Georgia Pacific's top executive Pete Correll talks to the Perini Journal about the massive move into tissue and the plans to spin off the consumer product and packaging business in a new company, simply called CP&P Inc. for the time being.
Georgia-Pacific has been much in the news lately. The American forest products giant, which had net sales in 2001 of US $25 billion, was first incorporated in 1927. It has been in the tissue business since 1963, when it acquired two small tissue mills. However, up until 2000, G-P had been a rather quiet player on the tissue scene, with most of its business concentrated in the more traditional forest products fields such as timber, pulp and fine papers.
In mid-July 2000, Alston D."Pete" Correll, G-P's chairman, CEO and president, announced a massive deal by which G-P would acquire all outstanding shares of rival tissue maker Fort James for approximately US $11 billion. Fort James itself was a relatively young company, having been formed in 1997 through the merger of two well established names in the US paper industry, James River and Fort Howard.
With the takeover of Fort James completed in November 2000, Georgia-Pacific immediately became the world's largest tissue maker, with total capacity at that time of over four million metric tons/year. This was an enormous jump from being the world's number five producer with capacity on the order of 600,000 tons per year.
Obviously G-P had decided that tissue would be its area of concentration for the future. The day after he made the Fort James deal public, Correll announced that G-P was merging its timber operations with Plum Creek Timber Company in a deal valued at approximately US $4 billion. These two major deals followed a series of smaller, but nonetheless significant, moves that had been made in the preceding years aimed at unlocking shareholder value from G-P's large but somewhat disparate asset base.
In May of this year, G-P announced yet another bold move. In the largest transformation step in G-P history, Correll presented a plan to split the company into two companies to separate the consumer products and packaging assets from the building products and distribution businesses. To learn more about the strategy behind the massive move into tissue, as well as where the group is headed for the future, we recently spoke with Pete Correll.
Correll has spent his entire career in the paper industry. A native of Brunswick, Georgia, his academic education includes a business degree from the University of Georgia and a Master's Degree in Pulp &Paper Technology and Chemical Engineering from the University of Maine. He started his career with Westvaco in 1964 and then spent ten years with Weyerhaeuser in various management positions. Following this, in 1977, Correll joined Mead where he advanced to become senior vice president of the forest products group before joining Georgia-Pacific in 1988. He became Georgia-Pacific's chairman and chief executive officer in 1993. Under the separation plan, Correll will become chairman and CEO of the as yet unofficially named consumer products and packaging company. While the name was not known as this issue went to press, it is clearly less important than the reasons Correll has for focusing on tissue and the strategy behind the transformation of Georgia-Pacific.
It should be kept in mind that when this interview took place, Correll was legally restricted from making any major comments about the pending initial public offering (IPO) of the new company.
PJL: WHAT WAS THE MOTIVATION BEHIND THE BIG MOVE INTO TISSUE WITH THE ACQUISITION OF FORT JAMES IN 2000?
PETE CORRELL: We decided, and publicly stated, about five years ago that we wanted to move out of the cyclical, commodity-like product sectors into higher-margin, higher-value businesses. We knew that tissue was a good business for us and had been focusing more on it during the 1990s. Almost nobody outside our company realizes that between 1990 and 2000 we were among the fastest growing tissue companies in the world. By this I mean organic growth, before the Fort James acquisition. We were growing at an average annual compound rate of 9% per year. We launched and built two brands, our Sparkle kitchen towels and Angel Soft bath tissue, during this time.
Based on this experience, we felt we understood the tissue business very well. We also liked the margins that these products gave us. Therefore we decided that a bigger move into tissue would be a good way to improve margins as well as to stabilize earnings.
Around that time, Fort James missed earnings estimates several times and each time this happened their stock dropped. When the price was down to a level that we were comfortable with in mid-2000 we jumped at the opportunity to buy it. In fact we had bid for Fort Howard in 1997 when they eventually teamed up with James River, so we knew them quite well.
Obviously the upcoming split of the company means we will be highly focused on consumer products in the new company but, under the US stock market rules, I am not allowed to say much about that just now.
PJL: EVEN THOUGH G-P HAS BEEN IN THE TISSUE BUSINESS SINCE 1963, IT IS ONLY RECENTLY THAT YOU HAVE MADE IT SUCH AN IMPORTANT PART OF YOUR BUSINESS. HOW DO YOU PLAN TO COMPETE AGAINST TWO OF THE WORLD LEADERS IN CONSUMER PRODUCTS, PROCTER & GAMBLE AND KIMBERLY-CLARK, BOTH WELL- KNOWN FOR THEIR MARKETING STRENGTHS AND R&D ACHIEVEMENTS. DO YOU INTEND TO MAKE ANY BIG CHANGES IN YOUR MARKETING AND R&D ORGANIZATIONS?
PETE CORRELL: Quite frankly, we are not in business specifically to do marketing or R&D. We are in business to make money and on that score we compete very favorably with K-C and P&G. Our margins are comparable. We are very focused on being a low-cost producer and I tell you there is simply no substitute for this strategy when it comes to making money. We are also highly focused on knowing our customers very well and I think we have excelled at that. We recognized very early in the development of the mass retailers like Wal-Mart that they were going to be very big. Therefore, we have devoted a lot of attention to serving them and this intimacy with these customers has paid off very well for us.
On the subject of R&D, we have a great R&D effort with two excellent R&D facilities in the company, one in Wisconsin, USA, and the other in Kunheim, France. After we bought Fort James, we learned that they were even more technically advanced than we originally thought, with a surprising amount of good technology they had in the pipeline, ready to roll out. I was especially impressed with the very sophisticated embossing technology that they had. This is a good example where they had some excellent ideas that we were able to get into the market very quickly. For example, our new scrubbing circles' which we have recently incorporated on our Brawny towels is a result of the superior embossing technology that Fort James possessed.
I think this is an important benefit of the acquisition, as G-P has always been known for its implementation skills and Fort James had good technology. Thus we have been able to act quickly to implement the technology they had been developing.
That's why you have seen, and will continue to see, a whole raft of new products and product upgrades.
As another example, we are now upgrading our Quilted Northern bath tissue so that our two-ply product will be as good as or even better than Charmin from P&G. We are confident that we can meet or beat our competitors as quality using the embossing expertise we already have in place.
PJL: ON THE SUBJECT OF R&D, WILL YOU BE PUTTING MORE EMPHASIS ON THIS AREA IN THE FUTURE AND WILL YOU INVEST IN BASIC RESEARCH?
PETE CORRELL: As far as basic research, we don't intend to focus much of our resources there. We want to work with applied technology that can give us a competitive advantage on cost or quality. We already have excellent resources and facilities at our R&D units. We are not planning to expand these efforts but do aim to work harder to promote technology transfer. We are working especially on moving technology across the ocean from the USA to Europe and vice versa.
PJL: HOW WELL HAS THE INTEGRATION OF FJ INTO G-P GONE? HOW ARE THE SYNERGY EFFECTS COMING ALONG AND ARE THEY UP TO YOUR EXPECTATIONS?
PETE CORRELL: We think the integration is proceeding very well. When we did the deal we said we expected around $500 million in synergy effects. Now we are looking at even higher numbers, with the latest estimate up towards US $560 million. We are very pleased with the way the entire acquisition has gone. As far as any trouble spots, I quite frankly can't name any area where things haven't gone as we expected.
PJL: WITH SUCH A GIANT EMPHASIS ON TISSUE, IT SEEMS THAT YOU MIGHT BE STRETCHED A LITTLE THIN WITH RESPECT TO MANAGEMENT RESOURCES IN THE TISSUE AREA. HOW ARE YOU ADDRESSING THIS ISSUE?
PETE CORRELL: We have an outstanding management team running our tissue business both in the United States and Europe, and I believe we have done an excellent job of retaining the strongest team members from the respective tissue businesses of G-P and Fort James. In addition we have been bolstering our sales and marketing talent with managers experienced in a wide range of consumer products companies like Campbell's Soups, Kraft, Heinz, etc.
Mike Burandt, who was instrumental in building G-P's tissue business from the ground up, is the president of our North American business while John Lundgren, a tissue veteran who came over from Fort James, runs our European business.
Reporting to them are a host of excellent facility managers, sales managers and marketing managers. So, I believe we are quite "deep" in talent.
PJL: HOW IMPORTANT IS YOUR EUROPEAN OPERATION TO YOU? THERE WAS A LOT OF TALK JUST AFTER THE FORT JAMES DEAL, THAT YOU WERE PLANNING TO SELL THE EUROPEAN UNIT. WHAT IS YOUR POSITION ON THAT NOW?
PETE CORRELL: There are a lot of dumb rumors that get started when a big acquisition occurs. And the idea that we were thinking about selling the European operation was one of those rumors. Europe is very important to us. We plan to keep our European operation and use it as a platform for further international growth. We are a big player in several of the European markets, and we are the market leader in two of the biggest European markets, France and Britain. Of course we have almost nothing in Germany at the moment but we don't want to be there right now as the returns are too low.
PJL: DO YOU HAVE ANY FURTHER GLOBAL AMBITIONS? WHAT ABOUT ASIA AND SOUTH AMERICA?
PETE CORRELL: We are interested in global expansion in the future, but we of course first want to concentrate on getting the most out of what we presently have. We already have a small tissue converting operation in China and another one in Russia. We do want to grow further in the global markets but it is not our top priority at the moment.
PJL: DO YOU ENVISAGE GETTING INTO OTHER HYGIENE PRODUCTS SUCH AS BABY DIAPERS?
PETE CORRELL: In North America, at least, we feel that Kimberly-Clark and Procter & Gamble have done a very good job at making it difficult for anyone else to enter the baby diaper market. So for the time being, we don't think there is much room for another player in that sector. In Europe we are already in the baby care and feminine hygiene sector, especially in France where we have a very strong presence.
PJL: WHAT IS YOUR POSITION ON BRANDS VS PRIVATE LABEL TISSUE PRODUCTS? CAN YOU ENVISION PL BECOMING MUCH BIGGER IN THE USA, AS IN EUROPE?
PETE CORRELL: I don't think that there is going to be any dramatic swing in the US market when it comes to private label.
The US is a brand-conscious society and I think that brands will continue to have the largest share. However, we are well equipped if some sort of swing does occur. Our margins are the same on both private label and brands.
PJL: HOW IS THE US TISSUE MARKET FOR YOU NOW? YOU ARE SAID TO HAVE QUITE A FEW MACHINES RUNNING AT REDUCED CAPACITY.
PETE CORRELL: We are generally satisfied with our margins but in the AFH sector we do have some extra capacity that we are not using right now. We are running that capacity as needed to keep the balance with market demand. But right now our margins are good, at 21% for the whole tissue business.
PJL: YOU HAVE RECENTLY MADE A BIG MOVE INTO TAD TECHNOLOGY WITH THE STARTUP OF YOUR FIRST TAD MA CHINE IN FRANCE LAST YEAR AND THE ANNOUNCEMENT THAT YOU WILL BUILD ANOTHER ONE IN PORT HUDSON, USA. WHAT IS YOUR PLAN AND WHY WASN'T THE FIRST MACHINE AT PORT HUDSON, WHICH YOU BUILT IN 2000, A TAD MACHINE?
PETE CORRELL: The technology used depends on the product you are talking about. If we look at kitchen towels, TAD is clearly better for that application. And since we are looking to grow in the towel market, that is why we recently said that we will be building a new TAD machine about every two years for the foreseeable future. We built one in France last year and have one TAD machine going in at Port Hudson next year. Following that we will build another one on the West Coast in about two years' time, which will most likely go in at the Wauna, Oregon, mill. So we are concentrating heavily on TAD for towels. But for bathroom tissue, it is a different story. We are quite convinced, based on the superior embossing technology that we have, that we can make a two-ply bath tissue that will compete very well with TAD from our competitors. For example we have recently upgraded our Quilted Northern Bath Tissue which is based on a conventional wet-pressed base sheet. This is our new Ultra Quilted Northern, using our proprietary embossing in a 2-ply product. This is clearly as good as the Ultra Charmin, which is based on TAD. So I don't see any reason to use TAD in bath tissue. We can make a product which is as good as TAD but at a lower cost.
As far as the first Port Hudson tissue machine, it is not a TAD unit because we wanted to focus that machine on the bathroom tissue market. It is a state of the art machine, with a crescent former and a multi-layer headbox, but it's a bath machine, not towel, so we didn't need TAD.
PJL: WILL YOU SHUTDOWN MACHINES IN OTHER MILLS WHEN THE PORT HUDSON TAD MACHINE STARTS NEXT YEAR?
PETE CORRELL: We have consistently said we are going to match our production to customers' demand, so we will close smaller, less efficient capacity - unless we fill those machines with orders.
PJL: WHAT ARE YOUR GOALS FOR THE NEXT FEW YEARS WITH THE GEORGIA-PACIFIC GROUP?
PETE CORRELL: Our goals for the next couple of years will be to get our balance sheet in shape of course. We have too much debt right now and we are working hard to address that. We have already brought our debt down quite a bit but we have some more to go. We are also splitting the company in two and that will of course take quite a lot of our attention but I am not presently allowed to say anything more about the split as we are in the legally required quiet period before the IPO. We also want to continue to move up the value chain in complimentary products to the range we already have. In North America we really can't do much more as far as acquisitions in tissue as our market share is already about as high as the government will allow. Of course we can grow organically by building assets but we are not going to be too aggressive in that direction. As I said we will build a new TAD machine about every two years for the foreseeable future to grow with the market. As far as complimentary products I mean items that are sold by the retailers that are related to our tissue and tableware product line. We are looking at opportunities and synergies in that area and are confident that we can grow the business in that manner.
Outside North America, we certainly want to grow globally and plan to use our strong European group as a base for expansion in the future.