The New Growth At Weyerhaeuser

How do you please shareholders and environmentalists alike? For paper and forest-products companies, it's traditionally an either/or choice. Make shareholders happy, and chances are you'll send the green crowd up the wall. Please the environmentalists, and shareholders probably will soon be heading for the door.

In the four years since becoming CEO of Weyerhaeuser Co., John W. Creighton Jr. has racked up credits with both. Shareholders like his extensive restructuring: The one-time laggard is now among the industry's most profitable players. And Creighton is making inroads with an even tougher crowd: Green activists are beginning to give Weyerhaeuser kudos for going beyond legal obligations to cut pollution and reduce damage to the lands it logs.

A BULLY? It's far from the company Creighton, 62, inherited in 1991, after three years as president under longtime CEO George H. Weyerhaeuser. Lackluster earnings at the Federal Way (Wash.) company had left it near the bottom of the industry. Investors scorned it as unwieldy and paternalistic. It was loaded down with outdated mills, and it also ran a slew of noncore subsidiaries making everything from milk cartons to disposable diapers. Meanwhile, environmentalists saw Weyerhaeuser as a chain-saw-wielding bully, recklessly denuding hills.

Creighton hardly seemed a reformer. A low-key man with a law degree and an MBA, he had been hand-picked by Weyerhaeuser to be the first CEO not related to one of the founders of the 95-year-old company. Creighton also came from the company's tiny real estate group, near-heresy in an industry where top jobs have always gone to paper and forestry execs. But being an outsider has advantages. "Not being a forest-products person, he didn't have a lot of the ingrained habits," says Carlton Martin, portfolio manager at College Retirement Equities Fund, which owns roughly 1% of Weyerhaeuser.

Within a year of becoming president, Creighton set about rejuvenating Weyerhaeuser. He began by dumping many of the noncore units. More important, he led managers through an 18-month reengineering in which each mill and tree farm had to redesign the way it worked. Creighton's goal: to add $700 million to operating earnings by 1995. To eliminate the impact of price fluctuations in the cyclical industry, the gains were measured in constant dollars, at 1989 price levels.

Few gave Creighton much chance of success. But he met his $700 million goal a year early. About $100 million has come out of corporate overhead. Most, however, came as Weyerhaeuser cut costs while boosting output at its aging plants. At a Washington mill, managers upped productivity by simplifying the flow of lumber, then installed computerized lasers that scan logs to determine the highest-value boards that can be cut from them. Now, output from each log is up 15%--and the mill produces 45% more lumber per hour than in 1990. And at a money-losing box plant in Tennessee, employees suggested buying used machines to speed production. The equipment doubled productivity per worker in two years. "These improvements are going to stick because the [employees] have ownership," Creighton says.

At the same time, Creighton spent $1 billion modernizing three big paper plants. The investments slashed costs while boosting quality and output. At the Longview (Wash.) plant, new pulping equipment raised capacity by 40%, even as it consumes less energy, chemicals, and water.

The changes add up: In 1994, the company's operating income hit $1.2 billion, up 24%, on revenues of $10.4 billion, an 8.9% rise. This year, Prudential Securities analyst Mark Rogers expects operating profits will soar 72%, to $2.1 billion, on sales of $11.5 billion, thanks to both rising paper prices and Weyerhaeuser's improved cost structure.

Of course, rising paper prices are lifting profits industrywide. Yet Weyerhaeuser is moving to the head of the class. Its operating margin was just 8.9% in 1989--well under the industry's 14% average. By 1994, it hit 11.7%, nearly 30% better than rivals. And while Weyerhaeuser posted record earnings last year, others remain far below the peak profits attained in the late 1980s. Since 1989, net income has fallen 59% at International Paper Co. and 53% at Georgia-Pacific Corp. "[Weyerhaeuser is] one of only three companies out of 18 that exceeded 1989 earnings in 1994," says Evadna Lynn, paper and forest-products analyst with Dean Witter Reynolds Inc.

The stock is also much improved: From a low of 18 in 1990, it hit nearly 49 in early 1994. Fears that slowing construction will dent lumber sales have pushed it to around 43 today. To get it moving again, Creighton boosted the dividend 33% in April and announced plans to repurchase up to 10 million shares. He has also targeted another $600 million in incremental earnings by 1997--and he has pledged not to add capacity for at least two years. "Weyerhaeuser has gone from a build-or-perish mentality to one focused on financial returns," says Michael P. Stack, portfolio manager at Independence Investment Associates in Boston, which owns about 2% of Weyerhaeuser. "They're much more aware today that the shareholder is an important part of the equation."

Creighton is also making green concerns a bigger part of Weyerhaeuser's brief. While many in the industry fight regulation, Creighton argues that Weyerhaeuser's long-term interests--and its ability to plan for the future--are better served by a more cooperative stance. "Although we own huge amounts of [private] timberland, to some degree we operate at the sufferance of the public," he says. He has won applause from some greens. "They're never going to do everything environmentalists wish; if they did, they'd go broke," says Alan Copsey, chair of the Washington Environmental Council's forest resources committee. "But they're one of the best at taking care of the land."

Take the recent modernization of its paper mills, where Weyerhaeuser included technology to eliminate most chlorines. It hasn't eliminated them altogether, as some greens demand, but it expects to meet proposed Environmental Protection Agency rules by 1996--two years earlier than required--even as many rivals fight the new rules.

But it's in the forest that changes are most dramatic. To head off criticism of clear-cutting--which Creighton insists is necessary--the company is sending foresters to classes at Jones & Jones, a "green" Seattle firm of landscape architects. They're learning to log following the contours of the land. That makes Weyerhaeuser the first major forester to plan "designer clear-cuts," in which trees are left along mountain ridges and the edges of clear-cuts are "feathered" less abruptly.

The moves go beyond esthetics. Working with environmentalists, native tribes, and Seattle's water department, Weyerhaeuser analyzed the impact of logging on 12 Northwest river basins, then came up with plans for harvesting trees that lessen threats to salmon runs. The company is replacing culverts under logging roads to allow fish passage, and it leaves trees near streams to shade the fish. "They agreed to fix all the problems," says Kurt Beardslee, executive director of Washington Trout, a fish-conservation group.

Still, Weyerhaeuser has a long way to go to quell public concerns. Since last year, Creighton and Charles W. Bingham, executive vice-president for timberlands, have been fielding questions at public "town hall meetings." The meetings have provided opportunity for dialogue--and for activists to blast Weyerhaeuser about toxic waste, conversion of forest land to housing subdivisions, and continued clear-cutting. "They have taken tangible steps to try to demonstrate they're changing the way they do business," says Steve Whitney, Northwest regional director of the Wilderness Society. "But it's also true that there are vast acres under their control where it's business as usual." No one ever said attaining leadership in both earnings and environmentalism would be easy. But Creighton isn't shying away from either challenge.

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