IP CEO Talks Global Outlook

By Bill Dries

International Paper’s acquisition of Temple-Inland Inc. of Austin, Texas, is going smoother than anticipated, according to IP CEO John Faraci.

FARACI

It’s going well enough that Faraci is willing to talk about the prospect of adding new jobs to IP operations in Memphis, which is home to the global and North American headquarters of International Paper.

“Our Memphis footprint is more or less the same as we integrate Temple – the possibility that some more jobs will come into Memphis,” Faraci told The Daily News. “Temple is pretty much a North American-based company and we’re not going to be operating out of Austin.”

In a wide-ranging interview following the company’s latest quarterly earnings statement, Faraci talked about the integration of the two companies following the closing in February of the $3.5 billion deal.

“It’s a company that was focused on performance. They probably emphasize volume more than profitability. We emphasize profitability more than volume,” he said. “We come from the same industry and we were competitors. So, I think it’s a mistake to assume the cultures are similar. But that doesn’t mean we can’t get employees to buy into what International Paper is trying to do.”

Faraci recently marked a milestone in the company’s three-year transformation from one that makes paper products to a company with its own logistics network.

“It’s a different business than manufacturing. We’re one of the largest national distributors of paper and packaging products,” he said. “I’d say the main challenges in the marketplace are profitable sales and commercial printing.”

The transformation has included two acquisitions – the first of Weyerhauser for $6 billion in 2008 and the second Temple-Inland.

“We’re using the lessons we learned from Weyerhauser on Temple as opposed to kind of relearning new things. We bought the company not the business, which is a little different,” he said. “International Paper has done a lot of consolidating over the last decade. One of our core competencies is we know how to integrate companies quickly and successfully.”

The other part of the transformation was IP’s decision to sell its timberland holdings starting in 2005.

“It forced us to really kind of look at our strategy and say we are going to do whatever it takes to be successful in what’s left over because we don’t have the timberland to kind of hold us up,” Faraci said. “It generated a lot of cash and it gave us the resources to really reposition International Paper in a way that turned out to be positive for the company.”

He still refers to the company as a basic materials company in which free cash flow generation is more of a priority than revenue growth.

Part of IP’s continuing evolution is xpedx, its North American printing distribution business.

“The commercial printing market, which is 60 percent of xpedx’s revenues, is struggling. Our sales to that channel, which is our biggest market are pretty weak,” he said. “It’s just more important that we be working on some of these other things we can do to change our cost structure.”

IP released its first-quarter results the same day as new gross domestic product forecasts were released. Faraci talked of the connection with his company’s performance and what that says about the future of the U.S. economy.

“Our corrugated packing business shipments were up about a percent. That’s probably consistent with 2 percent GDP growth not 3,” he said. “So, we’ve got a recovering but a far from fully recovered economy and probably not enough GDP growth to really make a big dent in jobs, which is what it’s going to take.”

The U.S. market is a different market for International Paper, he emphasized, as he contrasted it with the move of IP into new global markets.

“In North America, the markets are big and mature. Packaging has still got a little growth in it – probably 1 or 2 percent. Paper is declining we think this year about 2 percent, but probably 3 to 4 percent over time. … It’s not going to shrink to zero,” Faraci said. “Markets like Russia, India, Latin America and China are growing because per capita consumption is so low. As those economies grow even with electronic substitution, the consumption of paper will grow as will the consumption of packaging.”

Faraci also said the supply chains are different as are the customers and the nature of the markets.

“I guess what we learned in operating in some of those environments where business practices are different is that it is hard to change things but it can be done,” he said. “You can do business the way we need to do business in these emerging markets. But you’ve got to be clear. You’ve got to be persistent and no exceptions.”