WoodPro TechNote on wood industry performance

WoodPro TechNote 2005-1

The best of times, the worst of times

The headline jumped out at me as I posted it in The WoodPro Chronicle.

“2004 as good as it gets for wood products industry.”

Scanning the article, I read of housing starts, and the resulting demand for structural wood products, that defied all expectations for the year. "I don't know that it was a record year for the industry, but I would be confident that it ranks right up there with the best on record," one industry expert is quoted as saying. One West Coast county realized a net increase of nearly 100 mill jobs.

The positive news seems to be coming from all wood industry sectors.

• International Builders' Show Sets New Records In Orlando (1-31-05)
• Home Starts Rebound In December, Single-Family Production Sets A Record In 2004 (1-19-05)
• Canadian home sales hit record in 2004 (1-18-05)
• Kraftmaid Announces Addition of Western Manufacturing Plant in West Jordan, Utah (2-3-05)
• American Woodmark Celebrates Opening of New Manufacturing Facility (1-8-05)
• Summerville wood-products companies hiring 110 employees for new facilities (1-25-05)
• Rarity in the timber industry: Company to build sawmill (1-25-05)
• Greenstone strandboard mill still a go (1-8-05)
• A too-familiar sight: plywood flies off shelves (9-12-04)
• Pulp mill sets production record (12-14-04)

And accordingly, the public companies seem to be racking it up…

• Stanley Furniture breaks records in 4th quarter (2-9-05)
• Hooker Furniture's 2004 Net Income Up 24% (1-18-05)
• American Woodmark Corporation Announces Record Results (8-25-04)
• G-P full-year net income more than doubles in 2004 (2-1-05)
• International Paper Reports Higher Fourth-Quarter Earnings from Continuing Operations (2-3-05)
• La-Z-Boy Reports Third Quarter Net Sales Increase (2-9-05)
• MASCO Corporation Reports Record Third Quarter (11-2-04)
• Temple-Inland Increases Cash Dividend, Approves Share Repurchases and Announces Stock Split (2-4-05)
• Weyerhaeuser Reports Net Earnings of $1.3 Billion for 2004 (1-21-05)

And yet, how good is it, really? Are we really in a period where our industry is “as good as it gets”? Are we reaping the benefit of leaner operations, better management, and stronger markets caused by better products? Or are the headlines reflecting an anomaly, one due perhaps to a fundamental change in the relationship between North American wood products companies and the way their products reach the markets? And what of the people in the industry – is everyone reaping the benefit of working in an industry that’s “as good as it gets”?

Let’s drill down past a few of the headlines and explore the facts.

• Stanley Furniture – while reporting record sales, Stanley attributed most of their improvement to “grabbing market share from competitors”. Left unsaid, is that many of their American competitors have gone out of business, leaving a void for the remaining competition. And while claiming improvements in efficiency for their operations, they credited “intelligent outsourcing” for improvements in “styling and value” in their products. Translated: “inefficient” operations were outsourced to other (probably foreign) companies, and the resulting improvements in “efficiency” allowed Stanley to offer a wider range of products at a lower cost than if they had been made in the “inefficient” operations.

• La-Z-Boy – Net sales increases near year’s end didn’t necessarily mean good things for La-Z-Boy, as the numbers also showed a 27% decrease in profits for the same period. The CEO points a finger in both directions of the supply chain: “Operating margins continue to be weaker than last year primarily as a result of continued pressure on margins from increased raw material pricing [our emphasis]. During the quarter we began to see improvements in our margin trend as the impact of our price increases to our customers [again, our emphasis] began to take effect. These increases will be fully implemented by the end of our fourth quarter."

Increasing prices to the customer is not a winning strategy in today’s marketplace; and the search for lower raw material costs usually leads overseas, these days. The impact has been realized in several closed North American facilities, including two closed La-Z-Boy plants in North Carolina and another, one of the most honored names in Pennsylvania manufacturing, Pennsylvania House Furniture, at the end of 2004.

However, La-Z-Boy’s finger-pointing operational strategy is lauded by many stock analysts, including one who says, “Last week, investors bid up shares of La-Z-Boy, apparently on news that the U.S. Commerce Department will impose tariffs on furniture imported from China. If investors are still thinking of La-Z-Boy as a domestic manufacturer that would reap maximum benefit from tariffs, they may be in for a surprise. Instead, investors may want to focus on La-Z-Boy's ability to execute a strategy that utilizes the best available source of product instead of a reliance on any one source [our emphasis].” Nor is this strategy unique to La-Z-Boy; in fact, the clear trend is that the most profitable US furniture companies are the ones taking their operations overseas. At least, for now…

• The upbeat financial reports of Weyerhaeuser, Temple-Inland, Masco, International Paper, Georgia-Pacific, and many others too numerous to mention all contain disclosures of closed or sold operations. LP Corporation, in fact, was lauded by stock analysts as it cut its number of operations to less than half the 106 it had in 1999.

Clearly, North American wood products companies are making improvements in productivity and are in most cases being rewarded with increased profitability, due to a complementary increase in housing demand driven by historically low interest rates. Just as clearly, this increased productivity is coming, at least partially, through technological improvements, outsourcing, and plant closings that reduce the number of US workers employed in the industry. Most company managers and industry analysts view this as a natural, necessary, and beneficial “leaning” of the industry. And investors tend to agree.

But, even as Charles Dickens so brilliantly pointed out in his “Tale of Two Cities”, the best of times can contain within them, hidden in deeply personal, human stories, the worst of times. From the employee point view, our industry is in turmoil. Certainly, there are examples of companies that have seemingly increased employee satisfaction and safety through operational and technological improvements. But these benefits are being enjoyed by fewer and fewer American workers, and they are increasingly fragile. Among those who remain employed in the North American wood products industry, uncertainty prevails. Employees remain on guard for the newest automated machine center, the next plant closing announcement, the latest management reorganization, the ominous headline announcing another overseas competitor.

Perhaps, it all works out. Perhaps, our displaced employees are finding better jobs and improving their life. Perhaps, the benefit of more jobs elsewhere in the world more than compensate for the loss of them here.

But undoubtedly, our American wood products industry is suffering from a hidden threat…the loss of its most valuable resource, the wood products employee. More employees mean more ideas, more improvements, more new products, more energy, more constituents, and come to think of it, more customers. The health of the US wood products industry can’t be judged just by short-term profit statements; it must be judged by the total throughput of all resources utilized for and by the industry. All the machines, all the plants, and yes, all the employees. If our wood industry leaders can’t get us back on track to increasing the total throughput of these resources in America, the names of our American wood products companies may become no more than placeholders for prosperity in other parts of the world. And ultimately, even the placeholder may no longer be needed.

We call for American wood products leaders to make the necessary investment in plants, research, technology, innovative management, and young, energetic, well-trained new employees; and to place corporate goals second to national good. The headlines above affirm that some companies are doing just that, and are being rewarded for it. Certainly, wood industry leaders in the most competitive foreign countries are supported by consensus recognition there that what is good for their companies (in terms of actual, on-the-ground operations) is good for their countries. Sometimes it seems that only in 21st century America is capitalism so pure that maximum corporate profits count more than the benefit the company makes to the country, to the community. But in reality, patriotism is not at all foreign to our industry…communities all over the country still stand as testament to the guiding leadership and contributions of the giants of our wood products industries in days gone by.

The fate of our industry now lies in the leadership decisions of the next years, the next months, even the coming weeks. In 2015, will we in the American wood products industry be reporting the best of times, or the worst of times?