Hail to the Chief
International Paper's John Faraci: MBQ's first annual Platinum CEO of the Year.
When International Paper announced 25 years ago that it was moving its operations headquarters to Memphis from Manhattan, it was not only the biggest news story of the year locally, it was also the biggest real estate story of the year.
More than 600 employees made the move that first year, giving a boost to the housing and office markets that has kept on paying dividends. Today the Fortune 500 company has some 2,400 employees in Memphis and occupies three glass towers in International Place in East Memphis. This is in addition to a recycling facility, logistics center, and box plant in the Greater Memphis area.
John Faraci, 62, joined IP in 1974 and has been the CEO since 2003. Under his leadership, International Paper completed the transformation of its business in 2010, managed its way through the recession, regained its stock market valuation, acquired corrugated packing manufacturer Temple-Inland for approximately $4 billion in 2011, and announced $1.5 billion in capital investments this year.
For his business leadership and commitment to Memphis and International Paper’s stewardship of conservation lands in Tennessee and the Southeast, John Faraci is MBQ’s first annual Platinum CEO of the Year. The recognition is given to executives running the largest companies and organizations in our community, those employing more than 1,000 people.
International Paper’s CEO was in an upbeat mood when I met with him at the company’s world headquarters in Memphis in February. It was an unseasonably warm day, and in a month or so the azaleas and oak trees in the heavily landscaped courtyard outside his window would begin to blossom and leaf out. The place looks like the Memphis Botanic Garden. I was a bit surprised to see several smokers outside, but then I realized cigarettes come in packaging. Nobody, Faraci included, was wearing a tie.
Earlier that morning, Faraci had announced the company’s fourth-quarter and year-end reports, and they were, he proudly told Wall Street analysts, “the best financials in two decades.” The stock price, which fell below $4 a share in 2009, was back to $31, the dividend an attractive 3.5 percent. The takeover of Temple-Inland was expected to be approved by regulatory agencies by mid-February.
A native of New Jersey, Faraci earned his undergraduate degree in history and economics from Denison University in Granville, Ohio, where he played on the tennis team. He got a Master’s degree in business administration from the University of Michigan. He and his wife, Heath, have two daughters.
“I’m an outdoor person but not a hunter or fisherman in a serious way,” he said. “I love the outdoors, which is why I came to International Paper. I play golf to have fun and I play tennis to win. ”
International Paper is the “other” big corporation in Memphis. FedEx and AutoZone are home grown, and their founders, Fred Smith and J.R. “Pitt” Hyde, are household names. Their signs and products are on our roads, doorsteps, sports facilities, and street corners.
IP is king of corrugated packaging and wood fiber, which is not exactly a water cooler topic. The company is not in newsprint, having the foresight to ditch that line 30 years ago. In 2006, IP sold most of its 6.8 million acres of timberland — the largest transfer of land in America since the Louisiana Purchase. Today, its closest mills to Memphis are in Alabama and Kentucky.
“Consumers see our products every day when they go buy the products that they use,” Faraci said. “We make an array of packaging for non-durables, from bottled water to vegetables to hoses to toys — you name it. Most of that stuff at some point in the supply chain gets shipped in a corrugated package. And a high percentage of what comes to you in your direct mail was made by IP.”
As the largest user of wood fiber in the world, IP still feels a stewardship responsibility. When it sold six million acres of land, it let 11 states pick what they wanted for preserves and was able to accommodate all of their requests. Dry Branch is a 2,600-acre tract in Lewis County in Middle Tennessee that was purchased by the Nature Conservancy in 2006. Cumberland Forest in northeast Tennessee is a 75,000-acre Wildlife Management Area that was sold by IP to the Conservation Fund in 2002.
Over 70 percent of the company’s fuel sources are renewable biofuels.
“When I heard the President talk about green industry and creating jobs, I said [IP has] the best green jobs in the industry,” Faraci said. “We are based on a renewable sustainable resource. We supply over 60 percent of our power from electricity we make ourselves. Our industry is planting over four million trees every day. And we are the fourth largest collector of recycled fiber in the country and the biggest user of recycled fiber in the country.”
The IP CEO is just as proud of his company’s commitment to Memphis. “I think our signature project in Memphis is our support and partnership with the National Civil Rights Museum,” Faraci said. “That’s an historic place in every sense. We got involved in early on and continue to be involved.”
Faraci was not in the first group of employees to move to Memphis. He came here in 1994, moved after a few years to New York and New Zealand, and returned in 2007. But he remembers when the news broke in 1987 that IP was leaving Manhattan for Memphis.
“I was in Dallas running one of our businesses there,” he said. “I thought it was a good idea to get out of New York City. Dallas was on the list of possible cities for the operations headquarters, but it was on the periphery. Our locus of operations was the Southeast, and Memphis turned out to be a good location. Seventy percent of International Paper is in North America, and Memphis is basically in the center of the United States.”
He was not immediately won over, however.
“[Today] you can hire young people who want to come to Memphis,” he said. “That was not true when I first moved here. We had a difficult time recruiting from outside the area. Now it is much easier because Memphis has a lot more to offer. The NBA does make a difference. FedEx is a much larger employer now. Memphis is a different city now.”
And Faraci is candid about the declining level of passenger service at Memphis International Airport in the wake of cuts by Delta Airlines.
“Yes, it is a problem,” he said. “Especially on the international side. On direct flight from Memphis to anywhere, we are impacted because we are a global company. Memphis not being the hub it once was, it’s more difficult for us. We can deal with it. We have our own fleet of planes. But the more nonstops, the better off you are.”
The generally positive business outlook this year is a marked contrast from three years ago. During 15 months in 2008-2009, IP lost and regained more than 75 percent of its market value.
“It was an anxious time for employees, for sure,” Faraci said. “I was always very confident that IP was caught up in the market downdraft, not something uniquely directed at IP. One of our big competitors went bankrupt, and I knew we were strong enough to withstand what was coming, but the honest answer is none of us knew how bad it was going to get.”
Had IP, I wondered, ever been a takeover target?
“You would have thought so in any normal time but nobody had money and nobody could get any money because the credit markets were closed,” he said.
“You could have IP at that time for $6 billion,” he continued. “If you look back, there were not many transactions done then. There were some desperate companies that needed capital. But not only did we not sell the company, we didn’t even issue any equity. And we were able to generate a lot of cash and demonstrate that we could manage through that tough economic time.”
The acquisition of Temple-Inland was what is known as a hostile takeover. Faraci said it will have little direct impact on Memphis but will open the way to $1.5 billion in capital investment in 2012, including about $100 million in North America.
“The economy is recovering but far from fully recovered,” he said. “It’s moving in the right direction but slower than we would like. We are still not back to pre-recession activity in some of our businesses. The transformation of IP is basically behind us. Temple-Inland is part of the next step.”
I asked him what he would like to see out of Washington, D.C., regardless of who wins the 2012 election.
“We need to create conditions for sustainable growth of 3 to 4 percent a year,” Faraci said. “To create that we need tax reform and entitlement reform, and we need to deal with debt. One way the budget got balanced a decade ago was we had strong tax revenues. We don’t need to increase the tax rate, we need to get more people paying taxes and generate a bigger economic pie.”