The making of the world’s leading player in key timber products is expected to be under way soon after Weyerhaeuser declared victory in the long-running takeover battle for industry rival Willamette Industries.
Weyerhaeuser, the largest private owner of softwood timber in the world, believes its three nominated directors were elected to Willamette’s board at the annual meeting last week.
Willamette claimed the vote is too close to call and will have to be confirmed by a full count of all proxy votes, but analysts believe the takeover could be settled in weeks.
Weyerhaeuser is the third largest timber products com-pany in the US and Willamette is the seventh. If it goes ahead, the US$7bn takeover would create a giant with the largest timber holdings in North America and the power to compete globally in an industry beset with overcapacity and low prices.
European entry
In addition to efficiencies and the bringing together of timberlands close to each company’s mills, Weyerhaeuser would also move into Europe through Medite panel operations in Ireland and France.
The three Weyerhaeuser-friendly directors, if confirmed, are expected to push Willamette into merger talks. The process could continue for another year, but brokers say it is likely to be settled much sooner. As an extra carrot, Weyerhaeuser extended its US$50 a share offer to June 28. Willamette shares were trading at US$48.78 after the meeting.
Weyerhaeuser’s latest financial results, though, mirrored the misfortunes of many in the timber and wood products sector. The slowdown in the US economy and its effects migrating around the globe continue to weaken demand, cause overcapacity and lower prices. The situation is exacerbated by higher energy costs.
Weyerhaeuser had previously announced an 11.5% increase in profits at US$194m for the last quarter, before going into the earlier rounds of the takeover battle. It was one of the few US forest products groups not to issue a profits warning for the quarter.
However, earnings plunged 45% to US$107m on sales not much changed at US$3.6bn for the same period last year. Wood products lost US$33m, against profits a year before of US$138m.
The theme running through the company’s explanation and the backbone of financial statements by many companies this quarter, has been coming to terms with lumber prices that are down 20% and OSB prices at 10-year lows.
The North Central OSB reference price averaged US$132 (7/16in basis), the second lowest since 1992, and down 49% from a year before. Although MDF prices have improved, OSB is expected to continue to suffer from lower prices and overcapacity. Panel production in the US is expected to fall this year for the first time since 1991.
Hardwood prices in the US are down by as much as 15% while hardwood markets around the world are relatively quiet. Softwood and sheet materials sectors have suffered throughout the world and are expected to remain competitive, with consolidations and casualties.
Markets for engineered wood products remained stable, but Weyerhaeuser was among many companies to admit that efforts to concentrate on value-added products had not offset losses elsewhere.
Production cutsL
Weyerhaeuser is also typical in suffering from production downtime. Analysts said they had been urging the company to follow competitors and cutback in line with weaker demand. Weyerhaeuser has only now curtailed production at many of its lumber mills and at all of its OSB plants to balance inventories with demand. The company said it expected to continue operating at less than full capacity for most of the first half of the year.
Weyerhaeuser CEO Steven Rogel said: ‘Our results reflect the challenging market conditions we faced during the first quarter.’ But he added: ‘All of us are focused on taking the steps necessary to ensure that Weyerhaeuser generates solid shareholder returns regardless of market conditions.’
There has been little sign of improvement in the US economy and there are heightened fears of trouble brewing in the UK and Continental Europe. America’s Federal Reserve, the European Central Bank and the Bank of England have all cut interest rates. The US is unsure whether the downturn is a cyclical adjustment that could be around for some time or recession. Last month the US Fed cut interest rates to the lowest level in seven years. Sentiment about modest gains in retail sales was dampened when the world’s largest retailer Wal-Mart warned that trading would be subdued into August.
Europe slows
Difficulties facing Europe increased as figures began to show economic growth was weaker than expected in France and Germany, and the euro had reached a new six-month low against the dollar. Exports have been slowing and there has been more vigorous de-stocking.
In the UK, the slowdown in manufacturing continued. But housebuilders have reported good figures, despite very wet weather. Chipboard demand has also been good, although low prices are causing concern. Much of the good news has been in the continuing popularity of timber frame houses, with the ratio of timber frame up from 9% to 10%. Short-term projections are for continued growth.
This is reflected in the fortunes of Palgrave Brown, the engineered wood specialist, which has nearly doubled turnover and trebled profits in recent years. Latest figures show annual sales growth of 46% (TTJ June 9).
US building products hit
In the US, though, Georgia-Pacific CEO Pete Correll described building products as in one of the worst down cycles in two decades. G-P posted a loss of US$137m, compared with earnings of US$194m last year. This included US$82m to permanently close the Bellingham mill and chemical plant in Washington, with the loss of 420 jobs. It said it would continue to cut back production on panels, gypsum and lumber.
International Paper has followed a similar path. CEO John Dillon recently told shareholders: ‘While we can’t change the economy, we are changing the company. We are matching our production to our orders, which has led to reductions in inventories.’
G-P reported first-quarter earnings of US$24m, compared with US$249m on turnover which was almost unchanged at US$6.9bn.Part of the strategy now is to focus on wood products.
Nexfor loss
Nexfor reported an operating loss of US$7m in the first quarter of 2001, compared to a breakeven position in the last three months of 2000. The European panel losses increased to US$9m and plans were announced to consolidate the UK lamination activities with the closure of the plant at South Shields.
Building materials giant Louisiana-Pacific Corp reduced its quarterly dividend to five cents a share, despite recent improvement, as product prices reached near-record lows. CEO Mark Suwyn renewed the company’s commitment to aggressively manage the business through current weak market conditions by cutting costs and increasing operational efficiencies. The company has reduced staff by 23% over the past 15 months and capital expenditures by 50% in the last quarter.
He said: ‘Last year was very difficult both in terms of rapidly declining building product prices and increases in resin and energy costs. OSB alone dropped nearly 50% from first quarter 2000 and a full 60% from their 1999 peak.’
UPM-Kymmene remains bullish on wood-based building supplies for new construction and structural repairs. Overall, it boosted operating profits 12% on an 11% gain in turnover, mostly by improved prices for the company’s main products. Wood products’ turnover was up 7%, largely due to company acquisitions, while operating profits dipped by a third due to lower sawn timber prices and the higher cost of logs.
The company believes economic growth in Europe will continue at a reasonable level, despite gloomy economic predictions. The company admitted it is ‘bringing supply into line with demand’, but said prospects on the plywood market are expected to remain good. Plywood deliveries were up 4% and it enjoyed good profitability by raising both efficiency levels and product prices.
Nordic results
Profits at forest group Södra were slightly lower for the first quarter at SKr365m, compared with SKr382m last year. Sales were up but mainly because of the acquisition of mills in Norway last year. Södra, too, suffered downtime and increased competition for timber products exceeding demand.
Stora Enso was also hit by weak demand, with operating profits down 50% on sales reduced by 2.6%. It was a similar story at Finnforest, which posted first quarter losses of e4.2m.
The South Africa group Sappi suffered a 27% drop in profits and is pulling out of some packaging products to concentrate on timber and paper. Chairman Eugene Van As said: ‘If difficult market and currency conditions persist, group earnings for the second half are likely to be as modest as those for the first.’
