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VOL. 127 | NO. 107 | Friday, June 1, 2012

Xpedx, Distribution at Heart of IP’s Future

By Bill Dries

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International Paper Co. executives spent more than four hours last week talking with investors and analysts about the Memphis-based company’s near-term potential and future.

FARACI

IP CEO John Faraci declared earlier this year that the paper and packaging company with global holdings is now beginning its post-transformation period that began in 2005 when it sold $11 billion worth of its assets including timberlands and continued through the recession up to this year’s acquisition of rival Temple-Inland of Austin, Texas.

With investors last month, Faraci and IP executives talked of a paper, corrugated cardboard and packaging company that still has a global reach but which is moving its goods based on the needs of very different markets – mature and emerging.

Those markets are divided into five global regions – North America being the largest.

“And it probably will continue to be that way for a long time,” Faraci said. “That said, we have $6 billion of revenues outside North America in low-cost, high-margin places and we have strong capable management teams on the ground out in those regions leading those businesses.”

IP is described by Faraci as primarily a manufacturing business. But one of Faraci’s near-term challenges is xpedx, which not only does commercial printing but also business-to-business distribution of packaging, print and facility supplies in North America.

Commercial printing is 60 percent of xpedx’s revenues and those revenues are “struggling” by Faraci’s description.

At the end of the first quarter of 2012, xpedx had earnings of $19 million compared to $33 million in the last three months of 2011.

While IP’s move to sell off its timberland holdings turned a lot of heads in the paper business, Mary Laschinger, senior vice president of xpedx, said the company also made a key change seven years ago to xpedx, which had been acquiring rivals and others in the same line of work since the late 1980s. Xpedx bought 20 companies in a 19-year period ending in 2008.

“When we made those acquisitions we had a view that based on the customers and markets, we did not fully integrate all of these businesses into one single system,” she said.

That changed starting in 2005 and by the end of last year, according to Laschinger, the integration process was almost complete.

It’s part of a process in a large global company with many parts that has been looking at its size for the last seven years as well as where it does business and what businesses it should be in and which it shouldn’t be in.

“I would remind you that International Paper is not a bigger and better story or strategy,” Faraci told investors. “We do believe size has some impact … but the most important measure at International Paper in our plan is profitability. Size is an outcome, not a measure of success.”

With that, Laschinger has become used to questions about how xpedx fits into a portfolio that includes a mill in Russia, box plants in China, more mills in India and a eucalyptus plantation in Brazil.

Her answer is that xpedx shares customers with the rest of IP. It is a channel to other markets because it is a distribution business.

“Distribution plays a significant role in providing access to customers and a large customer base that the mill system or maybe the box plants either choose not to serve or cannot serve based on the customer needs,” she said.

She and Faraci and the rest of the International Paper team are aware of the downside of being in the paper business at a time when paper use is declining.

But Laschinger says the print business is here to stay for IP and senior vice president Tim Nicholls said the rate of the decline has evened out.

“We think it’s manageable and we think it’s going to be around 3 percent per year over the next few years,” Nicholls told investors at last week’s gathering, noting a 1999 peak in uncoated free sheet paper in North America of 16 million tons a year. That then began declining at a rate of 2 percent annually. It was about that time that electronic and digital media began to make rapid advances.

“We think that electronic media accounted for about a third of the demand destruction over that period of time,” Nicholls said.

That accelerated with and because of the recession starting in 2008.

“Once the economy started improving we’re back on a pace of 3 percent,” he said. “We think that continues even as advances in electronic media continues.”

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 128 339 21,916
MORTGAGES 76 240 16,657
FORECLOSURE NOTICES 14 31 1,535
BUILDING PERMITS 0 641 43,132
BANKRUPTCIES 36 136 6,853
BUSINESS LICENSES 4 27 3,196
UTILITY CONNECTIONS 0 0 0
MARRIAGE LICENSES 0 0 0