Simpson Paper Co.-Exits coated papers business to focus on packaging grades

Simpson Paper Co. is a division of Simpson Investment Co. The company also owns a 50% stake in a large, modern pulp mill in Chile. Until a series of asset sales beginning in 1994, Simpson was one of the largest U.S. suppliers of cover and text grades, as well as a supplier of printing and writing grades. Simpson's focus is now on linerboard and packaging grades, plus small quantities of market pulp.

Until 1985, Simpson was essentially a regional player with a number of smaller printing/writing mills situated in fast-growing markets, primarily California. But starting in the mid-1980s, Simpson began to expand aggressively by purchasing five mills in Texas, Washington, Michigan, Vermont, and Oregon. The majority of these facilities had been older, struggling mills in need of significant upgrading. Some of these mills were improved in the late 1980s, but they are predominately still subpar facilities. The company also expanded internationally by forming a joint-venture partnership in a Chilean market pulp facility.

A SERIES OF MILL CLOSURES. Within the last five years, Simpson has dramatically reduced its grade portfolio (see Figure 1). In December 1992, Simpson initiated a major restructuring of its California operations, necessitated by reduced wood supplies and the need for heavy environmental expenditures. The company shut down its Humboldt market pulp mill in Fairhaven, Calif., and cut production in half at its printing/writing papers mill in Pomona, Calif.

In 1994 and 1995, the company continued its internal focus, concentrating on shutting down unprofitable operations and restarting others in order to capitalize on strong market demand. Simpson shut down two paper machines and converted another to pulp production. In late 1994, more corporate announcements were made including a capital improvement plan for its Tacoma, Wash., mill (which includes a recycling plant), the restart of a pulp mill and machine in Anderson, Calif., and the restart of a recycled corrugating medium machine in Pomona. The company permanently closed its text and cover mill in Miquon, Pa., in August 1995.

In 1996 and 1997, a series of major mill purges has left Simpson to focus on packaging grades and pulp and to exit the coated papers and text & cover businesses. This represents a dramatic shift from the corporate plan outlined in January 1996, when the company's primary business focus was coated printing and specialty papers, along with packaging and pulp. Near term, the company's mill portfolio will include only the Tacoma kraft linerboard, market pulp, and specialty packaging mill; the Cellulosa del Pacific pulp mill in Chile; and Simpson Timber. (see Figure 2).

UPGRADING OLDER FACILITIES. Simpson has a history of purchasing inefficient mills and upgrading them with the help of significant capital infusions. In September 1985, Simpson purchased Champion International Corp.'s kraft linerboard/market pulp mill at Tacoma. Close to $200 million has been invested at the mill since 1985 to expand production, swing more into bleached grades, improve quality, and reduce environmental impact.

Simpson has invested nearly $60 million in capital improvements at the Tacoma mill since September 1994. The centerpiece of the capital program was the installation of a new recycling plant with capacity to process 500 tpd of old corrugated containers (OCC). The OCC plant allows the mill to reduce its reliance on woodchips and lower its raw material costs. The plant started up in 1995.

The mill currently produces 870 short tpd (approximately 315,000 short tpy) of natural kraft and mottled white linerboard, high-performance linerboard, and kraft bag paper on two fourdrinier paper machines. In addition, the mill produces 300 tpd of bleached and unbleached softwood market pulp.

As part of the capital project, Simpson also installed a new high-performance press on the No. 14 paper machine, a 264 in. wide Beloit fourdrinier. The press allows the mill to maintain high product quality while using a much larger proportion of recycled fiber in its papermaking operations. The mill's linerboard products contain up to 50% recycled fiber.

In early 1987, Simpson purchased Champion's floundering printing/writing papers mill in Pasadena, Texas. The company soon embarked on a capital investment program designed to improve productivity, product quality, and customer service. Projects have included the restart of an idled pulp dryer in September 1987 and a $38 million rebuild and speedup of No. 24 coated paper machine in 1991.

In mid-1994, Simpson shut down selected paper machines and converted another to pulp production. The shutdowns left the mill with three machines: PM Nos. 21 and 23 produce about 90,000 tpy of hardwood and softwood pulp, and PM No. 24 continues to produce about 160,000 tpy of coated free-sheet. More work was intended for the mill but will not likely be implemented as Simpson has targeted the capital-intensive Pasadena mill for sale.

In October 1987, the company acquired Chesapeake Corp.'s white papers mill in Plainwell, Mich. Simpson upgraded the three-machine facility, reinforcing its position as one of the leaders in the premium coated free-sheet market, but the mill was sold to the investor group The New Group, Inc., in mid-1997. The Plainwell mill now operates as Plainwell Paper Co. The 100,000 tpy Plainwell mill produced roughly two-thirds recycled-content premium coated and uncoated printing papers and one-third release liner grades.

Next, in 1990 (Simpson Investments' centennial year) the company purchased a small nonintegrated one-machine facility in Gilman, Vt., from Georgia-Pacific Corp. This mill, which was renamed the Centennial Mill, produces safety papers. Simpson wants to sell this mill as well.

Simpson's most recent purchase was the West Linn facility, which it acquired from James River Corp. in December 1990 for $67 million in cash. A motivating factor in the West Linn purchase was a desire to expand Simpson's recycled paper production. West Linn, Oregon's oldest continuing operating paper mill, produced about 180,000 tpy of double-coated book stock and used about 10,000 tpy of office wastepaper (primarily sorted white ledger and computer printout) for its 90,000 tpy onsite deinking plant.

Simpson permanently closed the West Linn mill by September 1996 after it failed to find a buyer since putting the mill up for sale in early 1996. The mill no longer fit within the corporate strategy as a core business area. In April 1997, however, the mill reopened under new management. West Linn Paper Properties Co., a newly formed subsidiary of Belgravia Investments Ltd. of Vancouver, B.C., signed an agreement with Simpson to purchase all of the assets of the 108-year-old mill.

NO MORE CALIFORNIA MILLS. In the past two years, Simpson has sold, or announced plans to sell, all of its California mills (see Figure 2). The Ripon, Calif., mill was sold in mid-1996. And the Anderson and Pomona mills are currently up for sale. The Anderson and Pomona white papers mills are small to mid-size facilities whose main strength is their proximity to major markets.

The Anderson mill's PM No. 2, which manufactured 70,000 tpy of uncoated free-sheet, closed in June 1994. However, in February 1995 the machine restarted, this time manufacturing about 55,000 tons of bleached packaging papers, ranging in basis weights from 30 to 60 lb, to be used in bags and flexible packaging. The mill has one on-machine and one off-machine coater.

Anderson's pulp mill, which was "indefinitely" closed in May 1993, also reopened in February 1995, with an estimated capacity of 90,000 tpy. Originally, PM No. 2 was to be used to dry pulp, but with the increased demand for bleached packaging papers, the company decided to convert the machine and capitalize on the growing packaging papers segment. PM No. 1 continues to produce about 100,000 tpy of coated free-sheet made from a blend of hardwood and softwood pulps. Some of the output is sold as market pulp. Before the Shasta pulp mill shut down in May 1993, all of the 250 tpd (90,000 tpy) of production was integrated into production of paper in the adjacent mill.

In late 1992, Simpson shut down PM No. 9 at Pomona, cutting printing/writing paper production at the mill in half due to weak pricing and unacceptably high production costs for certain paper grades.

Then in early 1993, Simpson shut down the mill's deinking plant. The San Gabriel mill's bleached deinked pulp capacity was estimated at 60 tpd and had been the company's only deinking plant. However, in November 1994, the company restarted its No. 9 paper machine at the San Gabriel mill as a 100%-recycled corrugating medium machine. Pomona already uses more than 26,000 tpy of wastepaper for its remaining text and cover papers production. Pomona also serves as a distribution center and converting facility for paper produced at other Simpson mills.

A fourth California facility, the Humboldt market pulp mill in Fairhaven, was closed indefinitely in first-quarter 1993. The mill had an estimated capacity of 225,000 tpy of bleached kraft market pulp.

To narrow its focus on coated and specialty papers (i.e., coated one-side label, coated sheets and web, safety and packaging, and pulp), Simpson finalized the sale of its text and cover business, including the Ripon and Vicksburg mill to Fox River Paper Co. in June 1996.

The Ripon mill is a nonintegrated facility housing one small machine (120 in. trim). It produces a variety of commodity and specialty uncoated free-sheet papers including recycled text and cover, colors, and cotton-content bond. The Vicksburg mill is a small facility which produces fine papers such as bristols and cover and text papers. Prior to the sale, Simpson was considered the largest U.S. text and cover maker with about 20% of the market.

Rounding out Simpson's once-large portfolio is its 50% stake in a 345,000 tpy bleached kraft market pulp mill in Mininco, Chile. Although this greenfield mill was not completed until late 1991, Simpson's involvement in Chile dates back to the 1970s, when it operated a timber company there. Simpson's joint-venture partner in the new mill is Chilean powerhouse Compania Manufacturera de Papeles y Cartones (CMPC), a company in which Simpson is a minority shareholder. Most of the mill's production is being exported to nonintegrated companies, with CMPC responsible for marketing in Latin America and Europe (likely the most important destination) and Simpson covering North America, Mexico, and Asia.

TIMBER. Simpson Paper and Simpson Timber control about 775,000 acres of U.S. timberland in the Pacific Northwest and California, including a 10,000 acre eucalyptus tree farm in California. It also has wood processing facilities in California, Oregon, and Washington and is one of the top 20 lumber firms in North America, with softwood lumber production topping 600 million bd ft.

FINANCIAL PERFORMANCE. Simpson, which has always been a closely held company, went private in 1984. Thus, financial information is not released. However, it is probably safe to assume that the depressed market conditions for the majority of Simpson's product lines were felt at the bottom line in the early 1990s, thus prompting a corporate asset re-examination. Making matters worse, Simpson's mills, which in general are old and inefficient, have been burdened with more than their fair share of environmental woes and expenses.

With some mill assets already sold and others awaiting sale, Simpson has narrowly focused its corporate efforts on businesses where it has strong market and/or cost positions. From an asset standpoint, Simpson's portfolio is radically different than it was only five years ago.

BY DREW MILLER

Executive Editor Pulp & Paper Company Profiles

AT A GLANCE:

Further information on Simpson Paper Co. and other companies in this series can be found in Pulp & Paper's 1996 Pulp & Paper Company Profiles: Performance and Strategy Analysis of North American Paper Companies.
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