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weyerhaeuser annual reports 1998


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weyerhaeuser annual reports 1998

  1. 1. the future is growing weyerhaeuser 1998 annual report
  2. 2. this past year FOR WEYERHAEUSER, was one of change and growth. After nearly 100 years as a company, it may seem strange to change. We are one of the world’s largest forest products companies. We own or manage more softwood timber than anyone in the world. We are a leading manufacturer of lumber, pulp and paper products. Our work force of 35,000 is one of the most dedicated and talented in the industry. But we’re changing to operate with speed, simplicity and decisiveness. We’re leveraging our enduring values and innovative capabilities to create a promising future. To illustrate these changes in our annual report we chose Ning Yeh, an artist whose landscape watercolors are executed simply, decisively, with speed. The portraits of Ning Yeh at work depict the company we’re becoming. the 1998 weyerhaeuser annual report LETTER TO SHAREHOLDERS 3 SENIOR MANAGEMENT TEAM 9 TIMBERLANDS 16 WOOD PRODUCTS 20 P U L P, P A P E R & P A C K A G I N G 3 0 R E A L E S TAT E A N D R E L AT E D A S S E T S 34 S I G N I F I C A N T A C C O M P L I S H M E N T S 35 FINANCIAL REPORT 37 W E Y E R H A E U S E R C O M PA N Y F O U N D AT I O N 7 4 C O R P O R AT E D ATA & S H A R E H O L D E R I N F O R M AT I O N 7 6
  3. 3. Forest products is one of the world’s most important industries. We fulfill needs fundamental to human well-being: shelter, communication, commerce. All told, forest products represent close to $600 billion in global gross economic output. Weyerhaeuser is one of the largest private owners of trees on Earth. And here is how we’re becoming the world’s best forest products company...
  4. 4. • Align business objectives with our corporate long-range plan. • Develop the capabilities of our people. superior stra Our v building profit from to be the best customer focus company in • Clearly understand customer needs and expectations. • Align our resources with the needs of our customers. • Deliver superior returns to shareholders. one company weyer • the future i
  5. 5. • Follow a disciplined approach to capital deployment. • Measure and track our progress. tegy execution • Build safety into everything we do. • Deploy reliable processes across the company. • Engage our people in improving our operations. • Create a more ision: diverse work force. safely delivering forest products value to customers the world. aeuser • one vision s growing TM
  6. 6. highlights dollar amounts in millions except per-share figures. 1998 1997 Net sales and revenues $ 11,210 $ 10,766 Net earnings before nonrecurring items 351 339 (9) (45) Effect of nonrecurring items (1) Net earnings 342 294 Cash flow from operations, before working capital changes 1,092 1,018 Capital expenditures (excluding acquisitions) 656 615 Total assets 13,075 12,834 Shareholders’ interest 4,649 4,526 1998 1997 before effect of before effect of nonrecurring nonrecurring nonrecurring nonrecurring items items(1) net items items(1) net Basic earnings per common share (2) (.12) First quarter $ .43 $ — $ .43 $ .22 $ $ .10 Second quarter .34 — .34 .47 .09 .56 Third quarter .56 — .56 .53 .04 .57 (.23) (.05) Fourth quarter .38 .15 .54 .49 (.23) (.04) $ 1.71 $ $ 1.48 $ 1.76 $ $ 1.72 (1) The 1998 nonrecurring items are charges primarily associated with the closure of the Longview, Washington chemical facility; changing the British Columbia lumber operations; and the streamlining of pulp and paper operations. The 1997 nonrecurring items are the net of gains on the sales of Weyerhaeuser Mortgage Company and Saskatoon Chemicals, Ltd., and interest income from a favorable federal income tax decision offset by the loss on the sale of Shemin Nurseries; the consolidation, closure or disposition of certain recycling facilities; and closure of two plywood facilities, an export lumber mill and a corrugated medium machine. (2) Diluted earnings per common share by quarter for 1998 and 1997 were $0.43, $0.34, $0.55 and $ 0.15; and $0.10, $0.55, $0.57 and $0.49, respectively. market prices—high/low 1998 1997 15 16 15 16 $ 50 5⁄8 - 44 1⁄2 First quarter $ 57 ⁄ - 44 ⁄ 617⁄16 - 44 9⁄16 55 1⁄4 - 42 5⁄8 Second quarter 7 16 34 6315⁄16 - 515⁄8 Third quarter 47 ⁄ - 36 ⁄ 519⁄16 - 413⁄4 60 3⁄4 - 46 1⁄16 Fourth quarter 7 16 34 $ 6315⁄16 - 425⁄8 Year $ 61 ⁄ - 36 ⁄ The consolidated financial statements include: (1) Weyerhaeuser Company (Weyerhaeuser), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction, and other real estate related activities.
  7. 7. STEVEN R ROGEL President & Chief Executive Officer (Chairman, President & Chief Executive Officer effective April 20, 1999) to our shareholders When we say “the future is growing” at Weyerhaeuser, we’re talking about more than the billions of trees we’ve planted. We’re making a statement about our ability to further increase shareholder returns. We’re stating there’s a company in our industry that represents an outstanding long-term investment opportunity. We’re saying that company is Weyerhaeuser. Few forest products companies can match the resources we’re deploying to meet this objective. Like you, the men WE BEGIN WITH AN O U T S TA N D I N G WORK FORCE. and women of Weyerhaeuser are part owners of this business. Through our Performance Share Plan, employees receive stock if our performance exceeds certain measures relative to our peer group and the Standard and Poor’s 500. This is not automatic, however, as demonstrated by the fact that we have not paid out on the plan in the years where we’ve failed to meet all of the program’s criteria. As owners, employees have an additional incentive to improve performance and better align their interests with those of other shareholders. We’ve given these employees some of the best assets with which to work. Our timber is unmatched. We have some great facilities in place and we’re getting better. Our research capabilities are world-renowned.We have one of the strongest balance sheets in the industry. In short, we have the tools to become the best forest products company in the world. By being the best, we can deliver superior returns. Some say such optimism is misplaced. 3
  8. 8. They wonder how a company in our industry can produce superior returns. I don’t deny that we face challenges. Our industry has struggled recently. In 1998, the Asian economic situation affected our entire industry. Imported pulp and paper products found customers in our markets. Forest product exports originally bound for Asia glutted domestic markets. Prices sank. Weyerhaeuser adjusted to these conditions. We took downtime to balance inventory levels with market conditions. We found ways to reduce costs. We maintained our focus on customers. As a result, we fared better in 1998 than many predicted. But we weren’t untouched by market conditions. NET EARNINGS before nonrecurring items were $339 million, or $1.71 per common share. This compares with $351 million, or $1.76 per common share, before nonrecurring items in 1997. were $10.8 billion NET SALES compared with $11.2 billion last year. N E T from operations, CASH FLOW before working capital changes, was $1 billion compared with $1.1 billion in 1997. It is easy to blame Asia for these disappointing results. It’s also easy to believe that our troubles will end when Asia’s economy improves. But such views ignore reality. While we will benefit from a stronger Asia, we recognize that we cannot rely on that recovery to solve our problems. Our industry has changed. We now operate in a global marketplace where the performance of domestic and international markets is intertwined. Our task is to change Weyerhaeuser to succeed in this environment and capitalize on our potential. It requires that we leverage our strengths and eliminate our weaknesses to become the best forest products company in the world. Weyerhaeuser already was making significant progress toward this goal when I arrived last year. 4
  9. 9. Through WE WERE BECOMING MORE FOCUSED. $12 steps taken since 1990, we have evolved to a company that basically does three 11 things. We grow trees. We convert them into wood and paper products. And we 10 develop selected timberland properties 9 for higher and better uses. This has allowed us to focus our capital on 8 89 90 91 92 93 94 95 96 97 98 sustaining our core businesses. We were net sales and revenues billions of dollars Despite M A I N TA I N I N G A S T R O N G B A L A N C E S H E E T . difficult market conditions the past two years, we remain comfortably within our target range of 35 to 45 percent of debt to total capital and have one of the best credit ratings in our industry. We had, and continue to have, one of the Our total shareholder return since B E S T- P E R F O R M I N G S T O C K S I N T H E I N D U S T R Y. 1991 ranks second among our peer group.* Our return on net assets has been in the top quartile of our industry since 1992—a leadership position we’re committed to improving even further. But we want to do more than outperform our industry peer group. We want to excel in manufacturing. We want to operate more safely than anyone else—inside or outside of our industry. We want to be an O U T S TA N D I N G INVESTMENT O P P O R T U N I T Y. $1,000 This year we began laying the foundation to achieve these goals. It 750 started by taking a hard look at ourselves. What are our strengths? 500 What are our weaknesses? What chal- lenges do we face? How do we compare 250 with successful companies outside our 0 89 90 91 92 93 94 95 96 97 98 industry? It was an enlightening process. net earnings (before nonrecurring items) We learned what it takes to be the best. millions of dollars * Boise Cascade, Bowater, Champion International, Georgia-Pacific, International Paper, Louisiana-Pacific, MacMillian Bloedel, Potlatch, Smurfit-Stone, Temple-Inland, Union Camp, Westvaco, Willamette. 5
  10. 10. The answer lies in doing three things very well. $5.00 EXECUTING O U R S T R AT E G I E S . F O C U S I N G ON CUSTOMERS. 3.75 These three objectives form O P E R AT I N G S A F E LY. the base of our strategy. The inside front 2.50 cover of this report lists these objectives and their supporting elements. We also learned 1.25 that we must develop a system and organiza- 0 tion to achieve these objectives. It means 89 90 91 92 93 94 95 96 97 98 basic earnings per common share operating with speed, simplicity and decisive- (before nonrecurring items) dollars ness—terms not currently associated with Weyerhaeuser. It means changing our decision-making process, how we’re organized, how we manage this company. In 1998, we started making those changes. We began to deliver RESHAPING I M P O R TA N T FUNCTIONS services in the most cost-effective and efficient manner. We started with engineering and information technology. Then we combined our environmental, health and safety groups into a single organization. Finally, we aligned the manufacturing functions of our primary pulp, fine paper and containerboard mills under a single vice president. All are now company-wide functions accountable for two goals. First, they must meet the needs of the businesses they support. Second, they are to develop company-wide standards and reduce redundancy in their functions. From my experience, this approach produces substantial savings. We’re reviewing other support functions and in 1999 we’ll organize them to deliver services in the most cost-efficient and effective manner. We began R E P L I C A T I N G across RELIABLE PROCESSES the company. One key process involves how we deploy capital. To help increase the effectiveness of our investments, we’ve put in place a disciplined process of reviewing each request for capital. As we review these requests, they must demonstrate that they are the most cost-effective way of supporting our long-term strategies. Only projects that meet our strict criteria receive capital. 6
  11. 11. This approach eliminates nonstrategic efforts, develops better-planned projects, and eliminates waste and rework. We believe this process will ultimately increase the effectiveness of our capital spending by 20 to 30 percent. But our disciplined approach to capital spending is already producing results. By applying a “one-company” approach to investments, we reduced our capital expenditures, excluding acquisitions, this year by $41 million compared with our spending in 1997. Other reliable processes will help us produce a safer and more productive work environment. We continued to refine For example, we’re carefully HOW WE SERVE OUR CUSTOMERS. aligning our research and development capabilities with key pulp customers. Through this alignment, we can develop special pulp to meet unique customer requirements. In the process, we differentiate our products and reduce our exposure to volatile commodity markets. We began to STRENGTHENING OUR CORE BUSINESSES withstand down cycles in their markets. This includes growing and optimizing key businesses: Timberlands, Wood Products, Fine Paper and Containerboard Packaging. Our purchase of the Dryden, Ontario, facilities, for example, significantly enhances our Fine Paper business and augments our Canadian Lumber position. 25 We’re also improving the returns in our 20 Pulp, Paper and Packaging sector by 15 reducing its exposure to commodity grades, improving process reliability and maintaining 10 tight controls on capital spending. We 5 continued to capture the maximum value from our timberlands. Weyerhaeuser 0 89 90 91 92 93 94 95 96 97 98 return on shareholders’ equity currently owns or manages more than 5.3 (before nonrecurring items) percent million acres of timber in the United States. 7
  12. 12. We hold timber licenses for 27 million acres in Canada—a position we increased this year by acquiring additional timber licenses in Ontario as part of our Dryden acquisition. Over the years we’ve continually upgraded our timber- land asset with investments we’ve made in New Zealand, South America and the southern United States. In the future, we will continue to on these low-cost FOCUS OUR INVESTMENT ACTIVITIES regions of the world. We also expect to benefit from our forestry practices, especially from our land in the United States. Over the next 10 years, we’ll see a significant increase in the volume of timber we harvest. At 1997 prices, the pre-tax cash flow generated by these forests will increase by more than 50 percent. We took some important steps in 1998. Weyerhaeuser is becoming more efficient, more cost-competitive and better positioned for future growth. Our work, however, is not done. We must drive these changes further into our organization. We must learn to operate more reliably. We must eliminate redundancy. We must continue our control on capital spending. We must look for future growth opportunities. Weyerhaeuser is a great company. It has a promising future. Our challenge is to fulfill our potential. We will do that. We will prove to you that at Weyerhaeuser “the future is growing.” STEVEN R ROGEL President & Chief Executive Officer (Chairman, President & Chief Executive Officer effective April 20, 1999) 8
  13. 13. senior management team STEVEN R ROGEL President & Chief Executive Officer (Chairman, President & Chief Executive Officer effective April 20, 1999) WILLIAM C STIVERS Executive Vice President & Chief Financial Officer WILLIAM R CORBIN Executive Vice President Wood Products RICHARD C GOZON Executive Vice President Pulp, Paper & Packaging GEORGE H WEYERHAEUSER JR Senior Vice President Technology RICHARD E HANSON Senior Vice President Timberlands MACK L HOGANS Senior Vice President Corporate Affairs THOMAS M LUTHY Senior Vice President STEVEN R HILL Senior Vice President Human Resources During 1998, these changes were made to the Senior Management Team: Senior Vice President, Technology, NORMAN E JOHNSON retired in April after a career with Weyerhaeuser Company spanning more than four decades. G E O R G E H W E Y E R H A E U S E R J R , who had previously served as President and Chief Executive Officer of Weyerhaeuser Canada Ltd, succeeded Johnson as Senior Vice President, Technology on May 11, 1998. W I L L I A M C S T I V E R S was elected Executive Vice President and T H O M A S M L U T H Y Senior Vice President, Wood Products, announced in Chief Financial Officer in April. He had served as Senior Vice President November that he would retire on March 31, 1999 after 31 years at and Chief Financial Officer since 1990. Weyerhaeuser Company. He is succeeded by W I L L I A M R C O R B I N , Executive Vice President, Timberlands, who became Executive Vice President, Wood Products on November 9, 1998. R I C H A R D E H A N S O N was named Senior Vice President, Timberlands, on November 9, 1998 succeeding Corbin. Hanson previously served as Vice President, Western Timberlands.
  14. 14. speed Watercolor is an exacting art. It relies on foresight and the ability to execute quickly. Weyerhaeuser is applying the same approach to our business. Success in a global market requires one to identify opportunities and then act quickly. Completing the purchase of the Dryden, Ontario, facilities in less than one month shows that we are learning to act with speed. In the future, we will apply the same approach to take advantage of opportunities critical to our long-term success.
  15. 15. Chinese brush painting reduces a form to its simplest expression. Only significant elements are put on paper. There are no wasted motions. The picture emerges from simple brushstrokes. At Weyerhaeuser, we seek simplicity. We’re focusing on how to deliver products and services more efficiently. We’re eliminating wasted motions. Making decisions faster. Being more accountable. Replicating processes throughout the company. The result is greater customer satisfaction and higher shareholder returns. simplicity
  16. 16. The artist has many brushes from which to choose. Only one creates the desired effect. A clear vision of the finished picture allows the painter to choose the right brush. In business, we have many opportunities. Only a few create our vision. Decisiveness comes from eliminating distracting options. We’ve identified where to focus our attention. Each decisive action we take moves us closer to our goal to be the best forest products company in the world. decisiveness
  17. 17. statistical data NET SALES 1998 1997 1996 1995 1994 (millions of dollars) To unaffiliated customers: Raw materials ( logs, chips and timber ) $ 760 $ 830 $ 850 $ 877 $ 599 Other products 37 37 32 25 37 $ 797 $ 867 $ 882 $ 902 $ 636 Intersegment sales $ 520 $ 513 $ 574 $ 502 $ 488 SALES VOLUMES (millions) Raw materials—cubic feet 235 254 254 271 259 A N N U A L P R O D U C T I O N C A PA C I T Y (millions) Logs—cubic feet 476 412 420 392 495 Fee harvest—cubic feet 541 496 518 525 585 16
  18. 18. timberlands we have managed our timber- F O R N E A R LY 1 0 0 Y E A R S , land asset for growth. What started out as 900,000 acres in 1900 now encompasses more than 5.3 million acres throughout the United States and timber licenses on 27 million acres in Canada. We’ve also grown inter- nationally with joint ventures in New Zealand and Uruguay. During 1998, this focus on growth once again produced strong results from our Timberlands sector. We did, however, feel the effect of the Asian economic situation. Prices for both export and domestic logs dropped in response to lower Asian demand and higher inventories in the United States. This drop was offset somewhat by higher stumpage values in the southern United States. were $487 million compared with $535 O P E R AT I N G EARNINGS million in 1997. in 1998 were $636 million compared with $797 million the prior year. NET SALES Our Timberlands sector is focusing on three strategies to enhance its earnings potential. from our increasing harvest level. Due to our advanced forestry CAPTURE THE MAXIMUM VA L U E practices, we’ll see a significant increase in the volume of timber we harvest over the next 10 years. At 1997 prices, the pre-tax cash flow generated by these forests will increase by more than 50 percent. In addition, selective pruning will produce knot-free wood for use in high-margin appearance- grade lumber. I N V E S T The Southern Hemisphere— IN TIMBERLANDS WITH LOW COST AND HIGH PRODUCTION. especially New Zealand and South America—represents significant growth opportunities. We own a 51 percent interest in 193,000 acres of managed forestland and related assets in New Zealand. 17
  19. 19. As the majority owner,Weyerhaeuser is responsible for the management and marketing activities of the joint venture. We’ve also made additional investments through our partnership with institu- tional investors known as the World Timberfund. This partnership currently holds a 97 percent interest in a venture that has acquired 234,000 acres of private agricultural land in Uruguay that is being converted into plantation forests. L O W E R C O S T S A N D I M P R O V E Q U A L I T Y. To maximize the returns, we manage our timberlands as if they were a stand-alone opera- tion. This means reducing costs and improving the quality of our product. We’ve reduced overhead costs by improving work systems and eliminating redundancy and waste. To improve quality, we’ve used selective pruning to produce knot-free wood. Within the next five years, we’ll begin harvesting this timber for use in appearance-grade lumber and other higher-value products that command higher market values. Weyerhaeuser is a leader in the development of the Sustainable Forestry Initiative (SFI), a comprehensive SM program developed by members of the American Forest & Paper Association. Under SFI, participating private forest landowners follow a land stewardship ethic that integrates forestry and conservation practices. This ensures that we meet present needs without compromising the ability of future generations to access wood and enjoy a healthy environment. We view SFI as a natural extension of our long-standing commitment to environmental stewardship and sustainable forestry. In the future, we will continue to manage this asset to enhance its value and generate shareholder value. 18
  20. 20. P R I N C I PA L L O C AT I O N S Acres owned 1,989,000 Oregon, Washington WESTERN TIMBERLANDS Alabama, Arkansas, Georgia, Louisiana, Mississippi, Acres owned 3,110,000 SOUTHERN TIMBERLANDS North Carolina, Oklahoma Acres leased 241,000 3,351,000 Acres licensed 27,002,000 Alberta, British Columbia, Ontario, Saskatchewan CANADIAN TIMBERLANDS* (of which 18,938,000 acres are productive) * Managed by Canadian operations. 600 200 500 150 400 100 300 200 50 100 0 0 94 95 96 97 98 94 95 96 97 98 earnings capital spending (before nonrecurring items ) (excludes acquisitions) millions of dollars millions of dollars 19
  21. 21. statistical data NET SALES 1998 1997 1996 1995 1994 (millions of dollars) Softwood lumber $ 2,094 $ 1,988 $ 1,648 $ 1,880 $ 1,793 Softwood plywood and veneer 502 519 591 636 452 Oriented strand board, composite and other panel products 594 667 752 750 765 Hardwood lumber 272 235 193 175 240 Engineered wood products 284 233 207 157 330 Raw materials ( logs, chips & timber ) 232 220 228 91 228 Other products 599 511 430 401 667 $ 4,577 $ 4,373 $ 4,049 $ 4,090 $ 4,475 SALES VOLUMES 1998 1997 1996 1995 1994 (millions) Softwood lumber—board feet 4,869 4,745 4,515 4,402 4,995 Softwood plywood and veneer—square feet (3/8”) 2,042 2,172 2,324 2,685 1,842 Composite panels—square feet (3/4”) 551 604 648 660 586 Oriented strand board—square feet (3/8”) 2,462 2,083 1,931 1,803 2,697 Hardwood lumber—board feet 362 349 293 254 339 Engineered wood products—linear feet 137 116 128 71 164 Hardwood doors ( thousands ) 730 652 648 617 789 Raw materials—cubic feet 325 304 260 165 315 C A PA C I T Y ANNUAL PRODUCTION 1998 1997 1996 1995 1994 (thousands) 4,161 Softwood lumber—board feet 3,968 3,701 3,419 3,249 4,025 Softwood plywood and veneer 1,017 —square feet (3/8”) 1,092 1,243 1,292 1,249 960 575 Composite panels—square feet (3/4”) 478 535 583 594 510 Oriented strand board 2,240 —square feet (3/8”) 2,041 1,687 1,654 1,568 2,179 386 Hardwood lumber—board feet 345 333 278 229 342 Hardwood doors ( thousands) 850 740 646 643 597 788 — Logs—cubic feet 519 500 494 279 526 P R I N C I PA L M A N U FA C T U R I N G FA C I L I T I E S Softwood lumber, plywood and veneer Hardwood lumber 12 32 Composite panels Hardwood doors 1 5 Oriented strand board 6 20
  22. 22. wood products Our focus on customers and improved operating efficiencies helped the Wood Products sector withstand the chal- lenges of a mixed market. Domestically, our oriented strand board and plywood markets benefited from another year of robust housing starts. This was offset, however, by the effects of the Japanese economy on lumber. Weak demand from Japan pushed import and domestic lumber into the US market resulting in low prices despite high demand. In 1998, our Wood Products sector produced: O P E R AT I N G EARNINGS of $208 million, excluding nonrecurring charges associated with changes to our Western Canada lumber operations to make them more competitive. This compares with $212 million, excluding charges associated with the closure of two plywood facilities and an export lumber mill, in 1997. NET SALES of $4.5 billion compared with $4.6 billion in 1997. Over the next five years, we will enhance the earnings potential of this sector by: We develop “value propositions” with FOCUSING ON CUSTOMERS. customers so they know what to expect from Weyerhaeuser. It’s an approach that ensures that we work on those things providing the most value to customers. Such “value propositions” range from providing large distributors with special lumber grades to developing product and delivery improvements. Our Installer’s Edge oriented strand board (OSB) is just one outgrowth of TM this approach. Early OSB required special installation in wet conditions. Working with customers, Weyerhaeuser developed a product that addressed this problem. This lowers the cost of installation for builders and increases use of our product. Similar “value propositions” result in products with higher margins and increased customer loyalty. between our timber, LEVERAGING THE INTERNAL ALIGNMENT manufacturing, sales and distribution operations to efficiently serve target industry segments. Industrial, treated truss and engineered products are examples of how we match our focus on industry segments with the strength of a “one-company” approach to reduce costs and meet the unique needs of key customers. 21
  23. 23. Over the ENHANCING INTERNAL GROWTH OPPORTUNITIES. next five years we will continue to significantly increase our production capabilities through modernization. This includes deploying new tech- nologies that increase the amount of lumber per log while producing higher-quality lumber. We also involve our employees to help develop ways to increase our uptime and reduce the amount of time it takes to complete projects. As a result, we expect to increase lumber production by 35 percent and production of oriented strand board and plywood by 17 percent at our existing facilities. Wood Products consists of businesses targeted for potential S T R A T E G I C A L LY G R O W I N G T H E B U S I N E S S . growth. Most of this growth will come from operational improvements to existing facilities. We also expect to grow our appearance-grade wood capabilities to maximize our practice of selectively pruning existing timber. Such pruning reduces knots thereby creating “clear” wood for use in lumber that produces higher margins. While growth through acquisitions is not a primary strategy for Wood Products, we will take this approach in selected cases. Our purchase of the Dryden, Ontario, paper facility, for example, also provided an opportunity to add two mills to our Canadian lumber position. This acquisition enhances our product mix and allows us to better serve Eastern markets. Through operational excellence, we expect to achieve our earnings growth while maintaining capital spending near depreciation levels over the next five years. This will improve the returns on invested capital and is key to achieving our shareholder return goals. 600 400 500 300 400 200 300 200 100 100 0 0 94 95 96 97 98 94 95 96 97 98 capital spending earnings (excludes acquisitions) (before nonrecurring items) millions of dollars millions of dollars 22
  24. 24. P R I N C I PA L L O C AT I O N S produces dimension lumber. United States: SOFTWOOD LUMBER Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, Oregon, Washington Canada: Alberta, British Columbia, Ontario, Saskatchewan United States: manufactures softwood structural and “appearance” P LY W O O D Alabama, Arkansas, Oklahoma, Washington (veneer) panels for home remodelers, builders and industrial use. produces structural sheathing, ORIENTED STRAND BOARD United States: Michigan, North Carolina, West Virginia subflooring, underlayments and other panels for residential Canada: and commercial construction. Alberta makes industrial particleboard and United States: COMPOSITE PRODUCTS Georgia, North Carolina, Oregon, Wisconsin medium density fiberboard used primarily in furniture, laminating, countertops, millwork, door manufacturing and for export. produces hardwood lumber and HARDWOOD LUMBER United States: Arkansas, Michigan, Oklahoma, Oregon, Pennsylvania, components for use in manufacturing cabinets and furniture. Washington, Wisconsin United States: B U I L D I N G M A T E R I A L S D I S T R I B U T I O N sells a broad Alabama, Arizona, California, Colorado, Florida, Georgia, range of building materials from a network of in-market customer Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, service centers, satellites and reload operations located throughout Louisiana, Michigan, Minnesota, Missouri, Montana, North America. Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin Canada: Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec produces architectural doors used ARCHITECTURAL DOORS United States: Wisconsin mainly in offices, schools and hospitals. PRODUCTS 23
  25. 25. innovation Building on the work of preceding masters, a painter further develops the art form by creating new strokes and techniques. Such innovation enriches the art and enhances the enjoyment for viewers. We’re using our outstanding research and development capabilities to enrich the science of forestry and meet new customer needs. Innovation requires venturing into new areas. But as we pursue these opportunities, we’re aligning our capabilities with the needs of customers.
  26. 26. enduring values The values of Chinese brush painting are centuries old. They create a sense of purpose and discipline for the painter. For nearly a century, Weyerhaeuser has adhered to a set of values to guide us. They include being responsible to the communities in which we operate, respecting the environment and developing our employees. It means operating according to the highest ethical standards. As we look to our second hundred years, we’ll continue to steer a course guided by these enduring values.
  27. 27. the future Placing a chop, or stamp, on the watercolor completes a Chinese brush painting. Each chop has a special meaning. This chop depicts “endless possibilities.” As we look to our future, we believe in endless possibilities. We have the people, the resources, the financial strength and the commit- ment to be the best forest products company in the world. We will fufill our potential through future growth.
  28. 28. statistical data NET SALES 1998 1997 1996 1995 1994 (millions of dollars) Pulp $ 986 $ 954 $ 1,616 $ 1,012 $ 935 Paper ( 1 ) 842 803 1,001 664 869 Paperboard and containerboard 301 281 325 240 298 Packaging 1,781 1,921 1,863 1,495 1,894 Newsprint (2) 416 451 508 356 37 Recycling 189 140 266 121 191 Other products 94 98 103 178 88 $ 4,609 $ 4,648 $ 5,682 $ 4,066 $ 4,312 SALES VOLUMES 1998 1997 1996 1995 1994 (millions) Pulp—air-dry metric tons 1,982 1,868 2,060 2,068 2,012 Paper—tons (1) 1,146 1,007 1,006 998 1,181 Paperboard—tons 243 205 230 201 236 Containerboard—tons 389 346 259 254 323 Packaging—MSF 44,508 42,323 34,342 34,483 44,299 Newsprint—metric tons (2) 684 629 663 638 62 Recycling—tons 2,229 2,011 1,467 985 2,546 ANNUAL PRODUCTION 1998 1997 1996 1995 1994 C A PA C I T Y (thousands) Pulp—air-dry metric tons 2,063 2,004 2,159 2,041 2,255 1,971 Paper—tons (1) 1,128 1,034 1,060 982 1,594 1,235 Paperboard—tons 231 206 229 189 230 237 Containerboard—tons 2,381 2,331 2,329 2,357 2,600 2,291 Packaging—MSF 46,488 44,471 36,041 36,020 50,000 46,410 Newsprint—metric tons (2) 704 631 687 651 — 69 Recycling—tons 3,655 3,428 2,754 2,042 — 3,833 P R I N C I PA L M A N U FA C T U R I N G FA C I L I T I E S Pulp 9 Containerboard 4 Paper 6 Packaging 44 Paperboard 1 Recycling 24 (1) Reflects the acquisition of the Dryden, Ontario, fine paper mill in October 1998. (2) Reflects the ownership restructuring of the North Pacific Paper Corporation (NORPAC ) newsprint facility from a fully consolidated subsidiary to an equity affiliate in February 1998. 30
  29. 29. pulp paper and packaging • and a IMPROVED O P E R AT I N G EFFICIENCIES disciplined approach to capital spending helped our Pulp, Paper and Packaging sector withstand difficult market conditions. During the year, Asian demand for pulp, paper and containerboard declined while imports of fine papers into the United States increased significantly. This led to high inventories and weak industry prices across most product lines. The effect of these forces was evident in our 1998 results: O P E R A T I N G were $192 million, unchanged from 1997 levels. 1998 operating EARNINGS earnings exclude nonrecurring charges associated with the closure of a chlor-alkali facility and the streamlining of pulp and paper operations. Operating earnings for 1997 exclude a gain for the sale of a chemical facility and charges associated with the consolidation, closure or disposition of some recycling facilities. N E T were $4.3 billion in 1998 compared with $4.6 billion the prior SALES year. Although these results are better than many in our industry, we are improving our perform- ance to deliver superior shareholder returns. We have identified five specific ways to grow revenues and improve margins from our Pulp, Paper and Packaging sector. LOWER COSTS AND from existing facilities. INCREASE OUTPUT We’ve significantly improved the efficiency of our operations by engaging employees in the design and implementation of improved work systems. This approach has increased the relia- bility and performance of our mills while allowing us to maintain stringent control on overhead costs. In the future, our goal is to use process improvements to increase output from existing facilities by 1.5 to 2 percent annually. 31
  30. 30. Capital spending M A I N TA I N T I G H T C O N T R O L S O N C A P I TA L S P E N D I N G . in 1998 was $325 million compared with $315 million last year. This is the second year we’ve kept spending at, or below, depreciation levels. It also marks the third consecu- tive year of positive net cash flows in difficult market conditions. Such results reflect our strategy of investing capital to improve operating efficiencies at existing facilities rather than adding new capacity. GROW FINE PA P E R . In September, we acquired the Dryden, Ontario, fine paper facility and related assets. The acquisition adds 380,000 short tons of fine paper a year to our system, gives us additional geographic range and increases our ability to serve the fast-growing retail paper market. Our Fine Paper business has a sustained record of performance improvements that we will extend to the Dryden operations. As one of the industry’s S E L E C T I V E LY GROW C O N TA I N E R B O A R D PA C K A G I N G . largest providers of packaging solutions, we are prudently growing this business to meet the evolving needs of our customers. In May, we opened a box plant in Shanghai with SCA Packaging Europe BV to serve existing customers doing business in China. In October, we formed a joint venture with Wilton Connor Packaging to meet the needs of our domestic customers in the rapidly growing point-of-purchase display market. R E P O S I T I O N M A R K E T P U L P. We’re improving the competitive position of market pulp by reducing its exposure to volatile commodity markets. We’ll build on past successes to reduce this exposure to 800 1,200 less than 50 percent through product enhancements 1,000 developed by our extensive research and development 600 800 capabilities. By differentiating our pulp, we’ll add 400 600 value for customers, improve margins and increase returns to shareholders. We’re confident we can overcome 400 200 our current market challenges to position Weyerhaeuser 200 as a leader in shareholder return. We will do that by 0 94 95 96 97 98 94 95 96 97 98 capital spending earnings continuing to improve efficiencies and differentiating (excludes acquisitions) (before nonrecurring items) millions of dollars millions of dollars our products in ways customers recognize and value. 32
  31. 31. P R I N C I PA L L O C AT I O N S manufactures wood pulp for global markets. United States: MARKET PULP Georgia, Mississippi, North Carolina, Washington Canada: Alberta, British Columbia, Ontario, Saskatchewan United States: manufactures a range of both coated and uncoated F I N E PA P E R Mississippi, North Carolina, fine papers and markets its products through paper merchants. Washington, Wisconsin Canada: Ontario, Saskatchewan produces and markets bleached United States: B L E A C H E D PA P E R B O A R D Washington paperboard to West Coast and Pacific Rim customers for production of liquid containers such as milk and juice cartons. manufactures containerboard United States: C O N TA I N E R B O A R D PA C K A G I N G Arizona, California, Colorado, Connecticut, (medium and linerboard) and corrugated boxes. Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, Wisconsin operates an extensive wastepaper collection system United States: RECYCLING Arizona, California, Colorado, Illinois, to supply company mills and national and international customers. Iowa, Kansas, Maryland, Minnesota, Nebraska, North Carolina, Oklahoma, Oregon, Tennessee, Texas, Utah, Virginia, Washington PRODUCTS 33
  32. 32. real estate and related assets Continued execution of its strategic plan, combined with a robust domestic housing market, resulted in strong earnings for our Real Estate business. For the year, the sector reported earnings of $124 million. This compares with $66 million before a gain associated with the sale of Weyerhaeuser Mortgage Company in 1997. our Real Estate business focuses on the home- TO MAXIMIZE ITS EARNING POTENTIAL, building and land-development business. Improved earnings resulted from increased operating efficiencies and improved margins and inventory turnover. During the year, the backlog of homes sold, both in absolute terms and as a percentage of in-process inventory, was increased to record levels. Home- building and land-development sales increased over the prior year. strong earnings by our real estate operations. THESE IMPROVEMENTS HELPED PRODUCE With home-building and land-development activities in Southern California, Las Vegas, Houston, Maryland, Virginia and the Puget Sound area in Washington state, Weyerhaeuser Real Estate Company continues to be among the largest home builders in its selected markets. P R I N C I PA L L O C AT I O N S United States: LAND MANAGEMENT Arkansas, Georgia, North Carolina, Washington United States: PA R D E E C O N S T R U C T I O N C O M PA N Y Nevada, Southern California United States: Q U A D R A N T C O R P O R AT I O N Washington United States: TRENDMAKER HOMES Texas WINCHESTER HOMES United States: Maryland, Virginia W E Y E R H A E U S E R R E A LT Y I N V E S T O R S United States: California, Washington O P E R AT I O N S 34
  33. 33. significant accomplishments SAFETY Safety is a core value at Weyerhaeuser and the company’s number one priority. We measure safety by recordable incident rate, which is the number of recordable safety incidents per 100 employees per year. In 1998, our recordable incident rate was 3.9 compared with 4.6 in 1997, a 16 percent decrease. The target for 1999 is 2.5. The ongoing goal is a rate of less than one. Those facilities or operations receiving significant external recognition for their efforts to improve safety during 1998 include: Received a “Star” plant site designation by the PULP MILL Flint River, Georgia US Department of Occupational Safety and Health Administration (OSHA). Flint River is the fifth Weyerhaeuser facility to receive OSHA’s highest award for accident prevention and on-the-job safety performance. Accepted into OSHA’s Voluntary Protection Program. C O N TA I N E R B O A R D PA C K A G I N G P L A N T Amarillo, Texas Acceptance requires plants to exceed the industry safety average and have active safety processes that exceed OSHA regulations. Received second consecutive Oregon OSHA Safety & Health T I M B E R L A N D S O P E R AT I O N Coos Bay, Oregon Achievement Recognition Program (SHARP) award. SHARP provides incentives for Oregon employers to develop and implement effective injury- and illness-prevention programs. Received the Plant Safety Award from the National Wood ARCHITECTURAL DOOR BUSINESS Marshfield, Wisconsin Window and Door Association for outstanding safety performance in a 12-month period. Received Dow Chemical Company’s Sales Excellence Award B U I L D I N G M AT E R I A L S Distribution Business for outstanding performance. Dow—the world’s largest producer of Styrofoam™ brand extruded insulation products—recognized BMD for doubling its sales of Styrofoam™ products in three years. Won Fleetwood Homes’ Circle of Excellence Customer Satisfaction Award for the second consecutive year. Fleetwood is the largest manufacturer of recreational vehicles and manufactured homes in the United States. Presented 1998 Golden Hammer Award for vendor excellence Building Materials Distribution; in marketing and partnership by National Home Center News. Southern, Western and Canadian Lumber; Plywood; This is the second consecutive year Weyerhaeuser has Eastern and Western Oriented Strand Board; won the award. Composite Products; Hardwood Lumber CUSTOMERS/SUPPLIERS 35
  34. 34. CITIZENSHIP Received the Oregon Department of Fish and Wildlife W E Y E R H A E U S E R C O M PA N Y Southwest Georgia and the Oregon Department of Forestry’s Fish and Wildlife Steward Award for Forest Lands in the industrial landowner category. The award recognizes private landowners that improve fish and wildlife resources through forest stewardship activities. W E Y E R H A E U S E R C O M PA N Y Won the American Forest & Paper Association Environment Flint River, Georgia, Pulp Mill and Energy Achievement Award for Pollution Prevention. The award recognizes the progress made by the forest products industry in the areas of environment, safety, energy and wildlife stewardship. Received the WD Littleford Award sponsored by the American Business Press. The award, given to recognize Weyerhaeuser’s commitment to environmental improve- ments, was shared with Chemical Engineering magazine. G R A N D E P R A R I E / G R A N D E C A C H E O P E R AT I O N S Achieved 100 percent environmental compliance in one of Alberta, Canada the most stringent provinces in Canada. The operations include a pulp mill, two sawmills and forestlands. P LY W O O D A N D L U M B E R M I L L Received the Arkansas Environmental Federation’s 1998 Mountain Pine, Arkansas Waste Minimization/Pollution Award for water discharges improvement. The federation, an environmental education association focused on businesses, recognizes companies that take extra efforts to protect the environment. VA I L T R E E FA R M Designated Landowner of Merit by the Washington State Western Timberlands Organization Department of Natural Resources. This designation is awarded to forest landowners that demonstrate advanced forest management and planning skills, including superior compliance with Washington’s Forest Practices Rules and proactive resource protection. Was ranked number one in responsibility to the community W E Y E R H A E U S E R C O M PA N Y and environment among forest and paper products companies by Fortune magazine’s Corporate Reputation Survey. 36
  35. 35. the 1998 financial report D E S C R I P T I O N O F T H E B U S I N E S S O F T H E C O M PA N Y 3 8 FINANCIAL REVIEW 43 R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N TA N T S 5 0 C O N S O L I D AT E D S TAT E M E N T O F E A R N I N G S 5 1 C O N S O L I D AT E D B A L A N C E S H E E T 5 2 C O N S O L I D AT E D S TAT E M E N T O F C A S H F L O W S 5 4 C O N S O L I D AT E D S AT E M E N T O F S H A R E H O L D E R S ’ I N T E R E S T S 5 6 N O T E S T O F I N A N C I A L S TAT E M E N T S 5 7 HISTORICAL SUMMARY 72