International Paper's efforts at consolidation and capacity management win praise from financial community, but Dillon acknowledges difficult decisions

International Paper's Dillon Named Global CEO of the Year by Financial Community

Pulp & Paper and PPI Publisher Cyndi Ratcliff presents the Global CEO of the Year Award to IP CEO John Dillon.

As you're well aware, International Paper has been making a lot of changes over the past few years. Along with that have come a lot of hard decisions that we've made to make a stronger, more focused, and-the principal objective that we're after-a more profitable company and a company that's bringing its return on investment up to the levels that are respectable. So I want to accept this award on behalf of the 120,000 employees in our company, all of whom have been behind this objective. And I think, again, by the fact that we're here today suggests that we are making significant improvements.

Having said that, we recognize that it is a very difficult time for people in our company as a result of the closures that we've had to announce. And that makes these decisions, which are necessary from a corporate perspective, all the more difficult when you put it into the context of what we're trying to do in managing our capacity and being consistent with the orders that we're receiving.

But as we move forward, we know that it's really a pivotal, pivotal time for this industry. We're now operating in a global marketplace. We have to serve customers on a worldwide basis. We're no longer regional or national companies. And equally important, we must meet the ex-pectation of our shareowners, and we have to change the relatively low level of earnings and the volatility of earnings that we have experienced this last decade.

It's also my view that the time is now to make this happen. We haven't got another two years, another three years, another decade. The industry has experienced a decade of terrible performance from an earnings perspective and in the eyes of our shareowners. And all that we have to do is check the newspapers to get our grade on that. I recognize that those shareowners are not the only constituent that we work for, but they are the people from whom the financial wherewithal comes to build and run these businesses.

At International Paper, we concluded that if we continue to do things as we have done them historically, we were not likely to improve the shareowner performance. And as I said, although we often think in terms of shareowners, it's also important to recognize that our employees are more or less in the same situation. Our employees are frustrated. Everybody is proud. Everybody wants to work for an organization that is winning, is growing, is doing wonderful things. So our employees have suffered through the problems that we've experienced over the last decade, and it's depressing to them as well as our customers. You know, I say that the worst consumer product experience in the world is flying on commercial airlines. Sometimes I think what we have put our customers through over the last years in terms of the effect of inventory cycles is equally as devastating.

So how do we make these changes? Yes, we've taken some pretty bold steps to improve the performance of the company. We've embarked on a plan for a stronger IP, importantly, a more focused IP, and at the end of that, the result is a more profitable International Paper. The plan encompasses fundamentally three areas that we have been following.

The first is industry consolidation. That is driven by a dogma, a belief, a passion on our part that we're going to operate in relatively few businesses but that we're going to have the premier position in those businesses of anybody in the world. The second area is managing our capacity more effectively. And the third area is moving to a customer-focused organization.

So let me start with consolidation, and those of you in the room understand what has been going on in the last two or three years and certainly what continues. Through consolidation we have directed International Paper to compete fundamentally in three core areas-the packaging business, the printing papers business, and the timber and forest products business. In fact, once we complete the divestitures that we've announced, and they are well under way-then capital employed in International Paper will move to about 95% behind these three businesses. That's compared with where we were a few years ago with about 75% of our capital directed in those areas.

We've made a lot of progress. It started with Federal Paper Board. Union Camp followed that. And, of course, more recently was the merger of Champion International with our company. Importantly, what we're trying to do here is develop scale and low cost capacity that allows us to, in fact, re-align our capacity more efficiently and take out the high-cost operations that we've acquired or have evolved over the years. The divestiture activities, again, have re-sulted in much stronger businesses and a more focused company, as I've indicated.

The second area of change has been that of capacity management. We're changing International Paper from a belief that every facility, every machine has got to run 100% of the time to be effective to a belief that we have to match the capacity of our system with the orders that we receive. That means we operate facilities to meet customer supply needs while avoiding what has happened to us in the past of building horrendous inventories as we have tried to operate the system full during a period of time when we haven't had the orders. This means changing the belief that the only way to make more money is to operate flat out.

I grew up with the people that I worked for early in my career always telling me that the most profitable unit of production in this company was the last unit of production. As we dig into this and understand some pretty fundamental economics, we find that is not the case, and it's particularly not the case if you can't sell it.

And so we've changed to making more money, not making more tons. And it's been tough. It's been tough to change our mindsets from that of being instructed and trained and growing up in an environment where there was this belief that you just had to run 100% of the time to a belief that, indeed, this world is within our control. There is no greater authority suggesting that we have to operate systems beyond what our orders are.

In addition, International Paper shareowners have made it pretty loud and clear to us, and they've said, "Hey, there is a price to pay if you do not manage your production with your customer orders." And they're saying stop operating beyond your order book and stop adding new capacity because the growth characteristics are such and the amount of incremental capacity that we can get out of these systems is so huge that new capacity is simply not needed in this world that we're competing in.

One of the tools you've heard me talk a lot about and heard others in International Paper talk a lot about is marginal economics, and I'll talk about it again for a few minutes because I think it is really a tremendously powerful tool. It's pretty simple. It is basically the understanding that there is a cost curve associated with your production unit, and there is a revenue curve associated with your sales book. Historically we have thought about these as averages, and when you think about them as averages you really don't understand what's going on in the tale of these two curves. We've found the ability to roll back production in some of these facilities by 10%, 15%, or 20% and at the end of the day make more money, not roll back production and make less money. For example, at these facilities the last tons of paper are simply the most costly tons of paper. That's not the case in every facility, but as you go across our company all of us have been surprised by the steepness of these curves.

The other good part of operating in this mode is that we can operate consistently. We don't have to be going up and down and taking downtime. And it's good for our employees when they work consistently. It's terribly important for our customers because we can maintain an orderly supply flow to them. And it's good for the communities because of all the employee issues associated with it.

The third area of the company that we feel strongly about and continue to work on is this whole issue of people management. We all say from time to time that what we do with our employees is perhaps the most important thing that we can do, and as we have looked at the behavior of International Paper over the years, we have found that indeed we can do a whole lot better in terms of recognition of how effective we are in involving our employees in the process of managing this company.