Every speaker likes to begin a speech on a positive
note and there is a major piece of good news I can share with you this morning
… but it will be no surprise. That is, that earlier this year, Weyerhaeuser
acquired Willamette Industries, creating the foundation for your company
to become the global forest products leader. In the words of a popular song,
it’s a “brand new day” at Weyerhaeuser.
And, looking
back at 2001, corporate America, our industry and our company could use
a brand new day. Last year, American industry experienced one of its worst
years since World War II, with corporate profits declining 22 percent.
In our industry, we suffered through continued overcapacity, an
overly strong dollar and market uncertainty caused by the softwood lumber
disagreement. At Weyerhaeuser, we had to deal with all these factors, plus
mill shutdowns and closures and our effort to acquire Willamette Industries.
This environment contributed to financial results that,
quite simply, were not very good. For the year, we earned $354 million,
or $1.61 per share, as compared with $840 million, or $3.72 per share, in
2000. Our return on net assets was a disappointing 5 percent. Sales declined
$1.5 billion from 2000 – from $16 billion to $14.5 billion.
This
is hardly news to warm the cockles of a shareholder’s heart. But consider
this – during 2001, our stock price increased nearly 7 percent while the
S&P 500 Index declined by 12 percent. Or you could have invested in
NASDAQ stocks.
Overall, the NASDAQ index declined 21
percent. Most “dot.coms” turned into “dot.gones” and disappeared altogether.
Meanwhile, Weyerhaeuser shares have continued to rise,
up another 12.5 percent this year through last Friday.
How
can this be? And why – when we went to investors in March to sell $4 billion
in bonds – did they demand several times that amount, leading us to issue
$5.5 billion in bonds?
The answer is that investors are
looking for a company that makes real products that people need … a company
that has a solid balance sheet … a company that has a bright future … and
a company that they can trust.
An indication of how
our company is viewed by financial analysts and leaders of other companies
is our standing in Fortune magazine’s Corporate Reputation Survey. This
year, Weyerhaeuser finished first in our industry in four of the eight categories
measured: financial soundness, long-term investment, quality of management
and social responsibility.
Incidentally, our first-quarter
earnings will come out next week. These will include Willamette Industries
from February 12.
Now I want to address three questions
that should be of interest to you, our shareholders:
- What’s the outlook for our industry?
- How
will the combination of Weyerhaeuser and Willamette benefit you, the shareholder?
- What steps are we taking to rationalize our combined assets?
First, will we do better this year? There are some
encouraging signs: The U.S. and global economies appear to be recovering
and continuing industry consolidation should help drive out excess capacity.
But as I’ve said many times, we can’t depend on improved pricing to produce
the financial results we want. In any industry like ours where prices in
constant dollars for many products have declined over time, competitiveness
depends on continually cutting costs and increasing productivity from our
existing resources.
On the cost-cutting side, we’ve
been engaged in two major initiatives over the past few years that have
returned substantial savings:
- Our Purchasing
Improvement Effort has gained us more than $200 million in annual savings.
- Our Support Alignment effort – aimed at reducing redundancy and
complexity within our staff organizations – has achieved $100 million of
the $165 million in annual savings targeted.
I
should also mention that since we’ve begun interacting with our new team
members from Willamette, we’ve discovered that people there are used to
doing a lot of the things we do a lot more simply – and at less cost and
with fewer resources – than at Weyerhaeuser.
This has
led your Senior Management Team to challenge the company to reexamine many
of our processes and practices with an eye to reducing complexity and costs.
On the productivity side of the equation, much of our
effort falls under what we call process reliability. In simple terms, process
reliability means our equipment and work systems operate together to maximize
uptime and minimize waste.
What do I want you to take
away from these cost-cutting and productivity-enhancing initiatives? That
your company is continually seeking ways to decrease costs and increase
margins.
A good example is our newsprint mill in Longview,
Washington. Over a five-year period, a 7 percent improvement in process
reliability increased site profitability by more than $30 million a year
based on trend prices. About one-third of this amount came from incremental
production and the balance from higher margins due to lower production costs.
An added benefit was a significant decline in safety incidents.
But cutting costs and increasing productivity account for only
a portion of our strategy to generate shareholder value. Another major component
is growth. Five years ago, you owned an $11-plus-billion company in terms
of sales and revenues.
At the end of this year, it’s
possible you will own a $20-plus-billion company. But the real question
is shareholder value creation. The result of our growth is that we’ve moved
from a large player in the U.S. industry to a global powerhouse. Both our
customers and our competitors are taking notice. So is Wall Street.
What else have these purchases gained us? Obviously, new customers
and new markets, as well as additional revenues. But also synergies. That’s
a 10-dollar financial term for efficiency gains or new revenue opportunities
that arise through combination.
When we bought MacMillan
Bloedel and Trus Joist, we calculated we could gain at least $200 million
a year in such synergies. Last year, a full year ahead of schedule, we achieved
this target.
We believe Willamette Industries will provide
even greater synergies. We’re projecting $300 million a year – and we’re
already seeing them. Here are four good examples:
- By selling Willamette wood products directly to one of our large
customers – rather than through middlemen – we’ve been able to achieve a
significantly higher net return while providing the customer a larger volume
of quality product.
- The Willamette forms business was
short of white-paper roll stock. At the same time, Weyerhaeuser’s Plymouth
mill – which makes that product – was short of orders and facing downtime.
We were able to put Willamette’s demand together with Weyerhaeuser’s supply
and keep the money for buying the paper inside the company.
- Another
synergy arose when we placed most of Willamette’s insurance needs through
Weyerhaeuser’s insurance department for processing. That will save more
than $1 million for the combined companies.
- Finally,
Weyerhaeuser recently won all of a large food-processor’s box business,
amounting to about 2 percent of all U.S. packaging demand. To adequately
supply this customer, we were facing the need to spend $25-30 million to
upgrade eight facilities.
With the addition
of the Willamette box plants to our system, we can reduce freight, improve
asset utilization and reduce the amount of capital required by $10-12 million.
I believe these are just a small sample of the opportunities available
through our combination.
So how is the integration process
going? From all accounts, even better than I expected, and I was optimistic
to begin with.
Relationships between Willamette and
Weyerhaeuser people on our integration teams – as well as those occurring
through the normal course of business – have been cordial, professional,
and marked by an attitude of “let’s get on with it.” Already, we’ve made
almost all major organizational decisions and we’re maintaining all of Willamette’s
businesses. We continue to move deliberately toward June first, when we
will begin putting the two companies together not only on paper, but in
fact.
To give you a sense of the spirit with which our
Weyerhaeuser employees view the Willamette acquisition, I’d like to show
you a brief video clip. Roll the tape, please.
[Video
of Weyerhaeuser employees welcoming Willamette employees.]
I’d
like to acknowledge the work of our integration teams, as well as all the
other people working on our combination. They’re doing a great job.
And we can never forget our customers, who are the reason for our
existence. We have some with us today – and I’d like to ask them to stand
and be acknowledged.
Along with Willamette, we did pick
up some debt – $7.9 billion worth, to be exact. Our plan is to pay this
debt down to our historic range over the next 3-5 years using free cash
flow.
Much of this money will come from the synergies
I mentioned previously – and part will come from rationalizing our capacity.
In an environment of overcapacity, we must make sure that we’re not adding
to the problem – and costing the company money – by maintaining inefficient
facilities.
We’re currently studying the implications
of our combination with Willamette and preparing a capacity rationalization
plan.
In addition to synergies, money to pay down the
debt will come from tightly controlling capital spending and rigorously
seeking cost-savings everywhere. Our mantra for the next few years is going
to be “Integrate Willamette … capture synergies … pay down debt.”
There is one more topic I want to address and that’s Enron. In
our current business environment, I don’t see how any CEO can ignore the
E-word when speaking with shareholders. Enron’s collapse has left many shareholders
questioning the accuracy of the information they receive from their companies.
I assure you that your company is not another Enron. To start with,
real, tangible products and assets underlie your investment. More importantly,
our balance sheet is solid and accurate, and it is overseen by leaders of
the highest integrity. There are no surprises in our financial statements
… no hidden partnerships, no so-called “creative accounting.”
Arthur Andersen has served as our auditor since 1946 and has served
the interests of shareholders well. However, the Audit Committee of our
Board of Directors felt that – given the events of the past year – the company
should appoint a new auditing firm. The committee is currently reviewing
several candidates.
As a final note on this subject,
2002 marks the 25th anniversary of our Business Conduct Program, started
by Bill Ruskelshaus and one of the first at any company. This is another
piece of evidence that we take high standards of ethics and business conduct
very seriously at Weyerhaeuser.
As I conclude my remarks,
I want to recognize some people who have served Weyerhaeuser admirably in
the past and who are now departing – as well as some new leaders who, I’m
sure, will serve Weyerhaeuser with distinction in the future.
I’ll start with John Driscoll, who has been a member of our board
of directors since 1979 and who will be retiring this year. John, will you
please stand?
John wasn’t here long when the company
had to deal with the Mount St. Helens eruption and the consequent destruction
of 68,000 acres of Weyerhaeuser timber.
John, the board,
and company leaders were faced with a major decision: To replant or not.
Wisely and thankfully, they decided to replant and today we have green forests
where once there were only blown-down trees and volcanic dust.
John has been involved with many other critical decisions as well,
not to mention his leadership of, or membership on, a number of important
board committees. He has served our company well and we will miss him.
Also retiring this year – in fact, already retired – is Dick Gozon,
who has been a member of our Senior Management Team and the leader of our
Pulp, Paper and Packaging sector since 1994. Dick brought with him a focus
on customers, employees and results. He also proved adept at leading change.
Dick will you please stand?
Dick has been such a strong
presence on our leadership team that I’ve appointed three people to take
his place. Actually, I’m exaggerating a bit. With the dramatic increase
in size of our paper operations, I felt it made sense to divide Dick’s former
responsibilities into three new positions.
Two of the
leaders filling these positions and becoming new members of our Senior Management
Team are from Willamette: Marvin Cooper is now our senior vice president
for Pulp, Paper and Containerboard Manufacturing, and Mick Onustock is now
our senior vice president for the Pulp and White Paper businesses. Marv
and Mick, would you please stand and be recognized?
We’ve
also promoted one of Weyerhaeuser’s long-standing business leaders to the
Senior Management Team. Jim Keller, formerly head of our Containerboard
Packaging Business, is now senior vice president for Containerboard Packaging
and Recycling. Jim, would you please stand and be recognized?
In conclusion, let me say to all our shareholders that we’re raising
the bar on our expectations. We still expect to be the best forest products
company in the world. But we’re also setting our sights on becoming one
of the best companies in the world, period.
Getting there
will take some hard work on all our parts and the continued support of you,
our shareholders. But let me leave you with this thought: “The future never
just happened. It was created.”
We’re going to create
Weyerhaeuser’s future. We’re going to grow the global forest products leader.
It truly is a brand new day at Weyerhaeuser.
