The future for Georgia-Pacific depends on tissue: although the company is struggling with asbestos liability and staggering debt loads, Georgia-Pacific sees hope in a solid tissue business.

For its 75th anniversary in 2002, Georgia-Pacific Corp. (GP) produced a roller-coaster year. The company, based in Atlanta, Georgia, USA, continued its good job of transforming itself from a commodity pulp and paper company into the largest tissue manufacturer in the world. Simultaneously, its stock price plummeted, largely because of investor concerns over asbestos liability and huge debt loads.

As G-P enters 2003, it has a strong footing with its tissue business. From a company whose first premium tissue mill started operating in 1988, G-P has come a long way in a short time. G-P is now the largest tissue producer and marketer in the world. Its tissue manufacturing operations are efficient and large scale.

Although G-P is formulating a tissue strategy focusing on paring down debt and improving profit margins, the company realizes that its strong tissue and towel business must not suffer any reversals. The consumer products business of the company must not only continue to add value but also contribute more than half of earnings before interest, depreciation, taxes, and amortization (EBIDTA).

THREE MAJOR CHALLENGES

Entering 2003, G-P faces three major challenges according to A. D. "Pete" Correll, chairman and CEO. In prepared remarks to a meeting of investment analysts in New York City on November 6, 2002, he mentioned three major challenges--improving profit margins, paring down debt, and managing asbestos liability.

Despite everything good that Correll as a leader and G-P as a corporation have done to transform the organization in recent years, those last two challenges have helped reduce its stock price by more than 50% since July 29, 2002. Correll says that asbestos liability is "fiscally immaterial" to G-P's operations. G-P has managed this liability for the previous 15 years and sees no reason why it cannot continue to do so in the future.

However, the asbestos liability was seen as a primary motivator behind G-P's now tabled plan to split the company into a consumer products unit and a building products unit. According to some observers, G-P shelved the plan after it became apparent that the split might not offer the consumer products unit the desired shelter from asbestos liability. Investors still view this issue as a millstone dragging down the stock price of G-P.

Paring down debt is a serious issue. Moody's Investor Services and Standard & Poor's--the two major bond rating agencies in the United States-downgraded G-P's bonds to "junk bond status" this past fall. The reasons were more than US$ 12 billion in debt for 2002 resulting from the Wisconsin Tissue and Fort James acquisitions and concerns about the ability of the company to produce sufficient cash flow to meet debt payments.

Although G-P sold the Wisconsin Tissue operations and its uncoated pulp and paper mill operations and is nearing completion of a sale of its 60% stake in Unisource to Bain Capital, the company still faces a debt of more than US$ 12 billion. The annual cash flow needed to meet the interest on this debt alone was US$ 830 million.

In a discussion with investment analysts, G-P indicated that it has generated and will continue to generate sufficient cash flow to meet this debt. The company has ah average cash flow per quarter of US$ 625 million since the first quarter of 2000. In addition, it has secured a US$ 600 million bridge loan to meet its debts. For one big debt, a US$ 3.75 billion "revolver bank note" that matures in 2005 with a currently outstanding US$ 2.4 billion amount, G-P is looking into major capital markets. It is also having discussions with banks to secure another similar loan.

The third major challenge facing G-P is to continue to grow profit margins. G-P expects to achieve this goal with tissue leading the way. G-P will grow by maintaining its existing share of the market, adding higher profit margin products into its lineup of tissue and towel products, and growing its European operations.

A TISSUE REVIEW

G-P is the world's largest tissue manufacturer. This fact is noteworthy because only three years ago tissue was but a small contributor to the company's bottom line. In 2001, tissue operations for G-P had gross sales of US$ 7.2 billion--US$ 3.6 billion in retail tissue and towel sales, US$1.3 billion in away-from-home sales, US$1.4 billion from European operations, and US$ 900 million from Dixie brand sales of plates, cups, napkins, and other items.

G-P listens to where Americans shop. The company has concentrated its sales efforts into fast-growing channels such as Home Depot, Lowe's, Costco, Sam's Club, Wal-Mart, and similar outlets. C-P is now the number one or two supplier to these high volume stores. G-P has a unique relationship with these shopping channels because they can purchase a broad spectrum of tissue and towel products from G-P.

"We are a company that offers branded label and private label products to these customers," Correll said. He added that G-P offers a super-premium, premium, and standard brand in all tissue and towel categories.

When dealing with these shopping channels, G-P also wants to "leverage opportunities to integrate tissue and paper logistics." This means G-P wants to be the one-stop supplier of tissue and paper products into club stores to reduce its costs and improve returns on its paper and tissue products.

The tissue strategy at G-P is the same this year as last year--reduce exposure to volatile commodity markets, increase the number of higher margin products, and maximize efficiencies in manufacturing operations. On this last point, Correll said G-P is doing very well because synergies resulting From the Fort James merger are progressing beyond expectations. By the end of 2002, G-P expects to achieve annualized savings of US$ 335 million resulting from the synergies achieved through the merger of Fort ,lames and G-P. Correll adds that this figure should rise to US$ 550 million by the end of 2003--US$ 50 million more than anticipated at the time of the merger.

A GROWTH STRATEGY

The tissue strategy at G-P focuses on optimizing brand positioning, leveraging its leading position in growing sales channels, and launching innovative, new products. G-P produces tissues and towels for the consumer and away-from-home markets.

In elucidating this strategy, Correll said that in 2002 alone G-P introduced "new and improved 'Quilted Northern' and 'Brawny' napkins and towels," developed a new motion hands sensor, and produced "Easy-Nap" for quick service restaurants such as McDonald's. "Brand rationalization and efficiencies in manufacturing operations, decreases in brand overlaps, and increases in Dixie brand sales are some major ways G-P expects to become not only the world's biggest tissue manufacturer but also the world's highest return-on-tissue company," Correll said.

"We have made significant improvements in brand rationalization; reductions in retail SKUs; and advances in purchasing, transportation and logistics," Correll told stock analysts in November. "Starting with 2003, we expect to have 20% EBIDTA come from new products of refurbished products introduced within the past three years."

G-P expects its tissue and towel business to produce high profit margins because the company holds a leading position--first or second--in all the tissue and towel markets it serves. Even after selling a major part of its away-from-home tissue business to SCA, G-P is still the number one producer of away-from-home tissue, towels, and napkins. "Our away-from-home tissue and towel sales and units produced grew at a double-digit rate this year," Correll told the analysts. "This was due to the bankruptcy of American Tissue that forced their customers to seek other tissue suppliers such as G-P."

When asked how G-P will maintain these figures, Correll cited the low-cost manufacturing efficiencies of the company. "We area major producer of fluff pulp. Our Brunswick, Georgia (USA), plant is the world's second largest producer. We are converting our Leaf River (Georgia) plant to soft fluff pulp from southern softwood."

THE TISSUE CHALLENGE

For all its bravado about its consumer and away-from-home tissue and towel operations, the biggest challenge G-P faces is marketing. The tissue marketplace is very competitive. Procter & Gamble and Kimberly-Clark are the major challengers to the leading brand marketing position of G-R will G-P continue to hold off the challenges of these seasoned competitors? The answer is still unfolding, but G-P is well on its way to giving a resounding answer of "Yes!"

To cite one example, the toilet tissue market has three major players--Charmin Tissue from Procter & Gamble with about US$ 940 million in annual sales, Quilted Northern from G-P with US$ 561 million, and Scott Tissue from Kimberly-Clark with US$ 461 million, according to Information Resources, Inc.

Media advertising expenditures from these three brands according to their advertising agencies were US$ 23.1 million for Charmin, US$ 13 million for Scott, and US$ 11.4 million for G-P according to Competitive Media Reporting. The question now is whether G-P will continue its second place position with so little media advertising compared with the other two companies. G-P would not answer that question, but a consultant said G-P puts its money into trade support of it sales distributors and channels. In specific terms, the money not spent on advertising goes into the Costco, Sam's Club, and Wal-Mart stores, assuring that G-P has the number one place in these stores.

Whether G-P can continue to win the marketing battle remains a question. The success of G-P on the operational side is not in question. Specifically, G-P has moved its tissue manufacturing operations to take advantage of huge, efficient manufacturing mills in the Fort James and G-P mix. It will continue to do this in 2003, with plans to add higher margin products into its mills in Rincon, Georgia, and Muskogee, Oklahoma, USA. These recycled paper-based mills are low-test producers and high-quality manufacturers.

G-P also will upgrade its manufacturing operations to remain competitive with companies that have installed through-air-drying (TAD) tissue machines. G-P expects total capital spending to reach US$ 700 million in 2002 and increase by US$ 50 million more in 2003. The major reasons for the large expenditures are installation by G-P of two new TAD machines with a 2004 startup. One is at Wauna, Oregon, and the other is at Port Hudson, Louisiana, USA.

EUROPEAN FLIP-FLOP

Last year, Correll expressed "concern" over the European operations of G-R During this year, European tissue and towel operations should be solid contributors to the bottom line. Correll told analysts that "the European operations are not resale. Not for sale!"

He explained that Europe is a "brand name" area, and G-P has the number one brand name in individual countries and sections of Europe. "The Lotus brand has a dominant position in France and the Benelux countries," Correll told analysts. He added that G-P also has a solid foothold with leading brands in Spain and the Scandinavian countries. "The two problem areas in Europe are the United Kingdom, an unbranded market, and Italy, where our two manufacturing facilities are less than superb."

Correll stated that European tissue operations produce sound financial results. "We achieve a better return on investment (ROI) from Europe than the United States," Correll said. He went on to note that "Europe is a growth area for us now that the federal government has told us we cannot grow any more in the United States."

A CAVEAT

As G-P enters 2003, its business strategy in general and tissue strategy in particular have not changed from the beginning of 2002. G-P wants to grow its higher margin, customer-focused businesses. It wants to reduce its exposure to undifferentiated, volatile commodity markets. Everything seems in place for G-P's tissue strategy to achieve success, but a sign of warning does exist--the economy in the United States. In discussing third quarter 2002 results, Correll said, "Overall, the economic outlook for North America shows no signs of appreciable improvements in the near term. This will continue to affect most business at G-P. We are taking steps to ensure that we remain as profitable as possible under the circumstances." No matter what steps G-P takes in the current economic slowdown, its future growth and development clearly depend on the tissue business.

IN THIS ARTICLE YOU WILL LEARN:

* The three major business challenges facing Georgia-Pacific Corp.

* How the Atlanta-based company looks to its tissue business to help meet these challenges.

* G-P's tissue strategy and how far the company has come in implementing this strategy.

* Why G-P now views its European tissue business as a strong growth area in 2003 and beyond

ADDITION RESOURCES:

* Georgia-Pacific Corp.'s corporate website is: http://www.gapac.com

* Investment firms that cover Georgia Pacific Corp. also provide use full information.

Jerome A. Koncel is a freelance writer based in Schaumburg, Illinois, USA. A veteran paper Industry journalist, Koncel is the former editor of American Pepermaker magazine. Contact him by email at jerry_koncel.yahoo.com.