Mark Sutton isnt afraid of making tough decisions even when it comes to taking apart an iconic American business. As chief of strategy at International Paper Co. from 2005 to 2007 under then-CEO John Faraci, Sutton created the blueprint the Memphis, Tennesseebased company followed to sell off 30 percent of its operations, including beverage packaging, coated paper and wood products. Although International Paper, founded in 1898, was almost synonymous with its forests, it also unloaded 6 million acres of timberland in exchange for long-term supply agreements with the buyers.
In the face of a secular decline in demand for office copy paper, Faraci and Sutton wanted to expand IP into the still growing area of packaging (95 percent of all goods travel in a box). The company sold $11 billion of assets during the restructuring and did two major deals: It acquired Weyerhaeusers U.S. packaging business in 2008, becoming North Americas largest producer of corrugated boxes, and four years later purchased Temple-Inland, a maker of corrugated packaging and building products. International Paper also expanded into Brazil and other emerging markets. Its global investments included a joint venture in Russia in 2007 to serve the Chinese market with specialty softwood pulp.
Sutton, who spent 30 years at IP before becoming its CEO on November 1, 2014, was a natural to carry out the strategy, having done most jobs at the company already. The now-54-year-old executive grew up in New Orleans, studied electrical engineering at Louisiana State University and long thought he would work in the regions booming petrochemical industry like his father, a career DuPont manager. But when he graduated in 1984, a recession deterred him. Instead, he expanded his job search and landed at IP, planning to stay only until the economy improved.
Sutton, however, took on increasingly bigger roles within International Paper and quickly forgot about the petrochemical business. As an engineer, he started in manufacturing, holding spots in product management, maintenance and engineering. In 1994 he became plant manager of a mill in Wisconsin, a role Sutton describes as perfect training for the top job: Youre essentially the CEO of International Paper in that location and in that town. Sutton says the job required him to think about everything from labor negotiations, the impact of the company on the local community and the commercial end of the business.
Sutton soon moved into sales and marketing and from there assumed general management roles. In 2000 he took over the $1 billion corrugated packaging business in Europe, moving with his wife and four young children to France. He stayed five years and had two more children. When he returned to the U.S., it was for the corporate strategy job, this time in Memphis. Though IP has had its operational headquarters there since 1987, it moved its global corporate offices from Stamford, Connecticut, to Memphis in 2006.
In 2007 Sutton took over IPs global supply chain, with responsibility for forest land operations, transportation, logistics, planning and scheduling. Its an opportunity to see the way your company is actually wired and plumbed, he says. I just had an eye-opening experience about how things really start from the forest and end up with a product that the customers like. Before becoming CEO, Sutton ran the companys paper business for the Americas and then oversaw industrial packaging.
Senior Writer Julie Segal recently talked to the International Paper CEO about how the strategy he outlined a decade ago has worked out, the opportunity and challenges of doing business globally and how even environmentally focused customers see the advantages of using paper in everything from advertising to teaching children.
Institutional Investor: Ten years ago you helped sell off a third of IPs operations. That had to be painful.
SUTTON: In 2003 and 2004 we had maybe a 4 percent return on investment, and we needed to be at a minimum of 8 percent. In some cases, we had good businesses, but we didnt have a strategy to really win. Either we didnt have the capital to go global or we were in second or third place behind really good competitors that we just honestly didnt think we would catch. We couldnt reach the return levels we needed with the portfolio we had. We had to do something, and we had to do something big.
But then came the recession of 08.
Yes, just as we were approaching a company that was getting close to its cost of capital we had returns in the 7 percent range and then the recession hit. We lost almost two years of progress.
But you fast-forward to now, and we just completed 2015 on the sixth consecutive year of returns greater than our cost of capital. Cash flow is averaging $1.8 billion a year from making and selling products. Nothing from land sales, nothing that isnt core. We have really transformed the companys financial profile.
But arent there still challenges?
We have to clean up some things in the portfolio, which we started to do last year. Some of the Asia investments in China have not worked out. Weve decided we can serve that market better with competitive imported products from the U.S. and from Russia. We dont have to make products on the ground in China because we dont have the advantage the fiber advantage or the natural resource advantage.
What are the most important pieces of your strategy now?
We want to continue to grow our global packaging platform. Weve got a great business in the U.S. And through kraftliner board the container board thats globally traded weve got a great position in the important markets in Europe and Latin America. We think theres more that we can do, especially in the Americas, if we can find the right opportunities. We have a pretty good business in Europe that we think we can make better.
Youre limited in the U.S., right?
We are limited to being much larger than we are today in the U.S. just based on regulations and so forth, but we can make our existing business better, mainly by lowering our cost to manufacture.
When we acquired Temple-Inland, we got a ruling from the Justice Department even in that acquisition that we needed to divest some of our containerboard manufacturing. From that experience, we know weve bumped up against some of the limits that the Justice Department is comfortable with. Obviously, that can change, but our size and our scale on containerboard manufacturing is close to where it probably can be in the U.S, at least when it comes to any kind of acquisition. We can, obviously, continue to grow our box business, and we can continue to improve.
Youve changed strategic direction in emerging markets?
Yeah, the thing weve come to realize is that unit volume growth, which tends to be higher in emerging markets so Asia, India, Latin America doesnt always equal profitable growth. And so what were doing is trying to balance the need to serve the growing markets, but doing it in a way that allows us to be profitable sooner rather than later.
What about China?
We had decided to invest in China and actually manufacture boxes and manufacture coated paperboard for consumer packaging. In both of those instances, we concluded after seven or eight years that theres not enough of an advantage for us to be located there doing that, mainly a raw material advantage, because China isnt blessed with the fiber unless its recycled. At the same time, we were also importing products to China from our Russian operation softwood pulp from our Siberian pulp mills but also from the U.S.: containerboard and specialty pulp for baby diapers and other absorber products. Those avenues are very profitable for us. So were capturing the Chinese growth, but were doing it from a cost base thats profitable.
Talk about other markets important to IP.
We have a small business in India, which we started in 2010 to see if we could learn about the Indian market and whether we could do business there. Weve answered most of those questions but there are no plans to do anything further right now. Its an interesting market, but its a long-term, future kind of thing. We have a big business in Brazil. Of course Brazils in a deep recession right now, for the first time in quite some time. Were holding our own, mainly because we have a very large export position out of Brazil. And so were able to manage our financial performance with a weak Brazilian currency and a product thats globally competitive, but its not a great situation with the recession right now.
Youre in a business that produces something that everyone wants to use less of. How do think about this issue?
We take a renewable natural resource, which is wood fiber, we add value to it, and we make a product that, in the case of the corrugated box, 90 percent of those are recycled and put back into the system. So at the beginning of life, the primary raw material is renewable, meaning you just plant more trees. And at the end of life, the box is recycled, which feeds into the system, which means over time, you need fewer trees to begin with. And so its a pretty good story, and it helps our customers when they try to tell their sustainability story, that theyve got sustainable farming or sustainable practices in getting their products grown and made, and then they serve it and get it to market in a sustainable package.
But most people think of the paper business as environmentally destructive.
We need to educate the public about what were doing, because some of what we do in the forest, to the average person, is not intuitive. Think about our process: We take the small trees out of the forest to make room for the other trees to grow, so you can make lumber, and then the whole process starts over again. We generate 75 percent of our own energy from biomass waste.
Paper, though, is still a big symbol of environmental concerns.
If were using less because we want to save money and we dont think we need the hard copy, thats legitimate. Using less because its bad for the environment is not legitimate. Electronic communications and all of that isnt impact-free; its just we dont see it.
A lot of our customers tell us the highest return they get on their advertising, for instance, is when they use direct mail, because we actually look at it, feel it. We dont even open most of our emails. And paper has a role in education that I think were just beginning to learn about. Were teaching kids using digital devices and yet were starting to see some research that says, well, maybe thats not the right approach for every type of learning. Kids learn when they write with a pencil or pen on paper. I think papers a pretty durable product.
Tell us about the conversations you have with investors interested in buying the stock of companies that produce sustainable products.
Its not top-of-mind for a lot of investors. They say, We know youre doing these things, but a lot of the conversations are about financial performance or nearer-term plans.
Where we do have a lot more conversations is with customers. In customer meetings Ive been in, whether its companies that make baby diapers and have a branded product and want to use natural fibers and natural materials, or the coffee industry that is working hard to make sure theyre getting coffee from sustainably grown fair trade coffee farmers. The last thing they want to do is serve this coffee in a package that could be viewed as not sustainable. These customers want us to play a role in their efforts. Theyre the ones that I have the sustainability conversations with, more so than the investment community.
IP provides recycling services. How can you improve on this?
Its all about improving collection rates, and making the right thing to do the easy thing to do for the consumer. Boxes are a poster child for how it should work, but paper cups and other items arent recycled at the highest levels. People tend to throw these in the trash and its not as easy to recycle. So theres things you can do to improve recovery rates. Office papers are in pretty good shape when it comes to whats recovered and fed back into the system.