Less than two years after David Scheible assumed the helm of Graphic Packaging, things had taken a turn for the worse. Its stock price had fallen to $1 per share and the distinguished New York Stock Exchange was threatening to delist the company as shareholders bailed and the economy soured in 2008.
“Because we had grown primarily through acquisitions, we were 6.8 times levered which means we were functionally bankrupt,” says Scheible, president and CEO. “We needed to generate cash in order to pay down debt and become a legitimate public company.”
A survey of Graphic Packaging’s employees revealed that the provider of paperboard and flexible packaging for such notable clients as McDonald’s, General Mills and Coors was slow to make decisions and that its divisionally-focused management team was disengaged from the company’s broader goals.
The candid feedback inspired Scheible to set a new course. Under his leadership, the $4.3 billion industry giant has strategically realigned itself. He’s reduced debt by $1.3 billion and strengthened Graphic Packaging’s market share by tethering its operations to the consumer products industry. His efforts have boosted the company’s share price to just more than $8 and produced 11 percent year-over-year earnings growth for the most recent quarter.
Here’s an in-depth look at Scheible’s efforts to repackage Graphic Packaging.
Turn up the volume on accountability
It seems that decision making wasn’t Graphic Packaging’s only shortcoming.
“Our employees said our managers were good at storytelling but not good at holding people accountable or creating a culture of accountability,” Scheible says. “There was no doubt in my mind that we needed a cultural revolution to get to the next level.”
Scheible turned up the volume on accountability by replacing 80 percent of his leadership team. While he acknowledges that jettisoning incumbent managers is never an easy decision, he maintains that it’s more expedient to start over than to try to change the attitudes of veterans who saw no reason to change and preferred the status quo.
“It was a gut-level decision but I thought we needed an upgrade,” he says. “We needed results-oriented leaders who possess the ability to interpret data and make speedy decisions. People who realize the difference between achieving a good result and telling a good story.”
It turns out that Graphic Packaging had other lagging issues that were impeding decision-making and accountability, as its history of acquisitions had left the company was disparate IT systems, goals and reward programs.
“Each division was tracking cash, inventory and various operational metrics,” Scheible says. “Which made it difficult to conduct comparisons and identify the underperforming units. It turned out that some divisions were doing well while others were not.”
So Scheible eliminated Graphic Packaging’s divisional fiefdoms by introducing a company-wide set of operational KPIs and replacing patchwork software programs with what he calls a plain vanilla version of SAP. Finally, he created a uniform compensation plan linking managerial pay and bonuses to the company’s overall performance.
“The good news was that our employees liked working here and said they would recommend our company to a colleague, so our survey proved that we were doing some things right,” Scheible says. “I wanted to make sure that we had the leaders and resources to build on what we were doing well while eliminating the bad.”
Narrow your focus
Downsizing or eliminating vertical markets is always risky, especially for CEOs of public companies whose moves are scrutinized by shareholders. However, Scheible was convinced that Graphic Packaging’s array of sub-sized businesses was hindering the company’s potential.
As one can imagine, making a package for a pharmaceutical product requires different materials and equipment than making a carton to hold six bottles of beer. Graphic Packaging’s limited presence in pharmaceuticals and cosmetics made it difficult to maximize the company’s investment in manufacturing equipment. Moreover, the company needed a plethora of manufacturing plants to support its diverse customer base.
“It’s not that the business was bad or unprofitable,” Scheible says. “But we couldn’t leverage our assets because we lacked critical mass in some segments.”
“Since we were better at some things than others, I thought we’d be better off by doubling down on the business we knew and focusing on industries that offered the most stable growth for the foreseeable future,” he says.
So Scheible scaled back the company’s position in pharmaceuticals and cosmetics and sold the plastics division before tethering its operations to consumer products, with a strong focus on the packaging needs of the food and beverage industries.
He based his decision on the projected growth and stability of the consumer products industry and its ability to generate a steady cash flow. Scheible also felt that consumer products offered enough diversity to mitigate the risk of putting the company’s eggs into a single basket. So far, his hunch seems to be right.
Despite, the overall slowing of net sales growth rates in 2012 food, beverage and household products companies experienced positive net sales growth of 7.0 percent, 5.5 percent and 3.2 percent respectively, according to the 2013 Financial Performance Report by the Grocery Manufacturers Association and PwC US.
In addition, his move has helped Graphic Packaging eliminate excess capacity in its plants resulting in closing 21manufacturing facilities since 2008. While his downsizing strategies weren’t always popular with employees, shareholders have benefited from Scheible’s efforts to reduce operating expenses as Graphic Packaging’s operating profits soared from $219 million in 2010 to $322 million in 2012.
“Sometimes you have to make tough decisions,” Scheible says. “While closing a plant impacted some people, our consolidation efforts ultimately benefited the people who are with us today. We’ve boosted employment at our remaining plants and now employ 15,000 people.”
After reducing debt and narrowing the company’s focus, Scheible consummated five strategic acquisitions and a merger as part of a deliberate effort to increase GPI’s market share, global footprint and capabilities in the consumer products industry.
Some purchases fostered European expansion while others, like the 2011 acquisition of Sierra Pacific, provided Graphic Packaging with a strategic location to service customers on the West Coast while upping its ante in the fast-growing craft beer and litho-printed laminated wine box markets.
“We’re far and away the leading producer of folding cartons for beer, but our recent moves have further propelled us into the rapidly growing craft beer segment,” Scheible says.
“Our improved financial performance afforded us the opportunity to stretch on the acquisition front and we’re taking advantage of it,” he says. “We’re focused on opportunities in under-served markets like China and Japan that provide us with a first mover advantage,” he says.
In some cases, Graphic Packaging’s first mover advantage comes from its commitment to sustainability and its ability to create more efficient packaging out of recycled materials, especially in emerging countries.
“The fact that we don’t have to dig up dinosaurs to make a package gives us a competitive advantage and makes us more efficient at the same time,” he says. “For instance, in the U.S. we’ve replaced the plastic clamshells at Panera Bread with a smaller, paper product. And that kind of innovation gives us a leg up on many local or regional competitors.”
Scheible has gone to great lengths to ensure the thorough and seamless assimilation of the Graphic Packaging’s recent acquisitions by refining his assimilation plan and adopting the principals described by authors Mark Feldman and Michael Spratt in “Five Frogs on a Log: A CEO's Field Guide to Accelerating the Transition in Mergers, Acquisitions and Gut Wrenching Change.”
“We’ve created an office of integration that reports to me,” Scheible says. “It’s staffed with 12 full-time employees who have backgrounds in legal, HR, finance, IT and operations. They can spring into action at a moment’s notice.”
The expense of maintaining a dedicated team is more than offset by the identification of synergistic reductions in overhead following an acquisition. For instance, analysts project that Graphic Packaging will realize more than $70 million in cost savings this year as the company integrates its recent acquisitions.
“I’ve learned a few things about assimilation from my successes and failures,” Scheible says. “First, don’t acquire a company unless it supports your core business and second, always retain the best person when you’re deciding between an incumbent and a newly acquired manager.”
How to reach: Graphic Packaging International (770) 240-7200 or www.graphicpkg.com
Create a culture of accountability.
Improve your financial performance by narrowing your focus.
Acquire market share through acquisitions.
The Scheible File
Name: David Scheible
Title: Chairman, Cresident and CEO
Company: Graphic Packaging International, Inc. is a wholly owned subsidiary of Graphic Packaging Holding Company headquartered in Sandy Springs, Ga.
Birthplace: Evansville, Ind.
Education: He has a bachelor’s degree in biochemistry and a master of science degree in industrial administration with a concentration in finance from Purdue University.
What was your first job?
Given my background in chemistry, I went to work for B.F. Goodrich right out of college where I sold chloride and rubber treatment chemicals in Latin America. My role prepared me for my future career by teaching me how to interface with customers, how to prioritize their needs, how to navigate the international marketplace and best of all, how to speak Spanish.
What’s the best advice you’ve ever received?
My boss at Avery Denison taught me that speed beats perfection every time when it comes to decision-making. You’ll never have all the data you need so make the best decision you can, adjust quickly and keep the organization moving forward.
Who do you admire most in business and why?
I admire Steve Jobs for his clear vision and unwavering desire to change people’s lives and Warren Buffet for the way he executes his strategy. He doesn’t fall in love with an industry or product; he falls in love with a management team and its ability to carry out its vision and strategy.
What’s your definition of business success?
What I would tell you is that success is a journey. It’s about setting goals, achieving them, being accountable and making corrections when you don’t. Then doing it over and over again.
What’s your biggest obstacle to future growth?
Our aging workforce and a lack of interest in manufacturing careers by Gen Y’ers is a challenge that we’ve identified and are trying to overcome. We’ve defined the career path for our employees and created a rotational training program to help us engage Millennials. Some of our local plants are conducting sophisticated training programs as part of a conscientious effort to develop a qualified workforce. We’re not sexy like Yahoo! but there are some good reasons why young people should consider a career in manufacturing.