This is an interesting time for me to be addressing PIMA on the subject of challenges and changes within our industry. This is an industry that I grew up in and spent four decades working in. I have helped it grow and become stronger. I’ve seen products change and companies come and go. Yet, I believe in its products and the role it plays in meeting the needs of our society.
Recently, however, some might argue that I have come to embody the very subject of today’s discussion of challenges to our industry. After all, I told a conference in New York last winter that we were in a new era of strategic review and decisions at Weyerhaeuser. I said that we would closely analyze every asset in every business to maximize the investment of our shareholders.
This would include maintaining integrated operations where our customers and investors benefit from a tight linkage that begins with the seedling and continues through to the actual product.
I said that fine paper does not define us. I also acknowledged that we had some concerns about the dynamics of that market and we were reviewing Weyerhaeuser’s role in it.
Since then, rumors have swirled throughout the industry and in the media about the future of our fine paper assets. Late last month, we acknowledged that we had stepped up this review process and were considering the sale of these assets as one of the alternatives.
While this has not been an easy process on any of us, it has been especially difficult for our people in the fine paper business.
No one likes to hear the leader of their company proclaim publicly that they work in an asset whose future is under intense scrutiny. You know this is a competitive industry. Each day you must face a new set of pressures. Now put yourself in the place of our people after I had made my statements in New York.
That’s why I’d like to take this opportunity to briefly acknowledge the efforts of our fine paper team.
Throughout this review, and all the rumors it has created, this team has never taken their eye off the ball. In both sales and production, they have achieved superlative results, often producing personal bests. They have stood tall, even when these personal bests did not find their way to our bottom line.
I cannot say where these assets and people will reside in the future. They could be with Weyerhaeuser; they could be with another company.
But I do know that if we choose to leave this business, it not be for a lack of effort by the outstanding people of our fine paper business.
So, what are the pressures that lead to a review such as the one we’re undergoing? What has changed?
Weyerhaeuser embraces constant renewal to meet the ever-changing needs of customers, shareholders, communities, employees and suppliers.
We are a company that understands the power of vision, strategy and execution to create our future.
In the past, you’ve seen us grow through acquisitions to anticipate the needs of a rapidly changing customer base. In the process, we’ve added assets, brought in new leadership, infused our company with innovative ideas and become more efficient.
It would be nice to say that these changes have prepared us for every challenge we could possibly face. But everyone here knows that you cannot stand still; you cannot stop changing.
Today, the pace of change is accelerating as demonstrated by the significant amount of restructuring within our industry. International Paper is selling its timberlands and wood products business. Koch Industries acquired Georgia-Pacific. We are exploring the sale of our fine paper assets.
Other companies have announced similar changes in their business models. These are significant shifts in our industry driven by competition from the Southern Hemisphere, increased use of electronic communications and the movement of manufacturing offshore.
Now a new force driving change has emerged and it is one of our greatest challenges. I’m talking about the evolution of capital markets and the shortened planning horizons resulting from today’s investor expectations.
Before we assign blame for short-term investment return horizons, let me remind you that all of us in this room who are planning for our retirements play a role in why these expectations have shortened.
Let me explain. When you retire, you will likely rely on three sources of income.
The first is Social Security. The taxes you paid throughout your career have prepaid your participation and it is the responsibility of the government to maintain the funding of this program.
If you work for a company with a solid pension fund, that is your second source of retirement income. In the case of Weyerhaeuser, our fund is rock solid.
The third is your 401(k), and this is where today’s investment pressure plays a role.
In most cases, 401(k) accounts consist of mutual funds managed by institutional shareholders who buy positions in public companies. In our case, such institutions now hold 82 percent of our shares.
As a person planning for their retirement, you want these managers to create a diversified portfolio that produces maximum investor value – something they have done consistently.
This expectation by individuals has a dramatic effect upon companies and our expected returns.
A stock held in an institutional portfolio must play its role in fund-management strategy to deliver the best possible investor returns.
The timeframe is far shorter than the rotation cycle of even our fastest-growing trees. In our industry, most of our large shareholders acknowledge the cyclical nature of our businesses.
In a world that places ever-greater emphasis on “what did you do for me today?” institutional investors face constant pressure to produce immediate results.
Financial analysts propose strategic moves that may seem to make short-term sense, but may not make as much long-term sense. That is the reality of today’s Wall Street. If we expect to attract and satisfy the owners of capital, we must understand the Street’s view of our world.
The influence of shareholders – the owners of the company – has never been greater, and they are often catalysts for positive change.
As a result, we are driving improved business returns and safety performance – function-by-function, asset-by-asset, and business-by-business. While maintaining the long-term perspective that has been instrumental to our success, we are working hard to restructure our portfolio to enhance shareholder value in the near term. We are determined to deliver improved profitability, but not in a manner that compromises the health and vitality of the enterprise.
And that’s the challenge for our industry. Paper production is a capital-intensive business. It requires long-term planning and the willingness to withstand the normal down cycles.
But, given the pressure to produce today, is there a chance to develop for the long term? Or will we see paper production move to owners that are more tolerant of a short-term tradeoff for long-term growth? Are we witnessing a permanent change in the role North America will play in paper production?
There are many critical decisions for our industry and there are no simple solutions.
Some of our shareholders have expressed frustration with the pace of our own strategic change and I understand their concerns. The question, however, is not whether Weyerhaeuser will continue to be a player in the paper industry, but what, if any, role North America will play in paper production.
Can we withstand the challenges of the Southern Hemisphere? Can we manufacture our products in a way that maintains our environmental leadership? Will our society continue to embrace substitutes for our products? Will consumers continue to seek and prefer products made from wood?
Some say that any company that depends on harvesting trees should not be part of the world’s future supply of raw materials.
Our detractors cannot, or will not, look beyond the fallen log to see the well-managed forest. If the wood products industry doesn’t tell our story well, then the questions I pose about competition within the industry will be moot. Paper, fluff pulp, plywood and dimensional lumber begin in the woods, and they share the concern that some have regarding the use of wood fiber in our society.
We in the industry know better. We know our good record in managing our forests and our mills. It is up to us to demonstrate to others that we are actually part of the solution to ecologically satisfying world demand.
We must continue to work together to ensure that people understand and support the role forest products play in their lives. That’s why Weyerhaeuser, along with other leading forest products companies, have formed the Abundant Forests Alliance.
Together, we have created a campaign to inform and educate key customers on how our industry uses sustainable forestry practices, new technologies, improved recycling and other advances to ensure there will always be enough trees.
We can play a role in creating our future through active participation. We cannot stand on the sidelines and wring our hands. Yes, the world has changed and we can change too.
We can demonstrate to our investors that we can produce the returns they expect. We can show the world that our products are the preferred choice over many alternatives.
If you’re already involved in AFA, thank you. If you’re not, and you’re in a position to influence your company into participating, I still encourage you to get off the sidelines and into the game. You can also help through your individual efforts.
Remember that we can be proud of our industry’s record in the woods and in environmentally sound practices in the mills. We can talk a good talk about our walk. We offer the world a range of products made from a remarkable and renewable resource. Let’s take a page out of the playbook of our fine paper team and continue to delight our customers.
We can have pride in the technological improvements we’ve made that contribute to cleaner water and air and reduce our environmental footprint.
I look forward to your participation whether it is in AFA or through you individual efforts. Together we can shape an exciting future for this industry.
Thank you.
