LENS Letter to Temple Inland
April 24, 1997 Mr. Richard Warner Dear Richard, My colleague, John Goodrich, and I very much enjoyed our recent telephone discussion. It was a pleasure to catch up on the progress of the company, and to hear your observations regarding its various segments. The extent to which you have been successful in reducing the cyclicality of your earnings was certainly manifest in your latest quarterly earnings report: the bank and home building were strong, whereas the paperboard side actually operated at a loss. As we mentioned to you, we have been seeing a pattern among certain companies in America who are not afraid to redefine what their true "core" business really constitutes. In the end, a company is in business to provide a competitive return to its shareholders, and as various sectors of the economy inevitably remake themselves, a company should profitably adapt its expertise to meet the new challenges and opportunities that lie within the new environment. One such company, we believe, has been Ashland. Historically their core business has been refining, and they have traded on the market in tandem with the woes and fortunes of that segment. Refining, however, has become a highly capital intensive, low-margin commodity business, which does not appear capable of providing acceptable levels of return on invested capital. As a result, Paul Chellgren (CEO of Ashland) has envisioned a new strategy, to de-emphasize the commodity portion of the business, and move more toward the niche side where margins are better and capital investment is lower. The strategy of the future is service and marketing-based, using hydrocarbon derivatives with existing trade names as the new core. The old core will presumably find its way in a joint venture or other aggregation that will provide it with better operating synergies on a global basis. The parallels of refining to your paperboard business, while less than perfect, are there. Both are commodity-in/commodity-out oriented, with narrow margins, subject to larger economic cycles, and capital intensive. The frustration you must feel at times with the lack of return on invested capital, except for perhaps one year in four or five, I can only imagine. It may well be that an alliance/aggregation of your paperboard business with another, or other, entities could yield two benefits to you: 1) obvious scale synergies, and 2) removal of a low return capital base. Once accomplished, your new "core" suddenly becomes a "consumer service" business (financial services and building products), where margins are higher and more subject to brand name development, and invested capital is reduced. Your new core should be accorded a higher multiple, with better overall values resulting to your shareholders. Furthermore, your timberland holdings, which can now become de-linked from your paperboard business, take on more of the characteristic of an asset that can be profitably disposed of for the benefit of your shareholders. We would look forward to discussing these thoughts further with you as you continue to assess your strategic alternatives. Incidentally, we were sorry Bob Monks and Mr. Grum were unable to connect on your recent trip east. Hopefully, the new date for May 22nd will work. Sincerely yours, John P.M. Higgins |
|