Argentina). There are twice as many babies in India today as all of the babies in the America’s (from Alaska to Argentina). India has 45% more babies and 3 times more density of babies per unit area than China. India has 45% more babies and 3 times more density of babies per unit area than China. USA is the only country that shows significant baby growth in the next 20 years (due to immigration). USA is the only country that shows significant baby growth in the next 20 years (due to immigration). There are 4 African countries in the list of the 10 largest in regards to population of babies; with PPP below $600 they were not considered in previous table. There are 4 African countries in the list of the 10 largest in regards to population of babies; with PPP below $600 they were not considered in previous table.

Size of the adult diaper today and year 2025 There are 316 million adults over 70 years old in the world today (1 in every 3 requires protection). There are 316 million adults over 70 years old in the world today (1 in every 3 requires protection). By the tear 2025 there will be 563 million, this is a 78% increase (compare this against the 2.1% increase for babies) By the tear 2025 there will be 563 million, this is a 78% increase (compare this against the 2.1% increase for babies) For year 2025 I expect adult incontinence sales will grow at least 3 times the current volume sales of today. For year 2025 I expect adult incontinence sales will grow at least 3 times the current volume sales of today.

What can we learn from the table: China has the largest population of senior citizens and also the biggest growth in the next 20 years. China has the largest population of senior citizens and also the biggest growth in the next 20 years. India and the USA will also have significant growth. India and the USA will also have significant growth. European countries have marginal growth, Europe is not the “old continent” only because of its buildings…today it is also old because of its people. European countries have marginal growth, Europe is not the “old continent” only because of its buildings…today it is also old because of its people. Indonesia and Brazil will move from positions 9 and 10 th to position 5 th and 6 th in year Indonesia and Brazil will move from positions 9 and 10 th to position 5 th and 6 th in year 2025.

Diapers required by country (market share) Market share data per country is not available (not free). Market share data per country is not available (not free). I believe it is possible to estimate market share using only macroeconomic indicators from each country. I believe it is possible to estimate market share using only macroeconomic indicators from each country. With a mathematical model that uses “pre-segmented” Purchasing Power Parity (PPP), Unemployment data and a minimal threshold PPP that triggers diaper sales. With a mathematical model that uses “pre-segmented” Purchasing Power Parity (PPP), Unemployment data and a minimal threshold PPP that triggers diaper sales. The only information we do not have are the cultural barriers that generate market resistance…but we can have an educated guess. The only information we do not have are the cultural barriers that generate market resistance…but we can have an educated guess.

Market Share for Baby Diapers from my model: Only countries with PPP > $2,000 (*Nigeria, Bangladesh, Ethiopia and Congo excluded*) Country Market Share 2005 India2.0% China5.5% Indonesia9.0% Pakistan4.0% United States 95.5% Brazil29.5% Mexico58.6% Philippines21.5% Egypt22.2% Vietnam9.0%

What kind of cultural and social barriers?

Social and economic Barriers: In many countries the cost of diapers are very high in relation to the cost of labor. In India, it is still possible to hire a maid with $100 dollars per month (but not for long). In many countries the cost of diapers are very high in relation to the cost of labor. In India, it is still possible to hire a maid with $100 dollars per month (but not for long). It takes a lot of money to reeducate people regarding what are acceptable social practices (such as babies “peeing” on the street). It takes a lot of money to reeducate people regarding what are acceptable social practices (such as babies “peeing” on the street). Note: The playboy maid photo was to make sure you were not sleepy Note: The playboy maid photo was to make sure you were not sleepy

Baby diaper market predictions China will have the largest baby market grow in the next 5 years or so. Explain… Compare with Japan… China will have the largest baby market grow in the next 5 years or so. Explain… Compare with Japan… India will be the largest consumer of diapers within the next 15 years, explodes in about 3 to 5 more years when PPP reaches required Threshold (get ready!) India will be the largest consumer of diapers within the next 15 years, explodes in about 3 to 5 more years when PPP reaches required Threshold (get ready!) Brazil (waiting for higher PPP), 10% of the people in Brazil have 50% of the wealth. Indonesia… Brazil (waiting for higher PPP), 10% of the people in Brazil have 50% of the wealth. Indonesia… North African Countries (exceptional growth!) North African Countries (exceptional growth!) Latin America (Colombia, Argentina, Chile) OK. Mexico and Caribbean countries limited because of current poverty levels (Mexico’s poverty is 40% and market share is close to 60%, only growth in this region are exports) Latin America (Colombia, Argentina, Chile) OK. Mexico and Caribbean countries limited because of current poverty levels (Mexico’s poverty is 40% and market share is close to 60%, only growth in this region are exports)

Let us talk about the new diaper features.

How do you imagine the diaper of the future? People like to fantasize about the use of electronic gadgets. People like to fantasize about the use of electronic gadgets. The need moves the market and not only the technology The need moves the market and not only the technology I do not believe these gadgets will be mass produced

The diaper of the future: Landfill volume reduction, use microcapsules. Landfill volume reduction, use microcapsules. Skin protection, microcapsules to control pH !! Skin protection, microcapsules to control pH !! Grows when wetAfter salt is released

Diaper of the future: Special nonwoven fabrics (breathable when dry) Special nonwoven fabrics (breathable when dry) New nonwovens (breathable only when its hot) New nonwovens (breathable only when its hot) Backsheet without the need of laminated film will bring a new generation of extra soft diapers. Backsheet without the need of laminated film will bring a new generation of extra soft diapers. High compression packaging will continue. High compression packaging will continue. Air laid or pulp? What about synthetics? When? Air laid or pulp? What about synthetics? When? Better elastic components to improve diaper fit. Better elastic components to improve diaper fit. Much better pad integrity with new generation hot melts. Much better pad integrity with new generation hot melts. How much more performance in a diaper? How much more performance in a diaper?

Predictions regarding industry diversification Successful paper companies have a good chance of becoming successful diaper producers. Successful paper companies have a good chance of becoming successful diaper producers. Successful diaper producers have a slim chance of also becoming successful tissue producers, examples are everywhere. Successful diaper producers have a slim chance of also becoming successful tissue producers, examples are everywhere. Be careful when you diversify!! Be careful when you diversify!!

Conclusions

Thank you! Questions? By Carlos Richer Richer Investment SA de CV Diaper Consulting Services