Georgia-Pacific Corporation

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Georgia-Pacific Corporation

founded: 1927

Contact Information:

headquarters: 133 peachtree st. ne atlanta, ga 30303 phone: (404)652-4000 fax: (404)230-7008 url: http://www.gp.com

OVERVIEW

Georgia-Pacific Corporation is one of the world's leading manufacturers and distributors of building products. The company is also a major force in the production of pulp and paper. In 1997 the company's net sales were $13.09 billion, up from 1996's $13.02 billion.

As of 1997 Georgia-Pacific was the number one U.S. producer of structural and other wood panels, and was number two in the production of lumber. Much of the company's wood production comes from its own property. In 1997 the company owned or controlled 6 million acres of timberland and Georgia-Pacific operated the second-largest gypsum wallboard company in North America. The company also controlled the world's largest building products distribution system in 1997, with 100 distribution centers across the country. Georgia-Pacific operates a growing specialty chemicals business based on its propriety technology in wood products resins and pulp- and paper-related chemicals.

In addition to building products, Georgia-Pacific's other major business segment is pulp and paper production. In 1997 the company had the capacity to produce 9.4 million tons of pulp, paper, and paperboard. The company produced containerboard and packaging, communications papers, market pulp, and tissue.

To improve its competitive position, Georgia-Pacific invested $3.5 billion in capital projects and acquisitions between 1994 and 1996, primarily in building products facilities. This was $2-billion more than the investment required for maintenance and environmental compliance, according to the company.

COMPANY FINANCES

The corporation reported consolidated net sales of $13.1 billion and net income of $69 million for 1997, compared with net sales of $13.0 billion and net income of $156 million for 1996. Georgia-Pacific's building products division's net sales of $7.5 billion were up slightly from $7.4 billion the previous year. Sales in its pulp and paper division of $5.6 billion were the same as 1996, but operating profits of $174 million were down from $390 million in 1996. These declines were driven by higher wood costs in the company's manufacturing business, lower average lumber prices, and continued losses in its distribution division. The total debt for Georgia-Pacific Corporation, including both Georgia-Pacific Group and The Timber company, was $5.5 billion at the end of 1997.

Georgia-Pacific set a goal in 1996 of improving earnings by approximately $400 million by reducing overhead costs and improving efficiencies. In 1997 the corporation said it had achieved about $219 million in reductions, about half of its goal.

Georgia-Pacific stock ranged from a low of $70 to a high of $108 through December 16, 1997, when the company reorganized. Over the past five years the stock has traded from a low of $48 to a high of $108. On December 17, 1997, the new Georgia-Pacific Group began trading at $60 and in April 1998 it was selling at $66. The Timber Company opened at $26. Georgia-Pacific stock's price-earnings ratio estimate for 1998 was 15.4. Earnings per share in 1997 were $2.26.

ANALYSTS' OPINIONS

Market analysts note that the financial performances of forest products companies such as Georgia-Pacific tend to be highly cyclical. When prices for paper and wood products are high, so are company sales and profits. When those prices are low, the opposite occurs.

An April 1998 report by The Value Line Investment Survey noted that Georgia-Pacific should show improvement in 1998 due to its cost containment efforts and a strengthening of commodity prices. However, the spinoff of The Timber Company may "increase volatility," the report said, since the "G-P Group is unable to rely on cash flow from G-P Corp.'s timber operations during tight periods. But the company may benefit from a more rational capital spending policy."

A January 1998 stock report by Standard & Poor's remains "neutral" on Georgia-Pacific's shares. The report looks favorably on the company's move to separate its timber business and the modest upturn in paper and packaging, but is cautious about slowing wood markets.

HISTORY

The company now known as Georgia-Pacific was founded as a hardwood lumber wholesale company in Augusta, Georgia, by Owen Cheatham in 1927. By 1938 the company also operated five sawmills in the southern United States. The company moved into the northwest U.S. market in 1947 when it purchased a plywood mill in Bellingham, Washington. In the 1950s the company purchased large tracts of land that provided a base of timberlands for wood production—by 1960 the firm owned 1 million acres of timberland. In 1954 the company moved its headquarters to Portland, Oregon, and in 1957 changed its name to Georgia-Pacific. That same year, it established a presence in the pulp and paper industry by building a new mill in Toledo, Oregon.

FAST FACTS: About Georgia-Pacific Corporation

Ownership: Georgia-Pacific Corporation is a publicly owned company traded on the New York Stock Exchange under its "letter" stocks, Georgia-Pacific Group and The Timber Company. Georgia-Pacific options are traded on the Philadelphia Stock Exchange.

Ticker symbol: GP (Georgia-Pacific Group) and TGP (The Timber Company)

Officers: Alston D. "Pete" Correll, Chmn., CEO, & Pres., 57, $1,050,000; Donald L. Glass, Exec. VP-Timber / Pres., & CEO, The Timber Company, 48, $455,600; John F. McGovern, Exec. VP-Finance & CFO, 50, $540,500

Employees: 46,500

Chief Competitors: Georgia-Pacific Corporation's primary competitors are: Boise Cascade Corporation; Bowater Incorporated; Champion International Corporation; Consolidated Papers, Inc.; Fort James; International Paper; Kimberly Clark; Mead; Owens Corning; Procter & Gamble; Stone Container; Union Camp; USG; and Weyerhaeuser.

In the 1960s Georgia-Pacific purchased several forest products companies and also invested in new facilities. As a result, the company was able to move into new lines of business, such as containers, paperboard, tissue, and chemicals. By 1972 the company had grown so large that the U.S. Federal Trade Commission forced it to sell 20 percent of its business assets.

In the 1970s Georgia-Pacific continued to develop its chemical business and introduced inexpensive substitutes for plywood, such as waferboard. In 1979 the company purchased Hudson Pulp and Paper, and in 1982 moved its headquarters to Atlanta.

In 1988 Georgia-Pacific purchased Georgia-based Brunswick Pulp and Paper and its extensive southern timber holdings. In 1990 the company made another major acquisition with its purchase of Great Northern Nekoosa for $3.74 billion. The purchase, which was initially opposed by Great Northern, greatly increased Georgia-Pacific's pulp and paper production capacity but also increased its debt load. To pay off some of that debt, the company sold $1 billion in assets in 1990, including 19 container plants and more than 500,000 acres of timberland.

In 1991 Georgia-Pacific sold a large portion of its interest in Great Northern Paper to Bowater Incorporated. In 1996 the company made a major move to increase its position in the gypsum market by purchasing nine wall-board plants from Domtar Incorporated for $350 million.

In December 1997 Georgia-Pacific instituted a fundamental change in the way it does business. The company reorganized as two independent units to separate the performance and cash flows of Georgia Pacific's timber business from its manufacturing and distribution divisions. The corporation's existing common stock was redesignated as Georgia Pacific Group, representing Georgia-Pacific Corporation's pulp, paper, and building products businesses. The Timber Company was created to represent Georgia-Pacific Corporation's timber holdings. Georgia-Pacific issued stock in the newly formed Timber Company and the newly named Georgia-Pacific Group, which trade independently on the New York Stock Exchange.

STRATEGY

In 1995 Georgia-Pacific Corporation began to use a new operating standard called EVA, the acronym for "economic value added." EVA is a plan for measuring a company's performance and compensation plan. EVA measures a company's progress in economic terms by making sure that management's goals are synchronized with its shareholders' financial objectives. Rather than measure a company's financial success by its level of production or assets, EVA gauges a company by its capacity to produce real after tax profits.

To improve its EVA ratings, Georgia-Pacific's goal in 1995 was to streamline its work processes by establishing precise operating targets and incentives for its management team. The company also planned to "aggressively control costs."

Several strategies came into play when Georgia-Pacific Corporation separated its timber business into a new operating group, The Timber Company, in 1997. From an investment standpoint, the company claims the move should allow The Timber Company stock to be valued higher because of its stable, growing cash flows. Before the split, cash flows from timber operations were redirected into low return investments in plant and equipment. These cash flows can now be paid directly to shareholders in the form of share repurchases.

In addition to investor benefits, the company sees clearer timber pricing as a benefit of the separation of the two companies. The Timber Company supplied 83 percent of its output to the Georgia-Pacific Group in 1998, and its prices were based on an average of The Timber Company's outside sales and Georgia-Pacific Group's own purchases from other suppliers.

Finally, the separation allows company managers the flexibility to make financial and strategic decisions for their own businesses independently, giving them greater responsibility and accountability for the performance of their company.

CHRONOLOGY: Key Dates for Georgia-Pacific Corporation

1927:: Owen Cheatham opens the Georgia Hardwood Lumber Company in Augusta, Georgia
1948:: Changes the company name to Georgia-Pacific Plywood & Lumber Company
1951:: Name changes again to Georgia-Pacific Plywood Company
1956:: Name changes once again to Georgia-Pacific Corporation
1960:: Georgia-Pacific becomes the number three company in the industry
1972:: Georgia-Pacific is ordered to divest 20 percent of its interests
1987:: Paper products becomes more profitable than wood products for the company for the first time
1990:: Purchases Great Northern Nekoosa Corp.
1997:: Reorganizes as two independent units of timber divisions and manufacturing and distributing divisions

A three-year investment program, totaling $3.2 billion, was undertaken by Georgia-Pacific from 1994 to 1996. These investments in property, plants, and equipment have been reduced to $750 million annually and the company expects to continue this level of investment for the foreseeable future. Georgia-Pacific says it limits its investments either to businesses with higher returns, such as gypsum and tissue, or to projects that dramatically lower costs or improve efficiency. In 1997 The Timber Company invested $51 million in timber and timberlands. The company says it is committed to maintaining its annual investment at approximately $50 million.

INFLUENCES

Both of Georgia-Pacific's primary businesses are highly cyclical in that prices for building products and pulp and paper tend to rise and fall sharply based on supply and demand. The company's building products business is affected primarily by the level of U.S. housing starts; the level of repairs, remodeling and additions; commercial building activity; the availability and cost of financing; and changes in industry capacity. The performance of the company's pulp and paper business depends on national and international demand for its products, production capacity levels at Georgia-Pacific and its competitors, and the levels of product inventory carried both by the company and its customers. Also, Georgia-Pacific Group's earnings are especially volatile because it manufactures a significant percentage of the worldwide volume of several key products. When prices fluctuate, even in a minor way, Georgia-Pacific's operating income is influenced significantly.

According to the company's annual report, 1997 saw a 10-percent increase in lumber prices as well as a 10-percent increase in gypsum prices. On the other hand, prices for oriented strand board were 22 percent lower. Although average timber prices have remained stable since 1996, prices for hardwood and softwood timber used to make lumber and plywood have increased. Georgia-Pacific expects prices it pays for timber and wood fiber to increase over the foreseeable future.

The Asian economic crisis that began in October 1997 impacted the world pulp market by the end of the year. Orders from Asia dropped sharply, which combined with low pulp and paper prices, forced the company to take 165,000 tons of downtime between October 1997 and April 1998.

CURRENT TRENDS

Reorganization, restructuring, and cost reduction are three key trends for Georgia-Pacific in a three-year effort to improve efficiency throughout the corporation. The separation of the company's timber business from its other operations reflects an effort to make it an independent profit center for management purposes and to make its value more apparent to investors.

The company's restructuring efforts have been felt in all divisions of Georgia-Pacific. To reduce costs in its distribution division, the company sold 13 of its 70 distribution centers in 1998. These closings resulted in a loss of 1,500 of its 5,100 distribution-area employees. The company also announced plans to sell 8 of its 9 major millwork-fabrication plants, which assemble doors, windows, and similar products. Reducing overhead, cutting administrative expenses, and reassessing "administrative activities to eliminate nonessential work and related salaried positions," according to Georgia-Pacific's annual report, are ongoing efforts in the company's cost reduction drive.

Using technology in managing its timber business is one way Georgia-Pacific is facing the Information Age. Developed over a three-year period and at a cost of about $6 million, the Integrated Forest Management System involves Georgia-Pacific's proprietary computerized models, which provide information for planning and financing The Timber Company's forest resources. These computerized models project growth from the forest and predict future inventory estimates based on various management and harvesting scenarios. Georgia-Pacific says that this system will be used on all company properties by the end of 1998.

PRODUCTS

Georgia-Pacific is the largest manufacturer and distributor of building products in the United States. The Georgia-Pacific Group produces wood panels, lumber, gypsum products, chemicals, and other products at 150 facilities in the United States and 7 in Canada. Accounting for 20 percent of domestic production, the company's wood panels include plywood, OSB (oriented strand board) panels, hardboard, particleboard, panelboard, soft-board, decorative panels, and medium-density fiberboard.

Annually the Georgia-Pacific Group manufactures 2.7 billion board feet of lumber. The Group's 39 mills make lumber products from southern pine, a variety of Appalachian and Southern hardwoods, cypress, redwood, cedar, spruce, hemlock, and Douglas fir.

The gypsum products manufactured by Georgia-Pacific are wallboard, Dens specialty panels, fire-door cores, industrial plaster, and joint compound. The Group is also the leading supplier of wood resins, adhesives, and specialty chemicals.

In the pulp and paper business, Georgia-Pacific Group produces container-board and packaging, corrugated containers, kraft paper, communication papers, market pulp, and tissue. Its growing tissue products business makes napkins, bath tissue, and paper towels, marketed under the consumer brand names Angel Soft, Sparkle, Coronet, MD, and Delta. Communication paper, also known as uncoated free-sheet, is used in office copy machines and commercial printing, business forms, stationery, tablets, books, envelopes, and checks.

Georgia-Pacific's six mills make it the world's second-largest market pulp producer. Wood pulps are used in the manufacturer of many paper grades. Fluff pulp is used for disposable diapers and other sanitary items.

The Timber Company, created in 1997 to manage Georgia-Pacific Corporation's timber assets, grows and sells timber and wood fiber. It sells softwood sawtimber, softwood pulpwood, hardwood sawtimber, and hard-wood pulpwood to the Georgia-Pacific Group and other industrial wood users.

CORPORATE CITIZENSHIP

As a forest products company that cuts trees to produce its primary products, Georgia-Pacific has to manage the ongoing controversy that surrounds the use of forest resources. The company has responded by developing a comprehensive environmental policy.

In the mid- to late 1990s, Georgia-Pacific was using a set of principles to guide its environmental stew-ardship efforts. These 18 principles covered 4 main areas including management focus, conservation and sustainable use of resources, protection of health and the environment, and community awareness. The company was also participating in the Sustainable Forestry Initiative (SFI), sponsored by the American Forest & Paper Association, an industry trade group. The SFI established broad forest principles and detailed guidelines for managing forest lands for the future.

In addition to complying with its own environmental rules, in the mid-1990s Georgia-Pacific was providing assistance to its private timber suppliers to help them responsibly manage their land holdings. This company-wide forest management assistance program, called MAP, included reforestation of harvested timber stands and the use of best management practices (BMPs) to help protect water and soil quality during harvesting and re-planting operations. One example of a BMP is the creation of buffer zones that limit tree harvesting close to lakes, rivers, and streams.

Georgia-Pacific has also worked with non-profit groups to manage and protect ecologically sensitive land. For example, through a cooperative effort announced in January 1997, The Nature Conservancy's North Carolina Chapter and Georgia-Pacific worked to restore longleaf pine forests and manage 21,000 acres of southeastern coast forest lands along North Carolina's lower Roanoke River. Georgia-Pacific helped the Conservancy's staff in Wilmington, Delaware, create a 20-year forest management plan for these properties through the MAP program. In 1993 Georgia-Pacific signed an agreement with the U.S. Fish and Wildlife Service to conserve the habitat of the red-cockaded woodpecker on its timberlands. Other wildlife that has become a focus of Georgia-Pacific's protection programs are spotted owls, gopher tortoises, bald eagles, and many rare plants.

In 1995 Georgia-Pacific introduced its Environmental Excellence Awards to recognize the company's environmental successes and to encourage ongoing progress. The 1996 awards recognized 20 finalists in the categories of pollution prevention, community service, scientific research and technological innovation, and the Chairman's Award for Environmental Excellence.

GLOBAL PRESENCE

Georgia-Pacific derives most of its sales in the United States. It had a relatively small but growing position in international markets in the mid- to late-1990s. Sales to foreign markets in 1997 made up 8 percent of company sales.

The majority of the market pulp the company produces is exported. (Market pulp, used to make paper, is pulp that is sold on the open market. Pulp produced and used by the same company is not considered market pulp.) As of 1997 the company produced market pulp at six mills with a combined annual capacity of 2.1 million tons. The group exports approximately 65 percent of its market pulp, primarily to Europe, Asia, and Latin America.

EMPLOYMENT

A hiring freeze on salaried employees and a voluntary early retirement program were among the cost-cutting measures instituted by Georgia-Pacific in 1997. The company also began a reassessment of its administrative activities to eliminate nonessential positions. In addition, in late 1997 the company sold or closed a number of its distribution centers and its millwork fabrication facilities nationwide, causing approximately 1,500 employees to loose their jobs.

In May 1998 the company listed openings for experienced professionals in the fields of engineering, finance and accounting, information systems and sales, marketing, and distribution. In addition, Georgia-Pacific recruits for entry level, co-op, and intern positions. Candidates seeking temporary or supplemental jobs are referred to Georgia TEMP, Inc., a wholly owned subsidiary of Georgia-Pacific Corporation, which provides administrative and information systems professionals to Georgia-Pacific's Atlanta headquarters, as well as other Atlanta-area companies.

Among the benefits offered to salaried employees are several different options for health care plans, as well as life insurance, a retirement plan, stock purchase plans, paid holidays and vacations, an educational assistance program, a credit union, and a matching gift program.