The New King Of The Forest: International Paper

You can hardly blame the folks at International Paper Co. for strutting a bit. After languishing for years as an undistinguished and inefficient No. 3, IP had average annual profit growth of 63.3% between 1986 and 1989. Thanks to a smart acquisition spree, IP is now the leader in the paper industry worldwide. But even IP is discovering it can't maintain its earnings momentum in the unforgiving paper business.

There's no doubt that Chief Executive John A. Georges has substantially remade the company since his arrival in 1984. To make IP less vulnerable to the wild cyclical swings of the U. S. industry, he has vastly expanded its presence overseas and increased its focus on high-margin specialty products. But even though these moves have helped the company outperform its now-troubled industry, they haven't been enough to prevent steep profit declines in 1990 and the first three quarters of this year. Now, the question is whether Georges has successfully positioned IP for a durable earnings rebound once the industry recovers.

If not, it won't be for lack of trying. Since taking over, the acquisitive Georges has plunked down $4.5 billion to snap up 23 paper companies here and abroad. Today, $4.1 billion, or 32%, of total sales comes from exports or foreign-based units.

MINIMAL HAVOC. To further insulate itself from the ups and downs of the commodity-paper business, the company has increasingly emphasized specialty items, such as photographic papers. These products will likely boast profit margins of around 13% this year, compared with 8% for traditional commodity items, such as paperboard and reprographic paper used in copying machines. Specialty products now constitute 14% of sales, more than triple the proportion in 1985.

Georges has also refashioned IP into a more efficient competitor. Since 1985, IP has spent $4.8 billion upgrading its network of 185 paper mills and manufacturing facilities. It's now among the lowest-cost producers in the industry, analysts say. Adds Thomas C. Graham, a company director and chairman of Washington Steel Corp.: "Georges has taken a company that was a dog in the industry and made it into the best."

This dog is now definitely the leader of the pack. Soft demand has meant an industrywide earnings falloff, and IP's profits, excluding a onetime charge of $ 212 million, were down 18% last year, to $706 million, on $13 billion in sales. But earnings fell by as much as 72% at archrival Boise Cascade Corp. And profits for the industry as a whole sank 26%. International Paper's stock performance has also outpaced rivals' (chart).

Now, the 60-year-old Georges wants IP to become even less dependent on the U. S. market. He's scouting for new acquisitions, particularly in the Far East. "I'm looking at possible deals all the time," he says. IP certainly can handle another big buy or two. Since virtually all of Georges' deals have been paid for in cash or stock, the company's long-term debt-to-capital ratio is a reasonable 32%, vs. 40% industrywide.

One area in which Georges has taken some lumps has been IP's labor relations, which were strained by his cost-cutting campaign and what union leaders decry as heavy-handed tactics. During a 1987 contract dispute over proposed cuts in wages and benefits, IP brought in replacement hands and locked out some 1,200 striking workers at a mill in Mobile, Ala. That lockout resulted in a 16-month strike by three other IP paper mills nationwide.

In the end, an agreement was struck--but the United Paperworkers International Union has filed claims with the National Labor Relations Board, charging that IP owes its members more than $40 million in back pay. Says Mark Brooks, special-projects director for the union: "The company has gone from a relatively enlightened employer to the absolute worst since John Georges became CEO." Georges, who says most of the labor problems are behind the company, defends its stance. "The world market isn't very forgiving. You've got to be cost-competitive," he says.

IP is still feeling the unforgivingness of the market. It recently reported that earnings in the first nine months of 1991 were off 37%, to $345 million, on sales of $9.5 billion. But once again, IP's numbers were better than most. Still, if the industry fails to make stick a round of 9% to 24% price hikes, 1992 could be ugly. Georges is upbeat: "I think we've hit bottom and are on our way back up." But a rebound, he adds, may not come until 1993.

Georges argues that IP is now well-positioned for an earnings ride when the industry recovery arrives. In 1985, he shrewdly sold off the company's remaining cyclical newsprint operations, which once accounted for a third of pulp and paper output. The deal looks good now: Newsprint prices have fallen 23% from their high of $650 per ton in 1989. To fill the gap, Georges expanded the company's position as a paper distributor with the acquisition of Hammermill Papers in 1986. It's a much more stable -- and profitable -- business than newsprint and now accounts for 20%, or about $3 billion, of total sales.

And consider the company's Strathmore Paper unit, which makes premium uncoated paper products in some 230 colors for stationery, catalogues, and annual reports. It's a lucrative business. IP can sell the paper for $2,500 to $5,000 per ton, vs. the $800 to $900 a ton the company fetches for such commodities as copy-machine paper.

OUTSIDER. Bailing out of newsprint was an unusual move for a large, integrated paper company, but Georges has often gone against the conventional wisdom of the industry. During the last upturn, in 1989, rival companies such as Georgia- Pacific Corp. made huge investments to increase output of commodities such as pulp. IP refused. Now, with prices for these products having fallen as much as 40% this year, competitors are reeling.

Georges' iconoclasm may stem from being an industry outsider. Like his predecessor, Edward Gee, he was brought in from Du Pont Co. There, Georges managed its textile fiber department and learned how to navigate through the highly cyclical chemical industry. There, too, Georges developed what associates describe as his low-key and analytical managerial style.

Now, Georges will have to be sure IP can make the most of the industry rebound. Already, some customers are grumbling that IP's new size has made it less attentive to customer service. "They're elitist. I haven't seen one of their corporate officers on these premises in the last five years," says the purchasing director at a major Midwestern manufacturer of business forms.

And IP may not be such a standout once prices for commodities rebound, lifting rivals' earnings. Moreover, others may decide to follow IP's lead and challenge it in its specialty markets. "The only way a specialty business can cushion you is if there are few other competitors," says one rival.

Indeed, being No. 1 brings a challenge of its own. IP's achievements have been considerable. Now, Georges must make sure that IP is ready to be an overachiever again.

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