Weyerhaeuser Speeches and Interviews

Good morning.

Thank you Dwight (Schmidt) for that fine introduction. I appreciate the opportunity to address you on this first day of WorldPak 2002. I’m always invigorated by being on a college campus and being surrounded by so much youthful energy and enthusiasm focused on learning and improving the world we live in.

To Bruce Harte, Director of Michigan State’s School of Packaging, I offer my congratulations on this, the 50th anniversary of the school’s founding.

Half a century is quite an accomplishment. Weyerhaeuser did not become actively engaged in the corrugated packaging business until 1957 when we acquired a company known as Kieckhefer-Eddy. So, this means the MSU School of Packaging is about five years older than our box business.

However, packaging, generically speaking, is much, much older than that, reaching back into prehistory, with containers made of gourds, woven grasses and animal organs. As early as the First or Second Century B.C., sheets of treated mulberry bark were used by the Chinese to wrap foods.

Over the centuries, packaging has taken many forms. “Barrels, bottles, bags, baskets, boxes” … this is how Michigan State’s website advertises an exhibit at the university museum titled “The Age of Packaging.”

I plan to make a visit before I leave the campus, and I encourage you to do so as well. None of us should ever forget that we’re involved in a vital and meritorious enterprise – providing people the goods they need to lead a civilized life.

As the museum undoubtedly demonstrates, there are many forms of packaging, but, as you might expect, as CEO of the world’s second-largest maker of containerboard and kraft paper, when I talk about boxes, I’m talking about corrugated boxes. So – begging the indulgence of you who represent other forms of packaging – this is where I will direct most of my remarks.

I’ve titled my remarks “Thinking Inside and Outside of the Box.” When I use the term “inside the box,” I’m referring to thinking within the confines of the corrugated box business the way we find it today.

When I refer to “outside of the box,” I’m referring to thinking creatively about the corrugated box business of the future.

If I could leave you with one thought today, it’s this: the packaging business is changing and corrugated boxes are changing – and must change – with it. A century ago, people were changing from wooden boxes to corrugated for packaging. Business in those days was uncomplicated, compared to today where it can be extremely complex, depending on a customer’s needs.

Our customers today are often mega-corporations spanning the globe. They need boxes from Lansing to London … from Capetown to Kuala Lumpur … from Santiago to Sydney.

Customers want strong boxes that can enclose anything up to refrigerators, washers, even mobile homes. They want elegant boxes to enhance that special product. They want boxes in custom shapes and sizes. And they want these boxes to protect their products as much as egg cartons protect eggs.

They often want their boxes to help sell their products and promote their company, so they need colorful graphics and clear printing.

And they want their boxes “just-in-time,” so they can minimize their inventory. And to add to the complexity, some customers want all of these features in the same box. With those thoughts as preface, I’ll focus my remarks around four topics:

• First, the state of the corrugated-packaging industry today from my perspective as a CEO.
• Second, how our industry must become even more customer-focused in new ways to meet their growing needs.
• Third, the importance of continuing to attract the talent we need to secure the future of the packaging industry.
• And finally, some good news for you.

I’ll begin by talking about economics. As we all know, the prospects for most forms of packaging rise and fall with the health of the economy, especially the manufacturing sector. I think most economists would share my view that the global economy is a bit under the weather at the present time. Hopefully, we’re beginning to recover.

Clearly, the latest recession has been unique in many respects, including the U.S. stock market bubble and an overvalued U.S. dollar. At times, I’m concerned about the source of the recovery and whether we will climb out. But as an optimist, I believe the world economy will return to a reasonable growth track for the rest of the decade.

However, there’s no denying that much damage has been done. One economist has indicated that more than six trillion dollars in value loss occurred on the NASDAQ exchange since the collapse began in March of 2000.

Many even then considered the NASDAQ stock prices grossly inflated, but inflated or not, these valuations – and the promise of future business they were based upon – fueled a great deal of economic activity. When the reckoning in the stock market took place, many businesses cut back on their purchases. Some aren’t making any purchases because they’re no longer around.

This resulted in a terrible 2001 for the global economy. American industry experienced one of its worst years since World War II, with corporate profits plummeting 22 percent from the previous year. Businesses in other countries didn’t fare so well either.

The box business has not seen a downturn like the current one since the mid-1970s.

Because of anemic corporate earnings, Business Week magazine recently opined that full economic recovery may not occur until 2004-2005.

This pain is most pronounced in the manufacturing sector – and those of us in the packaging business have been getting our share.

Poor returns in the various North American and European paper markets have led some companies to exit the paper business.

At the same time, others – viewing the changes in the marketplace and the low market caps of almost all paper companies – have chosen to grow, mainly through acquisition.

This furthers a trend in our industry that has been in nearly full flood for several years now.

I’m talking about industry consolidation. It’s happening around the world – and I believe it’s a good thing.

Weyerhaeuser has been a leading consolidator in a big way. Since 1998, we’ve acquired facilities from Bowater, bought MacMillan Bloedel and Trus Joist, and, earlier this year, purchased Willamette Industries.

Within the corrugated industry, other major deals we’ve seen in just this year alone, include:

• Mead and Westvaco
• Temple-Inland and Gaylord
• And the pending acquisition of Jefferson Smurfit Group by an investor group – Madison Partners.

Why am I a fan of consolidation? Because the fragmentation of our industry has led to construction binges and overcapacity – at both the mill and converting levels.

In the long run, capacity gluts have some nasty effects. Eventually, overcapacity drives some producers out of business, forces costly downtime, and can create instability in supply chains.

Fragmentation and overcapacity also make it difficult to provide top-quality service to customers, who are increasingly requiring dependable national, or even global, supply as they consolidate.

To understand why our industry needs to consolidate, we first need to understand why our customers are consolidating. This ties directly into my second topic – how the corrugated packaging industry must change to meet the growing needs of our customers, especially the large ones.

Within the past few years in North America, we’ve seen Albertson’s buy American Stores … Safeway purchase Dominick’s … and Kroger acquire Fred Meyer, all major grocery chains.

I know this one well, since I was on the board of Fred Meyer and now am on the board of Kroger. I guess you could say I got acquired too.

In addition, Iowa Beef Packers bought Food Brands before Tyson Foods bought it … Pepsi-Cola bought Quaker Oats … Gillette bought Duracell … Ford bought Jaguar, Land Rover, Mazda, and Volvo.

It’s happening to every company in every industry.

Why are there so many mergers among our customer base? Because their customers – our ultimate customers – want:

• Product availability and selection.
• Damage-free goods.
• Choice of features.
• Ease of payment.
• No stock-outs.
• Quality.
• In a word, value.

...benefits that often are best provided by large suppliers.

And the movement toward consolidation that begins at the retail level ripples its way back through the value chain to wholesalers and to their suppliers.

The channel to the retail customer for virtually every business my company is engaged in, is consolidating into two tiers. On one hand, we have the large national suppliers. On the other, we have the regional or niche players.

The mid-tier operator is almost gone. And, in this race to give the customer ever greater value, the competition has really gone global!

To compete in today’s marketplace, you have to be absolutely clear what customers want – and you have to be able to provide it. So what do our packaging customers want?

• Consistent quality and supply over a wide geographic basis, often to international destinations.
• The strongest boxes possible for the least amount of fiber.
• Specific qualities for their boxes, often including eye-catching graphics.
• Simplified procure-to-pay systems that are convenient and that lower their costs.
• Vendor-managed inventories.
• Protection against cyclical business movements that cause sudden increases or drops in pricing.
• Environmentally acceptable packaging.
• And, finally, our customers want an attractive value proposition – a fair price for the range of benefits they want – just like their customers.

Many of these demands translate into the need to create greater efficiencies in supply-chain logistics.

Speed to market is not just a catch phrase. It is a stark reality.

It means taking costs and time out of the supply equation. It means generating a continuous flow and replenishment of product from suppliers onto the retail shelf. This in turn, requires suppliers to modify their back-office activities to provide quicker turnaround in materials they supply, which in our case is packaging.

With the growth of our customers, companies like Weyerhaeuser must manage the customer relationship carefully. And it’s not just about price.

One of our major customers serves a large retail chain that gets 400 inventory turns a year for the product they provide.

Think about it. 400 turns!

That’s more than one turn a day off the retailer’s shelf. Think of the logistics coordination among every player in that supply chain. Compound this with trying to balance supply to demand and just-in-time deliveries.

Companies like this one prefer to do business with only a handful of suppliers – or even a sole supplier – for an entire category of products.

A major reason? Because timing of inventory delivery is critical to the economic success of that business on a daily basis, let alone monthly or quarterly.

To keep their business, we must serve them well.

The point: Size does count. This is a lesson that Stora Enso of Finland has learned well. Stora is Europe’s largest and oldest paper company.

Size has allowed them to be more disciplined and focused on creating stable returns, while at the same time, providing flexibility to sell non-core assets.

But size alone isn’t enough to keep up with today’s customers. We must innovate, especially when it comes to cutting costs and shortening the supply chain.

The implications for suppliers are clear:

• More continuous flow of product.
• Reduction of working capital from both a receivables and inventory standpoint.
• Better use of transportation through cube and/or weight utilization and freight-lane optimization.

That should provide you enough rationale for why the corrugated box business needs to change – and why we must continually innovate.

And where does innovation come from? From gray matter – i.e., brains. And this gets to my third topic – the need to attract the people we need to our industry. Whether we’re talking paper or other packaging materials, we must continually attract new talent if any of us in the packaging industry want to see a brighter future.

American songwriter Irving Berlin once said of success, “The toughest thing about success is that you’ve got to keep on being a success. Talent is only a starting point in this business. You’ve got to keep on working that talent.”

I see that happening here at Michigan State as well as at other universities. You’ve been turning out top-notch, industry-oriented, students for half a century. And for this, our industry in indebted to you.

I wish more students would get excited about pursuing a career in corrugated packaging. It may not appear as sexy as working on Wall Street or joining a high-tech company.

But the pay is steady and we make real products that society needs … and will continue to need indefinitely.

Competition requires us to constantly innovate. We need to convey to both CEOs and prospective recruits that there is a need for innovation – for creativity – in our industry, and that we seek their imagination. This is where the excitement comes in.

One way to attract more young people to our industry is to expand packaging curricula to other universities across the country.

Finally, on to topic four – the good news. The good news, ladies and gentlemen, is that people are going to continue to buy things, and those things are going to continue to be shipped in some form of packaging.

Let me share with you some statistics.

• The global packaging industry today, excluding China, is estimated to be worth about 400 billion dollars and generally grows in line with worldwide GDP … which, on a normalized basis, is approximately 3-to-4 percent annually. Of that 400 billion dollars, 34 percent is from corrugated products.
• China’s demand for containerboard and paperboard is expected to reach 80 million metric tons by 2015, up from 40 million tons today. To meet this level of demand, China will need to add 40 million tons of new production capacity, requiring an investment of 48 billion dollars between now and 2015.

The challenge for us in the containerboard business is how we’ll compete for the opportunity to meet this demand.

In sum, there’s a lot of business out there, but please note, the growth is not in North America. Nonetheless, I want North American, corrugated packaging to get its share.

But for North American producers of containerboard, there is good news in the fact that the American dollar is declining against other currencies.

As I said when I began, for any of us to grow our shares of the market, or to help the overall market itself grow, we’ve got to adapt to our customers’ needs, provide value and innovate no matter where our customers happen to be.

This means we’ve got to think inside the box, how things are today, and outside the box, how we want things to be tomorrow. Otherwise, we all might find ourselves “boxed out.”

I’m determined that will not happen to my company – and I’m sure you feel the same way about yours.

That’s why we’re all at this conference and I wish you a pleasant and productive learning experience in your remaining time here.