SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
December 6, 1994
Date of Report (Date of Earliest Event Reported)
INTERNATIONAL PAPER COMPANY
(Exact name of Registrant as specified in its charter)
New York 1-3157 13-0872805
(State of (Commission (IRS Employer
Incorporation) File) Identification
Number)
Two Manhattanville Road, Purchase, NY 10577
(Address of Principal executive offices)
914-397-1500
(Telephone No.)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
N/A
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
N/A
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
N/A
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
N/A
ITEM 5. OTHER EVENTS
Speech by Mr. John A. Georges, Chairman and CEO of International
Paper Company, delivered to a Financial Analysts meeting held on
October 18, 1994 in New York, New York.
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS
N/A
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
N/A
(b) Pro Forma Financial Information:
N/A
2
(c) Exhibits:
(99) Speech by Mr. John A. Georges, Chairman and CEO of
International Paper Company, delivered to a Financial
Analysts meeting held on October 18, 1994.
ITEM 8. CHANGES IN FISCAL YEAR
N/A
3
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: December 6, 1994 /s/ SYVERT E. NERHEIM
Purchase, NY Syvert E. Nerheim
Assistant Secretary
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EXHIBIT INDEX
(99) Speech by Mr. John A. Georges, Chairman and CEO of International
Paper Company, delivered to a Financial Analysts meeting held on
October 18, 1994.
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JOHN A. GEORGES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Good afternoon. Now that you have had a chance to absorb the information from
this morning, I'd like to share with you my thoughts about International
Paper's plans and prospects for the future. As you know, I became chief
executive officer of International Paper 10 years ago. When I did, I made a
commitment to you. Those of you who were here at that time may remember that
I said I would never overpromise and that I would deliver on what I said. And
I believe that we as an organization have lived up to that commitment. When I
say to you today that I'm excited about the prospects for our company over
the next several years, I don't use those words lightly.
You know that we've maintained a respectable level of profitability even
through the down cycle and that we are today in a very strong financial
position. That distinguishes us from a number of our competitors.
Another factor is that - and I realize I'm somewhat biased when I make the
comment - I have the strongest management team in the industry: not just the
people you heard from this morning, who in my mind are very impressive, but
the others in this room with whom you are having lunch. They are as dedicated
as I am to making a step change in the profitability of our company over the
next several years. And I'll tell you in a few minutes how we're going to do
that. I'm going to take the information given to you by Bob, Wes, John and
Mark, and put much of that same information in a different context, a context
that will help you understand what we're about.
STRATEGIES
Value-Added Products
Cost Reduction
Growth
o Core Paper, Packaging and Wood Businesses
o Distribution and Specialty Products Businesses
o Geographic Coverage
GOAL: 15 PERCENT ROE OVER A FULL CYCLE
Over the past years, we have described our strategies as constituting the
following: (1) We said we wanted to increase the quantity of value-added
products in our core products and to expand into related specialty
businesses. (2) We wanted to be a low-cost producer in our major product
areas, through aggressive cost reduction. (3) We wanted to grow our revenues
by selectively expanding in our core paper, packaging and wood businesses, in
distribution and specialty products businesses, and in geographic coverage.
There were obvious underlying reasons for these strategies. Back in the
middle 1980s, our mix in most of our businesses consisted almost entirely of
basic commodity grades. We were not a value-added company. Also, while we had
moved from being a company of old, higher cost mills through an aggressive
modernization program in the early 1980s and had made substantial progress,
we still had more to do. We needed to bring new vitality to the company to
help it grow. (We had flat revenues for quite a number of years as we went
through our restructuring.) We were interested in expanding our product line
to include products that were related to our core competencies, that would
give us greater growth and profitability and less cyclicality. This is what
we promised you some years ago.
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We also said we would pursue opportunities globally, seeking the best return
for our shareholders. And, finally, we set a goal to achieve a 15 percent
return on equity on average over a full business cycle. When I first stated
that goal, our ROE was 2 to 3 percent.
Today, I'd like to update you on our strategies in view of the progress we
have made. So let me take some of the same information given to you by the
previous speakers and restate it in the context of these strategies.
VALUE-ADDED PRODUCTS
Let's first review the pursuit of enriching our product mix with value-added
products.
In containerboard, in the trough of the last cycle, only 5 to 10 percent of
our products were what I would call value-added. By value-added I mean
products for which we received a higher price in the marketplace than the
basic product. I'm not talking about either recycled or lightweight products,
but some of the other specialty products. As John said, today about 30
percent of our product line commands a higher price. The Mansfield mill
coming on stream in 1996 will add to that capability.
INDUSTRIAL PACKAGING
High Strength, High Smoothness
Lightweight, Moisture Resistant
Recycled
Mottled White, White-Top
Triton System
Let's now turn to consumer packaging. In bleached board, the change is even
more dramatic, given the recent modernization of our Texarkana, Texas, Pine
Bluff, Ark., and Moss Point, Miss., mills. Before that modernization, I'd say
we were primarily in the commodity end of the folding carton business, and we
also made carton board for liquid packaging. Currently, we sell very little
in the commodity end of the business. Today, John Dillon covered the progress
we've made.
Now some of our progress has been tedious: for example, our aseptic packaging
program has been going on for almost 10 years. But we have persevered. Today,
we're proud of our product line. It's as good as any in the business, and we
are the clear leaders in some areas.
CONSUMER PACKAGING
Aseptic Systems
Liquid Packaging
o Juice Cartons
o Spout Pak
High-End Graphics
Coatings
In printing papers, our Hammermill and Springhill brands are respected as the
premier lines in the uncoated white papers business. Recently, we've added
100 percent recycled products and we've done a tremendous amount of work to
develop new specialty products for today's office equipment.
PRINTING PAPERS
100% Recycled Products
Specialty Papers for New Equipment
o Ink-Jet Printers
o Laser Printers
o Color Graphics
In the specialty products businesses, Mark Suwyn described a broad array of
new products, the life blood of these businesses.
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SPECIALTY PRODUCTS
Masonite
o New Door Facing Products - CraftMaster
o New Wood Siding - OmniWood
Decorative Products
o Acquired Fome-Cor
Nonwovens
o New Polypropylene Spunbond Lines
o Hydroentanglement - Project Coral
Specialty Industrial Papers
Specialty Chemicals
Imaging
o Direct Computer-to-Plate Products
o Imagesetting Films
o Multi IV Photographic Paper
The idea I want to convey to you is that we have made very substantial
progress in our strategy to expand our offering of value-added products.
At a recent management meeting, we reviewed our organization, our process and
our progress and we concluded that it was time to step up our efforts in
product development. In the last few years, we have reduced by half the time
needed to take a new grade or product from conception to commercial
production. In short, we have drastically improved our productivity. We've
hired a competent group of young, skilled people, and we intend to expand our
product development efforts in the coming years.
You have perhaps read recently that we are consolidating all of our packaging
development efforts in a new facility in Cincinnati, Ohio, from nine locations
around the country. Development of paper products will be at Erie, Pa., and
McKinney, Texas. Just a year ago, we purchased a coating facility in McKinney
for the production of low-volume grades of specialty paper products. The
facility is profitable, but more importantly, it's a development facility. In
our first year, we commercialized 13 new grades through McKinney. Today, we
have 15 development projects being processed there. We've come a long way, and
product development remains a very high and important strategy in the coming
years.
COST REDUCTION
Let me move to our second key strategy, cost reduction. I'm not talking about
the ongoing cost reduction that companies do all the time. On that, we keep
score. It runs about $100 million to $200 million a year on things that we do
to provide incremental change in the organization. We do that to be
competitive, and usually our customer winds up getting the cost savings.
Seldom do we improve our profitability a lot through ongoing cost reduction,
but heaven help you if you don't. The idea is to do it as well as, if not
better than, the competition.
As we went through the last cycle, we took a very hard look at ourselves. We
knew that we couldn't wait for good times to return, that we had to make step
changes in our organization. Now for the next five minutes, I'm going to talk
about manufacturing. It is an important part of our business, and we are
spending a great deal of time focusing on the manufacturing aspects of our
organization.
One way of getting cost reduction is through capital expenditures, what I
call a capital-intensive process. We're very good at that, and we have done a
lot of it in the past. What I'm going to describe to you now is quite
different and is not capital-intensive at all. It deals in a very significant
way with how you manage people
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and how you run the organization. But let me take you a step at a time
through our cost reduction process.
COST REDUCTION
Reduce Management Layers
High-Performance Work Systems
Organization Redesign
Productivity Improvements
o Precision in Manufacturing
o Mill Uptime and Improved Manufacturing Systems
o Cost of Quality
Leverage Purchasing Power
REDUCE MANAGEMENT LAYERS
The first thing that we did was to benchmark ourselves with companies both
inside and outside our industry. As we did, we realized that we had work to
do in terms of reducing management layers. It sounds simple, but it's a
little harder to put into practice. After much study, we concluded that we
must reduce the number of layers in our organization by an average of about
one and a half over the next 15 months. The actual reduction will be
somewhere between one and two layers, depending on the part of the
organization.
A lot of good things happen if you handle this reduction right. It is not
just a question of reducing people, although that is an important part of it.
More importantly, in reducing layers you end up with a more efficient
organization. Layers in an organization are like glue. By this I mean that
things take longer to get through it. The fewer people from whom you need to
get approvals and the more you empower people to make decisions, the faster
things go. But suffice it to say that we are committed to reducing the layers
in our organization. We thought we had a lean organization, but now we're
committed to getting even leaner.
HIGH-PERFORMANCE WORK SYSTEMS
The second part of our cost reduction effort has to do with high-performance
work systems. Different people call this concept by different names, but
basically it deals with how you get your work force to do what they are fully
capable of doing on their own. Company after company has found that one of
the biggest problems lies in having supervisors tell workers what to do and
how to do it when, in fact, the workers are quite capable of making these
decisions themselves.
At International Paper, we've had some good success with high-performance
work systems. Several of our mills and plants are far along in using the
concept as a way of energizing and involving the work force. In every case,
the results are phenomenal in terms of output, quality and yields -
everything that matters in a manufacturing organization.
So here is our job: How do we take something that is well known and apply it
in several hundred installations in this company, and in a finite time frame?
I'm not talking about 10 years or even five years in the future. The job for
us is to do it so that we start to get a payoff immediately, recognizing that
to capture the essence of what people call high-performance work systems will
take a little longer. We're into this and we're convinced that it will make a
big difference in the way we manage the Company. In
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fact, it makes the reduction of layers possible. These efforts are additive
and reinforcing. You can't do one without doing the other.
ORGANIZATION REDESIGN
Our cost reduction programs are not limited to our plants and mills. As part
of our organization redesign, we've taken a closer look at our finance and
human resource organizations. We found that each of the acquisitions we made
over the past several years came with its own financial system. Although we
have worked hard to consolidate these systems, we discovered further
opportunities to reduce costs.
Our analysis showed that our finance-related costs were about 1.5 percent of
our revenues, which is below average for a large U.S. industrial company. We
found that a typical company was at 1.8 percent and that 1.5 percent was
excellent. However, the really outstanding companies were at the 1.1 percent
level, and our program is aimed to get us there. About 18 months ago, our
finance organization went to work on this organization redesign. They're well
into it and we're going to begin seeing a payoff on it next year. It will
take another couple of years to complete.
The same thing can be said about the human resource organization redesign.
PRODUCTIVITY IMPROVEMENTS
As we move on in the manufacturing organization, our initiatives take a back
to basics, blocking and tackling approach. "Precision in manufacturing"
requires everyone in the plant or mill to continually assess and improve
operating procedures and to make sure that all machine components are
maintained properly and that operators know how to do their jobs in the safest,
most efficient and most quality-conscious way. It is a systematic approach to
training and to quality management.
Now if you have one mill, you can argue that you have to learn it all
yourself. But when you have as many mills and plants as we do, you can
leverage that into a competitive advantage because what you learn at one
place can be applied someplace else.
We've been doing this now for about a year in our printing papers
organization. Effectiveness - by this I mean product output - has gone up 5
percent. But there's more to be gained. We are applying what we've learned to
our several hundred installations around the country. All the principles are
the same.
"Mill uptime and improved manufacturing and maintenance systems" is designed
to improve the reliability and availability of our plant and machinery. It
involves getting people to solve problems to keep costs down. This need not
be done at the supervisor's level, but rather at the maintenance and operator
level where problems first occur.
We've had four mills on a special program for the past year. On average they
are getting $6 million to $10 million a year savings in mill uptime and
in improved manufacturing and maintenance from their efforts. We've
demonstrated it can be done. Now we intend to do it in every location of this
company.
Another cost reduction initiative currently under way is an effort to reduce
the "cost of quality" throughout the system. This program is based on the
idea that we can measure and control the amount of money spent on preventing,
evaluating, correcting and recovering from products
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that don't meet our customers' specifications. In our businesses, the cost of
quality can range from 4 percent to more than 30 percent, depending on the
complexity of the operation. Obviously, you can't eliminate all such costs.
There are reasons why some of this cost exists. For example, the trim of the
machine just isn't perfect. But we also know that when a mill attacks cost of
quality in a disciplined way, it can get the numbers down significantly. We
have mills that have taken cost of quality from 25 percent down to 20 percent.
Now when you start multiplying such reductions across a company our size, the
dollars are profound. And again, we've been working on quality for a long time.
We've seen where our star plants have succeeded in reducing the cost of
quality. The question now is, how do we get 200 installations to do it all the
time? We think we know how to do it; it's now a question of being sure that we
challenge the entire organization to do it and, again, to do it over a finite
period of time.
LEVERAGE PURCHASING POWER
As our final step in cost reduction, we have learned that as we've gotten
bigger, we can leverage our ability to buy. For example, we've got some 60
plants that buy inks. All of them used to buy it by themselves; they
specified their own and bought it. Now we have them all buy it together for a
savings of 20 percent on ink cost - big dollars for a company our size.
We have centralized our purchasing for major items but have not done it for
our specialty or international businesses. Now, though, we're going to do it
across our whole system, down to many much smaller items, and I believe this
will contribute a fair amount to savings.
EARNINGS IMPACT
IMPACT OF COST REDUCTION INITIATIVES
o Cost Savings of Several Hundred Million Dollars
Annually
What am I looking for? Out of all this, I'm saying that we're going to
capture several hundred million dollars a year. I'm confident of it, and I'm
being conservative in saying it. These steps are different from the cost
reduction we've done up to now in the sense that we're not going to pass it
on. I think we're going to be able to keep most of it because it results from
a step change, and I don't think our competitors are going to catch up to us
on this one. And so on this one I've got to be braver and say, normal cost
reduction savings will get passed on, but a large part of these reductions
I'm going to capture for International Paper's shareholders
INTERNATIONAL PAPER
Earnings at Bottom of Economic Cycles
Early to Mid-1980s $0 Per Share
Low of Last Cycle $2 to $3 Per Share
Expected Low of Next Cycle $4 to $5 Per Share
What might all of this mean? If you look back to the mid-1980s when times
were rough for International Paper, we were one of the poorer performing
companies in the industry. We were just about at break-even. Through the
work that we did beginning at that time through the last cycle, our earnings
bottomed at $2 to $3 per share. I don't think many paper companies can say
that at the bottom they did better in this cycle than the previous cycle. But
we think we made a step improvement in our relative position in the industry.
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As a result of the activities I've just discussed, when the next cycle comes,
and it will come, our objective is to earn $4 to $5 a share at the bottom.
And I'm pretty bullish that we're going to make that happen. Cost reduction
will continue, except that we are making step changes in how we do things,
instead of only the incremental changes that we were making in the past.
GROWTH
GROWTH: CORE PAPER & PACKAGING BUSINESSES
Mansfield Lightweight Containerboard - Recycled
Riverdale Uncoated Freesheet - Recycled
Kwidzyn Uncoated Freesheet, Coated Board
Nicolet Specialty Industrial Papers
Oswego Lightweight Containerboard - Recycled
ONE MILLION TONS OF ADDITIONAL
PRODUCT IN A RISING MARKET
Let me move on to the next item that we talked about, growth. Today, you've
heard that we're going to bring on about a million tons of additional product
in the next 18 to 24 months through projects that are well under way. This
will add substantially to International Paper's earnings in the rising
market. As it comes on line over the next two years, it represents only
minimal industry expansion across a wide variety of products and markets.
Nevertheless, it's coming on stream in the right businesses at the right time
in the cycle. It is also the most ambitious program in the Company's history.
We have never had this kind of growth program in our core paper and packaging
businesses. Importantly, it's not the only growth that's going on. You heard
about most of the other growth areas earlier today, but there are some you
didn't hear about. For example, there is rapid growth in a whole variety of
our specialty businesses. The interesting point here is that, in almost every
instance, the products we're adding qualify as being close to proprietary, if
not specialty, products. And these are businesses that are growing worldwide.
GROWTH: SPECIALTY BUSINESSES
OSB Plant - Texas
CraftMaster Door Facing Line - Laurel, Miss., and Europe
Polypropylene Spunbond - Toronto, Canada, and Mexico
Project Coral - Commercial Development Unit
Liquid Packaging - China and France
Nevamar Expansion
Expanded Chemicals - Panama City, Fla., and Europe
LARGELY PROPRIETARY PRODUCTS
IN SPECIALIZED MARKETS
We will also continue to look for acquisitions that will add strength to
these businesses. You've seen us acquire distribution companies and other
small operations that fit well with these businesses, and I would expect that
to continue.
The international market is yet another area for growth. In the past couple
of years, we've made a number of investments in overseas markets. Kwidzyn,
our mill in Poland, will cost us a total of $300 million when we're finished
with the modernization program next year. To date, the Kwidzyn investment is
performing beyond our expectations.
Scitex is an equity investment we made in the last couple of years. It has
been a disappointment in the sense that the price of the stock has declined,
partly because of an earnings decline and partly because the Israeli market
collapsed. But it has stabilized and it's swinging up. Over the long term,
the Scitex investment will still serve the purpose for which it was intended.
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Carter Holt Harvey, where we have a 24 percent interest in a major
corporation in New Zealand, has been an excellent investment. The business
has done well, as has the price of the stock. It has also given us a window
in two important parts of the world - the Pacific Rim and South America. We
hope to find a way to participate in these markets to a greater extent than
we do now.
Our strategy continues to include interest in global markets and we have made
some recent organization changes to further this interest. These changes follow
the pattern set in Europe. After we established a sizable base there, Wes Smith
went over as president of International Paper - Europe. He spent three years
there; now Mike Amick is in that position. The European operation has expanded
and is much improved over time.
Just recently we've assigned Jerry Marterer, who managed our specialty
industrial papers business and our quality program, to be president of
International Paper - Asia. He's going to be based in Hong Kong; in fact,
he's there now. Although we've had a presence in the Far East, our knowledge
of it has been limited and our efforts there fragmented. Jerry is there to
give us a high-level corporate development presence and to help us look at
opportunities in that part of the world. He will get to understand the
markets, the businesses, the people.
Similarly, we have named Harry Lambroussis, formerly vice president of our
imaging business, to be president of International Paper - Latin/South
America. Like Jerry Marterer, he will have operational responsibility but,
more importantly, he will have corporate development responsibility for the
Southern Hemisphere. (You've already heard from a number of people today
about our plans to build a plant in Mexico and to expand in South America.)
There are many opportunities in Latin America - we just have to be astute
enough to figure out how to take full advantage of them.
Before I leave you today, I want to point out that these remarks are my way
of saying that the strategies we described to you over the last seven or
eight years remain the fundamental strategies that are in place today. We're
going to continue to emphasize value-added products and we're going to expand
that effort. We have a monumental cost reduction effort under way in this
company. And we continue to look at - and probably have - the most expansive
growth plan for the next couple of years that we've ever had.
In conclusion, this is for us a very unusual time. We think we've done many
good things over the past few years that have positioned us well in terms of
products, costs and markets. And, frankly, we've come to a point now where we
think we've got the wind behind us. We think we're going to enjoy two or
three spectacular years.
The thing I want to convey to you, however, is that a part of the activity in
the organization is aimed at taking full advantage of the economic upswing
and strong demand we're seeing now. That's going to happen, and that is the
easy part of managing a business. The difficult part is how we position
ourselves far beyond that. And that's the reason we're talking about the
continued emphasis on product development and on step changes to achieve cost
reduction. We're pretty excited about what's happening. I would like to close
by saying, "We're Ready."
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