Pope & Talbot, Inc.

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Pope & Talbot, Inc.

1500 S.W. First Avenue, Suite 200
Portland, Oregon 97201-5830
U.S.A.
Telephone: (503) 228-9161
Fax: (503) 220-2722
Web site: http://www.poptal.com

Public Company
Incorporated: 1852 as Puget Mill Company
Employees: 2,229
Sales: $546.3 million (2002)
Stock Exchanges: New York Pacific
Ticker Symbol: POP
NAIC: 321113 Sawmills; 322110 Pulp Mills

One of the oldest forest products companies in the United States, Pope & Talbot, Inc. specializes in pulp and wood products. The firm operates three pulp mills in Oregon and British Columbia that have an overall yearly capacity of 830,000 metric tons. These mills produce northern bleached softwood kraft chip and sawdust pulp for use in the production of newsprint, tissue, and coated and uncoated paper. Pope & Talbot's pulp business, which generates about 60 percent of overall revenues, distributes its products to customers in more than two dozen countries, including the United States and Canada as well as nations in South America, Europe, and the Asia-Pacific region. The company's wood products side includes three sawmills in British Columbia and one in South Dakota with a combined annual capacity of about 640 million board feet of lumber. These four sawmills produce dimension and board lumber, wood chips, and other byproducts. The primary customers of Pope & Talbot's wood products business are in the United States and Canada.

Early History: Quickly Becoming the Dominant Lumber Company on Puget Sound

Andrew Jackson Pope and Frederic Talbot, two ambitious young men from Maine, arrived in San Francisco on December 1, 1849, after a grueling 51-day journey around South America on a number of different steam ships. Although they were exhausted when they stepped ashore, the excitement of San Francisco, which had grown from a population of 6,000 to 20,000 in just six months, overwhelmed the two Easterners. Pope and Talbot immediately recognized the potential for starting a new business, and on the following day, they joined with partners Lucius Sanborn and J.P. Keller to establish a company to operate barges in San Francisco bay.

A short two months later, the partners were able not only to pay for the cost of their new barges and boats, but also to turn a profit of more than $800. After buying out Sanborn's interest, Pope, Talbot, and Keller decided to enter the lumber business. A number of disastrous fires in San Francisco had convinced the partners that demand for lumber would remain high. Soon they opened a lumberyard and began transporting consignments of the product from one area to another. A stroke of good fortune occurred when Frederic Talbot's older brother, W.C. Talbot, arrived in California with his brig, the Oriental. A large, seaworthy vessel, the Oriental provided the firm with a greater range of transport. When Frederic Talbot decided to permanently return to the East Coast and open a business in New York, his older brother replaced him as a partner in the company.

For a short time, the partners shipped lumber from Maine to California through arrangements with Pope's relatives. They found this impractical as a long-term strategy, however, especially given the enormous demand for lumber in and around the San Francisco area. They built their own mill in the Oregon Territory on Puget Sound, on a site that Native Americans called Teekalet, or "Brightness of the Noonday Sun"; settlers renamed it Port Gamble. By 1853 the partners' mill was producing nearly 2,000 board feet of lumber per day. Four years later production had jumped to a total of eight million board feet for the year, and the company (which had been christened Puget Mill Company in 1852) was known as the largest and most successful business on Puget Sound.

The late 1850s brought an Indian war, a gold rush that destabilized the labor market, and a short period of overproduction as a result of new lumber mills established on Puget Sound. Yet the mill at Port Gamble continued to prosper. In response to a growing demand for lumber during and after the Civil War, the Puget Mill Company added new equipment and began to acquire smaller mills in the area, including important mills on Camano Island and Port Ludlow. By 1879 the company was producing more than 200,000 board feet per day and nearly 70 million feet per year.

As the 19th century progressed, leadership of the firm changed hands. J.P. Keller died in June 1862, and was replaced as a partner of the firm by mill superintendent Cyrus Walker. Andrew Pope died in September 1878, and Captain Talbot in August 1881. William H. Talbot, the son of Captain Talbot, had been groomed by his father in every aspect of the lumber business, and when the elder Talbot died, the son quickly became the driving force behind the company, relying heavily on Cyrus Walker's 28 years of experience in the mill. In 1882 the total capacity of all the Puget Mill operations amounted to 99 million board feet of lumber per year. In 1885 the number of cargoes of lumber shipped from the mill at Port Gamble alone reached 49; by 1888, the number had risen to 78. The company also owned one of the largest shipping fleets for the transportation of its lumber, with 14 ships carrying lumber to customers in Japan, Hawaii, Australia, South America, China, Korea, India, and South Africa. During this same period, the Puget Mill Company was also purchasing enormous tracts of timberland in order to maintain a reliable source of wood for its mills; by 1892, the firm reported ownership of 186,000 acres.

During the 1890s and the years immediately following the turn of the century, Puget Mill Company expanded its marketing operations and opened three new offices in San Francisco. The development of railroad traffic heralded even greater prosperity for the company, because it transformed the isolated state of Washington into the nation's largest distributor of lumber. As timberlands in Wisconsin, Michigan, and Minnesota were depleted, demand for Washington's lumber skyrocketed. The number of mills in Washington had grown from 46 in 1870 to 310 by 1890. By 1906 there were more than 900 lumber mills in the state producing 4.3 billion board feet of lumber.

Following Setbacks, Sale of Company in Early 20th Century

Beginning in 1907, however, the Puget Mill Company suffered a series of setbacks. When the state of Washington levied a tax increase on the acreage of timberland held by the company, Puget Mill's extensive holdings nearly became a liability. In addition, equipment used in the company's mills had become antiquated, and Puget Mill's operations were running inefficiently. In 1908 the company sold the last of its aging fleet of schooners, once the largest lumber armada on the West Coast. The company joined an organization that chartered the tonnage for shipment, thus relieving Puget Mill Company of the burden of maintaining its own fleet. By the end of World War I, the company had grown large, diverse, and somewhat cumbersome, with some 15 corporations under the direct management of Puget Mill. Labor unrest, which occurred throughout the Northwest region during this time, affected all of the company's holdings.

In July 1925, William Talbot, exhausted and in ill health, decided to sell Puget Mill Company to the Charles R. McCormick Lumber Company. McCormick, a native of Michigan, had arrived in Portland, Oregon, in 1901. He renovated a dilapidated millsite at St. Helens on the Columbia River, and from there he created a lumber empire that grew to become one of the largest on the Pacific Coast. McCormick purchased all of Puget Mill Company, including mills and timberlands, at a price of $15 million. Talbot, known as a shrewd businessman, made McCormick agree to build a new mill at Port Gamble, with Puget Mill Company holding a mortgage on all the mills, timberlands, and logging camps operated by McCormick.

From the beginning of the takeover, McCormick's management team made serious errors and miscalculations. Modernizations and improvements at Port Ludlow and St. Helens, as well as the new mill at Port Gamble, were plagued by cost overruns. McCormick soon faced rising interest rates, amortization payments, and annual taxes of more than $1 million. As his debts steadily increased, McCormick devised a strategy of expansion, hiring a larger sales staff and increasing production. Costs continued to outrun revenues, however, and by the start of the Depression in 1930 the company had posted a loss of $858,587. The company's situation only worsened with the economic problems brought on by the Depression.

Rebirth of Independent Pope & Talbot: Late 1930s

After William Talbot died, George Pope, Sr., assumed the position of president of Puget Mill Company and began to pressure McCormick to resign. When McCormick's expansion strategy failed to revitalize the company, he vacated his position in December 1931. Pope was then elected chairman of the board of Charles R. McCormick Lumber Company, with the intention of protecting the interests of the Puget Mill Company. He immediately appointed managers who exemplified his own financially conservative viewpoint, and began to reduce the debt incurred by McCormick. By 1937 all the bank loans and a significant portion of the mortgage bonds were retired. In 1938 the Puget Mill Company brought a suit of foreclosure against the Charles R. McCormick Lumber Company. Unable to pay its obligations of over $7 million, the McCormick Company was forced to cede all of its holdings to the owners of Puget Mill. The principals of the foreclosure suit, George Pope, Sr.; George Pope, Jr.; Frederic C. Talbot; and Talbot Walker, all descendants of the original owners, reacquired the company their forefathers had labored to build.

Company Perspectives:

Pope & Talbot's strategic focus and corporate structure encompass the complementary businesses of two forest industry groups: wood products and pulp. The Company manufactures softwood lumber and market pulp in the U.S. and Canada.

We have continually prospered in the face of cyclical markets since 1849 by planting, cultivating, and creating value for our customers, communities, and shareholders. Our achievements have created a foundation for continuing our cycle of success in the future.

George Pope, Sr., became president of the company, which was renamed Pope & Talbot, Inc. in 1940. Before any analysis and reorganization of the lumber operations and steamship activities could take place, however, World War II began. George Pope, Sr., became chairman of the board, allowing his son, George Pope, Jr., to assume the position of president and deal with the demands of the war years.

Pope & Talbot mills operated at full capacity during the entire war. The company produced lumber for panel bridges used in the invasion of Europe, tent poles, and Signal Corps material for communication lines. Company lumber was used for the construction of naval housing, and the company's fleet of steamships made vital contributions to the American war effort. Pope & Talbot vessels transported the supplies necessary for waging war in every area of conflict, and stopped at ports including Murmansk, Bizerte, Salerno, Guadalcanal, and Okinawa. The company also suffered casualties: four ships were sunk during the war, including the S.S. West Ivis, which lost its entire crew. During the height of worldwide hostilities, Pope & Talbot was responsible for more than 75 ships. The war helped improve the financial position of the company, which was one of the three largest lumber producers in the entire Northwest by the end of the war.

Developing into Fully Integrated Forest Products Company in Postwar Era

The future appeared especially promising for the company's steamship operations during the postwar years: industry along the Pacific Coast needed large quantities of bulk materials, while the East Coast needed lumber and other products from the western United States. However, volatile labor relations plagued the company. In 1948 a three-month strike by dock workers cost the firm more than $1.25 million, and a series of strikes in 1954 caused Pope & Talbot to lose a significant portion of its steamship cargoes. By 1958 the company was down to one shipping route, and another year of strikes in the maritime industry during 1959 brought its vessels to a standstill. Competition from the railroad industry also began to take business away from shipping. As a result, in 1963 Pope & Talbot decided to terminate shipping operations by selling the four remaining vessels in its once-proud fleet.

In contrast to its shipping activities, the company's lumber operations were highly successful. Having purchased a large tract of timberland near Oakridge, Oregon, in 1946, management assured itself of adequate timber holdings for the foreseeable future. By 1950 the company owned over one billion board feet of timber ready for cutting, and during the next decade it opened new mills in the United States and Canada. Pope & Talbot also implemented a diversification strategy which included building a particleboard plant, a veneer mill, and a wood treatment facility, and in 1961 the company purchased a plywood plant. These moves brought the company closer to fulfilling its goal of a fully integrated wood products program.

In 1963 George Pope, Jr., resigned as president of the company and was replaced by Cyrus T. Walker, a descendant of one of the company's early partners. In 1966 Pope & Talbot reported that its lumber division provided 61.6 percent of its revenues, plywood 13.9 percent, veneer 7.1 percent, particleboard 6.2 percent, and hardboard 6.2 percent. Net earnings increased from $717,000 in 1965 to $1.2 million in 1966. In 1968 sales increased an astronomical 73 percent over the previous year, totaling some $3 million. The company's success lay in the fact that management was moving quickly to take advantage of growing markets for new wood products. In 1969 the firm continued its expansion strategy by purchasing another mill in Canada, procuring cutting rights to more than a million acres of timberland in Canada, and constructing a new log utilization plant.

Key Dates:

1849:: Andrew Jackson Pope and Frederic Talbot, along with two other partners, establish a company to operate barges in San Francisco bay.
1852:: After opening a lumberyard and beginning construction of a lumber mill at Port Gamble, Washington, the company takes the name Puget Mill Company.
1892:: Firm reports owning 186,000 acres of timberland.
1925:: Puget Mill Company is sold to Charles R. McCormick Lumber Company.
1938:: Descendants of the original owners of Puget Mill reacquire the company.
1940:: Puget Mill Company is renamed Pope & Talbot, Inc.
1963:: Company ends its shipping operations, selling the last four vessels in its fleet.
1972:: Pope & Talbot is listed on the New York Stock Exchange.
1978:: Company expands into the pulp business with an investment in a bleached kraft pulp mill in Halsey, Oregon.
1980s:: Pope & Talbot diversifies into consumer products by either acquiring or building diaper and tissue plants.
1985:: Firm's real estate and timber holdings in the state of Washington are spun off to shareholders.
1992:: Large sawmill in Castlegar, British Columbia, is purchased.
1995:: Pope & Talbot shuts down its 142-year-old sawmill at Port Gamble.
1996:: Diaper business is sold to Paragon Trade Brands, Inc.
1998:: The company's private label tissue business is divested; Pope & Talbot gains 60 percent stake in Harmac Pacific Inc., operator of a pulp mill near Nanaimo, British Columbia.
1999:: Company purchases full control of Harmac Pacific.
2001:: Pope & Talbot buys the Mackenzie pulp mill in northern British Columbia from Norske Skog Canada.

Late 1970s and 1980s: Expanding into Pulp, Tissue, and Diapers

The company changed leadership in 1971 when Cyrus Walker retired and the fourth generation of Popes and Talbots assumed control. Peter T. Pope was elected chairman of the board, and Guy B. Pope was appointed president and chief operating officer. Under their tenure, the firm continued to grow. In 1972 Pope & Talbot was listed on the New York Stock Exchange, and the following year the company surpassed $100 million in revenues. When the housing and construction industry was hit hard by a recession during the mid-1970s, Pope & Talbot made plans to enter the pulp and paper industry, which would allow the company to use all of the yield from its timberlands. Consequently, in March 1978, the firm invested $24 million in a joint venture with American Can Company to operate a bleached kraft pulp mill near Halsey, Oregon. (It took full control of this mill in 1983.)

During the 1980s, Pope & Talbot insulated itself as much as possible from the cyclical nature of the housing and construction industry. The pulp mill at Halsey took the company into an entirely new, and highly profitable, direction. Pulp is made from softwood chips, hardwood chips, and sawdust, and is used to manufacture newspaper and printing and writing grade paper. Soon the company had major contracts throughout the Pacific Northwest to sell its pulp. Not content with just pulp production, Pope & Talbot began to diversify into the consumer products market by either acquiring or building diaper and tissue plants. By the early 1990s, Pope & Talbot listed two tissue plants and six diaper plants as part of its holdings. Manufacturing an entire line of napkins, paper towels, and facial and bath tissues from 100 percent recycled paper for private label customers became highly profitable. The Ultra Thin disposable diaper developed into the company's most lucrative product. By 1993 Pope & Talbot's wood products were bringing in approximately 48 percent of revenues, while its pulp, tissue, and diaper products were generating 52 percent.

During this same period, the company gradually reduced its exposure to the timber market of the U.S. Pacific Northwest, where concerns over the environmental impact of logging was reducing logging activity and making the cost of the timber more expensive. In 1985 Pope & Talbot spun off to its shareholders its real estate and timber holdings in the state of Washington, creating a limited partnership called Pope Resources. Four years later, its sawmill in Oakridge, Oregon, was sold, and then in 1992 the company sold its remaining Oregon timberlands. Continuing to shift its wood products operations north of the border, Pope & Talbot purchased a large sawmill in Castlegar, British Columbia, from Westar Group Ltd. for $19.4 million. The shift away from the U.S. Pacific Northwest culminated on November 30, 1995, when Pope & Talbot closed its 142-year-old sawmill at Port Gamble. The company now operated three sawmills in British Columbia with total annual capacity of 465 million board feet, along with two smaller mills in the Black Hills region of the United States, in Spearfish, South Dakota; and Newcastle, Wyoming.

Late 1990s and Beyond: Focusing on Pulp and Lumber

The company moved in the late 1990s to focus on two core areas of the forest products market: lumber and pulp. In February 1996 Pope & Talbot sold its disposable diaper business to Paragon Trade Brands, Inc. for $50.5 million in cash and $14.5 million in Paragon stock. The diaper business, which had come under intense price competition from industry giants Kimberly-Clark Corporation and the Procter & Gamble Company, had generated about $157 million of revenues in 1994, or 24 percent of the total of $660 million. Then in February 1998 Pope & Talbot sold its private label tissue business to an investor group for $147 million, completing its exit from the consumer products-sector. The tissue operations had generated 29 percent, or $136 million, of the 1997 revenues of $468 million.

Seeking to expand its pulp operations, Pope & Talbot gained a 60 percent stake in Harmac Pacific Inc. by the end of 1998, through a hostile takeover. Based in Vancouver, Harmac operated a pulp mill near Nanaimo, British Columbia, with an annual capacity of 370,000 tons of northern bleached softwood kraft pulp. In November 1999 Pope & Talbot purchased the remaining minority stake in Harmac, which was subsequently merged into the firm's Canadian subsidiary, Pope & Talbot Ltd. Peter T. Pope stepped down as CEO at the end of July 1999 and was succeeded by Michael Flannery, who had been president of the company since September 1995 and before that had been head of the wood products operations for several years. Flannery became chairman as well in August 2000, although Pope remained on the board of directors. Also in 2000, Pope & Talbot closed its sawmill in Newcastle, Wyoming, because of reduced availability of public timber in the Black Hills region.

Pope & Talbot further bolstered its pulp production in June 2001 when it completed a $104.4 million acquisition of the Mackenzie pulp mill in northern British Columbia from Norske Skog Canada. This mill, which used chips and sawdust to produce a fine grade of northern bleached softwood pulp, had an annual capacity of 230,000 metric tons. Unfortunately, Pope & Talbot around this time began to be buffeted by the severe economic downturn that had a particularly depressive effect on pulp prices. Concurrently, a trade dispute erupted between the United States and Canada following the April 2001 expiration of the two countries' Softwood Lumber Agreement. The United States subsequently slapped duties on Canadian lumber imports, forcing Pope & Talbot to pay $14.1 million in lumber duties during 2002. One result of these developments was that the company posted net losses of $24.9 million and $21 million for 2001 and 2002, respectively.

During the first nine months of 2003, Pope & Talbot recorded a net loss of $19.1 million. The corporation continued to be affected by the lumber trade dispute and was further hurt by an appreciating Canadian dollar, which resulted in higher manufacturing costs for the firm's Canadian operations. Some potentially positive news for the company's future came late in the year with the announcement of a proposed agreement between the United States and Canada on the lumber dispute. Nevertheless, Pope & Talbot—because it was a small player in a consolidating industry increasingly dominated by global giants—was likely to continue to be forced to ride the cyclical ups and downs of its industry without having much in the way of resources to smooth out these fluctuations.

Principal Subsidiaries

Pope & Talbot International Ltd. (Canada); Pope & Talbot Ltd. (Canada); Mackenzie Pulp Land Ltd. (Canada); Pope & Talbot Mackenzie Pulp Operations Ltd. (Canada); Pope & Talbot Wis., Inc.; Penn Timber, Inc.; Pope & Talbot Relocation Services, Inc.; P&T Power Company; Pope & Talbot Pulp Sales USA, Inc.; Pope & Talbot Pulp Sales Europe SPRL (Belgium); Pope & Talbot Lumber Sales, Inc.; Halsey Cl02 Limited Partnership; P&T Community Trust (Canada); P&T Funding Ltd. (Canada); P&T Funding Limited Partnership (Canada).