Key executive shares insights into the MacMillan Bloedel acquisition, capital spending, and environmental issues

GEORGE WEYERHAEUSER SHARES VIEWS ON INDUSTRY AND TECHNOLOGICAL CHALLENGES

Weyerhaeuser joined the company in Dierks, Ark., in 1978, where he held various positions including technical forester and contract logger administrator before becoming sawmill supervisor in 1980. He moved to the Valliant, Okla., operations in 1981, where he assumed several company roles before being named vice president and mill manager for Containerboard in 1987. In 1990, Weyerhaeuser moved to Corporate Headquarters in Federal Way to become vice president, manufacturing for Weyerhaeuser pulp & paper businesses. He served as president and chief executive officer of Weyerhaeuser Canada from June 1993 to May 1998.

Weyerhaeuser’s great-great grandfather was Frederick Weyerhaeuser, one of the Weyerhaeuser Co. founders in 1900.

P&P: What was the attraction of MacMillan Bloedel compared to other companies that Weyerhaeuser may have looked at?

G.W.: The main attraction of MacMillan Bloedel was what had been done there in the last two years really turning the company around—it was not seen by the market. So price was excellent for both companies, and there was an immediate fit of the businesses they had with Weyerhaeuser. They were expanding oriented strand board (OSB). That was something that we wanted to do, but we didn’t want to build any market capacity, and there was an obvious opportunity there. We’d been working very hard on renewing our distribution business across North America and making sure we had the range of products that our customers are looking for. And MacMillan had a very similar geographic range, but filled in a few holes for us. They brought additional durable products that we didn’t have in our mix that are quite valued by North American building markets. They had begun to work exports to Japan in a way that was similar to us. We don’t have the luxury of exporting off of public land any more out in the Northwest. So it’s an area where Weyerhaeuser is internally focused, but growth was difficult. If you add it all up, all the businesses were businesses that we’re in. They’re businesses that we were going to grow. And MacMillan had been through a lot of the hard work of getting the corporation streamlined and focused on its customers. And they weren’t getting a lot of credit for it, so we were able to make a very attractive offer to their shareholders in a way that is going to be valuable for our shareholders, too.

P&P: Do you see any difficulties in integrating the MacMillan Bloedel assets into Weyerhaeuser?

G.W.: Well, distinguish between the assets and the corporation. The assets fit very nicely into Weyerhaeuser. They’re in good shape in general. They are well-operated. They’ve been hiring the best people across Canada. They’ve got good, solid operations here in the U.S. So that piece of it won’t be very difficult. However, they’ve been the leading Canadian forest products company for a long, long time, and it will not be easy to integrate that corporation with our corporation. That’s going to take a lot of work. We’ve been in Canada a long time, and we’ve been very successful, but we have done it in their shadow. We’ll have to recognize the company we’ve merged with was the leader. So we’re going to have to completely relearn what it’s like to do business in that country as the visible leader, rather than just one of the small players. So I think it will be a careful process. It can’t be slow. The markets don’t let you do that sort of thing slowly anymore.

P&P: What new challenges does Weyerhaeuser face regarding land use and trade issues in and with Canada?

G.W.: For 35 years we’ve been in the middle of those issues already. On both sides of the border inside of our company, our people understand the trade challenges. What’s different is MacMillan had been a visible leader with the U.S. and Canadian governments. We’ve always been very much in the background. So, suddenly, we’ll be out on display as we firm up our positions. But we’ve had a principle of doing what was right for free trade in forest products around the world.That will not change. However, we recognize there are very different land use systems in North America, and that companies and governments will have to work out those differences. Over the long term, we think it’s best for our shareholders that we be able to go after whatever the best market in the world is for a given forest product. And to do that, we’ve got to have smooth functioning borders to bring our products across.

So once the countries decide what’s fair, we want to play by those rules. We want to do that whether we’re talking about logs going to Asia or lumber going to the United States. I don’t want to see dislocation in the markets. In a short time period, managed trade agreemnents between two countries can get ugly. They can distort markets if they are too rigid and inflexible. That is the case in the current situation. So I’m not looking forward to the expiration of the Softwood Lumber Agreement, and I’m not looking forward to negotiating whatever is going to come next, because it will be messy. But as a principle, over the long run, Weyerhaeuser believes in trading forest products. It’s good for the world; we think it’s good for us. And it’s easy to stand on that kind of principle in either country and do so publicly. Our merger does not change our position other than it’s now quite visible.

P&P: What challenges do the issues of forest management and lumber products certification bring forth?

G.W.: Well, there really is no change. MacMillan was working on that issue just as we were, and they were feeling the same pressures. We have to get our customers and the public comfortable with our forest practices, and their expectations are changing faster than the regulatory regimes in any of the countries. We have to make sure that there’s good science informing our decisions and we do a good job of explaining to our customers and their customers how we’re adapting our practices to fit that science. Right now, all the world is saying: We don’t think we trust you enough to let you do what you think is right for the sustainability of your soil and your trees. We want to have someone looking over your shoulder to tell us that you’re doing what you say you’re doing. I understand how we got there, and I’m comfortable with that public skepticism. On the other hand, I don’t want to see the world fighting over whose certification system is the best. I don’t think it’s an area where companies are going to get a competitive advantage. I don’t think it’s an area that we should be trying to “outmarket” each other. But I do think our customers are asking for verification of practices, and in the end, we will need some sort of equivalent certification systems around the world. We want our customers to be comfortable so that trade can continue. It can be perceived to be a help to the environment, a kind of trade that causes best practices to proliferate, rather than one that undermines the environmental regulations in a country. A lot of people criticize the forest products industry for destroying the world’s forests, and that’s not what we’re about. Certification can help that, both the perception and the reality.

P&P: How does a company resolve the different agendas of different environmental organizations?

G.W.: The challenge is determining whose standards you are certifying to, and how those standards are set. What we’re talking about are very long-lived forests. So the reality is, none of us will absolutely know for sure until hundreds of years from now whether or not what we’re doing is sustainable. So we have to have sound science programs bringing us information, allowing us to constantly adapt our practices based on the best current knowledge. And then we need an international regime that enforces those sound science principles on the commercial industry.

Right now, people in British Columbia are very, very confident that they’re meeting the toughest standards around. There aren’t many people there, so they haven’t had the pressure on the forests we’ve had, say, in New England. There’s still room for science to bring new information because there are still mistakes to be made. There’s still opportunity to get things right. So that’s why B.C. is under the pressure that it is. But people are beginning to look at the impact that commercial forestry has on the other forest resources in a very thorough, scientific way. I think once there’s a system to show that to the world, the controversy will move elsewhere. Most of the world’s forest harvest still is consumed as firewood for use in kitchens, not into commercial forest products. So the world does have an issue with the forest cover, but it’s not because people are practicing commercial forestry in B.C. And I think a certification system will help get that message to customers.

P&P: Is the industry going to reach a point where there are too many trees coming to market due to increased productivity via better harvesting and tree genetics?

G.W.: I guess the answer to that is a giant “I don’t know,” because we’re also seeing more and more pressure to withdraw land from commercial forestry. So there’s pressure on the resource base that’s been offset by productivity improvements. And right now, I can’t say which one of those trends is going to predominate for the rest of my career. I know the President is talking about taking 40 million more acres out of the federal forests. If that happens, then we need to figure out how to get more productivity on the remaining land right away. If I were just talking about pulp and paper, I’d probably stress increasing the fiber supply from the urban forest. That’s been growing rapidly throughout my career and replacing some of the pressure on the original forests in the South with lots of product available for expansion.

But I think we’ve probably done the easy part of recycling in North America. It gets tougher and tougher every five percent more. So I don’t think supply is going to provide shocks to the other part of the system the way it has. So we’ve got productivity growth on the land offset by coming to the end of the easy recycling and further withdrawals of federal timber. And how all that balances out, I don’t know.

P&P: Are U.S. companies going to find themselves in a competitive disadvantage with their European and Asian counterparts because they are limiting their capital expenditures to historic low levels?

G.W.: I think the North American industry is going to find itself at a disadvantage because new technology around the world will be competitive. On the other hand, for decades the industry has not earned a return on the capital we invested. So not just Wall Street, but our shareholders, our directors, now even our management teams are saying, ‘no more.’ The industry lost the right to grow. That’s happening all across this country. So we will end up having to compete with assets that are not as big as the Asian assets; that are not as technically capable as what the competitors in Europe have. And we’re going to find ourselves in a very, very tough competitive situation as a result. So the nice answer would be to figure out how to keep making those investments and grow, but in a mature market, that’s not easily done.

P&P: Do you think it’s going to hurt the U.S. industry in the longer term?

G.W.: Yes, and it’s going to hurt the industry shorter term, too. The short term operating costs are what kill you when you compare your costs against big new mills with low fiber costs, decent energy costs, and low labor costs. We’re going to be competing against some big global monsters. And we’re doing it with old equipment, old technology, and old cost structures. And I can’t wave a wand and make it go away. I can get up in front of the employees and talk about it a lot. I mean, that’s part of what management has to do these days. One has to say, ‘Folks, here’s the situation. Like it or not, here’s what we face if we’re going to make this community thrive. So we’re not going to be able to print money. This is what we are going to have to do to compete. It will not be fun.’

P&P: Will Weyerhaeuser continue to be a major producer of a large number of pulp and paper grades or will the company look to narrow the number of markets it serves?

G.W.: When I look at what our capabilities as a company are, I still see very good synergies between running the separate paper businesses, say like paper and pulp businesses. So I don’t see the tremendous savings that would come from focusing in on individual grades. So that’s the micro, inside the company. On a macro basis, I think it would make sense to get the market a little more consolidated.

Maybe the best example would be the automobile industry around the world. People have integrated their manufacturing in the automotive sector across global boundaries, but they continue to bring the full range of products. They do that in a way that satisfies individual market segments. We do it with core engineering skills and core manufacturing skills. They don’t always use the same assembly lines, but they use the same practices. Now, I think that’s where the pulp and paper industry is likely going to end up. We’re so fragmented now, it looks like an easy step forward is to have someone focusing on coated free-sheet and someone else saying, ‘Well, I think I’ll be more successful in containerboard.’ When you actually look at what it takes to bring the resource out of the woods, through the pulping facility and into the end grades, a lot of the basic skills are the same, and I think there are returns of scale. So I think at Weyerhaeuser, we’ll probably continue to pursue a full range of businesses and concentrate on the synergies. From another single company standpoint, that may or may not make sense, but for us it does. But I think the world’s going to see more and more consolidation. With consolidations, there will be a focus on narrowing business lines to serve customers. But Weyerhaeuser will continue to serve the broad pulp and paper markets.

P&P: Do you envision Weyerhaeuser acquiring overseas paper and paperboard assets to accompany its forestry and lumber operations?

G.W.: It’s not something we’re currently planning. We started going overseas in a big way back in the ’70’s and found it wasn’t as easy as working in the United States, so we backed off. We’ve had overseas manufacturing before—we used to be in Europe. We found it was very difficult for a North American company to run overseas manufacturing well. And it’s a skill that, I think, we’re going to need to be competitive in the future, but it’s not something that we’re currently good at. So compared to the opportunity to pursue further consolidation in North America, the overseas investments still look pretty difficult to us. So I think the answer is, yes, we’re eventually going to have to be global, but no, right now we speak English.

P&P: Given increasing environmental regulations, including the Cluster Rule, do you think there will ever be another greenfield pulp mill built in the U.S.?

G.W.: I think there could be, but it will not be easily sited. On the other hand, we’re making advancements in the technology of the closing the mills, so there’s less and less impact from a new mill. But still, the regulatory hurdles are huge. There will be new mills around the world, and they will be very tight. Whether or not they’ll be in the U.S. remains to be seen.

P&P: Will environmental pressures move the industry to totally chlorine free (TCF) bleaching?

G.W.: I won’t make that prediction, but I will predict that we will continue to minimize the impact of the basic kraft pulp process. And that will likely require more and more closing up of the mill streams, and chlorine will continue to be a challenge. But I don’t know that I’ll predict any inherent advantage to TCF. The things that we’re going to substitute, if we substitute, are equally potent chemical actors. And they don’t have the shock value of the word “chlorine” in their name. But chlorine dioxide and chlorine gas are two very different chemicals, even though they happen to share a name, but then again, so does table salt. So I think we will have to continue to study how our manufacturing systems are impacting the environment. We’ve got to get the public where they’re not worried about what we do, and a big part of that is making sure that the effluent doesn’t have color in it and that mills don’t smell. But another big part is making sure that animals downstream don’t have any recognizable impacts from what we do. That will likely require further closure. That may put pressure on chlorine.

P&P: Do you foresee increased use of bleached chemithermomechanical pulp (BCTMP) in place of bleached kraft pulp?

G.W.: There certainly are applications for CTMP. I think there’s going to be a lot of progress in the quality of that grade, so it will put pressure on kraft pulp usage for some grades. But to do it well, one probably needs to start with a nice Scandinavian fiber. That’s the way producers will try to find unique advantage from their still growing fiber base. In the U.S., we need to be finding things that we can do with our more rapidly grown Southern fibers and find unique applications to stay up with Scandinavian producers.

I think as paper products get lighter and lighter and the demands for performance get higher, some of the advantages of the kraft process are going to come back to the forefront. So while BCTMP producers may go after higher yields and higher brightnesses and get their niche that way, we’ll work on making products lighter while maintaining strength requirements. And that may require the strength of kraft pulp. So who knows which will find the upper hand. I expect both will continue to have applications that are preferred.

P&P: What market positions and acquisitions do you see Weyerhaeuser growing in the future?

G.W.: Weyerhaeuser won’t grow unless it’s in the interest of the shareholders. So we’re not going to grow to save the industry. We will grow if the opportunities are right. But I draw your attention back to my answer about MacMillan Bloedel, every business they were in, we had independently decided we were going to grow. And we were not planning on building. If we end up with something that fits that well, again, I think we’ll do it. We will likely continue to grow where it makes sense to our shareholders.

P&P: How does Weyerhaeuser convince its investors to be a technology leader and to take risks?

G.W.: I don’t think I’ve got an answer. Weyerhaeuser has been the first on some process technologies. We haven’t had a good track record of teaching that innovation across our system faster than our competitors. We can’t point to unique value we’ve created through our research and vision process. We had an ozone pilot process in the lab and an oxygen bleaching system in our Everett mill back in the late ’70s—we solved a lot of the basic problems that industry is resolving today. But we did it at a time when the market wasn’t ready for oxygen bleached pulp. The world wasn’t worried about chlorine the way it is today. So even though we did do research and had it ready to go, we never pulled it into the commercial plants. And that’s a lesson we continue to remember. So I doubt Weyerhaeuser single-handedly will be bringing basic primary process kinds of research through.

The people that make money on that kind of venture are equipment suppliers. They do that kind of research. We need to work with them through things like university programs to make sure that the industry’s problems are apparent to the suppliers, and we’ve got good scientists hammering away at them. But I doubt we’ll see massive change in technology by the primary manufacturers. Most people have stopped doing the kind of research that would lead to one of those kinds of innovations. We still do a little bit, but it’s only because we’ve kept it small and off the radar screen.

P&P: What technological challenges have to be addressed entering the 21st century and what changes are going to be seen?

G.W.: Let me separate the answer into two separate realms. One is, I think to be a competitive primary industry, we need to make sure that we’re forever taking the waste out of our manufacturing systems. And I think Weyerhaeuser will pursue that through avenues such as the Institute of Paper Science and Technology, and through work with the paper engineering schools. Because in the end, those kinds of massive process changes have not made the primary industry any more competitive, company by company. Because it’s the kind of thing we’ve had to do with our suppliers and it’s been shared quickly, whether we like it or not. So there are not unique returns available from technology for changing basic process stuff. It’s not something that there’s a track record of anyone doing very well. But it’s essential that it go on if we continue to compete against substitute materials, whether it’s electronics or packaging or whatever. We’re going to have to get the energy out of our systems. We’re going to have to get the waste streams reused inside rather than disposed as something going out to a landfill. And as an industry, we need to make that investment in a big way.

So the first set of technical challenges is: How do we as an industry further reduce the inputs to our processes so that we can compete against the external substitutes? But the second thing I’ll say is, we need to be much more innovative as individual companies looking for extensions in our product, new services, new opportunities to make forest products serve the needs of our customers. And that’s the kind of thing that companies do one at a time or in small collaborations. And I think there’s just as much at stake in that kind of technical innovation as there is back in the primary manufacturing issues. There the challenges are slightly different. It’s not the big energy balances or the big mass flow challenges. It’s things like: How do you get better service properties for this particular grade: Or how do you get more strength in that grade? Those are the kinds of things that companies need to work on directly with their customers. They often require changes back up in the primary process, but that kind of process research I think we can do.

There’s been healthy innovation in the past. I think we need to pick up the pace on that kind of product innovation in order to earn returns we’re promising our shareholders.

P&P: How can the industry look to improve and enhance its financial performance and image?

G.W.: It would be a 25-year answer. I think that we need to see environmental performance as a service that we offer to our customers. Right now when you talk to the industry leaders, they still have the mind set that environmentalism is causing us to put in expensive new capital processes to control our emissions, and it’s not really doing anything for society. And it’s sort of a grudging acceptance of a responsibility. I think that’s going to turn around as moderate environmentalists see that the world’s population continues to grow, and they continue to have demands on materials. And that the forest products industry is one of the most benign of all industries in terms of its impact on the environment. So when a generation younger than us takes over our industry, I think we’ll find that the public supports what we’re doing. The moderate environmentalists are helping the best companies be successful. And as an industry, we’ll end up providing energy back to the grid, rather than using energy. We’ll end up much more enclosed in our manufacturing in terms of the waste streams. And we’ll end up being a pretty closed industry in terms of the product recycling.

So we’ll be seen as a source of recreational opportunity, of drinking water and energy, and doing all that while supplying basic fiber needs in a way that has less environmental impact than, say, hydrocarbon-based materials or whatever other substitute you can make up. We’ll probably still be seen as sort of a stepchild, because people who are attracted to the industry are going to be the ones who like to be out in the rural communities who like to fish, who love to spend time in the woods. So we’ll never quite fit the glamorous high-tech world, but I think we’ll be seen as people who are helping conserve the old ways while we satisfy society’s demand. So our kids will have a better industry.