Rayonier Inc.

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Rayonier Inc.

1177 Summer Street
Stamford, Connecticut 06905-5529
U.S.A
(203) 348-7000
Fax: (203) 964-4528>
Web site: http://www.rayonier.com

Public Company
Incorporated: 1926 as Rainier Pulp and Paper Company
Employees: 2,500
Sales: $1.1 billion (1997)
Stock Exchanges: New York
Ticker Symbol: RYN
SICs: 0811 Timber Tracts; 2411 Logging; 2421 Sawmills & Planing Mills; 2426 Hardwood Dimension & Flooring Mills; 2611 Pulp Mills

Rayonier Inc. is an international leader in the forest products industry, operating in more than 70 countries. The company manages 1.5 million acres of timberland in the United States and New Zealand, which provide the raw material for its products. It also operates two pulp mills and three lumber manufacturing facilities in the United States, plus a fiberboard plant in New Zealand that was acquired in 1997. Over two-thirds of Rayonier’s income is derived from sales of timber and wood products; its remaining income comes from sales of specialty pulp products, such as cellulose pulp used in photographic film. Rayonier focuses heavily on the international market; about half of its sales in 1997 were made outside of the United States. During the late 1990s, along with many other companies in this industry, Rayonier experienced a drop in sales and income. In 1997 it was forced to close a third pulp mill in Washington, and its sales reflected a six percent decrease from the previous year. Rayonier’s operations also were greatly affected by environmental regulations, especially in the Pacific Northwest.

A New Use for a Weed

In the mid-1920s, the aptly named Edward M. Mills (formerly a Chicago banker) began to seek investors to develop pulp and paper mills in the largely untapped forests of the Pacific Northwest. The result was the Rainier Pulp and Paper Company, founded in Shelton, Washington, in 1926. The company’s first product was pulp produced from hemlock, which grew so plentifully on the Olympic Peninsula that it was considered a weed and so was very cheap. Unfortunately for the new company, the Great Depression threatened its early success. Mills turned to a new market, convincing the Dupont Company to use hemlock instead of cotton to manufacture rayon, which was just beginning to be popular.

This strategy proved immensely successful. By 1937, the Rainier Company merged with two other mills in Washington, to form Rayonier Incorporated. This name was a combination of “rayon” and “Rainier,” the mountain visible from the original Shelton mill. Rayonier immediately became the largest rayon pulp manufacturer in the world, and was listed as a publicly traded company on the New York Stock Exchange.

Becomes Part of ITT Takeover Saga

In 1968, Rayonier was acquired by the ITT Corporation (originally the International Telephone and Telegraph Corporation), and became part of ITT’s steady growth into a conglomerate. The new entity, ITT Rayonier, became a wholly owned subsidiary of ITT, and the 1980s found Rayonier immersed in the world of hostile corporate takeovers. In 1979 ITT had hired a new CEO, Rand Araskog, a West Point graduate and an interrogator of Soviet defectors for the National Security Agency in the 1950s. An aggressive investor, he fought off three takeover attempts of ITT in the 1980s, later chronicling these events in a book whose title illustrated his approach to business, The ITT Wars. At the same time, his salary of $8.5 million (high even in the late 1980s) was questioned by numerous investors in ITT, including the California Public Employees’ Retirement System, especially given ITT’s mediocre performance. Facing growing criticism, Araskog split ITT into three separate corporations, and several subsidiaries were spun off as independent corporations, including Rayonier. As of February 28, 1994, Rayonier once again was an independent company, and it took back its original name. Its president through the ITT years, Ronald Gross, shortly afterward became chairman and CEO, a position he still held in 1998. Araskog continued to serve on the Rayonier board of directors as well.

Focus on International Operations

Rayonier had long been active in the international arena, having marketed its pulp products in Japan since the 1930s and in Korea and China since the early 1980s. The newly independent Rayonier also placed a great deal of attention on operating as a multinational company, targeting Europe, Asia, and Latin America. In 1995, sales outside of the United States made up 59 percent of Rayonier’s total sales of $1.26 billion. Rayonier managed timber holdings in New Zealand (almost 220,000 acres) that supplied much of the Asian market, and it also purchased lumber from Chile and Russia. There was a significant difference in the “rotation age” of timberland in the United States and elsewhere. Timber in the southeastern United States (primarily softwoods such as Southern pine) would mature in only 20-25 years; but in the northwestern United States (home to Douglas fir and hemlock), the cycle was 45-50 years. In New Zealand, the average rotation period was 25-28 years. Thus the New Zealand timber holdings became more desirable. More than half of Rayonier’s specialty pulp products also were sold to foreign countries.

In the later 1990s, however, Rayonier’s international operations became less profitable, particularly as the Asian economies became less stable. In 1996, the share of sales outside of the United States dropped to 55 percent; in 1997 they decreased even more, to only 49 percent. Nevertheless, Rayonier had great hopes for expanding its business in the two most populous countries in Asia, China, and India. These developing markets carried unique challenges, with delivery technology often not matching the demand for products. As described by Dennis Snyder, a Rayonier vice-president, in the Journal of Commerce, when Rayonier began to ship fluff pulp to China in the late 1980s, Chinese ports lacked the equipment needed to handle the packages of this product. It had to be broken into individual rolls that could be handled manually.

As of 1997, the geographic distribution of Rayonier’s two key product lines (timber and wood products, and specialty pulp products) broke down as follows: timber and wood (United States, 62 percent; Japan, 18 percent; South Korea, nine percent; New Zealand, seven percent; other, four percent), specialty pulp (United States, 41 percent; Europe, 23 percent; Japan, 14 percent; Latin America, ten percent; other Asian countries, nine percent; other, three percent).

Plagued by Environmental and Legal Concerns

Rayonier is subject to many state and federal environmental laws and regulations, affecting its handling of air emissions, water discharges, and waste disposal. Its operations also have been greatly influenced by federal laws governing the cutting of timber, particularly the Endangered Species Act. Rayonier claims to have spent over $100 million in the 1990s for voluntary and required environmental measures. Much of Rayonier’s timberland in Washington is home to presently endangered species such as the northern spotted owl and the marbled murrelet, as well as several varieties of salmon. As a result, there have been ongoing negotiations and more heated interactions involving Rayonier, the Environmental Protection Agency (EPA) and state agencies, and environmental groups.

A graphic example of this clash was seen in the fate that befell the Rayonier pulp plant in Port Angeles, Washington. Throughout the 1990s, the company had to reduce the amount of timber harvested from private land that was the home of endangered species. As a result, the Washington hemlock that was used at the Port Angeles mill became more expensive, and the mill lost money almost every year. Also, the plant facility itself was considered an environmental problem, and required numerous expensive upgrades. (As described in a Seattle Times article, ’Tor nearly 70 years, the smokestacks of the Rayonier mill have scented the air … with a faint, sulphur-like smell.) However, the mill provided jobs for several hundred workers, and paid taxes that amounted to ten percent of the city’s budget. When it appeared inevitable that the plant would close, workers began to display bumper stickers saying, “Millworkers are an endangered species, too!” Rayonier closed the mill permanently in February 1997, citing its inability to continue competing with plants in lower-cost areas such as the southeastern United States, South Africa, and Asia.

The issue of environmental measures taken against companies such as Rayonier was a heated political topic in the late 1990s. Controversial measures that were satisfactory to neither enviromentalists nor timber companies were taken in the areas of clear-cutting timber, air emissions, and water discharges. Notably, a growing number of companies were allowed to adopt “Habitat Conservation Plans” (HCPs). In exchange for the right to do commercial logging on private property, the companies were required to adopt voluntary conservation plans that exempted them from some other environmental regulations. Many environmental organizations, such as the National Wildlife Federation, were greatly concerned that the voluntary plans would not adequately protect plant and animal life. For instance, the Washington state office of the National Audubon Society found that the vast majority of the proposed HCPs in that state involved the cutting of older (and hence more commercially valuable) trees on private land, and relied on using adjacent federal forestland as a refuge for the displaced endangered species. The federal approval process for new plans, including Rayonier’s, was temporarily suspended in December 1997 as the result of a lawsuit.

Company Perspectives

Our commitment is to provide long term value to shareholders. We won’t be satisfied with anything less than financial performance consistently within the top quartile of our industry. We will achieve these business objectives while maintaining high ethical standards and meeting our responsibilities to our communities, the environment and our employees. We’re a company built on a solid foundation, whose strong roots and global reach shape us unlike any other in the forest industry.

Other environmental problems also faced Rayonier in the 1990s. For example, in 1994 its former wholly owned subsidiary, Southern Wood Piedmont Company (SWP), was named as a Potentially Responsible Party (PRP) under the EPA’s Comprehensive Environmental Response Compensation and Liability Act (CERCLA), based on coal tar derivative deposits found in Tennessee’s Chattanooga Creek. SWP had ceased operations in 1986, but Rayonier would remain liable for its actions. According to Rayonier’s 1997 annual report, it was designated as a PRP or the state equivalent in eight separate federal and state actions.

In addition to the numerous environmental concerns facing Rayonier, it also was named as a defendant in a 1997 Georgia lawsuit brought by Powell-Duffryn Terminals. Rayonier had stored a pulp manufacturing byproduct (crude sulfate turpentine) at one of Powell-Duffryn’s marine terminals and storage facilities, and a major fire and explosion caused extensive damage. As a result, damages of $57 million were being sought against Rayonier and the other defendant.

Products, Prospects, and Strategy in the Late 1990s

As of 1998, Rayonier’s products fell into two categories: timber and wood products; and specialty pulp products. It managed almost 1.5 million acres of standing timber in the United States (1.23 million acres) and New Zealand (219,000 acres), much of it fast-growing softwood. A specialized market was logs and wood products sent to Pacific Rim countries, made with wood obtained from its own acreage, as well as from timber stands in Chile and Russia. Its U.S.-based lumber mills (two in Georgia and one in Idaho) produced boards and assorted lumber products for both domestic sale and export. A newly opened plant in New Zealand produced medium-density-fiberboard (MDF), which was used in place of solid wood in furniture, cabinets, and paneling. Its specialty pulp products were of three varieties, produced in two mills located in Georgia and Florida. Chemical cellulose was used to produce a wide variety of common products (including cigarette filters, photographic film, cellophane, paint, cement, printing ink, explosives, and textile fibers). Fluff pulps found their way into disposable products, such as diapers and personal hygiene products. Specialty paper pulps were the primary material used in filter papers, decorative laminate papers, and special printing and writing papers.

In the mid- and late 1990s, the timber and pulp industries both were experiencing hard times, a fate shared by Rayonier. Its 1992 sales (while owned by ITT) stood at $974 million, with a $103 million loss in the income column; 1993 saw sales drop to $936 million. After Rayonier became an independent company again, its sales rose gradually at first ($1.07 billion in 1994 and $1.26 billion in 1995), but then began to decline again. For 1996, sales totalled $1.18 billion (with a loss of $98 million); 1997 sales dropped again, to $1.1 billion. Although the U.S. timber market was relatively strong in the late 1990s, there was a sharp decline in the demand for timber from New Zealand, and pulp prices were also dropping. For example, a grade of pulp that sold for $975 a ton in mid-1995 brought only $500 a ton in early 1997. In a January 1998 press release, CEO Gross attributed this problem to developing economies in Asia, which had been a key market for these products: “The turmoil in Asia has clouded the near-term outlook.” In early 1998, there was some hope that at least the pulp market was recovering, as the rating firm Goldman Sachs raised its ratings on a number of pulp-related companies, including Rayonier.

In its 1997 annual report, the management of Rayonier set out a detailed strategy for its coming years. Aware of the possibility that Asian economies might continue to falter, Rayonier anticipated another “challenging year.” In a belt-tightening mode (adopting cost controls and reducing discretionary spending), the company planned to adopt a four-pronged strategy: (1) to manage its U.S. and New Zealand timber acreage for strong cash flow; (2) to enhance its position as the world’s leading supplier of specialty pulp, an already highly profitable segment; (3) to pursue strategic opportunities in its timber and wood product operations; and (4) to remain in the top quartile of company financial results in the industry. Two early results of this strategy were a cut of $15 million in operating costs in 1997, plus the announcement of a worldwide timberland alliance with Grantham, Mayo, Van Otterloo & Co. LLC (GMO), a global investment management firm based in Boston. GMO chose Rayonier in early 1998 to manage its forest and timber operations, in return for an option to co-invest in the GMO properties.