Georgia-Pacific, King of the Bathroom?


By Amy Tsao Forest-product companies have been taken to the woodshed for the past several years. High energy costs and low commodities prices have hammered earnings at makers of paper and building materials. That's why Georgia-Pacific (GP) announced a bold plan last year to exit many of its volatile commodities businesses, including wood products, pulp, and paper, and focus instead on making tissue. That's right, tissue -- a stable consumer product if ever there was one. After all, everybody always needs tissue.

So the company acquired a leading tissue maker, Fort James, a year ago and has divested four white-paper mills and reduced debt, thanks to the merger of its timber-land division with a land trust. Those moves have won praise from some analysts. "We are becoming increasingly confident that Georgia-Pacific's metamorphosis from a pure commodity player to a value-added, consumer-products company was a sound strategic move," writes Steve Chercover, an analyst with D.A. Davidson & Co. in a recent research report.

That may be, but GP has a long way to go before investors are likely to start looking at the Atlanta-based company as a major player in consumer goods. The economic landscape has changed dramatically since GP's decision to diversify, and the economic slowdown is putting the squeeze on all manufacturers, including tissue makers.

BEWARE OF BIG DOGS. GP made Coronet paper towels and Angel Soft toilet paper even before acquiring Fort James. But with the acquisition, it became the biggest tissue maker in the world, gaining a broad spectrum of brands including Brawny paper towels and Dixie cups. Previous to the Fort James buy, 13% of Georgia-Pacific's earnings before interest and taxes came from its consumer business. This year it will be around half of total earnings and will only get bigger as the company slims down by divesting more of its commodity businesses. Meanwhile, in the next few years, it's concentrating more on container-board and packaging businesses as well as paper and packaging distribution.

But the going could be rocky. High-profile competitors such as Procter & Gamble (PG) and Kimberly-Clark (KMB) have had mixed success during the downturn and have responded by upgrading their product lines. Plus, some new, big dogs are in this hunt: Mass merchandisers like Wal-Mart (WMT) are adding to the strain. With consumers spending somewhat more cautiously these days, retailers are shunning brand names and placing cheaper, store-label products on their shelves. Meanwhile, overcapacity and competition from manufacturers abroad have pressured all companies that deal in wood and paper.

Tissue products have more stable pricing than the boom-bust cycle of commodities, but consumer-products giants P&G and Kimberly-Clark won't likely stand around while Georgia-Pacific tries to steal their thunder. Tom Abrams, an analyst with Dreyfus Corp. expects GP to solidify its position in value brands while repositioning other product lines over the next two to three years.

HEAVY DEBT. "Along the way, things will really depend on strategic decisions that other companies take, how they anticipate Georgia-Pacific entering the market, and what they're willing to give up in price," Abrams says.

GP posted $22 billion in revenues in 2000 and earned $343 million, or $1.95 per share. But for 2001, analysts on average expect a loss of $0.27 per share. Debt is hurting the company's results. At the end of the first quarter, the company carried $14.8 billion in debt, nearly all of which came from its Fort James acquisition.

The pending merger of GP's Timber Co. division with Plum Creek Timber will cut debt by $620 million. And its commercial tissue business (separate from its consumer business) was sold off for $661 million after taxes. The company's goal is to reduce total debt to $9.5 billion by end of 2003.

IN TRANSITION. At around $34 a share, the stock is near its 52-week high of $36. But here's an irony: Forest-products stocks have had a good run this year as investors sought safety in commodities-focused stocks -- just when GP is trying to lessen its focus on commodities.

Some analysts predict the stock could get an added boost due to improved second-quarter results across the board for companies with businesses in wood products. Traditionally, these prices shoot up in the spring. But GP's worth is still hard to gauge while it's in transition, says Jim Jiao, a basic-materials analyst at Federated Investors. "Investors who want tissue-related products will still go to P&G or Kimberly-Clark," Jiao says.

Moving away from commodities, long GP's bread and butter, drew criticism from the start. Investors questioned why a company with a strong brand in plywood and other paper and pulp products would embark on such a reinvention. GP stock briefly sold off after the Fort James deal was unveiled last July.

"UNIQUE PLANS." Michael Burandt, George Pacific's president of North American consumer products, isn't worried. He says he has beefed up his division with marketing executives from the likes of Campbell, Philip Morris, and Heinz. And within the next six to nine months, all GP consumer operations will share a common order-entry system for more integration.

Burandt says GP will be very aggressive over the next two years, rolling out "rather unique plans" for its Quilted Northern and Angel Soft toilet paper lines early next year: "We're coming up with improved products supported by new campaigns."

Those two brands rank a close second and third behind P&G's Charmin, according to Information Resources Inc. And its Brawny paper towels are a distant third to P&G's Bounty. Now it's a matter of moving up the ladder in market share and brand strength.

"They've done a good job until now of executing, and they deserve credit for that," says Mark Connelly, an analyst with Credit Suisse First Boston. "But we're talking about layer upon layer of execution risk." In the next few years, the company has to show it's able to sell its commodity-based assets at attractive prices, gain market share from consumer-product titans, and keep margins up on the commodity businesses it decides to keep. Worries Connelly: "I'm not convinced we're going get paid for taking those additional risks."

BATTLE FOR SHARE. GP will undoubtedly have to step up marketing spending as it launches new campaigns for its tissue products. "The history of any company trying to grab share is that it does it though price or promotion," says Ann Gilin Lefever, an analyst with Lehman Brothers, who covers P&G. GP "represents one more player trying to take a bigger piece of the pie."

The downside: GP's increased emphasis on consumer products could touch off a marketing battle. "We'll see a rise in marketing spending if Georgia-Pacific is going to be innovating behind its brands and communicating advantages of its brand to consumers," says William Steele, a P&G analyst with Banc of America. Steele notes that GP's brands aren't nearly as strong as P&G's, but he's watching to see what the company does to improve its brands.

So what should investors watch for? Execution of some basics, really. The company has to show it can find buyers for the commodity businesses it aims to shed, while continuing to gain market share on the consumer-products side. Also, pay attention to the slumping economy: If it forces shoppers to tighten their purse strings, the fight to get products inside consumers' bathrooms and kitchens could be fierce. Tsao covers financial markets for BW Online in New York


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