When I stood before you here one year ago, Georgia-Pacific was in the midst of tackling an array of daunting challenges across many fronts.
Our total corporate debt was too high and there were lingering concerns that liquidity was an issue. A pitched price war for the consumer's dollar was being waged within the North American consumer products business. Our packaging and bleached pulp and paper businesses were seeing conditions worsen, general demand was weak and a white-collar employment recovery hadn't begun. The building products industry was on its heels after suffering through an unprecedented recession in commercial construction. Worse, there was the notion that this great company was struggling through these difficult economic conditions, so much so that our share price hovered below $15 the last time we were together.
Given all we have faced and all that we have accomplished, I am more than pleased today to report to our shareholders that the major strides we made in the past year were significant, and that our course forward, as a result of these strides, remains steadfast and focused.
In short, there is a lot of excitement to share with you today. First and foremost, I want to highlight the tremendous progress made on our financial strategy to reduce our debt by maximizing cash flow from operations through controlling capital spending, increasing margins, reducing our operating costs, and executing divestitures of non-core assets.
Despite the tough market conditions last year, we proved once again that Georgia-Pacific can and does generate a lot of cash. Led by our consumer products business and an incredibly strong rebound in our building products businesses, we generated $1.8 billion in cash from our operations.
These strong cash flows contributed significantly to reducing overall debt and will continue to do so over time.
Also important to fueling our debt reduction was our focused effort to divest non-strategic assets--like railroads and individual facilities that are of greater value to others. And in 2004, such transactions will contribute significantly more to debt reduction.
So overall, we paid down nearly $900 million in debt--with more than half of the reduction achieved in the fourth quarter alone. This really is a testament to what our assets will be capable of when the economy operates at a fully recovered level. Combining our 2003 effort with the previous two years, we've been able to reduce our total debt by $5 billion. And, we continue to work hard at this every day. Last month, Moody's revised its outlook for our debt ratings from negative to stable, and just last week Fitch upgraded our ratings and also changed the outlook to stable.
We are determined to trim our debt level to less than $8 billion and believe this action, together with stronger economic conditions, will merit the eventual return of Georgia-Pacific's ratings to full investment grade.
We've also done a good job of managing capital through a very tough economic climate. We've shown a disciplined approach in the last several years to controlling capital spending while still investing strategically in key targeted projects that will add to our returns and maintain our competitive position.
For example, our plans to open an oriented strand board manufacturing facility in northern Florida next year and our successful startup of through-air-dried tissue machines in Louisiana and Oregon are among the significant demonstrations of this approach.
The latter two machines, also known as TAD machines, including the Wauna, Oregon machine, shown here, are the foundation of our strategy for improving both branded and private label paper towels in North America.
At the same time, all of our businesses continue to focus very intensely on reducing working capital, particularly on inventories and receivables.
Our headquarters' staff and our businesses continued to make great strides in lowering our ongoing overhead costs. Between 2002 and 2004, we will have reduced our annual overhead costs by more than $200 million. We are a leaner company and one that is making the tough decision to continue cost improvement in 2004.
In short, every stride we have made on the financial and operating front began to achieve greater recognition of our value in the marketplace. From an investor perspective, I am proud to report a vast improvement in our stock performance since this time a year ago.
Our calendar year returns for 2003 were 95 percent, far outstripping the majority of our peer group competitor companies. For the 52 weeks ending April 30, GP's total shareholder returns were more than 130 percent. Our principal competitors' total returns over this same period were at best just over 30 percent.
Of course, no review of our 2003 progress would be complete if I did not reflect on asbestos, which has been the biggest single issue overhanging our company and its future in the minds of investors. We set out to ensure that we dealt aggressively with asbestos on two fronts - managing our litigation and working to find a fair asbestos solution through our federal and state lawmakers. We have been very active on both fronts -- and we have marked progress to show for it.
From a financial perspective, we helped the world get some perspective on the asbestos issue's effect on GP, reminding market observers that the cost of our asbestos liabilities annually represents no more than 7 percent of our earnings before income taxes, depreciation and amortization, and that is before any insurance recoveries. The truth is that this is a difficult but manageable issue. Annually, we also add another year to our reserves for this liability so that we are responsibly taking the long view into account for our shareholders.
On the asbestos legislative front, we are encouraged that state and federal lawmakers began recognizing that this is an issue truly worthy of a national remedy. U.S. Senate legislation to create a national trust fund that would be fair to victims, companies and insurers, while reducing the high transaction costs for asbestos cases, received serious consideration on the Senate floor in April, and mediation toward an eventual solution continues today.
We remain hopeful that lawmakers will heed the call made by so many affected by this issue, including our employees and retirees, and reach a bi-partisan consensus that will bring greater certainty to all parties affected by asbestos. While our financial position and returns improved remarkably during 2003, I want to spend the rest of my time this morning sharing some of the outstanding strides being made within each of our businesses.
There's no doubt in anyone's mind that the MVP in our current lineup is our building products segment. These businesses, including wood and gypsum panels, lumber and chemical manufacturing, and our distribution division, achieved outstanding improvements in 2003 following a prolonged recession in commercial construction and industrial markets.
The building products manufacturing segment alone reported an operating profit of $379 million for the full year 2003, compared with $129 million for 2002. We saw a huge turnaround in our structural panels business around the middle of last year, which resulted in a record-breaking fourth quarter performance in that business - a time of year that is traditionally slow for this industry.
2004 has roared in even stronger. Demand for building products remained especially brisk in the first quarter, with year-over-year plywood prices up 52 percent, oriented strand board prices improving 115 percent and softwood lumber prices up more than 12 percent.
Shipments of these products were higher as well. The outstanding pace of housing starts and strong sales of existing homes, combined with favorable winter weather, continue to fuel this remarkable recovery in our building products manufacturing business, which resulted in an all-time first quarter record.
On the existing home front, the upward trend in do-it-yourself home remodeling continues as well. GP capitalized on this market growth by continuing to position our building products on the shelves of major home supply retailers.
In 2003, we launched an array of marketing and branding campaigns in the building products business to make buyers sensitive to issues like structural integrity, longevity and mold.
We even renamed Southern pine plywood, a product we developed ourselves in the early 1960s. Our newly branded GP Plytanium™ panels put a fresh name on a familiar face. Let's take a quick look.
Our panels strategy includes positioning mills in key geographic regions - through exchanges and acquisitions - as well as the startup I mentioned in Hosford, Florida, of a new oriented strand board facility next year.
Late in 2002 we acquired two plywood plants in an asset swap with Louisiana Pacific. During the past year, we have invested to upgrade these two plants at Cleveland, Texas, and Logansport, Louisiana, and today that investment is generating millions for GP.
And, we experienced unprecedented growth in our GP Toughrock and DensArmor gypsum panels brands first introduced in 2002. In 2003, our Dens family of products saw a nearly 40 percent increase in sales.
An extension of the Dens technology line--which includes gypsum products used in the construction of interior walls and ceilings of buildings -- DensArmor and DensArmor Plus offer unequaled resistance to moisture, mold and mildew in all interior building surfaces.
Our Dens gypsum products, all of which feature our patented fiberglass mat technology, are the focus of newly restarted production at Savannah, Georgia, and Long Beach, California.
Not only are our building products beginning to attract a premium at the cash register, they are prominently featured on the growing category of Do-It-Yourself TV programming.
At the same time, our building products distribution business benefited from the positive factors that sparked our rebound in manufacturing. This segment recorded an operating profit of $98 million in 2003.
As part of our continuing portfolio alignment, we announced last September our intent to explore strategic alternatives for our building products distribution business, including its possible sale. The distribution business purchases less than 25 percent of its supply from GP-owned manufacturing facilities, with the balance sourced from an array of third-party vendors.
By separating this business and giving it an opportunity to grow, we can enable Georgia-Pacific to focus its manufacturing businesses.
In March, we announced a definitive agreement to sell our building products distribution business to a new company to be called BlueLinx, which will be owned by Cerberus (Sur-bur-us) Capital Management L.P., a private, New York-based investment firm, and members of the distribution management team. We expect the transaction to result in net after-tax proceeds of approximately $780 million, subject to working capital adjustments. Proceeds will be used to reduce debt.
Market conditions weren't as strong for our consumer products businesses in 2003, but there were some solid performances in the face of fierce competition domestically and overseas.
Our international consumer products segment reported an operating profit of $160 million for 2003, compared to $141 million for 2002. The currency exchange rate contributed to improvements in this business.
Our first quarter performance was also helped in part by our ongoing efficiency and cost improvements. While prices were weaker than a year ago, shipments were up 5 percent due to seasonal factors.
Late in 2003 we began to reorganize our assets in the United Kingdom in an effort to reduce overhead and operating costs, and to improve our efficiency going forward. As part of this effort, we decided to close our converting facility at Wrexham, Wales, at the beginning of this year.
New GP products also reached the European market in 2003. Following the successful launch of our touch-less towel dispenser, enMotion, our European Lotus Professional brand launched a matching foam soap dispenser currently available in Belgium, Denmark, Germany, the Netherlands, Norway, Sweden, Finland and the U.K. The foam soap segment is the fastest-growing soap segment in Europe.
Also new in the away-from-home market in the U.K. and the Netherlands is Lotus Professional's Evolution Air Freshener. Compact and efficient in use, the air freshener circulates Lotus Professional's own tropical and floral fragrances. In addition, Nemo and his Disney friends swam "across the pond" in 2003 to make a special appearance on our "Movie Magic" paper towels and facial tissue in the United Kingdom. In addition, GP's Deeko brand launched a variety of party goods, including paper plates, invitations and balloons showcasing the film's characters.
Our European business remains strong, producing the third consecutive year of earnings growth in a highly competitive market. Our strategy in Europe includes looking for and acting on expansion opportunities.
With the Fort James acquisition, we gained two outstanding R&D facilities -- one of which is in Kunheim, France.
At this research facility, our scientists developed the proprietary high visibility structure (HVS) technology, which was used to help create our newly improved Quilted Northern bath tissue in North America.
Our facility in Gien is a state-of-the-art mill producing bath tissue and kitchen towels for France and other countries, and is our leading production facility in Europe in terms of tissue capacity.
In the last few years, Gien took the corporate lead in successfully installing and using TAD technology.
Today, our North American Tissue operations in Port Hudson and Wauna are benefiting from the proven European technology and expertise that has migrated across the ocean.
Which brings me to our North American consumer products business. The segment recorded a 2003 operating profit of $601 million, down from an operating profit of $851 million for the previous year, in the face of intense competition and higher operating costs for raw materials, energy and distribution.
More recently, we launched our improved Brawny paper towels and Quilted Northern bath tissue, resulting in greater advertising, promotion and distribution expenses during the first quarter 2004. The good news is that the marketplace is responding very favorably to these new products and Brawny and Quilted Northern experienced positive growth in both shipments and net pricing during the first quarter. In fact, Brawny's dollar to volume share ratio is the best it's been since we acquired the brand.
Our overall retail tissue shipments were up from a year ago as well, primarily due to increased sales to fast-growing mass retail, club and dollar stores.
The away-from-home tissue business also faced very competitive circumstances and prices were lower despite higher shipments than a year ago. To help offset higher costs across all of our domestic consumer products businesses, we have announced price increases to our customers in both retail and away-from-home consumer products, including tissue, towels, napkins and Dixie products.
Clearly the manufacturing highlight of the last two years for North American consumer products was introducing TAD machines, first at Port Hudson, then at Wauna. These machines were central to our launch late last year of the improved Brawny towel. Consumers tell us our new, massively improved Brawny is one of the best paper towels available today - and we agree.
In January, we unveiled the softest-ever version of our 102-year-old flagship brand - Quilted Northern bath tissue. It features a top sheet with new and improved micro-quilting and a second layer with extra softness. Our new Quilted Northern is softer, stronger, more absorbent and more durable.
Both launches have gone exceptionally well. We are focusing during the first half of this year on getting consumers to try the new products by supporting them with strong advertising programs.
We also have begun a new ad campaign for AngelSoft, which is our more affordable premium bath tissue.
The second half of the year should provide more insight into our level of success. In our commercial tissue business, we saw tremendous success with one of the most innovative concepts ever rolled out.
Just wave your hand in front of enMotion and it automatically dispenses a towel. Launched first in the U.S., and then in the Netherlands and other European countries, enMotion has quadrupled volume targets since its launch.
If you're like most people, whenever you think of disposable cups, you think Dixie. The brand name is recognized by 97 percent of consumers and is still the fastest-growing cup and plate brand in the United States.
With 39 new product launches in 2003 alone, Dixie continued to enhance its strong consumer loyalty and increase its dollar share.
Now, for Packaging. We believe that our packaging business is simply the best in the sector. In a year when our competitors suffered, our packaging segment reported an operating profit of $345 million in 2003, including asset sales, compared with $323 million in 2002. In the first three months of this year, box prices were lower than a year ago, which was offset somewhat by higher shipment volumes.
Prices in this business have consistently fallen since first quarter a year ago, and there are now signs that they reached their trough, with demand showing definite signs of improvement.
Our operating rates were dramatically better in the first quarter than the same quarter last year. The key attributes that allow us to maintain this position are our expertise in supply chain management, commitment to quality, and innovative approaches to packaging that respond to customers' needs.
This "customer-eye" view can be seen day in and day out at our new Innovation Institute. Located just up the road in Norcross, this "think tank" is designed to provide our customers with a unique, hands-on environment to test total packaging solutions - from the package itself, to shipment, to set-up and sale.
We've also made some strategic acquisitions within the packaging segment during the last year. In fact, last month, we announced the acquisition of the Inland Packaging assets in Ontario, California, and Harrington, Delaware. These facilities will allow us to deliver high-quality graphic packaging to our customers in key markets.
Our bleached pulp and paper segment faced tough conditions in 2003. With overcapacity and weak market conditions, this segment reported an operating loss of $133 million in 2003 compared to an operating profit of $58 million in 2002.
In 2003, GP office products' total shipments were up nine percent over 2002, primarily due to new distribution at Kmart, BJ's Wholesale and Costco Canada.
While conditions remained tough in the first quarter of 2004, shipments of white paper were slightly higher than a year ago as many customers purchased before announced price increases take effect in the second quarter.
I believe continued gains in employment and the weakened dollar will help this business recover in 2004.
Also, fully consistent with our plan to focus on more stable, value-added businesses and to reduce corporate debt, we announced in January that we had signed an agreement to sell our non-integrated fluff and market pulp operations in Brunswick, Georgia, and New Augusta, Mississippi, to Koch Industries for $610 million. We expect this transaction to close soon and result in debt reduction of $535 million.
Just as GP facilities are important to their communities, we recognize that our continuing success as a company depends largely on the vitality and quality of life in the communities where we operate and where our employees live. So thousands of GP employees will continue to be engaged in efforts like the Kyle Petty Charity Ride Across America, our Angel Soft Angels in Action program, the Susan G. Komen Breast Cancer Foundation's 'Race for the Cure', building homes for Habitat for Humanity, and supporting Rebuilding Together.
These are among numerous examples of the thousands of ways our employees strive to enrich the lives of others, just as they do with the everyday essential products that they make and sell.
To capture and highlight our efforts, Georgia-Pacific in 2003 produced and distributed its first Corporate Social Responsibility report.
While we have publicly reported our safety, environmental, social and economic progress over the years, we have brought all this information together in one place. I encourage you to pick up a highlights brochure available outside this room or to visit the gp-dot-com site, where we have compiled this information.
The report reinforces our long-time commitment and provides examples of how we:
-- Make a difference in our communities - from educational programs to our employees getting actively involved with outstanding local causes;
-- Incorporate environmental considerations into the overall management of our businesses;
-- Implement safety programs that protect our employees both at work and at home, and
-- Use our recruiting and talent management programs to attract and keep the best employees in our industry.
These are just some of the many ways we take action on our company values: safety first and integrity always, treat people with dignity and respect, build value for investors through focus on customers, and excellence in all we do. These values have been and will continue to be the cornerstone of Georgia-Pacific. These values were also the basis for our response to shareholders, who last year asked us to implement a shareholder proposal to establish a policy of expensing stock options.
In November, your board of directors voted to approve the expensing of stock options on the company's income statement, adopting a FASB method for expensing all stock options awarded in 2003 and thereafter. Significantly, this approach as well as other stock compensation awards, equaled approximately 9 cents per share difference in our first quarter earnings alone, when comparing GP's net results to our competitors.
Responding to shareholder and stakeholder views and concerns, and upholding our values continue to be reflected in our approach to corporate governance. During 2003, your Board of Directors updated and affirmed our long-standing corporate governance structure to codify several of these policies and practices, and to meet new and recently revised requirements of federal and state law and the rules of the New York Stock Exchange.
This process included updating our company's Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Board committee charters, as well as adoption of a Code of Ethics for Senior Financial Officers.
We are proud of our strong approach to corporate governance, and believe that our core values and the policies and practices inspired by these values will continue to serve Georgia-Pacific and all of its communities and stakeholders well in the future.
Simply put, 2003 was a year when we delivered on our strategy and commitments. When economic and market conditions remained tough, we did not bend or break. In fact, we continued to make the strides necessary to become stronger still, particularly as we begin to see the signs of recovery blossoming in early 2004.
Georgia-Pacific has been in business now for over three-quarters of a century, providing the everyday essential products needed by people around the globe. Today, you see a forest products company that built its strategy on the ability to serve the big box, power retailers and national accounts.
We're seeing success because it fits with what both the consumer and the mass retailer have decided they want: quality products at a good value. At the core of this strategy is flawless execution, which we intend to focus on delivering throughout 2004 and beyond.
On behalf of our company and its 60,000 employees, thank you for being an owner of Georgia-Pacific and for your continued support of our Board, our management team and me. I'm looking forward to 2004. We expect to deliver even stronger second quarter results, based on improving conditions in our consumer products, packaging and bleached paper businesses, combined with continued positive market conditions for building products.
I am also pleased to report that your executive management team continued to evolve in a positive direction as your Board of Directors worked to address the future leadership of Georgia-Pacific.
Through 2003 and in the first several months of 2004, we have continued to align GP's executive management team as part of our deliberate and orderly transition forward. We have a tremendous amount of leadership talent at GP, and I am enthusiastic about how smoothly these actions took place, which is a testament to the capability and unity of our top leadership team and their dedication to our company's long-term success.
Source: Georgia-Pacific Corp.