BRUSSELS, Sept 1, 2014 (PPI Magazine) - For International Paper's (IP) John Faraci, his toughest decision in 11 years as the firm's top executive was the unwinding and $11 billion sell-off of the company's vast forestland assets as well as various non-core businesses. IP called the effort a "transformation plan," a term that would later be used by other US pulp and paper firms to denote their restructuring programs.
It was hard because Faraci said IP's "trees" on 6.8 million acres were at the time in 2005-2006 the company's best assets with the highest return and cash flow generation of any company business.
"We decided on paper and packaging," which were losing money, he said. Specifically, packaging, primarily containerboard, and uncoated freesheet (UFS) paper were selected.
"That [decision] was huge," Faraci told PPI Pulp & Paper Week in early August. "We could have gone in any direction. We could have become a tree and lumber business. We decided we wanted to be more focused, more global. ... It was about being more competitive and transforming the company."
For the second time since 2006, Faraci was recently selected by financial analysts as the 2014 RISI North American CEO of the Year. He will be honored on October 9 at RISI's annual conference in Boston. He also will speak at the event and participate in a CEO panel discussion.
"He doesn't really get as much credit as he deserves," said one Wall Street analyst.
"He's executed quite successfully" and IP has "best-in-class" margins, the analyst added.
Faraci is to retire before March 2015. The 64-year-old chairman/CEO is a world traveler who turned the world's largest pulp and paper company around with the transformation program and also with an aggressive globalization push.
"We wanted to be better than average," said Faraci, who started with IP in 1974. He described IP in 2005 as a decathlete skilled in 10 varied events and "not capable of winning gold medals."
Since 2007 and the Great Recession, IP has increased annual revenue 31% to $29 billion and increased EBIT by 15%. IP's profit of $1.378 billion last year was the highest since 2007. Today, IP maintains large positions in Brazil and Latin America, Russia and eastern Europe, China and Asia Pacific, and a small share in India. All of these were acquired in the last seven years. IP now generates three-quarters of every dollar in revenue from packaging, mostly containerboard and corrugated boxes (64% of company revenue). That's up from a two-thirds packaging share five years ago and one-third share 10 years ago.
The expansion occurred principally in the US, but also throughout the world, including Brazil, China, India, Morocco, and Russia.
In retirement, Faraci laughed at the thought that he might refrain from much international travel.
The transformation asset sales generated roughly $11 billion and, "At first, we didn't know what to do with the proceeds," he said.
Then came a bevy of deals that cost at least $11 billion to remold IP -- especially into emerging markets. This occurred while US paper and board capacity declined 15% from 2000 and to 2010.
Various deals since 2006
In 2006, IP entered a venture with Sun Paper in China involving coated paperboard, and did a pulp swap in Brazil for a UFS mill that paved the way for the company to become a major uncoated printing and writing paper producer in Latin America.
In 2007, IP joined a venture with Russia's Ilim Group, a large market pulp producer that exports to the world's largest single-country producer of paper and board, China. The venture company mills also produce kraft linerboard, and printing and writing papers.
In 2010 and 2011, IP acquired 15 packaging plants in China from SCA, including 13 that are corrugated plants, and acquired a majority share of printing papers producer Andhra Pradesh Paper in India.
In 2012, IP gained a share in Brazilian containerboard and corrugated producer Orsa and this year acquired the remaining 25% of the firm.
Big Weyco/Temple purchases
In the US, IP spent $6 billion in 2008 to acquire the containerboard mills, and corrugated and recycling plant system of Weyerhaeuser, and paid $4.5 billion in 2012 for Temple-Inland, which was one of North America's largest containerboard producers.
From these deals, IP's No. 1 share in the 35-million-ton/yr North American containerboard market rose to 30%, according to RISI capacity figures.
The Wall Street analyst pointed out that Faraci faced opposition for acquiring the Weyco assets. His decision to shut the one-million-ton/yr Courtland, AL, paper mill late last year also was significant because it eliminated almost one-third of IP's UFS capacity in North America, the analyst said.
"He's willing to take a long-term view and do what he thinks is right, and even if it goes against conventional wisdom," the analyst added.
The acquisitions outside the US meant 23% of IP's revenue in 2013 was from offshore, up from a 17% offshore share in 2005.
Globally, Faraci said he counted on connections for market entry and IP's own know-how for results. Interest in Brazil stemmed from IP-acquired Champion International's pulp and printing papers mills in Brazil. He learned of the China/Asia Pacific potential from IP's Carter Holt Harvey (CHH) venture in New Zealand. Faraci was CHH's CEO and managing director from 1995-1999. Interest in Russia came from IP's experience since 1992 at the Kwidzyn coated boxboard and office, offset, and newsprint papers mill in Poland.
He remembers a government official in Poland noting that IP was "one of the few US companies looking at all at Poland."
"Had we not made the investment in Poland," Faraci said, "we wouldn't have had the vision, courage, (and) perseverance in Russia."
Faraci sees strong growth potential in Russia. He sees the same in India because of a growing population and middle class.
The India growth should create a local population that will "consume a lot of everything, but it will happen slowly over time."
For the deals overseas, IP acquired venture shares in established companies. From that position, IP added its pulp and paper insight while looking out "five years from now."
He told of IP helping Sun Paper enhance its coated paperboard to a "more value-added" mix, which included the start of a new machine in 2012. IP and Sun operate four board PMs in China.
Faraci stressed that it is a "real challenge" to operate assets in other parts of the world. No other top 10 US pulp and paper company has been active offshore in acquisitions or ventures in the last several years. Georgia-Pacific sold its tissue operation in Europe. RockTenn is focused in the US. Domtar, Graphic Packaging, Greif, and MeadWestvaco have grown offshore assets selectively. The lone top 10 firm with a big global footprint is tissue paper producer Kimberly-Clark.
Outside North America, Faraci cited three keys for doing business: to "know what you don't know," select a top partner, and be ready for "hard work" with perseverance.
"Having the right partner is absolutely key," he said, adding that the company worked on the Ilim Russia partnership for two or three years before reaching agreement.
The woodyard at IP's operation in Bratsk, Russia
Keep ‘eyes wide open'
"You need to have your eyes wide open," he said. "Everything in the emerging markets takes longer."
He told of the company's Compagnie Marocaine des Cartons et des Papiers (CMCP) corrugated plant in Morocco. IP acquired a 65% share of CMCP in 2005, with the goal for the plant to mainly make boxes for the southern European produce business. He said CMCP grew slower than expected. The business took five or six years to grow as the company wanted instead of three. Even so, Faraci said the plant is one of the company's finest in corrugated packaging.
IP was "lucky" to generate the $11 billion before third quarter 2008 when the Great Recession knocked down economic growth, according to Faraci.
In a presentation the day before Halloween in 2008, Faraci told of the dramatic drop in demand and prophetically said that "there is no question from my perspective that the world changed in the third quarter."
IP sales declined 6% and by $1.5 billion in 2009, from 2008.
The recession "was like crossing a river and we couldn't see the other side, but knew a bank was there and that we will find that bank," he said.
"What I learned is that people at IP can step up and do things they've never done before."
The company's gain of $1.7 billion in 2009 from a newfound "black liquor" biofuel tax credit for kraft pulp producers "wasn't a lifeline" during the recession and "if we hadn't received the black liquor tax credit, IP still would have gotten through that period," according to Faraci. Even so, the $1.7 billion helped IP to $704 million in net income.
Faraci was chairman of the American Forest & Paper Association (AF&PA) trade group board of directors during the recession, according to AF&PA president/CEO Donna Harman:
"John's belief that the industry is stronger as a result of the sum of its parts was always evident at our board table. He helped set the tone for the entire industry to succeed and was never afraid to push for a faster pace of change," Harman said. "His leadership and IP's success have affected not only the US paper and packaging industry, but the global industry as well."
At IP, Faraci said he leaves a "strong leadership team." He is to be replaced by Mark Sutton, who has been in charge of the industrial packaging unit. Sutton recently was promoted to be president/COO.
"There is a succession plan in place and an orderly transition will unfold over time," Faraci said.
In Sutton's place is Bill Hoel on an interim basis as Senior VP of industrial packaging.
Other members of the lead team include CFO Carol Roberts who used to lead the industrial packaging unit, and Timothy Nicholls, who runs the white papers and Americas operations, and formerly was CFO. Tom Kadien is Sr VP of consumer packaging and in charge of the Asia and China unit. Tommy Joseph is Senior VP of manufacturing and technology.
Raised in Newark, NJ, Faraci was active in sports in high school. His father ran a family business in the fabrication sector. His wife's father also ran a family business, in construction. He was influenced watching the family businesses run. In college, Faraci played on the tennis team at Denison University, a small, private liberal arts college in Granville, OH, near Columbus. His tennis favorites are John McEnroe and Andre Agassi, both former No. 1s in the world in the 1980s and 1990s, respectively. Faraci still likes to "play tennis to win and golf for fun," he said.
In retirement, Faraci said this week: "I'll be rooting from the sidelines (for IP). We won't be the same in five to 10 years as we are today."
His legacy at IP is that: "We made a difference."
Greg Rudder is Editor of PPI Pulp & Paper Week and is based in RISI's San Francisco, CA, office.
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